Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

[X]   

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2016

OR

 

[    ]   

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period From                          to                         

Commission File Number 1-6541

LOEWS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware       13-2646102

(State or other jurisdiction of

incorporation or organization)

     

(I.R.S. Employer  

Identification No.)

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

(Address of principal executive offices) (Zip Code)

(212) 521-2000

(Registrant’s telephone number, including area code)

NOT APPLICABLE

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

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

 

  Yes        X          No                    

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

 

Yes         X          No                     Not Applicable                  

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

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

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

 

   Yes                      No        X        

 

                                 Class                                 

      

      Outstanding at April 22, 2016      

Common stock, $0.01 par value

     339,016,271 shares            

 

 

 


Table of Contents

INDEX

 

     Page
No.
 

Part I.   Financial Information

  

Item 1.   Financial Statements (unaudited)

  

Consolidated Condensed Balance Sheets
March 31, 2016 and December 31, 2015

     3   

Consolidated Condensed Statements of Income
Three months ended March 31, 2016 and 2015

     4   

Consolidated Condensed Statements of Comprehensive Income
Three months ended March 31, 2016 and 2015

     5   

Consolidated Condensed Statements of Equity
Three months ended March 31, 2016 and 2015

     6   

Consolidated Condensed Statements of Cash Flows
Three months ended March 31, 2016 and 2015

     7   

Notes to Consolidated Condensed Financial Statements

     8   

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

     36   

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

     54   

Item 4.   Controls and Procedures

     54   

Part II.   Other Information

     55   

Item 1.   Legal Proceedings

     55   

Item 1A.   Risk Factors

     55   

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

     55   

Item 6.  Exhibits

     56   

 

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

    March 31,
2016
        December 31,    
2015
 

 

 

(Dollar amounts in millions, except per share data)

   

Assets:

   

Investments:

   

Fixed maturities, amortized cost of $37,507 and $37,407

  $ 40,475            $ 39,701        

Equity securities, cost of $817 and $824

    777         752        

Limited partnership investments

    3,301         3,313        

Other invested assets, primarily mortgage loans

    822         824        

Short term investments

    5,275         4,810        

 

 

Total investments

    50,650         49,400        

Cash

    308         440        

Receivables

    8,227         8,041        

Property, plant and equipment

    15,351         15,477        

Goodwill

    350         351        

Other assets

    1,716         1,699        

Deferred acquisition costs of insurance subsidiaries

    622         598        

 

 

Total assets

  $ 77,224            $ 76,006        

 

 

Liabilities and Equity:

   

Insurance reserves:

   

Claim and claim adjustment expense

  $     23,018            $ 22,663        

Future policy benefits

    10,500         10,152        

Unearned premiums

    3,807         3,671        

 

 

Total insurance reserves

    37,325         36,486        

Payable to brokers

    630         567        

Short term debt

           1,040        

Long term debt

    10,584         9,520        

Deferred income taxes

    540         382        

Other liabilities

    5,017         5,201        

 

 

Total liabilities

    54,099         53,196        

 

 

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 – 339,933,179 and 339,897,547 shares

           3        

Additional paid-in capital

    3,177         3,184        

Retained earnings

    14,812         14,731        

Accumulated other comprehensive loss

    (126)        (357)       

 

 
    17,866         17,561        

Less treasury stock, at cost (918,767 shares)

    (33)     

 

 

Total shareholders’ equity

    17,833         17,561        

Noncontrolling interests

    5,292         5,249        

 

 

Total equity

    23,125         22,810        

 

 

Total liabilities and equity

  $ 77,224            $ 76,006        

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

Three Months Ended March 31    2016      2015  

 

 
(In millions, except per share data)              

Revenues:

     

Insurance premiums

   $ 1,699       $ 1,687        

Net investment income

     422         588        

Investment gains (losses):

     

Other-than-temporary impairment losses

     (23      (12)       

Other net investment gains (losses)

     (5      22        

 

 

Total investment gains (losses)

     (28      10        

Contract drilling revenues

     444         600        

Other revenues

     636         593        

 

 

Total

     3,173         3,478        

 

 

Expenses:

     

Insurance claims and policyholders’ benefits

     1,408         1,339        

Amortization of deferred acquisition costs

     307         303        

Contract drilling expenses

     213         351        

Other operating expenses (Note 4)

     907         1,249        

Interest

     143         131        

 

 

Total

     2,978         3,373        

 

 

Income before income tax

     195         105        

Income tax (expense) benefit

     4         (56)       

 

 

Net income

     199         49        

Amounts attributable to noncontrolling interests

     (97      60        

 

 

Net income attributable to Loews Corporation

   $ 102       $ 109        

 

 

Basic and diluted net income per share

   $ 0.30       $ 0.29        

 

 

Dividends per share

   $     0.0625       $     0.0625        

 

 

Weighted average shares outstanding:

     

Shares of common stock

     339.10         372.83        

Dilutive potential shares of common stock

     0.15         0.36        

 

 

Total weighted average shares outstanding assuming dilution

     339.25         373.19        

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

Three Months Ended March 31    2016      2015  

 

 
(In millions)              

Net income

   $ 199       $ 49        

 

 

Other comprehensive income (loss), after tax

     

Changes in:

     

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

     5         (1)       

Net other unrealized gains on investments

     228         110        

 

 

Total unrealized gains on available-for-sale investments

     233         109        

Unrealized gains on cash flow hedges

     1         3        

Pension liability

     8         4        

Foreign currency

     14         (96)       

 

 

Other comprehensive income

     256         20        

 

 

Comprehensive income

     455         69        

Amounts attributable to noncontrolling interests

     (122      57        

 

 

Total comprehensive income attributable to Loews Corporation

   $         333       $         126        

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF EQUITY

(Unaudited)

 

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

 

 
(In millions)                                                          

Balance, January 1, 2015

   $ 24,650                $         $ 3,481              $ 15,515            $ 280                  $                 -             $ 5,370           

Net income

     49                          109                     (60)          

Other comprehensive income

     20                               17                      3           

Dividends paid

     (105)                         (23)                    (82)          

Issuance of equity securities by subsidiary

     109                     (2)                    1                      110           

Purchases of subsidiary stock from noncontrolling interests

     (26)                    3                            (29)          

Purchases of Loews treasury stock

     (71)                                   (71)           

Issuance of Loews common stock

     7                     7                         

Stock-based compensation

     5                     5                         

Other

     (8)                    (17)               (1)                    10           

 

 

Balance, March 31, 2015

   $       24,630                $         $ 3,477              $       15,600            $ 298                  $ (71)            $       5,322           

 

 

Balance, January 1, 2016

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

Net income

     199                          102                     97           

Other comprehensive income

     256                               231                      25           

Dividends paid

     (96)                         (21)                    (75)          

Purchases of subsidiary stock from noncontrolling interests

     (9)                    3                            (12)          

Purchases of Loews treasury stock

     (33)                                   (33)           

Stock-based compensation

     3                     2                            1           

Other

     (5)                    (12)                           7           

 

 

Balance, March 31, 2016

   $ 23,125                $         $ 3,177              $ 14,812            $ (126)                 $ (33)            $ 5,292           

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Three Months Ended March 31    2016      2015  

 

 
(In millions)              

Operating Activities:

     

Net income

   $         199          $           49        

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

     585            510        

Changes in operating assets and liabilities, net:

     

Receivables

     (275)           (153)       

Deferred acquisition costs

     (23)           (13)       

Insurance reserves

     511            304        

Other assets

     (20)           (57)       

Other liabilities

     (287)           (227)       

Trading securities

     (541)           (371)       

 

 

Net cash flow operating activities

     149            42        

 

 

Investing Activities:

     

Purchases of fixed maturities

     (2,238)           (1,919)       

Proceeds from sales of fixed maturities

     1,722            1,144        

Proceeds from maturities of fixed maturities

     490            1,144        

Purchases of limited partnership investments

     (170)           (34)       

Proceeds from sales of limited partnership investments

     89            20        

Purchases of property, plant and equipment

     (292)           (453)       

Dispositions

     220            5        

Change in short term investments

     16            197        

Other, net

     6            (10)       

 

 

Net cash flow investing activities

     (157)           94        

 

 

Financing Activities:

     

Dividends paid

     (21)           (23)       

Dividends paid to noncontrolling interests

     (75)           (82)       

Purchases of subsidiary stock from noncontrolling interests

     (8)           (24)       

Purchases of Loews treasury stock

     (33)           (67)       

Issuance of Loews common stock

        7        

Proceeds from sale of subsidiary stock

        84        

Principal payments on debt

     (1,809)           (759)       

Issuance of debt

     1,824            636        

Other, net

     (1)           5        

 

 

Net cash flow financing activities

     (123)           (223)       

 

 

Effect of foreign exchange rate on cash

     (1)           (6)       

 

 

Net change in cash

     (132)           (93)       

Cash, beginning of period

     440            364        

 

 

Cash, end of period

   $ 308          $ 271        

 

 

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 53% 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 51% owned subsidiary); and the operation of a chain of hotels (Loews Hotels Holding Corporation (“Loews Hotels”), a wholly owned subsidiary). Unless the context otherwise requires, the terms “Company,” “Loews” and “Registrant” as used herein mean Loews Corporation excluding its subsidiaries and the term “Net income (loss) attributable to Loews Corporation” as used herein means Net income (loss) attributable to Loews Corporation shareholders.

In the opinion of management, the accompanying unaudited Consolidated Condensed Financial Statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 31, 2016 and December 31, 2015 and the results of operations, comprehensive income and changes in shareholders’ equity and cash flows for the three months ended March 31, 2016 and 2015. Net income for the first quarter of each of the years is not necessarily indicative of net income for that entire year. These Consolidated Condensed Financial Statements should be read in conjunction with the Consolidated Financial Statements in the 2015 Annual Report on Form 10-K.

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 6.1 million and 3.5 million shares were not included in the diluted weighted average shares amounts for the three months ended March 31, 2016 and 2015 due to the exercise price being greater than the average stock price.

Accounting changes – In April of 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The updated accounting guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, rather than as a deferred asset. As required, the Company’s Consolidated Condensed Balance Sheet has been retrospectively adjusted to reflect the effect of the adoption of the updated accounting guidance, which resulted in a decrease of $23 million in Other assets and Long term debt at December 31, 2015.

Recently issued ASUs – In May of 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The core principle of the new accounting guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new accounting guidance provides a five-step analysis of transactions to determine when and how revenue is recognized and requires enhanced disclosures about revenue. In August of 2015, the FASB formally amended the effective date of this update to annual reporting periods beginning after December 15, 2017, including interim periods, and it can be adopted either retrospectively or with 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.

In May of 2015, the FASB issued ASU 2015-09, “Financial Services Insurance (Topic 944): Disclosures about Short-Duration Contracts.” The updated accounting guidance requires enhanced disclosures to provide additional information about insurance liabilities for short-duration contracts. The guidance is effective for annual periods beginning after December 15, 2015 and for interim periods beginning after December 15, 2016. The Company is currently evaluating the effect the updated guidance will have on its financial statement disclosures.

 

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In January of 2016, the FASB issued ASU 2016-01, “Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The updated accounting guidance requires changes to the reporting model for financial instruments. The guidance is effective for interim and annual periods beginning after December 15, 2017. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements, and expects the primary change to be the requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.

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

2.  Investments

Net investment income is as follows:

 

Three Months Ended March 31    2016            2015       
(In millions)                       

Fixed maturity securities

   $         446           $         443      

Limited partnership investments

     (40)            160      

Short term investments

                    

Equity securities

                    

Income (loss) from trading portfolio (a)

     15             (15)     

Other

                        

Total investment income

     436             602      

Investment expenses

     (14)              (14)       

Net investment income

   $     422           $ 588      

 

 

(a)      Includes net unrealized gains (losses) related to changes in fair value on trading securities still held of $15 and $(14) for the three months ended March 31, 2016 and 2015.

 

Investment gains (losses) are as follows:

 

Three Months Ended March 31    2016            2015       
(In millions)                       

Fixed maturity securities

   $          (17)          $             12      

Equity securities

     (5)           

Derivative instruments

     (7)            (1)     

Short term investments and other

                  (1)       

Investment gains (losses) (a)

   $ (28)          $ 10      

 

 

(a)

Includes gross realized gains of $45 and $34 and gross realized losses of $67 and $22 on available-for-sale securities for the three months ended March 31, 2016 and 2015.

 

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

 

Three Months Ended March 31    2016           2015      

 

(In millions)                       

Fixed maturity securities available-for-sale:

          

Corporate and other bonds

   $             16          $ 5     

States, municipalities and political subdivisions

           5     

Asset-backed:

          

Residential mortgage-backed

           1     

Other asset-backed

     2           

 

Total asset-backed

     2            1     

 

Total fixed maturities available-for-sale

     18            11     

 

Equity securities available-for-sale:

          

Common stock

     5            1     

 

Net OTTI losses recognized in earnings

   $ 23          $             12     

 

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

 

March 31, 2016    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

    $ 17,093             $ 1,255              $ 236              $ 18,112        

States, municipalities and political subdivisions

     11,478           1,704              3               13,179               $ (15)           

Asset-backed:

              

Residential mortgage-backed

     5,028           197              19               5,206           (33)           

Commercial mortgage-backed

     2,137           78              16               2,199        

Other asset-backed

     937           4              20               921        

 

 

Total asset-backed

     8,102           279              55               8,326           (33)           

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

     133           7                 140        

Foreign government

     447           17              1               463        

Redeemable preferred stock

     33           2                 35        

 

 

Fixed maturities available-for-sale

     37,286           3,264              295               40,255           (48)           

Fixed maturities trading

     221              1               220        

 

 

Total fixed maturities

     37,507           3,264              296               40,475           (48)           

 

 

Equity securities:

              

Common stock

     37           6              2               41        

Preferred stock

     145           5              2               148        

 

 

Equity securities available-for-sale

     182           11              4               189           -            

Equity securities trading

     635           74              121               588        

 

 

Total equity securities

     817           85              125               777           -            

 

 

Total

    $ 38,324             $ 3,349              $ 421              $ 41,252               $ (48)           

 

 

 

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December 31, 2015    Cost or
Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
      Estimated 
Fair Value
     Unrealized
  OTTI Losses  
(Gains)
 

 

 

Fixed maturity securities:

              

Corporate and other bonds

   $ 17,097         $ 1,019           $ 347            $ 17,769      

States, municipalities and political subdivisions

     11,729         1,453           8             13,174         $ (4)           

Asset-backed:

              

Residential mortgage-backed

     4,935         154           17             5,072         (37)           

Commercial mortgage-backed

     2,154         55           12             2,197      

Other asset-backed

     923         6           8             921      

 

 

Total asset-backed

     8,012         215           37             8,190         (37)           

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

     62         5              67      

Foreign government

     334         13           1             346      

Redeemable preferred stock

     33         2              35      

 

 

Fixed maturities available-for-sale

     37,267         2,707           393             39,581         (41)           

Fixed maturities, trading

     140            20             120      

 

 

Total fixed maturities

     37,407         2,707           413             39,701         (41)           

 

 

Equity securities:

              

Common stock

     46         3           1             48      

Preferred stock

     145         7           3             149      

 

 

Equity securities available-for-sale

     191         10           4             197         -             

Equity securities, trading

     633         56           134             555      

 

 

Total equity securities

     824         66           138             752         -             

 

 

Total

   $ 38,231         $ 2,773           $ 551            $ 40,453         $ (41)           

 

 

The net unrealized gains on investments included in the tables above are recorded as a component of Accumulated other comprehensive income (“AOCI”). When presented in AOCI, these amounts are net of tax and noncontrolling interests and any required Shadow Adjustments. To the extent that unrealized gains on fixed income securities supporting certain products within CNA’s Life & Group Non-Core business would result in a premium deficiency if realized, a related increase in Insurance reserves is recorded, net of tax and noncontrolling interests, as a reduction of net unrealized gains through Other comprehensive income (“Shadow Adjustments”). As of March 31, 2016 and December 31, 2015, the net unrealized gains on investments included in AOCI were net of Shadow Adjustments of $1,176 million and $996 million.

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

 

    

Less than

12 Months

    

12 Months

or Longer

     Total  
  

 

 

 
March 31, 2016      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

       $ 2,669             $ 174            $ 279             $ 62           $ 2,948           $ 236      

States, municipalities and political subdivisions

     90             3             64                154           3      

Asset-backed:

                 

Residential mortgage-backed

     376             11             159             8           535           19      

Commercial mortgage-backed

     505             14             102             2           607           16      

Other asset-backed

     572             20             5                577           20      

 

 

Total asset-backed

     1,453             45             266             10           1,719           55      

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

     23                      23        

Foreign government

     54             1                   54           1      

Redeemable preferred stock

     2                      2        

 

 

Total fixed maturity securities

     4,291             223             609             72           4,900           295      

 

 

Common stock

     6             2                   6           2      

Preferred stock

     17             2                   17           2      

 

 

Total

       $ 4,314             $ 227            $ 609             $ 72           $ 4,923           $ 299      

 

 

 

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     Less than      12 Months         
     12 Months      or Longer      Total  
  

 

 

 
            Gross             Gross             Gross  
     Estimated      Unrealized      Estimated      Unrealized        Estimated        Unrealized    
December 31, 2015      Fair Value        Losses      Fair Value      Losses        Fair Value      Losses  

 

 

Fixed maturity securities:

                 

Corporate and other bonds

     $    4,882              $    302          $     174            $      45          $ 5,056            $ 347           

States, municipalities and political subdivisions

     338              8            75               413            8           

Asset-backed:

                 

Residential mortgage-backed

     963              9            164            8            1,127            17           

Commercial mortgage-backed

     652              10            96            2            748            12           

Other asset-backed

     552              8            5               557            8           

 

 

Total asset-backed

     2,167              27            265            10            2,432            37           

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

     4                       4         

Foreign government

     54              1                  54            1           

Redeemable preferred stock

     3                       3         

 

 

Total fixed maturity securities

     7,448              338            514            55            7,962            393           

Common stock

     3              1                  3            1           

Preferred stock

     13              3                  13            3           

 

 

Total

     $    7,464              $    342          $     514            $      55          $ 7,978            $ 397           

 

 

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 attributable to changes in interest rates, credit spreads and other factors, including volatility in the energy and metals and mining sectors. As of March 31, 2016, the Company held fixed maturity securities and equity securities with an estimated fair value and a cost or amortized cost of $2.5 billion in the energy and metals and mining sectors. The portion of these securities in a gross unrealized loss position had an estimated fair value of $1.1 billion and a cost or amortized cost of $1.2 billion. The Company has no current intent to sell securities with unrealized losses, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded as of March 31, 2016.

The following table presents the activity related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held as of March 31, 2016 and 2015 for which a portion of an OTTI loss was recognized in Other comprehensive income.

 

Three Months Ended March 31            2016                     2015              

 

(In millions)                 

Beginning balance of credit losses on fixed maturity securities

   $ 53      $ 62     

Reductions for securities sold during the period

     (5     (1  

 

Ending balance of credit losses on fixed maturity securities

   $ 48      $ 61     

 

 

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Contractual Maturity

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

 

     March 31, 2016      December 31, 2015  

 

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

 

 
(In millions)                            

Due in one year or less

   $ 1,747               $ 1,773            $ 1,574            $ 1,595          

Due after one year through five years

     8,352                 8,753              7,738              8,082          

Due after five years through ten years

     14,587                 15,129              14,652              14,915          

Due after ten years

     12,600                 14,600              13,303              14,989          

 

 

Total

   $   37,286               $   40,255            $   37,267            $   39,581          

 

 

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

Derivative Financial Instruments

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

 

      March 31, 2016    December 31, 2015
     Contractual/              Contractual/          
     Notional     Estimated Fair Value       Notional     Estimated Fair Value   
      Amount      Asset    (Liability)    Amount      Asset    (Liability)
(In millions)                              

Without hedge designation:

                             

Equity markets:

                             

Options – purchased

     $       906        $   21               $ 501        $  16       

  – written

       238             $       (10)           614               $  (28)   

Futures – long

                      312               (1)   

 – short

       101                           

Interest rate risk:

                             

Futures – long

                      63            

Foreign exchange:

                             

Currency forwards – long

       267          8               133          2       

   – short

       262               (10)           152            

Currency options – long

       300          3               550          7       

Commodities:

                             

Futures – long

       64                           

Embedded derivative on funds withheld liability

       178               (1)           179          5       

 

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3.  Fair Value

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

 

   

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

 

   

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

 

   

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

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

The Company performs control procedures over information obtained from pricing services and brokers to ensure prices received represent a reasonable estimate of fair value and to confirm representations regarding whether inputs are observable or unobservable. Procedures 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 period-over-period changes in price are reviewed and challenged with the pricing service or broker based on exception criteria, (iv) detailed analysis, where the Company 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.

 

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

 

March 31, 2016   Level 1         Level 2         Level 3         Total  

 

 
(In millions)                                    

Fixed maturity securities:

                      

Corporate and other bonds

      $ 17,919         $ 193         $ 18,112      

States, municipalities and political subdivisions

        13,177                    13,179      

Asset-backed:

             

Residential mortgage-backed

        5,078           128           5,206      

Commercial mortgage-backed

        2,172           27           2,199      

Other asset-backed

        871           50           921      

 

 

Total asset-backed

        8,121           205           8,326      

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

  $ 139                        140      

Foreign government

        463               463      

Redeemable preferred stock

    35                   35      

 

 

Fixed maturities available-for-sale

    174           39,681           400           40,255      

Fixed maturities trading

        217                    220      

 

 

Total fixed maturities

  $ 174         $   39,898         $        403         $   40,475      

 

 

Equity securities available-for-sale

  $ 170             $ 19         $ 189      

Equity securities trading

    588                   588      

 

 

Total equity securities

  $ 758         $        $ 19         $ 777      

 

 

Short term investments

  $     4,135         $ 1,064             $ 5,199      

Other invested assets

    102           17               119      

Receivables

        12               12      

Life settlement contracts

          $ 72           72      

Payable to brokers

    (102)          (10)              (112)     

 

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Table of Contents
December 31, 2015   Level 1         Level 2         Level 3         Total  

 

 
(In millions)                                    

Fixed maturity securities:

                      

Corporate and other bonds

      $ 17,601         $ 168         $ 17,769      

States, municipalities and political subdivisions

        13,172                    13,174      

Asset-backed:

             

Residential mortgage-backed

        4,938           134           5,072      

Commercial mortgage-backed

        2,175           22           2,197      

Other asset-backed

        868           53           921      

 

 

Total asset-backed

        7,981           209           8,190      

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

  $ 66                        67      

Foreign government

        346               346      

Redeemable preferred stock

    35                   35      

 

 

Fixed maturities available-for-sale

    101           39,101           379           39,581      

Fixed maturities trading

        35           85           120      

 

 

Total fixed maturities

  $ 101         $   39,136         $        464         $   39,701      

 

 

Equity securities available-for-sale

  $ 177             $ 20         $ 197      

Equity securities trading

    554                        555      

 

 

Total equity securities

  $ 731         $        $ 21         $ 752      

 

 

Short term investments

  $     3,600         $ 1,134             $ 4,734      

Other invested assets

    102           44               146      

Receivables

               $          12      

Life settlement contracts

            74           74      

Payable to brokers

    (196)                  (196)     

 

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Table of Contents

The following tables present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2016 and 2015:

 

         

 

 

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

                                    Transfers
  into
  Level 3
          Transfers
  out of
  Level 3
                 

Unrealized

Gains

(Losses)

  Recognized in  

Net Income
on Level
3 Assets and
Liabilities

Held at
March 31

 
2016   Balance,
January 1
      Included in
  Net Income
    Included in
OCI
    Purchases         Sales            Settlements                       Balance,
  March 31
       

 

 
(In millions)                                                                                    

Fixed maturity securities:

                               

Corporate and other bonds

  $ 168           $ (1)      $ 4          $ 53          $ (16)        $ (3)               $ (12)          $ 193          

States, municipalities and political subdivisions

    2                                   2          

Asset-backed:

                               

Residential mortgage-backed

    134                            (5)                 (2)            128          

Commercial mortgage- backed

    22               9                        (4)            27          

Other asset-backed

    53                         $ 2             (5)            50          

 

 

Total asset-backed

    209                  -            9                     (5)             2             (11)            205             $ -             

 

 

Fixed maturities available-for-sale

    379             4            62            (16)          (8)             2             (23)            400          

Fixed maturities trading

    85                    2            (85)                      3          

 

 

Total fixed maturities

  $ 464           $      $ 4          $ 64          $       (101)        $ (8)           $ 2           $ (23)          $ 403             $ -             

 

 

Equity securities available-for-sale

  $ 20           $ (1)                             $ 19          

Equity securities trading

    1                 $ (1)                      -          

 

 

Total equity securities

  $ 21           $      $ (1)         $ -          $ (1)        $ -            $ -           $ -           $ 19             $ -             

 

 

Life settlement contracts

  $ 74           $                $ (6)                   $ 72             $ 1             

Derivative financial instruments, net

    3           (1)            $ (2)                       

 

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Table of Contents
         

 

 

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

                                    Transfers
  into
  Level 3
          Transfers
  out of
  Level 3
                 

Unrealized

Gains

(Losses)

  Recognized in  

Net Income
on Level
3 Assets and
Liabilities

Held at
March 31

 
2015   Balance,
January 1
      Included in
  Net Income
    Included in
OCI
    Purchases         Sales            Settlements                       Balance,
  March 31
       

 

 
(In millions)                                                                                    

Fixed maturity securities:

                               

Corporate and other bonds

  $ 162           $        $ 12          $ (12)        $ (14)           $ 37               $ 186          

States, municipalities and political subdivisions

    94                            (9)                     86          

Asset-backed:

                               

Residential mortgage-backed

    189                    72                (10)               $ (20)            232          

Commercial mortgage- backed

    83                $ 1            6                (1)                 (26)            64          

Other asset-backed

    655                  9            35            (144)          (3)                     553          

 

 

Total asset-backed

    927                  10            113            (144)          (14)             -             (46)            849             $ -             

 

 

Fixed maturities available-for-sale

    1,183                  10            125            (156)          (37)             37             (46)            1,121          

Fixed maturities trading

    90                   (1)                      89          

 

 

Total fixed maturities

  $ 1,273           $      $ 10          $ 125          $       (157)        $ (37)           $ 37           $ (46)          $ 1,210             $ -             

 

 

Equity securities available-for-sale

  $ 16           $ (3)                             $ 13          

Equity securities trading

    1                                   1          

 

 

Total equity securities

  $ 17           $      $ (3)         $ -          $        $ -            $ -           $ -           $ 14             $ -             

 

 

Life settlement contracts

  $ 82           $ 13                 $ (16)                   $ 79             $ 1             

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

 

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

 

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

 

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Securities 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 March 31, 2016 and 2015 there were no transfers between Level 1 and Level 2. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods.

Valuation Methodologies and Inputs

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

Fixed Maturity Securities

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

Equity Securities

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

Derivative Financial Instruments

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

Short Term Investments

Securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and treasury bills. Level 2 primarily includes commercial paper, for which all inputs are market observable. Fixed maturity securities purchased within one year of maturity are classified consistent with fixed maturity securities discussed above. Short term investments as presented in the tables above differ from the amounts presented in the Consolidated Condensed Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.

 

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Other Invested Assets

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

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.

Significant Unobservable Inputs

The following tables 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 tables below are primarily based on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of unobservable inputs from these broker quotes is neither provided nor reasonably available to the Company.

 

March 31, 2016   Estimated
Fair Value
   

Valuation

Techniques

 

Unobservable

Inputs

 

Range

(Weighted

Average)

 

 

 
    (In millions)                

Fixed maturity securities

    $ 142        Discounted cash flow    Credit spread     0% – 20% (4%)   

Life settlement contracts

    72        Discounted cash flow    Discount rate risk premium     9%   
      Mortality assumption               55% – 1,676% (164%)   
December 31, 2015                    

 

 

Fixed maturity securities

    $ 138          Discounted cash flow   Credit spread     3% – 184% (6%)   

Life settlement contracts

    74          Discounted cash flow   Discount rate risk premium     9%   
      Mortality assumption     55% – 1,676% (164%)   

For fixed maturity securities, an increase to the credit spread assumptions would result in a lower fair value measurement. For life settlement contracts, an increase in the discount rate risk premium or decrease in the mortality assumption would result in a lower fair value measurement.

 

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Financial Assets and Liabilities Not Measured at Fair Value

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

 

    Carrying     Estimated Fair Value  
March 31, 2016   Amount         Level 1           Level 2            Level 3                Total        

 

 
(In millions)                                              

Assets:

               

Other invested assets, primarily mortgage loans

   $ 675                   $ 697               $ 697             

Liabilities:

               

Short term debt

    2              2          2     

Long term debt

    10,571        $ 9,610          648          10,258     
December 31, 2015                                              

 

 

Assets:

               

Other invested assets, primarily mortgage loans

   $ 678            $ 688        $ 688     

Liabilities:

               

Short term debt

    1,038        $ 1,050          2          1,052     

Long term debt

    9,507          8,538          595          9,133     

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

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

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

4.  Property, Plant and Equipment

Diamond Offshore

Sale of Assets

In February of 2016, Diamond Offshore entered into a ten-year agreement with a subsidiary of GE Oil & Gas (“GE”) to provide services with respect to certain blowout preventer and related well control equipment on four newly-built drillships. Such services include management of maintenance, certification and reliability with respect to such equipment. In connection with the contractual services agreement with GE, Diamond Offshore will sell the well control equipment to a GE affiliate and subsequently lease back such equipment over separate ten-year operating leases. During March of 2016, Diamond Offshore executed two sale and leaseback transactions and received $105 million in proceeds with no gain or loss recognized on the transactions. Future commitments under

 

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the operating leases and contractual services agreements are estimated to aggregate approximately $327 million over the term of the agreements. Diamond Offshore expects to complete the remaining sale and leaseback transactions in the second and fourth quarters of 2016.

Asset Impairments

During the first quarter of 2016, in response to continued deterioration of the market fundamentals in the oil and gas industry, significant cutbacks in customer capital spending plans and contract cancellations by customers as well as recently announced regulatory requirements in the U.S. Gulf of Mexico, Diamond Offshore evaluated ten of its drilling rigs with indications that their carrying amounts may not be recoverable. Using an undiscounted, projected probability-weighted cash flow analysis, Diamond Offshore determined that the carrying values of these rigs were not impaired.

If market fundamentals in the oil and gas industry deteriorate or if Diamond Offshore is unable to extend or secure new contracts for its current, actively-marketed drilling fleet or reactivate any of its cold stacked rigs or if Diamond Offshore experiences unfavorable changes to actual dayrates and rig utilization, additional impairment losses may be required to be recognized in future periods.

During the first quarter of 2015, Diamond Offshore evaluated 17 of its drilling rigs with indications that their carrying amounts may not be recoverable. Based on this evaluation, Diamond Offshore determined that seven mid-water semisubmersibles as well as an older drillship were impaired and an impairment loss was recognized aggregating $359 million ($158 million after tax and noncontrolling interests) for the three months ended March 31, 2015.

See Note 6 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for further discussion of Diamond Offshore’s asset impairments.

5.  Claim and Claim Adjustment Expense Reserves

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

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

 

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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 $36 million and $29 million for the three months ended March 31, 2016 and 2015. Catastrophe losses in 2016 related primarily to U.S. weather-related events.

Net Prior Year Development

The following tables and discussion present net prior year development.

 

Three Months Ended March 31, 2016    Specialty       Commercial     International         Total       

 

 
(In millions)                         

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

   $ (34)          $     (14)            $ (4)        $ (52)       

Pretax (favorable) unfavorable premium development

     (11)        (2)          (1)              (14)       

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (45)          $ (16)            $ (5)        $ (66)       

 

 

Three Months Ended March 31, 2015

        

 

 

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

   $          $ (5)            $ (4)        $ (7)       

Pretax (favorable) unfavorable premium development

     (6)        (1)          16           9        

 

 

Total pretax (favorable) unfavorable net prior year development

   $ (4)          $ (6)            $         12         $ 2        

 

 

Specialty

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

 

Three Months Ended March 31            2016             2015          

 

 
(In millions)             

Medical professional liability

   $ (7)      $ 14       

Other professional liability and management liability

     (9)        (3)      

Surety

       1       

Warranty

         

Other

              (20)                (10)      

 

 

Total pretax (favorable) unfavorable development

   $ (34)      $ 2       

 

 

 

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2016

Favorable development for medical professional liability was due to lower than expected severity in accident years 2011 and prior. This was partially offset by unfavorable development in accident years 2012 and 2013 recorded related to higher than expected large loss emergence and higher than expected severity in accident years 2014 and 2015.

Favorable development in other professional liability and management liability was primarily related to favorable settlements on claims in accident years 2011 through 2013. This was partially offset by unfavorable development recorded related to a specific financial institutions claim in accident year 2014 and continued deterioration on claims in accident year 2009 related to the credit crisis.

Favorable development for other coverages was primarily due to better than expected claim frequency in property coverages provided to Specialty customers in accident year 2015.

2015

Overall, unfavorable development for medical professional liability was primarily related to increased frequency in the Aging Services book for accident years 2013 and 2014, partially offset by better than expected severity in accident years 2010 and prior.

Favorable development for other coverages was primarily due to better than expected frequency in property coverages provided to Specialty customers in accident year 2014.

Commercial

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

 

Three Months Ended March 31         2016             2015           

 

 
(In millions)             

Commercial auto

   $ (15)     

General liability

             (15)      $ 4        

Workers’ compensation

            (1)       

Property and other

     12                 (8)       

 

 

Total pretax (favorable) unfavorable development

   $ (14)      $ (5)       

 

 

2016

Favorable development for commercial auto was primarily due to favorable settlements on claims in accident years 2011 through 2014.

Favorable development for general liability was primarily due to favorable settlements on claims in accident years 2013 and 2014.

Unfavorable development for property and other was primarily due to higher than expected severity from a 2015 catastrophe event.

2015

Favorable development for property and other was due to lower than expected loss emergence from 2014 catastrophe events.

 

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International

The following table and discussion present further detail of the development recorded for the International segment:

 

Three Months Ended March 31         2016                2015         

 

 
(In millions)             

Other professional liability

   $ (1)     

Liability

     $ (5)       

Property & marine

             (4)                (6)       

Other

            7        

 

 

Total pretax (favorable) unfavorable development

   $ (4)      $ (4)       

 

 

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

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

Through December 31, 2013, CNA recognized $0.9 billion of additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the LPT exceeded the $2.2 billion consideration paid, resulting in the NICO LPT moving into a gain position, requiring deferred retroactive reinsurance accounting treatment. This deferred gain is recognized in earnings in proportion to actual paid recoveries under the LPT. Over the life of the contract, there is no economic impact as long as any additional losses incurred are within the limit of the LPT. In a period in which a change in the estimate of ceded incurred losses is recognized, the change to the deferred gain is cumulatively recognized in earnings as if the revised estimate was available at the effective date of the LPT.

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

 

Three Months Ended March 31          2016                 2015              

 

 
(In millions)             

Net A&EP adverse development before consideration of LPT

   $ 200          $ -                

Provision for uncollectible third party reinsurance on A&EP

    

 

 

Additional amounts ceded under LPT

     200            -                

Retroactive reinsurance benefit recognized

             (73)                   (5)               

 

 

Pretax impact of unrecognized deferred retroactive reinsurance benefit

   $ 127          $ (5)               

 

 

CNA expected to complete its reserve review of A&EP reserves in the second quarter of 2016, however, during the first quarter of 2016 CNA received communication from NICO that their reserve review indicated a substantial increase in reserves. As a result, CNA accelerated and completed its reserve review during the first quarter. Based upon CNA’s accelerated review, net unfavorable development prior to cessions to the LPT of $200 million was recognized; $146 million related to asbestos claims and $54 million related to environmental pollution claims. The unfavorable development was driven by an increase in anticipated future expenses associated with determination of coverage, higher anticipated payouts associated with a limited number of historical accounts having significant asbestos exposures and higher than expected severity on pollution claims. This unfavorable development was ceded to NICO under the LPT, however CNA’s reported earnings were negatively affected due to the application of retroactive reinsurance accounting, as only a portion of the additional amounts ceded under the LPT were recognized in the current quarter. Retroactive reinsurance accounting resulted in the recognition of a reinsurance benefit of $73 million in the current quarter, while the remaining $127 million of incurred losses covered by the LPT will be recognized as a benefit through future earnings in proportion to the actual paid recoveries subject to the

 

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NICO LPT. All amounts recognized related to the LPT are recorded within Insurance claims and policyholders’ benefits in the Consolidated Condensed Statement of Income.

As of March 31, 2016 and December 31, 2015, the cumulative amounts ceded under the LPT were $2.8 billion and $2.6 billion. Cumulative losses recognized in the Consolidated Condensed Statements of Income that are covered by the LPT were $368 million and $241 million as of March 31, 2016 and December 31, 2015.

NICO established a collateral trust account as security for its obligations to CNA. The fair value of the collateral trust account was $2.7 billion and $2.8 billion as of March 31, 2016 and December 31, 2015. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the full aggregate reinsurance limit as well as certain of NICO’s performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third-party reinsurers related to CNA’s A&EP claims.

6.  Income Taxes

The components of U.S. and foreign income before income tax and a reconciliation between the federal income tax expense at statutory rates and the actual income tax expense is as follows:

 

Three Months Ended March 31        2016           2015         

 

 
(In millions)             

Income before income tax:

    

U.S.

   $ 39        $       137          

Foreign

          156          (32)         

 

 

Total

   $ 195        $ 105          

 

 

Income tax expense at statutory rate

   $ 69        $ 37          

Increase (decrease) in income tax expense resulting from:

    

Exempt investment income

     (30)         (29)         

Foreign related tax differential

     (39)         27          

Amortization of deferred charges associated with intercompany rig sales to other tax jurisdictions

       37          

Taxes related to domestic affiliate

     3          (10)         

Partnership earnings not subject to taxes

     (17)         (13)         

Unrecognized tax benefit (expense)

     5          3          

Other

     5          4          

 

 

Income tax expense (benefit)

   $ (4)       $ 56          

 

 

The effective tax rate is impacted by the change in the relative components of earnings or losses generated in foreign tax jurisdictions with lower tax rates.

7.  Debt

CNA Financial

In the first quarter of 2016, CNA completed a public offering of $500 million aggregate principal amount of 4.5% senior notes due March 1, 2026 and used the net proceeds to repay the entire $350 million outstanding principal amount of its 6.5% senior notes due August 15, 2016.

Diamond Offshore

In the first quarter of 2016, Diamond Offshore cancelled its commercial paper program and repaid the $287 million in commercial paper outstanding at December 31, 2015 with proceeds from Eurodollar loans under its revolving credit agreement. As of March 31, 2016, there were no amounts outstanding under the revolving credit agreement.

Loews

In March of 2016, the Company completed a public offering of $500 million aggregate principal amount of 3.8% senior notes due April 1, 2026 and repaid in full the entire $400 million aggregate principal amount of its 5.3% senior notes at maturity.

 

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8.  Shareholders’ Equity

Accumulated other comprehensive income (loss)

The tables below display the changes in Accumulated other comprehensive income (“AOCI”) by component for the three months ended March 31, 2015 and 2016:

 

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

 

 
(In millions)                                          

Balance, January 1, 2015

   $ 32              $ 846               $ (6)             $ (641)              $ 49                   $ 280        

Other comprehensive income (loss) before reclassifications, after tax of $0, $(62), $1, $0 and $0

     (1)               119                 (2)                  (96)                20        

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

        (9)                5                4                    -        

 

 

Other comprehensive income (loss)

     (1)               110                 3                4                 (96)                20        

Issuance of equity securities by subsidiary

              1                    1        

Amounts attributable to noncontrolling interests

        (12)                      9                 (3)       

 

 

Balance, March 31, 2015

   $ 31              $ 944               $       (3)             $ (636)              $     (38)                  $ 298        

 

 

Balance, January 1, 2016

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

Other comprehensive income before reclassifications, after tax of $(2), $(108), $0, $0 and $0

     3                217                       14                 234        

Reclassification of losses from accumulated other comprehensive income, after tax of $(1), $(7), $0, $(3) and $0

     2                11                 1                8                    22        

 

 

Other comprehensive income

     5                228                 1                8                 14                 256        

Amounts attributable to noncontrolling interests

        (21)                   (2)                (2)                (25)       

 

 

Balance, March 31, 2016

   $       29              $ 554               $ (2)             $ (643)              $ (64)                  $ (126)       

 

 

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

 

Major Category of AOCI    Affected Line Item

 

OTTI gains (losses)    Investment gains (losses)
Unrealized gains (losses) on investments    Investment gains (losses)
Cash flow hedges    Other revenues and Contract drilling expenses
Pension liability    Other operating expenses

 

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Subsidiary Equity Transactions

Loews purchased 0.3 million shares of CNA common stock at an aggregate cost of $8 million during the first three months of 2016. The Company’s percentage ownership interest in CNA remained unchanged as a result of these transactions, at 90%. The Company’s purchase price of the shares was lower than the carrying value of its investment in CNA, resulting in an increase to Additional paid-in capital (“APIC”) of $3 million.

Treasury Stock

The Company repurchased 0.9 million and 1.8 million shares of Loews common stock at aggregate costs of $33 million and $71 million during the three months ended March 31, 2016 and 2015.

9.  Benefit Plans

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

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

 

          Other  
                  Pension Benefits                 Postretirement Benefits      
 

 

 

 
Three Months Ended March 31   2016               2015              2016              2015          

 

 
(In millions)                        

Service cost

        $         2                 $         4               

Interest cost

    32                 32                $         1                $         1           

Expected return on plan assets

    (44)                (48)               (1)               (1)          

Amortization of unrecognized net loss

    11                 11               

Amortization of unrecognized prior service benefit

        (1)               (2)          

Settlement charge

    1                  

 

 

Net periodic benefit cost

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

 

 

10.  Business Segments

The Company’s segments are CNA’s Financial core property and casualty commercial insurance operations, including Specialty, Commercial, International and Other Non-Core operations; Diamond Offshore; Boardwalk Pipeline; Loews Hotels; and Corporate and other. The Company’s reportable segments are primarily based on its individual operating subsidiaries. Each of the principal operating subsidiaries is headed by a chief executive officer who is responsible for the operation of its business and has the duties and authority commensurate with that position. Investment gains (losses) and the related income taxes, excluding those of CNA, are included in the Corporate and other segment.

 

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

 

Three Months Ended March 31            2016                       2015          

 

 
(In millions)              

Revenues (a):

     

CNA Financial:

     

Property and Casualty:

     

Specialty

     $        865               $        917        

Commercial

     802               895        

International

     215               206        

Other Non-Core

     321               334        

 

 

Total CNA Financial

     2,203               2,352        

Diamond Offshore

     471               627        

Boardwalk Pipeline

     347               330        

Loews Hotels

     163               139        

Corporate and other

     (11)              30        

 

 

Total

     $     3,173               $     3,478        

 

 

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

     

CNA Financial:

     

Property and Casualty:

     

Specialty

     $        180               $        207        

Commercial

     95               186        

International

     10               13        

Other Non-Core

     (227)              (92)       

 

 

Total CNA Financial

     58               314        

Diamond Offshore

     83               (287)       

Boardwalk Pipeline

     99               77        

Loews Hotels

     9               10        

Corporate and other

     (54)              (9)       

 

 

Total

     $        195               $        105        

 

 

Net income (loss) (a):

     

CNA Financial:

     

Property and Casualty:

     

Specialty

     $        107               $        123        

Commercial

     56               110        

International

     8               9        

Other Non-Core

     (111)              (32)       

 

 

Total CNA Financial

     60               210        

Diamond Offshore

     43               (126)       

Boardwalk Pipeline

     31               25        

Loews Hotels

     3               5        

Corporate and other

     (35)              (5)       

 

 

Total

     $        102               $        109        

 

 

 

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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 March 31    2016      2015    

 

 

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

     

CNA Financial:

     

Property and Casualty:

     

Specialty

     $          (11)             $            4        

Commercial

     (18)             4        

International

     4              1        

Other Non-Core

     (3)             1        

 

 

Total

     $          (28)             $          10        

 

 

Net income (loss):

     

CNA Financial:

     

Property and Casualty:

     

Specialty

     $            (7)             $            2        

Commercial

     (10)             3        

International

     3              1        

Other Non-Core

     (3)             2        

 

 

Total

     $          (17)             $            8        

 

 

11.  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.

12.  Commitments and Contingencies

CNA Financial

In the course of selling business entities and assets to third parties, CNA 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 sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such guarantee and indemnification agreements in effect for sales of business entities, assets and third party loans may include provisions that survive indefinitely. As of March 31, 2016, the aggregate amount related to quantifiable guarantees was $375 million and the aggregate amount related to indemnification agreements was $259 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 March 31, 2016, CNA had outstanding unlimited indemnifications in connection with the sales of certain of its business entities or assets that included tax liabilities arising prior to a purchaser’s ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. Certain provisions of the indemnification agreements survive indefinitely while others survive until the applicable statutes of limitation expire, or until the agreed upon contract terms expire.

CNA also provided guarantees, if the primary obligor fails to perform, to holders of structured settlement annuities provided by a previously owned subsidiary. As of March 31, 2016, the potential amount of future payments CNA could be required to pay under these guarantees was approximately $2.0 billion, which will be paid over the lifetime of the annuitants. CNA does not believe any payment is likely under these guarantees, as CNA is the beneficiary of a trust that must be maintained at a level that approximates the discounted reserves for these annuities.

 

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Diamond Offshore

Diamond Offshore is financially obligated under a contract with Hyundai Heavy Industries, Co. Ltd. (“Hyundai”) for the construction of a dynamically positioned, harsh environment semisubmersible drilling rig. The total cost of the rig including shipyard costs, capital spares, commissioning, project management and shipyard supervision is estimated to be $764 million. The remaining contractual payment of $440 million is due upon delivery of the rig, which is expected to occur in the second half of 2016.

13.  Consolidating Financial Information

The following schedules present the Company’s consolidating balance sheet information at March 31, 2016 and December 31, 2015, and consolidating statements of income information for the three months ended March 31, 2016 and 2015. These schedules present the individual subsidiaries of the Company and their contribution to the Consolidated Condensed Financial Statements. Amounts presented will not necessarily be the same as those in the individual financial statements of the Company’s subsidiaries due to adjustments for purchase accounting, income taxes and noncontrolling interests. In addition, many of the Company’s subsidiaries use a classified balance sheet which also leads to differences in amounts reported for certain line items.

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

 

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Loews Corporation

Consolidating Balance Sheet Information

 

March 31, 2016     CNA
 Financial
      Diamond
 Offshore
     Boardwalk
Pipeline
     Loews  
Hotels  
     Corporate
and Other
     Eliminations      Total        

 

 

(In millions)

                    

Assets:

                    

Investments

   $ 45,371        $ 119          $ 78       $ 5,082           $ 50,650       

Cash

     242          15       $ 10           12         29             308       

Receivables

     7,531          367         88           36         230        $ (25)           8,227       

Property, plant and equipment

     255          6,222         7,735                 1,093         46                 15,351       

Deferred income taxes

     484                3         59          (546)           -       

Goodwill

     113             237                    350       

Investments in capital stocks of subsidiaries

                 14,932          (14,932)           -       

Other assets

     863          225         321           288                 15            1,716       

Deferred acquisition costs of insurance subsidiaries

     622                         622       

 

 

Total assets

   $ 55,481        $ 6,948       $ 8,391         $ 1,510       $ 20,382        $ (15,488)         $ 77,224       

 

 

Liabilities and Equity:

                    

Insurance reserves

   $ 37,325                       $ 37,325       

Payable to brokers

     256                 $ 374             630       

Short term debt

                 $ 2               3       

Long term debt

     2,711        $ 1,980       $ 3,475           644         1,774             10,584       

Deferred income taxes

             230         786           50          $ (531)           540       

Other liabilities

     3,739          541         435           59         268          (25)           5,017       

 

 

Total liabilities

     44,037          2,751         4,696           755         2,416          (556)           54,099       

 

 

Total shareholders’ equity

     10,264          2,239         1,543           753         17,966          (14,932)           17,833       

Noncontrolling interests

     1,180          1,958         2,152           2               5,292       

 

 

Total equity

     11,444          4,197         3,695           755         17,966          (14,932)           23,125       

 

 

Total liabilities and equity

   $ 55,481        $ 6,948       $ 8,391         $ 1,510       $ 20,382        $ (15,488)         $ 77,224       

 

 

 

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Loews Corporation

Consolidating Balance Sheet Information

 

December 31, 2015    CNA
 Financial 
      Diamond 
 Offshore 
     Boardwalk
Pipeline
       Loews    
  Hotels    
      Corporate
 and Other
     Eliminations          Total        

 

 
(In millions)                                                 

Assets:

                    

Investments

   $ 44,699       $ 117          $ 81       $ 4,503          $ 49,400       

Cash

     387         13       $ 4         12         24            440       

Receivables

     7,384         409         93         35         96       $ 24           8,041       

Property, plant and equipment

     333         6,382         7,712         1,003         47            15,477       

Deferred income taxes

     662               3         68         (733)          -       

Goodwill

     114            237                  351       

Investments in capital stocks of subsidiaries

                 15,129         (15,129)          -       

Other assets

     848         233         319         282            17           1,699       

Deferred acquisition costs of insurance subsidiaries

     598                        598       

 

 

Total assets

   $ 55,025       $ 7,154       $ 8,365       $ 1,416       $ 19,867       $ (15,821)        $ 76,006       

 

 

Liabilities and Equity:

                    

Insurance reserves

   $ 36,486                      $ 36,486       

Payable to brokers

     358                $ 209            567       

Short term debt

     351       $ 287          $ 2         400            1,040       

Long term debt

     2,213         1,980       $ 3,458         590         1,279            9,520       

Deferred income taxes

     5         276         766         47          $ (712)          382       

Other liabilities

     3,883         496         510         70         222         20           5,201       

 

 

Total liabilities

     43,296         3,039         4,734         709         2,110         (692)          53,196       

 

 

Total shareholders’ equity

     10,516         2,195         1,517         705         17,757         (15,129)          17,561       

Noncontrolling interests

     1,213         1,920         2,114         2               5,249       

 

 

Total equity

     11,729         4,115         3,631         707         17,757         (15,129)          22,810       

 

 

Total liabilities and equity

   $ 55,025       $ 7,154       $ 8,365       $ 1,416       $ 19,867       $ (15,821)        $ 76,006       

 

 

 

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Loews Corporation

Consolidating Statement of Income Information

 

Three Months Ended March 31, 2016    CNA
Financial
      Diamond  
 Offshore  
     Boardwalk
Pipeline
        Loews  
   Hotels  
     Corporate
and Other
     Eliminations            Total        

 

 
(In millions)                                                 

Revenues:

                    

Insurance premiums

   $ 1,699                        $ 1,699        

Net investment income (loss)

     435                  $ (13)             422        

Intercompany interest and dividends

                 558         $ (558)             -        

Investment losses

     (28)                         (28)       

Contract drilling revenues

      $ 444                       444        

Other revenues

     97           27         $ 347          $ 163          2              636        

 

 

Total

           2,203           471           347            163          547           (558)             3,173        

 

 

Expenses:

                    

Insurance claims and policyholders’ benefits

     1,408                          1,408        

Amortization of deferred acquisition costs

     307                          307        

Contract drilling expenses

        213                       213        

Other operating expenses

     380           149           205            148          25              907        

Interest

     50           26           43                    18              143        

 

 

Total

     2,145           388           248            154          43           -              2,978        

 

 

Income before income tax

     58           83           99                    504           (558)             195        

Income tax (expense) benefit

     9           1           (19)           (6)         19              4        

 

 

Net income

     67           84           80                    523           (558)             199        

Amounts attributable to noncontrolling interests

     (7)          (41)          (49)                    (97)       

 

 

Net income attributable to Loews Corporation

   $ 60         $ 43         $ 31          $       $ 523         $ (558)           $ 102        

 

 

 

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Loews Corporation

Consolidating Statement of Income Information

 

Three Months Ended March 31, 2015    CNA    
Financial 
  

Diamond 

Offshore 

  

    Boardwalk

Pipeline  

  

Loews   

Hotels   

  

    Corporate

    and Other

       Eliminations    Total        

 

(In millions)                                        

Revenues:

                       

Insurance premiums

   $        1,687                        $       1,687    

Net investment income

   558         $              1           $         29        588    

Intercompany interest and dividends

               567     $        (567)        

Investment gains

   10                    10    

Contract drilling revenues

      600                 600    

Other revenues

   97     26     $        330         $        139           593    

 

Total

   2,352     627     330     139     597     (567)      3,478    

 

Expenses:

                       

Insurance claims and policyholders’ benefits

   1,339                    1,339    

Amortization of deferred acquisition costs

   303                    303    

Contract drilling expenses

      351                 351    

Other operating expenses

   357     539     208     124     21        1,249    

Interest

   39     24     45        18        131    

 

Total

   2,038     914     253     129     39     -       3,373    

 

Income (loss) before income tax

   314     (287)    77     10     558     (567)      105    

Income tax (expense) benefit

   (80)    41     (16)    (5)          (56)   

 

Net income (loss)

   234     (246)    61        562     (567)      49    

Amounts attributable to noncontrolling interests

   (24)    120     (36)             60    

 

Net income (loss) attributable to Loews Corporation

   $           210     $         (126)    $          25     $            5     $       562     $        (567)      $          109    

 

 

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

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with our Consolidated Condensed Financial Statements included in Item 1 of this Report, Risk Factors included in Part II, Item 1A of this Report, and the Consolidated Financial Statements, Risk Factors, and MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2015. This MD&A is comprised of the following sections:

 

     Page
     No.     

Overview

   36

Consolidated Financial Results

   36

Parent Company Structure

   37

Critical Accounting Estimates

   37

Results of Operations by Business Segment

   38

CNA Financial

   38

Diamond Offshore

   41

Boardwalk Pipeline

   45

Loews Hotels

   47

Corporate and Other

   47

Liquidity and Capital Resources

   48

Parent Company

   48

Subsidiaries

   49

Investments

   50

Accounting Standards Update

   53

Forward-Looking Statements

   53

OVERVIEW

We are a holding company. Our subsidiaries are engaged in the following lines of business:

 

   

commercial property and casualty insurance (CNA Financial Corporation (“CNA”), a 90% owned subsidiary);

 

   

operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (“Diamond Offshore”), a 53% 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 51% owned subsidiary); and

 

   

operation of a chain of hotels (Loews Hotels Holding Corporation (“Loews Hotels”), a wholly owned subsidiary).

Unless the context otherwise requires, references in this Report to “Loews Corporation,” “the Company,” “Parent Company,” “we,” “our,” “us” or like terms refer to the business of Loews Corporation excluding its subsidiaries.

Consolidated Financial Results

Net income for the three months ended March 31, 2016 was $102 million, or $0.30 per share, compared to $109 million, or $0.29 per share, in the 2015 first quarter. Net income declined by $7 million as compared to the prior year due to lower earnings at CNA and reduced results from the parent company investment portfolio, partially offset by higher earnings at Diamond Offshore because of the absence this quarter of an asset impairment charge. Higher earnings at Boardwalk Pipeline also served as a partial offset. The increase in net income per share is due to treasury share purchases over the past year.

CNA’s earnings decreased due to a $74 million (after tax and noncontrolling interests) charge related to the 2010 retroactive reinsurance agreement to cede its legacy asbestos and environmental pollution liabilities (Loss Portfolio Transfer, or LPT). Under retroactive reinsurance accounting, amounts ceded through the LPT in excess of the consideration paid result in a deferred benefit that is recognized in income in proportion to paid recoveries over future periods. CNA’s earnings were also impacted by a decline in net investment income driven by limited partnership investment results, as well as realized investment losses in 2016 as compared to gains in 2015. These investment-

 

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Table of Contents

related declines, which totaled $99 million (after tax and noncontrolling interests), were partially offset by improved property & casualty underwriting results and improved results in the Life & Group segment.

Diamond Offshore’s prior year earnings reflected a $158 million (after tax and noncontrolling interests) asset impairment charge. Year-over-year earnings also benefited from revenue earned by newbuild drillships, demobilization fees, lower operating costs, lower depreciation expense resulting mainly from the asset impairment charges taken in 2015, and a lower effective tax rate. These favorable items were largely offset by a substantial reduction in the number of operating rigs.

Boardwalk Pipeline’s earnings increased as new rates took effect following the Gulf South rate case. Additionally, the Evangeline pipeline, which was placed into service in mid-2015, and new growth projects contributed to earnings.

Book value per share increased to $52.60 at March 31, 2016 from $51.67 at December 31, 2015. Book value per share excluding Accumulated other comprehensive income (“AOCI”) increased to $52.98 at March 31, 2016 from $52.72 at December 31, 2015.

Parent Company Structure

We are a holding company and derive substantially all of our cash flow from our subsidiaries. We rely upon our invested cash balances and distributions from our subsidiaries to generate the funds necessary to meet our obligations and to declare and pay any dividends to our shareholders. The ability of our subsidiaries to pay dividends is subject to, among other things, the availability of sufficient earnings and funds in such subsidiaries, applicable state laws, including in the case of the insurance subsidiaries of CNA, laws and rules governing the payment of dividends by regulated insurance companies and compliance with covenants in their respective loan agreements. Claims of creditors of our subsidiaries will generally have priority as to the assets of such subsidiaries over our claims and those of our creditors and shareholders.

CRITICAL ACCOUNTING ESTIMATES

Certain accounting estimates require us to make judgments that affect the amounts reflected in the Consolidated Condensed Financial Statements. Such estimates and judgments necessarily involve varying, and possibly significant, degrees of uncertainty. Accordingly, certain amounts currently recorded in the financial statements will likely be adjusted in the future based on new available information and changes in other facts and circumstances. See the Critical Accounting Estimates section and the Results of Operations by Business Segment – CNA Financial – Reserves – Estimates and Uncertainties section of our MD&A included under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015 for further information.

 

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Table of Contents

RESULTS OF OPERATIONS BY BUSINESS SEGMENT

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

CNA Financial

The following table summarizes the results of operations for CNA for the three months ended March 31, 2016 and 2015 as presented in Note 13 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report. For further discussion of Net investment income and Net realized investment results, see the Investments section of this MD&A.

 

Three Months Ended March 31    2016    2015     

 

(In millions)               

Revenues:

        

Insurance premiums

   $     1,699                 $     1,687    

Net investment income

   435     558    

Investment gains (losses)

   (28)    10    

Other revenues

   97     97    

 

Total

   2,203     2,352    

 

Expenses:

        

Insurance claims and policyholders’ benefits

   1,408     1,339    

Amortization of deferred acquisition costs

   307     303    

Other operating expenses

   380     357    

Interest

   50     39    

 

Total

   2,145     2,038    

 

Income before income tax

   58     314    

Income tax (expense) benefit

      (80)   

 

Net income

   67     234    

Amounts attributable to noncontrolling interests

   (7)    (24)   

 

Net income attributable to Loews Corporation

   $          60     $        210    

 

Net income decreased $150 million for the three months ended March 31, 2016 as compared with the same period in 2015, primarily due to a $74 million (after tax and noncontrolling interests) charge related to the application of retroactive reinsurance accounting to adverse reserve development ceded under the 2010 asbestos and environmental pollution (“A&EP”) loss portfolio transfer, as further discussed in Note 5 of the Notes to Consolidated Condensed Financial Statements included under Item 1. Earnings were also impacted by lower net investment income and lower net realized investment results, driven by lower limited partnership returns and lower gains on sales of securities and higher other than temporary impairment (“OTTI”) losses. These decreases were partially offset by improved underwriting results, including favorable net prior year development of $66 million as compared to unfavorable net prior year development of $2 million in 2015.

CNA Property and Casualty Insurance Operations

CNA’s core property and casualty commercial insurance operations are aggregated and reported in three business segments: Specialty, Commercial and International. CNA’s non-core operations include its Life & Group Non-Core and Other operations.

In the evaluation of the results of the property and casualty businesses, CNA utilizes insurance related metrics including the loss ratio, the expense ratio, the dividend ratio and the combined ratio to assess its operating performance. See the Results of Operations by Business Segment – CNA Financial – Results of Operations section of our MD&A included under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015 for further information.

 

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Table of Contents

The following tables summarize the results of CNA’s property and casualty operations for the three months ended March 31, 2016 and 2015:

 

Three Months Ended March 31, 2016    Specialty              Commercial         International            Total          

 

(In millions, except %)                         

Net written premiums

   $         684        $         748        $         236         $       1,668       

Net earned premiums

   682        688        198         1,568       

Net investment income

   107        126        12         245       

Net operating income

   114        66        5         185       

Net realized investment gains (losses)

   (7)       (10)       3         (14)      

Net income

   107        56        8         171       

Other performance metrics:

              

Loss and loss adjustment expense ratio

   57.1%    64.2%    61.2%     60.7%   

Expense ratio

   32.1        37.3        37.8         35.2       

Dividend ratio

   0.2        0.4           0.2       

 

Combined ratio

   89.4%    101.9%    99.0%     96.1%   

 

Rate

   1%      0%       0%        0%      

Retention

   87          83          77            83         

New business (a)

   $         65          $       137          $        60            $        262         

Three Months Ended March 31, 2015

              

 

Net written premiums

   $         698        $         759        $         212         $       1,669       

Net earned premiums

   680        678        191         1,549       

Net investment income

   155        204        14         373       

Net operating income

   121        107        8         236       

Net realized investment gains

   2        3        1         6       

Net income

   123        110        9         242       

Other performance metrics:

              

Loss and loss adjustment expense ratio

   63.1%     66.9%     60.7%     64.5%    

Expense ratio

   31.3        36.0        37.6        34.1       

Dividend ratio

   0.2        0.4           0.3       

 

Combined ratio

   94.6%    103.3%     98.3%     98.9%    

 

Rate

   1%      3%        (1)%     1%       

Retention

   86          76           78         80          

New business (a)

   $         76          $      138           $           35         $       249          

 

(a)

For International, beginning in 2016, this includes Hardy new business, which was $31 million for the three months ended March 31, 2016.

Net written premiums were consistent for the three months ended March 31, 2016 as compared with the same period in 2015. Net written premiums decreased for Specialty and Commercial, primarily driven by lower new business due to competitive market conditions in Specialty. These decreases were offset by an increase in International, primarily driven by unfavorable premium development primarily at Hardy in 2015. Excluding the effect of foreign currency exchange rates, premium development and the timing of reinsurance purchases in International net written premiums were consistent as compared to the same period in 2015. The increase in net earned premiums was consistent with the trend in net written premiums in recent quarters for Commercial and International. For Specialty, excluding premium development, net earned premiums decreased, which was consistent with the trend in net written premiums.

Net operating income decreased $51 million for the three months ended March 31, 2016 as compared with the same period in 2015. The decrease in net operating income was primarily due to lower net investment income, partially offset by higher net favorable prior year development in Specialty and improved underwriting results in Commercial. Catastrophe losses were $21 million (after tax and noncontrolling interests) for the three months ended March 31, 2016 as compared to catastrophe losses of $17 million (after tax and noncontrolling interests) for the same period in 2015.

 

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Table of Contents

Favorable net prior year development of $66 million and unfavorable net prior year development of $2 million was recorded for the three months ended March 31, 2016 and 2015. Further information on net prior year development is included in Note 5 of the Notes to Consolidated Condensed Financial Statements included under Item 1.

Specialty’s combined ratio improved 5.2 points for the three months ended March 31, 2016 as compared with the same period in 2015. The loss ratio improved 6.0 points due to higher net favorable prior year reserve development. The expense ratio increased 0.8 points for the three months ended March 31, 2016 as compared with the same period in 2015 due to higher underwriting expenses.

Commercial’s combined ratio improved 1.4 points for the three months ended March 31, 2016 as compared with the same period in 2015. The loss ratio improved 2.7 points, primarily due to an improved non-catastrophe current accident year loss ratio and higher favorable net prior year reserve development. The expense ratio increased 1.3 points for the three months ended March 31, 2016 as compared with the same period in 2015, due to higher underwriting expenses and contingent commissions.

International’s combined ratio increased 0.7 points for the three months ended March 31, 2016 as compared with the same period in 2015. The loss ratio increased 0.5 points due to an increase in the current accident year loss ratio driven by political risk losses which was substantially offset by the favorable period over period effect of net prior year premium development. The expense ratio increased 0.2 points due to higher expenses, partially offset by the favorable impact of higher net earned premiums.

Other Non-Core Operations

Other Non-Core primarily includes the results of CNA’s long term care business that is in run-off and also includes certain corporate expenses, including interest on corporate debt, and the results of property and casualty business in run-off, including CNA Re and A&EP.

The following tables summarize the results of CNA’s Other Non-Core operations for the three months ended March 31, 2016 and 2015:

 

Three Months Ended March 31, 2016    Life & Group
Non-Core
   Other     Other    
            Non-Core
    

 

(In millions)                    

Net earned premiums

   $        131            $          131    

Net investment income

   187               $          3     190    

Net operating loss

   (2)        (106)    (108)   

Net realized investment gains (losses)

   (3)           (3)   

Net loss

   (5)        (106)    (111)   

Three Months Ended March 31, 2015

           

 

Net earned premiums

   $        138            $          138    

Net investment income

   179               $          6     185    

Net operating loss

   (15)        (19)    (34)   

Net realized investment gains

   2              

Net loss

   (13)        (19)    (32)   

Net earned premiums decreased $7 million for the three months ended March 31, 2016 as compared with the same period in 2015. The effect of policy lapses was partially offset by premium rate increases.

The net loss increased $79 million for the three months ended March 31, 2016 as compared with the same period in 2015. During the three months ended March 31, 2016, CNA recorded net unfavorable development of $200 million related to its A&EP reserves. This unfavorable development was ceded to NICO under the loss portfolio transfer, however CNA’s earnings were negatively affected by a $74 million (after tax and noncontrolling interests) charge related to the application of retroactive reinsurance accounting, as further discussed in Note 5 of the Notes to Consolidated Condensed Financial Statements included under Item 1. In addition, the net loss was also impacted by lower realized net investment results and $5 million of expense related to the redemption of CNA’s $350 million senior notes due in August of 2016, partially offset by improved results in the long term care business. Due to the recognition of the premium deficiency and resetting of actuarial assumptions in the fourth quarter of 2015, the

 

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operating results for CNA’s long term care business in 2016 now reflect the variance between actual experience and the expected results contemplated in CNA’s best estimate reserves.

Diamond Offshore

Market Overview

Diamond Offshore provides contract drilling services to the energy industry around the world with a fleet of 30 offshore drilling rigs, which includes four jack-up rigs that are being marketed for sale. Diamond Offshore’s fleet consists of 21 semisubmersibles, including the Ocean GreatWhite, which is under construction, five jack-up rigs and four dynamically positioned drillships. Diamond Offshore expects the harsh environment, ultra-deepwater semisubmersible rig, the Ocean GreatWhite, to be delivered in the second half of 2016.

Market fundamentals in the oil and gas industry have continued to deteriorate in 2016. Oil prices, which had fallen to a 12-year low below $30 per barrel in January, have rebounded slightly but continue to exhibit day-to-day volatility, due to multiple factors, including fluctuations in the current and expected level of global oil inventories and the lack of a supply response by the Organization of Petroleum Exporting Countries (“OPEC”). These factors, as well as other geopolitical and economic issues, combined with significant operating losses incurred by some independent and national oil companies and exploration and production companies during 2015, have resulted in significantly reduced capital spending plans for 2016 and possibly beyond, as operators struggle to stay cash neutral in the current oil price environment. There have been very few rig tenders thus far in 2016, primarily limited to short-term or well-to-well work not commencing until 2017 or later.

Since 2014, approximately 50 floater rigs have been retired and others have been cold stacked, slightly abating the current oversupply of drilling rigs. The number of available rigs continues to grow as contracted rigs come off contract and newly-built rigs are delivered. Competition for the limited number of drilling jobs continues to be intense. In some cases, dayrates have been negotiated at near break-even levels to provide for the recovery of operating costs for rigs that would otherwise be uncontracted or cold stacked. Many industry analysts have predicted that the offshore contract drilling market may remain depressed with further declines in dayrates and utilization likely in 2016 and 2017.

As a result of the depressed market conditions and continued pessimistic outlook for the near term, certain of Diamond Offshore’s customers, as well as those of its competitors, have attempted to renegotiate or terminate existing drilling contracts. Such renegotiations could include requests to lower the contract dayrate, lowering of a dayrate in exchange for additional contract term, shortening the term on one contracted rig in exchange for additional term on another rig, early termination of a contract in exchange for a lump sum margin payout and many other possibilities. In addition to the potential for renegotiations, some of Diamond Offshore’s drilling contracts permit the customer to terminate the contract early after specified notice periods, usually resulting in a contractually specified termination amount, which may not fully compensate Diamond Offshore for the loss of the contract. Particularly during depressed market conditions, the early termination of a contract may result in a rig being idle for an extended period of time, which could adversely affect Diamond Offshore’s business. When a customer terminates a contract prior to the contract’s scheduled expiration, Diamond Offshore’s contract backlog is also adversely impacted.

Diamond Offshore’s results of operations and cash flows for the quarter ended March 31, 2016 have been negatively impacted by depressed market conditions in the offshore drilling industry. Diamond Offshore currently expects that these adverse market conditions will continue for the foreseeable future. The continuation of these conditions for an extended period could result in more of Diamond Offshore’s rigs being without contracts and/or cold stacked or scrapped and could further materially and adversely affect its business. When Diamond Offshore cold stacks or elects to scrap a rig, Diamond Offshore evaluates the rig for impairment. During 2015, Diamond Offshore recognized an aggregate impairment loss of $861 million to write down 17 of its drilling rigs to their estimated recoverable amounts. During the first quarter of 2016, Diamond Offshore evaluated ten of its drilling rigs with indications that their carrying amounts may not be recoverable and determined that no additional rigs were impaired at this time.

On April 28, 2016, Diamond Offshore’s agent in Mexico received a letter from PEMEX-Exploración y Producción (“PEMEX”) purporting to exercise its contractual right to terminate its drilling contract on the Ocean Scepter with 30 days’ advance notice. Diamond Offshore is in discussions with PEMEX regarding the matter. As of May 2, 2016, 15 rigs in Diamond Offshore’s fleet were cold stacked, including four jack-up rigs that are currently being marketed for sale.

 

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Globally, the ultra-deepwater and deepwater floater markets continue to be depressed. Diminished or nonexistent demand, combined with an oversupply of rigs has caused floater dayrates to decline significantly and industry analysts expect offshore drillers to continue to scrap older, lower specification rigs; however, newer and higher specification rigs have also been impacted by the recycling trend.

In an effort to manage the oversupply of rigs and potentially avoid the cost of cold stacking newly-built rigs, which, in the case of dynamically-positioned rigs, can be significant, several drilling contractors have exercised options to delay the delivery of rigs by the shipyard or have exercised their right to cancel orders due to the late delivery of rigs. As of the date of this report, industry data indicates that there are approximately 55 competitive, or non-owner-operated, newbuild floaters on order, including 16 rigs scheduled for delivery in 2016 of which 12 units are not yet contracted for future work. An additional 39 rigs are currently scheduled to be delivered between 2017 and 2021, over half of which are not yet contracted for future work. Industry analysts predict that delivery dates may shift further as newbuild owners negotiate with their respective shipyards.

While conditions in the mid-water market vary slightly by region, mid-water rigs have been adversely impacted by (i) lower demand, (ii) declining dayrates, (iii) increased regulatory requirements, including more stringent design requirements for well control equipment, which could significantly increase the capital needed to comply with design requirements that would permit such rigs to work in the U.S. Gulf of Mexico (“GOM”), (iv) the challenges experienced by lower specification units in this segment as a result of more complex customer specifications and (v) the intensified competition resulting from the migration of some deepwater and ultra-deepwater units to compete against mid-water units. To date, the mid-water market has seen the highest number of cold-stacked and scrapped rigs. Since 2012, Diamond Offshore has sold 12 of its mid-water rigs for scrap. As market conditions remain challenging, Diamond Offshore expects higher-specification rigs to take the place of lower-specification units, where possible, leading to additional lower-specification rigs being cold stacked or ultimately scrapped.

On April 14, 2016, the Bureau of Safety and Environmental Enforcement (“BSEE”), issued its final well control regulations, nearly six years after the Macondo well blowout in the GOM. This final rule addresses the full range of systems and equipment associated with well control operations, focusing on requirements for blowout preventers (“BOPs”), well design, well control casing, cementing, real-time monitoring and subsea containment. The regulations combine prescriptive and performance-based measures to cultivate a greater culture of safety for both oil and gas companies and offshore rig operators that minimizes risk. Key features of the well control regulations include requirements for BOPs, double shear rams, third-party reviews of equipment, real-time monitoring data, safe drilling margins, centralizers, inspections and other reforms related to well design and control, casing, cementing and subsea containment. Most of these requirements will become effective three months after publication of the final rule in the Federal Register; however, several requirements have more extended timeframes for compliance.

The issuance of these rules could result in the future retirement of older, less capable rigs, for which compliance with the new requirements is not physically or economically feasible. Additionally, some analysts predict that the new rules will drive the continued preference for modern floaters.

Contract Drilling Backlog

The following table reflects Diamond Offshore’s contract drilling backlog as of April 1, 2016 (based on contract information known at that time) and February 16, 2016 (the date reported in our Annual Report on Form 10-K for the year ended December 31, 2015). Contract drilling backlog as presented below includes only firm commitments (typically represented by signed contracts) and is calculated by multiplying the contracted operating dayrate by the firm contract period and adding one-half of any potential rig performance bonuses. Diamond Offshore’s calculation also assumes full utilization of its drilling equipment for the contract period (excluding scheduled shipyard and survey days); however, the amount of actual revenue earned and the actual periods during which revenues are earned will be different than the amounts and periods shown in the tables below due to various factors. Utilization rates, which generally approach 92% - 98% during contracted periods, can be adversely impacted by downtime due to various operating factors including, but not limited to, weather conditions and unscheduled repairs and maintenance. Contract drilling backlog excludes revenues for mobilization, demobilization, contract preparation and customer reimbursables. No revenue is generally earned during periods of downtime for regulatory surveys. Changes in Diamond Offshore’s contract drilling backlog between periods are generally a function of the performance of work on term contracts, as well as the extension or modification of existing term contracts and the execution of additional contracts. In addition, under certain circumstances, Diamond Offshore’s customers may seek to terminate or renegotiate its contracts.

 

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      April 1,  
 2016  
         February 16,        
2016        
 

 

 
(In millions)                  

Floaters:

       

Ultra-Deepwater (a)

   $        4,137          $ 4,415            

Deepwater

     327           375            

Mid-Water

     307           356            

 

 

Total Floaters

     4,771           5,146            

Jack-ups (b)

     7           49            

 

 

Total

   $ 4,778          $       5,195            

 

 

 

(a)

Ultra-deepwater floaters includes $641 million attributable to future work for the semisubmersible Ocean GreatWhite, which is under construction.

(b)

On April 28, 2016, Diamond Offshore’s agent in Mexico received a letter from PEMEX purporting to exercise its contractual right to terminate its drilling contract on the Ocean Scepter with 30 days’ advance notice. Diamond Offshore is in discussions with PEMEX regarding the matter.

The following table reflects the amount of Diamond Offshore’s contract drilling backlog by year as of April 1, 2016:

 

Year Ended December 31    Total        2016 (a)        2017         2018       2019 - 2020    

 

 
(In millions)                                         

Floaters:

                    

Ultra-Deepwater (b)

   $ 4,137         $ 794           $ 1,201         $ 1,142          $   1,000           

Deepwater

     327           191             136           

Mid-Water

     307           171             136           

 

 

Total Floaters

     4,771           1,156             1,473           1,142         1,000           

Jack-ups (c)

     7           7                  

 

 

Total

   $   4,778         $   1,163           $   1,473         $   1,142          $   1,000           

 

 

 

(a)

Represents a nine-month period beginning April 1, 2016.

(b)

Ultra-deepwater floaters includes $54 million for the year 2016, $214 million for each of the years 2017 and 2018 and $159 million for the year 2019 attributable to future work for the Ocean GreatWhite, which is under construction.

(c)

On April 28, 2016, Diamond Offshore’s agent in Mexico received a letter from PEMEX purporting to exercise its contractual right to terminate its drilling contract on the Ocean Scepter with 30 days’ advance notice. Diamond Offshore is in discussions with PEMEX regarding the matter.

The following table reflects the percentage of rig days committed by year as of April 1, 2016. The percentage of rig days committed is calculated as the ratio of total days committed under contracts, as well as scheduled shipyard, survey and mobilization days for all rigs in Diamond Offshore’s fleet, to total available days (number of rigs multiplied by the number of days in a particular year). Total available days have been calculated based on the expected final commissioning date for the Ocean GreatWhite, which is under construction.

 

Year Ended December 31      2016 (a)        2017          2018        2019–2020      

 

 

Rig Days Committed (b)

                 

Floaters:

                 

Ultra-Deepwater

       47%           58%           57%         26%         

Deepwater

       24%           17%           

Mid-Water

       19%           13%           

Total Floaters

       32%           34%           25%         11%         

Jack-ups (c)

       3%                

 

(a)

Represents a nine-month period beginning April 1, 2016.

(b)

Includes approximately 285 currently known, scheduled shipyard days for rig commissioning, contract preparation, surveys and extended maintenance projects, as well as rig mobilization days for the remainder of 2016.

(c)

On April 28, 2016, Diamond Offshore’s agent in Mexico received a letter from PEMEX purporting to exercise its contractual right to terminate its drilling contract on the Ocean Scepter with 30 days’ advance notice. Diamond Offshore is in discussions with PEMEX regarding the matter.

 

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Dayrate and Utilization Statistics

 

Three Months Ended March 31    2016      2015    

 

 

Revenue earning days (a)

     

Floaters:

     

Ultra-Deepwater

     612          506       

Deepwater

     177          285       

Mid-Water

     181          663       

Jack-ups

     91          358       

Utilization (b)

     

Floaters:

     

Ultra-Deepwater

     61%         51%       

Deepwater

     28%         45%       

Mid-Water

     25%         49%       

Jack-ups

     18%         66%       

Average daily revenue (c)

     

Floaters:

     

Ultra-Deepwater

   $    533,000        $    496,800       

Deepwater

     334,500          486,500       

Mid-Water

     263,100          265,900       

Jack-ups

     118,400          92,400       

 

(a)

A revenue earning day is defined as a 24-hour period during which a rig earns a dayrate after commencement of operations and excludes mobilization, demobilization and contract preparation days.

(b)

Utilization is calculated as the ratio of total revenue earning days divided by the total calendar days in the period for all rigs in Diamond Offshore’s fleet (including cold-stacked rigs, but excluding rigs under construction). As of March 31, 2016, Diamond Offshore’s cold-stacked rigs included three ultra-deepwater semisubmersibles, four deepwater semisubmersibles, five mid-water semisubmersibles and four jack-up rigs.

(c)

Average daily revenue is defined as total contract drilling revenue for all the specified rigs in Diamond Offshore’s fleet per revenue earning day.

Results of Operations

The following table summarizes the results of operations for Diamond Offshore for the three months ended March 31, 2016 and 2015 as presented in Note 13 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report:

 

Three Months Ended March 31    2016      2015  

 

 

(In millions)

     

Revenues:

     

Contract drilling revenues

   $ 444        $ 600      

Net investment income

        1      

Other revenues

     27          26      

 

 

Total

     471          627      

 

 

Expenses:

     

Contract drilling expenses

     213          351      

Other operating expenses

     

 Impairment of assets

        359      

 Other expenses

     149          180      

Interest

     26          24      

 

 

Total

     388          914      

 

 

Income (loss) before income tax

     83          (287)     

Income tax benefit

             41      

Amounts attributable to noncontrolling interests

     (41)         120      

 

 

Net income (loss) attributable to Loews Corporation

   $             43        $         (126)     

 

 

 

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Contract drilling revenue decreased $156 million for the three months ended March 31, 2016 as compared with the 2015 period, primarily as a result of fewer revenue earning days for the deepwater, mid-water and jack-up fleets, reflecting continued low demand for contract drilling services in those markets. These decreases were partially offset by the favorable impact of an increase in revenue earning days for the ultra-deepwater fleet, which included the operation of three newbuild drillships that commenced drilling operations subsequent to the first quarter of 2015 and an increase in average daily revenue for the ultra-deepwater fleet, primarily due to the inclusion of $40 million in demobilization revenue for the Ocean Endeavor.

Revenue generated by ultra-deepwater floaters increased $75 million for the three months ended March 31, 2016 as compared with the 2015 period, primarily as a result of increased utilization of $52 million and higher average daily revenue of $22 million. Revenue earning days for the first quarter of 2016 increased, compared to the first quarter of 2015, primarily due to incremental revenue earning days for newbuild drillships and the Ocean Monarch, which was warm stacked during the first quarter of 2015. The increase in revenue earning days was partially offset by fewer revenue earning days for the Ocean Endeavor and Ocean Rover, both of which completed contracts in the first quarter of 2016, and fewer revenue earning days for the cold-stacked Ocean Baroness and the Ocean Clipper, which was sold in November 2015. Average daily revenue increased during the first quarter of 2016, compared to the first quarter of 2015, primarily due to the inclusion of $40 million in demobilization revenue for the Ocean Endeavor, which completed its contract in the Black Sea in January 2016.

Revenue generated by deepwater floaters decreased $80 million for the three months ended March 31, 2016 as compared with the 2015 period, primarily due to downtime associated with the cold stacking and idling of rigs that had operated during the first quarter of 2015, partially offset by incremental revenue earning days for the Ocean Victory and Ocean Valiant, neither of which were under contract during the first quarter of 2015.

Revenue generated by mid-water floaters decreased $129 million for the first quarter of 2016, compared to the same quarter of 2015, reflecting a significant reduction in demand in the mid-water drilling market with only two mid-water floaters being operated during both periods. Subsequent to the first quarter of 2015, Diamond Offshore sold nine mid-water floaters, reducing the mid-water fleet to five drilling rigs, three of which are currently cold stacked.

Revenue generated by jack-up rigs decreased $22 million for the three months ended March 31, 2016 as compared with the 2015 period, primarily due to the cold stacking of three rigs which were operating under contract in the first quarter of 2015. On April 28, 2016, Diamond Offshore’s agent in Mexico received a letter from PEMEX purporting to exercise its contractual right to terminate its drilling contract on the Ocean Scepter, Diamond Offshore’s sole working jack-up rig, with 30 days’ advance notice. Diamond Offshore is in discussions with PEMEX regarding the matter.

Net income increased $169 million for the three months ended March 31, 2016 as compared with the 2015 period, primarily due to the prior year impact of a $158 million asset impairment charge (after tax and noncontrolling interests) related to the carrying value of eight drilling rigs and lower depreciation expense.

Boardwalk Pipeline

Market Overview

The transportation rates that Boardwalk Pipeline is able to charge customers are heavily influenced by the amount and geographical location of natural gas production and demand for gas by end users such as power plants, petrochemical facilities and liquefied natural gas (“LNG”) export facilities. Changes in certain longer term trends such as the development of gas production from the Marcellus and Utica production areas located in the northeastern U.S. and changes to related pipeline infrastructure have resulted in a sustained narrowing of basis differentials corresponding to traditional flow patterns on Boardwalk Pipeline’s natural gas pipeline systems (generally south to north and west to east), reducing the transportation rates and adversely impacting other contract terms that Boardwalk Pipeline can negotiate with its customers for available transportation capacity and for contracts due for renewal for Boardwalk Pipeline’s transportation services.

Each year, a portion of Boardwalk Pipeline’s firm natural gas transportation and storage contracts expire and need to be renewed or replaced. Over the past several years, Boardwalk Pipeline has renewed many expiring contracts at lower rates and for shorter terms than in the past, or not at all. Boardwalk Pipeline expects this trend to continue, mainly for contracts to transport gas from west to east across Boardwalk Pipeline’s system, and therefore, Boardwalk Pipeline may not be able to sell all of its available capacity, extend expiring contracts with existing customers or obtain replacement contracts at attractive rates or for a similar term as the expiring contracts. These

 

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sustained conditions have had, and Boardwalk Pipeline expects will continue to have, a materially adverse effect on Boardwalk Pipeline’s revenues, earnings and distributable cash flows.

Natural gas producers account for a significant portion of Boardwalk Pipeline’s revenues, with approximately 50% of its 2015 revenues generated from contracts with natural gas producers. During 2015, the price of oil and natural gas continued to decline as a result of increasing gas supplies, mainly from shale production areas in the U.S., which has adversely impacted the businesses of certain of Boardwalk Pipeline’s producer customers, including those that have contracted with Boardwalk Pipeline for capacity on some of its growth projects. If gas prices remain low, or continue to decline, for a sustained period of time, the businesses of Boardwalk Pipeline’s producer customers will be further adversely affected, which could reduce the demand for Boardwalk Pipeline’s services, result in the non-renewal of contracted capacity, or renewal at lower rates or on less attractive terms, or lead some customers, particularly customers that are experiencing financial difficulties, to default on their obligations to Boardwalk Pipeline or seek to terminate or renegotiate existing contracts. Should any such customers file for bankruptcy protection, they may also seek to have their contracts with Boardwalk Pipeline rejected in the bankruptcy proceeding.

A majority of Boardwalk Pipeline’s customers are rated investment-grade by at least one of the major credit rating agencies, however, the ratings of several of Boardwalk Pipeline’s oil and gas producer customers, including some of those supporting its growth projects, have recently been downgraded. The downgrades further restrict liquidity for those customers and may result in nonperformance of their contractual obligations, including failure to make future payments or, for customers supporting Boardwalk Pipeline’s growth projects, failure to post required letters of credit or other collateral as construction progresses over the remainder of 2016.

Boardwalk Pipeline is currently engaged in a number of growth projects having an aggregate estimated cost of approximately $1.6 billion. A number of growth projects remain subject to regulatory approval to commence construction and all of which are subject to the risk that they may not be completed, may be impacted by significant cost overruns or may be materially changed prior to completion as a result of future developments or circumstances that Boardwalk Pipeline cannot predict at this time.

In early 2016, a customer on Boardwalk Pipeline’s Northern Supply Access project, which had contracted for 100,000 million British thermal units per day (“MMBtu/d”) of capacity, filed for bankruptcy protection and rejected Boardwalk Pipeline’s contract. Boardwalk Pipeline has an unsecured claim in the bankruptcy proceedings for an amount that was determined by agreement between Boardwalk Pipeline and that customer. Boardwalk Pipeline is continuing to market the capacity associated with that customer’s precedent agreement. If Boardwalk Pipeline cannot sell the capacity on acceptable terms, the scope of the project could be adjusted to accommodate the reduced volume commitment. In April of 2016, another customer that has contracted for 30,000 MMBtu/d of capacity on this project failed to increase its letter of credit in default of its obligations under a credit support agreement. The transportation agreement with this customer remains in place and Boardwalk Pipeline is in discussions regarding the required credit support.

Results of Operations

The following table summarizes the results of operations for Boardwalk Pipeline for the three months ended March 31, 2016 and 2015 as presented in Note 13 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report:

 

Three Months Ended March 31    2016         2015             

 

 
(In millions)                

Revenues:

       

Other revenue, primarily operating

   $       347          $       330              

 

 

Total

     347            330              

 

 

Expenses:

       

Operating

     205            208              

Interest

     43            45              

 

 

Total

     248            253              

 

 

Income before income tax

     99            77              

Income tax expense

     (19)           (16)             

Amounts attributable to noncontrolling interests

     (49)           (36)             

 

 

Net income attributable to Loews Corporation

   $ 31          $ 25              

 

 

 

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Total revenues increased $17 million for the three months ended March 31, 2016 as compared with the 2015 period. Excluding items offset in fuel and transportation expense, primarily retained fuel, operating revenues increased $23 million. The increase was primarily due to higher transportation revenues of $22 million which resulted from incremental revenues from the Gulf South rate case of $9 million, the return to service of the Evangeline pipeline in mid-2015 and growth projects recently placed into service, partially offset by the effects of the market conditions.

Operating expenses decreased $3 million for the three months ended March 31, 2016 as compared with the 2015 period. Excluding items offset in operating revenues, operating costs and expenses increased $4 million primarily due to higher employee-related costs and increased maintenance activities, partially offset by a decrease in depreciation expense. Interest expense decreased $2 million primarily due to higher capitalized interest related to capital projects and lower average debt balances.

Net income for the three months ended March 31, 2016 increased $6 million as compared with the 2015 period, primarily reflecting the higher revenues and lower depreciation and interest expense as discussed above.

Loews Hotels

The following table summarizes the results of operations for Loews Hotels for the three months ended March 31, 2016 and 2015 as presented in Note 13 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report:

 

Three Months Ended March 31    2016        2015             

 

 

(In millions)

       

Revenues:

       

Operating revenue

   $      138           $      120                

Revenues related to reimbursable expenses

     25             19                

 

 

Total

     163             139                

 

 

Expenses:

       

Operating

     123             112                

Reimbursable expenses

     25             19                

Depreciation

     15             11                

Equity income from joint ventures

     (15)            (18)               

Interest

     6             5                

 

 

Total

     154             129                

 

 

Income before income tax

     9             10                

Income tax expense

     (6)            (5)               

 

 

Net income attributable to Loews Corporation

   $ 3           $ 5                

 

 

Operating revenues increased $18 million for the three months ended March 31, 2016 as compared with the 2015 period primarily due to the acquisition of one hotel during the first three months of 2016 and two hotels during 2015.

Income before income tax decreased $1 million for the three months ended March 31, 2016 as compared with the 2015 period, due to the increase in revenues offset by increases in operating and depreciation expenses of $11 million and $4 million primarily due to the acquisitions in 2016 and 2015. In addition, equity income from joint venture properties decreased $3 million for the three months ended March 31, 2016 as compared with the 2015 period.

Net income decreased $2 million for the three months ended March 31, 2016 as compared with the 2015 period, due to the changes discussed above and an increase in the effective tax rate due to a higher state tax provision for the increased ratio of Florida based income.

Corporate and Other

Corporate and Other operations consist primarily of investment income at the Parent Company, corporate interest expenses and other corporate administrative costs. Investment income includes earnings on cash and short term investments held at the Parent Company level to meet current and future liquidity needs, as well as results of limited partnership investments and the trading portfolio.

 

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The following table summarizes the results of operations for Corporate and Other for the three months ended March 31, 2016 and 2015 as presented in Note 13 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report:

 

Three Months Ended March 31                2016                  2015          
(In millions)              

Revenues:

     

Net investment income (loss)

   $ (13)           $     29            

Other revenues

     2              1            

Total

     (11)             30            

Expenses:

     

Operating

     25              21            

Interest

     18              18            

Total

     43              39            

Loss before income tax

     (54)             (9)           

Income tax benefit

     19              4            

Net loss attributable to Loews Corporation

   $ (35)           $     (5)           
                   

Net investment results decreased by $42 million for the three months ended March 31, 2016 as compared with the 2015 period, primarily due to lower results from limited partnership investments, partially offset by improved performance of equity based investments and fixed income investments in the trading portfolio.

Net results decreased $30 million for the three months ended March 31, 2016 as compared with the 2015 period primarily due to the change in revenues discussed above and increased corporate overhead expenses.

LIQUIDITY AND CAPITAL RESOURCES

Parent Company

Parent Company cash and investments, net of receivables and payables at March 31, 2016 totaled $4.9 billion, as compared to $4.3 billion at December 31, 2015. During the three months ended March 31, 2016, we received $558 million in dividends from our subsidiaries, including a special dividend from CNA of $485 million. Cash outflows included the payment of $33 million to fund treasury stock purchases, $8 million to purchase shares of CNA, $21 million of cash dividends to our shareholders and net cash contributions of approximately $40 million to Loews Hotels. As a holding company we depend on dividends from our subsidiaries and returns on our investment portfolio to fund our obligations. We are not responsible for the liabilities and obligations of our subsidiaries and there are no parental guarantees.

In March of 2016, we completed a public offering of $500 million aggregate principal amount of 3.8% senior notes due April 1, 2026 and repaid in full the entire $400 million aggregate principal amount of our 5.3% senior notes at maturity. The net proceeds will be used for general corporate purposes.

As of March 31, 2016, there were 339,014,412 shares of Loews common stock outstanding. Depending on market and other conditions, we may purchase our shares and shares of our subsidiaries outstanding common stock in the open market or otherwise. During the three months ended March 31, 2016, we purchased 0.9 million shares of Loews common stock and 0.3 million shares of CNA common stock.

In March of 2016, Moody’s downgraded our unsecured debt rating from A2 to A3 and the outlook remains stable. Our current unsecured debt ratings are A+ for S&P and A for Fitch Ratings, Inc., with a stable outlook for both. We have an effective Registration Statement on Form S-3 registering the future sale of an unlimited amount of our debt and equity securities. From time to time, we consider issuance of Parent Company indebtedness under this registration statement.

We continue to pursue conservative financial strategies while seeking opportunities for responsible growth. These include the expansion of existing businesses, full or partial acquisitions and dispositions, and opportunities for efficiencies and economies of scale.

 

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Subsidiaries

CNA’s cash provided by operating activities was $334 million for the three months ended March 31, 2016 as compared with $94 million for the same period in 2015. Cash provided by operating activities reflected increased receipts relating to the returns on invested capital for limited partnerships.

CNA declared and paid a quarterly dividend of $0.25 per share and a special dividend of $2.00 per share of its common stock in the first quarter of 2016. On April 29, 2016, CNA’s Board of Directors declared a quarterly dividend of $0.25 per share, payable June 1, 2016 to shareholders of record on May 16, 2016. CNA’s declaration and payment of future dividends is at the discretion of its Board of Directors and will depend on many factors, including CNA’s earnings, financial condition, business needs and regulatory constraints. The payment of dividends by CNA’s insurance subsidiaries without prior approval of the insurance department of each subsidiary’s domiciliary jurisdiction is generally limited by formula. Dividends in excess of these amounts are subject to prior approval by the respective insurance regulator.

Dividends from the Continental Casualty Company (“CCC”), a subsidiary of CNA, are subject to the insurance holding company laws of the State of Illinois, the domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require prior approval by the Illinois Department of Insurance (“Department”), are determined based on the greater of the prior year’s statutory net income or 10% of statutory surplus as of the end of the prior year, as well as the timing and amount of dividends paid in the preceding twelve months. Additionally, ordinary dividends may only be paid from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As of March 31, 2016, CCC was in a positive earned surplus position. The maximum allowable dividend CCC could pay during 2016 that would not be subject to the Department’s prior approval is $1.1 billion, less dividends paid during the preceding twelve months measured at that point in time. CCC paid dividends of $300 million during the nine months ended December 31, 2015 and $565 million during the three months ended March 31, 2016. As of March 31, 2016, CCC is able to pay approximately $214 million of dividends that would not be subject to prior approval of the Department. The actual level of dividends paid in any year is determined after an assessment of available dividend capacity, holding company liquidity and cash needs as well as the impact the dividends will have on the statutory surplus of the applicable insurance company.

Diamond Offshore’s cash provided by operating activities for the three months ended March 31, 2016 increased $81 million compared to the 2015 period, primarily due to a net decrease in cash payments for contract drilling and general and administrative expenses, including personnel-related, repairs and maintenance, and other rig operating costs of $188 million, partially offset by lower cash receipts from contract drilling services of $109 million. The decline in both cash receipts and cash payments related to the performance of contract drilling services reflects a reduction in contract drilling activity during the three months ended March 31, 2016 as well as Diamond Offshore’s continuing efforts to control costs.

For the remainder of 2016, Diamond Offshore has budgeted approximately $620 million for capital expenditures of which approximately $510 million is expected be spent towards construction of the ultra-deepwater semisubmersible, the Ocean GreatWhite and the remainder towards ongoing capital maintenance and replacement programs. Construction continues on the Ocean GreatWhite with delivery expected in the second half of 2016. The estimated total project cost, including shipyard costs, capital spares, commissioning, project management and shipyard supervision is $764 million, of which $256 million has been incurred as of March 31, 2016. The final installment of $440 million is due upon delivery of the rig.

During March of 2016, Diamond Offshore executed two sale and leaseback transactions and received $105 million in proceeds with no gain or loss recognized on the transactions. For further information about these transactions, see Note 4 of the Notes to Consolidated Condensed Financial Statements in Item 1 of this report.

As of March 31, 2016, Diamond Offshore had no loans or letters of credit outstanding under the credit agreement and is in compliance with all covenant requirements. As of April 28, 2016, Diamond Offshore had $1.5 billion available under its revolving credit facility to provide short-term liquidity for payment obligations.

In February of 2016, Moody’s Investors Service, Inc. (“Moody’s”) downgraded Diamond Offshore’s senior unsecured credit rating to Ba2 from Baa2, with a stable outlook, and also downgraded its short-term credit rating to sub-prime. Diamond Offshore’s current corporate credit rating for Standard & Poor’s (“S&P”) is BBB+ and its short-term credit rating is A2. Market conditions and other factors, many of which are outside of Diamond Offshore’s control, could cause its credit ratings to be lowered. A downgrade in Diamond Offshore’s credit ratings could adversely impact its cost of issuing additional debt and the amount of additional debt that it could issue, and could further restrict access to capital markets and Diamond Offshore’s ability to raise additional debt or rollover existing maturities. As a consequence, Diamond Offshore may not be able to issue additional debt in amounts and/or

 

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with terms that it considers to be reasonable. One or more of these occurrences could limit Diamond Offshore’s ability to pursue other business opportunities.

Diamond Offshore will make periodic assessments of its capital spending programs based on industry conditions and will make adjustments if it determines they are required. Diamond Offshore, may, from time to time, issue debt or equity securities, or a combination thereof, to finance capital expenditures, the acquisition of assets and businesses or for general corporate purposes. Diamond Offshore’s ability to access the capital markets by issuing debt or equity securities will be dependent on its results of operations, current financial condition, current credit ratings, current market conditions and other factors beyond its control.

Boardwalk Pipeline’s cash provided by operating activities decreased $25 million for the three months ended March 31, 2016 compared to the 2015 period primarily due to the timing of accruals, partially offset by increased net income, excluding the effects of non-cash items such as depreciation and amortization and asset impairment.

In the first quarters of 2016 and 2015, Boardwalk Pipeline declared and paid quarterly distributions to its common unitholders of record of $0.10 per common unit and an amount to the general partner on behalf of its 2% general partner interest. In April of 2016, the Partnership declared a quarterly cash distribution to unitholders of record of $0.10 per common unit.

For the three months ended March 31, 2016 and 2015, Boardwalk Pipeline’s capital expenditures were $106 million and $62 million, consisting of a combination of growth and maintenance capital. Boardwalk Pipeline expects total capital expenditures to be approximately $850 million in 2016, primarily related to growth projects and pipeline system maintenance expenditures. Boardwalk Pipeline expects to finance 2016 growth capital expenditures through existing capital resources, including Boardwalk Pipeline’s revolving credit facility, the Subordinated Loan facility and cash flows from operating activities.

As of May 2, 2016, Boardwalk Pipeline had outstanding borrowings of $365 million resulting in over $1.1 billion of available borrowing capacity under its revolving credit facility and is in compliance with all of its debt covenants.

INVESTMENTS

Investment activities of non-insurance subsidiaries primarily include investments in fixed income securities, including short term investments. The Parent Company portfolio also includes equity securities, including short sales and derivative instruments, and investments in limited partnerships. These types of investments generally present greater volatility, less liquidity and greater risk than fixed income investments and are included within Results of Operations – Corporate and Other.

We enter into short sales and invest in certain derivative instruments that are used for asset and liability management activities, income enhancements to our portfolio management strategy and to benefit from anticipated future movements in the underlying markets. If such movements do not occur as anticipated, then significant losses may occur. Monitoring procedures include senior management review of daily detailed reports of existing positions and valuation fluctuations to ensure that open positions are consistent with our portfolio strategy.

Credit exposure associated with non-performance by the counterparties to derivative instruments is generally limited to the uncollateralized change in fair value of the derivative instruments recognized in the Consolidated Condensed Balance Sheets. We mitigate the risk of non-performance by monitoring the creditworthiness of counterparties and diversifying derivatives to multiple counterparties. We occasionally require collateral from our derivative investment counterparties depending on the amount of the exposure and the credit rating of the counterparty.

 

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Insurance

CNA maintains a large portfolio of fixed maturity and equity securities, including large amounts of corporate and government issued debt securities, residential and commercial mortgage-backed securities, and other asset-backed securities and investments in limited partnerships which pursue a variety of long and short investment strategies across a broad array of asset classes. CNA’s investment portfolio supports its obligation to pay future insurance claims and provides investment returns which are an important part of CNA’s overall profitability.

Net Investment Income

The significant components of CNA’s Net investment income are presented in the following table:

 

Three Months Ended March 31            2016                          2015          
(In millions)              

Fixed maturity securities:

     

Taxable

   $ 345                   $ 342           

Tax-exempt

     101                     101           

Total fixed maturity securities

     446                     443           

Limited partnership investments

     (14)                    114           

Other, net of investment expense

     3                     1           

Net investment income before tax

   $     435                   $ 558           
                   

Net investment income after tax and noncontrolling interests

   $ 283                   $     354           
                   

Effective income yield for the fixed maturity securities portfolio, before tax

     4.8%                 4.8%        

Effective income yield for the fixed maturity securities portfolio, after tax

     3.4%                 3.4%        

Net investment income after tax and noncontrolling interests for the three months ended March 31, 2016 decreased $71 million as compared with the same period in 2015. The decrease was driven by limited partnerships, which returned (0.6)% as compared with 3.9% in the prior year period.

Net Realized Investment Gains (Losses)

The components of CNA’s Net realized investment gains (losses) are presented in the following table:

 

Three Months Ended March 31            2016                      2015          
(In millions)              

Realized investment gains (losses):

     

Fixed maturity securities:

     

Corporate and other bonds

   $ (15)               $     13            

States, municipalities and political subdivisions

     3                  (4)           

Asset-backed

     (6)                 3            

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

     1                     

Total fixed maturity securities

     (17)                 12            

Equity securities

     (5)              

Derivative securities

     (7)                 (1)           

Short term investments and other

     1                  (1)           

Total realized investment gains (losses)

     (28)                 10            

Income tax (expense) benefit

     9                  (1)           

Amounts attributable to noncontrolling interests

     2           &nbs