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, 2016
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 | (I.R.S. Employer | |
incorporation or organization) | 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 21, 2016 | |||
Common stock, $0.01 par value |
336,959,362 shares |
2
Item 1. Financial Statements.
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
|
||||||||
(Dollar amounts in millions, except per share data) |
||||||||
Assets: |
||||||||
Investments: |
||||||||
Fixed maturities, amortized cost of $38,810 and $37,407 |
$ 42,894 | $ 39,701 | ||||||
Equity securities, cost of $581 and $824 |
586 | 752 | ||||||
Limited partnership investments |
3,293 | 3,313 | ||||||
Other invested assets, primarily mortgage loans |
719 | 824 | ||||||
Short term investments |
4,893 | 4,810 | ||||||
|
||||||||
Total investments |
52,385 | 49,400 | ||||||
Cash |
344 | 440 | ||||||
Receivables |
7,853 | 8,041 | ||||||
Property, plant and equipment |
15,200 | 15,477 | ||||||
Goodwill |
347 | 351 | ||||||
Other assets |
1,760 | 1,699 | ||||||
Deferred acquisition costs of insurance subsidiaries |
619 | 598 | ||||||
|
||||||||
Total assets |
$ 78,508 | $ 76,006 | ||||||
|
||||||||
Liabilities and Equity: |
||||||||
Insurance reserves: |
||||||||
Claim and claim adjustment expense |
$ 22,672 | $ 22,663 | ||||||
Future policy benefits |
11,219 | 10,152 | ||||||
Unearned premiums |
3,862 | 3,671 | ||||||
|
||||||||
Total insurance reserves |
37,753 | 36,486 | ||||||
Payable to brokers |
451 | 567 | ||||||
Short term debt |
185 | 1,040 | ||||||
Long term debt |
10,737 | 9,520 | ||||||
Deferred income taxes |
735 | 382 | ||||||
Other liabilities |
5,241 | 5,201 | ||||||
|
||||||||
Total liabilities |
55,102 | 53,196 | ||||||
|
||||||||
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 339,951,927 and 339,897,547 shares |
3 | 3 | ||||||
Additional paid-in capital |
3,207 | 3,184 | ||||||
Retained earnings |
15,031 | 14,731 | ||||||
Accumulated other comprehensive income (loss) |
144 | (357) | ||||||
|
||||||||
18,385 | 17,561 | |||||||
Less treasury stock, at cost (2,992,565 shares) |
(115) | |||||||
|
||||||||
Total shareholders equity |
18,270 | 17,561 | ||||||
Noncontrolling interests |
5,136 | 5,249 | ||||||
|
||||||||
Total equity |
23,406 | 22,810 | ||||||
|
||||||||
Total liabilities and equity |
$ 78,508 | $ 76,006 | ||||||
|
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, | |||||||||||||||
|
|
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
|
||||||||||||||||
(In millions, except per share data) | ||||||||||||||||
Revenues: |
||||||||||||||||
Insurance premiums |
$ | 1,767 | $ | 1,751 | $ | 5,196 | $ | 5,173 | ||||||||
Net investment income |
561 | 321 | 1,570 | 1,419 | ||||||||||||
Investment gains (losses): |
||||||||||||||||
Other-than-temporary impairment losses |
(18 | ) | (56 | ) | (56 | ) | (99) | |||||||||
Other net investment gains |
63 | 6 | 74 | 57 | ||||||||||||
|
||||||||||||||||
Total investment gains (losses) |
45 | (50 | ) | 18 | (42) | |||||||||||
Contract drilling revenues |
340 | 599 | 1,141 | 1,816 | ||||||||||||
Other revenues |
574 | 548 | 1,842 | 1,716 | ||||||||||||
|
||||||||||||||||
Total |
3,287 | 3,169 | 9,767 | 10,082 | ||||||||||||
|
||||||||||||||||
Expenses: |
||||||||||||||||
Insurance claims and policyholders benefits |
1,202 | 1,200 | 3,949 | 4,008 | ||||||||||||
Amortization of deferred acquisition costs |
314 | 319 | 926 | 936 | ||||||||||||
Contract drilling expenses |
187 | 276 | 598 | 971 | ||||||||||||
Other operating expenses (Note 4) |
898 | 898 | 3,416 | 3,026 | ||||||||||||
Interest |
130 | 128 | 403 | 393 | ||||||||||||
|
||||||||||||||||
Total |
2,731 | 2,821 | 9,292 | 9,334 | ||||||||||||
|
||||||||||||||||
Income before income tax |
556 | 348 | 475 | 748 | ||||||||||||
Income tax expense |
(163 | ) | (66 | ) | (171 | ) | (170) | |||||||||
|
||||||||||||||||
Net income |
393 | 282 | 304 | 578 | ||||||||||||
Amounts attributable to noncontrolling interests |
(66 | ) | (100 | ) | 60 | (117) | ||||||||||
|
||||||||||||||||
Net income attributable to Loews Corporation |
$ | 327 | $ | 182 | $ | 364 | $ | 461 | ||||||||
|
||||||||||||||||
Basic and diluted net income per share |
$ | 0.97 | $ | 0.50 | $ | 1.08 | $ | 1.25 | ||||||||
|
||||||||||||||||
Dividends per share |
$ | 0.0625 | $ | 0.0625 | $ | 0.1875 | $ | 0.1875 | ||||||||
|
||||||||||||||||
Weighted average shares outstanding: |
||||||||||||||||
Shares of common stock |
337.18 | 360.91 | 338.33 | 367.74 | ||||||||||||
Dilutive potential shares of common stock |
0.44 | 0.19 | 0.28 | 0.29 | ||||||||||||
|
||||||||||||||||
Total weighted average shares outstanding assuming dilution |
337.62 | 361.10 | 338.61 | 368.03 | ||||||||||||
|
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, |
|||||||||||||||
|
|
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
|
||||||||||||||||
(In millions) | ||||||||||||||||
Net income |
$ | 393 | $ | 282 | $ | 304 | $ | 578 | ||||||||
|
||||||||||||||||
Other comprehensive income (loss), after tax |
||||||||||||||||
Changes in: |
||||||||||||||||
Net unrealized gains (losses) on investments with other-than-temporary impairments |
3 | 2 | 7 | (3) | ||||||||||||
Net other unrealized gains (losses) on investments |
42 | (39 | ) | 591 | (292) | |||||||||||
|
||||||||||||||||
Total unrealized gains (losses) on available-for-sale investments |
45 | (37 | ) | 598 | (295) | |||||||||||
Unrealized gains on cash flow hedges |
1 | 1 | 2 | 5 | ||||||||||||
Pension liability |
7 | 4 | 20 | 51 | ||||||||||||
Foreign currency |
(24 | ) | (53 | ) | (58 | ) | (100) | |||||||||
|
||||||||||||||||
Other comprehensive income (loss) |
29 | (85 | ) | 562 | (339) | |||||||||||
|
||||||||||||||||
Comprehensive income |
422 | 197 | 866 | 239 | ||||||||||||
Amounts attributable to noncontrolling interests |
(70 | ) | (91 | ) | (1 | ) | (82) | |||||||||
|
||||||||||||||||
Total comprehensive income attributable to Loews Corporation |
$ | 352 | $ | 106 | $ | 865 | $ | 157 | ||||||||
|
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 (Loss) |
Common Held in |
Noncontrolling Interests |
||||||||||||||||||||||
|
||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
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 | ||||||||||||
|
||||||||||||||||||||||||||||
Balance, January 1, 2016 |
$ | 22,810 | $ | 3 | $ | 3,184 | $ | 14,731 | $ | (357 | ) | $ | - | $ | 5,249 | |||||||||||||
Net income |
304 | 364 | (60) | |||||||||||||||||||||||||
Other comprehensive income |
562 | 501 | 61 | |||||||||||||||||||||||||
Dividends paid |
(177 | ) | (63 | ) | (114) | |||||||||||||||||||||||
Purchases of subsidiary stock from noncontrolling interests |
(9 | ) | 3 | (12) | ||||||||||||||||||||||||
Purchases of Loews treasury stock |
(115 | ) | (115 | ) | ||||||||||||||||||||||||
Stock-based compensation |
35 | 33 | 2 | |||||||||||||||||||||||||
Other |
(4 | ) | (13 | ) | (1 | ) | 10 | |||||||||||||||||||||
|
||||||||||||||||||||||||||||
Balance, September 30, 2016 |
$ | 23,406 | $ | 3 | $ | 3,207 | $ | 15,031 | $ | 144 | $ | (115 | ) | $ | 5,136 | |||||||||||||
|
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 | 2016 | 2015 | ||||||
|
||||||||
(In millions) |
||||||||
Operating Activities: |
||||||||
Net income |
$ | 304 | $ | 578 | ||||
Adjustments to reconcile net income to net cash provided (used) by operating activities, net |
1,676 | 1,370 | ||||||
Changes in operating assets and liabilities, net: |
||||||||
Receivables |
(165 | ) | 31 | |||||
Deferred acquisition costs |
(24 | ) | 11 | |||||
Insurance reserves |
464 | 195 | ||||||
Other assets |
(80 | ) | (81) | |||||
Other liabilities |
9 | (108) | ||||||
Trading securities |
(468 | ) | 199 | |||||
|
||||||||
Net cash flow operating activities |
1,716 | 2,195 | ||||||
|
||||||||
Investing Activities: |
||||||||
Purchases of fixed maturities |
(7,472 | ) | (7,055) | |||||
Proceeds from sales of fixed maturities |
4,239 | 3,590 | ||||||
Proceeds from maturities of fixed maturities |
2,263 | 3,101 | ||||||
Purchases of limited partnership investments |
(324 | ) | (120) | |||||
Proceeds from sales of limited partnership investments |
207 | 156 | ||||||
Purchases of property, plant and equipment |
(1,264 | ) | (1,447) | |||||
Dispositions |
277 | 28 | ||||||
Change in short term investments |
104 | 298 | ||||||
Other, net |
124 | (138) | ||||||
|
||||||||
Net cash flow investing activities |
(1,846 | ) | (1,587) | |||||
|
||||||||
Financing Activities: |
||||||||
Dividends paid |
(63 | ) | (69) | |||||
Dividends paid to noncontrolling interests |
(114 | ) | (138) | |||||
Purchases of subsidiary stock from noncontrolling interests |
(8 | ) | (29) | |||||
Purchases of Loews treasury stock |
(115 | ) | (617) | |||||
Issuance of Loews common stock |
7 | |||||||
Proceeds from sale of subsidiary stock |
114 | |||||||
Principal payments on debt |
(2,882 | ) | (1,761) | |||||
Issuance of debt |
3,226 | 1,851 | ||||||
Other, net |
(2 | ) | 4 | |||||
|
||||||||
Net cash flow financing activities |
42 | (638) | ||||||
|
||||||||
Effect of foreign exchange rate on cash |
(8 | ) | (6) | |||||
|
||||||||
Net change in cash |
(96 | ) | (36) | |||||
Cash, beginning of period |
440 | 364 | ||||||
|
||||||||
Cash, end of period |
$ | 344 | $ | 328 | ||||
|
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 attributable to Loews Corporation as used herein means Net income attributable to Loews Corporation shareholders.
In the opinion of management, the accompanying unaudited Consolidated Condensed Financial Statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the Companys financial position as of September 30, 2016 and December 31, 2015, results of operations and comprehensive income for the three and nine months ended September 30, 2016 and 2015 and changes in shareholders equity and cash flows for the nine months ended September 30, 2016 and 2015. 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. These Consolidated Condensed Financial Statements should be read in conjunction with the Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2015.
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. Shares attributable to employee stock-based compensation awards of 3.3 million, 5.8 million, 4.7 million and 4.5 million shares were not included in the diluted weighted average shares amounts for the three and nine months ended September 30, 2016 and 2015 because the effect would have been antidilutive.
Accounting changes In April of 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The updated accounting guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, rather than as a deferred asset. As required, the Companys Consolidated Condensed Balance Sheet has been retrospectively adjusted to reflect the effect of the adoption of the updated accounting guidance, which resulted in a decrease of $23 million in Other assets and Long term debt at December 31, 2015.
Recently issued ASUs 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.
In May of 2015, the FASB issued ASU 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 guidance is effective for annual periods
8
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, but expects to provide additional incurred and paid claims development information by accident year, quantitative information about claim frequency and the history of claims duration for significant lines of business within the annual financial statements.
In January of 2016, the FASB issued ASU 2016-01, Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The updated accounting guidance requires changes to the reporting model for financial instruments. The guidance is effective for interim and annual periods beginning after December 15, 2017. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements, and expects the primary change to be the requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.
In February of 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and nonlease components in a contract in accordance with the new revenue guidance in ASU 2014-09. The updated guidance is effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the effect the updated guidance will have on its consolidated financial statements.
In June of 2016, the FASB issued ASU 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through net income. The guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements, and expects the primary changes to be the use of the expected credit loss model for the mortgage loan portfolio and reinsurance receivables and the presentation of credit losses within the available-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down. The expected credit loss model will require a financial asset to be presented at the net amount expected to be collected. The allowance method for available-for-sale debt securities will allow the Company to record reversals of credit losses if the estimate of credit losses declines.
2. Investments
Net investment income is as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
|
||||||||||||||||
(In millions) |
||||||||||||||||
Fixed maturity securities |
$ | 457 | $ | 449 | $ | 1,352 | $ | 1,344 | ||||||||
Limited partnership investments |
91 | (122 | ) | 98 | 88 | |||||||||||
Short term investments |
3 | 4 | 8 | 7 | ||||||||||||
Equity securities |
1 | 3 | 8 | 9 | ||||||||||||
Income (loss) from trading portfolio (a) |
11 | (5 | ) | 113 | (9) | |||||||||||
Other |
12 | 9 | 34 | 26 | ||||||||||||
|
||||||||||||||||
Total investment income |
575 | 338 | 1,613 | 1,465 | ||||||||||||
Investment expenses |
(14 | ) | (17 | ) | (43 | ) | (46) | |||||||||
|
||||||||||||||||
Net investment income |
$ | 561 | $ | 321 | $ | 1,570 | $ | 1,419 | ||||||||
|
(a) | Includes net unrealized gains (losses) related to changes in fair value on trading securities still held of $8, $(59), $63 and $(71) for the three and nine months ended September 30, 2016 and 2015. |
9
Investment gains (losses) are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(In millions) | ||||||||||||||||
Fixed maturity securities |
$ | 47 | $ | (29 | ) | $ | 34 | $ | (29) | |||||||
Equity securities |
(3 | ) | (18 | ) | (5 | ) | (19) | |||||||||
Derivative instruments |
1 | (1 | ) | (12 | ) | 9 | ||||||||||
Short term investments and other |
(2 | ) | 1 | (3) | ||||||||||||
|
||||||||||||||||
Investment gains (losses) (a) |
$ | 45 | $ | (50 | ) | $ | 18 | $ | (42) | |||||||
|
(a) | Includes gross realized gains of $68, $23, $157 and $93 and gross realized losses of $24, $70, $128 and $141 on available-for-sale securities for the three and nine months ended September 30, 2016 and 2015. |
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, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(In millions) | ||||||||||||||||
Fixed maturity securities available-for-sale: |
||||||||||||||||
Corporate and other bonds |
$ | 14 | $ | 36 | $ | 43 | $ | 52 | ||||||||
States, municipalities and political subdivisions |
18 | |||||||||||||||
Asset-backed: |
||||||||||||||||
Residential mortgage-backed |
1 | 1 | 7 | |||||||||||||
Other asset-backed |
3 | 1 | ||||||||||||||
|
||||||||||||||||
Total asset-backed |
- | 1 | 4 | 8 | ||||||||||||
|
||||||||||||||||
Total fixed maturities available-for-sale |
14 | 37 | 47 | 78 | ||||||||||||
|
||||||||||||||||
Equity securities available-for-sale - common stock |
4 | 19 | 9 | 20 | ||||||||||||
Short term investments |
1 | |||||||||||||||
|
||||||||||||||||
Net OTTI losses recognized in earnings |
$ | 18 | $ | 56 | $ | 56 | $ | 99 | ||||||||
|
10
The amortized cost and fair values of securities are as follows:
September 30, 2016 | Cost or Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
Unrealized OTTI Losses (Gains) |
|||||||||||||||
|
||||||||||||||||||||
(In millions) |
||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||
Corporate and other bonds |
$ | 17,985 | $1,867 | $ | 36 | $ | 19,816 | $ | (1) | |||||||||||
States, municipalities and political subdivisions |
11,566 | 1,937 | 2 | 13,501 | (27) | |||||||||||||||
Asset-backed: |
||||||||||||||||||||
Residential mortgage-backed |
5,174 | 206 | 15 | 5,365 | (24) | |||||||||||||||
Commercial mortgage-backed |
2,064 | 88 | 8 | 2,144 | ||||||||||||||||
Other asset-backed |
948 | 12 | 1 | 959 | ||||||||||||||||
|
||||||||||||||||||||
Total asset-backed |
8,186 | 306 | 24 | 8,468 | (24) | |||||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises |
68 | 8 | 76 | |||||||||||||||||
Foreign government |
415 | 23 | 438 | |||||||||||||||||
Redeemable preferred stock |
18 | 2 | 20 | |||||||||||||||||
|
||||||||||||||||||||
Fixed maturities available-for-sale |
38,238 | 4,143 | 62 | 42,319 | (52) | |||||||||||||||
Fixed maturities trading |
572 | 4 | 1 | 575 | ||||||||||||||||
|
||||||||||||||||||||
Total fixed maturities |
38,810 | 4,147 | 63 | 42,894 | (52) | |||||||||||||||
|
||||||||||||||||||||
Equity securities: |
||||||||||||||||||||
Common stock |
15 | 6 | 1 | 20 | ||||||||||||||||
Preferred stock |
93 | 5 | 2 | 96 | ||||||||||||||||
|
||||||||||||||||||||
Equity securities available-for-sale |
108 | 11 | 3 | 116 | - | |||||||||||||||
Equity securities trading |
473 | 81 | 84 | 470 | ||||||||||||||||
|
||||||||||||||||||||
Total equity securities |
581 | 92 | 87 | 586 | ||||||||||||||||
|
||||||||||||||||||||
Total |
$ | 39,391 | $4,239 | $ | 150 | $ | 43,480 | $ | (52) | |||||||||||
|
||||||||||||||||||||
December 31, 2015 | ||||||||||||||||||||
|
||||||||||||||||||||
(In millions) | ||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||
Corporate and other bonds |
$ | 17,097 | $ 1,019 | $ | 347 | $ | 17,769 | |||||||||||||
States, municipalities and political subdivisions |
11,729 | 1,453 | 8 | 13,174 | $ | (4) | ||||||||||||||
Asset-backed: |
||||||||||||||||||||
Residential mortgage-backed |
4,935 | 154 | 17 | 5,072 | (37) | |||||||||||||||
Commercial mortgage-backed |
2,154 | 55 | 12 | 2,197 | ||||||||||||||||
Other asset-backed |
923 | 6 | 8 | 921 | ||||||||||||||||
|
||||||||||||||||||||
Total asset-backed |
8,012 | 215 | 37 | 8,190 | (37) | |||||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises |
62 | 5 | 67 | |||||||||||||||||
Foreign government |
334 | 13 | 1 | 346 | ||||||||||||||||
Redeemable preferred stock |
33 | 2 | 35 | |||||||||||||||||
|
||||||||||||||||||||
Fixed maturities available-for-sale |
37,267 | 2,707 | 393 | 39,581 | (41) | |||||||||||||||
Fixed maturities, trading |
140 | 20 | 120 | |||||||||||||||||
|
||||||||||||||||||||
Total fixed maturities |
37,407 | 2,707 | 413 | 39,701 | (41) | |||||||||||||||
|
||||||||||||||||||||
Equity securities: |
||||||||||||||||||||
Common stock |
46 | 3 | 1 | 48 | ||||||||||||||||
Preferred stock |
145 | 7 | 3 | 149 | ||||||||||||||||
|
||||||||||||||||||||
Equity securities available-for-sale |
191 | 10 | 4 | 197 | - | |||||||||||||||
Equity securities, trading |
633 | 56 | 134 | 555 | ||||||||||||||||
|
||||||||||||||||||||
Total equity securities |
824 | 66 | 138 | 752 | - | |||||||||||||||
|
||||||||||||||||||||
Total |
$ | 38,231 | $ 2,773 | $ | 551 | $ | 40,453 | $ | (41) | |||||||||||
|
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. 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
11
realized, a related increase in Insurance reserves is recorded, net of tax and noncontrolling interests, as a reduction of net unrealized gains through Other comprehensive income (Shadow Adjustments). As of September 30, 2016 and December 31, 2015, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $1.5 billion and $996 million.
The available-for-sale securities in a gross unrealized loss position are as follows:
Less than 12 Months |
12 Months or Longer |
Total | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
September 30, 2016 | Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
||||||||||||||||||
|
||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||
Corporate and other bonds |
$ | 617 | $ | 10 | $ | 338 | $ | 26 | $ | 955 | $ | 36 | ||||||||||||
States, municipalities and political subdivisions |
163 | 2 | 9 | 172 | 2 | |||||||||||||||||||
Asset-backed: |
||||||||||||||||||||||||
Residential mortgage-backed |
273 | 6 | 212 | 9 | 485 | 15 | ||||||||||||||||||
Commercial mortgage-backed |
391 | 7 | 96 | 1 | 487 | 8 | ||||||||||||||||||
Other asset-backed |
153 | 1 | 17 | 170 | 1 | |||||||||||||||||||
|
||||||||||||||||||||||||
Total asset-backed |
817 | 14 | 325 | 10 | 1,142 | 24 | ||||||||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises |
2 | 2 | ||||||||||||||||||||||
Foreign government |
16 | 16 | ||||||||||||||||||||||
|
||||||||||||||||||||||||
Total fixed maturity securities |
1,615 | 26 | 672 | 36 | 2,287 | 62 | ||||||||||||||||||
Common stock |
1 | 1 | ||||||||||||||||||||||
Preferred stock |
15 | 2 | 15 | 2 | ||||||||||||||||||||
|
||||||||||||||||||||||||
Total |
$ | 1,630 | $ | 29 | $ | 672 | $ | 36 | $ | 2,302 | $ | 65 | ||||||||||||
|
||||||||||||||||||||||||
December 31, 2015 |
||||||||||||||||||||||||
|
||||||||||||||||||||||||
(In millions) |
||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||
Corporate and other bonds |
$ | 4,882 | $ | 302 | $ | 174 | $ | 45 | $ | 5,056 | $ | 347 | ||||||||||||
States, municipalities and political subdivisions |
338 | 8 | 75 | 413 | 8 | |||||||||||||||||||
Asset-backed: |
||||||||||||||||||||||||
Residential mortgage-backed |
963 | 9 | 164 | 8 | 1,127 | 17 | ||||||||||||||||||
Commercial mortgage-backed |
652 | 10 | 96 | 2 | 748 | 12 | ||||||||||||||||||
Other asset-backed |
552 | 8 | 5 | 557 | 8 | |||||||||||||||||||
|
||||||||||||||||||||||||
Total asset-backed |
2,167 | 27 | 265 | 10 | 2,432 | 37 | ||||||||||||||||||
U.S. Treasury and obligations of government- sponsored enterprises |
4 | 4 | ||||||||||||||||||||||
Foreign government |
54 | 1 | 54 | 1 | ||||||||||||||||||||
Redeemable preferred stock |
3 | 3 | ||||||||||||||||||||||
|
||||||||||||||||||||||||
Total fixed maturity securities |
7,448 | 338 | 514 | 55 | 7,962 | 393 | ||||||||||||||||||
Common stock |
3 | 1 | 3 | 1 | ||||||||||||||||||||
Preferred stock |
13 | 3 | 13 | 3 | ||||||||||||||||||||
|
||||||||||||||||||||||||
Total |
$ | 7,464 | $ | 342 | $ | 514 | $ | 55 | $ | 7,978 | $ | 397 | ||||||||||||
|
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 attributable to changes in interest rates, 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, 2016.
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, 2016 and 2015 for which a portion of an OTTI loss was recognized in Other comprehensive income.
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||
|
|
|||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||
|
||||||||||||||||||||
(In millions) |
||||||||||||||||||||
Beginning balance of credit losses on fixed maturity securities |
$ | 41 | $ | 59 | $ | 53 | $ | 62 | ||||||||||||
Reductions for securities sold during the period |
(2) | (2) | (14) | (5) | ||||||||||||||||
Reductions for securities the Company intends to sell or more likely than not will be required to sell |
(1) | (1) | ||||||||||||||||||
|
||||||||||||||||||||
Ending balance of credit losses on fixed maturity securities |
$ | 38 | $ | 57 | $ | 38 | $ | 57 | ||||||||||||
|
Contractual Maturity
The following table presents available-for-sale fixed maturity securities by contractual maturity.
September 30, 2016 | December 31, 2015 | |||||||||||||||||||
|
|
|||||||||||||||||||
Cost or Amortized Cost |
Estimated Fair Value |
Cost or Amortized Cost |
Estimated Fair Value |
|||||||||||||||||
|
||||||||||||||||||||
(In millions) |
||||||||||||||||||||
Due in one year or less |
$ | 1,665 | $ | 1,710 | $ | 1,574 | $ | 1,595 | ||||||||||||
Due after one year through five years |
9,052 | 9,584 | 7,738 | 8,082 | ||||||||||||||||
Due after five years through ten years |
14,659 | 15,625 | 14,652 | 14,915 | ||||||||||||||||
Due after ten years |
12,862 | 15,400 | 13,303 | 14,989 | ||||||||||||||||
|
||||||||||||||||||||
Total |
$ | 38,238 | $ | 42,319 | $ | 37,267 | $ | 39,581 | ||||||||||||
|
Actual maturities may differ from contractual maturities because certain securities may be called or prepaid. Securities not due at a single date are allocated based on weighted average life.
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, 2016 | December 31, 2015 | |||||||||||||||||||||||
|
||||||||||||||||||||||||
Contractual/ | Contractual / | |||||||||||||||||||||||
Notional | Estimated Fair Value | Notional | Estimated Fair Value | |||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Amount | Asset | (Liability) | Amount | Asset | (Liability) | |||||||||||||||||||
|
||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Without hedge designation: |
||||||||||||||||||||||||
Equity markets: |
||||||||||||||||||||||||
Options purchased |
$ | 391 | $ | 22 | $ 501 | $ | 16 | |||||||||||||||||
written |
229 | $ | (9) | 614 | $ (28) | |||||||||||||||||||
Futures long |
312 | (1) | ||||||||||||||||||||||
short |
106 | (1) | ||||||||||||||||||||||
Interest rate risk: |
||||||||||||||||||||||||
Futures long |
63 | |||||||||||||||||||||||
Foreign exchange: |
||||||||||||||||||||||||
Currency forwards long |
133 | 2 | ||||||||||||||||||||||
short |
152 | |||||||||||||||||||||||
Currency options long |
250 | 550 | 7 | |||||||||||||||||||||
Commodities: |
||||||||||||||||||||||||
Futures long |
68 | 1 | ||||||||||||||||||||||
Embedded derivative on funds withheld liability |
175 | (8 | ) | 179 | 5 |
3. Fair Value
Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable:
● | Level 1 Quoted prices for identical instruments in active markets. |
● | Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. |
● | Level 3 Valuations derived from valuation techniques in which one or more significant inputs are not observable. |
Prices may fall within Level 1, 2 or 3 depending upon the 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.
14
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, 2016 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
||||||||||||||||
(In millions) |
||||||||||||||||
Fixed maturity securities: |
||||||||||||||||
Corporate and other bonds |
$ | 19,555 | $ | 261 | $ | 19,816 | ||||||||||
States, municipalities and political subdivisions |
13,500 | 1 | 13,501 | |||||||||||||
Asset-backed: |
||||||||||||||||
Residential mortgage-backed |
5,286 | 79 | 5,365 | |||||||||||||
Commercial mortgage-backed |
2,120 | 24 | 2,144 | |||||||||||||
Other asset-backed |
916 | 43 | 959 | |||||||||||||
|
||||||||||||||||
Total asset-backed |
8,322 | 146 | 8,468 | |||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises |
$ | 76 | 76 | |||||||||||||
Foreign government |
438 | 438 | ||||||||||||||
Redeemable preferred stock |
20 | 20 | ||||||||||||||
|
||||||||||||||||
Fixed maturities available-for-sale |
96 | 41,815 | 408 | 42,319 | ||||||||||||
Fixed maturities trading |
569 | 6 | 575 | |||||||||||||
|
||||||||||||||||
Total fixed maturities |
$ | 96 | $ | 42,384 | $ | 414 | $ | 42,894 | ||||||||
|
||||||||||||||||
Equity securities available-for-sale |
$ | 97 | $ | 19 | $ | 116 | ||||||||||
Equity securities trading |
469 | 1 | 470 | |||||||||||||
|
||||||||||||||||
Total equity securities |
$ | 566 | $ | - | $ | 20 | $ | 586 | ||||||||
|
||||||||||||||||
Short term investments |
$ | 3,902 | $ | 911 | $ | 4,813 | ||||||||||
Other invested assets |
54 | 5 | 59 | |||||||||||||
Life settlement contracts |
$ | 67 | 67 | |||||||||||||
Payable to brokers |
(215 | ) | (215) |
15
December 31, 2015 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
||||||||||||||||
(In millions) |
||||||||||||||||
Fixed maturity securities: |
||||||||||||||||
Corporate and other bonds |
$ | 17,601 | $ | 168 | $ | 17,769 | ||||||||||
States, municipalities and political subdivisions |
13,172 | 2 | 13,174 | |||||||||||||
Asset-backed: |
||||||||||||||||
Residential mortgage-backed |
4,938 | 134 | 5,072 | |||||||||||||
Commercial mortgage-backed |
2,175 | 22 | 2,197 | |||||||||||||
Other asset-backed |
868 | 53 | 921 | |||||||||||||
|
||||||||||||||||
Total asset-backed |
7,981 | 209 | 8,190 | |||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises |
$ | 66 | 1 | 67 | ||||||||||||
Foreign government |
346 | 346 | ||||||||||||||
Redeemable preferred stock |
35 | 35 | ||||||||||||||
|
||||||||||||||||
Fixed maturities available-for-sale |
101 | 39,101 | 379 | 39,581 | ||||||||||||
Fixed maturities trading |
35 | 85 | 120 | |||||||||||||
|
||||||||||||||||
Total fixed maturities |
$ | 101 | $ | 39,136 | $ | 464 | $ | 39,701 | ||||||||
|
||||||||||||||||
Equity securities available-for-sale |
$ | 177 | $ | 20 | $ | 197 | ||||||||||
Equity securities trading |
554 | 1 | 555 | |||||||||||||
|
||||||||||||||||
Total equity securities |
$ | 731 | $ | - | $ | 21 | $ | 752 | ||||||||
|
||||||||||||||||
Short term investments |
$ | 3,600 | $ | 1,134 | $ | 4,734 | ||||||||||
Other invested assets |
102 | 44 | 146 | |||||||||||||
Receivables |
9 | $ | 3 | 12 | ||||||||||||
Life settlement contracts |
74 | 74 | ||||||||||||||
Payable to brokers |
(196 | ) | (196) |
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, 2016 and 2015:
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 | ||||||||||||||||||||||||||||||||||
2016 | 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 |
$ | 242 | $ | 1 | $ | 7 | $ | 16 | $ | (5) | $ | 261 | ||||||||||||||||||||||||||||
States, municipalities and political subdivisions |
2 | (1) | 1 | |||||||||||||||||||||||||||||||||||||
Asset-backed: |
||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed |
134 | (1 | ) | 5 | (1) | $ | (58 | ) | 79 | |||||||||||||||||||||||||||||||
Commercial mortgage- backed |
11 | 23 | (8) | (2 | ) | 24 | ||||||||||||||||||||||||||||||||||
Other asset-backed |
45 | 34 | (36 | ) | 43 | |||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total asset-backed |
190 | - | (1 | ) | 62 | $ | - | (9) | $ | - | (96 | ) | 146 | $ | - | |||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Fixed maturities available-for-sale |
434 | 1 | 6 | 78 | (15) | (96 | ) | 408 | ||||||||||||||||||||||||||||||||
Fixed maturities trading |
6 | 6 | (1) | |||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total fixed maturities |
$ | 440 | $ | 1 | $ | 6 | $ | 78 | $ | - | $ | (15) | $ | - | $ | (96 | ) | $ | 414 | $ | (1) | |||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Equity securities available-for-sale |
$ | 19 | $ | (1 | ) | $ | 1 | $ | 19 | $ | (2) | |||||||||||||||||||||||||||||
Equity securities trading |
2 | $ | (1) | 1 | (1) | |||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total equity securities |
$ | 21 | $ | (1 | ) | $ | 1 | $ | (1) | $ | - | $ | - | $ | - | $ | - | $ | 20 | $ | (3) | |||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Life settlement contracts |
$ | 67 | $ | 67 | ||||||||||||||||||||||||||||||||||||
Derivative financial instruments, net |
1 | $ | (1 | ) | - |
17
Net Realized Gains |
Transfers into |
Transfers out of |
Balance, |
Unrealized Gains (Losses) Recognized in Net Income on Level 3 Assets and Liabilities |
||||||||||||||||||||||||||||||||||||
2015 | Balance, July 1 |
Included in Net Income |
Included in OCI |
Purchases | Sales | Settlements | Held at 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 |
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 | ||||||||||||||||||||||||||||||||||
2016 | 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 |
$ | 168 | $ | 1 | $ | 14 | $ | 163 | $ | (36 | ) | $ | (15) | $ | (34) | $ | 261 | |||||||||||||||||||||||
States, municipalities and political subdivisions |
2 | (1) | 1 | |||||||||||||||||||||||||||||||||||||
Asset-backed: |
||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed |
134 | 2 | (2) | 15 | (10) | (60) | 79 | |||||||||||||||||||||||||||||||||
Commercial mortgage-backed |
22 | 32 | (17) | $ | 3 | (16) | 24 | |||||||||||||||||||||||||||||||||
Other asset-backed |
53 | 2 | 69 | (25 | ) | (1) | 2 | (57) | 43 | |||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total asset-backed |
209 | 2 | - | 116 | (25 | ) | (28) | 5 | (133) | 146 | $ | - | ||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Fixed maturities available-for-sale |
379 | 3 | 14 | 279 | (61 | ) | (44) | 5 | (167) | 408 | ||||||||||||||||||||||||||||||
Fixed maturities trading |
85 | 5 | 2 | (86 | ) | 6 | 3 | |||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total fixed maturities |
$ | 464 | $ | 8 | $ | 14 | $ | 281 | $ | (147 | ) | $ | (44) | $ | 5 | $ | (167) | $ | 414 | $ | 3 | |||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Equity securities available-for-sale |
$ | 20 | $ | (1 | ) | $ | 19 | $ | (2) | |||||||||||||||||||||||||||||||
Equity securities trading |
1 | 1 | $ | (1 | ) | 1 | ||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total equity securities |
$ | 21 | $ | - | $ | - | $ | - | $ | (1 | ) | $ | - | $ | - | $ | - | $ | 20 | $ | (2) | |||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Life settlement contracts |
$ | 74 | $ | 10 | $ | (17) | $ | 67 | $ | 2 | ||||||||||||||||||||||||||||||
Derivative financial instruments, net |
3 | (4 | ) | $ | (2 | ) | $ | 3 | - | (3) |
19
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 |
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, 2016 there were no transfers between Level 1 and Level 2. 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. 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 highly liquid and exchange traded 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 primarily 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 primarily priced using broker/dealer quotes and 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 valued 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.
21
Other Invested Assets
Level 1 securities include exchange traded open-end funds valued using quoted market prices.
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 measurement of Level 3 assets. Valuations for assets and liabilities not presented in the tables 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, 2016 | Estimated Fair Value |
Valuation Techniques |
Unobservable Inputs |
Range (Weighted Average) |
||||||||
|
||||||||||||
(In millions) | ||||||||||||
Fixed maturity securities |
$ | 211 | Discounted cash flow | Credit spread | 2% 40% (6%) | |||||||
Life settlement contracts |
67 | Discounted cash flow | Discount rate risk premium | 9% | ||||||||
Mortality assumption | 55% 1,676% (162%) | |||||||||||
December 31, 2015 | ||||||||||||
|
||||||||||||
Fixed maturity securities |
$ | 138 | Discounted cash flow | Credit spread | 3% 184% (6%) | |||||||
Life settlement contracts |
74 | Discounted cash flow | Discount rate risk premium | 9% | ||||||||
Mortality assumption | 55% 1,676% (164%) |
For fixed maturity securities, an increase to the credit spread assumptions would result in a lower 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 | Estimated Fair Value | |||||||||||||||||||
September 30, 2016 | Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
(In millions) | ||||||||||||||||||||
Assets: |
||||||||||||||||||||
Other invested assets, primarily mortgage loans |
$ | 629 | $ | 654 | $ | 654 | ||||||||||||||
Liabilities: |
||||||||||||||||||||
Short term debt |
185 | $ | 182 | 3 | 185 | |||||||||||||||
Long term debt |
10,722 | 10,428 | 646 | 11,074 | ||||||||||||||||
December 31, 2015 | ||||||||||||||||||||
Assets: |
||||||||||||||||||||
Other invested assets, primarily mortgage loans |
$ | 678 | $ | 688 | $ | 688 | ||||||||||||||
Liabilities: |
||||||||||||||||||||
Short term debt |
1,038 | $ | 1,050 | 2 | 1,052 | |||||||||||||||
Long term debt |
9,507 | 8,538 | 595 | 9,133 |
The following methods and assumptions were used in estimating the fair value of these financial assets and liabilities.
The fair value of mortgage loans, included in Other invested assets, was 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
Sale of Assets
In February of 2016, Diamond Offshore entered into a ten-year agreement with a subsidiary of GE Oil & Gas (GE) to provide services with respect to certain blowout preventer and related well control equipment on four newly-built drillships. Such services include management of maintenance, certification and reliability with respect to such equipment. In connection with the contractual services agreement with GE, Diamond Offshore will sell the well control equipment to a GE affiliate and subsequently lease back such equipment pursuant to separate ten-year operating leases. During the nine months ended September 30, 2016, Diamond Offshore completed three sale and leaseback transactions and received $158 million in proceeds, which was less than the carrying value of the
23
equipment. The resulting difference was recorded as prepaid rent with no gain or loss recognized on the transactions, and will be amortized over the terms of the operating leases. Future commitments under the operating leases and contractual services agreements are estimated to aggregate approximately $491 million over the term of the agreements. Diamond Offshore expects to complete the remaining sale and leaseback transaction in the fourth quarter of 2016.
Asset Impairments
During the second quarter of 2016, in response to the continuing decline in industry-wide utilization for semisubmersible rigs, further exacerbated by additional and more frequent contract cancelations by customers, declining dayrates, as well as the results of a third-party strategic review of Diamond Offshores long-term business plan completed in the second quarter of 2016, Diamond Offshore reassessed its projections for a recovery in the offshore drilling market. As a result, Diamond Offshore concluded that an expected market recovery is now likely further in the future than had previously been estimated. Consequently, Diamond Offshore believes its cold-stacked rigs, as well as those rigs expected to be cold-stacked in the near term after they come off contract, will likely remain cold-stacked for an extended period of time. Diamond Offshore also believes that the re-entry costs for these rigs will be higher than previously estimated, negatively impacting the undiscounted, probability-weighted cash flow projections utilized in its impairment analysis. In addition, in response to the declining market, Diamond Offshore also reduced anticipated market pricing and expected utilization of these rigs after reactivation. In the second quarter of 2016, Diamond Offshore evaluated 15 of its drilling rigs with indications that their carrying amounts may not be recoverable. Based on updated assumptions and analyses, Diamond Offshore determined that the carrying values of eight of these rigs, consisting of three ultra-deepwater, three deepwater and two mid-water semisubmersible rigs, were impaired.
Diamond Offshore estimated the fair value of the eight impaired rigs using an income approach. The fair value of each rig was estimated based on a calculation of the rigs discounted future net cash flows over its remaining economic life, which utilized significant unobservable inputs, including, but not limited to, assumptions related to estimated dayrate revenue, rig utilization, estimated reactivation and regulatory survey costs, as well as estimated proceeds that may be received on ultimate disposition of the rig. The fair value estimates were representative of Level 3 fair value measurements due to the significant level of estimation involved and the lack of transparency as to the inputs used. During the second quarter of 2016, Diamond Offshore recognized an impairment loss of $672 million ($263 million after tax and noncontrolling interests).
In the third quarter of 2016, Diamond Offshore evaluated nine of its drilling rigs with indications that their carrying amounts may not be recoverable. Based on its assumptions and analyses, Diamond Offshore determined that the carrying values of these rigs were not impaired. If market fundamentals in the offshore oil and gas industry deteriorate further, Diamond Offshore may be required to recognize additional impairment losses in future periods.
Diamond Offshore recognized aggregate impairment losses of $2 million ($1 million after tax and noncontrolling interests) and $361 million ($159 million after tax and noncontrolling interests) for the three and nine months ended September 30, 2015. See Note 6 of the Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2015 for further discussion of Diamond Offshores 2015 asset impairments.
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 claim 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,
24
the cost of repair materials and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. There can be no assurance that CNAs ultimate cost for insurance losses will not exceed current estimates.
Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in CNAs results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of $16 million and $14 million for the three months ended September 30, 2016 and 2015 and $137 million and $103 million for the nine months ended September 30, 2016 and 2015. Catastrophe losses in 2016 resulted primarily from U.S. weather-related events and the Fort McMurray wildfires.
Net Prior Year Development
The following tables and discussion present net prior year development.
Three Months Ended September 30, 2016 | Specialty | Commercial | International | Total | ||||||||||||
|
||||||||||||||||
(In millions) | ||||||||||||||||
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development |
$ | (112) | $ | (5) | $ | (15) | $ | (132) | ||||||||
Pretax (favorable) unfavorable premium development |
(3) | (2) | (5) | |||||||||||||
|
||||||||||||||||
Total pretax (favorable) unfavorable net prior year development |
$ | (112) | $ | (8) | $ | (17) | $ | (137) | ||||||||
|
||||||||||||||||
Three Months Ended September 30, 2015 | ||||||||||||||||
|
||||||||||||||||
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) | ||||||||
|
||||||||||||||||
Nine Months Ended September 30, 2016 | ||||||||||||||||
|
||||||||||||||||
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development |
$ | (211) | $ | (37) | $ | (34) | $ | (282) | ||||||||
Pretax (favorable) unfavorable premium development |
(18) | (7) | (2) | (27) | ||||||||||||
|
||||||||||||||||
Total pretax (favorable) unfavorable net prior year development |
$ | (229) | $ | (44) | $ | (36) | $ | (309) | ||||||||
|
||||||||||||||||
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) | ||||||||
|
25
Specialty
The following table and discussion present 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, |
|||||||||||||||
|
|
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
|
||||||||||||||||
(In millions) |
||||||||||||||||
Medical professional liability |
$ | 13 | $ | (19) | $ | (17) | $ | (11) | ||||||||
Other professional liability and management liability |
(48) | (37) | (98) | (41) | ||||||||||||
Surety |
(63) | (70) | (63) | (69) | ||||||||||||
Warranty |
2 | 7 | 1 | |||||||||||||
Other |
(16) | (4) | (40) | (21) | ||||||||||||
|
||||||||||||||||
Total pretax (favorable) unfavorable development |
$ | (112) | $ | (130) | $ | (211) | $ | (141) | ||||||||
|
Three Months
2016
Unfavorable development for medical professional liability was primarily due to higher than expected frequency in accident years 2014 and 2015 in aging services. Increased claims on a specific hospital policy in accident years 2014 and 2015 was also an unfavorable contributor, although more than offset by favorable development relative to expectations in accident years 2013 and prior.
Favorable development in other professional liability and management liability was primarily related to lower than expected frequency of claims and favorable outcomes on specific claims for accident years 2010 through 2014.
Favorable development in surety coverages was primarily due to lower than expected frequency of large losses in accident years 2014 and prior.
Favorable development for other coverages was due to better than expected claim frequency in commercial lines coverages provided to Specialty customers in accident years 2010 through 2015.
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 was 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.
Nine Months
2016
Favorable development for medical professional liability was primarily due to lower than expected severities for individual healthcare professionals, allied facilities and hospitals in accident years 2011 and prior. This was partially offset by unfavorable development in accident years 2012 and 2013 related to higher than expected large loss emergence in hospitals and higher than expected frequency and severity in accident years 2014 and 2015 in CNAs aging services business.
Favorable development in other professional liability and management liability was primarily related to favorable settlements on closed claims in accident years 2011 through 2013 in professional services. Additional favorable development related to lower than expected frequency of claims and favorable outcomes on specific claims in accident years 2010 through 2014 in professional services. This was partially offset by unfavorable development
26
related to a specific financial institutions claim in accident year 2014, higher severities in accident year 2015 and deterioration on credit crises-related claims in accident year 2009.
Favorable development in surety coverages was primarily due to lower than expected frequency of large losses in accident years 2014 and prior.
Favorable development for other coverages provided to Specialty customers was due to better than expected claim frequency in property coverages in accident year 2015 and commercial lines coverages in accident years 2010 through 2015.
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.
Commercial
The following table and discussion present further detail of the development recorded for the Commercial segment:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
|
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
|
||||||||||||||||
(In millions) |
||||||||||||||||
Commercial auto |
$ | (12) | $ | (47) | $ | 7 | ||||||||||
General liability |
14 | $ | 3 | (38) | 8 | |||||||||||
Workers compensation |
(6) | (1) | 48 | 22 | ||||||||||||
Property and other |
(1) | (13) | (37) | |||||||||||||
|
||||||||||||||||
Total pretax (favorable) unfavorable development |
$ | (5) | $ | (11) | $ | (37) | $ | - | ||||||||
|
Three Months
2016
Favorable development for commercial auto was primarily due to lower than expected severities in accident years 2012 through 2015.
Unfavorable development for general liability was primarily due to an increase in reported claims prior to the closing of the three year window set forth by the Minnesota Child Victims Act in accident years 2006 and prior.
Favorable development for workers compensation was primarily driven by lower than expected frequencies in accident years 2009 through 2014, partially offset by the estimated impact of recent Florida court rulings in accident years 2008 through 2015.
27
2015
Favorable development for property and other was primarily due to better than expected loss emergence on catastrophe events in accident year 2014.
Nine Months
2016
Favorable development for commercial auto was primarily due to favorable settlements on claims in accident years 2010 through 2014 and lower than expected severities in accident years 2012 through 2015.
Favorable development for general liability was primarily due to better than expected claim settlements in accident years 2012 through 2014 and better than expected severity on umbrella claims in accident years 2010 through 2013. This was partially offset by unfavorable development related to an increase in reported claims prior to the closing of the three year window set forth by the Minnesota Child Victims Act in accident years 2006 and prior.
Unfavorable development for workers compensation was primarily due to higher than expected severity for Defense Base Act contractors and the estimated impact of recent Florida court rulings in accident years 2008 through 2015. This was partially offset by favorable development related to lower than expected frequencies related to accident years 2009 through 2014.
Unfavorable development for property and other was primarily due to higher than expected severity from a 2015 catastrophe event. This was offset by favorable development primarily due to better than expected loss frequency in accident years 2013 through 2015.
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.
The nine months also included unfavorable loss development related to an extra contractual obligation loss and losses associated with premium development.
International
The following table and discussion present further detail of the development recorded for the International segment:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
|
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
|
||||||||||||||||
(In millions) |
||||||||||||||||
Medical professional liability |
$ | (2 | ) | $ | (8 | ) | $ | (3 | ) | $ | (8) | |||||
Other professional liability |
(1 | ) | (11 | ) | 16 | (16) | ||||||||||
Liability |
(2 | ) | (5 | ) | (21 | ) | (12) | |||||||||
Property & marine |
(9 | ) | (5 | ) | (16 | ) | (19) | |||||||||
Other |
(1 | ) | (5 | ) | (10 | ) | 9 | |||||||||
|
||||||||||||||||
Total pretax (favorable) unfavorable development |
$ | (15 | ) | $ | (34 | ) | $ | (34 | ) | $ | (46) | |||||
|
Three Months
2016
Favorable development for other professional liability was primarily due to favorable settlements on claims in accident years 2013 and prior. This was largely offset by higher than expected unfavorable large loss emergence in accident years 2014 and 2015.
28
Favorable development for property and marine was primarily due to favorable emergence of expected losses on a specific claim relating to the December 2015 United Kingdom (U.K.) Floods.
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.
Nine Months
2016
Unfavorable development for other professional liability was primarily due to higher than expected large loss emergence in accident years 2011 through 2015, partially offset by favorable settlements on claims in accident years 2013 and prior.
Favorable development for liability was primarily due to better than expected severity in accident years 2013 and prior.
Favorable development for property and marine was primarily due to favorable emergence of expected losses on a specific claim relating to the December 2015 U.K. Floods.
Favorable development for other coverages was primarily due to better than expected severity in auto liability in accident years 2011 through 2015.
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.
Asbestos and Environmental Pollution (A&EP) 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 A&EP liabilities were ceded to NICO through a loss portfolio transfer (loss portfolio transfer or LPT). At the effective date of the transaction, 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 LPT 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
29
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 recognized $0.9 billion of additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the LPT exceeded the $2.2 billion consideration paid, resulting in the NICO LPT moving into a gain position, requiring deferred retroactive reinsurance accounting treatment. This deferred gain is recognized in earnings in proportion to actual paid recoveries under the LPT. Over the life of the contract, there is no economic impact as long as any additional losses incurred are within the limit of the LPT. In a period in which a change in the estimate of ceded incurred losses is recognized, the change to the deferred gain is cumulatively recognized in earnings as if the revised estimate was available at the effective date of the LPT.
The following table presents the impact of the loss portfolio transfer on the Consolidated Condensed Statements of Income.
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
|
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
|
||||||||||||||||
(In millions) |
||||||||||||||||
Net A&EP adverse development before consideration of LPT |
$ | - | $ | - | $ | 200 | $ | 150 | ||||||||
Provision for uncollectible third party reinsurance on A&EP |
||||||||||||||||
|
||||||||||||||||
Additional amounts ceded under LPT |
- | - | 200 | 150 | ||||||||||||
Retroactive reinsurance benefit recognized |
(12) | (4) | (94) | (75) | ||||||||||||
|
||||||||||||||||
Pretax impact of unrecognized deferred retroactive reinsurance benefit |
$ | (12) | $ | (4) | $ | 106 | $ | 75 | ||||||||
|
CNA completed its reserve review of A&EP reserves in the first quarter of 2016. Based upon CNAs review, net unfavorable development prior to cessions to the LPT of $200 million was recognized. The unfavorable development was driven by an increase in anticipated future expenses associated with determination of coverage, higher anticipated payouts associated with a limited number of historical accounts having significant asbestos exposures and higher than expected severity on pollution claims. This unfavorable development was ceded to NICO under the LPT, however CNAs reported earnings were negatively affected due to the application of retroactive reinsurance accounting, as only a portion of the additional amounts ceded under the LPT were recognized in that quarter. All amounts recognized related to the LPT are recorded within Insurance claims and policyholders benefits in the Consolidated Condensed Statement of Income.
As of September 30, 2016 and December 31, 2015, the cumulative amounts ceded under the LPT were $2.8 billion and $2.6 billion. The unrecognized deferred retroactive reinsurance benefit was $347 million and $241 million as of September 30, 2016 and December 31, 2015.
NICO established a collateral trust account as security for its obligations to CNA. The fair value of the collateral trust account was $2.5 billion and $2.8 billion as of September 30, 2016 and December 31, 2015. 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.
30
6. Income Taxes
The components of U.S. and foreign income before income tax and a reconciliation between the federal income tax expense at statutory rates and the actual income tax expense is as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
|
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
|
||||||||||||||||
(In millions) | ||||||||||||||||
Income (loss) before income tax: |
||||||||||||||||
U.S. |
$ 638 | $ 188 | $ 535 | $ 454 | ||||||||||||
Foreign |
(82) | 160 | (60) | 294 | ||||||||||||
|
||||||||||||||||
Total |
$ 556 | $ 348 | $ 475 | $ 748 | ||||||||||||
|
||||||||||||||||
Income tax expense at statutory rate |
$ 194 | $ 122 | $ 166 | $ 262 | ||||||||||||
Increase (decrease) in income tax expense resulting from: |
||||||||||||||||
Exempt investment income |
(28) | (34) | (92) | (92) | ||||||||||||
Foreign related tax differential |
2 | (27) | 102 | (32) | ||||||||||||
Amortization of deferred charges associated with intercompany rig sales to other tax jurisdictions |
1 | 42 | ||||||||||||||
Taxes related to domestic affiliate |
1 | 5 | 2 | (1) | ||||||||||||
Partnership earnings not subject to taxes |
(9) | (6) | (37) | (26) | ||||||||||||
Unrecognized tax benefit |
(2) | (4) | 8 | 1 | ||||||||||||
Other |
5 | 9 | 22 | 16 | ||||||||||||
|
||||||||||||||||
Income tax expense |
$ 163 | $ 66 | $ 171 | $ 170 | ||||||||||||
|
The effective tax rate is impacted by the change in the relative components of earnings or losses generated in foreign tax jurisdictions with lower tax rates.
As of September 30, 2016, a valuation allowance of $61 million was established for the future tax benefit of foreign tax credits in the U.S. which Diamond Offshore no longer expects to be able to realize prior to their expiration.
7. Debt
CNA Financial
In the first quarter of 2016, CNA completed a public offering of $500 million aggregate principal amount of 4.5% senior notes due March 1, 2026 and used the net proceeds to repay the entire $350 million outstanding principal amount of its 6.5% senior notes due August 15, 2016.
Diamond Offshore
In the first quarter of 2016, Diamond Offshore cancelled its commercial paper program and repaid the $287 million in commercial paper outstanding at December 31, 2015 with proceeds from Eurodollar loans under its revolving credit agreement. As of September 30, 2016, there was $182 million outstanding under the revolving credit agreement.
Boardwalk Pipeline
In May of 2016, Boardwalk Pipeline completed a public offering of $550 million aggregate principal amount of 6.0% senior notes due June 1, 2026 and used the proceeds to reduce borrowings under its revolving credit facility.
Loews
In March of 2016, the Company completed a public offering of $500 million aggregate principal amount of 3.8% senior notes due April 1, 2026 and repaid in full the entire $400 million aggregate principal amount of its 5.3% senior notes at maturity.
31
8. Shareholders Equity
Accumulated other comprehensive income (loss)
The tables below display the changes in Accumulated other comprehensive income (AOCI) by component for the three and nine months ended September 30, 2015 and 2016:
OTTI Gains |
Unrealized Gains (Losses) on Investments |
Cash Flow Hedges |
Pension Liability |
Foreign Currency Translation |
Total Accumulated Other Comprehensive Income (Loss) |
|||||||||||||||||||
|
||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Balance, July 1, 2015 |
$ 28 | $ 619 | $ (3) | $ (598) | $ 7 | $ 53 | ||||||||||||||||||
Other comprehensive income (loss) before reclassifications, after tax of $(1), $38, $0, $(1) and $0 |
2 | (70) | (1) | (53) | (122) | |||||||||||||||||||
Reclassification of losses from accumulated other comprehensive income, after tax of $0, $(17), $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) | ||||||||||||||||||
|
||||||||||||||||||||||||
Balance, July 1, 2016 |
$ 28 | $ 838 | $ (2) | $ (639) | $ (106) | $ 119 | ||||||||||||||||||
Other comprehensive income (loss) before reclassifications, after tax of $(4), $(32), $0, $0 and $0 |
7 | 69 | (24) | 52 | ||||||||||||||||||||
Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $2, $13, $0, $(4) and $0 |
(4) | (27) | 1 | 7 | (23) | |||||||||||||||||||
|
||||||||||||||||||||||||
Other comprehensive income (loss) |
3 | 42 | 1 | 7 | (24) | 29 | ||||||||||||||||||
Amounts attributable to noncontrolling interests |
(1) | (4) | (1) | 2 | (4) | |||||||||||||||||||
|
||||||||||||||||||||||||
Balance, September 30, 2016 |
$ 30 | $ 876 | $ (2) | $ (632) | $ (128) | $ 144 | ||||||||||||||||||
|
32
OTTI Gains (Losses) |
Unrealized Gains (Losses) on Investments |
Cash Flow Hedges |
Pension Liability |
Foreign Currency Translation |
Total Accumulated Other Comprehensive Income (Loss) |
|||||||||||||||||||
|
||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Balance, January 1, 2015 |
$ 32 | $ 846 | $ (6) | $ (641) | $ 49 | $ 280 | ||||||||||||||||||
Other comprehensive income (loss) before reclassifications, after tax of $1, $162, $1, $(19) and $0 |
(3) | (321) | (2) | 36 | (100) | (390) | ||||||||||||||||||
Reclassification of losses from accumulated other comprehensive income, after tax of $0, $(22), $(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) | ||||||||||||||||||
|
||||||||||||||||||||||||
Balance, January 1, 2016 |
$ 24 | $ 347 | $ (3) | $ (649) | $ (76) | $ (357) | ||||||||||||||||||
Other comprehensive income (loss) before reclassifications, after tax of $(5), $(304), $0, $0 and $0 |
9 | 608 | (58) | 559 | ||||||||||||||||||||
Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $1, $12, $0, $(11) and $0 |
(2) | (17) | 2 | 20 | 3 | |||||||||||||||||||
|
||||||||||||||||||||||||
Other comprehensive income (loss) |
7 | 591 | 2 | 20 | (58) | 562 | ||||||||||||||||||
Amounts attributable to noncontrolling interests |
(1) | (62) | (1) | (3) | 6 | (61) | ||||||||||||||||||
|
||||||||||||||||||||||||
Balance, September 30, 2016 |
$ 30 | $ 876 | $ (2) | $ (632) | $ (128) | $ 144 | ||||||||||||||||||
|
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) | |
Cash flow hedges | Other revenues and Contract drilling expenses | |
Pension liability | Other operating expenses |
33
Subsidiary Equity Transactions
Loews purchased 0.3 million shares of CNA common stock at an aggregate cost of $8 million during the nine months ended September 30, 2016. The Companys percentage ownership interest in CNA remained unchanged as a result of these transactions, at 90%. The Companys purchase price of the shares was lower than the carrying value of its investment in CNA, resulting in an increase to Additional paid-in capital (APIC) of $3 million.
Treasury Stock
The Company repurchased 3.0 million and 16.3 million shares of Loews common stock at aggregate costs of $115 million and $633 million during the nine months ended September 30, 2016 and 2015.
9. Benefit Plans
The Company has several non-contributory defined benefit plans and postretirement benefit plans covering eligible employees and retirees.
The following table presents the components of net periodic benefit cost for the plans:
Pension Benefits | ||||||||||||||||
|
|
|||||||||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
|
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
|
||||||||||||||||
(In millions) | ||||||||||||||||
Service cost |
$ | 2 | $ | 2 | $ | 6 | $ | 10 | ||||||||
Interest cost |
33 | 31 | 97 | 95 | ||||||||||||
Expected return on plan assets |
(45) | (48) | (133) | (145) | ||||||||||||
Amortization of unrecognized net loss |
11 | 9 | 34 | 32 | ||||||||||||
Settlement charge |
1 | 2 | 3 | 2 | ||||||||||||
|
||||||||||||||||
Net periodic benefit cost |
$ | 2 | $ | (4) | $ | 7 | $ | (6) | ||||||||
|
||||||||||||||||
Other Postretirement Benefits | ||||||||||||||||
|
|
|||||||||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
|
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
|
||||||||||||||||
(In millions) | ||||||||||||||||
Service cost |
$ | 1 | $ | 1 | $ | 1 | $ | 1 | ||||||||
Interest cost |
1 | 1 | 2 | 2 | ||||||||||||
Expected return on plan assets |
(1) | (1) | (3) | (3) | ||||||||||||
Amortization of unrecognized prior service benefit |
(1) | (3) | (3) | (8) | ||||||||||||
Amortization of unrecognized net loss |
1 | |||||||||||||||
|
||||||||||||||||
Net periodic benefit cost |
$ | - | $ | (2) | $ | (3) | $ | (7) | ||||||||
|
10. Business Segments
The Companys segments are CNA Financials core property and casualty commercial insurance operations which include Specialty, Commercial and International; CNAs Other Non-Core operations; Diamond Offshore; Boardwalk Pipeline; Loews Hotels; and Corporate and other. 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. For additional disclosures regarding the composition of the Companys segments see Note 20 of the Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2015.
34
The following tables present the Companys consolidated revenues and income (loss) by business segment:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
|
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
|
||||||||||||||||
(In millions) | ||||||||||||||||
Revenues (a): |
||||||||||||||||
CNA Financial: |
||||||||||||||||
Property and Casualty: |
||||||||||||||||
Specialty |
$ | 946 | $ | 846 | $ | 2,739 | $ | 2,667 | ||||||||
Commercial |
913 | 767 | 2,591 | 2,545 | ||||||||||||
International |
229 | 216 | 658 | 642 | ||||||||||||
Other Non-Core |
345 | 324 | 996 | 978 | ||||||||||||
|
||||||||||||||||
Total CNA Financial |
2,433 | 2,153 | 6,984 | 6,832 | ||||||||||||
Diamond Offshore |
350 | 608 | 1,211 | 1,867 | ||||||||||||
Boardwalk Pipeline |
306 | 296 | 961 | 925 | ||||||||||||
Loews Hotels |
161 | 146 | 513 | 452 | ||||||||||||
Corporate and other |
37 | (34 | ) | 98 | 6 | |||||||||||
|
||||||||||||||||
Total |
$ | 3,287 | $ | 3,169 | $ | 9,767 | $ | 10,082 | ||||||||
|
||||||||||||||||
Income (loss) before income tax and noncontrolling interests (a): |
||||||||||||||||
CNA Financial: |
||||||||||||||||
Property and Casualty: |
||||||||||||||||
Specialty |
$ | 306 | $ | 248 | $ | 736 | $ | 661 | ||||||||
Commercial |
186 | 83 | 427 | 391 | ||||||||||||
International |
33 | 23 | 16 | 71 | ||||||||||||
Other Non-Core |
(49 | ) | (120 | ) | (355 | ) | (410) | |||||||||
|
||||||||||||||||
Total CNA Financial |
476 | 234 | 824 | 713 | ||||||||||||
Diamond Offshore |
36 | 139 | (538 | ) | (42) | |||||||||||
Boardwalk Pipeline |
46 | 48 | 210 | 163 | ||||||||||||
Loews Hotels |
4 | 1 | 17 | 25 | ||||||||||||
Corporate and other |
(6 | ) | (74 | ) | (38 | ) | (111) | |||||||||
|
||||||||||||||||
Total |
$ | 556 | $ | 348 | $ | 475 | $ | 748 | ||||||||
|
||||||||||||||||
Net income (loss) (a): |
||||||||||||||||
CNA Financial: |
||||||||||||||||
Property and Casualty: |
||||||||||||||||
Specialty |
$ | 180 | $ | 147 | $ | 437 | $ | 394 | ||||||||
Commercial |
110 | 49 | 252 | 231 | ||||||||||||
International |
22 | 9 | 9 | 37 | ||||||||||||
Other Non-Core |
(4 | ) | (44 | ) | (141 | ) | (167) | |||||||||
|
||||||||||||||||
Total CNA Financial |
308 | 161 | 557 | 495 | ||||||||||||
Diamond Offshore |
7 | 47 | (240 | ) | (34) | |||||||||||
Boardwalk Pipeline |
14 | 18 | 62 | 55 | ||||||||||||
Loews Hotels |
3 | 2 | 7 | 15 | ||||||||||||
Corporate and other |
(5 | ) | (46 | ) | (22 | ) | (70) | |||||||||
|
||||||||||||||||
Total |
$ | 327 | $ | 182 | $ | 364 | $ | 461 | ||||||||
|
35
(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, |
|||||||||||||||||
|
| |||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||
| ||||||||||||||||||
Revenues and Income (loss) before income tax and noncontrolling interests: |
||||||||||||||||||
CNA Financial: |
||||||||||||||||||
Property and Casualty: |
||||||||||||||||||
Specialty |
$ | 9 | $ | (22 | ) | $ | 2 | $ | (18 | ) | ||||||||
Commercial |
12 | (29 | ) | 2 | (23 | ) | ||||||||||||
International |
6 | (1 | ) | 14 | 1 | |||||||||||||
Other Non-Core |
18 | 2 | 12 | (2 | ) | |||||||||||||
| ||||||||||||||||||
Total CNA Financial |
45 | (50 | ) | 30 | (42 | ) | ||||||||||||
Corporate and other |
(12 | ) | ||||||||||||||||
| ||||||||||||||||||
Total |
$ | 45 | $ | (50 | ) | $ | 18 | $ | (42 | ) | ||||||||
| ||||||||||||||||||
Net income (loss): |
||||||||||||||||||
CNA Financial: |
||||||||||||||||||
Property and Casualty: |
||||||||||||||||||
Specialty |
$ | 5 | $ | (14 | ) | $ | 1 | $ | (11 | ) | ||||||||
Commercial |
7 | (16 | ) | 1 | (13 | ) | ||||||||||||
International |
4 | 10 | 1 | |||||||||||||||
Other Non-Core |
11 | 1 | 4 | 5 | ||||||||||||||
| ||||||||||||||||||
Total CNA Financial |
27 | (29 | ) | 16 | (18 | ) | ||||||||||||
Corporate and other |
(4 | ) | ||||||||||||||||
| ||||||||||||||||||
Total |
$ | 27 | $ | (29 | ) | $ | 12 | $ | (18 | ) | ||||||||
|
11. Legal Proceedings
CNA Financial
In September 2016, a class action lawsuit was filed against CCC, Continental Assurance Company (CAC), CNA, the Investment Committee of the CNA 401(k) Plus Plan, The Northern Trust Company and John Does 1-10 (Defendants) over the CNA 401(k) Plus Plan. The complaint alleges that Defendants breached fiduciary duties to the CNA 401(k) Plus Plan and caused prohibited transactions in violation of The Employee Retirement Income Security Act of 1974 when the CNA Fixed Income Funds annuity contract with CAC was canceled. The plaintiff alleges he and a proposed class of the CNA 401(k) Plus Plan participants who had invested in the Fixed Income Fund suffered lower returns in their CNA 401(k) Plus Plan investments as a consequence of these alleged violations and seeks relief on behalf of the putative class. CNA has only recently begun evaluating the lawsuit as this litigation is in its preliminary stages, and as of yet no class has been certified. CCC and the other Defendants are contesting the case and the Company currently is unable to predict the final outcome or the impact on its financial condition, results of operations or cash flows. As of September 30, 2016, the likelihood of loss is reasonably possible, but the amount of loss, if any, cannot be estimated at this stage of the litigation.
Other Litigation
The Company and its subsidiaries are parties to other 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.
12. 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 representations and warranties with respect to the business entities or assets 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
36
indefinitely. As of September 30, 2016, the aggregate amount related to quantifiable guarantees was $375 million and the aggregate amount related to indemnification agreements was $258 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 a 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, 2016, 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.
CNA also provided guarantees, if the primary obligor fails to perform, to holders of structured settlement annuities provided by a previously owned subsidiary. As of September 30, 2016, the potential amount of future payments CNA could be required to pay under these guarantees was approximately $1.9 billion, which will be paid over the lifetime of the annuitants. CNA does not believe any payment 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.
13. Consolidating Financial Information
The following schedules present the Companys consolidating balance sheet information at September 30, 2016 and December 31, 2015, and consolidating statements of income information for the nine months ended September 30, 2016 and 2015. 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.
37
Loews Corporation
Consolidating Balance Sheet Information
September 30, 2016 | CNA Financial |
Diamond Offshore |
Boardwalk Pipeline |
Loews Hotels |
Corporate and Other |
Eliminations | Total | |||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
(In millions) |
||||||||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||
Investments |
$ 46,980 | $ 76 | $ 105 | $ 98 | $ 5,126 | $ 52,385 | ||||||||||||||||||||||||||
Cash |
290 | 5 | 7 | 18 | 24 | 344 | ||||||||||||||||||||||||||
Receivables |
7,389 | 278 | 93 | 25 | 138 | $ (70) | 7,853 | |||||||||||||||||||||||||
Property, plant and equipment |
281 | 5,820 | 7,954 | 1,102 | 43 | 15,200 | ||||||||||||||||||||||||||
Deferred income taxes |
241 | 3 | 58 | (302) | - | |||||||||||||||||||||||||||
Goodwill |
110 | 237 | 347 | |||||||||||||||||||||||||||||
Investments in capital stocks of subsidiaries |
15,250 | (15,250) | - | |||||||||||||||||||||||||||||
Other assets |
924 | 231 | 319 | 268 | 4 | 14 | 1,760 | |||||||||||||||||||||||||
Deferred acquisition costs of insurance subsidiaries |
619 | 619 | ||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total assets |
$ 56,834 | $ 6,410 | $ 8,715 | $ 1,514 | $ 20,643 | $ (15,608) | $ 78,508 | |||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Liabilities and Equity: |
||||||||||||||||||||||||||||||||
Insurance reserves |
$ 37,753 | $ 37,753 | ||||||||||||||||||||||||||||||
Payable to brokers |
234 | $ 217 | 451 | |||||||||||||||||||||||||||||
Short term debt |
1 | $ 182 | $ 2 | 185 | ||||||||||||||||||||||||||||
Long term debt |
2,713 | 1,981 | $ 3,627 | 642 | 1,774 | 10,737 | ||||||||||||||||||||||||||
Deferred income taxes |
3 | 164 | 807 | 49 | $ (288) | 735 | ||||||||||||||||||||||||||
Other liabilities |
3,960 | 451 | 546 | 72 | 282 | (70) | 5,241 | |||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total liabilities |
44,664 | 2,778 | 4,980 | 765 | 2,273 | (358) | 55,102 | |||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total shareholders equity |
10,915 | 1,936 | 1,552 | 747 | 18,370 | (15,250) | 18,270 | |||||||||||||||||||||||||
Noncontrolling interests |
1,255 | 1,696 | 2,183 | 2 | 5,136 | |||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total equity |
12,170 | 3,632 | 3,735 | 749 | 18,370 | (15,250) | 23,406 | |||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Total liabilities and equity |
$ 56,834 | $ 6,410 | $ 8,715 | $ 1,514 | $ 20,643 | $ (15,608) | $ 78,508 | |||||||||||||||||||||||||
|
38
Loews Corporation
Consolidating Balance Sheet Information
December 31, 2015 | CNA Financial |
Diamond Offshore |
Boardwalk Pipeline |
Loews Hotels |
Corporate and Other |
Eliminations | Total | |||||||||||||||||||||
|
||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||
Investments |
$ 44,699 | $ 117 | $ 81 | $ 4,503 | $ 49,400 | |||||||||||||||||||||||
Cash |
387 | 13 | $ 4 | 12 | 24 | 440 | ||||||||||||||||||||||
Receivables |
7,384 | 409 | 93 | 35 | 96 | $ 24 | 8,041 | |||||||||||||||||||||
Property, plant and equipment |
333 | 6,382 | 7,712 | 1,003 | 47 | 15,477 | ||||||||||||||||||||||
Deferred income taxes |
662 | 3 | 68 | (733) | - | |||||||||||||||||||||||
Goodwill |
114 | 237 | 351 | |||||||||||||||||||||||||
Investments in capital stocks of subsidiaries |
15,129 | (15,129) | - | |||||||||||||||||||||||||
Other assets |
848 | 233 | 319 | 282 | 17 | 1,699 | ||||||||||||||||||||||
Deferred acquisition costs of insurance subsidiaries |
598 | 598 | ||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||
Total assets |
$ 55,025 | $ 7,154 | $ 8,365 | $ 1,416 | $ 19,867 | $ (15,821) | $ 76,006 | |||||||||||||||||||||
|
||||||||||||||||||||||||||||
Liabilities and Equity: |
||||||||||||||||||||||||||||
Insurance reserves |
$ 36,486 | $ 36,486 | ||||||||||||||||||||||||||
Payable to brokers |
358 | $ 209 | 567 | |||||||||||||||||||||||||
Short term debt |
351 | $ 287 | $ 2 | 400 | 1,040 | |||||||||||||||||||||||
Long term debt |
2,213 | 1,980 | $ 3,458 | 590 | 1,279 | 9,520 | ||||||||||||||||||||||
Deferred income taxes |
5 | 276 | 766 | 47 | $ (712) | 382 | ||||||||||||||||||||||
Other liabilities |
3,883 | 496 | 510 | 70 | 222 | 20 | 5,201 | |||||||||||||||||||||
|
||||||||||||||||||||||||||||
Total liabilities |
43,296 | 3,039 | 4,734 | 709 | 2,110 | (692) | 53,196 | |||||||||||||||||||||
|
||||||||||||||||||||||||||||
Total shareholders equity |
10,516 | 2,195 | 1,517 | 705 | 17,757 | (15,129) | 17,561 | |||||||||||||||||||||
Noncontrolling interests |
1,213 | 1,920 | 2,114 | 2 | 5,249 | |||||||||||||||||||||||
|
||||||||||||||||||||||||||||
Total equity |
11,729 | 4,115 | 3,631 | 707 | 17,757 | (15,129) | 22,810 | |||||||||||||||||||||
|
||||||||||||||||||||||||||||
Total liabilities and equity |
$ 55,025 | $ 7,154 | $ 8,365 | $ 1,416 | $ 19,867 | $ (15,821) | $ 76,006 | |||||||||||||||||||||
|
39
Loews Corporation
Consolidating Statement of Income Information
Nine Months Ended September 30, 2016 | CNA Financial |
Diamond Offshore |
Boardwalk Pipeline |
Loews Hotels |
Corporate and Other |
Eliminations | Total | |||||||||||||||||||||
|
||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Revenues: |
||||||||||||||||||||||||||||
Insurance premiums |
$ | 5,196 | $ | 5,196 | ||||||||||||||||||||||||
Net investment income |
1,461 | $ | 1 | $ | 108 | 1,570 | ||||||||||||||||||||||
Intercompany interest and dividends |
706 | $ | (706) | - | ||||||||||||||||||||||||
Investment gains (losses) |
30 | (12) | 18 | |||||||||||||||||||||||||
Contract drilling revenues |
1,141 | 1,141 | ||||||||||||||||||||||||||
Other revenues |
297 | 69 | $ | 961 | $ | 513 | 2 | 1,842 | ||||||||||||||||||||
|
||||||||||||||||||||||||||||
Total |
6,984 | 1,199 | 961 | 513 | 816 | (706) | 9,767 | |||||||||||||||||||||
|
||||||||||||||||||||||||||||
Expenses: |
||||||||||||||||||||||||||||
Insurance claims and policyholders benefits |
3,949 | 3,949 | ||||||||||||||||||||||||||
Amortization of deferred acquisition costs |
926 | 926 | ||||||||||||||||||||||||||
Contract drilling expenses |
598 | 598 | ||||||||||||||||||||||||||
Other operating expenses |
1,158 | 1,082 | 615 | 479 | 82 | 3,416 | ||||||||||||||||||||||
Interest |
127 | 69 | 136 | 17 | 54 | 403 | ||||||||||||||||||||||
|
||||||||||||||||||||||||||||
Total |
6,160 | 1,749 | 751 | 496 | 136 | - | 9,292 | |||||||||||||||||||||
|
||||||||||||||||||||||||||||
Income (loss) before income tax |
824 | (550) | 210 | 17 | 680 | (706) | 475 | |||||||||||||||||||||
Income tax (expense) benefit |
(203) | 78 | (44) | (10) | 8 | (171) | ||||||||||||||||||||||
|
||||||||||||||||||||||||||||
Net income (loss) |
621 | (472) | 166 | 7 | 688 | (706) | 304 | |||||||||||||||||||||
Amounts attributable to noncontrolling interests |
(64) | 228 | (104) | 60 | ||||||||||||||||||||||||
|
||||||||||||||||||||||||||||
Net income (loss) attributable to Loews Corporation |
$ | 557 | $ | (244) | $ | 62 | $ | 7 | $ | 688 | $ | (706) | $ | 364 | ||||||||||||||
|
40
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 | ||||||||||||||
|
41
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, 2015. 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). |
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, 2016 was $327 million, or $0.97 per share, compared to net income of $182 million, or $0.50 per share, in the prior year period. Net income for the nine months ended September 30, 2016 was $364 million, or $1.08 per share, compared to $461 million, or $1.25 per share, in the prior year period.
Results include asset impairment charges at Diamond Offshore of $267 million (after tax and noncontrolling interests) for the nine months ended September 30, 2016 and $159 million (after tax and noncontrolling interests) for the nine months ended September 30, 2015.
Book value per share increased to $54.22 at September 30, 2016 from $51.67 at December 31, 2015.
42
Three Months Ended September 30, 2016 Compared to 2015
Net income attributable to Loews Corporation for the three months ended September 30, 2016 increased $145 million as compared to the prior year period due to higher earnings at CNA and improved results from the parent company investment portfolio. These increases were partially offset by lower earnings at Diamond Offshore and Boardwalk Pipeline.
CNAs earnings increased due to higher net investment income driven by limited partnership investments as well as realized investment gains in the third quarter of 2016 compared to losses in the prior year period. These increases were partially offset by lower favorable net prior year reserve development and higher underwriting expenses, which included certain non-recurring costs related to information technology and employee termination costs.
Diamond Offshores earnings decreased due to a substantial reduction in the number of rigs operating as compared to the year ago period and significant unscheduled rig downtime, partially offset by lower depreciation expense resulting mainly from the asset impairment charges incurred in prior periods.
Boardwalk Pipelines earnings were lower due to a non-recurring franchise tax refund received in last years third quarter. Excluding the tax refund, Boardwalk Pipelines earnings were higher due to revenues from new growth projects recently placed in service and an increase in storage and parking and lending revenues, partially offset by an increase in interest expense.
Loews Hotels earnings increased primarily due to higher earnings from joint venture properties.
Income generated by the parent company investment portfolio improved due to higher income from limited partnership investments and equity securities.
Nine Months Ended September 30, 2016 Compared to 2015
Net income attributable to Loews Corporation for the nine months ended September 30, 2016 decreased primarily due to lower earnings at Diamond Offshore partially offset by improved results at CNA, Boardwalk Pipeline and from the parent company investment portfolio.
CNAs earnings increased due to higher net investment income driven by limited partnership investments, realized investment gains in 2016 as compared to losses in 2015, and higher favorable net prior year reserve development, partially offset by higher underwriting expenses.
Diamond Offshores earnings decreased primarily due to increased asset impairment charges. Excluding these impairment charges, year-over-year earnings decreased as a result of a substantial reduction in the number of operating rigs, partially offset by revenue earned by newbuild drillships and lower depreciation expense as a result of the asset impairment charges.
Boardwalk Pipelines earnings increased due to new rates in effect following the Gulf South rate case, the return to service of the Evangeline pipeline, and growth projects recently placed in service.
Loews Hotels results decreased primarily due to an impairment charge related to a joint venture property.
Income generated by the parent company investment portfolio improved due to higher income from equity securities.
We are a holding company and derive substantially all of our cash flow from our subsidiaries. We rely upon our invested cash balances and distributions from our subsidiaries to generate the funds necessary to meet our obligations and to declare and pay any dividends to our shareholders. The ability of our subsidiaries to pay dividends is subject to, among other things, the availability of sufficient earnings and funds in such subsidiaries, applicable state laws, including in the case of the insurance subsidiaries of CNA, laws and rules governing the payment of dividends by regulated insurance companies and compliance with covenants in their respective loan agreements. Claims of creditors of our subsidiaries will generally have priority as to the assets of such subsidiaries over our claims and those of our creditors and shareholders.
43
Certain accounting estimates require us to make judgments that affect the amounts reflected in the Consolidated Condensed Financial Statements. Such estimates and judgments necessarily involve varying, and possibly significant, degrees of uncertainty. Accordingly, certain amounts currently recorded in the financial statements will likely be adjusted in the future based on new available information and changes in other facts and circumstances. See the Critical Accounting Estimates section and the Results of Operations by Business Segment CNA Financial Reserves Estimates and Uncertainties section of our MD&A included under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015 for further information.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Unless the context otherwise requires, references to net operating income (loss), net realized investment results and net income (loss) reflect amounts attributable to Loews Corporation shareholders.
The following table summarizes the results of operations for CNA for the three and nine months ended September 30, 2016 and 2015 as presented in Note 13 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report. For further discussion of Net investment income and Net realized investment results, see the Investments section of this MD&A.
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
|
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
|
||||||||||||||||
(In millions) | ||||||||||||||||
Revenues: |
||||||||||||||||
Insurance premiums |
$ | 1,767 | $ | 1,751 | $ | 5,196 | $ | 5,173 | ||||||||
Net investment income |
524 | 354 | 1,461 | 1,412 | ||||||||||||
Investment gains (losses) |
45 |