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
(Registrants telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X | No |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes X | No | Not Applicable |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer X Accelerated filer Non-accelerated filer Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes | No X |
Class |
Outstanding at October 23, 2015 | |||
Common stock, $0.01 par value |
354,342,618 shares |
2
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.
3
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.
4
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.
5
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 |
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.
6
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.
7
Loews Corporation and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Loews Corporation is a holding company. Its subsidiaries are engaged in the following lines of business: commercial property and casualty insurance (CNA Financial Corporation (CNA), a 90% owned subsidiary); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (Diamond Offshore), a 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 contracts 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.
8
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. |
9
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) | |||||||||||
|
10
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 CNAs 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).
11
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.
12
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 | ||||||||
|
13
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. |
14
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 CNAs life settlement contracts are included in Other assets on the Consolidated Condensed Balance Sheets. Equity options purchased are included in Equity securities, and all other derivative assets are included in Receivables. Derivative liabilities are included in Payable to brokers. Assets and liabilities measured at fair value on a recurring 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) |
15
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) |
16
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 | $ | (2) | 4 | (7) | 204 | ||||||||||||||||||||||||||||||||
Commercial mortgage-backed |
87 | 5 | (4) | 8 | (15) | (10) | 71 | |||||||||||||||||||||||||||||||||
Other asset-backed |
490 | (6) | 43 | (20) | (32) | (4) | 471 | |||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total asset-backed |
784 | 7 | (12) | 55 | (20) | (54) | $ | - | (14) | 746 | $ | - | ||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Fixed maturities available-for-sale |
1,010 | 7 | (12) | 82 | (21) | (65) | (41) | 960 | ||||||||||||||||||||||||||||||||
Fixed maturities trading |
89 | (2) | (1) | 86 | $ | (2) | ||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total fixed maturities |
$ | 1,099 | $ | 5 | $ | (12) | $ | 82 | $ | (22) | $ | (65) | $ | - | $ | (41) | $ | 1,046 | $ | (2) | ||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
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 |
$ | 75 | $ | 5 | $ | (6) | $ | 74 | $ | 2 |
17
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) | $ | 4 | $ | (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) |
18
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 |
19
Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses) |
Transfers | Transfers | Unrealized (Losses) Recognized in on Level 3 Assets and |
|||||||||||||||||||||||||||||||||||||
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 | 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 |
20
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 Companys policy is to recognize transfers between levels at the beginning of quarterly reporting periods.
Valuation Methodologies and Inputs
The following section describes the valuation methodologies and relevant inputs used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instruments are generally classified.
Fixed Maturity Securities
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.
21
Life Settlement Contracts
The fair values of life settlement contracts are determined as the present value of the anticipated death benefits less anticipated premium payments based on contract terms that are distinct for each insured, as well as CNAs own assumptions for mortality, premium expense, and the rate of return that a buyer would require on the contracts, as no comparable market pricing data is available.
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.
22
Financial Assets and Liabilities Not Measured at Fair Value
The carrying amount, estimated fair value and the level of the fair value hierarchy of the Companys financial 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.
23
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 rigs 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 Offshores previously impaired mid-water semisubmersible rigs. The fair value of Diamond Offshores 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 Offshores 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
CNAs property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including claims that are incurred but not reported (IBNR) as of the reporting date. CNAs reserve projections are based primarily on detailed analysis of the facts in each case, CNAs experience with similar cases and various historical development patterns. Consideration is given to such historical patterns as field reserving trends and claims settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions including inflation and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.
Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the
24
results of operations in the period that the need for such adjustments is determined. There can be no assurance that CNAs ultimate cost for insurance losses will not exceed current estimates.
Catastrophes are an inherent risk of the property and casualty insurance business and can contribute to material period-to-period fluctuations in CNAs 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) | ||||||||
|
||||||||||||||||||||
|
25
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.
26
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.
27
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.
28
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 CNAs insurance subsidiaries completed a transaction with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc., under which substantially all of CNAs 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.
29
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 NICOs performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third party reinsurers related to CNAs 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 CNAs 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.
30
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.
31
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) | ||||||||||||||
|
32
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 |
33
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 Companys percentage ownership interest in Diamond Offshore increased as a result of these transactions, from 52% to 53%. The Companys 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 Companys percentage ownership interest in Boardwalk Pipeline declined as a result of this transaction, from 53% to 51%. The Companys 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 participants age or years of service) and a specified interest rate (which is established annually for all participants) applied to accrued balances. The benefits for another plan which covers salaried employees are based on formulas which include, among others, years of service and average pay. The Companys funding policy is to make contributions in accordance with applicable governmental regulatory requirements.
Other Postretirement Benefit Plans - The Company has several postretirement benefit plans covering eligible employees and retirees. Participants generally become eligible after reaching age 55 with required years of service. Actual requirements for coverage vary by plan. Benefits for retirees who were covered by bargaining units vary by each unit and contract. Benefits for certain retirees are in the form of a Company health care account.
Benefits for retirees reaching age 65 are generally integrated with Medicare. Other retirees, based on plan provisions, must use Medicare as their primary coverage, with the Company reimbursing a portion of the unpaid amount; or are reimbursed for the Medicare Part B premium or have no Company coverage. The benefits provided by the Company are basically health and, for certain retirees, life insurance type benefits.
The Company funds certain of these benefit plans, and accrues postretirement benefits during the active service of those employees who would become eligible for such benefits when they retire.
The components of net periodic benefit cost are as follows:
Pension Benefits | ||||||||||||||||
|
|
|||||||||||||||
Three Months Ended 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) | ||||||||
|
34
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 Companys 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.
CNAs 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 Lloyds marketplace. Other Non-Core primarily includes the results of CNAs 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 Offshores fleet consists of 33 drilling rigs, including one newbuild rig which is under construction. On September 30, 2015, Diamond Offshores 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.
35
The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the year ended December 31, 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 segments carried insurance reserves, as adjusted.
The following tables set forth the Companys 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 | ||||||||
|
36
(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 Companys 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 Companys 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 purchasers ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. 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
37
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) | ||||
|
38
13. Consolidating Financial Information
The following schedules present the Companys 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 Companys subsidiaries due to adjustments for purchase accounting, income taxes and noncontrolling interests. In addition, many of the Companys subsidiaries use a classified balance sheet which also leads to differences in amounts reported for certain line items.
The Corporate and other column primarily reflects the parent companys investment in its subsidiaries, invested cash portfolio and corporate long term debt. The elimination adjustments are for intercompany assets and liabilities, interest and dividends, the parent companys investment in capital stocks of subsidiaries, and various reclasses of debit or credit balances to the amounts in consolidation. Purchase accounting adjustments have been pushed down to the appropriate subsidiary.
39
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 | $ | 6 | 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 | ||||||||||||||
|
40
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 | $ | 8 | 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 | ||||||||||||||
|
41
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 | $ | 2 | $ | 1 | $ | 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 | ||||||||||||||
|
42
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 | $ | 1 | $ | 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 | 9 | 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 | 8 | 620 | (647) | 1,052 | |||||||||||||||||||||
Discontinued operations, net |
(197) | (187) | (384) | |||||||||||||||||||||||||
|
||||||||||||||||||||||||||||
Net income |
496 | 278 | 100 | 8 | 433 | (647) | 668 | |||||||||||||||||||||
Amounts attributable to noncontrolling interests |
(50) | (142) | (93) | (285) | ||||||||||||||||||||||||
|
||||||||||||||||||||||||||||
Net income attributable to Loews Corporation |
$ | 446 | $ | 136 | $ | 7 | $ | 8 | $ | 433 | $ | (647) | $ | 383 | ||||||||||||||
|
43
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Managements discussion and analysis of financial condition and results of operations (MD&A) should be read in conjunction with our Consolidated Condensed Financial Statements included in Item 1 of this Report, Risk Factors included in Part II, Item 1A of this Report, and the Consolidated Financial Statements, Risk Factors, and MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2014. This MD&A is comprised of the following sections:
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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.
CNAs 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 Offshores 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 Companys investment in Diamond Offshore. These decreases were partially offset by significantly reduced contract drilling expenses.
Boardwalk Pipelines 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.
CNAs 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 Offshores 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 Pipelines 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 CNAs 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.
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.
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 |
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