Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

x   

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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 October 19, 2012

Common stock, $0.01 par value     393,601,749 shares

 

 

 


Table of Contents

INDEX

 

     Page
No.
 

Part I. Financial Information

  

Item 1. Financial Statements (unaudited)

  

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

     3   

Consolidated Condensed Statements of Income
Three and nine months ended September  30, 2012 and 2011

     4   

Consolidated Condensed Statements of Comprehensive Income
Three and nine months ended September  30, 2012 and 2011

     5   

Consolidated Condensed Statements of Equity
Nine months ended September 30, 2012 and 2011

     6   

Consolidated Condensed Statements of Cash Flows
Nine months ended September 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

     39   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     69   

Item 4. Controls and Procedures

     69   

Part II. Other Information

     70   

Item 1. Legal Proceedings

     70   

Item 1A. Risk Factors

     70   

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

     70   

Item 6. Exhibits

     71   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

     September 30,
2012
    December 31,
2011
 

 

 
(Dollar amounts in millions, except per share data)             

Assets:

    

Investments:

    

Fixed maturities, amortized cost of $38,093 and $37,466

   $ 42,429      $ 40,040   

Equity securities, cost of $974 and $902

     1,019        927   

Limited partnership investments

     2,991        2,711   

Other invested assets, primarily mortgage loans

     368        245   

Short term investments

     6,107        5,105   

 

 

Total investments

     52,914        49,028   

Cash

     169        129   

Receivables

     9,474        9,259   

Property, plant and equipment

     13,564        13,618   

Goodwill

     939        908   

Other assets

     1,546        1,357   

Deferred acquisition costs of insurance subsidiaries

     603        552   

Separate account business

     345        417   

 

 

Total assets

   $ 79,554      $ 75,268   

 

 

Liabilities and Equity:

    

Insurance reserves:

    

Claim and claim adjustment expense

   $ 24,331      $ 24,303   

Future policy benefits

     10,974        9,810   

Unearned premiums

     3,681        3,250   

Policyholders’ funds

     165        191   

 

 

Total insurance reserves

     39,151        37,554   

Payable to brokers

     808        162   

Short term debt

     18        88   

Long term debt

     8,848        8,913   

Deferred income taxes

     1,122        622   

Other liabilities

     4,400        4,309   

Separate account business

     345        417   

 

 

Total liabilities

     54,692        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 – 397,071,327 and 396,585,226 shares

     4        4   

Additional paid-in capital

     3,595        3,494   

Retained earnings

     15,415        14,890   

Accumulated other comprehensive income

     964        384   

 

 
     19,978        18,772   

Less treasury stock, at cost (3,492,830 shares)

     (139  

 

 

Total shareholders’ equity

     19,839        18,772   

Noncontrolling interests

     5,023        4,431   

 

 

Total equity

     24,862        23,203   

 

 

Total liabilities and equity

   $ 79,554      $ 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     Nine Months Ended  
     September 30,     September 30,  
  

 

 

 
     2012     2011     2012     2011  

 

 
(In millions, except per share data)                         

Revenues:

        

Insurance premiums

   $ 1,781      $ 1,732      $ 5,098      $ 4,942   

Net investment income

     682        333        1,794        1,513   

Investment gains (losses):

        

Other-than-temporary impairment losses

     (62     (75     (89     (136

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

     (2     (2     (25     (44

 

 

Net impairment losses recognized in earnings

     (64     (77     (114     (180

Other net investment gains

     71        50        173        195   

 

 

Total investment gains (losses)

     7        (27     59        15   

Contract drilling revenues

     714        861        2,195        2,520   

Other

     531        539        1,701        1,658   

 

 

Total

     3,715        3,438        10,847        10,648   

 

 

Expenses:

        

Insurance claims and policyholders’ benefits

     1,435        1,400        4,164        4,131   

Amortization of deferred acquisition costs

     333        297        937        880   

Contract drilling expenses

     358        392        1,160        1,142   

Other operating expenses

     1,071        784        2,891        2,345   

Interest

     109        126        331        406   

 

 

Total

     3,306        2,999        9,483        8,904   

 

 

Income before income tax

     409        439        1,364        1,744   

Income tax expense

     (99     (123     (337     (462

 

 

Net income

     310        316        1,027        1,282   

Amounts attributable to noncontrolling interests

     (133     (154     (427     (491

 

 

Net income attributable to Loews Corporation

   $ 177      $ 162      $ 600      $ 791   

 

 

Basic net income per share

   $ 0.45      $ 0.41      $ 1.52      $ 1.94   

 

 

Diluted net income per share

   $ 0.45      $ 0.40      $ 1.51      $ 1.94   

 

 

Dividends per share

   $ 0.0625      $ 0.0625      $ 0.1875      $ 0.1875   

 

 

Weighted-average shares outstanding:

        

Shares of common stock

     394.48        401.01        395.88        407.20   

Dilutive potential shares of common stock

     0.81        0.72        0.76        0.85   

 

 

Total weighted-average shares outstanding assuming dilution

     395.29        401.73        396.64        408.05   

 

 

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
September 30,
    Nine Months Ended
September 30,
 
  

 

 

 
     2012     2011     2012     2011  

 

 
(In millions)                         

Net income

   $ 310      $ 316      $ 1,027      $ 1,282   

 

 

Other comprehensive income (loss)

        

Changes in:

        

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

     36        (14     73        25   

Net other unrealized gains on investments

     191        228        528        551   

 

 

Total unrealized gains on available-for-sale investments

     227        214        601        576   

Unrealized gains (losses) on cash flow hedges

     (18     8        (5     (3

Foreign currency

     34        (54     36        (23

Pension liability

         11        2   

 

 

Other comprehensive income

     243        168        643        552   

 

 

Comprehensive income

     553        484        1,670        1,834   

Amounts attributable to noncontrolling interests

     (160     (159     (493     (547

 

 

Total comprehensive income attributable to Loews Corporation

   $ 393      $ 325      $ 1,177      $ 1,287   

 

 

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

     1,282             791             491   

Other comprehensive income

     552               496           56   

Dividends paid

     (373          (76          (297

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

     (690               (690  

Issuance of Loews common stock

     4           4            

Stock-based compensation

     16           14               2   

Other

     (6        (1     (2          (3

 

 

Balance, September 30, 2011

   $ 23,490      $ 4       $ 3,653      $ 15,213      $ 744       $ (705   $ 4,581   

 

 

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

     1,027             600             427   

Other comprehensive income

     643               577           66   

Dividends paid

     (404          (74          (330

Issuance of equity securities by subsidiary

     508           79          3           426   

Purchase of Loews treasury stock

     (139               (139  

Issuance of Loews common stock

     9           9            

Stock-based compensation

     17           15               2   

Other

     (2        (2     (1          1   

 

 

Balance, September 30, 2012

   $ 24,862      $ 4       $ 3,595      $ 15,415      $ 964       $ (139   $ 5,023   

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

6


Table of Contents

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Nine Months Ended September 30    2012     2011  

 

 
(In millions)             

Operating Activities:

    

Net income

   $ 1,027      $ 1,282   

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

     1,110        975   

Changes in operating assets and liabilities, net:

    

Receivables

     522        224   

Deferred acquisition costs

     (27     (21

Insurance reserves

     (53     (5

Other assets

     (14     149   

Other liabilities

     (41     (349

Trading securities

     (422     (231

 

 

Net cash flow operating activities

     2,102        2,024   

 

 

Investing Activities:

    

Purchases of fixed maturities

     (7,369     (8,854

Proceeds from sales of fixed maturities

     4,761        5,912   

Proceeds from maturities of fixed maturities

     2,655        2,434   

Purchases of equity securities

     (30     (51

Proceeds from sales of equity securities

     72        171   

Purchases of property, plant and equipment

     (825     (502

Deposits for construction of offshore drilling equipment

     (169     (478

Acquisitions

     (367  

Dispositions

     160        28   

Change in short term investments

     (637     1,295   

Change in other investments

     (173     (314

Other, net

     20        6   

 

 

Net cash flow investing activities

     (1,902     (353

 

 

Financing Activities:

    

Dividends paid

     (74     (76

Dividends paid to noncontrolling interests

     (330     (297

Acquisition of CNA Surety noncontrolling interests

       (475

Purchases of treasury shares

     (139     (700

Issuance of common stock

     9        4   

Proceeds from sale of subsidiary stock

     557        172   

Principal payments on debt

     (2,098     (1,630

Issuance of debt

     1,918        1,351   

Other, net

     (6     (11

 

 

Net cash flow financing activities

     (163     (1,662

 

 

Effect of foreign exchange rate on cash

     3        (1

 

 

Net change in cash

     40        8   

Cash, beginning of period

     129        120   

 

 

Cash, end of period

   $ 169      $ 128   

 

 

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 55% 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 and third quarters of 2012 Boardwalk Pipeline sold 9.2 million and 11.6 million common units through public offerings for $245 million and $311 million, reducing the Company’s ownership interest from 64% to 58%. In October of 2012, Boardwalk Pipeline sold an additional 11.2 million units for $292 million, further reducing the Company’s ownership to 55%. As a result, the Company will record an increase to Additional paid-in capital (“APIC”) in the fourth quarter of 2012 of approximately $36 million. Unless the context otherwise requires, the terms “Company,” “Loews” and “Registrant” as used herein mean Loews Corporation excluding its subsidiaries and the term “Net income (loss) – Loews” as used herein means Net income (loss) attributable to Loews Corporation.

In the opinion of management, the accompanying unaudited Consolidated Condensed Financial Statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 2012 and December 31, 2011 and the results of operations and comprehensive income for the three and nine months ended September 30, 2012 and 2011 and changes in shareholders’ equity and cash flows for the nine months ended September 30, 2012 and 2011.

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

Reference is made to the Notes to Consolidated Financial Statements in the 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 of 2.3 million, 3.2 million, 2.7 million and 2.1 million shares were not included in the diluted weighted average shares amount for the three and nine months ended September 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 acquired Hardy, a specialized Lloyd’s of London (“Lloyd’s”) underwriter primarily of short-tail exposures in marine and aviation, non-marine property, specialty lines and 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 purchase price for Hardy was $231 million and resulted in CNA recording $55 million of identifiable indefinite-lived intangible assets, $81 million of identifiable finite-lived intangible assets and $35 million of goodwill.

PL Midstream LLC On October 1, 2012, a joint venture between Boardwalk Pipeline and Boardwalk Pipelines Holding Corp. (“BPHC”), a wholly owned subsidiary of the Company, acquired PL Midstream LLC, a company that provides salt dome storage, pipeline transportation, fractionation and brine supply services, for approximately $625 million. The acquisition was funded with proceeds from a $225 million five-year variable rate term loan and equity contributions by BPHC of $269 million for a 65% equity interest and of $148 million by Boardwalk Pipeline for a 35% equity interest.

 

8


Table of Contents

On October 15, 2012, Boardwalk Pipeline acquired BPHC’s 65% equity interest in the joint venture for $269 million, which was funded through the sale of common units, and will not result in any significant adjustments to the Consolidated Financial Statements.

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.

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 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 nine months ended September 30, 2011 were a $59 million and $171 million decrease in Amortization of deferred acquisition costs, a $59 million and $178 million increase in Other operating expenses, resulting in no impact and a $5 million decrease in Net income and no impact and a $0.02 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     Nine Months Ended  
     September 30,     September 30,  
  

 

 

 
     2012     2011     2012     2011  

 

 
(In millions)                         

Fixed maturity securities

   $ 507      $ 494      $ 1,528      $ 1,505   

Short term investments

     3        4        10        11   

Limited partnership investments

     110        (87     210        69   

Equity securities

     4        4        10        16   

Income (loss) from trading portfolio (a)

     66        (70     62        (55

Other

     5        3        16        12   

 

 

Total investment income

     695        348        1,836        1,558   

Investment expenses

     (13     (15     (42     (45

 

 

Net investment income

   $ 682      $ 333      $ 1,794      $ 1,513   

 

 

 

(a)    Includes net unrealized gains (losses) related to changes in fair value on trading securities still held of $66, $(63), $21 and $(86) for the three and nine months ended September 30, 2012 and 2011.

 

Investment gains (losses) are as follows:

 

        

  

Fixed maturity securities

   $   26      $ (29   $   73      $   11   

Equity securities

     (15     (1     (14     (3

Derivative instruments

     (2     1        (4  

Short term investments and other

     (2     2        4        7   

 

 

Investment gains (losses) (a)

   $ 7      $ (27   $ 59      $ 15   

 

 

 

(a)    Includes gross realized gains of $80, $57, $203 and $240 and gross realized losses of $69, $87, $144 and $232 on available-for-sale securities for the three and nine months ended September 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     Nine Months Ended  
     September 30,     September 30,  
  

 

 

 
     2012     2011     2012     2011  

 

 
(In millions)                         

Fixed maturity securities available-for-sale:

        

Corporate and other bonds

   $ 7      $ 49      $ 23      $ 73   

States, municipalities and political subdivisions

     17          17     

Asset-backed:

        

Residential mortgage-backed

     20        21        49        95   

Other asset-backed

       4          4   

 

 

Total asset-backed

     20        25        49        99   

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

         1     

 

 

Total fixed maturities available-for-sale

     44        74        90        172   

 

 

Equity securities available-for-sale:

        

Common stock

     1        3        5        7   

Preferred stock

     19          19        1   

 

 

Total equity securities available-for-sale

     20        3        24        8   

 

 

Net OTTI losses recognized in earnings

   $ 64      $ 77      $ 114      $ 180   

 

 

 

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:

 

September 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

   $ 19,209       $ 2,634       $ 32       $ 21,811      

States, municipalities and political subdivisions

     9,415         1,450         53         10,812      

Asset-backed:

              

Residential mortgage-backed

     5,907         264         81         6,090       $ (12

Commercial mortgage-backed

     1,582         123         17         1,688         (3

Other asset-backed

     944         23         1         966      

 

 

Total asset-backed

     8,433         410         99         8,744         (15

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

     182         11         1         192      

Foreign government

     588         26            614      

Redeemable preferred stock

     101         14            115      

 

 

Fixed maturities available-for-sale

     37,928         4,545         185         42,288         (15

Fixed maturities, trading

     165         1         25         141      

 

 

Total fixed maturities

     38,093         4,546         210         42,429         (15

 

 

Equity securities:

              

Common stock

     22         24            46      

Preferred stock

     206         8            214      

 

 

Equity securities available-for-sale

     228         32            260         —     

Equity securities, trading

     746         94         81         759      

 

 

Total equity securities

     974         126         81         1,019         —     

 

 

Total

   $ 39,067       $ 4,672       $ 291       $ 43,448       $ (15

 

 

December 31, 2011

              

 

 
(In millions)                                   

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 September 30, 2012 and December 31, 2011, the net unrealized gains on investments included in AOCI were net of Shadow Adjustments of $1.1 billion 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  
  

 

 

 
September 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

   $ 600       $ 18       $ 210       $ 14       $ 810       $ 32   

States, municipalities and political subdivisions

     84         1         227         52         311         53   

Asset-backed:

                 

Residential mortgage-backed

     327         3         580         78         907         81   

Commercial mortgage-backed

     142         2         132         15         274         17   

Other asset-backed

     66         1               66         1   

 

 

Total asset-backed

     535         6         712         93         1,247         99   

 

 

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

     22         1               22         1   

 

 

Total

   $ 1,241       $ 26       $ 1,149       $ 159       $ 2,390       $ 185   

 

 
December 31, 2011                                          

 

 
(In millions)                                          

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   

 

 

Based on current facts and circumstances, the Company believes the unrealized losses presented in the table above are primarily attributable to broader economic conditions, changes in interest rates and credit spreads, market illiquidity and other market factors, but are not indicative of the ultimate collectibility of the current amortized costs 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 September 30, 2012.

The amount of pretax net unrealized gains (losses) on available-for-sale securities reclassified out of AOCI into earnings was $12 million, $(29) million, $59 million and $12 million for the three and nine months ended September 30, 2012 and 2011.

 

13


Table of Contents

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

 

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

 

 

 
     2012     2011     2012     2011  

 

 
(In millions)                         

Beginning balance of credit losses on fixed maturity securities

   $ 99      $ 82      $ 92      $ 141   

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

     2        11        23        29   

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

       10        2        11   

Reductions for securities sold during the period

     (3     (4     (11     (50

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

         (8     (32

 

 

Ending balance of credit losses on fixed maturity securities

   $ 98      $ 99      $ 98      $ 99   

 

 

Contractual Maturity

The following table summarizes available-for-sale fixed maturity securities by contractual maturity at September 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.

 

     September 30, 2012      December 31, 2011  

 

 
     Cost or
Amortized
Cost
     Estimated
Fair Value
     Cost or
Amortized
Cost
     Estimated
Fair Value
 

 

 
(In millions)                            

Due in one year or less

   $ 1,861       $ 1,876       $ 1,802       $ 1,812   

Due after one year through five years

     13,382         14,176         13,110         13,537   

Due after five years through ten years

     8,490         9,337         8,410         8,890   

Due after ten years

     14,195         16,899         14,017         15,692   

 

 

Total

   $ 37,928       $ 42,288       $ 37,339       $ 39,931   

 

 

Investment Commitments

As of September 30, 2012, the Company had committed approximately $114 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 September 30, 2012, the Company had commitments to purchase $159 million and sell $154 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 September 30, 2012, the Company had obligations on unfunded bank loan participations in the amount of $6 million.

 

14


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 September 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.

 

15


Table of Contents

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

 

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

Fixed maturity securities:

        

Corporate and other bonds

     $ 21,552      $ 259      $ 21,811   

States, municipalities and political subdivisions

       10,723        89        10,812   

Asset-backed:

        

Residential mortgage-backed

       5,653        437        6,090   

Commercial mortgage-backed

       1,571        117        1,688   

Other asset-backed

       595        371        966   

 

 

Total asset-backed

       7,819        925        8,744   

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

   $ 168        24          192   

Foreign government

     139        475          614   

Redeemable preferred stock

     29        60        26        115   

 

 

Fixed maturities available-for-sale

     336        40,653        1,299        42,288   

Fixed maturities, trading

       48        93        141   

 

 

Total fixed maturities

   $ 336      $ 40,701      $ 1,392      $ 42,429   

 

 

Equity securities available-for-sale

   $ 98      $ 112      $ 50      $ 260   

Equity securities, trading

     748          11        759   

 

 

Total equity securities

   $ 846      $ 112      $ 61      $ 1,019   

 

 

Short term investments

   $ 4,833      $ 1,223      $ 8      $ 6,064   

Other invested assets

         11        11   

Receivables

       45        11        56   

Life settlement contracts

         113        113   

Separate account business

     4        338        3        345   

Payable to brokers

     (69     (18     (6     (93

 

16


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

 

17


Table of Contents

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

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

Transfers

into
Level 3

   

Transfers

out of
Level 3

    Balance,
September 30
   
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

  $ 488      $ 1      $ (4   $ 50      $ (5   $ (11   $        $ (260   $ 259      $ (1

States, municipalities and political subdivisions

    89                      89     

Asset-backed:

                   

Residential mortgage-backed

    443        (17     20        21          (8       (22     437        (18

Commercial mortgage-backed

    166        4        6        12          (17     11        (65     117     

Other asset-backed

    434        2        5        143        (117     (34       (62     371     

 

 

Total asset-backed

    1,043        (11     31        176        (117     (59     11        (149     925        (18

Redeemable preferred stock

    27          (1               26     

 

 

Fixed maturities available-for-sale

    1,647        (10     26        226        (122     (70     11        (409     1,299        (19

Fixed maturities, trading

    94              (1           93     

 

 

Total fixed maturities

  $ 1,741      $ (10   $ 26      $ 226      $ (123   $ (70   $ 11      $ (409   $ 1,392      $ (19

 

 

Equity securities available-for-sale

  $ 93      $ (19   $ (10           $ (14   $ 50      $ (19

Equity securities trading

    9        2                    11        3   

 

 

Total equity securities

  $ 102      $ (17   $ (10   $ —        $ —        $ —        $ —        $ (14   $ 61      $ (16

 

 

Short term investments

  $ 4          $ 7      $ (4     $ 1        $ 8     

Other invested assets

    11                      11     

Life settlement contracts

    116      $ 7            $ (10         113     

Separate account business

    3                      3     

Derivative financial instruments, net

    12        (1   $ (5         (1         5      $ (2

 

18


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
September 30

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

Transfers

into
Level 3

   

Transfers

out of
Level 3

    Balance,
September 30
   

 

 
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

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

States, municipalities and political subdivisions

    179            3                182     

Asset-backed:

                   

Residential mortgage-backed

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

Commercial mortgage-backed

    95          (7     76              (5     159     

Other asset-backed

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

 

 

Total asset-backed

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

 

 

Fixed maturities available-for-sale

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

Fixed maturities, trading

    114        (3                 111        (3

 

 

Total fixed maturities

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

 

 

Equity securities available-for-sale

  $ 36            $ (1       $ (3   $ 32     

Equity securities trading

    16      $ (4                 12      $ (4

 

 

Total equity securities

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

 

 

Short term investments

  $ 6                    $ 6     

Other invested assets

    10                      10     

Life settlement contracts

    129      $ 11            $ (15         125      $ (1

Separate account business

    37            $ (2           35     

Derivative financial instruments, net

    (37     (13   $ 11            11            (28     (1

 

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
September 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,
September 30
   
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

  $ 482      $ 7      $ 2      $ 196      $ (117   $ (43   $ 42      $ (310   $ 259      $ (1

States, municipalities and political subdivisions

    171          3            (85         89     

Asset-backed:

                   

Residential mortgage-backed

    452        (15     (2     81          (24       (55     437        (18

Commercial mortgage-backed

    59        6        14        141        (12     (21     11        (81     117     

Other asset-backed

    343        8        8        501        (293     (93       (103     371     

 

 

Total asset-backed

    854        (1     20        723        (305     (138     11        (239     925        (18

Redeemable preferred stock

        (1     53        (26           26     

 

 

Fixed maturities available-for-sale

    1,507        6        24        972        (448     (266     53        (549     1,299        (19

Fixed maturities, trading

    101        (7       1        (2           93        (7

 

 

Total fixed maturities

  $ 1,608      $ (1   $ 24      $ 973      $ (450   $ (266   $ 53      $ (549   $ 1,392      $ (26

 

 

Equity securities available-for-sale

  $ 67      $ (19   $ 6      $ 26      $ (16       $ (14   $ 50      $ (21

Equity securities trading

    14        (3                 11        (1

 

 

Total equity securities

  $ 81      $ (22   $ 6      $ 26      $ (16   $ —        $ —        $ (14   $ 61      $ (22

 

 

Short term investments

  $ 27          $ 23      $ (4   $ (39   $ 1        $ 8     

Other invested assets

    11                      11     

Life settlement contracts

    117      $ 30              (34         113      $ 3   

Separate account business

    23              (20           3     

Derivative financial instruments, net

    (15     (5   $ 29          (6     2            5        (1

 

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
September 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,
September 30
   

 

 
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

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

States, municipalities and political subdivisions

    266            3          (87         182     

Asset-backed:

                   

Residential mortgage-backed

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

Commercial mortgage-backed

    73        3        11        81        (4         (5     159     

Other asset-backed

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

 

 

Total asset-backed

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

Redeemable preferred stock

    3        3        (3       (3          

 

 

Fixed maturities available-for-sale

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

Fixed maturities, trading

    184        (1         (72           111        6   

 

 

Total fixed maturities

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

 

 

Equity securities available-for-sale

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

Equity securities trading

    6        (9       1            14          12        (9

 

 

Total equity securities

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

 

 

Short term investments

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

Other invested assets

    26      $ 3          $ (19           10      $ 1   

Life settlement contracts

    129        20              (24         125        2   

Separate account business

    41              (6           35     

Derivative financial instruments, net

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

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

 

21


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 $106 million of transfers from Level 2 to Level 1 during the three and nine months ended September 30, 2012 and no transfers between Level 1 and Level 2 during the three or nine months ended September 30, 2011. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods.

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.

 

September 30, 2012    Fair Value      Valuation
Technique(s)
  

Unobservable

Input(s)

  

Range (Weighted

Average)

(In millions)                      

Assets

           

Fixed maturity securities

   $ 98       Discounted cash flow    Expected maturity date    3.6 – 5.6 years (4.6 years)
     61       Market approach    Private offering price    $60.00 – $105.00 ($101.49)

Equity securities

     33       Market approach    Private offering price    $0.10 – $3,842.00 per share
            ($583.95 per share)
     17       Income approach    EBITDA(a) projection    $80 million
         EBITDA(a) multiple    1.82

Life settlement contracts

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

65% – 928% (185%)

 

 

(a) Earnings before interest, tax, depreciation and amortization

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, earnings projections, and earnings multiples 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.

 

22


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

Financial Assets:

              

Other invested assets, primarily mortgage loans

   $ 358             $ 374       $ 374   

Financial Liabilities:

              

Premium deposits and annuity contracts

     103               108         108   

Short term debt

     18          $ 13         5         18   

Long term debt

     8,848            9,693         285         9,978   

 

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   

 

23


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.

 

     September 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          $ (6   $ 300       $ 3       $ (3

Commodities:

                

Forwards – short

     316       $ 45         (8 )      268         64         (22

Foreign exchange:

                

Currency forwards – short

     140         4           154         1         (8

Without hedge designation:

                

Equity markets:

                

Options – purchased

     254         19           286         33      

– written

     350            (10     398            (23

Equity swaps and warrants – long

     11         8           63         16      

Interest rate risk:

                

Interest rate swaps

             100         1         (1

Credit default swaps

                

– purchased protection

     78            (1     145         8         (1

– sold protection

     33            (2     28            (2

Foreign exchange:

                

Currency forwards – long

     32              203         4      

  – short

     327         4         (2     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 $2 million and $4 million were recorded in Investment gains (losses) for the three and nine months ended September 30, 2012. A gain of $1 million and no impact was recorded for the three and nine months ended September 30, 2011. For the three and nine months ended September 30, 2012 and 2011, losses included in Net investment income were $17 million, $16 million, $1 million and $5 million.

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. A loss of $16 million and gains of $33 million and $11 million were recognized in OCI related to these cash flow hedges for the three and nine months ended September 30, 2012 and three months ended September 30, 2011. There was no net impact recognized in OCI for the nine months ended September 30, 2011. For the three and nine months ended September 30, 2012 and the nine months ended September 30, 2011, the amount of gains reclassified from AOCI into income were $12 million, $39 million and $2 million. Losses of $3 million were reclassified from AOCI into income for the three months ended September 30, 2011. As of September 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 $35 million. The net amounts recognized due to ineffectiveness were less than $1 million for the three and nine months ended September 30, 2012 and 2011.

 

24


Table of Contents

5. Property, Plant and Equipment

 

     September 30,
2012
     December 31,
2011
 

 

 
(In millions)              

Pipeline equipment (net of accumulated DD&A of $1,101 and $926)

   $ 6,671       $ 6,749   

Offshore drilling equipment (net of accumulated DD&A of $3,497 and $3,378)

     3,920         4,119   

Natural gas and oil proved and unproved properties (net of accumulated DD&A of $2,643 and $2,056)

     965         1,330   

Other (net of accumulated DD&A of $933 and $899)

     973         799   

Construction in process

     1,035         621   

 

 

Property, plant and equipment, net

   $ 13,564       $ 13,618   

 

 

HighMount Impairment of Natural Gas and Oil Properties

For the three and nine months ended September 30, 2012, HighMount recorded non-cash ceiling test impairment charges of $261 million and $527 million ($166 million and $336 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 $322 million and $657 million ($205 million and $419 million after tax). As a result of significant declines in natural gas and NGL prices at September 30, 2012, HighMount performed a goodwill impairment test and 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 is now operating 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.

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.

 

25


Table of Contents

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 $27 million and $123 million for the three and nine months ended September 30, 2012. Catastrophe losses in 2012 related primarily to U.S. storms and Hurricane Isaac. CNA reported catastrophe losses, net of reinsurance, of $50 million and $205 million for the three and nine months ended September 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 September 30, 2012    CNA
Specialty
    CNA
Commercial
    Other     Total  
(In millions)                         

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

   $ (39   $ 2      $ (3   $ (40)   

Pretax (favorable) unfavorable premium development

     (1     (5     (1     (7)   

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (40   $ (3   $ (4   $ (47)   

 

 

Three Months Ended September 30, 2011

                                

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

   $ (5   $ (42   $ 11      $ (36)   

Pretax (favorable) unfavorable premium development

     (26     (11     1        (36)   

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (31   $ (53   $ 12      $ (72)   

 

 
Nine Months Ended September 30, 2012                             

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

   $ (80   $ (25   $ (5   $ (110)   

Pretax (favorable) unfavorable premium development

     (15     (41     1        (55)   

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (95   $ (66   $ (4   $ (165)   

 

 

Nine Months Ended September 30, 2011

                                

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

   $ (72   $ (99   $ 5      $   (166)   

Pretax (favorable) unfavorable premium development

     (34     21          (13)   

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (106   $ (78   $ 5      $   (179)   

 

 

For the nine months ended September 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 nine months ended September 30, 2011, favorable premium development was recorded for CNA Specialty primarily due to changes in estimates of exposures in medical professional liability tail coverages.

 

26


Table of Contents

For the nine months ended September 30, 2011, unfavorable premium development for CNA Commercial was recorded due to a further 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 (“development”) recorded for the CNA Specialty segment:

 

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

 

 

 
     2012     2011     2012     2011  

 

 
(In millions)                         

Medical professional liability

   $ 9      $ (18   $ (6   $ (52

Other professional liability

     1        1        (1     (20

Surety

     (60     1        (59     (2

Warranty

         (1     (12

Other

     11        11        (13     14   

 

 

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

   $ (39   $ (5   $ (80   $ (72

 

 

Three Month Comparison

2012

Favorable development for surety coverages was primarily due to better than expected loss emergence in accident years 2010 and prior.

Other includes standard property and casualty coverages provided to CNA Specialty customers. Unfavorable development for other coverages was primarily due to an unfavorable outcome on an individual general liability claim in accident year 2009.

2011

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

Unfavorable development for other coverages was primarily due to increased frequency of large claims in auto and workers’ compensation coverages in accident years 2009 and 2010.

Nine Month Comparison

2012

Favorable development for surety coverages was primarily due to better than expected loss emergence in accident years 2010 and prior.

Overall, favorable development for other coverages was primarily due to favorable loss emergence in property and workers’ compensation coverages in accident years 2005 and subsequent. Unfavorable development was recorded in accident year 2009 primarily due to an unfavorable outcome on an individual general liability claim.

2011

Favorable development for medical professional liability was primarily due to favorable case incurred emergence in nurses, physicians, and 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.

 

27


Table of Contents

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

Unfavorable development for other coverages was primarily due to increased frequency of large claims in auto and workers’ compensation coverages in accident years 2009 and 2010.

CNA Commercial

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

 

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

 

 

 
     2012     2011     2012     2011  

 

 
(In millions)                         

Commercial auto

   $ 9      $ (2   $ 11      $ (36

General liability

     (21     4        (26     26   

Workers’ compensation

     24        3        13        39   

Property and other

     (10     (47     (23     (128

 

 

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

   $ 2      $ (42   $ (25   $ (99

 

 

Three Month Comparison

2012

Favorable development for general liability coverages was primarily due to favorable loss emergence in accident years 2003 and prior related to large account business.

Unfavorable development for workers’ compensation was primarily due to increased medical severity in accident years 2010 and 2011.

Favorable development for property and marine coverages was due to favorable loss emergence in non-catastrophe losses in accident years 2009 and subsequent.

2011

Overall, unfavorable development for workers’ compensation was related to increased medical severity and higher adjusting and other payments in accident years 2008 and subsequent. Additionally, favorable development for workers’ compensation was due to reduced indemnity severity in accident years 2002 and prior.

Favorable development for property and other coverages was due to decreased frequency of large losses in accident year 2010 and favorable loss emergence related to non-catastrophe claims in accident years 2010 and prior.

Nine Month Comparison

2012

Unfavorable development for commercial auto coverages was primarily due to higher than expected frequency in accident years 2009 and subsequent.

Favorable development for general liability coverages was primarily due to favorable loss emergence in accident years 2003 and prior related to large account business.

Overall, unfavorable development for workers’ compensation was primarily due to increased medical severity in accident years 2010 and 2011 and losses related to favorable premium development in accident year 2011. Favorable development was recorded in accident years 2001 and prior reflecting favorable experience.

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 years 2009 through 2011.

 

28


Table of Contents

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 was related to increased medical severity and higher adjusting and other payments in accident years 2008 and subsequent.

Favorable development for property and other coverages was due to decreased frequency of large losses in commercial multi-peril coverages primarily in accident year 2010, a favorable settlement on an individual equipment breakdown claim in accident year 2003, favorable loss emergence related to catastrophe claims in accident year 2008 and favorable loss emergence related to non-catastrophe claims in accident years 2010 and prior.

7. Debt

CNA Financial

In April of 2012, CNA entered into a $250 million revolving credit agreement with a syndicate of banks. The credit agreement which matures on April 19, 2016 bears interest at London Interbank Offered Rate plus applicable margin. 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 September 30, 2012, there were no borrowings under the credit facility and CNA was in compliance with all covenants.

Diamond Offshore

In September of 2012, Diamond Offshore entered into a $750 million revolving credit agreement with a syndicate of banks. The credit agreement, which matures on September 28, 2017, bears interest at Diamond Offshore’s option on either an alternate base rate or Eurodollar rate, as defined in the credit agreement, plus an applicable margin. As of September 30, 2012, there were no borrowings under the credit facility and Diamond Offshore was in compliance with all covenants.

Boardwalk Pipeline

In September of 2012, Boardwalk Pipeline repaid in full its $200 million variable rate term loan due December 1, 2016. In August of 2012, Boardwalk Pipeline repaid at maturity the entire $225 million principal amount of its 5.8% senior notes.

In June of 2012, Boardwalk Pipeline issued $300 million principal amount of 4.0% senior notes due June 15, 2022.

In April of 2012, Boardwalk Pipeline entered into a Second Amended and Restated Credit Agreement (“Amended Credit Agreement”) with aggregate lending commitments of $1.0 billion. The Amended Credit Agreement has a maturity date of April 27, 2017. As of September 30, 2012, Boardwalk Pipeline had $350 million of loans outstanding under the revolving credit facility with a weighted-average interest rate on the borrowings of 1.3% and had no letters of credit issued. As of September 30, 2012, Boardwalk Pipeline was in compliance with all covenants under the credit facility and had available borrowing capacity of $650 million.

Boardwalk Pipeline’s total debt balance amounted to $3.2 billion at September 30, 2012, as compared to $3.4 billion at December 31, 2011.

Loews Hotels

In June of 2012, Loews Hotels borrowed $81 million under a new $105 million loan agreement. The loan agreement bears interest at 4.3% and matures on June 15, 2015.

 

29


Table of Contents

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
September 30,
    Nine Months Ended
September 30,
 
  

 

 

 
     2012     2011     2012     2011  

 

 
(In millions)                         

Service cost

   $ 5      $ 6      $ 17      $ 18   

Interest cost

     39        41        114        123   

Expected return on plan assets

     (47     (47     (140     (141

Amortization of unrecognized net loss

     11        8        34        22   

 

 

Net periodic benefit cost

   $ 8      $ 8      $ 25      $ 22   

 

 
     Other Postretirement Benefits  
  

 

 

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

 

 

 
     2012     2011     2012     2011  

 

 
(In millions)                         

Service cost

   $ 1      $ 1      $ 1      $ 1   

Interest cost

     1        1        4        5   

Expected return on plan assets

     (1       (3     (2

Amortization of unrecognized net loss

       1          1   

Amortization of unrecognized prior service benefit

     (6     (7     (19     (20

Regulatory asset decrease

       1          4   

 

 

Net periodic benefit cost

   $ (5   $ (3   $ (17   $ (11

 

 

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 business and has the duties and authority commensurate with that position. Investment gains (losses) and the related income taxes, excluding those of CNA, are included in the Corporate and other segment.

CNA’s results are reported in four business segments: CNA Specialty, CNA Commercial, Life & Group Non-Core and Other. 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

 

30


Table of Contents

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. Life & Group Non-Core primarily includes the results of the life and group lines of business that are in run-off. Other includes the operations of Hardy since its acquisition date of July 2, 2012, 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. Hardy is a specialized Lloyd’s underwriter primarily of short-tail exposures.

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 two rigs being constructed utilizing the hulls of two of Diamond Offshore’s existing mid-water floaters. On September 30, 2012, Diamond Offshore’s drilling rigs were located offshore 14 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 14,540 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.

 

31


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
September 30,
    Nine Months Ended
September 30,
 
  

 

 

 
     2012     2011     2012     2011  

 

 
(In millions)                         

Revenues (a):

        

CNA Financial:

        

CNA Specialty

   $ 957      $ 874      $ 2,798      $ 2,640   

CNA Commercial

     1,091        962        3,163        3,040   

Life & Group Non-Core

     340        334        1,050        993   

Other

     77        6        101        29   

 

 

Total CNA Financial

     2,465        2,176        7,112        6,702   

Diamond Offshore

     730        881        2,319        2,582   

Boardwalk Pipeline

     271        269        862        843   

HighMount

     74        95        219        297