Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
|
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
|
|
|
THE
SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended September 30, 2008
OR
¨
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
|
|
|
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the Transition Period
From ____________ to _____________
Commission
File Number 1-6541
LOEWS
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
|
13-2646102
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
667
Madison Avenue, New York, N.Y. 10065-8087
(Address
of principal executive offices) (Zip Code)
(212)
521-2000
(Registrant’s
telephone number, including area code)
NOT
APPLICABLE
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15
(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated
filer
|
X
|
|
Accelerated
filer
|
|
|
Non-accelerated
filer
|
|
|
Smaller
reporting company
|
|
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
Class
|
|
Outstanding
at October 17, 2008
|
Common
stock, $0.01 par value
|
|
436,091,267
shares
|
INDEX
|
Page
|
|
No.
|
|
|
Part
I. Financial Information
|
|
|
|
|
|
|
|
|
Item 1. Financial
Statements (unaudited)
|
|
|
|
|
|
Consolidated Condensed Balance
Sheets
|
|
|
September 30, 2008 and December
31, 2007
|
3
|
|
|
|
|
Consolidated Condensed
Statements of Operations
|
|
|
Three and nine months ended
September 30, 2008 and 2007
|
4
|
|
|
|
|
Consolidated Condensed
Statements of Shareholders’ Equity
|
|
|
September 30, 2008 and
2007
|
6
|
|
|
|
|
Consolidated Condensed
Statements of Cash Flows
|
|
|
Nine months ended September 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
|
45
|
|
|
|
|
Item 3. Quantitative
and Qualitative Disclosures about Market Risk
|
83
|
|
|
|
|
Item 4. Controls and
Procedures
|
86
|
|
|
|
|
Part
II. Other Information
|
|
|
|
|
|
Item 1. Legal
Proceedings
|
87
|
|
|
|
|
Item 1A. Risk
Factors
|
87
|
|
|
|
|
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds
|
88
|
|
|
|
|
Item
6. Exhibits
|
88
|
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements.
Loews
Corporation and Subsidiaries
CONSOLIDATED
CONDENSED BALANCE SHEETS
(Unaudited)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
Fixed maturities, amortized
cost of $33,003 and $34,816
|
|
$ |
29,733 |
|
|
$ |
34,663 |
|
Equity securities, cost of
$1,776 and $1,143
|
|
|
1,516 |
|
|
|
1,347 |
|
Limited partnership
investments
|
|
|
2,207 |
|
|
|
2,321 |
|
Other
investments
|
|
|
149 |
|
|
|
108 |
|
Short term
investments
|
|
|
8,673 |
|
|
|
8,230 |
|
Total
investments
|
|
|
42,278 |
|
|
|
46,669 |
|
Cash
|
|
|
236 |
|
|
|
140 |
|
Receivables
|
|
|
12,201 |
|
|
|
11,469 |
|
Property,
plant and equipment
|
|
|
12,809 |
|
|
|
10,218 |
|
Deferred
income taxes
|
|
|
1,466 |
|
|
|
441 |
|
Goodwill
and other intangible assets
|
|
|
1,358 |
|
|
|
1,353 |
|
Assets
of discontinued operations
|
|
|
1 |
|
|
|
2,841 |
|
Other
assets
|
|
|
1,481 |
|
|
|
1,347 |
|
Deferred
acquisition costs of insurance subsidiaries
|
|
|
1,157 |
|
|
|
1,161 |
|
Separate
account business
|
|
|
430 |
|
|
|
476 |
|
Total
assets
|
|
$ |
73,417 |
|
|
$ |
76,115 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
reserves:
|
|
|
|
|
|
|
|
|
Claim and claim adjustment
expense
|
|
$ |
28,023 |
|
|
$ |
28,588 |
|
Future policy
benefits
|
|
|
7,442 |
|
|
|
7,106 |
|
Unearned
premiums
|
|
|
3,549 |
|
|
|
3,597 |
|
Policyholders’
funds
|
|
|
454 |
|
|
|
930 |
|
Total insurance
reserves
|
|
|
39,468 |
|
|
|
40,221 |
|
Payable
to brokers
|
|
|
1,593 |
|
|
|
580 |
|
Collateral
on loaned securities
|
|
|
6 |
|
|
|
63 |
|
Short
term debt
|
|
|
273 |
|
|
|
358 |
|
Long
term debt
|
|
|
7,401 |
|
|
|
6,900 |
|
Reinsurance
balances payable
|
|
|
367 |
|
|
|
401 |
|
Liabilities
of discontinued operations
|
|
|
|
|
|
|
1,637 |
|
Other
liabilities
|
|
|
3,970 |
|
|
|
3,990 |
|
Separate
account business
|
|
|
430 |
|
|
|
476 |
|
Total
liabilities
|
|
|
53,508 |
|
|
|
54,626 |
|
Minority
interest
|
|
|
4,168 |
|
|
|
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 – 436,402,567 and
529,683,628 shares
|
|
|
4 |
|
|
|
5 |
|
Former Carolina Group
stock
|
|
|
|
|
|
|
1 |
|
Additional
paid-in capital
|
|
|
3,288 |
|
|
|
3,967 |
|
Earnings
retained in the business
|
|
|
14,435 |
|
|
|
13,691 |
|
Accumulated
other comprehensive income (loss)
|
|
|
(1,974 |
) |
|
|
(65 |
) |
|
|
|
15,753 |
|
|
|
17,599 |
|
Less
treasury stock, at cost (314,000 shares of Loews common stock
at
|
|
|
|
|
|
|
|
|
September 30, 2008 and 340,000
shares of former Carolina Group stock at
|
|
|
|
|
|
|
|
|
December 31,
2007)
|
|
|
12 |
|
|
|
8 |
|
Total shareholders’
equity
|
|
|
15,741 |
|
|
|
17,591 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
73,417 |
|
|
$ |
76,115 |
|
See
accompanying Notes to Consolidated Condensed Financial
Statements.
Loews
Corporation and Subsidiaries
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums
|
|
$ |
1,799 |
|
|
$ |
1,882 |
|
|
$ |
5,385 |
|
|
$ |
5,616 |
|
Net investment
income
|
|
|
355 |
|
|
|
647 |
|
|
|
1,531 |
|
|
|
2,165 |
|
Investment
losses
|
|
|
(650 |
) |
|
|
(54 |
) |
|
|
(812 |
) |
|
|
(183 |
) |
Gain on issuance of subsidiary
stock
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
139 |
|
Contract drilling
revenues
|
|
|
882 |
|
|
|
628 |
|
|
|
2,589 |
|
|
|
1,854 |
|
Other
|
|
|
584 |
|
|
|
422 |
|
|
|
1,809 |
|
|
|
1,119 |
|
Total
|
|
|
2,970 |
|
|
|
3,525 |
|
|
|
10,504 |
|
|
|
10,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance claims and
policyholders’ benefits
|
|
|
1,519 |
|
|
|
1,575 |
|
|
|
4,380 |
|
|
|
4,496 |
|
Amortization of deferred
acquisition costs
|
|
|
355 |
|
|
|
384 |
|
|
|
1,083 |
|
|
|
1,137 |
|
Contract drilling
expenses
|
|
|
314 |
|
|
|
281 |
|
|
|
872 |
|
|
|
715 |
|
Other operating
expenses
|
|
|
741 |
|
|
|
566 |
|
|
|
1,982 |
|
|
|
1,584 |
|
Interest
|
|
|
82 |
|
|
|
81 |
|
|
|
259 |
|
|
|
230 |
|
Total
|
|
|
3,011 |
|
|
|
2,887 |
|
|
|
8,576 |
|
|
|
8,162 |
|
Income
(loss) before income tax and minority interest
|
|
|
(41 |
) |
|
|
638 |
|
|
|
1,928 |
|
|
|
2,548 |
|
Income tax expense
(benefit)
|
|
|
(56 |
) |
|
|
182 |
|
|
|
537 |
|
|
|
774 |
|
Minority
interest
|
|
|
159 |
|
|
|
147 |
|
|
|
615 |
|
|
|
482 |
|
Total
|
|
|
103 |
|
|
|
329 |
|
|
|
1,152 |
|
|
|
1,256 |
|
Income
(loss) from continuing operations
|
|
|
(144 |
) |
|
|
309 |
|
|
|
776 |
|
|
|
1,292 |
|
Discontinued
operations, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of
operations
|
|
|
7 |
|
|
|
246 |
|
|
|
350 |
|
|
|
685 |
|
Gain on
disposal
|
|
|
|
|
|
|
|
|
|
|
4,362 |
|
|
|
|
|
Net
income (loss)
|
|
$ |
(137 |
) |
|
$ |
555 |
|
|
$ |
5,488 |
|
|
$ |
1,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$ |
(144 |
) |
|
$ |
309 |
|
|
$ |
776 |
|
|
$ |
1,292 |
|
Discontinued operations,
net
|
|
|
7 |
|
|
|
100 |
|
|
|
4,501 |
|
|
|
280 |
|
Loews common
stock
|
|
|
(137 |
) |
|
|
409 |
|
|
|
5,277 |
|
|
|
1,572 |
|
Former Carolina Group stock -
discontinued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations, net
|
|
|
|
|
|
|
146 |
|
|
|
211 |
|
|
|
405 |
|
Total
|
|
$ |
(137 |
) |
|
$ |
555 |
|
|
$ |
5,488 |
|
|
$ |
1,977 |
|
Loews
Corporation and Subsidiaries
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per Loews common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$ |
(0.33 |
) |
|
$ |
0.58 |
|
|
$ |
1.58 |
|
|
$ |
2.41 |
|
Discontinued operations,
net
|
|
|
0.02 |
|
|
|
0.19 |
|
|
|
9.16 |
|
|
|
0.52 |
|
Net income
(loss)
|
|
$ |
(0.31 |
) |
|
$ |
0.77 |
|
|
$ |
10.74 |
|
|
$ |
2.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per Loews common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$ |
(0.33 |
) |
|
$ |
0.58 |
|
|
$ |
1.58 |
|
|
$ |
2.40 |
|
Discontinued operations,
net
|
|
|
0.02 |
|
|
|
0.19 |
|
|
|
9.14 |
|
|
|
0.52 |
|
Net income
(loss)
|
|
$ |
(0.31 |
) |
|
$ |
0.77 |
|
|
$ |
10.72 |
|
|
$ |
2.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted net income per former Carolina Group share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations,
net
|
|
$ |
- |
|
|
$ |
1.34 |
|
|
$ |
1.95 |
|
|
$ |
3.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common
stock
|
|
|
436.32 |
|
|
|
531.86 |
|
|
|
491.19 |
|
|
|
536.53 |
|
Former Carolina Group
stock
|
|
|
- |
|
|
|
108.44 |
|
|
|
108.47 |
|
|
|
108.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common
stock
|
|
|
436.32 |
|
|
|
533.19 |
|
|
|
492.40 |
|
|
|
537.71 |
|
Former Carolina Group
stock
|
|
|
- |
|
|
|
108.58 |
|
|
|
108.60 |
|
|
|
108.55 |
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FASB Interpretation No.
48,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
“Accounting For
Uncertainty in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes an
interpretation of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FASB No. 109,” net of
minority
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37 |
) |
|
|
|
|
|
|
|
|
FASB Staff Position
Technical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulletin No. 85-4-1,
“Accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Life Settlement
Contracts by
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-Party
Investors,” net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and minority
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2007, as adjusted
|
|
|
|
|
|
5 |
|
|
|
1 |
|
|
|
4,018 |
|
|
|
12,096 |
|
|
|
387 |
|
|
|
(8 |
) |
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,977 |
|
|
|
|
|
|
|
|
|
Other comprehensive
loss
|
|
|
(327 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(327 |
) |
|
|
|
|
Comprehensive
income
|
|
$ |
1,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common stock,
$0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101 |
) |
|
|
|
|
|
|
|
|
Former Carolina Group stock,
$1.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(148 |
) |
|
|
|
|
|
|
|
|
Purchase
of Loews treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(672 |
) |
Issuance
of Loews common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of former Carolina Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
Deferred
tax benefit related to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest expense imputed
on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diamond Offshore’s
1.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
debentures (Note
13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2007
|
|
|
|
|
|
$ |
5 |
|
|
$ |
1 |
|
|
$ |
4,071 |
|
|
$ |
13,822 |
|
|
$ |
60 |
|
|
$ |
(680 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2008
|
|
|
|
|
|
$ |
5 |
|
|
$ |
1 |
|
|
$ |
3,967 |
|
|
$ |
13,691 |
|
|
$ |
(65 |
) |
|
$ |
(8 |
) |
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
5,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,488 |
|
|
|
|
|
|
|
|
|
Other comprehensive
loss
|
|
|
(1,962 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,962 |
) |
|
|
|
|
Comprehensive
income
|
|
$ |
3,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common stock,
$0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94 |
) |
|
|
|
|
|
|
|
|
Former Carolina Group stock,
$0.911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99 |
) |
|
|
|
|
|
|
|
|
Purchase
of Loews treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
Issuance
of Loews common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
of treasury stock
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(700 |
) |
|
|
(3,949 |
) |
|
|
|
|
|
|
4,650 |
|
Balance,
September 30, 2008
|
|
|
|
|
|
$ |
4 |
|
|
$ |
- |
|
|
$ |
3,288 |
|
|
$ |
14,435 |
|
|
$ |
(1,974 |
) |
|
$ |
(12 |
) |
See
accompanying Notes to Consolidated Condensed Financial
Statements.
Loews
Corporation and Subsidiaries
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine
Months Ended September 30
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
5,488 |
|
|
$ |
1,977 |
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
provided
(used) by operating activities, net
|
|
|
(2,741 |
) |
|
|
(36 |
) |
Changes
in operating assets and liabilities, net:
|
|
|
|
|
|
|
|
|
Reinsurance
receivables
|
|
|
691 |
|
|
|
591 |
|
Other
receivables
|
|
|
(131 |
) |
|
|
(71 |
) |
Federal income
tax
|
|
|
(360 |
) |
|
|
(93 |
) |
Prepaid reinsurance
premiums
|
|
|
(6 |
) |
|
|
22 |
|
Deferred acquisition
costs
|
|
|
4 |
|
|
|
1 |
|
Insurance
reserves
|
|
|
(238 |
) |
|
|
(271 |
) |
Reinsurance balances
payable
|
|
|
(34 |
) |
|
|
(56 |
) |
Other
liabilities
|
|
|
(172 |
) |
|
|
97 |
|
Trading
securities
|
|
|
(1,145 |
) |
|
|
1,677 |
|
Other, net
|
|
|
(121 |
) |
|
|
(183 |
) |
Net
cash flow operating activities - continuing operations
|
|
|
1,235 |
|
|
|
3,655 |
|
Net
cash flow operating activities - discontinued operations
|
|
|
142 |
|
|
|
719 |
|
Net
cash flow operating activities - total
|
|
|
1,377 |
|
|
|
4,374 |
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of fixed maturities
|
|
|
(39,989 |
) |
|
|
(53,496 |
) |
Proceeds
from sales of fixed maturities
|
|
|
36,545 |
|
|
|
53,002 |
|
Proceeds
from maturities of fixed maturities
|
|
|
3,374 |
|
|
|
3,720 |
|
Purchases
of equity securities
|
|
|
(170 |
) |
|
|
(157 |
) |
Proceeds
from sales of equity securities
|
|
|
177 |
|
|
|
182 |
|
Purchases
of property, plant and equipment
|
|
|
(2,937 |
) |
|
|
(1,352 |
) |
Proceeds
from sales of property, plant and equipment
|
|
|
71 |
|
|
|
13 |
|
Change
in collateral on loaned securities
|
|
|
(57 |
) |
|
|
(3,518 |
) |
Change
in short term investments
|
|
|
1,567 |
|
|
|
196 |
|
Change
in other investments
|
|
|
(147 |
) |
|
|
(103 |
) |
Acquisition
of business, net of cash acquired
|
|
|
|
|
|
|
(4,029 |
) |
Net
cash flow investing activities - continuing operations
|
|
|
(1,566 |
) |
|
|
(5,542 |
) |
Net
cash flow investing activities - discontinued operations,
|
|
|
|
|
|
|
|
|
including
proceeds from dispositions
|
|
|
620 |
|
|
|
|
|
Net
cash flow investing activities - total
|
|
|
(946 |
) |
|
|
(5,542 |
) |
Loews
Corporation and Subsidiaries
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine
Months Ended September 30
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid
|
|
$ |
(193 |
) |
|
$ |
(249 |
) |
Dividends
paid to minority interest
|
|
|
(354 |
) |
|
|
(339 |
) |
Purchases
of treasury shares
|
|
|
(12 |
) |
|
|
(672 |
) |
Purchases
of treasury shares by subsidiary
|
|
|
(70 |
) |
|
|
|
|
Issuance
of common stock
|
|
|
4 |
|
|
|
6 |
|
Proceeds
from subsidiaries’ equity issuances
|
|
|
246 |
|
|
|
315 |
|
Principal
payments on debt
|
|
|
(902 |
) |
|
|
(4 |
) |
Issuance
of debt
|
|
|
1,320 |
|
|
|
2,110 |
|
Receipts
of investment contract account balances
|
|
|
3 |
|
|
|
2 |
|
Return
of investment contract account balances
|
|
|
(421 |
) |
|
|
(59 |
) |
Excess
tax benefits from share-based payment arrangements
|
|
|
4 |
|
|
|
6 |
|
Other
|
|
|
26 |
|
|
|
10 |
|
Net
cash flow financing activities - continuing
operations
|
|
|
(349 |
) |
|
|
1,126 |
|
Net
cash flow financing activities - discontinued
operations
|
|
|
|
|
|
|
2 |
|
Net
cash flow financing activities - total
|
|
|
(349 |
) |
|
|
1,128 |
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rate on cash - continuing operations
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
76 |
|
|
|
(40 |
) |
Net
cash transactions from:
|
|
|
|
|
|
|
|
|
Continuing operations to
discontinued operations
|
|
|
782 |
|
|
|
760 |
|
Discontinued operations to
continuing operations
|
|
|
(782 |
) |
|
|
(760 |
) |
Cash,
beginning of period
|
|
|
160 |
|
|
|
174 |
|
Cash,
end of period
|
|
$ |
236 |
|
|
$ |
134 |
|
|
|
|
|
|
|
|
|
|
Cash,
end of period:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
236 |
|
|
$ |
116 |
|
Discontinued
operations
|
|
|
|
|
|
|
18 |
|
Total
|
|
$ |
236 |
|
|
$ |
134 |
|
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
Operations, 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 September 30, 2008 and December 31, 2007 and
the results of operations for the three and nine months ended September 30, 2008
and 2007 and changes in cash flows for the nine months ended September 30, 2008
and 2007.
Net income (loss) for the third
quarter and first nine months of each of the years is not necessarily indicative
of net income (loss) 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 $168
million and $103 million for the nine months ended September 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 September 30, 2008. See Note
4.
In
October of 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157- 3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active,” which clarifies the application of SFAS No. 157 in an inactive
market. The FSP addresses application issues such as how management’s internal
assumptions should be considered when measuring fair value when relevant
observable data do not exist; how observable market information in a market that
is not active should be considered when measuring fair value and how the use of
market quotes should be considered when assessing the relevance of observable
and unobservable data available to measure fair value. FSP No. FAS 157-3 was
effective upon issuance. The Company’s adoption of FSP No. FAS 157-3 had no
impact on the financial condition or results of operations as of or for the
three and nine months ended September 30, 2008.
In April of 2007, the FASB issued 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 nine months ended September 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
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities
|
|
$ |
501 |
|
|
$ |
501 |
|
|
$ |
1,495 |
|
|
$ |
1,523 |
|
Short
term investments
|
|
|
36 |
|
|
|
79 |
|
|
|
125 |
|
|
|
243 |
|
Limited
partnerships
|
|
|
(77 |
) |
|
|
19 |
|
|
|
(70 |
) |
|
|
142 |
|
Equity
securities
|
|
|
18 |
|
|
|
7 |
|
|
|
62 |
|
|
|
18 |
|
Trading
portfolio
|
|
|
(117 |
) |
|
|
33 |
|
|
|
(66 |
) |
|
|
221 |
|
Other
|
|
|
6 |
|
|
|
19 |
|
|
|
27 |
|
|
|
60 |
|
Total
investment income
|
|
|
367 |
|
|
|
658 |
|
|
|
1,573 |
|
|
|
2,207 |
|
Investment
expense
|
|
|
(12 |
) |
|
|
(11 |
) |
|
|
(42 |
) |
|
|
(42 |
) |
Net
investment income
|
|
$ |
355 |
|
|
$ |
647 |
|
|
$ |
1,531 |
|
|
$ |
2,165 |
|
Investment
gains (losses) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
$ |
(315 |
) |
|
$ |
(39 |
) |
|
$ |
(475 |
) |
|
$ |
(322 |
) |
Equity
securities, including short positions
|
|
|
(376 |
) |
|
|
16 |
|
|
|
(405 |
) |
|
|
30 |
|
Derivative
instruments
|
|
|
35 |
|
|
|
(45 |
) |
|
|
47 |
|
|
|
94 |
|
Short
term investments
|
|
|
5 |
|
|
|
7 |
|
|
|
12 |
|
|
|
7 |
|
Other,
including guaranteed separate account business
|
|
|
1 |
|
|
|
7 |
|
|
|
9 |
|
|
|
8 |
|
Investment
losses
|
|
|
(650 |
) |
|
|
(54 |
) |
|
|
(812 |
) |
|
|
(183 |
) |
Gain
on issuance of subsidiary stock (Note 13)
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
139 |
|
|
|
|
(650 |
) |
|
|
(54 |
) |
|
|
(810 |
) |
|
|
(44 |
) |
Income
tax benefit
|
|
|
227 |
|
|
|
19 |
|
|
|
284 |
|
|
|
14 |
|
Minority
interest
|
|
|
44 |
|
|
|
3 |
|
|
|
54 |
|
|
|
15 |
|
Investment
losses, net
|
|
$ |
(379 |
) |
|
$ |
(32 |
) |
|
$ |
(472 |
) |
|
$ |
(15 |
) |
For the three months ended September 30,
2008, other-than-temporary impairment (“OTTI”) losses of $584 million were
recorded primarily in the non-redeemable preferred equity securities and
corporate and other taxable bonds sectors. This compared to OTTI losses for
the three months ended September 30, 2007 of $188 million recorded primarily in
the corporate and other taxable bonds and asset-backed bonds sectors. The OTTI
losses for 2008 were primarily driven by credit issues.
For the three months ended September 30,
2008, the Company recorded realized investment losses, including OTTI losses, of
$305 million related to securities issued by Federal National Mortgage
Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie
Mac”), $100 million related to securities issued by Washington Mutual, $96
million related to securities issued by Icelandic banks and $35 million related
to securities issued by American International Group.
Realized investment losses for the nine
months ended September 30, 2008 included OTTI losses of $840 million, recorded
primarily in the non-redeemable preferred equity securities, corporate and other
taxable bonds and asset-backed bonds sectors. This compared to OTTI losses
for the nine months ended September 30, 2007 of $451 million recorded primarily
in the corporate and other taxable bonds and asset-backed bonds sectors. The
OTTI losses for 2008 were primarily driven by credit issues.
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 in the September 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
|
|
|
|
|
September
30, 2008
|
|
Cost
|
|
|
Gains
|
|
|
12
Months
|
|
|
or
Greater
|
|
|
Fair
Value
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and
obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of government
agencies
|
|
$ |
1,431 |
|
|
$ |
88 |
|
|
$ |
1 |
|
|
|
|
|
$ |
1,518 |
|
Asset-backed
securities
|
|
|
9,982 |
|
|
|
27 |
|
|
|
484 |
|
|
$ |
746 |
|
|
|
8,779 |
|
States, municipalities and
political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions-tax
exempt
|
|
|
7,781 |
|
|
|
21 |
|
|
|
596 |
|
|
|
240 |
|
|
|
6,966 |
|
Corporate
|
|
|
9,495 |
|
|
|
73 |
|
|
|
797 |
|
|
|
352 |
|
|
|
8,419 |
|
Other debt
|
|
|
3,618 |
|
|
|
59 |
|
|
|
193 |
|
|
|
103 |
|
|
|
3,381 |
|
Redeemable preferred
stocks
|
|
|
72 |
|
|
|
3 |
|
|
|
2 |
|
|
|
|
|
|
|
73 |
|
Fixed
maturities available-for-sale
|
|
|
32,379 |
|
|
|
271 |
|
|
|
2,073 |
|
|
|
1,441 |
|
|
|
29,136 |
|
Fixed
maturities, trading
|
|
|
624 |
|
|
|
1 |
|
|
|
11 |
|
|
|
17 |
|
|
|
597 |
|
Total
fixed maturities
|
|
|
33,003 |
|
|
|
272 |
|
|
|
2,084 |
|
|
|
1,458 |
|
|
|
29,733 |
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
available-for-sale
|
|
|
1,112 |
|
|
|
187 |
|
|
|
166 |
|
|
|
169 |
|
|
|
964 |
|
Equity securities,
trading
|
|
|
664 |
|
|
|
53 |
|
|
|
102 |
|
|
|
63 |
|
|
|
552 |
|
Total
equity securities
|
|
|
1,776 |
|
|
|
240 |
|
|
|
268 |
|
|
|
232 |
|
|
|
1,516 |
|
Short
term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investments
available-for-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sale
|
|
|
5,387 |
|
|
|
6 |
|
|
|
1 |
|
|
|
|
|
|
|
5,392 |
|
Short term investments,
trading
|
|
|
3,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,281 |
|
Total
short term investments
|
|
|
8,668 |
|
|
|
6 |
|
|
|
1 |
|
|
|
- |
|
|
|
8,673 |
|
Total
|
|
$ |
43,447 |
|
|
$ |
518 |
|
|
$ |
2,353 |
|
|
$ |
1,690 |
|
|
$ |
39,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 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.
|
|
September
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
|
|
$ |
10,068 |
|
|
$ |
698 |
|
|
$ |
4,771 |
|
|
$ |
228 |
|
7-12
months
|
|
|
6,269 |
|
|
|
1,048 |
|
|
|
1,584 |
|
|
|
193 |
|
13-24
months
|
|
|
2,775 |
|
|
|
937 |
|
|
|
690 |
|
|
|
57 |
|
Greater
than 24 months
|
|
|
1,880 |
|
|
|
325 |
|
|
|
3,869 |
|
|
|
138 |
|
Total investment grade
available-for-sale
|
|
|
20,992 |
|
|
|
3,008 |
|
|
|
10,914 |
|
|
|
616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment
grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6
months
|
|
|
1,037 |
|
|
|
122 |
|
|
|
1,527 |
|
|
|
73 |
|
7-12
months
|
|
|
839 |
|
|
|
203 |
|
|
|
125 |
|
|
|
8 |
|
13-24
months
|
|
|
798 |
|
|
|
168 |
|
|
|
26 |
|
|
|
4 |
|
Greater
than 24 months
|
|
|
16 |
|
|
|
11 |
|
|
|
9 |
|
|
|
2 |
|
Total non-investment grade
available-for-sale
|
|
|
2,690 |
|
|
|
504 |
|
|
|
1,687 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed income securities available-for-sale
|
|
|
23,682 |
|
|
|
3,512 |
|
|
|
12,601 |
|
|
|
703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
and non-redeemable preferred stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6
months
|
|
|
21 |
|
|
|
3 |
|
|
|
893 |
|
|
|
143 |
|
7-12
months
|
|
|
371 |
|
|
|
156 |
|
|
|
104 |
|
|
|
28 |
|
13-24
months
|
|
|
172 |
|
|
|
167 |
|
|
|
|
|
|
|
|
|
Total
redeemable and non-redeemable preferred stocks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-for-sale
|
|
|
564 |
|
|
|
326 |
|
|
|
997 |
|
|
|
171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6
months
|
|
|
12 |
|
|
|
9 |
|
|
|
34 |
|
|
|
1 |
|
7-12
months
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
13-24
months
|
|
|
11 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Greater
than 24 months
|
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
Total
equity securities available-for-sale
|
|
|
27 |
|
|
|
11 |
|
|
|
38 |
|
|
|
1 |
|
Total
fixed maturity and equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-for-sale
|
|
$ |
24,273 |
|
|
$ |
3,849 |
|
|
$ |
13,636 |
|
|
$ |
875 |
|
At September 30, 2008, the fair value
of the available-for-sale fixed maturities was $29,136 million, representing
68.9% of the total investment portfolio. The unrealized position associated with
the fixed maturity portfolio included $3,514 million in gross unrealized losses,
consisting of asset-backed securities which represented 35.0%, corporate bonds
which represented 32.7%, tax-exempt bonds which represented 23.8%, and all other
fixed maturity securities which represented 8.5%. The gross unrealized loss for
any single issuer was no greater than 0.3% of the carrying value of the total
general account fixed maturity portfolio. The total fixed maturity portfolio
gross unrealized losses included 2,520 securities which were, in aggregate,
approximately 13.0% 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
September 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 September 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
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 662 securities in a
gross unrealized loss position aggregating $1,226 million. Of these securities
in a gross unrealized loss position, 61.0% are rated AAA, 17.0% are rated AA,
16.0% are rated A, 4.0% are rated BBB and 2.0% are non-investment grade (rated
BB or lower). The aggregate severity of the unrealized loss was approximately
14.0% 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 securities in this category are modeled in order to evaluate the
risks of default on the performance of the underlying collateral. Within this
analysis multiple factors are analyzed including probable risk of default, loss
severity upon a default, payment delinquency, over collateralization and
interest coverage triggers, credit support from lower-rated tranches and rating
agency actions amongst others. Securities are modeled against base-case and
reasonable stress scenarios of probable default activity, given current market
conditions, and then analyzed for potential impact to our particular holdings.
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 September 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 $299
million. There were OTTI losses of $30 million and $209 million recorded on
asset-backed securities, $14 million and $147 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 nine months ended September 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 183 agency mortgage-backed pass-through securities and 2
agency CMOs in an unrealized loss position aggregating $4 million as of
September 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 September 30, 2008.
States,
Municipalities and Political Subdivisions – Tax-Exempt Securities
The unrealized losses on the
Company's investments in tax-exempt municipal securities were caused primarily
by changes in credit spreads, and to a lesser extent, changes in interest rates.
Market conditions in the tax-exempt sector of the market were driven by
significant selling pressure in the market particularly late in the third
quarter. This selling pressure was caused by a combination of factors that
resulted in forced liquidations of municipal positions that increased supply
while demand was decreasing. These conditions increased the yields of the sector
far above historical norms sending prices down and increasing the Company’s
unrealized losses. The Company invests in tax-exempt 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
821 securities in a gross unrealized loss position aggregating $836 million with
all of these unrealized losses related to investment grade securities (rated
BBB- or higher including the impact of mono-line insurance) where the cash flows
are supported by the credit of the issuer. The aggregate severity of the
unrealized losses was approximately 12.0% 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 September 30, 2008. There were OTTI
losses of $1 million recorded on tax-exempt municipal securities for the three
and nine months ended September 30, 2008.
Corporate
Bonds
The holdings in this category include
681 securities in a gross unrealized loss position aggregating $1,149 million.
Of the unrealized losses in this category, 62.0% 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 14.0% of amortized cost. Within corporate bonds, the industry
sectors with the largest gross unrealized losses were financial, consumer
cyclical, communications, consumer non-cyclical and utilities, which as a
percentage of total gross unrealized losses were approximately 32.0%, 19.0%,
17.0%, 8.0% and 8.0% at September 30, 2008. The decline in fair value was
primarily attributable to deterioration and volatility in the broader credit
markets that resulted in widening of credit spreads over risk free rates well
beyond historical norms and macro conditions in certain sectors that the market
viewed as out of favor. The Company monitors the financial performance of the
corporate bond issuers for potential factors that may cause a change in outlook
and addresses securities that are deemed to be OTTI promptly. Because these
declines were not related to any issuer specific credit events, 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 September 30, 2008. There were
OTTI losses of $105 million and $136 million recorded on corporate bonds for the
three and nine months ended September 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 96.0% of the
gross unrealized losses in this category come from securities issued by
financial institutions, 3.0% from utilities and less than 1.0% from
communications. The holdings in this category include 39 securities in a gross
unrealized loss position aggregating $326 million. Of these securities in a
gross unrealized loss position, 56.0% are rated A, 40.0% are rated BBB and 4.0%
are rated lower than BBB. The Company believes the holdings in this category
have been adversely impacted by significant credit spread widening brought on by
a combination of factors in the capital markets. The majority 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.
The Company has recorded other-than-temporary impairment losses on securities of
those issuers that have been placed in conservatorship, have been acquired or
have shown signs of other-than-temporary credit deterioration. The Company has
been monitoring the capital raising efforts of the issuers in this sector, their
ability to continue paying dividends and all other relevant news and believes,
given current facts and circumstances, the remaining issuers in this sector with
unrealized losses are sufficiently capitalized and will recover in value.
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 September 30, 2008. This evaluation was made on
the basis that these securities possess characteristics similar to debt
securities. There were OTTI losses of $255 million and $263 million recorded on
preferred stock, primarily on Freddie Mac and Fannie Mae for the three and nine
months ended September 30, 2008.
Credit
Default Swaps
The Company utilizes credit default
swaps (“CDS”), which involve the transfer of credit risk from one party to
another in exchange for period payments, to manage credit risk within its
overall approach to portfolio management. The Company may purchase CDS
protection to mitigate default risk and credit deterioration for fixed income
and preferred stock holdings in the investment portfolio. The Company may also
sell CDS protection for the purpose of replicating fixed income securities in
the cash market where supply is limited in certain issuers or it is more
beneficial to transact in the derivative markets. In all cases, the underlying
reference obligations for the CDS transactions are single name entities or
established indices.
A summary of the contractual or notional
amounts and gross fair values related to CDS follows:
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
|
Contractual/
|
|
|
|
|
|
|
|
|
Contractual/
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Estimated
Fair Value
|
|
|
Notional
|
|
|
Estimated
Fair Value
|
|
|
|
Amount
|
|
|
Asset
|
|
|
(Liability)
|
|
|
Amount
|
|
|
Asset
|
|
|
(Liability)
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
default swaps - purchased protection
|
|
$ |
405 |
|
|
$ |
84 |
|
|
$ |
(2 |
) |
|
$ |
978 |
|
|
$ |
79 |
|
|
$ |
(4 |
) |
Credit
default swaps - sold protection
|
|
|
248 |
|
|
|
|
|
|
|
(75 |
) |
|
|
276 |
|
|
|
1 |
|
|
|
(47 |
) |
Investment
Commitments
As of September 30, 2008 and December
31, 2007, the Company had committed approximately $331 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 September 30, 2008 and December 31, 2007, the
Company had commitments to purchase $23 million and $58 million and to sell $0
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 September 30, 2008 and December 31, 2007, the Company had
obligations on unfunded bank loan participations in the amount of $20 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 not
observable.
|
The Company attempts to establish fair
value as an exit price in an orderly transaction consistent with normal
settlement market conventions. The Company is responsible for the valuation
process and seeks to obtain quoted market prices for all securities. When quoted
market prices in active markets are not available, the Company uses a number of
methodologies to establish fair value estimates, including discounted cash flow
models, prices from recently executed transactions of similar securities or
broker/dealer quotes, utilizing market observable information to the extent
possible. 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. The Company also uses pricing
services as a significant source of data. The Company monitors all pricing
inputs to determine if the markets from which the data is gathered are active.
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:
September
30, 2008
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity
securities
|
|
$ |
1,856 |
|
|
$ |
24,658 |
|
|
$ |
3,219 |
|
|
$ |
29,733 |
|
Equity
securities
|
|
|
1,187 |
|
|
|
115 |
|
|
|
214 |
|
|
|
1,516 |
|
Other
investments
|
|
|
|
|
|
|
73 |
|
|
|
69 |
|
|
|
142 |
|
Short term
investments
|
|
|
7,407 |
|
|
|
1,266 |
|
|
|
|
|
|
|
8,673 |
|
Receivables
|
|
|
|
|
|
|
29 |
|
|
|
|
|
|
|
29 |
|
Assets of discontinued
operations
|
|
|
77 |
|
|
|
69 |
|
|
|
20 |
|
|
|
166 |
|
Other assets
|
|
|
|
|
|
|
7 |
|
|
|
121 |
|
|
|
128 |
|
Separate account
business
|
|
|
44 |
|
|
|
338 |
|
|
|
43 |
|
|
|
425 |
|
Total
|
|
$ |
10,571 |
|
|
$ |
26,555 |
|
|
$ |
3,686 |
|
|
$ |
40,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable to
brokers
|
|
$ |
(150 |
) |
|
$ |
(129 |
) |
|
$ |
(47 |
) |
|
$ |
(326 |
) |
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 nine months ended September 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,
July 1, 2008
|
|
$ |
3,434 |
|
|
$ |
263 |
|
|
$ |
- |
|
|
$ |
23 |
|
|
$ |
118 |
|
|
$ |
45 |
|
|
$ |
(83 |
) |
Total
net realized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and net change in
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains (losses) on
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Net income
(loss)
|
|
|
(36 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
50 |
|
Included in
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income (loss)
|
|
|
(103 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(7 |
) |
|
|
31 |
|
Purchases,
sales, issuances and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
settlements
|
|
|
(127 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
24 |
|
Net
transfers in (out) of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
51 |
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
Balance,
September 30, 2008
|
|
$ |
3,219 |
|
|
$ |
214 |
|
|
$ |
- |
|
|
$ |
20 |
|
|
$ |
121 |
|
|
$ |
43 |
|
|
$ |
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
(loss)
|
|
|
(160 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
29 |
|
Included in
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income (loss)
|
|
|
(373 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(11 |
) |
|
|
34 |
|
Purchases,
sales, issuances and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
settlements
|
|
|
(46 |
) |
|
|
24 |
|
|
|
|
|
|
|
(3 |
) |
|
|
(28 |
) |
|
|
(2 |
) |
|
|
(22 |
) |
Net
transfers in (out) of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
889 |
|
|
|
(1 |
) |
|
|
(85 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
26 |
|
|
|
|
|
Balance,
September 30, 2008
|
|
$ |
3,219 |
|
|
$ |
214 |
|
|
$ |
- |
|
|
$ |
20 |
|
|
$ |
121 |
|
|
$ |
43 |
|
|
$ |
22 |
|
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 (loss) for Level 3 assets and
liabilities for the three and nine months ended September 30, 2008.
|
|
Fixed
|
|
|
|
|
|
|
|
|
Derivative
|
|
|
|
|
|
|
Maturity
|
|
|
Equity
|
|
|
Other
|
|
|
Financial
|
|
|
|
|
Three
Months Ended September 30, 2008
|
|
Securities
|
|
|
Securities
|
|
|
Assets
|
|
|
Instruments,
Net
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment loss
|
|
$ |
(17 |
) |
|
$ |
(1 |
) |
|
|
|
|
|
|
|
$ |
(18 |
) |
Investment
gains (losses)
|
|
|
(19 |
) |
|
|
|
|
|
|
|
|
$ |
54 |
|
|
|
35 |
|
Other
revenues
|
|
|
|
|
|
|
|
|
|
$ |
4 |
|
|
|
(4 |
) |
|
|
- |
|
Total
|
|
$ |
(36 |
) |
|
$ |
(1 |
) |
|
$ |
4 |
|
|
$ |
50 |
|
|
$ |
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment loss
|
|
$ |
(11 |
) |
|
$ |
(2 |
) |
|
|
|
|
|
|
|
|
|
$ |
(13 |
) |
Investment
gains (losses)
|
|
|
(149 |
) |
|
|
(2 |
) |
|
|
|
|
|
$ |
55 |
|
|
|
(96 |
) |
Other
revenues
|
|
|
|
|
|
|
|
|
|
$ |
34 |
|
|
|
(26 |
) |
|
|
8 |
|
Total
|
|
$ |
(160 |
) |
|
$ |
(4 |
) |
|
$ |
34 |
|
|
$ |
29 |
|
|
$ |
(101 |
) |
The tables below summarize changes in
unrealized gains or losses recorded in Net income (loss) for the three and nine
months ended September 30, 2008 for Level 3 assets and liabilities still held at
September 30, 2008.
|
|
Fixed
|
|
|
|
|
|
|
|
|
Derivative
|
|
|
|
|
|
Maturity
|
|
|
Equity
|
|
|
Other
|
|
|
Financial
|
|
|
|
Three
Months Ended September 30, 2008
|
|
Securities
|
|
|
Securities
|
|
|
Assets
|
|
|
Instruments,
Net
|
|
|
Total
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income (loss)
|
|
$ |
(5 |
) |
|
$ |
1 |
|
|
|
|
|
|
|
|
$ |
(4 |
) |
Investment
gains (losses)
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
$ |
76 |
|
|
|
54 |
|
Other
revenues
|
|
|
|
|
|
|
|
|
|
$ |
3 |
|
|
|
|
|
|
|
3 |
|
Total
|
|
$ |
(27 |
) |
|
$ |
1 |
|
|
$ |
3 |
|
|
$ |
76 |
|
|
$ |
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment loss
|
|
$ |
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(11 |
) |
Investment
gains (losses)
|
|
|
(155 |
) |
|
$ |
(4 |
) |
|
|
|
|
|
$ |
7 |
|
|
|
(152 |
) |
Other
revenues
|
|
|
|
|
|
|
|
|
|
$ |
8 |
|
|
|
|
|
|
|
8 |
|
Total
|
|
$ |
(166 |
) |
|
$ |
(4 |
) |
|
$ |
8 |
|
|
$ |
7 |
|
|
$ |
(155 |
) |
Securities transferred into Level 3 for
the three months ended September 30, 2008 relate primarily to securities for
which broker quotes based on unobservable market information have become a
significant input to the valuation process. For the nine months ended September
30, 2008, securities transferred into Level 3 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 activity, 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 83.2% 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. Level 2 derivatives include forwards valued using observable market
spot rates. 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 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 (loss) 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 (loss) to each
class of common stock for the three and nine months ended September 30, 2008 and
2007 was as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions, except %)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income
(loss)
|
|
$ |
(137 |
) |
|
$ |
555 |
|
|
$ |
5,488 |
|
|
$ |
1,977 |
|
Less income attributable to
former Carolina Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
|
|
|
- |
|
|
|
146 |
|
|
|
211 |
|
|
|
405 |
|
Income (loss) attributable to
Loews common stock
|
|
$ |
(137 |
) |
|
$ |
409 |
|
|
$ |
5,277 |
|
|
$ |
1,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former
Carolina Group stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to former
Carolina Group stock
|
|
$ |
- |
|
|
$ |
233 |
|
|
$ |
339 |
|
|
$ |
649 |
|
Weighted average economic
interest of the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
former Carolina
Group
|
|
|
- |
|
|
|
62.4 |
% |
|
|
62.4 |
% |
|
|
62.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to former
Carolina Group stock
|
|
$ |
- |
|
|
$ |
146 |
|
|
$ |
211 |
|
|
$ |
405 |
|
The following is a reconciliation of
basic weighted shares outstanding to diluted weighted shares:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding-basic
|
|
|
436.32 |
|
|
|
531.86 |
|
|
|
491.19 |
|
|
|
536.53 |
|
Stock
options and SARs (a)
|
|
|
- |
|
|
|
1.33 |
|
|
|
1.21 |
|
|
|
1.18 |
|
Weighted
average shares outstanding-diluted
|
|
|
436.32 |
|
|
|
533.19 |
|
|
|
492.40 |
|
|
|
537.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former
Carolina Group stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding-basic
|
|
|
- |
|
|
|
108.44 |
|
|
|
108.47 |
|
|
|
108.42 |
|
Stock
options and SARs
|
|
|
- |
|
|
|
0.14 |
|
|
|
0.13 |
|
|
|
0.13 |
|
Weighted
average shares outstanding-diluted
|
|
|
- |
|
|
|
108.58 |
|
|
|
108.60 |
|
|
|
108.55 |
|
(a)
|
For
the three months ended September 30, 2008, common equivalent shares,
consisting solely of stock options and SARs, are excluded from the
calculation of diluted net loss per share as their effects are
antidilutive.
|
Certain
options and SARs 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
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock
|
|
|
5,343,396 |
|
|
|
705,689 |
|
|
|
1,337,264 |
|
|
|
237,034 |
|
Former
Carolina Group stock
|
|
|
- |
|
|
|
101,630 |
|
|
|
255,983 |
|
|
|
34,245 |
|
6.
Reinsurance
CNA cedes insurance to reinsurers to
limit its maximum loss, provide greater diversification of risk, minimize
exposures on larger risks and to exit certain lines of business. The ceding of
insurance does not discharge the primary liability of CNA. Therefore, a credit
exposure exists with respect to property and casualty and life reinsurance ceded
to the extent that any reinsurer is unable to meet its obligations or to the
extent that the reinsurer disputes the liabilities assumed under reinsurance
agreements. Property and casualty reinsurance coverages are tailored to the
specific risk characteristics of each product line and CNA’s retained amount
varies by type of coverage. Reinsurance contracts are purchased to protect
specific lines of business such as property and workers’ compensation. Corporate
catastrophe reinsurance is also purchased for property and workers’ compensation
exposure. Most reinsurance contracts are purchased on an excess of loss basis.
CNA also utilizes facultative reinsurance in certain lines. In addition, CNA
assumes reinsurance as a member of various reinsurance pools and
associations.
The following table summarizes the
amounts receivable from reinsurers at September 30, 2008 and December 31,
2007.
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
receivables related to insurance reserves:
|
|
|
|
|
|
|
Ceded claim and claim
adjustment expense
|
|
$ |
6,468 |
|
|
$ |
7,056 |
|
Ceded future policy
benefits
|
|
|
946 |
|
|
|
987 |
|
Ceded policyholders’
funds
|
|
|
41 |
|
|
|
43 |
|
Reinsurance
receivables related to paid losses
|
|
|
543 |
|
|
|
603 |
|
Reinsurance
receivables
|
|
|
7,998 |
|
|
|
8,689 |
|
Less
allowance for uncollectible reinsurance
|
|
|
387 |
|
|
|
461 |
|
Reinsurance
receivables, net of allowance
|
|
|
|
|
|
|
|
|
for uncollectible
reinsurance
|
|
$ |
7,611 |
|
|
$ |
8,228 |
|
CNA has established an allowance for
uncollectible reinsurance receivables. During the third quarter of 2008, CNA
revised its estimate of the required allowance for uncollectible reinsurance
receivables resulting in a release of $42 million. There were no significant
changes in the allowance for uncollectible reinsurance for the nine months ended
September 30, 2007. Changes in the allowance for uncollectible reinsurance
receivables are presented as a component of Insurance claims and policyholders’
benefits in the Consolidated Condensed Statements of Operations.
7.
Receivables
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
$ |
7,998 |
|
|
$ |
8,689 |
|
Other
insurance
|
|
|
2,160 |
|
|
|
2,284 |
|
Security
sales
|
|
|
1,084 |
|
|
|
163 |
|
Accrued
investment income
|
|
|
391 |
|
|
|
340 |
|
Other
|
|
|
1,262 |
|
|
|
791 |
|
Total
|
|
|
12,895 |
|
|
|
12,267 |
|
Less: allowance
for doubtful accounts on reinsurance receivables
|
|
|
387 |
|
|
|
461 |
|
allowance for other doubtful
accounts and cash discounts
|
|
|
307 |
|
|
|
337 |
|
Receivables
|
|
$ |
12,201 |
|
|
$ |
11,469 |
|
8. Property,
Plant and Equipment
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
71 |
|
|
$ |
70 |
|
Buildings
and building equipment
|
|
|
643 |
|
|
|
670 |
|
Offshore
drilling equipment
|
|
|
5,249 |
|
|
|
4,540 |
|
Machinery
and equipment
|
|
|
1,360 |
|
|
|
1,313 |
|
Pipeline
equipment
|
|
|
3,575 |
|
|
|
2,445 |
|
Natural
gas and NGL proved and unproved properties
|
|
|
3,240 |
|
|
|
2,869 |
|
Construction
in process
|
|
|
2,245 |
|
|
|
1,423 |
|
Leaseholds
and leasehold improvements
|
|
|
75 |
|
|
|
79 |
|
Total
|
|
|
16,458 |
|
|
|
13,409 |
|
Less
accumulated depreciation, depletion and amortization
|
|
|
3,649 |
|
|
|
3,191 |
|
Property,
plant and equipment
|
|
$ |
12,809 |
|
|
$ |
10,218 |
|
Diamond
Offshore Construction Projects
Construction in process at September 30,
2008, included $293 million related to the major upgrade of the Ocean Monarch to
ultra-deepwater service including accrued capital expenditures aggregating $39
million related to this project. Diamond Offshore anticipates that the upgrade
of the Ocean Monarch
will be completed in late 2008. Construction of Diamond Offshore’s two new
jack-up rigs Ocean Shield
and Ocean
Scepter was completed in the second quarter and third quarter of 2008,
respectively.
Boardwalk
Pipeline Expansion Projects
In 2008, Boardwalk Pipeline placed in
service the remaining pipeline assets and related compression associated with
the East Texas to Mississippi Expansion project from Delhi, Louisiana to
Harrisville, Mississippi. In addition, the pipeline assets and two compressor
stations related to the Southeast Expansion project were placed in service. As a
result, approximately $1.1 billion was transferred from Construction in process
to Pipeline equipment. The assets will generally be depreciated over a term of
35 years.
9. 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 nine
months ended September 30, 2008, net of reinsurance, were $248 million and $348
million. Catastrophe losses in 2008 related primarily to Hurricanes Gustav and
Ike. Catastrophe losses related to events occurring for the three and nine
months ended September 30, 2007, net of reinsurance, were $10 million and $54
million. 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.
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental
|
|
|
|
|
|
Environmental
|
|
|
|
Asbestos
|
|
|
Pollution
|
|
|
Asbestos
|
|
|
Pollution
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
reserves
|
|
$ |
2,155 |
|
|
$ |
309 |
|
|
$ |
2,352 |
|
|
$ |
367 |
|
Ceded
reserves
|
|
|
(940 |
) |
|
|
(115 |
) |
|
|
(1,030 |
) |
|
|
(125 |
) |
Net
reserves
|
|
$ |
1,215 |
|
|
$ |
194 |
|
|
$ |
1,322 |
|
|
$ |
242 |
|
Asbestos
CNA recorded $18 million and $6 million
of unfavorable asbestos-related net claim and claim adjustment expense reserve
development for the nine months ended September 30, 2008 and 2007. CNA paid
asbestos-related claims, net of reinsurance recoveries, of $125 million and $121
million for the nine months ended September 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. While the confirmation hearing
has not been scheduled, W.R. Grace expects the hearing to occur in 2009. 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, insurer financial strength and debt ratings, and the
Company’s results of operations and/or equity.
Environmental
Pollution
CNA recorded $3 million and $1 million
of unfavorable environmental pollution net claim and claim adjustment expense
reserve development for the nine months ended September 30, 2008 and 2007. CNA
paid environmental pollution-related claims, net of reinsurance recoveries, of
$51 million and $31 million for the nine months ended September 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 September 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)
|
|
$ |
(4 |
) |
|
$ |
(68 |
) |
|
$ |
1 |
|
|
$ |
(71 |
) |
A&E
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
13 |
|
Pretax
unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development before impact of
premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
(4 |
) |
|
|
(68 |
) |
|
|
14 |
|
|
|
(58 |
) |
Pretax
unfavorable (favorable) premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
3 |
|
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(2 |
) |
Total
pretax unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
$ |
(1 |
) |
|
$ |
(70 |
) |
|
$ |
11 |
|
|
$ |
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
unfavorable (favorable) net prior
|
|
|
|
|
|
|
|
|
|
|
|
|
year claim and allocated claim
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
expense reserve
development:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
(Non-A&E)
|
|
$ |
(67 |
) |
|
$ |
3 |
|
|
$ |
4 |
|
|
$ |
(60 |
) |
A&E
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
3 |
|
Pretax
unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development before impact of
premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
(67 |
) |
|
|
3 |
|
|
|
7 |
|
|
|
(57 |
) |
Pretax
favorable premium development
|
|
|
(5 |
) |
|
|
(3 |
) |
|
|
(2 |
) |
|
|
(10 |
) |
Total
pretax unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
$ |
(72 |
) |
|
$ |
- |
|
|
$ |
5 |
|
|
$ |
(67 |
) |
2008
Net Prior Year Development
Standard
Lines
The favorable claim and allocated claim
adjustment expense reserve development was primarily due to favorable experience
in general liability and property coverages offset by unfavorable experience in
workers’ compensation (including excess workers’ compensation coverages) and
large account business.
For general liability excluding
construction defect, $228 million in favorable claim and allocated claim
adjustment expense reserve development was due to decreased frequency and
severity of claims across multiple accident years. The improvement was due to
underwriting initiatives and favorable outcomes on individual claims. Favorable
development of $207 million associated with construction defect exposures was
due to lower severity resulting from various claim handling initiatives and
lower than expected frequency of claims, primarily in accident years 1999 and
prior. Claims handling initiatives have resulted in an increase in the number of
claims closed without payment and increased recoveries from other parties
involved in the claims. The lower construction defect frequency is due to
underwriting initiatives designed to limit the exposure to future construction
defect claims. For property exposures, $31 million of favorable development was
primarily the result of decreased frequency and severity in recent years. The
remaining favorable development was the result of favorable experience across
several miscellaneous coverages in Standard Lines.
Unfavorable development of $248 million
for workers’ compensation was primarily the result of the impact of claim cost
inflation on lifetime medical and home health care claims in accident years 1999
and prior. The changes were driven by increased life expectancy due to advances
in medical care and increasing medical inflation. Unfavorable development of
$161 million for large account business was also driven primarily by workers’
compensation claim cost inflation primarily in accident years 2001 and prior.
Unfavorable development of $90 million on excess workers’ compensation was due
to claims in accident years 2002 and prior. Increasing medical inflation,
increased life expectancy resulting from advances in medical care, and reviews
of individual claims have resulted in higher cost estimates of existing claims
and a higher estimate of the number of claims expected to reach
excess
layers. The remaining unfavorable development was driven primarily by commercial
auto liability coverages in recent accident years due to an increase in
frequency.
Specialty
Lines
The favorable claim and allocated claim
adjustment expense reserve development was primarily due to favorable experience
in medical professional liability and surety business, partially offset by
unfavorable experience in professional liability coverages.
Favorable claim and allocated claim
adjustment expense reserve development of approximately $52 million for medical
professional liability was primarily due to better than expected frequency of
large losses in accident years 2005 and 2006 for healthcare facilities and
medical technology firms. Favorable development of approximately $22 million for
surety coverages was due to better than expected frequency in accident years
2002 through 2006. The remaining favorable development was due primarily to
favorable outcomes on individual claims in accident years 2004 through 2006 for
miscellaneous professional and general liability coverages.
Unfavorable development of approximately
$18 million for professional liability coverages was primarily due to an
increase in the frequency of large claims in older accident years.
Other
Insurance
The unfavorable claim and allocated
claim adjustment expense reserve development was primarily related to the
commutation of a ceded reinsurance arrangement. The unfavorable development was
offset by a release of a previously established allowance for uncollectible
reinsurance.
2007
Net Prior Year Development
Standard
Lines
Approximately $42 million of favorable
claim and allocated claim adjustment expense reserve development was due to
decreased severity on open claims within the general liability exposures in
accident years 2003 and prior, as well as lower frequency in accident years 2004
through 2006.
Approximately $25 million of favorable
claim and allocated claim adjustment expense development was recorded related to
property exposures, primarily due to decreased frequency and severity on claims
in accident years 2005 and 2006. The severity change was driven by decreased
incurred losses as a result of changes in individual claims reserve
estimates.
Nine
Month Comparison
|
|
Standard
|
|
|
Specialty
|
|
|
Other
|
|
|
|
|
Nine
Months Ended September 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)
|
|
$ |
(54 |
) |
|
$ |
(50 |
) |
|
$ |
9 |
|
|
$ |
(95 |
) |
A&E
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
21 |
|
Pretax
unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development before impact of
premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
(54 |
) |
|
|
(50 |
) |
|
|
30 |
|
|
|
(74 |
) |
Pretax
unfavorable (favorable) premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
4 |
|
|
|
(20 |
) |
|
|
(3 |
) |
|
|
(19 |
) |
Total
pretax unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
$ |
(50 |
) |
|
$ |
(70 |
) |
|
$ |
27 |
|
|
$ |
(93 |
) |
|
|
Standard
|
|
|
Specialty
|
|
|
Other
|
|
|
|
|
Nine
Months Ended September 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)
|
|
$ |
(74 |
) |
|
$ |
(4 |
) |
|
$ |
12 |
|
|
$ |
(66 |
) |
A&E
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
7 |
|
Pretax
unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development before impact of
premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
(74 |
) |
|
|
(4 |
) |
|
|
19 |
|
|
|
(59 |
) |
Pretax
favorable premium development
|
|
|
(15 |
) |
|
|
(13 |
) |
|
|
(5 |
) |
|
|
(33 |
) |
Total
pretax unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
$ |
(89 |
) |
|
$ |
(17 |
) |
|
$ |
14 |
|
|
$ |
(92 |
) |
2008
Net Prior Year Development
Standard
Lines
The favorable claim and allocated claim
adjustment expense reserve development was primarily due to favorable experience
in general liability and property coverages including marine exposures,
partially offset by unfavorable experience in workers’ compensation (including
excess workers’ compensation coverages) and large account business.
For general liability excluding
construction defect, $254 million in favorable claim and allocated claim
adjustment expense reserve development was due to decreased frequency and
severity of claims across multiple accident years. The improvement was due to
underwriting initiatives and favorable outcomes on individual claims. Favorable
development of $207 million associated with construction defect exposures was
due to lower severity resulting from various claim handling initiatives and
lower than expected frequency of claims, primarily in accident years 1999 and
prior. Claims handling initiatives have resulted in an increase in the number of
claims closed without payment and increased recoveries from other parties
involved in the claims. The lower construction defect frequency is due to
underwriting initiatives designed to limit the exposure to future construction
defect claims. For property coverages including marine exposures, approximately
$95 million of favorable development was primarily the result of decreased
frequency and severity in recent years. The $95 million of favorable property
and marine development includes approximately $29 million due to favorable
outcomes on claims relating to catastrophes, primarily in accident year
2005.
Unfavorable development of $248 million
for workers’ compensation was primarily the result of the impact of claim cost
inflation on lifetime medical and home health care claims in accident years 1999
and prior. The changes were driven by increased life expectancy due to advances
in medical care and increasing medical inflation. Unfavorable development of
$161 million for large account business was also driven primarily by workers’
compensation claim cost inflation primarily in accident years 2001 and prior.
Unfavorable development of $114 million on excess workers’ compensation was due
to claims in accident years 2002 and prior. Increasing medical inflation,
increased life expectancy resulting from advances in medical care, and reviews
of individual claims have resulted in higher cost estimates of existing claims
and a higher estimate of the number of claims expected to reach excess
layers.
Specialty
Lines
The favorable claim and allocated claim
adjustment expense reserve development was primarily due to favorable experience
in medical professional liability, professional liability coverages in recent
years, and surety business, partially offset by unfavorable experience in
professional liability coverages in older years.
Favorable claim and allocated claim
adjustment expense reserve development of approximately $52 million for medical
professional liability was primarily due to better than expected frequency of
large losses in accident years 2005 and 2006 for healthcare facilities and
medical technology firms. Approximately $22 million of favorable development was
recorded for professional liability coverages due primarily to favorable
outcomes on individual claims in accident years 2004 through 2006. Favorable
development of approximately $14 million for surety coverages was due to better
than expected frequency in accident years 2002 through 2006.
Unfavorable development of approximately
$33 million for professional liability coverages was primarily due to an
increase in the frequency of large claims in older accident years. The favorable
premium development is primarily the result of a change in ultimate premiums
within a foreign affiliate’s property and financial lines.
Other
Insurance
The unfavorable claim and allocated
claim adjustment expense reserve development was primarily related to
commutations of certain ceded reinsurance arrangements. The unfavorable
development was offset by a release of a previously established allowance for
uncollectible reinsurance.
2007
Net Prior Year Development
Standard
Lines
Approximately $42 million of favorable
claim and allocated claim adjustment expense reserve development was due to
decreased severity on open claims within the general liability exposures in
accident years 2003 and prior, as well as lower frequency in accident years 2004
through 2006. In addition, approximately $14 million of unfavorable premium
development was taken primarily as a result of favorable claim and allocated
claim adjustment expense reserve development on retrospectively rated large
account policies relating to the automobile and general liability lines of
business in accident years 2001 and subsequent. This favorable claim and
allocated claim adjustment expense reserve development was due to lower than
anticipated frequency and severity.
Approximately $58 million of favorable
claim and allocated claim adjustment expense reserve development was due to
decreased frequency and severity on claims related to property exposures,
primarily in accident years 2005 and 2006. The change was driven by decreased
incurred losses as a result of changes in individual claims reserve
estimates.
Approximately $42 million of favorable
premium development was recorded mainly as a result of additional premium
resulting from audits on recent policies related to workers’ compensation and
general liability books of business. This was partially offset by $27 million of
unfavorable claim and 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.
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. This unfavorable
development was offset by favorable development in commercial auto, monoline
general liability and umbrella product lines. This favorable development was due
to improved severity in recent accident years.
Specialty
Lines
Approximately $9 million of favorable
claim and claim adjustment expense reserve development was recorded in the
excess and surplus line of business. This favorable development was primarily
related to improved frequency and severity on excess general liability claims
across several accident years.
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.
Other
Insurance
Approximately $9 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.
10. 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.
11. Statutory
Accounting Practices
CNA’s ability to pay dividends and other
credit obligations is significantly dependent on receipt of dividends from its
subsidiaries. The payment of dividends to CNA by its insurance subsidiaries
without prior approval of the insurance department of each subsidiary’s
domiciliary jurisdiction is limited by formula. Dividends in excess of these
amounts are subject to prior approval by the respective state insurance
departments.
Dividends from Continental Casualty
Company (“CCC”) are subject to the insurance holding company laws of the State
of Illinois, the domiciliary state of CCC. Under these laws, ordinary dividends,
or dividends that do not require prior approval of the Illinois Department of
Financial and Professional Regulation – Division of Insurance (the
“Department”), may be paid only from earned surplus, which is calculated by
removing unrealized gains from unassigned surplus. As of September 30, 2008, CCC
is in a negative earned surplus position. Any future dividend payments made
during 2008 would be subject to the Department’s prior approval.
CNA’s domestic insurance subsidiaries
are subject to risk-based capital requirements. Risk-based capital is a method
developed by the National Association of Insurance Commissioners (“NAIC”) to
determine the minimum amount of statutory capital appropriate for an insurance
company to support its overall business operations in consideration of its size
and risk profile. The formula for determining the amount of risk-based capital
specifies various factors, weighted based on the perceived degree of risk, which
are applied to certain financial balances and financial activity. The adequacy
of a company's actual capital is evaluated by a comparison to the risk-based
capital results, as determined by the formula. Companies below minimum
risk-based capital requirements are classified within certain levels, each of
which requires specified corrective action. As of September 30, 2008 and
December 31, 2007, all of CNA’s domestic insurance subsidiaries exceeded the
minimum risk-based capital requirements.
Combined statutory capital and surplus
and net income, determined in accordance with accounting practices prescribed or
permitted by insurance regulatory authorities for the property and casualty and
the life insurance subsidiaries, were as follows:
|
|
Statutory
Capital and Surplus
|
|
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and casualty companies (a)
|
|
$ |
7,967 |
|
|
$ |
8,511 |
|
Life
company
|
|
|
514 |
|
|
|
471 |
|
(a)
|
Surplus
includes the property and casualty companies’ equity ownership of the life
company’s capital and surplus.
|
|
|
Statutory
Net Income (Loss)
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and casualty companies
|
|
$ |
(259 |
) |
|
$ |
164 |
|
|
$ |
- |
|
|
$ |
570 |
|
Life
company
|
|
|
(26 |
) |
|
|
(3 |
) |
|
|
5 |
|
|
|
26 |
|
In conformity with accounting practices
prescribed by insurance regulatory authorities, preliminary statutory capital
and surplus as of September 30, 2008, presented above, reflects the impact of a
$1.0 billion surplus note, which will be issued subsequent to September 30, 2008
but prior to the filing of CCC’s third quarter statutory statements. See Note 20
of the Notes to Consolidated Condensed Financial Statements for further
discussion.
12. 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 $163
|
|
|
(263 |
) |
|
|
|
|
|
|
|
|
|
|
(263 |
) |
Adjustment
for items included in net income,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of tax of
$59
|
|
|
(102 |
) |
|
|
|
|
|
|
|
|
|
|
(102 |
) |
Foreign
currency translation adjustment, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax of $2
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
31 |
|
Pension
liability adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of $2
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
7 |
|
Balance,
September 30, 2007
|
|
$ |
219 |
|
|
$ |
117 |
|
|
$ |
(276 |
) |
|
$ |
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2008
|
|
$ |
12 |
|
|
$ |
117 |
|
|
$ |
(194 |
) |
|
$ |
(65 |
) |
Unrealized
holding losses, net of tax of $1,265
|
|
|
(2,062 |
) |
|
|
|
|
|
|
|
|
|
|
(2,062 |
) |
Adjustment
for items included in net income,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of tax of $79 and
$20
|
|
|
133 |
|
|
|
|
|
|
|
34 |
|
|
|
167 |
|
Foreign
currency translation adjustment, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax
|
|
|
|
|
|
|
(56 |
) |
|
|
|
|
|
|
(56 |
) |
Pension
liability adjustment, net of tax of $5
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
(11 |
) |
Disposal
of discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of $33
|
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
53 |
|
Balance,
September 30, 2008
|
|
$ |
(1,917 |
) |
|
$ |
61 |
|
|
$ |
(118 |
) |
|
$ |
(1,974 |
) |
13. Significant
Transactions
Diamond
Offshore
In the first nine 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 September 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 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 do 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.
14. 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
nine months ended September 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 nine months of 2008,
the Company made $71 million of total contributions to the pension plans and $9
million to the postretirement healthcare and life insurance benefit
plans.
Net periodic benefit cost
components:
|
|
Pension
Benefits
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
8 |
|
|
$ |
7 |
|
|
$ |
23 |
|
|
$ |
24 |
|
Interest
cost
|
|
|
41 |
|
|
|
40 |
|
|
|
123 |
|
|
|
121 |
|
Expected
return on plan assets
|
|
|
(49 |
) |
|
|
(47 |
) |
|
|
(145 |
) |
|
|
(141 |
) |
Amortization
of net loss
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
Amortization
of prior service cost
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
Actuarial
loss
|
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
|
|
9 |
|
Settlement
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
Net
periodic benefit cost
|
|
$ |
2 |
|
|
$ |
4 |
|
|
$ |
6 |
|
|
$ |
18 |
|
|
|
Other
Postretirement Benefits
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
1 |
|
|
|
|
|
$ |
2 |
|
|
$ |
1 |
|
Interest
cost
|
|
|
3 |
|
|
$ |
4 |
|
|
|
9 |
|
|
|
11 |
|
Expected
return on plan assets
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
(3 |
) |
Amortization
of prior service benefit
|
|
|
(5 |
) |
|
|
(6 |
) |
|
|
(17 |
) |
|
|
(19 |
) |
Actuarial
loss
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
Regulatory
asset decrease
|
|
|
1 |
|
|
|
1 |
|
|
|
4 |
|
|
|
4 |
|
Net
periodic benefit cost
|
|
$ |
(2 |
) |
|
$ |
(1 |
) |
|
$ |
(5 |
) |
|
$ |
(4 |
) |
15. 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. 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
Reinsurance Company Limited. This segment also includes the results related to
the centralized adjusting and settlements of A&E.
Diamond Offshore’s business primarily
consists of operating 46 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 as of December 31, 2007.
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, 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
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard Lines
|
|
$ |
734 |
|
|
$ |
1,032 |
|
|
$ |
2,601 |
|
|
$ |
3,127 |
|
Specialty Lines
|
|
|
947 |
|
|
|
1,074 |
|
|
|
3,035 |
|
|
|
3,140 |
|
Life and Group
Non-Core
|
|
|
(11 |
) |
|
|
308 |
|
|
|
534 |
|
|
|
972 |
|
Other Insurance
|
|
|
(11 |
) |
|
|
70 |
|
|
|
92 |
|
|
|
231 |
|
Total
CNA Financial
|
|
|
1,659 |
|
|
|
2,484 |
|
|
|
6,262 |
|
|
|
7,470 |
|
Diamond
Offshore
|
|
|
868 |
|
|
|
655 |
|
|
|
2,630 |
|
|
|
1,935 |
|
HighMount
|
|
|
200 |
|
|
|
100 |
|
|
|
590 |
|
|
|
100 |
|
Boardwalk
Pipeline
|
|
|
222 |
|
|
|
141 |
|
|
|
641 |
|
|
|
490 |
|
Loews
Hotels
|
|
|
90 |
|
|
|
90 |
|
|
|
292 |
|
|
|
285 |
|
Corporate
and other
|
|
|
(69 |
) |
|
|
55 |
|
|
|
89 |
|
|
|
430 |
|
Total
|
|
$ |
2,970 |
|
|
$ |
3,525 |
|
|
$ |
10,504 |
|
|
$ |
10,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income tax and minority
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard Lines
|
|
$ |
(272 |
) |
|
$ |
232 |
|
|
$ |
(39 |
) |
|
$ |
584 |
|
Specialty Lines
|
|
|
120 |
|
|
|
239 |
|
|
|
512 |
|
|
|
697 |
|
Life and Group
Non-Core
|
|
|
(369 |
) |
|
|
(224 |
) |
|
|
(472 |
) |
|
|
(281 |
) |
Other Insurance
|
|
|
(17 |
) |
|
|
2 |
|
|
|
(17 |
) |
|
|
19 |
|
Total
CNA Financial
|
|
|
(538 |
) |
|
|
249 |
|
|
|
(16 |
) |
|
|
1,019 |
|
Diamond
Offshore
|
|
|
446 |
|
|
|
285 |
|
|
|
1,441 |
|
|
|
945 |
|
HighMount
|
|
|
74 |
|
|
|
30 |
|
|
|
225 |
|
|
|
30 |
|
Boardwalk
Pipeline
|
|
|
73 |
|
|
|
40 |
|
|
|
226 |
|
|
|
156 |
|
Loews
Hotels
|
|
|
7 |
|
|
|
7 |
|
|
|
57 |
|
|
|
47 |
|
Corporate
and other
|
|
|
(103 |
) |
|
|
27 |
|
|
|
(5 |
) |
|
|
351 |
|
Total
|
|
$ |
(41 |
) |
|
$ |
638 |
|
|
$ |
1,928 |
|
|
$ |
2,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard Lines
|
|
$ |
(151 |
) |
|
$ |
141 |
|
|
$ |
1 |
|
|
$ |
357 |
|
Specialty Lines
|
|
|
64 |
|
|
|
128 |
|
|
|
284 |
|
|
|
385 |
|
Life and Group
Non-Core
|
|
|
(207 |
) |
|
|
(121 |
) |
|
|
(250 |
) |
|
|
(141 |
) |
Other Insurance
|
|
|
(9 |
) |
|
|
8 |
|
|
|
(5 |
) |
|
|
22 |
|
Total
CNA Financial
|
|
|
(303 |
) |
|
|
156 |
|
|
|
30 |
|
|
|
623 |
|
Diamond
Offshore
|
|
|
145 |
|
|
|
95 |
|
|
|
475 |
|
|
|
320 |
|
HighMount
|
|
|
47 |
|
|
|
19 |
|
|
|
142 |
|
|
|
19 |
|
Boardwalk
Pipeline
|
|
|
31 |
|
|
|
19 |
|
|
|
98 |
|
|
|
74 |
|
Loews
Hotels
|
|
|
6 |
|
|
|
4 |
|
|
|
36 |
|
|
|
29 |
|
Corporate
and other
|
|
|
(70 |
) |
|
|
16 |
|
|
|
(5 |
) |
|
|
227 |
|
Income
(loss) from continuing operations
|
|
|
(144 |
) |
|
|
309 |
|
|
|
776 |
|
|
|
1,292 |
|
Discontinued
operations
|
|
|
7 |
|
|
|
246 |
|
|
|
4,712 |
|
|
|
685 |
|
Total
|
|
$ |
(137 |
) |
|
$ |
555 |
|
|
$ |
5,488 |
|
|
$ |
1,977 |
|
(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
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
and Income (loss) before income tax and
|
|
|
|
|
|
|
|
|
|
|
|
|
minority
interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard Lines
|
|
$ |
(178 |
) |
|
$ |
(29 |
) |
|
$ |
(254 |
) |
|
$ |
(116 |
) |
Specialty Lines
|
|
|
(115 |
) |
|
|
(13 |
) |
|
|
(154 |
) |
|
|
(62 |
) |
Life and Group
Non-Core
|
|
|
(298 |
) |
|
|
(9 |
) |
|
|
(321 |
) |
|
|
(26 |
) |
Other Insurance
|
|
|
(60 |
) |
|
|
(6 |
) |
|
|
(84 |
) |
|
|
(13 |
) |
Total
CNA Financial
|
|
|
(651 |
) |
|
|
(57 |
) |
|
|
(813 |
) |
|
|
(217 |
) |
Corporate
and other
|
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
|
|
173 |
|
Total
|
|
$ |
(650 |
) |
|
$ |
(54 |
) |
|
$ |
(810 |
) |
|
$ |
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard Lines
|
|
$ |
(103 |
) |
|
$ |
(17 |
) |
|
$ |
(148 |
) |
|
$ |
(68 |
) |
Specialty Lines
|
|
|
(66 |
) |
|
|
(7 |
) |
|
|
(88 |
) |
|
|
(36 |
) |
Life and Group
Non-Core
|
|
|
(175 |
) |
|
|
(5 |
) |
|
|
(188 |
) |
|
|
(15 |
) |
Other Insurance
|
|
|
(35 |
) |
|
|
(4 |
) |
|
|
(49 |
) |
|
|
(7 |
) |
Total
CNA Financial
|
|
|
(379 |
) |
|
|
(33 |
) |
|
|
(473 |
) |
|
|
(126 |
) |
Corporate
and other
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
111 |
|
Total
|
|
$ |
(379 |
) |
|
$ |
(32 |
) |
|
$ |
(472 |
) |
|
$ |
(15 |
) |
16. Legal
Proceedings
California
Long Term Care Litigation
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 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. The appellants’ brief is
due to be filed on December 22, 2008. 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.
Insurance
Brokerage Antitrust Litigation
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. Oral argument, if granted, will be held on April 20, 2009.
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.
Global
Crossing Limited Litigation
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 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. Pretrial proceedings are ongoing and no trial date has been set.
CCC believes it has meritorious defenses to the claims in this action and
continues to defend the case vigorously. However, adverse developments could
have a material adverse effect on CNA’s business and the Company’s results of
operations and/or equity.
CNA is
also a party to litigation and claims related to A&E cases arising in the
ordinary course of business. See Note 9 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. In Cochran vs. R.J. Reynolds Tobacco
Company, et al. (2002, Circuit Court, George County, Mississippi), the
Company filed a motion to dismiss the complaint for lack of personal
jurisdiction during 2003, which remains pending. In 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. In Clalit vs. Philip Morris, Inc., et
al. (1998, Jerusalem District Court of Israel), the court dismissed the
Company from this action for lack of personal jurisdiction during 2006, and the
plaintiff has noticed an appeal. In Young vs. The American Tobacco
Company, Inc. et al. (1997, Civil District Court, Orleans Parish,
Louisiana), the Company filed an exception for lack of personal jurisdiction
during 2000, 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.
17. 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 September 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 September 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 September 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 $80 million to guarantee
the payment by CNA Surety
Capital
Trust I of annual dividends of $1.9 million over 26 years and redemption of $30
million of preferred securities.
Diamond Offshore Construction
Projects
As of September 30, 2008 Diamond
Offshore had purchase obligations aggregating approximately $61 million related
to the major upgrade of the Ocean Monarch. Diamond
Offshore expects to complete funding of this project in 2008. However, the
actual timing of these expenditures will vary based on the completion of various
construction milestones and the timing of the delivery of equipment, 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 September 30, 2008, the
remaining obligation under these agreements is approximately 3.7 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 September 30, 2008, Boardwalk Pipeline had purchase commitments
of $295 million primarily related to its expansion projects.
18. 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 Operations, 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 September 30, 2008, the
remaining run-off business is administered by Continental Reinsurance
Corporation International, Ltd., a wholly owned 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.
In the
third quarter of 2008, CNA recognized a change in estimate of the tax benefit
related to the 2007 sale of its United Kingdom discontinued operations
subsidiary.
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 nine months
ended September 30, 2008.
Results
of Discontinued Operations
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment
income
|
|
$ |
2 |
|
|
$ |
33 |
|
|
$ |
20 |
|
|
$ |
99 |
|
Manufactured
products
|
|
|
|
|
|
|
1,094 |
|
|
|
1,750 |
|
|
|
3,148 |
|
Investment
gains
|
|
|
1 |
|
|
|
5 |
|
|
|
3 |
|
|
|
8 |
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Total
|
|
|
3 |
|
|
|
1,132 |
|
|
|
1,773 |
|
|
|
3,256 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance related
expenses
|
|
|
3 |
|
|
|
3 |
|
|
|
8 |
|
|
|
23 |
|
Cost of manufactured products
sold
|
|
|
|
|
|
|
638 |
|
|
|
1,039 |
|
|
|
1,839 |
|
Other operating
expenses
|
|
|
|
|
|
|
105 |
|
|
|
173 |
|
|
|
305 |
|
Interest
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
Total
|
|
|
3 |
|
|
|
748 |
|
|
|
1,222 |
|
|
|
2,171 |
|
Income
before income tax and minority interest
|
|
|
- |
|
|
|
384 |
|
|
|
551 |
|
|
|
1,085 |
|
Income
tax (expense) benefit
|
|
|
8 |
|
|
|
(138 |
) |
|
|
(200 |
) |
|
|
(401 |
) |
Minority
interest
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
1 |
|
Results
of discontinued operations
|
|
|
7 |
|
|
|
246 |
|
|
|
350 |
|
|
|
685 |
|
Gain
on disposal (net of tax of $51)
|
|
|
|
|
|
|
|
|
|
|
4,362 |
|
|
|
|
|
Net
income from discontinued operations
|
|
$ |
7 |
|
|
$ |
246 |
|
|
$ |
4,712 |
|
|
$ |
685 |
|
Lorillard’s revenues amounted to
99.5% of total revenues of discontinued operations for the nine months ended
September 30, 2008 and 95.1% and 95.3% for the three and nine months ended
September 30, 2007. Lorillard’s pretax income amounted to 100% of total pretax
income of discontinued operations for the nine months ended September 30, 2008
and 99.2% and 99.5% for the three and nine months ended September 30,
2007.
The components of discontinued
operations included in the Consolidated Condensed Balance Sheets are as
follows:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
of discontinued operations:
|
|
|
|
|
|
|
Investments
|
|
$ |
166 |
|
|
$ |
1,495 |
|
Cash
|
|
|
|
|
|
|
20 |
|
Receivables
|
|
|
|
|
|
|
293 |
|
Reinsurance
receivables
|
|
|
6 |
|
|
|
1 |
|
Property, plant and
equipment
|
|
|
|
|
|
|
218 |
|
Deferred income
taxes
|
|
|
|
|
|
|
575 |
|
Goodwill and other intangible
assets
|
|
|
|
|
|
|
5 |
|
Other assets
|
|
|
1 |
|
|
|
408 |
|
Insurance reserves and other
liabilities
|
|
|
(172 |
) |
|
|
(174 |
) |
Assets
of discontinued operations
|
|
$ |
1 |
|
|
$ |
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 $1 million and $23 million as of September 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 September 30, 2008 and
December 31, 2007, the insurance reserves are net of discounts of $76 million
and $73 million, respectively.
19. Consolidating
Financial Information
The following schedules present the
Company’s consolidating balance sheet information at September 30, 2008 and
December 31, 2007, and consolidating statements of operations information for
the nine months ended September 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
|
|
|
|
|
|
|
|
September
30, 2008
|
|
Financial
|
|
|
Offshore
|
|
|
HighMount
|
|
|
Pipeline
|
|
|
Hotels
|
|
|
and
Other
|
|
|
Eliminations
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$ |
37,059 |
|
|
$ |
608 |
|
|
$ |
84 |
|
|
$ |
13 |
|
|
$ |
45 |
|
|
$ |
4,469 |
|
|
|
|
|
$ |
42,278 |
|
Cash
|
|
|
115 |
|
|
|
28 |
|
|
|
64 |
|
|
|
10 |
|
|
|
15 |
|
|
|
4 |
|
|
|
|
|
|
236 |
|
Receivables
|
|
|
11,202 |
|
|
|
708 |
|
|
|
81 |
|
|
|
56 |
|
|
|
35 |
|
|
|
122 |
|
|
$ |
(3 |
) |
|
|
12,201 |
|
Property,
plant and equipment
|
|
|
346 |
|
|
|
3,337 |
|
|
|
3,384 |
|
|
|
5,343 |
|
|
|
354 |
|
|
|
45 |
|
|
|
|
|
|
|
12,809 |
|
Deferred
income taxes
|
|
|
2,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(979 |
) |
|
|
1,466 |
|
Goodwill
and other intangible assets
|
|
|
106 |
|
|
|
20 |
|
|
|
1,066 |
|
|
|
163 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
1,358 |
|
Assets
of discontinued operations
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Investments
in capital stocks of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,838 |
|
|
|
(12,838 |
) |
|
|
- |
|
Other
assets
|
|
|
846 |
|
|
|
166 |
|
|
|
66 |
|
|
|
357 |
|
|
|
45 |
|
|
|
2 |
|
|
|
(1 |
) |
|
|
1,481 |
|
Deferred
acquisition costs of insurance subsidiaries
|
|
|
1,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,157 |
|
Separate
account business
|
|
|
430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
430 |
|
Total
assets
|
|
$ |
53,707 |
|
|
$ |
4,867 |
|
|
$ |
4,745 |
|
|
$ |
5,942 |
|
|
$ |
497 |
|
|
$ |
17,480 |
|
|
$ |
(13,821 |
) |
|
$ |
73,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
reserves
|
|
$ |
39,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1 |
) |
|
$ |
39,468 |
|
Payable
to brokers
|
|
|
1,001 |
|
|
$ |
20 |
|
|
$ |
89 |
|
|
$ |
2 |
|
|
|
|
|
|
$ |
481 |
|
|
|
|
|
|
|
1,593 |
|
Collateral
on loaned securities
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Short
term debt
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
73 |
|
|
|
|
|
|
|
|
|
|
|
273 |
|
Long
term debt
|
|
|
1,807 |
|
|
|
503 |
|
|
|
1,715 |
|
|
|
2,353 |
|
|
|
156 |
|
|
|
867 |
|
|
|
|
|
|
|
7,401 |
|
Reinsurance
balances payable
|
|
|
367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
367 |
|
Deferred
income taxes
|
|
|
|
|
|
|
422 |
|
|
|
103 |
|
|
|
92 |
|
|
|
48 |
|
|
|
314 |
|
|
|
(979 |
) |
|
|
- |
|
Other
liabilities
|
|
|
2,345 |
|
|
|
554 |
|
|
|
187 |
|
|
|
743 |
|
|
|
14 |
|
|
|
130 |
|
|
|
(3 |
) |
|
|
3,970 |
|
Separate
account business
|
|
|
430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
430 |
|
Total
liabilities
|
|
|
45,625 |
|
|
|
1,499 |
|
|
|
2,094 |
|
|
|
3,190 |
|
|
|
291 |
|
|
|
1,792 |
|
|
|
(983 |
) |
|
|
53,508 |
|
Minority
interest
|
|
|
1,154 |
|
|
|
1,651 |
|
|
|
|
|
|
|
1,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,168 |
|
Shareholders’
equity
|
|
|
6,928 |
|
|
|
1,717 |
|
|
|
2,651 |
|
|
|
1,389 |
|
|
|
206 |
|
|
|
15,688 |
|
|
|
(12,838 |
) |
|
|
15,741 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
53,707 |
|
|
$ |
4,867 |
|
|
$ |
4,745 |
|
|
$ |
5,942 |
|
|
$ |
497 |
|
|
$ |
17,480 |
|
|
$ |
(13,821 |
) |
|
$ |
73,417 |
|
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 Operations Information
|
|
CNA
|
|
|
Diamond
|
|
|
|
|
|
Boardwalk
|
|
|
Loews
|
|
|
Corporate
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2008
|
|
Financial
|
|
|
Offshore
|
|
|
HighMount
|
|
|
Pipeline
|
|
|
Hotels
|
|
|
and
Other
|
|
|
Eliminations
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums
|
|
$ |
5,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1 |
) |
|
$ |
5,385 |
|
Net
investment income
|
|
|
1,449 |
|
|
$ |
10 |
|
|
|
|
|
$ |
2 |
|
|
$ |
1 |
|
|
$ |
69 |
|
|
|
|
|
|
|
1,531 |
|
Intercompany
interest and dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,053 |
|
|
|
(1,053 |
) |
|
|
- |
|
Investment
gains (losses)
|
|
|
(813 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(812 |
) |
Gain
on issuance of subsidiary stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Contract
drilling revenues
|
|
|
|
|
|
|
2,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,589 |
|
Other
|
|
|
240 |
|
|
|
31 |
|
|
$ |
590 |
|
|
|
639 |
|
|
|
291 |
|
|
|
18 |
|
|
|
|
|
|
|
1,809 |
|
Total
|
|
|
6,262 |
|
|
|
2,631 |
|
|
|
590 |
|
|
|
641 |
|
|
|
292 |
|
|
|
1,142 |
|
|
|
(1,054 |
) |
|
|
10,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
claims and policyholders’ benefits
|
|
|
4,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,380 |
|
Amortization
of deferred acquisition costs
|
|
|
1,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,083 |
|
Contract
drilling expenses
|
|
|
|
|
|
|
873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
872 |
|
Other
operating expenses
|
|
|
715 |
|
|
|
310 |
|
|
|
308 |
|
|
|
369 |
|
|
|
227 |
|
|
|
53 |
|
|
|
|
|
|
|
1,982 |
|
Interest
|
|
|
100 |
|
|
|
6 |
|
|
|
57 |
|
|
|
46 |
|
|
|
8 |
|
|
|
42 |
|
|
|
|
|
|
|
259 |
|
Total
|
|
|
6,278 |
|
|
|
1,189 |
|
|
|
365 |
|
|
|
415 |
|
|
|
235 |
|
|
|
95 |
|
|
|
(1 |
) |
|
|
8,576 |
|
Income
(loss) before income tax and minority interest
|
|
|
(16 |
) |
|
|
1,442 |
|
|
|
225 |
|
|
|
226 |
|
|
|
57 |
|
|
|
1,047 |
|
|
|
(1,053 |
) |
|
|
1,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
(89 |
) |
|
|
462 |
|
|
|
83 |
|
|
|
61 |
|
|
|
21 |
|
|
|
(1 |
) |
|
|
|
|
|
|
537 |
|
Minority
interest
|
|
|
43 |
|
|
|
505 |
|
|
|
|
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
615 |
|
Total
|
|
|
(46 |
) |
|
|
967 |
|
|
|
83 |
|
|
|
128 |
|
|
|
21 |
|
|
|
(1 |
) |
|
|
- |
|
|
|
1,152 |
|
Income
from continuing operations
|
|
|
30 |
|
|
|
475 |
|
|
|
142 |
|
|
|
98 |
|
|
|
36 |
|
|
|
1,048 |
|
|
|
(1,053 |
) |
|
|
776 |
|
Discontinued
operations, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of operations
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
341 |
|
|
|
|
|
|
|
350 |
|
Gain on disposal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,362 |
|
|
|
|
|
|
|
4,362 |
|
Net
income
|
|
$ |
39 |
|
|
$ |
475 |
|
|
$ |
142 |
|
|
$ |
98 |
|
|
$ |
36 |
|
|
$ |
5,751 |
|
|
$ |
(1,053 |
) |
|
$ |
5,488 |
|
Loews
Corporation
Consolidating
Statement of Operations Information
|
|
CNA
|
|
|
Diamond
|
|
|
|
|
|
Boardwalk
|
|
|
Loews
|
|
|
Corporate
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2007
|
|
Financial
|
|
|
Offshore
|
|
|
HighMount
|
|
|
Pipeline
|
|
|
Hotels
|
|
|
and
Other
|
|
|
Eliminations
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums
|
|
$ |
5,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1 |
) |
|
$ |
5,616 |
|
Net
investment income
|
|
|
1,859 |
|
|
$ |
26 |
|
|
|
|
|
$ |
16 |
|
|
$ |
1 |
|
|
$ |
263 |
|
|
|
|
|
|
|
2,165 |
|
Intercompany
interest and dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,171 |
|
|
|
(1,171 |
) |
|
|
- |
|
Investment
gains (losses)
|
|
|
(217 |
) |
|
|
2 |
|
|
$ |
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(183 |
) |
Gain
on issuance of subsidiary stock
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142 |
|
|
|
|
|
|
|
139 |
|
Contract
drilling revenues
|
|
|
|
|
|
|
1,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,854 |
|
Other
|
|
|
211 |
|
|
|
55 |
|
|
|
100 |
|
|
|
474 |
|
|
|
284 |
|
|
|
1 |
|
|
|
(6 |
) |
|
|
1,119 |
|
Total
|
|
|
7,470 |
|
|
|
1,934 |
|
|
|
132 |
|
|
|
490 |
|
|
|
285 |
|
|
|
1,577 |
|
|
|
(1,178 |
) |
|
|
10,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
claims and policyholders’
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefits
|
|
|
4,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,496 |
|
Amortization
of deferred acquisition costs
|
|
|
1,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,137 |
|
Contract
drilling expenses
|
|
|
|
|
|
|
715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
715 |
|
Other
operating expenses
|
|
|
713 |
|
|
|
258 |
|
|
|
58 |
|
|
|
288 |
|
|
|
229 |
|
|
|
45 |
|
|
|
(7 |
) |
|
|
1,584 |
|
Interest
|
|
|
105 |
|
|
|
17 |
|
|
|
12 |
|
|
|
46 |
|
|
|
9 |
|
|
|
41 |
|
|
|
|
|
|
|
230 |
|
Total
|
|
|
6,451 |
|
|
|
990 |
|
|
|
70 |
|
|
|
334 |
|
|
|
238 |
|
|
|
86 |
|
|
|
(7 |
) |
|
|
8,162 |
|
Income
before income tax and minority interest
|
|
|
1,019 |
|
|
|
944 |
|
|
|
62 |
|
|
|
156 |
|
|
|
47 |
|
|
|
1,491 |
|
|
|
(1,171 |
) |
|
|
2,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
283 |
|
|
|
292 |
|
|
|
22 |
|
|
|
47 |
|
|
|
18 |
|
|
|
112 |
|
|
|
|
|
|
|
774 |
|
Minority
interest
|
|
|
113 |
|
|
|
334 |
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
482 |
|
Total
|
|
|
396 |
|
|
|
626 |
|
|
|
22 |
|
|
|
82 |
|
|
|
18 |
|
|
|
112 |
|
|
|
- |
|
|
|
1,256 |
|
Income
from continuing operations
|
|
|
623 |
|
|
|
318 |
|
|
|
40 |
|
|
|
74 |
|
|
|
29 |
|
|
|
1,379 |
|
|
|
(1,171 |
) |
|
|
1,292 |
|
Discontinued
operations, net
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
692 |
|
|
|
|
|
|
|
685 |
|
Net
income
|
|
$ |
616 |
|
|
$ |
318 |
|
|
$ |
40 |
|
|
$ |
74 |
|
|
$ |
29 |
|
|
$ |
2,071 |
|
|
$ |
(1,171 |
) |
|
$ |
1,977 |
|
20. Subsequent
Events
CNA
Preferred Issue and CCC Surplus Note
Under an agreement dated October 27,
2008, CNA will issue, and Loews has agreed to purchase, $1.25 billion of CNA
non-voting cumulative senior preferred stock (“Preferred Issue”).
CNA will use the proceeds from the
Preferred Issue to increase the statutory surplus of its principal insurance
subsidiary, CCC, through the purchase of a $1.0 billion surplus note of CCC.
Surplus notes are financial instruments with a stated maturity date and
scheduled interest payments, issued by insurance enterprises with the approval
of the insurer’s domiciliary state. Surplus notes are treated as capital under
statutory accounting. All payments of interest and principal on this note are
subject to the prior approval of the Illinois Department of Financial and
Professional Regulation - Division of Insurance. The surplus note of CCC will
have a term of 20 years and will accrue interest at a rate of 10.0% per
year.
Limited
Partnership Investments
The Company’s limited partnership
investments consist of 82 individual partnerships which cover a broad range of
investment strategies including fixed income arbitrage, global arbitrage,
long/short equity, relative value, multi-strategy and private equity. The
investments across partnerships and investment strategies provide for risk
diversification within the limited partnership portfolio and the overall
investment portfolio. These strategies consist primarily of underlying
marketable securities and may include low levels of leverage and the use of
derivatives which may potentially introduce more volatility and risk to the
partnership returns. The continued disruption and turmoil in the capital markets
has had a negative impact on limited partnership returns.
As described in Note 1 of the Notes to
Consolidated Financial Statements within the Company’s 2007 Form 10-K, the
Company’s carrying value of investments in limited partnerships typically
reflects a reporting lag. Subsequent to September 30, 2008, the Company received
preliminary September 2008 results from the general partners of certain limited
partnership investments indicating a pretax loss of approximately $110 million
that will be reflected in the fourth quarter results due to the reporting
lag.
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
|
46
|
|
Separation of
Lorillard
|
47
|
|
Parent Company Structure
|
48
|
|
Critical Accounting Estimates
|
48
|
|
Results of Operations by Business Segment
|
48
|
|
CNA Financial
|
48
|
|
Standard Lines
|
49
|
|
Specialty Lines
|
51
|
|
Life and Group Non-Core
|
53
|
|
Other Insurance
|
54
|
|
A&E Reserves
|
55
|
|
Diamond Offshore
|
58
|
|
HighMount
|
60
|
|
Boardwalk Pipeline
|
63
|
|
Loews Hotels
|
64
|
|
Corporate and Other
|
65
|
|
Liquidity and Capital Resources
|
65
|
|
CNA Financial
|
65
|
|
Diamond Offshore
|
67
|
|
HighMount
|
68
|
|
Boardwalk Pipeline
|
68
|
|
Loews Hotels
|
69
|
|
Corporate and Other
|
69
|
|
Investments
|
70
|
|
Accounting Standards
|
80
|
|
Forward-Looking Statements
|
80
|
|
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 (loss) and earnings (loss)
per share information attributable to Loews common stock and former Carolina
Group stock is summarized in the table below.
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to Loews common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before net
investment losses
|
|
$ |
235 |
|
|
$ |
341 |
|
|
$ |
1,248 |
|
|
$ |
1,307 |
|
Net investment losses (a)
|
|
|
(379 |
) |
|
|
(32 |
) |
|
|
(472 |
) |
|
|
(15 |
) |
Income
(loss) from continuing operations
|
|
|
(144 |
) |
|
|
309 |
|
|
|
776 |
|
|
|
1,292 |
|
Discontinued
operations, net (b)
|
|
|
7 |
|
|
|
100 |
|
|
|
4,501 |
|
|
|
280 |
|
Net
income (loss) attributable to Loews common stock
|
|
|
(137 |
) |
|
|
409 |
|
|
|
5,277 |
|
|
|
1,572 |
|
Net
income attributable to former Carolina Group stock -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations (c)
|
|
|
|
|
|
|
146 |
|
|
|
211 |
|
|
|
405 |
|
Consolidated
net income (loss)
|
|
$ |
(137 |
) |
|
$ |
555 |
|
|
$ |
5,488 |
|
|
$ |
1,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$ |
(0.33 |
) |
|
$ |
0.58 |
|
|
$ |
1.58 |
|
|
$ |
2.40 |
|
Discontinued operations, net
(b)
|
|
|
0.02 |
|
|
|
0.19 |
|
|
|
9.14 |
|
|
|
0.52 |
|
Loews common
stock
|
|
$ |
(0.31 |
) |
|
$ |
0.77 |
|
|
$ |
10.72 |
|
|
$ |
2.92 |
|
Former Carolina Group stock -
Discontinued operations (c)
|
|
$ |
- |
|
|
$ |
1.34 |
|
|
$ |
1.95 |
|
|
$ |
3.73 |
|
(a)
|
Includes a gain of $92 for the
nine months ended September 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 debentures into Diamond Offshore
common stock.
|
(b)
|
Includes a tax-free non-cash
gain of $4,287 related to the Separation of Lorillard and an after tax
gain of $75 from the sale of Bulova Corporation for the nine months ended
September 30, 2008.
|
(c)
|
The Carolina Group and
Carolina Group stock were eliminated effective June 10, 2008 upon
completion of the Separation of
Lorillard.
|
Investments
in Subsidiaries
To assist our CNA subsidiary in
strengthening the statutory capital of its principal insurance subsidiary
Continental Casualty Company (“CCC”), which has been adversely impacted by the
ongoing disruption in the capital markets, we agreed to purchase $1.25 billion
of a new series of non-voting cumulative senior preferred stock from CNA. The
new preferred stock will accrue cumulative dividends at the rate of 10% per
annum, payable quarterly, for the first five years after issuance, with the
dividend rate resetting thereafter and on each subsequent five year anniversary
to the higher of 10% or the 10-year U.S. Treasury rate at such time plus 7%. No
dividends may be declared on CNA’s common stock while the new preferred stock is
outstanding. CNA will use $1.0 billion of the proceeds from the new preferred
stock to increase the statutory surplus of CCC. We expect to complete the
purchase of the new preferred stock during the fourth quarter of 2008, subject
to customary closing conditions.
Our Board of Directors also approved a
commitment to purchase up to $1.0 billion of equity securities from Boardwalk
Pipeline to facilitate the funding of the anticipated costs to complete its
pipeline expansion projects. We would provide that equity capital to the extent
that external funds are not available to Boardwalk Pipeline on acceptable terms.
Boardwalk Pipeline anticipates that it will require a portion of this equity
capital prior to the end of this year and the balance during the first half of
2009.
Income
(Loss) from Continuing Operations
The loss from continuing operations for
the third quarter of 2008 primarily resulted from a decline in results at CNA
reflecting higher net investment losses described below, a $145 million (after
tax and minority interest) increase in catastrophe losses primarily from
hurricanes and a reduction in investment income reflecting losses from limited
partnership investments. Investment income at the holding company also included
losses in 2008, as compared to gains
in the
prior year period. These declines were partially offset by significantly
improved results at Diamond Offshore due to higher dayrates in 2008 and improved
results at HighMount and Boardwalk Pipeline. Results in 2007 also included a $96
million charge at CNA (after tax and minority interest) in connection with a
settlement of an arbitration proceeding related to a run-off book of
business.
Net investment losses included in loss
from continuing operations amounted to $379 million (after tax and minority
interest) in the third quarter of 2008 compared to net investment losses of $32
million (after tax and minority interest) in the comparable period of the prior
year. For the three months ended September 30, 2008, the Company recorded net
realized investment losses of $178 million related to securities issued by
Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation, $58 million related to securities issued by Washington Mutual, $57
million related to securities issued by Icelandic banks and $21 million related
to securities issued by American International Group.
The decline in income from continuing
operations for the nine months ended September 30, 2008 primarily reflects a
decline in results at CNA, the increased investment losses and the reduced
investment income discussed above. These decreases were partially offset by
improved results at Diamond Offshore, HighMount and Boardwalk
Pipeline.
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 Operations, 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 September 30, 2008, the book value
per share of Loews common stock was $36.10, 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 MD&A 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 Reinsurance Company Limited. 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
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In millions, except %)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums
|
|
$ |
723 |
|
|
$ |
753 |
|
|
$ |
2,342 |
|
|
$ |
2,524 |
|
Net earned premiums
|
|
|
762 |
|
|
|
841 |
|
|
|
2,313 |
|
|
|
2,546 |
|
Net investment income
|
|
|
136 |
|
|
|
209 |
|
|
|
499 |
|
|
|
664 |
|
Net operating income
|
|
|
(48 |
) |
|
|
158 |
|
|
|
149 |
|
|
|
425 |
|
Net realized investment losses
|
|
|
(103 |
) |
|
|
(17 |
) |
|
|
(148 |
) |
|
|
(68 |
) |
Net income
(loss)
|
|
|
(151 |
) |
|
|
141 |
|
|
|
1 |
|
|
|
357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense
|
|
|
96.3 |
% |
|
|
60.9 |
% |
|
|
81.1 |
% |
|
|
66.2 |
% |
Expense
|
|
|
34.4 |
|
|
|
32.3 |
|
|
|
31.3 |
|
|
|
32.1 |
|
Dividend
|
|
|
(1.4 |
) |
|
|
0.4 |
|
|
|
(0.2 |
) |
|
|
0.1 |
|
Combined
|
|
|
129.3 |
% |
|
|
93.6 |
% |
|
|
112.2 |
% |
|
|
98.4 |
% |
Three
Months Ended September 30, 2008 Compared to 2007
Net written premiums for Standard Lines
decreased $30 million for the three months ended September 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. This unfavorable impact was partially
offset by decreased ceded premiums. Net earned premiums decreased $79 million
for the three months ended September 30, 2008 as compared with the same period
in 2007, consistent with the decreased net written premiums.
Standard Lines averaged rate decreases
of 5.0% for the three months ended September 30, 2008, as compared to decreases
of 4.0% for the three months ended September 30, 2007 for the contracts that
renewed during those periods. Retention rates of 80.0% and 73.0% were achieved
for those contracts that were available for renewal in each period.
Net results decreased $292 million for
the three months ended September 30, 2008 as compared with the same period in
2007. This decrease was primarily attributable to decreased net operating
results and higher net realized investment losses. See the Investments section
of this MD&A for further discussion of the net realized investment results
and net investment income.
Net operating results decreased $206
million for the three months ended September 30, 2008 as compared with the same
period in 2007. This decrease was primarily driven by higher catastrophe
impacts, lower net investment income and less favorable net prior year
development. The catastrophe impacts were $144 million after tax and minority
interest in the third quarter of 2008, which included a $6 million after tax and
minority interest catastrophe-related insurance assessment, as compared to
catastrophe losses of $6 million after tax and minority interest in the third
quarter of 2007.
The combined ratio increased 35.7 points
for the three months ended September 30, 2008 as compared with the same period
in 2007. The loss ratio increased 35.4 points primarily due to increased
catastrophe losses and lower favorable net prior year development, partially
offset by lower current accident year loss ratios across most lines of
business.
Catastrophes
losses had an adverse impact of 31.0 points on the loss ratio for the three
months ended September 30, 2008.
During the third quarter of 2008, CNA’s
ongoing actuarial reviews confirmed various trends in the number and size of
claims across certain lines of business, and CNA recorded favorable and
unfavorable development for those lines in the third quarter of 2008. See
additional discussion in Note 9 of the Notes to Consolidated Condensed Financial
Statements included under Item 1. The trend in recent accident years was
generally favorable across several lines of business. Since CNA’s estimates for
the current accident year partially rely on the trends and results for recent
accident years, the current accident year non-catastrophe losses decreased by
$53 million as referenced in the loss ratio discussion above.
The expense ratio increased 2.1 points
for the three months ended September 30, 2008 as compared with the same period
in 2007. The increase was primarily driven by CNA’s estimate of the ultimate
assessment from the Texas Windstorm Insurance Association related to catastrophe
losses incurred in the third quarter of 2008.
The dividend ratio decreased 1.8 points
for the three months ended September 30, 2008 as compared with the same period
in 2007, due to favorable dividend development.
Favorable net prior year development of
$1 million was recorded for the three months ended September 30, 2008, including
$4 million of favorable claim and allocated claim adjustment expense reserve
development and $3 million of unfavorable premium development. Favorable net
prior year development of $72 million, including $67 million of favorable claim
and allocated claim adjustment expense reserve development and $5 million of
favorable premium development, was recorded for the three months ended September
30, 2007. Further information on Standard Lines net prior year development for
the three months ended September 30, 2008 and 2007 is included in Note 9 of the
Notes to Consolidated Condensed Financial Statements included under Item
1.
Nine
Months Ended September 30, 2008 Compared to 2007
Net written premiums for Standard
Lines decreased $182 million and net earned premiums decreased $233 million for
the nine months ended September 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 nine months ended September 30, 2008, as compared to
decreases of 4.0% for the nine months ended September 30, 2007 for the contracts
that renewed during those periods. Retention rates of 81.0% and 77.0% were
achieved for those contracts that were available for renewal in each
period.
Net income decreased $356 million for
the nine months ended September 30, 2008 as compared with the same period in
2007. This decrease was primarily attributable to decreased net operating income
and higher net realized investment losses. See the Investments section of this
MD&A for further discussion of the net realized investment results and net
investment income.
Net operating income decreased $276
million for the nine months ended September 30, 2008 as compared with the same
period in 2007. This decrease was primarily driven by the items discussed in the
three month comparison above. The catastrophe impacts were $201 million after
tax and minority interest for the nine months ended September 30, 2008, as
compared to catastrophe losses of $30 million after tax and minority interest in
the same period of 2007.
The combined ratio increased 13.8
points for the nine months ended September 30, 2008 as compared with the same
period in 2007. The loss ratio increased 14.9 points primarily due to increased
catastrophe losses and higher current accident year loss ratios across certain
lines of business. Catastrophes losses related to 2008 events had an adverse
impact of 14.5 points on the loss ratio for the nine months ended September 30,
2008. The expense ratio decreased 0.8 points for the nine months ended September
30, 2008 as compared with the same period in 2007.
Favorable net prior year development
of $50 million was recorded for the nine months ended September 30, 2008,
including $54 million of favorable claim and allocated claim adjustment expense
reserve development and $4 million of unfavorable premium development. Favorable
net prior year development of $89 million, including $74 million of favorable
claim and allocated claim adjustment expense reserve development and $15 million
of favorable premium development, was recorded for the nine months ended
September 30, 2007. Further information on Standard Lines net prior year
development for the nine months ended September 30, 2008 and 2007 is included in
Note 9 of the Notes to Consolidated Condensed Financial Statements included
under Item 1.
The following table summarizes the
gross and net carried reserves as of September 30, 2008 and December 31, 2007
for Standard Lines.
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Case Reserves
|
|
$ |
6,071 |
|
|
$ |
5,988 |
|
Gross
IBNR Reserves
|
|
|
6,086 |
|
|
|
6,060 |
|
Total
Gross Carried Claim and Claim Adjustment Expense Reserves
|
|
$ |
12,157 |
|
|
$ |
12,048 |
|
|
|
|
|
|
|
|
|
|
Net
Case Reserves
|
|
$ |
4,877 |
|
|
$ |
4,750 |
|
Net
IBNR Reserves
|
|
|
5,100 |
|
|
|
5,170 |
|
Total
Net Carried Claim and Claim Adjustment Expense Reserves
|
|
$ |
9,977 |
|
|
$ |
9,920 |
|
Specialty
Lines
The following table summarizes the
results of operations for Specialty Lines.
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In millions, except %)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums
|
|
$ |
875 |
|
|
$ |
886 |
|
|
$ |
2,583 |
|
|
$ |
2,619 |
|
Net earned premiums
|
|
|
882 |
|
|
|
885 |
|
|
|
2,614 |
|
|
|
2,600 |
|
Net investment income
|
|
|
121 |
|
|
|
152 |
|
|
|
408 |
|
|
|
463 |
|
Net operating income
|
|
|
130 |
|
|
|
135 |
|
|
|
372 |
|
|
|
421 |
|
Net realized investment losses
|
|
|
(66 |
) |
|
|
(7 |
) |
|
|
(88 |
) |
|
|
(36 |
) |
Net income
|
|
|
64 |
|
|
|
128 |
|
|
|
284 |
|
|
|
385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense
|
|
|
58.5 |
% |
|
|
62.8 |
% |
|
|
62.8 |
% |
|
|
62.7 |
% |
Expense
|
|
|
29.0 |
|
|
|
26.6 |
|
|
|
27.8 |
|
|
|
26.3 |
|
Dividend
|
|
|
0.3 |
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.2 |
|
Combined
|
|
|
87.8 |
% |
|
|
89.6 |
% |
|
|
91.0 |
% |
|
|
89.2 |
% |
Three
Months Ended September 30, 2008 Compared to 2007
Net written premiums for Specialty Lines
decreased $11 million for the three months ended September 30, 2008 as compared
with 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 $3 million for
the three months ended September 30, 2008 as compared with the same period in
2007, consistent with the decrease in net written premiums.
Specialty Lines averaged rate decreases
of 3.0% for the three months ended September 30, 2008 as compared to decreases
of 4.0% for the three months ended September 30, 2007 for the contracts that
renewed during those periods. Retention rates of 84.0% and 82.0% were achieved
for those contracts that were available for renewal in each period.
Net income decreased $64 million for the
three months ended September 30, 2008 as compared with the same period in 2007.
This decrease was primarily attributable to higher net realized investment
losses. See the Investments section of this MD&A for further discussion of
the net realized investment results and net investment income.
Net operating income decreased $5
million for the three months ended September 30, 2008 as compared with the same
period in 2007. This decrease was primarily driven by lower net investment
income, decreased current accident year underwriting results and higher
catastrophe losses. These unfavorable results were partially offset by favorable
net prior year development. Catastrophe losses were $7 million after tax and
minority interest in the third quarter of 2008. There were no catastrophe losses
in the three months ended September 30, 2007.
The combined ratio improved 1.8 points
for the three months ended September 30, 2008 as compared with the same period
in 2007. The loss ratio improved 4.3 points, primarily due to favorable net
prior year development for the three months ended September 30, 2008. This was
partially offset by higher current accident year loss ratios recorded in our
errors and omissions (E&O) and directors and officers (D&O) coverages
for financial institutions due to the current financial markets credit
crisis.
The expense ratio increased 2.4 points
for the three months ended September 30, 2008 as compared with the same period
in 2007. The increase primarily related to changes in estimates for
insurance-related assessments and reduced ceding commissions.
Favorable net prior year development of
$70 million, including $68 million of favorable claim and allocated claim
adjustment expense reserve development and $2 million of favorable premium
development, was recorded for the three months ended September 30, 2008. There
was $3 million of unfavorable claim and allocated claim adjustment expense
reserve development and $3 million of favorable premium development, resulting
in no net prior year development for the three months ended September 30, 2007.
Further information on Specialty Lines net prior year development for the three
months ended September 30, 2008 and 2007 is included in Note 9 of the Notes to
Consolidated Condensed Financial Statements included under Item 1.
Nine
Months Ended September 30, 2008 Compared to 2007
Net written premiums for Specialty Lines
decreased $36 million for the nine months ended September 30, 2008 as compared
with 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 $14 million for the nine months ended September
30, 2008 as compared to the same period in 2007, which reflects the decreased
use of reinsurance.
Specialty Lines averaged rate decreases
of 3.0% for each of the nine month periods ended September 30, 2008 and 2007 for
the contracts that renewed during those periods. Retention rates of 84.0% and
83.0% were achieved for those contracts that were available for renewal in each
period.
Net income decreased $101 million for
the nine months ended September 30, 2008 as compared with the same period in
2007. This decrease was primarily attributable to lower net operating income and
higher net realized investment losses. See the Investments section of this
MD&A for further discussion of the net realized investment results and net
investment income.
Net operating income decreased $49
million for the nine months ended September 30, 2008 as compared with the same
period in 2007, primarily due to the items discussed in the three month
comparison above. Catastrophe losses were $8 million after tax and minority
interest for the nine months ended September 30, 2008 as compared with $1
million after tax and minority interest in the same period in 2007.
The combined ratio increased 1.8 points
for the nine months ended September 30, 2008 as compared with the same period in
2007. The loss ratio was favorably impacted by net prior year development, and
unfavorably impacted by higher current accident year loss ratios as discussed in
the three month comparison above and increased catastrophe losses. The expense
ratio increased 1.5 points for the nine months ended September 30, 2008 as
compared to the same period in 2007. The increase primarily related to the items
discussed in the three month comparison above.
Favorable net prior year development of
$70 million, including $50 million of favorable claim and allocated claim
adjustment expense reserve development and $20 million of favorable premium
development, was recorded for the nine months ended September 30, 2008.
Favorable net prior year development of $17 million, including $4 million of
favorable claim and allocated claim adjustment expense reserve development and
$13 million of favorable premium development, was recorded for the nine months
ended September 30, 2007. Further information on Specialty Lines net prior year
development for the nine months ended September 30, 2008 and 2007 is included in
Note 9 of the Notes to Consolidated Condensed Financial Statements included
under Item 1.
The following table summarizes the
gross and net carried reserves as of September 30, 2008 and December 31, 2007
for Specialty Lines.
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Case Reserves
|
|
$ |
2,662 |
|
|
$ |
2,585 |
|
Gross
IBNR Reserves
|
|
|
5,702 |
|
|
|
5,818 |
|
Total
Gross Carried Claim and Claim Adjustment Expense Reserves
|
|
$ |
8,364 |
|
|
$ |
8,403 |
|
|
|
|
|
|
|
|
|
|
Net
Case Reserves
|
|
$ |
2,204 |
|
|
$ |
2,090 |
|
Net
IBNR Reserves
|
|
|
4,681 |
|
|
|
4,527 |
|
Total
Net Carried Claim and Claim Adjustment Expense Reserves
|
|
$ |
6,885 |
|
|
$ |
6,617 |
|
Life
& Group Non-Core
The following table summarizes the
results of operations for Life & Group Non-Core.
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums
|
|
$ |
154 |
|
|
$ |
156 |
|
|
$ |
460 |
|
|
$ |
469 |
|
Net investment income
|
|
|
135 |
|
|
|
145 |
|
|
|
376 |
|
|
|
494 |
|
Net operating loss
|
|
|
(32 |
) |
|
|
(116 |
) |
|
|
(62 |
) |
|
|
(126 |
) |
Net realized investment losses
|
|
|
(175 |
) |
|
|
(5 |
) |
|
|
(188 |
) |
|
|
(15 |
) |
Net loss
|
|
|
(207 |
) |
|
|
(121 |
) |
|
|
(250 |
) |
|
|
(141 |
) |
Three
Months Ended September 30, 2008 Compared to 2007
Net earned premiums for Life &
Group Non-Core decreased $2 million for the three months ended September 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.
The net loss in 2008 was primarily
due to net realized investment losses. See the Investments section of this
MD&A for further discussion of the net realized investment results. The
results in 2008 were also impacted by adverse investment performance on a
portion of CNA’s pension deposit business. The net loss in 2007 included an
after tax and minority interest loss of $96 million related to the settlement of
the IGI Contingency.
Nine
Months Ended September 30, 2008 Compared to 2007
Net earned premiums for Life &
Group Non-Core decreased $9 million for the nine months ended September 30, 2008
as compared with the same period in 2007.
Net loss increased $109 million for
the nine months ended September 30, 2008 as compared with the same period in
2007, primarily due to the reasons discussed above in the three month
comparison. The decreased net investment income included a decline of trading
portfolio results of $144 million, 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 CNA’s pension
deposit business.
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 $(9) million and $(10) million for
the nine months ended September 30, 2008 and 2007. The related assets were $222
million and related liabilities were $204 million at September 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
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
47 |
|
|
$ |
74 |
|
|
$ |
166 |
|
|
$ |
238 |
|
Revenues
|
|
|
(11 |
) |
|
|
70 |
|
|
|
92 |
|
|
|
231 |
|
Net
operating income
|
|
|
26 |
|
|
|
12 |
|
|
|
44 |
|
|
|
29 |
|
Net
realized investment losses
|
|
|
(35 |
) |
|
|
(4 |
) |
|
|
(49 |
) |
|
|
(7 |
) |
Net
income (loss)
|
|
|
(9 |
) |
|
|
8 |
|
|
|
(5 |
) |
|
|
22 |
|
Three
Months Ended September 30, 2008 Compared to 2007
Revenues decreased $81 million for
the three months ended September 30, 2008 as compared with the same period in
2007. Revenues were unfavorably impacted by higher net realized investment
losses and lower net investment income. See the Investments section of this
MD&A for further discussion of net investment income and net realized
investment results.
Net results decreased $17 million for
the three months ended September 30, 2008 as compared with the same period in
2007. The decrease was primarily due to decreased revenues as discussed above,
partially offset by a release from the allowance for uncollectible reinsurance
receivables of $24 million arising from a change in estimate as further
discussed in Note 6 of the Notes to Consolidated Condensed Financial Statements
included under Item 1. In addition, the 2007 results included current accident
year losses related to certain mass torts.
Unfavorable net prior year
development of $11 million was recorded for the three months ended September 30,
2008, including $14 million of unfavorable claim and allocated claim adjustment
expense reserve development and $3 million of favorable premium development.
Unfavorable net prior year development of $5 million was recorded for the three
months ended September 30, 2007, including $7 million of unfavorable claim and
allocated claim adjustment expense reserve development and $2 million of
favorable premium development. Further information on Corporate & Other
Non-Core net prior year development for the three months ended September 30,
2008 and 2007 is included in Note 9 of the Notes to Consolidated Condensed
Financial Statements included under Item 1.
Nine
Months Ended September 30, 2008 Compared to 2007
Revenues decreased $139 million for
the nine months ended September 30, 2008 as compared with the same period in
2007. Revenues were unfavorably impacted by lower net investment income and
higher net realized investment losses. See the Investments section of this
MD&A for further discussion of net investment income and net realized
investment results.
Net results decreased $27 million for
the nine months ended September 30, 2008 as compared with the same period in
2007, primarily due to the reasons discussed above in the three month
comparison.
Unfavorable net prior year
development of $27 million was recorded for the nine months ended September 30,
2008, including $30 million of unfavorable claim and allocated claim adjustment
expense reserve development and $3 million of favorable premium development.
Unfavorable net prior year development of $14 million was recorded for the nine
months ended September 30, 2007, including $19 million of unfavorable claim and
allocated claim adjustment expense reserve development and $5 million of
favorable premium development. Further information on Corporate & Other
Non-Core net prior year development for the nine months ended September 30,
2008 and 2007 is included in Note 9 of the Notes to Consolidated Condensed
Financial Statements included under Item 1.
The following table summarizes the gross
and net carried reserves as of September 30, 2008 and December 31, 2007 for
Corporate & Other Non-Core.
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Case Reserves
|
|
$ |
1,886 |
|
|
$ |
2,159 |
|
Gross
IBNR Reserves
|
|
|
2,686 |
|
|
|
2,951 |
|
Total
Gross Carried Claim and Claim Adjustment Expense Reserves
|
|
$ |
4,572 |
|
|
$ |
5,110 |
|
|
|
|
|
|
|
|
|
|
Net
Case Reserves
|
|
$ |
1,182 |
|
|
$ |
1,328 |
|
Net
IBNR Reserves
|
|
|
1,597 |
|
|
|
1,787 |
|
Total
Net Carried Claim and Claim Adjustment Expense Reserves
|
|
$ |
2,779 |
|
|
$ |
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 9 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 with CNA’s policyholders identifying the policies and the
terms for payment of asbestos related liabilities. Claim payments are contingent
on presentation of 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 81.0% and 81.2% of CNA’s total active asbestos accounts are
classified as small accounts at September 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 following tables depict CNA’s
overall pending asbestos accounts and associated reserves at September 30, 2008
and December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
Number of
|
|
|
Net Paid
|
|
|
Net Asbestos
|
|
|
Asbestos Net
|
|
September
30, 2008
|
|
Policyholders
|
|
|
Losses
|
|
|
Reserves
|
|
|
Reserves
|
|
(In millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders
with settlement agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured settlements
|
|
|
16 |
|
|
$ |
16 |
|
|
$ |
135 |
|
|
|
11.1 |
% |
Wellington
|
|
|
3 |
|
|
|
1 |
|
|
|
11 |
|
|
|
0.9 |
|
Coverage in place
|
|
|
36 |
|
|
|
16 |
|
|
|
87 |
|
|
|
7.2 |
|
Total with settlement agreements
|
|
|
55 |
|
|
|
33 |
|
|
|
233 |
|
|
|
19.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholders with active accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large asbestos accounts
|
|
|
233 |
|
|
|
65 |
|
|
|
226 |
|
|
|
18.6 |
|
Small asbestos accounts
|
|
|
994 |
|
|
|
21 |
|
|
|
84 |
|
|
|
6.9 |
|
Total other policyholders
|
|
|
1,227 |
|
|
|
86 |
|
|
|
310 |
|
|
|
25.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed reinsurance and pools
|
|
|
|
|
|
|
6 |
|
|
|
127 |
|
|
|
10.5 |
|
Unassigned IBNR
|
|
|
|
|
|
|
|
|
|
|
545 |
|
|
|
44.8 |
|
Total
|
|
|
1,282 |
|
|
$ |
125 |
|
|
$ |
1,215 |
|
|
|
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 9 of the
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 with 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 74.4% and 72.9% of CNA’s total active pollution accounts are
classified as small accounts as of September 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 September
30, 2008 and December 31, 2007.
|
|
|
|
|
|
|
|
Net
|
|
|
Percent
of
|
|
|
|
|
|
|
|
|
|
Environmental
|
|
|
Environmental
|
|
|
|
Number
of
|
|
|
Net
|
|
|
Pollution
|
|
|
Pollution
Net
|
|
September
30, 2008
|
|
Policyholders
|
|
|
Paid
Losses
|
|
|
Reserves
|
|
|
Reserve
|
|
(In millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders with settlement agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured settlements
|
|
|
11 |
|
|
$ |
2 |
|
|
$ |
6 |
|
|
|
3.1 |
% |
Coverage in place
|
|
|
16 |
|
|
|
2 |
|
|
|
15 |
|
|
|
7.7 |
|
Total with settlement agreements
|
|
|
27 |
|
|
|
4 |
|
|
|
21 |
|
|
|
10.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholders with active accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large pollution accounts
|
|
|
110 |
|
|
|
34 |
|
|
|
49 |
|
|
|
25.3 |
|
Small pollution accounts
|
|
|
320 |
|
|
|
11 |
|
|
|
33 |
|
|
|
17.0 |
|
Total other policyholders
|
|
|
430 |
|
|
|
45 |
|
|
|
82 |
|
|
|
42.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed reinsurance and pools
|
|
|
|
|
|
|
2 |
|
|
|
29 |
|
|
|
14.9 |
|
Unassigned IBNR
|
|
|
|
|
|
|
|
|
|
|
62 |
|
|
|
32.0 |
|
Total
|
|
|
457 |
|
|
$ |
51 |
|
|
$ |
194 |
|
|
|
100.0 |
% |
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine months ended
September 30, 2008 and 2007 as presented in Note 19 of the Notes to Consolidated
Condensed Financial Statements included in Item 1 of this Report:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
drilling
|
|
$ |
882 |
|
|
$ |
628 |
|
|
$ |
2,589 |
|
|
$ |
1,854 |
|
Net investment
income
|
|
|
3 |
|
|
|
9 |
|
|
|
10 |
|
|
|
26 |
|
Investment gains
(losses)
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
|
|
(1 |
) |
Other revenue, primarily
operating
|
|
|
(17 |
) |
|
|
18 |
|
|
|
31 |
|
|
|
55 |
|
Total
|
|
|
869 |
|
|
|
657 |
|
|
|
2,631 |
|
|
|
1,934 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
drilling
|
|
|
315 |
|
|
|
281 |
|
|
|
873 |
|
|
|
715 |
|
Other operating
|
|
|
104 |
|
|
|
87 |
|
|
|
310 |
|
|
|
258 |
|
Interest
|
|
|
3 |
|
|
|
2 |
|
|
|
6 |
|
|
|
17 |
|
Total
|
|
|
422 |
|
|
|
370 |
|
|
|
1,189 |
|
|
|
990 |
|
Income
before income tax and minority interest
|
|
|
447 |
|
|
|
287 |
|
|
|
1,442 |
|
|
|
944 |
|
Income
tax expense
|
|
|
147 |
|
|
|
89 |
|
|
|
462 |
|
|
|
292 |
|
Minority
interest
|
|
|
155 |
|
|
|
102 |
|
|
|
505 |
|
|
|
334 |
|
Net
income
|
|
$ |
145 |
|
|
$ |
96 |
|
|
$ |
475 |
|
|
$ |
318 |
|
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, as well
as from quarter to quarter.
The growing global economic crisis
created an environment of uncertainty during the third quarter of 2008 that has
continued into the fourth quarter of 2008. The price of crude oil fell from $142
per barrel at the beginning of the period to $100 per barrel at the close, and
was trading in the mid-$60s range in late October. At the same time, reported
dayrates for offshore rigs continued to rise, setting records for both the
current fleet and new-build rigs, as well as U.S. Gulf of Mexico jack-ups.
Diamond Offshore is unable to predict the impact on its business of a continued
decline in commodity prices and the global economy. Possible negative impacts,
among others, could include a decline in dayrates for new contracts, and a
slowing in the pace of new contract activity.
During the last quarter of 2008,
Diamond Offshore expects that six of its rigs will undergo 5-year regulatory
inspections and will be out of service for approximately 266 days in the
aggregate, including downtime for planned maintenance projects. Diamond Offshore
expects to spend an additional approximately 308 days during the remainder of
2008 for an intermediate survey, the mobilization of rigs, completion of
contract modifications, extended maintenance projects not performed in
conjunction with regulatory surveys and repairs to the Ocean Tower as discussed in
“Liquidity and Capital Resources – Diamond Offshore.” In addition, Diamond
Offshore expects that an additional five of its rigs will undergo 5-year surveys
during 2009 and will be out of service for approximately 280 days in the
aggregate. During 2009, Diamond Offshore also expects to spend an additional
approximately 921 days for intermediate surveys, the mobilization of rigs,
contract modifications for international contracts, extended maintenance
projects and completion of repairs to the Ocean Tower. In addition,
Diamond Offshore expects the Ocean Bounty to be taken out
of service at some time subsequent to the first quarter of 2009 for a water
depth upgrade and repowering project. Diamond Offshore expects these projects to
take approximately one year to complete and will extend into 2010. However,
Diamond Offshore can provide no assurance as to the exact timing and/or duration
of downtime associated with regulatory inspections, planned rig mobilizations
and other shipyard projects.
Revenues increased by $212 million and
$697 million, or 32.3% and 36.0%, and net income increased by $49 million and
$157 million, or 51.0% and 49.4%, in the three and nine months ended September
30, 2008, as compared to the corresponding periods of the prior year. Continued
high overall utilization and historically high dayrates for Diamond Offshore’s
floater fleet contributed to an overall increase in net income. In many of the
floater markets in which Diamond Offshore operates, average dayrates increased
as Diamond Offshore’s rigs operated under contracts at higher dayrates than
those earned during the third quarter of 2007. Diamond Offshore’s results for
the three and nine months ended September 30, 2008 were impacted by $25 million
and $8 million in pretax losses on foreign currency forward exchange contracts,
primarily from mark-to-market accounting, which is included in Other
revenue.
Revenues from high specification
floaters and intermediate semisubmersible rigs increased by $231 million and
$724 million in the three and nine months ended September 30, 2008, as compared
to the corresponding periods of the prior year. The increase primarily reflects
increased dayrates of $198 million and $569 million and increased utilization of
$31 million and $142 million, respectively.
Revenues from jack-up rigs increased $22
million and $11 million, in the three and nine months ended September 30, 2008,
as compared to the corresponding periods of the prior year, due primarily to
increased dayrates of $23 million and $11 million and increased utilization of
$3 million and $9 million, respectively. Revenues were unfavorably impacted by a
decrease in the recognition of mobilization fees and other operating revenues,
primarily for the Ocean
Spur, of $4 million and $7 million in the three and nine months ended
September 30, 2007.
Net income increased in the three and
nine months ended September 30, 2008, as compared to the corresponding periods
of the prior year, due to the revenue increases as noted above, partially offset
by increased contract drilling expenses. Overall cost increases for maintenance
and repairs between the 2008 and 2007 periods reflect the impact of high,
sustained utilization of Diamond Offshore’s drilling units across its fleet,
higher maintenance costs, contract
preparation
and mobilization costs. Diamond Offshore's results for the third quarter of 2008
also include normal operating costs for its newly constructed jack-up rigs,
the Ocean Shield and
Ocean Scepter, that
began operating offshore Malaysia in the second quarter of 2008 and offshore
Argentina during the third quarter of 2008, respectively. The increase in
overall operating and overhead costs also reflects the impact of higher prices
throughout the offshore drilling industry and its support businesses, including
higher costs associated with hiring and retaining skilled personnel for Diamond
Offshore’s worldwide offshore fleet.
Interest expense decreased $11 million
in the nine months ended September 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 nine months ended
September 30, 2008 and 2007 as presented in Note 19 of the Notes to Consolidated
Condensed Financial Statements included in Item 1 of this Report.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
(1)
|
|
|
2008
|
|
|
2007
(1)
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue, primarily
operating
|
|
$ |
200 |
|
|
$ |
100 |
|
|
$ |
590 |
|
|
$ |
100 |
|
Investment
gains
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
32 |
|
Total
|
|
|
200 |
|
|
|
101 |
|
|
|
590 |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
106 |
|
|
|
58 |
|
|
|
308 |
|
|
|
58 |
|
Interest
|
|
|
20 |
|
|
|
12 |
|
|
|
57 |
|
|
|
12 |
|
Total
|
|
|
126 |
|
|
|
70 |
|
|
|
365 |
|
|
|
70 |
|
Income
before income tax
|
|
|
74 |
|
|
|
31 |
|
|
|
225 |
|
|
|
62 |
|
Income
tax expense
|
|
|
27 |
|
|
|
11 |
|
|
|
83 |
|
|
|
22 |
|
Net
income
|
|
$ |
47 |
|
|
$ |
20 |
|
|
$ |
142 |
|
|
$ |
40 |
|
(1)
|
HighMount
commenced operations on July 31,
2007.
|
HighMount’s revenues, profitability
and future growth depend substantially on natural gas and NGL prices and
HighMount’s ability to increase its natural gas and NGL production. In recent
years, there has been significant price volatility in natural gas and NGL prices
due to a variety of factors HighMount cannot control or predict. These factors,
which include weather conditions, political and economic events, and competition
from other energy sources, impact supply and demand for natural gas, which
determines the pricing. In addition, the price HighMount realizes for its gas
production is affected by HighMount’s hedging activities as well as locational
differences in market prices. HighMount’s
decision
to increase its natural gas production is dependent upon HighMount’s ability to
realize attractive returns on its capital investment program. Returns are
affected by commodity prices, capital and operating costs.
HighMount’s operating income is
primarily affected by revenue factors, but is also a function of varying levels
of production expenses, production and ad valorem taxes, as well as
depreciation, depletion and amortization (“DD&A”) expenses. HighMount’s
production expenses represent all costs incurred to operate and maintain wells
and related equipment and facilities. The principal components of HighMount’s
production expenses are, among other things, direct and indirect costs of labor
and benefits, repairs and maintenance, materials, supplies, and fuel. In
general, HighMount’s labor costs increase primarily due to higher salary levels
and continued upward pressure on salaries and wages as a result of the increased
competition for skilled workers. In response to these market conditions,
HighMount has implemented retention programs, including increases in
compensation. Production expenses are also affected by increases of the cost of
fuel, materials, and supplies. HighMount’s production and ad valorem taxes
increase primarily when prices of natural gas and NGL increase, but they are
also affected by changes in production, as well as appreciated property values.
HighMount calculates depletion using the units-of-production method, which
depletes the capitalized costs and future development costs associated with
evaluated properties based on the ratio of production volumes for the current
period to total remaining reserve volumes for the evaluated properties.
HighMount’s depletion expense is affected by its capital spending program and
projected future development costs, as well as reserve changes resulting from
drilling programs, well performance, and revisions due to changing commodity
prices.
Presented below are production and sales
statistics related to HighMount’s operations for the three and nine months ended
September 30, 2008 and 2007:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
(1)
|
|
|
2008
|
|
|
2007
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
production (Bcf)
|
|
|
19.7 |
|
|
|
13.7 |
|
|
|
59.3 |
|
|
|
13.7 |
|
Gas
sales (Bcf)
|
|
|
18.1 |
|
|
|
12.6 |
|
|
|
54.5 |
|
|
|
12.6 |
|
Oil
production/sales (Mbbls)
|
|
|
86.6 |
|
|
|
38.1 |
|
|
|
259.8 |
|
|
|
38.1 |
|
NGL
production/sales (Mbbls)
|
|
|
805.9 |
|
|
|
582.0 |
|
|
|
2,656.4 |
|
|
|
582.0 |
|
Equivalent
production (Bcfe)
|
|
|
25.1 |
|
|
|
17.4 |
|
|
|
76.8 |
|
|
|
17.4 |
|
Equivalent
sales (Bcfe)
|
|
|
23.4 |
|
|
|
16.4 |
|
|
|
72.0 |
|
|
|
16.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
realized prices without hedging results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas (per Mcf)
|
|
$ |
9.46 |
|
|
$ |
5.24 |
|
|
$ |
9.06 |
|
|
$ |
5.24 |
|
NGL (per Bbl)
|
|
|
63.86 |
|
|
|
44.71 |
|
|
|
60.06 |
|
|
|
44.71 |
|
Oil (per Bbl)
|
|
|
114.38 |
|
|
|
72.88 |
|
|
|
109.00 |
|
|
|
72.88 |
|
Equivalent (per
Mcfe)
|
|
|
9.92 |
|
|
|
5.81 |
|
|
|
9.47 |
|
|
|
5.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
realized prices with hedging results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas (per Mcf)
|
|
$ |
7.85 |
|
|
$ |
5.29 |
|
|
$ |
7.73 |
|
|
$ |
5.29 |
|
NGL (per Bbl)
|
|
|
56.41 |
|
|
|
44.33 |
|
|
|
49.53 |
|
|
|
44.33 |
|
Oil (per Bbl)
|
|
|
114.38 |
|
|
|
72.88 |
|
|
|
109.00 |
|
|
|
72.88 |
|
Equivalent (per
Mcfe)
|
|
|
8.42 |
|
|
|
5.84 |
|
|
|
8.07 |
|
|
|
5.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
cost per Mcfe:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
expenses
|
|
$ |
1.20 |
|
|
$ |
0.94 |
|
|
$ |
1.03 |
|
|
$ |
0.94 |
|
Production and ad valorem
taxes
|
|
|
0.81 |
|
|
|
0.50 |
|
|
|
0.76 |
|
|
|
0.50 |
|
General and administrative
expenses
|
|
|
0.61 |
|
|
|
0.50 |
|
|
|
0.67 |
|
|
|
0.50 |
|
Depletion
expense
|
|
|
1.65 |
|
|
|
1.40 |
|
|
|
1.56 |
|
|
|
1.40 |
|
(1)
|
HighMount
commenced operations on July 31,
2007.
|
The increase in the volumes produced
and sold included in the table above, as well as HighMount’s revenues and
expenses, is mainly attributable to the fact that the 2007 comparative periods
presented herein represent two months of activity, compared to three and nine
months of activity in 2008.
Three
Months Ended September 30, 2008 Compared to 2007
HighMount’s operating revenues, which
consist primarily of natural gas and NGL sales, increased by $100 million to
$200 million for the third quarter of 2008, compared to $100 million for the
third quarter of 2007. HighMount commenced operations on July 31, 2007. The
increase was primarily due to the increase in volumes sold of 7.0
Bcfe,
which
increased revenues by $41 million, as well as higher commodity prices in 2008
compared to 2007, which contributed another $96 million to the increase in
revenues. These increases were partially offset by a decrease of $35 million due
to the effect of HighMount’s hedging activities.
Operating expenses primarily consist
of production expenses, production and ad valorem taxes, general and
administrative costs and DD&A. Production expenses totaled $28 million, or
$1.20 per Mcfe sold, in the three months ended September 30, 2008 compared to
$15 million, or $0.94 per Mcfe sold, in the three months ended September 30,
2007. The increase in production expenses of $13 million was primarily due to
the increase in volumes sold, which increased production expense by $7 million.
The increase on a per unit basis contributed $6 million and is primarily the
result of a higher cost environment.
Production and ad valorem taxes
during the three months ended September 30, 2008 and 2007 were $19 million and
$8 million, respectively. The increase of $11 million was due primarily to
increased production taxes as a result of higher natural gas and NGL prices,
increased production, and appreciated property values. For the three months
ended September 30, 2008 and 2007, production and ad valorem taxes were $0.81
and $0.50 per Mcfe, respectively. General and administrative expenses, which
consist primarily of compensation related costs, increased by $6 million, to $14
million in the third quarter of 2008, compared to $8 million in the third
quarter of 2007. General and administrative expense increased on a per Mcfe
basis from $0.50 in 2007 to $0.61 in 2008 primarily due to increased headcount
and compensation related expenses.
DD&A expenses increased by $18
million to $45 million for the third quarter of 2008, compared to $27 million
for the third quarter of 2007. DD&A expenses included depletion of natural
gas and NGL properties of $41 million and $24 million for the three months ended
September 30, 2008 and 2007, respectively. Depletion expense increased by $17
million in 2008, compared to 2007, due primarily to an $11 million increase from
production volumes and $6 million due to higher depletion expense per Mcfe.
HighMount’s depletion rate per Mcfe increased by $0.25 per Mcfe to $1.65 per
Mcfe in the third quarter of 2008, compared to $1.40 per Mcfe in the third
quarter of 2007. The increase of HighMount’s depletion expense on a per unit
basis was primarily due to higher capital costs and higher projected future
development costs, the result of higher prices and other economic conditions,
particularly the cost of steel and diesel fuel.
Nine
Months Ended September 30, 2008 Compared to 2007
HighMount’s operating revenues
increased by $490 million to $590 million for the nine months ended September
30, 2008, compared to $100 million for the same period of 2007. HighMount
commenced operations on July 31, 2007. The increase was primarily due to the
increase in volumes sold of 55.6 Bcfe, which increased revenues by $323 million,
as well as higher commodity prices in 2008 compared to 2007, which contributed
another $263 million to the increase in revenues. The increase in revenue due to
higher volumes and prices was offset by a decrease of $101 million due to the
effect of HighMount’s hedging activities.
Production expenses totaled $74
million, or $1.03 per Mcfe sold, in the nine months ended September 30, 2008
compared to $15 million, or $0.94 per Mcfe sold, in the nine months ended
September 30, 2007. The increase in production expenses of $59 million was
primarily due to the increase in volumes sold, which increased production
expense by $53 million. The increase on a per unit basis contributed $6 million
and is primarily the result of a higher cost environment.
Production and ad valorem taxes
during the nine months ended September 30, 2008 and 2007 were $55 million and $8
million, respectively. The increase of $47 million was due primarily to
increased production taxes as a result of higher natural gas and NGL prices,
increased production, and appreciated property values. For the nine months ended
September 30, 2008 and 2007, production and ad valorem taxes were $0.76 and
$0.50 per Mcfe, respectively. General and administrative expenses increased by
$40 million to $48 million during the nine months ended September 30, 2008,
compared to $8 million during the same period of 2007. General and
administrative expense increased on a per Mcfe basis from $0.50 in 2007 to $0.67
in 2008 primarily due to increased headcount and compensation related
expenses.
DD&A expenses increased by $104
million to $131 million for the nine months ended September 30, 2008, compared
to $27 million for the same period of 2007. DD&A expenses included depletion
of natural gas and NGL properties of $120 million and $24 million for the nine
months ended September 30, 2008 and 2007, respectively. Depletion expense
increased by $96 million in 2008, compared to 2007, due primarily to an $83
million increase from higher production volumes and $13 million due to higher
depletion expense per Mcfe. HighMount’s depletion rate per Mcfe increased by
$0.16 per Mcfe to $1.56 per Mcfe in 2008, compared to $1.40 per Mcfe in 2007.
The increase of HighMount’s depletion expense on a per unit basis was primarily
due to higher capital costs and higher projected future development costs, the
result of higher prices and other economic conditions, particularly the cost of
steel and diesel fuel.
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 nine months ended
September 30, 2008 and 2007 as presented in Note 19 of the Notes to Consolidated
Condensed Financial Statements included in Item 1 of this Report:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue, primarily
operating
|
|
$ |
221 |
|
|
$ |
136 |
|
|
$ |
639 |
|
|
$ |
474 |
|
Net investment
income
|
|
|
1 |
|
|
|
5 |
|
|
|
2 |
|
|
|
16 |
|
Total
|
|
|
222 |
|
|
|
141 |
|
|
|
641 |
|
|
|
490 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
140 |
|
|
|
86 |
|
|
|
369 |
|
|
|
288 |
|
Interest
|
|
|
9 |
|
|
|
15 |
|
|
|
46 |
|
|
|
46 |
|
Total
|
|
|
149 |
|
|
|
101 |
|
|
|
415 |
|
|
|
334 |
|
Income
before income tax and minority interest
|
|
|
73 |
|
|
|
40 |
|
|
|
226 |
|
|
|
156 |
|
Income
tax expense
|
|
|
20 |
|
|
|
11 |
|
|
|
61 |
|
|
|
47 |
|
Minority
interest
|
|
|
22 |
|
|
|
10 |
|
|
|
67 |
|
|
|
35 |
|
Net
income
|
|
$ |
31 |
|
|
$ |
19 |
|
|
$ |
98 |
|
|
$ |
74 |
|
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 affect its transportation revenues, and spreads in natural gas prices
across time (for example summer to winter), which primarily affect 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 $81 million
to $222 million for the third quarter of 2008, compared to $141 million for the
2007 period. Gas transportation revenues increased $38 million, excluding fuel,
due mainly to Boardwalk Pipeline’s expansion projects. Boardwalk Pipeline’s fuel
revenues increased $20 million due to expansion-related throughput and an
increase in the price of natural gas. Other revenues increased $17 million due
to a gain on the disposition of coal reserves and $15 million related to a gain
on the sale of gas associated with Boardwalk Pipeline’s western Kentucky storage
expansion project.
Net income increased $12 million to
$31 million in the third quarter of 2008, compared to $19 million in the third
quarter of 2007, primarily due to the increased revenue discussed above,
partially offset by a $54 million increase in operating expenses. The primary
drivers were a $21 million increase in fuel costs from providing service on
Boardwalk Pipeline’s expansion projects and higher natural gas prices.
Depreciation and other taxes, primarily comprised of property taxes, increased
$18 million due to an increase in Boardwalk Pipeline’s asset base from
expansion. The 2007 period was also favorably impacted by $5 million from
insurance recoveries related to the 2005 hurricanes.
Total revenues for the nine months
ended September 30, 2008 increased $151 million to $641 million, compared to
$490 million for the nine months ended September 30, 2007. Gas transportation
revenues, excluding fuel, increased $83 million, $76 million of which was
related to Boardwalk Pipeline’s expansion projects and the remainder to higher
interruptible services. Fuel revenues increased $39 million due to
expansion-related throughput and higher natural gas prices. Gas storage revenues
increased $10 million related to an increase in storage capacity associated with
Boardwalk Pipeline’s western Kentucky storage expansion project. These increases
were partially offset by lower PAL revenues of
$25
million due to unfavorable natural gas price spreads. Other revenues for 2008
include a $31 million gain on the sale of gas related to Boardwalk Pipeline’s
western Kentucky storage expansion project, a $17 million gain on the
disposition of coal reserves and an $11 million gain from the settlement of a
contract claim.
Net income increased $24 million to
$98 million in the first nine months of 2008, compared to $74 million in the
first nine months of 2007, primarily due to the increased revenues discussed
above, partially offset by an $81 million increase in operating expenses. The
primary drivers were increased depreciation and other taxes, primarily comprised
of property taxes, of $43 million associated with an increase in Boardwalk
Pipeline’s asset base due to expansion and increased fuel costs of $42 million
from providing service on Boardwalk Pipeline’s expansion projects and higher
natural gas prices. The 2007 net income was unfavorably impacted by a $15
million impairment charge related to Boardwalk Pipeline’s 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 nine months ended
September 30, 2008 and 2007 as presented in Note 19 of the Notes to Consolidated
Condensed Financial Statements included in Item 1 of this Report:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue, primarily
operating
|
|
$ |
90 |
|
|
$ |
90 |
|
|
$ |
291 |
|
|
$ |
284 |
|
Net investment
income
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
Total
|
|
|
90 |
|
|
|
90 |
|
|
|
292 |
|
|
|
285 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
81 |
|
|
|
80 |
|
|
|
227 |
|
|
|
229 |
|
Interest
|
|
|
2 |
|
|
|
3 |
|
|
|
8 |
|
|
|
9 |
|
Total
|
|
|
83 |
|
|
|
83 |
|
|
|
235 |
|
|
|
238 |
|
Income
before income tax
|
|
|
7 |
|
|
|
7 |
|
|
|
57 |
|
|
|
47 |
|
Income
tax expense
|
|
|
1 |
|
|
|
3 |
|
|
|
21 |
|
|
|
18 |
|
Net
income
|
|
$ |
6 |
|
|
$ |
4 |
|
|
$ |
36 |
|
|
$ |
29 |
|
Revenues were flat for the three months
ended September 30, 2008, as compared to the corresponding period of 2007.
Revenues increased by $7 million, or 2.5%, for the nine months ended September
30, 2008, as compared to the corresponding period of 2007.
Net income increased by $2 million and
$7 million, or 50.0% and 24.1%, respectively in the three and nine months ended
September 30, 2008, as compared to the corresponding periods of
2007.
For the three months ended September 30,
2008, revenue per available room increased to $180.59, compared to $180.10 in
the prior year, reflecting improvements in average room rates of $6.35, or 2.8%,
partially offset by lower occupancy rates.
Revenues increased in the nine months
ended September 30, 2008, as compared to the corresponding period of 2007, due
to an increase in revenue per available room to $188.92, compared to $184.86 in
the prior year, reflecting improvements in average room rates of $9.96, or 4.1%
offset by lower occupancy rates.
Net income for the three months ended
September 30, 2008 increased primarily due to an increase in joint venture
equity income, partially offset by increased operating expenses.
Net income for the nine months ended
September 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 nine months
ended September 30, 2008 and 2007 as presented in Note 19 of the Notes to
Consolidated Condensed Financial Statements included in Item 1 of this
Report:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
(loss)
|
|
$ |
(88 |
) |
|
$ |
58 |
|
|
$ |
69 |
|
|
$ |
263 |
|
Investment
gains
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
142 |
|
Other
|
|
|
18 |
|
|
|
1 |
|
|
|
17 |
|
|
|
1 |
|
Total
|
|
|
(70 |
) |
|
|
59 |
|
|
|
88 |
|
|
|
406 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
19 |
|
|
|
21 |
|
|
|
52 |
|
|
|
45 |
|
Interest
|
|
|
15 |
|
|
|
13 |
|
|
|
42 |
|
|
|
41 |
|
Total
|
|
|
34 |
|
|
|
34 |
|
|
|
94 |
|
|
|
86 |
|
Income
(loss) before income tax
|
|
|
(104 |
) |
|
|
25 |
|
|
|
(6 |
) |
|
|
320 |
|
Income
tax expense (benefit)
|
|
|
(34 |
) |
|
|
10 |
|
|
|
(1 |
) |
|
|
112 |
|
Income
(loss) from continuing operations
|
|
|
(70 |
) |
|
|
15 |
|
|
|
(5 |
) |
|
|
208 |
|
Discontinued
operations, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of
operations
|
|
|
(1 |
) |
|
|
246 |
|
|
|
341 |
|
|
|
692 |
|
Gain on
disposal
|
|
|
|
|
|
|
|
|
|
|
4,362 |
|
|
|
|
|
Net
income (loss)
|
|
$ |
(71 |
) |
|
$ |
261 |
|
|
$ |
4,698 |
|
|
$ |
900 |
|
Revenues decreased by $129 million and
$318 million for the three and nine months ended September 30, 2008 as compared
to the corresponding periods of 2007. Net income decreased by $332 million for
the three months ended September 30, 2008 and increased by $3,798 million for
the nine months ended September 30, 2008, as compared to the corresponding
periods of 2007.
Revenues decreased in the three
months ended September 30, 2008, as compared to the corresponding period of
2007, due primarily to decreased net investment income of $146 million. Revenues
decreased in the nine months ended September 30, 2008 primarily due to decreased
investment income of $194 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 nine months ended September 30, 2008 includes a $4.3 billion gain on the
Separation of Lorillard and a $75 million gain on the sale of
Bulova.
Income (loss) from continuing
operations decreased primarily due to the reduction in revenues discussed above
for the three and nine months ended September 30, 2008 as compared to the
corresponding periods of 2007.
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 nine months ended September
30, 2008, net cash provided by operating activities was $1,261 million as
compared with $713 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, decreased loss payments and decreased tax payments.
Policyholders’ fund withdrawals are reflected as financing cash flows. Cash
provided by operating activities was unfavorably impacted by decreased premium
collections and decreased investment income.
For the nine months ended September
30, 2008, net cash used by investing activities was $508 million as compared
with $667 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.
For the nine months ended September
30, 2008, net cash used by financing activities was $733 million as compared
with $83 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.
Liquidity
CNA believes that its present cash
flows from operations, investing activities and financing activities are
sufficient to fund its working capital and debt obligation needs and CNA does
not expect this to change in the near term due to the following
factors:
|
·
|
CNA
does not anticipate changes in its core property and casualty commercial
insurance operations which would significantly impact liquidity and CNA
continues to maintain reinsurance contracts which limit the impact of
potential catastrophic events.
|
|
·
|
CNA
has entered into several settlement agreements and assumed reinsurance
contracts that require collateralization of future payment obligations and
assumed reserves if CNA’s ratings or other specific criteria fall below
certain thresholds. The ratings triggers are generally more than one level
below CNA’s current ratings. A downgrade below CNA’s current ratings
levels would also result in additional collateral requirements for
derivative contracts for which CNA is in a liability position at any given
point in time. At September 30, 2008, the total potential
collateralization requirements amount to approximately $90
million.
|
|
·
|
As
of September 30, 2008, CNA held short term investments of approximately
$710 million.
|
CNA has an effective shelf
registration statement under which it may issue debt or equity
securities.
Cumulative
Senior Preferred Stock
Under an agreement dated October 27,
2008, CNA will issue, and Loews has agreed to purchase, $1.25 billion of CNA
non-voting cumulative senior preferred stock (“Preferred Issue”). The terms of
the Preferred Issue were approved by a special committee of independent members
of CNA’s Board of Directors. The principal terms of the Preferred Issue are as
follows:
|
·
|
The
Preferred Issue is perpetual and is senior to CNA’s common stock and any
future preferred stock as to the payment of dividends and amounts payable
upon any liquidation, dissolution or winding
up.
|
|
·
|
No
dividends may be declared on CNA’s common stock or any future preferred
stock until the Preferred Issue has been repaid in full. As
such, CNA has suspended its quarterly dividend
payment.
|
|
·
|
The
Preferred Issue is not convertible into any other securities and may only
be redeemed upon the mutual agreement of CNA and
Loews.
|
|
·
|
The
Preferred Issue accrues cumulative dividends at an initial rate of 10.0%
per year. On the fifth anniversary of the issuance and every five years
thereafter, the dividend rate will increase to the higher of 10.0% or the
then current 10-year U.S. Treasury yield plus 700 basis
points.
|
|
·
|
Dividends
are payable quarterly and any dividends not paid when due will be
compounded quarterly.
|
Dividends
On August 20, 2008, CNA paid a
quarterly common stock dividend of $0.15 per share, to shareholders of record on
August 6, 2008. In accordance with the terms of the Preferred Issue discussed
above, CNA has suspended its quarterly common stock dividend
payment.
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. In the first quarter of 2008, CNA repurchased a total of 2,649,621
shares at an average price of $26.53 (including commission) per share. In
accordance with the terms of the Preferred Issue discussed above, common stock
repurchases by CNA are prohibited. No shares of CNA common stock were purchased
during the year ended December 31, 2007.
Diamond Offshore
Cash and
investments, net of receivables and payables, totaled $636 million at September
30, 2008, compared to $640 million at December 31, 2007. In 2008, Diamond
Offshore paid cash dividends totaling $574 million, consisting of special cash
dividends in 2008 of $522 million and its regular quarterly cash dividends of
$52 million. In October of 2008, Diamond Offshore announced a special cash
dividend of $1.875 per share and a regular cash dividend of $0.125 per
share.
Cash
provided by operating activities was $1,039 million in the first nine months of
September 30, 2008, compared to $873 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 $184
million during the first nine months of 2008 compared to providing $25 million
during the first nine 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 third 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 $315 million to
modernize this rig of which $254 million had been spent through September 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
and Ocean
Scepter are currently operating offshore Malaysia and Argentina,
respectively. The aggregate cost for both rigs was approximately $320 million
with an additional approximately $10 million spent to acquire drill pipe for the
new units.
In September of 2008, the Ocean Tower sustained
significant damage during Hurricane Ike, which impacted the Gulf of Mexico and
the upper Texas and Louisiana Gulf coasts. The Ocean Tower lost its derrick,
drill floor and drill floor equipment during the hurricane, and Diamond Offshore
expects the drilling rig to be out of drilling service through the third quarter
of 2009. Diamond Offshore has not yet made a final assessment of the estimated
costs to repair the Ocean
Tower nor has Diamond Offshore determined whether or not it will have an
insurable loss related to this rig. Diamond Offshore is currently assessing
damages to its remaining drilling fleet within the impacted areas, as well as
its shorebase facilities in Louisiana; however, Diamond Offshore does not
believe that there is a likelihood that it will have an insurable loss in
relation to this portion of the drilling fleet and shorebase
facilities.
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 nine months ended September 30, 2008, Diamond Offshore spent
approximately $341 million for capital additions, including $111 million towards
modification of certain of its rigs to meet contractual
requirements.
As of September 30, 2008 and December
31, 2007, there were no loans outstanding under Diamond Offshore’s $285 million
credit facility; however, $58 million in letters of credit were issued under the
credit facility as of September 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 $391 million for the nine months ended September 30, 2008,
compared to $39 million in the prior year. 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 nine months ended September 30, 2008 was $415
million and consisted primarily of additions to HighMount’s property and
equipment. HighMount spent $293 million and $47 million on capital expenditures
for its drilling program in 2008 and 2007, respectively. HighMount is
experiencing a higher capital cost environment attributable to increased costs
for casing, tubing and diesel fuel.
At September 30, 2008, $115 million
was outstanding under HighMount’s $400 million revolving credit facility. In
addition, $12 million in letters of credit have been issued, which reduced the
available capacity under the facility to $273 million.
In September of 2008, Lehman Brothers
Bank FSB (“Lehman”) failed to fund their share (7.6%) of a short term borrowing
under the revolving credit facility. All other lenders met their revolving
commitments on the September of 2008 borrowing. If Lehman fails to fund future
commitments under the revolving credit facility and is not replaced by another
lender, the available capacity under the facility would be reduced to $252
million from $273 million.
Boardwalk Pipeline
At September 30, 2008 and December
31, 2007, cash and investments amounted to $23 million and $317 million,
respectively. Funds from operations for the nine months ended September 30, 2008
and 2007 amounted to $276 million and $229 million. In the nine months ended
September 30, 2008 and 2007, Boardwalk Pipeline’s capital expenditures were $1.9
billion and $688 million, respectively.
Boardwalk Pipeline maintains a
revolving credit facility, which has aggregate lending commitments of $1.0
billion. A financial institution which has a $50 million commitment under the
revolving credit facility filed for bankruptcy protection in the third quarter
of 2008 and has not funded its portion of Boardwalk Pipeline’s borrowing
requests since that time. As of September 30, 2008, Boardwalk Pipeline had $256
million of loans outstanding under the revolving credit facility of which the
weighted-average interest rate on the borrowings was 3.0%. Any letters of credit
previously issued by Boardwalk Pipeline under the facility expired in the third
quarter of 2008. As of September 30, 2008, Boardwalk Pipeline was in compliance
with all covenant requirements under its credit facility. Subsequent to
September 30, 2008, Boardwalk Pipeline borrowed all of the remaining unfunded
commitments under the credit facility (excluding the unfunded commitment of the
bankrupt lender noted above), which increased borrowings to $958
million.
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 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 do 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
$24 million in the first nine months of 2008. Boardwalk Pipeline expects to fund
the remainder of its 2008 maintenance capital expenditures of approximately $35
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
Invested
|
|
|
|
Total
|
|
|
through
|
|
|
|
Estimated
|
|
|
September
30,
|
|
|
|
Cost
|
|
|
2008
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southeast
Expansion
|
|
$ |
775 |
|
|
$ |
635 |
|
Gulf
Crossing Project
|
|
|
1,800 |
|
|
|
1,002 |
|
Fayetteville
and Greenville Laterals
|
|
|
1,290 |
|
|
|
450 |
|
Total
|
|
$ |
3,865 |
|
|
$ |
2,087 |
|
Boardwalk Pipeline expects to incur
expansion capital expenditures of approximately $0.9 billion in the remainder of
2008 and approximately $0.9 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 has financed its expansion
capital costs through equity financings and the incurrence of debt, including
sales of debt by it and its subsidiaries, borrowings under its revolving credit
facility and available operating cash flow in excess of operating needs. To
complete its announced projects, Boardwalk Pipeline anticipates it will need to
issue as much as $1 billion in equity securities. As discussed in “MD&A –
Consolidated Financial Results,” the Company’s Board of Directors approved a
commitment to provide the equity capital to the extent that external funds are
not available to Boardwalk Pipeline on acceptable terms. Boardwalk Pipeline
anticipates that it will require a portion of this equity capital prior to the
end of this year and the balance during the first half of 2009.
During the nine months ended September
30, 2008, Boardwalk Pipeline paid cash distributions of $186 million, including
$129 million to us. In October of 2008, Boardwalk Pipeline declared a quarterly
distribution of $0.475 per unit.
Loews
Hotels
Funds from operations continue to exceed
operating requirements. Cash and investments decreased to $60 million at
September 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, partially offset by cash from operations. 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 September 30, 2008 totaled $4.1
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 $1,053 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 $193 million of
dividends paid to our shareholders.
As of September 30, 2008, there were
436,088,567 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. During
the nine months ended September 30, 2008, we purchased 314,000 shares of Loews
common stock at an aggregate cost of $12 million.
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
Investment activities of non-insurance
companies include investments in fixed income securities, equity securities
including short sales, derivative instruments and short-term investments, and
are carried at fair value. Securities, included in our trading portfolio, short
sales and derivative instruments are marked to market and reported as net
investment income in the Consolidated Condensed Statements of
Operations.
We enter into short sales and invest in
certain derivative instruments that are used for asset and liability management
activities, income enhancements to our portfolio management strategy and to
benefit from anticipated future movements in the underlying markets. If such
movements do not occur as anticipated, then significant losses may occur.
Monitoring procedures include senior management review of daily detailed reports
of existing positions and valuation fluctuations to ensure that open positions
are consistent with our portfolio strategy.
Credit exposure associated with
non-performance by the counterparties to derivative instruments is generally
limited to the uncollateralized change in fair value of the derivative
instruments recognized in the Consolidated Condensed Balance Sheets. We mitigate
the risk of non-performance by monitoring the creditworthiness of counterparties
and diversifying derivatives to multiple counter-parties. We occasionally
require collateral from our derivative investment counterparties depending on
the amount of the exposure and the credit rating of the
counterparty.
We do not believe that any of the
derivative instruments we use are unusually complex, nor do the use of these
instruments, in our opinion, result in a higher degree of risk.
The prolonged and severe disruptions
in the public debt and equity markets, including among other things, widening of
credit spreads, bankruptcies and government intervention in a number of large
financial institutions, have resulted in the Company incurring significant
realized and unrealized losses within the insurance and non-insurance
portfolios.
Subsequent to September 30, 2008,
through the date of this report, conditions in the public debt and equity
markets have continued to deteriorate and pricing levels have continued to
decline. As a result, depending on market conditions, the Company could incur
substantial additional realized and unrealized losses in future
periods.
Insurance
Net Investment Income
The significant components of CNA’s net
investment income are presented in the following table:
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
$ |
501 |
|
|
$ |
501 |
|
|
$ |
1,495 |
|
|
$ |
1,523 |
|
Short-term investments
|
|
|
29 |
|
|
|
57 |
|
|
|
94 |
|
|
|
146 |
|
Limited partnerships
|
|
|
(77 |
) |
|
|
19 |
|
|
|
(70 |
) |
|
|
142 |
|
Equity securities
|
|
|
18 |
|
|
|
7 |
|
|
|
62 |
|
|
|
18 |
|
Income (loss) from trading portfolio (a)
|
|
|
(23 |
) |
|
|
(2 |
) |
|
|
(104 |
) |
|
|
41 |
|
Other
|
|
|
3 |
|
|
|
9 |
|
|
|
14 |
|
|
|
31 |
|
Total investment income
|
|
|
451 |
|
|
|
591 |
|
|
|
1,491 |
|
|
|
1,901 |
|
Investment expense
|
|
|
(12 |
) |
|
|
(11 |
) |
|
|
(42 |
) |
|
|
(42 |
) |
Net investment income
|
|
$ |
439 |
|
|
$ |
580 |
|
|
$ |
1,449 |
|
|
$ |
1,859 |
|
(a)
|
The
change in net unrealized losses on trading securities, included in net
investment income, was $(6) million, $(12) million, $(21) million and $(9)
million for the three and nine months ended September 30, 2008 and
2007.
|
Net investment income decreased by $141
million for the three months ended September 30, 2008 compared with the same
period in 2007. This decrease was primarily driven by decreased results from
limited partnerships, short term investments and the trading portfolio. The
decreased returns from short term investments were caused by an overall decrease
in rates and a partial shift to lower risk U.S. Treasury Bills and agency
discount notes.
Net investment income decreased by $410
million for the nine months ended September 30, 2008 compared with the same
period of 2007. The decrease was primarily driven by decreased results from
limited partnerships, the trading portfolio and short term investments due to
decreased interest rates. The decreased results from the trading portfolio were
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
Operations.
The continued disruption and turmoil
in the capital markets has had a negative impact on limited partnership returns.
See additional discussion in Note 20 of the Notes to Consolidated Condensed
Financial Statements included under Item 1.
The bond segment of the investment
portfolio yielded 5.7% and 5.8% for the nine months ended September 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
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government bonds
|
|
$ |
34 |
|
|
$ |
131 |
|
|
$ |
20 |
|
|
$ |
37 |
|
Corporate and other taxable bonds
|
|
|
(289 |
) |
|
|
(88 |
) |
|
|
(328 |
) |
|
|
(113 |
) |
Tax-exempt bonds
|
|
|
1 |
|
|
|
10 |
|
|
|
51 |
|
|
|
(43 |
) |
Asset-backed bonds
|
|
|
(61 |
) |
|
|
(81 |
) |
|
|
(218 |
) |
|
|
(191 |
) |
Redeemable preferred stock
|
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
(12 |
) |
Total fixed maturity securities
|
|
|
(315 |
) |
|
|
(39 |
) |
|
|
(475 |
) |
|
|
(322 |
) |
Equity securities
|
|
|
(376 |
) |
|
|
16 |
|
|
|
(405 |
) |
|
|
30 |
|
Derivative securities
|
|
|
35 |
|
|
|
(45 |
) |
|
|
47 |
|
|
|
62 |
|
Short term investments
|
|
|
4 |
|
|
|
5 |
|
|
|
11 |
|
|
|
5 |
|
Other invested assets, including dispositions
|
|
|
1 |
|
|
|
6 |
|
|
|
9 |
|
|
|
8 |
|
Total realized investment losses
|
|
|
(651 |
) |
|
|
(57 |
) |
|
|
(813 |
) |
|
|
(217 |
) |
Income tax benefit
|
|
|
228 |
|
|
|
19 |
|
|
|
286 |
|
|
|
75 |
|
Minority interest
|
|
|
44 |
|
|
|
5 |
|
|
|
54 |
|
|
|
16 |
|
Net realized investment
losses
|
|
$ |
(379 |
) |
|
$ |
(33 |
) |
|
$ |
(473 |
) |
|
$ |
(126 |
) |
Net realized investment losses increased
$346 million for the three month period and $347 million for the nine month
period ended September 30, 2008 as compared with the same periods in
2007.
For the three months ended September
30, 2008, other-than-temporary impairment (OTTI) losses of $341 million, driven
by credit issues, were recorded primarily in the non-redeemable preferred equity
securities and corporate and other taxable bonds sectors. For the three months
ended September 30, 2007, OTTI losses of $108 million were recorded primarily in
the corporate and other taxable bonds and asset-backed bonds
sectors.
For the three months ended September
30, 2008, CNA recorded net realized investment losses, including OTTI losses, of
$178 million related to securities issued by Fannie Mae and Freddie Mac, $58
million related to securities issued by Washington Mutual, $57 million related
to securities issued by Icelandic banks and $21 million related to securities
issued by American International Group.
For the nine months ended September
30, 2008, OTTI losses of $489 million were recorded primarily in the
non-redeemable preferred equity securities, corporate and other taxable bonds
and asset-backed bonds sectors. For the nine months ended September 30, 2007,
OTTI losses of $261 million were recorded primarily in the corporate and other
taxable bonds and asset-backed 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
the takeover of the government sponsored entities Freddie Mac and Fannie Mae,
the failure of several financial institutions, continued significant credit
spread widening in fixed income sectors, market volatility and uncertainty in
capital markets world-wide and the lingering impact from the sub-prime
residential mortgage concerns.
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.
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
Effective
Duration
|
|
|
|
|
|
Effective
Duration
|
|
|
|
Fair
Value
|
|
|
(In
years)
|
|
|
Fair
Value
|
|
|
(In
years)
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segregated
investments
|
|
$ |
8,182 |
|
|
|
10.2 |
|
|
$ |
9,211 |
|
|
|
10.7 |
|
Other
interest sensitive investments
|
|
|
26,339 |
|
|
|
4.1 |
|
|
|
29,406 |
|
|
|
3.3 |
|
Total
|
|
$ |
34,521 |
|
|
|
5.6 |
|
|
$ |
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). CNA also may enter into
credit default swaps for the purpose of selling credit protection in order to
replicate the risk of fixed income securities. Derivative securities are
recorded at fair value at the reporting date. Derivatives are also utilized 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 cash
collateral to satisfy margin deposits on exchange-traded derivatives totaling
$12 million as of September 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
September 30, 2008, CNA provided $27 million of cash collateral for
over-the-counter derivative instruments.
CNA 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 (loss). 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
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) on fixed maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
and equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
$ |
75 |
|
|
$ |
181 |
|
|
$ |
275 |
|
|
$ |
324 |
|
Gross realized losses
|
|
|
(390 |
) |
|
|
(220 |
) |
|
|
(750 |
) |
|
|
(646 |
) |
Net realized losses on fixed maturity securities
|
|
|
(315 |
) |
|
|
(39 |
) |
|
|
(475 |
) |
|
|
(322 |
) |
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
10 |
|
|
|
30 |
|
|
|
21 |
|
|
|
50 |
|
Gross realized losses
|
|
|
(386 |
) |
|
|
(14 |
) |
|
|
(426 |
) |
|
|
(20 |
) |
Net realized gains
(losses) on equity securities
|
|
|
(376 |
) |
|
|
16 |
|
|
|
(405 |
) |
|
|
30 |
|
Net realized losses on fixed maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and equity securities
|
|
$ |
(691 |
) |
|
$ |
(23 |
) |
|
$ |
(880 |
) |
|
$ |
(292 |
) |
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.
|
|
Fair
|
|
|
|
|
|
Months
in
|
|
|
|
Value at
|
|
|
|
|
|
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.
|
|
$ |
10,309 |
|
|
$ |
105 |
|
|
|
0-6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable
preferred stock of Fannie Mae.
|
|
|
|
|
|
|
|
|
|
|
|
|
The
company is now in conservatorship.
|
|
|
2 |
|
|
|
48 |
|
|
|
7-12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
income securities of an investment banking firm that
|
|
|
|
|
|
|
|
|
|
|
|
|
filed
bankruptcy causing the market value of the securities to
|
|
|
|
|
|
|
|
|
|
|
|
|
decline
rapidly.
|
|
|
13 |
|
|
|
40 |
|
|
|
0-12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable
preferred stock of Freddie Mac.
|
|
|
|
|
|
|
|
|
|
|
|
|
The
company is now in conservatorship.
|
|
|
1 |
|
|
|
23 |
|
|
|
0-12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
backed pass-through securities were sold based on
|
|
|
|
|
|
|
|
|
|
|
|
|
deteriorating
performance of the underlying loans and the
|
|
|
|
|
|
|
|
|
|
|
|
|
resulting
rapid market price decline.
|
|
|
36 |
|
|
|
18 |
|
|
|
0-6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
income securities of 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.
|
|
|
37 |
|
|
|
16 |
|
|
|
0-6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
10,398 |
|
|
$ |
250 |
|
|
|
|
|
(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:
|
|
September
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
|
|
$ |
1,518 |
|
|
|
4.1 |
% |
|
$ |
687 |
|
|
|
1.7 |
% |
Asset-backed securities
|
|
|
8,779 |
|
|
|
23.7 |
|
|
|
11,409 |
|
|
|
27.3 |
|
States, municipalities and political subdivisions-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax-exempt
|
|
|
6,966 |
|
|
|
18.8 |
|
|
|
7,675 |
|
|
|
18.4 |
|
Corporate securities
|
|
|
8,419 |
|
|
|
22.7 |
|
|
|
8,952 |
|
|
|
21.4 |
|
Other debt securities
|
|
|
3,381 |
|
|
|
9.1 |
|
|
|
4,299 |
|
|
|
10.3 |
|
Redeemable preferred stock
|
|
|
73 |
|
|
|
0.2 |
|
|
|
1,058 |
|
|
|
2.5 |
|
Total fixed maturity securities available-for-sale
|
|
|
29,136 |
|
|
|
78.6 |
|
|
|
34,080 |
|
|
|
81.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
government agencies
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
Asset-backed securities
|
|
|
14 |
|
|
|
|
|
|
|
31 |
|
|
|
0.1 |
|
Corporate securities
|
|
|
24 |
|
|
|
|
|
|
|
123 |
|
|
|
0.3 |
|
Other debt securities
|
|
|
2 |
|
|
|
|
|
|
|
18 |
|
|
|
|
|
Total fixed maturity securities trading
|
|
|
40 |
|
|
|
|
|
|
|
177 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
389 |
|
|
|
1.0 |
|
|
|
452 |
|
|
|
1.1 |
|
Preferred stock
|
|
|
572 |
|
|
|
1.6 |
|
|
|
116 |
|
|
|
0.3 |
|
Total equity securities available-for-sale
|
|
|
961 |
|
|
|
2.6 |
|
|
|
568 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investments available-for-sale
|
|
|
4,728 |
|
|
|
12.8 |
|
|
|
4,497 |
|
|
|
10.8 |
|
Short term investments trading
|
|
|
21 |
|
|
|
0.1 |
|
|
|
180 |
|
|
|
0.4 |
|
Limited partnerships
|
|
|
2,110 |
|
|
|
5.7 |
|
|
|
2,214 |
|
|
|
5.3 |
|
Other investments
|
|
|
63 |
|
|
|
0.2 |
|
|
|
73 |
|
|
|
0.1 |
|
Total general account investments
|
|
$ |
37,059 |
|
|
|
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 $3,386 million at September 30, 2008 compared with a net
unrealized gain of $74 million at December 31, 2007. The unrealized position at
September 30, 2008 was comprised of a net unrealized loss of $3,243 million for
fixed maturity securities, a net unrealized loss of $148 million for equity
securities and a net unrealized gain of $5 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 our general account investment portfolio.
The following table provides the
composition of fixed maturity securities available-for-sale in a gross
unrealized loss position at September 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
|
|
|
1.0 |
% |
|
|
|
Due
after one year through five years
|
|
|
10.0 |
|
|
|
4.0 |
% |
Due
after five years through ten years
|
|
|
14.0 |
|
|
|
11.0 |
|
Due
after ten years
|
|
|
75.0 |
|
|
|
85.0 |
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
CNA’s non-investment grade fixed income
securities available-for-sale at September 30, 2008 that were in a gross
unrealized loss position had a fair value of $2,690 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 September 30, 2008 and
December 31, 2007.
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Estimated
|
|
|
Fair Value as a Percentage of Amortized Cost
|
|
|
Unrealized
|
|
September
30, 2008
|
|
Fair Value
|
|
|
|
90-99 |
% |
|
|
80-89 |
% |
|
|
70-79 |
% |
|
<70%
|
|
|
Loss
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
$ |
1,037 |
|
|
$ |
40 |
|
|
$ |
40 |
|
|
$ |
17 |
|
|
$ |
25 |
|
|
$ |
122 |
|
7-12 months
|
|
|
839 |
|
|
|
20 |
|
|
|
46 |
|
|
|
55 |
|
|
|
82 |
|
|
|
203 |
|
13-24 months
|
|
|
798 |
|
|
|
14 |
|
|
|
70 |
|
|
|
38 |
|
|
|
46 |
|
|
|
168 |
|
Greater than 24 months
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
7 |
|
|
|
11 |
|
Total non-investment grade
|
|
$ |
2,690 |
|
|
$ |
74 |
|
|
$ |
156 |
|
|
$ |
114 |
|
|
$ |
160 |
|
|
$ |
504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2008 or December 31, 2007. This determination was
based on a number of factors that CNA regularly consider 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 September 30, 2008 that were in a gross unrealized loss
position had a fair value of $563 million and gross unrealized losses of $335
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. The majority of the unrealized
losses in this category are related to non-redeemable preferred stock holdings
of financial institutions. The holdings in this industry sector have been
adversely impacted by significant credit spread widening brought on by the
volatility in the capital markets in addition to the government sponsored
entities Freddie Mac and Fannie Mae being placed in conservatorship for which
CNA has recognized realized investment losses. The remainder of the holdings in
this category are being monitored and CNA believes, given current facts and
circumstances, are sufficiently capitalized and will recover in
value.
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, 89.3% and 89.1% of which were rated as
investment grade (rated BBB- or higher) at September 30, 2008 and December 31,
2007.
The following table summarizes the
ratings of CNA’s general account bond portfolio at carrying value.
|
|
September
30, 2008
|
|
|
December 31, 2007
|
|
(In millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and affiliated agency securities
|
|
$ |
1,515 |
|
|
|
5.2 |
% |
|
$ |
816 |
|
|
|
2.5 |
% |
Other AAA rated
|
|
|
11,477 |
|
|
|
39.4 |
|
|
|
16,728 |
|
|
|
50.4 |
|
AA and A rated
|
|
|
7,518 |
|
|
|
25.8 |
|
|
|
6,326 |
|
|
|
19.1 |
|
BBB rated
|
|
|
5,481 |
|
|
|
18.8 |
|
|
|
5,713 |
|
|
|
17.2 |
|
Non-investment grade
|
|
|
3,112 |
|
|
|
10.8 |
|
|
|
3,616 |
|
|
|
10.8 |
|
Total
|
|
$ |
29,103 |
|
|
|
100.0 |
% |
|
$ |
33,199 |
|
|
|
100.0 |
% |
At September 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 September 30, 2008 was $392 million, which represents 1.1%
of CNA’s total investment portfolio. These securities were in a net unrealized
gain position of $164 million at September 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:
|
|
September
30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term investments available-for-sale:
|
|
|
|
|
|
|
Commercial
paper
|
|
$ |
1,035 |
|
|
$ |
3,040 |
|
U.S. Treasury
securities
|
|
|
2,192 |
|
|
|
577 |
|
Money market
funds
|
|
|
121 |
|
|
|
72 |
|
Other, including collateral
held related to securities lending
|
|
|
1,380 |
|
|
|
808 |
|
Total
short term investments available-for-sale
|
|
|
4,728 |
|
|
|
4,497 |
|
|
|
|
|
|
|
|
|
|
Short
term investments trading:
|
|
|
|
|
|
|
|
|
Commercial
paper
|
|
|
|
|
|
|
35 |
|
Money market
funds
|
|
|
21 |
|
|
|
139 |
|
Other
|
|
|
|
|
|
|
6 |
|
Total
short term investments trading
|
|
|
21 |
|
|
|
180 |
|
Total
short term investments
|
|
$ |
4,749 |
|
|
$ |
4,677 |
|
Securities
Lending Activities
CNA lends securities to unrelated
parties, primarily major brokerage firms through two programs: an internally
managed program and an external program managed by CNA’s lead custodial bank as
agent. The securities lending program is for the purpose of enhancing income.
CNA does not lend securities for operating or financing purposes. Borrowers of
these securities must deposit and maintain collateral with CNA of at least 102%
of the fair value of the securities loaned, adjusted to fair value daily,
regardless of whether the collateral is cash or securities. Only cash collateral
is accepted for CNA’s internally managed program and is typically invested in
the highest quality commercial paper with maturities of less than 7 days. U.S.
Government, agencies or Government National Mortgage Association securities are
accepted as non-cash collateral for the external program. CNA maintains
effective control over all loaned securities and, therefore, continues to report
such securities as Fixed maturity securities in the Consolidated Condensed
Balance Sheets.
The lending programs are matched-book
programs where the collateral is invested to substantially match the term of the
loan which limits risk. In accordance with CNA lending agreements, securities on
loan are returned immediately to CNA upon notice. 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 September 30,
2008. The fair value of non-cash collateral was $543 million and $273 million at
September 30, 2008 and December 31, 2007.
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 September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
Total
|
|
|
Percent
|
|
|
|
Security
Type
|
|
|
|
|
|
Security
|
|
|
of
Total
|
|
September
30, 2008
|
|
MBS
(a)
|
|
|
CMO
(b)
|
|
|
ABS
(c)
|
|
|
CDO
(d)
|
|
|
Total
|
|
|
Type
|
|
|
Investments
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
$ |
448 |
|
|
$ |
1,061 |
|
|
|
|
|
|
|
|
$ |
1,509 |
|
|
|
16.9 |
% |
|
|
3.6 |
% |
AAA
|
|
|
|
|
|
|
4,566 |
|
|
$ |
1,929 |
|
|
$ |
9 |
|
|
|
6,504 |
|
|
|
72.4 |
|
|
|
15.4 |
|
AA
|
|
|
|
|
|
|
42 |
|
|
|
294 |
|
|
|
25 |
|
|
|
361 |
|
|
|
4.0 |
|
|
|
0.9 |
|
A
|
|
|
|
|
|
|
1 |
|
|
|
107 |
|
|
|
71 |
|
|
|
179 |
|
|
|
2.0 |
|
|
|
0.4 |
|
BBB
|
|
|
|
|
|
|
33 |
|
|
|
291 |
|
|
|
10 |
|
|
|
334 |
|
|
|
3.7 |
|
|
|
0.8 |
|
Non-investment
grade and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity
tranches
|
|
|
|
|
|
|
27 |
|
|
|
43 |
|
|
|
23 |
|
|
|
93 |
|
|
|
1.0 |
|
|
|
0.2 |
|
Total
fair value
|
|
$ |
448 |
|
|
$ |
5,730 |
|
|
$ |
2,664 |
|
|
$ |
138 |
|
|
$ |
8,980 |
|
|
|
100.0 |
% |
|
|
21.3 |
% |
Total
amortized cost
|
|
$ |
454 |
|
|
$ |
6,603 |
|
|
$ |
3,018 |
|
|
$ |
361 |
|
|
$ |
10,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of total fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
by
security type
|
|
|
5.0 |
% |
|
|
63.8 |
% |
|
|
29.7 |
% |
|
|
1.5 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-prime
(included above)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value
|
|
|
|
|
|
|
|
|
|
$ |
1,371 |
|
|
$ |
7 |
|
|
$ |
1,378 |
|
|
|
15.3 |
% |
|
|
3.3 |
% |
Amortized
cost
|
|
|
|
|
|
|
|
|
|
|
1,535 |
|
|
|
32 |
|
|
|
1,567 |
|
|
|
15.0 |
% |
|
|
3.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A
(included above)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value
|
|
|
|
|
|
$ |
1,084 |
|
|
|
|
|
|
$ |
4 |
|
|
$ |
1,088 |
|
|
|
12.1 |
% |
|
|
2.6 |
% |
Amortized
cost
|
|
|
|
|
|
|
1,268 |
|
|
|
|
|
|
|
8 |
|
|
|
1,276 |
|
|
|
12.2 |
% |
|
|
3.0 |
% |
(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 September 30, 2008 were $8,980 million of asset-backed securities,
at fair value, which represents 21.3% of total invested assets. Of the total
asset-backed securities, 89.3% were U.S. Government Agency issued or AAA rated.
Of the total invested assets, $1,378 million or 3.3% have exposure to sub-prime
residential mortgage (sub-prime) collateral, as measured by the original deal
structure, while 2.6% have exposure to Alternative A (Alt-A) collateral. Of the
securities with sub-prime exposure, approximately 97.0% were rated investment
grade, while 98.0% 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 $41 million through limited partnerships and sold credit default
swaps which provide the buyer protection against declines in sub-prime
indices.
All asset-backed securities in an
unrealized loss position are reviewed as part of the ongoing OTTI process, which
resulted in OTTI losses of $17 million and $122 million after tax and minority
interest for the three and nine months ended September 30, 2008. Included in
these OTTI losses were $15 million and $99 million after tax 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.
ACCOUNTING
STANDARDS
In December of 2007, the Financial
Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
Standards (“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 September 30, 2008) will be
recognized in the shareholders’ equity section of the Consolidated Condensed
Balance Sheets as opposed to the Consolidated Condensed Statements of
Operations.
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.
In September of 2008, the FASB issued
FSP No. FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and
Certain Guarantees: An Amendment of SFAS No. 133 and FASB Interpretation (“FIN”)
No. 45; and Clarification of the Effective Date of SFAS No. 161.” This FSP
requires disclosures by sellers of credit derivatives, including credit
derivatives embedded in a hybrid instruments and requires additional disclosure
about the current status of the payment/performance risk of a guarantee. The
provisions of this FSP that amend SFAS No. 133 and FIN No. 45 shall be effective
for reporting periods ending after November 15, 2008. We are currently
evaluating the disclosure requirements of this FSP.
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 us, including the effects
of assessments and other surcharges for guaranty funds and second-injury
funds, other mandatory pooling arrangements and future
assessments levied on insurance companies and other financial industry
participants under the Emergency Economic Stabilization Act of 2008
recoupment provisions;
|
|
·
|
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, as well as on the markets for directors and officers and errors
and omissions coverages, along with the effects of liquidity crises that
may impact the types, liquidity and valuation of investments that may be
held by insurers and their holding
companies;
|
|
·
|
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 and financial markets and credit 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; by us and our subsidiaries, including any
additional investments by us in our
subsidiaries;
|
|
·
|
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 Operations. Market risk exposure is presented for each class of
financial instrument held by us at September 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 September 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 $292 million and $333 million at September 30, 2008 and December
31, 2007, respectively. A 100 basis point decrease would result in an increase
in market value of $320 million and $350 million at September 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 September 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 September 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 September 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 September 30, 2008, the amount of gas loaned out by Boardwalk
Pipeline was approximately 7.6 trillion British thermal units (“TBtu”) and the
amount considered an imbalance was approximately 4.2 TBtu. Assuming an average
market price during September 2008 of $7.54 per million British thermal units
(“MMBtu”), the market value of gas loaned out and considered an imbalance at
September 30, 2008, would have been approximately $89 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
|
|
|
|
September
30,
|
|
|
December 31,
|
|
|
September
30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
markets
(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities (a)
|
|
$ |
502 |
|
|
$ |
744 |
|
|
$ |
(126 |
) |
|
$ |
(186 |
) |
Futures -
short
|
|
|
|
|
|
|
|
|
|
|
83 |
|
|
|
102 |
|
Options -
purchased
|
|
|
50 |
|
|
|
35 |
|
|
|
3 |
|
|
|
1 |
|
-written
|
|
|
(65 |
) |
|
|
(16 |
) |
|
|
(67 |
) |
|
|
(5 |
) |
Short sales
|
|
|
(83 |
) |
|
|
(84 |
) |
|
|
21 |
|
|
|
21 |
|
Limited partnership
investments
|
|
|
241 |
|
|
|
443 |
|
|
|
(26 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures
– long
|
|
|
|
|
|
|
|
|
|
|
(41 |
) |
|
|
(9 |
) |
Fixed maturities –
long
|
|
|
597 |
|
|
|
582 |
|
|
|
(1 |
) |
|
|
(4 |
) |
Fixed maturities –
short
|
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
2 |
|
Short term
investments
|
|
|
3,281 |
|
|
|
2,628 |
|
|
|
|
|
|
|
|
|
Other
derivatives
|
|
|
(2 |
) |
|
|
|
|
|
|
1 |
|
|
|
(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
$(171) at December 31, 2007. 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
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
markets (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
General accounts (a)
|
|
$ |
964 |
|
|
$ |
568 |
|
|
$ |
(241 |
) |
|
$ |
(142 |
) |
Separate
accounts
|
|
|
35 |
|
|
|
45 |
|
|
|
(9 |
) |
|
|
(11 |
) |
Limited
partnership investments
|
|
|
1,966 |
|
|
|
1,878 |
|
|
|
(110 |
) |
|
|
(106 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities (a)(b)
|
|
|
29,136 |
|
|
|
34,081 |
|
|
|
(1,747 |
) |
|
|
(1,900 |
) |
Short term investments (a)
|
|
|
5,392 |
|
|
|
5,602 |
|
|
|
(16 |
) |
|
|
(4 |
) |
Other invested
assets
|
|
|
7 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
Interest rate swaps and other
(c)
|
|
|
(76 |
) |
|
|
(88 |
) |
|
|
60 |
|
|
|
81 |
|
Other derivative
securities
|
|
|
58 |
|
|
|
38 |
|
|
|
6 |
|
|
|
33 |
|
Separate accounts (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
376 |
|
|
|
419 |
|
|
|
(17 |
) |
|
|
(20 |
) |
Short term
investments
|
|
|
14 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
Debt
|
|
|
(6,997 |
) |
|
|
(7,204 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodities
(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forwards – short
(c)
|
|
|
86 |
|
|
|
11 |
|
|
|
(119 |
) |
|
|
(119 |
) |
Forwards – long
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
Options –
written
|
|
|
1 |
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
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 $(293) and $(317) at September 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 $(7) and $(106) at September 30, 2008 and
December 31, 2007,
respectively.
|
|
(c)
|
The
market risk at September 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 September 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 September 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 16 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.
The
Emergency Economic Stabilization Act of 2008 may impact the fair value
determinations of CNA’s invested assets and may lead to regulatory limitations,
impositions and restrictions upon CNA.
One of the main features of the
Emergency Economic Stabilization Act of 2008 (“the Act”), which took effect
October 3, 2008, is the establishment of the Troubled Assets Relief Program
(“TARP”). Although CNA is eligible to participate in TARP, CNA has not yet
decided whether to tender its eligible securities. Regardless of CNA’s
participation decision, several provisions of the Act could affect CNA. Purchase
prices under TARP could impact marketplace fair values of similar securities,
thereby impacting CNA’s fair value determinations. Also, the mandatory plan
adopted to recoup the net losses of TARP within the next five years may target
financial institutions such as CNA and may lead to regulatory limitations,
impositions and future assessments. All of these factors may have an adverse
material impact on CNA’s business, insurer financial strength and debt ratings,
and our results of operations and equity.
We
provide capital to our subsidiaries from time to time, which reduces cash
balances at the parent company.
We are a holding company and get
substantially all of our income and cash flow from our operating subsidiaries.
Certain of our operating subsidiaries require substantial amounts of capital
from time to time to fund expansions, enhance capital or to satisfy rating
agency or regulatory requirements or for other reasons. Sufficient capital to
satisfy these needs may not be available to our subsidiaries when needed on
acceptable terms from the capital markets or other third parties. In such cases,
we have in the past, and may in the future, provide substantial amounts of debt
or equity capital to our subsidiaries, which may not be on market terms. Any
such investments reduce the amount of cash available at the parent company which
might otherwise be used to fund acquisitions, share buybacks, dividends or other
investments or to fund other capital requirements of our subsidiaries.
Significantly reduced levels of cash at the parent company could also result in
a downgrade of our ratings by the major credit rating agencies which could have
a material adverse effect on our results of operations and equity.
Continued
deterioration in the public debt and equity markets could lead to additional
investment losses.
The prolonged and severe disruptions
in the public debt and equity markets, including among other things, widening of
credit spreads, bankruptcies and government intervention in a number of large
financial institutions, have resulted in significant realized and unrealized
losses in the investment portfolios of CNA and the parent company. For the nine
months ended September 30, 2008 we incurred substantial realized and unrealized
investment losses, as described in MD&A under Item 2 of this report.
Subsequent to September 30, 2008, through the date of this report, conditions in
the public debt and equity markets have continued to deteriorate and pricing
levels have continued to decline. As a result,
depending
on market conditions, we could incur substantial additional realized and
unrealized losses in future periods, which could have a material adverse impact
on our financial condition, results of operations and equity.
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
1, 2008 -
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2008
|
|
|
314,000 |
|
|
$ |
38.85 |
|
|
|
N/A |
|
|
|
N/A |
|
Item 6. Exhibits.
|
Exhibit
|
Description
of Exhibit
|
Number
|
|
|
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:
October 29, 2008
|
By:
|
/s/ Peter W. Keegan
|
|
|
PETER W. KEEGAN
|
|
|
Senior Vice President and
|
|
|
Chief Financial Officer
|
|
|
(Duly authorized officer
|
|
|
and principal financial
|
|
|
officer)
|