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 June 30, 2017

OR

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ____________ to _____________

Commission File Number 1-6541

LOEWS CORPORATION

(Exact name of registrant as specified in its charter)

 

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

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

(Address of principal executive offices) (Zip Code)

(212) 521-2000

(Registrant’s telephone number, including area code)

NOT APPLICABLE

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

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

Yes       X                                                                 No                 

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

Yes      X                                         No                                                          Not Applicable                    

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

 

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

Emerging growth company         

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

 

                    

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

Yes                                                                                                                 No       X      

 

                     Class                        

 

      Outstanding at July 21, 2017       

Common stock, $0.01 par value   336,601,242 shares

 

 

 


Table of Contents

INDEX

 

     Page  
     No.  

Part I. Financial Information

  

Item 1. Financial Statements (unaudited)

  

Consolidated Condensed Balance Sheets

     3  

June 30, 2017 and December 31, 2016

  

Consolidated Condensed Statements of Income

     4  

Three and six months ended June 30, 2017 and 2016

  

Consolidated Condensed Statements of Comprehensive Income (Loss)

     5  

Three and six months ended June 30, 2017 and 2016

  

Consolidated Condensed Statements of Equity

     6  

Six months ended June 30, 2017 and 2016

  

Consolidated Condensed Statements of Cash Flows

     7  

Six months ended June 30, 2017 and 2016

  

Notes to Consolidated Condensed Financial Statements

     8  

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

     39  

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     58  

Item 4. Controls and Procedures

     58  

Part II. Other Information

     58  

Item 1. Legal Proceedings

     58  

Item 1A. Risk Factors

     58  

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

     60  

Item 6. Exhibits

     61  

 

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PART I. FINANCIAL INFORMATION

Item 1.   Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

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

Assets:

    

Investments:

    

Fixed maturities, amortized cost of $38,982 and $38,947

   $ 42,065     $ 41,494  

Equity securities, cost of $603 and $571

     607       549  

Limited partnership investments

     3,254       3,220  

Other invested assets, primarily mortgage loans

     748       683  

Short term investments

     4,932       4,765  

Total investments

     51,606       50,711  

Cash

     357       327  

Receivables

     7,977       7,644  

Property, plant and equipment

     15,447       15,230  

Goodwill

     647       346  

Other assets

     2,420       1,736  

Deferred acquisition costs of insurance subsidiaries

     647       600  

Total assets

   $       79,101     $ 76,594  
                  

Liabilities and Equity:

    

Insurance reserves:

    

Claim and claim adjustment expense

   $ 22,179     $ 22,343  

Future policy benefits

     10,824       10,326  

Unearned premiums

     4,107       3,762  

Total insurance reserves

     37,110       36,431  

Payable to brokers

     478       150  

Short term debt

     192       110  

Long term debt

     11,094       10,668  

Deferred income taxes

     852       636  

Other liabilities

     5,269       5,238  

Total liabilities

     54,995       53,233  

Commitments and contingent liabilities

    

Preferred stock, $0.10 par value:

    

Authorized – 100,000,000 shares

    

Common stock, $0.01 par value:

    

Authorized – 1,800,000,000 shares

    

Issued – 336,724,742 and 336,621,358 shares

     3       3  

Additional paid-in capital

     3,178       3,187  

Retained earnings

     15,677       15,196  

Accumulated other comprehensive loss

     (36     (223
     18,822       18,163  

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

     (6        

Total shareholders’ equity

     18,816       18,163  

Noncontrolling interests

     5,290       5,198  

Total equity

     24,106       23,361  

Total liabilities and equity

   $ 79,101     $ 76,594  
                  

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     Six Months Ended  
     June 30,     June 30,  
      2017     2016     2017     2016  
(In millions, except per share data)                         

Revenues:

        

Insurance premiums

   $ 1,734     $ 1,730     $ 3,379     $ 3,429  

Net investment income

     478       587       1,082       1,009  

Investment gains (losses):

        

Other-than-temporary impairment losses

     (2     (15     (4     (38

Other net investment gains

     45       16       81       11  

Total investment gains (losses)

     43       1       77       (27

Contract drilling revenues

     392       357       756       801  

Other revenues

     712       632       1,365       1,268  

Total

     3,359       3,307       6,659       6,480  

Expenses:

        

Insurance claims and policyholders’ benefits

     1,280       1,339       2,573       2,747  

Amortization of deferred acquisition costs

     312       305       617       612  

Contract drilling expenses

     196       198       400       411  

Other operating expenses (Note 5)

     1,085       1,611       1,931       2,518  

Interest

     139       130       281       273  

Total

     3,012       3,583       5,802       6,561  

Income (loss) before income tax

     347       (276     857       (81 )   

Income tax expense

     (69     (12     (188     (8

Net income (loss)

     278       (288     669       (89

Amounts attributable to noncontrolling interests

     (47     223       (143     126  

Net income (loss) attributable to Loews Corporation

   $ 231     $ (65   $ 526     $ 37  
                                  

Basic and diluted net income (loss) per share

   $ 0.69     $ (0.19   $ 1.56     $ 0.11  
                                  

Dividends per share

   $     0.0625     $     0.0625     $ 0.125     $ 0.125  
                                  

Weighted average shares outstanding:

        

Shares of common stock

     336.91       338.72           336.90           338.91  

Dilutive potential shares of common stock

     0.81               0.80       0.19  

Total weighted average shares outstanding assuming dilution

     337.72       338.72       337.70       339.10  
                                  

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
      2017     2016     2017     2016  
(In millions)                         

Net income (loss)

     $ 278     $ (288   $ 669     $ (89

Other comprehensive income (loss), after tax

        

Changes in:

        

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

       (1     (4     4  

Net other unrealized gains on investments

     77       321       144       549  

Total unrealized gains on available-for-sale investments

     77       320       140       553  

Unrealized gains on cash flow hedges

           1  

Pension liability

     7       5       15       13  

Foreign currency translation

     42       (48     53       (34 )       

Other comprehensive income

     126       277       208       533  

Comprehensive income (loss)

     404       (11     877       444  

Amounts attributable to noncontrolling interests

     (60     191       (164     69  

Total comprehensive income attributable to Loews Corporation

     $         344     $         180     $         713     $         513  
                                  

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF EQUITY

(Unaudited)

 

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

Balance, January 1, 2016

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

Net income (loss)

     (89          37           (126

Other comprehensive income

     533              476         57  

Dividends paid

     (136          (42         (94 )       

Purchases of subsidiary stock from noncontrolling interests

     (9        3             (12

Purchases of Loews treasury stock

     (98              (98  

Stock-based compensation

     24          23             1  

Other

     (4              (13     (2                     11  

Balance, June 30, 2016

   $ 23,031     $ 3      $ 3,197     $ 14,724     $ 119     $ (98   $ 5,086  
                                                           

Balance, January 1, 2017

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

Net income

     669            526           143  

Other comprehensive income

     208              187         21  

Dividends paid

     (138          (42         (96

Purchases of Loews treasury stock

     (6              (6  

Stock-based compensation

     14          (9           23  

Other

     (2                      (3                     1  

Balance, June 30, 2017

   $ 24,106     $ 3      $ 3,178     $ 15,677     $ (36   $ (6   $ 5,290  
                                                           

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Six Months Ended June 30    2017     2016  
(In millions)             

Operating Activities:

    

Net income (loss)

   $ 669     $ (89

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

     614       1,389  

Changes in operating assets and liabilities, net:

    

Receivables

     (223     (429

Deferred acquisition costs

     (41     (25

Insurance reserves

     262       666  

Other assets

     (108     (87

Other liabilities

     (79     (106

Trading securities

     137       (548

Net cash flow operating activities

     1,231       771  

Investing Activities:

    

Purchases of fixed maturities

     (4,840     (4,874

Proceeds from sales of fixed maturities

     3,142       3,070  

Proceeds from maturities of fixed maturities

     1,770       1,247  

Purchases of limited partnership investments

     (47     (280

Proceeds from sales of limited partnership investments

     119       124  

Purchases of property, plant and equipment

     (476     (895

Acquisitions

     (1,222     (79

Dispositions

     69       274  

Change in short term investments

     (29     148  

Other, net

     (40     148  

Net cash flow investing activities

     (1,554     (1,117 )   

Financing Activities:

    

Dividends paid

     (42     (42

Dividends paid to noncontrolling interests

     (96     (94

Purchases of subsidiary stock from noncontrolling interests

       (8

Purchases of Loews treasury stock

     (6     (86

Principal payments on debt

     (908     (2,352

Issuance of debt

     1,401       2,843  

Other, net

     (1     (1

Net cash flow financing activities

     348       260  

Effect of foreign exchange rate on cash

     5       (6

Net change in cash

     30       (92

Cash, beginning of period

     327       440  

Cash, end of period

   $           357     $           348  
                  

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 (Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”), a 51% owned subsidiary); the operation of a chain of hotels (Loews Hotels Holding Corporation (“Loews Hotels & Co”), a wholly owned subsidiary); and the manufacture of rigid plastic packaging solutions (Consolidated Container Company LLC, a 99% owned subsidiary). Unless the context otherwise requires, the terms “Company,” “Loews” and “Registrant” as used herein mean Loews Corporation excluding its subsidiaries and the term “Net income (loss) attributable to Loews Corporation” as used herein means Net income (loss) attributable to Loews Corporation shareholders.

In the opinion of management, the accompanying unaudited Consolidated Condensed Financial Statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of June 30, 2017 and December 31, 2016, results of operations and comprehensive income for the three and six months ended June 30, 2017 and 2016 and changes in shareholders’ equity and cash flows for the six months ended June 30, 2017 and 2016. Net income (loss) for the second quarter and first half of each of the years is not necessarily indicative of net income (loss) for that entire year. These Consolidated Condensed Financial Statements should be read in conjunction with the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

The Company presents basic and diluted net income (loss) per share on the Consolidated Condensed Statements of Income. Basic net income (loss) per share excludes dilution and is computed by dividing net income (loss) attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. 0.6 million and 4.7 million shares for the three months ended June 30, 2017 and 2016 and 0.6 million and 5.1 million shares for the six months ended June 30, 2017 and 2016 attributable to employee stock-based compensation awards were not included in the diluted weighted average shares outstanding amounts because the effect would have been antidilutive.

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

Recently issued ASUs – In May of 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The core principle of the new accounting guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new accounting guidance provides a five-step analysis of transactions to determine when and how revenue is recognized and requires enhanced disclosures about revenue. 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. The guidance can be adopted either retrospectively or with a cumulative effect adjustment at the date of adoption. The Company expects the updated guidance will not have a material effect on its consolidated financial statements.

 

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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 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 guidance will have on its consolidated financial statements.

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

2. Acquisition of Consolidated Container Company

On May 22, 2017, the Company completed the previously announced acquisition of CCC Acquisition Holdings, Inc. for $1.2 billion, subject to closing adjustments. CCC Acquisition Holdings, Inc., through its wholly owned subsidiary, Consolidated Container Company LLC (“Consolidated Container”), is a rigid plastic packaging and recycled resins manufacturer that provides packaging solutions to end markets such as beverage, food and household chemicals through a network of manufacturing locations across North America. The results of Consolidated Container are included in the Consolidated Condensed Financial Statements since the acquisition date in the Corporate segment. Consolidated Container’s revenues were $91 million and, as a result of purchase accounting charges and acquisition costs, net income was not significant for the three and six months ended June 30, 2017. For the year ended December 31, 2016, Consolidated Container reported total revenues of $788 million.

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

 

(In millions)       

Cash

   $ 5     

Property, plant and equipment

     394     

Goodwill

     299     

Other assets:

  

Inventory

     57     

Customer relationships

     457     

Trade name

     43     

Other

     122     

Deferred income taxes

     (17)    

Other liabilities:

  

Accounts payable

     (53)    

Pension liability

     (27)    

Other

     (53)    
     $     1,227     
          

 

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

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

3. Investments

Net investment income is as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
            2017                 2016                 2017                 2016        
(In millions)                         

Fixed maturity securities

   $ 457     $ 449     $ 912     $ 895     

Limited partnership investments

     23       47       139       7     

Short term investments

     4       2       8       5     

Equity securities

     2       4       3       7     

Income (loss) from trading portfolio (a)

     (1     87       33       102     

Other

     8       13       16       22     

Total investment income

     493       602       1,111       1,038     

Investment expenses

     (15     (15     (29     (29)    

Net investment income

   $     478     $     587     $     1,082     $     1,009     
                                  

 

(a)

Net unrealized gains (losses) related to changes in fair value on trading securities still held were $(6) and $60 for the three months ended June 30, 2017 and 2016 and $19 and $81 for the six months ended June 30, 2017 and 2016.

 

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Investment gains (losses) are as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
            2017                 2016                 2017                 2016        
(In millions)                         

Fixed maturity securities

   $ 44     $ 4     $ 76     $ (13)    

Equity securities

       3         (2)    

Derivative instruments

     (3     (6     (2     (13)    

Short term investments and other

     2               3       1     

Investment gains (losses) (a)

   $ 43     $ 1     $ 77     $ (27)    
                                  

 

(a)

Gross realized gains on available-for-sale securities were $57 and $44 for the three months ended June 30, 2017 and 2016 and $106 and $89 for the six months ended June 30, 2017 and 2016. Gross realized losses on available-for-sale securities were $13 and $37 for the three months ended June 30, 2017 and 2016 and $30 and $104 for the six months ended June 30, 2017 and 2016.

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
            2017                  2016                  2017                  2016        
(In millions)                            

Fixed maturity securities available-for-sale:

           

  Corporate and other bonds

   $ 2      $ 13      $ 4      $ 29     

  Asset-backed:

           

    Residential mortgage-backed

        1           1     

    Other asset-backed

              1                 3     

  Total asset-backed

     -        2        -        4     

Total fixed maturities available-for-sale

     2        15        4        33     

Equity securities available-for-sale - common stock

                                5     

Net OTTI losses recognized in earnings

   $ 2      $ 15      $ 4      $ 38     
                                     

 

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

 

June 30, 2017    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

   $ 17,823      $ 1,589      $ 29      $ 19,383     

States, municipalities and political subdivisions

     12,461        1,380        15        13,826      $ (13

Asset-backed:

              

Residential mortgage-backed

     4,835        124        38        4,921        (27

Commercial mortgage-backed

     1,907        59        14        1,952     

Other asset-backed

     1,050        16        5        1,061           

Total asset-backed

     7,792        199        57        7,934        (27

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

     113        4        2        115     

Foreign government

     438        12        1        449     

Redeemable preferred stock

     18        1                 19           

Fixed maturities available- for-sale

     38,645        3,185        104        41,726        (40

Fixed maturities trading

     337        3        1        339           

Total fixed maturities

     38,982        3,188        105        42,065        (40

Equity securities:

              

Common stock

     17        5           22     

Preferred stock

     91        6        1        96           

Equity securities available-for-sale

     108        11        1        118        -  

Equity securities trading

     495        79        85        489     

Total equity securities

     603        90        86        607        -  

Total

   $ 39,585      $ 3,278      $ 191      $ 42,672      $ (40
                                              
December 31, 2016                                        

Fixed maturity securities:

              

Corporate and other bonds

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

States, municipalities and political subdivisions

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

Asset-backed:

              

Residential mortgage-backed

     5,004        120        51        5,073        (28

Commercial mortgage-backed

     2,016        48        24        2,040     

Other asset-backed

     1,022        8        5        1,025           

Total asset-backed

     8,042        176        80        8,138        (28

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

     83        10           93     

Foreign government

     435        13        3        445     

Redeemable preferred stock

     18        1                 19           

Fixed maturities available-for-sale

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

Fixed maturities trading

     598        3                 601           

Total fixed maturities

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

Equity securities:

              

Common stock

     13        6           19     

Preferred stock

     93        2        4        91           

Equity securities available-for-sale

     106        8        4        110        -  

Equity securities trading

     465        60        86        439           

Total equity securities

     571        68        90        549        -  

Total

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

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

 

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Other comprehensive income (“Shadow Adjustments”). As of June 30, 2017 and December 31, 2016, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $1.1 billion and $909 million (after tax and noncontrolling interests).

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

 

    

Less than

12 Months

  

12 Months

or Longer

   Total
June 30, 2017    Estimated
Fair Value
  

Gross

Unrealized

Losses

  

Estimated

Fair Value

  

Gross

Unrealized

Losses

  

Estimated

Fair Value

  

Gross

Unrealized

Losses

(In millions)                              

Fixed maturity securities:

                 

Corporate and other bonds

     $ 1,314        $ 26        $ 52        $ 3        $ 1,366        $ 29  

States, municipalities and political subdivisions

     742        15        24           766        15  

Asset-backed:

                 

Residential mortgage-backed

     1,722        34        141        4        1,863        38  

Commercial mortgage-backed

     473        8        125        6        598        14  

Other asset-backed

     159        4        14        1        173        5  

Total asset-backed

     2,354        46        280        11        2,634        57  

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

     65        2              65        2  

Foreign government

     109        1                          109        1  

Total fixed maturity securities

     4,584        90        356        14        4,940        104  

Equity securities:

                 

Common stock

     1                 1     

Preferred stock

     15        1                          15        1  

Total equity securities

     16        1        -        -        16        1  

Total

     $ 4,600        $ 91        $ 356        $ 14        $ 4,956        $ 105  
                                                       
December 31, 2016                                    

Fixed maturity securities:

                 

Corporate and other bonds

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

States, municipalities and political subdivisions

     959        32        23        1        982        33  

Asset-backed:

                 

Residential mortgage-backed

     2,136        44        201        7        2,337        51  

Commercial mortgage-backed

     756        22        69        2        825        24  

Other asset-backed

     398        5        24                 422        5  

Total asset-backed

     3,290        71        294        9        3,584        80  

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

     5                 5     

Foreign government

     108        3                          108        3  

Total fixed maturity securities

     6,977        167        571        25        7,548        192  

Equity securities

     12                 13        4        25        4  

Total

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

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

 

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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 June 30, 2017 and 2016 for which a portion of an OTTI loss was recognized in Other comprehensive income.

 

    

      Three Months Ended      

June 30,

   

      Six Months Ended      

June 30,

 
      2017     2016     2017     2016  
(In millions)                         

Beginning balance of credit losses on fixed maturity securities

       $ 32           $ 48         $ 36           $ 53  

Reductions for securities sold during the period

     (2     (7     (6     (12

Ending balance of credit losses on fixed maturity securities

       $ 30           $ 41         $ 30           $ 41  
                                  

Contractual Maturity

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

 

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

Due in one year or less

     $ 1,590            $ 1,628            $ 1,779            $ 1,828      

Due after one year through five years

     7,732            8,098            7,566            7,955      

Due after five years through ten years

     15,754            16,404            15,892            16,332      

Due after ten years

     13,569            15,596            13,112            14,778      

Total

     $ 38,645            $ 41,726            $ 38,349            $ 40,893      
                                     

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

 

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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.

 

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

With hedge designation:

                

Interest rate risk:

                

Interest rate swaps

     $ 500                

Without hedge designation:

                

Equity markets:

                

Options – purchased

     221        $ 14          $ 223        $ 14     

              – written

     231           $ (8     267               $ (8

Futures – short

     243             225        1     

Commodity futures – long

     37        1          42        

Embedded derivative on funds withheld liability

     171           (1     174        3     

4. Fair Value

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

 

 

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

 

 

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

 

 

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

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

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

 

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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.

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

 

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

Fixed maturity securities:

          

Corporate and other bonds

     $ 19,283      $ 100      $ 19,383  

States, municipalities and political subdivisions

       13,825        1        13,826  

Asset-backed:

          

Residential mortgage-backed

       4,798        123        4,921  

Commercial mortgage-backed

       1,939        13        1,952  

Other asset-backed

             979        82        1,061  

Total asset-backed

       7,716        218        7,934  

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

   $ 115             115  

Foreign government

       449           449  

Redeemable preferred stock

     19                         19  

Fixed maturities available-for-sale

     134       41,273        319        41,726  

Fixed maturities trading

             334        5        339  

Total fixed maturities

   $ 134     $ 41,607      $ 324      $ 42,065  
                                    

Equity securities available-for-sale

   $ 99        $ 19      $ 118  

Equity securities trading

     488                1        489  

Total equity securities

   $ 587     $ -      $ 20      $ 607  
                                    

Short term investments

   $ 3,858     $ 981         $ 4,839  

Other invested assets

     60       5           65  

Receivables

     1             1  

Life settlement contracts

        $ 1        1  

Payable to brokers

     (8           (8

 

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

Fixed maturity securities:

          

Corporate and other bonds

     $ 18,828      $ 130      $ 18,958  

States, municipalities and political subdivisions

       13,239        1        13,240  

Asset-backed:

          

Residential mortgage-backed

       4,944        129        5,073  

Commercial mortgage-backed

       2,027        13        2,040  

Other asset-backed

             968        57        1,025  

Total asset-backed

       7,939        199        8,138  

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

   $ 93             93  

Foreign government

       445           445  

Redeemable preferred stock

     19                         19  

Fixed maturities available-for-sale

     112       40,451        330        40,893  

Fixed maturities trading

             595        6        601  

Total fixed maturities

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

Equity securities available-for-sale

   $ 91        $ 19      $ 110  

Equity securities trading

     438                1        439  

Total equity securities

   $ 529     $ -      $ 20      $ 549  
                                    

Short term investments

   $ 3,833     $ 853         $ 4,686  

Other invested assets

     55       5           60  

Receivables

     1             1  

Life settlement contracts

        $ 58        58  

Payable to brokers

     (44           (44

 

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

 

                                                          Unrealized  
                                                          Gains  
                                                          (Losses)  
          Net Realized Gains                                         Recognized in  
          (Losses) and Net Change                                         Net Income  
          in Unrealized Gains                                         (Loss) on Level  
          (Losses)                                         3 Assets and  
          Included in                             Transfers       Transfers             Liabilities  
      Balance,         Net Income         Included in                         into     out of         Balance,         Held at  
2017   April 1     (Loss)     OCI     Purchases         Sales         Settlements     Level 3     Level 3     June 30     June 30  
(In millions)                                                            

Fixed maturity securities:

                   

Corporate and other bonds

  $ 121               $ (11)         $ (10)       $ 100        

States, municipalities and political subdivisions

    1                       1        

Asset-backed:

                   

Residential mortgage-backed

    126       $ 1       $ 1             (5)             123        

Commercial mortgage- backed

    13                       13        

Other asset-backed

    117                       $ 13                 (2)       $ 24           (70)         82              

Total asset-backed

    256         1         1         13       $       (7)         24           (70)         218         $ -         

Fixed maturities available-for-sale

    378         1         1         13           (18)         24           (80)         319        

Fixed maturities trading

    5                                                                 5           (1)        

Total fixed maturities

  $ 383       $ 1       $ 1       $ 13       $     $ (18)       $ 24         $ (80)       $ 324         $ (1)        
                                                                                 

Equity securities available-for-sale

  $ 19         $ 1         $ (1)           $ 19        

Equity securities trading

    1                                                                 1              

Total equity securities

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

Life settlement contracts

  $ 46             $ (45)           $ 1        

 

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                                        Unrealized  
                                        Gains  
                                        (Losses)  
        Net Realized Gains                           Recognized in  
        (Losses) and Net Change                           Net Income  
        in Unrealized Gains                           (Loss) on Level  
        (Losses)                           3 Assets and  
        Included in                   Transfers     Transfers         Liabilities  
      Balance,       Net Income       Included in                 into   out of       Balance,       Held at  
2016   April 1   (Loss)   OCI   Purchases       Sales       Settlements   Level 3   Level 3   June 30   June 30  
(In millions)                                          

Fixed maturity securities:

                   

Corporate and other bonds

  $ 193     $ 1     $ 3     $ 94     $ (20)     $ (7)       $ (22)     $ 242    

States, municipalities and political subdivisions

    2                     2    

Asset-backed:

                   

Residential mortgage-backed

    128       1       (1)       10         (4)           134    

Commercial mortgage- backed

    27               (9)     $ 3       (10)       11    

Other asset-backed

    50               2       35       (25)       (1)               (16)       45          

Total asset-backed

    205       1       1       45       (25)       (14)       3       (26)       190     $ -         

Fixed maturities available-for-sale

    400       2       4       139       (45)       (21)       3       (48)       434    

Fixed maturities trading

    3       4                       (1)                               6       4         

Total fixed maturities

  $ 403     $ 6     $ 4     $ 139     $ (46)     $ (21)     $ 3     $ (48)     $ 440     $ 4         
                                                                                 

Equity securities available-for-sale

  $ 19                   $ 19    

Equity securities trading

    -     $ 1             $ 1                                       2     $ 1         

Total equity securities

  $ 19     $ 1     $ -     $ 1     $ -     $ -     $ -     $ -     $ 21     $ 1         
                                                                                 

Life settlement contracts

  $ 72     $ 6           $ (11)         $ 67     $ (3)        

Derivative financial instruments, net

      (2)             $ 3         1       (3)        

 

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                                        Unrealized  
                                        Gains  
                                        (Losses)  
        Net Realized Gains                           Recognized in  
        (Losses) and Net Change                           Net Income  
        in Unrealized Gains                           (Loss) on Level  
        (Losses)                           3 Assets and  
        Included in                   Transfers     Transfers         Liabilities  
    Balance,     Net Income       Included in                 into   out of     Balance,     Held at  
2017     January 1     (Loss)   OCI   Purchases       Sales       Settlements   Level 3   Level 3   June 30   June 30  
(In millions)                                          

Fixed maturity securities:

                   

Corporate and other bonds

  $ 130       $ 1     $ 5     $ (1)     $ (25)       $ (10)     $ 100    

States, municipalities and political subdivisions

    1                     1    

Asset-backed:

                   

Residential mortgage-backed

    129     $ 2       3           (11)           123    

Commercial mortgage-backed

    13                     13    

Other asset-backed

    57       (1             51               (2)     $ 52       (75)       82          

Total asset-backed

    199       1       3       51       -       (13)       52       (75)       218         $ -         

Fixed maturities available-for-sale

    330       1       4       56       (1)       (38)       52       (85)       319    

Fixed maturities trading

    6       (1                                                     5       (1)        

Total fixed maturities

  $ 336     $ -     $ 4     $ 56     $ (1)     $ (38)     $ 52     $ (85)     $ 324         $ (1)        
                                                                                 

Equity securities available-for-sale

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

Equity securities trading

    1                                                               1          

Total equity securities

  $ 20     $ -     $ 2     $ 1     $ (3)     $ -     $ -     $ -     $ 20         $ -         
                                                                                 

Life settlement contracts

  $ 58     $ 6         $ (58)     $ (5)         $ 1    

Derivative financial instruments, net

    -       1           (1)             -    

 

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                                        Unrealized  
                                        Gains  
                                        (Losses)  
        Net Realized Gains                           Recognized in  
        (Losses) and Net Change                           Net Income  
        in Unrealized Gains                           (Loss) on Level  
        (Losses)                           3 Assets and  
        Included in                   Transfers     Transfers         Liabilities  
    Balance,     Net Income       Included in                 into   out of     Balance,     Held at  
2016     January 1     (Loss)   OCI   Purchases       Sales       Settlements   Level 3   Level 3   June 30   June 30  
(In millions)                                          

Fixed maturity securities:

                   

Corporate and other bonds

  $ 168       $ 7     $ 147     $ (36)     $ (10)       $ (34)     $ 242    

States, municipalities and political subdivisions

    2                     2    

Asset-backed:

                   

Residential mortgage-backed

    134     $ 2       (1)       10         (9)         (2)       134    

Commercial mortgage- backed

    22           9         (9)     $ 3       (14)       11    

Other asset-backed

    53               2       35       (25)       (1)       2       (21)       45          

Total asset-backed

    209       2       1       54       (25)       (19)       5       (37)       190     $ -         

Fixed maturities available-for-sale

    379       2       8       201       (61)       (29)       5       (71)       434    

Fixed maturities trading

    85       5               2       (86)                               6       4         

Total fixed maturities

  $ 464     $ 7     $ 8     $ 203     $ (147)     $ (29)     $ 5     $ (71)     $ 440     $ 4         
                                                                                 

Equity securities available-for-sale

  $ 20       $ (1)               $ 19    

Equity securities trading

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

Total equity securities

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

Life settlement contracts

  $ 74     $ 10           $ (17)         $ 67     $ (3)        

Derivative financial instruments, net

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

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

 

Major Category of Assets and Liabilities    Consolidated Condensed Statements of Income Line Items
Fixed maturity securities available-for-sale    Investment gains (losses)
Fixed maturity securities, trading    Net investment income
Equity securities available-for-sale    Investment gains (losses)
Equity securities, trading    Net investment income
Other invested assets    Investment gains (losses) and Net investment income
Derivative financial instruments held in a trading portfolio    Net investment income
Derivative financial instruments, other    Investment gains (losses) and Other revenues
Life settlement contracts    Other revenues

 

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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 and six months ended June 30, 2017 and 2016 there were no transfers between Level 1 and Level 2. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods.

Valuation Methodologies and Inputs

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

Fixed Maturity Securities

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

Equity Securities

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

Derivative Financial Instruments

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

Short Term Investments

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

 

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Other Invested Assets

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

Life Settlement Contracts

CNA accounts for its investment in life settlement contracts using the fair value method. Historically, the fair value of life settlement contracts was determined as the present value of the anticipated death benefits less anticipated premium payments based on contract terms that are distinct for each insured, as well as CNA’s own assumptions for mortality, premium expense and the rate of return that a buyer would require on the contracts.

The entire portfolio of life settlement contracts was determined to be held for sale as of December 31, 2016 as CNA reached an agreement on terms to sell the portfolio. As such, CNA adjusted the fair value to the estimated sales proceeds less cost to sell. The definitive Purchase and Sale Agreement (“PSA”) related to the portfolio was executed on March 7, 2017 (“sale date”). In connection therewith, the life settlement contracts and related sale proceeds were placed in escrow until the buyer is recognized as the owner and beneficiary of each individual life settlement contract by the life insurance company that issued the policy. All but $1 million of the contracts have been released from escrow as of June 30, 2017. CNA derecognized the released contracts and recorded the consideration, including a note receivable, which is payable over three years and is carried at amortized cost less any valuation allowance. The note receivable of $45 million is included within Other assets on the June 30, 2017 Consolidated Condensed Balance Sheet and interest income is accreted to the principal balance of the note receivable. The contracts remaining in escrow have not been derecognized, continue to be measured at the fair value per the PSA, and are expected to clear escrow in the third quarter of 2017.

The fair value of CNA’s investments in life settlement contracts were $1 million and $58 million as of June 30, 2017 and December 31, 2016, and are included in Other assets on the Consolidated Condensed Balance Sheets. Despite the sale, the contracts have been classified as Level 3 as there is not an active market for life settlement contracts. The cash receipts and payments related to the life settlement contracts prior to the sale date are included in operating activities on the Consolidated Condensed Statements of Cash Flows. Cash receipts related to the sale of the life settlement contracts as well as principal payments on the note receivable are included in investing activities.

Significant Unobservable Inputs

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

 

June 30, 2017   

Estimated

Fair Value

  

Valuation

Techniques

  

Unobservable

Inputs

  

Range

(Weighted

Average)

     (In millions)               

Fixed maturity securities

   $        125   

Discounted

cash flow

   Credit spread    2% – 40% (4%)

December 31, 2016

                   

Fixed maturity securities

   $        106   

Discounted

cash flow

   Credit spread    2% – 40% (4%)

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

 

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

Assets:

                        

Other invested assets, primarily mortgage loans

     $ 646                $ 655      $ 655

Liabilities:

                        

Short term debt

       190           $ 154        40        194

Long term debt

       11,075             10,074        1,217        11,291

December 31, 2016

                                                      

Assets:

                        

Other invested assets, primarily mortgage loans

     $ 591                $ 594      $ 594

Liabilities:

                        

Short term debt

       107           $ 104        3        107

Long term debt

       10,655             10,150        646        10,796

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

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

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

5. Property, Plant and Equipment

Diamond Offshore

Asset Impairments

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

 

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

As of June 30, 2017, there were nine rigs in Diamond Offshore’s drilling fleet for which there were no current indicators that their carrying amounts may not be recoverable and, therefore, were not evaluated for impairment at that time. If market fundamentals in the offshore oil and gas industry deteriorate further or a projected market recovery is further delayed, additional impairment losses may be required to be recognized in future periods.

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

Boardwalk Pipeline

Sale of Assets

In May of 2017, Boardwalk Pipeline sold a processing plant and related assets, for approximately $65 million, including customary adjustments. The sale resulted in a loss of $47 million ($15 million after tax and noncontrolling interests) and is included in Other operating expenses on the Consolidated Condensed Statements of Income.

6. Claim and Claim Adjustment Expense Reserves

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

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

Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in CNA’s results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of $39 million and $85 million for the three months ended June 30, 2017 and 2016 and $73 million and $121 million for the six months ended June 30, 2017 and 2016. Catastrophe losses in 2017 related primarily to U.S. weather-related events. Catastrophe losses in 2016 resulted primarily from U.S. weather-related events and the Fort McMurray wildfires.

 

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Liability for Unpaid Claim and Claim Adjustment Expenses Rollforward

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

 

Six Months Ended June 30    2017        2016  

 

 
(In millions)                

Reserves, beginning of year:

       

Gross

   $     22,343        $     22,663         

Ceded

     4,094          4,087         

 

 

Net reserves, beginning of year

     18,249          18,576         

 

 

Net incurred claim and claim adjustment expenses:

       

Provision for insured events of current year

     2,443          2,583         

Decrease in provision for insured events of prior years

     (159        (198)        

Amortization of discount

     93          93         

 

 

Total net incurred (a)

     2,377          2,478         

 

 

Net payments attributable to:

       

Current year events

     (266        (311)        

Prior year events

     (2,331        (2,185)        

 

 

Total net payments

     (2,597        (2,496)        

 

 

Foreign currency translation adjustment and other

     70          46         

 

 

Net reserves, end of period

     18,099          18,604         

Ceded reserves, end of period

     4,080          4,371         

 

 

Gross reserves, end of period

   $ 22,179        $ 22,975         

 

 

 

(a)

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

Net Prior Year Development

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

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
      2017     2016     2017     2016  
(In millions)                         

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

   $ (55   $ (98   $ (112   $ (150 )     

Pretax (favorable) unfavorable premium development

     (8     (8     17       (22

Total pretax (favorable) unfavorable net prior year development

   $ (63   $ (106   $ (95   $ (172
                                  

Premium development can occur in the property and casualty business when there is a change in exposure on auditable policies or when premium accruals differ from processed premium. Audits on policies usually occur in a period after the expiration date of the policy. See Note 10 for further information on the premium development for the Small Business multi-peril package product and workers’ compensation policies for the three and six months ended June 30, 2017.

 

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

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
      2017     2016     2017     2016  
(In millions)                         

Medical professional liability

   $ 3     $ (23   $ 4     $ (30 )     

Other professional liability and management liability

     (37     (41     (69     (50

Commercial auto

       (20     (26     (35

General liability

     (1     (37     (1     (52

Workers’ compensation

     (46     50       (46     54  

Other

     26       (27     26       (37

Total pretax (favorable) unfavorable development

   $ (55   $ (98   $ (112   $ (150
                                  

Three Months

2017

Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency in accident years 2013 through 2015 and lower than expected severity in accident years 2014 through 2016 for professional liability.

Favorable development for workers’ compensation was primarily related to decreases in frequency and severity in recent accident years, partially attributable to California reforms related to decreases in medical costs.

Unfavorable development for other coverages was primarily due to higher than expected severity in accident year 2016 for property and other, higher than expected severity in accident year 2015 arising from the management liability business for other professional liability and adverse large claims experience in the Hardy political risks portfolio, relating largely to accident year 2016. This unfavorable development was partially offset by favorable development in accident years 2014 and prior for other professional liability and better than expected frequency in accident years 2014 through 2016, for property and marine.

2016

Favorable development in medical professional liability was due to lower than expected severity for individual healthcare professionals and allied facilities for accident years 2014 and prior.

Favorable development in other professional liability and management liability was primarily related to lower than expected frequency of claims in accident years 2010 through 2015, mainly driven by professional services. This was partially offset by unfavorable development in accident year 2015 related to an increase in management liability frequency of larger claims.

Favorable development for commercial auto was primarily due to favorable settlements on claims in accident years 2010 through 2014.

Favorable development for general liability was primarily due to better than expected claim settlements in accident years 2012 through 2014 and better than expected severity on umbrella claims in accident years 2010 through 2013.

Unfavorable development for workers’ compensation was due to a reduction in estimated recoveries on war hazard claims for Defense Base Act contractors, which was partially offset by favorable development related to lower than expected frequencies for the small and middle market businesses in accident years 2009 through 2014.

Favorable development for other coverages was primarily due to better than expected loss emergence in accident years 2013 through 2015 for property and other, better than expected severity in accident years 2013 and prior for liability and better than expected severity in auto liability in accident years 2011 through 2015, partially offset by unfavorable development for higher than expected large loss emergence in accident years 2011 through 2015 for other professional liability.

 

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Six Months

2017

Favorable development in other professional liability and management liability was primarily due to favorable settlements on closed claims and a lower frequency of large losses for accident years 2011 through 2016 for professional and management liability, lower than expected claim frequency in accident years 2013 through 2015 for professional liability and lower than expected severity in accident years 2014 through 2016 for professional liability.

Favorable development for commercial auto was primarily due to lower than expected severity in accident years

2013 through 2015.

Favorable development for workers’ compensation was primarily related to decreases in frequency and severity in recent accident years, partially attributable to California reforms related to decreases in medical costs.

The drivers of development for the six month period for other coverages were generally consistent with the three month summary above.

2016

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

Favorable development in other professional liability and management liability was primarily related to lower than expected frequency of claims in accident years 2010 through 2015, mainly driven by professional services. Additional favorable development was related to favorable outcomes on larger claims in 2013 and prior in professional services. This was partially offset by unfavorable development in accident years 2014 and 2015 related to an increase in management liability frequency of larger claims.

Favorable development for commercial auto was primarily due to favorable settlements on claims in accident years 2010 through 2014.

Favorable development for general liability was primarily due to better than expected claim settlements in accident years 2012 through 2014 and better than expected severity on umbrella claims in accident years 2010 through 2013.

Unfavorable development for workers’ compensation was due to a reduction in estimated recoveries on war hazard claims for Defense Base Act contractors, which was partially offset by favorable development related to lower than expected frequencies for the small and middle market businesses in accident years 2009 through 2014.

Favorable development for other coverages was primarily due to better than expected claim frequency in property coverages in accident year 2015, better than expected loss emergence in accident years 2013 through 2015 for property and other, better than expected severity in accident years 2013 and prior for liability and better than expected severity in auto liability in accident years 2011 through 2015. This favorable development was partially offset by unfavorable development which was primarily due to higher than expected severity from a 2015 catastrophe event for property and other and higher than expected large loss emergence in accident years 2011 through 2015 for other professional liability.

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

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

 

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party reinsurance receivables related to A&EP claims with a net book value of $215 million, resulting in total consideration of $2.2 billion.

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

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

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
      2017     2016     2017     2016  
(In millions)                         

Net A&EP adverse development before consideration of LPT

   $ -     $ -     $ 60     $ 200  

Retroactive reinsurance benefit recognized

     (3     (9     (43     (82 )     

Pretax impact of A&EP reserve development and the LPT

   $ (3   $ (9   $ 17     $ 118  
                                  

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

As of June 30, 2017 and December 31, 2016, the cumulative amounts ceded under the LPT were $2.9 billion and $2.8 billion. The unrecognized deferred retroactive reinsurance benefit was $351 million and $334 million as of June 30, 2017 and December 31, 2016.

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

 

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7. Shareholders’ Equity

Accumulated other comprehensive income (loss)

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

 

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

Balance, April 1, 2016

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

Other comprehensive income (loss) before reclassifications, after tax of $1, $(164), $0, $0 and $0

       (1 )       322               (48 )       273

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

                 (1 )                 5                 4

Other comprehensive income (loss)

       (1 )       321            -       5       (48 )       277

Amounts attributable to noncontrolling interests

                 (37 )                 (1 )       6       (32 )

Balance, June 30, 2016

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

Balance, April 1, 2017

     $ 23     $     636     $ (2 )     $ (638 )     $ (168 )     $     (149 )

Other comprehensive income (loss) before reclassifications, after tax of $1, $(63), $0, $0 and $0

       (1 )       108               42       149

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $(1), $15, $0, $(3) and $0

       1       (31 )                 7                 (23 )

Other comprehensive income

       -       77       -       7       42       126

Amounts attributable to noncontrolling interests

                 (8 )                 (1 )       (4 )       (13 )

Balance, June 30, 2017

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

 

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

Balance, January 1, 2016

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

Other comprehensive income (loss) before reclassifications, after tax of $(1), $(272), $0, $0 and $0

       2       539               (34 )       507

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

       2       10       1       13                 26

Other comprehensive income (loss)

       4       549       1       13       (34 )       533

Amounts attributable to noncontrolling interests

                 (58 )                 (3 )       4       (57 )

Balance, June 30, 2016

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

Balance, January 1, 2017

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

Other comprehensive income (loss) before reclassifications, after tax of $0, $(110), $0, $0 and $0

       (1 )       193       (1 )           53       244

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $1, $24, $0, $(7) and $0

       (3 )       (49 )       1       15                 (36 )

Other comprehensive income (loss)

       (4 )       144       -       15       53       208

Amounts attributable to noncontrolling interests

                 (15 )                 (1 )       (5 )       (21 )

Balance, June 30, 2017

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

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

 

Major Category of AOCI    Affected Line Item
OTTI gains (losses)    Investment gains (losses)
Unrealized gains (losses) on investments    Investment gains (losses)
Cash flow hedges    Other revenues, Interest expense and Contract drilling expenses
Pension liability    Other operating expenses

 

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Treasury Stock

The Company repurchased 0.1 million and 2.6 million shares of Loews common stock at aggregate costs of $6 million and $98 million during the six months ended June 30, 2017 and 2016.

8. Benefit Plans

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

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

 

                                                                                           
     Pension Benefits
     Three Months Ended    Six Months Ended
     June 30,    June 30,
      2017    2016    2017    2016

(In millions)

           

Service cost

     $ 2                   $ 2                 $ 4                 $ 4           

Interest cost

     29                 32                 59                 64           

Expected return on plan assets

     (43)                (44)                (86)                (88)          

Amortization of unrecognized net loss

     11                 12                 22                 23           

Settlement charge

     1                 1                 3                 2           

Net periodic benefit cost

     $ -                    $ 3                 $ 2                 $ 5           
                                     
     Other Postretirement Benefits
     Three Months Ended    Six Months Ended
     June 30,    June 30,
      2017    2016    2017    2016

(In millions)

           

Interest cost

           $ 1                 $ 1           

Expected return on plan assets

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

Amortization of unrecognized prior service benefit

              (1)                (1)                (2)          

Net periodic benefit cost

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

9. Legal Proceedings

CNA Financial

In September of 2016, a class action lawsuit was filed against CCC, Continental Assurance Company (“CAC”), CNA, the Investment Committee of the CNA 401(k) Plus Plan, The Northern Trust Company and John Does 1-10 (collectively “Defendants”) related to the CNA 401(k) Plus Plan. The complaint alleges that Defendants breached fiduciary duties to the CNA 401(k) Plus Plan and caused prohibited transactions in violation of the Employee Retirement Income Security Act of 1974 when the CNA 401(k) Plus Plan’s Fixed Income Fund’s annuity contract with CAC was canceled. The plaintiff alleges he and a proposed class of the CNA 401(k) Plus Plan participants who had invested in the Fixed Income Fund suffered lower returns in their CNA 401(k) Plus Plan investments as a consequence of these alleged violations and seeks relief on behalf of the putative class. This litigation is in its early stages, and as of yet no class has been certified. CCC and the other defendants are contesting the case. The parties are scheduled to attend a mediation in September of 2017.

CNA believes the likelihood of loss is reasonably possible; however, given the status of the litigation, the novel issues raised by the allegations and the uncertainty as to how to assess potential damages, management is currently unable to predict the final outcome. The Plan trustees have provided notice to their fiduciary coverage insurance carriers. Based on CNA’s current assessment and consideration of available insurance coverage, CNA does not believe that the ultimate resolution of this matter will have a material impact on its condensed consolidated financial statements; however, the timing of recognition of loss, if any, and insurance recovery, if any, may differ.

 

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Other Litigation

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

10. Commitments and Contingencies

CNA Guarantees

In the course of selling business entities and assets to third parties, CNA agreed to guarantee the performance of certain obligations of previously owned subsidiaries and to indemnify purchasers for losses arising out of breaches of representations and warranties with respect to the business entities or assets sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such guarantee and indemnification agreements in effect for sales of business entities, assets and third party loans may include provisions that survive indefinitely. As of June 30, 2017, the aggregate amount related to quantifiable guarantees was $434 million and the aggregate amount related to quantifiable indemnification agreements was $254 million. In certain cases, should CNA be required to make payments under any such guarantee, it would have the right to seek reimbursement from an affiliate of a previously owned subsidiary.

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

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

CNA Small Business Premium Rate Adjustment

In prior quarters, CNA identified rating errors related to its multi-peril package product and workers’ compensation policies within its Small Business unit and CNA is in the process of voluntarily issuing premium refunds related to affected policies. After the rating errors were identified, written and earned premium have been reported net of any impact from the premium rate adjustments. Premium development recognized as a result of the rating errors was favorable of $1 million and adverse of $37 million for the three and six months ended June 30, 2017.

The estimated refund liability for the multi-peril product and workers’ compensation policies as of June 30, 2017 was $96 million. CNA has reduced pretax income by $1 million and $6 million for the three and six months ended June 30, 2017 for interest due to policyholders on the aggregate refund amounts.

The amount of the refund and corresponding liability will continue to increase until required changes to the automated rating processes are fully implemented. The required changes were implemented in the second quarter of 2017 for the multi-peril product and are expected to be implemented by the end of the third quarter of 2017 for workers’ compensation policies. Any fines or penalties related to the foregoing are reasonably possible, but are not expected to be material to the Company’s financial statements.

11. Segments

The Company has five reportable segments comprised of its four individual operating subsidiaries, CNA, Diamond Offshore, Boardwalk Pipeline and Loews Hotels & Co; and the Corporate segment. Each of the operating subsidiaries are headed by a chief executive officer who is responsible for the operation of its business and has the duties and authority commensurate with that position. The operations of Consolidated Container since the acquisition date are included in the Corporate segment. For additional disclosures regarding the composition of the Company’s segments, see Note 20 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

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The following tables present the reportable segments of the Company and their contribution to the Consolidated Condensed Statements of Income. Amounts presented will not necessarily be the same as those in the individual financial statements of the Company’s subsidiaries due to adjustments for purchase accounting, income taxes and noncontrolling interests.

 

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

 

Three Months Ended June 30, 2017   

CNA

Financial

 

Diamond

Offshore

 

Boardwalk

Pipeline

 

Loews

Hotels & Co

  Corporate   Total         

(In millions)

            

Revenues:

            

Insurance premiums

   $ 1,734             $ 1,734           

Net investment income

     475     $ 1         $ 2       478           

Investment gains

     43               43           

Contract drilling revenues

       392             392           

Other revenues

     114       6     $ 318     $ 181       93       712           

Total

     2,366       399       318       181       95       3,359           

Expenses:

            

Insurance claims and policyholders’ benefits

     1,280               1,280           

Amortization of deferred acquisition costs

     312               312           

Contract drilling expenses

       196             196           

Other operating expenses

     364       185       251       155       130       1,085           

Interest

     40       27       44       6       22       139           

Total

     1,996       408       295       161       152       3,012           

Income (loss) before income tax

     370       (9     23       20       (57     347           

Income tax (expense) benefit

     (98     23       (5     (10     21       (69)          

Net income (loss)

     272       14       18       10       (36     278           

Amounts attributable to noncontrolling interests

     (28     (7     (12                     (47)          

Net income (loss) attributable to Loews Corporation

   $ 244     $ 7     $ 6     $ 10     $ (36   $ 231           
                                                  

 

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

Revenues:

                   

Insurance premiums

   $     1,730                  $     1,730    

Net investment income

     502               $ 85        587    

Investment gains (losses)

     13      $ (12               1    

Contract drilling revenues

        357                 357    

Other revenues

     103        33      $ 308      $       189        (1      632          

Total

     2,348              378              308        189        84        3,307          

Expenses:

                   

Insurance claims and policyholders’ benefits

     1,339                    1,339    

Amortization of deferred acquisition costs

     305                    305    

Contract drilling expenses

        198                 198    

Other operating expenses

     376        825        198        180        32        1,611    

Interest

     38        24        45        5        18        130          

Total

     2,058        1,047        243        185        50        3,583          

Income (loss) before income tax

     290        (669      65        4        34        (276  

Income tax (expense) benefit

     (80      99        (16      (3      (12      (12        

Net income (loss)

     210        (570      49        1        22        (288  

Amounts attributable to noncontrolling interests

     (21      276        (32                        223          

Net income (loss) attributable to Loews Corporation

   $ 189      $ (294    $ 17      $ 1      $ 22      $ (65        
                                                               

 

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

Revenues:

                   

Insurance premiums

   $     3,379                  $     3,379    

Net investment income

     1,020      $ 1            $ 61        1,082    

Investment gains

     77                    77    

Contract drilling revenues

        756                 756    

Other revenues

     219        19      $ 686      $ 348        93        1,365          

Total

     4,695        776        686        348        154        6,659          

Expenses:

                   

Insurance claims and policyholders’ benefits

     2,573                    2,573    

Amortization of deferred acquisition costs

     617                    617    

Contract drilling expenses

        400                 400    

Other operating expenses

     707        305        455        296        168        1,931    

Interest

     83        55        90        13        40        281          

Total

     3,980        760        545        309        208        5,802    
                                                               

Income (loss) before income tax

     715        16        141        39        (54      857