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 June 30, 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 July 23, 2012

Common stock, $0.01 par value     395,596,576 shares

 

 

 


Table of Contents

INDEX

 

     Page
No.
 

Part I. Financial Information

  

Item 1. Financial Statements (unaudited)

  

Consolidated Condensed Balance Sheets
June 30, 2012 and December 31, 2011

     3   

Consolidated Condensed Statements of Income
Three and six months ended June 30, 2012 and 2011

     4   

Consolidated Condensed Statements of Comprehensive Income
Three and six months ended June  30, 2012 and 2011

     5   

Consolidated Condensed Statements of Equity
Six months ended June 30, 2012 and 2011

     6   

Consolidated Condensed Statements of Cash Flows
Six months ended June 30, 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

     40   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     68   

Item 4. Controls and Procedures

     68   

Part II. Other Information

     69   

Item 1. Legal Proceedings

     69   

Item 1A. Risk Factors

     69   

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

     69   

Item 6. Exhibits

     70   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

     June 30,
2012
     December 31,
2011
 

 

 
(Dollar amounts in millions, except per share data)              

Assets:

     

Investments:

     

Fixed maturities, amortized cost of $38,041 and $37,466

   $ 41,498       $ 40,040   

Equity securities, cost of $899 and $902

     889         927   

Limited partnership investments

     2,743         2,711   

Other invested assets, primarily mortgage loans

     350         245   

Short term investments

     5,595         5,105   

 

 

Total investments

     51,075         49,028   

Cash

     136         129   

Receivables

     9,145         9,259   

Property, plant and equipment

     13,709         13,618   

Goodwill

     908         908   

Other assets

     1,401         1,357   

Deferred acquisition costs of insurance subsidiaries

     584         552   

Separate account business

     370         417   

 

 

Total assets

   $ 77,328       $ 75,268   

 

 

Liabilities and Equity:

     

Insurance reserves:

     

Claim and claim adjustment expense

   $ 24,007       $ 24,303   

Future policy benefits

     10,352         9,810   

Unearned premiums

     3,478         3,250   

Policyholders’ funds

     167         191   

 

 

Total insurance reserves

     38,004         37,554   

Payable to brokers

     395         162   

Short term debt

     88         88   

Long term debt

     9,048         8,913   

Deferred income taxes

     952         622   

Other liabilities

     4,230         4,309   

Separate account business

     370         417   

 

 

Total liabilities

     53,087         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 – 396,879,276 and 396,585,226 shares

     4         4   

Additional paid-in capital

     3,543         3,494   

Retained earnings

     15,263         14,890   

Accumulated other comprehensive income

     746         384   

 

 
     19,556         18,772   

Less treasury stock, at cost (1,305,200 shares)

     51      

 

 

Total shareholders’ equity

     19,505         18,772   

Noncontrolling interests

     4,736         4,431   

 

 

Total equity

     24,241         23,203   

 

 

Total liabilities and equity

   $ 77,328       $ 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     Six Months Ended  
     June 30,     June 30,  
  

 

 

 
     2012     2011     2012     2011  

 

 
(In millions, except per share data)                         

Revenues:

        

Insurance premiums

   $ 1,668      $ 1,595      $ 3,317      $ 3,210   

Net investment income

     386        519        1,112        1,180   

Investment gains (losses):

        

Other-than-temporary impairment losses

     (12     (41     (27     (61

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

     (11     (21     (23     (42

 

 

Net impairment losses recognized in earnings

     (23     (62     (50     (103

Other net investment gains

     43        81        102        145   

 

 

Total investment gains

     20        19        52        42   

Contract drilling revenues

     726        870        1,481        1,659   

Other

     588        539        1,170        1,119   

 

 

Total

     3,388        3,542        7,132        7,210   

 

 

Expenses:

        

Insurance claims and policyholders’ benefits

     1,348        1,367        2,729        2,731   

Amortization of deferred acquisition costs

     309        286        604        583   

Contract drilling expenses

     405        388        802        750   

Other operating expenses

     1,001        824        1,820        1,561   

Interest

     111        129        222        280   

 

 

Total

     3,174        2,994        6,177        5,905   

 

 

Income before income tax

     214        548        955        1,305   

Income tax expense

     (16     (144     (238     (339

 

 

Net income

     198        404        717        966   

Amounts attributable to noncontrolling interests

     (142     (154     (294     (337

 

 

Net income attributable to Loews Corporation

   $ 56      $ 250      $ 423      $ 629   

 

 

Basic net income per share

   $ 0.14      $ 0.61      $ 1.07      $ 1.53   

 

 

Diluted net income per share

   $ 0.14      $ 0.61      $ 1.06      $ 1.53   

 

 

Dividends per share

   $ 0.0625      $ 0.0625      $ 0.125      $ 0.125   

 

 

Weighted-average shares outstanding:

        

Shares of common stock

     396.40        407.82        396.59        410.34   

Dilutive potential shares of common stock

     0.73        0.92        0.71        0.93   

 

 

Total weighted-average shares outstanding assuming dilution

     397.13        408.74        397.30        411.27   

 

 

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     Six Months Ended  
     June 30,     June 30,  
  

 

 

 
     2012     2011     2012     2011  

 

 
(In millions)                         

Net income

   $ 198      $ 404      $ 717      $ 966   

 

 

Other comprehensive income (loss)

        

Changes in:

        

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

     (3     1        37        39   

Net other unrealized gains on investments

     120        300        337        323   

 

 

Total unrealized gains on available-for-sale investments

     117        301        374        362   

Unrealized gains (losses) on cash flow hedges

     (2     6        13        (11

Foreign currency

     (19     5        2        31   

Pension liability

     4        2        11        2   

 

 

Other comprehensive income

     100        314        400        384   

 

 

Comprehensive income

     298        718        1,117        1,350   

Amounts attributable to noncontrolling interests

     (150     (199     (333     (388

 

 

Total comprehensive income attributable to Loews Corporation

   $ 148      $ 519      $ 784      $ 962   

 

 

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

     966             629             337   

Other comprehensive income

     384               333           51   

Dividends paid

     (247          (51          (196

Acquisition of CNA Surety noncontrolling interests

     (475        (59       17           (433

Issuance of equity securities by subsidiary

     152           28          1           123   

Purchase of Loews treasury stock

     (415               (415  

Issuance of Loews common stock

     4           4            

Stock-based compensation

     12           10               2   

Other

     (10        (2     (2          (6

 

 

Balance, June 30, 2011

   $ 23,399      $ 4       $ 3,648      $ 15,076      $ 581       $ (430   $ 4,520   

 

 

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

     717             423             294   

Other comprehensive income

     400               361           39   

Dividends paid

     (266          (50          (216

Issuance of equity securities by subsidiary

     222           36          1           185   

Purchase of Loews treasury stock

     (51               (51  

Issuance of Loews common stock

     5           5            

Stock-based compensation

     11           10               1   

Other

     —             (2            2   

 

 

Balance, June 30, 2012

   $ 24,241      $ 4       $ 3,543      $ 15,263      $ 746       $ (51   $ 4,736   

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

6


Table of Contents

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Six Months Ended June 30    2012     2011  

 

 
(In millions)             

Operating Activities:

    

Net income

   $ 717      $ 966   

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

     673        443   

Changes in operating assets and liabilities, net:

    

Receivables

     257        203   

Deferred acquisition costs

     (17     (19

Insurance reserves

     121        93   

Other assets

     (81     27   

Other liabilities

     (87     (276

Trading securities

     (477     (521

 

 

Net cash flow operating activities

     1,106        916   

 

 

Investing Activities:

    

Purchases of fixed maturities

     (5,169     (6,200

Proceeds from sales of fixed maturities

     3,303        4,124   

Proceeds from maturities of fixed maturities

     1,566        1,825   

Purchases of equity securities

     (27     (44

Proceeds from sales of equity securities

     61        153   

Purchases of property, plant and equipment

     (530     (300

Deposits for construction of offshore drilling equipment

     (169     (478

Acquisitions

     (170  

Dispositions

     151        9   

Change in short term investments

     (116     1,580   

Change in other investments

     (75     (301

Other, net

     17        5   

 

 

Net cash flow investing activities

     (1,158     373   

 

 

Financing Activities:

    

Dividends paid

     (50     (51

Dividends paid to noncontrolling interests

     (216     (196

Acquisition of CNA Surety noncontrolling interests

       (426

Purchases of treasury shares

     (51     (422

Issuance of common stock

     5        4   

Proceeds from sale of subsidiary stock

     246        172   

Principal payments on debt

     (1,246     (1,433

Issuance of debt

     1,375        1,101   

Other, net

     (4     (12

 

 

Net cash flow financing activities

     59        (1,263

 

 

Effect of foreign exchange rate on cash

       2   

 

 

Net change in cash

     7        28   

Cash, beginning of period

     129        120   

 

 

Cash, end of period

   $ 136      $ 148   

 

 

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 June 30, 2012 and December 31, 2011 and the results of operations and comprehensive income for the three and six months ended June 30, 2012 and 2011 and changes in shareholders’ equity and cash flows for the six months ended June 30, 2012 and 2011.

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

Reference is made to the Notes to Consolidated Financial Statements in the 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 net income per share on the Consolidated Condensed Statements of Income. Basic net income per share excludes dilution and is computed by dividing net income attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Stock appreciation rights (“SARs”) of 1.9 million, 1.7 million, 2.3 million and 1.8 million shares were not included in the diluted weighted average shares amount for the three and six months ended June 30, 2012 and 2011 due to the exercise price being greater than the average stock price.

Hardy Underwriting Bermuda Limited (“Hardy”) – On July 2, 2012, CNA completed the previously announced acquisition of Hardy, a specialized Lloyd’s of London (“Lloyd’s”) underwriter of marine and aviation, property and specialty business, as well as property treaty reinsurance. Hardy has business operations in the United Kingdom, Bermuda, Bahrain, Guernsey and Singapore. For the year ended December 31, 2011, Hardy reported gross written premiums of $430 million. The closing of the acquisition followed approval of the transaction agreement by Hardy shareholders and regulatory approvals in various jurisdictions. The purchase price for Hardy was approximately $230 million. At June 30, 2012, approximately $230 million of British pound denominated short term investments were held in escrow to fund the acquisition.

CNA has not yet finalized the purchase accounting related to the acquisition of Hardy. CNA estimates that the fair value of Hardy’s assets will include approximately $55 million of identifiable indefinite-lived intangible assets and $80 million of identifiable finite-lived intangible assets, as well as the recognition of approximately $35 million of goodwill. The goodwill is not expected to be deductible for tax purposes.

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

 

8


Table of Contents

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.

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 Statements of Income for the three and six months ended June 30, 2011 were a $64 million and $112 million decrease in Amortization of deferred acquisition costs, a $67 million and $119 million increase in Other operating expenses, no impact and a $1 million decrease in Income tax expense, and a $1 million decrease in Net income attributable to noncontrolling interests for both periods, resulting in a $2 million and $5 million decrease in Net income and a $0.01 and $0.01 decrease in Basic and Diluted net income per share. There were no changes to net cash flows from operating, investing or financing activities for the comparative periods presented as a result of the adoption of the new accounting standard.

 

9


Table of Contents

2. Investments

Net investment income is as follows:

 

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

 

 

 
     2012     2011     2012     2011  

 

 
(In millions)                         

Fixed maturity securities

   $ 505      $ 505      $ 1,021      $ 1,011   

Short term investments

     4        4        7        7   

Limited partnerships

     (43     22        100        156   

Equity securities

     2        6        6        12   

Income (loss) from trading portfolio (a)

     (74     (8     (4     15   

Other

     7        5        11        9   

 

 

Total investment income

     401        534        1,141        1,210   

Investment expenses

     (15     (15     (29     (30

 

 

Net investment income

   $ 386      $ 519      $ 1,112      $ 1,180   

 

 

 

(a)    Includes net unrealized gains (losses) related to changes in fair value on trading securities still held of $(90), $(17), $(60) and $1 for the three and six months ended June 30, 2012 and 2011.

 

Investment gains (losses) are as follows:

 

        

  

Fixed maturity securities

   $   17      $   20      $   47      $   40   

Equity securities

       (2     1        (2

Derivative instruments

     (1       (2     (1

Short term investments

       1          3   

Other

     4          6        2   

 

 

Investment gains (a)

   $ 20      $ 19      $ 52      $ 42   

 

 

 

(a)    Includes gross realized gains of $51, $90, $123 and $183 and gross realized losses of $34, $72, $75 and $145 on available-for-sale securities for the three and six months ended June 30, 2012 and 2011.

 

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

 

        

  

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

 

 

 
     2012     2011     2012     2011  

 

 
(In millions)                         

Fixed maturity securities available-for-sale:

        

Corporate and other bonds

   $ 6      $ 15      $ 16      $ 24   

Asset-backed:

        

Residential mortgage-backed

     15        46        29        74   

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

         1     

 

 

Total fixed maturities available-for-sale

     21        61        46        98   

 

 

Equity securities available-for-sale:

        

Common stock

     2        1        4        4   

Preferred stock

           1   

 

 

Total equity securities available-for-sale

     2        1        4        5   

 

 

Net OTTI losses recognized in earnings

   $ 23      $ 62      $ 50      $ 103   

 

 

 

10


Table of Contents

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.

 

11


Table of Contents

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

 

June 30, 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

  $ 19,350      $ 2,209      $ 79      $ 21,480     

States, municipalities and political subdivisions

    9,225        1,225        66        10,384     

Asset-backed:

         

Residential mortgage-backed

    5,817        215        141        5,891      $ 42   

Commercial mortgage-backed

    1,514        82        27        1,569        (2

Other asset-backed

    1,046        20        1        1,065     

 

 

Total asset-backed

    8,377        317        169        8,525        40   

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

    172        12          184     

Foreign government

    616        23          639     

Redeemable preferred stock

    101        10          111     

 

 

Fixed maturities available-for-sale

    37,841        3,796        314        41,323        40   

Fixed maturities, trading

    200          25        175     

 

 

Total fixed maturities

    38,041        3,796        339        41,498        40   

 

 

Equity securities:

         

Common stock

    27        21          48     

Preferred stock

    225        17          242     

 

 

Equity securities available-for-sale

    252        38          290        —     

Equity securities, trading

    647        67        115        599     

 

 

Total equity securities

    899        105        115        889        —     

 

 

Total

  $ 38,940      $ 3,901      $ 454      $ 42,387      $ 40   

 

 

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   

 

 

 

12


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 June 30, 2012 and December 31, 2011, the net unrealized gains on investments included in AOCI were net of Shadow Adjustments of $846 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 is 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  
 

 

 

 
June 30, 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

  $ 1,550       $ 53       $ 192       $ 26       $ 1,742       $ 79   

States, municipalities and political subdivisions

    174         2         301         64         475         66   

Asset-backed:

                

Residential mortgage-backed

    276         13         923         128         1,199         141   

Commercial mortgage-backed

    158         5         153         22         311         27   

Other asset-backed

    181         1               181         1   

 

 

Total asset-backed

    615         19         1,076         150         1,691         169   

 

 

Total

  $ 2,339       $ 74       $ 1,569       $ 240       $ 3,908       $ 314   

 

 
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 $15 million, $20 million, $47 million and $41 million for the three and six months ended June 30, 2012 and 2011.

 

13


Table of Contents

The following table summarizes the activity for the three and six months ended June 30, 2012 and 2011 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at June 30, 2012 and 2011 for which a portion of an OTTI loss was recognized in Other comprehensive income.

 

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

 

 

 
     2012     2011     2012     2011  

 

 
(In millions)                         

Beginning balance of credit losses on fixed maturity securities

   $ 100      $ 113      $ 92      $ 141   

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

     10        8        21        18   

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

     1          2        1   

Reductions for securities sold during the period

     (4     (21     (8     (46

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

     (8     (18     (8     (32

 

 

Ending balance of credit losses on fixed maturity securities

   $ 99      $ 82      $ 99      $ 82   

 

 

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.

Asset-Backed Securities

Asset-backed securities include residential mortgage-backed securities, both agency and non-agency, commercial mortgage-backed securities and other asset-backed securities. The fair value of total asset-backed holdings at June 30, 2012 was $8.5 billion which was comprised of 2,035 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.

The gross unrealized losses on residential mortgage-backed securities included $63 million related to securities guaranteed by a U.S. government agency or sponsored enterprise and $78 million related to non-agency structured securities. Non-agency structured securities included 94 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 8.9% of amortized cost.

Commercial mortgage-backed securities included 44 securities that had at least one trade lot in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 7.9% of amortized cost.

 

14


Table of Contents

The following table summarizes asset-backed securities in a gross unrealized loss position by ratings distribution at June 30, 2012.

 

June 30, 2012    Amortized
Cost
     Estimated
Fair Value
     Gross
Unrealized
Losses
 

 

 
(In millions)                     

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

   $ 468       $ 405       $ 63       

AAA

     247         241         6       

AA

     163         155         8       

A

     141         134         7       

BBB

     162         148         14       

Non-investment grade

     679         608         71       

 

 

Total

   $ 1,860       $ 1,691       $ 169       

 

 

The Company believes the unrealized losses are primarily attributable to broader economic conditions, changes in interest rates and credit spreads, market illiquidity 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 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 June 30, 2012.

Contractual Maturity

The following table summarizes available-for-sale fixed maturity securities by contractual maturity at June 30, 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.

 

      June 30, 2012      December 31, 2011  
      Amortized
Cost
     Estimated
Fair Value
     Amortized
Cost
     Estimated
Fair Value
 
(In millions)                            

Due in one year or less

   $ 1,889       $ 1,904       $ 1,802       $ 1,812   

Due after one year through five years

     13,118         13,728         13,110         13,537   

Due after five years through ten years

     8,561         9,228         8,410         8,890   

Due after ten years

     14,273         16,463         14,017         15,692   

 

 

Total

   $ 37,841       $ 41,323       $ 37,339       $ 39,931   

 

 

Investment Commitments

As of June 30, 2012, the Company had committed approximately $141 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 June 30, 2012, the Company had commitments to purchase $145 million and sell $124 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 June 30, 2012, the Company had obligations on unfunded bank loan participations in the amount of $12 million.

 

15


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 type of financial instruments being measured and the methodologies and inputs used at June 30, 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.

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.

 

16


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:

 

June 30, 2012    Level 1     Level 2     Level 3     Total  
(In millions)                         

Fixed maturity securities:

        

Corporate and other bonds

     $ 20,992      $ 488      $ 21,480   

States, municipalities and political subdivisions

       10,295        89        10,384   

Asset-backed:

        

Residential mortgage-backed

       5,448        443        5,891   

Commercial mortgage-backed

       1,403        166        1,569   

Other asset-backed

       631        434        1,065   

 

 

Total asset-backed

       7,482        1,043        8,525   

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

   $ 142        42          184   

Foreign government

     120        519          639   

Redeemable preferred stock

     28        56        27        111   

 

 

Fixed maturities available-for-sale

     290        39,386        1,647        41,323   

Fixed maturities, trading

       81        94        175   

 

 

Total fixed maturities

   $ 290      $ 39,467      $ 1,741      $ 41,498   

 

 

Equity securities available-for-sale

   $ 106      $ 91      $ 93      $ 290   

Equity securities, trading

     589        1        9        599   

 

 

Total equity securities

   $ 695      $ 92      $ 102      $ 889   

 

 

Short term investments

   $ 5,068      $ 271      $ 4      $ 5,343   

Other invested assets

         11        11   

Receivables

       65        18        83   

Life settlement contracts

         116        116   

Separate account business

     12        355        3        370   

Payable to brokers

     (27     (24     (6     (57

 

17


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

 

18


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 six months ended June 30, 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
June 30

 
2012   Balance,
April 1
    Included in
Net Income
    Included
in OCI
    Purchases     Sales     Settlements    

Transfers

into
Level 3

   

Transfers

out of
Level 3

    Balance,
June 30
   
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

  $ 485      $ 3      $ 2      $ 68      $ (26   $ (13   $ 9      $ (40   $ 488     

States, municipalities and political subdivisions

    173          1            (85         89     

Asset-backed:

                   

Residential mortgage-backed

    447        1        (18     22          (9         443     

Commercial mortgage-backed

    105        2        4        87        (12     (4       (16     166     

Other asset-backed

    384        2        (1     182        (99     (34         434     

 

 

Total asset-backed

    936        5        (15     291        (111     (47       (16     1,043     

Redeemable preferred stock

    53              (26           27     

 

 

Fixed maturities available-for-sale

    1,647        8        (12     359        (163     (145     9        (56     1,647     

Fixed maturities, trading

    101              (3         (4     94     

 

 

Total fixed maturities

  $ 1,748      $ 8      $ (12   $ 359      $ (166   $ (145   $ 9      $ (60   $ 1,741      $ —     

 

 

Equity securities available-for-sale

  $ 74          19      $ 15      $ (15         $ 93      $ (1

Equity securities trading

    11      $ (2                 9        (2

 

 

Total equity securities

  $ 85      $ (2   $ 19      $ 15      $ (15   $ —        $ —        $ —        $ 102      $ (3

 

 

Short term investments

  $ —            $ 4              $ 4     

Other invested assets

    11                      11     

Life settlement contracts

    115      $ 20            $ (19         116      $ 3   

Separate account business

    4            $ (1           3     

Derivative financial instruments, net

    (8     1      $ 21          (1     (1         12     

 

19


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

June 30

 
2011   Balance,
April 1
    Included in
Net Income
    Included
in OCI
    Purchases     Sales     Settlements    

Transfers

into
Level 3

   

Transfers

out of
Level 3

    Balance,
June 30
   

 

 
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

  $ 576      $ (2   $ 2      $ 304      $ (29   $ (70   $ 31        $ 812      $ (3

States, municipalities and political subdivisions

    188          (1         (8         179     

Asset-backed:

                   

Residential mortgage-backed

    738        (13     12        50        (57     (19     $ (24     687        (15

Commercial mortgage-backed

    88          2        5                95     

Other asset-backed

    445        1          127        (44     (24       (14     491     

 

 

Total asset-backed

    1,271        (12     14        182        (101     (43     —          (38     1,273        (15

 

 

Fixed maturities available-for-sale

    2,035        (14     15        486        (130     (121     31        (38     2,264        (18

Fixed maturities, trading

    182              (68           114        1   

 

 

Total fixed maturities

  $ 2,217      $ (14   $ 15      $ 486      $ (198   $ (121   $ 31      $ (38   $ 2,378      $ (17

 

 

Equity securities available-for-sale

  $ 30      $ (1     $ 4      $ (2     $ 5        $ 36      $ (1

Equity securities trading

    6        (5       1            14          16        (5

 

 

Total equity securities

  $ 36      $ (6   $ —        $ 5      $ (2   $ —        $ 19      $ —        $ 52      $ (6

 

 

Short term investments

  $ 27              $ (21       $ 6     

Other invested assets

    9      $ 1                    10      $ 1   

Life settlement contracts

    127        6              (4         129        3   

Separate account business

    39            $ (2           37     

Derivative financial instruments, net

    (36     (11   $ (1         11            (37  

 

20


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
June 30

 
2012   Balance,
January 1
    Included in
Net Income
    Included
in OCI
    Purchases     Sales     Settlements    

Transfers

into
Level 3

   

Transfers

out of
Level 3

    Balance,
June 30
   
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

  $ 482      $ 6      $ 6      $ 146      $ (112   $ (32   $ 42      $ (50   $ 488     

States, municipalities and political subdivisions

    171          3            (85         89     

Asset-backed:

                   

Residential mortgage-backed

    452        2        (22     60          (16       (33     443     

Commercial mortgage-backed

    59        2        8        129        (12     (4       (16     166     

Other asset-backed

    343        6        3        358        (176     (59       (41     434     

 

 

Total asset-backed

    854        10        (11     547        (188     (79       (90     1,043     

Redeemable preferred stock

    —              53        (26           27     

 

 

Fixed maturities available-for-sale

    1,507        16        (2     746        (326     (196     42        (140     1,647     

Fixed maturities, trading

    101        (7       1        (1           94      $ (7

 

 

Total fixed maturities

  $ 1,608      $ 9      $ (2   $ 747      $ (327   $ (196   $ 42      $ (140   $ 1,741      $ (7

 

 

Equity securities available-for-sale

  $ 67        $ 16      $ 26      $ (16         $ 93      $ (3

Equity securities trading

    14      $ (5                 9        (4

 

 

Total equity securities

  $ 81      $ (5   $ 16      $ 26      $ (16   $ —        $ —        $ —        $ 102      $ (7

 

 

Short term investments

  $ 27          $ 16        $ (39       $ 4     

Other invested assets

    11                      11     

Life settlement contracts

    117      $ 23              (24         116      $ 3   

Separate account business

    23            $ (20           3     

Derivative financial instruments, net

    (15     (4   $ 34          (6     3            12        1   

 

21


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
June 30

 
2011   Balance,
January 1
    Included in
Net Income
    Included in
OCI
    Purchases     Sales     Settlements     Transfers
into
Level 3
    Transfers
out of
Level 3
    Balance,
June 30
   

 

 
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

  $ 624      $ 2      $ (3   $ 346      $ (50   $ (97   $ 40      $ (50   $ 812      $ (3

States, municipalities and political subdivisions

    266                (87         179     

Asset-backed:

                   

Residential mortgage-backed

    767        (12     14        97        (83     (41       (55     687        (15

Commercial mortgage- backed

    73        3        18        5        (4           95     

Other asset-backed

    359        5          327        (131     (55       (14     491     

 

 

Total asset-backed

    1,199        (4     32        429        (218     (96     —          (69     1,273        (15

Redeemable preferred stock

    3        3        (3       (3           —       

 

 

Fixed maturities available-for-sale

    2,092        1        26        775        (271     (280     40        (119     2,264        (18

Fixed maturities, trading

    184        1            (71           114        1   

 

 

Total fixed maturities

  $ 2,276      $ 2      $ 26      $ 775      $ (342   $ (280   $ 40      $ (119   $ 2,378      $ (17

 

 

Equity securities available-for-sale

  $ 26      $ (2   $ (1   $ 19      $ (11     $ 5        $ 36      $ (4

Equity securities trading

    6        (5       1            14          16        (5

 

 

Total equity securities

  $ 32      $ (7   $ (1   $ 20      $ (11   $ —        $ 19      $ —        $ 52      $ (9

 

 

Short term investments

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

Other invested assets

    26      $ 3          $ (19           10      $ 1   

Life settlement contracts

    129        9              (9         129        3   

Separate account business

    41              (4           37     

Derivative financial instruments, net

    (21     (19   $ (16         19            (37  

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

 

22


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 or six months ended June 30, 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.

 

June 30, 2012    Fair Value      Valuation
Technique(s)
   Unobservable Input(s)    Range
(Weighted Average)
(In millions)                      

Assets

           

Fixed maturity securities

   $ 122       Discounted cash flow    Expected maturity date    0.3 – 4.7 years (3.5 years)
         Spreads off benchmark yields    225 – 325 bps (269bps)
     34       Market approach    Private offering price    $97.25 – $100.08 ($99.16)

Equity securities

     93       Market approach    Private offering price    $0.10 – $4,023 per share
            ($268.85 per share)

Life settlement contracts

     116       Discounted cash flow    Discount rate risk premium    9%
         Mortality assumption   

65% – 928% (185%)

 

For fixed maturity securities, an increase to the expected call date assumption or credit spreads off benchmark yields 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.

 

23


Table of Contents

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  
June 30, 2012    Amount      Level 1    Level 2      Level 3      Total  
(In millions)                                 

Financial Assets:

              

Other invested assets, primarily mortgage loans

   $ 339             $ 352       $ 352   

Financial Liabilities:

              

Premium deposits and annuity contracts

     105               109         109   

Short term debt

     88          $ 83         5         88   

Long term debt

     9,048            9,589         287         9,876   

 

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   

 

24


Table of Contents

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.

 

     June 30, 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          $ (5   $ 300       $ 3       $ (3

Commodities:

                

Forwards – short

     291       $ 72         (4     268         64         (22

Foreign exchange:

                

Currency forwards – short

     219         3         (3     154         1         (8

Without hedge designation:

                

Equity markets:

                

Options – purchased

     393         30           286         33      

– written

     499            (20     398            (23

Equity swaps and warrants – long

     11         8           63         16      

Equity futures – short

     218            (5        

Interest rate risk:

                

Interest rate swaps

     100            (2     100         1         (1

Credit default swaps

                

– purchased protection

     88         2         (1     145         8         (1

– sold protection

     43            (2     28            (2

Foreign exchange:

                

Currency forwards – long

     68         3           203         4      

  – short

     258            (3     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, $2 million and $1 million were included in Investment gains (losses) for the three and six months ended June 30, 2012 and the six months ended June 30, 2011. Gains of $5 million and $1 million and losses of $4 million were included in Net investment income for the three and six months ended June 30, 2012 and the six months ended June 30, 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 losses on future foreign currency expenditures, as well as risks attributable to changes in interest rates on long term debt. For the three and six months ended June 30, 2012, the amount of gains recognized in OCI related to these cash flow hedges were $15 million and $49 million. For the three and six months ended June 30, 2011, gains of $5 million and losses of $11 million were recognized in OCI related to these cash flow hedges. For the three and six months ended June 30, 2012, the amount of gains reclassified from AOCI into income were $18 million and $27

 

25


Table of Contents

million. Losses of $3 million and gains of $5 million were reclassified from AOCI into income for the three and six months ended June 30, 2011. As of June 30, 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 $51 million. The net amounts recognized due to ineffectiveness were less than $1 million for the three and six months ended June 30, 2012 and 2011.

5. Property, Plant and Equipment

 

     June 30,
2012
     December 31,
2011
 

 

 
(In millions)              

Pipeline equipment (net of accumulated DD&A of $1,045 and $926)

   $ 6,716       $ 6,749   

Offshore drilling equipment (net of accumulated DD&A of $3,400 and $3,378)

     3,965         4,119   

Natural gas and oil proved and unproved properties (net of accumulated DD&A of $2,365 and $2,056)

     1,162         1,330   

Other (net of accumulated DD&A of $937 and $899)

     972         799   

Construction in process

     894         621   

 

 

Property, plant and equipment, net

   $ 13,709       $ 13,618   

 

 

HighMount Impairment of Natural Gas and Oil Properties

For the three and six months ended June 30, 2012, HighMount recorded non-cash ceiling test impairment charges of $222 million and $266 million ($142 million and $170 million after tax) related to its carrying value of natural gas and oil properties. The impairments were recorded within Other operating expenses and as credits to Accumulated depreciation, depletion and amortization. The write-downs were the result of declines in natural gas and natural gas liquid (“NGL”) prices. Had the effects of HighMount’s cash flow hedges not been considered in calculating the ceiling limitation, the impairments would have been $266 million and $335 million ($170 million and $214 million after tax). As a result of significant declines in natural gas and NGL prices at June 30, 2012, HighMount performed a goodwill impairment test. HighMount also performed its annual goodwill impairment test as of April 30, 2012. No impairment charges were required.

Diamond Offshore

In May of 2012, Diamond Offshore entered into a contract for a fourth ultra-deepwater drillship at a total cost of $655 million including commissioning, spares and project management. The first installment of $169 million was included in Construction in process

During the first half of 2012, Diamond Offshore sold six jack-up rigs for total proceeds of $132 million, resulting in a pretax gain of approximately $76 million, recorded in Other revenues.

Loews Hotels

In June of 2012, Loews Hotels acquired a hotel in Hollywood, California, which will be operated as the Loews Hollywood Hotel. The hotel has approximately 630 guestrooms, including 32 suites and over 48,000 square feet of meeting space. The acquisition was funded with a combination of cash and newly incurred debt.

6. 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.

 

26


Table of Contents

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 $68 million and $96 million for the three and six months ended June 30, 2012. Catastrophe losses in 2012 related primarily to U.S. storms. CNA reported catastrophe losses, net of reinsurance, of $100 million and $155 million for the three and six months ended June 30, 2011.

Net Prior Year Development

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

 

Three Months Ended June 30, 2012    CNA
Specialty
    CNA
Commercial
    Other     Total  
(In millions)                         

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

   $ (35   $ (13   $ (4   $ (52)   

Pretax (favorable) unfavorable premium development

     (5     (19     1        (23)   

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (40   $ (32   $ (3   $ (75)   

 

 

Three Months Ended June 30, 2011

                                

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

   $ (52   $ (50   $ (9   $   (111)   

Pretax (favorable) unfavorable premium development

     (1     40          39   

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (53   $ (10   $ (9   $ (72)   

 

 

 

27


Table of Contents
Six Months Ended June 30, 2012    CNA
Specialty
    CNA
Commercial
    Other     Total  
(In millions)                         

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

   $ (41   $ (27   $ (2   $ (70)   

Pretax (favorable) unfavorable premium development

     (14     (36     2        (48)   

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (55   $ (63   $ —        $ (118)   

 

 

Six Months Ended June 30, 2011

                                

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

   $ (67   $ (57   $ (6   $   (130)   

Pretax (favorable) unfavorable premium development

     (8     32        (1     23   

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (75   $ (25   $ (7   $ (107)   

 

 

For the three and six months ended June 30, 2012, favorable premium development was recorded for CNA Commercial primarily due to premium adjustments on auditable policies arising from increased exposures.

For the three and six months ended June 30, 2011, unfavorable premium development was recorded due to a reduction of ultimate premium estimates relating to retrospectively rated policies, partially offset by premium adjustments on auditable policies due to 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     Six Months Ended  
     June 30,     June 30,  
  

 

 

 
     2012     2011     2012     2011  

 

 
(In millions)                         

Medical professional liability

   $ (9   $ (20   $ (15   $ (34

Other professional liability

     (6     (27     (2     (21

Surety

       (3     1        (3

Warranty

       (2     (1     (12

Other

     (20       (24     3   

 

 

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

   $ (35   $ (52   $ (41   $ (67

 

 

 

28


Table of Contents

Three Month Comparison

2012

Favorable development for medical professional liability was primarily due to a decrease in incurred loss severity in accident years 2008 through 2010.

Other includes standard property and casualty coverages provided to CNA Specialty customers. Favorable development for other coverages was primarily due to favorable loss emergence in property and workers’ compensation coverages in accident years 2005 and subsequent.

2011

Favorable development for medical professional liability was primarily due to favorable case incurred emergence in primary institutions in accident years 2008 and prior.

Favorable development for other professional liability was driven by better than expected loss emergence in life agents coverages.

Six Month Comparison

2012

Favorable development for medical professional liability was primarily due to a decrease in incurred loss severity in accident years 2008 through 2010 and reductions in the estimated frequency of large losses in accident years 2008 and prior.

Favorable development for other coverages was primarily due to favorable loss emergence in property and workers’ compensation coverages in accident years 2005 and subsequent.

2011

Favorable development for medical professional liability was primarily due to favorable case incurred emergence in accident years 2008 and prior.

Favorable development for other professional liability was driven by better than expected loss emergence in life agents coverages.

Favorable development in warranty was driven by favorable policy year experience on an aggregate stop loss policy 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
June 30,
    Six Months Ended
June 30,
 
  

 

 

 
     2012     2011     2012     2011  

 

 
(In millions)                         

Commercial auto

   $ 2      $ (44   $ 2      $ (34

General liability

     (13       (5     22   

Workers’ compensation

     8        28        (11     36   

Property and other

     (10     (34     (13     (81

 

 

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

   $ (13   $ (50   $ (27   $ (57

 

 

 

29


Table of Contents

Three Month Comparison

2012

Favorable development for general liability coverages was primarily related to favorable loss emergence in accident years 2005 and prior.

Favorable development for property and marine coverages was due to a favorable outcome on an individual claim in accident year 2005 and favorable loss emergence in non-catastrophe losses in accident year 2010.

2011

Favorable development for commercial auto coverages was due to lower than expected severity on bodily injury claims in accident years 2006 and prior.

Unfavorable development for workers’ compensation primarily reflected higher than expected severity on risk management claims, in accident years 2006 and prior.

Favorable development for property coverages was due to favorable loss emergence related to catastrophe claims in accident year 2008 and non-catastrophe claims in accident years 2009 and prior.

Six Month Comparison

2012

Overall, favorable development for workers’ compensation reflects favorable experience in accident years 2001 and prior. Unfavorable development was recorded in accident year 2010 related to increased medical severity and in accident year 2011 related to favorable premium development.

Favorable development for property and marine coverages was due to a favorable outcome on an individual claim in accident year 2005 and favorable loss emergence in non-catastrophe losses in accident year 2010.

2011

Favorable development for commercial auto coverages was due to lower than expected severity on bodily injury claims in accident years 2006 and prior.

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

Unfavorable development for workers’ compensation primarily reflected higher than expected severity on risk management claims, in accident years 2006 and prior.

Favorable development for property coverages was due to lower than expected frequency in commercial multi-peril coverages primarily in accident year 2010, a favorable settlement on an individual claim in accident year 2003 in the equipment breakdown book, favorable loss emergence related to catastrophe claims in accident year 2008 and favorable loss emergence related to non-catastrophe claims in accident years 2009 and prior.

7. Debt

In April of 2012, CNA entered into a $250 million credit agreement with a syndicate of banks and lenders. The credit agreement which matures on April 19, 2016 bears interest at London Interbank Offered Rate plus applicable margin and is intended to be used for general corporate purposes. At CNA’s election the commitments under the unsecured credit facility may be increased from time to time up to an additional aggregate amount of $100 million, and two one-year extensions are available prior to first and second anniversary of the closing. As of June 30, 2012 there were no borrowings under the credit facility and CNA was in compliance with all covenants.

In June of 2012, Boardwalk Pipeline issued $300 million principal amount of 4.0% senior notes due June 15, 2022. Boardwalk Pipeline used the proceeds to reduce borrowings under its revolving credit facility.

In April of 2012, Boardwalk Pipeline entered into a Second Amended and Restated Credit Agreement (“Amended Credit Agreement”) having aggregate lending commitments of $1.0 billion. The Amended Credit Agreement has a

 

30


Table of Contents

maturity date of April 2017. As of June 30, 2012, Boardwalk Pipeline had $215 million of loans outstanding under its revolving credit facility with a weighted-average interest rate on the borrowings of 1.4% and had no letters of credit issued. As of June 30, 2012, Boardwalk Pipeline was in compliance with all covenants under the credit facility and had available borrowing capacity of $785 million.

In June of 2012, Loews Hotels borrowed $81 million under a new $105 million loan agreement. The loan agreement bears interest at 4.25% and matures on June 15, 2015.

8. Benefit Plans

Pension Plans—The Company has several non-contributory defined benefit plans for eligible employees. Benefits for certain plans are determined annually based on a specified percentage of annual earnings (based on the participant’s age or years of service) and a specified interest rate (which is established annually for all participants) applied to accrued balances. The benefits for another plan which 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  
  

 

 

 
    

Three Months Ended

June 30,

    Six Months Ended
June 30,
 
  

 

 

 
     2012     2011     2012     2011  

 

 
(In millions)                         

Service cost

   $ 6      $ 5      $ 12      $ 12   

Interest cost

     37        41        75        82   

Expected return on plan assets

     (46     (47     (93     (94

Amortization of unrecognized net loss

     12        7        23        14   

 

 

Net periodic benefit cost

   $ 9      $ 6      $ 17      $ 14   

 

 
     Other Postretirement Benefits  
  

 

 

 
    

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
  

 

 

 
     2012     2011     2012     2011  

 

 
(In millions)                         

Interest cost

   $ 2      $ 2      $ 3      $ 4   

Expected return on plan assets

     (1     (1     (2     (2

Amortization of unrecognized net gain

       (1    

Amortization of unrecognized prior service benefit

     (7     (6     (13     (13

Regulatory asset decrease

       2          3   

 

 

Net periodic benefit cost

   $ (6   $ (4   $ (12   $ (8

 

 

9. 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

 

31


Table of Contents

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 44 drilling rigs, including four new-build rigs which are under construction and one rig being constructed utilizing the hull of one of Diamond Offshore’s existing mid-water floaters. On June 30, 2012, Diamond Offshore’s drilling rigs were located offshore 11 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 18 hotels, 16 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.

 

32


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
June 30,
    Six Months Ended
June 30,
 
  

 

 

 
     2012     2011     2012     2011  

 

 
(In millions)                         

Revenues (a):

        

CNA Financial:

        

CNA Specialty

   $ 896      $ 875      $ 1,841      $ 1,766   

CNA Commercial

     984        984        2,072        2,078   

Life and Group Non-Core

     360        333        710        659   

Other

     6        10        24        23   

 

 

Total CNA Financial

     2,246        2,202        4,647        4,526   

Diamond Offshore

     793        892        1,589        1,701   

Boardwalk Pipeline

     277        263        591        574   

HighMount

     69        98        145        202