Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

x

  

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

OR

 

¨

  

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From                          to                        

Commission File Number 1-6541

LOEWS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   13-2646102
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

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

(Address of principal executive offices) (Zip Code)

(212) 521-2000

(Registrant’s telephone number, including area code)

NOT APPLICABLE

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

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

 

  Yes        x          No      ¨

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

 

  Yes        x          No      ¨       Not Applicable      ¨  

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

 

Large accelerated filer

  x      Accelerated filer    ¨      Non-accelerated filer   ¨      Smaller reporting company   ¨

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

 

  Yes      ¨       No        x   

 

Class

     

Outstanding at October 21, 2011

Common stock, $0.01 par value     396,566,700 shares

 

 

 


Table of Contents

INDEX

 

     Page
No.
 

Part I.  Financial Information

  

Item 1.  Financial Statements (unaudited)

  

Consolidated Condensed Balance Sheets
September 30, 2011 and December 31, 2010

     3   

Consolidated Condensed Statements of Income
Three and nine months ended September  30, 2011 and 2010

     4   

Consolidated Condensed Statements of Comprehensive Income
Three and nine months ended September  30, 2011 and 2010

     5   

Consolidated Condensed Statements of Equity
Nine months ended September 30, 2011 and 2010

     6   

Consolidated Condensed Statements of Cash Flows
Nine months ended September 30, 2011 and 2010

     7   

Notes to Consolidated Condensed Financial Statements

     9   

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

     47   

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

     77   

Item 4.  Controls and Procedures

     77   

Part II.  Other Information

     78   

Item 1.  Legal Proceedings

     78   

Item 1A.  Risk Factors

     78   

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

     78   

Item 6.  Exhibits

     79   

 

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PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

     September 30,
2011
    December 31,
2010
 

 

 
(Dollar amounts in millions, except per share data)             

Assets:

    

Investments:

    

Fixed maturities, amortized cost of $37,144 and $36,677

   $ 39,680      $ 37,814   

Equity securities, cost of $935 and $979

     924        1,086   

Limited partnership investments

     2,953        2,814   

Other invested assets

     220        113   

Short term investments

     5,848        7,080   

 

 

Total investments

     49,625        48,907   

Cash

     128        120   

Receivables

     10,109        10,142   

Property, plant and equipment

     12,935        12,636   

Deferred income taxes

       289   

Goodwill

     856        856   

Other assets

     1,451        1,798   

Deferred acquisition costs of insurance subsidiaries

     783        1,079   

Separate account business

     418        450   

 

 

Total assets

   $ 76,305      $ 76,277   

 

 

Liabilities and Equity:

    

Insurance reserves:

    

Claim and claim adjustment expense

   $ 25,031      $ 25,496   

Future policy benefits

     9,258        8,718   

Unearned premiums

     3,386        3,203   

Policyholders’ funds

     176        173   

 

 

Total insurance reserves

     37,851        37,590   

Payable to brokers

     567        685   

Short term debt

     1,206        647   

Long term debt

     8,026        8,830   

Deferred income taxes

     802        562   

Other liabilities

     3,870        4,407   

Separate account business

     418        450   

 

 

Total liabilities

     52,740        53,171   

 

 

Preferred stock, $0.10 par value:

    

Authorized – 100,000,000 shares

    

Common stock, $0.01 par value:

    

Authorized – 1,800,000,000 shares

    

Issued – 415,156,538 and 414,930,507 shares

     4        4   

Additional paid-in capital

     3,658        3,667   

Retained earnings

     15,282        14,564   

Accumulated other comprehensive income

     735        230   

 

 
     19,679        18,465   

Less treasury stock, at cost (17,754,138 and 384,400 shares)

     (705     (15

 

 

Total shareholders’ equity

     18,974        18,450   

Noncontrolling interests

     4,591        4,656   

 

 

Total equity

     23,565        23,106   

 

 

Total liabilities and equity

   $ 76,305      $ 76,277   

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

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

 

 

 
     2011     2010     2011     2010  

 

 
(In millions, except per share data)                         

Revenues:

        

Insurance premiums

   $ 1,732      $ 1,645      $ 4,942      $ 4,868   

Net investment income

     333        654        1,513        1,797   

Investment gains (losses):

        

Other-than-temporary impairment losses

     (75     (41     (136     (189

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

     (2     (3     (44     28   

 

 

Net impairment losses recognized in earnings

     (77     (44     (180     (161

Other net investment gains

     50        106        195        255   

 

 

Total investment gains (losses)

     (27     62        15        94   

Contract drilling revenues

     861        749        2,520        2,405   

Other

     539        591        1,658        1,736   

 

 

Total

     3,438        3,701        10,648        10,900   

 

 

Expenses:

        

Insurance claims and policyholders’ benefits

     1,400        1,343        4,131        3,798   

Amortization of deferred acquisition costs

     356        351        1,051        1,038   

Contract drilling expenses

     392        351        1,142        1,009   

Other operating expenses (Note 5)

     725        1,271        2,167        2,714   

Interest

     126        127        406        384   

 

 

Total

     2,999        3,443        8,897        8,943   

 

 

Income before income tax

     439        258        1,751        1,957   

Income tax expense

     (124     (84     (464     (619

 

 

Income from continuing operations

     315        174        1,287        1,338   

Discontinued operations, net

       (22       (21

 

 

Net income

     315        152        1,287        1,317   

Amounts attributable to noncontrolling interests

     (153     (116     (491     (495

 

 

Net income attributable to Loews Corporation

   $ 162      $ 36      $ 796      $ 822   

 

 

Net income attributable to Loews Corporation:

        

Income from continuing operations

   $ 162      $ 56      $ 796      $ 841   

Discontinued operations, net

       (20       (19

 

 

Net income

   $ 162      $ 36      $ 796      $ 822   

 

 

Basic net income per share:

        

Income from continuing operations

   $ 0.41      $ 0.13      $ 1.96      $ 2.00   

Discontinued operations, net

       (0.04       (0.04

 

 

Net income

   $ 0.41      $ 0.09      $ 1.96      $ 1.96   

 

 

Diluted net income per share:

        

Income from continuing operations

   $ 0.40      $ 0.13      $ 1.95      $ 2.00   

Discounted operations, net

       (0.04       (0.04

 

 

Net income

   $ 0.40      $ 0.09      $ 1.95      $ 1.96   

 

 

Dividends per share

   $ 0.0625      $ 0.0625      $ 0.1875      $ 0.1875   

 

 

Weighted-average shares outstanding:

        

Shares of common stock

     401.01        417.67        407.20        419.67   

Dilutive potential shares of common stock

     0.72        0.80        0.85        0.80   

 

 

Total weighted-average shares outstanding assuming dilution

     401.73        418.47        408.05        420.47   

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

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

 

 

 
     2011     2010     2011     2010  

 

 
(In millions)                         

Net income

   $ 315      $ 152      $ 1,287      $ 1,317   

 

 

Other comprehensive income (loss)

        

Changes in:

        

Net unrealized gains on investments with other- than-temporary impairments

     (14     39        25        81   

Net other unrealized gains on investments

     219        720        542        1,400   

 

 

Total unrealized gains on available-for-sale investments

     205        759        567        1,481   

Unrealized gains (losses) on cash flow hedges

     8        15        (3     82   

Foreign currency

     (54     38        (23     44   

Pension liability

       (2     2        2   

 

 

Other comprehensive income

     159        810        543        1,609   

 

 

Comprehensive income

     474        962        1,830        2,926   

Amounts attributable to noncontrolling interests

     (158     (206     (547     (671

 

 

Total comprehensive income attributable to Loews Corporation

   $ 316      $ 756      $ 1,283      $ 2,255   

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF EQUITY

(Unaudited)

 

           Loews Corporation Shareholders        
    

 

 

   
                              Accumulated     Common        
                  Additional           Other     Stock        
           Common      Paid-in     Retained     Comprehensive     Held in     Noncontrolling  
     Total     Stock      Capital     Earnings     Income (Loss)     Treasury     Interests  

 

 
(In millions)                                            

Balance, January 1, 2010

   $ 21,085      $ 4       $ 3,637      $ 13,693      $ (419   $ (16   $ 4,186   

Net income

     1,317             822            495   

Other comprehensive income

     1,609               1,433          176   

Dividends paid

     (476          (79         (397

Issuance of equity securities by subsidiary

     279           83          1          195   

Purchase of Loews treasury stock

     (337              (337  

Issuance of Loews common stock

     5           5           

Stock-based compensation

     17           15              2   

Other

     —             18        (3     2          (17

 

 

Balance, September 30, 2010

   $ 23,499      $ 4       $ 3,758      $ 14,433      $ 1,017      $ (353   $ 4,640   

 

 

Balance, January 1, 2011

   $ 23,106      $ 4       $ 3,667      $ 14,564      $ 230      $ (15   $ 4,656   

Net income

     1,287             796            491   

Other comprehensive income

     543               487          56   

Dividends paid

     (373          (76         (297

Acquisition of CNA Surety noncontrolling interests

     (475        (54       17          (438

Issuance of equity securities by subsidiary

     152           28          1          123   

Purchase of Loews treasury stock

     (690              (690  

Issuance of Loews common stock

     4           4           

Stock-based compensation

     16           14              2   

Other

     (5        (1     (2         (2

 

 

Balance, September 30, 2011

   $ 23,565      $ 4       $ 3,658      $ 15,282      $ 735      $ (705   $ 4,591   

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Nine Months Ended September 30    2011     2010  

 

 
(In millions)             

Operating Activities:

    

Net income

   $ 1,287      $ 1,317   

Adjustments to reconcile net income to net cash provided by operating activities, net

     977        640   

Changes in operating assets and liabilities, net:

    

Reinsurance receivables

     405        (545

Other receivables

     (181     (38

Deferred acquisition costs

     (28     12   

Insurance reserves

     (5     (563

Other liabilities

     (349     28   

Trading securities

     (231     243   

Other, net

     149        (110

 

 

Net cash flow operating activities – continuing operations

     2,024        984   

Net cash flow operating activities – discontinued operations

       (89

 

 

Net cash flow operating activities – total

     2,024        895   

 

 

Investing Activities:

    

Purchases of fixed maturities

     (8,854     (12,981

Proceeds from sales of fixed maturities

     5,912        9,263   

Proceeds from maturities of fixed maturities

     2,434        2,891   

Purchases of equity securities

     (51     (92

Proceeds from sales of equity securities

     171        215   

Purchases of property, plant and equipment

     (502     (670

Deposits for construction of offshore drilling equipment

     (478  

Sales of property, plant and equipment

     28        789   

Change in short term investments

     1,295        629   

Change in other investments

     (314     (552

Other, net

     6        7   

 

 

Net cash flow investing activities – continuing operations

     (353     (501

Net cash flow investing activities – discontinued operations

       75   

 

 

Net cash flow investing activities – total

     (353     (426

 

 

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - (Continued)

(Unaudited)

 

Nine Months Ended September 30    2011     2010      

 

 
(In millions)             

Financing Activities:

    

Dividends paid

   $ (76   $ (79

Dividends paid to noncontrolling interests

     (297     (397

Acquisition of CNA Surety noncontrolling interests

     (475  

Purchases of treasury shares

     (700     (351

Issuance of common stock

     4        5   

Proceeds from sale of subsidiary stock

     172        337   

Principal payments on debt

     (1,630     (659

Issuance of debt

     1,351        645   

Other, net

     (11     (28

 

 

Net cash flow financing activities – continuing operations

     (1,662     (527

Net cash flow financing activities – discontinued operations

    

 

 

Net cash flow financing activities – total

     (1,662     (527

 

 

Effect of foreign exchange rate on cash

     (1  

 

 

Net change in cash

     8        (58

Net cash transactions:

    

From continuing operations to discontinued operations

       (14

To discontinued operations from continuing operations

       14   

Cash, beginning of period

     120        190   

 

 

Cash, end of period

   $ 128      $ 132   

 

 

Cash, end of period:

    

Continuing operations

   $ 128      $ 132   

Discontinued operations

    

 

 

Total

   $ 128      $ 132   

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

Loews Corporation is a holding company. Its subsidiaries are engaged in the following lines of business: commercial property and casualty insurance (CNA Financial Corporation (“CNA”), a 90% owned subsidiary); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (“Diamond Offshore”), a 50.4% owned subsidiary); exploration, production and marketing of natural gas and natural gas liquids (HighMount Exploration & Production LLC (“HighMount”), a wholly owned subsidiary); the operation of interstate natural gas pipeline systems (Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”), a 64% owned subsidiary); and the operation of hotels (Loews Hotels Holding Corporation (“Loews Hotels”), a wholly owned subsidiary). In the second quarter of 2011 Boardwalk Pipeline sold 6 million common units through a public offering for $170 million, reducing the Company’s ownership interest from 66% to 64%. 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) – Loews” as used herein means Net income (loss) attributable to Loews Corporation.

In the opinion of management, the accompanying unaudited Consolidated Condensed Financial Statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 2011 and December 31, 2010 and the results of operations and comprehensive income for the three and nine months ended September 30, 2011 and 2010 and changes in shareholders’ equity and cash flows for the nine months ended September 30, 2011 and 2010.

Net income for the third quarter and first nine months of each of the years is not necessarily indicative of net income for that entire year.

Reference is made to the Notes to Consolidated Financial Statements in the 2010 Annual Report on Form 10-K which should be read in conjunction with these Consolidated Condensed Financial Statements.

The Company presents basic and diluted earnings per share on the Consolidated Condensed Statements of Income. Basic earnings 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 earnings 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 3.2 million, 2.6 million, 2.1 million and 2.6 million shares were not included in the diluted weighted average shares amount for the three and nine months ended September 30, 2011 and 2010 due to the exercise price being greater than the average stock price.

First Insurance Company of Hawaii – CNA owns 50% of the common stock of First Insurance Company of Hawaii (“FICOH”). On August 11, 2011, CNA announced the sale of its noncontrolling interest in FICOH to Tokio Marine & Nichido Fire Insurance Co., Ltd., the other 50% shareholder. The sale, which is subject to regulatory approval, is anticipated to close in the fourth quarter of 2011 and is not expected to have a material impact on the Company’s results of operations. CNA previously anticipated recovering the undistributed earnings of FICOH at a dividend tax rate. As a result of the pending sale, CNA has increased income tax expense by $22 million for the three and nine months ended September 30, 2011 to reflect the statutory tax rate.

CNA Surety Corporation – On June 10, 2011, CNA completed its previously announced acquisition of the noncontrolling interests of CNA Surety Corporation (“CNA Surety”). Previously CNA owned approximately 61% of the outstanding publicly traded common stock of CNA Surety. CNA Surety is now a wholly owned subsidiary of CNA, and, effective after the close of the stock market on June 10, 2011, trading in CNA Surety common stock ceased. The aggregate purchase price was approximately $475 million, based on the offer price of $26.55 per share and inclusive of the retirement of CNA Surety employee stock options. The amount paid to acquire the common shares of CNA Surety in excess of the closing date noncontrolling interests included in the Company’s equity of $438 million was reflected as an adjustment to Additional paid-in capital of $54 million. In addition, Accumulated other comprehensive income increased by $17 million related to the portion of net unrealized gains previously

 

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allocated to the noncontrolling shareholders. Net income attributable to the noncontrolling interests for the nine months ended September 30, 2011 and the three and nine months ended September 30, 2010 was not significant.

New accounting standards not yet adopted – In October 2010, the FASB issued updated accounting guidance which limits the capitalization of costs incurred to acquire or renew insurance contracts to those that are incremental direct costs of successful contract acquisitions. The updated accounting guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011 with prospective or retrospective application allowed. The Company intends to adopt this updated accounting guidance retrospectively and is currently assessing the impact it will have on its financial condition and results of operations. The Company preliminarily estimates that amounts capitalized under the current accounting guidance as of September 30, 2011 would be approximately $75 million to $130 million less under the updated guidance. Any reduction of capitalized costs will also necessitate a change in related deferred tax balances.

2. Investments

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

 

 

 
     2011     2010     2011     2010  

 

 
(In millions)                         

Net investment income consists of:

        

Fixed maturity securities

   $ 494      $ 511      $ 1,505      $ 1,540   

Short term investments

     4        4        11        18   

Limited partnerships

     (87     91        69        178   

Equity securities

     4        7        16        26   

Income (loss) from trading portfolio (a)

     (70     52        (55     68   

Other

     3        3        12        8   

 

 

Total investment income

     348        668        1,558        1,838   

Investment expenses

     (15     (14     (45     (41

 

 

Net investment income

   $ 333      $ 654      $ 1,513      $ 1,797   

 

 

(a)     Includes net unrealized gains/(losses) related to changes in fair value on trading securities still held of $(63), $55, $(86) and $52 for the three and nine months ended September 30, 2011 and 2010.

        

 

Investment gains (losses) are as follows:

        

Fixed maturity securities

   $ (29   $ 76      $ 11      $ 169   

Equity securities

     (1     (17     (3     (42

Derivative instruments

     1        (1       (32

Short term investments

       1        3        5   

Other

     2        3        4        (6

 

 

Investment gains (losses) (a)

   $ (27   $ 62      $ 15      $ 94   

 

 

(a)     Includes gross realized gains of $57, $124, $240 and $359 and gross realized losses of $87, $65, $232 and $232 on available-for-sale securities for the three and nine months ended September 30, 2011 and 2010.

        

 

 

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
      2011      2010      2011      2010  
(In millions)                            

Fixed maturity securities available-for-sale:

           

Corporate and other bonds

   $ 49       $ 17       $ 73       $ 59   

States, municipalities and political subdivisions

              20   

Asset-backed:

           

Residential mortgage-backed

     21         18         95         55   

Commercial mortgage-backed

              2   

Other asset-backed

     4            4         2   

 

 

Total fixed maturity securities available-for-sale

     74         35         172         138   

 

 

Equity securities available-for-sale:

           

Common stock

     3         5         7         10   

Preferred stock

        4         1         13   

 

 

Total equity securities available-for-sale

     3         9         8         23   

 

 

Net OTTI losses recognized in earnings

   $ 77       $ 44       $ 180       $ 161   

 

 

A security is impaired if the fair value of the security is less than its cost adjusted for accretion, amortization and previously recorded OTTI losses, otherwise defined as an unrealized loss. When a security is impaired, the impairment is evaluated to determine whether it is temporary or other-than-temporary.

Significant judgment is required in the determination of whether an OTTI loss has occurred for a security. CNA follows a consistent and systematic process for determining and recording an OTTI loss. CNA has established a committee responsible for the OTTI process. This committee, referred to as the Impairment Committee, is made up of three officers appointed by CNA’s Chief Financial Officer. The Impairment Committee is responsible for evaluating all securities in an unrealized loss position on at least a quarterly basis.

The Impairment Committee’s assessment of whether an OTTI loss has occurred incorporates both quantitative and qualitative information. Fixed maturity securities that CNA intends to sell, or it more likely than not will be required to sell before recovery of amortized cost, are considered to be other-than-temporarily impaired and the entire difference between the amortized cost basis and fair value of the security is recognized as an OTTI loss in earnings. The remaining fixed maturity securities in an unrealized loss position are evaluated to determine if a credit loss exists. The factors considered by the Impairment Committee include: (i) the financial condition and near term prospects of the issuer, (ii) whether the debtor is current on interest and principal payments, (iii) credit ratings of the securities and (iv) general market conditions and industry or sector specific outlook. CNA also considers results and analysis of cash flow modeling for asset-backed securities, and when appropriate, other fixed maturity securities. The focus of the analysis for asset-backed securities is on assessing the sufficiency and quality of underlying collateral and timing of cash flows based on scenario tests. If the present value of the modeled expected cash flows equals or exceeds the amortized cost of a security, no credit loss is judged to exist and the asset-backed security is deemed to be temporarily impaired. If the present value of the expected cash flows is less than amortized cost, the security is judged to be other-than-temporarily impaired for credit reasons and that shortfall, referred to as the credit component, is recognized as an OTTI loss in earnings. The difference between the adjusted amortized cost basis and fair value, referred to as the non-credit component, is recognized as OTTI in Other comprehensive income. In subsequent reporting periods, a change in intent to sell or further credit impairment on a security whose fair value has not deteriorated will cause the non-credit component originally recorded as OTTI in Other comprehensive income to be recognized as an OTTI loss in earnings.

CNA performs the discounted cash flow analysis using stressed scenarios to determine future expectations regarding recoverability. For asset-backed securities, significant assumptions enter into these cash flow projections

 

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including delinquency rates, probable risk of default, loss severity upon a default, over collateralization and interest coverage triggers and credit support from lower level tranches.

CNA applies the same impairment model as described above for the majority of non-redeemable preferred stock securities on the basis that these securities possess characteristics similar to debt securities and that the issuers maintain their ability to pay dividends. For all other equity securities, in determining whether the security is other-than-temporarily impaired, the Impairment Committee considers a number of factors including, but not limited to: (i) the length of time and the extent to which the fair value has been less than amortized cost, (ii) the financial condition and near term prospects of the issuer, (iii) the intent and ability of CNA to retain its investment for a period of time sufficient to allow for an anticipated recovery in value and (iv) general market conditions and industry or sector specific outlook.

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

 

September 30, 2011    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

   $ 19,141       $ 1,918       $ 160       $ 20,899      

States, municipalities and political subdivisions

     8,834         853         150         9,537      

Asset-backed:

              

Residential mortgage-backed

     5,812         199         161         5,850       $ 82   

Commercial mortgage-backed

     1,255         55         61         1,249         (8

Other asset-backed

     1,035         15         14         1,036      

 

 

Total asset-backed

     8,102         269         236         8,135         74   

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

     221         16            237      

Foreign government

     557         25            582      

Redeemable preferred stock

     49         8            57      

 

 

Fixed maturities available- for-sale

     36,904         3,089         546         39,447         74   

Fixed maturities, trading

     240            7         233      

 

 

Total fixed maturities

     37,144         3,089         553         39,680         74   

 

 

Equity securities:

              

Common stock

     103         19         2         120      

Preferred stock

     213         2         8         207      

 

 

Equity securities available-for-sale

     316         21         10         327         —     

Equity securities, trading

     619         64         86         597      

 

 

Total equity securities

     935         85         96         924         —     

 

 

Total

   $ 38,079       $ 3,174       $ 649       $ 40,604       $ 74   

 

 

 

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December 31, 2010    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

   $ 19,503       $ 1,603       $ 70       $ 21,036      

States, municipalities and political subdivisions

     8,157         142         410         7,889      

Asset-backed:

              

Residential mortgage-backed

     6,255         101         265         6,091       $ 114   

Commercial mortgage-backed

     994         40         41         993         (2

Other asset-backed

     753         18         8         763      

 

 

Total asset-backed

     8,002         159         314         7,847         112   

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

     122         16         1         137      

Foreign government

     602         18            620      

Redeemable preferred stock

     47         7            54      

 

 

Fixed maturities available-for-sale

     36,433         1,945         795         37,583         112   

Fixed maturities, trading

     244            13         231      

 

 

Total fixed maturities

     36,677         1,945         808         37,814         112   

 

 

Equity securities:

              

Common stock

     90         25            115      

Preferred stock

     332         2         9         325      

 

 

Equity securities available-for-sale

     422         27         9         440         —     

Equity securities, trading

     557         123         34         646      

 

 

Total equity securities

     979         150         43         1,086         —     

 

 

Total

   $ 37,656       $ 2,095       $ 851       $ 38,900       $ 112   

 

 

At September 30, 2011 and December 31, 2010, net unrealized gains on investments included in Accumulated other comprehensive income (“AOCI”) supporting certain products within CNA’s Life & Group Non-Core segment were reduced by $420 million and $135 million, net of tax and noncontrolling interests, resulting from a reduction of Deferred acquisition costs or an increase in Future policy benefit reserves.

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

 

     Less than 12 Months      Greater than 12 Months      Total  
  

 

 

 
September 30, 2011    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

   $ 3,143       $ 134       $ 142       $ 26       $ 3,285       $ 160   

States, municipalities and political subdivisions

     270         4         716         146         986         150   

Asset-backed:

                 

Residential mortgage-backed

     789         20         978         141         1,767         161   

Commercial mortgage-backed

     474         42         179         19         653         61   

Other asset-backed

     377         4         77         10         454         14   

 

 

Total asset-backed

     1,640         66         1,234         170         2,874         236   

 

 

Total fixed maturities available- for-sale

     5,053         204         2,092         342         7,145         546   

 

 

Equity securities available-for-sale:

                 

Common stock

     36         2               36         2   

Preferred stock

     129         7         19         1         148         8   

 

 

Total

   $ 5,218       $ 213       $ 2,111       $ 343       $ 7,329       $ 556   

 

 

 

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Table of Contents
     Less than 12 Months      Greater than 12 Months      Total  
  

 

 

 
December 31, 2010    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

   $ 1,719       $ 34       $ 405       $ 36       $ 2,124       $ 70   

States, municipalities and political subdivisions

     3,339         164         745         246         4,084         410   

Asset-backed:

                 

Residential mortgage-backed

     1,800         52         1,801         213         3,601         265   

Commercial mortgage-backed

     164         3         333         38         497         41   

Other asset-backed

     122         1         60         7         182         8   

 

 

Total asset-backed

     2,086         56         2,194         258         4,280         314   

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

     8         1               8         1   

 

 

Total fixed maturities available-for-sale

     7,152         255         3,344         540         10,496         795   

Equity securities available-for-sale:

                 

Preferred stock

     175         5         70         4         245         9   

 

 

Total

   $ 7,327       $ 260       $ 3,414       $ 544       $ 10,741       $ 804   

 

 

The amount of pretax net unrealized gains (losses) on available-for-sale securities reclassified out of AOCI into earnings was $(29) million, $62 million, $12 million and $133 million for the three and nine months ended September 30, 2011 and 2010.

The following table summarizes the activity for the three and nine months ended September 30, 2011 and 2010 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at September 30, 2011 and 2010 for which a portion of an OTTI loss was recognized in Other comprehensive income.

 

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

 

 

 
     2011     2010     2011     2010  

 

 
(In millions)                         

Beginning balance of credit losses on fixed maturity securities

   $ 82      $ 171      $ 141      $ 164   

Additional credit losses for securities for which an OTTI loss was previously recognized

     11        4        29        26   

Credit losses for securities for which an OTTI loss was not previously recognized

     10        1        11        9   

Reductions for securities sold during the period

     (4     (27     (50     (50

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

       (8     (32     (8

 

 

Ending balance of credit losses on fixed maturity securities

   $ 99      $ 141      $ 99      $ 141   

 

 

Based on current facts and circumstances, the Company has determined that no additional OTTI losses related to the securities in an unrealized loss position presented in the table above are required to be recorded. A discussion of some of the factors reviewed in making that determination is presented below.

The classification between investment grade and non-investment grade presented in the discussion below is based on a ratings methodology that takes into account ratings from two major providers, Standard & Poor’s and Moody’s Investors Service, Inc. in that order of preference. If a security is not rated by these providers, the Company formulates an internal rating. For securities with credit support from third party guarantees, the rating reflects the greater of the underlying rating of the issuer or the insured rating.

 

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Corporate and Other Bonds

The unrealized losses on the Company’s investments in this category primarily relate to non-investment grade bonds and bonds within the financial industry sector. The financial industry sector holdings in this category include bonds with an aggregate fair value of $1,702 million and an aggregate amortized cost of $1,793 million as of September 30, 2011.

The corporate and other bonds in a gross unrealized loss position by ratings distribution are as follows:

 

September 30, 2011    Amortized
Cost
     Estimated
Fair Value
     Gross
Unrealized
Losses
 

 

 
(In millions)                     

AAA

   $ 58       $ 57       $ 1   

AA

     202         196         6   

A

     1,018         975         43   

BBB

     1,280         1,219         61   

Non-investment grade

     887         838         49   

 

 

Total

   $ 3,445       $ 3,285       $ 160   

 

 

The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost. Additionally, the Company believes that the unrealized losses on these securities were not due to factors regarding the ultimate collection of principal and interest; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at September 30, 2011.

States, Municipalities and Political Subdivisions

The unrealized losses on the Company’s investments in this category are primarily due to market conditions for zero coupon bonds, particularly for those with maturity dates that exceed 20 years. Yields for these securities continue to be higher than historical norms relative to after-tax returns on similar fixed income securities.

The states, municipalities and political subdivisions securities in a gross unrealized loss position by ratings distribution are as follows:

 

September 30, 2011    Amortized
Cost
     Estimated
Fair Value
     Gross
Unrealized
Losses
 

 

 
(In millions)                     

AAA

   $ 198       $ 190       $ 8   

AA

     485         378         107   

A

     370         340         30   

BBB

     67         63         4   

Non-investment grade

     16         15         1   

 

 

Total

   $ 1,136       $ 986       $ 150   

 

 

The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost. Additionally, the Company believes that the unrealized losses on these securities were not due to factors regarding the ultimate collection of principal and interest; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at September 30, 2011.

 

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Table of Contents

Asset-Backed Securities

The fair value of total asset-backed holdings at September 30, 2011 was $8,135 million which was comprised of 2,055 different securities. The fair value of these securities tends to be influenced by the characteristics and projected cash flows of the underlying collateral rather than the credit of the issuer. Each security has deal-specific tranche structures, credit support that results from the unique deal structure, particular collateral characteristics and other distinct security terms. As a result, seemingly common factors such as delinquency rates and collateral performance affect each security differently. Of these securities, 132 had underlying collateral that was either considered sub-prime or Alt-A in nature. The exposure to sub-prime residential mortgage collateral and Alternative A residential mortgages that have lower than normal standards of loan documentation collateral is measured by the original deal structure.

Residential mortgage-backed securities included 149 non-agency structured securities that had at least one trade lot in a gross unrealized loss position. The aggregate severity of the gross unrealized loss for residential mortgage-backed securities was approximately 7.6% of amortized cost.

Commercial mortgage-backed securities included 66 securities that had at least one trade lot in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 8.6% of amortized cost. Other asset-backed securities included 46 securities that had at least one trade lot in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 3.1% of amortized cost.

The asset-backed securities in a gross unrealized loss position by ratings distribution are as follows:

 

September 30, 2011    Amortized
Cost
     Estimated
Fair Value
     Gross
Unrealized    
Losses
 

 

 
(In millions)                     

U.S. Government, Government Agencies and Government-Sponsored Enterprises

   $ 481       $ 465       $ 16       

AAA

     762         734         28       

AA

     441         415         26       

A

     213         203         10       

BBB

     316         278         38       

Non-investment grade

     897         779         118       

 

 

Total

   $ 3,110       $ 2,874       $ 236       

 

 

The Company believes the unrealized losses are primarily attributable to broader economic conditions, changes in interest rates, wider than historical bid/ask spreads and uncertainty with regard to the timing and amount of ultimate collateral realization, but are not indicative of the ultimate collectibility of the current carrying values of securities. The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at September 30, 2011.

 

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Table of Contents

Contractual Maturity

The following table summarizes available-for-sale fixed maturity securities by contractual maturity at September 30, 2011 and December 31, 2010. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid with or without call or prepayment penalties. Securities not due at a single date are allocated based on weighted average life.

 

      September 30, 2011      December 3 1, 2010  
      Amortized
Cost
     Estimated
Fair Value
     Amortized
Cost
     Estimated
Fair Value
 
(In millions)                            

Due in one year or less

   $ 1,658       $ 1,662       $ 1,515       $ 1,506   

Due after one year through five years

     12,947         13,407         11,198         11,653   

Due after five years through ten years

     8,447         8,941         10,034         10,437   

Due after ten years

     13,852         15,437         13,686         13,987   

 

 

Total

   $ 36,904       $ 39,447       $ 36,433       $ 37,583   

 

 

Limited Partnerships

The carrying value of limited partnerships as of September 30, 2011 and December 31, 2010 was $3.0 billion and $2.8 billion. Limited partnerships comprising 61.8% of the total carrying value were reported on a current basis through September 30, 2011 with no reporting lag, 25.0% were reported on a one month lag and the remainder were reported on more than a one month lag. As of September 30, 2011 and December 31, 2010, the Company had 86 and 84 active limited partnership investments. The number of limited partnerships held and the strategies employed provide diversification to the limited partnership portfolio and the overall invested asset portfolio.

Of the limited partnerships held, 84.7% and 87.4% at September 30, 2011 and December 31, 2010, employ hedge fund strategies that generate returns through investing in securities that are marketable while engaging in various management techniques primarily in public fixed income and equity markets. These hedge fund strategies include both long and short positions in fixed income, equity and derivative instruments. The hedge fund strategies may seek to generate gains from mispriced or undervalued securities, price differentials between securities, distressed investments, sector rotation, or various arbitrage disciplines. Within hedge fund strategies, approximately 43.1% were equity related, 36.7% pursued a multi-strategy approach, 14.9% were focused on distressed investments and 5.3% were fixed income related at September 30, 2011. Limited partnerships representing 11.0% and 9.1% at September 30, 2011 and December 31, 2010 were invested in private debt and equity. The remaining were invested in various other partnerships including real estate.

While the Company generally does not invest in highly leveraged partnerships, there are risks which may result in losses due to short-selling, derivatives or other speculative investment practices. The use of leverage increases volatility generated by the underlying investment strategies.

The Company’s limited partnership investments contain withdrawal provisions that generally limit liquidity for a period of thirty days up to one year and in some cases do not permit withdrawals until the termination of the partnership. Typically, withdrawals require advanced written notice of up to 90 days.

Investment Commitments

As of September 30, 2011, the Company had committed approximately $157 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 and sales. The purchase and sale of these investments are recorded on the date that the legal agreements are finalized and cash settlements are made. As of September 30, 2011, the Company had commitments to purchase $110 million and sell $51 million of such investments.

 

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Table of Contents

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.

The Company attempts to establish fair value as an exit price in an orderly transaction consistent with normal settlement market conventions. The Company is responsible for the valuation process and seeks to obtain quoted market prices for all securities. When quoted market prices in active markets are not available, the Company uses a number of methodologies to establish fair value estimates, including discounted cash flow models, prices from recently executed transactions of similar securities or broker/dealer quotes, utilizing market observable information to the extent possible. In conjunction with modeling activities, the Company may use external data as inputs. The modeled inputs are consistent with observable market information, when available, or with the Company’s assumptions as to what market participants would use to value the securities. The Company also uses pricing services as a significant source of data. The Company monitors all the pricing inputs to determine if the markets from which the data is gathered are active. As further validation of the Company’s valuation process, the Company samples past fair value estimates and compares the valuations to actual transactions executed in the market on similar dates.

 

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Table of Contents

The fair values of CNA’s life settlement contracts are included in Other assets. 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 summarized in the tables below:

 

September 30, 2011    Level 1     Level 2     Level 3     Total  
(In millions)                         

Fixed maturity securities:

        

Corporate and other bonds

     $ 20,280      $ 619      $ 20,899   

States, municipalities and political subdivisions

       9,355        182        9,537   

Asset-backed:

        

Residential mortgage-backed

       5,219        631        5,850   

Commercial mortgage-backed

       1,090        159        1,249   

Other asset-backed

       607        429        1,036   

 

 

Total asset-backed

   $ —          6,916        1,219        8,135   

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

     176        61          237   

Foreign government

     92        490          582   

Redeemable preferred stock

     3        54          57   

 

 

Fixed maturities available-for-sale

     271        37,156        2,020        39,447   

Fixed maturities, trading

       122        111        233   

 

 

Total fixed maturities

   $ 271      $ 37,278      $ 2,131      $ 39,680   

 

 

Equity securities available-for-sale

   $ 179      $ 116      $ 32      $ 327   

Equity securities, trading

     585          12        597   

 

 

Total equity securities

   $ 764      $ 116      $ 44      $ 924   

 

 

Short term investments

   $ 5,276      $ 566      $ 6      $ 5,848   

Other invested assets

       6        10        16   

Receivables

       56        4        60   

Life settlement contracts

         125        125   

Separate account business

     23        360        35        418   

Payable to brokers

     (179     (53     (32     (264

 

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Table of Contents
December 31, 2010    Level 1     Level 2     Level 3     Total  
(In millions)                         

Fixed maturity securities:

        

Corporate and other bonds

     $ 20,412      $ 624      $ 21,036   

States, municipalities and political subdivisions

       7,623        266        7,889   

Asset-backed:

        

Residential mortgage-backed

       5,324        767        6,091   

Commercial mortgage-backed

       920        73        993   

Other asset-backed

       404        359        763   

 

 

Total asset-backed

   $        6,648        1,199        7,847   

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

     76        61          137   

Foreign government

     115        505          620   

Redeemable preferred stock

     3        48        3        54   

 

 

Fixed maturities available-for-sale

     194        35,297        2,092        37,583   

Fixed maturities, trading

       47        184        231   

 

 

Total fixed maturities

   $ 194      $ 35,344      $ 2,276      $ 37,814   

 

 

Equity securities available-for-sale

   $ 288      $ 126      $ 26      $ 440   

Equity securities, trading

     640          6        646   

 

 

Total equity securities

   $ 928      $ 126      $ 32      $ 1,086   

 

 

Short term investments

   $ 6,079      $ 974      $ 27      $ 7,080   

Other invested assets

         26        26   

Receivables

       74        2        76   

Life settlement contracts

         129        129   

Separate account business

     28        381        41        450   

Payable to brokers

     (328     (79     (23     (430

Discontinued operations investments, included in Other liabilities

     11        60          71   

 

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Table of Contents

The tables below present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2011 and 2010:

 

           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

Held at
September 30

 
2011    Balance,
July 1
    Included in
Net Income
    Included
in OCI
    Purchases      Sales     Settlements          Balance,
September 30
   
(In millions)                                                                         

Fixed maturity securities:

                      

Corporate and other bonds

   $ 812      $ (7   $ (3   $ 113       $ (107   $ (47   $ 12       $ (154   $ 619      $ (10

States, municipalities and political subdivisions

     179            3                  182     

Asset-backed:

                      

Residential mortgage-backed

     687        1        (5     73         (81     (13        (31     631     

Commercial mortgage- backed

     95          (7     76                (5     159     

Other asset-backed

     491        (5     (6     114         (105     (25     2         (37     429        (4

 

 

Total asset-backed

     1,273        (4     (18     263         (186     (38     2         (73     1,219        (4

 

 

Fixed maturities available-for-sale

     2,264        (11     (21     379         (293     (85     14         (227     2,020        (14

Fixed maturities, trading

     114        (3                   111        (3

 

 

Total fixed maturities

   $ 2,378      $ (14   $ (21   $ 379       $ (293   $ (85   $ 14       $ (227   $ 2,131      $ (17

 

 

Equity securities available-for-sale

   $ 36             $ (1        $ (3   $ 32     

Equity securities trading

     16      $ (4                   12      $ (4

 

 

Total equity securities

   $ 52      $ (4   $ —        $ —         $ (1   $ —        $ —         $ (3   $ 44      $ (4

 

 

Short term investments

   $ 6                      $ 6     

Other invested assets

     10                        10     

Life settlement contracts

     129      $ 11             $ (15          125      $ (1

Separate account business

     37             $ (2            35     

Derivative financial instruments, net

     (37     (13   $ 11             11             (28     (1

 

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

Purchases,
Sales,
Issuances

and
Settlements

   

Transfers

into Level 3

    

Transfers

out of
Level 3

          Unrealized
Gains (Losses)
Recognized in
Net Income on
Level 3 Assets
and Liabilities
Held at
September 30
 
2010    Balance,
July 1
     Included in
Net Income
    Included in
OCI
           Balance,
September 30
   
(In millions)                                                           

Fixed maturity securities:

                  

Corporate and other bonds

   $ 718       $ 1      $ 18      $ (83      $ (54   $ 600      $ (1

States, municipalities and political subdivisions

     539           3        (84          458     

Asset-backed:

                  

Residential mortgage-backed

     659         1        (9     (5          646     

Commercial mortgage-backed

     95           3             (20     78     

Other asset-backed

     306         (1     7        (66          246     

 

 

Total asset-backed

     1,060         —          1        (71   $ —           (20     970        —     

Redeemable preferred stock

     1                    1     

 

 

Fixed maturities available-for-sale

     2,318         1        22        (238        (74     2,029        (1

Fixed maturities, trading

     191         (2       (1          188        (2

 

 

Total fixed maturities

   $ 2,509       $ (1   $ 22      $ (239   $ —         $ (74   $ 2,217      $ (3

 

 

Equity securities available-for-sale

   $ 4       $ (3     $ 15      $ 6         $ 22      $ (4

Short term investments

     21             (8      $ (11     2     

Other invested assets

     —           2          26             28        2   

Life settlement contracts

     134         8          (6          136        4   

Separate account business

     37             4             41     

Derivative financial instruments, net

     4         (3   $ (15     1             (13  

 

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Table of Contents
           Net Realized Gains
(Losses) and Net Change
in Unrealized Gains
(Losses)
                       Transfers
into Level 3
    

Transfers
out of

Level 3

   

Balance,

September 30

    Unrealized
Gains (Losses)
Recognized in
Net Income on
Level 3 Assets
and Liabilities
Held at
September 30
 
2011   

Balance,

January 1

   

Included in

Net Income

   

Included in

OCI

    Purchases      Sales     Settlements           
(In millions)                                                                         

Fixed maturity securities:

                      

Corporate and other bonds

   $ 624      $ (5   $ (6   $ 459       $ (157   $ (144   $ 52       $ (204   $ 619      $ (11

States, municipalities and political subdivisions

     266            3           (87          182     

Asset-backed:

                      

Residential mortgage-backed

     767        (11     9        170         (164     (54        (86     631        (15

Commercial mortgage- backed

     73        3        11        81         (4          (5     159     

Other asset-backed

     359          (6     441         (236     (80     2         (51     429        (4

 

 

Total asset-backed

     1,199        (8     14        692         (404     (134     2         (142     1,219        (19

Redeemable preferred stock

     3        3        (3        (3           

 

 

Fixed maturities available-for-sale

     2,092        (10     5        1,154         (564     (365     54         (346     2,020        (30

Fixed maturities, trading

     184        (1          (72            111        6   

 

 

Total fixed maturities

   $ 2,276      $ (11   $ 5      $ 1,154       $ (636   $ (365   $ 54       $ (346   $ 2,131      $ (24

 

 

Equity securities available-for-sale

   $ 26      $ (2   $ (1   $ 19       $ (12     $ 5       $ (3   $ 32      $ (3

Equity securities trading

     6        (9       1             14           12        (9

 

 

Total equity securities

   $ 32      $ (11   $ (1   $ 20       $ (12   $      $ 19       $ (3   $ 44      $ (12

 

 

Short term investments

   $ 27          $ 12         $ (23      $ (10   $ 6     

Other invested assets

     26      $ 3           $ (19            10      $ 1   

Life settlement contracts

     129        20               (24          125        2   

Separate account business

     41               (6            35     

Derivative financial instruments, net

     (21     (32   $ (5          30             (28     (1

 

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Table of Contents
           Net Realized Gains
(Losses) and Net Change

in Unrealized Gains
(Losses)
    

Purchases,
Sales,

Issuances

and

Settlements

   

Transfers

into Level 3

    

Transfers

out of

Level 3

         

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

Held at

September 30

 
2010   

Balance,

January 1

   

Included in

Net Income

   

Included in

OCI

           

Balance,

September 30

   
(In millions)                                                           

Fixed maturity securities:

                  

Corporate and other bonds

   $ 609      $ 10      $ 56       $ 29      $ 23       $ (127   $ 600      $ (2

States, municipalities and political subdivisions

     756          9         (307          458     

Asset-backed:

                  

Residential mortgage-backed

     629        (7     20         50           (46     646        (10

Commercial mortgage- backed

     123        (1     1         6        7         (58     78        (2

Other asset-backed

     348        3        29         (89        (45     246        (1

 

 

Total asset-backed

     1,100        (5     50         (33     7         (149     970        (13

Redeemable preferred stock

     2        6           (7          1     

 

 

Fixed maturities available-for-sale

     2,467        11        115         (318     30         (276     2,029        (15

Fixed maturities, trading

     197        6           (15          188        5   

 

 

Total fixed maturities

   $ 2,664      $ 17      $ 115       $ (333   $ 30       $ (276   $ 2,217      $ (10

 

 

Equity securities available-for-sale

   $ 11      $ (4      $ 14      $ 8       $ (7   $ 22      $ (5

Short term investments

                 12        1         (11     2     

Other invested assets

            2           26             28        2   

Life settlement contracts

     130        25           (19          136        11   

Separate account business

     38             3             41     

Discontinued operations investments

     16        $ 1         (2        (15         

Derivative financial instruments, net

     (48     (18     27         26             (13  

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)
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 shown in the Level 3 tables may be transferred in or out of Level 3 based on the availability of observable market information used to verify pricing sources or used in pricing models. The availability of observable market information varies based on market conditions and trading volume and may cause securities to move in and out of Level 3 from reporting period to reporting period. There were no significant transfers between Level 1 and Level 2 during the three or nine months ended September 30, 2011. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods.

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

Fixed Maturity Securities

Level 1 securities include highly liquid U.S. and foreign government bonds and redeemable preferred stock valued using quoted market prices. The remaining fixed maturity securities are valued using pricing for similar securities, recently executed transactions, cash flow models with yield curves, broker/dealer quotes and other pricing models utilizing observable inputs. The valuation for most fixed maturity securities is classified as Level 2. Level 2 securities may also include securities that have firm sale commitments and prices that are not recorded until the settlement date. 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 tax-exempt and taxable auction rate certificates. Fair value of auction rate securities is determined utilizing a pricing model with three primary inputs. The interest rate and spread inputs are observable from like instruments while the maturity date assumption is unobservable due to the uncertain nature of the principal prepayments prior to maturity.

Equity Securities

Level 1 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 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 include currency forwards valued using observable market forward rates. Over-the-counter derivatives, principally interest rate swaps, total return swaps, commodity swaps, credit default swaps, equity warrants and options, are valued using inputs including broker/dealer quotes and are classified within Level 2 or Level 3 of the valuation hierarchy, depending on the amount of transparency as to whether these quotes are based on information that is observable in the marketplace.

Short Term Investments

The valuation of 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 observable. Level 3 securities include fixed maturity securities purchased within one year of maturity where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency to the market inputs used.

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.

 

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Table of Contents

Separate Account Business

Separate account business includes fixed maturity securities, equities and short term investments. The valuation methodologies for these asset types have been described above.

Financial Assets and Liabilities Not Measured at Fair Value

The carrying amount and estimated fair value of the Company’s financial instrument assets and liabilities which are not measured at fair value on the Consolidated Condensed Balance Sheets are listed in the table below.

 

     September 30, 2011      December 31, 2010  

 

 
     Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

 

 
(In millions)                            

Financial assets:

           

Other invested assets

   $ 204       $ 214           $ 87       $ 86       

Financial liabilities:

           

Premium deposits and annuity contracts

   $ 108       $ 110           $ 104       $ 105       

Short term debt

     1,206         1,210             647         662       

Long term debt

     8,026         8,633             8,830         9,243       

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

The fair values of 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.

Premium deposits and annuity contracts were valued based on cash surrender values, estimated fair values or policyholder liabilities, net of amounts ceded related to sold business.

Fair value of debt was based on observable quoted market prices when available. When quoted market prices were not available, the fair value for debt was based on quoted market prices of comparable instruments adjusted for differences between the quoted 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. Derivative Financial Instruments

The Company invests in certain derivative instruments for a number of purposes, including: (i) asset and liability management activities, (ii) income enhancements for its portfolio management strategy and (iii) to benefit from anticipated future movements in the underlying markets. If such movements do not occur as anticipated, then significant losses may occur.

Monitoring procedures include senior management review of daily detailed reports of existing positions and valuation fluctuations to ensure that open positions are consistent with the Company’s portfolio strategy.

The Company does not believe that any of the derivative instruments utilized by it are unusually complex, nor do these instruments contain embedded leverage features which would expose the Company to a higher degree of risk.

The Company uses derivatives in the normal course of business, primarily in an attempt to reduce its exposure to market risk (principally interest rate risk, equity price risk, commodity price risk and foreign currency risk) stemming from various assets and liabilities and credit risk (the ability of an obligor to make timely payment of principal and/or interest). The Company’s principal objective under such risk strategies is to achieve the desired reduction in economic risk, even if the position does not receive hedge accounting treatment.

 

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Table of Contents

CNA’s use of derivatives is limited by statutes and regulations promulgated by the various regulatory bodies to which it is subject, and by its own derivative policy. The derivative policy limits the authorization to initiate derivative transactions to certain personnel. Derivatives entered into for hedging, regardless of the choice to designate hedge accounting, shall have a maturity that effectively correlates to the underlying hedged asset or liability. The policy prohibits the use of derivatives containing greater than one-to-one leverage with respect to changes in the underlying price, rate or index. The policy also prohibits the use of borrowed funds, including funds obtained through securities lending, to engage in derivative transactions.

The Company has exposure to economic losses due to interest rate risk arising from changes in the level of, or volatility of, interest rates. The Company attempts to mitigate its exposure to interest rate risk in the normal course of portfolio management, which includes rebalancing its existing portfolios of assets and liabilities. In addition, various derivative financial instruments are used to modify the interest rate risk exposures of certain assets and liabilities. These strategies include the use of interest rate swaps, interest rate caps and floors, options, futures, forwards and commitments to purchase securities. These instruments are generally used to lock interest rates or market values, to shorten or lengthen durations of fixed maturity securities or to hedge (on an economic basis) interest rate risks associated with investments and variable rate debt. The Company infrequently designates these types of instruments as hedges against specific assets or liabilities.

The Company has exposure to equity price risk as a result of its investment in equity securities and equity derivatives. Equity price risk results from changes in the level or volatility of equity prices, which affect the value of equity securities, or instruments that derive their value from such securities. The Company attempts to mitigate its exposure to such risks by limiting its investment in any one security or index. The Company may also manage this risk by utilizing instruments such as options, swaps, futures and collars to protect appreciation in securities held.

The Company has exposure to credit risk arising from the uncertainty associated with a financial instrument obligor’s ability to make timely principal and/or interest payments. The Company attempts to mitigate this risk by limiting credit concentrations, practicing diversification, and frequently monitoring the credit quality of issuers and counterparties. In addition, the Company may utilize credit derivatives such as credit default swaps (“CDS”) to modify the credit risk inherent in certain investments. CDS involve a transfer of credit risk from one party to another in exchange for periodic payments.

Foreign currency risk arises from the possibility that changes in foreign currency exchange rates will impact the fair value of financial instruments denominated in a foreign currency. The Company’s foreign transactions are primarily denominated in Australian dollars, Brazilian reais, British pounds, Canadian dollars and the European Monetary Unit. The Company typically manages this risk via asset/liability currency matching and through the use of foreign currency forwards.

In addition to the derivatives used for risk management purposes described above, the Company may also use derivatives for purposes of income enhancement. Income enhancement transactions are entered into with the intention of providing additional income or yield to a particular portfolio segment or instrument.

The Company will also use CDS to sell credit protection against a specified credit event. In selling credit protection, CDS are used to replicate fixed income securities when credit exposure to certain issuers is not available or when it is economically beneficial to transact in the derivative market compared to the cash market alternative. Credit risk includes both the default event risk and market value exposure due to fluctuations in credit spreads. In selling CDS protection, the Company receives a periodic premium in exchange for providing credit protection on a single name reference obligation or a credit derivative index. If there is an event of default as defined by the CDS agreement, the Company is required to pay the counterparty the referenced notional amount of the CDS contract and in exchange the Company is entitled to receive the referenced defaulted security or the cash equivalent.

 

27


Table of Contents

The tables below summarize open CDS contracts where the Company sold credit protection as of September 30, 2011 and December 31, 2010. The fair value of the contracts represents the amounts that the Company would receive or pay at those dates to exit the derivative positions. The maximum amount of future payments assumes no residual value in the defaulted securities that the Company would receive as part of the contract terminations and is equal to the notional value of the CDS contracts.

 

September 30, 2011    Fair Value
of Credit
Default
Swaps
    Maximum
Amount of
Future
Payments
under Credit
Default
Swaps
    

Weighted
Average
Years

To Maturity

 

 

 
(In millions of dollars)                    

A-rated

     $ 5         5.0   

BBB-rated

   $ (2     15         5.1   

BB-rated

     (1     22         4.3   

B-rated

       3         0.7   

CCC-rated

     (1     5         5.0   

 

 

Total

   $ (4   $ 50         4.5   

 

 

December 31, 2010

       

 

 

BB-rated

   $ 1      $ 5         2.5   

B-rated

       3         1.5   

 

 

Total

   $ 1      $ 8         2.1   

 

 

Credit exposure associated with non-performance by the counterparties to derivative instruments is generally limited to the uncollateralized fair value of the asset related to the instruments recognized on the Consolidated Condensed Balance Sheets. The Company attempts to mitigate the risk of non-performance by monitoring the creditworthiness of counterparties and diversifying derivatives to multiple counterparties. The Company generally requires that all over-the-counter derivative contracts be governed by an International Swaps and Derivatives Association (“ISDA”) Master Agreement, and exchanges collateral under the terms of these agreements with its derivative investment counterparties depending on the amount of the exposure and the credit rating of the counterparty. The Company does not offset its net derivative positions against the fair value of the collateral provided. The fair value of collateral provided by the Company was $18 million at September 30, 2011 and $2 million at December 31, 2010 and consisted of cash and U.S. Treasury Bills. The fair value of cash collateral received from counterparties was $1 million at September 30, 2011 and December 31, 2010.

The agreements governing HighMount’s derivative instruments contain certain covenants, including a maximum debt to capitalization ratio reviewed quarterly. If HighMount does not comply with these covenants, the counterparties to the derivative instruments could terminate the agreements and request payment on those derivative instruments in net liability positions. The aggregate fair value of HighMount’s derivative instruments that are in a liability position was $68 million at September 30, 2011. HighMount was not required to post any collateral under the governing agreements. At September 30, 2011, HighMount was in compliance with all of its covenants under the derivatives agreements.

See Note 3 for information regarding the fair value of derivative instruments.

 

28


Table of Contents

A summary of the aggregate contractual or notional amounts and gross estimated fair values related to derivative financial instruments follows. Equity options purchased are included in Equity securities, and all other derivative assets are reported as Receivables. Derivative liabilities are included in Payable to brokers on the Consolidated Condensed Balance Sheets. 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.

 

     September 30, 2011     December 31, 2010  

 

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

 

 
(In millions)                                         

With hedge designation:

                

Interest rate risk:

                

Interest rate swaps

           $ 1,095          $ (75

Commodities:

                

Forwards – short

   $ 325       $ 52       $ (26     487       $ 70         (24

Foreign exchange:

                

Currency forwards – short

     191            (14     140         4      

Without hedge designation:

                

Equity markets:

                

Options – purchased

     222         44           207         30      

Options – written

     366            (37     340            (10

Futures – short

     43                 

Equity swaps and warrants – long

     16         14              

Equity swaps and warrants – short

     11                 

Interest rate risk:

                

Interest rate swaps (a)

     1,100            (38     5            (1

Credit default swaps – purchased protection

     63         2         (2     20            (2

Credit default swaps – sold protection

     50            (4     8         1      

Forward commitments for mortgage-backed securities

     62         1              

Futures – short

     13                 

Foreign exchange:

                

Currency forwards – long

     7            (2        

Currency forwards – short

     162         4              

 

(a) As a result of HighMount expecting to replace its $1.1 billion variable-rate term loans, included in Short term debt in the Consolidated Condensed Balance Sheets at September 30, 2011, before their scheduled maturity date in July of 2012, the hedge designation has been removed from the related interest rate swaps.

Derivatives without hedge designation – For derivatives not held in a trading portfolio, new derivative transactions entered into totaled approximately $64 million and $88 million in notional value while derivative termination activity totaled approximately $14 million and $47 million during the three and nine months ended September 30, 2011. This activity was primarily attributable to forward commitments for mortgage-backed securities and foreign currency forwards. During the three and nine months ended September 30, 2010, new derivative transactions entered into totaled approximately $342 million and $1.1 billion in notional value while derivative termination activity totaled approximately $361 million and $1.1 billion. This activity was primarily attributable to interest rate futures and forward commitments for mortgage-backed securities.

 

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Table of Contents

A summary of the recognized gains (losses) related to derivative financial instruments without hedge designation follows. Changes in the fair value of derivatives not held in a trading portfolio are reported in Investment gains (losses) and changes in the fair value of derivatives held for trading purposes are reported in Net investment income on the Consolidated Condensed Statements of Income.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

 

 
(In millions)                         

Included in Net investment income:

        

Equity markets:

        

Equity options – purchased

   $ 16      $ (7   $ 7      $ (10

Equity options – written

     (18     10        (11     15   

Futures – long

     (8     (3     (8     (6

Futures – short

     6        (1     5        (4

Foreign exchange:

        

Currency forwards – long

     (2     2        (2  

Currency forwards – short

     5        (8     5        (9

Currency options – short

       1          (1

Interest rate risk:

        

Credit default swaps – purchased protection

     2          2     

Credit default swaps – sold protection

     (3       (3  

Options on government securities – short

       (66       (66

Futures – long

       4          (14

Futures – short

     2        14        2        14   

Other

     (1       (2     (2

 

 
     (1     (54     (5     (83

 

 

Included in Investment gains (losses):

        

Interest rate risk:

        

Interest rate swaps

           (44

Credit default swaps – purchased protection

       (1       (1

Forward commitments for mortgage-backed securities

     1          1     

Currency forwards – short

         (1  

Commodity forwards – short

           13   

 

 
     1        (1            (32

 

 

Total

   $      $ (55   $ (5   $ (115

 

 

Cash flow hedges – A significant portion of the Company’s hedge strategies represents cash flow hedges of the variable price risk associated with the purchase and sale of natural gas and other energy-related products. As of September 30, 2011, approximately 58.9 billion cubic feet of natural gas equivalents was hedged by qualifying cash flow hedges. The effective portion of these commodity hedges is reclassified from AOCI into earnings when the anticipated transaction affects earnings. Approximately 22% of these derivatives have settlement dates in 2011 and 57% have settlement dates in 2012. As of September 30, 2011, the estimated amount of net unrealized gains associated with commodity contracts that will be reclassified into earnings during the next twelve months was $21 million. However, these amounts are likely to vary materially as a result of changes in market conditions. Foreign currency forward exchange contracts are used to reduce exposure to future foreign currency expenditures. The effective portion of these hedges is reclassified from AOCI into earnings when the hedged transaction affects earnings or it is determined that the hedged transaction will not occur. As of September 30, 2011, the estimated amount of net unrealized losses associated with these contracts that will be reclassified into earnings over the next twelve months was $14 million. The Company also uses interest rate swaps to hedge its exposure to variable interest rates or risk attributable to changes in interest rates on long term debt. The effective portion of the hedges is

 

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amortized to interest expense over the term of the related notes. As of September 30, 2011, the estimated amount of net unrealized losses associated with interest rate swaps that will be reclassified into earnings during the next twelve months was $45 million. On September 30, 2011, HighMount determined that the expected payments of interest on its variable-rate term loans were not probable, but possible of occurring and discontinued hedge accounting treatment prospectively for its interest rate swaps. HighMount will record future changes in the fair value of the swaps through earnings and reclass any amounts deferred in AOCI to earnings when the date of refinancing is known. For the three and nine months ended September 30, 2011 and 2010, the net amounts recognized due to ineffectiveness were less than $1 million.

As a result of the sale of certain gas producing properties in 2010, HighMount recognized losses of $36 million in Investment gains (losses) in the Consolidated Condensed Statements of Income for the nine months ended September 30, 2010, reflecting the reclassification of net derivative losses from AOCI to earnings.

The following table summarizes the effective portion of the net derivative gains or losses included in OCI and the amount reclassified into income for derivatives designated as cash flow hedges and for de-designated hedges:

 

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

 

 

 
     2011     2010     2011     2010  

 

 
(In millions)                         

Amount of gain (loss) recognized in OCI:

        

Commodities

   $ 27      $ 34      $ 9      $ 151   

Foreign exchange

     (17     6        (5     1   

Interest rate

     1        (10     (4     (44

 

 

Total

   $ 11      $ 30      $ —        $ 108   

 

 

Amount of gain (loss) reclassified from AOCI into income:

        

Commodities

   $ 8      $ 23      $ 33      $ 71   

Foreign exchange

     4          12        1   

Interest rate

     (15     (13     (43     (92

 

 

Total

   $ (3   $ 10      $ 2      $ (20

 

 

Location of gain (loss) reclassified from AOCI into income:

 

Type of cash flow hedge    Consolidated Condensed Statements of Income line items

 

Commodities    Other revenues and Investment gains (losses)
Foreign exchange    Contract drilling expenses
Interest rate    Interest expense and Investment gains (losses)

The Company also enters into short sales as part of its portfolio management strategy. Short sales are commitments to sell a financial instrument not owned at the time of sale, usually done in anticipation of a price decline. Short sales resulted in proceeds of $140 million and $308 million with fair value liabilities of $142 million and $317 million at September 30, 2011 and December 31, 2010. These positions are marked to market and investment gains or losses are included in Net investment income in the Consolidated Condensed Statements of Income.

 

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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 have contributed to material period-to-period fluctuations in the Company’s results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of $50 million and $205 million for the three and nine months ended September 30, 2011. Catastrophe losses in 2011 related primarily to domestic storms, Hurricane Irene and the event in Japan. CNA reported catastrophe losses, net of reinsurance, of $12 million and $100 million for the three and nine months ended September 30, 2010 for events occurring in those periods.

Asbestos and Environmental Pollution (“A&EP”) Reserves

On August 31, 2010, Continental Casualty Company 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 A&EP liabilities were ceded to NICO.

Under the terms of the NICO transaction, effective January 1, 2010 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 (“Loss Portfolio Transfer”). Included in the $1.6 billion of net A&EP claim and allocated claim adjustment expense reserves was approximately $90 million of net claim and allocated claim adjustment expense reserves relating to CNA’s discontinued operations. 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 (net of an allowance of $100 million for uncollectible reinsurance receivables on billed third party reinsurance receivables, as discussed further below). As of August 31, 2010, NICO deposited approximately $2.2 billion in a collateral trust account as security for its obligations to CNA. This $2.2 billion will be reduced by the amount of net A&EP claim and allocated claim adjustment expense payments. 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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The following table displays the impact of the Loss Portfolio Transfer on the Consolidated Condensed Statements of Income:

 

Three and Nine Months Ended September 30, 2010        
(In millions)       

Other operating expenses

     $      (529)   

Income tax benefit

     185   

 

 

Loss from continuing operations, included in the Other Insurance segment

     (344

Loss from discontinued operations

     (21

 

 

Net loss

     (365

Amounts attributable to noncontrolling interests

     37   

 

 

Net loss attributable to Loews Corporation

     $      (328)   

 

 

In connection with the transfer of billed third party reinsurance receivables related to A&EP claims and the coverage of credit risk afforded under the terms of the Loss Portfolio Transfer, CNA reduced its allowance for uncollectible reinsurance receivables on billed third party reinsurance receivables and ceded claim and allocated claim adjustment expense reserves by $200 million. This reduction is reflected in Other operating expenses presented above.

Net Prior Year Development

The following tables and discussion include the net prior year development recorded for CNA Specialty, CNA Commercial and Other Insurance:

 

Three Months Ended September 30, 2011    CNA
Specialty