UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017March 31, 2018
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 Number1-6541
LOEWS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 13-2646102 | |||||
(State or other jurisdiction of | (I.R.S. Employer | |||||
incorporation or organization) | Identification No.) |
667 Madison Avenue, New York, N.Y. 10065-8087
(Address of principal executive offices) (Zip Code)
(212)521-2000
(Registrant’s telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Yes | X | No |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes X No Not Applicable
Yes | X | No | Not Applicable |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.
Large accelerated filer | X | Accelerated filer | Non-accelerated filer | Smaller reporting company |
Emerging growth company |
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).
Yes No X
Yes | No | X |
Class | Outstanding at | |||
Common stock, $0.01 par value | 319,322,226 shares |
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
June 30, | December 31, | March 31, 2018 | December 31, 2017 | |||||||||||||
2017 | 2016 | |||||||||||||||
(Dollar amounts in millions, except per share data) | ||||||||||||||||
Assets: | ||||||||||||||||
Investments: | ||||||||||||||||
Fixed maturities, amortized cost of $38,982 and $38,947 | $ | 42,065 | $ | 41,494 | ||||||||||||
Equity securities, cost of $603 and $571 | 607 | 549 | ||||||||||||||
Fixed maturities, amortized cost of $38,830 and $38,861 | $ | 41,100 | $ 42,133 | |||||||||||||
Equity securities, cost of $1,326 and $1,177 | 1,333 | 1,224 | ||||||||||||||
Limited partnership investments | 3,254 | 3,220 | 3,291 | 3,278 | ||||||||||||
Other invested assets, primarily mortgage loans | 748 | 683 | 974 | 945 | ||||||||||||
Short term investments | 4,932 | 4,765 | 4,367 | 4,646 | ||||||||||||
Total investments | 51,606 | 50,711 | 51,065 | 52,226 | ||||||||||||
Cash | 357 | 327 | 451 | 472 | ||||||||||||
Receivables | 7,977 | 7,644 | 7,893 | 7,613 | ||||||||||||
Property, plant and equipment | 15,447 | 15,230 | 15,461 | 15,427 | ||||||||||||
Goodwill | 647 | 346 | 661 | 659 | ||||||||||||
Other assets | 2,420 | 1,736 | 4,590 | 2,555 | ||||||||||||
Deferred acquisition costs of insurance subsidiaries | 647 | 600 | 665 | 634 | ||||||||||||
Total assets | $ | 79,101 | $ | 76,594 | $ | 80,786 | $ 79,586 | |||||||||
Liabilities and Equity: | ||||||||||||||||
Insurance reserves: | ||||||||||||||||
Claim and claim adjustment expense | $ | 22,179 | $ | 22,343 | $ | 22,067 | $ 22,004 | |||||||||
Future policy benefits | 10,824 | 10,326 | 10,783 | 11,179 | ||||||||||||
Unearned premiums | 4,107 | 3,762 | 4,256 | 4,029 | ||||||||||||
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| |||||||||||||||
Total insurance reserves | 37,110 | 36,431 | 37,106 | 37,212 | ||||||||||||
Payable to brokers | 478 | 150 | 280 | 60 | ||||||||||||
Short term debt | 192 | 110 | 213 | 280 | ||||||||||||
Long term debt | 11,094 | 10,668 | 11,255 | 11,253 | ||||||||||||
Deferred income taxes | 852 | 636 | 734 | 749 | ||||||||||||
Other liabilities | 5,269 | 5,238 | 7,350 | 5,466 | ||||||||||||
Total liabilities | 54,995 | 53,233 | 56,938 | 55,020 | ||||||||||||
Commitments and contingent liabilities | ||||||||||||||||
Preferred stock, $0.10 par value: | ||||||||||||||||
Authorized – 100,000,000 shares | ||||||||||||||||
Common stock, $0.01 par value: | ||||||||||||||||
Authorized – 1,800,000,000 shares | ||||||||||||||||
Issued – 336,724,742 and 336,621,358 shares | 3 | 3 | ||||||||||||||
Issued – 332,646,800 and 332,487,815 shares | 3 | 3 | ||||||||||||||
Additionalpaid-in capital | 3,178 | 3,187 | 3,142 | 3,151 | ||||||||||||
Retained earnings | 15,677 | 15,196 | 16,321 | 16,096 | ||||||||||||
Accumulated other comprehensive loss | (36 | ) | (223 | ) | (417 | ) | (26 | ) | ||||||||
18,822 | 18,163 | |||||||||||||||
Less treasury stock, at cost (123,500 shares) | (6 | ) | ||||||||||||||
19,049 | 19,224 | |||||||||||||||
Less treasury stock, at cost (10,250,033 and 400,000 shares) | (517 | ) | (20 | ) | ||||||||||||
Total shareholders’ equity | 18,816 | 18,163 | 18,532 | 19,204 | ||||||||||||
Noncontrolling interests | 5,290 | 5,198 | 5,316 | 5,362 | ||||||||||||
Total equity | 24,106 | 23,361 | 23,848 | 24,566 | ||||||||||||
Total liabilities and equity | $ | 79,101 | $ | 76,594 | $ | 80,786 | $ 79,586 | |||||||||
See accompanying Notes to Consolidated Condensed Financial Statements.
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||||||
Three Months Ended March 31 | 2018 | 2017 | ||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 |
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(In millions, except per share data) | ||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||
Insurance premiums | $ | 1,734 | $ | 1,730 | $ | 3,379 | $ | 3,429 | $ | 1,785 | $ | 1,645 | ||||||||||||||||
Net investment income | 478 | 587 | 1,082 | 1,009 | 506 | 604 | ||||||||||||||||||||||
Investment gains (losses): | ||||||||||||||||||||||||||||
Other-than-temporary impairment losses | (2 | ) | (15 | ) | (4 | ) | (38 | ) | (6 | ) | (2 | ) | ||||||||||||||||
Other net investment gains | 45 | 16 | 81 | 11 | 15 | 36 | ||||||||||||||||||||||
Total investment gains (losses) | 43 | 1 | 77 | (27 | ) | |||||||||||||||||||||||
Contract drilling revenues | 392 | 357 | 756 | 801 | ||||||||||||||||||||||||
Other revenues | 712 | 632 | 1,365 | 1,268 | ||||||||||||||||||||||||
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Total investment gains | 9 | 34 | ||||||||||||||||||||||||||
Operating revenues and other | 1,281 | 1,017 | ||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||
Total | 3,359 | 3,307 | 6,659 | 6,480 | 3,581 | 3,300 | ||||||||||||||||||||||
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| |||||||||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||
Insurance claims and policyholders’ benefits | 1,280 | 1,339 | 2,573 | 2,747 | 1,339 | 1,293 | ||||||||||||||||||||||
Amortization of deferred acquisition costs | 312 | 305 | 617 | 612 | 296 | 305 | ||||||||||||||||||||||
Contract drilling expenses | 196 | 198 | 400 | 411 | ||||||||||||||||||||||||
Other operating expenses (Note 5) | 1,085 | 1,611 | 1,931 | 2,518 | ||||||||||||||||||||||||
Operating expenses and other | 1,400 | 1,050 | ||||||||||||||||||||||||||
Interest | 139 | 130 | 281 | 273 | 141 | 142 | ||||||||||||||||||||||
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Total | 3,012 | 3,583 | 5,802 | 6,561 | 3,176 | 2,790 | ||||||||||||||||||||||
Income (loss) before income tax | 347 | (276 | ) | 857 | (81 | ) | ||||||||||||||||||||||
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Income before income tax | 405 | 510 | ||||||||||||||||||||||||||
Income tax expense | (69 | ) | (12 | ) | (188 | ) | (8 | ) | (25 | ) | (119 | ) | ||||||||||||||||
Net income (loss) | 278 | (288 | ) | 669 | (89 | ) | ||||||||||||||||||||||
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| |||||||||||||||||||||||||||
Net income | 380 | 391 | ||||||||||||||||||||||||||
Amounts attributable to noncontrolling interests | (47 | ) | 223 | (143 | ) | 126 | (87 | ) | (96 | ) | ||||||||||||||||||
Net income (loss) attributable to Loews Corporation | $ | 231 | $ | (65 | ) | $ | 526 | $ | 37 | |||||||||||||||||||
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Net income attributable to Loews Corporation | $ | 293 | $ | 295 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Basic and diluted net income (loss) per share | $ | 0.69 | $ | (0.19 | ) | $ | 1.56 | $ | 0.11 | |||||||||||||||||||
Basic net income per share | $ | 0.89 | $ | 0.88 | ||||||||||||||||||||||||
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Diluted net income per share | $ | 0.89 | $ | 0.87 | ||||||||||||||||||||||||
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Dividends per share | $ | 0.0625 | $ | 0.0625 | $ | 0.125 | $ | 0.125 | $ | 0.0625 | $ | 0.0625 | ||||||||||||||||
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Weighted average shares outstanding: | ||||||||||||||||||||||||||||
Shares of common stock | 336.91 | 338.72 | 336.90 | 338.91 | 327.78 | 336.88 | ||||||||||||||||||||||
Dilutive potential shares of common stock | 0.81 | 0.80 | 0.19 | 0.94 | 0.80 | |||||||||||||||||||||||
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Total weighted average shares outstanding assuming dilution | 337.72 | 338.72 | 337.70 | 339.10 | 328.72 | 337.68 | ||||||||||||||||||||||
|
See accompanying Notes to Consolidated Condensed Financial Statements.
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
Three Months Ended March 31 | 2018 | 2017 | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 |
| ||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Net income (loss) | $ | 278 | $ | (288 | ) | $ | 669 | $ | (89 | ) | ||||||||||||||
Net income | $ | 380 | $ | 391 | ||||||||||||||||||||
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Other comprehensive income (loss), after tax | ||||||||||||||||||||||||
Changes in: | ||||||||||||||||||||||||
Net unrealized gains (losses) on investments with other- than-temporary impairments | (1 | ) | (4 | ) | 4 | |||||||||||||||||||
Net other unrealized gains on investments | 77 | 321 | 144 | 549 | ||||||||||||||||||||
Total unrealized gains onavailable-for-sale investments | 77 | 320 | 140 | 553 | ||||||||||||||||||||
Net unrealized losses on investments with other-than-temporary impairments | (9) | (4) | ||||||||||||||||||||||
Net other unrealized gains (losses) on investments | (429) | 67 | ||||||||||||||||||||||
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Total unrealized gains (losses) on investments | (438) | 63 | ||||||||||||||||||||||
Unrealized gains on cash flow hedges | 1 | 10 | ||||||||||||||||||||||
Pension liability | 7 | 5 | 15 | 13 | 10 | 8 | ||||||||||||||||||
Foreign currency translation | 42 | (48 | ) | 53 | (34 | ) | 11 | 11 | ||||||||||||||||
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Other comprehensive income | 126 | 277 | 208 | 533 | ||||||||||||||||||||
Other comprehensive income (loss) | (407) | 82 | ||||||||||||||||||||||
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Comprehensive income (loss) | 404 | (11 | ) | 877 | 444 | (27) | 473 | |||||||||||||||||
Amounts attributable to noncontrolling interests | (60 | ) | 191 | (164 | ) | 69 | (43) | (104) | ||||||||||||||||
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Total comprehensive income attributable to Loews Corporation | $ | 344 | $ | 180 | $ | 713 | $ | 513 | ||||||||||||||||
Total comprehensive income (loss) attributable to Loews Corporation | $ | (70) | $ | 369 | ||||||||||||||||||||
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See accompanying Notes to Consolidated Condensed Financial Statements.
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF EQUITY
(Unaudited)
Loews Corporation Shareholders | Loews Corporation Shareholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated | Common | Accumulated | Common | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Additional | Other | Stock | Additional | Other | Stock | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common | Paid-in | Retained | Comprehensive | Held in | Noncontrolling | Common | Paid-in | Retained | Comprehensive | Held in | Noncontrolling | |||||||||||||||||||||||||||||||||||||||||||||||||
Total | Stock | Capital | Earnings | Income (Loss) | Treasury | Interests | Total | Stock | Capital | Earnings | Income (Loss) | Treasury | Interests | |||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2016 | $ | 22,810 | $ | 3 | $ | 3,184 | $ | 14,731 | $ | (357 | ) | $ | - | $ | 5,249 | |||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | (89 | ) | 37 | (126 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | 533 | 476 | 57 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid | (136 | ) | (42 | ) | (94 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchases of subsidiary stock from noncontrolling interests | (9 | ) | 3 | (12 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchases of Loews treasury stock | (98 | ) | (98 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 24 | 23 | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | (4 | ) | (13 | ) | (2 | ) | 11 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2016 | $ | 23,031 | $ | 3 | $ | 3,197 | $ | 14,724 | $ | 119 | $ | (98 | ) | $ | 5,086 | |||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2017 | $ | 23,361 | $ | 3 | $ | 3,187 | $ | 15,196 | $ | (223 | ) | $ | - | $ | 5,198 | $ | 23,361 | $ | 3 | $ | 3,187 | $ | 15,196 | $ | (223) | $ | - | $ | 5,198 | |||||||||||||||||||||||||||||||
Net income | 669 | 526 | 143 | 391 | 295 | 96 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | 208 | 187 | 21 | 82 | 74 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid | (138 | ) | (42 | ) | (96 | ) | (97 | ) | (21 | ) | (76 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | (19 | ) | 19 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | (3 | ) | (4 | ) | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2017 | $ | 23,734 | $ | 3 | $ | 3,168 | $ | 15,466 | $ | (149) | $ | - | $ | 5,246 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2018, as reported | $ | 24,566 | $ | 3 | $ | 3,151 | $ | 16,096 | $ | (26) | $ | (20 | ) | $ | 5,362 | |||||||||||||||||||||||||||||||||||||||||||||
Cumulative effect adjustments from changes in accounting standards (Note 1) | (91 | ) | (43 | ) | (28) | (20 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2018, as adjusted | 24,475 | 3 | 3,151 | 16,053 | (54) | (20 | ) | 5,342 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 380 | 293 | 87 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | (407 | ) | (363) | (44 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid | (98 | ) | (20 | ) | (78 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchases of Loews treasury stock | (6 | ) | (6 | ) | (497 | ) | (497 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 14 | (9 | ) | 23 | - | (7 | ) | 7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | (2 | ) | (3 | ) | 1 | (5 | ) | (2 | ) | (5 | ) | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2017 | $ | 24,106 | $ | 3 | $ | 3,178 | $ | 15,677 | $ | (36 | ) | $ | (6 | ) | $ | 5,290 | ||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2018 | $ | 23,848 | $ | 3 | $ | 3,142 | $ | 16,321 | $ | (417) | $ | (517 | ) | $ | 5,316 | |||||||||||||||||||||||||||||||||||||||||||||
See accompanying Notes to Consolidated Condensed Financial Statements.
Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30 | 2017 | 2016 | ||||||||||||||
Three Months Ended March 31 | 2018 | 2017 | ||||||||||||||
(In millions) | ||||||||||||||||
Operating Activities: | ||||||||||||||||
Net income (loss) | $ | 669 | $ | (89 | ) | |||||||||||
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities, net | 614 | 1,389 | ||||||||||||||
Net income | $ | 380 | $ | 391 | ||||||||||||
Adjustments to reconcile net income to net cash provided (used) by operating activities, net | 185 | 318 | ||||||||||||||
Changes in operating assets and liabilities, net: | ||||||||||||||||
Receivables | (223 | ) | (429 | ) | (147 | ) | 51 | |||||||||
Deferred acquisition costs | (41 | ) | (25 | ) | (29 | ) | (24 | ) | ||||||||
Insurance reserves | 262 | 666 | 311 | 135 | ||||||||||||
Other assets | (108 | ) | (87 | ) | (56 | ) | (40 | ) | ||||||||
Other liabilities | (79 | ) | (106 | ) | (215 | ) | (265 | ) | ||||||||
Trading securities | 137 | (548 | ) | 84 | (567 | ) | ||||||||||
Net cash flow operating activities | 1,231 | 771 | 513 | (1 | ) | |||||||||||
Investing Activities: | ||||||||||||||||
Purchases of fixed maturities | (4,840 | ) | (4,874 | ) | (2,690 | ) | (2,097 | ) | ||||||||
Proceeds from sales of fixed maturities | 3,142 | 3,070 | 2,576 | 1,359 | ||||||||||||
Proceeds from maturities of fixed maturities | 1,770 | 1,247 | 531 | 823 | ||||||||||||
Purchases of limited partnership investments | (47 | ) | (280 | ) | (63 | ) | (18 | ) | ||||||||
Proceeds from sales of limited partnership investments | 119 | 124 | 69 | 62 | ||||||||||||
Purchases of property, plant and equipment | (476 | ) | (895 | ) | (230 | ) | (211 | ) | ||||||||
Acquisitions | (1,222 | ) | (79 | ) | ||||||||||||
Dispositions | 69 | 274 | 2 | 2 | ||||||||||||
Change in short term investments | (29 | ) | 148 | (25 | ) | 366 | ||||||||||
Other, net | (40 | ) | 148 | (114 | ) | (13 | ) | |||||||||
Net cash flow investing activities | (1,554 | ) | (1,117 | ) | 56 | 273 | ||||||||||
Financing Activities: | ||||||||||||||||
Dividends paid | (42 | ) | (42 | ) | (20 | ) | (21 | ) | ||||||||
Dividends paid to noncontrolling interests | (96 | ) | (94 | ) | (78 | ) | (76 | ) | ||||||||
Purchases of subsidiary stock from noncontrolling interests | (8 | ) | ||||||||||||||
Purchases of Loews treasury stock | (6 | ) | (86 | ) | (497 | ) | ||||||||||
Principal payments on debt | (908 | ) | (2,352 | ) | (303 | ) | (776 | ) | ||||||||
Issuance of debt | 1,401 | 2,843 | 233 | 685 | ||||||||||||
Other, net | (1 | ) | (1 | ) | 74 | |||||||||||
Net cash flow financing activities | 348 | 260 | (591 | ) | (188 | ) | ||||||||||
Effect of foreign exchange rate on cash | 5 | (6 | ) | 1 | 1 | |||||||||||
Net change in cash | 30 | (92 | ) | (21 | ) | 85 | ||||||||||
Cash, beginning of period | 327 | 440 | 472 | 327 | ||||||||||||
Cash, end of period | $ | 357 | $ | 348 | $ | 451 | $ | 412 | ||||||||
See accompanying Notes to Consolidated Condensed Financial Statements.
Loews Corporation and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Loews Corporation is a holding company. Its subsidiaries are engaged in the following lines of business: commercial property and casualty insurance (CNA Financial Corporation (“CNA”), a 90%89% owned subsidiary); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (“Diamond Offshore”), a 53% owned subsidiary); transportation and storage of natural gas and natural gas liquids (Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”), a 51% owned subsidiary); the operation of a chain of hotels (Loews Hotels Holding Corporation (“Loews Hotels & Co”), a wholly owned subsidiary); and the manufacture of rigid plastic packaging solutions (Consolidated Container Company LLC (“Consolidated Container”), a 99% owned subsidiary). Unless the context otherwise requires, the terms “Company,” “Loews” and “Registrant” as used herein mean Loews Corporation excluding its subsidiaries and the term “Net income (loss) attributable to Loews Corporation” as used herein means Net income (loss) attributable to Loews Corporation shareholders.
In the opinion of management, the accompanying unaudited Consolidated Condensed Financial Statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of June 30, 2017March 31, 2018 and December 31, 2016,2017 and results of operations, and comprehensive income for the three and six months ended June 30, 2017 and 2016 and changes in shareholders’ equity and cash flows for the sixthree months ended June 30, 2017March 31, 2018 and 2016.2017. Net income (loss) for the secondfirst quarter and first half of each of the years is not necessarily indicative of net income (loss) for that entire year. These Consolidated Condensed Financial Statements should be read in conjunction with the Consolidated Financial Statements in the Company’s Annual Report on Form10-K for the year ended December 31, 2016.2017.
The Company presents basic and diluted net income (loss) per share on the Consolidated Condensed Statements of Income. Basic net income (loss) per share excludes dilution and is computed by dividing net income (loss) attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. 0.6There were no shares and 0.7 million and 4.7 million shares for the three months ended June 30, 2017 and 2016 and 0.6 million and 5.1 million shares for the six months ended June 30, 2017 and 2016 attributable to employee stock-based compensation awards were not included inexcluded from the diluted weighted average shares outstanding amounts for the three months ended March 31, 2018 and 2017 because the effect would have been antidilutive.
Accounting changes –In MarchMay of 2016,2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”)2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The updated accounting guidance simplifies the accounting for share-based payment award transactions, including income tax consequences and classification on the statement of cash flows. As of January 1, 2017, the Company adopted the updated accounting guidance and began recognizing excess tax benefits or deficiencies on vesting or settlement of awards as an income tax benefit or expense within net income and the related cash flows classified within operating activities. The change impacted the amount and timing of income tax expense recognition as well as the calculation of diluted earnings per share. The accounting change did not have a material effect on the consolidated financial statements.
Recently issued ASUs –In May of 2014, the FASB issued ASU2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU2014-09”).” 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 standard excludes from its scope the accounting for insurance contracts, financial instruments and certain other agreements that are subject to other guidance in the FASB formally amendedAccounting Standards Codification, which limits the effective dateimpact of this update to annual reporting periods beginning after December 15, 2017, including interim periods. Thechange in accounting for the Company.
On January 1, 2018, the Company adopted the updated accounting guidance can be adopted either retrospectively orusing the modified retrospective method, with a cumulative effect adjustment atto the opening balance sheet. Upon adoption, the new guidance was applied to all contracts subject to the standard that were not completed as of the date of adoption. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance. At adoption, the cumulative effect adjustment decreased beginning Retained earnings by $62 million (after tax and noncontrolling interests), resulted in a deferred tax asset of $23 million and increased Other assets by approximately $1.9 billion and Other liabilities by approximately $2.0 billion.
The Company expectsimpact of the updatednew guidance is primarily related to revenue on CNA’snon-insurance warranty products and services, which will notbe recognized more slowly as compared to the historic revenue recognition pattern. For the warranty products in which CNA acts as principal, Operating revenues and other and Operating expenses and other are increased to reflect the gross amount paid by consumers, including the retail seller’s markup, which is considered a commission to the Company’s agent. Thisgross-up of revenues and expenses resulted in an increase to Other assets and Other liabilities on the Consolidated Condensed Balance Sheet, as the revenue and expense are recognized over the actuarially determined expected claims emergence pattern. Prior to the adoption of ASU2014-09, Other assets and Other liabilities would have a material effectbeen $2.6 billion and $5.3 billion as of March 31, 2018, as compared to $2.6 billion and $5.5 billion as of December 31, 2017. The impact of adopting the new guidance resulted in an increase to Operating revenues and other and Operating expenses and other by $131 million and $133 million for the three months ended March 31, 2018. See Note 6 for additional information on its consolidated financial statements.revenues from contracts with customers.
In January of 2016, the FASB issued ASU2016-01, “Financial Instruments– Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”Liabilities” (“ASU2016-01”). The updated accounting guidance requires changes to the reporting model for financial instruments. The guidance is effective for interim and annual periods beginning after December 15, 2017. The Company expectsprimarily changes the primary change to be the requirementmodel for equity investmentssecurities by requiring changes in the fair value of equity securities (except those accounted for under the equity method of accounting, orthose without readily determinable fair values and those that result in consolidation of the investee) to be measured atrecognized through the income statement. With the adoption of the new guidance, equity securities are no longer classified asavailable-for-sale or trading. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance. As of January 1, 2018, the Company adopted the updated accounting guidance and recognized a cumulative effect adjustment of $25 million (after tax and noncontrolling interests) as an increase to beginning Retained earnings. For the three months ended March 31, 2018, the Company recognized a pretax loss of approximately $15 million on the Company’s Consolidated Condensed Statements of Income as a result of this change. For the three months ended March 31, 2017, a $4 million increase in the fair value with changes in fair valueof equity securities was recognized in netOther comprehensive income.
In October of 2016, the FASB issued ASU2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” The updated guidance amends the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. As of January 1, 2018, the Company adopted this updated guidance using the modified retrospective approach with a cumulative effect adjustment of $9 million (after noncontrolling interests) as a decrease to beginning Retained earnings with an offset to a deferred income tax liability.
In February of 2018, the FASB issued ASU2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU2018-02”). Current accounting guidance requires the remeasurement of deferred tax liabilities and assets due to a change in tax laws or rates with the effect included in Net income in the reporting period that includes the enactment date. Because the remeasurement of deferred taxes due to a reduction in the federal corporate income tax rate under the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) is required to be included in Net income, the tax effects of items within Accumulated Other Comprehensive Income (“AOCI”) do not reflect the appropriate rate (referred to as “stranded tax effects”). The updated accounting guidance allows a reclassification from AOCI to Retained earnings for the stranded tax effects resulting from the Tax Act. The Company early adopted the updated guidance effective January 1, 2018 and elected to reclassify the stranded tax effects from AOCI to Retained earnings. The impact of the change resulted in a $3 million (after noncontrolling interests) increase in Retained earnings and a corresponding decrease in AOCI. The decrease in AOCI is comprised of a $130 million (after noncontrolling interests) decrease in pension liability and a $127 million (after noncontrolling interests) increase in unrealized gains (losses) on investments. The Company releases tax effects from AOCI utilizing thesecurity-by-security approach for investments and using enacted tax rates based on the pretax adjustments for pension and postretirement benefits.
Recently issued ASUs –In February of 2016, the FASB issued ASU2016-02, “Leases (Topic 842).” The updated guidance requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and nonlease components in a contract in accordance with the new revenue guidance in ASU2014-09. The updated guidance is effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.
In June of 2016, the FASB issued ASU2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through net income. The guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements, and expects the primary changes to be the use of the expected credit loss model for the mortgage loan portfolio and reinsurance receivables and the presentation of credit losses within theavailable-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down. The expected credit loss model will require a financial asset to be presented at the net amount expected to be collected. Under the allowance method foravailable-for-sale debt securities the Company will record reversals of credit losses if the estimate of credit losses declines.
2. AcquisitionIncome tax reform update–Based on the Company’s interpretation of Consolidated Container Companythe Tax Act, anon-cash provisional $200 million increase to net income (net of noncontrolling interests) was recorded during the fourth quarter of 2017. This increase included aone-time mandatory repatriation of previously deferred earnings of certain of Diamond Offshore’snon-U.S. subsidiaries inclusive of the utilization of certain tax attributes offset by a provisional liability for uncertain tax positions related to such attributes. In 2018, the U.S. Department of the Treasury and the Internal Revenue Service issued additional guidance which clarified certain of Diamond Offshore’s tax positions, which resulted in a $23 million increase to net income (net of noncontrolling interests) in the first quarter of 2018 for uncertain tax positions related
On May 22, 2017,
to the Company completedmandatory repatriation toll charges in accordance with the previously announced acquisitionSecurities and Exchange Commission’s Staff Accounting Bulletin No. 118 (“SAB 118”). SAB 118 allows companies to report the income tax effects of CCC Acquisition Holdings, Inc. for $1.2 billion,the Tax Act as a provisional amount based on a reasonable estimate, which would be subject to closing adjustments. CCC Acquisition Holdings, Inc., through its wholly owned subsidiary, Consolidated Containeradjustment during a reasonable measurement period, not to exceed twelve months, until the accounting and analysis under ASC 740 is complete.
The Company LLC (“Consolidated Container”), is a rigid plastic packaging and recycled resins manufacturer that provides packaging solutions to end markets such as beverage, food and household chemicals through a network of manufacturing locations across North America. The results of Consolidated Container are includedstill in the Consolidated Condensed Financial Statements sinceprocess of evaluating the acquisition date inestimate as it relates to the Corporate segment. Consolidated Container’s revenues were $91 milliontax effect of: (i) the amount of deferred tax assets and as a result of purchase accounting charges and acquisition costs, netliabilities subject to the income was not significant fortax rate change from 35% to 21%, including the three and six months ended June 30, 2017. For the year ended December 31, 2016, Consolidated Container reported total revenues of $788 million.
The acquisition was funded with approximately $620 million of parent company cash and debt financing proceeds at Consolidated Container of $600 million, as described below. The following table summarizes the preliminary allocationcalculation of the purchase pricemandatory deemed repatriation aspect of the Tax Act and the state tax effect of adjustments made to the tangiblefederal temporary differences, (ii) the ability to more likely than not realize the benefit of deferred tax assets, including net operating losses and intangible assets acquiredforeign tax credits, (iii) the effect ofre-computing CNA’s insurance reserves and liabilities assumed based on their estimated fair value asthe transition adjustment from existing law, the effects of the acquisition date and is subject to change within the measurement period. The primary areas that are not yet finalized relate to working capital at closing and determination of tax bases of net assets acquired.
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Customer relationships were valued using an income approach, which values the intangible asset at the present value of the related incremental after tax cash flows. The customer relationships intangible asset will be amortized over a useful life of 21 years. The trade name was valued using an income approach, which values the intangible asset based on an estimate of cost savings, or a relief from royalty. The trade name will be amortized over a useful life of 10 years. Goodwill includes value associated with the assembled workforce and Consolidated Container’s future growth and profitability. The assets acquired and liabilities assumed as part of the acquisition did not result in a step up of tax basis and approximately $94 million of goodwill is deductible for tax purposes.
Consolidated Container entered into a credit agreement providing for a $605 million term loan and a five year $125 million asset based lending facility (“ABL facility”) in conjunction with the acquisition. The term loan is a variable rate facility which bears interest at a floating rate equal to the London Interbank Offered Rate (“LIBOR”) plus an applicable margin of 3.5%, subject to a 1.0% floor. The term loan matures on May 22, 2024 and requires annual principal amortization of 1.0% of the original loan amount beginning December 31, 2017. Consolidated Container recorded approximately $19 million of debt issuance costs, which will be amortized over the terms of the facilities. Consolidated Container entered into interest rate swaps for a notional amount of $500 million to hedge its cash flow exposure to the variable rate debt. These swaps effectively fix the interest ratehave no impact on the hedged portion ofeffective tax rate and (iv) the term loan at approximately 5.6%. As of June 30, 2017, Consolidated Container hadspecial accounting method provisions for recognizing income for U.S. federal income tax purposes no borrowings outstanding under its ABL facility.later than financial accounting purposes and the transition adjustment from existing law, which will also have no impact on the effective tax rate.
3.2. Investments
Net investment income is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||
Three Months Ended March 31 | 2018 | 2017 | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Fixed maturity securities | $ | 457 | $ | 449 | $ | 912 | $ | 895 | $ | 446 | $ | 455 | ||||||||||||
Limited partnership investments | 23 | 47 | 139 | 7 | 48 | 116 | ||||||||||||||||||
Short term investments | 4 | 2 | 8 | 5 | 9 | 4 | ||||||||||||||||||
Equity securities | 2 | 4 | 3 | 7 | 10 | 1 | ||||||||||||||||||
Income (loss) from trading portfolio (a) | (1 | ) | 87 | 33 | 102 | (3 | ) | 34 | ||||||||||||||||
Other | 8 | 13 | 16 | 22 | 11 | 8 | ||||||||||||||||||
Total investment income | 493 | 602 | 1,111 | 1,038 | 521 | 618 | ||||||||||||||||||
Investment expenses | (15 | ) | (15 | ) | (29 | ) | (29) | (15 | ) | (14 | ) | |||||||||||||
Net investment income | $ | 478 | $ | 587 | $ | 1,082 | $ | 1,009 | $ | 506 | $ | 604 | ||||||||||||
(a) | Net unrealized (losses) gains |
Investment gains (losses) are as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||
Three Months Ended March 31 | 2018 | 2017 | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Fixed maturity securities | $ | 44 | $ | 4 | $ | 76 | $ | (13) | $ | 18 | $ | 32 | ||||||||||||
Equity securities | 3 | (2) | (15 | ) | ||||||||||||||||||||
Derivative instruments | (3 | ) | (6 | ) | (2 | ) | (13) | 5 | 1 | |||||||||||||||
Short term investments and other | 2 | 3 | 1 | 1 | 1 | |||||||||||||||||||
Investment gains (losses) (a) | $ | 43 | $ | 1 | $ | 77 | $ | (27) | ||||||||||||||||
Investment gains (a) | $ | 9 | $ | 34 | ||||||||||||||||||||
(a) | Gross realized gains onavailable-for-sale securities were |
The components of other-than-temporary impairment (“OTTI”) losses recognized in earnings by asset type are as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(In millions) | ||||||||||||||||
Fixed maturity securitiesavailable-for-sale: | ||||||||||||||||
Corporate and other bonds | $ | 2 | $ | 13 | $ | 4 | $ | 29 | ||||||||
Asset-backed: | ||||||||||||||||
Residential mortgage-backed | 1 | 1 | ||||||||||||||
Other asset-backed | 1 | 3 | ||||||||||||||
Total asset-backed | - | 2 | - | 4 | ||||||||||||
Total fixed maturitiesavailable-for-sale | 2 | 15 | 4 | 33 | ||||||||||||
Equity securitiesavailable-for-sale - common stock | 5 | |||||||||||||||
Net OTTI losses recognized in earnings | $ | 2 | $ | 15 | $ | 4 | $ | 38 | ||||||||
Three Months Ended March 31 | 2018 | 2017 | ||||||
(In millions) | ||||||||
Fixed maturity securitiesavailable-for-sale: | ||||||||
Corporate and other bonds | $ | 5 | $ | 2 | ||||
Asset-backed | 1 | |||||||
Net OTTI losses recognized in earnings | $ | 6 | $ | 2 | ||||
The amortized cost and fair values of fixed maturity and equity securities are as follows:
June 30, 2017 | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Unrealized OTTI Losses (Gains) | ||||||||||||||||||||||||||||||||||||||||
March 31, 2018 | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Unrealized OTTI Losses (Gains) | ||||||||||||||||||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | |||||||||||||||||||||||||||||||||||||||||||||
Corporate and other bonds | $ | 17,823 | $ | 1,589 | $ | 29 | $ | 19,383 | $ | 17,538 | $ | 1,177 | $ | 115 | $ | 18,600 | |||||||||||||||||||||||||||||
States, municipalities and political subdivisions | 12,461 | 1,380 | 15 | 13,826 | $ | (13 | ) | 11,682 | 1,205 | 12 | 12,875 | ||||||||||||||||||||||||||||||||||
Asset-backed: | |||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 4,835 | 124 | 38 | 4,921 | (27 | ) | 5,050 | 83 | 78 | 5,055 | $ | (27 | ) | ||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 1,907 | 59 | 14 | 1,952 | 1,948 | 29 | 22 | 1,955 | |||||||||||||||||||||||||||||||||||||
Other asset-backed | 1,050 | 16 | 5 | 1,061 | 1,185 | 10 | 7 | 1,188 | |||||||||||||||||||||||||||||||||||||
Total asset-backed | 7,792 | 199 | 57 | 7,934 | (27 | ) | 8,183 | 122 | 107 | 8,198 | (27 | ) | |||||||||||||||||||||||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises | 113 | 4 | 2 | 115 | 124 | 2 | 7 | 119 | |||||||||||||||||||||||||||||||||||||
Foreign government | 438 | 12 | 1 | 449 | 448 | 7 | 5 | 450 | |||||||||||||||||||||||||||||||||||||
Redeemable preferred stock | 18 | 1 | 19 | 9 | 1 | 10 | |||||||||||||||||||||||||||||||||||||||
Fixed maturities available-for-sale | 38,645 | 3,185 | 104 | 41,726 | (40 | ) | |||||||||||||||||||||||||||||||||||||||
Fixed maturitiesavailable-for-sale | 37,984 | 2,514 | 246 | 40,252 | (27 | ) | |||||||||||||||||||||||||||||||||||||||
Fixed maturities trading | 337 | 3 | 1 | 339 | 846 | 3 | 1 | 848 | |||||||||||||||||||||||||||||||||||||
Total fixed maturities | 38,982 | 3,188 | 105 | 42,065 | (40 | ) | |||||||||||||||||||||||||||||||||||||||
Equity securities: | |||||||||||||||||||||||||||||||||||||||||||||
Common stock | 17 | 5 | 22 | ||||||||||||||||||||||||||||||||||||||||||
Preferred stock | 91 | 6 | 1 | 96 | |||||||||||||||||||||||||||||||||||||||||
Equity securitiesavailable-for-sale | 108 | 11 | 1 | 118 | - | ||||||||||||||||||||||||||||||||||||||||
Equity securities trading | 495 | 79 | 85 | 489 | |||||||||||||||||||||||||||||||||||||||||
Total equity securities | 603 | 90 | 86 | 607 | - | ||||||||||||||||||||||||||||||||||||||||
Total | $ | 39,585 | $ | 3,278 | $ | 191 | $ | 42,672 | $ | (40 | ) | ||||||||||||||||||||||||||||||||||
Total fixed maturity securities | $ | 38,830 | $ | 2,517 | $ | 247 | $ | 41,100 | $ | (27 | ) | ||||||||||||||||||||||||||||||||||
December 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||
December 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | |||||||||||||||||||||||||||||||||||||||||||||
Corporate and other bonds | $ | 17,711 | $ | 1,323 | $ | 76 | $ | 18,958 | $ | (1 | ) | $ | 17,210 | $ | 1,625 | $ | 28 | $ | 18,807 | ||||||||||||||||||||||||||
States, municipalities and political subdivisions | 12,060 | 1,213 | 33 | 13,240 | (16 | ) | 12,478 | 1,551 | 2 | 14,027 | $ | (11 | ) | ||||||||||||||||||||||||||||||||
Asset-backed: | |||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 5,004 | 120 | 51 | 5,073 | (28 | ) | 5,043 | 109 | 32 | 5,120 | (27 | ) | |||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 2,016 | 48 | 24 | 2,040 | 1,840 | 46 | 14 | 1,872 | |||||||||||||||||||||||||||||||||||||
Other asset-backed | 1,022 | 8 | 5 | 1,025 | 1,083 | 16 | 5 | 1,094 | |||||||||||||||||||||||||||||||||||||
Total asset-backed | 8,042 | 176 | 80 | 8,138 | (28 | ) | 7,966 | 171 | 51 | 8,086 | (27 | ) | |||||||||||||||||||||||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises | 83 | 10 | 93 | 111 | 2 | 4 | 109 | ||||||||||||||||||||||||||||||||||||||
Foreign government | 435 | 13 | 3 | 445 | 437 | 9 | 2 | 444 | |||||||||||||||||||||||||||||||||||||
Redeemable preferred stock | 18 | 1 | 19 | 10 | 1 | 11 | |||||||||||||||||||||||||||||||||||||||
Fixed maturitiesavailable-for-sale | 38,349 | 2,736 | 192 | 40,893 | (45 | ) | 38,212 | 3,359 | 87 | 41,484 | (38 | ) | |||||||||||||||||||||||||||||||||
Fixed maturities trading | 598 | 3 | 601 | 649 | 2 | 2 | 649 | ||||||||||||||||||||||||||||||||||||||
Total fixed maturities | 38,947 | 2,739 | 192 | 41,494 | (45 | ) | 38,861 | 3,361 | 89 | 42,133 | (38 | ) | |||||||||||||||||||||||||||||||||
Equity securities: | |||||||||||||||||||||||||||||||||||||||||||||
Common stock | 13 | 6 | 19 | 21 | 7 | 1 | 27 | ||||||||||||||||||||||||||||||||||||||
Preferred stock | 93 | 2 | 4 | 91 | 638 | 31 | 1 | 668 | |||||||||||||||||||||||||||||||||||||
Equity securitiesavailable-for-sale | 106 | 8 | 4 | 110 | - | 659 | 38 | 2 | 695 | - | |||||||||||||||||||||||||||||||||||
Equity securities trading | 465 | 60 | 86 | 439 | 518 | 92 | 81 | 529 | |||||||||||||||||||||||||||||||||||||
Total equity securities | 571 | 68 | 90 | 549 | - | 1,177 | 130 | 83 | 1,224 | - | |||||||||||||||||||||||||||||||||||
Total | $ | 39,518 | $ | 2,807 | $ | 282 | $ | 42,043 | $ | (45 | ) | ||||||||||||||||||||||||||||||||||
Total fixed maturity and equity securities | $ | 40,038 | $ | 3,491 | $ | 172 | $ | 43,357 | $ | (38 | ) | ||||||||||||||||||||||||||||||||||
The net unrealized gains onavailable-for-sale investments included in the tables above are recorded as a component of Accumulated other comprehensive income (“AOCI”).AOCI. When presented in AOCI, these amounts are net of tax and noncontrolling interests and any required Shadow Adjustments. To the extent that unrealized gains on fixed income securities supporting certain long term care products and structured settlements not funded by annuities would result in a premium deficiency if those gains were realized, a related increase in Insurance reserves is recorded, net of tax and noncontrolling interests, as a reduction of net unrealized gains through
Other comprehensive income (“Shadow Adjustments”). As of June 30, 2017March 31, 2018 and December 31, 2016,2017, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $1.1$1.2 billion and $909 million$1.3 billion (after tax and noncontrolling interests).
Theavailable-for-sale securities in a gross unrealized loss position are as follows:
Less than 12 Months | 12 Months or Longer | Total | Less than | 12 Months | ||||||||||||||||||||||||||||||||||||||||||||||||||
June 30, 2017 | Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||||||||||||||||||||||||||
12 Months | or Longer | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2018 | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate and other bonds | $ | 4,229 | $ | 104 | $ | 146 | $ | 11 | $ | 4,375 | $ | 115 | ||||||||||||||||||||||||||||||||||||||||||
States, municipalities and political subdivisions | 962 | 12 | 3 | 965 | 12 | |||||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 2,570 | 55 | 504 | 23 | 3,074 | 78 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 668 | 11 | 200 | 11 | 868 | 22 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other asset-backed | 441 | 5 | 15 | 2 | 456 | 7 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total asset-backed | 3,679 | 71 | 719 | 36 | 4,398 | 107 | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury and obligations of government- sponsored enterprises | 59 | 4 | 26 | 3 | 85 | 7 | ||||||||||||||||||||||||||||||||||||||||||||||||
Foreign government | 214 | 5 | 4 | 218 | 5 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total fixed maturity securities | $ | 9,143 | $ | 196 | $ | 898 | $ | 50 | $ | 10,041 | $ | 246 | ||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate and other bonds | $ | 1,314 | $ | 26 | $ | 52 | $ | 3 | $ | 1,366 | $ | 29 | $ | 1,354 | $ | 21 | $ | 168 | $ | 7 | $ | 1,522 | $ | 28 | ||||||||||||||||||||||||||||||
States, municipalities and political subdivisions | 742 | 15 | 24 | 766 | 15 | 72 | 1 | 85 | 1 | 157 | 2 | |||||||||||||||||||||||||||||||||||||||||||
Asset-backed: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 1,722 | 34 | 141 | 4 | 1,863 | 38 | 1,228 | 5 | 947 | 27 | 2,175 | 32 | ||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 473 | 8 | 125 | 6 | 598 | 14 | 403 | 4 | 212 | 10 | 615 | 14 | ||||||||||||||||||||||||||||||||||||||||||
Other asset-backed | 159 | 4 | 14 | 1 | 173 | 5 | 248 | 3 | 18 | 2 | 266 | 5 | ||||||||||||||||||||||||||||||||||||||||||
Total asset-backed | 2,354 | 46 | 280 | 11 | 2,634 | 57 | 1,879 | 12 | 1,177 | 39 | 3,056 | 51 | ||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises | 65 | 2 | 65 | 2 | 49 | 2 | 21 | 2 | 70 | 4 | ||||||||||||||||||||||||||||||||||||||||||||
Foreign government | 109 | 1 | 109 | 1 | 166 | 2 | 4 | 170 | 2 | |||||||||||||||||||||||||||||||||||||||||||||
Total fixed maturity securities | 4,584 | 90 | 356 | 14 | 4,940 | 104 | 3,520 | 38 | 1,455 | 49 | 4,975 | 87 | ||||||||||||||||||||||||||||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock | 1 | 1 | 7 | 1 | 7 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||
Preferred stock | 15 | 1 | 15 | 1 | 93 | 1 | 93 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||
Total equity securities | 16 | 1 | - | - | 16 | 1 | 100 | 2 | - | - | 100 | 2 | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 4,600 | $ | 91 | $ | 356 | $ | 14 | $ | 4,956 | $ | 105 | ||||||||||||||||||||||||||||||||||||||||||
Total fixed maturity and equity securities | $ | 3,620 | $ | 40 | $ | 1,455 | $ | 49 | $ | 5,075 | $ | 89 | ||||||||||||||||||||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate and other bonds | $ | 2,615 | $ | 61 | $ | 254 | $ | 15 | $ | 2,869 | $ | 76 | ||||||||||||||||||||||||||||||||||||||||||
States, municipalities and political subdivisions | 959 | 32 | 23 | 1 | 982 | 33 | ||||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 2,136 | 44 | 201 | 7 | 2,337 | 51 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 756 | 22 | 69 | 2 | 825 | 24 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other asset-backed | 398 | 5 | 24 | 422 | 5 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total asset-backed | 3,290 | 71 | 294 | 9 | 3,584 | 80 | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises | 5 | 5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign government | 108 | 3 | 108 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total fixed maturity securities | 6,977 | 167 | 571 | 25 | 7,548 | 192 | ||||||||||||||||||||||||||||||||||||||||||||||||
Equity securities | 12 | 13 | 4 | 25 | 4 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 6,989 | $ | 167 | $ | 584 | $ | 29 | $ | 7,573 | $ | 196 | ||||||||||||||||||||||||||||||||||||||||||
Based on current facts and circumstances, the Company believes the unrealized losses presented in the June 30, 2017March 31, 2018 securities in a gross unrealized loss position table above are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are attributable to changes in interest rates, credit spreads and other factors. The Company has no current intent to sell securities with unrealized losses, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded as of June 30, 2017.March 31, 2018.
The following table presents the activity related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held as of June 30,March 31, 2018 and 2017 and 2016 for which a portion of an OTTI loss was recognized in Other comprehensive income.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||
Three Months Ended March 31 | 2018 | 2017 | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Beginning balance of credit losses on fixed maturity securities | $ | 32 | $ | 48 | $ | 36 | $ | 53 | $ | 27 | $ | 36 | ||||||||||||
Reductions for securities sold during the period | (2 | ) | (7 | ) | (6 | ) | (12 | ) | (2 | ) | (4 | ) | ||||||||||||
Ending balance of credit losses on fixed maturity securities | $ | 30 | $ | 41 | $ | 30 | $ | 41 | $ | 25 | $ | 32 | ||||||||||||
Contractual Maturity
The following table presentsavailable-for-sale fixed maturity securities by contractual maturity.
June 30, 2017 | December 31, 2016 | March 31, 2018 | December 31, 2017 | |||||||||||||||||||||||||||||||||
Cost or | Estimated | Cost or | Estimated | Cost or | Estimated | Cost or | Estimated | |||||||||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||
Due in one year or less | $ | 1,590 | $ | 1,628 | $ | 1,779 | $ | 1,828 | $ | 1,323 | $ | 1,343 | $ | 1,135 | $ | 1,157 | ||||||||||||||||||||
Due after one year through five years | 7,732 | 8,098 | 7,566 | 7,955 | 8,277 | 8,495 | 8,165 | 8,501 | ||||||||||||||||||||||||||||
Due after five years through ten years | 15,754 | 16,404 | 15,892 | 16,332 | 15,802 | 16,093 | 16,060 | 16,718 | ||||||||||||||||||||||||||||
Due after ten years | 13,569 | 15,596 | 13,112 | 14,778 | 12,582 | 14,321 | 12,852 | 15,108 | ||||||||||||||||||||||||||||
Total | $ | 38,645 | $ | 41,726 | $ | 38,349 | $ | 40,893 | $ | 37,984 | $ | 40,252 | $ | 38,212 | $ | 41,484 | ||||||||||||||||||||
|
Actual maturities may differ from contractual maturities because certain securities may be called or prepaid. Securities not due at a single date are allocated based on weighted average life.
Derivative Financial Instruments
A summary of the aggregate contractual or notional amounts and gross estimated fair values related to derivative financial instruments follows. The contractual or notional amounts for derivatives are used to calculate the exchange of contractual payments under the agreements and may not be representative of the potential for gain or loss on these instruments. Gross estimated fair values of derivative positions are currently presented in Equity securities, Receivables and Payable to brokers on the Consolidated Condensed Balance Sheets.
March 31, 2018 | December 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||
June 30, 2017 | December 31, 2016 | Contractual/ Notional Amount | Contractual/ Notional Amount | |||||||||||||||||||||||||||||||||||||||||||||
Contractual/ | Contractual/ | Estimated Fair Value | Estimated Fair Value | |||||||||||||||||||||||||||||||||||||||||||||
Notional | Estimated Fair Value | Notional | Estimated Fair Value | Asset | (Liability) | Asset | (Liability) | |||||||||||||||||||||||||||||||||||||||||
Amount | Asset | (Liability) | Amount | Asset | (Liability) |
| ||||||||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
With hedge designation: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate risk: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | 500 | $ 500 | $ 15 | $ 500 | $ 4 | ||||||||||||||||||||||||||||||||||||||||||
Without hedge designation: | ||||||||||||||||||||||||||||||||||||||||||||||||
Equity markets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Options – purchased | 221 | $ | 14 | $ | 223 | $ | 14 | 144 | 9 | 224 | 12 | |||||||||||||||||||||||||||||||||||||
– written | 231 | $ | (8 | ) | 267 | $ | (8 | ) | 166 | $ (7) | 290 | $ (7) | ||||||||||||||||||||||||||||||||||||
Futures – short | 243 | 225 | 1 | 146 | 265 | 1 | ||||||||||||||||||||||||||||||||||||||||||
Commodity futures – long | 37 | 1 | 42 | 46 | 44 | |||||||||||||||||||||||||||||||||||||||||||
Embedded derivative on funds withheld liability | 171 | (1 | ) | 174 | 3 | 163 | 1 | 167 | (3) |
4.3. Fair Value
Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable:
Level 1 – Quoted prices for identical instruments in active markets.
● | Level 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 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. |
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are not observable.
Prices may fall within Level 1, 2 or 3 depending upon the methodology and inputs used to estimate fair value for each specific security. In general, the Company seeks to price securities using third party pricing services. Securities not priced by pricing services are submitted to independent brokers for valuation and, if those are not available, internally developed pricing models are used to value assets using a methodology and inputs the Company believes market participants would use to value the assets. Prices obtained from third-party pricing services or brokers are not adjusted by the Company.
The Company performs control procedures over information obtained from pricing services and brokers to ensure prices received represent a reasonable estimate of fair value and to confirm representations regarding whether inputs are observable or unobservable. Procedures may include: (i) the review of pricing service methodologies or broker pricing qualifications, (ii) back-testing, where past fair value estimates are compared to actual transactions executed in the market on similar dates, (iii) exception reporting, where period-over-period changes in price are reviewed and
challenged with the pricing service or broker based on exception criteria, (iv) detailed analysis, where the Company performs an independent analysis of the inputs and assumptions used to price individual securities and (v) pricing validation, where prices received are compared to prices independently estimated by the Company.
Assets and liabilities measured at fair value on a recurring basis are presentedsummarized in the following tables:tables. Corporate bonds and other includes obligations of the U.S. Treasury, government-sponsored enterprises and foreign governments and redeemable preferred stock.
June 30, 2017 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(In millions) | ||||||||||||||||
Fixed maturity securities: | ||||||||||||||||
Corporate and other bonds | $ | 19,283 | $ | 100 | $ | 19,383 | ||||||||||
States, municipalities and political subdivisions | 13,825 | 1 | 13,826 | |||||||||||||
Asset-backed: | ||||||||||||||||
Residential mortgage-backed | 4,798 | 123 | 4,921 | |||||||||||||
Commercial mortgage-backed | 1,939 | 13 | 1,952 | |||||||||||||
Other asset-backed | 979 | 82 | 1,061 | |||||||||||||
Total asset-backed | 7,716 | 218 | 7,934 | |||||||||||||
U.S. Treasury and obligations of government-sponsored enterprises | $ | 115 | 115 | |||||||||||||
Foreign government | 449 | 449 | ||||||||||||||
Redeemable preferred stock | 19 | 19 | ||||||||||||||
Fixed maturitiesavailable-for-sale | 134 | 41,273 | 319 | 41,726 | ||||||||||||
Fixed maturities trading | 334 | 5 | 339 | |||||||||||||
Total fixed maturities | $ | 134 | $ | 41,607 | $ | 324 | $ | 42,065 | ||||||||
Equity securitiesavailable-for-sale | $ | 99 | $ | 19 | $ | 118 | ||||||||||
Equity securities trading | 488 | 1 | 489 | |||||||||||||
Total equity securities | $ | 587 | $ | - | $ | 20 | $ | 607 | ||||||||
Short term investments | $ | 3,858 | $ | 981 | $ | 4,839 | ||||||||||
Other invested assets | 60 | 5 | 65 | |||||||||||||
Receivables | 1 | 1 | ||||||||||||||
Life settlement contracts | $ | 1 | 1 | |||||||||||||
Payable to brokers | (8 | ) | (8 | ) |
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 maturitiesavailable-for-sale Fixed maturities trading Total fixed maturities Equity securitiesavailable-for-sale Equity securities trading Total equity securities Short term investments Other invested assets Receivables Life settlement contracts Payable to brokers Fixed maturity securities: Corporate bonds and other States, municipalities and political subdivisions Asset-backed Fixed maturitiesavailable-for-sale Fixed maturities trading Total fixed maturities Equity securities Short term and other Receivables Payable to brokers December 31, 2017 Fixed maturity securities: Corporate bonds and other States, municipalities and political subdivisions Asset-backed Fixed maturitiesavailable-for-sale Fixed maturities trading Total fixed maturities Equity securitiesavailable-for-sale Equity securities trading Total equity securities Short term and other Receivables Payable to brokersDecember 31, 2016 Level 1 Level 2 Level 3 Total (In millions) $ 18,828 $ 130 $ 18,958 13,239 1 13,240 4,944 129 5,073 2,027 13 2,040 968 57 1,025 7,939 199 8,138 $ 93 93 445 445 19 19 112 40,451 330 40,893 595 6 601 $ 112 $ 41,046 $ 336 $ 41,494 $ 91 $ 19 $ 110 438 1 439 $ 529 $ - $ 20 $ 549 $ 3,833 $ 853 $ 4,686 55 5 60 1 1 $ 58 58 (44 ) (44 ) March 31, 2018 Level 1 Level 2 Level 3 Total (In millions) $ 167 $ 18,912 $ 100 $ 19,179 12,874 1 12,875 7,919 279 8,198 167 39,705 380 40,252 10 831 7 848 $ 177 $ 40,536 $ 387 $ 41,100 $ 711 $ 602 $ 20 $ 1,333 3,356 978 4,334 15 15 (7) (7) $ 128 $ 19,145 $ 98 $ 19,371 14,026 1 14,027 7,751 335 8,086 128 40,922 434 41,484 10 635 4 649 $ 138 $ 41,557 $ 438 $ 42,133 $ 91 $ 584 $ 20 $ 695 527 2 529 $ 618 $ 584 $ 22 $ 1,224 $ 3,669 $ 958 $ 4,627 1 4 5 (12) (12)
The following tables present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2017March 31, 2018 and 2016:2017:
Unrealized | ||||||||||||||||||||||||||||||||||||||||
Gains | ||||||||||||||||||||||||||||||||||||||||
(Losses) | ||||||||||||||||||||||||||||||||||||||||
Net Realized Gains | Recognized in | |||||||||||||||||||||||||||||||||||||||
(Losses) and Net Change | Net Income | |||||||||||||||||||||||||||||||||||||||
in Unrealized Gains | (Loss) on Level | |||||||||||||||||||||||||||||||||||||||
(Losses) | 3 Assets and | |||||||||||||||||||||||||||||||||||||||
Included in | Transfers | Transfers | Liabilities | |||||||||||||||||||||||||||||||||||||
Balance, | Net Income | Included in | into | out of | Balance, | Held at | ||||||||||||||||||||||||||||||||||
2017 | April 1 | (Loss) | OCI | Purchases | Sales | Settlements | Level 3 | Level 3 | June 30 | June 30 | ||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||
Corporate and other bonds | $ | 121 | $ | (11) | $ | (10) | $ | 100 | ||||||||||||||||||||||||||||||||
States, municipalities and political subdivisions | 1 | 1 | ||||||||||||||||||||||||||||||||||||||
Asset-backed: | ||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 126 | $ | 1 | $ | 1 | (5) | 123 | |||||||||||||||||||||||||||||||||
Commercial mortgage- backed | 13 | 13 | ||||||||||||||||||||||||||||||||||||||
Other asset-backed | 117 | $ | 13 | (2) | $ | 24 | (70) | 82 | ||||||||||||||||||||||||||||||||
Total asset-backed | 256 | 1 | 1 | 13 | $ | - | (7) | 24 | (70) | 218 | $ | - | ||||||||||||||||||||||||||||
Fixed maturitiesavailable-for-sale | 378 | 1 | 1 | 13 | (18) | 24 | (80) | 319 | ||||||||||||||||||||||||||||||||
Fixed maturities trading | 5 | 5 | (1) | |||||||||||||||||||||||||||||||||||||
Total fixed maturities | $ | 383 | $ | 1 | $ | 1 | $ | 13 | $ | - | $ | (18) | $ | 24 | $ | (80) | $ | 324 | $ | (1) | ||||||||||||||||||||
Equity securitiesavailable-for-sale | $ | 19 | $ | 1 | $ | (1) | $ | 19 | ||||||||||||||||||||||||||||||||
Equity securities trading | 1 | 1 | ||||||||||||||||||||||||||||||||||||||
Total equity securities | $ | 20 | $ | - | $ | 1 | $ | - | $ | (1) | $ | - | $ | - | $ | - | $ | 20 | $ | - | ||||||||||||||||||||
Life settlement contracts | $ | 46 | $ | (45) | $ | 1 |
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 | ||||||||||||||||||||||||||||||||||
2018 | January 1 | Net Income | OCI | Purchases | Sales | Settlements | Level 3 | Level 3 | March 31 | March 31 | ||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||
Corporate bonds and other | $ | 98 | $ | (1) | $ | (2) | $ | 5 | $ | 100 | ||||||||||||||||||||||||||||||
States, municipalities and political subdivisions | 1 | 1 | ||||||||||||||||||||||||||||||||||||||
Asset-backed | 335 | 7 | $ (5) | $ | 30 | $ | (72) | (6) | $ | (10) | 279 | |||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||
Fixed maturitiesavailable-for-sale | 434 | 6 | (5) | 30 | (72) | (8) | 5 | (10) | 380 | $ | - | |||||||||||||||||||||||||||||
Fixed maturities trading | 4 | 3 | 7 | 3 | ||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||
Total fixed maturities | $ | 438 | $ | 9 | $ (5) | $ | 30 | $ | (72) | $ | (8) | $ | 5 | $ | (10) | $ | 387 | $ | 3 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||
Equity securities | $ | 22 | $ | (2) | $ | 20 | $ | (2) |
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 Fixed maturitiesavailable-for-sale Fixed maturities trading Total fixed maturities Equity securitiesavailable-for-sale Equity securities trading Total equity securities Life settlement contracts Derivative financial instruments, net Unrealized Gains (Losses) Net Realized Gains Recognized in (Losses) and Net Change Net Income in Unrealized Gains (Loss) on Level (Losses) 3 Assets and Included in Transfers Transfers Liabilities Balance, Net Income Included in into out of Balance, Held at 2016 April 1 (Loss) OCI Purchases Sales Settlements Level 3 Level 3 June 30 June 30 (In millions) $ 193 $ 1 $ 3 $ 94 $ (20) $ (7) $ (22) $ 242 2 2 128 1 (1) 10 (4) 134 27 (9) $ 3 (10) 11 50 2 35 (25) (1) (16) 45 205 1 1 45 (25) (14) 3 (26) 190 $ - 400 2 4 139 (45) (21) 3 (48) 434 3 4 (1) 6 4 $ 403 $ 6 $ 4 $ 139 $ (46) $ (21) $ 3 $ (48) $ 440 $ 4 $ 19 $ 19 - $ 1 $ 1 2 $ 1 $ 19 $ 1 $ - $ 1 $ - $ - $ - $ - $ 21 $ 1 $ 72 $ 6 $ (11) $ 67 $ (3) (2) $ 3 1 (3)
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 Fixed maturitiesavailable-for-sale Fixed maturities trading Total fixed maturities Equity securitiesavailable-for-sale Equity securities trading Total equity securities Life settlement contracts Derivative financial instruments, net Unrealized Gains (Losses) Net Realized Gains Recognized in (Losses) and Net Change Net Income in Unrealized Gains (Loss) on Level (Losses) 3 Assets and Included in Transfers Transfers Liabilities Balance, Net Income Included in into out of Balance, Held at 2017 January 1 (Loss) OCI Purchases Sales Settlements Level 3 Level 3 June 30 June 30 (In millions) $ 130 $ 1 $ 5 $ (1) $ (25) $ (10) $ 100 1 1 129 $ 2 3 (11) 123 13 13 57 (1 ) 51 (2) $ 52 (75) 82 199 1 3 51 - (13) 52 (75) 218 $ - 330 1 4 56 (1) (38) 52 (85) 319 6 (1 ) 5 (1) $ 336 $ - $ 4 $ 56 $ (1) $ (38) $ 52 $ (85) $ 324 $ (1) $ 19 $ 2 $ 1 $ (3) $ 19 1 1 $ 20 $ - $ 2 $ 1 $ (3) $ - $ - $ - $ 20 $ - $ 58 $ 6 $ (58) $ (5) $ 1 - 1 (1) -
Unrealized | Unrealized (Losses) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gains | Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses) | Transfers | Transfers | Net Income 3 Assets and | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2017 | Balance, January 1 | Included in Net Income | Included in OCI | Purchases | Sales | Settlements | into Level 3 | out of Level 3 | Balance, March 31 | Held at March 31 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Losses) |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Realized Gains | Recognized in | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Losses) and Net Change | Net Income | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
in Unrealized Gains | (Loss) on Level | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Losses) | 3 Assets and | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Included in | Transfers | Transfers | Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, | Net Income | Included in | into | out of | Balance, | Held at | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2016 | January 1 | (Loss) | OCI | Purchases | Sales | Settlements | Level 3 | Level 3 | June 30 | June 30 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate and other bonds | $ | 168 | $ | 7 | $ | 147 | $ | (36) | $ | (10) | $ | (34) | $ | 242 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate bonds and other | $ | 130 | $ 1 | $ | 5 | $ | (1) | $ | (14 | ) | $ | 121 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
States, municipalities and political subdivisions | 2 | 2 | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 134 | $ | 2 | (1) | 10 | (9) | (2) | 134 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage- backed | 22 | 9 | (9) | $ | 3 | (14) | 11 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other asset-backed | 53 | 2 | 35 | (25) | (1) | 2 | (21) | 45 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total asset-backed | 209 | 2 | 1 | 54 | (25) | (19) | 5 | (37) | 190 | $ | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed | 199 | 2 | 38 | (6 | ) | $ | 28 | $ | (5) | 256 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Fixed maturitiesavailable-for-sale | 379 | 2 | 8 | 201 | (61) | (29) | 5 | (71) | 434 | 330 | $ | - | 3 | 43 | (1) | (20 | ) | 28 | (5) | 378 | $ | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturities trading | 85 | 5 | 2 | (86) | 6 | 4 | 6 | (1) | 5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total fixed maturities | $ | 464 | $ | 7 | $ | 8 | $ | 203 | $ | (147) | $ | (29) | $ | 5 | $ | (71) | $ | 440 | $ | 4 | $ | 336 | $ | (1) | $ 3 | $ | 43 | $ | (1) | $ | (20 | ) | $ | 28 | $ | (5) | $ | 383 | $ | - | ||||||||||||||||||||||||||||||||||||||||
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Equity securitiesavailable-for-sale | $ | 20 | $ | (1) | $ | 19 | $ | 19 | $ 1 | $ | 1 | $ | (2) | $ | 19 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity securities trading | 1 | $ | 1 | $ | 1 | $ | (1) | 2 | $ | 1 | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total equity securities | $ | 21 | $ | 1 | $ | (1) | $ | 1 | $ | (1) | $ | - | $ | - | $ | - | $ | 21 | $ | 1 | $ | 20 | $ | - | $ 1 | $ | 1 | $ | (2) | $ | - | $ | - | $ | - | $ | 20 | $ | - | |||||||||||||||||||||||||||||||||||||||||
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Life settlement contracts | $ | 74 | $ | 10 | $ | (17) | $ | 67 | $ | (3) | $ | 58 | $ | 6 | $ | (13) | $ | (5) | $ | 46 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative financial instruments, net | 3 | (3) | $ | (2) | $ | 3 | 1 | (3) | - | 1 | (1) | - |
Net realized and unrealized gains and losses are reported in Net income (loss) as follows:
Major Category of Assets and Liabilities | Consolidated Condensed Statements of Income Line Items | |
Fixed maturity securitiesavailable-for-sale | Investment gains (losses) | |
Fixed maturity securities trading | Net investment income | |
Equity securities | ||
Investment gains (losses) and 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 | |
Life settlement contracts | Operating revenues and other |
Securities may be transferred in or out of levels within the fair value hierarchy based on the availability of observable market information and quoted prices used to determine the fair value of the security. The availability of observable market information and quoted prices varies based on market conditions and trading volume. During the three and six months ended June 30,March 31, 2018 there were $29 million of transfers from Level 2 to Level 1 and no transfers from Level 1 to Level 2. During the three months ended March 31, 2017 and 2016 there were no transfers between Level 1 and Level 2. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods.
Valuation Methodologies and Inputs
The following section describes the valuation methodologies and relevant inputs used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instruments are generally classified.
Fixed Maturity Securities
Level 1 securities include highly liquid and exchange traded bonds and redeemable preferred stock, valued using quoted market prices. Level 2 securities include most other fixed maturity securities as the significant inputs are observable in the marketplace. All classes of Level 2 fixed maturity securities are valued using a methodology based on information generated by market transactions involving identical or comparable assets, a discounted cash flow methodology or a combination of both when necessary. Common inputs for all classes of fixed maturity securities include prices from recently executed transactions of similar securities, marketplace quotes, benchmark yields, spreads off benchmark yields, interest rates and U.S. Treasury or swap curves. Specifically for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data. Fixed maturity securities are primarily assigned to Level 3 in cases where broker/dealer quotes are significant inputs to the valuation, and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. Level 3 securities also include private placement debt securities whose fair value is determined using internal models with inputs that are not market observable.
Equity Securities
Level 1 equity securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarilynon-redeemable preferred stocks and common stocks valued using pricing for similar securities, recently executed transactions and other pricing models utilizing market observable inputs. Level 3 securities are primarily priced using broker/dealer quotes and internal models with inputs that are not market observable.
Derivative Financial Instruments
Exchange traded derivatives are valued using quoted market prices and are classified within Level 1 of the fair value hierarchy. Level 2 derivatives primarily include currency forwards valued using observable market forward rates.Over-the-counter derivatives, principally interest rate swaps, total return swaps, commodity swaps, equity warrants and options, are valued using inputs including broker/dealer quotes and are classified within Level 2 or Level 3 of the valuation hierarchy, depending on the amount of transparency as to whether these quotes are based on information that is observable in the marketplace.
Short Term Investmentsand Other Invested Assets
Securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds, treasury bills and treasury bills.exchange tradedopen-end funds valued using quoted market prices. Level 2 primarily includes commercial paper, for which all inputs are market observable. Fixed maturity securities purchased within one year of maturity are classified consistent with fixed maturity securities discussed above. Short term investments as presented in the tables above differ from the amounts presented in the Consolidated Condensed Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.
Other Invested Assets
Level 1 securities include exchange tradedopen-end funds valued using quoted market prices.
Life Settlement Contracts
CNA accounts forsold its investment in life settlement contracts usingto a third party in 2017. The valuation of the fair value method. Historically, the fair value of life settlement contracts was determined as the present value of the anticipated death benefits less anticipated premium payments based on contractthe terms that are distinct for each insured, as well as CNA’s own assumptions for mortality, premium expense and the rate of return that a buyer would require on the contracts.
The entire portfolio of life settlement contracts was determined to be held for sale as of December 31, 2016 as CNA reached an agreement on terms to sell the portfolio. As such, CNA adjusted the fair value to the estimated sales proceeds less cost to sell. The definitive Purchase and Sale Agreement (“PSA”) related to the portfolio was executed on March 7, 2017 (“sale date”). In connection therewith, the life settlement contracts and related sale proceeds were placed in escrow until the buyer is recognized as the owner and beneficiary of each individual life settlement contract by the life insurance company that issued the policy. All but $1 million of the contracts have been released from escrow as of June 30, 2017. CNA derecognized the released contracts and recorded the consideration, including a note receivable, which is payable over three years and is carried at amortized cost less any valuation allowance. The note receivable of $45 million is included within Other assets on the June 30, 2017 Consolidated Condensed Balance Sheet and interest income is accreted to the principal balance of the note receivable.sale. The contracts remaining in escrow have not been derecognized, continue to be measured at the fair value per the PSA, and are expected to clear escrow in the third quarter of 2017.
The fair value of CNA’s investments in life settlement contracts were $1 million and $58 million as of June 30, 2017 and December 31, 2016, and are included in Other assets on the Consolidated Condensed Balance Sheets. Despite the sale, the contracts have been classified as Level 3 as there iswas not an active market for life settlement contracts. The cash receipts and payments related to the life settlement contracts prior to the sale date are included in operating activities on the Consolidated Condensed Statements of Cash Flows. Cash receipts related to the sale of the life settlement contracts as well as principal payments on the note receivable are included in investing activities.
Significant Unobservable Inputs
The following tables present quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurement of Level 3 assets. Valuations for assets and liabilities not presented in the tables below are primarily based on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of unobservable inputs from these broker quotes is neither provided nor reasonably available to the Company. The valuation of life settlement contracts was based on the terms of the sale of the contracts to a third party; therefore the contracts are not included in the tables below.
Estimated
| Valuation
| Unobservable
| Range (Weighted Average) | |||||||||
| ||||||||||||
(In millions) | ||||||||||||
|
| |||||||||||
| ||||||||||||
Fixed maturity securities | $ | Discounted
| Credit spread | 1% – 12% (3%) | ||||||||
December 31, 2017 | ||||||||||||
Fixed maturity securities | $ 136 | Discounted cash flow | Credit spread | 1% – |
For fixed maturity securities, an increase to the credit spread assumptions 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 Condensed Balance Sheets are presented in the following tables. The carrying amounts and estimated fair values of short term debt and long term debt exclude capital lease obligations. The carrying amounts reported on the Consolidated Condensed Balance Sheets for cash and short term investments not carried at fair value and certain other assets and liabilities approximate fair value due to the short term nature of these items.
Carrying | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||||||||||||||||||||||||||||||||||||
June 30, 2017 | Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||||||||||||||
March 31, 2018 | Carrying Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||||||||||||||||||
Other invested assets, primarily mortgage loans | $ | 646 | $ | 655 | $ | 655 | $ 864 | $ 856 | $ 856 | ||||||||||||||||||||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||||||||||||||||||
Short term debt | 190 | $ | 154 | 40 | 194 | 210 | $ 36 | 174 | 210 | ||||||||||||||||||||||||||||||||||||
Long term debt | 11,075 | 10,074 | 1,217 | 11,291 | 11,238 | 10,662 | 562 | 11,224 | |||||||||||||||||||||||||||||||||||||
December 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||
December 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||||||||||||||||||
Other invested assets, primarily mortgage loans | $ | 591 | $ | 594 | $ | 594 | $ 839 | $ 844 | $ 844 | ||||||||||||||||||||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||||||||||||||||||
Short term debt | 107 | $ | 104 | 3 | 107 | 278 | $ 156 | 122 | 278 | ||||||||||||||||||||||||||||||||||||
Long term debt | 10,655 | 10,150 | 646 | 10,796 | 11,236 | 10,966 | 525 | 11,491 |
The following methods and assumptions were used in estimating the fair value of these financial assets and liabilities.
The fair values of mortgage loans, included in Other invested assets, were based on the present value of the expected future cash flows discounted at the current interest rate for similar financial instruments, adjusted for specific loan risk.
Fair value of debt was based on observable market prices when available. When observable market prices were not available, the fair value of debt was based on observable market prices of comparable instruments adjusted for differences between the observed instruments and the instruments being valued or is estimated using discounted cash flow analyses, based on current incremental borrowing rates for similar types of borrowing arrangements.
5. Property, Plant and Equipment
Diamond Offshore
Asset Impairments
During the second quarter of 2017, Diamond Offshore evaluated seven drilling rigs with indicators of impairment. Due to the continued deterioration of market fundamentals in the contract drilling industry, as well as newly-available market projections, which indicated that a full market recovery is likely to occur further in the future than had previously been estimated, Diamond Offshore determined that the carrying values of one ultra-deepwater and one deepwater semisubmersible rig were impaired.
Diamond Offshore estimated the fair value of the rigs impaired in 2017 using an income approach, whereby the fair value of each rig was estimated based on a calculation of the rig’s future net cash flows. These calculations utilized significant unobservable inputs, including estimated proceeds that may be received on ultimate disposition of the rig, and are representative of Level 3 fair value measurements due to the significant level of estimation involved and lack of transparency as to the inputs used. During the second quarter of 2017, Diamond Offshore recorded an asset impairment charge of $72 million ($23 million after tax and noncontrolling interests), which is included in Other operating expenses on the Consolidated Condensed Statements of Income.
As of June 30, 2017, there were nine rigs in Diamond Offshore’s drilling fleet for which there were no current indicators that their carrying amounts may not be recoverable and, therefore, were not evaluated for impairment at that time. If market fundamentals in the offshore oil and gas industry deteriorate further or a projected market recovery is further delayed, additional impairment losses may be required to be recognized in future periods.
Diamond Offshore recorded aggregate asset impairment charges of $672 million ($263 million after tax and noncontrolling interests), which is included in Other operating expenses on the Consolidated Condensed Statements of Income for the three and six months ended June 30, 2016. See Note 6 of the Consolidated Financial Statements in the Company’s Annual Report on Form10-K for the year ended December 31, 2016 for further discussion of Diamond Offshore’s 2016 asset impairments.
Boardwalk Pipeline
Sale of Assets
In May of 2017, Boardwalk Pipeline sold a processing plant and related assets, for approximately $65 million, including customary adjustments. The sale resulted in a loss of $47 million ($15 million after tax and noncontrolling interests) and is included in Other operating expenses on the Consolidated Condensed Statements of Income.
6.4. Claim and Claim Adjustment Expense Reserves
CNA’s property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including incurred but not reported (“IBNR”) claims as of the reporting date. CNA’s reserve projections are based primarily on detailed analysis of the facts in each case, CNA’s experience with similar cases and various historical development patterns. Consideration is given to such historical patterns as claim reserving trends and settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions including inflation and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.
Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers’ compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. There can be no assurance that CNA’s ultimate cost for insurance losses will not exceed current estimates.
Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to materialperiod-to-period fluctuations in CNA’s results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of $39 million and $85$34 million for the three months ended June 30, 2017March 31, 2018 and 2016 and $73 million and $121 million for the six months ended June 30, 2017 and 2016. Catastrophe2017. Net catastrophe losses in the first quarter of 2018 and 2017 related primarily to U.S. weather-related events. Catastrophe losses in 2016 resulted primarily from U.S. weather-related events and the Fort McMurray wildfires.
Liability for Unpaid Claim and Claim Adjustment Expenses Rollforward
The following table presents a reconciliation between beginning and ending claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves ofnon-core operations. Other Insurance Operations.
Six Months Ended June 30 | 2017 | 2016 | ||||||||||||||||
Three Months Ended March 31 | 2018 | 2017 | ||||||||||||||||
|
|
| ||||||||||||||||
(In millions) | ||||||||||||||||||
Reserves, beginning of year: | ||||||||||||||||||
Gross | $ | 22,343 | $ | 22,663 | $ | 22,004 | $ | 22,343 | ||||||||||
Ceded | 4,094 | 4,087 | 3,934 | 4,094 | ||||||||||||||
|
|
| ||||||||||||||||
Net reserves, beginning of year | 18,249 | 18,576 | 18,070 | 18,249 | ||||||||||||||
|
|
| ||||||||||||||||
Net incurred claim and claim adjustment expenses: | ||||||||||||||||||
Provision for insured events of current year | 2,443 | 2,583 | 1,246 | 1,207 | ||||||||||||||
Decrease in provision for insured events of prior years | (159 | ) | (198) | (34) | (82) | |||||||||||||
Amortization of discount | 93 | 93 | 47 | 48 | ||||||||||||||
|
|
| ||||||||||||||||
Total net incurred (a) | 2,377 | 2,478 | 1,259 | 1,173 | ||||||||||||||
|
|
| ||||||||||||||||
Net payments attributable to: | ||||||||||||||||||
Current year events | (266 | ) | (311) | (91) | (68) | |||||||||||||
Prior year events | (2,331 | ) | (2,185) | (1,219) | (1,184) | |||||||||||||
|
|
| ||||||||||||||||
Total net payments | (2,597 | ) | (2,496) | (1,310) | (1,252) | |||||||||||||
|
|
| ||||||||||||||||
Foreign currency translation adjustment and other | 70 | 46 | (9) | 14 | ||||||||||||||
|
|
| ||||||||||||||||
Net reserves, end of period | 18,099 | 18,604 | 18,010 | 18,184 | ||||||||||||||
Ceded reserves, end of period | 4,080 | 4,371 | 4,057 | 4,076 | ||||||||||||||
|
|
| ||||||||||||||||
Gross reserves, end of period | $ | 22,179 | $ | 22,975 | $ | 22,067 | $ | 22,260 | ||||||||||
|
|
|
(a) | Total net incurred above does not agree to Insurance claims and policyholders’ benefits as reflected in the Consolidated Condensed Statements of Income due to amounts related to retroactive reinsurance deferred gain accounting, uncollectible reinsurance and loss deductible receivables and benefit expenses related to future policy benefits, which are not reflected in the table above. |
Net Prior Year Development
Changes in estimates of claim and allocated claim adjustment expense reserves and premium accruals, net of reinsurance, for prior years are defined as net prior year loss reserve development. These changes can be favorable or unfavorable. The following table and discussion present
Favorable net prior year development:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(In millions) | ||||||||||||||||
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development | $ | (55 | ) | $ | (98 | ) | $ | (112 | ) | $ | (150 | ) | ||||
Pretax (favorable) unfavorable premium development | (8 | ) | (8 | ) | 17 | (22 | ) | |||||||||
Total pretax (favorable) unfavorable net prior year development | $ | (63 | ) | $ | (106 | ) | $ | (95 | ) | $ | (172 | ) | ||||
Premium development can occur in theof $39 million and $57 million was recorded for CNA’s commercial property and casualty business when there is a change in exposure on auditable policies or when premium accruals differ from processed premium. Audits on policies usually occur in a period after the expiration date of the policy. See Note 10 for further information on the premium development for the Small Business multi-peril package product and workers’ compensation policiesoperations (“Property & Casualty Operations”) for the three and six months ended June 30,March 31, 2018 and 2017.
The following table and discussion present details of the net prior year claim and allocated claim adjustment expense reserve development (“development”):in CNA’s Property & Casualty Operations:
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||||
Three Months Ended March 31 | 2018 | 2017 | ||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 |
| ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||
Medical professional liability | $ | 3 | $ | (23 | ) | $ | 4 | $ | (30 | ) | $ | 20 | $ | 20 | ||||||||||||
Other professional liability and management liability | (37 | ) | (41 | ) | (69 | ) | (50 | ) | (34) | (32) | ||||||||||||||||
Surety | (15) | |||||||||||||||||||||||||
Commercial auto | (20 | ) | (26 | ) | (35 | ) | (1) | (26) | ||||||||||||||||||
General liability | (1 | ) | (37 | ) | (1 | ) | (52 | ) | (8) | (18) | ||||||||||||||||
Workers’ compensation | (46 | ) | 50 | (46 | ) | 54 | (6) | |||||||||||||||||||
Other | 26 | (27 | ) | 26 | (37 | ) | 5 | (1) | ||||||||||||||||||
|
| |||||||||||||||||||||||||
Total pretax (favorable) unfavorable development | $ | (55 | ) | $ | (98 | ) | $ | (112 | ) | $ | (150 | ) | $ | (39) | $ | (57) | ||||||||||
|
Three Months2018
Unfavorable development for medical professional liability was primarily due to higher than expected severity in accident years 2014 and 2017
in CNA’s hospitals business. Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency in accident years 2013 through 2015 and lower than expected severity in accident years 2014 through 2016 for professional liability.
related to financial institutions. Favorable development for workers’ compensation was primarily related to decreases in frequency and severity in recent accident years, partially attributable to California reforms related to decreases in medical costs.
Unfavorable development for other coverages was primarily due to higher than expected severity in accident year 2016 for property and other, higher than expected severity in accident year 2015 arising from the management liability business for other professional liability and adverse large claims experience in the Hardy political risks portfolio, relating largely to accident year 2016. This unfavorable development was partially offset by favorable development in accident years 2014 and prior for other professional liability and better than expected frequency in accident years 2014 through 2016, for property and marine.
2016
Favorable development in medical professional liabilitysurety was due to lower than expected severity for individual healthcare professionals and allied facilitiesloss emergence for accident years 20142015 and prior.
Favorable development in other professional liability and management liability was primarily related to lower than expected frequency of claims in accident years 2010 through 2015, mainly driven by professional services. This was partially offset by unfavorable development in accident year 2015 related to an increase in management liability frequency of larger claims.
Favorable development for commercial auto was primarily due to favorable settlements on claims in accident years 2010 through 2014.
Favorable development for general liability was primarily due to betterlower than expected claim settlementsfrequency and severity in accident years 2012 through 20142015 and better than expected severity on umbrella claims in accident years 2010 through 2013.prior for the middle market construction business.
2017
Unfavorable development for workers’ compensation was due to a reduction in estimated recoveries on war hazard claims for Defense Base Act contractors, which was partially offset by favorable development related to lower than expected frequencies for the small and middle market businesses in accident years 2009 through 2014.
Favorable development for other coveragesmedical professional liability was primarily due to better than expected loss emergence in accident years 2013 through 2015 for property and other, better than expected severity in accident years 2013 and prior for liability and better than expected severity in auto liability in accident years 2011 through 2015, partially offset by unfavorable development forcontinued higher than expected large loss emergencefrequency in accident years 2011 through 2015 for other professional liability.
Six Months
2017
aging services. Favorable development in other professional liability and management liability was primarily due to favorable settlements on closed claims and a lower than expected frequency of large losses forrelated to professional liability in accident years 2011 through 2016 for professional and management liability, lower than expected claim frequency in accident years 2013 through 2015 for professional liability and lower than expected severity in accident years 2014 through 2016 for professional liability.
2016. Favorable development for commercial auto was primarily due to lower than expected severity in accident years
2013 through 2015.
Favorable development for workers’ compensation was primarily related to decreases in frequency and severity in recent accident years, partially attributable to California reforms related to decreases in medical costs.
The drivers of development for the six month period for other coverages were generally consistent with the three month summary above.
2016
Favorable development for medical professionalgeneral liability was primarily due to lower than expected severity for individual healthcare professionals, allied facilities, and hospitals in accident years 2011 and prior. This was partially offset by unfavorable development in accident years 2012 and 2013 related to higher than expected large loss emergence in hospitals and higher than expected severity in accident years 2014 and 2015 in the aging services business.
Favorable development in other professional liability and management liability was primarily related to lower than expected frequency of claims in accident years 2010 through 2015, mainly driven by professional services. Additional favorable development was related to favorable outcomes on larger claims in 2013 and prior in professional services. This was partially offset by unfavorable development in accident years 2014 and 2015 related to an increase in management liability frequency of larger claims.
Favorable development for commercial auto was primarily due to favorable settlements on claims in accident years 2010 through 2014.
Favorable development for general liability was primarily due to better than expected claim settlements in accident years 2012 through 2014 and better than expected severity on umbrella claims in accident years 2010 through 2013.
Unfavorable development for workers’ compensation was due to a reduction in estimated recoveries on war hazard claims for Defense Base Act contractors, which was partially offset by favorable development related to lower than expected frequencies for the small and middle market businesses in accident years 2009 through 2014.
Favorable development for other coverages was primarily due to better than expected claim frequency in property coverages in accident year 2015, better than expected loss emergence in accident years 2013 through 2015 for property and other, better than expected severity in accident years 2013 and prior for liability and better than expected severity in auto liability in accident years 2011 through 2015. This favorable development was partially offset by unfavorable development which was primarily due to higher than expected severity from a 2015 catastrophe event for property and other and higher than expected large loss emergence in accident years 2011 through 2015 for other professional liability.life sciences.
Asbestos and Environmental Pollution (“A&EP”) Reserves
In 2010, Continental Casualty Company (“CCC”) together with several of CNA’s other insurance subsidiaries completed a transaction with National Indemnity Company (“NICO”), a subsidiary of Berkshire Hathaway Inc., under which substantially all of CNA’s legacy A&EP liabilities were ceded to NICO through a loss portfolio transfer (“LPT”loss portfolio transfer” or “LPT”). At the effective date of the transaction, CNA ceded approximately $1.6 billion of net A&EP claim and allocated claim adjustment expense reserves to NICO under a retroactive reinsurance agreement with an aggregate limit of $4.0 billion. The $1.6 billion of claim and allocated claim adjustment expense reserves ceded to NICO was net of $1.2 billion of ceded claim and allocated claim adjustment expense reserves under existing third party reinsurance contracts. The NICO LPT aggregate reinsurance limit also covers credit risk on the existing third party reinsurance related to these liabilities. CNA paid NICO a reinsurance premium of $2.0 billion and transferred to NICO billed third
party reinsurance receivables related to A&EP claims with a net book value of $215 million, resulting in total consideration of $2.2 billion.
Subsequent to the effective date of the LPT, CNA recognized adverse prior year development on its A&EP reserves which resulted in additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the LPT exceeded the $2.2 billion consideration paid, resulting in the NICO LPT moving into a gain position, requiring retroactive reinsurance accounting. Under retroactive reinsurance accounting, this gain is deferred and only recognized in earnings in proportion to actual paid recoveries under the LPT. Over the life of the contract, there is no economic impact as long as any additional losses incurred are within the limit of the LPT. In a period in which CNA recognizes a change in the estimate of A&EP reserves that increases the amounts ceded under the LPT, the proportion of actual paid recoveries to total ceded losses is impactedaffected and the change in the deferred gain is recognized in earnings as if the revised estimate of ceded losses was available at the effective date of the LPT. The effect of the deferred retroactive reinsurance benefit is recorded in Insurance claims and policyholders’ benefits in the Consolidated Condensed Statements of Income.
The following table presents the impact of the loss portfolio transfer on the Consolidated Condensed Statements of Income.
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||||
Three Months Ended March 31 | 2018 | 2017 | ||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 |
| ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||
Additional amounts ceded under LPT: | ||||||||||||||||||||||||||
Net A&EP adverse development before consideration of LPT | $ | - | $ | - | $ | 60 | $ | 200 | $ | 113 | $ | 60 | ||||||||||||||
Provision for uncollectible third-party reinsurance on A&EP | (16 | ) | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||
Total additional amounts ceded under LPT | 97 | 60 | ||||||||||||||||||||||||
Retroactive reinsurance benefit recognized | (3 | ) | (9 | ) | (43 | ) | (82 | ) | (57 | ) | (40) | |||||||||||||||
Pretax impact of A&EP reserve development and the LPT | $ | (3 | ) | $ | (9 | ) | $ | 17 | $ | 118 | ||||||||||||||||
| ||||||||||||||||||||||||||
Pretax impact of deferred retroactive reinsurance | $ | 40 | $ | 20 | ||||||||||||||||||||||
|
| |||||||||||||||||||||||||
|
|
Based upon CNA’s annual A&EP reserve review, net unfavorable prior year development of $60$113 million and $200$60 million was recognized before consideration of cessions to the LPT for the sixthree months ended June 30, 2017March 31, 2018 and 2016.2017. Additionally, in 2018, CNA released a portion of its provision for uncollectible third party reinsurance. The 2018 unfavorable development was driven by higher than anticipated defense costs on direct asbestos environmental accounts and paid losses on assumed reinsurance exposures. The 2017 unfavorable development was driven by modestly higher anticipated payouts on claims from known sources of asbestos exposure. The 2016 unfavorable development was driven by an increase in anticipated future expenses associated with determination of coverage, higher anticipated payouts associated with a limited number of historical accounts having significant asbestos exposures and higher than expected severity on pollution claims. While thisthe unfavorable development was ceded to NICO under the LPT, CNA’s reported earnings in boththe periods were negatively affected due to the application of retroactive reinsurance accounting.
As of June 30, 2017March 31, 2018 and December 31, 2016,2017, the cumulative amounts ceded under the LPT were $2.9$3.0 billion and $2.8$2.9 billion. The unrecognized deferred retroactive reinsurance benefit was $351$366 million and $334$326 million as of June 30, 2017March 31, 2018 and December 31, 2016.2017.
NICO established a collateral trust account as security for its obligations to CNA. The fair value of the collateral trust account was $2.8$2.9 billion and $3.1 billion as of June 30, 2017March 31, 2018 and December 31, 2016.2017. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the aggregate reinsurance limit as well as certain of NICO’s performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third-party reinsurers related to CNA’s A&EP claims.
7.5. Shareholders’ Equity
Accumulated other comprehensive income (loss)
The tables below present the changes in AOCI by component for the three and six months ended June 30, 2016March 31, 2017 and 2017:2018:
Total | ||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||
OTTI | Unrealized | Foreign | Other | |||||||||||||||||||||||||||
Gains | Gains (Losses) | Cash Flow | Pension | Currency | Comprehensive | |||||||||||||||||||||||||
(Losses) | on Investments | Hedges | Liability | Translation | Income (Loss) | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||
Balance, April 1, 2016 | $ | 29 | $ | 554 | $ | (2 | ) | $ | (643 | ) | $ | (64 | ) | $ | (126 | ) | ||||||||||||||
Other comprehensive income (loss) before reclassifications, after tax of $1, $(164), $0, $0 and $0 | (1 | ) | 322 | (48 | ) | 273 | ||||||||||||||||||||||||
Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $6, $0, $(4) and $0 | (1 | ) | 5 | 4 | ||||||||||||||||||||||||||
Other comprehensive income (loss) | (1 | ) | 321 | - | 5 | (48 | ) | 277 | ||||||||||||||||||||||
Amounts attributable to noncontrolling interests | (37 | ) | (1 | ) | 6 | (32 | ) | |||||||||||||||||||||||
Balance, June 30, 2016 | $ | 28 | $ | 838 | $ | (2 | ) | $ | (639 | ) | $ | (106 | ) | $ | 119 | |||||||||||||||
Balance, April 1, 2017 | $ | 23 | $ | 636 | $ | (2 | ) | $ | (638 | ) | $ | (168 | ) | $ | (149 | ) | ||||||||||||||
Other comprehensive income (loss) before reclassifications, after tax of $1, $(63), $0, $0 and $0 | (1 | ) | 108 | 42 | 149 | |||||||||||||||||||||||||
Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $(1), $15, $0, $(3) and $0 | 1 | (31 | ) | 7 | (23 | ) | ||||||||||||||||||||||||
Other comprehensive income | - | 77 | - | 7 | 42 | 126 | ||||||||||||||||||||||||
Amounts attributable to noncontrolling interests | (8 | ) | (1 | ) | (4 | ) | (13 | ) | ||||||||||||||||||||||
Balance, June 30, 2017 | $ | 23 | $ | 705 | $ | (2 | ) | $ | (632 | ) | $ | (130 | ) | $ | (36 | ) | ||||||||||||||
Total | ||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||
OTTI | Unrealized | Foreign | Other | |||||||||||||||||||||||||||
Gains | Gains (Losses) | Cash Flow | Pension | Currency | Comprehensive | |||||||||||||||||||||||||
(Losses) | on Investments | Hedges | Liability | Translation | Income (Loss) | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||
Balance, January 1, 2017 | $ | 27 | $ | 576 | $ | (2 | ) | $ | (646 | ) | $ | (178 | ) | $ | (223 | ) | ||||||||||||||
Other comprehensive income (loss) before reclassifications, after tax of $(1), $(47), $0, $0 and $0 | 85 | (1 | ) | 11 | 95 | |||||||||||||||||||||||||
Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $2, $9, $0, $(4) and $0 | (4 | ) | (18 | ) | 1 | 8 | (13 | ) | ||||||||||||||||||||||
Other comprehensive income (loss) | (4 | ) | 67 | - | 8 | 11 | 82 | |||||||||||||||||||||||
Amounts attributable to noncontrolling interests | (7 | ) | (1 | ) | (8 | ) | ||||||||||||||||||||||||
Balance, March 31, 2017 | $ | 23 | $ | 636 | $ | (2 | ) | $ | (638 | ) | $ | (168 | ) | $ | (149 | ) | ||||||||||||||
Balance, January 1, 2018, as reported | $ | 22 | $ | 673 | $ | - | $ | (633 | ) | $ | (88 | ) | $ | (26 | ) | |||||||||||||||
Cumulative effect adjustment for adoption of ASU2016-01 (a), after tax of $0, $8, $0, $0 and $0 | (25 | ) | (25 | ) | ||||||||||||||||||||||||||
Cumulative effect adjustment for adoption of ASU2018-02 (a) | 4 | 123 | (130 | ) | (3 | ) | ||||||||||||||||||||||||
Balance, January 1, 2018, as adjusted | 26 | 771 | - | (763 | ) | (88 | ) | (54 | ) | |||||||||||||||||||||
Other comprehensive income (loss) before reclassifications, after tax of $2, $105, $(2), $0 and $0 | (10 | ) | (414 | ) | 8 | 11 | (405 | ) | ||||||||||||||||||||||
Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $4, $0, $(3) and $0 | 1 | (15 | ) | 2 | 10 | (2 | ) | |||||||||||||||||||||||
Other comprehensive income (loss) | (9 | ) | (429 | ) | 10 | 10 | 11 | (407 | ) | |||||||||||||||||||||
Amounts attributable to noncontrolling interests | 1 | 44 | (1 | ) | 44 | |||||||||||||||||||||||||
Balance, March 31, 2018 | $ | 18 | $ | 386 | $ | 10 | $ | (753 | ) | $ | (78 | ) | $ | (417 | ) | |||||||||||||||
Balance, January 1, 2016 Other comprehensive income (loss) before reclassifications, after tax of $(1), $(272), $0, $0 and $0 Reclassification of losses from accumulated other comprehensive income, after tax of $(1), $(1), $0, $(7) and $0 Other comprehensive income (loss) Amounts attributable to noncontrolling interests Balance, June 30, 2016 Balance, January 1, 2017 Other comprehensive income (loss) before reclassifications, after tax of $0, $(110), $0, $0 and $0 Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $1, $24, $0, $(7) and $0 Other comprehensive income (loss) Amounts attributable to noncontrolling interests Balance, June 30, 2017 Total Accumulated OTTI Unrealized Foreign Other Gains Gains (Losses) Cash Flow Pension Currency Comprehensive (Losses) on Investments Hedges Liability Translation Income (Loss) (In millions) $ 24 $ 347 $ (3 ) $ (649 ) $ (76 ) $ (357 ) 2 539 (34 ) 507 2 10 1 13 26 4 549 1 13 (34 ) 533 (58 ) (3 ) 4 (57 ) $ 28 $ 838 $ (2 ) $ (639 ) $ (106 ) $ 119 $ 27 $ 576 $ (2 ) $ (646 ) $ (178 ) $ (223 ) (1 ) 193 (1 ) 53 244 (3 ) (49 ) 1 15 (36 ) (4 ) 144 - 15 53 208 (15 ) (1 ) (5 ) (21 ) $ 23 $ 705 $ (2 ) $ (632 ) $ (130 ) $ (36 )
(a) | For information regarding this accounting standard see Note 1. |
Amounts reclassified from AOCI shown above are reported in Net income (loss) as follows:
Major Category of AOCI | Affected Line Item | |
OTTI gains (losses) | Investment gains (losses) | |
Unrealized gains (losses) on investments | Investment gains (losses) | |
Cash flow hedges | ||
Pension liability |
Treasury Stock
The Company repurchased 0.1 million and 2.69.9 million shares of Loews common stock at an aggregate costscost of $6 million and $98$497 million during the sixthree months ended June 30, 2017March 31, 2018.
6. Revenue from Contracts with Customers
Disaggregation of revenues–Revenue from contracts with customers, other than insurance premiums, is reported within Operating revenues and 2016.other on the Consolidated Condensed Statements of Income. The following table presents revenues from contracts with customers disaggregated by revenue type along with the reportable segment and a reconciliation to Operating revenues and other as reported in Note 10:
8.
Three Months Ended March 31 | 2018 | 2017 (a) | ||||||||||||
(In millions) | ||||||||||||||
Non-insurance warranty and other services - CNA Financial | $ | 245 | $ | 100 | ||||||||||
Contract drilling - Diamond Offshore | 296 | 375 | ||||||||||||
Transportation and storage of natural gas and NGLs and other services - Boardwalk Pipeline | 331 | 351 | ||||||||||||
Lodging and related services - Loews Hotels & Co | 183 | 167 | ||||||||||||
Rigid plastic packaging and recycled resin – Corporate | 213 | |||||||||||||
Total revenues from contracts with customers | 1,268 | 993 | ||||||||||||
Other revenues | 13 | 24 | ||||||||||||
Operating revenues and other | $ | 1,281 | $ | 1,017 | ||||||||||
(a) | Prior period amounts have not been adjusted under the modified retrospective method of adoption for ASU2014-09. |
CNA’snon-insurance warranty revenues are primarily generated from separately-priced service contracts that provide mechanical breakdown and other coverages to vehicle or consumer goods owners, which generally provide coverage from one month to ten years. Additionally, CNA provides warranty administration services for dealer and manufacturer warranty products.Non-insurance revenues are recognized when obligations under the terms of the contract with CNA’s customers are satisfied, which is generally over time as obligations are fulfilled. CNA recognizesnon-insurance warranty revenues over the service period in proportion to the actuarially determined expected claims emergence pattern. Customers pay in full at the inception of the warranty contract. A liability for unearned warranty revenue is recorded when cash payments are received or due in advance of CNA’s performance, including amounts which are refundable upon cancellation.
Diamond Offshore’s contract drilling revenues primarily result from providing a drilling rig and the crew and supplies necessary to operate the rig, mobilizing and demobilizing the rig to and from the drill site and performing rig preparation activities and/or modifications required for the contract. Consideration received for performing these activities may consist of dayrate drilling revenue, mobilization and demobilization revenue, contract preparation revenue and reimbursement revenue for the purchase of supplies, equipment, personnel services and other services requested by the customer. Diamond Offshore accounts for these integrated services provided within its drilling contracts as a single performance obligation satisfied over time and comprised of a series of distinct time increments in which drilling services are provided. The total transaction price is determined for each individual contract by estimating both fixed and variable consideration expected to be earned over the term of the contract. The standard contract term ranges from two to 60 months.
Boardwalk Pipeline primarily earns revenues by providing transportation and storage services for natural gas and natural gas liquids and hydrocarbons (referred to together as “NGLs”) on a firm and interruptible basis and provides interruptible natural gas parking and lending services. 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. The majority of Boardwalk Pipeline’s revenues are from firm service contracts which are accounted for as a single promise to stand ready each month of the contract term to provide the committed capacity for either transportation or storage services. The transaction price is comprised of a fixed fee based on the capacity reserved plus a usage fee paid on the volume of commodity transported or injected and withdrawn from storage. Both the fixed and the usage fees are allocated to the single performance obligation of providing transportation or storage service and recognized over time as control is passed to the customer. These service contracts can range in term from one to 20 years and are invoiced monthly.
Loews Hotels & Co provides lodging and related goods and services as well as management and marketing services. Loews Hotels & Co allocates the lodging transaction price to the distinct goods and services based on the market price. Lodging and related revenues are recognized as the guest takes possession of the goods or receives the services. Management and marketing services revenues are recognized as the services are provided and billed on a monthly basis. In addition, Loews Hotels & Co recognizes revenue for the reimbursement of payroll expenses incurred on behalf of the owners of joint venture and managed hotel properties.
Consolidated Container manufactures rigid plastic packaging and recycled resins and provides packaging solutions to end markets such as beverage, food and household chemicals through a network of manufacturing locations across North America. Consolidated Container recognizes revenue as control is transferred to the customer.
Receivables from contracts with customers – As of March 31, 2018 and January 1, 2018, receivables from contracts with customers were approximately $424 million and $488 million and are included within Receivables on the Consolidated Condensed Balance Sheets.
Deferred revenue – The Company records deferred revenue, which is primarily related tonon-insurance warranty contracts, when payment is received in advance of satisfying the performance obligations. As of March 31, 2018 and January 1, 2018, deferred revenue resulting from contracts with customers was approximately $3.1 billion and $3.0 billion and is included in Other liabilities on the Consolidated Condensed Balance Sheets. The increase in deferred revenue is primarily due to cash payments received in advance of satisfying performance obligations, partially offset by cancellations and revenues recognized during the period. Approximately $268 million of revenues recognized during the three months ended March 31, 2018 were included in deferred revenue as of January 1, 2018.
Contract costs – Costs to obtain or fulfill contracts with customers are deferred and recorded as Other assets. These costs are expected to be recoverable over the duration of the contract and are amortized in the same manner the related revenue is recognized. As of March 31, 2018, the Company had approximately $2.3 billion of costs to obtain contracts with customers, primarily related to CNA for amounts paid to dealers and other agents to obtainnon-insurance warranty contracts, which are included in Other assets on the Consolidated Condensed Balance Sheet. For the three months ended March 31, 2018, amortization expense totaled $171 million and is included in Operating expenses and other in the Consolidated Condensed Statement of Income.
For CNA’snon-insurance warranty contract costs, a premium deficiency arises to the extent that estimated future costs associated with these contracts exceed unrecognized revenue. Anticipated investment income is also considered in the determination of the recoverability of deferred costs. CNA evaluates its deferred costs for recoverability as part of its premium deficiency assessment. If necessary, adjustments to deferred costs and a premium deficiency reserve, if any, are recorded in current period results of operations. No premium deficiency was recognized in the three months ended March 31, 2018.
Performance obligations– As of March 31, 2018, approximately $11.9 billion of estimated operating revenues is expected to be recognized in the future related to outstanding performance obligations. The balance relates primarily to revenues for transportation and storage of natural gas and NGLs at Boardwalk Pipeline andnon-insurance warranty services at CNA. Approximately $1.5 billion will be recognized during the remaining nine months of 2018, $1.8 billion in 2019 and the remainder in following years. The actual timing of recognition may vary due to factors outside of the Company’s control. The Company has elected to exclude variable consideration related entirely to wholly unsatisfied performance obligations and contracts where revenue is recognized based upon the right to invoice the customer. Therefore, the estimated operating revenues exclude contract drilling dayrate revenue at Diamond Offshore and interruptible service contract revenue at Boardwalk Pipeline.
7. Benefit Plans
The Company hasand its subsidiaries have severalnon-contributory defined benefit plans and postretirement benefit plans covering eligible employees and retirees.
The following table presents the components of net periodic benefit(benefit) cost for the plans:
Pension Benefits | Pension Benefits | Other Postretirement Benefits | ||||||||||||||||||||||||||||||
Three Months Ended | Six Months Ended |
|
| |||||||||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||||||||||
Three Months Ended March 31 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 |
| ||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Service cost | $ | 2 | $ | 2 | $ | 4 | $ | 4 | $ | 2 | $ | 2 | ||||||||||||||||||||
Interest cost | 29 | 32 | 59 | 64 | 27 | 30 | $ | 1 | $ | 1 | ||||||||||||||||||||||
Expected return on plan assets | (43) | (44) | (86) | (88) | (45) | (43) | (1) | (1) | ||||||||||||||||||||||||
Amortization of unrecognized net loss | 11 | 12 | 22 | 23 | 11 | 11 | ||||||||||||||||||||||||||
Amortization of unrecognized prior service benefit | (1) | (1) | ||||||||||||||||||||||||||||||
Settlement charge | 1 | 1 | 3 | 2 | 4 | 2 | ||||||||||||||||||||||||||
Net periodic benefit cost | $ | - | $ | 3 | $ | 2 | $ | 5 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
Net periodic (benefit) cost | $ | (1) | $ | 2 | $ | (1) | $ | (1) | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
Other Postretirement Benefits | ||||||||||||||||||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Interest cost | $ | 1 | $ | 1 | ||||||||||||||||||||||||||||
Expected return on plan assets | $ | (1) | $ | (1) | (2) | (2) | ||||||||||||||||||||||||||
Amortization of unrecognized prior service benefit | (1) | (1) | (2) | |||||||||||||||||||||||||||||
Net periodic benefit cost | $ | (1) | $ | (2) | $ | (2) | $ | (3) | ||||||||||||||||||||||||
9.8. Legal Proceedings
CNA Financial
In September of 2016, a class action lawsuit was filed against CCC, Continental Assurance Company (“CAC”) (a former subsidiary of CCC), CNA, the Investment Committee of the CNA 401(k) Plus Plan (“Plan”), The Northern Trust Company and John Does1-10 (collectively “Defendants”) related to the CNA 401(k) Plus Plan. The complaint alleges that Defendants breached fiduciary duties to the CNA 401(k) Plus Plan and caused prohibited transactions in violation of the Employee Retirement Income Security Act of 1974 when the CNA 401(k) Plus Plan’s Fixed Income Fund’s annuity contract with CAC was canceled. The plaintiff alleges he and a proposed class of the CNA 401(k) Plus Plan participants who had invested in the Fixed Income Fund suffered lower returns in their CNA 401(k) Plus Plan investments as a consequence of these alleged violations and seeks relief on behalf of the putative class. This litigation is in its early stages, and as of yet no class has been certified. CCC and the other defendants are contesting the case. The parties are scheduled to attend a mediation in September of 2017.
CNA believes the likelihood of loss is reasonably possible; however, given the status of the litigation, the novel issues raised by the allegations and the uncertainty as to how to assess potential damages, management is currently unable to predict the final outcome. The Plan trustees have provided notice to their fiduciary coverage insurance carriers.
The plaintiff, Defendants and the Plan’s fiduciary insurance carriers have agreed on terms to settle this matter. Upon execution of final settlement agreements, plaintiff and Defendants will propose a class settlement for court approval. Based on the executed term sheet, management has recorded its best estimate of CNA’s current assessment and consideration of available insurance coverage, CNAprobable loss. The Company does not believe that the ultimate resolution of this matter will have a material impact on its condensed consolidated financial statements; however, the timing of recognition of loss, if any, and insurance recovery, if any, may differ.statements.
Other LitigationCNA Financial
In September of 2016, a class action lawsuit was filed against CCC, Continental Assurance Company (“CAC”) (a former subsidiary of CCC), CNA, the Investment Committee of the CNA 401(k) Plus Plan (“Plan”), The Northern Trust Company and John Does1-10 (collectively “Defendants”) related to the Plan. The complaint alleges that Defendants breached fiduciary duties to the Plan and caused prohibited transactions in violation of the Employee Retirement Income Security Act of 1974 when the Plan’s Fixed Income Fund’s annuity contract with CAC was canceled. The plaintiff alleges he and a proposed class of the Plan participants who had invested in the Fixed Income Fund suffered lower returns in Plan investments as a consequence of these alleged violations and seeks relief on behalf of the putative class. The Plan trustees have provided notice to their fiduciary coverage insurance carriers.
The Company and its subsidiaries are parties to other litigation arising in the ordinary course of business. The outcome of this litigation will not, in the opinion of management, materially affect the Company’s results of operations or equity.
10. Commitments and Contingencies
CNA Guarantees
In the course of selling business entities and assets to third parties, CNA agreed to guarantee the performance of certain obligations of previously owned subsidiaries and to indemnify purchasers for losses arising out of breaches of representations and warranties with respect to the business entities or assets sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such guarantee and indemnification agreements in effect for sales of business entities, assets and third party loans may include provisions that survive indefinitely. As of June 30, 2017, the aggregate amount related to quantifiable guarantees was $434 millionplaintiff, Defendants and the aggregate amount relatedPlan’s fiduciary insurance carriers have agreed on terms to quantifiable indemnificationsettle this matter. Upon execution of final settlement agreements, was $254 million. In certain cases, should CNA be required to make payments under any such guarantee, it would haveplaintiff and Defendants will propose a class settlement for court approval. Based on the right to seek reimbursement from an affiliateexecuted term sheet, management has recorded its best estimate of a previously owned subsidiary.
In addition, CNA has agreed to provide indemnification to third party purchasers for certain losses associated with sold business entities or assets that are not limited by a contractual monetary amount. As of June 30, 2017, CNA had outstanding unlimited indemnifications in connection with the sales of certain of its business entities or assets that included tax liabilities arising prior to a purchaser’s ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. Certain provisions of the indemnification agreements survive indefinitely while others survive until the applicable statutes of limitation expire, or until the agreed upon contract terms expire.
CNA also provided guarantees, if the primary obligor fails to perform, to holders of structured settlement annuities provided by a previously owned subsidiary. As of June 30, 2017, the potential amount of future payments CNA could be required to pay under these guarantees was approximately $1.8 billion, which will be paid over the lifetime of the annuitants. CNACNA’s probable loss. The Company does not believe any payment is likely under these guarantees, as CNA isthat the beneficiaryultimate resolution of this matter will have a trust that must be maintained at a level that approximates the discounted reserves for these annuities.
CNA Small Business Premium Rate Adjustment
In prior quarters, CNA identified rating errors related tomaterial impact on its multi-peril package product and workers’ compensation policies within its Small Business unit and CNA is in the process of voluntarily issuing premium refunds related to affected policies. After the rating errors were identified, written and earned premium have been reported net of any impact from the premium rate adjustments. Premium development recognized as a result of the rating errors was favorable of $1 million and adverse of $37 million for the three and six months ended June 30, 2017.
The estimated refund liability for the multi-peril product and workers’ compensation policies as of June 30, 2017 was $96 million. CNA has reduced pretax income by $1 million and $6 million for the three and six months ended June 30, 2017 for interest due to policyholders on the aggregate refund amounts.
The amount of the refund and corresponding liability will continue to increase until required changes to the automated rating processes are fully implemented. The required changes were implemented in the second quarter of 2017 for the multi-peril product and are expected to be implemented by the end of the third quarter of 2017 for workers’ compensation policies. Any fines or penalties related to the foregoing are reasonably possible, but are not expected to be material to the Company’sconsolidated financial statements.
11. Segments
The Company has five reportable segments comprised of its four individual operating subsidiaries, CNA, Diamond Offshore, Boardwalk Pipeline and Loews Hotels & Co; and the Corporate segment. Each of the operating subsidiaries are headed by a chief executive officer who is responsible for the operation of its business and has the duties and authority commensurate with that position. The operations of Consolidated Container since the acquisition date are included in the Corporate segment. For additional disclosures regarding the composition of the Company’s segments, see Note 20 of the Consolidated Financial Statements in the Company’s Annual Report on Form10-K for the year ended December 31, 2016.
The following tables present the reportable segments of the Company and their contribution to the Consolidated Condensed Statements of Income. Amounts presented will not necessarily be the same as those in the individual financial statements of the Company’s subsidiaries due to adjustments for purchase accounting, income taxes and noncontrolling interests.
Statements of Income by segment are presented in the following tables.
Three Months Ended June 30, 2017 | CNA Financial | Diamond Offshore | Boardwalk Pipeline | Loews Hotels & Co | Corporate | Total | ||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Insurance premiums | $ | 1,734 | $ | 1,734 | ||||||||||||||||||||
Net investment income | 475 | $ | 1 | $ | 2 | 478 | ||||||||||||||||||
Investment gains | 43 | 43 | ||||||||||||||||||||||
Contract drilling revenues | 392 | 392 | ||||||||||||||||||||||
Other revenues | 114 | 6 | $ | 318 | $ | 181 | 93 | 712 | ||||||||||||||||
Total | 2,366 | 399 | 318 | 181 | 95 | 3,359 | ||||||||||||||||||
Expenses: | ||||||||||||||||||||||||
Insurance claims and policyholders’ benefits | 1,280 | 1,280 | ||||||||||||||||||||||
Amortization of deferred acquisition costs | 312 | 312 | ||||||||||||||||||||||
Contract drilling expenses | 196 | 196 | ||||||||||||||||||||||
Other operating expenses | 364 | 185 | 251 | 155 | 130 | 1,085 | ||||||||||||||||||
Interest | 40 | 27 | 44 | 6 | 22 | 139 | ||||||||||||||||||
Total | 1,996 | 408 | 295 | 161 | 152 | 3,012 | ||||||||||||||||||
Income (loss) before income tax | 370 | (9 | ) | 23 | 20 | (57 | ) | 347 | ||||||||||||||||
Income tax (expense) benefit | (98 | ) | 23 | (5 | ) | (10 | ) | 21 | (69) | |||||||||||||||
Net income (loss) | 272 | 14 | 18 | 10 | (36 | ) | 278 | |||||||||||||||||
Amounts attributable to noncontrolling interests | (28 | ) | (7 | ) | (12 | ) | (47) | |||||||||||||||||
Net income (loss) attributable to Loews Corporation | $ | 244 | $ | 7 | $ | 6 | $ | 10 | $ | (36 | ) | $ | 231 | |||||||||||
Revenues: Insurance premiums Net investment income Investment gains (losses) Contract drilling revenues Other revenues Total Expenses: Insurance claims and policyholders’ benefits Amortization of deferred acquisition costs Contract drilling expenses Other operating expenses Interest Total Income (loss) before income tax Income tax (expense) benefit Net income (loss) Amounts attributable to noncontrolling interests Net income (loss) attributable to Loews CorporationThree Months Ended June 30, 2016 CNA
Financial Diamond
Offshore Boardwalk
Pipeline Loews
Hotels & Co Corporate Total (In millions) $ 1,730 $ 1,730 502 $ 85 587 13 $ (12 ) 1 357 357 103 33 $ 308 $ 189 (1 ) 632 2,348 378 308 189 84 3,307 1,339 1,339 305 305 198 198 376 825 198 180 32 1,611 38 24 45 5 18 130 2,058 1,047 243 185 50 3,583 290 (669 ) 65 4 34 (276 ) (80 ) 99 (16 ) (3 ) (12 ) (12 ) �� 210 (570 ) 49 1 22 (288 ) (21 ) 276 (32 ) 223 $ 189 $ (294 ) $ 17 $ 1 $ 22 $ (65 )
Revenues: Insurance premiums Net investment income Investment gains Contract drilling revenues Other revenues Total Expenses: Insurance claims and policyholders’ benefits Amortization of deferred acquisition costs Contract drilling expenses Other operating expenses Interest Total Income (loss) before income tax Income tax (expense) benefit Net income (loss) Amounts attributable to noncontrolling interests Net income (loss) attributable to Loews CorporationSix Months Ended June 30, 2017 CNA
Financial Diamond
Offshore Boardwalk
Pipeline Loews
Hotels & Co Corporate Total (In millions) $ 3,379 $ 3,379 1,020 $ 1 $ 61 1,082 77 77 756 756 219 19 $ 686 $ 348 93 1,365 4,695 776 686 348 154 6,659 2,573 2,573 617 617 400 400 707 305 455 296 168 1,931 83 55 90 13 40 281 3,980 760 545 309 208 5,802 715 16 141 39 (54 ) 857 (182 ) 21 (28 ) (19 ) 20 (188 ) 533 37 113 20 (34 ) 669 (55 ) (18 ) (70 ) (143 ) $ 478 $ 19 $ 43 $ 20 $ (34 ) $ 526
Revenues: Insurance premiums Net investment income Investment losses Contract drilling revenues Other revenues Total Expenses: Insurance claims and policyholders’ benefits Amortization of deferred acquisition costs Contract drilling expenses Other operating expenses Interest Total Income (loss) before income tax Income tax (expense) benefit Net income (loss) Amounts attributable to noncontrolling interests Net income (loss) attributable to Loews CorporationSix Months Ended June 30, 2016 CNA
Financial Diamond
Offshore Boardwalk
Pipeline Loews
Hotels &
Co Corporate Total (In millions) $ 3,429 $ 3,429 937 $ 72 1,009 (15 ) $ (12 ) (27 ) 801 801 200 60 $ 655 $ 352 1 1,268 4,551 849 655 352 73 6,480 2,747 2,747 612 612 411 411 756 974 403 328 57 2,518 88 50 88 11 36 273 4,203 1,435 491 339 93 6,561 348 (586 ) 164 13 (20 ) (81 ) (71 ) 100 (35 ) (9 ) 7 (8 ) 277 (486 ) 129 4 (13 ) (89 ) (28 ) 235 (81 ) 126 $ 249 $ (251 ) $ 48 $ 4 $ (13 ) $ 37
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with our Consolidated Condensed Financial Statements included under Item 1 of this Report, Risk Factors included under Part II, Item 1A of this Report, and the Consolidated Financial Statements, Risk Factors, and MD&A included in our Annual Report on Form10-K for the year ended December 31, 2016. This MD&A is comprised of the following sections:
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OVERVIEW
We are a holding company and have five reportable segments comprised of our four individual operating subsidiaries, CNA Financial Corporation (“CNA”), Diamond Offshore Drilling, Inc. (“Diamond Offshore”), Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”) and Loews Hotels Holding Corporation (“Loews Hotels & Co”); and our Corporate segment. The results of operations of Consolidated Container Company LLC since the acquisition date are included in the Corporate segment. Each of our operating subsidiaries is headed by a chief executive officer who is responsible for the operation of its business and has the duties and authority commensurate with that position.
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 Consolidated Financial Statements in our Annual Report on Form10-K for the year ended December 31, 2016) 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.
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.
RESULTS OF OPERATIONS
Consolidated Financial Results
The following table summarizes net income (loss) attributable to Loews Corporation by segment and net income (loss) per share attributable to Loews Corporation for the three and six months ended June 30, 2017 and 2016:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(In millions, except per share data) | ||||||||||||||||
CNA Financial | $ | 244 | $ | 189 | $ | 478 | $ | 249 | ||||||||
Diamond Offshore | 7 | (294 | ) | 19 | (251) | |||||||||||
Boardwalk Pipeline | 6 | 17 | 43 | 48 | ||||||||||||
Loews Hotels & Co | 10 | 1 | 20 | 4 | ||||||||||||
Corporate | (36 | ) | 22 | (34 | ) | (13) | ||||||||||
Net income (loss) attributable to Loews Corporation | $ | 231 | $ | (65 | ) | $ | 526 | $ | 37 | |||||||
Basic and diluted net income (loss) per share | $ | 0.69 | $ | (0.19 | ) | $ | 1.56 | $ | 0.11 | |||||||
Net income attributable to Loews Corporation for the three months ended June 30, 2017 was $231 million, or $0.69 per share, compared to a net loss of $65 million, or $0.19 per share in the 2016 period. Net income attributable to Loews Corporation for the six months ended June 30, 2017 was $526 million, or $1.56 per share, compared to $37 million, or $0.11 per share, in the 2016 period. The results for the three and six months ended June 30, 2017 include asset impairment charges at Diamond Offshore of $23 million as compared with $267 million (both after tax and noncontrolling interests) in the 2016 periods.
Excluding the impairment charges at Diamond Offshore, net income attributable to Loews Corporation increased $52 million and $245 million for the three and six months ended June 30, 2017 as compared with the 2016 periods due to higher earnings at CNA, Diamond Offshore and Loews Hotels & Co. These increases were partially offset by lower earnings at Boardwalk Pipeline and lower income generated by the parent company investment portfolio.
Unless the context otherwise requires, references herein to net operating income (loss), net realized investment results and net income (loss) reflect amounts attributable to Loews Corporation shareholders.
Acquisition of Consolidated Container Company
On May 22, 2017, we completed the previously announced acquisition of CCC Acquisition Holdings, Inc. for $1.2 billion, subject to closing adjustments. CCC Acquisition Holdings, Inc., through its wholly owned subsidiary, Consolidated Container Company LLC (“Consolidated Container”), is a rigid plastic packaging and recycled resins manufacturer and provides packaging solutions to end markets such as beverage, food and household chemicals through a network of manufacturing locations across North America.
CNA Financial
In September of 2016, a class action lawsuit was filed against CCC, Continental Assurance Company (“CAC”) (a former subsidiary of CCC), CNA, the Investment Committee of the CNA 401(k) Plus Plan (“Plan”), The Northern Trust Company and John Does1-10 (collectively “Defendants”) related to the Plan. The complaint alleges that Defendants breached fiduciary duties to the Plan and caused prohibited transactions in violation of the Employee Retirement Income Security Act of 1974 when the Plan’s Fixed Income Fund’s annuity contract with CAC was canceled. The plaintiff alleges he and a proposed class of the Plan participants who had invested in the Fixed Income Fund suffered lower returns in Plan investments as a consequence of these alleged violations and seeks relief on behalf of the putative class. The Plan trustees have provided notice to their fiduciary coverage insurance carriers.
The plaintiff, Defendants and the Plan’s fiduciary insurance carriers have agreed on terms to settle this matter. Upon execution of final settlement agreements, plaintiff and Defendants will propose a class settlement for court approval. Based on the executed term sheet, management has recorded its best estimate of CNA’s probable loss. The Company does not believe that the ultimate resolution of this matter will have a material impact on its consolidated financial statements.
Other Litigation
The Company and its subsidiaries are from time to time parties to other litigation arising in the ordinary course of business. While it is difficult to predict the outcome or effect of any litigation, management does not believe that the outcome of any such pending litigation will materially affect the Company’s results of operations or equity.
9. Commitments and Contingencies
CNA Guarantees
In the course of selling business entities and assets to third parties, CNA agreed to guarantee the performance of certain obligations of previously owned subsidiaries and to indemnify purchasers for losses arising out of breaches of representations and warranties with respect to the business entities or assets sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such guarantee and indemnification agreements in effect for sales of business entities, assets and third party loans may include provisions that survive indefinitely. As of March 31, 2018, the aggregate amount related to quantifiable guarantees was $375 million and the aggregate amount related to quantifiable indemnification agreements was $252 million. In certain cases, should CNA be required to make payments under any such guarantee, it would have the right to seek reimbursement from an affiliate of a previously owned subsidiary.
In addition, CNA has agreed to provide indemnification to third party purchasers for certain losses associated with sold business entities or assets that are not limited by a contractual monetary amount. As of March 31, 2018, CNA had outstanding unlimited indemnifications in connection with the sales of certain of its business entities or assets that included tax liabilities arising prior to a purchaser’s ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. Certain provisions of the indemnification agreements survive indefinitely while others survive until the applicable statutes of limitation expire, or until the agreed upon contract terms expire.
CNA also provided guarantees, if the primary obligor fails to perform, to holders of structured settlement annuities provided by a previously owned subsidiary. As of March 31, 2018, the potential amount of future payments CNA could be required to pay under these guarantees was approximately $1.8 billion, which will be paid over the lifetime of the annuitants. CNA does not believe any payment is likely under these guarantees, as CNA is the beneficiary of a trust that must be maintained at a level that approximates the discounted reserves for these annuities.
CNA Small Business Premium Rate Adjustment
In 2016 and 2017, CNA identified rating errors related to its multi-peril package product and workers’ compensation policies within its Small Business unit and determined that it would voluntarily issue premium refunds along with interest on affected policies. After the rating errors were identified, written and earned premium have been reported net of any impact from the premium rate adjustments. In the first quarter of 2017, CNA recorded a charge which reduced earned premium by $38 million and increased interest expense by $5 million for interest due to policyholders on the premium rate adjustments.
The policyholder refunds for the multi-peril package product were issued in the third quarter of 2017. The policyholder refunds for workers’ compensation policies are expected to be refunded in the second half of 2018, and as such, an additional $1 million of interest expense was recorded in the first quarter of 2018. The estimated refund liability, including interest, for the workers’ compensation policies as of March 31, 2018 was $60 million.
10. Segments
The Company has five reportable segments comprised of four individual operating subsidiaries, CNA, Diamond Offshore, Boardwalk Pipeline and Loews Hotels & Co; and the Corporate segment. The operations of Consolidated Container are included in the Corporate segment for the three months ended March 31, 2018. Each of the operating subsidiaries is headed by a chief executive officer who is responsible for the operation of its business and has the duties and authority commensurate with that position. For additional disclosures regarding the composition of the Company’s segments, see Note 19 of the Consolidated Financial Statements in the Company’s Annual Report on Form10-K for the year ended December 31, 2017.
The following tables present the reportable segments of the Company and their contribution to the Consolidated Condensed Statements of Income. Amounts presented will not necessarily be the same as those in the individual financial statements of the Company’s subsidiaries due to adjustments for purchase accounting, income taxes and noncontrolling interests.
Statements of Income by segment are presented in the following tables.
Three Months Ended March 31, 2018 | CNA Financial | Diamond Offshore | Boardwalk Pipeline | Loews Hotels & Co | Corporate | Total | ||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Insurance premiums | $ | 1,785 | $ | 1,785 | ||||||||||||||||||||
Net investment income | 490 | $ | 2 | $ | 14 | 506 | ||||||||||||||||||
Investment gains | 9 | 9 | ||||||||||||||||||||||
Operating revenues and other | 251 | 297 | $ | 337 | $ | 183 | 213 | 1,281 | ||||||||||||||||
Total | 2,535 | 299 | 337 | 183 | 227 | 3,581 | ||||||||||||||||||
Expenses: | ||||||||||||||||||||||||
Insurance claims and policyholders’ benefits | 1,339 | 1,339 | ||||||||||||||||||||||
Amortization of deferred acquisition costs | 296 | 296 | ||||||||||||||||||||||
Operating expenses and other | 518 | 296 | 198 | 156 | 232 | 1,400 | ||||||||||||||||||
Interest | 35 | 28 | 44 | 7 | 27 | 141 | ||||||||||||||||||
Total | 2,188 | 324 | 242 | 163 | 259 | 3,176 | ||||||||||||||||||
Income (loss) before income tax | 347 | (25 | ) | 95 | 20 | (32 | ) | 405 | ||||||||||||||||
Income tax (expense) benefit | (55 | ) | 44 | (12 | ) | (7 | ) | 5 | (25 | ) | ||||||||||||||
Net income (loss) | 292 | 19 | 83 | 13 | (27 | ) | 380 | |||||||||||||||||
Amounts attributable to noncontrolling interests | (31 | ) | (9 | ) | (47 | ) | (87 | ) | ||||||||||||||||
Net income (loss) attributable to Loews Corporation | $ | 261 | $ | 10 | $ | 36 | $ | 13 | $ | (27 | ) | $ | 293 | |||||||||||
(In millions) Revenues: Insurance premiums Net investment income Investment gains Operating revenues and other Total Expenses: Insurance claims and policyholders’ benefits Amortization of deferred acquisition costs Operating expenses and other Interest Total Income before income tax Income tax expense Net income Amounts attributable to noncontrolling interests Net income attributable to Loews CorporationThree Months Ended March 31, 2017 CNA
Financial Diamond
Offshore Boardwalk
Pipeline Loews
Hotels & Co Corporate Total $ 1,645 $ 1,645 545 $ 59 604 34 34 105 $ 377 $ 368 $ 167 1,017 2,329 377 368 167 59 3,300 1,293 1,293 305 305 343 324 204 141 38 1,050 43 28 46 7 18 142 1,984 352 250 148 56 2,790 345 25 118 19 3 510 (84 ) (2 ) (23 ) (9 ) (1 ) (119 ) 261 23 95 10 2 391 (27 ) (11 ) (58 ) (96 ) $ 234 $ 12 $ 37 $ 10 $ 2 $ 295
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with our Consolidated Condensed Financial Statements included under Item 1 of this Report, Risk Factors included under Part II, Item 1A of this Report, and the Consolidated Financial Statements, Risk Factors, and MD&A included in our Annual Report on Form10-K for the year ended December 31, 2017. This MD&A is comprised of the following sections:
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We are a holding company and have five reportable segments comprised of four individual operating subsidiaries, CNA Financial Corporation (“CNA”), Diamond Offshore Drilling, Inc. (“Diamond Offshore”), Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”) and Loews Hotels Holding Corporation (“Loews Hotels & Co”); and the Corporate segment. The operations of Consolidated Container Company LLC (“Consolidated Container”) are included in the Corporate segment for the three months ended March 31, 2018. For information on the acquisition of Consolidated Container on May 22, 2017, see Notes 2 and 11 of the Consolidated Financial Statements in our Annual Report on Form10-K for the year ended December 31, 2017. Each of our operating subsidiaries is headed by a chief executive officer who is responsible for the operation of its business and has the duties and authority commensurate with that position.
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 Consolidated Financial Statements in our Annual Report on Form10-K for the year ended December 31, 2017) 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.
Unless the context otherwise requires, references in this Report to “Loews Corporation,” “the Company,” “Parent Company,” “we,” “our,” “us” or like terms refer to the business of Loews Corporation excluding its subsidiaries.
Consolidated Financial Results
The following table summarizes net income (loss) attributable to Loews Corporation by segment and net income per share attributable to Loews Corporation for the three months ended March 31, 2018 and 2017:
Three Months Ended March 31 | 2018 | 2017 | ||||||
| ||||||||
(In millions, except per share data) | ||||||||
CNA Financial | $ | 261 | $ | 234 | ||||
Diamond Offshore | 10 | 12 | ||||||
Boardwalk Pipeline | 36 | 37 | ||||||
Loews Hotels & Co | 13 | 10 | ||||||
Corporate | (27 | ) | 2 | |||||
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Net income attributable to Loews Corporation | $ | 293 | $ | 295 | ||||
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Basic net income per common share | $ | 0.89 | $ | 0.88 | ||||
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Diluted net income per common share | $ | 0.89 | $ | 0.87 | ||||
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Net income attributable to Loews Corporation for the three months ended March 31, 2018 was $293 million, or $0.89 per share, compared to $295 million, or $0.87 per share in the 2017 period.
Net income for the three months ended March 31, 2018 decreased slightly as compared with the prior year period as lower earnings at Diamond Offshore and Boardwalk Pipeline and lower net investment income were mostly offset by higher earnings at CNA and Loews Hotels & Co. The increased earnings per share reflects the substantial treasury share purchases in 2017 and 2018.
The following table summarizes the results of operations for CNA for the three and six months ended June 30,March 31, 2018 and 2017 and 2016 as presented in Note 1110 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report. For further discussion of Net investment income and Net realized investment results, see the Investments section of this MD&A.
Three Months Ended | Six Months Ended | |||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||
(In millions) | ||||||||||||||||||||
Revenues: | ||||||||||||||||||||
Insurance premiums | $ | 1,734 | $ | 1,730 | $ | 3,379 | $ | 3,429 | ||||||||||||
Net investment income | 475 | 502 | 1,020 | 937 | ||||||||||||||||
Investment gains (losses) | 43 | 13 | 77 | (15 | ) | |||||||||||||||
Other revenues | 114 | 103 | 219 | 200 | ||||||||||||||||
Total | 2,366 | 2,348 | 4,695 | 4,551 | ||||||||||||||||
Expenses: | ||||||||||||||||||||
Insurance claims and policyholders’ benefits | 1,280 | 1,339 | 2,573 | 2,747 | ||||||||||||||||
Amortization of deferred acquisition costs | 312 | 305 | 617 | 612 | ||||||||||||||||
Other operating expenses | 364 | 376 | 707 | 756 | ||||||||||||||||
Interest | 40 | 38 | 83 | 88 | ||||||||||||||||
Total | 1,996 | 2,058 | 3,980 | 4,203 | ||||||||||||||||
Income before income tax | 370 | 290 | 715 | 348 | ||||||||||||||||
Income tax expense | (98 | ) | (80 | ) | (182 | ) | (71 | ) | ||||||||||||
Net income | 272 | 210 | 533 | 277 | ||||||||||||||||
Amounts attributable to noncontrolling interests | (28 | ) | (21 | ) | (55 | ) | (28 | ) | ||||||||||||
Net income attributable to Loews Corporation | $ | 244 | $ | 189 | $ | 478 | $ | 249 | ||||||||||||
Three Months Ended June 30, 2017 Compared to 2016
Three Months Ended March 31 | 2018 | 2017 | ||||||
| ||||||||
(In millions) | ||||||||
Revenues: | ||||||||
Insurance premiums | $ | 1,785 | $ | 1,645 | ||||
Net investment income | 490 | 545 | ||||||
Investment gains | 9 | 34 | ||||||
Other revenues | 251 | 105 | ||||||
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Total | 2,535 | 2,329 | ||||||
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Expenses: | ||||||||
Insurance claims and policyholders’ benefits | 1,339 | 1,293 | ||||||
Amortization of deferred acquisition costs | 296 | 305 | ||||||
Other operating expenses | 518 | 343 | ||||||
Interest | 35 | 43 | ||||||
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Total | 2,188 | 1,984 | ||||||
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Income before income tax | 347 | 345 | ||||||
Income tax expense | (55 | ) | (84) | |||||
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Net income | 292 | 261 | ||||||
Amounts attributable to noncontrolling interests | (31 | ) | (27) | |||||
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Net income attributable to Loews Corporation | $ | 261 | $ | 234 | ||||
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Net income attributable to Loews increased $55$27 million for the three months ended June 30, 2017March 31, 2018 as compared with the 2016 period, primarily2017 period. Net income increased due to improved current accident year underwriting results and higher net realized investment results, driven by higher net realized investment gains on sales of securities and lower other-than-temporary impairment (“OTTI”) losses recognizedthe reduction in earnings.the corporate income tax rate. These increases were partiallymore than offset by lower net investment income, driven primarily by lower limited partnership investments. Favorable netreturns, and higher adverse prior year reserve development of $63 million and $106 million was recorded infor the three months ended June 30,March 31, 2018 under the 2010
asbestos and environmental pollution (“A&EP”) loss portfolio transfer as compared with the 2017 and 2016. Further information on net prior year development is includedperiod, as further discussed in Note 64 of the Notes to Consolidated Condensed Financial Statements included under Item 1.
Six Months Ended June 30, 2017 Compared to 2016
Net income increased $229 million for the six months ended June 30, 2017 as compared with the 2016 period primarily due to higher net investment income, driven by limited partnership investments and improved underwriting results despite less favorable net prior year loss reserve development. In addition, results reflect the favorable period over period effect of foreign currency exchange gains and losses and lower adverse prior year reserve development Earnings in the six months ended June 30, 2017 under the 2010 A&EP loss portfolio transfer as compared with the 2016 period. Earnings2018 also benefited from improved net realized investment results driven by higher net realized investment gains on sales of securities and lower OTTI losses recognized in earnings. Favorable net prior year development of $95 million and $172 million was recordedfavorable persistency in the six months ended June 30, 2017 and 2016.
CNA’s Core andNon-Core Operationslong term care business.
CNA’s core business is itsProperty & Casualty and Other Insurance Operations
CNA’s commercial property and casualty insurance operations that(“Property & Casualty Operations”) include its Specialty, Commercial and International lines of business. CNA’snon-core operations Other Insurance Operations outside of Property & Casualty Operations include its long term care business that is inrun-off, certain corporate expenses, including interest on CNA’s corporate debt, and certain property and casualty businesses inrun-off, including CNA Re and A&EP. 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. We believe the presentation of CNA as one reportable segment is appropriate in accordance with applicable accounting standards on segment reporting. However, for purposes of this discussion and analysis of the results of operations, we provide greater detail with
respect to CNA’s coreProperty & Casualty Operations andnon-core operations Other Insurance Operations to enhance the reader’s understanding and to provide further transparency into key drivers of CNA’s financial results.
In assessing CNA’s insurance operations, the Company utilizes the net operatingcore income (loss) financial measure. Net operatingCore income (loss) is calculated by excluding from net income (loss) the after tax and noncontrolling interests effects of (i) net realized investment gains or losses, (ii) income or loss from discontinued operations, and (iii) any cumulative effects of changes in accounting guidance.guidance and (iv) deferred tax asset and liability remeasurement as a result of an enacted U.S. federal tax rate change. In addition, core income (loss) excludes the effects of noncontrolling interests. The calculation of net operatingcore income (loss) excludes net realized investment gains or losses because net realized investment gains or losses are largely discretionary, except for some losses related to OTTI, and are generally driven by economic factors that are not necessarily consistent with key drivers of underwriting performance, and are therefore not considered an indication of trends in insurance operations. Net operatingCore income (loss) is deemed to be anon-GAAP financial measure and management believes this measure is useful to investors as management uses this measure to assess financial performance.
Property and& Casualty Operations
In evaluating the results of the property and casualty operations,Property & Casualty Operations, 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,cost, 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 renewal premium change, rate, retention and new business in evaluating operating trends. Renewal premium change represents the estimated change in average premium on policies that renew, including rate and exposure changes. Rate represents the average change in price on policies that renew excluding exposure change.changes. Exposure represents the measure of risk used in the pricing of the insurance product. Retention represents the percentage of premium dollars renewed in comparison to the expiring premium dollars from policies available to renew. Rate, renewalRenewal premium change, rate and retention presented for the prior year isperiod are updated to reflect subsequent activity on policies written in the period. New business represents premiums from policies written with new customers and additional policies written with existing customers.
Effective January 1, 2018, CNA changed the presentation of its life sciences business and technology and media related errors and omissions (“E&O”) business within the Specialty and Commercial businesses as a result of a change in management responsibility. The life sciences business, with approximately $110 million of net written premium, provides product liability and other coverages such as property and workers compensation associated with the life sciences industry. This business, which was previously reported as part of the Specialty business, is now reported as part of the Commercial business. The technology and media related E&O business, with approximately $70 million of net written premium, provides network security and privacy, media and E&O coverage primarily for technology risks. This business, which was previously reported as part of the Commercial business, is now reported as part of the Specialty business. Data for prior reporting periods has been adjusted to reflect the new presentation.
The following tables summarize the results of CNA’s property and casualty operationsProperty & Casualty Operations for the three and six months ended June 30, 2017March 31, 2018 and 2016:2017:
Three Months Ended June 30, 2017 | Specialty | Commercial | International | Total | ||||||||||||||||
(In millions, except %) | ||||||||||||||||||||
Net written premiums | $ | 716 | $ | 767 | $ | 219 | $ | 1,702 | ||||||||||||
Net earned premiums | 689 | 705 | 206 | 1,600 | ||||||||||||||||
Net investment income | 120 | 143 | 13 | 276 | ||||||||||||||||
Net operating income | 121 | 104 | 9 | 234 | ||||||||||||||||
Net realized investment gains | 9 | 11 | 5 | 25 | ||||||||||||||||
Net income | 130 | 115 | 14 | 259 | ||||||||||||||||
Other performance metrics: | ||||||||||||||||||||
Loss and loss adjustment expense ratio | 57.7 | % | 60.0 | % | 62.8 | % | 59.4 | % | ||||||||||||
Expense ratio | 32.0 | 34.5 | 37.3 | 33.8 | ||||||||||||||||
Dividend ratio | 0.2 | 0.6 | 0.3 | |||||||||||||||||
Combined ratio | 89.9 | % | 95.1 | % | 100.1 | % | 93.5 | % | ||||||||||||
Rate | 1% | 0% | 0% | 0% | ||||||||||||||||
Renewal premium change | 1 | 2 | 4 | 2 | ||||||||||||||||
Retention | 88 | 82 | 78 | 84 | ||||||||||||||||
New business | $ | 66 | $ | 153 | $ | 73 | $ | 292 |
Net written premiums Net earned premiums Net investment income Net operating income (loss) Net realized investment gains Net income (loss) Other performance metrics: Loss and loss adjustment expense ratio Expense ratio Dividend ratio Combined ratio Rate Renewal premium change Retention New business Net written premiums Net earned premiums Net investment income Net operating income Net realized investment gains Net income Other performance metrics: Loss and loss adjustment expense ratio Expense ratio Dividend ratio Combined ratio Rate Renewal premium change Retention New business Net written premiums Net earned premiums Net investment income Net operating income (loss) Net realized investment gains (losses) Net income (loss) Other performance metrics: Loss and loss adjustment expense ratio Expense ratio Dividend ratio Combined ratio Rate Renewal premium change Retention New businessThree Months Ended June 30, 2016 Specialty Commercial International Total (In millions, except %) $ 691 $ 740 $ 194 $ 1,625 702 696 197 1,595 133 164 13 310 147 83 (24 ) 206 3 3 3 9 150 86 (21 ) 215 53.9 % 67.4 % 79.8 % 63.0 % 31.3 35.7 38.8 34.2 0.2 0.4 0.2 85.4 % 103.5 % 118.6 % 97.4 % 0% 0% (2)% 0% 1 2 (3) 1 88 84 76 84 $ 61 $ 146 $ 62 $ 269 Six Months Ended June 30, 2017 $ 1,395 $ 1,482 $ 457 $ 3,334 1,353 1,356 403 3,112 273 321 25 619 259 188 27 474 13 18 9 40 272 206 36 514 57.9 % 63.4 % 60.6 % 60.7 % 32.1 35.9 37.1 34.3 0.1 0.5 0.3 90.1 % 99.8 % 97.7 % 95.3 % 1% 0% 0% 0% 2 1 2 2 88 84 78 84 $ 123 $ 292 $ 138 $ 553 Six Months Ended June 30, 2016 $ 1,375 $ 1,488 $ 430 $ 3,293 1,384 1,384 395 3,163 240 290 25 555 261 149 (19 ) 391 (4 ) (7 ) 6 (5 ) 257 142 (13 ) 386 55.5 % 65.8 % 70.5 % 61.9 % 31.7 36.5 38.3 34.7 0.2 0.4 0.2 87.4 % 102.7 % 108.8 % 96.8 % 1% 0% (1)% 0% 2 3 (2) 2 88 83 79 84 $ 126 $ 283 $ 122 $ 531
Three Months Ended June 30, 2017 Compared to 2016
Three Months Ended March 31, 2018 | Specialty | Commercial | International | Total | ||||||||||||
| ||||||||||||||||
(In millions, except %) | ||||||||||||||||
Net written premiums | $ | 686 | $ | 832 | $ | 295 | $ | 1,813 | ||||||||
Net earned premiums | 672 | 743 | 236 | 1,651 | ||||||||||||
Net investment income | 122 | 149 | 14 | 285 | ||||||||||||
Core income | 171 | 133 | 23 | 327 | ||||||||||||
Other performance metrics: | ||||||||||||||||
Loss and loss adjustment expense ratio | 56.3 | % | 63.0 | % | 60.4 | % | 59.9% | |||||||||
Expense ratio | 31.0 | 33.5 | 36.2 | 32.8 | ||||||||||||
Dividend ratio | 0.2 | 0.6 | 0.4 | |||||||||||||
| ||||||||||||||||
Combined ratio | 87.5 | % | 97.1 | % | 96.6 | % | 93.1% | |||||||||
| ||||||||||||||||
Rate | 2% | 1% | 2% | 2% | ||||||||||||
Renewal premium change | 3 | 3 | 8 | 4 | ||||||||||||
Retention | 85 | 84 | 80 | 83 | ||||||||||||
New business | $ | 81 | $ | 181 | $ | 93 | $ | 355 | ||||||||
Three months ended March 31, 2017 | ||||||||||||||||
| ||||||||||||||||
Net written premiums | $ | 670 | $ | 724 | $ | 238 | $ | 1,632 | ||||||||
Net earned premiums | 654 | 661 | 197 | 1,512 | ||||||||||||
Net investment income | 148 | 183 | 12 | 343 | ||||||||||||
Core income | 137 | 111 | 20 | 268 | ||||||||||||
Other performance metrics: | ||||||||||||||||
Loss and loss adjustment expense ratio | 61.2 | % | 63.9 | % | 58.3 | % | 62.0% | |||||||||
Expense ratio | 31.9 | 37.3 | 36.8 | 34.9 | ||||||||||||
Dividend ratio | 0.1 | 0.5 | 0.3 | |||||||||||||
| ||||||||||||||||
Combined ratio | 93.2 | % | 101.7 | % | 95.1 | % | 97.2% | |||||||||
| ||||||||||||||||
Rate | 1% | 0% | 1% | 1% | ||||||||||||
Renewal premium change | 4 | 4 | 1 | 4 | ||||||||||||
Retention | 88 | 85 | 78 | 85 | ||||||||||||
New business | $ | 55 | $ | 140 | $ | 65 | $ | 260 |
Total net written premiums increased $77$181 million for the three months ended June 30, 2017March 31, 2018 as compared with the 20162017 period. Net written premiums for Specialty, Commercial and International increased $25 million, $27 million and $25$108 million for the three months ended June 30, 2017March 31, 2018 as compared with the 20162017 period. The renewal2017 period included an unfavorable premium change was positive, retention remained strongrate adjustment in Small Business which affected both net written premiums and new business was modestly higher and broad-based in Specialty. The increasenet earned premiums. Excluding the Small Business premium rate adjustment, net written premiums for Commercial wasincreased $61 million driven by higher new business within Middle Markets and positive renewal premium change, offset by slightly lower retention. The changechange. Net written premiums for International wasSpecialty increased $16 million for the three months ended March 31, 2018 as compared with the same period in 2017 due to higher new business improved retention and positive renewal premium change. Net written premiums for International increased $57 million for the three months ended March 31, 2018 as compared with the 2017 period due to broad based growth across all International’s platforms driven by higher new business, positive renewal premium change and higher retention. The changetrend in net earned premiums was consistent with the trend in net written premiums in recent quarters.Commercial, Specialty and International for the three months ended March 31, 2018 as compared with the 2017 period.
Total net operating
Core income increased $28$59 million for the three months ended June 30, 2017March 31, 2018 as compared with the 20162017 period. The increase in net operatingExcluding the effect of the corporate income was primarilytax rate change, core income increased approximately $4 million due to improved underwriting results and the favorable period over period effect of foreign currency exchange gains and losses partiallywhich more than offset by lower net investment income. Catastropheincome, driven by lower limited partnership returns.
Net catastrophe losses were $21$34 million (after tax and noncontrolling interests) for the three months ended June 30,March 31, 2018 and 2017. For the three months ended March 31, 2018 and 2017, compared to $52Specialty had net catastrophe losses of $3 million (after tax and noncontrolling interests) in$4 million. For the 2016 period.three months ended March 31, 2018 and 2017, Commercial had net catastrophe losses of $29 million and $27 million. For the three months ended March 31, 2018 and 2017, International had net catastrophe losses of $2 million and $3 million.
Favorable net prior year loss reserve development of $63$39 million and $106$57 million was recorded for the three months ended June 30, 2017March 31, 2018 and 2016.2017. For the three months ended June 30,March 31, 2018 and 2017, and 2016, Specialty recorded favorable net prior year loss reserve development of $28$30 million and $72 million,$12 million. For the three months ended March 31, 2018 and 2017, Commercial recorded favorable net prior year loss reserve development of $33$9 million and $20 million$43 million. For the three months ended March 31, 2018 and 2017, International recorded favorable net prior year loss reserve development of $2$0 million and $14$2 million. Further information on net prior year development is included in Note 64 of the Notes to Consolidated Condensed Financial Statements included under Item 1.
Specialty’s combined ratio increased 4.5improved 5.7 points for the three months ended June 30, 2017March 31, 2018 as compared with the 2016 period. The loss ratio increased 3.8 points driven by lower favorable net prior year loss reserve development partially offset by an improved current accident year loss ratio. Specialty’s expense ratio increased 0.7 points for the three months ended June 30, 2017 as compared with the 2016 period.
Commercial’s combined ratio improved 8.4 points for the three months ended June 30, 2017 as compared with the 2016 period.same period in 2017. The loss ratio improved 7.44.9 points primarily due to an improved2.7 points of improvement in the current accident year loss ratio and higher favorable net prior year loss reserve development. The expense ratio improved 1.2decreased 0.9 points for the three months ended June 30, 2017March 31, 2018 as compared with the 2016same period due to lower employee costs.in 2017.
International’sExcluding the impact of the Small Business premium rate adjustment, Commercial’s combined ratio improved 18.5increased 0.9 points for the three months ended June 30, 2017March 31, 2018 as compared withto the 20162017 period. TheThis was driven by 5.0 points of less favorable net prior year loss ratio improved 17.0 points due to an improvedreserve development largely offset by a 2.4 point improvement in the current accident year loss ratio driven byand a lower level of large and catastrophe losses, partially offset by1.8 point decrease in the expense ratio due to higher net earned premiums.
International’s combined ratio increased 1.5 points for the three months ended March 31, 2018 as compared with the 2017 period. The loss ratio increased 2.1 points, primarily due to lower favorable net prior year loss reserve development. International’sThe expense ratio improved 1.5decreased 0.6 points primarilyfor the three months ended March 31, 2018 as compared with the 2017 period due to higher net earned premiums.
Six Months Ended June 30, 2017 Compared to 2016Other Insurance Operations
Total net written premiums increased $41The following table summarizes the results of CNA’s Other Insurance Operations for the three months ended March 31, 2018 and 2017:
Three Months Ended March 31 | 2018 | 2017 | ||||||
| ||||||||
(In millions) | ||||||||
Net earned premiums | $ | 134 | $ | 133 | ||||
Net investment income | 205 | 202 | ||||||
Core loss | (46) | (33) |
The core loss was $46 million for the sixthree months ended June 30, 2017March 31, 2018, an increase of $13 million as compared with the 20162017 period. Net written premiums for International increased $27Excluding the effect of the corporate income tax rate change, core loss decreased by approximately $10 million for the six months ended June 30, 2017 as compared to the prior year period primarily due to higher new business and positive renewal premium change. Net written premiums for Specialty increased $20 million for the six months ended June 30, 2017 as compared with the 2016 period, driven by positive renewalfavorable persistency and further helped by premium change. Net written premiums for Commercial decreased $6 million for the six months ended June 30, 2017 as compared with the 2016 period due to unfavorable premium developmentrate increases. The favorable persistency was driven by a high proportion of policyholders choosing to reduce benefits in lieu of premium rate adjustment within its Small Business unitincreases. These increases are partially offset by higher adverse net prior year reserve development recorded in 2018 for A&EP under the loss portfolio transfer, as further discussed in Note 10 to the Consolidated Condensed Financial Statements under Item 1. This was mostly offset by higher new business within Middle Markets, positive renewal premium change and higher retention. The change in net earned premiums was consistent with the trend in net written premiums in recent quarters.
Total net operating income increased $83 million for the six months ended June 30, 2017 as compared with the 2016 period. The increase in net operating income was primarily due to higher net investment income, improved underwriting results despite less favorable net prior year loss reserve development. In addition, results reflect the favorable period over period effect of foreign currency exchange gains and losses. Catastrophe losses were $43 million (after tax and noncontrolling interests) for the six months ended June 30, 2017 as compared to catastrophe losses of $73 million (after tax and noncontrolling interests) for the 2016 period.
Favorable net prior year development of $95 million and $172 million was recorded for the six months ended June 30, 2017 and 2016. For the six months ended June 30, 2017 and 2016, Specialty recorded favorable net prior year development of $64 million and $117 million, Commercial recorded favorable net prior year loss reserve development of $58 million and unfavorable premium development of $38 million as compared with favorable net prior year loss reserve development of $32 million and favorable premium development of $4 million and International recorded favorable net prior year development of $11 million and $19 million. Further information on net prior year development is included in Note 64 of the Notes to Consolidated Condensed Financial Statements included under Item 1.
Specialty’s combined ratio increased 2.7 points for the six months ended June 30, 2017 as compared with the 2016 period. The loss ratio increased 2.4 points driven by lower favorable net prior year loss reserve development partially offset by an improved current accident year loss ratio. Specialty’s expense ratio increased 0.4 points for the six months ended June 30, 2017 as compared with the 2016 period.
Commercial’s combined ratio improved 2.9 points for the six months ended June 30, 2017 as compared with the 2016 period driven by an improved current accident year loss ratio. Excluding the impact of the Small Business premium rate adjustment on the ratios for both periods, the combined ratio decreased 6.6 points, driven by a 4.7 point decrease in the loss ratio primarily due to improved current accident year loss ratio and a 2.0 point decrease in the expense ratio primarily due to lower employee costs.
International’s combined ratio improved 11.1 points for the six months ended June 30, 2017 as compared with the 2016 period. The loss ratio improved 9.9 points due to an improved current accident year loss ratio driven by a lower level of large and catastrophe losses. International’s expense ratio improved 1.2 points primarily due to higher net earned premiums.
Non-CoreNon-GAAP OperationsReconciliation of Core Income (Loss) to Net Income
The following table summarizes the results of CNA’snon-core operationsreconciles core income (loss) to net income attributable to Loews Corporation for the three and six months ended June 30, 2017 and 2016:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
|
| |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
| ||||||||||||||||
(In millions) | ||||||||||||||||
Net earned premiums | $ | 135 | $ | 136 | $ | 268 | $ | 267 | ||||||||
Net investment income | 199 | 192 | 401 | 382 | ||||||||||||
Net operating loss | (16 | ) | (23 | ) | (42 | ) | (131) | |||||||||
Net realized investment gains (losses) | 1 | �� | (3 | ) | 6 | (6) | ||||||||||
Net loss | (15 | ) | (26 | ) | (36 | ) | (137) |
Three Months Ended June 30, 2017 Compared to 2016
The net loss was $15 millionCNA segment for the three months ended June 30, 2017, an improvement of $11 million as compared with the 2016 period. This improvement was primarily driven by improved long term care morbidity.March 31, 2018 and 2017:
Three Months Ended March 31 | 2018 | 2017 | ||||||
| ||||||||
(In millions) | ||||||||
Core income (loss): | ||||||||
Property & Casualty Operations | $ | 327 | $ | 268 | ||||
Other Insurance Operations | (46 | ) | (33) | |||||
| ||||||||
Total core income | 281 | 235 | ||||||
Realized investment gains (after tax) | 8 | 23 | ||||||
Consolidating adjustments including purchase accounting and noncontrolling interests | (28 | ) | (24) | |||||
| ||||||||
Net income attributable to Loews Corporation | $ | 261 | $ | 234 | ||||
|
Six Months Ended June 30, 2017 Compared to 2016
The net loss was $36 million for the six months ended June 30, 2017, an improvement of $101 million as compared with the 2016 period. This improvement was primarily driven by lower adverse prior year reserve development in 2017 for A&EP under the loss portfolio transfer. During the six months ended June 30, 2017 and 2016, CNA recorded net unfavorable development of $60 million and $200 million related to its A&EP reserves. This unfavorable development was ceded to NICO under the loss portfolio transfer; however CNA’s earnings were negatively affected by charges of $12 million (after tax and noncontrolling interests) and $74 million (after tax and noncontrolling interests) related to the application of retroactive reinsurance accounting, as further discussed in Note 6 of the Notes to Consolidated Condensed Financial Statements included under Item 1. In addition, the net loss benefited from favorable morbidity partially offset by unfavorable persistency in the long term care business.
Overview
Overall fundamentals in the offshore oil and gas industry relating to oil prices and demand for drilling services have not yet improved from those described in the Results of Operations – Diamond Offshore section of our MD&A included under Item 7 of our Annual Report on Form10-K for the year ended December 31, 2016. Production cuts2017. The offshore contract drilling market continues to be burdened by an oversupply of drilling rigs based on current demand. Contract rollovers, or the Organizationavailability of a drilling rig at completion of a contract if options for future work are not exercised or further work secured, continue to add to the Petroleum Exporting Countries (“OPEC”),uncontracted supply of rigs. Such rollovers have predominately been for higher-specification floaters, which have now been extended untilslow to contract despite the end of the first quarter of 2018, initially buoyedhigher crude oil prices from previous lows in 2016; however, the favorable price impact of the OPEC cuts is currently being negated by increased production by U.S. shale producers and othernon-OPEC producing countries, resulting in volatile commodity prices. Capital spending for offshore exploration and development has continued to decline, with 2017 capital spending estimated by some industry analysts to decrease up to 20% from 2016 levels. If these market estimates are realized, it would represent three consecutive years of decline in offshore spending. Some industry analysts have also reportedprice. Industry reports indicate that there has been and may continue to be a shift in capital spending towards land-based activity. However, customer inquiries and new tenders have increased in 2017, compared to 2016, for offshore rig availability inremain approximately 40 newbuild floaters on order with scheduled deliveries between 2018 and beyond.
Competition among offshore drillers remains intense as rig supply exceeds demand, despite the cold stacking and retirement2021, most of numerous rigs during 2016. Additionally, based on industry data as of the date of this Report,which have not yet been contracted for future work. Industry analysts also report that there are in excess of 30 floaterover 90 speculativejack-up rigs currently on order with scheduled deliveries from 2017 through 2021. The majoritybetween 2018 and 2020. Given the oversupply of rigs, competition for the limited number of offshore drilling jobs remains intense. Most recently, higher specification floaters are being bid in all markets to keep those rigs active and avoid the higher stacking costs for such rigs. Despite these factors, certain drilling contractors have announced the reactivation of stacked rigs or plans to reactivate certain rigs if contracts are awarded. Looking forward, there has been a recent increase in rig tenders, primarily for work in the North Sea and Australia floater markets commencing in 2019 and beyond. However, many of these rigstenders are not currently contractedlimited to single-well jobs, with options for future work, which further increases competition. Some industry analysts have predicted that demand for drilling rigs in the offshore market will slowly improve, but utilization growth will not be significant enough to impact dayrates for some time.wells.
Contract Drilling Backlog
Diamond Offshore’s contract drilling backlog was $2.9$2.2 billion and $3.6$2.4 billion as of JulyApril 1, 20172018 (based on contract information knownavailable at that time) and January 1, 20172018 (the date reported in our Annual Report on Form10-K for the year ended December 31, 2016)2017). The contract drilling backlog by year as of JulyApril 1, 20172018 is $0.7 billion in 2017 (for thesix-month period beginning July 1, 2017), $1.1$0.9 billion in 2018 $0.9(for the nine-month period beginning April 1, 2018), $1.0 billion in 2019 and $0.2$0.3 billion in 2020.
Contract drilling backlog includes $75 million and $119 million for 2017 and 2018 attributable to contracted work for theOcean Valorunder a contract that Petróleo Brasileiro S.A. (“Petrobras”) has attempted to terminate, which is currently in effect pursuant to an injunction granted by a Brazilian court. Petrobras appealed the granting of the injunction, but in March of 2017, the court ruled against Petrobras’ appeal and upheld the injunction. As a result of the favorable ruling, both the injunction and theOcean Valor contract remain in effect. Petrobras has the right to seek to appeal the ruling to the Superior Court of Justice. Diamond Offshore intends to continue to defend its rights under the contract, which is estimated to conclude in accordance with its terms in October of 2018. However, litigation is inherently unpredictable, and there can be no assurance as to the ultimate outcome of this matter. The rig is currently on standby earning a reduced dayrate.
Contract drilling backlog includes only firm commitments (typically represented by signed contracts) and is calculated by multiplying the contracted operating dayrate by the firm contract period. 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 stated above due to various factors affecting utilization such as weather conditions and unscheduled repairs and maintenance. Contract drilling backlog excludes revenues for mobilization, demobilization, contract preparation and customer reimbursables. Changes in Diamond Offshore’s contract drilling backlog between periods are generally a function of the performance of work on term contracts, as well as the extension or modification of existing term contracts and the execution of additional contracts. In addition, under certain circumstances, Diamond Offshore’s customers may seek to terminate or renegotiate its contracts, which could adversely affect its reported backlog.
Results of Operations
The following table summarizes the results of operations for Diamond Offshore for the three and six months ended June 30,March 31, 2018 and 2017 and 2016 as presented in Note 1110 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
|
| |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
| ||||||||||||||||
(In millions) | ||||||||||||||||
Revenues: | ||||||||||||||||
Contract drilling revenues | $ | 392 | $ | 357 | $ | 756 | $ | 801 | ||||||||
Net investment income | 1 | 1 | ||||||||||||||
Investment losses | (12 | ) | (12) | |||||||||||||
Other revenues | 6 | 33 | 19 | 60 | ||||||||||||
| ||||||||||||||||
Total | 399 | 378 | 776 | 849 | ||||||||||||
| ||||||||||||||||
Expenses: | ||||||||||||||||
Contract drilling expenses | 196 | 198 | 400 | 411 | ||||||||||||
Other operating expenses | ||||||||||||||||
Impairment of assets | 72 | 680 | 72 | 680 | ||||||||||||
Other expenses | 113 | 145 | 233 | 294 | ||||||||||||
Interest | 27 | 24 | 55 | 50 | ||||||||||||
| ||||||||||||||||
Total | 408 | 1,047 | 760 | 1,435 | ||||||||||||
| ||||||||||||||||
Income (loss) before income tax | (9 | ) | (669 | ) | 16 | (586) | ||||||||||
Income tax benefit | 23 | 99 | 21 | 100 | ||||||||||||
Amounts attributable to noncontrolling interests | (7 | ) | 276 | (18 | ) | 235 | ||||||||||
| ||||||||||||||||
Net income (loss) attributable to Loews Corporation | $ | 7 | $ | (294 | ) | $ | 19 | $ | (251) | |||||||
| ||||||||||||||||
|
Three Months Ended June 30, 2017 Compared to 2016
Three Months Ended March 31 | 2018 | 2017 | ||||||
| ||||||||
(In millions) | ||||||||
Revenues: | ||||||||
Net investment income | $ | 2 | ||||||
Contract drilling revenues | 288 | $ | 364 | |||||
Other revenues | 9 | 13 | ||||||
| ||||||||
Total | 299 | 377 | ||||||
| ||||||||
Expenses: | ||||||||
Contract drilling expenses | 185 | 204 | ||||||
Other operating expenses | 111 | 120 | ||||||
Interest | 28 | 28 | ||||||
| ||||||||
Total | 324 | 352 | ||||||
| ||||||||
Income (loss) before income tax | (25) | 25 | ||||||
Income tax (expense) benefit | 44 | (2) | ||||||
Amounts attributable to noncontrolling interests | (9) | (11) | ||||||
| ||||||||
Net income attributable to Loews Corporation | $ | 10 | $ | 12 | ||||
|
Contract drilling revenue increased $35decreased $76 million for the three months ended June 30, 2017March 31, 2018 as compared with the 20162017 period, primarily relateddue to incremental226 fewer revenue earning days, forcombined with theOcean GreatWhite, which began its first contract in the first quarter effect of 2017, and theOcean BlackRhino, which was between contracts during the prior year quarter and less unplanned downtime for repairs to other rigs. These increases were partially offset by decreases in contract drillinglower average daily revenue primarily related to theOcean Monarch, which was in the shipyard for a survey and contract modifications during the second quarter of 2017 prior to beginning a new contract in June at a lower dayrate, theOcean Valor earning a reduced, standby dayrate during 2017, the warm stacking of theOcean Guardian after completion of its contract in early April of 2017, theOcean Scepterearning a reduced dayrate, which began operating under a new contract offshore Mexico in 2017 and the sale of rigs since the second quarter of 2016.
earned. Contract drilling expense decreased $2$19 million for the three months ended June 30, 2017March 31, 2018 as compared with the 20162017 period, primarily due to a net reduction in costs attributable to various factors, including rigs that were sold after the 2016 period, reduced costs of $18 million for currently cold-stacked and previously-owned rigs, which had incurred bycontract drilling expense in theOcean Guardian first quarter of 2017. In addition, contract drilling expense reflects favorable reductions in labor and implementation of other cost control measures,related rig operating costs, partially offset by incremental contract drilling costs associated with the drillships and theOcean GreatWhite. Interest expense increased $3drillships.
Net income attributable to Loews Corporation decreased $2 million for the three months ended June 30, 2017March 31, 2018 as compared with the 20162017 period, reflecting lower margins from contract drilling services, primarily due to lower capitalized interest for construction projects.
Net results increased $301 million for the three months ended June 30, 2017 as compared with the 2016 period, primarily due to an asset impairment charge of $23 million (after taxes and noncontrolling interests)contract drilling revenues. The decrease in the 2017 period, as compared with $267 million (after taxes and noncontrolling interests) in the 2016 period, as discussed in Note 5 of the Consolidated Condensed Financial Statements included under Item 1. In addition, results in 2017 benefited from the favorable impact of higher utilization of the fleet, as discussed above, andnet income was partially offset by lower depreciation expense, primarily due to a lower depreciable asset base in the second quarter of 2017, compared to the 2016 period, as a result of the asset impairments takenrecognized in 2016. The results were also impacted by the absence2017, and an income tax benefit of a $12$43 million ($423 million after tax and noncontrolling interests) loss on an investment in privately-held corporate bonds sold in the 2016 period. These favorable variances were partially offset by the absence of $15 million in net reimbursable revenue related to the completion of theOcean Endeavor’s demobilization from the Black Sea in the 2016 period.
Six Months Ended June 30, 2017 Compared to 2016
Contract drilling revenue decreased $45 million for the six months ended June 30, 2017 as compared with the 2016 period, primarily due to the absencereversal of $40 million in demobilization revenuean uncertain tax position recognized in the first quarter of 2016 for theOcean Endeavor.In addition, contract drilling revenue decreased due to incremental downtime for theOcean Monarch, which was in the shipyard for a survey and contract modifications during much of the first half of 2017, the completion of the final contract for theOcean Ambassador in March of 2016 prior to the rig being sold, decreased revenue from theOcean Scepter, which had been idle since completion of its contract in Mexico during May 2016, commenced operations offshore Mexico in February 2017 under a new contract and the cold stacking and sale of other rigs. The decrease in contract drilling revenue also reflects lower dayrates earned under new contracts for both theOcean Monarchand Ocean BlackRhinoand a lower dayrate being earned by theOcean Valiant under its current contract in the North Sea, which commenced in the fourth quarter of 2016. These decreases were partially offset by increases in contract drilling revenue primarily related to incremental revenue earning days for theOcean GreatWhite and theOcean BlackRhino,which was warm stacked for much of the prior year period, theOcean Apex, which operated through the first six months of 2017 under a contract that commenced in the second quarter of 2016 and reduced downtime for repairs.
Contract drilling expense decreased $11 million for the six months ended June 30, 2017, as compared with the 2016 period, primarily due to a net reductiondiscussed in costs attributable to various factors, including the cold stacking of rigs, reduced costs related to theOcean Ambassadorand implementation of other cost control measures, partially offset by incremental contract drilling costs associated with the drillships and theOcean GreatWhite. Interest expense increased $5 million for the six months ended June 30, 2017 as compared with the 2016 period primarily due to lower capitalized interest for construction projects.
Net results increased $270 million for the six months ended June 30, 2017 as compared with the 2016 period, primarily due to an asset impairment charge of $23 million (after taxes and noncontrolling interests) in the 2017 period as compared with $267 million (after taxes and noncontrolling interests) in the 2016 period and lower depreciation, primarily due to a lower depreciable asset base in 2017, comparedNote 1 to the 2016 period, as a result of the asset impairments taken in 2016. The results were also impacted by the absence of a $12 million ($4 million after tax and noncontrolling interests) loss on an investment in privately-held corporate bonds sold in the 2016 period. These favorable variances were partially offset by the absence of $40 million in demobilization revenue and $15 million in net reimbursable revenue related to the completion of theOcean Endeavor’s demobilization from the Black Sea in the 2016 period.Consolidated Condensed Financial Statements under Item 1.
Firm Transportation Contracts and Growth ProjectsAgreements
Each year aA substantial portion of Boardwalk Pipeline’s transportation and storage capacity is contracted for under firm agreements. For the last twelve months ended March 31, 2018, approximately 88% of Boardwalk Pipeline’s revenues, excluding retained fuel, were derived from fixed fees under firm agreements. Boardwalk Pipeline expects to earn revenues of approximately $9.3 billion from fixed fees under committed firm agreements in place as of March 31, 2018, including agreements for storage and other services, over the remaining term of the agreements. This amount has increased by approximately $460 million from the comparable amount at December 31, 2017, from contracts entered into during the first quarter of 2018, and is included in the discussion of Performance Obligations in Note 6 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report. For Boardwalk Pipeline’s customers that are charged maximum tariff rates related to its Federal Energy Regulatory Commission (“FERC”) regulated operating subsidiaries, the revenues expected to be earned from fixed fees under committed firm agreements reflect the current tariff rate for such services for the term of the agreements, however, the tariff rates may be subject to future adjustment. The revenues expected to be earned from fixed fees under committed firm agreements do not include additional revenues Boardwalk Pipeline may recognize under firm agreements based on actual utilization of the contracted pipeline or storage capacity, any expected revenues for periods after the expiration dates of the existing agreements, execution of precedent agreements associated with growth projects or other events that occurred or will occur subsequent to March 31, 2018.
Contract Renewals
In the 2018 to 2020 timeframe, the initial transportation agreements associated with the East Texas Pipeline, Southeast Expansion, Gulf Crossing Pipeline Company, LLC (“Gulf Crossing”) and Fayetteville and Greenville Laterals, which were placed into service in 2008 and 2009, will expire. These projects were large, new pipeline expansions, developed to serve growing production in Texas, Oklahoma, Arkansas and Louisiana and anchored primarily byten-yearfirm transportation agreements with producers. Since these projects went into service, gas production from the Utica and Marcellus area in the Northeast has grown significantly and has altered the flow patterns of natural gas in North America. Over the last few years, gas production from other basins such as Barnett and Fayetteville, which primarily supported two of these expansions, has declined because the production economics in those basins are not as competitive as other production basins, such as Utica and Marcellus. These market dynamics have resulted in less production from certain basins tied to Boardwalk Pipeline’s system and a narrowing of basis differentials across portions of its pipeline systems, primarily for capacity associated with natural gas flows from west to east. Total revenues generated from these expansion projects’ capacity will be materially lower when these contracts expire, and need to be renewed or replacedfor example, as reporteddiscussed in the Results of Operations – Boardwalk Pipeline section of our MD&A included under Item 7 of our Annual Report on Form10-K for the year ended December 31, 2016.2017 for the Southwestern Energy Company (“Southwestern”) agreements and the Gulf South Pipeline Company, LP (“Gulf South”) expansion contract expirations.
PartiallyOil and gas producers are recently beginning to increase their natural gas production in central Oklahoma from the Scoop/Stack/Merge production areas where they have been successful at developing natural gas liquids production. It is expected that several new projects in central Oklahoma, such as Enable Midstream Partner’s pipeline expansion and Cheniere Energy’s Midship pipeline, will bring substantial new supplies to the area where the Gulf Crossing pipeline is located. These developments could provide Gulf Crossing opportunities to provide natural gas transportation services to a combination of producers looking for liquidity and market access andend-users looking for supply diversity. Similarly, oil and gas producers in north Louisiana and east Texas are having success with significant rich and dry gas development and are seeking access to multiple pipeline outlets, including Gulf South’s East Texas and Southeast expansions, in order to sell their gas toend-use customers and to ship to other market centers. While some of the Gulf South capacity has been remarketed at lower rates and for shorter terms, Boardwalk Pipeline believes that the current market rates are not indicative of the long-term value of that capacity. Boardwalk Pipeline continues to focus its marketing efforts on enhancing the value of the remaining expansion capacity and is working with customers to match gas supplies from various basins to new and existing customers and markets, including aggregating supplies at key locations along its pipelines to provideend-use customers with attractive and diverse supply options.
FERC Policy Statement, Notice of Inquiry and Notice of Proposed Rulemaking
Effective December 22, 2017, the Tax Cuts and Jobs Act of 2017 changed several provisions of the federal tax code, including a reduction in the maximum corporate tax rate. On March 15, 2018, in a set of related issuances, FERC addressed the treatment of federal income tax allowances in interstate pipeline companies’ rates. FERC issued a Revised Policy Statement on Treatment of Income Taxes (“Revised Policy Statement”) reversing its long-standing policy by stating that it will no longer permit master limited partnerships to include an income tax allowance in theircost-of-service. FERC issued the Revised Policy Statement in response to a remand from the U.S. Court of Appeals for the D.C. Circuit inUnited Airlines v. FERC, in which the court determined that FERC had not justified its conclusion that a pipeline organized as a resultmaster limited partnership would not “double recover” its income taxes under the then current policy by both including an income tax allowance in itscost-of-service and earning a return on equity calculated using the discounted cash flow methodology. Requests for rehearing and clarification of the increase in overall gas supplies, demand markets, primarilyRevised Policy Statement have been filed by various industry participants.
FERC also issued a Notice of Inquiry (“NOI”) requesting comments on the effect of the Tax Cuts and Jobs Act of 2017 on FERC jurisdictional rates. The NOI requests comments by May 21, 2018 on whether and how FERC should address changes relating to accumulated deferred income taxes and bonus depreciation. Actions FERC will take, if any, following receipt of responses to the NOI and any potential impacts from final rules or policy statements issued following the NOI on the rates Boardwalk Pipeline can charge for transportation and storage services are uncertain at this time, but such actions could materially impact the maximum cost-based transportation and storage rates Boardwalk Pipeline is permitted to charge its customers.
Also included in the Gulf Coast area, are growing dueMarch 15, 2018 issuances is a Notice of Proposed Rulemaking (“NOPR”) proposing rules for implementation of the Revised Policy Statement and the corporate income tax rate reduction with respect to newinterstate natural gas export facilities, power plantspipeline rates. The NOPR proposes a new rule that will, if it becomes final, require all FERC-regulated natural gas pipelines to make aone-time informational filing reflecting the impacts of the Tax Cuts and petrochemical facilities and increased exports to Mexico. These developments have resulted in significant growth projects for Boardwalk Pipeline, several of which were placed into service during 2016. These include the Ohio to Louisiana Access project, the Southern Indiana Lateral, the Western Kentucky Market Lateral, a project to serve a power plant in South Texas, and, in MarchJobs Act of 2017 and the Northern Supply Access Project.Revised Policy Statement on each individual pipeline’scost-of-service. The NOPR proposes a procedure
that would permit customers to protest or comment on each pipeline’s informational filing. This proposed procedure may encourage the FERC or one or more of Boardwalk Pipeline’s customers to challenge a pipeline’s informational filings which could lead to challenges to the maximum applicable rates pursuant to Section 5 of the Natural Gas Act (“NGA”).
The NOPR proposes that each FERC-regulated natural gas pipeline will select one of four options: file a limited NGA Section 4 filing reducing its rates only as required related to the Tax Cuts and Jobs Act of 2017 and the Revised Policy Statement, commit to filing a general NGA Section 4 rate case in the near future, file a statement explaining why an adjustment to rates is not needed, or take no other action. Boardwalk Pipeline has filed comments in this proceeding. Once the comment period is complete, the FERC is expected to issue a final rule.
Even without action on the NOPR or NOI, the FERC and/or Boardwalk Pipeline’s customers may challenge the maximum applicable rates that any of Boardwalk Pipeline’s regulated pipelines are allowed to charge in accordance with Section 5 of the NGA. The Tax Cuts and Jobs Act of 2017 and the Revised Policy Statement may increase the likelihood of such a challenge due to the resulting treatment of the allowance for income taxes in the determination of maximum applicable rates. If such a challenge is successful for any of its pipelines, the revenues associated with transportation and storage services the pipeline provides pursuant tocost-of-service rates could materially decrease in the future, which would adversely affect the revenues on that pipeline going forward.
While Boardwalk Pipeline is continuing to review FERC’s Revised Policy Statement, NOI and NOPR, based on a preliminary assessment, it does not expect them to have a material impact on its revenues in the near term. All of the firm contracts on the Gulf Crossing Pipeline and the majority of contracts on Texas Gas Transmission are negotiated or discounted rate agreements, which are not ordinarily affected by FERC’s policy revisions. Gulf South Pipeline currently has a rate moratorium in place with its customers until 2023, which Boardwalk Pipeline believes will be unaffected by these actions.
Given the effects of a number of factors, including the Tax Cuts and Jobs Act of 2017 and the Revised Policy Statement, we are evaluating whether remaining a publicly traded master limited partnership is the appropriate structure for Boardwalk Pipeline. Potential transition from publicly traded master limited partnership status could take the form of an additional $1.1 billionelection to be treated as a corporation for federal income tax purposes (sometimes referred to as a“check-the-box-election”), a conversion to a corporation or another transaction designed to result in Boardwalk Pipeline’s treatment as a corporation, or all or part of growth projectsits publicly traded common units being owned by an affiliate treated as a corporation, for federal income tax purposes.
In addition, despite Boardwalk Pipeline’s view regarding the potential near term impact on its revenues of the FERC’s recent actions, the magnitude of the effect of the Revised Policy Statement on the maximum applicablecost-of-service rate it reasonably likely will be allowed to charge in the future may result in its general partner being able to exercise its right under developmentBoardwalk Pipeline’s partnership agreement to call and purchase all of Boardwalk Pipeline’s outstanding common units. As has been described in Boardwalk Pipeline’s Securities and Exchange Commission filings since its initial public offering, its general partner has the right under its partnership agreement to call and purchase all of Boardwalk Pipeline’s common units if (i) the general partner and its affiliates own more than 50% in the aggregate of Boardwalk Pipeline’s outstanding common units and (ii) the general partner receives an opinion of legal counsel to the effect that Boardwalk Pipeline being a pass-through entity for tax purposes has or will reasonably likely in the future have a material adverse effect on the maximum applicable rate that can be charged to customers by Boardwalk Pipeline’s subsidiaries that are expected to be placed into service in 2017 through 2019,regulated interstate natural gas pipelines. Because Boardwalk Pipelines Holding Corp. (“BPHC”), the sole member of the general partner and through June 30, 2017, Boardwalk Pipeline has invested $425 millionour wholly-owned subsidiary, holds more than 50% of capital in these projects. These new projects have lengthy planning and construction periods. As a result, these projects will not contribute to Boardwalk Pipeline’s earningsoutstanding common units, this call right would become exercisable if the general partner receives the specified opinion of legal counsel. Under Boardwalk Pipeline’s partnership agreement and cash flows until theythe governing documents for the general partner, any decision by the general partner to exercise such purchase right will be made by BPHC, rather than by the general partner’s board of directors. The purchase price per unit for the purchase right would be equal to the average of the daily closing prices of Boardwalk Pipeline’s common units for the 180 consecutive trading days preceding the date three days before the date the general partner mails notice of its election to exercise the purchase right. We are placed into service overanalyzing the next several years.FERC’s recent actions and seriously considering the purchase right under the partnership agreement in connection therewith.
Results of Operations
The following table summarizes the results of operations for Boardwalk Pipeline for the three and six months ended June 30,March 31, 2018 and 2017 and 2016 as presented in Note 1110 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
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2017 | 2016 | 2017 | 2016 | |||||||||||||
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Revenues: | ||||||||||||||||
Other revenue, primarily operating | $ | 318 | $ | 308 | $ | 686 | $ | 655 | ||||||||
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Total | 318 | 308 | 686 | 655 | ||||||||||||
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Expenses: | ||||||||||||||||
Operating | 251 | 198 | 455 | 403 | ||||||||||||
Interest | 44 | 45 | 90 | 88 | ||||||||||||
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Total | 295 | 243 | 545 | 491 | ||||||||||||
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Income before income tax | 23 | 65 | 141 | 164 | ||||||||||||
Income tax expense | (5 | ) | (16 | ) | (28 | ) | (35 | ) | ||||||||
Amounts attributable to noncontrolling interests | (12 | ) | (32 | ) | (70 | ) | (81 | ) | ||||||||
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Net income attributable to Loews Corporation | $ | 6 | $ | 17 | $ | 43 | $ | 48 | ||||||||
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Three Months Ended June 30, 2017 Compared to 2016
Three Months Ended March 31 | 2018 | 2017 | ||||||||||
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(In millions) | ||||||||||||
Revenues: | ||||||||||||
Other revenue, primarily operating | $ | 337 | $ | 368 | ||||||||
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Total | 337 | 368 | ||||||||||
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Expenses: | ||||||||||||
Operating | 198 | 204 | ||||||||||
Interest | 44 | 46 | ||||||||||
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Total | 242 | 250 | ||||||||||
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Income before income tax | 95 | 118 | ||||||||||
Income tax expense | (12 | ) | (23 | ) | ||||||||
Amounts attributable to noncontrolling interests | (47 | ) | (58 | ) | ||||||||
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Net income attributable to Loews Corporation | $ | 36 | $ | 37 | ||||||||
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Total revenues increased $10decreased $31 million for the three months ended June 30, 2017March 31, 2018 as compared with the 20162017 period. Excluding the $13 millionnet effect of income from the settlement of a legal matter in the 2016 period and items offset in fuel and transportation expense, primarily retained fuel, operating revenues increased $21 million. The increase was driven by an increasedecreased $17 million, primarily due to a decrease in transportation revenues of $20$15 million, which resulted primarily from growth projects recently placed into service,the Southwestern contract restructuring, partially offset by contract expirations.the impact from colder winter weather. In addition, storage and parking and lending revenues decreased related to unfavorable market conditions.
Operating expenses increased $53decreased $6 million for the three months ended June 30, 2017March 31, 2018 as compared with the 20162017 period. Excluding items offset in operating revenues, and the $47 million loss on the sale of a processing plant, as discussed in Note 5 to the Consolidated Condensed Financial Statements under Item 1, operating costs and expenses increased $3$7 million primarily due to timing of maintenance activities and an increaseincreased asset base from recently completed growth projects. Interest expense decreased $2 million as a result of lower average borrowing rates from the use of the revolving credit facility in maintenance activities.2018.
Net income attributable to Loews Corporation decreased $11$1 million for the three months ended June 30, 2017March 31, 2018 as compared with the 2016 period,2017 period. Excluding the effect of the corporate income tax rate change, net income decreased $8 million primarily due to the changes discussed above.
Six Months Ended June 30, 2017 Compared to 2016
Total revenues increased $31 million for the six months ended June 30, 2017 as compared with the 2016 period. Excluding income from the settlement of a legal matter in the 2016 period and items offset in fuel and transportation expense, primarily retained fuel, operating revenues increased $44 million. The increase was driven by an increase in transportation revenues of $35 million, which resulted from growth projects recently placed into service. Storage and parking and lending revenues were higher by $4 million primarily from the effects of favorable market conditions on time period price spreads.
Operating expenses increased $52 million for the six months ended June 30, 2017 as compared with the 2016 period. Excluding items offset in operating revenues and the $47 million loss on the sale of a processing plant, operating costs and expenses increased $3 million. Interest expense increased $2 million primarily due to higher average debt levels at higher borrowing rates.
Net income decreased $5 million for the six months ended June 30, 2017 as compared with the 2016 period, primarily due to the changes discussed above.
The following table summarizes the results of operations for Loews Hotels & Co for the three and six months ended June 30,March 31, 2018 and 2017 and 2016 as presented in Note 1110 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||
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2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
Three Months Ended March 31 | 2018 | 2017 | ||||||||||||||||||||||||||
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Revenues: | ||||||||||||||||||||||||||||
Operating revenue | $ | 154 | $ | 156 | $ | 290 | $ | 294 | $ | 153 | $ | 136 | ||||||||||||||||
Revenues related to reimbursable expenses | 27 | 33 | 58 | 58 | 30 | 31 | ||||||||||||||||||||||
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Total | 181 | 189 | 348 | 352 | 183 | 167 | ||||||||||||||||||||||
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Expenses: | ||||||||||||||||||||||||||||
Operating | 128 | 129 | 251 | 252 | 131 | 123 | ||||||||||||||||||||||
Reimbursable expenses | 27 | 33 | 58 | 58 | 30 | 31 | ||||||||||||||||||||||
Depreciation | 15 | 15 | 31 | 30 | 17 | 16 | ||||||||||||||||||||||
Equity (income) loss from joint ventures | (15 | ) | 3 | (44 | ) | (12) | ||||||||||||||||||||||
Equity income from joint ventures | (22 | ) | (29 | ) | ||||||||||||||||||||||||
Interest | 6 | 5 | 13 | 11 | 7 | 7 | ||||||||||||||||||||||
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Total | 161 | 185 | 309 | 339 | 163 | 148 | ||||||||||||||||||||||
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Income before income tax | 20 | 4 | 39 | 13 | 20 | 19 | ||||||||||||||||||||||
Income tax expense | (10 | ) | (3 | ) | (19 | ) | (9) | (7 | ) | (9 | ) | |||||||||||||||||
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Net income attributable to Loews Corporation | $ | 10 | $ | 1 | $ | 20 | $ | 4 | $ | 13 | $ | 10 | ||||||||||||||||
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Operating revenues decreased $2increased $17 million and $4operating expenses increased $8 million for the three and six months ended June 30, 2017March 31, 2018 as compared with the 2016 periods primarily2017 period due to a decrease in revenue as a resultthe improved performance of renovation activities.several owned hotels, primarily the Loews Miami Beach Hotel.
Equity income from joint ventures increased $18decreased $7 million for the three months ended June 30, 2017March 31, 2018 as compared with the 20162017 period. The increaseThis decrease was primarily due to the absencea net benefit of $10 million from a $13 milliongain on sale and an impairment charge related to an equity interest in a joint venture hotel propertyproperties in the 2016 period and the opening of a new joint venture hotel in the third quarter of 2016. Equity2017 period. Absent this net benefit, equity income from joint ventures increased $32due to higher equity income from Universal Orlando joint venture properties.
Net income increased $3 million for the sixthree months ended June 30, 2017March 31, 2018 as compared with the 20162017 period. The increase was primarily due toExcluding the $25 million gain oneffect of the sale of an equity interest in the Loews Don CeSar Hotel, a joint venture hotel property, in February of 2017, the absence of a $13 million impairment charge related to an equity interest in a joint venture hotel property in the 2016 period and the opening of a new joint venture hotel in 2016, partially offset by a $15 million impairment charge in 2017 related to an equity interest in a joint venture hotel property.
Netcorporate income tax rate change, net income increased $9approximately $1 million and $16 million for the three and six months ended June 30, 2017 as compared with the 2016 periods primarily due to the changes discussed above.
Corporate operations consist primarily of investment income at the Parent Company, operating results of Consolidated Container fromin the 2018 period, as it was acquired on May 22, 2017, acquisition date, corporate interest expenses and other corporate administrative costs. Investment income includes earnings on cash and short term investments held at the Parent Company to meet current and future liquidity needs, as well as results of limited partnership investments and the trading portfolio.
The following table summarizes the results of operations for Corporate for the three and six months ended June 30,March 31, 2018 and 2017 and 2016 as presented in Note 1110 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||
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2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
Three Months Ended March 31 | 2018 | 2017 | ||||||||||||||||||||||||||
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(In millions) | ||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||
Net investment income | $ | 2 | $ | 85 | $ | 61 | $ | 72 | $ | 14 | $ | 59 | ||||||||||||||||
Other revenues | 93 | (1 | ) | 93 | 1 | 213 | ||||||||||||||||||||||
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Total | 95 | 84 | 154 | 73 | 227 | 59 | ||||||||||||||||||||||
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Expenses: | ||||||||||||||||||||||||||||
Operating | 130 | 32 | 168 | 57 | 232 | 38 | ||||||||||||||||||||||
Interest | 22 | 18 | 40 | 36 | 27 | 18 | ||||||||||||||||||||||
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Total | 152 | 50 | 208 | 93 | 259 | 56 | ||||||||||||||||||||||
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Income (loss) before income tax | (57 | ) | 34 | (54 | ) | (20) | (32 | ) | 3 | |||||||||||||||||||
Income tax (expense) benefit | 21 | (12 | ) | 20 | 7 | 5 | (1 | ) | ||||||||||||||||||||
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Net income (loss) attributable to Loews Corporation | $ | (36 | ) | $ | 22 | $ | (34 | ) | $ | (13) | $ | (27 | ) | $ | 2 | |||||||||||||
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Net investment income decreased by $83 million and $11$45 million for the three and six months ended June 30, 2017March 31, 2018 as compared with the 2016 periods, primarily2017 period due to lower results from equity based investments in the trading portfolio, partially offset by improved performance of limited partnership investments.portfolio.
Other revenues increased $94 million and $92$213 million for the three and six months ended June 30, 2017March 31, 2018 as compared with the 2016 periods, primarily2017 period due to $91 million of revenue from Consolidated Container’s operations since the acquisition date.operations.
Operating expenses increased $98 million and $111$194 million for the three and six months ended June 30, 2017March 31, 2018 as compared with the 2016 periods,2017 period primarily due to $89$200 million of expenses inclusive of expenses resulting from purchase accounting, for Consolidated Container’s operations, sincepartially offset by the acquisition date. In addition, operating expenses increased due to the timingabsence of compensation accruals and costs related to the acquisition of Consolidated Container, partially offset by the absence of prior year expenses related to the implementation of the 2016 Incentive Compensation Plan.Container. Interest expense increased $4$9 million for the three and six months ended June 30, 2017March 31, 2018 as compared with the 2016 periods,2017 period primarily due to interest expense associated with Consolidated Container’s $605 million term loan from the date of acquisition of Consolidated Container.loan.
Net resultsincome decreased $58 million and $21$29 million for the three and six months ended June 30, 2017March 31, 2018 as compared with the 2016 periods,2017 period. Excluding the effect of the corporate income tax rate change, net income decreased $23 million primarily due to the changes discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Parent Company cash and investments, net of receivables and payables, totaled $4.9 billion at June 30, 2017March 31, 2018 and December 31, 2016 totaled $5.0 billion.2017. During the sixthree months ended June 30, 2017,March 31, 2018, we received $633$571 million in dividends from our subsidiaries, including a special dividend from CNA of $485 million. Cash outflows included the payment of $620$497 million to fund the acquisition of Consolidated Container, which was in addition to approximately $600 million of debt financing proceeds at the subsidiary level as discussed in Note 2 to the Consolidated Condensed Financial Statements under Item 1. In addition, cash outflows included the payment of $42treasury stock purchases, $20 million of cash dividends to our shareholders and $6approximately $65 million of net cash contributions to fund treasury stock purchases.Loews Hotels & Co. As a holding company we depend on dividends from our subsidiaries and returns on our investment portfolio to fund our obligations. We also have an effective Registration Statement on FormS-3 on file with the Securities and Exchange Commission (“SEC”) registering the future sale of an unlimited amount of our debt and equity securities. We are not responsible for the liabilities and obligations of our subsidiaries and there are no Parent Company guarantees.
As of July 21, 2017,April 20, 2018, there were 336,601,242319,322,226 shares of Loews common stock outstanding. Depending on market and other conditions, we may purchase our shares and shares of our subsidiaries outstanding common stock in the open market or otherwise. During the sixthree months ended June 30, 2017,March 31, 2018, we purchased 0.19.9 million shares of Loews common stock. We haveAs of April 20, 2018, we had purchased an effective Registration Statement on FormS-3 on file with the Securities and Exchange Commission (“SEC”) registering the future saleadditional 3.1 million shares of Loews common stock in 2018 at an unlimited amount of our debt and equity securities.
In April of 2017, Fitch Ratings, Inc. affirmed our unsecured debt rating at A, with the rating outlook revised to negative from stable and in June of 2017, S&P Global Ratings (“S&P”) lowered our corporate credit and senior debt ratings from A+ to A with a stable outlook. Our current unsecured debt rating is A3 for Moody’s Investors Service, Inc. (“Moody’s”), with a stable outlook. Should one or more rating agencies downgrade our credit ratings from current levels, or announce that they have placed us under review for a potential downgrade, ouraggregate cost of capital could increase and our ability to raise new capital could be adversely affected.$155 million.
We continue to pursue conservative financial strategies while seeking opportunities for responsible growth. Future uses of our cash may include investing in our subsidiaries, new acquisitions, dividends and/or repurchases of our and our subsidiaries’ outstanding common stock.
CNA’s cash provided by operating activities was $515$218 million for the sixthree months ended June 30, 2017March 31, 2018 as compared with $613$282 million for the 20162017 period. CashThe decrease in cash provided by operating activities reflectedwas driven by a lower level of distributions on limited partnerships and higher net claim payments partially offset by an increase in premiums collectedcollected. CNA believes that its present cash flows from operating, investing and lower salariesfinancing activities are sufficient to fund its current and related expenses paid.expected working capital and debt obligation needs.
CNA declared and paid dividends of $2.50$2.30 per share on its common stock, including a special dividend of $2.00 per share, duringin the six months ended June 30, 2017.first quarter of 2018. On July 28, 2017,April 27, 2018, CNA’s Board of Directors declared a quarterly dividend of $0.30 per share on its common stock, payable AugustMay 30, 20172018 to shareholders of record on AugustMay 14, 2017.2018. CNA’s declaration and payment of future dividends is at the discretion of its Board of Directors and will depend on many factors, including CNA’s earnings, financial condition, business needs and regulatory constraints.
Dividends from the Continental Casualty Company (“CCC”), a subsidiary of CNA, are subject to the insurance holding company laws of the State of Illinois, the domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require prior approval by the Illinois Department of Insurance (“Department”), are determined based on the greater of the prior year’s statutory net income or 10% of statutory surplus as of the end of the prior year, as well as the timing and amount of dividends paid in the preceding twelve months. Additionally, ordinary dividends may only be paid from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As of June 30, 2017,March 31, 2018, CCC was in a positive earned surplus position. The maximum allowable dividend CCC could pay during 20172018 that would not be subject to the Department’s prior approval is approximately $1.1 billion, less dividends paid during the preceding twelve months measured at that point in time. CCC paid dividends of $200$280 million during the sixnine months ended December 31, 20162017 and $775$670 million during the sixthree months ended June 30, 2017.March 31, 2018. As of June 30, 2017,March 31, 2018, CCC is able to pay approximately $100$123 million of dividends that would not be subject to prior approval of the Department. The actual level of dividends paid in any year is determined after an assessment of available dividend capacity, holding company liquidity and cash needs as well as the impact the dividends will have on the statutory surplus of the applicable insurance company.
Diamond Offshore’s cash provided by operating activities for the sixthree months ended June 30, 2017March 31, 2018 decreased $129$15 million compared to the 20162017 period, primarily due to loweran increase in cash receipts fromexpenditures for contract drilling services and other working capital requirements of $203$31 million, partially offset by a net decreasean increase in cash payments for contract drilling expenses, including personnel-related, repairs and maintenance and other rig operating costs of $74 million. The decline in both cash receipts and cash payments related tocollected from the performance of contract drilling services reflects continuing depressed market conditions in the offshore drilling industry, as well as positive results of Diamond Offshore’s continuing focus on controlling costs.$5 million and lower income taxes payments, net of refunds, of $12 million.
For 2017,2018, Diamond Offshore has budgeted approximately $145$220 million for capital expenditures. At March 31, 2018, Diamond Offshore has no othersignificant purchase obligations, except for majorthose related to its direct rig upgrades at June 30, 2017.operations, which arise during the normal course of business.
As of June 30, 2017,March 31, 2018, Diamond Offshore had no outstanding borrowings under its credit agreement and was in compliance with all covenant requirements thereunder. As of July 27, 2017,April 26, 2018, Diamond Offshore had no outstanding borrowings and $1.5 billion available under its credit agreement to provide liquidity for its payment obligations.
In July of 2017, Moody’s downgraded Diamond Offshore’s corporate credit rating to Ba3 with a negative outlook from Ba2 with a stable outlook. Diamond Offshore’s current corporate credit rating by S&P remainsBB- with a negative outlook. Market conditions and other factors, many of which are outside of Diamond Offshore’s control, could cause its credit ratings to be lowered. A downgrade in Diamond Offshore’s credit ratings could adversely impact its cost of issuing additional debt and the amount of additional debt that it could issue, and could further restrict its access to capital markets and its ability to raise funds by issuing additional debt. 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.
Diamond Offshore will make periodic assessments of its capital spending programs based on industry conditions and will make adjustments if it determines they are required. Diamond Offshore, may, from time to time, issue debt or equity securities, or a combination thereof, to finance capital expenditures, the acquisition of assets and businesses or for general corporate purposes. Diamond Offshore’s ability to access the capital markets by issuing debt or equity securities will be dependent on its results of operations, current financial condition, current credit ratings, current market conditions and other factors beyond its control.
Boardwalk Pipeline’s cash provided by operating activities increased $43decreased $17 million for the sixthree months ended June 30, 2017March 31, 2018 compared to the 20162017 period primarily due to the change in net income, excluding the effects ofnon-cash items such as depreciation amortization and the loss on the sale of operating assets. The increase also reflects the settlement of the Gulf South rate refund in the 2016 period.amortization.
In the secondfirst quarters of 20172018 and 2016,2017, Boardwalk Pipeline declared and paid quarterly distributions to its common unitholders of record of $0.10 per common unit and an amount to the general partner on behalf of its 2% general partner interest. In JulyApril of 2017, Boardwalk Pipeline2018, the Partnership declared a quarterly cash distribution to unitholders of record of $0.10 per common unit.
In JanuaryAs of 2017,March 31, 2018, Boardwalk Pipeline completed a public offeringhad $385 million of $500 million aggregate principal amount of 4.5% senior notes due July 15, 2027 and plans to use the proceeds to refinance future maturities of debt and to fund growth capital expenditures. Initially, the proceeds were used to reduce outstanding borrowings under its revolving credit facility. As of June 30, 2017,facility and was in compliance with all covenant requirements. Boardwalk Pipeline had no outstanding borrowings under its revolving credit facility. In July of 2017, Boardwalk Pipeline extended the maturity date of its revolving credit facility by one year to May 26, 2022. Boardwalk Pipeline has in place a subordinated loan agreement with a subsidiary of the Company under which it could borrow up to $300 million until December 31, 2018. As of July 28, 2017,April 27, 2018, Boardwalk Pipeline had no outstanding borrowings under the subordinated loan agreement.
For the sixthree months ended June 30,March 31, 2018 and 2017, and 2016, Boardwalk Pipeline’s capital expenditures were $303$111 million and $259$134 million, consisting of a combination of growth and maintenance capital expenditures.capital. Boardwalk Pipeline expects total capital expenditures to be approximately $790$550 million in 2017,2018, primarily related to growth projects and pipeline system maintenance. This reflects a $60 million reduction in Boardwalk Pipeline’s expected growth capital expenditures for 2017, resulting from both a delay in the timing of the expenditures and an overall reduction in spending.maintenance expenditures.
Boardwalk Pipeline anticipates that its existing capital resources, including its revolving credit facility, subordinated loan agreement and cash flows from operating activities, will be adequate to fund its operations for 2017.2018. Boardwalk Pipeline may seek to access the capital markets to fund some or all capital expenditures for growth projects, acquisitions or for general business purposes. Boardwalk Pipeline’s ability to access the capital markets for equity and debt financing under reasonable terms depends on its current financial condition, current credit ratings, current market conditions and market conditions.other factors beyond its control.
In the first quarter of 2018, Loews Hotels & Co completed the financial closing for its investment in the Loews Kansas City Hotel with a governmental authority in Kansas City, Missouri issuing debt to support the development of the 800 room hotel, meetings space and parking garage. Loews Hotels & Co is obligated to repay approximately $95 million.
Investment activities ofnon-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.
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 reports of existing positions and valuation fluctuations to seek to ensure that open positions are consistent with our portfolio strategy.
Credit exposure associated withnon-performance by counterparties to our derivative instruments is generally limited to the uncollateralized change in fair value of the derivative instruments recognized in the Consolidated Condensed Balance Sheets. We mitigate the risk ofnon-performance by monitoring the creditworthiness of counterparties and diversifying derivatives by using 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.
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 Netnet investment income are presented in the following table:table. Fixed income securities, as presented, include both fixed maturity andnon-redeemable preferred stock.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(In millions) | ||||||||||||||||
Fixed maturity securities: | ||||||||||||||||
Taxable | $ | 351 | $ | 349 | $ | 698 | $ | 694 | ||||||||
Tax-exempt | 106 | 100 | 214 | 201 | ||||||||||||
Total fixed maturity securities | 457 | 449 | 912 | 895 | ||||||||||||
Limited partnership investments | 16 | 46 | 106 | 32 | ||||||||||||
Other, net of investment expense | 2 | 7 | 2 | 10 | ||||||||||||
Net investment income before tax | $ | 475 | $ | 502 | $ | 1,020 | $ | 937 | ||||||||
Net investment income after tax and noncontrolling interests | $ | 308 | $ | 325 | $ | 656 | $ | 608 | ||||||||
Effective income yield for the fixed maturity securities portfolio, before tax | 4.8 | % | 4.8 | % | 4.8 | % | 4.8 | % | ||||||||
Effective income yield for the fixed maturity securities portfolio, after tax | 3.4 | % | 3.5 | % | 3.4 | % | 3.4 | % |
Three Months Ended March 31 | 2018 | 2017 | ||||||||||
(In millions) | ||||||||||||
Fixed income securities: | ||||||||||||
Taxable fixed income securities | $ | 350 | $ | 348 | ||||||||
Tax-exempt fixed income securities | 105 | 108 | ||||||||||
Total fixed income securities | 455 | 456 | ||||||||||
Limited partnership and common stock investments | 31 | 90 | ||||||||||
Other, net of investment expense | 4 | (1 | ) | |||||||||
Pretax net investment income | $ | 490 | $ | 545 | ||||||||
Fixed income securities after tax and noncontrolling interests | $ | 337 | $ | 296 | ||||||||
Net investment income after tax and noncontrolling interests | $ | 362 | $ | 349 | ||||||||
Effective income yield for the fixed income securities portfolio, before tax | 4.7 | % | 4.8 | % | ||||||||
Effective income yield for the fixed income securities portfolio, after tax | 3.9 | % | 3.4 | % |
Net investment income afterbefore tax and noncontrolling interests for the three months ended June 30, 2017March 31, 2018 decreased $17$55 million as compared with the 20162017 period. The decrease was driven by limited partnership investments, which returned 0.7%1.2% in 20172018 as compared with 1.8%3.8% in the 20162017 period. Income from fixed maturity securities, after tax and noncontrolling interests, forHowever, despite the three months ended June 30, 2017 increased $4 million as compared with the 2016 period, primarily due to an increasedecline in the invested asset base.
Netlimited partnership income, net investment income after tax and noncontrolling interests increased $13 million for the sixthree months ended June 30, 2017 increased $48 millionMarch 31, 2018 as compared with the 2016 period. The increase was driven by limited partnership investments, which returned 4.5% in 2017 as compared with 1.2% inperiod given stable fixed income returns and the prior year period. Income from fixed maturity securities afterlower corporate income tax and noncontrolling interests for the six months ended June 30, 2017 increased $11 million as compared with the 2016 period, primarily due to an increase in the invested asset base.rate.
Net Realized Investment Gains (Losses)
The components of CNA’s Netnet realized investment gains (losses)results are presented in the following table:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
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2017 | 2016 | 2017 | 2016 | |||||||||||||
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(In millions) | ||||||||||||||||
Realized investment gains (losses): | ||||||||||||||||
Fixed maturity securities: | ||||||||||||||||
Corporate and other bonds | $ | 39 | $ | 7 | $ | 68 | $ | (8) | ||||||||
States, municipalities and political subdivisions | 4 | 10 | 3 | |||||||||||||
Asset-backed | (1 | ) | 6 | (5 | ) | |||||||||||
U.S. Treasury and obligations of government-sponsored enterprises | 2 | 1 | 3 | 2 | ||||||||||||
Foreign government | 2 | 2 | ||||||||||||||
| ||||||||||||||||
Total fixed maturity securities | 44 | 16 | 76 | (1) | ||||||||||||
Equity securities | 3 | (2) | ||||||||||||||
Derivative securities | (3 | ) | (6 | ) | (2 | ) | (13) | |||||||||
Short term investments and other | 2 | 3 | 1 | |||||||||||||
| ||||||||||||||||
Total realized investment gains (losses) | 43 | 13 | 77 | (15) | ||||||||||||
Income tax (expense) benefit | (15 | ) | (6 | ) | (26 | ) | 3 | |||||||||
Amounts attributable to noncontrolling interests | (2 | ) | (1 | ) | (5 | ) | 1 | |||||||||
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Net realized investment gains (losses) attributable to Loews Corporation | $ | 26 | $ | 6 | $ | 46 | $ | (11) | ||||||||
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Three Months Ended March 31 | 2018 | 2017 | ||||||||||
(In millions) | ||||||||||||
Realized investment gains (losses): | ||||||||||||
Fixed maturity securities: | ||||||||||||
Corporate bonds and other | $ | 19 | $ | 30 | ||||||||
States, municipalities and political subdivisions | 20 | 6 | ||||||||||
Asset-backed | (21 | ) | (4 | ) | ||||||||
Total fixed maturity securities | 18 | 32 | ||||||||||
Non-redeemable preferred stock | (15 | ) | ||||||||||
Short term and other | 6 | 2 | ||||||||||
Total realized investment gains | 9 | 34 | ||||||||||
Income tax expense | (1 | ) | (11 | ) | ||||||||
Amounts attributable to noncontrolling interests | (1 | ) | (3 | ) | ||||||||
Net realized investment gains attributable to Loews Corporation | $ | 7 | $ | 20 | ||||||||
Net realized investment gains improved $20before tax and noncontrolling interests decreased $25 million for the three months ended June 30, 2017March 31, 2018 as compared with the 2016 period,2017 period. The decrease was driven by higherthe decline in fair value ofnon-redeemable preferred stock and lower net realized investment gains on sales of securities and lower OTTI losses recognized in earnings. Net realized investment results improved $57 million for the six months ended June 30, 2017 as compared with the 2016 period, driven by higher net realized investment gains on sales of securities and lower OTTI losses recognized in earnings.securities. Further information on CNA’s realized gains and losses, including OTTI losses, is set forth in Note 32 of the Notes to Consolidated Condensed Financial Statements included under Item 1.
Portfolio Quality
The following table presents the estimated fair value and net unrealized gains (losses) of CNA’s fixed maturity securities by rating distribution:
March 31, 2018 | December 31, 2017 | |||||||||||||||||||||||||||||||
Net | Net | |||||||||||||||||||||||||||||||
June 30, 2017 | December 31, 2016 | Unrealized | Unrealized | |||||||||||||||||||||||||||||
Estimated Fair Value | Net (Losses) | Estimated Fair Value | Net Unrealized Gains (Losses) | Estimated | Gains | Estimated | Gains | |||||||||||||||||||||||||
|
| Fair Value | (Losses) | Fair Value | (Losses) | |||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
U.S. Government, Government agencies and Government-sponsored enterprises | $ | 4,249 | $ | 39 | $ | 4,212 | $ | 32 | $ | 4,491 | $ | (52 | ) | $ | 4,514 | $ | 21 | |||||||||||||||
AAA | 1,819 | 139 | 1,881 | 110 | 3,265 | 259 | 1,954 | 152 | ||||||||||||||||||||||||
AA | 9,104 | 870 | 8,911 | 750 | 7,096 | 576 | 8,982 | 914 | ||||||||||||||||||||||||
A | 10,014 | 895 | 9,866 | 832 | 9,168 | 702 | 9,643 | 952 | ||||||||||||||||||||||||
BBB | 13,409 | 982 | 12,802 | 664 | 13,413 | 699 | 13,554 | 1,093 | ||||||||||||||||||||||||
Non-investment grade | 3,154 | 156 | 3,233 | 156 | 2,826 | 84 | 2,840 | 140 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
Total | $ | 41,749 | $ | 3,081 | $ | 40,905 | $ | 2,544 | $ 40,259 | $ 2,268 | $ 41,487 | $ 3,272 | ||||||||||||||||||||
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As of June 30, 2017March 31, 2018 and December 31, 2016,2017, only 2% of CNA’s fixed maturity portfolio was rated internally.
The following table presents CNA’savailable-for-sale fixed maturity securities in a gross unrealized loss position by ratings distribution:
June 30, 2017 | Estimated Fair Value | Gross Unrealized Losses | ||||||||||||||
|
| Gross | ||||||||||||||
Estimated | Unrealized | |||||||||||||||
March 31, 2018 | Fair Value | Losses | ||||||||||||||
(In millions) | ||||||||||||||||
U.S. Government, Government agencies and Government-sponsored enterprises | $ | 1,744 | $ | 34 | $ | 2,997 | $ | 82 | ||||||||
AAA | 197 | 6 | 451 | 12 | ||||||||||||
AA | 616 | 10 | 754 | 11 | ||||||||||||
A | 635 | 12 | 1,579 | 33 | ||||||||||||
BBB | 1,150 | 22 | 3,379 | 79 | ||||||||||||
Non-investment grade | 598 | 20 | 881 | 29 | ||||||||||||
| ||||||||||||||||
Total | $ | 4,940 | $ | 104 | $ | 10,041 | $ | 246 | ||||||||
|
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The following table presents the maturity profile for theseavailable-for-sale fixed maturity securities. Securities not due to mature on a single date are allocated based on weighted average life:
June 30, 2017 | Estimated Fair Value | Gross Unrealized Losses | ||||||||||||||
|
| Gross | ||||||||||||||
Estimated | Unrealized | |||||||||||||||
March 31, 2018 | Fair Value | Losses | ||||||||||||||
(In millions) | ||||||||||||||||
Due in one year or less | $ | 72 | $ | 1 | $ | 113 | $ | 4 | ||||||||
Due after one year through five years | 785 | 15 | 1,779 | 41 | ||||||||||||
Due after five years through ten years | 3,035 | 66 | 6,569 | 164 | ||||||||||||
Due after ten years | 1,048 | 22 | 1,580 | 37 | ||||||||||||
| ||||||||||||||||
Total | $ | 4,940 | $ | 104 | $ | 10,041 | $ | 246 | ||||||||
|
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Duration
A primary objective in the management of CNA’s 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 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 CNA’s 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 innon-core operations. Other Insurance Operations.
The effective durations of CNA’s fixed maturity securities,non-redeemable preferred stock and short term investments are presented in the following table. Amounts presented are net of payable and receivable amounts for securities purchased and sold, but not yet settled.
March 31, 2018 | December 31, 2017 | |||||||||||||||||||||||||||||||
June 30, 2017 | December 31, 2016 | Effective | Effective | |||||||||||||||||||||||||||||
Estimated Fair Value | Effective Duration (Years) | Estimated Fair Value | Effective Duration (Years) | Estimated | Duration | Estimated | Duration | |||||||||||||||||||||||||
|
| Fair Value | (Years) | Fair Value | (Years) | |||||||||||||||||||||||||||
(In millions of dollars) | ||||||||||||||||||||||||||||||||
Investments supportingnon-core operations | $ | 16,375 | 8.7 | $ | 15,724 | 8.7 | ||||||||||||||||||||||||||
Other interest sensitive investments | 26,513 | 4.4 | 26,669 | 4.6 | ||||||||||||||||||||||||||||
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Investments supporting Other Insurance Operations | $ | 16,413 | 8.3 | $ | 16,797 | 8.4 | ||||||||||||||||||||||||||
Other investments | 25,656 | 4.5 | 26,817 | 4.4 | ||||||||||||||||||||||||||||
Total | $ | 42,888 | 6.1 | $ | 42,393 | 6.1 | $ | 42,069 | 6.0 | $ | 43,614 | 5.9 | ||||||||||||||||||||
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|
|
The duration of the total portfolio is aligned with the cash flow characteristics of the underlying liabilities.
The investment portfolio is periodically analyzed for changes in duration and related price 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 the Quantitative and Qualitative Disclosures about Market Risk included under Item 7A of our Annual Report on Form10-K for the year ended December 31, 2016.2017.
Short Term Investments
The carrying value of the components of CNA’s Short term investments are presented in the following table:
June 30, | December 31, | |||||||||||||||
2017 | 2016 | March 31, | December 31, | |||||||||||||
|
| 2018 | 2017 | |||||||||||||
(In millions) | ||||||||||||||||
Short term investments: | ||||||||||||||||
Commercial paper | $ | 932 | $ | 733 | $ | 946 | $ | 905 | ||||||||
U.S. Treasury securities | 186 | 433 | 134 | 355 | ||||||||||||
Money market funds | 76 | 44 | 23 | 44 | ||||||||||||
Other | 139 | 197 | 127 | 132 | ||||||||||||
| ||||||||||||||||
Total short term investments | $ | 1,333 | $ | 1,407 | $ | 1,230 | $ | 1,436 | ||||||||
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Certain accounting policies require us to make estimates and judgments that affect the amounts reflected in the Consolidated Condensed Financial Statements. Such estimates and judgments necessarily involve varying, and possibly significant, degrees of uncertainty. Accordingly, certain amounts currently recorded in the financial statements will likely be adjusted in the future based on new available information and changes in other facts and circumstances. See the Critical Accounting Estimates and the Insurance Reserves sections of our MD&A included under Item 7 of our Annual Report on Form10-K for the year ended December 31, 20162017 for further information.
For a discussion of accounting standards updates that have been adopted or will be adopted in the future, please seeread Note 1 of the Notes to Consolidated Condensed Financial Statements included under Item 1.
Investors are cautioned that certain statements contained in this Report as well as some statements in other SEC filings and periodic press releases and some oral statements made by us and our subsidiaries and our and their officials during presentations may constitute “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 does not directly relate to any historical or current fact and may project, indicate or imply future results, events, performance or achievements. Such statements 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 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.
Developments in any of the risks or uncertainties facing us or our subsidiaries, including those described under Part II, Item 1A, Risk Factors of this Report and Part I, Item 1A, Risk Factors in our Annual Report on Form10-K for the year ended December 31, 20162017 and in 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 they are made 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 3. Quantitative and Qualitative Disclosures about Market Risk.
The following describes an addition toThere were no material changes in our Quantitative and Qualitative Disclosures about Market Risk and should be read in conjunction withmarket risk components as of March 31, 2018. See the Quantitative and Qualitative Disclosures about Market Risk included under Item 7A of our Annual Report on FormForm10-K10-K for the year ended December 31, 2016.2017 for further information. Additional information related to portfolio duration and market conditions is discussed in the Investments section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included under Part I, Item 2.
Commodity Price Risk – We have exposure to price risk as a result of Consolidated Container’s purchases of certain raw materials, such as high-density polyethylene, polycarbonate, polypropylene and polyethylene terephthalate resins in connection with the production of its products. The purchase prices of these raw materials are determined based on prevailing market conditions. While Consolidated Container’s operations are affected by fluctuations in resin prices, its net income over time is generally unaffected by these changes because industry practice and many Consolidated Container contractual arrangements permit or require Consolidated Container to pass through these cost changes to its customers. In the future, however, Consolidated Container may not always be able to pass through these changes in raw material costs in a timely manner or at all due to competitive pressures.
Item 4. Controls and Procedures.
The Company maintains a system of disclosure controls and procedures (as defined in Rules13a-15(e) and15d-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 to the Securities and Exchange Commission under the Exchange Act, 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 management, including the Company’s principal executive officer (“CEO”) and principal financial officer (“CFO”), concluded conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Report and, based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2017.March 31, 2018.
There were no changes in the Company’s internal control over financial reporting (as defined in Rules13a-15(f) and15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2017March 31, 2018 that have materially affected or that are reasonably likely to materially affect the Company’s internal control over financial reporting.
Information on our legal proceedings is set forth in Notes 98 and 109 to the Consolidated Condensed Financial Statements included under Part I, Item 1.
Our Annual Report onForm10-K for the year ended December 31, 20162017 includes a detailed discussion of certain risk factors facing the company. The information presented below describes additions to, and supplements, such risk factors and should be read in conjunction with the Risk Factors included under Item 1A of our Annual ReportonForm10-K for the year ended December 31, 2016.2017.
Risks Related to Us and Our Subsidiary, Consolidated Container Company (“Consolidated Container”)Boardwalk Pipeline
Consolidated Container’s substantial indebtednessBoardwalk Pipeline’s natural gas transportation and storage operations are subject to extensive regulation by the FERC, including rules and regulations related to the rates it can charge for its services and its ability to construct or abandon facilities. Boardwalk Pipeline may not be able to recover the full cost of operating its pipelines, including earning a reasonable return.
Boardwalk Pipeline’s natural gas transportation and storage operations are subject to extensive regulation by the FERC, including the types and terms of services it may offer to its customers, the rates it can charge its customers, construction of new facilities, creation, modification or abandonment of services or facilities and recordkeeping and relationships with affiliated companies. An adverse FERC action in any of these areas could affect its ability to meetcompete for business, construct new facilities, offer new services or recover the full cost of operating its obligationspipelines and may otherwise restrict its activities.other facilities. This regulatory oversight can result in longer lead times to develop and complete any future project than competitors that are not subject to the FERC’s regulations. The FERC can also deny it the right to abandon certain facilities from service.
Consolidated Container has a significant amount of indebtedness, which requires significant interest payments. Its inability to generate sufficient cash flow to satisfy its debt obligations, or to refinance its obligations on commercially reasonable terms, would have a material adverse effect on its business. Consolidated Container’s substantial indebtedness could have important consequences. For example, it could:
limit its ability to borrow moneyThe FERC regulates the rates Boardwalk Pipeline can charge for its workingnatural gas transportation and storage operations. For its cost-based services, the FERC establishes both the maximum and minimum rates it can charge. The basic elements that the 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 capital expenditures, debt service requirements or other corporate purposes;
increase its vulnerability to general adverse economicEffective December 22, 2017, the Tax Cuts and industry conditions; and
limit its ability to respond to business opportunities,Jobs Act of 2017 changed several provisions of the federal tax code, including growing its business through acquisitions.
In addition, the credit agreements governing its current indebtedness contain, and any future debt instruments would likely contain, financial and other restrictive covenants, which impose significant operating and financial restrictions on it. As a result of these covenants, Consolidated Container could be limitedreduction in the manner in which it conducts its business and may be unable to engage in favorable business activities or finance future operations or capital needs. Furthermore, a failure to comply with these covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on its business.
Fluctuations in raw material prices and raw material availability may affect Consolidated Container’s results.
To produce its products, Consolidated Container uses large quantities of plastic resins and recycled plastic materials. It faces the risk that its access to these raw materials may be interrupted or that it may not be able to purchase these raw materials at prices that are acceptable to it. In general, Consolidated Container does not have long-term supply contracts with its suppliers, and its purchases of raw materials are subject to market prices. Although Consolidated Container generally is able to pass changes in the prices of raw materials through to its customers over a period of time, it may not always be able to do so or there may be a lag between when its costs increase and when it passes those costs through to its customers. It may not be able to pass through all future raw material price increasesmaximum corporate tax rate. On March 15, 2018, in a timely manner or at all due to competitive pressures. In addition,set of related issuances, FERC addressed the treatment of federal income tax allowances in interstate pipeline companies’ rates. FERC issued a sustained increase in resin and recycled plastic prices, relative to alternative packaging materials, would make plastic containers less economical forRevised Policy Statement on Treatment of Income Taxes (“Revised Policy Statement”) reversing its customers and could result in a slower pace of conversions to, or reductions in the use of, plastic containers. Any limitation on its ability to procure its primary raw materials or to pass through price increases in such materials on a timely basis could negatively affect its results of operations.
Consolidated Container depends on several large customers, the loss of which could have a material adverse effect on its business. In addition, because many of its customers’ contracts are requirements-based contracts, it faces the risk that they will purchase less than anticipated volumes.
The termination of any of Consolidated Container’s top customer relationships or significant declines in demand for its products could have a material adverse effect on Consolidated Container’s business. Furthermore, in Consolidated Container’s rigid packaging business, many of its contracts with large customers are requirements-based contracts that do not obligate the customer to purchase fixed amounts of product from it and are subject to terminationlong-standing policy by its customers under certain circumstances. As a result, despite the existence of contracts with most of its key customers, Consolidated Container generally faces the risk that the customers will not purchase expected amounts of the products covered under contracts. Additionally, customer contracts come up for renewal on a regular basis in the ordinary course of business, and Consolidated Container cannot guaranteestating that it will be ableno longer permit master limited partnerships to successfully renew these contractsinclude an income tax allowance in theircost-of-service. FERC issued the Revised Policy Statement in response to a remand from the U.S. Court of Appeals for the D.C. Circuit in United Airlines v. FERC, in which the court determined that FERC had not justified its conclusion that a pipeline organized as a master limited partnership would not “double recover” its income taxes under the then current policy by both including an income tax allowance in itscost-of-service and earning a return on favorable termsequity calculated using the discounted cash flow methodology. Requests for rehearing and clarification of the Revised Policy Statement have been filed by various industry participants.
FERC also issued a Notice of Inquiry (“NOI”) requesting comments on the effect of the Tax Cuts and Jobs Act of 2017 on FERC jurisdictional rates. The NOI requests comments by May 21, 2018 on whether and how FERC should address changes relating to accumulated deferred income taxes and bonus depreciation. Actions FERC will take, if any, following receipt of responses to the NOI and any potential impacts from final rules or policy statements issued following the NOI on the rates Boardwalk Pipeline can charge for transportation and storage services are uncertain at this time, but such actions could materially impact the maximum cost-based transportation and storage rates it is permitted to charge its customers.
Also included in the March 15, 2018 issuances is a Notice of Proposed Rulemaking (“NOPR”) proposing rules for implementation of the Revised Policy Statement and the corporate income tax rate reduction with respect to interstate natural gas pipeline rates. The NOPR proposes a new rule that will, if it becomes final, require all as they expire.FERC-regulated natural gas pipelines to make aone-time informational filing reflecting the impacts of the Tax Cuts and Jobs Act of 2017 and the Revised Policy Statement on each individual pipeline’scost-of-service. The NOPR proposes a procedure that would permit customers to protest or comment on each pipeline’s informational filing. This proposed procedure
Consolidated Container’s customers
may increase their self-manufacturing.
Increased self-manufacturing by Consolidated Container’s customers may have a material adverse impact on its sales volume and financial results. Consolidated Container believes that its customers may engage in self-manufacturing over time at locations where transportation costs are high, and where low complexity and available space to install blow molding equipment exists. Ifencourage the FERC or one or more of Consolidated Container’sBoardwalk Pipeline’s customers to challenge a pipeline’s informational filings which could lead to challenges to the maximum applicable rates pursuant to Section 5 of the Natural Gas Act (“NGA”).
The NOPR proposes that each FERC-regulated natural gas pipeline will select one of four options: file a limited NGA Section 4 filing reducing its rates only as required related to the Tax Cuts and Jobs Act of 2017 and the Revised Policy Statement, commit to filing a general NGA Section 4 rate case in the near future, file a statement explaining why an adjustment to rates is not needed, or take no other action. Boardwalk Pipeline has filed comments in this proceeding. Once the comment period is complete, the FERC is expected to issue a final rule.
Even without action on the NOPR or NOI, the FERC and/or Boardwalk Pipeline’s customers may challenge the maximum applicable rates that any of Boardwalk Pipeline’s regulated pipelines are allowed to charge in accordance with Section 5 of the NGA. The Tax Cuts and Jobs Act of 2017 and the Revised Policy Statement may increase their self-manufacturing, it maythe likelihood of such a challenge due to the resulting treatment of the allowance for income taxes in the determination of maximum applicable rates. If such a challenge is successful for any of its pipelines, the revenues associated with transportation and storage services the pipeline provides pursuant tocost-of-service rates could materially decrease in the future, which would adversely affect the revenues on that pipeline going forward.
On April 18, 2018, the FERC announced it will review its business.1999 Policy Statement on Certification of New Interstate Natural Gas Pipeline Facilities that has been used in the determination of whether to grant certificates of public convenience and necessity for new pipeline projects. In its Notice of Inquiry, the FERC seeks comments from the industry on whether, and if so how, the FERC should revise its approach under its currently effective Policy Statement on the certification of new natural gas facilities. Boardwalk Pipeline does not expect that any change in this policy would affect it in a materially different manner than any other interstate natural gas pipeline company operating in the U.S.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Items 2 (a) and (b) are inapplicable.
(c) STOCK REPURCHASES
Period | (a) Total number of shares purchased | (b) Average price paid per share | (c) Total number of shares purchased as part of publicly announced plans or | (d) Maximum number of shares of shares that may yet be | ||||
April 1, 2017 - April 30, 2017 | None | N/A | N/A | N/A | ||||
May 1, 2017 - May 31, 2017 | 123,500 | $45.98 | N/A | N/A | ||||
June 1, 2017 - June 30, 2017 | None | N/A | N/A | N/A |
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 of shares that may yet be | ||||
January 1, 2018 - | ||||||||
January 31, 2018 | 2,903,500 | $ 51.65 | N/A | N/A | ||||
February 1, 2018 - | ||||||||
February 28, 2018 | 3,100,819 | 49.31 | N/A | N/A | ||||
March 1, 2018 - | ||||||||
March 31, 2018 | 3,845,714 | 50.54 | N/A | N/A |
Exhibit | ||
Description of Exhibit |
Number | |
31.1* | ||
31.2* | ||
32.1* | ||
32.2* | ||
XBRL Instance Document | 101.INS * | |
XBRL Taxonomy Extension Schema | 101.SCH * | |
XBRL Taxonomy Extension Calculation Linkbase | 101.CAL* | |
XBRL Taxonomy Extension Definition Linkbase | 101.DEF * | |
XBRL Taxonomy Label Linkbase | 101.LAB * | |
XBRL Taxonomy Extension Presentation Linkbase | 101.PRE * |
* | Filed herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, hereunto duly authorized.
LOEWS CORPORATION | ||||
(Registrant) | ||||
Dated: | By: | /s/ David B. Edelson | ||
DAVID B. EDELSON | ||||
Senior Vice President and | ||||
Chief Financial Officer | ||||
(Duly authorized officer | ||||
and principal financial | ||||
officer) |
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