Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

[X]

   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
   THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

OR

 

[ ]

   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
   OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From                      to                      

Commission File Number 1-6541

LOEWS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   13-2646102

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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

(Address of principal executive offices) (Zip Code)

(212) 521-2000

(Registrant’s telephone number, including area code)

NOT APPLICABLE

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

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

 

Yes          X        

 

No                   

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

 

Yes         X        

 

No                   

 

Not Applicable                   

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

 

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

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

 

Yes                   

 

No         X        

 

Class     Outstanding at April 21, 2014
Common stock, $0.01 par value     386,499,603 shares

 

 

 


Table of Contents

INDEX

 

    

Page

No.

 

Part I. Financial Information

  

Item 1. Financial Statements (unaudited)

  

Consolidated Condensed Balance Sheets
March 31, 2014 and December  31, 2013

     3   

Consolidated Condensed Statements of Income
Three months ended March  31, 2014 and 2013

     4   

Consolidated Condensed Statements of Comprehensive Income
Three months ended March 31, 2014 and 2013

     5   

Consolidated Condensed Statements of Equity
Three months ended March  31, 2014 and 2013

     6   

Consolidated Condensed Statements of Cash Flows
Three months ended March  31, 2014 and 2013

     7   

Notes to Consolidated Condensed Financial Statements

     8   

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

     36   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     61   

Item 4. Controls and Procedures

     61   

Part II. Other Information

     62   

Item 1. Legal Proceedings

     62   

Item 1A. Risk Factors

     62   

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

     62   

Item 6. Exhibits

     63   

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

     March 31,
2014
      December 31,    
2013
   
(Dollar amounts in millions, except per share data)         

Assets:

        

Investments:

        

Fixed maturities, amortized cost of $37,031 and $39,426

     $ 39,511       $ 41,320  

Equity securities, cost of $813 and $881

       805         871  

Limited partnership investments

       3,512         3,420  

Other invested assets

       649         562  

Short term investments

       7,586         6,800  
   

Total investments

       52,063         52,973  

Cash

       301         295  

Receivables

       8,355         9,361  

Property, plant and equipment

       14,974         14,498  

Goodwill

       354         357  

Assets held for sale

       3,486      

Other assets

       1,618         1,650  

Deferred acquisition costs of insurance subsidiaries

       652         624  

Separate account business

                 181  

Total assets

     $ 81,803       $ 79,939  
   
   

 

Liabilities and Equity:

        

Insurance reserves:

        

Claim and claim adjustment expense

     $ 23,933       $ 24,089  

Future policy benefits

       8,254         10,471  

Unearned premiums

       3,838         3,718  

Policyholders’ funds

       26         116  
   

Total insurance reserves

       36,051         38,394  

Payable to brokers

       882         143  

Short term debt

       854         840  

Long term debt

       10,456         10,006  

Deferred income taxes

       898         716  

Liabilities held for sale

       3,250      

Other liabilities

       4,295         4,753  

Separate account business

           181  
   

Total liabilities

       56,686         55,033  
   

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 – 387,454,185 and 387,210,096 shares

       4         4  

Additional paid-in capital

       3,604         3,607  

Retained earnings

       15,541         15,508  

Accumulated other comprehensive income

       563         339  
   
       19,712         19,458  

Less treasury stock, at cost (542,370 shares)

       (24 )    
   

Total shareholders’ equity

       19,688         19,458  

Noncontrolling interests

       5,429         5,448  
   

Total equity

       25,117         24,906  
   

Total liabilities and equity

     $     81,803       $     79,939  
   
   

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 March 31   2014      2013    
 
(In millions, except per share data)               

Revenues:

            

Insurance premiums

    $ 1,806          $ 1,764    

Net investment income

      577            599    

Investment gains (losses):

            

Other-than-temporary impairment losses

      (2 )          (18 )  

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

            
 

  Net impairment losses recognized in earnings

      (2 )          (18 )  

  Other net investment gains

      44            37    
 

Total investment gains

      42            19    

Contract drilling revenues

      685            700    

Other

      633            604    
 

Total

      3,743            3,686    
 

Expenses:

            

Insurance claims and policyholders’ benefits

      1,446            1,396    

Amortization of deferred acquisition costs

      329            328    

Contract drilling expenses

      370            375    

Other operating expenses

      991            981    

Interest

      124            108    
 

  Total

      3,260            3,188    
 

Income before income tax

      483            498    

Income tax expense

      (92 )          (109 )  
 

Income from continuing operations

      391            389    

Discontinued operations, net of income tax

      (207 )          9    
 

Net income

      184            398    

Amounts attributable to noncontrolling interests

      (125 )          (156 )  
 

Net income attributable to Loews Corporation

    $ 59          $ 242        
 

Net income attributable to Loews Corporation:

            

Income from continuing operations

    $ 245          $ 234    

Discontinued operations, net

      (186 )          8    
 

Net income

    $ 59          $ 242        
 

Basic and diluted net income per share:

            

Income from continuing operations

    $ 0.63          $ 0.60    

Discontinued operations, net

      (0.48 )          0.02    
 

Net income

    $ 0.15          $ 0.62        
 

Dividends per share

    $     0.0625          $     0.0625      
 

Weighted-average shares outstanding:

            

Shares of common stock

      387.34            391.39    

Dilutive potential shares of common stock

      0.73            0.77      
 

Total weighted-average shares outstanding assuming dilution

      388.07            392.16      
 

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 March 31   2014    2013    
 
(In millions)             

Net income

    $         184        $      398    
 

Other comprehensive income (loss), after tax

          

Changes in:

          

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

      12          14    

Net other unrealized gains (losses) on investments

      237          (62 )  
 

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

      249          (48 )  

Unrealized gains on discontinued operations

      8         

Unrealized losses on cash flow hedges

           (21 )  

Pension liability

      (1 )        4    

Foreign currency

      (6 )        (61 )  
 

Other comprehensive income (loss)

      250          (126 )  
 

Comprehensive income

      434          272    

Amounts attributable to noncontrolling interests

      (151 )        (142 )  
 

Total comprehensive income attributable to Loews Corporation

    $ 283        $ 130    
 
 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF EQUITY

(Unaudited)

 

         Loews Corporation Shareholders    
                      Accumulated   Common    
              Additional       Other   Stock    
         Common    Paid-in   Retained   Comprehensive   Held in   Noncontrolling
     Total   Stock    Capital   Earnings   Income   Treasury   Interests
   

(In millions)

                             

Balance, January 1, 2013

     $ 24,676       $ 4        $ 3,595       $ 15,192       $ 678       $ (10 )     $ 5,217  

Net income

       398                  242                 156  

Other comprehensive loss

       (126 )                    (112 )           (14 )

Dividends paid

       (146 )                (24 )               (122 )

Purchase of Loews treasury stock

       (92 )                        (92 )    

Issuance of Loews common stock

       3              3                  

Stock-based compensation

       4              (9 )                   13  

Other

       1                              1  
   

Balance, March 31, 2013

     $       24,718       $           4        $       3,589       $       15,410       $           566       $ (102 )     $ 5,251  
   
   

Balance, January 1, 2014

     $ 24,906       $ 4        $ 3,607       $ 15,508       $ 339       $               -       $         5,448  

Net income

       184                  59                 125  

Other comprehensive income

       250                      224             26  

Dividends paid

       (130 )                (24 )               (106 )

Purchase of subsidiary stock from
noncontrolling interests

       (82 )            (8 )                   (74 )

Purchase of Loews treasury stock

       (24 )                        (24 )    

Issuance of Loews common stock

       5              5                  

Stock-based compensation

       9                              9  

Other

       (1 )                (2 )               1  
   

Balance, March 31, 2014

     $ 25,117       $ 4        $ 3,604       $ 15,541       $ 563       $ (24 )     $ 5,429  
   
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Three Months Ended March 31    2014      2013    
 
(In millions)                

Operating Activities:

             

Net income

     $     184          $     398    

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

       746            335    

Changes in operating assets and liabilities, net:

             

Receivables

       38            (68 )  

Deferred acquisition costs

       (21 )          (40 )  

Insurance reserves

       85            79    

Other assets

       (90 )          (3 )  

Other liabilities

       (294 )          (101 )  

Trading securities

       (225 )          8    
 

Net cash flow operating activities

       423            608    
 

Investing Activities:

             

Purchases of fixed maturities

       (2,072 )          (2,720 )  

Proceeds from sales of fixed maturities

            1,550                 1,409    

Proceeds from maturities of fixed maturities

       851            866    

Purchases of equity securities

       (5 )          (12 )  

Proceeds from sales of equity securities

       11            51    

Purchases of limited partnership investments

       (73 )          (41 )  

Proceeds from sales of limited partnership investments

       68            58    

Purchases of property, plant and equipment

       (758 )          (602 )  

Dispositions

       11            5    

Change in short term investments

       (222 )          375    

Other, net

       2            (22 )  
 

Net cash flow investing activities

       (637 )          (633 )  
 

Financing Activities:

             

Dividends paid

       (24 )          (24 )  

Dividends paid to noncontrolling interests

       (106 )          (122 )  

Purchase of subsidiary stock from noncontrolling interests

       (86 )         

Purchase of Loews treasury stock

       (18 )          (95 )  

Issuance of Loews common stock

       5            3    

Principal payments on debt

       (240 )          (196 )  

Issuance of debt

       701            420    

Other, net

       1            (3 )  
 

Net cash flow financing activities

       233            (17 )  
 

Effect of foreign exchange rate on cash

       1            (7 )  
 

Transfer of cash to assets held for sale

       (14 )         
 

Net change in cash

       6            (49 )  

Cash, beginning of period

       295            228    
 

Cash, end of period

     $ 301          $ 179    
 
 

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 51% 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 53% owned subsidiary); exploration, production and marketing of natural gas and oil (including condensate and natural gas liquids), (HighMount Exploration & Production LLC (“HighMount”), a wholly owned subsidiary); and the operation of 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 (loss) attributable to Loews Corporation” as used herein means Net income (loss) attributable to Loews Corporation shareholders.

In the opinion of management, the accompanying unaudited Consolidated Condensed Financial Statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 31, 2014 and December 31, 2013 and the results of operations, comprehensive income and changes in shareholders’ equity and cash flows for the three months ended March 31, 2014 and 2013.

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

Reference is made to the Notes to Consolidated Financial Statements in the 2013 Annual Report on Form 10-K which should be read in conjunction with these Consolidated Condensed Financial Statements.

The Company presents basic and diluted net income per share on the Consolidated Condensed Statements of Income. Basic net income per share excludes dilution and is computed by dividing net income attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Stock appreciation rights (“SARs”) of 1.9 million and 2.0 million shares were not included in the diluted weighted average shares amounts for the three months ended March 31, 2014 and 2013 due to the exercise price being greater than the average stock price.

Sale of Continental Assurance Company (“CAC”) – On February 10, 2014, CNA entered into a definitive agreement to sell the majority of its run-off annuity and pension deposit business through the sale of the common stock of CAC. The sale is subject to regulatory approvals and other customary closing conditions and is expected to close in the second quarter of 2014. The business being sold, which was previously reported within Life & Group Non-Core, is now reported as discontinued operations in the Consolidated Condensed Statements of Income for the three months ended March 31, 2014 and 2013 and the assets and liabilities are presented as held for sale on the Consolidated Condensed Balance Sheet as of March 31, 2014. The Company has elected not to present these assets and liabilities as held for sale for the comparative period in the Consolidated Condensed Balance Sheets. See Note 12 for further discussion of discontinued operations.

The definitive agreement provides for a pre-close dividend by CAC and also includes a 100% coinsurance agreement on a separate small block of annuity business outside of CAC. The assets and liabilities related to the coinsurance agreement and the assets related to the estimated dividend do not qualify as held for sale presentation. Therefore they are not reflected as held for sale on the Consolidated Condensed Balance Sheet as of March 31, 2014.

Bluegrass Project – As discussed in Note 2 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, Boardwalk Pipeline executed a series of agreements in 2013 with The Williams Companies, Inc. to develop the Bluegrass Project, a joint venture project that would develop a pipeline to transport natural gas liquids. The open season for capacity on the pipeline ended in the

 

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first quarter of 2014, and although discussions with potential customers continued throughout the first quarter, Boardwalk Pipeline was unable to obtain sufficient firm customer commitments to support the project. Further, delays in the development of the project and other factors have resulted in escalations in the estimated costs to complete the project. Considering these factors, in April of 2014, the Company is no longer making capital investments in the Bluegrass Project. As a result, in the first quarter of 2014, the Company expensed the previously capitalized project costs that had been incurred, resulting in a charge of $94 million ($55 million after tax and noncontrolling interests), inclusive of a $10 million charge recorded by Boardwalk Pipeline Partners, LP. This charge was recorded within Other operating expenses on the Consolidated Condensed Statements of Income. The Company does not expect to incur significant additional charges related to this joint venture project.

Impairment of Natural Gas and Oil Properties – Results for the three months ended March 31, 2014 and 2013 include ceiling test impairment charges of $29 million and $145 million, ($19 million and $92 million after tax) related to the carrying value of HighMount’s natural gas and oil properties. The impairments were recorded within Other operating expenses and as credits to Accumulated depreciation, depletion and amortization. The 2014 write-down was primarily attributable to insufficient reserve additions from recent exploration activities due to variability in well performance where HighMount is testing different horizontal target zones and hydraulic fracture designs. Had the effects of HighMount’s cash flow hedges not been considered in calculating the ceiling limitation, the impairments would have been $29 million and $195 million, ($18 million and $124 million after tax) for the three months ended March 31, 2014 and 2013.

2. Investments

Net investment income is as follows:

 

Three Months Ended March 31    2014    2013    
 
(In millions)              

Fixed maturity securities

     $ 452        $ 457    

Short term investments

       1          2    

Limited partnership investments

       87          146    

Equity securities

       2          3    

Income (loss) from trading portfolio (a)

       40          (3 )  

Other

       8          6    
 

Total investment income

       590          611    

Investment expenses

       (13 )        (12 )  
 

Net investment income

     $       577        $       599    
 
 

 

(a)

Includes net unrealized gains (losses) related to changes in fair value on trading securities still held of $13 and $(15) million for the three months ended March 31, 2014 and 2013.

Investment gains (losses) are as follows:

 

Three Months Ended March 31    2014   2013    
 
(In millions)             

Fixed maturity securities

     $ 38       $ 27    

Equity securities

       5         (13 )  

Derivative instruments

           2    

Short term investments and other

       (1 )       3    
 

Investment gains (a)

     $         42       $         19    
 
 

 

(a)

Includes gross realized gains of $58 and $41 and gross realized losses of $15 and $27 on available-for-sale securities for the three months ended March 31, 2014 and 2013.

 

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

 

Three Months Ended March 31    2014    2013     
 
(In millions)               

Fixed maturity securities available-for-sale:

            

  Corporate and other bonds

     $           1        $           3     

  Asset-backed residential mortgage-backed

       1          
 

Total fixed maturities available-for-sale

       2          3     
 

Equity securities available-for-sale:

            

  Preferred stock

            15     
 

Net OTTI losses recognized in continuing earnings

     $ 2        $ 18     
 
 

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

 

    Cost or   Gross   Gross       Unrealized
    Amortized   Unrealized   Unrealized   Estimated   OTTI Losses
March 31, 2014   Cost   Gains   Losses   Fair Value   (Gains)
   
(In millions)                    

Fixed maturity securities:

                   

Corporate and other bonds

    $ 17,265       $ 1,612       $ 56       $ 18,821      

States, municipalities and political subdivisions

      11,113         871         129         11,855      

Asset-backed:

                   

Residential mortgage-backed

      4,854         156         66         4,944       $ (47 )

Commercial mortgage-backed

      1,974         92         13         2,053         (3 )

Other asset-backed

      966         12         2         976      
   

Total asset-backed

      7,794         260         81         7,973         (50 )

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

      135         7         1         141      

Foreign government

      559         18         1         576      

Redeemable preferred stock

      32         2             34      
   

Fixed maturities available-for-sale

      36,898         2,770         268         39,400         (50 )

Fixed maturities, trading

      133             22         111      
   

Total fixed maturities

      37,031         2,770         290         39,511         (50 )
   

Equity securities:

                   

Common stock

      33         9             42      

Preferred stock

      130         2             132      
   

Equity securities available-for-sale

      163         11         -         174         -  

Equity securities, trading

      650         100         119         631      
   

Total equity securities

      813         111         119         805                  -  
   

Total

    $ 37,844       $ 2,881       $ 409       $ 40,316       $ (50 )
   
   

 

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December 31, 2013    Cost or
Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
    

Unrealized
OTTI Losses

(Gains)

 
(In millions)                                   

Fixed maturity securities:

              

Corporate and other bonds

   $     19,352       $     1,645           $     135           $ 20,862      

States, municipalities and political subdivisions

     11,281         548             272             11,557      

Asset-backed:

              

Residential mortgage-backed

     4,940         123             92             4,971       $     (37)       

Commercial mortgage-backed

     1,995         90             22             2,063         (3)       

Other asset-backed

     945         13             3             955      

 

 

Total asset-backed

     7,880         226             117             7,989         (40)       

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

     139         6             1             144      

Foreign government

     531         15             3             543      

Redeemable preferred stock

     92         10                102      

 

 

Fixed maturities available-for-sale

     39,275         2,450             528             41,197         (40)       

Fixed maturities, trading

     151            28             123      

 

 

Total fixed maturities

     39,426         2,450             556             41,320         (40)       

 

 

Equity securities:

              

Common stock

     36         9                45      

Preferred stock

     143         1             4             140      

 

 

Equity securities available-for-sale

     179         10             4             185         -         

Equity securities, trading

     702         119             135             686      

 

 

Total equity securities

     881         129             139             871         -         

 

 

Total

   $     40,307       $     2,579           $     695           $     42,191       $ (40)       

 

 

 

 

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. At March 31, 2014 and December 31, 2013, the net unrealized gains on investments included in AOCI were net of Shadow Adjustments of $639 million and $478 million. To the extent that unrealized gains on fixed income securities supporting certain products within CNA’s Life & Group Non-Core segment would result in a premium deficiency if realized, a related decrease in Deferred acquisition costs, and/or increase in Insurance reserves is recorded, net of tax and noncontrolling interests, as a reduction of net unrealized gains through Other comprehensive income (loss) (Shadow Adjustments).

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

 

     Less than      12 Months         
     12 Months      or Longer      Total  
            Gross             Gross             Gross  
     Estimated      Unrealized      Estimated      Unrealized      Estimated      Unrealized  
March 31, 2014    Fair Value      Losses      Fair Value      Losses      Fair Value      Losses  
(In millions)                                          

Fixed maturity securities:

                 

Corporate and other bonds

   $ 2,002           $ 48           $ 109           $ 8           $ 2,111           $ 56       

States, municipalities and political subdivisions

     1,397             56             244             73             1,641             129       

Asset-backed:

                 

Residential mortgage-backed

     739             13             347             53             1,086             66       

Commercial mortgage-backed

     515             12             91             1             606             13       

Other asset-backed

     167             2             3                170             2       

 

 

Total asset-backed

     1,421             27             441             54             1,862             81       

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

     6             1             3                9             1       

Foreign government

     61             1             4                65             1       

 

 

Total fixed maturity securities

     4,887             133             801             135             5,688             268       

Preferred stock

     16                      16          

 

 

Total

   $ 4,903           $ 133           $ 801           $ 135           $ 5,704           $ 268       

 

 

 

 

 

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     Less than      12 Months         
     12 Months      or Longer      Total  
            Gross             Gross             Gross  
     Estimated      Unrealized      Estimated      Unrealized      Estimated      Unrealized  
December 31, 2013    Fair Value      Losses      Fair Value      Losses      Fair Value      Losses  
(In millions)                                          

Fixed maturity securities:

                 

Corporate and other bonds

   $ 3,592             $ 129           $ 72           $ 6           $ 3,664           $ 135         

States, municipalities and political subdivisions

     3,251             197             129             75             3,380             272         

Asset-backed:

                 

Residential mortgage-backed

     1,293             29             343             63             1,636             92         

Commercial mortgage-backed

     640             22                   640             22         

Other asset-backed

     269             3                   269             3         

 

 

Total asset-backed

     2,202             54             343             63             2,545             117         

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

     13             1                   13             1         

Foreign government

     111             3                   111             3         

 

 

Total fixed maturity securities

     9,169             384             544             144             9,713             528         

Preferred stock

     87             4                   87             4         

 

 

Total

   $ 9,256             $ 388           $ 544           $ 144           $     9,800           $ 532         

 

 

 

 

Based on current facts and circumstances, the Company believes the unrealized losses presented in the table above are primarily attributable to broader economic conditions, changes in interest rates and credit spreads, market illiquidity and other market factors, but are not indicative of the ultimate collectibility of the current amortized cost of the securities. The investments with longer duration, primarily included within the states, municipalities and political subdivision asset category, were more significantly affected by changes in market interest rates. The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at March 31, 2014.

The following table summarizes the activity for the three months ended March 31, 2014 and 2013 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at March 31, 2014 and 2013 for which a portion of an OTTI loss was recognized in Other comprehensive income (loss).

 

Three Months Ended March 31    2014      2013  
(In millions)              

Beginning balance of credit losses on fixed maturity securities

   $         74        $         95      

Reductions for securities sold during the period

     (2)         (3)     

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

     (3)      

 

 

Ending balance of credit losses on fixed maturity securities

   $         69        $         92      

 

 

 

 

 

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Contractual Maturity

The following table summarizes available-for-sale fixed maturity securities by contractual maturity at March 31, 2014 and December 31, 2013. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid with or without call or prepayment penalties. Securities not due at a single date are allocated based on weighted average life.

 

      March 31, 2014      December 31, 2013    
     Cost or      Estimated      Cost or      Estimated    
     Amortized      Fair      Amortized      Fair    
      Cost      Value      Cost      Value    
(In millions)                            

Due in one year or less

   $ 2,684           $ 2,729           $ 2,420           $ 2,455         

Due after one year through five years

     8,839             9,401             9,496             10,068         

Due after five years through ten years

     11,455             11,876             11,667             11,954         

Due after ten years

     13,920             15,394             15,692             16,720         

 

 

Total

   $   36,898           $   39,400           $   39,275           $   41,197         

 

 

 

 

Investment Commitments

As of March 31, 2014, the Company had committed approximately $384 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.

The Company invests in various privately placed debt securities, including bank loans, as part of its overall investment strategy and has committed to additional future purchases, sales and funding. As of March 31, 2014, the Company had commitments to purchase or fund additional amounts of $154 million and sell $180 million under the terms of such securities.

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

 

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Table of Contents

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

 

March 31, 2014    Level 1     Level 2     Level 3     Total       
(In millions)                             

Fixed maturity securities:

          

Corporate and other bonds

   $ 24      $ 18,608      $ 189      $ 18,821     

States, municipalities and political subdivisions

       11,769        86        11,855     

Asset-backed:

          

Residential mortgage-backed

       4,585        359        4,944     

Commercial mortgage-backed

       1,927        126        2,053     

Other asset-backed

       537        439        976     

 

Total asset-backed

       7,049        924        7,973     

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

     135        6          141     

Foreign government

     76        500          576     

Redeemable preferred stock

     23        11          34     

 

Fixed maturities available-for-sale

     258        37,943        1,199        39,400     

Fixed maturities, trading

       26        85        111     

 

Total fixed maturities

   $ 258      $   37,969      $   1,284      $   39,511     

 

 

Equity securities available-for-sale

   $ 117      $ 55      $ 2      $ 174     

Equity securities, trading

     629          2        631     

 

Total equity securities

   $ 746      $ 55      $ 4      $ 805     

 

 

Short term investments

   $       6,868      $ 651        $ 7,519     

Other invested assets

     100        55          155     

Receivables

       7      $ 1        8     

Life settlement contracts

         87        87     

Payable to brokers

     (299     (8     (6     (313  

Assets held for sale-nonrecurring

       3,486          3,486     

Liabilities held for sale-nonrecurring

       (3,250       (3,250  

 

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Table of Contents
December 31, 2013    Level 1     Level 2     Level 3     Total       
(In millions)                             

Fixed maturity securities:

          

Corporate and other bonds

   $ 33      $ 20,625      $ 204      $ 20,862     

States, municipalities and political subdivisions

       11,486        71        11,557     

Asset-backed:

          

Residential mortgage-backed

       4,640        331        4,971     

Commercial mortgage-backed

       1,912        151        2,063     

Other asset-backed

       509        446        955     

 

Total asset-backed

       7,061        928        7,989     

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

     116        28          144     

Foreign government

     81        462          543     

Redeemable preferred stock

     45        57          102     

 

Fixed maturities available-for-sale

     275        39,719        1,203        41,197     

Fixed maturities, trading

       43        80        123     

 

Total fixed maturities

   $ 275      $   39,762      $       1,283      $   41,320     

 

 

Equity securities available-for-sale

   $ 126      $ 48      $ 11      $ 185     

Equity securities, trading

     678          8        686     

 

Total equity securities

   $ 804      $ 48      $ 19      $ 871     

 

 

Short term investments

   $       6,162      $ 563        $ 6,725     

Other invested assets

       54          54     

Receivables

       5      $ 2        7     

Life settlement contracts

         88        88     

Separate account business

     9        171        1        181     

Payable to brokers

     (40     (7     (5     (52  

 

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Table of Contents

The tables below present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2014 and 2013:

 

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

Unrealized
Gains
(Losses)
Recognized in
Net Income
on Level

3 Assets and

Liabilities

 
2014   Balance,
January 1
    Included in
Net Income
    Included in
OCI
    Purchases     Sales     Settlements     into
Level 3
    out of
Level 3
    Balance,
March 31
    Held at
March 31
 
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

  $ 204           $ 1           $ 1           $ 5           $ (4)          $ (5)          $ 3           $ (16)          $ 189          

States, municipalities and political subdivisions

    71               1                   14               86          

Asset-backed:

                   

Residential mortgage-backed

    331             1             15             25               (21)            21             (13)            359          

Commercial mortgage-backed

    151             1             (1)                (1)              (24)            126          

Other asset-backed

    446             1               148             (83)            (72)              (1)            439          
   

Total asset-backed

    928             3             14             173             (83)            (94)            21             (38)            924             -        
   

Fixed maturities available-for-sale

    1,203             4             16             178             (87)            (99)            38             (54)            1,199          

Fixed maturities, trading

    80             5                         85           $ 5        
   

Total fixed maturities

  $   1,283           $ 9           $ 16           $   178           $   (87)          $   (99)          $   38           $   (54)          $   1,284           $ 5        
   
   

Equity securities available-for-sale

  $ 11           $ 3           $   (4)            $ (8)                $ 2          

Equity securities trading

    8               (1)            $ 1             (6)                  2           $   (1)       
   

Total equity securities

  $ 19           $ 2           $ (4)          $ 1           $ (14)          $ -           $ -           $ -           $ 4           $ (1)       
   
   

Life settlement contracts

  $ 88           $ 10                 $ (11)              $ 87           $ 1        

Separate account business

    1                       $ (1)            -          

Derivative financial instruments, net

    (3)            (1)          $ (1)          $ (2)          $ 1             1                 (5)            2        

 

16


Table of Contents
                                                         

Unrealized

Gains

(Losses)

Recognized in

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

Net Income

on Level

3 Assets and

Liabilities

 
2013  

Balance,

January 1

   

  Included in

  Net Income

   

Included in  

OCI  

    Purchases     Sales     Settlements     into
Level 3
   

out of

Level 3

   

Balance,

March 31

    Held at
March 31
 

 

 
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

  $ 219          $ 2         $ 91        $ (17)      $ (20)        $ 26          $ (18)        $ 283          $ (1)           

States, municipalities and political subdivisions

    96          $ (3)          85          (47)        (2)              129         

Asset-backed:

                   

Residential mortgage-backed

    413                   61            (11)            (16)          450         

Commercial mortgage- backed

    129                 5           73            (7)            (24)          177         

Other asset-backed

    368                 1           136          (99)        (13)              396         

 

 

Total asset-backed

    910                 6           270          (99)        (31)          -            (40)          1,023            -            

Redeemable preferred stock

    26                        26         

 

 

Fixed maturities available-for-sale

    1,251                 8           446          (163)        (53)          26            (58)          1,461            (1)           

Fixed maturities, trading

    89                   19          (2)              107            1            

 

 

Total fixed maturities

  $   1,340          $      $ 8         $       465        $       (165)      $       (53)        $       26          $       (58)        $     1,568          $ -            

 

 

 

 

Equity securities available-for-sale

  $ 34          $ (15)      $ 1                 $ (1)        $ 19          $ (15)           

Equity securities trading

    7          (3)          $ (1)              3            (3)           

 

 

Total equity securities

  $ 41          $     (18)      $ 1         $ -        $ (1)      $ -         $ -          $ (1)        $ 22          $       (18)           

 

 

 

 

Short term investments

  $ 6              $ (1)            $ 5         

Other invested assets

    1                (1)              -         

Life settlement contracts

    100          $            $ (12)              95         

Separate account business

    2                        2         

Derivative financial instruments, net

    5               $       (4)                   (3)              2         

    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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Table of Contents

Securities shown in the Level 3 tables may be transferred in or out of Level 3 based on the availability of observable market information used to determine the fair value of the security. The availability of observable market information varies based on market conditions and trading volume and may cause securities to move in and out of Level 3 from reporting period to reporting period. There were $23 million of transfers from Level 2 to Level 1 and $1 million of transfers from Level 1 to Level 2 during the three months ended March 31, 2014. There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2013. 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

Fixed maturity securities are valued using methodologies that model information generated by market transactions involving identical or comparable assets, as well as discounted cash flow methodologies. Common inputs include: prices from recently executed transactions of similar securities, broker/dealer 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.

Level 1 securities include exchange traded bonds, highly liquid U.S. and foreign government 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. Securities are generally assigned to Level 3 in cases where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. Level 3 securities also include 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, broker/dealer quotes and other pricing models utilizing market observable inputs. Level 3 securities are priced using internal models with inputs that are not market observable.

Derivative Financial Instruments

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

Short Term Investments

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 classified 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. Level 2 securities include overseas deposits which can be redeemed at net asset value in 90 days or less.

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.

Separate Account Business

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

Assets and Liabilities Held for Sale on a Nonrecurring Basis

Assets and liabilities held for sale include assets and liabilities of CAC. These assets and liabilities are valued using the agreed upon transaction price for the sale of the common stock of CAC and are classified within Level 2 of the fair value hierarchy. See Note 12 for further discussion of the assets and liabilities classified as held for sale.

Significant Unobservable Inputs

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

 

                  Range  
          Valuation   Unobservable   (Weighted  
March 31, 2014   Fair Value     Technique(s)   Input(s)   Average)  
    (In millions)                

Assets

       

Fixed maturity securities

  $ 116        Discounted cash flow   Credit spread     2% – 15% (4%)   

Equity securities

    2        Market approach   Private offering price     $4,295 per share   

Life settlement contracts

    87        Discounted cash flow   Discount rate risk premium     9%   
      Mortality assumption     70% – 743% (191%)   

December 31, 2013

       

 

 

Assets

       

Fixed maturity securities

  $ 142        Discounted cash flow   Credit spread     2% – 20% (4%)   

Equity securities

    10        Market approach   Private offering price     $360 –$4,268 per share   
          ($1,148 per share)   

Life settlement contracts

    88        Discounted cash flow   Discount rate risk premium     9%   
      Mortality assumption     70% – 743% (192%)   

For fixed maturity securities, an increase in the credit spread assumptions would result in a lower fair value measurement. For equity securities, an increase in the private offering price, earnings projections and earnings

 

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multiple would result in a higher fair value measurement. For life settlement contracts, an increase in the discount rate risk premium or decrease in the mortality assumption would result in a lower fair value measurement.

Financial Assets and Liabilities Not Measured at Fair Value

The carrying amount, estimated fair value and the level of the fair value hierarchy of the Company’s financial instrument assets and liabilities which are not measured at fair value on the Consolidated Condensed Balance Sheets are listed in the tables below. The carrying amounts 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        
March 31, 2014    Amount      Level 1    Level 2      Level 3      Total        
(In millions)                                      

Financial Assets:

                 

Other invested assets

   $ 495             $         510       $ 510      

Financial Liabilities:

                 

Short term debt

     852          $ 823         126         949      

Long term debt

     10,444            10,934         61         10,995      

December 31, 2013

                 

 

Financial Assets:

                 

Other invested assets

   $ 508             $ 515       $ 515      

Financial Liabilities:

                 

Premium deposits and annuity contracts

     57               58         58      

Short term debt

     838          $ 852         20         872      

Long term debt

     9,995            10,387         182         10,569      

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

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

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

Fair value of debt was based on observable market prices when available. When observable market prices were not available, the fair value for 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.

 

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4. Derivative Financial Instruments

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

 

     March 31, 2014     December 31, 2013  
   
     Contractual/                   Contractual/                
     Notional      Estimated Fair Value     Notional      Estimated Fair Value  
     Amount      Asset      (Liability)     Amount      Asset          (Liability)      
   

(In millions)

                

With hedge designation:

                

Interest rate risk:

                

Interest rate swaps

       $ 300              $ (3       $ 300                  $ (4)       

Commodities:

                

Forwards – short

     165           $ 2         (8     191           $ 5         (4)       

Foreign exchange:

                

Currency forwards – short

     146             5           114             2         (1)       

Without hedge designation:

                

Equity markets:

                

Options – purchased

     2,685             37           1,561                     41      

              – written

     307                (15     729                (23)       

Equity swaps and warrants

                

              – long

     11             2           17             9      

Interest rate risk:

                

Credit default swaps

                

  – purchased protection

     150                (4     50                (3)       

  – sold protection

     25             1           25             

Foreign exchange:

                

Currency forwards – long

     34                  55             

                                – short

     69             1           113             

Gross estimated fair values of derivative positions are currently presented in Equity securities, Receivables and Payable to brokers on the Consolidated Condensed Balance Sheets. There would be no significant difference in the balance included in such accounts if the estimated fair values were presented net for the periods ended March 31, 2014 and December 31, 2013.

For derivative financial instruments without hedge designation, changes in the fair value of derivatives not held in a trading portfolio are reported in Investment gains (losses) and changes in the fair value of derivatives held for trading purposes are reported in Net investment income on the Consolidated Condensed Statements of Income. There were no gains or losses included in Investment gains (losses) for the three months ended March 31, 2014. Gains of $2 million were included in Investment gains (losses) for the three months ended March 31, 2013. Gains of $8 million and losses of $13 million were included in Net investment income for the three months ended March 31, 2014 and 2013.

The Company’s derivative financial instruments with cash flow hedge designation hedge variable price risk associated with the purchase and sale of natural gas and other energy-related products, exposure to foreign currency losses on future foreign currency expenditures, as well as risks attributable to changes in interest rates on long term debt. Losses of $7 million and $18 million were recognized in OCI related to these cash flow hedges for the three months ended March 31, 2014 and 2013. For the three months ended March 31, 2014 and 2013, losses of $7 million

 

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and gains of $13 million were reclassified from AOCI into income. As of March 31, 2014, the estimated amount of net unrealized gains associated with these cash flow hedges that will be reclassified from AOCI into earnings during the next twelve months was $11 million. The net amounts recognized due to ineffectiveness were less than $1 million for the three ended March 31, 2014 and 2013.

5. Claim and Claim Adjustment Expense Reserves

CNA’s property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including claims that are incurred but not reported (“IBNR”) as of the reporting date. CNA’s reserve projections are based primarily on detailed analysis of the facts in each case, CNA’s experience with similar cases and various historical development patterns. Consideration is given to such historical patterns as field reserving trends and claims settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions including inflation and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.

Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers’ compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. There can be no assurance that CNA’s ultimate cost for insurance losses will not exceed current estimates.

Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in CNA’s results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of $74 million and $39 million for the three months ended March 31, 2014 and 2013. Catastrophe losses in the first quarter of 2014 related primarily to U.S. winter weather-related events.

Net Prior Year Development

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

 

     CNA     CNA               
Three Months Ended March 31, 2014    Specialty     Commercial      Other         Total      
   
(In millions)                          

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

   $ (2     $ 17            $         10      $ 25        

Pretax (favorable) unfavorable premium development

     (8     (19)             (4     (31)       
   

Total pretax (favorable) unfavorable net prior year development

   $ (10     $ (2)           $ 6      $ (6)       
   
   

 

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     CNA      CNA                
Three Months Ended March 31, 2013    Specialty      Commercial      Other            Total        
   
(In millions)                            

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

   $ (15)         $ (11)                $ (26)       

Pretax (favorable) unfavorable premium development

     (8)         (10)           $ 5         (13)       
   

Total pretax (favorable) unfavorable net prior year development

   $ (23)         $ (21)           $         5         $ (39)       
   
   

CNA Specialty

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

 

Three Months Ended March 31          2014                 2013            
   
(In millions)             

Medical professional liability

   $ 1      $ (3)       

Other professional liability and management liability

     (6     (1)       

Surety

     1        1        

Other

     2        (12)       
   

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

   $ (2)      $ (15)       
   
   

 

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2014

Favorable development for other professional liability and management liability was related to better than expected loss emergence in accident years 2004 and prior.

2013

Overall, favorable development for medical professional liability reflects favorable experience in accident years 2009 and prior. Unfavorable development was recorded for accident years 2010 and 2011 due to higher than expected large loss activity.

Other includes standard property and casualty coverages provided to CNA Specialty customers. Favorable development for other coverages was primarily due to better than expected loss emergence in property coverages in accident years 2010 and subsequent.

CNA Commercial

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

 

Three Months Ended March 31         2014                 2013            
   
(In millions)            

Commercial auto

  $ 20      $ (5)       

General liability

    (5     (21)       

Workers’ compensation

    10        25        

Property and other

    (8     (10)       
   

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

  $ 17      $ (11)       
   
   

2014

Unfavorable development for commercial auto was primarily related to higher than expected frequency in accident years 2012 and 2013 and higher than expected loss emergence in accident years 2010 and 2011.

Unfavorable development for workers’ compensation was primarily due to the recognition of losses related to favorable premium development in accident year 2013.

2013

Favorable development in the general liability coverages was primarily due to better than expected loss emergence in accident years 2002 and prior.

Unfavorable development for workers’ compensation was primarily due to higher than expected large losses and increased severity in the state of California in accident year 2010.

6. Debt

CNA Financial

In February of 2014, CNA completed a public offering of $550 million aggregate principal amount of 4.0% senior notes due May 15, 2024. CNA intends to use the net proceeds from this offering to repurchase, redeem, repay or otherwise retire the $549 million outstanding aggregate principal balance of its 5.9% senior notes due December 15, 2014.

Diamond Offshore

In March of 2014, Diamond Offshore entered into an agreement to increase its revolving credit facility by $250 million and extend the maturity date by six months. The credit agreement provides for a $1.0 billion revolving credit facility for general corporate purposes, maturing on March 17, 2019.

 

 

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7. Shareholders’ Equity

Accumulated Other Comprehensive Income

The tables below display the changes in Accumulated other comprehensive income (“AOCI”) by component for the three months ended March 31, 2013 and 2014:

 

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

Balance, January 1, 2013

  $ 18           $ 1,233               $ -             $ 16           $ (732)          $ 143               $ 678            

Other comprehensive income (loss) before reclassifications, after tax of $(7), $29, $0, $6, $0 and $0

    14             (49)                  (12)              (61)                (108)           

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $6, $0, $4, $(3) and $0

            (13)                        (9)            4                     (18)           

Other comprehensive income (loss)

    14             (62)                -               (21)            4             (61)                (126)           

Amounts attributable to noncontrolling interests

    (1)            5                         3             1             6                 14            

Balance, March 31, 2013

  $ 31           $ 1,176               $ -             $ (2)          $ (727)          $ 88               $ 566            
   
   

Balance, January 1, 2014

  $ 23           $ 622               $ -             $ (7)          $ (432)          $ 133               $ 339            

Transfer to net assets held for sale

    (5)            (17)                22                     -            

Other comprehensive income (loss) before reclassifications, after tax of $(6), $(141), $(5), $3, $0 and $0

    12             264                 8               (4)              (6)                274            

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $14, $0, $(3), $(1) and $0

            (27)                        4             (1)                    (24)           

Other comprehensive income (loss)

    12             237                 8               -             (1)            (6)                250            

Amounts attributable to noncontrolling interests

    (1)            (24)                (1)              (1)            1                     (26)           

Balance, March 31, 2014

  $       29           $         818               $     29             $       (8)          $       (432)          $       127               $ 563            
   
   

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)

Unrealized gains (losses) on discontinued operations

  

Discontinued operations, net of income tax

Cash flow hedges

  

Interest expense, Other revenues and Contract drilling expenses

Pension liability

  

Other operating expenses

 

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Subsidiary Equity Transactions

Diamond Offshore repurchased 1.9 million shares of its common stock at an aggregate cost of $86 million during the three months ended March 31, 2014. The Company’s percentage ownership interest in Diamond Offshore increased as a result of these repurchases, from 50.4% to 51.1%. The repurchase price of the shares exceeded the Company’s carrying value, resulting in a decrease to Additional paid-in capital of $8 million.

Treasury Stock

The Company repurchased 0.5 million and 2.1 million shares of Loews common stock at aggregate costs of $24 million and $92 million during the three months ended March 31, 2014 and 2013.

8. Benefit Plans

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

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

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

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

The components of net periodic benefit cost are as follows:

 

            Other  
     Pension Benefits      Postretirement Benefits  
Three Months Ended March 31    2014      2013      2014            2013        
   
(In millions)                            

Service cost

   $ 5            $ 6            

Interest cost

     37              34          $ 1              $ 1            

Expected return on plan assets

       (53)               (49)             (1)           (1)           

Amortization of unrecognized net loss

     7              14            

Amortization of unrecognized prior service benefit

           (6)           (6)           
   

Net periodic benefit cost

   $ (4)           $ 5          $ (6)             $ (6)           
   
   

9. Business Segments

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

CNA’s results are reported in four business segments: CNA Specialty, CNA Commercial, Life & Group Non-Core and Other. CNA Specialty provides a broad array of professional, financial and specialty property and casualty products and services, primarily through insurance brokers and managing general underwriters. CNA Commercial includes property and casualty coverages sold to small businesses and middle market entities and organizations primarily through an independent agency distribution system. CNA Commercial also includes commercial insurance and risk management products sold to large corporations primarily through insurance brokers. Life & Group Non-Core primarily includes the results of the life and group lines of business that are in run-off. Other includes the

 

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operations of Hardy Underwriting Bermuda Limited (“Hardy”), corporate expenses, including interest on corporate debt, and the results of certain property and casualty business primarily in run-off, including CNA Re and asbestos and environmental pollution. Hardy is a specialized Lloyd’s of London underwriter primarily of short-tail exposures in marine and aviation, non-marine property, specialty lines and property treaty reinsurance.

Diamond Offshore owns and operates offshore drilling rigs that are chartered on a contract basis for fixed terms by companies engaged in exploration and production of hydrocarbons. Offshore rigs are mobile units that can be relocated based on market demand. Diamond Offshore’s fleet consists of 45 drilling rigs, including four newbuild rigs which are under construction and one rig being constructed utilizing the hull of one of Diamond Offshore’s existing mid-water floaters. On March 31, 2014, Diamond Offshore’s drilling rigs were located offshore 11 countries in addition to the United States.

Boardwalk Pipeline is engaged in the interstate transportation and storage of natural gas and NGLs and gathering and processing of natural gas. This segment consists of interstate natural gas pipeline systems originating in the Gulf Coast region, Oklahoma and Arkansas, and extending north and east through the midwestern states of Tennessee, Kentucky, Illinois, Indiana and Ohio, natural gas storage facilities in four states and NGL pipelines and storage facilities in Louisiana, with approximately 14,450 miles of pipeline.

HighMount is engaged in the exploration, production and marketing of natural gas and oil (including condensate and NGLs), primarily located in the Permian Basin in West Texas as well as in the Mississippian Lime in Oklahoma.

Loews Hotels operates a chain of 19 hotels, 18 of which are in the United States and one is in Canada.

The Corporate and other segment consists primarily of corporate investment income, corporate interest expense and other unallocated expenses.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. In addition, CNA does not maintain a distinct investment portfolio for every insurance segment, and accordingly, allocation of assets to each segment is not performed. Therefore, a significant portion of net investment income and investment gains (losses) are allocated based on each segment’s carried insurance reserves, as adjusted. On February 10, 2014, CNA entered into a definitive agreement to sell the majority of its run-off annuity and pension business through the sale of the common stock of CAC. The business being sold, which was previously reported within Life & Group Non-Core, is now reported as discontinued operations in the Consolidated Condensed Statements of Income for the three months ended March 31, 2014 and 2013. See Notes 1 and 12 for further discussion of discontinued operations.

 

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

 

Three Months Ended March 31    2014           2013        
   
(In millions)             

Revenues (a):

    

CNA Financial:

    

CNA Specialty

   $ 979      $ 956        

CNA Commercial

     1,041        1,101        

Life and Group Non-Core

     331        315        

Other

     112        83        

Total CNA Financial

     2,463        2,455        

Diamond Offshore

     710        732        

Boardwalk Pipeline

     357        329        

HighMount

     55        68        

Loews Hotels

     105        94        

Corporate and other

     53        8        

Total

   $ 3,743      $ 3,686        
   
   

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

    

CNA Financial:

    

CNA Specialty

   $ 212      $ 215        

CNA Commercial

     127        198        

Life and Group Non-Core

     (16     (23)       

Other

     (22     (40)       

Total CNA Financial

     301        350        

Diamond Offshore

     168        205        

Boardwalk Pipeline

     23        99        

HighMount

     (31     (139)       

Loews Hotels

     5     

Corporate and other

     17        (17)       

Total

   $ 483      $ 498        
   
   

Net income (loss) (a):

    

CNA Financial:

    

CNA Specialty

   $ 128      $ 128        

CNA Commercial

     77        115        

Life and Group Non-Core

     7     

Other

     (12     (25)       

Total CNA Financial

     200        218        

Diamond Offshore

     69        82        

Boardwalk Pipeline

     (18     33        

HighMount

     (20     (88)       

Loews Hotels

     3     

Corporate and other

     11        (11)       

Income from continuing operations

               245                  234        

Discontinued operations, net

     (186     8        

Total

   $ 59      $ 242        
   
   

 

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(a)

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

 

Three Months Ended March 31    2014            2013        
   

Revenues and Income before income tax and noncontrolling interests:

     

CNA Financial:

     

CNA Specialty

   $ 12       $ 3        

CNA Commercial

     12         4        

Life and Group Non-Core

     16         9        

Other

     2         3        
   

Total

   $ 42       $ 19        
   
   

Net income:

     

CNA Financial:

     

CNA Specialty

   $ 7       $ 2        

CNA Commercial

     7         2        

Life and Group Non-Core

     9         6        

Other

     1         2        
   

Total

   $           24       $ 12        
   
   

10. Legal Proceedings

The Company and its subsidiaries are parties to 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.

11. Commitments and Contingencies

In the course of selling business entities and assets to third parties, CNA has agreed to indemnify purchasers for losses arising out of breaches of representation and warranties with respect to the business entities or assets being sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such indemnification agreements may include provisions that survive indefinitely. As of March 31, 2014, the aggregate amount of quantifiable indemnification agreements in effect for sales of business entities, assets and third party loans was $702 million.

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 March 31, 2014, 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. These indemnification agreements survive until the applicable statutes of limitation expire, or until the agreed upon contract terms expire.

 

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12. Discontinued Operations

As discussed in Note 1, on February 10, 2014, CNA entered into a definitive agreement to sell the majority of its run-off annuity and pension deposit business through the sale of the common stock of CAC. The assets and liabilities of the business being sold are presented as held for sale on the Consolidated Condensed Balance Sheet as of March 31, 2014 and the results of operations have been reclassified as discontinued operations in the Consolidated Condensed Statements of Income for the three months ended March 31, 2014 and 2013.

The results of discontinued operations reflected in the Consolidated Condensed Statements of Income were as follows:

 

Three Months Ended March 31    2014           2013        
   
(In millions)             

Revenues:

    

Net investment income

   $ 41      $ 42        

Investment gains

     1        5        

Other

       1        
   

Total revenues

     42        48        

Expenses:

    

Insurance claims and policyholders’ benefits

     31        33        

Other operating expenses

     1        1        
   

Total

     32        34        
   

Income before income tax

     10        14        

Income tax expense

     (3     (5)       
   

Results of discontinued operations, net of income tax

     7        9        

Impairment loss on sale, net of tax benefit of $41

     (214  

Amounts attributable to noncontrolling interests

                21        (1)       
   

Income (loss) from discontinued operations

   $ (186   $ 8        
   
   

 

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The following table presents the detailed assets and liabilities held for sale as of March 31, 2014:

 

 

 
(In millions)       

Assets:

  

Investments:

  

Fixed maturity securities at fair value

   $ 2,684        

Equity securities at fair value

     16        

Other invested assets

     1        

Short term investments

     36        

 

 

Total investments

     2,737        

Cash

     14        

Receivables

     787        

Other assets

     55        

Separate account business

     148        

 

 

Assets held for sale

     3,741        

Less: Impairment on sale

     (255)       

 

 

Total assets held for sale

   $     3,486        

 

 

 

 

Liabilities:

  

Insurance reserves

   $ 3,017        

Other liabilities

     85        

Separate account business

     148        

 

 

Total liabilities held for sale

   $ 3,250        

 

 

 

 

13.  Consolidating Financial Information

The following schedules present the Company’s consolidating balance sheet information at March 31, 2014 and December 31, 2013, and consolidating statements of income information for the three months ended March 31, 2014 and 2013. 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

 

March 31, 2014   

CNA

Financial

    

Diamond

Offshore

    

Boardwalk

Pipeline

    

HighMount

    

Loews

Hotels

    

Corporate

and Other

     Eliminations      Total      

 

 
(In millions)                                                        

Assets:

                       

Investments

   $ 45,008       $ 1,582          $ 10           $ 55       $ 5,408           $ 52,063       

Cash

     206         17       $ 13           1             10         54             301       

Receivables

     7,599         438         95           80             32         128        $ (17)           8,355       

Property, plant and equipment

     274         5,959         7,275           983             440         43             14,974       

Deferred income taxes

     70               507             3            (580)           -        

Goodwill

     119         20         215                       354       

Assets held for sale

     3,486                           3,486       

Investments in capital stocks of subsidiaries

                    17,175          (17,175)           -        

Other assets

     777         316         286           12             181         20          26            1,618       

Deferred acquisition costs of insurance subsidiaries

     652                           652       

 

 

Total assets

   $    58,191       $     8,332       $     7,884         $      1,593           $       721       $    22,828        $    (17,746)         $    81,803       

 

 

 

 

Liabilities and Equity:

                       

Insurance reserves

   $ 36,051                         $ 36,051       

Payable to brokers

     364             $ 12              $ 506             882       

Short term debt

     549       $ 250            1           $ 54               854       

Long term debt

     2,558         2,230       $ 3,375           481             133         1,679             10,456       

Deferred income taxes

        522         683              42         205        $ (554)           898       

Liabilities held for sale

     3,250                           3,250       

Other liabilities

     2,870         729         359           98             26         673          (460)           4,295       

 

 

Total liabilities

     45,642         3,731         4,417           592             255         3,063          (1,014)           56,686       

 

 

Total shareholders’ equity

     11,285         2,362         1,541           1,001             466         19,765          (16,732)           19,688       

Noncontrolling interests

     1,264         2,239         1,926                       5,429       

 

 

Total equity

     12,549         4,601         3,467           1,001             466         19,765          (16,732)           25,117       

 

 

Total liabilities and equity

   $ 58,191       $ 8,332       $ 7,884         $ 1,593           $ 721       $ 22,828        $ (17,746)         $ 81,803       

 

 

 

 

 

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Loews Corporation

Consolidating Balance Sheet Information

 

December 31, 2013   

CNA

Financial

    

Diamond

Offshore

    

Boardwalk

Pipeline

     HighMount     

Loews

Hotels

    

Corporate

and Other

     Eliminations      Total      

 

 
(In millions)                                                        

Assets:

                       

Investments

   $ 46,107       $ 2,061          $ 28         $ 43       $ 4,734          $ 52,973       

Cash

     195         36       $ 29         1           10         24            295       

Receivables

     8,666         498         97         143           28         74       $ (145)           9,361       

Property, plant and equipment

     282         5,472         7,296         974           430         44            14,498       

Deferred income taxes

     244               517           3            (764)           -       

Goodwill

     119         20         215            3               357       

Investments in capital stocks of subsidiaries

                    17,264         (17,264)           -       

Other assets

     741         305         360         15           183         7         39            1,650       

Deferred acquisition costs of insurance subsidiaries

     624                           624       

Separate account business

     181                           181       

 

 

Total assets

   $     57,159       $      8,392       $      7,997       $      1,678         $       700       $     22,147       $    (18,134)         $    79,939       

 

 

 

 

Liabilities and Equity:

                       

Insurance reserves

   $ 38,394                         $ 38,394       

Payable to brokers

     85       $ 1          $ 9            $ 48            143       

Short term debt

     549         250            21         $ 20               840       

Long term debt

     2,011         2,230       $ 3,424         481           182         1,678            10,006       

Deferred income taxes

        516         689            41         195       $ (725)           716       

Other liabilities

     3,323         734         427         121           23         690         (565)           4,753       

Separate account business

     181                           181       

 

 

Total liabilities

     44,543         3,731         4,540         632           266         2,611         (1,290)           55,033       

 

 

Total shareholders’ equity

     11,354         2,362         1,570         1,046           434         19,536         (16,844)           19,458       

Noncontrolling interests

     1,262         2,299         1,887                     5,448       

 

 

Total equity

     12,616         4,661         3,457         1,046           434         19,536         (16,844)           24,906       

 

 

Total liabilities and equity

   $ 57,159       $ 8,392       $ 7,997       $ 1,678         $ 700       $ 22,147       $ (18,134)         $ 79,939       

 

 

 

 

 

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Table of Contents

Loews Corporation

Consolidating Statement of Income Information

 

Three Months Ended March 31, 2014   CNA
Financial
    Diamond
Offshore
    Boardwalk
Pipeline
    HighMount     Loews
Hotels
    Corporate
and Other
    Eliminations     Total  

 

 
(In millions)                                                

Revenues:

               

Insurance premiums

  $       1,806                   $     1,806        

Net investment income

    526               $ 51             577        

Intercompany interest and dividends

              377         $ (377)            -        

Investment gains

    42                     42        

Contract drilling revenues

    $       685                   685        

Other

    89         25       $ 357       $ 55       $       105         2             633        

 

 

Total

    2,463         710         357         55         105         430           (377)            3,743        

 

 

Expenses:

               

Insurance claims and policyholders’ benefits

    1,446                     1,446        

Amortization of deferred acquisition costs

    329                     329        

Contract drilling expenses

      370                   370        

Other operating expenses

    343         154         293         84         99         18             991        

Interest

    44         18         41                       18             124        

 

 

Total

    2,162         542         334         86         100         36           -             3,260        

 

 

Income (loss) before income tax

    301         168         23         (31)               394           (377)            483        

Income tax (expense) benefit

    (79)        (27)        11         11         (2)        (6)            (92)       

 

 

Income (loss) from continuing operations

    222         141         34         (20)               388           (377)            391        

Discontinued operations, net of income tax

    (207)                    (207)       

 

 

Net income (loss)

    15         141         34         (20)               388           (377)            184        

Amounts attributable to noncontrolling interests

    (1)        (72)        (52)                (125)       

 

 

Net income (loss) attributable to Loews Corporation

  $ 14       $ 69       $       (18)      $       (20)      $      $       388         $       (377)          $ 59        

 

 

 

 

 

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Table of Contents

Loews Corporation

Consolidating Statement of Income Information

 

    CNA     Diamond     Boardwalk           Loews     Corporate              
Three Months Ended March 31, 2013   Financial     Offshore     Pipeline     HighMount     Hotels     and Other     Eliminations     Total      

 

 
(In millions)                                                

Revenues:

               

Insurance premiums

  $       1,764                   $     1,764        

Net investment income

    591       $            $ 7          599        

Intercompany interest and dividends

                    182      $       (182)          -        

Investment gains

    19                     19        

Contract drilling revenues

            700                   700        

Other

    81         31       $       329       $ 68         $       94        1          604        

 

 

Total

    2,455         732         329         68           94        190        (182)          3,686        

 

 

Expenses:

               

Insurance claims and policyholders’ benefits

    1,396                     1,396        

Amortization of deferred acquisition costs

    328                     328        

Contract drilling expenses

      375                   375        

Other operating expenses

    339         144         190         202           91        15          981        

Interest

    42                40         5           3        10          108        

 

 

Total

    2,105         527         230         207           94        25        -           3,188        

 

 

Income (loss) before income tax

    350         205         99             (139)          -        165        (182)          498        

Income tax (expense) benefit

    (108)        (36)        (22)        51             6          (109)       

 

 

Income (loss) from continuing operations

    242         169         77         (88)          -        171        (182)          389        

Discontinued operations, net of income tax

                       9        

 

 

Net income (loss)

    251         169         77         (88)          -        171        (182)          398       

Amounts attributable to noncontrolling interests

    (25)        (87)        (44)                (156)       

 

 

Net income (loss) attributable to Loews Corporation

  $ 226       $ 82       $ 33       $ (88)        $ -      $ 171      $ (182)        $ 242        

 

 

 

 

 

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Table of Contents

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, 2013. This MD&A is comprised of the following sections:

 

     Page
     No.

Overview

   36

Consolidated Financial Results

   36

Parent Company Structure

   37

Critical Accounting Estimates

   37

Results of Operations by Business Segment

   38

CNA Financial

   38

Diamond Offshore

   41

Boardwalk Pipeline

   45

HighMount

   47

Loews Hotels

   49

Corporate and Other

   50

Liquidity and Capital Resources

   51

CNA Financial

   51

Diamond Offshore

   51

Boardwalk Pipeline

   53

HighMount

   53

Loews Hotels

   53

Corporate and Other

   53

Investments

   54

Forward-Looking Statements

   57

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 51% 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 53% owned subsidiary);

 

   

exploration, production and marketing of natural gas and oil (including condensate and natural gas liquids) (HighMount Exploration & Production LLC (“HighMount”), a wholly owned subsidiary); and

 

   

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

    Income from continuing operations for the 2014 first quarter was $245 million, or $0.63 per share, compared to $234 million, or $0.60 per share, in the 2013 first quarter. Net income attributable to Loews includes a loss from discontinued operations of $186 million (after tax and noncontrolling interests) for the three months ended March 31, 2014 related to CNA’s pending sale of its annuity and pension deposit business.

 

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Table of Contents

    Income from continuing operations increased primarily due to higher parent company investment income as a result of improved performance of the trading portfolio and lower ceiling test impairment charges at HighMount. These increases were partially offset by a $55 million charge (after tax and noncontrolling interests) related to the write off of all previously capitalized costs incurred by the Company and Boardwalk Pipeline for the proposed Bluegrass project.

    CNA earnings decreased primarily due to lower net investment income, higher catastrophe losses and lower favorable net prior year development, partially offset by improved non-catastrophe current accident year underwriting results and higher realized investment gains.

    Diamond Offshore’s earnings decreased primarily due to lower utilization and increased interest expense as a result of higher debt levels. These declines were partially offset by higher dayrates earned.

    Book value per share increased to $50.89 at March 31, 2014 from $50.25 at December 31, 2013 and $49.93 at March 31, 2013. Book value per share excluding Accumulated other comprehensive income (“AOCI”) increased to $49.43 at March 31, 2014 from $49.38 at December 31, 2013 and $48.48 at March 31, 2013.

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.

CRITICAL ACCOUNTING ESTIMATES

    The preparation of the consolidated condensed financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. Actual results could differ from those estimates.

    The consolidated condensed financial statements and accompanying notes have been prepared in accordance with GAAP, applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the consolidated condensed financial statements. In general, our estimates are based on historical experience, evaluation of current trends, information from third party professionals and various other assumptions that we believe are reasonable under the known facts and circumstances.

    We consider the accounting policies discussed below to be critical to an understanding of our consolidated condensed financial statements as their application places the most significant demands on our judgment.

 

   

Insurance Reserves

   

Reinsurance and Other Receivables

   

Litigation

   

Valuation of Investments and Impairment of Securities

   

Long Term Care Products

   

Payout Annuity Contracts

   

Pension and Postretirement Benefit Obligations

   

Valuation of HighMount’s Proved Reserves

   

Impairment of Long-Lived Assets

   

Goodwill

   

Income Taxes

    Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from estimates, which may have a material adverse impact on our results of operations or equity. 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, 2013 for further information.

 

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Table of Contents

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

    On February 10, 2014, CNA entered into a definitive agreement to sell the majority of its run-off annuity and pension deposit business through the sale of the common stock of Continental Assurance Company (“CAC”). In connection with the pending sale, the Company recorded an impairment charge of $193 million (after tax and noncontrolling interests). The business being sold, which was previously reported within Life & Group Non-Core is now reported as discontinued operations in the Consolidated Condensed Statements of Income for the three months ended March 31, 2014 and 2013 and assets and liabilities held for sale in the Consolidated Condensed Balance Sheet as of March 31, 2014. Further information on the sale is provided in Notes 1 and 12 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report.

    The following table summarizes the results of operations for CNA for the three months ended March 31, 2014 and 2013 as presented in Note 13 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report:

 

Three Months Ended March 31    2014        2013      

 

(In millions)                    

Revenues:

         

Insurance premiums

   $     1,806         $     1,764     

Net investment income

     526           591     

Investment gains

     42           19     

Other

     89           81     

 

Total

     2,463           2,455     

 

Expenses:

         

Insurance claims and policyholders’ benefits

     1,446           1,396     

Amortization of deferred acquisition costs

     329           328     

Other operating expenses

     343           339     

Interest

     44           42     

 

Total

     2,162           2,105     

 

Income before income tax

     301           350     

Income tax expense

     (79        (108  

 

Income from continuing operations

     222           242     

Discontinued operations, net of income tax

     (207        9     

 

Net income

     15           251     

Amounts attributable to noncontrolling interests

     (1        (25  

 

Net income attributable to Loews Corporation

   $ 14         $ 226     

 

 

    Income from continuing operations decreased $20 million for the three months ended March 31, 2014 as compared with the same period in 2013, due to lower net investment income, higher catastrophe losses and lower favorable net prior year development, partially offset by improved non-catastrophe current accident year underwriting results and higher net realized investment gains. See the Investments section of this MD&A for further discussion of net realized investment results and net investment income. Further information on net prior year development is included in Note 5 of the Notes to Consolidated Condensed Financial Statements included under Item 1.

CNA Property and Casualty Insurance Operations

    CNA’s property and casualty insurance operations consist of professional, financial, specialty property and casualty products and services and commercial insurance and risk management products.

    In the evaluation of the results of the property and casualty businesses, CNA utilizes the loss ratio, the expense ratio, the dividend ratio and the combined ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred

 

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acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders’ dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios.

The following tables summarize the results of CNA’s property and casualty operations for the three months ended March 31, 2014 and 2013:

 

     CNA     CNA              
Three Months Ended March 31, 2014    Specialty     Commercial     Hardy     Total      

 

 
(In millions, except %)                         

Net written premiums

   $ 796      $ 899      $ 72      $ 1,767          

Net earned premiums

     748        822        98        1,668          

Net investment income

     151        198        1        350          

Net operating income

     121        70        6      &nb