Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

[X]   

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

OR

 

[    ]   

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From                      to                      

Commission File Number 1-6541

LOEWS CORPORATION

(Exact name of registrant as specified in its charter)

 

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

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

(Address of principal executive offices) (Zip Code)

(212) 521-2000

(Registrant’s telephone number, including area code)

NOT APPLICABLE

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

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

Yes         X                                                               No                   

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

Yes        X                                   No                                                Not Applicable                 

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

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

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

Yes                                                                            No          X      

 

Class

     

      Outstanding at April 22, 2013      

Common stock, $0.01 par value                 388,965,441 shares

 

 

 


Table of Contents

INDEX

 

     Page
No.
 

Part I.  Financial Information

  

Item 1.  Financial Statements (unaudited)

  

Consolidated Condensed Balance Sheets
March 31, 2013 and December 31, 2012

     3     

Consolidated Condensed Statements of Income
Three months ended March 31, 2013 and 2012

     4     

Consolidated Condensed Statements of Comprehensive Income
Three months ended March 31, 2013 and 2012

     5     

Consolidated Condensed Statements of Equity
Three months ended March 31, 2013 and 2012

     6     

Consolidated Condensed Statements of Cash Flows
Three months ended March 31, 2013 and 2012

     7     

Notes to Consolidated Condensed Financial Statements

     8     

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

     32     

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

     56     

Item 4.  Controls and Procedures

     56     

Part II.  Other Information

     57     

Item 1.  Legal Proceedings

     57     

Item 1A.  Risk Factors

     57     

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

     57     

Item 6.  Exhibits

     58     

 

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PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

      March 31, 
2013
      December 31,  
2012
 

 

 
(Dollar amounts in millions, except per share data)             

Assets:

    

Investments:

    

Fixed maturities, amortized cost of $38,668 and $38,324

   $ 42,912            $ 42,765       

Equity securities, cost of $709 and $893

     691          898       

Limited partnership investments

     3,207          3,090       

Other invested assets, primarily mortgage loans

     473          460       

Short term investments

     5,901          5,835       

 

 

Total investments

     53,184          53,048       

Cash

     179          228       

Receivables

     9,605          9,366       

Property, plant and equipment

     14,204          13,935       

Goodwill

     993          996       

Other assets

     1,529          1,538       

Deferred acquisition costs of insurance subsidiaries

     641          598       

Separate account business

     279          312       

 

 

Total assets

   $ 80,614            $ 80,021       

 

 

Liabilities and Equity:

    

Insurance reserves:

    

Claim and claim adjustment expense

   $ 24,511            $ 24,763       

Future policy benefits

     11,469          11,475       

Unearned premiums

     3,759          3,610       

Policyholders’ funds

     154          157       

 

 

Total insurance reserves

     39,893          40,005       

Payable to brokers

     738          205       

Short term debt

     19          19       

Long term debt

     9,418          9,191       

Deferred income taxes

     895          840       

Other liabilities

     4,654          4,773       

Separate account business

     279          312       

 

 

Total liabilities

     55,896          55,345       

 

 

Preferred stock, $0.10 par value:

    

Authorized – 100,000,000 shares

    

Common stock, $0.01 par value:

    

Authorized – 1,800,000,000 shares

    

Issued – 392,242,941 and 392,054,766 shares

     4          4       

Additional paid-in capital

     3,589          3,595       

Retained earnings

     15,410          15,192       

Accumulated other comprehensive income

     566          678       

 

 
     19,569          19,469       

Less treasury stock, at cost (2,344,500 and 249,600 shares)

     (102)         (10)      

 

 

Total shareholders’ equity

     19,467          19,459       

Noncontrolling interests

     5,251          5,217       

 

 

Total equity

     24,718          24,676       

 

 

Total liabilities and equity

   $ 80,614            $ 80,021       

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

Three Months Ended March 31        2013             2012      

 

 
(In millions, except per share data)             

Revenues:

    

Insurance premiums

   $ 1,764      $ 1,649       

Net investment income

     641        726       

Investment gains (losses):

    

Other-than-temporary impairment losses

     (18     (15)      

Portion of other-than-temporary impairment losses

recognized in Other comprehensive income (loss)

       (12)      

 

 

Net impairment losses recognized in earnings

     (18     (27)      

Other net investment gains

     42        59       

 

 

Total investment gains

     24        32       

Contract drilling revenues

     700        755       

Other

     605        582       

 

 

Total

     3,734        3,744       

 

 

Expenses:

    

Insurance claims and policyholders’ benefits

     1,429        1,381       

Amortization of deferred acquisition costs

     328        295       

Contract drilling expenses

     375        397       

Other operating expenses

     982        819       

Interest

     108        111       

 

 

Total

     3,222        3,003       

 

 

Income before income tax

     512        741       

Income tax expense

     (114     (222)      

 

 

Net income

     398        519       

Amounts attributable to noncontrolling interests

     (156     (152)      

 

 

Net income attributable to Loews Corporation

   $ 242      $ 367       

 

 

Basic net income per share

   $ 0.62      $ 0.93       

 

 

Diluted net income per share

   $ 0.62      $ 0.92       

 

 

Dividends per share

   $     0.0625      $     0.0625       

 

 

Weighted-average shares outstanding:

    

Shares of common stock

     391.39        396.77       

Dilutive potential shares of common stock

     0.77        0.67       

 

 

Total weighted-average shares outstanding assuming dilution

     392.16        397.44       

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

Three Months Ended March 31        2013               2012        

 

 
(In millions)             

Net income

   $ 398      $ 519       

 

 

Other comprehensive income (loss), after tax

    

Changes in:

    

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

     14        40       

Net other unrealized gains (losses) on investments

     (62     217       

 

 

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

     (48     257       

Unrealized gains (losses) on cash flow hedges

     (21     15       

Pension liability

     4        7       

Foreign currency

     (61     21       

 

 

Other comprehensive income (loss)

     (126     300       

 

 

Comprehensive income

     272        819       

Amounts attributable to noncontrolling interests

     (142     (183)      

 

 

Total comprehensive income attributable to Loews Corporation

   $ 130      $       636       

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF EQUITY

(Unaudited)

 

                Loews Corporation Shareholders       
       

 

 

  
           Total                        Common        
Stock
         

    Additional    
Paid-in

Capital

     Retained
Earnings
     Accumulated
Other
Comprehensive
Income
     Common
Stock
Held in
Treasury
           Noncontrolling  
Interests
 

 

 
(In millions)                                                              

Balance, January 1, 2012

   $ 23,203             $     4                    $ 3,494             $ 14,890           $ 384               $ -         $ 4,431       

Net income

     519                    367                     152       

Other comprehensive income

     300                       269                      31       

Dividends paid

     (133                 (25)                    (108)      

Issuance of equity securities by subsidiary

     222                 36                  1                      185       

Issuance of Loews common stock

     5                 5                       

Stock-based compensation

     6                 5                          1       

Other

     (1              (2)                        1       

 

 

Balance, March 31, 2012

   $ 24,121             $ 4                    $ 3,538            $ 15,232           $ 654               $ -         $ 4,693       

 

 

Balance, January 1, 2013

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

Net income

     398                    242                     156       

Other comprehensive loss

     (126                    (112)                    (14)      

Dividends paid

     (146                 (24)                    (122)      

Purchase of Loews treasury stock

     (92                       (92     

Issuance of Loews common stock

     3                 3                      

Stock-based compensation

     4                 (9)                        13       

Other

     1                               1       

 

 

Balance, March 31, 2013

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

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Three Months Ended March 31   2013           2012        

 

 
(In millions)            

Operating Activities:

   

Net income

  $ 398      $ 519       

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

    335        270       

Changes in operating assets and liabilities, net:

   

Receivables

    (68     142       

Deferred acquisition costs

    (40     (15)      

Insurance reserves

    79        99       

Other assets

    (3     (6)      

Other liabilities

    (101     (187)      

Trading securities

    8        (494)      

 

 

Net cash flow operating activities

    608        328       

 

 

Investing Activities:

   

Purchases of fixed maturities

    (2,720     (2,842)      

Proceeds from sales of fixed maturities

    1,409        1,929       

Proceeds from maturities of fixed maturities

    866        683       

Purchases of equity securities

    (12     (12)      

Proceeds from sales of equity securities

    51        19       

Purchases of limited partnership investments

    (41     (66)      

Proceeds from sales of limited partnership investments

    58        97       

Purchases of property, plant and equipment

    (602     (238)      

Dispositions

    5        41       

Change in short term investments

    375        (88)      

Other, net

    (22     (36)      

 

 

Net cash flow investing activities

    (633     (513)      

 

 

Financing Activities:

   

Dividends paid

    (24     (25)      

Dividends paid to noncontrolling interests

    (122     (108)      

Purchases of treasury shares

    (95  

Issuance of common stock

    3        5       

Proceeds from sale of subsidiary stock

    1        245       

Principal payments on debt

    (196     (331)      

Issuance of debt

    420        370       

Other, net

    (4     (2)      

 

 

Net cash flow financing activities

    (17     154       

 

 

Effect of foreign exchange rate on cash

    (7     1       

 

 

Net change in cash

    (49     (30)      

Cash, beginning of period

    228        129       

 

 

Cash, end of period

  $         179      $ 99       

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

 

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Loews Corporation and Subsidiaries

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.  Basis of Presentation

Loews Corporation is a holding company. Its subsidiaries are engaged in the following lines of business: commercial property and casualty insurance (CNA Financial Corporation (“CNA”), a 90% owned subsidiary); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (“Diamond Offshore”), a 50.4% owned subsidiary); transportation and storage of natural gas and natural gas liquids and gathering and processing of natural gas (Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”), a 55% owned subsidiary); exploration, production and marketing of natural gas and oil (including condensate and natural gas liquids), (HighMount Exploration & Production LLC (“HighMount”), a wholly owned subsidiary); and the operation of a chain of hotels (Loews Hotels Holding Corporation (“Loews Hotels”), a wholly owned subsidiary). Unless the context otherwise requires, the terms “Company,” “Loews” and “Registrant” as used herein mean Loews Corporation excluding its subsidiaries and the term “Net income (loss) attributable to Loews Corporation” as used herein means Net income (loss) attributable to Loews Corporation shareholders.

In the opinion of management, the accompanying unaudited Consolidated Condensed Financial Statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 31, 2013 and December 31, 2012 and the results of operations, comprehensive income and changes in shareholders’ equity and cash flows for the three months ended March 31, 2013 and 2012.

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

Reference is made to the Notes to Consolidated Financial Statements in the 2012 Annual Report on Form 10-K which should be read in conjunction with these Consolidated Condensed Financial Statements.

The Company presents basic and diluted net income per share on the Consolidated Condensed Statements of Income. Basic net income per share excludes dilution and is computed by dividing net income (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. Stock appreciation rights (“SARs”) of 2.0 million and 2.2 million shares were not included in the diluted weighted average shares amount for the three months ended March 31, 2013 and 2012 due to the exercise price being greater than the average stock price.

Impairment of Natural Gas and Oil Properties – For the three months ended March 31, 2013 and 2012, HighMount recorded a non-cash ceiling test impairment charge of $145 million and $44 million ($92 million and $28 million after tax) related to the carrying value of its natural gas and oil properties. The impairments were recorded within Other operating expenses and as credits to Accumulated depreciation, depletion and amortization. The 2013 write-down was attributable to reduced average natural gas liquids (“NGL”) and oil prices used in the ceiling test calculation and negative reserve revisions. Had the effects of HighMount’s cash flow hedges not been considered in calculating the ceiling limitation, the impairments would have been $195 million and $69 million ($124 million and $44 million after tax) for the three months ended March 31, 2013 and 2012. As a result of the ceiling test impairment charge, HighMount performed a goodwill impairment test and no impairment charge was required.

2.  Investments

Net investment income is as follows:

 

Three Months Ended March 31    2013          2012      

 

 
(In millions)                  

Fixed maturity securities

   $ 499         $ 516       

Short term investments

     2           3       

Limited partnership investments

     146           143       

Equity securities

     3           4       

Income (loss) from trading portfolio (a)

     (3        70       

Other

     6           4       

 

 

Total investment income

     653           740       

Investment expenses

     (12        (14)      

 

 

Net investment income

   $         641         $         726       

 

 

 

(a)

Includes net unrealized gains (losses) related to changes in fair value on trading securities still held of $(15) million and $36 million for the three months ended March 31, 2013 and 2012.

 

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Investment gains (losses) are as follows:

 

Three Months Ended March 31    2013     2012          

 

 
(In millions)             

Fixed maturity securities

   $ 32      $ 30       

Equity securities

     (13                   1       

Derivative instruments

                   2        (1)      

Short term investments and other

     3        2       

 

 

Investment gains (a)

   $ 24      $ 32       

 

 

 

(a)

Includes gross realized gains of $46 million and $72 million and gross realized losses of $27 million and $41 million on available-for-sale securities for the three months ended March 31, 2013 and 2012.

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

 

Three Months Ended March 31    2013      2012      

 

 
(In millions)              

Fixed maturity securities available-for-sale:

     

Corporate and other bonds

   $ 3       $ 10       

Asset-backed:

     

Residential mortgage-backed

        14       

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

                      1       

 

 

Total fixed maturities available-for-sale

                   3         25       

 

 

Equity securities available-for-sale:

     

Common stock

        2       

Preferred stock

     15      

 

 

Total equity securities available-for-sale

     15         2       

 

 

Net OTTI losses recognized in earnings

   $ 18       $ 27       

 

 

A security is impaired if the fair value of the security is less than its cost adjusted for accretion, amortization and previously recorded OTTI losses, otherwise defined as an unrealized loss. When a security is impaired, the impairment is evaluated to determine whether it is temporary or other-than-temporary.

Significant judgment is required in the determination of whether an OTTI loss has occurred for a security. CNA follows a consistent and systematic process for determining and recording an OTTI loss. CNA has established a committee responsible for the OTTI process. This committee, referred to as the Impairment Committee, is made up of three officers appointed by CNA’s Chief Financial Officer. The Impairment Committee is responsible for evaluating all securities in an unrealized loss position on at least a quarterly basis.

The Impairment Committee’s assessment of whether an OTTI loss has occurred incorporates both quantitative and qualitative information. Fixed maturity securities that CNA intends to sell, or it more likely than not will be required to sell before recovery of amortized cost, are considered to be other-than-temporarily impaired and the entire difference between the amortized cost basis and fair value of the security is recognized as an OTTI loss in earnings. The remaining fixed maturity securities in an unrealized loss position are evaluated to determine if a credit loss exists. The factors considered by the Impairment Committee include: (i) the financial condition and near term prospects of the issuer, (ii) whether the debtor is current on interest and principal payments, (iii) credit ratings of the securities and (iv) general market conditions and industry or sector specific outlook. CNA also considers results and analysis of cash flow modeling for asset-backed securities, and when appropriate, other fixed maturity securities.

The focus of the analysis for asset-backed securities is on assessing the sufficiency and quality of underlying collateral and timing of cash flows based on scenario tests. If the present value of the modeled expected cash flows equals or exceeds the amortized cost of a security, no credit loss is judged to exist and the asset-backed security is deemed to be temporarily impaired. If the present value of the expected cash flows is less than amortized cost, the security is judged to be other-than-temporarily impaired for credit reasons and that shortfall, referred to as the credit

 

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component, is recognized as an OTTI loss in earnings. The difference between the adjusted amortized cost basis and fair value, referred to as the non-credit component, is recognized as OTTI in Other comprehensive income. In subsequent reporting periods, a change in intent to sell or further credit impairment on a security whose fair value has not deteriorated will cause the non-credit component originally recorded as OTTI in Other comprehensive income to be recognized as an OTTI loss in earnings.

CNA performs the discounted cash flow analysis using stressed scenarios to determine future expectations regarding recoverability. For asset-backed securities, significant assumptions enter into these cash flow projections including delinquency rates, probable risk of default, loss severity upon a default, over collateralization and interest coverage triggers and credit support from lower level tranches.

CNA applies the same impairment model as described above for the majority of non-redeemable preferred stock securities on the basis that these securities possess characteristics similar to debt securities and that the issuers maintain their ability to pay dividends. For all other equity securities, in determining whether the security is other-than-temporarily impaired, the Impairment Committee considers a number of factors including, but not limited to: (i) the length of time and the extent to which the fair value has been less than amortized cost, (ii) the financial condition and near term prospects of the issuer, (iii) the intent and ability of CNA to retain its investment for a period of time sufficient to allow for an anticipated recovery in value and (iv) general market conditions and industry or sector specific outlook.

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

 

March 31, 2013    Cost or
Amortized
Cost
     Gross
Unrealized
Gains
    Gross
Unrealized
Losses
     Estimated
Fair Value
     Unrealized
OTTI Losses
(Gains)
 

 

 
(In millions)                                  

Fixed maturity securities:

             

Corporate and other bonds

     $    19,747         $ 2,562               $    18                 $22,291          

States, municipalities and political subdivisions

     9,599         1,408             59               10,948          

Asset-backed:

             

Residential mortgage-backed

     5,518         235             70               5,683                 $      (49)      

Commercial mortgage-backed

     1,853         147             10               1,990             (3)      

Other asset-backed

     932         23                955          

 

 

Total asset-backed

     8,303         405             80               8,628             (52)      

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

     170         11                181          

Foreign government

     528         24                552          

Redeemable preferred stock

     123         14             1               136          

 

 

Fixed maturities available-for-sale

     38,470         4,424             158               42,736             (52)      

Fixed maturities, trading

     198           22               176          

 

 

Total fixed maturities

     38,668         4,424             180               42,912             (52)      

 

 

Equity securities:

             

Common stock

     38         17                55          

Preferred stock

     139         7                146          

 

 

Equity securities available-for-sale

     177         24             -               201             -       

Equity securities, trading

     532         51             93               490          

 

 

Total equity securities

     709         75             93               691             -       

 

 

Total

     $    39,377             $ 4,499               $    273                 $43,603                 $      (52)      

 

 

 

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December 31, 2012    Cost or
Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Unrealized
OTTI Losses
(Gains)
 

 

 
(In millions)                                   

Fixed maturity securities:

              

Corporate and other bonds

   $ 19,530         $  2,698          $ 21           $ 22,207        

States, municipalities and political subdivisions

     9,372         1,455           44             10,783        

Asset-backed:

              

Residential mortgage-backed

     5,745         246           71             5,920             $ (28)      

Commercial mortgage-backed

     1,692         147           17             1,822           (3)      

Other asset-backed

     929         23              952        

 

 

Total asset-backed

     8,366         416           88             8,694           (31)      

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

     172         11           1             182        

Foreign government

     588         25              613        

Redeemable preferred stock

     113         13           1             125        

 

 

Fixed maturities available-for-sale

     38,141         4,618           155             42,604           (31)      

Fixed maturities, trading

     183            22             161        

 

 

Total fixed maturities

     38,324         4,618           177             42,765           (31)      

 

 

Equity securities:

              

Common stock

     38         14              52        

Preferred stock

     190         7              197        

 

 

Equity securities available-for-sale

     228         21           -             249           -        

Equity securities, trading

     665         80           96             649        

 

 

Total equity securities

     893         101           96             898           -        

 

 

Total

   $ 39,217         $  4,719          $ 273           $ 43,663             $ (31)      

 

 

The net unrealized gains on investments included in the tables above are recorded as a component of Accumulated Other Comprehensive Income (“AOCI”). When presented in AOCI, these amounts are net of tax and noncontrolling interests and any required Shadow Adjustments. At March 31, 2013 and December 31, 2012, the net unrealized gains on investments included in AOCI were net of Shadow Adjustments of $1.3 billion and $1.4 billion. To the extent that unrealized gains on fixed income securities supporting certain products within CNA’s Life & Group Non-Core segment would result in a premium deficiency if realized, a related decrease in Deferred acquisition costs, and/or increase in Insurance reserves is recorded, net of tax and noncontrolling interests, as a reduction of net unrealized gains (losses) through Other comprehensive income (Shadow Adjustments).

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

 

     Less than      12 Months                
     12 Months      or Longer      Total  
  

 

 

 
            Gross             Gross             Gross    
       Estimated      Unrealized      Estimated      Unrealized      Estimated      Unrealized    
March 31, 2013      Fair Value      Losses      Fair Value      Losses      Fair Value      Losses    

 

 
(In millions)                                          

Fixed maturity securities:

                 

Corporate and other bonds

       $ 951             $ 13               $ 50               $ 5             $  1,001               $ 18       

States, municipalities and political subdivisions

     683             16               121             43             804             59       

Asset-backed:

                 

Residential mortgage-backed

     920             19               347             51             1,267             70       

Commercial mortgage-backed

     155             2               141             8             296             10       

 

 

Total asset-backed

     1,075             21               488             59             1,563             80       

Redeemable preferred stock

     34             1                     34             1       

 

 

Total

       $ 2,743             $ 51               $ 659               $ 107             $  3,402               $ 158       

 

 

 

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     Less than      12 Months                
     12 Months      or Longer      Total  
  

 

 

 
            Gross             Gross             Gross    
       Estimated      Unrealized      Estimated      Unrealized      Estimated      Unrealized    
December 31, 2012      Fair Value      Losses      Fair Value      Losses      Fair Value      Losses    

 

 
(In millions)                                          

Fixed maturity securities:

                 

Corporate and other bonds

       $ 846             $ 13           $ 108             $ 8           $ 954             $ 21       

States, municipalities and political subdivisions

     254             5           165             39           419             44       

Asset-backed:

                 

Residential mortgage-backed

     583             5           452             66           1,035             71       

Commercial mortgage-backed

     85             2           141             15           226             17       

 

 

Total asset-backed

     668             7           593             81           1,261             88       

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

     23             1                 23             1       

Redeemable preferred stock

     28             1                 28             1       

 

 

Total

       $   1,819             $ 27           $     866             $ 128           $  2,685             $ 155       

 

 

The amount of pretax net realized gains on available-for-sale securities reclassified out of AOCI into earnings was $19 million and $32 million for the three months ended March 31, 2013 and 2012.

Based on current facts and circumstances, the Company believes the unrealized losses presented in the table above are primarily attributable to broader economic conditions, changes in interest rates and credit spreads, market illiquidity and other market factors, but are not indicative of the ultimate collectibility of the current amortized cost of the securities. The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at March 31, 2013.

The following table summarizes the activity for the three months ended March 31, 2013 and 2012 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at March 31, 2013 and 2012 for which a portion of an OTTI loss was recognized in Other comprehensive income.

 

Three Months Ended March 31          2013                      2012            

 

 
(In millions)                  

Beginning balance of credit losses on fixed maturity securities

   $ 95         $ 92       

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

          11       

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

          1       

Reductions for securities sold during the period

     (3        (4)      

 

 

Ending balance of credit losses on fixed maturity securities

   $ 92         $ 100       

 

 

 

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Contractual Maturity

The following table summarizes available-for-sale fixed maturity securities by contractual maturity at March 31, 2013 and December 31, 2012. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid with or without call or prepayment penalties. Securities not due at a single date are allocated based on weighted average life.

 

     March 31, 2013      December 3 1, 2012  

 

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

 

 
(In millions)                            

Due in one year or less

   $ 1,783             $ 1,819             $ 1,648             $ 1,665         

Due after one year through five years

     12,916               13,731               13,603               14,442         

Due after five years through ten years

     9,430               10,267               8,726               9,555         

Due after ten years

     14,341               16,919               14,164               16,942         

 

 

Total

   $   38,470             $   42,736             $   38,141             $   42,604         

 

 

Investment Commitments

As of March 31, 2013, the Company had committed approximately $247 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.

The Company invests in various privately placed debt securities, including bank loans, as part of its overall investment strategy and has committed to additional future purchases, sales and funding. As of March 31, 2013, the Company had commitments to purchase or fund additional amounts of $167 million and sell $210 million under the terms of such securities.

3.  Fair Value

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

 

   

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

 

   

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

 

   

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

The type of financial instruments being measured and the methodologies and inputs used at March 31, 2013 were consistent with those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2012.

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

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

 

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

 

March 31, 2013      Level 1     Level 2     Level 3     Total        

 

 
(In millions)                         

Fixed maturity securities:

        

Corporate and other bonds

   $ 28      $ 21,980      $ 283      $ 22,291       

States, municipalities and political subdivisions

       10,819        129        10,948       

Asset-backed:

        

Residential mortgage-backed

       5,233        450        5,683       

Commercial mortgage-backed

       1,813        177        1,990       

Other asset-backed

       559        396        955       

 

 

Total asset-backed

       7,605        1,023        8,628       

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

     155        26          181       

Foreign government

     104        448          552       

Redeemable preferred stock

     51        59        26        136       

 

 

Fixed maturities available-for-sale

     338        40,937        1,461        42,736       

Fixed maturities, trading

     4        65        107        176       

 

 

Total fixed maturities

   $ 342      $   41,002      $     1,568      $   42,912       

 

 

Equity securities available-for-sale

   $ 120      $ 62      $ 19      $ 201       

Equity securities, trading

     487          3        490       

 

 

Total equity securities

   $ 607      $ 62      $ 22      $ 691       

 

 

Short term investments

   $ 5,448      $ 397      $ 5      $ 5,850       

Other invested assets

       48          48       

Receivables

       17        7        24       

Life settlement contracts

         95        95       

Separate account business

     11        266        2        279       

Payable to brokers

     (379     (18     (5     (402)      

 

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Table of Contents
December 31, 2012      Level 1     Level 2     Level 3     Total        

 

 

(In millions)

        

Fixed maturity securities:

        

Corporate and other bonds

   $ 6      $ 21,982      $ 219      $ 22,207       

States, municipalities and political subdivisions

       10,687        96        10,783       

Asset-backed:

        

Residential mortgage-backed

       5,507        413        5,920       

Commercial mortgage-backed

       1,693        129        1,822       

Other asset-backed

       584        368        952       

 

 

Total asset-backed

       7,784        910        8,694       

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

     158        24          182       

Foreign government

     140        473          613       

Redeemable preferred stock

     40        59        26        125       

 

 

Fixed maturities available-for-sale

     344        41,009        1,251        42,604       

Fixed maturities, trading

       72        89        161       

 

 

Total fixed maturities

   $ 344      $   41,081      $     1,340      $   42,765       

 

 

Equity securities available-for-sale

   $ 117      $ 98      $ 34      $ 249       

Equity securities, trading

     642          7        649       

 

 

Total equity securities

   $ 759      $ 98      $ 41      $ 898       

 

 

Short term investments

   $ 4,990      $ 799      $ 6      $ 5,795       

Other invested assets

       58        1        59       

Receivables

       32        11        43       

Life settlement contracts

         100        100       

Separate account business

     4        306        2        312       

Payable to brokers

     (95     (11     (6     (112)      

 

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The tables below present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2013 and 2012:

 

2013   Balance,
January 1
    Net Realized Gains
(Losses) and Net Change

in Unrealized Gains
(Losses)
   

Purchases

   

Sales

   

Settlements

   

Transfers

into

Level 3

   

Transfers

out of

Level 3

   

Balance,
March 31

   

Unrealized
Gains
(Losses)
Recognized in
Net Income
on Level

3 Assets and
Liabilities

 
                 
                 
      Included in
  Net Income
    

Included in 

OCI 

                Held at
March 31
 

 

 
(In millions)                                                             

Fixed maturity securities:

                    

Corporate and other bonds

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

States, municipalities and political subdivisions

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

Asset-backed:

                    

Residential mortgage-backed

    413            3              61            (11)            (16)          450         

Commercial mortgage- backed

    129            1            5            73            (7)            (24)          177         

Other asset-backed

    368            3            1            136          (99)          (13)              396         

 

 

Total asset-backed

    910            7            6            270          (99)          (31)          -          (40)          1,023            -           

Redeemable preferred stock

    26                           26         

 

 

Fixed maturities available-for-sale

    1,251            4            8            446          (163)          (53)          26          (58)          1,461            (1)          

Fixed maturities, trading

    89            1              19          (2)                107            1           

 

 

Total fixed maturities

  $ 1,340             $ 5          $ 8          $ 465        $     (165)        $ (53)        $ 26        $ (58)        $ 1,568          $ -           

 

 

Equity securities available-for-sale

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

Equity securities trading

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

 

 

Total equity securities

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

 

 

Short term investments

  $ 6                 $ (1)              $ 5         

Other invested assets

    1                   (1)                -         

Life settlement contracts

    100             $ 7               $ (12)              95         

Separate account business

    2                           2         

Derivative financial instruments, net

    5            3         $ (4)              1           (3)              2         

 

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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    
 
2012    Balance, 
January 1 
    Included in 
Net Income 
    Included in 
OCI 
    Purchases        Sales     Settlements       into 
Level 3 
     out of 
Level 3 
    Balance,  
March 31  
    Held at    
March 31    
 

 

 
(In millions)                                                               

Fixed maturity securities:

                      

Corporate and other bonds

   $ 482      $ 3      $ 4      $ 78       $ (86   $ (19   $ 33       $ (10   $ 485        

States, municipalities and political subdivisions

     171          2                    173        

Asset-backed:

                      

Residential mortgage-backed

     452        1        (4     38           (7        (33     447        

Commercial mortgage- backed

     59          4        42                  105        

Other asset-backed

     343        4        4        176         (77     (25        (41     384        

 

 

Total asset-backed

     854        5        4        256         (77     (32     -         (74     936        

Redeemable preferred stock

     -            53                  53        

 

 

Fixed maturities available-for-sale

     1,507        8        10        387         (163     (51     33         (84     1,647        

Fixed maturities, trading

     101        (7       7                  101         $ (7)           

 

 

Total fixed maturities

   $ 1,608      $ 1      $ 10      $ 394       $ (163   $ (51   $ 33       $ (84   $ 1,748         $ (7)           

 

 

Equity securities available-for-sale

   $ 67        $ (3   $ 11       $ (1          $ 74         $ (2)           

Equity securities trading

     14      $ (3                   11           (3)           

 

 

Total equity securities

   $ 81      $ (3   $ (3   $ 11       $ (1   $ -      $ -       $ -      $ 85         $ (5)           

 

 

Short term investments

   $ 27          $ 12         $ (39        $ -        

Other invested assets

     11                        11        

Life settlement contracts

     117      $ 3               (5          115         $ (1)           

Separate account business

     23             $ (19            4        

Derivative financial instruments, net

     (15     (6   $ 13        1         (5     4             (8 )        1            

Net realized and unrealized gains and losses are reported in Net income as follows:

 

Major Category of Assets and Liabilities    Consolidated Condensed Statements of Income Line Items

 

Fixed maturity securities available-for-sale    Investment gains (losses)
Fixed maturity securities, trading    Net investment income
Equity securities available-for-sale    Investment gains (losses)
Equity securities, trading    Net investment income
Other invested assets    Investment gains (losses) and Net investment income
Derivative financial instruments held in a trading portfolio    Net investment income
Derivative financial instruments, other    Investment gains (losses) and Other revenues
Life settlement contracts    Other revenues

 

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Securities shown in the Level 3 tables may be transferred in or out of Level 3 based on the availability of observable market information used to determine the fair value of the security. The availability of observable market information varies based on market conditions and trading volume and may cause securities to move in and out of Level 3 from reporting period to reporting period. There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2013 and 2012. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods.

Significant Unobservable Inputs

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

 

March 31, 2013    Fair Value      Valuation
Technique(s)
  

Unobservable

Input(s)

  

Range

(Weighted

Average)

 

 

 
     (In millions)                   

Assets

           

Fixed maturity securities

    $ 78           Discounted cash
flow
   Expected call date      3.0 – 4.6 years (4.0 years)   
         Credit spread adjustment      0.02% – 0.48% (0.17%)   
     97           Market approach    Private offering price      $34.70 – $122.09 ($102.97)   

Equity securities

     19           Market approach    Private offering price      $33.73 –$3,970.99 per share   
              ($1,114.32 per share)   

Life settlement contracts

     95           Discounted cash
flow
   Discount rate risk premium      9%   
         Mortality assumption      69% – 883% (209.2%)   
December 31, 2012                        

 

 

Assets

           

Fixed maturity securities

    $ 121           Discounted cash flow    Expected call date      3.3 – 5.3 years (4.3 years)   
         Credit spread adjustment      0.02% – 0.48% (0.17%)   
     72           Market approach    Private offering price      $42.39 – $102.32 ($100.11)   

Equity securities

     34           Market approach    Private offering price      $4.54 – $3,842.00 per share   
              ($571.17 per share)   

Life settlement contracts

     100           Discounted cash flow    Discount rate risk premium      9%   
         Mortality assumption      69% – 883% (208.9%)   

For fixed maturity securities, an increase to the expected call date assumption and credit spread adjustment or decrease in the private offering price would result in a lower fair value measurement. For equity securities, an increase in the private offering price would result in a higher fair value measurement. For life settlement contracts, an increase in the discount rate risk premium or decrease in the mortality assumption would result in a lower fair value measurement.

 

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Financial Assets and Liabilities Not Measured at Fair Value

The methods and assumptions used to estimate the fair value for financial assets and liabilities not measured at fair value were consistent with those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2012.

The carrying amount, estimated fair value and the level of the fair value hierarchy of the Company’s financial instrument assets and liabilities which are not measured at fair value on the Consolidated Condensed Balance Sheets are listed in the tables below. The carrying amounts reported on the Consolidated Condensed Balance Sheets for cash and short term investments not carried at fair value and certain other assets and liabilities approximate fair value due to the short term nature of these items.

 

     Carrying      Estimated Fair Value  
March 31, 2013    Amount      Level 1      Level 2      Level 3       Total      
(In millions)                                 

Financial Assets:

              

Other invested assets, primarily mortgage loans

   $ 425             $ 449       $ 449       

Financial Liabilities:

              

Premium deposits and annuity contracts

     96               100         100       

Short term debt

     19          $ 13           6         19       

Long term debt

     9,418            10,216           350         10,566       

December 31, 2012

                                        

Financial Assets:

              

Other invested assets, primarily mortgage loans

   $ 401             $ 418       $ 418       

Financial Liabilities:

              

Premium deposits and annuity contracts

     100               104         104       

Short term debt

     19          $ 13           6         19       

Long term debt

     9,191            10,170           202         10,372       

 

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4.  Derivative Financial Instruments

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

 

    March 31, 2013      December 31, 2012  

 

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

 

 

       

 

 

 
    Amount          Asset      (Liability)      Amount          Asset      (Liability)      

 

 
(In millions)                                         

With hedge designation:

                

Interest rate risk:

                

Interest rate swaps

      $ 300                $ (5)            $ 300              $ (6)       

Commodities:

                

Forwards – short

    319           $ 20         (14)          288           $ 39         (3)       

Foreign exchange:

                

Currency forwards – short

    125             3         (1)          144             4      

Without hedge designation:

                

Equity markets:

                

Options – purchased

    972             19            255             19      

 – written

    866                (13)          374                (11)       

Equity swaps and warrants

                

 – long

    13             3            14             6      

Interest rate risk:

                

Credit default swaps

                

  – purchased protection

    73                (3)          78                (2)       

  – sold protection

    27                   33                (2)       

Foreign exchange:

                

Currency forwards – long

    63             1            404                (2)       

 – short

    72                   128             

Gross estimated fair values of derivative positions are currently presented in Equity securities, Receivables and Payable to brokers on the Consolidated Condensed Balance Sheets. There would be no significant difference in the balance included in such accounts if the estimated fair values were presented net for the periods ended March 31, 2013 and December 31, 2012.

For derivative financial instruments without hedge designation, changes in the fair value of derivatives not held in a trading portfolio are reported in Investment gains (losses) and changes in the fair value of derivatives held for trading purposes are reported in Net investment income on the Consolidated Condensed Statements of Income. Gains of $2 million and losses of $1 million were included in Investment gains (losses) for the three months ended March 31, 2013 and 2012. Losses of $13 million and $4 million were included in Net investment income for the three months ended March 31, 2013 and 2012.

The Company’s derivative financial instruments with cash flow hedge designation hedge variable price risk associated with the purchase and sale of natural gas and other energy-related products, exposure to foreign currency losses on future foreign currency expenditures, as well as risks attributable to changes in interest rates on long term debt. Losses of $18 million and gains of $34 million were recognized in OCI related to these cash flow hedges for the three months ended March 31, 2013 and 2012. Gains of $13 million and $9 million were reclassified from AOCI into income for the three months ended March 31, 2013 and 2012. As of March 31, 2013, the estimated amount of net unrealized gains associated with these cash flow hedges that will be reclassified from AOCI into earnings during the next twelve months was $4 million. The net amounts recognized due to ineffectiveness were less than $1 million for the three months ended March 31, 2013 and 2012.

 

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5.  Claim and Claim Adjustment Expense Reserves

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

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

Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in CNA’s results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of $39 million and $28 million for the three months ended March 31, 2013 and 2012. Catastrophe losses in the first quarter of 2013 related primarily to U.S. storms.

Net Prior Year Development

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

 

      CNA      CNA                
Three Months Ended March 31, 2013     Specialty      Commercial       Other          Total          

 

 
(In millions)                            

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

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

Pretax (favorable) unfavorable premium development

     (8)         (10)           $ 5             (13)           

 

 

Total pretax (favorable) unfavorable net prior year development

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

 

 
Three Months Ended March 31, 2012                            

 

 

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

   $ (6)         $ (14)           $ 2       $ (18)           

Pretax (favorable) unfavorable premium development

     (9)         (17)             1         (25)           

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (15)         $ (31)           $ 3       $ (43)           

 

 

 

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For the three months ended March 31, 2013 and 2012, favorable premium development was recorded for CNA Commercial primarily due to premium adjustments on auditable policies arising from increased exposures.

CNA Specialty

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

 

Three Months Ended March 31        2013              2012      

 

 
(In millions)              

Medical professional liability

   $ (3)       $ (6)     

Other professional liability

     (1)         4      

Surety

             1      

Warranty

        (1)     

Other

     (12)         (4)     

 

 

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

   $ (15)       $ (6)     

 

 

2013

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

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

2012

Favorable development for medical professional liability was primarily due to reductions in the estimated frequency of large losses in accident years 2008 and prior.

CNA Commercial

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

 

Three Months Ended March 31        2013              2012      

 

 
(In millions)              

Commercial auto

   $ (5)      

General liability

     (21)       $ 8      

Workers’ compensation

     25          (19)     

Property and other

     (10)         (3)     

 

 

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

   $ (11)       $ (14)     

 

 

2013

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

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

2012

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

 

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6.  Accumulated Other Comprehensive Income (“AOCI”)

The table below presents the change in AOCI by component for the three months ended March 31, 2013.

 

                                               Total   
                 Cash Flow Hedges                 Accumulated   
      

 

 

       
     Unrealized
Gains (Losses)
On Investments
    OTTI
Gains
(Losses)
    Interest
Rate Swaps
    Commodity
Hedges
    Foreign
Currency
Forwards
    Pension
Liability
    Foreign
Currency
Translation
    Other 
Comprehensive 
Income (Loss) 
 

 

 
(In millions)                                                 

Balance, January 1, 2013

   $ 1,233      $ 18      $ (9   $ 24      $ 1      $ (732   $ 143      $ 678       

 

 

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

     (49     14        1        (13         (61     (108)      

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $6, $0,$(1), $4, $1, $(3) and $0

     (13       (1     (7     (1     4          (18)      

 

 

  Other comprehensive income (loss)

     (62     14        -        (20     (1     4        (61     (126)      

Amounts attributable to noncontrolling interests

     5        (1       2        1        1        6        14       

 

 

Balance, March 31, 2013

   $ 1,176      $ 31      $ (9   $ 6      $ 1      $ (727   $ 88      $ 566       

 

 

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

 

Major Category of AOCI    Affected Line Item     

 

  

Unrealized gains (losses) on investments

   Investment gains (losses)   

OTTI gains (losses)

   Investment gains (losses)   

Cash flow hedges

     

Interest rate swaps

   Interest expense   

Commodity hedges

   Other revenues   

Foreign currency forwards

   Contract drilling expenses   

Pension liability

   Other operating expenses   

 

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7.  Benefit Plans

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

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

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

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

The components of net periodic benefit cost are as follows:

 

         Pension Benefits      Other  
      Postretirement Benefits  
 
  

 

 

 
Three Months Ended March 31          2013      2012      2013        2012  

 

 
(In millions)                            

Service cost

     $      6          $      6          

Interest cost

     34          38          $        1          $      1           

Expected return on plan assets

     (49)         (47)         (1)         (1)          

Amortization of unrecognized net loss

     14          11          

Amortization of unrecognized prior service benefit

           (6)         (6)          

 

 

Net periodic benefit cost

     $      5          $      8          $      (6)         $    (6)          

 

 

8.  Business Segments

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

CNA’s results are reported in four business segments: CNA Specialty, CNA Commercial, Life & Group Non-Core and Other. CNA Specialty provides a broad array of professional, financial and specialty property and casualty products and services, primarily through insurance brokers and managing general underwriters. CNA Commercial includes property and casualty coverages sold to small businesses and middle market entities and organizations primarily through an independent agency distribution system. CNA Commercial also includes commercial insurance and risk management products sold to large corporations primarily through insurance brokers. Life & Group Non-Core primarily includes the results of the life and group lines of business that are in run-off. Other includes the operations of Hardy Underwriting Bermuda Limited (“Hardy”) since its acquisition date of July 2, 2012, corporate expenses, including interest on corporate debt, and the results of certain property and casualty business primarily in run-off, including CNA Re and asbestos and environmental pollution. Hardy is a specialized Lloyd’s of London underwriter primarily of short-tail exposures in marine and aviation, non-marine property, specialty lines and property treaty reinsurance.

Diamond Offshore owns and operates offshore drilling rigs that are chartered on a contract basis for fixed terms by companies engaged in exploration and production of hydrocarbons. Offshore rigs are mobile units that can be relocated based on market demand. Diamond Offshore’s fleet consists of 44 drilling rigs, including four new-build rigs which are under construction and two rigs being constructed utilizing the hulls of Diamond Offshore’s existing mid-water floaters. On March 31, 2013, Diamond Offshore’s drilling rigs were located offshore 12 countries in addition to the United States.

 

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Boardwalk Pipeline is engaged in the interstate transportation and storage of natural gas and natural gas liquids (“NGLs”) and gathering and processing of natural gas. This segment consists of interstate natural gas pipeline systems originating in the Gulf Coast region, Oklahoma and Arkansas, and extending north and east through the midwestern states of Tennessee, Kentucky, Illinois, Indiana and Ohio, natural gas storage facilities in four states and NGL pipelines and storage facilities in Louisiana, with approximately 14,410 miles of pipeline.

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

Loews Hotels operates a chain of 19 hotels, 17 of which are in the United States and two are in Canada.

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

The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. In addition, CNA does not maintain a distinct investment portfolio for every insurance segment, and accordingly, allocation of assets to each segment is not performed. Therefore, a significant portion of net investment income and investment gains (losses) are allocated based on each segment’s carried insurance reserves, as adjusted.

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

 

Three Months Ended March 31    2013        2012        

 

 
(In millions)             

Revenues (a):

    

CNA Financial:

    

CNA Specialty

   $ 956      $ 945        

CNA Commercial

     1,101        1,088        

Life and Group Non-Core

     363        350        

Other

     83        18        

 

 

Total CNA Financial

     2,503        2,401        

Diamond Offshore

     732        796        

Boardwalk Pipeline

     329        314        

HighMount

     68        76        

Loews Hotels

     94        80        

Corporate and other

     8        77        

 

 

Total

   $     3,734      $     3,744        

 

 

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

    

CNA Financial:

    

CNA Specialty

   $ 215      $ 209        

CNA Commercial

     198        227        

Life and Group Non-Core

     (9     (37)       

Other

     (40     (33)       

 

 

Total CNA Financial

     364        366        

Diamond Offshore

     205        252        

Boardwalk Pipeline

     99        92        

HighMount

     (139     (34)       

Loews Hotels

       7        

Corporate and other

     (17     58        

 

 

Total

   $ 512      $ 741        

 

 

 

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Three Months Ended March 31    2013         2012          

 

 
(In millions)             

Net income (loss) (a):

    

CNA Financial:

    

CNA Specialty

   $ 128      $ 125        

CNA Commercial

     115        131        

Life and Group Non-Core

     8        (10)       

Other

     (25     (20)       

 

 

Total CNA Financial

     226        226        

Diamond Offshore

     82        87        

Boardwalk Pipeline

     33        35        

HighMount

     (88     (22)       

Loews Hotels

       4        

Corporate and other

     (11     37        

 

 

Total

   $         242      $         367        

 

 

 

(a)

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

 

Three Months Ended March 31    2013               2012          

 

 

Revenues and Income before income tax and noncontrolling interests:

     

CNA Financial:

     

CNA Specialty

   $ 3       $ 8        

CNA Commercial

     4         11        

Life and Group Non-Core

     14         13        

Other

     3      

 

 

Total

   $ 24       $ 32        

 

 

Net income:

     

CNA Financial:

     

CNA Specialty

   $ 2       $ 5        

CNA Commercial

     2         6        

Life and Group Non-Core

     8         7        

Other

     2         1        

 

 

Total

   $         14       $         19        

 

 

9.  Legal Proceedings

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

10.  Commitments and Contingencies

Guarantees

In the course of selling business entities and assets to third parties, CNA has agreed to indemnify purchasers for losses arising out of breaches of representation and warranties with respect to the business entities or assets being sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such indemnification provisions generally survive for periods ranging from nine months following the applicable closing date to the expiration of the relevant statutes of limitation. As of March 31, 2013, the aggregate amount of quantifiable indemnification agreements in effect for sales of business entities, assets and third party loans was $724 million.

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 March 31, 2013, 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

 

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sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. These indemnification agreements survive until the applicable statutes of limitation expire, or until the agreed upon contract terms expire.

Offshore Rig Purchase Obligations

Diamond Offshore has entered into four turnkey construction contracts with Hyundai Heavy Industries, Co. Ltd. for the construction of four dynamically positioned, ultra-deepwater drillships, the first two of which are expected to be delivered in the second and fourth quarters of 2013. Diamond Offshore expects the aggregate cost of the construction of its drillships, including commissioning, spares and project management costs, to be approximately $2.6 billion, of which approximately $650 million in contractual installment payments have been paid. These amounts are included in Construction in process within Property, plant and equipment in the Consolidated Condensed Balance Sheets. Diamond Offshore expects to pay a total of approximately $790 million as the two drillships are delivered in 2013.

In December of 2011 and August of 2012, Diamond Offshore entered into agreements for the construction of two moored semisubmersible deepwater rigs with expected completion dates in the third quarter of 2013 and the second quarter of 2014. The rigs will be constructed utilizing the hulls of two of Diamond Offshore’s mid-water floaters and the aggregate cost of the two rigs, including commissioning, spares and project management costs, is estimated to be approximately $690 million, of which $121 million in contractual installment payments have been paid.

In February of 2013, Diamond Offshore entered into a vessel modification agreement for enhancements to a mid-water floater that will enable the rig to work in the North Sea. The contracted price with the shipyard is $29 million, of which $6 million has been paid. The total cost of the project is estimated to be approximately $120 million, including shipyard costs, owner-furnished equipment and labor, commissioning and spares, with an expected completion date in the first quarter of 2014.

Boardwalk Pipeline

Boardwalk Pipeline’s future capital commitments are comprised of binding commitments under purchase orders for materials ordered but not received and firm commitments under binding construction service agreements. The commitments as of March 31, 2013 were approximately $130 million, all of which are expected to be settled within the next twelve months.

Loews Hotels

Loews Hotels has commitments aggregating approximately $285 million for development and renovation of hotel properties.

11.  Consolidating Financial Information

The following schedules present the Company’s consolidating balance sheet information at March 31, 2013 and December 31, 2012, and consolidating statements of income information for the three months ended March 31, 2013 and 2012. These schedules present the individual subsidiaries of the Company and their contribution to the Consolidated Condensed Financial Statements. Amounts presented will not necessarily be the same as those in the individual financial statements of the Company’s subsidiaries due to adjustments for purchase accounting, income taxes and noncontrolling interests. In addition, many of the Company’s subsidiaries use a classified balance sheet which also leads to differences in amounts reported for certain line items.

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

 

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Loews Corporation

Consolidating Balance Sheet Information

 

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

 

 
(In millions)                                                       

Assets:

                      

Investments

     $    47,593         $      1,433            $           10         $          63         $      4,085           $    53,184        

Cash

     123         24         $             4         7         10         11           179        

Receivables

     8,861         489         87         48         25         101         $           (6     9,605        

Property, plant and equipment

     295         4,973         7,250         1,055         585         46           14,204        

Deferred income taxes

     46               794               (840     -        

Goodwill

     115         20         271         584         3              993        

Investments in capital stocks of subsidiaries

                    17,094         (17,094     -        

Other assets

     735         338         317         19         94         17         9        1,529        

Deferred acquisition costs of insurance subsidiaries

     641                          641        

Separate account business

     279                          279        

 

 

Total assets

     $    58,688         $      7,277         $      7,929         $      2,517         $        780         $    21,354         $  (17,931     $    80,614        

 

 

Liabilities and Equity:

                      

Insurance reserves

     $    39,893                          $    39,893        

Payable to brokers

     325         $              1         $             5         $           14            $         393           738        

Short term debt

     13                  $            6              19        

Long term debt

     2,558         1,489         3,607         720         350         694           9,418        

Deferred income taxes

        492         635            38         561         $       (831     895        

Other liabilities

     3,254         643         379         122         23         239         (6     4,654        

Separate account business

     279                          279        

 

 

Total liabilities

     46,322         2,625         4,626         856         417         1,887         (837     55,896        

 

 

Total shareholders’ equity

     11,129         2,357         1,586         1,661         361         19,467         (17,094     19,467        

Noncontrolling interests

     1,237         2,295         1,717            2              5,251        

 

 

Total equity

     12,366         4,652         3,303         1,661         363         19,467         (17,094     24,718        

 

 

Total liabilities and equity

     $    58,688         $      7,277         $      7,929         $      2,517         $        780         $    21,354         $  (17,931     $    80,614        

 

 

 

28


Table of Contents

Loews Corporation

Consolidating Balance Sheet Information

 

December 31, 2012    CNA
Financial
     Diamond
Offshore
     Boardwalk
Pipeline
     HighMount      Loews
Hotels
     Corporate
and Other
     Eliminations     Total           

 

 
(In millions)                                                       

Assets:

                      

Investments

   $ 47,636       $ 1,435       $ 1         $           8       $ 33       $ 3,935         $ 53,048        

Cash

     156         53         3         2         10         4           228        

Receivables

     8,516         503         89         69         25         183         $         (19     9,366        

Property, plant and equipment

     297         4,870         7,252         1,136         333         47           13,935        

Deferred income taxes

     119               734               (853     -        

Goodwill

     118         20         271         584         3              996        

Investments in capital stocks of subsidiaries

                    16,936         (16,936     -        

Other assets

     730         366         330         22         84         4         2        1,538        

Deferred acquisition costs of insurance subsidiaries

     598                          598        

Separate account business

     312                          312        

 

 

Total assets

   $   58,482       $     7,247       $ 7,946         $    2,555       $         488       $   21,109         $  (17,806   $     80,021        

 

 

Liabilities and Equity:

                      

Insurance reserves

   $ 40,005                        $ 40,005        

Payable to brokers

     61               $         10          $ 134           205        

Short term debt

     13                $ 6              19        

Long term debt

     2,557       $ 1,489       $ 3,539         710         203         693           9,191        

Deferred income taxes

        483         619            37         552         $       (851     840        

Other liabilities

     3,260         675         432         120         42         263         (19     4,773        

Separate account business

     312                          312        

 

 

Total liabilities

     46,208         2,647         4,590         840         288         1,642         (870     55,345        

 

 

Total shareholders’ equity

     11,058         2,331         1,624         1,715         200         19,467         (16,936     19,459        

Noncontrolling interests

     1,216         2,269         1,732                    5,217        

 

 

Total equity

     12,274         4,600         3,356         1,715         200         19,467         (16,936     24,676        

 

 

Total liabilities and equity

   $ 58,482       $ 7,247       $ 7,946         $    2,555       $ 488       $ 21,109         $  (17,806   $ 80,021        

 

 

 

29


Table of Contents

Loews Corporation

Consolidating Statement of Income Information

 

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

 

 
(In millions)                                                   

Revenues:

                  

Insurance premiums

   $       1,764                    $     1,764        

Net investment income

     633      $ 1             $ 7           641        

Intercompany interest and dividends

                182         $      (182     -        

Investment gains

     24                      24        

Contract drilling revenues

       700                    700        

Other

     82        31      $     329        $          68      $         94         1           605        

 

 

Total

     2,503        732        329        68        94         190         (182     3,734        

 

 

Expenses:

                  

Insurance claims and policyholders’ benefits

     1,429                      1,429        

Amortization of deferred acquisition costs

     328                      328        

Contract drilling expenses

       375                    375        

Other operating expenses

     340        144        190        202        91         15           982        

Interest

     42        8        40        5        3         10