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, 2016

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   (I.R.S. Employer  
incorporation or organization)   Identification No.)

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

(Address of principal executive offices) (Zip Code)

(212) 521-2000

(Registrant’s telephone number, including area code)

NOT APPLICABLE

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

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

Yes          X                                                                           No                  

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

Yes          X                                      No                                                 Not Applicable                  

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

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

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

Yes                                                                                     No           X        

 

Class

     

Outstanding at October 21, 2016

Common stock, $0.01 par value

      336,959,362 shares

 

 

 


Table of Contents

INDEX

 

     Page
No.
 

Part I. Financial Information

  

Item 1. Financial Statements (unaudited)

  

Consolidated Condensed Balance Sheets
September  30, 2016 and December 31, 2015

     3   

Consolidated Condensed Statements of Income
Three and nine months ended September 30, 2016 and 2015

     4   

Consolidated Condensed Statements of Comprehensive Income
Three and nine months ended September 30, 2016 and 2015

     5   

Consolidated Condensed Statements of Equity
Nine months ended September 30, 2016 and 2015

     6   

Consolidated Condensed Statements of Cash Flows
Nine months ended September 30, 2016 and 2015

     7   

Notes to Consolidated Condensed Financial Statements

     8   

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

     42   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     66   

Item 4. Controls and Procedures

     66   

Part II. Other Information

     67   

Item 1. Legal Proceedings

     67   

Item 1A. Risk Factors

     67   

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

     67   

Item 6. Exhibits

     68   

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

     September 30,      December 31,  
     2016      2015  

 

 

(Dollar amounts in millions, except per share data)

     

Assets:

     

Investments:

     

Fixed maturities, amortized cost of $38,810 and $37,407

     $    42,894              $    39,701        

Equity securities, cost of $581 and $824

     586              752        

Limited partnership investments

     3,293              3,313        

Other invested assets, primarily mortgage loans

     719              824        

Short term investments

     4,893              4,810        

 

 

Total investments

     52,385              49,400        

Cash

     344              440        

Receivables

     7,853              8,041        

Property, plant and equipment

     15,200              15,477        

Goodwill

     347              351        

Other assets

     1,760              1,699        

Deferred acquisition costs of insurance subsidiaries

     619              598        

 

 

Total assets

     $    78,508              $    76,006        

 

 

Liabilities and Equity:

     

Insurance reserves:

     

Claim and claim adjustment expense

     $    22,672              $    22,663        

Future policy benefits

     11,219              10,152        

Unearned premiums

     3,862              3,671        

 

 

Total insurance reserves

     37,753              36,486        

Payable to brokers

     451              567        

Short term debt

     185              1,040        

Long term debt

     10,737              9,520        

Deferred income taxes

     735              382        

Other liabilities

     5,241              5,201        

 

 

Total liabilities

     55,102              53,196        

 

 

Commitments and contingent liabilities

     

Preferred stock, $0.10 par value:

     

Authorized – 100,000,000 shares

     

Common stock, $0.01 par value:

     

Authorized – 1,800,000,000 shares

     

Issued – 339,951,927 and 339,897,547 shares

     3              3        

Additional paid-in capital

     3,207              3,184        

Retained earnings

     15,031              14,731        

Accumulated other comprehensive income (loss)

     144              (357)       

 

 
     18,385              17,561        

Less treasury stock, at cost (2,992,565 shares)

     (115)          

 

 

Total shareholders’ equity

     18,270              17,561        

Noncontrolling interests

     5,136              5,249        

 

 

Total equity

     23,406              22,810        

 

 

Total liabilities and equity

     $    78,508              $    76,006        

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

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

 

 

 
     2016     2015     2016     2015  

 

 
(In millions, except per share data)                         

Revenues:

        

Insurance premiums

   $ 1,767      $ 1,751      $ 5,196      $ 5,173       

Net investment income

     561        321        1,570        1,419       

Investment gains (losses):

        

Other-than-temporary impairment losses

     (18     (56     (56     (99)      

Other net investment gains

     63        6        74        57       

 

 

Total investment gains (losses)

     45        (50     18        (42)      

Contract drilling revenues

     340        599        1,141        1,816       

Other revenues

     574        548        1,842        1,716       

 

 

Total

     3,287        3,169        9,767        10,082       

 

 

Expenses:

        

Insurance claims and policyholders’ benefits

     1,202        1,200        3,949        4,008       

Amortization of deferred acquisition costs

     314        319        926        936       

Contract drilling expenses

     187        276        598        971       

Other operating expenses (Note 4)

     898        898        3,416        3,026       

Interest

     130        128        403        393       

 

 

Total

     2,731        2,821        9,292        9,334       

 

 

Income before income tax

     556        348        475        748       

Income tax expense

     (163     (66     (171     (170)      

 

 

Net income

     393        282        304        578       

Amounts attributable to noncontrolling interests

     (66     (100     60        (117)      

 

 

Net income attributable to Loews Corporation

   $ 327      $ 182      $ 364      $ 461       

 

 

Basic and diluted net income per share

   $ 0.97      $ 0.50      $ 1.08      $ 1.25       

 

 

Dividends per share

   $     0.0625      $     0.0625      $     0.1875      $       0.1875       

 

 

Weighted average shares outstanding:

        

Shares of common stock

     337.18        360.91        338.33        367.74       

Dilutive potential shares of common stock

     0.44        0.19        0.28        0.29       

 

 

Total weighted average shares outstanding assuming dilution

     337.62        361.10        338.61        368.03       

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

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

 

 

 
     2016     2015     2016     2015  

 

 
(In millions)                         

Net income

        $ 393      $ 282      $ 304      $ 578        

 

 

Other comprehensive income (loss), after tax

        

Changes in:

        

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

     3        2        7        (3)       

Net other unrealized gains (losses) on investments

     42        (39     591        (292)       

 

 

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

     45        (37     598        (295)       

Unrealized gains on cash flow hedges

     1        1        2        5        

Pension liability

     7        4        20        51        

Foreign currency

     (24     (53     (58     (100)       

 

 

Other comprehensive income (loss)

     29        (85     562        (339)       

 

 

Comprehensive income

     422        197        866        239        

Amounts attributable to noncontrolling interests

     (70     (91     (1     (82)       

 

 

Total comprehensive income attributable to Loews Corporation

        $ 352      $      106      $      865      $        157        

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF EQUITY

(Unaudited)

 

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

Common
Stock

Held in
Treasury

    Noncontrolling
Interests
 

 

 
(In millions)                                            

Balance, January 1, 2015

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

Net income

     578             461            117        

Other comprehensive loss

     (339            (304       (35)       

Dividends paid

     (207          (69         (138)       

Issuance of equity securities by subsidiary

     115           (2       1          116        

Purchases of subsidiary stock from noncontrolling interests

     (31        5              (36)       

Purchases of Loews treasury stock

     (633              (633  

Issuance of Loews common stock

     7           7           

Stock-based compensation

     19           17              2        

Other

     (6        (18     (1         13        

 

 

Balance, September 30, 2015

   $ 24,153      $ 4       $ 3,490      $ 15,906      $ (23   $ (633   $ 5,409        

 

 

Balance, January 1, 2016

   $ 22,810      $ 3       $ 3,184      $ 14,731      $ (357   $ -      $ 5,249        

Net income

     304             364            (60)       

Other comprehensive income

     562               501          61        

Dividends paid

     (177          (63         (114)       

Purchases of subsidiary stock from noncontrolling interests

     (9        3              (12)       

Purchases of Loews treasury stock

     (115              (115  

Stock-based compensation

     35           33              2        

Other

     (4        (13     (1         10        

 

 

Balance, September 30, 2016

   $       23,406      $        3       $         3,207      $       15,031      $        144      $             (115   $         5,136        

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Nine Months Ended September 30    2016     2015  

 

 

(In millions)

    

Operating Activities:

    

Net income

   $ 304      $ 578        

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

     1,676        1,370        

Changes in operating assets and liabilities, net:

    

Receivables

     (165     31        

Deferred acquisition costs

     (24     11        

Insurance reserves

     464        195        

Other assets

     (80     (81)       

Other liabilities

     9        (108)       

Trading securities

     (468     199        

 

 

Net cash flow operating activities

     1,716        2,195        

 

 

Investing Activities:

    

Purchases of fixed maturities

     (7,472     (7,055)       

Proceeds from sales of fixed maturities

     4,239        3,590        

Proceeds from maturities of fixed maturities

     2,263        3,101        

Purchases of limited partnership investments

     (324     (120)       

Proceeds from sales of limited partnership investments

     207        156        

Purchases of property, plant and equipment

     (1,264     (1,447)       

Dispositions

     277        28        

Change in short term investments

     104        298        

Other, net

     124        (138)       

 

 

Net cash flow investing activities

     (1,846     (1,587)       

 

 

Financing Activities:

    

Dividends paid

     (63     (69)       

Dividends paid to noncontrolling interests

     (114     (138)       

Purchases of subsidiary stock from noncontrolling interests

     (8     (29)       

Purchases of Loews treasury stock

     (115     (617)       

Issuance of Loews common stock

       7        

Proceeds from sale of subsidiary stock

       114        

Principal payments on debt

     (2,882     (1,761)       

Issuance of debt

     3,226        1,851        

Other, net

     (2     4        

 

 

Net cash flow financing activities

     42        (638)       

 

 

Effect of foreign exchange rate on cash

     (8     (6)       

 

 

Net change in cash

     (96     (36)       

Cash, beginning of period

     440        364        

 

 

Cash, end of period

   $         344      $         328        

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.  Basis of Presentation

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

In the opinion of management, the accompanying unaudited Consolidated Condensed Financial Statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of September 30, 2016 and December 31, 2015, results of operations and comprehensive income for the three and nine months ended September 30, 2016 and 2015 and changes in shareholders’ equity and cash flows for the nine months ended September 30, 2016 and 2015. 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. These Consolidated Condensed Financial Statements should be read in conjunction with the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

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. Shares attributable to employee stock-based compensation awards of 3.3 million, 5.8 million, 4.7 million and 4.5 million shares were not included in the diluted weighted average shares amounts for the three and nine months ended September 30, 2016 and 2015 because the effect would have been antidilutive.

Accounting changes In April of 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The updated accounting guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, rather than as a deferred asset. As required, the Company’s Consolidated Condensed Balance Sheet has been retrospectively adjusted to reflect the effect of the adoption of the updated accounting guidance, which resulted in a decrease of $23 million in Other assets and Long term debt at December 31, 2015.

Recently issued ASUs In May of 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The core principle of the new accounting guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new accounting guidance provides a five-step analysis of transactions to determine when and how revenue is recognized and requires enhanced disclosures about revenue. In August of 2015, the FASB formally amended the effective date of this update to annual reporting periods beginning after December 15, 2017, including interim periods, and it can be adopted either retrospectively or with a cumulative effect adjustment at the date of adoption. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its consolidated financial statements.

In May of 2015, the FASB issued ASU 2015-09, “Financial Services Insurance (Topic 944): Disclosures about Short-Duration Contracts.” The updated accounting guidance requires enhanced disclosures to provide additional information about insurance liabilities for short-duration contracts. The guidance is effective for annual periods

 

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beginning after December 15, 2015 and for interim periods beginning after December 15, 2016. The Company is currently evaluating the effect the updated guidance will have on its financial statement disclosures, but expects to provide additional incurred and paid claims development information by accident year, quantitative information about claim frequency and the history of claims duration for significant lines of business within the annual financial statements.

In January of 2016, the FASB issued ASU 2016-01, “Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The updated accounting guidance requires changes to the reporting model for financial instruments. The guidance is effective for interim and annual periods beginning after December 15, 2017. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements, and expects the primary change to be the requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.

In February of 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The updated guidance requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and nonlease components in a contract in accordance with the new revenue guidance in ASU 2014-09. The updated guidance is effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the effect the updated guidance will have on its consolidated financial statements.

In June of 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through net income. The guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements, and expects the primary changes to be the use of the expected credit loss model for the mortgage loan portfolio and reinsurance receivables and the presentation of credit losses within the available-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down. The expected credit loss model will require a financial asset to be presented at the net amount expected to be collected. The allowance method for available-for-sale debt securities will allow the Company to record reversals of credit losses if the estimate of credit losses declines.

2.  Investments

Net investment income is as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2016     2015     2016     2015  

 

 

(In millions)

        

Fixed maturity securities

   $ 457      $ 449      $ 1,352      $ 1,344        

Limited partnership investments

     91        (122     98        88        

Short term investments

     3        4        8        7        

Equity securities

     1        3        8        9        

Income (loss) from trading portfolio (a)

     11        (5     113        (9)       

Other

     12        9        34        26        

 

 

Total investment income

     575        338        1,613        1,465        

Investment expenses

     (14     (17     (43     (46)       

 

 

Net investment income

   $         561      $         321      $       1,570      $       1,419        

 

 

 

(a)

Includes net unrealized gains (losses) related to changes in fair value on trading securities still held of $8, $(59), $63 and $(71) for the three and nine months ended September 30, 2016 and 2015.

 

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Investment gains (losses) are as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
      2016     2015     2016     2015  
(In millions)                         

Fixed maturity securities

   $ 47      $ (29   $ 34      $ (29)      

Equity securities

     (3     (18     (5     (19)      

Derivative instruments

     1        (1     (12     9       

Short term investments and other

       (2     1        (3)      

 

 

Investment gains (losses) (a)

   $           45      $           (50   $           18      $           (42)      

 

 

 

(a)

Includes gross realized gains of $68, $23, $157 and $93 and gross realized losses of $24, $70, $128 and $141 on available-for-sale securities for the three and nine months ended September 30, 2016 and 2015.

The components of net 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,  
      2016      2015      2016      2015  
(In millions)                            

Fixed maturity securities available-for-sale:

           

Corporate and other bonds

   $ 14       $ 36       $ 43       $ 52       

States, municipalities and political subdivisions

              18       

Asset-backed:

           

Residential mortgage-backed

        1         1         7       

Other asset-backed

           3         1       

 

 

Total asset-backed

     -         1         4         8       

 

 

Total fixed maturities available-for-sale

     14         37         47         78       

 

 

Equity securities available-for-sale - common stock

     4         19         9         20       

Short term investments

              1       

 

 

Net OTTI losses recognized in earnings

   $          18       $          56       $          56       $          99       

 

 

 

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

 

September 30, 2016    Cost or
Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Unrealized
OTTI Losses
(Gains)
 

 

 

(In millions)

              

Fixed maturity securities:

              

Corporate and other bonds

   $     17,985           $1,867           $       36           $     19,816         $        (1)       

States, municipalities and political subdivisions

     11,566           1,937             2             13,501           (27)       

Asset-backed:

              

Residential mortgage-backed

     5,174           206             15             5,365           (24)       

Commercial mortgage-backed

     2,064           88             8             2,144        

Other asset-backed

     948           12             1             959        

 

 

Total asset-backed

     8,186           306             24             8,468           (24)       

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

     68           8                76        

Foreign government

     415           23                438        

Redeemable preferred stock

     18           2                20        

 

 

Fixed maturities available-for-sale

     38,238           4,143             62             42,319           (52)       

Fixed maturities trading

     572           4             1             575        

 

 

Total fixed maturities

     38,810           4,147             63             42,894           (52)       

 

 

Equity securities:

              

Common stock

     15           6             1             20        

Preferred stock

     93           5             2             96        

 

 

Equity securities available-for-sale

     108           11             3             116           -        

Equity securities trading

     473           81             84             470        

 

 

Total equity securities

     581           92             87             586        

 

 

Total

   $     39,391           $4,239           $      150           $     43,480         $      (52)       

 

 
December 31, 2015                                   

 

 
(In millions)                                   

Fixed maturity securities:

              

Corporate and other bonds

   $     17,097           $ 1,019           $     347           $     17,769        

States, municipalities and political subdivisions

     11,729           1,453             8             13,174         $        (4)         

Asset-backed:

              

Residential mortgage-backed

     4,935           154             17             5,072           (37)         

Commercial mortgage-backed

     2,154           55             12             2,197        

Other asset-backed

     923           6             8             921        

 

 

Total asset-backed

     8,012           215             37             8,190           (37)         

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

     62           5                67        

Foreign government

     334           13             1             346        

Redeemable preferred stock

     33           2                35        

 

 

Fixed maturities available-for-sale

     37,267           2,707             393             39,581           (41)         

Fixed maturities, trading

     140              20             120        

 

 

Total fixed maturities

     37,407           2,707             413             39,701           (41)         

 

 

Equity securities:

              

Common stock

     46           3             1             48        

Preferred stock

     145           7             3             149        

 

 

Equity securities available-for-sale

     191           10             4             197           -           

Equity securities, trading

     633           56             134             555        

 

 

Total equity securities

     824           66             138             752           -           

 

 

Total

   $     38,231           $ 2,773           $      551           $     40,453         $       (41)         

 

 

The net unrealized gains on investments included in the tables above are recorded as a component of Accumulated other comprehensive income (“AOCI”). When presented in AOCI, these amounts are net of tax and noncontrolling interests and any required Shadow Adjustments. To the extent that unrealized gains on fixed income securities supporting certain products within CNA’s Life & Group Non-Core business would result in a premium deficiency if

 

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realized, a related increase in Insurance reserves is recorded, net of tax and noncontrolling interests, as a reduction of net unrealized gains through Other comprehensive income (“Shadow Adjustments”). As of September 30, 2016 and December 31, 2015, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $1.5 billion and $996 million.

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, 2016    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

       $ 617           $     10       $     338       $     26           $ 955       $     36     

States, municipalities and political subdivisions

     163         2         9            172         2     

Asset-backed:

                 

Residential mortgage-backed

     273         6         212         9         485         15     

Commercial mortgage-backed

     391         7         96         1         487         8     

Other asset-backed

     153         1         17            170         1     

 

 

Total asset-backed

     817         14         325         10         1,142         24     

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

     2                  2      

Foreign government

     16                  16      

 

 

Total fixed maturity securities

     1,615         26         672         36         2,287         62     

Common stock

        1                  1     

Preferred stock

     15         2               15         2     

 

 

Total

       $ 1,630           $ 29       $ 672       $ 36           $  2,302       $ 65     

 

 

December 31, 2015

                 

 

 

(In millions)

                 

Fixed maturity securities:

                 

Corporate and other bonds

       $ 4,882             $ 302         $ 174         $ 45               $ 5,056         $ 347         

States, municipalities and political subdivisions

     338           8           75              413           8         

Asset-backed:

                 

Residential mortgage-backed

     963           9           164           8             1,127           17         

Commercial mortgage-backed

     652           10           96           2             748           12         

Other asset-backed

     552           8           5              557           8         

 

 

Total asset-backed

     2,167           27           265           10             2,432           37         

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

     4                    4        

Foreign government

     54           1                 54           1         

Redeemable preferred stock

     3                    3        

 

 

Total fixed maturity securities

     7,448           338           514           55             7,962           393         

Common stock

     3           1                 3           1         

Preferred stock

     13           3                 13           3         

 

 

Total

       $ 7,464             $ 342         $ 514         $ 55               $ 7,978         $ 397         

 

 

Based on current facts and circumstances, the Company believes the unrealized losses presented in the table above are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are attributable to changes in interest rates, credit spreads and other factors. The Company has no current intent to sell securities with unrealized losses, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded as of September 30, 2016.

 

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The following table presents the activity related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held as of September 30, 2016 and 2015 for which a portion of an OTTI loss was recognized in Other comprehensive income.

 

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

 

 

 
     2016      2015      2016      2015        

 

 

(In millions)

             

Beginning balance of credit losses on fixed maturity securities

   $     41           $     59           $     53           $     62         

Reductions for securities sold during the period

     (2)            (2)            (14)            (5)        

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

     (1)               (1)           

 

 

Ending balance of credit losses on fixed maturity securities

   $     38           $ 57           $ 38           $ 57         

 

 

Contractual Maturity

The following table presents available-for-sale fixed maturity securities by contractual maturity.

 

     September 30, 2016      December 31, 2015        
  

 

 

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

 

 

(In millions)

             

Due in one year or less

   $ 1,665           $ 1,710           $ 1,574           $ 1,595         

Due after one year through five years

     9,052             9,584             7,738             8,082         

Due after five years through ten years

     14,659             15,625             14,652             14,915         

Due after ten years

     12,862             15,400             13,303             14,989         

 

 

Total

   $     38,238           $     42,319           $     37,267           $     39,581         

 

 

Actual maturities may differ from contractual maturities because certain securities may be called or prepaid. Securities not due at a single date are allocated based on weighted average life.

 

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Derivative Financial Instruments

A summary of the aggregate contractual or notional amounts and gross estimated fair values related to derivative financial instruments follows. The contractual or notional amounts for derivatives are used to calculate the exchange of contractual payments under the agreements and may not be representative of the potential for gain or loss on these instruments. Gross estimated fair values of derivative positions are currently presented in Equity securities, Receivables and Payable to brokers on the Consolidated Condensed Balance Sheets.

 

     September 30, 2016     December 31, 2015  

 

 
     Contractual/                   Contractual /                
     Notional      Estimated Fair Value     Notional         Estimated Fair Value    
     

 

 

      

 

 

 
     Amount      Asset      (Liability)     Amount       Asset      (Liability)  

 

 
(In millions)                                         

Without hedge designation:

                

Equity markets:

                

Options – purchased

   $       391           $         22           $ 501              $   16          

– written

     229              $ (9)        614                   $  (28)       

Futures – long

             312                   (1)       

– short

     106                (1)           

Interest rate risk:

                

Futures – long

             63                

Foreign exchange:

                

Currency forwards – long

             133                2          

                               – short

             152                

Currency options – long

     250                  550                7          

Commodities:

                

Futures – long

     68             1              

Embedded derivative on funds withheld liability

     175                (8     179                5          

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.

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

 

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

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

 

September 30, 2016    Level 1     Level 2      Level 3      Total  

 

 

(In millions)

          

Fixed maturity securities:

          

Corporate and other bonds

     $ 19,555       $ 261       $ 19,816       

States, municipalities and political subdivisions

       13,500         1         13,501       

Asset-backed:

          

Residential mortgage-backed

       5,286         79         5,365       

Commercial mortgage-backed

       2,120         24         2,144       

Other asset-backed

       916         43         959       

 

 

Total asset-backed

       8,322         146         8,468       

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

   $ 76              76       

Foreign government

       438            438       

Redeemable preferred stock

     20              20       

 

 

Fixed maturities available-for-sale

     96        41,815         408         42,319       

Fixed maturities trading

       569         6         575       

 

 

Total fixed maturities

   $ 96      $   42,384       $ 414       $   42,894       

 

 

Equity securities available-for-sale

   $ 97         $ 19       $ 116       

Equity securities trading

     469           1         470       

 

 

Total equity securities

   $ 566      $ -       $ 20       $ 586       

 

 

Short term investments

   $ 3,902      $ 911          $ 4,813       

Other invested assets

     54        5            59       

Life settlement contracts

        $ 67         67       

Payable to brokers

     (215           (215)      

 

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Table of Contents
December 31, 2015    Level 1     Level 2      Level 3      Total  

 

 

(In millions)

          

Fixed maturity securities:

          

Corporate and other bonds

     $ 17,601       $ 168       $ 17,769        

States, municipalities and political subdivisions

       13,172         2         13,174        

Asset-backed:

          

Residential mortgage-backed

       4,938         134         5,072        

Commercial mortgage-backed

       2,175         22         2,197        

Other asset-backed

       868         53         921        

 

 

Total asset-backed

       7,981         209         8,190        

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

   $ 66        1            67        

Foreign government

       346            346        

Redeemable preferred stock

     35              35        

 

 

Fixed maturities available-for-sale

     101        39,101         379         39,581        

Fixed maturities trading

       35         85         120        

 

 

Total fixed maturities

   $ 101      $   39,136       $     464       $   39,701        

 

 

Equity securities available-for-sale

   $ 177         $ 20       $ 197        

Equity securities trading

     554           1         555        

 

 

Total equity securities

   $ 731      $ -       $ 21       $ 752        

 

 

Short term investments

   $     3,600      $ 1,134          $ 4,734        

Other invested assets

     102        44            146        

Receivables

       9       $ 3         12        

Life settlement contracts

          74         74        

Payable to brokers

     (196           (196)       

 

 

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Table of Contents

The following tables present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2016 and 2015:

 

                                                                 Unrealized    
                                                                 Gains    
                                                                 (Losses)    
                                                           Recognized in    
            Net Realized Gains                                              Net Income    
            (Losses) and Net Change                                              on Level    
            in Unrealized Gains                                              3 Assets and    
            (Losses)                          Transfers      Transfers            Liabilities    
     Balance,        Included in       Included in                          into      out of     Balance,      Held at    
2016    July 1      Net Income     OCI     Purchases      Sales      Settlements      Level 3      Level 3     September 30      September 30    

 

 
(In millions)                                                                   

Fixed maturity securities:

                          

Corporate and other bonds

   $ 242               $         1      $         7      $         16            $ (5)              $         261            

States, municipalities and political subdivisions

     2                   (1)                1            

Asset-backed:

                          

Residential mortgage-backed

     134           (1     5              (1)            $ (58     79            

Commercial mortgage- backed

     11             23              (8)              (2     24            

Other asset-backed

     45             34                    (36     43            

 

 

Total asset-backed

     190         -        (1     62         $           -         (9)         $ -         (96     146             $ -           

 

 

Fixed maturities available-for-sale

     434         1        6        78              (15)              (96     408            

Fixed maturities trading

     6                           6               (1)           

 

 

Total fixed maturities

   $ 440               $ 1      $ 6      $ 78         $           -       $ (15)         $ -       $ (96   $ 414             $ (1)           

 

 

Equity securities available-for-sale

   $ 19               $ (1   $ 1                    $ 19             $ (2)           

Equity securities trading

     2           $ (1)                      1               (1)           

 

 

Total equity securities

   $ 21               $ (1   $ 1      $ (1)         $           -       $           -         $ -       $           -      $ 20             $ (3)           

 

 

Life settlement contracts

   $ 67                         $ 67            

Derivative financial instruments, net

     1               $ (1                     -            

 

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Table of Contents
           

 

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

                      

Transfers

into
Level 3

    

Transfers

out of
Level 3

   

Balance,
September 30

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

 

 

(In millions)

                        

Fixed maturity securities:

                        

Corporate and other bonds

   $ 141           $ 27       $ (1   $ (11      $ (3   $ 153            

States, municipalities and political subdivisions

     85                       (24     61            

Asset-backed:

                        

Residential mortgage-backed

     207       $ 2      $ (2     4           (7          204            

Commercial mortgage-backed

     87         5        (4     8           (15        (10     71            

Other asset-backed

     490           (6     43         (20     (32        (4     471            

 

 

Total asset-backed

     784         7        (12     55         (20     (54   $ -         (14     746             $         -           

 

 

Fixed maturities available-for-sale

     1,010         7        (12     82         (21     (65        (41     960            

Fixed maturities trading

     89         (2          (1            86             $       (2)           

 

 

Total fixed maturities

   $     1,099       $         5      $ (12   $         82       $ (22   $ (65   $ -       $ (41   $ 1,046             $       (2)           

 

 

Equity securities available-for-sale

   $ 16         $ (1               $ 15            

Equity securities trading

     1       $ 1           $ (2            -             $ 1           

 

 

Total equity securities

   $ 17       $ 1      $ (1   $ -       $ (2   $         -      $         -       $ -      $ 15             $ 1           

 

 

Life settlement contracts

   $ 75       $ 5             $ (6        $ 74             $ 2           

 

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Table of Contents
                                                                  Unrealized  
                                                                  Gains  
                                                                  (Losses)  
                                                            Recognized in  
            Net Realized Gains                                               Net Income  
            (Losses) and Net Change                                               on Level  
            in Unrealized Gains                                               3 Assets and  
            (Losses)                          Transfers      Transfers             Liabilities  
     Balance,      Included in     Included in                          into      out of      Balance,      Held at  
2016    January 1      Net Income     OCI      Purchases      Sales     Settlements      Level 3      Level 3      September 30      September 30  

 

 
(In millions)                                                                    

Fixed maturity securities:

                           

Corporate and other bonds

   $ 168          $ 1      $ 14         $ 163         $ (36   $ (15)           $ (34)       $ 261            

States, municipalities and political subdivisions

     2                      (1)                1            

Asset-backed:

                           

Residential mortgage-backed

     134            2        (2)           15             (10)             (60)          79            

Commercial mortgage-backed

     22                 32             (17)        $     3           (16)          24            

Other asset-backed

     53                      2            69           (25     (1)          2           (57)          43            

 

 

Total asset-backed

     209                    2        -            116           (25     (28)          5           (133)          146             $ -            

 

 

Fixed maturities available-for-sale

     379            3        14            279           (61     (44)          5           (167)          408            

Fixed maturities trading

     85            5           2           (86              6               3            

 

 

Total fixed maturities

   $ 464          $ 8      $ 14          $ 281         $     (147   $ (44)        $ 5         $ (167)        $ 414             $ 3            

 

 

Equity securities available-for-sale

   $ 20          $ (1                    $ 19             $     (2)           

Equity securities trading

     1            1            $ (1              1            

 

 

Total equity securities

   $ 21          $ -      $ -          $ -         $ (1   $ -          $ -         $ -       $ 20             $ (2)           

 

 

Life settlement contracts

   $ 74          $ 10              $ (17)               $ 67             $ 2            

Derivative financial instruments, net

     3            (4         $ (2      $ 3              -               (3)           

 

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                                                                Unrealized    
                                                                Gains    
                                                                (Losses)    
                                                                Recognized in    
            Net Realized Gains                                             Net Income    
            (Losses) and Net Change                                             on Level    
            in Unrealized Gains                                             3 Assets and    
            (Losses)                         Transfers      Transfers            Liabilities    
     Balance,        Included in       Included in                         into      out of     Balance,      Held at    
2015    January 1      Net Income     OCI     Purchases      Sales     Settlements      Level 3      Level 3     September 30      September 30    

 

 
(In millions)                                                                  

Fixed maturity securities:

                         

Corporate and other bonds

   $ 162       $ (1   $ (1   $ 39         $ (13   $ (32)         $ 37       $ (38   $ 153            

States, municipalities and political subdivisions

     94         1               (10)              (24     61            

Asset-backed:

                         

Residential mortgage-backed

     189         4        (4     76             (28)              (33     204            

Commercial mortgage-backed

     83         7        (4     23             (17)           17         (38     71            

Other asset-backed

     655         3        4        125           (254     (52)              (10     471             $ (1)           

 

 

Total asset-backed

     927         14        (4     224           (254     (97)           17         (81     746               (1)           

 

 

Fixed maturities available-for-sale

     1,183         14        (5     263           (267     (139)           54         (143     960               (1)           

Fixed maturities trading

     90         (2          (2             86               (2)           

 

 

Total fixed maturities

   $ 1,273       $ 12      $ (5   $ 263         $     (269   $     (139)         $ 54       $ (143   $ 1,046             $ (3)           

 

 

Equity securities available-for-sale

   $ 16         $ (1                $ 15            

Equity securities trading

     1       $ 1           $ (2             -             $ 1            

 

 

Total equity securities

   $ 17       $ 1      $ (1   $ -         $ (2   $ -         $ -       $ -      $ 15             $ 1            

 

 

Life settlement contracts

   $ 82       $ 22             $ (30)              $ 74             $ 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) and Net investment income

Derivative financial instruments held in a trading portfolio

  

Net investment income

Derivative financial instruments, other

   Investment gains (losses) and Other revenues

Life settlement contracts

  

Other revenues

 

 

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Securities may be transferred in or out of levels within the fair value hierarchy based on the availability of observable market information and quoted prices used to determine the fair value of the security. The availability of observable market information and quoted prices varies based on market conditions and trading volume. During the three and nine months ended September 30, 2016 there were no transfers between Level 1 and Level 2. During the three and nine months ended September 30, 2015, there were $10 million of transfers from Level 2 to Level 1 and no transfers from Level 1 to Level 2. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods.

Valuation Methodologies and Inputs

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

Fixed Maturity Securities

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

Equity Securities

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

Derivative Financial Instruments

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

Short Term Investments

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

 

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Other Invested Assets

Level 1 securities include exchange traded open-end funds valued using quoted market prices.

Life Settlement Contracts

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

Significant Unobservable Inputs

The following tables present quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurement of Level 3 assets. Valuations for assets and liabilities not presented in the tables 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, 2016      Estimated
Fair Value
     Valuation
Techniques
   Unobservable
Inputs
     Range
(Weighted
Average)
 

 

 
       (In millions)                     

Fixed maturity securities

       $ 211         Discounted cash flow    Credit spread        2% – 40% (6%)   

Life settlement contracts

       67         Discounted cash flow    Discount rate risk premium        9%   
           Mortality assumption        55% – 1,676% (162%)   
December 31, 2015                            

 

 

Fixed maturity securities

       $ 138           Discounted cash flow    Credit spread        3% – 184% (6%)   

Life settlement contracts

       74           Discounted cash flow    Discount rate risk premium        9%   
           Mortality assumption        55% – 1,676% (164%)   

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

 

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Financial Assets and Liabilities Not Measured at Fair Value

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

 

       Carrying     Estimated Fair Value  
September 30, 2016      Amount     Level 1          Level 2        Level 3         Total      
(In millions)                                          

Assets:

                     

Other invested assets, primarily mortgage loans

     $ 629                $       654          $ 654          

Liabilities:

                     

Short term debt

       185             $ 182             3           185          

Long term debt

       10,722             10,428             646           11,074          
December 31, 2015                                               

Assets:

                     

Other invested assets, primarily mortgage loans

     $ 678                $ 688          $ 688          

Liabilities:

                     

Short term debt

       1,038             $ 1,050             2           1,052          

Long term debt

       9,507             8,538             595           9,133          

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

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

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

4.  Property, Plant and Equipment

Diamond Offshore

Sale of Assets

In February of 2016, Diamond Offshore entered into a ten-year agreement with a subsidiary of GE Oil & Gas (“GE”) to provide services with respect to certain blowout preventer and related well control equipment on four newly-built drillships. Such services include management of maintenance, certification and reliability with respect to such equipment. In connection with the contractual services agreement with GE, Diamond Offshore will sell the well control equipment to a GE affiliate and subsequently lease back such equipment pursuant to separate ten-year operating leases. During the nine months ended September 30, 2016, Diamond Offshore completed three sale and leaseback transactions and received $158 million in proceeds, which was less than the carrying value of the

 

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equipment. The resulting difference was recorded as prepaid rent with no gain or loss recognized on the transactions, and will be amortized over the terms of the operating leases. Future commitments under the operating leases and contractual services agreements are estimated to aggregate approximately $491 million over the term of the agreements. Diamond Offshore expects to complete the remaining sale and leaseback transaction in the fourth quarter of 2016.

Asset Impairments

During the second quarter of 2016, in response to the continuing decline in industry-wide utilization for semisubmersible rigs, further exacerbated by additional and more frequent contract cancelations by customers, declining dayrates, as well as the results of a third-party strategic review of Diamond Offshore’s long-term business plan completed in the second quarter of 2016, Diamond Offshore reassessed its projections for a recovery in the offshore drilling market. As a result, Diamond Offshore concluded that an expected market recovery is now likely further in the future than had previously been estimated. Consequently, Diamond Offshore believes its cold-stacked rigs, as well as those rigs expected to be cold-stacked in the near term after they come off contract, will likely remain cold-stacked for an extended period of time. Diamond Offshore also believes that the re-entry costs for these rigs will be higher than previously estimated, negatively impacting the undiscounted, probability-weighted cash flow projections utilized in its impairment analysis. In addition, in response to the declining market, Diamond Offshore also reduced anticipated market pricing and expected utilization of these rigs after reactivation. In the second quarter of 2016, Diamond Offshore evaluated 15 of its drilling rigs with indications that their carrying amounts may not be recoverable. Based on updated assumptions and analyses, Diamond Offshore determined that the carrying values of eight of these rigs, consisting of three ultra-deepwater, three deepwater and two mid-water semisubmersible rigs, were impaired.

Diamond Offshore estimated the fair value of the eight impaired rigs using an income approach. The fair value of each rig was estimated based on a calculation of the rig’s discounted future net cash flows over its remaining economic life, which utilized significant unobservable inputs, including, but not limited to, assumptions related to estimated dayrate revenue, rig utilization, estimated reactivation and regulatory survey costs, as well as estimated proceeds that may be received on ultimate disposition of the rig. The fair value estimates were representative of Level 3 fair value measurements due to the significant level of estimation involved and the lack of transparency as to the inputs used. During the second quarter of 2016, Diamond Offshore recognized an impairment loss of $672 million ($263 million after tax and noncontrolling interests).

In the third quarter of 2016, Diamond Offshore evaluated nine of its drilling rigs with indications that their carrying amounts may not be recoverable. Based on its assumptions and analyses, Diamond Offshore determined that the carrying values of these rigs were not impaired. If market fundamentals in the offshore oil and gas industry deteriorate further, Diamond Offshore may be required to recognize additional impairment losses in future periods.

Diamond Offshore recognized aggregate impairment losses of $2 million ($1 million after tax and noncontrolling interests) and $361 million ($159 million after tax and noncontrolling interests) for the three and nine months ended September 30, 2015. See Note 6 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for further discussion of Diamond Offshore’s 2015 asset impairments.

5.  Claim and Claim Adjustment Expense Reserves

CNA’s property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including claims that are incurred but not reported (“IBNR”) as of the reporting date. CNA’s reserve projections are based primarily on detailed analysis of the facts in each case, CNA’s experience with similar cases and various historical development patterns. Consideration is given to such historical patterns as field reserving trends and claim 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,

 

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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 CNA’s results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of $16 million and $14 million for the three months ended September 30, 2016 and 2015 and $137 million and $103 million for the nine months ended September 30, 2016 and 2015. Catastrophe losses in 2016 resulted primarily from U.S. weather-related events and the Fort McMurray wildfires.

Net Prior Year Development

The following tables and discussion present net prior year development.

 

Three Months Ended September 30, 2016    Specialty      Commercial      International      Total   

 

 
(In millions)                            

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

   $       (112)       $      (5)             $           (15)         $     (132)         

Pretax (favorable) unfavorable premium development

        (3)             (2)           (5)         

 

 

Total pretax (favorable) unfavorable net prior year development

   $       (112)       $      (8)             $           (17)         $     (137)         

 

 
Three Months Ended September 30, 2015                            

 

 

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

   $       (130)       $      (11)             $           (34)         $     (175)         

Pretax (favorable) unfavorable premium development

     (2)         (5)             2            (5)         

 

 

Total pretax (favorable) unfavorable net prior year development

   $       (132)       $      (16)             $           (32)         $     (180)         

 

 
Nine Months Ended September 30, 2016                            

 

 

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

   $       (211)       $      (37)             $           (34)         $     (282)         

Pretax (favorable) unfavorable premium development

     (18)         (7)             (2)           (27)         

 

 

Total pretax (favorable) unfavorable net prior year development

   $       (229)       $      (44)             $           (36)         $     (309)         

 

 
Nine Months Ended September 30, 2015                            

 

 

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

   $       (141)            $           (46)         $     (187)         

Pretax (favorable) unfavorable premium development

     (10)       $      (17)             16            (11)         

 

 

Total pretax (favorable) unfavorable net prior year development

   $       (151)       $      (17)             $           (30)         $     (198)         

 

 

 

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Specialty

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

 

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

 

 

 
         2016      2015      2016      2015     

 

 

(In millions)

           

Medical professional liability

       $ 13        $ (19)       $ (17)       $ (11)     

Other professional liability and management liability

     (48)         (37)         (98)         (41)     

Surety

     (63)         (70)         (63)         (69)     

Warranty

                        1      

Other

     (16)         (4)         (40)         (21)     

 

 

Total pretax (favorable) unfavorable development

       $           (112)       $           (130)       $           (211)       $           (141)     

 

 

Three Months

2016

Unfavorable development for medical professional liability was primarily due to higher than expected frequency in accident years 2014 and 2015 in aging services. Increased claims on a specific hospital policy in accident years 2014 and 2015 was also an unfavorable contributor, although more than offset by favorable development relative to expectations in accident years 2013 and prior.

Favorable development in other professional liability and management liability was primarily related to lower than expected frequency of claims and favorable outcomes on specific claims for accident years 2010 through 2014.

Favorable development in surety coverages was primarily due to lower than expected frequency of large losses in accident years 2014 and prior.

Favorable development for other coverages was due to better than expected claim frequency in commercial lines coverages provided to Specialty customers in accident years 2010 through 2015.

2015

Favorable development in medical professional liability was related to lower than expected severity in accident years 2008 through 2013.

Favorable development in other professional liability and management liability was related to better than expected large loss emergence in financial institutions in accident years 2012 and prior. Additional favorable development related to lower than expected severity in accident years 2009 through 2013 for directors and officers liability.

Favorable development for surety coverages was primarily due to lower than expected frequency of large losses in accident years 2013 and prior.

Nine Months

2016

Favorable development for medical professional liability was primarily due to lower than expected severities for individual healthcare professionals, allied facilities and hospitals in accident years 2011 and prior. This was partially offset by unfavorable development in accident years 2012 and 2013 related to higher than expected large loss emergence in hospitals and higher than expected frequency and severity in accident years 2014 and 2015 in CNA’s aging services business.

Favorable development in other professional liability and management liability was primarily related to favorable settlements on closed claims in accident years 2011 through 2013 in professional services. Additional favorable development related to lower than expected frequency of claims and favorable outcomes on specific claims in accident years 2010 through 2014 in professional services. This was partially offset by unfavorable development

 

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related to a specific financial institutions claim in accident year 2014, higher severities in accident year 2015 and deterioration on credit crises-related claims in accident year 2009.

Favorable development in surety coverages was primarily due to lower than expected frequency of large losses in accident years 2014 and prior.

Favorable development for other coverages provided to Specialty customers was due to better than expected claim frequency in property coverages in accident year 2015 and commercial lines coverages in accident years 2010 through 2015.

2015

Overall, favorable development for medical professional liability was related to lower than expected severity in accident years 2008 through 2013. Unfavorable development was recorded related to increased claim frequency in the aging services business for accident years 2013 and 2014.

Overall, favorable development in other professional liability and management liability related to better than expected large loss emergence in financial institutions in accident years 2012 and prior. Additional favorable development related to lower than expected severity in accident years 2009 through 2013 for directors and officers liability and lower than expected severity in accident years 2010 and prior for professional services. Unfavorable development was related to increased claim frequency on public company management liability in accident years 2012 through 2014.

Favorable development for surety coverages was primarily due to lower than expected frequency of large losses in accident years 2013 and prior.

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

Commercial

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

 

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

 

 

 
         2016      2015      2016      2015     

 

 

(In millions)

           

Commercial auto

       $           (12)          $ (47)       $ 7      

General liability

     14        $         (38)         8      

Workers’ compensation

     (6)         (1)         48          22      

Property and other

     (1)                   (13)                      (37)     

 

 

Total pretax (favorable) unfavorable development

       $ (5)       $ (11)       $           (37)       $ -      

 

 

Three Months

2016

Favorable development for commercial auto was primarily due to lower than expected severities in accident years 2012 through 2015.

Unfavorable development for general liability was primarily due to an increase in reported claims prior to the closing of the three year window set forth by the Minnesota Child Victims Act in accident years 2006 and prior.

Favorable development for workers’ compensation was primarily driven by lower than expected frequencies in accident years 2009 through 2014, partially offset by the estimated impact of recent Florida court rulings in accident years 2008 through 2015.

 

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2015

Favorable development for property and other was primarily due to better than expected loss emergence on catastrophe events in accident year 2014.

Nine Months

2016

Favorable development for commercial auto was primarily due to favorable settlements on claims in accident years 2010 through 2014 and lower than expected severities in accident years 2012 through 2015.

Favorable development for general liability was primarily due to better than expected claim settlements in accident years 2012 through 2014 and better than expected severity on umbrella claims in accident years 2010 through 2013. This was partially offset by unfavorable development related to an increase in reported claims prior to the closing of the three year window set forth by the Minnesota Child Victims Act in accident years 2006 and prior.

Unfavorable development for workers’ compensation was primarily due to higher than expected severity for Defense Base Act contractors and the estimated impact of recent Florida court rulings in accident years 2008 through 2015. This was partially offset by favorable development related to lower than expected frequencies related to accident years 2009 through 2014.

Unfavorable development for property and other was primarily due to higher than expected severity from a 2015 catastrophe event. This was offset by favorable development primarily due to better than expected loss frequency in accident years 2013 through 2015.

2015

Unfavorable development for workers’ compensation was primarily due to higher than expected severity related to Defense Base Act contractors in accident years 2008 through 2013.

Favorable development for property and other was primarily due to better than expected loss emergence from 2012 and 2014 catastrophe events and better than expected frequency of large claims in accident year 2014.

The nine months also included unfavorable loss development related to an extra contractual obligation loss and losses associated with premium development.

International

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

 

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

 

 

 
         2016     2015     2016     2015     

 

 

(In millions)

        

Medical professional liability

       $ (2   $ (8   $ (3   $ (8)     

Other professional liability

     (1     (11     16        (16)     

Liability

     (2     (5     (21     (12)     

Property & marine

     (9     (5     (16     (19)     

Other

     (1     (5     (10     9      

 

 

Total pretax (favorable) unfavorable development

       $           (15   $           (34   $           (34   $           (46)     

 

 

Three Months

2016

Favorable development for other professional liability was primarily due to favorable settlements on claims in accident years 2013 and prior. This was largely offset by higher than expected unfavorable large loss emergence in accident years 2014 and 2015.

 

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Favorable development for property and marine was primarily due to favorable emergence of expected losses on a specific claim relating to the December 2015 United Kingdom (“U.K.”) Floods.

2015

Favorable development in medical professional liability was due to better than expected loss emergence on accident years 2011 to 2013.

Favorable development in other professional liability was due to better than expected large loss emergence in accident years 2011 and prior.

Favorable development in liability was due to better than expected large loss emergence in accident years 2012 and prior.

Favorable development in property and marine was due to better than expected individual large loss emergence and favorable settlements on large claims in accident years 2013 and 2014.

Nine Months

2016

Unfavorable development for other professional liability was primarily due to higher than expected large loss emergence in accident years 2011 through 2015, partially offset by favorable settlements on claims in accident years 2013 and prior.

Favorable development for liability was primarily due to better than expected severity in accident years 2013 and prior.

Favorable development for property and marine was primarily due to favorable emergence of expected losses on a specific claim relating to the December 2015 U.K. Floods.

Favorable development for other coverages was primarily due to better than expected severity in auto liability in accident years 2011 through 2015.

2015

Favorable development in medical professional liability was due to better than expected loss emergence on accident years 2011 to 2013.

Favorable development in other professional liability was due to better than expected large loss emergence in accident years 2011 and prior.

Favorable development in liability was due to better than expected large loss emergence in accident years 2012 and prior.

Favorable development in property and marine was due to better than expected individual large loss emergence and favorable settlements on large claims in accident years 2013 and 2014.

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

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

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

 

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billion and transferred to NICO billed third party reinsurance receivables related to A&EP claims with a net book value of $215 million, resulting in total consideration of $2.2 billion.

Through December 31, 2013, CNA recognized $0.9 billion of additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the LPT exceeded the $2.2 billion consideration paid, resulting in the NICO LPT moving into a gain position, requiring deferred retroactive reinsurance accounting treatment. This deferred gain is recognized in earnings in proportion to actual paid recoveries under the LPT. Over the life of the contract, there is no economic impact as long as any additional losses incurred are within the limit of the LPT. In a period in which a change in the estimate of ceded incurred losses is recognized, the change to the deferred gain is cumulatively recognized in earnings as if the revised estimate was available at the effective date of the LPT.

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

 

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

 

 

 
         2016      2015      2016      2015     

 

 

(In millions)

           

Net A&EP adverse development before consideration of LPT

       $       $       $ 200        $ 150      

Provision for uncollectible third party reinsurance on A&EP

           

 

 

Additional amounts ceded under LPT

                     200          150      

Retroactive reinsurance benefit recognized

     (12)         (4)         (94)         (75)     

 

 

Pretax impact of unrecognized deferred retroactive reinsurance benefit

       $           (12)       $           (4)       $           106        $           75      

 

 

CNA completed its reserve review of A&EP reserves in the first quarter of 2016. Based upon CNA’s review, net unfavorable development prior to cessions to the LPT of $200 million was recognized. The unfavorable development was driven by an increase in anticipated future expenses associated with determination of coverage, higher anticipated payouts associated with a limited number of historical accounts having significant asbestos exposures and higher than expected severity on pollution claims. This unfavorable development was ceded to NICO under the LPT, however CNA’s reported earnings were negatively affected due to the application of retroactive reinsurance accounting, as only a portion of the additional amounts ceded under the LPT were recognized in that quarter. All amounts recognized related to the LPT are recorded within Insurance claims and policyholders’ benefits in the Consolidated Condensed Statement of Income.

As of September 30, 2016 and December 31, 2015, the cumulative amounts ceded under the LPT were $2.8 billion and $2.6 billion. The unrecognized deferred retroactive reinsurance benefit was $347 million and $241 million as of September 30, 2016 and December 31, 2015.

NICO established a collateral trust account as security for its obligations to CNA. The fair value of the collateral trust account was $2.5 billion and $2.8 billion as of September 30, 2016 and December 31, 2015. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the full aggregate reinsurance limit as well as certain of NICO’s performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third-party reinsurers related to CNA’s A&EP claims.

 

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6.  Income Taxes

The components of U.S. and foreign income before income tax and a reconciliation between the federal income tax expense at statutory rates and the actual income tax expense is as follows:

 

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

 

 

 
         2016      2015      2016          2015        

 

 
(In millions)                            

Income (loss) before income tax:

           

U.S.

     $    638          $    188             $    535          $    454         

Foreign

         (82)             160             (60)         294         

 

 

Total

     $    556          $    348             $    475          $    748         

 

 

Income tax expense at statutory rate

     $    194          $    122             $    166          $    262         

Increase (decrease) in income tax expense resulting from:

           

Exempt investment income

     (28)         (34)            (92)         (92)        

Foreign related tax differential

             (27)            102          (32)        

Amortization of deferred charges associated with intercompany rig sales to other tax jurisdictions

        1                42         

Taxes related to domestic affiliate

             5                     (1)        

Partnership earnings not subject to taxes

     (9)         (6)            (37)         (26)        

Unrecognized tax benefit

     (2)         (4)                    1         

Other

             9             22          16         

 

 

Income tax expense

     $    163          $    66             $    171          $    170         

 

 

The effective tax rate is impacted by the change in the relative components of earnings or losses generated in foreign tax jurisdictions with lower tax rates.

As of September 30, 2016, a valuation allowance of $61 million was established for the future tax benefit of foreign tax credits in the U.S. which Diamond Offshore no longer expects to be able to realize prior to their expiration.

7.  Debt

CNA Financial

In the first quarter of 2016, CNA completed a public offering of $500 million aggregate principal amount of 4.5% senior notes due March 1, 2026 and used the net proceeds to repay the entire $350 million outstanding principal amount of its 6.5% senior notes due August 15, 2016.

Diamond Offshore

In the first quarter of 2016, Diamond Offshore cancelled its commercial paper program and repaid the $287 million in commercial paper outstanding at December 31, 2015 with proceeds from Eurodollar loans under its revolving credit agreement. As of September 30, 2016, there was $182 million outstanding under the revolving credit agreement.

Boardwalk Pipeline

In May of 2016, Boardwalk Pipeline completed a public offering of $550 million aggregate principal amount of 6.0% senior notes due June 1, 2026 and used the proceeds to reduce borrowings under its revolving credit facility.

Loews

In March of 2016, the Company completed a public offering of $500 million aggregate principal amount of 3.8% senior notes due April 1, 2026 and repaid in full the entire $400 million aggregate principal amount of its 5.3% senior notes at maturity.

 

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8.  Shareholders’ Equity

Accumulated other comprehensive income (loss)

The tables below display the changes in Accumulated other comprehensive income (“AOCI”) by component for the three and nine months ended September 30, 2015 and 2016:

 

    

OTTI

Gains
(Losses)

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

 

 
(In millions)                                          

Balance, July 1, 2015

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

Other comprehensive income (loss) before reclassifications, after tax of $(1), $38, $0, $(1) and $0

     2                 (70)                 (1)              (53)              (122)      

Reclassification of losses from accumulated other comprehensive income, after tax of $0, $(17), $0, $(2) and $0

        31               1               5                  37       

 

 

Other comprehensive income (loss)

     2                 (39)              1               4               (53)              (85)      

Amounts attributable to noncontrolling interests

        4               (1)              1               5               9       

 

 

Balance, September 30, 2015

     $        30                 $        584               $        (3)              $        (593)              $        (41)              $      (23)      

 

 

Balance, July 1, 2016

     $        28                 $        838               $        (2)              $        (639)              $      (106)              $      119       

Other comprehensive income (loss) before reclassifications, after tax of $(4), $(32), $0, $0 and $0

     7                 69                     (24)              52       

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $2, $13, $0, $(4) and $0

     (4)                (27)              1               7                  (23)      

 

 

Other comprehensive income (loss)

     3                 42               1               7               (24)              29       

Amounts attributable to noncontrolling interests

     (1)                (4)              (1)                 2               (4)      

 

 

Balance, September 30, 2016

     $        30                 $        876               $        (2)              $        (632)              $      (128)              $      144       

 

 

 

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

 

 
(In millions)                                          

Balance, January 1, 2015

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

Other comprehensive income (loss) before reclassifications, after tax of $1, $162, $1, $(19) and $0

     (3)              (321)              (2)              36               (100)              (390)        

Reclassification of losses from accumulated other comprehensive income, after tax of $0, $(22), $(2), $(9) and $0

        29               7               15                  51         

 

 

Other comprehensive income (loss)

     (3)              (292)              5               51               (100)              (339)        

Issuance of equity securities by subsidiary

              1                  1         

Amounts attributable to noncontrolling interests

     1               30               (2)              (4)              10               35         

 

 

Balance, September 30, 2015

     $        30               $        584               $        (3)              $        (593)              $         (41)              $        (23)        

 

 

Balance, January 1, 2016

     $        24               $        347               $        (3)              $        (649)              $         (76)              $      (357)        

Other comprehensive income (loss) before reclassifications, after tax of $(5), $(304), $0, $0 and $0

     9               608                     (58)              559         

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $1, $12, $0, $(11) and $0

     (2)              (17)              2               20                  3         

 

 

Other comprehensive income (loss)

     7               591               2               20               (58)              562         

Amounts attributable to noncontrolling interests

     (1)              (62)              (1)              (3)              6               (61)        

 

 

Balance, September 30, 2016

     $        30               $        876               $        (2)              $        (632)              $       (128)              $        144         

 

 

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

 

Major Category of AOCI    Affected Line Item

 

OTTI gains (losses)    Investment gains (losses)
Unrealized gains (losses) on investments    Investment gains (losses)
Cash flow hedges    Other revenues and Contract drilling expenses
Pension liability    Other operating expenses

 

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Subsidiary Equity Transactions

Loews purchased 0.3 million shares of CNA common stock at an aggregate cost of $8 million during the nine months ended September 30, 2016. The Company’s percentage ownership interest in CNA remained unchanged as a result of these transactions, at 90%. The Company’s purchase price of the shares was lower than the carrying value of its investment in CNA, resulting in an increase to Additional paid-in capital (“APIC”) of $3 million.

Treasury Stock

The Company repurchased 3.0 million and 16.3 million shares of Loews common stock at aggregate costs of $115 million and $633 million during the nine months ended September 30, 2016 and 2015.

9.  Benefit Plans

The Company has several non-contributory defined benefit plans and postretirement benefit plans covering eligible employees and retirees.

The following table presents the components of net periodic benefit cost for the plans:

 

     Pension Benefits  
  

 

 

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

 

 

 
         2016             2015          2016          2015      

 

 
(In millions)                           

Service cost

     $ 2            $ 2             $ 6              $ 10         

Interest cost

     33              31                     97            95         

Expected return on plan assets

     (45)             (48)              (133)           (145)        

Amortization of unrecognized net loss

     11              9               34                  32         

Settlement charge

     1              2               3            2         

 

 

Net periodic benefit cost

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

 

 
     Other Postretirement Benefits  
  

 

 

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

 

 

 
         2016         2015          2016          2015  

 

 
(In millions)                           

Service cost

     $ 1                $ 1           $ 1           $ 1         

Interest cost

     1              1             2             2         

Expected return on plan assets

     (1)             (1)            (3)            (3)        

Amortization of unrecognized prior service benefit

     (1)             (3)            (3)            (8)        

Amortization of unrecognized net loss

             1         

 

 

Net periodic benefit cost

     $ -                $ (2)          $ (3)          $ (7)        

 

 

10.  Business Segments

The Company’s segments are CNA Financial’s core property and casualty commercial insurance operations which include Specialty, Commercial and International; CNA’s Other Non-Core operations; Diamond Offshore; Boardwalk Pipeline; Loews Hotels; and Corporate and other. The Company’s reportable segments are primarily based on its individual operating subsidiaries. Each of the principal operating subsidiaries is headed by a chief executive officer who is responsible for the operation of its business and has the duties and authority commensurate with that position. Investment gains (losses) and the related income taxes, excluding those of CNA, are included in the Corporate and other segment. For additional disclosures regarding the composition of the Company’s segments see Note 20 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

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

 

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

 

 

 
         2016      2015      2016      2015    

 

 
(In millions)                            

Revenues (a):

           

CNA Financial:

           

Property and Casualty:

           

Specialty

   $ 946       $ 846       $       2,739       $       2,667       

Commercial

     913         767         2,591         2,545       

International

     229         216         658         642       

Other Non-Core

     345         324         996         978       

 

 

Total CNA Financial

     2,433         2,153         6,984         6,832       

Diamond Offshore

     350         608         1,211         1,867       

Boardwalk Pipeline

     306         296         961         925       

Loews Hotels

     161         146         513         452       

Corporate and other

     37         (34      98         6       

 

 

Total

   $ 3,287       $ 3,169       $ 9,767       $ 10,082       

 

 

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

           

CNA Financial:

           

Property and Casualty:

           

Specialty

   $ 306       $ 248       $ 736       $ 661       

Commercial

     186         83         427         391       

International

     33         23         16         71       

Other Non-Core

     (49      (120      (355      (410)      

 

 

Total CNA Financial

     476         234         824         713       

Diamond Offshore

     36         139         (538      (42)      

Boardwalk Pipeline

     46         48         210         163       

Loews Hotels

     4         1         17         25       

Corporate and other

     (6      (74      (38      (111)      

 

 

Total

   $ 556       $ 348       $ 475       $ 748       

 

 

Net income (loss) (a):

           

CNA Financial:

           

Property and Casualty:

           

Specialty

   $ 180       $ 147       $ 437       $ 394       

Commercial

     110         49         252         231       

International

     22         9         9         37       

Other Non-Core

     (4      (44      (141      (167)      

 

 

Total CNA Financial

     308         161         557         495       

Diamond Offshore

     7         47         (240      (34)      

Boardwalk Pipeline

     14         18         62         55       

Loews Hotels

     3         2         7         15       

Corporate and other

     (5      (46      (22      (70)      

 

 

Total

   $ 327       $ 182       $ 364       $ 461       

 

 

 

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(a)

Investment gains (losses) included in Revenues, Income (loss) before income tax and noncontrolling interests and Net income (loss) are as follows:

 

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

 

 

               2016              2015             2016             2015        

 

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

           

CNA Financial:

           

Property and Casualty:

           

Specialty

     $ 9       $ (22   $ 2      $ (18  

Commercial

     12         (29     2        (23  

International

     6         (1     14        1     

Other Non-Core

     18         2        12        (2  

 

Total CNA Financial

     45         (50     30        (42  

Corporate and other

          (12    

 

Total

     $ 45       $ (50   $ 18      $ (42  

 

Net income (loss):

           

CNA Financial:

           

Property and Casualty:

           

Specialty

     $ 5       $ (14   $ 1      $ (11  

Commercial

     7         (16     1        (13  

International

     4           10        1     

Other Non-Core

     11         1        4        5     

 

Total CNA Financial

     27         (29     16        (18  

Corporate and other

          (4    

 

Total

     $ 27       $ (29   $ 12      $ (18  

 

11.  Legal Proceedings

CNA Financial

In September 2016, a class action lawsuit was filed against CCC, Continental Assurance Company (“CAC”), CNA, the Investment Committee of the CNA 401(k) Plus Plan, The Northern Trust Company and John Does 1-10 (“Defendants”) over the CNA 401(k) Plus Plan. The complaint alleges that Defendants breached fiduciary duties to the CNA 401(k) Plus Plan and caused prohibited transactions in violation of The Employee Retirement Income Security Act of 1974 when the CNA Fixed Income Fund’s annuity contract with CAC was canceled. The plaintiff alleges he and a proposed class of the CNA 401(k) Plus Plan participants who had invested in the Fixed Income Fund suffered lower returns in their CNA 401(k) Plus Plan investments as a consequence of these alleged violations and seeks relief on behalf of the putative class. CNA has only recently begun evaluating the lawsuit as this litigation is in its preliminary stages, and as of yet no class has been certified. CCC and the other Defendants are contesting the case and the Company currently is unable to predict the final outcome or the impact on its financial condition, results of operations or cash flows. As of September 30, 2016, the likelihood of loss is reasonably possible, but the amount of loss, if any, cannot be estimated at this stage of the litigation.

Other Litigation

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

12.  Commitments and Contingencies

CNA Financial

In the course of selling business entities and assets to third parties, CNA agreed to guarantee the performance of certain obligations of a previously owned subsidiary and to indemnify purchasers for losses arising out of breaches of representations and warranties with respect to the business entities or assets sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such guarantee and indemnification agreements in effect for sales of business entities, assets and third party loans may include provisions that survive

 

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indefinitely. As of September 30, 2016, the aggregate amount related to quantifiable guarantees was $375 million and the aggregate amount related to indemnification agreements was $258 million. Should CNA be required to make payments under the guarantee, it would have the right to seek reimbursement in certain cases from an affiliate of a previously owned subsidiary.

In addition, CNA has agreed to provide indemnification to third party purchasers for certain losses associated with sold business entities or assets that are not limited by a contractual monetary amount. As of September 30, 2016, CNA had outstanding unlimited indemnifications in connection with the sales of certain of its business entities or assets that included tax liabilities arising prior to a purchaser’s ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. Certain provisions of the indemnification agreements survive indefinitely while others survive until the applicable statutes of limitation expire, or until the agreed upon contract terms expire.

CNA also provided guarantees, if the primary obligor fails to perform, to holders of structured settlement annuities provided by a previously owned subsidiary. As of September 30, 2016, the potential amount of future payments CNA could be required to pay under these guarantees was approximately $1.9 billion, which will be paid over the lifetime of the annuitants. CNA does not believe any payment is likely under these guarantees, as CNA is the beneficiary of a trust that must be maintained at a level that approximates the discounted reserves for these annuities.

13.  Consolidating Financial Information

The following schedules present the Company’s consolidating balance sheet information at September 30, 2016 and December 31, 2015, and consolidating statements of income information for the nine months ended September 30, 2016 and 2015. These schedules present the individual subsidiaries of the Company and their contribution to the Consolidated Condensed Financial Statements. Amounts presented will not necessarily be the same as those in the individual financial statements of the Company’s subsidiaries due to adjustments for purchase accounting, income taxes and noncontrolling interests. In addition, many of the Company’s subsidiaries use a classified balance sheet which also leads to differences in amounts reported for certain line items.

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

 

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Loews Corporation

Consolidating Balance Sheet Information

 

September 30, 2016    CNA
Financial
     Diamond
Offshore
     Boardwalk
Pipeline
     Loews
Hotels
     Corporate
and Other
     Eliminations      Total         

 

 

(In millions)

                       

Assets:

                       

Investments

     $    46,980         $              76         $       105         $         98         $      5,126            $      52,385      

Cash

     290         5         7         18         24            344      

Receivables

     7,389         278         93         25         138         $          (70)         7,853      

Property, plant and equipment

     281         5,820         7,954         1,102         43            15,200      

Deferred income taxes

     241               3         58         (302)         -      

Goodwill

     110            237                  347      

Investments in capital stocks of subsidiaries

                 15,250         (15,250)         -      

Other assets

     924         231         319         268         4         14          1,760      

Deferred acquisition costs of insurance subsidiaries

     619                        619      

 

 

Total assets

     $    56,834         $         6,410         $    8,715         $    1,514         $    20,643         $    (15,608)         $      78,508      

 

 

Liabilities and Equity:

                       

Insurance reserves

     $    37,753                        $      37,753      

Payable to brokers

     234                  $         217            451      

Short term debt

     1         $            182            $           2               185      

Long term debt

     2,713         1,981         $    3,627         642         1,774            10,737      

Deferred income taxes

     3         164         807         49            $        (288)         735      

Other liabilities

     3,960         451         546         72         282         (70)         5,241      

 

 

Total liabilities

     44,664         2,778         4,980         765         2,273         (358)         55,102      

 

 

Total shareholders’ equity

     10,915         1,936         1,552         747         18,370         (15,250)         18,270      

Noncontrolling interests

     1,255         1,696         2,183         2               5,136      

 

 

Total equity

     12,170         3,632         3,735         749         18,370         (15,250)         23,406      

 

 

Total liabilities and equity

     $    56,834         $         6,410         $    8,715         $    1,514         $    20,643         $    (15,608)         $      78,508      

 

 

 

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Loews Corporation

Consolidating Balance Sheet Information

 

December 31, 2015    CNA
Financial
     Diamond
Offshore
     Boardwalk
Pipeline
     Loews  
Hotels  
     Corporate
and Other
     Eliminations      Total  

 

 
(In millions)                                                 

Assets:

                    

Investments

     $    44,699         $          117            $         81         $      4,503            $    49,400      

Cash

     387         13         $            4         12         24            440      

Receivables

     7,384         409         93         35         96         $            24          8,041      

Property, plant and equipment

     333         6,382         7,712         1,003         47            15,477      

Deferred income taxes

     662               3         68         (733)         -      

Goodwill

     114            237                  351      

Investments in capital stocks of subsidiaries

                 15,129         (15,129)         -      

Other assets

     848         233         319         282            17          1,699      

Deferred acquisition costs of insurance subsidiaries

     598                        598      

 

 

Total assets

     $    55,025         $       7,154         $     8,365         $    1,416         $    19,867         $    (15,821)         $    76,006      

 

 

Liabilities and Equity:

                    

Insurance reserves

     $    36,486                        $    36,486      

Payable to brokers

     358                  $         209            567      

Short term debt

     351         $          287            $           2         400            1,040      

Long term debt

     2,213         1,980         $     3,458         590         1,279            9,520      

Deferred income taxes

     5         276         766         47            $         (712)         382      

Other liabilities

     3,883         496         510         70         222         20          5,201      

 

 

Total liabilities

     43,296         3,039         4,734         709         2,110         (692)         53,196      

 

 

Total shareholders’ equity

     10,516         2,195         1,517         705         17,757         (15,129)         17,561      

Noncontrolling interests

     1,213         1,920         2,114         2               5,249      

 

 

Total equity

     11,729         4,115         3,631         707         17,757         (15,129)         22,810      

 

 

Total liabilities and equity

     $    55,025         $       7,154         $     8,365         $    1,416         $    19,867         $    (15,821)         $    76,006      

 

 

 

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Table of Contents

Loews Corporation

Consolidating Statement of Income Information

 

Nine Months Ended September 30, 2016    CNA
  Financial
       Diamond
  Offshore
       Boardwalk
  Pipeline
         Loews
    Hotels
       Corporate
  and Other
      Eliminations      Total   

 

 
(In millions)                                                 

Revenues:

                    

Insurance premiums

   $ 5,196                       $       5,196      

Net investment income

     1,461        $             $ 108             1,570      

Intercompany interest and dividends

                 706        $ (706)         -      

Investment gains (losses)

     30          (12)                     18      

Contract drilling revenues

        1,141                      1,141      

Other revenues

     297          69        $ 961        $ 513                     1,842      

 

 

Total

     6,984          1,199          961          513          816          (706)         9,767      

 

 

Expenses:

                    

Insurance claims and policyholders’ benefits

     3,949                         3,949      

Amortization of deferred acquisition costs

     926                         926      

Contract drilling expenses

        598                      598      

Other operating expenses

     1,158          1,082          615          479          82             3,416      

Interest

     127          69          136          17          54             403      

 

 

Total

     6,160          1,749          751          496          136                  9,292      

 

 

Income (loss) before income tax

     824          (550)         210          17          680          (706)         475      

Income tax (expense) benefit

     (203)         78          (44)         (10)                    (171)     

 

 

Net income (loss)

     621          (472)         166                  688          (706)         304      

Amounts attributable to noncontrolling interests

     (64)         228          (104)                  60      

 

 

Net income (loss) attributable to Loews Corporation

   $ 557        $ (244)       $ 62        $       $ 688        $ (706)       $ 364      

 

 

 

 

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Table of Contents

Loews Corporation

Consolidating Statement of Income Information

 

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

 

 
(In millions)                                                 

Revenues:

                    

Insurance premiums

   $ 5,173                       $ 5,173      

Net investment income

     1,412        $       $          $            1,419      

Intercompany interest and dividends

                 733        $ (733)           -      

Investment losses

     (42)                        (42)     

Contract drilling revenues

        1,816                      1,816      

Other revenues

     289          49          924        $ 452                     1,716      

 

 

Total

     6,832          1,867          925          452          739          (733)           10,082      

 

 

Expenses:

                    

Insurance claims and policyholders’ benefits

     4,008                         4,008      

Amortization of deferred acquisition costs

     936                         936      

Contract drilling expenses

        971                      971      

Other operating expenses

     1,058          867          628          412          61             3,026      

Interest

     117          71          134          15          56             393      

 

 

Total

     6,119          1,909          762          427          117          -             9,334      

 

 

Income (loss) before income tax

     713          (42)         163          25          622          (733)           748      

Income tax (expense) benefit

     (162)         (6)         (33)         (10)         41             (170)     

 

 

Net income (loss)

     551          (48)         130          15          663          (733)           578      

Amounts attributable to noncontrolling interests

     (56)         14          (75)                  (117)     

 

 

Net income (loss) attributable to Loews Corporation

   $ 495        $ (34)       $ 55        $ 15        $ 663        $ (733)         $ 461      

 

 

 

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

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with our Consolidated Condensed Financial Statements included in Item 1 of this Report, Risk Factors included in Part II, Item 1A of this Report, and the Consolidated Financial Statements, Risk Factors, and MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2015. This MD&A is comprised of the following sections:

 

     Page
      No.      
 

Overview

     42          

Consolidated Financial Results

     42          

Parent Company Structure

     43          

Critical Accounting Estimates

     44          

Results of Operations by Business Segment

     44          

CNA Financial

     44          

Diamond Offshore

     50          

Boardwalk Pipeline

     56          

Loews Hotels

     58          

Corporate and Other

     59          

Liquidity and Capital Resources

     59          

Parent Company

     59          

Subsidiaries

     60          

Investments

     62          

Accounting Standards Update

     65          

Forward-Looking Statements

     65          

OVERVIEW

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

 

   

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

 

   

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

 

   

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

 

   

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

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

Consolidated Financial Results

Net income for the three months ended September 30, 2016 was $327 million, or $0.97 per share, compared to net income of $182 million, or $0.50 per share, in the prior year period. Net income for the nine months ended September 30, 2016 was $364 million, or $1.08 per share, compared to $461 million, or $1.25 per share, in the prior year period.

Results include asset impairment charges at Diamond Offshore of $267 million (after tax and noncontrolling interests) for the nine months ended September 30, 2016 and $159 million (after tax and noncontrolling interests) for the nine months ended September 30, 2015.

Book value per share increased to $54.22 at September 30, 2016 from $51.67 at December 31, 2015.

 

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Three Months Ended September 30, 2016 Compared to 2015

Net income attributable to Loews Corporation for the three months ended September 30, 2016 increased $145 million as compared to the prior year period due to higher earnings at CNA and improved results from the parent company investment portfolio. These increases were partially offset by lower earnings at Diamond Offshore and Boardwalk Pipeline.

CNA’s earnings increased due to higher net investment income driven by limited partnership investments as well as realized investment gains in the third quarter of 2016 compared to losses in the prior year period. These increases were partially offset by lower favorable net prior year reserve development and higher underwriting expenses, which included certain non-recurring costs related to information technology and employee termination costs.

Diamond Offshore’s earnings decreased due to a substantial reduction in the number of rigs operating as compared to the year ago period and significant unscheduled rig downtime, partially offset by lower depreciation expense resulting mainly from the asset impairment charges incurred in prior periods.

Boardwalk Pipeline’s earnings were lower due to a non-recurring franchise tax refund received in last year’s third quarter. Excluding the tax refund, Boardwalk Pipeline’s earnings were higher due to revenues from new growth projects recently placed in service and an increase in storage and parking and lending revenues, partially offset by an increase in interest expense.

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

Income generated by the parent company investment portfolio improved due to higher income from limited partnership investments and equity securities.

Nine Months Ended September 30, 2016 Compared to 2015

Net income attributable to Loews Corporation for the nine months ended September 30, 2016 decreased primarily due to lower earnings at Diamond Offshore partially offset by improved results at CNA, Boardwalk Pipeline and from the parent company investment portfolio.

CNA’s earnings increased due to higher net investment income driven by limited partnership investments, realized investment gains in 2016 as compared to losses in 2015, and higher favorable net prior year reserve development, partially offset by higher underwriting expenses.

Diamond Offshore’s earnings decreased primarily due to increased asset impairment charges. Excluding these impairment charges, year-over-year earnings decreased as a result of a substantial reduction in the number of operating rigs, partially offset by revenue earned by newbuild drillships and lower depreciation expense as a result of the asset impairment charges.

Boardwalk Pipeline’s earnings increased due to new rates in effect following the Gulf South rate case, the return to service of the Evangeline pipeline, and growth projects recently placed in service.

Loews Hotels’ results decreased primarily due to an impairment charge related to a joint venture property.

Income generated by the parent company investment portfolio improved due to higher income from equity securities.

Parent Company Structure

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

 

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CRITICAL ACCOUNTING ESTIMATES

Certain accounting estimates require us to make judgments that affect the amounts reflected in the Consolidated Condensed Financial Statements. Such estimates and judgments necessarily involve varying, and possibly significant, degrees of uncertainty. Accordingly, certain amounts currently recorded in the financial statements will likely be adjusted in the future based on new available information and changes in other facts and circumstances. See the Critical Accounting Estimates section and the Results of Operations by Business Segment – CNA Financial – Reserves – Estimates and Uncertainties section of our MD&A included under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015 for further information.

RESULTS OF OPERATIONS BY BUSINESS SEGMENT

Unless the context otherwise requires, references to net operating income (loss), net realized investment results and net income (loss) reflect amounts attributable to Loews Corporation shareholders.

CNA Financial Overview

The following table summarizes the results of operations for CNA for the three and nine months ended September 30, 2016 and 2015 as presented in Note 13 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report. For further discussion of Net investment income and Net realized investment results, see the Investments section of this MD&A.

 

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

 

 

 
        2016             2015             2016             2015      

 

 
(In millions)                        

Revenues:

       

Insurance premiums

  $         1,767      $         1,751      $         5,196      $         5,173        

Net investment income

    524        354        1,461        1,412        

Investment gains (losses)

    45