Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

[    ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From                      to                     

Commission File Number 1-6541

LOEWS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware         13-2646102
(State or other jurisdiction of         (I.R.S. Employer
incorporation or organization)         Identification No.)

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

(Address of principal executive offices) (Zip Code)

(212) 521-2000

(Registrant’s telephone number, including area code)

NOT APPLICABLE

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

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

 

  Yes        X            No                     

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

 

  Yes        X         No                       Not Applicable                     

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

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

Emerging growth company         

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

                                  

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

 

  Yes                        No        X         

 

Class

         

    Outstanding at October 20, 2017    

    Common stock, $0.01 par value           336,631,152 shares

 

 

 


Table of Contents

INDEX

 

     Page
No.
 

Part I. Financial Information

  

Item 1. Financial Statements (unaudited)

  

Consolidated Condensed Balance Sheets
September  30, 2017 and December 31, 2016

     3  

Consolidated Condensed Statements of Income
Three and nine months ended September 30, 2017 and 2016

     4  

Consolidated Condensed Statements of Comprehensive Income
Three and nine months ended September 30, 2017 and 2016

     5  

Consolidated Condensed Statements of Equity
Nine months ended September 30, 2017 and 2016

     6  

Consolidated Condensed Statements of Cash Flows
Nine months ended September 30, 2017 and 2016

     7  

Notes to Consolidated Condensed Financial Statements

     8  

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

     40  

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

     59  

Item 4.  Controls and Procedures

     59  

Part II. Other Information

     59  

Item 1.  Legal Proceedings

     59  

Item 1A. Risk Factors

     59  

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

     60  

Item 6.  Exhibits

     61  

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

      September 30,
2017
  December 31,
2016
(Dollar amounts in millions, except per share data)         

Assets:

    

Investments:

    

Fixed maturities, amortized cost of $39,230 and $38,947

   $ 42,507     $ 41,494  

Equity securities, cost of $592 and $571

     610       549  

Limited partnership investments

     3,201       3,220  

Other invested assets, primarily mortgage loans

     825       683  

Short term investments

     4,991       4,765  

Total investments

     52,134       50,711  

Cash

     416       327  

Receivables

     7,792       7,644  

Property, plant and equipment

     15,475       15,230  

Goodwill

     648       346  

Other assets

     2,419       1,736  

Deferred acquisition costs of insurance subsidiaries

     643       600  

Total assets

   $ 79,527     $ 76,594  
   

Liabilities and Equity:

    

Insurance reserves:

    

Claim and claim adjustment expense

   $ 22,209     $ 22,343  

Future policy benefits

     11,040       10,326  

Unearned premiums

     4,060       3,762  

Total insurance reserves

     37,309       36,431  

Payable to brokers

     324       150  

Short term debt

     194       110  

Long term debt

     11,239       10,668  

Deferred income taxes

     905       636  

Other liabilities

     5,195       5,238  

Total liabilities

     55,166       53,233  

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 – 336,753,017 and 336,621,358 shares

     3       3  

Additional paid-in capital

     3,181       3,187  

Retained earnings

     15,811       15,196  

Accumulated other comprehensive income (loss)

     32       (223
     19,027       18,163  

Less treasury stock, at cost (123,500 shares)

     (6        

Total shareholders’ equity

     19,021       18,163  

Noncontrolling interests

     5,340       5,198  

Total equity

     24,361       23,361  

Total liabilities and equity

   $ 79,527     $ 76,594  
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

3


Table of Contents

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
      2017     2016     2017     2016  
(In millions, except per share data)                         

Revenues:

        

Insurance premiums

   $ 1,806     $ 1,767     $ 5,185     $ 5,196  

Net investment income

     557       561       1,639       1,570  

Investment gains (losses):

        

Other-than-temporary impairment losses

     (5     (18     (9     (56

Other net investment gains

     21       63       102       74  

Total investment gains

     16       45       93       18  

Contract drilling revenues

     357       340       1,113       1,141  

Other revenues

     785       574       2,150       1,842  

  Total

     3,521       3,287       10,180       9,767  

Expenses:

        

Insurance claims and policyholders’ benefits

     1,480       1,202       4,053       3,949  

Amortization of deferred acquisition costs

     309       314       926       926  

Contract drilling expenses

     198       187       598       598  

Other operating expenses (Note 5)

     1,047       898       2,978       3,416  

Interest

     223       130       504       403  

  Total

     3,257       2,731       9,059       9,292  

Income before income tax

     264       556       1,121       475  

Income tax expense

     (52     (163     (240     (171

Net income

     212       393       881       304  

Amounts attributable to noncontrolling interests

     (55     (66     (198     60  

Net income attributable to Loews Corporation

   $ 157     $ 327     $ 683     $ 364  
   

Basic net income per share

   $ 0.46     $ 0.97     $ 2.03     $ 1.08  
   

Diluted net income per share

   $ 0.46     $ 0.97     $ 2.02     $ 1.08  
   

Dividends per share

   $ 0.0625     $ 0.0625     $ 0.1875     $ 0.1875  
   

Weighted average shares outstanding:

        

Shares of common stock

     336.91       337.18       336.90       338.33  

Dilutive potential shares of common stock

     0.88       0.44       0.83       0.28  

Total weighted average shares outstanding assuming dilution

     337.79       337.62       337.73       338.61  
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

4


Table of Contents

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
      2017     2016     2017     2016  
(In millions)                         

Net income

   $ 212     $ 393     $ 881     $ 304  

Other comprehensive income (loss), after tax

        

Changes in:

        

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

     1       3       (3     7  

Net other unrealized gains on investments

     23       42       167       591  

  Total unrealized gains on available-for-sale investments

     24       45       164       598  

Unrealized gains on cash flow hedges

     1       1       1       2  

Pension liability

     11       7       26       20  

Foreign currency translation

     41       (24     94       (58

Other comprehensive income

     77       29       285       562  

Comprehensive income

     289       422       1,166       866  

Amounts attributable to noncontrolling interests

     (64     (70     (228     (1

Total comprehensive income attributable to Loews Corporation

   $ 225     $ 352     $ 938     $ 865  
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

5


Table of Contents

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF EQUITY

(Unaudited)

 

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

Balance, January 1, 2016

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

Net income

     304            364           (60

Other comprehensive income

     562              501         61  

Dividends paid

     (177          (63         (114

Purchases of subsidiary stock from

               

noncontrolling interests

     (9        3             (12

Purchases of Loews treasury stock

     (115              (115  

Stock-based compensation

     35          33             2  

Other

     (4              (13     (1                     10  

Balance, September 30, 2016

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

Balance, January 1, 2017

   $ 23,361     $ 3      $ 3,187     $ 15,196     $ (223   $ -     $ 5,198  

Net income

     881            683           198  

Other comprehensive income

     285              255         30  

Dividends paid

     (180          (63         (117

Purchases of Loews treasury stock

     (6              (6  

Stock-based compensation

     24          (8           32  

Other

     (4              2       (5                     (1

Balance, September 30, 2017

   $       24,361     $         3      $ 3,181     $     15,811     $ 32     $ (6   $ 5,340  
                           

See accompanying Notes to Consolidated Condensed Financial Statements.

 

6


Table of Contents

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Nine Months Ended September 30    2017   2016
(In millions)         

Operating Activities:

    

Net income

   $ 881     $ 304  

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

     959       1,676  

Changes in operating assets and liabilities, net:

    

Receivables

     19       (165

Deferred acquisition costs

     (34     (24

Insurance reserves

     248       464  

Other assets

     (85     (80

Other liabilities

     (116     9  

Trading securities

     (62     (468

Net cash flow operating activities

     1,810       1,716  

Investing Activities:

    

Purchases of fixed maturities

     (6,877     (7,472

Proceeds from sales of fixed maturities

     4,167       4,239  

Proceeds from maturities of fixed maturities

     2,635       2,263  

Purchases of limited partnership investments

     (85     (324

Proceeds from sales of limited partnership investments

     179       207  

Purchases of property, plant and equipment

     (735     (1,185

Acquisitions

     (1,218     (79

Dispositions

     68       277  

Change in short term investments

     (85     104  

Other, net

     (136     124  

Net cash flow investing activities

     (2,087     (1,846

Financing Activities:

    

Dividends paid

     (63     (63

Dividends paid to noncontrolling interests

     (117     (114

Purchases of subsidiary stock from noncontrolling interests

       (8

Purchases of Loews treasury stock

     (6     (115

Principal payments on debt

     (2,249     (2,882

Issuance of debt

     2,808       3,226  

Other, net

     (16     (2

Net cash flow financing activities

     357       42  

Effect of foreign exchange rate on cash

     9       (8

Net change in cash

     89       (96

Cash, beginning of period

     327       440  

Cash, end of period

   $     416     $         344  
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

7


Table of Contents

Loews Corporation and Subsidiaries

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.  Basis of Presentation

Loews Corporation is a holding company. Its subsidiaries are engaged in the following lines of business: commercial property and casualty insurance (CNA Financial Corporation (“CNA”), a 89% owned subsidiary); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (“Diamond Offshore”), a 53% owned subsidiary); transportation and storage of natural gas and natural gas liquids (Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”), a 51% owned subsidiary); the operation of a chain of hotels (Loews Hotels Holding Corporation (“Loews Hotels & Co”), a wholly owned subsidiary); and the manufacture of rigid plastic packaging solutions (Consolidated Container Company LLC, a 99% 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 normal recurring accruals) necessary to present fairly the Company’s financial position as of September 30, 2017 and December 31, 2016, results of operations and comprehensive income for the three and nine months ended September 30, 2017 and 2016 and changes in shareholders’ equity and cash flows for the nine months ended September 30, 2017 and 2016. Net income (loss) for the third quarter and first nine months of each of the years is not necessarily indicative of net income (loss) for that entire year. These Consolidated Condensed Financial Statements should be read in conjunction with the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

The Company presents basic and diluted net income (loss) per share on the Consolidated Condensed Statements of Income. Basic net income (loss) per share excludes dilution and is computed by dividing net income (loss) attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted 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. 0.4 million and 3.3 million shares for the three months ended September 30, 2017 and 2016 and 0.4 million and 4.7 million shares for the nine months ended September 30, 2017 and 2016 attributable to employee stock-based compensation awards were not included in the diluted weighted average shares outstanding amounts because the effect would have been antidilutive.

Accounting changes – In March of 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The updated accounting guidance simplifies the accounting for share-based payment award transactions, including income tax consequences and classification on the statement of cash flows. As of January 1, 2017, the Company adopted the updated accounting guidance and began recognizing excess tax benefits or deficiencies on vesting or settlement of awards as an income tax benefit or expense within net income and the related cash flows classified within operating activities. The change impacted the amount and timing of income tax expense recognition as well as the calculation of diluted earnings per share. The accounting change did not have a material effect on the consolidated financial statements.

Recently issued ASUs – In May of 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The core principle of the new accounting guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new accounting guidance provides a five-step analysis of transactions to determine when and how revenue is recognized and requires enhanced disclosures about revenue. The guidance is effective for interim and annual reporting periods beginning after December 15, 2017, and may be adopted either retrospectively or on a modified basis, with a cumulative effect adjustment to the opening balance sheet at the date of adoption. The Company expects to adopt this updated guidance using the modified retrospective method. The standard excludes from its scope the accounting for insurance contracts, financial instruments and certain other agreements that are subject to other guidance in the FASB Accounting Standards Codification, which limits the impact of this change in accounting for the Company. Upon adoption, the Company

 

8


Table of Contents

expects that revenue on CNA’s warranty products and services will be recognized more slowly than under the current revenue recognition pattern. The Company also expects that Other revenues and operating expenses will increase significantly for CNA’s warranty products to reflect the gross amount paid by consumers to the auto dealers that act as CNA’s agents. While the Company continues to evaluate the effect the guidance will have on its consolidated financial statements, the Company expects the adoption of the updated guidance will not have a material effect on its results of operations or financial position.

In January of 2016, the FASB issued ASU 2016-01, “Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The updated accounting guidance requires changes to the reporting model for financial instruments. The guidance is effective for interim and annual periods beginning after December 15, 2017. The Company expects the primary change to be the requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. Upon adoption, the Company will recognize an adjustment for the cumulative amount of unrealized investment gains and losses related to available-for-sale equity securities within the opening balances of Retained earnings and Accumulated other comprehensive income (loss). The Company expects the adoption of the updated guidance will not have a material effect on its consolidated financial statements.

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

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

In October of 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” The updated guidance amends the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company is currently evaluating its historical intra-group transactions for the possible effect of the updated guidance. The Company expects to adopt this updated guidance using the modified retrospective approach with a cumulative effect adjustment to the opening balance of Retained earnings with an offset to a deferred income tax liability.

2. Acquisition of Consolidated Container Company

On May 22, 2017, the Company completed the previously announced acquisition of CCC Acquisition Holdings, Inc. for $1.2 billion, subject to closing adjustments. CCC Acquisition Holdings, Inc., through its wholly owned subsidiary, Consolidated Container Company LLC (“Consolidated Container”), is a rigid plastic packaging and recycled resins manufacturer that provides packaging solutions to end markets such as beverage, food and household chemicals through a network of manufacturing locations across North America. The results of Consolidated Container are included in the Consolidated Condensed Financial Statements since the acquisition date in the Corporate segment. For the three months ended September 30, 2017 and for the period since the acquisition date, Consolidated Container’s revenues were $202 million and $293 million and net income was not significant. For the year ended December 31, 2016, Consolidated Container reported total revenues of $788 million.

 

9


Table of Contents

The acquisition was funded with approximately $620 million of parent company cash and debt financing proceeds at Consolidated Container of $600 million, as discussed in Note 7. The following table summarizes the preliminary allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value as of the acquisition date and is subject to change within the measurement period. The primary areas that are not yet finalized relate to working capital at closing and determination of tax bases of net assets acquired.

 

(In millions)       

Cash

   $ 5  

Property, plant and equipment

     391  

Goodwill

     300  

Other assets:

  

Inventory

     57  

Customer relationships

     459  

Trade name

     43  

Other

     122      

Deferred income taxes

     (17

Other liabilities:

  

Accounts payable

     (52

Pension liability

     (27

Other

     (58
   $     1,223  
   

Customer relationships were valued using an income approach, which values the intangible asset at the present value of the related incremental after tax cash flows. The customer relationships intangible asset will be amortized over a useful life of 21 years. The trade name was valued using an income approach, which values the intangible asset based on an estimate of cost savings, or a relief from royalty. The trade name will be amortized over a useful life of 10 years. Goodwill includes value associated with the assembled workforce and Consolidated Container’s future growth and profitability. The assets acquired and liabilities assumed as part of the acquisition did not result in a step up of tax basis and approximately $94 million of goodwill is deductible for tax purposes.

 

10


Table of Contents

3.  Investments

Net investment income is as follows:

 

     Three Months Ended          Nine Months Ended
     September 30,           September 30,
      2017   2016           2017   2016
(In millions)                        

Fixed maturity securities

     $ 455     $ 457            $ 1,367     $ 1,352

Limited partnership investments

       67       91              206       98

Short term investments

       5       3              13       8

Equity securities

       1       1              4       8

Income from trading portfolio (a)

       34       11              67       113

Other

       10       12                    26       34

Total investment income

       572       575              1,683       1,613     

Investment expenses

       (15 )       (14 )                    (44 )       (43 )

Net investment income

     $         557     $         561            $     1,639     $     1,570
   

 

(a)

Net unrealized gains (losses) related to changes in fair value on trading securities still held were $22 and $8 for the three months ended September 30, 2017 and 2016 and $35 and $63 for the nine months ended September 30, 2017 and 2016.

Investment gains (losses) are as follows:

 

     Three Months Ended          Nine Months Ended
     September 30,           September 30,
      2017   2016           2017   2016
(In millions)                        

Fixed maturity securities

     $ 16     $ 47            $ 92     $ 34     

Equity securities

           (3 )                  (5 )

Derivative instruments

       (1 )       1              (3 )       (12 )

Short term investments and other

       1                              4       1

Investment gains (a)

     $             16     $         45            $         93     $         18
   

 

(a)

Gross realized gains on available-for-sale securities were $34 and $68 for the three months ended September 30, 2017 and 2016 and $140 and $157 for the nine months ended September 30, 2017 and 2016. Gross realized losses on available-for-sale securities were $18 and $24 for the three months ended September 30, 2017 and 2016 and $48 and $128 for the nine months ended September 30, 2017 and 2016.

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

 

     Three Months Ended           Nine Months Ended
     September 30,            September 30,
      2017    2016            2017    2016
(In millions)                           

Fixed maturity securities available-for-sale:

                          

Corporate and other bonds

     $ 4      $ 14             $ 8      $ 43

Asset-backed:

                          

  Residential mortgage-backed

       1                    1        1

  Other asset-backed

                                                     3     

Total asset-backed

       1        -                     1        4

Total fixed maturities available-for-sale

       5        14               9        47

Equity securities available-for-sale - common stock

                  4                                9

Net OTTI losses recognized in earnings

     $             5      $         18             $         9      $         56
   

 

11


Table of Contents

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

 

     Cost or    Gross    Gross         Unrealized
     Amortized    Unrealized    Unrealized    Estimated    OTTI Losses
September 30, 2017    Cost    Gains    Losses    Fair Value    (Gains)
(In millions)                         

Fixed maturity securities:

              

Corporate and other bonds

   $ 17,965      $ 1,645      $ 26      $ 19,584     

States, municipalities and political subdivisions

     12,462        1,501        7        13,956      $ (14

Asset-backed:

              

  Residential mortgage-backed

     4,906        127        28        5,005        (28

  Commercial mortgage-backed

     1,858        55        13        1,900     

  Other asset-backed

     1,047        18        4        1,061           

Total asset-backed

     7,811        200        45        7,966        (28

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

     115        3        3        115     

Foreign government

     439        10        4        445     

Redeemable preferred stock

     18        2                 20           

Fixed maturities available-for-sale

     38,810        3,361        85        42,086        (42

Fixed maturities trading

     420        2        1        421           

Total fixed maturities

     39,230        3,363        86        42,507        (42

Equity securities:

              

Common stock

     16        7        1        22     

Preferred stock

     102        5                 107           

Equity securities available-for-sale

     118        12        1        129        -  

Equity securities trading

     474        86        79        481           

Total equity securities

     592        98        80        610        -  

Total

   $ 39,822      $ 3,461      $ 166      $ 43,117      $ (42
            

December 31, 2016

                                            

Fixed maturity securities:

              

Corporate and other bonds

   $ 17,711      $ 1,323      $ 76      $ 18,958      $ (1

States, municipalities and political subdivisions

     12,060        1,213        33        13,240        (16

Asset-backed:

              

  Residential mortgage-backed

     5,004        120        51        5,073        (28

  Commercial mortgage-backed

     2,016        48        24        2,040     

  Other asset-backed

     1,022        8        5        1,025           

Total asset-backed

     8,042        176        80        8,138        (28

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

     83        10           93     

Foreign government

     435        13        3        445     

Redeemable preferred stock

     18        1                 19           

Fixed maturities available-for-sale

     38,349        2,736        192        40,893        (45

Fixed maturities trading

     598        3                 601           

Total fixed maturities

     38,947        2,739        192        41,494        (45

Equity securities:

              

Common stock

     13        6           19     

Preferred stock

     93        2        4        91           

Equity securities available-for-sale

     106        8        4        110        -  

Equity securities trading

     465        60        86        439           

Total equity securities

     571        68        90        549        -  

Total

   $ 39,518      $ 2,807      $ 282      $ 42,043      $ (45
            

The net unrealized gains on investments included in the tables above are recorded as a component of Accumulated other comprehensive income (“AOCI”). When presented in AOCI, these amounts are net of tax and noncontrolling interests and any required Shadow Adjustments. To the extent that unrealized gains on fixed income securities supporting certain long term care products would result in a premium deficiency if realized, a related increase in

 

12


Table of Contents

Insurance reserves is recorded, net of tax and noncontrolling interests, as a reduction of net unrealized gains through Other comprehensive income (“Shadow Adjustments”). As of September 30, 2017 and December 31, 2016, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $1.2 billion and $909 million (after tax and noncontrolling interests).

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

 

     Less than    12 Months     
     12 Months    or Longer    Total
September 30, 2017    Estimated
Fair Value
   Gross
Unrealized
Losses
   Estimated
Fair Value
   Gross
Unrealized
Losses
   Estimated
Fair Value
   Gross
Unrealized
Losses
(In millions)                              

Fixed maturity securities:

                 

Corporate and other bonds

   $ 1,216      $ 21      $ 91      $ 5      $ 1,307      $ 26  

States, municipalities and political subdivisions

     583        6        56        1        639        7  

Asset-backed:

                 

Residential mortgage-backed

     1,522        25        106        3        1,628        28  

Commercial mortgage-backed

     378        6        138        7        516        13  

Other asset-backed

     129        4        10                 139        4  

Total asset-backed

     2,029        35        254        10        2,283        45  

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

     67        3        6           73        3  

Foreign government

     191        4        5                 196        4  

Total fixed maturity securities

     4,086        69        412        16        4,498        85  

Equity securities:

                 

Common stock

     2        1              2        1  

Preferred stock

     16                                   16        -  

Total equity securities

     18        1        -        -        18        1  

Total

   $ 4,104      $ 70      $ 412      $ 16      $ 4,516      $ 86  
                     

December 31, 2016

                                                     

Fixed maturity securities:

                 

Corporate and other bonds

   $ 2,615      $ 61      $ 254      $ 15      $ 2,869      $ 76  

States, municipalities and political subdivisions

     959        32        23        1        982        33  

Asset-backed:

                 

Residential mortgage-backed

     2,136        44        201        7        2,337        51  

Commercial mortgage-backed

     756        22        69        2        825        24  

Other asset-backed

     398        5        24                 422        5  

Total asset-backed

     3,290        71        294        9        3,584        80  

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

     5                 5        -    

Foreign government

     108        3                          108        3  

Total fixed maturity securities

     6,977        167        571        25        7,548        192  

Equity securities

     12                 13        4        25        4  

Total

   $ 6,989      $ 167      $ 584      $ 29      $ 7,573      $ 196  
                     

Based on current facts and circumstances, the Company believes the unrealized losses presented in the September 30, 2017 securities in a gross unrealized loss position table above are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are attributable to changes in interest rates, credit spreads and other factors. The Company has no current intent to sell securities with unrealized losses, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded as of September 30, 2017.

 

13


Table of Contents

The following table presents the activity related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held as of September 30, 2017 and 2016 for which a portion of an OTTI loss was recognized in Other comprehensive income.

 

     Three Months Ended           Nine Months Ended
     September 30,            September 30,
      2017       2016                2017       2016    
(In millions)                         

Beginning balance of credit losses on fixed maturity securities

   $ 30     $ 41           $ 36     $ 53  

Reductions for securities sold during the period

     (2     (2           (8     (14

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

             (1                         (1

Ending balance of credit losses on fixed maturity securities

   $ 28     $ 38           $ 28     $ 38  
   

Contractual Maturity

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

 

      September 30, 2017            December 31, 2016
      Cost or
Amortized
Cost
   Estimated
Fair
Value
           Cost or
Amortized
Cost
   Estimated
Fair
Value
(In millions)                           

Due in one year or less

   $ 1,374        $ 1,404             $ 1,779        $ 1,828  

Due after one year through five years

     7,931          8,293               7,566          7,955  

Due after five years through ten years

     15,853          16,574               15,892          16,332  

Due after ten years

     13,652          15,815                     13,112          14,778  

Total

   $ 38,810        $ 42,086             $ 38,349        $   40,893    
   

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

 

14


Table of Contents

Derivative Financial Instruments

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

 

      September 30, 2017   December 31, 2016
     Contractual/             Contractual/          
     Notional    Estimated Fair Value   Notional    Estimated Fair Value
      Amount    Asset    (Liability)   Amount    Asset    (Liability)
(In millions)                             

With hedge designation:

                

Interest rate swaps

     $ 500                

Without hedge designation:

                

Equity markets:

                

Options – purchased

     267      $     15          $  223      $ 14     

– written

     296           $ (8     267             $ (8 )     

Futures – short

     249           (1     225        1     

Commodity futures – long

     39             42        

Embedded derivative on funds withheld liability

     170           (1     174        3     

4.  Fair Value

Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable:

 

   

Level 1 – Quoted prices for identical instruments in active markets.

 

   

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

 

   

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are not observable.

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

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 may include: (i) the review of pricing service methodologies or broker pricing qualifications, (ii) back-testing, where past fair value estimates are compared to actual transactions executed in the market on similar dates, (iii) exception reporting, where period-over-period changes in price are reviewed and challenged with the pricing service or broker based on exception criteria, (iv) detailed analysis, where the Company

 

15


Table of Contents

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.

Assets and liabilities measured at fair value on a recurring basis are presented in the following tables:

 

September 30, 2017      Level 1    Level 2      Level 3      Total
(In millions)                          

Fixed maturity securities:

                 

Corporate and other bonds

        $   19,465        $ 119        $   19,584  

States, municipalities and political subdivisions

          13,955          1          13,956  

Asset-backed:

                 

Residential mortgage-backed

          4,829          176          5,005  

Commercial mortgage-backed

          1,876          24          1,900  

Other asset-backed

                915          146          1,061  

Total asset-backed

          7,620          346          7,966  

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

     $ 115                  115  

Foreign government

          445               445  

Redeemable preferred stock

       20                              20  

Fixed maturities available-for-sale

       135        41,485          466          42,086  

Fixed maturities trading

       9        407          5          421  

Total fixed maturities

     $ 144      $ 41,892        $ 471        $ 42,507  
   

Equity securities available-for-sale

     $ 110           $ 19        $ 129  

Equity securities trading

       479                   2          481  

Total equity securities

     $ 589      $ -        $ 21        $ 610  
   

Short term investments

     $     4,019      $ 876             $ 4,895  

Other invested assets

       61        5               66  

Payable to brokers

       (9                (9

 

16


Table of Contents
December 31, 2016      Level 1    Level 2      Level 3      Total
(In millions)                          

Fixed maturity securities:

                 

Corporate and other bonds

        $   18,828        $ 130        $   18,958  

States, municipalities and political subdivisions

          13,239          1          13,240  

Asset-backed:

                 

Residential mortgage-backed

          4,944          129          5,073  

Commercial mortgage-backed

          2,027          13          2,040  

Other asset-backed

                968          57          1,025  

Total asset-backed

          7,939          199          8,138  

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

     $ 93                  93  

Foreign government

          445               445  

Redeemable preferred stock

       19                              19  

Fixed maturities available-for-sale

       112        40,451          330          40,893  

Fixed maturities trading

                595          6          601  

Total fixed maturities

     $ 112      $ 41,046        $ 336        $ 41,494  
   

Equity securities available-for-sale

     $ 91           $ 19        $ 110  

Equity securities trading

       438                   1          439  

Total equity securities

     $ 529      $ -        $ 20        $ 549  
   

Short term investments

     $     3,833      $ 853             $ 4,686  

Other invested assets

       55        5               60  

Receivables

       1                  1  

Life settlement contracts

             $ 58          58  

Payable to brokers

       (44                (44

 

17


Table of Contents

The following tables present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2017 and 2016:

 

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

Unrealized
Gains

(Losses)
Recognized in
Net Income
(Loss) on Level
3 Assets and

2017    Balance,
July 1
   Included in
Net Income
(Loss)
  Included in
OCI
  Purchases        Sales    Settlements   Transfers
into
Level 3
   Transfers
out of
Level 3
   Balance,
September 30
   Liabilities
Held at
September 30
(In millions)                                               

Fixed maturity securities:

                          

Corporate and other bonds

   $ 100      $ 1     $ 1     $ 13         $ (11   $ 15         $ 119           

States, municipalities and political subdivisions

     1                          1           

Asset-backed:

                          

Residential mortgage-backed

     123        1       1             (7     58           176           

Commercial mortgage-backed

     13          (1     12           (2     2           24           

Other asset-backed

     82        (1     1       27                 (4     41                 146                 

Total asset-backed

     218        -       1       39      $         -         (13     101      $ -        346                $ -        

Fixed maturities available-for-sale

     319        1       2       52           (24     116           466           

Fixed maturities trading

     5                                                                    5                 

Total fixed maturities

   $ 324      $ 1     $ 2     $ 52      $         -       $ (24   $ 116      $ -      $ 471                $ -        
                                                        

Equity securities available-for-sale

   $ 19                        $ 19           

Equity securities trading

     1                      $ 1                                           2                 

Total equity securities

   $ 20      $ -     $ -     $ 1      $         -       $ -     $ -      $ -      $ 21                $ -        
                                                        

Life settlement contracts

   $ 1             $         (1)              $ -           

 

18


Table of Contents
          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

2016    Balance,
July 1
   Included in
Net Income
  Included in
OCI
  Purchases   Sales    Settlements   into
Level 3
   out of
Level 3
  Balance,
September 30
   Held at
September 30
(In millions)                                             

Fixed maturity securities:

                        

Corporate and other bonds

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

States, municipalities and political subdivisions

     2                 (1          1           

Asset-backed:

                        

Residential mortgage-backed

     134          (1     5          (1      $ (58     79           

Commercial mortgage-backed

     11            23          (8        (2     24           

Other asset-backed

     45                        34                                 (36     43                 

Total asset-backed

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

Fixed maturities available-for-sale

     434        1       6       78          (15        (96     408           

Fixed maturities trading

     6                                                                  6              (1

Total fixed maturities

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

Equity securities available-for-sale

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

Equity securities trading

     2                      $ (1                                       1              (1

Total equity securities

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

Life settlement contracts

   $ 67                      $ 67           

Derivative financial instruments, net

     1      $ (1                   -           

 

19


Table of Contents
          Net Realized Gains
(Losses) and Net Change
in Unrealized Gains
(Losses)
                             

Unrealized
Gains

(Losses)
Recognized in
Net Income
(Loss) on Level
3 Assets and

2017   

Balance,

January 1

   Included in
Net Income
(Loss)
  Included in
OCI
  Purchases    Sales    Settlements   Transfers
into
Level 3
   Transfers
out of
Level 3
  Balance,
September 30
   Liabilities
Held at
September 30
(In millions)                                              

Fixed maturity securities:

                         

Corporate and other bonds

   $ 130      $ 1     $ 2     $ 18      $     (1)      $ (36   $ 15      $ (10   $ 119           

States, municipalities and political subdivisions

     1                         1           

Asset-backed:

                         

Residential mortgage-backed

     129        3       4             (18     58          176           

Commercial mortgage-backed

     13          (1     12           (2     2          24           

Other asset-backed

     57        (2     1       78                 (6     93        (75     146                 

Total asset-backed

     199        1       4       90            -         (26     153        (75     346                $ -  

Fixed maturities available-for-sale

     330        2       6       108            (1)        (62     168        (85     466           

Fixed maturities trading

     6        (1                                                        5              (1

Total fixed maturities

   $ 336      $ 1     $ 6     $ 108      $     (1)      $ (62   $ 168      $ (85   $ 471                $ (1 )     
                                                       

Equity securities available-for-sale

   $ 19        $ 2     $ 1      $     (3)             $ 19           

Equity securities trading

     1                        1                                          2                 

Total equity securities

   $ 20      $ -     $ 2     $ 2      $     (3)      $ -     $ -      $ -     $ 21                $ -  
                                                       

Life settlement contracts

   $ 58      $ 6          $     (59)      $ (5        $ -           

Derivative financial instruments, net

     -        1                (1)               -           

 

20


Table of Contents
          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

2016   

Balance,

January 1

   Included in
Net Income
  Included in
OCI
  Purchases    Sales   Settlements   into
Level 3
   out of
Level 3
  Balance,
September 30
   Held at
September 30
(In millions)                                             

Fixed maturity securities:

                        

Corporate and other bonds

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

States, municipalities and political subdivisions

     2                 (1          1           

Asset-backed:

                        

Residential mortgage-backed

     134        2       (2     15          (10        (60     79           

Commercial mortgage-backed

     22            32          (17   $ 3        (16     24           

Other asset-backed

     53                2       69        (25     (1     2        (57     43                 

Total asset-backed

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

Fixed maturities available-for-sale

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

Fixed maturities trading

     85        5               2        (86                              6              3  

Total fixed maturities

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

Equity securities available-for-sale

   $ 20      $ (1                 $ 19            $ (2

Equity securities trading

     1        1                      $ (1                              1                 

Total equity securities

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

Life settlement contracts

   $ 74      $ 10            $ (17        $ 67            $ 2  

Derivative financial instruments, net

     3        (4        $ (2     $ 3          -              (3

Net realized and unrealized gains and losses are reported in Net income (loss) 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

 

21


Table of Contents

Securities may be transferred in or out of levels within the fair value hierarchy based on the availability of observable market information and quoted prices used to determine the fair value of the security. The availability of observable market information and quoted prices varies based on market conditions and trading volume. During the three and nine months ended September 30, 2017 and 2016 there were no transfers between Level 1 and Level 2. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods.

Valuation Methodologies and Inputs

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

Fixed Maturity Securities

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

Equity Securities

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

Derivative Financial Instruments

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

Short Term Investments

Securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and treasury bills. Level 2 primarily includes commercial paper, for which all inputs are market observable. Fixed maturity securities purchased within one year of maturity are 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.

 

22


Table of Contents

Other Invested Assets

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

Life Settlement Contracts

CNA accounts for its investment in life settlement contracts using the fair value method. Historically, the fair value of life settlement contracts was 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.

The entire portfolio of life settlement contracts was determined to be held for sale as of December 31, 2016 as CNA reached an agreement on terms to sell the portfolio. As such, CNA adjusted the fair value to the estimated sales proceeds less cost to sell. The definitive Purchase and Sale Agreement (“PSA”) related to the portfolio was executed on March 7, 2017 (“sale date”). In connection therewith, the life settlement contracts and related sale proceeds were placed in escrow until the buyer was recognized as the owner and beneficiary of each individual life settlement contract by the life insurance company that issued the policy. All of the contracts have been released from escrow as of September 30, 2017. CNA derecognized the released contracts and recorded the consideration, including a note receivable, which is payable over three years and is carried at amortized cost less any valuation allowance. The note receivable of $45 million is included within Other assets on the September 30, 2017 Consolidated Condensed Balance Sheet and interest income is accreted to the principal balance of the note.

The fair value of CNA’s investments in life settlement contracts were $0 million and $58 million as of September 30, 2017 and December 31, 2016, and are included in Other assets on the Consolidated Condensed Balance Sheets. Despite the sale, the contracts were classified as Level 3 as there is not an active market for life settlement contracts. The cash receipts and payments related to the life settlement contracts prior to the sale date are included in operating activities on the Consolidated Condensed Statements of Cash Flows. Cash receipts related to the sale of the life settlement contracts as well as principal payments on the note receivable are included in investing activities.

Significant Unobservable Inputs

The following tables present quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurement of Level 3 assets. Valuations for assets and liabilities not presented in the tables below are primarily based on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of unobservable inputs from these broker quotes is neither provided nor reasonably available to the Company. The valuation of life settlement contracts was based on the terms of the sale of the contracts to a third party; therefore the contracts are not included in the tables below.

 

September 30, 2017   

Estimated

Fair Value

  

Valuation

Techniques

  

Unobservable

Inputs

  

Range

(Weighted

Average)

 
     (In millions)                 

Fixed maturity securities

   $        139   

Discounted

cash flow

   Credit spread      1% – 12% (3%)  

December 31, 2016

                       

Fixed maturity securities

   $        106   

Discounted

cash flow

   Credit spread      2% – 40% (4%)  

For fixed maturity securities, an increase to the credit spread assumptions would result in a lower fair value measurement.

 

23


Table of Contents

Financial Assets and Liabilities Not Measured at Fair Value

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

 

     Carrying      Estimated Fair Value  
September 30, 2017    Amount      Level 1      Level 2      Level 3      Total      
(In millions)                                   

Assets:

              

Other invested assets, primarily mortgage loans

   $ 722            $ 731      $ 731  

Liabilities:

              

Short term debt

     191         $ 152        41        193  

Long term debt

     11,222           10,316        1,216        11,532  

December 31, 2016

                                            

Assets:

              

Other invested assets, primarily mortgage loans

   $ 591            $ 594      $ 594  

Liabilities:

              

Short term debt

     107         $ 104        3        107  

Long term debt

     10,655           10,150        646        10,796  

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.

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

5.  Property, Plant and Equipment

Diamond Offshore

Asset Impairments

During the third quarter of 2017, Diamond Offshore evaluated six drilling rigs with indicators of impairment. Based on its assumptions and analyses, Diamond Offshore determined that the carrying values of these rigs were not impaired. If market fundamentals in the offshore oil and gas industry deteriorate further or a market recovery is delayed, additional impairment losses may be required to be recognized in future periods.

 

24


Table of Contents

During the second quarter of 2017, Diamond Offshore evaluated seven drilling rigs with indicators of impairment. Due to the continued deterioration of market fundamentals in the contract drilling industry, as well as newly-available market projections, which indicated that a full market recovery is likely to occur further in the future than had previously been estimated, Diamond Offshore determined that the carrying values of one ultra-deepwater and one deepwater semisubmersible rig were impaired.

Diamond Offshore estimated the fair value of the rigs impaired in 2017 using an income approach, whereby the fair value of each rig was estimated based on a calculation of the rig’s future net cash flows. These calculations utilized significant unobservable inputs, including estimated proceeds that may be received on ultimate disposition of the rig, and are representative of Level 3 fair value measurements due to the significant level of estimation involved and lack of transparency as to the inputs used. During the second quarter of 2017, Diamond Offshore recorded an asset impairment charge of $72 million ($23 million after tax and noncontrolling interests), which is included in Other operating expenses on the Consolidated Condensed Statements of Income.

Diamond Offshore recorded aggregate asset impairment charges of $672 million ($263 million after tax and noncontrolling interests), which is included in Other operating expenses on the Consolidated Condensed Statements of Income for the nine months ended September 30, 2016. See Note 6 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for further discussion of Diamond Offshore’s 2016 asset impairments.

Boardwalk Pipeline

Sale of Assets

In May of 2017, Boardwalk Pipeline sold a processing plant and related assets, for approximately $64 million, including customary adjustments. The sale resulted in a loss of $47 million ($15 million after tax and noncontrolling interests) and is included in Other operating expenses on the Consolidated Condensed Statements of Income.

6.  Claim and Claim Adjustment Expense Reserves

CNA’s property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including incurred but not reported (“IBNR”) claims 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 claim reserving trends and 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 $269 million and $16 million for the three months ended September 30, 2017 and 2016 and $342 million and $137 million for the nine months ended September 30, 2017 and 2016. Net catastrophe losses for the three and nine months ended September 30, 2017 included $149 million related to Hurricane Harvey, $95 million related to Hurricane Irma and $20 million related to Hurricane Maria. The remaining catastrophe losses in 2017 related primarily to U.S. weather-related events. Catastrophe-related reinsurance reinstatement premium was $6 million for the three and nine months ended September 30, 2017. Catastrophe losses in 2016 resulted primarily from U.S. weather-related events and the Fort McMurray wildfires.

 

25


Table of Contents

Liability for Unpaid Claim and Claim Adjustment Expenses Rollforward

The following table presents a reconciliation between beginning and ending claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves of non-core operations.

 

Nine Months Ended September 30    2017        2016  
(In millions)                

Reserves, beginning of year:

       

Gross

   $ 22,343        $ 22,663  

Ceded

     4,094          4,087  

Net reserves, beginning of year

     18,249          18,576  

Net incurred claim and claim adjustment expenses:

       

Provision for insured events of current year

     3,949          3,799  

Decrease in provision for insured events of prior years

     (284        (332

Amortization of discount

     138          134  

Total net incurred (a)

     3,803          3,601  

Net payments attributable to:

       

Current year events

     (560        (591

Prior year events

     (3,401        (3,209

Total net payments

     (3,961        (3,800

Foreign currency translation adjustment and other

     110          39  

Net reserves, end of period

     18,201          18,416  

Ceded reserves, end of period

     4,008          4,256  

Gross reserves, end of period

   $     22,209        $     22,672  
   

 

(a)

Total net incurred above does not agree to Insurance claims and policyholders’ benefits as reflected in the Consolidated Condensed Statements of Income due to amounts related to retroactive reinsurance deferred gain accounting, uncollectible reinsurance and loss deductible receivables and benefit expenses related to future policy benefits, which are not reflected in the table above.

Net Prior Year Development

Changes in estimates of claim and allocated claim adjustment expense reserves and premium accruals, net of reinsurance, for prior years are defined as net prior year development. These changes can be favorable or unfavorable. The following table and discussion present net prior year development:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
      2017     2016     2017     2016  
(In millions)                         

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

   $ (115   $ (132   $ (227   $ (282

Pretax (favorable) unfavorable premium development

     (19     (5     (2     (27

Total pretax (favorable) unfavorable net prior year development

   $ (134   $ (137   $ (229   $ (309
   

Premium development can occur in the property and casualty business when there is a change in exposure on auditable policies or when premium accruals differ from processed premium. Audits on policies usually occur in a period after the expiration date of the policy. See Note 11 for further information on the premium development for the Small Business multi-peril package product and workers’ compensation policies for the three and nine months ended September 30, 2017.

 

26


Table of Contents

The following table and discussion present details of the net prior year claim and allocated claim adjustment expense reserve development (“development”):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
      2017     2016     2017     2016  
(In millions)                         

Medical professional liability

   $ 1     $ 13     $ 5     $ (17

Other professional liability and management liability

     (27     (48     (96     (98

Surety

     (82     (63     (82     (63

Commercial auto

     (14     (12     (40     (47

General liability

     7       14       6       (38

Workers’ compensation

     7       (6     (39     48  

Other

     (7     (30     19       (67

Total pretax (favorable) unfavorable development

   $ (115   $ (132   $ (227   $ (282
   

Three Months

2017

Favorable development in other professional and management liability was primarily due to lower than expected claim frequency in accident years 2012 through 2015, primarily for professional liability products.

Favorable development in surety coverages was primarily due to lower than expected frequency of large losses in accident years 2015 and prior.

Favorable development for commercial auto was primarily due to lower than expected severity in accident years 2015 and 2016, as well as a large favorable recovery on a claim in accident year 2012.

Unfavorable development in workers’ compensation reflects the recognition of loss estimates related to favorable premium development as well as an adverse arbitration ruling related to reinsurance recoverables from older accident years.

Favorable development for other coverages reflects better than expected emergence in Canadian run-off business in accident years 2014 and prior.

2016

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

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

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

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

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

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

 

27


Table of Contents

Favorable development for other coverages was primarily due to better than expected claim frequency in commercial lines coverages provided to customers in accident years 2010 through 2015, favorable settlements on claims in accident years 2013 and prior and favorable emergence of expected losses on a specific claim relating to the December 2015 United Kingdom (“U.K.”) floods for property and marine. This favorable development was partially offset by higher than expected unfavorable large loss emergence in accident years 2014 and 2015.

Nine Months

2017

Favorable development in other professional liability and management liability was primarily due to favorable settlements on closed claims and a lower frequency of large losses for accident years 2011 through 2016 for professional and management liability, lower than expected claim frequency in accident years 2012 through 2015 for professional liability and lower than expected severity in accident years 2014 through 2016 for professional liability.

Favorable development in surety coverages was primarily due to lower than expected frequency of large losses in accident years 2015 and prior.

Favorable development for commercial auto was primarily due to lower than expected severity in accident years 2013 through 2016, as well as a large favorable recovery on a claim in accident year 2012.

Favorable development for workers’ compensation was primarily related to decreases in frequency and severity in recent accident years, partially attributable to California reforms related to decreases in medical costs. This was partially offset by unfavorable development related to an adverse arbitration ruling on reinsurance recoverables from older accident years as well as the recognition of loss estimates associated with favorable premium development.

Favorable development for other coverages was primarily due to better than expected emergence in the Canadian run-off business in accident years 2014 and prior, as well as several favorable settlements relating to large claims in the Europe Professional Indemnity portfolio. Additional favorable development related to better than expected frequency in accident years 2014 through 2016 for property and marine. This was partially offset by unfavorable development related to higher than expected severity in accident year 2015 arising from the management liability business and higher than expected severity in accident year 2016 for property and other and adverse large claims experience in the Hardy Political Risks portfolio, relating largely to accident year 2016 for other coverages.

2016

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

Favorable development in other professional liability and management liability was primarily related to favorable settlements on closed claims in accident years 2011 through 2013 in professional services. Additional favorable development related to lower than expected frequency of claims and favorable outcomes on specific claims in accident years 2010 through 2014 in professional services. This was partially offset by unfavorable development related to a specific financial institutions claim in accident year 2014, higher severities in accident year 2015 and deterioration on credit crises-related claims in accident year 2009.

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

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

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

Unfavorable development for workers’ compensation was primarily due to higher than expected severity for Defense Base Act contractors and the estimated impact of recent Florida court rulings in accident years 2008 through

 

28


Table of Contents

2015. This was partially offset by favorable development related to lower than expected frequencies related to accident years 2009 through 2014.

Favorable development for other coverages was primarily due to better than expected claim frequency in property coverages in accident year 2015 and commercial lines coverages in accident years 2010 through 2015, better than expected loss frequency in accident years 2013 through 2015 for property and other, favorable settlements on claims in accident years 2013 and prior, better than expected severity in accident years 2013 and prior for liability, favorable emergence of expected losses on a specific claim relating to the December 2015 U.K. floods for property and marine and better than expected severity in accident years 2011 through 2015 for auto liability. This favorable development was partially offset by higher than expected severity from a 2015 catastrophe event for property and other and higher than expected large loss emergence in accident years 2011 through 2015.

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

In 2010, Continental Casualty Company (“CCC”) together with several of CNA’s insurance subsidiaries completed a transaction with National Indemnity Company (“NICO”), a subsidiary of Berkshire Hathaway Inc., under which substantially all of CNA’s legacy A&EP liabilities were ceded to NICO through a loss portfolio transfer (“LPT”). At the effective date of the transaction, CNA ceded approximately $1.6 billion of net A&EP claim and allocated claim adjustment expense reserves to NICO under a retroactive reinsurance agreement with an aggregate limit of $4.0 billion. The $1.6 billion of claim and allocated claim adjustment expense reserves ceded to NICO was net of $1.2 billion of ceded claim and allocated claim adjustment expense reserves under existing third party reinsurance contracts. The NICO LPT aggregate reinsurance limit also covers credit risk on the existing third party reinsurance related to these liabilities. CNA paid NICO a reinsurance premium of $2.0 billion and transferred to NICO billed third party reinsurance receivables related to A&EP claims with a net book value of $215 million, resulting in total consideration of $2.2 billion.

Subsequent to the effective date of the LPT, CNA recognized adverse prior year development on its A&EP reserves which resulted in additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the LPT exceeded the $2.2 billion consideration paid, resulting in the NICO LPT moving into a gain position, requiring retroactive reinsurance accounting. Under retroactive reinsurance accounting, this gain is deferred and only recognized in earnings in proportion to actual paid recoveries under the LPT. Over the life of the contract, there is no economic impact as long as any additional losses incurred are within the limit of the LPT. In a period in which CNA recognizes a change in the estimate of A&EP reserves that increases the amounts ceded under the LPT, the proportion of actual paid recoveries to total ceded losses is impacted and the change in the deferred gain is recognized in earnings as if the revised estimate of ceded losses was available at the effective date of the LPT. The effect of the deferred retroactive reinsurance benefit is recorded in Insurance claims and policyholders’ benefits in the Consolidated Condensed Statements of Income.

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

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2017     2016     2017     2016  
(In millions)                        

Net A&EP adverse development before consideration of LPT

  $ -     $ -     $ 60     $ 200  

Retroactive reinsurance benefit recognized

    (17     (12     (60     (94

Pretax impact of A&EP reserve development and the LPT

  $ (17   $ (12   $ -     $ 106  
   

Based upon CNA’s annual A&EP reserve review, net unfavorable prior year development of $60 million and $200 million was recognized before consideration of cessions to the LPT for the nine months ended September 30, 2017 and 2016. The 2017 unfavorable development was driven by modestly higher anticipated payouts on claims from known sources of asbestos exposure. The 2016 unfavorable development was driven by an increase in anticipated future expenses associated with determination of coverage, higher anticipated payouts associated with a limited number of historical accounts having significant asbestos exposures and higher than expected severity on pollution claims. While this unfavorable development was ceded to NICO under the LPT, CNA’s reported earnings in both periods were negatively affected due to the application of retroactive reinsurance accounting.

As of September 30, 2017 and December 31, 2016, the cumulative amounts ceded under the LPT were $2.9 billion and $2.8 billion. The unrecognized deferred retroactive reinsurance benefit was $334 million as of September 30, 2017 and December 31, 2016.

 

29


Table of Contents

NICO established a collateral trust account as security for its obligations to CNA. The fair value of the collateral trust account was $2.9 billion and $2.8 billion as of September 30, 2017 and December 31, 2016. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the aggregate reinsurance limit as well as certain of NICO’s performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third-party reinsurers related to CNA’s A&EP claims.

7.  Debt

CNA Financial

In the third quarter of 2017, CNA completed a public offering of $500 million aggregate principal amount of its 3.5% senior notes due August 15, 2027 and used a portion of the net proceeds to redeem the entire $350 million outstanding principal amount of its 7.4% senior notes due November 15, 2019. The redemption of the $350 million senior notes resulted in a loss of $42 million ($24 million after tax and noncontrolling interests) and is included in Interest expense on the Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2017.

Diamond Offshore

In the third quarter of 2017, Diamond Offshore completed a public offering of $500 million aggregate principal amount of its 7.9% senior notes due August 15, 2025 and used the net proceeds together with cash on hand to redeem the entire $500 million outstanding principal amount of its 5.9% senior notes due May 1, 2019. The redemption of this debt resulted in a loss of $35 million ($11 million after tax and noncontrolling interests) and is included in Interest expense on the Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2017.

Boardwalk Pipeline

In the first quarter of 2017, Boardwalk Pipeline completed a public offering of $500 million aggregate principal amount of its 4.5% senior notes due July 15, 2027 and used the net proceeds to repay the entire $275 million outstanding principal amount of its 6.3% senior notes due August 15, 2017 and to fund growth capital expenditures.

Consolidated Container

In the second quarter of 2017, Consolidated Container entered into a credit agreement providing for a $605 million term loan and a five year $125 million asset based lending facility (“ABL facility”) in conjunction with the acquisition discussed in Note 2. The term loan is a variable rate facility which bears interest at a floating rate equal to the London Interbank Offered Rate (“LIBOR”) plus an applicable margin of 3.5%, subject to a 1.0% floor. The term loan matures on May 22, 2024 and requires annual principal amortization of 1.0% of the original loan amount beginning December 31, 2017. Consolidated Container recorded approximately $19 million of debt issuance costs, which will be amortized over the terms of the facilities. Consolidated Container entered into interest rate swaps for a notional amount of $500 million to hedge its cash flow exposure to the variable rate debt. These swaps effectively fix the interest rate on the hedged portion of the term loan at approximately 5.6%. As of September 30, 2017, Consolidated Container had no borrowings outstanding under its ABL facility.

 

30


Table of Contents

8.  Shareholders’ Equity

Accumulated other comprehensive income (loss)

The tables below present the changes in AOCI by component for the three and nine months ended September 30, 2016 and 2017:

 

      OTTI
Gains
(Losses)
 

Unrealized
Gains (Losses)

on Investments

  Cash Flow
Hedges
  Pension
Liability
  Foreign
Currency
Translation
  Total
Accumulated
Other
Comprehensive
Income (Loss)
(In millions)                         

Balance, July 1, 2016

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

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

     7       69           (24     52  

Reclassification of (gains) losses from accumulated other

            

comprehensive income, after tax of $2, $13, $0, $(4) and $0

     (4     (27     1       7               (23

Other comprehensive income (loss)

     3       42       1       7       (24     29  

Amounts attributable to noncontrolling interests

     (1     (4     (1             2       (4

Balance, September 30, 2016

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

Balance, July 1, 2017

   $ 23     $ 705     $ (2   $ (632   $ (130   $ (36

Other comprehensive income (loss) before reclassifications, after tax of $0, $(20), $0, $0 and $0

     1       35       (2       41       75  

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

             (12     3       11               2  

Other comprehensive income

     1       23       1       11       41       77  

Amounts attributable to noncontrolling interests

             (3     (1     (1     (4     (9

Balance, September 30, 2017

   $ 24     $ 725     $ (2   $ (622   $ (93   $ 32  
                   

 

31


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

Balance, January 1, 2016

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

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

     9       608           (58     559  

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

     (2     (17     2       20               3  

Other comprehensive income (loss)

     7       591       2       20       (58     562  

Amounts attributable to noncontrolling interests

     (1     (62     (1     (3     6       (61

Balance, September 30, 2016

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

Balance, January 1, 2017

   $ 27     $ 576     $ (2   $ (646   $ (178   $ (223

Other comprehensive income (loss) before reclassifications, after tax of $0, $(130), $0, $0 and $0

       228       (3       94       319  

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $1, $28, $0, $(13) and $0

     (3     (61     4       26               (34

Other comprehensive income (loss)

     (3     167       1       26       94       285  

Amounts attributable to noncontrolling interests

             (18     (1     (2     (9     (30

Balance, September 30, 2017

   $ 24     $ 725     $ (2   $ (622   $ (93   $ 32  
                   

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

 

Major Category of AOCI

  

Affected Line Item

OTTI gains (losses)

  

Investment gains (losses)

Unrealized gains (losses) on investments

  

Investment gains (losses)

Cash flow hedges

  

Other revenues, Interest expense and Contract drilling expenses

Pension liability

  

Other operating expenses

 

32


Table of Contents

Treasury Stock

The Company repurchased 0.1 million and 3.0 million shares of Loews common stock at aggregate costs of $6 million and $115 million during the nine months ended September 30, 2017 and 2016.

 

9.

Benefit Plans

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

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

 

     Pension Benefits
     Three Months Ended
September 30,
  Nine Months Ended
September 30,
      2017   2016   2017   2016
(In millions)                 

Service cost

   $ 2     $ 2     $ 6     $ 6  

Interest cost

     30       33       89       97  

Expected return on plan assets

     (43     (45     (129     (133

Amortization of unrecognized net loss

     10       11       32       34  

Settlement charge

     7       1       10       3  

Net periodic benefit cost

   $ 6     $ 2     $ 8     $ 7  
   
     Other Postretirement Benefits
     Three Months Ended
September 30,
  Nine Months Ended
September 30,
      2017   2016   2017   2016
(In millions)                 

Service cost

     $ 1       $ 1  

Interest cost

   $ 1       1     $ 2       2  

Expected return on plan assets

     (1     (1     (3     (3

Amortization of unrecognized prior service benefit

     (1 )      (1     (2 )      (3

Net periodic benefit cost

   $ (1   $ -     $ (3   $ (3
   

 

10.  Legal Proceedings

CNA Financial

In September of 2016, a class action lawsuit was filed against CCC, Continental Assurance Company (“CAC”), CNA, the Investment Committee of the CNA 401(k) Plus Plan (“Plan”), The Northern Trust Company and John Does 1-10 (collectively “Defendants”) related to the Plan. The complaint alleges that Defendants breached fiduciary duties to the Plan and caused prohibited transactions in violation of the Employee Retirement Income Security Act of 1974 when the Plan’s Fixed Income Fund’s annuity contract with CAC was canceled. The plaintiff alleges he and a proposed class of the Plan participants who had invested in the Fixed Income Fund suffered lower returns in their Plan investments as a consequence of these alleged violations and seeks relief on behalf of the putative class. CCC and the other defendants are contesting the case and no class has been certified. The Plan trustees have provided notice to their fiduciary coverage insurance carriers. Progress on the litigation has been limited as the parties are currently in mediation.

Based on information currently available and CNA’s assessment of the mediation, CNA has recorded its best estimate of probable loss, however, it is reasonably possible that the ultimate liability may differ from that amount given the inherent uncertainty involved in this matter. After consideration of available insurance coverage, the Company does not believe that the ultimate resolution of this matter will have a material impact on its condensed consolidated financial statements; however, the timing of recognition of any additional loss, if any, and insurance recovery, if any, may differ.

 

33


Table of Contents

Other Litigation

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

 

11.  Commitments

and Contingencies

CNA Guarantees

In the course of selling business entities and assets to third parties, CNA agreed to guarantee the performance of certain obligations of previously owned subsidiaries and to indemnify purchasers for losses arising out of breaches of representations and warranties with respect to the business entities or assets sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such guarantee and indemnification agreements in effect for sales of business entities, assets and third party loans may include provisions that survive indefinitely. As of September 30, 2017, the aggregate amount related to quantifiable guarantees was $375 million and the aggregate amount related to quantifiable indemnification agreements was $254 million. In certain cases, should CNA be required to make payments under any such guarantee, it would have the right to seek reimbursement from an affiliate of a previously owned subsidiary.

In addition, CNA has agreed to provide indemnification to third party purchasers for certain losses associated with sold business entities or assets that are not limited by a contractual monetary amount. As of September 30, 2017, CNA had outstanding unlimited indemnifications in connection with the sales of certain of its business entities or assets that included tax liabilities arising prior to a purchaser’s ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. Certain provisions of the indemnification agreements survive indefinitely while others survive until the applicable statutes of limitation expire, or until the agreed upon contract terms expire.

CNA also provided guarantees, if the primary obligor fails to perform, to holders of structured settlement annuities provided by a previously owned subsidiary. As of September 30, 2017, the potential amount of future payments CNA could be required to pay under these guarantees was approximately $1.8 billion, which will be paid over the lifetime of the annuitants. CNA does not believe any payment is likely under these guarantees, as CNA is the beneficiary of a trust that must be maintained at a level that approximates the discounted reserves for these annuities.

CNA Small Business Premium Rate Adjustment

In prior quarters, CNA identified rating errors related to its multi-peril package product and workers’ compensation policies within its Small Business unit and CNA determined that it would voluntarily issue premium refunds along with interest on affected policies. After the rating errors were identified, written and earned premium have been reported net of any impact from the premium rate adjustments. There was no premium development impact for the three months ended September 30, 2017 and $37 million of adverse premium development was recognized as a result of the rating errors for the nine months ended September 30, 2017. CNA’s pretax income was reduced by $1 million and $7 million for the three and nine months ended September 30, 2017 for interest due to policyholders on the premium rate adjustments.

The policyholder refunds for the multi-package product were issued in the quarter ended September 30, 2017. The estimated refund liability for the workers’ compensation policies as of September 30, 2017 was $61 million including interest. Any fines or penalties related to the foregoing are reasonably possible, but are not expected to be material to the Company’s financial statements.

 

12.  Segments

The Company has five reportable segments comprised of four individual operating subsidiaries, CNA, Diamond Offshore, Boardwalk Pipeline and Loews Hotels & Co; and the Corporate segment. Each of the 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. The operations of Consolidated Container since the acquisition date are included in the Corporate segment. For additional disclosures regarding the composition of the Company’s segments, see Note 20 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

34


Table of Contents

The following tables present the reportable segments of the Company and their contribution to the Consolidated Condensed Statements of Income. 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.

 

35


Table of Contents

Statements of Income by segment are presented in the following tables.

 

Three Months Ended September 30, 2017    CNA
Financial
  Diamond
Offshore
  Boardwalk
Pipeline
  Loews
Hotels & Co
  Corporate    Total    
(In millions)                          

Revenues:

             

Insurance premiums

           $     1,806              $     1,806       

Net investment income

     509           $ 48        557       

Investment gains

     16                16       

Contract drilling revenues

             $     357              357       

Other revenues

     110       11     $ 301     $ 162       201        785       

Total

     2,441       368       301       162       249        3,521       

Expenses:

             

Insurance claims and policyholders’ benefits

     1,480                1,480       

Amortization of deferred acquisition costs

     309                309       

Contract drilling expenses

       198              198       

Other operating expenses

     379       109       191       147       221        1,047       

Interest

     83       64       41       7       28        223       

Total

     2,251       371       232       154       249        3,257       

Income (loss) before income tax

     190       (3     69       8       -        264       

Income tax (expense) benefit

     (44     14       (18     (4              (52)      

Net income

     146       11       51       4       -        212       

Amounts attributable to noncontrolling interests

     (16     (5     (34                      (55)      

Net income attributable to Loews Corporation

           $     130             $ 6     $ 17     $ 4     $ -      $ 157       
                    

 

36


Table of Contents
Three Months Ended September 30, 2016    CNA Financial   Diamond
Offshore
  Boardwalk
Pipeline
  Loews
Hotels & Co
  Corporate   Total
(In millions)                         

Revenues:

            

Insurance premiums

           $     1,767                     $     1,767       

Net investment income

     524         $         1                 $     36       561       

Investment gains

     45               45       

Contract drilling revenues

       340             340       

Other revenues

     97       9             $     306             $     161       1       574       

Total

     2,433       350       306       161       37       3,287       

Expenses:

            

Insurance claims and policyholders’ benefits

     1,202               1,202       

Amortization of deferred acquisition costs

     314               314       

Contract drilling expenses

       187             187       

Other operating expenses

     402       108       212       151       25       898       

Interest

     39       19       48       6       18       130       

Total

     1,957       314       260       157       43       2,731       

Income (loss) before income tax

     476       36       46       4       (6     556       

Income tax (expense) benefit

     (132     (22     (9     (1     1       (163)      

Net income (loss)

     344       14       37       3       (5     393       

Amounts attributable to noncontrolling interests

     (36     (7     (23                     (66)      

Net income (loss) attributable to Loews Corporation

           $     308         $     7             $     14             $     3             $ (5           $     327       
                   

 

37


Table of Contents
Nine Months Ended September 30, 2017    CNA
Financial
  Diamond
Offshore
  Boardwalk
Pipeline
  Loews
Hotels & Co
  Corporate   Total
(In millions)                         

Revenues:

            

Insurance premiums

           $     5,185                     $     5,185       

Net investment income

     1,529         $         1                 $     109       1,639       

Investment gains

     93               93       

Contract drilling revenues

       1,113             1,113       

Other revenues

     329       30             $     987             $     510       294       2,150       

Total

     7,136       1,144       987       510       403       10,180       

Expenses:

            

Insurance claims and policyholders’ benefits

     4,053               4,053       

Amortization of deferred acquisition costs

     926               926       

Contract drilling expenses

       598             598       

Other operating expenses

     1,086       414       646       443       389       2,978       

Interest

     166       119       131       20       68       504       

Total

     6,231       1,131       777       463       457       9,059       

Income (loss) before income tax

     905       13       210       47       (54     1,121       

Income tax (expense) benefit

     (226     35       (46     (23     20       (240)      

Net income (loss)

     679       48       164       24       (34     881       

Amounts attributable to noncontrolling interests

     (71     (23     (104                     (198)      

Net income (loss) attributable to Loews Corporation

           $     608             $     25             $     60             $     24             $     (34)             $     683       
                   

 

38


Table of Contents
Nine Months Ended September 30, 2016    CNA Financial   Diamond
Offshore
  Boardwalk
Pipeline
  Loews
Hotels & Co
  Corporate   Total
(In millions)                         

Revenues:

            

Insurance premiums

           $     5,196                     $     5,196       

Net investment income

     1,461             $     1                 $     108       1,570       

Investment gains (losses)

     30       (12           18       

Contract drilling revenues

       1,141             1,141       

Other revenues

     297       69             $     961             $     513       2       1,842       

Total

     6,984       1,199       961       513       110       9,767       

Expenses:

            

Insurance claims and policyholders’ benefits

     3,949               3,949       

Amortization of deferred acquisition costs

     926               926       

Contract drilling expenses

       598             598       

Other operating expenses

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

Interest

     127       69       136       17       54       403       

Total

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

Income (loss) before income tax

     824       (550     210       17       (26     475       

Income tax (expense) benefit

     (203     78       (44     (10     8       (171)      

Net income (loss)

     621       (472     166       7       (18     304       

Amounts attributable to noncontrolling interests

     (64     228       (104                     60       

Net income (loss) attributable to Loews Corporation

           $     557             $     (244)             $         62             $     7             $     (18)             $     364       
                   

 

39


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 under Item 1 of this Report, Risk Factors included under 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, 2016. This MD&A is comprised of the following sections:

 

     Page
No.

 

Overview

   40

Results of Operations

   41

Consolidated Financial Results

   41

Acquisition of Consolidated Container Company

   41

CNA Financial

   42

Diamond Offshore

   47

Boardwalk Pipeline

   49

Loews Hotels & Co

   51

Corporate

   52

Liquidity and Capital Resources

   53

Parent Company

   53

Subsidiaries

   53

Investments

   55

Critical Accounting Estimates

   58

Accounting Standards Update

   58

Forward-Looking Statements

   58

OVERVIEW

We are a holding company and have five reportable segments comprised of four individual operating subsidiaries, CNA Financial Corporation (“CNA”), Diamond Offshore Drilling, Inc. (“Diamond Offshore”), Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”) and Loews Hotels Holding Corporation (“Loews Hotels & Co”); and our Corporate segment. The results of operations of Consolidated Container Company LLC since the acquisition date are included in the Corporate segment. Each of our operating subsidiaries is headed by a chief executive officer who is responsible for the operation of its business and has the duties and authority commensurate with that position.

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 (see Note 13 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016) 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.

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.

 

40


Table of Contents

RESULTS OF OPERATIONS

Consolidated Financial Results

The following table summarizes net income (loss) attributable to Loews Corporation by segment and net income (loss) per share attributable to Loews Corporation for the three and nine months ended September 30, 2017 and 2016:

 

     Three Months Ended
September 30,
  Nine Months Ended
September 30,
      2017    2016   2017   2016
(In millions, except per share data)                  

CNA Financial

   $ 130      $ 308     $ 608     $ 557  

Diamond Offshore

     6        7       25       (244

Boardwalk Pipeline

     17        14       60       62  

Loews Hotels & Co

     4        3       24       7  

Corporate

              (5     (34     (18

Net income attributable to Loews Corporation

   $ 157      $ 327     $ 683     $ 364  
   

Basic net income per share

   $ 0.46      $ 0.97     $ 2.03     $ 1.08  
   

Diluted net income per share

   $ 0.46      $ 0.97     $ 2.02     $ 1.08  
   

Net income attributable to Loews Corporation for the three months ended September 30, 2017 was $157 million, or $0.46 per share, compared to $327 million, or $0.97 per share in the 2016 period. Net income attributable to Loews Corporation for the nine months ended September 30, 2017 was $683 million, or $2.02 per share, compared to $364 million, or $1.08 per share, in the 2016 period.

Net income for the three months ended September 30, 2017 included several significant items. In the third quarter of 2017, the Company incurred $170 million of net catastrophe losses at CNA as compared to $10 million in 2016, and a loss of $35 million in the aggregate on the early redemption of debt at CNA and Diamond Offshore. Excluding these significant items, earnings increased $25 million as compared to the prior year period mainly due to higher earnings at CNA, Diamond Offshore and improved results from the parent company investment portfolio.

Net income for the nine months ended September 30, 2017 included the aggregate debt redemption loss discussed above, net catastrophe losses at CNA of $213 million in 2017 as compared with $85 million in 2016, a loss on the sale of a processing facility at Boardwalk Pipeline of $15 million in 2017 and asset impairment charges at Diamond Offshore of $23 million in 2017 as compared with $267 million in 2016. Excluding these items, earnings increased $253 million mainly due to higher earnings at CNA, Diamond Offshore and Loews Hotels & Co.

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

Acquisition of Consolidated Container Company

On May 22, 2017, we completed the acquisition of CCC Acquisition Holdings, Inc. for $1.2 billion, subject to closing adjustments. CCC Acquisition Holdings, Inc., through its wholly owned subsidiary, Consolidated Container Company LLC (“Consolidated Container”), is a rigid plastic packaging and recycled resins manufacturer and provides packaging solutions to end markets such as beverage, food and household chemicals through a network of manufacturing locations across North America.

 

41


Table of Contents

CNA Financial

The following table summarizes the results of operations for CNA for the three and nine months ended September 30, 2017 and 2016 as presented in Note 12 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report. For further discussion of Net investment income and Net realized investment results, see the Investments section of this MD&A.

 

     Three Months Ended
September 30,
  Nine Months Ended
September 30,
      2017   2016   2017   2016
(In millions)                 

Revenues:

        

Insurance premiums

   $ 1,806     $ 1,767     $ 5,185     $ 5,196  

Net investment income

     509       524       1,529       1,461  

Investment gains

     16       45       93       30  

Other revenues

     110       97       329       297  

Total

     2,441       2,433       7,136       6,984  

Expenses:

        

Insurance claims and policyholders’ benefits

     1,480       1,202       4,053       3,949  

Amortization of deferred acquisition costs

     309       314       926       926  

Other operating expenses

     379       402       1,086       1,158  

Interest

     83       39       166       127  

Total

     2,251       1,957       6,231       6,160  

Income before income tax

     190       476       905       824  

Income tax expense

     (44     (132     (226     (203

Net income

     146       344       679       621  

Amounts attributable to noncontrolling interests

     (16     (36     (71     (64

Net income attributable to Loews Corporation

   $ 130     $ 308     $ 608     $ 557  
   

Three Months Ended September 30, 2017 Compared to 2016

Net income decreased $178 million for the three months ended September 30, 2017 as compared with the 2016 period, driven by significantly higher net catastrophe losses in the current year period, a loss of $24 million (after tax and noncontrolling interests) on the early redemption of debt in 2017 and lower net realized investment results. These decreases were partially offset by improved non-catastrophe current accident year underwriting results. Favorable net prior year development of $134 million and $137 million was recorded in the three months ended September 30, 2017 and 2016. Further information on net prior year development is included in Note 6 of the Notes to Consolidated Condensed Financial Statements included under Item 1.

Nine Months Ended September 30, 2017 Compared to 2016

Net income increased $51 million for the nine months ended September 30, 2017 as compared with the 2016 period primarily due to lower adverse prior year reserve development recorded under the 2010 asbestos and environmental pollution (“A&EP”) loss portfolio transfer, improved non-catastrophe current accident year underwriting results, higher net investment income and improved net realized investment results. These increases were partially offset by significantly higher net catastrophe losses in the current year period, lower favorable net prior year loss reserve development and a loss of $24 million (after tax and noncontrolling interests) on the early redemption of debt in 2017. Favorable net prior year development of $229 million and $309 million was recorded in the nine months ended September 30, 2017 and 2016.

CNA’s Core and Non-Core Operations

CNA’s core business is its property and casualty insurance operations that include its Specialty, Commercial and International lines of business. CNA’s non-core operations include its long term care business that is in run-off, certain corporate expenses, including interest on CNA’s corporate debt, and certain property and casualty businesses in run-off, including CNA Re and A&EP. CNA’s products and services are primarily marketed through independent agents, brokers and managing general underwriters to a wide variety of customers, including small, medium and large businesses, insurance companies, associations, professionals and other groups. We believe the presentation of CNA as one reportable segment is appropriate in accordance with applicable accounting standards on segment reporting. However, for purposes of this discussion and analysis of the results of operations, we provide greater detail with

 

42


Table of Contents

respect to CNA’s core and non-core operations to enhance the reader’s understanding and to provide further transparency into key drivers of CNA’s financial results.

In assessing CNA’s insurance operations, the Company utilizes the net operating income (loss) financial measure. Net operating income (loss) is calculated by excluding from net income (loss) the after tax and noncontrolling interests effects of (i) net realized investment gains or losses, (ii) income or loss from discontinued operations and (iii) any cumulative effects of changes in accounting guidance. The calculation of net operating income excludes net realized investment gains or losses because net realized investment gains or losses are largely discretionary, except for some losses related to other than temporary impairments (“OTTI”), and are generally driven by economic factors that are not necessarily consistent with key drivers of underwriting performance, and are therefore not considered an indication of trends in insurance operations. Net operating income (loss) is deemed to be a non-GAAP financial measure and management believes this measure is useful to investors as management uses this measure to assess financial performance.

Property and Casualty Operations

In evaluating the results of the property and casualty operations, 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 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. In addition, CNA also utilizes renewal premium change, rate, retention and new business in evaluating operating trends. Renewal premium change represents the estimated change in average premium on policies that renew, including rate and exposure changes. Rate represents the average change in price on policies that renew excluding exposure change. Exposure represents the measure of risk used in the pricing of the insurance product. Retention represents the percentage of premium dollars renewed in comparison to the expiring premium dollars from policies available to renew. Rate, renewal premium change and retention presented for the prior year is updated to reflect subsequent activity on policies written in the period. New business represents premiums from policies written with new customers and additional policies written with existing customers.

The following tables summarize the results of CNA’s property and casualty operations for the three and nine months ended September 30, 2017 and 2016:

 

Three Months Ended September 30, 2017    Specialty   Commercial   International   Total
(In millions, except %)                 

Net written premiums

   $ 705     $ 687     $ 207     $ 1,599  

Net earned premiums

     703       741       226       1,670  

Net investment income

     134       161       13       308  

Net operating income (loss)

     161       22       (34     149  

Net realized investment gains

     2       2       4       8  

Net income (loss)

     163       24      <