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 March 31, 2014
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 April 21, 2014 | |||
Common stock, $0.01 par value | 386,499,603 shares |
2
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
March 31, 2014 |
December 31, 2013 | |||||||||
(Dollar amounts in millions, except per share data) | ||||||||||
Assets: |
||||||||||
Investments: |
||||||||||
Fixed maturities, amortized cost of $37,031 and $39,426 |
$ | 39,511 | $ | 41,320 | ||||||
Equity securities, cost of $813 and $881 |
805 | 871 | ||||||||
Limited partnership investments |
3,512 | 3,420 | ||||||||
Other invested assets |
649 | 562 | ||||||||
Short term investments |
7,586 | 6,800 | ||||||||
Total investments |
52,063 | 52,973 | ||||||||
Cash |
301 | 295 | ||||||||
Receivables |
8,355 | 9,361 | ||||||||
Property, plant and equipment |
14,974 | 14,498 | ||||||||
Goodwill |
354 | 357 | ||||||||
Assets held for sale |
3,486 | |||||||||
Other assets |
1,618 | 1,650 | ||||||||
Deferred acquisition costs of insurance subsidiaries |
652 | 624 | ||||||||
Separate account business |
181 | |||||||||
Total assets |
$ | 81,803 | $ | 79,939 | ||||||
Liabilities and Equity: |
||||||||||
Insurance reserves: |
||||||||||
Claim and claim adjustment expense |
$ | 23,933 | $ | 24,089 | ||||||
Future policy benefits |
8,254 | 10,471 | ||||||||
Unearned premiums |
3,838 | 3,718 | ||||||||
Policyholders funds |
26 | 116 | ||||||||
Total insurance reserves |
36,051 | 38,394 | ||||||||
Payable to brokers |
882 | 143 | ||||||||
Short term debt |
854 | 840 | ||||||||
Long term debt |
10,456 | 10,006 | ||||||||
Deferred income taxes |
898 | 716 | ||||||||
Liabilities held for sale |
3,250 | |||||||||
Other liabilities |
4,295 | 4,753 | ||||||||
Separate account business |
181 | |||||||||
Total liabilities |
56,686 | 55,033 | ||||||||
Commitments and contingent liabilities |
||||||||||
Preferred stock, $0.10 par value: |
||||||||||
Authorized 100,000,000 shares |
||||||||||
Common stock, $0.01 par value: |
||||||||||
Authorized 1,800,000,000 shares |
||||||||||
Issued 387,454,185 and 387,210,096 shares |
4 | 4 | ||||||||
Additional paid-in capital |
3,604 | 3,607 | ||||||||
Retained earnings |
15,541 | 15,508 | ||||||||
Accumulated other comprehensive income |
563 | 339 | ||||||||
19,712 | 19,458 | |||||||||
Less treasury stock, at cost (542,370 shares) |
(24 | ) | ||||||||
Total shareholders equity |
19,688 | 19,458 | ||||||||
Noncontrolling interests |
5,429 | 5,448 | ||||||||
Total equity |
25,117 | 24,906 | ||||||||
Total liabilities and equity |
$ | 81,803 | $ | 79,939 | ||||||
See accompanying Notes to Consolidated Condensed Financial Statements.
3
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31 | 2014 | 2013 | ||||||||||||||
(In millions, except per share data) | ||||||||||||||||
Revenues: |
||||||||||||||||
Insurance premiums |
$ | 1,806 | $ | 1,764 | ||||||||||||
Net investment income |
577 | 599 | ||||||||||||||
Investment gains (losses): |
||||||||||||||||
Other-than-temporary impairment losses |
(2 | ) | (18 | ) | ||||||||||||
Portion of other-than-temporary impairment losses |
||||||||||||||||
Net impairment losses recognized in earnings |
(2 | ) | (18 | ) | ||||||||||||
Other net investment gains |
44 | 37 | ||||||||||||||
Total investment gains |
42 | 19 | ||||||||||||||
Contract drilling revenues |
685 | 700 | ||||||||||||||
Other |
633 | 604 | ||||||||||||||
Total |
3,743 | 3,686 | ||||||||||||||
Expenses: |
||||||||||||||||
Insurance claims and policyholders benefits |
1,446 | 1,396 | ||||||||||||||
Amortization of deferred acquisition costs |
329 | 328 | ||||||||||||||
Contract drilling expenses |
370 | 375 | ||||||||||||||
Other operating expenses |
991 | 981 | ||||||||||||||
Interest |
124 | 108 | ||||||||||||||
Total |
3,260 | 3,188 | ||||||||||||||
Income before income tax |
483 | 498 | ||||||||||||||
Income tax expense |
(92 | ) | (109 | ) | ||||||||||||
Income from continuing operations |
391 | 389 | ||||||||||||||
Discontinued operations, net of income tax |
(207 | ) | 9 | |||||||||||||
Net income |
184 | 398 | ||||||||||||||
Amounts attributable to noncontrolling interests |
(125 | ) | (156 | ) | ||||||||||||
Net income attributable to Loews Corporation |
$ | 59 | $ | 242 | ||||||||||||
Net income attributable to Loews Corporation: |
||||||||||||||||
Income from continuing operations |
$ | 245 | $ | 234 | ||||||||||||
Discontinued operations, net |
(186 | ) | 8 | |||||||||||||
Net income |
$ | 59 | $ | 242 | ||||||||||||
Basic and diluted net income per share: |
||||||||||||||||
Income from continuing operations |
$ | 0.63 | $ | 0.60 | ||||||||||||
Discontinued operations, net |
(0.48 | ) | 0.02 | |||||||||||||
Net income |
$ | 0.15 | $ | 0.62 | ||||||||||||
Dividends per share |
$ | 0.0625 | $ | 0.0625 | ||||||||||||
Weighted-average shares outstanding: |
||||||||||||||||
Shares of common stock |
387.34 | 391.39 | ||||||||||||||
Dilutive potential shares of common stock |
0.73 | 0.77 | ||||||||||||||
Total weighted-average shares outstanding assuming dilution |
388.07 | 392.16 | ||||||||||||||
See accompanying Notes to Consolidated Condensed Financial Statements.
4
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended March 31 | 2014 | 2013 | ||||||||||||||
(In millions) | ||||||||||||||||
Net income |
$ | 184 | $ | 398 | ||||||||||||
Other comprehensive income (loss), after tax |
||||||||||||||||
Changes in: |
||||||||||||||||
Net unrealized gains on investments with other-than-temporary impairments |
12 | 14 | ||||||||||||||
Net other unrealized gains (losses) on investments |
237 | (62 | ) | |||||||||||||
Total unrealized gains (losses) on available-for-sale investments |
249 | (48 | ) | |||||||||||||
Unrealized gains on discontinued operations |
8 | |||||||||||||||
Unrealized losses on cash flow hedges |
(21 | ) | ||||||||||||||
Pension liability |
(1 | ) | 4 | |||||||||||||
Foreign currency |
(6 | ) | (61 | ) | ||||||||||||
Other comprehensive income (loss) |
250 | (126 | ) | |||||||||||||
Comprehensive income |
434 | 272 | ||||||||||||||
Amounts attributable to noncontrolling interests |
(151 | ) | (142 | ) | ||||||||||||
Total comprehensive income attributable to Loews Corporation |
$ | 283 | $ | 130 | ||||||||||||
See accompanying Notes to Consolidated Condensed Financial Statements.
5
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF EQUITY
(Unaudited)
Loews Corporation Shareholders | ||||||||||||||||||||||||||||||||||||||||
Accumulated | Common | |||||||||||||||||||||||||||||||||||||||
Additional | Other | Stock | ||||||||||||||||||||||||||||||||||||||
Common | Paid-in | Retained | Comprehensive | Held in | Noncontrolling | |||||||||||||||||||||||||||||||||||
Total | Stock | Capital | Earnings | Income | Treasury | Interests | ||||||||||||||||||||||||||||||||||
(In millions) |
||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2013 |
$ | 24,676 | $ | 4 | $ | 3,595 | $ | 15,192 | $ | 678 | $ | (10 | ) | $ | 5,217 | |||||||||||||||||||||||||
Net income |
398 | 242 | 156 | |||||||||||||||||||||||||||||||||||||
Other comprehensive loss |
(126 | ) | (112 | ) | (14 | ) | ||||||||||||||||||||||||||||||||||
Dividends paid |
(146 | ) | (24 | ) | (122 | ) | ||||||||||||||||||||||||||||||||||
Purchase of Loews treasury stock |
(92 | ) | (92 | ) | ||||||||||||||||||||||||||||||||||||
Issuance of Loews common stock |
3 | 3 | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
4 | (9 | ) | 13 | ||||||||||||||||||||||||||||||||||||
Other |
1 | 1 | ||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2013 |
$ | 24,718 | $ | 4 | $ | 3,589 | $ | 15,410 | $ | 566 | $ | (102 | ) | $ | 5,251 | |||||||||||||||||||||||||
Balance, January 1, 2014 |
$ | 24,906 | $ | 4 | $ | 3,607 | $ | 15,508 | $ | 339 | $ | - | $ | 5,448 | ||||||||||||||||||||||||||
Net income |
184 | 59 | 125 | |||||||||||||||||||||||||||||||||||||
Other comprehensive income |
250 | 224 | 26 | |||||||||||||||||||||||||||||||||||||
Dividends paid |
(130 | ) | (24 | ) | (106 | ) | ||||||||||||||||||||||||||||||||||
Purchase of subsidiary stock from |
(82 | ) | (8 | ) | (74 | ) | ||||||||||||||||||||||||||||||||||
Purchase of Loews treasury stock |
(24 | ) | (24 | ) | ||||||||||||||||||||||||||||||||||||
Issuance of Loews common stock |
5 | 5 | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
9 | 9 | ||||||||||||||||||||||||||||||||||||||
Other |
(1 | ) | (2 | ) | 1 | |||||||||||||||||||||||||||||||||||
Balance, March 31, 2014 |
$ | 25,117 | $ | 4 | $ | 3,604 | $ | 15,541 | $ | 563 | $ | (24 | ) | $ | 5,429 | |||||||||||||||||||||||||
See accompanying Notes to Consolidated Condensed Financial Statements.
6
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31 | 2014 | 2013 | ||||||||||||||
(In millions) | ||||||||||||||||
Operating Activities: |
||||||||||||||||
Net income |
$ | 184 | $ | 398 | ||||||||||||
Adjustments to reconcile net income to net cash |
746 | 335 | ||||||||||||||
Changes in operating assets and liabilities, net: |
||||||||||||||||
Receivables |
38 | (68 | ) | |||||||||||||
Deferred acquisition costs |
(21 | ) | (40 | ) | ||||||||||||
Insurance reserves |
85 | 79 | ||||||||||||||
Other assets |
(90 | ) | (3 | ) | ||||||||||||
Other liabilities |
(294 | ) | (101 | ) | ||||||||||||
Trading securities |
(225 | ) | 8 | |||||||||||||
Net cash flow operating activities |
423 | 608 | ||||||||||||||
Investing Activities: |
||||||||||||||||
Purchases of fixed maturities |
(2,072 | ) | (2,720 | ) | ||||||||||||
Proceeds from sales of fixed maturities |
1,550 | 1,409 | ||||||||||||||
Proceeds from maturities of fixed maturities |
851 | 866 | ||||||||||||||
Purchases of equity securities |
(5 | ) | (12 | ) | ||||||||||||
Proceeds from sales of equity securities |
11 | 51 | ||||||||||||||
Purchases of limited partnership investments |
(73 | ) | (41 | ) | ||||||||||||
Proceeds from sales of limited partnership investments |
68 | 58 | ||||||||||||||
Purchases of property, plant and equipment |
(758 | ) | (602 | ) | ||||||||||||
Dispositions |
11 | 5 | ||||||||||||||
Change in short term investments |
(222 | ) | 375 | |||||||||||||
Other, net |
2 | (22 | ) | |||||||||||||
Net cash flow investing activities |
(637 | ) | (633 | ) | ||||||||||||
Financing Activities: |
||||||||||||||||
Dividends paid |
(24 | ) | (24 | ) | ||||||||||||
Dividends paid to noncontrolling interests |
(106 | ) | (122 | ) | ||||||||||||
Purchase of subsidiary stock from noncontrolling interests |
(86 | ) | ||||||||||||||
Purchase of Loews treasury stock |
(18 | ) | (95 | ) | ||||||||||||
Issuance of Loews common stock |
5 | 3 | ||||||||||||||
Principal payments on debt |
(240 | ) | (196 | ) | ||||||||||||
Issuance of debt |
701 | 420 | ||||||||||||||
Other, net |
1 | (3 | ) | |||||||||||||
Net cash flow financing activities |
233 | (17 | ) | |||||||||||||
Effect of foreign exchange rate on cash |
1 | (7 | ) | |||||||||||||
Transfer of cash to assets held for sale |
(14 | ) | ||||||||||||||
Net change in cash |
6 | (49 | ) | |||||||||||||
Cash, beginning of period |
295 | 228 | ||||||||||||||
Cash, end of period |
$ | 301 | $ | 179 | ||||||||||||
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 51% owned subsidiary); transportation and storage of natural gas and natural gas liquids and gathering and processing of natural gas (Boardwalk Pipeline Partners, LP (Boardwalk Pipeline), a 53% 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 a chain of hotels (Loews Hotels Holding Corporation (Loews Hotels), a wholly owned subsidiary). 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) attributable to Loews Corporation as used herein means Net income (loss) attributable to Loews Corporation shareholders.
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 March 31, 2014 and December 31, 2013 and the results of operations, comprehensive income and changes in shareholders equity and cash flows for the three months ended March 31, 2014 and 2013.
Net income for the first quarter 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 2013 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 and 2.0 million shares were not included in the diluted weighted average shares amounts for the three months ended March 31, 2014 and 2013 due to the exercise price being greater than the average stock price.
Sale of Continental Assurance Company (CAC) On February 10, 2014, CNA entered into a definitive agreement to sell the majority of its run-off annuity and pension deposit business through the sale of the common stock of CAC. The sale is subject to regulatory approvals and other customary closing conditions and is expected to close in the second quarter of 2014. The business being sold, which was previously reported within Life & Group Non-Core, is now reported as discontinued operations in the Consolidated Condensed Statements of Income for the three months ended March 31, 2014 and 2013 and the assets and liabilities are presented as held for sale on the Consolidated Condensed Balance Sheet as of March 31, 2014. The Company has elected not to present these assets and liabilities as held for sale for the comparative period in the Consolidated Condensed Balance Sheets. See Note 12 for further discussion of discontinued operations.
The definitive agreement provides for a pre-close dividend by CAC and also includes a 100% coinsurance agreement on a separate small block of annuity business outside of CAC. The assets and liabilities related to the coinsurance agreement and the assets related to the estimated dividend do not qualify as held for sale presentation. Therefore they are not reflected as held for sale on the Consolidated Condensed Balance Sheet as of March 31, 2014.
Bluegrass Project As discussed in Note 2 of the Notes to Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2013, Boardwalk Pipeline executed a series of agreements in 2013 with The Williams Companies, Inc. to develop the Bluegrass Project, a joint venture project that would develop a pipeline to transport natural gas liquids. The open season for capacity on the pipeline ended in the
8
first quarter of 2014, and although discussions with potential customers continued throughout the first quarter, Boardwalk Pipeline was unable to obtain sufficient firm customer commitments to support the project. Further, delays in the development of the project and other factors have resulted in escalations in the estimated costs to complete the project. Considering these factors, in April of 2014, the Company is no longer making capital investments in the Bluegrass Project. As a result, in the first quarter of 2014, the Company expensed the previously capitalized project costs that had been incurred, resulting in a charge of $94 million ($55 million after tax and noncontrolling interests), inclusive of a $10 million charge recorded by Boardwalk Pipeline Partners, LP. This charge was recorded within Other operating expenses on the Consolidated Condensed Statements of Income. The Company does not expect to incur significant additional charges related to this joint venture project.
Impairment of Natural Gas and Oil Properties Results for the three months ended March 31, 2014 and 2013 include ceiling test impairment charges of $29 million and $145 million, ($19 million and $92 million after tax) related to the carrying value of HighMounts natural gas and oil properties. The impairments were recorded within Other operating expenses and as credits to Accumulated depreciation, depletion and amortization. The 2014 write-down was primarily attributable to insufficient reserve additions from recent exploration activities due to variability in well performance where HighMount is testing different horizontal target zones and hydraulic fracture designs. Had the effects of HighMounts cash flow hedges not been considered in calculating the ceiling limitation, the impairments would have been $29 million and $195 million, ($18 million and $124 million after tax) for the three months ended March 31, 2014 and 2013.
2. Investments
Net investment income is as follows:
Three Months Ended March 31 | 2014 | 2013 | |||||||||||||
(In millions) | |||||||||||||||
Fixed maturity securities |
$ | 452 | $ | 457 | |||||||||||
Short term investments |
1 | 2 | |||||||||||||
Limited partnership investments |
87 | 146 | |||||||||||||
Equity securities |
2 | 3 | |||||||||||||
Income (loss) from trading portfolio (a) |
40 | (3 | ) | ||||||||||||
Other |
8 | 6 | |||||||||||||
Total investment income |
590 | 611 | |||||||||||||
Investment expenses |
(13 | ) | (12 | ) | |||||||||||
Net investment income |
$ | 577 | $ | 599 | |||||||||||
(a) | Includes net unrealized gains (losses) related to changes in fair value on trading securities still held of $13 and $(15) million for the three months ended March 31, 2014 and 2013. |
Investment gains (losses) are as follows:
Three Months Ended March 31 | 2014 | 2013 | |||||||||||||
(In millions) | |||||||||||||||
Fixed maturity securities |
$ | 38 | $ | 27 | |||||||||||
Equity securities |
5 | (13 | ) | ||||||||||||
Derivative instruments |
2 | ||||||||||||||
Short term investments and other |
(1 | ) | 3 | ||||||||||||
Investment gains (a) |
$ | 42 | $ | 19 | |||||||||||
(a) | Includes gross realized gains of $58 and $41 and gross realized losses of $15 and $27 on available-for-sale securities for the three months ended March 31, 2014 and 2013. |
9
The components of other-than-temporary impairment (OTTI) losses recognized in earnings by asset type are as follows:
Three Months Ended March 31 | 2014 | 2013 | ||||||||||||||
(In millions) | ||||||||||||||||
Fixed maturity securities available-for-sale: |
||||||||||||||||
Corporate and other bonds |
$ | 1 | $ | 3 | ||||||||||||
Asset-backed residential mortgage-backed |
1 | |||||||||||||||
Total fixed maturities available-for-sale |
2 | 3 | ||||||||||||||
Equity securities available-for-sale: |
||||||||||||||||
Preferred stock |
15 | |||||||||||||||
Net OTTI losses recognized in continuing earnings |
$ | 2 | $ | 18 | ||||||||||||
The amortized cost and fair values of securities are as follows:
Cost or | Gross | Gross | Unrealized | |||||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | OTTI Losses | ||||||||||||||||||||||||
March 31, 2014 | Cost | Gains | Losses | Fair Value | (Gains) | |||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||
Corporate and other bonds |
$ | 17,265 | $ | 1,612 | $ | 56 | $ | 18,821 | ||||||||||||||||||||
States, municipalities and political subdivisions |
11,113 | 871 | 129 | 11,855 | ||||||||||||||||||||||||
Asset-backed: |
||||||||||||||||||||||||||||
Residential mortgage-backed |
4,854 | 156 | 66 | 4,944 | $ | (47 | ) | |||||||||||||||||||||
Commercial mortgage-backed |
1,974 | 92 | 13 | 2,053 | (3 | ) | ||||||||||||||||||||||
Other asset-backed |
966 | 12 | 2 | 976 | ||||||||||||||||||||||||
Total asset-backed |
7,794 | 260 | 81 | 7,973 | (50 | ) | ||||||||||||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises |
135 | 7 | 1 | 141 | ||||||||||||||||||||||||
Foreign government |
559 | 18 | 1 | 576 | ||||||||||||||||||||||||
Redeemable preferred stock |
32 | 2 | 34 | |||||||||||||||||||||||||
Fixed maturities available-for-sale |
36,898 | 2,770 | 268 | 39,400 | (50 | ) | ||||||||||||||||||||||
Fixed maturities, trading |
133 | 22 | 111 | |||||||||||||||||||||||||
Total fixed maturities |
37,031 | 2,770 | 290 | 39,511 | (50 | ) | ||||||||||||||||||||||
Equity securities: |
||||||||||||||||||||||||||||
Common stock |
33 | 9 | 42 | |||||||||||||||||||||||||
Preferred stock |
130 | 2 | 132 | |||||||||||||||||||||||||
Equity securities available-for-sale |
163 | 11 | - | 174 | - | |||||||||||||||||||||||
Equity securities, trading |
650 | 100 | 119 | 631 | ||||||||||||||||||||||||
Total equity securities |
813 | 111 | 119 | 805 | - | |||||||||||||||||||||||
Total |
$ | 37,844 | $ | 2,881 | $ | 409 | $ | 40,316 | $ | (50 | ) | |||||||||||||||||
10
December 31, 2013 | Cost or Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
Unrealized (Gains) |
|||||||||||||||
(In millions) | ||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||
Corporate and other bonds |
$ | 19,352 | $ | 1,645 | $ | 135 | $ | 20,862 | ||||||||||||
States, municipalities and political subdivisions |
11,281 | 548 | 272 | 11,557 | ||||||||||||||||
Asset-backed: |
||||||||||||||||||||
Residential mortgage-backed |
4,940 | 123 | 92 | 4,971 | $ | (37) | ||||||||||||||
Commercial mortgage-backed |
1,995 | 90 | 22 | 2,063 | (3) | |||||||||||||||
Other asset-backed |
945 | 13 | 3 | 955 | ||||||||||||||||
|
||||||||||||||||||||
Total asset-backed |
7,880 | 226 | 117 | 7,989 | (40) | |||||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises |
139 | 6 | 1 | 144 | ||||||||||||||||
Foreign government |
531 | 15 | 3 | 543 | ||||||||||||||||
Redeemable preferred stock |
92 | 10 | 102 | |||||||||||||||||
|
||||||||||||||||||||
Fixed maturities available-for-sale |
39,275 | 2,450 | 528 | 41,197 | (40) | |||||||||||||||
Fixed maturities, trading |
151 | 28 | 123 | |||||||||||||||||
|
||||||||||||||||||||
Total fixed maturities |
39,426 | 2,450 | 556 | 41,320 | (40) | |||||||||||||||
|
||||||||||||||||||||
Equity securities: |
||||||||||||||||||||
Common stock |
36 | 9 | 45 | |||||||||||||||||
Preferred stock |
143 | 1 | 4 | 140 | ||||||||||||||||
|
||||||||||||||||||||
Equity securities available-for-sale |
179 | 10 | 4 | 185 | - | |||||||||||||||
Equity securities, trading |
702 | 119 | 135 | 686 | ||||||||||||||||
|
||||||||||||||||||||
Total equity securities |
881 | 129 | 139 | 871 | - | |||||||||||||||
|
||||||||||||||||||||
Total |
$ | 40,307 | $ | 2,579 | $ | 695 | $ | 42,191 | $ | (40) | ||||||||||
|
||||||||||||||||||||
|
The net unrealized gains on investments included in the tables above are recorded as a component of Accumulated other comprehensive income (AOCI). When presented in AOCI, these amounts are net of tax and noncontrolling interests and any required Shadow Adjustments. At March 31, 2014 and December 31, 2013, the net unrealized gains on investments included in AOCI were net of Shadow Adjustments of $639 million and $478 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 of net unrealized gains through Other comprehensive income (loss) (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 | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
March 31, 2014 | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||
Corporate and other bonds |
$ | 2,002 | $ | 48 | $ | 109 | $ | 8 | $ | 2,111 | $ | 56 | ||||||||||||
States, municipalities and political subdivisions |
1,397 | 56 | 244 | 73 | 1,641 | 129 | ||||||||||||||||||
Asset-backed: |
||||||||||||||||||||||||
Residential mortgage-backed |
739 | 13 | 347 | 53 | 1,086 | 66 | ||||||||||||||||||
Commercial mortgage-backed |
515 | 12 | 91 | 1 | 606 | 13 | ||||||||||||||||||
Other asset-backed |
167 | 2 | 3 | 170 | 2 | |||||||||||||||||||
|
||||||||||||||||||||||||
Total asset-backed |
1,421 | 27 | 441 | 54 | 1,862 | 81 | ||||||||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises |
6 | 1 | 3 | 9 | 1 | |||||||||||||||||||
Foreign government |
61 | 1 | 4 | 65 | 1 | |||||||||||||||||||
|
||||||||||||||||||||||||
Total fixed maturity securities |
4,887 | 133 | 801 | 135 | 5,688 | 268 | ||||||||||||||||||
Preferred stock |
16 | 16 | ||||||||||||||||||||||
|
||||||||||||||||||||||||
Total |
$ | 4,903 | $ | 133 | $ | 801 | $ | 135 | $ | 5,704 | $ | 268 | ||||||||||||
|
||||||||||||||||||||||||
|
11
Less than | 12 Months | |||||||||||||||||||||||
12 Months | or Longer | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
December 31, 2013 | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||
Corporate and other bonds |
$ | 3,592 | $ | 129 | $ | 72 | $ | 6 | $ | 3,664 | $ | 135 | ||||||||||||
States, municipalities and political subdivisions |
3,251 | 197 | 129 | 75 | 3,380 | 272 | ||||||||||||||||||
Asset-backed: |
||||||||||||||||||||||||
Residential mortgage-backed |
1,293 | 29 | 343 | 63 | 1,636 | 92 | ||||||||||||||||||
Commercial mortgage-backed |
640 | 22 | 640 | 22 | ||||||||||||||||||||
Other asset-backed |
269 | 3 | 269 | 3 | ||||||||||||||||||||
|
||||||||||||||||||||||||
Total asset-backed |
2,202 | 54 | 343 | 63 | 2,545 | 117 | ||||||||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises |
13 | 1 | 13 | 1 | ||||||||||||||||||||
Foreign government |
111 | 3 | 111 | 3 | ||||||||||||||||||||
|
||||||||||||||||||||||||
Total fixed maturity securities |
9,169 | 384 | 544 | 144 | 9,713 | 528 | ||||||||||||||||||
Preferred stock |
87 | 4 | 87 | 4 | ||||||||||||||||||||
|
||||||||||||||||||||||||
Total |
$ | 9,256 | $ | 388 | $ | 544 | $ | 144 | $ | 9,800 | $ | 532 | ||||||||||||
|
||||||||||||||||||||||||
|
Based on current facts and circumstances, the Company believes the unrealized losses presented in the table above are primarily attributable to broader economic conditions, changes in interest rates and credit spreads, market illiquidity and other market factors, but are not indicative of the ultimate collectibility of the current amortized cost of the securities. The investments with longer duration, primarily included within the states, municipalities and political subdivision asset category, were more significantly affected by changes in market interest rates. 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 March 31, 2014.
The following table summarizes the activity for the three months ended March 31, 2014 and 2013 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at March 31, 2014 and 2013 for which a portion of an OTTI loss was recognized in Other comprehensive income (loss).
Three Months Ended March 31 | 2014 | 2013 | ||||||
(In millions) | ||||||||
Beginning balance of credit losses on fixed maturity securities |
$ | 74 | $ | 95 | ||||
Reductions for securities sold during the period |
(2) | (3) | ||||||
Reductions for securities the Company intends to sell or more likely than not will be required to sell |
(3) | |||||||
|
||||||||
Ending balance of credit losses on fixed maturity securities |
$ | 69 | $ | 92 | ||||
|
||||||||
|
12
Contractual Maturity
The following table summarizes available-for-sale fixed maturity securities by contractual maturity at March 31, 2014 and December 31, 2013. 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.
March 31, 2014 | December 31, 2013 | |||||||||||||||
Cost or | Estimated | Cost or | Estimated | |||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
(In millions) | ||||||||||||||||
Due in one year or less |
$ | 2,684 | $ | 2,729 | $ | 2,420 | $ | 2,455 | ||||||||
Due after one year through five years |
8,839 | 9,401 | 9,496 | 10,068 | ||||||||||||
Due after five years through ten years |
11,455 | 11,876 | 11,667 | 11,954 | ||||||||||||
Due after ten years |
13,920 | 15,394 | 15,692 | 16,720 | ||||||||||||
|
||||||||||||||||
Total |
$ | 36,898 | $ | 39,400 | $ | 39,275 | $ | 41,197 | ||||||||
|
||||||||||||||||
|
Investment Commitments
As of March 31, 2014, the Company had committed approximately $384 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. As of March 31, 2014, the Company had commitments to purchase or fund additional amounts of $154 million and sell $180 million under the terms of such securities.
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. |
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. Prices obtained from third-party pricing services or brokers are not adjusted by the Company.
13
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 analysis, where the Company performs an independent analysis of the inputs and assumptions used to price individual securities and (v) pricing validation, where prices received are compared to prices independently estimated by the Company.
The fair values of CNAs life settlement contracts are included in Other assets on the Consolidated Condensed Balance Sheets. 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 and nonrecurring basis are summarized in the tables below:
March 31, 2014 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
(In millions) | ||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||
Corporate and other bonds |
$ | 24 | $ | 18,608 | $ | 189 | $ | 18,821 | ||||||||||
States, municipalities and political subdivisions |
11,769 | 86 | 11,855 | |||||||||||||||
Asset-backed: |
||||||||||||||||||
Residential mortgage-backed |
4,585 | 359 | 4,944 | |||||||||||||||
Commercial mortgage-backed |
1,927 | 126 | 2,053 | |||||||||||||||
Other asset-backed |
537 | 439 | 976 | |||||||||||||||
| ||||||||||||||||||
Total asset-backed |
7,049 | 924 | 7,973 | |||||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises |
135 | 6 | 141 | |||||||||||||||
Foreign government |
76 | 500 | 576 | |||||||||||||||
Redeemable preferred stock |
23 | 11 | 34 | |||||||||||||||
| ||||||||||||||||||
Fixed maturities available-for-sale |
258 | 37,943 | 1,199 | 39,400 | ||||||||||||||
Fixed maturities, trading |
26 | 85 | 111 | |||||||||||||||
| ||||||||||||||||||
Total fixed maturities |
$ | 258 | $ | 37,969 | $ | 1,284 | $ | 39,511 | ||||||||||
| ||||||||||||||||||
| ||||||||||||||||||
Equity securities available-for-sale |
$ | 117 | $ | 55 | $ | 2 | $ | 174 | ||||||||||
Equity securities, trading |
629 | 2 | 631 | |||||||||||||||
| ||||||||||||||||||
Total equity securities |
$ | 746 | $ | 55 | $ | 4 | $ | 805 | ||||||||||
| ||||||||||||||||||
| ||||||||||||||||||
Short term investments |
$ | 6,868 | $ | 651 | $ | 7,519 | ||||||||||||
Other invested assets |
100 | 55 | 155 | |||||||||||||||
Receivables |
7 | $ | 1 | 8 | ||||||||||||||
Life settlement contracts |
87 | 87 | ||||||||||||||||
Payable to brokers |
(299 | ) | (8 | ) | (6 | ) | (313 | ) | ||||||||||
Assets held for sale-nonrecurring |
3,486 | 3,486 | ||||||||||||||||
Liabilities held for sale-nonrecurring |
(3,250 | ) | (3,250 | ) |
14
December 31, 2013 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
(In millions) | ||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||
Corporate and other bonds |
$ | 33 | $ | 20,625 | $ | 204 | $ | 20,862 | ||||||||||
States, municipalities and political subdivisions |
11,486 | 71 | 11,557 | |||||||||||||||
Asset-backed: |
||||||||||||||||||
Residential mortgage-backed |
4,640 | 331 | 4,971 | |||||||||||||||
Commercial mortgage-backed |
1,912 | 151 | 2,063 | |||||||||||||||
Other asset-backed |
509 | 446 | 955 | |||||||||||||||
| ||||||||||||||||||
Total asset-backed |
7,061 | 928 | 7,989 | |||||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises |
116 | 28 | 144 | |||||||||||||||
Foreign government |
81 | 462 | 543 | |||||||||||||||
Redeemable preferred stock |
45 | 57 | 102 | |||||||||||||||
| ||||||||||||||||||
Fixed maturities available-for-sale |
275 | 39,719 | 1,203 | 41,197 | ||||||||||||||
Fixed maturities, trading |
43 | 80 | 123 | |||||||||||||||
| ||||||||||||||||||
Total fixed maturities |
$ | 275 | $ | 39,762 | $ | 1,283 | $ | 41,320 | ||||||||||
| ||||||||||||||||||
| ||||||||||||||||||
Equity securities available-for-sale |
$ | 126 | $ | 48 | $ | 11 | $ | 185 | ||||||||||
Equity securities, trading |
678 | 8 | 686 | |||||||||||||||
| ||||||||||||||||||
Total equity securities |
$ | 804 | $ | 48 | $ | 19 | $ | 871 | ||||||||||
| ||||||||||||||||||
| ||||||||||||||||||
Short term investments |
$ | 6,162 | $ | 563 | $ | 6,725 | ||||||||||||
Other invested assets |
54 | 54 | ||||||||||||||||
Receivables |
5 | $ | 2 | 7 | ||||||||||||||
Life settlement contracts |
88 | 88 | ||||||||||||||||
Separate account business |
9 | 171 | 1 | 181 | ||||||||||||||
Payable to brokers |
(40 | ) | (7 | ) | (5 | ) | (52 | ) |
15
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 March 31, 2014 and 2013:
Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses) |
Transfers | Transfers | Unrealized 3 Assets and Liabilities |
|||||||||||||||||||||||||||||||||||||
2014 | Balance, January 1 |
Included in Net Income |
Included in OCI |
Purchases | Sales | Settlements | into Level 3 |
out of Level 3 |
Balance, March 31 |
Held at March 31 |
||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||||||||||||
Corporate and other bonds |
$ | 204 | $ | 1 | $ | 1 | $ | 5 | $ | (4) | $ | (5) | $ | 3 | $ | (16) | $ | 189 | ||||||||||||||||||||||
States, municipalities and political subdivisions |
71 | 1 | 14 | 86 | ||||||||||||||||||||||||||||||||||||
Asset-backed: |
||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed |
331 | 1 | 15 | 25 | (21) | 21 | (13) | 359 | ||||||||||||||||||||||||||||||||
Commercial mortgage-backed |
151 | 1 | (1) | (1) | (24) | 126 | ||||||||||||||||||||||||||||||||||
Other asset-backed |
446 | 1 | 148 | (83) | (72) | (1) | 439 | |||||||||||||||||||||||||||||||||
Total asset-backed |
928 | 3 | 14 | 173 | (83) | (94) | 21 | (38) | 924 | - | ||||||||||||||||||||||||||||||
Fixed maturities available-for-sale |
1,203 | 4 | 16 | 178 | (87) | (99) | 38 | (54) | 1,199 | |||||||||||||||||||||||||||||||
Fixed maturities, trading |
80 | 5 | 85 | $ | 5 | |||||||||||||||||||||||||||||||||||
Total fixed maturities |
$ | 1,283 | $ | 9 | $ | 16 | $ | 178 | $ | (87) | $ | (99) | $ | 38 | $ | (54) | $ | 1,284 | $ | 5 | ||||||||||||||||||||
Equity securities available-for-sale |
$ | 11 | $ | 3 | $ | (4) | $ | (8) | $ | 2 | ||||||||||||||||||||||||||||||
Equity securities trading |
8 | (1) | $ | 1 | (6) | 2 | $ | (1) | ||||||||||||||||||||||||||||||||
Total equity securities |
$ | 19 | $ | 2 | $ | (4) | $ | 1 | $ | (14) | $ | - | $ | - | $ | - | $ | 4 | $ | (1) | ||||||||||||||||||||
Life settlement contracts |
$ | 88 | $ | 10 | $ | (11) | $ | 87 | $ | 1 | ||||||||||||||||||||||||||||||
Separate account business |
1 | $ | (1) | - | ||||||||||||||||||||||||||||||||||||
Derivative financial instruments, net |
(3) | (1) | $ | (1) | $ | (2) | $ | 1 | 1 | (5) | 2 |
16
Unrealized Gains (Losses) Recognized in |
||||||||||||||||||||||||||||||||||||||||
Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses) |
Transfers | Transfers | Net Income on Level 3 Assets and Liabilities |
|||||||||||||||||||||||||||||||||||||
2013 | Balance, January 1 |
Included in Net Income |
Included in OCI |
Purchases | Sales | Settlements | into Level 3 |
out of Level 3 |
Balance, March 31 |
Held at March 31 |
||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||||||||||||
Corporate and other bonds |
$ | 219 | $ | 2 | $ | 91 | $ | (17) | $ | (20) | $ | 26 | $ | (18) | $ | 283 | $ | (1) | ||||||||||||||||||||||
States, municipalities and political subdivisions |
96 | $ | (3) | 85 | (47) | (2) | 129 | |||||||||||||||||||||||||||||||||
Asset-backed: |
||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed |
413 | 3 | 61 | (11) | (16) | 450 | ||||||||||||||||||||||||||||||||||
Commercial mortgage- backed |
129 | 1 | 5 | 73 | (7) | (24) | 177 | |||||||||||||||||||||||||||||||||
Other asset-backed |
368 | 3 | 1 | 136 | (99) | (13) | 396 | |||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total asset-backed |
910 | 7 | 6 | 270 | (99) | (31) | - | (40) | 1,023 | - | ||||||||||||||||||||||||||||||
Redeemable preferred stock |
26 | 26 | ||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Fixed maturities available-for-sale |
1,251 | 4 | 8 | 446 | (163) | (53) | 26 | (58) | 1,461 | (1) | ||||||||||||||||||||||||||||||
Fixed maturities, trading |
89 | 1 | 19 | (2) | 107 | 1 | ||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total fixed maturities |
$ | 1,340 | $ | 5 | $ | 8 | $ | 465 | $ | (165) | $ | (53) | $ | 26 | $ | (58) | $ | 1,568 | $ | - | ||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Equity securities available-for-sale |
$ | 34 | $ | (15) | $ | 1 | $ | (1) | $ | 19 | $ | (15) | ||||||||||||||||||||||||||||
Equity securities trading |
7 | (3) | $ | (1) | 3 | (3) | ||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total equity securities |
$ | 41 | $ | (18) | $ | 1 | $ | - | $ | (1) | $ | - | $ | - | $ | (1) | $ | 22 | $ | (18) | ||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Short term investments |
$ | 6 | $ | (1) | $ | 5 | ||||||||||||||||||||||||||||||||||
Other invested assets |
1 | (1) | - | |||||||||||||||||||||||||||||||||||||
Life settlement contracts |
100 | $ | 7 | $ | (12) | 95 | ||||||||||||||||||||||||||||||||||
Separate account business |
2 | 2 | ||||||||||||||||||||||||||||||||||||||
Derivative financial instruments, net |
5 | 3 | $ | (4) | 1 | (3) | 2 |
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) and 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 |
17
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 $23 million of transfers from Level 2 to Level 1 and $1 million of transfers from Level 1 to Level 2 during the three months ended March 31, 2014. There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2013. The Companys policy is to recognize transfers between levels at the beginning of quarterly reporting periods.
Valuation Methodologies and Inputs
The following section describes the valuation methodologies and relevant inputs used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instruments are generally classified.
Fixed Maturity Securities
Fixed maturity securities are valued using methodologies that model information generated by market transactions involving identical or comparable assets, as well as discounted cash flow methodologies. Common inputs include: prices from recently executed transactions of similar securities, broker/dealer quotes, benchmark yields, spreads off benchmark yields, interest rates and U.S. Treasury or swap curves. Specifically for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data.
Level 1 securities include exchange traded bonds, highly liquid U.S. and foreign government bonds, and redeemable preferred stock, valued using quoted market prices. Level 2 securities include most other fixed maturity securities as the significant inputs are observable in the marketplace. 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. Level 3 securities also include private placement debt securities whose fair value is determined using internal models with inputs that are not market observable.
Equity Securities
Level 1 equity securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily non-redeemable preferred stocks and common stocks valued using pricing for similar securities, recently executed transactions, broker/dealer quotes and other pricing models utilizing market observable inputs. Level 3 securities 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 primarily 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
Securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and treasury bills. Level 2 primarily includes commercial paper, for which all inputs are market observable. Fixed maturity securities purchased within one year of maturity are classified consistent with fixed maturity securities discussed above. Short term investments as presented in the tables above differ from the amounts presented in the Consolidated Condensed Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.
18
Other Invested Assets
Level 1 securities include exchange traded open-end funds valued using quoted market prices. Level 2 securities include overseas deposits which can be redeemed at net asset value in 90 days or less.
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.
Separate Account Business
Separate account business includes fixed maturity securities, equities and short term investments. The valuation methodologies and inputs for these asset types have been described above.
Assets and Liabilities Held for Sale on a Nonrecurring Basis
Assets and liabilities held for sale include assets and liabilities of CAC. These assets and liabilities are valued using the agreed upon transaction price for the sale of the common stock of CAC and are classified within Level 2 of the fair value hierarchy. See Note 12 for further discussion of the assets and liabilities classified as held for sale.
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.
Range | ||||||||||||
Valuation | Unobservable | (Weighted | ||||||||||
March 31, 2014 | Fair Value | Technique(s) | Input(s) | Average) | ||||||||
(In millions) | ||||||||||||
Assets |
||||||||||||
Fixed maturity securities |
$ | 116 | Discounted cash flow | Credit spread | 2% 15% (4%) | |||||||
Equity securities |
2 | Market approach | Private offering price | $4,295 per share | ||||||||
Life settlement contracts |
87 | Discounted cash flow | Discount rate risk premium | 9% | ||||||||
Mortality assumption | 70% 743% (191%) | |||||||||||
December 31, 2013 |
||||||||||||
|
||||||||||||
Assets |
||||||||||||
Fixed maturity securities |
$ | 142 | Discounted cash flow | Credit spread | 2% 20% (4%) | |||||||
Equity securities |
10 | Market approach | Private offering price | $360 $4,268 per share | ||||||||
($1,148 per share) | ||||||||||||
Life settlement contracts |
88 | Discounted cash flow | Discount rate risk premium | 9% | ||||||||
Mortality assumption | 70% 743% (192%) |
For fixed maturity securities, an increase in the credit spread assumptions would result in a lower fair value measurement. For equity securities, an increase in the private offering price, earnings projections and earnings
19
multiple 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 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 and estimated fair values of short term debt and long term debt exclude capital lease obligations. 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 | |||||||||||||||||||
March 31, 2014 | Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
(In millions) | ||||||||||||||||||||
Financial Assets: |
||||||||||||||||||||
Other invested assets |
$ | 495 | $ | 510 | $ | 510 | ||||||||||||||
Financial Liabilities: |
||||||||||||||||||||
Short term debt |
852 | $ | 823 | 126 | 949 | |||||||||||||||
Long term debt |
10,444 | 10,934 | 61 | 10,995 | ||||||||||||||||
December 31, 2013 |
||||||||||||||||||||
| ||||||||||||||||||||
Financial Assets: |
||||||||||||||||||||
Other invested assets |
$ | 508 | $ | 515 | $ | 515 | ||||||||||||||
Financial Liabilities: |
||||||||||||||||||||
Premium deposits and annuity contracts |
57 | 58 | 58 | |||||||||||||||||
Short term debt |
838 | $ | 852 | 20 | 872 | |||||||||||||||
Long term debt |
9,995 | 10,387 | 182 | 10,569 |
The following methods and assumptions were used in estimating the fair value of these financial assets and liabilities.
The fair values of mortgage loans, included in Other invested assets, were based on the present value of the expected future cash flows discounted at the current interest rate for similar financial instruments, adjusted for specific loan risk.
Premium deposits and annuity contracts were valued based on cash surrender values or estimated fair values of policyholder liabilities, net of amounts ceded related to sold business.
Fair value of debt was based on observable market prices when available. When observable market prices were not available, the fair value for debt was based on observable market prices of comparable instruments adjusted for differences between the observed 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.
20
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.
March 31, 2014 | December 31, 2013 | |||||||||||||||||||||||
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 |
$ | 300 | $ | (3 | ) | $ | 300 | $ | (4) | |||||||||||||||
Commodities: |
||||||||||||||||||||||||
Forwards short |
165 | $ | 2 | (8 | ) | 191 | $ | 5 | (4) | |||||||||||||||
Foreign exchange: |
||||||||||||||||||||||||
Currency forwards short |
146 | 5 | 114 | 2 | (1) | |||||||||||||||||||
Without hedge designation: |
||||||||||||||||||||||||
Equity markets: |
||||||||||||||||||||||||
Options purchased |
2,685 | 37 | 1,561 | 41 | ||||||||||||||||||||
written |
307 | (15 | ) | 729 | (23) | |||||||||||||||||||
Equity swaps and warrants |
||||||||||||||||||||||||
long |
11 | 2 | 17 | 9 | ||||||||||||||||||||
Interest rate risk: |
||||||||||||||||||||||||
Credit default swaps |
||||||||||||||||||||||||
purchased protection |
150 | (4 | ) | 50 | (3) | |||||||||||||||||||
sold protection |
25 | 1 | 25 | |||||||||||||||||||||
Foreign exchange: |
||||||||||||||||||||||||
Currency forwards long |
34 | 55 | ||||||||||||||||||||||
short |
69 | 1 | 113 |
Gross estimated fair values of derivative positions are currently presented in Equity securities, Receivables and Payable to brokers on the Consolidated Condensed Balance Sheets. There would be no significant difference in the balance included in such accounts if the estimated fair values were presented net for the periods ended March 31, 2014 and December 31, 2013.
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. There were no gains or losses included in Investment gains (losses) for the three months ended March 31, 2014. Gains of $2 million were included in Investment gains (losses) for the three months ended March 31, 2013. Gains of $8 million and losses of $13 million were included in Net investment income for the three months ended March 31, 2014 and 2013.
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. Losses of $7 million and $18 million were recognized in OCI related to these cash flow hedges for the three months ended March 31, 2014 and 2013. For the three months ended March 31, 2014 and 2013, losses of $7 million
21
and gains of $13 million were reclassified from AOCI into income. As of March 31, 2014, 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 $11 million. The net amounts recognized due to ineffectiveness were less than $1 million for the three ended March 31, 2014 and 2013.
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 including inflation and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.
Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. There can be no assurance that 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 CNAs results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of $74 million and $39 million for the three months ended March 31, 2014 and 2013. Catastrophe losses in the first quarter of 2014 related primarily to U.S. winter weather-related events.
Net Prior Year Development
The following tables and discussion include the net prior year development recorded for CNA Specialty, CNA Commercial and Other.
CNA | CNA | |||||||||||||||
Three Months Ended March 31, 2014 | Specialty | Commercial | Other | Total | ||||||||||||
(In millions) | ||||||||||||||||
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development |
$ | (2 | ) | $ | 17 | $ | 10 | $ | 25 | |||||||
Pretax (favorable) unfavorable premium development |
(8 | ) | (19) | (4 | ) | (31) | ||||||||||
Total pretax (favorable) unfavorable net prior year development |
$ | (10 | ) | $ | (2) | $ | 6 | $ | (6) | |||||||
22
CNA | CNA | |||||||||||||||
Three Months Ended March 31, 2013 | Specialty | Commercial | Other | Total | ||||||||||||
(In millions) | ||||||||||||||||
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development |
$ | (15) | $ | (11) | $ | (26) | ||||||||||
Pretax (favorable) unfavorable premium development |
(8) | (10) | $ | 5 | (13) | |||||||||||
Total pretax (favorable) unfavorable net prior year development |
$ | (23) | $ | (21) | $ | 5 | $ | (39) | ||||||||
CNA Specialty
The following table and discussion provide further detail of the net prior year claim and allocated claim adjustment expense reserve development (development) recorded for the CNA Specialty segment:
Three Months Ended March 31 | 2014 | 2013 | ||||||
(In millions) | ||||||||
Medical professional liability |
$ | 1 | $ | (3) | ||||
Other professional liability and management liability |
(6 | ) | (1) | |||||
Surety |
1 | 1 | ||||||
Other |
2 | (12) | ||||||
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development |
$ | (2) | $ | (15) | ||||
23
2014
Favorable development for other professional liability and management liability was related to better than expected loss emergence in accident years 2004 and prior.
2013
Overall, favorable development for medical professional liability reflects favorable experience in accident years 2009 and prior. Unfavorable development was recorded for accident years 2010 and 2011 due to higher than expected large loss activity.
Other includes standard property and casualty coverages provided to CNA Specialty customers. Favorable development for other coverages was primarily due to better than expected loss emergence in property coverages in accident years 2010 and subsequent.
CNA Commercial
The following table and discussion provide further detail of the development recorded for the CNA Commercial segment:
Three Months Ended March 31 | 2014 | 2013 | ||||||
(In millions) | ||||||||
Commercial auto |
$ | 20 | $ | (5) | ||||
General liability |
(5 | ) | (21) | |||||
Workers compensation |
10 | 25 | ||||||
Property and other |
(8 | ) | (10) | |||||
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development |
$ | 17 | $ | (11) | ||||
2014
Unfavorable development for commercial auto was primarily related to higher than expected frequency in accident years 2012 and 2013 and higher than expected loss emergence in accident years 2010 and 2011.
Unfavorable development for workers compensation was primarily due to the recognition of losses related to favorable premium development in accident year 2013.
2013
Favorable development in the general liability coverages was primarily due to better than expected loss emergence in accident years 2002 and prior.
Unfavorable development for workers compensation was primarily due to higher than expected large losses and increased severity in the state of California in accident year 2010.
6. Debt
CNA Financial
In February of 2014, CNA completed a public offering of $550 million aggregate principal amount of 4.0% senior notes due May 15, 2024. CNA intends to use the net proceeds from this offering to repurchase, redeem, repay or otherwise retire the $549 million outstanding aggregate principal balance of its 5.9% senior notes due December 15, 2014.
Diamond Offshore
In March of 2014, Diamond Offshore entered into an agreement to increase its revolving credit facility by $250 million and extend the maturity date by six months. The credit agreement provides for a $1.0 billion revolving credit facility for general corporate purposes, maturing on March 17, 2019.
24
7. Shareholders Equity
Accumulated Other Comprehensive Income
The tables below display the changes in Accumulated other comprehensive income (AOCI) by component for the three months ended March 31, 2013 and 2014:
Unrealized | Total | |||||||||||||||||||||||||||
Unrealized | Gains | Accumulated | ||||||||||||||||||||||||||
OTTI | Gains | (Losses) on | Foreign | Other | ||||||||||||||||||||||||
Gains | (Losses) on | Discontinued | Cash Flow | Pension | Currency | Comprehensive | ||||||||||||||||||||||
(Losses) | Investments | Operations | Hedges | Liability | Translation | Income (Loss) | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Balance, January 1, 2013 |
$ | 18 | $ | 1,233 | $ | - | $ | 16 | $ | (732) | $ | 143 | $ | 678 | ||||||||||||||
Other comprehensive income (loss) before reclassifications, after tax of $(7), $29, $0, $6, $0 and $0 |
14 | (49) | (12) | (61) | (108) | |||||||||||||||||||||||
Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $6, $0, $4, $(3) and $0 |
(13) | (9) | 4 | (18) | ||||||||||||||||||||||||
Other comprehensive income (loss) |
14 | (62) | - | (21) | 4 | (61) | (126) | |||||||||||||||||||||
Amounts attributable to noncontrolling interests |
(1) | 5 | 3 | 1 | 6 | 14 | ||||||||||||||||||||||
Balance, March 31, 2013 |
$ | 31 | $ | 1,176 | $ | - | $ | (2) | $ | (727) | $ | 88 | $ | 566 | ||||||||||||||
Balance, January 1, 2014 |
$ | 23 | $ | 622 | $ | - | $ | (7) | $ | (432) | $ | 133 | $ | 339 | ||||||||||||||
Transfer to net assets held for sale |
(5) | (17) | 22 | - | ||||||||||||||||||||||||
Other comprehensive income (loss) before reclassifications, after tax of $(6), $(141), $(5), $3, $0 and $0 |
12 | 264 | 8 | (4) | (6) | 274 | ||||||||||||||||||||||
Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $14, $0, $(3), $(1) and $0 |
(27) | 4 | (1) | (24) | ||||||||||||||||||||||||
Other comprehensive income (loss) |
12 | 237 | 8 | - | (1) | (6) | 250 | |||||||||||||||||||||
Amounts attributable to noncontrolling interests |
(1) | (24) | (1) | (1) | 1 | (26) | ||||||||||||||||||||||
Balance, March 31, 2014 |
$ | 29 | $ | 818 | $ | 29 | $ | (8) | $ | (432) | $ | 127 | $ | 563 | ||||||||||||||
Amounts reclassified from AOCI shown above are reported in Net income as follows:
Major Category of AOCI |
Affected Line Item | |
OTTI gains (losses) |
Investment gains (losses) | |
Unrealized gains (losses) on investments |
Investment gains (losses) | |
Unrealized gains (losses) on discontinued operations |
Discontinued operations, net of income tax | |
Cash flow hedges |
Interest expense, Other revenues and Contract drilling expenses | |
Pension liability |
Other operating expenses |
25
Subsidiary Equity Transactions
Diamond Offshore repurchased 1.9 million shares of its common stock at an aggregate cost of $86 million during the three months ended March 31, 2014. The Companys percentage ownership interest in Diamond Offshore increased as a result of these repurchases, from 50.4% to 51.1%. The repurchase price of the shares exceeded the Companys carrying value, resulting in a decrease to Additional paid-in capital of $8 million.
Treasury Stock
The Company repurchased 0.5 million and 2.1 million shares of Loews common stock at aggregate costs of $24 million and $92 million during the three months ended March 31, 2014 and 2013.
8. 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:
Other | ||||||||||||||||
Pension Benefits | Postretirement Benefits | |||||||||||||||
Three Months Ended March 31 | 2014 | 2013 | 2014 | 2013 | ||||||||||||
(In millions) | ||||||||||||||||
Service cost |
$ | 5 | $ | 6 | ||||||||||||
Interest cost |
37 | 34 | $ | 1 | $ | 1 | ||||||||||
Expected return on plan assets |
(53) | (49) | (1) | (1) | ||||||||||||
Amortization of unrecognized net loss |
7 | 14 | ||||||||||||||
Amortization of unrecognized prior service benefit |
(6) | (6) | ||||||||||||||
Net periodic benefit cost |
$ | (4) | $ | 5 | $ | (6) | $ | (6) | ||||||||
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 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 results are reported in four business segments: CNA Specialty, CNA Commercial, Life & Group Non-Core and Other. 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. Life & Group Non-Core primarily includes the results of the life and group lines of business that are in run-off. Other includes the
26
operations of Hardy Underwriting Bermuda Limited (Hardy), 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. Hardy is a specialized Lloyds of London underwriter primarily of short-tail exposures in marine and aviation, non-marine property, specialty lines and property treaty reinsurance.
Diamond Offshore owns and operates 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 45 drilling rigs, including four newbuild rigs which are under construction and one rig being constructed utilizing the hull of one of Diamond Offshores existing mid-water floaters. On March 31, 2014, 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 and NGLs and gathering and processing of natural gas. This segment consists of 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, natural gas storage facilities in four states and NGL pipelines and storage facilities in Louisiana, with approximately 14,450 miles of pipeline.
HighMount is engaged in the exploration, production and marketing of natural gas and oil (including condensate and NGLs), primarily located in the Permian Basin in West Texas as well as in the Mississippian Lime in Oklahoma.
Loews Hotels operates a chain of 19 hotels, 18 of which are in the United States and one is in Canada.
The Corporate and other segment consists primarily of corporate investment income, 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, 2013. In addition, CNA does not maintain a distinct investment portfolio for every insurance segment, and accordingly, allocation of assets to each segment is not performed. Therefore, a significant portion of net investment income and investment gains (losses) are allocated based on each segments carried insurance reserves, as adjusted. On February 10, 2014, CNA entered into a definitive agreement to sell the majority of its run-off annuity and pension business through the sale of the common stock of CAC. The business being sold, which was previously reported within Life & Group Non-Core, is now reported as discontinued operations in the Consolidated Condensed Statements of Income for the three months ended March 31, 2014 and 2013. See Notes 1 and 12 for further discussion of discontinued operations.
27
The following tables set forth the Companys consolidated revenues and income (loss) by business segment:
Three Months Ended March 31 | 2014 | 2013 | ||||||
(In millions) | ||||||||
Revenues (a): |
||||||||
CNA Financial: |
||||||||
CNA Specialty |
$ | 979 | $ | 956 | ||||
CNA Commercial |
1,041 | 1,101 | ||||||
Life and Group Non-Core |
331 | 315 | ||||||
Other |
112 | 83 | ||||||
Total CNA Financial |
2,463 | 2,455 | ||||||
Diamond Offshore |
710 | 732 | ||||||
Boardwalk Pipeline |
357 | 329 | ||||||
HighMount |
55 | 68 | ||||||
Loews Hotels |
105 | 94 | ||||||
Corporate and other |
53 | 8 | ||||||
Total |
$ | 3,743 | $ | 3,686 | ||||
Income (loss) before income tax and noncontrolling interests (a): |
||||||||
CNA Financial: |
||||||||
CNA Specialty |
$ | 212 | $ | 215 | ||||
CNA Commercial |
127 | 198 | ||||||
Life and Group Non-Core |
(16 | ) | (23) | |||||
Other |
(22 | ) | (40) | |||||
Total CNA Financial |
301 | 350 | ||||||
Diamond Offshore |
168 | 205 | ||||||
Boardwalk Pipeline |
23 | 99 | ||||||
HighMount |
(31 | ) | (139) | |||||
Loews Hotels |
5 | |||||||
Corporate and other |
17 | (17) | ||||||
Total |
$ | 483 | $ | 498 | ||||
Net income (loss) (a): |
||||||||
CNA Financial: |
||||||||
CNA Specialty |
$ | 128 | $ | 128 | ||||
CNA Commercial |
77 | 115 | ||||||
Life and Group Non-Core |
7 | |||||||
Other |
(12 | ) | (25) | |||||
Total CNA Financial |
200 | 218 | ||||||
Diamond Offshore |
69 | 82 | ||||||
Boardwalk Pipeline |
(18 | ) | 33 | |||||
HighMount |
(20 | ) | (88) | |||||
Loews Hotels |
3 | |||||||
Corporate and other |
11 | (11) | ||||||
Income from continuing operations |
245 | 234 | ||||||
Discontinued operations, net |
(186 | ) | 8 | |||||
Total |
$ | 59 | $ | 242 | ||||
28
(a) | Investment gains included in Revenues, Income before income tax and noncontrolling interests and Net income are as follows: |
Three Months Ended March 31 | 2014 | 2013 | ||||||
Revenues and Income before income tax and noncontrolling interests: |
||||||||
CNA Financial: |
||||||||
CNA Specialty |
$ | 12 | $ | 3 | ||||
CNA Commercial |
12 | 4 | ||||||
Life and Group Non-Core |
16 | 9 | ||||||
Other |
2 | 3 | ||||||
Total |
$ | 42 | $ | 19 | ||||
Net income: |
||||||||
CNA Financial: |
||||||||
CNA Specialty |
$ | 7 | $ | 2 | ||||
CNA Commercial |
7 | 2 | ||||||
Life and Group Non-Core |
9 | 6 | ||||||
Other |
1 | 2 | ||||||
Total |
$ | 24 | $ | 12 | ||||
10. Legal Proceedings
The Company and its subsidiaries are parties to litigation arising in the ordinary course of business. The outcome of this litigation will not, in the opinion of management, materially affect the Companys results of operations or equity.
11. Commitments and Contingencies
In the course of selling business entities and assets to third parties, CNA has agreed to indemnify purchasers for losses arising out of breaches of representation and warranties with respect to the business entities or assets being sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such indemnification agreements may include provisions that survive indefinitely. As of March 31, 2014, the aggregate amount of quantifiable indemnification agreements in effect for sales of business entities, assets and third party loans was $702 million.
CNA has agreed to provide indemnification to third party purchasers for certain losses associated with sold business entities or assets that are not limited by a contractual monetary amount. As of March 31, 2014, CNA had outstanding unlimited indemnifications in connection with the sales of certain of its business entities or assets that included tax liabilities arising prior to a purchasers ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. These indemnification agreements survive until the applicable statutes of limitation expire, or until the agreed upon contract terms expire.
29
12. Discontinued Operations
As discussed in Note 1, on February 10, 2014, CNA entered into a definitive agreement to sell the majority of its run-off annuity and pension deposit business through the sale of the common stock of CAC. The assets and liabilities of the business being sold are presented as held for sale on the Consolidated Condensed Balance Sheet as of March 31, 2014 and the results of operations have been reclassified as discontinued operations in the Consolidated Condensed Statements of Income for the three months ended March 31, 2014 and 2013.
The results of discontinued operations reflected in the Consolidated Condensed Statements of Income were as follows:
Three Months Ended March 31 | 2014 | 2013 | ||||||
(In millions) | ||||||||
Revenues: |
||||||||
Net investment income |
$ | 41 | $ | 42 | ||||
Investment gains |
1 | 5 | ||||||
Other |
1 | |||||||
Total revenues |
42 | 48 | ||||||
Expenses: |
||||||||
Insurance claims and policyholders benefits |
31 | 33 | ||||||
Other operating expenses |
1 | 1 | ||||||
Total |
32 | 34 | ||||||
Income before income tax |
10 | 14 | ||||||
Income tax expense |
(3 | ) | (5) | |||||
Results of discontinued operations, net of income tax |
7 | 9 | ||||||
Impairment loss on sale, net of tax benefit of $41 |
(214 | ) | ||||||
Amounts attributable to noncontrolling interests |
21 | (1) | ||||||
Income (loss) from discontinued operations |
$ | (186 | ) | $ | 8 | |||
30
The following table presents the detailed assets and liabilities held for sale as of March 31, 2014:
|
||||
(In millions) | ||||
Assets: |
||||
Investments: |
||||
Fixed maturity securities at fair value |
$ | 2,684 | ||
Equity securities at fair value |
16 | |||
Other invested assets |
1 | |||
Short term investments |
36 | |||
|
||||
Total investments |
2,737 | |||
Cash |
14 | |||
Receivables |
787 | |||
Other assets |
55 | |||
Separate account business |
148 | |||
|
||||
Assets held for sale |
3,741 | |||
Less: Impairment on sale |
(255) | |||
|
||||
Total assets held for sale |
$ | 3,486 | ||
|
||||
|
||||
Liabilities: |
||||
Insurance reserves |
$ | 3,017 | ||
Other liabilities |
85 | |||
Separate account business |
148 | |||
|
||||
Total liabilities held for sale |
$ | 3,250 | ||
|
||||
|
13. Consolidating Financial Information
The following schedules present the Companys consolidating balance sheet information at March 31, 2014 and December 31, 2013, and consolidating statements of income information for the three months ended March 31, 2014 and 2013. These schedules present the individual subsidiaries of the Company and their contribution to the Consolidated Condensed Financial Statements. Amounts presented will not necessarily be the same as those in the individual financial statements of the Companys subsidiaries due to adjustments for purchase accounting, income taxes and noncontrolling interests. In addition, many of the Companys subsidiaries use a classified balance sheet which also leads to differences in amounts reported for certain line items.
The Corporate and Other column primarily reflects the parent companys investment in its subsidiaries, invested cash portfolio and corporate long term debt. The elimination adjustments are for intercompany assets and liabilities, interest and dividends, the parent companys investment in capital stocks of subsidiaries, and various reclasses of debit or credit balances to the amounts in consolidation. Purchase accounting adjustments have been pushed down to the appropriate subsidiary.
31
Loews Corporation
Consolidating Balance Sheet Information
March 31, 2014 | CNA Financial |
Diamond Offshore |
Boardwalk Pipeline |
HighMount |
Loews Hotels |
Corporate and Other |
Eliminations | Total | ||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||
Investments |
$ | 45,008 | $ | 1,582 | $ | 10 | $ | 55 | $ | 5,408 | $ | 52,063 | ||||||||||||||||||||
Cash |
206 | 17 | $ | 13 | 1 | 10 | 54 | 301 | ||||||||||||||||||||||||
Receivables |
7,599 | 438 | 95 | 80 | 32 | 128 | $ | (17) | 8,355 | |||||||||||||||||||||||
Property, plant and equipment |
274 | 5,959 | 7,275 | 983 | 440 | 43 | 14,974 | |||||||||||||||||||||||||
Deferred income taxes |
70 | 507 | 3 | (580) | - | |||||||||||||||||||||||||||
Goodwill |
119 | 20 | 215 | 354 | ||||||||||||||||||||||||||||
Assets held for sale |
3,486 | 3,486 | ||||||||||||||||||||||||||||||
Investments in capital stocks of subsidiaries |
17,175 | (17,175) | - | |||||||||||||||||||||||||||||
Other assets |
777 | 316 | 286 | 12 | 181 | 20 | 26 | 1,618 | ||||||||||||||||||||||||
Deferred acquisition costs of insurance subsidiaries |
652 | 652 | ||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total assets |
$ | 58,191 | $ | 8,332 | $ | 7,884 | $ | 1,593 | $ | 721 | $ | 22,828 | $ | (17,746) | $ | 81,803 | ||||||||||||||||
|
||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Liabilities and Equity: |
||||||||||||||||||||||||||||||||
Insurance reserves |
$ | 36,051 | $ | 36,051 | ||||||||||||||||||||||||||||
Payable to brokers |
364 | $ | 12 | $ | 506 | 882 | ||||||||||||||||||||||||||
Short term debt |
549 | $ | 250 | 1 | $ | 54 | 854 | |||||||||||||||||||||||||
Long term debt |
2,558 | 2,230 | $ | 3,375 | 481 | 133 | 1,679 | 10,456 | ||||||||||||||||||||||||
Deferred income taxes |
522 | 683 | 42 | 205 | $ | (554) | 898 | |||||||||||||||||||||||||
Liabilities held for sale |
3,250 | 3,250 | ||||||||||||||||||||||||||||||
Other liabilities |
2,870 | 729 | 359 | 98 | 26 | 673 | (460) | 4,295 | ||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total liabilities |
45,642 | 3,731 | 4,417 | 592 | 255 | 3,063 | (1,014) | 56,686 | ||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total shareholders equity |
11,285 | 2,362 | 1,541 | 1,001 | 466 | 19,765 | (16,732) | 19,688 | ||||||||||||||||||||||||
Noncontrolling interests |
1,264 | 2,239 | 1,926 | 5,429 | ||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total equity |
12,549 | 4,601 | 3,467 | 1,001 | 466 | 19,765 | (16,732) | 25,117 | ||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total liabilities and equity |
$ | 58,191 | $ | 8,332 | $ | 7,884 | $ | 1,593 | $ | 721 | $ | 22,828 | $ | (17,746) | $ | 81,803 | ||||||||||||||||
|
||||||||||||||||||||||||||||||||
|
32
Loews Corporation
Consolidating Balance Sheet Information
December 31, 2013 | CNA Financial |
Diamond Offshore |
Boardwalk Pipeline |
HighMount | Loews Hotels |
Corporate and Other |
Eliminations | Total | ||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||
Investments |
$ | 46,107 | $ | 2,061 | $ | 28 | $ | 43 | $ | 4,734 | $ | 52,973 | ||||||||||||||||||||
Cash |
195 | 36 | $ | 29 | 1 | 10 | 24 | 295 | ||||||||||||||||||||||||
Receivables |
8,666 | 498 | 97 | 143 | 28 | 74 | $ | (145) | 9,361 | |||||||||||||||||||||||
Property, plant and equipment |
282 | 5,472 | 7,296 | 974 | 430 | 44 | 14,498 | |||||||||||||||||||||||||
Deferred income taxes |
244 | 517 | 3 | (764) | - | |||||||||||||||||||||||||||
Goodwill |
119 | 20 | 215 | 3 | 357 | |||||||||||||||||||||||||||
Investments in capital stocks of subsidiaries |
17,264 | (17,264) | - | |||||||||||||||||||||||||||||
Other assets |
741 | 305 | 360 | 15 | 183 | 7 | 39 | 1,650 | ||||||||||||||||||||||||
Deferred acquisition costs of insurance subsidiaries |
624 | 624 | ||||||||||||||||||||||||||||||
Separate account business |
181 | 181 | ||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total assets |
$ | 57,159 | $ | 8,392 | $ | 7,997 | $ | 1,678 | $ | 700 | $ | 22,147 | $ | (18,134) | $ | 79,939 | ||||||||||||||||
|
||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Liabilities and Equity: |
||||||||||||||||||||||||||||||||
Insurance reserves |
$ | 38,394 | $ | 38,394 | ||||||||||||||||||||||||||||
Payable to brokers |
85 | $ | 1 | $ | 9 | $ | 48 | 143 | ||||||||||||||||||||||||
Short term debt |
549 | 250 | 21 | $ | 20 | 840 | ||||||||||||||||||||||||||
Long term debt |
2,011 | 2,230 | $ | 3,424 | 481 | 182 | 1,678 | 10,006 | ||||||||||||||||||||||||
Deferred income taxes |
516 | 689 | 41 | 195 | $ | (725) | 716 | |||||||||||||||||||||||||
Other liabilities |
3,323 | 734 | 427 | 121 | 23 | 690 | (565) | 4,753 | ||||||||||||||||||||||||
Separate account business |
181 | 181 | ||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total liabilities |
44,543 | 3,731 | 4,540 | 632 | 266 | 2,611 | (1,290) | 55,033 | ||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total shareholders equity |
11,354 | 2,362 | 1,570 | 1,046 | 434 | 19,536 | (16,844) | 19,458 | ||||||||||||||||||||||||
Noncontrolling interests |
1,262 | 2,299 | 1,887 | 5,448 | ||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total equity |
12,616 | 4,661 | 3,457 | 1,046 | 434 | 19,536 | (16,844) | 24,906 | ||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total liabilities and equity |
$ | 57,159 | $ | 8,392 | $ | 7,997 | $ | 1,678 | $ | 700 | $ | 22,147 | $ | (18,134) | $ | 79,939 | ||||||||||||||||
|
||||||||||||||||||||||||||||||||
|
33
Loews Corporation
Consolidating Statement of Income Information
Three Months Ended March 31, 2014 | CNA Financial |
Diamond Offshore |
Boardwalk Pipeline |
HighMount | Loews Hotels |
Corporate and Other |
Eliminations | Total | ||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Revenues: |
||||||||||||||||||||||||||||||||
Insurance premiums |
$ | 1,806 | $ | 1,806 | ||||||||||||||||||||||||||||
Net investment income |
526 | $ | 51 | 577 | ||||||||||||||||||||||||||||
Intercompany interest and dividends |
377 | $ | (377) | - | ||||||||||||||||||||||||||||
Investment gains |
42 | 42 | ||||||||||||||||||||||||||||||
Contract drilling revenues |
$ | 685 | 685 | |||||||||||||||||||||||||||||
Other |
89 | 25 | $ | 357 | $ | 55 | $ | 105 | 2 | 633 | ||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total |
2,463 | 710 | 357 | 55 | 105 | 430 | (377) | 3,743 | ||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Expenses: |
||||||||||||||||||||||||||||||||
Insurance claims and policyholders benefits |
1,446 | 1,446 | ||||||||||||||||||||||||||||||
Amortization of deferred acquisition costs |
329 | 329 | ||||||||||||||||||||||||||||||
Contract drilling expenses |
370 | 370 | ||||||||||||||||||||||||||||||
Other operating expenses |
343 | 154 | 293 | 84 | 99 | 18 | 991 | |||||||||||||||||||||||||
Interest |
44 | 18 | 41 | 2 | 1 | 18 | 124 | |||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total |
2,162 | 542 | 334 | 86 | 100 | 36 | - | 3,260 | ||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Income (loss) before income tax |
301 | 168 | 23 | (31) | 5 | 394 | (377) | 483 | ||||||||||||||||||||||||
Income tax (expense) benefit |
(79) | (27) | 11 | 11 | (2) | (6) | (92) | |||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Income (loss) from continuing operations |
222 | 141 | 34 | (20) | 3 | 388 | (377) | 391 | ||||||||||||||||||||||||
Discontinued operations, net of income tax |
(207) | (207) | ||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Net income (loss) |
15 | 141 | 34 | (20) | 3 | 388 | (377) | 184 | ||||||||||||||||||||||||
Amounts attributable to noncontrolling interests |
(1) | (72) | (52) | (125) | ||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Net income (loss) attributable to Loews Corporation |
$ | 14 | $ | 69 | $ | (18) | $ | (20) | $ | 3 | $ | 388 | $ | (377) | $ | 59 | ||||||||||||||||
|
||||||||||||||||||||||||||||||||
|
34
Loews Corporation
Consolidating Statement of Income Information
CNA | Diamond | Boardwalk | Loews | Corporate | ||||||||||||||||||||||||||||
Three Months Ended March 31, 2013 | Financial | Offshore | Pipeline | HighMount | Hotels | and Other | Eliminations | Total | ||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Revenues: |
||||||||||||||||||||||||||||||||
Insurance premiums |
$ | 1,764 | $ | 1,764 | ||||||||||||||||||||||||||||
Net investment income |
591 | $ | 1 | $ | 7 | 599 | ||||||||||||||||||||||||||
Intercompany interest and dividends |
182 | $ | (182) | - | ||||||||||||||||||||||||||||
Investment gains |
19 | 19 | ||||||||||||||||||||||||||||||
Contract drilling revenues |
700 | 700 | ||||||||||||||||||||||||||||||
Other |
81 | 31 | $ | 329 | $ | 68 | $ | 94 | 1 | 604 | ||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total |
2,455 | 732 | 329 | 68 | 94 | 190 | (182) | 3,686 | ||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Expenses: |
||||||||||||||||||||||||||||||||
Insurance claims and policyholders benefits |
1,396 | 1,396 | ||||||||||||||||||||||||||||||
Amortization of deferred acquisition costs |
328 | 328 | ||||||||||||||||||||||||||||||
Contract drilling expenses |
375 | 375 | ||||||||||||||||||||||||||||||
Other operating expenses |
339 | 144 | 190 | 202 | 91 | 15 | 981 | |||||||||||||||||||||||||
Interest |
42 | 8 | 40 | 5 | 3 | 10 | 108 | |||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total |
2,105 | 527 | 230 | 207 | 94 | 25 | - | 3,188 | ||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Income (loss) before income tax |
350 | 205 | 99 | (139) | - | 165 | (182) | 498 | ||||||||||||||||||||||||
Income tax (expense) benefit |
(108) | (36) | (22) | 51 | 6 | (109) | ||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Income (loss) from continuing operations |
242 | 169 | 77 | (88) | - | 171 | (182) | 389 | ||||||||||||||||||||||||
Discontinued operations, net of income tax |
9 | 9 | ||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Net income (loss) |
251 | 169 | 77 | (88) | - | 171 | (182) | 398 | ||||||||||||||||||||||||
Amounts attributable to noncontrolling interests |
(25) | (87) | (44) | (156) | ||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Net income (loss) attributable to Loews Corporation |
$ | 226 | $ | 82 | $ | 33 | $ | (88) | $ | - | $ | 171 | $ | (182) | $ | 242 | ||||||||||||||||
|
||||||||||||||||||||||||||||||||
|
35
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Managements discussion and analysis of financial condition and results of operations (MD&A) should be read in conjunction with our Consolidated Condensed Financial Statements included in Item 1 of this Report, Risk Factors included in Part II, Item 1A of this Report, and the Consolidated Financial Statements, Risk Factors, and MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2013. This MD&A is comprised of the following sections:
Page | ||
No. | ||
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47 | ||
49 | ||
50 | ||
51 | ||
51 | ||
51 | ||
53 | ||
53 | ||
53 | ||
53 | ||
54 | ||
57 |
We are a holding company. Our subsidiaries are engaged in the following lines of business:
| commercial property and casualty insurance (CNA Financial Corporation (CNA), a 90% owned subsidiary); |
| operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (Diamond Offshore), a 51% owned subsidiary); |
| transportation and storage of natural gas and natural gas liquids and gathering and processing of natural gas (Boardwalk Pipeline Partners, LP (Boardwalk Pipeline), a 53% 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 |
| operation of a chain of hotels (Loews Hotels Holding Corporation (Loews Hotels), a wholly owned subsidiary). |
Unless the context otherwise requires, references in this Report to Loews Corporation, the Company, Parent Company, we, our, us or like terms refer to the business of Loews Corporation excluding its subsidiaries.
Consolidated Financial Results
Income from continuing operations for the 2014 first quarter was $245 million, or $0.63 per share, compared to $234 million, or $0.60 per share, in the 2013 first quarter. Net income attributable to Loews includes a loss from discontinued operations of $186 million (after tax and noncontrolling interests) for the three months ended March 31, 2014 related to CNAs pending sale of its annuity and pension deposit business.
36
Income from continuing operations increased primarily due to higher parent company investment income as a result of improved performance of the trading portfolio and lower ceiling test impairment charges at HighMount. These increases were partially offset by a $55 million charge (after tax and noncontrolling interests) related to the write off of all previously capitalized costs incurred by the Company and Boardwalk Pipeline for the proposed Bluegrass project.
CNA earnings decreased primarily due to lower net investment income, higher catastrophe losses and lower favorable net prior year development, partially offset by improved non-catastrophe current accident year underwriting results and higher realized investment gains.
Diamond Offshores earnings decreased primarily due to lower utilization and increased interest expense as a result of higher debt levels. These declines were partially offset by higher dayrates earned.
Book value per share increased to $50.89 at March 31, 2014 from $50.25 at December 31, 2013 and $49.93 at March 31, 2013. Book value per share excluding Accumulated other comprehensive income (AOCI) increased to $49.43 at March 31, 2014 from $49.38 at December 31, 2013 and $48.48 at March 31, 2013.
We are a holding company and derive substantially all of our cash flow from our subsidiaries. We rely upon our invested cash balances and distributions from our subsidiaries to generate the funds necessary to meet our obligations and to declare and pay any dividends to our shareholders. The ability of our subsidiaries to pay dividends is subject to, among other things, the availability of sufficient earnings and funds in such subsidiaries, applicable state laws, including in the case of the insurance subsidiaries of CNA, laws and rules governing the payment of dividends by regulated insurance companies and compliance with covenants in their respective loan agreements. Claims of creditors of our subsidiaries will generally have priority as to the assets of such subsidiaries over our claims and those of our creditors and shareholders.
The preparation of the consolidated condensed financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. Actual results could differ from those estimates.
The consolidated condensed financial statements and accompanying notes have been prepared in accordance with GAAP, applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the consolidated condensed financial statements. In general, our estimates are based on historical experience, evaluation of current trends, information from third party professionals and various other assumptions that we believe are reasonable under the known facts and circumstances.
We consider the accounting policies discussed below to be critical to an understanding of our consolidated condensed financial statements as their application places the most significant demands on our judgment.
| Insurance Reserves |
| Reinsurance and Other Receivables |
| Litigation |
| Valuation of Investments and Impairment of Securities |
| Long Term Care Products |
| Payout Annuity Contracts |
| Pension and Postretirement Benefit Obligations |
| Valuation of HighMounts Proved Reserves |
| Impairment of Long-Lived Assets |
| Goodwill |
| Income Taxes |
Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from estimates, which may have a material adverse impact on our results of operations or equity. See the Critical Accounting Estimates section and the Results of Operations by Business Segment CNA Financial Reserves Estimates and Uncertainties section of our MD&A included under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013 for further information.
37
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Unless the context otherwise requires, references to net operating income (loss), net realized investment results and net income (loss) reflect amounts attributable to Loews Corporation shareholders.
On February 10, 2014, CNA entered into a definitive agreement to sell the majority of its run-off annuity and pension deposit business through the sale of the common stock of Continental Assurance Company (CAC). In connection with the pending sale, the Company recorded an impairment charge of $193 million (after tax and noncontrolling interests). The business being sold, which was previously reported within Life & Group Non-Core is now reported as discontinued operations in the Consolidated Condensed Statements of Income for the three months ended March 31, 2014 and 2013 and assets and liabilities held for sale in the Consolidated Condensed Balance Sheet as of March 31, 2014. Further information on the sale is provided in Notes 1 and 12 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report.
The following table summarizes the results of operations for CNA for the three months ended March 31, 2014 and 2013 as presented in Note 13 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report:
Three Months Ended March 31 | 2014 | 2013 | ||||||||
| ||||||||||
(In millions) | ||||||||||
Revenues: |
||||||||||
Insurance premiums |
$ | 1,806 | $ | 1,764 | ||||||
Net investment income |
526 | 591 | ||||||||
Investment gains |
42 | 19 | ||||||||
Other |
89 | 81 | ||||||||
| ||||||||||
Total |
2,463 | 2,455 | ||||||||
| ||||||||||
Expenses: |
||||||||||
Insurance claims and policyholders benefits |
1,446 | 1,396 | ||||||||
Amortization of deferred acquisition costs |
329 | 328 | ||||||||
Other operating expenses |
343 | 339 | ||||||||
Interest |
44 | 42 | ||||||||
| ||||||||||
Total |
2,162 | 2,105 | ||||||||
| ||||||||||
Income before income tax |
301 | 350 | ||||||||
Income tax expense |
(79 | ) | (108 | ) | ||||||
| ||||||||||
Income from continuing operations |
222 | 242 | ||||||||
Discontinued operations, net of income tax |
(207 | ) | 9 | |||||||
| ||||||||||
Net income |
15 | 251 | ||||||||
Amounts attributable to noncontrolling interests |
(1 | ) | (25 | ) | ||||||
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Net income attributable to Loews Corporation |
$ | 14 | $ | 226 | ||||||
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Income from continuing operations decreased $20 million for the three months ended March 31, 2014 as compared with the same period in 2013, due to lower net investment income, higher catastrophe losses and lower favorable net prior year development, partially offset by improved non-catastrophe current accident year underwriting results and higher net realized investment gains. See the Investments section of this MD&A for further discussion of net realized investment results and net investment income. Further information on net prior year development is included in Note 5 of the Notes to Consolidated Condensed Financial Statements included under Item 1.
CNA Property and Casualty Insurance Operations
CNAs property and casualty insurance operations consist of professional, financial, specialty property and casualty products and services and commercial insurance and risk management products.
In the evaluation of the results of the property and casualty businesses, CNA utilizes the loss ratio, the expense ratio, the dividend ratio and the combined ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred
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acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios.
The following tables summarize the results of CNAs property and casualty operations for the three months ended March 31, 2014 and 2013:
CNA | CNA | |||||||||||||||
Three Months Ended March 31, 2014 | Specialty | Commercial | Hardy | Total | ||||||||||||
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(In millions, except %) | ||||||||||||||||
Net written premiums |
$ | 796 | $ | 899 | $ | 72 | $ | 1,767 | ||||||||
Net earned premiums |
748 | 822 | 98 | 1,668 | ||||||||||||
Net investment income |
151 | 198 | 1 | 350 | ||||||||||||
Net operating income |
121 | 70 | 6 | & |