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 June 30, 2014

OR

 

[   ]  

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period From                        to                       

Commission File Number 1-6541

LOEWS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware         13-2646102

(State or other jurisdiction of  

incorporation or organization)

       

(I.R.S. Employer   

Identification No.)

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

(Address of principal executive offices) (Zip Code)

(212) 521-2000

(Registrant’s telephone number, including area code)

NOT APPLICABLE

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

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

 

  Yes        X            No                     

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

 

  Yes        X         No                       Not Applicable                     

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

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

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

 

  Yes                        No        X         

 

Class

         

Outstanding at July 28, 2014

Common stock, $0.01 par value       381,108,162 shares

 

 

 


Table of Contents

INDEX

 

     Page
No.
 

Part I. Financial Information

  

Item 1. Financial Statements (unaudited)

  

Consolidated Condensed Balance Sheets
June 30, 2014 and December 31, 2013

     3   

Consolidated Condensed Statements of Income
Three and six months ended June 30, 2014 and 2013

     4   

Consolidated Condensed Statements of Comprehensive Income
Three and six months ended June  30, 2014 and 2013

     5   

Consolidated Condensed Statements of Equity
Six months ended June 30, 2014 and 2013

     6   

Consolidated Condensed Statements of Cash Flows
Six months ended June 30, 2014 and 2013

     7   

Notes to Consolidated Condensed Financial Statements

     8   

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

     42   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     69   

Item 4. Controls and Procedures

     69   

Part II. Other Information

     70   

Item 1. Legal Proceedings

     70   

Item 1A. Risk Factors

     70   

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

     70   

Item 6. Exhibits

     71   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

     June 30,
2014   
      December 31,  
2013
 
   

(Dollar amounts in millions, except per share data)

    

Assets:

    

Investments:

    

Fixed maturities, amortized cost of $37,346 and $39,426

   $ 40,585        $ 41,320        

Equity securities, cost of $825 and $881

     864        871        

Limited partnership investments

     3,561        3,420        

Other invested assets

     665        562        

Short term investments

     7,276        6,772        
   

Total investments

     52,951        52,945        

Cash

     277        294        

Receivables

     8,441        9,338        

Property, plant and equipment

     14,133        13,524        

Goodwill

     355        357        

Assets of discontinued operations

     4,406        1,041        

Other assets

     1,681        1,635        

Deferred acquisition costs of insurance subsidiaries

     650        624        

Separate account business

       181        
   

Total assets

   $ 82,894        $ 79,939        
   
   

Liabilities and Equity:

    

Insurance reserves:

    

Claim and claim adjustment expense

   $ 23,996        $ 24,089        

Future policy benefits

     8,696        10,471        

Unearned premiums

     3,851        3,718        

Policyholders’ funds

     27        116        
   

Total insurance reserves

     36,570        38,394        

Payable to brokers

     815        134        

Short term debt

     974        819        

Long term debt

     9,828        9,525        

Deferred income taxes

     996        716        

Liabilities of discontinued operations

     3,946        632        

Other liabilities

     4,410        4,632        

Separate account business

       181        
   

Total liabilities

     57,539        55,033        
   

Commitments and contingent liabilities

    

Preferred stock, $0.10 par value:

    

Authorized – 100,000,000 shares

    

Common stock, $0.01 par value:

    

Authorized – 1,800,000,000 shares

    

Issued – 387,476,248 and 387,210,096 shares

     4        4        

Additional paid-in capital

     3,608        3,607        

Retained earnings

     15,633        15,508        

Accumulated other comprehensive income

     807        339        
   
     20,052        19,458        

Less treasury stock, at cost (4,471,870 shares)

     (195  
   

Total shareholders’ equity

     19,857        19,458        

Noncontrolling interests

     5,498        5,448        
   

Total equity

     25,355        24,906        
   

Total liabilities and equity

   $      82,894        $ 79,939        
   
   

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    
June 30,
          Six Months Ended      
June 30,
 
      2014     2013     2014     2013  
(In millions, except per share data)                         

Revenues:

        

Insurance premiums

       $ 1,811          $ 1,800        $ 3,617        $ 3,564      

Net investment income

     597        535        1,174        1,134      

Investment gains (losses):

        

Other-than-temporary impairment losses

     (5     (16     (7     (34)     

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

        
   

Net impairment losses recognized in earnings

     (5     (16     (7     (34)     

Other net investment gains (losses)

     (9     2        35        39      
   

Total investment gains (losses)

     (14     (14     28        5      

Contract drilling revenues

     650        745        1,335        1,445      

Other

     549        550        1,127        1,086      
   

Total

     3,593        3,616        7,281        7,234      
   

Expenses:

        

Insurance claims and policyholders’ benefits

     1,441        1,485        2,887        2,881      

Amortization of deferred acquisition costs

     335        335        664        663      

Contract drilling expenses

     395        369        765        744      

Other operating expenses

     750        753        1,657        1,532      

Interest

     126        108        248        211      
   

Total

     3,047        3,050        6,221        6,031      
   

Income before income tax

     546        566        1,060        1,203      

Income tax expense

     (145     (163     (248     (323)     
   

Income from continuing operations

     401        403        812        880      

Discontinued operations, net

     (186     9        (413     (70)     
   

Net income

     215        412        399        810      

Amounts attributable to noncontrolling interests

     (99     (143     (224     (299)     
   

Net income attributable to Loews Corporation

       $ 116          $ 269        $ 175        $ 511      
   
   

Net income attributable to Loews Corporation:

        

Income from continuing operations

       $ 303          $ 261        $ 568        $ 583      

Discontinued operations, net

     (187     8        (393     (72)     
   

Net income

       $ 116          $ 269        $ 175        $ 511      
   
   

Basic and diluted net income per share:

        

Income from continuing operations

       $ 0.79          $ 0.67        $ 1.47        $ 1.49      

Discontinued operations, net

     (0.49     0.02        (1.02     (0.18)     
   

Net income

       $ 0.30          $ 0.69        $ 0.45        $ 1.31      
   
   

Dividends per share

       $ 0.0625          $ 0.0625        $ 0.125        $ 0.125      
   
   

Weighted-average shares outstanding:

        

Shares of common stock

     385.72        388.79        386.53        390.08      

Dilutive potential shares of common stock

     0.65        0.83        0.68        0.80      
   

Total weighted-average shares outstanding assuming dilution

     386.37        389.62        387.21        390.88      
   
   

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               Six Months Ended        
    June 30,     June 30,  
     2014       2013       2014       2013         

(In millions)

       

Net income

      $ 215          $ 412        $ 399        $ 810        

Other comprehensive income (loss), after tax

       

Changes in:

       

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

    2        (8     14        6        

Net other unrealized gains (losses) on investments

    270        (585     507        (647)       

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

    272        (593     521        (641)       

Discontinued operations

    10        11        15        (5)       

Unrealized gains (losses) on cash flow hedges

      (1     3        (6)       

Pension liability

    (53     5        (54     9        

Foreign currency

    42        (13     36        (74)       

Other comprehensive income (loss)

    271        (591     521        (717)       

Comprehensive income (loss)

    486        (179     920        93        

Amounts attributable to noncontrolling interests

    (126     (83     (277     (225)       

Total comprehensive income (loss) attributable to Loews Corporation

      $ 360          $ (262     $ 643        $ (132)       
   
   

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
    

Common
Stock

Held in
    Treasury    

     Noncontrolling 
Interests
 

(In millions)

                   

Balance, January 1, 2013

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

Net income

     810              511                299          

Other comprehensive loss

     (717              (643)                   (74)         

Dividends paid

     (292           (49)               (243)         

Issuance of equity securities by subsidiary

     337           51               2                    284          

Purchase of Loews treasury stock

     (177                 (177)          

Issuance of Loews common stock

     3           3                  

Stock-based compensation

     7           (6)                    13          

Other

     (5                                                  (5)         

Balance, June 30, 2013

   $ 24,642      $ 4             $ 3,643          $ 15,654        $ 37                 $ (187)           $ 5,491          
   
   

Balance, January 1, 2014

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

Net income

     399              175                224          

Other comprehensive income

     521                 468                    53          

Dividends paid

     (232           (48)               (184)         

Purchases of subsidiary stock from noncontrolling interests

     (83        (8)                    (75)         

Purchases of Loews treasury stock

     (195                 (195)          

Issuance of Loews common stock

     5           5                  

Stock-based compensation

     14           4                     10          

Other

     20                          (2)                           22          

Balance, June 30, 2014

   $       25,355      $ 4             $     3,608          $     15,633        $ 807                 $ (195)           $ 5,498          
   
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

6


Table of Contents

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Six Months Ended June 30    2014      2013      

(In millions)

     

Operating Activities:

     

Net income

   $ 399        $ 810        

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

           1,112          613        

Changes in operating assets and liabilities, net:

     

Receivables

     (142)         (180)       

Deferred acquisition costs

     (10)         (43)       

Insurance reserves

     234          198        

Other assets

     (178)         (70)       

Other liabilities

     (106)         54        

Trading securities

     (117)         (879)       

Net cash flow operating activities

     1,192          503        

Investing Activities:

     

Purchases of fixed maturities

     (4,921)         (5,656)       

Proceeds from sales of fixed maturities

     2,919          3,143        

Proceeds from maturities of fixed maturities

     1,954          1,820        

Purchases of equity securities

     (11)         (33)       

Proceeds from sales of equity securities

     14          60        

Purchases of limited partnership investments

     (109)         (203)       

Proceeds from sales of limited partnership investments

     118          169        

Purchases of property, plant and equipment

     (1,152)             (1,150)       

Dispositions

     30          24        

Change in short term investments

             616        

Other, net

     (4)         (83)       

Net cash flow investing activities

     (1,159)         (1,293)       

Financing Activities:

     

Dividends paid

     (48)         (49)       

Dividends paid to noncontrolling interests

     (184)         (243)       

Purchases of subsidiary stock from noncontrolling interests

     (88)      

Purchases of Loews treasury stock

     (182)         (180)       

Issuance of Loews common stock

             3        

Proceeds from sale of subsidiary stock

             370        

Principal payments on debt

     (331)         (742)       

Issuance of debt

     766          1,598        

Other, net

     17          (23)       

Net cash flow financing activities

     (41)         734        

 

Effect of foreign exchange rate on cash

             (6)       

 

Transfer of cash to assets of discontinued operations

     (11)         (2)       

Net change in cash

     (17)         (64)       

Cash, beginning of period

     294          226        

Cash, end of period

   $ 277        $ 162        
   
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

7


Table of Contents

Loews Corporation and Subsidiaries

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.  Basis of Presentation

Loews Corporation is a holding company. Its subsidiaries are engaged in the following lines of business: commercial property and casualty insurance (CNA Financial Corporation (“CNA”), a 90% owned subsidiary); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (“Diamond Offshore”), a 51% owned subsidiary); transportation and storage of natural gas and natural gas liquids and gathering and processing of natural gas (Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”), a 53% owned subsidiary); 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 June 30, 2014 and December 31, 2013, the results of operations and comprehensive income for the three and six months ended June 30, 2014 and 2013 and changes in shareholders’ equity and cash flows for the six months ended June 30, 2014 and 2013.

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

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

The Company presents basic and diluted net income per share on the Consolidated Condensed Statements of Income. Basic net income per share excludes dilution and is computed by dividing net income attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Stock appreciation rights (“SARs”) of 2.2 million, 1.4 million, 2.1 million and 1.7 million shares were not included in the diluted weighted average shares amounts for the three and six months ended June 30, 2014 and 2013 due to the exercise price being greater than the average stock price.

Updated accounting guidance not yet adopted – In April of 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” Under the new accounting guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. The update also requires new disclosures for discontinued operations and disposals that do not meet the definition of a discontinued operation. The new accounting guidance is to be applied prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014, and will not have a material impact on the Company’s consolidated financial statements.

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. This update is effective for annual reporting periods beginning after December 15, 2016, including interim periods, and can be adopted either retrospectively or as a cumulative effect adjustment at the date of adoption. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its consolidated financial statements.

 

8


Table of Contents

2.  Acquisitions and Divestitures

Continental Assurance Company (“CAC”) – On August 1, 2014, CNA closed the previously announced sale of the majority of its run-off annuity and pension deposit business through the sale of the common stock of CAC. The business sold, which was previously reported within the Life & Group Non-Core segment, is reported as discontinued operations in the Consolidated Condensed Statements of Income for the three and six months ended June 30, 2014 and 2013 and the assets and liabilities are presented as discontinued operations on the Consolidated Condensed Balance Sheet as of June 30, 2014. The Company has elected not to present these assets and liabilities as discontinued operations for the comparative period in the Consolidated Condensed Balance Sheets.

The sales agreement included a 100% coinsurance agreement on a separate small block of annuity business outside of CAC. The assets and liabilities related to the coinsurance agreement do not qualify for discontinued operations presentation, therefore they are not reflected as discontinued operations on the Consolidated Condensed Balance Sheet as of June 30, 2014.

HighMount – In May of 2014, the Company announced that HighMount Exploration & Production LLC (“HighMount”), its natural gas and oil exploration and production subsidiary, is pursuing strategic alternatives, including a potential sale of the business. In furtherance of that pursuit, the Company initiated an auction process and expects to sell HighMount, therefore the assets and liabilities of HighMount have been reclassified as discontinued operations on the Consolidated Condensed Balance Sheets as of June 30, 2014 and December 31, 2013, and are reported at estimated fair value. In the second quarter of 2014, the Company recognized an impairment charge of $259 million ($167 million after tax) related to the excess carrying value of HighMount over the estimated fair value, less costs to sell. The Company measured estimated fair value using an estimated sale price arrived at by assessing market response in the auction process in relation to valuation models provided by HighMount’s financial advisors, which are Level 3 inputs of the fair value hierarchy. The impairment charge is subject to adjustment in future periods, which could be positive or negative, reflecting the final sale price and transaction costs. The assets and liabilities of HighMount consist primarily of natural gas and oil reserves, related liabilities and long term debt. The results of operations of HighMount have been reclassified as discontinued operations in the Consolidated Condensed Statements of Income for the three and six months ended June 30, 2014 and 2013.

See Note 14 for further discussion of discontinued operations.

Bluegrass Project – As discussed in Note 2 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, Boardwalk Pipeline executed a series of agreements in 2013 with The Williams Companies, Inc. to develop the Bluegrass Project, a joint venture project that would develop a pipeline to transport natural gas liquids. The open season for capacity on the pipeline ended in the first quarter of 2014, and although discussions with potential customers continued throughout the first quarter, Boardwalk Pipeline was unable to obtain sufficient firm customer commitments to support the project. Further, delays in the development of the project and other factors have resulted in escalations in the estimated costs to complete the project. Considering these factors, the Company determined that it would no longer make capital investments in the Bluegrass Project. In the first quarter of 2014, the Company expensed the previously capitalized project costs that had been incurred, resulting in a charge of $94 million ($55 million after tax and noncontrolling interests), inclusive of a $10 million charge recorded by Boardwalk Pipeline Partners, LP. This charge was recorded within Other operating expenses on the Consolidated Condensed Statements of Income. The Company does not expect to incur significant additional charges related to this joint venture project.

Loews Hotels – In 2014, Loews Hotels added three properties to its portfolio. Loews Hotels has a joint venture interest in the Cabana Bay Beach Resort, an 1,800 guestroom hotel at Universal Orlando, Florida, which opened in March of 2014. In July of 2014, Loews Hotels purchased the Loews Chicago O’Hare Hotel, a 556 guestroom hotel, and the Loews Minneapolis Hotel, a 255 guestroom hotel, for a total cost of approximately $190 million funded with a combination of cash and debt. Construction continues on the Loews Chicago Hotel, a 400 guestroom hotel, which Loews Hotels agreed to purchase upon completion of development, expected to occur in late 2014. The Loews Chicago Hotel is planned to open in early 2015.

 

9


Table of Contents

3.  Investments

Net investment income is as follows:

 

         Three Months Ended              Six Months Ended      
     June 30,      June 30,  
  

 

 

 
       2014      2013        2014     2013  

 

 
(In millions)                           

Fixed maturity securities

       $ 451          $ 454          $ 903         $ 911      

Short term investments

                            3      

Limited partnership investments

     116          84          203         230      

Equity securities

                            6      

Income (loss) from trading portfolio (a)

     30                  70         (2)     

Other

     10                  18         12      

 

 

Total investment income

     611          549          1,201         1,160      

Investment expenses

     (14)         (14)         (27)        (26)     

 

 

Net investment income

       $ 597          $ 535          $ 1,174         $ 1,134      

 

 

 

(a)

Includes net unrealized gains (losses) related to changes in fair value on trading securities still held of $40, $(30), $60 and $(43) for the three and six months ended June 30, 2014 and 2013.

Investment gains (losses) are as follows:

 

         Three Months Ended              Six Months Ended      
     June 30,      June 30,  
  

 

 

 
       2014      2013        2014     2013  

 

 
(In millions)                           

Fixed maturity securities

       $   (19)         $ (7)         $ 19         $      20      

Equity securities

        (2)                (15)     

Derivative instruments

             (5)                (3)     

Short term investments and other

                       3      

 

 

Investment gains (losses) (a)

       $ (14)         $   (14)         $      28         $ 5      

 

 

 

(a)

Includes gross realized gains of $20, $38, $78 and $79 and gross realized losses of $39, $47, $54 and $74 on available-for-sale securities for the three and six months ended June 30, 2014 and 2013.

 

10


Table of Contents

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

 

        Three Months Ended               Six Months Ended      
    June 30,     June 30,  
 

 

 

 
      2014     2013         2014     2013  

 

 
(In millions)                        

Fixed maturity securities available-for-sale:

       

Corporate and other bonds

      $        $        $        $ 8       

Asset-backed:

       

Residential mortgage-backed

                         3       

Other asset-backed

                         1       

 

 

Total asset-backed

                         4       

 

 

Total fixed maturities available-for-sale

                         12       

 

 

Equity securities available-for-sale:

       

Common stock

                         2       

Preferred stock

               20       

 

 

Total equity securities available-for-sale

                         22       

 

 

Net OTTI losses recognized in earnings

      $        $ 16         $   7         $ 34       

 

 

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

 

June 30, 2014   Cost or
Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Estimated
Fair Value
    Unrealized
OTTI Losses
(Gains)
 

 

 
(In millions)                              

Fixed maturity securities:

         

Corporate and other bonds

    $ 17,276        $ 1,852            $ 30            $19,098         

States, municipalities and political subdivisions

    11,215        1,178            70            12,323         

Asset-backed:

         

Residential mortgage-backed

    4,882        202            14            5,070              $ (51)       

Commercial mortgage-backed

    1,999        107            7            2,099            (3)       

Other asset-backed

    1,172        16            3            1,185         

 

 

Total asset-backed

    8,053        325            24            8,354            (54)       

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

    61        6            1            66         

Foreign government

    533        18            1            550         

Redeemable preferred stock

    39        3              42         

 

 

Fixed maturities available-for-sale

    37,177        3,382            126            40,433            (54)       

Fixed maturities, trading

    169          17            152         

 

 

Total fixed maturities

    37,346        3,382            143            40,585            (54)       

 

 

Equity securities:

         

Common stock

    46        14              60         

Preferred stock

    129        5              134         

 

 

Equity securities available-for-sale

    175        19            -            194            -        

Equity securities, trading

    650        119            99            670         

 

 

Total equity securities

    825        138            99            864            -        

 

 

Total

    $ 38,171        $ 3,520          $ 242            $41,449              $ (54)       

 

 

 

11


Table of Contents
December 31, 2013   Cost or
Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Estimated
Fair Value
    Unrealized  
OTTI Losses  
(Gains)  
 

 

 
(In millions)                              

Fixed maturity securities:

         

Corporate and other bonds

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

States, municipalities and political subdivisions

    11,281        548            272            11,557     

Asset-backed:

         

Residential mortgage-backed

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

Commercial mortgage-backed

    1,995        90            22            2,063        (3)         

Other asset-backed

    945        13            3            955     

 

 

Total asset-backed

    7,880        226            117            7,989        (40)         

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

    139        6            1            144     

Foreign government

    531        15            3            543     

Redeemable preferred stock

    92        10              102     

 

 

Fixed maturities available-for-sale

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

Fixed maturities, trading

    151          28            123     

 

 

Total fixed maturities

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

 

 

Equity securities:

         

Common stock

    36        9              45     

Preferred stock

    143        1            4            140     

 

 

Equity securities available-for-sale

    179        10            4            185        -          

Equity securities, trading

    702        119            135            686     

 

 

Total equity securities

    881        129            139            871        -          

 

 

Total

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

 

 

The net unrealized gains on investments included in the tables above are recorded as a component of Accumulated other comprehensive income (“AOCI”). When presented in AOCI, these amounts are net of tax and noncontrolling interests and any required Shadow Adjustments. At June 30, 2014 and December 31, 2013, the net unrealized gains on investments included in AOCI were net of Shadow Adjustments of $841 million and $478 million. To the extent that unrealized gains on fixed income securities supporting certain products within CNA’s Life & Group Non-Core segment would result in a premium deficiency if realized, a related decrease in Deferred acquisition costs, and/or increase in Insurance reserves is recorded, net of tax and noncontrolling interests, as a reduction of net unrealized gains through Other comprehensive income (loss) (Shadow Adjustments).

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

 

   

Less than

12 Months

   

12 Months

or Longer

    Total  
 

 

 

 
June 30, 2014     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

      $ 813            $ 12          $ 548          $ 18          $ 1,361          $ 30     

States, municipalities and political subdivisions

    316            2          587          68          903          70     

Asset-backed:

           

Residential mortgage-backed

    125            1          332          13          457          14     

Commercial mortgage-backed

    205            2          171          5          376          7     

Other asset-backed

    269            3          12            281          3     

 

 

Total asset-backed

    599            6          515          18          1,114          24     

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

    2            1          4            6          1     

Foreign government

    39            1          9            48          1     

 

 

Total fixed maturity securities

    1,769            22          1,663          104          3,432          126     

Preferred stock

    10              2            12       

 

 

Total

      $ 1,779            $ 22          $ 1,665          $ 104          $ 3,444          $ 126     

 

 

 

12


Table of Contents
   

Less than

12 Months

   

12 Months

or Longer

    Total  
 

 

 

 
December 31, 2013     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

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

States, municipalities and political subdivisions

    3,251            197           129            75           3,380          272         

Asset-backed:

           

Residential mortgage-backed

    1,293            29           343            63           1,636          92         

Commercial mortgage-backed

    640            22               640          22         

Other asset-backed

    269            3               269          3         

 

 

Total asset-backed

    2,202            54           343            63           2,545          117         

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

    13            1               13          1         

Foreign government

    111            3               111          3         

 

 

Total fixed maturity securities

    9,169            384           544            144           9,713          528         

Preferred stock

    87            4               87          4         

 

 

Total

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

 

 

Based on current facts and circumstances, the Company believes the unrealized losses presented in the table above are primarily attributable to broader economic conditions, changes in interest rates and credit spreads, market illiquidity and other market factors, but are not indicative of the ultimate collectibility of the current amortized cost of the securities. The 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 at June 30, 2014.

The following table summarizes the activity for the three and six months ended June 30, 2014 and 2013 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at June 30, 2014 and 2013 for which a portion of an OTTI loss was recognized in Other comprehensive income (loss).

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
 

 

 

 
        2014              2013             2014            2013    

 

 
(In millions)                        

Beginning balance of credit losses on fixed maturity securities

      $ 69         $ 92       $ 74       $ 95      

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

               1      

Reductions for securities sold during the period

    (3)          (4)        (5)        (7)     

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

        (3)     

 

 

Ending balance of credit losses on fixed maturity securities

      $ 66         $ 89       $ 66       $ 89      

 

 

 

13


Table of Contents

Contractual Maturity

The following table summarizes available-for-sale fixed maturity securities by contractual maturity at June 30, 2014 and December 31, 2013. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid with or without call or prepayment penalties. Securities not due at a single date are allocated based on weighted average life.

 

     June 30, 2014      December 31, 2013  

 

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

 

 
(In millions)                            

Due in one year or less

   $ 2,832           $ 2,883          $ 2,420           $ 2,455         

Due after one year through five years

     9,251             9,893            9,496             10,068         

Due after five years through ten years

     11,206             11,792            11,667             11,954         

Due after ten years

     13,888             15,865            15,692             16,720         

 

 

Total

   $ 37,177           $ 40,433          $ 39,275           $ 41,197         

 

 

Investment Commitments

As of June 30, 2014, the Company had committed approximately $348 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 June 30, 2014, the Company had commitments to purchase or fund additional amounts of $244 million and sell $158 million under the terms of such securities.

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

 

14


Table of Contents

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

The fair values of CNA’s life settlement contracts are included in Other assets on the Consolidated Condensed Balance Sheets. Equity options purchased are included in Equity securities, and all other derivative assets are included in Receivables. Derivative liabilities are included in Payable to brokers. Assets and liabilities measured at fair value on a recurring basis and assets and liabilities of discontinued operations measured on a nonrecurring basis at June 30, 2014 are summarized in the tables below:

 

June 30, 2014     Level 1         Level 2         Level 3           Total        

 

 
(In millions)                        

Fixed maturity securities:

       

Corporate and other bonds

  $ 34       $ 18,870       $ 194       $ 19,098      

States, municipalities and political subdivisions

      12,244         79         12,323      

Asset-backed:

       

Residential mortgage-backed

      4,885         185         5,070      

Commercial mortgage-backed

      2,040         59         2,099      

Other asset-backed

      559         626         1,185      

 

 

Total asset-backed

      7,484         870         8,354      

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

    62                  66      

Foreign government

    60         490           550      

Redeemable preferred stock

    30         12           42      

 

 

Fixed maturities available-for-sale

    186         39,104         1,143         40,433      

Fixed maturities, trading

      61         91         152      

 

 

Total fixed maturities

  $ 186       $ 39,165       $ 1,234       $ 40,585      

 

 

Equity securities available-for-sale

  $ 137       $ 55       $      $ 194      

Equity securities, trading

    666                  670      

 

 

Total equity securities

  $ 803       $ 55       $      $ 864      

 

 

Short term investments

  $ 6,575       $ 606         $ 7,181      

Other invested assets

    102         45           147      

Receivables

               7      

Life settlement contracts

      $ 86         86      

Payable to brokers

    (579)        (1)          (580)     

Assets of discontinued operations

      3,593         813         4,406      

Liabilities of discontinued operations

      (3,343)        (603)        (3,946)     

 

15


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

Fixed maturity securities:

        

Corporate and other bonds

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

States, municipalities and political subdivisions

       11,486        71        11,557     

Asset-backed:

        

Residential mortgage-backed

       4,640        331        4,971     

Commercial mortgage-backed

       1,912        151        2,063     

Other asset-backed

       509        446        955     
   

Total asset-backed

       7,061        928        7,989     

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

     116        28          144     

Foreign government

     81        462          543     

Redeemable preferred stock

     45        57          102     
   

Fixed maturities available-for-sale

     275        39,719        1,203        41,197     

Fixed maturities, trading

       43        80        123     
   

Total fixed maturities

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

Equity securities available-for-sale

   $ 126      $ 48      $ 11      $ 185     

Equity securities, trading

     678          8        686     
   

Total equity securities

   $ 804      $ 48      $ 19      $ 871     
   
   

Short term investments

   $  6,134      $ 563        $ 6,697     

Other invested assets

       54          54     

Receivables

       3          3     

Life settlement contracts

       $ 88        88     

Separate account business

     9        171        1        181     

Payable to brokers

     (40     (1     (3     (44)    

Assets of discontinued operations

     28        2        2        32     

Liabilities of discontinued operations

       (6     (2     (8)    

 

16


Table of Contents

The tables below present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2014 and 2013:

 

         

Net Realized Gains
(Losses) and Net Chang

in Unrealized Gains

(Losses)

                     

Transfers

   

Transfers

         

Unrealized

Gains

(Losses)
    Recognized in    
Net Income

on Level
3 Assets and
Liabilities

 
2014   Balance,
April 1
    Included in
Net Income
    Included in
OCI
    Purchases    

Sales

   

Settlements

    into
Level 3
    out of
Level 3
    Balance,
June 30
   

Held at

June 30

 

 

 
(In millions)                                                

Fixed maturity securities:

               

Corporate and other bonds

  $ 189       $        $ 21        $ (6)      $ (5)      $ 5          $ (11)      $ 194       

States, municipalities and political subdivisions

    86              $ 1          1          (10)              79       

Asset-backed:

               

Residential mortgage-backed

    359         (24)        47          22          (174)        (19)          (26)        185       

Commercial mortgage- backed

    126                1            (60)        (1)        12            (20)        59       

Other asset-backed

    439           4          229          (28)        (18)            626        $ (1)               

 

 

Total asset-backed

    924         (23)        52          251          (262)        (38)        12            (46)        870          (1)               

 

 

Fixed maturities available-for-sale

    1,199         (21)        53          273          (278)        (43)        17            (57)        1,143          (1)               

Fixed maturities, trading

    85                            91          6                

 

 

Total fixed maturities

  $ 1,284       $ (15)      $ 53        $ 273        $     (278)      $ (43)      $ 17          $ (57)      $ 1,234        $ 5                

 

 

Equity securities available-for-sale

  $                    $ 2       

Equity securities trading

         $        $ 1                  4        $ 1                

 

 

Total equity securities

  $      $      $ -        $ 1        $      $      $ -          $      $ 6        $ 1                

 

 

Life settlement contracts

  $ 87       $ 12             $ (13)          $ 86        $ 1                

Derivative financial instruments, net

    (4)                 $          $        -       

 

17


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    

 
      Balance,         Included in           Included in                             into     out of         Balance,     Held at      
2013     April 1     Net Income     OCI       Purchases       Sales     Settlements         Level 3     Level 3         June 30     June 30      

 

 
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

  $ 283        $ 1          $ (3)         $ 13        $ (54)      $ (6)          $ (32)        $ 202          $ (1)             

States, municipalities and political subdivisions

    129            4            37          (32)        (3)        $ 5             140         

Asset-backed:

                   

Residential mortgage-backed

    450          (1)           (1)           50          (10)        (21)          4           (43)          428            (2)             

Commercial mortgage- backed

    177            4            5            (2)          21           (40)          165         

Other asset-backed

    396            (3)           38          (33)        (11)              387            (1)             

 

 

Total asset-backed

    1,023          (1)           -            93          (43)        (34)          25           (83)          980            (3)             

Redeemable preferred stock

    26            (1)                     25         

 

 

Fixed maturities available-for-sale

    1,461          -            -            143          (129)        (43)          30           (115)          1,347            (4)             

Fixed maturities, trading

    107                (20)              87         

 

 

Total fixed maturities

  $   1,568        $ -          $ -          $ 143        $       (149)      $ (43)        $ 30         $ (115)        $     1,434          $ (4)             

 

 

Equity securities available-for-sale

  $ 19        $ (5)         $ (1)                   $ 13          $ (5)             

Equity securities trading

    3          (1)                       2            (2)             

 

 

Total equity securities

  $ 22        $ (6)         $ (1)         $ -        $      $ -         $ -         $ -         $ 15          $ (7)             

 

 

Short term investments

  $ 5              $ (5)            $ -         

Life settlement contracts

    95        $ 4                $ (8)              91          $ (1)             

Separate account business

    2                        2         

Derivative financial instruments, net

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

 

18


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

Transfers

into

   

Transfers

out of

          Unrealized
Gains
(Losses)
Recognized in
Net Income
on Level
3 Assets and
Liabilities
 
    Balance,     Included in     Included in                               Balance,         Held at  
2014   January 1     Net Income     OCI     Purchases         Sales     Settlements     Level 3     Level 3     June 30     June 30  

 

 
(In millions)                                                

Fixed maturity securities:

               

Corporate and other bonds

  $ 204          $ 2         $ 1         $ 26         $ (10)      $ (10)          $ 8         $ (27)        $ 194            

States, municipalities and political subdivisions

    71            1           2           1           (10)          14             79            

Asset-backed:

               

Residential mortgage-backed

    331            (23)          62           47           (174)        (40)            21           (39)          185            

Commercial mortgage-backed

    151            2               (60)        (2)            12           (44)          59            

Other asset-backed

    446            1           4           377           (111)        (90)              (1)          626             $ (1)         

 

 

Total asset-backed

    928            (20)          66           424           (345)        (132)            33           (84)          870               (1)         

 

 

Fixed maturities available-for-sale

    1,203            (17)          69           451           (365)        (142)            55           (111)          1,143               (1)         

Fixed maturities, trading

    80            11                       91               11          

 

 

Total fixed maturities

  $ 1,283          $ (6)        $ 69         $ 451         $    (365)      $ (142)          $ 55         $ (111)        $ 1,234             $ 10          

 

 

Equity securities available-for-sale

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

Equity securities trading

    8              $ 2           (6)              4            

 

 

Total equity securities

  $ 19          $ 3         $ (4)        $ 2         $ (14)      $ -           $ -         $ -         $ 6             $ -          

 

 

Life settlement contracts

  $ 88          $ 22               $ (24)              $ 86             $ 2          

Separate account business

    1                      $ (1)          -            

Derivative financial instruments, net

    (3)           1           $ (2)        $            2           -               2          

 

19


Table of Contents

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,

June 30

    

Unrealized
Gains
(Losses)

Recognized in
Net Income
on Level

3 Assets and
Liabilities

Held at
June 30

 
      Included in
Net Income
     Included in
OCI
                      

 

 
(In millions)                                                        

Fixed maturity securities:

                       

Corporate and other bonds

   $ 219        $ 1          $ (1)         $ 104        $ (71)       $ (26)        $ 26         $ (50)       $ 202           $ (2)       

States, municipalities and political subdivisions

     96          (3)           4            122          (79)         (5)          5              140        

Asset-backed:

                       

Residential mortgage-backed

     413          2            (1)           111          (10)         (32)          4           (59)         428           (2)       

Commercial mortgage-backed

     129          1            9            78             (9)          21           (64)         165        

Other asset-backed

     368          3            (2)           174          (132)         (24)                387           (1)       

 

 

Total asset-backed

     910          6            6            363          (142)         (65)          25           (123)         980           (3)       

Redeemable preferred stock

     26             (1)                          25        

 

 

Fixed maturities available-for-sale

     1,251          4            8            589          (292)         (96)          56           (173)         1,347           (5)       

Fixed maturities, trading

     89          1               19          (22)                  87           1        

 

 

Total fixed maturities

   $ 1,340        $ 5          $ 8          $ 608        $ (314)       $ (96)        $ 56         $ (173)       $ 1,434           $ (4)       

 

 

Equity securities available-for-sale

   $ 34        $ (20)                        $ (1)       $ 13           $ (20)       

Equity securities trading

             (5)                             2           (5)       

 

 

Total equity securities

   $ 41        $ (25)         $ -          $       $       $ -         $ -         $ (1)       $ 15           $ (25)       

 

 

Short term investments

   $                $ (6)                $ -        

Other invested assets

                      (1)                  -        

Life settlement contracts

     100        $ 11                   $ (20)                91           $ 1       

Separate account business

                                  2        

Derivative financial instruments, net

             5          $ (2)          $            (4)                5           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

Derivative financial instruments included in Assets and Liabilities of discontinued operations

  

Discontinued operations, net

Life settlement contracts

  

Other revenues

 

20


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 months ended June 30, 2014 there were $1 million of transfers from Level 2 to Level 1 and no transfers from Level 1 to Level 2. During the six months ended June 30, 2014 there were $24 million of transfers from Level 2 to Level 1 and $1 million from Level 1 to Level 2. There were no transfers between Level 1 and Level 2 during the three or six months ended June 30, 2013. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods.

Valuation Methodologies and Inputs

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

Fixed Maturity Securities

Fixed maturity securities are valued using methodologies that model information generated by market transactions involving identical or comparable assets, as well as discounted cash flow methodologies. Common inputs include: prices from recently executed transactions of similar securities, broker/dealer quotes, benchmark yields, spreads off benchmark yields, interest rates and U.S. Treasury or swap curves. Specifically for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data.

Level 1 securities include exchange traded bonds, highly liquid U.S. and foreign government bonds, and redeemable preferred stock, valued using quoted market prices. Level 2 securities include most other fixed maturity securities as the significant inputs are observable in the marketplace. Securities are generally assigned to Level 3 in cases where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. Level 3 securities also include private placement debt securities whose fair value is determined using internal models with inputs that are not market observable.

Equity Securities

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

Derivative Financial Instruments

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

Short Term Investments

Securities that are actively traded and 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.

 

21


Table of Contents

Other Invested Assets

Level 1 securities include exchange traded open-end funds valued using quoted market prices. Level 2 securities include overseas deposits which can be redeemed at net asset value in 90 days or less.

Life Settlement Contracts

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

Separate Account Business

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

Assets and Liabilities of Discontinued Operations on a Nonrecurring Basis

Assets and liabilities of discontinued operations relate to CAC and HighMount, as discussed in Notes 2 and 14. The assets and liabilities for CAC are valued using the agreed upon transaction price for the sale of the common stock of CAC and are classified within Level 2 of the fair value hierarchy. The estimated fair value of HighMount’s assets and liabilities is based on an expected sale price arrived at by assessing market response in the auction process in relation to valuation models provided by HighMount’s financial advisors, which are Level 3 inputs of the fair value hierarchy.

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.

 

June 30, 2014    Fair Value      Valuation
Technique(s)
  

Unobservable

Input(s)

  

Range

(Weighted

Average)

 

 

 
     (In millions)                   

Assets

           

Fixed maturity securities

     $ 115         Discounted cash flow    Credit spread      2% – 15% (4%)   

Equity securities

     2         Market approach    Private offering price      $4,334 per share   

Life settlement contracts

     86         Discounted cash flow    Discount rate risk premium      9%   
         Mortality assumption      70% – 743% (194%)   
December 31, 2013                        

 

 

Assets

           

Fixed maturity securities

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

Equity securities

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

Life settlement contracts

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

 

22


Table of Contents

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

Financial Assets and Liabilities Not Measured at Fair Value

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

 

June 30, 2014   

Carrying

Amount

     Estimated Fair Value          
     

 

 
            Level 1    Level 2      Level 3        Total    

 

 

(In millions)

              

Financial Assets:

              

Other invested assets

   $ 518             $ 540       $ 540         

Financial Liabilities:

              

Short term debt

     974          $ 815         175         990         

Long term debt

     9,818            10,598         10         10,608         

December 31, 2013

              

 

 

Financial Assets:

              

Other invested assets

   $ 508             $ 515       $ 515         

Financial Liabilities:

              

Premium deposits and annuity contracts

     57               58         58         

Short term debt

     818          $ 832         20         852         

Long term debt

     9,515            9,907         182         10,089         

Long term debt included in discontinued operations

     500            500            500         

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

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

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

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

 

23


Table of Contents

5.  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.

 

     June 30, 2014     December 31, 2013  

 

 
    

Contractual/
Notional

Amount

    

 

Estimated Fair Value

   

Contractual/
Notional

Amount

    

 

Estimated Fair Value    

 
        Asset      (Liability)        Asset      (Liability)    

 

 
(In millions)                                         

With hedge designation:

                

Commodities:

                

Forwards – short

   $ 8            $ 11       $ 1      

Foreign exchange:

                

Currency forwards – short

     167       $ 6           114         2       $ (1)     

Without hedge designation:

                

Equity markets:

                

Options – purchased

     1,467         37           1,561         41      

                  – written

     777          $ (21     729            (23)     

Equity swaps and warrants

                

                  – long

     12         5           17         9      

Interest rate risk:

                

Credit default swaps

                

– purchased protection

     255              50            (3)     

– sold protection

     5              25         

Foreign exchange:

                

Currency forwards – long

             55         

                                    – short

     219            (1     113         

Currency options – long

     375         1              

Discontinued operations:

                

Interest rate risk:

                

Interest rate swaps

     200            (2     300            (4)     

Commodities:

                

Forwards – short

     127         1         (8     180         4         (4)     

Forwards – long

     134         1         (4        

Gross estimated fair values of derivative positions are currently presented in Equity securities, Receivables, Payable to brokers and Assets and Liabilities of discontinued operations 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 June 30, 2014 and December 31, 2013.

In connection with the anticipated sale of HighMount, as discussed in Note 2, cash flow hedge accounting treatment was discontinued for all of HighMount’s commodity and interest rate swaps in the second quarter of 2014 and a loss of $3 million after tax was reclassified from AOCI into Discontinued operations, net for those hedges where the original forecasted transactions are no longer probable of occurring. In addition, mark-to-market losses of $2 million after tax were recognized on these derivatives in the second quarter of 2014.

 

24


Table of Contents

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 $1 million and losses of $5 million for the three months ended June 30, 2014 and 2013 and gains of $1 million and losses of $3 million for the six months ended June 30, 2014 and 2013 were included in Investment gains (losses). Losses of $3 million for the three months ended June 30, 2014 and 2013 and gains of $5 million and losses of $16 million for the six months ended June 30, 2014 and 2013 were included in Net investment income.

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 exposure to foreign currency losses on future foreign currency expenditures. Gains of $5 million and losses of $2 million were recognized in OCI related to these cash flow hedges for the three months ended June 30, 2014 and 2013. Gains of $8 million and losses of $7 million were recognized in OCI related to these cash flow hedges for the six months ended June 30, 2014 and 2013. For the three months ended June 30, 2014 and 2013, gains of $4 million and $1 million were reclassified from AOCI into income. For the six months ended June 30, 2014 and 2013, gains of $3 million and $2 million were reclassified from AOCI into income. As of June 30, 2014, the estimated amount of net unrealized gains associated with these cash flow hedges that will be reclassified from AOCI into earnings during the next twelve months was $3 million. The net amounts recognized due to ineffectiveness were less than $1 million for the three and six months ended June 30, 2014 and 2013.

6.  Claim and Claim Adjustment Expense Reserves

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

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

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 $56 million and $65 million for the three months ended June 30, 2014 and 2013 and $130 million and $104 million for the six months ended June 30, 2014 and 2013. Catastrophe losses in 2014 related primarily to U.S. weather-related events.

 

25


Table of Contents

Net Prior Year Development

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

 

Three Months Ended June 30, 2014    CNA
Specialty
     CNA
Commercial
     Other      Total          

 

 
(In millions)                            

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

   $ (55)       $ 79             $ 24          

Pretax (favorable) unfavorable premium development

     (1)         (5)         $ 4         (2)         

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (56)       $ 74          $ 4       $ 22          

 

 
Three Months Ended June 30, 2013                            

 

 

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

   $ (41)       $ 27          $ 9       $ (5)         

Pretax (favorable) unfavorable premium development

     (5)         (5)           2         (8)         

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (46)       $ 22          $ 11       $ (13)         

 

 
Six Months Ended June 30, 2014                            

 

 

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

   $ (57)       $ 96          $ 10       $ 49          

Pretax (favorable) unfavorable premium development

     (9)         (24)              (33)         

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (66)       $ 72          $ 10       $ 16          

 

 
Six Months Ended June 30, 2013                            

 

 

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

   $ (56)       $ 16          $ 9       $ (31)         

Pretax (favorable) unfavorable premium development

     (13)         (15)           7         (21)         

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (69)       $ 1          $ 16       $ (52)         

 

 

 

26


Table of Contents

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    

June 30,    

    

Six Months Ended        

June 30,        

 
      2014        2013        2014        2013    
(In millions)                            

Medical professional liability

   $ 1          $ (17)         $ 2          $ (20)     

Other professional liability and management liability

     (58)           (23)           (64)           (24)     

Surety

        1            1            2      

Other

     2            (2)           4            (14)     

 

 

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

   $ (55)         $ (41)         $ (57)         $ (56)     

 

 

Three Months

2014

Favorable development for other professional liability and management liability was primarily related to favorable outcomes on individual large claims in accident years 2009 and prior, which contributed to a lower estimate of ultimate severity. Additionally, there was better than expected severity in accident years 2008 through 2011.

2013

Favorable development for medical professional liability was primarily due to a decrease in incurred loss severity in accident years 2009 and prior.

Overall, favorable development for other professional liability and management liability was related to better than expected loss emergence in accident years 2007 through 2009. Unfavorable development was recorded in accident years 2010 through 2012 related to an increase in severity.

Six Months

2014

Favorable development for other professional liability and management liability was primarily related to favorable outcomes on individual large claims in accident years 2009 and prior, which contributed to a lower estimate of ultimate severity. Additionally, there was better than expected severity in accident years 2008 through 2011.

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.

Overall, favorable development for other professional liability and management liability was related to better than expected loss emergence in accident years 2007 through 2009. Unfavorable development was recorded in accident years 2010 through 2012 related to an increase in severity.

Favorable development for other coverages was primarily due to better than expected loss emergence in property coverages in accident years 2010 and subsequent.

 

27


Table of Contents

CNA Commercial

The following table and discussion provide further detail of the development recorded for the CNA Commercial segment. The majority of the 2014 unfavorable development relates to business classes which CNA has exited, but also includes Small Business where CNA is taking underwriting actions in an effort to improve profitability.

 

    

Three Months Ended    

June 30,    

    

Six Months Ended        

June 30,        

 
      2014         2013      2014         2013     
(In millions)                            

Commercial auto

   $             20          $ 2          $             40          $             (3)      

General liability

     30            15            25            (6)      

Workers’ compensation

     40            45            50            70       

Property and other

     (11)           (35)           (19)           (45)      

 

 

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

   $ 79          $             27          $     96          $     16       

 

 

Three Months

2014

Unfavorable development for commercial auto was primarily related to higher than expected frequency of large losses in accident years 2010 through 2013.

Unfavorable development for general liability was primarily related to higher than expected severity in accident years 2009 through 2011. In addition, there was higher than expected severity in accident year 2013 related to Small Business.

Unfavorable development for workers’ compensation was primarily due to higher than expected severity related to Defense Base Act contractors in accident years 2012 and 2013.

Favorable development for property and other first-party coverages was recorded in accident years 2012 and prior, primarily related to fewer claims than expected and favorable individual claim settlements.

2013

Unfavorable development for general liability coverages was primarily related to increased incurred loss severity in accident years 2010 through 2012.

Unfavorable development for workers’ compensation was primarily in response to legislation enacted during 2013 related to the New York Fund for Reopened Cases. The law change necessitated an increase in reserves as re-opened workers’ compensation claims can no longer be turned over to the state for handling and payment after December 31, 2013.

Favorable development for property and other coverages was primarily related to favorable outcomes on litigated catastrophe claims in accident years 2005 and 2010 and favorable loss emergence on non-catastrophe losses in accident year 2012.

Six Months

2014

Unfavorable development for commercial auto was primarily related to higher than expected frequency of large losses in accident years 2010 through 2013. Additionally, unfavorable development was recorded for higher than expected frequency in accident years 2012 and 2013 and higher than expected severity in accident years 2010 and 2011.

Unfavorable development for general liability was primarily related to higher than expected severity in accident years 2009 through 2011. In addition, there was higher than expected severity in accident year 2013 related to Small Business.

 

28


Table of Contents

Unfavorable development for workers’ compensation was primarily due to higher than expected severity related to Defense Base Act contractors in accident years 2012 and 2013 and the recognition of losses related to favorable premium development in accident year 2013.

Favorable development for property and other first-party coverages was recorded in accident years 2012 and prior, primarily related to fewer claims than expected and favorable individual claim settlements.

2013

Overall, favorable development for general liability coverages was primarily related to better than expected loss emergence in accident years 2002 and prior. Unfavorable development was recorded in accident years 2010 through 2012 primarily related to increased incurred loss severity.

Unfavorable development for workers’ compensation was recorded in response to legislation in New York as discussed above. Additional unfavorable development was primarily due to higher than expected large losses and increased severity in the state of California in accident year 2010.

Favorable development for property and other coverages was primarily related to favorable outcomes on litigated catastrophe claims in accident years 2005 and 2010 and favorable loss emergence on non-catastrophe losses in accident year 2012.

7.  Income Taxes

During 2013, Diamond Offshore received notification from the Egyptian tax authorities proposing a $1.2 billion increase in taxable income for the years 2006 to 2008. In December of 2013, Diamond Offshore accrued an additional $57 million of expense for uncertain tax positions in Egypt for all open years. During the first quarter of 2014, Diamond Offshore settled certain disputes for the years 2006 through 2008 with the Egyptian tax authorities, resulting in a net reduction to income tax expense of $17 million.

During the second quarter of 2014, the Appeals Committee in Egypt issued a decision regarding one remaining open item for the years 2006 to 2008. Diamond Offshore has filed an objection with the Egyptian courts to continue disputing the matter and believes that its position will, more likely than not, be sustained. However, if Diamond Offshore’s position is not sustained, tax expense and related penalties would increase by approximately $50 million related to this issue for the 2006 through 2008 tax years as of June 30, 2014.

In July of 2014, the United Kingdom Finance Act (“Finance Act”) was enacted, with an effective date retroactive to April 1, 2014. Certain provisions of the Finance Act will limit the amount of tax deductions available with respect to Diamond Offshore’s rigs operating in the United Kingdom (“U.K.”) under bareboat charter arrangements, which could significantly increase income tax expense in the U.K.

8.  Debt

CNA Financial

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

Diamond Offshore

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

 

29


Table of Contents

9.  Shareholders’ Equity

Accumulated Other Comprehensive Income

The tables below display the changes in Accumulated other comprehensive income (“AOCI”) by component for the three and six months ended June 30, 2013 and 2014:

 

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

 

 
(In millions)                                                 

Balance, April 1, 2013

   $ 31          $ 1,176          $ 4          $ (6)         $ (727)           $ 88          $ 566      

Other comprehensive income (loss) before reclassifications, after tax of $4, $317, $(7), $2, $0 and $0

     (8)           (589)           14                  (13)           (596)     

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $(3), $2, $0, $(2) and $0

        4            (3)           (1)           5                 5      

 

 

Other comprehensive income (loss)

     (8)           (585)           11            (1)           5              (13)           (591)     

Issuance of equity securities by subsidiary

                 2                 2      

Amounts attributable to noncontrolling interests

        59                  (1)             2            60      

 

 

Balance, June 30, 2013

   $       23          $       650          $     15          $     (7)         $     (721)           $       77          $ 37      

 

 

Balance, April 1, 2014

   $ 29          $ 820          $ 21          $ (2)         $ (432)           $     127          $     563      

Other comprehensive income before reclassifications, after tax of $(1), $(140), $(4), $(2), $0 and $0

     2            257            3            3               42            307      

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $(6), $(2), $1, $27 and $0

        13            7            (3)           (53)                (36)     

 

 

Other comprehensive income (loss)

     2            270            10            -            (53)             42            271      

Amounts attributable to noncontrolling interests

     (1)           (28)           (1)           (1)           7              (3)           (27)     

 

 

Balance, June 30, 2014

   $ 30          $ 1,062          $ 30          $ (3)         $ (478)           $     166          $ 807      

 

 

 

30


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

 

 
(In millions)                                                 

Balance, January 1, 2013

   $ 18          $     1,233          $ 20          $ (4)         $ (732)           $ 143          $ 678      

Other comprehensive income (loss) before reclassifications, after tax of $(3), $346, $(2), $3, $0 and $0

     6            (638)           6            (4)              (74)           (704)     

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $3, $6, $0, $(5) and $0

        (9)           (11)           (2)           9                 (13)     

 

 

Other comprehensive income (loss)

     6            (647)           (5)           (6)           9              (74)           (717)     

Issuance of equity securities by subsidiary

                 2                 2      

Amounts attributable to noncontrolling interests

     (1)           64               3               8            74      

 

 

Balance, June 30, 2013

   $     23          $ 650          $     15          $     (7)         $       (721)           $     77          $     37      

 

 

Balance, January 1, 2014

   $ 23          $ 622          $ (3)         $ (4)         $ (432)           $ 133          $ 339      

Transfer to net assets of discontinued operations

     (5)           (15)           20                     -      

Other comprehensive income before reclassifications, after tax of $(7), $(281), $(5), $(3), $0 and $0

     14            521            5            5               36            581      

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $8, $(5), $1, $26 and $0

        (14)           10            (2)           (54)                (60)     

 

 

Other comprehensive income (loss)

     14            507            15            3            (54)             36            521      

Amounts attributable to noncontrolling interests

     (2)           (52)           (2)           (2)           8              (3)           (53)     

 

 

Balance, June 30, 2014

   $ 30          $ 1,062          $ 30          $ (3)         $ (478)           $ 166          $ 807      

 

 

 

31


Table of Contents

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

 

Major Category of AOCI    Affected Line Item

 

OTTI gains (losses)

  

Investment gains (losses)

Unrealized gains (losses) on investments

  

Investment gains (losses)

Unrealized gains (losses) and cash flow hedges related to discontinued operations

  

Discontinued operations, net

Cash flow hedges

  

Other revenues and Contract drilling expenses

Pension liability

  

Other operating expenses

Subsidiary Equity Transactions

Diamond Offshore repurchased 1.9 million shares of its common stock at an aggregate cost of $88 million during the six months ended June 30, 2014. The Company’s percentage ownership interest in Diamond Offshore increased as a result of these repurchases, from 50.4% to 51.1%. The repurchase price of the shares exceeded the Company’s carrying value, resulting in a decrease to Additional paid-in capital of $8 million.

Treasury Stock

The Company repurchased 4.5 million and 4.0 million shares of Loews common stock at aggregate costs of $195 million and $177 million during the six months ended June 30, 2014 and 2013.

10.  Benefit Plans

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

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

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

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

The components of net periodic benefit cost are as follows:

 

     Pension Benefits         
  

 

 

 
               Three Months Ended      Six Months Ended         
               June 30,      June 30,         
  

 

 

 
               2014      2013      2014      2013         

 

 
(In millions)                            

Service cost

         $     3              $     6              $     8              $     12                  

Interest cost

     37                33                74                67                  

Expected return on plan assets

     (52)               (50)               (105)               (99)                 

Amortization of unrecognized net loss

     8                14                15                28                  

Regulatory asset decrease

     1                   1             

 

 

Net periodic benefit cost

         $ (3)             $ 3              $ (7)             $ 8                  

 

 

 

32


Table of Contents
     Other Postretirement Benefits         
  

 

 

 
               Three Months Ended      Six Months Ended         
               June 30,      June 30,         
  

 

 

 
               2014      2013      2014      2013         

 

 
(In millions)                            

Interest cost

         $     1              $     1              $     2              $       2                  

Expected return on plan assets

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

Amortization of unrecognized prior service benefit

     (7)               (7)               (13)               (13)                 

Curtailment gain

     (86)                  (86)            

 

 

Net periodic benefit cost

         $ (93)             $ (7)             $ (99)             $ (13)                 

 

 

In the second quarter of 2014, CNA eliminated certain postretirement medical benefits associated with the CNA Health and Group Benefits Program. This change is a negative plan amendment and also resulted in an $86 million curtailment gain which is included in Other operating expenses in the Consolidated Condensed Statements of Income. In connection with the plan amendment, CNA remeasured the plan benefit obligation which resulted in a decrease to the discount rate used to determine the benefit obligation from 3.6% to 3.1%.

11.  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”), 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 newbuild rigs which are under construction and one rig being constructed utilizing the hull of one of Diamond Offshore’s existing mid-water floaters. On June 30, 2014, Diamond Offshore’s drilling rigs were located offshore 11 countries in addition to the United States.

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

Loews Hotels operates a chain of 21 hotels, 20 of which are in the United States and one is in Canada.

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

The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. In addition, CNA does not maintain a distinct investment portfolio for every insurance segment, and accordingly, allocation of assets to each segment is not performed. Therefore, a significant portion of net investment income and investment gains (losses) are allocated based on each segment’s carried insurance reserves, as adjusted.

 

33


Table of Contents

The HighMount and CAC businesses are reported as discontinued operations in the Consolidated Condensed Statements of Income for the three and six months ended June 30, 2014 and 2013. See Notes 2 and 14 for further discussion of discontinued operations.

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

 

     Three Months Ended      Six Months Ended      
     June 30,      June 30,      
     2014      2013      2014      2013      
   
(In millions)                            

Revenues (a):

           

CNA Financial:

           

CNA Specialty

       $ 993        $ 954        $ 1,972        $ 1,910       

CNA Commercial

     1,027          1,104          2,068          2,205       

Life & Group Non-Core

     316          303          647          618       

Other

     104          89          216          172       

 

 

Total CNA Financial

     2,440          2,450          4,903          4,905       

Diamond Offshore

     701          760          1,411          1,492       

Boardwalk Pipeline

     295          304          652          633       

Loews Hotels

     112          101          217          195       

Corporate and other

     45                  98          9       

 

 

Total

       $       3,593        $       3,616        $ 7,281        $ 7,234       

 

 

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

           

CNA Financial:

           

CNA Specialty

       $ 269        $ 220        $ 481        $ 435       

CNA Commercial

     80          161          207          359       

Life & Group Non-Core

     (23)         (84)         (39)         (107)      

Other

     39          (25)         17          (65)      

 

 

Total CNA Financial

     365          272          666          622       

Diamond Offshore

     112          257          280          462       

Boardwalk Pipeline

     54          67          77          166       

Loews Hotels

                     14          2       

Corporate and other

             (32)         23          (49)      

 

 

Total

       $ 546        $ 566        $       1,060        $       1,203       

 

 

Net income (loss) (a):

           

CNA Financial:

           

CNA Specialty

       $ 160        $ 129        $ 288        $ 257       

CNA Commercial

     48          94          125          209       

Life & Group Non-Core

             (36)         13          (36)      

Other

     21          (15)                 (40)      

 

 

Total CNA Financial

     235          172          435          390       

Diamond Offshore

     42          87          111          169       

Boardwalk Pipeline

     17          22          (1)         55       

Loews Hotels

                             1       

Corporate and other

             (21)         15          (32)      

 

 

Income from continuing operations

     303          261          568          583       

Discontinued operations, net

     (187)                 (393)         (72)      

 

 

Total

       $ 116        $ 269        $ 175        $ 511       

 

 

 

34


Table of Contents
(a)

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

 

     Three Months Ended      Six Months Ended      
     June 30,      June 30,      
  

 

 

 
     2014      2013      2014      2013      

 

 

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

           

CNA Financial:

           

CNA Specialty

     $ (5)       $ (6)       $ 7       $ (3)      

CNA Commercial

     (7)         (12)         5         (8)      

Life & Group Non-Core

     (4)            12         9       

Other

                     4         7       

 

 

Total

     $         (14)       $         (14)       $         28       $         5       

 

 

Net income (loss):

           

CNA Financial:

           

CNA Specialty

     $ (3)       $ (3)       $ 4       $ (1)      

CNA Commercial

     (5)         (6)         2         (4)      

Life & Group Non-Core

     (3)            6         6       

Other

                     3         3       

 

 

Total

     $ (9)       $ (8)       $ 15       $ 4       

 

 

12.  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.

13.  Commitments and Contingencies

CNA Financial

In the course of selling business entities and assets to third parties, CNA has agreed to indemnify purchasers for losses arising out of breaches of representation and warranties with respect to the business entities or assets being sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such indemnification agreements may include provisions that survive indefinitely. As of June 30, 2014, the aggregate amount of quantifiable indemnification agreements in effect for sales of business entities, assets and third party loans was $699 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 June 30, 2014, CNA had outstanding unlimited indemnifications in connection with the sales of certain of its business entities or assets that included tax liabilities arising prior to a purchaser’s ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. 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.

Diamond Offshore

In July of 2014, Diamond Offshore was notified by Petróleo Brasileiro S.A., (“Petrobras”) that it is currently challenging assessments by Brazilian tax authorities of withholding taxes associated with the provision of drilling rigs for its operations in Brazil during the years 2008 and 2009. If Petrobras is ultimately assessed such withholding taxes, it will seek reimbursement from Diamond Offshore for the portion allocable to its drilling rigs. Diamond Offshore disputes any basis for Petrobras to obtain such reimbursement and has notified Petrobras of its position and intends to pursue all legal remedies available to defend itself. However, if Diamond Offshore’s position is not sustained, the amount of such reimbursement could be material.

 

35


Table of Contents

14. Discontinued Operations

As discussed in Note 2, HighMount and the CAC business are classified and presented as discontinued operations.

The Consolidated Condensed Statements of Income include discontinued operations of HighMount for the three and six months ended June 30, 2014 and 2013, as follows:

 

     Three Months Ended      Six Months Ended      
     June 30,      June 30,      
  

 

 

 
     2014      2013      2014      2013      

 

 
(In millions)                            

Revenues:

           

Other revenue, primarily operating

     $       46        $         66        $     101        $     134       

 

 

Total

     46          66          101          134       

 

 

Expenses:

           

Other operating expenses

           

Impairment of natural gas and oil properties

           29          145       

Operating

     56          53          111          110       

Interest

                             9       

 

 

Total

     59          57          145          264       

 

 

Income (loss) before income tax

     (13)                 (44)         (130)      

Income tax (expense) benefit

     (12)         (4)         (1)         47       

 

 

Results of discontinued operations, net of income tax

     (25)                 (45)         (83)      

Impairment loss, net of tax benefit of $92

     (167)            (167)      

 

 

Income (loss) from discontinued operations

     $ (192)       $       $ (212)       $ (83)      

 

 

The Consolidated Condensed Statements of Income include discontinued operations of the CAC business for the three and six months ended June 30, 2014 and 2013, as follows:

 

     Three Months Ended      Six Months Ended      
     June 30,      June 30,      
  

 

 

 
     2014      2013      2014      2013      

 

 
(In millions)                            

Revenues:

           

Net investment income

     $       39        $         44        $       80        $       86       

Investment gains

                        5       

Other

        (1)         

 

 

Total revenues

     $ 40        $ 43        $ 82        $ 91       

 

 

Expenses:

           

Insurance claims and policyholders’ benefits

     32          36          63          69       

Other operating expenses

                             2       

 

 

Total

     33          37          65          71       

 

 

Income before income tax

                     17          20       

Income tax expense

     (1)         (2)         (4)         (7)      

 

 

Results of discontinued operations, net of income tax

                     13          13       

Impairment loss, net of tax benefit of $41

           (214)      

Amounts attributable to noncontrolling interests

     (1)         (1)         20          (2)      

 

 

Income (loss) from discontinued operations

     $       $       $ (181)       $ 11       

 

 

 

36


Table of Contents

The following table presents the assets and liabilities reported as discontinued operations as of June 30, 2014:

 

     CNA      HighMount      Eliminations      Total      

 

 
(In millions)                            

Assets:

           

Investments, including cash

   $ 2,845        $ 25           $ 2,870       

Receivables

     811          38        $ (16)         833       

Property, plant and equipment

        1,014             1,014       

Deferred income taxes

        552          (552)         -       

Other assets

     46          11             57       

Separate account business

     146                146       

 

 

Assets of discontinued operations

     3,848          1,640          (568)         4,920       

Less: Impairment of carrying value

     (255)         (259)            (514)      

 

 

Total assets of discontinued operations

   $     3,593        $     1,381        $     (568)       $     4,406       

 

 

Liabilities:

           

Insurance reserves

   $ 3,109              $ 3,109       

Short term debt

      $ 480             480       

Other liabilities

     88          123             211       

Separate account business

     146                146       

 

 

Total liabilities of discontinued operations

   $ 3,343        $ 603        $       $ 3,946       

 

 

The following table presents the assets and liabilities of HighMount reported as discontinued operations as of December 31, 2013:

 

     HighMount      Eliminations      Total      

 

 
(In millions)                     

Assets:

        

Investments, including cash

   $ 29           $ 29       

Receivables

     143        $ (120)         23       

Property, plant and equipment

     974             974       

Deferred income taxes

     517          (517)         -       

Other assets

     15             15       

 

 

Total assets of discontinued operations

   $     1,678        $     (637)       $       1,041       

 

 

Liabilities:

        

Short term debt

   $ 21           $ 21       

Long term debt

     481             481       

Other liabilities

     130             130       

 

 

Total liabilities of discontinued operations

   $ 632        $       $ 632       

 

 

15. Consolidating Financial Information

The following schedules present the Company’s consolidating balance sheet information at June 30, 2014 and December 31, 2013, and consolidating statements of income information for the three and six months ended June 30, 2014 and 2013. These schedules present the individual subsidiaries of the Company and their contribution to the Consolidated Condensed Financial Statements. Amounts presented will not necessarily be the same as those in the individual financial statements of the Company’s subsidiaries due to adjustments for purchase accounting, income taxes and noncontrolling interests. In addition, many of the Company’s subsidiaries use a classified balance sheet which also leads to differences in amounts reported for certain line items.

The Corporate and Other column primarily reflects the parent company’s investment in its subsidiaries, invested cash portfolio, corporate long term debt and assets and liabilities of discontinued operations of HighMount. 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.

 

37


Table of Contents

Loews Corporation

Consolidating Balance Sheet Information

 

     CNA      Diamond            Boardwalk      Loews            Corporate                
June 30, 2014    Financial      Offshore            Pipeline      Hotels            and Other      Eliminations      Total      

 

 
(In millions)                                                 

Assets:

                    

Investments

   $ 46,080       $ 1,315          $ 107       $ 5,449              $ 52,951        

Cash

     204         16       $ 44             2         11                277        

Receivables

     7,674         575         84             35         95           $ (22)            8,441        

Property, plant and equipment

     271         6,060         7,319             442         41