INDEX
|
Page
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No.
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Part
I. Financial Information
|
|
|
|
|
|
|
|
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Item 1. Financial
Statements (unaudited)
|
|
|
|
|
|
Consolidated Condensed Balance
Sheets
|
|
|
June 30, 2008 and December 31,
2007
|
3
|
|
|
|
|
Consolidated Condensed
Statements of Income
|
|
|
Three and six months ended June
30, 2008 and 2007
|
4
|
|
|
|
|
Consolidated Condensed
Statements of Shareholders’ Equity
|
|
|
June 30, 2008 and
2007
|
6
|
|
|
|
|
Consolidated Condensed
Statements of Cash Flows
|
|
|
Six months ended June 30, 2008
and 2007
|
7
|
|
|
|
|
Notes to Consolidated Condensed
Financial Statements
|
9
|
|
|
|
|
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
40
|
|
|
|
|
Item 3. Quantitative
and Qualitative Disclosures about Market Risk
|
73
|
|
|
|
|
Item 4. Controls and
Procedures
|
76
|
|
|
|
|
Part
II. Other Information
|
|
|
|
|
|
Item 1. Legal
Proceedings
|
77
|
|
|
|
|
Item 1A. Risk
Factors
|
77
|
|
|
|
|
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds
|
77
|
|
|
|
|
Item 4. Submission of Matters
to a Vote of Security Holders
|
77
|
|
|
|
|
Item
6. Exhibits
|
79
|
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements.
Loews
Corporation and Subsidiaries
CONSOLIDATED
CONDENSED BALANCE SHEETS
(Unaudited)
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
Fixed maturities, amortized
cost of $32,422 and $34,816
|
|
$ |
30,980 |
|
|
$ |
34,663 |
|
Equity securities, cost of
$2,267 and $1,143
|
|
|
2,196 |
|
|
|
1,347 |
|
Limited partnership
investments
|
|
|
2,428 |
|
|
|
2,321 |
|
Other
investments
|
|
|
18 |
|
|
|
108 |
|
Short term investments
|
|
|
9,736 |
|
|
|
8,230 |
|
Total
investments
|
|
|
45,358 |
|
|
|
46,669 |
|
Cash
|
|
|
168 |
|
|
|
140 |
|
Receivables
|
|
|
11,965 |
|
|
|
11,469 |
|
Property,
plant and equipment
|
|
|
11,782 |
|
|
|
10,218 |
|
Deferred
income taxes
|
|
|
1,026 |
|
|
|
441 |
|
Goodwill
and other intangible assets
|
|
|
1,357 |
|
|
|
1,353 |
|
Assets
of discontinued operations
|
|
|
6 |
|
|
|
2,841 |
|
Other
assets
|
|
|
1,502 |
|
|
|
1,347 |
|
Deferred
acquisition costs of insurance subsidiaries
|
|
|
1,167 |
|
|
|
1,161 |
|
Separate account business
|
|
|
451 |
|
|
|
476 |
|
Total assets
|
|
$ |
74,782 |
|
|
$ |
76,115 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
reserves:
|
|
|
|
|
|
|
|
|
Claim and claim adjustment
expense
|
|
$ |
28,202 |
|
|
$ |
28,588 |
|
Future policy
benefits
|
|
|
7,326 |
|
|
|
7,106 |
|
Unearned
premiums
|
|
|
3,644 |
|
|
|
3,597 |
|
Policyholders’ funds
|
|
|
582 |
|
|
|
930 |
|
Total insurance
reserves
|
|
|
39,754 |
|
|
|
40,221 |
|
Payable
to brokers
|
|
|
1,971 |
|
|
|
580 |
|
Collateral
on loaned securities
|
|
|
|
|
|
|
63 |
|
Short
term debt
|
|
|
258 |
|
|
|
358 |
|
Long
term debt
|
|
|
7,137 |
|
|
|
6,900 |
|
Reinsurance
balances payable
|
|
|
373 |
|
|
|
401 |
|
Liabilities
of discontinued operations
|
|
|
|
|
|
|
1,637 |
|
Other
liabilities
|
|
|
3,803 |
|
|
|
3,990 |
|
Separate account business
|
|
|
451 |
|
|
|
476 |
|
Total liabilities
|
|
|
53,747 |
|
|
|
54,626 |
|
Minority interest
|
|
|
4,254 |
|
|
|
3,898 |
|
Preferred
stock, $0.10 par value,
|
|
|
|
|
|
|
|
|
Authorized – 100,000,000
shares
|
|
|
|
|
|
|
|
|
Common
stock:
|
|
|
|
|
|
|
|
|
Loews common stock, $0.01 par
value:
|
|
|
|
|
|
|
|
|
Authorized – 1,800,000,000
shares
|
|
|
|
|
|
|
|
|
Issued and outstanding –
436,267,871 and 529,683,628 shares
|
|
|
4 |
|
|
|
5 |
|
Former Carolina Group
stock
|
|
|
|
|
|
|
1 |
|
Additional
paid-in capital
|
|
|
3,280 |
|
|
|
3,967 |
|
Earnings
retained in the business
|
|
|
14,598 |
|
|
|
13,691 |
|
Accumulated other comprehensive income
(loss)
|
|
|
(1,101 |
) |
|
|
(65 |
) |
|
|
|
16,781 |
|
|
|
17,599 |
|
Less treasury stock, at cost (340,000 shares of
former Carolina Group stock)
|
|
|
|
|
|
|
8 |
|
Total shareholders’ equity
|
|
|
16,781 |
|
|
|
17,591 |
|
Total liabilities and shareholders’
equity
|
|
$ |
74,782 |
|
|
$ |
76,115 |
|
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums
|
|
$ |
1,774 |
|
|
$ |
1,872 |
|
|
$ |
3,586 |
|
|
$ |
3,734 |
|
Net investment
income
|
|
|
697 |
|
|
|
785 |
|
|
|
1,176 |
|
|
|
1,518 |
|
Investment gains
(losses)
|
|
|
(111 |
) |
|
|
(108 |
) |
|
|
(162 |
) |
|
|
(129 |
) |
Gain on issuance of subsidiary
stock
|
|
|
2 |
|
|
|
4 |
|
|
|
2 |
|
|
|
139 |
|
Contract drilling
revenues
|
|
|
937 |
|
|
|
636 |
|
|
|
1,707 |
|
|
|
1,226 |
|
Other
|
|
|
623 |
|
|
|
328 |
|
|
|
1,225 |
|
|
|
697 |
|
Total
|
|
|
3,922 |
|
|
|
3,517 |
|
|
|
7,534 |
|
|
|
7,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance claims and
policyholders’ benefits
|
|
|
1,472 |
|
|
|
1,473 |
|
|
|
2,861 |
|
|
|
2,921 |
|
Amortization of deferred
acquisition costs
|
|
|
360 |
|
|
|
372 |
|
|
|
728 |
|
|
|
753 |
|
Contract drilling
expenses
|
|
|
271 |
|
|
|
222 |
|
|
|
558 |
|
|
|
434 |
|
Other operating
expenses
|
|
|
624 |
|
|
|
532 |
|
|
|
1,241 |
|
|
|
1,018 |
|
Interest
|
|
|
88 |
|
|
|
71 |
|
|
|
177 |
|
|
|
149 |
|
Total
|
|
|
2,815 |
|
|
|
2,670 |
|
|
|
5,565 |
|
|
|
5,275 |
|
Income before income tax and minority
interest
|
|
|
1,107 |
|
|
|
847 |
|
|
|
1,969 |
|
|
|
1,910 |
|
Income tax
expense
|
|
|
340 |
|
|
|
256 |
|
|
|
593 |
|
|
|
592 |
|
Minority interest
|
|
|
256 |
|
|
|
169 |
|
|
|
456 |
|
|
|
335 |
|
Total
|
|
|
596 |
|
|
|
425 |
|
|
|
1,049 |
|
|
|
927 |
|
Income
from continuing operations
|
|
|
511 |
|
|
|
422 |
|
|
|
920 |
|
|
|
983 |
|
Discontinued
operations, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of
operations
|
|
|
170 |
|
|
|
232 |
|
|
|
343 |
|
|
|
439 |
|
Gain on disposal
|
|
|
4,282 |
|
|
|
|
|
|
|
4,362 |
|
|
|
|
|
Net income
|
|
$ |
4,963 |
|
|
$ |
654 |
|
|
$ |
5,625 |
|
|
$ |
1,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$ |
511 |
|
|
$ |
422 |
|
|
$ |
920 |
|
|
$ |
983 |
|
Discontinued operations,
net
|
|
|
4,348 |
|
|
|
91 |
|
|
|
4,494 |
|
|
|
180 |
|
Loews common
stock
|
|
|
4,859 |
|
|
|
513 |
|
|
|
5,414 |
|
|
|
1,163 |
|
Former Carolina Group stock -
discontinued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations, net
|
|
|
104 |
|
|
|
141 |
|
|
|
211 |
|
|
|
259 |
|
Total
|
|
$ |
4,963 |
|
|
$ |
654 |
|
|
$ |
5,625 |
|
|
$ |
1,422 |
|
Loews
Corporation and Subsidiaries
CONSOLIDATED
CONDENSED STATEMENTS OF INCOME
(Unaudited)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per Loews common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$ |
1.00 |
|
|
$ |
0.78 |
|
|
$ |
1.77 |
|
|
$ |
1.83 |
|
Discontinued operations,
net
|
|
|
8.56 |
|
|
|
0.17 |
|
|
|
8.66 |
|
|
|
0.33 |
|
Net income
|
|
$ |
9.56 |
|
|
$ |
0.95 |
|
|
$ |
10.43 |
|
|
$ |
2.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per Loews common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$ |
1.00 |
|
|
$ |
0.78 |
|
|
$ |
1.77 |
|
|
$ |
1.82 |
|
Discontinued operations,
net
|
|
|
8.54 |
|
|
|
0.17 |
|
|
|
8.64 |
|
|
|
0.33 |
|
Net income
|
|
$ |
9.54 |
|
|
$ |
0.95 |
|
|
$ |
10.41 |
|
|
$ |
2.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per former Carolina Group share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations,
net
|
|
$ |
0.97 |
|
|
$ |
1.31 |
|
|
$ |
1.95 |
|
|
$ |
2.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per former Carolina Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations,
net
|
|
$ |
0.96 |
|
|
$ |
1.30 |
|
|
$ |
1.95 |
|
|
$ |
2.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common
stock
|
|
|
508.16 |
|
|
|
536.30 |
|
|
|
518.93 |
|
|
|
538.90 |
|
Former Carolina Group
stock
|
|
|
108.48 |
|
|
|
108.44 |
|
|
|
108.47 |
|
|
|
108.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common
stock
|
|
|
509.43 |
|
|
|
537.50 |
|
|
|
520.17 |
|
|
|
540.01 |
|
Former Carolina Group
stock
|
|
|
108.60 |
|
|
|
108.56 |
|
|
|
108.60 |
|
|
|
108.54 |
|
See
accompanying Notes to Consolidated Condensed Financial
Statements.
Loews
Corporation and Subsidiaries
CONSOLIDATED
CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
Former
|
|
|
|
|
|
Earnings
|
|
|
Accumulated
|
|
|
Common
|
|
|
|
Comprehensive
|
|
|
Loews
|
|
|
Carolina
|
|
|
Additional
|
|
|
Retained
|
|
|
Other
|
|
|
Stock
|
|
|
|
Income
|
|
|
Common
|
|
|
Group
|
|
|
Paid-in
|
|
|
in
the
|
|
|
Comprehensive
|
|
|
Held
in
|
|
|
|
(Loss)
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Business
|
|
|
Income (Loss)
|
|
|
Treasury
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2007
|
|
|
|
|
$ |
5 |
|
|
$ |
1 |
|
|
$ |
4,018 |
|
|
$ |
12,099 |
|
|
$ |
387 |
|
|
$ |
(8 |
) |
Adjustment
to initially apply:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIN No. 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37 |
) |
|
|
|
|
|
|
|
|
FSP
FTB 85-4-1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2007 as adjusted
|
|
|
|
|
|
5 |
|
|
|
1 |
|
|
|
4,018 |
|
|
|
12,096 |
|
|
|
387 |
|
|
|
(8 |
) |
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,422 |
|
|
|
|
|
|
|
|
|
Other comprehensive
loss
|
|
|
(276 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(276 |
) |
|
|
|
|
Comprehensive
income
|
|
$ |
1,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common stock,
$0.125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67 |
) |
|
|
|
|
|
|
|
|
Former Carolina Group stock,
$0.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99 |
) |
|
|
|
|
|
|
|
|
Purchase
of Loews treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(384 |
) |
Issuance
of Loews common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of former Carolina Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
Deferred
tax benefit related to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest expense imputed
on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diamond Offshore’s
1.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
debentures (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2007
|
|
|
|
|
|
$ |
5 |
|
|
$ |
1 |
|
|
$ |
4,065 |
|
|
$ |
13,349 |
|
|
$ |
111 |
|
|
$ |
(392 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2008
|
|
|
|
|
|
$ |
5 |
|
|
$ |
1 |
|
|
$ |
3,967 |
|
|
$ |
13,691 |
|
|
$ |
(65 |
) |
|
$ |
(8 |
) |
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
5,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,625 |
|
|
|
|
|
|
|
|
|
Other comprehensive
loss
|
|
|
(1,089 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,089 |
) |
|
|
|
|
Comprehensive
income
|
|
$ |
4,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common stock,
$0.125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66 |
) |
|
|
|
|
|
|
|
|
Former Carolina Group stock,
$0.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99 |
) |
|
|
|
|
|
|
|
|
Issuance
of Loews common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption
of former Carolina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group stock (Note
2)
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(602 |
) |
|
|
53 |
|
|
|
8 |
|
Exchange
of Lorillard common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for Loews common stock (Note
2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,650 |
) |
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
of treasury stock
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(700 |
) |
|
|
(3,949 |
) |
|
|
|
|
|
|
4,650 |
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
Balance, June 30, 2008
|
|
|
|
|
|
$ |
4 |
|
|
$ |
- |
|
|
$ |
3,280 |
|
|
$ |
14,598 |
|
|
$ |
(1,101 |
) |
|
$ |
- |
|
See
accompanying Notes to Consolidated Condensed Financial
Statements.
Loews
Corporation and Subsidiaries
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
5,625 |
|
|
$ |
1,422 |
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
provided
(used) by operating activities, net
|
|
|
(3,777 |
) |
|
|
(138 |
) |
Changes
in operating assets and liabilities, net:
|
|
|
|
|
|
|
|
|
Reinsurance
receivables
|
|
|
447 |
|
|
|
556 |
|
Other
receivables
|
|
|
(271 |
) |
|
|
(72 |
) |
Federal income
tax
|
|
|
(32 |
) |
|
|
21 |
|
Prepaid reinsurance
premiums
|
|
|
(20 |
) |
|
|
(22 |
) |
Deferred acquisition
costs
|
|
|
(6 |
) |
|
|
(7 |
) |
Insurance reserves and
claims
|
|
|
(148 |
) |
|
|
(86 |
) |
Reinsurance balances
payable
|
|
|
(28 |
) |
|
|
(11 |
) |
Other
liabilities
|
|
|
(504 |
) |
|
|
(171 |
) |
Trading
securities
|
|
|
1,488 |
|
|
|
587 |
|
Other, net
|
|
|
(94 |
) |
|
|
(64 |
) |
Net
cash flow operating activities - continuing operations
|
|
|
2,680 |
|
|
|
2,015 |
|
Net cash flow operating activities - discontinued
operations
|
|
|
151 |
|
|
|
297 |
|
Net cash flow operating activities -
total
|
|
|
2,831 |
|
|
|
2,312 |
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of fixed maturities
|
|
|
(28,260 |
) |
|
|
(33,938 |
) |
Proceeds
from sales of fixed maturities
|
|
|
26,260 |
|
|
|
31,598 |
|
Proceeds
from maturities of fixed maturities
|
|
|
2,464 |
|
|
|
2,836 |
|
Purchases
of equity securities
|
|
|
(133 |
) |
|
|
(97 |
) |
Proceeds
from sales of equity securities
|
|
|
132 |
|
|
|
109 |
|
Purchases
of property, plant and equipment
|
|
|
(1,779 |
) |
|
|
(718 |
) |
Proceeds
from sales of property, plant and equipment
|
|
|
15 |
|
|
|
13 |
|
Change
in collateral on loaned securities
|
|
|
(63 |
) |
|
|
(503 |
) |
Change
in short term investments
|
|
|
(1,542 |
) |
|
|
(1,207 |
) |
Change
in other investments
|
|
|
(153 |
) |
|
|
(85 |
) |
Other, net
|
|
|
1 |
|
|
|
56 |
|
Net
cash flow investing activities - continuing operations
|
|
|
(3,058 |
) |
|
|
(1,936 |
) |
Net
cash flow investing activities - discontinued operations,
|
|
|
|
|
|
|
|
|
including proceeds from
dispositions
|
|
|
618 |
|
|
|
169 |
|
Net cash flow investing activities -
total
|
|
|
(2,440 |
) |
|
|
(1,767 |
) |
Loews
Corporation and Subsidiaries
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid
|
|
$ |
(165 |
) |
|
$ |
(166 |
) |
Dividends
paid to minority interest
|
|
|
(233 |
) |
|
|
(315 |
) |
Purchases
of treasury shares
|
|
|
|
|
|
|
(379 |
) |
Purchases
of treasury shares by subsidiary
|
|
|
(70 |
) |
|
|
|
|
Issuance
of common stock
|
|
|
2 |
|
|
|
7 |
|
Proceeds
from subsidiaries’ equity issuances
|
|
|
245 |
|
|
|
312 |
|
Principal
payments on debt
|
|
|
(747 |
) |
|
|
(2 |
) |
Issuance
of debt
|
|
|
886 |
|
|
|
|
|
Receipts
of investment contract account balances
|
|
|
2 |
|
|
|
1 |
|
Return
of investment contract account balances
|
|
|
(299 |
) |
|
|
(57 |
) |
Excess
tax benefits from share-based payment arrangements
|
|
|
3 |
|
|
|
7 |
|
Other
|
|
|
3 |
|
|
|
9 |
|
Net
cash flow financing activities - continuing
operations
|
|
|
(373 |
) |
|
|
(583 |
) |
Net cash flow financing activities
- discontinued
operations
|
|
|
|
|
|
|
3 |
|
Net cash flow financing activities -
total
|
|
|
(373 |
) |
|
|
(580 |
) |
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate on cash -
continuing operations
|
|
|
(1 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
17 |
|
|
|
(35 |
) |
Net
cash transactions from:
|
|
|
|
|
|
|
|
|
Continuing operations to
discontinued operations
|
|
|
780 |
|
|
|
520 |
|
Discontinued operations to
continuing operations
|
|
|
(780 |
) |
|
|
(520 |
) |
Cash, beginning of period
|
|
|
160 |
|
|
|
174 |
|
Cash, end of period
|
|
$ |
177 |
|
|
$ |
139 |
|
|
|
|
|
|
|
|
|
|
Cash,
end of period:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
168 |
|
|
$ |
133 |
|
Discontinued operations
|
|
|
9 |
|
|
|
6 |
|
Total
|
|
$ |
177 |
|
|
$ |
139 |
|
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% owned subsidiary); the operation of offshore oil and gas drilling rigs
(Diamond Offshore Drilling, Inc. (“Diamond Offshore”), a 50.4% owned
subsidiary); exploration, production and marketing of natural gas and natural
gas liquids (HighMount Exploration & Production LLC (“HighMount”), a wholly
owned subsidiary); the operation of interstate natural gas transmission pipeline
systems (Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”), a 70% owned
subsidiary); and the operation of hotels (Loews Hotels Holding Corporation
(“Loews Hotels”), a wholly owned subsidiary). Unless the context otherwise
requires, the terms “Company,” “Loews” and “Registrant” as used herein mean
Loews Corporation excluding its subsidiaries.
In June
of 2008, the Company disposed of its entire ownership interest in its wholly
owned subsidiary, Lorillard, Inc. (“Lorillard”). The Consolidated Condensed
Financial Statements have been reclassified to reflect Lorillard as a
discontinued operation. Accordingly, Lorillard’s assets, liabilities, revenues,
expenses and cash flows have been excluded from the respective captions in the
Consolidated Condensed Balance Sheets, Consolidated Condensed Statements of
Income, and Consolidated Condensed Statements of Cash Flows and have been
included in Assets and Liabilities of discontinued operations, Discontinued
Operations, net and Net cash flows - discontinued operations,
respectively.
In the opinion of management, the
accompanying unaudited Consolidated Condensed Financial Statements reflect all
adjustments (consisting of only normal recurring accruals) necessary to present
fairly the financial position as of June 30, 2008 and December 31, 2007 and the
results of operations for the three and six months ended June 30, 2008 and 2007
and changes in cash flows for the six months ended June 30, 2008 and
2007.
Net income for the second quarter and
first half of each of the years is not necessarily indicative of net income for
that entire year.
Reference is made to the Notes to
Consolidated Financial Statements in the 2007 Annual Report on Form 10-K which
should be read in conjunction with these Consolidated Condensed Financial
Statements.
Supplementary cash flow information –
As discussed in Note 2, in June of 2008, the Company disposed of its entire
ownership interest in Lorillard resulting in a non-cash gain on disposal of $4.3
billion. Investing activities include accrued capital expenditures of $112
million and $21 million for the six months ended June 30, 2008 and
2007.
Accounting changes – In September of
2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” SFAS
No. 157 provides enhanced guidance for using fair value to measure assets and
liabilities. The standard also responds to investors’ requests for expanded
information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value, and the effect of
fair value measurements on earnings. A one year deferral has been granted for
the implementation of SFAS No. 157 for all nonrecurring fair value measurements
of nonfinancial assets and nonfinancial liabilities. As a result, the Company
has partially applied the provisions of SFAS No. 157 upon adoption at January 1,
2008. The assets and liabilities that are recognized or disclosed at fair value
for which the Company has not applied the provisions of SFAS No. 157 include
goodwill, other intangible assets, long term debt and asset retirement
obligations. The effect of partially adopting SFAS No. 157 did not have a
significant impact on the Company’s financial condition at the date of adoption
or the results of operations for the period ended June 30, 2008. See Note
4.
In April of 2007, the FASB issued FASB
Staff Position (“FSP”) No. FIN 39-1, “Amendment of FASB Interpretation (“FIN”)
No. 39.” FSP FIN No. 39-1 permits a reporting entity to offset fair value
amounts recognized for the right to reclaim cash collateral or the obligation to
return cash collateral against fair value amounts recognized for derivative
instruments executed with the same counterparty under the same master netting
arrangement that have been offset in the statement of financial position in
accordance with FIN No. 39. Additionally, FSP No. FIN 39-1 requires that a
reporting entity shall not offset fair value amounts recognized for derivative
instruments without offsetting fair value amounts recognized for the right to
reclaim cash collateral or the obligation to return cash collateral. The Company
adopted FSP No. FIN 39-1 in 2008, by electing to not offset cash collateral
amounts recognized for derivative instruments under the same master netting
arrangements and as a result
will no
longer offset fair value amounts recognized for derivative instruments. The
Company presented the effect of adopting FSP No. FIN 39-1 as a change in
accounting principle through retrospective application. The effect on the
Consolidated Condensed Balance Sheet as of December 31, 2007 was an increase of
$36 million in Other investments and Payable to brokers. The adoption of FSP No.
FIN 39-1 had no impact on the Company’s financial condition or results of
operations as of or for the six months ended June 30, 2008.
2. Separation
of Lorillard, Inc.
The Company disposed of Lorillard
through the following two integrated transactions, collectively referred to as
the “Separation”:
|
·
|
On
June 10, 2008, the Company distributed 108,478,429 shares, or
approximately 62%, of the outstanding common stock of Lorillard in
exchange for and in redemption of all of the 108,478,429 outstanding
shares of the Company’s former Carolina Group stock, in accordance with
the Company’s Restated Certificate of Incorporation (the “Redemption”);
and
|
|
·
|
On
June 16, 2008, the Company distributed the remaining 65,445,000 shares, or
approximately 38%, of the outstanding common stock of Lorillard in
exchange for 93,492,857 shares of Loews common stock, reflecting an
exchange ratio of 0.70 (the “Exchange
Offer”).
|
As a result of the Separation, Lorillard
is no longer a subsidiary of Loews and Loews no longer owns any interest in the
outstanding stock of Lorillard. As of the completion of the Redemption, the
former Carolina Group and former Carolina Group stock have been eliminated. In
addition, at that time all outstanding stock options and stock appreciation
rights (“SARs”) awarded under the Company’s former Carolina Group 2002 Stock
Option Plan were assumed by Lorillard and converted into stock options and SARs
which are exercisable for shares of Lorillard common stock.
The Loews common stock acquired by the
Company in the Exchange Offer was recorded as a decrease in the Company’s
Shareholders’ equity, reflecting Loews common stock at market value of the
shares of Loews common stock delivered in the Exchange Offer. This decline was
offset by a $4.3 billion gain to the Company from the Exchange Offer, which was
reported as a gain on disposal of the discontinued business.
Prior to the Redemption, the Company had
a two class common stock structure: Loews common stock and former Carolina Group
stock. Former Carolina Group stock, commonly called a tracking stock, was
intended to reflect the performance of a defined group of Loews’s assets and
liabilities referred to as the former Carolina Group. The principal assets and
liabilities attributable to the former Carolina Group were Loews’s 100%
ownership of Lorillard, including all dividends paid by Lorillard to Loews, and
any and all liabilities, costs and expenses arising out of or relating to
tobacco or tobacco-related businesses. Immediately prior to the Separation,
outstanding former Carolina Group stock represented an approximately 62%
economic interest in the performance of the former Carolina Group. The Loews
Group consisted of all of Loews’s assets and liabilities other than those
allocated to the former Carolina Group, including an approximately 38% interest
in the former Carolina Group.
3. Investments
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities
|
|
$ |
476 |
|
|
$ |
526 |
|
|
$ |
994 |
|
|
$ |
1,022 |
|
Short
term investments
|
|
|
36 |
|
|
|
88 |
|
|
|
89 |
|
|
|
164 |
|
Limited
partnerships
|
|
|
46 |
|
|
|
71 |
|
|
|
7 |
|
|
|
123 |
|
Equity
securities
|
|
|
39 |
|
|
|
6 |
|
|
|
44 |
|
|
|
11 |
|
Income
from trading portfolio
|
|
|
103 |
|
|
|
96 |
|
|
|
51 |
|
|
|
188 |
|
Other
|
|
|
9 |
|
|
|
21 |
|
|
|
21 |
|
|
|
41 |
|
Total
investment income
|
|
|
709 |
|
|
|
808 |
|
|
|
1,206 |
|
|
|
1,549 |
|
Investment expense
|
|
|
(12 |
) |
|
|
(23 |
) |
|
|
(30 |
) |
|
|
(31 |
) |
Net investment income
|
|
$ |
697 |
|
|
$ |
785 |
|
|
$ |
1,176 |
|
|
$ |
1,518 |
|
Investment
gains (losses) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
$ |
(158 |
) |
|
$ |
(266 |
) |
|
$ |
(160 |
) |
|
$ |
(283 |
) |
Equity
securities, including short positions
|
|
|
(14 |
) |
|
|
10 |
|
|
|
(29 |
) |
|
|
14 |
|
Derivative
instruments
|
|
|
56 |
|
|
|
147 |
|
|
|
12 |
|
|
|
139 |
|
Short
term investments
|
|
|
5 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
Other, including guaranteed separate account
business
|
|
|
|
|
|
|
1 |
|
|
|
8 |
|
|
|
1 |
|
Investment
losses
|
|
|
(111 |
) |
|
|
(108 |
) |
|
|
(162 |
) |
|
|
(129 |
) |
Gain on issuance of subsidiary stock (Note
11)
|
|
|
2 |
|
|
|
4 |
|
|
|
2 |
|
|
|
139 |
|
|
|
|
(109 |
) |
|
|
(104 |
) |
|
|
(160 |
) |
|
|
10 |
|
Income
tax (expense) benefit
|
|
|
39 |
|
|
|
36 |
|
|
|
57 |
|
|
|
(5 |
) |
Minority interest
|
|
|
6 |
|
|
|
10 |
|
|
|
10 |
|
|
|
12 |
|
Investment gains (losses),
net
|
|
$ |
(64 |
) |
|
$ |
(58 |
) |
|
$ |
(93 |
) |
|
$ |
17 |
|
Other-than-temporary
impairment (“OTTI”) losses of $170 million were recorded primarily in the
asset-backed bonds sector for the three months ended June 30, 2008. This
compared to OTTI losses of $176 million recorded primarily in the corporate and
other taxable bonds, asset-backed bonds and U.S. Government bonds sectors for
the three months ended June 30, 2007. Realized investment losses included OTTI
losses of $256 million, recorded primarily in the asset-backed bonds sector for
the six months ended June 30, 2008. This compared to OTTI losses of $263 million
recorded primarily in the corporate and other taxable bonds, asset-backed bonds
and U.S. Government bonds sectors for the six months ended June 30, 2007. The
OTTI losses for 2008 were primarily driven by credit issue related OTTI losses.
These OTTI losses were driven mainly by credit market conditions and the
continued disruption caused by issues surrounding the sub-prime residential
mortgage (sub-prime) crisis.
The Company’s investment policies
emphasize high credit quality and diversification by industry, issuer and issue.
Assets supporting interest rate sensitive liabilities are segmented within the
general account to facilitate asset/liability duration
management.
In 2008, the Company re-evaluated its
classification of preferred stocks between redeemable and non-redeemable
and determined that certain securities that were previously classified as
redeemable preferred stock have characteristics similar to equities. These
securities are presented as preferred stock securities included in Equity
securities available-for-sale beginning with the June 30, 2008 Consolidated
Condensed Balance Sheet.
The amortized cost and market values of
securities are as follows:
|
|
|
|
|
|
|
|
Gross Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Less
Than
|
|
|
12 Months
|
|
|
|
|
June 30, 2008
|
|
Cost
|
|
|
Gains
|
|
|
12 Months
|
|
|
or Greater
|
|
|
Fair Value
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and
obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of government
agencies
|
|
$ |
597 |
|
|
$ |
92 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
687 |
|
Asset-backed
securities
|
|
|
10,695 |
|
|
|
69 |
|
|
|
328 |
|
|
|
524 |
|
|
|
9,912 |
|
States, municipalities and
political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions-tax
exempt
|
|
|
7,153 |
|
|
|
46 |
|
|
|
255 |
|
|
|
111 |
|
|
|
6,833 |
|
Corporate
|
|
|
9,690 |
|
|
|
170 |
|
|
|
389 |
|
|
|
144 |
|
|
|
9,327 |
|
Other debt
|
|
|
3,756 |
|
|
|
100 |
|
|
|
131 |
|
|
|
24 |
|
|
|
3,701 |
|
Redeemable preferred stocks
|
|
|
49 |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
49 |
|
Fixed
maturities available-for-sale
|
|
|
31,940 |
|
|
|
478 |
|
|
|
1,105 |
|
|
|
804 |
|
|
|
30,509 |
|
Fixed maturities, trading
|
|
|
482 |
|
|
|
6 |
|
|
|
3 |
|
|
|
14 |
|
|
|
471 |
|
Total fixed maturities
|
|
|
32,422 |
|
|
|
484 |
|
|
|
1,108 |
|
|
|
818 |
|
|
|
30,980 |
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
available-for-sale
|
|
|
1,507 |
|
|
|
210 |
|
|
|
186 |
|
|
|
109 |
|
|
|
1,422 |
|
Equity securities, trading
|
|
|
760 |
|
|
|
128 |
|
|
|
68 |
|
|
|
46 |
|
|
|
774 |
|
Total equity securities
|
|
|
2,267 |
|
|
|
338 |
|
|
|
254 |
|
|
|
155 |
|
|
|
2,196 |
|
Short
term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investments
available-for-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sale
|
|
|
6,262 |
|
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
6,260 |
|
Short term investments,
trading
|
|
|
3,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,476 |
|
Total short term
investments
|
|
|
9,738 |
|
|
|
1 |
|
|
|
3 |
|
|
|
- |
|
|
|
9,736 |
|
Total
|
|
$ |
44,427 |
|
|
$ |
823 |
|
|
$ |
1,365 |
|
|
$ |
973 |
|
|
$ |
42,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and obligations
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
government agencies
|
|
$ |
594 |
|
|
$ |
93 |
|
|
|
|
|
|
|
|
$ |
687 |
|
Asset-backed
securities
|
|
|
11,777 |
|
|
|
39 |
|
|
$ |
223 |
|
|
$ |
183 |
|
|
|
11,410 |
|
States, municipalities and
political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions-tax exempt
|
|
|
7,615 |
|
|
|
144 |
|
|
|
82 |
|
|
|
2 |
|
|
|
7,675 |
|
Corporate
|
|
|
8,867 |
|
|
|
246 |
|
|
|
149 |
|
|
|
12 |
|
|
|
8,952 |
|
Other debt
|
|
|
4,143 |
|
|
|
208 |
|
|
|
48 |
|
|
|
4 |
|
|
|
4,299 |
|
Redeemable preferred stocks
|
|
|
1,216 |
|
|
|
2 |
|
|
|
160 |
|
|
|
|
|
|
|
1,058 |
|
Fixed
maturities available-for-sale
|
|
|
34,212 |
|
|
|
732 |
|
|
|
662 |
|
|
|
201 |
|
|
|
34,081 |
|
Fixed maturities, trading
|
|
|
604 |
|
|
|
6 |
|
|
|
19 |
|
|
|
9 |
|
|
|
582 |
|
Total fixed maturities
|
|
|
34,816 |
|
|
|
738 |
|
|
|
681 |
|
|
|
210 |
|
|
|
34,663 |
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
available-for-sale
|
|
|
366 |
|
|
|
214 |
|
|
|
12 |
|
|
|
|
|
|
|
568 |
|
Equity securities, trading
|
|
|
777 |
|
|
|
99 |
|
|
|
69 |
|
|
|
28 |
|
|
|
779 |
|
Total equity securities
|
|
|
1,143 |
|
|
|
313 |
|
|
|
81 |
|
|
|
28 |
|
|
|
1,347 |
|
Short
term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investments
available-for-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sale
|
|
|
5,600 |
|
|
|
3 |
|
|
|
1 |
|
|
|
|
|
|
|
5,602 |
|
Short term investments,
trading
|
|
|
2,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,628 |
|
Total short term
investments
|
|
|
8,228 |
|
|
|
3 |
|
|
|
1 |
|
|
|
- |
|
|
|
8,230 |
|
Total
|
|
$ |
44,187 |
|
|
$ |
1,054 |
|
|
$ |
763 |
|
|
$ |
238 |
|
|
$ |
44,240 |
|
The following table summarizes,
available-for-sale securities in an unrealized loss position at June 30, 2008
and December 31, 2007, the aggregate fair value and gross unrealized loss by
length of time those securities have been continuously in an unrealized loss
position.
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Loss
|
|
|
Fair Value
|
|
|
Loss
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6
months
|
|
$ |
11,981 |
|
|
$ |
628 |
|
|
$ |
4,771 |
|
|
$ |
228 |
|
7-12
months
|
|
|
2,543 |
|
|
|
431 |
|
|
|
1,584 |
|
|
|
193 |
|
13-24
months
|
|
|
1,477 |
|
|
|
346 |
|
|
|
690 |
|
|
|
57 |
|
Greater than 24 months
|
|
|
2,057 |
|
|
|
244 |
|
|
|
3,869 |
|
|
|
138 |
|
Total investment grade
available-for-sale
|
|
|
18,058 |
|
|
|
1,649 |
|
|
|
10,914 |
|
|
|
616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment
grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6
months
|
|
|
1,012 |
|
|
|
70 |
|
|
|
1,527 |
|
|
|
73 |
|
7-12
months
|
|
|
1,262 |
|
|
|
149 |
|
|
|
125 |
|
|
|
8 |
|
13-24
months
|
|
|
147 |
|
|
|
36 |
|
|
|
26 |
|
|
|
4 |
|
Greater than 24 months
|
|
|
8 |
|
|
|
4 |
|
|
|
9 |
|
|
|
2 |
|
Total non-investment grade
available-for-sale
|
|
|
2,429 |
|
|
|
259 |
|
|
|
1,687 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
available-for-sale
|
|
|
20,487 |
|
|
|
1,908 |
|
|
|
12,601 |
|
|
|
703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
and non-redeemable preferred stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6
months
|
|
|
127 |
|
|
|
14 |
|
|
|
893 |
|
|
|
143 |
|
7-12
months
|
|
|
745 |
|
|
|
237 |
|
|
|
104 |
|
|
|
28 |
|
13-24
months
|
|
|
96 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
Greater than 24 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
redeemable and non-redeemable preferred stocks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-for-sale
|
|
|
968 |
|
|
|
286 |
|
|
|
997 |
|
|
|
171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6
months
|
|
|
33 |
|
|
|
9 |
|
|
|
34 |
|
|
|
1 |
|
7-12
months
|
|
|
13 |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
13-24
months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than 24 months
|
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
Total equity securities
available-for-sale
|
|
|
49 |
|
|
|
10 |
|
|
|
38 |
|
|
|
1 |
|
Total
fixed maturity and equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-for-sale
|
|
$ |
21,504 |
|
|
$ |
2,204 |
|
|
$ |
13,636 |
|
|
$ |
875 |
|
At June 30, 2008, the fair value of
the available-for-sale fixed maturities was $30,509 million, representing 67.3%
of the total investment portfolio. The unrealized position associated with the
fixed maturity portfolio included $1,909 million in gross unrealized losses,
consisting of asset-backed securities which represented 44.7%, corporate bonds
which represented 27.9%, tax-exempt bonds which represented 19.2%, and all other
fixed maturity securities which represented 8.2%. The gross unrealized loss for
any single issuer was no greater than 0.2% of the carrying value of the total
general account fixed maturity portfolio. The total fixed maturity portfolio
gross unrealized losses included 2,095 securities which were, in aggregate,
approximately 9.0% below amortized cost.
Given the current facts and
circumstances, the Company has determined that the securities presented in the
above unrealized gain/loss tables were temporarily impaired when evaluated at
June 30, 2008 or December 31, 2007, and therefore no related realized
losses were recorded. A discussion of some of the factors reviewed in making
that determination as of June 30, 2008 is presented below.
Asset-Backed
Securities
The unrealized losses on the
Company’s investments in asset-backed securities were caused by a combination of
factors related to the market disruption caused by credit concerns surrounding
the sub-prime issue, but also extended into other asset-backed securities in the
market and specifically in the Company’s portfolio.
The majority of the holdings in this
category are collateralized mortgage obligations (“CMOs”) typically
collateralized with prime residential mortgages and corporate asset-backed
structured securities. The holdings in these sectors include 624 securities in a
gross unrealized loss position aggregating $849 million. Of these securities in
a gross unrealized loss position, 54.0% are rated AAA, 19.0% are rated AA, 23.0%
are rated A and 4.0% are rated BBB or lower. The aggregate severity of the
unrealized loss was approximately 10.0% of amortized cost. The contractual cash
flows on the asset-backed structured securities are passed through, but may be
structured into classes of preference. The structured securities held are
generally secured by over collateralization or default protection provided by
subordinated tranches. Within this category, securities subject to Emerging
Issues Task Force (“EITF”) Issue No. 99-20, “Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets,” are monitored for significant adverse changes in cash flow
projections. If there are adverse changes in cash flows, the amount of
accretable yield is prospectively adjusted and an OTTI loss is recognized. As of
June 30, 2008, there was no adverse change in estimated cash flows noted for the
securities in an unrealized loss position held subject to EITF 99-20, which have
a gross unrealized loss of $214 million. The Company received $53 million of
principal repayments on these securities consistent with the cash flow
expectations. There were OTTI losses of $128 million and $179 million recorded
on asset-backed securities, $118 million and $133 million of which related to
specific EITF 99-20 securities for which the most recent evaluation did show an
adverse change in cash flows for the three and six months ended June 30,
2008.
The remainder of the holdings in this
category includes mortgage-backed securities guaranteed by an agency of the U.S.
Government. There were 186 agency mortgage-backed pass-through securities and 3
agency CMOs in an unrealized loss position aggregating $3 million as of June 30,
2008. The cumulative unrealized losses on these securities was approximately
4.0% of amortized cost. These securities do not tend to be influenced by the
credit of the issuer but rather the characteristics and projected cash flows of
the underlying collateral.
The Company believes the decline in
fair value was primarily attributable to the market disruption caused by
sub-prime related issues and other temporary market conditions and is not
indicative of the quality of the underlying collateral. Because the Company has
the ability and intent to hold these investments until an anticipated recovery
of fair value, which may be maturity, the Company considers these investments to
be temporarily impaired at June 30, 2008.
States,
Municipalities and Political Subdivisions – Tax-Exempt Securities
The unrealized losses on the
Company’s investments in municipal securities were caused primarily by changes
in credit spreads, and to a lesser extent, changes in interest rates. The
Company invests in municipal securities as an asset class for economic
benefits of the returns on the class compared to like after-tax returns on
alternative classes. The holdings in this category include 584 securities in a
gross unrealized loss position aggregating $366 million with all of these
unrealized losses related to investment grade securities (rated BBB- or higher)
where the cash flows are supported by the credit of the issuer. The aggregate
severity of the unrealized losses was approximately 7.0% of amortized cost.
Because the Company has the ability and intent to hold these investments until
an anticipated recovery of fair value, which may be maturity, the Company
considers these investments to be temporarily impaired at June 30, 2008. There
were no OTTI losses recorded on municipal securities for the three and six
months ended June 30, 2008.
Corporate
Bonds
The holdings in this category include
545 securities in a gross unrealized loss position aggregating $533 million. Of
the unrealized losses in this category, 59.0% relate to securities rated as
investment grade. The total holdings in this category are diversified across 11
industry sectors. The aggregate severity of the unrealized losses were
approximately 8.0% of amortized cost. Within corporate bonds, the industry
sectors with the largest gross unrealized losses were financial, consumer
cyclical, communications and industrial, which as a percentage of total gross
unrealized losses were approximately 39.0%, 21.0%, 11.0% and 8.0% at June 30,
2008. The decline in fair value was primarily attributable to deterioration in
the broader credit markets that resulted in widening of credit spreads over risk
free rates and macro conditions in certain sectors that the market viewed as out
of favor. Because the decline was not related to specific credit quality issues,
and because the Company has the ability and intent to hold these investments
until an anticipated recovery of fair value, which may be maturity, the Company
considers these
investments
to be temporarily impaired at June 30, 2008. There were OTTI losses of $22
million and $32 million recorded on corporate bonds for the three and six months
ended June 30, 2008.
Preferred
Stock
The unrealized losses on the
Company’s investments in preferred stock were caused by similar factors as those
that affected the Company’s corporate bond portfolio. Approximately 70.0% of the
gross unrealized losses in this category come from securities issued
by financial institutions, 27.0% from government agency issued securities
and 3.0% from utilities. The holdings in this category include 48 securities in
a gross unrealized loss position aggregating $286 million. Of these securities
in a gross unrealized loss position, 27.0% are rated AA, 39.0% are rated A,
29.0% are rated BBB and 5.0% are rated lower than BBB. The Company believes the
holdings in this category have been adversely impacted by changes in short term
interest rates and significant credit spread widening brought on by a
combination of factors in the capital markets. Many of the securities in this
category are related to the banking and mortgage industries and are experiencing
what the Company believes to be temporarily depressed valuations. Because the
Company has the ability and intent to hold these investments until an
anticipated recovery of fair value, the Company considers these investments to
be temporarily impaired at June 30, 2008. There were OTTI losses of $3 million
and $8 million recorded on preferred stock for the three and six months ended
June 30, 2008.
Investment
Commitments
As of June 30, 2008 and December 31,
2007, the Company had committed approximately $528 million and $461 million to
future capital calls from various third-party limited partnership investments in
exchange for an ownership interest in the related partnerships.
The Company invests in multiple bank
loan participations as part of its overall investment strategy and has committed
to additional future purchases and sales. The purchase and sale of these
investments are recorded on the date that the legal agreements are finalized and
cash settlement is made. As of June 30, 2008 and December 31, 2007, the Company
had commitments to purchase $76 million and $58 million and sell $4 million and
$3 million of various bank loan participations. When loan participation
purchases are settled and recorded they may contain both funded and unfunded
amounts. An unfunded loan represents an obligation by the Company to provide
additional amounts under the terms of the loan participation. The funded
portions are reflected on the Consolidated Condensed Balance Sheets, while any
unfunded amounts are not recorded until a draw is made under the loan facility.
As of June 30, 2008 and December 31, 2007, the Company had obligations on
unfunded bank loan participations in the amount of $17 million and $23
million.
4. Fair
Value
Fair value is the price that would be
received upon sale of an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The following
fair value hierarchy is used in selecting inputs, with the highest priority
given to Level 1, as these are the most transparent or reliable:
|
·
|
Level
1 – Quoted prices for identical instruments in active
markets.
|
|
·
|
Level
2 – Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs are observable in
active markets.
|
|
·
|
Level
3 – Valuations derived from valuation techniques in which one or more
significant inputs are
unobservable.
|
The Company is responsible for the
valuation process and seeks to obtain quoted market prices for all securities.
When quoted market prices are not available, the Company uses a number of
methodologies including discounted cash flow models, prices from recently
executed transactions of similar securities or broker/dealer quotes using market
observable information to the extent possible to establish fair value estimates.
In conjunction with modeling activities, the Company may use external data as
inputs. The modeled inputs are consistent with observable market information
when available, or with the Company’s assumptions as to what market participants
would use to value the securities. As further validation of the Company’s
valuation process, the Company samples its past fair value estimates and
compares the valuations to actual transactions executed in the market on similar
dates.
The fair values of CNA’s life settlement
contracts investments are included in Other assets. Assets and liabilities
measured at fair value on a recurring basis are summarized below:
June 30, 2008
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity
securities
|
|
$ |
688 |
|
|
$ |
26,858 |
|
|
$ |
3,434 |
|
|
$ |
30,980 |
|
Equity
securities
|
|
|
1,831 |
|
|
|
102 |
|
|
|
263 |
|
|
|
2,196 |
|
Other
investments
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
12 |
|
Short term
investments
|
|
|
6,725 |
|
|
|
3,011 |
|
|
|
|
|
|
|
9,736 |
|
Receivables
|
|
|
|
|
|
|
29 |
|
|
|
|
|
|
|
29 |
|
Assets of discontinued
operations
|
|
|
36 |
|
|
|
111 |
|
|
|
23 |
|
|
|
170 |
|
Other assets
|
|
|
|
|
|
|
18 |
|
|
|
118 |
|
|
|
136 |
|
Separate account business
|
|
|
42 |
|
|
|
359 |
|
|
|
45 |
|
|
|
446 |
|
Total
|
|
$ |
9,322 |
|
|
$ |
30,488 |
|
|
$ |
3,895 |
|
|
$ |
43,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable to brokers
|
|
$ |
(196 |
) |
|
$ |
(364 |
) |
|
$ |
(95 |
) |
|
$ |
(655 |
) |
The tables below presents a
reconciliation 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, 2008:
|
|
Fixed
|
|
|
|
|
|
|
|
|
Assets
of
|
|
|
|
|
|
Separate
|
|
|
Derivative
|
|
|
|
Maturity
|
|
|
Equity
|
|
|
Short
Term
|
|
|
Discontinued
|
|
|
Other
|
|
|
Account
|
|
|
Financial
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Investments
|
|
|
Operations
|
|
|
Assets
|
|
|
Business
|
|
|
Instruments,
Net
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
April 1, 2008
|
|
$ |
2,471 |
|
|
$ |
196 |
|
|
$ |
85 |
|
|
$ |
41 |
|
|
$ |
118 |
|
|
$ |
47 |
|
|
$ |
(90 |
) |
Total
net realized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and net change in
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains (losses) on
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Net
income
|
|
|
(81 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
10 |
|
Included in
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income (loss)
|
|
|
(55 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
(9 |
) |
Purchases,
sales, issuances and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
settlements
|
|
|
80 |
|
|
|
48 |
|
|
|
|
|
|
|
(1 |
) |
|
|
(12 |
) |
|
|
2 |
|
|
|
6 |
|
Net
transfers in (out) of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
1,019 |
|
|
|
22 |
|
|
|
(85 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2008
|
|
$ |
3,434 |
|
|
$ |
263 |
|
|
$ |
- |
|
|
$ |
23 |
|
|
$ |
118 |
|
|
$ |
45 |
|
|
$ |
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2008
|
|
$ |
2,909 |
|
|
$ |
199 |
|
|
$ |
85 |
|
|
$ |
42 |
|
|
$ |
115 |
|
|
$ |
30 |
|
|
$ |
(19 |
) |
Total
net realized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and net change in
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains (losses) on
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Net
income
|
|
|
(124 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
(21 |
) |
Included in
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income (loss)
|
|
|
(270 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
3 |
|
Purchases,
sales, issuances and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
settlements
|
|
|
81 |
|
|
|
48 |
|
|
|
|
|
|
|
(2 |
) |
|
|
(27 |
) |
|
|
(1 |
) |
|
|
(46 |
) |
Net
transfers in (out) of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
838 |
|
|
|
22 |
|
|
|
(85 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
20 |
|
|
|
|
|
Balance,
June 30, 2008
|
|
$ |
3,434 |
|
|
$ |
263 |
|
|
$ |
- |
|
|
$ |
23 |
|
|
$ |
118 |
|
|
$ |
45 |
|
|
$ |
(83 |
) |
The tables below summarize gains and
losses due to changes in fair value, including both realized and unrealized
gains and losses, recorded in Net income for Level 3 assets and liabilities for
the three and six months ended June 30, 2008.
|
|
Fixed
|
|
|
|
|
|
|
|
|
Derivative
|
|
|
|
|
|
|
Maturity
|
|
|
Equity
|
|
|
Other
|
|
|
Financial
|
|
|
|
|
Three
Months Ended June 30, 2008
|
|
Securities
|
|
|
Securities
|
|
|
Assets
|
|
|
Instruments,
Net
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income (loss)
|
|
$ |
8 |
|
|
$ |
(1 |
) |
|
|
|
|
|
|
|
$ |
7 |
|
Investment
gains (losses)
|
|
|
(89 |
) |
|
|
|
|
|
|
|
|
$ |
23 |
|
|
|
(66 |
) |
Other
revenues
|
|
|
|
|
|
|
|
|
|
$ |
12 |
|
|
|
(13 |
) |
|
|
(1 |
) |
Total
|
|
$ |
(81 |
) |
|
$ |
(1 |
) |
|
$ |
12 |
|
|
$ |
10 |
|
|
$ |
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income (loss)
|
|
$ |
6 |
|
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
$ |
5 |
|
Investment
gains (losses)
|
|
|
(130 |
) |
|
|
(2 |
) |
|
|
|
|
|
$ |
1 |
|
|
|
(131 |
) |
Other
revenues
|
|
|
|
|
|
|
|
|
|
$ |
30 |
|
|
|
(22 |
) |
|
|
8 |
|
Total
|
|
$ |
(124 |
) |
|
$ |
(3 |
) |
|
$ |
30 |
|
|
$ |
(21 |
) |
|
$ |
(118 |
) |
The tables below summarize changes in unrealized gains or losses recorded in Net
income for the three and six months ended June 30, 2008 for Level 3 assets and
liabilities still held at June 30, 2008.
|
|
Fixed
|
|
|
|
|
|
|
|
|
Derivative
|
|
|
|
|
|
Maturity
|
|
|
Equity
|
|
|
Other
|
|
|
Financial
|
|
|
|
Three
Months Ended June 30, 2008
|
|
Securities
|
|
|
Securities
|
|
|
Assets
|
|
|
Instruments,
Net
|
|
|
Total
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income (loss)
|
|
$ |
(2 |
) |
|
$ |
(1 |
) |
|
|
|
|
|
|
|
$ |
(3 |
) |
Investment
gains (losses)
|
|
|
(90 |
) |
|
|
(2 |
) |
|
|
|
|
$ |
15 |
|
|
|
(77 |
) |
Other
revenues
|
|
|
|
|
|
|
|
|
|
$ |
1 |
|
|
|
|
|
|
|
1 |
|
Total
|
|
$ |
(92 |
) |
|
$ |
(3 |
) |
|
$ |
1 |
|
|
$ |
15 |
|
|
$ |
(79 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income (loss)
|
|
$ |
(6 |
) |
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
$ |
(7 |
) |
Investment
losses
|
|
|
(133 |
) |
|
|
(4 |
) |
|
|
|
|
|
$ |
(69 |
) |
|
|
(206 |
) |
Other
revenues
|
|
|
|
|
|
|
|
|
|
$ |
5 |
|
|
|
|
|
|
|
5 |
|
Total
|
|
$ |
(139 |
) |
|
$ |
(5 |
) |
|
$ |
5 |
|
|
$ |
(69 |
) |
|
$ |
(208 |
) |
Securities transferred into Level 3 for
the three and six months ended June 30, 2008 relate primarily to tax-exempt
auction rate certificates, included within Fixed maturity securities. These were
previously valued using observable prices for similar securities, but due to
decreased market liquidity, fair value is determined by cash flow models using
market observable and unobservable inputs.
The following section describes the
valuation methodologies used to measure different financial instruments at fair
value, including an indication of the level in the fair value hierarchy in which
the instrument is generally classified.
Fixed
Maturity Securities
Level 1 securities include highly liquid
government bonds for which quoted market prices are available. The remaining
fixed maturity securities are valued using pricing for similar securities,
recently executed transactions, cash flow models with yield curves,
broker/dealer quotes and other pricing models utilizing observable inputs. The
valuation for most fixed income securities, excluding government bonds, is
classified as Level 2. Securities within Level 2 include certain corporate
bonds, municipal bonds, asset-backed securities, mortgage-backed pass-through
securities and redeemable preferred stock. Securities are generally assigned to
Level 3 in cases where broker/dealer quotes are significant inputs to the
valuation and there is a lack of transparency as to whether these quotes are
based on information that is observable in the marketplace. Level 3 securities
include certain corporate bonds, asset-backed securities, municipal bonds and
redeemable preferred stock.
Equity
Securities
Level 1 securities include publicly
traded securities valued using quoted market prices. Level 2 securities are
primarily non-redeemable preferred securities and common stocks valued using
pricing for similar securities, recently executed transactions, broker/dealer
quotes and other pricing models utilizing observable inputs. Level 3 securities
include one equity security, which represents 67.7% of the total, in an entity
which is not publicly traded and is valued based on a discounted cash flow
analysis model which is adjusted for the Company’s assumption regarding an
inherent lack of liquidity in the security. The remaining non-redeemable
preferred stocks and equity securities are primarily valued using inputs
including broker/dealer quotes for which there is a lack of transparency as to
whether these quotes are based on information that is observable in the
marketplace.
Derivative
Financial Instruments
Exchange traded derivatives are valued
using quoted market prices and are classified within Level 1 of the fair value
hierarchy. Over-the-counter derivatives, principally credit default and interest
rate swaps, forwards and options, represent the present value of amounts
estimated to be received from or paid to a marketplace participant in settlement
of these instruments. They are valued using inputs including broker/dealer
quotes and are classified within Level 2 or Level 3 of the valuation hierarchy,
depending on the amount of transparency as to whether these quotes are based on
information that is observable in the marketplace.
Short
Term Investments
The valuation of securities that are
actively traded or have quoted prices are classified as Level 1. These
securities include money market funds and treasury bills. Level 2 includes
commercial paper, for which all inputs are observable.
Life
Settlement Contracts
The fair values of life settlement
contracts are estimated using discounted cash flows based on CNA’s own
assumptions for mortality, premium expense, and the rate of return that a buyer
would require on the contracts, as no comparable market pricing data is
available.
Discontinued
Operations Investments
Assets relating to CNA’s discontinued
operations include fixed maturity securities, equities and short term
investments. The valuation methodologies for these asset types have been
described above.
Separate
Account Business
Separate account business includes fixed
maturity securities, equities and short term investments. The valuation
methodologies for these asset types have been described above.
5. Earnings
Per Share
Companies
with complex capital structures are required to present basic and diluted
earnings per share. Basic earnings per share excludes dilution and is computed
by dividing net income attributable to each class of common stock by the
weighted average number of common shares of each class of common stock
outstanding for the period. Diluted earnings 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.
Prior to the Separation, the Company had
two classes of common stock: former Carolina Group stock, a tracking
stock intended to reflect the economic performance of a group of the Company’s
assets and liabilities, called the former Carolina Group, principally consisting
of Lorillard, Inc. and Loews common stock, representing the economic performance
of the Company’s remaining assets, including the interest in the former Carolina
Group not represented by former Carolina Group stock.
The attribution of income to each class
of common stock for the three and six months ended June 30, 2008 and 2007 was as
follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions, except %)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net
income
|
|
$ |
4,963 |
|
|
$ |
654 |
|
|
$ |
5,625 |
|
|
$ |
1,422 |
|
Less income attributable to
former Carolina Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
|
|
|
104 |
|
|
|
141 |
|
|
|
211 |
|
|
|
259 |
|
Income attributable to Loews common
stock
|
|
$ |
4,859 |
|
|
$ |
513 |
|
|
$ |
5,414 |
|
|
$ |
1,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former
Carolina Group stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to former
Carolina Group stock
|
|
$ |
168 |
|
|
$ |
227 |
|
|
$ |
339 |
|
|
$ |
416 |
|
Weighted average economic
interest of the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
former Carolina Group
|
|
|
62.4 |
% |
|
|
62.4 |
% |
|
|
62.4 |
% |
|
|
62.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to former Carolina Group
stock
|
|
$ |
104 |
|
|
$ |
141 |
|
|
$ |
211 |
|
|
$ |
259 |
|
The following is a reconciliation of
basic weighted shares outstanding to diluted weighted shares:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding-basic
|
|
|
508.16 |
|
|
|
536.30 |
|
|
|
518.93 |
|
|
|
538.90 |
|
Stock options and stock appreciation
rights
|
|
|
1.27 |
|
|
|
1.20 |
|
|
|
1.24 |
|
|
|
1.11 |
|
Weighted average shares
outstanding-diluted
|
|
|
509.43 |
|
|
|
537.50 |
|
|
|
520.17 |
|
|
|
540.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former
Carolina Group stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding-basic
|
|
|
108.48 |
|
|
|
108.44 |
|
|
|
108.47 |
|
|
|
108.41 |
|
Stock options and stock appreciation
rights
|
|
|
0.12 |
|
|
|
0.12 |
|
|
|
0.13 |
|
|
|
0.13 |
|
Weighted average shares
outstanding-diluted
|
|
|
108.60 |
|
|
|
108.56 |
|
|
|
108.60 |
|
|
|
108.54 |
|
Certain
options and stock appreciation rights were not included in the diluted weighted
shares amount due to the exercise price being greater than the average stock
price for the respective periods. The number of weighted average shares not
included in the diluted computations is as follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock
|
|
|
1,179,504 |
|
|
|
2,633 |
|
|
|
1,176,438 |
|
|
|
1,324 |
|
Former
Carolina Group stock
|
|
|
310,125 |
|
|
|
549 |
|
|
|
255,983 |
|
|
|
25,414 |
|
6. Receivables
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
$ |
8,242 |
|
|
$ |
8,689 |
|
Other
insurance
|
|
|
2,284 |
|
|
|
2,284 |
|
Security
sales
|
|
|
848 |
|
|
|
163 |
|
Accrued
investment income
|
|
|
331 |
|
|
|
340 |
|
Other
|
|
|
1,011 |
|
|
|
791 |
|
Total
|
|
|
12,716 |
|
|
|
12,267 |
|
Less: allowance
for doubtful accounts on reinsurance receivables
|
|
|
445 |
|
|
|
461 |
|
allowance for other doubtful accounts and cash
discounts
|
|
|
306 |
|
|
|
337 |
|
Receivables
|
|
$ |
11,965 |
|
|
$ |
11,469 |
|
7. Property,
Plant and Equipment
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
70 |
|
|
$ |
70 |
|
Buildings
and building equipment
|
|
|
638 |
|
|
|
670 |
|
Offshore
drilling equipment
|
|
|
5,000 |
|
|
|
4,540 |
|
Machinery
and equipment
|
|
|
1,343 |
|
|
|
1,313 |
|
Pipeline
equipment
|
|
|
3,397 |
|
|
|
2,445 |
|
Natural
gas and NGL proved and unproved properties
|
|
|
3,123 |
|
|
|
2,869 |
|
Construction
in process
|
|
|
1,638 |
|
|
|
1,423 |
|
Leaseholds and leasehold
improvements
|
|
|
76 |
|
|
|
79 |
|
Total
|
|
|
15,285 |
|
|
|
13,409 |
|
Less accumulated depreciation, depletion and
amortization
|
|
|
3,503 |
|
|
|
3,191 |
|
Property, plant and
equipment
|
|
$ |
11,782 |
|
|
$ |
10,218 |
|
Diamond
Offshore Construction Projects
Construction in process at June 30,
2008, included $286 million related to the major upgrade of the Ocean Monarch to
ultra-deepwater service and $149 million related to the construction of the
Ocean Scepter. Diamond Offshore
anticipates delivery of the Ocean Scepter in the third
quarter of 2008 and expects the upgrade of the Ocean Monarch to be completed
in late 2008. Construction of the Ocean Shield was completed in
the second quarter of 2008.
Boardwalk
Pipeline Expansion Projects
In 2008, Boardwalk Pipeline placed in
service the remaining pipeline assets associated with the East Texas to
Mississippi Expansion project from Delhi, Louisiana to Harrisville, Mississippi
and related compression. In addition, the pipeline assets and one compressor
station related to the Southeast Expansion project were placed in service. As a
result, approximately $913 million was transferred from Construction in process
to Pipeline equipment. The assets will generally be depreciated over a term of
35 years.
8. Claim
and Claim Adjustment Expense Reserves
CNA’s property and casualty insurance
claim and claim adjustment expense reserves represent the estimated amounts
necessary to resolve all outstanding claims, including claims that are incurred
but not reported (“IBNR”) as of the reporting date. CNA’s reserve projections
are based primarily on detailed analysis of the facts in each case, CNA’s
experience with similar cases and various historical development patterns.
Consideration is given to such historical patterns as field reserving trends and
claims settlement practices, loss payments, pending levels of unpaid claims and
product mix, as well as court decisions, economic conditions 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 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.
Catastrophes are an inherent risk of the
property and casualty insurance business and have contributed to material
period-to-period fluctuations in the Company’s results of operations and/or
equity. Catastrophe losses related to events occurring for the three and six
months ended June 30, 2008, net of reinsurance, were $47 million and $100
million. Catastrophe losses in 2008 related primarily to storms, floods, and
tornadoes. Catastrophe losses related to events occurring for the three and six
months ended June 30, 2007, net of reinsurance, were $12 million and $44
million. Catastrophe losses in 2007 related primarily to tornadoes, floods and
winter storms. There can be no assurance that CNA’s ultimate cost for
catastrophes will not exceed current estimates.
The following provides discussion of
CNA’s asbestos and environmental pollution (“A&E”) reserves.
A&E
Reserves
CNA’s property and casualty insurance
subsidiaries have actual and potential exposures related to A&E claims. The
following table provides data related to CNA’s A&E claim and claim
adjustment expense reserves.
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental
|
|
|
|
|
|
Environmental
|
|
|
|
Asbestos
|
|
|
Pollution
|
|
|
Asbestos
|
|
|
Pollution
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
reserves
|
|
$ |
2,206 |
|
|
$ |
326 |
|
|
$ |
2,352 |
|
|
$ |
367 |
|
Ceded reserves
|
|
|
(977 |
) |
|
|
(118 |
) |
|
|
(1,030 |
) |
|
|
(125 |
) |
Net reserves
|
|
$ |
1,229 |
|
|
$ |
208 |
|
|
$ |
1,322 |
|
|
$ |
242 |
|
Asbestos
CNA recorded $6 million and $3 million
of unfavorable asbestos-related net claim and claim adjustment expense reserve
development for the six months ended June 30, 2008 and 2007. CNA paid
asbestos-related claims, net of reinsurance recoveries, of $99 million and $89
million for the six months ended June 30, 2008 and 2007.
The ultimate cost of reported claims,
and in particular A&E claims, is subject to a great many uncertainties,
including future developments of various kinds that CNA does not control and
that are difficult or impossible to foresee accurately. With respect to the
litigation identified below in particular, numerous factual and legal issues
remain unresolved. Rulings on those issues by the courts are critical to the
evaluation of the ultimate cost to CNA. The outcome of the litigation cannot be
predicted with any reliability. Accordingly, the extent of losses beyond any
amounts that may be accrued are not readily determinable at this
time.
Some asbestos-related defendants have
asserted that their insurance policies are not subject to aggregate limits on
coverage. CNA has such claims from a number of insureds. Some of these claims
involve insureds facing exhaustion of products liability aggregate limits in
their policies, who have asserted that their asbestos-related claims fall within
so-called “non-products” liability coverage contained within their policies
rather than products liability coverage, and that the claimed “non-products”
coverage is not subject to any aggregate limit. It is difficult to predict the
ultimate size of any of the claims for coverage purportedly not subject to
aggregate limits or predict to what extent, if any, the attempts to assert
“non-products” claims outside the products liability aggregate will succeed.
CNA’s policies also contain other limits applicable to these claims and CNA has
additional coverage defenses to certain claims. CNA has attempted to manage its
asbestos exposure by aggressively seeking to settle claims on acceptable terms.
There can be no assurance that any of these settlement efforts will be
successful, or that any such claims can be settled on terms acceptable to CNA.
Where CNA cannot settle a claim on acceptable terms, CNA aggressively litigates
the claim. However, adverse developments with respect to such matters could have
a material adverse effect on the Company’s results of operations and/or
equity.
Certain
asbestos claim litigation in which CNA is currently engaged is described
below:
On February 13, 2003, CNA announced it
had resolved asbestos-related coverage litigation and claims involving A.P.
Green Industries, A.P. Green Services and Bigelow–Liptak Corporation. Under the
agreement, CNA is required to pay $70 million, net of reinsurance recoveries,
over a ten year period commencing after the final approval of a bankruptcy plan
of reorganization. The settlement received initial bankruptcy court approval on
August 18, 2003. The debtor’s plan of reorganization includes an injunction to
protect CNA from any future claims. The bankruptcy court issued an opinion on
September 24, 2007 recommending confirmation of that plan. Several insurers have
appealed that ruling; that appeal is pending at this time.
CNA is engaged in insurance coverage
litigation in New York State Court, filed in 2003, with a defendant class of
underlying plaintiffs who have asbestos bodily injury claims against the former
Robert A. Keasbey Company (“Keasbey”) (Continental Casualty Co. v.
Employers Ins. of Wausau et al., No. 601037/03 (N.Y. County)). Keasbey, a
currently dissolved corporation, was a seller and installer of
asbestos-containing insulation products in New York and New Jersey. Thousands of
plaintiffs have filed bodily injury claims against Keasbey. However, under New
York court rules, asbestos claims are not cognizable unless they meet certain
minimum medical impairment standards. Since 2002, when these court rules were
adopted, only a small portion of such claims have met medical impairment
criteria under New York court rules and as to the remaining claims, Keasbey’s
involvement at a number of work sites is a highly contested issue.
CNA issued Keasbey primary policies for
1970-1987 and excess policies for 1971-1978. CNA has paid an amount
substantially equal to the policies’ aggregate limits for products and completed
operations claims in the confirmed CNA policies. Claimants against Keasbey
allege, among other things, that CNA owes coverage under sections of the
policies not subject to the aggregate limits, an allegation CNA vigorously
contests in the lawsuit. In the litigation, CNA and the claimants seek
declaratory relief as to the interpretation of various policy provisions. On May
8, 2007, the Court in the first phase of the trial held that all of CNA’s
primary policy products aggregates were exhausted and that past products
liability claims could not be recharacterized as operations claims. The Court
also found that while operations claims would not be subject to products
aggregates, such claims could be made only against the policies in effect when
the claimants were exposed to asbestos from Keasbey operations. These holdings
limit CNA’s exposure to those instances where Keasbey used asbestos in
operations between 1970 and 1987. Keasbey largely ceased using asbestos in its
operations in the early 1970’s. CNA noticed an appeal to the Appellate Division
to challenge certain aspects of the Court’s ruling. Other insurer parties to the
litigation also filed separate notices of appeal to the Court’s ruling. The
appeal was fully briefed and was argued on December 6, 2007. Numerous legal
issues remain to be resolved on appeal with respect to coverage that are
critical to the final result, which cannot be predicted with any reliability.
Accordingly, the extent of losses beyond any amounts that may be accrued are not
readily determinable at this time.
CNA has insurance coverage disputes
related to asbestos bodily injury claims against a bankrupt insured, Burns &
Roe Enterprises, Inc. (“Burns & Roe”). These disputes are currently part of
coverage litigation (stayed in view of the bankruptcy) and an adversary
proceeding in In re: Burns
& Roe Enterprises, Inc., pending in the U.S. Bankruptcy Court for the
District of New Jersey, No. 00-41610. Burns & Roe provided engineering and
related services in connection with construction projects. At the time of its
bankruptcy filing, on December 4, 2000, Burns & Roe asserted that it faced
approximately 11,000 claims alleging bodily injury resulting from exposure to
asbestos as a result of construction projects in which Burns & Roe was
involved. CNA allegedly provided primary liability coverage to Burns & Roe
from 1956-1969 and 1971-1974, along with certain project-specific policies from
1964-1970. In September of 2007, CNA entered into an agreement with Burns &
Roe, the Official Committee of Unsecured Creditors appointed by the Bankruptcy
Court and the Future Claims Representative (the “Addendum”), which provides that
claims allegedly covered by CNA policies will be adjudicated in the tort system,
with any coverage disputes related to those claims to be decided in coverage
litigation. With the approval of the Bankruptcy Court, Burns & Roe included
the Addendum as part of its Fourth Amended Plan (the “Plan”), which was filed on
June 9, 2008 and which will be the subject of a later confirmation hearing. With
respect to both confirmation of the Plan and coverage issues, numerous factual
and legal issues remain to be resolved that are critical to the final result,
the outcome of which cannot be predicted with any reliability. These factors
include, among others: (a) whether CNA has any further responsibility to
compensate claimants against Burns & Roe under its policies and, if so,
under which; (b) whether CNA’s responsibilities under its policies extend to a
particular claimant’s entire claim or only to a limited percentage of the claim;
(c) whether CNA’s responsibilities under its policies are limited by the
occurrence limits or other provisions of the policies; (d) whether certain
exclusions, including professional liability exclusions, in some of CNA’s
policies apply to exclude certain claims; (e) the extent to which claimants can
establish exposure to asbestos materials as to which Burns & Roe has any
responsibility; (f) the legal theories which must be pursued by such claimants
to establish the liability of Burns & Roe and whether such theories can, in
fact, be established; (g) the diseases and damages alleged by such claimants;
(h) the extent that any liability of Burns & Roe would be shared with other
potentially responsible parties; (i) whether the Plan, which includes the
Addendum, will be
approved
by the Bankruptcy Court in its current form; and (j) the impact of bankruptcy
proceedings on claims and coverage issue resolution. Accordingly, the extent of
losses beyond any amounts that may be accrued are not readily determinable at
this time.
Suits have also been initiated directly
against the CNA companies and numerous other insurers in two jurisdictions:
Texas and Montana. Approximately 80 lawsuits were filed in Texas beginning in
2002, against two CNA companies and numerous other insurers and non-insurer
corporate defendants asserting liability for failing to warn of the dangers of
asbestos (e.g. Boson v. Union
Carbide Corp., (Nueces County, Texas)). During 2003, several of the Texas
suits were dismissed and while certain of the Texas courts’ rulings were
appealed, plaintiffs later dismissed their appeals. A different Texas court,
however, denied similar motions seeking dismissal. After that court denied a
related challenge to jurisdiction, the insurers transferred the case, among
others, to a state multi-district litigation court in Harris County charged with
handling asbestos cases. In February 2006, the insurers petitioned the appellate
court in Houston for an order of mandamus, requiring the multi-district
litigation court to dismiss the case on jurisdictional and substantive grounds.
On February 29, 2008, the appellate court denied the insurers’ mandamus petition
on procedural grounds, but did not reach a decision on the merits of the
petition. Instead, the appellate court allowed to stand the multi-district
litigation court’s determination that the case remained on its inactive docket
and that no further action can be taken unless qualifying reports are filed or
the filing of such reports is waived. With respect to the cases that are still
pending in Texas, in June 2008, plaintiffs in the only active case dropped the
remaining CNA company from that suit, leaving only inactive cases against CNA
companies. In those inactive cases, numerous factual and legal issues remain to
be resolved that are critical to the final result, the outcome of which cannot
be predicted with any reliability. These factors include: (a) the speculative
nature and unclear scope of any alleged duties owed to individuals exposed to
asbestos and the resulting uncertainty as to the potential pool of potential
claimants; (b) the fact that imposing such duties on all insurer and non-insurer
corporate defendants would be unprecedented and, therefore, the legal boundaries
of recovery are difficult to estimate; (c) the fact that many of the claims
brought to date are barred by the Statute of Limitations and it is unclear
whether future claims would also be barred; (d) the unclear nature of the
required nexus between the acts of the defendants and the right of any
particular claimant to recovery; and (e) the existence of hundreds of
co-defendants in some of the suits and the applicability of the legal theories
pled by the claimants to thousands of potential defendants. Accordingly, the
extent of losses beyond any amounts that may be accrued is not readily
determinable at this time.
On March 22, 2002, a direct action was
filed in Montana (Pennock, et
al. v. Maryland Casualty, et al. First Judicial District Court of Lewis
& Clark County, Montana) by eight individual plaintiffs (all employees of
W.R. Grace & Co. (“W.R. Grace”)) and their spouses against CNA, Maryland
Casualty and the State of Montana. This action alleges that the carriers failed
to warn of or otherwise protect W.R. Grace employees from the dangers of
asbestos at a W.R. Grace vermiculite mining facility in Libby, Montana. The
Montana direct action is currently stayed because of W.R. Grace’s pending
bankruptcy. On April 7, 2008, W.R. Grace announced a settlement in principle
with the asbestos personal injury claimants committee subject to confirmation of
a plan of reorganization by the bankruptcy court. It is unknown when the
confirmation hearing might take place. The settlement in principle with the
asbestos claimants has no present impact on the stay currently imposed on the
Montana direct action and with respect to such claims, numerous factual and
legal issues remain to be resolved that are critical to the final result, the
outcome of which cannot be predicted with any reliability. These factors
include: (a) the unclear nature and scope of any alleged duties owed to people
exposed to asbestos and the resulting uncertainty as to the potential pool of
potential claimants; (b) the potential application of Statutes of Limitation to
many of the claims which may be made depending on the nature and scope of the
alleged duties; (c) the unclear nature of the required nexus between the acts of
the defendants and the right of any particular claimant to recovery; (d) the
diseases and damages claimed by such claimants; (e) the extent that such
liability would be shared with other potentially responsible parties; and (f)
the impact of bankruptcy proceedings on claims resolution. Accordingly, the
extent of losses beyond any amounts that may be accrued are not readily
determinable at this time.
CNA is vigorously defending these and
other cases and believes that it has meritorious defenses to the claims
asserted. However, there are numerous factual and legal issues to be resolved in
connection with these claims, and it is extremely difficult to predict the
outcome or ultimate financial exposure represented by these matters. Adverse
developments with respect to any of these matters could have a material adverse
effect on CNA’s business, and insurer financial strength and debt ratings, and
the Company’s results of operations and/or equity.
Environmental
Pollution
CNA recorded $2 million and $1 million
of unfavorable environmental pollution net claim and claim adjustment expense
reserve development for the six months ended June 30, 2008 and 2007. CNA paid
environmental pollution-related claims, net of reinsurance recoveries, of $36
million and $21 million for the six months ended June 30, 2008 and
2007.
Net
Prior Year Development
The net prior year development presented
below includes premium development due to its direct relationship to claim and
allocated claim adjustment expense reserve development. The net prior year
development presented below excludes the impact of increases or decreases in the
allowance for uncollectible reinsurance, but includes the impact of
commutations.
Three
Month Comparison
|
|
Standard
|
|
|
Specialty
|
|
|
Other
|
|
|
|
|
Three Months Ended June 30,
2008
|
|
Lines
|
|
|
Lines
|
|
|
Insurance
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
unfavorable (favorable) net prior
|
|
|
|
|
|
|
|
|
|
|
|
|
year claim and allocated claim
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
expense reserve
development:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
(Non-A&E)
|
|
$ |
(15 |
) |
|
$ |
1 |
|
|
$ |
5 |
|
|
$ |
(9 |
) |
A&E
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
6 |
|
Pretax
unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development before impact of
premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
(15 |
) |
|
|
1 |
|
|
|
11 |
|
|
|
(3 |
) |
Pretax
unfavorable (favorable) premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
(8 |
) |
|
|
1 |
|
|
|
1 |
|
|
|
(6 |
) |
Total
pretax unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
$ |
(23 |
) |
|
$ |
2 |
|
|
$ |
12 |
|
|
$ |
(9 |
) |
Three Months Ended June 30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
unfavorable (favorable) net prior
|
|
|
|
|
|
|
|
|
|
|
|
|
year claim and allocated claim
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
expense reserve
development:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
(Non-A&E)
|
|
$ |
(20 |
) |
|
$ |
(14 |
) |
|
$ |
8 |
|
|
$ |
(26 |
) |
A&E
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
4 |
|
Pretax
unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development before impact of
premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
(20 |
) |
|
|
(14 |
) |
|
|
12 |
|
|
|
(22 |
) |
Pretax
unfavorable (favorable) premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
16 |
|
|
|
|
|
|
|
(5 |
) |
|
|
11 |
|
Total
pretax unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
$ |
(4 |
) |
|
$ |
(14 |
) |
|
$ |
7 |
|
|
$ |
(11 |
) |
2008
Net Prior Year Development
Standard
Lines
Approximately $29 million of favorable
claim and allocated claim adjustment expense reserve development was recorded
due to favorable outcomes on claims relating to catastrophes, primarily in
accident year 2005.
Approximately $8 million of favorable
premium development was recorded across several coverages and accident years due
to additional premium processing on auditable policies and changes to ultimate
premium estimates. This favorable development was offset by additional
unfavorable claim and allocated claim adjustment expense reserve
development.
Other
Insurance
The unfavorable claim and allocated
claim adjustment expense reserve development was primarily related to
commutation activity, a portion of which was offset by a release of a previously
established allowance for uncollectible reinsurance.
2007
Net Prior Year Development
Standard
Lines
Approximately $33 million of favorable
claim and allocated claim adjustment expense reserve development was due to
lower than anticipated frequency and severity on claims related to large
property products, primarily in accident years 2005 and 2006. The change was
driven by decreased incurred losses as a result of changes in individual case
reserve estimates.
Additional unfavorable prior year
reserve development was recorded in the workers’ compensation line of business
as a result of continued claim cost inflation in older accident years, driven by
increasing medical inflation and advances in medical care. Additional favorable
development was recorded in the commercial automobile, monoline general
liability and umbrella product lines. This favorable development was due to
improved severity in recent accident years.
Approximately $14 million of unfavorable
premium development was taken primarily as a result of favorable claim and
allocated claim adjustment expense reserve development on large account retro
policies relating to the automobile and general liability lines of business in
accident years 2001 and subsequent. This favorable claim and allocated claim
expense reserve development was due to lower than anticipated frequency and
severity.
Specialty
Lines
Approximately $9 million of favorable
claim and allocated claim adjustment expense reserve development was recorded in
the excess and surplus lines of business. This favorable development was
primarily related to improved frequency and severity on excess general liability
claims across several accident years.
Other
Insurance
Approximately $6 million of unfavorable
claim and allocated claim adjustment expense reserve development was related to
commutation activity, a portion of which was offset by a release of a previously
established allowance for uncollectible reinsurance.
Six
Month Comparison
|
|
Standard
|
|
|
Specialty
|
|
|
Other
|
|
|
|
|
Six Months Ended June 30,
2008
|
|
Lines
|
|
|
Lines
|
|
|
Insurance
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
unfavorable (favorable) net prior
|
|
|
|
|
|
|
|
|
|
|
|
|
year claim and allocated claim
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
expense reserve
development:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
(Non-A&E)
|
|
$ |
(50 |
) |
|
$ |
18 |
|
|
$ |
8 |
|
|
$ |
(24 |
) |
A&E
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
8 |
|
Pretax
unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development before impact of
premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
(50 |
) |
|
|
18 |
|
|
|
16 |
|
|
|
(16 |
) |
Pretax
unfavorable (favorable) premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
1 |
|
|
|
(18 |
) |
|
|
|
|
|
|
(17 |
) |
Total
pretax unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
$ |
(49 |
) |
|
$ |
- |
|
|
$ |
16 |
|
|
$ |
(33 |
) |
|
|
Standard
|
|
|
Specialty
|
|
|
Other
|
|
|
|
|
Six Months Ended June 30,
2007
|
|
Lines
|
|
|
Lines
|
|
|
Insurance
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
unfavorable (favorable) net prior
|
|
|
|
|
|
|
|
|
|
|
|
|
year claim and allocated claim
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
expense reserve
development:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
(Non-A&E)
|
|
$ |
(7 |
) |
|
$ |
(7 |
) |
|
$ |
8 |
|
|
$ |
(6 |
) |
A&E
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
4 |
|
Pretax
unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development before impact of
premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
(7 |
) |
|
|
(7 |
) |
|
|
12 |
|
|
|
(2 |
) |
Pretax
unfavorable (favorable) premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
(10 |
) |
|
|
(10 |
) |
|
|
(3 |
) |
|
|
(23 |
) |
Total
pretax unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
$ |
(17 |
) |
|
$ |
(17 |
) |
|
$ |
9 |
|
|
$ |
(25 |
) |
2008
Net Prior Year Development
Standard
Lines
Approximately $49 million of favorable
claim and allocated claim adjustment expense reserve development was recorded in
property coverages. This favorable development was due to lower than expected
frequency in accident year 2007 and favorable outcomes on several individual
claims in accident years 2006 and prior, including approximately $29 million
related to catastrophes, primarily in accident year 2005.
Approximately $23 million of favorable
claim and allocated claim adjustment expense reserve development was recorded in
general liability due to favorable outcomes on individual claims causing lower
severity in accident years 2003 and prior.
Approximately $24 million of unfavorable
claim and allocated claim adjustment expense reserve development was recorded in
excess workers’ compensation due to higher than expected frequency and severity
in accident years 2003 and prior. This is a result of continued claim cost
inflation in older accident years, driven by increasing medical inflation and
advances in medical care.
Specialty
Lines
Approximately $10 million of favorable
premium development was recorded due to a change in ultimate premiums within a
foreign affiliate’s property and financial lines. This was offset by
approximately $9 million of related unfavorable claim and allocated claim
adjustment expense reserve development.
Other
Insurance
The net prior year development recorded
for the six months ended June 30, 2008 relates to the same reasons included in
the three month discussion.
2007
Net Prior Year Development
Standard
Lines
Approximately $42 million of favorable
premium development was recorded primarily as a result of additional premium
resulting from audits on recent policies related to workers’ compensation and
general liability books of business. This was offset by $27 million of
unfavorable claim and allocated claim adjustment expense reserve development
related to this premium.
Approximately $16 million of unfavorable
premium development was recorded due to a change in the estimate of CNA’s
exposure related to its participation in involuntary pools. This unfavorable
premium development was partially offset by $9 million of favorable claim and
allocated claim adjustment expense reserve development.
The remaining net prior year development
recorded relates primarily to the items included in the three month
discussion.
Specialty
Lines
Approximately $9 million of favorable
premium development was recorded mainly as a result of additional premium
resulting from audits on recent policies related primarily to general liability
coverages. Unfavorable claim and allocated claim adjustment expense reserve
development was recorded related to those premiums.
The remaining net prior year development
recorded relates primarily to the items included in the three month
discussion.
Other
Insurance
The net prior year development recorded
for the six months ended June 30, 2007 relates to the same reasons included in
the three month discussion.
9. Debt
In January of 2008, CNA repaid its $150
million 6.45% senior note at maturity.
In March
of 2008, Texas Gas Transmission, LLC, a wholly owned subsidiary of Boardwalk
Pipeline, issued $250 million aggregate principal amount of 5.5% senior notes
due 2013 in a private placement. The proceeds from this offering were primarily
used to finance a portion of its expansion projects.
10. Comprehensive
Income (Loss)
The components of Accumulated other
comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Gains (Losses)
|
|
|
Foreign
|
|
|
Pension
|
|
|
Comprehensive
|
|
|
|
on Investments
|
|
|
Currency
|
|
|
Liability
|
|
|
Income (Loss)
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2007
|
|
$ |
584 |
|
|
$ |
86 |
|
|
$ |
(283 |
) |
|
$ |
387 |
|
Unrealized
holding losses, net of tax of $145
|
|
|
(228 |
) |
|
|
|
|
|
|
|
|
|
|
(228 |
) |
Adjustment
for items included in net income,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of tax of
$35
|
|
|
(61 |
) |
|
|
|
|
|
|
|
|
|
|
(61 |
) |
Foreign
currency translation adjustment, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax of $1
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
5 |
|
Pension
liability adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of $3
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
8 |
|
Balance, June 30, 2007
|
|
$ |
295 |
|
|
$ |
91 |
|
|
$ |
(275 |
) |
|
$ |
111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2008
|
|
$ |
12 |
|
|
$ |
117 |
|
|
$ |
(194 |
) |
|
$ |
(65 |
) |
Unrealized
holding losses, net of tax of $710
|
|
|
(1,166 |
) |
|
|
|
|
|
|
|
|
|
|
(1,166 |
) |
Adjustment
for items included in net income,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of tax of $38 and
$20
|
|
|
66 |
|
|
|
|
|
|
|
34 |
|
|
|
100 |
|
Foreign
currency translation adjustment, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax
|
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
(15 |
) |
Pension
liability adjustment, net of tax of $4
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
(8 |
) |
Disposal
of discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of $33
|
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
53 |
|
Balance, June 30, 2008
|
|
$ |
(1,088 |
) |
|
$ |
102 |
|
|
$ |
(115 |
) |
|
$ |
(1,101 |
) |
11. Significant
Transactions
Diamond
Offshore
In the first six months of 2007, the
holders of $451 million in principal amount of Diamond Offshore’s 1.5%
debentures converted their outstanding debentures into 9.2 million shares of
Diamond Offshore’s common stock at a price of $49.02 per share. In addition, the
holders of $2 million aggregate principal amount of Diamond
Offshore’s
Zero
Coupon Debentures converted their outstanding debentures into 20,658 shares of
Diamond Offshore’s common stock at a price of $73.00 per share.
The Company’s ownership interest in
Diamond Offshore declined from approximately 54% to 51% due to these
transactions. In accordance with Securities and Exchange Commission Staff
Accounting Bulletin Topic 5-H, “Accounting for Sales of Stock by a Subsidiary”
(“SAB No. 51”), the Company recognized a pretax gain of $142 million ($92
million after provision for deferred income taxes) on the issuance of subsidiary
stock.
Prior to the conversion of Diamond
Offshore’s 1.5% convertible debentures, the Company carried a deferred tax
liability related to interest expense imputed on the bonds for U.S. federal
income tax purposes. As a result of the conversion, the deferred tax liability
was settled and a tax benefit of $26 million, net of minority interest, was
included in shareholders’ equity as an increase in additional paid-in
capital.
Boardwalk
Pipeline
In the second quarter of 2008, Boardwalk
Pipeline sold 10 million common units at a price of $25.30 per unit in a public
offering and received net proceeds of $243 million. In addition, the Company
contributed $5 million to maintain its 2% general partner interest. The
Company’s percentage ownership interest in Boardwalk Pipeline declined as a
result of this transaction. The issuance price of the common units exceeded the
Company’s carrying amount, increasing the amount of cumulative pretax SAB No. 51
gains to approximately $536 million at June 30, 2008, from $472 million at
December 31, 2007. In accordance with SAB No. 51, recognition of a gain is only
appropriate if the class of securities sold by the subsidiary does not contain
any preference over the subsidiary’s other classes of securities. As a result,
the Company has deferred gain recognition until the common units no longer have
preference over other classes of securities.
In June of 2008, the Company
purchased 22,866,667 of Boardwalk Pipeline’s newly created class B units
representing limited partner interests (“class B units”) for $30 per class B
unit, or an aggregate purchase price of $686 million. The Company contributed an
additional $14 million to maintain its 2% general partner interest. Boardwalk
Pipeline intends to use the proceeds of approximately $700 million to fund a
portion of the costs of its ongoing expansion projects.
Beginning with the distribution in
respect of the quarter ending September 30, 2008, the class B units will share
in quarterly distributions of available cash from operating surplus with
Boardwalk Pipeline’s common units, until each common unit and class B unit has
received a quarterly distribution of $0.30. The class B units will not
participate in quarterly distributions above $0.30 per unit and are convertible
into common units of Boardwalk Pipeline on a one-for-one basis at any time after
June 30, 2013.
12. Benefit
Plans
Pension Plans - The Company has several
non-contributory defined benefit plans for eligible employees. The benefits for
certain plans which cover salaried employees and certain union employees are
based on formulas which include, among others, years of service and average pay.
The benefits for one plan which covers union workers under various union
contracts and certain salaried employees are based on years of service
multiplied by a stated amount. Benefits for another plan are determined annually
based on a specified percentage of annual earnings (based on the participant’s
age) and a specified interest rate (which is established annually for all
participants) applied to accrued balances. The Company’s funding policy is to
make contributions in accordance with applicable governmental regulatory
requirements.
Other Postretirement Benefit Plans - The
Company has several postretirement benefit plans covering eligible employees and
retirees. Participants generally become eligible after reaching age 55 with
required years of service. Actual requirements for coverage vary by plan.
Benefits for retirees who were covered by bargaining units vary by each unit and
contract. Benefits for certain retirees are in the form of a Company health care
account.
Benefits for retirees reaching age 65
are generally integrated with Medicare. Other retirees, based on plan
provisions, must use Medicare as their primary coverage, with the Company
reimbursing a portion of the unpaid amount; or are reimbursed for the Medicare
Part B premium or have no Company coverage. The benefits provided by the Company
are basically health and, for certain retirees, life insurance type
benefits.
The Company funds certain of these
benefit plans and accrues postretirement benefits during the active service of
those employees who would become eligible for such benefits when they
retire.
At December 31, 2007, the Company
expected to contribute $24 million to its pension plans and $13 million to its
postretirement healthcare and life insurance benefit plans in 2008. During the
six months ended June 30, 2008, CNA
decided
to contribute an additional $43 million to their pension plan bringing the
expected pension contributions to $67 million.
During the first six months of 2008, the
Company made $13 million of total contributions to the pension plans and $5
million to the postretirement healthcare and life insurance benefit
plans.
Net periodic benefit cost
components:
|
|
Pension Benefits
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
7 |
|
|
$ |
5 |
|
|
$ |
15 |
|
|
$ |
17 |
|
Interest
cost
|
|
|
42 |
|
|
|
36 |
|
|
|
82 |
|
|
|
81 |
|
Expected
return on plan assets
|
|
|
(48 |
) |
|
|
(43 |
) |
|
|
(96 |
) |
|
|
(94 |
) |
Amortization
of net loss
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Amortization
of prior service cost
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
Actuarial
loss
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
6 |
|
Settlement costs
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
4 |
|
Net periodic benefit cost
|
|
$ |
2 |
|
|
$ |
- |
|
|
$ |
4 |
|
|
$ |
14 |
|
|
|
Other Postretirement
Benefits
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
|
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
1 |
|
Interest
cost
|
|
$ |
3 |
|
|
|
3 |
|
|
|
6 |
|
|
|
7 |
|
Expected
return on plan assets
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
Amortization
of prior service benefit
|
|
|
(7 |
) |
|
|
(6 |
) |
|
|
(12 |
) |
|
|
(13 |
) |
Actuarial
loss
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
Regulatory asset decrease
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
Net periodic benefit cost
|
|
$ |
(2 |
) |
|
$ |
(1 |
) |
|
$ |
(3 |
) |
|
$ |
(3 |
) |
13. Business
Segments
The Company’s reportable segments are
primarily based on its individual operating subsidiaries. Each principal
operating subsidiary is headed by a chief executive officer who is responsible
for the operation of its business and has the duties and authority commensurate
with that position. Investment gains (losses) and the related income taxes,
excluding those of CNA Financial, are included in the Corporate and other
segment.
CNA’s core property and casualty
commercial insurance operations are reported in two business segments: Standard
Lines and Specialty Lines. Standard Lines includes standard property and
casualty coverages sold to small businesses and middle market entities and
organizations in the U.S. primarily through an independent agency distribution
system. Standard Lines also includes commercial insurance and risk management
products sold to large corporations in the U.S. primarily through insurance
brokers. Specialty Lines provides a broad array of professional, financial and
specialty property and casualty products and services, including excess and
surplus lines, primarily through insurance brokers and managing general
underwriters. Specialty Lines also includes insurance coverages sold globally
through CNA’s foreign operations (“CNA Global”). The non-core operations are
managed in Life & Group Non-Core segment and Other Insurance segment. Life
& Group Non-Core primarily includes the results of the life and group lines
of business sold or placed in run-off. Other Insurance primarily includes the
results of certain property and casualty lines of business placed in run-off,
including CNA Re. This segment also includes the results related to the
centralized adjusting and settlements of A&E.
Diamond Offshore’s business primarily
consists of operating 45 offshore drilling rigs that are chartered on a contract
basis for fixed terms by companies engaged in exploration and production of
hydrocarbons. Offshore rigs are mobile units that can be relocated based on
market demand. The majority of these rigs are located in the Gulf of Mexico
region with the remainder operating in Brazil, the North Sea, and various other
foreign markets.
HighMount’s business consists primarily
of natural gas exploration and production operations located in the Permian
Basin in Texas, the Antrim Shale in Michigan and the Black Warrior Basin in
Alabama, with estimated proved reserves totaling approximately 2.5 trillion
cubic feet equivalent.
Boardwalk Pipeline is engaged in the
interstate transportation and storage of natural gas. This segment consists of
interstate natural gas pipeline systems located in the Southeast and running
north and east through Texas, Louisiana, Mississippi, Alabama, Florida,
Arkansas, Tennessee, Kentucky, Indiana, Ohio and Illinois.
Loews Hotels owns and/or operates 18
hotels, 16 of which are in the United States and two are in Canada.
The Corporate and other segment consists
primarily of corporate investment income, including investment gains (losses)
from non-insurance subsidiaries, equity earnings from shipping operations, as
well as corporate interest expenses and other corporate administrative
costs.
The accounting policies of the segments
are the same as those described in the summary of significant accounting
policies. In addition, CNA does not maintain a distinct investment portfolio for
each of its insurance segments, and accordingly, allocation of assets to each
segment is not performed. Therefore, net investment income and investment gains
(losses) are allocated based on each segment’s carried insurance reserves, as
adjusted.
The following tables set forth the
Company’s consolidated revenues and income (loss) by business
segment:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard Lines
|
|
$ |
922 |
|
|
$ |
1,025 |
|
|
$ |
1,867 |
|
|
$ |
2,095 |
|
Specialty Lines
|
|
|
1,039 |
|
|
|
1,044 |
|
|
|
2,088 |
|
|
|
2,066 |
|
Life and Group
Non-Core
|
|
|
308 |
|
|
|
334 |
|
|
|
545 |
|
|
|
664 |
|
Other Insurance
|
|
|
52 |
|
|
|
66 |
|
|
|
103 |
|
|
|
161 |
|
Total
CNA Financial
|
|
|
2,321 |
|
|
|
2,469 |
|
|
|
4,603 |
|
|
|
4,986 |
|
Diamond
Offshore
|
|
|
970 |
|
|
|
661 |
|
|
|
1,762 |
|
|
|
1,280 |
|
HighMount
|
|
|
201 |
|
|
|
|
|
|
|
390 |
|
|
|
|
|
Boardwalk
Pipeline
|
|
|
206 |
|
|
|
159 |
|
|
|
419 |
|
|
|
349 |
|
Loews
Hotels
|
|
|
105 |
|
|
|
100 |
|
|
|
202 |
|
|
|
195 |
|
Corporate and other
|
|
|
119 |
|
|
|
128 |
|
|
|
158 |
|
|
|
375 |
|
Total
|
|
$ |
3,922 |
|
|
$ |
3,517 |
|
|
$ |
7,534 |
|
|
$ |
7,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income tax and minority
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard Lines
|
|
$ |
119 |
|
|
$ |
147 |
|
|
$ |
233 |
|
|
$ |
352 |
|
Specialty Lines
|
|
|
201 |
|
|
|
247 |
|
|
|
392 |
|
|
|
458 |
|
Life and Group
Non-Core
|
|
|
(67 |
) |
|
|
(50 |
) |
|
|
(103 |
) |
|
|
(57 |
) |
Other Insurance
|
|
|
3 |
|
|
|
(12 |
) |
|
|
|
|
|
|
17 |
|
Total
CNA Financial
|
|
|
256 |
|
|
|
332 |
|
|
|
522 |
|
|
|
770 |
|
Diamond
Offshore
|
|
|
590 |
|
|
|
351 |
|
|
|
995 |
|
|
|
660 |
|
HighMount
|
|
|
76 |
|
|
|
|
|
|
|
151 |
|
|
|
|
|
Boardwalk
Pipeline
|
|
|
64 |
|
|
|
36 |
|
|
|
153 |
|
|
|
116 |
|
Loews
Hotels
|
|
|
32 |
|
|
|
22 |
|
|
|
50 |
|
|
|
40 |
|
Corporate and other
|
|
|
89 |
|
|
|
106 |
|
|
|
98 |
|
|
|
324 |
|
Total
|
|
$ |
1,107 |
|
|
$ |
847 |
|
|
$ |
1,969 |
|
|
$ |
1,910 |
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard Lines
|
|
$ |
76 |
|
|
$ |
93 |
|
|
$ |
152 |
|
|
$ |
216 |
|
Specialty Lines
|
|
|
113 |
|
|
|
139 |
|
|
|
220 |
|
|
|
257 |
|
Life and Group
Non-Core
|
|
|
(31 |
) |
|
|
(23 |
) |
|
|
(43 |
) |
|
|
(20 |
) |
Other Insurance
|
|
|
4 |
|
|
|
(5 |
) |
|
|
4 |
|
|
|
14 |
|
Total
CNA Financial
|
|
|
162 |
|
|
|
204 |
|
|
|
333 |
|
|
|
467 |
|
Diamond
Offshore
|
|
|
194 |
|
|
|
118 |
|
|
|
330 |
|
|
|
225 |
|
HighMount
|
|
|
48 |
|
|
|
|
|
|
|
95 |
|
|
|
|
|
Boardwalk
Pipeline
|
|
|
28 |
|
|
|
16 |
|
|
|
67 |
|
|
|
55 |
|
Loews
Hotels
|
|
|
19 |
|
|
|
14 |
|
|
|
30 |
|
|
|
25 |
|
Corporate and other
|
|
|
60 |
|
|
|
70 |
|
|
|
65 |
|
|
|
211 |
|
Income
from continuing operations
|
|
|
511 |
|
|
|
422 |
|
|
|
920 |
|
|
|
983 |
|
Discontinued operations
|
|
|
4,452 |
|
|
|
232 |
|
|
|
4,705 |
|
|
|
439 |
|
Total
|
|
$ |
4,963 |
|
|
$ |
654 |
|
|
$ |
5,625 |
|
|
$ |
1,422 |
|
(a)
|
Investment gains
(losses) included in Revenues, Income (loss) before income tax and
minority interest and Net income (loss) are as
follows:
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
and Income (loss) before income tax and
|
|
|
|
|
|
|
|
|
|
|
|
|
minority
interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard Lines
|
|
$ |
(60 |
) |
|
$ |
(62 |
) |
|
$ |
(76 |
) |
|
$ |
(87 |
) |
Specialty Lines
|
|
|
(30 |
) |
|
|
(35 |
) |
|
|
(39 |
) |
|
|
(49 |
) |
Life and Group
Non-Core
|
|
|
(6 |
) |
|
|
(18 |
) |
|
|
(23 |
) |
|
|
(17 |
) |
Other Insurance
|
|
|
(15 |
) |
|
|
(24 |
) |
|
|
(24 |
) |
|
|
(7 |
) |
Total
CNA Financial
|
|
|
(111 |
) |
|
|
(139 |
) |
|
|
(162 |
) |
|
|
(160 |
) |
Corporate and other
|
|
|
2 |
|
|
|
35 |
|
|
|
2 |
|
|
|
170 |
|
Total
|
|
$ |
(109 |
) |
|
$ |
(104 |
) |
|
$ |
(160 |
) |
|
$ |
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard Lines
|
|
$ |
(35 |
) |
|
$ |
(37 |
) |
|
$ |
(45 |
) |
|
$ |
(51 |
) |
Specialty Lines
|
|
|
(17 |
) |
|
|
(21 |
) |
|
|
(22 |
) |
|
|
(29 |
) |
Life and Group
Non-Core
|
|
|
(3 |
) |
|
|
(10 |
) |
|
|
(13 |
) |
|
|
(10 |
) |
Other Insurance
|
|
|
(10 |
) |
|
|
(13 |
) |
|
|
(14 |
) |
|
|
(3 |
) |
Total
CNA Financial
|
|
|
(65 |
) |
|
|
(81 |
) |
|
|
(94 |
) |
|
|
(93 |
) |
Corporate and other
|
|
|
1 |
|
|
|
23 |
|
|
|
1 |
|
|
|
110 |
|
Total
|
|
$ |
(64 |
) |
|
$ |
(58 |
) |
|
$ |
(93 |
) |
|
$ |
17 |
|
14. Legal
Proceedings
Shaffer v. Continental Casualty
Company, et al., U.S. District Court, Central District of California,
CV06-2235 RGK, is a class action on behalf of certain California individual long
term health care policyholders, alleging that Continental Casualty Company
(“CCC”) and CNA knowingly or negligently used unrealistic actuarial assumptions
in pricing these policies. On January 8, 2008, CCC, CNA and the plaintiffs
entered into a binding agreement settling the case on a nationwide basis for the
policy forms potentially affected by the allegations of the
complaint. Following a fairness hearing, the Court entered an order
approving the settlement. This order was appealed to the
Ninth
Circuit Court of Appeals. CNA believes it has meritorious defenses to this
appeal and intends to defend the appeal vigorously. The agreement did not
have a material adverse effect on the financial condition, cash flows or results
of operations of the Company, however it still remains subject to the favorable
resolution of the appeal.
On August 1, 2005, CNA and several of
its insurance subsidiaries were joined as defendants, along with other insurers
and brokers, in multidistrict litigation pending in the United States District
Court for the District of New Jersey, In re Insurance Brokerage Antitrust
Litigation, Civil No. 04-5184 (FSH). The plaintiffs allege bid rigging
and improprieties in the payment of contingent commissions in connection with
the sale of insurance that violated federal and state antitrust laws, the
federal Racketeer Influenced and Corrupt Organizations (“RICO”) Act and state
common law. After discovery, the District Court dismissed the federal antitrust
claims and the RICO claims, and declined to exercise supplemental jurisdiction
over the state law claims. The plaintiffs have appealed the dismissal of their
complaint to the Third Circuit Court of Appeals. The parties have filed their
briefs on the appeal, but the Court of Appeals has temporarily stayed the
appeal. CNA believes it has meritorious defenses to this action and intends to
defend the case vigorously.
The extent of losses beyond any amounts
that may be accrued are not readily determinable at this time. However, based on
facts and circumstances presently known, in the opinion of management, an
unfavorable outcome will not materially affect the equity of the Company,
although results of operations may be adversely affected.
CCC has been named as a defendant in an
action brought by the bankruptcy estate of Global Crossing Limited (“Global
Crossing”) in the United States Bankruptcy Court for the Southern District of
New York, Global Crossing
Estate Representative, for itself and as the Liquidating Trustee of the Global
Crossing Liquidating Trust v. Gary Winnick, et al., Case No. 04 Civ. 2558
(GEL). In the complaint, plaintiff seeks unspecified monetary damages from CCC
and the other defendants for alleged fraudulent transfers and alleged breaches
of fiduciary duties arising from actions taken by Global Crossing while CCC was
a shareholder of Global Crossing. The Court dismissed some of the claims against
CCC as a matter of law. The remainder of the case is now in discovery. CCC
believes it has meritorious defenses to the remaining claims in this action and
intends to defend the case vigorously.
The extent of losses beyond any amounts
that may be accrued are not readily determinable at this time. However, based on
facts and circumstances presently known, in the opinion of management, an
unfavorable outcome will not materially affect the equity of the Company,
although results of operations may be adversely affected.
CNA is
also a party to litigation and claims related to A&E cases arising in the
ordinary course of business. See Note 8 for further discussion.
The Company has been named as a
defendant in the following four cases alleging substantial damages based on
alleged health effects caused by smoking cigarettes or exposure to tobacco
smoke, all of which also name a former subsidiary, Lorillard, Inc. or one of its
subsidiaries, as a defendant: Cochran vs. R.J. Reynolds Tobacco
Company, et al. (2002, Circuit Court, George County, Mississippi). In
2003 the Company filed a motion to dismiss the complaint for lack of personal
jurisdiction, which remains pending; Cypret vs. The American Tobacco
Company, Inc. et al. (1998, Circuit Court, Jackson County, Missouri). The
Company plans to file a motion to dismiss the complaint for lack of personal
jurisdiction in the event it receives personal service of this action; Clalit vs. Philip Morris, Inc., et
al. (1998, Jerusalem District Court of Israel). In 2006 the court
dismissed the Company from this action for lack of personal jurisdiction, and
the plaintiff has noticed an appeal; and Young vs. The American Tobacco
Company, Inc. et al. (1997, Civil District Court, Orleans Parish,
Louisiana). In 2000 the Company filed an exception for lack of personal
jurisdiction, which remains pending.
The Company does not believe it is a
proper defendant in any of the foregoing tobacco related cases and as a result,
does not believe the outcome will have a material affect on the Company’s
results of operations or equity. Further, pursuant to the Separation Agreement
dated May 7, 2008 between the Company and Lorillard and its subsidiaries,
Lorillard and its subsidiaries have agreed to indemnify and hold the Company
harmless from all costs and expenses based upon or arising out of the operation
or conduct of Lorillard’s business, including among other things, smoking and
health claims and litigation such as the four cases described
above.
The Company and its subsidiaries are
also parties to other litigation arising in the ordinary course of business. The
outcome of this other litigation will not, in the opinion of management,
materially affect the Company’s results of operations or
equity.
15. Commitments
and Contingencies
Guarantees
In the course of selling business
entities and assets to third parties, CNA has agreed to indemnify purchasers for
losses arising out of breaches of representation and warranties with respect to
the business entities or assets being sold, including, in certain cases, losses
arising from undisclosed liabilities or certain named litigation. Such
indemnification provisions generally survive for periods ranging from nine
months following the applicable closing date to the expiration of the relevant
statutes of limitation. As of June 30, 2008, the aggregate amount of
quantifiable indemnification agreements in effect for sales of business
entities, assets and third party loans was $873 million.
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, 2008, 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. These indemnification agreements survive until the applicable
statutes of limitation expire, or until the agreed upon contract terms expire.
As of June 30, 2008 and December 31, 2007, CNA has recorded approximately $23
million and $27 million of liabilities related to these indemnification
agreements.
In connection with the issuance of
preferred securities by CNA Surety Capital Trust I, CNA Surety, a 62% owned and
consolidated subsidiary of CNA, issued a guarantee of $75 million to guarantee
the payment by CNA Surety Capital Trust I of annual dividends of $1.5 million
over 30 years and redemption of $30 million of preferred
securities.
Diamond Offshore Construction
Projects
As of June 30, 2008, Diamond Offshore
had purchase obligations aggregating approximately $109 million related to the
major upgrade of one rig and construction of one new jack-up rig. Diamond
Offshore expects to complete funding of these projects in 2008. However, the
actual timing of these expenditures will vary based on the completion of various
construction milestones, which are beyond Diamond Offshore’s
control.
HighMount
Volumetric Production Payment Transactions
As part
of the acquisition of exploration and production assets from Dominion Resources,
Inc., HighMount assumed an obligation to deliver approximately 15 Bcf of natural
gas through February 2009 under previously existing Volumetric Production
Payment (“VPP”) agreements. Under these agreements, certain HighMount acquired
properties are subject to fixed-term overriding royalty interests which had been
conveyed to the VPP purchaser. While HighMount is obligated under the agreement
to produce and deliver to the purchaser its portion of future natural gas
production from the properties, HighMount retains control of the properties and
rights to future development drilling. If production from the properties subject
to the VPP is inadequate to deliver the natural gas provided for in the VPP,
HighMount has no obligation to make up the shortfall. At June 30, 2008, the
remaining obligation under these agreements is approximately 6.1 Bcf of natural
gas.
Boardwalk
Pipeline Purchase Commitments
Boardwalk Pipeline is engaged in several
major expansion projects that will require the investment of significant capital
resources. As of June 30, 2008, Boardwalk Pipeline had purchase commitments of
$451 million primarily related to its expansion projects.
16. Discontinued
Operations
Lorillard
As discussed in Note 2, in June of
2008, the Company disposed of its entire ownership interest in Lorillard. The
Consolidated Condensed Financial Statements have been reclassified to reflect
Lorillard as a discontinued operation. Accordingly, the assets and liabilities,
revenues and expenses and cash flows of Lorillard have been excluded from the
respective captions in the Consolidated Condensed Balance Sheets, Consolidated
Condensed Statements of Income, and Consolidated Condensed Statements of Cash
Flows, and have been included in Assets and Liabilities of discontinued
operations, Discontinued operations, net and Net cash flows - discontinued
operations, respectively.
CNA
CNA has discontinued operations, which
consist of run-off insurance and reinsurance operations acquired in its merger
with The Continental Corporation in 1995. As of June 30, 2008, the remaining
run-off business is administered by Continental Reinsurance Corporation
International, Ltd., a Bermuda subsidiary. The business consists of facultative
property and casualty, treaty excess casualty and treaty pro-rata reinsurance
with underlying exposure to a diverse, multi-line domestic and international
book of business encompassing property, casualty and marine
liabilities.
The income (loss) from discontinued
operations reported below related to CNA primarily represents the net investment
income, realized investment gains and losses, foreign currency gains and losses,
effects of the accretion of the loss reserve discount and re-estimation of the
ultimate claim and claim adjustment expense reserve of the discontinued
operations.
Bulova
The Company sold Bulova for
approximately $263 million in January of 2008. The Company recorded a pretax
gain of approximately $126 million, $75 million after tax, for the six months
ended June 30, 2008.
Results
of Discontinued Operations
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment
income
|
|
$ |
6 |
|
|
$ |
28 |
|
|
$ |
18 |
|
|
$ |
66 |
|
Manufactured
products
|
|
|
829 |
|
|
|
1,095 |
|
|
|
1,750 |
|
|
|
2,054 |
|
Investment
gains
|
|
|
1 |
|
|
|
4 |
|
|
|
2 |
|
|
|
3 |
|
Other
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Total
|
|
|
836 |
|
|
|
1,128 |
|
|
|
1,770 |
|
|
|
2,124 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance related
expenses
|
|
|
1 |
|
|
|
19 |
|
|
|
6 |
|
|
|
20 |
|
Cost of manufactured products
sold
|
|
|
485 |
|
|
|
634 |
|
|
|
1,039 |
|
|
|
1,201 |
|
Other operating
expenses
|
|
|
72 |
|
|
|
99 |
|
|
|
172 |
|
|
|
200 |
|
Interest
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
Total
|
|
|
559 |
|
|
|
754 |
|
|
|
1,219 |
|
|
|
1,423 |
|
Income
before income tax and minority interest
|
|
|
277 |
|
|
|
374 |
|
|
|
551 |
|
|
|
701 |
|
Income
tax expense
|
|
|
(107 |
) |
|
|
(143 |
) |
|
|
(208 |
) |
|
|
(263 |
) |
Minority interest
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Results
of discontinued operations
|
|
|
170 |
|
|
|
232 |
|
|
|
343 |
|
|
|
439 |
|
Gain on disposal (net of tax of $7 and
$51)
|
|
|
4,282 |
|
|
|
|
|
|
|
4,362 |
|
|
|
|
|
Net income from discontinued
operations
|
|
$ |
4,452 |
|
|
$ |
232 |
|
|
$ |
4,705 |
|
|
$ |
439 |
|
Lorillard’s revenues amounted to
99.6% and 99.7% of total revenues of discontinued operations for the three and
six months ended June 30, 2008 and 95.7% and 95.3% for the three and six months
ended June 30, 2007. Lorillard’s pretax income amounted to approximately 100.0%
of total pretax income of discontinued operations for all periods
presented.
The components of discontinued
operations included in the Consolidated Condensed Balance Sheets are as
follows:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
of discontinued operations:
|
|
|
|
|
|
|
Investments
|
|
$ |
170 |
|
|
$ |
1,495 |
|
Cash
|
|
|
9 |
|
|
|
19 |
|
Receivables
|
|
|
|
|
|
|
293 |
|
Reinsurance
receivables
|
|
|
6 |
|
|
|
1 |
|
Property, plant and
equipment
|
|
|
|
|
|
|
218 |
|
Deferred income
taxes
|
|
|
|
|
|
|
575 |
|
Goodwill and other intangible
assets
|
|
|
|
|
|
|
5 |
|
Other assets
|
|
|
2 |
|
|
|
409 |
|
Insurance reserves and other
liabilities
|
|
|
(181 |
) |
|
|
(174 |
) |
Assets of discontinued
operations
|
|
$ |
6 |
|
|
$ |
2,841 |
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued
operations:
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
$ |
- |
|
|
$ |
1,637 |
|
The assets and liabilities of Lorillard
totaling $2.6 billion and $1.6 billion, and Bulova totaling $218 million
and $50 million, respectively, as of December 31, 2007 are included in Assets of
discontinued operations and Liabilities of discontinued operations in the
Consolidated Condensed Balance Sheet. The assets of CNA’s discontinued
operations totaling $6 million and $23 million as of June 30, 2008 and December
31, 2007 are included in Assets of discontinued operations in the Consolidated
Condensed Balance Sheets.
CNA’s accounting and reporting for
discontinued operations is in accordance with APB No. 30, “Reporting the Results
of Operations – Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.”
In accordance with APB No. 30, CNA’s assets and liabilities of discontinued
operations are presented in net assets. At June 30, 2008 and December 31, 2007,
the insurance reserves are net of discounts of $79 million and $73 million,
respectively.
17. Consolidating
Financial Information
The following schedules present the
Company’s consolidating balance sheet information at June 30, 2008 and December
31, 2007, and consolidating statements of income information for the six months
ended June 30, 2008 and 2007. These schedules present the individual
subsidiaries of the Company and their contribution to the consolidated condensed
financial statements. Amounts presented will not necessarily be the same as
those in the individual financial statements of the Company’s subsidiaries due
to adjustments for purchase accounting, income tax and minority interests. In
addition, many of the Company’s subsidiaries use a classified balance sheet
which also leads to differences in amounts reported for certain line
items.
The Corporate and Other column primarily
reflects the parent company’s investment in its subsidiaries, invested cash
portfolio, the assets and liabilities of discontinued operations of Lorillard
and Bulova and corporate long term debt. The elimination adjustments are for
intercompany assets and liabilities, interest and dividends, the parent
company’s investment in capital stocks of subsidiaries, and various reclasses of
debit or credit balances to the amounts in consolidation. Purchase accounting
adjustments have been pushed down to the appropriate
subsidiary.
Loews
Corporation
Consolidating
Balance Sheet Information
|
|
CNA
|
|
|
Diamond
|
|
|
|
|
|
Boardwalk
|
|
|
Loews
|
|
|
Corporate
|
|
|
|
|
|
|
|
June
30, 2008
|
|
Financial
|
|
|
Offshore
|
|
|
HighMount
|
|
|
Pipeline
|
|
|
Hotels
|
|
|
and
Other
|
|
|
Eliminations
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$ |
39,373 |
|
|
$ |
727 |
|
|
$ |
7 |
|
|
$ |
478 |
|
|
$ |
44 |
|
|
$ |
4,729 |
|
|
|
|
|
$ |
45,358 |
|
Cash
|
|
|
78 |
|
|
|
14 |
|
|
|
48 |
|
|
|
5 |
|
|
|
18 |
|
|
|
5 |
|
|
|
|
|
|
168 |
|
Receivables
|
|
|
10,890 |
|
|
|
674 |
|
|
|
105 |
|
|
|
104 |
|
|
|
30 |
|
|
|
165 |
|
|
$ |
(3 |
) |
|
|
11,965 |
|
Property,
plant and equipment
|
|
|
340 |
|
|
|
3,295 |
|
|
|
3,310 |
|
|
|
4,450 |
|
|
|
357 |
|
|
|
30 |
|
|
|
|
|
|
|
11,782 |
|
Deferred
income taxes
|
|
|
1,842 |
|
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(873 |
) |
|
|
1,026 |
|
Goodwill
and other intangible assets
|
|
|
106 |
|
|
|
20 |
|
|
|
1,065 |
|
|
|
163 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
1,357 |
|
Assets
of discontinued operations
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Investments
in capital stocks of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,912 |
|
|
|
(13,912 |
) |
|
|
- |
|
Other
assets
|
|
|
868 |
|
|
|
164 |
|
|
|
43 |
|
|
|
343 |
|
|
|
44 |
|
|
|
41 |
|
|
|
(1 |
) |
|
|
1,502 |
|
Deferred
acquisition costs of insurance subsidiaries
|
|
|
1,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,167 |
|
Separate
account business
|
|
|
451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
451 |
|
Total
assets
|
|
$ |
55,121 |
|
|
$ |
4,894 |
|
|
$ |
4,635 |
|
|
$ |
5,543 |
|
|
$ |
496 |
|
|
$ |
18,882 |
|
|
$ |
(14,789 |
) |
|
$ |
74,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
reserves
|
|
$ |
39,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1 |
) |
|
$ |
39,754 |
|
Payable
to brokers
|
|
|
566 |
|
|
$ |
198 |
|
|
$ |
378 |
|
|
$ |
37 |
|
|
$ |
1 |
|
|
$ |
791 |
|
|
|
|
|
|
|
1,971 |
|
Short
term debt
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
258 |
|
Long
term debt
|
|
|
1,807 |
|
|
|
503 |
|
|
|
1,690 |
|
|
|
2,096 |
|
|
|
174 |
|
|
|
867 |
|
|
|
|
|
|
|
7,137 |
|
Reinsurance
balances payable
|
|
|
373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
373 |
|
Deferred
income taxes
|
|
|
|
|
|
|
422 |
|
|
|
|
|
|
|
77 |
|
|
|
47 |
|
|
|
327 |
|
|
|
(873 |
) |
|
|
- |
|
Other
liabilities
|
|
|
2,285 |
|
|
|
522 |
|
|
|
195 |
|
|
|
608 |
|
|
|
16 |
|
|
|
180 |
|
|
|
(3 |
) |
|
|
3,803 |
|
Separate
account business
|
|
|
451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
451 |
|
Total
liabilities
|
|
|
45,437 |
|
|
|
1,645 |
|
|
|
2,263 |
|
|
|
2,818 |
|
|
|
296 |
|
|
|
2,165 |
|
|
|
(877 |
) |
|
|
53,747 |
|
Minority
interest
|
|
|
1,309 |
|
|
|
1,592 |
|
|
|
|
|
|
|
1,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,254 |
|
Shareholders’
equity
|
|
|
8,375 |
|
|
|
1,657 |
|
|
|
2,372 |
|
|
|
1,372 |
|
|
|
200 |
|
|
|
16,717 |
|
|
|
(13,912 |
) |
|
|
16,781 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
55,121 |
|
|
$ |
4,894 |
|
|
$ |
4,635 |
|
|
$ |
5,543 |
|
|
$ |
496 |
|
|
$ |
18,882 |
|
|
$ |
(14,789 |
) |
|
$ |
74,782 |
|
Loews
Corporation
Consolidating
Balance Sheet Information
|
|
CNA
|
|
|
Diamond
|
|
|
|
|
|
Boardwalk
|
|
|
Loews
|
|
|
Corporate
|
|
|
|
|
|
|
|
December
31, 2007
|
|
Financial
|
|
|
Offshore
|
|
|
HighMount
|
|
|
Pipeline
|
|
|
Hotels
|
|
|
and
Other
|
|
|
Eliminations
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$ |
41,789 |
|
|
$ |
633 |
|
|
$ |
34 |
|
|
$ |
316 |
|
|
$ |
58 |
|
|
$ |
3,839 |
|
|
|
|
|
$ |
46,669 |
|
Cash
|
|
|
94 |
|
|
|
7 |
|
|
|
19 |
|
|
|
1 |
|
|
|
15 |
|
|
|
4 |
|
|
|
|
|
|
140 |
|
Receivables
|
|
|
10,672 |
|
|
|
523 |
|
|
|
136 |
|
|
|
87 |
|
|
|
22 |
|
|
|
32 |
|
|
$ |
(3 |
) |
|
|
11,469 |
|
Property,
plant and equipment
|
|
|
350 |
|
|
|
3,058 |
|
|
|
3,121 |
|
|
|
3,303 |
|
|
|
365 |
|
|
|
21 |
|
|
|
|
|
|
|
10,218 |
|
Deferred
income taxes
|
|
|
1,224 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(786 |
) |
|
|
441 |
|
Goodwill
and other intangible assets
|
|
|
106 |
|
|
|
20 |
|
|
|
1,061 |
|
|
|
163 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
1,353 |
|
Assets
of discontinued operations
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,818 |
|
|
|
|
|
|
|
2,841 |
|
Investments
in capital stocks of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,967 |
|
|
|
(14,967 |
) |
|
|
- |
|
Other
assets
|
|
|
824 |
|
|
|
130 |
|
|
|
47 |
|
|
|
272 |
|
|
|
36 |
|
|
|
39 |
|
|
|
(1 |
) |
|
|
1,347 |
|
Deferred
acquisition costs of insurance subsidiaries
|
|
|
1,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,161 |
|
Separate
account business
|
|
|
476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
476 |
|
Total
assets
|
|
$ |
56,719 |
|
|
$ |
4,371 |
|
|
$ |
4,421 |
|
|
$ |
4,142 |
|
|
$ |
499 |
|
|
$ |
21,720 |
|
|
$ |
(15,757 |
) |
|
$ |
76,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
reserves
|
|
$ |
40,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1 |
) |
|
$ |
40,221 |
|
Payable
to brokers
|
|
|
441 |
|
|
|
|
|
|
$ |
38 |
|
|
|
|
|
|
|
|
|
|
$ |
101 |
|
|
|
|
|
|
|
580 |
|
Collateral
on loaned securities
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63 |
|
Short
term debt
|
|
|
350 |
|
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
358 |
|
Long
term debt
|
|
|
1,807 |
|
|
|
503 |
|
|
|
1,647 |
|
|
$ |
1,848 |
|
|
|
229 |
|
|
|
866 |
|
|
|
|
|
|
|
6,900 |
|
Reinsurance
balances payable
|
|
|
401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401 |
|
Deferred
income taxes
|
|
|
|
|
|
|
362 |
|
|
|
|
|
|
|
60 |
|
|
|
45 |
|
|
|
319 |
|
|
|
(786 |
) |
|
|
- |
|
Liabilities
of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,637 |
|
|
|
|
|
|
|
1,637 |
|
Other
liabilities
|
|
|
2,463 |
|
|
|
587 |
|
|
|
280 |
|
|
|
561 |
|
|
|
16 |
|
|
|
91 |
|
|
|
(8 |
) |
|
|
3,990 |
|
Separate
account business
|
|
|
476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
476 |
|
Total
liabilities
|
|
|
46,223 |
|
|
|
1,455 |
|
|
|
1,965 |
|
|
|
2,469 |
|
|
|
295 |
|
|
|
3,014 |
|
|
|
(795 |
) |
|
|
54,626 |
|
Minority
interest
|
|
|
1,467 |
|
|
|
1,425 |
|
|
|
|
|
|
|
1,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,898 |
|
Shareholders’
equity
|
|
|
9,029 |
|
|
|
1,491 |
|
|
|
2,456 |
|
|
|
667 |
|
|
|
204 |
|
|
|
18,706 |
|
|
|
(14,962 |
) |
|
|
17,591 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
56,719 |
|
|
$ |
4,371 |
|
|
$ |
4,421 |
|
|
$ |
4,142 |
|
|
$ |
499 |
|
|
$ |
21,720 |
|
|
$ |
(15,757 |
) |
|
$ |
76,115 |
|
Loews
Corporation
Consolidating
Statement of Income Information
|
|
CNA
|
|
|
Diamond
|
|
|
|
|
|
Boardwalk
|
|
|
Loews
|
|
|
Corporate
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2008
|
|
Financial
|
|
|
Offshore
|
|
|
HighMount
|
|
|
Pipeline
|
|
|
Hotels
|
|
|
and
Other
|
|
|
Eliminations
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums
|
|
$ |
3,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1 |
) |
|
$ |
3,586 |
|
Net
investment income
|
|
|
1,010 |
|
|
$ |
7 |
|
|
|
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
157 |
|
|
|
|
|
|
|
1,176 |
|
Intercompany
interest and dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
876 |
|
|
|
(876 |
) |
|
|
- |
|
Investment
losses
|
|
|
(162 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(162 |
) |
Gain
on issuance of subsidiary stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Contract
drilling revenues
|
|
|
|
|
|
|
1,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,707 |
|
Other
|
|
|
168 |
|
|
|
48 |
|
|
$ |
390 |
|
|
|
418 |
|
|
|
201 |
|
|
|
|
|
|
|
|
|
|
|
1,225 |
|
Total
|
|
|
4,603 |
|
|
|
1,762 |
|
|
|
390 |
|
|
|
419 |
|
|
|
202 |
|
|
|
1,035 |
|
|
|
(877 |
) |
|
|
7,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
claims and policyholders’ benefits
|
|
|
2,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,861 |
|
Amortization
of deferred acquisition costs
|
|
|
728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
728 |
|
Contract
drilling expenses
|
|
|
|
|
|
|
558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
558 |
|
Other
operating expenses
|
|
|
425 |
|
|
|
206 |
|
|
|
202 |
|
|
|
229 |
|
|
|
146 |
|
|
|
34 |
|
|
|
(1 |
) |
|
|
1,241 |
|
Interest
|
|
|
67 |
|
|
|
3 |
|
|
|
37 |
|
|
|
37 |
|
|
|
6 |
|
|
|
27 |
|
|
|
|
|
|
|
177 |
|
Total
|
|
|
4,081 |
|
|
|
767 |
|
|
|
239 |
|
|
|
266 |
|
|
|
152 |
|
|
|
61 |
|
|
|
(1 |
) |
|
|
5,565 |
|
Income
before income tax and minority interest
|
|
|
522 |
|
|
|
995 |
|
|
|
151 |
|
|
|
153 |
|
|
|
50 |
|
|
|
974 |
|
|
|
(876 |
) |
|
|
1,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
128 |
|
|
|
315 |
|
|
|
56 |
|
|
|
41 |
|
|
|
20 |
|
|
|
33 |
|
|
|
|
|
|
|
593 |
|
Minority
interest
|
|
|
61 |
|
|
|
350 |
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
456 |
|
Total
|
|
|
189 |
|
|
|
665 |
|
|
|
56 |
|
|
|
86 |
|
|
|
20 |
|
|
|
33 |
|
|
|
- |
|
|
|
1,049 |
|
Income
from continuing operations
|
|
|
333 |
|
|
|
330 |
|
|
|
95 |
|
|
|
67 |
|
|
|
30 |
|
|
|
941 |
|
|
|
(876 |
) |
|
|
920 |
|
Discontinued
operations, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
343 |
|
|
|
|
|
|
|
343 |
|
Gain
on disposal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,362 |
|
|
|
|
|
|
|
4,362 |
|
Net
income
|
|
$ |
333 |
|
|
$ |
330 |
|
|
$ |
95 |
|
|
$ |
67 |
|
|
$ |
30 |
|
|
$ |
5,646 |
|
|
$ |
(876 |
) |
|
$ |
5,625 |
|
Loews
Corporation
Consolidating
Statement of Income Information
|
|
CNA
|
|
|
Diamond
|
|
|
|
|
|
Boardwalk
|
|
|
Loews
|
|
|
Corporate
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2007
|
|
Financial
|
|
|
Offshore
|
|
|
HighMount
|
|
|
Pipeline
|
|
|
Hotels
|
|
|
and
Other
|
|
|
Eliminations
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums
|
|
$ |
3,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1 |
) |
|
$ |
3,734 |
|
Net
investment income
|
|
|
1,279 |
|
|
$ |
17 |
|
|
|
|
|
$ |
11 |
|
|
$ |
1 |
|
|
$ |
210 |
|
|
|
|
|
|
|
1,518 |
|
Intercompany
interest and dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
855 |
|
|
|
(855 |
) |
|
|
|
|
Investment
gains (losses)
|
|
|
(160 |
) |
|
|
|
|
|
$ |
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(129 |
) |
Gain
on issuance of subsidiary stock
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142 |
|
|
|
|
|
|
|
139 |
|
Contract
drilling revenues
|
|
|
|
|
|
|
1,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,226 |
|
Other
|
|
|
132 |
|
|
|
37 |
|
|
|
|
|
|
|
338 |
|
|
|
194 |
|
|
|
(4 |
) |
|
|
|
|
|
|
697 |
|
Total
|
|
|
4,986 |
|
|
|
1,277 |
|
|
|
31 |
|
|
|
349 |
|
|
|
195 |
|
|
|
1,203 |
|
|
|
(856 |
) |
|
|
7,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
claims and policyholders’
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefits
|
|
|
2,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,921 |
|
Amortization
of deferred acquisition costs
|
|
|
753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
753 |
|
Contract
drilling expenses
|
|
|
|
|
|
|
434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
434 |
|
Other
operating expenses
|
|
|
473 |
|
|
|
171 |
|
|
|
|
|
|
|
202 |
|
|
|
149 |
|
|
|
24 |
|
|
|
(1 |
) |
|
|
1,018 |
|
Interest
|
|
|
69 |
|
|
|
15 |
|
|
|
|
|
|
|
31 |
|
|
|
6 |
|
|
|
28 |
|
|
|
|
|
|
|
149 |
|
Total
|
|
|
4,216 |
|
|
|
620 |
|
|
|
- |
|
|
|
233 |
|
|
|
155 |
|
|
|
52 |
|
|
|
(1 |
) |
|
|
5,275 |
|
Income
before income tax and minority interest
|
|
|
770 |
|
|
|
657 |
|
|
|
31 |
|
|
|
116 |
|
|
|
40 |
|
|
|
1,151 |
|
|
|
(855 |
) |
|
|
1,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
225 |
|
|
|
203 |
|
|
|
11 |
|
|
|
36 |
|
|
|
15 |
|
|
|
102 |
|
|
|
|
|
|
|
592 |
|
Minority
interest
|
|
|
78 |
|
|
|
232 |
|
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
335 |
|
Total
|
|
|
303 |
|
|
|
435 |
|
|
|
11 |
|
|
|
61 |
|
|
|
15 |
|
|
|
102 |
|
|
|
- |
|
|
|
927 |
|
Income
from continuing operations
|
|
|
467 |
|
|
|
222 |
|
|
|
20 |
|
|
|
55 |
|
|
|
25 |
|
|
|
1,049 |
|
|
|
(855 |
) |
|
|
983 |
|
Discontinued
operations, net
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
446 |
|
|
|
|
|
|
|
439 |
|
Net
income
|
|
$ |
460 |
|
|
$ |
222 |
|
|
$ |
20 |
|
|
$ |
55 |
|
|
$ |
25 |
|
|
$ |
1,495 |
|
|
$ |
(855 |
) |
|
$ |
1,422 |
|
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
Management’s discussion and analysis of
financial condition and results of operations (“MD&A”) should be read in
conjunction with our Consolidated Condensed Financial Statements included in
Item 1 of this Report, Risk Factors included in Part II, Item 1A of this Report,
and the Consolidated Financial Statements, Risk Factors, and MD&A included
in our Annual Report on Form 10-K for the year ended December 31, 2007. This
MD&A is comprised of the following sections:
|
Page
|
|
No.
|
|
|
Overview
|
|
|
Consolidated Financial
Results
|
41
|
|
Separation
of Lorillard
|
42
|
|
Parent Company
Structure
|
42
|
|
Critical
Accounting Estimates
|
42
|
|
Results
of Operations by Business Segment
|
43
|
|
CNA Financial
|
43
|
|
Standard Lines
|
44
|
|
Specialty Lines
|
46
|
|
Life and Group
Non-Core
|
47
|
|
Other Insurance
|
48
|
|
A&E
Reserves
|
49
|
|
Diamond Offshore
|
52
|
|
HighMount
|
54
|
|
Boardwalk
Pipeline
|
55
|
|
Loews Hotels
|
57
|
|
Corporate and
Other
|
57
|
|
Liquidity
and Capital Resources
|
58
|
|
CNA Financial
|
58
|
|
Diamond Offshore
|
59
|
|
HighMount
|
60
|
|
Boardwalk
Pipeline
|
60
|
|
Loews Hotels
|
61
|
|
Corporate and
Other
|
61
|
|
Investments
|
62
|
|
Accounting
Standards
|
70
|
|
Forward-Looking
Statements
|
70
|
|
OVERVIEW
We are a holding company. Our
subsidiaries are engaged in the following lines of business:
|
·
|
commercial
property and casualty insurance (CNA Financial Corporation (“CNA”), a 90%
owned subsidiary);
|
|
·
|
operation
of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc.
(“Diamond Offshore”), a 50.4% owned
subsidiary);
|
|
·
|
exploration,
production and marketing of natural gas, natural gas liquids and, to a
lesser extent, oil (HighMount Exploration & Production LLC
(“HighMount”), a wholly owned
subsidiary);
|
|
·
|
operation
of interstate natural gas transmission pipeline systems (Boardwalk
Pipeline Partners, LP (“Boardwalk Pipeline”), a 70% owned subsidiary);
and
|
|
·
|
operation
of hotels (Loews Hotels Holding Corporation (“Loews Hotels”), a wholly
owned subsidiary).
|
Unless the context otherwise requires,
references in this report to “Loews Corporation,” “the Company,” “we,” “our,” “us”
or like terms refer to the business of Loews Corporation excluding its
subsidiaries.
Consolidated
Financial Results
Net income and earnings per share
information attributable to Loews common stock and former Carolina Group stock
is summarized in the table below.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to Loews common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before net investment
gains (losses)
|
|
$ |
575 |
|
|
$ |
480 |
|
|
$ |
1,013 |
|
|
$ |
966 |
|
Net investment gains (losses) (a)
|
|
|
(64 |
) |
|
|
(58 |
) |
|
|
(93 |
) |
|
|
17 |
|
Income
from continuing operations
|
|
|
511 |
|
|
|
422 |
|
|
|
920 |
|
|
|
983 |
|
Discontinued operations, net (b)
|
|
|
4,348 |
|
|
|
91 |
|
|
|
4,494 |
|
|
|
180 |
|
Net
income attributable to Loews common stock
|
|
|
4,859 |
|
|
|
513 |
|
|
|
5,414 |
|
|
|
1,163 |
|
Net
income attributable to former Carolina Group stock -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations (c)
|
|
|
104 |
|
|
|
141 |
|
|
|
211 |
|
|
|
259 |
|
Consolidated net income
|
|
$ |
4,963 |
|
|
$ |
654 |
|
|
$ |
5,625 |
|
|
$ |
1,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$ |
1.00 |
|
|
$ |
0.78 |
|
|
$ |
1.77 |
|
|
$ |
1.82 |
|
Discontinued operations, net (b)
|
|
|
8.54 |
|
|
|
0.17 |
|
|
|
8.64 |
|
|
|
0.33 |
|
Loews common stock
|
|
$ |
9.54 |
|
|
$ |
0.95 |
|
|
$ |
10.41 |
|
|
$ |
2.15 |
|
Former Carolina Group stock - Discontinued
operations (c)
|
|
$ |
0.96 |
|
|
$ |
1.30 |
|
|
$ |
1.95 |
|
|
$ |
2.39 |
|
|
(a)
|
Includes a gain of $92 for the
six months ended June 30, 2007 related to a reduction in the Company’s
ownership interest in Diamond Offshore from the conversion of Diamond
Offshore’s 1.5% convertible debt into Diamond Offshore common
stock.
|
|
(b)
|
Includes a tax-free non-cash
gain of $4,287 related to the Separation for the three and six months
ended June 30, 2008 and an after tax gain of $75 from the sale of Bulova
Corporation for the six months ended June 30,
2008.
|
|
(c)
|
The Carolina Group and
Carolina Group stock were eliminated effective June 10, 2008 upon
completion of the
Separation.
|
Consolidated income from continuing
operations for the 2008 second quarter was $511 million, or $1.00 per share,
compared to $422 million, or $0.78 per share, in the 2007 second quarter. Income
from continuing operations for the six months ended June 30, 2008 was $920
million, or $1.77 per share, compared to $983 million, or $1.82 per share, in
the prior year.
The increase in income from continuing
operations primarily reflects higher dayrates and utilization at Diamond
Offshore, increased gas transportation revenues at Boardwalk Pipeline, the
operations of HighMount which was acquired in July of 2007, and an increase in
equity earnings of a joint venture at Loews Hotels. These increases were
partially offset by a decline in results at CNA reflecting lower net investment
income, decreased current accident year underwriting results and increased
catastrophe losses.
Income from continuing operations
includes net investment losses of $64 million (after tax and minority interest)
in the second quarter of 2008 compared to net investment losses of $58 million
(after tax and minority interest) in the comparable period of the prior
year.
The decline in income from continuing
operations for the six months ended June 30, 2008 primarily reflects a decline
in results at CNA, and the increased investment losses discussed below. These
decreases were partially offset by improved results at Diamond Offshore,
Boardwalk Pipeline, HighMount and Loews Hotels.
Income from continuing operations
includes net investment losses of $93 million (after tax and minority interest)
in the first half of 2008 compared to net investment gains of $17 million (after
tax and minority interest) in the comparable period of the prior year. The 2007
investment gains included $92 million (after tax) related to a reduction in our
ownership interest in Diamond Offshore from the conversion of Diamond Offshore’s
1.5% convertible debt into Diamond Offshore common stock.
Separation
of Lorillard
In June of 2008, we disposed of our
entire ownership interest in our wholly owned subsidiary, Lorillard, Inc.
(“Lorillard”), through the following two integrated transactions, collectively
referred to as the “Separation”:
|
·
|
On
June 10, 2008, we distributed 108,478,429 shares, or approximately 62%, of
the outstanding common stock of Lorillard in exchange for and in
redemption of all of the 108,478,429 outstanding shares of the Company’s
former Carolina Group stock, in accordance with our Restated Certificate
of Incorporation (the “Redemption”);
and
|
|
·
|
On
June 16, 2008, we distributed the remaining 65,445,000 shares, or
approximately 38%, of the outstanding common stock of Lorillard in
exchange for 93,492,857 shares of Loews common stock, reflecting an
exchange ratio of 0.70 (the “Exchange
Offer”).
|
As a result of the Separation, Lorillard
is no longer a subsidiary of ours and we no longer own any interest in the
outstanding stock of Lorillard. As of the completion of the Redemption, the
former Carolina Group and former Carolina Group stock have been eliminated. In
addition, at that time all outstanding stock options and stock appreciation
rights (“SARs”) awarded under the Company’s former Carolina Group 2002 Stock
Option Plan were assumed by Lorillard and converted into stock options and SARs
which are exercisable for shares of Lorillard common stock.
The Loews common stock acquired by us in
the Exchange Offer was recorded as a decrease in our Shareholders’ equity,
reflecting Loews common stock at market value of the shares of Loews common
stock delivered in the Exchange Offer. This decline was offset by a $4.3 billion
gain to us from the Exchange Offer, which was reported as a gain on disposal of
the discontinued business.
Our Consolidated Condensed Financial
Statements have been reclassified to reflect Lorillard as a discontinued
operation. Accordingly, the assets and liabilities, revenues and expenses and
cash flows have been excluded from the respective captions in the Consolidated
Condensed Balance Sheets, Consolidated Condensed Statements of Income, and
Consolidated Condensed Statements of Cash Flows and have been included in Assets
and Liabilities of discontinued operations, Discontinued Operations, net and Net
cash flows - discontinued operations, respectively.
Prior to the Redemption, we had a two
class common stock structure: Loews common stock and former Carolina Group
stock. Former Carolina Group stock, commonly called a tracking stock, was
intended to reflect the performance of a defined group of Loews’s assets and
liabilities referred to as the former Carolina Group. The principal assets and
liabilities attributable to the former Carolina Group were our 100% ownership of
Lorillard, including all dividends paid by Lorillard to us, and any and all
liabilities, costs and expenses arising out of or relating to tobacco or
tobacco-related businesses. Immediately prior to the Separation, outstanding
former Carolina Group stock represented an approximately 62% economic interest
in the performance of the former Carolina Group. The Loews Group consisted of
all of Loews’s assets and liabilities other than those allocated to the former
Carolina Group, including an approximately 38% interest in the former Carolina
Group.
Parent
Company Structure
We are a holding company and derive
substantially all of our cash flow from our subsidiaries. We rely upon our
invested cash balances and distributions from our subsidiaries to generate the
funds necessary to meet our obligations and to declare and pay any dividends to
our stockholders. The ability of our subsidiaries to pay dividends is subject
to, among other things, the availability of sufficient 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 Liquidity and Capital Resources – CNA
Financial, below). 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.
At June 30, 2008, the book value per
share of Loews common stock was $38.47, compared to $32.40 at December 31,
2007.
CRITICAL
ACCOUNTING ESTIMATES
The preparation of the consolidated
condensed financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) requires us to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and the related notes. Actual results could differ from
those estimates.
The consolidated condensed financial
statements and accompanying notes have been prepared in accordance with GAAP,
applied on a consistent basis. We continually evaluate the accounting policies
and estimates used to prepare the consolidated condensed financial statements.
In general, our estimates are based on historical experience, evaluation of
current trends, information from third party professionals and various other
assumptions that we believe are reasonable under the known facts and
circumstances.
We consider the accounting policies
discussed below to be critical to an understanding of our consolidated condensed
financial statements as their application places the most significant demands on
our judgment.
|
·
|
Valuation
of Investments and Impairment of
Securities
|
|
·
|
Long
Term Care Products
|
|
·
|
Pension
and Postretirement Benefit
Obligations
|
|
·
|
Valuation
of HighMount’s Proved Reserves
|
Due to the inherent uncertainties
involved with these types of judgments, actual results could differ
significantly from estimates, which may have a material adverse impact on our
results of operations or equity. See the Critical Accounting Estimates and the
Results of Operations by Business Segment - CNA Financial - Reserves - Estimates and
Uncertainties sections of our Management’s Discussion and Analysis of Financial
Condition and Results of Operations included under Item 7 of our Form 10-K for
the year ended December 31, 2007 for further information.
RESULTS
OF OPERATIONS BY BUSINESS SEGMENT
CNA
Financial
Insurance operations are conducted by
subsidiaries of CNA Financial Corporation (“CNA”). CNA is a 90% owned
subsidiary.
CNA’s core property and casualty
commercial insurance operations are reported in two business segments: Standard
Lines and Specialty Lines. Standard Lines includes standard property and
casualty coverages sold to small businesses and middle market entities and
organizations in the U.S. primarily through an independent agency distribution
system. Standard Lines also includes commercial insurance and risk management
products sold to large corporations in the U.S. primarily through insurance
brokers. Specialty Lines provides a broad array of professional, financial and
specialty property and casualty products and services, including excess and
surplus lines, primarily through insurance brokers and managing general
underwriters. Specialty Lines also includes insurance coverages sold globally
through CNA’s foreign operations (“CNA Global”). The non-core operations are
managed in Life & Group Non-Core segment and Other Insurance segment. Life
& Group Non-Core primarily includes the results of the life and group lines
of business sold or placed in run-off. Other Insurance primarily includes the
results of certain property and casualty lines of business placed in run-off,
including CNA Re. This segment also includes the results related to the
centralized adjusting and settlements of A&E.
Segment
Results
The following discusses the results
of continuing operations for CNA’s operating segments. CNA utilizes the net
operating income financial measure to monitor its operations. Net operating
income is calculated by excluding from net income the after-tax and minority
interest of 1) net realized investment gains or losses, 2) income or loss from
discontinued operations and 3) any cumulative effects of changes in accounting
principles. In evaluating the results of its Standard Lines and Specialty Lines
segments, CNA utilizes the loss ratio, the expense ratio, the dividend ratio,
and the combined ratio. These ratios are calculated using GAAP financial
results. The loss ratio is the percentage of net incurred claim and claim
adjustment expenses to net earned premiums. The expense ratio is the percentage
of insurance underwriting and acquisition expenses, including the amortization
of deferred acquisition costs, to net earned premiums. The dividend ratio is the
ratio of policyholders’ dividends incurred to net earned premiums. The combined
ratio is the sum of the loss, expense and dividend ratios.
Standard
Lines
The following table summarizes the
results of operations for Standard Lines.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions, except %)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
written premiums
|
|
$ |
848 |
|
|
$ |
904 |
|
|
$ |
1,619 |
|
|
$ |
1,771 |
|
Net
earned premiums
|
|
|
768 |
|
|
|
842 |
|
|
|
1,551 |
|
|
|
1,705 |
|
Net
investment income
|
|
|
199 |
|
|
|
235 |
|
|
|
363 |
|
|
|
455 |
|
Net
operating income
|
|
|
111 |
|
|
|
130 |
|
|
|
197 |
|
|
|
267 |
|
Net
realized investment losses
|
|
|
(35 |
) |
|
|
(37 |
) |
|
|
(45 |
) |
|
|
(51 |
) |
Net
income
|
|
|
76 |
|
|
|
93 |
|
|
|
152 |
|
|
|
216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment
expense
|
|
|
73.7 |
% |
|
|
69.0 |
% |
|
|
73.7 |
% |
|
|
68.8 |
% |
Expense
|
|
|
29.0 |
|
|
|
34.0 |
|
|
|
29.6 |
|
|
|
32.0 |
|
Dividend
|
|
|
0.5 |
|
|
|
(0.4 |
) |
|
|
0.5 |
|
|
|
|
|
Combined
|
|
|
103.2 |
% |
|
|
102.6 |
% |
|
|
103.8 |
% |
|
|
100.8 |
% |
Three
Months Ended June 30, 2008 Compared to 2007
Net written premiums for Standard
Lines decreased $56 million for the three months ended June 30, 2008 as compared
with the same period in 2007, primarily due to decreased production. The
competitive market conditions are expected to put ongoing pressure on premium
and income levels, and the expense ratio. Net earned premiums decreased $74
million for the three months ended June 30, 2008 as compared with the same
period in 2007, consistent with the decreased premiums written.
Standard Lines averaged rate
decreases of 6.0% for the three months ended June 30, 2008, as compared to
decreases of 4.0% for the three months ended June 30, 2007 for the contracts
that renewed during those periods. Retention rates of 80.0% and 81.0% were
achieved for those contracts that were available for renewal in each
period.
Net income decreased $17 million for
the three months ended June 30, 2008 as compared with the same period in 2007.
This decrease was primarily attributable to decreased net operating
income.
Net operating income decreased $19
million for the three months ended June 30, 2008 as compared with the same
period in 2007. This decrease was primarily driven by lower net investment
income, higher catastrophe losses and decreased current accident year
underwriting results. These decreases were partially offset by increased
favorable net prior year development and lower expenses. The catastrophe losses
were $26 million after-tax and minority interest in the second quarter of 2008,
as compared to $7 million after-tax and minority interest in the second quarter
of 2007.
The combined ratio increased
0.6 points for the three months ended June 30, 2008 as compared with the
same period in 2007. The loss ratio increased 4.7 points primarily due to
increased catastrophe losses and higher current accident year loss ratios
related to the decline in rates, partially offset by increased favorable net
prior year loss development.
The expense ratio decreased 5.0
points for the three months ended June 30, 2008 as compared with the same period
in 2007. The decrease primarily related to favorable changes in estimates for
insurance-related assessment liabilities.
The dividend ratio increased 0.9
points for the three months ended June 30, 2008 as compared with the same period
in 2007. The 2007 results included favorable dividend development in the
workers’ compensation line of business.
Favorable net prior year development
of $23 million was recorded for the three months ended June 30, 2008,
including $15 million of favorable claim and allocated claim adjustment
expense reserve development and $8 million of favorable premium
development. Favorable net prior year development of $4 million, including $20
million of favorable claim and allocated claim adjustment expense reserve
development and $16 million of unfavorable premium development, was
recorded for the three months ended June 30, 2007. Further information on
Standard Lines net prior year development for the three months ended June 30,
2008 and 2007 is included in Note 8 of the Notes to Consolidated Condensed
Financial Statements included under Item 1.
Six
Months Ended June 30, 2008 Compared to 2007
Net written premiums for Standard
Lines decreased $152 million and net earned premiums decreased $154 million for
the six months ended June 30, 2008 as compared with the same period in 2007, due
to the reasons discussed above in the three month comparison.
Standard Lines averaged rate
decreases of 6.0% for the six months ended June 30, 2008, as compared to
decreases of 4.0% for the six months ended June 30, 2007 for the contracts that
renewed during those periods. Retention rates of 80.0% and 79.0% were achieved
for those contracts that were available for renewal in each period.
Net income decreased $64 million for
the six months ended June 30, 2008 as compared with the same period in 2007.
This decrease was primarily attributable to decreased net operating
income.
Net
operating income decreased $70 million for the six months ended June 30, 2008 as
compared with the same period in 2007. This decrease was primarily driven by
lower net investment income, higher catastrophe losses and decreased current
accident year underwriting results. These decreases were partially offset by
increased favorable net prior year development and lower expenses. The
catastrophe losses were $57 million after-tax and minority interest for the six
months ended June 30, 2008, as compared to $24 million after-tax and minority
interest in the same period of 2007.
The combined ratio increased 3.0
points for the six months ended June 30, 2008 as compared with the same period
in 2007. The loss ratio increased 4.9 points primarily due to increased
catastrophe losses and current accident year loss ratios related in part to the
decline in rates, partially offset by increased favorable net prior year loss
development as discussed below.
The expense ratio decreased 2.4
points for the six months ended June 30, 2008 as compared with the same period
in 2007. The decrease primarily related to favorable changes in estimates for
insurance-related assessment liabilities.
The dividend ratio increased 0.5
points for the three months ended June 30, 2008 as compared with the same period
in 2007. The 2007 results included favorable dividend development in the
workers’ compensation line of business.
Favorable net prior year development
of $49 million was recorded for the six months ended June 30, 2008, including
$50 million of favorable claim and allocated claim adjustment expense reserve
development and $1 million of unfavorable premium development. Favorable net
prior year development of $17 million, including $7 million of favorable claim
and allocated claim adjustment expense reserve development and $10 million of
favorable premium development, was recorded for the six months ended June 30,
2007. Further information on Standard Lines net prior year development for the
six months ended June 30, 2008 and 2007 is included in Note 8 of the Notes to
Consolidated Condensed Financial Statements included under Item 1.
The following table summarizes the
gross and net carried reserves as of June 30, 2008 and December 31, 2007 for
Standard Lines.
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Case Reserves
|
|
$ |
6,083 |
|
|
$ |
5,988 |
|
Gross IBNR Reserves
|
|
|
5,893 |
|
|
|
6,060 |
|
Total Gross Carried Claim and Claim Adjustment
Expense Reserves
|
|
$ |
11,976 |
|
|
$ |
12,048 |
|
|
|
|
|
|
|
|
|
|
Net
Case Reserves
|
|
$ |
4,863 |
|
|
$ |
4,750 |
|
Net IBNR Reserves
|
|
|
5,003 |
|
|
|
5,170 |
|
Total Net Carried Claim and Claim Adjustment
Expense Reserves
|
|
$ |
9,866 |
|
|
$ |
9,920 |
|
Specialty
Lines
The following table summarizes the
results of operations for Specialty Lines.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions, except %)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
written premiums
|
|
$ |
860 |
|
|
$ |
869 |
|
|
$ |
1,708 |
|
|
$ |
1,733 |
|
Net
earned premiums
|
|
|
859 |
|
|
|
870 |
|
|
|
1,732 |
|
|
|
1,715 |
|
Net
investment income
|
|
|
155 |
|
|
|
162 |
|
|
|
287 |
|
|
|
311 |
|
Net
operating income
|
|
|
130 |
|
|
|
160 |
|
|
|
242 |
|
|
|
286 |
|
Net
realized investment losses
|
|
|
(17 |
) |
|
|
(21 |
) |
|
|
(22 |
) |
|
|
(29 |
) |
Net
income
|
|
|
113 |
|
|
|
139 |
|
|
|
220 |
|
|
|
257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment
expense
|
|
|
65.2 |
% |
|
|
61.1 |
% |
|
|
65.0 |
% |
|
|
62.6 |
% |
Expense
|
|
|
27.6 |
|
|
|
25.7 |
|
|
|
27.1 |
|
|
|
26.2 |
|
Dividend
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.5 |
|
|
|
0.2 |
|
Combined
|
|
|
92.9 |
% |
|
|
87.0 |
% |
|
|
92.6 |
% |
|
|
89.0 |
% |
Three
Months Ended June 30, 2008 Compared to 2007
Net written premiums for Specialty
Lines decreased $9 million for the three months ended June 30, 2008 as compared
to the same period in 2007. Premiums written in 2008 were unfavorably impacted
by decreased production as compared with the same period in 2007. The
competitive market conditions are expected to put ongoing pressure on premium
and income levels, and the expense ratio. This unfavorable impact was partially
offset by decreased ceded premiums. Net earned premiums decreased $11 million
for the three months ended June 30, 2008 as compared to the same period in 2007,
consistent with the decrease in net written premiums.
Specialty Lines averaged rate
decreases of 4.0% for the three months ended June 30, 2008 as compared to
decreases of 3.0% for the three months ended June 30, 2007 for the contracts
that renewed during those periods. Retention rates of 83.0% and 84.0% were
achieved for those contracts that were available for renewal in each
period.
Net income decreased $26 million for
the three months ended June 30, 2008 as compared with the same period in 2007.
This decrease was primarily attributable to lower net operating
income.
Net operating income decreased $30
million for the three months ended June 30, 2008 as compared with the same
period in 2007. This decrease was primarily driven by unfavorable net prior year
development for the three months ended June 30, 2008 as compared to favorable
net prior year development for the same period in 2007 and decreased current
accident year underwriting results. The 2007 results included favorable
experience and a change in estimate related to dealer profit commissions in the
warranty line of business.
The combined ratio increased 5.9
points for the three months ended June 30, 2008 as compared with the same period
in 2007. The loss ratio increased 4.1 points, primarily due to unfavorable net
prior year development for the three months ended June 30, 2008 as compared to
favorable net prior year development for the same period in 2007 and higher
current accident year loss ratios primarily related to the decline in
rates.
The expense ratio increased 1.9
points for the three months ended June 30, 2008 as compared with the same period
in 2007. The 2007 results included a favorable change in estimate related to
dealer profit commissions in the warranty line of business.
Unfavorable net prior year
development of $2 million, including $1 million of unfavorable claim and
allocated claim adjustment expense reserve development and $1 million of
unfavorable premium development, was recorded for the three months ended June
30, 2008. Favorable claim and allocated claim adjustment expense reserve
development of $14 million was recorded for the three months ended June 30,
2007. There was no premium development for the three months ended June 30,
2007.
Six
Months Ended June 30, 2008 Compared to 2007
Net written premiums for Specialty
Lines decreased $25 million for the six months ended June 30, 2008 as compared
to the same period in 2007. Premiums written in 2008 were unfavorably impacted
by decreased production as compared with the same period in 2007. The
competitive market conditions are expected to put ongoing pressure on premium
and income levels, and the expense ratio. This unfavorable impact was partially
offset by decreased ceded premiums. The U.S. Specialty Lines reinsurance
structure was primarily quota share reinsurance through April 2007. CNA
elected not to renew this coverage upon its expiration. With CNA’s current
diversification in the previously reinsured lines of business and its management
of the gross limits on the business written, CNA did not believe the cost of
renewing the program was commensurate with its projected benefit. Net earned
premiums increased $17 million for the six months ended June 30, 2008 as
compared to the same period in 2007, which reflects the decreased use of
reinsurance.
Specialty Lines averaged rate
decreases of 4.0% for the six months ended June 30, 2008 as compared to
decreases of 2.0% for the six months ended June 30, 2007 for the contracts that
renewed during those periods. Retention rates of 84.0% were achieved for those
contracts that were available for renewal in each period.
Net income decreased $37 million for
the six months ended June 30, 2008 as compared with the same period in 2007.
This decrease was primarily attributable to lower net operating
income.
Net operating income decreased $44
million for the six months ended June 30, 2008 as compared with the same period
in 2007. This decrease was primarily driven by less favorable net prior year
development, lower net investment income and decreased current accident year
underwriting results.
The combined ratio increased 3.6
points for the six months ended June 30, 2008 as compared with the same period
in 2007. The loss ratio increased 2.4 points and the expense ratio increased 0.9
point primarily due to the reasons discussed in the three month comparison
above.
Unfavorable claim and allocated claim
adjustment expense reserve development of $18 million and $18 million of
favorable premium development was recorded for the six months ended June 30,
2008, resulting in no net prior year development. Favorable net prior year
development of $17 million, including $7 million of favorable claim and
allocated claim adjustment expense reserve development and $10 million of
favorable premium development, was recorded for the six months ended June 30,
2007.
The following table summarizes the
gross and net carried reserves as of June 30, 2008 and December 31, 2007 for
Specialty Lines.
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Case Reserves
|
|
$ |
2,730 |
|
|
$ |
2,585 |
|
Gross IBNR Reserves
|
|
|
5,790 |
|
|
|
5,818 |
|
Total Gross Carried Claim and Claim Adjustment
Expense Reserves
|
|
$ |
8,520 |
|
|
$ |
8,403 |
|
|
|
|
|
|
|
|
|
|
Net
Case Reserves
|
|
$ |
2,231 |
|
|
$ |
2,090 |
|
Net IBNR Reserves
|
|
|
4,656 |
|
|
|
4,527 |
|
Total Net Carried Claim and Claim Adjustment
Expense Reserves
|
|
$ |
6,887 |
|
|
$ |
6,617 |
|
Life
and Group Non-Core
The following table summarizes the
results of operations for Life and Group Non-Core.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earned premiums
|
|
$ |
149 |
|
|
$ |
157 |
|
|
$ |
306 |
|
|
$ |
313 |
|
Net
investment income
|
|
|
157 |
|
|
|
188 |
|
|
|
241 |
|
|
|
349 |
|
Net
operating loss
|
|
|
(28 |
) |
|
|
(13 |
) |
|
|
(30 |
) |
|
|
(10 |
) |
Net
realized investment losses
|
|
|
(3 |
) |
|
|
(10 |
) |
|
|
(13 |
) |
|
|
(10 |
) |
Net loss
|
|
|
(31 |
) |
|
|
(23 |
) |
|
|
(43 |
) |
|
|
(20 |
) |
Three
Months Ended June 30, 2008 Compared to 2007
Net earned premiums for Life &
Group Non-Core decreased $8 million for the three months ended June 30, 2008 as
compared with the same period in 2007. The net earned premiums relate primarily
to the group and individual long term care businesses.
Net results decreased $8 million for
the three months ended June 30, 2008 as compared with the same period in 2007.
The 2008 net results were impacted by adverse reserve development on its run-off
participation in a reinsurance pool, adverse investment performance on a portion
of CNA’s pension deposit business, and unfavorable long term care experience. In
addition, net results for the second quarter of 2007 included favorable
resolution of certain contingencies. Lower net realized investment losses
partially offset these unfavorable impacts.
The decreased net investment income
included a decline of trading portfolio results of $45 million, which was more
than offset by a corresponding decrease in the policyholders’ funds reserves
supported by the trading portfolio, which is included in Insurance claims and
policyholders’ benefits on the Consolidated Condensed Statements of Income
included under Item 1. The trading portfolio supports the indexed group annuity
portion of CNA’s pension deposit business. See the Investments
section of this MD&A for further discussion of net investment income and net
realized investment results.
Six
Months Ended June 30, 2008 Compared to 2007
Net earned premiums for Life &
Group Non-Core decreased $7 million for the six months ended June 30, 2008 as
compared with the same period in 2007.
Net results decreased $23 million for
the six months ended June 30, 2008 as compared with the same period in 2007. In
addition to the unfavorable items discussed in the three month comparison, net
results were also unfavorably impacted by higher net realized investment losses
and lower net investment income. The decreased net investment income included a
decline of trading portfolio results of $124 million, a significant portion of
which was offset by a corresponding decrease in the policyholders’ fund reserves
supported by the trading portfolio. The trading portfolio supports the indexed
group annuity portion of our pension deposit business, which experienced a
decline in net results of $7 million for the six months ended June 30, 2008 as
compared with the same period in 2007.
During the first quarter of 2008, CNA
decided to exit the indexed group annuity portion of its pension deposit
business. This business had net results of $(4) million and $3 million for the
six months ended June 30, 2008 and 2007. The related assets were $367 million
and related liabilities were $341 million at June 30, 2008. CNA expects these
liabilities to be settled with the policyholders during the remainder of 2008
with no material impact to results of operations.
Other
Insurance
The following table summarizes the
results of operations for the Other Insurance segment, including A&E and
intrasegment eliminations.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
65 |
|
|
$ |
86 |
|
|
$ |
119 |
|
|
$ |
164 |
|
Revenues
|
|
|
52 |
|
|
|
66 |
|
|
|
103 |
|
|
|
161 |
|
Net
operating income
|
|
|
14 |
|
|
|
8 |
|
|
|
18 |
|
|
|
17 |
|
Net
realized investment losses
|
|
|
(10 |
) |
|
|
(13 |
) |
|
|
(14 |
) |
|
|
(3 |
) |
Net income (loss)
|
|
|
4 |
|
|
|
(5 |
) |
|
|
4 |
|
|
|
14 |
|
Three
Months Ended June 30, 2008 Compared to 2007
Revenues decreased $14 million for
the three months ended June 30, 2008 as compared with the same period in 2007.
Revenues were unfavorably impacted by lower net investment income, partially
offset by improved net realized investment results. See the Investments section
of this MD&A for further discussion of net investment income and net
realized investment results.
Net results improved $9 million for
the three months ended June 30, 2008 as compared with the same period in 2007.
The 2007 results included current accident year losses related to certain mass
torts. In addition, net income for the second quarter of 2008 included lower
interest costs on corporate debt and $3 million related to the settlement of
litigation brought by CNA against the issuer of a bond investment it previously
held. These favorable impacts were partially offset by the decreased revenues as
discussed above.
Unfavorable net prior year
development of $12 million was recorded for the three months ended June 30,
2008, including $11 million of unfavorable net prior year claim and allocated
claim adjustment expense reserve development and $1 million of unfavorable
premium development. Unfavorable net prior year development of $7 million was
recorded for the three months ended June 30, 2007, including $12 million of
unfavorable net prior year claim and allocated claim adjustment expense reserve
development and $5 million of favorable premium development.
Six
Months Ended June 30, 2008 compared to 2007
Revenues decreased $58 million for
the six months ended June 30, 2008 as compared with the same period in
2007. Revenues were unfavorably impacted by lower net investment
income and decreased net realized investment results. See the
Investments section of this MD&A for further discussion of net investment
income and net realized investment results.
Net income decreased $10 million for
the six months ended June 30, 2008 as compared with the same period in
2007. The decrease in net income was primarily due to decreased
revenues as discussed above. These unfavorable impacts were partly
offset by the favorable items discussed in the three month comparison
above.
Unfavorable net prior year claim and
allocated claim adjustment expense reserve development of $16 million was
recorded for the six months ended June 30, 2008. There was no premium
development recorded for the six months ended June 30,
2008. Unfavorable net prior year development of $9 million was
recorded for the six months ended June 30, 2007, including $12 million of
unfavorable net prior year claim and allocated claim adjustment expense reserve
development and $3 million of favorable premium development.
The following table summarizes the
gross and net carried reserves as of June 30, 2008 and December 31, 2007 for
Corporate & Other Non-Core.
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Case Reserves
|
|
$ |
1,963 |
|
|
$ |
2,159 |
|
Gross IBNR Reserves
|
|
|
2,771 |
|
|
|
2,951 |
|
Total Gross Carried Claim and Claim Adjustment
Expense Reserves
|
|
$ |
4,734 |
|
|
$ |
5,110 |
|
|
|
|
|
|
|
|
|
|
Net
Case Reserves
|
|
$ |
1,209 |
|
|
$ |
1,328 |
|
Net IBNR Reserves
|
|
|
1,659 |
|
|
|
1,787 |
|
Total Net Carried Claim and Claim Adjustment
Expense Reserves
|
|
$ |
2,868 |
|
|
$ |
3,115 |
|
A&E
Reserves
CNA’s property and casualty insurance
subsidiaries have actual and potential exposures related to asbestos and
environmental pollution (“A&E”) claims. Further information on A&E claim
and claim adjustment expense reserves and net prior year development is included
in Note 8 of the Notes to Consolidated Condensed Financial Statements included
under Item 1.
Asbestos
CNA has resolved a number of its
large asbestos accounts by negotiating settlement agreements. Structured
settlement agreements provide for payments over multiple years as set forth in
each individual agreement.
In 1985, 47 asbestos producers and
their insurers, including The Continental Insurance Company (“CIC”), executed
the Wellington Agreement. The agreement was intended to resolve all issues and
litigation related to coverage for asbestos exposures. Under this agreement,
signatory insurers committed scheduled policy limits and made the limits
available to pay asbestos claims based upon coverage blocks designated by the
policyholders in 1985, subject to extension by policyholders. CIC was a
signatory insurer to the Wellington Agreement.
CNA has also used coverage in place
agreements to resolve large asbestos exposures. Coverage in place agreements are
typically agreements between CNA and its policyholders identifying the policies
and the terms for payment of asbestos related liabilities. Claim payments are
contingent on presentation of adequate documentation showing exposure during the
policy periods and other documentation supporting the demand for claim payment.
Coverage in place agreements may have annual payment caps. Coverage in place
agreements are evaluated based on claims filings trends and
severities.
CNA categorizes active asbestos
accounts as large or small accounts. CNA defines a large account as an active
account with more than $100,000 of cumulative paid losses. CNA has made
resolving large accounts a significant management priority. Small accounts are
defined as active accounts with $100,000 or less of cumulative paid losses.
Approximately 80.2% and 81.2% of our total active asbestos accounts are
classified as small accounts at June 30, 2008 and December 31,
2007.
CNA also evaluates its asbestos
liabilities arising from its assumed reinsurance business and its participation
in various pools, including Excess & Casualty Reinsurance Association
(“ECRA”).
IBNR reserves relate to potential
development on accounts that have not settled and potential future claims from
unidentified policyholders.
The tables below depict CNA’s overall
pending asbestos accounts and associated reserves at June 30, 2008 and December
31, 2007.
|
|
|
|
|
|
|
|
|
|
|
Percent
of
|
|
|
|
Number
of
|
|
|
Net
Paid
|
|
|
Net
Asbestos
|
|
|
Asbestos
Net
|
|
June 30, 2008
|
|
Policyholders
|
|
|
Losses
|
|
|
Reserves
|
|
|
Reserves
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders
with settlement agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured
settlements
|
|
|
14 |
|
|
$ |
15 |
|
|
$ |
130 |
|
|
|
10.6 |
% |
Wellington
|
|
|
3 |
|
|
|
1 |
|
|
|
11 |
|
|
|
0.9 |
|
Coverage in place
|
|
|
37 |
|
|
|
19 |
|
|
|
91 |
|
|
|
7.4 |
|
Total with settlement
agreements
|
|
|
54 |
|
|
|
35 |
|
|
|
232 |
|
|
|
18.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
policyholders with active accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large asbestos
accounts
|
|
|
235 |
|
|
|
42 |
|
|
|
213 |
|
|
|
17.3 |
|
Small asbestos accounts
|
|
|
952 |
|
|
|
18 |
|
|
|
86 |
|
|
|
7.0 |
|
Total other policyholders
|
|
|
1,187 |
|
|
|
60 |
|
|
|
299 |
|
|
|
24.3 |
|
Assumed
reinsurance and pools
|
|
|
|
|
|
|
4 |
|
|
|
130 |
|
|
|
10.6 |
|
Unassigned IBNR
|
|
|
|
|
|
|
|
|
|
|
568 |
|
|
|
46.2 |
|
Total
|
|
|
1,241 |
|
|
$ |
99 |
|
|
$ |
1,229 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders
with settlement agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured
settlements
|
|
|
14 |
|
|
$ |
29 |
|
|
$ |
151 |
|
|
|
11.4 |
% |
Wellington
|
|
|
3 |
|
|
|
1 |
|
|
|
12 |
|
|
|
1.0 |
|
Coverage in place
|
|
|
34 |
|
|
|
38 |
|
|
|
100 |
|
|
|
7.6 |
|
Total with settlement
agreements
|
|
|
51 |
|
|
|
68 |
|
|
|
263 |
|
|
|
20.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
policyholders with active accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large asbestos
accounts
|
|
|
233 |
|
|
|
45 |
|
|
|
237 |
|
|
|
17.9 |
|
Small asbestos accounts
|
|
|
1,005 |
|
|
|
15 |
|
|
|
93 |
|
|
|
7.0 |
|
Total other policyholders
|
|
|
1,238 |
|
|
|
60 |
|
|
|
330 |
|
|
|
24.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
reinsurance and pools
|
|
|
|
|
|
|
8 |
|
|
|
133 |
|
|
|
10.0 |
|
Unassigned IBNR
|
|
|
|
|
|
|
|
|
|
|
596 |
|
|
|
45.1 |
|
Total
|
|
|
1,289 |
|
|
$ |
136 |
|
|
$ |
1,322 |
|
|
|
100.0 |
% |
Some asbestos-related defendants have
asserted that their insurance policies are not subject to aggregate limits on
coverage. CNA has such claims from a number of insureds. Some of these claims
involve insureds facing exhaustion of products liability aggregate limits in
their policies, who have asserted that their asbestos-related claims fall within
so-
called
“non-products” liability coverage contained within their policies rather than
products liability coverage, and that the claimed “non-products” coverage is not
subject to any aggregate limit. It is difficult to predict the ultimate size of
any of the claims for coverage purportedly not subject to aggregate limits or
predict to what extent, if any, the attempts to assert “non-products” claims
outside the products liability aggregate will succeed. CNA’s policies also
contain other limits applicable to these claims and CNA has additional coverage
defenses to certain claims. CNA has attempted to manage its asbestos exposure by
aggressively seeking to settle claims on acceptable terms. There can be no
assurance that any of these settlement efforts will be successful, or that any
such claims can be settled on terms acceptable to CNA. Where CNA cannot settle a
claim on acceptable terms, CNA aggressively litigates the claim. However,
adverse developments with respect to such matters could have a material adverse
effect on the Company’s results of operations and/or equity.
CNA is involved in significant
asbestos-related claim litigation, which is described in Note 8 of the Notes to
Consolidated Condensed Financial Statements included under Item 1.
Environmental
Pollution
CNA classifies its environmental
pollution accounts into several categories, which include structured
settlements, coverage in place agreements and active accounts. Structured
settlement agreements provide for payments over multiple years as set forth in
each individual agreement.
CNA has also used coverage in place
agreements to resolve pollution exposures. Coverage in place agreements are
typically agreements between CNA and its policyholders identifying the policies
and the terms for payment of pollution related liabilities. Claim payments are
contingent on presentation of adequate documentation of damages during the
policy periods and other documentation supporting the demand for claim payment.
Coverage in place agreements may have annual payment caps.
CNA categorizes active accounts as
large or small accounts in the pollution area. CNA defines a large account as an
active account with more than $100,000 cumulative paid losses. CNA has made
closing large accounts a significant management priority. Small accounts are
defined as active accounts with $100,000 or less of cumulative paid losses.
Approximately 72.9% and 72.6% of CNA’s total active pollution accounts are
classified as small accounts as of June 30, 2008 and December 31,
2007.
CNA also evaluates its environmental
pollution exposures arising from its assumed reinsurance and its participation
in various pools, including ECRA.
CNA carries unassigned IBNR reserves
for environmental pollution. These reserves relate to potential development on
accounts that have not settled and potential future claims from unidentified
policyholders.
The tables below depict CNA’s overall
pending environmental pollution accounts and associated reserves at June 30,
2008 and December 31, 2007.
|
|
|
|
|
|
|
|
Net
|
|
|
Percent
of
|
|
|
|
|
|
|
|
|
|
Environmental
|
|
|
Environmental
|
|
|
|
Number
of
|
|
|
Net
|
|
|
Pollution
|
|
|
Pollution
Net
|
|
June 30, 2008
|
|
Policyholders
|
|
|
Paid Losses
|
|
|
Reserves
|
|
|
Reserve
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders
with settlement agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured
settlements
|
|
|
10 |
|
|
$ |
1 |
|
|
$ |
6 |
|
|
|
2.9 |
% |
Coverage in place
|
|
|
18 |
|
|
|
3 |
|
|
|
15 |
|
|
|
7.2 |
|
Total with settlement
agreements
|
|
|
28 |
|
|
|
4 |
|
|
|
21 |
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
policyholders with active accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large pollution
accounts
|
|
|
107 |
|
|
|
24 |
|
|
|
46 |
|
|
|
22.1 |
|
Small pollution accounts
|
|
|
288 |
|
|
|
7 |
|
|
|
35 |
|
|
|
16.8 |
|
Total other policyholders
|
|
|
395 |
|
|
|
31 |
|
|
|
81 |
|
|
|
38.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
reinsurance and pools
|
|
|
|
|
|
|
1 |
|
|
|
30 |
|
|
|
14.4 |
|
Unassigned IBNR
|
|
|
|
|
|
|
|
|
|
|
76 |
|
|
|
36.6 |
|
Total
|
|
|
423 |
|
|
$ |
36 |
|
|
$ |
208 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
Net
|
|
|
Percent
of
|
|
|
|
|
|
|
|
|
|
Environmental
|
|
|
Environmental
|
|
|
|
Number
of
|
|
|
Net
|
|
|
Pollution
|
|
|
Pollution
Net
|
|
December 31, 2007
|
|
Policyholders
|
|
|
Paid Losses
|
|
|
Reserves
|
|
|
Reserve
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders
with settlement agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured
settlements
|
|
|
10 |
|
|
$ |
9 |
|
|
$ |
6 |
|
|
|
2.5 |
% |
Coverage in place
|
|
|
18 |
|
|
|
8 |
|
|
|
14 |
|
|
|
5.8 |
|
Total with settlement
agreements
|
|
|
28 |
|
|
|
17 |
|
|
|
20 |
|
|
|
8.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
policyholders with active accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large pollution
accounts
|
|
|
112 |
|
|
|
17 |
|
|
|
53 |
|
|
|
21.9 |
|
Small pollution accounts
|
|
|
298 |
|
|
|
9 |
|
|
|
42 |
|
|
|
17.4 |
|
Total other policyholders
|
|
|
410 |
|
|
|
26 |
|
|
|
95 |
|
|
|
39.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
reinsurance and pools
|
|
|
|
|
|
|
1 |
|
|
|
31 |
|
|
|
12.7 |
|
Unassigned IBNR
|
|
|
|
|
|
|
|
|
|
|
96 |
|
|
|
39.7 |
|
Total
|
|
|
438 |
|
|
$ |
44 |
|
|
$ |
242 |
|
|
|
100.0 |
% |
Diamond
Offshore
Diamond Offshore Drilling, Inc. and
subsidiaries (“Diamond Offshore”). Diamond Offshore is a 50.4% owned
subsidiary.
The following table summarizes the
results of operations for Diamond Offshore for the three and six months ended
June 30, 2008 and 2007 as presented in Note 17 of the Notes to Consolidated
Condensed Financial Statements included in Item 1 of this Report:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
drilling
|
|
$ |
937 |
|
|
$ |
636 |
|
|
$ |
1,707 |
|
|
$ |
1,226 |
|
Net investment
income
|
|
|
3 |
|
|
|
7 |
|
|
|
7 |
|
|
|
17 |
|
Investment
losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
Other revenue, primarily
operating
|
|
|
30 |
|
|
|
18 |
|
|
|
48 |
|
|
|
37 |
|
Total
|
|
|
970 |
|
|
|
661 |
|
|
|
1,762 |
|
|
|
1,277 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
drilling
|
|
|
271 |
|
|
|
222 |
|
|
|
558 |
|
|
|
434 |
|
Other operating
|
|
|
107 |
|
|
|
84 |
|
|
|
206 |
|
|
|
171 |
|
Interest
|
|
|
2 |
|
|
|
4 |
|
|
|
3 |
|
|
|
15 |
|
Total
|
|
|
380 |
|
|
|
310 |
|
|
|
767 |
|
|
|
620 |
|
Income
before income tax and minority interest
|
|
|
590 |
|
|
|
351 |
|
|
|
995 |
|
|
|
657 |
|
Income
tax expense
|
|
|
190 |
|
|
|
110 |
|
|
|
315 |
|
|
|
203 |
|
Minority interest
|
|
|
206 |
|
|
|
124 |
|
|
|
350 |
|
|
|
232 |
|
Net income
|
|
$ |
194 |
|
|
$ |
117 |
|
|
$ |
330 |
|
|
$ |
222 |
|
Diamond Offshore’s revenues vary
based upon demand, which affects the number of days the fleet is utilized and
the dayrates earned. When a rig is idle, no dayrate is earned and revenues will
decrease as a result. Revenues can also be affected as a result of the
acquisition or disposal of rigs, required surveys and shipyard upgrades. In
order to improve utilization or realize higher dayrates, Diamond Offshore may
mobilize its rigs from one market to another. However, during periods of
mobilization, revenues may be adversely affected. As a response to changes in
demand, Diamond Offshore may withdraw a rig from the market by stacking it or
may reactivate a rig stacked previously, which may decrease or increase
revenues, respectively.
The two most significant variables
affecting revenues are dayrates for rigs and rig utilization rates, each of
which is a function of rig supply and demand in the marketplace. As utilization
rates increase, dayrates tend to increase as well,
reflecting
the lower supply of available rigs, and vice versa. Demand for drilling services
is dependent upon the level of expenditures set by oil and gas companies for
offshore exploration and development as well as a variety of political and
economic factors. The availability of rigs in a particular geographical region
also affects both dayrates and utilization rates. These factors are not within
Diamond Offshore’s control and are difficult to predict.
Diamond Offshore’s operating income is
primarily affected by revenue factors, but is also a function of varying levels
of operating expenses. Diamond Offshore’s contract drilling expenses represent
all direct and indirect costs associated with the operation and maintenance of
its drilling equipment. The principal components of Diamond Offshore’s contract
drilling costs are, among other things, direct and indirect costs of labor and
benefits, repairs and maintenance, freight, regulatory inspections, boat and
helicopter rentals and insurance. Labor and repair and maintenance costs
represent the most significant components of contract drilling expenses. In
general, Diamond Offshore’s labor costs increase primarily due to higher salary
levels, rig staffing requirements and costs associated with labor regulations in
the geographic regions in which Diamond Offshore’s rigs operate. Diamond
Offshore has experienced and continues to experience upward pressure on salaries
and wages as a result of the strengthening offshore drilling market and
increased competition for skilled workers. In response to these market
conditions, Diamond Offshore has implemented retention programs, including
increases in compensation. Costs to repair and maintain equipment fluctuate
depending upon the type of activity the drilling unit is performing, as well as
the age and condition of the equipment and the regions in which the rigs are
working.
Contract drilling expenses generally
are not affected by changes in dayrates, and short term reductions in
utilization do not necessarily result in lower operating expenses. For instance,
if a rig is to be idle for a short period of time, few decreases in contract
drilling expenses may actually occur since the rig is typically maintained in a
prepared or “ready stacked” state with a full crew. In addition, when a rig is
idle, Diamond Offshore is responsible for certain contract drilling expenses
such as rig fuel and supply boat costs, which are typically costs of the
operator when a rig is under contract. However, if the rig is to be idle for an
extended period of time, Diamond Offshore may reduce the size of a rig’s crew
and take steps to “cold stack” the rig, which lowers expenses and partially
offsets the impact on operating income.
Operating income is also negatively
impacted when Diamond Offshore performs certain regulatory inspections that are
due every five years (“5-year survey”) for each of Diamond Offshore’s rigs as
well as intermediate surveys, which are performed at interim periods between
5-year surveys. Contract drilling revenue decreases because these surveys are
performed during scheduled downtime in a shipyard. No revenue is generally
earned during periods of downtime for regulatory surveys. Contract drilling
expenses increase as a result of these surveys due to the cost to mobilize the
rigs to a shipyard, inspection costs incurred and repair and maintenance costs.
Repair and maintenance costs may be required resulting from the survey or may
have been previously planned to take place during this mandatory downtime. The
number of rigs undergoing a 5-year survey will vary from year to year. During
the second half of 2008, Diamond Offshore expects that nine of its rigs
will undergo regulatory inspections and will be out of service
for approximately 500 days in the aggregate, including downtime for
planned maintenance projects. In addition, Diamond Offshore expects rigs to be
out of service for approximately 400 days for the mobilization of rigs,
completion of contract modifications and for extended maintenance projects not
performed in conjunction with regulatory surveys.
Revenues increased by $309 million and
$485 million, or 46.7% and 38.0%, and net income increased by $77 million and
$108 million in the three and six months ended June 30, 2008, as compared to the
corresponding periods of the prior year.
Revenues from high specification
floaters and intermediate semisubmersible rigs increased by $309 million and
$493 million in the three and six months ended June 30, 2008, as compared to the
corresponding periods of the prior year. The increase primarily reflects
increased dayrates of $278 million and $371 million and increased utilization of
$26 million and $111 million, respectively.
Revenues from jack-up rigs decreased $8
million and $12 million, in the three and six months ended June 30, 2008, as
compared to the corresponding periods of the prior year, due primarily to
decreased dayrates of $5 million and $13 million, partially offset by increased
utilization of $7 million and $6 million, respectively. Revenues were also
unfavorably impacted by a decrease in the recognition of mobilization fees,
primarily for the Ocean
Spur, of $7 million and $2 million in the three and six months ended June
30, 2007.
Net income increased in the three and
six months ended June 30, 2008, as compared to the corresponding periods of the
prior year, due to the revenue increases as noted above, and reduced interest
expense, partially offset by increased contract drilling expenses.
Interest expense decreased $2 million in
the second quarter of 2008, as compared to the second quarter of 2007, primarily
due to more interest cost capitalized to Diamond Offshore’s qualifying rig
upgrades and construction projects in the second quarter of 2008. Interest
expense decreased $12 million in the six months ended June 30, 2008,
primarily
due to
the reduced interest expense and the absence of a $9 million write off of debt
issuance costs related to conversions of Diamond Offshore’s 1.5% debentures into
common stock in 2007.
HighMount
HighMount Exploration & Production
LLC (“HighMount”). HighMount is a wholly owned subsidiary.
HighMount commenced operations on
July 31, 2007, when it acquired certain exploration and production assets, and
assumed certain related obligations, from subsidiaries of Dominion Resources,
Inc. Prior to the acquisition, natural gas forwards were entered into in order
to manage the commodity price risk of the natural gas assets to be acquired. The
mark-to-market adjustments related to these forwards have been reflected as
investment gains in the following table. Concurrent with the closing of the
acquisition, these forwards were designated as hedges and included in
HighMount’s operating results or Accumulated other comprehensive income on the
Consolidated Condensed Balance Sheet.
We use the following terms throughout
this discussion of HighMount’s results of operations, with “equivalent” volumes
computed with oil and natural gas liquid (“NGL”) quantities converted to Mcf, on
an energy equivalent ratio of one barrel to six Mcf:
Bbl
|
-
|
Barrel
(of oil or NGLs)
|
Bcf
|
-
|
Billion
cubic feet (of natural gas)
|
Bcfe
|
-
|
Billion
cubic feet of natural gas equivalent
|
Mbbl
|
-
|
Thousand
barrels (of oil or NGLs)
|
Mcf
|
-
|
Thousand
cubic feet (of natural gas)
|
Mcfe
|
-
|
Thousand
cubic feet of natural gas
equivalent
|
The following table summarizes the
results of operations for HighMount for the three and six months ended June 30,
2008 and 2007 as presented in Note 17 of the Notes to Consolidated Condensed
Financial Statements included in Item 1 of this Report.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue, primarily
operating
|
|
$ |
201 |
|
|
|
|
|
$ |
390 |
|
|
|
|
Investment gains
|
|
|
|
|
|
$ |
31 |
|
|
|
|
|
|
$ |
31 |
|
Total
|
|
|
201 |
|
|
|
31 |
|
|
|
390 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
106 |
|
|
|
|
|
|
|
202 |
|
|
|
|
|
Interest
|
|
|
19 |
|
|
|
|
|
|
|
37 |
|
|
|
|
|
Total
|
|
|
125 |
|
|
|
- |
|
|
|
239 |
|
|
|
- |
|
Income
before income tax
|
|
|
76 |
|
|
|
31 |
|
|
|
151 |
|
|
|
31 |
|
Income tax expense
|
|
|
28 |
|
|
|
11 |
|
|
|
56 |
|
|
|
11 |
|
Net income
|
|
$ |
48 |
|
|
$ |
20 |
|
|
$ |
95 |
|
|
$ |
20 |
|
Operating revenues consisted
primarily of natural gas and NGL sales of $198 million and $384 million for the
three and six months ended June 30, 2008.
Presented below are production and sales
statistics related to HighMount’s operations for the three and six months ended
June 30, 2008:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30, 2008
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
Gas
production (Bcf)
|
|
|
19.9 |
|
|
|
39.6 |
|
Gas
sales (Bcf)
|
|
|
18.3 |
|
|
|
36.4 |
|
Oil
production/sales (Mbbls)
|
|
|
88.7 |
|
|
|
173.2 |
|
NGL
production/sales (Mbbls)
|
|
|
938.8 |
|
|
|
1,850.5 |
|
Equivalent
production (Bcfe)
|
|
|
26.0 |
|
|
|
51.7 |
|
Equivalent
sales (Bcfe)
|
|
|
24.5 |
|
|
|
48.6 |
|
|
|
|
|
|
|
|
|
|
Average
realized prices without hedging results:
|
|
|
|
|
|
|
|
|
Gas (per Mcf)
|
|
$ |
10.21 |
|
|
$ |
8.86 |
|
NGL (per Bbl)
|
|
|
61.11 |
|
|
|
58.41 |
|
Oil (per Bbl)
|
|
|
117.21 |
|
|
|
106.31 |
|
Equivalent (per
Mcfe)
|
|
|
10.41 |
|
|
|
9.25 |
|
|
|
|
|
|
|
|
|
|
Average
realized prices with hedging results:
|
|
|
|
|
|
|
|
|
Gas (per Mcf)
|
|
$ |
7.90 |
|
|
$ |
7.67 |
|
NGL (per Bbl)
|
|
|
46.15 |
|
|
|
46.53 |
|
Oil (per Bbl)
|
|
|
117.21 |
|
|
|
106.31 |
|
Equivalent (per
Mcfe)
|
|
|
8.11 |
|
|
|
7.90 |
|
Operating expenses primarily consist
of production expenses, general and administrative costs and depreciation,
depletion and amortization. Production expenses totaled $44 million and $82
million for the three and six months ended June 30, 2008, or $1.80 and $1.68 per
Mcfe sold, and included production and ad valorem taxes of $20 million and $36
million, respectively. General and administrative expenses were $16 million and
$34 million, or $0.68 and $0.70 per Mcfe sold, and primarily consisted of
compensation related costs. Depreciation, depletion and amortization expenses
totaled $46 million and $86 million and included depletion of natural gas and
NGL properties totaling $42 million and $79 million. HighMount calculates
depletion using the units-of-production method, which depletes the capitalized
costs and future development costs associated with evaluated properties based on
the ratio of production volume for the current period to total remaining reserve
volume for the evaluated properties. On a per unit basis, depletion expense was
$1.61 and $1.52 per Mcfe produced for the three and six months ended June 30,
2008.
Boardwalk
Pipeline
Boardwalk Pipeline Partners, LP and
subsidiaries (“Boardwalk Pipeline”). Boardwalk Pipeline is a 70% owned
subsidiary.
The following table summarizes the
results of operations for Boardwalk Pipeline for the three and six months ended
June 30, 2008 and 2007 as presented in Note 17 of the Notes to Consolidated
Condensed Financial Statements included in Item 1 of this Report:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue, primarily
operating
|
|
$ |
206 |
|
|
$ |
152 |
|
|
$ |
418 |
|
|
$ |
338 |
|
Net investment income
|
|
|
|
|
|
|
7 |
|
|
|
1 |
|
|
|
11 |
|
Total
|
|
|
206 |
|
|
|
159 |
|
|
|
419 |
|
|
|
349 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
124 |
|
|
|
109 |
|
|
|
229 |
|
|
|
202 |
|
Interest
|
|
|
18 |
|
|
|
14 |
|
|
|
37 |
|
|
|
31 |
|
Total
|
|
|
142 |
|
|
|
123 |
|
|
|
266 |
|
|
|
233 |
|
Income
before income tax and minority interest
|
|
|
64 |
|
|
|
36 |
|
|
|
153 |
|
|
|
116 |
|
Income
tax expense
|
|
|
16 |
|
|
|
11 |
|
|
|
41 |
|
|
|
36 |
|
Minority interest
|
|
|
20 |
|
|
|
9 |
|
|
|
45 |
|
|
|
25 |
|
Net income
|
|
$ |
28 |
|
|
$ |
16 |
|
|
$ |
67 |
|
|
$ |
55 |
|
Boardwalk Pipeline’s business is
affected by trends involving natural gas price levels and natural gas price
spreads, including spreads between physical locations on its pipeline system,
which affects its transportation revenues, and spreads in natural gas prices
across time (for example summer to winter), which primarily affects its parking
and lending (“PAL”) and storage revenues. High natural gas prices in recent
years have helped to drive increased production levels in locations such as the
Bossier Sands and Barnett Shale gas producing regions in East Texas, which has
resulted in additional supply being available on the west side of Boardwalk
Pipeline’s system. This has resulted in widened west-to-east basis differentials
which have benefited its transportation revenues. The high natural gas prices
have also driven increased production in regions such as the Fayetteville Shale
in Arkansas and the Caney Woodford Shale in Oklahoma, which, together with the
higher production levels in East Texas, have formed the basis for several
pipeline expansion projects including those being undertaken by Boardwalk
Pipeline. Wide spreads in natural gas prices between time periods during the
past two to three years, for example fall 2006 to spring 2007, were favorable
for Boardwalk Pipeline’s PAL and interruptible storage services during that
period. These spreads decreased substantially in 2007, and have continued to
decrease into 2008, which resulted in reduced PAL and interruptible storage
revenues. Boardwalk Pipeline cannot predict future time period spreads or basis
differentials.
Total revenues increased $47 million,
or 29.6%, to $206 million for the second quarter of 2008, compared to $159
million for the 2007 period. The primary increase related to a $28 million
increase in gas transportation revenues, excluding fuel, of which the majority
was generated by Boardwalk Pipeline’s expansion projects. Boardwalk Pipeline’s
fuel revenues increased $17 million due to expansion-related throughput and an
increase in the price of natural gas. These increases were partially offset by
an $8 million decrease in PAL revenues due to unfavorable natural gas price
spreads. Other revenues increased $13 million related to a gain on the sale of
gas associated with Boardwalk Pipeline’s western Kentucky storage expansion
project.
Operating costs and expenses
increased $15 million to $124 million for the second quarter of 2008, compared
to $109 million for the 2007 period, primarily resulting from a $17 million
increase in fuel costs from expansion projects and higher natural gas prices.
Depreciation and other taxes increased $14 million due to an increase in
Boardwalk Pipeline’s asset base from expansion. These increases were partially
offset by a $15 million impairment charge in 2007 related to Boardwalk
Pipeline’s Magnolia storage facility.
Total revenues for the six months
ended June 30, 2008 increased $70 million, or 20.1%, to $419 million, compared
to $349 million for the six months ended June 30, 2007. Gas transportation
revenues, excluding fuel, increased $45 million related to Boardwalk Pipeline’s
expansion projects and higher rates on Boardwalk Pipeline’s existing systems.
Fuel revenues increased $19 million due to expansion-related throughput and
higher natural gas prices. These increases were partially offset by lower PAL
revenues of $22 million due to unfavorable natural gas price spreads. Revenues
also increased $15 million related to gains recognized on the sale of gas
associated with Boardwalk Pipeline’s western Kentucky storage expansion project
and an $11 million gain from the settlement of a contract claim.
Operating costs and expenses for the
six months ended June 30, 2008 increased $27 million, to $229 million, compared
to $202 million for the six months ended June 30, 2007. The primary drivers were
increased depreciation and other taxes of $25 million associated with an
increase in Boardwalk Pipeline’s asset base due to expansion and increased fuel
costs of $21 million from usage for expansion projects and higher natural gas
prices. The 2007 period was unfavorably impacted by a $15 million impairment
related to the Magnolia storage facility.
Loews
Hotels
Loews Hotels Holding Corporation and
subsidiaries (“Loews Hotels”). Loews Hotels is a wholly owned
subsidiary.
The following table summarizes the
results of operations for Loews Hotels for the three and six months ended June
30, 2008 and 2007 as presented in Note 17 of the Notes to Consolidated Condensed
Financial Statements included in Item 1 of this Report:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue, primarily
operating
|
|
$ |
104 |
|
|
$ |
99 |
|
|
$ |
201 |
|
|
$ |
194 |
|
Net investment income
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Total
|
|
|
105 |
|
|
|
100 |
|
|
|
202 |
|
|
|
195 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
70 |
|
|
|
75 |
|
|
|
146 |
|
|
|
149 |
|
Interest
|
|
|
3 |
|
|
|
3 |
|
|
|
6 |
|
|
|
6 |
|
Total
|
|
|
73 |
|
|
|
78 |
|
|
|
152 |
|
|
|
155 |
|
Income
before income tax
|
|
|
32 |
|
|
|
22 |
|
|
|
50 |
|
|
|
40 |
|
Income tax expense
|
|
|
13 |
|
|
|
8 |
|
|
|
20 |
|
|
|
15 |
|
Net income
|
|
$ |
19 |
|
|
$ |
14 |
|
|
$ |
30 |
|
|
$ |
25 |
|
Revenues increased by $5 million and $7
million, or 5.0% and 3.6%, and net income increased by $5 million and $5
million, or 35.7% and 20.0%, respectively in the three and six months ended June
30, 2008, as compared to the corresponding periods of 2007.
Revenues increased in the three months
ended June 30, 2008, as compared to the corresponding period of 2007, due to an
increase in revenue per available room to $200.77, compared to $195.44 in the
prior year, reflecting improvements in average room rates of $10.43, or
4.3%.
Revenues increased in the six months
ended June 30, 2008, as compared to the corresponding period of 2007, due to an
increase in revenue per available room to $193.20, compared to $187.37 in the
prior year, reflecting improvements in average room rates of $11.75, or
4.8%.
Pretax income for the three and six
months ended June 30, 2008 increased primarily due to an $11 million gain
related to an adjustment in the carrying value of a joint venture investment,
partially offset by increased operating expenses.
Revenue per available room is an
industry measure of the combined effect of occupancy rates and average room
rates on room revenues. Other hotel operating revenues primarily include guest
charges for food and beverages.
Corporate
and Other
Corporate operations consist primarily
of investment income, discontinued operations of Lorillard through June of 2008
and Bulova through January of 2008, investment gains (losses) from non-insurance
subsidiaries, corporate interest expenses and other corporate administrative
costs.
The following table summarizes the
results of operations for Corporate and Other for the three and six months ended
June 30, 2008 and 2007 as presented in Note 17 of the Notes to Consolidated
Condensed Financial Statements included in Item 1 of this Report:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment
income
|
|
$ |
117 |
|
|
$ |
99 |
|
|
$ |
157 |
|
|
$ |
210 |
|
Investment
gains
|
|
|
2 |
|
|
|
4 |
|
|
|
2 |
|
|
|
142 |
|
Other
|
|
|
|
|
|
|
(6 |
) |
|
|
(1 |
) |
|
|
(5 |
) |
Total
|
|
|
119 |
|
|
|
97 |
|
|
|
158 |
|
|
|
347 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
16 |
|
|
|
8 |
|
|
|
33 |
|
|
|
24 |
|
Interest
|
|
|
13 |
|
|
|
15 |
|
|
|
27 |
|
|
|
28 |
|
Total
|
|
|
29 |
|
|
|
23 |
|
|
|
60 |
|
|
|
52 |
|
Income
before income tax
|
|
|
90 |
|
|
|
74 |
|
|
|
98 |
|
|
|
295 |
|
Income tax expense
|
|
|
29 |
|
|
|
24 |
|
|
|
33 |
|
|
|
102 |
|
Income
from continuing operations
|
|
|
61 |
|
|
|
50 |
|
|
|
65 |
|
|
|
193 |
|
Discontinued
operations, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of
operations
|
|
|
171 |
|
|
|
443 |
|
|
|
342 |
|
|
|
446 |
|
Gain on disposal
|
|
|
4,282 |
|
|
|
|
|
|
|
4,362 |
|
|
|
|
|
Net income
|
|
$ |
4,514 |
|
|
$ |
493 |
|
|
$ |
4,769 |
|
|
$ |
639 |
|
Revenues increased by $22 million for
the three months ended June 30, 2008 and decreased by $189 million for the six
months ended June 30, 2008. Net income increased by $4,021 million and $4,130
million in the three and six months ended June 30, 2008, as compared to the
corresponding periods of 2007.
Revenues increased in the three
months ended June 30, 2008, as compared to the corresponding period of 2007, due
primarily to increased net investment income of $18 million. Revenues decreased
in the six months ended June 30, 2008 primarily due to decreased investment
income of $53 million and reduced investment gains. Investment gains for 2007
included a $142 million pretax gain ($92 million after tax) related to the
issuance of Diamond Offshore common stock from the conversion of $451 million
principal amount of Diamond Offshore’s 1.5% debentures into Diamond Offshore
common stock.
In 2008, the Company completed the
sale of Bulova Corporation and disposed of its entire ownership interest in
Lorillard, Inc. The results of operations and gains on disposal of these
businesses are presented as discontinued operations.
Discontinued operations for the three
and six months includes a $4.3 billion gain on the Separation of Lorillard.
Discontinued operations for the six months ended June 30, 2008, also includes a
$75 million gain on the sale of Bulova.
LIQUIDITY
AND CAPITAL RESOURCES
CNA
Financial
Cash
Flow
CNA’s principal operating cash flow
sources are premiums and investment income from its insurance subsidiaries.
CNA’s primary operating cash flow uses are payments for claims, policy benefits
and operating expenses.
For the six months ended June 30,
2008, net cash provided by operating activities was $812 million as compared
with $541 million for the same period in 2007. Cash provided by operating
activities was favorably impacted by increased net sales of trading securities
to fund policyholders’ withdrawals of investment contract products issued by CNA
and decreased tax and expense payments. Policyholders’ fund withdrawals are
reflected as financing cash flows. Cash provided by operating activities was
unfavorably impacted by decreased premium collections and increased loss
payments.
For the six months ended June 30,
2008, net cash used by investing activities was $231 million as compared with
$529 million for the same period in 2007. Cash flows used by investing
activities related principally to purchases of fixed maturity securities. The
cash flow from investing activities is impacted by various factors such as the
anticipated payment of claims, financing activity, asset/liability management
and individual security buy and sell decisions made in the normal course of
portfolio management. Net cash flows provided by investing
activities-discontinued operations for the six months ended June 30, 2007
included $64 million of cash proceeds related to the sale of a discontinued
operations business.
For the six months ended June 30,
2008, net cash used by financing activities was $594 million as compared with
$54 million for the same period in 2007. In January 2008, CNA repaid its $150
million 6.45% senior note. CNA also purchased outstanding shares of its common
stock as discussed below. Additionally, the increase in cash used for financing
activities is related to increased policyholders’ fund withdrawals in 2008 as
compared to 2007, which are reflected as a Return of investment contract account
balances on the Consolidated Condensed Statements of Cash Flows.
CNA believes that its present cash
flows from operations, investing activities and financing activities, including
cash dividends from CNA subsidiaries, are sufficient to fund its working capital
and debt obligation needs.
CNA has an effective shelf
registration statement under which it may issue debt or equity
securities.
Dividends
On May 21, 2008, CNA paid a quarterly
dividend of $0.15 per share, to shareholders of record on May 7, 2008. On July
23, 2008 CNA’s Board of Directors declared a quarterly dividend of $0.15 per
share, payable August 20, 2008 to shareholders of record on August 6, 2008. The
declaration and payment of future dividends to holders of CNA’s common stock
will be at the discretion of CNA’s Board of Directors and will depend on many
factors, including CNA’s earnings, financial condition, business needs, and
regulatory constraints.
Share
Repurchases
CNA’s Board of Directors has approved
an authorization to purchase, in the open market or through privately negotiated
transactions, CNA’s outstanding common stock, as CNA’s management deems
appropriate. For the six months ended June 30, 2008, CNA repurchased a total of
2,649,621 shares at an average price of $26.53 (including commission) per share.
Share repurchases may continue. No shares of CNA common stock were purchased
during the second quarter of 2008 or for the year ended December 31,
2007.
Diamond
Offshore
Cash and investments, net of receivables
and payables, totaled $741 million at June 30, 2008, compared to $640 million at
December 31, 2007. In 2008, Diamond Offshore paid cash dividends totaling $383
million, consisting of special cash dividends in 2008 of $348 million and its
regular quarterly cash dividends of $35 million. In July of 2008, Diamond
Offshore announced a special cash dividend of $1.25 per share and a regular cash
dividend of $0.125 per share.
Cash provided by operating activities
was $594 million in the first six months of June 30, 2008, compared to $584
million in the comparable period of 2007. The increase in cash flow from
operations is primarily due to an increase in net income and higher favorable
adjustments for depreciation and other non-cash items, partially offset by an
increase in net cash required to satisfy Diamond Offshore’s working capital
requirements. Trade and other receivables used $150 million during the first six
months of 2008 compared to providing $62 million during the first six
months of 2007 due to normal changes in the billing cycle combined with the
effect of higher dayrates earned by Diamond Offshore’s rigs subsequent to the
second quarter of 2007.
The upgrade of the Ocean Monarch continues in
Singapore with expected delivery of the upgraded rig late in the fourth quarter
of 2008. Diamond Offshore expects to spend approximately $310 million to
modernize this rig of which $229 million had been spent through June 30,
2008.
Construction of Diamond Offshore’s
two high-performance, premium jack-up rigs, the Ocean Scepter and the Ocean Shield has been
completed. The Ocean Shield
is currently operating offshore Malaysia while the Ocean Scepter is being
commissioned. Diamond Offshore expects the Ocean Scepter to begin
operating under contract during the third quarter of 2008. The aggregate
expected cost for both rigs is approximately $320 million, including drill pipe
and capitalized interest, of which $294 million had been spent through June 30,
2008.
Diamond Offshore estimates that capital
expenditures in 2008 associated with its ongoing rig equipment replacement and
enhancement programs and other corporate requirements will be approximately $540
million. In the six months
ended
June 30, 2008, Diamond Offshore spent approximately $190 million for capital
additions, including $37 million towards modification of certain of its rigs to
meet contractual requirements.
As of June 30, 2008 and December 31,
2007, there were no loans outstanding under Diamond Offshore’s $285 million
credit facility; however, $54 million in letters of credit were issued under the
credit facility as of June 30, 2008.
Diamond Offshore’s liquidity and capital
requirements are primarily a function of its working capital needs, capital
expenditures and debt service requirements. Cash required to meet Diamond
Offshore’s capital commitments is determined by evaluating the need to upgrade
rigs to meet specific customer requirements and by evaluating Diamond Offshore’s
ongoing rig equipment replacement and enhancement programs, including water
depth and drilling capability upgrades. It is the opinion of Diamond Offshore’s
management that its operating cash flows and cash reserves will be sufficient to
meet these capital commitments; however, Diamond Offshore will continue to make
periodic assessments based on industry conditions.
HighMount
Net cash flows provided by operating
activities were $274 million. Key drivers of net operating cash flows are
commodity prices, production volumes and operating costs.
The primary driver of cash used in
investing activities was capital spending, inclusive of acquisitions. Cash used
in investing activities in the six months ended June 30, 2008 was $288 million.
HighMount spent $200 million on capital expenditures for its drilling program.
HighMount is experiencing a higher capital cost environment attributable to
increased costs of casing, tubing and diesel fuel.
At June 30, 2008, $90 million was
outstanding under HighMount’s $400 million revolving credit facility. In
addition, $6 million in letters of credit have been issued, which reduced the
available capacity under the facility to $304 million. During the first six
months of 2008, HighMount borrowed $120 million and repaid $77 million under the
facility.
Boardwalk
Pipeline
At June 30, 2008 and December 31, 2007,
cash and investments amounted to $483 million and $317 million, respectively.
Funds from operations for each of the six months ended June 30, 2008 and 2007
amounted to $172 million. In the six months ended June 30, 2008 and
2007, Boardwalk Pipeline’s capital expenditures were $1,090 million and
$380 million, respectively.
Boardwalk Pipeline maintains a $1.0
billion revolving credit facility. During the first six months of 2008,
Boardwalk Pipeline borrowed and repaid $518 million under the facility. As of
June 30, 2008, Boardwalk Pipeline was in compliance with all covenant
requirements under its $1.0 billion revolving credit agreement and no amount was
drawn under this facility. In addition, Boardwalk Pipeline has outstanding
letters of credit for $58 million to support certain obligations associated with
its pipeline expansion projects, which reduced the available capacity under the
facility.
In August of 2007, Boardwalk Pipeline
entered into a Treasury rate lock for a notional amount of $150 million to hedge
the risk attributable to changes in the risk-free component of forward 10 year
interest rates through February 1, 2008. The reference rate on the Treasury rate
lock was 4.7%. On February 1, 2008, Boardwalk Pipeline paid the counterparty
approximately $15 million to settle the Treasury rate lock. The Treasury rate
lock was designated as a cash flow hedge; therefore, the loss will be recognized
in Interest expense over ten years.
In March of 2008, Texas Gas
Transmission, LLC, a wholly owned subsidiary of Boardwalk Pipeline, issued $250
million aggregate principal amount of 5.5% senior notes due 2013. The proceeds
from this offering were primarily used to finance a portion of its expansion
projects.
In June of 2008, Boardwalk Pipeline sold
10 million common units at a price of $25.30 per unit in a public offering and
received net proceeds of $243 million. In addition, the Company contributed $5
million to maintain its 2% general partner interest.
In June of 2008, the Company
purchased 22,866,667 of Boardwalk Pipeline’s newly created class B units
representing limited partner interests (“class B units”) for $30 per class B
unit, or an aggregate purchase price of $686 million. The Company owns
approximately 70% of Boardwalk Pipeline, including 100% of Boardwalk Pipeline’s
general partner which contributed an additional $14 million to Boardwalk
Pipeline to maintain its 2% general partner interest. Boardwalk Pipeline intends
to use the proceeds of $700 million to fund a portion of the costs of its
ongoing expansion projects.
Beginning with the distribution in
respect of the quarter ending September 30, 2008, the class B units will share
in quarterly distributions of available cash from operating surplus on a pari
passu basis with Boardwalk Pipeline’s common units, until each common unit and
class B unit has received a quarterly distribution of $0.30. The class B units
will not participate in quarterly distributions above $0.30 per unit. The class
B units will be convertible into common units of Boardwalk Pipeline on a
one-for-one basis at any time after June 30, 2013.
Maintenance capital expenditures were
$13 million in the first six months of 2008. Boardwalk Pipeline expects to fund
the remainder of its 2008 maintenance capital expenditures of approximately $45
million from operating cash flows.
Boardwalk Pipeline has undertaken
significant capital expansion projects, substantially all of which have been or
are expected to be funded with proceeds from its equity and debt financings.
Boardwalk Pipeline expects the total cost of these projects to be as
follows:
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
Estimated
|
|
|
Estimated
|
|
|
Total
|
|
|
Invested
|
|
|
|
Project
Cost
|
|
|
Additional
|
|
|
Estimated
|
|
|
through
|
|
|
|
at March 31, 2008
|
|
|
Cost (a)
|
|
|
Cost
|
|
|
June 30, 2008
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southeast
Expansion
|
|
$ |
775 |
|
|
|
|
|
$ |
775 |
|
|
$ |
553 |
|
Gulf
Crossing Project
|
|
|
1,690 |
|
|
$ |
110 |
|
|
|
1,800 |
|
|
|
505 |
|
Fayetteville and Greenville
Laterals
|
|
|
1,250 |
|
|
|
40 |
|
|
|
1,290 |
|
|
|
261 |
|
Total
|
|
$ |
3,715 |
|
|
$ |
150 |
|
|
$ |
3,865 |
|
|
$ |
1,319 |
|
(a)
|
These
costs are related to the addition of compression to increase the
transmission capacity to approximately 1.7 Bcf per day on the Gulf
Crossing project and 1.3 Bcf per day on the Fayetteville Lateral. The
additional capacity is required to accommodate commitments made under new
transportation agreements. Boardwalk Pipeline expects the additional
compression to be in service in
2010.
|
Boardwalk Pipeline completed its East
Texas to Mississippi expansion project during the second quarter of 2008 at a
total cost of approximately $960 million. This project consists of approximately
242 miles of 42-inch pipeline from DeSoto Parish in western Louisiana to near
Harrisville, Mississippi. Customers have contracted at fixed rates for 1.4 Bcf
per day of firm transportation capacity on a long-term basis which represents
substantially all of the normal operating capacity.
Boardwalk Pipeline expects to incur
expansion capital expenditures of approximately $1.8 billion in the remainder of
2008 and approximately $0.7 billion in 2009 and 2010 to complete its pipeline
expansion projects, based upon current cost estimates. Boardwalk Pipeline has
experienced cost increases in these projects and various factors could cause its
costs to exceed that amount. Boardwalk Pipeline expects to finance its remaining
pipeline expansion capital costs through equity financings and the incurrence of
debt, including sales of debt by it and its subsidiaries and borrowings under
its revolving credit facility, as well as available operating cash flow in
excess of operating needs. However, the impact of the cost increases Boardwalk
Pipeline has experienced and may experience in the future to complete its
expansion capital projects could adversely impact Boardwalk Pipeline’s financing
costs.
During the six months ended June 30,
2008, Boardwalk Pipeline paid cash distributions of $120 million, including $85
million to us. In July of 2008, Boardwalk Pipeline declared a quarterly
distribution of $0.47 per unit.
Loews
Hotels
Funds from operations continue to exceed
operating requirements. Cash and investments decreased to $62 million at June
30, 2008 from $73 million at December 31, 2007. The decrease is primarily due to
$35 million of dividends paid to the Parent Company in the first quarter of
2008. Funds for other capital expenditures and working capital requirements are
expected to be provided from existing cash balances, operations and advances or
capital contributions from us.
Corporate
and Other
Parent Company cash and investments, net
of receivables and payables, at June 30, 2008 totaled $4.0 billion, as compared
to $3.8 billion at December 31, 2007. The increase in net cash and investments
is primarily due to the receipt of $876 million in dividends from subsidiaries
(including $ 491 million from Lorillard) and the receipt of $263 million in
connection with the sale of Bulova, partially offset by the $700 million
purchase of Boardwalk Pipeline’s class B units described in “Liquidity and
Capital Resources – Boardwalk Pipeline,” and $165 million of dividends paid to
our shareholders.
As of June 30, 2008, there were
436,267,871 shares of Loews common stock outstanding. As discussed above,
effective with the completion of the Separation of Lorillard, the former
Carolina Group and former Carolina Group stock have been eliminated. As part of
the Separation, we exchanged 65,445,000 shares of Lorillard common stock for
93,492,857 shares of Loews common stock. Depending on market and other
conditions, we may purchase shares of our and our subsidiaries’ outstanding
common stock in the open market or otherwise.
We have an effective Registration
Statement on Form S-3 registering the future sale of an unlimited amount of our
debt and equity securities.
We continue to pursue conservative
financial strategies while seeking opportunities for responsible growth. These
include the expansion of existing businesses, full or partial acquisitions and
dispositions, and opportunities for efficiencies and economies of
scale.
INVESTMENTS
Insurance
Net
Investment Income
The significant components of CNA’s net
investment income are presented in the following table:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities
|
|
$ |
476 |
|
|
$ |
526 |
|
|
$ |
994 |
|
|
$ |
1,022 |
|
Short-term
investments
|
|
|
26 |
|
|
|
39 |
|
|
|
65 |
|
|
|
89 |
|
Limited
partnerships
|
|
|
46 |
|
|
|
71 |
|
|
|
7 |
|
|
|
123 |
|
Equity
securities
|
|
|
39 |
|
|
|
6 |
|
|
|
44 |
|
|
|
11 |
|
Income
(loss) from trading portfolio (a)
|
|
|
(4 |
) |
|
|
40 |
|
|
|
(81 |
) |
|
|
43 |
|
Other
|
|
|
5 |
|
|
|
12 |
|
|
|
11 |
|
|
|
22 |
|
Total
investment income
|
|
|
588 |
|
|
|
694 |
|
|
|
1,040 |
|
|
|
1,310 |
|
Investment expense
|
|
|
(12 |
) |
|
|
(23 |
) |
|
|
(30 |
) |
|
|
(31 |
) |
Net investment income
|
|
$ |
576 |
|
|
$ |
671 |
|
|
$ |
1,010 |
|
|
$ |
1,279 |
|
(a)
|
The
change in net unrealized gains (losses) on trading securities, included in
net investment income, was $(2) million, $(15) million, $1 million and $3
million for the three and six months ended June 30, 2008 and
2007.
|
Net investment income decreased by
$95 million for the three months ended June 30, 2008 compared with the same
period in 2007. This decrease was primarily driven by decreased results from the
trading portfolio and limited partnerships. The decreased results from the
trading portfolio were more than offset by a corresponding decrease in the
policyholders’ funds reserves supported by the trading portfolio, which is
included in Insurance claims and policyholders’ benefits on the Consolidated
Condensed Statements of Income.
Net investment income decreased by
$269 million for the six months ended June 30, 2008 compared with the same
period of 2007. The decrease was primarily driven by the same reasons discussed
above in the three month comparison.
The bond segment of the investment
portfolio yielded 5.7% and 5.8% for the six months ended June 30, 2008 and
2007.
Net
Realized Investment Gains (Losses)
The components of CNA’s net realized
investment results are presented in the following table:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
bonds
|
|
$ |
(46 |
) |
|
$ |
(96 |
) |
|
$ |
(14 |
) |
|
$ |
(94 |
) |
Corporate and other taxable
bonds
|
|
|
(8 |
) |
|
|
(50 |
) |
|
|
(39 |
) |
|
|
(25 |
) |
Tax-exempt
bonds
|
|
|
10 |
|
|
|
(42 |
) |
|
|
50 |
|
|
|
(53 |
) |
Asset-backed
bonds
|
|
|
(118 |
) |
|
|
(77 |
) |
|
|
(157 |
) |
|
|
(110 |
) |
Redeemable preferred stock
|
|
|
4 |
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
Total fixed maturity
securities
|
|
|
(158 |
) |
|
|
(266 |
) |
|
|
(160 |
) |
|
|
(283 |
) |
Equity
securities
|
|
|
(14 |
) |
|
|
11 |
|
|
|
(29 |
) |
|
|
14 |
|
Derivative
securities
|
|
|
56 |
|
|
|
115 |
|
|
|
12 |
|
|
|
107 |
|
Short-term
investments
|
|
|
5 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
Other invested assets, including
dispositions
|
|
|
|
|
|
|
1 |
|
|
|
8 |
|
|
|
2 |
|
Total
realized investment gains (losses)
|
|
|
(111 |
) |
|
|
(139 |
) |
|
|
(162 |
) |
|
|
(160 |
) |
Income
tax benefit
|
|
|
40 |
|
|
|
48 |
|
|
|
58 |
|
|
|
56 |
|
Minority interest
|
|
|
6 |
|
|
|
10 |
|
|
|
10 |
|
|
|
11 |
|
Net realized investment gains
(losses)
|
|
$ |
(65 |
) |
|
$ |
(81 |
) |
|
$ |
(94 |
) |
|
$ |
(93 |
) |
Net realized investment losses
decreased by $17 million for the three months ended June 30, 2008 compared with
the same period in 2007. Net realized investment losses were essentially
unchanged for the six months ended June 30, 2008 and 2007.
For the three months ended June 30,
2008, other-than-temporary impairment (“OTTI”) losses of $97 million, driven by
credit issues, were recorded primarily within the asset-backed bonds sector. For
the three months ended June 30, 2007, OTTI losses of $101 million were recorded
primarily in the corporate and other taxable bonds, asset-backed bonds and U.S.
Government bonds sectors.
For the six months ended June 30,
2008, OTTI losses of $149 million were recorded primarily in the asset-backed
bonds sector. For the six months ended June 30, 2007, OTTI losses of $152
million were recorded primarily in the corporate and other taxable bonds,
asset-backed bonds and U.S. Government bonds sectors.
The OTTI losses related to securities
for which CNA did not assert an intent to hold until an anticipated recovery in
value. The judgment as to whether an impairment is other-than-temporary
incorporates many factors including the likelihood of a security recovering to
cost, CNA’s intent and ability to hold the security until recovery, general
market conditions, specific sector views and significant changes in expected
cash flows. CNA’s decision to record an OTTI loss is primarily based on whether
the security’s fair value is likely to recover to its amortized cost in light of
all of the factors considered over the expected holding period. Current factors
and market conditions that contributed to recording impairments in 2008 included
significant credit spread widening in fixed income sectors and market
disruptions surrounding sub-prime residential mortgage concerns. In some
instances, an OTTI loss was recorded because, in CNA’s judgment, recovery to
cost is not likely.
A primary objective in the management
of the fixed maturity and equity portfolios is to optimize return relative to
underlying liabilities and respective liquidity needs. CNA’s views on the
current interest rate environment, tax regulations, asset class valuations,
specific security issuer and broader industry segment conditions, and the
domestic and global economic conditions, are some of the factors that enter into
an investment decision. CNA also continually monitors exposure to issuers of
securities held and broader industry sector exposures and may from time to time
adjust such exposures based on its views of a specific issuer or industry
sector.
A further consideration in the
management of the investment portfolio is the characteristics of the underlying
liabilities and the ability to align the duration of the portfolio to those
liabilities 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
liabilities primarily in the Life & Group Non-Core segment including
annuities, structured benefit settlements and long term care products. The
remaining investments are managed to support the Standard Lines, Specialty Lines
and Other Insurance segments.
The effective durations of fixed
income securities, short term investments, preferred stocks and interest rate
derivatives are presented in the table below. Short term investments are net of
securities lending collateral and accounts payable and receivable amounts for
securities purchased and sold, but not yet settled.
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Effective
Duration
|
|
|
|
|
|
Effective
Duration
|
|
|
|
Fair Value
|
|
|
(In years)
|
|
|
Fair Value
|
|
|
(In years)
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segregated
investments
|
|
$ |
9,066 |
|
|
|
10.6 |
|
|
$ |
9,211 |
|
|
|
10.7 |
|
Other interest sensitive
investments
|
|
|
27,781 |
|
|
|
3.6 |
|
|
|
29,406 |
|
|
|
3.3 |
|
Total
|
|
$ |
36,847 |
|
|
|
5.3 |
|
|
$ |
38,617 |
|
|
|
5.1 |
|
The investment portfolio is
periodically analyzed for changes in duration and related price change risk.
Additionally, CNA periodically reviews the sensitivity of the portfolio to the
level of foreign exchange rates and other factors that contribute to market
price changes. A summary of these risks and specific analysis on changes is
included in the Quantitative and Qualitative Disclosures About Market Risk in
Item 3 of this Report.
CNA invests in certain derivative
financial instruments primarily to reduce its exposure to market risk
(principally interest rate, equity price and foreign currency risk) and credit
risk (risk of nonperformance of underlying obligor). Derivative securities are
recorded at fair value at the reporting date. CNA also uses derivatives to
mitigate market risk by purchasing Standard & Poor’s (“S&P”) 500 Index
futures in a notional amount equal to the contract liability relating to Life
& Group Non-Core indexed group annuity contracts. CNA provided collateral to
satisfy margin deposits on exchange-traded derivatives totaling $24 million as
of June 30, 2008. For over-the-counter derivative transactions CNA utilizes
International Swaps and Derivatives Association Master Agreements that specify
certain limits over which collateral is exchanged. As of June 30, 2008, CNA
provided $42 million of cash as collateral for over-the-counter derivative
instruments.
CNA’s classifies its fixed maturity
and equity securities as either available-for-sale or trading, and as such, they
are carried at fair value. The amortized cost of fixed maturity securities is
adjusted for amortization of premiums and accretion of discounts to maturity,
which is included in net investment income. Changes in fair value related to
available-for-sale securities are reported as a component of other comprehensive
income. Changes in fair value of trading securities are reported within net
investment income. As of January 1, 2008, we adopted Statement of Financial
Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” See Note 4 of
the Notes to Consolidated Condensed Financial Statements included under Item 1
for further information.
The following table provides further
detail of gross realized investment gains and losses, which include OTTI losses,
on available-for-sale fixed maturity and equity securities:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gains (losses) on fixed maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
and equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized
gains
|
|
$ |
83 |
|
|
$ |
45 |
|
|
$ |
200 |
|
|
$ |
143 |
|
Gross realized losses
|
|
|
(241 |
) |
|
|
(311 |
) |
|
|
(360 |
) |
|
|
(426 |
) |
Net realized losses on fixed maturity
securities
|
|
|
(158 |
) |
|
|
(266 |
) |
|
|
(160 |
) |
|
|
(283 |
) |
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized
gains
|
|
|
7 |
|
|
|
13 |
|
|
|
11 |
|
|
|
20 |
|
Gross realized losses
|
|
|
(21 |
) |
|
|
(2 |
) |
|
|
(40 |
) |
|
|
(6 |
) |
Net realized gains (losses) on equity
securities
|
|
|
(14 |
) |
|
|
11 |
|
|
|
(29 |
) |
|
|
14 |
|
Net
realized losses on fixed maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and equity securities
|
|
$ |
(172 |
) |
|
$ |
(255 |
) |
|
$ |
(189 |
) |
|
$ |
(269 |
) |
The following table provides details
of the largest realized investment losses from sales of securities aggregated by
issuer, including: the fair value of the securities at date of sale, the amount
of the loss recorded and the period of time that the securities had been in an
unrealized loss position prior to sale. The period of time that the securities
had been in an unrealized loss position prior to sale can vary due to the timing
of individual security purchases. Also included is a narrative providing the
industry sector along with the facts and circumstances giving rise to the
loss.
|
|
|
|
|
|
|
|
Months
in
|
|
|
|
Fair
Value
|
|
|
|
|
|
Unrealized
|
|
|
|
Date
of
|
|
|
Loss
|
|
|
Loss
Prior
|
|
Issuer Description and
Discussion
|
|
Sale
|
|
|
On Sale
|
|
|
To Sale (a)
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Various
notes and bonds issued by the United States Treasury.
|
|
|
|
|
|
|
|
|
|
Securities
sold due to outlook on interest rates.
|
|
$ |
7,839 |
|
|
$ |
84 |
|
|
|
0-6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
provider of wireless and wire line communication services.
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
were sold to reduce exposure because the company
|
|
|
|
|
|
|
|
|
|
|
|
|
announced
a significant shortfall in operating results, causing
|
|
|
|
|
|
|
|
|
|
|
|
|
significant
credit deterioration which resulted in a rating
|
|
|
|
|
|
|
|
|
|
|
|
|
downgrade.
|
|
|
38 |
|
|
|
16 |
|
|
|
7-12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
provider of electronic communications solutions. Issuer
|
|
|
|
|
|
|
|
|
|
|
|
|
announced
a decision to explore the sale of a struggling and
|
|
|
|
|
|
|
|
|
|
|
|
|
major
product unit creating uncertainty with respect to asset
|
|
|
|
|
|
|
|
|
|
|
|
|
value
relative to total debt. Securities were sold to
reduce
|
|
|
|
|
|
|
|
|
|
|
|
|
exposure.
|
|
|
61 |
|
|
|
7 |
|
|
|
7-12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
7,938 |
|
|
$ |
107 |
|
|
|
|
|
(a)
|
Represents
the range of consecutive months the various positions were in an
unrealized loss prior to sale.
|
Valuation
and Impairment of Investments
The following table details the
carrying value of CNA’s general account investments:
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
account investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and
obligations of
|
|
|
|
|
|
|
|
|
|
|
|
|
government
agencies
|
|
$ |
687 |
|
|
|
1.7 |
% |
|
$ |
687 |
|
|
|
1.7 |
% |
Asset-backed
securities
|
|
|
9,912 |
|
|
|
25.2 |
|
|
|
11,409 |
|
|
|
27.3 |
|
States, municipalities and
political subdivisions-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax-exempt
|
|
|
6,833 |
|
|
|
17.4 |
|
|
|
7,675 |
|
|
|
18.4 |
|
Corporate
securities
|
|
|
9,327 |
|
|
|
23.7 |
|
|
|
8,952 |
|
|
|
21.4 |
|
Other debt
securities
|
|
|
3,701 |
|
|
|
9.4 |
|
|
|
4,299 |
|
|
|
10.3 |
|
Redeemable preferred stock
|
|
|
49 |
|
|
|
0.1 |
|
|
|
1,058 |
|
|
|
2.5 |
|
Total fixed maturity securities
available-for-sale
|
|
|
30,509 |
|
|
|
77.5 |
|
|
|
34,080 |
|
|
|
81.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and
obligations of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
government
agencies
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
Asset-backed
securities
|
|
|
18 |
|
|
|
|
|
|
|
31 |
|
|
|
0.1 |
|
Corporate
securities
|
|
|
29 |
|
|
|
0.1 |
|
|
|
123 |
|
|
|
0.3 |
|
Other debt securities
|
|
|
4 |
|
|
|
|
|
|
|
18 |
|
|
|
|
|
Total fixed maturity securities
trading
|
|
|
51 |
|
|
|
0.1 |
|
|
|
177 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
447 |
|
|
|
1.1 |
|
|
|
452 |
|
|
|
1.1 |
|
Preferred stock
|
|
|
972 |
|
|
|
2.5 |
|
|
|
116 |
|
|
|
0.3 |
|
Total equity securities
available-for-sale
|
|
|
1,419 |
|
|
|
3.6 |
|
|
|
568 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term investments available-for-sale
|
|
|
5,014 |
|
|
|
12.7 |
|
|
|
4,497 |
|
|
|
10.8 |
|
Short
term investments trading
|
|
|
50 |
|
|
|
0.1 |
|
|
|
180 |
|
|
|
0.4 |
|
Limited
partnerships
|
|
|
2,321 |
|
|
|
6.0 |
|
|
|
2,214 |
|
|
|
5.3 |
|
Other investments
|
|
|
9 |
|
|
|
|
|
|
|
73 |
|
|
|
0.1 |
|
Total general account
investments
|
|
$ |
39,373 |
|
|
|
100.0 |
% |
|
$ |
41,789 |
|
|
|
100.0 |
% |
A significant judgment in the
valuation of investments is the determination of when an OTTI has occurred. CNA
analyzes securities on at least a quarterly basis. Part of this analysis is to
monitor the length of time and severity of the decline below amortized cost for
those securities in an unrealized loss position.
Investments in the general account
had a net unrealized loss of $1,519 million at June 30, 2008 compared with a net
unrealized gain of $74 million at December 31, 2007. The unrealized
position at June 30, 2008 was comprised of a net unrealized loss of
$1,431 million for fixed maturity securities, a net unrealized loss of
$85 million for equity securities and a net unrealized loss of $3 million
for short term investments. The unrealized position at December 31, 2007
was comprised of a net unrealized loss of $131 million for fixed maturity
securities, a net unrealized gain of $202 million for equity securities and
a net unrealized gain of $3 million for short term investments. See Note 3 of
the Notes to Consolidated Condensed Financial Statements included under Item 1
for further detail on the unrealized position of CNA’s general account
investment portfolio.
The following table provides the
composition of fixed maturity securities available-for-sale in a gross
unrealized loss position at June 30, 2008 by maturity profile. Securities not
due at a single date are allocated based on weighted average life.
|
|
Percent
of
|
|
|
Percent
of
|
|
|
|
Market
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Loss
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
|
5.0 |
% |
|
|
4.0 |
% |
Due
after one year through five years
|
|
|
23.0 |
|
|
|
14.0 |
|
Due
after five years through ten years
|
|
|
26.0 |
|
|
|
31.0 |
|
Due after ten years
|
|
|
46.0 |
|
|
|
51.0 |
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
CNA’s non-investment grade fixed income
securities available-for-sale at June 30, 2008 that were in a gross unrealized
loss position had a fair value of $2,429 million. The following tables summarize
the fair value and gross unrealized loss of non-investment grade securities
categorized by the length of time those securities have been in a continuous
unrealized loss position and further categorized by the severity of the
unrealized loss position in 10.0% increments as of June 30, 2008 and December
31, 2007.
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Estimated
|
|
|
Fair Value as a Percentage of Amortized
Cost
|
|
|
Unrealized
|
|
June 30, 2008
|
|
Fair Value
|
|
|
|
90-99 |
% |
|
|
80-89 |
% |
|
|
70-79 |
% |
|
<70%
|
|
|
Loss
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment
grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
$ |
1,012 |
|
|
$ |
29 |
|
|
$ |
20 |
|
|
$ |
8 |
|
|
$ |
13 |
|
|
$ |
70 |
|
7-12 months
|
|
|
1,262 |
|
|
|
46 |
|
|
|
63 |
|
|
|
11 |
|
|
|
29 |
|
|
|
149 |
|
13-24 months
|
|
|
147 |
|
|
|
3 |
|
|
|
13 |
|
|
|
2 |
|
|
|
18 |
|
|
|
36 |
|
Greater than 24 months
|
|
|
8 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
3 |
|
|
|
4 |
|
Total non-investment grade
|
|
$ |
2,429 |
|
|
$ |
78 |
|
|
$ |
97 |
|
|
$ |
21 |
|
|
$ |
63 |
|
|
$ |
259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment
grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
$ |
1,527 |
|
|
$ |
56 |
|
|
$ |
14 |
|
|
$ |
3 |
|
|
|
|
|
|
$ |
73 |
|
7-12 months
|
|
|
125 |
|
|
|
6 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
13-24 months
|
|
|
26 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
$ |
1 |
|
|
|
4 |
|
Greater than 24 months
|
|
|
9 |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Total non-investment grade
|
|
$ |
1,687 |
|
|
$ |
64 |
|
|
$ |
18 |
|
|
$ |
4 |
|
|
$ |
1 |
|
|
$ |
87 |
|
As part of the ongoing OTTI monitoring
process, CNA evaluated the facts and circumstances based on available
information for each of the non-investment grade securities and determined that
the securities presented in the above tables were temporarily impaired when
evaluated at June 30, 2008 or December 31, 2007. This determination was based on
a number of factors that CNA regularly considers including, but not limited to:
the issuers’ ability to meet current and future interest and principal payments,
an evaluation of the issuers’ financial condition and near term prospects, CNA’s
assessment of the sector outlook and estimates of the fair value of any
underlying collateral. In all cases where a decline in value is judged to be
temporary, CNA has the intent and ability to hold these securities for a period
of time sufficient to recover the amortized cost of its investment through an
anticipated recovery in the fair value of such securities or by holding the
securities to maturity. In many cases, the securities held are matched to
liabilities as part of ongoing asset/liability duration management. As such, CNA
continually assesses its ability to hold securities for a time sufficient to
recover any temporary loss in value or until maturity. CNA believes it has
sufficient levels of liquidity so as to not impact the asset/liability
management process.
CNA’s equity securities classified as
available-for-sale as of June 30, 2008 that were in a gross unrealized loss
position had a fair value of $982 million and gross unrealized losses of $295
million. Under the same process as followed for fixed maturity securities, CNA
monitors the equity securities for other-than-temporary declines in value. In
all cases
where a
decline in value is judged to be temporary, CNA has the intent and ability to
hold these securities for a period of time sufficient to recover the cost of its
investment through an anticipated recovery in the fair value of such
securities.
Invested assets are exposed to various
risks, such as interest rate and credit risk. Due to the level of risk
associated with certain invested assets and the level of uncertainty related to
changes in the value of these assets, it is possible that changes in these risks
in the near term, including increases in interest rates and further credit
spread widening, could have an adverse material impact on our results of
operations or equity.
The general account portfolio consists
primarily of high quality bonds, 88.4% and 89.1% of which were rated as
investment grade (rated BBB- or higher) at June 30, 2008 and December 31,
2007.
The following table summarizes the
ratings of CNA’s general account bond portfolio at carrying value.
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and affiliated agency securities
|
|
$ |
789 |
|
|
|
2.6 |
% |
|
$ |
816 |
|
|
|
2.5 |
% |
Other
AAA rated
|
|
|
12,358 |
|
|
|
40.5 |
|
|
|
16,728 |
|
|
|
50.4 |
|
AA
and A rated
|
|
|
8,038 |
|
|
|
26.3 |
|
|
|
6,326 |
|
|
|
19.1 |
|
BBB
rated
|
|
|
5,809 |
|
|
|
19.0 |
|
|
|
5,713 |
|
|
|
17.2 |
|
Non investment-grade
|
|
|
3,517 |
|
|
|
11.6 |
|
|
|
3,616 |
|
|
|
10.8 |
|
Total
|
|
$ |
30,511 |
|
|
|
100.0 |
% |
|
$ |
33,199 |
|
|
|
100.0 |
% |
At June 30, 2008 and December 31, 2007,
approximately 97.0% and 95.0% of the general account portfolio was issued by
U.S. Government and affiliated agencies or was rated by S&P or Moody’s
Investors Service (“Moody’s”). The remaining bonds were rated by other rating
agencies or CNA.
Non-investment grade bonds, as presented
in the tables above, are primarily high-yield securities rated below BBB- by
bond rating agencies, as well as other unrated securities that, according to
CNA’s analysis, are below investment grade. High-yield securities generally
involve a greater degree of risk than investment grade securities. However,
expected returns should compensate for the added risk. This risk is also
considered in the interest rate assumptions for the underlying insurance
products.
The carrying value of securities that
are either subject to trading restrictions or trade in illiquid private
placement markets at June 30, 2008 was $491 million, which represents 1.2% of
CNA’s total investment portfolio. These securities were in a net unrealized gain
position of $168 million at June 30, 2008.
Short
Term Investments
The carrying value of the components
of the general account short term investment portfolio is presented in the
following table:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term investments available-for-sale:
|
|
|
|
|
|
|
Commercial
paper
|
|
$ |
2,004 |
|
|
$ |
3,040 |
|
U.S. Treasury
securities
|
|
|
1,207 |
|
|
|
577 |
|
Money market
funds
|
|
|
263 |
|
|
|
72 |
|
Other, including collateral held related to
securities lending
|
|
|
1,540 |
|
|
|
808 |
|
Total short term investments
available-for-sale
|
|
|
5,014 |
|
|
|
4,497 |
|
|
|
|
|
|
|
|
|
|
Short
term investments trading:
|
|
|
|
|
|
|
|
|
Commercial
paper
|
|
|
|
|
|
|
35 |
|
Money market
funds
|
|
|
49 |
|
|
|
139 |
|
Other
|
|
|
1 |
|
|
|
6 |
|
Total short term investments
trading
|
|
|
50 |
|
|
|
180 |
|
Total short term
investments
|
|
$ |
5,064 |
|
|
$ |
4,677 |
|
The fair value of collateral held
related to securities lending, included in other short term investments, was $53
million at December 31, 2007. There was no collateral held at June 30,
2008.
Asset-backed
and Sub-prime Mortgage Exposure
The following table provides detail
of the Company’s exposure to asset-backed and sub-prime mortgage related
securities as of June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
Total
|
|
|
Percent
|
|
|
|
Security Type
|
|
|
|
|
|
Security
|
|
|
of
Total
|
|
June 30, 2008
|
|
MBS (a)
|
|
|
CMO (b)
|
|
|
ABS (c)
|
|
|
CDO (d)
|
|
|
Total
|
|
|
Type
|
|
|
Investments
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
$ |
638 |
|
|
$ |
1,120 |
|
|
|
|
|
|
|
|
$ |
1,758 |
|
|
|
17.4 |
% |
|
|
3.9 |
% |
AAA
|
|
|
|
|
|
|
4,986 |
|
|
$ |
2,238 |
|
|
$ |
9 |
|
|
|
7,233 |
|
|
|
71.5 |
% |
|
|
15.9 |
% |
AA
|
|
|
|
|
|
|
150 |
|
|
|
329 |
|
|
|
29 |
|
|
|
508 |
|
|
|
5.0 |
% |
|
|
1.1 |
% |
A |
|
|
|
|
|
|
8 |
|
|
|
131 |
|
|
|
116 |
|
|
|
255 |
|
|
|
2.5 |
% |
|
|
0.6 |
% |
BBB
|
|
|
|
|
|
|
1 |
|
|
|
278 |
|
|
|
7 |
|
|
|
286 |
|
|
|
2.8 |
% |
|
|
0.6 |
% |
Non-investment
grade and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity tranches
|
|
|
|
|
|
|
5 |
|
|
|
61 |
|
|
|
14 |
|
|
|
80 |
|
|
|
0.8 |
% |
|
|
0.2 |
% |
Total fair value
|
|
$ |
638 |
|
|
$ |
6,270 |
|
|
$ |
3,037 |
|
|
$ |
175 |
|
|
$ |
10,120 |
|
|
|
100.0 |
% |
|
|
22.3 |
% |
Total amortized cost
|
|
$ |
650 |
|
|
$ |
6,606 |
|
|
$ |
3,297 |
|
|
$ |
351 |
|
|
$ |
10,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of total fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
by
security type
|
|
|
6.3 |
% |
|
|
61.0 |
% |
|
|
31.0 |
% |
|
|
1.7 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-prime
(included above)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value
|
|
|
|
|
|
$ |
1 |
|
|
$ |
1,558 |
|
|
$ |
10 |
|
|
$ |
1,569 |
|
|
|
15.5 |
% |
|
|
3.5 |
% |
Amortized
cost
|
|
|
|
|
|
|
1 |
|
|
|
1,668 |
|
|
|
33 |
|
|
|
1,702 |
|
|
|
15.6 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A
(included above)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value
|
|
|
|
|
|
$ |
1,218 |
|
|
|
|
|
|
$ |
12 |
|
|
$ |
1,230 |
|
|
|
12.2 |
% |
|
|
2.7 |
% |
Amortized
cost
|
|
|
|
|
|
|
1,321 |
|
|
|
|
|
|
|
12 |
|
|
|
1,333 |
|
|
|
12.2 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Mortgage-backed securities (“MBS”)
|
(b)
Collateralized mortgage obligations (“CMO”)
|
(c)
Asset-backed securities (“ABS”)
|
(d)
Collateralized debt obligations
(“CDO”)
|
Included in our fixed maturity
securities at June 30, 2008 were $10,120 million of asset-backed securities, at
fair value, which represents 22.3% of total invested assets. Of the total
asset-backed securities, 88.9% were U.S. Government Agency issued or AAA rated.
The majority of our asset-backed securities are actively traded in liquid
markets. Of the total invested assets, $1,569 million or 3.5% have exposure to
sub-prime residential mortgage (sub-prime) collateral, as measured by the
original deal structure, while 2.7% have exposure to Alternative A (Alt-A)
collateral. Of the securities with sub-prime exposure, approximately 97.0% were
rated investment grade, while over 99.0% of the Alt-A securities were rated
investment grade. We believe that each of these securities would be rated
investment grade even without the benefit of any applicable third-party
guarantees. In addition to sub-prime exposure in fixed maturity securities,
there is exposure of approximately $44 million through limited partnerships and
credit default swaps.
All asset-backed securities in an
unrealized loss position are reviewed as part of the ongoing OTTI process, which
resulted in OTTI losses of $75 million and $105 million after-tax and minority
interest for the three and six months ended June 30, 2008. Included in
these OTTI
losses were $58 million and $83 million after tax and
minority interest related to securities
with sub-prime
and Alt-A exposure. Our review of
these securities includes an analysis of cash flow modeling under various
default scenarios, the seniority of the specific tranche within the deal
structure, the composition of the collateral and the actual default experience.
Given current market conditions and the specific facts and circumstances related
to our individual sub-prime and Alt-A exposures, we believe that all remaining
unrealized losses are temporary in nature. Continued deterioration in these
markets beyond our current expectations may cause us to reconsider and record
additional OTTI losses.
Federal
National Mortgage Association and Federal Home Loan Mortgage
Corporation
The aggregate amounts of CNA’s direct
exposure at June 30, 2008, at amortized cost, of equity and debt securities of
Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan
Mortgage Corporation (“Freddie Mac”) are set forth below.
|
|
June
30,
|
|
|
|
2008
|
|
(In
millions)
|
|
|
|
|
|
|
|
Fannie
Mae
|
|
|
|
Preferred stock
|
|
$ |
137 |
|
Senior bonds
|
|
|
16 |
|
|
|
|
|
|
Freddie
Mac
|
|
|
|
|
Discount notes
|
|
$ |
846 |
|
Preferred stock
|
|
|
184 |
|
Senior bonds
|
|
|
67 |
|
CNA’s entire holdings of Freddie Mac
Discount notes had either matured or were disposed of, at or above amortized
cost, subsequent to June 30, 2008.
ACCOUNTING
STANDARDS
In December of 2007, the Financial
Accounting Standards Board (“FASB”) issued SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements.” This standard will improve,
simplify, and converge internationally the reporting of noncontrolling interests
in consolidated financial statements. SFAS No. 160 requires all entities to
report noncontrolling (minority) interests in subsidiaries as a component of
equity in the consolidated financial statements. Moreover, SFAS No. 160 requires
that transactions between an entity and noncontrolling interests be treated as
equity transactions. SFAS No. 160 is effective for fiscal years beginning after
December 15, 2008. As a result, after January 1, 2009, the Company’s deferred
gains related to the issuances of Boardwalk Pipeline common units ($536 million
at June 30, 2008) will be recognized in the shareholders’ equity section of the
Consolidated Condensed Balance Sheets as opposed to the Consolidated Condensed
Statements of Income.
In March of 2008, the FASB issued
SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.”
SFAS No. 161 is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity’s financial position,
financial performance and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008. We are currently evaluating the disclosure requirements of SFAS
No. 161.
In May of 2008, the FASB issued FASB
Staff Position (“FSP”) No. APB 14-1, “Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement).” This FSP clarifies that convertible debt instruments that may be
settled in cash upon conversion (including partial cash settlement) are not
addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants.” FSP No. APB 14-1 specifies
that issuers of such instruments should separately account for the liability and
equity components in a manner that will reflect the entity’s nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. It is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. We are
currently evaluating the impact that adopting FSP No. APB 14-1 will have on our
results of operations and equity.
FORWARD-LOOKING
STATEMENTS
Investors are cautioned that certain
statements contained in this Report as well as some statements in periodic press
releases and some oral statements made by our officials and our subsidiaries
during presentations about us, are “forward-looking” statements within the
meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”).
Forward-looking statements include, without limitation, any statement that may
project, indicate or imply future results, events, performance or achievements,
and may contain the words “expect,” “intend,” “plan,” “anticipate,” “estimate,”
“believe,” “will be,” “will continue,” “will likely result,” and similar
expressions. In addition, any statement concerning future financial performance
(including future revenues, earnings or growth rates), ongoing business
strategies or prospects, and possible actions taken by us or our subsidiaries,
which may be provided by management are also forward-looking statements as
defined by the Act.
Forward-looking statements are based on
current expectations and projections about future events and are inherently
subject to a variety of risks and uncertainties, many of which are beyond our
control, that could cause actual results to differ materially from those
anticipated or projected. These risks and uncertainties include, among
others:
Risks
and uncertainties primarily affecting us and our insurance
subsidiaries
|
·
|
the
impact of competitive products, policies and pricing and the competitive
environment in which CNA operates, including changes in CNA’s book of
business;
|
|
·
|
product
and policy availability and demand and market responses, including the
level of CNA’s ability to obtain rate increases and decline or non-renew
under priced accounts, to achieve premium targets and profitability and to
realize growth and retention
estimates;
|
|
·
|
development
of claims and the impact on loss reserves, including changes in claim
settlement policies;
|
|
·
|
the
performance of reinsurance companies under reinsurance contracts with
CNA;
|
|
·
|
the
effects upon insurance markets and upon industry business practices and
relationships of current litigation, investigations and regulatory
activity by the New York State Attorney General’s office and other
authorities concerning contingent commission arrangements with brokers and
bid solicitation activities;
|
|
·
|
legal
and regulatory activities with respect to certain non-traditional and
finite-risk insurance products, and possible resulting changes in
accounting and financial reporting in relation to such products, including
our restatement of financial results in May of 2005 and CNA’s relationship
with an affiliate, Accord Re Ltd., as disclosed in connection with that
restatement;
|
|
·
|
regulatory
limitations, impositions and restrictions upon CNA, including the effects
of assessments and other surcharges for guaranty funds and second-injury
funds and other mandatory pooling
arrangements;
|
|
·
|
weather
and other natural physical events, including the severity and frequency of
storms, hail, snowfall and other winter conditions, natural disasters such
as hurricanes and earthquakes, as well as climate change, including
effects on weather patterns, greenhouse gases, sea, land and air
temperatures, sea levels, rain and
snow;
|
|
·
|
regulatory
requirements imposed by coastal state regulators in the wake of hurricanes
or other natural disasters, including limitations on the ability to exit
markets or to non-renew, cancel or change terms and conditions in
policies, as well as mandatory assessments to fund any shortfalls arising
from the inability of quasi-governmental insurers to pay
claims;
|
|
·
|
man-made
disasters, including the possible occurrence of terrorist attacks and the
effect of the absence or insufficiency of applicable terrorism legislation
on coverages;
|
|
·
|
the
unpredictability of the nature, targets, severity or frequency of
potential terrorist events, as well as the uncertainty as to CNA’s ability
to contain its terrorism exposure effectively, notwithstanding the
extension until 2014 of the Terrorism Risk Insurance Act of
2002;
|
|
·
|
the
occurrence of epidemics;
|
|
·
|
exposure
to liabilities due to claims made by insureds and others relating to
asbestos remediation and health-based asbestos impairments, as well as
exposure to liabilities for environmental pollution, construction defect
claims and exposure to liabilities due to claims made by insureds and
others relating to lead-based paint and other mass
torts;
|
|
·
|
the
sufficiency of CNA’s loss reserves and the possibility of future increases
in reserves;
|
|
·
|
regulatory
limitations and restrictions, including limitations upon CNA’s ability to
receive dividends from its insurance subsidiaries imposed by state
regulatory agencies and minimum risk-based capital standards established
by the National Association of Insurance
Commissioners;
|
|
·
|
the
risks and uncertainties associated with CNA’s loss reserves as outlined
under “Results of Operations by Business Segment - CNA Financial - Reserves – Estimates
and Uncertainties” in the MD&A portion of our Annual Report on Form
10-K for the year ended December 31,
2007;
|
|
·
|
the
possibility of further changes in CNA’s ratings by ratings agencies,
including the inability to access certain markets or distribution
channels, and the required collateralization of future payment obligations
as a result of such changes, and changes in rating agency policies and
practices;
|
|
·
|
the
effects of corporate bankruptcies and accounting errors on capital markets
and on the markets for directors and officers and errors and omissions
coverages;
|
|
·
|
general
economic and business conditions, including inflationary pressures on
medical care costs, construction costs and other economic sectors that
increase the severity of claims;
|
|
·
|
the
effectiveness of current initiatives by claims management to reduce the
loss and expense ratios through more efficacious claims handling
techniques; and
|
|
·
|
changes
in the composition of CNA’s operating
segments.
|
Risks
and uncertainties primarily affecting us and our energy
subsidiaries
|
·
|
the
impact of changes in demand for oil and natural gas and oil and gas price
fluctuations on E&P activity;
|
|
·
|
costs
and timing of rig upgrades;
|
|
·
|
utilization
levels and dayrates for offshore oil and gas drilling
rigs;
|
|
·
|
timing
and duration of required regulatory inspections for offshore oil and gas
drilling rigs;
|
|
·
|
the
availability and cost of insurance, and the risks associated with
self-insurance, covering drilling
rigs;
|
|
·
|
regulatory
issues affecting natural gas transmission, including ratemaking and other
proceedings particularly affecting our gas transmission
subsidiaries;
|
|
·
|
the
ability of Boardwalk Pipeline to renegotiate, extend or replace existing
customer contracts on favorable
terms;
|
|
·
|
the
successful development and projected cost and timing of planned expansion
projects as well as the financing of such projects;
and
|
|
·
|
the
development of additional natural gas reserves and changes in reserve
estimates.
|
Risks
and uncertainties affecting us and our subsidiaries generally
|
·
|
general
economic and business conditions;
|
|
·
|
changes
in financial markets (such as interest rate, credit, currency, commodities
and equities markets) or in the value of specific investments including
the short and long-term effects of losses produced or threatened in
relation to sub-prime residential mortgage-backed securities (sub-prime)
including claims under directors and officers and errors and omissions
coverages in connection with market disruptions recently experienced in
relation to the sub-prime crisis in the U.S.
economy;
|
|
·
|
changes
in domestic and foreign political, social and economic conditions,
including the impact of the global war on terrorism, the war in Iraq, the
future outbreak of hostilities and future acts of
terrorism;
|
|
·
|
potential
changes in accounting policies by the FASB, the SEC or regulatory agencies
for any of our subsidiaries’ industries which may cause us or our
subsidiaries to revise their financial accounting and/or disclosures in
the future, and which may change the way analysts measure our and our
subsidiaries’ business or financial
performance;
|
|
·
|
the
impact of regulatory initiatives and compliance with governmental
regulations, judicial rulings and jury
verdicts;
|
|
·
|
the
results of financing efforts;
|
|
·
|
the
closing of any contemplated transactions and
agreements;
|
|
·
|
the
successful integration, transition and management of acquired
businesses;
|
|
·
|
the
outcome of pending or future litigation, including any tobacco-related
suits to which we are or may become a
party;
|
|
·
|
the
availability of indemnification by Lorillard and its subsidiaries for any
tobacco-related liabilities that we may incur as a result of
tobacco-related lawsuits or otherwise, as provided in the Separation
Agreement; and
|
|
·
|
the
impact of the Separation on our future financial position, results of
operations, cash flows and risk
profile.
|
Developments in any of these areas,
which are more fully described elsewhere in this Report, could cause our results
to differ materially from results that have been or may be anticipated or
projected. Forward-looking statements speak only as of the date of this Report
and we expressly disclaim any obligation or undertaking to update these
statements to reflect any change in our expectations or beliefs or any change in
events, conditions or circumstances on which any forward-looking statement is
based.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk.
We are a large diversified holding
company. As such, we and our subsidiaries have significant amounts of financial
instruments that involve market risk. Our measure of market risk exposure
represents an estimate of the change in fair value of our financial instruments.
Changes in the trading portfolio are recognized in the Consolidated Condensed
Statements of Income. Market risk exposure is presented for each class of
financial instrument held by us at June 30, 2008 and December 31, 2007, assuming
immediate adverse market movements of the magnitude described below. We believe
that the various rates of adverse market movements represent a measure of
exposure to loss under hypothetically assumed adverse conditions. The estimated
market risk exposure represents the hypothetical loss to future earnings and
does not represent the maximum possible loss nor any expected actual loss, even
under adverse conditions, because actual adverse fluctuations would likely
differ. In addition, since our investment portfolio is subject to change based
on our portfolio management strategy as well as in response to changes in the
market, these estimates are not necessarily indicative of the actual results
which may occur.
Exposure to market risk is managed and
monitored by senior management. Senior management approves our overall
investment strategy and has responsibility to ensure that the investment
positions are consistent with that strategy with an acceptable level of risk. We
may manage risk by buying or selling instruments or entering into offsetting
positions.
Interest Rate Risk – We have exposure to
interest rate risk arising from changes in the level or volatility of interest
rates. We attempt to mitigate our exposure to interest rate risk by utilizing
instruments such as interest rate swaps, interest rate caps, commitments to
purchase securities, options, futures and forwards. We monitor our sensitivity
to interest rate risk by evaluating the change in the value of our financial
assets and liabilities due to fluctuations in interest rates. The evaluation is
performed by applying an instantaneous change in interest rates by varying
magnitudes on a static balance sheet to determine the effect such a change in
rates would have on the recorded market value of our investments and the
resulting effect on shareholders’ equity. The analysis presents the sensitivity
of the market value of our financial instruments to selected changes in market
rates and prices which we believe are reasonably possible over a one-year
period.
The sensitivity analysis estimates the
change in the market value of our interest sensitive assets and liabilities that
were held on June 30, 2008 and December 31, 2007 due to instantaneous parallel
shifts in the yield curve of 100 basis points, with all other variables held
constant.
The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Accordingly, the analysis may not be indicative of, is not intended to
provide, and does not provide a precise forecast of the effect of changes of
market interest rates on our earnings or shareholders’ equity. Further, the
computations do not contemplate any actions we could undertake in response to
changes in interest rates.
Our debt is denominated in U.S. Dollars
and has been primarily issued at fixed rates, therefore, interest expense would
not be impacted by interest rate shifts. The impact of a 100 basis point
increase in interest rates on fixed rate debt would result in a decrease in
market value of $303 million and $333 million at June 30, 2008 and December 31,
2007, respectively. A 100 basis point decrease would result in an increase in
market value of $331 million and $350 million at June 30, 2008 and December 31,
2007, respectively. HighMount has entered into interest rate swaps for a
notional amount of $1.6 billion to hedge its exposure to fluctuations in LIBOR.
These swaps effectively fix the interest rate at
5.8%.
Gains or losses from derivative instruments used for hedging purposes, to the
extent realized, will generally be offset by recognition of the hedged
transaction.
Equity Price Risk – We have exposure to
equity price risk as a result of our investment in equity securities and equity
derivatives. Equity price risk results from changes in the level or volatility
of equity prices which affect the value of equity securities or instruments that
derive their value from such securities or indexes. Equity price risk was
measured assuming an instantaneous 25% decrease in the underlying reference
price or index from its level at June 30, 2008 and December 31, 2007, with all
other variables held constant.
Foreign Exchange Rate Risk – Foreign
exchange rate risk arises from the possibility that changes in foreign currency
exchange rates will impact the value of financial instruments. We have foreign
exchange rate exposure when we buy or sell foreign currencies or financial
instruments denominated in a foreign currency. This exposure is mitigated by our
asset/liability matching strategy and through the use of futures for those
instruments which are not matched. Our foreign transactions are primarily
denominated in Australian dollars, Canadian dollars, British pounds, Japanese
yen and the European Monetary Unit. The sensitivity analysis assumes an
instantaneous 20% decrease in the foreign currency exchange rates versus the
U.S. dollar from their levels at June 30, 2008 and December 31, 2007, with all
other variables held constant.
Commodity Price Risk – We have exposure
to price risk as a result of our investments in commodities. Commodity price
risk results from changes in the level or volatility of commodity prices that
impact instruments which derive their value from such commodities. Commodity
price risk was measured assuming an instantaneous increase of 20% from their
levels at June 30, 2008 and December 31, 2007. The impact of a change in
commodity prices on HighMount’s non-trading commodity-based financial derivative
instruments at a point in time is not necessarily representative of the results
that will be realized when such contracts are ultimately settled. Net losses
from commodity derivative instruments used for hedging purposes, to the extent
realized, will generally be offset by recognition of the underlying hedged
transaction, such as revenue from sales.
Credit Risk – We are exposed to
credit risk relating to the risk of loss resulting from the nonperformance by a
customer of its contractual obligations. Boardwalk Pipeline has exposure related
to receivables for services provided, as well as volumes owed by customers for
imbalances or gas lent by Boardwalk Pipeline to them, generally under parking
and lending services and no notice services. Boardwalk Pipeline maintains credit
policies intended to minimize risk and actively monitors these policies. Natural
gas price volatility has increased dramatically in recent years, which has
materially increased Boardwalk Pipeline’s credit risk related to gas loaned to
customers. As of June 30, 2008, the amount of gas loaned out by Boardwalk
Pipeline was approximately 20.1 trillion British thermal units (“TBtu”) and the
amount considered an imbalance was approximately 4.2 TBtu. Assuming an average
market price during June 2008 of $12.54 per million British thermal units
(“MMBtu”), the market value of gas loaned out and considered an imbalance at
June 30, 2008, would have been approximately $305 million. If any significant
customer of Boardwalk Pipeline should have credit or financial problems
resulting in a delay or failure to repay the gas they owe to Boardwalk Pipeline,
this could have a material adverse effect on our financial condition, results of
operations and cash flows.
The following tables present our market
risk by category (equity markets, interest rates, foreign currency exchange
rates and commodity prices) on the basis of those entered into for trading
purposes and other than trading purposes.
Trading
portfolio:
Category of risk exposure:
|
|
Fair Value Asset
(Liability)
|
|
|
Market Risk
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
markets
(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities (a)
|
|
$ |
722 |
|
|
$ |
744 |
|
|
$ |
(180 |
) |
|
$ |
(186 |
) |
Futures -
short
|
|
|
|
|
|
|
|
|
|
|
64 |
|
|
|
102 |
|
Options -
purchased
|
|
|
52 |
|
|
|
35 |
|
|
|
38 |
|
|
|
1 |
|
- written
|
|
|
(28 |
) |
|
|
(16 |
) |
|
|
(9 |
) |
|
|
(5 |
) |
Short sales
|
|
|
(87 |
) |
|
|
(84 |
) |
|
|
22 |
|
|
|
21 |
|
Limited partnership
investments
|
|
|
360 |
|
|
|
443 |
|
|
|
(29 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures
– long
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
(9 |
) |
Fixed maturities –
long
|
|
|
471 |
|
|
|
582 |
|
|
|
(1 |
) |
|
|
(4 |
) |
Fixed maturities –
short
|
|
|
(78 |
) |
|
|
(16 |
) |
|
|
6 |
|
|
|
2 |
|
Short term
investments
|
|
|
3,476 |
|
|
|
2,628 |
|
|
|
|
|
|
|
|
|
Other derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
Note:
|
The
calculation of estimated market risk exposure is based on assumed adverse
changes in the underlying reference price or index of (1) a decrease in
equity prices of 25% and (2) an increase in interest rates of 100 basis
points. Adverse changes on options which differ from those presented above
would not necessarily result in a proportionate change to the estimated
market risk exposure.
|
|
(a)
|
A
decrease in equity prices of 25% would result in market risk amounting to
$(85) and $(171) at June 30, 2008 and December 31, 2007, respectively.
This market risk would be offset by decreases in liabilities to customers
under variable insurance
contracts.
|
Other
than trading portfolio:
Category of risk exposure:
|
|
Fair Value Asset
(Liability)
|
|
|
Market Risk
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
markets (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
General accounts (a)
|
|
$ |
1,422 |
|
|
$ |
568 |
|
|
$ |
(355 |
) |
|
$ |
(142 |
) |
Separate
accounts
|
|
|
42 |
|
|
|
45 |
|
|
|
(11 |
) |
|
|
(11 |
) |
Limited
partnership investments
|
|
|
2,068 |
|
|
|
1,878 |
|
|
|
(116 |
) |
|
|
(106 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities (a)(b)
|
|
|
30,509 |
|
|
|
34,081 |
|
|
|
(1,832 |
) |
|
|
(1,900 |
) |
Short term investments (a)
|
|
|
6,260 |
|
|
|
5,602 |
|
|
|
(14 |
) |
|
|
(4 |
) |
Other invested
assets
|
|
|
6 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
Interest rate swaps and other
(c)
|
|
|
(68 |
) |
|
|
(88 |
) |
|
|
63 |
|
|
|
81 |
|
Other derivative
securities
|
|
|
4 |
|
|
|
38 |
|
|
|
54 |
|
|
|
33 |
|
Separate accounts (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
395 |
|
|
|
419 |
|
|
|
(18 |
) |
|
|
(20 |
) |
Short term
investments
|
|
|
8 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
Debt
|
|
|
(7,141 |
) |
|
|
(7,204 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodities
(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forwards – short
(c)
|
|
|
(280 |
) |
|
|
11 |
|
|
|
(210 |
) |
|
|
(119 |
) |
Forwards – long
|
|
|
6 |
|
|
|
|
|
|
|
4 |
|
|
|
3 |
|
Note:
|
The
calculation of estimated market risk exposure is based on assumed adverse
changes in the underlying reference price or index of (1) a decrease in
equity prices of 25%, (2) an increase in interest rates of 100 basis
points and (3) an increase in commodity prices of
20%.
|
|
(a)
|
Certain
securities are denominated in foreign currencies. An assumed 20% decline
in the underlying exchange rates would result in an aggregate foreign
currency exchange rate risk of $(311) and $(317) at June 30, 2008 and
December 31, 2007,
respectively.
|
|
(b)
|
Certain
fixed maturities positions include options embedded in convertible debt
securities. A decrease in underlying equity prices of 25% would result in
market risk amounting to $(5) and $(106) at June 30, 2008 and December 31,
2007, respectively.
|
|
(c)
|
The
market risk at June 30, 2008 and December 31, 2007 will generally be
offset by recognition of the underlying hedged
transaction.
|
Item
4. Controls and Procedures.
The Company maintains a system of
disclosure controls and procedures which are 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 Securities Exchange Act of 1934
(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 under the Exchange Act is accumulated and communicated to the
Company’s management on a timely basis to allow decisions regarding required
disclosure.
The Company’s principal executive
officer (“CEO”) and principal financial officer (“CFO”) undertook an evaluation
of the Company’s disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
report. The CEO and CFO have concluded that the Company’s controls and
procedures were effective as of June 30, 2008.
There were no changes in the
Company’s internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with
the foregoing evaluation that occurred during the quarter ended June 30, 2008,
that have materially affected or that are reasonably likely to materially affect
the Company’s internal control over financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings.
Information with respect to legal
proceedings is incorporated by reference to Note 14 of the Notes to Consolidated
Condensed Financial Statements included in Part I of this Report.
Item
1A. Risk Factors.
Our Annual Report on Form 10-K for the
year ended December 31, 2007 includes a detailed discussion of certain material
risk factors facing our company. The information presented below describes
updates and additions to such risk factors and should be read in conjunction
with the risk factors and information disclosed in our Annual Report on Form
10-K for the year ended December 31, 2007.
We
could have a liability in the future for tobacco-related lawsuits.
As a result of our ownership of
Lorillard prior to the Separation, which was consummated in June 2008, from time
to time we have been named as a defendant in tobacco-related lawsuits. We are
currently a defendant in four such lawsuits and could be named as a defendant in
additional tobacco-related suits, notwithstanding the completion of the
Separation. In the Separation Agreement entered into between us and Lorillard
and its subsidiaries in connection with the Separation, Lorillard and each of
its subsidiaries has agreed to indemnify us for liabilities related to
Lorillard’s tobacco business, including liabilities that we may incur for
current and future tobacco-related litigation against us. An adverse decision in
a tobacco-related lawsuit against us could, if the indemnification is deemed for
any reason to be unenforceable or any amounts owed to us thereunder are not
collectible, in whole or in part, have a material adverse effect on our
financial condition, results of operations and equity. We do not expect that the
Separation will alter the legal exposure of either entity with respect to
tobacco-related claims. We do not believe that we had or have any liability for
tobacco-related claims, and we have never been held liable for any such
claims.
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
programs
|
(d) Maximum number of shares (or approximate
dollar value)
of shares that may yet be purchased under the
plans or programs (in millions)
|
|
|
|
|
|
April
1, 2008 - |
|
|
|
|
April
30, 2008
|
-
|
-
|
-
|
-
|
May
1, 2008 - |
|
|
|
|
May
31, 2008
|
-
|
-
|
-
|
-
|
June
1, 2008 -
|
|
|
|
|
June
30, 2008
|
-
|
-
|
-
|
-
|
Note:
|
In
June of 2008, the Company acquired 93,492,857 shares of Loews common stock
in exchange for 65,445,000 shares of Lorillard common stock. Please read
Note 2 of the Notes to Consolidated Condensed Financial Statements
included in Part I, Item 1.
|
Item
4. Submission of Matters to a Vote of Security Holders.
Set forth below is information
relating to the 2008 Annual Meeting of Shareholders of the
Registrant.
The annual meeting was called to
order at 11:00 A.M., May 13, 2008. Represented at the meeting, in
person or by proxy, were shares representing 510,061,154 votes, approximately
90.7% of the votes represented by issued and outstanding shares entitled to
vote.
The following business was
transacted:
Election of
Directors
Over 95% of the votes cast for
directors were voted for the election of the following directors. The number of
votes for, against and abstained with respect to each director was as
follows:
|
Votes
For
|
|
Votes
Against
|
|
Votes
Abstained
|
|
|
|
|
|
|
Ann
E. Berman
|
503,302,549
|
|
3,785,169
|
|
2,973,436
|
Joseph
L. Bower
|
492,345,332
|
|
14,605,836
|
|
3,109,986
|
Charles
M. Diker
|
501,515,122
|
|
5,525,375
|
|
3,020,657
|
Paul
J. Fribourg
|
487,401,422
|
|
19,570,104
|
|
3,089,628
|
Walter
L. Harris
|
490,767,664
|
|
16,149,318
|
|
3,144,172
|
Philip
A. Laskawy
|
501,751,288
|
|
5,233,588
|
|
3,076,278
|
Gloria
R. Scott
|
497,087,882
|
|
9,772,075
|
|
3,201,197
|
Andrew
H. Tisch
|
500,231,328
|
|
6,744,535
|
|
3,085,291
|
James
S. Tisch
|
499,095,864
|
|
7,887,418
|
|
3,077,872
|
Jonathan
M. Tisch
|
499,556,615
|
|
7,484,392
|
|
3,020,147
|
Ratification of the
appointment of independent auditors
Approved – 501,130,106 votes,
approximately 98.3% of the votes cast, voted to ratify the appointment of
Deloitte & Touche, LLP as independent auditors for the Company. 5,986,119
votes, approximately 1.2% of the votes cast, voted against, and shares
representing 2,944,929 votes, approximately 0.6% of the votes cast,
abstained.
Shareholder proposal
relating to cumulative voting
Rejected – 341,605,880 votes,
approximately 72.4% of the votes cast, voted against this shareholder proposal.
125,784,540 votes, approximately 26.7% of the votes cast, were cast for, and
shares representing 4,384,383 votes, approximately 0.9% of the votes cast,
abstained. In addition, there were shares representing 38,286,351 votes as to
which brokers indicated that they did not have authority to vote (“broker
non-votes”).
Shareholder proposal
relating to performance standards for executive compensation
Rejected – 351,012,008 votes,
approximately 74.4% of the votes cast, voted against this shareholder proposal.
113,886,055 votes, approximately 24.1% of the votes cast, were cast for, and
shares representing 6,876,740, approximately 1.5% of the votes cast, abstained.
In addition, there were 38,286,351 broker non-votes.
Shareholder proposal
relating health care reform
Rejected – 403,994,226 votes,
approximately 85.6% of the votes cast, voted against this shareholder proposal.
12,380,965 votes, approximately 2.6% of the votes cast, were cast for, and
shares representing 55,399,612 votes, approximately 11.7% of the votes cast,
abstained. In addition, there were 38,286,351 broker non-votes.
Shareholder proposal
relating to advertising expenditures
Rejected – 405,006,790 votes,
approximately 85.6% of the votes cast, voted against this shareholder proposal.
9,881,502 votes, approximately 2.1% of the votes cast, were cast for, and shares
representing 56,886,511 votes, approximately 12.1% of the votes cast, abstained.
In addition, there were 38,286,351 broker non-votes.
Item
6. Exhibits.
|
Exhibit
|
Description of Exhibit
|
Number
|
|
|
Separation
Agreement, dated as of May 7, 2008, by and among Registrant, Lorillard,
Inc., Lorillard Tobacco Company, Lorillard Licensing Company LLC, One Park
Media Services, Inc. and Plisa, S.A.
|
10.1*
|
|
|
Certification
by the Chief Executive Officer of the Company pursuant to Rule 13a-14(a)
and Rule 15d-14(a)
|
31.1*
|
|
|
Certification
by the Chief Financial Officer of the Company pursuant to Rule 13a-14(a)
and Rule 15d-14(a)
|
31.2*
|
|
|
Certification
by the Chief Executive Officer of the Company pursuant to 18 U.S.C.
Section 1350 (as adopted by Section 906 of the Sarbanes-Oxley Act of
2002)
|
32.1*
|
|
|
Certification
by the Chief Financial Officer of the Company pursuant to 18 U.S.C.
Section 1350 (as adopted by Section 906 of the Sarbanes-Oxley Act of
2002)
|
32.2*
|
*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: July
30, 2008
|
By:
|
/s/ Peter W. Keegan
|
|
|
PETER
W. KEEGAN
|
|
|
Senior
Vice President and
|
|
|
Chief
Financial Officer
|
|
|
(Duly
authorized officer
|
|
|
and
principal financial
|
|
|
officer)
|
79