10-Q
Table of Contents
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

[X]   

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015

OR

 

[   ]   

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period From                          to                         

Commission File Number 1-6541

LOEWS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware      13-2646102

(State or other jurisdiction of

incorporation or organization)

    

(I.R.S. Employer

Identification No.)

667 Madison Avenue, New York, N.Y. 10065-8087

(Address of principal executive offices) (Zip Code)

(212) 521-2000

(Registrant’s telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes        X                                                       No                   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes        X                                       No                                                    Not Applicable                  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   X      Accelerated filer            Non-accelerated filer            Smaller reporting company        

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes                                                                    No        X      

 

Class             Outstanding at July 24, 2015      

Common stock, $0.01 par value            

    363,081,509 shares

 

 


Table of Contents

INDEX

 

     Page
No.
 

Part I.  Financial Information

  

Item 1.  Financial Statements (unaudited)

  

Consolidated Condensed Balance Sheets

     3     

June 30, 2015 and December 31, 2014

  

Consolidated Condensed Statements of Income

     4     

Three and six months ended June 30, 2015 and 2014

  

Consolidated Condensed Statements of Comprehensive Income (Loss)

     5     

Three and six months ended June 30, 2015 and 2014

  

Consolidated Condensed Statements of Equity

     6     

Six months ended June 30, 2015 and 2014

  

Consolidated Condensed Statements of Cash Flows

     7     

Six months ended June 30, 2015 and 2014

  

Notes to Consolidated Condensed Financial Statements

     8     

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

     43     

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

     71     

Item 4.  Controls and Procedures

     71     

Part II.  Other Information

     72     

Item 1.  Legal Proceedings

     72     

Item 1A.  Risk Factors

     72     

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

     72     

Item 6.  Exhibits

     73     

 

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

     June 30,
2015
    December 31,  
2014  
 

 

 
(Dollar amounts in millions, except per share data)             

Assets:

    

Investments:

    

Fixed maturities, amortized cost of $37,321 and $37,469

   $ 39,954      $ 40,885         

Equity securities, cost of $783 and $733

     756        728         

Limited partnership investments

     3,714        3,674         

Other invested assets, primarily mortgage loans

     768        731         

Short term investments

     5,856        6,014         

 

 

Total investments

     51,048        52,032         

Cash

     249        364         

Receivables

     8,097        7,770         

Property, plant and equipment

     15,917        15,611         

Goodwill

     373        374         

Other assets

     1,710        1,616         

Deferred acquisition costs of insurance subsidiaries

     621        600         

 

 

Total assets

   $    78,015      $ 78,367         

 

 

Liabilities and Equity:

    

Insurance reserves:

    

Claim and claim adjustment expense

   $ 23,193      $ 23,271         

Future policy benefits

     9,360        9,490         

Unearned premiums

     3,815        3,592         

Policyholders’ funds

       27         

 

 

Total insurance reserves

     36,368        36,380         

Payable to brokers

     741        673         

Short term debt

     1,061        335         

Long term debt

     9,791        10,333         

Deferred income taxes

     773        893         

Other liabilities

     4,949        5,103         

 

 

Total liabilities

     53,683        53,717         

 

 

Commitments and contingent liabilities

    

Preferred stock, $0.10 par value:

    

Authorized – 100,000,000 shares

    

Common stock, $0.01 par value:

    

Authorized – 1,800,000,000 shares

    

Issued – 373,203,709 and 372,934,540 shares

     4        4         

Additional paid-in capital

     3,483        3,481         

Retained earnings

     15,747        15,515         

Accumulated other comprehensive income

     53        280         

 

 
     19,287        19,280         

Less treasury stock, at cost (7,572,200 shares)

     (305  

 

 

Total shareholders’ equity

     18,982        19,280         

Noncontrolling interests

     5,350        5,370         

 

 

Total equity

     24,332        24,650         

 

 

Total liabilities and equity

   $ 78,015      $ 78,367         

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Table of Contents

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

         Three Months Ended     Six Months Ended          
     June 30,     June 30,          
  

 

 

 
     2015     2014     2015     2014      

 

 
(In millions, except per share data)                         

Revenues:

        

Insurance premiums

       $ 1,735      $ 1,811      $ 3,422      $ 3,617        

Net investment income

     510        597        1,098        1,174        

Investment gains (losses):

        

Other-than-temporary impairment losses

     (31     (5     (43     (7)       

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

        

 

 

Net impairment losses recognized in earnings

     (31     (5     (43     (7)       

Other net investment gains (losses)

     29        (9     51        35        

 

 

Total investment gains (losses)

     (2     (14     8        28        

Contract drilling revenues

     617        650        1,217        1,335        

Other revenues

     575        549        1,168        1,127        

 

 

Total

     3,435        3,593        6,913        7,281        

 

 

Expenses:

        

Insurance claims and policyholders’ benefits

     1,469        1,441        2,808        2,887        

Amortization of deferred acquisition costs

     314        335        617        664        

Contract drilling expenses

     344        395        695        765        

Other operating expenses (Note 4)

     879        750        2,128        1,657        

Interest

     134        126        265        248        

 

 

Total

     3,140        3,047        6,513        6,221        

 

 

Income before income tax

     295        546        400        1,060        

Income tax expense

     (48     (145     (104     (248)       

 

 

Income from continuing operations

     247        401        296        812        

Discontinued operations, net

       (186       (413)       

 

 

Net income

     247        215        296        399        

Amounts attributable to noncontrolling interests

     (77     (99     (17     (224)       

 

 

Net income attributable to Loews Corporation

       $ 170      $ 116      $ 279      $ 175        

 

 

Net income attributable to Loews Corporation:

        

Income from continuing operations

       $ 170      $ 303      $ 279      $ 568        

Discontinued operations, net

       (187       (393)       

 

 

Net income

       $ 170      $ 116      $ 279      $ 175        

 

 

Basic and diluted net income per share:

        

Income from continuing operations

       $ 0.46      $ 0.79      $ 0.75      $ 1.47        

Discontinued operations, net

       (0.49       (1.02)       

 

 

Net income

       $ 0.46      $ 0.30      $ 0.75      $ 0.45        

 

 

Dividends per share

       $ 0.0625      $ 0.0625      $ 0.125      $ 0.125        

 

 

Weighted average shares outstanding:

        

Shares of common stock

     369.61        385.72        371.21        386.53        

Dilutive potential shares of common stock

     0.36        0.65        0.36        0.68        

 

 

Total weighted average shares outstanding assuming dilution

     369.97        386.37        371.57        387.21        

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

           Three Months Ended
      June 30,
     Six Months Ended      
June 30,      
 
  

 

 

 
         2015      2014      2015     2014        

 

 
(In millions)                           

Net income

       $ 247          $ 215         $ 296      $ 399          

 

 

Other comprehensive income (loss), after tax

          

Changes in:

          

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

     (4)           2           (5     14          

Net other unrealized gains (losses) on investments

     (363)           270           (253     507          

 

 

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

     (367)           272           (258     521          

Discontinued operations

        10             15          

Unrealized gains on cash flow hedges

     1               4        3          

Pension liability

     43            (53)          47        (54)         

Foreign currency

     49            42           (47     36          

 

 

Other comprehensive income (loss)

     (274)           271           (254     521          

 

 

Comprehensive income (loss)

     (27)           486           42        920          

Amounts attributable to noncontrolling interests

     (48)           (126)          9        (277)         

 

 

Total comprehensive income (loss) attributable to Loews Corporation

       $ (75)         $ 360         $ 51      $ 643          

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Table of Contents

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF EQUITY

(Unaudited)

 

           Loews Corporation Shareholders         
       Total         Common
    Stock
       Additional
  Paid-in
  Capital
      Retained
  Earnings
    Accumulated
Other
Comprehensive
Income
    

Common    
Stock    

Held in    
Treasury    

     Noncontrolling  
Interests  
 

 

 
(In millions)                                              

Balance, January 1, 2014

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

Net income

     399             175              224          

Other comprehensive income

     521               468                   53          

Dividends paid

     (232          (48           (184)         

Purchases of subsidiary stock from noncontrolling interests

     (83        (8             (75)         

Purchases of Loews treasury stock

     (195               (195)            

Issuance of Loews common stock

     5           5             

Stock-based compensation

     14           4                10          

Other

     20             (2           22          

 

 

Balance, June 30, 2014

   $ 25,355        $         4       $ 3,608      $   15,633      $ 807              $ (195)             $ 5,498          

 

 

Balance, January 1, 2015

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

Net income

     296             279              17          

Other comprehensive income

     (254            (228)                  (26)         

Dividends paid

     (156          (46           (110)         

Issuance of equity securities by subsidiary

     115           (2       1                   116          

Purchases of subsidiary stock from noncontrolling interests

     (26        3                (29)         

Purchases of Loews treasury stock

     (305               (305)            

Issuance of Loews common stock

     7           7             

Stock-based compensation

     12           12             

Other

     (7        (18     (1           12          

 

 

Balance, June 30, 2015

   $ 24,332        $ 4       $ 3,483      $ 15,747      $ 53              $ (305)             $ 5,350          

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Six Months Ended June 30    2015       2014      

 

 
(In millions)       

Operating Activities:

  

Net income

   $           296      $ 399        

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

     803            1,112        

Changes in operating assets and liabilities, net:

  

Receivables

     (243     (142)       

Deferred acquisition costs

     (8     (10)       

Insurance reserves

     451        234        

Other assets

     (102     (178)       

Other liabilities

     (120     (106)       

Trading securities

     10        (117)       

 

 

Net cash flow operating activities

     1,087        1,192        

 

 

Investing Activities:

  

Purchases of fixed maturities

     (5,029     (4,921)       

Proceeds from sales of fixed maturities

     2,859        2,919        

Proceeds from maturities of fixed maturities

     2,304        1,954        

Purchases of equity securities

     (30     (11)       

Proceeds from sales of equity securities

     33        14        

Purchases of limited partnership investments

     (78     (109)       

Proceeds from sales of limited partnership investments

     85        118        

Purchases of property, plant and equipment

     (1,227     (1,152)       

Dispositions

     20        30        

Change in short term investments

     119        3        

Other, net

     (90     (4)       

 

 

Net cash flow investing activities

     (1,034     (1,159)       

 

 

Financing Activities:

  

Dividends paid

     (46     (48)       

Dividends paid to noncontrolling interests

     (110     (184)       

Purchases of subsidiary stock from noncontrolling interests

     (24     (88)       

Purchases of Loews treasury stock

     (287     (182)       

Issuance of Loews common stock

     7        5        

Proceeds from sale of subsidiary stock

     114        4        

Principal payments on debt

     (1,329     (331)       

Issuance of debt

     1,503        766        

Other, net

     6        17        

 

 

Net cash flow financing activities

     (166     (41)       

 

 

Effect of foreign exchange rate on cash

     (2     2        

 

 

Transfer of cash to assets of discontinued operations

       (11)       

 

 

Net change in cash

     (115     (17)       

Cash, beginning of period

     364        294        

 

 

Cash, end of period

   $ 249      $ 277        

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Table of Contents

Loews Corporation and Subsidiaries

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.  Basis of Presentation

Loews Corporation is a holding company. Its subsidiaries are engaged in the following lines of business: commercial property and casualty insurance (CNA Financial Corporation (“CNA”), a 90% owned subsidiary); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (“Diamond Offshore”), a 53% owned subsidiary); transportation and storage of natural gas and natural gas liquids and gathering and processing of natural gas (Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”), a 51% owned subsidiary); and the operation of a chain of hotels (Loews Hotels Holding Corporation (“Loews Hotels”), a wholly owned subsidiary). Unless the context otherwise requires, the terms “Company,” “Loews” and “Registrant” as used herein mean Loews Corporation excluding its subsidiaries and the term “Net income (loss) attributable to Loews Corporation” as used herein means Net income (loss) attributable to Loews Corporation shareholders.

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

In the opinion of management, the accompanying unaudited Consolidated Condensed Financial Statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of June 30, 2015 and December 31, 2014, the results of operations and comprehensive income for the three and six months ended June 30, 2015 and 2014 and changes in shareholders’ equity and cash flows for the six months ended June 30, 2015 and 2014.

Net income for the second quarter and first half of each of the years is not necessarily indicative of net income for that entire year.

Reference is made to the Notes to Consolidated Financial Statements in the 2014 Annual Report on Form 10-K which should be read in conjunction with these Consolidated Condensed Financial Statements.

The Company presents basic and diluted net income per share on the Consolidated Condensed Statements of Income. Basic net income per share excludes dilution and is computed by dividing net income attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Stock appreciation rights (“SARs”) of 3.7 million, 2.2 million, 3.6 million and 2.1 million shares were not included in the diluted weighted average shares amounts for the three and six months ended June 30, 2015 and 2014 due to the exercise price being greater than the average stock price.

As of June 30, 2015, the Company had $20 million of goodwill related to its investment in Diamond Offshore. As a result of the continued deterioration of the market fundamentals in the oil and gas industry, the Company performed the first step of a goodwill impairment test as of June 30, 2015 comparing the fair market value of the Company’s investment in Diamond Offshore to book value. No impairment charge was required based on passing the first step of the impairment test. Due to the continued market decline subsequent to June 30, 2015, the Company may be required to record an impairment charge in the near future.

On August 1, 2014, CNA completed the sale of Continental Assurance Company (“CAC”), its former life insurance subsidiary and on September 30, 2014, the Company sold HighMount Exploration & Production LLC (“HighMount”), its natural gas and oil exploration and production subsidiary. The results of these sold businesses are reflected as discontinued operations in the Consolidated Condensed Statements of Income as further discussed in Note 12.

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

 

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In May of 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The core principle of the new accounting guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new accounting guidance provides a five-step analysis of transactions to determine when and how revenue is recognized and requires enhanced disclosures about revenue. This update was effective for annual reporting periods beginning after December 15, 2016, including interim periods, and can be adopted either retrospectively or as 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 July of 2015, the FASB voted to approve a one year deferral of the effective date of ASU 2014-09. The FASB expects to issue a final ASU formally amending the effective date by the end of the third quarter of 2015.

2.  Investments

Net investment income is as follows:

 

           Three Months Ended     Six Months Ended        
           June 30,     June 30,        
  

 

 

 
         2015     2014     2015     2014      

 

 
(In millions)                         

Fixed maturity securities

       $ 452      $ 451      $ 895      $ 903        

Short term investments

       1        3        2        

Limited partnership investments

     50        116        210        203        

Equity securities

     3        3        6        5        

Income (loss) from trading portfolio (a)

     11        30        (4     70        

Other

     9        10        17        18        

 

 

Total investment income

     525        611        1,127        1,201        

Investment expenses

     (15     (14     (29     (27)       

 

 

Net investment income

       $ 510      $ 597      $     1,098      $     1,174        

 

 

 

(a)

Includes net unrealized gains (losses) related to changes in fair value on trading securities still held of $(10), $40, $(17) and $60 for the three and six months ended June 30, 2015 and 2014.

Investment gains (losses) are as follows:

 

           Three Months Ended     Six Months Ended        
           June 30,     June 30,        
  

 

 

 
         2015     2014     2015     2014      

 

 
(In millions)                         

Fixed maturity securities

       $ (12   $ (19     $ 19        

Equity securities

     (1     $ (1     5        

Derivative instruments

     11        1                 10        1        

Short term investments and other

       4        (1     3        

 

 

Investment gains (losses) (a)

       $ (2   $ (14   $ 8      $          28        

 

 

 

(a)

Includes gross realized gains of $36, $20, $70 and $78 and gross realized losses of $49, $39, $71 and $54 on available-for-sale securities for the three and six months ended June 30, 2015 and 2014.

 

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

 

        Three Months Ended    
June 30,
        Six Months Ended        
        June 30,         
 
 

 

 

 
    2015     2014         2015     2014      

 

 
(In millions)                        

Fixed maturity securities available-for-sale:

       

Corporate and other bonds

    $     11      $     2        $ 16      $ 3       

States, municipalities and political subdivisions

    13          18     

Asset-backed:

       

Residential mortgage-backed

    5        1          6        2       

Other asset-backed

    1        1          1        1       

 

 

Total asset-backed

    6        2          7        3       

 

 

Total fixed maturities available-for-sale

    30        4          41        6       

 

 

Equity securities available-for-sale:

       

Common stock

      1          1        1       

Short term investments

    1          1     

 

 

Net OTTI losses recognized in earnings

    $ 31      $ 5        $ 43      $ 7       

 

 

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

 

June 30, 2015    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

   $ 16,879            $1,337             $      88           $ 18,128        

States, municipalities and political subdivisions

     11,707            1,186             40             12,853        

Asset-backed:

              

Residential mortgage-backed

     4,940            175             15             5,100         $ (46)       

Commercial mortgage-backed

     2,186            77             12             2,251           (2)       

Other asset-backed

     1,044            12             1             1,055        

 

 

Total asset-backed

     8,170            264             28             8,406           (48)       

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

     24            5                29        

Foreign government

     387            13             1             399        

Redeemable preferred stock

     33            2                35        

 

 

Fixed maturities available-for-sale

     37,200            2,807             157             39,850           (48)       

Fixed maturities trading

     121               17             104        

 

 

Total fixed maturities

     37,321            2,807             174             39,954           (48)       

 

 

Equity securities:

              

Common stock

     54            8             2             60        

Preferred stock

     154            4             2             156        

 

 

Equity securities available-for-sale

     208            12             4             216           -        

Equity securities trading

     575            74             109             540        

 

 

Total equity securities

     783            86             113             756           -        

 

 

Total

   $ 38,104            $2,893             $    287           $ 40,710         $ (48)       

 

 

 

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Table of Contents
December 31, 2014    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

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

States, municipalities and political subdivisions

     11,285           1,463            8               12,740       

Asset-backed:

              

Residential mortgage-backed

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

Commercial mortgage-backed

     2,056           93            5               2,144          (2)       

Other asset-backed

     1,234           11            10               1,235       

 

 

Total asset-backed

     8,318           322            28               8,612          (55)       

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

     26           5               31       

Foreign government

     438           16               454       

Redeemable preferred stock

     39           3               42       

 

 

Fixed maturities available-for-sale

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

Fixed maturities trading

     137              17               120       

 

 

Total fixed maturities

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

 

 

Equity securities:

              

Common stock

     38           9               47       

Preferred stock

     172           5            2               175       

 

 

Equity securities available-for-sale

     210           14            2               222          -        

Equity securities trading

     523           96            113               506       

 

 

Total equity securities

     733           110            115               728          -        

 

 

Total

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

 

 

The net unrealized gains on investments included in the tables above are recorded as a component of Accumulated other comprehensive income (“AOCI”). When presented in AOCI, these amounts are net of tax and noncontrolling interests and any required Shadow Adjustments. As of June 30, 2015 and December 31, 2014, the net unrealized gains on investments included in AOCI were net of Shadow Adjustments of $917 million and $1.2 billion. To the extent that unrealized gains on fixed income securities supporting certain products within CNA’s Life & Group Non-Core business would result in a premium deficiency if realized, a related decrease in Deferred acquisition costs, and/or increase in Insurance reserves are recorded, net of tax and noncontrolling interests, as a reduction of net unrealized gains through Other comprehensive income (“Shadow Adjustments”).

 

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Table of Contents

The available-for-sale securities in a gross unrealized loss position are as follows:

 

    Less than
12 Months
    12 Months
or Longer
    Total  
 

 

 

 
June 30, 2015   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

    $  3,217           $ 73             $      152          $ 15            $   3,369         $ 88     

States, municipalities and political subdivisions

    1,523           34           143          6          1,666          40     

Asset-backed:

           

Residential mortgage-backed

    451           6           167          9          618          15     

Commercial mortgage-backed

    557           9           61          3          618          12     

Other asset-backed

    135           1           18            153          1     

 

 

Total asset-backed

    1,143           16           246          12          1,389          28     

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

    3                 3       

Foreign government

    20           1           1            21          1     

 

 

Total fixed maturity securities

    5,906           124           542          33          6,448          157     

 

 

Common stock

    21           2               21          2     

Preferred stock

    17           2               17          2     

 

 

Total

    $  5,944           $ 128             $      542          $ 33            $   6,486         $ 161     

 

 
December 31, 2014                                    

 

 
(In millions)                                    

Fixed maturity securities:

           

Corporate and other bonds

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

States, municipalities and political subdivisions

    335           5           127          3          462          8     

Asset-backed:

           

Residential mortgage-backed

    293           5           189          8          482          13     

Commercial mortgage-backed

    264           2           99          3          363          5     

Other asset-backed

    607           10           7            614          10     

 

 

Total asset-backed

    1,164           17           295          11          1,459          28     

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

    3             4            7       

Foreign government

    3             3            6       

Redeemable preferred stock

    3                 3       

 

 

Total fixed maturity securities

    2,838           68           706          29          3,544          97     

Preferred stock

    17           2           1            18          2     

 

 

Total

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

 

 

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

 

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

 

        Three Months Ended         Six Months Ended          
        June 30,           June 30,        
 

 

 

 
      2015         2014       2015             2014          

 

 
(In millions)                        

Beginning balance of credit losses on fixed maturity securities

    $ 61       $ 69       $ 62           $ 74        

Reductions for securities sold during the period

    (2)        (3)        (3)            (5)       

Reductions for securities the Company intends to sell or more likely than not will be required to sell

          (3)       

 

 

Ending balance of credit losses on fixed maturity securities

    $ 59       $ 66       $ 59           $ 66        

 

 

Contractual Maturity

The following table presents available-for-sale fixed maturity securities by contractual maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid with or without call or prepayment penalties. Securities not due at a single date are allocated based on weighted average life.

 

     June 30, 2015        December 31, 2014      

 

 
     Cost or   
Amortized   
Cost   
    

Estimated   
Fair   

Value   

     Cost or   
Amortized   
Cost   
     Estimated   
Fair   
Value   
 

 

 
(In millions)                            

Due in one year or less

   $ 1,539               $ 1,559             $ 2,479             $ 2,511         

Due after one year through five years

     7,523                 7,972               9,070               9,621         

Due after five years through ten years

     14,099                 14,549               12,055               12,584         

Due after ten years

     14,039                 15,770               13,728               16,049         

 

 

Total

   $   37,200               $   39,850             $   37,332             $   40,765         

 

 

 

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Table of Contents

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.

 

    June 30, 2015     December 31, 2014  

 

 
    Contractual/           Contractual/        
    Notional       Estimated Fair Value       Notional       Estimated Fair Value    
    Amount       Asset              (Liability)     Amount       Asset           (Liability)  

 

 
(In millions)                                    

With hedge designation:

           

Foreign exchange:

           

Currency forwards – short

    $          3                $          70            $        (5)     

Without hedge designation:

           

Equity markets:

           

Options    – purchased

    163          $ 9          544        $     24     

   – written

    397              $          (11)          292            (21)     

Equity swaps and warrants – long

    10            2          10          2     

Futures – long

    74              (1)           

Futures – short

    208                130          2     

Foreign exchange:

           

Currency forwards – long

    110              (1)          109            (3)     

 – short

    78                88          2     

Currency options – long

    446            11          151          7     

– short

    279              (2)           

Embedded derivative on funds withheld liability

    183            6          184            (3)     

Investment Commitments

As of June 30, 2015, the Company had committed approximately $295 million to future capital calls from various third party limited partnership investments in exchange for an ownership interest in the related partnerships.

The Company invests in various privately placed debt securities, including bank loans, as part of its overall investment strategy and has committed to additional future purchases, sales and funding. As of June 30, 2015, the Company had commitments to purchase or fund additional amounts of $134 million and sell $79 million under the terms of such securities.

3.  Fair Value

Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable:

 

   

Level 1 – Quoted prices for identical instruments in active markets.

 

   

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

 

   

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are not observable.

 

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Table of Contents

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

The Company performs control procedures over information obtained from pricing services and brokers to ensure prices received represent a reasonable estimate of fair value and to confirm representations regarding whether inputs are observable or unobservable. Procedures include: (i) the review of pricing service or broker pricing methodologies, (ii) back-testing, where past fair value estimates are compared to actual transactions executed in the market on similar dates, (iii) exception reporting, where period-over-period changes in price are reviewed and challenged with the pricing service or broker based on exception criteria, (iv) detailed analysis, where the Company performs an independent analysis of the inputs and assumptions used to price individual securities and (v) pricing validation, where prices received are compared to prices independently estimated by the Company.

The fair values of CNA’s life settlement contracts are included in Other assets on the Consolidated Condensed Balance Sheets. Equity options purchased are included in Equity securities, and all other derivative assets are included in Receivables. Derivative liabilities are included in Payable to brokers. Assets and liabilities measured at fair value on a recurring basis are presented in the following tables:

 

June 30, 2015    Level 1     Level 2     Level 3      Total      

 

 
(In millions)                          

Fixed maturity securities:

         

Corporate and other bonds

   $ 28      $ 17,959      $ 141       $ 18,128        

States, municipalities and political subdivisions

       12,768        85         12,853        

Asset-backed:

         

Residential mortgage-backed

       4,893        207         5,100        

Commercial mortgage-backed

       2,164        87         2,251        

Other asset-backed

       565        490         1,055        

 

 

Total asset-backed

       7,622        784         8,406        

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

     28        1           29        

Foreign government

     32        367           399        

Redeemable preferred stock

     24        11           35        

 

 

Fixed maturities available-for-sale

     112        38,728        1,010         39,850        

Fixed maturities trading

       15        89         104        

 

 

Total fixed maturities

   $ 112      $   38,743      $     1,099       $   39,954        

 

 

Equity securities available-for-sale

   $ 139      $ 61      $ 16       $ 216        

Equity securities trading

     539          1         540        

 

 

Total equity securities

   $ 678      $ 61      $ 17       $ 756        

 

 

Short term investments

   $    4,876      $ 900         $ 5,776        

Other invested assets

     103        43           146        

Receivables

       11           11        

Life settlement contracts

       $ 75         75        

Payable to brokers

     (521     (5        (526)       

 

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Table of Contents
December 31, 2014     Level 1      Level 2     Level 3      Total      

 

 
(In millions)                          

Fixed maturity securities:

         

Corporate and other bonds

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

States, municipalities and political subdivisions

       12,646        94         12,740        

Asset-backed:

         

Residential mortgage-backed

       5,044        189         5,233        

Commercial mortgage-backed

       2,061        83         2,144        

Other asset-backed

       580        655         1,235        

 

 

Total asset-backed

       7,685        927         8,612        

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

     28        3           31        

Foreign government

     41        413           454        

Redeemable preferred stock

     30        12           42        

 

 

Fixed maturities available-for-sale

     131        39,451        1,183         40,765        

Fixed maturities trading

       30        90         120        

 

 

Total fixed maturities

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

 

 

Equity securities available-for-sale

   $ 145      $ 61      $ 16       $ 222        

Equity securities trading

     505          1         506        

 

 

Total equity securities

   $ 650      $ 61      $ 17       $ 728        

 

 

Short term investments

   $    4,989      $ 963         $ 5,952        

Other invested assets

     102        41           143        

Receivables

     2        7           9        

Life settlement contracts

       $ 82         82        

Payable to brokers

     (546     (6        (552)       

 

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Table of Contents

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 six months ended June 30, 2015 and 2014:

 

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

Unrealized
Gains
(Losses)
Recognized in
Net Income
on Level 3
Assets and

Liabilities

 
2015   Balance,
April 1
      Included in  
Net Income
      Included in  
OCI
      Purchases         Sales         Settlements       into
Level 3
    out of
Level 3
    Balance,
June 30
    Held at
June 30
 

 

 
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

  $ 186         $ (2)         $ (1)              $ (7)            $ (35)          $ 141            $ (3)            

States, municipalities and political subdivisions

    86                 (1)                85           

Asset-backed:

                   

Residential mortgage-backed

    232         1          (2)              (11)              (13)            207           

Commercial mortgage-backed

    64         1          (1)          $ 9            (1)          $ 17              (2)            87           

Other asset-backed

    553         2          1           47        $ (90)          (17)              (6)            490           

 

 

Total asset-backed

    849         4          (2)          56          (90)          (29)            17              (21)            784              -             

 

 

Fixed maturities available-for-sale

    1,121         2          (3)          56          (90)          (37)            17              (56)            1,010              (3)            

Fixed maturities trading

    89                       89           

 

 

Total fixed maturities

  $ 1,210         $ 2          $ (3)          $ 56        $     (90)          $ (37)          $ 17            $ (56)          $     1,099            $ (3)            

 

 

Equity securities available-for-sale

  $ 13           $ 3                   $ 16           

Equity securities trading

                         1           

 

 

Total equity securities

  $ 14         $ -          $ 3           $ -        $ -           $ -           $ -            $ -            $ 17            $ -             

 

 

Life settlement contracts

  $ 79         $ 4                $ (8)              $ 75            $ (2)            

 

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Table of Contents
          Net Realized Gains
(Losses) and Net Change
in Unrealized Gains
(Losses)
                      Transfers     Transfers           Unrealized
Gains
(Losses)
Recognized in
Net Income
on Level 3
Assets and
Liabilities
 
2014   Balance,
April 1
   

Included in

Net Income

    Included in
OCI
    Purchases     Sales     Settlements    

into

Level 3

   

out of

Level 3

   

Balance,

June 30

   

Held at

June 30

 

 

 
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

  $ 189       $ 1           $ 21          $ (6)        $ (5)          $ 5          $ (11)          $ 194             

States, municipalities and political subdivisions

    86         1         $ 1            1            (10)                79             

Asset-backed:

                   

Residential mortgage-backed

    359         (24)          47            22            (174)          (19)              (26)            185             

Commercial mortgage-backed

    126         1           1              (60)          (1)            12            (20)            59             

Other asset-backed

    439           4            229            (28)          (18)                626              $         (1)             

 

 

Total asset-backed

    924         (23)          52            251            (262)          (38)            12            (46)            870                (1)             

 

 

Fixed maturities available-for-sale

    1,199         (21)          53            273            (278)          (43)            17            (57)            1,143                (1)             

Fixed maturities trading

    85         6                       91                6              

 

 

Total fixed maturities

  $     1,284       $         (15)        $         53          $         273          $         (278)        $ (43)          $         17          $         (57)          $     1,234              $ 5              

 

 

Equity securities available-for-sale

  $                    $ 2             

Equity securities trading

         $ 1           $ 1                    4              $ 1              

 

 

Total equity securities

  $      $ 1         $ -          $ 1          $ -          $ -           $ -          $ -           $ 6              $ 1              

 

 

Life settlement contracts

  $ 87       $ 12               $ (13)              $ 86              $ 1              

Derivative financial instruments, net

    (4)        1             $ 1              $ 2             -             

 

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

                     

Transfers

into
Level 3

   

Transfers

out of
Level 3

          Unrealized
Gains
(Losses)
Recognized in
Net Income
on Level 3
Assets and
Liabilities
 
2015   Balance,
January 1
    Included in
Net Income
    Included in
OCI
    Purchases     Sales     Settlements         Balance,
June 30
   

Held at

June 30

 

 

 
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

  $ 162          $ (1)         $ (1)        $ 12          $ (12)        $ (21)        $ 37          $ (35)        $ 141          $ (3)             

States, municipalities and political subdivisions

    94            1                  (10)              85         

Asset-backed:

                   

Residential mortgage-backed

    189            2            (2)          72              (21)            (33)          207         

Commercial mortgage-backed

    83            2              15              (2)          17            (28)          87         

Other asset-backed

    655            3            10            82            (234)          (20)            (6)          490         

 

 

Total asset-backed

    927            7            8            169            (234)          (43)          17            (67)          784            -               

 

 

Fixed maturities available-for-sale

    1,183            7            7            181            (246)          (74)          54            (102)          1,010            (3)             

Fixed maturities trading

    90                  (1)                89         

 

 

Total fixed maturities

  $ 1,273          $ 7          $ 7          $ 181          $     (247)        $ (74)        $ 54          $ (102)        $     1,099          $ (3)             

 

 

Equity securities available-for-sale

  $ 16                        $ 16         

Equity securities trading

    1                          1         

 

 

Total equity securities

  $ 17          $ -          $ -          $ -          $ -          $ -          $ -          $ -          $ 17          $ -               

 

 

Life settlement contracts

  $ 82          $ 17                $ (24)            $ 75          $ (1)             

 

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Table of Contents
            Net Realized Gains
(Losses) and Net Change
in Unrealized Gains
(Losses)
                          Transfers          Transfers                

Unrealized
Gains
(Losses)
Recognized in
Net Income
on Level 3

Assets and

Liabilities

 
2014    Balance,
January 1
    

    Included in

    Net Income

     Included in    
OCI    
     Purchases      Sales      Settlements     

into

Level 3

    

out of

Level 3

     Balance,
June 30
    

Held at

June 30

 

 

 
(In millions)                                                               

Fixed maturity securities:

                          

Corporate and other bonds

   $ 204           $         $ 1               $ 26        $ (10)       $ (10)          $ 8           $ (27)         $ 194           

States, municipalities and political subdivisions

     71                   2                         (10)            14                79           

Asset-backed:

                             

Residential mortgage-backed

     331           (23)         62                 47          (174)         (40)            21             (39)           185           

Commercial mortgage-backed

     151                         (60)         (2)            12             (44)           59           

Other asset-backed

     446                   4                 377          (111)         (90)               (1)           626            $ (1)         

 

 

Total asset-backed

     928           (20)         66                 424          (345)         (132)            33             (84)           870              (1)         

 

 

Fixed maturities available-for-sale

     1,203           (17)         69                 451          (365)         (142)            55             (111)           1,143              (1)         

Fixed maturities trading

     80           11                            91              11          

 

 

Total fixed maturities

   $ 1,283           $ (6)         $ 69               $     451        $     (365)       $     (142)          $             55           $         (111)         $     1,234            $ 10          

 

 

Equity securities available-for-sale

   $ 11           $         $ (4)                 $ (8)                $ 2           

Equity securities trading

     8               $         (6)                  4           

 

 

Total equity securities

   $ 19           $         $ (4)              $       $ (14)       $ -           $ -           $ -          $ 6            $ -          

 

 

Life settlement contracts

   $ 88           $ 22                 $ (24)                $ 86            $ 2          

Separate account business

     1                           $ (1)           -           

Derivative financial instruments, net

     (3)                   $ (2)       $               2            -              2          

Net realized and unrealized gains and losses are reported in Net income as follows:

 

Major Category of Assets and Liabilities    Consolidated Condensed Statements of Income Line Items

 

Fixed maturity securities available-for-sale    Investment gains (losses)
Fixed maturity securities, trading    Net investment income
Equity securities available-for-sale    Investment gains (losses)
Equity securities, trading    Net investment income
Other invested assets    Investment gains (losses) and Net investment income
Derivative financial instruments held in a trading portfolio    Net investment income
Derivative financial instruments, other    Investment gains (losses) and Other revenues
Life settlement contracts    Other revenues

 

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Table of Contents

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 six months ended June 30, 2015 there were no transfers between Level 1 and Level 2. During the three months ended June 30, 2014 there were $1 million of transfers from Level 2 to Level 1 and no transfers from Level 1 to Level 2. During the six months ended June 30, 2014 there were $24 million of transfers from Level 2 to Level 1 and $1 million of transfers from Level 1 to Level 2. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods.

Valuation Methodologies and Inputs

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

Fixed Maturity Securities

Level 1 securities include exchange traded bonds, highly liquid U.S. and foreign government bonds and redeemable preferred stock, valued using quoted market prices. Level 2 securities include most other fixed maturity securities as the significant inputs are observable in the marketplace. All classes of Level 2 fixed maturity securities are valued using a methodology based on information generated by market transactions involving identical or comparable assets, a discounted cash flow methodology or a combination of both when necessary. Common inputs for all classes of fixed maturity securities include prices from recently executed transactions of similar securities, marketplace quotes, benchmark yields, spreads off benchmark yields, interest rates and U.S. Treasury or swap curves. Specifically for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data. Fixed maturity securities are generally assigned to Level 3 in cases where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. Level 3 securities also include private placement debt securities whose fair value is determined using internal models with inputs that are not market observable.

Equity Securities

Level 1 equity securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily non-redeemable preferred stocks and common stocks valued using pricing for similar securities, recently executed transactions, broker/dealer quotes and other pricing models utilizing market observable inputs. Level 3 securities are priced using internal models with inputs that are not market observable.

Derivative Financial Instruments

Exchange traded derivatives are valued using quoted market prices and are classified within Level 1 of the fair value hierarchy. Level 2 derivatives primarily include currency forwards valued using observable market forward rates. Over-the-counter derivatives, principally interest rate swaps, total return swaps, commodity swaps, 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.

 

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Table of Contents

Short Term Investments

Securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and treasury bills. Level 2 primarily includes commercial paper, for which all inputs are market observable. Fixed maturity securities purchased within one year of maturity are classified consistent with fixed maturity securities discussed above. Short term investments as presented in the tables above differ from the amounts presented in the Consolidated Condensed Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.

Other Invested Assets

Level 1 securities include exchange traded open-end funds valued using quoted market prices. Level 2 securities include overseas deposits which can be redeemed at net asset value in 90 days or less.

Life Settlement Contracts

The fair values of life settlement contracts are determined as the present value of the anticipated death benefits less anticipated premium payments based on contract terms that are distinct for each insured, as well as CNA’s own assumptions for mortality, premium expense, and the rate of return that a buyer would require on the contracts, as no comparable market pricing data is available.

Significant Unobservable Inputs

The following tables present quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurements of Level 3 assets. Valuations for assets and liabilities not presented in the table below are primarily based on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of unobservable inputs from these broker quotes is neither provided nor reasonably available to the Company.

 

June 30, 2015    Estimated
Fair Value
    

Valuation

Techniques

  

Unobservable

Inputs

  

Range

(Weighted

Average)

 

     (In millions)                 

Fixed maturity securities

     $ 97         Discounted cash flow    Credit spread    2% – 13% (3%)

Life settlement contracts

     75         Discounted cash flow    Discount rate risk premium Mortality assumption   

9%

55% – 1,676% (165%)

 

December 31, 2014

                     

 

Fixed maturity securities

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

 

Equity securities

  

 

 

 

16    

 

  

  

 

Market approach

  

 

Private offering price

  

 

$12 – $4,391 per share

($600 per share)

Life settlement contracts

     82           Discounted cash flow    Discount rate risk premium Mortality assumption   

9%

55% – 1,676% (163%)

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

 

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Table of Contents

Financial Assets and Liabilities Not Measured at Fair Value

The carrying amount, estimated fair value and the level of the fair value hierarchy of the Company’s financial assets and liabilities which are not measured at fair value on the Consolidated Condensed Balance Sheets are presented in the following tables. The carrying amounts and estimated fair values of short term debt and long term debt exclude capital lease obligations. The carrying amounts reported on the Consolidated Condensed Balance Sheets for cash and short term investments not carried at fair value and certain other assets and liabilities approximate fair value due to the short term nature of these items.

 

    

Carrying

Amount

     Estimated Fair Value  
June 30, 2015       Level 1    Level 2        Level 3        Total  

 

 
(In millions)                                 

Assets:

              

Other invested assets, primarily mortgage loans

   $ 622             $ 640       $ 640        

Liabilities:

              

Short term debt

     1,060          $ 1,037             36         1,073        

Long term debt

     9,776            9,492             470         9,962        
December 31, 2014                                 

 

 

Assets:

              

Other invested assets, primarily mortgage loans

   $ 588             $ 608       $ 608        

Liabilities:

              

Short term debt

     334          $ 255             84         339        

Long term debt

     10,320            10,299             420         10,719        

The following methods and assumptions were used in estimating the fair value of these financial assets and liabilities.

The fair values of mortgage loans, included in Other invested assets, were based on the present value of the expected future cash flows discounted at the current interest rate for similar financial instruments, adjusted for specific loan risk.

Fair value of debt was based on observable market prices when available. When observable market prices were not available, the fair value of debt was based on observable market prices of comparable instruments adjusted for differences between the observed instruments and the instruments being valued or is estimated using discounted cash flow analyses, based on current incremental borrowing rates for similar types of borrowing arrangements.

4.  Property, Plant and Equipment

Diamond Offshore

Asset Impairment

In response to recently announced regulatory requirements in the U.S. Gulf of Mexico, as well as the continued deterioration of the market fundamentals in the oil and gas industry, including the dramatic decline in oil prices, significant cutbacks in customer capital spending plans and contract cancellations by customers, Diamond Offshore evaluated most of its mid-water semisubmersible rigs, one drillship and five jack-up rigs for impairment during the first quarter of 2015.

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

 

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Table of Contents

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

Based on this evaluation, Diamond Offshore determined that seven mid-water semisubmersibles and one drillship were impaired and an impairment loss was recognized aggregating $359 million ($158 million after tax and noncontrolling interests) for the six months ended June 30, 2015. The fair value of five of the impaired rigs was determined utilizing a market approach, which utilized the most recent contracted sales price for another of Diamond Offshore’s previously impaired mid-water semisubmersible rigs. The fair value of Diamond Offshore’s three remaining rigs (which were under contract with a customer at that time) was determined using an income approach, which utilized significant unobservable inputs, including assumptions related to estimated dayrate revenue, rig utilization and anticipated costs for the remainder of the current contract, as well as estimated proceeds that may be received on disposition of each rig, representative of a Level 3 fair value measurement.

Of the impaired rigs, three semisubmersible rigs were sold for scrap in the second quarter of 2015 and another three rigs are currently cold stacked or are expected to be cold stacked in the near term. Two of the remaining impaired rigs are currently under contract and are expected to be cold stacked or sold for scrap at the end of their respective contracts. During the second quarter of 2015, Diamond Offshore reviewed most of their mid-water semisubmersibles, which were not previously impaired, two ultra-deepwater semisubmersibles, one deepwater semisubmersible and five jack-up rigs for impairment. As of June 30, 2015, Diamond Offshore determined that further impairment had not occurred. The aggregate fair value of the impaired rigs was $4 million as of June 30, 2015 and is included in Property, plant and equipment on the Consolidated Condensed Balance Sheets.

Loews Hotels

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

5.  Claim and Claim Adjustment Expense Reserves

CNA’s property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including claims that are incurred but not reported (“IBNR”) as of the reporting date. CNA’s reserve projections are based primarily on detailed analysis of the facts in each case, CNA’s experience with similar cases and various historical development patterns. Consideration is given to such historical patterns as field reserving trends and claims settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions including inflation and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.

Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers’ compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. There can be no assurance that CNA’s ultimate cost for insurance losses will not exceed current estimates.

Catastrophes are an inherent risk of the property and casualty insurance business and can contribute to material period-to-period fluctuations in CNA’s results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of $60 million and $56 million for the three months ended June 30, 2015 and 2014 and $89 million and $130 million for the six months ended June 30, 2015 and 2014. Catastrophe losses in 2015 related primarily to U.S. weather-related events.

 

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Table of Contents

Net Prior Year Development

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

 

Three Months Ended June 30, 2015    Specialty     Commercial     International         Total      

 

 
(In millions)                         

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

   $ (13)          $ 16           $ (8)      $ (5)       

Pretax (favorable) unfavorable premium development

     (2)        (11)        (2)        (15)       

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (15)          $          $ (10)      $ (20)       

 

 
Three Months Ended June 30, 2014                         

 

 

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

   $ (41)          $ 90           $ (25)      $ 24        

Pretax (favorable) unfavorable premium development

     (2)        (6)               (2)       

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (43)          $ 84           $ (19)      $ 22        

 

 
Six Months Ended June 30, 2015                         

 

 

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

   $ (11)          $ 11           $ (12)      $ (12)       

Pretax (favorable) unfavorable premium development

     (8)        (12)        14         (6)       

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (19)          $ (1)          $      $ (18)       

 

 
Six Months Ended June 30, 2014                         

 

 

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

   $ (44)          $ 108           $ (15)      $ 49        

Pretax (favorable) unfavorable premium development

     (8)        (24)        (1)        (33)       

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (52)          $ 84           $ (16)      $ 16        

 

 

 

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Table of Contents

Specialty

The following table and discussion provide further detail of the net prior year claim and allocated claim adjustment expense reserve development (“development”) recorded for the Specialty segment:

 

                                                                   
   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
 

 

 

 
    2015     2014     2015     2014    

 

 
(In millions)                        

Medical professional liability

      $ (6)      $      $      $ 1      

Other professional liability and management liability

    (1)        (44)        (4)        (50)     

Surety

               1      

Warranty

                 

Other

    (7)        2          (17)        4      

 

 

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

      $ (13)      $ (41)      $ (11)      $ (44)     

 

 

Three Months

2015

Overall, favorable development in medical professional liability was primarily due to lower than expected severity for individual healthcare professionals and allied facilities in accident years 2009 through 2012. Unfavorable development was recorded related to increased claim frequency in the aging services business in accident years 2009 and 2010.

Favorable development of $38 million was recorded in other professional liability and management liability related to lower than expected severity for professional services primarily in accident years 2010 and prior. Unfavorable development of $37 million was recorded primarily related to increased claim frequency on public company management liability in accident years 2012 through 2014.

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

2014

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

Six Months

2015

Overall, unfavorable development for medical professional liability was primarily related to increased claim frequency in the aging services business for accident years 2009 through 2014, partially offset by lower than expected severity in accident years 2010 and prior. Additional favorable development was due to lower than expected severity for individual healthcare professionals and allied facilities in accident years 2009 through 2012.

Favorable development of $41 million was recorded in other professional liability and management liability primarily related to lower than expected severity in accident years 2010 and prior for professional services. Unfavorable development of $37 million was recorded primarily related to increased claim frequency on public company management liability in accident years 2012 through 2014.

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

 

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Table of Contents

2014

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

Commercial

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

 

                                                                   
    

Three Months Ended

June 30,

    

Six Months Ended

June 30,

 
  

 

 

 
     2015      2014      2015      2014    

 

 
(In millions)                            

Commercial auto

       $       $ 19       $       $ 39      

General liability

             32                 32      

Workers’ compensation

     24          39         23          50      

Property and other

     (16)            (24)         (13)     

 

 

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

       $ 16        $ 90       $ 11        $ 108      

 

 

Three Months

2015

In the aggregate, the unfavorable loss development of $16 million was driven by an extra contractual obligation loss and losses associated with premium development. The reserve development discussed below was largely offsetting.

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 catastrophe events and better than expected claim frequency of large claims in accident year 2014.

2014

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

Unfavorable development for general liability was primarily related to higher than expected severity in accident years 2009 through 2011. In addition, there was higher than expected severity in accident year 2013 related to Small Business.

Unfavorable development for workers’ compensation was primarily due to higher than expected severity related to Defense Base Act contractors in accident years 2012 and 2013.

Six Months

2015

In addition to the favorable property development noted in the three month discussion, there was additional favorable development for property related to better than expected loss emergence from 2014 catastrophe events.

2014

Unfavorable development for commercial auto was primarily related to increased claim frequency of large losses in accident years 2010 through 2013. Additionally, unfavorable development was recorded for increased claim frequency in accident years 2012 and 2013 and higher than expected severity in accident years 2010 and 2011.

 

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Unfavorable development for general liability was primarily related to higher than expected severity in accident years 2009 through 2011. In addition, there was higher than expected severity in accident year 2013 related to Small Business.

Unfavorable development for workers’ compensation was primarily due to higher than expected severity related to Defense Base Act contractors in accident years 2012 and 2013 and the recognition of losses related to favorable premium development in accident year 2013.

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

International

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

 

                                                                   
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
  

 

 

 
     2015      2014            2015      2014        

 

 
(In millions)                            

Medical professional liability

            $ 1      

Other professional liability

       $ (5)       $ (14)           $ (5)         (15)     

Liability

     (2)         (4)         (7)         (6)     

Property & marine

     (8)         (7)         (14)         1      

Other

                14          (6)     

Commutations

              10      

 

 

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

       $ (8)       $ (25)           $ (12)       $ (15)     

 

 

Three Months

2015

Favorable development in property and marine was due to better than expected emergence in accident years 2012 through 2014.

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

2014

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

Six Months

2015

Favorable development in property and marine was due to better than expected emergence in accident years 2012 through 2014.

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

 

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2014

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

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

Asbestos and Environmental Pollution Reserves

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

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

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

 

                                                                   
    

Three Months Ended

June 30

    

Six Months Ended

June 30

 
  

 

 

 
     2015      2014            2015      2014        

 

 
(In millions)                            

Net A&EP adverse development before consideration of LPT

       $ 150           $ 150        

Provision for uncollectible third party reinsurance on A&EP

           

 

 

Additional amounts ceded under LPT

     150             150        

Retroactive reinsurance benefit recognized

     (66)       $ (1)         (71)       $ (5)     

 

 

Pretax impact of unrecognized deferred retroactive reinsurance benefit

       $ 84        $ (1)       $ 79         $ (5)     

 

 

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

As of June 30, 2015 and December 31, 2014, the cumulative amounts ceded under the LPT were $2.6 billion and $2.5 billion. The unrecognized deferred retroactive reinsurance benefit was $255 million and $176 million as of June 30, 2015 and December 31, 2014.

NICO established a collateral trust account as security for its obligations to CNA. The fair value of the collateral trust account was $3.1 billion and $3.4 billion at June 30, 2015 and December 31, 2014. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the full aggregate reinsurance limit as well as certain of NICO’s performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third party reinsurers related to CNA’s A&EP claims.

 

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6.  Debt

Diamond Offshore

In the second quarter of 2015, Diamond Offshore issued $375 million in commercial paper supported by its existing $1.5 billion revolving credit facility. As of June 30, 2015, the commercial paper notes had a weighted average interest rate of 0.5% and a weighted average remaining term of eight days.

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

Boardwalk Pipeline

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

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

In May of 2015, Boardwalk Pipeline entered into an amended revolving credit agreement having aggregate lending commitments of $1.5 billion and a maturity date of May 2020. As of June 30, 2015, Boardwalk Pipeline had $400 million of loans outstanding under its revolving credit facility with a weighted-average interest rate on the borrowings of 1.4%.

 

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7.  Shareholders’ Equity

Accumulated other comprehensive income

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

 

   

OTTI

Gains
    (Losses)    

    Unrealized
Gains (Losses)
on Investments
    Discontinued
    Operations    
    Cash Flow
    Hedges    
    Pension
    Liability    
    Foreign
Currency
Translation
   

Total

Accumulated
Other
Comprehensive
Income (Loss)

 

 

 
(In millions)                                          

Balance, April 1, 2014

  $ 29                 $ 820             $ 21             $ (2)            $ (432)            $ 127                 $ 563        

Other comprehensive income before reclassifications, after tax of $(1), $(140), $(4), $(2), $0 and $0

    2               257               3               3                 42               307        

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $(6), $(2), $1, $27 and $0

      13               7               (3)              (53)                (36)       

 

 

Other comprehensive income (loss)

    2               270               10               -               (53)              42               271        

Amounts attributable to noncontrolling interests

    (1)              (28)              (1)              (1)              7               (3)              (27)       

 

 

Balance, June 30, 2014

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

 

 

Balance, April 1, 2015

  $ 31                 $ 944             $ -             $ (3)            $ (636)            $ (38)                $ 298        

Other comprehensive income (loss) before reclassifications, after tax of $2, $186, $0, $0, $(18) and $0

    (4)              (370)                  37               49               (288)       

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $(5), $0, $0, $(4) and $0

      7                 1               6                 14        

 

 

Other comprehensive income (loss)

    (4)              (363)              -               1               43               49               (274)       

Amounts attributable to noncontrolling interests

    1               38                 (1)              (5)              (4)              29        

 

 

Balance, June 30, 2015

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

 

 

 

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OTTI

Gains
    (Losses)    

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

 

 
(In millions)                                          

Balance, January 1, 2014

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

Transfer to net assets of discontinued operations

    (5)              (15)              20                     -          

Other comprehensive income before reclassifications, after tax of $(7), $(281), $(5), $(3), $0 and $0

    14               521               5               5                 36               581          

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $8, $(5), $1, $26 and $0

      (14)              10               (2)              (54)                (60)         

 

 

Other comprehensive income (loss)

    14               507               15               3               (54)              36               521          

Amounts attributable to noncontrolling interests

    (2)              (52)              (2)              (2)              8               (3)              (53)         

 

 

Balance, June 30, 2014

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

 

 

Balance, January 1, 2015

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

Other comprehensive income (loss) before reclassifications, after tax of $2, $124, $0, $1, $(18) and $0

    (5)              (251)                (2)              37               (47)              (268)         

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $(5), $0, $(2), $(7) and $0

      (2)                6               10                 14          

 

 

Other comprehensive income (loss)

    (5)              (253)              -               4               47               (47)              (254)         

Issuance of equity securities by subsidiary

            1                 1          

Amounts attributable to noncontrolling interests

    1               26                 (1)              (5)              5               26          

 

 

Balance, June 30, 2015

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

 

 

Amounts reclassified from AOCI shown above are reported in Net income as follows:

 

Major Category of AOCI    Affected Line Item

 

OTTI gains (losses)    Investment gains (losses)
Unrealized gains (losses) on investments    Investment gains (losses)
Unrealized gains (losses) and cash flow hedges related to discontinued operations    Discontinued operations, net
Cash flow hedges    Other revenues and Contract drilling expenses
Pension liability    Other operating expenses

 

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Table of Contents

Subsidiary Equity Transactions

Loews purchased 0.9 million shares of Diamond Offshore common stock at an aggregate cost of $24 million during the six months ended June 30, 2015. The Company’s percentage ownership interest in Diamond Offshore increased as a result of these transactions, from 52% to 53%. The Company’s carrying value exceeded the purchase price of the shares, resulting in an increase to Additional paid-in capital (“APIC”) of $3 million.

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

Treasury Stock

The Company repurchased 7.6 million and 4.5 million shares of Loews common stock at aggregate costs of $305 million and $195 million during the six months ended June 30, 2015 and 2014.

8.  Benefit Plans

Pension Plans - The Company has several non-contributory defined benefit plans for eligible employees. Benefits for certain plans are determined annually based on a specified percentage of annual earnings (based on the participant’s age or years of service) and a specified interest rate (which is established annually for all participants) applied to accrued balances. The benefits for another plan which covers salaried employees are based on formulas which include, among others, years of service and average pay. The Company’s funding policy is to make contributions in accordance with applicable governmental regulatory requirements.

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

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

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

The components of net periodic benefit cost are as follows:

 

     Pension Benefits  
  

 

 

 
         Three Months Ended    
June 30,
         Six Months Ended    
June 30,
 
  

 

 

 
     2015      2014      2015      2014  

 

 

(In millions)

           

Service cost

       $         4                    $         3                  $         8                $         8            

Interest cost

     32                    37                  64                  74            

Expected return on plan assets

     (49)                   (52)                 (97)                 (105)           

Amortization of unrecognized net loss

     12                    8                  23                  15            

Regulatory asset decrease

        1                     1            

 

 

Net periodic benefit cost

       $ (1)                   $ (3)                 $ (2)               $ (7)           

 

 

 

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Table of Contents
     Other Postretirement Benefits  
  

 

 

 
    

    Three Months Ended    

June 30,

    

    Six Months Ended    

June 30,

 
  

 

 

 
     2015      2014      2015      2014  

 

 

(In millions)

           

Interest cost

        $         1                  $         1                $         2            

Expected return on plan assets

       $         (1)                   (1)                 (2)                 (2)           

Amortization of unrecognized prior service benefit

     (3)                   (7)                 (5)                 (13)           

Amortization of unrecognized net loss

     1                       1               

Curtailment gain

        (86)                    (86)           

 

 

Net periodic benefit cost

       $ (3)                   $ (93)                 $ (5)               $ (99)           

 

 

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

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

9.  Business Segments

The Company’s reportable segments are primarily based on its individual operating subsidiaries. Each of the principal operating subsidiaries is headed by a chief executive officer who is responsible for the operation of its business and has the duties and authority commensurate with that position. Investment gains (losses) and the related income taxes, excluding those of CNA, are included in the Corporate and other segment.

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

Diamond Offshore owns and operates offshore drilling rigs that are chartered on a contract basis for fixed terms by companies engaged in exploration and production of hydrocarbons. Offshore rigs are mobile units that can be relocated based on market demand. Diamond Offshore’s fleet consists of 35 drilling rigs, including one newbuild rig which is under construction. On June 30, 2015, Diamond Offshore’s drilling rigs were located offshore seven countries in addition to the United States.

Boardwalk Pipeline is engaged in the interstate transportation and storage of natural gas and NGLs and gathering and processing of natural gas. This segment consists of interstate natural gas pipeline systems originating in the Gulf Coast region, Oklahoma and Arkansas, and extending north and east through the midwestern states of Tennessee, Kentucky, Illinois, Indiana and Ohio, natural gas storage facilities in four states and NGL pipelines and storage facilities in Louisiana, with approximately 14,625 miles of pipeline.

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

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

 

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Table of Contents

The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. In addition, CNA does not maintain a distinct investment portfolio for every insurance segment, and accordingly, allocation of assets to each segment is not performed. Therefore, a significant portion of net investment income and investment gains (losses) are allocated based on each segment’s carried insurance reserves, as adjusted.

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
  

 

 

 
     2015     2014     2015     2014      

 

 
(In millions)                         

Revenues (a):

        

CNA Financial:

        

Property and Casualty:

        

Specialty

       $ 904          $ 931      $ 1,821      $ 1,846        

Commercial

     883        936        1,778        1,882        

International

     220        244        426        503        

Other Non-Core

     320        329        654        672        

 

 

Total CNA Financial

     2,327        2,440        4,679        4,903        

Diamond Offshore

     632        701        1,259        1,411        

Boardwalk Pipeline

     299        295        629        652        

Loews Hotels

     167        112        306        217        

Corporate and other

     10        45        40        98        

 

 

Total

       $       3,435          $       3,593      $       6,913      $       7,281        

 

 

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

        

CNA Financial:

        

Property and Casualty:

        

Specialty

       $ 206          $ 246      $ 413      $ 449        

Commercial

     122        65        308        184        

International

     35        31        48        58        

Other Non-Core

     (198     23        (290     (25)       

 

 

Total CNA Financial

     165        365        479        666        

Diamond Offshore

     106        112        (181     280        

Boardwalk Pipeline (b)

     38        54        115        77        

Loews Hotels

     14        9        24        14        

Corporate and other

     (28     6        (37     23        

 

 

Total

       $ 295          $ 546      $ 400      $ 1,060        

 

 

Net income (loss) (a):

        

CNA Financial:

        

Property and Casualty:

        

Specialty

       $ 124          $ 146      $ 247      $ 269        

Commercial

     72        39        182        112        

International

     19        18        28        33        

Other Non-Core

     (91     32        (123     21        

 

 

Total CNA Financial

     124        235        334        435        

Diamond Offshore

     45        42        (81     111        

Boardwalk Pipeline (b)

     12        17        37        (1)       

Loews Hotels

     8        5        13        8        

Corporate and other

     (19     4        (24     15        

 

 

Income from continuing operations

     170        303        279        568        

Discontinued operations, net

       (187       (393)       

 

 

Total

       $ 170          $ 116      $ 279      $ 175        

 

 

 

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Table of Contents
(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
June 30,
     Six Months Ended June 30,  
  

 

 

 
             2015              2014      2015              2014          

 

 

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

           

CNA Financial:

           

Property and Casualty:

           

Specialty

      $ (5)       $       $ 6        

Commercial

       $         (5)                 5        

International

             (3)              

Other Non-Core

     (5)         (1)         (4)         17        

 

 

Total

       $     (2)       $         (14)       $       $ 28        

 

 

Net income (loss):

           

CNA Financial:

           

Property and Casualty:

           

Specialty

       $       $ (4)       $       $ 3        

Commercial

        (6)                 1        

International

                        1        

Other Non-Core

                        10        

 

 

Total

       $       $ (9)       $             11        $ 15        

 

 

 

(b)

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

10.  Legal Proceedings

The Company and its subsidiaries are parties to litigation arising in the ordinary course of business. The outcome of this litigation will not, in the opinion of management, materially affect the Company’s results of operations or equity.

11.  Commitments and Contingencies

CNA Financial

In the course of selling business entities and assets to third parties, CNA agreed to guarantee the performance of certain obligations of a previously owned subsidiary and to indemnify purchasers for losses arising out of breaches of representation and warranties with respect to the business entities or assets being sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such guarantee and indemnification agreements in effect for sales of business entities, assets and third party loans may include provisions that survive indefinitely. As of June 30, 2015, the aggregate amount related to quantifiable guarantees was $375 million and the aggregate amount related to indemnification agreements was $260 million. Should CNA be required to make payments under the guarantee, it would have the right to seek reimbursement in certain cases from an affiliate of 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 June 30, 2015, CNA had outstanding unlimited indemnifications in connection with the sales of certain of its business entities or assets that included tax liabilities arising prior to a purchaser’s ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. Certain provisions of the indemnification agreements survive indefinitely while others survive until the applicable statutes of limitation expire, or until the agreed upon contract terms expire.

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

 

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

Diamond Offshore

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

In July of 2014, Diamond Offshore was notified by Petróleo Brasileiro S.A., (“Petrobras”) that it is challenging assessments by Brazilian tax authorities of withholding taxes associated with the provision of drilling rigs for its operations in Brazil during the years 2008 and 2009. If Petrobras is ultimately assessed such withholding taxes, it will seek reimbursement from Diamond Offshore for the portion allocable to its drilling rigs. Diamond Offshore disputes any basis for Petrobras to obtain such reimbursement and has notified Petrobras of its position and intends to pursue all legal remedies available to defend any reimbursement claims against it vigorously. Diamond Offshore is currently unable to estimate the range of loss, if any, that it would incur if Petrobras is ultimately assessed such taxes and if it is determined that Petrobras is entitled to obtain reimbursement from Diamond Offshore. However, if Diamond Offshore’s position is not sustained, the amount of such reimbursement could have a material adverse effect on its financial condition and the Company’s results of operations and cash flows.

12.  Discontinued Operations

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

 

     Three Months Ended      Six Months Ended  
     June 30, 2014      June 30, 2014  

 

 
(In millions)              

Revenues:

     

Other revenue, primarily operating

     $           46                   $          101          

 

 

Total

     46                   101          

 

 

Expenses:

     

Other operating expenses

     

Impairment of natural gas and oil properties

        29          

Operating

     56                   111          

Interest

     3                   5          

 

 

Total

     59                   145          

 

 

Loss before income tax

     (13)                  (44)         

Income tax expense

     (12)                  (1)         

 

 

Results of discontinued operations, net of income tax

     (25)                  (45)         

Impairment loss, net of tax benefit of $92

     (167)                  (167)         

 

 

Loss from discontinued operations

     $       (192)                  $         (212)         

 

 

 

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

 

     Three Months Ended      Six Months Ended  
     June 30, 2014      June 30, 2014  

 

 

(In millions)

     

Revenues:

     

Net investment income

     $           39                   $           80          

Investment gains

     1                   2          

 

 

Total

     40                   82          

 

 

Expenses:

     

Insurance claims and policyholders’ benefits

     32                   63          

Other operating expenses

     1                   2          

 

 

Total

     33                   65          

 

 

Income before income tax

     7                   17          

Income tax expense

     (1)                  (4)         

 

 

Results of discontinued operations, net of income tax

     6                   13          

Impairment loss, net of tax benefit of $41

        (214)         

Amounts attributable to noncontrolling interests

     (1)                  20          

 

 

Income (loss) from discontinued operations

     $             5                   $        (181)         

 

 

13.  Consolidating Financial Information

The following schedules present the Company’s consolidating balance sheet information at June 30, 2015 and December 31, 2014, and consolidating statements of income information for the six months ended June 30, 2015 and 2014. These schedules present the individual subsidiaries of the Company and their contribution to the Consolidated Condensed Financial Statements. Amounts presented will not necessarily be the same as those in the individual financial statements of the Company’s subsidiaries due to adjustments for purchase accounting, income taxes and noncontrolling interests. In addition, many of the Company’s subsidiaries use a classified balance sheet which also leads to differences in amounts reported for certain line items.

The Corporate and other column primarily reflects the parent company’s investment in its subsidiaries, invested cash portfolio and corporate long term debt. The elimination adjustments are for intercompany assets and liabilities, interest and dividends, the parent company’s investment in capital stocks of subsidiaries, and various reclasses of debit or credit balances to the amounts in consolidation. Purchase accounting adjustments have been pushed down to the appropriate subsidiary.

 

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Loews Corporation

Consolidating Balance Sheet Information

 

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

 

 
(In millions)                                                 

Assets:

                    

Investments

   $     45,332       $ 102          $ 100       $ 5,514            $ 51,048        

Cash

     145         10       $ 20           11         63              249        

Receivables

     7,365         537         123           45         121         $ (94)             8,097        

Property, plant and equipment

     304         6,934         7,633           997         49              15,917        

Deferred income taxes

     283               2         146           (431)             -        

Goodwill

     116         20         237                    373        

Investments in capital stocks of subsidiaries

                 15,756           (15,756)             -        

Other assets

     835         268         324           261         10           12              1,710        

Deferred acquisition costs of insurance subsidiaries

     621                        621        

 

 

Total assets

   $ 55,001       $ 7,871       $ 8,337         $     1,416       $ 21,659         $ (16,269)           $     78,015        

 

 

Liabilities and Equity:

                    

Insurance reserves

   $ 36,368                      $ 36,368        

Payable to brokers

     196                $ 545              741        

Short term debt

     1       $ 625          $ 35         400              1,061        

Long term debt

     2,564         1,982       $ 3,493           471         1,281              9,791        

Deferred income taxes

     8         393         755           36          $ (419)             773        

Other liabilities

     3,660         591         425           66         301           (94)             4,949        

 

 

Total liabilities

     42,797         3,591         4,673           608         2,527           (513)             53,683        

 

 

Total shareholders’ equity

     10,944         2,285         1,571           806         19,132           (15,756)             18,982        

Noncontrolling interests

     1,260         1,995         2,093           2               5,350        

 

 

Total equity

     12,204         4,280         3,664           808         19,132           (15,756)             24,332        

 

 

Total liabilities and equity

   $ 55,001       $ 7,871       $ 8,337         $ 1,416       $ 21,659         $ (16,269)           $ 78,015        

 

 

 

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Loews Corporation

Consolidating Balance Sheet Information

 

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

 

 
(In millions)                                                 

Assets:

                    

Investments

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

Cash

     190         16       $         9         141             364       

Receivables

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

Property, plant and equipment

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

Deferred income taxes

     222               2         374          (598)          -       

Goodwill

     117         20         237                   374       

Investments in capital stocks of subsidiaries

                 15,974          (15,974)          -       

Other assets

     778         307         304          206                 14           1,616       

Deferred acquisition costs of insurance subsidiaries

     600                        600       

 

 

Total assets

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

 

 

Liabilities and Equity:

                    

Insurance reserves

   $ 36,380                      $ 36,380       

Payable to brokers

     117       $ 5             $ 551             673       

Short term debt

        250          $ 85               335       

Long term debt

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

Deferred income taxes

     11         514         732          36          $ (400)          893       

Other liabilities

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

 

 

Total liabilities

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

 

 

Total shareholders’ equity

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

Noncontrolling interests

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

 

 

Total equity

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

 

 

Total liabilities and equity

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

 

 

 

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Loews Corporation

Consolidating Statement of Income Information

 

Six Months Ended June 30, 2015    CNA
Financial
     Diamond
Offshore
     Boardwalk
Pipeline
     Loews
Hotels
     Corporate
and Other
     Eliminations      Total  

 

 
(In millions)                                                 

Revenues:

                    

Insurance premiums

   $       3,422                       $       3,422        

Net investment income

     1,058        $             $ 39              1,098        

Intercompany interest and dividends

                 650         $ (650)         -        

Investment gains

                            8        

Contract drilling revenues

              1,217                      1,217        

Other revenues

     191          41        $       629        $ 306          1              1,168        

 

 

Total

     4,679          1,259          629          306          690           (650)         6,913        

 

 

Expenses:

                    

Insurance claims and policyholders’ benefits

     2,808                         2,808        

Amortization of deferred acquisition costs

     617                         617        

Contract drilling expenses

        695                      695        

Other operating expenses

     697          696          423                  272          40              2,128        

Interest

     78          49          91          10          37              265        

 

 

Total

     4,200          1,440          514          282          77                   6,513        

 

 

Income (loss) before income tax

     479          (181)         115          24          613           (650)         400        

Income tax (expense) benefit

     (107)         22          (21)         (11)         13              (104)       

 

 

Net income (loss)

     372          (159)         94          13          626           (650)         296        

Amounts attributable to noncontrolling interests

     (38)         78          (57)                  (17)       

 

 

Net income (loss) attributable to Loews Corporation

   $ 334        $ (81)       $ 37        $ 13        $          626         $     (650)       $ 279        

 

 

 

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Loews Corporation

Consolidating Statement of Income Information

 

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

 

 
(In millions)                                                 

Revenues:

                    

Insurance premiums

   $         3,617                         $       3,617        

Net investment income

     1,076          $ 1                $ 97                 1,174        

Intercompany interest and dividends

                 512            $       (512)             -        

Investment gains

     28                           28        

Contract drilling revenues

        1,335                        1,335        

Other revenues

     182            75          $         652              $         217            1                 1,127        

 

 

Total

     4,903            1,411            652                217            610              (512)             7,281        

 

 

Expenses:

                    

Insurance claims and policyholders’ benefits

     2,887                           2,887        

Amortization of deferred acquisition costs

     664                           664        

Contract drilling expenses

        765                        765        

Other operating expenses

     596            329            494                200            38                 1,657        

Interest

     90            37            81                3            37                 248        

 

 

Total

     4,237            1,131            575                203            75              -              6,221        

 

 

Income before income tax

     666            280            77                14            535              (512)             1,060        

Income tax (expense) benefit

     (182)           (53)           1                (6)           (8)                (248)       

 

 

Income from continuing operations

     484            227            78                8            527              (512)             812        

Discontinued operations, net

     (201)                    (212)                (413)       

 

 

Net income

     283            227            78                8            315              (512)             399        

Amounts attributable to noncontrolling interests

     (29)           (116)           (79)                        (224)       

 

 

Net income (loss) attributable to Loews Corporation

   $ 254          $         111          $ (1)             $ 8          $         315            $ (512)           $ 175        

 

 

 

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

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with our Consolidated Condensed Financial Statements included in Item 1 of this Report, Risk Factors included in Part II, Item 1A of this Report, and the Consolidated Financial Statements, Risk Factors, and MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2014. This MD&A is comprised of the following sections:

 

          Page     
No.

Overview

   43

Consolidated Financial Results

   43

Discontinued Operations

   44

Parent Company Structure

   45

Critical Accounting Estimates

   45

Results of Operations by Business Segment

   45

CNA Financial

   46

Diamond Offshore

   51

Boardwalk Pipeline

   57

Loews Hotels

   60

Corporate and Other

   60

Discontinued Operations

   61

Liquidity and Capital Resources

   61

CNA Financial

   61

Diamond Offshore

   62

Boardwalk Pipeline

   63

Loews Hotels

   63

Corporate and Other

   64

Investments

   64

Accounting Standards Update

   68

Forward-Looking Statements

   68

OVERVIEW

We are a holding company. Our subsidiaries are engaged in the following lines of business:

 

   

commercial property and casualty insurance (CNA Financial Corporation (“CNA”), a 90% owned subsidiary);

 

   

operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (“Diamond Offshore”), a 53% owned subsidiary);

 

   

transportation and storage of natural gas and natural gas liquids and gathering and processing of natural gas (Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”), a 51% owned subsidiary); and

 

   

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

See below for a discussion of discontinued operations.

Unless the context otherwise requires, references in this Report to “Loews Corporation,” “the Company,” “Parent Company,” “we,” “our,” “us” or like terms refer to the business of Loews Corporation excluding its subsidiaries.

Consolidated Financial Results

Net income for the three months ended June 30, 2015 was $170 million, or $0.46 per share, compared to $116 million, or $0.30 per share, in the prior year period. Net income for the six months ended June 30, 2015 was $279 million, or $0.75 per share, compared to $175 million, or $0.45 per share, in the prior year period. Net income for the three and six month periods in 2014 included losses from discontinued operations of $187 million and $393 million reflecting the disposition by Loews of HighMount Exploration & Production, LLC (“HighMount”) and by CNA of its annuity and pension deposit business.

 

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Income from continuing operations for the three months ended June 30, 2015 was $170 million, or $0.46 per share, compared to $303 million, or $0.79 per share, in the 2014 second quarter. Income from continuing operations decreased primarily due to lower earnings at CNA and less favorable performance of the parent company trading portfolio as a result of lower returns on equities and limited partnership investments.

CNA’s earnings decreased primarily due to an $84 million ($49 million after tax and noncontrolling interests) charge related to a retroactive reinsurance agreement to cede its legacy asbestos and environmental pollution liabilities (“LPT”). Under retroactive reinsurance accounting, amounts ceded through the LPT in excess of the consideration paid result in a deferred benefit that is recognized in income in proportion to paid recoveries over future periods. The year-over-year earnings comparison was also impacted by a gain of $86 million ($50 million after tax and noncontrolling interests) in 2014 from a postretirement plan curtailment. The decline in the second quarter of 2015 as compared to the prior year was partially offset by an improvement in net prior year development in CNA’s commercial business segment.

Diamond Offshore’s earnings were relatively flat as lower rig utilization and increased depreciation and interest expense were offset by significantly reduced contract drilling expenses.

Boardwalk Pipeline’s earnings decreased primarily as a result of lower parking and lending revenue and increased depreciation and interest costs. Boardwalk Pipeline recorded $12 million of higher transportation revenue due to business interruption insurance proceeds received and new rates taking effect as a result of the Gulf South rate case.

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

Discontinued operations in 2014 included an impairment charge related to the divested HighMount business.

Income from continuing operations for the six months ended June 30, 2015 was $279 million, or $0.75 per share, compared to $568 million, or $1.47 per share, in the prior year period. Income from continuing operations decreased primarily due to lower earnings at CNA and Diamond Offshore.

CNA’s earnings decreased primarily due to the reasons discussed above.

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

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

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

Discontinued operations in 2014 included impairment charges related to the sale of both CNA’s annuity and pension deposit business and HighMount.

Book value per share increased to $51.91 at June 30, 2015 from $51.70 at December 31, 2014 and $51.85 at June 30, 2014. Book value per share excluding accumulated other comprehensive income (“AOCI”) increased to $51.77 at June 30, 2015 from $50.95 at December 31, 2014 and $49.74 at June 30, 2014.

Discontinued Operations

On August 1, 2014, CNA completed the sale of Continental Assurance Company (“CAC”), its former life insurance subsidiary and on September 30, 2014, the Company sold HighMount, its natural gas and oil exploration and production subsidiary. The results of these sold businesses are reported as discontinued operations in the Consolidated Condensed Statements of Income.

 

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Parent Company Structure

We are a holding company and derive substantially all of our cash flow from our subsidiaries. We rely upon our invested cash balances and distributions from our subsidiaries to generate the funds necessary to meet our obligations and to declare and pay any dividends to our shareholders. The ability of our subsidiaries to pay dividends is subject to, among other things, the availability of sufficient earnings and funds in such subsidiaries, applicable state laws, including in the case of the insurance subsidiaries of CNA, laws and rules governing the payment of dividends by regulated insurance companies and compliance with covenants in their respective loan agreements. Claims of creditors of our subsidiaries will generally have priority as to the assets of such subsidiaries over our claims and those of our creditors and shareholders.

CRITICAL ACCOUNTING ESTIMATES

The preparation of the consolidated condensed financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. Actual results could differ from those estimates.

The consolidated condensed financial statements and accompanying notes have been prepared in accordance with GAAP, applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the consolidated condensed financial statements. In general, our estimates are based on historical experience, evaluation of current trends, information from third party professionals and various other assumptions that we believe are reasonable under the known facts and circumstances.

We consider the accounting policies discussed below to be critical to an understanding of our consolidated condensed financial statements as their application places the most significant demands on our judgment. Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from estimates, which may have a material adverse impact on our results of operations or equity.

 

   

Insurance Reserves

   

Reinsurance and Other Receivables

   

Valuation of Investments and Impairment of Securities

   

Long Term Care Policies

   

Pension and Postretirement Benefit Obligations

   

Impairment of Long-Lived Assets

   

Goodwill

   

Income Taxes

Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from estimates, which may have a material adverse impact on our results of operations or equity. See the Critical Accounting Estimates section and the Results of Operations by Business Segment – CNA Financial – Reserves – Estimates and Uncertainties section of our MD&A included under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2014 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.

 

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CNA Financial

The following table summarizes the results of operations for CNA for the three and six months ended June 30, 2015 and 2014 as presented in Note 13 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report:

 

         Three Months Ended    
June 30,
         Six Months Ended    
June 30,
 
  

 

 

 
           2015            2014              2015         2014      

 

 
(In millions)                           

Revenues:

          

Insurance premiums

     $     1,735              $     1,811          $ 3,422      $ 3,617        

Net investment income

     500                550            1,058        1,076        

Investment gains (losses)

     (2)               (14)           8        28        

Other revenues

     94                93            191        182        

 

 

Total

     2,327                2,440            4,679        4,903        

 

 

Expenses:

          

Insurance claims and policyholders’ benefits

     1,469                1,441            2,808        2,887        

Amortization of deferred acquisition costs

     314                335            617        664        

Other operating expenses

     340                253            697        596        

Interest

     39                46            78        90        

 

 

Total

     2,162                2,075            4,200        4,237        

 

 

Income before income tax

     165                365            479        666        

Income tax expense

     (27)               (103)           (107     (182)       

 

 

Income from continuing operations

     138                262            372        484        

Discontinued operations, net

        6              (201)       

 

 

Net income

     138                268            372        283        

Amounts attributable to noncontrolling interests

     (14)               (28)           (38)        (29)       

 

 

Net income attributable to Loews Corporation

     $ 124              $ 240          $ 334      $ 254        

 

 

Three Months Ended June 30, 2015 Compared to 2014

Income from continuing operations decreased $124 million for the three months ended June 30, 2015 as compared with the same period in 2014. Results in 2015 were negatively impacted by a $49 million (after tax and noncontrolling interests) charge related to the application of retroactive reinsurance accounting to adverse reserve development ceded under the 2010 asbestos and environmental pollution (“A&EP”) loss portfolio transfer, as further discussed in Note 5 of the Notes to Consolidated Condensed Financial Statements included under Item 1. Results in 2014 benefited from a $50 million (after tax and noncontrolling interests) curtailment gain related to a change in postretirement benefits, as further discussed in Note 8 of the Notes to Consolidated Condensed Financial Statements included under Item 1. In addition, results in 2015 included lower net investment income and decreased results in the long term care business, partially offset by improved underwriting results. See the Investments section of this MD&A for further discussion of net realized investment results and net investment income. Further information on net prior year development is included in Note 5 of the Notes to Consolidated Condensed Financial Statements included under Item 1.

Six Months Ended June 30, 2015 Compared to 2014

Income from continuing operations decreased $112 million for the six months ended June 30, 2015 as compared with the same period in 2014, primarily due to the same reasons as discussed above in the three month comparison.

CNA Property and Casualty Insurance Operations

CNA’s property and casualty insurance operations consist of professional, financial, specialty property and casualty products and services and commercial insurance and risk management products.

In the evaluation of the results of the property and casualty businesses, CNA utilizes the loss ratio, the expense ratio, the dividend ratio and the combined ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders’ dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios.

 

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Table of Contents

The following tables summarize the results of CNA’s property and casualty operations for the three and six months ended June 30, 2015 and 2014:

 

Three Months Ended June 30, 2015    Specialty      Commercial      Internationa