10-Q
Table of Contents

 

 

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 September 30, 2015

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

(Registrant’s 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 October 23, 2015    

Common stock, $0.01 par value

     354,342,618 shares              

 

 

 


Table of Contents

INDEX

 

    

Page

No.

 

Part I.  Financial Information

  

Item 1.  Financial Statements (unaudited)

  

Consolidated Condensed Balance Sheets
September 30, 2015 and December 31, 2014

     3     

Consolidated Condensed Statements of Income
Three and nine months ended September  30, 2015 and 2014

     4     

Consolidated Condensed Statements of Comprehensive Income
Three and nine months ended September 30, 2015 and 2014

     5     

Consolidated Condensed Statements of Equity
Nine months ended September  30, 2015 and 2014

     6     

Consolidated Condensed Statements of Cash Flows
Nine months ended September  30, 2015 and 2014

     7     

Notes to Consolidated Condensed Financial Statements

     8     

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

     44     

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

     72     

Item 4.  Controls and Procedures

     72     

Part II.  Other Information

     73     

Item 1.  Legal Proceedings

     73     

Item 1A.  Risk Factors

     73     

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

     73     

Item 6.  Exhibits

     74     

 

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

    September 30,     December 31,  
    2015     2014  

 

 
(Dollar amounts in millions, except per share data)            

Assets:

   

Investments:

   

Fixed maturities, amortized cost of $37,690 and $37,469

      $     40,301             $    40,885         

Equity securities, cost of $978 and $733

    885             728         

Limited partnership investments

    3,495             3,674         

Other invested assets, primarily mortgage loans

    787             731         

Short term investments

    5,082             6,014         

 

 

Total investments

    50,550             52,032         

Cash

    328             364         

Receivables

    8,079             7,770         

Property, plant and equipment

    15,902             15,611         

Goodwill

    352             374         

Other assets

    1,715             1,616         

Deferred acquisition costs of insurance subsidiaries

    606             600         

 

 

Total assets

      $ 77,532             $    78,367         

 

 

Liabilities and Equity:

   

Insurance reserves:

   

Claim and claim adjustment expense

      $ 22,867             $    23,271         

Future policy benefits

    9,520             9,490         

Unearned premiums

    3,706             3,592         

Policyholders’ funds

      27         

 

 

Total insurance reserves

    36,093             36,380         

Payable to brokers

    733             673         

Short term debt

    1,278             335         

Long term debt

    9,492             10,333         

Deferred income taxes

    796             893         

Other liabilities

    4,987             5,103         

 

 

Total liabilities

    53,379             53,717         

 

 

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 – 373,211,389 and 372,934,540 shares

    4             4         

Additional paid-in capital

    3,490             3,481         

Retained earnings

    15,906             15,515         

Accumulated other comprehensive income (loss)

    (23)            280         

 

 
    19,377             19,280         

Less treasury stock, at cost (16,319,020 shares)

    (633)         

 

 

Total shareholders’ equity

    18,744             19,280         

Noncontrolling interests

    5,409             5,370         

 

 

Total equity

    24,153             24,650         

 

 

Total liabilities and equity

      $ 77,532             $    78,367         

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

         Three Months Ended     Nine Months Ended      
     September 30,     September 30,  
  

 

 

 
     2015     2014     2015     2014  

 

 

(In millions, except per share data)

        

Revenues:

        

Insurance premiums

   $ 1,751      $ 1,810      $ 5,173      $ 5,427      

Net investment income

     321        451        1,419        1,625      

Investment gains (losses):

        

Other-than-temporary impairment losses

     (56     (10     (99     (17)     

Portion of other-than-temporary impairment losses recognized in Other comprehensive income

        

 

 

Net impairment losses recognized in earnings

     (56     (10     (99     (17)     

Other net investment gains

     6        47        57        82      

 

 

Total investment gains (losses)

     (50     37        (42     65      

Contract drilling revenues

     599        728        1,816        2,063      

Other revenues

     548        497        1,716        1,624      

 

 

Total

     3,169        3,523        10,082        10,804      

 

 

Expenses:

        

Insurance claims and policyholders’ benefits

     1,200        1,354        4,008        4,241      

Amortization of deferred acquisition costs

     319        332        936        996      

Contract drilling expenses

     276        400        971        1,165      

Other operating expenses (Note 4)

     898        977        3,026        2,634      

Interest

     128        121        393        369      

 

 

Total

     2,821        3,184        9,334        9,405      

 

 

Income before income tax

     348        339        748        1,399      

Income tax expense

     (66     (99     (170     (347)     

 

 

Income from continuing operations

     282        240        578        1,052      

Discontinued operations, net

       29          (384)     

 

 

Net income

     282        269        578        668      

Amounts attributable to noncontrolling interests

     (100     (61     (117     (285)     

 

 

Net income attributable to Loews Corporation

   $ 182      $ 208      $ 461      $ 383      

 

 

Net income attributable to Loews Corporation:

        

Income from continuing operations

   $ 182      $ 179      $ 461      $ 747      

Discontinued operations, net

       29          (364)     

 

 

Net income

   $ 182      $ 208      $ 461      $ 383      

 

 

Basic and diluted net income per share:

        

Income from continuing operations

   $ 0.50      $ 0.47      $ 1.25      $ 1.94      

Discontinued operations, net

       0.08          (0.94)     

 

 

Net income

   $ 0.50      $ 0.55      $ 1.25      $ 1.00      

 

 

Dividends per share

   $ 0.0625      $ 0.0625      $ 0.1875      $ 0.1875      

 

 

Weighted average shares outstanding:

        

Shares of common stock

     360.91        380.59        367.74        384.53      

Dilutive potential shares of common stock

     0.19        0.60        0.29        0.66      

 

 

Total weighted average shares outstanding assuming dilution

     361.10        381.19        368.03        385.19      

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

    

      Three Months Ended      

September 30,

    

    Nine Months Ended    

September 30,

 
  

 

 

 
       2015          2014        2015      2014  

 

 
(In millions)                            

Net income

     $     282              $   269              $     578              $     668        

 

 

Other comprehensive income (loss), after tax

           

Changes in:

           

Net unrealized gains (losses) on investments with other-than-temporary impairments

     2              1              (3)             15        

Net other unrealized gains (losses) on investments

     (39)             (83)             (292)                 424        

 

 

Total unrealized gains (losses) on available-for-sale investments

     (37)             (82)             (295)             439        

Discontinued operations

        (34)                (19)       

Unrealized gains (losses) on cash flow hedges

     1              (4)             5              (1)       

Pension liability

     4              2              51              (52)       

Foreign currency

     (53)             (73)             (100)             (37)       

 

 

Other comprehensive income (loss)

     (85)             (191)             (339)             330        

 

 

Comprehensive income

     197              78              239              998        

Amounts attributable to noncontrolling interests

     (91)             (39)             (82)             (316)       

 

 

Total comprehensive income attributable to Loews Corporation

     $     106              $     39              $     157              $     682        

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF EQUITY

(Unaudited)

 

           Loews Corporation Shareholders         
     Total    

    Common

    Stock

    

  Additional  

  Paid-in  

  Capital  

    

  Retained

  Earnings

   

Accumulated

Other

Comprehensive

Income

    

  Common    

  Stock    

  Held in    
  Treasury    

    

Noncontrolling  

Interests  

 

 

 
(In millions)                                               

Balance, January 1, 2014

   $       24,906      $ 4       $     3,607          $       15,508      $ 339            $ -            $ 5,448          

Net income

     668              383              285          

Other comprehensive income

     330                299                 31          

Dividends paid

     (333           (72           (261)         

Purchases of subsidiary stock from noncontrolling interests

     (83        (8)                  (75)         

Purchases of Loews treasury stock

     (415                (415)          

Issuance of Loews common stock

     5           5                 

Stock-based compensation

     19           9                    10          

Other

     19              (2           21          

 

 

Balance, September 30, 2014

   $ 25,116      $ 4       $ 3,613          $ 15,817      $ 638            $ (415)           $ 5,459          

 

 

Balance, January 1, 2015

   $ 24,650      $ 4       $ 3,481          $ 15,515      $ 280            $ -            $ 5,370          

Net income

     578              461              117          

Other comprehensive loss

     (339               (304)                (35)         

Dividends paid

     (207           (69           (138)         

Issuance of equity securities by subsidiary

     115           (2)            1                 116          

Purchases of subsidiary stock from noncontrolling interests

     (31        5                    (36)         

Purchases of Loews treasury stock

     (633                (633)          

Issuance of Loews common stock

     7           7                 

Stock-based compensation

     19           17                    2          

Other

     (6        (18)          (1           13          

 

 

Balance, September 30, 2015

   $ 24,153      $ 4       $ 3,490          $ 15,906      $ (23)           $       (633)           $ 5,409          

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

                           
Nine Months Ended September 30    2015      2014  

 

 
(In millions)              

Operating Activities:

     

Net income

   $ 578       $ 668        

Adjustments to reconcile net income to net cash provided (used) by operating activities, net

     1,370         1,491        

Changes in operating assets and liabilities, net:

     

Receivables

     31         571        

Deferred acquisition costs

     11         14        

Insurance reserves

     195         (222)       

Other assets

     (81      (127)       

Other liabilities

     (108      (152)       

Trading securities

     199         (147)       

 

 

Net cash flow operating activities

     2,195         2,096        

 

 

Investing Activities:

     

Purchases of fixed maturities

     (7,055         (7,457)       

Proceeds from sales of fixed maturities

     3,590         4,005        

Proceeds from maturities of fixed maturities

     3,101         2,901        

Purchases of equity securities

     (60      (44)       

Proceeds from sales of equity securities

     43         23        

Purchases of limited partnership investments

     (120      (218)       

Proceeds from sales of limited partnership investments

     156         133        

Purchases of property, plant and equipment

     (1,447      (1,775)       

Dispositions

     28         1,030        

Change in short term investments

     298         489        

Other, net

     (121      (52)       

 

 

Net cash flow investing activities

     (1,587      (965)       

 

 

Financing Activities:

     

Dividends paid

     (69      (72)       

Dividends paid to noncontrolling interests

     (138      (261)       

Purchases of subsidiary stock from noncontrolling interests

     (29      (88)       

Purchases of Loews treasury stock

     (617      (396)       

Issuance of Loews common stock

     7         5        

Proceeds from sale of subsidiary stock

     114         4        

Principal payments on debt

     (1,761      (1,250)       

Issuance of debt

     1,851         1,259        

Other, net

     4         14        

 

 

Net cash flow financing activities

     (638      (785)       

 

 

Effect of foreign exchange rate on cash

     (6      (3)       

 

 

Net change in cash

     (36      343        

Cash, beginning of period

     364         294        

 

 

Cash, end of period

   $ 328       $ 637        

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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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 53% 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 51% 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.

Loews segments are CNA Financial, including Specialty, Commercial, International and Other Non-Core; Diamond Offshore; Boardwalk Pipeline; Loews Hotels; and Corporate and other. See Note 9 for additional information on segments.

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 September 30, 2015 and December 31, 2014, the results of operations and comprehensive income for the three and nine months ended September 30, 2015 and 2014 and changes in shareholders’ equity and cash flows for the nine months ended September 30, 2015 and 2014.

Net income for the third quarter and first nine months 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 2014 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 5.8 million, 2.6 million, 4.5 million and 2.2 million shares were not included in the diluted weighted average shares amounts for the three and nine months ended September 30, 2015 and 2014 due to the exercise price being greater than the average stock price.

As a result of the continued deterioration of the market fundamentals in the oil and gas industry, the Company assessed the carrying value of goodwill related to its investment in Diamond Offshore. An impairment charge of $20 million was recorded in Other operating expenses in the third quarter of 2015 to write-off all goodwill attributable to Diamond Offshore.

On August 1, 2014, CNA completed the sale of Continental Assurance Company (“CAC”), its former life insurance subsidiary and on September 30, 2014, the Company sold HighMount Exploration & Production LLC (“HighMount”), its natural gas and oil exploration and production subsidiary. The results of these sold businesses are reflected as discontinued operations in the Consolidated Condensed Statements of Income as further discussed in Note 12. In connection with the sale of CAC, CNA entered into a 100% coinsurance agreement on a separate small block of annuity business outside of CAC. As a result of the coinsurance agreement, the $31 million (after tax and noncontrolling interests) difference between market value and book value of the funds withheld assets at the coinsurance contract’s inception was recognized as a loss in Other operating expenses in the third quarter of 2014.

Updated accounting guidance not yet adopted – In May of 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-09, “Financial Services-Insurance (Topic 944): Disclosures about Short-Duration Contracts.” The updated accounting guidance requires enhanced disclosures to provide additional information about insurance liabilities for short-duration contracts. The updated guidance is effective for annual reporting periods beginning after December 15, 2015 and for interim periods beginning after December 15, 2016. The Company is currently evaluating the effect the updated guidance will have on its financial statement disclosures.

 

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In May of 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The core principle of the new accounting guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new accounting guidance provides a five-step analysis of transactions to determine when and how revenue is recognized and requires enhanced disclosures about revenue. In August of 2015, the FASB formally amended the effective date of this update to annual reporting periods beginning after December 15, 2017, including interim periods, and it can be adopted either retrospectively or with a cumulative effect adjustment at the date of adoption. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its consolidated financial statements.

2.  Investments

Net investment income is as follows:

 

                                                       
     Three Months Ended      Nine Months Ended        
     September 30,      September 30,        
  

 

 

 
     2015      2014      2015      2014        

 

 
(In millions)                            

Fixed maturity securities

     $ 449       $ 453       $ 1,344       $ 1,356      

Short term investments

     4         1         7         3      

Limited partnership investments

     (122      26         88         229      

Equity securities

     3         2         9         7      

Income (loss) from trading portfolio (a)

     (5      (24      (9      46      

Other

     9         7         26         25      

 

 

Total investment income

     338         465         1,465         1,666      

Investment expenses

     (17      (14      (46      (41)     

 

 

Net investment income

     $  321       $ 451       $ 1,419       $ 1,625      

 

 

 

(a) Includes net unrealized gains (losses) related to changes in fair value on trading securities still held of $(59), $(19), $(71) and $46 for the three and nine months ended September 30, 2015 and 2014.

Investment gains (losses) are as follows:

 

                                                       
     Three Months Ended      Nine Months Ended        
     September 30,      September 30,        
  

 

 

 
     2015      2014      2015      2014        

 

 
(In millions)                            

Fixed maturity securities

     $ (29    $ 39       $ (29    $      58      

Equity securities

     (18      (3      (19      2      

Derivative instruments

     (1                9         1      

Short term investments and other

     (2      1         (3      4      

 

 

Investment gains (losses) (a)

     $   (50    $   37       $ (42    $ 65      

 

 

 

(a) Includes gross realized gains of $23, $52, $93 and $130 and gross realized losses of $70, $16, $141 and $70 on available-for-sale securities for the three and nine months ended September 30, 2015 and 2014.

 

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The components of net other-than-temporary impairment (“OTTI”) losses recognized in earnings by asset type are as follows:

 

       Three Months Ended        Nine Months Ended      
       September 30,        September 30,      
  

 

 

 
     2015        2014        2015        2014      

 

 
(In millions)                                  

Fixed maturity securities available-for-sale:

                 

Corporate and other bonds

     $ 36         $ 6         $ 52         $ 9       

States, municipalities and political subdivisions

               18        

Asset-backed:

                 

Residential mortgage-backed

     1           2           7           4       

Other asset-backed

               1           1       

 

 

Total asset-backed

     1           2           8           5       

 

 

Total fixed maturities available-for-sale

     37           8           78           14       

 

 

Equity securities available-for-sale:

                 

Common stock

     19           2           20           3       

Short term investments

               1        

 

 

Net OTTI losses recognized in earnings

     $         56         $         10         $         99         $         17       

 

 

The amortized cost and fair values of securities are as follows:

 

                        Unrealized      
    Cost or     Gross   Gross         OTTI      
    Amortized     Unrealized   Unrealized   Estimated     Losses      
September 30, 2015   Cost     Gains   Losses   Fair Value     (Gains)      

 

 
(In millions)                          

Fixed maturity securities:

         

Corporate and other bonds

    $  17,172      $1,237   $  210     $  18,199     

States, municipalities and political subdivisions

    11,978      1,336   17     13,297        $        (5)       

Asset-backed:

         

Residential mortgage-backed

    4,850      204   13     5,041        (46)       

Commercial mortgage-backed

    2,183      77   9     2,251     

Other asset-backed

    1,009      11   4     1,016     

 

 

Total asset-backed

    8,042      292   26     8,308        (46)       

U.S. Treasury and obligations of government-sponsored enterprises

    24      5       29     

Foreign government

    333      12   1     344     

Redeemable preferred stock

    33      2       35     

 

 

Fixed maturities available-for-sale

    37,582      2,884   254     40,212        (51)       

Fixed maturities trading

    108        19     89     

 

 

Total fixed maturities

    37,690      2,884   273     40,301        (51)       

 

 

Equity securities:

         

Common stock

    62      3       65     

Preferred stock

    145      4   2     147     

 

 

Equity securities available-for-sale

    207      7   2     212        -        

Equity securities trading

    771      51   149     673     

 

 

Total equity securities

    978      58   151     885        -        

 

 

Total

    $  38,668      $2,942   $  424     $  41,186        $      (51)       

 

 

 

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    Cost or     Gross   Gross         Unrealized  
    Amortized     Unrealized   Unrealized   Estimated     OTTI Losses  
December 31, 2014   Cost     Gains   Losses   Fair Value     (Gains)  

 

 
(In millions)                          

Fixed maturity securities:

         

Corporate and other bonds

    $  17,226       $1,721       $    61           $  18,886       

States, municipalities and political subdivisions

    11,285       1,463       8           12,740       

Asset-backed:

         

Residential mortgage-backed

    5,028       218       13           5,233          $      (53)       

Commercial mortgage-backed

    2,056       93       5           2,144          (2)       

Other asset-backed

    1,234       11       10           1,235       

 

 

Total asset-backed

    8,318       322       28           8,612          (55)       

U.S. Treasury and obligations of government-sponsored enterprises

    26       5           31       

Foreign government

    438       16           454       

Redeemable preferred stock

    39       3           42       

 

 

Fixed maturities available-for-sale

    37,332       3,530       97           40,765          (55)       

Fixed maturities trading

    137         17           120       

 

 

Total fixed maturities

    37,469       3,530       114           40,885          (55)       

 

 

Equity securities:

         

Common stock

    38       9           47       

Preferred stock

    172       5       2           175       

 

 

Equity securities available-for-sale

    210       14       2           222          -        

Equity securities trading

    523       96       113           506       

 

 

Total equity securities

    733       110       115           728          -        

 

 

Total

    $  38,202       $3,640       $  229           $  41,613          $      (55)       

 

 

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. As of September 30, 2015 and December 31, 2014, the net unrealized gains on investments included in AOCI were net of Shadow Adjustments of $938 million and $1.2 billion. To the extent that unrealized gains on fixed income securities supporting certain products within CNA’s Life & Group Non-Core business would result in a premium deficiency if realized, a related decrease in Deferred acquisition costs, and/or increase in Insurance reserves are recorded, net of tax and noncontrolling interests, as a reduction of net unrealized gains through Other comprehensive income (“Shadow Adjustments”).

 

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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    
September 30, 2015     Fair Value     Losses     Fair Value     Losses     Fair Value     Losses    

 

 
(In millions)                                    

Fixed maturity securities:

           

Corporate and other bonds

    $  3,758           $    180          $      188          $      30          $  3,946          $      210     

States, municipalities and political subdivisions

    655           11          131          6          786          17     

Asset-backed:

           

Residential mortgage-backed

    308           3          211          10          519          13     

Commercial mortgage-backed

    479           6          81          3          560          9     

Other asset-backed

    354           4          9            363          4     

 

 

Total asset-backed

    1,141           13          301          13          1,442          26     

U.S. Treasury and obligations of government-sponsored enterprises

    1                 1       

Foreign government

    23             3          1          26          1     

Redeemable preferred stock

    3                 3       

 

 

Total fixed maturity securities

    5,581           204          623          50          6,204          254     

Preferred stock

    3             14          2          17          2     

 

 

Total

    $  5,584           $    204          $      637          $      52          $  6,221          $      256     

 

 
December 31, 2014                                    

 

 
(In millions)                                    

Fixed maturity securities:

           

Corporate and other bonds

    $    1,330           $      46          $       277          $      15          $    1,607          $        61     

States, municipalities and political subdivisions

    335           5          127          3          462          8     

Asset-backed:

           

Residential mortgage-backed

    293           5          189          8          482          13     

Commercial mortgage-backed

    264           2          99          3          363          5     

Other asset-backed

    607           10          7            614          10     

 

 

Total asset-backed

    1,164           17          295          11          1,459          28     

U.S. Treasury and obligations of government-sponsored enterprises

    3             4            7       

Foreign government

    3             3            6       

Redeemable preferred stock

    3                 3       

 

 

Total fixed maturity securities

    2,838           68          706          29          3,544          97     

Preferred stock

    17           2          1            18          2     

 

 

Total

    $    2,855           $      70          $       707          $      29          $    3,562          $      99     

 

 

Based on current facts and circumstances, the Company believes the unrealized losses presented in the table above are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are primarily attributable to changes in interest rates and credit spreads and other factors. The Company has no current intent to sell securities with unrealized losses, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded as of September 30, 2015.

 

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The following table presents the activity related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held as of September 30, 2015 and 2014 for which a portion of an OTTI loss was recognized in Other comprehensive income.

 

    Three Months Ended     Nine Months Ended      
    September 30,     September 30,      
 

 

 

 
      2015     2014     2015     2014      

 

 
(In millions)                        

Beginning balance of credit losses on fixed maturity securities

      $ 59      $ 66      $ 62      $ 74      

Reductions for securities sold during the period

    (2     (2     (5     (7)     

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

      $ 57      $ 64      $ 57      $ 64      

 

 

Contractual Maturity

The following table presents available-for-sale fixed maturity securities by contractual maturity. 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.

 

     September 30, 2015      December 31, 2014        

 

 
     Cost or      Estimated      Cost or      Estimated        
     Amortized      Fair      Amortized      Fair        
     Cost      Value      Cost      Value        

 

 
(In millions)                            

Due in one year or less

   $ 1,406           $ 1,425           $ 2,479         $ 2,511           

Due after one year through five years

     7,789             8,200             9,070           9,621           

Due after five years through ten years

     14,149             14,577             12,055           12,584           

Due after ten years

     14,238             16,010             13,728           16,049           

 

 

Total

   $   37,582           $   40,212           $   37,332         $   40,765           

 

 

 

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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. Gross estimated fair values of derivative positions are currently presented in Equity securities, Receivables and Payable to brokers on the Consolidated Condensed Balance Sheets.

 

    September 30, 2015     December 31, 2014  

 

 
    Contractual/                 Contractual/              
    Notional       Estimated Fair Value       Notional       Estimated Fair Value    
   

 

 

     

 

 

 
    Amount     Asset     (Liability)     Amount     Asset     (Liability)  

 

 
(In millions)                                    

With hedge designation:

           

Foreign exchange:

           

Currency forwards – short

        $ 70              $          (5)     

Without hedge designation:

           

Equity markets:

           

Options – purchased

    $    1,619          $   50          544          $ 24     

              – written

    1,256              $          (29)        292              (21)     

Equity swaps and warrants – long

    10            1          10            2     

Futures – long

    70            1           

Futures – short

    95              (1)        130            2     

Foreign exchange:

           

Currency forwards – long

    358              (52)        109              (3)     

                                – short

    435            53          88            2     

Currency options  – long

    100            1          151            7     

                               – short

    50              (1)         

Embedded derivative on funds withheld liability

    182            5          184              (3)     

Investment Commitments

As of September 30, 2015, the Company had committed approximately $414 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 September 30, 2015, the Company had commitments to purchase or fund additional amounts of $81 million and sell $43 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.

 

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Prices may fall within Level 1, 2 or 3 depending upon the methodology and inputs used to estimate fair value for each specific security. In general, the Company seeks to price securities using third party pricing services. Securities not priced by pricing services are submitted to independent brokers for valuation and, if those are not available, internally developed pricing models are used to value assets using a methodology and inputs the Company believes market participants would use to value the assets. Prices obtained from third-party pricing services or brokers are not adjusted by the Company.

The Company performs control procedures over information obtained from pricing services and brokers to ensure prices received represent a reasonable estimate of fair value and to confirm representations regarding whether inputs are observable or unobservable. Procedures 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 period-over-period changes in price 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 CNA’s 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 basis are presented in the following tables:

 

September 30, 2015    Level 1      Level 2      Level 3      Total    

 

 
(In millions)                            

Fixed maturity securities:

           

Corporate and other bonds

   $ 28       $   18,018       $ 153       $ 18,199        

States, municipalities and political subdivisions

        13,236         61         13,297        

Asset-backed:

           

Residential mortgage-backed

        4,837         204         5,041        

Commercial mortgage-backed

        2,180         71         2,251        

Other asset-backed

        545         471         1,016        

 

 

Total asset-backed

        7,562         746         8,308        

U.S. Treasury and obligations of government-sponsored enterprises

     28         1            29        

Foreign government

     28         316            344        

Redeemable preferred stock

     24         11            35        

 

 

Fixed maturities available-for-sale

     108         39,144         960         40,212        

Fixed maturities trading

        3         86         89        

 

 

Total fixed maturities

   $ 108       $ 39,147       $  1,046       $   40,301        

 

 

Equity securities available-for-sale

   $ 154       $ 43       $ 15       $ 212        

Equity securities trading

     673               673        

 

 

Total equity securities

   $ 827       $ 43       $ 15       $ 885        

 

 

Short term investments

   $   4,225       $ 773          $ 4,998        

Other invested assets

     102         45            147        

Receivables

        56            56        

Life settlement contracts

         $ 74         74        

Payable to brokers

     (430      (54         (484)       

 

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December 31, 2014    Level 1      Level 2      Level 3      Total    

 

 
(In millions)                            

Fixed maturity securities:

           

Corporate and other bonds

   $ 32       $ 18,692       $ 162       $ 18,886       

States, municipalities and political subdivisions

        12,646         94         12,740       

Asset-backed:

           

Residential mortgage-backed

        5,044         189         5,233       

Commercial mortgage-backed

        2,061         83         2,144       

Other asset-backed

        580         655         1,235       

 

 

Total asset-backed

        7,685         927         8,612       

U.S. Treasury and obligations of government-sponsored enterprises

     28         3            31       

Foreign government

     41         413            454       

Redeemable preferred stock

     30         12            42       

 

 

Fixed maturities available-for-sale

     131         39,451         1,183         40,765       

Fixed maturities trading

        30         90         120       

 

 

Total fixed maturities

   $ 131       $   39,481       $     1,273       $   40,885       

 

 

Equity securities available-for-sale

   $ 145       $ 61       $ 16       $ 222       

Equity securities trading

     505            1         506       

 

 

Total equity securities

   $ 650       $ 61       $ 17       $ 728       

 

 

Short term investments

   $     4,989       $ 963          $ 5,952       

Other invested assets

     102         41            143       

Receivables

     2         7            9       

Life settlement contracts

         $ 82         82       

Payable to brokers

     (546      (6         (552)      

 

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The following tables present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2015 and 2014:

 

                                                          Unrealized    
                                                          Gains    
                                                          (Losses)    
                                                          Recognized in    
          Net Realized Gains                                         Net Income    
            (Losses) and Net Change                                           on Level    
          in Unrealized Gains                                         3 Assets and    
          (Losses)                       Transfers     Transfers           Liabilities    
    Balance,       Included in     Included in                         into     out of     Balance,     Held at    
2015   July 1       Net Income     OCI       Purchases     Sales     Settlements     Level 3     Level 3     September 30     September 30    

 

 
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

  $ 141            $ 27        $ (1)      $ (11)            $ (3)        $ 153             

States, municipalities and political subdivisions

    85                      (24)          61             

Asset-backed:

                   

Residential mortgage-backed

    207          $      $ (2)            4            (7)                204             

Commercial mortgage-backed

    87                 (4)            8            (15)              (10)          71             

Other asset-backed

    490            (6)            43          (20)        (32)              (4)          471             

 

 

Total asset-backed

    784                 (12)            55          (20)        (54)          $ -          (14)          746              $ -              

 

 

Fixed maturities available-for-sale

    1,010                 (12)            82          (21)        (65)              (41)          960             

Fixed maturities trading

    89          (2)            (1)              86              $ (2)             

 

 

Total fixed maturities

  $     1,099          $      $ (12)          $ 82        $       (22)      $ (65)          $ -        $ (41)        $ 1,046              $ (2)             

 

 

Equity securities available-for-sale

  $ 16          $ (1)                    $ 15             

Equity securities trading

    1          $          $ (2)              -              $ 1              

 

 

Total equity securities

  $ 17          $      $ (1)          $ -        $ (2)      $ -            $ -        $ -         $ 15              $ 1              

 

 

Life settlement contracts

  $ 75          $            $ (6)              $ 74              $ 2              

 

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                                                          Unrealized    
                                                          Gains    
                                                          (Losses)    
                                                          Recognized in    
          Net Realized Gains                                         Net Income    
            (Losses) and Net Change                                           on Level    
          in Unrealized Gains                                         3 Assets and    
          (Losses)                       Transfers     Transfers           Liabilities    
    Balance,       Included in     Included in                         into     out of     Balance,     Held at    
2014   July 1       Net Income     OCI       Purchases     Sales     Settlements     Level 3     Level 3     September 30     September 30    

 

 
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

  $ 194          $ (1)          $        $ (3)          $ (21)        $ 173             

States, municipalities and political subdivisions

    79            1                       80             

Asset-backed:

                   

Residential mortgage-backed

    185          $ 1                (17)        $ 11          (20)          160             

Commercial mortgage-backed

    59          2          (2)            28           (21)          31            97             

Other asset-backed

    626          1          (4)            80           (25)            (36)          642             

 

 

Total asset-backed

    870          4          (6)            108       $ -        (63)          42          (56)          899              $ -              

 

 

Fixed maturities available-for-sale

    1,143          4          (6)            112           (66)          42          (77)          1,152             

Fixed maturities trading

    91                        91             

 

 

Total fixed maturities

  $     1,234          $ 4        $ (6)          $ 112       $ -      $ (66)        $ 42        $ (77)        $ 1,243              $ -              

 

 

Equity securities available-for-sale

  $ 2          $ (1)          $ 16               $ 17             

Equity securities trading

    4              (1)                3             

 

 

Total equity securities

  $ 6          $ -        $ (1)          $ 15       $           -      $ -         $ -        $ -         $ 20              $ -              

 

 

Life settlement contracts

  $ 86          $ 1              $ (1)            $ 86              $ 1              

Derivative financial instruments, net

    -                        -                (1)            

 

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                                                          Unrealized    
                                                          Gains    
                                                          (Losses)    
                                                          Recognized in    
          Net Realized Gains                                         Net Income    
          (Losses) and Net Change                                         on Level    
          in Unrealized Gains                                         3 Assets and    
          (Losses)                       Transfers     Transfers           Liabilities    
    Balance,       Included in     Included in                         into     out of     Balance,     Held at    
2015   January 1       Net Income     OCI       Purchases     Sales     Settlements     Level 3     Level 3     September 30     September 30    

 

 
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

  $ 162            $ (1)       $ (1)          $ 39        $ (13)      $ (32)        $ 37          $ (38)        $ 153             

States, municipalities and political subdivisions

    94            1                (10)            (24)          61             

Asset-backed:

                   

Residential mortgage-backed

    189            4          (4)            76            (28)            (33)          204             

Commercial mortgage- backed

    83            7          (4)            23            (17)          17            (38)          71             

Other asset-backed

    655            3          4             125          (254)        (52)            (10)          471              $ (1)             

 

 

Total asset-backed

    927            14          (4)            224          (254)        (97)          17            (81)          746                (1)             

 

 

Fixed maturities available-for-sale

    1,183            14          (5)            263          (267)        (139)          54            (143)          960                (1)             

Fixed maturities trading

    90            (2)             (2)              86                (2)             

 

 

Total fixed maturities

  $   1,273            $ 12        $ (5)          $ 263        $     (269)      $ (139)        $ 54          $ (143)        $ 1,046              $ (3)             

 

 

Equity securities available-for-sale

  $ 16            $ (1)                    $ 15             

Equity securities trading

    1            $ 1            $ (2)              -              $ 1              

 

 

Total equity securities

  $ 17            $ 1        $ (1)          $ -        $ (2)      $ -         $ -          $ -         $ 15              $ 1              

 

 

Life settlement contracts

  $ 82            $ 22              $ (30)            $ 74              $ 1              

 

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          Net Realized Gains
  (Losses) and Net Change  
in Unrealized Gains
(Losses)
                         Transfers       Transfers          

Unrealized  
Gains  

(Losses)  

Recognized in  
Net Income  

on Level  

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,
September 30
    Held at  
September 30  
 

 

 
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

  $ 204          $ 2          $ 30        $ (10)      $ (13)        $ 8         $ (48)       $ 173             

States, municipalities and political subdivisions

    71          1        $ 3            1          (10)          14             80             

Asset-backed:

                   

Residential mortgage-backed

    331          (22)         62            47          (174)        (57)          32           (59)         160             

Commercial mortgage-backed

    151          4          (2)           28          (60)        (23)          43           (44)         97             

Other asset-backed

    446          2            457          (111)        (115)            (37)         642              $ (1)             

 

 

Total asset-backed

    928          (16)         60            532          (345)        (195)          75           (140)         899                (1)             

 

 

Fixed maturities available-for-sale

    1,203          (13)         63            563          (365)        (208)          97           (188)         1,152                (1)             

Fixed maturities trading

    80          11                      91                11              

 

 

Total fixed maturities

  $ 1,283          $ (2)       $ 63          $ 563        $       (365   $ (208)        $ 97         $ (188)       $ 1,243              $ 10              

 

 

 

 

Equity securities available-for-sale

  $ 11          $ 3        $ (5)         $ 16        $ (8)            $ 17             

Equity securities trading

    8              1          (6)              3             

 

 

Total equity securities

  $ 19          $ 3        $ (5)         $ 17        $ (14)      $ -         $ -         $ -        $ 20              $ -              

 

 

 

 

Life settlement contracts

  $ 88          $ 23              $ (25)            $ 86              $ 3              

Separate account business

    1                    $ (1)         -             

Derivative financial instruments, net

    (3)         1          $ (2)       $            2          -                1              

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

 

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Securities may be transferred in or out of levels within the fair value hierarchy based on the availability of observable market information and quoted prices used to determine the fair value of the security. The availability of observable market information and quoted prices varies based on market conditions and trading volume. During the three and nine months ended September 30, 2015 there were $10 million of transfers from Level 2 to Level 1 and no transfers from Level 1 to Level 2. During the three months ended September 30, 2014 there were no transfers between Level 1 and Level 2. During the nine months ended September 30, 2014 there were $24 million of transfers from Level 2 to Level 1 and $1 million of transfers from Level 1 to Level 2. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods.

Valuation Methodologies and Inputs

The following section describes the valuation methodologies and relevant inputs used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instruments are generally classified.

Fixed Maturity Securities

Level 1 securities include 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. All classes of Level 2 fixed maturity securities are valued using a methodology based on information generated by market transactions involving identical or comparable assets, a discounted cash flow methodology or a combination of both when necessary. Common inputs for all classes of fixed maturity securities include prices from recently executed transactions of similar securities, marketplace quotes, benchmark yields, spreads off benchmark yields, interest rates and U.S. Treasury or swap curves. Specifically for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data. Fixed maturity securities are 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 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, 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.

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.

 

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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 CNA’s 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.

Significant Unobservable Inputs

The following tables present quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurements of Level 3 assets. Valuations for assets and liabilities not presented in the 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.

 

September 30, 2015    Estimated
Fair Value
    

Valuation

Techniques

  

Unobservable

Inputs

  

Range

(Weighted

Average)

 

 

 
     (In millions)                   

Fixed maturity securities

     $ 121         Discounted cash flow    Credit spread      2% – 31% (3%)   

Life settlement contracts

     74         Discounted cash flow    Discount rate risk premium      9%   
         Mortality assumption              55% – 1,676% (164%)   

December 31, 2014

           

 

 

Fixed maturity securities

     $ 101           Discounted cash flow    Credit spread      2% – 13% (3%)   

Equity securities

     16           Market approach    Private offering price      $12 – $4,391 per share   
              ($600 per share)   

Life settlement contracts

     82           Discounted cash flow    Discount rate risk premium      9%   
         Mortality assumption      55% – 1,676% (163%)   

For fixed maturity securities, an increase to the credit spread assumptions would result in a lower fair value measurement. For equity securities, an increase in the private offering price would result in a higher fair value measurement. For life settlement contracts, an increase in the discount rate risk premium or decrease in the mortality assumption would result in a lower fair value measurement.

 

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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 Company’s financial assets and liabilities which are not measured at fair value on the Consolidated Condensed Balance Sheets are presented in the following tables. 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

Amount

    Estimated Fair Value  
    

 

 
September 30, 2015           Level 1       Level 2      Level 3        Total            

 

 
(In millions)                                

Assets:

             

Other invested assets, primarily mortgage loans

   $ 640            $ 660       $ 660           

Liabilities:

             

Short term debt

     1,277          $ 1,267          35         1,302           

Long term debt

     9,479           8,811          555         9,366           

 

December 31, 2014

             

 

 

Assets:

             

Other invested assets, primarily mortgage loans

   $ 588            $ 608       $ 608           

Liabilities:

             

Short term debt

     334          $ 255          84         339           

Long term debt

     10,320           10,299          420         10,719           

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.

Fair value of debt was based on observable market prices when available. When observable market prices were not available, the fair value of 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.

4.  Property, Plant and Equipment

Diamond Offshore

Asset Impairment

During the first quarter of 2015, in response to pending regulatory requirements in the U.S. Gulf of Mexico, as well as the continued deterioration of the market fundamentals in the oil and gas industry, including the dramatic decline in oil prices, significant cutbacks in customer capital spending plans and contract cancellations by customers, Diamond Offshore evaluated all drilling rigs with indications that their carrying amounts may not be recoverable.

Diamond Offshore utilizes an undiscounted probability-weighted cash flow analysis in testing an asset for potential impairment. A matrix of assumptions is developed for each rig under evaluation using multiple utilization/dayrate scenarios, to each of which Diamond Offshore assigns a probability of occurrence. Diamond Offshore arrives at a projected probability weighted cash flow for each rig based on the respective matrix and compares such amount to the carrying value of the asset to assess recoverability.

 

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The underlying assumptions and assigned probabilities of occurrence for utilization and dayrate scenarios are developed using a methodology that examines historical data for each rig, which considers the rig’s age, rated water depth and other attributes and then assesses its future marketability in light of the current and projected market environment at the time of assessment. Other assumptions, such as operating, maintenance and inspection costs, are estimated using historical data adjusted for known developments and future events that are anticipated by management at the time of the assessment.

Based on this evaluation, Diamond Offshore determined that seven mid-water semisubmersibles and one drillship were impaired and an impairment loss was recognized aggregating $359 million ($158 million after tax and noncontrolling interests) during the first quarter of 2015. The fair value of five of the impaired rigs was determined utilizing a market approach, which utilized the most recent contracted sales price for another of Diamond Offshore’s previously impaired mid-water semisubmersible rigs. The fair value of Diamond Offshore’s three remaining rigs (which were under contract with a customer at that time) was determined using an income approach, which utilized significant unobservable inputs, including assumptions related to estimated dayrate revenue, rig utilization and anticipated costs for the remainder of the current contract, as well as estimated proceeds that may be received on disposition of each rig, representative of a Level 3 fair value measurement.

During the third quarter of 2015, Diamond Offshore evaluated 13 drilling rigs with indications that their carrying amounts may not be recoverable and determined that further impairment of its fleet had not occurred. In October 2015, offers were received for three drilling rigs, consisting of one semisubmersible rig and one drillship, both of which were previously impaired, and one cold stacked jack-up rig. Diamond Offshore recorded an aggregate impairment loss of $2 million ($1 million after tax and noncontrolling interests) during the third quarter of 2015 to write down the carrying value of each of these rigs to their expected selling price. Impairment losses for the nine months ended September 30, 2015 were $361 million ($159 million after tax and noncontrolling interests).

Of the rigs impaired during 2015, four semisubmersible rigs have been sold for scrap and another three rigs are currently cold stacked. The two remaining rigs in the impairment group are under contract with customers and are expected to be sold for scrap at the end of their respective contracts. The aggregate fair value of the rigs in the impairment group was $9 million as of September 30, 2015.

During the three and nine months ended September 30, 2014, Diamond Offshore recognized an impairment loss aggregating $109 million ($55 million after tax and noncontrolling interests) related to semisubmersible rigs for which a plan had been initiated to retire and scrap. All of these rigs were subsequently sold for scrap.

Diamond Offshore’s assumptions are necessarily subjective and are an inherent part of the asset impairment evaluation. The use of different assumptions could produce results that differ from those reported. The actual amount realized upon disposition of the drilling rigs may vary if, or when, such rigs are sold.

Loews Hotels

In 2015, Loews Hotels has paid a total of approximately $330 million to acquire two hotels, funded with capital contributions from the Company.

5.  Claim and Claim Adjustment Expense Reserves

CNA’s 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. CNA’s reserve projections are based primarily on detailed analysis of the facts in each case, CNA’s 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

 

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results of operations in the period that the need for such adjustments is determined. There can be no assurance that CNA’s ultimate cost for insurance losses will not exceed current estimates.

Catastrophes are an inherent risk of the property and casualty insurance business and can contribute to material period-to-period fluctuations in CNA’s results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of $14 million and $17 million for the three months ended September 30, 2015 and 2014 and $103 million and $147 million for the nine months ended September 30, 2015 and 2014. Catastrophe losses in 2015 related primarily to U.S. weather-related events.

Net Prior Year Development

The following tables and discussion present net prior year development recorded for Specialty, Commercial, International and Other.

 

Three Months Ended September 30, 2015   Specialty     Commercial     International      Other        Total      

 

 
(In millions)                              

Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development

   $ (130      $ (11)              $ (34)             $ (175)         

Pretax (favorable) unfavorable premium development

    (2     (5)            2              (5)         

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (132      $ (16)              $ (32)         $ -          $   (180)         

 

 

 

 

Three Months Ended September 30, 2014

         

 

 

Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development

   $ (79      $ 71                $ (17)          $ (1)         $ (26)         

Pretax (favorable) unfavorable premium development

    (4       7               3           

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (83      $ 71                $ (10)          $ (1)         $ (23)         

 

 

 

 

Nine Months Ended September 30, 2015

         

 

 

Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development

   $ (141         $ (46)              $ (187)          

Pretax (favorable) unfavorable premium development

    (10      $ (17)            16               (11)          

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (151      $ (17)              $ (30)          $ -        $ (198)          

 

 

 

 

Nine Months Ended September 30, 2014

         

 

 

Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development

   $ (123      $ 179                $ (32)          $ (1     $ 23             

Pretax (favorable) unfavorable premium development

    (12     (24)             6               (30)           

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (135      $ 155                $ (26)          $ (1     $ (7)           

 

 

 

 

 

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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 Specialty segment:

 

     Three Months Ended
September 30,
    Nine Months Ended  
September 30,  
 
  

 

 

 
             2015                     2014                     2015                     2014          

 

 
(In millions)                         

Medical professional liability

       $ (19       $ 16          $ (11       $ 17      

Other professional liability and management liability

     (37     (9     (41     (59)     

Surety

     (70     (79     (69     (78)     

Warranty

         1     

Other

     (4     (7     (21     (3)     

 

 

Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development

       $ (130       $ (79       $ (141       $ (123)     

 

 

Three Months

2015

Favorable development in medical professional liability was related to lower than expected severity in accident years 2008 through 2013.

Favorable development in other professional liability and management liability related to better than expected large loss emergence in financial institutions in accident years 2012 and prior. Additional favorable development related to lower than expected severity in accident years 2009 through 2013 for directors and officers liability.

Favorable development for surety coverages was primarily due to lower than expected frequency of large losses in accident years 2013 and prior.

2014

Unfavorable development for medical professional liability was primarily related to increased frequency of large medical products liability class action lawsuits in accident years 2012 and prior.

Favorable development for surety coverages was primarily due to lower than expected frequency of large losses in accident years 2012 and prior.

Nine Months

2015

Overall, favorable development for medical professional liability was related to lower than expected severity in accident years 2008 through 2013. Unfavorable development was recorded related to increased claim frequency in the aging services business for accident years 2013 and 2014.

Overall, favorable development in other professional liability and management liability related to better than expected large loss emergence in financial institutions in accident years 2012 and prior. Additional favorable development related to lower than expected severity in accident years 2009 through 2013 for directors and officers liability and lower than expected severity in accident years 2010 and prior for professional services. Unfavorable development was related to increased claim frequency on public company management liability in accident years 2012 through 2014.

Favorable development for surety coverages was primarily due to lower than expected frequency of large losses in accident years 2013 and prior.

Favorable development for other coverages was due to better than expected claim frequency in property coverages provided to Specialty customers in accident year 2014.

 

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2014

Unfavorable development for medical professional liability was primarily related to increased frequency of large medical products liability class action lawsuits in accident years 2012 and prior.

Favorable development for other professional liability and management liability was primarily related to favorable outcomes on individual large claims in accident years 2009 and prior, which contributed to a lower estimate of ultimate severity. Additionally, there was better than expected severity in accident years 2008 through 2011.

Favorable development for surety coverages was primarily due to lower than expected frequency of large losses in accident years 2012 and prior.

Commercial

The following table and discussion provide further detail of the development recorded for the Commercial segment. A significant amount of the unfavorable development for the nine months ended September 30, 2014 relates to business classes which CNA has exited, but also includes Small Business where CNA has taken underwriting actions in an effort to improve profitability.

 

     Three Months Ended
September 30,
    Nine Months Ended  
September 30,  
 
  

 

 

 
             2015                     2014                     2015                     2014          

 

 
(In millions)                         

Commercial auto

         $ 13          $ 7          $ 52      

General liability

       $ 3        44        8        76      

Workers’ compensation

     (1     25        22        75      

Property and other

     (13     (11     (37     (24)     

 

 

Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development

       $ (11       $ 71          $ -          $ 179      

 

 

Three Months

2015

Favorable development for property and other was primarily due to better than expected loss emergence on catastrophe events in accident year 2014.

2014

Overall, unfavorable development for general liability coverages was primarily related to higher than expected severity in accident years 2010, 2011 and 2013. Favorable development was recorded primarily related to lower than expected frequency of large losses in accident years 2005 through 2008.

Overall, unfavorable development for workers’ compensation was primarily related to increased medical severity in accident years 2010 and prior and higher than expected severity related to Defense Base Act (“DBA”) contractors in accident years 2010 through 2013. Favorable development of $26 million was recorded in accident years 1996 and prior related to the commutation of a workers’ compensation reinsurance pool.

Favorable development for property and other first-party coverages was recorded in accident years 2010 and prior, primarily related to lower than expected frequency and favorable individual claim settlements.

Nine Months

2015

Unfavorable development for workers’ compensation was primarily due to higher than expected severity related to Defense Base Act contractors in accident years 2008 through 2013.

Favorable development for property and other was primarily due to better than expected loss emergence from 2012 and 2014 catastrophe events and better than expected frequency of large claims in accident year 2014.

 

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The nine months also included unfavorable loss development related to an extra contractual obligation loss and losses associated with premium development.

2014

Unfavorable development for commercial auto was primarily related to increased claim frequency of large losses in accident years 2010 through 2013.

Overall, unfavorable development for general liability was primarily related to higher than expected severity in accident years 2009 through 2011. In addition, there was higher than expected severity in accident year 2013 related to Small Business. Favorable development was recorded primarily related to lower than expected frequency of large losses in accident years 2005 through 2008.

Overall, unfavorable development for workers’ compensation was primarily due to increased medical severity in accident years 2010 and prior, higher than expected severity related to DBA contractors in accident years 2010 through 2013 and the recognition of losses related to favorable premium development in accident year 2013. Favorable development of $26 million was recorded in accident years 1996 and prior related to the commutation of a workers’ compensation reinsurance pool.

Overall, favorable development for property and other coverages in accident years 2011 and prior primarily related to lower than expected frequency and favorable individual claim settlements. Additionally, there was favorable development due to better than expected loss emergence in catastrophe losses in accident year 2013. Unfavorable development was recorded in accident year 2012 primarily related to higher than expected loss emergence in catastrophe losses.

International

The following table and discussion provide further detail of the development recorded for the International segment:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
  

 

 

 
             2015                     2014                     2015                     2014          

 

 
(In millions)                         

Medical professional liability

       $ (8       $ (3       $ (8       $ (2)     

Other professional liability

     (11     1        (16     (14)     

Liability

     (5     (3     (12     (9)     

Property & marine

     (5     (11     (19     (10)     

Other

     (5     (1     9        (7)     

Commutations

           10      

 

 

Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development

       $ (34       $ (17       $ (46       $ (32)     

 

 

Three Months

2015

Favorable development in medical professional liability was due to better than expected loss emergence on accident years 2011 to 2013.

Favorable development in other professional liability was due to better than expected large loss emergence in accident years 2011 and prior.

Favorable development in liability was due to better than expected large loss emergence in accident years 2012 and prior.

Favorable development in property and marine was due to better than expected individual large loss emergence and favorable settlements on large claims in accident years 2013 and 2014.

 

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2014

Favorable development for property and marine coverages was primarily related to better than expected severity in accident year 2013.

Nine Months

2015

Favorable development in medical professional liability was due to better than expected loss emergence on accident years 2011 to 2013.

Favorable development in other professional liability was due to better than expected large loss emergence in accident years 2011 and prior.

Favorable development in liability was due to better than expected large loss emergence in accident years 2012 and prior.

Favorable development in property and marine was due to better than expected individual large loss emergence and favorable settlements on large claims in accident years 2013 and 2014.

Unfavorable development in other is due to higher than expected large losses in financial institutions and political risk, primarily in accident year 2014.

2014

Favorable development for other professional liability was primarily related to lower than expected severity in accident years 2011 and prior.

Favorable development for property and marine coverages was primarily related to better than expected severity in accident year 2013.

Reinsurance commutations in the first quarter of 2014 reduced ceded losses from prior years. Overall the commutations increased net operating income because of the release of the related allowance for doubtful accounts on reinsurance receivables.

Asbestos and Environmental Pollution Reserves

In 2010, Continental Casualty Company (“CCC”) together with several of CNA’s insurance subsidiaries completed a transaction with National Indemnity Company (“NICO”), a subsidiary of Berkshire Hathaway Inc., under which substantially all of CNA’s legacy asbestos and environmental pollution (“A&EP”) liabilities were ceded to NICO (loss portfolio transfer or “LPT”). At the transaction effective date, CNA ceded approximately $1.6 billion of net A&EP claim and allocated claim adjustment expense reserves to NICO under a retroactive reinsurance agreement with an aggregate limit of $4.0 billion. The $1.6 billion of claim and allocated claim adjustment expense reserves ceded to NICO was net of $1.2 billion of ceded claim and allocated claim adjustment expense reserves under existing third party reinsurance contracts. The NICO aggregate reinsurance limit also covers credit risk on the existing third party reinsurance related to these liabilities. CNA paid NICO a reinsurance premium of $2.0 billion and transferred to NICO billed third party reinsurance receivables related to A&EP claims with a net book value of $215 million, resulting in total consideration of $2.2 billion.

Through December 31, 2013, CNA recorded $0.9 billion of additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the loss portfolio transfer exceeded the $2.2 billion consideration paid, resulting in a deferred retroactive reinsurance gain. This deferred gain is recognized in earnings in proportion to actual recoveries under the loss portfolio transfer. Over the life of the contract, there is no economic impact as long as any additional losses are within the limit under the contract. In a period in which the estimate of ceded losses is changed, the required change to the deferred gain is cumulatively recognized in earnings as if the revised estimate was available at the inception of the LPT.

 

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The following table displays the impact of the loss portfolio transfer on the Consolidated Condensed Statements of Income.

 

     Three Months Ended
September 30,
    Nine Months Ended  
September 30,  
 
  

 

 

 
             2015                     2014                     2015                     2014            

 

 
(In millions)                         

Net A&EP adverse development before consideration of LPT

           $ 150     

Provision for uncollectible third party reinsurance on A&EP

        

 

 

Additional amounts ceded under LPT

         150     

Retroactive reinsurance benefit recognized

       $ (4       $ (4     (75       $ (9)     

 

 

Pretax impact of deferred retroactive reinsurance benefit

       $ (4       $ (4       $ 75          $ (9)     

 

 

The fourth quarter of 2014 A&EP reserve review was not completed in 2014 because additional information and analysis on inuring third party reinsurance recoveries were needed to finalize the review. The review was finalized in the second quarter of 2015. Unfavorable development was due to a decrease in anticipated future reinsurance recoveries related to asbestos claims and higher than expected severity on pollution claims. The effect of the deferred retroactive reinsurance benefit is recorded in Insurance claims and policyholders’ benefits in the Consolidated Condensed Statements of Income.

As of September 30, 2015 and December 31, 2014, the cumulative amounts ceded under the LPT were $2.6 billion and $2.5 billion. The unrecognized deferred retroactive reinsurance benefit was $251 million and $176 million as of September 30, 2015 and December 31, 2014.

NICO established a collateral trust account as security for its obligations to CNA. The fair value of the collateral trust account was $2.8 billion and $3.4 billion at September 30, 2015 and December 31, 2014. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the full aggregate reinsurance limit as well as certain of NICO’s performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third party reinsurers related to CNA’s A&EP claims.

6.  Debt

CNA Financial

During the third quarter of 2015, CNA entered into a new credit agreement with a syndicate of banks and simultaneously terminated the previous credit agreement. The new credit agreement established a five-year $250 million senior unsecured revolving credit facility which may be used for general corporate purposes. At CNA’s election, the commitments under the new credit agreement may be increased from time to time up to an additional aggregate amount of $100 million and the new credit agreement includes two optional one-year extensions prior to the first and second anniversary of the closing date, subject to applicable consents.

Diamond Offshore

Diamond Offshore has a $1.5 billion senior unsecured revolving credit facility. In October 2015, Diamond Offshore entered into an extension agreement of the revolving credit facility, which, among other things, provides for a one-year extension of the maturity date. The extended revolving credit facility matures in October 2020, except for $40 million of commitments that mature in March 2019 and $60 million of commitments that mature in October 2019. In addition, Diamond Offshore also has the option to increase the revolving commitments under the revolving credit facility by up to an additional $500 million from time to time, upon receipt of additional commitments from new or existing lenders, and to request one additional one-year extension of the maturity date. Up to $250 million of the facility may be used for the issuance of performance or other standby letters of credit and up to $100 million may be used for swingline loans.

As of September 30, 2015, Diamond Offshore had $493 million outstanding of commercial paper supported by its existing $1.5 billion revolving credit facility. As of September 30, 2015, the commercial paper notes had a weighted average interest rate of 0.4% and a weighted average remaining term of two days.

Diamond Offshore repaid $250 million aggregate principal amount of its 4.9% senior notes due July 1, 2015, primarily with funds obtained through the issuance of additional commercial paper.

 

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Boardwalk Pipeline

In the first quarter of 2015, Boardwalk Pipeline completed a public offering of an additional $250 million aggregate principal amount of its 5.0% senior notes due December 15, 2024. Boardwalk Pipeline originally issued $350 million aggregate principal amount of its 5.0% senior notes due December 15, 2024 in November of 2014. During 2015, Boardwalk Pipeline used the net proceeds from this offering to retire all of the outstanding $250 million aggregate principal amount of 4.6% notes that matured on June 1, 2015 and repaid at maturity the entire $275 million aggregate principal amount of its 5.1% senior notes.

During 2015, Boardwalk Pipeline repaid the $200 million of outstanding borrowings and terminated all related commitments of their variable-rate term loan.

In May of 2015, Boardwalk Pipeline entered into an amended revolving credit agreement having aggregate lending commitments of $1.5 billion and a maturity date of May 2020. As of September 30, 2015, Boardwalk Pipeline had $365 million of loans outstanding under its revolving credit facility with a weighted-average interest rate on the borrowings of 1.4%.

Loews Hotels

In the third quarter of 2015, Loews Hotels entered into an $87 million mortgage loan agreement which bears interest at London Interbank Offered Rate (“LIBOR”) plus an applicable margin. The mortgage loan agreement is due October 1, 2018 and includes two optional one-year extensions, subject to applicable conditions.

 

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7. Shareholders’ Equity

Accumulated other comprehensive income

The tables below display the changes in Accumulated other comprehensive income (“AOCI”) by component for the three and nine months ended September 30, 2014 and 2015:

 

         OTTI
    Gains
    (Losses)
     Unrealized
Gains (Losses)
on Investments
     Discontinued
Operations
       Cash Flow
  Hedges
       Pension
  Liability
       Foreign
  Currency
  Translation
     Total
Accumulated
Other
Comprehensive
Income (Loss)
 

 

 
(In millions)                                                 

Balance, July 1, 2014

   $ 30           $ 1,062            $ 30            $ (3)           $   (478)           $ 166                $ 807       

Other comprehensive income (loss) before reclassifications, after tax of $(1), $52, $2, $2, $1 and $0

     1             (59)             (3)             (4)             (2)             (73)             (140)      

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $12, $21, $0, $(2) and $0

        (24)             (31)                4                 (51)      

 

 

Other comprehensive income (loss)

     1             (83)             (34)             (4)             2              (73)             (191)      

Amounts attributable to noncontrolling interests

     1             8              4              2                 7              22       

 

 

Balance, September 30, 2014

   $ 32           $ 987            $ -            $ (5)           $ (476)           $ 100                $ 638       

 

 

Balance, July 1, 2015

   $ 28           $ 619            $ -            $ (3)           $ (598)           $ 7                $ 53       

Other comprehensive income (loss) before reclassifications, after tax of $(1), $38, $0, $0, $(1) and $0

     2             (70)                   (1)             (53)             (122)      

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $(17), $0, $0, $(2) and $0

        31                 1              5                 37       

 

 

Other comprehensive income (loss)

     2             (39)             -              1              4              (53)             (85)      

Amounts attributable to noncontrolling interests

        4                 (1)             1              5              9       

 

 

Balance, September 30, 2015

   $ 30           $ 584            $ -            $ (3)           $ (593)           $ (41)               $ (23)      

 

 

 

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         OTTI
    Gains
    (Losses)
     Unrealized
Gains (Losses)
on Investments
     Discontinued
Operations
       Cash Flow
  Hedges
         Pension
    Liability
       Foreign
  Currency
  Translation
     Total
Accumulated
Other
Comprehensive
Income (Loss)
 

 

 
(In millions)                                                 

Balance, January 1, 2014

   $ 23              $ 622            $ (3)           $ (4)           $   (432)           $ 133            $ 339       

Transfer to net assets of discontinued operations

     (5)             (15)             20                       -       

Other comprehensive income (loss) before reclassifications, after tax of $(8), $(229), $(3), $(1), $1 and $0

     15              462              2              1              (2)             (37)             441       

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $20, $16, $1, $24 and $0

        (38)             (21)             (2)             (50)                (111)      

 

 

Other comprehensive income (loss)

     15              424              (19)             (1)             (52)             (37)             330       

Amounts attributable to noncontrolling interests

     (1)             (44)             2                 8              4              (31)      

 

 

Balance, September 30, 2014

   $ 32              $ 987            $ -            $ (5)           $ (476)           $ 100            $ 638       

 

 

Balance, January 1, 2015

   $ 32              $ 846            $ -            $ (6)           $ (641)           $ 49            $ 280       

Other comprehensive income (loss) before reclassifications, after tax of $1, $162, $0, $1, $(19) and $0

     (3)             (321)                (2)             36              (100)             (390)      

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $(22), $0, $(2), $(9) and $0

        29                 7              15                 51       

 

 

Other comprehensive income (loss)

     (3)             (292)             -              5              51              (100)             (339)      

Issuance of equity securities by subsidiary

                 1                 1       

Amounts attributable to noncontrolling interests

     1              30                 (2)             (4)             10              35       

 

 

Balance, September 30, 2015

   $ 30              $ 584            $ -            $ (3)           $ (593)           $ (41)           $ (23)      

 

 

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) and cash flow hedges related to discontinued operations

  

Discontinued operations, net

Cash flow hedges

  

Other revenues and Contract drilling expenses

Pension liability

  

Other operating expenses

 

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Subsidiary Equity Transactions

Loews purchased 1.1 million shares of Diamond Offshore common stock at an aggregate cost of $29 million during the nine months ended September 30, 2015. The Company’s percentage ownership interest in Diamond Offshore increased as a result of these transactions, from 52% to 53%. The Company’s carrying value exceeded the purchase price of the shares, resulting in an increase to Additional paid-in capital (“APIC”) of $5 million.

During the nine months ended September 30, 2015, Boardwalk Pipeline sold 7.1 million common units under an equity distribution agreement with certain broker-dealers and received net proceeds of $115 million, including a $2 million contribution from the Company to maintain its 2% general partner interest. The Company’s percentage ownership interest in Boardwalk Pipeline declined as a result of this transaction, from 53% to 51%. The Company’s carrying value exceeded the issuance price of the common units, resulting in a decrease to APIC of $2 million and an increase to AOCI of $1 million.

Treasury Stock

The Company repurchased 16.3 million and 9.6 million shares of Loews common stock at aggregate costs of $633 million and $415 million during the nine months ended September 30, 2015 and 2014.

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 participant’s 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 covers salaried employees are based on formulas which include, among others, years of service and average pay. The Company’s funding policy is to make contributions in accordance with applicable governmental regulatory requirements.

Other Postretirement Benefit Plans - The Company has several postretirement benefit plans covering eligible employees and retirees. Participants generally become eligible after reaching age 55 with required years of service. Actual requirements for coverage vary by plan. Benefits for retirees who were covered by bargaining units vary by each unit and contract. Benefits for certain retirees are in the form of a Company health care account.

Benefits for retirees reaching age 65 are generally integrated with Medicare. Other retirees, based on plan provisions, must use Medicare as their primary coverage, with the Company reimbursing a portion of the unpaid amount; or are reimbursed for the Medicare Part B premium or have no Company coverage. The benefits provided by the Company are basically health and, for certain retirees, life insurance type benefits.

The Company funds certain of these benefit plans, and accrues postretirement benefits during the active service of those employees who would become eligible for such benefits when they retire.

The components of net periodic benefit cost are as follows:

 

    Pension Benefits  
 

 

 

 
    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
 

 

 

 
            2015                     2014                     2015                     2014          

 

 
(In millions)                        

Service cost

      $ 2                   $ 5                   $ 10                   $ 13            

Interest cost

    31                 37                 95                 111            

Expected return on plan assets

    (48)                (52)                (145)                (157)           

Amortization of unrecognized net loss

    9                 7                 32                 22            

Regulatory asset decrease

          1            

Settlement charge

    2                   2              

 

 

Net periodic benefit cost

      $ (4)                  $ (3)                  $ (6)                  $ (10)           

 

 

 

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    Other Postretirement Benefits  
 

 

 

 
    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
 

 

 

 
            2015                    2014                    2015                    2014         

 

 
(In millions)                        

Service cost

      $ 1                    $ 1             

Interest cost

    1                  $ 1                2                  $ 3           

Expected return on plan assets

    (1)               (1)               (3)               (3)          

Amortization of unrecognized prior service benefit

    (3)               (2)               (8)               (15)          

Amortization of unrecognized net loss

        1             

Curtailment gain

          (86)          

 

 

Net periodic benefit cost

      $ (2)                 $ (2)                 $ (7)                 $ (101)          

 

 

In the second quarter of 2015, CNA eliminated future benefit accruals associated with the CNA Retirement Plan effective June 30, 2015. This amendment resulted in a $55 million curtailment which is a decrease in the plan benefit obligation liability and a reduction of the unrecognized actuarial losses included in AOCI. In connection with the curtailment, CNA remeasured the plan benefit obligation which resulted in an increase in the discount rate used to determine the benefit obligation from 3.9% to 4.0%.

In the second quarter of 2014, CNA eliminated certain postretirement medical benefits associated with the CNA Health and Group Benefits Program. This change is a negative plan amendment that resulted in an $86 million curtailment gain which is included in Other operating expenses in the Consolidated Condensed Statements of Income. In connection with the plan amendment, CNA remeasured the plan benefit obligation which resulted in a decrease to the discount rate used to determine the benefit obligation from 3.6% to 3.1%.

9.  Business Segments

The Company’s reportable segments are primarily based on its individual operating subsidiaries. Each of the principal operating subsidiaries is 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.

CNA’s results are reported in four business segments: Specialty, Commercial, International and Other Non-Core. Specialty provides a broad array of professional, financial and specialty property and casualty products and services, through a network of independent agents, brokers and managing general underwriters. Commercial includes property and casualty coverages sold to small businesses and middle market entities and organizations primarily through an independent agency distribution system. Commercial also includes commercial insurance and risk management products sold to large corporations primarily through insurance brokers. International provides management and professional liability coverages as well as a broad range of other property and casualty insurance products and services abroad through a network of brokers, independent agencies and managing general underwriters, as well as the Lloyd’s marketplace. Other Non-Core primarily includes the results of CNA’s individual and group long term care businesses that are in run-off and also includes corporate expenses, including interest on corporate debt, and the results of certain property and casualty business in run-off, including CNA Re and A&EP.

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 Offshore’s fleet consists of 33 drilling rigs, including one newbuild rig which is under construction. On September 30, 2015, Diamond Offshore’s drilling rigs were located offshore of seven 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 14,625 miles of pipeline.

Loews Hotels operates a chain of 23 hotels, 22 of which are in the United States and one of which is in Canada.

The Corporate and other segment consists primarily of corporate investment income, corporate interest expense and other unallocated expenses.

 

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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 Company’s Annual Report on Form 10-K for the year ended December 31, 2014. 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 segment’s carried insurance reserves, as adjusted.

The following tables set forth the Company’s consolidated revenues and income (loss) by business segment:

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
 

 

 

 
            2015                     2014                     2015                     2014          

 

 
(In millions)                        

Revenues (a):

       

CNA Financial:

       

Property and Casualty:

       

Specialty

      $ 846              $ 930              $ 2,667              $ 2,776       

Commercial

    767            890            2,545            2,772       

International

    216            241            642            744       

Other Non-Core

    324            350            978            1,022       

 

 

Total CNA Financial

    2,153            2,411            6,832            7,314       

Diamond Offshore

    608            737            1,867            2,148       

Boardwalk Pipeline

    296            279            925            931       

Loews Hotels

    146            126            452            343       

Corporate and other

    (34)           (30)           6            68       

 

 

Total

      $ 3,169              $ 3,523              $ 10,082              $ 10,804       

 

 

Income (loss) before income tax and noncontrolling interests (a):

       

CNA Financial:

       

Property and Casualty:

       

Specialty

      $ 248              $ 280              $ 661              $ 729       

Commercial

    83            83            391            267       

International

    23            10            71            68       

Other Non-Core

    (120)           (78)           (410)           (103)      

 

 

Total CNA Financial

    234            295            713            961       

Diamond Offshore

    139            82            (42)           362       

Boardwalk Pipeline (b)

    48            28            163            105       

Loews Hotels

    1              25            14       

Corporate and other

    (74)           (66)           (111)           (43)      

 

 

Total

      $ 348              $ 339              $ 748              $ 1,399       

 

 

Net income (loss) (a):

       

CNA Financial:

       

Property and Casualty:

       

Specialty

      $ 147              $ 166              $ 394              $ 435       

Commercial

    49            51            231            163       

International

    9            4            37            37       

Other Non-Core

    (44)           (33)           (167)           (12)      

 

 

Total CNA Financial

    161            188            495            623       

Diamond Offshore

    47            25            (34)           136       

Boardwalk Pipeline (b)

    18            8            55            7       

Loews Hotels

    2              15            8       

Corporate and other

    (46)           (42)           (70)           (27)      

 

 

Income from continuing operations

    182            179            461            747       

Discontinued operations, net

      29              (364)      

 

 

Total

      $ 182              $ 208              $ 461              $ 383       

 

 

 

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(a)

Investment gains (losses) included in Revenues, Income (loss) before income tax and noncontrolling interests and Net income (loss) are as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
  

 

 

 
             2015                      2014                      2015                      2014          

 

 

Revenues and Income (loss) before income tax and noncontrolling interests:

           

CNA Financial:

           

Property and Casualty:

           

Specialty

       $ (22)             $ 3              $ (18)             $ 9      

Commercial

     (29)           2            (23)           7      

International

     (1)           1            1            1      

Other Non-Core

     2            31            (2)           48      

 

 

Total

       $ (50)             $ 37              $ (42)             $ 65      

 

 

Net income (loss):

           

CNA Financial:

           

Property and Casualty:

           

Specialty

       $ (14)             $ 2              $ (11)             $ 5      

Commercial

     (16)           4            (13)           5      

International

        (1)           1         

Other Non-Core

     1            19            5            29      

 

 

Total

       $ (29)             $ 24              $ (18)             $ 39      

 

 

 

(b)

As discussed in Note 2 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, a charge of $94 million ($55 million after tax and noncontrolling interests) was recorded in the first quarter of 2014 related to the terminated Bluegrass Project.

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 Company’s results of operations or equity.

11.  Commitments and Contingencies

CNA Financial

In the course of selling business entities and assets to third parties, CNA agreed to guarantee the performance of certain obligations of a previously owned subsidiary and 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 guarantee and indemnification agreements in effect for sales of business entities, assets and third party loans may include provisions that survive indefinitely. As of September 30, 2015, the aggregate amount related to quantifiable guarantees was $375 million and the aggregate amount related to indemnification agreements was $260 million. Should CNA be required to make payments under the guarantee, it would have the right to seek reimbursement in certain cases from an affiliate of the previously owned subsidiary.

In addition, 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 September 30, 2015, 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 purchaser’s ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. Certain provisions of the indemnification agreements survive indefinitely while others survive until the applicable statutes of limitation expire, or until the agreed upon contract terms expire.

In the normal course of business, CNA also provided guarantees, if the primary obligor fails to perform, to holders of structured settlement annuities provided by a previously owned subsidiary, which are estimated to mature through 2120. The potential amount of future payments CNA could be required to pay under these guarantees was

 

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approximately $2.0 billion as of September 30, 2015. CNA does not believe a payable is likely under these guarantees, as CNA is the beneficiary of a trust that must be maintained at a level that approximates the discounted reserves for these annuities.

Diamond Offshore

Diamond Offshore is financially obligated under a contract with Hyundai Heavy Industries, Co. Ltd. for the construction of a dynamically positioned, harsh environment semisubmersible drilling rig, with expected delivery in the second quarter of 2016. The total cost of the rig including shipyard costs, capital spares, commissioning, project management and shipyard supervision is estimated to be $764 million. The remaining contractual payment of $440 million is due upon delivery of the rig.

12.  Discontinued Operations

The Consolidated Condensed Statements of Income include discontinued operations of HighMount as follows:

 

                           
     Three Months Ended
September 30, 2014
    Nine Months Ended 
September 30, 2014 
 

 

 
(In millions)             

Revenues:

    

Other revenue, primarily operating

       $ 49                  $ 150           

 

 

Total

     49                150           

 

 

Expenses:

    

Other operating expenses

    

Impairment of natural gas and oil properties

       29           

Operating

     54                165           

Interest

     3                8           

 

 

Total

     57                202           

 

 

Loss before income tax

     (8)               (52)          

Income tax benefit

     3                2           

 

 

Results of discontinued operations, net of income tax

     (5)               (50)          

Impairment loss, net of tax (expense) benefit of $(30) and $62

     30                (137)          

 

 

Income (loss) from discontinued operations

       $ 25                  $ (187)          

 

 

The Consolidated Condensed Statements of Income include discontinued operations of the CAC business as follows:

 

                                                       

 

 
(In millions)             

Revenues:

    

Net investment income

       $ 14                  $ 94           

Investment gains

     1                3           

 

 

Total

     15                97           

 

 

Expenses:

    

Insurance claims and policyholders’ benefits

     12                75           

Other operating expenses

       2           

 

 

Total

     12                77           

 

 

Income before income tax

     3                20           

Income tax expense

     (2)               (6)          

 

 

Results of discontinued operations, net of income tax

     1                14           

Loss on sale, net of tax (expense) benefit of $(1) and $40

     3                (211)          

Amounts attributable to noncontrolling interests

       20           

 

 

Income (loss) from discontinued operations

       $ 4                  $ (177)          

 

 

 

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13.  Consolidating Financial Information

The following schedules present the Company’s consolidating balance sheet information at September 30, 2015 and December 31, 2014, and consolidating statements of income information for the nine months ended September 30, 2015 and 2014. 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 Company’s subsidiaries due to adjustments for purchase accounting, income taxes and noncontrolling interests. In addition, many of the Company’s 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 company’s 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 company’s 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.

 

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Loews Corporation

Consolidating Balance Sheet Information

 

September 30, 2015    CNA    
Financial
     Diamond
Offshore
     Boardwalk
Pipeline
     Loews
Hotels
     Corporate
and Other
     Eliminations      Total  

 

 
(In millions)                                                 

Assets:

                    

Investments

   $ 45,318       $ 144          $ 91       $ 4,997            $    50,550      

Cash

     236         11       $         16         59              328      

Receivables

     7,069         519         121          38         459         $ (127)           8,079      

Property, plant and equipment

     310         6,892         7,654          998         48              15,902      

Deferred income taxes

     304               2         128           (434)           -      

Goodwill

     115            237                   352      

Investments in capital stocks of subsidiaries

                 15,751           (15,751)           -      

Other assets

     832         260         334          268         8           13            1,715      

Deferred acquisition costs of insurance subsidiaries

     606                        606      

 

 

Total assets

   $     54,790       $     7,826       $       8,352        $       1,413       $ 21,450         $   (16,299)         $ 77,532      

 

 

Liabilities and Equity:

                    

Insurance reserves

   $ 36,093                      $ 36,093      

Payable to brokers

     166                $ 567              733      

Short term debt

     350       $ 493          $ 35         400              1,278      

Long term debt

     2,214         1,982       $ 3,459          556         1,281              9,492      

Deferred income taxes

     6         402         765          42          $ (419)           796      

Other liabilities

     3,724         571         464          64         293           (129)           4,987      

 

 

Total liabilities

     42,553         3,448         4,688          697         2,541           (548)           53,379      

 

 

Total shareholders’ equity

     10,972         2,335         1,565          714         18,909           (15,751)           18,744      

Noncontrolling interests

     1,265         2,043         2,099          2               5,409      

 

 

Total equity

     12,237         4,378         3,664          716         18,909           (15,751)           24,153      

 

 

Total liabilities and equity

   $ 54,790       $ 7,826       $ 8,352        $ 1,413       $ 21,450         $ (16,299)         $ 77,532      

 

 

 

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Table of Contents

Loews Corporation

Consolidating Balance Sheet Information

 

December 31, 2014    CNA    
Financial
     Diamond
Offshore
     Boardwalk
Pipeline
     Loews
  Hotels  
     Corporate
and Other
     Eliminations      Total  

 

 
(In millions)                                                 

Assets:

                    

Investments

   $ 46,262       $ 234          $ 75       $ 5,461            $    52,032      

Cash

     190         16       $         9         141              364      

Receivables

     7,097         490         128          29         82         $ (56)           7,770      

Property, plant and equipment

     280         6,949         7,649          671         62              15,611      

Deferred income taxes

     222               2         374           (598)           -      

Goodwill

     117         20         237                   374      

Investments in capital stocks of subsidiaries

                 15,974           (15,974)           -      

Other assets

     778         307         304          206         7           14            1,616      

Deferred acquisition costs of insurance subsidiaries

     600                        600      

 

 

Total assets

   $ 55,546       $ 8,016       $ 8,326        $ 992       $ 22,101         $ (16,614)         $ 78,367      

 

 

Liabilities and Equity:

                    

Insurance reserves

   $ 36,380                      $ 36,380      

Payable to brokers

     117       $ 5             $ 551              673      

Short term debt

        250          $ 85               335      

Long term debt

     2,561         1,981       $ 3,690          421         1,680              10,333      

Deferred income taxes

     11         514         732          36          $ (400)           893      

Other liabilities

     3,713         792         400          17         421           (240)           5,103      

 

 

Total liabilities

     42,782         3,542         4,822          559         2,652           (640)           53,717      

 

 

Total shareholders’ equity

     11,457         2,359         1,558          431         19,449           (15,974)           19,280      

Noncontrolling interests

     1,307         2,115         1,946          2               5,370      

 

 

Total equity

     12,764         4,474         3,504          433         19,449           (15,974)           24,650      

 

 

Total liabilities and equity

   $     55,546       $       8,016       $       8,326        $ 992       $     22,101         $   (16,614)         $ 78,367      

 

 

 

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Table of Contents

Loews Corporation

Consolidating Statement of Income Information

 

Nine Months Ended September 30, 2015   CNA    
Financial
    Diamond
Offshore
   

Boardwalk

Pipeline

   

Loews

  Hotels  

    Corporate
and Other
    Eliminations     Total  

 

 
(In millions)                                          

Revenues:

             

Insurance premiums

  $ 5,173                 $ 5,173        

Net investment income

    1,412       $      $        $ 4            1,419        

Intercompany interest and dividends

            733          $ (733)            -        

Investment losses

    (42)                  (42)       

Contract drilling revenues

      1,816                 1,816        

Other revenues

    289         49                 924       $ 452         2            1,716        

 

 

Total

    6,832               1,867         925         452         739          (733)                10,082        

 

 

Expenses:

             

Insurance claims and policyholders’ benefits

          4,008                   4,008        

Amortization of deferred acquisition costs

    936                   936        

Contract drilling expenses

      971                 971        

Other operating expenses

    1,058         867         628         412         61            3,026        

Interest

    117         71         134         15         56            393        

 

 

Total

    6,119         1,909         762         427         117          -             9,334        

 

 

Income (loss) before income tax

    713         (42)        163         25         622          (733)            748        

Income tax (expense) benefit

    (162)        (6)        (33)        (10)        41            (170)       

 

 

Net income (loss)

    551         (48)        130         15                 663          (733)            578        

Amounts attributable to noncontrolling interests

    (56)        14         (75)              (117)       

 

 

Net income (loss) attributable to Loews Corporation

  $ 495       $ (34)      $ 55       $ 15       $ 663          $       (733)          $ 461        

 

 

 

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Table of Contents

Loews Corporation

Consolidating Statement of Income Information

 

Nine Months Ended September 30, 2014    CNA    
Financial
    Diamond
Offshore
    Boardwalk
Pipeline
    Loews
Hotels
    Corporate
and Other
    Eliminations     Total  

 

 
(In millions)                                           

Revenues:

              

Insurance premiums

   $ 5,427                 $ 5,427        

Net investment income

     1,556       $          $ 68             1,625        

Intercompany interest and dividends

                      647         $ (647)            -        

Investment gains

     65                   65        

Contract drilling revenues

       2,063                 2,063        

Other revenues

     266         84       $ 931         $         343             1,624        

 

 

Total

     7,314         2,148                 931           343         715           (647)                10,804        

 

 

Expenses:

              

Insurance claims and policyholders’ benefits

     4,241                   4,241        

Amortization of deferred acquisition costs

     996                   996        

Contract drilling expenses

               1,165                 1,165        

Other operating expenses

     978         575         705           320         56             2,634        

Interest

     138         46         121                  55             369        

 

 

Total

             6,353         1,786         826           329         111           -             9,405        

 

 

Income before income tax

     961         362         105           14         604           (647)            1,399        

Income tax (expense) benefit

     (268)        (84)        (5)          (6)        16             (347)       

 

 

Income from continuing operations

     693         278         100                  620           (647)            1,052        

Discontinued operations, net

     (197)              (187)            (384)       

 

 

Net income

     496         278         100                  433                 (647)            668        

Amounts attributable to noncontrolling interests

     (50)        (142)        (93)                (285)       

 

 

Net income attributable to Loews Corporation

   $ 446       $ 136       $ 7         $      $ 433         $ (647)          $ 383        

 

 

 

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Table of Contents

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s 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, 2014. This MD&A is comprised of the following sections:

 

         Page    
No.

Overview

   44

Consolidated Financial Results

   44

Parent Company Structure

   45

Critical Accounting Estimates

   46

Results of Operations by Business Segment

   46

CNA Financial

   47

Diamond Offshore

   52

Boardwalk Pipeline

   58

Loews Hotels

   61

Corporate and Other

   62

Discontinued Operations

   62

Liquidity and Capital Resources

   62

CNA Financial

   62

Diamond Offshore

   63

Boardwalk Pipeline

   64

Loews Hotels

   65

Corporate and Other

   65

Investments

   65

Accounting Standards Update

   69

Forward-Looking Statements

   69

OVERVIEW

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 53% 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 51% owned subsidiary); and

 

   

operation of a chain of hotels (Loews Hotels Holding Corporation (“Loews Hotels”), a wholly owned subsidiary).

See below for a discussion of discontinued operations.

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

Net income for the three months ended September 30, 2015 was $182 million, or $0.50 per share, compared to $208 million, or $0.55 per share, in the prior year period. For the nine months ended September 30, 2015, net income was $461 million, or $1.25 per share, compared to $383 million, or $1.00 per share, in the prior year period. In 2014, net income for the three month period in 2014 included income from discontinued operations of $29 million while the nine month period included a loss from discontinued operations of $364 million reflecting the disposition by Loews of HighMount Exploration & Production, LLC (“HighMount”) and by CNA of its former life insurance subsidiary.

 

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Income from continuing operations for the three months ended September 30, 2015 was $182 million, or $0.50 per share, compared to $179 million, or $0.47 per share, in the 2014 third quarter. Income from continuing operations increased primarily due to higher earnings at Diamond Offshore and Boardwalk Pipeline.

CNA’s earnings declined primarily due to lower limited partnership investment results and realized investment losses versus realized gains in the prior year quarter. Improved underwriting results driven by higher favorable net prior year development partially offset the negative related to the investment portfolio.

Diamond Offshore’s earnings increase stemmed from the absence in 2015 of the $55 million asset impairment charge (after tax and noncontrolling interests) in 2014 related to the carrying value of six drilling rigs. Excluding this charge, earnings declined primarily due to lower rig utilization and increased depreciation and interest expense. In addition, earnings were impacted by a $20 million impairment charge to write-off all goodwill associated with the Company’s investment in Diamond Offshore. These decreases were partially offset by significantly reduced contract drilling expenses.

Boardwalk Pipeline’s earnings increased primarily due to new rate hikes taking effect as a result of the Gulf South rate case and a franchise tax refund related to settlement of prior tax periods, partially offset by increased depreciation and interest costs.

Loews Hotels’ earnings increased primarily due to higher income from Universal Orlando joint venture properties.

Discontinued operations in 2014 included a favorable adjustment to the impairment charge at HighMount.

Income from continuing operations for the nine months ended September 30, 2015 was $461 million, or $1.25 per share, compared to $747 million, or $1.94 per share, in the prior year period. Income from continuing operations decreased primarily due to lower earnings at CNA and Diamond Offshore and lower parent company investment income as a result of lower performance of equities and derivative related securities in the trading portfolio and decreased results from limited partnership investments.

CNA’s earnings declined year-over-year because of lower limited partnership results and an $84 million charge ($49 million after tax and noncontrolling interests) in the second quarter of 2015 related to a retroactive reinsurance agreement to cede its legacy asbestos and environmental pollution liabilities. The year-over-year earnings comparison was also impacted by a gain of $86 million ($50 million after tax and noncontrolling interests) in 2014 from a postretirement plan curtailment. The decline in the nine months of 2015 as compared to the prior year was partially offset by improved underwriting results driven by higher favorable net prior year development.

Diamond Offshore’s earnings decreased primarily due to an asset impairment charge of $158 million (after tax and noncontrolling interests) in the first quarter of 2015 related to the carrying value of eight drilling rigs as well as lower rig utilization, the goodwill charge discussed above and increased depreciation and interest expense. Diamond Offshore recognized a $55 million asset impairment charge (after tax and noncontrolling interests) in the 2014 period.

Boardwalk Pipeline’s earnings increase stemmed from the impact of a $55 million charge (after tax and noncontrolling interests) in 2014 related to the write off of all capitalized costs associated with the terminated Bluegrass project as well as for the reasons discussed in the three month comparison above. Absent this charge, earnings decreased primarily due to the unusually cold and sustained winter of 2014 as compared to the relatively normal 2015 winter season and lower natural gas storage revenues.

Loews Hotels’ earnings increased primarily due to higher income from Universal Orlando joint venture properties partially offset by higher interest expense.

Discontinued operations in 2014 included impairment charges related to the sale of both CNA’s former life insurance subsidiary and HighMount.

Book value per share increased to $52.52 at September 30, 2015 from $51.70 at December 31, 2014 and $52.01 at September 30, 2014. Book value per share excluding accumulated other comprehensive income (“AOCI”) increased to $52.59 at September 30, 2015 from $50.95 at December 31, 2014 and $50.32 at September 30, 2014.

Parent Company Structure

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

 

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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.

CRITICAL ACCOUNTING ESTIMATES

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. 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.

 

   

Insurance Reserves

   

Reinsurance and Other Receivables

   

Valuation of Investments and Impairment of Securities