UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2015
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)
Securities registered pursuant to Section 12(b) of the Act:
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For the Fiscal Year Ended December 31, 2012
OR
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For the Transition Period From to
Commission File Number 1-6541
LOEWS CORPORATION
(Exact name of registrant as specified in its charter)
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |||||||
Loews Common Stock, par value $0.01 per share | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes X No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No X
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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer X Accelerated filer Non-accelerated filer Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
The aggregate market value of voting and non-voting common equity held by non-affiliates as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $12,707,000,000.$11,763,000,000.
As of February 15, 2013,3, 2016, there were 391,885,833338,998,280 shares of Loews common stock outstanding.
Documents Incorporated by Reference:
Portions of the Registrant’s definitive proxy statement intended to be filed by Registrant with the Commission prior to April 30, 201329, 2016 are incorporated by reference into Part III of this Report.
LOEWS CORPORATION
INDEX TO ANNUAL REPORT ON
FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 20122015
Item | Item | Page | Page | |||||||||
No. | PART I | No. | PART I | No. | ||||||||
1 | ||||||||||||
3 | ||||||||||||
9 | 3 | |||||||||||
12 | 9 | |||||||||||
15 | 12 | |||||||||||
20 | 17 | |||||||||||
21 | 19 | |||||||||||
22 | 19 | |||||||||||
1A | 22 | 19 | ||||||||||
1B | 43 | 42 | ||||||||||
2 | 43 | 42 | ||||||||||
3 | 43 | 42 | ||||||||||
4 | 43 | 42 | ||||||||||
PART II | PART II | |||||||||||
5 | 44 | 42 | ||||||||||
6 | 46 | 45 | ||||||||||
7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 47 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 46 | ||||||||
7A | 94 | 93 | ||||||||||
8 | 98 | 96 | ||||||||||
9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 177 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 174 | ||||||||
9A | 177 | 174 | ||||||||||
9B | 177 | Other Information | 174 | |||||||||
PART III | PART III | |||||||||||
Certain information called for by Part III (Items 10, 11, 12, 13 and 14) has been omitted as Registrant intends to file with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year a definitive Proxy Statement pursuant to Regulation 14A. | Certain information called for by Part III (Items 10, 11, 12, 13 and 14) has been omitted as Registrant intends to file with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year a definitive Proxy Statement pursuant to Regulation 14A. | |||||||||||
PART IV | PART IV | |||||||||||
15 | 178 | 175 |
Unless the context otherwise requires, references in this Report to “Loews Corporation,” “we,” “our,” “us” or like terms refer to the business of Loews Corporation excluding its subsidiaries.
We are a holding company. Our subsidiaries are engaged in the following lines of business:
commercial property and casualty insurance (CNA Financial Corporation, a 90% owned subsidiary); |
operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc., a |
transportation and storage of natural gas and natural gas liquids and gathering and processing of natural gas (Boardwalk Pipeline Partners, LP, a |
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operation of a chain of hotels (Loews Hotels Holding Corporation, a wholly owned subsidiary). |
Please read information relating to our major business segments from which we derive revenue and income contained in Note 20 of the Notes to Consolidated Financial Statements, included under Item 8.
CNA Financial Corporation (together with its subsidiaries, “CNA”) was incorporated in 1967 and is an insurance holding company. CNA’s property and casualty and remaining life & group insurance operations are primarily conducted by Continental Casualty Company (“CCC”), incorporated in 1897, and The Continental Insurance Company (“CIC”), organized in 1853, and certain other affiliates. CIC became a subsidiary of CNA in 1995 as a result of the acquisition of The Continental Corporation (“Continental”). CNA accounted for 65.6%67.8%, 63.4%67.7% and 63.0%68.0% of our consolidated total revenue for the years ended December 31, 2012, 20112015, 2014 and 2010.2013.
CNA’s insurance products primarily include commercial property and casualty coverages, including surety. CNA’s services include risk management, information services, warranty and claims administration. CNA’s products and services are primarily marketed through independent agents, brokers and managing general underwriters to a wide variety of customers, including small, medium and large businesses, insurance companies, associations, professionals and other groups.
CNA’s property and casualty field structure consists of 49 underwriting locations across the United States. In addition, there are five centralized processing operations which handle policy processing, billing and collection activities and also act as call centers to optimize service. The claims structure consists of two regional claim centers designed to efficiently handle the high volume of low severity claims including property damage, liability and workers’ compensation medical only claims, and 16 principal claim offices handling the more complex claims. In addition, CNA also has underwriting and claim capabilitiesa presence in Canada, Europe and Europe.Singapore consisting of 19 branch operations and access to business placed at Lloyd’s of London (“Lloyd’s”) through Hardy Underwriting Bermuda Limited (“Hardy”).
CNACNA’s core business, commercial property and casualty insurance operations, includes Specialty, Commercial and International. Other Non-Core business includes Life & Group Non-Core and Other.
CNA Specialty
Specialty includes the following business groups:
ProfessionalManagement & ManagementProfessional Liability: ProfessionalManagement & ManagementProfessional Liability provides management and professional liability insurance and risk management services and other specialized property and casualty coverages in the United States.coverages. This group provides professional liability coverages to various professional firms, including architects, real estate agents, small and mid-sized accounting firms, law firms and technologyother professional firms. ProfessionalManagement & ManagementProfessional Liability also provides directors and officers (“D&O”), employment practices, fiduciary and fidelity coverages. Specific areas of focus
include small and mid-size firms, public as well as privately held firms and not-for-profit
organizations, where tailored products for thisthese client segmentsegments are offered. Products within ProfessionalManagement & ManagementProfessional Liability are distributed through brokers, independent agents and managing general underwriters. ProfessionalManagement & ManagementProfessional Liability, through CNA HealthPro,HealthCare, also offers insurance products to serve the health care industry. Products include professional and general liability andas well as associated standard property and casualty coverages, and are distributed on a national basis through brokers, independent agents and managing general underwriters. Key customer segmentsgroups include long term careaging services, allied medical facilities, allied health care providers, life sciences, dental professionalsdentists, physicians, hospitals and mid-size and large health care facilities.
International: International provides similar management and professional liability insurancenurses and other specialized property and casualty coverages, through similar distribution channels, in Canada and Europe.medical practitioners.
Surety: Surety offers small, medium and large contract and commercial surety bonds. CNA Surety provides surety and fidelity bonds in all 50 states through a network of independent agencies. On June 10, 2011, CNA completed the acquisition of the noncontrolling interest of CNA Surety.agencies and brokers.
Warranty and Alternative Risks: Warranty and Alternative Risks provides extended service contracts and related products that provide protection from the financial burden associated with mechanical breakdown and other related losses, primarily for vehicles and portable electronic communication devices.
CNA Commercial
CNA Commercial’s property products include standard and excess property, coverages, as well as marine coverage, and boiler and machinery.machinery coverages. Casualty products include standard casualty insurance products such as workers’ compensation, general and product liability, commercial auto and umbrella coverages. Most insurance programs are provided on a guaranteed cost basis; however, CNA also offers specialized loss-sensitive insurance programs to those customers viewed as higher risk and less predictable in exposure.programs.
These property and casualty productscasualtyproducts are offered as part of CNA’s Middle Market, Small Business and Other Commercial andInternational insurance groups. CNA’s Small Business insurance group serves its smaller commercial accounts and theOther Commercial insurance group serves CNA’s middle markets and its larger risks. In addition, CNA Commercial providesalso includes total risk management services relating to claim and information services to the large commercial insurance marketplace, through a wholly owned subsidiary, CNA ClaimPlus, Inc., a third party administrator.
International
International provides property and casualty insurance and specialty coverages on a global basis through its operations in Canada, the United Kingdom, Continental Europe and Singapore as well as through its presence at Lloyd’s of London.
The International business is grouped into broad business units - Energy & Marine, Property, Casualty, Specialty, and Healthcare & Technology - and is managed across three territorial platforms.
Canada: Canada provides standard commercial and specialty insurance groupproducts, primarily consists ofin the commercial product lines of CNA’s operations in Europemarine, oil & gas, construction, manufacturing and Canada. During the fourth quarter of 2011, CNA sold its 50% ownership interest in First Insurance Company of Hawaii (“FICOH”).life science industries.
Also included in CNA Commercial isCNA Select Risk (“Select Risk”)Europe, which includes CNA’s excess: CNA Europe provides a diverse range of specialty products as well as commercial insurance products primarily in the marine, property, financial services and surplus lines coverages. Select Risk provides specialized insurance for selected commercial riskshealthcare & technology industries throughout Europe on both an individual customera domestic and programcross border basis. Customers insured by Select Risk are generally viewed as higher risk and less predictable in exposure than those covered by standard insurance markets. Select Risk’s products are distributed throughout the United States
Hardy: Hardy operates through specialist producers, program agents and brokers.
Hardy
In July of 2012, CNA completed the acquisition of Hardy Underwriting Bermuda Limited (“Hardy”), a specialized Lloyd’s of London (“Lloyd’s”) underwriter. Through Lloyd’s Syndicate 382, Hardy underwritesunderwriting primarily short-tail exposures in energy, marine, property, casualty and specialty lines with risks located in many countries around the following coverages: Marine & Aviationprovides coverage for a varietyworld. The capacity of large risks including energy, cargo and specie, marine hull and general aviation.Non-Marine Property comprises direct and facultative property, including construction insurance of industrial and commercial risks (heavy industry, general manufacturing and commercial property portfolios), together with residential and small commercial risks.Property Treaty Reinsurance offers catastrophe reinsurance on an excess of loss basis, proportional treaty and excess of loss coverages and crop reinsurance.Specialty Lines offers coverage for a variety of risks including political violence, accident and health and financial institutions.
Life & Group Non-Core
Life & Group Non-Core primarily includes the results of the life and group lines of business that are in run-off. CNA continues to service its existing individual long term care commitments, its payout annuity business and its pension deposit business. CNA also retains a block of group reinsurance and life settlement contracts. These businesses are being managed as a run-off operation. CNA’s group long term care business whilethat is in run-off. Long term care policies were sold on both an individual and group basis. While considered non-core, continues to accept new employeesenrollees in existing groups.groups were accepted through February 1, 2016.
Other
Other primarily includes certain CNA corporate expenses, including interest on CNA corporate debt and the results of certain property and casualty business in run-off, including CNA Re and asbestos and environmental pollution (“A&EP”). In 2010, CNA ceded substantially all of its legacy A&EP liabilities under the Loss Portfolio Transfer, as further discussed in Note 8 of the Notes to Consolidated Financial Statements included under Item 8.
Direct Written Premiums by Geographic Concentration
Set forth below is the distribution of CNA’s direct written premiums by geographic concentration.
Year Ended December 31 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||
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California | 9.5 | % | 9.4 | % | 9.3 | % | 9.1% | 9.1% | 9.2% | |||||||||||||||||||||||
Texas | 7.4 | 6.7 | 6.5 | 8.1 | 8.1 | 8.0 | ||||||||||||||||||||||||||
Illinois | 7.5 | 6.7 | 5.9 | |||||||||||||||||||||||||||||
New York | 7.1 | 6.7 | 6.8 | 7.1 | 7.2 | 7.2 | ||||||||||||||||||||||||||
Illinois | 6.5 | 4.9 | 4.0 | |||||||||||||||||||||||||||||
Florida | 5.8 | 6.1 | 6.1 | 5.7 | 5.7 | 5.9 | ||||||||||||||||||||||||||
Pennsylvania | 3.8 | 3.7 | 3.7 | |||||||||||||||||||||||||||||
New Jersey | 3.5 | 3.5 | 3.5 | 3.2 | 3.4 | 3.7 | ||||||||||||||||||||||||||
Pennsylvania | 3.4 | 3.4 | 3.4 | |||||||||||||||||||||||||||||
Canada | 3.0 | 3.0 | 2.9 | 2.2 | 2.6 | 3.1 | ||||||||||||||||||||||||||
All other states, countries or political subdivisions | 53.8 | 56.3 | 57.5 | 53.3 | 53.5 | 53.3 | ||||||||||||||||||||||||||
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100.0 | % | 100.0 | % | 100.0 | % | 100.0% | 100.0% | 100.0% | ||||||||||||||||||||||||
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Approximately 9.2%8.0%, 8.8%, and 6.9%9.0% of CNA’s direct written premiums were derived from outside of the United States for the years ended December 31, 2012, 20112015, 2014 and 2010.2013.
Property and Casualty Claim and Claim Adjustment Expenses
The following loss reserve development table illustrates the change over time of reserves established for property and casualty claim and claim adjustment expenses at the end of the preceding ten calendar years for CNA’s property and casualty insurance companies. The table excludes CNA’s life insurance subsidiaries, and as such, the carried reserves will not agree to the Consolidated Financial Statements included under Item 8. The first section shows the reserves as originally reported at the end of the stated year. The second section, reading down, shows the cumulative amounts paid as of the end of successive years with respect to the originally reported reserve liability. The third section, reading down, shows re-estimates of the originally recorded reserves as of the end of each successive year, which is the result of CNA’s property and casualty insurance subsidiaries’ expanded awareness of additional facts and circumstances that pertain to the unsettled claims. The last section compares the latest re-estimated reserves to the reserves originally established, and indicates whether the original reserves were adequate or inadequate to cover the estimated costs of unsettled claims.
The loss reserve development table is cumulative and, therefore, ending balances should not be added since the amount at the end of each calendar year includes activity for both the current and prior years. The development amounts in the table below include the impact of reinsurance commutations, but exclude the impact of the allowance for doubtful accounts on reinsurance receivables.
Schedule of Loss Reserve Development | Schedule of Loss Reserve Development | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Year Ended December 31 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010(a) | 2011 | 2012(b) | 2005 | 2006 | 2007 | 2008 | 2009 | 2010(a) | 2011 | 2012(b) | 2013 | 2014(c) | 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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(In millions of dollars) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Originally reported gross reserves for unpaid claim and claim adjustment expenses | 25,719 | 31,284 | 31,204 | 30,694 | 29,459 | 28,415 | 27,475 | 26,712 | 25,412 | 24,228 | 24,696 | 30,694 | 29,459 | 28,415 | 27,475 | 26,712 | 25,412 | 24,228 | 24,696 | 24,015 | 23,271 | 22,663 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Originally reported ceded recoverable | 10,490 | 13,847 | 13,682 | 10,438 | 8,078 | 6,945 | 6,213 | 5,524 | 6,060 | 4,967 | 5,075 | 10,438 | 8,078 | 6,945 | 6,213 | 5,524 | 6,060 | 4,967 | 5,075 | 4,911 | 4,344 | 4,087 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Originally reported net reserves for unpaid claim and claim adjustment expenses | 15,229 | 17,437 | 17,522 | 20,256 | 21,381 | 21,470 | 21,262 | 21,188 | 19,352 | 19,261 | 19,621 | 20,256 | 21,381 | 21,470 | 21,262 | 21,188 | 19,352 | 19,261 | 19,621 | 19,104 | 18,927 | 18,576 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Cumulative net paid as of: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
One year later | 5,373 | 4,382 | 2,651 | 3,442 | 4,436 | 4,308 | 3,930 | 3,762 | 3,472 | 4,277 | - | 3,442 | 4,436 | 4,308 | 3,930 | 3,762 | 3,472 | 4,277 | 4,588 | 4,352 | 4,089 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Two years later | 8,768 | 6,104 | 4,963 | 7,022 | 7,676 | 7,127 | 6,746 | 6,174 | 6,504 | - | - | 7,022 | 7,676 | 7,127 | 6,746 | 6,174 | 6,504 | 7,459 | 7,788 | 7,375 | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three years later | 9,747 | 7,780 | 7,825 | 9,620 | 9,822 | 9,102 | 8,340 | 8,374 | - | - | - | 9,620 | 9,822 | 9,102 | 8,340 | 8,374 | 8,822 | 9,834 | 9,957 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Four years later | 10,870 | 10,085 | 9,914 | 11,289 | 11,312 | 10,121 | 9,863 | - | - | - | - | 11,289 | 11,312 | 10,121 | 9,863 | 10,038 | 10,548 | 11,316 | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Five years later | 12,814 | 11,834 | 11,261 | 12,465 | 11,973 | 11,262 | - | - | - | - | - | 12,465 | 11,973 | 11,262 | 11,115 | 11,296 | 11,627 | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Six years later | 14,320 | 12,988 | 12,226 | 12,917 | 12,858 | - | - | - | - | - | - | 12,917 | 12,858 | 12,252 | 12,114 | 12,161 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Seven years later | 15,291 | 13,845 | 12,551 | 13,680 | - | - | - | - | - | - | - | 13,680 | 13,670 | 13,101 | 12,806 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Eight years later | 16,022 | 14,073 | 13,245 | - | - | - | - | - | - | - | - | 14,409 | 14,412 | 13,685 | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Nine years later | 16,180 | 14,713 | - | - | - | - | - | - | - | - | - | 15,092 | 14,939 | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ten years later | 16,754 | - | - | - | - | - | - | - | - | - | - | 15,575 | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net reserves re-estimated as of: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
End of initial year | 15,229 | 17,437 | 17,522 | 20,256 | 21,381 | 21,470 | 21,262 | 21,188 | 19,352 | 19,261 | 19,621 | 20,256 | 21,381 | 21,470 | 21,262 | 21,188 | 19,352 | 19,261 | 19,621 | 19,104 | 18,927 | 18,576 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
One year later | 17,650 | 17,671 | 18,513 | 20,588 | 21,601 | 21,463 | 21,021 | 20,643 | 18,923 | 19,081 | - | 20,588 | 21,601 | 21,463 | 21,021 | 20,643 | 18,923 | 19,081 | 19,506 | 19,065 | 18,672 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Two years later | 18,248 | 19,120 | 19,044 | 20,975 | 21,706 | 21,259 | 20,472 | 20,237 | 18,734 | - | - | 20,975 | 21,706 | 21,259 | 20,472 | 20,237 | 18,734 | 18,946 | 19,502 | 18,807 | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three years later | 19,814 | 19,760 | 19,631 | 21,408 | 21,609 | 20,752 | 20,014 | 20,012 | - | - | - | 21,408 | 21,609 | 20,752 | 20,014 | 20,012 | 18,514 | 18,908 | 19,214 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Four years later | 20,384 | 20,425 | 20,212 | 21,432 | 21,286 | 20,350 | 19,784 | - | - | - | - | 21,432 | 21,286 | 20,350 | 19,784 | 19,758 | 18,378 | 18,658 | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Five years later | 21,076 | 21,060 | 20,301 | 21,326 | 20,982 | 20,155 | - | - | - | - | - | 21,326 | 20,982 | 20,155 | 19,597 | 19,563 | 18,202 | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Six years later | 21,769 | 21,217 | 20,339 | 21,060 | 20,815 | - | - | - | - | - | - | 21,060 | 20,815 | 20,021 | 19,414 | 19,459 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Seven years later | 21,974 | 21,381 | 20,142 | 20,926 | - | - | - | - | - | - | - | 20,926 | 20,755 | 19,883 | 19,335 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Eight years later | 22,168 | 21,199 | 20,023 | - | - | - | - | - | - | - | - | 20,900 | 20,634 | 19,828 | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Nine years later | 22,016 | 21,100 | - | - | - | - | - | - | - | - | - | 20,817 | 20,606 | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ten years later | 21,922 | - | - | - | - | - | - | - | - | - | - | 20,793 | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total net (deficiency) redundancy | (6,693 | ) | (3,663 | ) | (2,501 | ) | (670 | ) | 566 | 1,315 | 1,478 | 1,176 | 618 | 180 | - | (537 | ) | 775 | 1,642 | 1,927 | 1,729 | 1,150 | 603 | 407 | 297 | 255 | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Reconciliation to gross re-estimated reserves: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net reserves re-estimated | 21,922 | 21,100 | 20,023 | 20,926 | 20,815 | 20,155 | 19,784 | 20,012 | 18,734 | 19,081 | - | 20,793 | 20,606 | 19,828 | 19,335 | 19,459 | 18,202 | 18,658 | 19,214 | 18,807 | 18,672 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Re-estimated ceded recoverable | 16,903 | 15,273 | 14,131 | 11,455 | 9,131 | 7,728 | 6,686 | 6,032 | 6,536 | 5,316 | - | 11,826 | 9,503 | 8,092 | 7,048 | 6,382 | 6,873 | 5,609 | 5,285 | 4,705 | 4,476 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total gross re-estimated reserves | 38,825 | 36,373 | 34,154 | 32,381 | 29,946 | 27,883 | 26,470 | 26,044 | 25,270 | 24,397 | - | 32,619 | 30,109 | 27,920 | 26,383 | 25,841 | 25,075 | 24,267 | 24,499 | 23,512 | 23,148 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total gross (deficiency) redundancy | (13,106 | ) | (5,089 | ) | (2,950 | ) | (1,687 | ) | (487 | ) | 532 | 1,005 | 668 | 142 | (169 | ) | - | (1,925 | ) | (650 | ) | 495 | 1,092 | 871 | 337 | (39 | ) | 197 | 503 | 123 | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Net (deficiency) redundancy related to: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Asbestos | (827 | ) | (177 | ) | (123 | ) | (113 | ) | (112 | ) | (107 | ) | (79 | ) | - | - | - | - | (113 | ) | (112 | ) | (107 | ) | (79 | ) | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Environmental pollution | (282 | ) | (209 | ) | (209 | ) | (159 | ) | (159 | ) | (159 | ) | (76 | ) | - | - | - | - | (159 | ) | (159 | ) | (159 | ) | (76 | ) | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total asbestos and environmental pollution | (1,109 | ) | (386 | ) | (332 | ) | (272 | ) | (271 | ) | (266 | ) | (155 | ) | - | - | - | - | (272 | ) | (271 | ) | (266 | ) | (155 | ) | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Core (Non-asbestos and environmental pollution) | (5,584 | ) | (3,277 | ) | (2,169 | ) | (398 | ) | 837 | 1,581 | 1,633 | 1,176 | 618 | 180 | - | (265 | ) | 1,046 | 1,908 | 2,082 | 1,729 | 1,150 | 603 | 407 | 297 | 255 | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total net (deficiency) redundancy | (6,693 | ) | (3,663 | ) | (2,501 | ) | (670 | ) | 566 | 1,315 | 1,478 | 1,176 | 618 | 180 | - | (537 | ) | 775 | 1,642 | 1,927 | 1,729 | 1,150 | 603 | 407 | 297 | 255 | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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(a) | Effective January 1, 2010, CNA ceded |
(b) |
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(c) | In the third quarter of 2014, CNA commuted a workers’ compensation reinsurance pool which had the |
Please read information relating to CNA’s property and casualty claim and claim adjustment expense reserves and reserve development set forth under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), and in Notes 1 and 8 of the Notes to Consolidated Financial Statements, included under Item 8.
Investments
Please read Item 7, MD&A – Investments and Notes 1, 3 4 and 54 of the Notes to Consolidated Financial Statements, included under Item 8.
Other
Competition: The property and casualty insurance industry is highly competitive both as to rate and service. CNA competes with a large number of stock and mutual insurance companies and other entities for both distributors and customers. Insurers compete on the basis of factors including products, price, services, ratings and financial strength. CNA must continuously allocate resources to refine and improve its insurance products and services.
There are approximately 2,8002,700 individual companies that sell property and casualty insurance in the United States. Based on 20112014 statutory net written premiums, CNA is the seventheighth largest commercial insurance writer and the 13th14th largest property and casualty insurance organization in the United States.
Regulation:The insurance industry is subject to comprehensive and detailed regulation and supervision. Regulatory oversight by applicable agencies is exercised through review of submitted filings and information, examinations (both financial and market conduct), direct inquiries and interviews. Each domestic and foreign jurisdiction has established supervisory agencies with broad administrative powers relative to licensing insurers and agents, approving policy forms, establishing reserve requirements, prescribing the form and content of statutory financial reports and regulating capital adequacy and the type, quality and amount of investments permitted. Such regulatory powers also extend to premium rate regulations, which require that rates not be excessive, inadequate or unfairly discriminatory.discriminatory, governance requirements and risk assessment practice and disclosure. In addition to regulation of dividends by insurance subsidiaries, intercompany transfers of assets may be subject to prior notice or approval by insurance regulators, depending on the size of such transfers and payments in relation to the financial position of the insurance subsidiaries making the transfer or payment.
Domestic insurers are also required by state insurance regulators to provide coverage to insureds who would not otherwise be considered eligible by the insurers. Each state dictates the types of insurance and the level of coverage that must be provided to such involuntary risks. CNA’s share of these involuntary risks is mandatory and generally a function of its respective share of the voluntary market by line of insurance in each state.
Further, domestic insurance companies are subject to state guaranty fund and other insurance-related assessments. Guaranty funds are governed by state insurance guaranty associations which levy assessments to meet the funding needs of insolvent insurer estates. Other insurance-related assessments are generally levied by state agencies to fund various organizations including disaster relief funds, rating bureaus, insurance departments, and workers’ compensation second injury funds, or by industry organizations that assist in the statistical analysis and ratemaking process and CNA has the ability to recoup certain of these assessments from policyholders.
As CNA’s insurance operations are conducted in a multitude of both domestic and foreign jurisdictions, CNA is subject to a number of regulatory agency requirements in respect of a portion, or all, of its operations. These include, but are not limited to, the State of Illinois Department of Insurance (which is CNA’s global group-wide supervisor), the U.K. Prudential Regulatory Authority and Financial Conduct Authority, the Bermuda Monetary Authority and the Office of Superintendent of Financial Institutions in Canada.
Hardy is also supervised by the Council of Lloyd’s, which is the franchisor for all Lloyd’s operations. The Council of Lloyd’s has wide discretionary powers to regulate Lloyd’s underwriting, such as establishing the capital requirements for syndicate participation. In addition, the annual business plans of each syndicate are subject to the review and approval of the Lloyd’s Franchise Board, which is responsible for business planning and monitoring for all syndicates.
The
Effective January 1, 2016, the European Union’s executive body, the European Commission, is implementingimplemented new capital adequacy and risk management regulations, called Solvency II, that would apply to CNA’s European operations. In addition, global regulators, includingAdditionally, the United StatesInternational Association of Insurance Supervisors (“IAIS”) continues to consider regulatory proposals addressing group supervision, capital requirements and enterprise risk management. The U.S. Federal Reserve, the U.S. Federal Insurance Office and the National Association of Insurance Commissioners are working with the International Association of Insurance Supervisors (“IAIS”)other global regulators to consider changes to insurance company supervision. Among the areas being addressed are company and group capital requirements, group supervision and enterprise risk management.define such proposals. It is not currently clear to what extent or how the activities of the IAIS activities will impact CNA as any final proposal would ultimately need to be legislated or U.S. insurance regulation.
Domestic insurers are also requiredregulated by the state insurance regulators to provide coverage to insureds who would not otherwise be considered eligible by the insurers. Each state dictates the types of insurance and the level of coverage that must be provided to such involuntary risks. CNA’s share of these involuntary risks is mandatory and generally a function of its respective share of the voluntary market by line of insurance in each individual country or state.
Further, insurance companies are subject to state guaranty fund and other insurance-related assessments. Guaranty fund assessments are levied by the state departments of insurance to cover claims of insolvent insurers. Other insurance-related assessments are generally levied by state agencies to fund various organizations including disaster relief funds, rating bureaus, insurance departments, and workers’ compensation second injury funds, or by industry organizations that assist in the statistical analysis and ratemaking process.
Although the federal government does not currently directly regulate the business of insurance, federal legislative and regulatory initiatives can impact the insurance industry in a variety of ways.industry. These initiatives and legislation include tort reform proposals; proposals addressingrelating to potential federal oversight of certain insurers; terrorism and natural catastrophe exposures; terrorismcybersecurity risk mechanisms;management; federal financial services reforms; variousand certain tax reforms. The Terrorism Risk Insurance Program Reauthorization Act of 2015 was enacted on January 12, 2015. The reauthorization provides for a federal government backstop for insured terrorism risks for another six years with increases to the insurer co-payment and program trigger. The existence of the mitigating effects of such law is part of the analysis of CNA’s overall risk posture for terrorism and, accordingly, its risk positioning may change if such law were modified. CNA also continues to invest in the security network of its systems on an enterprise-wide basis, especially considering the implications of data and privacy breaches. This requires an investment of a significant amount of resources by CNA on an ongoing basis. Potential implications of possible cybersecurity legislation on such current investment, if any, are uncertain. The foregoing proposals, affecting insurance companies;either separately or in the aggregate, create a regulatory and possible regulatory limitations, impositionslegal environment that may require changes in CNA’s business plan or significant investment of resources in order to operate in an effective and restrictions arising from the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as the Patient Protection and Affordable Care Act, both enacted in 2010.compliant manner.
VariousAdditionally, various legislative and regulatory efforts to reform the tort liability system have, and will continue to, impact CNA’s industry. Although there has been some tort reform with positive impact to the insurance industry, new causes of action and theories of damages continue to be proposed in state court actions or by federal or state legislatures that continue to expand liability for insurers and their policyholders. For example, some state legislatures have from time to time considered legislation addressing direct actions against insurers related to bad faith claims. As a result of this unpredictability in the law, insurance underwriting is expected to continue to be difficult in commercial lines, professional liability and other specialty coverages.
The Dodd-Frank Wall Street Reform and Consumer Protection Act expanded the federal presence in insurance oversight and may increase the regulatory requirements to which CNA may be subject. The Act’s requirements include streamlining the state-based regulation of reinsurance and nonadmitted insurance (property or casualty insurance placed from insurers that are eligible to accept insurance, but are not licensed to write insurance in a particular state). The Act also established a new Federal Insurance Office within the U.S. Department of the Treasury. The Act called for numerous studies and contemplates further regulation.
The Patient Protection and Affordable Care Act and the related amendments in the Health Care and Education Reconciliation Act may increase CNA’s operating costs and underwriting losses. This landmark legislation may lead to numerous changes in the health care industry that could create additional operating costs for CNA, particularly with respect to its workers’ compensation and long term care products.
Properties:The Chicago location houses CNA’s principal executive offices. CNA’s subsidiaries own or lease office space in various cities throughout the United States and in other countries. The following table sets forth certain information with respect to CNA’s principal office locations:
Location | Size (square feet) | Principal Usage | ||||||
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333 S. Wabash Avenue | 608,388 | Principal executive offices of CNA | ||||||
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2405 Lucien Way | 113,169 | Property and casualty insurance offices | ||||||
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125 S. Broad Street | 64,248 | Property and casualty insurance offices | ||||||
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101 S. Reid Street | 61,308 | Property and casualty insurance offices | ||||||
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4150 N. Drinkwater Boulevard | 56,281 | Property and casualty insurance offices | ||||||
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1 Meridian Boulevard | 53,579 | Property and casualty insurance offices | ||||||
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675 Placentia Avenue | 36,768 | Property and casualty insurance offices | ||||||
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1249 S. River Road | 36,676 | Property and casualty insurance offices | ||||||
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| 36,637 | Property and casualty insurance offices | ||||||
Dallas, Texas | ||||||||
555 Mission Street | 35,130 | Property and casualty insurance offices | ||||||
San Francisco, California |
CNA leases its office space described above except for the buildingsbuilding in Chicago, Illinois, Reading, Pennsylvania and Aurora, Illinois, which areis owned.
DIAMOND OFFSHORE DRILLING, INC.
Diamond Offshore Drilling, Inc. (“Diamond Offshore”) is engaged, through its subsidiaries, in the business of operating drilling rigs that are chartered on a contract basis for fixed terms by companies engaged in the exploration and production of hydrocarbons. Offshore rigs are mobile units that can be relocated based on market demand. Diamond Offshore accounted for 21.1%18.1%, 23.6%19.7% and 23.0%20.0% of our consolidated total revenue for the years ended December 31, 2012, 20112015, 2014 and 2010.2013.
Rigs: Diamond Offshore owns 44provides contract drilling services to the energy industry around the world with a fleet of 32 offshore drilling rigs, consistingwhich include four jack-up rigs that are being marketed for sale. Diamond Offshore’s fleet consists of 32 semisubmersible rigs, seven jack-ups and five dynamically positioned drillships, four of23 semisubmersibles including theOcean GreatWhite, which areis under construction, with deliveries scheduled forfive jack-up rigs and four dynamically-positioned drillships including the last of Diamond Offshore’s four newbuild drillships, theOcean BlackLion, which was delivered in the second and fourth quartersquarter of 2013 and the second and fourth quarters of 2014.2015. Diamond Offshore’sOffshore expects its harsh environment ultra-deepwater semisubmersible fleet also includesrig, theOcean OnyxGreatWhite,andOcean Apex, two moored semisubmersible rigs which are under construction and expected to be delivered in the third quarter of 2013 and the second quarter of 2014. Diamond Offshore’s diverse fleet enables it to offer a broad range of services worldwide in both the floater market (ultra-deepwater, deepwater and mid-water) and the non-floater, or jack-up market.mid-2016.
A floater rig is a type of mobile offshore drilling unit that floats and does not rest on the seafloor. This asset class includes self-propelled drillships and semisubmersible rigs. Semisubmersible rigs consist of an upper working and living deck resting on vertical columns connected to lower hull members. Such rigs operate in a “semi-submerged” position, remaining afloat, off bottom, in a position in which the lower hull is approximately 55 feet to 90 feet below the water line and the upper deck protrudes well above the surface. Semisubmersible rigsSemisubmersibles hold position while drilling by use of a series of small propulsion units or thrusters that provide dynamic positioning (“DP”) to keep the rig on location, or with anchors tethered to the seabed. Although DP semisubmersibles are self-propelled, such rigs may be moved long distances with the assistance of tug boats; non-DP,boats. Non-DP, or moored, semisubmersible rigssemisubmersibles require tug boats or the use of a heavy lift vessel to move between locations.
A drillship is an adaptation of a maritime vessel whichthat is designed and constructed to carry out drilling operations by means of a substructure with a moon pool centrally located in the hull. Drillships are typically self-propelled and are positioned over a drillsite through the use of either an anchoring system or a DP system similar to those used on semisubmersible rigs.
Diamond Offshore’s floater fleet (semisubmersibles and drillships) can be further categorized based on the nominal water depth for each class of rig as follows:
Category | Rated Water Depth (a) (in feet) | Number of Units in Fleet | ||
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Ultra-Deepwater | 7,501 to 12,000 | 12 (b) | ||
Deepwater | 5,000 to 7,500 | 7 | ||
Mid-Water | 400 to 4,999 | 8 |
(a) | Rated water depth for semisubmersibles and drillships reflects the maximum water depth in which a floating rig has been designed to operate. However, individual rigs are capable of drilling, or have drilled, in marginally greater water depths depending on various conditions (such as salinity of the ocean, weather and sea conditions). |
(b) | Includes |
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Jack-up rigs are mobile, self-elevating drilling platforms equipped with legs that are lowered to the ocean floor. Diamond Offshore’s jack-ups are used for drilling in water depths from 20 feet to 350 feet. The water depth limit ofin which a particular rig is able to operate is principally determined by the length of the rig’s legs. The rig hull includes the drilling equipment, jacking system, crew quarters, loading and unloading facilities, storage areas for bulk and liquid materials, heliport and other related equipment. A jack-up rig is towed to the drillsite with its hull riding in the sea, as a vessel, with its legs retracted. Once over a drillsite, the legs are lowered until they rest on the seabed and jacking continues with the legs penetrating the seabed until they are firm and stable, and resistance is sufficient to elevate the hull above the surface of the water. After completion of drilling operations, the hull is lowered until it rests in the
water and then the legs are retracted for relocation to another drillsite. All of Diamond Offshore’s jack-up rigs are equipped with a cantilever system that enables the rig to cantilever or extend its drilling package over the aft end of the rig.
As of February 16, 2016, theOcean Scepter, built in 2008, was operating offshore Mexico for Exploración Producción (“PEMEX”), under a long term contract. In addition, Diamond Offshore has four other jack-up rigs which it is currently marketing for sale. Fleet Enhancements and Additions:Diamond Offshore’s long term strategy is to upgrade its fleet to meet customer demand for advanced, efficient and high-tech rigs by acquiring or building new rigs when possible to do so at attractive prices, and otherwise by enhancing the capabilities of its existing rigs at a lower cost and reducedshortened construction period than newbuild construction would require. Since 2009, commencing with the acquisition of two newbuild, ultra-deepwater semisubmersible rigs, theOcean Courage andOcean Valor, Diamond Offshore has contracted with Hyundai Heavy Industries Co. Ltd.committed over $5.0 billion towards upgrading its fleet. In mid 2015, Diamond Offshore took delivery of theOcean BlackLion, for the constructionlast of four dynamically positioned, ultra-deepwater drillships. Diamond Offshore expects the aggregate cost for the four drillships including commissioning, spares and project management costs, to be approximately $2.6 billion.
Construction has begun on two moored semisubmersible rigs designed to operateconstructed in water depths up to 6,000 feet. The rigs will be constructed utilizing the hulls of two ofSouth Korea during Diamond Offshore’s mid-water floaters and the aggregate costmost recent fleet enhancement cycle. TheOcean GreatWhite remains under construction in South Korea with delivery of the two rigs is estimatednew rig expected to be approximately $680 million, including commissioning, spares and project management costs.
In Februaryoccur in mid-2016. Upon completion of 2013, Diamond Offshore announced that one of its mid-water floaters, theOcean Patriot, will undergo enhancements to enableacceptance testing, the rig to work in the North Sea at an estimated aggregate cost of approximately $120 million. The enhancement project is expected to begin during the third quarter of 2013 with completion expected in early 2014.commence drilling operations offshore Australia later this year.
Diamond Offshore will evaluate further rig acquisition and upgradeenhancement opportunities as they arise. However, Diamond Offshore can provide no assurance whether, or to what extent, it will continue to make rig acquisitions or upgradesenhancements to its fleet.
Pressure Control by the Hour:In February of 2016, Diamond Offshore entered into a ten-year agreement with GE Oil & Gas, (“GE”), to provide services with respect to certain blowout preventer and related well control equipment on Diamond Offshore’s four newbuild drillships. Such services include management of maintenance, certification and reliability with respect to such equipment. In connection with the services agreement with GE, Diamond Offshore will sell the equipment to a GE affiliate and will lease back such equipment over separate ten-year operating leases.
Markets: The principal markets for Diamond Offshore’s contract drilling services are the following:
South America, principally offshore |
Australia and Southeast Asia, including Malaysia, Indonesia |
the Middle |
Europe, principally in the United Kingdom (“U.K.”) and Norway; |
East and West Africa; |
the |
the Gulf of Mexico, including the U.S. and Mexico. |
Diamond Offshore actively markets its rigs worldwide. From time to time Diamond Offshore’s fleet operates in various other markets throughout the world.
Diamond Offshore believes its presence in multiple markets is valuable in many respects. For example, Diamond Offshore believes that its experience with safety and other regulatory matters in the U.K. has been beneficial in Australia and other international areas in which Diamond Offshore operates, while production experience it has gained through its Brazilian and North Sea operations has potential application worldwide. Additionally, Diamond Offshore believes its performance for a customer in one market area enables it to better understand that customer’s needs and better serve that customer in different market areas or other geographic locations.
Drilling Contracts: Diamond Offshore’s contracts to provide offshore drilling services vary in their terms and provisions. Diamond Offshore typically obtains its contracts through a competitive bid process, although it is not unusual for Diamond Offshore to be awarded drilling contracts following direct negotiations. Drilling contracts generally provide for a basic fixed dayrate regardless of whether or not such drilling results in a productive well. Drilling contracts may also provide for reductions in rates during periods when the rig is being moved or when
drilling operations are interrupted or restricted by equipment breakdowns, adverse weather conditions or other circumstances. Under dayrate contracts, Diamond Offshore generally pays the operating expenses of the rig, including wages and the cost of incidental supplies. Historically, dayrate contracts have accounted for the majority of Diamond Offshore’s revenues. In addition, from time to time, Diamond Offshore’s dayrate contracts may also provide for the ability to earn an incentive bonus from its customer based upon performance.
The duration of a dayrate drilling contract is generally tied to the time required to drill a single well or a group of wells, which Diamond Offshore refers to as a well-to-well contract, or a fixed period of time, in what Diamond Offshore refers to as a term contract. Many drilling contracts may be terminated by the customer in the event the drilling rig is destroyed or lost or if drilling operations are suspended for an extended period of time as a result of a breakdown of equipment or, in some cases, due to other events beyond the control of either party to the contract. Certain of Diamond Offshore’s contracts also permit the customer to terminate the contract early by giving notice, andnotice; in most circumstances, this requires the payment of an early termination fee by the customer. The contract term in many instances may also be extended by the customer exercising options for the drilling of additional wells or for an additional length of time, generally at competitive market rates and mutually agreeable terms at the time of the extension. In periods of decreasing demand for offshore rigs, drilling contractors may prefer longer term contracts to preserve dayrates at existing levels and ensure utilization, while customers may prefer shorter contracts that allow them to more quickly obtain the benefit of declining dayrates. Moreover, drilling contractors may accept lower dayrates in a declining market in order to obtain longer-term contracts and add backlog.
Customers: Diamond Offshore provides offshore drilling services to a customer base that includes major and independent oil and gas companies and government-owned oil companies. During 2012, 20112015, 2014 and 2010,2013, Diamond Offshore performed services for 19, 35 52 and 4639 different customers. During 2012, 20112015, 2014 and 2010,2013, one of Diamond Offshore’s customers in Brazil, Petróleo Brasileiro S.A. (“Petrobras”), (a Brazilian multinational energy company that is majority-owned by the Brazilian government), accounted for 33%24%, 35%32% and 24%34% of Diamond Offshore’s annual total consolidated revenues. OGX Petróleo e Gás Ltda. (“OGX”), (a privately owned Brazilian oilDuring 2015, ExxonMobil and natural gas company),Anadarko each accounted for 12%, 14% and 14% of Diamond Offshore’s annual total consolidated revenues in each of the years ended December 31, 2012, 2011 and 2010.revenues. No other customer accounted for 10% or more of Diamond Offshore’s annual total consolidated revenues during 2012, 20112015, 2014 or 2010.2013.
Brazil is oneAs of the most active floater markets in the world today. Currently, the greatest concentration of Diamond Offshore’s operating assets is offshore Brazil, where it has 12 rigs contracted.February 16, 2016, Diamond Offshore’s contract backlog was $5.2 billion attributable to 11 customers. All four of its drillships are currently contracted to work in the GOM. As of February 16, 2016, contract backlog attributable to Diamond Offshore’s expected operations offshore Brazil is $1.2 billion, $1.0 billion, $0.5 billionin the GOM was $510 million, $653 million and $62$653 million for the years 2013, 2014, 20152016, 2017 and 2016.2018, respectively, and $626 million in the aggregate for the years 2019 to 2020 attributable to three customers.
Competition:Competition: Despite consolidation in recentprevious years, the offshore contract drilling industry remains highly competitive with numerous industry participants, none of which at the present time has a dominant market share. The industry may also experience additional consolidation in the future, which could create other large competitors. Some of Diamond Offshore’s competitors may have greater financial or other resources than Diamond Offshore. Diamond Offshore competes with offshoreit does. Based on industry data as of the date of this report, there are approximately 840 mobile drilling contractors that together have almost 780 mobile rigs available worldwide.in service worldwide, including approximately 300 floater rigs.
The offshore contract drilling industry is influenced by a number of factors, including global economies and demand for oil and natural gas, current and anticipated prices of oil and natural gas, expenditures by oil and gas companies for exploration and development of oil and natural gas and the availability of drilling rigs.
Drilling contracts are traditionally awarded on a competitive bid basis. Price is typically the primary factor in determining which qualified contractor is awarded a job. Customers may also consider rig availability and location, a drilling contractor’s operational and safety performance record, and condition and suitability of equipment. Diamond Offshore believes it competes favorably with respect to these factors.
Diamond Offshore competes on a worldwide basis, but competition may vary significantly by region at any particular time. Competition for offshore rigs generally takes place on a global basis, as these rigs are highly mobile and may be moved, at a cost that may be substantial, from one region to another. It is characteristic of the offshore contract drilling industry to move rigs from areas of low utilization and dayrates to areas of greater activity and relatively higher dayrates. Significant new rig construction and upgrades of existing drilling units could also intensify price competition.
Governmental Regulation:Regulation: Diamond Offshore’s operations are subject to numerous international, foreign, U.S., state and local laws and regulations that relate directly or indirectly to its operations, including regulations controlling the discharge of materials into the environment, requiring removal and clean-up under some
circumstances, or otherwise relating to the protection of the environment, and may include laws or regulations pertaining to climate change, carbon emissions or energy use.
Operations Outside the United States: Diamond Offshore’s operations outside the U.S. accounted for approximately 94%79%, 90%85% and 81%89% of its total consolidated revenues for the years ended December 31, 2012, 20112015, 2014 and 2010.2013.
Properties: Diamond Offshore owns an office building in Houston, Texas, where its corporate headquarters are located, offices and other facilities in New Iberia, Louisiana, Aberdeen, Scotland, Macae, Brazil and Ciudad del Carmen, Mexico. Additionally, Diamond Offshore currently leases various office, warehouse and storage facilities in Australia, Egypt, Indonesia, Louisiana, Australia, Indonesia, Norway, Malaysia, Romania, Singapore, Egypt, Equatorial Guinea, Angola, VietnamThailand, Trinidad and Tobago, the U.K. and Vietnam to support its offshore drilling operations.
BOARDWALK PIPELINE PARTNERS, LP
Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”) is engaged in integrated natural gas and natural gas liquids (“NGLs”and hydocarbons (herein referred to together as “NGLs”) transportation and storage and natural gas gathering and processing. Boardwalk Pipeline accounted for 8.1%9.3%, 8.1%8.6% and 7.7%8.4% of our consolidated total revenue for the years ended December 31, 2012, 20112015, 2014 and 2010.2013.
We own approximately 55%51% of Boardwalk Pipeline comprised of 102,719,466125,586,133 common units, 22,866,667 class B units and a 2% general partner interest. A wholly owned subsidiary of ours, Boardwalk Pipelines Holding Corp. (“BPHC”) is the general partner and holds all of Boardwalk Pipeline’s incentive distribution rights which entitle the general partner to an increasing percentage of the cash that is distributed by Boardwalk Pipeline in excess of $0.4025 per unit per quarter.
In October of 2012, Boardwalk Pipeline acquired Boardwalk Louisiana Midstream LLC (“Louisiana Midstream”) for approximately $620 million. Louisiana Midstream provides transportation and storage services for natural gas and NGLs, fractionation services for NGLs and brine supply services for producers and consumers of petrochemicals through two hubs in southern Louisiana.
Boardwalk Pipeline owns and operates approximately 14,17014,090 miles of interconnected natural gas pipelines directly serving customers in 13 states and indirectly serving customers throughout the northeastern and southeastern United StatesU.S. through numerous interconnections with unaffiliated pipelines. Boardwalk Pipeline also owns approximately 240and operates more than 435 miles of NGL pipelines in Louisiana.Louisiana and Texas. In 2012,2015, its pipeline systems transported approximately 2.52.4 trillion cubic feet (“Tcf”) of natural gas and approximately 7.146.6 million barrels (“MMbbls”MMBbls”) of NGLs. Average daily throughput on Boardwalk Pipeline’s natural gas pipeline systems during 20122015 was approximately 6.96.7 billion cubic feet (“Bcf”). Boardwalk Pipeline’s natural gas storage facilities are comprised of 14 underground storage fields located in four states with aggregate working gas capacity of approximately 201.0205.0 Bcf and Boardwalk Pipeline’s NGL storage facilities consist of eightnine salt dome storage caverns located in one stateLouisiana with an aggregate storage capacity of approximately 17.6 MMbbls.24.0 MMBbls. Boardwalk Pipeline also owns twothree salt dome caverns and a brine pond for use in providing brine supply services and to support the NGL cavernstorage operations.
The pipeline and storage systems of Boardwalk Pipeline consist of the following:
The Gulf Crossing pipeline system, which originates in Texas and proceeds into Louisiana, operates approximately 360 miles of natural gas pipeline. The pipeline system has a peak-day delivery capacity of 1.7 Bcf per day and average daily throughput for the year ended December 31, 2012 was 1.3 Bcf per day.
The Gulf South pipeline system runs approximately 7,2407,390 miles along the Gulf Coast in the states of Texas, Louisiana, Mississippi, Alabama and Florida. Gulf South has two natural gas storage facilities with 83.0 Bcf of working gas storage capacity. The pipeline system has a peak-day delivery capacity of 6.88.3 Bcf per day and average daily throughput for the year ended December 31, 20122015 was 3.02.8 Bcf per day. Gulf South has ten natural gas storage facilities. The two natural gas storage facilities located in Louisiana and Mississippi have approximately 83.5 Bcf of working gas storage capacity and the eight salt dome natural gas storage caverns in Mississippi have approximately 46.0 Bcf of total storage capacity, of which approximately 29.6 Bcf is working gas capacity. Gulf South also owns undeveloped land which is suitable for up to five additional storage caverns.
The Texas Gas pipeline system originates in Louisiana, East Texas and Arkansas and runs for approximately 6,1106,020 miles north and east through Louisiana, Arkansas, Mississippi, Tennessee, Kentucky, Indiana, and into Ohio, with smaller diameter lines extending into Illinois. The pipeline system has a peak-day delivery capacity of 4.44.8 Bcf per day and average daily throughput for the year ended December 31, 20122015 was 2.52.6 Bcf per day. Texas Gas owns nine natural gas storage fields with 84.084.3 Bcf of working gas storage capacity.
The Gulf Crossing pipeline system originates in Texas and runs approximately 375 miles into Louisiana. The pipeline system has a peak-day delivery capacity of 1.9 Bcf per day and average daily throughput for the year ended December 31, 2015 was 1.2 Bcf per day.
Boardwalk Louisiana Midstream and Boardwalk Petrochemical Pipeline (collectively “Louisiana Midstream”) provide transportation and storage services for natural gas, NGL’s and ethylene, fractionation services for NGL’s and brine supply services. These assets provide approximately 67.1 MMBbls of salt dome storage capacity, including approximately 7.6 Bcf of working natural gas storage capacity and approximately 24.0 MMBbls of salt dome NGL storage capacity, significant brine supply infrastructure including three salt dome caverns and approximately 270 miles of pipeline assets.
Louisiana Midstream owns and operates the Evangeline Pipeline (“Evangeline”), which is an approximately 180 mile interstate ethylene pipeline that is capable of transporting approximately 2.6 billion pounds of ethylene per year between Texas and Louisiana, where it interconnects with Louisiana Midstream’s ethylene distribution system. Throughput for Louisiana Midstream was 46.6 MMBbls for the year ended December 31, 2015.
Boardwalk Field Services operates natural gas gathering, compression, treating and processing infrastructure primarily in southernsouth Texas with approximately 290 miles of pipeline.
In response to the change in the natural gas industry and the growth in the petrochemical industry, Boardwalk Pipeline is currently engaged in the following growth projects. SeeLiquidity and Capital Resources – Boardwalk Pipeline for further discussion of capital expenditures and financing.
Ohio to Louisiana Access Project: This project will provide long term firm natural gas transportation primarily from the Marcellus and Utica production areas to Louisiana, and while not creating additional capacity, would make a portion of Boardwalk Pipeline’s Texas Gas system bi-directional. The project is supported by firm transportation contracts with producers and end-users and has a weighted average contract life of approximately 13 years. The project is expected to be placed into service in the second quarter of 2016.
Southern Indiana Lateral Project: This project will consist of the construction of approximately 30 miles of pipeline from Indiana to Kentucky, adding approximately 0.1 Bcf per day of peak-day transmission capacity to Boardwalk Pipeline’s Texas Gas system. The project is expected to be placed into service in the third quarter of 2016, with a weighted-average contract life of 19 years.
Western Kentucky Market Lateral Project: This project consists of the construction of a pipeline lateral to provide deliveries to a proposed new power plant in Western Kentucky, adding approximately 0.2 Bcf per day of peak-day transmission capacity to Boardwalk Pipeline’s Texas Gas system. The project is expected to be placed into service in the third quarter of 2016, with a weighted-average contract life of 20 years.
Power Plant Project in South Texas: Boardwalk Pipeline’s power plant project consists of the addition of compression facilities and modifications of existing facilities to increase the operating capacity of certain sections of the Gulf South pipeline, providing transportation services of 0.2 Bcf per day to a new power plant in South Texas. The project is expected to be placed into service in the third quarter of 2016, with a weighted-average contract life of 20 years.
Northern Supply Access Project: This project will increase the peak-day transmission capacity on Boardwalk Pipeline’s Texas Gas system by the addition of compression facilities and other system modifications to make this portion of the system bi-directional and is supported by precedent agreements for 0.4 Bcf per day of peak-day transmission capacity. The project is expected to be placed into service in the first half of 2017, with a weighted-average contract life of 16 years. In October of 2015, one of the foundation shippers which contracted for 0.1 Bcf per day of peak-day transmission capacity failed to post the required credit support on the contractually required date. Boardwalk Pipeline continues to work with the customer as well as explore all options for the capacity associated with that customer’s precedent agreement, including adjusting the scope of the project to accommodate the reduced volume commitment. This project remains subject to the Federal Energy Regulatory Commission (“FERC”) regulatory approval to commence construction.
Sulphur Storage and Pipeline Expansion Project: Boardwalk Pipeline executed a long term agreement to provide liquids transportation and storage services to support the development of a new ethane cracker plant in Louisiana. The project will involve significant storage and infrastructure development to serve petrochemical customers near Boardwalk Pipeline’s Sulphur Hub and is expected to be placed into service in the second half of 2017.
Coastal Bend Header Project: Boardwalk Pipeline executed precedent agreements with foundation shippers to transport natural gas to serve a planned liquefied natural gas (“LNG”) liquefaction terminal in Freeport, Texas. As part of the project Boardwalk Pipeline will construct an approximately 65-mile pipeline supply header with approximate 1.4 Bcf per day of capacity to serve the terminal. Additionally, Boardwalk Pipeline will expand and modify its existing Gulf South pipeline facilities that will provide access to additional supply sources through various interconnects in South Texas and in the Marcellus Shale areaLouisiana area. The project is expected to be placed into service in Pennsylvania2018, with approximately 355 milesa weighted-average contract life of pipeline.20 years. This project remains subject to FERC regulatory approval to commence construction.
Brine Development Project: Boardwalk HP Storage Company, LLC (“HP Storage”) owns and operates seven salt dome natural gas storage cavernsPipeline executed agreements with a petrochemical customer in Mississippi, with 36.3 BcfLouisiana to provide brine supply services subject to certain minimum take requirements. The first portion of total storage capacity,the project, which was placed into service in the fourth quarter of which approximately 23.0 Bcf is working gas capacity. HP Storage also operates approximately 105 miles2015, consisted of constructing a pipeline which connects itsto the customer’s facilities with several major natural gas pipelines, including Gulf South. Average daily throughput for the pipeline system for theto supply brine over a three year ended December 31, 2012 was 0.1 Bcf per day. HP Storage also owns undeveloped land which is suitable for up to six additional storage caverns, one of which isperiod. The second portion, expected to be placed in service in 2013.
Louisiana Midstream’s storage services provide approximately 53.2 MMbbls2018, consists of salt dome storage capacity, including approximately 11.0 Bcf of working natural gas storage capacity and approximately 17.6 MMbbls of salt dome NGL storage capacity, significantproviding brine supply infrastructure including two salt dome caverns and more than 240 miles of pipeline assets, including an extensive ethylene distribution system.
Boardwalk Pipeline’s current expansion projects include the following:
Southeast Market Expansion: The Southeast Market Expansion project is an interconnection between Boardwalk Pipeline’s Gulf South pipeline and HP Storage facilities, additional compression facilities and approximately 70 miles of additional pipeline, adding 0.5 Bcf per day of peak-day transmission capacity, subject to Federal Energy Regulatory Commission (“FERC”) approval. The project is expected to be placed in service in the second half of 2014 and will cost approximately $300 million. The Southeast Market Expansion project is fully contracted withservices over a weighted-average contract life of approximately 10 years.
South Texas Eagle Ford Expansion: The South Texas Eagle Ford Expansion construction project consists of 55 miles of gathering pipeline and a cryogenic processing plant. The system will have the capability of gathering in excess of 0.3 Bcf per day of liquids-rich gas in the Eagle Ford Shale production area in Texas and processing up to 150 MMcf per day of liquids-rich gas. Boardwalk Pipeline will also provide re-delivery of processed residue gas to a number of interstate and intrastate pipelines. Boardwalk Pipeline has executed long term fee-based gathering and processing agreements for approximately 50% of the plant’s processing capacity. The plant and new pipeline are estimated to cost approximately $180 million and are expected to be placed in service in April of 2013.
Salt Dome Storage: HP Storage is developing a new salt dome storage cavern having working gas capacity of approximately 5.3 Bcf, which is expected to be placed in service in the second quarter of 2013 with an estimated cost of approximately $23 million.
Choctaw Brine Supply Expansion Projects: Louisiana Midstream is engaged in two brine supply service expansion projects. The first brine supply project consists of15-year period through the development of a one million barrel brine pond, which was placed in service in January of 2013 at a total cost of approximately $13 million. Louisiana Midstream has executed seven-year, fixed-fee contracts in support of this project. The second project, which is supported by a 20-year commitment with minimum volume requirements, consists of constructing 26 miles of 12-inch pipeline from Louisiana Midstream’s facilities to a petrochemical customer’s plant. This project is expected to cost approximately $50 millionadditional wells and is expected to be placed in service in the third quarter of 2013.associated facilities.
Customers:Boardwalk Pipeline serves a broad mix of customers, including producers of natural gas, and with end-use customers including local distribution companies, marketers, electric power generators, industrial users and interstate and intrastate pipelines who, in turn, provide transportation and storage services for end-users. These customers are located throughout the Gulf Coast, Midwest and Northeast regions of the U.S.
Competition: Boardwalk Pipeline competes with numerous other pipelines that provide transportation, storage and other services at many locations along its pipeline systems. Boardwalk Pipeline also competes with pipelines that are attached to new natural gas supply sources that are being developed closer to some of its traditional natural gas market areas. In addition, regulators’ continuing efforts to increase competition in the natural gas industry have increased the natural gas transportation options of Boardwalk Pipeline’s traditional customers. AsFor example, as a result of regulators’ policies, capacity segmentation and capacity release have created an active secondary market which increasingly competes with Boardwalk Pipeline’s natural gas pipeline services. Further, natural gas competes with other forms of energy available to Boardwalk Pipeline’s customers, including electricity, coal, fuel oils and alternative fuel sources.
The principal elements of competition among pipelines are availableavailability of capacity, rates, terms of service, access to gas supplies, flexibility and reliability of service. In many cases, the elements of competition, in particular flexibility, terms of service and reliability, are key differentiating factors between competitors. This is especially the case with capacity being sold on a longer term basis. Boardwalk Pipeline is focused on finding opportunities to enhance its competitive profile in these areas by increasing the flexibility of its pipeline systems, such as modifying them to allow for bi-directional flows, to meet the demands of customers, such as power generators and industrial users, and is continually reviewing its services and terms of service to offer customers enhanced service options.
Seasonality:Boardwalk Pipeline’s revenues can be affected by weather, natural gas price levels, gas price differentials between locations on its pipeline systems (basis spreads), gas price differentials between time periods, such as winter to summer (time period price spreads) and natural gas price volatility. Weather impacts natural gas demand for heating needs and power generation, which in turn influences the short term value of transportation and storage across Boardwalk Pipeline’s pipeline systems. Colder than normal winters can result in an increase in the demand for natural gas for heating needs and warmer than normal summers can impact cooling needs, both of which typically result in increased pipeline transportation revenues and throughput. While traditionally peak demand for natural gas occurs during the winter months driven by heating needs, the increased use of natural gas for cooling needs during the summer months has partially reduced the seasonality of revenues. In 2012,2015, approximately 53% of Boardwalk Pipeline’s revenue wasoperating revenues were recognized in the first and fourth quarters of the year.
Governmental Regulation:FERC regulates Boardwalk Pipeline’s natural gas operating subsidiaries under the Natural Gas Act of 1938 (“NGA”) In October of 2014, Boardwalk Pipeline’s The settlement provides for, among other things, (a) a system-wide rate design across the majority of the pipeline system; (b) a fuel tracker for determining future fuel rates; (c) a moratorium which prevents Gulf South or its customers from modifying the settlement rates until May 1, 2023, with certain exceptions; and (d) an extension of all No Notice Service (“NNS”) contracts to of 1938 and the Natural Gas Policy Act (“NGPA”) of 1978. FERC regulates, among other things, the rates and charges for the transportation and storage of natural gas in interstate commerce and the extension, enlargement or abandonment of facilities under its jurisdiction. Where required, Boardwalk Pipeline’s natural gas interstatepipeline subsidiaries hold certificates of public convenience and necessity issued by FERC covering certain of their facilities, activities and services. The maximum rates that may be charged by Boardwalk Pipeline’s subsidiaries operating under FERC’s jurisdiction, for all aspects of the natural gas transportation services it provides, are established through FERC’s cost-of-service rate-making process. The maximum rates that may be charged by Boardwalk Pipeline for storage services on Texas Gas, with the exception of services associated with a portion of the working gas capacity on that system, are established through FERC’s cost-of-service rate-making process. Key determinants in FERC’s cost-of-service rate-making process are the costs of providing service, the volumes of gas being transported, the rate design, the allocation of costs between services, the capital structure and the rate of return a pipeline is permitted to earn. The maximum rates that may be charged by Boardwalk Pipeline for storage services on Texas Gas, with the exception of services associated with a portion of the working gas capacity on that system, are established through FERC’s cost-of-service rate-making process. FERC has authorized Boardwalk Pipeline to charge market-based rates for its firm and interruptible storage services for the majority of its natural gas storage facilities. NoneFERC-regulated entities hasGulf South subsidiary filed a rate case with the FERC pursuant to Section 4 of the Natural Gas Act of 1938 (Docket No. RP15-65) in which Gulf South requested, among other things, a reconfiguration of the transportation rate zones on its system and, in general, an obligationincrease in its tariff rates. In 2015, an uncontested settlement was reached with Gulf South’s customers and approved by the FERC. The settlement will become effective March 1, 2016.file a new rate case.
Boardwalk Pipeline is also regulated by the U.S. Department of Transportation (“DOT”) through the Pipeline and Hazardous Material Safety Administration (“PHMSA”) under the Natural Gas Pipeline Safety Act of 1968, as amended by Title I of the Pipeline Safety Act of 1979 (“NGPSA”) and the Hazardous Liquids Pipeline Safety Act of 1979 (“HLPSA”), which regulates safety requirements in. The NGPSA and HLPSA govern the design, installation, testing, construction, operation, replacement and maintenancemanagement of interstate natural gas and NGL pipeline facilities. Boardwalk Pipeline has received authority from the Pipeline and Hazardous Materials Safety Administration (“PHMSA”), an agency of DOT,PHMSA to operate certain natural gas pipeline assets under special permits that will allow it to operate those pipeline assets at higher than normal operating pressures of up to 0.80 of the pipe’s Specified Minimum Yield Strength (“SMYS”). Operating at higher than normal operating pressures will allow each of these pipelines to transport all of the volumes Boardwalk Pipeline has contracted for with its customers. PHMSA retains discretion whether to grant or maintain authority for Boardwalk Pipeline to operate theseits natural gas pipeline assets at higher pressures. PHMSA has also developed regulations that require transportation pipeline operators to implement integrity management programs to comprehensively evaluate certain high risk areas along theirBoardwalk Pipeline’s pipelines and take additional measures to protect pipeline
segments located in highly populated areas. The NGPSA and HLPSA were most recently amended by the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011 (“2011 Act”) was enacted in 2012, andwith the 2011 Act requiring increased maximum civil penalties for certain violations to $200,000 per violation per day, and from a total cap of $1 million to $2 million. In addition, the 2011 Act reauthorized the federal pipeline safety programs of PHMSA through September 30, 2015, and directs the Secretary of Transportation to undertake a number of reviews, studies and reports, some of which may result in more stringent safety controls or additional natural gas and hazardous liquids pipeline safety rulemaking. A number of the provisions of the 2011 Act have the potential to cause owners and operators of pipeline facilities to incur significant capital expenditures and/or operating costs. New pipeline safety legislation that will reauthorize the federal pipeline safety programs of PHMSA through 2019 will be under consideration. Passage of new legislation reauthorizing the PHMSA pipeline safety
programs is expected to require, among other things, pursuit of those legal mandates included in the 2011 Act but not acted upon by PHMSA.
The Surface Transportation Board (“STB”), has authority to regulate the rates Boardwalk Pipeline charges for service on its ethylene pipelines. The STB requires that Boardwalk Pipeline’s transportation rates be reasonable and that its practices cannot unreasonably discriminate among its ethylene shippers.
Boardwalk Pipeline’s operations are also subject to extensive federal, state, and local laws and regulations relating to protection of the environment. Such laws and regulations impose, among other things, restrictions, liabilities and obligations in connection with the generation, handling, use, storage, transportation, treatment and disposal of hazardous substances and waste and in connection with spills, releases, discharges and emissions of various substances into the environment. Environmental regulations also require that Boardwalk Pipeline’s facilities, sites and other properties be operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities.
Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of corrective or remedial obligations, the occurrence of delays in the development of projects and the issuance of orders enjoining performance of some or all of Boardwalk Pipeline’s operations in the affected areas. While Boardwalk Pipeline believes that its past operations have not resulted in the incurrence of material costs with respect to these existing environmental laws and regulations, it can provide no assurance that continued compliance with existing requirements will not materially affect them, or that the current regulatory standards will not become more onerous in the future, resulting in more significant costs to maintain compliance or increased exposure to significant liabilities.
Properties:Boardwalk Pipeline is headquartered in approximately 108,000103,000 square feet of leased office space located in Houston, Texas. Boardwalk Pipeline also leases approximately 108,00060,000 square feet of office space in Owensboro, Kentucky. Boardwalk Pipeline’s operating subsidiaries own their respective pipeline systems in fee. However, substantial portions of these systems are constructed and maintained on property owned by others pursuant to rights-of-way, easements, permits, licenses or consents.
HIGHMOUNT EXPLORATION & PRODUCTION LLC
HighMount Exploration & Production, LLC (“HighMount”) is engaged in the exploration, production and marketing of natural gas and oil (including condensate and NGLs). HighMount accounted for 2.0%, 2.5% and 2.9% of our consolidated total revenue for the years ended December 31, 2012, 2011 and 2010.
HighMount’s proved reserves and production are primarily located in the Sonora field, a tight sands gas formation within the Permian Basin in West Texas. HighMount holds mineral rights on over 500,000 net acres in the Permian Basin, with over 6,000 producing wells. In addition, HighMount has working interests in undeveloped oil and gas properties located on approximately 73,000 net acres in Oklahoma and approximately 9,000 net acres in the Texas Panhandle which contain primarily oil reserves. During 2012, HighMount began the commercial development of its Oklahoma properties, utilizing horizontal drilling and hydraulic fracturing technologies.
HighMount’s interests in developed and undeveloped acreage, wellbores and well facilities generally take the form of working interests in leases that have varying terms. HighMount’s interests in these properties are, in many cases, held jointly with third parties and may be subject to royalty, overriding royalty, carried, net profits and other similar interests and contractual arrangements with other parties as is customary in the oil and gas industry. HighMount also owns and operates approximately 3,000 miles of gathering lines and over 65,000 horsepower of compression which are used to transport natural gas and NGLs principally from HighMount’s producing wells to processing plants and pipelines owned by third parties.
We use the following terms throughout this discussion of HighMount’s business, with “equivalent” volumes computed with oil and NGL quantities converted to Mcf, on an energy equivalent ratio of one barrel to six Mcf:
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As of December 31, 2012, HighMount owned 825.1 Bcfe of net proved reserves, of which 84.1% were classified as proved developed reserves. HighMount’s estimated total proved reserves consist of 557.6 Bcf of natural gas, 35.1 MMBbls of NGLs, and 9.5 MMBbls of oil and condensate. HighMount produced approximately 154 MMcfe per day of net natural gas, NGLs and oil during 2012. HighMount holds leasehold or drilling rights in 0.7 million net acres, of which 0.5 million is developed acreage and the balance is held for future exploration and development drilling opportunities. HighMount participated in the drilling of 91 wells during 2012, of which 83 (or 91.2%) are productive wells.
Reserves: HighMount’s reserves represent its share of reserves based on its net revenue interest in each property. Estimated reserves as of December 31, 2012 are based upon studies for each of HighMount’s properties prepared by HighMount staff engineers and are the responsibility of management. Calculations were prepared using standard geological and engineering methods generally accepted by the petroleum industry and in accordance with Securities and Exchange Commission (“SEC”) guidelines.
HighMount employs various internal controls to validate the reserve estimation process. The main internal controls include (i) detailed reviews of reserve-related information by reserve engineering and executive management, (ii) reserve audits performed by an independent third party reserve auditor, (iii) segregation of duties, and (iv) system reconciliation or automated interface between various systems used in the reserve estimation process.
HighMount employs a team of reservoir engineers that specialize in HighMount’s areas of operation. The reservoir engineering team reports to HighMount’s Chief Operating Officer. The compensation of HighMount’s reservoir engineers is not dependent on the quantity of reserves booked. HighMount also employs a lead evaluator who reports to the Chief Financial Officer. HighMount’s lead evaluator has over 33 years of petroleum engineering experience, most of which have been in the reservoir engineering and reserve fields. He is a member in good standing of the Society of Petroleum Evaluation Engineers and the Society of Petroleum Engineers, as well as a Licensed Professional Engineer in the State of Texas.
HighMount’s reserves estimates for 2012 have been independently audited by Netherland, Sewell & Associates, Inc. (“NSAI”), a worldwide leader of petroleum property analysis for industry and financial organizations and governmental agencies. NSAI was founded in 1961 and performs consulting services under Texas Board of Professional Engineers Registration No. F-2699. The technical person primarily responsible for NSAI’s audit and audit letter has 32 years of industry experience and has been practicing consulting petroleum engineering at NSAI since 1989.
The following table sets forth HighMount’s proved reserves at December 31, 2012, based on average 2012 prices of $2.76 per MMBtu for natural gas, $41.11 per Bbl for NGLs and $94.71 per Bbl for oil. Approximately 95% of HighMount’s proved reserves were located in the Permian Basin in Texas and approximately 5% of proved reserves were located in Oklahoma.
Natural Gas (MMcf) | NGLs (Bbls) | Oil (Bbls) | Natural Gas Equivalents (MMcfe) | |||||||||||||
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Proved developed | 490,978 | 28,835,347 | 4,945,283 | 693,662 | ||||||||||||
Proved undeveloped | 66,577 | 6,263,323 | 4,546,590 | 131,436 | ||||||||||||
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Total proved | 557,555 | 35,098,670 | 9,491,873 | 825,098 | ||||||||||||
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HighMount reviews its proved reserves on an annual basis. During 2012, total proved reserves declined 309 Bcfe, reflecting (i) a 328 Bcfe reduction as a result of economic factors such as lower gas prices and higher operating expenses, and as a result of higher production decline rates of its producing wells, partly due to the suspension of uneconomic maintenance and recompletion work, (ii) a 56 Bcfe reduction as a result of production during the year, offset by (iii) additions of 75 Bcfe through drilling and booking of proved undeveloped locations.
At December 31, 2012, HighMount had proved undeveloped reserves of 131 Bcfe on locations scheduled to be drilled in the next five years. During 2012, HighMount recorded negative net reserve revisions of 198 Bcfe primarily due to a reclassification of proved undeveloped reserves to the non-proved category because these reserves were no longer economical due to the decrease in natural gas prices. Also, 48 Bcfe of non-proved reserves were promoted to the proved undeveloped category as a result of the 2012 drilling activity. During 2012, HighMount spent $14 million to convert 2 Bcfe from proved undeveloped reserves to proved developed reserves through drilling. As of December 31, 2012, there were no proved undeveloped locations that had remained undeveloped for five years or more.
Estimated net quantities of proved natural gas and oil reserves at December 31, 2012, 2011 and 2010 and changes in the reserves during 2012, 2011 and 2010 are shown in Note 14 of the Notes to Consolidated Financial Statements included under Item 8.
HighMount’s Sonora properties typically have relatively long reserve lives and high well completion success rates. Based on December 31, 2012 proved reserves and HighMount’s average production from these properties during 2012, the average reserve-to-production index of HighMount’s proved reserves is 15 years.
In order to replenish reserves as they are depleted by production, and to increase reserves, HighMount develops its existing acreage by drilling new wells and, where available, employing new technologies and drilling strategies designed to enhance production from existing wells. In addition, HighMount seeks to acquire additional acreage in its core areas of operation, as well as other locations where its management has identified an opportunity.
During 2012, 2011 and 2010, HighMount engaged in the drilling activity presented in the following table:
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||||||||||||||||||||||||||
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Gross | Net | Gross | Net | Gross | Net | |||||||||||||||||||||||||||||||
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Development Wells | ||||||||||||||||||||||||||||||||||||
Productive Wells | 83 | 78.5 | 46 | 46.0 | 227 | 221.3 | ||||||||||||||||||||||||||||||
Dry Wells | 8 | 8.0 | 5 | 5.0 | 11 | 11.0 | ||||||||||||||||||||||||||||||
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Total Development Wells | 91 | 86.5 | 51 | 51.0 | 238 | 232.3 | ||||||||||||||||||||||||||||||
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Exploratory Wells | ||||||||||||||||||||||||||||||||||||
Productive Wells | 10 | 9.5 | ||||||||||||||||||||||||||||||||||
Dry Wells | 2 | 2.0 | 2 | 2.0 | ||||||||||||||||||||||||||||||||
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Total Exploratory Wells | 12 | 11.5 | 2 | 2.0 | ||||||||||||||||||||||||||||||||
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Total Completed Wells | 91 | 86.5 | 63 | 62.5 | 240 | 234.3 | ||||||||||||||||||||||||||||||
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In addition, at December 31, 2012, HighMount had 23 (20.2 net) wells in progress.
Acreage: As of December 31, 2012, HighMount owned interests in 1,107,551 gross (700,281 net) acres in the United States which is comprised of 609,659 gross (467,602 net) developed acres, and 497,892 gross (232,679 net) undeveloped acres.
As of December 31, 2012, leases covering 86,577, 27,859 and 9,843 of HighMount’s net acreage will expire by December 31, 2013, 2014 and 2015, if production is not established or HighMount takes no other action to extend the terms.
Production and Sales: Please see the Production and Sales statistics table for additional information included in the MD&A under Item 7.
HighMount utilizes its own marketing and sales personnel to market the natural gas and oil that it produces to large energy companies and intrastate pipelines and gathering companies. Production is typically sold and delivered directly to a pipeline at liquid pooling points or at the tailgates of various processing plants, where it then enters a pipeline system. Permian Basin natural gas sales prices are primarily at a Houston Ship Channel Index.
To manage the risk of fluctuations in prevailing commodity prices, HighMount enters into commodity and basis swaps and other derivative instruments.
Wells: As of December 31, 2012, HighMount had working interests in 6,133 gross producing wells (5,874 net producing wells) located primarily in the Permian Basin. In addition, HighMount had royalty interests in approximately 250 wells located in the Permian Basin. Wells located in the Permian Basin have a typical well depth in the range of 6,000 to 9,000 feet.
Competition: HighMount competes with other oil and gas companies in all aspects of its business, including acquisition of producing properties and leases and obtaining goods, services and labor, including drilling rigs and well completion services. HighMount also competes in the marketing of produced natural gas and oil. Some of HighMount’s competitors have substantially larger financial and other resources than HighMount. Factors that affect HighMount’s ability to acquire producing properties include available funds, available information about the property and standards established by HighMount for minimum projected return on investment. Natural gas and oil also compete with alternative fuel sources, including heating oil and coal.
Governmental Regulation: All of HighMount’s operations are conducted onshore in the United States. The U.S. oil and gas industry, and HighMount’s operations, are subject to regulation at the federal, state and local level. Such regulation includes requirements with respect to, among other things: permits to drill and to conduct other operations; provision of financial assurances (such as bonds) covering drilling and well operations; the location of wells; the method of drilling and completing wells; the surface use and restoration of properties upon which wells are drilled; the plugging and abandoning of wells; the marketing, transportation and reporting of production; the valuation and payment of royalties; the size of drilling and spacing units (regarding the density of wells which may be drilled in a particular area); the unitization or pooling of natural gas and oil properties; maximum rates of production from natural gas and oil wells; venting or flaring of natural gas; and the ratability of production and the operation of gathering systems and related assets.
HighMount uses hydraulic fracturing to stimulate the production of oil and natural gas. In recent years, concerns have been raised that the fracturing process may, among other things, contaminate underground sources of drinking water. The conference committee report for The Department of the Interior, Environment, and Related Agencies Appropriations Act for Fiscal Year 2010 requested the United States Environmental Protection Agency (“EPA”) to conduct a study of hydraulic fracturing, particularly the relationship between hydraulic fracturing and drinking water. In December of 2012 the EPA issued a progress report of the projects the EPA is conducting as part of the study. A final draft report is expected to be released for public comment and peer review in 2014. Several bills have been introduced in Congress seeking federal regulation of hydraulic fracturing, which has historically been regulated at the state level, though none of the proposed legislation has been passed into law. HighMount believes that similar bills will continue to be introduced in Congress and a number of federal agencies are analyzing, or have been requested to review, a variety of environmental issues associated with hydraulic fracturing; however, HighMount cannot predict whether any such bill will be passed into law or, if passed, the substance of any such new law.
The Federal Energy Policy Act of 2005 amended the NGA to prohibit natural gas market manipulation by any entity, directed the FERC to facilitate market transparency in the sale or transportation of physical natural gas and significantly increased the penalties for violations of the NGA of 1938, the NGPA of 1978, or FERC regulations or orders thereunder. In addition, HighMount owns and operates gas gathering lines and related facilities which are regulated by the DOT and state agencies with respect to safety and operating conditions.
HighMount’s operations are also subject to federal, state and local laws and regulations concerning the discharge of contaminants into the environment, the generation, storage, transportation and disposal of contaminants, and the protection of public health, natural resources, wildlife and the environment. In most instances, the regulatory requirements relate to the handling and disposal of drilling and production waste products, water and air pollution control procedures, and the remediation of petroleum-product contamination. In addition, HighMount’s operations may require it to obtain permits for, among other things, air emissions, discharges into surface waters, and the construction and operation of underground injection wells or surface pits to dispose of produced saltwater and other non-hazardous oilfield wastes. HighMount could be required, without regard to fault or the legality of the original disposal, to remove or remediate previously disposed wastes, to suspend or cease operations in contaminated areas or to perform remedial well plugging operations or cleanups to prevent future contamination.
In September of 2009, the EPA adopted regulations under the Clean Air Act requiring the monitoring and reporting of annual greenhouse gas (“GHG”) emissions by certain large U.S. GHG emitters. Affected companies are required to monitor their GHG emissions and report to the EPA. Oil and gas exploration and production companies that emit more than 25,000 metric tons of GHG per year from any facility (as defined in the regulations), including HighMount, are required to monitor and report emissions for facilities that meet the emissions threshold. HighMount filed its first GHG report in September of 2012 for the 2011 reporting year.
Properties: In addition to its interests in oil and gas producing properties, HighMount leases an aggregate of approximately 56,300 square feet of office space in Houston, Texas, which includes its corporate headquarters, and approximately 83,800 square feet of office space in Oklahoma City, Oklahoma. HighMount also leases other surface rights and office, warehouse and storage facilities necessary to operate its business. In addition to leased properties, HighMount also owns a 44,000 square foot office building in Sonora, Texas, and a 1,500 square foot office building in Morrison, Oklahoma.
LOEWS HOTELS HOLDING CORPORATION
The subsidiaries of Loews Hotels Holding Corporation (“Loews(collectively “Loews Hotels”), our wholly owned subsidiary, presently operate a chain of 1924 primarily upper, upscale hotels. Each hotel in the chain is managed by Loews Hotels. TenThirteen of these hotels are owned by Loews Hotels, fivenine are owned by joint ventures in which Loews Hotels has a significant equity interestinterests and fourtwo are managed for unaffiliated owners. Loews Hotels’ earnings are derived from the operation of its wholly owned hotels, its share of earnings in joint venture hotels and hotel management fees earned from both joint venture and managed hotels. Loews Hotels accounted for 2.7%4.5%, 2.4%3.3% and 2.1%2.6% of our consolidated total revenue for the years ended December 31, 2012, 20112015, 2014 and 2010.2013. The hotels are described below.
Name and Location | Number of
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Loews Annapolis Hotel, Annapolis, Maryland | | 215 | |||||
Loews | | 400 | |||||
Loews Chicago O’Hare Hotel, Chicago, Illinois | 556 | ||||||
Loews Coronado Bay Resort, San Diego, California (a) | |
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Loews Miami Beach Hotel, Miami Beach, Florida | 790 | ||||||
Loews Minneapolis Hotel, Minneapolis, Minnesota (a) | 251 | ||||||
Loews Philadelphia Hotel, Philadelphia, Pennsylvania | | 581 | |||||
Loews Regency New York Hotel, New York, New York (a) | |
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Loews Regency San Francisco Hotel, San Francisco, California | 155 | ||||||
Hotel 1000, Seattle, Washington | 120 | ||||||
Loews Vanderbilt Hotel, Nashville, Tennessee | 340 | ||||||
Loews Ventana Canyon Resort, Tucson, Arizona | 398 | ||||||
Loews Hotel Vogue, Montreal, Canada | | 142 | |||||
Joint | |||||||
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Hard Rock Hotel, at Universal Orlando, Orlando, Florida | 650 | ||||||
Loews Atlanta Hotel, Atlanta, Georgia | 414 | ||||||
Loews Boston Hotel, Boston, Massachusetts | 225 | ||||||
Loews Don CeSar Hotel, St. Pete Beach, Florida | 347 | ||||||
Loews Hollywood Hotel, Hollywood, California | | 628 | |||||
Loews Madison Hotel, Washington, D.C. | 356 | ||||||
Loews Portofino Bay Hotel, at Universal Orlando, Orlando, Florida | | 750 | |||||
Loews Royal Pacific Resort, at Universal Orlando, Orlando, Florida | 1,000 | ||||||
Universal’s Cabana Bay Beach Resort, Orlando, Florida | 1,800 | ||||||
Management Contract: | |||||||
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Loews New Orleans Hotel, New Orleans, Louisiana | | 285 | |||||
Loews Santa Monica Beach Hotel, Santa Monica, California | | ||||||
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The hotel is subject to a land lease. |
Competition:Competition from other hotels and lodging facilities is vigorous in all areas in which Loews Hotels operates. The demand for hotel rooms in many areas is seasonal and dependent on general and local economic conditions. Loews Hotels properties also compete with facilities offering similar services in locations other than those in which its hotels are located. Competition among luxury hotels is based primarily on quality of location, facilities and service. Competition among resort and commercial hotels is based on price and facilities as well as location and service. Because of the competitive nature of the industry, hotels must continually make expenditures for updating, refurnishing and repairs and maintenance, in order to prevent competitive obsolescence.
Recent Developments:
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EMPLOYEE RELATIONS
Including our operating subsidiaries as described below, we employed approximately 18,30016,700 persons at December 31, 2012. We, and our subsidiaries, have experienced satisfactory labor relations.2015 as follows:
CNA employed approximately 7,5006,900 persons.
Diamond Offshore employed approximately 5,3003,400 persons, including international crew personnel furnished through independent labor contractors.
Boardwalk Pipeline employed approximately 1,2001,260 persons, approximately 110 of whom are union members covered under collective bargaining units.
HighMount employed approximately 400 persons.
Loews Hotels employed approximately 3,6254,900 persons, approximately 9651,470 of whom are union members covered under collective bargaining units.
We, and our subsidiaries, have experienced satisfactory labor relations.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name | Position and Offices Held | Age | First Became Officer | |||
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David B. Edelson | Senior Vice President | 53 | 2005 | |||
Gary W. Garson | Senior Vice President, General Counsel and Secretary | 66 | 1988 | |||
Peter W. Keegan | Senior Vice President and Chief Financial Officer | 68 | 1997 | |||
Richard W. Scott | Senior Vice President and Chief Investment Officer | 59 | 2009 | |||
Kenneth I. Siegel | Senior Vice President | 55 | 2009 | |||
Andrew H. Tisch | Office of the President, Co-Chairman of the Board and Chairman of the Executive Committee | 63 | 1985 | |||
James S. Tisch | Office of the President, President and Chief Executive Officer | 60 | 1981 | |||
Jonathan M. Tisch | Office of the President and Co-Chairman of the Board | 59 | 1987 |
David B. Edelson Gary W. Garson Richard W. Scott Kenneth I. Siegel Andrew H. Tisch James S. Tisch Jonathan M. Tisch Name Position and Offices Held Age First
Became
Officer Senior Vice President and Chief Financial Officer 56 2005 Senior Vice President, General Counsel and Secretary 69 1988 Senior Vice President and Chief Investment Officer 62 2009 Senior Vice President 58 2009 Office of the President, Co-Chairman of the Board 66 1985 and Chairman of the Executive Committee Office of the President, President and 63 1981 Chief Executive Officer Office of the President and Co-Chairman of the Board 62 1987
Andrew H. Tisch and James S. Tisch are brothers and are cousins of Jonathan M. Tisch. None of the other officers or directors of Registrant is related to any other.
All of our executive officers except for Kenneth I. Siegel and Richard W. Scott have been engaged actively and continuously in our business for more than the past five years. Prior to joining us in 2009, Mr. Siegel was employed as a Managing Director in the Mergers & Acquisitions Department at Barclays Capital Inc. and previously in a similar capacity at Lehman Brothers. Prior to joining us in 2009, Mr. Scott was employed at American International Group, Inc. for more than five years, serving in various senior investment positions, including Chief Investment Officer–Insurance Portfolio Management.
Officers are elected and hold office until their successors are elected and qualified, and are subject to removal by the Board of Directors.
Our website address iswww.loews.com. We make available, free of charge, through the website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after these reports are electronically filed with or furnished to the SEC. Copies of our Code of Business Conduct and Ethics, Corporate Governance Guidelines, Audit Committee charter, Compensation Committee charter and Nominating and Governance Committee charter have also been posted and are available on our website.
Our business faces many risks. We have described below some of the more significant risks which we and our subsidiaries face. There may be additional risks that we do not yet know of or that we do not currently perceive to be significant that may also impact our business or the business of our subsidiaries.
Each of the risks and uncertainties described below could lead to events or circumstances that have a material adverse effect on our business, results of operations, cash flows, financial condition or equity and/or the business, results of operations, financial condition or equity of one or more of our subsidiaries.
You should carefully consider and evaluate all of the information included in this Report and any subsequent reports we may file with the SEC or make available to the public before investing in any securities issued by us. Our subsidiaries, CNA Financial Corporation, Diamond Offshore Drilling, Inc. and Boardwalk Pipeline Partners, LP, are public companies and file reports with the SEC. You are also cautioned to carefully review and consider the information contained in the reports filed by those subsidiaries before investing in any of their securities.
Risks Related to Us and Our Subsidiary, CNA Financial Corporation
If CNA determines that its recorded insurance reserves are insufficient to cover its estimated ultimate unpaid liability for claim and claim adjustment expenses, CNA may need to increase its insurance reserves.reserves which would result in a charge to CNA’s earnings.
CNA maintains insurance reserves to cover its estimated ultimate unpaid liability for claim and claim adjustment expenses, including the estimated cost of the claims adjudication process, for reported and unreported claims and for future policy benefits. Reserves represent CNA’s best estimate at a given point in time.claims. Insurance reserves are not an exact calculation of liability but instead are complex management estimates derived by CNA, generallydeveloped utilizing a variety of actuarial reserve estimation techniques from numerous assumptionsas of a given reporting date. The reserve estimation process involves a high degree of judgment and expectations about future events, manyvariability and is subject to a number of variables which are highly uncertain, such as estimates ofuncertain. These variables can be affected by both changes in internal processes and external events. Key variables include claims severity, frequency of claims, mortality, morbidity, discount rates, inflation, claims handling, case reserving policies and procedures, case reserving approach, underwriting and pricing policies, changes in the legal and regulatory environment and the lag time between the occurrence of an insured event and the time of its ultimate settlement. Mortality is the relative incidence of death. Morbidity is the frequency and severity of injury, illness, sickness and diseases contracted. Many
There is generally a higher degree of these uncertaintiesvariability in estimating required reserves for long-tail coverages, such as general liability and workers’ compensation, as they require a relatively longer period of time for claims to be reported and settled. The impact of changes in inflation and medical costs are not precisely quantifiable and require significant judgment on CNA’s part. As trends in underlying claims develop, particularly in so-called “long tail” or long durationmore pronounced for long-tail coverages CNA is sometimes requireddue to add to its reserves. This is called unfavorable net prior year
development and results in a charge to earnings in the amount of the added reserves, recorded in the period the change in estimate is made. These charges can be substantial.longer settlement period.
CNA is also subject to the uncertain effects of emerging or potential claims and coverage issues that arise as industry practices and legal, judicial, social, economic and other environmental conditions change. These issues have had, and may continue to have, a negative effect on CNA’s business by either extending coverage beyond the original underwriting intent or by increasing the number or size of claims, resulting in further increases in CNA’s reserves. The effects of these and other unforeseen emerging claim and coverage issues are extremely harddifficult to predict. Examples of emerging
Emerging or potential claims and coverage issues include:include, but are not limited to, uncertainty in future medical costs in workers’ compensation. In particular, medical cost inflation could be greater than expected due to new treatments, drugs and devices; increased health care utilization; and/or the future costs of health care facilities. In addition, the relationship between workers’ compensation and government and private health care providers could change, potentially shifting costs to workers’ compensation.
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In light of the many uncertainties associated with establishing the estimates and making the assumptionsjudgments necessary to establish reserve levels, CNA continually reviews and changes its reserve estimates in a regular and ongoing process as experience develops from the actual reporting and furthersettlement of claims are reported and settled.as the legal, regulatory and economic environment evolves. If estimatedCNA’s recorded reserves are insufficient for any reason, the required increase in reserves would be recorded as a charge against earnings in the period in which reserves are determined to be insufficient. These charges could be substantial.
CNA’s actual experience could vary from the key assumptions used to determine active life reserves for long term care products and payout annuity contracts could vary significantly from actual experience.policies.
CNA’s active life reserves for long term care products and payout annuity contractspolicies are based on certain keyCNA’s best estimate assumptions includingas of December 31, 2015 with no margin for adverse deviation. Key assumptions include morbidity, mortality, policy persistency (the percentage of policies remaining in force), discount rate and discount rates (whichfuture premium rate increases. These assumptions, which are impactedcritical bases for its reserve estimates are inherently uncertain. If actual experience varies from these assumptions or the future outlook for these assumptions changes, CNA may be required to increase its reserves. See the Life & Group Non-Core Policyholder Reserves portion of Reserves – Estimates and Uncertainties section of MD&A in Item 7 for more information.
Estimating future experience for long term care policies is highly uncertain because the required projection period is very long and there is limited historical data and industry data available to CNA, as only a small portion of the long term care policies which have been written to date are in claims paying status. Morbidity and persistency trends can be volatile and may be negatively affected by expected investment yields). many factors including, but not limited to policyholder behavior, socioeconomic factors, changes in health trends and advances in medical care.
A prolonged period during which interest rates remain at levels lower than those anticipated in CNA’s reserving maywould result in shortfalls in investment income on assets supporting policyCNA’s obligations under long term care policies, which may require changes to its reserves. TheseThis risk is more significant for CNA’s long term care products because the long potential duration of the policy obligations exceeds the duration of the supporting investment assets. In addition, CNA may not receive regulatory approval for the level of premium rate increases it requests. Any adverse deviation between the level of future premium rate increases approved and the level included in CNA’s reserving assumptions while based on historical data and industry experience and monitored consistently, are critical bases for reserve estimates and are inherently uncertain. may require an increase to its reserves.
If CNA’s estimated reserves are insufficient for any reason, including changes in assumptions, the required increase in reserves would be recorded as a charge against earnings in the period in which reserves are determined to be insufficient. These charges could be substantial.
Catastrophe losses are unpredictable and could result in material losses.
Catastrophe losses are an inevitable part of CNA’s business. Various events can cause catastrophe losses. These events can be natural or man-made, and may include hurricanes, windstorms, earthquakes, hail, severe winter weather, fires, floods, riots, strikes, civil commotion and acts of terrorism. The frequency and severity of these catastrophe events are inherently unpredictable. In addition, longer-term natural catastrophe trends may be changing and new types of catastrophe losses may be developing due to climate change, a phenomenon that has been associated with extreme weather events linked to rising temperatures, and includes effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain, hail and snow.
The extent of CNA’s losses from catastrophes is a function of the total amount of its insured exposures in the affected areas, the frequency and severity of the events themselves, the level of reinsurance assumed and ceded and reinsurance reinstatement premiums and state residual market assessments, if any. As in the case of catastrophe losses generally, it can take a long time for the ultimate cost to CNA to be finally determined, as a multitude of factors contribute to such costs, including evaluation of general liability and pollution exposures, additional living expenses, infrastructure disruption, business interruption and reinsurance collectibility. Reinsurance coverage for terrorism events is provided only in limited
circumstances, especially in regard to “unconventional” terrorism acts, such as nuclear, biological, chemical or radiological attacks. As a result of the items discussed above, catastrophe losses are particularly difficult to estimate.
As CNA’sAdditionally, claim experience develops on a specific catastrophe,frequency and severity for some lines of business can be correlated to an external factor such as economic activity, financial market volatility, increasing health care costs or changes in the legal or regulatory environment. Claim frequency and severity can also be correlated to insureds’ use of common business practices, equipment, vendors or software. This can result in multiple insured losses emanating out of the same underlying cause. In these instances, CNA may be requiredsubject to adjust its reserves,increased claim frequency and severity across multiple policies or take unfavorable net prior year development,lines of business concurrently. While CNA does not define such instances as catastrophes for financial reporting purposes, they are similar to reflect revised estimatescatastrophes in terms of the total cost of claims.uncertainty and potential impact on its results.
CNA has exposure related to A&EP claims, which could result in material losses.
CNA’s property and casualty insurance subsidiaries have exposures related to A&EP claims. CNA’s experience has been that establishing claim and claim adjustment expense reserves for casualty coverages relating to A&EP claims is subject to uncertainties that are greater than those presented by other claims. Additionally, traditional actuarial methods and techniques employed to estimate the ultimate cost of claims for more traditional property and casualty exposures are less precise in estimating claim and claim adjustment expense reserves for A&EP. As a result, estimating the ultimate cost of both reported and unreported A&EP claims is subject to a higher degree of variability.
On August 31, 2010, CNA completed a retroactive reinsurance transaction under which substantially all of its legacy A&EP liabilities were ceded to National Indemnity Company (“NICO”), a subsidiary of Berkshire Hathaway Inc., subject to an aggregate limit of $4.0 billion (“Loss Portfolio Transfer”(loss portfolio transfer or “LPT”). The cumulative amount ceded under the loss portfolio transfer as of December 31, 2015 is $2.6 billion. If the other parties to the Loss Portfolio Transferloss portfolio transfer do not fully perform their obligations, CNA’s liabilities fornet losses incurred on A&EP claims covered by the Loss Portfolio Transferloss portfolio transfer exceed the aggregate limit of $4.0 billion or CNA determines it has exposures to A&EP claims not covered by the Loss Portfolio Transfer,loss portfolio transfer, CNA may need to increase its recorded net reserves which would result in a charge against CNA’s earnings. These charges could be substantial.
CNA’s premium writings and profitability areCNA faces intense competition in its industry; CNA may be adversely affected by the cyclical nature of the property and casualty business as well as the availability and cost of reinsurance.
All aspects of the insurance industry are highly competitive and CNA must continuously allocate resources to refine and improve its insurance products and services. CNA competes with a large number of stock and mutual insurance companies and other entities for both distributors and customers. Insurers compete on the basis of factors including products, price, services, ratings and financial strength. The competitor insurer landscape has evolved substantially in recent years, with significant consolidation and new market entrants, resulting in increased pressures on CNA’s ability to remain competitive, particularly in implementing pricing that is both attractive to CNA’s customer base and risk appropriate to CNA. In addition, the property and casualty market is cyclical and has experienced periods characterized by relatively high levels of price competition, resulting in less restrictive underwriting standards and relatively low premium rates, followed by periods of relatively lower levels of competition, more selective underwriting standards and relatively high premium rates. During periods in which price competition is high, CNA may lose business to competitors offering competitive insurance products at lower prices. As a result, CNA’s premium levels and expense ratio could be materially adversely impacted.
Additionally, CNA purchases reinsurance to help manage its exposure to risk. Under CNA’s ceded reinsurance arrangements, another insurer assumes a specified portion of CNA’s exposure in exchange for a specified portion of policy premiums. Market conditions determine the availability and cost of the reinsurance protection CNA purchases, which affects the level of its business and profitability, as well as the level and types of risk CNA retains. If CNA is unable to obtain sufficient reinsurance at a cost it deems acceptable, CNA may be unwilling to bear the increased risk and would reduce the level of its underwriting commitments.
CNA may not be able to collect amounts owed to it by reinsurers, which could result in higher net incurred losses.
CNA has significant amounts recoverable from reinsurers which are reported as receivables on its balance sheets and are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves. The ceding of insurance does not, however, discharge CNA’s primary liability for claims. As a result, CNA is subject to credit risk relating to its ability to recover amounts due from reinsurers. In the past, certainCertain of CNA’s reinsurance carriers have experienced credit downgrades by rating agencies within the term of CNA’s contractual relationship. Such actionrelationship which increases the likelihood that CNA will not be able to recover amounts due. In addition, reinsurers could dispute amounts which CNA believes are due to it. If CNA is not able to collect the amounts dueCNA collects from reinsurers are less than the amount recorded for any of the foregoing reasons, its net incurred losses will be higher.
CNA may not be able to collect amounts owed to it by policyholders who hold deductible policies and/or who purchase retrospectively rated policies, which could result in higher net incurred losses.
A portion of CNA’s business is written under deductible policies. Under these policies, CNA is obligated to pay the related insurance claims and are reimbursed by the policyholder to the extent of the deductible, which may be significant. As a result, CNA is exposed to credit risk to the policyholder. If CNA is not able to collect the amounts dueCNA collects from policyholders are less than the amounts recorded, its incurred losses will be higher.
Moreover, certain policyholders purchase retrospectively rated workers’ compensation policies (i.e., policies in which premiums are adjusted after the policy period based on the actual loss experience of the policyholder during the policy period). Retrospectively rated policies expose CNA to additional credit risk to the extent that the adjusted premium is greater than the original premium.
CNA has incurred and may continue to incur significant realized and unrealized investment losses and volatility in net investment income arising from volatilitychanges in the capital and creditfinancial markets.
CNA’s investment portfolio is exposed to various risks, such as interest rate, credit spread, issuer default, equity prices and foreign currency, risks, many of which are unpredictable. Investment returnsFinancial markets are an important part of CNA’s overall profitability. Generalhighly sensitive to changes in economic conditions, changesmonetary policies, domestic and international geopolitical issues and many other factors. Changes in financial markets such asincluding fluctuations in interest rates, credit, conditionsequity prices and foreign currency commodity and stock prices, and many other factors beyond CNA’s control can adversely affect the value of its investments, and the realization of investment income. Further,income and the rate at which it discounts certain liabilities.
CNA has significant holdings in fixed maturity investments that are sensitive to changes in interest rates. A decline in interest rates may reduce the returns earned on new fixed maturity investments, thereby reducing CNA’s net investment income, while an increase in interest rates may reduce the value of its existing fixed maturity investments. The value of CNA’s fixed maturity investments is also subject to risk that certain investments may default or become impaired due to deterioration in the financial condition of issuers of the investments CNA holds. Any such impairments which CNA deems to be other-than-temporary would result in a charge to earnings.
In addition, CNA invests a portion of its assets in equity securities and limited partnerships which are subject to greater market volatility than its fixed incomematurity investments. In addition, limitedLimited partnership investments generally present, higher illiquidityprovide a lower level of liquidity than fixed income investments.maturity or equity investments and therefore may also limit CNA’s ability to withdraw assets. As a result of all of these factors, CNA may not realizeearn an adequate return on its investments, may incur losses on salesbe required to write down the value of its investments and may be required to write-downincur losses on the valuedisposition of its investments.
CNA’s valuation of investments and impairment of securities requires significant judgment which is inherently uncertain.
CNA exercises significant judgment in analyzing and validating fair values, which are primarily provided by third parties, for securities in its investment portfolio including those that are not regularly traded in active markets. CNA also exercises significant judgment in determining whether the impairment of particular investments is temporary or other-than-temporary. The valuation of residential and commercial mortgage and other asset backed securities can be particularly sensitive to fairly small changes in collateral performance. Due to the inherent uncertainties involved with these judgments, CNA may incur unrealized losses and conclude that other-than-temporary write-downs of its investments are required.
CNA is subject to capital adequacy requirements and, if it is unable to maintain or raise sufficient capital to meet these requirements, regulatory agencies may restrict or prohibit CNA from operating its business.
Insurance companies such as CNA are subject to capital adequacy standards set by regulators to help identify companies that merit further regulatory attention. These standards apply specified risk factors to various asset, premium and reserve components of statutory capital and surplus reported in CNA’s legal entity statutory basis of accounting financial statements. Current rules, including those promulgated by insurance regulators and specialized markets such as Lloyd’s, require companies to maintain statutory capital and surplus at a specified minimum level determined using the applicable jurisdiction’s regulatory capital adequacy formula. If CNA does not meet these minimum requirements, CNA may be restricted or prohibited from operating its business. If CNA is required to record a material charge against earnings in connection with a change in estimatesestimate or the occurrence of an event or if it incurs significant losses related to its investment portfolio, CNA may violate these minimum capital adequacy requirements unless it is able to raise sufficient additional capital.
While we have provided CNA with substantial amounts of capital in prior years, we may be restricted in our ability or may not be willing to provide additional capital support to CNA in the future. If CNA is in need of additional capital, CNA may be required to secure this funding from sources other than us. CNA may be limited in its ability to raise significant amounts of capital on favorable terms or at all.
Globally, insurance regulators are working cooperatively to develop a common framework for the supervision of internationally active insurance groups. Finalization and adoption of this framework could increase CNA’s minimum regulatory capital requirement as well as significantly increase its cost of regulatory compliance.
CNA’s insurance subsidiaries, upon whom CNA depends for dividends in order to fund its working capital needs, are limited by insurance regulators in their ability to pay dividends.
CNA is a holding company and is dependent upon dividends, loans and other sources of cash from its subsidiaries in order to meet its obligations. Ordinary dividend payments or dividends that do not require prior approval by the insurance subsidiaries’ domiciliary insurance regulator are generally limited to amounts determined by formula which varies by jurisdiction. The formula for the majority of domestic states is the greater of 10% of the prior year statutory surplus or the prior year statutory net income, less the aggregate of all dividends paid during the twelve months prior to the date of payment. Some jurisdictions including certain domestic states, however, have an additional stipulation that dividends cannot exceed the prior year’s earned surplus. If CNA is restricted, by regulatory rule or otherwise, from paying or receiving inter-companyintercompany dividends, CNA may not be able to fund its working capital needs and debt service requirements from available cash. As a result, CNA would need to look to other sources of capital which may be more expensive or may not be available at all.
Rating agencies may downgrade their ratings of CNA and thereby adversely affect its ability to write insurance at competitive rates or at all.
Ratings are an important factor in establishing the competitive position of insurance companies. CNA’s insurance company subsidiaries, as well as CNA’s public debt, are rated by rating agencies, namely, A.M. Best Company (“A.M. Best”), Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s (“S&P”). Ratings reflect the rating agency’s opinions of an insurance company’s or insurance holding company’s financial strength, capital adequacy, operating performance, strategic position and ability to meet its obligations to policyholders and debt holders.
DueThe rating agencies may take action to the intense competitive environment in which CNA operates, the uncertainty in determining reserves and the potential for CNA to take material unfavorable net prior year developmentlower CNA’s ratings in the future andas a result of any significant financial loss or possible changes in the methodology or criteria applied by the rating agencies, the rating agencies may take action to lower CNA’s ratings in the future. If CNA’s property and casualty insurance financial strength ratings are downgraded below current levels, CNA’s business and results of operations could be materially adversely affected.agencies. The severity of the impact on CNA’s business is dependent on the level of downgrade and, for certain products, which rating agency takes the rating action. Among the adverse effects in the event of such downgrades would be the inability to obtain a material volume of business from certain major insurance brokers, the inability to sell a material volume of CNA’s insurance products to certain markets and the required collateralization of certain future payment obligations or reserves.
In addition, it is possible that a lowering of our corporate debt ratings by certain of the rating agencies could result in an adverse impact on CNA’s ratings, independent of any change in CNA’s circumstances. CNA has entered into several settlement agreements and assumed reinsurance contracts that require collateralization of future payment obligations and assumed reserves if its ratings or other specific criteria fall below certain thresholds. The ratings triggers are generally more than one level below CNA’s current ratings.
Risks Related to Us and Our Subsidiary, Diamond Offshore Drilling, Inc.
The worldwide demand for Diamond Offshore’s businessdrilling services has declined significantly as a result of the decline in oil prices, which commenced during the second half of 2014 and has continued into 2016.
Demand for Diamond Offshore’s drilling services depends on the level ofin large part upon oil and natural gas industry offshore exploration and production activity in theand expenditure levels, which are directly affected by oil and gas industry, which is significantly affected by volatile oilprices and gas prices.
Diamond Offshore’s business depends on the level of activity in offshore oil and gas exploration, development and production in markets worldwide. Worldwide demand for oil and gas, oil and gas prices, market expectations of potential changes in theseoil and gas prices. Commencing in the second half of 2014, oil prices have declined precipitously and recently fell to a variety12-year low of politicalless than $30 per barrel. The dramatic reduction in commodity prices has caused a sharp decline in the demand for offshore drilling services, including services that Diamond Offshore provides and economic factors significantly affect this leveladversely affected its operations and cash flows in 2015. A prolonged period of activity. However, higher or lower commodity demand andlow oil prices do not necessarily translate into increased or decreased drilling activity sincewould have a material adverse effect on many of Diamond Offshore’s customers’ project development time, reserve replacement needs, as well as expectations of future commodity demandcustomers and, prices all combine to affect demand for Diamond Offshore’s rigs. therefore its business.
Oil and gas prices have been, and are expected to continue to be, extremely volatile and are affected by numerous factors beyond Diamond Offshore’s control, including:
worldwide supply and demand for oil and gas; |
the level of economic activity in energy-consuming markets; |
the worldwide economic environment or economic trends, such as recessions; |
the ability of the Organization of Petroleum Exporting Countries |
the level of production in non-OPEC countries; |
civil unrest and the worldwide political and military environment, including uncertainty or instability resulting from an escalation or additional outbreak of armed hostilities |
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the cost of exploring for, developing, producing and delivering oil and gas; |
the discovery rate of new oil and gas reserves; |
the rate of decline of existing and new oil and gas |
available pipeline and other oil and gas transportation and refining capacity; |
the ability of oil and gas companies to raise capital; |
weather |
natural disasters or incidents resulting from operating hazards inherent in offshore drilling, such as oil spills; |
the policies of various governments regarding exploration and development of their oil and gas reserves; |
technological advances affecting energy consumption, including development and exploitation of alternative fuels or energy sources; |
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domestic and foreign tax policy; and |
advances in exploration and development technology. |
An increase in commodity demand and prices will not necessarily result in an immediate increase in offshore drilling activity since Diamond Offshore’s customers’ project development times, reserve replacement needs, and expectations of future commodity demand, prices and supply of available competing rigs all combine to affect demand for its rigs.
Diamond Offshore’s business depends on the level of activity in the offshore oil and gas industry, which has been cyclical and is significantly affected by many factors outside of its control.
Demand for Diamond Offshore’s drilling services depends upon the level of offshore oil and gas exploration, development and production in markets worldwide, and those activities depend in large part on oil and gas prices, worldwide demand for oil and gas and a variety of political and economic factors. The level of offshore drilling activity is also adversely affected when operators reduce or defer new investment in offshore projects, reduce or suspend their drilling budgets or reallocate their drilling budgets away from offshore drilling in favor of other priorities, such as shale or other land-based projects, which could reduce demand for Diamond Offshore’s rigs and newbuilds. As a result, Diamond Offshore’s business and the oil and gas industry in general are subject to cyclical fluctuations.
As a result of the cyclical fluctuations in the market, there have been periods of lower demand, excess rig supply and lower dayrates, followed by periods of higher demand, shorter rig supply and higher dayrates. Diamond Offshore cannot predict the timing or duration of such fluctuations. Periods of lower demand or excess rig supply intensify the competition in the industry and often result in periods of lower utilization and lower dayrates. During these periods, Diamond Offshore’s rigs may not obtain contracts for future work and may be idle for long periods of time or may be able to obtain work only under contracts with lower dayrates or less favorable terms which could have a material adverse effect on Diamond Offshore’s business during these periods. Additionally, prolonged periods of low utilization and dayrates could also result in the recognition of impairment charges on certain of Diamond Offshore’s drilling rigs if future cash flow estimates, based upon information available to management at the time, indicate that the carrying value of these rigs may not be recoverable.
Diamond Offshore’s industry is highly competitive, with oversupply and intense price competition.
The offshore contract drilling industry is highly competitive with numerous industry participants. Some of Diamond Offshore’s competitors may be larger companies, have larger or more technologically advanced fleets and have greater financial or other resources than it does. The drilling industry has experienced consolidation in the past
and may experience additional consolidation, which could create additional large competitors. Drilling contracts are traditionally awarded on a competitive bid basis. Price is typically the primary factor in determining which qualified contractor is awarded a job; however, rig availability and location, a drilling contractor’s safety record and the quality and technical capability of service and equipment may also be considered.
Recent new rig construction and upgrades of existing drilling rigs, cancelation or termination of contracts, as well as established rigs coming off contract during 2015, have contributed to the current oversupply of drilling rigs intensifying price competition. Additional newbuild rigs entering the market are expected to further negatively impact rig utilization and intensify price competition as rigs are delivered.
Diamond Offshore provides offshore drilling services to a customer base that includes major and independent oil and gas companies and government-owned oil companies. During 2015, one of Diamond Offshore’s customers in Brazil, Petrobras, and Diamond Offshore’s five largest customers in the aggregate accounted for 24% and 65%, of its annual total consolidated revenues. The loss of a significant customer could have a material adverse impact on Diamond Offshore’s financial results especially in a declining market where the number of Diamond Offshore’s working drilling rigs is declining along with the number of its active customers. In addition, if a significant customer experiences liquidity constraints or other financial difficulties, it could materially adversely affect utilization rates in the affected market and also displace demand for Diamond Offshore’s other drilling rigs and newbuilds as the resulting excess supply enters the market. While it is normal for Diamond Offshore’s customer base to change over time as work programs are completed, the loss of or a significant reduction in the number of rigs contracted with any major customer may have a material adverse effect on Diamond Offshore’s future business.
Diamond Offshore can provide no assurance that its drilling contracts will not be terminated early or that its current backlog of contract drilling revenue will be ultimately realized.
Currently, Diamond Offshore’s customers may terminate their drilling contracts under certain circumstances, such as if the drilling rig is destroyed or lost, if Diamond Offshore suspends drilling operations for a specified period of time as a result of a breakdown of major equipment, excessive downtime for repairs, failure to meet minimum performance criteria (including customer acceptance testing) or, in some cases, due to other events beyond the control of either party. Diamond Offshore’s drilling contract for theOcean BlackLion, for example, requires it to successfully complete certain testing procedures for the rig’s equipment, including the blowout preventers and well control systems. Diamond Offshore is currently undergoing the required testing. If these tests are not successfully completed, Diamond Offshore’s customer has the right to terminate the drilling contract or may request a renegotiation of the terms of the contract.
In addition, some of Diamond Offshore’s drilling contracts permit the customer to terminate the contract after specified notice periods often by tendering contractually specified termination amounts, which may not fully compensate Diamond Offshore for the loss of the contract. During depressed market conditions, certain customers have utilized such contract clauses to seek to renegotiate or terminate a drilling contract or claim that Diamond Offshore has breached provisions of its drilling contracts in order to avoid their obligations to Diamond Offshore under circumstances where it believes it is in compliance with the contracts. Additionally, because of depressed commodity prices, restricted credit markets, economic downturns, changes in priorities or strategy or other factors beyond Diamond Offshore’s control, a customer may no longer want or need a rig that is currently under contract or may be able to obtain a comparable rig at a lower dayrate. For these reasons, customers may seek to renegotiate the terms of Diamond Offshore’s existing drilling contracts, terminate their contracts without justification or repudiate or otherwise fail to perform their obligations under the contracts. Such renegotiations could include requests to lower the contract dayrate, lowering of a dayrate in exchange for additional contract term, shortening the term on one contracted rig in exchange for additional term on another rig, early termination of a contract in exchange for a lump sum margin payout and many other possibilities. Diamond Offshore’s contract backlog may be adversely impacted as a result of such contract renegotiations.
When a customer terminates a contract prior to the contract’s scheduled expiration, Diamond Offshore’s contract backlog is adversely impacted, and it might not recover any compensation for the termination or any recovery Diamond Offshore might obtain may not fully compensate it for the loss of the contract. In any case, the early termination of a contract may result in Diamond Offshore’s rig being idle for an extended period of time. Each of these results could have a material adverse effect on Diamond Offshore’s business. In addition, if a customer cancels
a contract or if Diamond Offshore elects to terminate a contract due to the customer’s nonperformance and in either case Diamond Offshore is unable to secure a new contract on a timely basis and on substantially similar terms, or if a contract is disputed or suspended for an extended period of time or if a contract is renegotiated, it could materially and adversely affect Diamond Offshore’s business.
Generally, Diamond Offshore’s contract backlog only includes future revenues under firm commitments; however, from time to time, Diamond Offshore may report anticipated commitments for which definitive agreements have not yet been, but are expected to be, executed. Diamond Offshore can provide no assurance in such cases that it will be able to ultimately execute a definitive agreement. In addition, for the reasons described above, Diamond Offshore can provide no assurance that its customers will be willing or able to fulfill their contractual commitments. Diamond Offshore’s inability to perform under its contractual obligations or to execute definitive agreements, or its customers’ inability or unwillingness to fulfill their contractual commitments to Diamond Offshore, may have a material adverse effect on Diamond Offshore’s business.
Diamond Offshore may not be able to renew or replace expiring contracts for its rigs.
Diamond Offshore has a number of customer contracts that will expire in 2016 and 2017. Diamond Offshore’s ability to renew or replace expiring contracts or obtain new contracts, and the terms of any such contracts, will depend on various factors, including market conditions and the specific needs of its customers. Given the highly competitive and historically cyclical nature of the industry, Diamond Offshore may not be able to renew or replace the contracts or it may be required to renew or replace expiring contracts or obtain new contracts at dayrates that are below, and potentially substantially below, existing dayrates, or that have terms that are less favorable than existing contracts or it may be unable to secure contracts for these rigs.
Diamond Offshore’s contract drilling expense includes fixed costs that will not decline in proportion to decreases in rig utilization and dayrates.
Diamond Offshore’s contract drilling expense includes all direct and indirect costs associated with the operation, maintenance and support of its drilling equipment, which is often not affected by changes in dayrates and utilization. During periods of reduced revenue and/or activity, certain of Diamond Offshore’s fixed costs will not decline and often it may incur additional operating costs, such as fuel and catering costs, for which it is generally reimbursed by the customer when a rig is under contract. During times of reduced utilization, reductions in costs may not be immediate as Diamond Offshore may incur additional costs associated with cold stacking of a rig (particularly if Diamond Offshore cold stacks a newer rig, such as a drillship, for which cold stacking costs are typically substantially higher than for a jack-up rig or an older floater rig), or it may not be able to fully reduce the cost of its support operations in a particular geographic region due to the need to support the remaining drilling rigs in that region. A decline in revenue due to lower dayrates and/or utilization may not be offset by a corresponding decrease in contract drilling expense and could have a material adverse effect on Diamond Offshore’s business.
Diamond Offshore may enter into drilling contracts that expose it to greater risks than it normally assumes.
From time to time, Diamond Offshore may enter into drilling contracts with national oil companies, government-controlled entities or others that expose it to greater risks than it normally assumes, such as exposure to greater environmental or other liability and more onerous termination provisions giving the customer a right to terminate without cause or upon little or no notice. Upon termination, these contracts may not result in a payment to Diamond Offshore, or if a termination payment is required, it may not fully compensate Diamond Offshore for the loss of a contract. In addition, the early termination of a contract may result in a rig being idle for an extended period of time, which could adversely affect Diamond Offshore’s financial condition, results of operations and cash flows. While Diamond Offshore believes that the financial terms of these contracts and its operating safeguards in place may partially mitigate these risks, it can provide no assurance that the increased risk exposure will not have a material negative impact on future operations or financial results.
Contracts for Diamond Offshore’s drilling rigs are generally fixed dayrate contracts, and increases in Diamond Offshore’s operating costs could adversely affect the profitability on those contracts.
Diamond Offshore’s contracts for its drilling rigs generally provide for the payment of a fixed dayrate per rig operating day, although some contracts do provide for a limited escalation in dayrate due to increased operating costs it incurs on the project. Many of Diamond Offshore’s operating costs, such as labor costs, are unpredictable and fluctuate based on events beyond its control. In addition, equipment repair and maintenance expenses fluctuate depending on the type of activity the rig is performing, the age and condition of the equipment and general market factors impacting relevant parts, components and services. The gross margin that Diamond Offshore realizes on these fixed dayrate contracts will fluctuate based on variations in its operating costs over the terms of the contracts. In addition, for contracts with dayrate escalation clauses, Diamond Offshore may not be able to fully recover increased or unforeseen costs from its customers. Diamond Offshore’s inability to recover these increased or unforeseen costs from its customers could materially and adversely affect its business.
Rig conversions, upgrades or newbuilds may be subject to delays and cost overruns.
From time to time, Diamond Offshore adds new capacity through conversions or upgrades to its existing rigs or through new construction, such as the harsh environment, ultra-deepwater semisubmersible rig,Ocean GreatWhite, which is currently under construction. Projects of this type are subject to risks of delay or cost overruns inherent in any large construction project resulting from numerous factors, including the following:
● | shortages of equipment, materials or skilled labor; |
● | work stoppages; |
● | unscheduled delays in the delivery of ordered materials and equipment; |
● | unanticipated cost increases or change orders; |
● | weather interferences or storm damage; |
● | difficulties in obtaining necessary permits or in meeting permit conditions; |
● | design and engineering problems; |
● | disputes with shipyards or suppliers; |
● | availability of suppliers to recertify equipment for enhanced regulations; |
● | customer acceptance delays; |
● | shipyard failures or unavailability; and |
● | failure or delay of third party service providers, civil unrest and labor disputes. |
Failure to complete a rig upgrade or new construction on time, or failure to complete a rig conversion or new construction in accordance with its design specifications may, in some circumstances, result in the delay, renegotiation or cancellation of a drilling contract, resulting in a loss of contract drilling backlog and revenue to Diamond Offshore. If a drilling contract is terminated under these circumstances, Diamond Offshore may not be able to secure a replacement contract, or if it does secure a replacement contract, it may not contain equally favorable terms. In addition, impairment write-offs could result if a rig’s carrying value becomes excessive due to spending over budget on a newbuild construction project or major rig upgrade.
Diamond Offshore’s business involves numerous operating hazards which could expose it to significant losses and significant damage claims. Diamond Offshore is not fully insured against all of these risks and its contractual indemnity provisions may not fully protect Diamond Offshore.
Diamond Offshore’s operations are subject to the significant hazards inherent in drilling for oil and gas offshore, such as blowouts, reservoir damage, loss of production, loss of well control, unstable or faulty sea floor conditions, fires and natural disasters such as hurricanes. The occurrence of any of these types of events could result in the suspension of drilling operations, damage to or destruction of the equipment involved and injury or death to rig personnel, damage to producing or potentially productive oil and gas formations, and oil spillage, oil leaks, well blowouts and extensive uncontrolled fires, any of which could cause significant environmental damage. In addition, offshore drilling operations are subject to perils peculiar to marine operations,hazards, including capsizing, grounding, collision and loss or damage from severe weather. Operations also may be suspended because of machinery breakdowns, abnormal drilling conditions, failure of suppliers or subcontractors to perform or supply goods or services or personnel shortages. Any of the foregoing events could result in significant damage or loss to Diamond Offshore’s properties and assets or the properties and assets of others, injury or death to rig personnel or others, significant loss of revenues and significant damage claims against Diamond Offshore, which could have a material adverse effect on its business.
ConsistentDiamond Offshore’s drilling contracts with industry practice,its customers provide for varying levels of indemnity and allocation of liabilities between its customers and Diamond Offshore with respect to the hazards and risks inherent in, and damages or losses arising out of, its operations, and Diamond Offshore may not be fully protected. Diamond Offshore’s contracts with its customers generally contain contractual rights to indemnityprovide that Diamond Offshore and its customers each assume liability for their respective personnel and property. Diamond Offshore’s contracts also generally provide that its customers assume most of the responsibility for and indemnify Diamond Offshore against loss, damage or other liability resulting from, its customer for, among other things,hazards and risks, pollution originating from the well and subsurface damage or loss, while Diamond Offshore typically retains responsibility for and indemnifies its customers against pollution originating from the rig. However, in certain drilling contracts Diamond Offshore’s contractual rightsOffshore may not be fully indemnified by its customers for damage to indemnificationtheir property and/or the property of their other contractors. In certain contracts Diamond Offshore may be unenforceableassume liability for losses or limited due todamages (including punitive damages) resulting from pollution or contamination caused by negligent or willful acts of commission or omission by itself,Diamond Offshore, its suppliers and/or subcontractors, generally subject to negotiated caps on a per occurrence basis and/or on an aggregate basis for the term of the contract. In some cases, suppliers or subcontractors who provide equipment or services to Diamond Offshore may seek to limit their liability resulting from pollution or contamination. Diamond Offshore’s contracts are individually negotiated, and the levels of indemnity and allocation of liabilities in them can vary from contract to contract depending on market conditions, particular customer requirements and other factors existing at the time a contract is negotiated.
Additionally, the enforceability of indemnification provisions in Diamond Offshore’s contracts may be limited or prohibited by applicable law or may not be enforced by courts having jurisdiction, and Diamond Offshore could be held liable for substantial losses or damages and for fines and penalties imposed by regulatory authorities. The indemnification provisions of Diamond Offshore’s contracts may be subject to differing interpretations, and the laws or courts of certain jurisdictions may enforce such provisions while other laws or courts may find them to be unenforceable, void or limited by public policy considerations, including when the cause of the underlying loss or damage is Diamond Offshore’s gross negligence or willful misconduct, when punitive damages are attributable to Diamond Offshore or when fines or penalties are imposed directly against Diamond Offshore. The law with respect to the enforceability of indemnities varies from jurisdiction to jurisdiction and is unsettled under certain laws that are applicable to Diamond Offshore’s contracts. Current or future litigation in particular jurisdictions, whether or not Diamond Offshore is a party, may impact the interpretation and enforceability of indemnification provisions in its contracts. There can be no assurance that Diamond Offshore’s contracts with its customers, suppliers and subcontractors will fully protect it against all hazards and risks inherent in its operations. There can also be no assurance that those parties with contractual obligations to indemnify Diamond Offshore’s customers may dispute,Offshore will be financially able to do so or be unable to meet,will otherwise honor their contractual indemnification obligations.
Diamond Offshore maintains liability insurance, which includes coverage for environmental damage; however, because of contractual provisions and policy limits, Diamond Offshore’s insurance coverage may not adequately cover its losses and claim costs. In addition, certain risks such as pollution, reservoir damage and environmental risks are generally not fully insurable when they are determined to be the result of criminal acts.insurable. Also, Diamond Offshore does not typically purchase loss-of-hire insurance to
cover lost revenues when a rig is unable to work. Moreover, insurance costs acrossAccordingly, it is possible that Diamond Offshore’s losses from the industryhazards it faces could have increased following the Macondo incident and, in the future, certain insurance coverage is likely to become more costly and may become less available or not available at all.a material adverse effect on its business.
Diamond Offshore believes that the policy limit under its marine liability insurance is within the range that is customary for companies of its size in the offshore drilling industry and is appropriate for its business. However, if an accident or other event occurs that exceeds Diamond Offshore’s coverage limits or is not an insurable event under its insurance policies, or is not fully covered by contractual indemnity, it could have a material adverse effect on its results of operations, financial condition and cash flows.Diamond Offshore’s business. There can be no assurance that Diamond Offshore will continue to carry the insurance it currently maintains, that its insurance will cover all types of losses or that those parties with contractual obligations to indemnify Diamond Offshore will necessarily be financially able to indemnify Diamond Offshore against all of these risks. In addition, no assurance can be made that Diamond Offshore will be able to maintain adequate insurance in the future at rates it considers to be reasonable or that Diamond Offshore will be able to obtain insurance against some risks.
Diamond Offshore’s industry is highly competitiveOffshore has elected to self-insure for physical damage to rigs and cyclical, with intense price competition.
The offshore contract drilling industry is highly competitive with numerous industry participants, none of which at the present time has a dominant market share. Some of Diamond Offshore’s competitors may have greater financial or other resources than it does. The drilling industry has experienced consolidationequipment caused by named windstorms in the pastGOM.
Because the amount of insurance coverage available to Diamond Offshore has been limited, and may experience additional consolidation,the cost for such coverage is substantial, Diamond Offshore self-insures for physical damage to rigs and equipment caused by named windstorms in the GOM. This results in a higher risk of losses, which could create additional large competitors. Drilling contractsbe material, that are traditionally awarded on a competitive bid basis. Price is typically the primary factor in determining which qualified contractor is awarded a job; however, rig availability and location, a drilling contractor’s safety record and the quality and technical capability of service and equipment may also be considered.not covered by third party insurance contracts.
Diamond Offshore’s industry has historically been cyclical. There have been periods of lower demand, excess rig supply and low dayrates, followed by periods of high demand, short rig supply and high dayrates. Diamond Offshore cannot predict the timing or duration of such business cycles. Periods of excess rig supply intensify the competition in the industry and often result in rigs being idle for long periods of time. Prolonged periods of low utilization and dayrates could also result in the recognition of impairment charges onIn addition, certain of Diamond Offshore’s drilling rigs if future cash flow estimates, based upon information availableshore-based facilities are located in geographic regions that are susceptible to management at the time, indicatedamage or disruption from hurricanes and other weather events. Future hurricanes or similar natural disasters that the carrying value of these rigs may not be recoverable.
Significant new rig construction and upgrades of existing drilling rigs could also intensify price competition. Based on analyst reports, Diamond Offshore believes that there are approximately 67 floaters on order and scheduled for delivery between 2013 and 2016, with approximately 75% of these rigs scheduled for delivery in 2013 and 2014. The resulting increases in rig supply could be sufficient to depress rig utilization and intensify price competition from both existing competitors, as well as new entrants into the offshore drilling market. Not all of the rigs currently under construction have been contracted for future work, which may further intensify price competition as scheduled delivery dates occur. The majority of the floaters on order are dynamically positioned drilling rigs, which further increases competition withimpact Diamond Offshore’s fleet in certain circumstances, depending on customer requirements. In Brazil, Petrobras, which accounted for approximately 33% of Diamond Offshore’s consolidated revenues in 2012 and, as of February 1, 2013, accounted for approximately $2.6 billion of contract drilling backlog through 2016 and to which nine of Diamond Offshore’s floaters are currently contracted, has announced plans to construct locally 29 new ultra-deepwater drilling units to be delivered beginning in 2015. These new drilling rigs, if built, would increase rig supply and could intensify price competition in Brazil as well as other markets as they enter the market, would compete with, and could displace, Diamond Offshore’s deepwater and ultra-deepwater floaters coming off contract and could materially adversely affect Diamond Offshore’s utilization rates, particularly in Brazil.
Diamond Offshore can provide no assurance thatfacilities, its current backlog of contract drilling revenue will be ultimately realized.
As of February 1, 2013, Diamond Offshore’s contract drilling backlog was approximately $8.6 billion for contracted future work extending, in some cases, until 2019. Generally, contract backlog only includes future revenues under firm commitments; however, from time to time, Diamond Offshore may report anticipated commitments for which definitive agreements have not yet been, but are expected to be, executed. Diamond Offshore can provide no assurance that it will be able to perform under these contracts due to events beyond its control or that Diamond Offshore will be able to ultimately execute a definitive agreement in cases where one does not currently exist. In addition, Diamond Offshore can provide no assurance that its customers will be able to or
willing to fulfill their contractual commitments. Diamond Offshore’s inability to perform under its contractual obligations or to execute definitive agreementspersonnel located at those facilities or its customers’ inabilityongoing operations may negatively affect its business for those periods. These negative effects may include reduced or unwillingness to fulfill their contractual commitments may have a material adverse effect on Diamond Offshore’s business.
Diamond Offshore relies heavily on a relatively small number of customerslost sales and the loss of a significant customer and/or a dispute that leads to the loss of a customer could have a material adverse impact on its financial results.
Diamond Offshore provides offshore drilling services to a customer base that includes majorrevenues; costs associated with interruption in operations and independent oil and gas companies and government-owned oil companies. In 2012, Diamond Offshore’s five largest customers in the aggregate accounted for 62% of its consolidated revenues. Diamond Offshore expects Petrobras and OGX, which accounted for approximately 33% and 12% of Diamond Offshore’s consolidated revenues in 2012, to continue to be significant customers in 2013. Diamond Offshore’s contract drilling backlog, as of February 1, 2013, includes $1.0 billion, or 36% and $187 million or 7% of its contracted backlog for 2013, which is attributable to contracts with Petrobras and OGX for operations offshore Brazil. Petrobras has announced plans to construct locally, 29 new ultra-deepwater drilling units to be delivered beginning in 2015. These new drilling units, if built, would compete with, and could displace, Diamond Offshore’s deepwater and ultra-deepwater floaters coming off contract and could materially adversely affect utilization rates, particularly in Brazil. While it is normalresuming operations; reduced demand for Diamond Offshore’s customer base to change over time as work programs are completed, the loss of, or a significant reduction in the number of rigs contracted with, any major customer may have a material adverse effect on Diamond Offshore’s business.
The terms of Diamond Offshore’s drilling contracts may limit its ability to attain profitability in a decliningservices from customers that were similarly affected by these events; lost market or to benefit from increasing dayrates inshare; late deliveries; uninsured property losses; inadequate business interruption insurance; employee evacuations; and an improving market.
The duration of offshore drilling contracts is generally determined by customer requirements and, to a lesser extent, the respective management strategies of the offshore drilling contractors. In periods of decreasing demand for offshore rigs, drilling contractors generally prefer longer term contracts, but often at flat or slightly lower dayrates, to preserve dayrates at existing levels and ensure utilization, while customers prefer shorter contracts that allow them to more quickly obtain the benefit of lower dayrates. Conversely, in periods of rising demand for offshore rigs, contractors typically prefer shorter contracts that allow them to more quickly profit from increasing dayrates. In contrast, during these periods customers with reasonably definite drilling programs typically prefer longer term contracts to maintain dayrate prices at a consistent level. An inability to obtain longer term contracts in a declining market or to fully benefit from increasing dayrates in an improving market through shorter term contracts may limit Diamond Offshore’s profitability.retain necessary staff.
Contracts for Diamond Offshore’s drilling rigs are generally fixed dayrate contracts, and increases in Diamond Offshore’s operating costs could adversely affect the profitability on those contracts.
Diamond Offshore’s contracts for its drilling rigs provide for the payment of a fixed dayrate per rig operating day, although some contracts do provide for a limited escalation in dayrate due to increased operating costs incurred by Diamond Offshore. Many of Diamond Offshore’s operating costs, such as labor costs, are unpredictable and fluctuate based on events beyond Diamond Offshore’s control. The gross margin that Diamond Offshore realizes on these fixed dayrate contracts will fluctuate based on variations in Diamond Offshore’s operating costs over the terms of the contracts. In addition, for contracts with dayrate escalation clauses, Diamond Offshore may be unable to fully recover increased or unforeseen costs from its customers.
Diamond Offshore’s drilling contracts may be terminated due to events beyond its control.
Diamond Offshore’s customers may terminate some of their term drilling contracts if the drilling rig is destroyed or lost or if Diamond Offshore has to suspend drilling operations for a specified period of time as a result of a breakdown of major equipment or, in some cases, due to other events beyond the control of either party. In addition, some of Diamond Offshore’s drilling contracts permit the customer to terminate the contract after specified notice periods by tendering contractually specified termination amounts. These termination payments may not fully compensate Diamond Offshore for the loss of a contract. In addition, the early termination of a contract may result in a rig being idle for an extended period of time. During periods of depressed market conditions, Diamond Offshore may be subject to an increased risk of its customers seeking to repudiate their contracts. Diamond Offshore’s
customers’ ability to perform their obligations under drilling contracts may also be adversely affected by restricted credit markets and economic downturns. If Diamond Offshore’s customers cancel some of their contracts, and Diamond Offshore is unable to secure new contracts on a timely basis and on substantially similar terms, or if contracts are disputed or suspended for an extended period of time or if a number of contracts are renegotiated, it could materially and adversely affect Diamond Offshore’s financial condition, results of operations and cash flows.
Significant portions of Diamond Offshore’s operations are conducted outside the United States and involve additional risks not associated with United States domestic operations.
Diamond Offshore’s operations outside the United States accounted for approximately 79%, 85% and 89% of its total consolidated revenues for 2015, 2014 and 2013 and include operations in South America, Australia and Southeast Asia, Europe, East and West Africa, the Mediterranean and Mexico. Because Diamond Offshore operates in various regions throughout the world, it is exposed to risks of war, political disruption, civil disturbance, acts of terrorism, political corruption, possible economic and legal sanctions (such as possible restrictions against countries that the U.S. government may consider to be state sponsors of terrorism) and changes in global trade policies. Diamond Offshore may not have insurance coverage for these risks, or it may not be able to obtain adequate insurance coverage for such events at reasonable rates. Diamond Offshore’s operations may become restricted, disrupted or prohibited in any country in which may expose it to politicalany of the foregoing risks occur. In particular, the occurrence of any of these risks or any of the following events could materially and other uncertainties, including risks of:adversely impact Diamond Offshore’s business:
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piracy, terrorism or other assaults on property or personnel; |
kidnapping of personnel; |
seizure, expropriation, nationalization, deprivation, malicious damage or |
renegotiation or nullification of existing contracts; |
disputes and legal proceedings in international jurisdictions; |
● | changing social, political and economic conditions; |
enactment of additional or stricter U.S. government or international sanctions; |
● | imposition of wage and price controls, trade barriers or import-export quotas; |
restrictive foreign and domestic monetary policies; |
the inability to repatriate income or capital; |
difficulties in collecting accounts receivable and longer collection periods; |
fluctuations in currency exchange |
regulatory or financial requirements to comply with foreign bureaucratic actions; |
restriction or disruption of business activities; |
● | limitation of access to markets for periods of time; |
● | travel limitations or operational problems caused by public health threats; |
difficulties in supplying, repairing or replacing equipment or transporting personnel in remote locations; |
difficulties in obtaining visas or work permits for employees on a timely basis; and |
changing taxation |
Diamond Offshore is also subject to the U.S. Treasury Department’s Office of Foreign Assets Control and other U.S. laws and regulations governing its international operations in addition to worldwide anti-bribery laws. In addition, international contract drilling operations are subject to various laws and regulations in countries in which Diamond Offshore operates, including laws and regulations relating to:
the equipping and operation of drilling rigs; |
|
repatriation of foreign earnings or capital; |
oil and gas exploration and development; |
local content requirements; |
● | taxation of offshore earnings and earnings of expatriate personnel; and |
use and compensation of local employees and suppliers by foreign contractors. |
Some foreign governments favor or effectively require the awarding of drilling contracts to local contractors, require use of a local agent or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. These practices may adversely affect Diamond Offshore’s ability to compete in those regions. It is difficult to predict what governmental regulations may be enacted in the future that could adversely affect the international offshore drilling industry. The actions of foreign governments may materially and adversely affect Diamond Offshore’s ability to compete.
In addition, the shipment of goods, including the movement of a drilling rig across international borders, subjects Diamond Offshore to extensive trade laws and regulations. Diamond Offshore’s import activities are governed by unique customs laws and regulations that differ in each of the countries in which Diamond Offshore operates and often impose record keeping and reporting obligations. The laws and regulations concerning import/export activity and record keeping and reporting requirements are complex and change frequently. These laws and regulations may be enacted, amended, enforced and/or interpreted in a manner that could materially and adversely impact Diamond Offshore’s operations. Shipments can be delayed and denied export or entry for a variety of reasons, some of which may be outside of Diamond Offshore’s control. Shipping delays or denials could cause unscheduled downtime for rigs. Failure to comply with these laws and regulations could result in criminal and civil penalties, economic sanctions, seizure of shipments and/or the contractual withholding of monies owed to Diamond Offshore, among other things.
Diamond Offshore may enter into drilling contractsbe required to accrue additional tax liability on certain of its foreign earnings.
Certain of Diamond Offshore’s international rigs are owned and operated, directly or indirectly, by Diamond Foreign Asset Company (“DFAC”), a Cayman Islands subsidiary that exposes it owns. It is Diamond Offshore’s intention to greater risks than it normally assumes.
From timeindefinitely reinvest future earnings of DFAC and its foreign subsidiaries to time,finance foreign activities. Diamond Offshore does not expect to provide for U.S. taxes on any future earnings generated by DFAC and its foreign subsidiaries, except to the extent that these earnings are immediately subjected to U.S. federal income tax. Should a future distribution be made from any unremitted earnings of this subsidiary, Diamond Offshore may enter into drilling contracts with national oil companies, government-controlled entities or othersbe required to record additional U.S. income taxes, that, expose it to greater risks than it normally assumes, such as exposure to greater environmental or other liability and more onerous termination provisions giving the customer a right to terminate without cause or upon little or no notice. Upon termination, these contracts may not result in a payment to Diamond Offshore, or if a termination payment is required, it may not fully compensate Diamond Offshore for the loss of a contract. In addition, the early termination of a contract may result in a rig being idle for an extended period of time. For example, Diamond Offshore currently operates, and expects to continue to operate, its drilling rigs offshore Mexico for PEMEX – Exploración y Producción (“PEMEX”), the national oil company of Mexico. The terms of these contracts expose Diamond Offshore to greater environmental liability than it normally assumes, and provide that, among other things, each contract can be terminated by PEMEX on short notice, contractually or by statute, subject to certain conditions. While Diamond Offshore believes that the financial terms of these contracts and its operating safeguards in place mitigate these risks, it can provide no assurance that the increased risk exposure will notmaterial, could have a material negative impactadverse effect on future operations or financial results.Diamond Offshore’s business.
Fluctuations in exchange rates and nonconvertibility of currencies could result in losses.
Due to Diamond Offshore’s international operations, Diamond Offshore may experiencehas experienced currency exchange losses where revenues are received and expenses are paid in nonconvertible currencies or where it does not effectively hedge an exposure to a foreign currency. Diamond Offshore may also incur losses as a result of an inability to collect revenues because of a shortage of convertible currency available to the country of operation, controls over currency exchange or controls over the repatriation of income or capital. Diamond Offshore can provide no assurance that financial hedging arrangements will effectively hedge any foreign currency fluctuation losses that may arise.
Diamond Offshore relies on third-party suppliers, manufacturers and service providers to secure equipment, components and parts used in rig operations, conversions, upgrades and construction.
Diamond Offshore’s reliance on third-party suppliers, manufacturers and service providers to provide equipment and services exposes it to volatility in the quality, price and availability of such items. Certain components, parts and equipment that are used in Diamond Offshore’s operations may be requiredavailable only from a small number of suppliers, manufacturers or service providers. The failure of one or more third-party suppliers, manufacturers or service providers to accrue additional tax liability on certainprovide equipment, components, parts or services, whether due to capacity constraints, production or delivery disruptions, price increases, quality control issues, recalls or other decreased availability of its foreign earnings.
Certain ofparts and equipment, is beyond Diamond Offshore’s international rigs are ownedcontrol and operated, directlycould materially disrupt its operations or indirectly, by Diamond Offshore International Limited (“DOIL”), a wholly owned Cayman Islands subsidiary of Diamond Offshore. It is Diamond Offshore’s intention to indefinitely reinvest future earnings of DOIL and its foreign subsidiaries to finance foreign activities. Diamond Offshore does not expect to provide for U.S. taxes on any future earnings generated by DOIL, except to the extent that these earnings are immediately subjected to U.S. federal income tax. Should a future
distribution be made from any unremitted earnings of this subsidiary, Diamond Offshore may be required to record additional U.S. income taxes.
Rig conversions, upgrades or new builds may be subject to delays and cost overruns.
From time to time, Diamond Offshore adds new capacity through conversions or upgrades to existing rigs or through new construction, such as its four, ultra-deepwater drillships under construction and its construction of theOcean Apexand Ocean Onyx. Projects of this type are subject to risks of delay or cost overruns inherent in any large construction project resulting from numerous factors, including the following:
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Failure to complete a rig upgrade or new construction on time, or failure to complete a rig conversion or new construction in accordance with its design specifications may, in some circumstances, result in the delay, renegotiation or cancellation of a drilling contract, resulting incontracts, thereby causing a loss of contract drilling backlog and/or revenue, as well as an increase in operating costs.
Additionally, Diamond Offshore’s suppliers, manufacturers and revenueservice providers could be negatively impacted by current industry conditions or global economic conditions. If certain of Diamond Offshore’s suppliers, manufacturers or service providers were to Diamond Offshore. Ifexperience significant cash flow issues, become insolvent or otherwise curtail or discontinue their business as a drilling contract is terminated under these circumstances, Diamond Offshore may not be able to secureresult of such conditions, it could result in a replacement contract with equally favorable terms.
Diamond Offshore has elected to self-insure for physical damage to rigs andreduction or interruption in supplies or equipment caused by named windstorms in the GOM.
Because the amount of insurance coverage available to Diamond Offshore has been limited, andand/or a significant increase in the cost forprice of such coverage is substantial, Diamond Offshore has elected to self-insure for physical damage to rigssupplies and equipment, caused by named windstorms in the GOM. This results in a higher risk of losses, which could be material, that are not covered by third party insurance contracts.adversely impact Diamond Offshore’s business.
Risks Related to Us and Our Subsidiary, Boardwalk Pipeline Partners, LP
Boardwalk Pipeline’s actual construction and development costs could exceed its forecast, and its cash flow from construction and development projects may not be immediate, which may limit its ability to maintain or increase cash distributions.
Boardwalk Pipeline is engaged in multiple significant construction projects involving existing and new assets for which it has expended or will expend significant capital and it expects to engage in additional growth projects of this type. The construction of new assets involves regulatory, environmental, legal, political, materials and labor cost, operational and other risks that are difficult to predict and beyond Boardwalk Pipeline’s control. Any of these projects may not be completed on time or at all, may be impacted by significant cost overruns or may be materially changed prior to completion as a result of developments or circumstances that Boardwalk Pipeline is not aware of when it commits to the project, including the ability of any foundation shipper to provide adequate credit support or to otherwise perform their obligations under any precedent agreements. Any of these factors could result in material unexpected costs or have a material adverse effect on Boardwalk Pipeline’s ability to realize the anticipated benefits from its growth projects.
Boardwalk Pipeline’s revenues and cash flows may not increase immediately on its expenditure of funds on a particular project. For example, if Boardwalk Pipeline builds a new pipeline or expands an existing facility, the design, construction and development may occur over an extended period of time and Boardwalk Pipeline may not receive any increase in revenue or cash flow from that project until after it is placed in service and customers begin using the new facilities.
Boardwalk Pipeline is exposed to credit risk relating to nonperformance by its customers.
Credit risk relates to the risk of loss resulting from the nonperformance by a customer of its contractual obligations. Credit risk exists in relation to Boardwalk Pipeline’s growth projects, both because foundation shippers have made long term commitments to Boardwalk Pipeline for capacity on such projects and certain of the foundation shippers have agreed to provide credit support as construction progresses. If a foundation shipper fails to meet the contractual credit requirements, an adjustment to the scope of the project could occur to accommodate a reduced volume commitment or Boardwalk Pipeline may be forced to find new customers to replace the defaulting customer, which could reduce the returns on the project. Boardwalk Pipeline’s exposure also relates to receivables for services provided, future performance under firm agreements and volumes of gas owed by customers for imbalances or gas loaned by it to them under certain NNS and PAL services.
Boardwalk Pipeline relies on a limited number of customers for a significant portion of revenues. For 2015, no one customer comprised more than 10% of its operating revenues, and the top ten customers comprised approximately 45% of revenues. If any of Boardwalk Pipeline’s significant customers have credit or financial problems which result in a delay or failure to pay for services provided by Boardwalk Pipeline or contracted for with them, to post the required credit support for construction associated with its growth projects or to repay the gas they owe Boardwalk Pipeline, it could have a material adverse effect on its business. In addition, Boardwalk Pipeline’s FERC gas tariffs only allow it to require limited credit support in the event that transportation customers are unable to pay for Boardwalk Pipeline’s services.
Natural gas producers comprise a significant portion of Boardwalk Pipeline’s revenues and support several of its growth projects. For example, in 2015, approximately 50% of Boardwalk Pipeline’s revenues were generated from contracts with natural gas producers. During 2015, the prices of oil and natural gas declined significantly from an increase in supplies mainly from shale production areas in the U.S. Should the prices of natural gas and oil remain at current levels for a sustained period of time, or decline further, Boardwalk Pipeline could be exposed to increased credit risk associated with its producer customer group, which would adversely impact Boardwalk Pipeline’s business.
Boardwalk Pipeline may not be able to maintain or replace expiring natural gas transportation and storage contracts at attractive rates or on a long-term basis.basis and may not be able to sell short-term services at attractive rates or at all due to market conditions such as narrower basis differentials and sustained changes in the levels of natural gas and oil prices which adversely affect the value of its transportation services.
Transportation rates Boardwalk Pipeline is able to charge customers are heavily influenced by longer-term trends in, for example, the amount and geographical location of natural gas production and demand for gas by end-users such as power plants, petrochemical facilities and LNG export facilities. As a result of changes in longer-term trends, a sustained narrowing of basis differentials corresponding to traditional flow patterns on Boardwalk Pipeline’s pipeline systems (generally south to north and west to east) has occurred, reducing the transportation rates and adversely impacting other contract terms Boardwalk Pipeline can negotiate with its customers for available transportation capacity and for contracts scheduled for renewal.
Each year, a portion of Boardwalk Pipeline’s firm natural gas transportation contracts expire and need to be renewed or replaced. Over the past several years, Boardwalk Pipeline has renewed many expiring contracts at lower rates and for shorter terms than in the past, or not at all. Boardwalk Pipeline expects this trend to continue, mainly for contracts to transport gas from west to east across its system, and therefore, it may not be able to sell its available capacity, extend expiring contracts with existing customers or obtain replacement contracts at attractive rates or for the same term as the expiring contracts. A key driverThe prevailing market conditions may also lead some of Boardwalk Pipeline’s customers, particularly customers that influences the ratesare experiencing financial difficulties, to seek to renegotiate existing contracts to terms that are less attractive to it. These sustained conditions have had, and termsBoardwalk Pipeline expects will continue to have, a materially adverse effect on revenues, earnings and distributable cash flows.
In 2008 and 2009, Boardwalk Pipeline placed into service a number of large new pipelines and expansions of its system, including its East Texas Pipeline, Southeast Expansion, Gulf Crossing Pipeline, and Fayetteville and Greenville Laterals. These projects were supported by firm transportation contracts isagreements with anchor shippers, typically having a term of ten years and pricing and other terms negotiated based on then current market conditions, which included wider basis spreads and, correspondingly, higher transportation rates than those prevailing in the current and anticipated basis spreads - generally meaning the difference in the price of natural gas at receipt and delivery points on its natural gas pipeline systems which influence how much
customers are willing to pay to transport gas between those points. Basis differentials can be affected by, among other things, the availability and supply of natural gas, competition from other pipelines, including pipelines under development, available transportation and storage capacity, storage inventories, regulatory developments, weather and general market demand in markets served by its pipeline systems. As new sources of natural gas have been identified and developed, changes in pricing dynamics between supply basins, pooling points and market areas have occurred.market. As a result, ofin 2018 and 2019, Boardwalk Pipeline will have significantly more transportation contract expirations than other years. Boardwalk Pipeline cannot predict what market conditions will prevail at the increase in overall pipeline capacity andtime such contracts expire, but if the new sources of supply, basis spreads on its pipeline systems have narrowed over the past several years, reducing thecontracts are renewed, it expects that these contracts will renew at lower transportation rates Boardwalk Pipeline can negotiate with its customers onthan when the contracts due for renewal for its firmwere initially executed. For example, if these contracts were renewed at current transportation services. The narrowing of basis differentials has also adversely affected themarket rates, it is able to charge for its interruptible and short term firmrevenues earned from these transportation services. As a result, the ratescontracts would be materially lower. If Boardwalk Pipeline is able to obtain on renewals of expiring contracts are generally lower than those under the expiring contracts, which adversely impacts its revenues and distributable cash.
The development of large new gas supply basins in the U.S. and the overall increase in the supply of natural gas created by such development can significantly affect Boardwalk Pipeline’s business.
Growing supplies of natural gas are being produced in new production areas that are not connected to Boardwalk Pipeline’s system and are closer to large end-user market areas than the supply basins connected to its system that traditionally served these markets. For example, gas produced in the Marcellus Shale in Pennsylvania, New York, West Virginia and Ohio is being shipped to nearby northeast markets such as New York and Philadelphia which have traditionally been served by gas produced in Gulf Coast and mid-continent production areas which are connected to its pipelines. This has caused and may continue to cause gas produced in supply areas connected to its system to be diverted to other market areas which may adversely affect capacity utilization and transportation rates on its systems. In addition, as discussed above, growing supplies of natural gas from developing supply basins, especially shale plays, connected to Boardwalk Pipeline’s system have caused and may continue to cause basis spreads to narrow. All of these dynamics continue to impair Boardwalk Pipeline’s abilityunable to renew or replace existingthese and other expiring contracts when they expire, or to sell interruptibleif the terms of any such renewal or replacement contracts are not as favorable as the expiring agreements, its revenues and short term firm transportation services at attractive rates, whichcash flows could be materially adversely impactsaffected. These market factors and conditions could materially impact Boardwalk Pipeline’s revenues and distributable cash flows.business.
Changes in the price ofenergy prices, including natural gas, oil and NGLs, impactsimpact supply of and demand for those commodities, which impactsimpact Boardwalk Pipeline’s business.
Natural gas prices in the U.S. are currently lower than historical averages drivenBoardwalk Pipeline’s business is not significantly impacted by the abundant and growing gas supply discussed above.short-term change in commodity prices, however, its customers, a significant amount of which are producers, are directly impacted by changes in commodity prices, which can impact Boardwalk Pipeline’s ability to renew contracts at existing capacities or rates or impact the producer’s ability to make payment for the services it provides. The prices of natural gas, oil and NGLs fluctuatesfluctuate in response to changes in supply and demand, market uncertainty and a variety of additional factors, including:
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It is difficult to predict future changes in natural gas, oil and NGL prices. However,NGLs prices mentioned above were to continue for a sustained period of time, the economic environment that has existed over the last several years generally indicates a bias toward continued downward pressure on natural gas prices. Sustained low natural gas prices could negatively impact producers including those directly connected tobusinesses of Boardwalk Pipeline’s pipelines that haveproducer customer group would be adversely affected which, in turn, would reduce the demand for Boardwalk Pipeline’s services and could result in defaults or the non-renewal of contracted for capacity with them.
when existing contracts expire. Conversely, future increases in the price of natural gas and NGLs could make alternative energy and feedstock sources more competitive and reduce demand for natural gas.gas and NGLs. A reduced level of demand for natural gas and NGLs could reduce the utilization of capacity on Boardwalk Pipeline’s systems, reduce the demand for its services and could result in the non-renewal of contracted capacity as contracts expire and affectadversely impact its midstream businesses.
Boardwalk Pipeline may not have sufficient available cash, to continue making distributions to unitholders at the current distribution rate or at all.
The amount of cash Boardwalk Pipeline can distribute to its unitholders, including us, principally depends upon the amount of cash it generates from its operationsrevenues, earnings and financing activities and the amount of cash it requires, or determines to use, for other purposes, all of which fluctuate from quarter to quarter based on a number of factors. Many of these factors are beyond the control of Boardwalk Pipeline. Some of the factors that influence the amount of cash Boardwalk Pipeline has available for distribution in any quarter include:
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Boardwalk Pipeline may determine to reduce or eliminate distributions at any time it determines that its cash reserves are insufficient or are otherwise required to fund current or anticipated future operations, capital expenditures, acquisitions, growth or expansion projects or other business needs. Any such reduction would reduce the amount of cash available to us.
Investments that Boardwalk Pipeline makes, whether through acquisitions or growth projects, that appear to be accretive may nevertheless reduce its distributable cash flows.flow.
Boardwalk Pipeline plans to continue to grow
Legislative and diversify its business by among other things, investing in assets through acquisitions and organic growth projects. Its ability to grow, diversify and increase distributable cash flows will depend, in part, on its ability to close and execute on accretive acquisitions and projects. Any such transaction involves potential risks that may include, among other things:
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Additionally, acquisitions contain the following risks:
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Boardwalk Pipeline is exposed to credit riskregulatory initiatives relating to nonperformance by its customers.
Credit risk relatespipeline safety that require the use of new or more stringent safety controls, substantial changes to the risk of loss resulting from the nonperformance by a customer of its contractual obligations. Boardwalk Pipeline’s exposure generally relates to receivables for services provided, future performance under firm agreements and volumes of gas or other products owed by customers for imbalances or product loaned by it to them under certain of its services. For Boardwalk Pipeline’s FERC-regulated business, Boardwalk Pipeline’s tariffs only allow it to require limited credit support in the event that its transportation customers are unable to pay for its services. If any of its significant customers have credit or financial problems which result in a delay or failure to pay for services provided by them or contracted for with them, or to repay the product they owe them, it could have a material adverse effect on Boardwalk Pipeline’s business. In addition, as contracts expire, the credit or financial failure of any of its customers could also result in the non-renewal of contracted capacity, which could have a material adverse effect on its business.
Boardwalk Pipeline depends on certain key customers for a significant portion of its revenues. The loss of any of these key customers could result in a decline in its revenues.
Boardwalk Pipeline relies on a limited number of customers for a significant portion of revenues. Its largest customer in terms of revenue, Devon Gas Services, LP, represented over 12% of its 2012 revenues. Boardwalk Pipeline’s top ten customers comprised approximately 47% of its revenues in 2012. Boardwalk Pipeline may be unable to negotiate extensions or replacements of contracts with key customers on favorable terms which could materially reduce its contracted transportation volumes and the rates it can charge for its services.
Boardwalk Pipeline’s natural gas transportation and storage operations are subject to FERC’s rate-making policies which could limit its ability to recover the full cost of operating its pipelines, including earning a reasonable return.
Boardwalk Pipeline is subject to extensive regulations relating to the rates it can charge for its natural gas transportation and storage operations. For Boardwalk Pipeline’s cost-based services, FERC establishes both the maximum and minimum rates it can charge. The basic elements that FERC considers are the costs of providing service, the volumes of gas being transported, the rate design, the allocation of costs between services, the capital structure and the rate of return a pipeline is permitted to earn. Boardwalk Pipeline may not be able to recover all of its costs, including certain costs associated with pipeline integrity, through existing or future rates.
Customers or FERC can challenge the existing rates on any of Boardwalk Pipeline’s pipelines. Such a challenge against them could adversely affect its ability to charge rates that would cover future increases in its costs or even to continue to collect rates to maintain its current revenue levels that are designed to permit a reasonable opportunity to recover current costs and depreciation and earn a reasonable return.
If any of Boardwalk Pipeline’ pipelines under FERC jurisdiction were to file a rate case, or if they have to defend their rates in a proceeding commenced by a customer or FERC, Boardwalk Pipeline would be required, among other things, to establish that the inclusion of an income tax allowance in its cost of service is just and reasonable. Under current FERC policy, since it is a limited partnership and does not pay U.S. federal income taxes, this would require it to show that its unitholders (or their ultimate owners) are subject to federal income taxation. To support such a showing, Boardwalk Pipeline’s general partner may elect to require owners of its units to re-certify their status as being subject to U.S. federal income taxation on the income generated by Boardwalk Pipeline or may attempt to provide other evidence. Boardwalk Pipeline can provide no assurance that the evidence it might provide to FERC will be sufficient to establish that its unitholders (or their ultimate owners) are subject to U.S. federal income tax liability on the income generated by Boardwalk Pipeline’s jurisdictional pipelines. If Boardwalk Pipeline is unable to make such a showing, FERC could disallow a substantial portion of the income tax allowance included in the determination of the maximum rates that may be charged by its pipelines, which could result in a reduction of such maximum rates from current levels.
Pipeline safety laws and regulations requiring the performance of integrity management programs, or the usemore stringent enforcement of certain safety technologiesapplicable legal requirements could subject Boardwalk Pipeline to increased capital and operating costs and require it to use more comprehensive and stringent safety controls.operational delays.
Boardwalk Pipeline’s pipelines are subject to regulation by PHMSA of the DOT under the NGPSA with respect to natural gas and the HLPSA with respect to NGLs, both as amended.NGLs. The NGPSA and HLPSA govern the design, installation, testing, construction, operation, replacement and management of natural gas and NGLs pipeline facilities. These amendmentslaws have resulted in the adoption of rules by the DOT, through PHMSA, that, among other things, require transportation pipeline operators to implement integrity management programs, including more frequent inspections, correction of identified anomalies and other measures to ensure pipeline safety in high consequence areas (HCAs), such as high population areas, areas unusually sensitive to environmental damage and commercially navigable waterways. TheseIn addition, states have adopted regulations havesimilar to existing PHMSA regulations for certain intrastate natural gas and hazardous liquid pipelines, which regulations may impose more stringent requirements than found under federal law. Compliance with these rules has resulted in an overall increase in maintenance costs. Due to recent highly publicized incidents on certain pipelines in the U.S., it is possible thatNew laws or regulations adopted by PHMSA may developimpose more stringent regulations. Boardwalk Pipeline could incur significant additional costs if new or more stringently interpretedrequirements applicable to integrity management programs and other pipeline safety requirements are implemented.aspects of Boardwalk Pipeline’s operations, which could cause it to incur increased capital and operating costs and operational delays.
The NGPSA and HLPSA were most recently updated by the 2011 Act, which was enacted and signed into law in early 2012. Under the 2011 Act, maximum civil penalties for certain violations have been increased to $200,000 per violation per day, and fromwith a total cap of $1 million to $2$2.0 million. In addition, theThe 2011 Act reauthorized the federal pipeline safety programs of PHMSA through September 30, 2015, and directs the Secretary of Transportation to undertake a number of reviews, studies and reports, some of which may result in more stringent safety controls or inspections or additional natural gas and hazardous liquids pipeline safety rulemaking. AAmong other things, the 2011 Act directed the Secretary of Transportation to promulgate rules relating to expanded integrity management requirements, automatic or remote-controlled valve use, excess flow valve use, leak detection system installation, pipeline material strength testing and verification of maximum allowable pressures of certain pipelines. Although a number of the mandates imposed under the 2011 Act have yet to be acted upon by PHMSA, the provisions of the 2011 Act continue to have the potential to cause owners and operators of pipeline facilities to incur significant capital expenditures and/or operating costs.
Boardwalk Pipeline needs to maintain authority from PHMSA to operate portions of its pipeline systems at higher than normal operating pressures.
Further, Boardwalk Pipeline has entered into firm transportation contracts with shippers whichthat utilize the design capacity of certain of its pipeline assets, assuming that Boardwalk Pipeline operates those pipeline assets at higher than normal operating pressures (upof up to 0.80 of the pipeline’s SMYS).SMYS. Boardwalk Pipeline has authority from PHMSA to operate those pipeline assets at such higher pressures,pressures; however, PHMSA retains discretion to withdraw or modify this authority. If PHMSA were to withdraw or materially modify such authority, Boardwalk Pipeline may not be able to transport all of its contracted quantities of natural gas on its pipeline assets and could incur significant additional costs to re-obtain such authority or to develop alternate ways to meet its contractual obligations.
Risks RelatedBoardwalk Pipeline may not continue making distributions to Usunitholders at the current distribution rate, or at all.
The amount of cash Boardwalk Pipeline has available to distribute to its unitholders principally depends upon the amount of cash it generates from its operations and Our Subsidiary, HighMount Exploration & Production LLCfinancing activities and the amount of cash it requires, or determines to use, for other purposes, all of which fluctuate from quarter to quarter based on a number of factors, many of which are beyond the control of Boardwalk Pipeline. Some of the factors that influence the amount of cash Boardwalk Pipeline has available for distribution in any quarter include:
fluctuations in cash generated by its operations, including, as a result of the seasonality of its business, customer payment issues and the timing of payments, general business conditions and market conditions, which impact, for example, contract renewals, pricing, basis spreads, time period price spreads, market rates and supply and demand for natural gas and Boardwalk Pipeline’s services;
the level of capital expenditures Boardwalk Pipeline makes or anticipate making, including for expansion, growth projects and acquisitions;
the amount of cash necessary to meet current or anticipated debt service requirements and other liabilities;
fluctuations in working capital needs;
the ability to borrow funds and/or access capital markets on acceptable terms to fund operations or capital expenditures, including acquisitions, and restrictions contained in its debt agreements;
the cost and form of payment for pending or anticipated acquisitions and growth or expansion projects and the timing and commercial success of any such initiatives; and
unanticipated costs to operate Boardwalk Pipeline’s business, such as for maintenance and regulatory compliance.
There is no guarantee that unitholders will receive quarterly distributions from Boardwalk Pipeline. Boardwalk Pipeline’s distributions are determined each quarter by the board of directors of its general partner based on the board’s consideration of Boardwalk Pipeline’s financial position, earnings, cash flow, current and future business needs and other relevant factors at that time. Boardwalk Pipeline may reduce or eliminate distributions at any time it determines that its cash reserves are insufficient or are otherwise required to fund current or anticipated future operations, capital expenditures, acquisitions, growth or expansion projects, debt repayment or other business needs.
HighMountBoardwalk Pipeline may not be successful in executing its strategy to grow and diversify its business.
Boardwalk Pipeline relies primarily on the revenues generated from its long-haul natural gas transportation and storage services. As a result, negative developments in these services have significantly greater impact on Boardwalk Pipeline’s financial condition and results of operations than if it maintained more diverse assets. Boardwalk Pipeline is pursuing a strategy of growing and diversifying its business through acquisition and development of assets in complementary areas of the midstream energy sector, such as liquids transportation and storage assets, among others. Boardwalk Pipeline’s ability to grow, diversify and increase distributable cash flows will depend, in part, on its ability to close and execute on accretive acquisitions and projects. Boardwalk Pipeline may not be successful in acquiring or developing such assets or may do so on terms that ultimately are not profitable. Any such transactions involve potential risks that may include, among other things:
the diversion of management’s and employees’ attention from other business concerns;
inaccurate assumptions about volume, revenues and project costs, including potential synergies;
a decrease in Boardwalk Pipeline’s liquidity as a result of using available cash or borrowing capacity to finance the acquisition or project;
a significant increase in interest expense or financial leverage if it incurs additional debt to finance the acquisition or project;
inaccurate assumptions about the overall costs of equity or debt;
an inability to hire, train or retain qualified personnel to manage and operate the acquired business and assets or the developed assets;
unforeseen difficulties operating in new product areas or new geographic areas; and
changes in regulatory requirements or delays of regulatory approvals.
Additionally, acquisitions contain the following risks:
an inability to integrate successfully the businesses Boardwalk Pipeline acquires;
the assumption of unknown liabilities for which it is not indemnified, for which its indemnity is inadequate or for which its insurance policies may exclude from coverage;
limitations on rights to indemnity from the seller; and
customer or key employee losses of an acquired business.
There is no certainty that Boardwalk Pipeline will be able to complete these acquisitions or projects on schedule, on budget or at all.
Boardwalk Pipeline may not be able to replace reservesexpiring gas storage contracts at attractive rates or on a long-term basis and sustain production at current levels. Replacing reserves is risky and uncertain and requires significant capital expenditures.
HighMount’s success depends largely upon its ability to find, develop or acquire additional reserves that are economically recoverable. Unless HighMount replaces the reserves produced through successful development, exploration or acquisition, its proved reserves will decline over time. HighMount may not be able to successfully findsell short-term services at attractive rates or at all due to a sustained narrowing of price spreads between time periods and produce reserves economicallyreduced volatility which adversely affect Boardwalk Pipeline’s storage services.
Boardwalk Pipeline owns and operates substantial natural gas storage facilities. The market for the storage and PAL services that it offers is impacted by the factors and market conditions discussed above for Boardwalk Pipeline’s transportation services, and is also impacted by natural gas price differentials between time periods, such as winter to summer (time period price spreads), and the volatility in time period price spreads. Market conditions have caused a sustained narrowing of time period price spreads and a sustained decline in the future or to acquire proved reserves at acceptable costs. HighMount makes a substantial amount of capital expenditures for the acquisition, exploration and development of reserves. HighMount’s net cash flows have been negatively impacted by reduced natural gas and NGL prices as well as increased drilling costs developing HighMount’s oil reserves. If HighMount’s cash flow from operations is not sufficient to fund its capital expenditure budget, there can be no assurance that financing will be available or available at favorable terms to meet those requirements.
Estimatesprice volatility of natural gas, which has adversely impacted the rates Boardwalk Pipeline can charge for its storage and oil reserves are uncertainPAL services and inherently imprecise.the value associated with these services, especially when compared to previous historical levels. These market factors and conditions have adversely impacted Boardwalk Pipeline’s business.
Estimating the volume of provedBoardwalk Pipeline’s natural gas transportation and oil reserves isstorage operations are subject to extensive regulation by FERC, including rules and regulations related to the rates it can charge for its services and its ability to construct or abandon facilities. FERC’s rate-making policies could limit its ability to recover the full cost of operating its pipelines, including earning a complex process and is not an exact science because of numerous uncertainties inherent in the process. The process relies on interpretations of available geological, geophysical, engineering and production data. The extent, quality and reliability of this technical data can vary. The process also requires certain economic assumptions, such as oil and gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Therefore, these estimates are inherently imprecise.reasonable return.
Actual future production, commodity prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable reserves most likely will vary from HighMount’s estimates. Any significant variance could materially affect the quantities and present value of HighMount’s reserves. In addition, HighMount may adjust estimates of proved reserves upward or downward to reflect production history, results of exploration and development drilling, prevailing commodity prices and prevailing development expenses.
The timing of both the production and the expenses from the development and production ofBoardwalk Pipeline’s natural gas transportation and oil properties willstorageoperations are subject to extensive regulation by FERC, including the types and terms of services Boardwalk Pipeline may offer to its customers, construction of new facilities, creation, modification or abandonment of services or facilities, recordkeeping and relationships with affiliated companies. FERC action in any of these areas could adversely affect bothBoardwalk Pipeline’s ability to compete for business, construct new facilities, offer new services or recover the timing of actual future net cash flows from proved reserves and their present value. In addition, the 10% discount factor, used in calculating discounted future net cash flows for reporting purposes, is not necessarily the most accurate representation of their value.
If commodity prices remain depressed, HighMount may be required to take additional write-downs of the carrying values of its properties.
HighMount may be required, under full cost accounting rules,of operating its pipelines. This regulatory oversight can result in longer lead times to write-downdevelop and complete any future project than competitors that are not subject to FERC’s regulations. FERC can also deny Boardwalk Pipeline the carrying value ofright to remove certain facilities from service.
FERC also regulates the rates Boardwalk Pipeline can charge for its natural gas transportation and oil properties. A numberstorage operations. For cost-based services, FERC establishes both the maximum and minimum rates Boardwalk Pipeline can charge. The basic elements that FERC considers are the costs of factors could result in a write-down, including continued low commodity prices, a substantial downward adjustment to estimated proved reserves, a substantial increase in estimated developmentproviding service, the volumes of gas being transported, the rate design, the allocation of costs or deterioration in exploration results. It is difficult to predict future changes in gas prices. However,between services, the abundance of natural gas supply discoveries overcapital structure and the last few years would generally indicate a bias toward downward pressure on prices. HighMount utilizes the full cost method of accounting for its exploration and development activities. Under full cost accounting, HighMount is required to perform a ceiling test each quarter. The ceiling test is an impairment test and generally establishes a maximum, or “ceiling,” of the book value of
HighMount’s natural gas properties that is equal to the expected after tax present value (discounted at the required rate of 10%) of the future net cash flows from proved reserves, including the effect of cash flow hedges, calculated using the average first day of the month price for the preceding 12-month period.
If the net book value of HighMount’s exploration and production (“E&P”) properties (reduced by any related net deferred income tax liability) exceeds its ceiling limitation, HighMount will impair or “write-down” the book value of its E&P properties. HighMount recordedreturn a ceiling test impairment charge in each quarter of 2012, totaling $433 million (after taxes) for the year ended December 31, 2012 as a result of declines in natural gas and NGL prices. A write-downpipeline is permitted to earn. Boardwalk Pipeline may not be reversed inable to earn a return or recover all of its costs, including certain costs associated with pipeline integrity activities, through existing or future periods, even though higher natural gas and oil prices may subsequently increaserates. FERC can challenge the ceiling. Dependingexisting rates on the magnitudeany of anyBoardwalk Pipeline’s pipelines. Such a challenge against Boardwalk Pipeline could adversely affect its ability to charge rates that would cover future impairment, a ceiling test write-down could significantly reduce HighMount’s income, or produce a loss.
Natural gas, oil and other commodity prices are volatile.
The commodity price HighMount receives for its production heavily influences its revenue, profitability, access to capital and future rate of growth. If the current low price environment for natural gas continues, HighMount’s results of operations will be lower as well. HighMount is subject to risks due to frequent and possibly substantial fluctuations in commodity prices. NGL prices generally fluctuate on a basis that correlates to fluctuations in crude oil prices. In the past, the prices of natural gas and crude oil have been extremely volatile, and HighMount expects this volatility to continue. The markets and prices for natural gas and oil depend upon factors beyond HighMount’s control. These factors include, among others, economic and market conditions, domestic production and import levels, storage levels, basis differentials, weather, government regulations and taxation. Lower commodity prices may reduce the amount of natural gas and oil that HighMount can produce economically.
HighMount engages in commodity price hedging activities.
The extent of HighMount’s commodity price risk is related to the effectiveness and scope of HighMount’s hedging activities. To the extent HighMount hedges its commodity price risk, HighMount will forego the benefits it would otherwise experience if commodity prices or interest rates were to changeincreases in its favor. Furthermore, because HighMount has entered into derivative transactions relatedcosts or even to only a portion of its natural gas and oil production, HighMount will continue to have direct commodity price risk on the unhedged portion. HighMount’s actual future production may be significantly higher or lower than HighMount estimates at the time it enters into derivative transactions forcollect rates to maintain its current revenue levels that period.are designed to permit a reasonable opportunity to recover current costs and depreciation and earn a reasonable return.
As a result, HighMount’s hedging activities may not be as effective as HighMount intends in reducing the volatility of its cash flows, and in certain circumstances may actually increase the volatility of cash flows. In addition, even though HighMount’s management monitors its hedging activities, these activities can result in substantial losses. Such losses could occur under various circumstances, including if a counterparty does not perform its obligations under the applicable hedging arrangement or if the hedging arrangement is imperfect or ineffective.
Risks Related to Us and Our Subsidiaries Generally
In addition to the specific risks and uncertainties faced by our subsidiaries, as discussed above, we and all of our subsidiaries face risks and uncertainties related to, among other things, terrorism, hurricanes and other natural disasters, competition, government regulation, dependence on key executives and employees, litigation, dependence on information technology and compliance with environmental laws.
Acts of terrorism could harm us and our subsidiaries.
Future terrorist attacks and the continued threat of terrorism in this country or abroad, as well as possible retaliatory military and other action by the United States and its allies, could have a significant impact on the assets and businesses of certain of our subsidiaries. CNA issues coverages that are exposed to risk of loss from a terrorism act. Terrorist acts or the threat of terrorism, including increased political, economic and financial market instability and volatility in the price of oil and gas, could affect the market for Diamond Offshore’s drilling services and Boardwalk Pipeline’s transportation, gathering and storage services and HighMount’s exploration and production
activities.services. In addition, future terrorist attacks could lead to reductions in business travel and tourism which could harm Loews Hotels. While our subsidiaries take steps that they believe are appropriate to secure their assets, there is no assurance that they can completely secure them against a terrorist attack or obtain adequate insurance coverage for terrorist acts at reasonable rates.
Changes in tax laws of jurisdictions in which we or our subsidiaries operate could adversely impact us.
Changes in federal, state or foreign tax laws applicable to us or our subsidiaries could materially and adversely impact our and our subsidiaries’ tax liability, financial condition, results of operations and cash flows, including the amount of cash our subsidiaries have available to distribute to their shareholders, including us. In particular, potential changes to tax laws governing tax credits or relating to the taxation of interest from municipal bonds, foreign earnings and publicly traded partnerships could have such adverse effects.
Our subsidiaries are subject to extensive federal, state and local governmental regulations.
The businesses operated by our subsidiaries are impacted by current and potential federal, state and local governmental regulations which impose or might impose a variety of restrictions and compliance obligations on those companies. Governmental regulations can also change materially in ways that could adversely affect those companies. Risks faced by our subsidiaries related to governmental regulation include the following:
CNA. The insurance industry is subject to comprehensive and detailed regulation and supervision. Most insurance regulations are designed to protect the interests of CNA’s policyholders and third-party claimants rather than its investors. Each jurisdiction in which CNA does business has established supervisory agencies that regulate its business.business, generally at the state level. Any changes in federal regulation could also impose significant burdens on CNA. In addition, the Lloyd’s marketplace sets rules under which its members, including CNA’s Hardy syndicate, operate.
These rules and regulations includerelate to, among other things, the following:standards of solvency (including risk-based capital measures), government-supported backstops for certain catastrophic events (including terrorism), investment restrictions, accounting and reporting methodology, establishment of reserves and potential assessments of funds to settle covered claims against impaired, insolvent or failed private or quasi-governmental insurers.
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Regulatory powers also extend to premium rate regulations which require that rates not be excessive, inadequate or unfairly discriminatory. CNA may also be required by the jurisdictions in which it does business to provide coverage to persons who would not otherwise be considered eligible.eligible or restrict CNA from withdrawing from unprofitable lines of business or unprofitable market areas. Each jurisdiction dictates the types of insurance and the level of coverage that must be provided to such involuntary risks. CNA’s share of these involuntary risks is mandatory and is generally a function of its respective share of the voluntary market by line of insurance in each jurisdiction.
Diamond Offshore.TheCertain countries are subject to restrictions, sanctions and embargoes imposed by the United States government or other governmental or international authorities. These restrictions, sanctions and embargoes prohibit or limit Diamond Offshore from participating in certain business activities in those countries. Diamond Offshore’s operations are also subject to numerous local, state and federal laws and regulations in the United States and in foreign jurisdictions concerning the containment and disposal of hazardous materials, the remediation of contaminated properties and the protection of the environment.The offshore drilling industry is dependent on demand for services from the oil and gas exploration industry and, accordingly, iscan be affected by changingchanges in tax and other laws relating to the energy business generally. Diamond Offshore may be required to make significant capital expenditures for additional capital equipment or inspections and recertifications to comply with governmental laws and regulations. It is also possible that these laws and regulations may, in the future, add significantly to Diamond Offshore’s operating costs or result in a reduction in revenues associated with downtime required to install such equipment, or may otherwise significantly limit drilling activity.
In addition, Diamond Offshore’s business is negatively impacted when it performs certain regulatory inspections, which Diamond Offshore refers to as a 5-year survey, or special survey, that are due every five years for each of its rigs. These special surveys are generally performed in a shipyard and require scheduled downtime, which can negatively impact operating revenue. Operating expenses increase as a result of these special surveys due to the cost to mobilize the rigs to a shipyard, inspection costs incurred and repair and maintenance costs. Repair and maintenance activities may result from the special survey or may have been previously planned to take place during this mandatory downtime. The number of rigs undergoing a 5-year survey will vary from year to year, as well as from quarter to quarter. Diamond Offshore’s business may also be negatively impacted by intermediate surveys, which are performed at interim periods between 5-year surveys. Intermediate surveys are generally less extensive in duration and scope than a 5-year survey. Although an intermediate survey normally does not require shipyard time, the survey may require some downtime for the rig. Diamond Offshore can provide no assurance as to the exact timing and/or duration of downtime associated with regulatory inspections, planned rig mobilizations and other shipyard projects.
In the aftermath of the 2010 Macondo well blowout in April of 2010 and the subsequent investigation into the causes of the event, new rules have beenwere implemented for oil and gas operations in the GOM and in many of the international locations in which Diamond Offshore operates, including new standards for well design, casing and cementing and well control procedures, equipment inspections and certifications, as well as rules requiring operators to systematically identify risks and establish safeguards against those risks through a comprehensive safety and environmental management system (“SEMS”). New regulations may continue to be announced, including rules regarding drilling systems and equipment, such as blowout preventer and well control systems and lifesaving systems, as well as rules regarding employee training, engaging personnel in safety management and requiring third party audits of SEMS programs. Such new regulations could require modifications or enhancements to existing systems and equipment, or require new equipment, and could increase Diamond Offshore’s operating costs and cause downtime for its rigs if it is required to take any of them out of service between scheduled surveys or inspections, or if it is required to extend scheduled surveys or inspections, to meet any such new requirements. Diamond Offshore is not able to predict the likelihood, nature or extent of additional rulemaking, nor is it able to predict the future impact of these events on operations. Additional governmental regulations concerning licensing, taxation, equipment specifications, training requirements or other matters could increase the costs of Diamond Offshore’s operations, and enhanced permitting requirements, as well as escalating costs borne by its customers, could reduce exploration activity in the GOM and therefore demand for its services.
Governments in some countries are increasingly active in regulating and controlling the ownership of concessions, the exploration for oil and gas and other aspects of the oil and gas industry. The modification of existing laws or regulations or the adoption of new laws or regulations curtailing exploratory or developmental drilling for oil and gas for economic, environmental or other reasons could materially and adversely affect Diamond Offshore’s operations by limiting drilling opportunities.
Boardwalk Pipeline. Boardwalk Pipeline’s natural gas transportation and storage operations are subject to extensive regulation by FERC and PHMSA of the DOT among other federal and state authorities. In addition to FERC rules and regulations related to the rates Boardwalk Pipeline can charge for its services, federal regulations extend to pipeline safety, operating terms and conditions of service, the types of services Boardwalk Pipeline may offer, construction or abandonment of facilities, accounting and record keeping, and relationships and transactions
with affiliated companies. These regulations can adversely impact Boardwalk Pipeline’s ability to compete for business, construct new facilities, including by increasing the lead times to develop projects, offer new services, or recover the full cost of operating its pipelines.
HighMount. All of HighMount’s operations are conducted onshore in the United States. The U.S. oil and gas industry, and HighMount’s operations, are subject to regulation at the federal, state and local level. Such regulation includes requirements with respect to, among other things: permits to drill and to conduct other operations; provision of financial assurances (such as bonds) covering drilling and well operations; the location of wells; the method of drilling and completing wells; the surface use and restoration of properties upon which wells are drilled; the plugging and abandoning of wells; the marketing, transportation and reporting of production; the valuation and payment of royalties; the size of drilling and spacing units (regarding the density of wells which may be drilled in a particular area); the unitization or pooling of natural gas and oil properties; maximum rates of production from natural gas and oil wells; venting or flaring of natural gas; and the ratability of production and the operation of gathering systems and related assets. Changes in these regulations, which HighMount cannot predict, could be harmful to HighMount’s business and results of operations.
Hydraulic fracturing is a technique commonly used by oil and gas exploration companies, including HighMount, to stimulate the production of oil and natural gas by injecting fluids and sand into underground wells at high pressures, causing fractures or fissures in the geological formation which allow oil and gas to flow more freely. In recent years, concerns have been raised that the fracturing process and disposal of drilling fluids may contaminate underground sources of drinking water. The conference committee report for The Department of the Interior, Environment, and Related Agencies Appropriations Act for Fiscal Year 2010 requested the EPA to conduct a study of hydraulic fracturing, particularly the relationship between hydraulic fracturing and drinking water. In December of 2012 the EPA issued a progress report of the projects the EPA is conducting as part of the study. A final draft report is expected to be released for public comment and peer review in 2014. Several bills were introduced in the 111th and 112th Congresses seeking federal regulation of hydraulic fracturing, which has historically been regulated at the state level, though none of the proposed legislation was passed into law. Similar bills may be introduced in the
current Congress and a number of federal agencies are analyzing, or have been requested to review, a variety of environmental issues associated with hydraulic fracturing. If hydraulic fracturing is banned or significantly restricted by federal regulation or otherwise, it could impair HighMount’s ability to economically drill new wells, which would reduce its production, revenues and profitability.
HighMount owns and operates gas gathering lines and related facilities which are regulated by the DOT and state agencies with respect to safety and operating conditions. PHMSA has established minimum federal safety standards for certain gas gathering lines. PHMSA has indicated that changes to the current regulatory framework are needed to address gas exploration and production activities. If implemented, the new changes could impact HighMount’s ability to transport some of its natural gas or cause HighMount to incur additional costs.
Our subsidiaries face significant risks related to compliance with environmental laws.
Our subsidiaries have extensive obligations and financial exposure related to compliance with federal, state and local environmental laws, many of which have become increasingly stringent in recent years and may in some cases impose strict liability, which could be substantial, rendering a person liable for environmental damage without regard to negligence or fault on the part of that person. For example, Diamond Offshore could be liable for damages and costs incurred in connection with oil spills related to its operations, including for conduct of or conditions caused by others. HighMount is subject to extensive environmental regulation in the conduct of its business, particularly related to the handling and disposal of drilling and production waste products, water and air pollution control procedures, and the remediation of petroleum-product contamination. Boardwalk Pipeline is also subject to laws and regulations, including requiring the acquisition of permits or other approvals to conduct regulated activities, restricting the manner in which it disposes of waste, requiring remedial action to remove or mitigate contamination andresulting from a spill or other release, requiring capital expenditures to comply with pollution control requirements.
We and our subsidiaries are subject to physical and financial risks associated with climate change.
As awarenessThe U.S. Congress and the Environmental Protection Agency (“EPA”) as well as some states and regional groupings of climate change issues increases, governments around the world are beginning to address the matter. This may result in new environmental regulations that may unfavorably impact us, our subsidiaries and their suppliers and customers. We and our subsidiaries may be exposed to risks related to new laws or regulations pertaining to climate change, carbon emissions or energy use that could decrease the use of oil or natural gas, thus reducing demand for hydrocarbon-based fuel and related services provided by our energy subsidiaries. Governments also may pass laws or regulations encouraging or mandating the use of alternative energy sources, such as wind power and solar energy, which may reduce demand for oil and natural gas. In addition, changing global weather patternsstates have been associated with extreme weather events and could change longer-term natural catastrophe trends, including increasing the frequency and severity of hurricanes and other natural disasters which could increase future catastrophe losses at CNA and damage to property, disruption of business and higher operating costs at Diamond Offshore, Boardwalk Pipeline, HighMount and Loews Hotels.
There is currently no federal regulation that limits GHG emissions in the U.S. However, several bills were introduced in Congress in recent years that would regulate U.S. GHGconsidered legislation or regulations to reduce emissions under a cap and trade system. Although these bills were not passed into law, some regulation of that type may be enacted inGreenhouse Gas (“GHG”). In the U.S. in the near future. In addition, in 2009absence of federal GHG-limiting legislation, the EPA had adopted regulationsrules under authority of the Clean Air Act that, among other things, establish Potential for Significant Deterioration (“PSD”) construction and Title V operating permit reviews for GHG emissions from certain large stationary sources that are also potential major sources of certain principal, or criteria, pollutant emissions, which reviews could require securing PSD permits at covered facilities emitting GHGs and meeting “best available control technology” standards for those GHG emissions. In addition, the EPA has adopted rules requiring the monitoring and annual reporting of annual GHG emissions from certain petroleum and natural gas system sources in the U.S., including, among others, onshore processing, transmission, storage and distribution facilities. In October 2015, the EPA published a final reporting rule for certain onshore gathering and boosting systems consisting primarily of gathering pipelines, compressors and process equipment used to perform natural gas compression, dehydration and acid gas removal.
Moreover, the EPA proposed in August 2015 rules that will establish emission standards for methane and volatile organic compounds released from new and modified oil and natural gas production and natural gas processing and transmissions facilities, as part of the current U.S. President administration’s efforts to reduce methane emissions from the oil and natural gas sector by operatorsup to 45 percent from 2012 levels by 2025. The EPA is expected to finalize those rules in 2016. Furthermore, the EPA has passed a rule, known as the Clean Power Plan, to limit GHGs from power plants, but on February 9, 2016, the U.S. Supreme Court stayed this rule while it is being challenged in the federal D.C. Circuit Court of facilitiesAppeals. If this rule survives legal challenge, then depending on the methods used to implement this rule, it could reduce demand for the oil and natural gas that emit more than 25,000 metric tons of GHG per year, which includes Boardwalk Pipeline and HighMount. Numerous states and several regional multi-state climate initiatives have announcedPipeline’s customers produce. Although it is not possible at this time to predict how legislation or regulations that may be adopted plans to regulateaddress GHG emissions though the state programs vary widely. The establishmentwould impact businesses of a GHG reporting system and registry may be a first step toward broader regulation of GHG emissions. Compliance withour energy subsidiaries, any such future laws and regulations could impose significantresult in increased compliance costs on affected companies or adversely affect the demand foradditional operating restrictions, and the cost to produce and transport hydrocarbon-based fuel, which would adversely affectcould have a material adverse effect on the businesses of our energy subsidiaries.
Any significant interruption in the operation of critical computerour facilities, systems and business functions or breach in our data security infrastructure could result in a materially disruptadverse effect on our operations.
We and our subsidiaries have become more reliant on technology to help increase efficiency in our businesses. We are dependent upon operational and financial computer systems to process the data necessary to conduct almost all aspects of our businesses. Any failure of our or our subsidiaries’ computer systems, or those of our or their customers, vendors or others with whom we and they do business, could materially disrupt business operations. Computer and other business facilities and systems could become unavailable or impaired from a variety of causes, including among others, storms and other natural disasters, terrorist attacks, utility outages or complications encountered as existing systems are replaced or upgraded. In addition, it has been reported that unknown entities or groups have mounted so-called “cyber attacks” on businesses and other organizations solely to disable or disrupt
computer systems, disrupt operations and, in some cases, steal data. Any cyber attacks that affect our or our subsidiaries’ facilities could have a material adverse effect on our and their business or reputation.
A significant breach of our data security infrastructure, resulting from actions by our employees, vendors, third party administrators or by unknown third parties, that impacts our data framework or causes a failure to protect personal information of customers or employees may result in operational impairments and financial losses, as well as significant harm to our reputation.
The foregoing risks relating to disruption of service, interruption of operations and data loss could expose us to monetary and reputational damages. In addition, potential exposure includes substantially increased compliance costs and requires computer system upgrades and security related investments. The breach of confidential information also could give rise to legal liability and regulatory action under data protection and privacy laws and regulations, both in the U.S. and foreign jurisdictions. Any such legal or regulatory action could have a material adverse effect on our operations.
Loss of key vendor relationships or failureissues relating to the transitioning of a vendor to protect personal informationrelationships could result in a materially adverse effect on our and our subsidiaries’ operations.
We and our subsidiaries rely on services and products provided by many vendors in the United States and abroad. These include, for example, vendors of computer hardware, software and services, as well as other critical materials and services. If one or more key vendors becomes unable to continue to provide products or services at the requisite level, or fails to protect our proprietary information, including in some cases personal information of employees, customers or hotel guests, we and our subsidiaries may experience a material adverse effect on our or their business or reputation.
We could incur impairment charges related to the carrying value of the long-lived assets and goodwill of our subsidiaries.
Our subsidiaries regularly evaluate their long-lived assets and goodwill for impairment whenever events or changes in circumstances indicate the carrying value of these assets may not be recoverable. Most notably, we could incur impairment charges related to the carrying value of offshore drilling equipment at Diamond Offshore, natural gaspipeline and oil properties at HighMount, pipeline equipmentstorage assets at Boardwalk Pipeline and hotel properties owned by Loews Hotels.
In particular, Diamond Offshore is currently experiencing declining demand for certain offshore drilling rigs as a result of excess rig supply in the industry due, in part, to the numerous newly constructed rigs that have or will enter the market. As a result, these rigs will negatively impact utilization which could result in Diamond Offshore incurring additional asset impairments, rig retirements and/or rigs being scrapped.
We test goodwill for impairment on an annual basis or when events or changes in circumstances indicate that a potential impairment exists. The goodwill impairment test requires us to identify reporting units and estimate each unit’s fair value as of the testing date. We calculate the fair value of our reporting units (each of our principal operating subsidiaries) based on estimates of future discounted cash flows, which reflect management’s judgments and assumptions regarding the appropriate risk-adjusted discount rate, future industry conditions and operations and other factors. Asset impairment evaluations are, by nature, highly subjective. The use of different estimates and assumptions could result in materially different carrying values of our assets which could impact the need to record an impairment charge and the amount of any charge taken.
We are a holding company and derive substantially all of our income and cash flow from our subsidiaries.
We rely upon our invested cash balances and distributions from our subsidiaries to generate the funds necessary to meet our obligations and to declare and pay any dividends to holders of our common stock. Our subsidiaries are separate and independent legal entities and have no obligation, contingent or otherwise, to make funds available to us, whether in the form of loans, dividends or otherwise. The ability of our subsidiaries to pay dividends to us is also subject to, among other things, the availability of sufficient earnings and funds in such subsidiaries, applicable state laws, including in the case of the insurance subsidiaries of CNA, laws and rules governing the payment of dividends by regulated insurance companies, and their compliance with covenants in their respective loan agreements. Claims
of creditors of our subsidiaries will generally have priority as to the assets of such subsidiaries over our claims and our creditors and shareholders.
We could have liability in the future for tobacco-related lawsuits.
As a result of our ownership of Lorillard, Inc. (“Lorillard”) prior to the separation of Lorillard from us in 2008 (the “Separation”), from time to time we have been named as a defendant in tobacco-related lawsuits and could be named as a defendant in additional tobacco-related suits, notwithstanding the completion of the Separation. In the Separation Agreement entered into between us and Lorillard and its subsidiaries in connection with the Separation, Lorillard and each of its subsidiaries has agreed to indemnify us for liabilities related to Lorillard’s tobacco business, including liabilities that we may incur for current and future tobacco-related litigation against us. An adverse decision in a tobacco-related lawsuit against us could, if the indemnification is deemed for any reason to be unenforceable or any amounts owed to us thereunder are not collectible, in whole or in part, have a material adverse effect on our financial condition, results of operations and equity. We do not expect that the Separation will alter the legal exposure of either entity with respect to tobacco-related claims. We do not believe that we have any liability for tobacco-related claims, and we have never been held liable for any such claims.
Item 1B. Unresolved Staff Comments.
None.
Our corporate headquarters is located in approximately 136,000 square feet of leased office space in New York City. Information relating to our subsidiaries’ properties is contained under Item 1.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Price Range of Common Stock
Our common stock is listed on the New York Stock Exchange under the symbol “L.” The following table sets forth the reported high and low sales prices in each calendar quarter:
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First Quarter | $ 40.16 | $ 37.02 | $ 45.31 | $ 39.06 | $ | 42.78 | $ | 38.01 | $ | 48.15 | $ | 42.63 | ||||||||||||||||||||||||||
Second Quarter | 41.80 | 38.14 | 44.46 | 39.99 | 42.59 | 38.14 | 45.43 | 42.29 | ||||||||||||||||||||||||||||||
Third Quarter | 42.86 | 39.04 | 42.64 | 33.79 | 39.21 | 35.21 | 44.59 | 41.57 | ||||||||||||||||||||||||||||||
Fourth Quarter | 43.36 | 39.57 | 41.66 | 32.90 | 38.88 | 34.40 | 43.77 | 39.04 |
The following graph compares annual total return of our Common Stock, the Standard & Poor’s 500 Composite Stock Index (“S&P 500 Index”) and our Peer Group (“Loews Peer Group”) for the five years ended December 31, 2012.2015. The graph assumes that the value of the investment in our Common Stock, the S&P 500 Index and the Loews Peer Group was $100 on December 31, 20072010 and that all dividends were reinvested.
2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | |||||||||||||||||||||||||
Loews Common Stock | 100.00 | 56.48 | 73.34 | 79.06 | 76.98 | 83.84 | 100.0 | 97.37 | 106.04 | 126.23 | 110.59 | 101.72 | ||||||||||||||||||||||||
S&P 500 Index | 100.00 | 63.00 | 79.67 | 91.68 | 93.61 | 108.59 | 100.0 | 102.11 | 118.45 | 156.82 | 178.29 | 180.75 | ||||||||||||||||||||||||
Loews Peer Group (a) | 100.00 | 60.93 | 78.15 | 86.97 | 91.66 | 104.06 | 100.0 | 101.59 | 115.19 | 145.12 | 152.84 | 144.70 |
(a) | The Loews Peer Group consists of the following companies that are industry competitors of our principal operating subsidiaries: Ace Limited, W.R. Berkley Corporation, |
Dividend Information
We have paid quarterly cash dividends on Loews common stock in each year since 1967. Regular dividends of $0.0625 per share of Loews common stock were paid in each calendar quarter of 20122015 and 2011.2014.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides certain information as of December 31, 20122015 with respect to our equity compensation plans under which our equity securities are authorized for issuance.
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issued upon exercise | Weighted average | equity compensation | |||||||||||||||||||||||||
of outstanding | exercise price of | plans (excluding | |||||||||||||||||||||||||
options, warrants | outstanding options, | securities reflected | |||||||||||||||||||||||||
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column) | and rights | warrants and rights | in the first column) | |||||||||||||||||||||
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Equity compensation plans approved by security holders (a) | 6,535,150 | $ | 36.96 | 7,129,900 | 7,361,358 | $ | 40.30 | 5,357,709 | |||||||||||||||||||
Equity compensation plans not approved by security | N/A | N/A | N/A | N/A | N/A | N/A |
(a) | Reflects stock options and stock appreciation rights awarded under the Loews Corporation 2000 Stock Option Plan. |
(b) | We do not have equity compensation plans that have not been approved by our shareholders. |
Approximate Number of Equity Security Holders
We have approximately 1,1701,000 holders of record of our common stock.
Common Stock Repurchases
We repurchasedDuring the fourth quarter of 2015, we purchased shares of our common stock in 2012 as follows:
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January 1, 2012 – March 31, 2012 | 2,500 | $38.42 | ||||
April 1, 2012 – June 30, 2012 | 1,302,700 | 38.99 | ||||
July 1, 2012 – September 30, 2012 | 2,187,630 | 40.11 | ||||
October 1, 2012 – December 31, 2012 | 2,060,000 | 40.60 |
Period | (a) Total number of shares purchased | (b) Average price paid per share | (c) Total number of part of publicly | (d) Maximum number of shares (or approximate dollar value) of shares that may yet be purchased under the plans or programs (in millions) | ||||||||||||||||
October 1, 2015 - October 31, 2015 | 3,300,000 | $ | 36.34 | N/A | N/A | |||||||||||||||
November 1, 2015 - November 30, 2015 | 11,424,830 | $ | 37.29 | N/A | N/A | |||||||||||||||
December 1, 2015 - December 31, 2015 | 2,282,082 | $ | 37.57 | N/A | N/A |
Item 6. Selected Financial Data.
The following table presents selected financial data. The table should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data of this Form 10-K.
Year Ended December 31 | 2012 | 2011 | 2010 | 2009 | 2008 | 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||
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Results of Operations: | ||||||||||||||||||||||||||||||||||||||||
Revenues | $ | 14,552 | $ | 14,129 | $ | 14,615 | $ | 14,117 | $ | 13,247 | $ | 13,415 | $ | 14,325 | $ | 14,613 | $ | 14,072 | $ | 13,591 | ||||||||||||||||||||
Income before income tax | $ | 1,399 | $ | 2,226 | $ | 2,902 | $ | 1,728 | $ | 594 | $ | 244 | $ | 1,810 | $ | 2,277 | $ | 2,022 | $ | 2,327 | ||||||||||||||||||||
Income from continuing operations | $ | 1,110 | $ | 1,694 | $ | 2,008 | $ | 1,384 | $ | 585 | $ | 287 | $ | 1,353 | $ | 1,621 | $ | 1,509 | $ | 1,764 | ||||||||||||||||||||
Discontinued operations, net | (20 | ) | (2 | ) | 4,713 | (391 | ) | (552 | ) | (399 | ) | (70) | ||||||||||||||||||||||||||||
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Net income | 1,110 | 1,694 | 1,988 | 1,382 | 5,298 | 287 | 962 | 1,069 | 1,110 | 1,694 | ||||||||||||||||||||||||||||||
Amounts attributable to noncontrolling interests | (542 | ) | (632 | ) | (699 | ) | (819 | ) | (763) | (27 | ) | (371 | ) | (474 | ) | (542 | ) | (632) | ||||||||||||||||||||||
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Net income attributable to Loews Corporation | $ | 568 | $ | 1,062 | $ | 1,289 | $ | 563 | $ | 4,535 | $ | 260 | $ | 591 | $ | 595 | $ | 568 | $ | 1,062 | ||||||||||||||||||||
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Loews common stock: | ||||||||||||||||||||||||||||||||||||||||
Income (loss) from continuing operations | $ | 568 | $ | 1,062 | $ | 1,308 | $ | 565 | $ | (177) | ||||||||||||||||||||||||||||||
Discontinued operations, net | (19 | ) | (2 | ) | 4,501 | |||||||||||||||||||||||||||||||||||
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Loews common stock | 568 | 1,062 | 1,289 | 563 | 4,324 | |||||||||||||||||||||||||||||||||||
Former Carolina Group stock: | ||||||||||||||||||||||||||||||||||||||||
Net income attributable to Loews Corporation: | ||||||||||||||||||||||||||||||||||||||||
Income from continuing operations | $ | 260 | $ | 962 | $ | 1,149 | $ | 968 | $ | 1,121 | ||||||||||||||||||||||||||||||
Discontinued operations, net | 211 | (371 | ) | (554 | ) | (400 | ) | (59) | ||||||||||||||||||||||||||||||||
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Net income | $ | 568 | $ | 1,062 | $ | 1,289 | $ | 563 | $ | 4,535 | $ | 260 | $ | 591 | $ | 595 | $ | 568 | $ | 1,062 | ||||||||||||||||||||
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Loews common stock: | ||||||||||||||||||||||||||||||||||||||||
Income (loss) from continuing operations | $ | 1.43 | $ | 2.62 | $ | 3.11 | $ | 1.31 | $ | (0.37) | ||||||||||||||||||||||||||||||
Diluted Net Income Per Share: | ||||||||||||||||||||||||||||||||||||||||
Income from continuing operations | $ | 0.72 | $ | 2.52 | $ | 2.95 | $ | 2.44 | $ | 2.77 | ||||||||||||||||||||||||||||||
Discontinued operations, net | (0.04 | ) | (0.01 | ) | 9.43 | (0.97 | ) | (1.42 | ) | (1.01 | ) | (0.15) | ||||||||||||||||||||||||||||
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Net income | $ | 1.43 | $ | 2.62 | $ | 3.07 | $ | 1.30 | $ | 9.06 | $ | 0.72 | $ | 1.55 | $ | 1.53 | $ | 1.43 | $ | 2.62 | ||||||||||||||||||||
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Former Carolina Group stock: | ||||||||||||||||||||||||||||||||||||||||
Discontinued operations, net | $ | - | $ | - | $ | - | $ | - | $ | 1.95 | ||||||||||||||||||||||||||||||
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Financial Position: | ||||||||||||||||||||||||||||||||||||||||
Investments | $ | 53,048 | $ | 49,028 | $ | 48,907 | $ | 46,034 | $ | 38,450 | $ | 49,400 | $ | 52,032 | $ | 52,945 | $ | 53,040 | $ | 48,943 | ||||||||||||||||||||
Total assets | 80,021 | 75,268 | 76,198 | 73,990 | 69,791 | 76,029 | 78,367 | 79,939 | 80,021 | 75,268 | ||||||||||||||||||||||||||||||
Debt | 9,210 | 9,001 | 9,477 | 9,485 | 8,258 | 10,583 | 10,668 | 10,344 | 8,500 | 8,301 | ||||||||||||||||||||||||||||||
Shareholders’ equity | 19,459 | 18,772 | 18,386 | 16,833 | 13,068 | 17,561 | 19,280 | 19,458 | 19,459 | 18,772 | ||||||||||||||||||||||||||||||
Cash dividends per share: | ||||||||||||||||||||||||||||||||||||||||
Loews common stock | 0.25 | 0.25 | 0.25 | 0.25 | 0.25 | |||||||||||||||||||||||||||||||||||
Former Carolina Group stock | - | - | - | - | 0.91 | |||||||||||||||||||||||||||||||||||
Book value per share of Loews common stock | 49.67 | 47.33 | 44.35 | 39.60 | 30.04 | |||||||||||||||||||||||||||||||||||
Shares outstanding of Loews common stock | 391.81 | 396.59 | 414.55 | 425.07 | 435.09 | |||||||||||||||||||||||||||||||||||
Cash dividends per share | 0.25 | 0.25 | 0.25 | 0.25 | 0.25 | |||||||||||||||||||||||||||||||||||
Book value per share | 51.67 | 51.70 | 50.25 | 49.67 | 47.33 | |||||||||||||||||||||||||||||||||||
Shares outstanding | 339.90 | 372.93 | 387.21 | 391.81 | 396.59 |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s discussion and analysis of financial condition and results of operations is comprised of the following sections:
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Diamond Offshore | 81 | |
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We are a holding company. Our subsidiaries are engaged in the following lines of business:
commercial property and casualty insurance (CNA Financial Corporation (“CNA”), a 90% owned subsidiary); |
operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (“Diamond Offshore”), a |
transportation and storage of natural gas and natural gas liquids and gathering and processing of natural gas (Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”), a |
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operation of a chain of hotels (Loews Hotels Holding Corporation (“Loews Hotels”), a wholly owned subsidiary). |
See below for a discussion of discontinued operations.
Unless the context otherwise requires, references in this Report to “Loews Corporation,” “the Company,” “Parent Company,” “we,” “our,” “us” or like terms refer to the business of Loews Corporation excluding its subsidiaries.
The following discussion should be read in conjunction with Item 1A, Risk Factors, and Item 8, Financial Statements and Supplementary Data of this Form 10-K.
Consolidated Financial Results
Consolidated net income for the year ended December 31, 20122015 was $568$260 million, or $1.43$0.72 per share, compared to $1.1 billion,$591 million, or $2.62$1.55 per share, in 2011.2014. Net income in 2012 includes catastrophe losses2014 included discontinued operations reflecting the sale of $243HighMount Exploration & Production, LLC (“HighMount”) and CNA’s former life insurance subsidiary.
Income from continuing operations for 2015 was $260 million, or $0.72 per share, compared to $962 million, or $2.52 per share, in 2014. The decline in income from continuing operations was primarily due to a reserve charge at CNA and asset impairment charges at Diamond Offshore. In addition, parent company investment income declined as a result of lower performance of equity securities in the trading portfolio and decreased results from limited partnership investments.
CNA’s earnings decreased primarily due to a reserve charge of $177 million (after tax and noncontrolling interests) at CNA primarilyresulting from the unlocking of actuarial assumptions related to Storm Sandyfuture policy benefit reserves for the long term care business. Excluding this charge, CNA’s earnings declined year-over-year primarily due to lower limited partnership results and aftera $38 million charge (after tax ceiling testand noncontrolling interests) related to a retroactive reinsurance agreement to cede its legacy asbestos and environmental pollution liabilities. This earnings decline was partially offset by improved underwriting results driven by higher favorable net prior year development.
Diamond Offshore’s results for 2015 include asset impairment charges of $433totaling $341 million at HighMount(after tax and noncontrolling interests) related to the carrying value of its17 drilling rigs, as well as lower rig utilization. In addition, earnings were impacted by a $20 million impairment charge to write off all goodwill associated with the Company’s investment in Diamond Offshore as well as increased depreciation and interest expense. In 2014, Diamond Offshore recognized an asset impairment charge of $55 million (after tax and noncontrolling interests).
Boardwalk Pipeline’s earnings increase primarily stemmed from the impact of a $55 million charge (after tax and noncontrolling interests) in 2014 related to the write off of all capitalized costs associated with the terminated Bluegrass project. Absent this charge, earnings were largely consistent with the prior year as additional revenues from the settlement of the Gulf South rate case and a franchise tax refund related to settlement of prior tax periods were offset by lower natural gas storage revenues and oil properties reflecting declines in natural gasincreased depreciation and NGL prices. Lower results at Diamond Offshore also contributedinterest costs.
Loews Hotels’ earnings increased slightly as compared to the reduction in netprior year as higher income from Universal Orlando joint venture properties was partially offset by higher earnings at Boardwalk Pipelineinterest expense and increased tax expense due to an adjustment for prior years’ estimates and higher parent company investmentFlorida state income as a result of improved performance of equity investments.
CNA’s earnings declined due to higher catastrophe losses related to Storm Sandytaxes, reflecting increased profits at the Universal Orlando and a lower level of favorable net prior year development in 2012 than in 2011, partially offset by increased investment income. Increased investment income reflects improved performance of limited partnership investments.
Diamond Offshore earnings decreased as a result of lower rig utilization and a decrease in average dayrate partially offset by lower interest expense.
Boardwalk Pipeline’s earnings increased primarily due to the contributions from recent acquisitions, lower general and administrative expenses as well as lower impairment charges in 2012.Miami properties.
Book value per share increaseddecreased to $49.67$51.67 at December 31, 20122015 from $47.33$51.70 at December 31, 2011.2014. Book value per share excluding Accumulated other comprehensive income (“AOCI”) increased to $52.72 at December 31, 2015 from $50.95 at December 31, 2014.
We are a holding company and derive substantially all of our cash flow from our subsidiaries. We rely upon our invested cash balances and distributions from our subsidiaries to generate the funds necessary to meet our obligations and to declare and pay any dividends to our shareholders. The ability of our subsidiaries to pay dividends is subject to, among other things, the availability of sufficient earnings and funds in such subsidiaries, applicable state laws, including in the case of the insurance subsidiaries of CNA, laws and rules governing the payment of dividends by regulated insurance companies (see Note 13 of the Notes to Consolidated Financial Statements included under Item 8) and compliance with covenants in their respective loan agreements. Claims of creditors of
our subsidiaries will generally have priority as to the assets of such subsidiaries over our claims and those of our creditors and shareholders.
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and the related notes. Actual results could differ from those estimates.
The Consolidated Financial Statements and accompanying notes have been prepared in accordance with GAAP, applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the Consolidated Financial Statements. In general, our estimates are based on historical experience, evaluation of current trends, information from third party professionals and various other assumptions that we believe are reasonable under the known facts and circumstances.
We consider the accounting policies discussed below to be critical to an understanding of our Consolidated Financial Statements as their application places the most significant demands on our judgment. Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from estimates, which may have a material adverse impact on our results of operations and/or equity.
Insurance Reserves
Insurance reserves are established for both short and long-duration insurance contracts. Short-duration contracts are primarily related to property and casualty insurance policies where the reserving process is based on actuarial estimates of the amount of loss, including amounts for known and unknown claims. Long-duration contracts includeare primarily related to long term care products and payout annuity contracts and are estimated using actuarial estimates about mortality, morbidity and persistency as well as assumptions about expected investment returns.returns and future premium rate increases. The reserve for unearned premiums on property and casualty contracts represents the portion of premiums written related to the unexpired terms of coverage. The reserving process is discussed in further detail in the Reserves – Estimates and Uncertainties section below.
Reinsurance and Other Receivables
An exposure exists with respect to the collectibility of ceded property and casualty and life reinsurance to the extent that any reinsurer is unable to meet its obligations or disputes the liabilities CNA has ceded under reinsurance agreements. An allowance for doubtful accounts on reinsurance receivables is recorded on the basis of periodic evaluations of balances due from reinsurers, reinsurer solvency, CNA’s past experience and current economic
conditions. Further information on CNA’s reinsurance receivables is included in Note 1615 of the Notes to Consolidated Financial Statements included under Item 8.
Additionally, an exposure exists with respect to the collectibility of amounts due from customers on other receivables. An allowance for doubtful accounts is recorded on the basis of periodic evaluations of balances currently due currently oras well as in the future, management’s experience and current economic conditions.
If actual experience differs from the estimates made by management in determining the allowances for doubtful accounts on reinsurance and other receivables, net receivables as reflected on our Consolidated Balance Sheets may not be collected. Therefore, our results of operations and/or equity could be materially adversely impacted.affected.
Litigation
We and our subsidiaries are involved in various legal proceedings that have arisen during the ordinary course of business. We evaluate the facts and circumstances of each situation, and when management determines it necessary, a liability is estimated and recorded. Please read Note 18 of the Notes to Consolidated Financial Statements included under Item 8.
Valuation of Investments and Impairment of Securities
We classify fixed maturity securities and equity securities as either available-for-sale or trading which are both carried at fair value. Fair value represents the price that would be received in a sale of an asset in an orderly transaction between market participants on the measurement date, the determination of which requires us to make a significant number of assumptions and judgments. Securities with the greatest level of subjectivity around valuation are those that rely on inputs that are significant to the estimated fair value and that are not observable in the market or cannot be derived principally from or corroborated by observable market data. These unobservable inputs are based on assumptions consistent with what we believe other market participants would use to price such securities. Further information on fair value measurements is included in Note 4 of the Notes to Consolidated Financial Statements included under Item 8.
CNA’s investment portfolio is subject to market declines below amortized cost that may be other-than-temporary and therefore result in the recognition of impairment losses in earnings. Factors considered in the determination of whether or not a decline is other-than-temporary include a current intention or need to sell the security or an indication that a credit loss exists. Significant judgment exists regarding the evaluation of the financial condition and expected near-term and long term prospects of the issuer, the relevant industry conditions and trends, and whether CNA expects to receive cash flows sufficient to recover the entire amortized cost basis of the security. CNA has an Impairment Committee which reviews the investment portfolio on at least a quarterly basis, with ongoing analysis as new information becomes available. Further information on CNA’s process for evaluating impairments is included in Note 31 of the Notes to Consolidated Financial Statements included under Item 8.
Long Term Care Products and Payout Annuity ContractsPolicies
Future policy benefit reserves for CNA’s long term care products and payout annuity contractspolicies are based on certain assumptions including morbidity, mortality, policy persistency, and discount rates which are impacted by expected investment yields.and future premium rate increases. The adequacy of the reserves areis contingent on actual experience related to these key assumptions, which were generally established at time of issue.assumptions. If actual experience differs from these assumptions, the reserves may not be adequate, requiring CNA to add to reserves. Therefore,
A prolonged period during which interest rates remain at levels lower than those anticipated in CNA’s reserving discount rate assumption could result in shortfalls in investment income on assets supporting CNA’s obligations under long term care policies, which may also require an increase to CNA’s reserves. In addition, CNA may not receive regulatory approval for the premium rate increases it requests.
These changes to CNA’s reserves could materially adversely impact our results of operations and/or equity could be adversely impacted.and equity. The reserving process is discussed in further detail in the Reserves – Estimates and Uncertainties section below.
Pension and Postretirement Benefit Obligations
We make a significant number of assumptions in order to estimate the liabilities and costs related to our pension and postretirement benefit obligations under our benefit plans. The assumptions that have the most impact on pension costs are the discount rate and the expected long term rate of return on plan assets. These assumptions are evaluated relative to current market factors such as inflation, interest rates and fiscal and monetary policies.broader capital market expectations. Changes in these assumptions can have a material impact on pension obligations and pension expense.
In determining the discount rate assumption, we utilized current market information and liability information, including a discounted cash flow analysis of our pension and postretirement obligations. In particular, the basis for our discount rate selection was the yield on indices of highly rated fixed income debt securities with durations comparable to that of our plan liabilities. The yield curve was applied to expected future retirement plan payments to adjust the discount rate to reflect the cash flow characteristics of the plans. The yield curves and indices evaluated in the selection of the discount rate are comprised of high quality corporate bonds that are rated AA by an accepted rating agency.
In determining the expected long term rate of return on plan assets assumption, we considered the historical performance of the investment portfolio as well as the long term market return expectations based on the investment mix of the portfolio and the expected investment horizon.
Further information on our pension and postretirement benefit obligations is included in Note 1514 of the Notes to Consolidated Financial Statements included under Item 8.
Valuation of HighMount’s Proved Reserves
HighMount follows the full cost method of accounting for natural gas and oil exploration and production activities. Under the full cost method, all direct costs of property acquisition, exploration and development activities are capitalized and subsequently depleted using the units-of-production method. The depletable base of costs includes estimated future costs to be incurred in developing proved natural gas and oil reserves, as well as
capitalized asset retirement costs, net of projected salvage values. Capitalized costs in the depletable base are subject to a ceiling test. The test limits capitalized amounts to a ceiling, the present value of estimated future net revenues to be derived from the production of proved natural gas and oil reserves, using calculated average prices adjusted for any cash flow hedges in place. If net capitalized costs exceed the ceiling test at the end of any quarterly period, then a write-down of the assets must be recognized in that period. A write-down may not be reversed in future periods, even though higher natural gas and oil prices may subsequently increase the ceiling. For the year ended December 31, 2012, HighMount recognized non-cash impairment charges of $680 million ($433 million after tax) related to the carrying value of natural gas and oil properties, as discussed further in Note 7 of the Notes to Consolidated Financial Statements included under Item 8. In addition, gains or losses on the sale or other disposition of natural gas and oil properties are not recognized unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves.
HighMount’s estimate of proved reserves requires a high degree of judgment and is dependent on factors such as historical data, engineering estimates of proved reserve quantities, estimates of the amount and timing of future expenditures to develop the proved reserves, and estimates of future production from the proved reserves. HighMount’s estimated proved reserves are based upon studies for each of its properties prepared by HighMount staff engineers. Calculations were prepared using standard geological and engineering methods generally accepted by the petroleum industry and in accordance with SEC guidelines. Determination of proved reserves is based on, among other things, (i) a pricing mechanism for oil and gas reserves which uses an average 12-month price; (ii) a limitation on the classification of reserves as proved undeveloped to locations scheduled to be drilled within five years; and (iii) a 10% discount factor used in calculating discounted future net cash flows.
The process to estimate reserves is imprecise, and estimates are subject to revision. If there is a significant variance in any of HighMount’s estimates or assumptions in the future and revisions to the value of HighMount’s proved reserves are necessary, related depletion expense and the calculation of the ceiling test would be affected and recognition of natural gas and oil property impairments could occur. Given the volatility of natural gas and oil prices, it is possible that HighMount’s estimate of discounted future net cash flows from proved natural gas and oil reserves that is used to calculate the ceiling could materially change in the near term.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company uses a probability-weighted cash flow analysis to test property and equipment for impairment based on relevant market data. If an asset is determined to be impaired, a loss is recognized to reduce the carrying amount to the fair value of the asset. Management’s cash flow assumptions are an inherent part of our asset impairment evaluation and the use of different assumptions could produce results that differ from the reported amounts.
Goodwill
Goodwill is required to be evaluated on an annual basis and whenever, in management’s judgment, there is a significant change in circumstances that would be considered a triggering event. Management must apply judgment in assessing qualitatively whether events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Factors such as a reporting unit’s planned future operating results, long term growth outlook and industry and market conditions are considered. Judgment is also applied in determining the estimated fair value of reporting units’ assets and liabilities for purposes of performing quantitative goodwill impairment tests. Management uses all available information to make these fair value determinations, including the present values of expected future cash flows using discount rates commensurate with the risks involved in the assets and observed market multiples.
Income Taxes
Deferred income taxes are recognized for temporary differences between the financial statement and tax return bases of assets and liabilities. Any resulting future tax benefits are recognized to the extent that realization of such benefits is more likely than not, and a valuation allowance is established for any portion of a deferred tax asset that management believes may not be realized. The assessment of the need for a valuation allowance requires
management to make estimates and assumptions about future earnings, reversal of existing temporary differences and available tax planning strategies. If actual experience differs from these estimates and assumptions, the recorded deferred tax asset may not be fully realized, resulting in an increase to income tax expense in our results of operations. In addition, the ability to record deferred tax assets in the future could be limited resulting in a higher effective tax rate in that future period.
The Company has not established deferred tax liabilities for certain of its foreign earnings as it intends to indefinitely reinvest those earnings to finance foreign activities. However, if these earnings become subject to U.S. federal tax, any required provision could have a material impact on our financial results.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Unless the context otherwise requires, references to net operating income (loss), net realized investment results and net income (loss) reflect amounts attributable to Loews Corporation Shareholders.shareholders.
Reserves – Estimates and Uncertainties
The level of reserves CNA maintains represents its best estimate, as of a particular point in time, of what the ultimate settlement and administration of claims will cost based on CNA’s assessment of facts and circumstances known at that time. Reserves are not an exact calculation of liability but instead are complex estimates that CNA derives, generally utilizing a variety of actuarial reserve estimation techniques, from numerous assumptions and expectations about future events, both internal and external, many of which are highly uncertain. As noted below, CNA reviews its reserves for each segment of its business periodically and any such review could result in the need to increase reserves in amounts which could be material and could adversely affect its results of operations, equity, business and insurer financial strength and corporate debt ratings. Further information on reserves is provided in Note 8 of the Notes to Consolidated Financial Statements included under Item 8.
Property and Casualty Claim and Claim Adjustment Expense Reserves
CNA maintains loss reserves to cover its estimated ultimate unpaid liability for claim and claim adjustment expenses, including the estimated cost of the claims adjudication process, for claims that have been reported but not yet settled (case reserves) and claims that have been incurred but not reported (“IBNR”). Claim and claim adjustment expense reserves are reflected as liabilities and are included on the Consolidated Balance Sheets under the heading “Insurance Reserves.” Adjustments to prior year reserve estimates, if necessary, are reflected in results of operations in the period that the need for such adjustments is determined. The carried case and IBNR reserves as of each balance sheet date are provided in the discussion that follows and in Note 8 of the Notes to Consolidated Financial Statements included under Item 8.
The level of reserves CNA maintains represents its best estimate, as of a particular point in time, of what the ultimate settlement and administration of claims will cost based on CNA’s assessment of facts and circumstances known at that time. Reserves are not an exact calculation of liability but instead are complex estimates that CNA derives, generally utilizing a variety of actuarial reserve estimation techniques, from numerous assumptions and expectations about future events, both internal and external, many of which are highly uncertain.
CNA is subject to the uncertain effects of emerging or potential claims and coverage issues that arise as industry practices and legal, judicial, social, economic and other environmental conditions change. These issues have had, and may continue to have, a negative effect on CNA’s business by either extending coverage beyond the original underwriting intent or by increasing the number or size of claims. Examples of emerging
Emerging or potential claims and coverage issues include:include, but are not limited to, uncertainty in future medical costs in workers’ compensation. In particular, medical cost inflation could be greater than expected due to new treatments, drugs and devices, increased health care utilization and/or the future costs of health care facilities. In addition, the relationship between workers’ compensation and government and private health care providers could change, potentially shifting costs to workers’ compensation.
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The impact of these and other unforeseen emerging or potential claims and coverage issues is difficult to predict and could materially adversely affect the adequacy of CNA’s claim and claim adjustment expense reserves and could lead to future reserve additions.
CNA’s property and casualty insurance subsidiaries also have actual and potential exposures related to asbestos and environmental pollution (“A&EP”) claims. CNA’s experience has been that establishing reserves for casualty coverages relating to A&EP claims and the related claim adjustment expenses are subject to uncertainties that are greater than those presented by other claims. Additionally, traditional actuarial methods and techniques employed to estimate the ultimate cost of claims for more traditional property and casualty exposures are less precise in estimating claim and claim adjustment reserves for A&EP. As a result, estimating the ultimate cost of both reported and unreported A&EP claims is subject to a higher degree of variability.
To mitigate the risks posed by CNA’s exposure to A&EP claims and claim adjustment expenses, as further discussed in Note 8 of the Notes to Consolidated Financial Statements included under Item 8, on August 31, 2010, CNA completed a transaction with NICO, a subsidiary of Berkshire Hathaway Inc.National Indemnity Company (“NICO”), under which substantially all of CNA’s legacy A&EP liabilities were ceded to NICO effective January 1, 2010 (“Loss Portfolio Transfer”(loss portfolio transfer or “LPT”).
The Loss Portfolio Transferloss portfolio transfer is considered a retroactive reinsurance contract. In the event that theThe cumulative claim and allocated claim adjustment expensesamounts ceded under the Loss Portfolio Transferloss portfolio transfer exceed the consideration paid, the resultingtherefore CNA has recognized a deferred retroactive reinsurance gain. This deferred gain from such excess would be deferred. A cumulative amortization adjustment would beis recognized in earnings in proportion to actual recoveries under the period such excess arises so thatloss portfolio transfer. Over the resulting deferred gain would reflect the balance that would have existed if the revised estimate was available at the inception datelife of the Loss Portfolio Transfer. This accounting generally results in a reserve charge because of the timing difference between the recognition of the gross adverse reserve development and the related ceded reinsurance benefit. However,contract, there is no economic impact as long as theany additional losses are within the limit underof the contract. Any future adverse prior year development in excess
See Note 8 of approximately $230 million would put the Loss Portfolio Transfer into an overall gain positionNotes to the Consolidated Financial Statements included under Item 8 for further discussion of the loss portfolio transfer, its impact on CNA’s results of operations and the deferred retroactive reinsurance accounting.gain.
Historically, CNA performed its actuarial review of A&EP claims in the fourth quarter. In 2014, CNA was unable to complete the fourth quarter review because it determined that additional information and analysis of inuring third-party reinsurance recoveries was required. The reserve review was completed in the second quarter of 2015 and CNA management adopted the second quarter of the year as the timing for all future annual A&EP claims actuarial reviews.
Establishing Property & Casualty Reserve Estimates
In developing claim and claim adjustment expense (“loss” or “losses”) reserve estimates, CNA’s actuaries perform detailed reserve analyses that are staggered throughout the year. The data is organized at a “product”reserve group level. A productreserve group can be a line of business covering a subset of insureds such as commercial automobile liability for small or middle market customers, it can encompass several lines of business provided to a specific set of customers such as dentists, or it can be a particular type of claim such as construction defect. Every productreserve group is analyzedreviewed at least once during the year, with the exception of certain run-off products which are analyzed on a periodic basis.year. The analyses generally review losses gross of ceded reinsurance and apply the ceded reinsurance terms to the gross estimates to establish estimates net of reinsurance. In addition to the detailed analyses, CNA reviews actual loss emergence for all products each quarter.
The detailed analyses use a variety of generally accepted actuarial methods and techniques to produce a number of estimates of ultimate loss. CNA’s actuaries determine a point estimate of ultimate loss by reviewing the various estimates and assigning weight to each estimate given the characteristics of the productreserve group being reviewed. The reserve estimate is the difference between the estimated ultimate loss and the losses paid to date. The difference between the estimated ultimate loss and the case incurred loss (paid loss plus case reserve) is IBNR. IBNR calculated as such includes a provision for development on known cases (supplemental development) as well as a provision for claims that have occurred but have not yet been reported (pure IBNR).
Most of CNA’s business can be characterized as long-tail. For long-tail business, it will generally be several years between the time the business is written and the time when all claims are settled. CNA’s long-tail exposures include commercial automobile liability, workers’ compensation, general liability, medical professional liability, other professional liability and management liability coverages, assumed reinsurance run-off and products liability. Short-tail exposures include property, commercial automobile physical damage, marine, surety and warranty. CNA SpecialtyProperty and CNA Commercialcasualty insurance operations contain both long-tail and short-tail exposures. Hardy contains primarily short-tail exposures. Other containsnon-core operations contain long-tail exposures.
Various methods are used to project ultimate loss for both long-tail and short-tail exposures including, but not limited to, the following:
paid development; |
incurred development; |
loss ratio; |
Bornhuetter-Ferguson using paid loss; |
Bornhuetter-Ferguson using incurred loss; |
frequency times severity; and |
stochastic modeling. |
The paid development method estimates ultimate losses by reviewing paid loss patterns and applying them to accident or policy years with further expected changes in paid loss. Selection of the paid loss pattern may require consideration of several factors including the impact of inflation on claims costs, the rate at which claims professionals make claim payments and close claims, the impact of judicial decisions, the impact of underwriting changes, the impact of large claim payments and other factors. Claim cost inflation itself may require evaluation of changes in the cost of repairing or replacing property, changes in the cost of medical care, changes in the cost of wage replacement, judicial decisions, legislative changes and other factors. Because this method assumes that losses are paid at a consistent rate, changes in any of these factors can impact the results. Since the method does not rely on case reserves, it is not directly influenced by changes in the adequacy of case reserves.
For many products,reserve groups, paid loss data for recent periods may be too immature or erratic for accurate predictions. This situation often exists for long-tail exposures. In addition, changes in the factors described above may result in inconsistent payment patterns. Finally, estimating the paid loss pattern subsequent to the most mature point available in the data analyzed often involves considerable uncertainty for long-tail products such as workers’ compensation.
The incurred development method is similar to the paid development method, but it uses case incurred losses instead of paid losses. Since the method uses more data (case reserves in addition to paid losses) than the paid development method, the incurred development patterns may be less variable than paid patterns. However, selection of the incurred loss pattern typically requires analysis of all of the same factors described above. In addition, the inclusion of case reserves can lead to distortions if changes in case reserving practices have taken place, and the use of case incurred losses may not eliminate the issues associated with estimating the incurred loss pattern subsequent to the most mature point available.
The loss ratio method multiplies earned premiums by an expected loss ratio to produce ultimate loss estimates for each accident or policy year. This method may be useful for immature accident or policy periods or if loss development patterns are inconsistent, losses emerge very slowly, or there is relatively little loss history from which to estimate future losses. The selection of the expected loss ratio typically requires analysis of loss ratios from earlier accident or policy years or pricing studies and analysis of inflationary trends, frequency trends, rate changes, underwriting changes and other applicable factors.
The Bornhuetter-Ferguson method using paid loss is a combination of the paid development method and the loss ratio method. This method normally determines expected loss ratios similar to the approach used to estimate the expected loss ratio for the loss ratio method and typically requires analysis of the same factors described above. This method assumes that future losses will develop at the expected loss ratio level. The percent of paid loss to ultimate loss implied from the paid development method is used to determine what percentage of ultimate loss is yet to be paid. The use of the pattern from the paid development method typically requires consideration of the same factors listed in the description of the paid development method. The estimate of losses yet to be paid is added to current paid losses to estimate the ultimate loss for each year. For long-tail lines, this method will react very slowly if actual
ultimate loss ratios are different from expectations due to changes not accounted for by the expected loss ratio calculation.
The Bornhuetter-Ferguson method using incurred loss is similar to the Bornhuetter-Ferguson method using paid loss except that it uses case incurred losses. The use of case incurred losses instead of paid losses can result in development patterns that are less variable than paid patterns. However, the inclusion of case reserves can lead to distortions if changes in case reserving have taken place, and the method typically requires analysis of the same factors that need to be reviewed for the loss ratio and incurred development methods.
The frequency times severity method multiplies a projected number of ultimate claims by an estimated ultimate average loss for each accident or policy year to produce ultimate loss estimates. Since projections of the ultimate number of claims are often less variable than projections of ultimate loss, this method can provide more reliable results for productsreserve groups where loss development patterns are inconsistent or too variable to be relied on exclusively. In addition, this method can more directly account for changes in coverage that impact the number and
size of claims. However, this method can be difficult to apply to situations where very large claims or a substantial number of unusual claims result in volatile average claim sizes. Projecting the ultimate number of claims may require analysis of several factors including the rate at which policyholders report claims to CNA, the impact of judicial decisions, the impact of underwriting changes and other factors. Estimating the ultimate average loss may require analysis of the impact of large losses and claim cost trends based on changes in the cost of repairing or replacing property, changes in the cost of medical care, changes in the cost of wage replacement, judicial decisions, legislative changes and other factors.
Stochastic modeling produces a range of possible outcomes based on varying assumptions related to the particular productreserve group being modeled. For some products,reserve groups, CNA uses models which rely on historical development patterns at an aggregate level, while other productsreserve groups are modeled using individual claim variability assumptions supplied by the claims department. In either case, multiple simulations are run and the results are analyzed to produce a range of potential outcomes. The results will typically include a mean and percentiles of the possible reserve distribution which aid in the selection of a point estimate.
For many exposures, especially those that can be considered long-tail, a particular accident or policy year may not have a sufficient volume of paid losses to produce a statistically reliable estimate of ultimate losses. In such a case, CNA’s actuaries typically assign more weight to the incurred development method than to the paid development method. As claims continue to settle and the volume of paid loss increases, the actuaries may assign additional weight to the paid development method. For most of CNA’s products, even the incurred losses for accident or policy years that are early in the claim settlement process will not be of sufficient volume to produce a reliable estimate of ultimate losses. In these cases, CNA will not assign any weight to the paid and incurred development methods. CNA will use the loss ratio, Bornhuetter-Ferguson and frequency times severity methods. For short-tail exposures, the paid and incurred development methods can often be relied on sooner primarily because CNA’s history includes a sufficient number of years to cover the entire period over which paid and incurred losses are expected to change. However, CNA may also use the loss ratio, Bornhuetter-Ferguson and frequency times severity methods for short-tail exposures.
For other more complex productsreserve groups where the above methods may not produce reliable indications, CNA uses additional methods tailored to the characteristics of the specific situation.
Periodic Reserve Reviews
The reserve analyses performed by CNA’s actuaries result in point estimates. Each quarter, the results of the detailed reserve reviews are summarized and discussed with CNA’s senior management to determine the best estimate of reserves. This groupCNA’s senior management considers many factors in making this decision. The factors include, but are not limited to, the historical pattern and volatility of the actuarial indications, the sensitivity of the actuarial indications to changes in paid and incurred loss patterns, the consistency of claims handling processes, the consistency of case reserving practices, changes in CNA’s pricing and underwriting, pricing and underwriting trends in the insurance market and legal, judicial, social and economic trends.
CNA’s recorded reserves reflect its best estimate as of a particular point in time based upon known facts, consideration of the factors cited above and its judgment. The carried reserve may differ from the actuarial point estimate as the result of CNA’s consideration of the factors noted above as well as the potential volatility of the projections associated with the specific productreserve group being analyzed and other factors impactingaffecting claims costs that may not be quantifiable through traditional actuarial analysis. This process results in management’s best estimate which is then recorded as the loss reserve.
Currently, CNA’s recorded reserves are modestly higher than the actuarial point estimate. For CNA Commercial, CNA Specialty and Hardy,International, the difference between CNA’s reserves and the actuarial point estimate is primarily driven by uncertainty with respect to immature accident years, claim cost inflation, changes in claims handling, changes to the tort reform roll-backsenvironment which may adversely impact claim costs and the effects from the economy. For CNA’s legacy A&EP liabilities, the difference between CNA’s reserves and the actuarial point estimate is primarily driven by the potential tail volatility of run-off exposures.
The key assumptions fundamental to the reserving process are often different for various productsreserve groups and accident or policy years. Some of these assumptions are explicit assumptions that are required of a particular method, but most of the assumptions are implicit and cannot be precisely quantified. An example of an explicit assumption is the pattern employed in the paid development method. However, the assumed pattern is itself based on several implicit assumptions such as the impact of inflation on medical costs and the rate at which claim professionals close claims. As a result, the effect on reserve estimates of a particular change in assumptions typically cannot be specifically quantified, and changes in these assumptions cannot be tracked over time.
CNA’s recorded reserves are management’s best estimate. In order to provide an indication of the variability associated with CNA’s net reserves, the following discussion provides a sensitivity analysis that shows the approximate estimated impact of variations in significant factors affecting CNA’s reserve estimates for particular types of business. These significant factors are the ones that CNA believes could most likely materially impactaffect the reserves. This discussion covers the major types of business for which CNA believes a material deviation to its reserves is reasonably possible. There can be no assurance that actual experience will be consistent with the current assumptions or with the variation indicated by the discussion. In addition, there can be no assurance that other factors and assumptions will not have a material impact on CNA’s reserves.
Within CNA Specialty,The three areas for which CNA believes a materialsignificant deviation to its net reserves is reasonably possible forare (i) professional liability, management liability and related business. This business includessurety products; (ii) workers’ compensation and (iii) general liability.
Professional liability and management liability products and surety products include professional liability coverages provided to various professional firms, including architects, real estate agents, small and mid-sized accounting firms, law firms and technologyother professional firms. This businessThey also includesinclude D&O, employment practices, fiduciary, fidelity and surety coverages, as well as insurance products serving the health care delivery system. The most significant factor affecting reserve estimates for this businessthese liability coverages is claim severity. Claim severity is driven by the cost of medical care, the cost of wage replacement, legal fees, judicial decisions, legislative changes and other factors. Underwriting and claim handling decisions such as the classes of business written and individual claim settlement decisions can also impact claim severity. If the estimated claim severity increases by 9%, CNA estimates that the net reserves would increase by approximately $500 million. If the estimated claim severity decreases by 3%, CNA estimates that net reserves would decrease by approximately $150 million. CNA’s net reserves for this businessthese products were approximately $5.3$5.4 billion atas of December 31, 2012.
Within CNA Commercial, the two types of business for which CNA believes a material deviation to its net reserves is reasonably possible are workers’ compensation and general liability.2015.
For CNA Commercial workers’ compensation, since many years will pass from the time the business is written until all claim payments have been made, claim cost inflation on claim payments is the most significant factor affecting workers’ compensation reserve estimates. Workers’ compensation claim cost inflation is driven by the cost of medical care, the cost of wage replacement, expected claimant lifetimes, judicial decisions, legislative changes and other factors. If estimated workers’ compensation claim cost inflation increases by 100 basis points for the entire period over which claim payments will be made, CNA estimates that its net reserves would increase by approximately $450$400 million. If estimated workers’ compensation claim cost inflation decreases by 100 basis points for the entire period over which claim payments will be made, CNA estimates that its net reserves would decrease
by approximately $400$350 million. Net reserves for CNA Commercial workers’ compensation were approximately $4.9$4.3 billion atas of December 31, 2012.2015.
For CNA Commercial general liability, the most significant factor affecting reserve estimates is claim severity. Claim severity is driven by changes in the cost of repairing or replacing property, the cost of medical care, the cost of wage replacement, judicial decisions, legislation and other factors. If the estimated claim severity for general liability increases by 6%, CNA estimates that its net reserves would increase by approximately $250$200 million. If the estimated claim severity for general liability decreases by 3%, CNA estimates that its net reserves would decrease by approximately $100 million. Net reserves for CNA Commercial general liability were approximately $3.8$3.6 billion atas of December 31, 2012.2015.
Given the factors described above, it is not possible to quantify precisely the ultimate exposure represented by claims and related litigation. As a result, CNA regularly reviews the adequacy of its reserves and reassesses its reserve estimates as historical loss experience develops, additional claims are reported and settled and additional information becomes available in subsequent periods.
In light of the many uncertainties associated with establishing the estimates and making the assumptions necessary to establish reserve levels, CNA reviews itsreviewing CNA’s reserve estimates, on a regular basis andCNA makes adjustments in the period that the need for such adjustments is determined. These reviews have resulted in CNA’s
identification of information and trends that have caused CNA to change its reserves in prior periods and could lead to the identification of a need for additional material increases or decreases in claim and claim adjustment expense reserves, which could materially affect our results of operations and equity and CNA’s business and insurer financial strength and corporate debt ratings positively or negatively. See the Ratings section of this MD&A for further information regarding CNA’s financial strength and corporate debt ratings.
The following table summarizes gross and net carried reserves for CNA’s property and casualty operations:
December 31 | 2012 | 2011 | 2015 | 2014 | ||||||||||||||||
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(In millions) | ||||||||||||||||||||
Gross Case Reserves | $ | 8,771 | $ | 8,707 | $ | 7,608 | $ | 8,186 | ||||||||||||
Gross IBNR Reserves | 9,824 | 9,642 | 9,191 | 8,998 | ||||||||||||||||
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Total Gross Carried Claim and Claim Adjustment Expense Reserves | $ | 18,595 | $ | 18,349 | $ | 16,799 | $ | 17,184 | ||||||||||||
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Net Case Reserves | $ | 7,811 | $ | 7,806 | $ | 6,992 | $ | 7,474 | ||||||||||||
Net IBNR Reserves | 8,786 | 8,607 | 8,371 | 8,295 | ||||||||||||||||
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Total Net Carried Claim and Claim Adjustment Expense Reserves | $ | 16,597 | $ | 16,413 | $ | 15,363 | $ | 15,769 | ||||||||||||
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The following table summarizes the gross and net carried reserves for certain property and casualty business in run-off, including CNA Re and A&EP:
December 31 | 2012 | 2011 | ||||||||
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(In millions) | ||||||||||
Gross Case Reserves | $ | 1,207 | $ | 1,321 | ||||||
Gross IBNR Reserves | 1,955 | 1,808 | ||||||||
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Total Gross Carried Claim and Claim Adjustment Expense Reserves | $ | 3,162 | $ | 3,129 | ||||||
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Net Case Reserves | $ | 292 | $ | 347 | ||||||
Net IBNR Reserves | 220 | 244 | ||||||||
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Total Net Carried Claim and Claim Adjustment Expense Reserves | $ | 512 | $ | 591 | ||||||
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December 31 | 2015 | 2014 | ||||||
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(In millions) | ||||||||
Gross Case Reserves | $ | 1,521 | $ | 1,189 | ||||
Gross IBNR Reserves | 1,123 | 1,715 | ||||||
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Total Gross Carried Claim and Claim Adjustment Expense Reserves | $ | 2,644 | $ | 2,904 | ||||
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Net Case Reserves | $ | 130 | $ | 144 | ||||
Net IBNR Reserves | 153 | 171 | ||||||
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Total Net Carried Claim and Claim Adjustment Expense Reserves | $ | 283 | $ | 315 | ||||
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Life & Group Non-Core Policyholder Reserves
CNA calculatesmaintains both claim and maintainsclaim adjustment expense reserves as well as future policy benefit reserves for policyholder claims and benefits for the Life & Group Non-Core basedbusiness. Claim and claim expense reserves consist of estimated reserves for long term care policyholders that are currently receiving benefits, including claims that have been incurred but are not yet reported. In developing the claim and claim adjustment expense reserve estimates for CNA’s long term care policies, its actuaries perform a detailed claim experience study on actuarial assumptions.an annual basis. The study reviews the sufficiency of existing reserves for policyholders currently on claim and includes an evaluation of expected benefit utilization and claim duration. CNA’s recorded claim and claim adjustment expense reserves reflect its best estimate after incorporating the results of the most recent study. In addition, claim and claim adjustment reserves are also maintained for structured settlement obligations that are not funded by annuities related to certain property and casualty claimants. Future policy benefit reserves represent the active life reserves related to CNA’s long term care policies and are the present value of expected future benefit payments and expenses less expected future premiums. The determination of these reserves is fundamental to its financial results and requires management to make estimates and assumptions about expected investment and policyholder experience over the life of the contract. Since many of these contracts may be in force for several decades, these assumptions are subject to significant estimation risk.
TheWhile the structured settlement obligations arise under short duration contracts, long duration contract principles and actuarial assumptions representmethods are used to determine management’s best estimate of the required claim and claim adjustment reserve.
Under GAAP, reserves for long term care future policy benefits and the unfunded structured settlement annuity claim and claim adjustment expense reserves were first established based on CNA’s actuarial best estimate assumptions at the date the contract was issued plus a margin for adverse deviation. Actuarial assumptions include estimates of morbidity, mortality, policy persistency, discount rates and expenses over the life of the contracts. Under GAAP, theseThese assumptions are locked in throughout the life of the contract unless a premium deficiency develops. The impact of differences between the actuarial assumptions and actual experience is reflected in results of operations each period.
Annually, management assesses the adequacy of its GAAP reserves by product group by performing premium deficiency testing. In this test, reserves computed using best estimate assumptions as of the date of the test without provisions for adverse deviation are compared to the recorded reserves. If reserves determined based on management’s current best estimate assumptions are greater than the existing net GAAP reserves (i.e. reserves net of any Deferred acquisition costs asset), the existing net GAAP reserves are adjusted to the greater amount.
Payout Annuity Reserves
CNA’s payout annuity reserves consist primarily of single premium group and structured settlement annuities. The annuity payments are generally fixed and are either for a specified period or contingent on the survival of the payee. These reserves are discounted except for reserves for loss adjustment expenses on structured settlements not funded by annuities in its property and casualty insurance companies. In 2012 and 2011, CNA recognized a premium deficiency on its payout annuity reserves. Therefore, the actuarial assumptions established at time of issue have been unlocked and updated to management’s then current best estimate. The actuarial assumptions that management believes are subject to the most variability are discount rates and mortality.
The table below summarizes the estimated pretax impact on CNA’s results of operations from various hypothetical revisions to its assumptions. CNA has assumed that revisions to such assumptions would occur in each policy type, age and duration within each policy group. Although such hypothetical revisions are not currently required or anticipated, CNA believes they could occur based on past variances in experience and its expectations of the ranges of future experience that could reasonably occur.
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Any actual adjustment would be dependent on the specific policies affected and, therefore, may differ from the estimates summarized above.
Long Term Care Reserves
Long term care policies provide benefits for nursing home, assisted living and home health care subject to various daily and lifetime caps. Policyholders must continue to make periodic premium payments to keep the policy in force. Generally CNA has the ability to increase policy premiums, subject to state regulatory approval.
CNA’s long term care reserves consist of an active life reserve, a liability for due and unpaid claims, claims in the course of settlement and incurred but not reported claims. The active life reserve represents the present value of expected future benefit payments and expenses less expected future premium.
The actuarial assumptions that management believes are subject to the most variability are morbidity, persistency and discount rates, morbidity, and persistency, whichrate. Persistency can be affected by policy lapses and death. Discount rate is influenced by the investment yield on assets supporting long term care reserves which is subject to interest rate and market volatility. There is limited historical company and industry data available to CNA for long term care morbidity and mortality, as only a portion of the policies written to date are in claims paying status. As a result of this variability, CNA’s long term care reserves may be subject to material increases if actual experience develops adversely to its expectations.
Annually, management assesses the adequacy of its GAAP long term care future policy benefit reserves as well as the claim and claim adjustment expense reserves for unfunded structured settlement obligations by performing a gross premium valuation (“GPV”) to determine if there is a premium deficiency. Under the GPV, management estimates required reserves using best estimate assumptions, including anticipated future premium rate increases, as of the date of the assessment without provisions for adverse deviation. The GPV reserves are then compared to the recorded reserves. If the GPV reserves are greater than the existing net GAAP reserves (i.e. reserves net of any deferred acquisition costs asset), the existing net GAAP reserves are unlocked and are increased to the greater amount. Any such increase is reflected in CNA’s results of operations in the period in which the need for such adjustment is determined, and could materially adversely affect our results of operations and equity and CNA’s business and insurer financial strength and corporate debt ratings.
Prior to December 31, 2015, the active life reserves for long term care were based on actuarial assumptions established at policy issuance. The December 31, 2014 GPV indicated the carried reserves included a margin of approximately $100 million. The December 31, 2015 GPV indicated a premium deficiency of $296 million. A summary of the changes in the GPV results is presented in the table below:
(In millions) | ||||||
Long term care active life reserve - change in GPV | ||||||
December 31, 2014 margin | $ | 100 | ||||
Changes in underlying morbidity assumptions | (398 | ) | ||||
Changes in underlying persistency assumptions | (80 | ) | ||||
Changes in underlying discount rate assumptions | 47 | |||||
Changes in underlying premium rate action assumptions | 50 | |||||
Changes in underlying expense and other assumptions | (15 | ) | ||||
December 31, 2015 premium deficiency | $ | (296 | ) | |||
The premium deficiency was primarily driven by changes in morbidity assumptions in particular by higher claim incidence, reflective of trends observed in CNA’s emerging experience. There are a variety of factors that impact claim incidence rates, including, but not limited to, policyholder behavior, socioeconomic factors, changes in health trends and advances in medical care. The premium deficiency was also adversely affected by changes in persistency assumptions, primarily from lower projected active life mortality rates. Adverse changes from morbidity and persistency were somewhat offset by increases in planned rate increase actions and changes in discount rate assumptions. The increase in planned rate actions was primarily due to updated assumptions on the approval rate and timing of future premium rate increases in CNA’s group block. Changes in discount rate assumptions were
primarily due to changes in future interest rate assumptions, contemplating both near-term market indications and long-term normative assumptions. Changes in expenses and other assumptions had a small adverse impact on the premium deficiency.
The indicated premium deficiency necessitated a charge to income that was effected by the write off of the entire long term care deferred acquisition cost asset of $289 million and an increase to active life reserves of $7 million. As a result, the long term care active life reserves carried as of December 31, 2015 represent management’s best estimate assumptions at that date with no margin for adverse deviation. Since there is no margin in the carried reserves, CNA may have to unlock its reserve assumptions in the future. Factors that could affect the need to unlock reserve assumptions include the significance and persistence of variances between actual experience and the expected results contemplated in the best estimate reserves as well as changes in CNA’s outlook of the future.
In addition to the premium deficiency, CNA’s annual experience study of claim reserves indicated a deficiency of $9 million. The deficiency was primarily related to updating claim frequency assumptions on incurred but not reported claims, offset by favorable severity on existing claims. The total impact of the premium deficiency and claim reserve deficiency was $177 million (after tax and noncontrolling interests).
The table below summarizes the estimated pretax impact on CNA’s results of operations from various hypothetical revisions to its assumptions. CNA has assumed that revisions to such assumptions would occur in each policy type, age and duration within each policy group.group and would occur absent any changes, mitigating or otherwise, in the other assumptions. Although such hypothetical revisions are not currently required or anticipated, CNA believes they could occur based on past variances in experience and its expectations of the ranges of future experience that could reasonably occur.
It should be noted that CNA’s current GAAP long term care reserves contain a level of margin in excess of management’s current best estimates. Any required increase in the net GAAP reserves resulting The hypothetical revisions have been updated from the hypothetical revisionsdisclosures in prior periods to be reflective of CNA’s updated best estimate assumptions as of December 31, 2015 in support of its active life reserves. As a result, in some cases the table below would first reduce the margin before they would affect results of operations. The estimated impact to results of operations in the tablescenarios described below are after consideration of thenot directly comparable to prior periods. Persistency now reflects active life mortality and lapse whereas prior periods reflected total lives. Discount rates now reflect future interest rates only whereas prior periods reflected future interest rates and changes in CNA’s existing margin.investment portfolio yield. The hypothetical scenarios for morbidity and premium rate actions are comparable to prior periods.
Estimated Reduction | ||||||
December 31, 2015 | to Pretax Income | |||||
(In | ||||||
Hypothetical revisions | ||||||
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| 611 | |||||
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Persistency: | ||||||
5% | 211 | |||||
10% | 436 | |||||
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| 321 | |||||
| 675 | |||||
Premium rate actions: | ||||||
25% decrease in anticipated future rate increases premium | 165 | |||||
50% decrease in anticipated future rate increases premium | 329 |
Any actual adjustment would be dependent on the specific policies affected and, therefore, may differ from the estimates summarized above.
The following table summarizes the net carriedpolicyholder reserves for Life & Group Non-Core policyholder reserves:Non-Core:
December 31, 2012 | Claim and claim adjustment expenses | Future policy benefits | Policyholders’ funds | Separate account business | ||||||||||||
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(In millions) | ||||||||||||||||
Long term care | $ | 1,683 | $ | 6,879 | ||||||||||||
Payout annuities | 637 | 2,008 | ||||||||||||||
Institutional markets | 1 | 12 | $ | 100 | $ | 312 | ||||||||||
Other | 45 | 4 | ||||||||||||||
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Total (a) | $ | 2,366 | $ | 8,903 | $ | 100 | $ | 312 | ||||||||
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Long term care Payout annuities Institutional markets Other Total (a) Long term care Structured settlement annuities Other Total Shadow adjustments (a) Ceded reserves Total gross reserves December 31, 2014 Long term care Structured settlement annuities Other Total Shadow adjustments (a) Ceded reserves Total gross reservesDecember 31, 2011 Claim and claim
adjustment expenses Future
policy benefits Policyholders’
funds Separate
account business (In millions) $ 1,470 $ 6,374 660 1,997 1 15 $ 129 $ 417 53 5 $ 2,184 $ 8,391 $ 129 $ 417 Claim and claim Future December 31, 2015 adjustment expenses policy benefits Total (In millions) $ 2,229 $ 8,335 $ 10,564 581 581 21 21 2,831 8,335 11,166 99 1,610 1,709 290 207 497 $ 3,220 $ 10,152 $ 13,372 $ 2,064 $ 7,782 $ 9,846 606 606 28 1 29 2,698 7,783 10,481 145 1,522 1,667 340 185 525 $ 3,183 $ 9,490 $ 12,673
(a) |
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Results of Operations
The following table summarizes the results of operations for CNA for the years ended December 31, 2012, 20112015, 2014 and 20102013 as presented in Note 21 of the Notes to Consolidated Financial Statements included under Item 8. For further discussion of Net investment income and Net realized investment results, see the Investments section of this MD&A.
Year Ended December 31 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | ||||||||||||||||||
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Revenues: | ||||||||||||||||||||||||
Insurance premiums | $ | 6,882 | $ | 6,603 | $ | 6,515 | $ | 6,921 | $ | 7,212 | $ | 7,271 | ||||||||||||
Net investment income | 2,282 | 2,054 | 2,316 | 1,840 | 2,067 | 2,282 | ||||||||||||||||||
Investment gains (losses) | 60 | (19 | ) | 86 | (71 | ) | 54 | 16 | ||||||||||||||||
Other | 323 | 325 | 291 | |||||||||||||||||||||
Other revenues | 411 | 359 | 363 | |||||||||||||||||||||
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Total | 9,547 | 8,963 | 9,208 | 9,101 | 9,692 | 9,932 | ||||||||||||||||||
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Expenses: | ||||||||||||||||||||||||
Insurance claims and policyholders’ benefits | 5,896 | 5,489 | 4,985 | 5,384 | 5,591 | 5,806 | ||||||||||||||||||
Amortization of deferred acquisition costs | 1,274 | 1,176 | 1,168 | 1,540 | 1,317 | 1,362 | ||||||||||||||||||
Other operating expenses | 1,327 | 1,234 | 1,777 | 1,469 | 1,386 | 1,315 | ||||||||||||||||||
Interest | 170 | 185 | 157 | 155 | 183 | 166 | ||||||||||||||||||
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Total | 8,667 | 8,084 | 8,087 | 8,548 | 8,477 | 8,649 | ||||||||||||||||||
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Income before income tax | 880 | 879 | 1,121 | 553 | 1,215 | 1,283 | ||||||||||||||||||
Income tax expense | (247 | ) | (244 | ) | (335) | (71 | ) | (322 | ) | (363) | ||||||||||||||
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Income from continuing operations | 633 | 635 | 786 | 482 | 893 | 920 | ||||||||||||||||||
Discontinued operations, net | (20) | (197 | ) | 22 | ||||||||||||||||||||
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Net income | 633 | 635 | 766 | 482 | 696 | 942 | ||||||||||||||||||
Amounts attributable to noncontrolling interests | (63 | ) | (78 | ) | (129) | (49 | ) | (71 | ) | (95) | �� | |||||||||||||
|
|
| ||||||||||||||||||||||
Net income attributable to Loews Corporation | $ | 570 | $ | 557 | $ | 637 | $ | 433 | $ | 625 | $ | 847 | ||||||||||||
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|
20122015 Compared with 20112014
Net income increased $13Income from continuing operations decreased $411 million in 20122015 as compared with 2011. Net investment income increased $2282014. Results in 2015 were negatively impacted by a $177 million driven by significantly favorable limited partnership results.charge (after tax and noncontrolling interests) related to recognition of a premium deficiency and a small deficiency in claim reserves in CNA’s long term care business as further discussed in the Reserves – Estimates and Uncertainties section of this MD&A. In addition, investment gains (losses) increased $79results in 2015 decreased $78 million ($4546 million after tax and noncontrolling interests). See as compared to 2014 as a result of the Investments sectionapplication of this MD&A forretroactive reinsurance accounting to adverse reserve development ceded under the 2010 A&EP loss portfolio transfer, as further discussiondiscussed in Note 8 of the Notes to Consolidated Financial Statements included under Item 8. In addition, results in 2015 included lower net realized investment income and investment losses driven by lower limited partnership results and net investment income. Insurance premiums also increased $279 million, including the acquisition of Hardy. Insurance claims and policyholders’ benefits increased $407 million, primarily due to higher catastrophe impacts, including $171other than temporary impairment (“OTTI”) losses, partially offset by improved underwriting results. Results in 2014 were impacted by a $31 million (after tax and noncontrolling interests) loss on a coinsurance transaction related to the sale of CNA’s former life insurance subsidiary.
2014 Compared with 2013
Income from Storm Sandy, andcontinuing operations decreased $27 million in 2014 as compared with 2013 due to lower net investment income of $215 million, primarily driven by reduced limited partnership results, lower favorable net prior year development.development and a $31 million (after tax and noncontrolling interests) loss on the coinsurance transaction. These decreases were partially offset by an increase of $38 million ($22 million after tax and noncontrolling interests) in investment gains, improved current accident year underwriting results and the prior year impact of a $111 million (after tax and noncontrolling interests) deferred gain under retroactive reinsurance accounting related to the loss portfolio transfer. Further information on net prior year development for 20122014 and 20112013 is included in Note 8 of the Notes to Consolidated Financial Statements included under Item 8.
2011 Compared with 2010
As further discussed in Note 8 of the Notes to Consolidated Financial Statements included under Item 8, on August, 31, 2010, CNA completed the Loss Portfolio Transfer. We recognized a loss of $328 million (after tax and noncontrolling interests) in the third quarter of 2010, of which $309 million related to our continuing operations and $19 million related to our discontinued operations.
Net income decreased $80 million in 2011 as compared with 2010. Excluding the loss associated with the Loss Portfolio Transfer, net income decreased $408 million in 2011 as compared with 2010. Net investment income decreased $262 million, reflecting significant unfavorable limited partnership results. In addition, investment gains (losses) decreased $105 million ($56 million after tax and noncontrolling interests). See the Investments section of this MD&A for further discussion of net realized investment results and net investment income. Partially offsetting these decreases was an $88 million increase in insurance premiums. Insurance claims and policyholders’ benefits increased $504 million, primarily due to a lower level of favorable net prior year development, higher catastrophe losses and decreased results in CNA’s payout annuity business. CNA’s payout annuity business was negatively impacted by a $104 million (after tax and noncontrolling interests) increase in insurance reserves, due to unlocking actuarial reserve assumptions for anticipated adverse changes in mortality and discount rates, which reflect the current low interest rate environment and CNA’s view of expected investment yields, as discussed in Life & Group Non-Core Policyholder Reserves above. Further information on net prior year development for 2011 and 2010 is included in Note 8 of the Notes to Consolidated Financial Statements included under Item 8.
CNA Property and Casualty Insurance Operations
CNA’s property and casualty insurance operations consist of professional, financial, specialty property and casualty products and services and commercial insurance and risk management products.
In evaluating the results of the property and casualty businesses, CNA utilizes the loss ratio, the expense ratio, the dividend ratio and the combined ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders’ dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios. In addition, CNA also utilizes rate, retention and new business in evaluating operating trends. Rate represents the average change in price on policies that renew excluding exposure change. Retention represents the percentage of premium dollars renewed in comparison to the expiring premium dollars from policies available to renew. New business represents premiums from policies written with new customers and additional policies written with existing customers.
The following table summarizes the results of CNA’s property and casualty operations for the years ended December 31, 2012, 20112015, 2014 and 2010.2013.
Year Ended December 31, 2012 | CNA Specialty | CNA Commercial | Hardy | Total | ||||||||||||
| ||||||||||||||||
(In millions, except %) | ||||||||||||||||
Net written premiums | $ | 2,924 | $ | 3,373 | $ | 117 | $ | 6,414 | ||||||||
Net earned premiums | 2,898 | 3,306 | 120 | 6,324 | ||||||||||||
Net investment income | 592 | 854 | 3 | 1,449 | ||||||||||||
Net operating income (loss) | 453 | 250 | (21 | ) | 682 | |||||||||||
Net realized investment gains | 12 | 23 | 35 | |||||||||||||
Net income (loss) | 465 | 273 | (21 | ) | 717 | |||||||||||
Ratios: | ||||||||||||||||
Loss and loss adjustment expense | 63.2 | % | 77.9 | % | 60.3 | % | 70.8% | |||||||||
Expense | 31.5 | 35.3 | 57.2 | 34.0 | ||||||||||||
Dividend | 0.1 | 0.3 | 0.2 | |||||||||||||
| ||||||||||||||||
Combined | 94.8 | % | 113.5 | % | 117.5 | % | 105.0% | |||||||||
|
Year Ended December 31, 2015 | Specialty | Commercial | International | Total | ||||||||||||||||||||
| ||||||||||||||||||||||||
(In millions, except %) | ||||||||||||||||||||||||
Net written premiums | $ | 2,781 | $ | 2,818 | $ | 822 | $ | 6,421 | ||||||||||||||||
Net earned premiums | 2,782 | 2,788 | 804 | 6,374 | ||||||||||||||||||||
Net investment income | 474 | 593 | 52 | 1,119 | ||||||||||||||||||||
Net operating income | 502 | 331 | 33 | 866 | ||||||||||||||||||||
Net realized investment (losses) gains | (19 | ) | (28 | ) | 1 | (46 | ) | |||||||||||||||||
Net income | 483 | 303 | 34 | 820 | ||||||||||||||||||||
Other performance metrics: | ||||||||||||||||||||||||
Loss and loss adjustment expense ratio | 57.4 | % | 65.1 | % | 59.5 | % | 61.0 | % | ||||||||||||||||
Expense ratio | 31.1 | 36.1 | 38.1 | 34.2 | ||||||||||||||||||||
Dividend ratio | 0.2 | 0.3 | 0.2 | |||||||||||||||||||||
| ||||||||||||||||||||||||
Combined ratio | 88.7 | % | 101.5 | % | 97.6 | % | 95.4 | % | ||||||||||||||||
| ||||||||||||||||||||||||
Rate | 1 | % | 2 | % | (1 | )% | 1 | % | ||||||||||||||||
Retention | 86 | % | 79 | % | 76 | % | 81 | % | ||||||||||||||||
New Business (a) | $ | 279 | $ | 552 | $ | 111 | $ | 942 | ||||||||||||||||
Year Ended December 31, 2014 | ||||||||||||||||||||||||
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Net written premiums | $ | 2,839 | $ | 2,817 | $ | 880 | $ | 6,536 | ||||||||||||||||
Net earned premiums | 2,838 | 2,906 | 913 | 6,657 | ||||||||||||||||||||
Net investment income | 560 | 723 | 61 | 1,344 | ||||||||||||||||||||
Net operating income | 569 | 276 | 63 | 908 | ||||||||||||||||||||
Net realized investment gains (losses) | 9 | 9 | (1 | ) | 17 | |||||||||||||||||||
Net income | 578 | 285 | 62 | 925 | ||||||||||||||||||||
Other performance metrics: | ||||||||||||||||||||||||
Loss and loss adjustment expense ratio | 57.3 | % | 75.3 | % | 53.5 | % | 64.6 | % | ||||||||||||||||
Expense ratio | 30.1 | 33.7 | 38.9 | 32.9 | ||||||||||||||||||||
Dividend ratio | 0.2 | 0.3 | 0.2 | |||||||||||||||||||||
| ||||||||||||||||||||||||
Combined ratio | 87.6 | % | 109.3 | % | 92.4 | % | 97.7 | % | ||||||||||||||||
| ||||||||||||||||||||||||
Rate | 3 | % | 5 | % | (1 | )% | 3 | % | ||||||||||||||||
Retention | 87 | % | 73 | % | 74 | % | 78 | % | ||||||||||||||||
New Business (a) | $ | 309 | $ | 491 | $ | 115 | $ | 915 |
Year Ended December 31, 2011 | CNA Specialty | CNA Commercial | Total | |||||||||||||||||||||||||||||||||
Year Ended December 31, 2013 | Specialty | Commercial | International | Total | ||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||
(In millions, except %) | ||||||||||||||||||||||||||||||||||||
Net written premiums | $ | 2,872 | $ | 3,350 | $ | 6,222 | $ | 2,880 | $ | 2,960 | $ | 959 | $ | 6,799 | ||||||||||||||||||||||
Net earned premiums | 2,796 | 3,240 | 6,036 | 2,795 | 3,004 | 916 | 6,715 | |||||||||||||||||||||||||||||
Net investment income | 500 | 763 | 1,263 | 629 | 899 | 60 | 1,588 | |||||||||||||||||||||||||||||
Net operating income | 465 | 333 | 798 | 600 | 403 | 62 | 1,065 | |||||||||||||||||||||||||||||
Net realized investment gains (losses) | (3) | 10 | 7 | (2 | ) | (9 | ) | 3 | (8 | ) | ||||||||||||||||||||||||||
Net income | 462 | 343 | 805 | 598 | 394 | 65 | 1,057 | |||||||||||||||||||||||||||||
Ratios: | ||||||||||||||||||||||||||||||||||||
Loss and loss adjustment expense | 59.3% | 70.9% | 65.5% | |||||||||||||||||||||||||||||||||
Expense | 30.7 | 34.6 | 32.9 | |||||||||||||||||||||||||||||||||
Dividend | (0.1) | 0.3 | 0.1 | |||||||||||||||||||||||||||||||||
Other performance metrics: | ||||||||||||||||||||||||||||||||||||
Loss and loss adjustment expense ratio | 57.0 | % | 75.2 | % | 53.4 | % | 64.6 | % | ||||||||||||||||||||||||||||
Expense ratio | 29.9 | 34.0 | 39.7 | 33.1 | ||||||||||||||||||||||||||||||||
Dividend ratio | 0.2 | 0.3 | 0.2 | |||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||
Combined | 89.9% | 105.8% | 98.5% | |||||||||||||||||||||||||||||||||
Combined ratio | 87.1 | % | 109.5 | % | 93.1 | % | 97.9 | % | ||||||||||||||||||||||||||||
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Year Ended December 31, 2010 | ||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Net written premiums | $ | 2,691 | $ | 3,208 | $ | 5,899 | ||||||||||||||||||||||||||||||
Net earned premiums | 2,679 | 3,256 | 5,935 | |||||||||||||||||||||||||||||||||
Net investment income | 591 | 873 | 1,464 | |||||||||||||||||||||||||||||||||
Net operating income | 561 | 464 | 1,025 | |||||||||||||||||||||||||||||||||
Net realized investment gains (losses) | 18 | (14) | 4 | |||||||||||||||||||||||||||||||||
Net income | 579 | 450 | 1,029 | |||||||||||||||||||||||||||||||||
Ratios: | ||||||||||||||||||||||||||||||||||||
Loss and loss adjustment expense | 54.0% | 66.8% | 61.0% | |||||||||||||||||||||||||||||||||
Expense | 30.6 | 35.4 | 33.3 | |||||||||||||||||||||||||||||||||
Dividend | 0.5 | 0.4 | 0.4 | |||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Combined | 85.1% | 102.6% | 94.7% | |||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Rate | 6 | % | 9 | % | 1 | % | 7 | % | ||||||||||||||||||||||||||||
Retention | 85 | % | 74 | % | 79 | % | 79 | % | ||||||||||||||||||||||||||||
New Business (a) | $ | 342 | $ | 622 | $ | 117 | $ | 1,081 |
(a) | For International, this does not include Hardy new business. |
20122015 Compared with 20112014
Net written premiums increased $192decreased $115 million in 20122015 as compared with 2011.2014. This decrease was driven by the unfavorable effect of foreign currency exchange rates, the 2014 termination of a specialty product managing general underwriter relationship in Canada and unfavorable premium development at Hardy, for International, lower new business in Specialty and the residual effect of previous underwriting actions undertaken in certain business classes, offset by positive rate, higher retention and new business in Commercial. Net writtenearned premiums for 2012 included $117decreased $283 million related to Hardy and for 2011 included $128 million related to First Insurance Company of Hawaii (“FICOH”). Excluding Hardy and FICOH,in 2015 as compared with 2014, consistent with the increasetrend in net written premiums was primarily driven by positive rate achievement, partially offset by lower new business levels in certain lines in CNA Specialty. Net earned premiums increased $288 million in 2012 as compared with 2011, including $120 million related to Hardy during 2012 and $125 million related to FICOH during 2011. Excluding Hardy and FICOH, the increase in net earned premiums was consistent with increases in net written premiums and the impact of favorable premium development in CNA Commercial in 2012 as compared to unfavorable premium development in 2011.
The CNA Specialty average rate increased 5% in 2012 as compared to flat average rate in 2011 for the policies that renewed in each period. Retention of 86% and 87% was achieved in each period. The CNA Commercial average rate increased 7% in 2012 as compared with an increase of 2% in 2011 for the policies that renewed in each period. Retention of 78% was achieved in each period.premiums.
Net operating income decreased $116$42 million in 20122015 as compared to 2011.with 2014. The decrease in net operating income was primarily due to lower favorable net prior year development, higher catastrophe losses for CNA Commercial and decreased current accident year underwriting results in CNA Specialty. These unfavorable impacts were partially offset by higher net investment income and the inclusion of the Surety business on a wholly owned basisless favorable underwriting results in 2012 for CNA Specialty.International, partially offset by improved underwriting results in Commercial. Catastrophe losses were $243$85 million (after tax and noncontrolling interests) in 20122015 as compared to $130catastrophe losses of $92 million (after tax and noncontrolling interests) in 2011.
The combined ratio increased 6.5 points in 2012 as compared to 2011. The loss ratio increased 5.3 points in 2012 as compared to 2011, primarily due to higher catastrophe losses in CNA Commercial, lower favorable net prior year development and a higher current accident year loss ratio. The expense ratio increased by 1.1 points, primarily due to the favorable impact of recoveries in 2011 on insurance receivables written off in prior years in CNA Commercial and increased acquisition and underwriting expenses in CNA Specialty.2014.
Favorable net prior year development decreased by $189of $218 million from $428and $50 million was recorded in 2011 to $239 million in 2012.2015 and 2014. Further information on net prior year development for 2012 and 2011 is included in Note 8 of the Notes to Consolidated Financial Statements included under Item 8.
2011 Compared with 2010
Net written premiumsSpecialty’s combined ratio increased $323 million1.1 points in 20112015 as compared with 2010, primarily driven by new business, positive rate achievement in CNA Commercial, improved economic conditions reflected in insured exposures, as well as lower reinsurance costs. Net earned premiums increased $101 million in 2011 as compared with 2010, consistent with increases in net written premiums over recent quarters and favorable premium development in CNA Specialty, partially offset by unfavorable premium development in CNA Commercial.
The average rate for CNA Specialty was flat for 2011 as compared to a decrease of 2% in 2010 for the policies that renewed in each period. Retention of 87% and 86% was achieved in each period. The average rate for CNA Commercial increased 2% in 2011 as compared with an increase of 1% in 2010 for the policies that renewed in each period. Retention of 78% and 80% was achieved in each period.
Net operating income decreased $227 million in 2011 as compared to 2010 primarily due to lower net investment income, higher catastrophe losses and lower favorable net prior year development. Catastrophe losses were $130 million (after tax and noncontrolling interests) in 2011 as compared to $71 million (after tax and noncontrolling interests) in 2010.
The combined ratio increased 3.8 points in 2011 as compared to 2010.2014. The loss ratio increased 4.50.1 point due to deterioration in the current accident year loss ratio, primarily offset by higher net favorable prior year development. The expense ratio increased 1.0 point in 2015 as compared with 2014, driven by increased underwriting expenses and the unfavorable effect of lower net earned premiums.
Commercial’s combined ratio improved 7.8 points in 20112015 as compared to 2010, primarilywith 2014. The loss ratio improved 10.2 points, due to lower favorable net prior year development for 2015 as compared to unfavorable net prior year development for 2014 and higher catastrophe losses.an improved current accident year loss ratio. The expense ratio improved by 0.4increased 2.4 points primarilyin 2015 as compared with 2014, due to higher expenses including increased commissions, the favorable impact in 2014 of recoveries in 2011 on insurance receivables written off in prior years and the unfavorable effect of lower net earned premiums.
International’s combined ratio increased 5.2 points in CNA2015 as compared with 2014. The loss ratio increased 6.0 points, primarily due to less favorable net prior year development and an increase in the current accident year loss ratio driven by large losses. The expense ratio improved 0.8 points as compared with 2014, due to lower expenses, partially offset by the unfavorable effect of lower net earned premiums.
2014 Compared with 2013
Net written premiums decreased $263 million in 2014 as compared with 2013. The decrease in net written premiums was primarily driven by a lower level of new business, reflecting competitive market conditions in Commercial and Specialty, underwriting actions taken in certain business classes in Commercial and a 2013 commutation by Hardy, partially offset by continued rate increases in Commercial. Net earned premiums decreased $58 million in 2014 as compared with 2013, consistent with decreases in net written premiums.
Net operating income decreased $157 million in 2014 as compared to 2013, primarily due to lower net investment income, less favorable net prior year development and a legal settlement benefit of $28 million (after tax and noncontrolling interests) in 2013 for Commercial, partially offset by improved current accident year underwriting results in Specialty and Commercial. Catastrophe losses were $92 million (after tax and noncontrolling interests) in 2014 as compared to $100 million (after tax and noncontrolling interests) in 2013.
Favorable net prior year development decreased by $172$105 million, from $600$155 million in 20102013 to $428$50 million in 2011.2014. Further information on net prior year development for 2011 and 2010 is included in Note 8 of the Notes to Consolidated Financial Statements included under Item 8.
Life & GroupSpecialty’s combined ratio increased 0.5 points in 2014 as compared with 2013. The loss ratio increased 0.3 points due to less favorable net prior year development, partially offset by improvement in the current accident year loss ratio.
Commercial’s combined ratio and loss ratio in 2014 were largely consistent with 2013. The expense ratio improved 0.3 points in 2014 as compared with 2013, primarily due to the favorable impact of recoveries on insurance receivables written off in prior years.
International’s combined ratio improved 0.7 points in 2014 as compared with 2013. The loss ratio increased 0.1 points, due to the higher current accident year loss ratio, substantially offset by the impact of commutations. The expense ratio improved 0.8 points in 2014 as compared with 2013, primarily due to decreased acquisition expenses.
Other Non-Core and Other Operations
Life & GroupOther Non-Core primarily includes the results of the life and group lines ofCNA’s long term care business that areis in run-off. Other primarilyrun-off and also includes certain CNA corporate expenses, including interest on corporate debt and the results of certain property and casualty business in run-off, including CNA Re and A&EP. In 2010,Long term care policies were sold on both an individual and group basis. While considered non-core, new enrollees in existing groups were accepted through February 1, 2016.
The following table summarizes the results of CNA’s Other Non-Core operations for the years ended December 31, 2015, 2014 and 2013.
Year Ended December 31, 2015 | Life & Group Non-Core | Other | Other Non-Core | |||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||
Net earned premiums | $ | 548 | $ | 548 | ||||||||||||||||||||||||||
Net investment income | 704 | $ | 17 | 721 | ||||||||||||||||||||||||||
Net operating loss | (282 | ) | (117 | ) | (399 | ) | ||||||||||||||||||||||||
Net realized investment gains | 7 | 5 | 12 | |||||||||||||||||||||||||||
Net loss from continuing operations | (275 | ) | (112 | ) | (387 | ) | ||||||||||||||||||||||||
Year Ended December 31, 2014 | ||||||||||||||||||||||||||||||
Net earned premiums | $ | 556 | $ | 556 | ||||||||||||||||||||||||||
Net investment income | 700 | $ | 23 | 723 | ||||||||||||||||||||||||||
Net operating loss | (62 | ) | (76 | ) | (138 | ) | ||||||||||||||||||||||||
Net realized investment gains | 6 | 9 | 15 | |||||||||||||||||||||||||||
Net loss from continuing operations | (56 | ) | (67 | ) | (123 | ) | ||||||||||||||||||||||||
Year Ended December 31, 2013 | ||||||||||||||||||||||||||||||
Net earned premiums | $ | 559 | $ | 559 | ||||||||||||||||||||||||||
Net investment income | 662 | $ | 32 | 694 | ||||||||||||||||||||||||||
Net operating loss | (66 | ) | (182 | ) | (248 | ) | ||||||||||||||||||||||||
Net realized investment gains | 15 | 3 | 18 | |||||||||||||||||||||||||||
Net loss from continuing operations | (51 | ) | (179 | ) | (230 | ) |
2015 Compared with 2014
Net loss from continuing operations increased $264 million in 2015 as compared with 2014, driven by a $296 million charge related to recognition of a premium deficiency and a $9 million deficiency in claim reserves in CNA’s long term care business. The impact of both of these items was $177 million (after-tax and noncontrolling interests), as further discussed in the Reserves – Estimates and Uncertainties section of this MD&A. As a result of recognizing the premium deficiency, the actuarial assumptions used to determine long term care Future policy benefit reserves were unlocked. The December 31, 2015 Future policy benefit reserves for long term care are based on CNA’s best estimate assumptions with no margin for adverse deviation. Since there is no margin in the carried reserves, CNA ceded substantiallymay have to unlock its reserve assumptions in the future. Factors that could affect the need to unlock reserve assumptions include the significance and persistence of variances between actual experience and the expected results contemplated in the best estimate reserves as well as changes in CNA’s outlook of the future. The periodic operating results for this business in 2016 will reflect any variance between actual experience and the expected results contemplated in CNA’s best estimate reserves.
Excluding the effects of these items, results in 2015 were also negatively affected by higher morbidity in CNA’s long term care business. Results in 2014 were negatively affected by a $31 million loss (after-tax and noncontrolling interests) on a coinsurance transaction related to the sale of CNA’s former life insurance subsidiary.
Results in 2015 were also negatively impacted by an increase in gross A&EP claim reserves. While all of its legacy A&EP liabilitiesthis reserve development is reinsured under the Loss Portfolio Transfer,loss portfolio transfer, only a portion of the reinsurance recovery is currently recognized because of the application of retroactive reinsurance accounting. As a result, the comparison with 2014 was negatively affected by $78 million ($46 million after tax and noncontrolling interests), as further discussed in Note 8 of the Notes to Consolidated Financial Statements included under Item 8. Additionally, results in 2015 benefited from lower interest expense due to the maturity of higher coupon debt in the fourth quarter of 2014.
The following table summarizes the results of CNA’s Life & Group Non-Core and Other operations for the years ended December 31, 2012, 2011 and 2010.
Year Ended December 31, 2012 | Life & Group Non-Core | Other | Total | |||||||||
| ||||||||||||
(In millions) | ||||||||||||
Net earned premiums | $ | 560 | $ | 560 | ||||||||
Net investment income | 801 | $ | 32 | 833 | ||||||||
Net loss | (81) | (66 | ) | (147) | �� | |||||||
Year Ended December 31, 2011 | ||||||||||||
| ||||||||||||
Net earned premiums | $ | 569 | $ | 569 | ||||||||
Net investment income | 759 | $ | 32 | 791 | ||||||||
Net operating loss | (187) | (44 | ) | (231) | ||||||||
Net realized investment losses | (4) | (13 | ) | (17) | ||||||||
Net loss | (191) | (57 | ) | (248) | ||||||||
Year Ended December 31, 2010 | ||||||||||||
| ||||||||||||
Net earned premiums | $ | 582 | $ | 582 | ||||||||
Net investment income | 715 | $ | 137 | 852 | ||||||||
Net operating loss | (81) | (334 | ) | (415) | ||||||||
Net realized investment gains | 30 | 12 | 42 | |||||||||
Net loss | (51) | (322 | ) | (373) | ||||||||
|
20122014 Compared with 20112013
Net earned premiums, which relate primarily to the individual and group long term care businesses, decreased $9Results from continuing operations increased $107 million in 20122014 as compared with 2011,2013, primarily due to lapsingdriven by the prior year impact of policies in CNA’s individual long term care business, which is in run-off, partially offset by increased premiums resulting from rate increase actions related to this business.
Net loss decreased $101 million in 2012 as compared with 2011. The results include expenses of $22a $111 million (after tax and noncontrolling interests) deferred gain under retroactive reinsurance accounting related to the loss portfolio transfer. Results in 2012 and $1042014 included a $50 million (after tax and noncontrolling interests) in 2011benefit related to CNA’s payout annuity business, due to unlocking actuarial reserve assumptions. The initial reserving assumptions for these contracts were determined at issuance, including a margin for adverse deviation, and were locked in throughout the life of the contract unlesspostretirement plan curtailment, substantially offset by a premium deficiency developed. The increase to the related reserves in 2012 related to anticipated adverse changes in discount rates, which reflect the current low interest rate environment and CNA’s view of expected future investment yields. The increase in 2011 related to anticipated adverse changes in mortality and discount rates. Additionally, long term care claim reserves were increased $18$49 million (after tax and noncontrolling interests) lump sum pension plan settlement, as further discussed in 2012Note 14 of the Notes to Consolidated Financial Statements included under Item 8.
Results in CNA’s long term care and $30life settlement business improved in 2014, but that improvement was substantially offset by the $31 million (after tax and noncontrolling interests) in 2011.
The decrease in net loss was also driven byon the coinsurance transaction related to the sale of CNA’s former life insurance subsidiary and results for CNA’s remaining structured settlements. The improved results in Life & Group Non-Core life settlement contracts business and the impact of unfavorable performance in 2011 on its remaining pension deposit business.
2011 Compared with 2010
Net earned premiums, which relate primarily to the individual and group long term care businesses, decreased $13 million in 2011 as compared with 2010.
Net loss decreased $125 million in 2011 as compared with 2010, primarilywere driven by the loss of $328 million (after tax and noncontrolling interests) as a result of the Loss Portfolio Transfer consummated in the third quarter of 2010. As a result of that transaction, thehigher net investment income allocatedattributable to Other decreased substantially because of the lower net reservea higher invested asset base and associated risk capital.
These net loss decreases were partially offset by net loss increases in CNA’s payout annuity, pension deposit and long term care businesses. In 2011, CNA’s payout annuity business was negatively impacted by a $104 million (after tax and noncontrolling interests) increase in insurance reserves, as discussed above. In 2010, CNA’s payout annuity reserves were increased by $35 million (after tax and noncontrolling interests), resulting from unlocking assumptions. Additionally, long term care claim reserves were increased by $30 million (after tax and noncontrolling interests) in 2011.
A number of CNA’s separate account pension deposit contracts guarantee principal and an annual minimum rate of interest. If aggregate contract value in the separate account exceeds the fair value of the related assets, an additional Policyholders’ funds liability is established. In 2011, CNA increased this pretax liability by $18 million. In 2010, CNA decreased this pretax liability by $24 million.
Diamond Offshore’s operatingpretax income is primarily a function of contract drilling revenue earned less contract drilling expenses incurred or recognized. The two most significant variables affecting Diamond Offshore’s contract drilling revenues are dayrates for rigsearned and rig utilization rates achieved by its rigs, each of which is a function of rig supply and demand in the marketplace. These factors are not within Diamond Offshore’s control and are difficult to predict. RevenueDiamond Offshore generally recognizes revenue from dayrate drilling contracts are generally recognized as services are performed, consequently, when a rig is idle, no dayrate is earned and revenue will decrease as a result. Revenues can also be affected as a result of the acquisition or disposal of rigs, rig mobilizations, required surveys and shipyard projects. In connection with certain drilling contracts, Diamond Offshore may receive fees for the mobilization of equipment. In addition, some of Diamond Offshore’s drilling contracts require downtime before the start of the contract to prepare the rig to meet customer requirements for which it may or may not be compensated.
Diamond Offshore’s operatingpretax income is also a function of varying levels of operating expenses. Operating expenses generally are not affected by changes in dayrates, and short term reductions in utilization do not necessarily result in lower operating expenses. For instance, if a rig is to be idle for a short period of time, few decreases in operating expenses may actually occur since the rig is typically maintained in a prepared or “warm stacked” state with a full crew. In addition, when a rig is idle, Diamond Offshore is responsible for certain operating expenses such as rig fuel and supply boat costs, which are typically costs of the operator when a rig is under contract. However, if the rig is to be idle for an extended period of time, Diamond Offshore may reduce the size of a rig’s crew and take steps to “cold stack” the rig, which lowers expenses and partially offsets the impact on operatingpretax income. The cost of cold stacking a rig can vary depending on the type of rig. The costs of cold stacking a drillship, for example, is typically substantially higher than the cost of cold stacking a jack-up rig or an older floater rig.
Operating expenses represent all direct and indirect costs associated with the operation and maintenance of Diamond Offshore’s drilling equipment. The principal components of Diamond Offshore’s operating costs are, among other things, direct and indirect costs of labor and benefits, repairs and maintenance, freight, regulatory inspections, boat and helicopter rentals and insurance. Labor and repair and maintenance costs represent the most significant components of Diamond Offshore’s operating expenses. In general, labor costs increase primarily due to higher salary levels, rig staffing requirements and costs associated with labor regulations in the geographic regions in which Diamond Offshore’s rigs operate. In addition, the costs associated with training new and seasoned employees can be significant. Diamond Offshore expects its labor and training costs to increase in 2013 as a result of increased hiring and training activities as it continues the process of crewing its four new drillships. Costs to repair and maintain equipment fluctuate depending upon the type of activity the drilling rig is performing, as well as the age and condition of the equipment and the regions in which Diamond Offshore’s rigs are working.
OperatingPretax income is negatively impacted when Diamond Offshore performs certain regulatory inspections, which it refers to as a 5-year survey, or special survey, that are due every five years for each of Diamond Offshore’s rigs. Operating revenue decreases because these special surveys are generally performed during scheduled downtime in a shipyard. Operating expenses increase as a result of these special surveys due to the cost to mobilize the rigs to a shipyard, inspection costs incurred and repair and maintenance costs which are recognized as incurred. Repair and
maintenance activities may result from the special survey or may have been previously planned to take place during this mandatory downtime. The number of rigs undergoing a 5-year survey will vary from year to year, as well as from quarter to quarter.
In addition, operatingpretax income may also be negatively impacted by intermediate surveys, which are performed at interim periods between 5-year surveys. Intermediate surveys are generally less extensive in duration and scope than a 5-year survey. Although an intermediate survey may require some downtime for the drilling rig, it normally does not require dry-docking or shipyard time, except for rigs, generally older than 15 years that are located in the United Kingdom (“U.K.”) and Norwegian sectorssector of the North Sea.
As a result of anticipated downtime in the current year for rig mobilizations, regulatory surveys and shipyard projects,During 2016, Diamond Offshore expects contract drilling revenue in 2013 to decline from the levels attained in 2012. During 2013, 11 of Diamond Offshore’s rigs will require 5-year surveys and one of its U.K. rigs will require dry-docking for inspections. These 12 rigs will be out of service for approximately 830 days in the aggregate. Diamond Offshore also expects to spend an additional approximately 590535 days during 2013 for intermediate surveys, the mobilization of rigs and contract acceptance testing, including days associated with mobilization and extended maintenance projects, includingacceptance testing for theOcean GreatWhite, which is under construction and expected to be delivered in mid-2016 and rig modifications and acceptance testing for theOcean BlackRhino, which is scheduled to begin operating under a new contract preparation work forin January of 2017. Diamond Offshore expects theOcean Endeavor and North Sea enhancements forto be unavailable through mid-2016 as it demobilizes out of theOcean Patriot, each of which is expected to require approximately 180 days of downtime. Black Sea. Diamond Offshore can provide no assurance as to the exact timing and/or duration of downtime associated with regulatory inspections, planned rig mobilizations and other shipyard projects.
In April 2015, the Bureau of Safety and Environmental Enforcement (an agency established by the U.S. Department of the Interior that governs the offshore drilling industry on the Outer Continental Shelf) announced proposed rules that, when enacted, will include more stringent design requirements for well control equipment used in offshore drilling operations. Based on Diamond Offshore’s assessment of the proposed rules, it believes that it may need to incur significant capital costs to comply with the additional design requirements to enable its cold-stacked mid-water semisubmersibles to return to work in U.S. waters.
Diamond Offshore is self-insured for physical damage to rigs and equipment caused by named windstorms in the U.S. Gulf of Mexico.Mexico (“GOM”). If a named windstorm in the U.S. Gulf of MexicoGOM causes significant damage to Diamond Offshore’s rigs or equipment, it could have a material adverse effect on its financial condition, results of operations and cash flows. Under its insurance policy, that expires on May 1, 2013, Diamond Offshore carries physical damage insurance for certain losses other than those caused by named windstorms in the U.S. Gulf of MexicoGOM for which its deductible for physical damage is $25 million per occurrence. Diamond Offshore does not typically retain loss-of-hire insurance policies to cover its rigs.
In addition, under its current insurance policy, Diamond Offshore carries marine liability insurance covering certain legal liabilities, including coverage for certain personal injury claims, with no exclusions forand generally covering liabilities arising out of or relating to pollution and/or environmental risk. Diamond Offshore believes that the policy limit for its marine liability insurance is within the range that is customary for companies of its size in the offshore drilling industry and is appropriate for Diamond Offshore’s business. Diamond Offshore’s deductibles for marine liability coverage, including for personal injury claims, are $10$25 million for the first occurrence and vary in amounts ranging between $5 million and, if aggregate claims exceed certain thresholds, up to $100 million for each subsequent occurrence, depending on the nature, severity and frequency of claims whichthat might arise during the policy year.
Recent Developments
Internationally,Market fundamentals in the oil and gas industry deteriorated further in the fourth quarter of 2015 and have continued to decline in 2016. In early January 2016, oil prices fell to a 12-year low below $30 per barrel, with some industry analysts predicting even lower commodity prices before any market recovery. Oil markets continue to be volatile due to a number of geopolitical and economic factors. These factors, combined with significant operating losses incurred during the fourth quarter of 2015 by some independent and national oil companies and exploration and production companies, have caused most of these companies to announce additional cuts to their already reduced 2016 capital spending plans, reflecting delays in planned drilling or exploration projects, and, in some cases, termination of projects altogether. Rig tenders are infrequent and have generally been limited to short-term or well-to-well work not commencing until 2017 or later. There have been very few rig tenders thus far in 2016.
The offshore floater market is currently faced with an oversupply of drilling rigs, which thus far has only been slightly abated by the cold stacking and retirement of rigs. The number of available rigs continues to grow as contracted rigs come off contract and newbuilds are delivered, increasing competition. Competition for the limited number of
drilling jobs continues to be intense with some operators bidding multiple rigs on the same job, in some cases, bidding rigs of both higher and lower specifications. Operators are also continuing to attempt to sublet previously contracted rigs for which capital spending programs have been delayed or canceled. Industry analysts have predicted that the offshore contract drilling market may remain depressed with further declines in dayrates and utilization likely in 2016 and 2017.
As a result of the depressed market conditions and continued pessimistic outlook for the near term, certain of Diamond Offshore’s customers, as well as those of its competitors, have attempted to renegotiate or terminate existing drilling contracts. Such renegotiations could include requests to lower the contract dayrate, lowering of a dayrate in exchange for additional contract term, shortening the term on one contracted rig in exchange for additional term on another rig, early termination of a contract in exchange for a lump sum margin payout and many other possibilities. In addition to the potential for renegotiations, some of Diamond Offshore’s drilling contracts permit the customer to terminate the contract early after specified notice periods, sometimes resulting in no payment to Diamond Offshore or sometimes resulting in a contractually specified termination amount, which may not fully compensate it for the loss of the contract. During depressed market conditions, certain customers have utilized such contract clauses to seek to renegotiate or terminate a drilling contract or claim that Diamond Offshore has breached provisions of its drilling contracts in order to avoid their obligations to Diamond Offshore under circumstances where it believes it is in compliance with the contracts. Particularly during depressed market conditions, the early termination of a contract may result in a rig being idle for an extended period of time, which could adversely affect Diamond Offshore’s business. When a customer terminates a contract prior to the contract’s scheduled expiration, Diamond Offshore’s contract backlog is also adversely impacted.
Diamond Offshore’s results of operations and cash flows for the year ended December 31, 2015 have been materially impacted by depressed market conditions in the offshore drilling industry. Diamond Offshore currently expects that these adverse market conditions will continue for the foreseeable future. The continuation of these conditions for an extended period could result in more of its rigs being without contracts and/or cold stacked or scrapped and could further materially and adversely affect Diamond Offshore’s business. When Diamond Offshore cold stacks or elects to scrap a rig, they evaluate the rig for impairment. During 2015, Diamond Offshore recognized an aggregate impairment loss of $861 million, including an impairment loss of $499 million recognized in the fourth quarter of 2015.
As of February 16, 2016, 17 of Diamond Offshore’s rigs were not subject to a drilling contract with a customer, including 14 rigs that have been cold stacked. Of the cold stacked rigs, four jack-up rigs are currently being marketed for sale. A previously cold stacked jack-up rigwas sold in February of 2016.
Globally, the ultra-deepwater and deepwater floater markets are generally strong and continue to show signsbe depressed. Diminished or nonexistent demand, combined with an oversupply of further strengthening, particularly for ultra-deepwater rigs where there are reportedly few, if any, uncontractedhas caused floater dayrates to decline significantly. Offshore drilling contractors have been approached by customers with binding contracts, who have sought to and have successfully renegotiated such contracts at lower rates to obtain some financial relief in the current market, and, in some cases, have terminated contracts with and without compensation to the associated drilling contractor. Industry analysts expect offshore drillers to continue to scrap older, lower specification rigs; however, newer and higher specification rigs availablehave not been immune to work in 2013, inclusive of the expected 2013 newbuild deliveries, with the market expected to remain strong throughout 2013. Diamond Offshore believesrecycling trend. In addition, industry analysts predict that the diminished availabilitynumber of uncontracted floaters may more than double by the end of 2016.
Newbuild rig deliveries and established rigs in this market couldcoming off contract continue to put upward pressure on dayrates during 2013. However, due to its contracted backlogfuel an oversupply of floaters in 2013 (100% and 92% for itsboth the ultra-deepwater and deepwater fleets), Diamond Offshore has limited availabilitymarkets. In an effort to manage the oversupply of rigs and potentially avoid the cost of cold stacking newly-built rigs, which, in the case of dynamically-positioned rigs, can be significant, several drilling contractors have exercised options to delay the delivery of rigs by the shipyard or have exercised their right to cancel orders due to the late delivery of rigs. As of the date of this market and may not be able to benefit from higher price fixtures during that period. Newbuild orders for ultra-deepwater and deepwater floaters continued to be placed in 2012, including Diamond Offshore’s order for a fourth drillship and a semisubmersible rig, both of which are currently under construction. Basedreport, based on recent analystindustry data, there are 67 floater rigs, primarily ultra-deepwater and deepwater units,approximately 54 competitive, or non-owner-operated, newbuild floaters on order, or under construction, excluding an estimated 29 rigs to be built on behalf32 of Petróleo Brasileiro S.A., (“Petrobras”), which is currently Diamond Offshore’s most significant customer. Excluding Petrobras’ ordered rigs, nearly 73% of the floaters scheduled for delivery in 2014 and beyond are not yet contracted for future work, including two of Diamond Offshore’s drillships and one of its semisubmersible rigs under construction.work. In addition, Petrobras has recently announced that it plans to cap the number of its contracted deepwater rigs beginning in 2016. According tobased on industry analysts, they believe Petrobras intends to fill the majority of its deepwater requirement with its own rigs, whichreports, there are not yet under construction but which arecurrently 20 newbuild floaters scheduled for delivery in 2015 and beyond, although industry analysts believe that this timing may be delayed due to current Brazilian shipyard limitations. If imposed by Petrobras, this limit on the
number2016, of which only four rigs have been contracted rigs could lead to additional availability and increased competition in the deepwater market in the future.
Market demand for mid-water floaters is generally stable and is also strengthening in certain geographic markets. In both the U.K. and Norway sectors of the North Sea, the mid-water market is very strong with industry analysts predicting the next availability of rigs in late 2013. A 2012 discovery offshore Norway has resulted in increased interest in the harsh North Sea region, where there is a limited number of rigs capable of working and the barriers to entry are high, primarily due to significant rig modifications necessary to operate in the region. In February of 2013, Diamond Offshore announced its plan to upgrade one of its mid-water floaters for North Sea operations, with a minimum three-year contract for the upgraded rig in the U.K. sector of the North Sea beginning in 2014. In the Mediterranean region, demand remains solid, including the Black Sea region where recent gas discoveries have led to increased interest in the region. The Southeast Asia and Australia markets also remain steady with indications of possible strengthening.
Four of Diamond Offshore’s marketed jack-up rigs are currently operating in the Mexican waters of the Gulf of Mexico, where drilling activity remains stable and additional tendering activity is ongoing. Diamond Offshore’s other international jack-up commenced a two year bareboat charter offshore Ecuador in 2012. During 2012, Diamond Offshore sold six jack-up rigs, resulting in a pretax gain of approximately $76 million.
Drilling activity on the Outer Continental Shelf of the GOM has continued to strengthen and has surpassed pre-Macondo levels. Additionally, somefuture work; however, industry analysts predict that drilling activity, particularlydelivery dates may shift as newbuild owners negotiate with their respective shipyards.
While conditions in the mid-water market vary slightly by region, mid-water rigs have been adversely impacted by (i) lower demand, (ii) declining dayrates, (iii) increased regulatory requirements, including more stringent design requirements for well control equipment, which could significantly increase the capital needed to comply with design requirements that would permit such rigs to work in U.S. waters, (iv) the challenges experienced by lower specification units in this segment as a result of more complex customer specifications, and (v) the intensified competition resulting from the migration of some deepwater and ultra-deepwater units to compete against mid-water units. To date, the mid-water market will continuehas seen the highest number of cold-stacked and scrapped rigs. Since 2012, Diamond Offshore has sold 12 of its mid-water rigs for scrap. As market conditions remain challenging, Diamond Offshore expects higher specification rigs to strengthentake the place of lower specification units, where possible, leading to additional lower specification rigs being cold stacked or ultimately scrapped.
Impact of changes in 2013tax laws or their interpretation
Diamond Offshore operates through various subsidiaries in a number of countries throughout the world. As a result, it is subject to highly complex tax laws, treaties and beyond. However, Diamond Offshore’s ability to meet this demand is limitedregulations in the near term.jurisdictions in which it operates, which may change and are subject to interpretation. Changes in laws, treaties and regulations and the interpretation of such laws, treaties and regulations may put Diamond Offshore currently has two semisubmersible rigs on contract in the GOM, one ofat risk for future tax assessments and liabilities which is expected to have limited availability in the second half of 2013. It also has one mid-water floater and one jack-up rig there available for contract. Looking forward, Diamond Offshore’s two ultra-deepwater drillships as well as one semisubmersible rig under construction which are scheduled for delivery in 2014, none of which have been contractedcould be substantial and could be positionedhave a material adverse effect on its financial condition and our results of operations and cash flows. Further information is provided in this market. TheOcean Onyx which is currentlyNotes 10 and 18 of the Notes to Consolidated Financial Statements included under construction, is expected to commence a one-year contract plus potential option periods in the GOM during the third quarter of 2013.Item 8.
Contract Drilling Backlog
The following table reflects Diamond Offshore’s contract drilling backlog as of February 16, 2016 (based on contract information known at that time), October 1, 2013, October 17, 20122015 (the date reported in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012)2015) and February 1, 20129, 2015 (the date reported in our Annual Report on Form 10-K for the year ended December 31, 2011)2014). Contract drilling backlog as presented below includes only firm commitments (typically represented by signed contracts) and is calculated by multiplying the contracted operating dayrate by the firm contract period and adding one-half of any potential rig performance bonuses. Diamond Offshore’s calculation also assumes full utilization of its drilling equipment for the contract period (excluding scheduled shipyard and survey days); however, the amount of actual revenue earned and the actual periods during which revenues are earned will be different than the amounts and periods shown in the tables below due to various factors. Utilization rates, which generally approach 92% –- 98% during contracted periods, can be adversely impacted by downtime due to various operating factors including, but not limited to, weather conditions and unscheduled repairs and maintenance. Contract drilling backlog excludes revenues for mobilization, demobilization, contract preparation and customer reimbursables. No revenue is generally earned during periods of downtime for regulatory surveys. Changes in Diamond Offshore’s contract drilling backlog between periods are generally a function of the performance of work on term contracts, as well as the extension or modification of existing term contracts and the execution of additional contracts.
February 1, 2013 | October 17, 2012 | February 1, 2012 | February 16, 2016 | October 1, 2015 | February 9, 2015 | |||||||||||||||||||
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(In millions) | ||||||||||||||||||||||||
Floaters: | ||||||||||||||||||||||||
Ultra-Deepwater (a) | $ | 4,422 | $ | 4,660 | $ | 4,926 | $ | 4,415 | $ | 4,851 | $ | 5,390 | ||||||||||||
Deepwater | 1,229 | 1,373 | 1,081 | 375 | 439 | 748 | ||||||||||||||||||
Mid-Water | 2,649 | 2,510 | 2,348 | 356 | 401 | 611 | ||||||||||||||||||
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Total Floaters | 8,300 | 8,543 | 8,355 | 5,146 | 5,691 | 6,749 | ||||||||||||||||||
Jack-ups | 272 | 203 | 277 | 49 | 18 | 91 | ||||||||||||||||||
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Total | $ | 8,572 | $ | 8,746 | $ | 8,632 | $ | 5,195 | $ | 5,709 | $ | 6,840 | ||||||||||||
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(a) |
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The following table reflects the amount of Diamond Offshore’s contract drilling backlog by year as of February 1, 2013:16, 2016:
Year Ended December 31 | Total | 2013 | 2014 | 2015 | 2016 – 2019 | Total | 2016 | 2017 | 2018 | 2019 - 2020 | ||||||||||||||||||||||||||||||
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(In millions) | ||||||||||||||||||||||||||||||||||||||||
Floaters: | ||||||||||||||||||||||||||||||||||||||||
Ultra-Deepwater (a) | $ | 4,422 | $ | 979 | $ | 1,223 | $ | 996 | $ | 1,224 | $ | 4,415 | $ | 1,106 | $ | 1,201 | $ | 1,142 | $ | 966 | ||||||||||||||||||||
Deepwater | 1,229 | 569 | 456 | 142 | 62 | 375 | 238 | 137 | ||||||||||||||||||||||||||||||||
Mid-Water | 2,649 | 1,106 | 955 | 408 | 180 | 356 | 222 | 134 | ||||||||||||||||||||||||||||||||
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Total Floaters | 8,300 | 2,654 | 2,634 | 1,546 | 1,466 | 5,146 | 1,566 | 1,472 | 1,142 | 966 | ||||||||||||||||||||||||||||||
Jack-ups | 272 | 140 | 72 | 48 | 12 | 49 | 42 | 7 | ||||||||||||||||||||||||||||||||
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Total | $ | 8,572 | $ | 2,794 | $ | 2,706 | $ | 1,594 | $ | 1,478 | $ | 5,195 | $ | 1,608 | $ | 1,479 | $ | 1,142 | $ | 966 | ||||||||||||||||||||
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(a) |
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The following table reflects the percentage of rig days committed by year as of February 1, 2013.16, 2016. The percentage of rig days committed is calculated as the ratio of total days committed under contracts, as well as scheduled shipyard, survey and mobilization days for all rigs in Diamond Offshore’s fleet, to total available days (number of rigs multiplied by the number of days in a particular year). Total available days have been calculated based on the expected final commissioning datesdate for rigstheOcean GreatWhite, which is under construction.
Year Ended December 31 | 2013 (a) | 2014 (a) | 2015 (a) | 2016 - 2019 | 2016 | 2017 | 2018 | 2019–2020 | ||||||||||||||||||||||||||||
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Rig Days Committed (a) | ||||||||||||||||||||||||||||||||||||
Floaters: | ||||||||||||||||||||||||||||||||||||
Ultra-Deepwater | 100% | 86% | 57% | 14% | 67 | % | 58 | % | 57 | % | 25 | % | ||||||||||||||||||||||||
Deepwater | 92% | 44% | 15% | 2% | 30 | % | 17 | % | ||||||||||||||||||||||||||||
Mid-Water | 72% | 50% | 18% | 2% | 28 | % | 12 | % | ||||||||||||||||||||||||||||
Total Floaters | 83% | 60% | 30% | 6% | 45 | % | 34 | % | 25 | % | 11 | % | ||||||||||||||||||||||||
Jack-ups | 69% | 39% | 20% | 1% | 19 | % | 3 | % |
(a) |
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Dayrate and Utilization Statistics
Year Ended December 31 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||
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Revenue earning days (a) | ||||||||||||||||||||||||||||||||||
Floaters: | ||||||||||||||||||||||||||||||||||
Ultra-Deepwater | 2,475 | 2,387 | 1,873 | 2,690 | 2,151 | 2,392 | ||||||||||||||||||||||||||||
Deepwater | 1,605 | 1,718 | 1,342 | 1,339 | 1,206 | 1,530 | ||||||||||||||||||||||||||||
Mid-Water | 4,639 | 5,254 | 5,800 | 1,433 | 3,969 | 4,186 | ||||||||||||||||||||||||||||
Jack-ups (b) | 1,753 | 2,218 | 3,028 | |||||||||||||||||||||||||||||||
Jack-ups | 909 | 1,845 | 1,949 | |||||||||||||||||||||||||||||||
Utilization | ||||||||||||||||||||||||||||||||||
Floaters: | ||||||||||||||||||||||||||||||||||
Ultra-Deepwater | 85% | 82% | 66% | 64% | 65% | 82% | ||||||||||||||||||||||||||||
Deepwater | 88% | 94% | 74% | |||||||||||||||||||||||||||||||
Deepwater (c) | 52% | 55% | 84% | |||||||||||||||||||||||||||||||
Mid-Water | 68% | 72% | 79% | 36% | 61% | 64% | ||||||||||||||||||||||||||||
Jack-ups (d) | 53% | 47% | 61% | |||||||||||||||||||||||||||||||
Jack-ups | 42% | 78% | 76% | |||||||||||||||||||||||||||||||
Average daily revenue | ||||||||||||||||||||||||||||||||||
Floaters: | ||||||||||||||||||||||||||||||||||
Ultra-Deepwater | $ | 354,900 | $ | 342,900 | $ | 358,400 | $ | 497,700 | $ | 459,100 | $ | 357,300 | ||||||||||||||||||||||
Deepwater | 368,800 | 416,500 | 401,900 | 409,800 | 409,800 | 403,300 | ||||||||||||||||||||||||||||
Mid-Water | 263,600 | 269,600 | 281,000 | 270,500 | 271,300 | 286,200 | ||||||||||||||||||||||||||||
Jack-ups | 90,200 | 81,900 | 87,700 | 93,400 | 96,700 | 89,300 |
(a) | A revenue earning day is defined as a 24-hour period during which a rig earns a dayrate after commencement of operations and excludes mobilization, demobilization and contract preparation days. |
(b) |
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Utilization is calculated as the ratio of total revenue |
Utilization for Diamond Offshore’s |
Average daily revenue is defined as total contract drilling revenue |
Results of Operations
The following table summarizes the results of operations for Diamond Offshore for the years ended December 31, 2012, 20112015, 2014 and 20102013 as presented in Note 21 of the Notes to Consolidated Financial Statements included under Item 8:
Year Ended December 31 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||
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(In millions) | ||||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||
Contract drilling revenues | $ | 2,936 | $ | 3,254 | $ | 3,230 | $ | 2,360 | $ | 2,737 | $ | 2,844 | ||||||||||||||||||||||
Net investment income | 5 | 7 | 3 | 3 | 1 | 1 | ||||||||||||||||||||||||||||
Investment gains | 1 | |||||||||||||||||||||||||||||||||
Other | 131 | 73 | 128 | |||||||||||||||||||||||||||||||
Other revenues | 65 | 87 | 81 | |||||||||||||||||||||||||||||||
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Total | 3,072 | 3,335 | 3,361 | 2,428 | 2,825 | 2,926 | ||||||||||||||||||||||||||||
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Expenses: | ||||||||||||||||||||||||||||||||||
Contract drilling expenses | 1,537 | 1,549 | 1,391 | 1,228 | 1,524 | 1,573 | ||||||||||||||||||||||||||||
Other operating expenses | 572 | 535 | 546 | |||||||||||||||||||||||||||||||
Impairment of assets | 881 | 109 | ||||||||||||||||||||||||||||||||
Other expenses | 627 | 616 | 554 | |||||||||||||||||||||||||||||||
Interest | 46 | 73 | 91 | 94 | 62 | 25 | ||||||||||||||||||||||||||||
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Total | 2,155 | 2,157 | 2,028 | 2,830 | 2,311 | 2,152 | ||||||||||||||||||||||||||||
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Income before income tax | 917 | 1,178 | 1,333 | |||||||||||||||||||||||||||||||
Income tax expense | (223 | ) | (250 | ) | (413) | |||||||||||||||||||||||||||||
Income (loss) before income tax | (402 | ) | 514 | 774 | ||||||||||||||||||||||||||||||
Income tax (expense) benefit | 117 | (142 | ) | (245 | ) | |||||||||||||||||||||||||||||
Amounts attributable to noncontrolling interests | (357 | ) | (477 | ) | (474) | 129 | (189 | ) | (272 | ) | ||||||||||||||||||||||||
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Net income attributable to Loews Corporation | $ | 337 | $ | 451 | $ | 446 | ||||||||||||||||||||||||||||
Net income (loss) attributable to Loews Corporation | $ | (156 | ) | $ | 183 | $ | 257 | |||||||||||||||||||||||||||
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20122015 Compared with 20112014
Contract drilling revenue decreased $318 million and net income decreased $114$377 million in 20122015 as compared with 2011.2014, and contract drilling expense decreased $296 million during the same period. Contract drilling revenue for 2012 was negatively impacted by a decrease in both revenue earning days and average daily revenue earned by Diamond Offshore’s deepwater and mid-water floaters, partially offset by favorable revenue variances for its ultra-deepwater floaters. Contract drilling expense decreased $12 million primarily due to a decrease in expense forrevenue earned by both mid-water floaters and jack-ups due to the movement of certain rigs to other operating regions with lower cost structures, lower repair and inspection costs, as well as the absence of operating costs in 2012 for the recently sold jack-up rigs. The decrease in contract drilling expense wasfleets, partially offset by an increase in costs associated withrevenue earned by both ultra-deepwater and deepwater floaters,floaters. The decrease in contract drilling revenue also reflects a decrease in revenue earning days primarily due to higher personnel related, inspectioncold stacking, rig sales and shorebase support costs in 2012.incremental downtime between contracts for several rigs, partially offset by incremental revenue earning days for newly constructed and upgraded or enhanced rigs.
Revenue generated by ultra-deepwater floaters increased $61$352 million in 20122015 as compared with 2011,2014 primarily as a result of an increase in utilization of $248 million and higher average daily revenue earned of $104 million. Total revenue earning days increased primarily due to incremental revenue days for Diamond Offshore’s newbuild drillships, theOcean Endeavor,offshore Romania,and the Ocean Monarch, offshore Australia, partially offset by fewer revenue earning days for Diamond Offshore’s other ultra-deepwater floaters, including the early termination of drilling contracts for theOcean Baroness andOcean Clipper. Average daily revenue increased in 2015 primarily due to revenue associated with the operation of three additional drillships and theOcean Endeavor, including higher amortized mobilization and contract preparation revenue and a favorable dayrate adjustment for theOcean Courage.
Revenue generated by deepwater floaters increased $54 million in 2015 as compared with 2014 primarily due to an increase in utilization of $55 million. The increase in revenue earning days resulted from incremental operating days for four rigs after prolonged periods of nonproductive time for planned upgrades and surveys, as well as warm stacking between contracts, partially offset by fewer revenue earning days due to the cold stacking of theOcean Star and additional non-revenue earning days for rig mobilization and repairs.
Revenue generated by mid-water floaters decreased $689 million in 2015 as compared with 2014 primarily due to a decrease in utilization of $688 million. The decrease in revenue earning days resulted from the cold stacking or retirement of 12 mid-water rigs and the idling of theOcean Guardian andOcean Quest between contracts, partially offset by incremental revenue earning days for theOcean Patriot, operating in the North Sea, and the Ocean Ambassador,which is expected to complete its contract offshore Mexico in the first quarter of 2016.
Revenue generated by jack-up rigs decreased $94 million in 2015 as compared with 2014, primarily due to reduced utilization for five rigs that were under contract in 2014, but were cold stacked and marketed for sale at the end of 2015. In addition, revenue for 2015 was negatively impacted by a negotiated dayrate reduction for the remaining actively marketed jack-up rig, theOcean Scepter.
A net loss of $156 million in 2015 and net income of $183 million in 2014 resulted in a change of $339 million due to the impact of a $341 million asset impairment charge (after tax and noncontrolling interests) in 2015 related to the carrying value of 17 drilling rigs, as compared to the prior year when Diamond Offshore recorded a $55 million asset impairment charge (after tax and noncontrolling interests) related to the carrying values of six drilling rigs. Results in 2015 also include the recognition of a $20 million impairment charge to write off all goodwill associated with the Company’s investment in Diamond Offshore as well as higher depreciation and interest expense.
2014 Compared with 2013
Contract drilling revenue decreased $107 million in 2014 as compared with 2013. Contract drilling revenue decreased primarily due to fewer overall revenue earning days, partially offset by higher average daily revenue primarily earned by ultra-deepwater floaters.
Revenue generated by ultra-deepwater floaters increased $133 million in 2014 as compared with 2013 as a result of higher average daily revenue of $30$219 million, including the recognition of incremental mobilization and increasedcontract preparation fees of $51 million, partially offset by a decrease in utilization of $30 million due to higher revenue earning days. The increase in average$86 million. Average daily revenue isincreased primarily due to several rigs operating under higher dayrates earned by theOcean Monarch operating internationally during 2012as compared with the rig operating in the GOM in 2011.to 2013. The increasereduction in revenue earning days is primarily due to incremental downtime associated withfor inspections and shipyard projects, including theOcean MonarchConfidence life-extension project, downtime in 2011,between contracts and rig mobilizations, partially offset by a decreasereduction in revenue earning days in 2012 for other ultra-deepwater rigs as a result of scheduled surveys and shipyard projects as well as unscheduled downtime for repairs and incremental revenue earning days for theOcean BlackHawk which was placed in 2012.service in 2014.
Revenue generated by deepwater floaters decreased $135$123 million in 20122014 as compared with 2011,2013 primarily due to a $76lower utilization of $131 million, decrease inpartially offset by higher average daily revenue a $47of $8 million which reflected an increase in amortized mobilization and contract preparation revenue. The decrease in utilization as a result of fewer revenue earning days and a $12 million decrease in amortized mobilization fees. The decline in average daily revenue during 2012 is primarily due towas the completionresult of theOcean Valiant’s contract in Angola in December of 2011 which was at a significantly higher dayrate than the rig earned during 2012. The decrease in utilization during 2012 is primarily due to higher incremental downtime for shipyard projects and inspections as compared with 2011.
Revenue generated by mid-water floaters decreased $207 million in 2012 as compared with 2011, primarily due to a $166 million decrease in utilization, a $28 million decrease in average daily revenue and a $13 million decrease in amortized mobilization fees. Revenue earning days decreased by 615, primarily attributable to planned downtime
for mobilization and shipyard projects, unplanned downtime for repairs,associated with the warm stacking of rigs between contracts and additionalincremental scheduled downtime for surveys and shipyard projects and rig mobilizations, partially offset by incremental revenue earning days for theOcean Onyx which was placed into service during 2014.
Revenue generated by mid-water floaters decreased $121 million in 2014 as compared with 2013 primarily due to lower utilization of $62 million and lower average daily revenue of $59 million. The decrease in revenue earning days reflects the net impact of unplanned downtime associated with the cold stacking of rigs, unpaid equipment repairs and downtime between contracts, partially offset by a rig was cold-stacked.reduction in planned downtime for shipyard projects and regulatory inspections. The decrease in average daily revenue primarily reflects lower amortized mobilization and contract preparation revenue of $36 million and theOcean Quest operating in Vietnam at a lower dayrate in 2014 as compared with 2013, partially offset by higher dayrates earned by Diamond Offshore’s North Sea rigs.
Revenue generated by jack-up rigs decreased $37increased $4 million in 20122014 as compared with 2011,2013 primarily due to the salean increase in average daily revenue of six$14 million as a result of higher dayrates earned by several jack-up rigs in 2012, threeduring 2014, partially offset by lower utilization of which operated during 2011.$9 million compared to the prior year period.
Net income decreased $74 million in 20122014 as compared with 20112013 primarily reflecting a declinethe decrease in revenue, andthe impact of a $19$109 million impairment loss (after($55 million after tax and noncontrolling interests) on three mid-water floaters which are expectedrelated to be disposedthe carrying value of Diamond Offshore’s semisubmersible rigs, higher general and administrative expense and depreciation expense, as well as an increase in interest expense related to the $1.0 billion of senior unsecured notes issued in November of 2013. Net incomeGeneral and administrative costs for 2012 included2014 include higher employee compensation and termination benefits paid to certain current and former key executives. These increases were partially offset by a $32$9 million gain (after($3 million after tax and noncontrolling interests) recognized on the sale of sixthe previously held for sale jack-up rigs. In addition, interest expenserigOcean Spartan in the second quarter of 2014. Diamond Offshore recognized a charge for an uncollectible receivable of $23 million ($9 million after tax and noncontrolling interests) in 2013.
Diamond Offshore’s effective tax rate decreased $27 million in 20122014 as compared with 20112013 primarily due to incremental interest costs capitalized during 2012 related to the continuing rig construction projects.
Diamond Offshore’s annual effective tax rate for 2012 increased as compared with 2011. The higher effective tax rate in 2012 is primarily the result of differences in the mix of Diamond Offshore’s domestic and international pre-taxpretax earnings and losses,losses. Also contributing to the mixlower 2014 effective tax rate was the reversal of international$55 million ($27 million after noncontrolling interests) of reserves for uncertain tax positions in various foreign jurisdictions which were settled in Diamond Offshore’s favor or for which Diamond Offshore operates andthe statute of limitations had expired. The 2013 period was negatively impacted by a provision of $57 million ($27 million after noncontrolling interests) related to an uncertain tax position in Egypt, partially offset by the impact of a tax law provision that expired at the end of 2011. This provision allowed Diamond Offshore to defer recognition of certain foreign earnings for U.S. tax purposes during 2011, which deferral was unavailable in 2012. Diamond Offshore’s 2011 tax expense also included the reversal of $15 million of U.S. income tax expense, originally recognized in 2010, related to Diamond Offshore’s intention at that time to repatriate certain foreign earnings which changed in 2011 subsequent to its decision to build new drillships overseas.
The American Taxpayer Relief Act of 2012, or the Act, was signed into law on January 2, 2013. The Act extends through 2013 several expired or expiring temporary business provisions which are retroactively extended to the beginning of 2012. One of the extenders will again allow Diamond Offshore to defer recognition of certain foreign earnings for U.S. tax purposes. As required by GAAP, the effects of new legislation are recognized when signed into law. Consequently, Diamond Offshore expects to reduce its first quarter 2013reduced income tax expense by approximately $28 million as a result of recognizing the 2012 effect of the extenders.($13 million after noncontrolling interests).
As Diamond Offshore’s rigs frequently operate in different tax jurisdictions as they move from contract to contract, its effective tax rate can fluctuate substantially and its historical effective tax rates may not be sustainable and could increase materially.
2011 Compared with 2010
Contract drilling revenue increased $24 million and net income increased $5 million in 2011 as compared with 2010. Revenue generated by Diamond Offshore’s floater rigs increased an aggregate $95 million in 2011 as compared with 2010, while revenue generated by its jack-up fleet declined $71 million. Except for Diamond Offshore’s deepwater floaters, average daily revenue earned by its other rigs decreased during 2011 compared to the levels attained in 2010. Utilization for ultra-deepwater and deepwater floaters increased significantly in 2011 as compared with 2010; however, utilization for mid-water floater and jack-up fleets decreased in 2011. One additional mid-water floater and one jack-up rig were cold stacked during 2011. TheOcean Courage andOcean Valor, which began operating under contract late in the first quarter and in the fourth quarter of 2010, contributed incremental revenue of $162 million during 2011. Total contract drilling expense increased $158 million during 2011 as compared with 2010, reflecting incremental contract drilling expense for theOcean Courage andOcean Valor, higher amortized mobilization costs and higher other operating costs associated with rigs operating internationally rather than domestically.
Revenue from ultra-deepwater floaters increased $123 million in 2011 as compared with 2010, primarily due to increased utilization of $184 million, partially offset by a decrease in average daily revenue of $36 million and the receipt of a $31 million contract termination fee in 2010. Revenue earning days increased primarily due to the two new ultra-deepwater floaters which were under contract in Brazil for all of 2011 generating $162 million in incremental revenue. However, aggregate revenue earned by Diamond Offshore’s six other ultra-deepwater rigs decreased $39 million due to a lower average daily revenue earned, partially offset by an increase in revenue earning days due to downtime in 2010 associated with the relocation of three rigs from the GOM to international locations.
Revenue from deepwater floaters increased $169 million in 2011 as compared with 2010. This increase was primarily due to a $152 million increase in utilization and a $25 million increase in average daily revenue, partially offset by an $8 million decrease in amortized mobilization fees. Revenue earning days increased in 2011, primarily due to fewer non-operating days for repairs, inspections and contract preparation activities as compared to 2010.
Revenue from mid-water floaters decreased $197 million in 2011 as compared with 2010, primarily due to decreased utilization of $153 million, decreased average daily revenue of $59 million and decreased amortized mobilization fees of $9 million, partially offset by a $24 million demobilization fee received in relation to theOcean Yorktown’s completion of its contract offshore Brazil. Revenue earning days decreased by 546, primarily attributable to additional cold stacked days in 2011 compared to 2010, partially offset by less warm stacked days between contracts.
Revenue from jack-up rigs decreased $71 million in 2011 as compared with 2010, primarily due to decreased utilization of $71 million and decreased average daily revenue of $13 million, partially offset by a $13 million increase in amortized mobilization fees. Revenue earning days decreased by 810, reflecting the impact of cold stacking rigs during the period, the sale of theOcean Shield in July 2010 and an increase in warm stacked days in between contracts, partially offset by a decrease in the number of non-revenue earning days for repairs and mobilization of rigs.
Net income increased in 2011 as compared with 2010, primarily due to the changes in contract drilling revenue and expense discussed above. In addition, interest expense decreased $18 million, primarily due to interest capitalized in 2011 on Diamond Offshore’s three drillships under construction at that time. In 2010, Diamond Offshore recognized a pretax gain of $33 million related to the sale of theOcean Shield.
Diamond Offshore’s annual effective tax rate decreased in 2011 as compared with 2010. The lower effective tax rate in the current year is primarily the result of differences in the mix of Diamond Offshore’s domestic and international pretax earnings and losses, as well as the mix of international tax jurisdictions in which Diamond Offshore operates. Also contributing to the lower effective tax rate in 2011 was the impact of a tax law provision that expired at the end of 2009 but was subsequently signed back into law in December 2010. This provision allowed Diamond Offshore to defer recognition of certain foreign earnings for U.S. income tax purposes. The extension of this tax law provision, and Diamond Offshore’s decisions to build three new drillships overseas caused Diamond Offshore to reassess its intent to repatriate certain foreign earnings to the U.S. It is now Diamond Offshore’s intent to reinvest those earnings internationally. Consequently, Diamond Offshore is no longer providing taxes on those foreign earnings and has reversed previously accrued taxes related to those earnings.
Boardwalk Pipeline derives revenues primarily from the transportation and storage of natural gas and natural gas liquids (“NGLs”) and gathering and processing of natural gas for third parties. Transportation services consist of firm natural gas transportation, wherebywhere the customer pays a capacity reservation charge to reserve pipeline capacity at certain receipt and delivery points along pipeline systems, plus a commodity and fuel charge on the volume of natural gas actually transported, and interruptible natural gas transportation, wherebywhere the customer pays to transport gas only when capacity is available and used. Boardwalk Pipeline offers firm natural gas storage services in which the customer reserves and pays for a specific amount of storage capacity, including injection and withdrawal rights, and interruptible storage and parking and lending (“PAL”) services where the customer receives and pays for capacity only when it is available and used. Some PAL agreements are paid for at inception of the serviceBoardwalk Pipeline also transports and revenues for these agreements are recognized as service is provided over the term of the agreement.stores NGLs. Boardwalk Pipeline’s NGL contracts for most of its services are generally fee-based andfee based or based on minimum volume requirements, while others are dependent on actual volumes transported or stored, although in some cases minimum volume requirements apply.transported. Boardwalk Pipeline’s NGL storage rates are market based ratesmarket-based and contracts are typically fixed-pricefixed price arrangements with escalation clauses. Boardwalk Pipeline is not in the business of buying and selling natural gas and NGLs other than for system management purposes, but changes in the level of natural gas and NGLNGLs prices may impact the volumes of natural gas or NGLs transported and stored by customers on its pipeline systems. Due to the capital intensive nature of its business, Boardwalk Pipeline’s operating costs and expenses typically do not vary significantly based upon the amount of products transported, with the exception of fuel consumed at its compressor stations.
Market Conditions and Contract Renewals
TheTransportation rates that Boardwalk Pipeline is able to charge customers are heavily influenced by longer term trends in, for example, the amount and geographical location of natural gas being produced from unconventionalproduction and demand for gas by end users such as power plants, petrochemical facilities and liquefied natural gas production areas has greatly increased(“LNG”) export facilities. Changes in recent years. This dynamic drovecertain longer term trends such as the pipeline industry, including Boardwalk Pipeline, to construct substantial new pipeline infrastructure to support this development. However, the oversupplydevelopment of gas from these and other production areas has resulted in gas prices that are substantially lower than in recent years, which has caused producers to scale back production to levels below those that were expected when the new infrastructure was built. In addition, certain of these new supply basins, such asfrom the Marcellus and Utica Shale plays, are closerproduction areas located in the northeastern U.S. and changes to therelated pipeline infrastructure have resulted in a sustained narrowing of basis differentials corresponding to traditional high value markets served by interstate pipelines likeflow patterns on Boardwalk Pipeline, a development that has further affected howPipeline’s natural gas moves acrosspipeline systems (generally south to north and west to east), reducing the interstate pipeline grid. These factors have led to increased competition in certain pipeline markets, as well as substantially narrower price differentials than previous years between producing/supply areastransportation rates and market areas (basis spreads), which has put significant downward pressure on pricing for both firm and interruptible transportation capacityadversely impacting other contract terms that Boardwalk Pipeline is currently marketing.can negotiate with its customers for available transportation capacity and for contracts due for renewal for Boardwalk Pipeline’s transportation services. These conditions have had, and Boardwalk Pipeline does not expect basis spreadsexpects will continue to have, a material adverse effect on its system to improveBoardwalk Pipeline’s revenues, earnings and distributable cash flows. Further, during 2015, the prices of oil and natural gas declined significantly
from an increase in supplies mainly from shale production areas in the current year.U.S. which has adversely impacted the businesses of certain of Boardwalk Pipeline’s producer customers. If the recent declines in prices were to continue for a sustained period of time, the businesses of other members of Boardwalk Pipeline’s producer customer group could be adversely affected which, in turn, would reduce the demand for Boardwalk Pipeline’s services and could result in the non-renewal of contracted capacity, or the renewal of capacity at lower rates when existing contracts expire.
As of December 31, 2012, aA substantial portion of Boardwalk Pipeline’s transportation capacity wasis contracted for under firm transportation agreements. Actual revenues recognized from capacity reservation and minimum bill charges in 2015 were $940 million. Approximate projected revenues from capacity reservation and minimum bill charges under committed firm transportation agreements havingin place as of December 31, 2015, for each of the full years 2016 and 2017 are $1,010 million and $1,030 million. The amounts shown for 2015 and 2016 increased approximately $30 million and $110 million from what was previously reported in our 2014 10-K. Approximately half of the increase in each year is due to contract renewals during 2015 and new contracts that were entered into in 2015. The remainder is due to the settled Gulf South rate case, which resulted in a weighted-average remaining lifegeneral increase in rates, and the extension to 2023 of certain NNS contracts. Included in these revenues are approximately 6.0 years. However, each$25 million for 2017 that are anticipated under executed precedent transportation agreements for projects that are subject to regulatory approval to commence construction. Additional revenues Boardwalk Pipeline has recognized and may receive under firm transportation agreements based on actual utilization of the contracted pipeline facilities or any expected revenues for periods after the expiration dates of the existing agreements or execution of precedent agreements associated with growth projects or events that occurred subsequent to December 31, 2015 are not included in these amounts.
Each year a portion of Boardwalk Pipeline’s firm transportation agreements expire and mustneed to be renewed or replaced. Over the past several years, Boardwalk Pipeline has renewed or replaced contracts for most of the firm transportation capacity that expired in 2012, though on average at lower rates. The amount of contracted transportation capacity which will expire in 2013 is greater than in recent years. In light of the market conditions discussed above, Boardwalk Pipeline expects thatmany expiring transportation contracts renewed or entered into in 2013 will be at lower rates and for shorter terms than expiring contracts. Remainingin the past, or not renewed the contracts at all which has materially adversely impacted transportation revenues. Capacity not renewed and available capacity will be marketed and soldfor sale on a short term basis has been and continues to be sold under short term firm or interruptible contracts at rates reflective of basis spreads, which will also begenerally have been lower than historical rates, or in some cases not sold at lower rates based on current market conditions. Boardwalk Pipeline expects that these circumstances will negatively affectall. Rates for short term and interruptible transportation revenues and distributable cash flows in 2013.
The market for storage and PAL services is also impactedare influenced by the factors discussed above but can be more heavily affected by shorter term conditions such as wellcurrent and forecasted weather.
Demand has increased to transport gas from north to south, instead of south to north as had been the traditional flow pattern. This demand is being driven primarily by increases in gas production from the Marcellus and Utica production areas and growing demand for natural gas in the Gulf Coast area from new and planned power plants, petrochemical facilities and LNG export facilities. This flow pattern has resulted in growth opportunities for Boardwalk Pipeline that require significant capital expenditures, among other things, to make parts of Boardwalk Pipeline’s system bi-directional, and in many instances, will utilize existing pipeline capacity that has been turned back to Boardwalk Pipeline by customers that have not renewed expiring contracts. These projects have lengthy planning and construction periods and as a result, will not contribute to Boardwalk Pipeline’s earnings and cash flows until they are placed into service over the next several years. In some instances the projects remain subject to regulatory approval to commence construction. These projects are also subject to the risk that they may not be completed, may be impacted by significant cost overruns or may be materially changed prior to completion as a result of future developments or circumstances that Boardwalk Pipeline cannot predict at this time.
The value of Boardwalk Pipeline’s storage and PAL services (comprised of parking gas for customers and/or lending gas to customers) is affected by natural gas price differentials between time periods, such as winter to summer (time period price spreads). Time, price volatility of natural gas and other factors. Boardwalk Pipeline’s storage and parking services have greater value when the natural gas futures market is in contango (a positive time period price spreads declined from 2010 to 2011 and improvedspread, meaning that current price quotes for delivery of natural gas further in the first halffuture are higher than in the nearer term), while its lending service has greater value when the futures market is backwardated (a negative time period price spread, meaning that current price quotes for delivery of 2012; however,natural gas in the nearer term are higher than further in the future). The value of both storage and PAL services may also be favorably impacted by increased volatility in the price of natural gas, which allows Boardwalk Pipeline believesto optimize the value of its storage and PAL capacity.
Boardwalk Pipeline has seen the value of its storage and PAL services adversely impacted by some of the market factors discussed above, as well as there being fewer market participants from a decrease in the number of marketers taking storage positions, which has contributed to a narrowing of time period price spreads. Although in recent months, Boardwalk Pipeline has seen an increase in volatility that has allowed it to lock in favorable price spreads, generally, these factors have reduced the rates it can charge and the capacity it can sell under its storage and PAL services.
Pipeline System Maintenance
Boardwalk Pipeline incurs substantial costs for ongoing maintenance of its pipeline systems and related facilities, including those incurred for pipeline integrity management activities, equipment overhauls, general upkeep and repairs. These costs are not dependent on the amount of revenues earned from its natural gas transportation services. The Pipeline and Hazardous Materials Safety Administration (“PHMSA”) has developed regulations that require transportation pipeline operators to implement integrity management programs to comprehensively evaluate certain areas along pipelines and take additional measures to protect pipeline segments located in highly populated areas. These regulations have resulted in an overall increase in ongoing maintenance costs, including maintenance capital and maintenance expense. PHMSA has proposed more stringent regulations, including expanded integrity management requirements, automatic or remote-controlled valve use, leak detection system installation, pipeline material strength testing and verification of maximum allowable pressures of certain pipelines, which if implemented, could require Boardwalk Pipeline to incur significant additional costs.
Maintenance costs may be capitalized or expensed, depending on the nature of the activities. For any given reporting period, the mix of projects that Boardwalk Pipeline undertakes will affect the amounts it records as property, plant and equipment on its balance sheet or recognize as expenses, which impacts Boardwalk Pipeline’s earnings. In 2016, Boardwalk Pipeline expects to incur approximately $330 million to maintain its pipeline systems, of which approximately $130 million is expected to be maintenance capital. In 2015, these costs were $352 million, of which $143 million was recorded as maintenance capital. The projected decrease of approximately $22 million is primarily driven by the completion, in 2015, of maintenance activities associated with certain brine facilities. The maintenance capital amounts discussed above reflect pipeline integrity upgrades associated with certain segments of Boardwalk Pipeline’s natural gas pipelines which will be completed over the ensuing three years.
Credit Risk
Credit risk relates to the risk of loss resulting from the nonperformance by a customer of its contractual obligations. Boardwalk Pipeline actively monitors its customers’ credit profiles, as well as, the portion of its revenues generated from investment-grade and non-investment-grade customers. Approximately $1.0 billion of operating revenues in 2015 were earned from Boardwalk Pipeline’s top 50 customers. While almost all of these customers are rated investment-grade by at least one of the major credit rating agencies, many oil and gas producers have recently had their ratings placed under review.
Credit risk also exists in relation to Boardwalk Pipeline’s growth projects, both because the foundation shippers have made long-term commitments to it for capacity on such projects and certain of the foundation shippers have agreed to provide credit support as construction progresses. A large majority of these foundation shippers are rated investment-grade by at least one of the major credit rating agencies. As discussed elsewhere in this filing, Boardwalk Pipeline had one customer fail to post the required credit support on the contractually required date.
Natural gas producers comprise a significant portion of Boardwalk Pipeline’s revenues. For example, in 2015, approximately 50% of its revenues were generated from contracts with natural gas producers. During 2015, the prices of oil and natural gas declined significantly due to an increase in supplies mainly from shale production areas in the U.S. Should the prices of natural gas and oil remain at current forward pricing curves indicatelevels for a sustained period of time, or decline further, Boardwalk Pipeline could be exposed to increased credit risk associated with its producer customer group. Boardwalk Pipeline continues to monitor its credit risk carefully, especially as it relates to customers that may be affected by the spreadscurrent oil and natural gas markets.
Gulf South Rate Case
In October of 2014, Boardwalk Pipeline’s Gulf South subsidiary filed a rate case with the Federal Energy Regulatory Commission (“FERC”) pursuant to Section 4 of the Natural Gas Act of 1938 (Docket No. RP15-65), in which Gulf South requested, among other things, a reconfiguration of the transportation rate zones on the Gulf South system and, in general, an increase in its tariff rates. In 2015, an uncontested settlement was reached with Gulf South’s customers and approved by the FERC. The settlement will become effective March 1, 2016.
The settlement provides for, 2013 may notamong other things, (a) a system-wide rate design across the majority of the pipeline system; (b) a fuel tracker for determining future fuel rates; (c) a moratorium which prevents Gulf South or its customers from modifying the settlement rates until May 1, 2023, with certain exceptions; and (d) an extension of all No Notice Service (“NNS”) contracts to the end of the moratorium period at maximum rates, subject to each customer’s right to reduce capacity under those agreements from current levels by up to 6% on April 1, 2016, and by up to another 6% of their remaining contract capacity by April 1, 2020. The NNS customers had to elect by December 1, 2015, whether they wanted to reduce their initial contracted capacity. Only two NNS customers elected to reduce their contracted capacity effective on April 1, 2016.
The settled rates were moved into effect on November 1, 2015. Refunds for the difference between the rates as filed and as settled are required to be as favorable. Forward pricing curves change frequentlypaid to customers by May 1, 2016. For 2015, Boardwalk Pipeline recognized $20 million of additional operating revenues as a result of a variety of market factors, including weather, levels of storage gasthe rate case. Based on current, contracted capacity, and available capacity, among others and as such may not be a reliable predictor of actual future events. Accordingly,the elections made by Gulf South’s NNS customers, Boardwalk Pipeline cannot predict its futureexpects to recognize approximately $30 million in net revenues from interruptible storage and PAL services due toas a result of the uncertainty and volatilityrate case in market conditions discussed above.2016.
Results of Operations
The following table summarizes the results of operations for Boardwalk Pipeline for the years ended December 31, 2012, 20112015, 2014 and 20102013 as presented in Note 21 of the Notes to Consolidated Financial Statements included under Item 8:
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||||||||||
| ||||||||||||||||||||
(In millions) | ||||||||||||||||||||
Revenues: | ||||||||||||||||||||
Other revenue, primarily operating | $ | 1,187 | $ | 1,144 | $ | 1,128 | ||||||||||||||
Net investment income | 1 | |||||||||||||||||||
Investment losses | (3 | ) | ||||||||||||||||||
| ||||||||||||||||||||
Total | 1,184 | 1,144 | 1,129 | |||||||||||||||||
| ||||||||||||||||||||
Expenses: | ||||||||||||||||||||
Operating | 717 | 760 | 695 | |||||||||||||||||
Interest | 166 | 173 | 151 | |||||||||||||||||
| ||||||||||||||||||||
Total | 883 | 933 | 846 | |||||||||||||||||
| ||||||||||||||||||||
Income before income tax | 301 | 211 | 283 | |||||||||||||||||
Income tax expense | (70 | ) | (57 | ) | (73) | |||||||||||||||
Amounts attributable to noncontrolling interests | (122 | ) | (77 | ) | (96) | |||||||||||||||
| ||||||||||||||||||||
Net income attributable to Loews Corporation | $ | 109 | $ | 77 | $ | 114 | ||||||||||||||
|
Year Ended December 31 | 2015 | 2014 | 2013 | |||||||||||||||
| ||||||||||||||||||
(In millions) | ||||||||||||||||||
Revenues: | ||||||||||||||||||
Other revenue, primarily operating | $ | 1,253 | $ | 1,235 | $ | 1,231 | ||||||||||||
Net investment income | 1 | 1 | 1 | |||||||||||||||
| ||||||||||||||||||
Total | 1,254 | 1,236 | 1,232 | |||||||||||||||
| ||||||||||||||||||
Expenses: | ||||||||||||||||||
Operating | 851 | 931 | 776 | |||||||||||||||
Impairment of goodwill | 52 | |||||||||||||||||
Interest | 176 | 165 | 163 | |||||||||||||||
| ||||||||||||||||||
Total | 1,027 | 1,096 | 991 | |||||||||||||||
| ||||||||||||||||||
Income before income tax | 227 | 140 | 241 | |||||||||||||||
Income tax expense | (46 | ) | (11 | ) | (56 | ) | ||||||||||||
Amounts attributable to noncontrolling interests | (107 | ) | (111 | ) | (107 | ) | ||||||||||||
| ||||||||||||||||||
Net income attributable to Loews Corporation | $ | 74 | $ | 18 | $ | 78 | ||||||||||||
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20122015 Compared with 20112014
Total revenues increased $40$18 million in 20122015 as compared with 2011,2014. This increase is primarily due to $63 million of revenues earned by Boardwalk HP Storage Company, LLC (“HP Storage”), acquired in December of 2011, and Boardwalk Louisiana Midstream LLC (“Louisiana Midstream”), acquired in October of 2012, and higher PAL and storagetransportation revenues of $14$39 million resulting from improved market conditions.growth projects recently placed into service and includes $20 million of additional revenues from the Gulf South rate case. The increase in revenues wasrecently acquired Evangeline pipeline contributed an additional $11 million and Boardwalk Pipeline received $8 million of proceeds related to a business interruption claim. These increases were partially offset by the comparably warm weather experienced in the early part of the 2015 period in Boardwalk Pipeline’s market areas, a decrease in retained fuel of $34 million primarily due to lower natural gas prices.
Operating expenses decreased $43 million in 2012 as compared with 2011. The primary drivers of the decrease were charges incurred in 2011 including a $29 million impairment charge associated with Boardwalk Pipeline’s materials and supplies, an expense of $5 million representing an insurance deductible associated with replacing compressor assets and $4 million of gas losses associated with the Bistineau storage facility. In addition, in the 2012 period there were lower fuel costs of $21 millionretained due to lower natural gas prices and the effects of market and contract renewal conditions discussed above. Storage and PAL revenues were lower general and administrative expenses of $16by $20 million primarily as a result of cost management activitiesthe effects of unfavorable market conditions on time period price spreads.
Operating expenses decreased $80 million for 2015 as compared with 2014. This decrease is primarily due to a $94 million prior year charge to write off all capitalized costs associated with the terminated Bluegrass project, a $10 million franchise tax refund related to settlement of prior tax periods and a decrease in fuel and transportation expense due to lower operation and maintenance expenses of $11 million primarily from lower maintenance project costs and outside services.natural gas prices. These decreases were partially offset by $38higher depreciation expense of $35 million from an increase in the asset base, including the Evangeline acquisition and a change in the estimated lives of expenses incurredcertain older, low-pressure assets. Maintenance expense increased by HP$15 million primarily due to pipeline system maintenance activities as discussed above and the Evangeline acquisition. Interest expense increased $11 million primarily due to higher average debt balances as compared with 2014, lower capitalized interest related to capital projects and the expensing of previously deferred costs related to the refinancing of the revolving credit facility.
Net income for 2015 increased $56 million as compared with 2014, primarily reflecting the prior year Bluegrass charge of $55 million (after tax and noncontrolling interests) and higher revenues partially offset by higher depreciation and interest expense as discussed above.
2014 Compared with 2013
Total revenues increased $4 million in 2014, compared with 2013. This increase is primarily due to a $27 million increase in transportation and other revenues generally due to the colder than normal winter weather in Boardwalk Pipeline’s market areas and growth projects which were recently placed into service, partially offset by lower firm transportation revenues due to the effects of the market and contract renewal conditions discussed above. Additionally, revenues increased $13 million from fuel retained primarily due to higher natural gas prices and $15 million from gas sales associated with the Flag City processing plant, which were offset by gas purchases recorded in Operating expenses. Storage and Louisiana Midstreamparking and $9lending revenues were lower by $22 million primarily as a result of asset impairment charges.the effects of unfavorable market conditions on natural gas time period price spreads. The 20112013 period includedwas favorably impacted by a $30 million gain of $9 million from the sale of storage gas. Interest expense decreased $7 million for 2012, primarily from a charge recorded in 2011 on the early extinguishment of debt, partially offset by increased debt levels and higher average interest rates.
2011 Compared with 2010
Total revenues increased $15 million in 2011 as compared with 2010. Gas transportation revenues, excluding fuel, increased $61 million primarily from increased capacities resulting from the completion of several compression projects in 2010, operating the Fayetteville Lateral at its design capacity and the acquisition of HP Storage. PAL and storage revenues decreased $19 million due to decreased parking opportunities from unfavorable natural gas price spreads between time periods and fuel retained decreased $16 million primarily due to lower natural gas prices.
Operating expenses increased $65$155 million in 2011 as2014, compared with 2010. The2013. This increase includes a $29 million impairment charge associated with Boardwalk Pipeline’s materials and supplies, most of which was subsequently sold. There were also higher operation and maintenance expenses of $18 millionis primarily due to maintenance projectsa charge of $94 million to write off previously capitalized costs incurred for pipeline integrity managementthe Bluegrass Project, a project with The Williams Companies, Inc. which was dissolved due to cost escalations, construction delays and reliability spendinglack of customer commitments. The higher operating expenses were also caused by a $27 million increase in fuel and lower amountstransportation expenses primarily driven by gas purchases for the Flag City processing plant which were offset in revenues and the effects of labor capitalized from fewer growth projects and higher natural gas prices on fuel, a $17 million increase in depreciation and property taxes of $12 million associated withexpense primarily due to an increase in the asset base. These increases werebase and a $12 million increase in operation and maintenance expenses primarily due to increased maintenance expense projects.
Net income for 2014 decreased $60 million as compared to 2013 period primarily reflecting the Bluegrass Project related charge and higher operations, maintenance and depreciation expense, partially offset by lower fuel consumedthe prior year goodwill impairment charge of $9$16 million primarily due to lower natural gas prices. Interest expense increased by $22 million in 2011, primarily from a $13 million charge on the early extinguishment of debt(after tax and $8 million resulting from higher average interest rates on Boardwalk Pipeline’s long term debt and lower capitalized interest.
We use the following terms throughout this discussion of HighMount’s results of operations, with “equivalent” volumes computed with oil and NGL quantities converted to Mcf, on an energy equivalent ratio of one barrel to six Mcf:
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HighMount’s revenues and profitability depend substantially on natural gas and oil prices and HighMount’s ability to increase its natural gas and oil production. For the period July 2008 through December 2012, NYMEX natural gas contract settlement prices have ranged from a high of $13.11 in July 2008 to a low of $2.04 in May 2012. This price decline is reflective of an increase in the supply of natural gas resulting from new sources of supplynoncontrolling interests) discussed further below.
recoverable from shale formations, primarily the result of technological advancements in horizontal drilling and hydraulic fracturing. As a result of the decline in natural gas prices, HighMount changed its drilling program in 2011 to develop properties that produce primarily oil and natural gas liquids to benefit from the higher prices for these commodities. During 2012, NGL prices declined significantly and as a result HighMount reduced its overall drilling program and focused its capital investments primarily on oil producing properties. The reduced natural gas and NGL prices, as well as the increased drilling costs developing HighMount’s oil reserves negatively impacted HighMount’s net cash flow. Revenues from the sale of NGL and oil, including the impact of hedges, amounted to 46% of HighMount’s total revenues for the year ended December 31, 2012 as compared to 34% of its total revenue for the year ended December 31, 2011. The price HighMount realizes for its production is also affected by HighMount’s hedging activities, as well as locational differences in market prices. As a result of ceiling test impairment charges recorded in 2012 which were primarily due to significant declines in natural gas and NGL prices, HighMount performed quarterly goodwill impairment tests and no impairment charges were required.
HighMount’s operating expenses consist primarily of production expenses, production and ad valorem taxes, as well as depreciation, depletion and amortization (“DD&A”) expenses. Production expenses represent costs incurred to operate and maintain wells, related equipment and facilities and transportation costs. Production and ad valorem taxes increase or decrease primarily when prices of natural gas and oil increase or decrease, but they are also affected by changes in production and state incentive programs, as well as appreciated property values. HighMount calculates depletion using the units-of-production method, which depletes the capitalized costs and future development costs associated with evaluated properties based on the ratio of production volumes for the current period to total remaining reserve volumes for the evaluated properties. HighMount’s depletion expense is affected by its capital spending program and projected future development costs, as well as reserve changes resulting from drilling programs, well performance and revisions due to changing commodity prices.
Production and Sales Statistics
Presented below are production and sales statistics related to HighMount’s operations for 2012, 2011 and 2010:
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||
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Gas production (Bcf) | 39.1 | 45.4 | 57.4 | |||||||||
Gas sales (Bcf) | 36.6 | 42.7 | 53.6 | |||||||||
Oil production/sales (Mbbls) | 501.0 | 282.2 | 253.9 | |||||||||
NGL production/sales (Mbbls) | 2,357.2 | 2,693.7 | 3,008.9 | |||||||||
Equivalent production (Bcfe) | 56.2 | 63.3 | 77.0 | |||||||||
Equivalent sales (Bcfe) | 53.7 | 60.6 | 73.2 | |||||||||
Average realized prices without hedging results: | ||||||||||||
Gas (per Mcf) | $ | 2.67 | $ | 3.94 | $ | 4.30 | ||||||
NGL (per Bbl) | 37.35 | 52.70 | 40.96 | |||||||||
Oil (per Bbl) | 86.29 | 89.43 | 73.80 | |||||||||
Equivalent (per Mcfe) | 4.26 | 5.54 | 5.09 | |||||||||
Average realized prices with hedging results: | ||||||||||||
Gas (per Mcf) | $ | 4.24 | $ | 5.84 | $ | 6.03 | ||||||
NGL (per Bbl) | 38.36 | 39.60 | 34.84 | |||||||||
Oil (per Bbl) | 91.41 | 89.43 | 73.80 | |||||||||
Equivalent (per Mcfe) | 5.42 | 6.30 | 6.10 | |||||||||
Average cost per Mcfe: | ||||||||||||
Production expenses | $ | 1.33 | $ | 1.20 | $ | 1.12 | ||||||
Production and ad valorem taxes | 0.23 | 0.39 | 0.37 | |||||||||
General and administrative expenses | 0.76 | 0.68 | 0.62 | |||||||||
Depletion expense | 1.45 | 1.18 | 0.93 |
In the second quarter of 2010, HighMount completed the sale of exploration and production assets located in the Antrim Shale in Michigan and the Black Warrior Basin in Alabama. The Michigan and Alabama properties represented approximately 17% in aggregate of HighMount’s total proved reserves as of December 31, 2009, prior to the sales.
Results of Operations
The following table summarizes the results of operations for HighMount for the years ended December 31, 2012, 2011 and 2010 as presented in Note 21 of the Notes to Consolidated Financial Statements included in Item 8.
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||||||
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Revenues: | ||||||||||||||||
Other revenue, primarily operating | $ | 297 | $ | 390 | $ | 455 | ||||||||||
Investment losses | (34 | ) | (30) | |||||||||||||
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Total | 297 | 356 | 425 | |||||||||||||
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Expenses: | ||||||||||||||||
Other operating expenses | ||||||||||||||||
Impairment of natural gas and oil properties | 680 | |||||||||||||||
Operating | 239 | 245 | 258 | |||||||||||||
Interest | 14 | 46 | 61 | |||||||||||||
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Total | 933 | 291 | 319 | |||||||||||||
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Income (loss) before income tax | (636 | ) | 65 | 106 | ||||||||||||
Income tax (expense) benefit | 229 | (24 | ) | (48) | ||||||||||||
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Net income (loss) attributable to Loews Corporation | $ | (407 | ) | $ | 41 | $ | 58 | |||||||||
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2012 Compared with 2011
HighMount’s operating revenues decreased $93 million in 2012 as compared with 2011 due to decreased natural gas and NGL prices and sales volumes. Average prices realized per Mcfe were $5.42 in 2012 compared to $6.30 in 2011. HighMount sold 53.7 Bcfe in 2012 compared to 60.6 Bcfe in 2011. The decrease in sales volume was primarily due to the continued reduction in capital spending on natural gas drilling since 2008.
HighMount had hedges in place as of December 31, 2012 that covered approximately 59.5% and 26.6% of its total estimated 2013 and 2014 natural gas equivalent production at a weighted average price of $6.27 and $5.39 per Mcfe.
For the year ended December 31, 2012, HighMount recorded non-cash ceiling test impairment charges of $680 million ($433 million after tax) related to the carrying value of its natural gas and oil properties. The write-downs were the result of declines in natural gas and NGL prices. The December 31, 2012 ceiling test calculation was based on average 2012 prices of $2.76 per MMBtu for natural gas, $41.11 per Bbl for NGLs and $94.71 per Bbl for oil. See Valuation of HighMount’s Proved Reserves included in Critical Accounting Estimates above for further information.
Operating expenses were $239 million and $245 million in 2012 and 2011. Production expenses and production and ad valorem taxes were $98 million in 2012 as compared with $109 million in 2011. DD&A expenses were $101 million in 2012 as compared with $94 million in 2011. The increase in DD&A expenses was primarily due to negative reserve revisions in 2011 and projected future development activity focused on developing oil reserves.
In connection with refinancing its $1.1 billion variable rate term loans, a pretax loss of $34 million was recorded in the fourth quarter of 2011, reflecting derivative losses from termination of interest rate hedge activities. Interest expense decreased $32 million in 2012 as compared with 2011 due to a lower outstanding debt balance in 2012.
2011 Compared with 2010
HighMount’s operating revenues decreased $65 million in 2011 as compared with 2010. Operating revenues decreased by $46 million due to the sale of HighMount’s assets in Michigan and Alabama in 2010. Permian Basin operating revenues decreased by $19 million on sales volumes of 60.6 Bcfe in 2011 compared to 66.5 Bcfe in 2010. Average prices realized per Mcfe for Permian Basin sales were $6.30 in 2011 compared to $6.02 in 2010, which reflects hedging activities. The decrease in Permian Basin sales volume is primarily due to the reduction in HighMount’s drilling activity in response to lower natural gas prices.
HighMount had hedges in place as of December 31, 2011 that covered approximately 51.7% and 16.3% of its total estimated 2012 and 2013 natural gas equivalent production at a weighted average price of $5.79 and $5.44 per Mcfe.
In connection with refinancing its $1.1 billion variable rate term loans a pretax loss of $34 million was recorded in the fourth quarter of 2011, reflecting derivative losses from termination of interest rate hedge activities. As a result of the Michigan and Alabama asset sales in 2010, HighMount recognized a pretax loss of $30 million in Investment losses related to its interest rate and commodity hedging activities. HighMount used the proceeds from the basin sales to reduce the outstanding debt under its term loans by $500 million, which resulted in a $15 million decrease in interest expense in 2011.
Operating expenses decreased $13 million in 2011 as compared with 2010. The decline reflects a $21 million decrease related to the sale of HighMount’s assets in Michigan and Alabama, partially offset by an $8 million increase in operating expenses in the Permian Basin. The increase in operating expenses is due to higher DD&A expenses, partially offset by lower general and administrative expenses.
DD&A expenses were $94 million and $92 million for the years ended December 31, 2011 and 2010. This reflects a $10 million increase in the Permian Basin, due to negative reserve revisions and projected future development, offset by an $8 million decrease due to the sale of HighMount’s assets in Michigan and Alabama.
The following table summarizes the results of operations for Loews Hotels for the years ended December 31, 2012, 20112015, 2014 and 20102013 as presented in Note 21 of the Notes to Consolidated Financial Statements included under Item 8:
Year Ended December 31 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||
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Revenues: | ||||||||||||||||||||||||||||||||||
Other revenue, primarily operating | $ | 396 | $ | 336 | $ | 307 | ||||||||||||||||||||||||||||
Net investment income | 1 | 1 | 1 | |||||||||||||||||||||||||||||||
Operating revenue | $ | 527 | $ | 398 | $ | 323 | ||||||||||||||||||||||||||||
Revenues related to reimbursable expenses | 77 | 77 | 57 | |||||||||||||||||||||||||||||||
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Total | 397 | 337 | 308 | 604 | 475 | 380 | ||||||||||||||||||||||||||||
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Expenses: | ||||||||||||||||||||||||||||||||||
Other Operating expenses | ||||||||||||||||||||||||||||||||||
Operating | 366 | 306 | 284 | 467 | 351 | 299 | ||||||||||||||||||||||||||||
Reimbursable expenses | 77 | 77 | 57 | |||||||||||||||||||||||||||||||
Depreciation | 30 | 29 | 29 | 54 | 37 | 32 | ||||||||||||||||||||||||||||
Equity income from joint ventures | (24 | ) | (24 | ) | (17) | (43 | ) | (25 | ) | (13 | ) | |||||||||||||||||||||||
Interest | 11 | 9 | 10 | 21 | 14 | 9 | ||||||||||||||||||||||||||||
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Total | 383 | 320 | 306 | 576 | 454 | 384 | ||||||||||||||||||||||||||||
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Income before income tax | 14 | 17 | 2 | |||||||||||||||||||||||||||||||
Income tax expense | (7 | ) | (4 | ) | (1) | |||||||||||||||||||||||||||||
Income (loss) before income tax | 28 | 21 | (4 | ) | ||||||||||||||||||||||||||||||
Income tax (expense) benefit | (16 | ) | (10 | ) | 1 | |||||||||||||||||||||||||||||
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Net income attributable to Loews Corporation | $ | 7 | $ | 13 | $ | 1 | ||||||||||||||||||||||||||||
Net income (loss) attributable to Loews Corporation | $ | 12 | $ | 11 | $ | (3 | ) | |||||||||||||||||||||||||||
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EBITDA | $ | 55 | $ | 55 | $ | 41 | ||||||||||||||||||||||||||||
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2015 Compared with 2014
Operating revenues increased $129 million in 2015 as compared with 2014 primarily due to the acquisition of two hotels during 2015 and three hotels during 2014.
Earnings beforeOperating and depreciation expenses increased $116 million and $17 million in 2015 as compared with 2014 primarily due to the acquisition of two hotels during 2015 and three hotels during 2014.
Equity income increased $18 million in 2015 as compared with 2014 primarily due to improved performance of the Universal Orlando joint ventures, partially offset by a $5 million impairment of a joint venture equity interest in a hotel property.
Interest expense increased $7 million in 2015 as compared with 2014 primarily due to higher debt levels, including refinancings and new property-level debt incurred to fund acquisitions.
Net income increased slightly as compared to the prior year as higher income from Universal Orlando joint venture properties was partially offset by the negative impact of transaction and transition costs for hotels acquired during the year and higher interest expense. In addition, the effective tax depreciationrate increased due to an adjustment for prior years’ estimate and amortization (“EBITDA”) isa higher state tax accrual for an indicatorincrease in the ratio of operating performance usedFlorida based income.
2014 Compared with 2013
Operating revenues increased $75 million in 2014 as compared to 2013, primarily due to acquisitions in 2014 and the reopening in January of 2014 of the Loews Regency New York Hotel, which was closed for renovation in 2013. These increases were partially offset by the reduction in revenue recognized by Loews Hotels to measure its ability to service debt, fund capital expenditures and expand its business. EBITDAas a result of the sale of equity interests in two hotels in July of 2013. For periods following the sale of these equity interests, Loews Hotels’ share of earnings or losses for these hotels is a non-GAAP financial measure that is not meant to replace netincluded in Equity income as defined by GAAP. The following table reconciles EBITDA to Net income attributable to Loews Corporation for the years ended December 31, 2012, 2011 and 2010.from joint ventures.
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||||||
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EBITDA | $ | 55 | $ | 55 | $ | 41 | ||||||||||
Depreciation | (30 | ) | (29 | ) | (29) | |||||||||||
Interest | (11 | ) | (9 | ) | (10) | |||||||||||
Income tax expense | (7 | ) | (4 | ) | (1) | |||||||||||
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Net income attributable to Loews Corporation | $ | 7 | $ | 13 | $ | 1 | ||||||||||
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2012 Compared with 2011
RevenuesOperating expenses increased by $60$52 million in 20122014 as compared to 2011. Net income decreased by $6 million as compared to 2011.
The increase in revenues is2013 primarily due to $21 million from the addition of three hotels and the reopening of the Loews HollywoodRegency New York Hotel, to the portfoliopartially offset by a reduction in expenses as a result of owned properties for five months of 2012 and higher revenue per available room (“RevPAR”). RevPAR is an industry measure of the combined effect of occupancy rates and average room rates on room revenues. Other hotel operating revenues primarily include guest charges for food and beverages. RevPAR, occupancy rates and average room rates as discussed below are for owned hotels only. RevPAR increased $5.71 to $168.89 in 2012 as compared to 2011 reflecting improving occupancy and average room rates. Occupancy rates increased to 75.3% in 2012 from 73.6% in 2011. Average room rates increased by $2.69, or 1.2%, in 2012 as compared to 2011. In addition, revenues include $4 million from the gain on the sale of the Loews Denver Hotelequity interests in the fourth quarter of 2012.two hotels.
Revenues and operating expenses for 2012 also include $27 million of cost reimbursements from joint venture and managed properties, relating mainly to payroll incurred on behalf of the owners of hotel properties managed by us.
Equity income from joint venture properties increased $12 million in 2012 is consistent with 2011. Increases in average room rates at joint venture properties was offset by lower occupancy rates in 20122014 as compared to 2011.2013. The increase was primarily due to improved performance of the Universal Orlando properties, including the addition of Universal’s Cabana Bay Beach Resort.
Operating expensesInterest expense increased $60$5 million in 20122014 as compared to 2011,2013, primarily due to expensesthe refinancing of $22a $125 million including acquisitionmortgage loan for a new $300 million mortgage loan and transition related costs,incremental interest expense from the Loews Hollywood Hotel and $13 million of costs relatedproperty-level debt incurred to the closure of the Loews Regency Hotel for renovation,fund acquisitions. These increases were partially offset by $7 million related to the partial recoveryreduction in interest expense as a result of a loan guarantee payment. In addition, operating expensesthe sale of equity interests in 2012 include $27 million for cost reimbursements from joint venture and managed properties as discussed above.two hotels.
2011 Compared with 2010
Revenues increased by $29 million in 2011 as compared to 2010. Net income increased by $12 million as compared to 2010.
RevPAR increased $15.29 to $163.18 in 2011 as compared to 2010. The increase in RevPAR reflects improving occupancy and average room rates. Occupancy rates increased to 73.6% in 2011 from 70.1% in 2010. Average room rates increased by $10.46, or 5.0%, in 2011 as compared to 2010.
The improvement in operating results for 2011 as compared to 2010 is due primarily to increases in RevPAR described above, and increases in equity income from joint venture properties reflecting higher occupancy and average room rates.
Corporate and Other operations consist primarily of investment income at the Parent Company, corporate interest expenses and other corporate administrative costs. Investment income includes earnings on cash and short term investments held at the Parent Company level to meet current and future liquidity needs, as well as results of limited partnership investments and the trading portfolio managed to take advantage of potential market opportunities.portfolio.
The following table summarizes the results of operations for Corporate and Other for the years ended December 31, 2012, 20112015, 2014 and 20102013 as presented in Note 21 of the Notes to Consolidated Financial Statements included under Item 8:
Year Ended December 31 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||
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(In millions) | ||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||
Net investment income | $ | 61 | $ | 1 | $ | 187 | $ | 22 | $ | 94 | $ | 141 | ||||||||||||||||||
Other | 1 | (2 | ) | (3) | ||||||||||||||||||||||||||
Other revenues | 6 | 3 | 2 | |||||||||||||||||||||||||||
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Total | 62 | (1 | ) | 184 | 28 | 97 | 143 | |||||||||||||||||||||||
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Expenses: | ||||||||||||||||||||||||||||||
Operating | 106 | 87 | 80 | 116 | 103 | 98 | ||||||||||||||||||||||||
Interest | 40 | 44 | 47 | 74 | 74 | 62 | ||||||||||||||||||||||||
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Total | 146 | 131 | 127 | 190 | 177 | 160 | ||||||||||||||||||||||||
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Income (loss) before income tax | (84 | ) | (132 | ) | 57 | |||||||||||||||||||||||||
Income tax (expense) benefit | 29 | 47 | (24) | |||||||||||||||||||||||||||
Loss before income tax | (162 | ) | (80 | ) | (17 | ) | ||||||||||||||||||||||||
Income tax benefit | 59 | 28 | 7 | |||||||||||||||||||||||||||
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Net income (loss) attributable to Loews Corporation | $ | (55 | ) | $ | (85 | ) | $ | 33 | ||||||||||||||||||||||
Net loss attributable to Loews Corporation | $ | (103 | ) | $ | (52 | ) | $ | (10 | ) | |||||||||||||||||||||
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20122015 Compared with 20112014
Revenues increasedNet investment income decreased by $63$72 million for 2012in 2015 as compared to 2011,with 2014 primarily due to improvedlower performance of equityequities and fixed income investmentsderivative related securities in the trading portfolio partially offset byand lower performance ofresults from limited partnership investments for 2012.investments.
Net results improved $30decreased by $51 million for 2012in 2015 as compared to 2011. These changes werewith 2014 primarily due primarily to the change in revenues discussed above and increased corporate overhead expenses.
2014 Compared with 2013
Net investment income decreased by $47 million in 2014 as compared to 2013, primarily due to lower results from limited partnership investments and lower performance of fixed income investments and equity based investments, partially offset by an increaseimproved performance of foreign currency related investments in corporate overhead expenses and reduced corporate overhead allocated to our subsidiaries.the trading portfolio.
2011 Compared with 2010
Revenues decreased by $185Interest expense increased $12 million in 20112014, primarily due to a May of 2013 public offering of $500 million aggregate principal amount of 2.6% senior notes due May 15, 2023 and $500 million aggregate principal amount of 4.1% senior notes due May 15, 2043.
Net results decreased $42 million in 2014 as compared to 2010. There was2013, primarily due to the change in revenues and expenses discussed above.
Discontinued Operations
Losses from discontinued operations (after tax and noncontrolling interests) were $371 million and $554 million for the years ended December 31, 2014 and 2013. Results for the year ended December 31, 2014 reflect an impairment charge of $138 million related to the sale of HighMount, a net lossceiling test impairment charge of $85$19 million and losses from HighMount operations of $37 million, including exit and disposal costs related to the sale. Results for the year ended December 31, 2013 include a goodwill impairment charge of $382 million and a ceiling test impairment charge of $186 million.
Results for the year ended December 31, 2014 also include income from CAC operations of $12 million and an impairment charge of $189 million recorded in 2011 as compared to netconnection with the sale of the CAC business. CAC operations had income of $33$20 million in 2010. Due to less favorable equity investment returns and overall capital market volatility,for the results of the trading portfolio were flat for 2011 as compared to significant gains in 2010. Earnings on cash and short term investments were also negatively impacted in 2011 by lower effective income yields.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
CNA’s primary operating cash flow sources are premiums and investment income from its insurance subsidiaries. CNA’s primary operating cash flow uses are payments for claims, policy benefits and operating expenses, including interest expense on corporate debt. Additionally, cash may be paid or received for income taxes.
For 2012,2015, net cash provided by operating activities was $1.3 billion as compared with $1.7$1.4 billion for 2011. Cash flows resulting from reinsurance contract commutations are reported as operating activities. During 2012, operatingeach of 2015 and 2014. In 2015, cash flows were decreased by $30 million related to net cash outflows from commutations as compared with net cash inflows of $547 million during 2011. Additionally, CNA received a $29 million tax refund in 2012 as compared to tax payments of $61 million in 2011.
Net cash usedprovided by operating activities was $89 million in 2010. As further discussed in Note 8 of the Notesreflected lower premiums collected and decreased receipts relating to Consolidated Financial Statements included under Item 8returns on limited partnerships, offset by lower net claim payments. In 2014, cash provided by operating activities reflected increased receipts relating to returns on limited partnerships and previously referenced in this MD&A, in 2010 CNA completed the Loss Portfolio Transfer transaction. As a result of this transaction, operating cash flows were reduced for the initiallower net cash settlement with NICO. Excluding the impact of this transaction, netclaim payments, substantially offset by increased tax payments. Net cash provided by operating activities was approximately $1.8$1.2 billion for 2010.in 2013. In 2013, CNA contributed $75 million to the CNA Retirement Plan.
Cash flows from investing activities include the purchase and disposition of available-for-sale financial instruments. Additionally, cash flows from investing activitiesinstruments and may include the purchase and sale of businesses, land, buildings, equipment and other assets not generally held for resale.
Net cash used by investing activities was $934$372 million for 2012,2015, as compared with net cash used of $1.1 billion for 2011$918 million and net cash provided of $767$898 million for 2010.2014 and 2013. The cash flow from investing activities is impactedaffected by various factors such as the anticipated payment of claims, financing activity, asset/liability management and individual security buy and sell decisions made in the normal course of portfolio management. Additionally, during 2012, CNA acquired Hardy. Net cash provided by investing activities in 2010 primarily related to the sale of short term investments which was used to fund the $1.9 billion initial net cash settlement with NICO as discussed above.
Cash flows from financing activities may include proceeds from the issuance of debt and equity securities, outflows for stockholdershareholder dividends or repayment of debt and outlays to reacquire equity instruments. Net cash used by financing activities was $239$807 million, $644$519 million and $742$264 million for 2012, 20112015, 2014 and 2010.2013. Cash used by financing activities reflected an increased special shareholder dividend in 2015 as compared to 2014. Additionally, in 2014, CNA issued $550 million of senior notes.
Liquidity
CNA believes that its present cash flows from operations, investing activities and financing activities are sufficient to fund its current and expected working capital and debt obligation needs and CNA does not expect this to change in the near term. There are currently no amounts outstanding under CNA’s $250 million senior unsecured revolving credit facility.facility and no borrowings outstanding through CNA’s membership in the Federal Home Loan Bank of Chicago (“FHLBC”).
CNA has an effective Registration Statement on Form S-3 registering the future sale of an unlimited amount of its debt and equity securities.
Dividends
Dividends of $0.60$3.00 per share of CNA’s common stock, including a special dividend of $2.00 per share, were declared and paid in 2012.2015. On February 8, 2013,5, 2016, CNA’s Board of Directors declared a quarterly dividend of $0.20$0.25 per share and a special dividend of $2.00 per share, payable March 7, 20139, 2016 to stockholdersshareholders of record on February 21, 2013.22, 2016. The declaration and payment of future dividends is at the discretion of CNA’s Board of Directors and will depend on many factors, including CNA’s earnings, financial condition, business needs, and regulatory constraints.
Ratings
Ratings are an important factor in establishing the competitive position of insurance companies. CNA’s insurance company subsidiaries are rated by major rating agencies and these ratings reflect the rating agency’s opinion of the insurance company’s financial strength, operating performance, strategic position and ability to meet its obligations to policyholders. Agency ratings are not a recommendation to buy, sell or hold any security and may be revised or withdrawn at any time by the issuing organization. Each agency’s rating should be evaluated independently of any other agency’s rating. One or more of these agencies could take action in the future to change the ratings of CNA’s insurance subsidiaries.
The table below reflects the various group ratings issued by A.M. Best Company (“A.M. Best”), Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s (“S&P for the property and casualty and life companies.&P”). The table also includes the ratings for CNA senior debt.
Insurance Financial Strength Ratings | Corporate Debt Ratings | |||||||
| ||||||||
Group |
Group | CNA Senior Debt | ||||||
| ||||||||
A.M. Best | A | A | bbb | |||||
Moody’s | A3 | Not rated | Baa2 | |||||
S&P |
S&P maintains a positive outlook and A.M. Best, maintainsMoody’s and S&P each maintain a stable outlook on CNA. In June
Hardy through Syndicate 382, benefits from the collective financial strength of 2012, Moody’s upgraded CNA’s debt rating to Baa2the Lloyd’s market, which is rated A+ by S&P with a stable outlook affirmed CNA’s insurance financial strength rating and revised its outlook on CNA’s financial strength rating toA by A.M. Best with a positive from stable.outlook.
If CNA’s property and casualty insurance financial strength ratings were downgraded below current levels, its business and results of operations could be materially adversely affected. The severity of the impact on CNA’s business is dependent on the level of downgrade and, for certain products, which rating agency takes the rating action. Among the adverse effects in the event of such downgrades would be the inability to obtain a material volume of business from certain major insurance brokers, the inability to sell a material volume of CNA’s insurance products to certain markets and the required collateralization of certain future payment obligations or reserves. Downgrades of corporate debt ratings could result in adverse effects upon CNA’s liquidity position, including negatively impacting CNA’s ability to access capital markets, and increasing its financing costs.
Further, additional collateralization may be required for certain settlement agreements and assumed reinsurance contracts, as well as derivative contracts, if CNA’s ratings or other specific criteria fall below certain thresholds.
Cash and investments totaled $1.5 billion$130 million at December 31, 2012,2015, compared to $1.2 billion$250 million at December 31, 2011.2014. In 2012,2015, Diamond Offshore paid regular cash dividends totaling $490 million, consisting of aggregate regular cash dividends of $69 million and aggregate special cash dividends of $421 million. On February 4, 2013,8, 2016, Diamond Offshore declared aannounced that its Board of Directors was discontinuing its quarterly regular quarterly dividend of $0.125 per share and a special dividend of $0.75 per share.cash dividend.
Cash provided by operating activities was $736 million in 2012 was $1.3 billion,2015, compared to $1.4 billion$993 million in 2011,2014, a decrease of $109$257 million, compared to the 2011 period, primarily due to a decrease in cash receipts from contract drilling services of $445 million, partially offset by a $144 million net decrease in cash payments for contract drilling and general and administrative expenses, including personnel-related, maintenance, mobilization and other rig operating costs and lower earnings. Cash usedincome taxes paid, net of refunds of $44 million. The decline in investingcash receipts from and cash payments related to contract drilling services both reflect an aggregate decline in Diamond Offshore’s contract drilling operations as well as its efforts to control costs. The $73 million decrease in cash provided by operating activities in 2012 decreased $245 million2014 compared to 2011. This decrease2013 was primarily due to the salehigher cash payments related to contract drilling expenses of six jack-up rigs for cash proceeds of $132$77 million in 2012 and higher capital expenditures in 2011 related to the first installments for the constructioninterest payments of three new ultra-deepwater drillships.$51 million on senior notes.
Diamond Offshore is currently obligated under two vessel modification agreementsa construction agreement for the ultra-deepwater semisubmersible, theOcean GreatWhite. Construction continues with delivery expected in mid-2016. The estimated total project cost, including shipyard costs, capital spares, commissioning, project management and four turnkey contractsshipyard supervision, but excluding capitalized interest, is $764 million, of which $242 million has been incurred as of December 31, 2015.
For 2016, Diamond Offshore has budgeted approximately $675 million for capital expenditures of which approximately $525 million is expected to be spent on completion of the construction of two semisubmersible rigstheOcean GreatWhite. Diamond Offshore’s 2016 capital spending program also includes an estimated $150 million for ongoing capital maintenance and four new ultra-deepwater drillships.replacement programs.
Depending on market and other conditions, Diamond Offshore estimates thatmay purchase shares of its outstanding common stock in the open market or otherwise. Diamond Offshore did not purchase any shares of its outstanding common stock in 2015. During 2014, Diamond Offshore purchased 1.9 million shares of its outstanding common stock at an aggregate cost of $88 million.
Diamond Offshore’s credit agreement provides for the construction of the two semisubmersible rigs and the four new drillships, including commissioning, spares and project management,a $1.5 billion senior unsecured revolving credit facility, to be approximately $680 million and $2.6 billion, of which $93 million and $648 million has already been paid.
In September of 2012, Diamond Offshore entered into a $750 million syndicated, senior unsecured five-year revolving credit agreementused for general corporate purposes, that provides for revolving loans, up to $250 millionand maturing in performance or other standby letters of credit and up to $75 million in swingline loans.2020. As of December 31, 2012, there were2015, Diamond Offshore had no loans or letters of credit outstanding under the credit agreement.agreement and is in compliance with all covenant requirements.
For 2013,As of December 31, 2015, Diamond Offshore has budgeted approximately $1.8had $287 million in commercial paper notes outstanding with a weighted average interest rate of 0.86% and a weighted average remaining term of 5.8 days that was repaid in January of 2016. As of February 16, 2016, Diamond Offshore had no commercial paper notes outstanding.
During February of 2016, Diamond Offshore borrowed $305 million in Eurodollar loans under the credit agreement, which bear interest at 1.6% and will mature on February 29, 2016. As of February 16, 2016, Diamond Offshore had an additional $1.2 billion for capital expendituresavailable under the credit agreement.
As of December 31, 2015, Diamond Offshore had an aggregate $2.0 billion in long-term, unsecured senior notes outstanding, of which approximately $1.3 billion will be spent towards the construction of its new drillships and semisubmersible rigs, and approximately $120$500 million will mature in 2019 and the remainder will mature at various times beginning in 2023.
In January of 2016, Moody’s Investor Service, Inc. (“Moody’s”) announced that it would be spent onreviewing Diamond Offshore’s long-term corporate credit and unsecured debt rating and short-term credit rating for commercial paper, which are currently Baa2 and Prime-2, for possible downgrade. Diamond Offshore’s current corporate credit rating is BBB+ and its short-term credit rating is A2 for Standard & Poor’s (“S&P”). Market conditions and other factors, many of which are outside of Diamond Offshore’s control, could cause its credit ratings to be lowered. A downgrade in Diamond Offshore’s credit ratings could adversely impact its cost of issuing additional debt and the North Sea enhancement projectamount of additional debt that it could issue and could restrict Diamond Offshore’s access to its commercial paper program and capital markets and its ability to raise additional debt or rollover existing maturities. As a consequence, Diamond Offshore may not be able to issue additional debt in amounts and/or with terms that it considers to be reasonable. One or more of these occurrences could limit Diamond Offshore’s ability to pursue other business opportunities.
Certain of Diamond Offshore’s international rigs are owned and operated, directly or indirectly, by Diamond Foreign Asset Company (“DFAC”), and as a result of Diamond Offshore’s intention to indefinitely reinvest the earnings of DFAC and its foreign subsidiaries to finance Diamond Offshore’s foreign activities, Diamond Offshore does not expect such earnings to be available for distribution to its stockholders or to finance its domestic activities. To theOcean Patriot. extent available, Diamond Offshore expects to finance its 2013 capital expenditures throughutilize the use of existingoperating cash balancesflows generated by and cash reserves of DFAC, and the operating cash flows from operations.
In addition,available to and cash reserves of Diamond Offshore Drilling, Inc. to meet each entity’s respective working capital requirements and capital commitments. Diamond Offshore, may, from time to time, issue debt or equity securities, or a combination thereof, to finance capital expenditures, the acquisition of assets and businesses or for general corporate purposes. Diamond Offshore’s ability to access the capital markets by issuing debt or equity securities will be dependent on its results of operations, its current financial condition, current credit ratings, current market conditions and other factors beyond its control.
A substantial portion of Diamond Offshore’s cash flows has been and is expected to continue to be invested in the enhancement of its drilling fleet. Diamond Offshore determines the amount of cash required to meet its capital commitments by evaluating its rig construction obligations, the need to upgrade rigs to meet specific customer requirements and its ongoing rig equipment enhancement and replacement programs. As a result of Diamond Offshore’s intention to indefinitely reinvest the earnings of its wholly owned subsidiary, Diamond Offshore International Limited (“DOIL”), to finance its foreign activities, Diamond Offshore does not expect such earnings to be available for distribution to its stockholders or to finance its domestic activities. However, Diamond Offshore believes that the operating cash flows generated by and cash reserves of DOIL, and the operating cash flows available to and cash reserves of Diamond Offshore Drilling, Inc. will be sufficient to meet both its working capital requirements and its capital commitments over the next twelve months. Diamond Offshore will, however, continue to make periodic assessments based on industry conditions and will adjust capital spending programs if required.
At December 31, 20122015 and 2011,2014, cash and investments amounted to $4 million and $23$8 million. Funds from operations for the year ended December 31, 20122015 amounted to $576 million, compared to $454$514 million in 2011.2014. In 20122015 and 2011,2014, Boardwalk Pipeline’s capital expenditures were $227$375 million and $142 million. During 2012, Boardwalk Pipeline purchased from us the remaining 80% interest in HP Storage for $285$404 million, consisting of a combination of growth and acquired Louisiana Midstream for $620 million. These acquisitions were funded using cash from operations, borrowings under Boardwalk Pipeline’s revolving credit facilitymaintenance capital. In 2015 and debt and equity offerings as further discussed below. For the years ended December 31, 2012 and 2011,2014, Boardwalk Pipeline paid cash distributions of $479$102 million and $420$99 million to its partners. Boardwalk Pipeline expects total capital expenditures to be approximately $850 million in 2016, primarily related to growth projects discussed further in Item 1 and increased pipeline system maintenance expenditures. A summary of the estimated total costs of the growth projects and inception to date spending, as of December 31, 2015, are as follows:
Estimated total cost | Cash invested through December 31, 2015 | |||||||
| ||||||||
(In millions) | ||||||||
Ohio to Louisiana Access | $ | 115 | $ 55 | |||||
Southern Indiana Lateral | 75 | 7 | ||||||
Western Kentucky Market Lateral | 80 | 5 | ||||||
Power Plant in South Texas | 80 | 12 | ||||||
Northern Supply Access | 310 | 34 | ||||||
Sulphur Storage and Pipeline Expansion | 145 | 35 | ||||||
Coastal Bend Header | 720 | 28 | ||||||
Brine Development Project | 45 | 8 | ||||||
| ||||||||
Total | $ | 1,570 | $ 184 | |||||
|
In May 2015, Boardwalk Pipeline’s abilityPipeline entered into an amended credit facility which increased the borrowing capacity of the revolving credit facility to access$1.5 billion and extended the capital markets for debtmaturity date to May 26, 2020. As of February 16, 2016, Boardwalk Pipeline had outstanding borrowings of $470 million resulting in over $1.0 billion of available borrowing capacity and equity financingis in compliance with all covenant requirements under reasonable terms depends on its financial condition,the credit ratings and market conditions. facility.
Boardwalk Pipeline anticipates that for 2016 its existing capital resources, including the revolving credit facility, a subordinated loan agreement with a subsidiary of the Company and future cash flows generated from operationsoperating activities will be adequate to fund its operations, including its maintenanceplanned capital expenditures. The subordinated loan agreement provides borrowings of up to $300 million with a draw period through December 31, 2016 and matures in July of 2024, subject to certain mandatory pre-payment requirements. Boardwalk Pipeline may seek to access the capital markets to fund some or all of its growth capital expenditures for future growth projects or acquisitions, or for general corporate purposes, including to repay or refinance all or a portion of its indebtedness, a significant amount of which matures in the next five years.
In AprilMost of 2012, Boardwalk Pipeline entered into a Second Amended and Restated Revolving Credit Agreement (“Amended Credit Agreement”) with aggregate lending commitments of $1.0 billion. The Amended Credit Agreement has a maturity date of April 27, 2017. As of December 31, 2012, Boardwalk Pipeline had $302 million of loans outstanding under this revolving credit facility with a weighted-average interest rate of 1.3% and had no letters of credit issued. As of December 31, 2012, Boardwalk Pipeline was in compliance with all covenant requirements under the credit facility.
In 2012, Boardwalk Pipeline issued $300 million of 4.0% senior notes due June 2022 and $300 million of 3.4% senior notes due February 2023. The proceeds were used to redeem at maturity $225 million of 5.8% senior notes
due August 2012, repay in full its $200 million variable rate term loan due December 2016 and repay the $100 million of borrowings outstanding under the Subordinated Loan Agreement with us. The remaining proceeds were used to repay borrowings under Boardwalk Pipeline’s revolvingsenior unsecured debt is rated by independent credit facility.
In October of 2012, as part of financing the acquisition of Louisiana Midstream, Boardwalk Pipeline entered into a $225 million variable rate term loan due October 1, 2017.
In February, August and October of 2012, Boardwalk Pipeline sold 9.2 million, 11.6 million and 11.2 million common units in public offerings and received net proceeds of $250 million, $318 million and $298 million, including $5 million, $7 million and $6 million contributions from us to maintain our 2% general partner interest. The net proceeds were used to repay borrowings underrating agencies. Boardwalk Pipeline’s revolving credit facility,ratings affect its ability to purchaseaccess the remaining equity ownershippublic and private debt markets, as well as the terms and the cost of HP Storageborrowings. The ability to satisfy financing requirements or fund planned growth capital expenditures will depend upon Boardwalk Pipeline’s future operating performance and the ability to acquire Louisiana Midstream.
access the capital markets, which are affected by economic factors in its industry as well as other financial and business factors, some of which are beyond Boardwalk Pipeline incurs substantial costsPipeline’s control. The table below reflects the various group ratings issued by S&P, Moody’s and Fitch Ratings, Inc. (“Fitch”) for ongoing maintenanceBoardwalk Pipeline’s senior unsecured notes and that of its pipeline systems and related facilities, including those incurred for pipeline integrity management activities, equipment overhauls, general upkeep and repairs. The Pipeline and Hazardous Materials Safety Administration has developed regulations that require transportation pipeline operators to implement integrity management programs to comprehensively evaluate certain areas along pipelines and take additional measures to protect pipeline segments located in highly populated areas. These regulations have resulted in an overall increase in Boardwalk Pipeline’s ongoing maintenance costs. Due to recent widely-known incidents that have occurred on certain pipelines in the U.S., it is possible that PHMSA may develop more stringent regulations. Boardwalk Pipeline could incur significant additional costs if new or more stringently interpreted pipeline safety requirements are implemented.operating subsidiaries having outstanding rated debt as of February 17, 2016.
Boardwalk Pipeline expects total capital expenditures to be approximately $350 million in 2013, including approximately $100 million for maintenance capital, $42 million of which will be related to pipeline integrity management. In 2012, total capital expenditures were $227 million, of which $80 million was recorded as maintenance capital.
Boardwalk Pipeline expects to spend approximately $250 million in 2013 on its current expansion projects, including $33 million related to the Southeast Market Expansion, $73 million related to the South Texas Eagle Ford Expansion, $16 million related to the Natural Gas Salt Dome Storage Project and $39 million related to the Choctaw Brine Supply Expansion Project.
At December 31, 2012 and 2011, cash and investments amounted to $10 million and $85 million. Net cash flows provided by operating activities were $151 million and $140 million in 2012 and 2011. Key drivers of net operating cash flows are commodity prices, production volumes and operating costs.
Cash used in investing activities in 2012 was $336 million, compared to $292 million in 2011. The primary driver of cash used in investing activities is capital spent developing HighMount’s natural gas and oil reserves. In addition, in 2011, HighMount paid approximately $106 million for the acquisition of working interests in oil and gas properties which was funded by a capital contribution from us. HighMount expects to spend approximately $270 million on capital expenditures in 2013 developing its natural gas and oil reserves, with a focus on oil drilling opportunities. Funds for capital expenditures and working capital requirements are expected to be provided primarily from operating activities, the available capacity under the revolving credit facility and capital contributions from us.
At December 31, 2012, HighMount had $600 million of term loans outstanding and $110 million was outstanding under HighMount’s $250 million revolving credit facility. HighMount’s credit agreement governing its term loans and revolving credit facility contains financial covenants typical for these types of agreements, including a maximum debt to capitalization ratio and a minimum ratio of the net present value of its projected future cash flows from its proved natural gas and oil reserves to total debt. The calculation of net present value, performed at least annually, is based on commodity prices determined by the lenders. A decline in commodity prices can reduce HighMount’s borrowing capacity requiring repayment of a portion of its line of credit funded by a capital contribution from us. As a result of declining commodity prices, in 2012, we made a $100 million capital
Rating | Outlook | |||||||
Boardwalk | Operating | Boardwalk | Operating | |||||
Pipeline | Subsidiaries | Pipeline | Subsidiaries | |||||
S&P | BBB- | BBB- | Stable | Stable | ||||
Moody’s | Baa3 | Baa2 | Stable | Stable | ||||
Fitch | BBB- | BBB- | Stable | Stable |
contribution to HighMount of which $90 million was used to repay a portion of the amount outstanding under the line of credit in order to meet debt covenant requirements. In January of 2013, HighMount borrowed an additional $10 million under its revolving credit facility, bringing total borrowings to $720 million. The credit agreement also contains customary restrictions or limitations on HighMount’s ability to engage in certain transactions, including transactions with affiliates. At December 31, 2012, HighMount was in compliance with all of its covenants under the credit agreement.
Funds from operations continue to exceed operating requirements. Cash and investments totaled $43$93 million at December 31, 2012,2015, as compared to $81$84 million at December 31, 2011.2014.
In 2015 and January of 2013 the Loews Regency Hotel closed for an extensive renovation, with an anticipated completion in the fourth quarter of this year. Capital expenditures for the renovation are estimated to be approximately $85 million.
2016, Loews Hotels has addedpurchased three hotel properties to its portfolio consisting of the Loews Hollywood Hotel in 2012 and the Loews Boston Back Bay Hotel and the Loews Madison Hotel in 2013. These acquisitions were funded with existing cash balances, third partya joint venture equity debt andinterest in a hotel property for approximately $88$445 million, of netfunded with capital contributions by us.
from us and property level debt. In 2015, Loews Hotels received proceeds of $177 million from mortgage loan agreements in connection with one of the 2015 acquisitions and refinancing of $83 million in existing debt. Funds for future capital expenditures, including acquisitions of new properties, joint venture capital contributions, maintenance spending, renovation projectsrenovations and working capital requirements willare expected to be provided from operations, refinancing, newly incurred debt, existing cash balances and advances or capital contributions from us.
During 2016, Loews Hotels plans on making capital improvements of approximately $75 million in connection with extensive renovations to several hotel properties, during which time the revenues and earnings of Loews Hotels are expected to be adversely affected.
Corporate and Other
Parent Company cash and investments, net of receivables and payables at December 31, 20122015 totaled $3.9$4.3 billion, as compared to $3.3$5.1 billion at December 31, 2011. During 2012,2014. In 2015, we received $683$816 million in interest and dividends from our subsidiaries, $285 millionincluding a special dividend from the saleCNA of our 80% ownership interest in HP Storage to Boardwalk Pipeline and $100 million from the repayment of subordinated debt by Boardwalk Pipeline. These inflows were partially offset by$485 million. Cash outflows included, among other corporate overhead costs, the payment of $222 million$1.3 billion to fund treasury stock purchases, net capital contributions of approximately $100$29 million to our subsidiaries and $99purchase shares of Diamond Offshore, $90 million of cash dividends to our shareholders.shareholders and net cash contributions of approximately $260 million to our subsidiaries, primarily Loews Hotels.
As of December 31, 2012,2015, there were 391,805,166339,897,547 shares of Loews common stock outstanding. Depending on market and other conditions, we may purchase our shares and shares of our and our subsidiaries’subsidiaries outstanding common stock in the open market or otherwise. During the year ended December 31, 2012,In 2015, we purchased 5.633.3 million shares of Loews common stock at an aggregate costand 1.1 million shares of $222 million.Diamond Offshore.
In April of 2015, Fitch Ratings, Inc. downgraded our unsecured debt from A+ to A and the outlook remains stable. Our current unsecured debt ratings are A2 for Moody’s and A+ for S&P with a stable outlook for both. In December of 2015, S&P affirmed our A+ corporate and issuer credit ratings in connection with S&P’s newly published criteria on investment holding companies. We have an effective Registration Statement on Form S-3 registering the future sale of an unlimited amount of our debt and equity securities. From time to time, we consider issuance of Parent Company indebtedness under this registration statement.
We continue to pursue conservative financial strategies while seeking opportunities for responsible growth. These include the expansion of existing businesses, full or partial acquisitions and dispositions, and opportunities for efficiencies and economies of scale.
Off-Balance Sheet Arrangements
At December 31, 20122015 and 2011,2014, we did not have any off-balance sheet arrangements.
Our contractual payment obligations are as follows:
Payments Due by Period | Payments Due by Period | |||||||||||||||||||||||||||||||||||||||
December 31, 2012 | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||||||||||||||||||||||
Less than | More than | |||||||||||||||||||||||||||||||||||||||
December 31, 2015 | Total | 1 year | 1-3 years | 3-5 years | 5 years | |||||||||||||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||
Debt (a) | $ | 12,919 | $ | 488 | $ | 2,646 | $ | 3,494 | $ | 6,291 | $ | 15,208 | $ | 1,780 | $ | 1,950 | $ | 2,835 | $ | 8,643 | ||||||||||||||||||||
Operating leases | 399 | 66 | 107 | 80 | 146 | 494 | 59 | 104 | 89 | 242 | ||||||||||||||||||||||||||||||
Claim and claim adjustment expense reserves (b) | 26,505 | 6,152 | 7,607 | 3,910 | 8,836 | 24,056 | 5,256 | 6,563 | 3,303 | 8,934 | ||||||||||||||||||||||||||||||
Future policy benefits reserves (c) | 35,607 | 153 | 449 | 726 | 34,279 | 33,074 | (420) | (216) | 450 | 33,260 | ||||||||||||||||||||||||||||||
Policyholders’ funds reserves (c) | 133 | 26 | 15 | (1) | 93 | |||||||||||||||||||||||||||||||||||
Rig construction contracts | 1,766 | 928 | 838 | 440 | 440 | |||||||||||||||||||||||||||||||||||
Purchase and other obligations | 451 | 236 | 198 | 15 | 2 | 228 | 206 | 11 | 2 | 9 | ||||||||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||||||||||
Total | $ | 77,780 | $ | 8,049 | $ | 11,860 | $ | 8,224 | $ | 49,647 | $ | 73,500 | $ | 7,321 | $ | 8,412 | $ | 6,679 | $ | 51,088 | ||||||||||||||||||||
|
|
|
(a) | Includes estimated future interest payments. |
(b) | Claim and claim adjustment expense reserves are not discounted and represent CNA’s estimate of the amount and timing of the ultimate settlement and administration of gross claims based on its assessment of facts and circumstances known as of December 31, |
(c) | Future policy benefits |
(d) |
|
Does not include expected contribution of approximately |
In February of 2016, Diamond Offshore entered into a ten-year agreement with GE Oil & Gas (“GE”) to provide services with respect to certain blowout preventer and related well control equipment on its four newbuild drillships. Such services include management of maintenance, certification and reliability with respect to such equipment. In connection with the services agreement with GE, Diamond Offshore will sell the equipment to a GE affiliate for an aggregate $210 million and will lease back such equipment over separate ten-year operating leases. Future commitments for the full term under the services agreement and leases are estimated to aggregate approximately $650 million.
Further information on our commitments, contingencies and guarantees is provided in the Notes to Consolidated Financial Statements included under Item 8.
Investment activities of non-insurance subsidiaries primarily include investments in fixed income securities, including short term investments. The Parent Company portfolio also includes equity securities, including short sales and derivative instruments, and investments in limited partnerships. These types of investments generally present greater volatility, less liquidity and greater risk than fixed income investments and are included within Results of Operations – Corporate and Other.
We enter into short sales and invest in certain derivative instruments that are used for asset and liability management activities, income enhancements to our portfolio management strategy and to benefit from anticipated future movements in the underlying markets. If such movements do not occur as anticipated, then significant losses may occur. Monitoring procedures include senior management review of daily detailed reports of existing positions and valuation fluctuations to ensure that open positions are consistent with our portfolio strategy.
Credit exposure associated with non-performance by the counterparties to derivative instruments is generally limited to the uncollateralized change in fair value of the derivative instruments recognized in the Consolidated Balance Sheets. We mitigate the risk of non-performance by monitoring the creditworthiness of counterparties and diversifying derivatives to multiple counterparties. We occasionally require collateral from our derivative investment counterparties depending on the amount of the exposure and the credit rating of the counterparty.
Insurance
CNA maintains a large portfolio of fixed maturity and equity securities, including large amounts of corporate and government issued debt securities, residential and commercial mortgage-backed securities, and other asset-backed securities and investments in limited partnerships which pursue a variety of long and short investment strategies across a broad array of asset classes. CNA’s investment portfolio supports its obligation to pay future insurance claims and provides investment returns which are an important part of CNA’s overall profitability.
Net Investment Income
The significant components of CNA’s net investment income are presented in the following table:
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||
| ||||||||||||
(In millions) | ||||||||||||
Fixed maturity securities | $ | 2,022 | $ | 2,011 | $ | 2,051 | ||||||
Short term investments | 5 | 8 | 15 | |||||||||
Limited partnership investments | 251 | 48 | 249 | |||||||||
Equity securities | 12 | 20 | 32 | |||||||||
Trading portfolio | 24 | 9 | 13 | |||||||||
Other | 24 | 16 | 10 | |||||||||
| ||||||||||||
Gross investment income | 2,338 | 2,112 | 2,370 | |||||||||
Investment expenses | (56 | ) | (58 | ) | (54) | |||||||
| ||||||||||||
Net investment income | $ | 2,282 | $ | 2,054 | $ | 2,316 | ||||||
|
Year Ended December 31 | 2015 | 2014 | 2013 | |||||||||||
| ||||||||||||||
(In millions) | ||||||||||||||
Fixed maturity securities: | ||||||||||||||
Taxable | $ | 1,375 | $ | 1,399 | $ | 1,510 | ||||||||
Tax-exempt | 376 | 404 | 317 | |||||||||||
| ||||||||||||||
Total fixed maturity securities | 1,751 | 1,803 | 1,827 | |||||||||||
Limited partnership investments | 92 | 263 | 451 | |||||||||||
Other, net of investment expense | (3 | ) | 1 | 4 | ||||||||||
| ||||||||||||||
Net investment income before tax | $ | 1,840 | $ | 2,067 | $ | 2,282 | ||||||||
| ||||||||||||||
Net investment income after tax and noncontrolling interests | $ | 1,192 | $ | 1,323 | $ | 1,418 | ||||||||
| ||||||||||||||
Effective income yield for the fixed maturity securities portfolio, before tax | 4.7 | % | 4.8 | % | 5.0 | % | ||||||||
Effective income yield for the fixed maturity securities portfolio, after tax | 3.4 | % | 3.5 | % | 3.5 | % |
Net investment income increased $228after tax and noncontrolling interests decreased $131 million for 2012in 2015 as compared with 2011.2014. The increasedecrease was driven by limited partnership investments, which returned 3.0% in 2015 as compared with 9.7% in the prior year. Income from fixed maturity securities decreased by $30 million, after tax and noncontrolling interests, driven by a $22 million, after tax and noncontrolling interests, change in estimate effected by a change in accounting principle to better reflect the yield on fixed maturity securities that have call provisions. Additionally, income from fixed maturity securities decreased due to lower reinvestment rates, partially offset by favorable changes in estimates for prepayments for asset-backed securities. Additional information on the accounting change is included in Note 1 of the Notes to Consolidated Financial Statements included under Item 8.
Net investment income after tax and noncontrolling interests decreased $95 million in 2014 as compared with 2013. The decrease was primarily driven by limited partnerships, which produced a significant increaserate of return of 9.7% as compared with 18.3% in limited partnership investment income, increased trading portfolio income andthe prior year. This was partially offset by an increase in fixed maturity securities income. Limited partnership results were positively impacted by more favorable equity market returns, and overall capital market and credit spread volatility. The increase in fixed maturity securities income was driven by a higher invested asset base and a favorable net impact of changes in estimates of prepayments for asset-backed securities. These favorable impacts were partially offset by the effect of purchasing new investments at lower market interest rates.
Net investment income, decreased $262 millionafter tax and noncontrolling interests, due to additional investments in 2011 as compared with 2010. The decrease was primarily driven by a significant decrease in limited partnership results as well as lower fixed maturity security income. Limited partnership results were adversely impacted by less favorable equity market returns, and overall capitaltax-exempt securities.
market and credit spread volatility. The decrease in fixed maturity security income was primarily driven by the effect of purchasing new investments at lower market interest rates.
The fixed maturity investment portfolio provided a pretax effective income yield of 5.3%, 5.5% and 5.6% for the years ended December 31, 2012, 2011, and 2010. Tax-exempt municipal bonds generated $274 million, $240 million and $263 million of net investment income for the years ended December 31, 2012, 2011 and 2010.
Net Realized Investment Gains (Losses)
The components of CNA’s net realized investment results are presented in the following table:
Year Ended December 31 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||
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(In millions) | ||||||||||||||||||||||||||||||
Realized investment gains (losses): | ||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||
Corporate and other bonds | $ | 106 | $ | 48 | $ | 164 | $ | (55 | ) | $ | 67 | $ | 42 | |||||||||||||||||
States, municipalities and political subdivisions | (4 | ) | 5 | (128) | (22 | ) | (7 | ) | 36 | |||||||||||||||||||||
Asset-backed | (26 | ) | (82 | ) | 44 | 10 | (21 | ) | (40 | ) | ||||||||||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises | 3 | 1 | 3 | |||||||||||||||||||||||||||
Foreign government | 4 | 3 | 2 | 1 | 2 | 4 | ||||||||||||||||||||||||
Redeemable preferred stock | 3 | 7 | (1 | ) | ||||||||||||||||||||||||||
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Total fixed maturity securities | 83 | (22 | ) | 92 | (66 | ) | 41 | 41 | ||||||||||||||||||||||
Equity securities | (23 | ) | (1 | ) | (2) | (23 | ) | 1 | (22 | ) | ||||||||||||||||||||
Derivative securities | (2 | ) | (1) | 10 | (1 | ) | (9 | ) | ||||||||||||||||||||||
Short term investments and other | 2 | 4 | (3) | 8 | 13 | 6 | ||||||||||||||||||||||||
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Total realized investment gains (losses) | 60 | (19 | ) | 86 | (71 | ) | 54 | 16 | ||||||||||||||||||||||
Income tax (expense) benefit | (21 | ) | 8 | (36) | 33 | (18 | ) | (4 | ) | |||||||||||||||||||||
Amounts attributable to noncontrolling interests | (4 | ) | 1 | (4) | 4 | (4 | ) | (2 | ) | |||||||||||||||||||||
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Net realized investment gains (losses) attributable to Loews Corporation | $ | 35 | $ | (10 | ) | $ | 46 | $ | (34 | ) | $ | 32 | $ | 10 | ||||||||||||||||
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Net realized investment results decreased $66 million in 2015 as compared with 2014, driven by higher OTTI losses recognized in earnings and lower net realized investment gains on sales of securities. Net realized investment gains increased $45$22 million for 2012in 2014 as compared with 2011,2013, driven by lower other-than-temporary impairment (“OTTI”) losses recognized in earnings. Nethigher net realized investment gains decreased $56 million for 2011 as compared with 2010. Net realized investment results include OTTI losseson sales of $100 million, $140 million and $151 million for 2012, 2011 and 2010.securities. Further information on CNA’s realized gains and losses, including CNA’s OTTI losses and derivative gains (losses), as well as CNA’s impairment decision process, is set forth in NoteNotes 1 and 3 of the Notes to Consolidated Financial Statements included under Item 8.
Portfolio Quality
The following table presents the estimated fair value and net unrealized gains (losses) of CNA’s fixed maturity portfolio consists primarilysecurities by rating distribution:
December 31, 2015 | December 31, 2014 | |||||||||||||||||
Net | Net | |||||||||||||||||
Unrealized | Unrealized | |||||||||||||||||
Estimated | Gains | Estimated | Gains | |||||||||||||||
Fair Value | (Losses) | Fair Value | (Losses) | |||||||||||||||
(In millions) | ||||||||||||||||||
U.S. Government, Government agencies and | $ 3,910 | $ 101 | $ 3,882 | $ 144 | ||||||||||||||
AAA | 1,938 | 123 | 2,850 | 203 | ||||||||||||||
AA | 8,919 | 900 | 9,404 | 1,016 | ||||||||||||||
A | 10,044 | 904 | 10,594 | 1,064 | ||||||||||||||
BBB | 11,595 | 307 | 11,093 | 889 | ||||||||||||||
Non-investment grade | 3,166 | (16 | ) | 2,945 | 117 | |||||||||||||
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Total | $ 39,572 | $ 2,319 | $ 40,768 | $ 3,433 | ||||||||||||||
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As of high quality bonds, 91.6% and 92.1% of which were rated as investment grade (rated BBB- or higher) at December 31, 20122015 and 2011. The classification between investment grade and non-investment grade is based on a ratings methodology that takes into account ratings from two major providers, Standard & Poor’s (“S&P”) and Moody’s Investors Services, Inc. (“Moody’s”), in that order2014, only 1% of preference. If a security is not rated by these providers, CNA formulates an internal rating. At December 31, 2012 and 2011, approximately 98% of theCNA’s fixed maturity portfolio was rated by S&P or Moody’s, or was issued or guaranteed by the U.S. Government, Government agencies or Government-sponsored enterprises.internally.
The following table summarizes the ratings of CNA’s fixed maturity portfolio at fair value:
December 31 | 2012 | 2011 | ||||||||||||||
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(In millions of dollars) | ||||||||||||||||
U.S. Government, Government agencies and Government-sponsored enterprises | $ | 4,540 | 10.6% | $ | 4,760 | 11.9% | ||||||||||
AAA | 3,224 | 7.6 | 3,421 | 8.6 | ||||||||||||
AA and A | 19,305 | 45.3 | 17,807 | 44.6 | ||||||||||||
BBB | 11,997 | 28.1 | 10,790 | 27.0 | ||||||||||||
Non-investment grade | 3,567 | 8.4 | 3,159 | 7.9 | ||||||||||||
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Total | $ | 42,633 | 100.0% | $ | 39,937 | 100.0% | ||||||||||
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Non-investment grade fixed maturity securities, as presented in the table below, include high-yield securities rated below BBB- by bond rating agencies and other unrated securities that, according to CNA’s analysis, are below investment grade. Non-investment grade securities generally involve a greater degree of risk than investment grade securities. The amortized cost of CNA’s non-investment grade fixed maturity bond portfolio was $3.4 billion and $3.2 billion at December 31, 2012 and 2011. The following table summarizes the ratings of this portfolio at fair value.
December 31 | 2012 | 2011 | ||||||||||||||
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(In millions of dollars) | ||||||||||||||||
BB | $ | 1,529 | 42.9% | $ | 1,484 | 47.0% | ||||||||||
B | 1,075 | 30.1 | 867 | 27.4 | ||||||||||||
CCC - C | 724 | 20.3 | 689 | 21.8 | ||||||||||||
D | 239 | 6.7 | 119 | 3.8 | ||||||||||||
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Total | $ | 3,567 | 100.0% | $ | 3,159 | 100.0% | ||||||||||
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The following table summarizespresents available-for-sale fixed maturity securities in a gross unrealized loss position by ratings distribution.distribution:
December 31, 2012 | Estimated Fair Value | % | Gross Unrealized Losses | % | ||||||||||||
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(In millions of dollars) | ||||||||||||||||
U.S. Government, Government agencies and Government-sponsored enterprises | $ | 642 | 23.9% | $ | 45 | 29.1% | ||||||||||
AAA | 172 | 6.4 | 3 | 1.9 | ||||||||||||
AA | 387 | 14.4 | 41 | 26.5 | ||||||||||||
A | 323 | 12.0 | 12 | 7.7 | ||||||||||||
BBB | 551 | 20.5 | 22 | 14.2 | ||||||||||||
Non-investment grade | 610 | 22.8 | 32 | 20.6 | ||||||||||||
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Total | $ | 2,685 | 100.0% | $ | 155 | 100.0% | ||||||||||
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U.S. Government, Government agencies and AAA AA A BBB Non-investment grade Total Gross Estimated Unrealized December 31, 2015 Fair Value Losses (In millions)
Government-sponsored enterprises $ 684 $ 4 293 5 518 7 1,015 20 4,045 239 1,395 113 $ 7,950 $ 388
The following table providespresents the maturity profile for these available-for-sale fixed maturity securities. Securities not due to mature on a single date are allocated based on weighted average life.life:
December 31, 2012 | Estimated Fair Value | % | Gross Unrealized Losses | % �� | ||||||||||||||||||||||
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| Gross | ||||||||||||||||||||||||
(In millions of dollars) | ||||||||||||||||||||||||||
Estimated | Unrealized | |||||||||||||||||||||||||
December 31, 2015 | Fair Value | Losses | ||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||
Due in one year or less | $ | 213 | 7.9% | $ | 8 | 5.2% | $ | 252 | $ | 3 | ||||||||||||||||
Due after one year through five years | 913 | 34.0 | 22 | 14.2 | 1,127 | 37 | ||||||||||||||||||||
Due after five years through ten years | 865 | 32.2 | 72 | 46.5 | 5,091 | 224 | ||||||||||||||||||||
Due after ten years | 694 | 25.9 | 53 | 34.1 | 1,480 | 124 | ||||||||||||||||||||
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Total | $ | 2,685 | 100.0% | $ | 155 | 100.0% | $ | 7,950 | $ | 388 | ||||||||||||||||
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Duration
A primary objective in the management of the investment portfolio is to optimize return relative to corresponding liabilities and respective liquidity needs. CNA’s views on the current interest rate environment, tax regulations, asset class valuations, specific security issuer and broader industry segment conditions and the domestic and global economic conditions, are some of the factors that enter into an investment decision. CNA also continually monitors exposure to issuers of securities held and broader industry sector exposures and may from time to time adjust such exposures based on its views of a specific issuer or industry sector.
A further consideration in the management of the investment portfolio is the characteristics of the corresponding liabilities and the ability to align the duration of the portfolio to those liabilities and to meet future liquidity needs, minimize interest rate risk and maintain a level of income sufficient to support the underlying insurance liabilities. For portfolios where future liability cash flows are determinable and typically long term in nature, CNA segregates investments for asset/liability management purposes. The segregated investments support the long term care and structured settlement liabilities in the Life & Group Non-Core including annuities, structured settlements and long term care products.business.
The effective durations of fixed maturity securities and short term investments and interest rate derivatives are presented in the table below. Short term investmentsfollowing table. Amounts presented are net of accounts payable and receivable amounts for securities purchased and sold, but not yet settled.
December 31, 2015 | December 31, 2014 | |||||||||||||||||||||||||||||||||
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December 31, 2012 | December 31, 2011 | Effective | Effective | |||||||||||||||||||||||||||||||
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| Estimated | Duration | Estimated | Duration | |||||||||||||||||||||||||||||
Fair Value | Effective Duration (Years) | Fair Value | Effective Duration (Years) | Fair Value | (In Years) | Fair Value | (In Years) | |||||||||||||||||||||||||||
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(In millions of dollars) | ||||||||||||||||||||||||||||||||||
Investments supporting Life & Group Non-Core | $ 15,590 | 11.3 | $ | 13,820 | 11.5 | $ | 14,879 | 9.6 | $ | 14,668 | 10.5 | |||||||||||||||||||||||
Other interest sensitive investments | 28,855 | 3.9 | 28,071 | 3.9 | 26,435 | 4.3 | 27,748 | 4.0 | ||||||||||||||||||||||||||
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Total | $ 44,445 | 6.5 | $ | 41,891 | 6.4 | $ | 41,314 | 6.2 | $ | 42,416 | 6.3 | |||||||||||||||||||||||
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The investment portfolio is periodically analyzed for changes in duration and related price change risk. Additionally, CNA periodically reviews the sensitivity of the portfolio to the level of foreign exchange rates and other factors that contribute to market price changes. A summary of these risks and specific analysis on changes is included in Item 7A – Quantitative and Qualitative Disclosures about Market Risk included herein.
Short Term Investments
The carrying value of the components of CNA’s shortShort term investment portfolio isinvestments are presented in the following table:
December 31 | 2012 | 2011 | 2015 | 2014 | ||||||||||||||
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(In millions) | ||||||||||||||||||
Short term investments: | ||||||||||||||||||
Commercial paper | $ | 751 | $ | 411 | $ | 998 | $ | 922 | ||||||||||
U.S. Treasury securities | 617 | 903 | 411 | 466 | ||||||||||||||
Money market funds | 301 | 45 | 60 | 206 | ||||||||||||||
Other | 163 | 282 | 191 | 112 | ||||||||||||||
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Total short term investments | $ | 1,832 | $ | 1,641 | $ | 1,660 | $ | 1,706 | ||||||||||
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European Exposure
CNA’s fixed maturity portfolio includes European exposure. The following table summarizes European exposure included within fixed maturity holdings:
Corporate | Sovereign | Total | ||||||||||||||
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December 31, 2012 | Financial Sector | Other Sectors | ||||||||||||||
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(In millions) | ||||||||||||||||
AAA | $ | 224 | $ | 77 | $ | 118 | $ | 419 | ||||||||
AA | 227 | 128 | 35 | 390 | ||||||||||||
A | 878 | 796 | 6 | 1,680 | ||||||||||||
BBB | 386 | 1,109 | 6 | 1,501 | ||||||||||||
Non-investment grade | 15 | 193 | 208 | |||||||||||||
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Total fair value | $ | 1,730 | $ | 2,303 | $ | 165 | $ | 4,198 | ||||||||
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Total amortized cost | $ | 1,615 | $ | 2,027 | $ | 161 | $ | 3,803 | ||||||||
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European exposure is based on application of a country of risk methodology. Country of risk is derived from the issuing entity’s management location, country of primary listing, revenue and reporting currency. As of December 31, 2012, securities with a fair value and amortized cost of $2.0 billion and $1.8 billion relate to Eurozone countries, which consist of member states of the European Union that use the Euro as their national currency. Of this amount, securities with a fair value and amortized cost of $324 million and $298 million pertain to Greece, Italy, Ireland, Portugal and Spain.
For a discussion of accounting standards updates that have been adopted or will be adopted in the future, please read Note 1 of the Notes to Consolidated Financial Statements included under Item 8.
Investors are cautioned that certain statements contained in this Report as well as some statements in periodic press releases and some oral statements made by our officials and our subsidiaries during presentations about us, are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain the words “expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “will be,” “will continue,” “will likely result,” and similar expressions. In addition, any statement concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by us or our subsidiaries, which may be provided by management are also forward-looking statements as defined by the Act.
Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond our control, that could cause actual results to differ materially from those anticipated or projected. These risks and uncertainties include, among others:
Risks and uncertainties primarily affecting us and our insurance subsidiaries
the risks and uncertainties associated with CNA’s |
the risk that the other parties to the transaction in which, subject to certain limitations, CNA ceded its legacy A&EP liabilities will not fully perform their obligations to CNA, the uncertainty in estimating loss reserves for A&EP liabilities and the possible continued exposure of CNA to liabilities for A&EP claims that are not covered under the terms of the transaction; |
the performance of reinsurance companies under reinsurance contracts with CNA; |
the impact of competitive products, policies and pricing and the competitive environment in which CNA operates, including changes in CNA’s book of business; |
product and policy availability and demand and market responses, including the level of ability to obtain rate increases and decline or non-renew underpriced accounts, to achieve premium targets and profitability and to realize growth and retention estimates; |
general economic and business conditions, including recessionary conditions that may decrease the size and number of CNA’s insurance customers and create additional losses to CNA’s lines of business, especially those that provide management and professional liability insurance, as well as surety bonds, to businesses engaged in real estate, financial services and professional services and inflationary pressures on medical care costs, construction costs and other economic sectors that increase the severity of claims; |
conditions in the capital and credit markets, including continuing uncertainty and instability in these markets, as well as the overall economy, and their impact on the returns, types, liquidity and valuation of CNA’s investments; |
conditions in the capital and credit markets that may limit CNA’s ability to raise significant amounts of capital on favorable |
the possibility of changes in CNA’s ratings by ratings agencies, including the inability to access certain markets or distribution channels, and the required collateralization of future payment obligations as a result of such changes, and changes in rating agency policies and practices; |
regulatory limitations, impositions and restrictions upon CNA, including with respect to its ability to increase premium rates and the effects of assessments and other surcharges for guaranty funds and second-injury funds, other mandatory pooling arrangements and future assessments levied on insurance |
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regulatory limitations and restrictions, including limitations upon CNA’s ability to receive dividends from its insurance subsidiaries imposed by regulatory authorities, including regulatory capital adequacy standards; |
weather and other natural physical events, including the severity and frequency of storms, hail, snowfall and other winter conditions, natural disasters such as hurricanes and earthquakes, as well as climate change, including effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain, hail and snow; |
regulatory requirements imposed by coastal state regulators in the wake of hurricanes or other natural disasters, including limitations on the ability to exit markets or to non-renew, cancel or change terms and conditions in policies, as well as mandatory assessments to fund any shortfalls arising from the inability of quasi-governmental insurers to pay claims; |
man-made disasters, including the possible occurrence of terrorist attacks, the unpredictability of the nature, targets, severity or frequency of such events and the effect of the absence or insufficiency of applicable terrorism legislation on coverages; |
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the occurrence of epidemics. |
Risks and uncertainties primarily affecting us and our energy subsidiaries
the impact of changes in worldwide supply and demand for oil and natural gas and oil and gas price fluctuations on E&P activity, including |
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timing and cost of completion of rig upgrades, construction projects and other capital projects, including delivery dates and drilling contracts; |
changes in foreign and domestic oil and gas exploration, development and production activity; |
risks of international operations, compliance with foreign laws and taxation policies and seizure, expropriation, nationalization, deprivation, malicious damage or |
government policies regarding exploration and development of oil and gas reserves; |
market conditions in the offshore oil and gas drilling industry, including utilization levels and dayrates; |
timing and duration of required regulatory inspections for offshore oil and gas drilling rigs; |
the worldwide political and military environment, including for example, in oil-producing regions and locations where Diamond Offshore’s offshore drilling rigs are operating or are under construction; |
● | the risk of physical damage to rigs and equipment caused by named windstorms in the U.S. Gulf of Mexico; |
the availability, cost limits and adequacy of insurance and indemnification; |
the impact of new pipelines, |
the costs of maintaining and ensuring the integrity and reliability of Boardwalk Pipeline’s pipeline systems; the need to remove pipeline and other assets from service as a result of such activities, and the timing and financial impacts of returning any such assets to service; |
the impact of current and future environmental laws and regulations and exposure to environmental liabilities including matters related to global climate change; |
regulatory issues affecting natural gas transmission, including ratemaking and other proceedings particularly affecting Boardwalk Pipeline’s gas transmission subsidiaries; and |
the timing, cost, scope and financial performance of Boardwalk Pipeline’s recent, current and future acquisitions and growth projects, including the expansion into new product lines and geographical |
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Risks and uncertainties affecting us and our subsidiaries generally
general economic and business conditions; |
risks of war, military operations, other armed hostilities, terrorist acts or embargoes; |
potential changes in accounting policies by the Financial Accounting Standards Board, the Securities and Exchange Commission or regulatory agencies for any of our subsidiaries’ industries which may cause us or our subsidiaries to revise their financial accounting and/or disclosures in the future, and which may change the way analysts measure our and our subsidiaries’ business or financial performance; |
the impact of regulatory initiatives and compliance with governmental regulations, judicial rulings and jury verdicts; |
the results of financing efforts; by us and our subsidiaries, including any additional investments by us in our |
the ability of customers and suppliers to meet their obligations to us and our subsidiaries; |
the successful negotiation, consummation and completion of |
the successful integration, transition and management of acquired businesses; |
the outcome of pending or future litigation, including any tobacco-related suits to which we are or may become a party; |
possible casualty losses; |
the availability of indemnification by Lorillard and its subsidiaries for any tobacco-related liabilities that we may incur as a result of tobacco-related lawsuits or otherwise, as provided in the Separation Agreement; and |
potential future asset impairments. |
Developments in any of these or other areas of risk and uncertainty, which are more fully described elsewhere in this Report and our other filings with the SEC, could cause our results to differ materially from results that have
been or may be anticipated or projected. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date of this Report and we expressly disclaim any obligation or undertaking to update these statements to reflect any change in our expectations or beliefs or any change in events, conditions or circumstances on which any forward-looking statement is based.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We are a large diversified holding company. As such, we and our subsidiaries have significant amounts of financial instruments that involve market risk. Our measure of market risk exposure represents an estimate of the change in fair value of our financial instruments. Changes in the trading portfolio are recognized in the Consolidated Statements of Income. Market risk exposure is presented for each class of financial instrument held by us at December 31, assuming immediate adverse market movements of the magnitude described below. We believe that the various rates of adverse market movements represent a measure of exposure to loss under hypothetically assumed adverse conditions. The estimated market risk exposure represents the hypothetical loss to future earnings and does not represent the maximum possible loss nor any expected actual loss, even under adverse conditions, because actual adverse fluctuations would likely differ. In addition, since our investment portfolio is subject to change based on our portfolio management strategy as well as in response to changes in the market, these estimates are not necessarily indicative of the actual results which may occur.
Exposure to market risk is managed and monitored by senior management. Senior management approves our overall investment strategy and has responsibility to ensure that the investment positions are consistent with that strategy with an acceptable level of risk. We may manage risk by buying or selling instruments or entering into offsetting positions.
Interest Rate Risk – We have exposure to interest rate risk arising from changes in the level or volatility of interest rates. We attempt to mitigate our exposure to interest rate risk by utilizing instruments such as interest rate swaps, commitments to purchase securities, options, futures and forwards. We monitor our sensitivity to interest rate changes by revaluing financial assets and liabilities using a variety of different interest rates. The Company uses duration and convexity at the security level to estimate the change in fair value that would result from a change in each security’s yield. Duration measures the price sensitivity of an asset to changes in the yield rate. Convexity measures how the duration of the asset changes with interest rates. The duration and convexity analysis takes into account the unique characteristics (e.g., call and put options and prepayment expectations) of each security, in determining the hypothetical change in fair value. The analysis is performed at the security level and is aggregated up to the asset category level.
The evaluation is performed by applying an instantaneous change in the yield rates by varying magnitudes on a static balance sheet to determine the effect such a change in rates would have on the recorded market value of our investments and the resulting effect on shareholders’ equity. The analysis presents the sensitivity of the market value of our financial instruments to selected changes in market rates and prices which we believe are reasonably possible over a one year period.
The sensitivity analysis estimates the change in the fair value of our interest sensitive assets and liabilities that were held on December 31, 20122015 and 20112014 due to an instantaneous change in the yield of the security at the end of the period of 100 basis points, with all other variables held constant.
The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Accordingly, the analysis may not be indicative of, is not intended to provide, and does not provide a precise forecast of the effect of changes of market interest rates on our earnings or shareholders’ equity. Further, the computations do not contemplate any actions we could undertake in response to changes in interest rates.
Our debt is primarily denominated in U.S. Dollars and has been primarily issued at fixed rates, therefore, interest expense would not be impacted by interest rate shifts. The impact of a 100 basis point increase in interest rates on fixed rate debt would result in a decrease in market value of $498$481 million and $455$606 million at December 31, 20122015 and 2011.2014. The impact of a 100 basis point decrease would result in an increase in market value of $543$519 million and $505$671 million at December 31, 20122015 and 2011. HighMount has entered into interest rate swaps for a notional amount of
$300 million to hedge its exposure to fluctuations in LIBOR on a portion of its $600 million variable rate credit facility. These swaps effectively fix the interest rate at an effective rate of 3.4%.2014. At December 31, 2012,2015, the impact of a 100 basis point increase in interest rates on variable rate debt would increase interest expense by approximately $9$4 million on an annual basis.
Equity Price Risk – We have exposure to equity price risk as a result of our investment in equity securities and equity derivatives. Equity price risk results from changes in the level or volatility of equity prices which affect the value of equity securities or instruments that derive their value from such securities or indexes. Equity price risk was measured assuming an instantaneous 25% decrease in the underlying reference price or index from its level at December 31, 20122015 and 2011,2014, with all other variables held constant. A model was developed to analyze the observed changes in the value of limited partnerships held by the Company over a multiple year period along with the corresponding changes in various equity indices. The result of the model allowed us to estimate the change in value of limited partnerships when equity markets decline by 25%.
Foreign Exchange Rate Risk – Foreign exchange rate risk arises from the possibility that changes in foreign currency exchange rates will impact the value of financial instruments. We have foreign exchange rate exposure when we buy or sell foreign currencies or financial instruments denominated in a foreign currency, which is reduced through the use of forward contracts. Our foreign transactions are primarily denominated in Australian dollars, Canadian dollars, British pounds, Brazilian reaisJapanese yen, Saudi Arabian riyals, Chinese yuan and the European Monetary Unit. The sensitivity analysis assumes an instantaneous 20% decrease in the foreign currency exchange rates versus the U.S. dollar from their levels at December 31, 20122015 and 2011,2014, with all other variables held constant.
Commodity Price Risk – We have exposure to price risk as a result of our investments in commodities. Commodity price risk results from changes in the level or volatility of commodity prices that impact instruments which derive their value from such commodities. Commodity price risk was measured assuming an instantaneous increase of 20% from their levels at December 31, 20122015 and 2011. The impact of a change in commodity prices on the Company’s non-trading commodity-based financial derivative instruments at a point in time is not necessarily representative of the results that will be realized when such contracts are ultimately settled. Net losses from commodity derivative instruments used for hedging purposes, to the extent realized, will generally be offset by recognition of the underlying hedged transaction, such as revenue from sales.2014.
Credit Risk – We are exposed to credit risk relating to the risk of loss resulting from the nonperformance by a customer of its contractual obligations. Although nearly all of the Company’s customers pay for its services on a timely basis, the Company actively monitors the credit exposure to its customers. Certain of the Company’s subsidiaries may perform credit reviews of customers and may require customers to provide cash collateral, post a letter of credit, prepay for services or provide other credit enhancements.
The following tables present our market risk by category (equity prices, interest rates, foreign exchange rates and commodity prices) on the basis of those entered into for trading purposes and other than trading purposes.
Trading portfolio:
Category of risk exposure: | Fair Value Asset (Liability) | Market Risk | Fair Value Asset (Liability) | Market Risk | |||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||
December 31 | 2012 | 2011 | 2012 | 2011 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||||||||||||||
Equity prices (1): | |||||||||||||||||||||||||||||||||||||||||||
Equity securities – long | $ 630 | $ 590 | $ (158 | ) | $ (148) | $ 540 | $ 482 | $ | (135 | ) | $ | (120 | ) | ||||||||||||||||||||||||||||||
– short | (7) | (9 | ) | 2 | 2 | (166 | ) | (110 | ) | 42 | 28 | ||||||||||||||||||||||||||||||||
Options – purchased | 19 | 33 | 23 | 18 | 15 | 24 | 40 | (5 | ) | ||||||||||||||||||||||||||||||||||
– written | (14) | (23 | ) | (42 | ) | (2) | (28 | ) | (21 | ) | (36 | ) | 3 | ||||||||||||||||||||||||||||||
Other derivatives | (1 | ) | 2 | (78 | ) | (33 | ) | ||||||||||||||||||||||||||||||||||||
Interest rate (2): | |||||||||||||||||||||||||||||||||||||||||||
Fixed maturities – long | 161 | 109 | 5 | (3) | 120 | 120 | (5 | ) | (5 | ) | |||||||||||||||||||||||||||||||||
– short | (77) | (7 | ) | (414 | ) | (34 | ) | ||||||||||||||||||||||||||||||||||||
Short term investments | 2,526 | 2,092 | 2,884 | 4,015 | |||||||||||||||||||||||||||||||||||||||
Other derivatives | (3) | 8 | (3 | ) | (3) | ||||||||||||||||||||||||||||||||||||||
Other invested assets | 102 | 102 | (1 | ) | 1 | ||||||||||||||||||||||||||||||||||||||
Foreign exchange (3): | |||||||||||||||||||||||||||||||||||||||||||
Forwards and options | 9 | 6 | (8 | ) | (5 | ) |
Note: | The calculation of estimated market risk exposure is based on assumed adverse changes in the underlying reference price or index of (1) a decrease in equity prices of 25% |
Other than trading portfolio:
Category of risk exposure: | Fair Value Asset (Liability) | Market Risk | Fair Value Asset (Liability) | Market Risk | |||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||
December 31 | 2012 | 2011 | 2012 | 2011 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||||||||||||||
Equity prices (1): | |||||||||||||||||||||||||||||||||||||||||||
Equity securities: | |||||||||||||||||||||||||||||||||||||||||||
General accounts (a) | $ 249 | $ 304 | $ (62 | ) | $ (76) | $ 197 | $ 222 | $ | (49 | ) | $ | (56 | ) | ||||||||||||||||||||||||||||||
Limited partnership investments | 3,090 | 2,711 | (295 | ) | (242) | 3,313 | 3,674 | (478 | ) | (514 | ) | ||||||||||||||||||||||||||||||||
Interest rate (2): | |||||||||||||||||||||||||||||||||||||||||||
Fixed maturities (a) | 42,604 | 39,931 | (2,818 | ) | (2,614) | 39,581 | 40,765 | (2,562 | ) | (2,650 | ) | ||||||||||||||||||||||||||||||||
Short term investments (a) | 3,309 | 3,013 | (3 | ) | (11) | 1,926 | 1,999 | (2 | ) | (3 | ) | ||||||||||||||||||||||||||||||||
Other invested assets, primarily mortgage loans | 418 | 258 | (18 | ) | (11) | 688 | 608 | (31 | ) | (30 | ) | ||||||||||||||||||||||||||||||||
Interest rate swaps and other (b) | (6) | 10 | 13 | ||||||||||||||||||||||||||||||||||||||||
Other derivative securities | (3) | (1 | ) | ||||||||||||||||||||||||||||||||||||||||
Separate accounts: | |||||||||||||||||||||||||||||||||||||||||||
Fixed maturities | 288 | 381 | (4 | ) | (15) | ||||||||||||||||||||||||||||||||||||||
Short term investments | 21 | 32 | |||||||||||||||||||||||||||||||||||||||||
Other derivatives | 5 | (3 | ) | 13 | 17 | ||||||||||||||||||||||||||||||||||||||
Foreign exchange (3): | |||||||||||||||||||||||||||||||||||||||||||
Forwards – short | 4 | (7 | ) | (27 | ) | (26) | (5 | ) | (12 | ) | |||||||||||||||||||||||||||||||||
Other invested assets | 59 | (11 | ) | 44 | 41 | (5 | ) | ||||||||||||||||||||||||||||||||||||
Commodities (4): | |||||||||||||||||||||||||||||||||||||||||||
Forwards – short (b) | 36 | 42 | (48 | ) | (43) | ||||||||||||||||||||||||||||||||||||||
|
Note: | The calculation of estimated market risk exposure is based on assumed adverse changes in the underlying reference price or index of (1) a decrease in equity prices of 25%, (2) an increase in yield rates of 100 basis points, (3) a decrease in the foreign currency exchange rates versus the U.S. dollar of 20% and (4) an increase in commodity prices of 20%. |
(a) | Certain securities are denominated in foreign currencies. An assumed 20% decline in the underlying exchange rates would result in an aggregate foreign currency exchange rate risk of | |||
|
|
Item 8. Financial Statements and Supplementary Data.
Financial Statements and Supplementary Data are comprised of the following sections:
Page No. | ||||||
Management’s Report on Internal Control Over Financial Reporting | 99 | |||||
100 | ||||||
102 | ||||||
104 | ||||||
106 | ||||||
107 | ||||||
109 | ||||||
111 | ||||||
1. | 111 | |||||
2. | 119 | |||||
3. | 120 | |||||
4. | 126 | |||||
5. | 134 | |||||
6. | 135 | |||||
7. | 135 | |||||
8. | 137 | |||||
9. | 144 | |||||
10. | 145 | |||||
11. | 148 | |||||
12. | 150 | |||||
13. | 151 | |||||
14. | 152 | |||||
15. | 155 | |||||
16. | 163 | |||||
17. | 165 | |||||
18. | 165 | |||||
19. | 166 | |||||
20. | 166 | |||||
21. | 170 |
Page | ||||
No. | ||||
Management’s Report on Internal Control Over Financial Reporting | 97 | |||
Reports of Independent Registered Public Accounting Firm | 98 | |||
Consolidated Balance Sheets | 100 | |||
Consolidated Statements of Income | 102 | |||
Consolidated Statements of Comprehensive Income (Loss) | 103 | |||
Consolidated Statements of Equity | 104 | |||
Consolidated Statements of Cash Flows | 106 | |||
Notes to Consolidated Financial Statements: | 108 | |||
1. Summary of Significant Accounting Policies | 108 | |||
2. Acquisitions and Divestitures | 117 | |||
3. Investments | 118 | |||
4. Fair Value | 125 | |||
5. Receivables | 133 | |||
6. Property, Plant and Equipment | 133 | |||
7. Goodwill | 135 | |||
8. Claim and Claim Adjustment Expense Reserves | 135 | |||
9. Leases | 143 | |||
10. Income Taxes | 144 | |||
11. Debt | 148 | |||
12. Shareholders’ Equity | 151 | |||
13. Statutory Accounting Practices | 152 | |||
14. Benefit Plans | 154 | |||
15. Reinsurance | 161 | |||
16. Quarterly Financial Data (Unaudited) | 163 | |||
17. Legal Proceedings | 163 | |||
18. Commitments and Contingencies | 163 | |||
19. Discontinued Operations | 164 | |||
20. Business Segments | 165 | |||
21. Consolidating Financial Information | 168 |
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for us. Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.
There are inherent limitations to the effectiveness of any control system, however well designed, including the possibility of human error and the possible circumvention or overriding of controls. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Management must make judgments with respect to the relative cost and expected benefits of any specific control measure. The design of a control system also is based in part upon assumptions and judgments made by management about the likelihood of future events, and there can be no assurance that a control will be effective under all potential future conditions. As a result, even an effective system of internal control over financial reporting can provide no more than reasonable assurance with respect to the fair presentation of financial statements and the processes under which they were prepared.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012.2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control – Integrated Framework (2013). Based on this assessment, our management believes that, as of December 31, 2012,2015, our internal control over financial reporting was effective.
Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on the Company’s internal control over financial reporting. The report of Deloitte & Touche LLP follows this Report.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Loews Corporation
New York, NY
We have audited the internal control over financial reporting of Loews Corporation and subsidiaries (the “Company”) as of December 31, 2012,2015, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,2015, based on the criteria established inInternal Control – Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended December 31, 20122015 of the Company and our report dated February 22, 201319, 2016 expressed an unqualified opinion on those consolidated financial statements and financial statement schedules and included an explanatory paragraph regarding the change of accounting for costs associated with acquiring or renewing insurance contracts in 2012.schedules.
/s/ DELOITTE & TOUCHE LLP
New York, NY
February 22, 201319, 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Loews Corporation
New York, NY
We have audited the accompanying consolidated balance sheets of Loews Corporation and subsidiaries (the “Company”) as of December 31, 20122015 and 2011,2014, and the related consolidated statements of income, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended December 31, 2012.2015. Our audits also included the financial statement schedules listed in the Index at Item 15. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Loews Corporation and subsidiaries as of December 31, 20122015 and 2011,2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012,2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 1 of the Notes to Consolidated Financial Statements, the Company changed its accounting for costs associated with acquiring or renewing insurance contracts in 2012.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2012,2015, based on the criteria established inInternal Control – IntegratedFramework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 201319, 2016 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
New York, NY
February 22, 201319, 2016
Loews Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
|
|
| ||||||||||||||||
Assets: | ||||||||||||||||||
|
|
| ||||||||||||||||
December 31 | 2012 | 2011 | 2015 | 2014 | ||||||||||||||
|
|
| ||||||||||||||||
(Dollar amounts in millions, except per share data) | ||||||||||||||||||
Investments: | ||||||||||||||||||
Fixed maturities, amortized cost of $38,324 and $37,466 | $ | 42,765 | $ | 40,040 | ||||||||||||||
Fixed maturities, amortized cost of $37,407 and $37,469 | $ | 39,701 | $ | 40,885 | ||||||||||||||
Equity securities, cost of $893 and $902 | 898 | 927 | ||||||||||||||||
Equity securities, cost of $824 and $733 | 752 | 728 | ||||||||||||||||
Limited partnership investments | 3,090 | 2,711 | 3,313 | 3,674 | ||||||||||||||
Other invested assets, primarily mortgage loans | 460 | 245 | 824 | 731 | ||||||||||||||
Short term investments | 5,835 | 5,105 | 4,810 | 6,014 | ||||||||||||||
|
|
| ||||||||||||||||
Total investments | 53,048 | 49,028 | 49,400 | 52,032 | ||||||||||||||
Cash | 228 | 129 | 440 | 364 | ||||||||||||||
Receivables | 9,366 | 9,259 | 8,041 | 7,770 | ||||||||||||||
Property, plant and equipment | 13,935 | 13,618 | 15,477 | 15,611 | ||||||||||||||
Goodwill | 996 | 908 | 351 | 374 | ||||||||||||||
Other assets | 1,538 | 1,357 | 1,722 | 1,616 | ||||||||||||||
Deferred acquisition costs of insurance subsidiaries | 598 | 552 | 598 | 600 | ||||||||||||||
| ||||||||||||||||||
Separate account business | 312 | 417 | ||||||||||||||||
| ||||||||||||||||||
Total assets | $ | 80,021 | $ | 75,268 | $ | 76,029 | $ | 78,367 | ||||||||||
|
|
|
See Notes to Consolidated Financial Statements.
Loews Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
|
|
| ||||||||||||||||
Liabilities and Equity: | Liabilities and Equity: |
| ||||||||||||||||
|
| |||||||||||||||||
|
| |||||||||||||||||
December 31 | 2012 | 2011 | 2015 | 2014 | ||||||||||||||
|
|
| ||||||||||||||||
(Dollar amounts in millions, except per share data) | ||||||||||||||||||
Insurance reserves: | ||||||||||||||||||
Claim and claim adjustment expense | $ | 24,763 | $ | 24,303 | $ | 22,663 | $ | 23,271 | ||||||||||
Future policy benefits | 11,475 | 9,810 | 10,152 | 9,490 | ||||||||||||||
Unearned premiums | 3,610 | 3,250 | 3,671 | 3,592 | ||||||||||||||
Policyholders’ funds | 157 | 191 | 27 | |||||||||||||||
|
|
| ||||||||||||||||
Total insurance reserves | 40,005 | 37,554 | 36,486 | 36,380 | ||||||||||||||
Payable to brokers | 205 | 162 | 567 | 673 | ||||||||||||||
Short term debt | 19 | 88 | 1,040 | 335 | ||||||||||||||
Long term debt | 9,191 | 8,913 | 9,543 | 10,333 | ||||||||||||||
Deferred incomes taxes | 840 | 622 | ||||||||||||||||
Deferred income taxes | 382 | 893 | ||||||||||||||||
Other liabilities | 4,773 | 4,309 | 5,201 | 5,103 | ||||||||||||||
Separate account business | 312 | 417 | ||||||||||||||||
|
|
| ||||||||||||||||
Total liabilities | 55,345 | 52,065 | 53,219 | 53,717 | ||||||||||||||
|
|
| ||||||||||||||||
Commitments and contingent liabilities | ||||||||||||||||||
Shareholders’ equity: | ||||||||||||||||||
Preferred stock, $0.10 par value: | ||||||||||||||||||
Authorized – 100,000,000 shares | ||||||||||||||||||
Common stock, $0.01 par value: | ||||||||||||||||||
Authorized – 1,800,000,000 shares | ||||||||||||||||||
Issued – 392,054,766 and 396,585,226 shares | 4 | 4 | ||||||||||||||||
Issued and outstanding – 339,897,547 and shares 372,934,540 | 3 | 4 | ||||||||||||||||
Additional paid-in capital | 3,595 | 3,494 | 3,184 | 3,481 | ||||||||||||||
Retained earnings | 15,192 | 14,890 | 14,731 | 15,515 | ||||||||||||||
Accumulated other comprehensive income | 678 | 384 | ||||||||||||||||
| ||||||||||||||||||
19,469 | 18,772 | |||||||||||||||||
Less treasury stock, at cost (249,600 shares) | (10 | ) | ||||||||||||||||
Accumulated other comprehensive income (loss) | (357 | ) | 280 | |||||||||||||||
|
|
| ||||||||||||||||
Total shareholders’ equity | 19,459 | 18,772 | 17,561 | 19,280 | ||||||||||||||
Noncontrolling interests | 5,217 | 4,431 | 5,249 | 5,370 | ||||||||||||||
|
|
| ||||||||||||||||
Total equity | 24,676 | 23,203 | 22,810 | 24,650 | ||||||||||||||
|
|
| ||||||||||||||||
Total liabilities and equity | $ | 80,021 | $ | 75,268 | $ | 76,029 | $ | 78,367 | ||||||||||
|
|
|
See Notes to Consolidated Financial Statements.
Loews Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | ||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||
(In millions, except per share data) | ||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||
Insurance premiums | $ | 6,882 | $ | 6,603 | $ | 6,515 | $ | 6,921 | $ | 7,212 | $ | 7,271 | ||||||||||||||||
Net investment income | 2,349 | 2,063 | 2,508 | 1,866 | 2,163 | 2,425 | ||||||||||||||||||||||
Investment gains (losses): | ||||||||||||||||||||||||||||
Other-than-temporary impairment losses | (129 | ) | (175 | ) | (254) | (156 | ) | (77 | ) | (74) | ||||||||||||||||||
Portion of other-than-temporary impairment losses recognized in Other comprehensive income | (25 | ) | (41 | ) | 22 | |||||||||||||||||||||||
Portion of other-than-temporary impairment losses | ||||||||||||||||||||||||||||
recognized in Other comprehensive loss | (2) | |||||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||
Net impairment losses recognized in earnings | (154 | ) | (216 | ) | (232) | (156 | ) | (77 | ) | (76) | ||||||||||||||||||
Other net investment gains | 211 | 164 | 288 | 85 | 131 | 92 | ||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||
Total investment gains (losses) | 57 | (52 | ) | 56 | (71 | ) | 54 | 16 | ||||||||||||||||||||
Contract drilling revenues | 2,936 | 3,254 | 3,230 | 2,360 | 2,737 | 2,844 | ||||||||||||||||||||||
Other | 2,328 | 2,261 | 2,306 | |||||||||||||||||||||||||
Other revenues | 2,339 | 2,159 | 2,057 | |||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||
Total | 14,552 | 14,129 | 14,615 | 13,415 | 14,325 | 14,613 | ||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||
Insurance claims and policyholders’ benefits | 5,896 | 5,489 | 4,985 | 5,384 | 5,591 | 5,806 | ||||||||||||||||||||||
Amortization of deferred acquisition costs | 1,274 | 1,176 | 1,168 | 1,540 | 1,317 | 1,362 | ||||||||||||||||||||||
Contract drilling expenses | 1,537 | 1,549 | 1,391 | 1,228 | 1,524 | 1,573 | ||||||||||||||||||||||
Other operating expenses (Notes 7 and 8) | 4,006 | 3,167 | 3,652 | |||||||||||||||||||||||||
Other operating expenses (Note 6) | 4,499 | 3,585 | 3,170 | |||||||||||||||||||||||||
Interest | 440 | 522 | 517 | 520 | 498 | 425 | ||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||
Total | 13,153 | 11,903 | 11,713 | 13,171 | 12,515 | 12,336 | ||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||
Income before income tax | 1,399 | 2,226 | 2,902 | 244 | 1,810 | 2,277 | ||||||||||||||||||||||
Income tax expense | (289 | ) | (532 | ) | (894) | |||||||||||||||||||||||
Income tax (expense) benefit | 43 | (457 | ) | (656) | ||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||
Income from continuing operations | 1,110 | 1,694 | 2,008 | 287 | 1,353 | 1,621 | ||||||||||||||||||||||
Discontinued operations, net | (20) | (391 | ) | (552) | ||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||
Net income | 1,110 | 1,694 | 1,988 | 287 | 962 | 1,069 | ||||||||||||||||||||||
Amounts attributable to noncontrolling interests | (542 | ) | (632 | ) | (699) | (27 | ) | (371 | ) | (474) | ||||||||||||||||||
|
|
| ||||||||||||||||||||||||||
Net income attributable to Loews Corporation | $ | 568 | $ | 1,062 | $ | 1,289 | $ | 260 | $ | 591 | $ | 595 | ||||||||||||||||
|
|
| ||||||||||||||||||||||||||
Net income attributable to Loews Corporation: | ||||||||||||||||||||||||||||
Income from continuing operations | $ | 568 | $ | 1,062 | $ | 1,308 | $ | 260 | $ | 962 | $ | 1,149 | ||||||||||||||||
Discontinued operations, net | (19) | (371 | ) | (554) | ||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||
Net income | $ | 568 | $ | 1,062 | $ | 1,289 | $ | 260 | $ | 591 | $ | 595 | ||||||||||||||||
|
|
| ||||||||||||||||||||||||||
Basic net income per common share: | ||||||||||||||||||||||||||||
Income from continuing operations | $ | 0.72 | $ | 2.52 | $ | 2.96 | ||||||||||||||||||||||
Discontinued operations, net | (0.97 | ) | (1.43) | |||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Net income | $ | 0.72 | $ | 1.55 | $ | 1.53 | ||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Diluted net income per common share: | ||||||||||||||||||||||||||||
Income from continuing operations | $ | 0.72 | $ | 2.52 | $ | 2.95 | ||||||||||||||||||||||
Discontinued operations, net | (0.97 | ) | (1.42) | |||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Net income | $ | 0.72 | $ | 1.55 | $ | 1.53 | ||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Dividends per share | $ | 0.25 | $ | 0.25 | $ | 0.25 | ||||||||||||||||||||||
Basic weighted average number of shares outstanding | 362.43 | 381.92 | 388.64 | |||||||||||||||||||||||||
Diluted weighted average number of shares outstanding | 362.69 | 382.55 | 389.51 |
See Notes to Consolidated Financial Statements
Loews Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||
| ||||||||||||
(In millions, except per share data) | ||||||||||||
Basic net income per common share: | ||||||||||||
Income from continuing operations | $ | 1.44 | $ | 2.62 | $ | 3.12 | ||||||
Discontinued operations, net | (0.04) | |||||||||||
| ||||||||||||
Net income | $ | 1.44 | $ | 2.62 | $ | 3.08 | ||||||
| ||||||||||||
Diluted net income per common share: | ||||||||||||
Income from continuing operations | $ | 1.43 | $ | 2.62 | $ | 3.11 | ||||||
Discontinued operations, net | (0.04) | |||||||||||
| ||||||||||||
Net income | $ | 1.43 | $ | 2.62 | $ | 3.07 | ||||||
| ||||||||||||
Dividends per share | $ | 0.25 | $ | 0.25 | $ | 0.25 | ||||||
Basic weighted average number of shares outstanding | 395.12 | 404.53 | 418.72 | |||||||||
Diluted weighted average number of shares outstanding | 395.87 | 405.32 | 419.52 |
Year Ended December 31 | 2015 | 2014 | 2013 | |||||||||
| ||||||||||||
(In millions) | ||||||||||||
Net income | $ | 287 | $ | 962 | $ | 1,069 | ||||||
| ||||||||||||
Other comprehensive income (loss), after tax | ||||||||||||
Changes in: | ||||||||||||
Net unrealized gains (losses) on investments with other-than-temporary impairments | (9 | ) | 15 | 6 | ||||||||
Net other unrealized gains (losses) on investments | (557 | ) | 267 | (679) | ||||||||
| ||||||||||||
Total unrealized gains (losses) on available-for-sale investments | (566 | ) | 282 | (673) | ||||||||
Discontinued operations | (19 | ) | (23) | |||||||||
Unrealized gains (losses) on cash flow hedges | 5 | (3 | ) | |||||||||
Pension liability | (18 | ) | (235 | ) | 329 | |||||||
Foreign currency translation | (139 | ) | (94 | ) | (11) | |||||||
| ||||||||||||
Other comprehensive loss | (718 | ) | (69 | ) | (378) | |||||||
| ||||||||||||
Comprehensive income (loss) | (431 | ) | 893 | 691 | ||||||||
Amounts attributable to noncontrolling interests | 53 | (361 | ) | (437) | ||||||||
| ||||||||||||
Total comprehensive income (loss) attributable to Loews Corporation | $ (378 | ) | $ | 532 | $ | 254 | ||||||
|
See Notes to Consolidated Financial Statements.
Loews Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEEQUITY
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||
| ||||||||||||
(In millions) | ||||||||||||
Net income | $ | 1,110 | $ | 1,694 | $ | 1,988 | ||||||
| ||||||||||||
Other comprehensive income (loss), after tax | ||||||||||||
Changes in: | ||||||||||||
Net unrealized gains on investments with other-than-temporary impairments | 84 | 10 | 86 | |||||||||
Net other unrealized gains on investments | 339 | 362 | 494 | |||||||||
| ||||||||||||
Total unrealized gains on available-for-sale investments | 423 | 372 | 580 | |||||||||
Unrealized gains (losses) on cash flow hedges | (8 | ) | 39 | 60 | ||||||||
Foreign currency | 39 | (14 | ) | 49 | ||||||||
Pension liability | (132 | ) | (238 | ) | 29 | |||||||
| ||||||||||||
Other comprehensive income | 322 | 159 | 718 | |||||||||
| ||||||||||||
Comprehensive income | 1,432 | 1,853 | 2,706 | |||||||||
Amounts attributable to noncontrolling interests | (575 | ) | (648 | ) | (771) | |||||||
| ||||||||||||
Total comprehensive income attributable to Loews Corporation | $ | 857 | $ | 1,205 | $ | 1,935 | ||||||
|
Loews Corporation Shareholders | |||||||||||||||||||||||||||||||||||
Accumulated | Common | ||||||||||||||||||||||||||||||||||
Additional | Other | Stock | |||||||||||||||||||||||||||||||||
Common | Paid-in | Retained | Comprehensive | Held in | Noncontrolling | ||||||||||||||||||||||||||||||
Total | Stock | Capital | Earnings | Income (Loss) | Treasury | Interests | |||||||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||||||
Balance, January 1, 2013 | $ | 24,676 | $ | 4 | $ | 3,595 | $ | 15,192 | $ | 678 | �� | $ | (10 | ) | $ | 5,217 | |||||||||||||||||||
Net income | 1,069 | 595 | 474 | ||||||||||||||||||||||||||||||||
Other comprehensive loss | (378 | ) | (341 | ) | (37 | ) | |||||||||||||||||||||||||||||
Dividends paid | (597 | ) | (97 | ) | (500 | ) | |||||||||||||||||||||||||||||
Issuance of equity securities by subsidiary | 337 | 51 | 2 | 284 | |||||||||||||||||||||||||||||||
Purchases of Loews treasury stock | (218 | ) | (218 | ) | |||||||||||||||||||||||||||||||
Retirement of treasury stock | - | (48 | ) | (180 | ) | 228 | |||||||||||||||||||||||||||||
Issuance of Loews common stock | 5 | 5 | |||||||||||||||||||||||||||||||||
Stock-based compensation | 18 | 3 | 15 | ||||||||||||||||||||||||||||||||
Other | (6 | ) | 1 | (2 | ) | (5 | ) | ||||||||||||||||||||||||||||
Balance, December 31, 2013 | 24,906 | 4 | 3,607 | 15,508 | 339 | - | 5,448 | ||||||||||||||||||||||||||||
Net income | 962 | 591 | 371 | ||||||||||||||||||||||||||||||||
Other comprehensive loss | (69 | ) | (59 | ) | (10 | ) | |||||||||||||||||||||||||||||
Dividends paid | (433 | ) | (95 | ) | (338 | ) | |||||||||||||||||||||||||||||
Purchases of subsidiary stock from noncontrolling interests | (144 | ) | (9 | ) | (135 | ) | |||||||||||||||||||||||||||||
Purchases of Loews treasury stock | (622 | ) | (622 | ) | |||||||||||||||||||||||||||||||
Retirement of treasury stock | - | (136 | ) | (486 | ) | 622 | |||||||||||||||||||||||||||||
Issuance of Loews common stock | 6 | 6 | |||||||||||||||||||||||||||||||||
Stock-based compensation | 26 | 13 | 13 | ||||||||||||||||||||||||||||||||
Other | 18 | (3 | ) | 21 | |||||||||||||||||||||||||||||||
Balance, December 31, 2014 | $ | 24,650 | $ | 4 | $ | 3,481 | $ | 15,515 | $ | 280 | $ | - | $ | 5,370 |
See Notes to Consolidated Financial Statements.
Loews Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY
Loews Corporation Shareholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated | Common | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Additional | Other | Stock | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common | Paid-in | Retained | Comprehensive | Held in | Noncontrolling | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | Stock | Capital | Earnings | Income (Loss) | Treasury | Interests | Loews Corporation Shareholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| Total | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Common Stock Held in Treasury | Noncontrolling Interests | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2010 | $ | 21,085 | $ | 4 | $ | 3,637 | $ | 13,693 | $ (419) | $ (16) | $ | 4,186 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjustment to initially apply guidance on accounting for costs associated with acquiring or renewing insurance contracts | (79 | ) | (65 | ) | (14) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2014 | $ | 24,650 | $ | 4 | $ | 3,481 | $ | 15,515 | $ | 280 | $ | - | $ | 5,370 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 1,988 | 1,289 | 699 | 287 | 260 | 27 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | 718 | 646 | 72 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | (718 | ) | (638 | ) | (80 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid | (597 | ) | (105 | ) | (492) | (255 | ) | (90 | ) | (165 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of equity securities by subsidiary | 279 | 83 | 1 | 195 | 115 | (2 | ) | 1 | 116 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of Loews treasury stock | (405 | ) | (405) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Loews common stock | 8 | 8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Retirement of treasury stock | - | (97 | ) | (309 | ) | 406 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 21 | 18 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 10 | 18 | (3 | ) | 2 | (7) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2010 | 23,028 | 4 | 3,667 | 14,500 | 230 | (15) | 4,642 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 1,694 | 1,062 | 632 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | 159 | 143 | 16 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid | (500 | ) | (101 | ) | (399) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of CNA Surety noncontrolling interests | (475 | ) | (59 | ) | 17 | (433) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disposition of FICOH ownership interest | (155 | ) | (7) | (148) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of equity securities by subsidiary | 152 | 28 | 1 | 123 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of Loews treasury stock | (718 | ) | (718) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchases of subsidiary stock from noncontrolling interests | (31 | ) | 5 | (36 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchases of Loews treasury stock | (1,265 | ) | (1,265 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Retirement of treasury stock | - | (164 | ) | (569 | ) | 733 | - | (1 | ) | (311 | ) | (953 | ) | 1,265 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Loews common stock | 4 | 4 | 7 | 7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 22 | 19 | 3 | 26 | 23 | 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | (8 | ) | (1 | ) | (2 | ) | (5) | (6 | ) | (19 | ) | (1 | ) | 14 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2015 | $ | 22,810 | $ | 3 | $ | 3,184 | $ | 14,731 | $ | (357 | ) | $ | - | $ | 5,249 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2011 | $ | 23,203 | $ | 4 | $ | 3,494 | $ | 14,890 | $ | 384 | $ | - | $ | 4,431 | |||||||||||||||||||||||||||||||||||||||||||||||||||
|
See Notes to Consolidated Financial Statements.
Loews Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITYCASH FLOWS
Loews Corporation Shareholders | ||||||||||||||||||||||||||||
Accumulated | Common | |||||||||||||||||||||||||||
Additional | Other | Stock | ||||||||||||||||||||||||||
Common | Paid-in | Retained | Comprehensive | Held in | Noncontrolling | |||||||||||||||||||||||
Total | Stock | Capital | Earnings | Income | Treasury | Interests | ||||||||||||||||||||||
| ||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Balance, December 31, 2011 | $ | 23,203 | $ | 4 | $ | 3,494 | $ | 14,890 | $ | 384 | $ | - | $ | 4,431 | ||||||||||||||
Net income | 1,110 | 568 | 542 | |||||||||||||||||||||||||
Other comprehensive income | 322 | 289 | 33 | |||||||||||||||||||||||||
Dividends paid | (549) | (99) | (450) | |||||||||||||||||||||||||
Issuance of equity securities by subsidiary | 774 | 115 | 5 | 654 | ||||||||||||||||||||||||
Purchase of Loews treasury stock | (222) | (222) | ||||||||||||||||||||||||||
Retirement of treasury stock | - | (47) | (165) | 212 | ||||||||||||||||||||||||
Issuance of Loews common stock | 13 | 13 | ||||||||||||||||||||||||||
Stock-based compensation | 23 | 20 | 3 | |||||||||||||||||||||||||
Other | 2 | (2) | 4 | |||||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Balance, December 31, 2012 | $ | 24,676 | $ | 4 | $ | 3,595 | $ | 15,192 | $ | 678 | $ | (10) | $ | 5,217 | ||||||||||||||
|
Year Ended December 31 | 2015 | 2014 | 2013 | |||||||||||
(In millions) | ||||||||||||||
Operating Activities: | ||||||||||||||
Net income | $ | 287 | $ | 962 | $ | 1,069 | ||||||||
Adjustments to reconcile net income to net cash provided (used) by operating activities: | ||||||||||||||
Loss on sale of subsidiaries | 451 | |||||||||||||
Investment (gains) losses | 71 | (47 | ) | (26 | ) | |||||||||
Equity method investees | 182 | 64 | (380 | ) | ||||||||||
Amortization of investments | 17 | 3 | (24 | ) | ||||||||||
Depreciation, depletion and amortization | 955 | 899 | 871 | |||||||||||
Impairment of goodwill | 20 | 636 | ||||||||||||
Asset impairments | 865 | 228 | 325 | |||||||||||
Provision for deferred income taxes | (225 | ) | 11 | 6 | ||||||||||
Other non-cash items | 105 | 134 | 49 | |||||||||||
Changes in operating assets and liabilities, net: | ||||||||||||||
Receivables | 120 | 738 | 87 | |||||||||||
Deferred acquisition costs | 311 | 44 | 2 | |||||||||||
Insurance reserves | 241 | (363 | ) | (68 | ) | |||||||||
Other assets | (43 | ) | (128 | ) | (20 | ) | ||||||||
Other liabilities | (33 | ) | 123 | 470 | ||||||||||
Trading securities | 674 | (129 | ) | (901 | ) | |||||||||
Net cash flow operating activities | 3,547 | 2,990 | 2,096 | |||||||||||
Investing Activities: | ||||||||||||||
Purchases of fixed maturities | (8,675 | ) | (9,381 | ) | (11,197 | ) | ||||||||
Proceeds from sales of fixed maturities | 4,390 | 4,914 | 6,869 | |||||||||||
Proceeds from maturities of fixed maturities | 4,095 | 3,983 | 3,271 | |||||||||||
Purchases of equity securities | (62 | ) | (67 | ) | (77 | ) | ||||||||
Proceeds from sales of equity securities | 57 | 31 | 103 | |||||||||||
Purchases of limited partnership investments | (188 | ) | (271 | ) | (323 | ) | ||||||||
Proceeds from sales of limited partnership investments | 174 | 167 | 204 | |||||||||||
Purchases of property, plant and equipment | (1,555 | ) | (2,753 | ) | (1,737 | ) | ||||||||
Acquisitions | (157 | ) | (448 | ) | (235 | ) | ||||||||
Dispositions | 33 | 1,031 | 182 | |||||||||||
Change in short term investments | 120 | 1,396 | (101 | ) | ||||||||||
Other, net | (167 | ) | (72 | ) | (257 | ) | ||||||||
Net cash flow investing activities | (1,935 | ) | (1,470 | ) | (3,298 | ) |
Loews Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 (In millions) Financing Activities: Dividends paid Dividends paid to noncontrolling interests Purchases of subsidiary stock from noncontrolling interests Purchases of Loews treasury stock Issuance of Loews common stock Proceeds from sale of subsidiary stock Principal payments on debt Issuance of debt Other, net Net cash flow financing activities Effect of foreign exchange rate on cash Net change in cash Cash, beginning of year Cash, end of year See Notes to Consolidated Financial Statements. 2015 2014 2013 $ (90 ) $ (95 ) $ (97 ) (165 ) (338 ) (500 ) (29 ) (149 ) (1,265 ) (622 ) (228 ) 7 6 5 114 5 370 (1,929 ) (2,269 ) (1,494 ) 1,828 2,004 3,255 4 16 (40 ) (1,525 ) (1,442 ) 1,271 (11 ) (8 ) (3 ) 76 70 66 364 294 228 $ 440 $ 364 $ 294
Loews Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||
| ||||||||||||
(In millions) | ||||||||||||
Operating Activities: | ||||||||||||
Net income | $ | 1,110 | $ | 1,694 | $ | 1,988 | ||||||
Adjustments to reconcile net income to net cash provided (used) by operating activities: | ||||||||||||
Income from discontinued operations | 20 | |||||||||||
Investment (gains) losses | (57 | ) | 52 | (56) | ||||||||
Undistributed (earnings) losses | (103 | ) | 74 | (184) | ||||||||
Amortization of investments | (50 | ) | (64 | ) | (118) | |||||||
Depreciation, depletion and amortization | 905 | 833 | 816 | |||||||||
Impairment of natural gas and oil properties | 680 | |||||||||||
Provision for deferred income taxes | (22 | ) | 268 | 470 | ||||||||
Other non-cash items | 55 | 52 | (53) | |||||||||
Changes in operating assets and liabilities, net: | ||||||||||||
Receivables | 327 | 1,085 | (335) | |||||||||
Deferred acquisition costs | (16 | ) | (1 | ) | 29 | |||||||
Insurance reserves | 430 | (237 | ) | (805) | ||||||||
Other assets | 74 | 181 | (83) | |||||||||
Other liabilities | (73 | ) | (326 | ) | 132 | |||||||
Trading securities | (406 | ) | 354 | (1,778) | ||||||||
| ||||||||||||
Net cash flow operating activities - continuing operations | 2,854 | 3,965 | 43 | |||||||||
Net cash flow operating activities - discontinued operations | (90) | |||||||||||
| ||||||||||||
Net cash flow operating activities - total | 2,854 | 3,965 | (47) | |||||||||
| ||||||||||||
Investing Activities: | ||||||||||||
Purchases of fixed maturities | (10,299 | ) | (12,168 | ) | (16,715) | |||||||
Proceeds from sales of fixed maturities | 6,123 | 7,591 | 12,514 | |||||||||
Proceeds from maturities of fixed maturities | 3,699 | 3,055 | 3,340 | |||||||||
Purchases of equity securities | (54 | ) | (72 | ) | (99) | |||||||
Proceeds from sales of equity securities | 86 | 178 | 341 | |||||||||
Purchases of limited partnership investments | (372 | ) | (303 | ) | (663) | |||||||
Proceeds from sales of limited partnership investments | 227 | 143 | 166 | |||||||||
Purchases of property, plant and equipment | (1,236 | ) | (857 | ) | (917) | |||||||
Deposits for construction of offshore drilling equipment | (169 | ) | (478 | ) | ||||||||
Acquisitions | (987 | ) | (548 | ) | ||||||||
Dispositions | 221 | 222 | 805 | |||||||||
Change in short term investments | (192 | ) | 1,461 | 1,892 | ||||||||
Other, net | (142 | ) | (127 | ) | (76) | |||||||
| ||||||||||||
Net cash flow investing activities - continuing operations | (3,095 | ) | (1,903 | ) | 588 | |||||||
Net cash flow investing activities - discontinued operations | 76 | |||||||||||
| ||||||||||||
Net cash flow investing activities - total | (3,095 | ) | (1,903 | ) | 664 | |||||||
|
Loews Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||
| ||||||||||||
(In millions) | ||||||||||||
Financing Activities: | ||||||||||||
Dividends paid | $ | (99 | ) | $ | (101 | ) | $ (105) | |||||
Dividends paid to noncontrolling interests | (450 | ) | (399 | ) | (492) | |||||||
Acquisition of CNA Surety noncontrolling interests | (475 | ) | ||||||||||
Purchases of treasury shares | (212 | ) | (732 | ) | (405) | |||||||
Issuance of common stock | 13 | 4 | 8 | |||||||||
Proceeds from sale of subsidiary stock | 849 | 172 | 344 | |||||||||
Principal payments on debt | (2,910 | ) | (2,832 | ) | (659) | |||||||
Issuance of debt | 3,152 | 2,321 | 645 | |||||||||
Other, net | (7 | ) | (11 | ) | (24) | |||||||
| ||||||||||||
Net cash flow financing activities - continuing operations | 336 | (2,053 | ) | (688) | ||||||||
Net cash flow financing activities - discontinued operations | ||||||||||||
| ||||||||||||
Net cash flow financing activities - total | 336 | (2,053 | ) | (688) | ||||||||
| ||||||||||||
Effect of foreign exchange rate on cash - continuing operations | 4 | 1 | ||||||||||
| ||||||||||||
Net change in cash | 99 | 9 | (70) | |||||||||
Net cash transactions: | ||||||||||||
From continuing operations to discontinued operations | (14) | |||||||||||
To discontinued operations from continuing operations | 14 | |||||||||||
Cash, beginning of year | 129 | 120 | 190 | |||||||||
| ||||||||||||
Cash, end of year | $ | 228 | $ | 129 | $ | 120 | ||||||
|
See Notes to Consolidated Financial Statements.
Loews Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Basis of presentation – Loews Corporation is a holding company. Its subsidiaries are engaged in the following lines of business: commercial property and casualty insurance (CNA Financial Corporation (“CNA”), a 90% owned subsidiary); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (“Diamond Offshore”), a 50.4%53% owned subsidiary); transportation and storage of natural gas and natural gas liquids and gathering and processing of natural gas (Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”), a 55% owned subsidiary); exploration, production and marketing of natural gas and oil (including condensate and natural gas liquids), (HighMount Exploration & Production LLC (“HighMount”), a wholly51% owned subsidiary); and the operation of a chain of hotels (Loews Hotels Holding Corporation (“Loews Hotels”), a wholly owned subsidiary). Unless the context otherwise requires, the terms “Company,” “Loews” and “Registrant” as used herein mean Loews Corporation excluding its subsidiaries and the term “Net income (loss) attributable to Loews Corporation” as used herein means Net income (loss) attributable to Loews Corporation Shareholders.shareholders.
Loews segments are CNA Financial, including Specialty, Commercial, International and Other Non-Core; Diamond Offshore; Boardwalk Pipeline; Loews Hotels; and Corporate and other. See Note 20 for additional information on segments.
Principles of consolidation – The Consolidated Financial Statements include all subsidiaries and intercompany accounts and transactions have been eliminated. The equity method of accounting is used for investments in associated companies in which the Company generally has an interest of 20% to 50%.
Accounting estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. Actual results could differ from those estimates.
Accounting changes – In October of 2010, the Financial Accounting Standards Board (“FASB”) issued updated accounting guidance which limits the capitalization of costs incurred to acquire or renew insurance contracts to those that are incremental direct costs of successful contract acquisitions. The previous guidance allowed the capitalization of acquisition costs that vary with and are primarily related to the acquisition of new and renewal insurance contracts, whether the costs related to successful or unsuccessful efforts.
As of January 1, 2012, the Company adopted the updated accounting guidance prospectively as of January 1, 2004, the earliest date practicable. Due to the lack of available historical data related to certain accident and health contracts issued prior to January 1, 2004, a full retrospective application of the change in accounting guidance was impracticable. Acquisition costs capitalized prior to January 1, 2004 will continue to be accounted for under the previous accounting guidance and will be amortized over the premium-paying period of the related policies using assumptions consistent with those used for computing future policy benefit reserves for such contracts.
The Company has adjusted its previously reported financial information included herein to reflect the change in accounting guidance for deferred acquisition costs. The impacts of adopting the new accounting standard on the Company’s Consolidated Balance Sheet as of December 31, 2011 were a $106 million decrease in Deferred acquisition costs of insurance subsidiaries and a $37 million decrease in Deferred income tax liabilities. The impacts to Accumulated other comprehensive income (“AOCI”) and Additional paid-in capital (“APIC”) were the result of the indirect effects of the Company’s adoption of this guidance on Shadow Adjustments, as further discussed below, and CNA’s acquisition of the noncontrolling interest of CNA Surety in 2011.
The impacts on the Company’s Consolidated Statements of Income for the years ended December 31, 2011 and 2010 were $234 million and $219 million decreases in Amortization of deferred acquisition costs, $242 million and $219 million increases in Other operating expenses, resulting in a $2 million decrease and a $1 million increase in Net income and a $0.01 decrease and no impact in Basic and Diluted net income per share. There were no changes to net cash flows from operating, investing or financing activities for the comparative periods presented as a result of the adoption of the new accounting standard.
Investments – The Company classifies its fixed maturity securities and equity securities as either available-for-sale or trading, and as such, they are carried at fair value. Short term investments are carried at fair value. Changes
in fair value of trading securities are reported within Net investment income on the Consolidated Statements of Income. Changes in fair value related to available-for-sale securities are reported as a component of Other comprehensive income. The cost of fixed maturity securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, which are included in Net investment income on the Consolidated Statements of Income. Losses may be recognized within the Consolidated Statements of Income when a decline in value is determined by the Company to be other-than-temporary.
The cost of fixed maturity securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts, which are included in Net investment income on the Consolidated Statements of Income. The amortization of premium and accretion of discount for fixed maturity securities takes into consideration call and maturity dates that produce the lowest yield. This represents a change from prior reporting periods as previously the amortization of premiums was to maturity. This change in estimate, effected by a change in accounting principle, will result in a better reflection of the yield on fixed maturity securities with call provisions. This change, which was adopted in the fourth quarter of 2015, decreased Net investment income and the amortized cost of fixed maturity securities by $39 million in the Consolidated Statements of Income for the year ended December 31, 2015 and the Consolidated Balance Sheet as of December 31, 2015. This adjustment decreased basic and diluted net income per share by $0.06 for the year ended December 31, 2015.
To the extent that unrealized gains on fixed income securities supporting long term care products and payout annuity contractsstructured settlements not funded by annuities would result in a premium deficiency if those gains were realized, a related decrease in Deferred acquisition costs and/or increase in Insurance reserves isare recorded, net of tax and noncontrolling interests, as a reduction of net unrealized gains through Other comprehensive income (“Shadow Adjustments”). ForShadow Adjustments decreased $159 million (after tax and noncontrolling interests) and increased $679 million (after tax and noncontrolling interests) for the years ended December 31, 20122015 and 2011, Shadow Adjustments, net2014. As of participating policyholders’ interest, of $710 million and $515 million were recorded (after tax and noncontrolling interests). At December 31, 20122015 and 2011,2014, net unrealized gains on investments included in AOCIAccumulated other comprehensive income (“AOCI”) were correspondingly reduced by $1.4$996 million and $1.2 billion and $650 million (after tax and noncontrolling interests).
For asset-backed securities included in fixed maturity securities, the Company recognizes income using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The amortized cost of high credit quality fixed rate securities is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the securities. Such adjustments are reflected in Net investment income on the Consolidated Statements of Income. Interest income on lower rated and variable rate securities is determined using the prospective yield method.
The Company’s carrying value of investments in limited partnerships is its share of the net asset value of each partnership, as determined by the General Partner. Certain partnerships for which results are not available on a timely basis are reported on a lag, primarily three months or less. These investments are accounted for under the equity method and changes in net asset values are recorded within Net investment income on the Consolidated Statements of Income.
Investments in derivative securities are carried at fair value with changes in fair value reported as a component of Investment gains (losses), Income (loss) from trading portfolio, or Other comprehensive income (loss), depending on their hedge designation. A derivative is typically defined as an instrument whose value is “derived” from an underlying instrument, index or rate, has a notional amount, requires little or no initial investment and can be net settled. Derivatives include, but are not limited to, the following types of investments: interest rate swaps, interest rate caps and floors, put and call options, warrants, futures, forwards, commitments to purchase securities, credit default swaps and combinations of the foregoing. Derivatives embedded within non-derivative instruments (such as call options embedded in convertible bonds) must be split from the host instrument when the embedded derivative is not clearly and closely related to the host instrument.
A security is impaired if the fair value of the security is less than its cost adjusted for accretion, amortization and previously recorded other-than-temporary impairment (“OTTI”) losses, otherwise defined as an unrealized loss. When a security is impaired, the impairment is evaluated to determine whether it is temporary or other-than-temporary.
Significant judgment is required in the determination of whether an OTTI loss has occurred for a security. CNA follows a consistent and systematic process for determining and recording an OTTI loss. CNA has established a committee responsible for the OTTI process referred to as the Impairment Committee. The Impairment Committee is responsible for evaluating all securities in an unrealized loss position on at least a quarterly basis.
The Impairment Committee’s assessment of whether an OTTI loss has occurred incorporates both quantitative and qualitative information. Fixed maturity securities that CNA intends to sell, or it more likely than not will be required to sell before recovery of amortized cost, are considered to be other-than-temporarily impaired and the entire difference between the amortized cost basis and fair value of the security is recognized as an OTTI loss in earnings. The remaining fixed maturity securities in an unrealized loss position are evaluated to determine if a credit loss exists. The factors considered by the Impairment Committee include: (i) the financial condition and near term and long term prospects of the issuer, (ii) whether the debtor is current on interest and principal payments, (iii) credit ratings of the securities and (iv) general market conditions and industry or sector specific outlook. CNA also considers results and analysis of cash flow modeling for asset-backed securities, and when appropriate, other fixed maturity securities.
The focus of the analysis for asset-backed securities is on assessing the sufficiency and quality of underlying collateral and timing of cash flows based on scenario tests. If the present value of the modeled expected cash flows equals or exceeds the amortized cost of a security, no credit loss is judged to exist and the asset-backed security is deemed to be temporarily impaired. If the present value of the expected cash flows is less than amortized cost, the security is judged to be other-than-temporarily impaired for credit reasons and that shortfall, referred to as the credit component, is recognized as an OTTI loss in earnings. The difference between the adjusted amortized cost basis and fair value, referred to as the non-credit component, is recognized as OTTI in Other comprehensive income. In subsequent reporting periods, a change in intent to sell or further credit impairment on a security whose fair value has not deteriorated will cause the non-credit component originally recorded as OTTI in Other comprehensive income to be recognized as an OTTI loss in earnings.
CNA performs the discounted cash flow analysis using stressed scenarios to determine future expectations regarding recoverability. Significant assumptions enter into these cash flow projections including delinquency rates, probable risk of default, loss severity upon a default, over collateralization and interest coverage triggers and credit support from lower level tranches.
CNA applies the same impairment model as described above for the majority of non-redeemable preferred stock securities on the basis that these securities possess characteristics similar to debt securities and that the issuers maintain their ability to pay dividends. For all other equity securities, in determining whether the security is other-than-temporarily impaired, the Impairment Committee considers a number of factors including, but not limited to: (i) the length of time and the extent to which the fair value has been less than amortized cost, (ii) the financial condition and near term prospects of the issuer, (iii) the intent and ability of CNA to retain its investment for a period of time sufficient to allow for an anticipated recovery in value and (iv) general market conditions and industry or sector specific outlook.
Joint venture investments – The Company has 20% to 50% interests in operating joint ventures related to hotel properties and had joint venture interests in the former Bluegrass Project, as discussed in Note 2, that are accounted for under the equity method. The Company’s investment in these entities was $234 million and $158 million for the years ended December 31, 2015 and 2014 and reported in Other assets on the Company’s Consolidated Balance Sheets. Equity income (loss) for these investments was $43 million, $(62) million and $12 million for the years ended December 31, 2015, 2014 and 2013 and reported in Other operating expenses on the Company’s Consolidated Statements of Income. Some of these investments are variable interest entities (“VIE”) as defined in the accounting guidance because the entities will require additional funding from each equity owner throughout the development and construction phase and are accounted for under the equity method since the Company is not the primary beneficiary. The maximum exposure to loss for the VIE investments is $348 million, consisting of the amount of the investment and debt guarantees.
The following tables present summarized financial information for these joint ventures:
Year Ended December 31 | 2015 | 2014 | ||||||||||||||||||
(In millions) | ||||||||||||||||||||
Total assets | $ | 1,577 | $ | 1,231 | ||||||||||||||||
Total liabilities | 1,231 | 1,025 | ||||||||||||||||||
Year Ended December 31 | 2015 | 2014 | 2013 | |||||||||||||||||
Revenues | $ | 606 | $ | 491 | $ | 349 | ||||||||||||||
Net income | 71 | 32 | 7 |
Hedging – The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedging transactions. The Company also formally assesses (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative for which hedge accounting has been designated is not (or ceases to be) highly effective, the Company discontinues hedge accounting prospectively. See Note 53 for additional information on the Company’s use of derivatives.
Securities lending activities – The Company lends securities for the purpose of enhancing income or to finance positions to unrelated parties who have been designated as primary dealers by the Federal Reserve Bank of New York. Borrowers of these securities must deposit and maintain collateral with the Company of no less than 100% of the fair value of the securities loaned. U.S. Government securities and cash are accepted as collateral. The Company maintains effective control over loaned securities and, therefore, continues to report such securities as investments on the Consolidated Balance Sheets.
Securities lending is typically done on a matched-book basis where the collateral is invested to substantially match the term of the loan. This matching of terms tends to limit risk. In accordance with the Company’s lending agreements, securities on loan are returned immediately to the Company upon notice. Collateral is not reflected as an asset of the Company. There was no collateral held at December 31, 20122015 and 2011.2014.
Revenue recognition – Premiums on property and casualty insurance contracts are recognized in proportion to the underlying risk insured which are principally are earned ratably over the duration of the policies. Premiums on long term care contracts are earned ratably over the policy year in which they are due. The reserve for unearned premiums represents the portion of premiums written relating to the unexpired terms of coverage.
Insurance receivables include balances due currently or in the future, including amounts due from insureds related to losses under high deductible policies, and are presented at unpaid balances, net of an allowance for doubtful accounts. Amounts are considered past due based on policy payment terms. That allowance is determined based on periodic evaluations of aged receivables, management’s experience and current economic conditions. Insurance receivables and any related allowance are written off after collection efforts are exhausted or a negotiated settlement is reached.
Property and casualty contracts that are retrospectively rated contain provisions that result in an adjustment to the initial policy premium depending on the contract provisions and loss experience of the insured during the experience period. For such contracts, CNA estimates the amount of ultimate premiums that it may earn upon completion of the experience period and recognizes either an asset or a liability for the difference between the initial policy premium and the estimated ultimate premium. CNA adjusts such estimated ultimate premium amounts during the course of the experience period based on actual results to date. The resulting adjustment is recorded as either a reduction of or an increase to the earned premiums for the period.
Contract drilling revenue from dayrate drilling contracts is recognized as services are performed. In connection with such drilling contracts, Diamond Offshore may receive fees (either lump-sum or dayrate) for the mobilization of equipment. These fees are earned as services are performed over the initial term of the related drilling contracts. Absent a contract, mobilization costs are recognized currently. From time to time, Diamond Offshore may receive fees from its customers for capital improvements to their rigs. Diamond Offshore defers such fees received and recognizes these fees into revenue on a straight-line basis over the period of the related drilling contract. Diamond Offshore capitalizes the costs of such capital improvements and depreciates them over the estimated useful life of the improvement.
Revenues from transportation and storage services are recognized in the period the service is provided based on contractual terms and the related transported and stored volumes. The majority of Boardwalk Pipeline’s operating subsidiaries are subject to Federal Energy Regulatory Commission (“FERC”) regulations and, accordingly, certain revenues collected may be subject to possible refunds to its customers. An estimated refund liability is recorded considering regulatory proceedings, advice of counsel and estimated total exposure.
HighMount’s natural gas and oil production revenue is recognized based on actual volumes of natural gas and oil sold to purchasers. Sales require delivery of the product to the purchaser, passage of title and probability of collection of purchaser amounts owed. Natural gas and oil production revenue is reported net of royalties. HighMount uses the sales method of accounting for gas imbalances. An imbalance is created when the volumes of gas sold by HighMount pertaining to a property do not equate to the volumes produced to which HighMount is entitled based on its interest in the property. An asset or liability is recognized to the extent that HighMount has an imbalance in excess of the remaining reserves on the underlying properties.
Claim and claim adjustment expense reserves – Claim and claim adjustment expense reserves, except reserves for structured settlements not associated with asbestos and environmental pollution (“A&EP”), workers’ compensation lifetime claims and accident and health claims are not discounted and are based on (i) case basis estimates for losses reported on direct business, adjusted in the aggregate for ultimate loss expectations; (ii) estimates of incurred but not reported losses; (iii) estimates of losses on assumed reinsurance; (iv) estimates of future expenses to be incurred in the settlement of claims; (v) estimates of salvage and subrogation recoveries and (vi) estimates of amounts due from insureds related to losses under high deductible policies. Management considers current conditions and trends as well as past CNA and industry experience in establishing these estimates. The
effects of inflation, which can be significant, are implicitly considered in the reserving process and are part of the recorded reserve balance. Ceded claim and claim adjustment expense reserves are reported as a component of Receivables on the Consolidated Balance Sheets.
Claim and claim adjustment expense reserves are presented net of anticipated amounts due from insureds related to losses under deductible policies of $1.3$1.2 billion and $1.4 billion as of December 31, 20122015 and 2011.2014. A significant portion of these amounts are supported by collateral. CNA also has an allowance for uncollectible deductible
amounts, which is presented as a component of the allowance for doubtful accounts included in Receivables on the Consolidated Balance Sheets.
Structured settlements have been negotiated for certain property and casualty insurance claims. Structured settlements are agreements to provide fixed periodic payments to claimants. Certain structured settlements are funded by annuities purchased from Continental Assurance Company (“CAC”), a wholly owned and consolidated subsidiary of CNA, for which the related annuityCNA’s obligations are reported in Future policy benefits reserves. Obligations for structured settlements not funded by annuities are included in claim and claim adjustment expense reserves and carried at present values determined using interest rates ranging from 7.1% to 9.7% at December 31, 2012 and 5.5% to 8.0% at December 31, 2011.2015 and 2014. At December 31, 20122015 and 2011,2014, the discounted reserves for unfunded structured settlements were $602$560 million and $632$582 million, net of discount of $1.0 billion$880 million and $1.1 billion.$924 million.
Workers’ compensation lifetime claim reserves are calculated using mortality assumptions determined through statutory regulation and economic factors. Accident and health claim reserves are calculated using mortality and morbidity assumptions based on CNA and industry experience. Workers’ compensation lifetime claim reserves and accident and health claim reserves are discounted at interest rates ranging from 3.0%3.5% to 6.5%6.8% at both December 31, 20122015 and 2011.2014. At December 31, 20122015 and 2011,2014, such discounted reserves totaled $2.2$2.6 billion and $2.1$2.5 billion, net of discount of $837$653 million and $520$654 million.
Future policy benefits reserves – Reserves forFuture policy benefit reserves represent the active life reserves related to CNA’s long term care productspolicies and payout annuity contracts are computed using the net level premium method, which incorporates actuarial assumptions as to morbidity, mortality, persistency, discount rates, which are impacted by expected investment yieldsrate and expenses. Expense assumptions include the estimated effects of expensesprimarily relate to be incurred beyond the premium paying period.claim adjudication. Actuarial assumptions generally vary by plan, age at issue and policy duration. The initial assumptions are determined at issuance, include a margin for adverse deviation and are locked in throughout the life of the contract unless a premium deficiency develops. If a premium deficiency emerges, the assumptions are unlocked and deferred acquisition costs, if any, and the future policy benefit reserves are adjusted. The December 31, 2015 gross premium valuation indicated a premium deficiency of $296 million. The indicated premium deficiency necessitated a charge to income that was effected by the write off of the entire long term care deferred acquisition cost asset of $289 million and an increase to active life reserves of $7 million. As a result, the long term care active life reserves carried as of December 31, 2015 represent management’s best estimate assumptions at that date with no margin for adverse deviation. Interest rates for long term care products range from 5.0%6.6% to 7.4%7.0% at December 31, 20122015 and from 5.0%4.5% to 7.5% at7.9% as of December 31, 2011. Interest rates for payout annuity contracts range from 5.0% to 8.7% at December 31, 2012 and from 5.4% to 7.5% at December 31, 2011. In 2012, CNA unlocked assumptions related to its payout annuity contracts due to anticipated adverse changes in discount rates, which reflect the current low interest rate environment and its view of expected investment yields, resulting in loss recognition which increased insurance liabilities by $33 million. In 2011, CNA unlocked assumptions related to its payout annuity contracts due to anticipated adverse changes in mortality and discount rates resulting in loss recognition which increased insurance reserves by $166 million.2014.
Policyholders’ funds reserves – Policyholders’ funds reserves primarily include reserves for investment contracts without life contingencies. For these contracts, policyholder liabilities are generally equal to the accumulated policy account values, which consist of an accumulation of deposit payments plus credited interest, less withdrawals and amounts assessed through the end of the period.
Guaranty fund and other insurance-related assessments– Liabilities for guaranty fund and other insurance-related assessments are accrued when an assessment is probable, when it can be reasonably estimated and when the event obligating the entity to pay an imposed or probable assessment has occurred. Liabilities for guaranty funds and other insurance-related assessments are not discounted and are included as part of Other liabilities on the Consolidated Balance Sheets. As of December 31, 20122015 and 2011,2014, the liability balances were $143$129 million and $152$131 million. As of December 31, 2012 and 2011, included in Other assets on the Consolidated Balance Sheets were $2 million of related assets for premium tax offsets. This asset is limited to the amount that is able to be offset against premium tax on future premium collections from business written or committed to be written.
Reinsurance – Reinsurance accounting allows for contractual cash flows to be reflected as premiums and losses. To qualify for reinsurance accounting, reinsurance agreements must include risk transfer. To meet risk transfer requirements, a reinsurance contract must include both insurance risk, consisting of underwriting and timing risk, and a reasonable possibility of a significant loss for the assuming entity.
Reinsurance receivables related to paid losses are presented at unpaid balances. Reinsurance receivables related to unpaid losses are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves. Reinsurance receivables are reported net of an allowance for doubtful accounts on the Consolidated Balance Sheets. The cost of reinsurance is primarily accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies or over the reinsurance contract period. The ceding of insurance does not discharge the primary liability of CNA.
CNA has established an allowance for doubtful accounts on reinsurance receivables which relates to both amounts already billed on ceded paid losses as well as ceded reserves that will be billed when losses are paid in the future. The allowance for doubtful accounts on reinsurance receivables is estimated on the basis of periodic evaluations of balances due from reinsurers, reinsurer solvency, management’s experience and current economic conditions. Reinsurer financial strength ratings are updated and reviewed on an annual basis or sooner if CNA becomes aware of significant changes related to a reinsurer. Because billed receivables are generally 5%approximate 4% or less of total
reinsurance receivables, the age of the reinsurance receivables related to paid losses is not a significant input into the allowance analysis. Changes in the allowance for doubtful accounts on reinsurance receivables are presented as a component of Insurance claims and policyholders’ benefits on the Consolidated Statements of Income.
Amounts are considered past due based on the reinsurance contract terms. Reinsurance receivables related to paid losses and any related allowance are written off after collection efforts have been exhausted or a negotiated settlement is reached with the reinsurer. Reinsurance receivables related to paid losses from insolvent insurers are written off when the settlement due from the estate can be reasonably estimated. At the time reinsurance receivables related to paid losses are written off, any required adjustment to reinsurance receivables related to unpaid losses is recorded as a component of Insurance claims and policyholders’ benefits on the Consolidated Statements of Income.
Reinsurance contracts that do not effectively transfer the economic risk of loss on the underlying policies are recorded using the deposit method of accounting, which requires that premium paid or received by the ceding company or assuming company be accounted for as a deposit asset or liability. CNA had $3 million and $18 million recorded as deposit assets at December 31, 20122015 and 2011,2014, and $125$8 million and $123$9 million recorded as deposit liabilities atas of December 31, 20122015 and 2011.2014. Income on reinsurance contracts accounted for under the deposit method is recognized using an effective yield based on the anticipated timing of payments and the remaining life of the contract. When the anticipated timing of payments changes, the effective yield is recalculated to reflect actual payments to date and the estimated timing of future payments. The deposit asset or liability is adjusted to the amount that would have existed had the new effective yield been applied since the inception of the contract.
Participating insurance – Policyholder dividends are accrued usingA loss portfolio transfer is a retroactive reinsurance contract. If the cumulative claim and allocated claim adjustment expenses ceded under a loss portfolio transfer exceed the consideration paid, the resulting gain from such excess is deferred and amortized into earnings in future periods in proportion to actual recoveries under the loss portfolio transfer. In the period in which an estimateexcess arises, a portion of the amount to be paid based on underlying contractual obligations under policies and applicable state laws. Limitations exist ondeferred gain is cumulatively recognized in earnings as if the amountrevised estimate was available at the inception date of income from participating life insurance contracts that may be distributed to shareholders, and therefore the share of income on these policies that cannot be distributed to shareholders is excluded from Shareholders’ Equity by a charge to Income and Other comprehensive income and the establishment of a corresponding liability.loss portfolio transfer.
Deferred acquisition costs – AcquisitionDeferrable acquisition costs include commissions, premium taxes and certain underwriting and policy issuance costs which are incremental direct costs of successful contract acquisitions. Deferred acquisition costs related to long term care contracts issued prior to January 1, 2004 include costs which vary with and are primarily related to the acquisition of business, as further discussed above.business.
Acquisition costs related to property and casualty business are deferred and amortized ratably over the period the related premiums are earned.
As noted under Future policy benefit reserves, all of the long term care deferred acquisition costs of $289 million were written off as of December 31, 2015 in recognition of a premium deficiency. Deferred acquisition costs related to long term care contracts are amortized over the premium-paying period of the related policies using assumptions consistent with those used for computing future policy benefit reserves for such contracts. Assumptions are made at the date of policy issuance or acquisition and are consistently applied during the
lives of the contracts. Deviations from estimated experience are included in results of operations when they occur. For these contracts, the amortization period is typically the estimated life of the policy. At December 31, 2012 and 2011, deferred acquisition costs were presented net of Shadow Adjustments of $369 million and $398 million.
CNA evaluates deferred acquisition costs for recoverability. Anticipated investment income is considered in the determination of the recoverability of deferred acquisition costs. Adjustments, if necessary, are recorded in current period results of operations.
Deferred acquisition costs are presented net of ceding commissions and other ceded acquisition costs. Unamortized deferred acquisition costs relating to contracts that have been substantially changed by a modification in benefits, features, rights or coverages that were not anticipated in the original contract are not deferred and are included as a charge to operations in the period during which the contract modification occurred.
Investments in life settlement contracts and related revenue recognition – Prior to 2002, CNA purchased investments in life settlement contracts. A life settlement contract is a contract between the owner of a life insurance policy (the policy owner) and a third party investor (investor). Under a life settlement contract, CNA obtained the ownership and beneficiary rights of an underlying life insurance policy.
CNA accounts for its investments in life settlement contracts using the fair value method. Under the fair value method, each life settlement contract is carried at its fair value at the end of each reporting period. The change in fair value, life insurance proceeds received and periodic maintenance costs, such as premiums, necessary to keep the underlying policy in force, are recorded in Other revenues on the Consolidated Statements of Income.
The fair value of CNA’s investments in life settlement contracts were $100$74 million and $117$82 million at December 31, 20122015 and 2011,2014, and are included in Other assets on the Consolidated Balance Sheets. The cash receipts and payments related to life settlement contracts are included in Cash flows from operating activities on the Consolidated Statements of Cash Flows.
The following table details the values for life settlement contracts. The determination of fair value is discussed in Note 4.
Number of Life Settlement Contracts | Fair Value of Life Settlement Contracts | Face Amount of Life Insurance Policies | Number of Life Settlement Contracts | Fair Value of Life Settlement Contracts | Face Amount of Life Insurance Policies | |||||||||||||||||||||
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(Dollar amounts in millions) | ||||||||||||||||||||||||||
Estimated maturity during: | ||||||||||||||||||||||||||
2013 | 70 | $ | 15 | $ | 41 | |||||||||||||||||||||
2014 | 60 | 13 | 36 | |||||||||||||||||||||||
2015 | 60 | 11 | 34 | |||||||||||||||||||||||
2016 | 50 | 9 | 30 | 60 | $ | 11 | $ | 35 | ||||||||||||||||||
2017 | 40 | 7 | 27 | 60 | 10 | 31 | ||||||||||||||||||||
2018 | 50 | 8 | 27 | |||||||||||||||||||||||
2019 | 40 | 6 | 24 | |||||||||||||||||||||||
2020 | 40 | 5 | 21 | |||||||||||||||||||||||
Thereafter | 390 | 45 | 237 | 300 | 34 | 167 | ||||||||||||||||||||
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Total | 670 | $ | 100 | $ | 405 | 550 | $ | 74 | $ | 305 | ||||||||||||||||
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CNA uses an actuarial model to estimate the aggregate face amount of life insurance that is expected to mature in each future year and the corresponding fair value. This model projects the likelihood of the insured’s death for each inforce policy based upon CNA’s estimated mortality rates, which may vary due to the relatively small size of the portfolio of life settlement contracts. The number of life settlement contracts presented in the table above is based upon the average face amount of inforce policies estimated to mature in each future year.
The increase (decrease) in fair value recognized for the years ended December 31, 2012, 20112015, 2014 and 20102013 on contracts still being held was $11$1 million, $5$8 million and $10$(2) million. The gains recognized during the years ended December 31, 2012, 20112015, 2014 and 20102013 on contracts that settled were $42$24 million, $28$25 million and $19$15 million.
Separate Account Business – Separate account assets and liabilities represent contract holder funds related to investment and annuity products for which the policyholder assumes substantially all the risk and reward. The assets
are segregated into accounts with specific underlying investment objectives and are legally segregated from CNA. All assets of the separate account business are carried at fair value with an equal amount recorded for separate account liabilities. Fee income accruing to CNA related to separate accounts is primarily included within Other revenues on the Consolidated Statements of Income.
A number of separate account pension deposit contracts guarantee principal and an annual minimum rate of interest. If aggregate contract value in the separate account exceeds the fair value of the related assets, an additional Policyholders’ funds liability is established. During 2012 and 2010, CNA decreased this pretax Policyholders’ funds liability by $20 million and $24 million. CNA increased this pretax Policyholders’ funds liability by $18 million in 2011. Certain of these contracts are subject to a fair value adjustment if terminated by the policyholder.
Goodwill– Goodwill represents the excess of purchase price over fair value of net assets of acquired entities. Goodwill is tested for impairment annually or when certain triggering events require additional tests. In 2012, Boardwalk Pipeline changed the dateSubsequent reversal of its annuala goodwill impairment test from December 31 to November 30. The changecharge is preferable as it better aligns Boardwalk Pipeline’s goodwill impairment testing procedures with its planning process and alleviates resource constraints in connection with its year-end closing and financial reporting process. Due to significant judgments and estimates that are utilized in an impairment analysis, Boardwalk Pipeline determined it was impracticable to objectively determine operating and valuation estimates prior to November 30, 2012. As a result, the change in accounting principle was prospectively applied from November 30, 2012 and does not delay, accelerate, or avoid an impairment charge.permitted. See Note 7 for additional information on goodwill.
As a result of impairments of its Natural gas and oil properties (see Note 7), which were caused by declines in natural gas and natural gas liquids (“NGL”) prices, HighMount tested its goodwill for impairment at December 31, 2012. No impairment charge was required.
Property, plant and equipment – Property, plant and equipment is carried at cost less accumulated depreciation, depletion and amortization (“DD&A”). Depreciation is computed principally by the straight-line method over the estimated useful lives of the various classes of properties. Leaseholds and leasehold improvements are depreciated or amortized over the terms of the related leases (including optional renewal periods where appropriate) or the estimated lives of improvements, if less than the lease term.
The principal service lives used in computing provisions for depreciation are as follows:
Years | ||||
Pipeline equipment | 30 to 50 | |||
Offshore drilling equipment | 15 to 30 | |||
Other | 3 to 40 |
HighMount follows the full cost method of accounting for natural gas and oil exploration and production activities. Under the full cost method, all direct costs of property acquisition, exploration and development activities are capitalized. These capitalized costs are subject to a quarterly ceiling test. Under the ceiling test, amounts capitalized are limited to the present value of estimated future net revenues to be derived from the anticipated production of proved natural gas and oil reserves, assuming an average price during the twelve month period adjusted for cash flow hedges in place, and limiting the classification of proved undeveloped reserves to locations scheduled to be drilled within five years. If net capitalized costs exceed the ceiling test at the end of any quarterly period, then a permanent write-down of the assets must be recognized in that period. A write-down may not be reversed in future periods, even though higher natural gas and oil prices may subsequently increase the ceiling. Approximately 5.8% (unaudited) of HighMount’s total proved reserves as of December 31, 2012 are hedged by qualifying cash flow hedges, for which hedge adjusted prices were used to calculate estimated future net revenue. Future cash flows associated with settling asset retirement obligations that have been accrued in the Consolidated Balance Sheets are excluded from HighMount’s calculations of discounted cash flows under the full cost ceiling test.
Depletion of natural gas and oil producing properties is computed using the units-of-production method. Under the full cost method, the base of costs subject to depletion also includes estimated future costs to be incurred in developing proved natural gas and oil reserves, as well as capitalized asset retirement costs, net of projected salvage values. The costs of investments in unproved properties including associated exploration-related costs are initially
excluded from the depletable base. As the unproved properties are evaluated, a ratable portion of the capitalized costs is periodically reclassified to the depletable base, determined on a property by property basis, over the terms of underlying leases. Once a property has been completely evaluated, any remaining capitalized costs are then transferred to the depletable base. In addition, proceeds from the sale or other disposition of natural gas and oil properties are accounted for as reductions of capitalized cost, unless the sale would significantly alter the relationship between capitalized costs and proved reserves, in which case, a gain or loss is recognized.
Impairment of long-lived assets – The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets and intangibles with finite lives, under certain circumstances, are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value less cost to sell.
Income taxes – The Company and its eligible subsidiaries file a consolidated tax return. Deferred income taxes are recognized for temporary differences between the financial statement and tax return bases of assets and liabilities, based on enacted tax rates and other provisions of the tax law. The effect of a change in tax laws or rates on deferred tax assets and liabilities is recognized in income in the period in which such change is enacted. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not, and a valuation allowance is established for any portion of a deferred tax asset that management believes may not be realized.
The Company recognizes uncertain tax positions that it has taken or expects to take on a tax return. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. See Note 10 for additional information on the provision for income taxes.
Pension and postretirement benefits – The Company recognizes the overfunded or underfunded status of its defined benefit plans in Other assets or Other liabilities in the Consolidated Balance Sheets. Changes in funded status related to prior service costs and credits and actuarial gains and losses are recognized in the year in which the changes occur through Accumulated other comprehensive income (loss). The Company measures its benefit plan assets and obligations at December 31. Annual service cost, interest cost, expected return on plan assets, amortization of prior service costs and credits and amortization of actuarial gains and losses are recognized in the Consolidated Statements of Income.
Stock based compensation – The Company records compensation expense upon issuance of share-based payment awards for all awards it grants, modifies repurchases or cancels primarily on a straight-line basis over the requisite service period, generally three to four years. The share-based payment awards are valued using the Black-Scholes option pricing model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the valuation of these awards. These assumptions include the term that the awards are expected to be outstanding, an estimate of the volatility of the underlying stock price, applicable risk-free interest rates and the dividend yield of the Company’s stock.
The Company recognized compensation expense that decreased net income by $13$14 million, $12 million and $11 million for the year ended December 31, 2012. For the years ended December 31, 20112015, 2014 and 2010 the Company recognized compensation expense that decreased net income by $12 million each year.2013. Several of the Company’s subsidiaries also maintain their own stock option plans. The amounts reported above include the Company’s share of expense related to its subsidiaries’ plans.
Net income Per Shareper share– Companies with complex capital structures are required to present basic and diluted net income per share. Basic net income per share excludes dilution and is computed by dividing net income attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
For each of the years ended December 31, 2012, 20112015, 2014 and 2010,2013, approximately 0.80.3 million, 0.6 million and 0.9 million potential shares attributable to exercises under the Loews Corporation Stock Option Plan were included in the calculation of diluted net income per share. For those same periods, approximately 2.64.8 million, 2.02.3 million and 2.41.5 million Stock
Appreciation Rights (“SARs”) were not included in the calculation of diluted net income per share due to the exercise price being greater than the average stock price.
Foreign currency – Foreign currency translation gains and losses are reflected in Shareholders’ equity as a component of Accumulated other comprehensive income (loss). The Company’s foreign subsidiaries’ balance sheet accounts are translated at the exchange rates in effect at each year endreporting date and income statement accounts are translated at the average exchange rates. Foreign currency transaction gains of $10 million for the year ended December 31, 2012 and foreign currency transaction losses of $5$8 million, $22 million and $18$3 million for the years ended December 31, 20112015, 2014 and 20102013 were included in the Consolidated Statements of Income.
Regulatory accounting– The majority of Boardwalk Pipeline’s operating subsidiaries are regulated by FERC. GAAP for regulated entities requires Texas Gas Transmission, LLC (“Texas Gas”), a wholly owned subsidiary of Boardwalk Pipeline, to report certain assets and liabilities consistent with the economic effect of the manner in which independent third party regulators establish rates. Accordingly, certain costs and benefits are capitalized as regulatory assets and liabilities in order to provide for recovery from or refund to customers in future periods. Regulatory accounting is not applicable to Boardwalk Pipeline’s other FERC regulated entities.
Supplementary cash flow information – Cash payments made for interest on long term debt, net of capitalized interest, amounted to $450$513 million, $526$501 million and $494$415 million for the years ended December 31, 2012, 20112015, 2014 and 2010.2013. Cash payments for federal, foreign, state and local income taxes amounted to $120$110 million, $322$189 million and $378$183 million for the years ended December 31, 2012, 20112015, 2014 and 2010.2013. Investing activities exclude $35$3 million and $14$43 million of accrued capital expenditures for the years ended December 31, 20122015 and 2011. For2013 and include $14 million of previously accrued capital expenditures for the year ended December 31, 2010 investing activities include $51 million2014.
Updated accounting guidance not yet adopted –In May of previously accrued capital expenditures.2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606).” The core principle of the new accounting guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new accounting guidance provides a five-step analysis of transactions to determine when and how revenue is recognized and requires enhanced disclosures about revenue. In August of 2015, the FASB formally amended the effective date of this update to annual reporting periods beginning after December 15, 2017, including interim periods, and it can be adopted either retrospectively or with a cumulative effect adjustment at the date of adoption. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its consolidated financial statements.
In May of 2015, the FASB issued ASU 2015-09, “Financial Services– Insurance (Topic 944): Disclosures about Short-Duration Contracts.” The updated accounting guidance requires enhanced disclosures to provide additional information about insurance liabilities for short-duration contracts. The updated guidance is effective for annual reporting periods beginning after December 15, 2015 and for interim periods beginning after December 15, 2016. The Company is currently evaluating the effect the updated guidance will have on its financial statement disclosures.
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 primary change for the Company is expected 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. The updated guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the effect the updated guidance will have on its consolidated financial statements.
Note 2. Acquisition/Acquisitions and Divestitures
CNA Financial
On July 2, 2012,August 1, 2014, CNA acquired Hardy Underwriting Bermuda Limited (“Hardy”), a specialized Lloyd’scompleted the sale of London (“Lloyd’s”) underwriter. Through Lloyd’s syndicate 382, Hardy underwrites primarily short-tail exposures in marine and aviation, non-marine property, specialty lines and property treaty reinsurance. Hardy has businessCAC, its former life insurance subsidiary, which is reported as discontinued operations in the United Kingdom, Bermuda, Bahrain, Guernsey and Singapore. For the yearConsolidated Statements of Income for years ended December 31, 2011, Hardy2014 and 2013. See Note 19 for further discussion of discontinued operations.
In connection with the sale of CAC, CNA entered into a 100% coinsurance agreement on a separate small block of annuity business outside of CAC. The coinsurance agreement required the transfer of assets with a book value equal to the ceded reserves on the inception date of the contract. Because a substantial portion of the assets supporting these liabilities are held in trust for the benefit of the original cedant, those assets were transferred on a funds withheld basis. Under this approach CNA maintains legal ownership of the assets, but the investment income and realized gains and losses on those assets inure to the reinsurer. As a result, the $31 million (after tax and noncontrolling interests) difference between market value and book value of the funds withheld assets at the coinsurance contract’s inception was recognized in Other operating expenses in 2014.
HighMount
On September 30, 2014, the Company sold HighMount Exploration & Production LLC (“HighMount”), its former natural gas and oil exploration and production subsidiary. As of December 31, 2014, the Company had no remaining natural gas and oil properties. The results of this sold business are reported gross written premiumsas discontinued operations in the Consolidated Statements of $430 million.Income for years ended December 31, 2014 and 2013. See Note 19 for further discussion of discontinued operations.
Boardwalk Pipeline
In October of 2014, Boardwalk Pipeline acquired Boardwalk Petrochemical, formerly known as Chevron Petrochemical Pipeline, LLC, which owns the Evangeline ethylene pipeline system for $295 million in cash, subject to customary adjustments. This acquisition was made as part of Boardwalk Pipeline’s long term growth and diversification strategy and to complement existing natural gas liquids (“NGLs”) and ethylene midstream assets. The purchase price for Hardy was $231 million and resulted in CNA recording $55 million of identifiable indefinite-lived intangible assets, $81funded through borrowings under Boardwalk Pipeline’s revolving credit facility. Boardwalk Pipeline recorded $20 million of identifiable finite-lived intangible assets and $35$22 million of goodwill.
In November2013, Boardwalk Pipeline executed a series of 2011, CNA completedagreements with the sale of its 50% ownership interest in First InsuranceWilliams Companies, Inc. (“Williams”) to develop the Bluegrass Project. In 2014, the Company of Hawaii (“FICOH”) and received $165 million in net proceeds. This sale did not have a significant impact onexpensed the Company’s results of operations.
On June 10, 2011, CNA completed the acquisition of all of the publicly traded shares of common stock of CNA Surety Corporation (“CNA Surety”) for $475 million. Priorpreviously capitalized project costs related to the acquisition, CNA owned approximately 61%development process due to cost escalations, construction delays and the lack of the outstanding common stockcustomer commitments, resulting in a charge of CNA Surety.
Boardwalk Pipeline
On October 1, 2012,$94 million ($55 million after tax and noncontrolling interests), inclusive of a joint venture between Boardwalk Pipeline and Boardwalk Pipelines Holding Corp. (“BPHC”), a wholly owned subsidiary of the Company, acquired Boardwalk Louisiana Midstream LLC (“Louisiana Midstream”), a company that provides salt dome storage, pipeline transportation, fractionation and brine supply services, from PL Logistics LLC for approximately $620 million. The acquisition was funded with proceeds from a $225$10 million five-year variable rate term loan and equity contributions by BPHC of $269 million for a 65% equity interest and of $148 millioncharge recorded by Boardwalk Pipeline for a 35% equity interest. The joint venturePartners, LP. This charge was recorded $25 million of identifiable finite-lived intangible assets and $56 million of goodwill. On October 15, 2012, Boardwalk Pipeline acquired BPHC’s 65% equity interest in the joint venture for $269 million, which did not result in any significant adjustments to the Consolidated Financial Statements.
In December of 2011, Boardwalk HP Storage Company, LLC (“HP Storage”) acquired seven salt dome natural gas storage caverns and associated assets in Mississippi for approximately $550 million. HP Storage funded the acquisition with proceeds from a $200 million five-year variable rate term loan and equity contributions from BPHC and Boardwalk Pipeline. BPHC contributed $280 million for an 80% interest in HP Storage and Boardwalk Pipeline contributed $70 million for a 20% interest. HP Storage recorded $52 million of goodwill and $14 million of identifiable finite-lived intangible assets. In February of 2012, Boardwalk Pipeline acquired BPHC’s 80% interest in HP Storage for $285 million, which did not result in any significant adjustments to the Consolidated Financial Statements.
HighMount
In the fourth quarter of 2011, HighMount acquired working interests in oil and gas properties located in Oklahoma. The purchase price was approximately $106 million in cash and was included primarily in the cost of unproved properties within Property, plant and equipment in the Consolidated Balance Sheets.
In the second quarter of 2010, HighMount completed the sale of substantially all exploration and production assets located in the Antrim Shale in Michigan and the Black Warrior Basin in Alabama for approximately $530 million. These sales did not have a material impactOther operating expenses on the Consolidated Statements of Income. In accordancethe fourth quarter of 2014, Boardwalk Pipeline and Williams dissolved the Bluegrass project entities.
Loews Hotels
In 2015, Loews Hotels paid a total of approximately $330 million to acquire two hotels and in 2014, acquired three hotels for a total cost of approximately $230 million. These acquisitions were funded with the full cost methoda combination of accounting, proceeds from these sales were accounted for as reductions of capitalized costs.cash and property-level debt.
Net investment income is as follows:
Year Ended December 31 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | ||||||||||||||||||||
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(In millions) | ||||||||||||||||||||||||||
Fixed maturity securities | $ | 2,022 | $ | 2,011 | $ | 2,052 | $ | 1,751 | $ | 1,803 | $ | 1,827 | ||||||||||||||
Limited partnership investments | 119 | 304 | 519 | |||||||||||||||||||||||
Short term investments | 12 | 16 | 22 | 11 | 4 | 5 | ||||||||||||||||||||
Limited partnership investments | 283 | 97 | 315 | |||||||||||||||||||||||
Equity securities | 12 | 20 | 32 | 12 | 12 | 12 | ||||||||||||||||||||
Income (loss) from trading portfolio (a) | 52 | (39) | 131 | |||||||||||||||||||||||
Income from trading portfolio (a) | 2 | 64 | 90 | |||||||||||||||||||||||
Other | 24 | 16 | 10 | 34 | 34 | 25 | ||||||||||||||||||||
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Total investment income | 2,405 | 2,121 | 2,562 | 1,929 | 2,221 | 2,478 | ||||||||||||||||||||
Investment expenses | (56) | (58) | (54) | (63 | ) | (58) | (53 | ) | ||||||||||||||||||
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Net investment income | $ | 2,349 | $ | 2,063 | $ | 2,508 | $ | 1,866 | $ | 2,163 | $ | 2,425 | ||||||||||||||
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(a) | Includes net unrealized gains (losses) related to changes in fair value on trading securities still held of |
As of December 31, 2012,2015, the Company held nine$54 million of non-income producing fixed maturity securities aggregating $1 million of fair value.securities. As of December 31, 2011,2014, the Company held nineno non-income producing fixed maturity securities aggregating $3 million of fair value.securities. As of December 31, 20122015 and 2011,2014, no investments in a single issuer exceeded 10% of shareholders’ equity other than investments in securities issued by the U.S. Treasury and obligations of government-sponsored enterprises.
Investment gains (losses) are as follows:
Year Ended December 31 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | ||||||||||||||||||||
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(In millions) | ||||||||||||||||||||||||||
Fixed maturity securities | $ | 83 | $ | (22) | $ | 92 | $ | (66) | $ | 41 | $ | 41 | ||||||||||||||
Equity securities | (23) | (1) | (2) | (23) | 1 | (22 | ) | |||||||||||||||||||
Derivative instruments | (5) | (34) | (31) | 10 | (1 | ) | (9 | ) | ||||||||||||||||||
Short term investments and other | 2 | 5 | (3) | 8 | 13 | 6 | ||||||||||||||||||||
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Investment gains (losses) (a) | $ | 57 | $ | (52) | $ | 56 | $ | (71) | $ | 54 | $ | 16 | ||||||||||||||
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(a) | Includes gross realized gains of |
Net change in unrealized gains (losses) on available-for-sale investments is as follows:
Year Ended December 31 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | ||||||||||||||||||||||
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(In millions) | ||||||||||||||||||||||||||||
Fixed maturity securities | $ | 1,871 | $ | 1,442 | $ | 1,140 | $ | (1,114) | $ | 1,511 | $ | (2,541 | ) | |||||||||||||||
Equity securities | 5 | (2) | 7 | (6) | 6 | (15 | ) | |||||||||||||||||||||
Other | (1) | (3) | (1) | 1 | ||||||||||||||||||||||||
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Total net change in unrealized gains on available-for-sale investments | $ | 1,875 | $ | 1,437 | $ | 1,146 | ||||||||||||||||||||||
Total net change in unrealized gains (losses) on available-for-sale investments | $ | (1,119) | $ | 1,517 | $ | (2,556 | ) | |||||||||||||||||||||
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The components of other-than-temporary impairment (“OTTI”)OTTI losses recognized in earnings by asset type are as follows:
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||
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(In millions) | ||||||||||||
Fixed maturity securities available-for-sale: | ||||||||||||
Corporate and other bonds | $ | 27 | $ | 95 | $ | 68 | ||||||
States, municipalities and political subdivisions | 34 | 62 | ||||||||||
Asset-backed: | ||||||||||||
Residential mortgage-backed | 50 | 105 | 71 | |||||||||
Commercial mortgage-backed | 3 | |||||||||||
Other asset-backed | 6 | 3 | ||||||||||
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Total asset-backed | 50 | 111 | 77 | |||||||||
U.S. Treasury and obligations of government-sponsored enterprises | 1 | |||||||||||
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Total fixed maturity securities available-for-sale | 112 | 206 | 207 | |||||||||
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Equity securities available-for-sale: | ||||||||||||
Common stock | 6 | 8 | 11 | |||||||||
Preferred stock | 36 | 1 | 14 | |||||||||
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Total equity securities available-for-sale | 42 | 9 | 25 | |||||||||
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Short term investments | 1 | |||||||||||
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Net OTTI losses recognized in earnings | $ | 154 | $ | 216 | $ | 232 | ||||||
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Fixed maturity securities available-for-sale: Corporate and other bonds States, municipalities and political subdivisions Asset-backed: Residential mortgage-backed Other asset-backed Total asset-backed Total fixed maturities available-for-sale Equity securities available-for-sale: Common stock Preferred stock Total equity securities available-for-sale Short term investments Net OTTI losses recognized in earnings A security is impaired if the fair value of the security is less than its cost adjusted for accretion, amortization and previously recorded OTTI losses, otherwise defined as an unrealized loss. When a security is impaired, the impairment is evaluated to determine whether it is temporary or other-than-temporary.Year Ended December 31 2015 2014 2013 (In millions) $ 104 $ 18 $ 20 18 46 8 5 19 1 1 2 9 6 21 131 70 41 25 7 8 26 25 7 34 1 $ 156 $ 77 $ 76
Significant judgment is required in the determination of whether an OTTI loss has occurred for a security. CNA follows a consistent and systematic process for determining and recording an OTTI loss. CNA has established a committee responsible for the OTTI process. This committee, referred to as the Impairment Committee, is made up of three officers appointed by CNA’s Chief Financial Officer. The Impairment Committee is responsible for evaluating all securities in an unrealized loss position on at least a quarterly basis.
The Impairment Committee’s assessment of whether an OTTI loss has occurred incorporates both quantitative and qualitative information. Fixed maturity securities that CNA intends to sell, or it more likely than not will be required to sell before recovery of amortized cost, are considered to be other-than-temporarily impaired and the entire difference between the amortized cost basis and fair value of the security is recognized as an OTTI loss in earnings. The remaining fixed maturity securities in an unrealized loss position are evaluated to determine if a credit loss exists. The factors considered by the Impairment Committee include: (i) the financial condition and near term prospects of the issuer, (ii) whether the debtor is current on interest and principal payments, (iii) credit ratings of the
securities and (iv) general market conditions and industry or sector specific outlook. CNA also considers results and analysis of cash flow modeling for asset-backed securities, and when appropriate, other fixed maturity securities.
The focus of the analysis for asset-backed securities is on assessing the sufficiency and quality of underlying collateral and timing of cash flows based on scenario tests. If the present value of the modeled expected cash flows equals or exceeds the amortized cost of a security, no credit loss is judged to exist and the asset-backed security is deemed to be temporarily impaired. If the present value of the expected cash flows is less than amortized cost, the security is judged to be other-than-temporarily impaired for credit reasons and that shortfall, referred to as the credit component, is recognized as an OTTI loss in earnings. The difference between the adjusted amortized cost basis and fair value, referred to as the non-credit component, is recognized as OTTI in Other comprehensive income. In subsequent reporting periods, a change in intent to sell or further credit impairment on a security whose fair value has not deteriorated will cause the non-credit component originally recorded as OTTI in Other comprehensive income to be recognized as an OTTI loss in earnings.
CNA performs the discounted cash flow analysis using stressed scenarios to determine future expectations regarding recoverability. For asset-backed securities, significant assumptions enter into these cash flow projections including delinquency rates, probable risk of default, loss severity upon a default, over collateralization and interest coverage triggers and credit support from lower level tranches.
CNA applies the same impairment model as described above for the majority of non-redeemable preferred stock securities on the basis that these securities possess characteristics similar to debt securities and that the issuers maintain their ability to pay dividends. For all other equity securities, in determining whether the security is other-than-temporarily impaired, the Impairment Committee considers a number of factors including, but not limited to: (i) the length of time and the extent to which the fair value has been less than amortized cost, (ii) the financial condition and near term prospects of the issuer, (iii) the intent and ability of CNA to retain its investment for a period of time sufficient to allow for an anticipated recovery in value and (iv) general market conditions and industry or sector specific outlook.
The amortized cost and fair values of securities are as follows:
December 31, 2012 | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Unrealized OTTI Losses (Gains) | |||||||||||||||||||||||||||||||||||||
December 31, 2015 | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Unrealized OTTI Losses (Gains) | |||||||||||||||||||||||||||||||||||||
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(In millions) | ||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||
Corporate and other bonds | $ | 19,530 | $ | 2,698 | $ | 21 | $ | 22,207 | $ | 17,097 | $ | 1,019 | $ | 347 | $ | 17,769 | ||||||||||||||||||||||||||
States, municipalities and political subdivisions | 9,372 | 1,455 | 44 | 10,783 | 11,729 | 1,453 | 8 | 13,174 | $ | (4 | ) | |||||||||||||||||||||||||||||||
Asset-backed: | ||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 5,745 | 246 | 71 | 5,920 | $ | (28) | 4,935 | 154 | 17 | 5,072 | (37 | ) | ||||||||||||||||||||||||||||||
Commercial mortgage-backed | 1,692 | 147 | 17 | 1,822 | (3) | 2,154 | 55 | 12 | 2,197 | |||||||||||||||||||||||||||||||||
Other asset-backed | 929 | 23 | 952 | 923 | 6 | 8 | 921 | |||||||||||||||||||||||||||||||||||
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Total asset-backed | 8,366 | 416 | 88 | 8,694 | (31) | 8,012 | 215 | 37 | 8,190 | (37 | ) | |||||||||||||||||||||||||||||||
U.S. Treasury and obligations of government- sponsored enterprises | 172 | 11 | 1 | 182 | 62 | 5 | 67 | |||||||||||||||||||||||||||||||||||
Foreign government | 588 | 25 | 613 | 334 | 13 | 1 | 346 | |||||||||||||||||||||||||||||||||||
Redeemable preferred stock | 113 | 13 | 1 | 125 | 33 | 2 | 35 | |||||||||||||||||||||||||||||||||||
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Fixed maturities available-for-sale | 38,141 | 4,618 | 155 | 42,604 | (31) | 37,267 | 2,707 | 393 | 39,581 | (41 | ) | |||||||||||||||||||||||||||||||
Fixed maturities, trading | 183 | 22 | 161 | 140 | 20 | 120 | ||||||||||||||||||||||||||||||||||||
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Total fixed maturities | 38,324 | 4,618 | 177 | 42,765 | (31) | 37,407 | 2,707 | 413 | 39,701 | (41 | ) | |||||||||||||||||||||||||||||||
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Equity securities: | ||||||||||||||||||||||||||||||||||||||||||
Common stock | 38 | 14 | 52 | 46 | 3 | 1 | 48 | |||||||||||||||||||||||||||||||||||
Preferred stock | 190 | 7 | 197 | 145 | 7 | 3 | 149 | |||||||||||||||||||||||||||||||||||
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Equity securities available-for-sale | 228 | 21 | - | 249 | - | 191 | 10 | 4 | 197 | - | ||||||||||||||||||||||||||||||||
Equity securities, trading | 665 | 80 | 96 | 649 | 633 | 56 | 134 | 555 | ||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||
Total equity securities | 893 | 101 | 96 | 898 | - | 824 | 66 | 138 | 752 | - | ||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||
Total | $ | 39,217 | $ | 4,719 | $ | 273 | $ | 43,663 | $ | (31) | $ | 38,231 | $ | 2,773 | $ | 551 | $ | 40,453 | $ | (41 | ) | |||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||
December 31, 2014 | ||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||
Corporate and other bonds | $ | 17,226 | $ | 1,721 | $ | 61 | $ | 18,886 | ||||||||||||||||||||||||||||||||||
States, municipalities and political subdivisions | 11,285 | 1,463 | 8 | 12,740 | ||||||||||||||||||||||||||||||||||||||
Asset-backed: | ||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 5,028 | 218 | 13 | 5,233 | $ | (53 | ) | |||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 2,056 | 93 | 5 | 2,144 | (2 | ) | ||||||||||||||||||||||||||||||||||||
Other asset-backed | 1,234 | 11 | 10 | 1,235 | ||||||||||||||||||||||||||||||||||||||
Total asset-backed | 8,318 | 322 | 28 | 8,612 | (55 | ) | ||||||||||||||||||||||||||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises | 26 | 5 | 31 | |||||||||||||||||||||||||||||||||||||||
Foreign government | 438 | 16 | 454 | |||||||||||||||||||||||||||||||||||||||
Redeemable preferred stock | 39 | 3 | 42 | |||||||||||||||||||||||||||||||||||||||
Fixed maturities available-for-sale | 37,332 | 3,530 | 97 | 40,765 | (55 | ) | ||||||||||||||||||||||||||||||||||||
Fixed maturities, trading | 137 | 17 | 120 | |||||||||||||||||||||||||||||||||||||||
Total fixed maturities | 37,469 | 3,530 | 114 | 40,885 | (55 | ) | ||||||||||||||||||||||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||||||||||||||||||
Common stock | 38 | 9 | 47 | |||||||||||||||||||||||||||||||||||||||
Preferred stock | 172 | 5 | 2 | 175 | ||||||||||||||||||||||||||||||||||||||
Equity securities available-for-sale | 210 | 14 | 2 | 222 | - | |||||||||||||||||||||||||||||||||||||
Equity securities, trading | 523 | 96 | 113 | 506 | ||||||||||||||||||||||||||||||||||||||
Total equity securities | 733 | 110 | 115 | 728 | - | |||||||||||||||||||||||||||||||||||||
Total | $ | 38,202 | $ | 3,640 | $ | 229 | $ | 41,613 | $ | (55 | ) | |||||||||||||||||||||||||||||||
Fixed maturity securities: Corporate and other bonds States, municipalities and political subdivisions Asset-backed: Residential mortgage-backed Commercial mortgage-backed Other asset-backed Total asset-backed U.S. Treasury and obligations of government-sponsored enterprises Foreign government Redeemable preferred stock Fixed maturities available-for-sale Fixed maturities, trading Total fixed maturities Equity securities: Common stock Preferred stock Equity securities available-for-sale Equity securities, trading Total equity securities Total December 31, 2011 Cost or
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair Value Unrealized
OTTI Losses
(Gains) (In millions) $ 19,086 $ 1,946 $ 154 $ 20,878 9,018 900 136 9,782 5,786 172 183 5,775 $ 99 1,365 48 59 1,354 (2) 946 13 4 955 8,097 233 246 8,084 97 479 14 493 608 28 636 51 7 58 37,339 3,128 536 39,931 97 127 18 109 37,466 3,128 554 40,040 97 30 17 47 258 4 5 257 288 21 5 304 - 614 76 67 623 902 97 72 927 - $ 38,368 $ 3,225 $ 626 $ 40,967 $ 97
The available-for-sale securities in a gross unrealized loss position are as follows:
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
|
| |||||||||||||||||||||||
December 31, 2012 | 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 | $ | 846 | $ | 13 | $ | 108 | $ | 8 | $ | 954 | $ | 21 | ||||||||||||
States, municipalities and political subdivisions | 254 | 5 | 165 | 39 | 419 | 44 | ||||||||||||||||||
Asset-backed: | ||||||||||||||||||||||||
Residential mortgage-backed | 583 | 5 | 452 | 66 | 1,035 | 71 | ||||||||||||||||||
Commercial mortgage-backed | 85 | 2 | 141 | 15 | 226 | 17 | ||||||||||||||||||
| ||||||||||||||||||||||||
Total asset-backed | 668 | 7 | 593 | 81 | 1,261 | 88 | ||||||||||||||||||
U.S. Treasury and obligations of government- sponsored enterprises | 23 | 1 | 23 | 1 | ||||||||||||||||||||
Redeemable preferred stock | 28 | 1 | 28 | 1 | ||||||||||||||||||||
| ||||||||||||||||||||||||
Total | $ | 1,819 | $ | 27 | $ | 866 | $ | 128 | $ | 2,685 | $ | 155 | ||||||||||||
|
Less than 12 Months | 12 Months or Longer | Total | Less than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||||||||||||||||||||||||||
|
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| |||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2011 | Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||||||||||||||||||||||
December 31, 2015 | Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate and other bonds | $ | 2,552 | $ | 126 | $ | 159 | $ | 28 | $ | 2,711 | $ | 154 | $ | 4,882 | $ | 302 | $ | 174 | $ | 45 | $ | 5,056 | $ | 347 | ||||||||||||||||||||||||||
States, municipalities and political subdivisions | 67 | 1 | 721 | 135 | 788 | 136 | 338 | 8 | 75 | 413 | 8 | |||||||||||||||||||||||||||||||||||||||
Asset-backed: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 719 | 36 | 874 | 147 | 1,593 | 183 | 963 | 9 | 164 | 8 | 1,127 | 17 | ||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 431 | 39 | 169 | 20 | 600 | 59 | 652 | 10 | 96 | 2 | 748 | 12 | ||||||||||||||||||||||||||||||||||||||
Other asset-backed | 389 | 4 | 389 | 4 | 552 | 8 | 5 | 557 | 8 | |||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||
Total asset-backed | 1,539 | 79 | 1,043 | 167 | 2,582 | 246 | 2,167 | 27 | 265 | 10 | 2,432 | 37 | ||||||||||||||||||||||||||||||||||||||
U.S. Treasury and obligations of government- sponsored enterprises | 4 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||
Foreign government | 54 | 1 | 54 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||
Redeemable preferred stock | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||
Total fixed maturities available-for-sale | 4,158 | 206 | 1,923 | 330 | 6,081 | 536 | ||||||||||||||||||||||||||||||||||||||||||||
Equity securities available-for-sale: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total fixed maturity securities | 7,448 | 338 | 514 | 55 | 7,962 | 393 | ||||||||||||||||||||||||||||||||||||||||||||
Common stock | 3 | 1 | 3 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||
Preferred stock | 117 | 5 | 117 | 5 | 13 | 3 | 13 | 3 | ||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 4,275 | $ | 211 | $ | 1,923 | $ | 330 | $ | 6,198 | $ | 541 | $ | 7,464 | $ | 342 | $ | 514 | $ | 55 | $ | 7,978 | $ | 397 | ||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate and other bonds | $ | 1,330 | $ | 46 | $ | 277 | $ | 15 | $ | 1,607 | $ | 61 | ||||||||||||||||||||||||||||||||||||||
States, municipalities and political subdivisions | 335 | 5 | 127 | 3 | 462 | 8 | ||||||||||||||||||||||||||||||||||||||||||||
Asset-backed: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 293 | 5 | 189 | 8 | 482 | 13 | ||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 264 | 2 | 99 | 3 | 363 | 5 | ||||||||||||||||||||||||||||||||||||||||||||
Other asset-backed | 607 | 10 | 7 | 614 | 10 | |||||||||||||||||||||||||||||||||||||||||||||
Total asset-backed | 1,164 | 17 | 295 | 11 | 1,459 | 28 | ||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury and obligations of government- sponsored enterprises | 3 | 4 | 7 | |||||||||||||||||||||||||||||||||||||||||||||||
Foreign government | 3 | 3 | 6 | |||||||||||||||||||||||||||||||||||||||||||||||
Redeemable preferred stock | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total fixed maturity securities | 2,838 | 68 | 706 | 29 | 3,544 | 97 | ||||||||||||||||||||||||||||||||||||||||||||
Preferred stock | 17 | 2 | 1 | 18 | 2 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 2,855 | $ | 70 | $ | 707 | $ | 29 | $ | 3,562 | $ | 99 | ||||||||||||||||||||||||||||||||||||||
|
|
Based on current facts and circumstances, the Company believes the unrealized losses presented in the table above are primarily attributable to broader economic conditions, changes in interest rates and credit spreads, market illiquidity and other market factors, but are not indicative of the ultimate collectibility of the current amortized cost of the securities.securities, but rather are attributable to changes in interest rates, credit spreads and other factors, including volatility in the energy and metals and mining sectors due to declines in the price of oil and other commodities. As of December 31, 2015, the Company held fixed maturity securities and equity securities with an estimated fair value of $2.5 billion and a cost or amortized cost of $2.7 billion in the energy and metals and mining sectors. The portion of these securities in a gross unrealized loss position had an estimated fair value of $1.4 billion and a cost or amortized cost of $1.6 billion. The Company has no current intent to sell these securities with unrealized losses, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at December 31, 2012.2015.
The following table summarizespresents the activity for the years ended December 31, 2012, 2011 and 2010 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at December 31, 2012, 20112015, 2014 and 20102013 for which a portion of an OTTI loss was recognized in Other comprehensive income.
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||
| ||||||||||||
(In millions) | ||||||||||||
Beginning balance of credit losses on fixed maturity securities | $ | 92 | $ | 141 | $ | 164 | ||||||
Additional credit losses for securities for which an OTTI loss was previously recognized | 23 | 39 | 37 | |||||||||
Credit losses for securities for which an OTTI loss was not previously recognized | 2 | 11 | 11 | |||||||||
Reductions for securities sold during the period | (14) | (67) | (62) | |||||||||
Reductions for securities the Company intends to sell or more likely than not will be required to sell | (8) | (32) | (9) | |||||||||
| ||||||||||||
Ending balance of credit losses on fixed maturity securities | $ | 95 | $ | 92 | $ | 141 | ||||||
|
Year Ended December 31 | 2015 | 2014 | 2013 | |||||||||
| ||||||||||||
(In millions) | ||||||||||||
Beginning balance of credit losses on fixed maturity securities | $ | 62 | $ | 74 | $ | 95 | ||||||
Additional credit losses for securities for which an OTTI loss was previously recognized | 2 | |||||||||||
Reductions for securities sold during the period | (9 | ) | (9 | ) | (23 | ) | ||||||
Reductions for securities the Company intends to sell or more likely than not will be required to sell | (3 | ) | ||||||||||
| ||||||||||||
Ending balance of credit losses on fixed maturity securities | $ | 53 | $ | 62 | $ | 74 | ||||||
|
Contractual Maturity
The following table summarizespresents available-for-sale fixed maturity securities by contractual maturity at December 31, 2012 and 2011. maturity.
December 31 | 2015 | 2014 | ||||||||||||||
| ||||||||||||||||
Cost or | Cost or | |||||||||||||||
Amortized | Estimated | Amortized | Estimated | |||||||||||||
Cost | Fair Value | Cost | Fair Value | |||||||||||||
| ||||||||||||||||
(In millions) | ||||||||||||||||
Due in one year or less | $ | 1,574 | $ | 1,595 | $ | 2,479 | $ | 2,511 | ||||||||
Due after one year through five years | 7,738 | 8,082 | 9,070 | 9,621 | ||||||||||||
Due after five years through ten years | 14,652 | 14,915 | 12,055 | 12,584 | ||||||||||||
Due after ten years | 13,303 | 14,989 | 13,728 | 16,049 | ||||||||||||
| ||||||||||||||||
Total | $ | 37,267 | $ | 39,581 | $ | 37,332 | $ | 40,765 | ||||||||
|
Actual maturities may differ from contractual maturities because certain securities may be called or prepaid with or without call or prepayment penalties.prepaid. Securities not due at a single date are allocated based on weighted average life.
December 31 | 2012 | 2011 | ||||||||||||||
| ||||||||||||||||
Cost or Amortized Cost | Estimated Fair Value | Cost or Amortized Cost | Estimated Fair Value | |||||||||||||
| ||||||||||||||||
(In millions) | ||||||||||||||||
Due in one year or less | $ | 1,648 | $ | 1,665 | $ | 1,802 | $ | 1,812 | ||||||||
Due after one year through five years | 13,603 | 14,442 | 13,110 | 13,537 | ||||||||||||
Due after five years through ten years | 8,726 | 9,555 | 8,410 | 8,890 | ||||||||||||
Due after ten years | 14,164 | 16,942 | 14,017 | 15,692 | ||||||||||||
| ||||||||||||||||
Total | $ | 38,141 | $ | 42,604 | $ | 37,339 | $ | 39,931 | ||||||||
|
Limited Partnerships
The carrying value of limited partnerships as of December 31, 20122015 and 20112014 was approximately $3.1$3.3 billion and $2.7$3.7 billion which includes undistributed earnings of $828$952 million and $607 million.$1.3 billion. Limited partnerships comprising 74.0%70.8% of the total carrying value are reported on a current basis through December 31, 20122015 with no reporting lag, 13.2%12.8% are reported on a one month lag and the remainder are reported on more than a one month lag. As of December 31, 2012 and 2011, the Company had 86 and 83 active limited partnership investments. The number of limited partnerships held and the strategies employed provide diversification to the limited partnership portfolio and the overall invested asset portfolio.
OfLimited partnerships comprising 76.6% and 78.6% of the limited partnerships held, 84.1%carrying value at December 31, 20122015 and 2011,2014 employ hedge fund strategies that generate returns through investing in marketable securities that are marketable while engaging in various management techniques primarily inthe public fixed income and equity markets. These hedgeLimited partnerships comprising 23.4% and 18.6% of the carrying value at December 31, 2015 and 2014 were invested in private debt and equity, and the remaining limited partnerships were primarily invested in real estate strategies. Hedge fund strategies include both long and short positions in fixed income, equity and derivative instruments. TheThese hedge fund strategies may seek to generate gains from mispriced or undervalued securities, price differentials between securities, distressed investments, sector rotation or various arbitrage disciplines. Within hedge fund strategies, approximately 52.3%56.4% were equity related, 27.1%28.9% pursued a multi-strategy approach, 16.8%11.4% were focused on distressed investments and 3.8%3.3% were fixed income related at December 31, 2012.2015.
Limited partnerships representing 13.0% and 11.7% at December 31, 2012 and 2011 were invested in private debt and equity. The remaining were invested in various other partnerships including real estate.
The ten largest limited partnership positions held totaled $1.6$1.5 billion and $1.3$1.8 billion as of December 31, 20122015 and 2011.2014. Based on the most recent information available regarding the Company’s percentage ownership of the individual limited partnerships, the carrying value reflected on the Consolidated Balance Sheets represents approximately 4.1%2.8% and 3.9% of the aggregate partnership equity at December 31, 20122015 and 2011,2014, and the related income reflected on the Consolidated Statements of Income represents approximately 3.3%2.8%, 3.9%4.3% and 3.5%3.7% of the changes in total partnership equity for all limited partnership investments for the years ended December 31, 2012, 20112015, 2014 and 2010.2013.
While the Company generally does not invest in highly leveraged partnerships, there are risks which may result in losses due to short-selling, derivatives or other speculative investment practices. The use of leverage increases volatility generated by the underlying investment strategies.
The Company’s limited partnership investments contain withdrawal provisions that generally limit liquidity for a period of thirty days up to one year and in some cases do not permit withdrawals until the termination of the partnership. Typically, withdrawals require advance written notice of up to 90 days.
Investment Commitments
As of December 31, 2012, the Company had committed approximately $202 million to future capital calls from various third party limited partnership investments in exchange for an ownership interest in the related partnerships.
As of December 31, 2012, the Company had mortgage loan commitments of $22 million representing signed loan applications received and accepted.
The Company invests in various privately placed debt securities, including bank loans, as part of its overall investment strategy and has committed to additional future purchases, sales and funding. As of December 31, 2012, the Company had commitments to purchase $185 million and sell $164 million of such investments.
Investments on Deposit
Securities with carrying values of approximately $3.6 billion and $3.5 billion were deposited by CNA’s insurance subsidiaries under requirements of regulatory authorities and others as of December 31, 2012 and 2011.
Cash and securities with carrying values of approximately $4 million and $5 million were deposited with financial institutions as collateral for letters of credit as of December 31, 2012 and 2011. In addition, cash and securities were deposited in trusts with financial institutions to secure reinsurance and other obligations with various third parties. The carrying values of these deposits were approximately $277 million and $288 million as of December 31, 2012 and 2011.
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:
|
|
|
Prices may fall within Level 1, 2 or 3 depending upon the methodologies and inputs used to estimate fair value for each specific security. In general, the Company seeks to price securities using third party pricing services. Securities not priced by pricing services are submitted to independent brokers for valuation and, if those are not available, internally developed pricing models are used to value assets using methodologies and inputs the Company believes market participants would use to value the assets.
The Company performs control procedures over information obtained from pricing services and brokers to ensure prices received represent a reasonable estimate of fair value and to confirm representations regarding whether inputs are observable or unobservable. Procedures include (i) the review of pricing service or broker pricing methodologies, (ii) back-testing, where past fair value estimates are compared to actual transactions executed in the market on similar dates, (iii) exception reporting, where changes in price, period-over-period, are reviewed and challenged with the pricing service or broker based on exception criteria, (iv) detailed analyses, where the Company independently validates information regarding inputs and assumptions for individual securities and (v) pricing validation, where prices received are compared to prices independently estimated by the Company.
The fair values of CNA’s life settlement contracts are included in Other assets. Equity options purchased are included in Equity securities, and all other derivative assets are included in Receivables. Derivative liabilities are included in Payable to brokers. Assets and liabilities measured at fair value on a recurring basis are summarized in the tables below:
Fixed maturity securities: Corporate and other bonds States, municipalities and political subdivisions Asset-backed: Residential mortgage-backed Commercial mortgage-backed Other asset-backed Total asset-backed U.S. Treasury and obligations of government-sponsored enterprises Foreign government Redeemable preferred stock Fixed maturities available-for-sale Fixed maturities, trading Total fixed maturities Equity securities available-for-sale Equity securities, trading Total equity securities Short term investments Other invested assets Receivables Life settlement contracts Separate account business Payable to brokersDecember 31, 2012 Level 1 Level 2 Level 3 Total (In millions) $ 6 $ 21,982 $ 219 $ 22,207 10,687 96 10,783 5,507 413 5,920 1,693 129 1,822 584 368 952 7,784 910 8,694 158 24 182 140 473 613 40 59 26 125 344 41,009 1,251 42,604 72 89 161 $ 344 $ 41,081 $ 1,340 $ 42,765 $ 117 $ 98 $ 34 $ 249 642 7 649 $ 759 $ 98 $ 41 $ 898 $ 4,990 $ 799 $ 6 $ 5,795 58 1 59 32 11 43 100 100 4 306 2 312 (95) (11) (6) (112)
Fixed maturity securities: Corporate and other bonds States, municipalities and political subdivisions Asset-backed: Residential mortgage-backed Commercial mortgage-backed Other asset-backed Total asset-backed U.S. Treasury and obligations of government-sponsored enterprises Foreign government Redeemable preferred stock Fixed maturities available-for-sale Fixed maturities, trading Total fixed maturities Equity securities available-for-sale Equity securities, trading Total equity securities Short term investments Other invested assets Receivables Life settlement contracts Separate account business Payable to brokersDecember 31, 2011 Level 1 Level 2 Level 3 Total (In millions) $ 20,396 $ 482 $ 20,878 9,611 171 9,782 5,323 �� 452 5,775 1,295 59 1,354 612 343 955 7,230 854 8,084 $ 451 42 493 92 544 636 5 53 58 548 37,876 1,507 39,931 8 101 109 $ 548 $ 37,884 $ 1,608 $ 40,040 $ 124 $ 113 $ 67 $ 304 609 14 623 $ 733 $ 113 $ 81 $ 927 $ 4,570 $ 508 $ 27 $ 5,105 11 11 79 8 87 117 117 21 373 23 417 (32) (20) (23) (75)
The tables below present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2012 and 2011:
Unrealized Gains (Losses) Recognized in Net Income on Level 3 Assets and Liabilities Held at December 31 | ||||||||||||||||||||||||||||||||||||||||
Net Realized Gains | ||||||||||||||||||||||||||||||||||||||||
(Losses) and Net Change | ||||||||||||||||||||||||||||||||||||||||
in Unrealized Gains | ||||||||||||||||||||||||||||||||||||||||
(Losses) | Transfers | Transfers | ||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||
Balance, | Included in | Included in | into | out of | Balance, | |||||||||||||||||||||||||||||||||||
2012 | January 1 | Net Income | OCI | Purchases | Sales | Settlements | Level 3 | Level 3 | December 31 | |||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||
Corporate and other bonds | $ | 482 | $ | 6 | $ | 4 | $ | 230 | $ | (135) | $ | (88) | $ | 45 | $ | (325) | $ | 219 | $ | (3) | ||||||||||||||||||||
States, municipalities and political subdivisions | 171 | 14 | (89) | 96 | ||||||||||||||||||||||||||||||||||||
Asset-backed: | ||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 452 | (14) | 2 | 97 | (40) | (84) | 413 | (18) | ||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 59 | 8 | 14 | 165 | (12) | (28) | 13 | (90) | 129 | |||||||||||||||||||||||||||||||
Other asset-backed | 343 | 11 | 8 | 615 | (365) | (128) | (116) | 368 | ||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||
Total asset-backed | 854 | 5 | 24 | 877 | (377) | (196) | 13 | (290) | 910 | (18) | ||||||||||||||||||||||||||||||
Redeemable preferred stock | - | (1) | 53 | (26) | 26 | |||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||
Fixed maturities available-for-sale | 1,507 | 11 | 27 | 1,174 | (538) | (373) | 58 | (615) | 1,251 | (21) | ||||||||||||||||||||||||||||||
Fixed maturities, trading | 101 | (6) | 1 | (7) | 89 | (6) | ||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||
Total fixed maturities | $ | 1,608 | $ | 5 | $ | 27 | $ | 1,175 | $ | (545) | $ | (373) | $ | 58 | $ | (615) | $ | 1,340 | $ | (27) | ||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||
Equity securities available-for-sale | $ | 67 | $ | (36) | $ | 6 | $ | 27 | $ | (16) | $ | (14) | $ | 34 | $ | (38) | ||||||||||||||||||||||||
Equity securities, trading | 14 | (6) | (1) | 7 | (6) | |||||||||||||||||||||||||||||||||||
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Total equity securities | $ | 81 | $ | (42) | $ | 6 | $ | 27 | $ | (17) | $ | - | $ | - | $ | (14) | $ | 41 | $ | (44) | ||||||||||||||||||||
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Short term investments | $ | 27 | $ | 23 | $ | (4) | $ | (41) | $ | 1 | $ | 6 | ||||||||||||||||||||||||||||
Other invested assets | 11 | (10) | 1 | |||||||||||||||||||||||||||||||||||||
Life settlement contracts | 117 | $ | 53 | (70) | 100 | $ | 11 | |||||||||||||||||||||||||||||||||
Separate account business | 23 | (21) | 2 | |||||||||||||||||||||||||||||||||||||
Derivative financial instruments, net | (15) | (4) | $ | 30 | (6) | 5 | (1) |
Unrealized Gains (Losses) Recognized in Net Income on Level 3 Assets and Liabilities Held at December 31 Fixed maturity securities: Corporate and other bonds States, municipalities and political subdivisions Asset-backed: Residential mortgage-backed Commercial mortgage-backed Other asset-backed Total asset-backed Redeemable preferred stock Fixed maturities available-for-sale Fixed maturities, trading Total fixed maturities Equity securities available-for-sale Equity securities, trading Total equity securities Short term investments Other invested assets Life settlement contracts Separate account business Derivative financial instruments, net Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses) Transfers Transfers Balance, Included in Included in into out of Balance, 2011 January 1 Net Income OCI Purchases Sales Settlements Level 3 Level 3 December 31 (In millions) $ 624 $ (11) $ (1) $ 484 $ (204) $ (149) $ 79 $ (340) $ 482 $ (12) 266 (1) 3 (92) (5) 171 767 (16) (11) 225 (290) (60) (163) 452 (6) 73 20 (7) 81 (27) (81) 59 359 (9) 5 537 (341) (99) 2 (111) 343 (5) 1,199 (5) (13) 843 (658) (159) 2 (355) 854 (11) 3 3 (3) (3) - 2,092 (13) (18) 1,330 (865) (400) 81 (700) 1,507 (23) 184 (11) (72) 101 (4) $ 2,276 $ (24) $ (18) $ 1,330 $ (937) $ (400) $ 81 $ (700) $ 1,608 $ (27) $ 26 $ (2) $ 2 $ 66 $ (27) $ 5 $ (3) $ 67 $ (3) 6 (7) 1 14 14 (7) $ 32 $ (9) $ 2 $ 67 $ (27) $ - $ 19 $ (3) $ 81 $ (10) $ 27 $ 39 $ (29) $ (10) $ 27 26 $ 4 $ (19) 11 $ 1 129 33 (45) 117 5 41 (6) (12) 23 (21) (42) $ (1) 9 40 (15) 1
Net realized and unrealized gains and losses are reported in Net income as follows:
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Securities shown in the Level 3 tables may be transferred in or out of Level 3 based on the availability of observable market information used to determine the fair value of the security. The availability of observable market information varies based on market conditions and trading volume and may cause securities to move in and out of Level 3 from reporting period to reporting period. There were $106 million of transfers from Level 2 to Level 1 and $72 million of transfers from Level 1 to Level 2 during the year ended December 31, 2012. There were no significant transfers between Level 1 and Level 2 during the year ended December 31, 2011. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods.
Valuation Methodologies and Inputs
The following section describes the valuation methodologies and relevant inputs used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instruments are generally classified.
Fixed Maturity Securities
Fixed maturity securities are valued using methodologies that model information generated by market transactions involving identical or comparable assets, as well as discounted cash flow methodologies. Common inputs include: prices from recently executed transactions of similar securities, broker/dealer quotes, benchmark yields, spreads off benchmark yields, interest rates and U.S. Treasury or swap curves. Specifically for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data.
Level 1 securities include highly liquid U.S. and foreign government bonds, and redeemable preferred stock, valued using quoted market prices. Level 2 securities include most other fixed maturity securities as the significant inputs are observable in the marketplace. Securities are generally assigned to Level 3 in cases where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. Level 3 securities also include tax-exempt auction rate certificates and private placement debt securities. Fair value of auction rate securities is determined utilizing a pricing model with three primary inputs. The interest rate and spread inputs are observable from like instruments while the expected call date assumption is unobservable due to the uncertain nature of principal prepayments prior to maturity and the credit spread adjustment that is security specific. Fair value of certain private placement debt securities is determined using internal models with inputs that are not market observable.
Equity Securities
Level 1 equity securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily non-redeemable preferred stocks and common stocks valued using pricing for similar securities, recently executed transactions, broker/dealer quotes and other pricing models utilizing market observable inputs. Level 3 securities are priced using internal models with inputs that are not market observable.
Derivative Financial Instruments
Exchange traded derivatives are valued using quoted market prices and are classified within Level 1 of the fair value hierarchy. Level 2 derivatives primarily include currency forwards valued using observable market forward rates. Over-the-counter derivatives, principally interest rate swaps, total return swaps, commodity swaps, credit default swaps, equity warrants and options, are valued using inputs including broker/dealer quotes and are classified within Level 2 or Level 3 of the valuation hierarchy, depending on the amount of transparency as to whether these quotes are based on information that is observable in the marketplace.
Short Term Investments
The valuation of 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 Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.
Life Settlement Contracts
The fair values of life settlement contracts are determined as the present value of the anticipated death benefits less anticipated premium payments based on contract terms that are distinct for each insured, as well as CNA’s own assumptions for mortality, premium expense, and the rate of return that a buyer would require on the contracts, as no comparable market pricing data is available.
Separate Account Business
Separate account business includes fixed maturity securities, equities and short term investments. The valuation methodologies and inputs for these asset types have been described above.
Significant Unobservable Inputs
The table below presents quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurements of Level 3 assets. Valuations for assets and liabilities not presented in the table below are primarily based on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of unobservable inputs from these broker quotes is neither provided nor reasonably available to the Company.
December 31, 2012 | Fair Value | Valuation Technique(s) | Unobservable Input(s) | Range (Weighted Average) | ||||||||||
| ||||||||||||||
(In millions) | ||||||||||||||
Assets | ||||||||||||||
Fixed maturity securities | $ 121 | Discounted cash flow | Expected call date | 3.3 – 5.3 years (4.3 years) | ||||||||||
Credit spread adjustment | 0.02% – 0.48% (0.17%) | |||||||||||||
72 | Market approach | Private offering price | $42.39 – $102.32 ($100.11) | |||||||||||
Equity securities | 34 | Market approach | Private offering price | $4.54 – $3,842.00 per share | ||||||||||
($571.17 per share) | ||||||||||||||
Life settlement contracts | 100 | Discounted cash flow | Discount rate risk premium | 9% | ||||||||||
Mortality assumption | 69% – 883% (208.9%) |
For fixed maturity securities, an increase to the expected call date assumption and credit spread adjustment or decrease in the private offering price would result in a lower fair value measurement. For equity securities, an increase in the private offering price would result in a higher fair value measurement. For life settlement contracts, an increase in the discount rate risk premium or decrease in the mortality assumption would result in a lower fair value measurement.
Financial Assets and Liabilities Not Measured at Fair Value
The carrying amount, estimated fair value and the level of the fair value hierarchy of the Company’s financial instrument assets and liabilities which are not measured at fair value on the Consolidated Balance Sheets are listed in the tables below. The carrying amounts reported on the Consolidated 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 | |||||||||||||||||
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December 31, 2012 | Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||
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(In millions) | ||||||||||||||||||
Financial assets: | ||||||||||||||||||
Other invested assets, primarily mortgage loans | $ | 401 | $ | 418 | $ | 418 | ||||||||||||
Financial liabilities: | ||||||||||||||||||
Premium deposits and annuity contracts | 100 | 104 | 104 | |||||||||||||||
Short term debt | 19 | $ | 13 | 6 | 19 | |||||||||||||
Long term debt | 9,191 | 10,170 | 202 | 10,372 |
Carrying | Estimated | |||||||
December 31, 2011 | Amount | Fair Value | ||||||
| ||||||||
(In millions) | ||||||||
Financial assets: | ||||||||
Other invested assets, primarily mortgage loans | $ | 234 | $ | 247 | ||||
Financial liabilities: | ||||||||
Premium deposits and annuity contracts | 109 | 114 | ||||||
Short term debt | 88 | 90 | ||||||
Long term debt | 8,913 | 9,533 |
The following methods and assumptions were used in estimating the fair value of these financial assets and liabilities.
The fair values of mortgage loans were based on the present value of the expected future cash flows discounted at the current interest rate for similar financial instruments, adjusted for specific loan risk.
Premium deposits and annuity contracts were valued based on cash surrender values or estimated fair values of policyholder liabilities, net of amounts ceded related to sold business.
Fair value of debt was based on observable market prices when available. When observable market prices were not available, the fair value for debt was based on observable market prices of comparable instruments adjusted for differences between the observed instruments and the instruments being valued or is estimated using discounted cash flow analyses, based on current incremental borrowing rates for similar types of borrowing arrangements.
Note 5. Derivative Financial Instruments
The Company uses derivatives in the normal course of business, primarily in an attempt to reduce its exposure to market risk (principally interest rate risk, credit risk, equity price risk, commodity price risk and foreign currency risk) stemming from various assets and liabilities. The Company’s principal objective under such strategies is to achieve the desired reduction in economic risk, even if the position does not receive hedge accounting treatment.
The Company enters into interest rate swaps, futures and forward commitments to purchase securities to manage interest rate risk. Credit derivatives such as credit default swaps are entered into to modify the credit risk inherent in certain investments. Forward contracts, futures, swaps and options are used primarily to manage foreign currency and commodity price risk.
In addition to the derivatives used for risk management purposes described above, the Company may also use derivatives for purposes of income enhancement. Income enhancement transactions are entered into with the intention of providing additional income or yield to a particular portfolio segment or asset class. Income enhancement transactions include but are not limited to interest rate swaps, call options, put options, credit default swaps, index futures and foreign currency forwards. See Note 4 for information regarding the fair value of derivative instruments.
A summary of
The following tables present the aggregate contractual or notional amountsamount and gross estimated fair valuesvalue related to derivative financial instruments follows. instruments.
December 31 | 2015 | 2014 | ||||||||||||||||||||||
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Contractual/ | Contractual/ | |||||||||||||||||||||||
Notional | Estimated Fair Value | Notional | Estimated Fair Value | |||||||||||||||||||||
Amount | Asset | (Liability) | Amount | Asset | (Liability) | |||||||||||||||||||
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(In millions) | ||||||||||||||||||||||||
With hedge designation: | ||||||||||||||||||||||||
Foreign exchange: | ||||||||||||||||||||||||
Currency forwards – short | $ | 70 | $ | (5 | ) | |||||||||||||||||||
Without hedge designation: | ||||||||||||||||||||||||
Equity markets: | ||||||||||||||||||||||||
Options – purchased | $ | 501 | $ | 16 | 544 | $ | 24 | |||||||||||||||||
– written | 614 | $ | (28 | ) | 292 | (21 | ) | |||||||||||||||||
Futures – long | 312 | (1 | ) | |||||||||||||||||||||
Futures – short | 130 | 2 | ||||||||||||||||||||||
Interest rate risk: | ||||||||||||||||||||||||
Futures – long | 63 | |||||||||||||||||||||||
Foreign exchange: | ||||||||||||||||||||||||
Currency forwards – long | 133 | 2 | 109 | (3 | ) | |||||||||||||||||||
– short | 152 | 88 | 2 | |||||||||||||||||||||
Currency options – long | 550 | 7 | 151 | 7 | ||||||||||||||||||||
Embedded derivative on funds | ||||||||||||||||||||||||
withheld liability | 179 | 5 | 184 | (3 | ) |
Investment Commitments
As of December 31, 2015, the Company had committed approximately $398 million to future capital calls from various third party limited partnership investments in exchange for an ownership interest in the related partnerships.
The contractualCompany invests in various privately placed debt securities, including bank loans, as part of its overall investment strategy and has committed to additional future purchases, sales and funding. As of December 31, 2015, the Company had commitments to purchase or notionalfund additional amounts of $138 million and sell $67 million under the terms of such securities.
Investments on Deposit
Securities with carrying values of approximately $2.8 billion and $3.0 billion were deposited by CNA’s insurance subsidiaries under requirements of regulatory authorities and others as of December 31, 2015 and 2014.
Cash and securities with carrying values of approximately $364 million and $361 million were deposited with financial institutions as collateral for derivativesletters of credit as of December 31, 2015 and 2014. In addition, cash and securities were deposited in trusts with financial institutions to secure reinsurance and other obligations with various third parties. The carrying values of these deposits were approximately $263 million and $302 million as of December 31, 2015 and 2014.
Note 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 calculatevalue assets using a methodology and inputs the exchangeCompany 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 contractual payments underfair value and to confirm representations regarding whether inputs are observable or unobservable. Procedures include: (i) the agreementsreview of pricing service or broker pricing methodologies, (ii) back-testing, where past fair value estimates are compared to actual transactions executed in the market on similar dates, (iii) exception reporting, where period-over-period changes in price are reviewed and may not be representativechallenged with the pricing service or broker based on exception criteria, (iv) detailed analysis, where the Company performs an independent analysis of the potential for gain or loss on these instruments.inputs and assumptions used to price individual securities and (v) pricing validation, where prices received are compared to prices independently estimated by the Company.
December 31 | 2012 | 2011 | ||||||||||||||||||||||
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Contractual/ | Contractual/ | |||||||||||||||||||||||
Notional | Estimated Fair Value | Notional | Estimated Fair Value | |||||||||||||||||||||
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Amount | Asset | (Liability) | Amount | Asset | (Liability) | |||||||||||||||||||
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(In millions) | ||||||||||||||||||||||||
With hedge designation: | ||||||||||||||||||||||||
Interest rate risk: | ||||||||||||||||||||||||
Interest rate swaps | $ | 300 | $ | (6) | $ | 300 | $ | 3 | $ | (3) | ||||||||||||||
Commodities: | ||||||||||||||||||||||||
Forwards – short | 288 | $ | 39 | (3) | 268 | 64 | (22) | |||||||||||||||||
Foreign exchange: | ||||||||||||||||||||||||
Currency forwards – short | 144 | 4 | 154 | 1 | (8) | |||||||||||||||||||
Without hedge designation: | ||||||||||||||||||||||||
Equity markets: | ||||||||||||||||||||||||
Options – purchased | 255 | 19 | 286 | 33 | ||||||||||||||||||||
– written | 374 | (11) | 398 | (23) | ||||||||||||||||||||
Equity swaps and warrants – long | 14 | 6 | 63 | 16 | ||||||||||||||||||||
Interest rate risk: | ||||||||||||||||||||||||
Interest rate swaps | 100 | 1 | (1) | |||||||||||||||||||||
Credit default swaps | ||||||||||||||||||||||||
– purchased protection | 78 | (2) | 145 | 8 | (1) | |||||||||||||||||||
– sold protection | 33 | (2) | 28 | (2) | ||||||||||||||||||||
Foreign exchange: | ||||||||||||||||||||||||
Currency forwards – long | 404 | (2) | 203 | 4 | ||||||||||||||||||||
– short | 128 | 330 | (2) |
For derivative financial instruments without hedge designation, changesThe fair values of CNA’s life settlement contracts are included in the fair value of derivatives not held in a trading portfolio are reported in Investment gains (losses) and changes in the fair value of derivatives held for trading purposes are reported in Net investment incomeOther assets on the Consolidated Statements of Income. Losses of $5 million, $34 million and $31 million were recorded in Investment gains (losses) for the years ended December 31,
2012, 2011 and 2010. Losses of $19 million, $14 million and $75 million wereBalance Sheets. Equity options purchased are included in Net investment incomeEquity securities, and all other derivative assets are included in Receivables. Derivative liabilities are included in Payable to brokers. Assets and liabilities measured at fair value on a recurring basis are summarized in the tables below:
December 31, 2015 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
| ||||||||||||||||||
(In millions) | ||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||
Corporate and other bonds | $ | 17,601 | $ | 168 | $ | 17,769 | ||||||||||||
States, municipalities and political subdivisions | 13,172 | 2 | 13,174 | |||||||||||||||
Asset-backed: | ||||||||||||||||||
Residential mortgage-backed | 4,938 | 134 | 5,072 | |||||||||||||||
Commercial mortgage-backed | 2,175 | 22 | 2,197 | |||||||||||||||
Other asset-backed | 868 | 53 | 921 | |||||||||||||||
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Total asset-backed | 7,981 | 209 | 8,190 | |||||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises | $ | 66 | 1 | 67 | ||||||||||||||
Foreign government | 346 | 346 | ||||||||||||||||
Redeemable preferred stock | 35 | 35 | ||||||||||||||||
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Fixed maturities available-for-sale | 101 | 39,101 | 379 | 39,581 | ||||||||||||||
Fixed maturities trading | 35 | 85 | 120 | |||||||||||||||
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Total fixed maturities | $ | 101 | $ | 39,136 | $ | 464 | $ | 39,701 | ||||||||||
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Equity securities available-for-sale | $ | 177 | $ | 20 | $ | 197 | ||||||||||||
Equity securities trading | 554 | 1 | 555 | |||||||||||||||
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Total equity securities | $ | 731 | $ | - | $ | 21 | $ | 752 | ||||||||||
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Short term investments | $ | 3,600 | $ | 1,134 | $ | 4,734 | ||||||||||||
Other invested assets | 102 | 44 | 146 | |||||||||||||||
Receivables | 9 | $ | 3 | 12 | ||||||||||||||
Life settlement contracts | 74 | 74 | ||||||||||||||||
Payable to brokers | (196 | ) | (196) |
(In millions) Fixed maturity securities: Corporate and other bonds States, municipalities and political subdivisions Asset-backed: Residential mortgage-backed Commercial mortgage-backed Other asset-backed Total asset-backed U.S. Treasury and obligations of government-sponsored enterprises Foreign government Redeemable preferred stock Fixed maturities available-for-sale Fixed maturities trading Total fixed maturities Equity securities available-for-sale Equity securities trading Total equity securities Short term investments Other invested assets Receivables Life settlement contracts Payable to brokersDecember 31, 2014 Level 1 Level 2 Level 3 Total $ 32 $ 18,692 $ 162 $ 18,886 12,646 94 12,740 5,044 189 5,233 2,061 83 2,144 580 655 1,235 7,685 927 8,612 28 3 31 41 413 454 30 12 42 131 39,451 1,183 40,765 30 90 120 $ 131 $ 39,481 $ 1,273 $ 40,885 $ 145 $ 61 $ 16 $ 222 505 1 506 $ 650 $ 61 $ 17 $ 728 $ 4,989 $ 963 $ 5,952 102 41 143 2 7 9 $ 82 82 (546 ) (6 ) (552 )
The tables below present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2012, 20112015 and 2010.2014:
Unrealized | ||||||||||||||||||||||||||||||||||||||||
Gains | ||||||||||||||||||||||||||||||||||||||||
(Losses) | ||||||||||||||||||||||||||||||||||||||||
Recognized in | ||||||||||||||||||||||||||||||||||||||||
Net Realized Gains | Net Income | |||||||||||||||||||||||||||||||||||||||
(Losses) and Net Change | on Level | |||||||||||||||||||||||||||||||||||||||
in Unrealized Gains | 3 Assets and | |||||||||||||||||||||||||||||||||||||||
(Losses) | Transfers | Transfers | Liabilities | |||||||||||||||||||||||||||||||||||||
Balance, | Included in | Included in | into | out of | Balance, | Held at | ||||||||||||||||||||||||||||||||||
2015 | January 1 | Net Income | OCI | Purchases | Sales | Settlements | Level 3 | Level 3 | December 31 | December 31 | ||||||||||||||||||||||||||||||
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(In millions) | ||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||
Corporate and other bonds | $ | 162 | $ | (2) | $ | (3) | $ | 65 | $ | (13) | $ | (35) | $ | 40 | $ | (46) | $ | 168 | $ | (2) | ||||||||||||||||||||
States, municipalities and political subdivisions | 94 | 1 | (10) | (83) | 2 | |||||||||||||||||||||||||||||||||||
Asset-backed: | ||||||||||||||||||||||||||||||||||||||||
Residentialmortgage-backed | 189 | 5 | (3) | 81 | (35) | 14 | (117) | 134 | ||||||||||||||||||||||||||||||||
Commercialmortgage-backed | 83 | 7 | (4) | 23 | (17) | 17 | (87) | 22 | ||||||||||||||||||||||||||||||||
Other asset-backed | 655 | 3 | 3 | 130 | (263) | (52) | 7 | (430) | 53 | |||||||||||||||||||||||||||||||
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Total asset-backed | 927 | 15 | (4) | 234 | (263) | (104) | 38 | (634) | 209 | - | ||||||||||||||||||||||||||||||
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Fixed maturitiesavailable-for-sale | 1,183 | 14 | (7) | 299 | (276) | (149) | 78 | (763) | 379 | (2) | ||||||||||||||||||||||||||||||
Fixed maturities trading | 90 | (3) | (2) | 85 | (3) | |||||||||||||||||||||||||||||||||||
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Total fixed maturities | $ | 1,273 | $ | 11 | $ | (7) | $ | 299 | $ | (278) | $ | (149) | $ | 78 | $ | (763) | $ | 464 | $ | (5) | ||||||||||||||||||||
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Equity securitiesavailable-for-sale | $ | 16 | $ | (1) | $ | 4 | $ | 1 | $ | 20 | ||||||||||||||||||||||||||||||
Equity securities trading | 1 | $ | 1 | 1 | $ | (2) | 1 | $ | 1 | |||||||||||||||||||||||||||||||
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Total equity securities | $ | 17 | $ | 1 | $ | (1) | $ | 5 | $ | (2) | $ | - | $ | 1 | $ | - | $ | 21 | $ | 1 | ||||||||||||||||||||
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Life settlement contracts | $ | 82 | $ | 25 | $ | (33) | $ | 74 | $ | 1 | ||||||||||||||||||||||||||||||
Derivative financial instruments, net | $ | 3 | 3 |
Fixed maturity securities: Corporate and other bonds States, municipalities and political subdivisions Asset-backed: Residentialmortgage-backed Commercialmortgage-backed Other asset-backed Total asset-backed Fixed maturitiesavailable-for-sale Fixed maturities trading Total fixed maturities Equity securitiesavailable-for-sale Equity securities trading Total equity securities Life settlement contracts Separate account business Derivative financial instruments, net Unrealized Gains (Losses) Recognized in Net Realized Gains Net Income (Losses) and Net Change on Level in Unrealized Gains 3 Assets and (Losses) Transfers Transfers Liabilities Balance, Included in Included in into out of Balance, Held at 2014 January 1 Net Income OCI Purchases Sales Settlements Level 3 Level 3 December 31 December 31 (In millions) $ 204 $ 2 $ (1 ) $ 33 $ (23 ) $ (16 ) $ 18 $ (55 ) $ 162 71 1 4 14 (10 ) 14 94 331 (21 ) 61 94 (174 ) (72 ) 32 (62 ) 189 151 7 (6 ) 28 (60 ) (29 ) 43 (51 ) 83 446 2 (6 ) 488 (111 ) (117 ) (47 ) 655 $ (1) 928 (12 ) 49 610 (345 ) (218 ) 75 (160 ) 927 (1) 1,203 (9 ) 52 657 (378 ) (234 ) 107 (215 ) 1,183 (1) 80 11 (1 ) 90 11 $ 1,283 $ 2 $ 52 $ 657 $ (379 ) $ (234 ) $ 107 $ (215 ) $ 1,273 $ 10 $ 11 $ 3 $ (6 ) $ 16 $ (8 ) $ 16 8 (1 ) (6 ) 1 $ 1 $ 19 $ 2 $ (6 ) $ 16 $ (14 ) $ - $ - $ - $ 17 $ 1 $ 88 $ 33 $ (39 ) $ 82 $ 8 1 $ (1 ) - (3 ) 1 $ 2 - 2
Net realized and unrealized gains and losses are reported in Net income as follows:
Major Category of Assets and Liabilities | Consolidated 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 |
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. There were $63 million of transfers from Level 2 to Level 1 and $52 million of transfers from Level 1 to Level 2 during the year ended December 31, 2015. There were $24 million of transfers from Level 2 to Level 1 and $1 million of transfers from Level 1 to Level 2 during the year ended December 31, 2014. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods.
Valuation Methodologies and Inputs
The Company’s derivativefollowing section describes the valuation methodologies and relevant inputs used to measure different financial instruments withat 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 hedge designation hedge variable price risk associatedmethodology 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 the purchaseinputs 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 sale of natural gascommon stocks valued using pricing for similar securities, recently executed transactions and other energy-related products, exposurepricing 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 foreign currency losseswhether these quotes are based on future foreign currency expenditures,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 Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.
Other Invested Assets
Level 1 securities include exchange traded open-end funds valued using quoted market prices. Level 2 securities include overseas deposits which can be redeemed at net asset value in 90 days or less.
Life Settlement Contracts
The fair values of life settlement contracts are determined as the present value of the anticipated death benefits less anticipated premium payments based on contract terms that are distinct for each insured, as well as risks attributableCNA’s own assumptions for mortality, premium expense, and the rate of return that a buyer would require on the contracts, as no comparable market pricing data is available.
Significant Unobservable Inputs
The following tables present quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurements of Level 3 assets. Valuations for assets and liabilities not presented in the tables below are primarily based on broker/dealer quotes for which there is a lack of transparency as to changesinputs used to develop the valuations. The quantitative detail of unobservable inputs from these broker quotes is neither provided nor reasonably available to the Company.
Range | ||||||||||||
Estimated | Valuation | Unobservable | (Weighted | |||||||||
December 31, 2015 | Fair Value | Techniques | Inputs | Average) | ||||||||
| ||||||||||||
(In millions) | ||||||||||||
Fixed maturity securities | $ 138 | Discounted cash flow | Credit spread | 3% – 184% (6%) | ||||||||
Life settlement contracts | 74 | Discounted cash flow | Discount rate risk premium | 9% | ||||||||
Mortality assumption | 55% – 1,676% (164%) | |||||||||||
December 31, 2014 | ||||||||||||
| ||||||||||||
Fixed maturity securities | $ 101 | Discounted cash flow | Credit spread | 2% – 13% (3%) | ||||||||
Equity securities | 16 | Market approach | Private offering price | $12 – $4,391 per share | ||||||||
($600 per share) | ||||||||||||
Life settlement contracts | 82 | Discounted cash flow | Discount rate risk premium | 9% | ||||||||
Mortality assumption | 55% – 1,676% (163%) |
For fixed maturity securities, an increase to the credit spread assumptions would result in interest ratesa lower fair value measurement. For equity securities, an increase in the private offering price would result in a higher fair value measurement. For life settlement contracts, an increase in the discount rate risk premium or decrease in the mortality assumption would result in a lower fair value measurement.
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 Balance Sheets are presented in the following tables. The carrying amounts and estimated fair values of short term debt and long term debt. Gainsdebt exclude capital lease obligations. The carrying amounts reported on the Consolidated 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 $43 million, $33 millionthese items.
Carrying | Estimated Fair Value | |||||||||||||||||||
December 31, 2015 | Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
| ||||||||||||||||||||
(In millions) | ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Other invested assets, primarily mortgage loans | $ | 678 | $ | 688 | $ | 688 | ||||||||||||||
Liabilities: | ||||||||||||||||||||
Short term debt | 1,038 | $ | 1,050 | 2 | 1,052 | |||||||||||||||
Long term debt | 9,530 | 8,538 | 595 | 9,133 | ||||||||||||||||
December 31, 2014 | ||||||||||||||||||||
| ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Other invested assets, primarily mortgage loans | $ | 588 | $ | 608 | $ | 608 | ||||||||||||||
Liabilities: | ||||||||||||||||||||
Short term debt | 334 | $ | 255 | 84 | 339 | |||||||||||||||
Long term debt | 10,320 | 10,299 | 420 | 10,719 |
The following methods and $87 millionassumptions were recognizedused in OCI related toestimating 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 hedgesanalyses, based on current incremental borrowing rates for the years ended December 31, 2012, 2011 and 2010. Gainssimilar types of $54 million and losses of $28 million and $11 million were reclassified from AOCI into income for the years ended December 31, 2012, 2011 and 2010. As of December 31, 2012, the estimated amount of net unrealized gains associated with these cash flow hedges that will be reclassified from AOCI into earnings during the next twelve months was $34 million. For each of the years ended December 31, 2012, 2011 and 2010, the net amounts recognized due to ineffectiveness were less than $1 million.borrowing arrangements.
December 31 | 2012 | 2011 | 2015 | 2014 | ||||||||||||||
|
|
| ||||||||||||||||
(In millions) | ||||||||||||||||||
Reinsurance | $ | 6,231 | $ | 6,092 | ||||||||||||||
Reinsurance (Note 15) | $ | 4,491 | $ | 4,742 | ||||||||||||||
Insurance | 1,983 | 1,726 | 2,129 | 1,997 | ||||||||||||||
Receivable from brokers | 159 | 275 | 471 | 84 | ||||||||||||||
Accrued investment income | 437 | 442 | 408 | 412 | ||||||||||||||
Federal income taxes | 51 | 164 | 45 | 27 | ||||||||||||||
Other, primarily customer accounts | 717 | 801 | 593 | 625 | ||||||||||||||
|
|
| ||||||||||||||||
Total | 9,578 | 9,500 | 8,137 | 7,887 | ||||||||||||||
Less: allowance for doubtful accounts on reinsurance receivables | 73 | 91 | 38 | 48 | ||||||||||||||
allowance for other doubtful accounts | 139 | 150 | 58 | 69 | ||||||||||||||
|
|
| ||||||||||||||||
Receivables | $ | 9,366 | $ | 9,259 | $ | 8,041 | $ | 7,770 | ||||||||||
|
|
|
Note 7.6. Property, Plant and Equipment
December 31 | 2012 | 2011 | ||||||
| ||||||||
(In millions) | ||||||||
Pipeline equipment (net of accumulated DD&A of $1,168 and $926) | $ | 7,148 | $ | 6,749 | ||||
Offshore drilling equipment (net of accumulated DD&A of $3,347 and $3,378) | 3,824 | 4,119 | ||||||
Natural gas and oil proved and unproved properties (net of accumulated DD&A of $2,813 and $2,056) | 893 | 1,330 | ||||||
Other (net of accumulated DD&A of $874 and $899) | 815 | 799 | ||||||
Construction in process | 1,255 | 621 | ||||||
| ||||||||
Property, plant and equipment, net | $ | 13,935 | $ | 13,618 | ||||
|
Pipeline equipment (net of accumulated DD&A of $1,887 and $1,620) Offshore drilling equipment (net of accumulated DD&A of $3,335 and $4,159) Other (net of accumulated DD&A of $811 and $730) Construction in process Property, plant and equipment, net December 31 2015 2014 (In millions) $ 7,462 $ 7,491 6,071 6,459 1,450 1,083 494 578 $ 15,477 $ 15,611
DD&A expense and capital expenditures are as follows:
Year Ended December 31 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Capital | Capital | Capital |
| |||||||||||||||||||||||||||||||||||||||||||||||
DD&A | Expend. | DD&A | Expend. | DD&A | Expend. | DD&A | Capital Expend. | DD&A | Capital Expend. | DD&A | Capital Expend. | |||||||||||||||||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||
CNA Financial | $ | 71 | $ | 98 | $ | 70 | $ | 85 | $ | 69 | $ | 51 | $ | 74 | $ | 123 | $ | 69 | $ | 72 | $ | 72 | $ | 90 | ||||||||||||||||||||||||||
Diamond Offshore | 394 | 721 | 399 | 783 | 396 | 399 | 494 | 812 | 457 | 2,050 | 389 | 987 | ||||||||||||||||||||||||||||||||||||||
Boardwalk Pipeline | 256 | 247 | 231 | 142 | 222 | 204 | 327 | 390 | 292 | 378 | 275 | 305 | ||||||||||||||||||||||||||||||||||||||
HighMount | 101 | 346 | 94 | 324 | 92 | 188 | ||||||||||||||||||||||||||||||||||||||||||||
Loews Hotels | 30 | 30 | 29 | 19 | 29 | 13 | 54 | 389 | 37 | 289 | 32 | 369 | ||||||||||||||||||||||||||||||||||||||
Corporate and other | 7 | 10 | 10 | 19 | 8 | 5 | 6 | 4 | 6 | 24 | 6 | 4 | ||||||||||||||||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 859 | $ | 1,452 | $ | 833 | $ | 1,372 | $ | 816 | $ | 860 | $ | 955 | $ | 1,718 | $ | 861 | $ | 2,813 | $ | 774 | $ | 1,755 | ||||||||||||||||||||||||||
|
|
|
Capitalized interest related to the construction and upgrade of qualifying assets amounted to approximately $55$36 million, $31$80 million and $23$92 million for the years ended December 31, 2012, 20112015, 2014 and 2010.2013.
Pipeline Equipment
In October of 2012, Boardwalk Pipeline acquired Louisiana Midstream, a company that provides salt dome storage, pipeline transportation, fractionation and brine supply services for approximately $620 million, of which $550 million was allocated to Pipeline equipment.
In December of 2011, HP Storage acquired seven salt dome natural gas storage caverns and associated assets in Mississippi for approximately $550 million of which $487 million was allocated to Pipeline equipment. See Note 2 for additional information related to these purchases.
Offshore Drilling Equipment
Purchase of Assets
In 2012 and 2011,2015, Diamond Offshore recorded $251took delivery of one ultra-deepwater drillship. The net book value of this newly constructed rig was $655 million and $490at December 31, 2015, of which $225 million was reported in Construction in process for four new ultra-deepwater drillships. Delivery is expectedat December 31, 2014. At December 31, 2015, Construction in the second and fourth quarters of 2013 and in the second and fourth quarters of 2014. Process included $270 million related to one rig still under construction.
In addition,2014, Diamond Offshore recorded $235 million in Construction in process fortook delivery of three ultra-deepwater drillships and two new deepwater floaters in 2012. The rigs will be constructed utilizing the hulls of two of Diamond Offshore’s mid-water floaters. Delivery is expected for the third quarter of 2013 and in the second quarter of 2014.
Sale of Assets
In 2012, Diamond Offshore sold six jack-up rigs for total proceeds of $132 million, resulting in a pretax gain of approximately $76 million, recorded in Other revenues.
Asset Impairment
In 2012, Diamond Offshore decided to actively market for sale three mid-water rigs and one jack-up rig. The aggregate net book value of these newly constructed rigs was transferred$2.7 billion at December 31, 2014, of which $1.3 billion was reported in Construction in process at December 31, 2013. At December 31, 2014, Construction in process included $439 million related to two rigs still under construction.
Sale of Assets
At December 31, 2015, $14 million net book value of five jack-up rigs held for sale which iswas included in Other assets on the Consolidated Balance Sheets. One of these jack-up rigs held for sale was sold in February 2016 for $8 million. In connectionaddition, during 2015, nine rigs with the reclassification,an aggregate net book value of $5 million were sold at a nominal gain.
In 2014, Diamond Offshore sold a jack-up rig for $17 million, resulting in a gain of $9 million ($3 million after tax and noncontrolling interests).This gain was recorded in Other revenues on the Consolidated Statements of Income.
Asset Impairments
During 2015, in response to a continued deterioration of the market fundamentals in the oil and gas industry, including the dramatic decline in oil prices, significant cutbacks in customer capital spending plans and contract cancellations by customers, as well as pending regulatory requirements in the U.S. Gulf of Mexico, Diamond Offshore evaluated 25 of its drilling rigs for impairment. Based on this evaluation, Diamond Offshore determined that 17 of these rigs, consisting of two ultra-deepwater, one deepwater and nine mid-water floaters and five jack-up rigs, were impaired.
Diamond Offshore utilizes an impairment chargeundiscounted projected probability-weighted cash flow analysis in testing an asset for potential impairment. A matrix of $62 million relatedassumptions is developed for each rig under evaluation using multiple utilization/dayrate scenarios, to each of which Diamond Offshore assigns a probability of occurrence. Diamond Offshore arrives at a projected probability-weighted cash flow for each rig based on the respective matrix and compares such amount to the three mid-water rigs.carrying value of the asset to assess recoverability.
The underlying assumptions and assigned probabilities of occurrence for utilization and dayrate scenarios are developed using a methodology that examines historical data for each rig, which considers the rig’s age, rated water depth and other attributes and then assesses its future marketability in light of the current and projected market environment at the time of assessment. Other assumptions, such as operating, maintenance and inspection costs, are estimated using historical data adjusted for known developments and future events that are anticipated by management at the time of the assessment.
Diamond Offshore estimated the fair value of 16 of the impaired rigs utilizing a market approach, which required it to estimate the value that would be received for each rig in the principal or most advantageous market for that rig in an orderly transaction between market participants. Such estimates were based on various inputs, including historical contracted sales prices for similar rigs in the fleet, nonbinding quotes from rig brokers and/or indicative bids, where applicable. The fair value of the one remaining rig impaired in 2015 is estimated using an income approach, as Diamond Offshore has determined that the most likely use for eachthis rig would be to cold stack the rig and reintroduce it into the market at a later date. The fair value of this rig was measured using an expected present value technique that utilizesdetermined by discounting its future cash flows and includes assumptions which utilize significant unobservable inputs, representing a Level 3 fair value measurement, which includes assumptions forincluding those related to estimated dayrate revenue, rig utilization, estimated equipment upgrade and regulatory survey costs, as well as estimated proceeds that may be received on ultimate disposition of the rigrig. The fair value estimates are representative of Level 3 fair value measurements due to the significant level of estimation involved and estimated coststhe lack of transparency as to sell. Atthe inputs used.
Diamond Offshore recognized aggregate impairment losses of $861 million ($341 million after tax and noncontrolling interests) for the year ended December 31, 2012,2015. Of the rigs impaired in 2015, five mid-water rigs were sold during 2015 and five jack-up rigs are included in Other assets on the Consolidated Balance Sheets at December 31, 2015. Six rigs impaired in 2015 were cold stacked at the end of 2015, and the remaining impaired rig is expected to be sold for scrap after completion of its contract in 2016. The $175 million aggregate carrying value
of these impaired rigs is reported in Property, plant and equipment on the Consolidated Balance Sheets at December 31, 2015.
In the third quarter of 2014, Diamond Offshore determined it would retire and scrap six rigs, including a rig upon completion of its contract term in 2015. Diamond Offshore performed an impairment analysis to determine whether the carrying amount of these assets held for sale amounted to $12 million.
Natural Gas and Oil Proved and Unproved Properties
Impairment of Natural Gas and Oil Properties
In 2012, HighMount recorded non-cash ceiling testwas recoverable. Based on this analysis, an impairment charges of $680loss was recognized aggregating $109 million ($43355 million after tax) related totax and noncontrolling interests) for the carryingyear ended December 31, 2014. The fair value was determined through discussions and a quote from a rig broker, and for the rig under contract using an internally developed income approach, which are Level 3 inputs of its natural gas and oil properties. The impairments were recorded within Other operating expenses and as credits to Accumulated DD&A. The write-downs were the result of declines in natural gas and NGL prices. Had the effects of HighMount’s cash flow hedges not been considered in calculating the ceiling limitation, the impairments would have been $737 million ($469 million after tax).
Purchase of Assets
fair value hierarchy. In the fourth quarter of 2011, HighMount paid $106 million2014, two of the rigs were scrapped and at December 31, 2014, the carrying value of the remaining rigs amounted to acquire working interests$9 million. The remaining rigs impaired in 2014 were sold in 2015.
The impairment losses recorded during the years ended December 31, 2015 and 2014 are reported within Other operating expenses on the Consolidated Statements of Income. No impairment loss was recorded during the year ended December 31, 2013.
Diamond Offshore’s assumptions are necessarily subjective and are an inherent part of the asset impairment evaluation. If market fundamentals in the oil and gas properties locatedindustry deteriorate further or if Diamond Offshore is unable to secure new or extend existing contracts for its current, actively-marketed drilling fleet or reactivate any of its cold stacked rigs or if Diamond Offshore experiences unfavorable changes to actual dayrates and rig utilization, additional impairment losses may be required to be recognized in Oklahoma. See future periods.
Note 2 for additional information related to this purchase.
Costs Not Being Amortized
HighMount excludes from amortization the cost of unproved properties, the cost of exploratory wells in progress and major development projects in progress. Natural gas and oil property and equipment costs not being amortized as of December 31, 2012, are as follows, by the year in which such costs were incurred:7. Goodwill
Total | 2012 | 2011 | 2010 | Prior | ||||||||||||||||
| ||||||||||||||||||||
(In millions) | ||||||||||||||||||||
Acquisition costs | $ | 171 | $ | 2 | $ | 56 | $ | 1 | $ | 112 | ||||||||||
Exploration costs | 9 | 3 | 4 | 1 | 1 | |||||||||||||||
Capitalized interest | 29 | 8 | 9 | 7 | 5 | |||||||||||||||
| ||||||||||||||||||||
Total excluded costs | $ | 209 | $ | 13 | $ | 69 | $ | 9 | $ | 118 | ||||||||||
|
Total | CNA Financial | Diamond Offshore | Boardwalk Pipeline | Loews Hotels | ||||||||||||||||||
| ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||
Balance, December 31, 2013 | $ | 357 | $ | 119 | $ | 20 | $ | 215 | $ | 3 | ||||||||||||
Additions | 22 | 22 | ||||||||||||||||||||
Dispositions | (3 | ) | (3 | ) | ||||||||||||||||||
Other adjustments | (2 | ) | (2 | ) | ||||||||||||||||||
| ||||||||||||||||||||||
Balance, December 31, 2014 | 374 | 117 | 20 | 237 | - | |||||||||||||||||
Impairments | (20 | ) | (20 | ) | ||||||||||||||||||
Other adjustments | (3 | ) | (3 | ) | ||||||||||||||||||
| ||||||||||||||||||||||
Balance, December 31, 2015 | $ | 351 | $ | 114 | $ | - | $ | 237 | $ | - | ||||||||||||
|
As a result of the decline in natural gas and NGL prices, HighMount changed its drilling program in 2012 to develop properties that produce primarily oil. As a result, during 2012, $130 millioncontinued deterioration of costs associated with unevaluated natural gas prospects were reclassified as evaluated and includedthe market fundamentals in the full cost pool subjectoil and gas industry, the Company assessed the carrying value of goodwill related to depletion.its investment in Diamond Offshore. An impairment charge of $20 million was recorded in Other operating expenses in the third quarter of 2015 to write-off all goodwill attributable to Diamond Offshore.
Note 8. Claim and Claim Adjustment Expense Reserves
CNA’s property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including claims that are incurred but not reported (“IBNR”) as of the reporting date. CNA’s reserve projections are based primarily on detailed analysis of the facts in each case, CNA’s experience with similar cases and various historical development patterns. Consideration is given to such historical patterns as field reserving trends and claims settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions including inflation and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.
Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can all affect ultimate claim costs. In addition, time can be a critical part
of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers’ compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. There can be no assurance that CNA’s ultimate cost for insurance losses will not exceed current estimates.
Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in CNA’s results of operations and/or equity. CNA reported catastrophe losses, net of
reinsurance, of $391$141 million, $222$156 million and $121$169 million for the years ended December 31, 2012, 20112015, 2014 and 2010.2013. Catastrophe losses in 20122015 related primarily to Storm Sandy and other U.S. storms.weather-related events.
The following table below providespresents a reconciliation between beginning and ending claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves of the life company:Life & Group Non-Core segment.
Year Ended December 31 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | ||||||||||||||||||||
|
|
| ||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||
Reserves, beginning of year: | ||||||||||||||||||||||||||
Gross | $ | 24,303 | $ | 25,496 | $ | 26,816 | $ | 23,271 | $ | 24,089 | $ | 24,763 | ||||||||||||||
Ceded | 5,020 | 6,122 | 5,594 | 4,344 | 4,972 | 5,126 | ||||||||||||||||||||
|
|
| ||||||||||||||||||||||||
Net reserves, beginning of year | 19,283 | 19,374 | 21,222 | 18,927 | 19,117 | 19,637 | ||||||||||||||||||||
| ||||||||||||||||||||||||||
Reduction of net reserves due to the Loss Portfolio Transfer transaction | (1,381) | |||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||
Change in net reserves due to acquisition (disposition) of subsidiaries | 291 | (277 | ) | (98) | (13 | ) | ||||||||||||||||||||
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|
| ||||||||||||||||||||||||
Net incurred claim and claim adjustment expenses: | ||||||||||||||||||||||||||
Provision for insured events of current year | 5,273 | 4,904 | 4,741 | 4,934 | 5,043 | 5,114 | ||||||||||||||||||||
Decrease in provision for insured events of prior years | (182 | ) | (429 | ) | (544) | (255 | ) | (36 | ) | (115 | ) | |||||||||||||||
Amortization of discount | 145 | 135 | 123 | 166 | 161 | 154 | ||||||||||||||||||||
|
|
| ||||||||||||||||||||||||
Total net incurred (a) | 5,236 | 4,610 | 4,320 | 4,845 | 5,168 | 5,153 | ||||||||||||||||||||
|
|
| ||||||||||||||||||||||||
Net payments attributable to: | ||||||||||||||||||||||||||
Current year events | (988 | ) | (1,029 | ) | (908) | (856 | ) | (945 | ) | (981 | ) | |||||||||||||||
Prior year events | (4,280 | ) | (3,473 | ) | (3,776) | (4,089 | ) | (4,355 | ) | (4,588 | ) | |||||||||||||||
|
|
| ||||||||||||||||||||||||
Total net payments | (5,268 | ) | (4,502 | ) | (4,684) | (4,945 | ) | (5,300 | ) | (5,569 | ) | |||||||||||||||
|
|
| ||||||||||||||||||||||||
Foreign currency translation adjustment and other | 95 | 78 | (5) | (251 | ) | (45 | ) | (104 | ) | |||||||||||||||||
|
|
| ||||||||||||||||||||||||
Net reserves, end of year | 19,637 | 19,283 | 19,374 | 18,576 | 18,927 | 19,117 | ||||||||||||||||||||
Ceded reserves, end of year | 5,126 | 5,020 | 6,122 | 4,087 | 4,344 | 4,972 | ||||||||||||||||||||
|
|
| ||||||||||||||||||||||||
Gross reserves, end of year | $ | 24,763 | $ | 24,303 | $ | 25,496 | $ | 22,663 | $ | 23,271 | $ | 24,089 | ||||||||||||||
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|
|
(a) | Total net incurred above does not agree to Insurance claims and policyholders’ benefits as reflected in the Consolidated 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 and policyholders’ funds, which are not reflected in the table above. |
The changes in provision for insured events of prior years (net prior year claim and claim adjustment expense reserve development) were as follows:
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||
| ||||||||||||
(In millions) | ||||||||||||
Property and casualty reserve development | $ | (180 | ) | $ | (429 | ) | $ | (545) | ||||
Life reserve development in life company | (2 | ) | 1 | |||||||||
| ||||||||||||
Total | $ | (182 | ) | $ | (429 | ) | $ | (544) | ||||
|
The following tables summarizepresent the gross and net carried reserves:
December 31, 2012 | CNA Specialty | CNA Commercial | Life & Group Non-Core | Other | Total | |||||||||||||||
| ||||||||||||||||||||
(In millions) | ||||||||||||||||||||
Gross Case Reserves | $ | 2,292 | $ | 6,146 | $ | 2,690 | $ | 1,540 | $ | 12,668 | ||||||||||
Gross IBNR Reserves | 4,456 | 5,180 | 316 | 2,143 | 12,095 | |||||||||||||||
| ||||||||||||||||||||
Total Gross Carried Claim and Claim | ||||||||||||||||||||
Adjustment Expense Reserves | $ | 6,748 | $ | 11,326 | $ | 3,006 | $ | 3,683 | $ | 24,763 | ||||||||||
| ||||||||||||||||||||
Net Case Reserves | $ | 2,008 | $ | 5,611 | $ | 2,253 | $ | 484 | $ | 10,356 | ||||||||||
Net IBNR Reserves | 4,104 | 4,600 | 275 | 302 | 9,281 | |||||||||||||||
| ||||||||||||||||||||
Total Net Carried Claim and Claim | ||||||||||||||||||||
Adjustment Expense Reserves | $ | 6,112 | $ | 10,211 | $ | 2,528 | $ | 786 | $ | 19,637 | ||||||||||
| ||||||||||||||||||||
December 31, 2011 | ||||||||||||||||||||
| ||||||||||||||||||||
Gross Case Reserves | $ | 2,441 | $ | 6,266 | $ | 2,510 | $ | 1,321 | $ | 12,538 | ||||||||||
Gross IBNR Reserves | 4,399 | 5,243 | 315 | 1,808 | 11,765 | |||||||||||||||
| ||||||||||||||||||||
Total Gross Carried Claim and Claim | ||||||||||||||||||||
Adjustment Expense Reserves | $ | 6,840 | $ | 11,509 | $ | 2,825 | $ | 3,129 | $ | 24,303 | ||||||||||
| ||||||||||||||||||||
Net Case Reserves | $ | 2,086 | $ | 5,720 | $ | 2,025 | $ | 347 | $ | 10,178 | ||||||||||
Net IBNR Reserves | 3,937 | 4,670 | 254 | 244 | 9,105 | |||||||||||||||
| ||||||||||||||||||||
Total Net Carried Claim and Claim | ||||||||||||||||||||
Adjustment Expense Reserves | $ | 6,023 | $ | 10,390 | $ | 2,279 | $ | 591 | $ | 19,283 | ||||||||||
|
December 31, 2015 | Specialty | Commercial | International | Other Non-Core | Total | |||||||||||||||||
| ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||
Gross Case Reserves | $ | 2,011 | $ | 4,975 | $ | 622 | $ | 4,494 | $ | 12,102 | ||||||||||||
Gross IBNR Reserves | 4,258 | 4,208 | 725 | 1,370 | 10,561 | |||||||||||||||||
| ||||||||||||||||||||||
Total Gross Carried Claim and Claim Adjustment Expense Reserves | $ | 6,269 | $ | 9,183 | $ | 1,347 | $ | 5,864 | $ | 22,663 | ||||||||||||
| ||||||||||||||||||||||
Net Case Reserves | $ | 1,810 | $ | 4,651 | $ | 531 | $ | 2,844 | $ | 9,836 | ||||||||||||
Net IBNR Reserves | 3,758 | 3,925 | 688 | 369 | 8,740 | |||||||||||||||||
| ||||||||||||||||||||||
Total Net Carried Claim and Claim Adjustment Expense Reserves | $ | 5,568 | $ | 8,576 | $ | 1,219 | $ | 3,213 | $ | 18,576 | ||||||||||||
| ||||||||||||||||||||||
December 31, 2014 | ||||||||||||||||||||||
| ||||||||||||||||||||||
Gross Case Reserves | $ | 2,136 | $ | 5,298 | $ | 752 | $ | 4,070 | $ | 12,256 | ||||||||||||
Gross IBNR Reserves | 4,093 | 4,216 | 689 | 2,017 | 11,015 | |||||||||||||||||
| ||||||||||||||||||||||
Total Gross Carried Claim and Claim Adjustment Expense Reserves | $ | 6,229 | $ | 9,514 | $ | 1,441 | $ | 6,087 | $ | 23,271 | ||||||||||||
| ||||||||||||||||||||||
Net Case Reserves | $ | 1,929 | $ | 4,947 | $ | 598 | $ | 2,716 | $ | 10,190 | ||||||||||||
Net IBNR Reserves | 3,726 | 3,906 | 663 | 442 | 8,737 | |||||||||||||||||
| ||||||||||||||||||||||
Total Net Carried Claim and Claim Adjustment Expense Reserves | $ | 5,655 | $ | 8,853 | $ | 1,261 | $ | 3,158 | $ | 18,927 | ||||||||||||
|
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 tables and discussion present the net prior year development recorded for Specialty, Commercial, International and Other Non-Core segments.
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development Pretax (favorable) unfavorable premium development Total pretax (favorable) unfavorable net prior year development Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development Pretax (favorable) unfavorable premium development Total pretax (favorable) unfavorable net prior year development Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development Pretax (favorable) unfavorable premium development Total pretax (favorable) unfavorable net prior year development Year Ended December 31, 2015 Specialty Commercial International Other Total (In millions) $ (141 ) $ (15 ) $ (54 ) $ - $ (210 ) (11 ) (15 ) 18 (8 ) $ (152 ) $ (30 ) $ (36 ) $ - $ (218 ) Year Ended December 31, 2014 $ (136 ) $ 176 $ (59 ) $ (2 ) $ (21 ) (13 ) (20 ) 2 (1 ) (32 ) $ (149 ) $ 156 $ (57 ) $ (3 ) $ (53 ) Year Ended December 31, 2013 $ (196 ) $ 122 $ (38 ) $ (6 ) $ (118 ) (14 ) (8 ) (21 ) 1 (42 ) $ (210 ) $ 114 $ (59 ) $ (5 ) $ (160 )
Favorable net prior year development of $50 million, $14 million and $9 million was recorded in Life & Group Non-Core for the years ended December 31, 2015, 2014 and 2013. The favorable net prior year development for the year ended December 31, 2015 was driven by favorable claim severity.
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.
For the year ended December 31, 2013, favorable premium development for International is primarily due to a commutation recorded at Hardy.
Specialty
The following table and discussion presents further detail of the net prior year claim and allocated claim adjustment expense reserve development (“development”) recorded for the Specialty segment:
Year Ended December 31 | 2015 | 2014 | 2013 | |||||||||||
| ||||||||||||||
(In millions) | ||||||||||||||
Medical professional liability | $ | (43 | ) | $ | 39 | $ | (27 | ) | ||||||
Other professional liability and management liability | (87 | ) | (73 | ) | ||||||||||
Surety | (69 | ) | (82 | ) | (74 | ) | ||||||||
Warranty | (2 | ) | (2 | ) | (3 | ) | ||||||||
Other | (27 | ) | (4 | ) | (19 | ) | ||||||||
| ||||||||||||||
Total pretax (favorable) unfavorable development | $ | (141 | ) | $ | (136 | ) | $ | (196 | ) | |||||
|
2015
Overall, favorable development for medical professional liability was related to lower than expected severity in accident years 2012 and prior. Unfavorable development was recorded related to increased claim frequency and severity in the aging services business in accident years 2013 and 2014.
Favorable development in other professional liability and management liability related to better than expected large loss emergence in financial institutions primarily in accident years 2011 through 2014. Additional favorable development related to lower than expected severity for professional services in accident years 2011 and prior. Unfavorable development was recorded related to increased frequency of large claims on public company management liability in accident years 2012 through 2014.
Favorable development for surety coverages was primarily due to lower than expected frequency of large losses in accident years 2013 and prior.
Favorable development for other coverages was due to better than expected claim frequency in property coverages provided to Specialty customers in accident year 2014.
2014
Unfavorable development for medical professional liability was primarily related to increased frequency of large medical products liability class action lawsuits in accident years 2012 and prior and increased frequency of other large medical professional liability losses in accident years 2011 through 2013.
Overall, favorable development for other professional liability and management liability was related to better than expected severity in accident years 2008 through 2011, including favorable outcomes on individual large claims. Additional favorable development related to lower than expected frequency in accident years 2011 through 2013. Unfavorable development was recorded due to higher than expected severity in financial institution and professional service coverages in accident years 2009 through 2011.
Favorable development for surety coverages was primarily due to better than expected large loss emergence in accident years 2012 and prior.
2013
Overall, favorable development for medical professional liability reflects favorable experience in accident years 2009 and prior. Unfavorable development was recorded for accident years 2010 and 2011 due to higher than expected large loss activity.
Overall, favorable development for other professional liability and management liability was related to better than expected loss emergence in accident years 2010 and prior. Unfavorable development was recorded in accident year 2011 related to an increase in severity in management liability.
Favorable development for surety coverages was primarily due to better than expected large loss emergence in accident years 2011 and prior.
Other includes standard property and casualty coverages provided to Specialty customers. Favorable development for other coverages was primarily due to better than expected loss emergence in property coverages primarily in accident years 2010 and subsequent.
Commercial
The following table and discussion presents further detail of the development recorded for the Commercial segment:
Year Ended December 31 | 2015 | 2014 | 2013 | |||||||||||
| ||||||||||||||
(In millions) | ||||||||||||||
Commercial auto | $ | (22 | ) | $ | 31 | $ | 18 | |||||||
General liability | (33 | ) | 45 | 64 | ||||||||||
Workers’ compensation | 80 | 139 | 91 | |||||||||||
Property and other | (40 | ) | (39 | ) | (51 | ) | ||||||||
| ||||||||||||||
Total pretax (favorable) unfavorable development | $ | (15 | ) | $ | 176 | $ | 122 | |||||||
|
2015
Favorable development for commercial auto was primarily due to lower than expected severity in accident years 2009 through 2014.
Favorable development for general liability was primarily due to favorable settlements on claims in accident years 2010 through 2013.
Unfavorable development for workers’ compensation was primarily due to higher than expected severity related to Defense Base Act (“DBA”) contractors in accident years 2008 through 2014.
Favorable development for property and other was primarily due to better than expected claim emergence from 2012 and 2014 catastrophe events and better than expected frequency of large claims in accident year 2014.
The year ended December 31, 2015 also included unfavorable loss development related to extra contractual obligation losses and losses associated with premium development.
2014
Unfavorable development for commercial auto was primarily related to higher than expected frequency in accident years 2012 and 2013 and higher than expected severity for liability coverages in accident years 2010 through 2013. Favorable development was recorded related to fewer large claims than expected in accident years 2008 and 2009.
Overall, unfavorable development for general liability was primarily related to higher than expected severity in accident years 2010 through 2013. Favorable development was recorded primarily related to lower than expected frequency of large losses in accident years 2005 through 2009.
Overall, unfavorable development for workers’ compensation was primarily due to increased medical severity in accident years 2010 and prior, higher than expected severity related to DBA contractors in accident years 2010 through 2013 and the recognition of losses related to favorable premium development in accident year 2013.
Favorable development of $26 million was recorded in accident years 1996 and prior related to the commutation of a workers’ compensation reinsurance pool.
Favorable development for property and other first party coverages was recorded in accident years 2013 and prior, primarily related to fewer claims than expected and favorable individual claim settlements.
2013
Unfavorable development for commercial auto coverages was primarily due to higher than expected frequency in accident years 2011 and 2012 and large loss emergence in accident years 2009 and 2010.
Unfavorable development for general liability coverages was primarily related to increased incurred loss severity in accident years 2010 through 2012.
Unfavorable development for workers’ compensation includes CNA’s response to legislation enacted during 2013 related to the New York Fund for Reopened Cases. The law change necessitated an increase in reserves as re-opened workers’ compensation claims can no longer be turned over to the state for handling and payment after December 31, 2013. Additional unfavorable development was recorded in accident year 2012 related to increased frequency and severity on claims related to DBA contractors and in accident year 2010 due to higher than expected large losses and increased severity in the state of California.
Favorable development for property and other coverages was primarily related to favorable outcomes on litigated catastrophe claims in accident years 2005 and 2010 as well as favorable loss emergence in non-catastrophe losses in accident years 2010 through 2012.
International
The following table and discussion presents further detail of the development recorded for the International segment:
Year Ended December 31 | 2015 | 2014 | 2013 | |||||||||||
| ||||||||||||||
(In millions) | ||||||||||||||
Medical professional liability | $ | (9 | ) | $ | (7 | ) | $ | (7 | ) | |||||
Other professional liability | (16 | ) | (26 | ) | (30 | ) | ||||||||
Liability | (17 | ) | (13 | ) | (8 | ) | ||||||||
Property & marine | (29 | ) | (14 | ) | 13 | |||||||||
Other | 17 | (9 | ) | (17 | ) | |||||||||
Commutations | 10 | 11 | ||||||||||||
| ||||||||||||||
Total pretax (favorable) unfavorable development | $ | (54 | ) | $ | (59 | ) | $ | (38 | ) | |||||
|
2015
Favorable development in medical professional liability was due to better than expected frequency of losses in accident years 2011 to 2013.
Favorable development in other professional liability was due to better than expected large loss emergence in accident years 2011 and prior.
Favorable development in liability was due to better than expected large loss emergence in accident years 2012 and prior.
Favorable development in property and marine was due to better than expected individual large loss emergence and favorable settlements on large claims in accident years 2013 and 2014.
Unfavorable development in other is due to higher than expected large losses in financial institutions and political risk, primarily in accident year 2014.
2014
Overall, favorable development for other professional liability was primarily related to better than expected severity in accident years 2012 and prior. Unfavorable development was recorded in accident year 2008 due to financial crisis claims.
Favorable development for liability was primarily related to better than expected frequency and severity in accident years 2009 and subsequent.
Favorable development for property and marine coverages primarily related to better than expected frequency of large claims in accident years 2012 and prior.
Favorable development for other coverages was a result of better than expected frequency in Hardy, primarily in financial institution coverages.
Reinsurance commutations in the first quarter of 2014 reduced ceded losses from prior years. Overall the commutations increased net operating income because of the release of the related allowance for uncollectible reinsurance.
2013
Overall, favorable development for other professional liability was primarily related to better than expected severity in accident years 2011 and prior. Unfavorable development was recorded related to higher than expected severity in accident year 2012.
Overall, unfavorable development for property and marine coverages was primarily due to 2011 catastrophe events, including the Thailand floods and the New Zealand Lyttelton earthquake, and one large non-catastrophe claim. Favorable development was recorded related to better than expected severity in accident years 2008 through 2011.
Favorable development for other coverages was largely a result of better than expected severity in Hardy in accident year 2012.
The commutation of a third-party capital provider’s 15% participation in the 2012 year of account resulted in recognition of the 15% share of year of account premiums, losses and expenses.
A&EP Reserves
On August 31,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 (“Loss Portfolio Transfer”(loss portfolio transfer or “LPT”).
Under At the terms of the NICO transaction effective January 1, 2010date, 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. Included in the $1.6 billion of net A&EP claim and allocated claim adjustment expense reserves was approximately $90 million of net claim and allocated claim adjustment expense reserves relating to CNA’s discontinued operations. 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 aggregate reinsurance limit also covers credit risk on the existing third party reinsurance related to these liabilities.
CNA paid NICO a reinsurance premium of $2.0 billion and transferred to NICO billed third party reinsurance receivables related to A&EP claims with a net book value of $215 million, (netresulting in total consideration of $2.2 billion.
Through December 31, 2013, CNA recorded $0.9 billion of additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the loss portfolio transfer exceeded the $2.2 billion consideration paid, resulting in a deferred retroactive reinsurance gain. This deferred gain is recognized in earnings in proportion to actual recoveries under the loss portfolio transfer. Over the life of the contract, there is no economic impact as long
as any additional losses are within the limit under the contract. In a period in which the estimate of ceded losses is changed, the required change to the deferred gain is cumulatively recognized in earnings as if the revised estimate was available at the inception of the LPT. The effect of the deferred retroactive reinsurance benefit is recorded in Insurance claims and policyholders’ benefits in the Consolidated Statements of Income.
The following table presents the impact of the loss portfolio transfer on the Consolidated Statements of Income.
Year Ended December 31 | 2015 | 2014 | 2013 | |||||||||||||
| ||||||||||||||||
(In millions) | ||||||||||||||||
Net A&EP adverse development before consideration of LPT | $ | 150 | $ | - | $ | 363 | ||||||||||
Provision for uncollectible third party reinsurance on A&EP | 140 | |||||||||||||||
| ||||||||||||||||
Additional amounts ceded under LPT | 150 | - | 503 | |||||||||||||
Retroactive reinsurance benefit recognized | (85 | ) | (13 | ) | (314 | ) | ||||||||||
| ||||||||||||||||
Pretax impact of deferred retroactive reinsurance | $ | 65 | $ | (13 | ) | $ | 189 | |||||||||
|
During 2013, unfavorable development was recorded for accident years 2000 and prior related to A&EP claims due to an allowanceincrease in ultimate claim severity and higher than anticipated claim reporting, as well as increased defense costs. Additionally, CNA recognized a provision for uncollectible third-party reinsurance which increased the expected recovery from NICO.
The fourth quarter of $100 million for doubtful accounts2014 A&EP reserve review was not completed in 2014 because additional information and analysis on billedinuring third party reinsurance receivables,recoveries were needed to finalize the review. The review was finalized in the second quarter of 2015. Unfavorable development was due to a decrease in anticipated future reinsurance recoveries related to asbestos claims and higher than expected severity on pollution claims. CNA adopted the second quarter of the year as discussed further below). the timing for all future annual A&EP claims actuarial reviews.
As of AugustDecember 31, 2010, 2015 and 2014, the cumulative amounts ceded under the LPT were $2.6 billion and $2.5 billion. The unrecognized deferred retroactive reinsurance benefit was $241 million and $176 million as of December 31, 2015 and 2014.
NICO deposited approximately $2.2 billion inestablished a collateral trust account as security for its obligations to CNA. NICO may reduceThe fair value of the collateral by the amounttrust account was $2.8 billion and $3.4 billion as of net A&EP claimDecember 31, 2015 and allocated claim adjustment expense payments.2014. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the full aggregate reinsurance
limit as well as certain of NICO’s performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third partythird-party reinsurers related to CNA’s A&EP claims.
The following table displays the impact of the Loss Portfolio Transfer on the 2010 Consolidated Statement of Income:
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
In connection with the transfer of billed third party reinsurance receivables related to A&EP claims and the coverage of credit risk afforded under the terms of the Loss Portfolio Transfer, CNA reduced its allowance for doubtful accounts on billed third party reinsurance receivables and ceded claim and allocated claim adjustment expense reserves by $200 million. This reduction is reflected in Other operating expenses presented above.
The Loss Portfolio Transfer is considered a retroactive reinsurance contract. In the event that the cumulative claim and allocated claim adjustment expenses ceded under the Loss Portfolio Transfer exceed the consideration paid, the resulting gain from such excess would be deferred. A cumulative amortization adjustment would be recognized in earnings in the period such excess arises so that the resulting deferred gain would reflect the balance that would have existed if the revised estimate was available at the inception date of the Loss Portfolio Transfer. This accounting generally results in a reserve charge because of the timing difference between the recognition of the gross adverse reserve development and the related ceded reinsurance benefit. However, there is no economic impact as long as the additional losses are within the limit under the contract.
The remaining amount available under the $4.0 billion aggregate limit of the Loss Portfolio Transfer was $2.0 billion on an incurred basis at December 31, 2012. This incurred amount includes $399 million of adverse prior year development since the contract effective date of January 1, 2010. Any future adverse prior year development in excess of approximately $230 million would put the Loss Portfolio Transfer into an overall gain position under retroactive reinsurance accounting. The net ultimate paid losses ceded under the Loss Portfolio Transfer were $661 million through December 31, 2012. The fair value of the collateral trust account at December 31, 2012 was $2.5 billion.
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 tables and discussion include the net prior year development recorded for CNA Specialty, CNA Commercial and Other segments for the years ended December 31, 2012, 2011 and 2010. The net prior year development presented below includes premium development due to its direct relationship to claim and claim adjustment expense reserve development. The net prior year development presented below also includes the impact of commutations and write-offs, but excludes the impact of increases or decreases in the allowance for doubtful accounts on reinsurance receivables. See Note 16 for further discussion of the allowance for doubtful accounts on reinsurance receivables.
Favorable net prior year development of $11 million, $29 million and $2 million was recorded in the Life & Group Non-Core segment for the years ended December 31, 2012, 2011 and 2010.
Year Ended December 31, 2012 | CNA Specialty | CNA Commercial | Other | Total | ||||||||||||
| ||||||||||||||||
(In millions) | ||||||||||||||||
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development | $ | (135) | $ | (46) | $ | (24) | $ | (205) | ||||||||
Pretax (favorable) unfavorable premium development | (15) | (35) | 4 | (46) | ||||||||||||
| ||||||||||||||||
Total pretax (favorable) unfavorable net prior year development | $ | (150) | $ | (81) | $ | (20) | $ | (251) | ||||||||
|
Year Ended December 31, 2011 | ||||||||||||||||
| ||||||||||||||||
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development | $ | (217) | $ | (204) | $ | (2) | $ | (423) | ||||||||
Pretax (favorable) unfavorable premium development | (28) | 21 | (1) | (8) | ||||||||||||
| ||||||||||||||||
Total pretax (favorable) unfavorable net prior year development | $ | (245) | $ | (183) | $ | (3) | $ | (431) | ||||||||
|
Year Ended December 31, 2010 | ||||||||||||||||
| ||||||||||||||||
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development | $ | (341) | $ | (304) | $ | 8 | $ | (637) | ||||||||
Pretax (favorable) unfavorable premium development | (3) | 48 | (2) | 43 | ||||||||||||
| ||||||||||||||||
Total pretax (favorable) unfavorable net prior year development | $ | (344) | $ | (256) | $ | 6 | $ | (594) | ||||||||
|
For the year ended December 31, 2012, favorable premium development was recorded for CNA Commercial primarily due to premium adjustments on auditable policies arising from increased exposures.
For the year ended December 31, 2011, favorable premium development was recorded for CNA Specialty primarily due to changes in estimates of exposures in medical professional liability tail coverages. Unfavorable premium development for CNA Commercial was recorded due to a further reduction of ultimate premium estimates relating to retrospectively rated policies, partially offset by premium adjustments on auditable policies due to increased exposures.
For the year ended December 31, 2010, unfavorable premium development for CNA Commercial was recorded due to a change in ultimate premium estimates relating to retrospectively rated policies and return premium on auditable policies due to reduced exposures.
CNA Specialty
The following table and discussion provide further detail of the net prior year claim and allocated claim adjustment expense reserve development (“development”) recorded for the CNA Specialty segment:
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||
| ||||||||||||
(In millions) | ||||||||||||
Medical professional liability | $ | (32) | $ | (92) | $ | (98) | ||||||
Other professional liability | (22) | (78) | (129) | |||||||||
Surety | (63) | (47) | (103) | |||||||||
Warranty | (5) | (13) | ||||||||||
Other | (13) | 13 | (11) | |||||||||
| ||||||||||||
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development | $ | (135) | $ | (217) | $ | (341) | ||||||
|
2012
Favorable development for medical professional liability was primarily due to better than expected loss emergence in accident years 2008 and prior.
Overall, favorable development for other professional liability was primarily due to better than expected loss emergence in accident years 2003 through 2007. Unfavorable development was recorded in CNA’s lawyer coverages in accident years 2010 and 2011 primarily due to increased frequency and severity.
Favorable development for surety coverages was primarily due to better than expected loss emergence in accident years 2010 and prior.
Other includes standard property and casualty coverages provided to CNA Specialty customers. Overall, favorable development for other coverages was primarily due to favorable loss emergence in property and workers’ compensation coverages in accident years 2005 and subsequent. Unfavorable development was recorded in accident year 2009 primarily due to an unfavorable outcome on an individual general liability claim.
2011
Favorable development for medical professional liability was primarily due to favorable case incurred emergence in nurses, physicians, excess institutions and primary institutions in accident years 2008 and prior.
Favorable development for other professional liability was driven by better than expected loss emergence in the life agents, accountants, and architects & engineers business in accident years 2008 and prior. In addition, favorable development in CNA’s European book of business was primarily due to favorable outcomes on several large losses in financial directors and officers (“D&O”) and errors and omissions (“E&O”) coverages in accident years 2003 and prior.
Favorable development for surety coverages was primarily due to a decrease in the estimated loss on a large national contractor in accident year 2005 and better than expected loss emergence in accident years 2009 and prior.
Favorable development in warranty was driven by favorable policy year experience on an aggregate stop loss policy covering CNA’s non-insurance warranty subsidiary.
Unfavorable development for other coverages was primarily due to increased frequency of large claims in auto and workers’ compensation coverages in accident years 2009 and 2010.
2010
Overall, favorable development for medical professional liability was primarily due to lower than expected frequency of large losses, primarily in accident years 2007 and prior. This development amount also included unfavorable development in accident years 2008 and 2009 due to increased frequency of large losses related to medical products.
Overall, favorable development for other professional liability was recorded primarily in accident years 2007 and prior in D&O and E&O coverages due to several factors, including reduced frequency of large claims and the result of reviews of large claims. This development amount also included unfavorable development in employment practices liability, E&O and D&O coverages recorded in accident years 2008 and 2009, driven by the economic recession and higher unemployment.
Favorable development for surety coverages was primarily due to a decrease in the estimated loss on a large national contractor in accident year 2005 and lower than expected claim emergence in accident years 2008 and prior.
CNA Commercial
The following table and discussion provides further detail of development recorded for the CNA Commercial segment:
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||
| ||||||||||||
(In millions) | ||||||||||||
Commercial auto | $ 27 | $ (98) | $ (88) | |||||||||
General liability | (64) | (39) | (59) | |||||||||
Workers’ compensation | 15 | 36 | 47 | |||||||||
Property and other | (24) | (103) | (204) | |||||||||
| ||||||||||||
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development | $ (46) | $ (204) | $ (304) | |||||||||
|
2012
Unfavorable development for commercial auto coverages was primarily due to higher than expected loss emergence in accident years 2007 and subsequent and higher than expected frequency in accident year 2011.
Overall, favorable development for general liability coverages was primarily due to better than expected loss emergence in accident years 2006 and subsequent related to umbrella business and 2003 and prior related to large account business. Unfavorable development was recorded in accident years 2009 through 2011 related to several large losses.
Overall, unfavorable development for workers’ compensation was primarily due to increased medical severity in accident years 2010 and 2011 and the recognition of losses related to favorable premium development in accident year 2011. Favorable development was recorded in accident years 2001 and prior reflecting favorable experience.
Overall, favorable development for property and marine coverages was due to a favorable outcome on an individual claim in accident year 2005 and favorable loss emergence in non-catastrophe losses in accident years 2009 and 2010. Unfavorable development was recorded in accident year 2011 related to several large losses.
2011
Favorable development for commercial auto coverages was due to lower than expected severity on bodily injury claims and favorable claim emergence on umbrella policies in accident years 2006 and prior.
Favorable development in the general liability coverages was primarily due to favorable claim emergence in accident years 2007 and prior related to both primary and umbrella liability coverages.
Unfavorable development for workers’ compensation was related to increased medical severity in accident year 2010.
Overall, favorable development for property and other coverages was due to decreased frequency of large losses in commercial multi-peril coverages primarily in accident year 2010, favorable loss emergence related to catastrophe claims in accident year 2008 and favorable loss emergence related to non-catastrophe claims in accident years 2010 and prior. This development amount also included unfavorable development related to unallocated claim adjustment expenses.
2010
Favorable development for commercial auto coverages was primarily due to lower than expected frequency and severity trends in accident years 2009 and prior.
Overall, favorable development for general liability and umbrella coverages was primarily due to better than expected loss emergence in accident years 2006 and prior. This development amount also included unfavorable development, primarily driven by increased claim frequency in accident years 2004 and prior for excess workers’ compensation and in accident years 2008 and 2009 for a portion of CNA’s primary casualty surplus lines book. Unfavorable development was also recorded for accident years prior to 2001 related to mass tort claims, primarily as a result of increased defense costs on specific mass tort accounts, including amounts related to unallocated claim adjustment expenses.
Unfavorable development in workers’ compensation was related to increased severity of indemnity losses relative to expectations on claims related to Defense Base Act contractors, primarily in accident years 2008 and prior.
Favorable development was recorded for property and marine coverages. Favorable development on catastrophe claims was due to lower than expected incurred loss emergence, primarily in accident years 2008 and 2009. Favorable non-catastrophe development was due to lower than expected severity in accident years 2009 and prior. Favorable development in marine business was primarily due to decreased claim frequency and favorable cargo salvage recoveries in recent accident years as well as lower than expected severity for excess liability in accident years 2005 and prior. Favorable property and marine development in CNA’s European operation was due to lower than expected frequency of large claims primarily in accident year 2009.
Leases cover office facilities, machinery and computer equipment. The Company’s hotels in some instances are constructed on leased land. Rent expense amounted to $96$85 million, $91$94 million and $92$83 million for the years ended December 31, 2012, 20112015, 2014 and 2010.2013. The table below presents the future minimum lease payments to be made under non-cancelable operating leases along with lease and sublease minimum receipts to be received on owned and leased properties.
Future Minimum Lease | Future Minimum Lease | |||||||||||||||||||
Year Ended December 31 | Payments | Receipts | Payments | Receipts | ||||||||||||||||
|
|
| ||||||||||||||||||
(In millions) | ||||||||||||||||||||
2013 | $ | 66 | $ | 2 | ||||||||||||||||
2014 | 58 | |||||||||||||||||||
2015 | 49 | |||||||||||||||||||
2016 | 45 | $ | 59 | $ | 5 | |||||||||||||||
2017 | 35 | 53 | 5 | |||||||||||||||||
2018 | 51 | 5 | ||||||||||||||||||
2019 | 46 | 5 | ||||||||||||||||||
2020 | 43 | 4 | ||||||||||||||||||
Thereafter | 146 | 242 | 23 | |||||||||||||||||
|
|
| ||||||||||||||||||
Total | $ | 399 | $ | 2 | $ | 494 | $ | 47 | ||||||||||||
|
|
|
In connection with the planned relocation of CNA’s global headquarters, on February 12, 2016, CNA agreed to sell the current principal executive offices of CNA. Concurrently, CNA agreed to lease back the current office space until the relocation of the global headquarters under a separate lease agreement, which is expected to occur in 2018. These anticipated lease agreements include expected future minimum lease payments of $9 million in 2016, $10 million in 2017, $4 million in 2018, $0 in 2019, $5 million in 2020 and $138 million thereafter through the remainder of the seventeen year lease term on the new office space.
Note 10. Income Taxes
The Company and its eligible subsidiaries file a consolidated federal income tax return. The Company has entered into a separate tax allocation agreement with CNA, a majority-owned subsidiary in which its ownership exceeds 80%. The agreement provides that the Company will: (i) pay to CNA the amount, if any, by which the Company’s consolidated federal income tax is reduced by virtue of inclusion of CNA in the Company’s return or (ii) be paid by CNA an amount, if any, equal to the federal income tax that would have been payable by CNA if it had filed a separate consolidated return. The agreement may be canceled by either of the parties upon thirty days written notice.
For 20102013 through 2012,2015, the Internal Revenue Service (“IRS”) has accepted the Company into the Compliance Assurance Process (“CAP”), which is a voluntary program for large corporations. Under CAP, the IRS conducts a real-time audit and works contemporaneously with the Company to resolve any issues prior to the filing of the tax return. The Company believes this approach should reduce tax-related uncertainties, if any. Although the outcome of tax audits is always uncertain, the Company believes that any adjustments resulting from audits will not have a material impact on its results of operations, financial position and cash flows. The Company and/or its subsidiaries also file income tax returns in various state, local and foreign jurisdictions. These returns, with few exceptions, are no longer subject to examination by the various taxing authorities before 2008.2011.
Diamond Offshore, which is not included in the Company’s consolidated federal income tax return, files income tax returns in the U.S. federal, various state and foreign jurisdictions. Diamond Offshore’s 2009 and 2011 U.S. federal income tax returnsTax years that remain subject to examination.examination by these jurisdictions include years 2009 to 2015. The 20102013 federal income tax return is currently under examination. Tax years that remain subject to examination by the various other jurisdictions include years 2003 to 2011.
The current and deferred components of income tax expense (benefit), excluding taxes on discontinued operations, are as follows:
Year Ended December 31 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | ||||||||||||||||||||
|
|
| ||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||
Income tax expense (benefit): | ||||||||||||||||||||||||||
Federal: | ||||||||||||||||||||||||||
Current | $ | 183 | $ | 127 | $ | 154 | $ | 79 | $ | 370 | $ | 705 | ||||||||||||||
Deferred | (18) | 246 | 465 | (234 | ) | (23 | ) | (232 | ) | |||||||||||||||||
State and city: | ||||||||||||||||||||||||||
Current | 19 | 10 | 21 | 21 | 12 | 19 | ||||||||||||||||||||
Deferred | (5) | 14 | 15 | 5 | 6 | 1 | ||||||||||||||||||||
Foreign | 110 | 135 | 239 | 86 | 92 | 163 | ||||||||||||||||||||
|
|
| ||||||||||||||||||||||||
Total | $ | 289 | $ | 532 | $ | 894 | $ | (43 | ) | $ | 457 | $ | 656 | |||||||||||||
|
|
|
The components of U.S. and foreign income before income tax and a reconciliation between the federal income tax expense at statutory rates and the actual income tax expense is as follows:
Year Ended December 31 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | ||||||||||||||||||||||
| ||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Income before income tax: | ||||||||||||||||||||||||||||
U.S. | $ | 911 | $ | 1,466 | $ | 2,236 | $ | 543 | $ | 1,499 | $ | 1,945 | ||||||||||||||||
Foreign | 488 | 760 | 666 | (299 | ) | 311 | 332 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Total | $ | 1,399 | $ | 2,226 | $ | 2,902 | $ | 244 | $ | 1,810 | $ | 2,277 | ||||||||||||||||
|
| |||||||||||||||||||||||||||
Income tax expense at statutory rate | $ | 490 | $ | 779 | $ | 1,016 | $ | 86 | $ | 633 | $ | 797 | ||||||||||||||||
Increase (decrease) in income tax expense resulting from: | ||||||||||||||||||||||||||||
Exempt investment income | (86) | (76) | (85) | (126 | ) | (121 | ) | (99 | ) | |||||||||||||||||||
Foreign related tax differential | (152) | (203) | (105) | (18 | ) | (48 | ) | (117 | ) | |||||||||||||||||||
Amortization of deferred charges associated with intercompany rig sales to other tax jurisdictions | 31 | 30 | 30 | |||||||||||||||||||||||||
Amortization of deferred charges associated with intercompany | ||||||||||||||||||||||||||||
rig sales to other tax jurisdictions | 38 | 44 | 31 | |||||||||||||||||||||||||
Taxes related to domestic affiliate | 25 | 55 | 34 | (10 | ) | 14 | 19 | |||||||||||||||||||||
Partnership earnings not subject to taxes | (43) | (27) | (33) | (38 | ) | (39 | ) | (38 | ) | |||||||||||||||||||
Unrecognized tax benefit | 6 | (8) | 31 | |||||||||||||||||||||||||
Unrecognized tax benefit (expense) | 1 | (42 | ) | 66 | ||||||||||||||||||||||||
Other (a) | 18 | (18) | 6 | 24 | 16 | (3 | ) | |||||||||||||||||||||
Income tax expense (benefit) | $ | (43 | ) | $ | 457 | $ | 656 | |||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Income tax expense | $ | 289 | $ | 532 | $ | 894 | ||||||||||||||||||||||
|
(a) | Includes state and local taxes, retroactive tax law changes, adjustments to prior year estimates and other non-deductible expenses. |
Provision has been made for the expected U.S. federal income tax liabilities applicable to undistributed earnings of subsidiaries, except for certain subsidiaries for which the Company intends to invest the undistributed earnings indefinitely to finance foreign activities, or recover such undistributed earnings tax-free. The determination of the amount of the unrecognized deferred tax liability on approximately $2.0 billion of undistributed earnings related to foreign subsidiaries is not practicable.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding tax carryforwards and interest and penalties, is as follows:
Year Ended December 31 | 2012 | 2011 | 2015 | 2014 | 2013 | |||||||||||||||||||
| ||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Balance at January 1 | $ | 41 | $ | 46 | $ | 57 | $ | 91 | $ | 67 | ||||||||||||||
Additions based on tax positions related to the current year | 7 | 1 | 7 | 6 | 2 | |||||||||||||||||||
Additions for tax positions related to a prior year | 2 | 31 | ||||||||||||||||||||||
Reductions for tax positions related to a prior year | (2) | (2) | (3 | ) | (35 | ) | (7 | ) | ||||||||||||||||
Lapse of statute of limitations | (4) | (7 | ) | (5 | ) | (2 | ) | |||||||||||||||||
| ||||||||||||||||||||||||
Balance at December 31 | $ | 48 | $ | 41 | $ | 54 | $ | 57 | $ | 91 | ||||||||||||||
|
|
At December 31, 20122015, 2014 and 2011, there were $482013, $49 million, $51 million and $41$76 million of unrecognized tax benefits related to Diamond Offshore that if recognized would affect the effective tax rate.rate if recognized.
The Company recognizes interest accrued related to: (i) unrecognized tax benefits in Interest expense and (ii) tax refund claims in Other revenues on the Consolidated Statements of Income. The Company recognizes penalties in Income tax expense on the Consolidated Statements of Income. Penalties and interestInterest amounts recorded by the Company were insignificant for the years ended December 31, 2012, 20112015, 2014 and 2010.2013. The Company recorded income tax expense of $2 million and $38 million for the years ended December 31, 2015 and 2013 and income tax benefit of $22 million for the year ended December 31, 2014 related to penalties.
During 2013, Diamond Offshore received notification from the Egyptian tax authorities proposing a $1.2 billion increase in taxable income for the years 2006 to 2008. In December of 2013, Diamond Offshore accrued an additional $57 million of expense for uncertain tax positions in Egypt for all open years. During the first quarter of 2014, Diamond Offshore settled certain disputes for the years 2006 through 2008 with the Egyptian tax authorities, resulting in a net reduction to income tax expense of $17 million. One issue for the 2006 through 2008 period remains open, which Diamond Offshore appealed. The court case is scheduled to occur in the first quarter of 2016. Diamond Offshore has sought assistance from an agency of the U.S. Treasury Department, pursuant to international tax treaties and continues to believe that its position will, more likely than not, be sustained. However, if Diamond Offshore’s position is not sustained, tax expense and related penalties would increase by approximately $53 million related to this issue for the 2006 through 2008 tax years as of December 31, 2015.
During the third quarter of 2014, Diamond Offshore reversed $36 million of reserves for uncertain tax positions, including $6 million for interest and $11 million for penalties, related to a favorable court decision in Brazil resulting in the closure of the 2004 and 2005 tax years, approval from Malaysian tax authorities for the settlement of tax liabilities and penalties for the years 2003 through 2008 and the expiration of the statute of limitations in Mexico for the 2008 tax year.
Due to the 2015 expiration of the statute of limitations in Mexico for the 2009 tax year for one of Diamond Offshore’s subsidiaries operating in Mexico, Diamond Offshore reversed an $11 million accrual for an uncertain tax position of which $4 million is interest and $1 million is penalty.
The following table summarizes deferred tax assets and liabilities:
December 31 | 2012 | 2011 | 2015 | 2014 | ||||||||||||||
| ||||||||||||||||||
(In millions) | ||||||||||||||||||
Deferred tax assets: | ||||||||||||||||||
Insurance reserves: | ||||||||||||||||||
Property and casualty claim and claim adjustment expense reserves | $ | 352 | $ | 419 | $ | 178 | $ | 265 | ||||||||||
Unearned premium reserves | 162 | 142 | 230 | 187 | ||||||||||||||
Receivables | 62 | 75 | 30 | 37 | ||||||||||||||
Employee benefits | 524 | 449 | 419 | 432 | ||||||||||||||
Life settlement contracts | 45 | 61 | 48 | 46 | ||||||||||||||
Net loss and tax credits carried forward | 178 | 135 | ||||||||||||||||
Deferred retroactive reinsurance benefit | 84 | 61 | ||||||||||||||||
Net operating loss carryforwards | 245 | 321 | ||||||||||||||||
Tax credit carryforwards | 131 | 93 | ||||||||||||||||
Basis differential in investment in subsidiary | 26 | 29 | 19 | 21 | ||||||||||||||
Other | 205 | 227 | 282 | 209 | ||||||||||||||
| ||||||||||||||||||
Deferred tax assets | 1,554 | 1,537 | ||||||||||||||||
| ||||||||||||||||||
Total deferred tax assets | 1,666 | 1,672 | ||||||||||||||||
Valuation allowance | (147 | ) | (48 | ) | ||||||||||||||
Net deferred tax assets | 1,519 | 1,624 | ||||||||||||||||
Deferred tax liabilities: | ||||||||||||||||||
Deferred acquisition costs | (238) | (241) | (117 | ) | (226 | ) | ||||||||||||
Net unrealized gains | (733) | (521) | (166 | ) | (469 | ) | ||||||||||||
Property, plant and equipment | (691) | (790) | (998 | ) | (1,132 | ) | ||||||||||||
Basis differential in investment in subsidiary | (565) | (490) | (428 | ) | (472 | ) | ||||||||||||
Other liabilities | (167) | (117) | (173 | ) | (204 | ) | ||||||||||||
| ||||||||||||||||||
Deferred tax liabilities | (2,394) | (2,159) | (1,882 | ) | (2,503 | ) | ||||||||||||
|
| |||||||||||||||||
Net deferred tax liability (a) | $ | (363 | ) | $ | (879 | ) | ||||||||||||
Net deferred tax liability | $ | (840) | $ | (622) | ||||||||||||||
|
As of December 31, 2012, the Company has federal
(a) | Includes $19 and $14 of deferred tax assets reflected in Other assets in the Consolidated Balance Sheets at December 31, 2015 and 2014. |
Federal net operating loss carryforwards with a tax effect of approximately $40$138 million which expire in 20142034 and 20322035. Net operating loss carryforwards in foreign tax jurisdictions of $66 million expire between 2020 and federal2025 and $32 million can be carried forward indefinitely. Federal tax credit carryforwards of $100$83 million have indefinite lives and $46 million of which $95 millionforeign tax credit carryforwards expire between 2019in 2024 and 2022. Diamond Offshore has foreign operating loss carryforwards with a tax effect of approximately $24 million, of which $8 million have an indefinite life with the remaining benefits expiring between 2013 and 2021.2025.
Although realization of deferred tax assets is not assured, management believes it is more likely than not that the recognized deferred tax assets will be realized through recoupment of ordinary and capital taxes paid in prior carryback years and through future earnings, reversal of existing temporary differences and available tax planning strategies.
The American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013. The act extends,extended, through 2013, several expired or expiring temporary business provisions, commonly referred to as “extenders”,“extenders,” which arewere retroactively extended to the beginning of 2012. As required by GAAP, the effects of new legislation are recognized when signed into law. The Company expects to reduce the first quarter ofreduced 2013 tax expense by approximately $28 million as a result of recognizing the 2012 effect of the extenders.
December 31 | 2012 | 2011 | 2015 | 2014 | ||||||||||||||
| ||||||||||||||||||
(In millions) | ||||||||||||||||||
Loews Corporation (Parent Company): | ||||||||||||||||||
Senior: | ||||||||||||||||||
5.3% notes due 2016 (effective interest rate of 5.4%) (authorized, $400) | $ | 400 | $ | 400 | $ | 400 | $ | 400 | ||||||||||
2.6% notes due 2023 (effective interest rate of 2.8%) (authorized, $500) | 500 | 500 | ||||||||||||||||
6.0% notes due 2035 (effective interest rate of 6.2%) (authorized, $300) | 300 | 300 | 300 | 300 | ||||||||||||||
4.1% notes due 2043 (effective interest rate of 4.3%) (authorized, $500) | 500 | 500 | ||||||||||||||||
CNA Financial: | ||||||||||||||||||
Senior: | ||||||||||||||||||
8.4% notes due 2012 (effective interest rate of 8.6%) (authorized, $100) | 70 | |||||||||||||||||
5.9% notes due 2014 (effective interest rate of 6.0%) (authorized, $549) | 549 | 549 | ||||||||||||||||
6.5% notes due 2016 (effective interest rate of 6.6%) (authorized, $350) | 350 | 350 | 350 | 350 | ||||||||||||||
7.0% notes due 2018 (effective interest rate of 7.1%) (authorized, $150) | 150 | 150 | 150 | 150 | ||||||||||||||
7.4% notes due 2019 (effective interest rate of 7.5%) (authorized, $350) | 350 | 350 | 350 | 350 | ||||||||||||||
5.9% notes due 2020 (effective interest rate of 6.0%) (authorized, $500) | 500 | 500 | 500 | 500 | ||||||||||||||
5.8% notes due 2021 (effective interest rate of 5.9%) (authorized, $400) | 400 | 400 | 400 | 400 | ||||||||||||||
7.3% debentures due 2023 (effective interest rate of 7.3%) (authorized, $250) | 243 | 243 | 243 | 243 | ||||||||||||||
Variable rate note due 2036 (effective interest rate of 3.7%) | 30 | |||||||||||||||||
Other senior debt (effective interest rates approximate 2.9%) | 13 | 13 | ||||||||||||||||
4.0% notes due 2024 (effective interest rate of 4.0%) (authorized, $550) | 550 | 550 | ||||||||||||||||
Variable rate note due 2036 (effective interest rate of 3.8% and 3.5%) | 30 | 30 | ||||||||||||||||
Capital lease obligation | 4 | 2 | ||||||||||||||||
Diamond Offshore: | ||||||||||||||||||
Senior: | ||||||||||||||||||
5.2% notes due 2014 (effective interest rate of 5.2%) (authorized, $250) | 250 | 250 | ||||||||||||||||
Commercial paper (weighted average interest rate of 0.9%) | 287 | |||||||||||||||||
4.9% notes due 2015 (effective interest rate of 5.0%) (authorized, $250) | 250 | 250 | 250 | |||||||||||||||
5.9% notes due 2019 (effective interest rate of 6.0%) (authorized, $500) | 500 | 500 | 500 | 500 | ||||||||||||||
3.5% notes due 2023 (effective interest rate of 3.6%) (authorized, $250) | 250 | 250 | ||||||||||||||||
5.7% notes due 2039 (effective interest rate of 5.8%) (authorized, $500) | 500 | 500 | 500 | 500 | ||||||||||||||
4.9% notes due 2043 (effective interest rate of 5.0%) (authorized, $750) | 750 | 750 | ||||||||||||||||
Boardwalk Pipeline: | ||||||||||||||||||
Senior: | ||||||||||||||||||
Variable rate revolving credit facility due 2017 (effective interest rate of 1.3% and 0.5%) | 302 | 458 | ||||||||||||||||
8.0% subordinated loan due 2022 | 100 | |||||||||||||||||
Variable rate term loan due 2016 (effective interest rate of 1.8%) | 200 | |||||||||||||||||
Variable rate term loan due 2017 (effective interest rate of 2.0%) | 225 | |||||||||||||||||
5.8% notes due 2012 (effective interest rate of 6.0%) (authorized, $225) | 225 | |||||||||||||||||
Variable rate revolving credit facility due 2020 (effective interest rate of 1.7% and 1.5%) | 375 | 120 | ||||||||||||||||
Variable rate term loan due 2017 (effective interest rate of 1.9%) | 200 | |||||||||||||||||
4.6% notes due 2015 (effective interest rate of 5.1%) (authorized, $250) | 250 | 250 | 250 | |||||||||||||||
5.1% notes due 2015 (effective interest rate of 5.2%) (authorized, $275) | 275 | 275 | 275 | |||||||||||||||
5.9% notes due 2016 (effective interest rate of 6.0%) (authorized, $250) | 250 | 250 | 250 | 250 | ||||||||||||||
5.5% notes due 2017 (effective interest rate of 5.6%) (authorized, $300) | 300 | 300 | 300 | 300 | ||||||||||||||
6.3% notes due 2017 (effective interest rate of 6.4%) (authorized, $275) | 275 | 275 | 275 | 275 | ||||||||||||||
5.2% notes due 2018 (effective interest rate of 5.4%) (authorized, $185) | 185 | 185 | 185 | 185 | ||||||||||||||
5.8% notes due 2019 (effective interest rate of 5.9%) (authorized, $350) | 350 | 350 | 350 | 350 | ||||||||||||||
4.5% notes due 2021 (effective interest rate of 5.0%) (authorized, $440) | 440 | 440 | 440 | 440 | ||||||||||||||
4.0% notes due 2022 (effective interest rate of 4.4%) (authorized, $300) | 300 | 300 | 300 | |||||||||||||||
3.4% notes due 2023 (effective interest rate of 3.5%) (authorized, $300) | 300 | 300 | 300 | |||||||||||||||
5.0% notes due 2024 (effective interest rate of 5.2%) (authorized, $600 and $350) | 600 | 350 | ||||||||||||||||
7.3% debentures due 2027 (effective interest rate of 8.1%) (authorized, $100) | 100 | 100 | 100 | 100 | ||||||||||||||
HighMount: | ||||||||||||||||||
Senior: | ||||||||||||||||||
Variable rate credit facility due 2016 (effective interest rate of 3.4%) | 710 | 700 | ||||||||||||||||
Capital lease obligation | 10 | 10 | ||||||||||||||||
Loews Hotels: | ||||||||||||||||||
Senior debt, principally mortgages (effective interest rates approximate 3.9%) | 209 | 213 | ||||||||||||||||
Elimination of intercompany debt | (100) | |||||||||||||||||
| ||||||||||||||||||
Senior debt, principally mortgages (effective interest rates approximate 4.1%) | 598 | 506 | ||||||||||||||||
9,256 | 9,046 | 10,647 | 10,736 | |||||||||||||||
Less unamortized discount | 46 | 45 | 64 | 68 | ||||||||||||||
| ||||||||||||||||||
Debt | $ | 9,210 | $ | 9,001 | $ | 10,583 | $ | 10,668 | ||||||||||
|
|
December 31, 2012 | Principal | Unamortized Discount | Net | Short Term Debt | Long Term Debt | ||||||||||||||||||||||||||||||||||||||||||
|
| Unamortized | Short Term | Long Term | |||||||||||||||||||||||||||||||||||||||||||
December 31, 2015 | Principal | Discount | Net | Debt | Debt | ||||||||||||||||||||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Loews Corporation | $ | 700 | $ | 7 | $ | 693 | $ | 693 | $ | 1,700 | $ | 19 | $ | 1,681 | $ | 400 | $ | 1,281 | |||||||||||||||||||||||||||||
CNA Financial | 2,585 | 15 | 2,570 | $ | 13 | 2,557 | 2,577 | 11 | 2,566 | 351 | 2,215 | ||||||||||||||||||||||||||||||||||||
Diamond Offshore | 1,500 | 11 | 1,489 | 1,489 | 2,287 | 18 | 2,269 | 287 | 1,982 | ||||||||||||||||||||||||||||||||||||||
Boardwalk Pipeline | 3,552 | 13 | 3,539 | 3,539 | 3,485 | 16 | 3,469 | 3,469 | |||||||||||||||||||||||||||||||||||||||
HighMount | 710 | 710 | 710 | ||||||||||||||||||||||||||||||||||||||||||||
Loews Hotels | 209 | 209 | 6 | 203 | 598 | 598 | 2 | 596 | |||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 9,256 | $ | 46 | $ | 9,210 | $ | 19 | $ | 9,191 | $ | 10,647 | $ | 64 | $ | 10,583 | $ | 1,040 | $ | 9,543 | |||||||||||||||||||||||||||
|
|
At December 31, 2012,2015, the aggregate of long term debt maturing in each of the next five years is approximately as follows: $19 million in 2013, $820 million in 2014, $948 million in 2015, $1,712 million$1.1 billion in 2016, $1,104$657 million in 2017, $455 million in 2018, $1.2 billion in 2019, $1.2 billion in 2020, and $4,653 million$6.0 billion thereafter. Long term debt is generally redeemable in whole or in part at the greater of the principal amount or the net present value of scheduled payments discounted at the specified treasury rate plus a margin.
CNA Financial
In AprilCNA is a member of 2012,the Federal Home Loan Bank of Chicago (“FHLBC”). FHLBC membership provides participants with access to additional sources of liquidity through various programs and services. As a requirement of membership in the FHLBC, CNA held $17 million of FHLBC stock as of December 31, 2015, giving it access to approximately $349 million of additional liquidity. As of December 31, 2015, CNA has no outstanding borrowings from the FHLBC.
During the third quarter of 2015, CNA entered into a $250 million revolvingnew credit agreement with a syndicate of banks and simultaneously terminated the previous credit agreement. The new credit agreement established a five-year $250 million senior unsecured revolving credit facility which matures on April 19, 2016 bears interest at London Interbank Offered Rate plus applicable margin and is intended tomay be used for general businesscorporate purposes. At CNA’s election, the commitments under the unsecurednew credit facilityagreement may be increased from time to time up to an additional aggregate amount of $100 million and the new credit agreement includes two optional one-year extensions are available prior to the first and second anniversary of the closing.closing date, subject to applicable consents. As of December 31, 2012,2015 and 2014, there were no outstanding borrowings under the credit facilityagreements and CNA was in compliance with all covenants.
Diamond Offshore
Diamond Offshore has a $1.5 billion senior unsecured revolving credit facility. In September of 2012,October 2015, Diamond Offshore entered into a $750 millionan extension agreement of the revolving credit agreementfacility which, among other things, provides for general business purposes.a one-year extension of the maturity date for most of the lenders. The credit agreement, which matures on September 28, 2017, bears interest at Diamond Offshore’s option on either an alternate base rate or Eurodollar rate, as defined in the credit agreement, plus an applicable margin. As of December 31, 2012, there were no borrowings under theextended revolving credit facility matures in October 2020, except for $40 million of commitments that mature in March 2019 and $60 million of commitments that mature in October 2019. In addition, Diamond Offshore was in compliance with all covenants.
Boardwalk Pipeline
In April of 2012, Boardwalk Pipeline entered into a Second Amended and Restated Revolving Credit Agreement (“Amended Credit Agreement”) with aggregate lendingalso has the option to increase the revolving commitments of $1.0 billion. The Amended Credit Agreement has a maturity date of April 27, 2017. As of December 31, 2012, Boardwalk Pipeline had $302 million of loans outstanding under the revolving credit facility by up to an additional $500 million from time to time, upon receipt of additional commitments from new or existing lenders, and to request one additional one-year extension of the maturity date. Up to $250 million of the facility may be used for the issuance of performance or other standby letters of credit and up to $100 million may be used for swingline loans. At December 31, 2015 and 2014, there were no amounts outstanding under the credit agreement.
As of December 31, 2015, Diamond Offshore had $287 million outstanding of commercial paper supported by its existing $1.5 billion revolving credit facility. As of December 31, 2015, the commercial paper notes had a weighted average interest rate of 0.9% and a weighted average remaining term of 5.8 days.
In July of 2015, Diamond Offshore repaid $250 million aggregate principal amount of its 4.9% senior notes due July 1, 2015, primarily with funds obtained through the issuance of additional commercial paper.
Boardwalk Pipeline
Boardwalk Pipeline intends to refinance all of the outstanding $250 million aggregate principal amount of 5.9% notes due 2016 on a long term basis and has sufficient available capacity under their revolving credit facility to extend the amount that would otherwise come due in less than one year. The Boardwalk Pipeline Senior Notes due in 2016 are included in Long term debt on the Consolidated Balance Sheets.
In March of 2015, Boardwalk Pipeline completed a public offering of an additional $250 million aggregate principal amount of its 5.0% senior notes due December 15, 2024. Boardwalk Pipeline originally issued $350 million aggregate principal amount of its 5.0% senior notes due December 15, 2024 in November of 2014. During 2015, Boardwalk Pipeline used the net proceeds from this offering to retire all of the outstanding $250 million aggregate principal amount of 4.6% notes that matured on June 1, 2015 and repaid at maturity the entire $275 million aggregate principal amount of its 5.1% senior notes.
In May of 2015, Boardwalk Pipeline entered into an amended revolving credit agreement having aggregate lending commitments of $1.5 billion and a maturity date of May 26, 2020. Outstanding borrowings under Boardwalk’s revolving credit facility as of December 31, 2015 and 2014 were $375 million and $120 million with a weighted-average interest rate on the borrowings of 1.3%1.7% and had no letters of credit issued. As of1.5%. At December 31, 2012,2015, Boardwalk Pipeline was in compliance with all covenants under the credit facility and had available borrowing capacity of $698 million.$1.1 billion.
In June of 2012, Boardwalk Pipeline issued $300 million principal amount of 4.0% senior notes due June 15, 2022.
In August of 2012,During 2015, Boardwalk Pipeline repaid at maturity the entire $225$200 million principal amount of its 5.8% senior notes. outstanding borrowings and terminated all related commitments of their variable-rate term loan.
Loews Hotels
In September of 2012, Boardwalk Pipeline repaid in full its $200 million variable rate term loan due December 1, 2016.
In October of 2012, Boardwalk Pipeline2015, Loews Hotels entered into a $225an $87 million variable rate termmortgage loan agreement which bears interest at London Interbank Offered Rate (“LIBOR”) plus an applicable margin. The mortgage loan agreement is due October 1, 20172018 and includes two optional one-year extensions, subject to fund the acquisition of Louisiana Midstream.applicable conditions.
In November of 2012, Boardwalk Pipeline issued $300 million principal amount of 3.4% senior notes due February 1, 2023. The proceeds were utilized to repay $100 million of borrowings under its subordinated loan agreement with BPHC and to reduce outstanding borrowings under its revolving credit facility.
Accumulated other comprehensive income
The components oftables below display the changes in Accumulated other comprehensive income (loss)(“AOCI”) by component for the years ended December 31, 2013, 2014 and 2015:
OTTI Gains (Losses) | Unrealized Gains (Losses) on Investments | Discontinued Operations | Cash Flow Hedges | Pension Liability | Foreign Currency Translation | Total Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||||||
Balance, January 1, 2013 | $ | 18 | $ | 1,233 | $ | 20 | $ | (4 | ) | $ | (732 | ) | $ | 143 | $ | 678 | |||||||||||||||||||
Other comprehensive income (loss) before reclassifications, after tax of $(3), $354, $3, $4, $(165) and $0 | 6 | (658 | ) | (6 | ) | (6 | ) | 307 | (11 | ) | (368 | ) | |||||||||||||||||||||||
Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $10, $10, $(2), $(12) and $0 | (21 | ) | (17 | ) | 6 | 22 | (10 | ) | |||||||||||||||||||||||||||
Other comprehensive income (loss) | 6 | (679 | ) | (23 | ) | - | 329 | (11 | ) | (378 | ) | ||||||||||||||||||||||||
Issuance of equity securities by subsidiary | 2 | 2 | |||||||||||||||||||||||||||||||||
Amounts attributable to noncontrolling interests | (1 | ) | 68 | (31 | ) | 1 | 37 | ||||||||||||||||||||||||||||
Balance, December 31, 2013 | 23 | 622 | (3 | ) | (4 | ) | (432 | ) | 133 | 339 | |||||||||||||||||||||||||
Sale of subsidiaries | (5 | ) | (15 | ) | 20 | - | |||||||||||||||||||||||||||||
Other comprehensive income (loss) before reclassifications, after tax of $(8), $(132), $(3), $1, $132 and $0 | 15 | 295 | 2 | (2 | ) | (244 | ) | (94 | ) | (28 | ) | ||||||||||||||||||||||||
Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $10, $16, $0, $(7) and $0 | (28 | ) | (21 | ) | (1 | ) | 9 | (41 | ) | ||||||||||||||||||||||||||
Other comprehensive income (loss) | 15 | 267 | (19 | ) | (3 | ) | (235 | ) | (94 | ) | (69 | ) | |||||||||||||||||||||||
Amounts attributable to noncontrolling interests | (1 | ) | (28 | ) | 2 | 1 | 26 | 10 | 10 | ||||||||||||||||||||||||||
Balance, December 31, 2014 | 32 | 846 | - | (6 | ) | (641 | ) | 49 | 280 | ||||||||||||||||||||||||||
Other comprehensive loss before reclassifications, after tax of $13, $313, $0, $1, $16 and $0 | (23 | ) | (600 | ) | (2 | ) | (31 | ) | (139 | ) | (795 | ) | |||||||||||||||||||||||
Reclassification of losses from accumulated other comprehensive income, after tax of $(8), $(31), $0, $(2), $(11) and $0 | 14 | 43 | 7 | 13 | 77 | ||||||||||||||||||||||||||||||
Other comprehensive income (loss) | (9 | ) | (557 | ) | - | 5 | (18 | ) | (139 | ) | (718 | ) | |||||||||||||||||||||||
Issuance of equity securities by subsidiary | 1 | 1 | |||||||||||||||||||||||||||||||||
Amounts attributable to noncontrolling interests | 1 | 58 | (2 | ) | 9 | 14 | 80 | ||||||||||||||||||||||||||||
Balance, December 31, 2015 | $ | 24 | $ | 347 | $ | - | $ | (3 | ) | $ | (649 | ) | $ | (76 | ) | $ | (357 | ) |
Amounts reclassified from AOCI shown above are reported in Net income as follows:
Unrealized Gains (Losses) on Investments | OTTI Gains/ (Losses) | Cash Flow Hedges | Foreign Currency Translation | Pension Liability | Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||
| ||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Balance, January 1, 2010 | $ | 173 | $ | (144) | $ | (81) | $ | 77 | $ | (444) | $ | (419) | ||||||||||||
Unrealized holding gains on investments, after tax of $(319), $(32) and $(30) | 585 | 59 | 54 | 698 | ||||||||||||||||||||
Adjustments for items included in Net income, after tax of $48, $(15) and $(4) | (89) | 27 | 7 | (55) | ||||||||||||||||||||
Foreign currency translation adjustment | 49 | 49 | ||||||||||||||||||||||
Pension liability adjustment, after tax of $(15) | 29 | 29 | ||||||||||||||||||||||
Amounts attributable to noncontrolling interests | (62) | (7) | 2 | (5) | (72) | |||||||||||||||||||
| ||||||||||||||||||||||||
Balance, December 31, 2010 | 607 | (65) | (18) | 121 | (415) | 230 | ||||||||||||||||||
Acquisition of CNA Surety noncontrolling interests and disposition of FICOH ownership interest | 2 | 8 | 10 | |||||||||||||||||||||
Unrealized holding gains on investments, after tax of $(211), $23 and $(13) | 377 | (44) | 20 | 353 | ||||||||||||||||||||
Adjustments for items included in Net income, after tax of $8, $(29) and $(10) | (15) | 54 | 19 | �� | 58 | |||||||||||||||||||
Foreign currency translation adjustment | (14) | (14) | ||||||||||||||||||||||
Pension liability adjustment, after tax of $126 | (238) | (238) | ||||||||||||||||||||||
Issuance of equity securities by subsidiary | 1 | 1 | ||||||||||||||||||||||
Amounts attributable to noncontrolling interests | (42) | (2) | 4 | 1 | 23 | (16) | ||||||||||||||||||
| ||||||||||||||||||||||||
Balance, December 31, 2011 | 929 | (57) | 25 | 108 | (621) | 384 | ||||||||||||||||||
Unrealized holding gains on investments, after tax of $(151), $(54) and $(17) | 281 | 102 | 26 | 409 | ||||||||||||||||||||
Adjustments for items included in Net income, after tax of $(31), $10 and $20 | 58 | (18) | (34) | 6 | ||||||||||||||||||||
Foreign currency translation adjustment | 39 | 39 | ||||||||||||||||||||||
Pension liability adjustment, after tax of $68 | (132) | (132) | ||||||||||||||||||||||
Issuance of equity securities by subsidiary | 5 | 5 | ||||||||||||||||||||||
Amounts attributable to noncontrolling interests | (35) | (9) | (1) | (4) | 16 | (33) | ||||||||||||||||||
| ||||||||||||||||||||||||
Balance, December 31, 2012 | $ | 1,233 | $ | 18 | $ | 16 | $ | 143 | $ | (732) | $ | 678 | ||||||||||||
|
Major Category of AOCI | Affected Line Item | |
OTTI gains (losses) | Investment gains (losses) | |
Unrealized gains (losses) on investments | Investment gains (losses) | |
Unrealized gains (losses) and cash flow hedges related to discontinued operations | Discontinued operations, net | |
Cash flow hedges | Other revenues and Contract drilling expenses | |
Pension liability | Other operating expenses |
Common Stock Dividends
Dividends of $0.25 per share on the Company’s common stock were declared and paid in 2015, 2014 and 2013.
There are no restrictions on the Company’s retained earnings or net income with regard to payment of dividends. However, as a holding company, Loews relies upon invested cash balances and distributions from its subsidiaries to generate the funds necessary to declare and pay any dividends to holders of its common stock. The ability of the Company’s subsidiaries to pay dividends is subject to, among other things, the availability of sufficient earnings and funds in such subsidiaries, compliance with covenants in their respective loan agreements and applicable state laws, including in the case of the insurance subsidiaries of CNA, laws and rules governing the payment of dividends by regulated insurance companies. See Note 13 for a discussion of the regulatory restrictions on CNA’s availability to pay dividends.
Subsidiary Equity Transactions
In February, August and OctoberThe Company purchased 1.1 million shares of 2012, Diamond Offshore common stock at an aggregate cost of $29 million during 2015. The Company’s percentage ownership interest in Diamond Offshore increased as a result of these transactions, from 52% to 53%. The Company’s purchase price of the shares was lower than the carrying value of its investment in Diamond Offshore, resulting in an increase to Additional paid-in capital (“APIC”) of $5 million.
Boardwalk Pipeline sold 9.2 million, 11.6 million and 11.27.1 million common units in public offeringsunder an equity distribution agreement with certain broker-dealers during 2015 and received net proceeds of $250 million, $318 million and $298$115 million, including $5a $2 million $7 million and $6 million contributionscontribution from usthe Company to maintain ourits 2% general partner interest. The Company’s percentage ownership interest in Boardwalk Pipeline declined as a result of these transactions,this transaction, from 64%53% to 55%51%. The Company’s carrying value exceeded the issuance price of the common units, exceeded the Company’s carrying value, resulting in an increasea decrease to APIC of $115$2 million and an increase to AOCI of $5$1 million.
Treasury Share RepurchasesStock
The Company repurchased 5.633.3 million, 18.214.6 million and 11.04.9 million shares of Loewsits common stock at aggregate costs of $222 million, $718$1.3 billion, $622 million and $405$218 million during the years ended December 31, 2012, 20112015, 2014 and 2010.2013. As of December 31, 2015 all outstanding treasury stock was retired. Upon retirement, treasury stock iswas eliminated through a reduction to common stock, APIC and retained earnings.
Note 13. Statutory Accounting Practices
CNA’s insurance subsidiaries are domiciled in various jurisdictions. These subsidiaries prepare statutory financial statements in accordance with accounting practices prescribed or permitted by the respective jurisdictions’ insurance regulators. Domestic prescribed statutory accounting practices are set forth in a variety of publications of the National Association of Insurance Commissioners (“NAIC”) as well as state laws, regulations and general administrative rules. These statutory accounting principles vary in certain respects from GAAP. In converting from statutory accounting principles to GAAP, the more significant adjustments include deferral of policy acquisition costs and the inclusion of net unrealized holding gains or losses in shareholders’ equity relating to certain fixed maturity securities.
CNA’s ability to pay dividends and other credit obligations is significantly dependent on receipt of dividends from CCC
CNA has a prescribed practice as it directly or indirectly ownsrelates to the accounting under Statement of Statutory Accounting Principles No. 62R (“SSAP No. 62R”),Property and Casualty Reinsurance, paragraphs 67 and 68 in conjunction with the 2010 loss portfolio transfer with NICO as further discussed in Note 8. The prescribed practice allows CNA to aggregate all significant subsidiaries. third party AE&P reinsurance balances administered by NICO in Schedule F and to utilize the loss portfolio transfer as collateral for the underlying third-party reinsurance balances for purposes of calculating the statutory reinsurance penalty. This prescribed practice increased statutory capital and surplus at December 31, 2015 by $90 million.
The long term care premium deficiency discussed in Note 1 was recorded on a GAAP basis. There was no premium deficiency for statutory accounting purposes. Statutory accounting principles requires the use of prescribed discount rates in calculating the reserves for long term care future policy benefits which are lower than the discount rates used on a GAAP basis and results in higher carried reserves relative to GAAP reserves.
The payment of dividends by CNA’s insurance subsidiaries without prior approval of the insurance department of each subsidiary’s domiciliary jurisdiction is generally limited by formula. Dividends in excess of these amounts are subject to prior approval by the respective insurance regulator.
Dividends from CCC are subject to the insurance holding company laws of the State of Illinois, the domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require prior approval by the Illinois Department of Insurance (“Department”) are determined based on the greater of the prior year’s statutory net income or 10% of statutory surplus as of the end of the prior year, as well as timing and amount of dividends paid in the preceding 12 months. Additionally, ordinary dividends may only be paid only from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As of December 31, 2012,2015, CCC is in a positive earned surplus position, enablingposition. The maximum allowable dividend CCC tocould pay approximately $550 million of dividend payments during 20132016 that would not be subject to the Department’s prior approval.approval is $1.1 billion, less dividends paid during the preceding 12 months measured at that point in time. CCC paid dividends of $900 million in 2015. The actual level of dividends paid in any year is determined after an assessment of available dividend capacity, holding company liquidity and cash needs as well as the impact the dividends will have on the statutory surplus of the applicable insurance company.
Combined statutory capital and surplus and statutory net income (loss), determined in accordance with accounting practices prescribed or permitted by insurance and/or other regulatory authorities for the Combined Continental Casualty Companies and the life company, are presented in the table below.
Statutory Capital and Surplus | Statutory Net Income | ||||||||||||||||||||||||
December 31 | Year Ended December 31 | ||||||||||||||||||||||||
2015 (a) | 2014 | 2015 (a) | 2014 | 2013 | |||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||
Combined Continental Casualty Companies | $ | 10,723 | $ | 11,155 | $ | 1,148 | $ | 914 | $ | 913 | |||||||||||||||
Life company | - | - | - | 37 | 48 |
(a) | Information derived from the statutory-basis financial statements to be filed with insurance regulators. |
CNA’s domestic insurance subsidiaries are subject to risk-based capital (“RBC”) requirements. Risk-based capitalRBC is a method developed by the NAIC to determine the minimum amount of statutory capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The formula for determining the amount of risk-based capitalRBC specifies various factors, weighted based on the perceived degree of risk, which are applied to certain financial balances and financial activity. The adequacy of a company’s actual capital is evaluated by a comparison to the risk-based capitalRBC results, as determined by the formula. Companies below minimum risk-based capitalRBC requirements are classified within certain levels, each of which requires specified corrective action. As
The statutory capital and surplus presented above for CCC was approximately 266% and 270% of company action level RBC at December 31, 20122015 and 2011, all2014. Company action level RBC is the level of CNA’s domesticRBC which triggers a heightened level of regulatory supervision. The statutory capital and surplus of CCC’s foreign insurance subsidiaries, exceededwhich is not significant to the minimum risk-basedoverall statutory capital requirements.
Subsidiaries with insurance operations outside the United States areand surplus, also subject to insurance regulation in the countries in which they operate. CNA has legal entity and branch operations in other countries, primarily the United Kingdom, Canada and Bermuda. CNA’s foreign legal entities and branch met or exceeded their respective regulatory and other capital requirements.
Combined statutory capital and surplus and net income (loss), determined in accordance with accounting practices prescribed or permitted by insurance and/or other regulatory authorities for the Combined Continental Casualty Companies and the life company, were as follows:
Statutory Capital and Surplus | Statutory Net Income (Loss) | |||||||||||||||||||
|
| |||||||||||||||||||
December 31 | Year Ended December 31 | |||||||||||||||||||
|
| |||||||||||||||||||
2012 (b) | 2011 | 2012 (b) | 2011 | 2010 | ||||||||||||||||
| ||||||||||||||||||||
(In millions) | ||||||||||||||||||||
Combined Continental Casualty Companies (a) | $ 9,998 | $ 9,888 | $ 391 | $ 954 | $ 258 | |||||||||||||||
Life company | 556 | 519 | 44 | 29 | 86 |
|
|
The Hardy insurance entities are not owned by CCC, therefore their regulatory capital is not included in the Statutory Capital and Surplus of the Combined Continental Casualty Companies presented in the table above. At December 31, 2012, Hardy’s capital requirement was approximately $330 million, which included $66 million of capital provided by CCC and included in Combined Continental Casualty Companies’ Statutory Capital and Surplus above.
Note 14. Supplemental Natural Gas and Oil Information (Unaudited)
Users of this information should be aware that the process of estimating quantities of proved natural gas, NGLs and crude oil reserves is very complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure reserve estimates reported represent the most accurate assessments possible, the subjective decisions and variances in available data for various reservoirs make these estimates generally less precise than other estimates included in the financial statement disclosures.
Proved reserves represent quantities of natural gas, NGLs and oil which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be recoverable in the future from known reservoirs under existing economic conditions, operating methods and government regulations. Proved developed reserves are proved reserves which can be expected to be recovered through existing wells with existing equipment, infrastructure and operating methods.
Estimates of reserves as of December 31, 2012, 2011 and 2010 are based upon studies for each of HighMount’s properties prepared by HighMount staff engineers. Calculations were prepared using standard geological and engineering methods generally accepted by the petroleum industry and in accordance with SEC guidelines. HighMount’s reserve estimates for 2012 were audited by Netherland, Sewell & Associates, Inc., (“NSAI”). NSAI is an independent third party petroleum engineering consulting firm, and the audit was performed in accordance with the “Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information” promulgated by the Society of Petroleum Engineers. All proved reserves are located in the United States of America.
Reserves
Estimated net quantities of proved natural gas and oil (including condensate and NGLs) reserves at December 31, 2012, 2011 and 2010 and changes in the reserves during 2012, 2011 and 2010 are shown in the schedule below:
Proved Developed and Undeveloped Reserves | Natural Gas | NGLs and Oil | Natural Gas Equivalents | |||||||||
| ||||||||||||
(Bcf) | (thousands | (Bcfe) | ||||||||||
of barrels) | ||||||||||||
January 1, 2010 | 1,521 | 73,838 | 1,964 | |||||||||
Changes in reserves: | ||||||||||||
Extensions, discoveries and other additions (a) | 251 | 13,370 | 331 | |||||||||
Revisions of previous estimates (b) | (407) | (24,518) | (554) | |||||||||
Production | (57) | (3,263) | (77) | |||||||||
Sales of reserves in place | (363) | (232) | (364) | |||||||||
Purchases of reserves in place | ||||||||||||
| ||||||||||||
December 31, 2010 | 945 | 59,195 | 1,300 | |||||||||
Changes in reserves: | ||||||||||||
Extensions, discoveries and other additions | 26 | 3,556 | 48 | |||||||||
Revisions of previous estimates (c) | (107) | (7,540) | (152) | |||||||||
Production | (45) | (2,976) | (63) | |||||||||
Sales of reserves in place | (11) | |||||||||||
Purchases of reserves in place | 167 | 1 | ||||||||||
| ||||||||||||
December 31, 2011 | 819 | 52,391 | 1,134 | |||||||||
Changes in reserves: | ||||||||||||
Extensions, discoveries and other additions (d) | 22 | 8,960 | 75 | |||||||||
Revisions of previous estimates (e) | (244) | (13,902) | (328) | |||||||||
Production | (39) | (2,858) | (56) | |||||||||
Sales of reserves in place | ||||||||||||
Purchases of reserves in place | ||||||||||||
| ||||||||||||
December 31, 2012 | 558 | 44,591 | 825 | |||||||||
| ||||||||||||
Proved developed reserves at: | ||||||||||||
December 31, 2010 | 741 | 45,804 | 1,016 | |||||||||
December 31, 2011 | 623 | 37,951 | 851 | |||||||||
December 31, 2012 | 491 | 33,781 | 694 |
|
|
|
|
|
Capitalized Costs
The aggregate amounts of costs capitalized for natural gas and oil producing activities, and related aggregate amounts of accumulated depletion follow:
December 31 | 2012 | 2011 | 2010 | |||||||||
| ||||||||||||
(In millions) | ||||||||||||
Subject to depletion | $ | 3,497 | $ | 3,002 | $ | 2,818 | ||||||
Costs excluded from depletion | 209 | 384 | 272 | |||||||||
| ||||||||||||
Gross natural gas, NGL and oil properties | 3,706 | 3,386 | 3,090 | |||||||||
Less accumulated depletion | 2,813 | 2,056 | 1,991 | |||||||||
| ||||||||||||
Net natural gas, NGL and oil properties | $ | 893 | $ | 1,330 | $ | 1,099 | ||||||
|
The following costs were incurred in natural gas and oil producing activities:
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||
| ||||||||||||
(In millions) | ||||||||||||
Acquisition of properties: | ||||||||||||
Proved | $ | 12 | ||||||||||
Unproved | $ | 16 | 128 | $ | 29 | |||||||
| ||||||||||||
Subtotal | 16 | 140 | 29 | |||||||||
Exploration costs | 6 | 11 | 5 | |||||||||
Development costs (a) | 308 | 159 | 143 | |||||||||
| ||||||||||||
Total | $ | 330 | $ | 310 | $ | 177 | ||||||
|
|
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Natural Gas and Oil Reserves
The following table represents a calculation of the standardized measure of discounted future net cash flows relating to proved natural gas and oil reserve quantities that HighMount owns:
December 31 | 2012 | 2011 | 2010 | |||||||||
| ||||||||||||
(In millions) | ||||||||||||
Future cash inflows (a) (b) | $ | 3,405 | $ | 5,688 | $ | 6,044 | ||||||
Less: | ||||||||||||
Future production costs | 1,446 | 1,969 | 2,073 | |||||||||
Future development costs | 359 | 636 | 580 | |||||||||
Future income tax expense | 6 | 456 | 571 | |||||||||
| ||||||||||||
Future cash flows | 1,594 | 2,627 | 2,820 | |||||||||
Less annual discount (10% a year) | 948 | 1,725 | 1,863 | |||||||||
| ||||||||||||
Standardized measure of discounted future net cash flows | $ | 646 | $ | 902 | $ | 957 | ||||||
|
|
|
December 31 | 2012 | 2011 | 2010 | |||||||||
| ||||||||||||
Gas (per million British thermal units) | $ | 2.76 | $ | 4.12 | $ | 4.38 | ||||||
NGL (per barrel) | 41.11 | 55.18 | 43.75 | |||||||||
Oil (per barrel) | 94.71 | 96.19 | 79.43 |
In the foregoing determination of future cash inflows, sales prices for natural gas and oil represent average prices determined as an unweighted arithmetic average of the first-day-of-the-month price for each month, changed for contractual arrangements with customers. Future costs of developing and producing the proved natural gas and oil reserves reported at the end of each year shown were based on costs determined at each such year end, assuming the continuation of existing economic conditions. Future income taxes were computed by applying the appropriate year end or future statutory tax rate to future pretax net cash flows, less the tax basis of the properties involved, and giving effect to tax deductions, permanent differences and tax credits.
It is not intended that the FASB’s standardized measure of discounted future net cash flows represent the fair market value of HighMount’s proved reserves. HighMount cautions that the disclosures shown are based on estimates of proved reserve quantities and future production schedules which are inherently imprecise and subject to revision and the 10% discount rate. In addition, costs and prices as of the measurement date are used in the determinations, and no value was assigned to probable or possible reserves.
Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Natural Gas and Oil Reserves
The following table is a summary of changes between the total standardized measure of discounted future net cash flows at the beginning and end of each year:
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||
| ||||||||||||
(In millions) | ||||||||||||
Standardized measure, beginning of period | $ | 902 | $ | 957 | $ | 1,098 | ||||||
Changes in the year resulting from: | ||||||||||||
Sales and transfers of natural gas and oil produced during the year, less production costs | (213) | (291) | (345) | |||||||||
Net changes in prices and development costs | (644) | 164 | 890 | |||||||||
Extensions, discoveries and other additions, less production and development costs | 183 | 82 | 67 | |||||||||
Previously estimated development costs incurred during the period | 14 | 25 | 23 | |||||||||
Revisions of previous quantity estimates | 181 | (173) | (346) | |||||||||
Net changes in purchases and sales of proved reserves in place | 3 | (446) | ||||||||||
Accretion of discount | 100 | 107 | 114 | |||||||||
Income taxes | 131 | 20 | (77) | |||||||||
Net changes in production rates and other | (8) | 8 | (21) | |||||||||
| ||||||||||||
Standardized measure, end of period | $ | 646 | $ | 902 | $ | 957 | ||||||
|
Pension Plans – The Company has several non-contributory defined benefit plans for eligible employees. Benefits for certain plans are determined annually based on a specified percentage of annual earnings (based on the participant’s age or years of service) and a specified interest rate (which is established annually for all participants) applied to accrued balances. The benefits for another plan which covers salaried employees are based on formulas which include, among others, years of service and average pay. The Company’s funding policy is to make contributions in accordance with applicable governmental regulatory requirements.
Other Postretirement Benefit Plans – The Company has several postretirement benefit plans covering eligible employees and retirees. Participants generally become eligible after reaching age 55 with required years of service. Actual requirements for coverage vary by plan. Benefits for retirees who were covered by bargaining units vary by each unit and contract. Benefits for certain retirees are in the form of a Company health care account.
Benefits for retirees reaching age 65 are generally integrated with Medicare. Other retirees, based on plan provisions, must use Medicare as their primary coverage, with the Company reimbursing a portion of the unpaid amount; or are reimbursed for the Medicare Part B premium or have no Company coverage. The benefits provided by the Company are basically health and, for certain retirees, life insurance type benefits.
The Company funds certain of these benefit plans, and accrues postretirement benefits during the active service of those employees who would become eligible for such benefits when they retire. The Company uses December 31 as the measurement date for its plans.
Weighted-averageWeighted average assumptions used to determine benefit obligations:
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||||||||||||||||||
|
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||||||||||||||||
December 31 | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||
Discount rate | 3.6% | 4.5% | 5.3% | 3.5% | 4.3% | 5.0% | 4.0% | 3.7% | 4.4% | 3.7% | 3.4% | 4.2% | ||||||||||||||||||||||||||||||||||||
Expected long term rate of return on plan assets | 7.5% to 7.8% | 7.5% to 8.0% | 7.5% to 8.0% | 5.3% | 5.3% | 4.6% | 7.5% | 7.5% | 7.5% | 5.3% | 5.3% | 5.3% | ||||||||||||||||||||||||||||||||||||
Rate of compensation increase | 3.5% to 5.5% | 4.0% to 5.5% | 4.0% to 5.5% | 3.5% to 5.5% | 3.5% to 5.5% | 3.5% to 5.5% |
Weighted-averageWeighted average assumptions used to determine net periodic benefit cost:
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||||||||||||||||||
|
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31 | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||
Discount rate | 4.5% | 5.3% | 5.7% | 4.4% | 5.0% | 5.6% | 3.8% | 4.4% | 3.9% | 3.4% | 4.0% | 3.5% | ||||||||||||||||||||||||||||||||||||
Expected long term rate of return on plan assets | 7.5% to 8.0% | 7.5% to 8.0% | 7.5% to 8.0% | 5.3% | 4.6% | 5.4% | 7.5% | 7.5% | 7.5% to 7.8% | 5.3% | 5.3% | 5.3% | ||||||||||||||||||||||||||||||||||||
Rate of compensation increase | 4.0% to 5.5% | 4.0% to 5.5% | 4.0% to 5.5% | 3.5% to 5.5% | 3.5% to 5.5% | 3.5% to 5.5% |
The expected long term rate of return for plan assets is determined based on widely-accepted capital market principles, long term return analysis for global fixed income and equity markets as well as the active total return oriented portfolio management style. Long term trends are evaluated relative to market factors such as inflation, interest rates and fiscal and monetary policies, in order to assess the capital market assumptions as applied to the plan. Consideration of diversification needs and rebalancing is maintained.
Assumed health care cost trend rates:
December 31 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | ||||||||||||||||||
| ||||||||||||||||||||||||
Health care cost trend rate assumed for next year | 4.0% to 8.5% | 4.0% to 8.5% | 4.0% to 9.0% | 4.0% to 7.5% | 4.0% to 8.0% | 4.0% to 8.5% | ||||||||||||||||||
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | 4.0% to 5.0% | 4.0% to 5.0% | 4.0% to 5.0% | 4.0% to 5.0% | 4.0% to 5.0% | 4.0% to 5.0% | ||||||||||||||||||
Year that the rate reaches the ultimate trend rate | 2013-2021 | 2012-2020 | 2011-2020 | 2016-2021 | 2015-2021 | 2014-2022 |
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. An increase or decrease in the assumed health care cost trend rate of 1% in each year would not have a significant impact on the Company’s service and interest cost as of December 31, 2012.2015. An increase of 1% in each year would increase the Company’s accumulated postretirement benefit obligation as of December 31, 20122015 by $4$2 million and a decrease of 1% in each year would decrease the Company’s accumulated postretirement benefit obligation as of December 31, 20122015 by $6$3 million.
Net periodic benefit cost components:
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31 | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Service cost | $ 24 | $ 24 | $ 26 | $ 1 | $ 2 | $ 2 | $ | 12 | $ | 16 | $ | 22 | $ | 1 | $ | 1 | $ | 1 | ||||||||||||||||||||||||||||||||||||||||||
Interest cost | 151 | 164 | 168 | 5 | 6 | 11 | 127 | 149 | 136 | 3 | 4 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||
Expected return on plan assets | (188) | (188) | (176) | (4) | (3) | (4) | (193 | ) | (209 | ) | (198 | ) | (5 | ) | (4 | ) | (5 | ) | ||||||||||||||||||||||||||||||||||||||||||
Amortization of unrecognized net gain | 47 | 29 | 28 | 1 | 2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of unrecognized net loss | 42 | 30 | 54 | 1 | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of unrecognized prior service benefit | (25) | (27) | (24) | (1 | ) | (1 | ) | (10 | ) | (18 | ) | (25 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Regulatory asset decrease | 4 | 5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Settlement/Curtailment | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net periodic benefit cost | $ 34 | $ 29 | $ 46 | $ (23) | $ (17) | $ (8) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
In 2015, CNA eliminated future benefit accruals associated with the CNA Retirement Plan effective June 30, 2015. This amendment resulted in a $55 million curtailment which is a decrease in the plan benefit obligation liability and a reduction of the unrecognized actuarial losses included in AOCI. In connection with the curtailment, CNA remeasured the plan benefit obligation which resulted in an increase in the discount rate used to determine the benefit obligation from 3.9% to 4.0%.
During 2014, CNA offered a limited-time lump sum settlement payment opportunity to the majority of the terminated vested participants of the CNA Retirement Plan. Settlement payments of $253 million were made from CNA Retirement Plan assets and an $84 million settlement charge was recorded by the Company in the fourth quarter of 2014 to recognize a portion of the unrecognized actuarial losses previously reflected in AOCI. This settlement charge is included in Other operating expenses in the Consolidated Statements of Income.
In the second quarter of 2014, CNA eliminated certain postretirement medical benefits associated with the CNA Health and Group Benefits Program. This change was a negative plan amendment which resulted in an $86 million curtailment gain reported in Other operating expenses in the Consolidated Statements of Income. In connection with the plan amendment, CNA remeasured the plan benefit obligation which resulted in a decrease to the discount rate used to determine the benefit obligation from 3.6% to 3.1%.
The following provides a reconciliation of benefit obligations and plan assets:
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||
2012 | 2011 | 2012 | 2011 | Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||||
|
| 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||
Change in benefit obligation: | ||||||||||||||||||||||||||||||||||||||
Benefit obligation at January 1 | $ | 3,393 | $ | 3,146 | $ | 118 | $ | 159 | $ | 3,446 | $ | 3,336 | $ | 97 | $ | 101 | ||||||||||||||||||||||
Service cost | 24 | 24 | 1 | 2 | 12 | 16 | 1 | 1 | ||||||||||||||||||||||||||||||
Interest cost | 151 | 164 | 5 | 6 | 127 | 149 | 3 | 4 | ||||||||||||||||||||||||||||||
Plan participants’ contributions | 6 | 7 | 5 | 6 | ||||||||||||||||||||||||||||||||||
Amendments | (11) | |||||||||||||||||||||||||||||||||||||
Amendments/curtailments | (55 | ) | (4 | ) | (7 | ) | ||||||||||||||||||||||||||||||||
Actuarial (gain) loss | 303 | 295 | 8 | (15) | (96 | ) | 402 | (11 | ) | 7 | ||||||||||||||||||||||||||||
Benefits paid from plan assets | (190) | (182) | (16) | (17) | (187 | ) | (178 | ) | (13 | ) | (15 | ) | ||||||||||||||||||||||||||
Settlements | (12 | ) | (268 | ) | ||||||||||||||||||||||||||||||||||
Foreign exchange | 19 | (8 | ) | (7 | ) | |||||||||||||||||||||||||||||||||
Reduction of benefit obligations due to disposition of subsidiary | (54) | (13) | ||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||
Benefit obligation at December 31 | 3,700 | 3,393 | 122 | 118 | 3,227 | 3,446 | 82 | 97 | ||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||
Change in plan assets: | ||||||||||||||||||||||||||||||||||||||
Fair value of plan assets at January 1 | 2,435 | 2,468 | 82 | 73 | 2,713 | 2,914 | 87 | 81 | ||||||||||||||||||||||||||||||
Actual return on plan assets | 269 | 90 | 8 | 11 | (21 | ) | 233 | 2 | 9 | |||||||||||||||||||||||||||||
Company contributions | 141 | 113 | 7 | 8 | 15 | 19 | 5 | 6 | ||||||||||||||||||||||||||||||
Plan participants’ contributions | 6 | 7 | 5 | 6 | ||||||||||||||||||||||||||||||||||
Benefits paid from plan assets | (190) | (182) | (16) | (17) | (187 | ) | (178 | ) | (13 | ) | (15 | ) | ||||||||||||||||||||||||||
Settlements | (12 | ) | (268 | ) | ||||||||||||||||||||||||||||||||||
Foreign exchange | 17 | (8 | ) | (7 | ) | |||||||||||||||||||||||||||||||||
Reduction of plan assets due to disposition of subsidiary | (54) | |||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||
Fair value of plan assets at December 31 | 2,672 | 2,435 | 87 | 82 | 2,500 | 2,713 | 86 | 87 | ||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||
Funded status | $ | (1,028) | $ | (958) | $ | (35) | $ | (36) | $ | (727 | ) | $ | (733 | ) | $ | 4 | $ | (10 | ) | |||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||
Amounts recognized in the Consolidated Balance Sheets consist of: | ||||||||||||||||||||||||||||||||||||||
Other assets | $ | 11 | $ | 9 | $ | 38 | $ | 32 | ||||||||||||||||||||||||||||||
Other liabilities | (738 | ) | (742 | ) | (34 | ) | (42 | ) | ||||||||||||||||||||||||||||||
Net amount recognized | $ | (727 | ) | $ | (733 | ) | $ | 4 | $ | (10 | ) | |||||||||||||||||||||||||||
Amounts recognized in Accumulated other comprehensive income (loss), not yet recognized in net periodic (benefit) cost: | ||||||||||||||||||||||||||||||||||||||
Prior service credit | $ | (5 | ) | $ | (5 | ) | $ | (9 | ) | $ | (19 | ) | ||||||||||||||||||||||||||
Net actuarial loss | 1,106 | 1,090 | 8 | 18 | ||||||||||||||||||||||||||||||||||
Net amount recognized | $ | 1,101 | $ | 1,085 | $ | (1 | ) | $ | (1 | ) | ||||||||||||||||||||||||||||
Information for plans with projected and accumulated benefit obligations in excess of plan assets: | ||||||||||||||||||||||||||||||||||||||
Projected benefit obligation | $ | 3,129 | $ | 3,336 | ||||||||||||||||||||||||||||||||||
Accumulated benefit obligation | 3,114 | 3,262 | $ | 34 | $ | 42 | ||||||||||||||||||||||||||||||||
Fair value of plan assets | 2,391 | 2,713 |
Amounts recognized in the Consolidated Balance Sheets consist of: Other assets Other liabilities Net amount recognized Amounts recognized in Accumulated other comprehensive income (loss), not yet recognized in net periodic (benefit) cost: Prior service cost (credit) Net actuarial loss Net amount recognized Information for plans with projected and accumulated benefit obligations in excess of plan assets: Projected benefit obligation Accumulated benefit obligation Fair value of plan assets Pension Benefits Other Postretirement Benefits 2012 2011 2012 2011 (In millions) $ 27 $ 28 $ (1,028) $ (958) (62) (64) $ (1,028) $ (958) $ (35) $ (36) $ 3 $ 3 $ (140) $ (166) 1,348 1,174 24 20 $ 1,351 $ 1,177 $ (116) $ (146) $ 3,700 $ 3,328 3,509 3,218 $ 62 $ 64 2,672 2,370
The accumulated benefit obligation for all defined benefit pension plans was $3.6$3.2 billion and $3.3$3.4 billion at December 31, 20122015 and 2011.2014.
The Company employs a total return approach whereby a mix of equity and fixed maturity securities are used to maximize the long term return of plan assets for a prudent level of risk and to manage cash flows according to plan requirements. The target allocation of plan assets is 40% to 60% invested in equity securities and limited partnerships, with the remainder primarily invested in fixed maturity securities. The intent of this strategy is to minimize planthe Company’s expenses by outperforminggenerating investment returns that exceed the growth of the plan liabilities over the long run. Risk tolerance is established after careful consideration of the plan liabilities, plan funded status and corporate financial conditions. The investment portfolio contains a diversified blend of fixed maturity, equity and short term securities. Alternative investments, including limited partnerships, are used to enhance risk adjusted long term returns while improving portfolio diversification. At December 31, 2012,2015, the Company had committed $44$105 million to future capital calls from various third party limited partnership investments in exchange for an ownership interest in the related partnerships. Investment risk is monitored through annual liability measurements, periodic asset/liability studies and quarterly investment portfolio reviews.
The table below presents the estimated amounts to be recognized from Accumulated other comprehensive incomeAOCI into net periodic cost (benefit) during 2013.2016.
Pension Benefits | Other Benefits | |||
| ||||
(In millions) | ||||
Amortization of net actuarial loss | $ 56 | |||
Amortization of prior service credit | $ (24) | |||
| ||||
Total estimated amounts to be recognized | $ 56 | $ (24) | ||
|
Amortization of net actuarial loss Amortization of prior service credit Total estimated amounts to be recognized Pension
Benefits Other
Postretirement
Benefits (In millions) $ 46 $ - (1 ) (3 ) $ 45 $ (3 )
The table below presents the estimated future minimum benefit payments at December 31, 2012.2015.
Expected future benefit payments | Pension Benefits | Other Postretirement Benefits | Pension Benefits | Other Postretirement Benefits | ||||||||||||||
| ||||||||||||||||||
(In millions) | ||||||||||||||||||
2013 | $ | 220 | $ | 10 | ||||||||||||||
2014 | 218 | 10 | ||||||||||||||||
2015 | 222 | 10 | ||||||||||||||||
2016 | 227 | 9 | $ | 218 | $ | 8 | ||||||||||||
2017 | 233 | 9 | 217 | 8 | ||||||||||||||
Thereafter | 1,201 | 39 | ||||||||||||||||
| ||||||||||||||||||
$ | 2,321 | $ | 87 | |||||||||||||||
| ||||||||||||||||||
2018 | 216 | 7 | ||||||||||||||||
2019 | 217 | 7 | ||||||||||||||||
2020 | 219 | 7 | ||||||||||||||||
2021 – 2025 | 1,076 | 25 |
In 2013,2016, it is expected that contributions of approximately $93$14 million will be made to pension plans and $7$4 million to postretirement health care and life insurance benefit plans.
Pension plan assets measured at fair value on a recurring basis are summarized below.
December 31, 2012 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| ||||||||||||||||
(In millions) | ||||||||||||||||
Fixed maturity securities: | ||||||||||||||||
Corporate and other bonds | $ | 436 | $ | 11 | $ | 447 | ||||||||||
States, municipalities and political subdivisions | 91 | 91 | ||||||||||||||
Asset-backed | 269�� | 269 | ||||||||||||||
| ||||||||||||||||
Total fixed maturity securities | $ | - | 796 | 11 | 807 | |||||||||||
Equity securities | 424 | 102 | 5 | 531 | ||||||||||||
Short term investments | 41 | 82 | 123 | |||||||||||||
Fixed income mutual funds | 110 | 110 | ||||||||||||||
Limited partnerships: | ||||||||||||||||
Hedge funds | 591 | 391 | 982 | |||||||||||||
Private equity | 69 | 69 | ||||||||||||||
| ||||||||||||||||
Total limited partnerships | - | 591 | 460 | 1,051 | ||||||||||||
Other assets | 40 | 40 | ||||||||||||||
Investment contracts with insurance company | 10 | 10 | ||||||||||||||
| ||||||||||||||||
Total | $ | 575 | $ | 1,611 | $ | 486 | $ | 2,672 | ||||||||
| ||||||||||||||||
December 31, 2011 | ||||||||||||||||
| ||||||||||||||||
Fixed maturity securities: | ||||||||||||||||
Corporate and other bonds | $ | 377 | $ | 10 | $ | 387 | ||||||||||
States, municipalities and political subdivisions | 104 | 104 | ||||||||||||||
Asset-backed | 276 | 276 | ||||||||||||||
| ||||||||||||||||
Total fixed maturity securities | $ | - | 757 | 10 | 767 | |||||||||||
Equity securities | 386 | 75 | 5 | 466 | ||||||||||||
Short term investments | 77 | 35 | 112 | |||||||||||||
Fixed income mutual funds | 98 | 98 | ||||||||||||||
Limited partnerships: | ||||||||||||||||
Hedge funds | 533 | 355 | 888 | |||||||||||||
Private equity | 73 | 73 | ||||||||||||||
| ||||||||||||||||
Total limited partnerships | - | 533 | 428 | 961 | ||||||||||||
Other assets | 21 | 21 | ||||||||||||||
Investment contracts with insurance company | 10 | 10 | ||||||||||||||
| ||||||||||||||||
Total | $ | 561 | $ | 1,421 | $ | 453 | $ | 2,435 | ||||||||
|
Fixed maturity securities: Corporate and other bonds States, municipalities and political subdivisions Asset-backed Total fixed maturities Equity securities Short term investments Fixed income mutual funds Limited partnerships: Hedge funds Private equity Total limited partnerships Other assets Total December 31, 2014 Fixed maturity securities: Corporate and other bonds States, municipalities and political subdivisions Asset-backed U.S. Treasury and obligations of government- sponsored enterprises Total fixed maturities Equity securities Short term investments Fixed income mutual funds Limited partnerships: Hedge funds Private equity Total limited partnerships Other assets TotalDecember 31, 2015 Level 1 Level 2 Level 3 Total (In millions) $ 455 $ 10 $ 465 106 106 219 219 $ - 780 10 790 373 107 480 30 28 58 95 95 565 327 892 133 133 - 565 460 1,025 52 52 $ 498 $ 1,532 $ 470 $ 2,500 $ 463 $ 15 $ 478 80 80 216 216 $ 25 25 25 759 15 799 432 118 550 58 101 159 99 99 619 333 952 123 123 - 619 456 1,075 1 30 31 $ 615 $ 1,627 $ 471 $ 2,713
The limited partnership investments are recorded at fair value, which represents the plans’ share of the net asset value of each partnership. The share of the net asset value of each partnership is determined by the General Partner and is based upon the fair value of the underlying investments, which are valued using varying market approaches. Level 2 includes limited partnership investments which can be redeemed at net asset value in 90 days or less. Level 3 includes limited partnership investments with withdrawal provisions greater than 90 days, or for which withdrawals are not permitted until the termination of the partnership. Within hedge fund strategies, approximately 54% are57% were equity related, 35% pursue37% pursued a multi-strategy approach and 11% are6% were focused on distressed investments at December 31, 2012.
The fair value of the guaranteed investment contracts is an estimate of the amount that would be received in an orderly sale to a market participant at the measurement date. The amount the plan would receive from the contract holder if the contracts were terminated is the primary input and is unobservable. The guaranteed investment contracts are therefore classified as Level 3 investments.2015.
For a discussion of the valuation methodologies used to measure fixed maturity securities, equities and short term investments, see Note 4.
The tables below present reconciliations for all pension plan assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 20122015 and 2011:2014:
Actual Return on Assets | Net Purchases, | Net Transfers | ||||||||||||||||||||||
Balance at | Still Held at | Sold During | Sales, and | In (Out) of | Balance at | |||||||||||||||||||
2012 | January 1, | December 31, | the Year | Settlements | Level 3 | December 31, | ||||||||||||||||||
| ||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||
Corporate and other bonds | $ 10 | $ 1 | $ 11 | |||||||||||||||||||||
Equity securities | 5 | 5 | ||||||||||||||||||||||
Limited partnerships: | ||||||||||||||||||||||||
Hedge funds | 355 | 45 | $ 3 | $ (12) | 391 | |||||||||||||||||||
Private equity | 73 | 8 | (12) | 69 | ||||||||||||||||||||
| ||||||||||||||||||||||||
Total limited partnerships | 428 | 53 | 3 | (24) | $ - | 460 | ||||||||||||||||||
Investment contracts withinsurance company | 10 | 10 | ||||||||||||||||||||||
| ||||||||||||||||||||||||
Total | $ 453 | $ 54 | $ 3 | $ (24) | $ - | $ 486 | ||||||||||||||||||
|
2011 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||
Corporate and other bonds | $ 10 | $ 10 | ||||||||||||||||||||||
Asset-backed | 10 | $ (10) | - | |||||||||||||||||||||
| ||||||||||||||||||||||||
Total fixed maturity securities | 20 | $ - | $ - | (10) | $ - | 10 | ||||||||||||||||||
Equity securities | 6 | (1) | 5 | |||||||||||||||||||||
Limited partnerships: | ||||||||||||||||||||||||
Hedge funds | 427 | 5 | 5 | (82) | 355 | |||||||||||||||||||
Private equity | 66 | 10 | (3) | 73 | ||||||||||||||||||||
| ||||||||||||||||||||||||
Total limited partnerships | 493 | 15 | 5 | (85) | - | 428 | ||||||||||||||||||
Investment contracts with insurance company | 9 | 1 | 10 | |||||||||||||||||||||
| ||||||||||||||||||||||||
Total | $ 528 | $ 15 | $ 5 | $ (95) | $ - | $ 453 | ||||||||||||||||||
|
Fixed maturity securities: Corporate and other bonds Limited partnerships: Hedge funds Private equity Total limited partnerships Total 2014 Fixed maturity securities: Corporate and other bonds Equity securities Limited partnerships: Hedge funds Private equity Total limited partnerships Total Net Actual Return on Assets Purchases, Net Transfers Balance at Still Held at Sold During Sales, and In (Out) of Balance at 2015 January 1, December 31, the Year Settlements Level 3 December 31, (In millions) $ 15 $ (5 ) $ 10 333 $ 19 $ (25 ) 327 123 10 $ (1 ) 1 133 456 29 (1 ) (24 ) - 460 $ 471 $ 29 $ (1 ) $ (24 ) $ (5 ) $ 470 $ 15 $ 15 8 $ (8 ) 352 $ 21 (40 ) 333 125 19 $ 1 (22 ) 123 477 40 1 (62 ) $ - 456 $ 500 $ 40 $ 1 $ (70 ) $ - $ 471
Other postretirement benefits plan assets measured at fair value on a recurring basis are summarized below.
December 31, 2012 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||
December 31, 2015 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||
Corporate and other bonds | $ | 20 | $ | 20 | $ | 17 | $ | 17 | ||||||||||||||||||||||||||||||
States, municipalities and political subdivisions | 38 | 38 | 42 | 42 | ||||||||||||||||||||||||||||||||||
Asset-backed | 21 | 21 | 19 | 19 | ||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||
Total fixed maturity securities | $ | - | 79 | $ | - | 79 | ||||||||||||||||||||||||||||||||
Total fixed maturities | $ | - | 78 | $ | - | 78 | ||||||||||||||||||||||||||||||||
Short term investments | 4 | 4 | 3 | 3 | ||||||||||||||||||||||||||||||||||
Fixed income mutual funds | 4 | 4 | 5 | 5 | ||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||
Total | $ | 8 | $ | 79 | $ | - | $ | 87 | $ | 8 | $ | 78 | $ | - | $ | 86 | ||||||||||||||||||||||
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December 31, 2011 | ||||||||||||||||||||||||||||||||||||||
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December 31, 2014 | ||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||
Corporate and other bonds | $ | 20 | $ | 20 | $ | 18 | $ | 18 | ||||||||||||||||||||||||||||||
States, municipalities and political subdivisions | 35 | 35 | 43 | 43 | ||||||||||||||||||||||||||||||||||
Asset-backed | 20 | 20 | 20 | 20 | ||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||
Total fixed maturity securities | $ | - | 75 | $ | - | 75 | ||||||||||||||||||||||||||||||||
Total fixed maturities | $ | - | 81 | $ | - | 81 | ||||||||||||||||||||||||||||||||
Short term investments | 3 | 3 | 3 | 3 | ||||||||||||||||||||||||||||||||||
Fixed income mutual funds | 4 | 4 | 3 | 3 | ||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||
Total | $ | 7 | $ | 75 | $ | - | $ | 82 | $ | 6 | $ | 81 | $ | - | $ | 87 | ||||||||||||||||||||||
|
|
There were no Level 3 assets at December 31, 20122015 and 2011.2014.
Savings Plans – The Company and its subsidiaries have several contributory savings plans which allow employees to make regular contributions based upon a percentage of their salaries. Matching contributions are made up to specified percentages of employees’ contributions. The contributions by the Company and its subsidiaries to these plans amounted to $117$115 million, $100$125 million and $104$120 million for the years ended December 31, 2012, 20112015, 2014 and 2010.2013.
Stock Option Plans – In 2012, shareholders approved the amended and restated Loews Corporation 2000 Stock Option Plan (the “Loews Plan”). The aggregate number of shares of Loews common stock for which options or SARs may be granted under the Loews Plan increased from 12,000,000 shares tois 18,000,000 shares, and the maximum number of shares of Loews common stock with respect to which options or SARs may be granted to any individual in any calendar year is 1,200,000 shares. The exercise price per share may not be less than the fair market value of the common stock on the date of grant. Generally, options and SARs vest ratably over a four-year period and expire in ten years.
A summary of the stock option and SAR transactions for the Loews Plan follows:
2012 | 2011 | |||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||
Number of Awards | Weighted Average Exercise Price | Number of Awards | Weighted Average Exercise Price | |||||||||||||||||||||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||||||||||||||||||||||
|
| Number of Awards | Weighted Average Exercise Price | Number of Awards | Weighted Average Exercise Price | |||||||||||||||||||||||||||||||||||||||
Awards outstanding, January 1 | 6,624,609 | $ | 34.447 | 6,104,501 | $ | 33.082 | 6,908,778 | $ | 39.905 | 6,476,391 | $ | 38.497 | ||||||||||||||||||||||||||||||||
Granted | 970,800 | 39.605 | 910,200 | 39.957 | 924,000 | 38.715 | 910,375 | 43.839 | ||||||||||||||||||||||||||||||||||||
Exercised | (985,359 | ) | 22.517 | (370,789 | ) | 25.502 | (390,856 | ) | 28.586 | (392,519 | ) | 24.670 | ||||||||||||||||||||||||||||||||
Canceled | (74,900 | ) | 38.701 | (19,303 | ) | 34.692 | (80,564 | ) | 45.505 | (85,469 | ) | 45.117 | ||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||
Awards outstanding, December 31 | 6,535,150 | 36.963 | 6,624,609 | 34.447 | 7,361,358 | 40.295 | 6,908,778 | 39.905 | ||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||
Awards exercisable, December 31 | 4,566,021 | $ | 36.521 | 4,599,587 | $ | 33.405 | 5,341,685 | $ | 39.851 | 4,924,249 | $ | 38.742 | ||||||||||||||||||||||||||||||||
|
|
The following table summarizes information about the Company’s stock options and SARs outstanding in connection with the Loews Plan at December 31, 2012:2015:
Awards Outstanding | Awards Exercisable | ||||||||||||||||||||||||||||||||||||||||||
|
| Awards Outstanding | Awards Exercisable | ||||||||||||||||||||||||||||||||||||||||
Range of exercise prices | Number of Shares | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number of Shares | Weighted Price | |||||||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||||||||||||
$10.01-20.00 | 233,778 | 1.0 | $ | 18.529 | 233,778 | $ | 18.529 | ||||||||||||||||||||||||||||||||||||
20.01-30.00 | 952,506 | 4.2 | 24.733 | 814,683 | 24.631 | ||||||||||||||||||||||||||||||||||||||
$20.01-30.00 | 377,758 | 3.06 | $ | 25.472 | 377,758 | $ | 25.472 | ||||||||||||||||||||||||||||||||||||
30.01-40.00 | 3,212,716 | 6.5 | 36.742 | 1,873,805 | 35.967 | 2,969,582 | 4.82 | 37.168 | 2,410,992 | 37.084 | |||||||||||||||||||||||||||||||||
40.01-50.00 | 1,931,400 | 6.0 | 44.095 | 1,439,005 | 44.825 | 3,844,443 | 5.85 | 43.691 | 2,383,360 | 44.131 | |||||||||||||||||||||||||||||||||
50.01-60.00 | 204,750 | 4.1 | 51.080 | 204,750 | 51.080 | 169,575 | 1.06 | 51.080 | 169,575 | 51.080 |
In 2012,2015, the Company awarded SARs totaling 970,800924,000 shares. In accordance with the Loews Plan, the Company has the ability to settle SARs in shares or cash and has the intention to settle in shares. The SARs balance at December 31, 20122015 was 5,740,2087,350,858 shares. There were 7,129,9005,357,709 shares and 1,813,2116,099,228 shares available for grant as of December 31, 20122015 and 2011.2014.
The weighted average remaining contractual terms of awards outstanding and exercisable as of December 31, 2012,2015 were 5.75.2 years and 4.74.1 years. The aggregate intrinsic values of awards outstanding and exercisable at December 31, 20122015 were $33$9 million and $27$9 million. The total intrinsic value of awards exercised was $18$5 million, $6$8 million and $9$11 million for the years ended 2012, 20112015, 2014 and 2010.2013. The total fair value of shares vested was $11$6 million, $11$7 million and $12$7 million for the years ended 2012, 20112015, 2014 and 2010.2013.
The Company recorded stock-basedstock based compensation expense of $8$6 million, $10$6 million and $11$7 million related to the Loews Plan for the years ended December 31, 2012, 20112015, 2014 and 2010.2013. The related income tax benefits recognized were $3$2 million $4 million and $4 million.for each year. At December 31, 2012,2015, the compensation cost related to nonvested awards not yet recognized was $10$9 million, and the weighted average period over which it is expected to be recognized is 2.32.4 years.
The fair value of granted options and SARs for the Loews Plan were estimated at the grant date using the Black-Scholes pricing model with the following assumptions and results:
Year Ended December 31 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | ||||||||||||||||||
| ||||||||||||||||||||||||
Expected dividend yield | 0.6% | 0.6% | 0.7% | 0.7 | % | 0.6 | % | 0.6 | % | |||||||||||||||
Expected volatility | 19.0% | 24.1% | 24.7% | 19.1 | % | 16.9 | % | 16.3 | % | |||||||||||||||
Weighted average risk-free interest rate | 0.8% | 1.7% | 2.0% | 1.5 | % | 1.7 | % | 1.1 | % | |||||||||||||||
Expected holding period (in years) | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | ||||||||||||||||||
Weighted average fair value of awards | $ | 6.53 | $ | 8.92 | $ | 8.57 | $ | 6.94 | $ | 7.41 | $ | 6.75 |
CNA cedes insurance to reinsurers to limit its maximum loss, provide greater diversification of risk, minimize exposures on larger risks and to exit certain lines of business. The ceding of insurance does not discharge the primary liability of CNA. A credit exposure exists with respect to property and casualty and life reinsurance ceded to the extent that any reinsurer is unable to meet its obligations or to the extent that the reinsurer disputes the liabilities assumed under reinsurance agreements. Property and casualty reinsurance coverages are tailored to the specific risk characteristics of each product line and CNA’s retained amount varies by type of coverage. Reinsurance contracts are purchased to protect specific lines of business such as property and workers’ compensation. Corporate catastrophe reinsurance is also purchased for property and workers’ compensation exposure. Currently most reinsurance contracts are purchased on an excess of loss basis. CNA also utilizes facultative reinsurance in certain lines. In addition, CNA assumes reinsurance, primarily through Hardy and as a member of various reinsurance pools and associations.
The following table summarizespresents the amounts receivable from reinsurers:
December 31 | 2012 | 2011 | 2015 | 2014 | ||||||||||||||||
| ||||||||||||||||||||
(In millions) | ||||||||||||||||||||
Reinsurance receivables related to insurance reserves: | ||||||||||||||||||||
Ceded claim and claim adjustment expenses | $ | 5,126 | $ | 5,020 | $ | 4,087 | $ | 4,344 | ||||||||||||
Ceded future policy benefits | 759 | 792 | 207 | 185 | ||||||||||||||||
Ceded policyholders’ funds | 35 | 36 | ||||||||||||||||||
Reinsurance receivables related to paid losses | 311 | 244 | 197 | 213 | ||||||||||||||||
| ||||||||||||||||||||
Reinsurance receivables | 6,231 | 6,092 | 4,491 | 4,742 | ||||||||||||||||
Less allowance for doubtful accounts | 73 | 91 | 38 | 48 | ||||||||||||||||
|
| |||||||||||||||||||
Reinsurance receivables, net of allowance for doubtful accounts | $ | 6,158 | $ | 6,001 | $ | 4,453 | $ | 4,694 | ||||||||||||
|
|
CNA has established an allowance for doubtful accounts on reinsurance receivables. CNA reviews the allowance quarterly and adjusts the allowance as necessary to reflect changes in estimates of uncollecteduncollectible balances. The allowance may also be reduced related toby write-offs of reinsurance receivable balances.
CNA attempts to mitigate its credit risk related to reinsurance by entering into reinsurance arrangements with reinsurers that have credit ratings above certain levels and by obtaining collateral. On a limited basis, CNA may enter into reinsurance agreements with reinsurers that are not rated, primarily captive reinsurers. The primary methods of obtaining collateral are through reinsurance trusts, letters of credit and funds withheld balances. Such collateral was approximately $3.7$3.2 billion and $3.6$3.4 billion at December 31, 20122015 and 2011.2014.
CNA’s largest recoverables from a single reinsurer, atincluding ceded unearned premium reserves as of December 31, 2012, including prepaid reinsurance premiums,2015 were approximately $2.7$2.4 billion from subsidiaries of Berkshire Hathaway Group, $900$284 million from subsidiaries of Swiss Re Groupthe Gateway Rivers Insurance Company and $350$207 million from subsidiaries of the Hartford Insurance Group. The recoverable from the Berkshire Hathaway Group includes amounts related to third party reinsurance for which a
subsidiary of Berkshire HathawayNICO has assumed the credit risk under the terms of the Loss Portfolio Transferloss portfolio transfer as discussed in Note 8.
The effects of reinsurance on earned premiums are shownpresented in the following table:
Direct | Assumed | Ceded | Net | Assumed/ Net % | ||||||||||||||||||||||||||||||||||||
|
| Direct | Assumed | Ceded | Net | Assumed/ Net % | ||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2012 | ||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2015 | ||||||||||||||||||||||||||||||||||||||||
Property and casualty | $ | 8,354 | $ | 197 | $ | 2,229 | $ | 6,322 | 3.1% | $ | 9,853 | $ | 274 | $ | 3,754 | $ | 6,373 | 4.3 | % | |||||||||||||||||||||
Accident and health | 514 | 47 | 1 | 560 | 8.4 | 498 | 50 | 548 | 9.1 | |||||||||||||||||||||||||||||||
Life | 51 | 51 | ||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||
Earned premiums | $ | 8,919 | $ | 244 | $ | 2,281 | $ | 6,882 | 3.5% | $ | 10,351 | $ | 324 | $ | 3,754 | $ | 6,921 | 4.7 | % | |||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2011 | ||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2014 | ||||||||||||||||||||||||||||||||||||||||
Property and casualty | $ | 7,858 | $ | 95 | $ | 1,919 | $ | 6,034 | 1.6% | $ | 9,452 | $ | 277 | $ | 3,073 | $ | 6,656 | 4.2 | % | |||||||||||||||||||||
Accident and health | 521 | 50 | 2 | 569 | 8.8 | 508 | 48 | 556 | 8.6 | |||||||||||||||||||||||||||||||
Life | 55 | 55 | ||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||
Earned premiums | $ | 8,434 | $ | 145 | $ | 1,976 | $ | 6,603 | 2.2% | $ | 9,960 | $ | 325 | $ | 3,073 | $ | 7,212 | 4.5 | % | |||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2010 | ||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2013 | ||||||||||||||||||||||||||||||||||||||||
Property and casualty | $ | 7,716 | $ | 66 | $ | 1,849 | $ | 5,933 | 1.1% | $ | 9,063 | $ | 258 | $ | 2,609 | $ | 6,712 | 3.8 | % | |||||||||||||||||||||
Accident and health | 534 | 49 | 2 | 581 | 8.4 | 511 | 48 | 559 | 8.6 | |||||||||||||||||||||||||||||||
Life | 60 | 59 | 1 | |||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||
Earned premiums | $ | 8,310 | $ | 115 | $ | 1,910 | $ | 6,515 | 1.8% | $ | 9,574 | $ | 306 | $ | 2,609 | $ | 7,271 | 4.2 | % | |||||||||||||||||||||
|
|
Included in the direct and ceded earned premiums for the years ended December 31, 2012, 20112015, 2014 and 20102013 are $1.8$3.3 billion, $1.5$2.6 billion and $1.4$2.2 billion related to property business that is 100% reinsured as a result ofunder a significant third party captive program. The third party captives that participate in this program are affiliated with the non-insurance company policyholders, therefore this program provides a means for the policyholders to self-insure this property risk. CNA receives and retains a ceding commission.
Life and accidentAccident and health premiums are primarily from long duration contracts; property and casualty premiums are primarily from short duration contracts.
Insurance claims and policyholders’ benefits reported on the Consolidated Statements of Income are net of reinsurance recoveries of $1.5$2.6 billion, $1.3$1.4 billion and $1.1$1.5 billion for the years ended December 31, 2012, 20112015, 2014 and 2010,2013, including $814 million, $790 million$2.3 billion, $1.5 billion and $735$712 million related to the significant third party captive program discussed above.
The impact Reinsurance recoveries in 2014 were unfavorably affected by the commutation of a workers’ compensation reinsurance on life insurance inforce is shown in the following table:
December 31 | Direct | Assumed | Ceded | Net | ||||||||||||
| ||||||||||||||||
(In millions) | ||||||||||||||||
2012 | $ | 5,713 | - | $ | 5,702 | $ | 11 | |||||||||
2011 | 6,528 | - | 6,515 | 13 | ||||||||||||
2010 | 8,015 | - | 8,001 | 14 |
As of December 31, 2012 and 2011, CNA has ceded $1.1 billion and $1.2 billion of claim and claim adjustment expense reserves, future policy benefits and policyholders’ funds as a result of business operations sold in prior years. Subject to certain exceptions, the purchasers assumed the third party reinsurance credit risk of the sold business.pool.
Note 17.16. Quarterly Financial Data (Unaudited)
2012 Quarter Ended | Dec. 31 | Sept. 30 | June 30 | March 31 | ||||||||||||
| ||||||||||||||||
(In millions, except per share data) | ||||||||||||||||
Total revenues | $ | 3,705 | $ | 3,715 | $ | 3,388 | $ | 3,744 | ||||||||
Net income (loss) (a) | (32 | ) | 177 | 56 | 367 | |||||||||||
Per share-basic | (0.08 | ) | 0.45 | 0.14 | 0.93 | |||||||||||
Per share-diluted | (0.08 | ) | 0.45 | 0.14 | 0.92 |
2011 Quarter Ended | ||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
2015 Quarter Ended | Dec. 31 | Sept. 30 | June 30 | March 31 | ||||||||||||||||||||||||||||
(In millions, except per share data) | ||||||||||||||||||||||||||||||||
Total revenues | $ | 3,481 | $ | 3,438 | $ | 3,542 | $ | 3,668 | $ | 3,333 | $ | 3,169 | $ | 3,435 | $ | 3,478 | ||||||||||||||||
Net income (b) | 271 | 162 | 250 | 379 | ||||||||||||||||||||||||||||
Net income (loss) (a) | (201 | ) | 182 | 170 | 109 | |||||||||||||||||||||||||||
Per share-basic and diluted | (0.58 | ) | 0.50 | 0.46 | 0.29 | |||||||||||||||||||||||||||
2014 Quarter Ended | Dec. 31 | Sept. 30 | June 30 | March 31 | ||||||||||||||||||||||||||||
Total revenues | $ | 3,521 | $ | 3,523 | $ | 3,593 | $ | 3,688 | ||||||||||||||||||||||||
Income from continuing operations | 215 | 179 | 303 | 265 | ||||||||||||||||||||||||||||
Per share-basic | 0.68 | 0.41 | 0.61 | 0.92 | 0.58 | 0.47 | 0.79 | 0.68 | ||||||||||||||||||||||||
Per share-diluted | 0.68 | 0.40 | 0.61 | 0.92 | 0.57 | 0.47 | 0.79 | 0.68 | ||||||||||||||||||||||||
Discontinued operations, net | (7 | ) | 29 | (187 | ) | (206 | ) | |||||||||||||||||||||||||
Per share-basic and diluted | (0.02 | ) | 0.08 | (0.49 | ) | (0.53 | ) | |||||||||||||||||||||||||
Net income | 208 | 208 | 116 | 59 | ||||||||||||||||||||||||||||
Per share-basic | 0.56 | 0.55 | 0.30 | 0.15 | ||||||||||||||||||||||||||||
Per share-diluted | 0.55 | 0.55 | 0.30 | 0.15 |
The sum of the quarterly per share amounts may not equal per share amounts reported for year-to-date periods. This is due to changes in the number of weighted average shares outstanding and the effects of rounding for each period.
(a) | Net |
|
The Company and its subsidiaries are parties to litigation arising in the ordinary course of business. The outcome of this litigation will not, in the opinion of management, materially affect the Company’s results of operations or equity.
Note 19.18. Commitments and Contingencies
GuaranteesCNA Financial
In the course of selling business entities and assets to third parties, CNA has agreed to guarantee the performance of certain obligations of a previously owned subsidiary and to indemnify purchasers for losses arising out of breaches of representation and warranties with respect to the business entities or assets being sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such indemnification provisions generally survive for periods ranging from nine months following the applicable closing date to the expiration of the relevant statutes of limitation. As of December 31, 2012, the aggregate amount of quantifiableguarantee and indemnification agreements in effect for sales of business entities, assets and third party loans may include provisions that survive indefinitely. As of December 31, 2015, the aggregate amount related to quantifiable guarantees was $725$375 million and the aggregate amount related to indemnification agreements was $260 million. Should CNA be required to make payments under the guarantee, it would have the right to seek reimbursement in certain cases from an affiliate of a previously owned subsidiary.
In addition, CNA has agreed to provide indemnification to third partythird-party purchasers for certain losses associated with sold business entities or assets that are not limited by a contractual monetary amount. As of December 31, 2012,2015, 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. TheseCertain provisions of the indemnification agreements survive indefinitely, while others survive until the applicable statutes of limitation expire, or until the agreed upon contract terms expire.
In the normal course of business, CNA also provided guarantees, if the primary obligor fails to perform, to holders of structured settlement annuities provided by a previously owned subsidiary, which are estimated to mature through 2120. The potential amount of future payments CNA could be required to pay under these guarantees was approximately $2.0 billion as of December 31, 2015. CNA does not believe a payable is likely under these guarantees, as CNA is the beneficiary of a trust that must be maintained at a level that approximates the discounted reserves for these annuities.
Diamond Offshore
In February of 2016, Diamond Offshore Rig Purchase Obligationsentered into a ten-year agreement with GE Oil & Gas (“GE”) to provide services with respect to certain blowout preventer and related well control equipment on its four newbuild drillships. Such services include management of maintenance, certification and reliability with respect to such equipment. In connection with the services agreement with GE, Diamond Offshore will sell the equipment to a GE affiliate for an aggregate $210 million and will lease back such equipment over separate ten-year operating leases. Diamond Offshore does not expect to realize any gain or loss on these sale and leaseback transactions. Future commitments for the full term under the services agreement and leases are estimated to aggregate approximately $650 million.
Diamond Offshore has entered into four turnkey contractsis financially obligated under a contract with Hyundai Heavy Industries, Co. Ltd., (“Hyundai”) for the construction of foura dynamically positioned, ultra-deepwater drillships, with deliveries scheduled in the second and fourth quarters of 2013 and in the second and fourth quarters of 2014.harsh environment semisubmersible drilling rig. The aggregatetotal cost of the four drillships,rig including commissioning,shipyard costs, capital spares, andcommissioning, project management and shipyard supervision is expectedestimated to be approximately $2.6 billion, of which approximately $650 million has been paid. These amounts are included in Construction in process within Property, plant and equipment in the Consolidated Balance Sheets.$764 million. The remaining $2.0 billion will be paidcontractual payment of $440 million is due upon delivery of the drillshipsrig, which is expected to occur in 2013mid-2016.
Note 19. Discontinued Operations
As discussed in Note 2, HighMount and 2014.the CAC business are classified and presented as discontinued operations.
The Consolidated Statements of Income include discontinued operations of HighMount as follows:
Year Ended December 31 | 2014 | 2013 | ||||||
(In millions) | ||||||||
Revenues: | ||||||||
Other revenue, primarily operating | $ | 150 | $ | 259 | ||||
Total | 150 | 259 | ||||||
Expenses: | ||||||||
Impairment of goodwill | 584 | |||||||
Other operating expenses | ||||||||
Impairment of natural gas and oil properties | 29 | 291 | ||||||
Operating | 173 | 252 | ||||||
Interest | 8 | 17 | ||||||
Total | 210 | 1,144 | ||||||
Loss before income tax | (60 | ) | (885 | ) | ||||
Income tax benefit | 4 | 311 | ||||||
Results of discontinued operations, net of income tax | (56 | ) | (574 | ) | ||||
Impairment loss, net of tax benefit of $62 | (138 | ) | ||||||
Loss from discontinued operations | $ | (194 | ) | $ | (574 | ) | ||
In December2014 and 2013, HighMount recorded ceiling test impairment charges of 2011$29 million and August$291 million ($19 million and $186 million after tax) related to the carrying value of 2012, Diamond Offshore entered into agreementsits natural gas and oil properties. The 2014 write-down was primarily attributable to insufficient reserve additions from exploration activities due to variability in well performance where HighMount was testing different horizontal target zones and hydraulic fracture designs. The 2013 write-downs were primarily attributable to negative reserve revisions due to variability in well performance where HighMount was testing different horizontal target zones and hydraulic fracture designs and due to reduced
average NGL prices used in the ceiling test calculations. Had the effects of HighMount’s cash flow hedges not been considered in calculating the ceiling limitation, the impairments would have been $29 million and $301 million ($18 million and $192 million after tax) for the constructionyears ended December 31, 2014 and 2013.
Recognition of two moored semisubmersible rigs designeda ceiling test impairment charge was considered a triggering event for purposes of assessing any potential impairment of goodwill at HighMount under a two-step process. The first step compared HighMount’s estimated fair value to operate in water depths upits carrying value. Due to 6,000 feet with expected completion dates in the third quartercontinued low market prices for natural gas and NGLs, the history of quarterly ceiling test write-downs during 2013 and the then potential for future impairments, and negative reserve revisions recognized during 2013, HighMount reassessed its goodwill impairment analysis. To determine fair value, HighMount used a market approach which required significant estimates and assumptions and utilized significant unobservable inputs, representing a Level 3 fair value measurement. These estimates and assumptions primarily included, but were not limited to, earnings before interest, tax, depreciation and amortization, production and reserves, control premium, discount rates and required capital expenditures. These valuation techniques were based on analysis of comparable public companies, adjusted for HighMount’s growth profile. In the first step, HighMount determined that its carrying value exceeded its fair value requiring HighMount to perform the second quarterstep and to estimate the fair value of 2014.its assets and liabilities. The rigs will be constructed utilizingcarrying value of goodwill was limited to the hullsamount that HighMount’s estimated fair value exceeded the fair value of twoassets and liabilities. As a result, HighMount recorded a goodwill impairment charge of Diamond Offshore’s mid-water floaters and$584 million ($382 million after tax) for the aggregate costyear ended December 31, 2013, consisting of all of its remaining goodwill.
The Consolidated Statements of Income include discontinued operations of the two rigs, including commissioning, spares and project management costs, is estimated to be approximately $680 million, of which approximately $93 million has been paid.CAC business as follows:
Loews Hotels
Loews Hotels has commitments aggregating approximately $520 million for acquisitions, development and renovation of hotel properties.
Year Ended December 31 | 2014 | 2013 | ||||||
(In millions) | ||||||||
Revenues: | ||||||||
Net investment income | $ | 94 | $ | 168 | ||||
Investment gains | 3 | 11 | ||||||
Other revenues | 2 | |||||||
Total | 97 | 181 | ||||||
Expenses: | ||||||||
Insurance claims and policyholders’ benefits | 75 | 141 | ||||||
Other operating expenses | 2 | 3 | ||||||
Total | 77 | 144 | ||||||
Income before income tax | 20 | 37 | ||||||
Income tax expense | (6 | ) | (15 | ) | ||||
Results of discontinued operations, net of income tax | 14 | 22 | ||||||
Loss on sale, net of tax benefit of $40 | (211 | ) | ||||||
Amounts attributable to noncontrolling interests | 20 | (2 | ) | |||||
Income (loss) from discontinued operations | $ | (177 | ) | $ | 20 | |||
The Company’s reportable segments are primarily based on its individual operating subsidiaries. Each of the principal operating subsidiaries are headed by a chief executive officer who is responsible for the operation of its business and has the duties and authority commensurate with that position. Investment gains (losses) and the related income taxes, excluding those of CNA, are included in the Corporate and other segment.
CNA’s results are reported in four business segments: CNA Specialty, CNA Commercial, Life & Group Non-CoreInternational and Other. CNAOther Non-Core. Specialty provides a broad array of professional, financial and specialty property and casualty products and services, primarily through insurancea network of independent agents, brokers and managing general underwriters. CNA Commercial includes property and casualty coverages sold to small businesses and middle market entities and organizations primarily through an independent agency distribution system. CNA Commercial also includes commercial insurance and risk management products sold to large corporations primarily through insurance brokers. Life & Group Non-International provides management and professional liability coverages as well as a broad range of other property and casualty insurance
Coreproducts and services abroad through a network of brokers, independent agencies and managing general underwriters, as well as the Lloyd’s of London marketplace. Other Non-Core primarily includes the results of the life and group lines ofCNA’s long term care business that areis in run-off. Otherrun-off and also includes the operations of Hardy since its acquisition date of July 2, 2012,certain corporate expenses, including interest on corporate debt, and the results of certain property and casualty business primarily in run-off, including CNA Re and A&EP. Hardy is a specialized Lloyd’s underwriter primarily of short-tail exposures in marine and aviation, non-marine property, specialty lines and property treaty reinsurance.
Diamond Offshore owns and operates offshore drilling rigs that are chartered on a contract basis for fixed terms by companies engaged in exploration and production of hydrocarbons. Offshore rigs are mobile units that can be relocated based on market demand. Diamond Offshore’s fleet consists of 4432 drilling rigs, including one newbuild rig which is under construction, and four new-buildjack-up rigs which are under construction and two rigs being constructed utilizing the hulls of Diamond Offshore’s existing mid-water floaters.marketed for sale. On December 31, 2012,2015, Diamond Offshore’s drilling rigs were located offshore 12of seven countries in addition to the United States.
Boardwalk Pipeline is engaged in the interstate transportation and storage of natural gas and natural gas liquidsNGLs and gathering and processing of natural gas. This segment consists of interstate natural gas pipeline systems originating in the Gulf Coast region, Oklahoma and Arkansas, and extending north and east through the midwestern states of Tennessee, Kentucky, Illinois, Indiana and Ohio, natural gas storage facilities in four states and NGL pipelines and storage facilities in Louisiana and Texas, with approximately 14,41014,525 miles of pipeline.
HighMount is engaged in the exploration, production and marketing of natural gas and oil (including condensate and NGLs), primarily located in the Permian Basin in West Texas, as well as in the Oklahoma Mississippian Lime and Texas Panhandle regions.
Loews Hotels operates a chain of 1924 hotels, 1723 of which are in the United States and two areone of which is in Canada.
The Corporate and other segment consists primarily of corporate investment income, corporate interest expense and other unallocated expenses.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1. In addition, CNA does not maintain a distinct investment portfolio for each of itsevery insurance segments,segment, and accordingly, allocation of assets to each segment is not performed. Therefore, a significant portion of net investment income and investment gains (losses) are allocated based on each segment’s carried insurance reserves, as adjusted.
The following tables set forth the Company’s consolidated revenues and income (loss) by business segment:
Year Ended December 31 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | ||||||||||||||||||
| ||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Revenues (a): | ||||||||||||||||||||||||
CNA Financial: | ||||||||||||||||||||||||
CNA Specialty | $ | 3,742 | $ | 3,512 | $ | 3,516 | ||||||||||||||||||
CNA Commercial | 4,238 | 4,073 | 4,174 | |||||||||||||||||||||
Life & Group Non-Core | 1,395 | 1,334 | 1,357 | |||||||||||||||||||||
Other | 172 | 44 | 161 | |||||||||||||||||||||
| ||||||||||||||||||||||||
Property and Casualty: | ||||||||||||||||||||||||
Specialty | $ | 3,579 | $ | 3,708 | $ | 3,676 | ||||||||||||||||||
Commercial | 3,371 | 3,683 | 3,984 | |||||||||||||||||||||
International | 856 | 973 | 981 | |||||||||||||||||||||
Other Non-Core | 1,295 | 1,328 | 1,291 | |||||||||||||||||||||
Total CNA Financial | 9,547 | 8,963 | 9,208 | 9,101 | 9,692 | 9,932 | ||||||||||||||||||
Diamond Offshore | 3,072 | 3,334 | 3,361 | 2,428 | 2,825 | 2,926 | ||||||||||||||||||
Boardwalk Pipeline | 1,187 | 1,144 | 1,129 | 1,254 | 1,236 | 1,232 | ||||||||||||||||||
HighMount | 297 | 390 | 455 | |||||||||||||||||||||
Loews Hotels | 397 | 337 | 308 | 604 | 475 | 380 | ||||||||||||||||||
Corporate and other | 52 | (39 | ) | 154 | 28 | 97 | 143 | |||||||||||||||||
| ||||||||||||||||||||||||
Total | $ | 14,552 | $ | 14,129 | $ | 14,615 | $ | 13,415 | $ | 14,325 | $ | 14,613 | ||||||||||||
|
| |||||||||||||||||||||||
Income (loss) before income tax and noncontrolling interests (a)(b): | ||||||||||||||||||||||||
CNA Financial: | ||||||||||||||||||||||||
CNA Specialty | $ | 788 | $ | 805 | $ | 1,046 | ||||||||||||||||||
CNA Commercial | 451 | 591 | 777 | |||||||||||||||||||||
Life & Group Non-Core | (222 | ) | (386 | ) | (127) | |||||||||||||||||||
Other | (137 | ) | (131 | ) | (575) | |||||||||||||||||||
| ||||||||||||||||||||||||
Total CNA Financial | 880 | 879 | 1,121 | |||||||||||||||||||||
Diamond Offshore | 917 | 1,177 | 1,333 | |||||||||||||||||||||
Boardwalk Pipeline | 304 | 211 | 283 | |||||||||||||||||||||
HighMount | (636 | ) | 99 | 136 | ||||||||||||||||||||
Loews Hotels | 14 | 17 | 2 | |||||||||||||||||||||
Corporate and other | (80 | ) | (157 | ) | 27 | |||||||||||||||||||
| ||||||||||||||||||||||||
Total | $ | 1,399 | $ | 2,226 | $ | 2,902 | ||||||||||||||||||
| ||||||||||||||||||||||||
Net income (loss) (a)(b): | ||||||||||||||||||||||||
CNA Financial: | ||||||||||||||||||||||||
CNA Specialty | $ | 465 | $ | 462 | $ | 579 | ||||||||||||||||||
CNA Commercial | 273 | 343 | 450 | |||||||||||||||||||||
Life & Group Non-Core | (81 | ) | (191 | ) | (51) | |||||||||||||||||||
Other | (87 | ) | (57 | ) | (322) | |||||||||||||||||||
| ||||||||||||||||||||||||
Total CNA Financial | 570 | 557 | 656 | |||||||||||||||||||||
Diamond Offshore | 337 | 451 | 446 | |||||||||||||||||||||
Boardwalk Pipeline | 111 | 77 | 114 | |||||||||||||||||||||
HighMount | (407 | ) | 62 | 77 | ||||||||||||||||||||
Loews Hotels | 7 | 13 | 1 | |||||||||||||||||||||
Corporate and other | (50 | ) | (98 | ) | 14 | |||||||||||||||||||
| ||||||||||||||||||||||||
Income from continuing operations | 568 | 1,062 | 1,308 | |||||||||||||||||||||
Discontinued operations, net | (19) | |||||||||||||||||||||||
| ||||||||||||||||||||||||
Total | $ | 568 | $ | 1,062 | $ | 1,289 | ||||||||||||||||||
|
|
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||
| ||||||||||||
Revenues and Income (loss) before income tax and noncontrolling interests: | ||||||||||||
CNA Financial: | ||||||||||||
CNA Specialty | $ | 22 | $ | (5 | ) | $ | 30 | |||||
CNA Commercial | 39 | 14 | (15) | |||||||||
Life & Group Non-Core | (8 | ) | 53 | |||||||||
Other | (1 | ) | (20 | ) | 18 | |||||||
| ||||||||||||
Total CNA Financial | 60 | (19 | ) | 86 | ||||||||
Corporate and other | (3 | ) | (33 | ) | (30) | |||||||
| ||||||||||||
Total | $ | 57 | $ | (52 | ) | $ | 56 | |||||
| ||||||||||||
Net income (loss): | ||||||||||||
CNA Financial: | ||||||||||||
CNA Specialty | $ | 12 | $ | (3 | ) | $ | 18 | |||||
CNA Commercial | 23 | 10 | (14) | |||||||||
Life & Group Non-Core | (4 | ) | 30 | |||||||||
Other | (13 | ) | 12 | |||||||||
| ||||||||||||
Total CNA Financial | 35 | (10 | ) | 46 | ||||||||
Corporate and other | (2 | ) | (21 | ) | (19) | |||||||
| ||||||||||||
Total | $ | 33 | $ | (31 | ) | $ | 27 | |||||
|
(b) | Income taxes and interest expense are as follows: |
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||||||||||||||
| ||||||||||||||||||||||||
Income Taxes | Interest Expense | Income Taxes | Interest Expense | Income Taxes | Interest Expense | |||||||||||||||||||
| ||||||||||||||||||||||||
CNA Financial: | ||||||||||||||||||||||||
CNA Specialty | $ | 271 | $ | 279 | $ | 1 | $ | 351 | $ | 1 | ||||||||||||||
CNA Commercial | 148 | 206 | 262 | |||||||||||||||||||||
Life & Group Non-Core | (132 | ) | $ | 23 | (173 | ) | 23 | (71 | ) | 23 | ||||||||||||||
Other | (40 | ) | 147 | (68 | ) | 161 | (207 | ) | 133 | |||||||||||||||
| ||||||||||||||||||||||||
Total CNA Financial | 247 | 170 | 244 | 185 | 335 | 157 | ||||||||||||||||||
Diamond Offshore | 223 | 46 | 250 | 73 | 413 | 91 | ||||||||||||||||||
Boardwalk Pipeline | 70 | 166 | 57 | 173 | 73 | 151 | ||||||||||||||||||
HighMount | (229 | ) | 14 | 36 | 46 | 59 | 61 | |||||||||||||||||
Loews Hotels | 7 | 11 | 4 | 9 | 1 | 10 | ||||||||||||||||||
Corporate and other | (29 | ) | 33 | (59 | ) | 36 | 13 | 47 | ||||||||||||||||
| ||||||||||||||||||||||||
Total | $ | 289 | $ | 440 | $ | 532 | $ | 522 | $ | 894 | $ | 517 | ||||||||||||
|
Year Ended December 31 | 2015 | 2014 | 2013 | |||||||||||||||||||||
Income | Interest | Income | Interest | Income | Interest | |||||||||||||||||||
Taxes | Expense | Taxes | Expense | Taxes | Expense | |||||||||||||||||||
CNA Financial: | ||||||||||||||||||||||||
Property and Casualty: | ||||||||||||||||||||||||
Specialty | $ | 271 | $ | 324 | $ | 340 | ||||||||||||||||||
Commercial | 175 | 159 | 223 | |||||||||||||||||||||
International | 22 | $ | 1 | 34 | $ | 1 | 45 | $ | 1 | |||||||||||||||
Other Non-Core | (397 | ) | 154 | (195 | ) | 182 | (245 | ) | 165 | |||||||||||||||
Total CNA Financial | 71 | 155 | 322 | 183 | 363 | 166 | ||||||||||||||||||
Diamond Offshore | (117 | ) | 94 | 142 | 62 | 245 | 25 | |||||||||||||||||
Boardwalk Pipeline | 46 | 176 | 11 | 165 | 56 | 163 | ||||||||||||||||||
Loews Hotels | 16 | 21 | 10 | 14 | (1 | ) | 9 | |||||||||||||||||
Corporate and other | (59 | ) | 74 | (28 | ) | 74 | (7 | ) | 62 | |||||||||||||||
Total | $ | (43 | ) | $ | 520 | $ | 457 | $ | 498 | $ | 656 | $ | 425 | |||||||||||
Note 21. Consolidating Financial Information
The following schedules present the Company’s consolidating balance sheet information at December 31, 20122015 and 2011,2014, and consolidating statements of income information for the years ended December 31, 2012, 20112015, 2014 and 2010.2013. These schedules present the individual subsidiaries of the Company and their contribution to the consolidated financial statements. Amounts presented will not necessarily be the same as those in the individual financial statements of the Company’s subsidiaries due to adjustments for purchase accounting, income taxes and noncontrolling interests. In addition, many of the Company’s subsidiaries use a classified balance sheet which also leads to differences in amounts reported for certain line items.
The Corporate and Otherother column primarily reflects the parent company’s investment in its subsidiaries, invested cash portfolio and corporate long term debt. The elimination adjustments are for intercompany assets and liabilities, interest and dividends, the parent company’s investment in capital stocks of subsidiaries, and various reclasses of debit or credit balances to the amounts in consolidation. Purchase accounting adjustments have been pushed down to the appropriate subsidiary.
Loews Corporation
Consolidating Balance Sheet Information
December 31, 2012 | CNA Financial | Diamond Offshore | Boardwalk Pipeline | HighMount | Loews Hotels | Corporate and Other | Eliminations | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2015 | CNA Financial | Diamond Offshore | Boardwalk Pipeline | Loews Hotels | Corporate and Other | Eliminations | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investments | $ | 47,636 | $ | 1,435 | $ | 1 | $ | 8 | $ | 33 | $ | 3,935 | $ | 53,048 | $ | 44,699 | $ | 117 | $ | 81 | $ | 4,503 | $ | 49,400 | ||||||||||||||||||||||||||||||||||||
Cash | 156 | 53 | 3 | 2 | 10 | 4 | 228 | 387 | 13 | $ | 4 | 12 | 24 | 440 | ||||||||||||||||||||||||||||||||||||||||||||||
Receivables | 8,516 | 503 | 89 | 69 | 25 | 183 | $ | (19) | 9,366 | 7,384 | 409 | 93 | 35 | 96 | $ | 24 | 8,041 | |||||||||||||||||||||||||||||||||||||||||||
Property, plant and equipment | 297 | 4,870 | 7,252 | 1,136 | 333 | 47 | 13,935 | 333 | 6,382 | 7,712 | 1,003 | 47 | 15,477 | |||||||||||||||||||||||||||||||||||||||||||||||
Deferred income taxes | 119 | 734 | (853) | - | 662 | 3 | 68 | (733 | ) | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill | 118 | 20 | 271 | 584 | 3 | 996 | 114 | 237 | 351 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Investments in capital stocks of subsidiaries | 16,936 | (16,936) | - | 15,129 | (15,129 | ) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Other assets | 730 | 366 | 330 | 22 | 84 | 4 | 2 | 1,538 | 850 | 235 | 330 | 288 | 19 | 1,722 | ||||||||||||||||||||||||||||||||||||||||||||||
Deferred acquisition costs of insurance subsidiaries | 598 | 598 | 598 | 598 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Separate account business | 312 | 312 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 58,482 | $ | 7,247 | $ | 7,946 | $ | 2,555 | $ | 488 | $ | 21,109 | $ | (17,806) | $ | 80,021 | $ | 55,027 | $ | 7,156 | $ | 8,376 | $ | 1,422 | $ | 19,867 | $ | (15,819 | ) | $ | 76,029 | |||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Liabilities and Equity: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Insurance reserves | $ | 40,005 | $ | 40,005 | $ | 36,486 | $ | 36,486 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Payable to brokers | 61 | $ | 10 | $ | 134 | 205 | 358 | $ | 209 | 567 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Short term debt | 13 | $ | 6 | 19 | 351 | $ | 287 | $ | 2 | 400 | 1,040 | |||||||||||||||||||||||||||||||||||||||||||||||||
Long term debt | 2,557 | $ | 1,489 | $ | 3,539 | 710 | 203 | 693 | 9,191 | 2,215 | 1,982 | $ | 3,469 | 596 | 1,281 | 9,543 | ||||||||||||||||||||||||||||||||||||||||||||
Deferred income taxes | 483 | 619 | 37 | 552 | $ | (851) | 840 | 5 | 276 | 766 | 47 | $ | (712 | ) | 382 | |||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | �� | 3,260 | 675 | 432 | 120 | 42 | 263 | (19) | 4,773 | 3,883 | 496 | 510 | 70 | 220 | 22 | 5,201 | ||||||||||||||||||||||||||||||||||||||||||||
Separate account business | 312 | 312 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | 46,208 | 2,647 | 4,590 | 840 | 288 | 1,642 | (870) | 55,345 | 43,298 | 3,041 | 4,745 | 715 | 2,110 | (690 | ) | 53,219 | ||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total shareholders’ equity | 11,058 | 2,331 | 1,624 | 1,715 | 200 | 19,467 | (16,936) | 19,459 | 10,516 | 2,195 | 1,517 | 705 | 17,757 | (15,129 | ) | 17,561 | ||||||||||||||||||||||||||||||||||||||||||||
Noncontrolling interests | 1,216 | 2,269 | 1,732 | 5,217 | 1,213 | 1,920 | 2,114 | 2 | 5,249 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total equity | 12,274 | 4,600 | 3,356 | 1,715 | 200 | 19,467 | (16,936) | 24,676 | 11,729 | 4,115 | 3,631 | 707 | 17,757 | (15,129 | ) | 22,810 | ||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and equity | $ | 58,482 | $ | 7,247 | $ | 7,946 | $ | 2,555 | $ | 488 | $ | 21,109 | $ | (17,806) | $ | 80,021 | $ | 55,027 | $ | 7,156 | $ | 8,376 | $ | 1,422 | $ | 19,867 | $ | (15,819 | ) | $ | 76,029 | |||||||||||||||||||||||||||||
|
|
Loews Corporation
Consolidating Balance Sheet Information
December 31, 2011 | CNA Financial | Diamond Offshore | Boardwalk Pipeline | HighMount | Loews Hotels | Corporate and Other | Eliminations | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2014 | CNA Financial | Diamond Offshore | Boardwalk Pipeline | Loews Hotels | Corporate and Other | Eliminations | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investments | $ | 44,372 | $ | 1,206 | $ | 10 | $ | 85 | $ | 71 | $ | 3,284 | $ | 49,028 | $ | 46,262 | $ | 234 | $ | 75 | $ | 5,461 | $ | 52,032 | ||||||||||||||||||||||||||||||||||||
Cash | 75 | 30 | 13 | 10 | 1 | 129 | 190 | 16 | $ | 8 | 9 | 141 | 364 | |||||||||||||||||||||||||||||||||||||||||||||||
Receivables | 8,302 | 594 | 114 | 109 | 33 | 226 | $ | (119) | 9,259 | 7,097 | 490 | 128 | 29 | 82 | $ | (56 | ) | 7,770 | ||||||||||||||||||||||||||||||||||||||||||
Property, plant and equipment | 272 | 4,674 | 6,713 | 1,576 | 338 | 45 | 13,618 | 280 | 6,949 | 7,649 | 671 | 62 | 15,611 | |||||||||||||||||||||||||||||||||||||||||||||||
Deferred income taxes | 444 | 499 | (943) | - | 222 | 2 | 374 | (598 | ) | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill | 86 | 20 | 215 | 584 | 3 | 908 | 117 | 20 | 237 | 374 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Investments in capital stocks of subsidiaries | 16,807 | (16,807) | - | 15,974 | (15,974 | ) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Other assets | 544 | 453 | 307 | 19 | 23 | 11 | 1,357 | 778 | 307 | 304 | 206 | 7 | 14 | 1,616 | ||||||||||||||||||||||||||||||||||||||||||||||
Deferred acquisition costs of insurance subsidiaries | 552 | 552 | 600 | 600 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Separate account business | 417 | 417 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 55,064 | $ | 6,977 | $ | 7,372 | $ | 2,872 | $ | 478 | $ | 20,374 | $ | (17,869) | $ | 75,268 | $ | 55,546 | $ | 8,016 | $ | 8,326 | $ | 992 | $ | 22,101 | $ | (16,614 | ) | $ | 78,367 | |||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Liabilities and Equity: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Insurance reserves | $ | 37,554 | $ | 37,554 | $ | 36,380 | $ | 36,380 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Payable to brokers | 72 | $ | 8 | $ | 1 | $ | 36 | $ | 45 | 162 | 117 | $ | 5 | $ | 551 | 673 | ||||||||||||||||||||||||||||||||||||||||||||
Short term debt | 83 | $ | 5 | 88 | 250 | $ | 85 | 335 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Long term debt | 2,525 | 1,488 | 3,398 | 700 | 208 | 694 | $ | (100) | 8,913 | 2,561 | 1,981 | $ | 3,690 | 421 | 1,680 | 10,333 | ||||||||||||||||||||||||||||||||||||||||||||
Deferred income taxes | 530 | 493 | 51 | 491 | (943) | 622 | 11 | 514 | 732 | 36 | $ | (400 | ) | 893 | ||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 2,971 | 594 | 373 | 104 | 20 | 266 | (19) | 4,309 | 3,713 | 792 | 400 | 17 | 421 | (240 | ) | 5,103 | ||||||||||||||||||||||||||||||||||||||||||||
Separate account business | 417 | 417 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | 43,622 | 2,620 | 4,265 | 840 | 284 | 1,496 | (1,062) | 52,065 | 42,782 | 3,542 | 4,822 | 559 | 2,652 | (640 | ) | 53,717 | ||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total shareholders’ equity | 10,315 | 2,209 | 1,951 | 2,032 | 194 | 18,878 | (16,807) | 18,772 | 11,457 | 2,359 | 1,558 | 431 | 19,449 | (15,974 | ) | 19,280 | ||||||||||||||||||||||||||||||||||||||||||||
Noncontrolling interests | 1,127 | 2,148 | 1,156 | 4,431 | 1,307 | 2,115 | 1,946 | 2 | 5,370 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total equity | 11,442 | 4,357 | 3,107 | 2,032 | 194 | 18,878 | (16,807) | 23,203 | 12,764 | 4,474 | 3,504 | 433 | 19,449 | (15,974 | ) | 24,650 | ||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and equity | $ | 55,064 | $ | 6,977 | $ | 7,372 | $ | 2,872 | $ | 478 | $ | 20,374 | $ | (17,869) | $ | 75,268 | $ | 55,546 | $ | 8,016 | $ | 8,326 | $ | 992 | $ | 22,101 | $ | (16,614 | ) | $ | 78,367 | |||||||||||||||||||||||||||||
|
|
Loews Corporation
Consolidating Statement of Income Information
Year Ended December 31, 2012 | CNA Financial | Diamond Offshore | Boardwalk Pipeline | HighMount | Loews Hotels | Corporate and Other | Eliminations | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2015 | CNA Financial | Diamond Offshore | Boardwalk Pipeline | Loews Hotels | Corporate and Other | Eliminations | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Insurance premiums | $ | 6,882 | $ | 6,882 | $ | 6,921 | $ | 6,921 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net investment income | 2,282 | $ | 5 | $ | 1 | $ | 61 | 2,349 | 1,840 | $ | 3 | $ | 1 | $ | 22 | 1,866 | ||||||||||||||||||||||||||||||||||||||||||||
Intercompany interest and dividends | 683 | $ | (683) | - | 816 | $ | (816 | ) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||
Investment gains (losses) | 60 | $ | (3) | 57 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investment losses | (71 | ) | (71 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Contract drilling revenues | 2,936 | 2,936 | 2,360 | 2,360 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 323 | 131 | 1,187 | $ | 297 | 396 | 1 | (7) | 2,328 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other revenues | 411 | 65 | 1,253 | $ | 604 | 6 | 2,339 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 9,547 | �� | 3,072 | 1,184 | 297 | 397 | 745 | (690) | 14,552 | 9,101 | 2,428 | 1,254 | 604 | 844 | (816 | ) | 13,415 | |||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Insurance claims and policyholders’ benefits | 5,896 | 5,896 | 5,384 | 5,384 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of deferred acquisition costs | 1,274 | 1,274 | 1,540 | 1,540 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Contract drilling expenses | 1,537 | 1,537 | 1,228 | 1,228 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other operating expenses | 1,327 | 572 | 717 | 919 | 372 | 106 | (7) | 4,006 | 1,469 | 1,508 | 851 | 555 | 116 | 4,499 | ||||||||||||||||||||||||||||||||||||||||||||||
Interest | 170 | 46 | 166 | 14 | 11 | 40 | (7) | 440 | 155 | 94 | 176 | 21 | 74 | 520 | ||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 8,667 | 2,155 | 883 | 933 | 383 | 146 | (14) | 13,153 | 8,548 | 2,830 | 1,027 | 576 | 190 | - | 13,171 | |||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income (loss) before income tax | 880 | 917 | 301 | (636 | ) | 14 | 599 | (676) | 1,399 | 553 | (402 | ) | 227 | 28 | 654 | (816 | ) | 244 | ||||||||||||||||||||||||||||||||||||||||||
Income tax (expense) benefit | (247 | ) | (223 | ) | (70 | ) | 229 | (7 | ) | 29 | (289) | (71 | ) | 117 | (46 | ) | (16 | ) | 59 | 43 | ||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | 633 | 694 | 231 | (407 | ) | 7 | 628 | (676) | 1,110 | 482 | (285 | ) | 181 | 12 | 713 | (816 | ) | 287 | ||||||||||||||||||||||||||||||||||||||||||
Amounts attributable to noncontrolling interests | (63 | ) | (357 | ) | (122 | ) | (542) | (49 | ) | 129 | (107 | ) | (27 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) attributable to Loews Corporation | $ | 570 | $ | 337 | $ | 109 | $ | (407 | ) | $ | 7 | $ | 628 | $ | (676) | $ | 568 | $ | 433 | $ | (156 | ) | $ | 74 | $ | 12 | $ | 713 | $ | (816 | ) | $ | 260 | | ||||||||||||||||||||||||||
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Loews Corporation
Consolidating Statement of Income Information
Year Ended December 31, 2011 | CNA Financial | Diamond Offshore | Boardwalk Pipeline | HighMount | Loews Hotels | Corporate and Other | Eliminations | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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Year Ended December 31, 2014 | CNA Financial | Diamond Offshore | Boardwalk Pipeline | Loews Hotels | Corporate and Other | Eliminations | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Insurance premiums | $ | 6,603 | $ | 6,603 | $ | 7,212 | $ | 7,212 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net investment income | 2,054 | $ | 7 | $ | 1 | $ | 1 | 2,063 | 2,067 | $ | 1 | $ | 1 | $ | 94 | 2,163 | ||||||||||||||||||||||||||||||||||||||||||||
Intercompany interest and dividends | 624 | $ | (624 | ) | - | 782 | $ | (782 | ) | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
Investment gains (losses) | (19 | ) | 1 | $ | (34 | ) | (52) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Investment gains | 54 | 54 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Contract drilling revenues | 3,254 | 3,254 | 2,737 | 2,737 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 325 | 73 | $ | 1,144 | 390 | 336 | (2 | ) | (5 | ) | 2,261 | |||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other revenues | 359 | 87 | 1,235 | $ | 475 | 3 | 2,159 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 8,963 | 3,335 | 1,144 | 356 | 337 | 623 | (629 | ) | 14,129 | 9,692 | 2,825 | 1,236 | 475 | 879 | (782 | ) | 14,325 | |||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Insurance claims and policyholders’ benefits | 5,489 | 5,489 | 5,591 | 5,591 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of deferred acquisition costs | 1,176 | 1,176 | 1,317 | 1,317 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Contract drilling expenses | 1,549 | 1,549 | 1,524 | 1,524 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other operating expenses | 1,234 | 535 | 760 | 245 | 311 | 87 | (5 | ) | 3,167 | 1,386 | 725 | 931 | 440 | 103 | 3,585 | |||||||||||||||||||||||||||||||||||||||||||||
Interest | 185 | 73 | 173 | 46 | 9 | 44 | (8 | ) | 522 | 183 | 62 | 165 | 14 | 74 | 498 | |||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 8,084 | 2,157 | 933 | 291 | 320 | 131 | (13 | ) | 11,903 | 8,477 | 2,311 | 1,096 | 454 | 177 | - | 12,515 | ||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income before income tax | 879 | 1,178 | 211 | 65 | 17 | 492 | (616 | ) | 2,226 | 1,215 | 514 | 140 | 21 | 702 | (782 | ) | 1,810 | |||||||||||||||||||||||||||||||||||||||||||
Income tax (expense) benefit | (244 | ) | (250 | ) | (57) | (24 | ) | (4 | ) | 47 | (532) | (322 | ) | (142 | ) | (11 | ) | (10 | ) | 28 | (457 | ) | ||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income from continuing operations | 893 | 372 | 129 | 11 | 730 | (782 | ) | 1,353 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Discontinued operations, net | (197 | ) | (194 | ) | (391 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 635 | 928 | 154 | 41 | 13 | 539 | (616 | ) | 1,694 | 696 | 372 | 129 | 11 | 536 | (782 | ) | 962 | |||||||||||||||||||||||||||||||||||||||||||
Amounts attributable to noncontrolling interests | (78 | ) | (477 | ) | (77) | (632) | (71 | ) | (189 | ) | (111 | ) | (371 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income attributable to Loews Corporation | $ | 557 | $ | 451 | $ | 77 | $ | 41 | $ | 13 | $ | 539 | $ | (616 | ) | $ | 1,062 | $ | 625 | $ | 183 | $ | 18 | $ | 11 | $ | 536 | $ | (782 | ) | $ | 591 | ||||||||||||||||||||||||||||
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|
Loews Corporation
Consolidating Statement of Income Information
Year Ended December 31, 2010 | CNA Financial | Diamond Offshore | Boardwalk Pipeline | HighMount | Loews Hotels | Corporate and Other | Eliminations | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2013 | CNA Financial | Diamond Offshore | Boardwalk Pipeline | Loews Hotels | Corporate and Other | Eliminations | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Insurance premiums | $ | 6,515 | $ | 6,515 | $ | 7,271 | $ | 7,271 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net investment income | 2,316 | $ | 3 | $ | 1 | $ | 1 | $ | 187 | 2,508 | 2,282 | $ | 1 | $ | 1 | $ | 141 | 2,425 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Intercompany interest and dividends | 720 | $ | (720) | – | 736 | $ | (736 | ) | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investment gains (losses) | 86 | $ | (30) | 56 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investment gains | 16 | 16 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Contract drilling revenues | 3,230 | 3,230 | 2,844 | 2,844 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 291 | 128 | 1,128 | 455 | 307 | (3) | 2,306 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other revenues | 363 | 81 | 1,231 | $ | 380 | 2 | 2,057 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 9,208 | 3,361 | 1,129 | 425 | 308 | 904 | (720) | 14,615 | 9,932 | 2,926 | 1,232 | 380 | 879 | (736 | ) | 14,613 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Expenses: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Insurance claims and policyholders’ benefits | 4,985 | 4,985 | 5,806 | 5,806 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of deferred acquisition costs | 1,168 | 1,168 | 1,362 | 1,362 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Contract drilling expenses | 1,391 | 1,391 | 1,573 | 1,573 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other operating expenses | 1,777 | 546 | 695 | 258 | 296 | 80 | 3,652 | 1,315 | 554 | 828 | 375 | 98 | 3,170 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest | 157 | 91 | 151 | 61 | 10 | 55 | (8) | 517 | 166 | 25 | 163 | 9 | 62 | 425 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 8,649 | 2,152 | 991 | 384 | 160 | - | 12,336 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income (loss) before income tax | 1,283 | 774 | 241 | (4 | ) | 719 | (736 | ) | 2,277 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income tax (expense) benefit | (363 | ) | (245 | ) | (56 | ) | 1 | 7 | (656 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income (loss) from continuing operations | 920 | 529 | 185 | (3 | ) | 726 | (736 | ) | 1,621 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Discontinued operations, net | 22 | (574 | ) | (552 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | 942 | 529 | 185 | (3 | ) | 152 | (736 | ) | 1,069 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amounts attributable to noncontrolling interests | (95 | ) | (272 | ) | (107 | ) | (474 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) attributable to Loews Corporation | $ | 847 | $ | 257 | $ | 78 | $ | (3 | ) | $ | 152 | $ | (736 | ) | $ | 595 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 8,087 | 2,028 | 846 | 319 | 306 | 135 | (8) | 11,713 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income before income tax | 1,121 | 1,333 | 283 | 106 | 2 | 769 | (712) | 2,902 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income tax expense | (335) | (413) | (73) | (48) | (1) | (24) | (894) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income from continuing operations | 786 | 920 | 210 | 58 | 1 | 745 | (712) | 2,008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Discontinued operations, net | (20) | (20) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 766 | 920 | 210 | 58 | 1 | 745 | (712) | 1,988 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amounts attributable to noncontrolling interests | (129) | (474) | (96) | (699) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income attributable to Loews Corporation | $ | 637 | $ | 446 | $ | 114 | $ | 58 | $ | 1 | $ | 745 | $ | (712) | $ | 1,289 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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This Page Intentionally Left Blank
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
The Company maintains a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) which is designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the federal securities laws, including this Report is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Company under the Exchange Act is accumulated and communicated to the Company’s management on a timely basis to allow decisions regarding required disclosure.
The Company’s principal executive officer (“CEO”) and principal financial officer (“CFO”) undertook an evaluation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Report. The CEO and CFO have concluded that the Company’s controls and procedures were effective as of December 31, 2012.2015.
Internal Control Over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, and the implementing rules of the Securities and Exchange Commission, the Company included a report of management’s assessment of the design and effectiveness of its internal controls as part of this Annual Report on Form 10-K for the year ended December 31, 2012.2015. The independent registered public accounting firm of the Company reported on the effectiveness of internal control over financial reporting as of December 31, 2012.2015. Management’s report and the independent registered public accounting firm’s report are included in Item 8 of this Report under the captions entitled “Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm” and are incorporated herein by reference.
There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the foregoing evaluation that occurred during the quarter ended December 31, 2012,2015, that have materially affected or that are reasonably likely to materially affect the Company’s internal control over financial reporting.
None.
Except as set forth below and under Executive Officers of the Registrant in Part I of this Report, the information called for by Part III (Items 10, 11, 12, 13 and 14) has been omitted as Registrant intends to include such information in its definitive Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year.
Item 15. Exhibits and Financial Statement Schedules.
(a) 1. Financial Statements:
The financial statements above appear under Item 8. The following additional financial data should be read in conjunction with those financial statements. Schedules not included with these additional financial data have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes to consolidated financial statements.
Page | ||||
2. Financial Statement Schedules: | ||||
Loews Corporation and Subsidiaries: | ||||
Description | Exhibit | ||||||||
3. Exhibits: | |||||||||
(3) | Articles of Incorporation and By-Laws | ||||||||
Restated Certificate of Incorporation of the Registrant, dated August 11, 2009, incorporated herein by reference to Exhibit 3.1 to Registrant’s Report on Form 10-Q for the quarter ended September 30, 2009 | 3.01 | ||||||||
By-Laws of the Registrant as amended through October 9, 2007, incorporated herein by reference to Exhibit 3.1 to Registrant’s Report on Form 10-Q filed October 31, 2007 | 3.02 | ||||||||
(4) | Instruments Defining the Rights of Security Holders, Including Indentures | ||||||||
The Registrant hereby agrees to furnish to the Commission upon request copies of instruments with respect to long term debt, pursuant to Item 601(b)(4)(iii) of Regulation S-K | |||||||||
(10) | Material Contracts | ||||||||
Loews Corporation Executive Deferred Compensation Plan, | 10.01*+ |
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Loews Corporation Incentive Compensation Plan for Executive Officers, as amended through October 30, 2009, incorporated herein by reference to Exhibit 10.02 to Registrant’s Report on Form 10-K for the year ended December 31, 2009 | 10.02+ |
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Loews Corporation Amended and Restated Stock Option Plan, incorporated herein by reference to Exhibit A to Registrant’s Proxy Statement filed with the Commission on March 26, 2012 | 10.03+ |
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Description | ExhibitNumber | |||||
Separation Agreement, dated as of May 7, 2008, by and among Registrant, Lorillard, Inc., Lorillard Tobacco Company, Lorillard Licensing Company LLC, One Park Media Services, Inc. and Plisa, S.A., incorporated herein by reference to Exhibit 10.1 to the Registrant’s Report on Form 10-Q for the quarter ended June 30, 2008 | 10.04 | |||||
Amended and Restated Employment Agreement dated as of February | 10.05+ |
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Amendment dated as of February | 10.06*+
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Supplemental Retirement Agreement dated January 1, 2002 between Registrant and Andrew H. Tisch, incorporated herein by reference to Exhibit 10.30 to Registrant’s Report on Form 10-K for the year ended December 31, 2001 | 10.07+ |
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Amendment No. 1 dated January 1, 2003 to Supplemental Retirement Agreement between Registrant and Andrew H. Tisch, incorporated herein by reference to Exhibit 10.33 to Registrant’s Report on Form 10-K for the year ended December 31, 2002 | 10.08+ |
| ||||
Amendment No. 2 dated January 1, 2004 to Supplemental Retirement Agreement between Registrant and Andrew H. Tisch, incorporated herein by reference to Exhibit 10.27 to Registrant’s Report on Form 10-K for the year ended December 31, 2003 | 10.09+ |
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Amended and Restated Employment Agreement dated as of February | 10.10+ |
| ||||
Amendment dated as of February | 10.11*+
| |||||
Supplemental Retirement Agreement dated January 1, 2002 between Registrant and James S. Tisch, incorporated herein by reference to Exhibit 10.31 to Registrant’s Report on Form 10-K for the year ended December 31, 2001 | 10.12+ |
| ||||
Amendment No. 1 dated January 1, 2003 to Supplemental Retirement Agreement between Registrant and James S. Tisch, incorporated herein by reference to Exhibit 10.35 to Registrant’s Report on Form 10-K for the year ended December 31, 2002 | 10.13+ |
| ||||
Amendment No. 2 dated January 1, 2004 to Supplemental Retirement Agreement between Registrant and James S. Tisch, incorporated herein by reference to Exhibit 10.34 to Registrant’s Report on Form 10-K for the year ended December 31, 2003 | 10.14+ |
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Amended and Restated Employment Agreement dated as of February | 10.15+ |
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Amendment dated as of February | 10.16*+
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Supplemental Retirement Agreement dated January 1, 2002 between Registrant and Jonathan M. Tisch, incorporated herein by reference to Exhibit 10.32 to Registrant’s Report on Form 10-K for the year ended December 31, 2001 | 10.17+ |
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Exhibit | ||||||
Description | Number | |||||
Amendment No. 1 dated January 1, 2003 to Supplemental Retirement Agreement between Registrant and Jonathan M. Tisch, incorporated herein by reference to Exhibit 10.37 to Registrant’s Report on Form 10-K for the year ended December 31, 2002 | 10.18+
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Amendment No. 2 dated January 1, 2004 to Supplemental Retirement Agreement between Registrant and Jonathan M. Tisch, incorporated herein by reference to Exhibit 10.41 to Registrant’s Report on Form 10-K for the year ended December 31, 2003 | 10.19+ |
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Form of Stock Option Certificate for grants to executive officers and other employees and to non-employee directors pursuant to the Loews Corporation Amended and Restated Stock Option Plan, incorporated herein by reference to Exhibit 10.27 to Registrant’s Report on Form 10-K for the year ended December 31, 2009 | 10.20+ |
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Form of Award Certificate for grants of stock appreciation rights to executive officers and other employees pursuant to the Loews Corporation Amended and Restated Stock Option Plan, incorporated herein by reference to Exhibit 10.28 to Registrant’s Report on Form 10-K for the year ended December 31, 2009 | 10.21+ |
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Lease agreement dated November 20, 2001 between |
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| Subsidiaries of the Registrant | |||
List of subsidiaries of the Registrant | 21.01* | |||
(23) | Consent of Experts and Counsel | |||
Consent of Deloitte & Touche LLP | 23.01* | |||
(31) |
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| ||||
| Rule 13a-14(a)/15d-14(a) Certifications | |||
Certification by the Chief Executive Officer of the Company pursuant to Rule 13a-14(a) and Rule 15d-14(a) | 31.01* | |||
Certification by the Chief Financial Officer of the Company pursuant to Rule 13a-14(a) and Rule 15d-14(a) | 31.02* | |||
(32) | Section 1350 Certifications | |||
Certification by the Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350 (as adopted by Section 906 of the Sarbanes-Oxley Act of 2002) | 32.01* | |||
Certification by the Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350 (as adopted by Section 906 of the Sarbanes-Oxley Act of 2002) | 32.02* |
Exhibit | ||||
Description | Number | |||
(100) | XBRL | |||
XBRL Instance Document | ||||
XBRL Taxonomy Extension Schema | ||||
XBRL Taxonomy Extension Calculation Linkbase | ||||
XBRL Taxonomy Extension Definition Linkbase | ||||
XBRL Taxonomy Label Linkbase | ||||
XBRL Taxonomy Extension Presentation Linkbase |
* | Filed herewith. |
+ |
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Management contract or compensatory plan or arrangement. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
LOEWS CORPORATION | ||||||||
Dated: February | By |
| /s/ | |||||
( | ||||||||
Chief Financial Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. | ||||||
Dated: February | By | /s/ James S. Tisch | ||||
(James S. Tisch, President, | ||||||
Chief Executive Officer and Director) | ||||||
Dated: February | By | /s/ | ||||
( | ||||||
Chief Financial Officer) | ||||||
Dated: February | By | /s/ Mark S. Schwartz | ||||
(Mark S. Schwartz, | ||||||
Chief Accounting Officer) | ||||||
Dated: February | By | /s/ Lawrence S. Bacow | ||||
(Lawrence S. Bacow, Director) | ||||||
Dated: February | By | /s/ Ann E. Berman | ||||
(Ann E. Berman, Director) | ||||||
Dated: February | By | /s/ Joseph L. Bower | ||||
(Joseph L. Bower, Director) |
Dated: February | By | /s/ Charles D. Davidson | ||||
(Charles D. Davidson, Director) | ||||||
Dated: February 19, 2016 | By | /s/ Charles M. Diker | ||||
(Charles M. Diker, Director) | ||||||
Dated: February | By | /s/ Jacob A. Frenkel | ||||
(Jacob A. Frenkel, Director) | ||||||
Dated: February | By | /s/ Paul J. Fribourg | ||||
(Paul J. Fribourg, Director) | ||||||
Dated: February | By | /s/ Walter L. Harris | ||||
(Walter L. Harris, Director) | ||||||
Dated: February | By | /s/ Philip A. Laskawy | ||||
(Philip A. Laskawy, Director) | ||||||
Dated: February | By | /s/ Ken Miller | ||||
(Ken Miller, Director) | ||||||
Dated: February |
|
| ||||
19, 2016 | ||||||
| By | /s/ Andrew H. Tisch | ||||
(Andrew H. Tisch, Director) | ||||||
Dated: February | By | /s/ Jonathan M. Tisch | ||||
(Jonathan M. Tisch, Director) | ||||||
Dated: February 19, 2016 | By | /s/ Anthony Welters | ||||
(Anthony Welters, Director) |
Condensed Financial Information of Registrant
LOEWS CORPORATION
BALANCE SHEETS
ASSETS
December 31 | 2012 | 2011 | ||||||||||
| ||||||||||||
(In millions) | ||||||||||||
Current assets, principally investment in short term instruments | $ | 2,556 | $ | 2,267 | ||||||||
Investments in securities | 1,332 | 1,140 | ||||||||||
Investments in capital stocks of subsidiaries, at equity | 16,936 | 16,807 | ||||||||||
Other assets | 34 | 25 | ||||||||||
| ||||||||||||
Total assets | $ | 20,858 | $ | 20,239 | ||||||||
| ||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
| |||||||||||
Current liabilities | $ | 67 | $ | 233 | ||||||||
Long term debt | 693 | 694 | ||||||||||
Deferred income tax and other | 639 | 540 | ||||||||||
| ||||||||||||
Total liabilities | 1,399 | 1,467 | ||||||||||
Shareholders’ equity | 19,459 | 18,772 | ||||||||||
| ||||||||||||
Total liabilities and shareholders’ equity | $ | 20,858 | $ | 20,239 | ||||||||
| ||||||||||||
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
| |||||||||||
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||
| ||||||||||||
(In millions) | ||||||||||||
Revenues: | ||||||||||||
Equity in income of subsidiaries (a) | $ | 653 | $ | 1,193 | $ | 1,346 | ||||||
Interest and other | 51 | (17) | 134 | |||||||||
| ||||||||||||
Total | 704 | 1,176 | 1,480 | |||||||||
| ||||||||||||
Expenses: | ||||||||||||
Administrative | 101 | 81 | 80 | |||||||||
Interest | 40 | 44 | 55 | |||||||||
| ||||||||||||
Total | 141 | 125 | 135 | |||||||||
| ||||||||||||
563 | 1,051 | 1,345 | ||||||||||
Income tax (expense) benefit | 5 | 11 | (56) | |||||||||
| ||||||||||||
Net income | 568 | 1,062 | 1,289 | |||||||||
Equity in other comprehensive income of subsidiaries | 289 | 143 | 646 | |||||||||
| ||||||||||||
Total comprehensive income | $ | 857 | $ | 1,205 | $ | 1,935 | ||||||
|
December 31 | 2015 | 2014 | ||||||
| ||||||||
(In millions) | ||||||||
Current assets, principally investment in short term instruments | $ | 2,888 | $ | 3,959 | ||||
Investments in securities | 1,487 | 1,439 | ||||||
Investments in capital stocks of subsidiaries, at equity | 15,129 | 15,974 | ||||||
Other assets | 99 | 585 | ||||||
| ||||||||
Total assets | $ | 19,603 | $ | 21,957 | ||||
| ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY
| ||||||||
Current liabilities | $ | 260 | $ | 618 | ||||
Short term debt | 400 | |||||||
Long term debt | 1,281 | 1,680 | ||||||
Deferred income tax and other | 101 | 379 | ||||||
| ||||||||
Total liabilities | 2,042 | 2,677 | ||||||
Shareholders’ equity | 17,561 | 19,280 | ||||||
| ||||||||
Total liabilities and shareholders’ equity | $ | 19,603 | $ | 21,957 | ||||
|
SCHEDULE I
(Continued)
Year Ended December 31 | 2015 | 2014 | 2013 | |||||||||
| ||||||||||||
(In millions) | ||||||||||||
Revenues: | ||||||||||||
Equity in income of subsidiaries (a) | $ | 302 | $ | 1,034 | $ | 1,218 | ||||||
Interest and other | 74 | 92 | 83 | |||||||||
| ||||||||||||
Total | 376 | 1,126 | 1,301 | |||||||||
| ||||||||||||
Expenses: | ||||||||||||
Administrative | 108 | 97 | 91 | |||||||||
Interest | 74 | 74 | 62 | |||||||||
| ||||||||||||
Total | 182 | 171 | 153 | |||||||||
| ||||||||||||
Income before income tax | 194 | 955 | 1,148 | |||||||||
Income tax benefit | 66 | 7 | 1 | |||||||||
| ||||||||||||
Income from continuing operations | 260 | 962 | 1,149 | |||||||||
Discontinued operations, net | (371 | ) | (554) | |||||||||
| ||||||||||||
Net income | 260 | 591 | 595 | |||||||||
Equity in other comprehensive loss of subsidiaries | (638 | ) | (59 | ) | (341) | |||||||
| ||||||||||||
Total comprehensive income (loss) | $ | (378 | ) | $ | 532 | $ | 254 | |||||
|
SCHEDULE I (Continued) Condensed Financial Information of Registrant
LOEWS CORPORATION
STATEMENTS OF CASH FLOWS
Year Ended December 31 | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | ||||||||||||||||||
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(In millions) | ||||||||||||||||||||||||
Operating Activities: | ||||||||||||||||||||||||
Net income | $ | 568 | $ | 1,062 | $ | 1,289 | $ | 260 | $ | 591 | $ | 595 | ||||||||||||
Adjustments to reconcile net income to net cash provided (used) by operating activities: | ||||||||||||||||||||||||
Undistributed (earnings) losses of affiliates | 14 | (571) | (631) | |||||||||||||||||||||
Equity method investees | 488 | 95 | 58 | |||||||||||||||||||||
Provision for deferred income taxes | 67 | (21) | 92 | 113 | (62 | ) | (376) | |||||||||||||||||
Changes in operating assets and liabilities–net: | ||||||||||||||||||||||||
Changes in operating assets and liabilities, net: | ||||||||||||||||||||||||
Receivables | 2 | (37) | (154) | (6 | ) | (2 | ) | (1) | ||||||||||||||||
Accounts payable and accrued liabilities | (42) | (3) | (13) | 71 | 200 | 511 | ||||||||||||||||||
Trading securities | (396) | 420 | (1,931) | 718 | (269 | ) | (787) | |||||||||||||||||
Other, net | (13) | 16 | (39) | (8 | ) | (23 | ) | (59) | ||||||||||||||||
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| ||||||||||||||||||||||
200 | 866 | (1,387) | 1,636 | 530 | (59) | |||||||||||||||||||
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Investing Activities: | ||||||||||||||||||||||||
Investments and advances to subsidiaries | 262 | (848) | 508 | |||||||||||||||||||||
Investments in and advances to subsidiaries | (285 | ) | 130 | (669) | ||||||||||||||||||||
Change in investments, primarily short term | (158) | 1,003 | 375 | 7 | 111 | |||||||||||||||||||
Redemption of CNA preferred stock | 1,000 | |||||||||||||||||||||||
Other | (10) | (18) | (1) | (4 | ) | (2 | ) | (3) | ||||||||||||||||
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94 | 137 | 1,882 | (289 | ) | 135 | (561) | ||||||||||||||||||
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Financing Activities: | ||||||||||||||||||||||||
Dividends paid | (99) | (101) | (105) | (90 | ) | (95 | ) | (97) | ||||||||||||||||
Issuance of common stock | 13 | 4 | 8 | 7 | 6 | 5 | ||||||||||||||||||
Purchases of treasury shares | (212) | (732) | (405) | (1,265 | ) | (622 | ) | (228) | ||||||||||||||||
Principal payments on debt | (175) | |||||||||||||||||||||||
Issuance of debt | 983 | |||||||||||||||||||||||
Other | 4 | 1 | 2 | 1 | 2 | 1 | ||||||||||||||||||
|
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| ||||||||||||||||||||||
(294) | (1,003) | (500) | (1,347 | ) | (709 | ) | 664 | |||||||||||||||||
|
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| ||||||||||||||||||||||
Net change in cash | (5) | - | (44 | ) | 44 | |||||||||||||||||||
Cash, beginning of year | 5 | 44 | ||||||||||||||||||||||
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Cash, end of year | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 44 | ||||||||||||
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(a) | Cash dividends paid to the Company by affiliates amounted to |
LOEWS CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Column A | Column B | Column C | Column D | Column E | Column B | Column C | Column D | Column E | ||||||||||||||||||||||||||||
Additions | Additions | |||||||||||||||||||||||||||||||||||
Description | Balance at Beginning of Period | Charged to Costs and Expenses | Charged to Other Accounts | Deductions | Balance at End of Period | | Balance at Beginning of Period | | Charged to Costs and Expenses | Charged to Other | Deductions | | Balance at End of Period | | ||||||||||||||||||||||
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(In millions) | ||||||||||||||||||||||||||||||||||||
For the Year Ended December 31, 2012 | For the Year Ended December 31, 2015 | |||||||||||||||||||||||||||||||||||
Deducted from assets: | ||||||||||||||||||||||||||||||||||||
Allowance for doubtful accounts | $ 241 | $ 1 | $ 9 | $ 38 | $ 213 | $ | 117 | $ - | $ - | $ | 21 | $ | 96 | |||||||||||||||||||||||
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Total | $ 241 | $ 1 | $ 9 | $ 38 | $ 213 | $ | 117 | $ - | $ - | $ | 21 | $ | 96 | |||||||||||||||||||||||
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For the Year Ended December 31, 2011 | For the Year Ended December 31, 2014 | |||||||||||||||||||||||||||||||||||
Deducted from assets: | ||||||||||||||||||||||||||||||||||||
Allowance for doubtful accounts | $ 404 | $ 6 | $ 69 | $ 238 | $ 241 | $ | 329 | $ - | $ - | $ | 212 | $ | 117 | |||||||||||||||||||||||
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Total | $ 404 | $ 6 | $ 69 | $ 238 | $ 241 | $ | 329 | $ - | $ - | $ | 212 | $ | 117 | |||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||
For the Year Ended December 31, 2010 | For the Year Ended December 31, 2013 | |||||||||||||||||||||||||||||||||||
Deducted from assets: | ||||||||||||||||||||||||||||||||||||
Allowance for doubtful accounts | $ 614 | $ 1 | $ 69 | $ 280 | $ 404 | $ | 213 | $ 23 | $ 140 | $ | 47 | $ | 329 | |||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||
Total | $ 614 | $ 1 | $ 69 | $ 280 | $ 404 | $ | 213 | $ 23 | $ 140 | $ | 47 | $ | 329 | |||||||||||||||||||||||
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LOEWS CORPORATION AND SUBSIDIARIES
Supplemental Information Concerning Property and Casualty Insurance Operations
Consolidated Property and Casualty Operations | ||||||||||||
| ||||||||||||
December 31 | 2012 | 2011 | ||||||||||
| ||||||||||||
(In millions) | ||||||||||||
Deferred acquisition costs | $ | 598 | $ | 552 | ||||||||
Reserves for unpaid claim and claim adjustment expenses | 24,696 | 24,228 | ||||||||||
Discount deducted from claim and claim adjustment expense reserves above (based on interest rates ranging from 3.0% to 9.7%) | 1,850 | 1,569 | ||||||||||
Unearned premiums | 3,610 | 3,250 | ||||||||||
Year Ended December 31 | 2012 | 2011 | 2010 | |||||||||
| ||||||||||||
(In millions) | ||||||||||||
Net written premiums | $ | 6,964 | $ | 6,798 | $ | 6,471 | ||||||
Net earned premiums | 6,881 | 6,603 | 6,514 | |||||||||
Net investment income | 2,074 | 1,845 | 2,097 | |||||||||
Incurred claim and claim adjustment expenses related to current year | 5,266 | 4,901 | 4,737 | |||||||||
Incurred claim and claim adjustment expenses related to prior years | (180) | (429) | (545) | |||||||||
Amortization of deferred acquisition costs | 1,274 | 1,176 | 1,168 | |||||||||
Paid claim and claim adjustment expenses | 5,257 | 4,499 | 4,667 |
Consolidated Property and Casualty Operations | ||||||||
| ||||||||
December 31 | 2015 | 2014 | ||||||
| ||||||||
(In millions) | ||||||||
Deferred acquisition costs | $ | 598 | $ | 600 | ||||
Reserves for unpaid claim and claim adjustment expenses | 22,663 | 23,271 | ||||||
Discount deducted from claim and claim adjustment expense | ||||||||
reserves above (based on interest rates ranging from 3.5% to 8.0%) | 1,534 | 1,578 | ||||||
Unearned premiums | 3,671 | 3,592 |
Year Ended December 31 | 2015 | 2014 | 2013 | |||||||||
| ||||||||||||
(In millions) | ||||||||||||
Net written premiums | $ | 6,962 | $ | 7,088 | $ | 7,348 | ||||||
Net earned premiums | 6,921 | 7,212 | 7,271 | |||||||||
Net investment income | 1,807 | 2,031 | 2,240 | |||||||||
Incurred claim and claim adjustment expenses related to current year | 4,934 | 5,043 | 5,113 | |||||||||
Incurred claim and claim adjustment expenses related to prior years | (255) | (39) | (115) | |||||||||
Amortization of deferred acquisition costs | 1,540 | 1,317 | 1,362 | |||||||||
Paid claim and claim adjustment expenses | 4,945 | 5,297 | 5,566 |
L-4184