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 March 31, 2012

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 April 20, 2012

Common stock, $0.01 par value     396,836,271 shares

 

 

 


Table of Contents

INDEX

 

     Page
No.
 

Part I. Financial Information

  

Item 1. Financial Statements (unaudited)

  

Consolidated Condensed Balance Sheets
March 31, 2012 and December 31, 2011

     3   

Consolidated Condensed Statements of Income
Three months ended March 31, 2012 and 2011

     4   

Consolidated Condensed Statements of Comprehensive Income
Three months ended March  31, 2012 and 2011

     5   

Consolidated Condensed Statements of Equity
Three months ended March 31, 2012 and 2011

     6   

Consolidated Condensed Statements of Cash Flows
Three months ended March 31, 2012 and 2011

     7   

Notes to Consolidated Condensed Financial Statements

     8   

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

     32   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     56   

Item 4. Controls and Procedures

     56   

Part II. Other Information

     56   

Item 1. Legal Proceedings

     56   

Item 1A. Risk Factors

     56   

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

     56   

Item 6. Exhibits

     57   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

     March 31,
2012
     December 31,
2011
 

 

 
(Dollar amounts in millions, except per share data)              

Assets:

     

Investments:

     

Fixed maturities, amortized cost of $38,171 and $37,466

   $ 41,173       $ 40,040   

Equity securities, cost of $962 and $902

     1,026         927   

Limited partnership investments

     2,909         2,711   

Other invested assets, primarily mortgage loans

     292         245   

Short term investments

     5,558         5,105   

 

 

Total investments

     50,958         49,028   

Cash

     99         129   

Receivables

     9,409         9,259   

Property, plant and equipment

     13,522         13,618   

Goodwill

     908         908   

Other assets

     1,366         1,357   

Deferred acquisition costs of insurance subsidiaries

     576         552   

Separate account business

     402         417   

 

 

Total assets

   $ 77,240       $ 75,268   

 

 

Liabilities and Equity:

     

Insurance reserves:

     

Claim and claim adjustment expense

   $ 24,203       $ 24,303   

Future policy benefits

     9,959         9,810   

Unearned premiums

     3,383         3,250   

Policyholders’ funds

     169         191   

 

 

Total insurance reserves

     37,714         37,554   

Payable to brokers

     920         162   

Short term debt

     88         88   

Long term debt

     8,954         8,913   

Deferred income taxes

     937         622   

Other liabilities

     4,104         4,309   

Separate account business

     402         417   

 

 

Total liabilities

     53,119         52,065   

 

 

Preferred stock, $0.10 par value:

     

Authorized – 100,000,000 shares

     

Common stock, $0.01 par value:

     

Authorized – 1,800,000,000 shares

     

Issued–396,834,820 and 396,585,226 shares

     4         4   

Additional paid-in capital

     3,538         3,494   

Retained earnings

     15,232         14,890   

Accumulated other comprehensive income

     654         384   

 

 

Total shareholders’ equity

     19,428         18,772   

Noncontrolling interests

     4,693         4,431   

 

 

Total equity

     24,121         23,203   

 

 

Total liabilities and equity

   $ 77,240       $ 75,268   

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

3


Table of Contents

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

Three Months Ended March 31    2012     2011  

 

 
(In millions, except per share data)             

Revenues:

    

Insurance premiums

   $ 1,649      $ 1,615   

Net investment income

     726        661   

Investment losses:

    

Other-than-temporary impairment losses

     (15 )      (20

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

     (12     (21

 

 

Net impairment losses recognized in earnings

     (27     (41

Other net investment gains

     59        64   

 

 

Total investment gains

     32        23   

Contract drilling revenues

     755        789   

Other

     582        580   

 

 

Total

     3,744        3,668   

 

 

Expenses:

    

Insurance claims and policyholders’ benefits

     1,381        1,364   

Amortization of deferred acquisition costs

     295        297   

Contract drilling expenses

     397        362   

Other operating expenses

     819        737   

Interest

     111        151   

 

 

Total

     3,003        2,911   

 

 

Income before income tax

     741        757   

Income tax expense

     (222     (195

 

 

Net income

     519        562   

Amounts attributable to noncontrolling interests

     (152     (183

 

 

Net income attributable to Loews Corporation

   $ 367      $ 379   

 

 

Basic net income per share

   $ 0.93      $ 0.92   

 

 

Diluted net income per share

   $ 0.92      $ 0.92   

 

 

Dividends per share

   $ 0.0625      $ 0.0625   

 

 

Weighted-average shares outstanding:

    

Shares of common stock

     396.77        412.90   

Dilutive potential shares of common stock

     0.67        0.93   

 

 

Total weighted-average shares outstanding assuming dilution

     397.44        413.83   

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

4


Table of Contents

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

Three Months Ended March 31    2012     2011  

 

 
(In millions)             

Net income

   $ 519      $ 562   

 

 

Other comprehensive income (loss)

    

Changes in:

    

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

     40        38   

Net other unrealized gains on investments

     217        23   

 

 

Total unrealized gains on available-for-sale investments

     257        61   

Unrealized gains (losses) on cash flow hedges

     15        (17

Foreign currency

     21        26   

Pension liability

     7     

 

 

Other comprehensive income

     300        70   

 

 

Comprehensive income

     819        632   

Amounts attributable to noncontrolling interests

     (183     (189

 

 

Total comprehensive income attributable to Loews Corporation

   $ 636      $ 443   

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

5


Table of Contents

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, 2011, as reported

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

Adjustment to initially apply updated guidance on accounting for costs associated with acquiring or renewing insurance contracts

     (78          (64          (14

 

 

Balance, January 1, 2011, as restated

     23,028        4         3,667        14,500        230         (15     4,642   

Net income

     562             379             183   

Other comprehensive income

     70               64           6   

Dividends paid

     (124          (26          (98

Purchase of Loews treasury stock

     (187               (187  

Issuance of Loews common stock

     4           4            

Stock-based compensation

     6           5               1   

Other

     5           (5     (1          11   

 

 

Balance, March 31, 2011

   $ 23,364      $ 4       $ 3,671      $ 14,852      $ 294       $ (202   $ 4,745   

 

 

Balance, January 1, 2012, as reported

   $ 23,273      $ 4       $ 3,499      $ 14,957      $ 375       $ —        $ 4,438   

Adjustment to initially apply updated guidance on accounting for costs associated with acquiring or renewing insurance contracts

     (70        (5     (67     9           (7

 

 

Balance, January 1, 2012, as restated

     23,203        4         3,494        14,890        384         —          4,431   

Net income

     519             367             152   

Other comprehensive income

     300               269           31   

Dividends paid

     (133          (25          (108

Issuance of equity securities by subsidiary

     222           36          1           185   

Issuance of Loews common stock

     5           5            

Stock-based compensation

     6           5               1   

Other

     (1        (2            1   

 

 

Balance, March 31, 2012

   $ 24,121      $ 4       $ 3,538      $ 15,232      $ 654       $ —        $ 4,693   

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

6


Table of Contents

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Three Months Ended March 31    2012     2011  

 

 
(In millions)             

Operating Activities:

    

Net income

   $ 519      $ 562   

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

     270        164   

Changes in operating assets and liabilities, net:

    

Receivables

     142        138   

Deferred acquisition costs

     (15     (15

Insurance reserves

     99        45   

Other assets

     (6     10   

Other liabilities

     (187     (297

Trading securities

     (494 )      522   

 

 

Net cash flow operating activities

     328        1,129   

 

 

Investing Activities:

    

Purchases of fixed maturities

     (2,842     (3,480

Proceeds from sales of fixed maturities

     1,929        1,893   

Proceeds from maturities of fixed maturities

     683        965   

Purchases of equity securities

     (12     (34

Proceeds from sales of equity securities

     19        128   

Purchases of property, plant and equipment

     (238     (150

Deposits for construction of offshore drilling equipment

       (309

Dispositions

     41     

Change in short term investments

     (88     277   

Change in other investments

     (17     (114

Other, net

     12        8   

 

 

Net cash flow investing activities

     (513     (816

 

 

Financing Activities:

    

Dividends paid

     (25     (26

Dividends paid to noncontrolling interests

     (108     (98

Purchases of treasury shares

       (188

Issuance of common stock

     5        4   

Proceeds from sale of subsidiary stock

     245        6   

Principal payments on debt

     (331     (913

Issuance of debt

     370        904   

Other, net

     (2     (1

 

 

Net cash flow financing activities

     154        (312

 

 

Effect of foreign exchange rate on cash

     1        2   

 

 

Net change in cash

     (30     3   

Cash, beginning of period

     129        120   

 

 

Cash, end of period

   $ 99      $ 123   

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

7


Table of Contents

Loews Corporation and Subsidiaries

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

Loews Corporation is a holding company. Its subsidiaries are engaged in the following lines of business: commercial property and casualty insurance (CNA Financial Corporation (“CNA”), a 90% owned subsidiary); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (“Diamond Offshore”), a 50.4% owned subsidiary); interstate transportation and storage of natural gas (Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”), a 61% owned subsidiary); exploration, production and marketing of natural gas and oil (including condensate and natural gas liquids), (HighMount Exploration & Production LLC (“HighMount”), a wholly owned subsidiary); and the operation of hotels (Loews Hotels Holding Corporation (“Loews Hotels”), a wholly owned subsidiary). In the first quarter of 2012, Boardwalk Pipeline sold 9.2 million common units through a public offering for $245 million, reducing the Company’s ownership interest from 64% to 61%. 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 March 31, 2012 and December 31, 2011 and the results of operations, comprehensive income and changes in shareholders’ equity and cash flows for the three months ended March 31, 2012 and 2011.

Net income for the first quarter 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 2011 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 (loss) 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 2.2 million and 1.9 million shares were not included in the diluted weighted average shares amount for the three months ended March 31, 2012 and 2011 due to the exercise price being greater than the average stock price.

Impairment of Natural Gas and Oil Properties – For the three months ended March 31, 2012, HighMount recorded a non-cash ceiling test impairment charge of $44 million ($28 million after tax) related to its carrying value of natural gas and oil properties. The impairment was recorded as a credit to Accumulated depreciation, depletion and amortization. The write-down was the result of declines in natural gas prices. Had the effects of HighMount’s cash flow hedges not been considered in calculating the ceiling limitation, the impairment would have been $69 million ($44 million after tax).

Hardy Underwriting Bermuda Limited (“Hardy”) – On March 21, 2012, CNA announced an agreement to acquire Hardy, a specialized Lloyd’s underwriter, in a cash acquisition for approximately $227 million. Hardy underwrote approximately $430 million in gross written premiums in 2011. Subject to regulatory approvals and other conditions, the acquisition is expected to be completed during the second quarter of 2012. As of March 31, 2012, $230 million of short term investments were held in escrow in British pounds to fund the acquisition.

Accounting Changes – In October of 2010, the Financial Accounting Standards Board 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 previous guidance allowed the capitalization of acquisition costs that vary with and are primarily related to the acquisition of new and renewal insurance contracts, whether the costs related to successful or unsuccessful efforts.

As of January 1, 2012, the Company adopted the updated accounting guidance prospectively as of January 1, 2004, the earliest date practicable. Due to the lack of available historical data related to certain accident and health contracts issued prior to January 1, 2004, a full retrospective application of the change in accounting guidance was impracticable. Acquisition costs capitalized prior to January 1, 2004 will continue to be accounted for under the previous accounting guidance and will be amortized over the premium-paying period of the related policies using assumptions consistent with those used for computing future policy benefit reserves for such contracts.

 

8


Table of Contents

The Company has adjusted its previously reported financial information included herein to reflect the change in accounting guidance for deferred acquisition costs. The impacts of adopting the new accounting standard on the Company’s Consolidated Condensed Balance Sheet as of December 31, 2011 were a $106 million decrease in Deferred acquisition costs of insurance subsidiaries and a $37 million decrease in Deferred income tax liabilities. The impacts to Accumulated other comprehensive income (“AOCI”) and Additional paid-in capital (“APIC”) were the result of the indirect effects of the Company’s adoption of this guidance on Shadow Adjustments, as further discussed in Note 2, and CNA’s acquisition of the noncontrolling interest of CNA Surety in 2011.

The impacts on the Company’s Consolidated Condensed Statement of Income for the three month period ended March 31, 2011 were a $48 million decrease in Amortization of deferred acquisition costs, a $52 million increase in Other operating expenses and a $1 million decrease in Income tax expense, resulting in a $3 million decrease in Net income. There were no changes to net cash flows from operating, investing or financing activities for the comparative period presented as a result of the adoption of the new accounting standard.

2. Investments

Net investment income is as follows:

 

Three Months Ended March 31    2012     2011  

 

 
(In millions)             

Fixed maturity securities

   $ 516      $ 506   

Short term investments

     3        3   

Limited partnerships

     143        134   

Equity securities

     4        6   

Income from trading portfolio (a)

     70        23   

Other

     4        4   

 

 

Total investment income

     740        676   

Investment expenses

     (14     (15

 

 

Net investment income

   $ 726      $ 661   

 

 

 

(a) Includes net unrealized gains related to changes in fair value on trading securities still held of $36 million and $21 million for the three months ended March 31, 2012 and 2011.

Investment gains (losses) are as follows:

 

Three Months Ended March 31    2012     2011  

 

 
(In millions)             

Fixed maturity securities

   $ 30      $ 20   

Equity securities

     1     

Derivative instruments

     (1     (1

Short term investments

       2   

Other

     2        2   

 

 

Investment gains (a)

   $ 32      $ 23   

 

 

 

(a)

Includes gross realized gains of $72 million and $93 million and gross realized losses of $41 million and $73 million on available-for-sale securities for the three months ended March 31, 2012 and 2011.

 

9


Table of Contents

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

 

Three Months Ended March 31    2012      2011  
(In millions)              

Fixed maturity securities available-for-sale:

     

Corporate and other bonds

   $ 10       $ 9   

Asset-backed:

     

Residential mortgage-backed

     14         28   

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

     1      

 

 

Total fixed maturities available-for-sale

     25         37   

 

 

Equity securities available-for-sale:

     

Common stock

     2         3   

Preferred stock

        1   

 

 

Total equity securities available-for-sale

     2         4   

 

 

Net OTTI losses recognized in earnings

   $ 27       $ 41   

 

 

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 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.

 

10


Table of Contents

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

 

March 31, 2012   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

  $ 19,324      $ 2,013      $ 61      $ 21,276     

States, municipalities and political subdivisions

    9,234        1,042        93        10,183     

Asset-backed:

         

Residential mortgage-backed

    5,958        175        139        5,994      $ 37   

Commercial mortgage-backed

    1,297        68        36        1,329        (2

Other asset-backed

    1,022        18        1        1,039     

 

 

Total asset-backed

    8,277        261        176        8,362        35   

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

    224        12          236     

Foreign government

    634        21          655     

Redeemable preferred stock

    105        8          113     

 

 

Fixed maturities available-for-sale

    37,798        3,357        330        40,825        35   

Fixed maturities, trading

    373          25        348     

 

 

Total fixed maturities

    38,171        3,357        355        41,173        35   

 

 

Equity securities:

         

Common stock

    32        17        1        48     

Preferred stock

    246        4          250     

 

 

Equity securities available-for-sale

    278        21        1        298        —     

Equity securities, trading

    684        107        63        728     

 

 

Total equity securities

    962        128        64        1,026        —     

 

 

Total

  $ 39,133      $ 3,485      $ 419      $ 42,199      $ 35   

 

 
December 31, 2011                              

 

 

Fixed maturity securities:

         

Corporate and other bonds

  $ 19,086      $ 1,946      $ 154      $ 20,878     

States, municipalities and political subdivisions

    9,018        900        136        9,782     

Asset-backed:

         

Residential mortgage-backed

    5,786        172        183        5,775      $ 99   

Commercial mortgage-backed

    1,365        48        59        1,354        (2

Other asset-backed

    946        13        4        955     

 

 

Total asset-backed

    8,097        233        246        8,084        97   

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

    479        14          493     

Foreign government

    608        28          636     

Redeemable preferred stock

    51        7          58     

 

 

Fixed maturities available-for-sale

    37,339        3,128        536        39,931        97   

Fixed maturities, trading

    127          18        109     

 

 

Total fixed maturities

    37,466        3,128        554        40,040        97   

 

 

Equity securities:

         

Common stock

    30        17          47     

Preferred stock

    258        4        5        257     

 

 

Equity securities available-for-sale

    288        21        5        304        —     

Equity securities, trading

    614        76        67        623     

 

 

Total equity securities

    902        97        72        927        —     

 

 

Total

  $ 38,368      $ 3,225      $ 626      $ 40,967      $ 97   

 

 

 

11


Table of Contents

The net unrealized gains on investments included in the tables above are recorded as a component of AOCI. When presented in AOCI, these amounts are net of tax and noncontrolling interests and any required Shadow Adjustments. At March 31, 2012 and December 31, 2011, the net unrealized gains on investments included in AOCI were net of Shadow Adjustments of $676 million and $651 million. To the extent that unrealized gains on fixed income securities supporting certain products within CNA’s Life & Group Non-Core segment would result in a premium deficiency if realized, a related decrease in Deferred acquisition costs, and/or increase in Insurance reserves are recorded, net of tax and noncontrolling interests, as a reduction through Other comprehensive income (Shadow Adjustments).

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

 

    Less than 12 Months      12 Months or Longer      Total  
 

 

 

 
March 31, 2012   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

  $ 1,635       $ 43       $ 124       $ 18       $ 1,759       $ 61   

States, municipalities and political subdivisions

    385         8         460         85         845         93   

Asset-backed:

                

Residential mortgage-backed

    882         39         1,026         100         1,908         139   

Commercial mortgage-backed

    219         18         122         18         341         36   

Other asset-backed

    297         1               297         1   

 

 

Total asset-backed

    1,398         58         1,148         118         2,546         176   

 

 

Total fixed maturities available-for-sale

    3,418         109         1,732         221         5,150         330   

Equity securities available-for-sale:

                

Common stock

    4         1               4         1   

 

 

Total

  $ 3,422       $ 110       $ 1,732       $ 221       $ 5,154       $ 331   

 

 
December 31, 2011                                         

 

 

Fixed maturity securities:

                

Corporate and other bonds

  $ 2,552       $ 126       $ 159       $ 28       $ 2,711       $ 154   

States, municipalities and political subdivisions

    67         1         721         135         788         136   

Asset-backed:

                

Residential mortgage-backed

    719         36         874         147         1,593         183   

Commercial mortgage-backed

    431         39         169         20         600         59   

Other asset-backed

    389         4               389         4   

 

 

Total asset-backed

    1,539         79         1,043         167         2,582         246   

 

 

Total fixed maturities available-for-sale

    4,158         206         1,923         330         6,081         536   

Equity securities available-for-sale:

                

Preferred stock

    117         5               117         5   

 

 

Total

  $ 4,275       $ 211       $ 1,923       $ 330       $ 6,198       $ 541   

 

 

The amount of pretax net realized gains on available-for-sale securities reclassified out of AOCI into earnings was $32 million and $21 million for the three months ended March 31, 2012 and 2011.

The following table summarizes the activity for the three months ended March 31, 2012 and 2011 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at March 31, 2012 and 2011 for which a portion of an OTTI loss was recognized in Other comprehensive income.

 

Three Months Ended March 31    2012     2011  

 

 
(In millions)             

Beginning balance of credit losses on fixed maturity securities

   $ 92      $ 141   

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

     11        10   

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

     1        1   

Reductions for securities sold during the period

     (4     (25

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

    

will be required to sell

       (14

 

 

Ending balance of credit losses on fixed maturity securities

   $ 100      $ 113   

 

 

 

12


Table of Contents

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.

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. Securities that comprise 88.2% of the gross unrealized losses in this category are rated AA or higher.

The largest exposures at March 31, 2012 as measured by gross unrealized losses were several separate issues of Puerto Rico sales tax revenue bonds with gross unrealized losses of $63 million. All of these securities are rated investment grade.

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 March 31, 2012.

Asset-Backed Securities

The fair value of total asset-backed holdings at March 31, 2012 was $8.4 billion which was comprised of 2,028 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, 104 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.

The gross unrealized losses on residential mortgage-backed securities included $42 million related to securities guaranteed by a U.S. government agency or sponsored enterprise and $97 million related to non-agency structured securities. Non-agency structured securities included 112 securities that had at least one trade lot in a gross unrealized loss position and the aggregate severity of the gross unrealized loss was approximately 8.0% of amortized cost.

Commercial mortgage-backed securities included 43 securities that had at least one trade lot in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 9.6% of amortized cost.

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

 

March 31, 2012    Amortized
Cost
     Estimated
Fair Value
     Gross
Unrealized
Losses
 

 

 
(In millions)                     

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

   $ 852       $ 810       $ 42       

AAA

     246         239         7       

AA

     226         215         11       

A

     294         286         8       

BBB

     209         193         16       

Non-investment grade

     895         803         92       

 

 

Total

   $ 2,722       $ 2,546       $ 176       

 

 

 

13


Table of Contents

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 collectability of the current carrying values of the 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 March 31, 2012.

Contractual Maturity

The following table summarizes available-for-sale fixed maturity securities by contractual maturity at March 31, 2012 and December 31, 2011. 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.

 

      March 31, 2012      December 31, 2011  
      Amortized
Cost
     Estimated
Fair Value
     Amortized
Cost
     Estimated
Fair Value
 
(In millions)                            

Due in one year or less

   $ 1,842       $ 1,855       $ 1,802       $ 1,812   

Due after one year through five years

     13,003         13,573         13,110         13,537   

Due after five years through ten years

     8,713         9,326         8,410         8,890   

Due after ten years

     14,240         16,071         14,017         15,692   

 

 

Total

   $ 37,798       $ 40,825       $ 37,339       $ 39,931   

 

 

Investment Commitments

As of March 31, 2012, the Company had committed approximately $122 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.

The Company invests in various privately placed debt securities, including bank loans, as part of its overall investment strategy and has committed to additional future purchases, sales and funding. 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 March 31, 2012, the Company had commitments to purchase $151 million and sell $127 million of such investments. The Company has an obligation to fund additional amounts under the terms of current loan participations that may not be recorded until a draw is made. As of March 31, 2012, the Company had obligations on unfunded bank loan participations in the amount of $5 million.

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 type of financial instruments being measured and the methodologies and inputs used at March 31, 2012 were consistent with those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2011.

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

 

14


Table of Contents

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

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

 

March 31, 2012    Level 1     Level 2     Level 3     Total  
(In millions)                         

Fixed maturity securities:

        

Corporate and other bonds

     $ 20,791      $ 485      $ 21,276   

States, municipalities and political subdivisions

       10,010        173        10,183   

Asset-backed:

        

Residential mortgage-backed

       5,547        447        5,994   

Commercial mortgage-backed

       1,224        105        1,329   

Other asset-backed

       655        384        1,039   

 

 

Total asset-backed

   $ —          7,426        936        8,362   

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

     194        42          236   

Foreign government

     124        531          655   

Redeemable preferred stock

     5        55        53        113   

 

 

Fixed maturities available-for-sale

     323        38,855        1,647        40,825   

Fixed maturities, trading

     208        39        101        348   

 

 

Total fixed maturities

   $ 531      $ 38,894      $ 1,748      $ 41,173   

 

 

Equity securities available-for-sale

   $ 115      $ 109      $ 74      $ 298   

Equity securities, trading

     715        2        11        728   

 

 

Total equity securities

   $ 830      $ 111      $ 85      $ 1,026   

 

 

Short term investments

   $ 4,717      $ 583        $ 5,300   

Other invested assets

       $ 11        11   

Receivables

       81        4        85   

Life settlement contracts

         115        115   

Separate account business

     5        393        4        402   

Payable to brokers

     (254     (16     (12     (282

 

15


Table of Contents
December 31, 2011    Level 1     Level 2     Level 3     Total  
(In millions)                         

Fixed maturity securities:

        

Corporate and other bonds

     $ 20,396      $ 482      $ 20,878   

States, municipalities and political subdivisions

       9,611        171        9,782   

Asset-backed:

        

Residential mortgage-backed

       5,323        452        5,775   

Commercial mortgage-backed

       1,295        59        1,354   

Other asset-backed

       612        343        955   

 

 

Total asset-backed

   $        7,230        854        8,084   

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

     451        42          493   

Foreign government

     92        544          636   

Redeemable preferred stock

     5        53          58   

 

 

Fixed maturities available-for-sale

     548        37,876        1,507        39,931   

Fixed maturities, trading

       8        101        109   

 

 

Total fixed maturities

   $ 548      $ 37,884      $ 1,608      $ 40,040   

 

 

Equity securities available-for-sale

   $ 124      $ 113      $ 67      $ 304   

Equity securities, trading

     609          14        623   

 

 

Total equity securities

   $ 733      $ 113      $ 81      $ 927   

 

 

Short term investments

   $ 4,570      $ 508      $ 27      $ 5,105   

Other invested assets

         11        11   

Receivables

       79        8        87   

Life settlement contracts

         117        117   

Separate account business

     21        373        23        417   

Payable to brokers

     (32     (20     (23     (75

 

16


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 months ended March 31, 2012 and 2011:

 

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

Held at
March 31
 
2012   Balance,
January 1
    Included in
Net Income
    Included
in OCI
    Purchases     Sales     Settlements    

Transfers

into
Level 3

    Transfers
out of
Level 3
    Balance,
March 31
   
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

  $ 482      $ 3      $ 4      $ 78      $ (86   $ (19   $ 33      $ (10   $ 485     

States, municipalities and political subdivisions

    171          2                  173     

Asset-backed:

                   

Residential mortgage-backed

    452        1        (4     38          (7       (33     447     

Commercial mortgage-backed

    59          4        42                105     

Other asset-backed

    343        4        4        176        (77     (25       (41     384     

 

 

Total asset-backed

    854        5        4        256        (77     (32     —          (74     936     

Redeemable preferred stock

    —              53                53     

 

 

Fixed maturities available-for-sale

    1,507        8        10        387        (163     (51     33        (84     1,647     

Fixed maturities, trading

    101        (7       7                101      $ (7

 

 

Total fixed maturities

  $ 1,608      $ 1      $ 10      $ 394      $ (163   $ (51   $ 33      $ (84   $ 1,748      $ (7

 

 

Equity securities available-for-sale

  $ 67        $ (3   $ 11      $ (1         $ 74      $ (2

Equity securities trading

    14      $ (3                 11        (3

 

 

Total equity securities

  $ 81      $ (3   $ (3   $ 11      $ (1   $ —        $ —        $ —        $ 85      $ (5

 

 

Short term investments

  $ 27          $ 12        $ (39       $ —       

Other invested assets

    11                      11     

Life settlement contracts

    117      $ 3              (5         115      $ (1

Separate account business

    23            $ (19           4     

Derivative financial instruments, net

    (15     (6   $ 13        1        (5     4            (8     1   

 

17


Table of Contents
          Net Realized Gains
(Losses) and Net
Change in
Unrealized Gains
(Losses)
                                        Unrealized
Gains (Losses)
Recognized in
Net Income
on Level 3
Assets and
Liabilities

Held at
March 31
 
2011   Balance,
January 1
    Included in
Net Income
    Included in
OCI
    Purchases     Sales     Settlements    

Transfers

into
Level 3

   

Transfers

out of
Level 3

    Balance,
March 31
   
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

  $ 624      $ 4      $ (5   $ 41      $ (20   $ (27   $ 9      $ (50   $ 576     

States, municipalities and political subdivisions

    266          1            (79         188     

Asset-backed:

                   

Residential mortgage-backed

    767        1        2        47        (26     (22       (31     738     

Commercial mortgage-backed

    73        3        16          (4           88     

Other asset-backed

    359        4          200        (87     (31         445     

 

 

Total asset-backed

    1,199        8        18        247        (117     (53     —          (31     1,271     

Redeemable preferred stock

    3        3        (3       (3           —       

 

 

Fixed maturities available-for-sale

    2,092        15        11        288        (140     (159     9        (81     2,035     

Fixed maturities, trading

    184        1          1        (4           182     

 

 

Total fixed maturities

  $ 2,276      $ 16      $ 11      $ 289      $ (144   $ (159   $ 9      $ (81   $ 2,217      $ —     

 

 

Equity securities available-for-sale

  $ 26      $ (1   $ (1   $ 15      $ (9         $ 30      $ (3

Equity securities, trading

    6                      6     

 

 

Total equity securities

  $ 32      $ (1   $ (1   $ 15      $ (9   $ —        $ —        $ —        $ 36      $ (3

 

 

Short term investments

  $ 27          $ 12        $ (2     $ (10   $ 27     

Other invested assets

    26      $ 2          $ (19           9      $ 1   

Life settlement contracts

    129        3              (5         127        (1

Separate account business

    41              (2           39     

Derivative financial instruments, net

    (21     (8   $ (15         8            (36  

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

 

18


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 determine the fair value of the security. 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 transfers between Level 1 and Level 2 during the three months ended March 31, 2012 and 2011. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods.

Significant Unobservable Inputs

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

 

March 31, 2012    Fair Value      Valuation
Technique(s)
   Unobservable Input(s)    Range
(Weighted Average)
(In millions)                      

Assets

           

Fixed maturity securities

   $ 204       Discounted cash flow    Expected call date assumption    0.5 - 5.5 years (2.2 years)
     53       Market approach    Private offering price    $26.5 million per unit

Equity securities

     69       Market approach    Private offering price   

$0.10 - $4,023 per share

($211.01 per share)

Life settlement contracts

     115       Discounted cash flow   

Discount rate risk premium

Mortality assumption

  

9%

65% - 928% (181%)

 

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

Financial Assets and Liabilities Not Measured at Fair Value

The methods and assumptions used to estimate the fair value for financial assets and liabilities not measured at fair value were consistent with those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2011.

The carrying amount, estimated fair value and the level of the fair value hierarchy 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 tables below. The carrying amounts reported on the Consolidated Condensed Balance Sheets for cash and short term investments not carried at fair value and certain other assets and liabilities approximate fair value due to the short term nature of these items.

 

     Carrying      Estimated Fair Value  
March 31, 2012    Amount      Level 1    Level 2      Level 3      Total  
(In millions)                                 

Financial Assets:

              

Other invested assets, primarily mortgage loans

   $ 281             $ 295       $ 295   

Financial Liabilities:

              

Premium deposits and annuity contracts

     108               112         112   

Short term debt

     88          $ 84         5         89   

Long term debt

     8,954            9,457         208         9,665   

 

19


Table of Contents
December 31, 2011    Carrying
Amount
     Estimated
Fair Value
 

 

 
(In millions)              

Financial assets:

     

Other invested assets, primarily mortgage loans

   $ 234       $ 247   

Financial liabilities:

     

Premium deposits and annuity contracts

     109         114   

Short term debt

     88         90   

Long term debt

     8,913         9,533   

4. Derivative Financial Instruments

A summary of the aggregate contractual or notional amounts and gross estimated fair values related to derivative financial instruments follows. The contractual or notional amounts for derivatives are used to calculate the exchange of contractual payments under the agreements and may not be representative of the potential for gain or loss on these instruments.

 

     March 31, 2012     December 31, 2011  

 

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

 

 
(In millions)                                         

With hedge designation:

                

Interest rate risk:

                

Interest rate swaps

   $ 300       $ 3       $ (4   $ 300       $ 3       $ (3

Commodities:

                

Forwards – short

     269         71         (11     268         64         (22

Foreign exchange:

                

Currency forwards – short

     65         2         (1     154         1         (8

Without hedge designation:

                

Equity markets:

                

Options – purchased

     650         27           286         33      

– written

     389            (13     398            (23

Equity swaps and warrants – long

     20         14           63         16      

Interest rate risk:

                

Interest rate swaps

     117         1         (1     100         1         (1

Credit default swaps

                

– purchased protection

     58            (1     145         8         (1

– sold protection

     38              28            (2

Foreign exchange:

                

Currency forwards – long

     180            (2     203         4      

  – short

     142              330            (2

For derivative financial instruments without hedge designation, 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. Losses of $1 million were included in Investment gains (losses) for the three months ended March 31, 2012 and 2011. Losses of $4 million were included in Net investment income for the three months ended March 31, 2012 and 2011.

The Company’s derivative financial instruments with cash flow hedge designation hedge variable price risk associated with the purchase and sale of natural gas and other energy-related products, exposure to foreign currency

 

20


Table of Contents

losses on future foreign currency expenditures, as well as risks attributable to changes in interest rates on long term debt. For the three months ended March 31, 2012, the amount of gains recognized in OCI related to these cash flow hedges were $34 million, as compared to $16 million of losses recognized in the 2011 period. For the three months ended March 31, 2012 and 2011, the amount of gain reclassified from AOCI into income was $9 million and $8 million. As of March 31, 2012, the estimated amount of net unrealized gains associated with these cash flow hedges that will be reclassified from AOCI into earnings during the next twelve months was $46 million. The net amounts recognized due to ineffectiveness were less than $1 million for the three months ended March 31, 2012 and 2011.

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 $28 million and $55 million for the three months ended March 31, 2012 and 2011. Catastrophe losses in the first quarter of 2012 related primarily to U.S. storms.

Net Prior Year Development

The following tables and discussion include the net prior year development recorded for CNA Specialty, CNA Commercial and Other. Favorable net prior year development of $1 million was recorded in the Life & Group Non-Core segment for the three months ended March 31, 2012, compared to unfavorable net prior year development of $7 million for the same period in 2011.

 

Three Months Ended March 31, 2012    CNA
Specialty
    CNA
Commercial
    Other     Total  
(In millions)                         

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

   $ (6   $ (14   $ 2        $    (18)   

Pretax (favorable) unfavorable premium development

     (9     (17     1        (25)   

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (15   $ (31   $ 3        $    (43)   

 

 

Three Months Ended March 31, 2011

                                

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

   $ (15   $ (7   $ 3        $    (19)   

Pretax (favorable) unfavorable premium development

     (7     (8     (1     (16)   

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (22   $ (15   $ 2        $    (35)   

 

 

 

21


Table of Contents

For the three months ended March 31, 2012, favorable premium development was recorded for CNA Commercial primarily due to premium adjustments on auditable policies arising from increased exposures.

CNA Specialty

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

 

Three Months Ended March 31    2012     2011  

 

 
(In millions)             

Medical professional liability

   $ (6   $ (14

Other professional liability

     4        6   

Surety

     1     

Warranty

     (1     (10

Other

     (4     3   

 

 

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

   $ (6   $ (15

 

 

2012

Favorable development for medical professional liability was primarily due to reductions in the estimated frequency of large losses in accident years 2008 and prior.

2011

Favorable development for medical professional liability was primarily due to favorable loss emergence in aging services, physicians and excess institutions in accident years 2007 and prior.

Favorable development in warranty was driven by favorable policy year experience on an aggregate stop loss treaty covering CNA’s non-insurance warranty subsidiary.

CNA Commercial

The following table and discussion provide further detail of the net prior year claim and allocated claim adjustment expense reserve development recorded for the CNA Commercial segment:

 

Three Months Ended March 31    2012     2011  

 

 
(In millions)             

Commercial auto

     $ 10   

General liability

   $ 8        22   

Workers’ compensation

     (19     8   

Property and other

     (3     (47

 

 

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

   $ (14   $ (7

 

 

2012

Overall, favorable development for workers compensation reflects favorable experience in accident years 2001 and prior. Unfavorable development was recorded for accident year 2010 related to increased medical severity.

2011

Favorable development for property and marine coverages was due to lower than expected frequency in commercial multi-peril coverages primarily in accident year 2010 and a favorable settlement on an individual claim in accident year 2003 in the equipment breakdown book.

The unfavorable development in the general liability coverages was primarily due to two large claim outcomes on umbrella claims in accident year 2001.

 

22


Table of Contents

6. Benefit Plans

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

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

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

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

The components of net periodic benefit cost are as follows:

 

     Pension Benefits     Other
Postretirement Benefits
 
  

 

 

 
Three Months Ended March 31    2012     2011     2012     2011  

 

 
(In millions)                         

Service cost

   $ 6      $ 7       

Interest cost

     38        41      $ 1      $ 2   

Expected return on plan assets

     (47     (47     (1     (1

Amortization of unrecognized net loss

     11        7          1   

Amortization of unrecognized prior service benefit

         (6     (7

Regulatory asset decrease

           1   

 

 

Net periodic benefit cost

   $ 8      $ 8      $ (6   $ (4

 

 

7. Business Segments

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

CNA’s core property and casualty commercial insurance operations are reported in two business segments: CNA Specialty and CNA Commercial. CNA Specialty provides a broad array of professional, financial and specialty property and casualty products and services, primarily through insurance brokers and managing general underwriters. CNA Commercial includes property and casualty coverages sold to small businesses and middle market entities and organizations primarily through an independent agency distribution system. CNA Commercial also includes commercial insurance and risk management products sold to large corporations primarily through insurance brokers.

CNA’s non-core operations are managed in two segments: Life & Group Non-Core and Other. Life & Group Non-Core primarily includes the results of the life and group lines of business that are in run-off. Other primarily includes certain corporate expenses, including interest on corporate debt, and the results of certain property and casualty business primarily in run-off, including CNA Re and asbestos and environmental pollution.

Diamond Offshore’s business primarily consists of operating offshore drilling rigs that are chartered on a contract basis for fixed terms by companies engaged in exploration and production of hydrocarbons. Offshore rigs are mobile units that can be relocated based on market demand. Diamond Offshore’s fleet consists of 48 drilling rigs, including three new-build rigs which are under construction and one rig being constructed utilizing the hull of one of Diamond

 

23


Table of Contents

Offshore’s existing mid-water floaters. On March 31, 2012, Diamond Offshore’s drilling rigs were located offshore 12 countries in addition to the United States.

Boardwalk Pipeline is engaged in the interstate transportation and storage of natural gas. This segment consists of three interstate natural gas pipeline systems originating in the Gulf Coast region, Oklahoma and Arkansas, and extending north and east through the midwestern states of Tennessee, Kentucky, Illinois, Indiana and Ohio, with approximately 14,300 miles of pipeline.

HighMount is engaged in the exploration, production and marketing of natural gas and oil (including condensate and natural gas liquids), primarily located in the Permian Basin in West Texas. HighMount holds mineral rights on over 700,000 net acres with over 6,000 producing wells.

Loews Hotels owns and/or operates 17 hotels, 15 of which are in the United States and two are in Canada.

The Corporate and other segment consists primarily of corporate investment income, including investment gains (losses) from non-insurance subsidiaries, corporate interest expense and other unallocated expenses.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, other than the accounting for deferred acquisition costs, as further discussed in Note 1 herein. In addition, CNA does not maintain a distinct investment portfolio for each of its insurance segments, and accordingly, allocation of assets to each segment is not performed. Therefore, net investment income and investment gains (losses) are allocated based on each segment’s carried insurance reserves, as adjusted.

 

24


Table of Contents

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

 

Three Months Ended March 31    2012      2011  

 

 
(In millions)              

Revenues (a):

     

CNA Financial:

     

CNA Specialty

   $ 945       $ 891   

CNA Commercial

     1,088         1,094   

Life and Group Non-Core

     350         326   

Other

     18         13   

 

 

Total CNA Financial

     2,401         2,324   

Diamond Offshore

     796         809   

Boardwalk Pipeline

     314         311   

HighMount

     76         104   

Loews Hotels

     80         80   

Corporate and other

     77         40   

 

 

Total

   $ 3,744       $ 3,668   

 

 

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

     

CNA Financial:

     

CNA Specialty

   $ 209       $ 214   

CNA Commercial

     227         212   

Life and Group Non-Core

     (37      (48

Other

     (33      (46

 

 

Total CNA Financial

     366         332   

Diamond Offshore

     252         296   

Boardwalk Pipeline

     92         82   

HighMount

     (34      29   

Loews Hotels

     7         3   

Corporate and other

     58         15   

 

 

Total

   $ 741       $ 757   

 

 

Net income (loss) - Loews (a):

     

CNA Financial:

     

CNA Specialty

   $ 125       $ 121   

CNA Commercial

     131         125   

Life and Group Non-Core

     (10      (19

Other

     (20      (28

 

 

Total CNA Financial

     226         199   

Diamond Offshore

     87         117   

Boardwalk Pipeline

     35         33   

HighMount

     (22      19   

Loews Hotels

     4         2   

Corporate and other

     37         9   

 

 

Total

   $ 367       $ 379   

 

 

 

25


Table of Contents
(a) Investment gains (losses) included in Revenues, Income (loss) before income tax and noncontrolling interests and Net income (loss) - Loews are as follows:

 

Three Months Ended March 31    2012      2011  

 

 

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

     

CNA Financial:

     

CNA Specialty

   $ 8       $ 8   

CNA Commercial

     11         17   

Life and Group Non-Core

     13         (4

Other

        1   

 

 

Total CNA Financial

     32         22   

Corporate and other

        1   

 

 

Total

   $ 32       $ 23   

 

 

Net income (loss) - Loews:

     

CNA Financial:

     

CNA Specialty

   $ 5       $ 5   

CNA Commercial

     6         9   

Life and Group Non-Core

     7         (2

Other

     1      

 

 

Total

   $ 19       $ 12   

 

 

8. Legal Proceedings

In August 2005, CNA and certain insurance subsidiaries were joined as defendants, along with other insurers and brokers, in multidistrict litigation pending in the United States District Court for the District of New Jersey, In re Insurance Brokerage Antitrust Litigation, Civil No. 04-5184 (“GEB”). The plaintiffs’ consolidated class action complaint alleged bid rigging and improprieties in the payment of contingent commissions in connection with the sale of insurance. After various motions and preliminary court rulings providing for further proceedings, plaintiffs and various defendants, including CNA and its named insurance subsidiaries, executed final settlement documents and the plaintiffs filed a motion for preliminary approval of the settlement in May 2011, which was ultimately approved by the Court in March of 2012. In April of 2012, objectors to the settlement filed notices of appeal. As currently structured, the settlement will not have a material impact on the Company’s results of operations. In addition, the Company does not believe it has any material ongoing exposure relating to this matter.

The Company has been named as a defendant in the following two cases alleging substantial damages based on alleged health effects caused by smoking cigarettes or exposure to tobacco smoke, all of which also name a former subsidiary, Lorillard, Inc. or one of its subsidiaries, as a defendant. In Cypret vs. The American Tobacco Company, Inc. et al. (1998, Circuit Court, Jackson County, Missouri), the Company would contest jurisdiction and make use of all available defenses in the event it receives personal service of this action. In Young vs. The American Tobacco Company, Inc. et al. (1997, Civil District Court, Orleans Parish, Louisiana), the Company filed an exception for lack of personal jurisdiction during 2000, which remains pending.

The Company does not believe it is a proper defendant in any tobacco related cases and as a result, does not believe the outcome will have a material affect on its results of operations or equity. Further, pursuant to the Separation Agreement dated May 7, 2008 between the Company and Lorillard Inc. and its subsidiaries, Lorillard Inc. and its subsidiaries have agreed to indemnify and hold the Company harmless from all costs and expenses based upon or arising out of the operation or conduct of Lorillard’s business, including among other things, smoking and health claims and litigation such as the cases described above.

While the Company intends to defend vigorously all tobacco products liability litigation, it is not possible to predict the outcome of any of this litigation. Litigation is subject to many uncertainties. It is possible that one or more of the pending actions could be decided unfavorably.

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

 

26


Table of Contents

9. Commitments and Contingencies

Guarantees

In the course of selling business entities and assets to third parties, the Company has agreed to indemnify purchasers for losses arising out of breaches of representation and warranties with respect to the business entities or assets being sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such indemnification provisions generally survive for periods ranging from nine months following the applicable closing date to the expiration of the relevant statutes of limitation. As of March 31, 2012, the aggregate amount of quantifiable indemnification agreements in effect for sales of business entities, assets and third party loans was $763 million.

In addition, the Company has agreed to provide indemnification to third party purchasers for certain losses associated with sold business entities or assets that are not limited by a contractual monetary amount. As of March 31,2012, the Company had outstanding unlimited indemnifications in connection with the sales of certain of its business entities or assets that included tax liabilities arising prior to a purchaser’s ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. These indemnification agreements survive until the applicable statutes of limitation expire, or until the agreed upon contract terms expire.

Offshore Rig Purchase Obligations

Diamond Offshore has entered into three separate turnkey contracts with Hyundai Heavy Industries, Co. Ltd., (“Hyundai”) for the construction of three dynamically positioned, ultra-deepwaterdrillships, with deliveries scheduled for the second and fourth quarters of 2013 and in the second quarter of 2014. The aggregate cost of the three drillships, including commissioning, spares and project management, is expected to be approximately $1.8 billion. The contracted price of each drillship is payable in two installments. The first installments, aggregating $478 million, were paid in 2011 and are included in Property, plant and equipment in the Consolidated Condensed Balance Sheets. The final installments of the contracted price are payable to Hyundai upon delivery of each vessel.

In December of 2011, Diamond Offshore entered into an agreement for the construction of a moored semisubmersible rig designed to operate in water depths up to 6,000 feet. The rig will be constructed utilizing the hull of one of Diamond Offshore’s mid-water floaters and is estimated to cost approximately $300 million, including commissioning, spares and project management costs.

10. Consolidating Financial Information

The following schedules present the Company’s consolidating balance sheet information at March 31, 2012 and December 31, 2011, and consolidating statements of income information for the three months ended March 31, 2012 and 2011. These schedules present the individual subsidiaries of the Company and their contribution to the consolidated condensed financial statements. Amounts presented will not necessarily be the same as those in the individual financial statements of the Company’s subsidiaries due to adjustments for purchase accounting, income taxes and noncontrolling interests. In addition, many of the Company’s subsidiaries use a classified balance sheet which also leads to differences in amounts reported for certain line items.

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

 

27


Table of Contents

Loews Corporation

Consolidating Balance Sheet Information

 

March 31, 2012    CNA
Financial
     Diamond
Offshore
     Boardwalk
Pipeline
     HighMount      Loews
Hotels
     Corporate
and Other
     Eliminations     Total  
(In millions)                                                       

Assets:

                      

Investments

   $ 45,465       $ 1,368       $ 2       $ 49       $ 72       $ 4,002         $ 50,958   

Cash

     59         32         2            6              99   

Receivables

     8,295         577         100         108         34         419       $ (124     9,409   

Property, plant and equipment

     272         4,617         6,673         1,574         338         48           13,522   

Deferred income taxes

     229               505               (734       

Goodwill

     86         20         215         584         3              908   

Investments in capital stocks of subsidiaries

                    17,014         (17,014       

Other assets

     579         424         298         22         24         19           1,366   

Deferred acquisition costs of insurance subsidiaries

     576                          576   

Separate account business

     402                          402   

 

 

Total assets

   $ 55,963       $ 7,038       $ 7,290       $ 2,842       $ 477       $ 21,502       $ (17,872   $ 77,240   

 

 

Liabilities and Equity:

                      

Insurance reserves

   $ 37,714                        $ 37,714   

Payable to brokers

     404       $ 1       $ 1       $ 24          $ 490           920   

Short term debt

     83                $ 5              88   

Long term debt

     2,526         1,489         3,439         700         208         692       $ (100     8,954   

Deferred income taxes

        532         534            50         555         (734     937   

Other liabilities

     2,896         589         307         97         14         225         (24     4,104   

Separate account business

     402                          402   

 

 

Total liabilities

     44,025         2,611         4,281         821         277         1,962         (858     53,119   

 

 

Total shareholders’ equity

     10,759         2,244         1,678         2,021         200         19,540         (17,014     19,428   

Noncontrolling interests

     1,179         2,183         1,331                    4,693   

 

 

Total equity

     11,938         4,427         3,009         2,021         200         19,540         (17,014     24,121   

 

 

Total liabilities and equity

   $ 55,963       $ 7,038       $ 7,290       $ 2,842       $ 477       $ 21,502       $ (17,872   $ 77,240   

 

 

 

28


Table of Contents

Loews Corporation

Consolidating Balance Sheet Information

 

December 31, 2011   CNA
Financial
    Diamond
Offshore
    Boardwalk
Pipeline
    HighMount     Loews
Hotels
    Corporate
and Other
    Eliminations     Total  
(In millions)                                                

Assets:

               

Investments

  $ 44,372      $ 1,206      $ 10      $ 85      $ 71      $ 3,284        $ 49,028   

Cash

    75        30        13          10        1          129   

Receivables

    8,302        594        114        109        33        226      $ (119     9,259   

Property, plant and equipment

    272        4,674        6,713        1,576        338        45          13,618   

Deferred income taxes

    444            499            (943       

Goodwill

    86        20        215        584        3            908   

Investments in capital stocks of subsidiaries

              16,807        (16,807       

Other assets

    544        453        307        19        23        11          1,357   

Deferred acquisition costs of insurance subsidiaries

    552                    552   

Separate account business

    417                    417   

 

 

Total assets

  $ 55,064      $ 6,977      $ 7,372      $ 2,872      $ 478      $ 20,374      $ (17,869   $ 75,268   

 

 

Liabilities and Equity:

               

Insurance reserves

  $ 37,554                  $ 37,554   

Payable to brokers

    72      $ 8      $ 1      $ 36        $ 45          162   

Short term debt

    83            $ 5            88   

Long term debt

    2,525        1,488        3,398        700        208        694      $ (100     8,913   

Deferred income taxes

      530        493          51        491        (943     622   

Other liabilities

    2,971        594        373        104        20        266        (19     4,309   

Separate account business

    417                    417   

 

 

Total liabilities

    43,622        2,620        4,265        840        284        1,496        (1,062     52,065   

 

 

Total shareholders’ equity

    10,315        2,209        1,951        2,032        194        18,878        (16,807     18,772   

Noncontrolling interests

    1,127        2,148        1,156                4,431   

 

 

Total equity

    11,442        4,357        3,107        2,032        194        18,878        (16,807     23,203   

 

 

Total liabilities and equity

  $ 55,064      $ 6,977      $ 7,372      $ 2,872      $ 478      $ 20,374      $ (17,869   $ 75,268   

 

 

 

29


Table of Contents

Loews Corporation

Consolidating Statement of Income Information

 

Three Months Ended March 31, 2012   CNA
Financial
    Diamond
Offshore
    Boardwalk
Pipeline
    HighMount     Loews
Hotels
    Corporate
and Other
    Eliminations     Total  
(In millions)                                                

Revenues:

               

Insurance premiums

  $ 1,649                  $ 1,649   

Net investment income

    648      $ 2            $ 76          726   

Intercompany interest and dividends

              170      $ (170       

Investment gains

    32                    32   

Contract drilling revenues

      755                  755   

Other

    72        39      $ 314      $ 76      $ 80        2        (1     582   

 

 

Total

    2,401        796        314        76        80        248        (171     3,744   

 

 

Expenses:

               

Insurance claims and policyholders’ benefits

    1,381                    1,381   

Amortization of deferred acquisition costs

    295                    295   

Contract drilling expenses

      397                  397   

Other operating expenses

    317        132        181        107        71        12        (1     819   

Interest

    42        15        41        3        2        10        (2     111   

 

 

Total

    2,035        544        222        110        73        22        (3     3,003   

 

 

Income (loss) before income tax

    366        252        92        (34     7        226        (168     741   

Income tax (expense) benefit

    (115     (73     (22     12        (3     (21       (222

 

 

Net income (loss)

    251        179        70        (22     4        205        (168     519   

Amounts attributable to noncontrolling interests

    (25     (92     (35             (152

 

 

Net income (loss) attributable to Loews Corporation

  $ 226      $ 87      $ 35      $ (22   $ 4      $ 205      $ (168   $ 367   

 

 

 

30


Table of Contents

Loews Corporation

Consolidating Statement of Income Information

 

Three Months Ended March 31, 2011   CNA
Financial
    Diamond
Offshore
    Boardwalk
Pipeline
    HighMount     Loews
Hotels
    Corporate
and Other
    Eliminations     Total  
(In millions)                                                

Revenues:

               

Insurance premiums

  $ 1,615                  $ 1,615   

Net investment income

    620              $ 41          661   

Intercompany interest and dividends

              155      $ (155       

Investment gains

    22      $ 1                  23   

Contract drilling revenues

      789                  789   

Other

    67        20      $ 311      $ 104      $ 80        1        (3     580   

 

 

Total