FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

[X]

  

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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           (I.R.S. Employer   
incorporation or organization)         Identification No.)

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

(Address of principal executive offices) (Zip Code)

(212) 521-2000

(Registrant’s telephone number, including area code)

NOT APPLICABLE

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

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

 

  Yes        X            No                     

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

 

  Yes        X         No                       Not Applicable                     

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

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

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

 

  Yes                        No        X         

 

Class

         

Outstanding at October 27, 2014

Common stock, $0.01 par value       374,144,134 shares

 

 

 


Table of Contents

INDEX

 

    

Page

No.

 

Part I. Financial Information

  

Item 1. Financial Statements (unaudited)

  

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

     3   

Consolidated Condensed Statements of Income
Three and nine months ended September 30, 2014 and 2013

     4   

Consolidated Condensed Statements of Comprehensive Income
Three and nine months ended September  30, 2014 and 2013

     5   

Consolidated Condensed Statements of Equity
Nine months ended September 30, 2014 and 2013

     6   

Consolidated Condensed Statements of Cash Flows
Nine months ended September 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

     43   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     72   

Item 4. Controls and Procedures

     72   

Part II. Other Information

     73   

Item 1. Legal Proceedings

     73   

Item 1A. Risk Factors

     73   

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

     73   

Item 6. Exhibits

     74   

 

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

     September 30,    December 31,
      2014    2013
(Dollar amounts in millions, except per share data)          

Assets:

         

Investments:

         

Fixed maturities, amortized cost of $37,631 and $39,426

     $ 40,804             $ 41,320      

Equity securities, cost of $765 and $881

       754               871      

Limited partnership investments

       3,658               3,420      

Other invested assets

       702               562      

Short term investments

       6,726               6,772      

Total investments

       52,644               52,945      

Cash

       637               294      

Receivables

       8,185               9,338      

Property, plant and equipment

       14,411               13,524      

Goodwill

       353               357      

Assets of discontinued operations

            1,041      

Other assets

       1,672               1,635      

Deferred acquisition costs of insurance subsidiaries

       627               624      

Separate account business

                  181      

Total assets

     $ 78,529             $ 79,939      
   

Liabilities and Equity:

         

Insurance reserves:

         

Claim and claim adjustment expense

     $ 23,475             $ 24,089      

Future policy benefits

       8,890               10,471      

Unearned premiums

       3,703               3,718      

Policyholders’ funds

       27               116      

Total insurance reserves

       36,095               38,394      

Payable to brokers

       663               134      

Short term debt

       850               819      

Long term debt

       10,051               9,525      

Deferred income taxes

       1,030               716      

Liabilities of discontinued operations

            632      

Other liabilities

       4,724               4,632      

Separate account business

                  181      

Total liabilities

       53,413               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 – 387,493,404 and 387,210,096 shares

       4               4      

Additional paid-in capital

       3,613               3,607      

Retained earnings

       15,817               15,508      

Accumulated other comprehensive income

       638               339      
       20,072               19,458      

Less treasury stock, at cost (9,571,870 shares)

       (415)                 

Total shareholders’ equity

       19,657               19,458      

Noncontrolling interests

       5,459               5,448      

Total equity

       25,116               24,906      

Total liabilities and equity

     $       78,529             $       79,939      
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended   Nine Months Ended
     September 30,   September 30,
      2014   2013   2014   2013
(In millions, except per share data)                 

Revenues:

                

Insurance premiums

     $ 1,810       $ 1,825       $ 5,427       $ 5,389      

Net investment income

       451         605         1,625         1,739      

Investment gains (losses):

                

Other-than-temporary impairment losses

       (10 )       (15 )       (17 )       (49)     

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

                 (1 )                 (1)     

Net impairment losses recognized in earnings

       (10 )       (16 )       (17 )       (50)     

Other net investment gains

       47         18         82         57      

Total investment gains

       37         2         65         7      

Contract drilling revenues

       728         691         2,063         2,136      

Other revenues

       497         474         1,624         1,560      

Total

       3,523         3,597         10,804         10,831      

Expenses:

                

Insurance claims and policyholders’ benefits

       1,354         1,378         4,241         4,259      

Amortization of deferred acquisition costs

       332         341         996         1,004      

Contract drilling expenses

       400         420         1,165         1,164      

Other operating expenses

       977         777         2,634         2,309      

Interest

       121         105         369         316      

Total

       3,184         3,021         9,405         9,052      

Income before income tax

       339         576         1,399         1,779      

Income tax expense

       (99 )       (155 )       (347 )       (478)     

Income from continuing operations

       240         421         1,052         1,301      

Discontinued operations, net

       29         (37 )       (384 )       (107)     

Net income

       269         384         668         1,194      

Amounts attributable to noncontrolling interests

       (61 )       (102 )       (285 )       (401)     

Net income attributable to Loews Corporation

     $ 208       $ 282       $ 383       $ 793      
   

Net income attributable to Loews Corporation:

                

Income from continuing operations

     $ 179       $ 318       $ 747       $ 901      

Discontinued operations, net

       29         (36 )       (364 )       (108)     

Net income

     $ 208       $ 282       $ 383       $ 793      
   

Basic net income per share:

                

Income from continuing operations

     $ 0.47       $ 0.82       $ 1.94       $ 2.32      

Discontinued operations, net

       0.08         (0.09 )       (0.94 )       (0.28)     

Net income

     $ 0.55       $ 0.73       $ 1.00       $ 2.04      
   

Diluted net income per share:

                

Income from continuing operations

     $ 0.47       $ 0.82       $ 1.94       $ 2.31      

Discontinued operations, net

       0.08         (0.09 )       (0.94 )       (0.28)     

Net income

     $ 0.55       $ 0.73       $ 1.00       $ 2.03      
   

Dividends per share

     $     0.0625       $     0.0625       $     0.1875       $     0.1875      
   

Weighted average shares outstanding:

                

Shares of common stock

       380.59         387.26         384.53         389.13      

Dilutive potential shares of common stock

       0.60         0.88         0.66         0.83      

Total weighted average shares outstanding assuming dilution

       381.19         388.14         385.19         389.96      
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Table of Contents

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
      2014     2013     2014     2013  
(In millions)                         

Net income

   $ 269      $ 384      $ 668      $ 1,194        

Other comprehensive income (loss), after tax

        

Changes in:

        

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

     1        (3     15        3        

Net other unrealized gains (losses) on investments

     (83     (70     424        (717)       

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

     (82     (73     439        (714)       

Discontinued operations

     (34     (8     (19     (13)       

Unrealized gains (losses) on cash flow hedges

     (4     5        (1     (1)       

Pension liability

     2        3        (52     12        

Foreign currency

     (73     56        (37     (18)       

Other comprehensive income (loss)

      (191     (17     330        (734)       

Comprehensive income

     78        367        998        460        

Amounts attributable to noncontrolling interests

     (39      (102      (316      (327)       

Total comprehensive income attributable to Loews Corporation

   $ 39      $ 265      $ 682      $ 133        
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF EQUITY

(Unaudited)

 

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

Balance, January 1, 2013

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

Net income

     1,194                  793                  401        

Other comprehensive loss

     (734)                    (660)                (74)       

Dividends paid

     (444)                 (73)                 (371)       

Issuance of equity securities by subsidiary

     337               51               2                 284        

Purchase of Loews treasury stock

     (218)                       (218)        

Issuance of Loews common stock

     4               4                  

Stock-based compensation

     12               (1)                    13        

Other

     (6)                    (1)           (1)                             (4)       

Balance, September 30, 2013

   $         24,821          $                 4             $       3,648          $       15,911          $ 20            $ (228)         $ 5,466        
   

Balance, January 1, 2014

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

Net income

     668                  383                  285        

Other comprehensive income

     330                     299                 31        

Dividends paid

     (333)                 (72)                 (261)       

Purchases of subsidiary stock from

                    

noncontrolling interests

     (83)              (8)                    (75)       

Purchases of Loews treasury stock

     (415)                               (415)        

Issuance of Loews common stock

     5               5                  

Stock-based compensation

     19               9                     10        

Other

     19                              (2)                             21        

Balance, September 30, 2014

   $ 25,116          $ 4             $ 3,613          $ 15,817          $ 638            $ (415)         $ 5,459        
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Nine Months Ended September 30    2014     2013  

(In millions)

    

Operating Activities:

    

Net income

   $ 668      $ 1,194        

Adjustments to reconcile net income to net cash provided by operating activities, net

     1,491        925        

Changes in operating assets and liabilities, net:

    

Receivables

     571        146        

Deferred acquisition costs

     14        (23)       

Insurance reserves

     (222     (166)       

Other assets

     (127     (64)       

Other liabilities

     (152     215        

Trading securities

     (147     (898)       

Net cash flow operating activities

     2,096        1,329        

Investing Activities:

    

Purchases of fixed maturities

     (7,457     (8,205)       

Proceeds from sales of fixed maturities

     4,005        4,830        

Proceeds from maturities of fixed maturities

     2,901        2,496        

Purchases of equity securities

     (44     (61)       

Proceeds from sales of equity securities

     23        82        

Purchases of limited partnership investments

     (218     (263)       

Proceeds from sales of limited partnership investments

     133        187        

Purchases of property, plant and equipment

     (1,595     (1,307)       

Acquisitions

     (180     (235)       

Dispositions

     1,030        135        

Change in short term investments

     489        611        

Other, net

     (52     (135)       

Net cash flow investing activities

     (965     (1,865)       

Financing Activities:

    

Dividends paid

     (72     (73)       

Dividends paid to noncontrolling interests

     (261     (371)       

Purchases of subsidiary stock from noncontrolling interests

     (88  

Purchases of Loews treasury stock

     (396     (228)       

Issuance of Loews common stock

     5        4        

Proceeds from sale of subsidiary stock

     4        370        

Principal payments on debt

           (1,250           (1,058)       

Issuance of debt

     1,259        1,953        

Other, net

     14        (29)       

Net cash flow financing activities

     (785     568        

Effect of foreign exchange rate on cash

     (3     (3)       

Net change in cash

     343        29        

Cash, beginning of period

     294        228        

Cash, end of period

   $ 637      $ 257        
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.  Basis of Presentation

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

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

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 2.6 million, 1.4 million, 2.2 million and 1.4 million shares were not included in the diluted weighted average shares amounts for the three and nine months ended September 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.

 

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2.  Acquisitions and Divestitures

Continental Assurance Company (“CAC”) – On August 1, 2014, CNA completed the sale of the common stock of CAC. The sale price is subject to a customary post-closing review by the purchaser. 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 nine months ended September 30, 2014 and 2013.

In connection with the sale of CAC, CNA entered into a 100% coinsurance agreement on a separate small block of annuity business outside of CAC. The coinsurance agreement required the transfer of assets with a book value equal to the ceded reserves on the inception date of the contract. Because a substantial portion of the assets supporting these liabilities are held in trust for the benefit of the original cedant, those assets were transferred on a funds withheld basis. Under this approach CNA maintains legal ownership of the assets, but the investment income and realized gains and losses on those assets inure to the reinsurer. As a result, the $31 million (after tax and noncontrolling interests) difference between market value and book value of the funds withheld assets at the coinsurance contract’s inception was recognized in Other operating expenses.

HighMount – In May of 2014, the Company announced that HighMount Exploration & Production LLC (“HighMount”), its natural gas and oil exploration and production subsidiary, was pursuing strategic alternatives, including a potential sale of the business. 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. On August 7, 2014, the Company entered into an agreement to sell HighMount to privately held affiliates of EnerVest, Ltd. and on September 30, 2014, HighMount was sold for net proceeds of $794 million, subject to customary closing adjustments. HighMount’s bank debt of $480 million was repaid from proceeds of the sale. In the third quarter of 2014, the Company adjusted the previously recognized impairment and reduced the charge by $60 million ($30 million after tax) based on the actual sales price.

See Note 15 for further discussion of discontinued operations.

Evangeline Pipeline System – In October of 2014, Boardwalk Pipeline acquired Chevron Petrochemical Pipeline, LLC, which owns the Evangeline ethylene pipeline system for $295 million in cash, subject to customary adjustments. The purchase price was funded through borrowings under Boardwalk Pipeline’s revolving credit facility. As of September 30, 2014, Boardwalk Pipeline had recorded a $30 million deposit related to this transaction.

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. (“Williams”) to develop the Bluegrass Project. In the first quarter of 2014, the Company expensed the previously capitalized project costs related to the development process due to a lack of customer commitments, 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. In the third quarter of 2014, Boardwalk Pipeline and Williams agreed to dissolve the Bluegrass project entities.

Loews Hotels – In 2014, Loews Hotels has acquired three properties. In July of 2014, Loews Hotels purchased the Loews Chicago O’Hare Hotel, a 556 guestroom hotel, and the Loews Minneapolis Hotel, a 251 guestroom hotel, and in October of 2014, Loews Hotels purchased the Loews Ventana Canyon in Tucson, Arizona, a 398 guestroom hotel, which had been operated by Loews Hotels under a management agreement, for a total cost of approximately $230 million, funded with a combination of cash and property-level debt.

In addition, 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. Loews Hotels also has commitments of approximately $170 million for the Loews Chicago Hotel, a 400 guestroom hotel being developed and planned to open in early 2015 and approximately $60 million for the development, through a joint venture, of the Loews Sapphire Falls Resort at Universal Orlando, Florida, a 1,000 guestroom hotel, scheduled to open in late 2016.

 

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3.  Investments

Net investment income is as follows:

 

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

 

 

 
    2014     2013     2014     2013  

 

 
(In millions)                        

Fixed maturity securities

  $ 453      $ 461      $ 1,356      $ 1,372        

Short term investments

    1        2        3        5        

Limited partnership investments

    26        115        229        345        

Equity securities

    2        3        7        9        

Income (loss) from trading portfolio (a)

    (24     30        46        28        

Other

    7        7        25        19        

 

 

Total investment income

    465        618        1,666        1,778        

Investment expenses

    (14     (13     (41     (39)       

 

 

Net investment income

  $         451      $         605      $         1,625      $       1,739        

 

 

(a)    Includes net unrealized gains (losses) related to changes in fair value on trading securities still held of $(19), $25, $46 and $(22) for the three and nine months ended September 30, 2014 and 2013.

        

Investment gains (losses) are as follows:

  

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

 

 

 
    2014     2013     2014     2013  

 

 

(In millions)

       

Fixed maturity securities

  $ 39      $ 2      $ 58      $ 22        

Equity securities

    (3     (2     2        (17)       

Derivative instruments

      (1     1        (4)       

Short term investments and other

    1        3        4        6        

 

 

Investment gains (a)

  $ 37      $ 2      $ 65      $ 7        

 

 

 

(a)

Includes gross realized gains of $52, $50, $130 and $129 and gross realized losses of $16, $50, $70 and $124 on available-for-sale securities for the three and nine months ended September 30, 2014 and 2013.

 

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

 

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

 

 

 
    2014     2013     2014     2013  

 

 
(In millions)                        

Fixed maturity securities available-for-sale:

       

Corporate and other bonds

      $        $        $        $ 16       

Asset-backed:

       

Residential mortgage-backed

                         5       

Other asset-backed

                    2       

 

 

Total asset-backed

                         7       

 

 

Total fixed maturities available-for-sale

           11         14         23       

 

 

Equity securities available-for-sale:

       

Common stock

                         5       

Preferred stock

               22       

 

 

Total equity securities available-for-sale

                         27       

 

 

Net OTTI losses recognized in earnings

      $       10         $       16         $       17         $       50       

 

 

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

 

September 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

    $ 17,480        $ 1,704          $ 40            $19,144         

States, municipalities and political subdivisions

    11,217        1,295            53            12,459         

Asset-backed:

         

Residential mortgage-backed

    4,972        187            13            5,146          $ (54)       

Commercial mortgage-backed

    2,079        87            8            2,158            (2)       

Other asset-backed

    1,222        13            5            1,230         

 

 

Total asset-backed

    8,273        287            26            8,534            (56)       

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

    25        5              30         

Foreign government

    456        16            1            471         

Redeemable preferred stock

    39        3              42         

 

 

Fixed maturities available- for-sale

    37,490        3,310            120            40,680            (56)       

Fixed maturities, trading

    141          17            124         

 

 

Total fixed maturities

    37,631        3,310            137            40,804            (56)       

 

 

Equity securities:

         

Common stock

    35        11              46         

Preferred stock

    162        4            1            165         

 

 

Equity securities available-for-sale

    197        15            1            211            -        

Equity securities, trading

    568        87            112            543         

 

 

Total equity securities

    765        102            113            754            -        

 

 

Total

    $ 38,396        $ 3,412          $ 250            $41,558          $ (56)       

 

 

 

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

 

 
(In millions)                              

Fixed maturity securities:

         

Corporate and other bonds

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

States, municipalities and political subdivisions

    11,281        548            272            11,557     

Asset-backed:

         

Residential mortgage-backed

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

Commercial mortgage-backed

    1,995        90            22            2,063        (3)         

Other asset-backed

    945        13            3            955     

 

 

Total asset-backed

    7,880        226            117            7,989        (40)         

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

    139        6            1            144     

Foreign government

    531        15            3            543     

Redeemable preferred stock

    92        10              102     

 

 

Fixed maturities available-for-sale

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

Fixed maturities, trading

    151          28            123     

 

 

Total fixed maturities

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

 

 

Equity securities:

         

Common stock

    36        9              45     

Preferred stock

    143        1            4            140     

 

 

Equity securities available-for-sale

    179        10            4            185        -          

Equity securities, trading

    702        119            135            686     

 

 

Total equity securities

    881        129            139            871        -          

 

 

Total

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

 

 

The net unrealized gains on investments included in the tables above are recorded as a component of Accumulated other comprehensive income (“AOCI”). When presented in AOCI, these amounts are net of tax and noncontrolling interests and any required Shadow Adjustments. At September 30, 2014 and December 31, 2013, the net unrealized gains on investments included in AOCI were net of Shadow Adjustments of $873 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 are 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  
 

 

 

 
September 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

      $ 1,726            $ 23        $ 402        $ 17        $ 2,128        $ 40     

States, municipalities and political subdivisions

    176            2          435          51          611          53     

Asset-backed:

           

Residential mortgage-backed

    208            3          254          10          462          13     

Commercial mortgage-backed

    506            4          112          4          618          8     

Other asset-backed

    507            4          13          1          520          5     

 

 

Total asset-backed

    1,221            11          379          15          1,600          26     

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

           5            5       

Foreign government

    35              8          1          43          1     

 

 

Total fixed maturity securities

    3,158            36          1,229          84          4,387          120     

Preferred stock

    32            1          1            33          1     

 

 

Total

      $     3,190            $   37        $   1,230        $     84        $   4,420        $     121     

 

 

 

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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                          269           3      
   

Total asset-backed

      2,202          54          343             63            2,545           117      

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

      13                          13           1      

Foreign government

      111                          111           3      
   

Total fixed maturity securities

      9,169          384          544             144            9,713           528      

Preferred stock

      87                          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 not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are primarily attributable to changes in interest rates and credit spreads, market illiquidity and other factors. The Company has no current intent to sell securities with unrealized losses, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at September 30, 2014.

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

 

     Three Months Ended    Nine Months Ended
     September 30,    September 30,
          2014             2013            2014           2013  
(In millions)                    

Beginning balance of credit losses on fixed maturity securities

         $       66           $       89         $       74         $       95     

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

                          2     

Reductions for securities sold during the period

       (2)            (7)          (7)          (14)    

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

         $ 64           $ 83         $ 64         $ 83     
   

 

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Contractual Maturity

The following table summarizes available-for-sale fixed maturity securities by contractual maturity at September 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.

 

      September 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

   $ 2,329           $ 2,368          $ 2,420           $ 2,455       

Due after one year through five years

     8,888             9,455            9,496             10,068       

Due after five years through ten years

     12,446             12,951            11,667             11,954       

Due after ten years

     13,827             15,906            15,692             16,720       

Total

   $ 37,490           $ 40,680          $ 39,275           $ 41,197       
   

Investment Commitments

As of September 30, 2014, the Company had committed approximately $365 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 September 30, 2014, the Company had commitments to purchase or fund additional amounts of $140 million and sell $103 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.

 

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

 

September 30, 2014      Level 1          Level 2          Level 3            Total        
(In millions)                            

Fixed maturity securities:

           

Corporate and other bonds

   $ 33        $ 18,938        $ 173        $ 19,144      

States, municipalities and political subdivisions

        12,379          80          12,459      

Asset-backed:

           

Residential mortgage-backed

         4,986          160          5,146      

Commercial mortgage-backed

        2,061          97          2,158      

Other asset-backed

        588          642          1,230      

 

 

Total asset-backed

        7,635          899          8,534      

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

     27                     30      

Foreign government

     47          424             471      

Redeemable preferred stock

     30          12             42      

 

 

Fixed maturities available-for-sale

     137          39,391          1,152          40,680      

Fixed maturities, trading

        33          91          124      

 

 

Total fixed maturities

   $ 137        $ 39,424        $ 1,243        $ 40,804      

 

 

Equity securities available-for-sale

   $ 141        $ 53        $ 17        $ 211      

Equity securities, trading

     540                     543      

 

 

Total equity securities

   $ 681        $ 53        $ 20        $ 754      

 

 

Short term investments

   $ 6,047        $ 612           $ 6,659      

Other invested assets

     102          44             146      

Receivables

        19             19      

Life settlement contracts

         $ 86          86      

Payable to brokers

     (409)         (5)            (414)     

 

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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)    

 

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

 

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

Unrealized

Gains

(Losses)
    Recognized in    
Net Income

on Level

3 Assets and
Liabilities

 
    Balance,     Included in     Included in                       into     out of     Balance,     Held at  
2014   July 1     Net Income     OCI     Purchases     Sales     Settlements     Level 3     Level 3     September 30     September 30  
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

  $ 194         $ (1)        $ 4           $ (3)         $ (21)       $ 173       

States, municipalities and political subdivisions

    79           1                     80       

Asset-backed:

                   

Residential mortgage-backed

    185       $              (17)       $ 11            (20)         160       

Commercial mortgage-backed

    59                (2)         28             (21)         31              97       

Other asset-backed

    626                (4)         80             (25)           (36)         642       

 

 

Total asset-backed

    870                (6)         108         $         -          (63)         42            (56)         899        $ -                

 

 

Fixed maturities available-for-sale

    1,143                (6)         112             (66)         42            (77)         1,152       

Fixed maturities, trading

    91                       91       

 

 

Total fixed maturities

  $ 1,234       $      $ (6)       $ 112         $ -        $ (66)       $ 42          $ (77)       $ 1,243        $ -                

 

 

Equity securities available-for-sale

  $        $ (1)       $ 16                 $ 17       

Equity securities trading

               (1)                  3       

 

 

Total equity securities

  $      $      $ (1)       $ 15         $ -        $ -         $ -          $ -         $ 20        $ -                

 

 

Life settlement contracts

  $ 86       $            $ (1)           $ 86        $ 1                

Derivative financial instruments, net

                         -          (1)               

 

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

Unrealized

Gains

(Losses)
Recognized in    
Net Income

on Level

3 Assets and
Liabilities

 
    Balance,     Included in     Included in                       into     out of     Balance,     Held at  
2013   July 1     Net Income     OCI     Purchases     Sales     Settlements     Level 3     Level 3     September 30     September 30  
(In millions)                                                      

Fixed maturity securities:

                   

Corporate and other bonds

  $ 202       $ 1           $ 6        $       (6)        $ (8)        $ 17        $ (1)        $ 211       

States, municipalities and political subdivisions

    140         $ (3)              (15)            (27)          95       

Asset-backed:

                   

Residential mortgage-backed

    428           (20)          5            (21)            (22)          370        $ (1)               

Commercial mortgage-backed

    165         (1)          (2)          10            (1)            (14)          157       

Other asset-backed

    387           1           56            (6)            (5)          433          (1)               

 

 

Total asset-backed

    980         (1)          (21)          71          -           (28)          -          (41)          960          (2)               

Redeemable preferred stock

    25         (1)          1               (25)              -       

 

 

Fixed maturities available-for-sale

    1,347         (1)          (23)          77          (6)          (76)          17          (69)          1,266          (2)               

Fixed maturities, trading

    87         (8)              (1)                78          (8)               

 

 

Total fixed maturities

  $ 1,434       $ (9)        $ (23)        $ 77        $ (7)        $ (76)        $ 17        $ (69)        $ 1,344        $ (10)               

 

 

Equity securities available-for-sale

  $ 13       $ (2)        $ 2                   $ 13        $ (2)               

Equity securities trading

                         2       

 

 

Total equity securities

  $ 15       $ (2)        $ 2         $ -        $ -         $ -         $ -        $ -         $ 15        $ (2)               

 

 

Life settlement contracts

  $ 91       $ 3               $ (4)            $ 90       

Separate account business

                         2       

Derivative financial instruments, net

           2         $ (4)          $ (2)          (1)              -       

 

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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  
2014   January 1     Net Income     OCI     Purchases     Sales     Settlements     Level 3     Level 3     September 30     September 30  
(In millions)                                                      

Fixed maturity securities:

                   

Corporate and other bonds

  $ 204         $ 2           $ 30         $ (10)        $ (13)        $ 8         $ (48)        $ 173        

States, municipalities and political subdivisions

    71           1         $ 3           1           (10)            14             80        

Asset-backed:

                   

Residential mortgage-backed

    331           (22)          62           47           (174)          (57)          32           (59)          160        

Commercial mortgage-backed

    151           4           (2)          28           (60)          (23)          43           (44)          97        

Other asset-backed

    446           2             457           (111)          (115)            (37)          642         $ (1)             

 

 

Total asset-backed

    928           (16)          60           532           (345)          (195)          75           (140)          899           (1)             

 

 

Fixed maturities available-for-sale

    1,203           (13)          63           563           (365)            (208)          97           (188)          1,152           (1)             

Fixed maturities, trading

    80           11                       91           11              

 

 

Total fixed maturities

  $ 1,283         $ (2)        $ 63         $     563         $     (365)        $     (208)        $ 97         $     (188)        $     1,243         $ 10              

 

 

Equity securities available-for-sale

  $ 11         $ 3         $ (5)        $ 16         $ (8)              $ 17        

Equity securities trading

    8               1           (6)                3        

 

 

Total equity securities

  $ 19         $ 3         $ (5)        $ 17         $ (14)        $ -         $ -         $ -         $ 20         $ -              

 

 

Life settlement contracts

  $ 88         $ 23               $ (25)            $ 86         $ 3              

Separate account business

    1                     $ (1)          -        

Derivative financial instruments, net

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

 

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Table of Contents
         

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

(Losses)

                      Transfers     Transfers          

Unrealized

Gains

(Losses)
Recognized in    
Net Income

on Level

3 Assets and
Liabilities

 
    Balance,     Included in     Included in                       into     out of     Balance,     Held at  
2013   January 1     Net Income     OCI     Purchases     Sales     Settlements     Level 3     Level 3     September 30     September 30  
(In millions)                                                      

Fixed maturity securities:

                   

Corporate and other bonds

  $ 219         $ 2         $ (1)        $ 129         $ (96)        $ (34)        $ 43         $ (51)        $ 211         $ (2)             

States, municipalities and political subdivisions

    96           (3)          1           122           (79)          (20)          5           (27)          95        

Asset-backed:

                   

Residential mortgage-backed

    413           2           (21)          116           (10)          (53)          4           (81)          370           (3)             

Commercial mortgage-backed

    129             7           88             (10)          21           (78)          157        

Other asset-backed

    368           3           (1)          230           (132)          (30)            (5)          433           (2)             

 

 

Total asset-backed

    910           5           (15)          434           (142)          (93)          25           (164)          960           (5)             

Redeemable preferred stock

    26           (1)                (25)              -        

 

 

Fixed maturities available-for-sale

    1,251           3           (15)          685           (317)          (172)          73           (242)          1,266           (7)             

Fixed maturities, trading

    89           (7)              (4)                78           (7)             

 

 

Total fixed maturities

  $ 1,340         $ (4)        $ (15)        $ 685         $     (321)        $ (172)        $ 73         $ (242)        $ 1,344         $ (14)             

 

 

Equity securities available-for-sale

  $ 34         $ (22)        $ 2                 $ (1)        $ 13         $ (22)             

Equity securities trading

    7           (5)                      2           (5)             

 

 

Total equity securities

  $ 41         $ (27)        $ 2         $ -         $ -         $ -         $ -         $ (1)        $ 15         $ (27)             

 

 

Short term investments

  $ 6               $ (6)              $ -        

Other invested assets

    1                 (1)                -        

Life settlement contracts

    100         $ 14               $ (24)              90         $ (1)             

Separate account business

    2                         2        

Derivative financial instruments, net

    5           7         $ (6)        $ 1           (2)          (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

 

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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 September 30, 2014 there were no transfers between Level 1 and Level 2. During the nine months ended September 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 nine months ended September 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.

 

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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

Assets and liabilities of discontinued operations relate to HighMount, as discussed in Notes 2 and 15. These balances represent short term investments and derivative assets and liabilities, which are valued using the methodologies and inputs for these asset and liability types described above.

Significant Unobservable Inputs

The tables below present 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.

 

September 30, 2014    Fair Value      Valuation
Techniques
  

Unobservable

Inputs

  

Range

(Weighted

Average)

 

 

 
     (In millions)                   

Assets

           

Fixed maturity securities

     $ 95         Discounted cash flow    Credit spread      2% – 12% (3%)   

Equity securities

     18         Market approach    Private offering price      $13 – $4,388 per share   
              ($554 per share)   

Life settlement contracts

     86         Discounted cash flow    Discount rate risk premium      9%   
                 Mortality assumption    70% – 743% (193%)  
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%)   

 

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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.

 

     Carrying      Estimated Fair Value          
September 30, 2014    Amount          Level 1    Level 2      Level 3        Total    
(In millions)                                 

Financial Assets:

              

Other invested assets

   $ 556             $ 576       $ 576         

Financial Liabilities:

              

Short term debt

     850          $ 813         51         864         

Long term debt

     10,040            10,191         420         10,611         

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.

 

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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.

 

     September 30, 2014     December 31, 2013  

 

 
     Contractual/                   Contractual/                
     Notional      Estimated Fair Value     Notional      Estimated Fair Value  
     Amount      Asset      (Liability)     Amount      Asset      (Liability)  

 

 
(In millions)                                         

With hedge designation:

                

Foreign exchange:

                

Currency forwards – short

   $ 133          $ (4   $ 114       $ 2       $ (1

Without hedge designation:

                

Equity markets:

                

Options – purchased

     569       $ 18           1,561         41      

                  – written

     218            (18     729            (23

Equity swaps and warrants

                

                  – long

     12         4           17         9      

Interest rate risk:

                

Credit default swaps

                

– purchased protection

             50            (3

– sold protection

             25         

Foreign exchange:

                

Currency forwards – long

             55         

                                    – short

     181         7           113         

Currency options – long

     625         13              

                                 – short

     50                 

Embedded derivative on funds withheld liability

     185            (1        

Discontinued operations:

                

Interest rate risk:

                

Interest rate swaps

             300            (4

Commodities:

                

Forwards – short

             180         4         (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 September 30, 2014 and December 31, 2013.

In connection with the 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 2014 and a loss of $4 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 2014.

 

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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. Losses of $1 million for the three months ended September 30, 2013 and gains of $1 million and losses of $4 million for the nine months ended September 30, 2014 and 2013 were included in Investment gains (losses). Losses of $7 million and $17 million for the three months ended September 30, 2014 and 2013 and losses of $2 million and $33 million for the nine months ended September 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. Losses of $6 million and gains of $1 million were recognized in OCI related to these cash flow hedges for the three months ended September 30, 2014 and 2013. Gains of $2 million and losses of $6 million were recognized in OCI related to these cash flow hedges for the nine months ended September 30, 2014 and 2013. For the three months ended September 30, 2013, losses of $5 million were reclassified from AOCI into income. For the nine months ended September 30, 2014 and 2013, gains of $3 million and losses of $3 million were reclassified from AOCI into income. As of September 30, 2014, the estimated amount of net unrealized losses associated with these cash flow hedges that will be reclassified from AOCI into earnings during the next twelve months was $6 million. The net amounts recognized due to ineffectiveness were less than $1 million for the three and nine months ended September 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 $17 million and $42 million for the three months ended September 30, 2014 and 2013 and $147 million and $146 million for the nine months ended September 30, 2014 and 2013. Catastrophe losses in 2014 related primarily to U.S. weather-related events.

 

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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 September 30, 2014    CNA
Specialty
     CNA
Commercial
     Other          Total          

 

 
(In millions)                            

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

   $ (82)       $ 57            $ (1)       $ (26)         

Pretax (favorable) unfavorable premium development

     (2)         (1)                     3          

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (84)       $ 56            $       $ (23)         

 

 

Three Months Ended September 30, 2013

           

 

 

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

   $ (74)       $ (3)           $ (4)       $ (81)         

Pretax (favorable) unfavorable premium development

     (3)         7                      5          

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (77)       $ 4            $ (3)       $ (76)         

 

 

Nine Months Ended September 30, 2014

           

 

 

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

   $ (139)       $ 153            $       $ 23          

Pretax (favorable) unfavorable premium development

     (11)         (25)                     (30)         

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (150)       $ 128            $ 15        $ (7)         

 

 

Nine Months Ended September 30, 2013

           

 

 

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

   $ (130)       $ 13            $       $ (112)         

Pretax (favorable) unfavorable premium development

     (16)         (8)                     (16)         

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (146)       $ 5            $     13        $ (128)         

 

 

 

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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    
September 30,
     Nine Months Ended        
September 30,        
 
     2014        2013        2014        2013    

 

 
(In millions)                            

Medical professional liability

   $  13          $ 9          $ 15          $ (11)     

Other professional liability and management liability

     (9)           (4)           (73)           (28)     

Surety

     (79)           (76)           (78)           (74)     

Other

     (7)           (3)           (3)           (17)     

 

 

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

   $ (82)         $ (74)         $ (139)         $ (130)     

 

 

Three Months

2014

Unfavorable development for medical professional liability was primarily related to increased frequency of large medical products liability class action lawsuits in accident years 2012 and prior.

Favorable development for surety coverages was primarily due to lower than expected frequency of large losses in accident years 2012 and prior.

2013

Favorable development for surety coverages was primarily due to better than expected large loss emergence in accident years 2011 and prior.

Nine Months

2014

Unfavorable development for medical professional liability was primarily related to increased frequency of large medical products liability class action lawsuits in accident years 2012 and prior.

Favorable development for other professional liability and management liability was related to better than expected severity in accident years 2008 through 2011, including favorable outcomes on individual large claims.

Favorable development for surety coverages was primarily due to lower than expected frequency of large losses in accident years 2012 and prior.

2013

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

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 surety coverages was primarily due to better than expected large loss emergence in accident years 2011 and prior.

 

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

CNA Commercial

The following table and discussion provide further detail of the development recorded for the CNA Commercial segment. A significant amount of the unfavorable development for the nine months ended September 30, 2014 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    
September 30,    
     Nine Months Ended    
September 30,    
 
      2014        2013        2014        2013    
(In millions)                            

Commercial auto

   $ 12          $ 4          $ 52          $ 1      

General liability

     39            (18)           64            (24)     

Workers’ compensation

     24            26            74            96      

Property and other

     (18)           (15)           (37)           (60)     

 

 

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

   $ 57          $ (3)         $ 153          $ 13      

 

 

Three Months

2014

Overall, unfavorable development for general liability coverages was primarily related to higher than expected severity in accident years 2010, 2011 and 2013. Favorable development was recorded primarily related to lower than expected frequency of large losses in accident years 2005 through 2008.

Overall, unfavorable development for workers’ compensation was primarily related to increased medical severity in accident years 2010 and prior and higher than expected severity related to Defense Base Act (“DBA”) contractors in accident years 2010 through 2013. Favorable development of $26 million was recorded in accident years 1996 and prior related to the commutation of a workers’ compensation reinsurance pool.

Favorable development for property and other first-party coverages was recorded in accident years 2013 and prior, primarily related to fewer claims than expected and favorable individual claim settlements.

2013

Favorable development for general liability coverages was primarily related to better than expected loss emergence in accident years 2005 through 2007 and 2012.

Unfavorable development for workers’ compensation was primarily due to increased frequency and severity on claims related to DBA contractors in accident year 2012.

Favorable development for property and other coverages was primarily related to favorable loss emergence in non-catastrophe losses in accident years 2010 through 2012.

Nine Months

2014

Unfavorable development for commercial auto was primarily related to higher than expected frequency in accident years 2012 and 2013 and higher than expected severity for liability coverages in accident years 2009 through 2013.

Overall, unfavorable development for general liability was primarily related to higher than expected severity in accident years 2010, 2011 and 2013, including unfavorable development in accident year 2013 related to Small Business. Favorable development was recorded primarily related to lower than expected frequency of large losses in accident years 2005 through 2008.

 

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Overall, unfavorable development for workers’ compensation was primarily due to increased medical severity in accident years 2010 and prior, higher than expected severity related to DBA contractors in accident years 2010 through 2013 and the recognition of losses related to favorable premium development in accident year 2013. Favorable development of $26 million was recorded in accident years 1996 and prior related to the commutation of a workers’ compensation reinsurance pool.

Favorable development for property and other first-party coverages was recorded in accident years 2013 and prior, primarily related to fewer claims than expected and favorable individual claim settlements.

2013

Favorable development for general liability coverages was primarily related to better than expected loss emergence in accident years 2009 and prior and 2012.

Unfavorable development for workers’ compensation includes CNA’s 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. Additional unfavorable development was recorded in accident year 2012 related to increased frequency and severity on claims related to DBA contractors and in accident year 2010 due to higher than expected large losses and increased severity in the state of California.

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 in non-catastrophe losses in accident years 2010 through 2012.

7.  Impairment of Long-Lived Assets

In the third quarter of 2014, Diamond Offshore cold stacked a semisubmersible rig and expects to cold stack two additional rigs in the near term. Demand for offshore drilling rigs continues to decline and is exacerbated by an oversupply of rigs including newbuilds scheduled for delivery in 2014 and 2015. Due to these factors, among other things, Diamond Offshore plans to retire and scrap a number of rigs that are currently idle, as well as an additional rig upon completion of its contract term in March of 2015. As a result, Diamond Offshore performed an impairment analysis to determine whether the carrying amount of these assets was recoverable. Based on this analysis, an impairment loss, related to Diamond Offshore’s semisubmersible rigs, was recognized aggregating $109 million ($55 million after tax and noncontrolling interests) for the three and nine months ended September 30, 2014. This impairment loss was recorded within Other operating expenses on the Consolidated Condensed Statements of Income. At September 30, 2014, the fair value of these rigs amounted to $17 million. The fair value was determined through discussions and a nonbinding quote from a rig broker, and for the rig currently under contract using an internally developed income approach, which are Level 3 inputs of the fair value hierarchy.

8.  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 and continues to dispute the matter, believing 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 September 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 rigs operating in the United Kingdom (“U.K.”) under bareboat charter arrangements, which has caused Diamond Offshore’s expected tax expense for the full year of 2014 to increase by approximately $26 million.

 

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During the third quarter of 2014, Diamond Offshore reversed $36 million of reserves for uncertain tax positions, including $6 million for interest and $11 million for penalties, related to a favorable court decision in Brazil resulting in the closure of the 2004 and 2005 tax years, approval from Malaysian tax authorities for the settlement of tax liabilities and penalties for the years 2003 through 2008 and the expiration of the statute of limitations in Mexico for the 2008 tax year.

9.  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 September of 2014, Diamond Offshore repaid at maturity the entire $250 million principal amount of its 5.2% senior notes.

In October of 2014, Diamond Offshore entered into an agreement to increase its revolving credit facility by $500 million. The credit agreement provides for a $1.5 billion revolving credit facility for general corporate purposes, maturing in 2019. As of September 30, 2014, there were no borrowings under the revolving credit facility.

Loews Hotels

In August of 2014, Loews Hotels refinanced the indebtedness on the Miami Beach Hotel by extinguishing the existing $125 million 4.8% mortgage loan and entering into a new $300 million 4.1% mortgage loan due in September of 2024.

 

 

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10.  Shareholders’ Equity

Accumulated Other Comprehensive Income

The tables below display the changes in Accumulated other comprehensive income (“AOCI”) by component for the three and nine months ended September 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, July 1, 2013

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

Other comprehensive income (loss) before reclassifications, after tax of $1, $36, $(3), $0, $0 and $0

     (4)           (68)           8            1               56            (7)     

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $2, $8, $(1), $(5) and $0

     1            (2)           (16)           4            3               (10)     

 

 

Other comprehensive income (loss)

     (3)           (70)           (8)           5            3            56            (17)     

Amounts attributable to noncontrolling interests

     1            7               (2)              (6)           -      

 

 

Balance, September 30, 2013

   $       21          $       587          $ 7          $     (4)         $     (718)         $       127          $ 20      

 

 

Balance, July 1, 2014

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

Other comprehensive income (loss) before reclassifications, after tax of $(1), $52, $2, $2, $1 and $0

     1            (59)           (3)           (4)           (2)           (73)           (140)     

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $12, $21, $0, $(2) and $0

        (24)           (31)              4               (51)     

 

 

Other comprehensive income (loss)

     1            (83)           (34)           (4)           2            (73)           (191)     

Amounts attributable to noncontrolling interests

     1            8            4            2               7            22      

 

 

Balance, September 30, 2014

   $ 32          $ 987          $ -          $ (5)         $ (476)         $ 100          $ 638      

 

 

 

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                                               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 $(2), $382, $(5), $3, $0 and $0

     2            (706)           14            (3)              (18)           (711)     

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $5, $14, $(1), $(10) and $0

     1            (11)           (27)           2            12               (23)     

 

 

Other comprehensive income (loss)

     3            (717)           (13)           (1)           12            (18)           (734)     

Issuance of equity securities by subsidiary

                 2               2      

Amounts attributable to noncontrolling interests

        71               1               2            74      

 

 

Balance, September 30, 2013

   $       21          $       587          $ 7          $     (4)         $     (718)         $     127          $ 20      

 

 

Balance, January 1, 2014

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

Transfer to net assets of discontinued operations

     (5)           (15)               20                     -      

Other comprehensive income (loss) before reclassifications, after tax $(8), $(229), $(3), $(1), $1 and $0

     15            462            2            1            (2)           (37)           441      

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $20, $16, $1, $24 and $0

        (38)           (21)           (2)           (50)              (111)     

 

 

Other comprehensive income (loss)

     15            424            (19)           (1)           (52)           (37)           330      

Amounts attributable to noncontrolling interests

     (1)           (44)           2               8            4            (31)     

 

 

Balance, September 30, 2014

   $ 32          $ 987          $ -          $ (5)         $ (476)         $ 100          $ 638      

 

 

 

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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 nine months ended September 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 9.6 million and 4.9 million shares of Loews common stock at aggregate costs of $415 million and $218 million during the nine months ended September 30, 2014 and 2013.

11.  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      Nine Months Ended         
               September 30,      September 30,         
  

 

 

 
               2014      2013      2014      2013         

 

 
(In millions)                            

Service cost

         $     5              $     6              $     13              $     18                  

Interest cost

     37                34                111                101                  

Expected return on plan assets

     (52)               (49)               (157)               (148)                 

Amortization of unrecognized net loss

     7                12                22                40                  

Regulatory asset decrease

        4                1                4                  

 

 

Net periodic benefit cost

         $ (3)             $ 7              $ (10)             $ 15                  

 

 

 

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     Other Postretirement Benefits         
  

 

 

 
               Three Months Ended      Nine months ended           
               September 30,      September 30,         
  

 

 

 
               2014      2013      2014      2013           

 

 
(In millions)                            

Service cost

      $ 1                 $ 1                  

Interest cost

         $ 1                1              $ 3                3                  

Expected return on plan assets

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

Amortization of unrecognized net loss

        1                   1                  

Amortization of unrecognized prior service benefit

     (2)               (6)               (15)               (19)                 

Curtailment gain

           (86)            

 

 

Net periodic benefit cost

         $     (2)             $     (4)             $   (101)             $     (17)                 

 

 

In the second quarter of 2014, CNA eliminated certain postretirement medical benefits associated with the CNA Health and Group Benefits Program. This change was 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%.

12.  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 38 drilling rigs, excluding six mid-water rigs that Diamond Offshore plans to retire and scrap, and 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 September 30, 2014, Diamond Offshore’s drilling rigs were located offshore nine 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 14,625 miles of pipeline.

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

 

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significant portion of net investment income and investment gains (losses) are allocated based on each segment’s carried insurance reserves, as adjusted.

The HighMount and CAC businesses are reported as discontinued operations in the Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2014 and 2013. See Notes 2 and 15 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      Nine Months Ended      
     September 30,      September 30,      
     2014      2013      2014      2013      
   
(In millions)                            

Revenues (a):

           

CNA Financial:

           

CNA Specialty

   $ 987        $ 996        $ 2,959        $ 2,906       

CNA Commercial

     985          1,062          3,053          3,267       

Life & Group Non-Core

     343          300          990          918       

Other

     96          100          312          272       
   

Total CNA Financial

     2,411          2,458          7,314          7,363       

Diamond Offshore

     737          706          2,148          2,198       

Boardwalk Pipeline

     279          288          931          921       

Loews Hotels

     126          95          343          290       

Corporate and other

     (30)         50          68          59       
   

Total

   $       3,523        $       3,597        $       10,804        $       10,831       

 

 

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

           

CNA Financial:

           

CNA Specialty

   $ 290        $ 283        $ 771        $ 718       

CNA Commercial

     99          200          306          559       

Life & Group Non-Core

     (52)         (83)         (91)         (190)      

Other

     (42)         (26)         (25)         (91)      
   

Total CNA Financial

     295          374          961          996       

Diamond Offshore

     82          131          362          593       

Boardwalk Pipeline

     28          60          105          226       

Loews Hotels

        (2)         14       

Corporate and other

     (66)         13          (43)         (36)      
   

Total

   $ 339        $ 576        $ 1,399        $ 1,779       

 

 

Net income (loss) (a):

           

CNA Financial:

           

CNA Specialty

   $ 174        $ 170        $ 462        $ 427       

CNA Commercial

     61          119          186          328       

Life & Group Non-Core

     (19)         (33)         (6)         (69)      

Other

     (28)         (11)         (19)         (51)      
   

Total CNA Financial

     188          245          623          635       

Diamond Offshore

     25          44          136          213       

Boardwalk Pipeline

             19                  74       

Loews Hotels

                        2       

Corporate and other

     (42)                 (27)         (23)      
   

Income from continuing operations

     179          318          747          901       

Discontinued operations, net

     29          (36)         (364)         (108)      
   

Total

   $ 208        $ 282        $ 383        $ 793       

 

 

 

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(a)

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

 

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

 

 

 
     2014      2013      2014      2013      

 

 

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

           

CNA Financial:

           

CNA Specialty

   $       $       $ 10         $        (1)      

CNA Commercial

                     8         (5)      

Life & Group Non-Core

     30          (3)         42         6       

Other

                5         7       

 

 

Total

   $ 37        $       $ 65       $ 7       

 

 

Net income (loss):

           

CNA Financial:

           

CNA Specialty

   $          $ 6       $ (1)      

CNA Commercial

           $         5         (3)      

Life & Group Non-Core

     20                  (2)         26         4       

Other

     (1)                 2         5       

 

 

Total

   $         24        $       $         39       $ 5       

 

 

13.  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.

14.  Commitments and Contingencies

CNA Financial

In the course of selling business entities and assets to third parties, CNA has agreed to guarantee the performance of certain obligations of a previously owned subsidiary and 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 guarantee and indemnification agreements may include provisions that survive indefinitely. As of September 30, 2014, the aggregate amount of quantifiable guarantee and indemnification agreements in effect for sales of business entities, assets and third party loans was $375 million and $324 million. Should CNA be required to make payments under the guarantee, it would have the right to seek reimbursement in certain cases from an affiliate of a previously owned subsidiary.

In addition, CNA has agreed to provide indemnification to third party purchasers for certain losses associated with sold business entities or assets that are not limited by a contractual monetary amount. As of September 30, 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.

In the normal course of business, CNA also provided indemnifications, if the primary obligor fails to perform, to holders of structured settlement annuities provided by a previously owned subsidiary, which are estimated to mature through 2120. The potential amount of future payments CNA could be required to pay under these guarantees was approximately $1.9 billion at September 30, 2014. CNA does not believe a payable is likely under these guarantees, as CNA is the beneficiary of a trust that must be maintained at a level that approximates the discounted reserves for these annuities.

 

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Diamond Offshore

In July of 2014, Diamond Offshore was notified by Petróleo Brasileiro S.A., (“Petrobras”) that it is 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 any reimbursement claims against it vigorously. However, if Diamond Offshore’s position is not sustained, the amount of such reimbursement could be material.

15.  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 nine months ended September 30, 2014 and 2013, as follows:

 

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

 

 

 
     2014      2013      2014      2013      

 

 
(In millions)                            

Revenues:

           

Other revenue, primarily operating

     $ 49        $ 61        $ 150        $ 195       

 

 

Total

     49          61          150          195       

 

 

Expenses:

           

Other operating expenses

           

Impairment of natural gas and oil properties

        65          29          210       

Operating

     54          52          165          162       

Interest

                             13       

 

 

Total

     57          121          202          385       

 

 

Loss before income tax

     (8)         (60)         (52)         (190)      

Income tax benefit

             22                  69       

 

 

Results of discontinued operations, net of income tax

     (5)         (38)         (50)         (121)      

Impairment loss, net of tax (expense) benefit of $(30) and $62

     30             (137)      

 

 

Income (loss) from discontinued operations

     $       25        $       (38)       $     (187)       $     (121)      

 

 

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

 

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

 

 

 
     2014      2013      2014      2013      

 

 
(In millions)                            

Revenues:

           

Net investment income

     $       14        $        42        $ 94        $ 128       

Investment gains

                             8       

Other

                   1       

 

 

Total revenues

     $ 15        $ 46        $ 97        $      137       

 

 

Expenses:

           

Insurance claims and policyholders’ benefits

     12          36          75          105       

Other operating expenses

                        8       

 

 

Total

     12          42          77          113       

 

 

Income before income tax

                     20          24       

Income tax expense

     (2)         (3)         (6)         (10)      

 

 

Results of discontinued operations, net of income tax

                     14          14       

Loss on sale, net of tax (expense) benefit of $(1) and $40

                (211)      

Amounts attributable to noncontrolling interests

                20          (1)      

 

 

Income (loss) from discontinued operations

     $       $       $     (177)       $ 13       

 

 

 

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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