LOEWS
CORPORATION
INDEX
TO ANNUAL REPORT ON
FORM
10-K FILED WITH THE
SECURITIES
AND EXCHANGE COMMISSION
For
the Year Ended December 31, 2008
Item
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Page
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No.
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PART
I
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No.
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1
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Business
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3
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CNA
Financial Corporation
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3
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Diamond
Offshore Drilling, Inc.
|
10
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HighMount
Exploration & Production LLC
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13
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Boardwalk
Pipeline Partners, LP
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17
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Loews
Hotels Holding Corporation
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21
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Separation
of Lorillard
|
22
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Available
Information
|
23
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1
|
A
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Risk
Factors
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23
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1
|
B
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Unresolved
Staff Comments
|
50
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2
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Properties
|
50
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3
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Legal
Proceedings
|
50
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4
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Submission
of Matters to a Vote of Security Holders
|
51
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Executive
Officers of the Registrant
|
51
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PART
II
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5
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Market
for the Registrant’s Common Equity, Related Stockholder Matters and
Issuer
|
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Purchases
of Equity Securities
|
51
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Management’s
Report on Internal Control Over Financial Reporting
|
54
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Reports
of Independent Registered Public Accounting Firm
|
55
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6
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Selected
Financial Data
|
57
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7
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
58
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7
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A
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Quantitative
and Qualitative Disclosures about Market Risk
|
117
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8
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Financial
Statements and Supplementary Data
|
121
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9
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
205
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9
|
A
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Controls
and Procedures
|
205
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9
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B
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Other
Information
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205
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PART
III
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Certain
information called for by Part III (Items 10, 11, 12, 13 and 14) has been
omitted as Registrant intends to file with the Securities and Exchange
Commission not later than 120 days after the close of its fiscal year a
definitive Proxy Statement pursuant to Regulation 14A.
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PART
IV
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15
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Exhibits
and Financial Statement Schedules
|
206
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PART
I
Unless
the context otherwise requires, references in this Report to “Loews
Corporation,” “we,” “our,” “us” or like terms refer to the business of Loews
Corporation excluding its subsidiaries.
Item
1. Business.
We are a
holding company. Our subsidiaries are engaged in the following lines of
business:
|
·
|
commercial
property and casualty insurance (CNA Financial Corporation, a 90% owned
subsidiary);
|
|
·
|
operation
of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc., a
50.4% owned subsidiary);
|
|
·
|
exploration,
production and marketing of natural gas and natural gas liquids (HighMount
Exploration & Production LLC, a wholly owned
subsidiary);
|
|
·
|
operation
of interstate natural gas transmission pipeline systems (Boardwalk
Pipeline Partners, LP, a 74% owned subsidiary);
and
|
|
·
|
operation
of hotels (Loews Hotels Holding Corporation, a wholly owned
subsidiary).
|
Please
read information relating to our major business segments from which we derive
revenue and income contained in Note 24 of the Notes to Consolidated Financial
Statements, included under Item 8.
In June
of 2008, we disposed of our entire ownership interest in our wholly owned
subsidiary, Lorillard, Inc. (“Lorillard”) in two integrated transactions,
collectively referred to as the “Separation.” Please read the “Separation of
Lorillard” section below for information relating to these
transactions.
CNA
FINANCIAL CORPORATION
CNA
Financial Corporation (together with its subsidiaries, “CNA”) was incorporated
in 1967 and is an insurance holding company. CNA’s property and casualty
insurance operations are conducted by Continental Casualty Company (“CCC”),
incorporated in 1897, and The Continental Insurance Company (“CIC”), organized
in 1853, and its affiliates. CIC became a subsidiary of CNA in 1995 as a result
of the acquisition of The Continental Corporation (“Continental”). CNA accounted
for 58.9%, 69.1% and 75.0% of our consolidated total revenue for the years ended
December 31, 2008, 2007 and 2006, respectively.
CNA’s
core businesses serves a wide variety of customers, including small, medium and
large businesses, associations, professionals and groups with a broad range of
insurance and risk management products and services.
CNA’s
insurance products primarily include commercial property and casualty coverages.
CNA’s services include risk management, information services, warranty and
claims administration. CNA’s products and services are marketed through
independent agents, brokers and managing general agents.
CNA’s
core business, commercial property and casualty insurance operations, is
reported in two business segments: Standard Lines and Specialty
Lines. CNA’s non-core operations are managed in two business
segments: Life & Group Non-Core and Other Insurance. These
segments are managed separately because of differences in their product lines
and markets.
Standard
Lines
Standard
Lines works with an independent agency distribution system and network of
brokers to market a broad range of property and casualty insurance products and
services domestically primarily to small, middle-market and large businesses and
organizations. The Standard Lines operating model focuses on underwriting
performance, relationships with selected distribution sources and understanding
customer needs. Property products provide standard and excess property
coverages, as well as marine coverage, and boiler and machinery. Casualty
products provide standard casualty
Item 1.
Business
CNA Financial Corporation - (Continued)
insurance
products such as workers’ compensation, general and product liability and
commercial auto coverage through traditional products. Most insurance programs
are provided on a guaranteed cost basis; however, CNA also offers specialized,
loss-sensitive insurance programs to those customers viewed as higher risk and
less predictable in exposure.
These
property and casualty products are offered as part of CNA’s Business and
Commercial insurance groups. CNA’s Business insurance group serves its smaller
commercial accounts and the Commercial insurance group serves its middle markets
and its larger risks. In addition, Standard Lines provides total risk management
services relating to claim and information services to the large commercial
insurance marketplace, through a wholly owned subsidiary, CNA ClaimPlus, Inc., a
third party administrator.
Specialty
Lines
Specialty
Lines provides professional, financial and specialty property and casualty
products and services, both domestically and abroad, through a network of
brokers, managing general underwriters and independent agencies. Specialty Lines
provides solutions for managing the risks of its clients, including architects,
lawyers, accountants, healthcare professionals, financial intermediaries and
public and private companies. Product offerings also include surety and fidelity
bonds and vehicle warranty services.
Specialty
Lines includes the following business groups:
U.S. Specialty
Lines: U.S. Specialty Lines provides management and
professional liability insurance and risk management services, and other
specialized property and casualty coverages, primarily in the United States.
This group provides professional liability coverages to various professional
firms, including architects, realtors, small and mid-sized accounting firms, law
firms and technology firms. U.S. Specialty Lines also provides directors and
officers (“D&O”), employment practices, fiduciary and fidelity coverages.
Specific areas of focus include small and mid-size firms as well as privately
held firms and not-for-profit organizations where tailored products for this
client segment are offered. Products within U.S. Specialty Lines are distributed
through brokers, agents and managing general underwriters.
U.S.
Specialty Lines, through CNA HealthPro, also offers insurance products to serve
the healthcare delivery system. Products, which include professional liability
as well as associated standard property and casualty coverages, are distributed
on a national basis through a variety of channels including brokers, agents and
managing general underwriters. Key customer segments include long term care
facilities, allied healthcare providers, life sciences, dental professionals and
mid-size and large healthcare facilities and delivery systems.
Also
included in U.S. Specialty Lines is Excess and Surplus (“E&S”). E&S
provides specialized insurance and other financial products for selected
commercial risks on both an individual customer and program basis. Customers
insured by E&S are generally viewed as higher risk and less predictable in
exposure than those covered by standard insurance markets. E&S’s products
are distributed throughout the United States through specialist producers,
program agents and brokers.
Surety: Surety
consists primarily of CNA Surety and its insurance subsidiaries and offers
small, medium and large contract and commercial surety bonds. CNA Surety
provides surety and fidelity bonds in all 50 states through a combined network
of independent agencies. CNA owns approximately 62% of CNA Surety.
Warranty: Warranty
provides vehicle warranty service contracts and related products that protect
individuals from the financial burden associated with mechanical breakdown.
Products are distributed through independent agents.
CNA Global: CNA
Global consists of subsidiaries operating in Europe, Latin America, Canada and
Hawaii. These affiliates offer property and casualty insurance, through brokers,
managing general underwriters and independent agencies, to small and medium size
businesses and capitalize on strategic indigenous
opportunities.
Item 1.
Business
CNA
Financial Corporation -
(Continued)
Life
& Group Non-Core
The Life
& Group Non-Core segment primarily includes the results of the life and
group lines of business that have either been sold or placed in run-off. CNA
continues to service its existing individual long term care commitments, its
payout annuity business and its pension deposit business. CNA also manages a
block of group reinsurance and life settlement contracts. These businesses are
being managed as a run-off operation. CNA’s group long term care business, while
considered non-core, continues to be actively marketed. During 2008, CNA exited
the indexed group annuity portion of its pension deposit business.
Other
Insurance
Other
Insurance includes certain corporate expenses, including interest on corporate
debt, and the results of certain property and casualty business primarily in
run-off, including CNA Re. This segment also includes the results related to the
centralized adjusting and settlement of asbestos and environmental pollution
(“A&E”) claims.
Please
read Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations by Business Segment – CNA Financial” for information with
respect to each segment.
Supplementary
Insurance Data
The following table sets forth
supplementary insurance data:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Trade
Ratios - GAAP basis (a):
|
|
|
|
|
|
|
|
|
|
Loss
and loss adjustment expense ratio
|
|
|
78.7 |
% |
|
|
77.7 |
% |
|
|
75.7 |
% |
Expense
ratio
|
|
|
30.1 |
|
|
|
30.0 |
|
|
|
30.0 |
|
Dividend
ratio
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.3 |
|
Combined
ratio
|
|
|
109.0 |
% |
|
|
107.9 |
% |
|
|
106.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
Ratios - Statutory basis (preliminary) (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
and loss adjustment expense ratio
|
|
|
83.8 |
% |
|
|
79.8 |
% |
|
|
78.7 |
% |
Expense
ratio
|
|
|
30.1 |
|
|
|
30.0 |
|
|
|
30.2 |
|
Dividend
ratio
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.2 |
|
Combined
ratio
|
|
|
114.2 |
% |
|
|
110.1 |
% |
|
|
109.1 |
% |
(a)
|
Trade
ratios reflect the results of CNA’s property and casualty insurance
subsidiaries. Trade ratios are industry measures of property and casualty
underwriting results. The loss and loss adjustment expense ratio is the
percentage of net incurred claim and claim adjustment expenses to net
earned premiums. The primary difference in this ratio between accounting
principles generally accepted in the United States of America (“GAAP”) and
statutory accounting practices (“SAP”) is related to the treatment of
active life reserves (“ALR”) related to long term care insurance products
written in property and casualty insurance subsidiaries. For GAAP, ALR is
classified as future policy benefits reserves whereas for SAP, ALR is
classified as unearned premium reserves. The expense ratio, using amounts
determined in accordance with GAAP, is the percentage of underwriting and
acquisition expenses (including the amortization of deferred acquisition
expenses) to net earned premiums. The expense ratio, using amounts
determined in accordance with SAP, is the percentage of acquisition and
underwriting expenses (with no deferral of acquisition expenses) to net
written premiums. The dividend ratio, using amounts determined in
accordance with GAAP, is the ratio of policyholders’ dividends incurred to
net earned premiums. The dividend ratio, using amounts determined in
accordance with SAP, is the ratio of policyholders’ dividends paid to net
earned premiums. The combined ratio is the sum of the loss and loss
adjustment expense, expense and dividend
ratios.
|
Item 1.
Business
CNA
Financial Corporation -
(Continued)
The
following table displays the distribution of direct written premiums for CNA’s
operations by geographic concentration.
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
|
9.2 |
% |
|
|
9.5 |
% |
|
|
9.7 |
% |
New
York
|
|
|
6.9 |
|
|
|
7.0 |
|
|
|
7.5 |
|
Florida
|
|
|
6.5 |
|
|
|
7.5 |
|
|
|
8.0 |
|
Texas
|
|
|
6.2 |
|
|
|
6.1 |
|
|
|
5.8 |
|
Illinois
|
|
|
3.8 |
|
|
|
3.8 |
|
|
|
4.2 |
|
New
Jersey
|
|
|
3.8 |
|
|
|
3.7 |
|
|
|
4.0 |
|
Pennsylvania
|
|
|
3.3 |
|
|
|
3.4 |
|
|
|
3.4 |
|
Missouri
|
|
|
3.1 |
|
|
|
2.9 |
|
|
|
3.1 |
|
All
other states, countries or political subdivisions (a)
|
|
|
57.2 |
|
|
|
56.1 |
|
|
|
54.3 |
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
(a)
|
No
other individual state, country or political subdivision accounts for more
than 3.0% of direct written
premiums.
|
Approximately
7.4%, 6.9% and 5.9% of CNA’s direct written premiums were derived from outside
of the United States for the years ended December 31, 2008, 2007 and 2006.
Premiums from any individual foreign country were not significant.
Property
and Casualty Claim and Claim Adjustment Expenses
The
following loss reserve development table illustrates the change over time of
reserves established for property and casualty claim and claim adjustment
expenses at the end of the preceding ten calendar years for CNA’s property and
casualty insurance companies. The table excludes CNA’s life subsidiaries, and as
such, the carried reserves will not agree to the Consolidated Financial
Statements included under Item 8. The first section shows the reserves as
originally reported at the end of the stated year. The second section, reading
down, shows the cumulative amounts paid as of the end of successive years with
respect to the originally reported reserve liability. The third section, reading
down, shows re-estimates of the originally recorded reserves as of the end of
each successive year, which is the result of CNA’s property and casualty
insurance subsidiaries’ expanded awareness of additional facts and circumstances
that pertain to the unsettled claims. The last section compares the latest
re-estimated reserves to the reserves originally established, and indicates
whether the original reserves were adequate or inadequate to cover the estimated
costs of unsettled claims.
The loss
reserve development table for property and casualty companies is cumulative and,
therefore, ending balances should not be added since the amount at the end of
each calendar year includes activity for both the current and prior years.
Additionally, the development amounts in the following table include the impact
of commutations, but exclude the impact of the provision for uncollectible
reinsurance.
Item 1.
Business
CNA
Financial Corporation -
(Continued)
|
|
Schedule
of Loss Reserve Development
|
|
Year
Ended December 31
|
|
1998
|
|
|
1999(a)
|
|
|
2000
|
|
|
2001(b)
|
|
|
2002(c)
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originally
reported gross
reserves for unpaid claim
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
claim adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses
|
|
|
28,506 |
|
|
|
26,850 |
|
|
|
26,510 |
|
|
|
29,649 |
|
|
|
25,719 |
|
|
|
31,284 |
|
|
|
31,204 |
|
|
|
30,694 |
|
|
|
29,459 |
|
|
|
28,415 |
|
|
|
27,475 |
|
Originally
reported ceded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
recoverable
|
|
|
5,182 |
|
|
|
6,091 |
|
|
|
7,333 |
|
|
|
11,703 |
|
|
|
10,490 |
|
|
|
13,847 |
|
|
|
13,682 |
|
|
|
10,438 |
|
|
|
8,078 |
|
|
|
6,945 |
|
|
|
6,213 |
|
Originally
reported net reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
unpaid claim and claim
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
expenses
|
|
|
23,324 |
|
|
|
20,759 |
|
|
|
19,177 |
|
|
|
17,946 |
|
|
|
15,229 |
|
|
|
17,437 |
|
|
|
17,522 |
|
|
|
20,256 |
|
|
|
21,381 |
|
|
|
21,470 |
|
|
|
21,262 |
|
Cumulative
net paid as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
year later
|
|
|
7,321 |
|
|
|
6,547 |
|
|
|
7,686 |
|
|
|
5,981 |
|
|
|
5,373 |
|
|
|
4,382 |
|
|
|
2,651 |
|
|
|
3,442 |
|
|
|
4,436 |
|
|
|
4,308 |
|
|
|
- |
|
Two
years later
|
|
|
12,241 |
|
|
|
11,937 |
|
|
|
11,992 |
|
|
|
10,355 |
|
|
|
8,768 |
|
|
|
6,104 |
|
|
|
4,963 |
|
|
|
7,022 |
|
|
|
7,676 |
|
|
|
- |
|
|
|
- |
|
Three
years later
|
|
|
16,020 |
|
|
|
15,256 |
|
|
|
15,291 |
|
|
|
12,954 |
|
|
|
9,747 |
|
|
|
7,780 |
|
|
|
7,825 |
|
|
|
9,620 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Four
years later
|
|
|
18,271 |
|
|
|
18,151 |
|
|
|
17,333 |
|
|
|
13,244 |
|
|
|
10,870 |
|
|
|
10,085 |
|
|
|
9,914 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Five
years later
|
|
|
20,779 |
|
|
|
19,686 |
|
|
|
17,775 |
|
|
|
13,922 |
|
|
|
12,814 |
|
|
|
11,834 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Six
years later
|
|
|
21,970 |
|
|
|
20,206 |
|
|
|
18,970 |
|
|
|
15,493 |
|
|
|
14,320 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Seven
years later
|
|
|
22,564 |
|
|
|
21,231 |
|
|
|
20,297 |
|
|
|
16,769 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Eight
years later
|
|
|
23,453 |
|
|
|
22,373 |
|
|
|
21,382 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Nine
years later
|
|
|
24,426 |
|
|
|
23,276 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Ten
years later
|
|
|
25,178 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
reserves re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of initial year
|
|
|
23,324 |
|
|
|
20,759 |
|
|
|
19,177 |
|
|
|
17,946 |
|
|
|
15,229 |
|
|
|
17,437 |
|
|
|
17,522 |
|
|
|
20,256 |
|
|
|
21,381 |
|
|
|
21,470 |
|
|
|
21,262 |
|
One
year later
|
|
|
24,306 |
|
|
|
21,163 |
|
|
|
21,502 |
|
|
|
17,980 |
|
|
|
17,650 |
|
|
|
17,671 |
|
|
|
18,513 |
|
|
|
20,588 |
|
|
|
21,601 |
|
|
|
21,463 |
|
|
|
- |
|
Two
years later
|
|
|
24,134 |
|
|
|
23,217 |
|
|
|
21,555 |
|
|
|
20,533 |
|
|
|
18,248 |
|
|
|
19,120 |
|
|
|
19,044 |
|
|
|
20,975 |
|
|
|
21,706 |
|
|
|
- |
|
|
|
- |
|
Three
years later
|
|
|
26,038 |
|
|
|
23,081 |
|
|
|
24,058 |
|
|
|
21,109 |
|
|
|
19,814 |
|
|
|
19,760 |
|
|
|
19,631 |
|
|
|
21,408 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Four
years later
|
|
|
25,711 |
|
|
|
25,590 |
|
|
|
24,587 |
|
|
|
22,547 |
|
|
|
20,384 |
|
|
|
20,425 |
|
|
|
20,212 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Five
years later
|
|
|
27,754 |
|
|
|
26,000 |
|
|
|
25,594 |
|
|
|
22,983 |
|
|
|
21,076 |
|
|
|
21,060 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Six
years later
|
|
|
28,078 |
|
|
|
26,625 |
|
|
|
26,023 |
|
|
|
23,603 |
|
|
|
21,769 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Seven
years later
|
|
|
28,437 |
|
|
|
27,009 |
|
|
|
26,585 |
|
|
|
24,267 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Eight
years later
|
|
|
28,705 |
|
|
|
27,541 |
|
|
|
27,207 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Nine
years later
|
|
|
29,211 |
|
|
|
28,035 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Ten
years later
|
|
|
29,674 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
net (deficiency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
redundancy
|
|
|
(6,350 |
) |
|
|
(7,276 |
) |
|
|
(8,030 |
) |
|
|
(6,321 |
) |
|
|
(6,540 |
) |
|
|
(3,623 |
) |
|
|
(2,690 |
) |
|
|
(1,152 |
) |
|
|
(325 |
) |
|
|
7 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
re-estimated
reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
reserves re-estimated
|
|
|
29,674 |
|
|
|
28,035 |
|
|
|
27,207 |
|
|
|
24,267 |
|
|
|
21,769 |
|
|
|
21,060 |
|
|
|
20,212 |
|
|
|
21,408 |
|
|
|
21,706 |
|
|
|
21,463 |
|
|
|
- |
|
Re-estimated
ceded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
recoverable
|
|
|
8,178 |
|
|
|
10,673 |
|
|
|
11,458 |
|
|
|
16,965 |
|
|
|
16,313 |
|
|
|
14,709 |
|
|
|
13,576 |
|
|
|
10,935 |
|
|
|
8,622 |
|
|
|
7,277 |
|
|
|
- |
|
Total
gross re-estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves
|
|
|
37,852 |
|
|
|
38,708 |
|
|
|
38,665 |
|
|
|
41,232 |
|
|
|
38,082 |
|
|
|
35,769 |
|
|
|
33,788 |
|
|
|
32,343 |
|
|
|
30,328 |
|
|
|
28,740 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(deficiency) redundancy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos
claims
|
|
|
(2,152 |
) |
|
|
(1,576 |
) |
|
|
(1,511 |
) |
|
|
(739 |
) |
|
|
(748 |
) |
|
|
(98 |
) |
|
|
(43 |
) |
|
|
(34 |
) |
|
|
(32 |
) |
|
|
(27 |
) |
|
|
- |
|
Environmental
claims
|
|
|
(616 |
) |
|
|
(616 |
) |
|
|
(559 |
) |
|
|
(212 |
) |
|
|
(207 |
) |
|
|
(134 |
) |
|
|
(134 |
) |
|
|
(83 |
) |
|
|
(84 |
) |
|
|
(83 |
) |
|
|
- |
|
Total
asbestos and environmental
|
|
|
(2,768 |
) |
|
|
(2,192 |
) |
|
|
(2,070 |
) |
|
|
(951 |
) |
|
|
(955 |
) |
|
|
(232 |
) |
|
|
(177 |
) |
|
|
(117 |
) |
|
|
(116 |
) |
|
|
(110 |
) |
|
|
- |
|
Other
claims
|
|
|
(3,582 |
) |
|
|
(5,084 |
) |
|
|
(5,960 |
) |
|
|
(5,370 |
) |
|
|
(5,585 |
) |
|
|
(3,391 |
) |
|
|
(2,513 |
) |
|
|
(1,035 |
) |
|
|
(209 |
) |
|
|
117 |
|
|
|
- |
|
Total
net (deficiency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
redundancy
|
|
|
(6,350 |
) |
|
|
(7,276 |
) |
|
|
(8,030 |
) |
|
|
(6,321 |
) |
|
|
(6,540 |
) |
|
|
(3,623 |
) |
|
|
(2,690 |
) |
|
|
(1,152 |
) |
|
|
(325 |
) |
|
|
7 |
|
|
|
- |
|
(a)
|
Ceded
recoverable includes reserves transferred under retroactive reinsurance
agreements of $784 as of December 31,
1999.
|
(b)
|
Effective
January 1, 2001, CNA established a new life insurance company, CNA Group
Life Assurance Company (“CNAGLA”). Further, on January 1, 2001 $1,055 of
reserves were transferred from CCC to
CNAGLA.
|
(c)
|
Effective
October 31, 2002, CNA sold CNA Reinsurance Company Limited. As a result of
the sale, net reserves were reduced by
$1,316.
|
Item 1.
Business
CNA
Financial Corporation -
(Continued)
Please
read information relating to CNA’s property and casualty claim and claim
adjustment expense reserves and reserve development set forth under Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”), and in Notes 1 and 9 of the Notes to Consolidated
Financial Statements, included under Item 8.
Investments
Please
read Item 7, MD&A – Investments and Notes 1, 3, 4 and 5 of the Notes to
Consolidated Financial Statements, included under Item 8.
Other
Competition: The
property and casualty insurance industry is highly competitive both as to rate
and service. CNA’s consolidated property and casualty subsidiaries compete not
only with other stock insurance companies, but also with mutual insurance
companies, reinsurance companies and other entities for both producers and
customers. CNA must continuously allocate resources to refine and improve its
insurance products and services.
Rates
among insurers vary according to the types of insurers and methods of operation.
CNA competes for business not only on the basis of rate, but also on the basis
of availability of coverage desired by customers, ratings and quality of
service, including claim adjustment services.
There are
approximately 2,300 individual companies that sell property and casualty
insurance in the United States. Based on 2007 statutory net written premiums,
CNA is the seventh largest commercial insurance writer and the thirteenth
largest property and casualty insurance organization in the United States of
America.
Regulation: The
insurance industry is subject to comprehensive and detailed regulation and
supervision throughout the United States. Each state has established supervisory
agencies with broad administrative powers relative to licensing insurers and
agents, approving policy forms, establishing reserve requirements, fixing
minimum interest rates for accumulation of surrender values and maximum interest
rates of policy loans, prescribing the form and content of statutory financial
reports and regulating solvency and the type, quality and amount of investments
permitted. Such regulatory powers also extend to premium rate regulations, which
require that rates not be excessive, inadequate or unfairly discriminatory. In
addition to regulation of dividends by insurance subsidiaries, intercompany
transfers of assets may be subject to prior notice or approval by the state
insurance regulators, depending on the size of such transfers and payments in
relation to the financial position of the insurance affiliates making the
transfer or payment.
Insurers
are also required by the states to provide coverage to insureds who would not
otherwise be considered eligible by the insurers. Each state dictates the types
of insurance and the level of coverage that must be provided to such involuntary
risks. CNA’s share of these involuntary risks is mandatory and generally a
function of its respective share of the voluntary market by line of insurance in
each state.
Further,
insurance companies are subject to state guaranty fund and other
insurance-related assessments. Guaranty fund assessments are levied by the state
departments of insurance to cover claims of insolvent insurers. Other
insurance-related assessments are generally levied by state agencies to fund
various organizations including disaster relief funds, rating bureaus, insurance
departments, and workers’ compensation second injury funds, or by industry
organizations that assist in the statistical analysis and ratemaking
process.
Reform of
the U.S. tort liability system is another issue facing the insurance industry.
Over the last decade, many states have passed some type of reform. In recent
years, for example, significant state general tort reforms have been enacted in
Georgia, Ohio, Mississippi and South Carolina. Specific state legislation
addressing state asbestos reform has been passed in Ohio, Georgia, Florida and
Texas in past years as well. Although these states’ legislatures have begun to
address their litigious environments, some reforms are being challenged in the
courts and it will take some time before they are finalized. Even though there
has been some tort reform success, new causes of action and theories of damages
continue to be proposed in state court actions or by legislatures. For example,
some state legislatures are considering legislation addressing direct actions
against insurers related to bad faith claims. As a result of this
unpredictability in the law, insurance underwriting and rating are expected to
continue to be difficult in commercial lines, professional
liability
Item 1.
Business
CNA
Financial Corporation assword-
(Continued)
and some
specialty coverages and therefore could materially adversely affect the
Company’s results of operations and equity.
Although
the federal government and its regulatory agencies do not directly regulate the
business of insurance, federal legislative and regulatory initiatives can impact
the insurance industry in a variety of ways. These initiatives and legislation
include tort reform proposals; proposals addressing natural catastrophe
exposures; terrorism risk mechanisms; federal regulation of insurance; various
tax proposals affecting insurance companies; and possible regulatory
limitations, impositions and restrictions, as well as potential impacts on the
fair value determinations of CNA’s invested assets, arising from the Emergency
Economic Stabilization Act of 2008.
In
addition, 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 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 December 31, 2008 and 2007, all of CNA’s
domestic insurance subsidiaries exceeded the minimum risk-based capital
requirements.
Subsidiaries
with insurance operations outside the United States are also subject to
regulation in the countries in which they operate. CNA has operations in the
United Kingdom, Canada and other countries.
Properties: The
333 S. Wabash Avenue building, located in Chicago, Illinois and owned by CCC, a
wholly owned subsidiary of CNA, serves as the home office for CNA and its
insurance subsidiaries. CNA owns or leases office space in various cities
throughout the United States and in other countries. The following table sets
forth certain information with respect to the principal office buildings owned
or leased by CNA:
|
Size
|
|
|
Location
|
(square
feet)
|
|
Principal
Usage
|
|
|
|
|
333
S. Wabash Avenue
|
845,567
|
|
Principal
executive offices of CNA
|
Chicago,
Illinois
|
|
|
|
401
Penn Street
|
170,143
|
|
Property
and casualty insurance offices
|
Reading,
Pennsylvania
|
|
|
|
2405
Lucien Way
|
124,946
|
|
Property
and casualty insurance offices
|
Maitland,
Florida
|
|
|
|
40
Wall Street
|
107,607
|
|
Property
and casualty insurance offices
|
New
York, New York
|
|
|
|
1100
Ward Avenue
|
104,478
|
|
Property
and casualty insurance offices
|
Honolulu,
Hawaii
|
|
|
|
101
S. Phillips Avenue
|
81,101
|
|
Property
and casualty insurance offices
|
Sioux
Falls, South Dakota
|
|
|
|
600
N. Pearl Street
|
72,240
|
|
Property
and casualty insurance offices
|
Dallas,
Texas
|
|
|
|
4267
Meridian Parkway
|
70,004
|
|
Data Center
|
Aurora,
Illinois
|
|
|
|
675
Placentia Avenue
|
64,939
|
|
Property
and casualty insurance offices
|
Brea,
California
|
|
|
|
1249
South River Road
|
57,671
|
|
Property
and casualty insurance offices
|
Cranbury,
New Jersey
|
|
|
|
CNA
leases its office space described above except for the Chicago, Illinois
building, the Reading, Pennsylvania building, and the Aurora, Illinois building,
which are owned.
Item 1.
Business
DIAMOND
OFFSHORE DRILLING, INC.
Diamond
Offshore Drilling, Inc. (“Diamond Offshore”), is engaged, through its
subsidiaries, in the business of owning and operating drilling rigs that are
used in the drilling of offshore oil and gas wells on a contract basis for
companies engaged in exploration and production of hydrocarbons. Diamond
Offshore owns 45 offshore rigs. Diamond Offshore accounted for 26.3%, 18.3% and
15.2% of our consolidated total revenue for the years ended December 31, 2008,
2007 and 2006, respectively.
Diamond
Offshore owns and operates 30 semisubmersible rigs, consisting of 11 high
specification and 19 intermediate rigs. Semisubmersible rigs consist of an upper
working and living deck resting on vertical columns connected to lower hull
members. Such rigs operate in a “semi-submerged” position, remaining afloat, off
bottom, in a position in which the lower hull is approximately 55 feet to 90
feet below the water line and the upper deck protrudes well above the surface.
Semisubmersible rigs are typically anchored in position and remain stable for
drilling in the semi-submerged floating position due in part to their wave
transparency characteristics at the water line. Semisubmersible rigs can also be
held in position through the use of a computer controlled thruster
(“dynamic-positioning”) system to maintain the rig’s position over a drillsite.
Three semisubmersible rigs in Diamond Offshore’s fleet have this
capability.
Diamond
Offshore’s high specification semisubmersible rigs are generally capable of
working in water depths of 4,000 feet or greater or in harsh environments and
have other advanced features, as compared to intermediate semisubmersible rigs.
As of January 26, 2009, nine of the 11 high specification semisubmersible rigs,
including the recently upgraded Ocean Monarch, were located
in the U.S. Gulf of Mexico (“GOM”), while the remaining two rigs were located
offshore Brazil and Malaysia.
Diamond
Offshore’s intermediate semisubmersible rigs generally work in maximum water
depths up to 4,000 feet. As of January 26, 2009, Diamond Offshore had 19
intermediate semisubmersible rigs drilling offshore or undergoing contract
preparation activities in various offshore locations around the world. Six of
these intermediate semisubmersible rigs were located offshore Brazil; four were
located in the North Sea, three were located offshore Australia; two each were
located in the GOM and offshore Mexico; and one was located each of offshore
Libya and Vietnam.
Diamond
Offshore has 14 jack-up drilling rigs. Jack-up rigs are mobile, self-elevating
drilling platforms equipped with legs that are lowered to the ocean floor until
a foundation is established to support the drilling platform. The rig hull
includes the drilling rig, jacking system, crew quarters, loading and unloading
facilities, storage areas for bulk and liquid materials, heliport and other
related equipment. Diamond Offshore’s jack-up rigs are used for drilling in
water depths from 20 feet to 350 feet. The water depth limit of a particular rig
is principally determined by the length of the rig’s legs. A jack-up rig is
towed to the drillsite with its hull riding in the sea, as a vessel, with its
legs retracted. Once over a drillsite, the legs are lowered until they rest on
the seabed and jacking continues until the hull is elevated above the surface of
the water. After completion of drilling operations, the hull is lowered until it
rests in the water and then the legs are retracted for relocation to another
drillsite.
As of
January 26, 2009, six of Diamond Offshore’s 14 jack-up rigs were located in the
GOM. Three of those rigs are independent-leg cantilevered units, two are
mat-supported cantilevered units, and one is a mat-supported slot unit. Of
Diamond Offshore’s eight remaining jack-up rigs, all of which are
independent-leg cantilevered units, two were located offshore Egypt and Mexico
and one was located each of offshore Singapore, Croatia, Australia and
Argentina.
Diamond
Offshore’s strategy is to economically upgrade its fleet to meet customer demand
for advanced, efficient, high-tech rigs, particularly deepwater semisubmersible
rigs, in order to maximize the utilization of, and dayrates earned by, the rigs
in Diamond Offshore’s fleet. Since 1995, Diamond Offshore has increased the
number of its rigs capable of operating in 3,500 feet or more of water from
three rigs to 14 (11 of which are high specification units), primarily by
upgrading its existing fleet. Seven of these upgrades were to Diamond Offshore’s
Victory-class semisubmersible rigs, the design of which is well-suited for
significant upgrade projects. Diamond Offshore has two additional Victory-class
rigs that are currently operating as intermediate semisubmersible rigs that
could potentially be upgraded at some time in the future.
By the
end of 2008, Diamond Offshore had completed its most recent fleet enhancement
and additions program, which included the upgrade of two of Diamond Offshore’s
Victory-class semisubmersible rigs, the Ocean Endeavor (completed in
March of 2007) and the Ocean
Monarch (completed in December of 2008), to 10,000 foot water depth
capability and
Item 1.
Business
Diamond
Offshore Drilling, Inc. -
(Continued)
the
construction of two high-performance, premium jack-up rigs, the Ocean Shield (completed in
May of 2008) and
the Ocean Scepter
(completed in August of 2008).
Diamond
Offshore has one drillship, the Ocean Clipper, which was
located offshore Brazil as of January 26, 2009. Drillships, which are typically
self-propelled, are positioned over a drillsite through the use of either an
anchoring system or a dynamic-positioning system similar to those used on
certain semisubmersible rigs. Deep water drillships compete in many of the same
markets as do high specification semisubmersible rigs.
Markets: The
principal markets for Diamond Offshore’s contract drilling services are the
following:
|
·
|
the
Gulf of Mexico, including the United States and
Mexico;
|
|
·
|
Europe,
principally in the United Kingdom, or U.K., and
Norway;
|
|
·
|
the
Mediterranean Basin, including Egypt, Libya and Tunisia and other parts of
Africa;
|
|
·
|
South
America, principally in Brazil and
Argentina;
|
|
·
|
Australia
and Asia, including Malaysia, Indonesia and Vietnam;
and
|
|
·
|
the
Middle East, including Kuwait, Qatar and Saudi
Arabia.
|
Diamond
Offshore actively markets its rigs worldwide. From time to time Diamond
Offshore’s fleet operates in various other markets throughout the world as the
market demands.
Diamond
Offshore believes its presence in multiple markets is valuable in many respects.
For example, Diamond Offshore believes that its experience with safety and other
regulatory matters in the U.K. has been beneficial in Australia and other
international areas in which Diamond Offshore operates, while production
experience gained through Brazilian and North Sea operations has potential
application worldwide. Additionally, Diamond Offshore believes its performance
for a customer in one market segment or area enables it to better understand
that customer’s needs and better serve that customer in different market
segments or other geographic locations.
Diamond
Offshore’s contracts to provide offshore drilling services vary in their terms
and provisions. Diamond Offshore typically obtains its contracts through
competitive bidding, although it is not unusual for Diamond Offshore to be
awarded drilling contracts without competitive bidding. Drilling contracts
generally provide for a basic drilling rate on a fixed dayrate basis regardless
of whether or not such drilling results in a productive well. Drilling contracts
may also provide for lower rates during periods when the rig is being moved or
when drilling operations are interrupted or restricted by equipment breakdowns,
adverse weather conditions or other conditions beyond the control of Diamond
Offshore. Under dayrate contracts, Diamond Offshore generally pays the operating
expenses of the rig, including wages and the cost of incidental supplies.
Historically, dayrate contracts have accounted for the majority of Diamond
Offshore’s revenues. In addition, from time to time, Diamond Offshore’s dayrate
contracts may also provide for the ability to earn an incentive bonus from its
customers based upon performance.
A dayrate
drilling contract generally extends over a period of time covering either the
drilling of a single well or a group of wells, which Diamond Offshore refers to
as a well-to-well contract, or a fixed term, which Diamond Offshore refers to as
a term contract, and may be terminated by the customer in the event the drilling
unit is destroyed or lost or if drilling operations are suspended for a period
of time as a result of a breakdown of equipment or, in some cases, due to other
events beyond the control of either party to the contract. In addition, certain
of Diamond Offshore’s contracts permit the customer to terminate the contract
early by giving notice, and in most circumstances may require the payment of an
early termination fee by the customer. The contract term in many instances may
also be extended by the customer exercising options for the drilling of
additional wells or for an additional length of time, generally at competitive
market rates and mutually agreeable terms at the time of the
extension.
Customers: Diamond
Offshore provides offshore drilling services to a customer base that includes
major and independent oil and gas companies and government-owned oil companies.
During 2008, Diamond Offshore performed services for 49 different customers,
with Petroleo Brasileiro S.A., (“Petrobras”), accounting for 13.1% of
Diamond
Item 1.
Business
Diamond
Offshore Drilling, Inc. -
(Continued)
Offshore’s
annual total consolidated revenues. During 2007, Diamond Offshore performed
services for 49 different customers, none of which accounted for 10.0% or more
of Diamond Offshore’s annual total consolidated revenues. During 2006, Diamond
Offshore performed services for 51 different customers with Anadarko Petroleum
Corporation (which acquired Kerr-McGee Oil & Gas Corporation in mid – 2006)
and Petrobras accounting for 10.6% and 10.4% of Diamond Offshore’s annual total
consolidated revenues, respectively.
Competition: The offshore
contract drilling industry is highly competitive with numerous industry
participants, none of which at the present time has a dominant market share.
Some of Diamond Offshore’s competitors may have greater financial or other
resources than Diamond Offshore. Mergers among oil and gas exploration and
production companies have reduced the number of available customers. The
drilling industry has experienced consolidation in recent years and may
experience additional consolidation, which could create additional large
competitors. Diamond Offshore competes with offshore drilling contractors that
together have more than 600 mobile rigs available worldwide.
Significant
new rig construction and upgrades of existing drilling units could also
intensify price competition. Diamond Offshore believes that there are currently
170 jack-up rigs and floaters (semisubmersible rigs and drillships) on order and
scheduled for delivery between 2009 and 2012. Periods of improving dayrates and
expectations of sustained improvements in rig utilization rates and dayrates may
result in the construction of additional new rigs. The resulting increases in
rig supply could result in depressed rig utilization and greater price
competition from both existing competitors, as well as new entrants into the
offshore drilling market. Presently, not all of the rigs currently under
construction have been contracted for future work, which may further intensify
price competition as scheduled delivery dates occur. In addition, competing
contractors are able to adjust localized supply and demand imbalances by moving
rigs from areas of low utilization and dayrates to areas of greater activity and
relatively higher dayrates.
Governmental
Regulation: Diamond Offshore’s operations are subject to
numerous international, U.S., state and local laws and regulations that relate
directly or indirectly to Diamond Offshore’s operations, including regulations
controlling the discharge of materials into the environment, requiring removal
and clean-up under some circumstances, or otherwise relating to the protection
of the environment.
Operations Outside the United
States: Diamond Offshore’s operations outside the United
States accounted for 59.3%, 49.8% and 42.5% of Diamond Offshore’s total
consolidated revenues for the years ended December 31, 2008, 2007 and 2006,
respectively.
Properties: Diamond
Offshore owns an eight-story office building containing approximately 182,000
net rentable square feet on approximately 6.2 acres of land located in Houston,
Texas, where its corporate headquarters is located, two buildings totaling
39,000 square feet and 20 acres of land in New Iberia, Louisiana, for its
offshore drilling warehouse and storage facility, and a 13,000 square foot
building and five acres of land in Aberdeen, Scotland, for its North Sea
operations. Additionally, Diamond Offshore currently leases various office,
warehouse and storage facilities in Louisiana, Australia, Brazil, Indonesia,
Norway, The Netherlands, Malaysia, Singapore, Egypt, Argentina, Vietnam, Libya
and Mexico to support its offshore drilling operations.
Item 1.
Business
HIGHMOUNT
EXPLORATION & PRODUCTION LLC
On July
31, 2007, HighMount acquired certain exploration and production assets, and
assumed certain related obligations from subsidiaries of Dominion Resources,
Inc. (“Dominion”) for $4.0 billion, subject to adjustment. HighMount accounted
for 5.8% and 2.1% of our consolidated total revenue for the years ended December
31, 2008 and 2007.
We use
the following terms throughout this discussion of HighMount’s business, 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
|
Mcf
|
-
|
Thousand
cubic feet (of natural gas)
|
Mcfe
|
-
|
Thousand
cubic feet of natural gas equivalent
|
MMBbl
|
-
|
Million
barrels (of oil or NGLs)
|
MMBtu
|
-
|
Million
British thermal units
|
MMcf
|
-
|
Million
cubic feet (of natural gas)
|
MMcfe
|
-
|
Million
cubic feet of natural gas equivalent
|
Proved
reserves
|
-
|
Estimated
quantities of natural gas, NGLs and oil which, upon analysis of geologic
and engineering data, appear with reasonable certainty to be recoverable
in the future from known reservoirs under existing economic and operating
conditions
|
Proved
developed reserves
|
-
|
Proved
reserves which can be expected to be recovered through existing wells with
existing equipment and operating methods
|
Proved
undeveloped reserves
|
-
|
Proved
reserves which are expected to be recovered from new wells on undrilled
acreage or from existing wells where a relatively major expenditure is
required
|
Tcf
|
-
|
Trillion
cubic feet (of natural gas)
|
Tcfe
|
-
|
Trillion
cubic feet of natural gas
equivalent
|
In
addition, as used in this discussion of HighMount’s business, “gross wells”
refers to the total number of wells in which HighMount owns a working interest
and “net wells” refers to the sum of each of the gross wells multiplied by the
percentage working interest owned by HighMount in such well. “Gross acres”
refers to the total number of acres with respect to which HighMount owns or
leases an interest and “net acres” is the sum of each unit of gross acres
covered by a lease or other arrangement multiplied by HighMount’s percentage
mineral interest in such gross acreage.
HighMount
is engaged in the exploration, production and marketing of natural gas, NGLs
(predominantly ethane and propane) and, to a small extent, oil, primarily in the
Permian Basin in Texas, the Antrim Shale in Michigan and the Black Warrior Basin
in Alabama. HighMount holds interests in developed and undeveloped acreage,
wellbores and well facilities, which generally take the form of working
interests in leases that have varying terms. HighMount’s interests in these
properties are, in many cases, held jointly with third parties and may be
subject to royalty, overriding royalty, carried, net profits, working and other
similar interests and contractual arrangements with other parties as is
customary in the oil and gas industry. HighMount also owns or has interests in
gathering systems which transport natural gas and NGLs, principally from its
producing wells, to processing plants and pipelines owned by third
parties.
Reserves: HighMount’s
net proved reserves disclosed in this Report represent its share of proved
reserves based on its net revenue interest in each property. Estimated proved
reserves as of December 31, 2008 are based upon studies for each of HighMount’s
properties prepared by HighMount staff engineers. Calculations were prepared
using standard geological and engineering methods generally accepted by the
petroleum industry and in accordance with Securities and
Item 1.
Business
HighMount
Exploration & Production LLC -
(Continued)
Exchange
Commission (“SEC”) guidelines. Ryder Scott Company, L.P., an independent third
party petroleum engineering consulting firm, has audited HighMount’s proved
reserve estimates in accordance with the Standards Pertaining to the Estimating
and Auditing of Oil and Gas Reserves Information promulgated by the Society of
Petroleum Engineers.
The
following table sets forth HighMount’s proved reserves at December 31, 2008,
based on prevailing prices as of that date of $5.71 per MMBtu for natural gas,
$22.00 per Bbl for NGLs and $44.60 per Bbl for oil.
|
|
Natural
Gas
(MMcf)
|
|
|
NGLs
(Bbls)
|
|
|
Oil
(Bbls)
|
|
|
Natural
Gas
Equivalents
(MMcfe)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permian Basin
|
|
|
1,320,987 |
|
|
|
78,075,920 |
|
|
|
6,732,066 |
|
|
|
1,829,834 |
|
Antrim
Shale
|
|
|
246,547 |
|
|
|
|
|
|
|
18,885 |
|
|
|
246,661 |
|
Black Warrior Basin
|
|
|
126,285 |
|
|
|
|
|
|
|
|
|
|
|
126,285 |
|
Total
|
|
|
1,693,819 |
|
|
|
78,075,920 |
|
|
|
6,750,951 |
|
|
|
2,202,780 |
|
Estimated
net quantities of proved natural gas and oil (including condensate and NGLs)
reserves at December 31, 2008 and 2007 and changes in the reserves during 2008
and 2007 are shown in Note 17 of the Notes to Consolidated Financial Statements
included under Item 8.
HighMount’s
properties typically have relatively long reserve lives, high well completion
success rates and predictable production profiles. Based on December 31,
2008 proved reserves and HighMount’s average production from these properties
during 2008, the average reserve-to-production index of HighMount’s proved
reserves is 20 years.
In order
to replenish reserves as they are depleted by production, and to increase
reserves, HighMount further develops its existing acreage by drilling new wells
and, where available, employing new technologies and drilling strategies
designed to enhance production from existing wells. HighMount seeks to
opportunistically acquire additional acreage in the Permian Basin, Antrim Shale
and Black Warrior Basin, as well as other locations where its management has
identified an opportunity.
HighMount
engaged in the drilling activity presented in the following table. All wells
drilled during 2008 and 2007 were development wells.
Year
Ended December 31
|
|
2008
|
|
|
2007 (a)
|
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Productive
Wells
|
|
|
|
|
|
|
|
|
|
|
|
|
Permian
Basin
|
|
|
369 |
|
|
|
363.5 |
|
|
|
196 |
|
|
|
191.5 |
|
Antrim
Shale
|
|
|
59 |
|
|
|
22.7 |
|
|
|
5 |
|
|
|
3.7 |
|
Black
Warrior Basin
|
|
|
61 |
|
|
|
42.9 |
|
|
|
35 |
|
|
|
24.5 |
|
Total
Productive Wells
|
|
|
489 |
|
|
|
429.1 |
|
|
|
236 |
|
|
|
219.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dry
Wells
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permian
Basin
|
|
|
9 |
|
|
|
9.0 |
|
|
|
6 |
|
|
|
6.0 |
|
Total
Dry Wells
|
|
|
9 |
|
|
|
9.0 |
|
|
|
6 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Completed Wells
|
|
|
498 |
|
|
|
438.1 |
|
|
|
242 |
|
|
|
225.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wells
in Progress
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permian
Basin
|
|
|
32 |
|
|
|
31.9 |
|
|
|
12 |
|
|
|
12.0 |
|
Antrim
Shale
|
|
|
2 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
Black
Warrior Basin
|
|
|
1 |
|
|
|
1.0 |
|
|
|
7 |
|
|
|
4.9 |
|
Total
Wells in Progress
|
|
|
35 |
|
|
|
33.1 |
|
|
|
19 |
|
|
|
16.9 |
|
(a)
|
HighMount
commenced operations on July 31,
2007.
|
Item 1.
Business
HighMount
Exploration & Production LLC -
(Continued)
Acreage: As of
December 31, 2008, HighMount owned interests in developed and undeveloped
acreage in the locations set forth in the table below:
|
|
Developed
Acreage
|
|
|
Undeveloped
Acreage
|
|
|
Total
Acreage
|
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permian Basin
|
|
|
601,194 |
|
|
|
459,577 |
|
|
|
244,034 |
|
|
|
99,675 |
|
|
|
845,228 |
|
|
|
559,252 |
|
Antrim
Shale
|
|
|
240,478 |
|
|
|
108,490 |
|
|
|
12,114 |
|
|
|
2,300 |
|
|
|
252,592 |
|
|
|
110,790 |
|
Black Warrior Basin
|
|
|
101,293 |
|
|
|
72,064 |
|
|
|
415,909 |
|
|
|
264,634 |
|
|
|
517,202 |
|
|
|
336,698 |
|
Total
|
|
|
942,965 |
|
|
|
640,131 |
|
|
|
672,057 |
|
|
|
366,609 |
|
|
|
1,615,022 |
|
|
|
1,006,740 |
|
Production and
Sales: HighMount’s production and sales volumes are as
follows:
Year
Ended December 31
|
|
2008
|
|
|
2007
(a)
|
|
|
|
|
|
|
|
|
Production:
|
|
|
|
|
|
|
Gas
production (MMcf)
|
|
|
78,858 |
|
|
|
34,008 |
|
Gas
sales (MMcf)
|
|
|
72,525 |
|
|
|
31,420 |
|
NGL
(Bbls)
|
|
|
3,507,384 |
|
|
|
1,512,877 |
|
Oil
(Bbls)
|
|
|
351,272 |
|
|
|
114,014 |
|
Equivalent
(MMcfe)
|
|
|
102,010 |
|
|
|
43,769 |
|
|
|
|
|
|
|
|
|
|
Average
daily production:
|
|
|
|
|
|
|
|
|
Gas
(MMcf)
|
|
|
215 |
|
|
|
222 |
|
NGL
(Bbls)
|
|
|
9,583 |
|
|
|
9,888 |
|
Oil
(Bbls)
|
|
|
960 |
|
|
|
745 |
|
Equivalent
(MMcfe)
|
|
|
279 |
|
|
|
286 |
|
|
|
|
|
|
|
|
|
|
Average
realized price, without hedging results:
|
|
|
|
|
|
|
|
|
Gas
(per Mcf)
|
|
$ |
8.25 |
|
|
$ |
5.95 |
|
NGL
(per Bbl)
|
|
|
51.26 |
|
|
|
51.02 |
|
Oil
(per Bbl)
|
|
|
95.26 |
|
|
|
83.37 |
|
Equivalent
(Mcfe)
|
|
|
8.48 |
|
|
|
6.65 |
|
|
|
|
|
|
|
|
|
|
Average
realized price, with hedging results:
|
|
|
|
|
|
|
|
|
Gas
(per Mcf)
|
|
$ |
7.71 |
|
|
$ |
6.00 |
|
NGL
(per Bbl)
|
|
|
47.73 |
|
|
|
46.41 |
|
Oil
(per Bbl)
|
|
|
95.26 |
|
|
|
83.37 |
|
Equivalent
(Mcfe)
|
|
|
7.94 |
|
|
|
6.51 |
|
|
|
|
|
|
|
|
|
|
Average
cost per Mcfe:
|
|
|
|
|
|
|
|
|
Production
expenses
|
|
$ |
1.04 |
|
|
$ |
0.89 |
|
Production
and ad valorem taxes
|
|
|
0.70 |
|
|
|
0.54 |
|
General
and administrative expenses
|
|
|
0.69 |
|
|
|
0.58 |
|
Depletion
expense
|
|
|
1.58 |
|
|
|
1.41 |
|
(a)
|
HighMount
commenced operations on July 31,
2007.
|
HighMount
utilizes its own marketing and sales personnel to market the natural gas and
NGLs that it produces to large energy companies and intrastate pipelines and
gathering companies. Production is typically sold and delivered directly to a
pipeline at liquid pooling points or at the tailgates of various processing
plants, where it then enters a pipeline system. Permian Basin sales prices are
primarily at a Houston Ship Channel Index, Antrim sales are at a MichCon Index
and Black Warrior sales are at a Southern Natural Gas Pipeline
Index.
Item 1.
Business
HighMount
Exploration & Production LLC -
(Continued)
To manage
the risk of fluctuations in prevailing commodity prices, from time to time
HighMount enters into commodity and basis swaps and costless collars for a
portion of its anticipated production. In the future, HighMount may enter into
other price risk management instruments to hedge pricing risk on a portion of
its projected production.
Wells: As of
December 31, 2008, HighMount had an interest in the following producing
wells:
|
|
Natural
Gas Producing Wells
|
|
|
|
Gross
|
|
|
Net
|
|
|
|
|
|
|
|
|
Permian Basin
|
|
|
6,022 |
|
|
|
5,773 |
|
Antrim
Shale
|
|
|
1,806 |
|
|
|
1,009 |
|
Black Warrior Basin
|
|
|
1,349 |
|
|
|
1,100 |
|
Total
|
|
|
9,177 |
|
|
|
7,882 |
|
Wells
located in the Permian Basin have a typical well depth in the range of 6,000 to
9,000 feet, while wells located in the Antrim Shale and the Black Warrior Basin
have typical well depths of 1,200 feet and 2,000 feet,
respectively.
Competition: HighMount
competes with other oil and gas companies in all aspects of its business,
including acquisition of producing properties and leases and obtaining
goods, services and labor, including drilling rigs and well completion services.
HighMount also competes in the marketing of produced natural gas and NGLs. Some
of HighMount’s competitors have substantially larger financial and other
resources than HighMount. Factors that affect HighMount’s ability to acquire
producing properties include available funds, available information about the
property and standards established by HighMount for minimum projected return on
investment. Competition for sales of natural gas and NGLs is also presented by
alternative fuel sources, including heating oil, imported liquefied natural gas
(“LNG”)and other fossil fuels.
Regulation: All of
HighMount’s operations are conducted onshore in the United States. The U.S. oil
and gas industry, and HighMount’s operations, are subject to regulation at the
federal, state and local level. Such regulation includes requirements with
respect to, among other things: permits to drill and to conduct other
operations; provision of financial assurances (such as bonds) covering drilling
and well operations; the location of wells; the method of drilling and
completing wells; the surface use and restoration of properties upon which wells
are drilled; the plugging and abandoning of wells; the marketing, transportation
and reporting of production; and the valuation and payment of royalties; the
size of drilling and spacing units (regarding the density of wells which may be
drilled in a particular area); the unitization or pooling of properties; maximum
rates of production from wells; venting or flaring of natural gas and the
ratability of production.
The
Federal Energy Policy Act of 2005 amended the Natural Gas Act to prohibit
natural gas market manipulation by any entity, directed the Federal Energy
Regulatory Commission (“FERC”) to facilitate market transparency in the sale or
transportation of physical natural gas and significantly increased the penalties
for violations of the Natural Gas Act of 1938 (“NGA”), the Natural Gas Policy
Act of 1978, or FERC regulations or orders thereunder. In addition, HighMount
owns and operates gas gathering lines and related facilities which are regulated
by the U.S. Department of Transportation (“DOT”) and state agencies with respect
to safety and operating conditions.
HighMount’s
operations are also subject to federal, state and local laws and regulations
concerning the discharge of contaminants into the environment, the generation,
storage, transportation and disposal of contaminants, and the protection of
public health, natural resources, wildlife and the environment. In most
instances, the regulatory requirements relate to the handling and disposal of
drilling and production waste products, water and air pollution control
procedures, and the remediation of petroleum-product contamination. In addition,
HighMount’s operations may require it to obtain permits for, among other things,
air emissions, discharges into surface waters, and the construction and
operation of underground injection wells or surface pits to dispose of produced
saltwater and other non-hazardous oilfield wastes. HighMount could be required,
without regard to fault or the legality of the original disposal, to remove or
remediate previously disposed wastes, to suspend or cease operations in
contaminated areas or to perform remedial well plugging operations or cleanups
to prevent future contamination.
Properties: In
addition to its interests in oil and gas producing properties, HighMount leases
an aggregate of approximately 117,000 square feet of office space in three
locations in Houston, Texas, which includes its corporate
Item 1.
Business
HighMount
Exploration & Production LLC -
(Continued)
headquarters,
and approximately 102,000 square feet of office space in Oklahoma City, Oklahoma
and Traverse City, Michigan which is used in its operations. HighMount also
leases other surface rights and office, warehouse and storage facilities
necessary to operate its business.
BOARDWALK
PIPELINE PARTNERS, LP
Boardwalk
Pipeline Partners, LP (“Boardwalk Pipeline”) is engaged in the interstate
transportation and storage of natural gas. Boardwalk Pipeline accounted for
6.4%, 4.7% and 4.5% of our consolidated total revenue for the years ended
December 31, 2008, 2007 and 2006, respectively.
As of
February 13, 2009, we owned approximately 74% of Boardwalk Pipeline, comprised
of 107,534,609 common units, 22,866,667 class B units and a 2% general partner
interest. In November of 2008, all of our 33,093,878 subordinated units
converted to common units. A wholly owned subsidiary of ours is the general
partner and holds all of Boardwalk Pipeline’s incentive distribution rights,
which entitle the general partner to an increasing percentage of the cash that
is distributed by Boardwalk Pipeline in excess of $0.4025 per unit per
quarter.
Boardwalk
Pipeline owns and operates three interstate natural gas pipeline systems, with
approximately 14,000 miles of pipeline, directly serving customers in 12 states
and indirectly serving customers throughout the northeastern and southeastern
United States through numerous interconnections with unaffiliated pipelines. In
2008, its pipeline systems transported approximately 1.7 Tcf of gas. Average
daily throughput on its pipeline systems during 2008 was approximately 4.8 Bcf.
Boardwalk Pipeline’s natural gas storage facilities are comprised of 11
underground storage fields located in four states with aggregate working gas
capacity of approximately 160.0 Bcf.
As
discussed below, Boardwalk Pipeline is currently undertaking several significant
pipeline and storage expansion projects.
Boardwalk
Pipeline conducts all of its operations through three subsidiaries:
|
·
|
Gulf
Crossing Pipeline Company LLC (“Gulf Crossing”) operates approximately 350
miles of natural gas pipeline, located in Texas and Louisiana having an
initial peak-day delivery capacity of approximately 1.2 Bcf per
day.
|
|
·
|
Gulf
South Pipeline Company, L.P. (“Gulf South”) operates approximately 7,700
miles of natural gas pipeline, located in Texas, Louisiana, Mississippi,
Alabama and Florida having a peak-day delivery capacity of approximately
5.0 Bcf per day, 38 compressor stations having an aggregate of
approximately 378,900 horsepower and two natural gas storage fields
located in Louisiana and Mississippi with aggregate designated working gas
capacity of approximately 83.0 Bcf.
|
|
·
|
Texas
Gas Transmission, LLC (“Texas Gas”) operates approximately 5,950 miles of
natural gas pipeline located in Louisiana, Texas, Arkansas, Mississippi,
Tennessee, Kentucky, Indiana, Ohio and Illinois having a peak-day delivery
capacity of approximately 3.8 Bcf per day, 31 compressor stations having
an aggregate of approximately 552,700 horsepower and nine natural gas
storage fields located in Indiana and Kentucky with aggregate designated
working gas capacity of approximately 77.0
Bcf.
|
Boardwalk
Pipeline transports and stores natural gas for a broad mix of customers,
including marketers, local distribution companies (“LDCs”), producers, electric
power generation plants, interstate and intrastate pipelines and direct
industrial users.
Seasonality: Boardwalk
Pipeline’s revenues can be seasonal in nature, affected by weather and natural
gas price volatility. Weather impacts natural gas demand for power generation
and heating needs, which in turn influences the short term value of
transportation and storage across its pipeline systems. Colder than normal
winters or warmer than normal summers typically result in increased pipeline
transportation revenues. Peak demand for natural gas typically occurs during the
winter months, driven by heating needs. Excluding the impact of Boardwalk
Pipeline’s expansion projects that went into service in 2008, during 2008
approximately 54.0% of Boardwalk Pipeline’s total operating revenues were
recognized in the first and fourth calendar quarters. The effects of seasonality
on Boardwalk Pipeline’s revenues have been mitigated over the past several years
due to the increased use of gas-fired power generation in the
Item 1.
Business
Boardwalk
Pipeline Partners, LP -
(Continued)
summer
months to meet cooling needs, primarily in the Southeast and Midwest. Generally,
revenues from Boardwalk Pipeline’s expansion projects will be less seasonal in
nature due to the structure of the contracts and the fact that the capacity is
held primarily by producers, who are seeking a market for their production.
Boardwalk Pipeline expects the impact of seasonality to further decline in
coming years as the full impact of revenues from its expansion projects is taken
into account.
Regulation: FERC
regulates pipelines under the NGA and the Natural Gas Policy Act of 1978. FERC
regulates, among other things, the rates and charges for the transportation and
storage of natural gas in interstate commerce and the extension, enlargement or
abandonment of facilities under its jurisdiction. Where required, Boardwalk
Pipeline’s operating subsidiaries hold certificates of public convenience and
necessity issued by FERC covering certain of its facilities, activities and
services.
The
maximum rates that may be charged by Boardwalk Pipeline for gas transportation
are established through FERC’s cost-of-service
rate-making process. The maximum rates that may be charged by Boardwalk Pipeline
for storage services on Texas Gas, with the exception of Phase III of the
western Kentucky storage expansion, are also established through FERC’s cost-of-service
rate-making process. Key determinants in the cost-of-service rate-making process
are the costs of providing service, the allowed rate of return, throughput
assumptions, the allocation of costs and the rate design. Texas Gas is
prohibited from placing new rates into effect prior to November 1, 2010, and
neither Gulf South nor Texas Gas has an obligation to file a new rate case. Gulf
Crossing will have to either file a rate case or justify its initial firm
transportation rates within three years after the pipeline is fully placed in
service.
Boardwalk
Pipeline is also regulated by the DOT under the Natural Gas Pipeline Safety Act
of 1968, as amended by Title I of the Pipeline Safety Act of 1979, which
regulates safety requirements in the design, construction, operation and
maintenance of interstate natural gas pipelines. In addition, Boardwalk Pipeline
will require authority from the Pipelines and Hazardous Materials Safety
Administration (“PHMSA”) to operate its expansion pipelines, under a special
permit at higher operating pressures in order to transport all of the volumes
Boardwalk Pipeline has contracted for with customers on its expansion
projects.
Boardwalk
Pipeline’s operations are also subject to extensive federal, state and local
laws and regulations relating to protection of the environment. Such regulations
impose, among other things, restrictions, liabilities and obligations in
connection with the generation, handling, use, storage, transportation,
treatment and disposal of hazardous substances and waste and in connection with
spills, releases and emissions of various substances into the environment.
Environmental regulations also require that Boardwalk Pipeline’s facilities,
sites and other properties be operated, maintained, abandoned and reclaimed to
the satisfaction of applicable regulatory authorities.
Competition:
Boardwalk Pipeline competes with numerous interstate and intrastate pipelines
throughout its service territory to provide transportation and storage services
for its customers. Competition is particularly strong in the Midwest and Gulf
Coast states where Boardwalk Pipeline competes with numerous existing pipelines
and will compete with several new pipeline projects that are under construction,
including the Rockies Express Pipeline that will transport natural gas from
northern Colorado to eastern Ohio and the Mid-Continent Express Pipeline that
would transport gas from Texas to Alabama. The principal elements of competition
among pipelines are available capacity, rates, terms of service, access to
supply and flexibility and reliability of service. Boardwalk Pipeline competes
with these pipelines to maintain current business levels and to serve new demand
and markets. Boardwalk Pipeline also competes with other pipelines for contracts
with producers that would support new growth projects such as its pipeline
expansion projects discussed elsewhere in this Report. In addition, regulators’
continuing efforts to increase competition in the natural gas industry have
increased the natural gas transportation options of Boardwalk Pipeline’s
traditional customers. As a result of the regulators’ policies, segmentation and
capacity release have created an active secondary market which increasingly
competes with Boardwalk Pipeline’s services, particularly on its Texas Gas
system. Additionally, natural gas competes with other forms of energy available
to customers, including electricity, coal and fuel oils. To the extent usage of
natural gas decreases due to competition from other fuel sources, throughput on
Boardwalk Pipeline’s system may decrease and the need for customers to contract
for its services may decrease. Despite these competitive conditions,
substantially all of the operating capacity on Boardwalk Pipeline’s pipeline
systems, including its expansion projects, is sold out with a weighted-average
contract life of over 6 years.
Item 1.
Business
Boardwalk
Pipeline Partners, LP -
(Continued)
Expansion
Projects
Southeast
Expansion: Boardwalk Pipeline has constructed and placed in
service 111 miles of 42-inch pipeline and related compression assets,
originating near Harrisville, Mississippi and extending to an interconnect with
Transcontinental Pipe Line Company (“Transco”) in Choctaw County, Alabama
(“Transco Station 85”). The pipeline currently has 1.8 Bcf of peak-day
transmission capacity. Boardwalk Pipeline has applied to PHMSA for authority to
operate under a special permit that would allow the pipeline to be operated at
higher operating pressures, thereby increasing the peak-day transmission
capacity to 1.9 Bcf per day. Customers have contracted at fixed rates for
substantially all of the operational capacity of this pipeline, with such
contracts having a weighted-average term of approximately 9.3 years (including a
capacity lease agreement with Gulf Crossing). In February of 2009, Boardwalk
Pipeline placed in service the remaining compression assets related to this
project and construction on this project is complete.
Gulf Crossing
Project: In the first quarter of 2009, Boardwalk Pipeline
completed construction and placed in service the pipeline portion of the assets
associated with its Gulf Crossing project, which consists of approximately 357
miles of 42-inch pipeline that begins near Sherman, Texas and proceeds to the
Perryville, Louisiana area. Boardwalk Pipeline expects the initial compression
to be placed in service during the first quarter of 2009, providing Gulf
Crossing with a peak-day transmission capacity of 1.2 Bcf per day. Boardwalk
Pipeline has applied to PHMSA for authority to operate under a special permit
that would allow the pipeline to be operated at higher operating pressures,
thereby increasing its peak-day transmission capacity to 1.4 Bcf per day. The
peak-day transmission capacity would increase from 1.4 Bcf per day to 1.7 Bcf
per day following the construction of additional compression facilities which
Boardwalk Pipeline expects to place in service in the first quarter of 2010,
subject to FERC approval. Customers have contracted at fixed rates for
substantially all of the operational capacity of this pipeline, with such
contracts having a weighted-average term of approximately 9.5
years.
Fayetteville and Greenville
Laterals: Boardwalk Pipeline is constructing two laterals on
its Texas Gas pipeline system to transport gas from the Fayetteville Shale area
in Arkansas to markets directly and indirectly served by its existing interstate
pipelines. The Fayetteville Lateral will originate in Conway County, Arkansas
and proceed southeast through the Bald Knob, Arkansas area to an interconnect
with its Texas Gas mainline in Coahoma County, Mississippi consisting of
approximately 165 miles of 36-inch pipeline. The Greenville Lateral will
originate at the Texas Gas mainline near Greenville, Mississippi, and proceed
east to the Kosciusko, Mississippi area consisting of approximately 95 miles of
36-inch pipeline. The Greenville Lateral will provide customers access to
additional markets, located primarily in the Midwest, Northeast and
Southeast.
In
December of 2008, Boardwalk Pipeline placed in service the header, or first 66
miles, of the Fayetteville Lateral. In January of 2009, Boardwalk Pipeline
placed in service a portion of the Greenville Lateral which originates at the
Texas Gas mainline and continues to an interconnect with the Tennessee 800 line
in Holmes County, Mississippi. Included in the Fayetteville header is a section
of 18-inch pipeline under the Little Red River in Arkansas which will be
replaced with 36-inch pipeline once a new horizontal directional drill is
completed under the river. Boardwalk Pipeline expects the 36-inch pipeline
installation to be completed in the second quarter of 2009. The initial peak-day
transmission capacity of each of these laterals is approximately 0.8 Bcf per
day.
During
2008, Boardwalk Pipeline executed contracts for additional capacity that will
require Boardwalk Pipeline to add compression to increase the peak-day
transmission capacity of these laterals to approximately 1.3 Bcf per day for the
Fayetteville Lateral and 1.0 Bcf per day for the Greenville Lateral. To meet
this requirement Boardwalk Pipeline will add compression facilities to this
project and Boardwalk Pipeline has applied to PHMSA for authority to operate
under a special permit that would allow the Fayetteville Lateral to be operated
at higher operating pressures, in addition to replacing the section of 18-inch
pipeline noted above. Boardwalk Pipeline expects the new compression to be in
service during 2010, subject to FERC approval. Customers have contracted at
fixed rates for substantially all of the operational capacity of these laterals,
with such contracts having a weighted-average term of approximately 9.9
years.
Prior to
placing a new pipeline or lateral in service, Boardwalk Pipeline conducts
extensive tests to ensure that the pipeline can operate safely at normal
operating pressures. Further, to operate at higher operating pressures under the
PHMSA special permits discussed above, Boardwalk Pipeline designs, builds and
conducts additional stringent tests to ensure the pipeline’s integrity. In
performing such tests on one of its pipeline expansions, Boardwalk Pipeline
discovered some anomalies in a small number of pipe segments installed on the
East Texas to Mississippi segment of its Gulf South
Item 1.
Business
Boardwalk
Pipeline Partners, LP -
(Continued)
pipeline
system (the “East Texas Pipeline”). As a result, and as a prudent operator,
Boardwalk Pipeline elected to reduce operating pressure on this pipeline to
20.0% below its previous operating level, which was below the pipeline’s maximum
non-special permit operating pressure, while Boardwalk Pipeline investigates
further and replaces the affected pipe segments where necessary. Boardwalk
Pipeline has notified PHMSA of these anomalies and its ongoing testing and
remediation plans, and Boardwalk Pipeline will keep PHMSA informed as its
activities progress. See Item 1A – Risk Factors, and Item 7 – MD&A – Results
of Operations – Boardwalk Pipeline – Reduction of Operating Pressures on
Expansion Pipelines; Applications for Special Permits from PHMSA.
Western Kentucky Storage Expansion
Phase III: Boardwalk Pipeline is developing 8.3 Bcf of new
working gas capacity at its Midland storage facility, for which FERC has granted
Boardwalk Pipeline market-based rate authority. This expansion is supported by
10-year precedent agreements for 5.1 Bcf of storage capacity. In the fourth
quarter of 2008, Boardwalk Pipeline placed in service approximately 5.4 Bcf of
storage capacity. Boardwalk Pipeline is in discussion with potential customers
for the remaining capacity which it expects to place in service in the fourth
quarter of 2009.
Properties: Boardwalk
Pipeline is headquartered in approximately 103,000 square feet of leased office
space located in Houston, Texas. Boardwalk Pipeline also has approximately
108,000 square feet of office space in Owensboro, Kentucky in a building that it
owns. Boardwalk Pipeline’s operating subsidiaries own their respective pipeline
systems in fee. However, a substantial portion of these systems is constructed
and maintained on property owned by others pursuant to rights-of-way, easements,
permits, licenses or consents.
Item 1.
Business
LOEWS
HOTELS HOLDING CORPORATION
The
subsidiaries of Loews Hotels Holding Corporation (“Loews Hotels”), our wholly
owned subsidiary, presently operate the following 18 hotels. Loews Hotels
accounted for 2.9%, 2.7% and 2.7% of our consolidated total revenue for the
years ended December 31, 2008, 2007 and 2006, respectively.
|
Number
of
|
|
Name
and Location
|
Rooms
|
Owned,
Leased or Managed
|
|
|
|
Loews
Annapolis Hotel
|
220
|
|
Owned
|
Annapolis,
Maryland
|
|
|
|
Loews Coronado Bay
Resort
|
440
|
|
Land
lease expiring 2034
|
San
Diego, California
|
|
|
|
Loews
Denver Hotel
|
185
|
|
Owned
|
Denver,
Colorado
|
|
|
|
Don CeSar Beach
Resort, a Loews Hotel
|
347
|
|
Management
contract (a)(b)
|
St.
Pete Beach, Florida
|
|
|
|
Hard
Rock Hotel,
|
650
|
|
Management
contract (c)
|
at
Universal Orlando
|
|
|
|
Orlando,
Florida
|
|
|
|
Loews Lake Las
Vegas Resort
|
493
|
|
Management
contract (d)
|
Henderson,
Nevada
|
|
|
|
Loews
Le Concorde Hotel
|
405
|
|
Land
lease expiring 2069
|
Quebec
City, Canada
|
|
|
|
Loews
Miami Beach Hotel
|
790
|
|
Owned
|
Miami
Beach, Florida
|
|
|
|
Loews
New Orleans Hotel
|
285
|
|
Management
contract expiring 2018 (a)
|
New
Orleans, Louisiana
|
|
|
|
Loews
Philadelphia Hotel
|
585
|
|
Owned
|
Philadelphia,
Pennsylvania
|
|
|
|
The
Madison, a Loews Hotel
|
353
|
|
Management
contract expiring 2021 (a)
|
Washington,
D.C.
|
|
|
|
Loews
Portofino Bay Hotel,
|
750
|
|
Management
contract (c)
|
at
Universal Orlando
|
|
|
|
Orlando,
Florida
|
|
|
|
Loews
Regency Hotel
|
350
|
|
Land
lease expiring 2013, with renewal option
|
New
York, New York
|
|
|
for
47 years
|
Loews
Royal Pacific Resort
|
1,000
|
|
Management
contract (c)
|
at
Universal Orlando
|
|
|
|
Orlando,
Florida
|
|
|
|
Loews
Santa Monica Beach Hotel
|
340
|
|
Management
contract expiring 2018, with
|
Santa
Monica, California
|
|
|
renewal
option for 5 years (a)
|
Loews
Vanderbilt Hotel
|
340
|
|
Owned
|
Nashville,
Tennessee
|
|
|
|
Loews Ventana Canyon
Resort
|
400
|
|
Management
contract expiring 2019 (a)
|
Tucson,
Arizona
|
|
|
|
Loews
Hotel Vogue
|
140
|
|
Owned
|
Montreal,
Canada
|
|
|
|
(a)
|
These
management contracts are subject to termination
rights.
|
(b)
|
A
Loews Hotels subsidiary is a 20% owner of the hotel, which is being
operated by Loews Hotels pursuant to a management
contract.
|
(c)
|
A
Loews Hotels subsidiary is a 50% owner of these hotels located at the
Universal Orlando theme park, through a joint venture with Universal
Studios and the Rank Group. The hotels are on land leased by the joint
venture from the resort’s owners and are operated by Loews Hotels pursuant
to a management contract.
|
(d)
|
A
Loews Hotels subsidiary is a 25% owner of the hotel through a joint
venture with an institutional investor. This hotel is operated by Loews
Hotels pursuant to a management
contract.
|
Item 1.
Business
Loews
Hotels Holding Corporation -
(Continued)
The
hotels owned by Loews Hotels are subject to mortgage indebtedness totaling
approximately $226 million at December 31, 2008 with interest rates ranging from
4.5% to 6.3%, and maturing between 2009 and 2028. In addition, certain hotels
are held under leases which are subject to formula derived rental increases,
with rentals aggregating approximately $8 million for the year ended December
31, 2008.
Competition
from other hotels and lodging facilities is vigorous in all areas in which Loews
Hotels operates. The demand for hotel rooms in many areas is seasonal and
dependent on general and local economic conditions. Loews Hotels properties also
compete with facilities offering similar services in locations other than those
in which its hotels are located. Competition among luxury hotels is based
primarily on location and service. Competition among resort and commercial
hotels is based on price as well as location and service. Because of the
competitive nature of the industry, hotels must continually make expenditures
for updating, refurnishing and repairs and maintenance, in order to prevent
competitive obsolescence.
In August
of 2007, a joint venture, of which a Loews Hotels subsidiary is a 25% owner,
entered into an agreement to purchase, when completed, a hotel property
currently being constructed as part of a mixed use development project in
midtown Atlanta. Loews Hotels expects to open the hotel in 2010 and operate the
hotel pursuant to a management contract.
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 our 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 our 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 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 Balance Sheets, Consolidated Statements of Income, and Consolidated
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
Item 1.
Business
Separation
of Lorillard -
(Continued)
assets
and liabilities other than those allocated to the former Carolina Group,
including an approximately 38% economic interest in the former Carolina
Group.
EMPLOYEE
RELATIONS
Including
our operating subsidiaries as described below, we employed approximately 19,100
persons at December 31, 2008. We, and our subsidiaries, have experienced
satisfactory labor relations.
CNA
employed approximately 9,000 persons.
Diamond
Offshore employed approximately 5,700 persons, including international crew
personnel furnished through independent labor contractors.
HighMount
employed approximately 650 persons.
Boardwalk
Pipeline employed approximately 1,130 persons, approximately 90 of whom are
covered by a collective bargaining agreement.
Loews
Hotels employed approximately 2,350 persons, approximately 800 of whom are union
members covered under collective bargaining agreements.
AVAILABLE
INFORMATION
Our
website address is www.loews.com. We make available, free of charge, through the
website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as
soon as reasonably practicable after these reports are electronically filed with
or furnished to the SEC. Copies of our Code of Business Conduct and Ethics,
Corporate Governance Guidelines, Audit Committee charter, Compensation Committee
charter and Nominating and Governance Committee charter have also been posted
and are available on our website.
Item
1A. RISK FACTORS.
Our
business faces many risks. We have described below some of the more significant
risks which we and our subsidiaries face. There may be additional risks that we
do not yet know of or that we do not currently perceive to be significant that
may also impact our business or the business of our subsidiaries.
Each of
the risks and uncertainties described below could lead to events or
circumstances that have a material adverse effect on our business, results of
operations, cash flows, financial condition or equity and/or the business,
results of operations, financial condition or equity of one or more of our
subsidiaries.
You
should carefully consider and evaluate all of the information included in this
Report and any subsequent reports we may file with the SEC or make available to
the public before investing in any securities issued by us. Our subsidiaries,
CNA Financial Corporation, Diamond Offshore Drilling, Inc. and Boardwalk
Pipeline Partners, LP, are public companies and file reports with the SEC. You
are also cautioned to carefully review and consider the information contained in
the reports filed by those subsidiaries before investing in any of their
securities.
We
are a holding company and derive substantially all of our income and cash flow
from our subsidiaries.
We rely
upon our invested cash balances and distributions from our subsidiaries to
generate the funds necessary to meet our obligations and to declare and pay any
dividends to holders of our common stock. Our subsidiaries are separate and
independent legal entities and have no obligation, contingent or otherwise, to
make funds available to us, whether in the form of loans, dividends or
otherwise. The ability of our subsidiaries to pay dividends to us is also
subject to, among other things, the availability of sufficient 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. Claims of creditors of our subsidiaries will
generally have priority as to the assets of such subsidiaries over our claims
and our creditors and shareholders.
Item 1A.
Risk Factors
Continued
deterioration in the public debt and equity markets could lead to additional
investment losses and lower cash balances at the parent company, which could
impair our ability to fund acquisitions, share buybacks, dividends or other
investments or to fund capital needed by our subsidiaries .
For more
than a year, we have been experiencing severe volatility, illiquidity,
uncertainty and disruption in the capital and credit markets and the overall
economy, including among other things, large bankruptcies, government
intervention in a number of large financial institutions, growing levels of
defaults on indebtedness, recessionary economic conditions and widening of
credit spreads. These conditions resulted in significant realized and unrealized
losses and substantially reduced investment income, including a significant
decline in income from limited partnership investments, at CNA and the parent
company during 2008. Continued deterioration of the economy and the credit and
capital markets, including lower pricing levels of fixed income and equity
securities, could result in further such losses and further reduced investment
income, which would among other things reduce the cash balances available at the
parent company. Please see MD&A under Item 7 of this Report for
additional information on our Investments.
Certain
of our operating subsidiaries require substantial amounts of capital or other
financial support from time to time to fund expansions, enhance capital,
refinance indebtedness or 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 credit or
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 further
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. In addition,
significantly reduced levels of cash at the parent company could make us unable
or unwilling to fund future capital needs of our subsidiaries and result in a
downgrade of our ratings by the major credit rating agencies.
We
could have 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.
Risks
Related to Us and Our Subsidiary, CNA Financial Corporation
CNA
may continue to incur significant realized and unrealized investment losses and
volatility in net investment income arising from the severe disruption in the
capital and credit markets.
CNA
maintains a large portfolio of fixed income and equity securities, including
large amounts of corporate and government issued debt securities, collateralized
mortgage obligations, asset-backed and other structured securities, equity and
equity-based securities and investments in limited partnerships which pursue a
variety of long and short investment strategies across a broad array of asset
classes. CNA’s investment portfolio supports its obligation to pay future
insurance claims and provides investment returns which are an important part of
CNA’s overall profitability.
For more
than a year, capital and credit markets have experienced severe levels of
volatility, illiquidity, uncertainty and overall disruption. Despite government
intervention, market conditions have led to the merger or failure of a number of
prominent financial institutions and government sponsored entities, sharply
increased unemployment and reduced economic activity. In addition, significant
declines in the value of assets and securities that began with the residential
sub-prime mortgage crisis have spread to nearly all classes of investments,
including most of those held in CNA’s investment portfolio. As a result, during
2008 CNA incurred significant realized and unrealized losses in its
investment
Item 1A.
Risk Factors
portfolio
and experienced substantial declines in its net investment income which have
materially adversely impacted the Company’s results of operations and
stockholders’ equity.
In
addition, certain categories of CNA’s investments are particularly subject to
significant exposures in the current market environment. Although CNA normally
expects limited partnership investments to provide higher returns over time,
since 2008, they have presented greater risk, greater volatility and higher
illiquidity than CNA’s fixed income investments. Commercial mortgage-backed
securities (“CMBS”) also present greater risks due to the credit deterioration
in the commercial real estate market. Notably, even senior tranches of CMBS have
experienced significant price erosion due to market concerns involving the
valuation and credit performance of commercial real estate.
If these
economic and market conditions persist, CNA may continue to experience reduced
investment income and to incur substantial additional realized and unrealized
losses on its investments. As a result, the Company’s results of operations, and
CNA’s business, insurer financial strength and debt ratings could be materially
adversely impacted. Additional information on CNA’s investment portfolio is
included in the MD&A under Item 7 and Note 3 of the Notes to Consolidated
Financial Statements included under Item 8.
CNA
may continue to incur underwriting losses as a result of the global economic
crisis.
Overall
global economic conditions may continue to be recessionary and highly
unfavorable. Although many lines of CNA’s business have both direct and indirect
exposure to this economic crisis, the exposure is especially high for the lines
of business that provide management and professional liability insurance, as
well as surety bonds, to businesses engaged in real estate, financial services
and professional services. As a result, CNA has experienced and may continue to
experience unanticipated underwriting losses with respect to these lines of
business. Additionally, CNA could experience declines in its premium volume and
related insurance losses. Consequently, our results of operations, stockholders’
equity and CNA’s business, insurer financial strength and debt ratings could be
adversely impacted.
CNA’s
valuation of investments and impairment of securities requires significant
judgment.
CNA’s
investment portfolio is exposed to various risks such as interest rate, market
and credit risks, many of which are unpredictable. CNA exercises significant
judgment in analyzing these risks and in validating fair values provided by
third parties for securities in its investment portfolio that are not regularly
traded. CNA also exercises significant judgment in determining whether the
impairment of particular investments is temporary or other-than-temporary.
Securities with exposure to sub-prime residential mortgage collateral or
Alternative A (“Alt-A”) collateral are particularly sensitive to fairly small
changes in actual collateral performance and assumptions as to future collateral
performance.
During
2008, CNA incurred significant unrealized losses in its investment portfolio. In
addition, CNA recorded significant other-than-temporary impairment (“OTTI”)
losses primarily in the corporate and other taxable bonds, asset-backed bonds
and non-redeemable preferred equity securities sectors.
Due to
the inherent uncertainties involved with these types of judgments, CNA may incur
further unrealized losses and conclude that further other-than-temporary write
downs of its investments are required. As a result, the Company’s results of
operations, and CNA’s business, insurer financial strength and debt ratings
could be materially adversely impacted. Additional information on CNA’s
investment portfolio is included in the MD&A under Item 7 and Note 3 of the
Notes to Consolidated Financial Statements included under Item 8.
CNA
is unable to predict the impact of governmental efforts taken and proposed to be
taken in response to the economic and credit crisis.
The
Federal government has implemented various measures, including the establishment
of the Troubled Assets Relief Program pursuant to the Emergency Economic
Stabilization Act of 2008, in an effort to deal with the ongoing economic and
credit crisis. In addition, there are numerous proposals for further
legislative and regulatory actions at both the Federal and state levels,
particularly with respect to the financial services industry. Since
these new laws and regulations could involve critical matters affecting CNA’s
operations, they may have an impact on CNA’s business and its overall financial
condition. Due to this significant uncertainty, CNA is unable to
determine whether its actions in response to
Item 1A.
Risk Factors
these
governmental efforts will be effective or to predict with any certainty the
overall impact these governmental efforts will have on it.
CNA
may continue to incur significant losses from its investments in financial
institutions.
CNA’s
investment portfolio includes preferred stock and hybrid debt securities issued
by banks and other financial institutions. To date, government sponsored efforts
to recapitalize the financial system both in the United States, as well as
overseas, have been inconsistent and unpredictable. The uncertainty surrounding
these efforts and their potential impact on existing financial institution
securities has caused these securities to experience adverse price movement and
rating agency downgrades. If this uncertainty continues or if regulatory
decisions negatively affect CNA’s investments in financial institutions, CNA may
continue to incur significant losses in its investment portfolio. As a result,
the Company’s results of operations and CNA’s, business, insurer financial
strength and debt ratings could be materially adversely impacted. Additional
information on CNA’s investment portfolio is included in the MD&A under Item
7 and Note 3 of the Notes to Consolidated Financial Statements included under
Item 8.
Rating
agencies may downgrade their ratings for CNA, and thereby adversely affect CNA’s
ability to write insurance at competitive rates or at all.
Ratings
are an important factor in establishing the competitive position of insurance
companies. CNA’s insurance company subsidiaries, as well as its public debt, are
rated by rating agencies, namely, A.M. Best Company, Moody’s Investors Service
and Standard and Poor’s. Ratings reflect the rating agency’s opinions of an
insurance company’s financial strength, capital adequacy, operating performance,
strategic position and ability to meet its obligations to policyholders and
debtholders.
Due to
the intense competitive environment in which CNA operates, the severe disruption
in the capital and credit markets, the uncertainty in determining reserves and
the potential for CNA to take material unfavorable development in the future,
and possible changes in the methodology or criteria applied by the rating
agencies, the rating agencies may take action to lower CNA’s ratings in the
future. If CNA’s property and casualty insurance financial strength ratings were
downgraded below current levels, its business and results of operations could be
materially adversely affected. The severity of the impact on CNA’s business is
dependent on the level of downgrade and, for certain products, which rating
agency takes the rating action. Among the adverse effects in the event of such
downgrades would be the inability to obtain a material volume of business from
certain major insurance brokers, the inability to sell a material volume of
CNA’s insurance products to certain markets, and the required collateralization
of certain future payment obligations or reserves. Recently, Moody’s
and A.M. Best have revised their outlook on CNA from stable to
negative.
In
addition, it is possible that a lowering of our debt ratings by certain of the
rating agencies could result in an adverse impact on CNA’s ratings, independent
of any change in CNA’s circumstances. CNA has entered into several settlement
agreements and assumed reinsurance contracts that require collateralization of
future payment obligations and assumed reserves if its ratings or other specific
criteria fall below certain thresholds. The ratings triggers are generally more
than one level below CNA’s current ratings. Please read information on CNA’s
ratings included in the MD&A under Item 7.
CNA
is subject to capital adequacy requirements and, if it is unable to maintain or
raise sufficient capital to meet these requirements, regulatory agencies may
restrict or prohibit CNA from operating its business.
Insurance
companies such as CNA are subject to risk-based capital standards set by state
regulators to help identify companies that merit further regulatory attention.
These standards apply specified risk factors to various asset, premium and
reserve components of CNA’s statutory capital and surplus reported in CNA’s
statutory basis of accounting financial statements. Current rules require
companies to maintain statutory capital and surplus at a specified minimum level
determined using the risk-based capital formula. If CNA does not meet these
minimum requirements, state regulators may restrict or prohibit CNA from
operating its business. If CNA is required to record a material charge against
earnings in connection with a change in estimates or circumstances, CNA may
violate these minimum capital adequacy requirements unless it is able to raise
sufficient additional capital. Examples of events leading CNA to record a
material charge against earnings include impairment of its investments or
unexpectedly poor claims experience.
During
the fourth quarter of 2008, CNA took several actions to replenish its capital
position and bolster the statutory surplus of its operating insurance
subsidiaries. One of these actions was the November 7, 2008 purchase by Loews
of
Item 1A.
Risk Factors
12,500
shares of CNA’s non-voting cumulative preferred stock (“2008 Senior Preferred”)
for $1.25 billion. Loews, which owned approximately 90% of CNA’s outstanding
common stock as of December 31, 2008, has also provided CNA with substantial
amounts of capital in prior years. Given the ongoing turmoil in the capital and
credit markets, CNA may be limited in its ability to raise significant amounts
of capital on favorable terms or at all. In addition, Loews may be restricted in
its ability or willingness to provide additional capital support to
CNA. As a result, if CNA is in need of additional capital, CNA may be
required to secure this funding from sources other than Loews on terms that are
not favorable.
CNA’s
insurance subsidiaries, upon whom CNA depends for dividends in order to fund its
working capital needs, are limited by state regulators in their ability to pay
dividends.
CNA
Financial Corporation is a holding company and is dependent upon dividends,
loans and other sources of cash from its subsidiaries in order to meet its
obligations. Dividend payments, however, must be approved by the subsidiaries’
domiciliary state departments of insurance and are generally limited to amounts
determined by formula, which varies by state. The formula for the majority of
the states is the greater of 10% of the prior year statutory surplus or the
prior year statutory net income, less the aggregate of all dividends paid during
the twelve months prior to the date of payment. Some states, however, have an
additional stipulation that dividends cannot exceed the prior year’s earned
surplus. If CNA is restricted, by regulatory rule or otherwise, from paying or
receiving inter-company dividends, CNA may not be able to fund its working
capital needs and debt service requirements from available cash. As a result,
CNA would need to look to other sources of capital, which may be more expensive
or may not be available at all.
If
CNA determines that loss reserves are insufficient to cover its estimated
ultimate unpaid liability for claims, CNA may need to increase its loss
reserves.
CNA
maintains loss reserves to cover its estimated ultimate unpaid liability for
claims and claim adjustment expenses for reported and unreported claims and for
future policy benefits. Reserves represent CNA management’s best estimate at a
given point in time. Insurance reserves are not an exact calculation of
liability but instead are complex estimates derived by CNA, generally utilizing
a variety of reserve estimation techniques, from numerous assumptions and
expectations about future events, many of which are highly uncertain, such as
estimates of claims severity, frequency of claims, mortality, morbidity,
expected interest rates, inflation, claims handling and case reserving policies
and procedures, underwriting and pricing policies, changes in the legal and
regulatory environment and the lag time between the occurrence of an insured
event and the time of its ultimate settlement. Many of these uncertainties are
not precisely quantifiable and require significant management judgment. As
trends in underlying claims develop, particularly in so-called “long tail” or
long duration coverages, CNA is sometimes required to add to its reserves. This
is called unfavorable development and results in a charge to CNA’s earnings in
the amount of the added reserves, recorded in the period the change in estimate
is made. These charges can be substantial and can have a material adverse effect
on our results of operations and equity. Please read additional information on
CNA’s reserves included in MD&A under Item 7 and Note 9 of the Notes to
Consolidated Financial Statements included under Item 8.
CNA is
subject to uncertain effects of emerging or potential claims and coverage issues
that arise as industry practices and legal, judicial, social, and other
environmental conditions change. These issues have had, and may continue to
have, a negative effect on CNA’s business by either extending coverage beyond
the original underwriting intent or by increasing the number or size of claims,
resulting in further increases in CNA’s reserves which can have a material
adverse effect on our results of operations and equity. The effects of these and
other unforeseen emerging claim and coverage issues are extremely hard to
predict. Examples of emerging or potential claims and coverage issues
include:
|
·
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increases
in the number and size of claims relating to injuries from medical
products;
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·
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the
effects of accounting and financial reporting scandals and other major
corporate governance failures, which have resulted in an increase in the
number and size of claims, including director and officer and errors and
omissions insurance claims;
|
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·
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class
action litigation relating to claims handling and other
practices;
|
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·
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construction
defect claims, including claims for a broad range of additional insured
endorsements on policies;
|
Item 1A.
Risk Factors
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·
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clergy
abuse claims, including passage of legislation to reopen or extend various
statutes of limitations; and
|
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·
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mass
tort claims, including bodily injury claims related to silica, welding
rods, benzene, lead and various other chemical exposure
claims.
|
In light
of the many uncertainties associated with establishing the estimates and making
the assumptions necessary to establish reserve levels, CNA reviews and changes
its reserve estimates in a regular and ongoing process as experience develops
and further claims are reported and settled. In addition, CNA periodically
undergoes state regulatory financial examinations, including review and analysis
of its reserves. If estimated reserves are insufficient for any reason, the
required increase in reserves would be recorded as a charge against CNA’s
earnings for the period in which reserves are determined to be insufficient.
These changes could be substantial and could materially adversely affect the
Company’s results of operations and equity and CNA’s business, insurer financial
strength and debt ratings.
Loss
reserves for asbestos and environmental pollution are especially difficult to
estimate and may result in more frequent and larger additions to these
reserves.
CNA’s
experience has been that establishing reserves for casualty coverages relating
to A&E claim and claim adjustment expenses are subject to uncertainties that
are greater than those presented by other claims. Estimating the ultimate cost
of both reported and unreported claims are subject to a higher degree of
variability due to a number of additional factors, including among
others:
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·
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coverage
issues, including whether certain costs are covered under the policies and
whether policy limits apply;
|
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·
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inconsistent
court decisions and developing legal
theories;
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·
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continuing
aggressive tactics of plaintiffs’
lawyers;
|
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·
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the
risks and lack of predictability inherent in major
litigation;
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·
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changes
in the volume of asbestos and environmental pollution
claims;
|
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·
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the
impact of the exhaustion of primary limits and the resulting increase in
claims on any umbrella or excess policies CNA has
issued;
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·
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the
number and outcome of direct actions against
CNA;
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·
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CNA’s
ability to recover reinsurance for these claims;
and
|
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·
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changes
in the legal and legislative environment in which CNA
operates.
|
As a
result of this higher degree of variability, CNA has necessarily supplemented
traditional actuarial methods and techniques with additional estimating
techniques and methodologies, many of which involve significant judgment on the
part of CNA. Consequently, CNA may periodically need to record changes in its
claim and claim adjustment expense reserves in the future in these areas in
amounts that could materially adversely affect our results of operations and
equity and CNA’s business, insurer financial strength and debt ratings.
Additional information on A&E claims is included in MD&A under Item 7
and Note 9 of the Notes to Consolidated Financial Statements included under Item
8.
Asbestos claims. The
estimation of reserves for asbestos claims is particularly difficult in light of
the factors noted above. In addition, CNA’s ability to estimate the ultimate
cost of asbestos claims is further complicated by the following:
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·
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inconsistency
of court decisions and jury attitudes, as well as future court
decisions;
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·
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interpretation
of specific policy provisions;
|
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·
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allocation
of liability among insurers and
insureds;
|
Item 1A.
Risk Factors
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·
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missing
policies and proof of coverage;
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·
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the
proliferation of bankruptcy proceedings and attendant
uncertainties;
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novel
theories asserted by policyholders and their legal
counsel;
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the
targeting of a broader range of businesses and entities as
defendants;
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uncertainties
in predicting the number of future claims and which other insureds may be
targeted in the future;
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volatility
in claim numbers and settlement
demands;
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·
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increases
in the number of non-impaired claimants and the extent to which they can
be precluded from making claims;
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the
efforts by insureds to obtain coverage that is not subject to aggregate
limits;
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·
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the
long latency period between asbestos exposure and disease manifestation,
as well as the resulting potential for involvement of multiple policy
periods for individual claims;
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medical
inflation trends;
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the
mix of asbestos-related diseases presented;
and
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the
ability to recover reinsurance.
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In
addition, a number of CNA’s insureds have asserted that their claims for
insurance are not subject to aggregate limits on coverage. If these insureds are
successful in this regard, CNA’s potential liability for their claims would be
unlimited. Some of these insureds contend that their asbestos claims fall within
the so-called “non-products” liability coverage within their policies, rather
than the products liability coverage, and that this “non-products” liability
coverage is not subject to any aggregate limit. It is difficult to predict the
extent to which these claims will succeed and, as a result, the ultimate size of
these claims.
Environmental pollution
claims. The estimation of reserves for environmental pollution
claims is complicated by liability and coverage issues arising from these
claims. CNA and others in the insurance industry are disputing coverage for many
such claims. In addition to the coverage issues noted in the asbestos claims
section above, key coverage issues in environmental pollution claims include the
following:
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whether
cleanup costs are considered damages under the policies (and accordingly
whether CNA would be liable for these
costs);
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the
trigger of coverage, and the allocation of liability among triggered
policies;
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the
applicability of pollution exclusions and owned property
exclusions;
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the
potential for joint and several liability;
and
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the
definition of an occurrence.
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To date,
courts have been inconsistent in their rulings on these issues, thus adding to
the uncertainty of the outcome of many of these claims.
Further,
the scope of federal and state statutes and regulations determining liability
and insurance coverage for environmental pollution liabilities have been the
subject of extensive litigation. In many cases, courts have expanded the scope
of coverage and liability for cleanup costs beyond the original intent of CNA’s
insurance policies. In addition, the
Item 1A.
Risk Factors
standards
for cleanup in environmental pollution matters are unclear, the number of sites
potentially subject to cleanup under applicable laws is unknown and the impact
of various proposals to reform existing statutes and regulations is difficult to
predict.
Catastrophe
losses are unpredictable.
Catastrophe
losses are an inevitable part of CNA’s business. Various events can cause
catastrophe losses, including hurricanes, windstorms, earthquakes, hail,
explosions, severe winter weather, and fires, and their frequency and severity
are inherently unpredictable. In addition, longer-term natural catastrophe
trends may be changing and new types of catastrophe losses may be
developing due to climate change, a phenomenon that has been associated
with extreme weather events linked to rising temperatures, and includes effects
on global weather patterns, greenhouse gases, sea, land and air temperatures,
sea levels, rain, and snow. The extent of CNA’s losses from catastrophes is a
function of both the total amount of its insured exposures in the affected areas
and the severity of the events themselves. In addition, as in the case of
catastrophe losses generally, it can take a long time for the ultimate cost to
CNA to be finally determined. As its claim experience develops on a particular
catastrophe, CNA may be required to adjust reserves, or take unfavorable
development, to reflect its revised estimates of the total cost of claims. CNA
believes that it could incur significant catastrophe losses in the future.
Therefore, our results of operations and equity and CNA’s business, insurer
financial strength and debt ratings could be materially adversely impacted.
Please read information on catastrophe losses included in the MD&A under
Item 7 and Note 9 of the Notes to Consolidated Financial Statements included
under Item 8.
CNA’s
key assumptions used to determine reserves and deferred acquisition costs for
its long term care product offerings could vary significantly from actual
experience.
CNA’s
reserves and deferred acquisition costs for its long term care product offerings
are based on certain key assumptions including morbidity, which is the frequency
and severity of illness, sickness and diseases contracted, policy persistency,
which is the percentage of policies remaining in force, interest rates, and
future health care cost trends. If actual experience differs from these
assumptions, the deferred acquisition asset may not be fully realized and the
reserves may not be adequate, requiring CNA to add to reserves, or take
unfavorable development. Therefore, our results of operations and equity and
CNA’s business, insurer financial strength and debt ratings could be materially
adversely impacted.
CNA’s
premium writings and profitability are affected by the availability and cost of
reinsurance.
CNA
purchases reinsurance to help manage its exposure to risk. Under CNA’s
reinsurance arrangements, another insurer assumes a specified portion of CNA’s
claim and claim adjustment expenses in exchange for a specified portion of
policy premiums. Market conditions determine the availability and cost of the
reinsurance protection CNA purchases, which affects the level of CNA’s business
and profitability, as well as the level and types of risk CNA retains. If CNA is
unable to obtain sufficient reinsurance at a cost CNA deems acceptable, CNA may
be unwilling to bear the increased risk and would reduce the level of CNA’s
underwriting commitments. Therefore, our financial results of operations could
be materially adversely impacted. Please read information on reinsurance
included in MD&A under Item 7 and Note 19 of the Notes to Consolidated
Financial Statements included under Item 8.
CNA
may not be able to collect amounts owed to it by reinsurers.
CNA has
significant amounts recoverable from reinsurers which are reported as
receivables in the balance sheets and estimated in a manner consistent with
claim and claim adjustment expense reserves or future policy benefits reserves.
The ceding of insurance does not, however, discharge CNA’s primary liability for
claims. As a result, CNA is subject to credit risk relating to its ability to
recover amounts due from reinsurers. Certain of CNA’s reinsurance carriers have
experienced deteriorating financial conditions or have been downgraded by rating
agencies. A continuation or worsening of the current highly unfavorable global
economic conditions, along with the severe disruptions in the capital and credit
markets, could similarly impact all of CNA’s other reinsurers. In addition,
reinsurers could dispute amounts which CNA believes are due to it. If CNA is not
able to collect the amounts due to it from reinsurers, its claims expenses will
be higher. Please read information on reinsurance included in the MD&A under
Item 7 and Note 19 of the Notes to Consolidated Financial Statements included
under Item 8.
Item 1A.
Risk Factors
Risks
Related to Us and Our Subsidiary, Diamond Offshore Drilling, Inc.
Diamond
Offshore’s business depends on the level of activity in the oil and gas
industry, which is significantly affected by volatile oil and gas
prices.
Diamond
Offshore’s business depends on the level of activity in offshore oil and gas
exploration, development and production in markets worldwide. Worldwide demand
for oil and gas, oil and gas prices, market expectations of potential changes in
these prices and a variety of political and economic factors significantly
affect this level of activity. However, higher or lower commodity demand and
prices do not necessarily translate into increased or decreased drilling
activity since Diamond Offshore’s customers’ project development time, reserve
replacement needs, as well as expectations of future commodity demand and prices
all combine to drive demand for Diamond Offshore’s rigs. Oil and gas prices are
extremely volatile and are affected by numerous factors beyond Diamond
Offshore’s control, including:
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worldwide
demand for oil and gas;
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the
ability of the Organization of Petroleum Exporting Countries, commonly
called OPEC, to set and maintain production levels and
pricing;
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the
level of production in non-OPEC
countries;
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the
worldwide political and military environment, including uncertainty or
instability resulting from an escalation or additional outbreak of armed
hostilities in the Middle East, other oil-producing regions or other
geographic areas, further acts of terrorism in the United States or
elsewhere;
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the
worldwide economic environment or economic trends, such as
recessions;
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the
cost of exploring for, producing and delivering oil and
gas;
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the
discovery rate of new oil and gas
reserves;
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the
rate of decline of existing and new oil and gas
reserves;
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available
pipeline and other oil and gas transportation
capacity;
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the
ability of oil and gas companies to raise
capital;
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weather
conditions in the United States and
elsewhere;
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the
policies of various governments regarding exploration and development of
their oil and gas reserves;
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development
and exploitation of alternative
fuels;
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domestic
and foreign tax policy; and
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advances
in exploration and development
technology.
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The
current global financial and credit crisis may have a negative impact on Diamond
Offshore’s business and financial condition.
The
recent worldwide financial and credit crisis has reduced the availability of
liquidity and credit to fund the continuation and expansion of industrial
business operations. The continued shortage of liquidity and credit combined
with recent substantial losses in equity markets could lead to an extended
worldwide economic recession. Such deterioration has resulted in reduced demand
for crude oil and natural gas, exploration and production activity and offshore
drilling services that could lead to declining dayrates earned by Diamond
Offshore’s drilling rigs and a decrease in new contract activity. In addition,
the current credit crisis and recession have had and could continue to have an
impact on Diamond Offshore’s customers and suppliers, including among other
things, causing them to fail to meet their
Item 1A.
Risk Factors
obligations
to Diamond Offshore. Similarly, the current credit crisis could affect lenders
participating in Diamond Offshore’s credit facility, making them unable to
fulfill their commitments and obligations. The current credit crisis
could also limit Diamond Offshore’s ability to secure additional financing, if
needed, due to difficulties accessing the capital markets, which could limit its
ability to react to changing business and economic conditions.
Diamond
Offshore’s industry is cyclical.
Diamond
Offshore’s industry has historically been cyclical. There have been periods of
high demand, short rig supply and high dayrates, followed by periods of lower
demand, excess rig supply and low dayrates. Diamond Offshore cannot predict the
timing or duration of such business cycles. Periods of excess rig supply
intensify the competition in the industry and often result in rigs being idle
for long periods of time. In response to contraction in demand for Diamond
Offshore’s services, it may be required to idle rigs or to enter into lower rate
contracts. Prolonged periods of low utilization and dayrates could also result
in the recognition of impairment charges on certain of Diamond Offshore’s
drilling rigs if future cash flow estimates, based upon information available to
management at the time, indicate that the carrying value of these rigs may not
be recoverable.
Diamond
Offshore can provide no assurance that its current backlog of contract drilling
revenue will be ultimately realized.
As of
February 5, 2009, Diamond Offshore’s contract drilling backlog was approximately
$10.3 billion for contracted future work extending, in some cases, until 2016.
Contract backlog may include future earnings under both firm commitments and, in
a few instances, anticipated commitments for which definitive agreements have
not yet been executed. Diamond Offshore can provide no assurance that it will be
able to perform under these contracts due to events beyond its control or that
Diamond Offshore will be able to ultimately execute a definitive agreement where
one does not currently exist. In addition, Diamond Offshore can provide no
assurance that its customers will be able to or willing to fulfill their
contractual commitments. Diamond Offshore’s inability to perform under its
contractual obligations or to execute definitive agreements or its customers’
inability to fulfill their contractual commitments may have a material adverse
effect on Diamond Offshore’s business.
Diamond
Offshore relies heavily on a relatively small number of customers.
Diamond
Offshore provides offshore drilling services to a customer base that includes
major and independent oil and gas companies and government-owned oil companies.
However, the number of potential customers has decreased in recent years as a
result of mergers among the major international oil companies and large
independent oil companies. In 2008, Diamond Offshore’s five largest customers in
the aggregate accounted for approximately 40% of its consolidated revenues.
Diamond Offshore expects Petrobras, which accounted for approximately 13.0% of
Diamond Offshore’s consolidated revenues in 2008 to continue to be a significant
customer in 2009. While it is normal for Diamond Offshore’s customer base to
change over time as work programs are completed, the loss of any major customer
may have a material adverse effect on Diamond Offshore’s business.
The
terms of some of Diamond Offshore’s dayrate drilling contracts may limit its
ability to benefit from increasing dayrates in an improving market or to
preserve dayrates and utilization during periods of decreasing
dayrates.
The
duration of offshore drilling contracts is generally determined by customer
requirements and, to a lesser extent, the respective management strategies of
the offshore drilling contractors. In periods of rising demand for offshore
rigs, contractors typically prefer shorter contracts that allow them to more
quickly profit from increasing dayrates. In contrast, during these periods
customers with reasonably definite drilling programs typically prefer longer
term contracts to maintain dayrate prices at a consistent level. Conversely, in
periods of decreasing demand for offshore rigs, contractors generally prefer
longer term contracts, but often at flat or slightly lower dayrates to preserve
dayrates at existing levels and ensure utilization, while customers prefer
shorter contracts that allow them to more quickly obtain the benefit of lower
dayrates.
To the
extent possible within the scope of its customer’s requirements, Diamond
Offshore seeks to have a foundation of these long-term contracts with a
reasonable balance of shorter term exposure to the spot market in an attempt to
maintain upside potential while endeavoring to limit the downside impact of a
potential decline in the market. However, Diamond Offshore can provide no
assurance that it will be able to achieve or maintain such a balance from time
to time.
Item 1A.
Risk Factors
Diamond
Offshore’s contracts for its drilling units are generally fixed dayrate
contracts, and increases in Diamond Offshore’s operating costs could adversely
affect the profitability of those contracts.
Diamond
Offshore’s contracts for its drilling units provide for the payment of a fixed
dayrate per rig operating day, although some contracts do provide for a limited
escalation in dayrate due to increased operating costs incurred. Many of Diamond
Offshore’s operating costs, such as labor costs, are unpredictable and fluctuate
based on events beyond Diamond Offshore’s control. The gross margin that Diamond
Offshore realizes on these fixed dayrate contracts will fluctuate based on
variations in Diamond Offshore’s operating costs over the terms of the
contracts. In addition, for contracts with dayrate escalation clauses, Diamond
Offshore may be unable to recover increased or unforeseen costs from its
customers.
Diamond
Offshore’s drilling contracts may be terminated due to events beyond its
control.
Diamond
Offshore’s customers may terminate some of their drilling contracts if the
drilling unit is destroyed or lost or if drilling operations are suspended for a
specified period of time as a result of a breakdown of major equipment or, in
some cases, due to other events beyond the control of either party. In addition,
some of Diamond Offshore’s drilling contracts permit the customer to terminate
the contract after specified notice periods by tendering contractually specified
termination amounts. These termination payments may not fully compensate Diamond
Offshore for the loss of a contract. In addition, the early termination of a
contract may result in a rig being idle for an extended period of
time.
Diamond
Offshore’s business involves numerous operating hazards and Diamond Offshore is
not fully insured against all of them.
Diamond
Offshore’s operations are subject to the usual hazards inherent in drilling for
oil and gas offshore, such as blowouts, reservoir damage, loss of production,
loss of well control, punchthroughs, craterings and natural disasters such as
hurricanes or fires. The occurrence of these events could result in the
suspension of drilling operations, damage to or destruction of the equipment
involved and injury or death to rig personnel, damage to producing or
potentially productive oil and gas formations and environmental damage.
Operations also may be suspended because of machinery breakdowns, abnormal
drilling conditions, failure of subcontractors to perform or supply goods or
services or personnel shortages. In addition, offshore drilling operators are
subject to perils peculiar to marine operations, including capsizing, grounding,
collision and loss or damage from severe weather. Damage to the environment
could also result from our operations, particularly through oil spillage or
extensive uncontrolled fires. Diamond Offshore may also be subject to damage
claims by oil and gas companies or other parties.
Pollution
and environmental risks generally are not fully insurable, and Diamond Offshore
does not typically retain loss-of-hire insurance policies to cover its rigs.
Diamond Offshore’s insurance policies and contractual rights to indemnity may
not adequately cover its losses, or may have exclusions of coverage for some
losses. Diamond Offshore does not have insurance coverage or rights to indemnity
for all risks, including, among other things, liability risk for certain amounts
of excess coverage and certain physical
damage risk. If a significant accident or other event occurs and is not fully
covered by insurance or contractual indemnity, it could adversely affect our
financial position, results of operations and cash flows. There can be no
assurance that Diamond Offshore will continue to carry the insurance it
currently maintains or that those parties with contractual obligations to
indemnify Diamond Offshore will necessarily be financially able to indemnify it
against all these risks. In addition, no assurance can be made that Diamond
Offshore will be able to maintain adequate insurance in the future at rates it
considers to be reasonable or that it will be able to obtain insurance against
some risks.
Diamond
Offshore is self-insured for a portion of physical damage to rigs and equipment
caused by named windstorms in the U.S. Gulf of Mexico.
For
physical damage due to named windstorms in the U.S. Gulf of Mexico, Diamond
Offshore’s deductible is $75 million per occurrence (or lower for some rigs if
they are declared a constructive total loss) with an annual aggregate limit of
$125 million. Accordingly, Diamond Offshore’s insurance coverage for all
physical damage to its rigs and equipment caused by named windstorms in the U.S.
Gulf of Mexico for the policy period that expires May 1, 2009 is limited to $125
million.
Item 1A.
Risk Factors
Diamond
Offshore’s international operations involve additional risks not associated with
domestic operations.
Diamond
Offshore operates in various regions throughout the world that may expose it to
political and other uncertainties, including risks of:
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terrorist
acts, war and civil disturbances;
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piracy
or assaults on property or
personnel;
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kidnapping
of personnel;
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expropriation
of property or equipment;
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renegotiation
or nullification of existing
contracts;
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changing
political conditions;
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foreign
and domestic monetary policies;
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the
inability to repatriate income or
capital;
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fluctuations
in currency exchange rates;
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regulatory
or financial requirements to comply with foreign bureaucratic
actions;
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travel
limitations or operational problems caused by public health threats;
and
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changing
taxation policies.
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In
addition, international contract drilling operations are subject to various laws
and regulations in countries in which Diamond Offshore operates, including laws
and regulations relating to:
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the
equipping and operation of drilling
units;
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repatriation
of foreign earnings;
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oil
and gas exploration and
development;
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taxation
of offshore earnings and earnings of expatriate personnel;
and
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use
and compensation of local employees and suppliers by foreign
contractors.
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Some
foreign governments favor or effectively require the awarding of drilling
contracts to local contractors, require use of a local agent or require foreign
contractors to employ citizens of, or purchase supplies from, a particular
jurisdiction. These practices may adversely affect Diamond Offshore’s ability to
compete in those regions. It is difficult to predict what governmental
regulations may be enacted in the future that could adversely affect the
international drilling industry. The actions of foreign governments, including
initiatives by OPEC, may adversely affect Diamond Offshore’s ability to
compete.
Item 1A.
Risk Factors
Diamond
Offshore’s drilling contracts offshore Mexico expose it to greater risks than
they normally assume.
Diamond
Offshore currently operates and expects to continue to operate rigs drilling
offshore Mexico for PEMEX - Exploracion Y Produccion (“PEMEX”), the national oil
company of Mexico. The terms of these contracts expose Diamond Offshore to
greater risks than they normally assume, such as exposure to greater
environmental liability. In addition, each contract can be terminated
by PEMEX on 30 days notice, contractually or by statute, subject to certain
conditions.
Fluctuations
in exchange rates and nonconvertibility of currencies could result in
losses.
Due to
Diamond Offshore’s international operations, Diamond Offshore may experience
currency exchange losses where revenues are received and expenses are paid in
nonconvertible currencies or where it does not hedge an exposure to a foreign
currency. Diamond Offshore may also incur losses as a result of an inability to
collect revenues because of a shortage of convertible currency available to the
country of operation, controls over currency exchange or controls over the
repatriation of income or capital. Diamond Offshore can provide no assurance
that financial hedging arrangements will effectively hedge any foreign currency
fluctuation losses that may arise.
Diamond
Offshore may be required to accrue additional tax liability on certain of its
foreign earnings.
Certain
of Diamond Offshore’s international rigs are owned and operated, directly or
indirectly, by Diamond Offshore International Limited (“DOIL”), a wholly-owned
Cayman Islands subsidiary. Since forming this subsidiary it has been Diamond
Offshore’s intention to indefinitely reinvest the earnings of this subsidiary to
finance foreign operations. During 2007, DOIL made a non-recurring distribution
to its U.S. parent company, and Diamond Offshore recognized U.S. federal income
tax expense on the portion of the distribution that consisted of earnings of the
subsidiary that had not previously been subjected to U.S. federal income tax.
Notwithstanding the non-recurring distribution made in December of 2007, it
remains Diamond Offshore’s intention to indefinitely reinvest the future
earnings of DOIL to finance foreign activities, except for the earnings of
Diamond East Asia Limited, a wholly owned subsidiary of DOIL formed in December
of 2008. It is Diamond Offshore’s intention to repatriate the earnings of
Diamond East Asia Limited, and U.S. income taxes will be provided on such
earnings. Diamond Offshore does not expect to provide for U.S. taxes on any
future earnings generated by DOIL, except to the extent that these earnings are
immediately subjected to U.S. federal income tax or as they relate to Diamond
East Asia Limited. Should a future distribution be made from any unremitted
earnings of this subsidiary, Diamond Offshore may be required to record
additional U.S. income taxes that, if material, could have an adverse effect on
our financial position, results of operations and cash flows.
Rig
conversions, upgrades or new builds may be subject to delays and cost
overruns.
From time
to time, Diamond Offshore may undertake to add new capacity through conversions
or upgrades to rigs or through new construction. Projects of this type are
subject to risks of delay or cost overruns inherent in any large construction
project resulting from numerous factors, including the following:
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shortages
of equipment, materials or skilled
labor;
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unscheduled
delays in the delivery of ordered materials and
equipment;
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unanticipated
cost increases;
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difficulties
in obtaining necessary permits or in meeting permit
conditions;
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design
and engineering problems;
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customer
acceptance delays;
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Item 1A.
Risk Factors
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shipyard
failures or unavailability; and
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failure
or delay of third party service providers and labor
disputes.
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Failure
to complete a rig upgrade or new construction on time, or failure to complete a
rig conversion or new construction in accordance with its design specifications
may, in some circumstances, result in the delay, renegotiation or cancellation
of a drilling contract, resulting in a loss of revenue to Diamond Offshore. If a
drilling contract is terminated under these circumstances, Diamond Offshore may
not be able to secure replacement contract with as favorable terms.
Risks
Related to Us and Our Subsidiary, HighMount Exploration & Production
LLC
HighMount
may not be able to replace reserves and sustain production at current levels.
Replacing reserves is risky and uncertain and requires significant capital
expenditures.
HighMount’s
future success depends largely upon its ability to find, develop or acquire
additional reserves that are economically recoverable. Unless HighMount replaces
the reserves produced through
successful development, exploration or acquisition, its proved reserves will
decline over time. HighMount may not be able to successfully find and produce
reserves economically in the future or to acquire proved reserves at acceptable
costs.
By their
nature, undeveloped reserves are less certain. Thus, HighMount must make a
substantial amount of capital expenditures for the acquisition, exploration and
development of reserves. HighMount expects to fund its capital expenditures with
cash from its operating activities. If HighMount’s cash flow from operations is
not sufficient to fund its capital expenditure budget, there can be no assurance
that additional debt or equity financing will be available or available at
favorable terms to meet those requirements.
Estimates
of natural gas and NGL reserves are uncertain and inherently
imprecise.
Estimating
the volume of proved natural gas and NGL reserves is a complex process and is
not an exact science because of numerous uncertainties inherent in the process.
The process relies on interpretations of available geological, geophysical,
engineering and production data. The extent, quality and reliability of this
technical data can vary. The process also requires certain economic assumptions,
some of which are mandated by the SEC, such as oil and gas prices, drilling and
operating expenses, capital expenditures, taxes and availability of funds.
Therefore, these estimates are inherently imprecise. The accuracy of reserve
estimates is a function of:
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the
quality and quantity of available
data;
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the
interpretation of that data;
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the
accuracy of various mandated economic assumptions;
and
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the
judgment of the persons preparing the
estimate.
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Actual
future production, commodity prices, revenues, taxes, development expenditures,
operating expenses and quantities of recoverable reserves most likely will vary
from HighMount’s estimates. Any significant variance could materially affect the
quantities and present value of HighMount’s reserves. In addition, HighMount may
adjust estimates of proved reserves upward or downward to reflect production
history, results of exploration and development drilling, prevailing commodity
prices and prevailing development expenses.
The
timing of both the production and the expenses from the development and
production of natural gas and NGL properties will affect both the timing of
actual future net cash flows from proved reserves and their present value. In
addition, the 10.0% discount factor, which is required by the SEC to be used in
calculating discounted future net cash flows for reporting purposes, is not
necessarily the most accurate discount factor. The effective interest rate at
various times, and the risks associated with our business, or the oil and gas
industry in general, will affect the accuracy of the 10.0% discount
factor.
Item 1A.
Risk Factors
If
commodity prices decrease, HighMount may be required to take write-downs of the
carrying values of its properties.
HighMount
may be required, under full cost accounting rules, to write down the carrying
value of its natural gas and NGL properties if commodity prices decline
significantly, or if it makes substantial downward adjustments to its estimated
proved reserves, or increases its estimates of development costs or experiences
deterioration in its exploration results. HighMount utilizes the full cost
method of accounting for its exploration and development activities. Under full
cost accounting, HighMount is required to perform a ceiling test each quarter.
The ceiling test is an impairment test and generally establishes a maximum, or
“ceiling,” of the book value of HighMount’s natural gas properties that is equal
to the expected after tax present value (discounted at the required rate of
10.0%) of the future net cash flows from proved reserves, including the effect
of cash flow hedges, calculated using prevailing prices on the last day of the
period.
If the
net book value of HighMount’s exploration and production (“E&P”) properties
(reduced by any related net deferred income tax liability) exceeds its ceiling
limitation, SEC regulations require HighMount to impair or “write down” the book
value of its E&P properties. A write down may not be reversed in future
periods, even though higher natural gas and NGL prices may subsequently increase
the ceiling. Depending on the magnitude of any future impairment, a ceiling test
write down could significantly reduce HighMount’s income, or produce a loss. As
ceiling test computations involve the prevailing price on the last day of the
quarter, it is impossible to predict the timing and magnitude of any future
impairment. Additional information on the ceiling test is included in Note 8 of
the Notes to Consolidated Financial Statements included under Item
8.
HighMount
may incur significant goodwill impairment charges if market conditions
deteriorate.
HighMount
evaluates goodwill for impairment annually, or when events or circumstances
change, such as an adverse change in business climate, that would indicate an
impairment may have occurred. Goodwill is deemed to be impaired when the
carrying value exceeds its estimated fair value. HighMount’s annual impairment
test, which is performed as of April 30th each
year, is based on several factors requiring judgment. A significant decrease in
expected cash flows or changes in market conditions may represent an impairment
indicator requiring an assessment for the potential impairment of recorded
goodwill. Also, a ceiling test impairment may represent a triggering event
requiring HighMount to perform an interim period goodwill impairment test.
Should market conditions continue to significantly deteriorate, including
further declining commodity prices, HighMount could be required to record
additional goodwill impairments that may be significant. Please read “Critical
Accounting Estimates” in Part II, Item 7.
Natural
gas, NGL and other commodity prices are volatile.
The
commodity price HighMount receives for its production heavily influences its
revenue, profitability, access to capital and future rate of growth. HighMount
is subject to risks due to frequent and often substantial fluctuations in
commodity prices. NGL prices generally fluctuate on a basis that correlates to
fluctuations in crude oil prices. In the past, the prices of natural gas and
crude oil have been extremely volatile, and HighMount expects this volatility to
continue. The markets and prices for natural gas and NGLs depend upon factors
beyond HighMount’s control. These factors include demand, which fluctuates with
changes in market and economic conditions and other factors,
including:
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the
impact of market and basis differentials - market price spreads between
two points across HighMount’s natural gas
system;
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the
impact of weather on the demand for these
commodities;
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the
level of domestic production and imports of these
commodities;
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the
impact of changes in technologies on the level of
supply;
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natural
gas storage levels;
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actions
taken by foreign producing nations;
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the
availability of local, intrastate and interstate transportation
systems;
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Item 1A.
Risk Factors
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the
availability and marketing of competitive
fuels;
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the
impact of energy conservation efforts;
and
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the
extent of governmental regulation and
taxation.
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Lower
commodity prices may decrease HighMount’s revenues and may reduce the amount of
natural gas and NGLs that HighMount can produce economically.
HighMount
engages in commodity price hedging activities.
HighMount
is exposed to risks associated with fluctuations in commodity prices. The extent
of HighMount’s commodity price risk is related to the effectiveness and scope of
HighMount’s hedging activities. To the extent HighMount hedges its commodity
price risk, HighMount will forego the benefits it would otherwise experience if
commodity prices or interest rates were to change in its favor. Furthermore,
because HighMount has entered into derivative transactions related to only a
portion of the volume of its expected natural gas supply and production of NGLs,
HighMount will continue to have direct commodity price risk on the unhedged
portion. HighMount’s actual future supply and production may be significantly
higher or lower than HighMount estimates at the time it enters into derivative
transactions for that period.
As a
result, HighMount’s hedging activities may not be as effective as HighMount
intends in reducing the volatility of its cash flows, and in certain
circumstances may actually increase the volatility of cash flows. In addition,
even though HighMount’s management monitors its hedging activities, these
activities can result in substantial losses. Such losses could occur under
various circumstances, including if a counterparty does not perform its
obligations under the applicable hedging arrangement, the hedging arrangement is
imperfect or ineffective, or HighMount’s hedging policies and procedures are not
properly followed or do not work as planned.
Drilling
for and producing natural gas and NGLs is a high risk activity with many
uncertainties.
HighMount’s
future success will depend in part on the success of its exploitation,
exploration, development and production activities. HighMount’s E&P
activities are subject to numerous risks beyond its control, including the risk
that drilling will not result in oil and natural gas production volumes that are
commercially viable. HighMount’s decisions to purchase, explore, develop or
otherwise exploit prospects or properties will depend in part on the evaluation
of data obtained through geophysical and geological analyses, production data
and engineering studies, the results of which are often inconclusive or subject
to varying interpretations. HighMount’s cost of drilling, completing and
operating wells is often uncertain before drilling commences. Overruns in
budgeted expenditures are common risks that can make a particular project
uneconomical. Further, many factors may curtail, delay or cancel drilling,
including the following:
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lack
of acceptable prospective acreage;
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inadequate
capital resources;
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unexpected
drilling conditions; pressure or irregularities in formations; equipment
failures or accidents;
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adverse
weather conditions;
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unavailability
or high cost of drilling rigs, equipment, labor or
services;
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reductions
in commodity prices;
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the
impact of changes in technologies on commodity
prices;
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limitations
in the market for natural gas and
NGLs;
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Item 1A.
Risk Factors
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compliance
with governmental regulations; and
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mechanical
difficulties.
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HighMount’s
business involves many hazards and operational risks, some of which may not be
fully covered by insurance.
HighMount
is not insured against all risks. Losses and liabilities arising from uninsured
and underinsured events could materially and adversely affect HighMount’s
business, financial condition or results of operations. HighMount’s E&P
activities are subject to all of the operating risks associated with drilling
for and producing natural gas and NGLs,
including the possibility of:
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environmental
hazards, such as uncontrollable flows of natural gas, brine, well fluids,
toxic gas or other pollution into the environment, including groundwater
contamination;
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·
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abnormally
pressured formations;
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·
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mechanical
difficulties, such as stuck drilling and service tools and casing
collapse;
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personal
injuries and death; and
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If any of
these events occur, HighMount could incur substantial losses as a result of
injury or loss of life, damage to and destruction of property, natural resources
and equipment, pollution and other environmental damage, clean-up
responsibilities, regulatory investigation and penalties, suspension of
HighMount’s operations and repairs to resume operations, any of which could
adversely affect its ability to conduct operations or result in substantial
losses. HighMount may elect not to obtain insurance if the cost of available
insurance is excessive relative to the risks presented. In addition, pollution
and environmental risks generally are not fully insurable.
Risks
Related to Us and Our Subsidiary, Boardwalk Pipeline Partners, LP
Boardwalk
Pipeline is undertaking large, complex expansion projects which involve
significant risks that may adversely affect its business.
Boardwalk
Pipeline is currently undertaking several large, complex pipeline and storage
expansion projects and it may undertake additional expansion projects in the
future. In pursuing these and previous projects, Boardwalk Pipeline experienced
significant cost overruns and may experience cost increases in the future.
Boardwalk Pipeline also experienced construction delays and may experience
additional delays in the future. Delays in construction could result from a
variety of factors and have resulted in penalties under customer contracts such
as liquidated damage payments and could in the future result in similar losses.
In some cases, certain customers could have the right to terminate their
transportation agreements if the related expansion project is not completed by a
date specified in their precedent agreements.
The cost
overruns and construction delays Boardwalk Pipeline experienced have resulted
from a variety of factors, including the following:
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delays
in obtaining regulatory approvals;
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difficult
construction conditions, including adverse weather conditions and
encountering higher density rock formations than
anticipated;
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delays
in obtaining key materials; and
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Item 1A.
Risk Factors
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shortages
of qualified labor and escalating costs of labor and materials resulting
from the high level of construction activity in the pipeline
industry.
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In
pursuing current or future expansion projects, Boardwalk Pipeline could
experience additional delays or cost increases for the reasons described above
or as a result of other factors. Boardwalk Pipeline may not be able to complete
its current or future expansion projects on the expected terms, cost or
schedule, or at all. In addition, Boardwalk Pipeline cannot be certain that, if
completed, these projects will perform in accordance with its expectations.
Other areas of Boardwalk Pipeline’s business may suffer as a result of the
diversion of management’s attention and other resources from other business
concerns to its expansion projects. Any of these factors could have a material
adverse effect on Boardwalk Pipeline’s ability to realize the anticipated
benefits from its expansion projects. Please read Item 1, “Business – Boardwalk
Pipeline Partners, LP – Expansion Projects,” for more information.
Completion
of Boardwalk Pipeline’s expansion projects will require Boardwalk Pipeline to
raise significant amounts of debt and equity financing. Ongoing disruption of
the credit and capital markets may hinder or prevent Boardwalk Pipeline and its
customers from meeting future capital needs.
Global
financial markets and economic conditions have been, and continue to be,
experiencing extraordinary disruption and volatility following adverse changes
in global capital markets. Recently, market conditions have resulted in numerous
bankruptcies, insolvencies, forced sales of financial institutions as well as
market intervention by governments around the globe. The debt and equity
capital markets are exceedingly distressed and banks and other commercial
lenders have substantially curtailed their lending activities as a result of,
among other things, significant write-offs in the financial services sector, the
re-pricing of credit risk and current weak economic conditions. These
circumstances continue to make it difficult to obtain funding.
As a
result, the cost of raising money in the debt and equity capital markets and
commercial credit markets has increased substantially while the availability of
funds from those markets has diminished significantly. Many lenders and
institutional investors have increased interest rates, enacted tighter lending
standards, refused to refinance existing debt at maturity – at all or on terms
similar to the debt being refinanced – and reduced and in some cases ceased to
provide funding to borrowers. In some cases, lenders under existing revolving
credit facilities have been unwilling or unable to meet their funding
obligations, including one lender under Boardwalk Pipeline’s revolving credit
facility. If additional lenders under Boardwalk Pipeline’s credit facility were
to fail to fund their share of the credit facility, Boardwalk Pipeline’s
borrowing capacity could be further reduced. Although the Company has indicated
that it is willing to invest additional capital in Boardwalk Pipeline to finance
its expansion projects to the extent the public markets remain unavailable on
acceptable terms, we have not committed to any transaction at this time and any
additional investment by us would be subject to review and approval by Boardwalk
Pipeline’s independent Conflicts Committee. Due to these factors, Boardwalk
Pipeline cannot be certain that new debt or equity financing will be available
on acceptable terms or that Boardwalk Pipeline will be able to continue to
access the full amount of the remaining commitments under its revolving credit
facility in the future.
These
circumstances have impacted Boardwalk Pipeline’s business, or may impact its
business in a number of ways including but not limited to:
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limiting
the amount of capital available to Boardwalk Pipeline to fund new growth
capital projects and acquisitions, which would limit Boardwalk Pipeline’s
ability to grow its business, take advantage of business opportunities,
respond to competitive pressures and increase distributions to its
unitholders;
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adversely
affecting Boardwalk Pipeline’s ability to refinance outstanding
indebtedness at maturity on favorable or fair terms or at all;
and
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weakening
the financial strength of certain of Boardwalk Pipeline’s customers,
increasing the credit risk associated with those customers and/or limiting
their ability to grow which could affect their ability to pay for
Boardwalk Pipeline’s services or prompt them to reduce throughput or
contracted capacity on its
pipelines.
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Item 1A.
Risk Factors
A
portion of the expected maximum daily capacity of Boardwalk Pipeline’s pipeline
expansion projects is contingent on receiving and maintaining authority from
PHMSA to operate at higher operating pressures.
Boardwalk
Pipeline’s ability to transport a portion of the expected maximum capacity on
each of its expansion project pipelines is contingent on Boardwalk Pipeline’s
receipt of authority to operate those pipelines at higher operating pressures
under special permits issued by PHMSA. The ability to operate at higher
operating pressures increases the transportation capacity of the pipelines.
Boardwalk Pipeline has received both the special permit and the authority to
operate from PHMSA for the East Texas Pipeline, which was completed in 2008.
Boardwalk Pipeline has also received the special permits for its Southeast and
Gulf Crossing pipeline expansions and Fayetteville and Greenville Laterals, but
Boardwalk Pipeline has not received authority from PHMSA to operate under these
permits. Absent such authority, Boardwalk Pipeline will not be able to transport
all of the contracted for quantities of natural gas on these pipelines. PHMSA
retains discretion as to whether to grant, or to maintain in force, authority to
operate a pipeline at higher operating pressures. To the extent PHMSA does
not grant Boardwalk Pipeline authority to operate any of its expansion pipelines
under a special permit or withdraws previously granted authority, Boardwalk
Pipeline’s
transportation capacity made available to the market and its transportation
revenues would be reduced.
Boardwalk
Pipeline has discovered anomalies in a small number of pipe segments on its East
Texas Pipeline. As a result, and as a prudent operator, Boardwalk Pipeline has
elected to reduce operating pressure on this pipeline to 20.0% below its
previous operating level, which was below the pipeline’s maximum non-special
permit operating pressure. Boardwalk Pipeline does not expect to return to
normal operating pressure, or to operate at higher pressure under the special
permit, until after Boardwalk Pipeline has completed its investigation and
remediation measures, as appropriate, and PHMSA has concurred with Boardwalk
Pipeline’s determination to increase operating pressure. Operating at lower
pressure reduces the amount of gas that can flow through a pipeline and
therefore will reduce Boardwalk Pipeline’s expected revenues and cash flow from
the affected pipeline. In addition, Boardwalk Pipeline will incur costs to
replace defective pipe segments on the East Texas Pipeline and expects to
temporarily shut down this pipeline when performing the necessary remedial
measures, up to and including replacing certain pipe segments. Boardwalk
Pipeline cannot determine at this time the amount of costs it will incur or when
it might raise the operating pressure on this pipeline. Boardwalk Pipeline has
not completed testing all of its expansion pipelines and could find anomalies on
other pipelines which could have similar impacts with respect to those
pipelines. Boardwalk Pipeline will not receive authority from PHMSA to operate
any of its expansion pipelines at higher pressures under special permits until
it has fully tested and, as needed, remediated any anomalies on each such
pipeline.
Boardwalk
Pipeline is exposed to credit risk relating to nonperformance by its
customers.
Credit
risk relates to the risk of loss resulting from the nonperformance by a customer
of its contractual obligations. Boardwalk Pipeline’s exposure generally relates
to receivables for services provided, future performance under firm agreements
and volumes of gas owed by customers for imbalances or gas loaned by Boardwalk
Pipeline to them under certain no-notice services and PAL services. If any of
Boardwalk Pipeline’s significant customers have credit or financial problems
which result in a delay or failure to pay for services provided by Boardwalk
Pipeline, or contracted for with Boardwalk Pipeline, or to repay the gas they
owe Boardwalk Pipeline, it could have a material adverse effect on Boardwalk
Pipeline’s business. In addition, Boardwalk Pipeline’s FERC gas tariffs
only allow Boardwalk Pipeline to require limited credit support in the event
that Boardwalk Pipeline’s transportation customers are unable to pay for
Boardwalk Pipeline’s services. As contracts expire, the failure of any of
Boardwalk Pipeline’s customers could also result in the non-renewal of
contracted capacity. Item 7A of this Report contains more information on credit
risk arising from gas loaned to customers.
Upon
completion of Boardwalk Pipeline’s expansion projects, Boardwalk Pipeline’s
customer mix will have changed, leading to changes in credit risk.
Historically,
the customers accounting for the majority of Boardwalk Pipeline’s throughput and
revenues have been gas marketers and LDCs with investment grade ratings. After
completion of Boardwalk Pipeline’s current expansion projects, producers of
natural gas as a group will comprise a significantly larger portion of Boardwalk
Pipeline’s throughput and revenues. Boardwalk Pipeline expects one producer to
represent over 10.0% of its 2009 revenues. Historically producers have had lower
credit ratings than LDCs and marketers. Therefore the expected change in
Boardwalk Pipeline’s customer base could result in higher total credit risk. The
loss of access to credit for any of Boardwalk Pipeline’s major customers, or a
systemic loss of access to credit for any customer group in the
aggregate,
Item 1A.
Risk Factors
could
reduce Boardwalk Pipeline’s receipt of payment for services rendered or
otherwise reduce the level of services required by Boardwalk Pipeline’s
customers.
Boardwalk
Pipeline depends on certain key customers for a significant portion of its
revenues. The loss of any of these key customers could result in a decline in
its revenues.
Boardwalk
Pipeline relies on a limited number of customers for a significant portion of
its revenues. Boardwalk Pipeline may be unable to negotiate extensions or
replacements of contracts and key customers on favorable terms. The loss of all
or even a portion of the contracted volumes of these customers, as a result of
competition, creditworthiness or otherwise, could have a material adverse effect
on Boardwalk Pipeline’s business, unless Boardwalk Pipeline is able to contract
for comparable volumes from other customers at favorable rates.
Significant
changes in energy prices could affect supply and demand, reduce system
throughput and adversely affect Boardwalk Pipeline’s revenues and available
cash.
Due to
the natural decline in traditional gas production connected to Boardwalk
Pipeline’s system, Boardwalk Pipeline’s success depends on its ability to obtain
access to new sources of natural gas, which is dependent on factors beyond its
control, including the price level of natural gas. In general terms, the price
of natural gas fluctuates in response to changes in supply and demand, market
uncertainty and a variety of additional factors that are beyond Boardwalk
Pipeline’s control. These factors include:
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worldwide
economic conditions;
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weather
conditions, seasonal trends and hurricane
disruptions;
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the
relationship between the available supplies and the demand for natural
gas;
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the
availability of LNG;
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the
availability of adequate transportation
capacity;
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storage
inventory levels;
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the
price and availability of alternative
fuels;
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the
effect of energy conservation
measures;
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the
nature and extent of, and changes in, governmental regulation and
taxation; and
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the
anticipated future prices of natural gas, LNG and other
commodities.
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Since the
summer of 2008, the price level of natural gas has dropped substantially. It is
difficult to predict future changes in gas prices, however the recent global
economic slowdown would generally indicate a bias toward downward pressure on
prices rather than an increase. Further downward movement in gas prices could
negatively impact producers in nontraditional supply areas such as the Barnett
Shale, the Bossier Sands, the Caney Woodford Shale and the Fayetteville Shale,
including producers who have contracted for capacity on Boardwalk Pipeline’s
expansion projects. Significant financial difficulties experienced by Boardwalk
Pipeline’s producer customers could impact their ability to pay for services
rendered or otherwise reduce their demand for Boardwalk Pipeline’s
services.
High
natural gas prices may result in a reduction in the demand for natural gas. A
reduced level of demand for natural gas could reduce the utilization of capacity
on Boardwalk Pipeline’s systems, reduce the demand for Boardwalk Pipeline’s
services and could result in the non-renewal of contracted capacity as contracts
expire.
Item 1A.
Risk Factors
Boardwalk
Pipeline’s natural gas transportation and storage operations are subject to
FERC’s rate-making policies which could limit Boardwalk Pipeline’s ability to
recover the full cost of operating its pipelines, including earning a reasonable
return.
Boardwalk
Pipeline is subject to extensive regulations relating to the rates Boardwalk
Pipeline can charge for its transportation and storage operations. For the
cost-based services Boardwalk Pipeline offers, FERC establishes both the maximum
and minimum rates Boardwalk Pipeline can charge. The basic elements that FERC
considers are the cost of providing the service, the volumes of gas being
transported, how costs are allocated between services and the rate of return a
pipeline is permitted to earn. While neither Gulf South nor Texas Gas has an
obligation to file a rate case, Boardwalk Pipeline’s Gulf Crossing pipeline has
an obligation to file either a rate case or a cost-and-revenue study within
three years of being placed in service to justify its rates. Customers of
Boardwalk Pipeline’s subsidiaries or FERC can challenge the existing rates on
any of its pipelines. Such a challenge could adversely affect Boardwalk
Pipeline’s ability to establish reasonable transportation rates, to charge rates
that would cover future increases in Boardwalk Pipeline’s costs or even to
continue to collect rates to maintain its current revenue levels that are
designed to permit a reasonable opportunity to recover current costs and
depreciation and earn a reasonable return. Additionally, FERC can propose
changes or modifications to any of its existing rate-related
policies.
If
Boardwalk Pipeline’s subsidiaries were to file a rate case or if Boardwalk
Pipeline had to defend its rates in a proceeding commenced by a customer or
FERC, Boardwalk Pipeline would be required, among other things, to establish
that the inclusion of an income tax allowance in Boardwalk Pipeline’s cost of
service is just and reasonable. Under current FERC policy, since Boardwalk
Pipeline is a limited partnership and does not pay U.S. federal income taxes,
this would require Boardwalk Pipeline to show that its unitholders (or their
ultimate owners) are subject to federal income taxation. To support such a
showing Boardwalk Pipeline’s general partner may elect to require owners of
Boardwalk Pipeline’s units to re-certify their status as being subject to U.S.
federal income taxation on the income generated by Boardwalk Pipeline’s
subsidiaries or Boardwalk Pipeline may attempt to provide other evidence.
Boardwalk Pipeline can provide no assurance that the evidence it might provide
to FERC will be sufficient to establish that Boardwalk Pipeline’s unitholders
(or their ultimate owners) are subject to U.S. federal income tax liability on
the income generated by Boardwalk Pipeline’s jurisdictional pipelines. If
Boardwalk Pipeline is unable to make such a showing, FERC could disallow a
substantial portion of the income tax allowance included in the determination of
the maximum rates that may be charged by Boardwalk Pipeline’s subsidiaries,
which could result in a reduction of such maximum rates from current
levels.
Boardwalk
Pipeline may not be able to recover all of its costs through existing or future
rates. An adverse determination in any future rate proceeding brought by or
against any of Boardwalk Pipeline’s subsidiaries could have a material adverse
effect on its business.
Capacity
leaving Boardwalk Pipeline’s Lebanon, Ohio terminus is limited.
The
northeastern terminus of Boardwalk Pipeline’s pipeline systems is in Lebanon,
Ohio, where it connects with other interstate natural gas pipelines delivering
gas to Northeast, Midwest and East Coast markets. Pipeline capacity into Lebanon
is significantly greater than pipeline capacity leaving that point, creating a
bottleneck for supply into areas of high demand. This situation may be
compounded when the new Rockies Express pipeline reaches Lebanon later in 2009
while the remaining segments of that pipeline downstream of Lebanon are still
under construction. As of December 31, 2008, approximately 55.0% of Boardwalk
Pipeline’s long-term contracts with firm deliveries to Lebanon will expire or
have the ability to terminate by the end of 2010. Supply volumes from the Rocky
Mountains, Canada and LNG import terminals may compete with and displace volumes
from the Gulf Coast and Mid-Continent in order to serve the Northeast, Midwest
and East Coast markets.
Boardwalk
Pipeline may not be able to maintain or replace expiring gas transportation and
storage contracts at favorable rates.
Boardwalk
Pipeline’s primary exposure to market risk occurs at the time existing
transportation contracts expire and are subject to renegotiation. As of December
31, 2008, approximately 17.0% of the contracts for firm transportation capacity
on Boardwalk Pipeline’s systems, excluding agreements related to the expansion
projects not yet in service, was due to expire on or before December 31, 2009.
Upon expiration, Boardwalk Pipeline may not be able to extend contracts with
existing customers or obtain replacement contracts at favorable rates or on a
long term basis. A key determinant of
Item 1A.
Risk Factors
the value
that customers can realize from firm transportation on a pipeline and the price
they are willing to pay for transportation is the price differential between
physical locations, which can be affected by, among other things, the
availability of supply, available capacity, storage inventories, weather and
general market demand in the respective areas.
The
extension or replacement of existing contracts depends on a number of factors
beyond Boardwalk Pipeline’s control, including:
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existing
and new competition to deliver natural gas to Boardwalk Pipeline’s
markets;
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the
growth in demand for natural gas in Boardwalk Pipeline’s
markets;
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whether
the market will continue to support long term
contracts;
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the
current price differentials, or market price spreads between two points on
the Boardwalk Pipeline systems; and
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the
effects of state regulation on customer contracting
practices.
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If
third party pipelines and other facilities connected to Boardwalk Pipeline’s
pipelines and facilities become unavailable to transport natural gas, its
revenues could be adversely affected.
Boardwalk
Pipeline depends upon third party pipelines and other facilities that provide
delivery options to and from its pipelines. For example, Boardwalk Pipeline is
contractually committed to deliver approximately 1.8 Bcf per day to Transco
Station 85. If this or any other significant pipeline connection were to become
unavailable for current or future volumes of natural gas due to repairs, damage
to the facilities, lack of capacity or any other reason, Boardwalk Pipeline’s
ability to continue shipping natural gas to end markets could be restricted,
thereby reducing revenues.
Boardwalk
Pipeline’s operations are subject to operational hazards and unforeseen
interruptions for which Boardwalk Pipeline may not be adequately
insured.
There are
a variety of operating risks inherent in Boardwalk Pipeline’s natural gas
transportation and storage operations, such as leaks, explosions and mechanical
problems. Any of these or other similar occurrences could result in the
disruption of Boardwalk Pipeline’s operations, substantial repair costs,
personal injury or loss of human life, significant damage to property,
environmental pollution, impairment of Boardwalk Pipeline’s operations and
substantial financial losses. The location of pipelines near populated areas,
including residential areas, commercial business centers and industrial sites,
could significantly increase the level of damages resulting from some of these
risks.
Boardwalk
Pipeline currently possesses property, business interruption and general
liability insurance, but proceeds from such insurance coverage may not be
adequate for all liabilities or expenses incurred or revenues lost. Moreover,
such insurance may not be available in the future at commercially reasonable
costs and terms. Recent changes in the insurance markets have made it more
difficult for Boardwalk Pipeline to obtain certain types of coverage. The
insurance coverage Boardwalk Pipeline does obtain may contain large deductibles
or fail to cover certain hazards or all potential losses.
Risks
Related to Us and Our Subsidiaries Generally
In
addition to the specific risks and uncertainties faced by our subsidiaries, as
discussed above, we and all of our subsidiaries face risks and uncertainties
related to, among other things, terrorism, hurricanes and other natural
disasters, competition, government regulation, dependence on key executives and
employees, litigation, dependence on information technology and compliance with
environmental laws.
Future
acts of terrorism could harm us and our subsidiaries.
Future
terrorist attacks and the continued threat of terrorism in this country or
abroad, as well as possible retaliatory military and other action by the United
States and its allies, could have a significant impact on the businesses of
certain of our subsidiaries, including the following:
Item 1A.
Risk Factors
CNA. CNA continues
to face exposure to losses arising from terrorist acts, despite the passage of
the Terrorism Risk Insurance Program Reauthorization Act of 2007. The Terrorism
Risk Insurance Program Reauthorization Act of 2007 extended, until December 31,
2014, the program established within the U.S. Department of Treasury by the
Terrorism Risk Insurance Act of 2002. This program requires insurers to offer
terrorism coverage and the federal government to share in insured losses arising
from acts of terrorism. Given the unpredictability of the nature, targets,
severity and frequency of potential terrorist acts, this program does not
provide complete protection for future losses derived from acts of terrorism.
Further, the laws of certain states restrict CNA’s ability to mitigate this
residual exposure. For example, some states mandate property insurance coverage
of damage from fire following a loss, thereby prohibiting CNA from excluding
terrorism exposure. In addition, some states generally prohibit CNA from
excluding terrorism exposure from its primary workers’ compensation policies.
Consequently, there is substantial uncertainty as to CNA’s ability to contain
its terrorism exposure effectively since CNA continues to issue forms of
coverage, in particular, workers’ compensation, that are exposed to risk of loss
from a terrorism act.
Diamond Offshore, Boardwalk Pipeline
and HighMount. The continued threat of terrorism and the
impact of retaliatory military and other action by the United States and its
allies might lead to increased political, economic and financial market
instability and volatility in prices for oil and gas, which could affect the
market for Diamond Offshore’s oil and gas offshore drilling services, Boardwalk
Pipeline’s natural gas transportation, gathering and storage services and
HighMount’s natural gas exploration and production activities. In addition, it
has been reported that terrorists might target domestic energy facilities. While
our subsidiaries take steps that they believe are appropriate to increase the
security of their energy assets, there is no assurance that they can completely
secure their assets, completely protect them against a terrorist attack or
obtain adequate insurance coverage for terrorist acts at reasonable
rates.
Loews Hotels. The
travel and tourism industry went into a steep decline in the periods following
the 2001 World Trade Center event which had a negative impact on the occupancy
levels and average room rates at Loews Hotels. Future terrorist attacks could
similarly lead to reductions in business travel and tourism which could harm
Loews Hotels.
Certain
of our subsidiaries face significant risks related to the impact of hurricanes
and other natural disasters.
In
addition to CNA’s exposure to catastrophe losses discussed above, the businesses
operated by several of our other subsidiaries are exposed to significant harm
from the effects of natural disasters, particularly hurricanes and related
flooding and other damage. While much of the damage caused by natural disasters
is covered by insurance, we cannot be sure that such coverage will be available
or be adequate in all cases. These risks include the following:
Diamond
Offshore. Diamond Offshore operates its offshore rig fleet in
waters that can be severely impacted by hurricanes and other natural disasters,
including the U.S. Gulf of Mexico. In September of 2008, one of Diamond
Offshore’s jack-up drilling rigs, the Ocean Tower, was damaged in
Hurricane Ike, losing its derrick, drill floor and drill floor equipment. In
late August 2005, one of Diamond Offshore’s jack-up drilling rigs, the Ocean Warwick, was seriously
damaged during Hurricane Katrina and other rigs in Diamond’s fleet and its
warehouse in New Iberia, Louisiana sustained lesser damage in Hurricanes Katrina
or Rita, or in some cases both storms. In addition to damaging or destroying rig
equipment, some or all of which may be covered by insurance, catastrophes of
this kind result in additional operating expenses for Diamond Offshore,
including the cost of reconnaissance aircraft, rig crew over-time and employee
assistance, hurricane relief supplies, temporary housing and office space and
the rental of mooring equipment and others which may not be covered by
insurance.
Boardwalk
Pipeline. The nature and location of Boardwalk Pipeline’s
business, particularly with regard to its assets in the Gulf Coast region, may
make Boardwalk Pipeline susceptible to catastrophic losses especially from
hurricanes or named storms. Various other events can cause catastrophic losses,
including windstorms, earthquakes, hail, explosions, and severe winter weather
and fires. The frequency and severity of these events are inherently
unpredictable. The extent of losses from catastrophes is a function of both the
total amount of insured exposures in the affected areas and the severity of the
events themselves. Although Boardwalk Pipeline carries insurance, in the event
of a loss the coverage could be insufficient or there could be a material delay
in the receipt of the insurance proceeds.
Loews
Hotels. Hotels operated by Loews Hotels are exposed to damage,
business interruption and reductions in travel and tourism in markets affected
by significant natural disasters such as hurricanes. For example, Loews Hotels’
properties located in Florida and New Orleans suffered
significant damage from hurricanes and related flooding during the past three
years.
Item 1A.
Risk Factors
Certain
of our subsidiaries are subject to extensive federal, state and local
governmental regulations.
The
businesses operated by certain of our subsidiaries are impacted by current and
potential federal, state and local governmental regulations which imposes or
might impose a variety of restrictions and compliance obligations on those
companies. Governmental regulations can also change materially in ways that
could adversely affect those companies. Risks faced by our subsidiaries related
to governmental regulation include the following:
CNA. The insurance
industry is subject to comprehensive and detailed regulation and supervision
throughout the United States. Most insurance regulations are designed to protect
the interests of CNA’s policyholders rather than its investors. Each state in
which CNA does business has established supervisory agencies that regulate the
manner in which CNA does business. Their regulations relate to, among other
things:
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standards
of solvency, including risk-based capital
measurements;
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restrictions
on the nature, quality and concentration of
investments;
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restrictions
on CNA’s ability to withdraw from unprofitable lines of insurance or
unprofitable market areas;
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the
required use of certain methods of accounting and
reporting;
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the
establishment of reserves for unearned premiums, losses and other
purposes;
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potential
assessments for funds necessary to settle covered claims against impaired,
insolvent or failed private or quasi-governmental
insurers;
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licensing
of insurers and agents;
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approval
of policy forms;
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limitations
on the ability of CNA’s insurance subsidiaries to pay dividends to us;
and
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limitations
on the ability to non-renew, cancel or change terms and conditions in
policies.
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Regulatory
powers also extend to premium rate regulations which require that rates not be
excessive, inadequate or unfairly discriminatory. CNA also is required by the
states to provide coverage to persons who would not otherwise be considered
eligible by the insurers. Each state dictates the types of insurance and the
level of coverage that must be provided to such involuntary risks. CNA’s share
of these involuntary risks is mandatory and generally a function of its
respective share of the voluntary market by line of insurance in each
state.
Diamond
Offshore. Diamond Offshore’s operations are affected from time
to time in varying degrees by governmental laws and regulations. The drilling
industry is dependent on demand for services from the oil and gas exploration
industry and, accordingly, is affected by changing tax and other laws relating
to the energy business generally. Diamond Offshore may be required to make
significant capital expenditures to comply with governmental laws and
regulations. It is also possible that these laws and regulations may in the
future add significantly to Diamond Offshore’s operating costs or may
significantly limit drilling activity.
Governments
in some foreign countries are increasingly active in regulating and controlling
the ownership of concessions, the exploration for oil and gas and other aspects
of the oil and gas industries. The modification of existing laws or regulations
or the adoption of new laws or regulations curtailing exploratory or
developmental drilling for oil and gas for economic, environmental or other
reasons could materially and adversely affect Diamond Offshore’s operations by
limiting drilling opportunities.
The
Minerals Management Service of the U.S. Department of the Interior, or MMS, has
established guidelines for drilling operations in the GOM. Diamond Offshore
believes that it is currently in compliance with the existing regulations set
forth by the MMS with respect to its operations in the GOM; however, these
regulations are continually
Item 1A.
Risk Factors
under
review. Implementation of additional MMS regulations may subject Diamond
Offshore to increased costs of operating, or a reduction in the area and/or
periods of operation, in the GOM.
HighMount. All of
HighMount’s operations are conducted onshore in the United States. The U.S. oil
and gas industry, and HighMount’s operations, are subject to regulation at the
federal, state and local level. Such regulation includes requirements with
respect to, among other things: permits to drill and to conduct other
operations; provision of financial assurances (such as bonds) covering drilling
and well operations; the location of wells; the method of drilling and
completing wells; the surface use and restoration of properties upon which wells
are drilled; the plugging and abandoning of wells; the marketing, transportation
and reporting of production; and the valuation and payment of royalties; the
size of drilling and spacing units (regarding the density of wells which may be
drilled in a particular area); the unitization or pooling of natural gas and oil
properties; maximum rates of production from natural gas and oil wells; venting
or flaring of natural gas and the ratability of production.
HighMount’s
operations are also subject to federal, state and local laws and regulations
concerning the discharge of contaminants into the environment, the generation,
storage, transportation and disposal of contaminants, and the protection of
public health, natural resources, wildlife and the environment. In most
instances, the regulatory requirements relate to the handling and disposal of
drilling and production waste products, water and air pollution control
procedures, and the remediation of petroleum-product contamination. In addition,
HighMount’s operations may require it to obtain permits for, among other things,
air emissions, discharges into surface waters, and the construction and
operation of underground injection wells or surface pits to dispose of produced
saltwater and other non-hazardous oilfield wastes.
Boardwalk Pipeline. Boardwalk
Pipeline’s natural gas transportation and storage operations are subject to
extensive regulation by FERC and the DOT among other federal and state
authorities. In addition to FERC rules and regulations related to the rates
Boardwalk Pipeline can charge for its services, FERC’s regulatory authority
extends to:
|
·
|
operating
terms and conditions of service;
|
|
·
|
the
types of services Boardwalk Pipeline may offer to its
customers;
|
|
·
|
construction
of new facilities;
|
|
·
|
creation,
extension or abandonment of services or
facilities;
|
|
·
|
accounts
and records; and
|
|
·
|
relationships
with certain types of affiliated companies involved in the natural gas
business.
|
FERC’s
action in any of these areas or modifications of its current regulations can
adversely impact Boardwalk Pipeline’s ability to compete for business, to
construct new facilities, offer new services or to recover the full cost of
operating its pipelines. This regulatory oversight can result in longer lead
times to develop and complete an expansion project. The federal regulatory
approval and compliance process could raise the costs of such projects to the
point where they are no longer sufficiently timely or cost competitive when
compared to competing projects that are not subject to the federal regulatory
regime.
Under
PHMSA regulations, Boardwalk Pipeline is required to develop and maintain
integrity management programs to comprehensively evaluate certain areas along
its pipelines and take additional measures to protect pipeline segments located
in what the rule refers to as high consequence areas where a leak or rupture
could potentially do the most harm.
The
businesses operated by our subsidiaries face intense competition.
Each of
the businesses operated by our subsidiaries faces intense competition in its
industry and will be harmed materially if it is unable to compete effectively.
Certain of the competitive risks faced by those companies include:
CNA. All aspects
of the insurance industry are highly competitive and CNA must continuously
allocate resources to refine and improve its insurance products and services.
CNA competes with a large number of stock and mutual
Item 1A.
Risk Factors
insurance
companies and other entities for both distributors and customers. Insurers
compete on the basis of factors including products, price, services, ratings and
financial strength. CNA may lose business to competitors offering competitive
insurance products at lower prices.
Diamond
Offshore. The offshore contract drilling industry is highly
competitive with numerous industry participants, none of which at the present
time has a dominant market share. Some of Diamond Offshore’s competitors may
have greater financial or other resources than Diamond Offshore. The drilling
industry has experienced consolidation in recent years and may experience
additional consolidation, which could create additional large competitors.
Drilling contracts are traditionally awarded on a competitive bid basis. Intense
price competition is often the primary factor in determining which qualified
contractor is awarded a job, although rig availability and location, a drilling
contractor’s safety record and the quality and technical capability of service
and equipment may also be considered. Mergers among oil and gas exploration and
production companies have reduced the number of available customers as well as
the contraction of the global economy, increasing
competition. Significant new rig construction and upgrades of
existing drilling units could also intensify price competition. Diamond Offshore
believes there are approximately 170 jack-up rigs and floaters on
order and scheduled for delivery between 2009 and 2012. The resulting
increase in rig supply could result in depressed rig utilization and greater
price competition.
HighMount. HighMount
competes with other oil and gas companies in all aspects of its business,
including acquisition of producing properties and leases and obtaining goods,
services and labor, including drilling rigs and well completion services.
HighMount also competes in the marketing of produced natural gas and NGLs. Some
of HighMount’s competitors have substantially larger financial and other
resources than HighMount. Factors that affect HighMount’s ability to acquire
producing properties include available funds, available information about the
property and standards established by HighMount for minimum projected return on
investment. Competition for sales of natural gas and NGLs is also presented by
alternative fuel sources, including heating oil, imported LNG and other fossil
fuels.
Boardwalk
Pipeline. Boardwalk Pipeline competes primarily with other
interstate and intrastate pipelines in the transportation and storage of natural
gas. Competition is particularly strong in the Midwest and Gulf Coast states
where Boardwalk Pipeline competes with numerous existing pipelines and will
compete with several new pipeline projects that are under construction, such as
the Rockies Express Pipeline and the Mid-Continent Express Pipeline. Boardwalk
Pipeline also competes with other pipelines for contracts with producers that
would support new growth projects. Natural gas also competes with other forms of
energy available to Boardwalk Pipeline’s customers, including electricity, coal
and fuel oils. The principal elements of competition among pipelines are
availability of capacity, rates, terms of service, access to gas supplies,
flexibility and reliability. The FERC’s policies promote competition in gas
markets by increasing the number of gas transportation options available to
Boardwalk Pipeline’s customer base. Increased competition could reduce the
volumes of gas transported by Boardwalk Pipeline’s systems or, in instances
where Boardwalk Pipeline does not have long term contracts with fixed rates,
could force Boardwalk Pipeline to decrease its transportation or storage rates.
Competition could intensify the negative impact of factors that could
significantly decrease demand for natural gas in the markets served by Boardwalk
Pipeline’s systems, such as a recession or adverse economic conditions, weather,
higher fuel costs and taxes or other governmental or regulatory actions that
directly or indirectly increase the cost or limit the use of natural gas.
Boardwalk Pipeline’s ability to renew or replace existing contracts at rates
sufficient to maintain current revenues and cash flows could be adversely
affected by competition.
The
regulatory program that applies to interstate pipelines is different than the
regulatory program that applies to many of Boardwalk Pipeline’s competitors that
are not regulated interstate pipelines. This difference in regulatory oversight
can result in longer lead times to develop and complete a project when it is
regulated at the federal level. Boardwalk Pipeline competes against a number of
intrastate pipelines which have significant regulatory advantages over Boardwalk
Pipeline because of the absence of FERC regulation. In view of potential rate
advantages and construction and service flexibility available to intrastate
pipelines, Boardwalk Pipeline may lose customers and throughput to intrastate
competitors.
We
and our subsidiaries are subject to litigation.
We and
our subsidiaries are subject to litigation in the normal course of business.
Litigation is costly and time consuming to defend and could result in a material
expense. Please read information on litigation included in the MD&A under
Item 7 and Notes 9 and 21 of the Notes to Consolidated Financial Statements
included under Item 8. Certain of the litigation risks faced by us and our
subsidiaries are as follows:
Item 1A.
Risk Factors
CNA. CNA faces
substantial risks of litigation and arbitration beyond ordinary course claims
and A&E matters, which may contain assertions in excess of amounts covered
by reserves that it has established. These matters may be difficult to assess or
quantify and may seek recovery of very large or indeterminate amounts that
include punitive or treble damages.
We
and our subsidiaries are each dependent on a small number of key executives and
other key personnel to operate our businesses successfully.
Our
success and the success of our operating subsidiaries substantially depends upon
each company’s ability to attract and retain high quality executives and other
qualified employees. In many instances, there may be only a limited number of
available qualified executives in the business lines in which we and our
subsidiaries compete and the loss of one or more key employees or the inability
to attract and retain other talented personnel could impede the successful
implementation of our and our subsidiaries’ business strategies. Diamond
Offshore and HighMount have experienced upward pressure on salaries and wages
and increased competition for skilled workers as a result of the strong drilling
and oil and gas markets in recent years. Diamond Offshore has also sustained the
loss of experienced personnel to competitors and customers. In response to these
market conditions, Diamond Offshore and HighMount have implemented retention
programs, including increases in compensation.
Certain
of our subsidiaries face significant risks related to compliance with
environmental laws.
Certain
of our subsidiaries have extensive obligations and/or financial exposure related
to compliance with federal, state and local environmental laws. Laws and
regulations protecting the environment have become increasingly stringent in
recent years, and may in some cases impose “strict liability,” rendering a
person liable for environmental damage without regard to negligence or fault on
the part of that person. These laws and regulations may expose us and our
subsidiaries to liability for the conduct of or conditions caused by others or
for acts that were in compliance with all applicable laws at the time they were
performed. For example:
|
·
|
as
discussed in more detail above, many of CNA’s policyholders have made
claims for defense costs and indemnification in connection with
environmental pollution matters;
|
|
·
|
as
an operator of mobile offshore drilling units in navigable U.S. waters and
some offshore areas, Diamond Offshore may be liable for, among other
things, damages and costs incurred in connection with oil spills related
to those operations, including for conduct of or conditions caused by
others or for acts that were in compliance with all applicable laws at the
time they were performed;
|
|
·
|
the
risk of substantial environmental costs and liabilities is inherent in
natural gas transportation, gathering and storage, including with respect
to, among other things, the handling and discharge of solid and hazardous
waste from Boardwalk Pipeline’s facilities, compliance with clean air
standards and the abandonment and reclamation of Boardwalk Pipeline’s
facilities, sites and other properties;
and
|
|
·
|
development,
production and sale of natural gas and NGLs in the United States are
subject to extensive environmental laws and regulations, including those
related to discharge of materials into the environment and environmental
protection, permits for drilling operations, bonds for ownership,
development and production of oil and gas properties and reports
concerning operations, which could result in liabilities for personal
injuries, property damage, spills, discharge of hazardous materials,
remediation and clean-up costs and other environmental damages, suspension
or termination of HighMount’s operations and administrative, civil and
criminal penalties.
|
Certain
of our subsidiaries are subject to physical and financial risks associated with
climate change.
There is
a growing belief that emissions of greenhouse gases, most notably carbon
dioxide, may be linked to global climate change. Changing global weather
patterns, particularly rising temperatures, have been associated with extreme
weather events and could change longer-term natural catastrophe trends,
including increasing the frequency and severity of hurricanes and other natural
disasters which could increase future catastrophe losses at CNA and damage to
property, disruption of business and higher operating costs at Diamond Offshore,
Boardwalk Pipeline, HighMount and Loews Hotels.
Item 1A.
Risk Factors
While
there is currently no federal regulation of greenhouse gas emissions in the
U.S., it is anticipated that federal legislation, likely consisting of a cap and
trade system, governing the emission of greenhouse gases will be enacted in the
U.S. in the near future. In addition, the U.S. Environmental Protection Agency
may regulate certain carbon dioxide and other greenhouse gas emissions and some
greenhouse gases may be regulated as “air pollutants” under the Clean Air Act.
Numerous states have already announced or adopted plans to regulate the emission
of greenhouse gases for some industry sectors. Compliance with future laws and
regulations requiring adoption of greenhouse gas control programs or imposing
restrictions on emissions of carbon dioxide could adversely affect the demand
for and the cost to produce and transport oil and natural gas and could
adversely affect the businesses of our energy subsidiaries.
The
economic recession and ongoing financial and credit markets crisis have had and
may continue to have a negative impact on the business and financial condition
of us and our subsidiaries.
The
recent financial and credit crisis has substantially reduced the availability of
liquidity and credit available to businesses and consumers worldwide. The
continued shortage of liquidity and credit, combined with substantial losses in
equity and fixed income markets, has led to an economic recession in the United
States and abroad. Such deterioration of the worldwide economy and credit and
capital markets has and may continue to adversely affect the customers of our
subsidiaries, including the ability of such customers to perform under
contracts. The recession has also resulted in, and may result in further,
reduced demand for certain of the products and services provided by our
subsidiaries, including property casualty insurance, natural gas and gas
transportation services, offshore drilling services and hotel rooms and related
services. Such decline in demand could lead to lower revenues and earnings by
our subsidiaries. We cannot predict if the actions being taken by the United
States and other governments around the world to address this situation will be
successful in reducing the severity or duration of this recession.
Item
1B. Unresolved Staff Comments.
None.
Item
2. Properties.
Our
corporate headquarters is located in approximately 113,000 square feet of leased
office space in New York City. Information relating to our subsidiaries’
properties is contained under Item 1.
Item
3. Legal Proceedings.
Information
with respect to legal proceedings is incorporated by reference to Note 21 of the
Notes to Consolidated Financial Statements included under Item
8.
Item
4. Submission of Matters to a Vote of Security Holders.
None.
EXECUTIVE
OFFICERS OF THE REGISTRANT
|
|
|
First
|
|
|
|
Became
|
Name
|
Position
and Offices Held
|
Age
|
Officer
|
|
|
|
|
David
B. Edelson
|
Senior
Vice President
|
49
|
2005
|
Gary
W. Garson
|
Senior
Vice President, General Counsel and
|
62
|
1988
|
|
Secretary
|
|
|
Herbert
C. Hofmann
|
Senior
Vice President
|
66
|
1979
|
Peter
W. Keegan
|
Senior
Vice President and Chief Financial Officer
|
64
|
1997
|
Arthur
L. Rebell
|
Senior
Vice President
|
68
|
1998
|
Andrew
H. Tisch
|
Office
of the President, Co-Chairman of the Board
|
59
|
1985
|
|
and Chairman of the Executive
Committee
|
|
|
James
S. Tisch
|
Office
of the President, President and
|
56
|
1981
|
|
Chief Executive
Officer
|
|
|
Jonathan
M. Tisch
|
Office
of the President and Co-Chairman of the Board
|
55
|
1987
|
Andrew H.
Tisch and James S. Tisch are brothers and are cousins of Jonathan M. Tisch. None
of the other officers or directors of Registrant is related to any
other.
All of
our executive officers except David B. Edelson have been engaged actively and
continuously in our business for more than the past five years. Prior to joining
us, Mr. Edelson was employed at JPMorgan Chase & Co. for more than five
years, serving in various positions but most recently as Executive Vice
President and Corporate Treasurer.
Officers
are elected and hold office until their successors are elected and qualified,
and are subject to removal by the Board of Directors.
PART
II
Item
5. Market for the Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Price Range
of Common Stock
Loews
common stock
Our
common stock is listed on the New York Stock Exchange under the symbol “L.” The
following table sets forth the reported high and low sales prices in each
calendar quarter:
|
|
2008
|
|
|
2007
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
51.33 |
|
|
$ |
37.65 |
|
|
$ |
46.32 |
|
|
$ |
40.21 |
|
Second
Quarter
|
|
|
51.51 |
|
|
|
39.89 |
|
|
|
53.46 |
|
|
|
45.47 |
|
Third
Quarter
|
|
|
49.32 |
|
|
|
35.00 |
|
|
|
52.88 |
|
|
|
42.35 |
|
Fourth
Quarter
|
|
|
39.17 |
|
|
|
19.39 |
|
|
|
51.10 |
|
|
|
44.18 |
|
Item
5. Market for the Registrant’s Common Equity, Related Stockholder
Matters
and Issuer Purchases of Equity Securities
The
following graph compares annual total return of our Common Stock, the Standard
& Poor’s 500 Composite Stock Index (“S&P 500 Index”), our New Peer Group
and our Old Peer Group for the five years ended December 31, 2008. The graph
assumes that the value of the investment in our Common Stock, the S&P 500
Index, the Old Peer Group and the New Peer Group was $100 on December 31, 2003
and that all dividends were reinvested. We have historically constructed our
peer group based on comparable products and services, revenue composition and
size. However, in reevaluating our peer group this year, we have removed a total
of seven peers for the following reasons: three were tobacco
companies that were removed as a result of the Separation of Lorillard, two were
acquired and two were removed because they have going concern considerations. We
have also added eight new peers in the energy sector in light of the evolving
nature of our business. We believe these changes to the peer group provide a
more meaningful comparison in terms of comparable products and services, revenue
composition and size.
![Graph](graph.jpg)
|
2003
|
2004
|
2005
|
2006
|
2007
|
2008
|
Loews
Corporation Stock
|
100.00 |
143.57 |
195.14 |
257.66 |
314.44 |
177.60 |
S&P
500 Index
|
100.00 |
110.88 |
116.33 |
134.70 |
142.10 |
89.53 |
Loews
New Peer Group (a)
|
100.00 |
118.61 |
158.45 |
180.56 |
206.92 |
126.08 |
Loews
Old Peer Group (b)
|
100.00 |
108.71 |
125.67 |
143.73 |
144.18 |
83.54 |
(a)
|
Our
New Peer Group consists of the following companies that are industry
competitors of our principal operating subsidiaries: Ace
Limited, W.R. Berkley Corporation, Cabot Oil & Gas Corporation, The
Chubb Corporation, Energy Transfer Partners L.P., ENSCO International
Incorporated, The Hartford Financial Services Group, Inc., Kinder Morgan
Energy Partners, L.P., Noble Corporation, Range Resources Corp., Spectra
Energy Corporation (included from December 14, 2006 when it began
trading), Transocean, Ltd. and The Travelers Companies,
Inc.
|
(b)
|
Our
Old Peer Group consists of Ace Limited, Altria Group, Inc., American
International Group, Inc., The Chubb Corporation, Cincinnati Financial
Corporation, The Hartford Financial Services Group, Inc., Reynolds
American Inc., Safeco Corporation (through September 22, 2008 as it was
acquired by Liberty Mutual), The Travelers Companies, Inc., UST, Inc. and
XL Capital Ltd.
|
Dividend
Information
We have paid quarterly cash dividends
on Loews common stock in each year since 1967. Regular dividends of $0.0625 per
share of Loews Common Stock were paid in each calendar quarter of 2008 and
2007.
We paid quarterly cash dividends on
the former Carolina Group stock until the Separation. Regular dividends of
$0.455 per share of the former Carolina Group stock were paid in the first and
second quarters of 2008 and in each calendar quarter of
2007.
Item
5. Market for the Registrant’s Common Equity, Related Stockholder
Matters
and
Issuer Purchases of Equity
Securities
Securities
Authorized for Issuance Under Equity Compensation Plans
The following table provides certain
information as of December 31, 2008 with respect to our equity compensation
plans under which our equity securities are authorized for
issuance.
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
|
Weighted
average exercise price of outstanding options, warrants and
rights
|
|
Number
of securities remaining available for future issuance under
equity
compensation
plans
(excluding securities reflected in the first column)
|
|
|
|
|
|
|
Loews
common stock:
|
|
|
|
|
|
Equity compensation plans
approved by
|
|
|
|
|
|
security holders (a)
|
5,375,400
|
|
$
30.836
|
|
4,236,697
|
Equity
compensation plans not approved
|
|
|
|
|
|
by security holders (b)
|
N/A
|
|
N/A
|
|
N/A
|
(a)
|
Consists
of the Loews Corporation 2000 Stock Option
Plan.
|
(b)
|
We
do not have equity compensation plans that have not been authorized by our
stockholders.
|
Approximate
Number of Equity Security Holders
We have approximately 1,490 holders of
record of Loews common stock.
Common
Stock Repurchases
We repurchased Loews common stock in
2008 as follows:
Period
|
Total
number of shares purchased
|
Average
price
paid
per share
|
|
|
|
January
1, 2008 – March 31, 2008
|
0
|
N/A
|
April
1, 2008 – June 30, 2008
|
0
|
N/A
|
July
1, 2008 – September 30, 2008
|
314,000
|
$
38.85
|
October
1, 2008 – December 31, 2008
|
999,600
|
21.24
|
Note:
|
In
June of 2008, we acquired 93,492,857 shares of Loews common stock in
exchange for 65,445,000 shares of Lorillard common stock. Please read Note
2 of the Notes to Consolidated Financial Statements included in Item
8.
|
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for
establishing and maintaining adequate internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for us. Our internal
control system was designed to provide reasonable assurance to our management
and Board of Directors regarding the preparation and fair presentation of
published financial statements.
There are inherent limitations to the
effectiveness of any control system, however well designed, including the
possibility of human error and the possible circumvention or overriding of
controls. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Management must make judgments with respect to the
relative cost and expected benefits of any specific control measure. The design
of a control system also is based in part upon assumptions and judgments made by
management about the likelihood of future events, and there can be no assurance
that a control will be effective under all potential future conditions. As a
result, even an effective system of internal control over financial reporting
can provide no more than reasonable assurance with respect to the fair
presentation of financial statements and the processes under which they were
prepared.
Our management assessed the
effectiveness of our internal control over financial reporting as of December
31, 2008. In making this assessment, management used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal Control – Integrated
Framework. Based on this assessment, our management believes that, as of
December 31, 2008, our internal control over financial reporting was
effective.
Our independent registered public
accounting firm, Deloitte & Touche LLP, has issued an audit report on the
Company’s internal control over financial reporting. The report of Deloitte
& Touche LLP follows this report.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
Loews
Corporation
New York,
NY
We have audited the internal control
over financial reporting of Loews Corporation and subsidiaries (the “Company”)
as of December 31, 2008, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying management’s report on internal control over financial reporting.
Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over
financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors,
management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of the inherent limitations of
internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness of the internal control over
financial reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have also audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States),
the Company’s consolidated financial statements and financial statement
schedules as of and for the year ended December 31, 2008 and our report dated
February 24, 2009 expressed an unqualified opinion on those consolidated
financial statements and financial statement schedules and included an
explanatory paragraph regarding the change in method of accounting for defined
benefit pension and postretirement plans in 2006.
DELOITTE & TOUCHE LLP
New York,
NY
February
24, 2009
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
Loews
Corporation
New York,
NY
We have audited the accompanying
consolidated balance sheets of Loews Corporation and subsidiaries (the
“Company”) as of December 31, 2008 and 2007, and the related consolidated
statements of income, shareholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2008 listed in the Index at Item 8. Our
audits also included the financial statement schedules listed in the Index at
Item 15. These consolidated financial statements and financial statement
schedules are the responsibility of the Company’s management. Our responsibility
is to express an opinion on the consolidated financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated
financial statements present fairly, in all material respects, the financial
position of Loews Corporation and subsidiaries as of December 31, 2008 and 2007,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the
consolidated financial statements, the Company changed its method of accounting
for defined benefit pension and postretirement plans in 2006.
We have also audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States),
the Company’s internal control over financial reporting as of December 31, 2008,
based on the criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 24, 2009 expressed an unqualified
opinion on the Company’s internal control over financial reporting.
DELOITTE & TOUCHE
LLP
New York,
NY
February
24, 2009
Item
6. Selected Financial Data.
The following table presents selected
financial data. The table should be read in conjunction with Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and Item 8. Financial Statements and Supplementary Data of this Form
10-K.
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
13,247 |
|
|
$ |
14,302 |
|
|
$ |
13,844 |
|
|
$ |
12,197 |
|
|
$ |
11,674 |
|
Income
before income tax and minority
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
|
|
$ |
587 |
|
|
$ |
3,195 |
|
|
$ |
3,104 |
|
|
$ |
676 |
|
|
$ |
769 |
|
Income
(loss) from continuing operations
|
|
$ |
(182 |
) |
|
$ |
1,587 |
|
|
$ |
1,676 |
|
|
$ |
475 |
|
|
$ |
582 |
|
Discontinued
operations, net
|
|
|
4,712 |
|
|
|
902 |
|
|
|
815 |
|
|
|
737 |
|
|
|
634 |
|
Net income
|
|
$ |
4,530 |
|
|
$ |
2,489 |
|
|
$ |
2,491 |
|
|
$ |
1,212 |
|
|
$ |
1,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
$ |
(182 |
) |
|
$ |
1,587 |
|
|
$ |
1,676 |
|
|
$ |
475 |
|
|
$ |
582 |
|
Discontinued operations,
net
|
|
|
4,501 |
|
|
|
369 |
|
|
|
399 |
|
|
|
486 |
|
|
|
450 |
|
Loews common
stock
|
|
|
4,319 |
|
|
|
1,956 |
|
|
|
2,075 |
|
|
|
961 |
|
|
|
1,032 |
|
Former Carolina Group
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations,
net
|
|
|
211 |
|
|
|
533 |
|
|
|
416 |
|
|
|
251 |
|
|
|
184 |
|
Net income
|
|
$ |
4,530 |
|
|
$ |
2,489 |
|
|
$ |
2,491 |
|
|
$ |
1,212 |
|
|
$ |
1,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Net Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$ |
(0.38 |
) |
|
$ |
2.96 |
|
|
$ |
3.03 |
|
|
$ |
0.85 |
|
|
$ |
1.05 |
|
Discontinued operations,
net
|
|
|
9.43 |
|
|
|
0.69 |
|
|
|
0.72 |
|
|
|
0.87 |
|
|
|
0.80 |
|
Net income
|
|
$ |
9.05 |
|
|
$ |
3.65 |
|
|
$ |
3.75 |
|
|
$ |
1.72 |
|
|
$ |
1.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former
Carolina Group stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations,
net
|
|
$ |
1.95 |
|
|
$ |
4.91 |
|
|
$ |
4.46 |
|
|
$ |
3.62 |
|
|
$ |
3.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$ |
38,450 |
|
|
$ |
46,669 |
|
|
$ |
52,102 |
|
|
$ |
43,612 |
|
|
$ |
42,726 |
|
Total
assets
|
|
|
69,857 |
|
|
|
76,115 |
|
|
|
76,881 |
|
|
|
70,906 |
|
|
|
73,720 |
|
Debt
|
|
|
8,258 |
|
|
|
7,258 |
|
|
|
5,572 |
|
|
|
5,207 |
|
|
|
6,990 |
|
Shareholders’
equity
|
|
|
13,126 |
|
|
|
17,591 |
|
|
|
16,502 |
|
|
|
13,092 |
|
|
|
11,970 |
|
Cash
dividends per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common
stock
|
|
|
0.25 |
|
|
|
0.25 |
|
|
|
0.24 |
|
|
|
0.20 |
|
|
|
0.20 |
|
Former Carolina Group
stock
|
|
|
0.91 |
|
|
|
1.82 |
|
|
|
1.82 |
|
|
|
1.82 |
|
|
|
1.82 |
|
Book
value per share of Loews common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
|
|
|
30.17 |
|
|
|
32.40 |
|
|
|
30.14 |
|
|
|
23.64 |
|
|
|
21.85 |
|
Shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common
stock
|
|
|
435.09 |
|
|
|
529.68 |
|
|
|
544.20 |
|
|
|
557.54 |
|
|
|
556.75 |
|
Former Carolina Group
stock
|
|
|
- |
|
|
|
108.46 |
|
|
|
108.33 |
|
|
|
78.19 |
|
|
|
67.97 |
|
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
Management’s discussion and analysis of
financial condition and results of operations is comprised of the following
sections:
|
Page
|
|
No.
|
|
|
Overview
|
|
|
Consolidated Financial
Results
|
59
|
|
Separation of
Lorillard
|
60
|
|
Parent Company
Structure
|
61
|
|
Critical
Accounting Estimates
|
61
|
|
Results
of Operations by Business Segment
|
64
|
|
CNA Financial
|
64
|
|
Reserves – Estimates and
Uncertainties
|
64
|
|
Standard Lines
|
71
|
|
Specialty Lines
|
73
|
|
Life & Group
Non-Core
|
75
|
|
Other Insurance
|
76
|
|
A&E
Reserves
|
77
|
|
Diamond Offshore
|
82
|
|
HighMount
|
86
|
|
Boardwalk
Pipeline
|
89
|
|
Loews Hotels
|
93
|
|
Corporate and
Other
|
94
|
|
Liquidity
and Capital Resources
|
95
|
|
CNA Financial
|
95
|
|
Diamond Offshore
|
98
|
|
HighMount
|
99
|
|
Boardwalk
Pipeline
|
100
|
|
Loews Hotels
|
102
|
|
Corporate and
Other
|
102
|
|
Contractual
Obligations
|
103
|
|
Investments
|
104
|
|
Accounting
Standards
|
114
|
|
Forward-Looking
Statements
|
114
|
|
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 74% owned subsidiary);
and
|
|
·
|
operation
of hotels (Loews Hotels Holding Corporation (“Loews Hotels”), a wholly
owned subsidiary).
|
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Overview
-
(Continued)
Unless the context otherwise requires,
references in this Report to “the Company,” “we,” “our,” “us” or like terms
refer to the business of Loews Corporation excluding its
subsidiaries.
The following discussion should be read
in conjunction with Item 1A, Risk Factors, and Item 8, Financial Statements and
Supplementary Data of this Form 10-K.
Consolidated
Financial Results
Consolidated results from continuing
operations for the year ended December 31, 2008 amounted to a loss of $182
million, or $0.38 per share, compared to income from continuing operations of
$1,587 million, or $2.96 per share, in 2007. Results for the fourth quarter of
2008 amounted to a loss from continuing operations of $958 million, or $2.20 per
share, compared to income from continuing operations of $295 million, or $0.56
per share, in the 2007 fourth quarter. The fourth quarter and full year of 2008
included the following:
|
·
|
Realized
investment losses at CNA of $283 million for the fourth quarter of 2008
and $756 million for the full year 2008, after tax and minority
interest.
|
|
·
|
A
$440 million after tax non-cash impairment charge for the fourth quarter
and full year 2008, related to the carrying value of HighMount’s natural
gas and oil properties reflecting lower commodity prices at December 31,
2008.
|
|
·
|
A
$314 million after tax non-cash goodwill impairment charge for the fourth
quarter and full year 2008, related to
HighMount.
|
|
·
|
Book
value per common share of $30.17 at December 31, 2008 as compared to
$32.40 at December 31, 2007.
|
Net income for 2008 amounted to $4.5
billion compared to $2.5 billion for 2007. Net income includes a tax-free
non-cash gain of $4.3 billion related to the separation of Lorillard and an
after tax gain of $75 million from the sale of Bulova Corporation, both reported
as discontinued operations.
Net income and earnings (loss) per share
information attributable to Loews common stock and our former Carolina Group
stock is summarized in the table below.
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to Loews common stock:
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$ |
(182 |
) |
|
$ |
1,587 |
|
Discontinued operations,
net
|
|
|
4,501 |
|
|
|
369 |
|
Net
income attributable to Loews common stock
|
|
|
4,319 |
|
|
|
1,956 |
|
Net
income attributable to former Carolina Group stock –
|
|
|
|
|
|
|
|
|
Discontinued operations, net
(a)
|
|
|
211 |
|
|
|
533 |
|
Consolidated
net income
|
|
$ |
4,530 |
|
|
$ |
2,489 |
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
Loews common
stock
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$ |
(0.38 |
) |
|
$ |
2.96 |
|
Discontinued operations,
net
|
|
|
9.43 |
|
|
|
0.69 |
|
Loews common
stock
|
|
$ |
9.05 |
|
|
$ |
3.65 |
|
Former Carolina Group stock –
Discontinued operations, net (a)
|
|
$ |
1.95 |
|
|
$ |
4.91 |
|
(a)
|
The
Carolina Group and Carolina Group stock were eliminated as part of the
separation of Lorillard.
|
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Consolidated Financial Results -
(Continued)
Higher realized investment losses, lower
investment income and increased catastrophe losses, primarily from hurricanes,
at CNA contributed to the loss from continuing operations for 2008. Investment
income at the holding company also included losses in 2008, as compared to gains
in the prior year. The prolonged and severe disruptions in the debt and equity
markets, including among other things, widening of credit spreads, bankruptcies
and government intervention in a number of large financial institutions as well
as the global economic downturn, resulted in significant realized and unrealized
losses in CNA’s investment portfolio and declines in net investment income
during 2008.
HighMount’s results also contributed to
the loss from continuing operations and include a non-cash impairment charge of
$691 million ($440 million after tax) related to the carrying value of natural
gas and oil properties, and a non-cash charge related to the impairment of
goodwill of $482 million ($314 million after tax). These charges reflect
declines in commodity prices and negative reserve revisions in proved reserve
quantities based on a decline in commodity prices. There were no comparable
charges in 2007.
These declines were partially offset by
significantly improved results at Diamond Offshore.
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 our 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 our 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 the 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 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 Balance
Sheets, Consolidated Statements of Income, and Consolidated 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% economic interest in the former
Carolina Group.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
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.
CRITICAL
ACCOUNTING ESTIMATES
The preparation of the Consolidated
Financial Statements in conformity with accounting principles generally accepted
in the United States of America (“GAAP”) requires us to make estimates and
assumptions that affect the amounts reported in the Consolidated Financial
Statements and the related notes. Actual results could differ from those
estimates.
The Consolidated Financial Statements
and accompanying notes have been prepared in accordance with GAAP, applied on a
consistent basis. We continually evaluate the accounting policies and estimates
used to prepare the Consolidated Financial Statements. In general, our estimates
are based on historical experience, evaluation of current trends, information
from third party professionals and various other assumptions that we believe are
reasonable under the known facts and circumstances.
We consider the accounting policies
discussed below to be critical to an understanding of our Consolidated Financial
Statements as their application places the most significant demands on our
judgment. Due to the inherent uncertainties involved with this type of judgment,
actual results could differ significantly from estimates and may have a material
adverse impact on our results of operations and/or equity.
Insurance
Reserves
Insurance reserves are established for
both short and long-duration insurance contracts. Short-duration contracts are
primarily related to property and casualty insurance policies where the
reserving process is based on actuarial estimates of the amount of loss,
including amounts for known and unknown claims. Long-duration contracts
typically include traditional life insurance, payout annuities and long term
care products and are estimated using actuarial estimates about mortality,
morbidity and persistency as well as assumptions about expected investment
returns. The reserve for unearned premiums on property and casualty and accident
and health contracts represents the portion of premiums written related to the
unexpired terms of coverage. The inherent risks associated with the reserving
process are discussed in the Reserves – Estimates and Uncertainties section
below.
Reinsurance
Amounts recoverable from reinsurers are
estimated in a manner consistent with claim and claim adjustment expense
reserves or future policy benefits reserves and are reported as receivables in
the Consolidated Balance Sheets. The ceding of insurance does not discharge CNA
of its primary liability under insurance contracts written by CNA. An 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 disputes the
liabilities assumed under reinsurance agreements. An estimated allowance for
doubtful accounts is recorded on the basis of periodic evaluations of balances
due from reinsurers, reinsurer solvency, CNA’s past experience and current
economic conditions. Further information on CNA’s reinsurance program is
included in Note 19 of the Notes to Consolidated Financial Statements included
under Item 8.
Litigation
We and our subsidiaries are involved in
various legal proceedings that have arisen during the ordinary course of
business. We evaluate the facts and circumstances of each situation, and when
management determines it necessary, a liability is estimated and recorded.
Please read Note 21 of the Notes to Consolidated Financial Statements included
under Item 8.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Critical
Accounting Estimates -
(Continued)
Valuation
of Investments and Impairment of Securities
Invested assets are exposed to various
risks, such as interest rate, market and credit risks. Due to the level of risk
associated with certain invested assets and the level of uncertainty related to
changes in the fair value of these assets, it is possible that changes in risks
in the near term could have an adverse material impact on our results of
operations or equity.
CNA’s investment portfolio is subject to
market declines below amortized cost that may be other-than-temporary. A
significant judgment in the valuation of investments is the determination of
when an other-than-temporary impairment has occurred. CNA has an Impairment
Committee, which reviews the investment portfolio on at least a quarterly basis,
with ongoing analysis as new information becomes available. Any decline that is
determined to be other-than-temporary is recorded as an other-than-temporary
impairment loss in the results of operations in the period in which the
determination occurred. Further information on CNA’s process for evaluating
impairments is included in Note 3 of the Notes to Consolidated Financial
Statements included under Item 8.
Securities in the parent company’s
investment portfolio that are not part of its cash management activities are
classified as trading securities in order to reflect our investment philosophy.
These investments are carried at fair value with the net unrealized gain or loss
included in the Consolidated Statements of Income.
Long
Term Care Products
Reserves and deferred acquisition costs
for CNA’s long term care products are based on certain assumptions including
morbidity, policy persistency and interest rates. The recoverability of deferred
acquisition costs and the adequacy of the reserves are contingent on actual
experience related to these key assumptions and other factors such as future
health care cost trends. If actual experience differs from these assumptions,
the deferred acquisition costs may not be fully realized and the reserves may
not be adequate, requiring CNA to add to reserves, or take unfavorable
development. Therefore, our financial results could be adversely
impacted.
Pension
and Postretirement Benefit Obligations
We are required to make a significant
number of assumptions in order to estimate the liabilities and costs related to
our pension and postretirement benefit obligations to employees under our
benefit plans. The assumptions that have the most impact on pension costs are
the discount rate, the expected return on plan assets and the rate of
compensation increases. These assumptions are evaluated relative to current
market factors such as inflation, interest rates and fiscal and monetary
policies. Changes in these assumptions can have a material impact on pension
obligations and pension expense.
In determining the discount rate
assumption, we utilized current market information and liability information,
including a discounted cash flow analysis of our pension and postretirement
obligations. In particular, the basis for our discount rate selection was the
yield on indices of highly rated fixed income debt securities with durations
comparable to that of our plan liabilities. The yield curve was applied to
expected future retirement plan payments to adjust the discount rate to reflect
the cash flow characteristics of the plans. The yield curves and indices
evaluated in the selection of the discount rate are comprised of high quality
corporate bonds that are rated AA by an accepted rating agency.
The Company recorded a benefit of $1
million in 2008 for the pension and other postretirement benefit plans. Based on
current assumptions, the expected expense for the 2009 pension and other
postretirement benefit plans is $64 million.
Further information on our pension and
postretirement benefit obligations is included in Note 18 of the Notes to
Consolidated Financial Statements included under Item 8.
Valuation
of HighMount’s Proved Reserves
HighMount follows the full cost method
of accounting for natural gas and oil exploration and production (“E&P”)
activities prescribed by the Securities and Exchange Commission (“SEC”). Under
the full cost method, all direct costs of property acquisition, exploration and
development activities are capitalized and subsequently depleted using the
units-of-production method. The depletable base of costs includes estimated
future costs to be incurred in developing proved natural gas and natural gas
liquids (“NGLs”) reserves, as well as capitalized asset retirement costs, net of
projected
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Critical
Accounting Estimates -
(Continued)
salvage
values. Capitalized costs in the depletable base are subject to a ceiling test
prescribed by the SEC. The test limits capitalized amounts to a ceiling - the present value of
estimated future net revenues to be derived from the production of proved
natural gas and NGL reserves, assuming period-end pricing adjusted for any cash
flow hedges in place. If net capitalized costs exceed the ceiling test at the
end of any quarterly period, then a permanent write-down of the assets must be
recognized in that period. A write-down may not be reversed in future periods,
even though higher natural gas and NGL prices may subsequently increase the
ceiling. HighMount performs the ceiling test quarterly. At December 31, 2008,
total capitalized costs exceeded the ceiling and HighMount recognized a non-cash
impairment charge of $691 million ($440 million after tax) related to the
carrying value of natural gas and oil properties, as discussed further in Note 8
of the Notes to Consolidated Financial Statements included under Item 8. In
addition, gains or losses on the sale or other disposition of natural gas and
NGL properties are not recognized unless the gain or loss would significantly
alter the relationship between capitalized costs and proved
reserves.
HighMount’s estimate of proved reserves
requires a high degree of judgment and is dependent on factors such as
historical data, engineering estimates of proved reserve quantities, estimates
of the amount and timing of future expenditures to develop the proved reserves,
and estimates of future production from the proved reserves. HighMount’s
estimated proved reserves as of December 31, 2008 and 2007, are based upon
studies for each of HighMount’s properties prepared by HighMount staff
engineers. Calculations were prepared using standard geological and engineering
methods generally accepted by the petroleum industry and in accordance with SEC
guidelines. Ryder Scott Company, L.P., an independent third party petroleum
engineering consulting firm, has audited HighMount’s proved reserve estimates in
accordance with the Standards Pertaining to the Estimating and Auditing of Oil
and Gas Reserves Information promulgated by the Society of Petroleum Engineers.
Given the volatility of natural gas and NGL prices, it is possible that
HighMount’s estimate of discounted future net cash flows from proved natural gas
and NGL reserves that is used to calculate the ceiling could materially change
in the near term.
The process to estimate reserves is
imprecise, and estimates are subject to revision. If there is a significant
variance in any of HighMount’s estimates or assumptions in the future and
revisions to the value of HighMount’s proved reserves are necessary, related
depletion expense and the calculation of the ceiling test would be affected and
recognition of natural gas and NGL property impairments could occur. See Note 8
of the Notes to Consolidated Financial Statements included under Item
8.
Goodwill
Management must apply judgment in
determining the estimated fair value of its reporting units’ goodwill for
purposes of performing impairment tests. Management uses all available
information to make these fair value determinations, including the present
values of expected future cash flows using discount rates commensurate with the
risks involved in the assets and observed market multiples. Goodwill is required
to be evaluated on an annual basis and whenever, in management’s judgment, there
is a significant change in circumstances that would be considered a triggering
event.
Income
Taxes
We account for taxes under the asset and
liability method. Under this method, deferred income taxes are
recognized for temporary differences between the financial statement and tax
return bases of assets and liabilities. Any resulting future tax benefits are
recognized to the extent that realization of such benefits is more likely than
not, and a valuation allowance is established for any portion of a deferred tax
asset that management believes may not be realized. The assessment of the need
for a valuation allowance requires management to make estimates and assumptions
about future earnings, reversal of existing temporary differences and available
tax planning strategies. If actual experience differs from these estimates and
assumptions, the recorded deferred tax asset may not be fully realized resulting
in an increase to income tax expense in our results of operations. In
addition, the ability to record deferred tax assets in the future could be
limited resulting in a higher effective tax rate in that future
period.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
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 Life & Group Non-Core segment
primarily includes the results of the life and group lines of business that have
either been sold or placed in run-off. CNA continues to service its existing
individual long term care commitments, payout of its annuity business and its
pension deposit business. CNA also manages a block of group reinsurance and life
settlement contracts. These businesses are being managed as a run-off operation.
CNA’s group long term care business, while considered non-core, continues to be
actively marketed. During 2008, CNA exited the indexed group annuity portion of
its pension deposit business.
Other Insurance primarily includes
certain corporate expenses, including interest on corporate debt, and the
results of certain property and casualty business primarily in run-off,
including CNA Re. This segment also includes the results related to the
centralized adjusting and settlement of A&E claims.
Reserves
– Estimates and Uncertainties
CNA maintains reserves to cover its
estimated ultimate unpaid liability for claim and claim adjustment expenses,
including the estimated cost of the claims adjudication process, for claims that
have been reported but not yet settled (“case reserves”) and claims that have
been incurred but not reported (“IBNR”). Claim and claim adjustment expense
reserves are reflected as liabilities and are included on the Consolidated
Balance Sheets under the heading “Insurance Reserves.” Adjustments to prior year
reserve estimates, if necessary, are reflected in the results of operations in
the period that the need for such adjustments is determined. The carried case
and IBNR reserves are provided in the Segment Results section of this MD&A
and in Note 9 of the Notes to Consolidated Financial Statements included under
Item 8.
The level of reserves CNA maintains
represents its best estimate, as of a particular point in time, of what the
ultimate settlement and administration of claims will cost based on its
assessment of facts and circumstances known at that time. Reserves are not an
exact calculation of liability but instead are complex estimates that CNA
derives, generally utilizing a variety of actuarial reserve estimation
techniques, from numerous assumptions and expectations about future events, both
internal and external, many of which are highly uncertain.
CNA is subject to the uncertain effects
of emerging or potential claims and coverage issues that arise as industry
practices and legal, judicial, social and other environmental conditions change.
These issues have had, and may continue to have, a negative effect on CNA’s
business by either extending coverage beyond the original underwriting intent or
by increasing the number or size of claims. Examples of emerging or potential
claims and coverage issues include:
|
·
|
increases
in the number and size of claims relating to injuries from medical
products;
|
|
·
|
the
effects of accounting and financial reporting scandals and other major
corporate governance failures, which have resulted in an increase in the
number and size of claims, including directors and officers (“D&O”)
and errors and omissions (“E&O”) insurance
claims;
|
|
·
|
class
action litigation relating to claims handling and other
practices;
|
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - CNA Financial
-
(Continued)
|
·
|
construction
defect claims, including claims for a broad range of additional insured
endorsements on policies;
|
|
·
|
clergy
abuse claims, including passage of legislation to reopen or extend various
statutes of limitations; and
|
|
·
|
mass
tort claims, including bodily injury claims related to silica, welding
rods, benzene, lead and various other chemical exposure
claims.
|
CNA’s experience has been that
establishing reserves for casualty coverages relating to asbestos and
environmental pollution (“A&E”) claim and claim adjustment expenses are
subject to uncertainties that are greater than those presented by other claims.
Estimating the ultimate cost of both reported and unreported A&E claims are
subject to a higher degree of variability due to a number of additional factors,
including among others:
|
·
|
coverage
issues, including whether certain costs are covered under the policies and
whether policy limits apply;
|
|
·
|
inconsistent
court decisions and developing legal
theories;
|
|
·
|
continuing
aggressive tactics of plaintiffs’
lawyers;
|
|
·
|
the
risks and lack of predictability inherent in major
litigation;
|
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·
|
changes
in the volume of A&E claims;
|
|
·
|
the
impact of the exhaustion of primary limits and the resulting increase in
claims on any umbrella or excess policies CNA has
issued;
|
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·
|
the
number and outcome of direct actions against CNA;
and
|
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·
|
CNA’s
ability to recover reinsurance for A&E
claims.
|
It is also not possible to predict
changes in the legal and legislative environment and the impact on the future
development of A&E claims. This development will be affected by future court
decisions and interpretations, as well as changes in applicable legislation. It
is difficult to predict the ultimate outcome of large coverage disputes until
settlement negotiations near completion and significant legal questions are
resolved or, failing settlement, until the dispute is adjudicated. This is
particularly the case with policyholders in bankruptcy where negotiations often
involve a large number of claimants and other parties and require court approval
to be effective. A further uncertainty exists as to whether a national privately
financed trust to replace litigation of asbestos claims with payments to
claimants from the trust will be established and approved through federal
legislation, and, if established and approved, whether it will contain funding
requirements in excess of CNA’s carried loss reserves.
Traditional actuarial methods and
techniques employed to estimate the ultimate cost of claims for more traditional
property and casualty exposures are less precise in estimating claim and claim
adjustment reserves for A&E, particularly in an environment of emerging or
potential claims and coverage issues that arise from industry practices and
legal, judicial and social conditions. Therefore, these traditional actuarial
methods and techniques are necessarily supplemented with additional estimation
techniques and methodologies, many of which involve significant judgments that
are required of management. For A&E, CNA regularly monitors its exposures,
including reviews of loss activity, regulatory developments and court rulings.
In addition, CNA performs a comprehensive ground up analysis on its exposures
annually. CNA’s actuaries, in conjunction with their specialized claim unit, use
various modeling techniques to estimate its overall exposure to known accounts.
CNA uses this information and additional modeling techniques to develop loss
distributions and claim reporting patterns to determine reserves for accounts
that will report A&E exposure in the future. Estimating the average claim
size requires analysis of the impact of large losses and claim cost trend based
on changes in the cost of repairing or replacing property, changes in the cost
of legal fees, judicial decisions, legislative changes and other factors. Due to
the inherent uncertainties in estimating reserves for A&E claim and claim
adjustment expenses and the degree of variability due to, among other things,
the factors described above, CNA may be required to record material changes in
its claim and claim adjustment expense reserves in the future, should new
information become available or other developments emerge. See the A&E
Reserves section of this MD&A and Note 9 of the Notes to Consolidated
Financial Statements included under Item 8 for additional information relating
to A&E claims and reserves.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - CNA Financial
-
(Continued)
The impact of these and other unforeseen
emerging or potential claims and coverage issues is difficult to predict and
could materially adversely affect the adequacy of CNA’s claim and claim
adjustment expense reserves and could lead to future reserve additions. See the
Segment Results sections of this MD&A and Note 9 of the Notes to
Consolidated Financial Statements included under Item 8 for a discussion of
changes in reserve estimates and the impact on our results of
operations.
Establishing
Reserve Estimates
In developing claim and claim adjustment
expense (“loss” or “losses”) reserve estimates, CNA’s actuaries perform detailed
reserve analyses that are staggered throughout the year. The data is organized
at a “product” level. A product can be a line of business covering a subset of
insureds such as commercial automobile liability for small and middle market
customers, it can encompass several lines of business provided to a specific set
of customers such as dentists, or it can be a particular type of claim such as
construction defect. Every product is analyzed at least once during the year,
and many products are analyzed multiple times. The analyses generally review
losses gross of ceded reinsurance and apply the ceded reinsurance terms to the
gross estimates to establish estimates net of reinsurance. In addition to the
detailed analyses, CNA reviews actual loss emergence for all products each
quarter.
The detailed analyses use a variety of
generally accepted actuarial methods and techniques to produce a number of
estimates of ultimate loss. CNA’s actuaries determine a point estimate of
ultimate loss by reviewing the various estimates and assigning weight to each
estimate given the characteristics of the product being reviewed. The reserve
estimate is the difference between the estimated ultimate loss and the losses
paid to date. The difference between the estimated ultimate loss and the case
incurred loss (paid loss plus case reserve) is IBNR. IBNR calculated as such
includes a provision for development on known cases (supplemental development)
as well as a provision for claims that have occurred but have not yet been
reported (pure IBNR).
Most of CNA’s business can be
characterized as long-tail. For long-tail business, it will generally be several
years between the time the business is written and the time when all claims are
settled. CNA’s long-tail exposures include commercial automobile liability,
workers’ compensation, general liability, medical malpractice, other
professional liability coverages, assumed reinsurance run-off and products
liability. Short-tail exposures include property, commercial automobile physical
damage, marine and warranty. Each of CNA’s property/casualty segments, Standard
Lines, Specialty Lines and Other Insurance contain both long-tail and short-tail
exposures.
The methods used to project ultimate
loss for both long-tail and short-tail exposures include, but are not limited
to, the following:
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·
|
Bornhuetter-Ferguson
Using Premiums and Paid Loss,
|
|
·
|
Bornhuetter-Ferguson
Using Premiums and Incurred Loss,
and
|
The paid development method estimates
ultimate losses by reviewing paid loss patterns and applying them to accident
years with further expected changes in paid loss. Selection of the paid loss
pattern requires analysis of several factors including the impact of inflation
on claims costs, the rate at which claims professionals make claim payments and
close claims, the impact of judicial decisions, the impact of underwriting
changes, the impact of large claim payments and other factors. Claim cost
inflation itself requires evaluation of changes in the cost of repairing or
replacing property, changes in the cost of medical care, changes in the cost of
wage replacement, judicial decisions, legislative changes and other factors.
Because this method assumes that losses are paid at a consistent rate, changes
in any of these factors can
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - CNA Financial
-
(Continued)
impact
the results. Since the method does not rely on case reserves, it is not directly
influenced by changes in the adequacy of case reserves.
For many products, paid loss data for
recent periods may be too immature or erratic for accurate predictions. This
situation often exists for long-tail exposures. In addition, changes in the
factors described above may result in inconsistent payment patterns. Finally,
estimating the paid loss pattern subsequent to the most mature point available
in the data analyzed often involves considerable uncertainty for long-tail
products such as workers’ compensation.
The incurred development method is
similar to the paid development method, but it uses case incurred losses instead
of paid losses. Since the method uses more data (case reserves in addition to
paid losses) than the paid development method, the incurred development patterns
may be less variable than paid patterns. However, selection of the incurred loss
pattern requires analysis of all of the factors above. In addition, the
inclusion of case reserves can lead to distortions if changes in case reserving
practices have taken place, and the use of case incurred losses may not
eliminate the issues associated with estimating the incurred loss pattern
subsequent to the most mature point available.
The loss ratio method multiplies
premiums by an expected loss ratio to produce ultimate loss estimates for each
accident year. This method may be useful if loss development patterns are
inconsistent, losses emerge very slowly, or there is relatively little loss
history from which to estimate future losses. The selection of the expected loss
ratio requires analysis of loss ratios from earlier accident years or pricing
studies and analysis of inflationary trends, frequency trends, rate changes,
underwriting changes and other applicable factors.
The Bornhuetter-Ferguson using premiums
and paid loss method is a combination of the paid development approach and the
loss ratio approach. The method normally determines expected loss ratios similar
to the approach used to estimate the expected loss ratio for the loss ratio
method and requires analysis of the same factors described above. The method
assumes that only future losses will develop at the expected loss ratio level.
The percent of paid loss to ultimate loss implied from the paid development
method is used to determine what percentage of ultimate loss is yet to be paid.
The use of the pattern from the paid development method requires consideration
of all factors listed in the description of the paid development method. The
estimate of losses yet to be paid is added to current paid losses to estimate
the ultimate loss for each year. This method will react very slowly if actual
ultimate loss ratios are different from expectations due to changes not
accounted for by the expected loss ratio calculation.
The Bornhuetter-Ferguson using premiums
and incurred loss method is similar to the Bornhuetter-Ferguson using premiums
and paid loss method except that it uses case incurred losses. The use of case
incurred losses instead of paid losses can result in development patterns that
are less variable than paid patterns. However, the inclusion of case reserves
can lead to distortions if changes in case reserving have taken place, and the
method requires analysis of all the factors that need to be reviewed for the
loss ratio and incurred development methods.
The average loss method multiplies a
projected number of ultimate claims by an estimated ultimate average loss for
each accident year to produce ultimate loss estimates. Since projections of the
ultimate number of claims are often less variable than projections of ultimate
loss, this method can provide more reliable results for products where loss
development patterns are inconsistent or too variable to be relied on
exclusively. In addition, this method can more directly account for changes in
coverage that impact the number and size of claims. However, this method can be
difficult to apply to situations where very large claims or a substantial number
of unusual claims result in volatile average claim sizes. Projecting the
ultimate number of claims requires analysis of several factors including the
rate at which policyholders report claims to CNA, the impact of judicial
decisions, the impact of underwriting changes and other factors. Estimating the
ultimate average loss requires analysis of the impact of large losses and claim
cost trend based on changes in the cost of repairing or replacing property,
changes in the cost of medical care, changes in the cost of wage replacement,
judicial decisions, legislative changes and other factors.
For other more complex products where
the above methods may not produce reliable indications, CNA uses additional
methods tailored to the characteristics of the specific situation. Such products
include construction defect losses and A&E.
For construction defect losses, CNA’s
actuaries organize losses by report year. Report year groups claims by the year
in which they were reported. To estimate losses from claims that have not been
reported, various extrapolation techniques are applied to the pattern of claims
that have been reported to estimate the number of claims yet to
be
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - CNA Financial
-
(Continued)
reported.
This process requires analysis of several factors including the rate at which
policyholders report claims to CNA, the impact of judicial decisions, the impact
of underwriting changes and other factors. An average claim size is determined
from past experience and applied to the number of unreported claims to estimate
reserves for these claims.
For many exposures, especially those
that can be considered long-tail, a particular accident year may not have a
sufficient volume of paid losses to produce a statistically reliable estimate of
ultimate losses. In such a case, CNA’s actuaries typically assign more weight to
the incurred development method than to the paid development method. As claims
continue to settle and the volume of paid loss increases, the actuaries may
assign additional weight to the paid development method. For most of CNA’s
products, even the incurred losses for accident years that are early in the
claim settlement process will not be of sufficient volume to produce a reliable
estimate of ultimate losses. In these cases, CNA will not assign any weight to
the paid and incurred development methods. CNA will use loss ratio,
Bornhuetter-Ferguson and average loss methods. For short-tail exposures, the
paid and incurred development methods can often be relied on sooner primarily
because CNA’s history includes a sufficient number of years to cover the entire
period over which paid and incurred losses are expected to change. However, CNA
may also use loss ratio, Bornhuetter-Ferguson and average loss methods for
short-tail exposures.
Periodic
Reserve Reviews
The reserve analyses performed by CNA’s
actuaries result in point estimates. Each quarter, the results of the detailed
reserve reviews are summarized and discussed with CNA’s senior management to
determine the best estimate of reserves. This group considers many factors in
making this decision. The factors include, but are not limited to, the
historical pattern and volatility of the actuarial indications, the sensitivity
of the actuarial indications to changes in paid and incurred loss patterns, the
consistency of claims handling processes, the consistency of case reserving
practices, changes in CNA’s pricing and underwriting, and overall pricing and
underwriting trends in the insurance market.
CNA’s recorded reserves reflect its best
estimate as of a particular point in time based upon known facts, current law
and its judgment. The carried reserve may differ from the actuarial point
estimate as the result of CNA’s consideration of the factors noted above as well
as the potential volatility of the projections associated with the specific
product being analyzed and other factors impacting claims costs that may not be
quantifiable through traditional actuarial analysis. This process results in
management’s best estimate which is then recorded as the loss
reserve.
Currently, CNA’s reserves are slightly
higher than the actuarial point estimate. CNA does not establish a specific
provision for uncertainty. For Standard Lines, the difference between CNA’s
reserves and the actuarial point estimate is primarily due to the three most
recent accident years because the claim data from these accident years is very
immature. For Specialty Lines, the difference between CNA’s reserves and the
actuarial point estimate is spread more broadly across accident years reflecting
the volatility of claim outcomes. CNA believes it is prudent to wait until
actual experience confirms that the loss reserves should be adjusted. For Other
Insurance, the carried reserve is slightly higher than the actuarial point
estimate. For A&E exposures, CNA believes it is prudent, based on the
history of developments in this area and the volatility associated with the
reserves, to be above the point estimate until the ultimate outcome of the
issues associated with these exposures is clearer.
The key assumptions fundamental to the
reserving process are often different for various products and accident years.
Some of these assumptions are explicit assumptions that are required of a
particular method, but most of the assumptions are implicit and cannot be
precisely quantified. An example of an explicit assumption is the pattern
employed in the paid development method. However, the assumed pattern is itself
based on several implicit assumptions such as the impact of inflation on medical
costs and the rate at which claim professionals close claims. As a result, the
effect on reserve estimates of a particular change in assumptions usually cannot
be specifically quantified, and changes in these assumptions cannot be tracked
over time.
CNA’s recorded reserves are management’s
best estimate. In order to provide an indication of the variability associated
with CNA’s net reserves, the following discussion provides a sensitivity
analysis that shows the approximate estimated impact of variations in the most
significant factor affecting CNA’s reserve estimates for particular types of
business. These significant factors are the ones that could most likely
materially impact the reserves. This discussion covers the major types of
business for which CNA believes a material deviation to its reserves is
reasonably possible. There can be no assurance that actual experience will be
consistent with the current assumptions or with the variation
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - CNA Financial
-
(Continued)
indicated
by the discussion. In addition, there can be no assurance that other factors and
assumptions will not have a material impact on CNA’s reserves.
Within Standard Lines, the two types of
business for which CNA believes a material deviation to its net reserves is
reasonably possible are workers’ compensation and general
liability.
For Standard Lines workers’
compensation, since many years will pass from the time the business is written
until all claim payments have been made, claim cost inflation on claim payments
is the most significant factor affecting workers’ compensation reserve
estimates. Workers’ compensation claim cost inflation is driven by the cost of
medical care, the cost of wage replacement, expected claimant lifetimes,
judicial decisions, legislative changes and other factors. If estimated workers’
compensation claim cost inflation increases by 100 basis points for the entire
period over which claim payments will be made, CNA estimates that its net
reserves would increase by approximately $500 million. If estimated
workers’ compensation claim cost inflation decreases by 100 basis points for the
entire period over which claim payments will be made, CNA estimates that its net
reserves would decrease by approximately $450 million. CNA’s net reserves for
Standard Lines workers’ compensation were approximately $4.8 billion at December
31, 2008.
For Standard Lines general liability,
the predominant method used for estimating reserves is the incurred development
method. Changes in the cost to repair or replace property, the cost of medical
care, the cost of wage replacement, judicial decisions, legislation and other
factors all impact the pattern selected in this method. The pattern selected
results in the incurred development factor that estimates future changes in case
incurred loss. If the estimated incurred development factor for general
liability increases by 12.0%, CNA estimates that its net reserves would increase
by approximately $250 million. If the estimated incurred development factor for
general liability decreases by 10.0%, CNA estimates that its net reserves would
decrease by approximately $200 million. CNA’s net reserves for Standard Lines
general liability were approximately $3.3 billion at December 31,
2008.
Within Specialty Lines, CNA believes a
material deviation to its net reserves is reasonably possible for professional
liability and related business in the U.S. Specialty Lines group. This business
includes professional liability coverages provided to various professional
firms, including architects, realtors, small and mid-sized accounting firms, law
firms and technology firms. This business also includes D&O, employment
practices, fiduciary and fidelity coverages as well as insurance products
serving the healthcare delivery system. The most significant factor affecting
reserve estimates for this business is claim severity. Claim severity is driven
by the cost of medical care, the cost of wage replacement, legal fees, judicial
decisions, legislation and other factors. Underwriting and claim handling
decisions such as the classes of business written and individual claim
settlement decisions can also impact claim severity. If the estimated claim
severity increases by 9.0%, CNA estimates that the net reserves would increase
by approximately $400 million. If the estimated claim severity decreases by
3.0%, CNA estimates that net reserves would decrease by approximately $150
million. CNA’s net reserves for this business were approximately $4.8 billion at
December 31, 2008.
Within Other Insurance, the two types of
business for which CNA believes a material deviation to its net reserves is
reasonably possible are CNA Re and A&E.
For CNA Re, the predominant method used
for estimating reserves is the incurred development method. Changes in the cost
to repair or replace property, the cost of medical care, the cost of wage
replacement, the rate at which ceding companies report claims, judicial
decisions, legislation and other factors all impact the incurred development
pattern for CNA Re. The pattern selected results in the incurred development
factor that estimates future changes in case incurred loss. If the estimated
incurred development factor for CNA Re increases by 24.0%, CNA estimates that
its net reserves for CNA Re would increase by approximately $125 million. If the
estimated incurred development factor for CNA Re decreases by 18.0%, CNA
estimates that its net reserves would decrease by approximately $100 million.
CNA’s net reserves for CNA Re were approximately $0.7 billion at December 31,
2008.
For A&E, the most significant factor
affecting reserve estimates is overall account size trend. Overall account size
trend for A&E reflects the combined impact of economic trends (inflation),
changes in the types of defendants involved, the expected mix of asbestos
disease types, judicial decisions, legislation and other factors. If the
estimated overall account size trend for A&E increases by 400 basis points,
CNA estimates that its A&E net reserves would increase by approximately $250
million. If the estimated overall account size trend for A&E decreases by
400 basis points, CNA estimates that its A&E net reserves would decrease by
approximately $150 million. CNA’s net reserves for A&E were approximately
$1.5 billion at December 31, 2008.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - CNA Financial
-
(Continued)
Given the factors described above, it is
not possible to quantify precisely the ultimate exposure represented by claims
and related litigation. As a result, CNA regularly reviews the adequacy of its
reserves and reassesses its reserve estimates as historical loss experience
develops, additional claims are reported and settled and additional information
becomes available in subsequent periods.
In light of the many uncertainties
associated with establishing the estimates and making the assumptions necessary
to establish reserve levels, CNA reviews its reserve estimates on a regular
basis and makes adjustments in the period that the need for such adjustments is
determined. These reviews have resulted in CNA’s identification of information
and trends that have caused CNA to increase its reserves in prior periods and
could lead to the identification of a need for additional material increases in
claim and claim adjustment expense reserves, which could materially adversely
affect our results of operations and equity, CNA’s business and insurer
financial strength and debt ratings. See the Ratings section of this MD&A
for further information regarding CNA’s financial strength and debt
ratings.
Segment
Results
The following discusses the results of
continuing operations for CNA’s operating segments.
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”).
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 effects of (i)
net realized investment gains or losses, (ii) income or loss from discontinued
operations and (iii) any cumulative effects of changes in accounting principles.
In evaluating the results of CNA’s Standard Lines and Specialty Lines segments,
CNA management 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.
Changes in estimates of claim and
allocated claim adjustment expense reserves and premium accruals, net of
reinsurance, for prior years are defined as net prior year development within
this MD&A. These changes can be favorable or unfavorable. Net prior year
development does not include the impact of related acquisition expenses. Further
information on CNA’s reserves is provided in Note 9 of the Notes to Consolidated
Financial Statements included under Item 8.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - CNA Financial
-
(Continued)
Standard
Lines
The following table summarizes the
results of operations for Standard Lines:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions, except %)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
written premiums
|
|
$ |
3,054 |
|
|
$ |
3,267 |
|
|
$ |
3,598 |
|
Net
earned premiums
|
|
|
3,065 |
|
|
|
3,379 |
|
|
|
3,557 |
|
Net
investment income
|
|
|
506 |
|
|
|
878 |
|
|
|
840 |
|
Net
operating income
|
|
|
200 |
|
|
|
536 |
|
|
|
405 |
|
Net
realized investment gains (losses)
|
|
|
(285 |
) |
|
|
(87 |
) |
|
|
41 |
|
Net
income (loss)
|
|
|
(85 |
) |
|
|
449 |
|
|
|
446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment
expense
|
|
|
75.4 |
% |
|
|
67.4 |
% |
|
|
72.5 |
% |
Expense
|
|
|
31.6 |
|
|
|
32.5 |
|
|
|
31.6 |
|
Dividend
|
|
|
|
|
|
|
0.2 |
|
|
|
0.5 |
|
Combined
|
|
|
107.0 |
% |
|
|
100.1 |
% |
|
|
104.6 |
% |
2008
Compared with 2007
Net written premiums for Standard Lines
decreased $213 million in 2008 as compared with 2007. Premiums written in 2008
were unfavorably impacted by competitive market conditions resulting in
decreased production, as compared with 2007, across both of CNA’s Business and
Commercial Insurance groups. The competitive market conditions may 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 $314 million in 2008 as compared with 2007, consistent with the
decreased net written premiums.
Standard Lines averaged rate decreases
of 5.0% for 2008, as compared to decreases of 4.0% for 2007 for the contracts
that renewed during those periods. Retention rates of 82.0% and 78.0% were
achieved for those contracts that were available for renewal in each
period.
Net results decreased $534 million in
2008 as compared with 2007. This decrease was 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 $336
million in 2008 as compared with 2007. This decrease was primarily driven by
significantly lower net investment income and higher catastrophe impacts. The
catastrophe impacts were $204 million after tax and minority interest in 2008,
which included a $6 million after tax and minority interest catastrophe-related
insurance assessment, as compared to catastrophe losses of $43 million after tax
and minority interest in 2007.
In 2008, the amount due from
policyholders related to losses under deductible policies within Standard Lines
was reduced by $90 million for insolvent insureds. The reduction of this amount,
which is reflected as unfavorable net prior year reserve development, had no
effect on 2008 results of operations as CNA had previously recognized provisions
in prior years. These impacts were reported in Insurance claims and
policyholders’ benefits in the 2008 Consolidated Statement of
Income.
The combined ratio increased 6.9 points
in 2008 as compared with 2007. The loss ratio increased 8.0 points primarily due
to increased catastrophe losses. Catastrophes losses related to 2008 events had
an adverse impact of 11.1 points on the loss ratio in 2008 compared with an
adverse impact of 2.2 points in 2007.
The expense ratio decreased 0.9 points
in 2008 as compared with 2007 primarily related to changes in the assessment
rates imposed by certain states for insurance-related assessments. The dividend
ratio decreased 0.2 points in 2008 as compared with 2007 due to increased
favorable dividend development in the workers’ compensation line of
business.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - CNA Financial
-
(Continued)
Favorable net prior year development of
$18 million was recorded in 2008, including $34 million of favorable claim and
allocated claim adjustment expense reserve development and $16 million of
unfavorable premium development. Excluding the impact of the $90 million of
unfavorable net prior year reserve development discussed above, which had no net
impact on the 2008 results of operations, favorable net prior year development
was $108 million. Favorable net prior year development of $123 million,
including $104 million of favorable claim and allocated claim adjustment expense
reserve development and $19 million of favorable premium development, was
recorded in 2007. Further information on Standard Lines Net Prior Year
Development for 2008 and 2007 is included in Note 9 of the Notes to Consolidated
Financial Statements included under Item 8.
The following table summarizes the gross
and net carried reserves for Standard Lines:
December
31
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Case Reserves
|
|
$ |
6,158 |
|
|
$ |
5,988 |
|
Gross
IBNR Reserves
|
|
|
5,890 |
|
|
|
6,060 |
|
|
|
|
|
|
|
|
|
|
Total
Gross Carried Claim and Claim Adjustment Expense Reserves
|
|
$ |
12,048 |
|
|
$ |
12,048 |
|
|
|
|
|
|
|
|
|
|
Net
Case Reserves
|
|
$ |
4,995 |
|
|
$ |
4,750 |
|
Net
IBNR Reserves
|
|
|
4,875 |
|
|
|
5,170 |
|
|
|
|
|
|
|
|
|
|
Total
Net Carried Claim and Claim Adjustment Expense Reserves
|
|
$ |
9,870 |
|
|
$ |
9,920 |
|
2007
Compared with 2006
Net written premiums for Standard Lines
decreased $331 million in 2007 as compared with 2006, primarily due to decreased
production. The decreased production reflected CNA’s disciplined participation
in the competitive market. Net earned premiums decreased $178 million in 2007 as
compared with 2006, consistent with the decreased premiums written.
Standard Lines averaged rate decreases
of 4.0% for 2007, as compared to flat rates for 2006 for the contracts that
renewed during those periods. Retention rates of 78.0% and 81.0% were achieved
for those contracts that were available for renewal in each period.
Net income increased $3 million in 2007
as compared with 2006. This increase was primarily attributable to improved net
operating income, offset by decreased net realized investment results. See the
Investments section of this MD&A for further discussion of net investment
income and net realized investment results.
Net operating income increased $131
million in 2007 as compared with 2006. This increase was primarily driven by
favorable net prior year development in 2007 as compared to unfavorable net
prior year development in 2006 and increased net investment income. These
favorable impacts were partially offset by decreased current accident year
underwriting results including increased catastrophe losses. Catastrophe losses
were $43 million after tax and minority interest in 2007, as compared to $32
million after tax and minority interest in 2006.
The combined ratio improved 4.5 points
in 2007 as compared with 2006. The loss ratio improved 5.1 points primarily due
to favorable net prior year development in 2007 as compared to unfavorable net
prior year development in 2006. This favorable impact was partially offset by
higher current accident year loss ratios primarily related to the decline in
rates.
The dividend ratio improved 0.3 points
in 2007 as compared with 2006 due to favorable dividend development in the
workers’ compensation line of business.
The expense ratio increased 0.9 points
in 2007 as compared with 2006, primarily reflecting the impact of declining
earned premiums.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - CNA Financial
-
(Continued)
Favorable net prior year development of
$123 million was recorded in 2007, including $104 million of favorable claim and
allocated claim adjustment expense reserve development and $19 million of
favorable premium development. Unfavorable net prior year development of $150
million, including $208 million of unfavorable claim and allocated claim
adjustment expense reserve development and $58 million of favorable premium
development, was recorded in 2006. Further information on Standard Lines Net
Prior Year Development for 2007 and 2006 is included in Note 9 of the Notes to
Consolidated Financial Statements included under Item 8.
Specialty
Lines
The following table summarizes the
results of operations for Specialty Lines:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions, except %)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
written premiums
|
|
$ |
3,435 |
|
|
$ |
3,506 |
|
|
$ |
3,431 |
|
Net
earned premiums
|
|
|
3,477 |
|
|
|
3,484 |
|
|
|
3,411 |
|
Net
investment income
|
|
|
451 |
|
|
|
621 |
|
|
|
554 |
|
Net
operating income
|
|
|
433 |
|
|
|
550 |
|
|
|
573 |
|
Net
realized investment gains (losses)
|
|
|
(167 |
) |
|
|
(47 |
) |
|
|
23 |
|
Net
income
|
|
|
266 |
|
|
|
503 |
|
|
|
596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment
expense
|
|
|
61.9 |
% |
|
|
62.8 |
% |
|
|
60.4 |
% |
Expense
|
|
|
27.8 |
|
|
|
26.7 |
|
|
|
27.4 |
|
Dividend
|
|
|
0.4 |
|
|
|
0.2 |
|
|
|
0.1 |
|
Combined
|
|
|
90.1 |
% |
|
|
89.7 |
% |
|
|
87.9 |
% |
2008
Compared with 2007
Net written premiums for Specialty Lines
decreased $71 million in 2008 as compared with 2007. Premiums written in 2008
were unfavorably impacted by competitive market conditions resulting in
decreased production as compared with 2007, primarily in U.S. Specialty Lines.
These competitive market conditions may put ongoing pressure on premium and
income levels, and the expense ratio. The unfavorable impact in premiums written
was partially offset by decreased ceded premiums primarily due to decreased use
of reinsurance. Net earned premiums decreased $7 million 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 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
up for renewal in each period.
Net income decreased $237 million in
2008 as compared with 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 net investment
income and net realized investment results.
Net operating income decreased $117
million in 2008 as compared with 2007. This decrease was primarily driven by
significantly lower net investment income, decreased current accident year
underwriting results and increased foreign currency transaction losses. These
unfavorable results were partially offset by increased favorable net prior year
development.
The combined ratio increased 0.4 points
in 2008 as compared with 2007. The loss ratio improved 0.9 points, primarily due
to increased favorable net prior year development in 2008 as compared to 2007.
This was partially offset by higher current accident year loss ratios recorded
primarily in CNA’s 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 1.1 points
in 2008 as compared with 2007. The increase primarily related to increased
underwriting expenses and reduced ceding commissions.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - CNA Financial
-
(Continued)
Favorable net prior year development of
$184 million was recorded in 2008, including $164 million of favorable claim and
allocated claim adjustment expense reserve development and $20 million of
favorable premium development. Favorable net prior year development of $36
million was recorded in 2007, including $25 million of favorable claim and
allocated claim adjustment expense reserve development and $11 million of
favorable premium development. Further information on Specialty Lines Net Prior
Year Development for 2008 and 2007 is included in Note 9 of the Notes to
Consolidated Financial Statements included under Item 8.
The following table summarizes the gross
and net carried reserves for Specialty Lines:
December
31
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Case Reserves
|
|
$ |
2,719 |
|
|
$ |
2,585 |
|
Gross
IBNR Reserves
|
|
|
5,563 |
|
|
|
5,818 |
|
Total
Gross Carried Claim and Claim Adjustment Expense Reserves
|
|
$ |
8,282 |
|
|
$ |
8,403 |
|
|
|
|
|
|
|
|
|
|
Net
Case Reserves
|
|
$ |
2,149 |
|
|
$ |
2,090 |
|
Net
IBNR Reserves
|
|
|
4,694 |
|
|
|
4,527 |
|
Total
Net Carried Claim and Claim Adjustment Expense Reserves
|
|
$ |
6,843 |
|
|
$ |
6,617 |
|
2007
Compared with 2006
Net written premiums for Specialty Lines
increased $75 million in 2007 as compared with 2006. Premiums written were
unfavorably impacted by decreased production as compared with the same period in
2006. The decreased production reflected CNA’s disciplined participation in a
competitive market. This unfavorable impact was more than 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 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 $73
million as compared with the same period in 2006, consistent with the increased
net premiums written.
Specialty Lines averaged rate decreases
of 3.0% for 2007, as compared to decreases of 1.0% for 2006 for the contracts
that renewed during those periods. Retention rates of 83.0% and 85.0% were
achieved for those contracts that were up for renewal in each
period.
Net income decreased $93 million in 2007
as compared with 2006. This decrease was primarily attributable to decreases in
net realized investment results. See the Investments section of this MD&A
for further discussion of net investment income and net realized investment
results.
Net operating income decreased $23
million in 2007 as compared with 2006. This decrease was primarily driven by
decreased current accident year underwriting results and less favorable net
prior year development. These decreases were partially offset by increased net
investment income and favorable experience in the warranty line of
business.
The combined ratio increased 1.8 points
in 2007 as compared with 2006. The loss ratio increased 2.4 points, primarily
due to higher current accident year losses related to the decline in rates and
less favorable net prior year development as discussed below.
The expense ratio improved 0.7 points in
2007 as compared with 2006. This improvement was primarily due to a favorable
change in estimate related to dealer profit commissions in the warranty line of
business.
Favorable net prior year development of
$36 million was recorded in 2007, including $25 million of favorable claim and
allocated claim adjustment expense reserve development and $11 million of
favorable premium development. Favorable net prior year development of $66
million, including $61 million of favorable claim and allocated claim adjustment
expense reserve development and $5 million of favorable premium development, was
recorded in 2006. Further information on Specialty Lines Net Prior Year
Development for 2007 and 2006 is included in Note 9 of the Notes to Consolidated
Financial Statements included under Item 8.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - CNA Financial
-
(Continued)
Life
& Group Non-Core
The following table summarizes the
results of operations for Life & Group Non-Core.
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earned premiums
|
|
$ |
612 |
|
|
$ |
618 |
|
|
$ |
641 |
|
Net
investment income
|
|
|
484 |
|
|
|
622 |
|
|
|
698 |
|
Net
operating loss
|
|
|
(97 |
) |
|
|
(141 |
) |
|
|
(13 |
) |
Net
realized investment losses
|
|
|
(212 |
) |
|
|
(33 |
) |
|
|
(30 |
) |
Net
loss
|
|
|
(309 |
) |
|
|
(174 |
) |
|
|
(43 |
) |
2008
Compared with 2007
Net earned premiums for Life & Group
Non-Core decreased $6 million in 2008 as compared with 2007. Net earned premiums
relate primarily to the group and individual long term care
businesses.
Net loss increased $135 million in 2008
as compared with 2007. The increase in net loss was primarily due to increased
net realized investment losses and adverse investment performance on a portion
of CNA’s pension deposit business. Certain of the separate account investment
contracts related to CNA’s pension deposit business guarantee principal and a
minimum rate of interest, for which CNA recorded a pretax liability of $68
million in Policyholders’ funds during 2008 due to the performance of the
related assets supporting the 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, as discussed below. The decreased net investment income
included a decline of trading portfolio results of $140 million, which was
substantially offset by a corresponding decrease in the policyholders’ fund
reserves supported by the trading portfolio. The trading portfolio supported the
indexed group annuity portion of CNA’s pension deposit business. See the
Investments section of this MD&A for further discussion of net investment
income and net realized investment results.
The indexed group annuity portion of
CNA’s pension deposit business had a net loss of $20 million and $12 million for
2008 and 2007. The related assets were $720 million and related liabilities were
$688 million at December 31, 2007. During 2008, CNA settled these liabilities
with policyholders with no material impact to results of
operations.
2007
Compared with 2006
Net earned premiums for Life & Group
Non-Core decreased $23 million in 2007 as compared with 2006.
Net loss increased $131 million in 2007
as compared with 2006. The increase in net loss was primarily due to the after
tax and minority interest loss of $96 million related to the settlement of the
IGI Contingency. The IGI Contingency related to reinsurance arrangements with
respect to personal accident insurance coverages provided between 1997 and 1999
which were the subject of arbitration proceedings. CNA reached agreement in 2007
to settle the arbitration matter for a one-time payment of $250 million, which
resulted in an incurred loss, net of reinsurance, of $167 million pretax. The
decreased net investment income included a decline of net investment income in
the trading portfolio of $82 million, a significant portion of which was offset
by a corresponding decrease in the policyholders’ funds reserves supported by
the trading portfolio. The trading portfolio supports CNA’s pension deposit
business, which experienced a decline in net results of $29 million in 2007
compared to 2006. See the Investments section of this MD&A for further
discussion of net investment income and net realized investment
results.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - CNA Financial
-
(Continued)
Other
Insurance
The following table summarizes the
results of operations for the Other Insurance segment, including A&E and
intrasegment eliminations.
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
178 |
|
|
$ |
312 |
|
|
$ |
320 |
|
Revenues
|
|
|
30 |
|
|
|
299 |
|
|
|
361 |
|
Net
operating income (loss)
|
|
|
(48 |
) |
|
|
5 |
|
|
|
14 |
|
Net
realized investment gains (losses)
|
|
|
(92 |
) |
|
|
(13 |
) |
|
|
29 |
|
Net
income (loss)
|
|
|
(140 |
) |
|
|
(8 |
) |
|
|
43 |
|
2008
Compared with 2007
Revenues decreased $269 million in 2008
as compared with 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 $132 million in
2008 as compared with 2007. The decrease was primarily due to decreased revenues
as discussed above and expenses associated with a legal contingency. These
unfavorable impacts were partially offset by a $27 million release from the
allowance for uncollectible reinsurance receivables arising from a change in
estimate. In addition, the 2007 results included current accident year losses
related to certain mass torts.
Unfavorable net prior year development
of $122 million was recorded during 2008, including $123 million of unfavorable
claim and allocated claim adjustment expense reserve development and $1 million
of favorable premium development. Unfavorable net prior year development of $86
million was recorded in 2007, including $91 million of unfavorable claim and
allocated claim adjustment expense reserve development and $5 million of
favorable premium development. Further information on Other Insurance’s net
prior year development for 2008 and 2007 is included in Note 9 of the Notes to
Consolidated Financial Statements included under Item 8.
The following table summarizes the gross
and net carried reserves for the Other Insurance segment:
December
31
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Case Reserves
|
|
$ |
1,823 |
|
|
$ |
2,159 |
|
Gross
IBNR Reserves
|
|
|
2,578 |
|
|
|
2,951 |
|
Total
Gross Carried Claim and Claim Adjustment Expense Reserves
|
|
$ |
4,401 |
|
|
$ |
5,110 |
|
|
|
|
|
|
|
|
|
|
Net
Case Reserves
|
|
$ |
1,126 |
|
|
$ |
1,328 |
|
Net
IBNR Reserves
|
|
|
1,561 |
|
|
|
1,787 |
|
Total
Net Carried Claim and Claim Adjustment Expense Reserves
|
|
$ |
2,687 |
|
|
$ |
3,115 |
|
2007
Compared with 2006
Revenues decreased $62 million in 2007
as compared with 2006. Revenues were unfavorably impacted by decreased net
realized investment results. See the Investments section of this MD&A for
further discussion of net investment income and net realized investment
results.
Net results decreased $51 million in
2007 as compared with 2006. The decrease in net results was primarily due to
decreased revenues as discussed above, increased current accident year losses
related to certain mass torts and an increase in interest costs on corporate
debt. In addition, the 2006 results included a release of a restructuring
accrual. These unfavorable impacts were partially offset by a change in estimate
related to federal taxes and lower expenses.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - CNA Financial
-
(Continued)
Unfavorable net prior year development
of $86 million was recorded during 2007, including $91 million of unfavorable
net prior year claim and allocated claim adjustment expense reserve development
and $5 million of favorable premium development. Unfavorable net prior year
development of $88 million was recorded in 2006, including $86 million of
unfavorable net prior year claim and allocated claim adjustment expense reserve
development and $2 million of unfavorable premium development.
A&E
Reserves
CNA’s property and casualty insurance
subsidiaries have actual and potential exposures related to asbestos and
environmental pollution claims.
Establishing reserves for A&E claim
and claim adjustment expenses is subject to uncertainties that are greater than
those presented by other claims. Traditional actuarial methods and techniques
employed to estimate the ultimate cost of claims for more traditional property
and casualty exposures are less precise in estimating claim and claim adjustment
expense reserves for A&E, particularly in an environment of emerging or
potential claims and coverage issues that arise from industry practices and
legal, judicial and social conditions. Therefore, these traditional actuarial
methods and techniques are necessarily supplemented with additional estimating
techniques and methodologies, many of which involve significant judgments that
are required on CNA’s part. Accordingly, a high degree of uncertainty remains
for CNA’s ultimate liability for A&E claim and claim adjustment
expenses.
In addition to the difficulties
described above, estimating the ultimate cost of both reported and unreported
A&E claims is subject to a higher degree of variability due to a number of
additional factors, including among others: the number and outcome of
direct actions against CNA; coverage issues, including whether certain costs are
covered under the policies and whether policy limits apply; allocation of
liability among numerous parties, some of whom may be in bankruptcy proceedings,
and in particular the application of “joint and several” liability to specific
insurers on a risk; inconsistent court decisions and developing legal theories;
continuing aggressive tactics of plaintiffs’ lawyers; the risks and lack of
predictability inherent in major litigation; enactment of state and federal
legislation to address asbestos claims; the potential for increases and
decreases in A&E claims which cannot now be anticipated; the potential for
increases and decreases in costs to defend A&E claims; the possibility of
expanding theories of liability against CNA’s policyholders in A&E matters;
possible exhaustion of underlying umbrella and excess coverage; and future
developments pertaining to CNA’s ability to recover reinsurance for A&E
claims.
Due to the inherent uncertainties in
estimating claim and claim adjustment expense reserves for A&E and due to
the significant uncertainties described above related to A&E claims, CNA’s
ultimate liability for these cases, both individually and in aggregate, may
exceed the recorded reserves. Any such potential additional liability, or any
range of potential additional amounts, cannot be reasonably estimated currently,
but could be material to our results of operations or equity and CNA’s business,
insurer financial strength and debt ratings. Due to, among other things, the
factors described above, it may be necessary for CNA to record material changes
in its A&E claim and claim adjustment expense reserves in the future, should
new information become available or other developments emerge.
CNA has annually performed ground up
reviews of all open A&E claims to evaluate the adequacy of its A&E
reserves. In performing its comprehensive ground up analysis, CNA considers
input from its professionals with direct responsibility for the claims, inside
and outside counsel with responsibility for its representation and its actuarial
staff. These professionals consider, among many factors, the policyholders’
present and predicted future exposures, including such factors as claims volume,
trial conditions, prior settlement history, settlement demands and defense
costs; the impact of asbestos defendant bankruptcies on the policyholder; facts
or allegations regarding the policies CNA issued or are alleged to have issued,
including such factors as aggregate or per occurrence limits, whether the policy
is primary, umbrella or excess, and the existence of policyholder retentions
and/or deductibles; the policyholders’ allegations; the existence of other
insurance; and reinsurance arrangements.
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 Financial Statements included under Item
8.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - CNA Financial
-
(Continued)
The following table provides data
related to CNA’s A&E claim and claim adjustment expense
reserves.
December
31
|
|
2008
|
|
|
2007
|
|
|
|
Asbestos
|
|
|
Environmental
Pollution
|
|
|
Asbestos
|
|
|
Environmental
Pollution
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
reserves
|
|
$ |
2,112 |
|
|
$ |
392 |
|
|
$ |
2,352 |
|
|
$ |
367 |
|
Ceded
reserves
|
|
|
(910 |
) |
|
|
(130 |
) |
|
|
(1,030 |
) |
|
|
(125 |
) |
Net
reserves
|
|
$ |
1,202 |
|
|
$ |
262 |
|
|
$ |
1,322 |
|
|
$ |
242 |
|
Asbestos
In the past several years, CNA
experienced, at certain points in time, significant increases in claim counts
for asbestos-related claims. The factors that led to these increases included,
among other things, intensive advertising campaigns by lawyers for asbestos
claimants, mass medical screening programs sponsored by plaintiff lawyers and
the addition of new defendants such as the distributors and installers of
products containing asbestos. In recent years, the rate of new filings has
decreased. Various challenges to mass screening claimants have been successful.
Historically, the majority of asbestos bodily injury claims have been filed by
persons exhibiting few, if any, disease symptoms. Studies have concluded that
the percentage of unimpaired claimants to total claimants ranges between 66.0%
and up to 90.0%. Some courts and some state statutes mandate that so-called
“unimpaired” claimants may not recover unless at some point the claimant’s
condition worsens to the point of impairment. Some plaintiffs classified as
“unimpaired” continue to challenge those orders and statutes. Therefore, the
ultimate impact of the orders and statutes on future asbestos claims remains
uncertain.
Despite the decrease in new claim
filings in recent years, there are several factors, in CNA’s view, negatively
impacting asbestos claim trends. Plaintiff attorneys who previously sued
entities that are now bankrupt continue to seek other viable targets. As
plaintiff attorneys named additional defendants to new and existing asbestos
bodily injury lawsuits, CNA has experienced an increase in the total number of
policyholders with current asbestos claims. Companies with few or no previous
asbestos claims are becoming targets in asbestos litigation and, although they
may have little or no liability, nevertheless must be defended. Additionally,
plaintiff attorneys and trustees for future claimants are demanding that policy
limits be paid lump-sum into the bankruptcy asbestos trusts prior to
presentation of valid claims and medical proof of these claims. Various
challenges to these practices have succeeded in litigation, and are continuing
to be litigated. Plaintiff attorneys and trustees for future claimants are also
attempting to devise claims payment procedures for bankruptcy trusts that would
allow asbestos claims to be paid under lax standards for injury, exposure and
causation. This also presents the potential for exhausting policy limits in an
accelerated fashion. Challenges to these practices are being mounted, though the
ultimate impact or success of these tactics remains uncertain.
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 its 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.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - CNA Financial
-
(Continued)
Approximately
81.0% and 81.2% of CNA’s total active asbestos accounts are classified as small
accounts at December 31, 2008 and 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”).
CNA carries unassigned IBNR reserves for
asbestos. 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 asbestos accounts and associated reserves:
|
|
|
|
|
|
|
|
|
|
|
Percent
of
|
|
|
|
Number
of
|
|
|
Net
Paid
|
|
|
Net
Asbestos
|
|
|
Asbestos
Net
|
|
December
31, 2008
|
|
Policyholders
|
|
|
Losses
|
|
|
Reserves
|
|
|
Reserves
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders
with settlement agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured
settlements
|
|
|
18 |
|
|
$ |
17 |
|
|
$ |
133 |
|
|
|
11.1 |
% |
Wellington
|
|
|
3 |
|
|
|
1 |
|
|
|
11 |
|
|
|
0.9 |
|
Coverage in
place
|
|
|
36 |
|
|
|
16 |
|
|
|
94 |
|
|
|
7.8 |
|
Total
with settlement agreements
|
|
|
57 |
|
|
|
34 |
|
|
|
238 |
|
|
|
19.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
policyholders with active accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large asbestos
accounts
|
|
|
236 |
|
|
|
62 |
|
|
|
234 |
|
|
|
19.4 |
|
Small asbestos
accounts
|
|
|
1,009 |
|
|
|
32 |
|
|
|
91 |
|
|
|
7.6 |
|
Total
other policyholders
|
|
|
1,245 |
|
|
|
94 |
|
|
|
325 |
|
|
|
27.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
reinsurance and pools
|
|
|
|
|
|
|
19 |
|
|
|
114 |
|
|
|
9.5 |
|
Unassigned
IBNR
|
|
|
|
|
|
|
|
|
|
|
525 |
|
|
|
43.7 |
|
Total
|
|
|
1,302 |
|
|
$ |
147 |
|
|
$ |
1,202 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders
with settlement agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured
settlements
|
|
|
14 |
|
|
$ |
29 |
|
|
$ |
151 |
|
|
|
11.4 |
% |
Wellington
|
|
|
3 |
|
|
|
1 |
|
|
|
12 |
|
|
|
0.9 |
|
Coverage in
place
|
|
|
34 |
|
|
|
38 |
|
|
|
100 |
|
|
|
7.6 |
|
Total
with settlement agreements
|
|
|
51 |
|
|
|
68 |
|
|
|
263 |
|
|
|
19.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
10.1 |
|
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
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - CNA Financial
-
(Continued)
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 our results of operations and/or equity.
As a result of the uncertainties and
complexities involved, reserves for asbestos claims cannot be estimated with
traditional actuarial techniques that rely on historical accident year loss
development factors. In establishing asbestos reserves, CNA evaluates the
exposure presented by each insured. As part of this evaluation, CNA considers
the available insurance coverage; limits and deductibles; the potential role of
other insurance, particularly underlying coverage below any of its excess
liability policies; and applicable coverage defenses, including asbestos
exclusions. Estimation of asbestos-related claim and claim adjustment expense
reserves involves a high degree of judgment on CNA’s part and consideration of
many complex factors, including: inconsistency of court decisions,
jury attitudes and future court decisions; specific policy provisions;
allocation of liability among insurers and insureds; missing policies and proof
of coverage; the proliferation of bankruptcy proceedings and attendant
uncertainties; novel theories asserted by policyholders and their counsel; the
targeting of a broader range of businesses and entities as defendants; the
uncertainty as to which other insureds may be targeted in the future and the
uncertainties inherent in predicting the number of future claims; volatility in
claim numbers and settlement demands; increases in the number of non-impaired
claimants and the extent to which they can be precluded from making claims; the
efforts by insureds to obtain coverage not subject to aggregate limits; long
latency period between asbestos exposure and disease manifestation and the
resulting potential for involvement of multiple policy periods for individual
claims; medical inflation trends; the mix of asbestos-related diseases presented
and the ability to recover reinsurance.
CNA is involved in significant
asbestos-related claim litigation, which is described in Note 9 of the Notes to
Consolidated Financial Statements included under Item 8.
Environmental
Pollution
Environmental pollution cleanup is the
subject of both federal and state regulation. By some estimates, there are
thousands of potential waste sites subject to cleanup. The insurance industry
has been involved in extensive litigation regarding coverage issues. Judicial
interpretations in many cases have expanded the scope of coverage and liability
beyond the original intent of the policies. The Comprehensive Environmental
Response Compensation and Liability Act of 1980 (“Superfund”) and comparable
state statutes (“mini-Superfunds”) govern the cleanup and restoration of toxic
waste sites and formalize the concept of legal liability for cleanup and
restoration by “Potentially Responsible Parties” (“PRPs”). Superfund and the
mini-Superfunds establish mechanisms to pay for cleanup of waste sites if PRPs
fail to do so and assign liability to PRPs. The extent of liability to be
allocated to a PRP is dependent upon a variety of factors. Further, the number
of waste sites subject to cleanup is unknown. To date, approximately 1,500
cleanup sites have been identified by the Environmental Protection Agency
(“EPA”) and included on its National Priorities List (“NPL”). State authorities
have designated many cleanup sites as well.
Many policyholders have made claims
against CNA for defense costs and indemnification in connection with
environmental pollution matters. The vast majority of these claims relate to
accident years 1989 and prior, which coincides with CNA’s adoption of the
Simplified Commercial General Liability coverage form, which includes what is
referred to in the industry as absolute pollution exclusion. CNA and the
insurance industry are disputing coverage for many such claims. Key coverage
issues include whether cleanup costs are considered damages under the policies,
trigger of coverage, allocation of liability among triggered policies,
applicability of pollution exclusions and owned property exclusions, the
potential for joint and several liability and the definition of an occurrence.
To date, courts have been inconsistent in their rulings on these
issues.
CNA has made resolution of large
environmental pollution exposures a management priority. CNA resolved a number
of its large environmental accounts by negotiating settlement agreements. In its
settlements, CNA sought to resolve those exposures and obtain the broadest
release language to avoid future claims from the same policyholders seeking
coverage for sites or claims that had not emerged at the time CNA settled with
its policyholder. While the terms of each settlement agreement vary, CNA sought
to obtain broad environmental releases that include known and unknown sites,
claims and policies. The broad scope of the release provisions contained in
those settlement agreements should, in many cases, prevent future exposure from
settled policyholders. It remains uncertain, however, whether a court
interpreting the
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - CNA Financial
-
(Continued)
language
of the settlement agreements will adhere to the intent of the parties and uphold
the broad scope of language of the agreements.
CNA classifies its environmental
pollution accounts into several categories, which include structured
settlements, coverage in place agreements and active accounts. Structured
settlement agreements provide for payments over multiple years as set forth in
each individual agreement.
CNA has also used coverage in place
agreements to resolve pollution exposures. Coverage in place agreements are
typically agreements between CNA and its policyholders identifying the policies
and the terms for payment of pollution related liabilities. Claim payments are
contingent on presentation of adequate documentation of damages during the
policy periods and other documentation supporting the demand for claim payment.
Coverage in place agreements may have annual payment caps.
CNA categorizes active accounts as large
or small accounts in the pollution area. CNA defines a large account as an
active account with more than $100,000 cumulative paid losses. CNA has made
closing large accounts a significant management priority. Small accounts are
defined as active accounts with $100,000 or less of cumulative paid losses.
Approximately 73.4% and 72.7% of CNA’s total active pollution accounts are
classified as small accounts as of December 31, 2008 and 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:
December
31, 2008
|
|
Number
of
Policyholders
|
|
|
Net
Paid
Losses
|
|
|
Net
Environmental
Pollution
Reserves
|
|
|
Percent
of
Environmental
Pollution
Net
Reserve
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders
with settlement agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured
settlements
|
|
|
16 |
|
|
$ |
5 |
|
|
$ |
9 |
|
|
|
3.4 |
% |
Coverage in
place
|
|
|
16 |
|
|
|
3 |
|
|
|
13 |
|
|
|
5.0 |
|
Total
with settlement agreements
|
|
|
32 |
|
|
|
8 |
|
|
|
22 |
|
|
|
8.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
policyholders with active accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large pollution
accounts
|
|
|
116 |
|
|
|
40 |
|
|
|
48 |
|
|
|
18.3 |
|
Small pollution
accounts
|
|
|
320 |
|
|
|
11 |
|
|
|
41 |
|
|
|
15.7 |
|
Total
other policyholders
|
|
|
436 |
|
|
|
51 |
|
|
|
89 |
|
|
|
34.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
reinsurance and pools
|
|
|
|
|
|
|
4 |
|
|
|
27 |
|
|
|
10.3 |
|
Unassigned
IBNR
|
|
|
|
|
|
|
|
|
|
|
124 |
|
|
|
47.3 |
|
Total
|
|
|
468 |
|
|
$ |
63 |
|
|
$ |
262 |
|
|
|
100.0 |
% |
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - CNA Financial
-
(Continued)
December
31, 2007
|
|
Number
of
Policyholders
|
|
|
Net
Paid
Losses
|
|
|
Net
Environmental
Pollution
Reserves
|
|
|
Percent
of
Environmental
Pollution
Net
Reserve
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders
with settlement agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured
settlements
|
|
|
10 |
|
|
$ |
9 |
|
|
$ |
6 |
|
|
|
2.5 |
% |
Coverage in
place
|
|
|
18 |
|
|
|
8 |
|
|
|
14 |
|
|
|
5.8 |
|
Total
with settlement agreements
|
|
|
28 |
|
|
|
17 |
|
|
|
20 |
|
|
|
8.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
policyholders with active accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large pollution
accounts
|
|
|
112 |
|
|
|
17 |
|
|
|
53 |
|
|
|
21.9 |
|
Small pollution
accounts
|
|
|
298 |
|
|
|
9 |
|
|
|
42 |
|
|
|
17.4 |
|
Total
other policyholders
|
|
|
410 |
|
|
|
26 |
|
|
|
95 |
|
|
|
39.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
reinsurance and pools
|
|
|
|
|
|
|
1 |
|
|
|
31 |
|
|
|
12.7 |
|
Unassigned
IBNR
|
|
|
|
|
|
|
|
|
|
|
96 |
|
|
|
39.7 |
|
Total
|
|
|
438 |
|
|
$ |
44 |
|
|
$ |
242 |
|
|
|
100.0 |
% |
Diamond
Offshore
Diamond Offshore Drilling, Inc. and
subsidiaries (“Diamond Offshore”). Diamond Offshore is a 50.4% owned
subsidiary.
The 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. 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.
Demand 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.
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
periods of high, sustained utilization, maintenance and repair costs may
increase in order to maintain Diamond Offshore’s equipment in proper, working
order. 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. 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. In recent years,
Diamond Offshore has experienced upward pressure on salaries and wages as a
result of the strong offshore drilling market during this period and increased
competition for skilled workers. In response to these market conditions, Diamond
Offshore has implemented retention programs, including increases in
compensation.
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
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - Diamond Offshore
-
(Continued)
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 global economic recession
significantly reduced energy demand in the fourth quarter of 2008 and into the
first quarter of 2009. As a result, crude oil prices have fallen from a 2008
mid-summer high of $146 per barrel to as low as $34 per barrel in mid-February
2009, and remain volatile. With the falling energy prices, project economics for
Diamond Offshore’s customers have deteriorated, 2009 exploration budgets have
been trimmed, and demand and pricing for available drilling rigs is declining.
Diamond Offshore’s contract backlog should help mitigate the impact of the
current market; however, a prolonged decline in commodity prices and the global
economy could have a negative impact on Diamond Offshore. Possible negative
impacts, among others, could include customer credit problems, customers seeking
bankruptcy protection, customers attempting to renegotiate or terminate
contracts, a further slowing in the pace of new contracting activity, additional
declines in dayrates for new contracts, declines in utilization and the stacking
of idle equipment.
Five of Diamond Offshore’s rigs will
require 5-year surveys during 2009, and Diamond Offshore expects that these rigs
will be out of service for approximately 300 days in the aggregate. During 2009,
Diamond Offshore also expects to spend an additional approximately 950 days for
intermediate surveys, the mobilization of rigs, contract modifications for
international contracts and extended maintenance projects. 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 repowering project and minor water depth upgrade. Diamond
Offshore expects these projects to take approximately one year to complete and
to extend into 2010. 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.
Contract
Drilling Backlog
The following table reflects Diamond
Offshore’s contract drilling backlog as of February 5, 2009, October 23, 2008
(the date reported in Diamond Offshore’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2008) and February 7, 2008 (the date reported in
Diamond Offshore’s Annual Report on Form 10-K for the year ended December 31,
2007) and for the 2008 periods includes both firm commitments (typically
represented by signed contracts), as well as previously disclosed letters of
intent (“LOIs”) where indicated. An LOI is subject to customary conditions,
including the execution of a definitive agreement, and as such may not result in
a binding contract. Contract drilling backlog is calculated by multiplying the
contracted operating dayrate by the firm contract period and adding one half of
any potential rig performance bonuses. Diamond Offshore’s calculation also
assumes full utilization of its drilling equipment for the contract period
(excluding scheduled shipyard and survey days); however, the amount of actual
revenue earned and the actual periods during which revenues are earned will be
different than the amounts and periods shown in the tables below due to various
factors. Utilization rates, which generally approach 95-98% during contracted
periods, can be adversely impacted by downtime due to various operating factors
including, but not limited to, weather conditions and unscheduled repairs and
maintenance. Contract drilling backlog excludes revenues for mobilization,
demobilization, contract preparation and customer reimbursables. No revenue is
generally earned during periods of downtime for regulatory surveys. Changes in
Diamond Offshore’s contract drilling backlog between periods are a function of
the performance of work on term contracts, as well as the extension or
modification of existing term contracts and the execution of additional
contracts.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - Diamond Offshore
-
(Continued)
|
|
February
5,
2009
|
|
|
October
23,
2008
(b)
|
|
|
February
7,
2008
(b)
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
specification floaters
|
|
$ |
4,346 |
|
|
$ |
4,720 |
|
|
$ |
4,448 |
|
Intermediate
semisubmersible rigs (a)
|
|
|
5,567 |
|
|
|
6,302 |
|
|
|
5,985 |
|
Jack-ups
|
|
|
346 |
|
|
|
428 |
|
|
|
421 |
|
Total
|
|
$ |
10,259 |
|
|
$ |
11,450 |
|
|
$ |
10,854 |
|
(a)
|
Although
still legally under contract through 2011, contract drilling backlog as of
February 5, 2009 excludes future revenues associated with one of Diamond
Offshore’s intermediate semisubmersible rigs located in the U.K. sector of
the North Sea, which rig’s customer is currently in administration under
U.K. law (administration is a U.K. insolvency proceeding similar to U.S.
Chapter 11 bankruptcy reorganization but with an external manager,
typically an accountant, running the
company).
|
(b)
|
Contract
drilling backlog as of October 23, 2008 and February 7, 2008, included
$190 and $238 in contract drilling revenue relating to anticipated future
work under LOIs.
|
The following table reflects the amount
of Diamond Offshore’s contract drilling backlog by year as of February 5,
2009.
Year
Ended December 31
|
|
Total
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
2012
- 2016 |
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
specification floaters
|
|
$ |
4,346 |
|
|
$ |
1,507 |
|
|
$ |
1,185 |
|
|
$ |
822 |
|
|
$ |
832 |
|
Intermediate
semisubmersible rigs
|
|
|
5,567 |
|
|
|
1,747 |
|
|
|
1,340 |
|
|
|
953 |
|
|
|
1,527 |
|
Jack-ups
|
|
|
346 |
|
|
|
329 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
10,259 |
|
|
$ |
3,583 |
|
|
$ |
2,542 |
|
|
$ |
1,775 |
|
|
$ |
2,359 |
|
The following table reflects the
percentage of rig days committed by year as of February 5, 2009. The percentage
of rig days committed is calculated as the ratio of total days committed under
contracts and LOIs, as well as scheduled shipyard, survey and mobilization days
for all rigs in Diamond Offshore’s fleet to total available days (number of rigs
multiplied by the number of days in a particular year).
Year
Ended December 31
|
|
2009 (a)
|
|
|
2010 (a)
|
|
|
2011
|
|
|
|
2012
- 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
specification floaters
|
|
|
96.0 |
% |
|
|
69.0 |
% |
|
|
42.0 |
% |
|
|
10.0 |
% |
Intermediate
semisubmersible rigs
|
|
|
97.0 |
|
|
|
72.0 |
|
|
|
48.0 |
|
|
|
16.0 |
|
Jack-ups
|
|
|
51.0 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
(a)
|
Includes
approximately 1,500 and 600 scheduled shipyard, survey and mobilization
days for 2009 and 2010.
|
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - Diamond Offshore
-
(Continued)
Results
of Operations
The following table summarizes the
results of operations for Diamond Offshore for the years ended December 31,
2008, 2007 and 2006 as presented in Note 25 of the Notes to Consolidated
Financial Statements included under Item 8:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Contract
drilling
|
|
$ |
3,476 |
|
|
$ |
2,506 |
|
|
$ |
1,987 |
|
Net investment
income
|
|
|
12 |
|
|
|
34 |
|
|
|
38 |
|
Investment gains
(losses)
|
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
Other revenue
|
|
|
(2 |
) |
|
|
77 |
|
|
|
77 |
|
Total
|
|
|
3,487 |
|
|
|
2,616 |
|
|
|
2,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
drilling
|
|
|
1,185 |
|
|
|
1,004 |
|
|
|
805 |
|
Other operating
|
|
|
448 |
|
|
|
355 |
|
|
|
313 |
|
Interest
|
|
|
10 |
|
|
|
19 |
|
|
|
24 |
|
Total
|
|
|
1,643 |
|
|
|
1,378 |
|
|
|
1,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before tax and minority interest
|
|
|
1,844 |
|
|
|
1,238 |
|
|
|
960 |
|
Income
tax expense
|
|
|
582 |
|
|
|
429 |
|
|
|
285 |
|
Minority
interest
|
|
|
650 |
|
|
|
415 |
|
|
|
323 |
|
Net
income
|
|
$ |
612 |
|
|
$ |
394 |
|
|
$ |
352 |
|
2008
Compared with 2007
Revenues increased by $871 million, or
33.3%, and net income increased by $218 million, or 55.3%, in 2008, as compared
to 2007. 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 realized dayrates increased as Diamond Offshore’s rigs operated under
contracts at higher dayrates than those earned during 2007. Diamond Offshore’s
results for the year ended December 31, 2008 were impacted by $54 million in
pretax losses on foreign currency forward exchange contracts ($37 million in net
unrealized losses resulting from mark-to-market accounting on Diamond Offshore’s
open positions at December 31, 2008 and $17 million in net realized losses on
settlement), which is included in Other revenues.
Revenues from high specification
floaters and intermediate semisubmersible rigs increased by $892 million in
2008, as compared to 2007. The increase primarily reflects increased dayrates of
$767 million and increased utilization of $110 million,
respectively.
Revenues from jack-up rigs increased $79
million in 2008, as compared to2007, due primarily to increased utilization of
$96 million, partially offset by decreased dayrates of $20 million. Revenues
were favorably impacted by an increase in the recognition of mobilization fees
and other operating revenues, primarily for the Ocean Scepter, of $3 million
in 2008.
Net income increased in 2008, as
compared to 2007, 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,
additional survey and related maintenance costs, contract preparation and
mobilization costs. Diamond Offshore’s results for 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. Results for 2008 were also adversely
impacted by a $32
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - Diamond Offshore
-
(Continued)
million
provision for bad debt related to a North Sea semisubmersible rig contracted to
a U.K. customer that has entered into administration.
Interest expense decreased $9 million in
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.
In connection with a non-recurring
distribution of $850 million from a Diamond Offshore foreign subsidiary, a
portion of which consisted of earnings of the subsidiary that had not previously
been subjected to U.S. federal income tax, Diamond Offshore recognized $59
million of U.S. federal income tax expense in 2007.
2007
Compared with 2006
Revenues increased by $514 million, or
24.5%, and net income increased by $42 million, or 11.9%, in 2007, as compared
to 2006.
Revenues from high specification
floaters and intermediate semisubmersible rigs increased by $508 million in
2007, as compared to 2006. The increase primarily reflects increased dayrates of
$477 million and increased utilization of $29 million.
Revenues from jack-up rigs increased $11
million in 2007, as compared to 2006, primarily due to increased dayrates of $19
million. This increase was partially offset by decreased utilization of $18
million. Revenues were also favorably impacted by the recognition of a lump-sum
demobilization fee of $7 million in 2007.
Net income increased in 2007, as
compared to 2006, due to the revenue increases as noted above and reduced
interest expense, partially offset by increased contract drilling expenses and
income tax expense as discussed above.
Interest expense decreased $5 million in
2007, as compared to 2006, primarily due to reduced debt related to conversions
of Diamond Offshore’s 1.5% debentures into common stock. The decline in interest
expense in 2007 was partially offset by a $9 million write-off of debt issuance
costs related to the conversions.
In 2007, Diamond Offshore recognized $59
million of U.S. federal income tax expense in connection with a non-recurring
distribution from a foreign subsidiary.
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 (loss)
on the Consolidated Balance Sheet.
We use the following terms throughout
this discussion of HighMount’s results of operations, with “equivalent” volumes
computed with oil and NGL quantities converted to Mcf, on an energy equivalent
ratio of one barrel to six Mcf:
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
|
MMBtu
|
-
|
Million
British thermal units
|
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - HighMount -
(Continued)
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 recent months, natural gas prices decreased
significantly due largely to increased onshore natural gas production, plentiful
levels of working gas in storage and reduced commercial demand. The increase in
the onshore natural gas production was due largely to increased production from
“unconventional” sources of natural gas such as shale gas, coalbed methane,
tight sandstones and methane hydrates, made possible in recent years by modern
technology in creating extensive artificial fractures around well bores and
advances in horizontal drilling technology. Other key factors contributing to
the softness of natural gas prices likely included a lower level of industrial
demand for natural gas, as a result of the ongoing economic downturn, and
relatively low crude oil prices. Due to industry conditions, in February of 2009
HighMount elected to terminate contracts for five drilling rigs at its Permian
Basin property in the Sonora, Texas area. The estimated fee payable to the rig
contractor for exercising this early termination right will be approximately $23
million. In light of these developments, HighMount will reduce 2009 production
volumes through decreased drilling activity. 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, which
represents revenues less operating expenses, 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, during 2008 HighMount’s
labor costs increased 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, in 2008 HighMount
implemented retention programs, including increases in compensation. Production
expenses during 2008 were also affected by increases in the cost of fuel,
materials and supplies. The higher cost environment discussed above continued
during all of 2008. During the fourth quarter of 2008 the price of natural gas
declined significantly while operating expenses remained high. This environment
of low commodity prices and high operating expenses continued until December of
2008 when HighMount began to see evidence of decreasing operating expenses and
drilling costs. HighMount’s production and ad valorem taxes increase primarily
when prices of natural gas and NGLs 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:
Year
Ended December 31
|
|
2008
|
|
|
2007
(a)
|
|
|
|
|
|
|
|
|
Gas
production (Bcf)
|
|
|
78.9 |
|
|
|
34.0 |
|
Gas
sales (Bcf)
|
|
|
72.5 |
|
|
|
31.4 |
|
Oil
production/sales (Mbbls)
|
|
|
351.3 |
|
|
|
114.0 |
|
NGL
production/sales (Mbbls)
|
|
|
3,507.4 |
|
|
|
1,512.9 |
|
Equivalent
production (Bcfe)
|
|
|
102.0 |
|
|
|
43.8 |
|
Equivalent
sales (Bcfe)
|
|
|
95.7 |
|
|
|
41.2 |
|
|
|
|
|
|
|
|
|
|
Average
realized prices, without hedging results:
|
|
|
|
|
|
|
|
|
Gas (per Mcf)
|
|
$ |
8.25 |
|
|
$ |
5.95 |
|
NGL (per Bbl)
|
|
|
51.26 |
|
|
|
51.02 |
|
Oil (per Bbl)
|
|
|
95.26 |
|
|
|
83.37 |
|
Equivalent (per
Mcfe)
|
|
|
8.48 |
|
|
|
6.65 |
|
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - HighMount -
(Continued)
Year
Ended December 31
|
|
2008
|
|
|
2007
(a)
|
|
|
|
|
|
|
|
|
Average
realized prices, with hedging results:
|
|
|
|
|
|
|
Gas (per Mcf)
|
|
$ |
7.71 |
|
|
$ |
6.00 |
|
NGL (per Bbl)
|
|
|
47.73 |
|
|
|
46.41 |
|
Oil (per Bbl)
|
|
|
95.26 |
|
|
|
83.37 |
|
Equivalent (per
Mcfe)
|
|
|
7.94 |
|
|
|
6.51 |
|
|
|
|
|
|
|
|
|
|
Average
cost per Mcfe:
|
|
|
|
|
|
|
|
|
Production
expenses
|
|
$ |
1.04 |
|
|
$ |
0.89 |
|
Production and ad valorem
taxes
|
|
|
0.70 |
|
|
|
0.54 |
|
General and administrative
expenses
|
|
|
0.69 |
|
|
|
0.58 |
|
Depletion
expense
|
|
|
1.58 |
|
|
|
1.41 |
|
(a)
|
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 five months of activity, compared to twelve months of
activity in 2008.
The following table summarizes the
results of operations for HighMount for the years ended December 31, 2008 and
2007 as presented in Note 25 of the Notes to Consolidated Financial Statements
included under Item 8.
Year
Ended December 31
|
|
2008
|
|
|
2007
(a)
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Other revenue, primarily
operating
|
|
$ |
770 |
|
|
$ |
274 |
|
Investment
gains
|
|
|
|
|
|
|
32 |
|
Total
|
|
|
770 |
|
|
|
306 |
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Impairment of natural gas and
oil properties
|
|
|
691 |
|
|
|
|
|
Impairment of
goodwill
|
|
|
482 |
|
|
|
|
|
Operating
|
|
|
411 |
|
|
|
150 |
|
Interest
|
|
|
76 |
|
|
|
32 |
|
Total
|
|
|
1,660 |
|
|
|
182 |
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income tax
|
|
|
(890 |
) |
|
|
124 |
|
Income
tax (expense) benefit
|
|
|
315 |
|
|
|
(46 |
) |
Net
income (loss)
|
|
$ |
(575 |
) |
|
$ |
78 |
|
(a)
|
HighMount
commenced operations on July 31,
2007.
|
2008
Compared to 2007
HighMount’s revenues increased by
$464 million to $770 million for the year ended December 31, 2008, compared to
$306 million for 2007. HighMount commenced operations on July 31,
2007. This increase was primarily due to the increase in volumes sold of
54.5 Bcfe, which increased revenues by $362 million, as well as higher commodity
prices in 2008 compared to 2007, which contributed another $176 million to the
increase in revenues. The increase in revenue due to higher volumes and
prices was offset by a decrease of $46 million due to the effect of HighMount’s
hedging activities.
At December 31, 2008, HighMount
recorded a non-cash ceiling test impairment charge of $691 million ($440 million
after tax) related to the carrying value of its natural gas and oil properties.
The write-down was the result of declines in commodity prices and negative
revisions in HighMount’s proved reserve quantities during 2008. The negative
revisions were primarily a result of lower commodity prices. Had the effects of
HighMount’s cash flow hedges not been
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - HighMount -
(Continued)
considered
in calculating the ceiling limitation, the impairment would have been $873
million ($555 million after tax). Subsequent to December 31, 2008, prices for
natural gas and NGLs have continued to decline. As of February 6, 2009, natural
gas prices declined to $4.84 per MMBtu from $5.71 per MMBtu at December 31,
2008. If HighMount had calculated the ceiling test as of December 31, 2008 using
the February 6, 2009 natural gas price, and holding all other assumptions
constant, then HighMount would have incurred an additional after tax ceiling
test impairment of approximately $375 million. If gas prices remain at current
levels, a first quarter of 2009 ceiling test impairment is
possible.
At December 31, 2007, HighMount had
$1,061 million of goodwill recorded in conjunction with its acquisition of
certain exploration and production assets from subsidiaries of Dominion
Resources, Inc. HighMount typically performs its annual goodwill test for
impairment each April 30th and no impairment was determined at April 30, 2008.
During the second half of 2008, severe disruptions in the credit and capital
markets, reductions in global economic activity and increased supplies of
domestic natural gas from unconventional gas plays caused natural gas and
NGL-related commodity prices to decrease sharply, resulting in, among other
things, the ceiling test impairment discussed above. As a result, HighMount
performed a goodwill impairment test as of December 31, 2008, determined that
there was an impairment of goodwill and recorded a non-cash impairment charge of
$482 million ($314 million after tax).
Operating expenses primarily consist
of production expenses, production and ad valorem taxes, general and
administrative costs and DD&A. Production expenses totaled $99 million, or
$1.04 per Mcfe sold during 2008, compared to $37 million, or $0.89 per Mcfe sold
in 2007. The increase in production expense of $62 million was primarily
due to the increase in volumes sold totaling $49 million and $13 million
primarily due to a higher cost environment.
Production and ad valorem taxes were
$67 million and $22 million for 2008 and 2007, respectively. The increase
of $45 million was due primarily to increased production taxes as a result of
higher natural gas and NGL prices during 2008, increased production and
appreciated property values. Production and ad valorem taxes were $0.70 per Mcfe
in 2008 as compared to $0.54 per Mcfe in 2007. General and administrative
expenses, which consist primarily of compensation related costs, increased by
$44 million to $68 million during 2008, compared to $24 million during 2007,
primarily due to the fact that the 2007 comparative period represents five
months of activity, compared to twelve months of activity in 2008. General
and administrative expense increased on a per Mcfe basis from $0.58 in 2007 to
$0.69 in 2008 primarily due to increased headcount and compensation related
expenses.
DD&A expenses increased by $110
million to $177 million for 2008 as compared to $67 million for 2007. DD&A
expenses included depletion of natural gas and NGL properties of $162 million
and $62 million for 2008 and 2007. Depletion expense increased by $100 million
in 2008, compared to 2007, due primarily to an $82 million increase from higher
production volumes and $18 million due to higher depletion expense per Mcfe.
HighMount’s depletion rate per Mcfe increased by $0.17 per Mcfe to $1.58 per
Mcfe in 2008, compared to $1.41 per Mcfe in 2007. The increase on a per unit
basis was primarily due to higher capital costs throughout 2008 and higher
projected future development costs, reflecting higher costs particularly for
steel and diesel fuel, and other economic conditions. This environment of high
capital cost and high projected future development cost continued until December
of 2008, when HighMount began to see evidence of decreasing capital cost and
projected future development cost.
Boardwalk
Pipeline
Boardwalk Pipeline Partners, LP and
subsidiaries (“Boardwalk Pipeline”). Boardwalk Pipeline Partners, LP is a 74%
owned subsidiary.
Boardwalk Pipeline derives revenues
primarily from the interstate transportation and storage of natural gas for
third parties. Transportation and storage services are provided under firm
service and interruptible service agreements. Transportation and storage rates
and general terms and conditions of service are established by, and subject to
review and revision by, the Federal Energy Regulatory Commission
(“FERC”).
Under firm transportation agreements,
customers generally pay a fixed “capacity reservation” fee to reserve pipeline
capacity at certain receipt and delivery points, plus a commodity and fuel
charge paid on the volume of gas actually transported. Firm storage customers
reserve a specific amount of storage capacity and generally pay a capacity
reservation charge based on the amount of capacity being reserved plus an
injection and/or withdrawal fee. Capacity
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - Boardwalk
Pipeline -
(Continued)
reservation
revenues derived from a firm service contract are generally consistent during
the contract term, but can be higher in winter periods, especially related to
no-notice service agreements.
Interruptible transportation and storage
service is typically short term in nature. Customers pay for interruptible
services when capacity is available and used.
Boardwalk Pipeline’s parking and lending
(“PAL”) service is an interruptible service offered to customers providing them
the ability to park (inject) or borrow (withdraw) gas into or out of Boardwalk
Pipeline’s pipeline systems at a specific location for a specific period of
time. Customers pay for PAL service in advance or on a monthly basis depending
on the terms of the agreement.
A significant portion of Boardwalk
Pipeline’s operating revenues is derived from reservation charges under
multi-year firm contracts, therefore the risk of revenue fluctuations due to
near-term changes in natural gas supply and demand conditions, competition and
price volatility is significantly mitigated. For the year ended December 31,
2008, 66.0% of Boardwalk Pipeline’s operating revenues were associated with
reservation charges under firm contracts which do not vary based on capacity
utilization. Excluding contracts associated with Boardwalk Pipeline’s expansion
projects currently under construction, the weighted average contract life of its
contracts is approximately 4.1 years. Regardless of these factors, Boardwalk
Pipeline’s business can be impacted by shifts in supply and demand dynamics, the
mix of services requested by customers and by competition and regulatory
requirements, particularly when accompanied by downturns or sluggishness in the
economy, especially over a longer term.
Boardwalk Pipeline’s business is
affected by trends involving natural gas price levels and natural gas price
spreads, including spreads between physical locations on its pipeline system,
which affects its transportation revenues, and spreads in natural gas prices
across time (for example summer to winter), which primarily affects its PAL and
storage revenues. High natural gas prices in recent years have helped to drive
increased production levels in producing locations such as the Bossier Sands and
Barnett Shale gas producing regions in east Texas, which have resulted in
widened basis differentials on Boardwalk Pipeline’s systems and have benefited
Boardwalk Pipeline’s 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 constructed and being undertaken by
Boardwalk Pipeline.
The price for natural gas has declined
since its peak in the late summer of 2008, although average prices continue to
remain at elevated levels from those seen historically. Many of Boardwalk
Pipeline’s customers have been negatively impacted by these recent declines in
natural gas prices as well as current conditions in the capital markets, which
factors have caused several of Boardwalk Pipeline’s producer customers to
announce plans to decrease drilling levels and, in some cases, to consider
shutting in natural gas production from some producing wells, which could
adversely affect the volumes of natural gas Boardwalk Pipeline transports. While
the majority of Boardwalk Pipeline’s revenue is derived from capacity
reservation charges that are not impacted by the volume of natural gas
transported; a significant portion of Boardwalk Pipeline’s revenue,
approximately 34.0% in 2008, is derived from charges based on actual volumes
transported under firm and interruptible services. As a result, lower volumes of
natural gas transported would result in lower revenues from natural gas
transportation operations. Based on the significant level of revenue Boardwalk
Pipeline receives from reservation capacity charges under long term contracts
and Boardwalk Pipeline’s review of the recent announcements of drilling plans by
its customers, Boardwalk Pipeline does not expect the current level of natural
gas prices to have a significant adverse effect on its operating results.
However, Boardwalk Pipeline cannot give assurances that this will be the case,
or that commodity prices will not decline further, which could result in a
further reduction in drilling activities by Boardwalk Pipeline’s
customers.
In addition, wide spreads in natural gas
prices between time periods, such as winter to summer, impact Boardwalk
Pipeline’s PAL and interruptible storage revenues. These period to period price
spreads, which were favorable for Boardwalk Pipeline’s PAL and interruptible
storage services during 2006 and early 2007, decreased substantially in 2007 and
continued decreasing into 2008, which resulted in reduced PAL and interruptible
storage revenues for those periods. Boardwalk Pipeline cannot predict future
time period spreads or basis differentials.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - Boardwalk
Pipeline -
(Continued)
Reduction
of Operating Pressures on Expansion Pipelines; Applications for Special Permits
from the Pipelines and Hazardous Materials Safety Administration
(“PHMSA”)
As discussed elsewhere in this
Report, Boardwalk Pipeline has discovered anomalies in a small number of pipe
segments on its East Texas to Mississippi segment of its Gulf South pipeline
system (the “East Texas Pipeline”). As a result, and as a prudent operator,
Boardwalk Pipeline has elected to reduce operating pressure on that pipeline to
20.0% below its previous operating level, which was below the pipeline’s maximum
non-special permit operating pressure. Operating at lower pressure reduces the
amount of gas that can flow through a pipeline and therefore will reduce
expected revenues and cash flow. Boardwalk Pipeline does not expect to return to
normal operating pressure, or to operate at higher pressure under the special
permit discussed below, until after it has completed its investigation and
remediation measures, as appropriate, and PHMSA has concurred with Boardwalk
Pipeline’s determination to increase pressure. Boardwalk Pipeline will also
incur costs to replace defective pipe segments on the East Texas Pipeline, some
of which may be reimbursable from vendors, and expects to temporarily shut down
that pipeline when performing the necessary remedial measures, up to and
including replacing certain pipe segments. Boardwalk Pipeline will work with
PHMSA to return the East Texas Pipeline to its previous status under the special
permit after Boardwalk Pipeline has completed its investigation and remediation.
Boardwalk Pipeline cannot determine at this time the amount of costs it will
incur or when it may raise operating pressure. Boardwalk Pipeline has not
completed testing on all of its expansion pipelines and could find anomalies on
other pipelines which could have similar impacts with respect to those
pipelines.
Boardwalk Pipeline’s ability to
transport a portion of the expected maximum capacity on each of its expansion
project pipelines is contingent upon Boardwalk Pipeline’s receipt of authority
to operate these pipelines at higher operating pressures under special permits
issued by PHMSA. Boardwalk Pipeline has received authority to operate the East
Texas Pipeline under a special permit and has received the special permits for
the Southeast and Gulf Crossing pipeline expansions and Fayetteville and
Greenville Laterals, but Boardwalk Pipeline has not received authority to
operate under these permits. PHMSA retains discretion as to whether to grant, or
to maintain in force, authority to operate any of Boardwalk Pipeline’s pipelines
at higher operating pressures. Absent such authority, Boardwalk Pipeline will
not be able to transport all of the contracted for quantities of natural gas on
these pipelines and its transportation revenues, results of operations and cash
flows would be reduced.
See Item 1A, Risk Factors – Boardwalk
Pipeline Partners, LP – A portion of the expected maximum
daily capacity of Boardwalk Pipeline’s pipeline expansion projects is contingent
on receiving and maintaining authority from PHMSA to operate at higher operating
pressures.
Results
of Operations
The following table summarizes the
results of operations for Boardwalk Pipeline for the years ended December 31,
2008, 2007 and 2006 as presented in Note 25 of the Notes to Consolidated
Financial Statements included under Item 8:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Other revenue, primarily
operating
|
|
$ |
845 |
|
|
$ |
650 |
|
|
$ |
614 |
|
Net investment
income
|
|
|
3 |
|
|
|
21 |
|
|
|
4 |
|
Total
|
|
|
848 |
|
|
|
671 |
|
|
|
618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
498 |
|
|
|
381 |
|
|
|
358 |
|
Interest
|
|
|
58 |
|
|
|
61 |
|
|
|
62 |
|
Total
|
|
|
556 |
|
|
|
442 |
|
|
|
420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax and minority interest
|
|
|
292 |
|
|
|
229 |
|
|
|
198 |
|
Income
tax expense
|
|
|
79 |
|
|
|
68 |
|
|
|
65 |
|
Minority
interest
|
|
|
88 |
|
|
|
55 |
|
|
|
30 |
|
Net
income
|
|
$ |
125 |
|
|
$ |
106 |
|
|
$ |
103 |
|
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - Boardwalk
Pipeline -
(Continued)
2008
Compared with 2007
Total revenues increased $177 million
to $848 million in 2008, compared to $671 million for 2007. Gas transportation
revenues, excluding fuel, increased $112 million, primarily from Boardwalk
Pipeline’s expansion projects and higher no-notice transportation service and
interruptible services on its existing assets. Fuel revenues increased $44
million due to expansion-related throughput and higher natural gas prices. Gas
storage revenues increased $12 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 $27
million due to unfavorable natural gas price spreads. Other revenues for 2008
include a $17 million gain on the disposition of coal reserves and an $11
million gain from the settlement of a contract claim. Other revenues were
favorably impacted by a $12 million increase in gains on the sale of gas related
to Boardwalk Pipeline’s western Kentucky storage expansion project.
Net income increased $19 million to
$125 million in 2008, compared to $106 million in 2007, primarily due to the
increased revenues discussed above, partially offset by a $117 million increase
in operating expenses. The primary drivers were increased depreciation and other
taxes, primarily comprised of property taxes, of $59 million associated with an
increase in Boardwalk Pipeline’s asset base due to expansion and increased fuel
costs of $50 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.
2007
Compared with 2006
Total revenues increased by $53
million to $671 million for 2007, compared to $618 million for 2006. Operating
revenues increased primarily due to a $23 million increase in transportation
fees due to higher firm transportation rates, including $9 million from new
contracts associated with the Carthage, Texas to Keatchie, Louisiana pipeline
expansion and a $12 million increase in fuel revenues due to increase retained
volumes from higher system utilization, including amounts associated with
pipeline expansion. Operating revenues also include a $22 million favorable
variance from a gain on the sale of gas associated with the western Kentucky
storage expansion project. Net investment income increased $17 million as a
result of higher levels of invested cash.
Net income increased slightly in 2007,
as compared to 2006, primarily due to the increased revenues discussed above,
partially offset by a $23 million increase in operating expenses and a $25
million increase in minority interest expense. Operating expenses in 2007
include a $7 million increase in fuel costs mainly due to increased gas usage
and a $6 million increase in depreciation and amortization primarily due to
growth in operations. Operating expenses also include a $4 million charge
related to the cost of terminating an agreement with a construction contractor
on the Southeast expansion project. In addition, net income decreased due to a
$15 million loss due to impairment of Boardwalk Pipeline’s Magnolia storage
facility, and a $9 million charge related to pipeline in the South Timbalier Bay
area offshore Louisiana. The increase in minority interest expense is primarily
due to the sale of Boardwalk Pipeline common units in the fourth quarter of 2006
and the first and fourth quarters of 2007.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
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 years ended December 31, 2008,
2007 and 2006 as presented in Note 25 of the Notes to Consolidated Financial
Statements included under Item 8:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Other revenue, primarily
operating
|
|
$ |
379 |
|
|
$ |
382 |
|
|
$ |
370 |
|
Net investment
income
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
Total
|
|
|
380 |
|
|
|
384 |
|
|
|
371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
307 |
|
|
|
313 |
|
|
|
311 |
|
Interest
|
|
|
11 |
|
|
|
11 |
|
|
|
12 |
|
Total
|
|
|
318 |
|
|
|
324 |
|
|
|
323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax
|
|
|
62 |
|
|
|
60 |
|
|
|
48 |
|
Income
tax expense
|
|
|
22 |
|
|
|
24 |
|
|
|
19 |
|
Net
income
|
|
$ |
40 |
|
|
$ |
36 |
|
|
$ |
29 |
|
2008
Compared with 2007
Revenues decreased by $4 million or
1.0%, and net income increased by $4 million or 11.1%, in 2008 as compared to
2007.
Revenues decreased in 2008, as compared
to 2007, due to a decrease in revenue per available room to $183.01, compared to
$185.81 in 2007, reflecting a 2.1% decrease in occupancy rates partially offset
by improvements in average room rates of $3.35, or 1.4%.
Net income in 2008 increased primarily
due to an $11 million pretax gain related to an adjustment in the carrying value
of a joint venture investment, partially offset by increased operating
expenses.
In light of the economic downturn,
exacerbated by significant negative publicity surrounding conventions and other
corporate group events typically held at hotels, luxury hotel bookings for 2009
are significantly reduced from levels seen in recent years. As a result, we
expect revenue per available room and operating results at Loews Hotels to
decrease significantly in the near-term.
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.
2007
Compared with 2006
Revenues increased by $13 million or
3.5%, and net income increased by $7 million or 24.1%, respectively in 2007, as
compared to 2006.
Revenues and net income increased in
2007, as compared to 2006, due to an increase in revenue per available room to
$185.81, compared to $169.81 in 2006, reflecting improvements in average room
rates of $19.94, or 8.8%, and a 0.4% increase in occupancy rates, partially
offset by the classification of joint venture equity income as a component of
operating expenses in 2007, as compared to revenues in
2006.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Corporate
and Other
Corporate operations consist primarily of investment income
and investment gains (losses) at the Parent Company, corporate interest
expenses and other corporate administrative costs. Discontinued operations
include the results of operations of Lorillard through June of
2008 and the sale of Bulova in January of 2008 and the related gains on the
disposals of these businesses.
The following table summarizes the
results of operations for Corporate and Other for the years ended December 31,
2008, 2007 and 2006 as presented in Note 25 of the Notes to Consolidated
Financial Statements included under Item 8:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Net investment income
(loss)
|
|
$ |
(54 |
) |
|
$ |
295 |
|
|
$ |
351 |
|
Investment
gains
|
|
|
2 |
|
|
|
144 |
|
|
|
10 |
|
Other
|
|
|
16 |
|
|
|
2 |
|
|
|
10 |
|
Total
|
|
|
(36 |
) |
|
|
441 |
|
|
|
371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
79 |
|
|
|
76 |
|
|
|
65 |
|
Interest
|
|
|
56 |
|
|
|
55 |
|
|
|
75 |
|
Total
|
|
|
135 |
|
|
|
131 |
|
|
|
140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income tax
|
|
|
(171 |
) |
|
|
310 |
|
|
|
231 |
|
Income
tax (expense) benefit
|
|
|
55 |
|
|
|
(107 |
) |
|
|
(81 |
) |
Income
(loss) from continuing operations
|
|
|
(116 |
) |
|
|
203 |
|
|
|
150 |
|
Discontinued
operations, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of
operations
|
|
|
341 |
|
|
|
907 |
|
|
|
841 |
|
Gain on
disposal
|
|
|
4,362 |
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
4,587 |
|
|
$ |
1,110 |
|
|
$ |
991 |
|
2008
Compared with 2007
Revenues decreased by $477 million
and net income increased by $3,477 million in 2008 as compared to
2007.
Revenues decreased in 2008 as
compared to 2007, due primarily to decreased net investment income of $349
million and reduced investment gains. Net investment income declined due to
losses recorded in the trading portfolio in 2008, as compared to gains in 2007.
Results in 2008 also reflect reduced invested cash balances due to the parent
company’s equity investments in its CNA and Boardwalk Pipeline subsidiaries in
2008, the HighMount acquisition in 2007 and lower yields. Investment gains for
2007 included a $143 million pretax gain ($93 million after tax) related to the
issuance of Diamond Offshore common stock from the conversion of $456 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 year ended December 31, 2008 includes a $4,287 million gain on the
Separation of Lorillard and a $75 million gain on the sale of
Bulova.
Loss from continuing operations was
$116 million in 2008, compared to income from continuing operations of $203
million in 2007. The lower results were primarily due to the reduction in
revenues discussed above.
2007
Compared with 2006
Revenues increased $70 million and net
income increased by $119 million in 2007, as compared to 2006, due to increased
investment gains of $134 million, partially offset by reduced investment income
of $56 million. Investment
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations - Corporate and
Other -
(Continued)
gains for
2007 include a $143 million gain ($93 million after tax) due to the conversion
of $456 million principal amount of Diamond Offshore’s 1.5% debentures into
Diamond Offshore common stock. The decrease in investment income is due to a
lower invested asset balance (reflecting the $2.4 billion use of cash to
partially fund the HighMount acquisition) and reduced performance of the
Company’s trading portfolio.
Net income increased in 2007 due to
the increase in revenues, and also benefited from lower corporate interest
expenses due to the maturity of $300 million principal amount of 6.8% notes in
December of 2006.
LIQUIDITY
AND CAPITAL RESOURCES
CNA
Financial
As a result of the significant realized
and unrealized losses in CNA’s investment portfolio and declines in CNA’s net
investment income during 2008 as discussed in the Investments section of this
MD&A, CNA took several actions during the fourth quarter to strengthen its
capital position and to ensure its operating insurance subsidiaries had
sufficient statutory surplus, including the following:
|
·
|
In
October 2008, CNA suspended its quarterly dividend payment to common
stockholders.
|
|
·
|
In
November 2008, CNA issued, and Loews purchased, 12,500 shares of CNA’s
non-voting cumulative preferred stock (“2008 Senior Preferred”) for $1.25
billion.
|
|
·
|
CNA
used the majority of the proceeds from the 2008 Senior Preferred to
increase the statutory surplus of its principal insurance subsidiary,
Continental Casualty Company (“CCC”), through the purchase of a $1.0
billion surplus note of CCC.
|
|
·
|
In
November 2008, CNA borrowed $250 million on an existing credit facility
and used $200 million of the proceeds to retire senior notes that matured
in December 2008.
|
|
·
|
In
December 2008, CNA contributed $500 million of cash and short term
investments from CNA’s holding company to
CCC.
|
|
·
|
CNA
requested and received approval for a statutory permitted practice related
to the recognition of deferred tax assets which increased statutory
surplus of CCC by approximately $700 million as of December 31, 2008. The
permitted practice will remain in effect for the first, second and third
quarter 2009 reporting periods.
|
Further information on the 2008 Senior
Preferred, CCC surplus note and the statutory permitted practice is included in
Note 16 of the Notes to Consolidated Financial Statements included under Item
8.
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 2008, net cash provided by operating
activities was $1,558 million as compared to $1,239 million 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 tax payments and decreased loss 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 receipts.
For 2007, net cash provided by operating
activities was $1,239 million as compared to $2,250 million in 2006. Cash
provided by operating activities was unfavorably impacted by decreased net sales
of trading securities to fund policyholder withdrawals of investment contract
products issued by CNA. Cash provided by operating activities was also
unfavorably impacted by decreased premium collections, increased tax payments,
and increased loss payments.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity
and Capital Resources - CNA Financial
-
(Continued)
Net cash used for investing activities
was $1,908 million, $1,082 million and $1,646 million for 2008, 2007
and 2006. Cash flows used by investing activities related principally to
purchases of fixed maturity securities and short term investments. 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. In 2007, net cash flows provided by investing
activities-discontinued operations included $65 million of cash proceeds related
to the sale of the United Kingdom discontinued operations business.
Net cash provided by financing
activities was $347 million in 2008. In 2007 and 2006, net cash used for
financing activities was $185 million and $605 million. Net cash flow
provided by financing activities in 2008 was primarily related to the issuance
of the 2008 Senior Preferred stock to Loews, as discussed above, partially
offset by policyholders’ fund withdrawals and dividend payments. Additionally,
in January 2008, CNA repaid its $150 million 6.45% senior note at maturity. In
November 2008, CNA drew down $250 million on a credit facility established in
2007 and used $200 million of the proceeds to retire its 6.60% Senior Notes that
were due December 15, 2008.
Dividends
CNA declared and paid dividends of $0.45
and $0.35 per share of its common stock in 2008 and 2007. No dividends were paid
in 2006. In October 2008, CNA suspended its quarterly dividend payment on its
common stock.
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 2008 Senior Preferred, common stock repurchases
are prohibited. No shares of common stock were purchased during the years ended
December 31, 2007 or 2006.
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. As of December 31, 2008, the total potential
collateralization requirements amounted to approximately $85
million.
|
|
·
|
As
of December 31, 2008, CNA’s holding company held short term investments of
$539 million. CNA’s holding company’s ability to meet its debt service and
other obligations is significantly dependent on receipt of dividends from
its subsidiaries. As discussed further in Note 16 of the Notes to
Consolidated Financial Statements included under Item 8, 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. Notwithstanding this limitation, CNA believes that it
has sufficient liquidity to fund its preferred stock dividend and debt
service payments in 2009.
|
CNA has an effective shelf registration
statement under which it may issue $2.0 billion of debt or equity
securities.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity
and Capital Resources - CNA Financial
-
(Continued)
Commitments,
Contingencies and Guarantees
CNA has various commitments,
contingencies and guarantees which it becomes involved with during the ordinary
course of business. The impact of these commitments, contingencies and
guarantees should be considered when evaluating CNA’s liquidity and capital
resources.
Ratings
Ratings are an important factor in
establishing the competitive position of insurance companies. CNA’s insurance
company subsidiaries are rated by major rating agencies, and these ratings
reflect the rating agency’s opinion of the insurance company’s financial
strength, operating performance, strategic position and ability to meet its
obligations to policyholders. Agency ratings are not a recommendation to buy,
sell or hold any security, and may be revised or withdrawn at any time by the
issuing organization. Each agency’s rating should be evaluated independently of
any other agency’s rating. One or more of these agencies could take action in
the future to change the ratings of CNA’s insurance subsidiaries.
The table below reflects the various
group ratings issued by A.M. Best Company (“A.M. Best”), Moody’s Investors
Service (“Moody”) and Standard & Poor’s (“S&P”) for the property and
casualty and life companies. The table also includes the ratings for CNA’s
senior debt and the Continental Corporation (“Continental”) senior
debt.
|
Insurance
Financial Strength Ratings
|
Debt
Ratings
|
|
Property
& Casualty
|
Life
|
CNA
|
Continental
|
|
CCC
|
|
Senior
|
Senior
|
|
Group
|
CAC
|
Debt
|
Debt
|
A.M.
Best
|
A
|
A-
|
bbb
|
Not
rated
|
Moody’s
|
A3
|
Not
rated
|
Baa3
|
Baa3
|
S&P
|
A-
|
Not
rated
|
BBB-
|
BBB-
|
The following rating agency actions were
taken by these rating agencies with respect to CNA from January 1, 2008 through
February 23, 2009:
|
·
|
On
January 27, 2009, S&P withdrew CAC’s insurance financial strength
rating of BBB+ at CNA’s request.
|
|
·
|
On
February 9, 2009, Moody's affirmed CNA’s ratings and revised the outlook
from stable to negative.
|
|
·
|
On
February 13, 2009, A.M. Best affirmed CNA’s ratings and revised the
outlook from stable to negative.
|
In January 2009, CNA exercised its early
termination right under its contract with Fitch Ratings. As a result,
CNA no longer retains Fitch Ratings to issue insurance financial strength
ratings for the CCC Group or debt ratings for CNA and Continental.
If CNA’s property and casualty insurance
financial strength ratings were downgraded below current levels, CNA’s business
and our results of operations could be materially adversely affected. The
severity of the impact on CNA’s business is dependent on the level of downgrade
and, for certain products, which rating agency takes the rating
action. Among the adverse effects in the event of such downgrades
would be the inability to obtain a material volume of business from certain
major insurance brokers, the inability to sell a material volume of CNA’s
insurance products to certain markets and the required collateralization of
certain future payment obligations or reserves.
As discussed in the Liquidity section
above, additional collateralization may be required for certain settlement
agreements and assumed reinsurance contracts, as well as derivative contracts,
if CNA’s ratings or other specific criteria fall below certain
thresholds.
In addition, it is possible that a
lowering of our debt ratings by certain of these agencies could result in an
adverse impact on CNA’s ratings, independent of any change in circumstances at
CNA. None of the major rating agencies which rates us currently maintains a
negative outlook or has us on negative Credit Watch.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Diamond
Offshore
Cash and investments, net of receivables
and payables, totaled $737 million at December 31, 2008 compared to $640 million
at December 31, 2007. In 2008, Diamond Offshore paid cash dividends totaling
$852 million, consisting of special cash dividends of $783 million and regular
quarterly cash dividends of $69 million. In February of 2009, Diamond Offshore
declared a special dividend of $1.875 per share and a regular quarterly dividend
of $0.125 per share.
Diamond Offshore’s cash flows from
operations are impacted by the ability of its customers to weather the current
global financial and credit crisis. In general, before working for a customer
with whom Diamond Offshore has not had a prior business relationship and/or
whose financial stability may be uncertain, Diamond Offshore performs a credit
review on that company. Based on that analysis, Diamond Offshore may require
that the customer present a letter of credit, prepay or provide other credit
enhancements. Tightening of the credit markets may preclude Diamond Offshore
from doing business with potential customers and could have an impact on its
existing customers, causing them to fail to meet their obligations to Diamond
Offshore.
Cash provided by operating activities
was $1,620 million in 2008, compared to $1,208 million in 2007. The increase in
cash flows from operations in 2008 is primarily the result of higher average
dayrates earned by Diamond Offshore’s rigs as a result of high worldwide demand
for offshore contract drilling services through 2008 compared to 2007. The
favorable contribution to cash flows was partially offset by lower utilization
of Diamond Offshore’s offshore drilling units due to planned downtime for
modifications to its rigs to meet customer requirements and regulatory surveys,
as well as the ready-stacking of rigs within Diamond Offshore’s Gulf of Mexico
jack-up fleet between wells.
Diamond Offshore conducts a portion of
its operations in the local currency of the country where it operates. When
possible, Diamond Offshore attempts to minimize its currency exchange risk by
seeking international contracts payable in local currency in amounts equal to
its estimated operating costs payable in local currency with the balance of the
contract payable in U.S. dollars. At present, however, only a limited number of
its contracts are payable both in U.S. dollars and the local
currency.
To the extent that Diamond Offshore is
not able to cover its local currency operating costs with customer payments in
the local currency, Diamond Offshore also utilizes foreign exchange forward
contracts to reduce its currency exchange risk. Diamond Offshore’s forward
currency exchange contracts may obligate it to exchange predetermined amounts of
specified foreign currencies at specified foreign exchange rates on specific
dates or to net settle the spread between the contracted foreign currency
exchange rate and the spot rate on the contract settlement date, which for
certain contracts is the average spot rate for the contract period. Diamond
Offshore’s results for the year ended December 31, 2008 were impacted by $54
million of losses on foreign currency forward exchange contracts, primarily from
mark-to-market accounting, which is included in Other revenues.
During 2008, construction of Diamond
Offshore’s two high-performance, premium jack-up rigs, the Ocean Scepter and the Ocean Shield, was completed
at an aggregate construction cost of approximately $324 million. Both rigs began
operating under contract during 2008. The upgrade of the Ocean Monarch was completed
late in the fourth quarter of 2008 for an aggregate cost of approximately $310
million. The Ocean Monarch
arrived in the Gulf of Mexico in late January of 2009, and Diamond
Offshore is making final preparations for a four-year term contract, which it
expects to commence late in the first quarter of 2009. During 2008, Diamond
Offshore spent $182 million on construction and upgrade projects.
In 2008, Diamond Offshore spent
approximately $485 million on its continuing rig capital maintenance program
(other than rig upgrades and new construction), including $125 million towards
modification of certain of its rigs to meet contractual requirements. Diamond
Offshore estimates that capital expenditures in 2009 associated with its ongoing
rig equipment replacement and enhancement programs, equipment required for its
long term international contracts and other corporate requirements will be
approximately $400 million. In addition, Diamond Offshore expects to spend an
additional $70 million in 2009 in connection with a repowering project and water
depth upgrade for the Ocean
Bounty. Diamond Offshore expects to finance its 2009 capital expenditures
through the use of its existing cash balances or internally generated funds.
From time to time, however, Diamond Offshore may also make use of its credit
facility to finance capital expenditures.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity
and Capital Resources - Diamond Offshore
-
(Continued)
In December of 2008, Diamond Offshore
entered into an agreement to sell the Ocean Tower at a price in
excess of its $32 million carrying value. The agreement prohibits competitive
use of the rig, which is expected to be deployed by the purchaser as an
accommodation unit. Diamond Offshore does not expect the sale of the Ocean Tower to have a
material impact on its financial position, results of operations, or its ability
to compete in the jack-up market. Diamond Offshore expects to complete the sale
in the first quarter of 2009.
As of December 31, 2008, there were no
loans outstanding under Diamond Offshore’s $285 million credit facility;
however, $58 million in letters of credit were issued and outstanding under the
credit facility.
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 fund its ongoing operations and capital projects for the
next twelve months; however, Diamond Offshore will continue to make periodic
assessments based on industry conditions and will adjust capital spending
programs if required.
For physical damage due to named
windstorms in the U.S. Gulf of Mexico, Diamond Offshore’s insurance deductible
is $75 million per occurrence (or lower for some rigs if they are declared a
constructive total loss) with an annual aggregate limit of $125 million.
Accordingly, Diamond Offshore’s insurance coverage for all physical damage to
its rigs and equipment caused by named windstorms in the U.S. Gulf of Mexico for
the policy period ending May 1, 2009 is limited to $125 million. If named
windstorms in the U.S. Gulf of Mexico cause significant damage to Diamond
Offshore’s rigs or equipment, it could have a material adverse effect on our
financial position, results of operations and cash flows.
HighMount
Net cash flows provided by operating
activities were $487 million in 2008, compared to $146 million in 2007. 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. Cash used for investing activities in
2008 was $528 million and consisted primarily of additions to HighMount’s
natural gas and oil properties. HighMount spent $370 million and $166 million on
capital expenditures for its drilling program in 2008 and 2007, respectively.
During 2008, HighMount experienced a higher capital cost environment
attributable to increased costs for casing, tubing and diesel fuel.
At December 31, 2008, $115 million was
outstanding under HighMount’s $400 million revolving credit facility. In
addition, $9 million in letters of credit were issued, which reduced the
available capacity under the facility to $276 million. A financial institution
which has a $30 million funding commitment under the revolving credit facility
has not funded its portion of HighMount’s borrowing requests since September of
2008. All other lenders met their revolving commitments on the HighMount’s
borrowings. If the financial institution 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 $255 million from $276
million.
The agreements governing HighMount’s
$1.6 billion term loans and revolving credit facility contain financial
covenants typical for these types of agreements, including a maximum debt to
capitalization ratio. The credit agreement also contains customary restrictions
or limitations on HighMount’s ability to enter or engage in certain
transactions, including transactions with affiliates. At December 31, 2008,
HighMount was in compliance with all of its debt covenants under the credit
agreement and anticipates remaining in compliance in the
future.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Boardwalk
Pipeline
At December 31, 2008 and 2007, cash and
investments amounted to $315 million and $317 million. Funds from operations for
the year ended December 31, 2008 amounted to $350 million, compared to $282
million in 2007. In 2008 and 2007, Boardwalk Pipeline’s capital expenditures
were $2.7 billion and $1.2 billion, respectively.
Expansion
Capital Expenditures
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:
|
|
Total
Estimated
Cost
(a)
|
|
|
Cash
Invested
through
December
31,
2008
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southeast
Expansion
|
|
$ |
775 |
|
|
$ |
707 |
|
Gulf
Crossing Project
|
|
|
1,800 |
|
|
|
1,404 |
|
Fayetteville
and Greenville Laterals
|
|
|
1,290 |
|
|
|
684 |
|
Total
|
|
$ |
3,865 |
|
|
$ |
2,795 |
|
(a)
|
Boardwalk
Pipeline’s cost estimates are based on internally developed financial
models and timelines. Factors in the estimates include, but are not
limited to, those related to pipeline costs based on mileage, size and
type of pipe, materials and construction and engineering
costs.
|
Based upon current cost estimates,
Boardwalk Pipeline expects to incur expansion project capital expenditures of
approximately $1.0 billion in 2009 and 2010 to complete its pipeline expansion
projects. The majority of the expenditures are expected to occur during the
first half of 2009, with the remaining costs, associated with the construction
of additional compression facilities for the Gulf Crossing project and the
Fayetteville and Greenville Laterals, to be incurred in the latter half of 2009
and into 2010.
Boardwalk Pipeline is also engaged in
the western Kentucky storage expansion project. The cost of this project is
expected to be approximately $88 million. Through December 31, 2008, Boardwalk
Pipeline has spent $48 million related to this project.
The cost and timing estimates for these
projects are subject to a variety of other risks and uncertainties, including
obtaining regulatory approvals, adverse weather conditions, delays in obtaining
key materials, shortages of qualified labor and escalating costs of labor and
materials. As the announced expansion projects move toward completion, the risks
and uncertainties associated with the expansion projects are decreasing.
However, certain risks remain, primarily involving river crossings and receipt
of regulatory authority to operate the pipelines at higher operating
pressures.
Boardwalk Pipeline has financed its
expansion capital costs through the issuance of equity and debt, borrowings
under its revolving credit facility and available operating cash flow in excess
of operating needs. Boardwalk Pipeline anticipates it will need to finance an
additional $500 million to complete its expansion projects. In October of 2008,
the Company’s Board of Directors approved a commitment to provide the capital,
to the extent that external funds are not available to Boardwalk Pipeline on
acceptable terms, to complete the expansion projects. Item 1A, “Risk Factors –
Boardwalk Pipeline is undertaking large, complex expansion projects which
involve significant risks that may adversely affect its business,” contains more
information regarding the risks associated with Boardwalk Pipeline’s expansion
projects and the related financing. Item 1, “Business – Boardwalk Pipeline
Partners, LP – Expansion Projects,” contains more information regarding
Boardwalk Pipeline’s expansion projects.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity
and Capital Resources - Boardwalk
Pipeline -
(Continued)
In 2008, Boardwalk Pipeline received net
cash proceeds of approximately $1.7 billion from the following debt and equity
issuances which proceeds were used to fund a portion of the costs of its ongoing
expansion projects and to repay amounts borrowed under its revolving credit
facility:
Month
of
Issuance
|
|
Net
Cash
Proceeds
Received
|
|
Number
of
Units
|
|
|
Issue
Price
|
|
Type
of Issuance
|
(In
millions, except issue price)
|
|
|
|
|
|
|
|
|
|
|
|
|
October
|
|
$ |
500 |
|
(a)
|
|
|
21.2 |
|
|
$ |
23.13 |
|
Private
placement of common units to Loews
|
June
|
|
|
700 |
|
(b)
|
|
|
22.9 |
|
|
|
30.00 |
|
Private
placement of class B units to Loews
|
June
|
|
|
248 |
|
(c)
|
|
|
10.0 |
|
|
|
25.30 |
|
Public
offering of common units
|
March
|
|
|
247 |
|
|
|
|
N/A |
|
|
|
N/A |
|
Public
offering of debt
securities
|
(a)
|
Includes
a $10 contribution received from Boardwalk Pipeline’s general partner to
maintain its 2% general partner
interest.
|
(b)
|
Includes
a $14 contribution received from Boardwalk Pipeline’s general partner to
maintain its 2% general partner
interest.
|
(c)
|
Includes
a $5 contribution received from Boardwalk Pipeline’s general partner to
maintain its 2% general partner
interest.
|
The class B units noted above 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 began sharing in income allocations and distributions with respect to the
third quarter of 2008.
The class B units have the same
voting rights as if they were outstanding common units and are entitled to vote
as a separate class on any matters that materially adversely affect the rights
or preferences of the class B units in relation to other classes of partnership
interests or as required by law. 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.
Boardwalk Pipeline maintains a
revolving credit facility, which has aggregate lending commitments of $1.0
billion. Boardwalk Pipeline has utilized its revolving credit facility, to the
extent necessary, to finance its expansion projects. 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
December 31, 2008, Boardwalk Pipeline had $792 million of loans outstanding
under the revolving credit facility of which the weighted-average interest rate
on the borrowings was 3.4% and had no letters of credit issued. As of December
31, 2008, Boardwalk Pipeline was in compliance with all covenant requirements
under its credit facility. Subsequent to December 31, 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 $954 million.
Maintenance capital expenditures were
$51 million in 2008. Boardwalk Pipeline expects to fund its 2009 maintenance
capital expenditures of approximately $68 million from operating cash
flows.
Boardwalk Pipeline does not have an
immediate need to refinance any of its long term debt, including borrowings
under its revolving credit facility, as the earliest maturity date of such
indebtedness is in 2012. Boardwalk Pipeline believes that its cash flow from
operations will be sufficient to support its ongoing operations and maintenance
capital requirements.
Current economic conditions have made it
difficult for companies to obtain funding in either the debt or equity markets.
The current constraints in the capital markets may affect Boardwalk Pipeline’s
ability to obtain funding through new borrowings or the issuance of equity in
the public markets. In addition, Boardwalk Pipeline expects that, to the extent
Boardwalk Pipeline is successful in arranging new debt financing, it will incur
increased costs associated with these debt financings. As of December 31, 2008,
in addition to $315 million of cash on hand and short term investments,
Boardwalk Pipeline had available capacity under its credit facility of $162
million which Boardwalk Pipeline subsequently fully borrowed against. Boardwalk
Pipeline expects to utilize these resources, along with cash from operations, to
fund a significant portion of its growth capital expenditures and working
capital needs during 2009.
Boardwalk Pipeline’s ability to continue
to access capital markets for debt and equity financing under reasonable terms
depends on Boardwalk Pipeline’s financial condition, credit ratings and market
conditions. Boardwalk Pipeline
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity
and Capital Resources - Boardwalk
Pipeline -
(Continued)
anticipates
that its existing capital resources, ability to obtain financing and cash flow
generated from future operations will enable Boardwalk Pipeline to maintain its
current level of operations and its planned operations, including capital
expenditures, for 2009.
Boardwalk Pipeline recently signed
precedent agreements for 0.2 Bcf per day of capacity that will support expanding
its system from the Haynesville production area in northwest Louisiana to
Perryville, Louisiana. This project will consist of adding compression to the
Gulf South system at an estimated cost of up to $105 million. Boardwalk Pipeline
expects to finance this project with additional debt and to place this project
in service in the fourth quarter of 2010, subject to regulatory
approvals.
Distributions
During the year ended December 31, 2008,
Boardwalk Pipeline paid cash distributions of $260 million, including $181
million to us. In February of 2009, Boardwalk Pipeline declared a quarterly
distribution of $0.48 per common unit.
Loews
Hotels
Funds from operations continue to exceed
operating requirements. Cash and investments decreased to $72 million at
December 31, 2008 from $73 million at December 31, 2007. The decrease is
primarily due to $35 million of dividends paid to us 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. Loews Hotels is currently in negotiations to refinance $53
million of debt which is due in March 2009.
Corporate
and Other
Parent Company cash and investments, net
of receivables and payables, at December 31, 2008 totaled $2.3 billion, as
compared to $3.8 billion at December 31, 2007. The decrease in net cash and
investments is primarily due to the $1.25 billion purchase of CNA senior
preferred stock described in “Liquidity and Capital Resources CNA
Financial,” the $700 million purchase of Boardwalk Pipeline’s class B units and
$500 million purchase of Boardwalk Pipeline’s common units described in
“Liquidity and Capital Resources – Boardwalk Pipeline,” and $219 million of
dividends paid to our shareholders. These cash outflows were partially offset by
the receipt of $1,263 million in dividends from subsidiaries (including $491
million from Lorillard) and the receipt of $263 million in connection with the
sale of Bulova.
As of December 31, 2008, there were
435,091,667 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 year ended December 31,
2008, we purchased 1,313,600 shares of Loews common stock at an aggregate cost
of $33 million and 569,400 shares of CNA common stock at an aggregate cost of $8
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.
Off-Balance
Sheet Arrangements
At December 31, 2008 and 2007, we did
not have any off-balance sheet arrangements.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Contractual
Obligations
Our contractual payment obligations are
as follows:
|
|
Payments
Due by Period
|
|
December
31, 2008
|
|
Total
|
|
|
Less
than
1
year
|
|
|
1-3
years
|
|
|
4-5
years
|
|
|
More
than
5
years
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
(a)
|
|
$ |
11,340 |
|
|
$ |
499 |
|
|
$ |
1,425 |
|
|
$ |
3,904 |
|
|
$ |
5,512 |
|
Operating
leases (b)
|
|
|
340 |
|
|
|
93 |
|
|
|
113 |
|
|
|
77 |
|
|
|
57 |
|
Claim
and claim expense reserves (c)
|
|
|
29,104 |
|
|
|
6,425 |
|
|
|
8,087 |
|
|
|
4,210 |
|
|
|
10,382 |
|
Future
policy benefits reserves (d)
|
|
|
11,956 |
|
|
|
176 |
|
|
|
342 |
|
|
|
327 |
|
|
|
11,111 |
|
Policyholder
funds reserves (d)
|
|
|
207 |
|
|
|
24 |
|
|
|
10 |
|
|
|
4 |
|
|
|
169 |
|
Purchase
obligations (b)(e)
|
|
|
333 |
|
|
|
279 |
|
|
|
53 |
|
|
|
1 |
|
|
|
|
|
Pipeline
capacity agreements (f)
|
|
|
103 |
|
|
|
13 |
|
|
|
22 |
|
|
|
21 |
|
|
|
47 |
|
Total
(g)
|
|
$ |
53,383 |
|
|
$ |
7,509 |
|
|
$ |
10,052 |
|
|
$ |
8,544 |
|
|
$ |
27,278 |
|
(a)
|
Includes
estimated future interest payments, but does not include original issue
discount.
|
(b)
|
Includes
operating lease commitments of $23 in 2009 and $4 in 2010 and purchase
obligations of $18 in 2009 and $3 in 2010 related to a HighMount contract
that was terminated in February of 2009, subject to a contract termination
fee.
|
(c)
|
Claim
and claim adjustment expense reserves are not discounted and represent
CNA’s estimate of the amount and timing of the ultimate settlement and
administration of gross claims based on its assessment of facts and
circumstances known as of December 31, 2008. See the Reserves – Estimates
and Uncertainties section of this MD&A for further information. Claim
and claim adjustment expense reserves of $12 related to business which has
been 100% ceded to unaffiliated parties in connection with the individual
life sale are not included.
|
(d)
|
Future
policy benefits and policyholder funds reserves are not discounted and
represent CNA’s estimate of the ultimate amount and timing of the
settlement of benefits based on its assessment of facts and circumstances
known as of December 31, 2008. Future policy benefit reserves of $810 and
policyholder fund reserves of $38 related to business which has been 100%
ceded to unaffiliated parties in connection with the sale of CNA’s
individual life business in 2004 are not included. Additional information
on future policy benefits and policyholder funds reserves is included in
Note 1 of the Notes to Consolidated Financial Statements included under
Item 8.
|
(e)
|
Consists
primarily of obligations aggregating $199 related to Boardwalk Pipeline’s
expansion projects as previously discussed in Item 1, “Business –
Boardwalk Pipeline Partners, LP – Expansion
Projects.”
|
(f)
|
The
amounts shown are associated with various pipeline capacity agreements on
third-party pipelines that allow Boardwalk Pipeline’s operating
subsidiaries to transport gas to off-system markets on behalf of Boardwalk
Pipeline’s customers.
|
(g)
|
Does
not include expected estimated contribution of $82 to the Company’s
pension and postretirement plans in
2009.
|
Further information on our commitments,
contingencies and guarantees is provided in Notes 3, 5, 9, 12, 21 and 22 of the
Notes to Consolidated Financial Statements included under Item
8.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
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 that are considered part of our trading
portfolio, short sales and certain derivative instruments are marked to market
and reported as Net investment income in the Consolidated Statements of
Income.
We enter into short sales and invest in
certain derivative instruments that are used for asset and liability management
activities, income enhancements to our portfolio management strategy and to
benefit from anticipated future movements in the underlying markets. If such
movements do not occur as anticipated, then significant losses may occur.
Monitoring procedures include senior management review of daily detailed reports
of existing positions and valuation fluctuations to ensure that open positions
are consistent with our portfolio strategy.
Credit exposure associated with
non-performance by the counterparties to derivative instruments is generally
limited to the uncollateralized change in fair value of the derivative
instruments recognized in the Consolidated Balance Sheets. We mitigate the risk
of non-performance by monitoring the creditworthiness of counterparties and
diversifying derivatives to multiple counterparties. We occasionally require
collateral from our derivative investment counterparties depending on the amount
of the exposure and the credit rating of the counterparty.
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. Please read
“Results of Operations,” “Quantitative and Qualitative Disclosures about Market
Risk” and Note 5 of the Notes to Consolidated Financial Statements included
under Item 8 of this Report for additional information with respect to
derivative instruments, including recognized gains and losses on these
instruments.
For more than a year, capital and credit
markets have experienced severe levels of volatility, illiquidity, uncertainty
and overall disruption. Despite government intervention, market conditions have
led to the merger or failure of a number of prominent financial institutions and
government sponsored entities, sharply increased unemployment and reduced
economic activity. In addition, significant declines in the value of assets and
securities that began with the residential sub-prime mortgage crisis have spread
to nearly all classes of investments, including most of those held in our
insurance and non-insurance portfolios. As a result, during 2008 we incurred
significant realized and unrealized losses and experienced substantial declines
in our net investment income which have materially adversely impacted our
results of operations and equity.
Insurance
CNA maintains a large portfolio of fixed
maturity and equity securities, including large amounts of corporate and
government issued debt securities, collateralized mortgage obligations (“CMOs”),
asset-backed and other structured securities, equity and equity-based securities
and investments in limited partnerships which pursue a variety of long and short
investment strategies across a broad array of asset classes. CNA’s investment
portfolio supports its obligation to pay future insurance claims and provides
investment returns which are an important part of CNA’s overall
profitability.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Investments
-
(Continued)
Net
Investment Income
The significant components of CNA’s net
investment income are presented in the following table:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities
|
|
$ |
1,984 |
|
|
$ |
2,047 |
|
|
$ |
1,842 |
|
Short
term investments
|
|
|
115 |
|
|
|
186 |
|
|
|
248 |
|
Limited
partnerships
|
|
|
(379 |
) |
|
|
183 |
|
|
|
288 |
|
Equity
securities
|
|
|
80 |
|
|
|
25 |
|
|
|
23 |
|
Income
(loss) from trading portfolio (a)
|
|
|
(149 |
) |
|
|
10 |
|
|
|
103 |
|
Interest
on funds withheld and other deposits
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(68 |
) |
Other
|
|
|
21 |
|
|
|
36 |
|
|
|
18 |
|
Total
investment income
|
|
|
1,670 |
|
|
|
2,486 |
|
|
|
2,454 |
|
Investment
expense
|
|
|
(51 |
) |
|
|
(53 |
) |
|
|
(42 |
) |
Net
investment income
|
|
$ |
1,619 |
|
|
$ |
2,433 |
|
|
$ |
2,412 |
|
(a)
|
The
change in net unrealized gains (losses) on trading securities included in
Net investment income was $3 and $(15) for the years ended December 31,
2008 and 2007. There was no change in net unrealized gains (losses) on
trading securities included in Net investment income for the year ended
December 31, 2006.
|
Net investment income decreased by
$814 million in 2008 compared with 2007. The decrease was primarily driven by
significant losses from limited partnerships and the trading portfolio in 2008
and a decline in short term interest rates. Limited partnerships may present
greater risk, greater volatility and higher illiquidity than fixed maturity
investments. The decreased results from the trading portfolio were substantially
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 Statements of Income.
Net investment income increased by
$21 million in 2007 compared with 2006. The improvement was primarily driven by
an increase in the overall invested asset base and a reduction of interest
expense on funds withheld and other deposits as discussed further below. These
increases were substantially offset by decreases in limited partnership income
and results from the trading portfolio.
During 2006, CNA commuted several
significant reinsurance contracts which contained interest crediting provisions
that were reflected as a component of Net investment income in our Consolidated
Statements of Income. As of December 31, 2006, no further interest expense was
due on the commuted contracts.
The bond segment of the fixed
maturity investment portfolio provided an income yield of 5.7%, 5.8% and 5.6%
for the years ended December 31, 2008, 2007 and 2006.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Investments
-
(Continued)
Net
Realized Investment Gains (Losses)
The components of CNA’s net realized
investment results for available-for-sale securities are presented in the
following table:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
investment gains (losses):
|
|
|
|
|
|
|
|
|
|
Fixed maturity
securities:
|
|
|
|
|
|
|
|
|
|
U.S. Government
bonds
|
|
$ |
235 |
|
|
$ |
86 |
|
|
$ |
62 |
|
Corporate and other taxable
bonds
|
|
|
(643 |
) |
|
|
(183 |
) |
|
|
(98 |
) |
Tax-exempt
bonds
|
|
|
53 |
|
|
|
3 |
|
|
|
53 |
|
Asset-backed
bonds
|
|
|
(476 |
) |
|
|
(343 |
) |
|
|
(9 |
) |
Redeemable preferred
stock
|
|
|
|
|
|
|
(41 |
) |
|
|
(3 |
) |
Total fixed maturity
securities
|
|
|
(831 |
) |
|
|
(478 |
) |
|
|
5 |
|
Equity securities
|
|
|
(490 |
) |
|
|
117 |
|
|
|
16 |
|
Derivative
securities
|
|
|
(19 |
) |
|
|
32 |
|
|
|
18 |
|
Short term
investments
|
|
|
34 |
|
|
|
7 |
|
|
|
(5 |
) |
Other invested assets, including
dispositions
|
|
|
7 |
|
|
|
10 |
|
|
|
59 |
|
Allocated to participating
policyholders’ and minority interests
|
|
|
2 |
|
|
|
2 |
|
|
|
(1 |
) |
Total
realized investment gains (losses)
|
|
|
(1,297 |
) |
|
|
(310 |
) |
|
|
92 |
|
Income
tax (expense) benefit
|
|
|
456 |
|
|
|
108 |
|
|
|
(21 |
) |
Minority
interest
|
|
|
85 |
|
|
|
22 |
|
|
|
(8 |
) |
Net
realized investment gains (losses)
|
|
$ |
(756 |
) |
|
$ |
(180 |
) |
|
$ |
63 |
|
Net realized investment results
decreased by $576 million for 2008 compared with 2007. Net realized investment
results decreased by $243 million for 2007 compared with 2006. The decrease in
net realized investment results in both periods was primarily driven by an
increase in other-than-temporary impairment (“OTTI”) losses. Further information
on CNA’s OTTI losses and impairment decision process is set forth in Note 3 of
the Notes to Consolidated Financial Statements under Item 8.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Investments
-
(Continued)
The following table provides details
of the largest realized investment losses for the year ended December 31, 2008
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.
Issuer
Description and Discussion
|
|
Fair
Value
at
Date
of
Sale
|
|
|
Loss
On
Sale
|
|
|
Months
in
Unrealized
Loss
Prior
To
Sale (a)
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Various
notes and bonds issued by the United States
|
|
|
|
|
|
|
|
|
|
Treasury.
Securities sold due to outlook on interest rates.
|
|
$ |
10,663 |
|
|
$ |
106 |
|
|
|
0-6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable
preferred stock of Federal National Mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
Association.
The company is now in conservatorship.
|
|
|
6 |
|
|
|
51 |
|
|
|
0-12 |
+ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
income securities of an investment banking firm that
|
|
|
|
|
|
|
|
|
|
|
|
|
filed
bankruptcy causing the fair value of the securities
|
|
|
|
|
|
|
|
|
|
|
|
|
to
decline rapidly.
|
|
|
37 |
|
|
|
41 |
|
|
|
0-12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable
preferred stock of Federal Home Loan
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
Corporation. The company is now in conservatorship.
|
|
|
3 |
|
|
|
27 |
|
|
|
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.
|
|
|
41 |
|
|
|
17 |
|
|
|
0-12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
10,786 |
|
|
$ |
260 |
|
|
|
|
|
(a)
|
Represents
the range of consecutive months the various positions were in an
unrealized loss prior to sale. 0-12+ means certain positions were less
than 12 months, while others were greater than 12
months.
|
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Investments
- (Continued)
Gross
Unrealized Losses
The following tables summarize the fair
value and gross unrealized loss aging for fixed income investment and
non-investment grade securities categorized first by the length of time, as
measured by the first date those securities have been in a continuous unrealized
loss position, and then further categorized by the severity of the unrealized
loss position in 10% increments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Estimated
|
|
|
Fair
Value as a Percentage of Amortized Cost
|
|
|
Unrealized
|
|
December
31, 2008
|
|
Fair
Value
|
|
|
|
90-99 |
% |
|
|
80-89 |
% |
|
|
70-79 |
% |
|
|
60-69 |
% |
|
|
50-59 |
% |
|
|
40-49 |
% |
|
<40%
|
|
|
Loss
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
$ |
6,749 |
|
|
$ |
169 |
|
|
$ |
264 |
|
|
$ |
167 |
|
|
$ |
58 |
|
|
$ |
7 |
|
|
$ |
11 |
|
|
$ |
5 |
|
|
$ |
681 |
|
7-11 months
|
|
|
6,159 |
|
|
|
126 |
|
|
|
376 |
|
|
|
315 |
|
|
|
364 |
|
|
|
262 |
|
|
|
118 |
|
|
|
30 |
|
|
|
1,591 |
|
12-24 months
|
|
|
3,549 |
|
|
|
55 |
|
|
|
143 |
|
|
|
128 |
|
|
|
355 |
|
|
|
449 |
|
|
|
230 |
|
|
|
443 |
|
|
|
1,803 |
|
Greater than 24 months
|
|
|
1,778 |
|
|
|
27 |
|
|
|
67 |
|
|
|
151 |
|
|
|
68 |
|
|
|
52 |
|
|
|
8 |
|
|
|
136 |
|
|
|
509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment grade
|
|
|
18,235 |
|
|
|
377 |
|
|
|
850 |
|
|
|
761 |
|
|
|
845 |
|
|
|
770 |
|
|
|
367 |
|
|
|
614 |
|
|
|
4,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment
grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
|
853 |
|
|
|
10 |
|
|
|
47 |
|
|
|
93 |
|
|
|
50 |
|
|
|
44 |
|
|
|
16 |
|
|
|
30 |
|
|
|
290 |
|
7-11 months
|
|
|
374 |
|
|
|
1 |
|
|
|
20 |
|
|
|
43 |
|
|
|
40 |
|
|
|
33 |
|
|
|
19 |
|
|
|
17 |
|
|
|
173 |
|
12-24 months
|
|
|
1,078 |
|
|
|
3 |
|
|
|
30 |
|
|
|
83 |
|
|
|
193 |
|
|
|
94 |
|
|
|
203 |
|
|
|
41 |
|
|
|
647 |
|
Greater than 24 months
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-investment grade
|
|
|
2,317 |
|
|
|
14 |
|
|
|
97 |
|
|
|
219 |
|
|
|
288 |
|
|
|
171 |
|
|
|
240 |
|
|
|
88 |
|
|
|
1,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
20,552 |
|
|
$ |
391 |
|
|
$ |
947 |
|
|
$ |
980 |
|
|
$ |
1,133 |
|
|
$ |
941 |
|
|
$ |
607 |
|
|
$ |
702 |
|
|
$ |
5,701 |
|
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Investments
- (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Estimated
|
|
|
Fair
Value as a Percentage of Amortized Cost
|
|
|
Unrealized
|
|
December
31, 2007
|
|
Fair
Value
|
|
|
|
90-99 |
% |
|
|
80-89 |
% |
|
|
70-79 |
% |
|
|
60-69 |
% |
|
|
50-59 |
% |
|
|
40-49 |
% |
|
<40%
|
|
|
Loss
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
$ |
4,771 |
|
|
$ |
100 |
|
|
$ |
42 |
|
|
$ |
29 |
|
|
$ |
26 |
|
|
$ |
25 |
|
|
$ |
6 |
|
|
|
|
|
$ |
228 |
|
7-11 months
|
|
|
1,584 |
|
|
|
35 |
|
|
|
81 |
|
|
|
17 |
|
|
|
25 |
|
|
|
13 |
|
|
|
7 |
|
|
$ |
15 |
|
|
|
193 |
|
12-24 months
|
|
|
690 |
|
|
|
21 |
|
|
|
2 |
|
|
|
10 |
|
|
|
7 |
|
|
|
8 |
|
|
|
9 |
|
|
|
|
|
|
|
57 |
|
Greater than 24
months
|
|
|
3,869 |
|
|
|
88 |
|
|
|
42 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment grade
|
|
|
10,914 |
|
|
|
244 |
|
|
|
167 |
|
|
|
64 |
|
|
|
58 |
|
|
|
46 |
|
|
|
22 |
|
|
|
15 |
|
|
|
616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment
grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
|
1,527 |
|
|
|
56 |
|
|
|
14 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73 |
|
7-11 months
|
|
|
125 |
|
|
|
6 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
12-24 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
12,601 |
|
|
$ |
308 |
|
|
$ |
185 |
|
|
$ |
68 |
|
|
$ |
59 |
|
|
$ |
46 |
|
|
$ |
22 |
|
|
$ |
15 |
|
|
$ |
703 |
|
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Investments
- (Continued)
The classification between investment
grade and non-investment grade is based on a ratings methodology that takes into
account ratings from the three major providers, S&P, Moody’s and Fitch in
that order of preference. If a security is not rated by any of the three, CNA
formulates an internal rating.
As part of the ongoing OTTI monitoring
process, CNA evaluated the facts and circumstances based on available
information for each of these securities and determined that the securities
presented in the above tables were temporarily impaired when evaluated at
December 31, 2008 or 2007. This determination was based on a number of factors
that it regularly considers including, but not limited to: the
issuers’ ability to meet current and future interest and principal payments, an
evaluation of the issuers’ financial condition and near term prospects, CNA’s
assessment of the sector outlook and estimates of the fair value of any
underlying collateral. In all cases where a decline in value is judged to be
temporary, CNA has the intent and ability to hold these securities for a period
of time sufficient to recover the amortized cost of its investment through an
anticipated recovery in the fair value of such securities or by holding the
securities to maturity. In many cases, the securities held are matched to
liabilities as part of ongoing asset/liability duration management. As such, CNA
continually assesses its ability to hold securities for a time sufficient to
recover any temporary loss in value or until maturity. CNA believes it has
sufficient levels of liquidity so as to not impact the asset/liability
management process. Further information on CNA’s unrealized losses by asset
class and its considerations in determining that the securities were temporarily
impaired at December 31, 2008 is included in Note 3 to the Notes to Consolidated
Financial Statements included under Item 8.
Non-investment grade bonds, as presented
in the tables above, are primarily high-yield securities rated below BBB- by
rating agencies, as well as other unrated securities that, according to CNA’s
analysis, are below investment grade. Non-investment grade securities generally
involve a greater degree of risk than investment grade securities.
The following table provides the
composition of fixed maturity securities available-for-sale in a gross
unrealized loss position at December 31, 2008 by maturity profile. Securities
not due at a single date are allocated based on weighted average
life.
|
|
Percent
of
Fair
Value
|
|
|
Percent
of
Unrealized
Loss
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
|
11.0 |
% |
|
|
8.0 |
% |
Due
after one year through five years
|
|
|
31.0 |
|
|
|
21.0 |
|
Due
after five years through ten years
|
|
|
14.0 |
|
|
|
21.0 |
|
Due
after ten years
|
|
|
44.0 |
|
|
|
50.0 |
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
CNA’s fixed income portfolio consists
primarily of high quality bonds, 91.0% and 89.0% of which were rated as
investment grade (rated BBB- or higher) at December 31, 2008 and
2007.
The following table summarizes the
ratings of CNA’s fixed income bond portfolio at carrying value:
December
31
|
|
2008
|
|
|
2007
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and affiliated agency securities
|
|
$ |
2,993 |
|
|
|
10.4 |
% |
|
$ |
816 |
|
|
|
2.5 |
% |
Other
AAA rated
|
|
|
10,112 |
|
|
|
35.1 |
|
|
|
16,728 |
|
|
|
50.4 |
|
AA
and A rated
|
|
|
8,166 |
|
|
|
28.3 |
|
|
|
6,326 |
|
|
|
19.1 |
|
BBB
rated
|
|
|
5,000 |
|
|
|
17.3 |
|
|
|
5,713 |
|
|
|
17.2 |
|
Non
investment-grade
|
|
|
2,569 |
|
|
|
8.9 |
|
|
|
3,616 |
|
|
|
10.8 |
|
Total
|
|
$ |
28,840 |
|
|
|
100.0 |
% |
|
$ |
33,199 |
|
|
|
100.0 |
% |
At December 31, 2008 and 2007,
approximately 97.0% and 95.0% of the portfolio was issued by U.S. Government and
affiliated agencies or was rated by S&P or Moody’s. The remaining bonds were
rated by other rating agencies or CNA.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Investments
- (Continued)
The carrying value of securities that
are either subject to trading restrictions or trade in illiquid private
placement markets at December 31, 2008 was $368 million, which represents 1.1%
of CNA’s total investment portfolio. These securities were in a net unrealized
gain position of $170 million at December 31, 2008.
Duration
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.
|
|
December
31, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
Effective
Duration
|
|
|
|
|
|
Effective
Duration
|
|
|
|
Fair
Value
|
|
|
(Years)
|
|
|
Fair
Value
|
|
|
(Years)
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segregated
investments
|
|
$ |
8,168 |
|
|
|
9.9 |
|
|
$ |
9,211 |
|
|
|
10.7 |
|
Other
interest sensitive investments
|
|
|
25,194 |
|
|
|
4.5 |
|
|
|
29,406 |
|
|
|
3.3 |
|
Total
|
|
$ |
33,362 |
|
|
|
5.8 |
|
|
$ |
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 Item 7A – Quantitative and Qualitative Disclosures About Market Risk included
herein.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Investments
- (Continued)
Short
Term Investments
The carrying value of the components of
the general account short term investment portfolio is presented in the
following table:
December
31
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term investments available-for-sale:
|
|
|
|
|
|
|
Commercial
paper
|
|
$ |
563 |
|
|
$ |
3,040 |
|
U.S. Treasury
securities
|
|
|
2,258 |
|
|
|
577 |
|
Money market
funds
|
|
|
329 |
|
|
|
72 |
|
Other, including collateral
held related to securities lending
|
|
|
384 |
|
|
|
808 |
|
Total
short term investments available-for-sale
|
|
|
3,534 |
|
|
|
4,497 |
|
|
|
|
|
|
|
|
|
|
Short
term investments trading:
|
|
|
|
|
|
|
|
|
Commercial
paper
|
|
|
|
|
|
|
35 |
|
Money market
funds
|
|
|
|
|
|
|
139 |
|
Other
|
|
|
|
|
|
|
6 |
|
Total
short term investments trading
|
|
|
- |
|
|
|
180 |
|
|
|
|
|
|
|
|
|
|
Total
short term investments
|
|
$ |
3,534 |
|
|
$ |
4,677 |
|
Separate
Accounts
The following table summarizes the bond
ratings of the investments supporting CNA’s separate account products, which
guarantee principal and a minimum rate of interest, for which additional amounts
may be recorded in Policyholders’ funds should the aggregate contract value
exceed the fair value of the related assets supporting the business at any point
in time.
December
31
|
|
2008
|
|
|
2007
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
rated
|
|
$ |
120 |
|
|
|
35.0 |
% |
|
$ |
122 |
|
|
|
29.1 |
% |
AA
and A rated
|
|
|
148 |
|
|
|
43.2 |
|
|
|
224 |
|
|
|
53.5 |
|
BBB
rated
|
|
|
74 |
|
|
|
21.6 |
|
|
|
73 |
|
|
|
17.4 |
|
Non
investment-grade
|
|
|
1 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
343 |
|
|
|
100.0 |
% |
|
$ |
419 |
|
|
|
100.0 |
% |
At December 31, 2008 and 2007,
approximately 97.0% of the separate account portfolio was rated by S&P or
Moody’s. The remaining bonds were rated by other rating agencies or
CNA.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Investments
- (Continued)
Asset-backed
Mortgage Exposure
The following table provides detail of
the Company’s exposure to asset-backed and sub-prime mortgage related
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
Percent
|
|
|
|
Security
Type
|
|
|
|
|
|
of
Total
|
|
|
of
Total
|
|
December
31, 2008
|
|
MBS(a)
|
|
|
CMO(b)
|
|
|
ABS(c)
|
|
|
CDO(d)
|
|
|
Total
|
|
|
Security
Type
|
|
|
Investments
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
$ |
408 |
|
|
$ |
1,273 |
|
|
|
|
|
|
|
|
$ |
1,681 |
|
|
|
21.1 |
% |
|
|
4.4 |
% |
AAA
|
|
|
|
|
|
|
3,436 |
|
|
$ |
1,672 |
|
|
$ |
3 |
|
|
|
5,111 |
|
|
|
64.2 |
|
|
|
13.3 |
|
AA
|
|
|
|
|
|
|
191 |
|
|
|
190 |
|
|
|
6 |
|
|
|
387 |
|
|
|
4.9 |
|
|
|
1.0 |
|
A
|
|
|
|
|
|
|
80 |
|
|
|
96 |
|
|
|
28 |
|
|
|
204 |
|
|
|
2.6 |
|
|
|
0.5 |
|
BBB
|
|
|
|
|
|
|
92 |
|
|
|
230 |
|
|
|
2 |
|
|
|
324 |
|
|
|
4.1 |
|
|
|
0.8 |
|
Non-investment
grade and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity
tranches
|
|
|
|
|
|
|
213 |
|
|
|
27 |
|
|
|
8 |
|
|
|
248 |
|
|
|
3.1 |
|
|
|
0.6 |
|
Total
fair value
|
|
$ |
408 |
|
|
$ |
5,285 |
|
|
$ |
2,215 |
|
|
$ |
47 |
|
|
$ |
7,955 |
|
|
|
100.0 |
% |
|
|
20.6 |
% |
Total
amortized cost
|
|
$ |
405 |
|
|
$ |
6,372 |
|
|
$ |
2,887 |
|
|
$ |
197 |
|
|
$ |
9,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of total fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
by
security type
|
|
|
5.1 |
% |
|
|
66.5 |
% |
|
|
27.8 |
% |
|
|
0.6 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-prime
(included above)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value
|
|
|
|
|
|
|
|
|
|
$ |
1,163 |
|
|
$ |
1 |
|
|
$ |
1,164 |
|
|
|
14.6 |
% |
|
|
3.0 |
% |
Amortized
cost
|
|
|
|
|
|
|
|
|
|
|
1,477 |
|
|
|
31 |
|
|
|
1,508 |
|
|
|
15.3 |
|
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A
(included above)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value
|
|
|
|
|
|
$ |
898 |
|
|
|
|
|
|
$ |
3 |
|
|
$ |
901 |
|
|
|
11.3 |
% |
|
|
2.3 |
% |
Amortized
cost
|
|
|
|
|
|
|
1,229 |
|
|
|
|
|
|
|
8 |
|
|
|
1,237 |
|
|
|
12.5 |
|
|
|
3.2 |
|
(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 December 31, 2008 were $7,955 million of asset-backed securities,
at fair value, which represents 20.6% of total invested assets. Of the total
asset-backed securities, 85.3% were U.S. Government Agency issued or AAA rated.
Of the total invested assets, $1,164 million or 3.0% have exposure to sub-prime
residential mortgage (“sub-prime”) collateral, as measured by the original deal
structure, while 2.3% have exposure to Alternative A residential mortgages that
have lower than normal standards of loan documentation (“Alt-A”) collateral. Of
the securities with sub-prime exposure, approximately 98.0% were rated
investment grade, while 97.0% 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 $36 million through limited partnerships and sold credit default
swaps which provide the buyer protection against declines in sub-prime
indices.
Included in the table above are
commercial mortgage-backed securities (“CMBS”), which had an aggregate fair
value of $661 million and an aggregate amortized cost of $1,068 million at
December 31, 2008. Most of the CMBS holdings are in the form of senior tranches
of securitization, which benefit from significant credit support from
subordinated tranches.
All asset-backed securities in an
unrealized loss position are reviewed as part of the ongoing OTTI process, which
resulted in OTTI losses of $271 million after tax and minority interest for the
year ended December 31, 2008. Included in this OTTI loss was $115 million after
tax and minority interest related to securities with sub-prime and Alt-A
exposure. Our review of these securities includes an analysis of cash flow
modeling under various default scenarios, the seniority of the specific tranche
within the deal structure, the composition of the collateral and the actual
default experience. Given current market conditions and the specific facts and
circumstances related to our individual sub-prime, Alt-A and CMBS exposures, we
believe that all remaining unrealized losses are temporary in nature. Continued
deterioration in these
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Investments
- (Continued)
markets
beyond our current expectations may cause us to reconsider and record additional
OTTI losses. See Note 3 of the Notes to Consolidated Financial Statements
included under Item 8 for additional information related to unrealized losses on
asset-backed securities.
ACCOUNTING
STANDARDS
For a discussion of recent accounting
pronouncements not yet adopted, please read Note 1 of the Notes to Consolidated
Financial Statements included under Item 8.
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
|
·
|
conditions
in the capital and credit markets including severe levels of volatility,
illiquidity, uncertainty and overall disruption, as well as sharply
reduced economic activity, that may impact the returns, types, liquidity
and valuation of CNA’s investments;
|
|
·
|
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;
|
|
·
|
regulatory
limitations, impositions and restrictions upon CNA, 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;
|
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking
Statements -
(Continued)
|
·
|
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 this
Report;
|
|
·
|
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 mergers and failures of a number of prominent financial
institutions and government sponsored entities, as well as the effects of
accounting and financial reporting scandals and other major failures in
internal controls and governance on capital and credit markets, as well as
on the markets for directors and officers and errors and omissions
coverages;
|
|
·
|
general
economic and business conditions, including recessionary conditions that
may decrease the size and number of CNA’s insurance customers and create
higher exposures to CNA’s lines of business, especially those that provide
management and professional liability insurance, as well as surety bonds,
to businesses engaged in real estate, financial services and professional
services, and inflationary pressures on medical care costs, construction
costs and other economic sectors that increase the severity of
claims;
|
|
·
|
the
effectiveness of current initiatives by claims management to reduce the
loss and expense ratios through more efficacious claims handling
techniques; and
|
|
·
|
conditions
in the capital and credit markets that may limit CNA’s ability to raise
significant amounts of capital on favorable terms, as well as restrictions
on the ability or willingness of the Company to provide additional capital
support to CNA;
|
Risks
and uncertainties primarily affecting us and our energy
subsidiaries
|
·
|
the
impact of changes in worldwide demand for oil and natural gas and oil and
gas price fluctuations on E&P activity, including possible write downs
of the carrying value of natural gas and NGL properties and impairments of
goodwill;
|
|
·
|
costs
and timing of rig upgrades;
|
|
·
|
market
conditions in the offshore oil and gas drilling industry, including
utilization levels and dayrates;
|
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking
Statements -
(Continued)
|
·
|
timing
and duration of required regulatory inspections for offshore oil and gas
drilling rigs;
|
|
·
|
the
availability and cost of insurance;
|
|
·
|
regulatory
issues affecting natural gas transmission, including ratemaking and other
proceedings particularly affecting our gas transmission
subsidiaries;
|
|
·
|
the
ability of Boardwalk Pipeline to maintain or replace expiring customer
contracts on favorable terms;
|
|
·
|
the
successful completion, timing, cost, scope and future financial
performance of planned expansion projects as well as the financing of such
projects;
|
|
·
|
the
ability of Boardwalk Pipeline to obtain and maintain authority to operate
its expansion project pipelines at higher operating pressures under
special permits issued by PHMSA;
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 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
ability of customers and suppliers to meet their obligations to us and 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
7A. Quantitative and Qualitative Disclosures about Market
Risk.
We are a large diversified holding
company. As such, we and our subsidiaries have significant amounts of financial
instruments that involve market risk. Our measure of market risk exposure
represents an estimate of the change in fair value of our financial instruments.
Changes in the trading portfolio are recognized in the Consolidated Statements
of Income. Market risk exposure is presented for each class of financial
instrument held by us at December 31, assuming immediate adverse market
movements of the magnitude described below. We believe that the various rates of
adverse market movements represent a measure of exposure to loss under
hypothetically assumed adverse conditions. The estimated market risk exposure
represents the hypothetical loss to future earnings and does not represent the
maximum possible loss nor any expected actual loss, even under adverse
conditions, because actual adverse fluctuations would likely differ. In
addition, since our investment portfolio is subject to change based on our
portfolio management strategy as well as in response to changes in the market,
these estimates are not necessarily indicative of the actual results which may
occur.
Exposure to market risk is managed and
monitored by senior management. Senior management approves our overall
investment strategy and has responsibility to ensure that the investment
positions are consistent with that strategy with an acceptable level of risk. We
may manage risk by buying or selling instruments or entering into offsetting
positions.
Interest Rate Risk – We have exposure to
interest rate risk arising from changes in the level or volatility of interest
rates. We attempt to mitigate our exposure to interest rate risk by utilizing
instruments such as interest rate swaps, 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 December 31, 2008 and 2007 due to instantaneous parallel shifts in
the yield curve of 100 basis points, with all other variables held
constant.
The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Accordingly, the analysis may not be indicative of, is not intended to
provide, and does not provide a precise forecast of the effect of changes of
market interest rates on our earnings or shareholders’ equity. Further, the
computations do not contemplate any actions we could undertake in response to
changes in interest rates.
Our debt is denominated in U.S. Dollars
and has been primarily issued at fixed rates, therefore, interest expense would
not be impacted by interest rate shifts. The impact of a 100 basis point
increase in interest rates on fixed rate debt would result in a decrease in
market value of $303 million and $333 million at December 31, 2008 and 2007,
respectively. The impact of a 100 basis point decrease would result in an
increase in market value of $328 million and $350 million at December 31, 2008
and 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 December 31, 2008 and 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
Item
7A. Quantitative and Qualitative Disclosures about Market
Risk
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 December 31, 2008 and 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 December 31, 2008 and 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 has established
credit policies in the pipeline tariffs which are intended to minimize risk in
accordance with FERC policies and actively monitors this portion of its
business. Natural gas price volatility has increased dramatically in recent
years, which has materially increased Boardwalk Pipeline’s credit risk related
to gas loaned to its customers. As of December 31, 2008, the amount of gas
loaned out by Boardwalk Pipeline or owed to Boardwalk Pipeline due to gas
imbalances was approximately 34.4 trillion British thermal units (“TBtu”).
Assuming an average market price during December 2008 of $5.85 per million
British thermal units (“MMBtu”), the market value of gas loaned out and
considered an imbalance at December 31, 2008 would have been approximately $201
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.
More than 85.0% of Boardwalk
Pipeline’s revenues are derived from gas marketers, LDCs and producers, the
majority of which have investment grade ratings. After completion of Boardwalk
Pipeline’s expansion projects, producers will comprise a larger portion of its
revenues, both in aggregate as a group and separately. Boardwalk Pipeline
expects producers as a group to contribute a more significant portion of its
future revenues and one producer to represent over 10.0% of its total revenues.
Historically producers have had lower credit ratings than LDCs and LDC-sponsored
marketing companies. Therefore the expected change in Boardwalk Pipeline’s
customer base could result in higher total credit risk. Boardwalk Pipeline will
continue to actively monitor the credit risks associated with its customer
base.
Item
7A. Quantitative and Qualitative Disclosures about Market
Risk
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
|
|
December
31
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
markets (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities (a)
|
|
$ |
246 |
|
|
$ |
744 |
|
|
$ |
(61 |
) |
|
$ |
(186 |
) |
Futures – short
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102 |
|
Options – purchased
|
|
|
66 |
|
|
|
35 |
|
|
|
3 |
|
|
|
1 |
|
– written
|
|
|
(62 |
) |
|
|
(16 |
) |
|
|
(2 |
) |
|
|
(5 |
) |
Short sales
|
|
|
(106 |
) |
|
|
(84 |
) |
|
|
27 |
|
|
|
21 |
|
Limited partnership
investments
|
|
|
98 |
|
|
|
443 |
|
|
|
(24 |
) |
|
|
(30 |
) |
Interest
rate (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures − long
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
(9 |
) |
Fixed maturities −
long
|
|
|
565 |
|
|
|
582 |
|
|
|
(6 |
) |
|
|
(4 |
) |
Fixed maturities −
short
|
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
2 |
|
Short term
investments
|
|
|
1,022 |
|
|
|
2,628 |
|
|
|
|
|
|
|
|
|
Other
derivatives
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
Note:
|
The
calculation of estimated market risk exposure is based on assumed adverse
changes in the underlying reference price or index of (1) a decrease in
equity prices of 25% 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% includes market risk amounting to $(171)
at December 31, 2007 that would be offset by decreases in liabilities to
customers under variable insurance
contracts.
|
Item
7A. Quantitative and Qualitative Disclosures about Market
Risk
Other
than trading portfolio:
Category
of risk exposure:
|
|
Fair
Value Asset (Liability)
|
|
|
Market
Risk
|
|
December
31
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
markets (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
General accounts (a)
|
|
$ |
873 |
|
|
$ |
568 |
|
|
$ |
(218 |
) |
|
$ |
(142 |
) |
Separate
accounts
|
|
|
27 |
|
|
|
45 |
|
|
|
(7 |
) |
|
|
(11 |
) |
Limited partnership
investments
|
|
|
1,683 |
|
|
|
1,878 |
|
|
|
(94 |
) |
|
|
(106 |
) |
Interest
rate (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities (a)(b)
|
|
|
28,886 |
|
|
|
34,081 |
|
|
|
(1,919 |
) |
|
|
(1,900 |
) |
Short term investments (a)
|
|
|
5,007 |
|
|
|
5,602 |
|
|
|
(17 |
) |
|
|
(4 |
) |
Other invested
assets
|
|
|
4 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
Interest rate swaps and other
(c)
|
|
|
(183 |
) |
|
|
(88 |
) |
|
|
61 |
|
|
|
81 |
|
Other derivative
securities
|
|
|
(88 |
) |
|
|
38 |
|
|
|
90 |
|
|
|
33 |
|
Separate accounts (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
343 |
|
|
|
419 |
|
|
|
(17 |
) |
|
|
(20 |
) |
Short term
investments
|
|
|
7 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
Debt
|
|
|
(7,237 |
) |
|
|
(7,204 |
) |
|
|
|
|
|
|
|
|
Foreign
exchange (3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forwards –
short |
|
|
(37 |
) |
|
|
|
|
|
|
(33 |
) |
|
|
|
|
Commodities
(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forwards − short (c)
|
|
|
157 |
|
|
|
11 |
|
|
|
(69 |
) |
|
|
(119 |
) |
Forwards − long
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
Options −
written
|
|
|
4 |
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
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, (3) a decrease in the foreign currency exchange rates versus the
U.S. dollar of 20% and (4) an increase in commodity prices of
20%.
|
|
(a)
|
Certain
securities are denominated in foreign currencies. An assumed 20% decline
in the underlying exchange rates would result in an aggregate foreign
currency exchange rate risk of $(225) and $(317) at December 31, 2008 and
2007, respectively.
|
|
(b)
|
Certain
fixed maturities positions include options embedded in convertible debt
securities. A decrease in underlying equity prices of 25% would result in
market risk amounting to $(5) and $(106) at December 31, 2008 and 2007,
respectively.
|
|
(c)
|
The
market risk at December 31, 2008 and 2007 will generally be offset by
recognition of the underlying hedged
transaction.
|
Item
8. Financial Statements and Supplementary Data.
Financial Statements and Supplementary
Data are comprised of the following sections:
|
Page
|
|
No.
|
|
|
Consolidated
Balance Sheets
|
122
|
|
Consolidated
Statements of Income
|
124
|
|
Consolidated
Statements of Shareholders’ Equity
|
126
|
|
Consolidated
Statements of Cash Flows
|
127
|
|
Notes
to Consolidated Financial Statements:
|
|
|
1.
|
|
Summary
of Significant Accounting Policies
|
129
|
|
2.
|
|
Separation
of Lorillard
|
140
|
|
3.
|
|
Investments
|
140
|
|
4.
|
|
Fair
Value
|
149
|
|
5.
|
|
Derivative
Financial Instruments
|
153
|
|
6.
|
|
Earnings
Per Share
|
156
|
|
7.
|
|
Receivables
|
158
|
|
8.
|
|
Property,
Plant and Equipment
|
158
|
|
9.
|
|
Claim
and Claim Adjustment Expense Reserves
|
159
|
|
10.
|
|
Leases
|
170
|
|
11.
|
|
Income
Taxes
|
171
|
|
12.
|
|
Debt
|
174
|
|
13.
|
|
Comprehensive
Income (Loss)
|
177
|
|
14.
|
|
Significant
Transactions
|
177
|
|
15.
|
|
Restructuring
and Other Related Charges
|
178
|
|
16.
|
|
Statutory
Accounting Practices (Unaudited)
|
178
|
|
17.
|
|
Supplemental
Natural Gas and Oil Information (Unaudited)
|
180
|
|
18.
|
|
Benefit
Plans
|
183
|
|
19.
|
|
Reinsurance
|
188
|
|
20.
|
|
Quarterly
Financial Data (Unaudited)
|
190
|
|
21.
|
|
Legal
Proceedings
|
191
|
|
22.
|
|
Commitments
and Contingencies
|
192
|
|
23.
|
|
Discontinued
Operations
|
194
|
|
24.
|
|
Business
Segments
|
195
|
|
25.
|
|
Consolidating
Financial Information
|
199
|
|
Loews
Corporation and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31
|
|
2008
|
|
|
2007
|
|
(Dollar
amounts in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
(Notes 1, 3, 4 and 5):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, amortized cost
of $34,767 and $34,816
|
|
$ |
29,451 |
|
|
$ |
34,663 |
|
|
|
|
|
|
|
|
|
|
Equity securities, cost of $1,402
and $1,143
|
|
|
1,185 |
|
|
|
1,347 |
|
|
|
|
|
|
|
|
|
|
Limited partnership
investments
|
|
|
1,781 |
|
|
|
2,321 |
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
|
4 |
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
Short term
investments
|
|
|
6,029 |
|
|
|
8,230 |
|
|
|
|
|
|
|
|
|
|
Total
investments
|
|
|
38,450 |
|
|
|
46,669 |
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
131 |
|
|
|
140 |
|
|
|
|
|
|
|
|
|
|
Receivables
(Notes 1 and 7)
|
|
|
11,672 |
|
|
|
11,469 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment (Notes 1 and 8)
|
|
|
12,876 |
|
|
|
10,218 |
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes (Note 11)
|
|
|
2,931 |
|
|
|
441 |
|
|
|
|
|
|
|
|
|
|
Goodwill
and other intangible assets (Note 1 and 14)
|
|
|
875 |
|
|
|
1,353 |
|
|
|
|
|
|
|
|
|
|
Assets
of discontinued operations (Notes 1 and 23)
|
|
|
|
|
|
|
2,841 |
|
|
|
|
|
|
|
|
|
|
Other
assets (Notes 1, 14, 18 and 19)
|
|
|
1,413 |
|
|
|
1,347 |
|
|
|
|
|
|
|
|
|
|
Deferred
acquisition costs of insurance subsidiaries (Note 1)
|
|
|
1,125 |
|
|
|
1,161 |
|
|
|
|
|
|
|
|
|
|
Separate
account business (Notes 1, 4 and 5)
|
|
|
384 |
|
|
|
476 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
69,857 |
|
|
$ |
76,115 |
|
See
Notes to Consolidated Financial Statements.
Loews
Corporation and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
Liabilities
and Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31
|
|
2008
|
|
|
2007
|
|
(Dollar
amounts in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
reserves (Notes 1 and 9):
|
|
|
|
|
|
|
Claim and claim adjustment
expense
|
|
$ |
27,593 |
|
|
$ |
28,588 |
|
Future policy
benefits
|
|
|
7,529 |
|
|
|
7,106 |
|
Unearned
premiums
|
|
|
3,405 |
|
|
|
3,597 |
|
Policyholders’
funds
|
|
|
243 |
|
|
|
930 |
|
Total
insurance reserves
|
|
|
38,770 |
|
|
|
40,221 |
|
Payable
to brokers (Note 5)
|
|
|
679 |
|
|
|
580 |
|
Collateral
on loaned securities (Notes 1 and 3)
|
|
|
6 |
|
|
|
63 |
|
Short
term debt (Notes 4 and 12)
|
|
|
71 |
|
|
|
358 |
|
Long
term debt (Notes 4 and 12)
|
|
|
8,187 |
|
|
|
6,900 |
|
Reinsurance
balances payable (Notes 1 and 19)
|
|
|
316 |
|
|
|
401 |
|
Liabilities
of discontinued operations (Notes 1 and 23)
|
|
|
6 |
|
|
|
1,637 |
|
Other
liabilities (Notes 1, 4, 15 and 18)
|
|
|
4,316 |
|
|
|
3,990 |
|
Separate
account business (Notes 1, 4 and 5)
|
|
|
384 |
|
|
|
476 |
|
Total
liabilities
|
|
|
52,735 |
|
|
|
54,626 |
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
3,996 |
|
|
|
3,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingent liabilities
|
|
|
|
|
|
|
|
|
(Notes
1, 3, 5, 9, 10, 11, 12, 13, 15, 16, 18, 19, 21 and 22)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity (Notes 1, 2, 3, 6, 12 and 13):
|
|
|
|
|
|
|
|
|
Preferred stock, $0.10 par
value:
|
|
|
|
|
|
|
|
|
Authorized - 100,000,000
shares
|
|
|
|
|
|
|
|
|
Loews common stock, $0.01 par
value:
|
|
|
|
|
|
|
|
|
Authorized – 1,800,000,000
shares
|
|
|
|
|
|
|
|
|
Issued and outstanding –
435,091,667 and 529,683,628 shares
|
|
|
4 |
|
|
|
5 |
|
Former Carolina Group
stock
|
|
|
|
|
|
|
1 |
|
Additional paid-in
capital
|
|
|
3,283 |
|
|
|
3,967 |
|
Earnings retained in the
business
|
|
|
13,425 |
|
|
|
13,691 |
|
Accumulated other comprehensive
income (loss)
|
|
|
(3,586 |
) |
|
|
(65 |
) |
|
|
|
13,126 |
|
|
|
17,599 |
|
|
|
|
|
|
|
|
|
|
Less former
Carolina Group treasury stock, at cost
|
|
|
|
|
|
|
8 |
|
Total
shareholders’ equity
|
|
|
13,126 |
|
|
|
17,591 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
69,857 |
|
|
$ |
76,115 |
|
See
Notes to Consolidated Financial Statements.
Loews
Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF INCOME
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
(Note 1):
|
|
|
|
|
|
|
|
|
|
Insurance
premiums (Note 19)
|
|
$ |
7,150 |
|
|
$ |
7,482 |
|
|
$ |
7,603 |
|
Net
investment income (Note 3)
|
|
|
1,581 |
|
|
|
2,785 |
|
|
|
2,806 |
|
Investment
gains (losses) (Note 3)
|
|
|
(1,296 |
) |
|
|
(276 |
) |
|
|
93 |
|
Gain
on issuance of subsidiary stock (Note 3 and 14)
|
|
|
2 |
|
|
|
141 |
|
|
|
9 |
|
Contract
drilling revenues
|
|
|
3,476 |
|
|
|
2,506 |
|
|
|
1,987 |
|
Other
|
|
|
2,334 |
|
|
|
1,664 |
|
|
|
1,346 |
|
Total
|
|
|
13,247 |
|
|
|
14,302 |
|
|
|
13,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
(Note 1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
claims and policyholders’ benefits (Notes 9 and 19)
|
|
|
5,723 |
|
|
|
6,009 |
|
|
|
6,047 |
|
Amortization
of deferred acquisition costs
|
|
|
1,467 |
|
|
|
1,520 |
|
|
|
1,534 |
|
Contract
drilling expenses
|
|
|
1,185 |
|
|
|
1,004 |
|
|
|
805 |
|
Other
operating expenses
|
|
|
2,767 |
|
|
|
2,256 |
|
|
|
2,063 |
|
Impairment
of natural gas and oil properties (Notes 1 and 8)
|
|
|
691 |
|
|
|
|
|
|
|
|
|
Impairment
of goodwill (Note 1)
|
|
|
482 |
|
|
|
|
|
|
|
|
|
Restructuring
and other related charges (Note 15)
|
|
|
|
|
|
|
|
|
|
|
(13 |
) |
Interest
|
|
|
345 |
|
|
|
318 |
|
|
|
304 |
|
Total
|
|
|
12,660 |
|
|
|
11,107 |
|
|
|
10,740 |
|
Income
before income tax and minority interest
|
|
|
587 |
|
|
|
3,195 |
|
|
|
3,104 |
|
Income
tax expense (Note 11)
|
|
|
7 |
|
|
|
995 |
|
|
|
924 |
|
Minority
interest
|
|
|
762 |
|
|
|
613 |
|
|
|
504 |
|
Total
|
|
|
769 |
|
|
|
1,608 |
|
|
|
1,428 |
|
Income
(loss) from continuing operations
|
|
|
(182 |
) |
|
|
1,587 |
|
|
|
1,676 |
|
Discontinued
operations, net (Notes 1, 2 and 23):
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of
operations
|
|
|
350 |
|
|
|
902 |
|
|
|
815 |
|
Gain on
disposal
|
|
|
4,362 |
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
4,530 |
|
|
$ |
2,489 |
|
|
$ |
2,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to (Note 6):
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$ |
(182 |
) |
|
$ |
1,587 |
|
|
$ |
1,676 |
|
Discontinued operations,
net
|
|
|
4,501 |
|
|
|
369 |
|
|
|
399 |
|
Loews common
stock
|
|
|
4,319 |
|
|
|
1,956 |
|
|
|
2,075 |
|
Former Carolina Group stock-
discontinued operations, net
|
|
|
211 |
|
|
|
533 |
|
|
|
416 |
|
Total
|
|
$ |
4,530 |
|
|
$ |
2,489 |
|
|
$ |
2,491 |
|
See
Notes to Consolidated Financial Statements.
Loews
Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF INCOME
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per Loews common share (Note 6):
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$ |
(0.38 |
) |
|
$ |
2.97 |
|
|
$ |
3.03 |
|
Discontinued operations,
net
|
|
|
9.43 |
|
|
|
0.69 |
|
|
|
0.72 |
|
Net income
|
|
$ |
9.05 |
|
|
$ |
3.66 |
|
|
$ |
3.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per former Carolina Group share (Note 6):
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations,
net
|
|
$ |
1.95 |
|
|
$ |
4.92 |
|
|
$ |
4.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per Loews common share (Note 6):
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$ |
(0.38 |
) |
|
$ |
2.96 |
|
|
$ |
3.03 |
|
Discontinued operations,
net
|
|
|
9.43 |
|
|
|
0.69 |
|
|
|
0.72 |
|
Net income
|
|
$ |
9.05 |
|
|
$ |
3.65 |
|
|
$ |
3.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per former Carolina Group share (Note 6):
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations,
net
|
|
$ |
1.95 |
|
|
$ |
4.91 |
|
|
$ |
4.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common
stock
|
|
|
477.23 |
|
|
|
534.79 |
|
|
|
552.68 |
|
Former Carolina Group
stock
|
|
|
108.47 |
|
|
|
108.43 |
|
|
|
93.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common
stock
|
|
|
477.23 |
|
|
|
536.00 |
|
|
|
553.54 |
|
Former Carolina Group
stock
|
|
|
108.60 |
|
|
|
108.57 |
|
|
|
93.47 |
|
See
Notes to Consolidated Financial Statements.
Loews
Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Former
|
|
|
|
|
|
Earnings
|
|
|
Accumulated
|
|
|
Common
|
|
|
|
|
|
|
Loews
|
|
|
Carolina
|
|
|
Additional
|
|
|
Retained
|
|
|
Other
|
|
|
Stock
|
|
|
|
Comprehensive
|
|
|
Common
|
|
|
Group
|
|
|
Paid-in
|
|
|
in
the
|
|
|
Comprehensive
|
|
|
Held
in
|
|
|
|
Income
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Business
|
|
|
Income
(Loss)
|
|
|
Treasury
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2006
|
|
|
|
|
$ |
6 |
|
|
$ |
1 |
|
|
$ |
2,418 |
|
|
$ |
10,365 |
|
|
$ |
311 |
|
|
$ |
(8 |
) |
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
2,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,491 |
|
|
|
|
|
|
|
|
|
Other comprehensive
gains
|
|
|
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
219 |
|
|
|
|
|
Comprehensive
income
|
|
$ |
2,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
to initially apply:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 158 (Note
1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(143 |
) |
|
|
|
|
Dividends
paid per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common stock,
$0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(131 |
) |
|
|
|
|
|
|
|
|
Former Carolina Group stock,
$1.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(177 |
) |
|
|
|
|
|
|
|
|
Purchase
of Loews treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(510 |
) |
Retirement
of treasury stock
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(60 |
) |
|
|
(449 |
) |
|
|
|
|
|
|
510 |
|
Issuance
of Loews common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of former Carolina Group stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
|
|
|
|
|
5 |
|
|
|
1 |
|
|
|
4,018 |
|
|
|
12,099 |
|
|
|
387 |
|
|
|
(8 |
) |
Adjustment
to initially apply:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIN No. 48 (Note
1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37 |
) |
|
|
|
|
|
|
|
|
FSP FTB No. 85-4-1 (Note
1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2007, as adjusted
|
|
|
|
|
|
|
5 |
|
|
|
1 |
|
|
|
4,018 |
|
|
|
12,096 |
|
|
|
387 |
|
|
|
(8 |
) |
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
2,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,489 |
|
|
|
|
|
|
|
|
|
Other comprehensive
losses
|
|
|
(452 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(452 |
) |
|
|
|
|
Comprehensive
income
|
|
$ |
2,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common stock,
$0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(134 |
) |
|
|
|
|
|
|
|
|
Former Carolina Group stock,
$1.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(197 |
) |
|
|
|
|
|
|
|
|
Purchase
of Loews treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(672 |
) |
Retirement
of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(111 |
) |
|
|
(561 |
) |
|
|
|
|
|
|
672 |
|
Issuance
of Loews common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of former Carolina Group stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
Tax
benefit related to imputed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest on Diamond
Offshore’s
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5% debentures (Note
14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2007
|
|
|
|
|
|
|
5 |
|
|
|
1 |
|
|
|
3,967 |
|
|
|
13,691 |
|
|
|
(65 |
) |
|
|
(8 |
) |
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
4,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,530 |
|
|
|
|
|
|
|
|
|
Other comprehensive
losses
|
|
|
(3,574 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,574 |
) |
|
|
|
|
Comprehensive
income
|
|
$ |
956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common stock,
$0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(120 |
) |
|
|
|
|
|
|
|
|
Former Carolina Group stock,
$0.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99 |
) |
|
|
|
|
|
|
|
|
Purchase
of Loews treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33 |
) |
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
of treasury stock
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(710 |
) |
|
|
(3,972 |
) |
|
|
|
|
|
|
4,683 |
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
Balance,
December 31, 2008
|
|
|
|
|
|
$ |
4 |
|
|
$ |
- |
|
|
$ |
3,283 |
|
|
$ |
13,425 |
|
|
$ |
(3,586 |
) |
|
$ |
- |
|
See
Notes to Consolidated Financial Statements.
Loews
Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
4,530 |
|
|
$ |
2,489 |
|
|
$ |
2,491 |
|
Adjustments
to reconcile net income to net cash provided
|
|
|
|
|
|
|
|
|
|
|
|
|
(used)
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) loss from discontinued
operations
|
|
|
(4,712 |
) |
|
|
(902 |
) |
|
|
(815 |
) |
Provision for doubtful
accounts
|
|
|
10 |
|
|
|
32 |
|
|
|
72 |
|
Investment (gains)
losses
|
|
|
1,294 |
|
|
|
135 |
|
|
|
(102 |
) |
Undistributed
earnings
|
|
|
451 |
|
|
|
(107 |
) |
|
|
(206 |
) |
Provision for minority
interest
|
|
|
762 |
|
|
|
613 |
|
|
|
504 |
|
Amortization of
investments
|
|
|
(299 |
) |
|
|
(266 |
) |
|
|
(382 |
) |
Depreciation, depletion and
amortization
|
|
|
692 |
|
|
|
471 |
|
|
|
352 |
|
Impairment of natural gas and
oil properties
|
|
|
691 |
|
|
|
|
|
|
|
|
|
Impairment of
goodwill
|
|
|
482 |
|
|
|
|
|
|
|
|
|
Provision for deferred income
taxes
|
|
|
(378 |
) |
|
|
18 |
|
|
|
275 |
|
Other non-cash
items
|
|
|
(41 |
) |
|
|
(1 |
) |
|
|
1 |
|
Changes
in operating assets and liabilities-net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
receivables
|
|
|
928 |
|
|
|
1,258 |
|
|
|
2,489 |
|
Other
receivables
|
|
|
(86 |
) |
|
|
13 |
|
|
|
(338 |
) |
Federal income
tax
|
|
|
(308 |
) |
|
|
(18 |
) |
|
|
29 |
|
Prepaid reinsurance
premiums
|
|
|
33 |
|
|
|
72 |
|
|
|
(2 |
) |
Deferred acquisition
costs
|
|
|
36 |
|
|
|
29 |
|
|
|
7 |
|
Insurance
reserves
|
|
|
(590 |
) |
|
|
(830 |
) |
|
|
(771 |
) |
Reinsurance balances
payable
|
|
|
(85 |
) |
|
|
(138 |
) |
|
|
(1,097 |
) |
Other
liabilities
|
|
|
(131 |
) |
|
|
241 |
|
|
|
428 |
|
Trading
securities
|
|
|
(84 |
) |
|
|
1,797 |
|
|
|
(2,024 |
) |
Other, net
|
|
|
34 |
|
|
|
(131 |
) |
|
|
17 |
|
Net
cash flow operating activities - continuing operations
|
|
|
3,229 |
|
|
|
4,775 |
|
|
|
928 |
|
Net
cash flow operating activities - discontinued operations
|
|
|
142 |
|
|
|
896 |
|
|
|
787 |
|
Net
cash flow operating activities - total
|
|
|
3,371 |
|
|
|
5,671 |
|
|
|
1,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of fixed maturities
|
|
|
(48,404 |
) |
|
|
(73,157 |
) |
|
|
(63,517 |
) |
Proceeds
from sales of fixed maturities
|
|
|
41,749 |
|
|
|
69,012 |
|
|
|
52,413 |
|
Proceeds
from maturities of fixed maturities
|
|
|
4,092 |
|
|
|
4,744 |
|
|
|
9,090 |
|
Purchases
of equity securities
|
|
|
(210 |
) |
|
|
(236 |
) |
|
|
(340 |
) |
Proceeds
from sales of equity securities
|
|
|
221 |
|
|
|
340 |
|
|
|
221 |
|
Purchases
of property, plant and equipment
|
|
|
(3,997 |
) |
|
|
(2,247 |
) |
|
|
(904 |
) |
Proceeds
from sales of property, plant and equipment
|
|
|
87 |
|
|
|
37 |
|
|
|
24 |
|
Change
in collateral on loaned securities
|
|
|
(57 |
) |
|
|
(3,539 |
) |
|
|
2,834 |
|
Change
in short term investments
|
|
|
2,942 |
|
|
|
2,151 |
|
|
|
(2,334 |
) |
Change
in other investments
|
|
|
(260 |
) |
|
|
(214 |
) |
|
|
(178 |
) |
Acquisition
of businesses, net of cash acquired
|
|
|
|
|
|
|
(4,029 |
) |
|
|
|
|
Net
cash flow investing activities - continuing operations
|
|
|
(3,837 |
) |
|
|
(7,138 |
) |
|
|
(2,691 |
) |
Net
cash flow investing activities - discontinued operations,
including
|
|
|
|
|
|
|
|
|
|
|
|
|
proceeds from
dispositions
|
|
|
623 |
|
|
|
323 |
|
|
|
54 |
|
Net
cash flow investing activities - total
|
|
|
(3,214 |
) |
|
|
(6,815 |
) |
|
|
(2,637 |
) |
Loews
Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid
|
|
$ |
(219 |
) |
|
$ |
(331 |
) |
|
$ |
(308 |
) |
Dividends
paid to minority interest
|
|
|
(513 |
) |
|
|
(454 |
) |
|
|
(138 |
) |
Purchases
of treasury shares
|
|
|
(33 |
) |
|
|
(672 |
) |
|
|
(510 |
) |
Purchases
of treasury shares by subsidiary
|
|
|
(70 |
) |
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
4 |
|
|
|
8 |
|
|
|
1,642 |
|
Proceeds
from subsidiaries equity issuances
|
|
|
247 |
|
|
|
535 |
|
|
|
430 |
|
Principal
payments on debt
|
|
|
(1,282 |
) |
|
|
(5 |
) |
|
|
(730 |
) |
Issuance
of debt
|
|
|
2,285 |
|
|
|
2,142 |
|
|
|
1,097 |
|
Receipts
of investment contract account balances
|
|
|
3 |
|
|
|
3 |
|
|
|
4 |
|
Return
of investment contract account balances
|
|
|
(608 |
) |
|
|
(122 |
) |
|
|
(589 |
) |
Excess
tax benefits from share-based payment arrangements
|
|
|
3 |
|
|
|
7 |
|
|
|
5 |
|
Other
|
|
|
10 |
|
|
|
11 |
|
|
|
9 |
|
Net
cash flow financing activities - continuing operations
|
|
|
(173 |
) |
|
|
1,122 |
|
|
|
912 |
|
Net
cash flow financing activities - discontinued operations
|
|
|
|
|
|
|
3 |
|
|
|
2 |
|
Net
cash flow financing activities - total
|
|
|
(173 |
) |
|
|
1,125 |
|
|
|
914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rate on cash - continuing operations
|
|
|
(13 |
) |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
(29 |
) |
|
|
(14 |
) |
|
|
(8 |
) |
Net
cash transactions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations to
discontinued operations
|
|
|
785 |
|
|
|
1,259 |
|
|
|
826 |
|
Discontinued operations to
continuing operations
|
|
|
(785 |
) |
|
|
(1,259 |
) |
|
|
(826 |
) |
Cash,
beginning of year
|
|
|
160 |
|
|
|
174 |
|
|
|
182 |
|
Cash,
end of year
|
|
$ |
131 |
|
|
$ |
160 |
|
|
$ |
174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
131 |
|
|
$ |
140 |
|
|
$ |
117 |
|
Discontinued
operations
|
|
|
|
|
|
|
20 |
|
|
|
57 |
|
Total
|
|
$ |
131 |
|
|
$ |
160 |
|
|
$ |
174 |
|
See
Notes to Consolidated Financial Statements.
Loews
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1. Summary of Significant Accounting Policies
Basis of presentation - Loews Corporation is a
holding company. Its subsidiaries are engaged in the following lines of
business: commercial property and casualty insurance (CNA Financial Corporation
(“CNA”), a 90% owned subsidiary); the operation of offshore oil and gas drilling
rigs (Diamond Offshore Drilling, Inc. (“Diamond Offshore”), a 50.4% owned
subsidiary); exploration, production and marketing of natural gas and natural
gas liquids (HighMount Exploration & Production LLC (“HighMount”), a wholly
owed subsidiary); the operation of interstate natural gas pipeline systems
(Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”), a 74% 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 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 Balance Sheets, Consolidated Statements
of Income, and Consolidated 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.
Principles of consolidation –
The Consolidated Financial Statements include all significant subsidiaries and
all material intercompany accounts and transactions have been eliminated. The
equity method of accounting is used for investments in associated companies in
which the Company generally has an interest of 20% to 50%.
Accounting estimates – The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) requires management
to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and the related notes. Actual results could
differ from those estimates.
Accounting changes – In
January of 2009, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) No. EITF 99-20-1, which amends Emerging Issues Task Force
(“EITF”) Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held
by a Transferor in Securitized Financial Assets,” to achieve more consistent
determination of whether other-than-temporary impairments of available-for-sale
or held-to-maturity debt securities have occurred. Specifically, FSP No. EITF
99-20-1 amends EITF No. 99-20 to align the impairment guidance in EITF No. 99-20
with the impairment guidance in Statement of Financial Accounting Standards
(“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity
Securities.” The Company adopted this FSP as of December 31, 2008. The adoption
of FSP No. EITF 99-20-1 did not have an impact on the Company’s financial
condition or results of operations.
In September of 2006, the FASB issued
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 year ended December 31, 2008. See Note 4. The Company will
apply the provisions of SFAS No. 157 to its nonrecurring fair value measurements
of nonfinancial assets and liabilities as of January 1, 2009. Adoption of these
provisions is not anticipated to impact the Company’s financial condition or
results of operations.
Notes to
Consolidated Financial Statements
Note
1. Summary of Significant Accounting Policies – (Continued)
In October of 2008, the FASB issued
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 year ended December 31, 2008.
In September of 2008, the FASB issued
FSP No. FAS 133-1 and FIN 45-4, which amends SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” to require disclosures by
sellers of credit derivatives regarding the nature, circumstances requiring
performance and current status of performance risk under the derivative. This
FSP also requires disclosure of the maximum amount of future payments under the
derivatives, the fair value of the derivatives and the nature of any recourse
and collateral under the derivatives. This FSP also amends FASB Interpretation
(“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others,” to require
an additional disclosure about the current status of the payment/performance
risk of a guarantee. The Company has complied with the disclosure
requirements related to credit derivatives in Note 5 and guarantees in Note
22.
In April of 2007, the FASB issued FSP
No. FIN 39-1, “Amendment of FIN No. 39.” FSP No. FIN 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. See Note 5. The effect
on the Consolidated 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 year ended December 31, 2008.
In March of 2006, the FASB issued FSP
No. FTB 85-4-1, “Accounting for Life Settlement Contracts by Third Party
Investors.” A life settlement contract for purposes of FSP No. FTB 85-4-1 is a
contract between the owner of a life insurance policy (the “policy owner”) and a
third party investor (“investor”). The previous accounting guidance, FASB
Technical Bulletin (“FTB”) No. 85-4, “Accounting for Purchases of Life
Insurance,” required the purchaser of life insurance contracts to account for
the life insurance contract at its cash surrender value. Because life insurance
contracts are purchased in the secondary market at amounts in excess of the
policies’ cash surrender values, the application of guidance in FTB No. 85-4
created a loss upon acquisition of policies. FSP No. FTB 85-4-1 provides initial
and subsequent measurement guidance and financial statement presentation and
disclosure guidance for investments by third party investors in life settlement
contracts. FSP No. FTB 85-4-1 allows an investor to elect to account for its
investments in life settlement contracts using either the investment method or
the fair value method. The election shall be made on an instrument-by-instrument
basis and is irrevocable. The Company adopted FSP No. FTB 85-4-1 on January 1,
2007.
Prior to 2002, CNA purchased
investments in life settlement contracts. Under a life settlement contract, CNA
obtained the ownership and beneficiary rights of an underlying life insurance
policy. CNA elected to account for its investments in life settlement contracts
using the fair value method and the initial impact upon adoption of FSP No. FTB
85-4-1 under the fair value method was an increase to retained earnings of $34
million, after tax and minority interest.
Under the fair value method, each
life settlement contract is carried at its fair value at the end of each
reporting period. The change in fair value, life insurance proceeds received and
periodic maintenance costs, such as premiums, necessary to keep the underlying
policy in force, are recorded in Other revenues on the Consolidated Statements
of Income for the years ended December 31, 2008 and 2007. Amounts presented
related to 2006 were
Notes to
Consolidated Financial Statements
Note
1. Summary of Significant Accounting Policies – (Continued)
accounted
for under the previous accounting guidance, FTB No. 85-4, where the carrying
value of life settlement contracts was the cash surrender value, and revenue was
recognized and included in Other revenues on the Consolidated Statements of
Income when the life insurance policy underlying the life settlement contract
matured. Under the previous accounting guidance, maintenance expenses were
expensed as incurred and included in Other operating expenses on the
Consolidated Statements of Income. CNA’s investments in life settlement
contracts were $129 million and $115 million at December 31, 2008 and 2007 and
are included in Other assets on the Consolidated Balance Sheets. The cash
receipts and payments related to life settlement contracts are included in Cash
flows from operating activities on the Consolidated Statements of Cash Flows for
all periods presented.
The fair value of each life insurance
policy is determined as the present value of the anticipated death benefits less
anticipated premium payments for that policy. These anticipated values are
determined using mortality rates and policy terms that are distinct for each
insured. The discount rate used reflects current risk-free rates at applicable
durations and the risks associated with assessing the current medical condition
of the insured, the potential volatility of mortality experience for the
portfolio and longevity risk. CNA used its own experience to determine the fair
value of its portfolio of life settlement contracts. The mortality experience of
this portfolio of life insurance policies may vary by quarter due to its
relatively small size.
The following table details the
values for life settlement contracts as of December 31, 2008.
|
|
Number
of Life
|
|
|
Fair
Value of Life
|
|
|
Face
Amount of
|
|
|
|
Settlement
|
|
|
Settlement
|
|
|
Life
Insurance
|
|
|
|
Contracts
|
|
|
Contracts
|
|
|
Policies
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
maturity during:
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
100 |
|
|
$ |
19 |
|
|
$ |
55 |
|
2010
|
|
|
100 |
|
|
|
17 |
|
|
|
55 |
|
2011
|
|
|
100 |
|
|
|
15 |
|
|
|
53 |
|
2012
|
|
|
100 |
|
|
|
13 |
|
|
|
53 |
|
2013
|
|
|
100 |
|
|
|
11 |
|
|
|
51 |
|
Thereafter
|
|
|
814 |
|
|
|
54 |
|
|
|
436 |
|
Total
|
|
|
1,314 |
|
|
$ |
129 |
|
|
$ |
703 |
|
CNA uses an actuarial model to
estimate the aggregate face amount of life insurance that is expected to mature
in each future year and the corresponding fair value. This model projects the
likelihood of the insured’s death for each in force policy based upon CNA’s
estimated mortality rates. The number of life settlement contracts presented in
the table above is based upon the average face amount of in force policies
estimated to mature in each future year.
The increase in fair value recognized
for the years ended December 31, 2008 and 2007 on contracts still being held was
$17 million and $12 million. The gain recognized during the years ended December
31, 2008 and 2007 on contracts that matured was $30 million and $38
million.
In June of 2006, the FASB issued FIN
No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS
No. 109.” FIN No. 48 prescribes a comprehensive model for how a company should
recognize, measure, present, and disclose in its financial statements uncertain
tax positions that the company has taken or expects to take on a tax return. FIN
No. 48 states that a tax benefit from an uncertain position may be recognized
only if it is “more likely than not” that the position is sustainable, based on
its technical merits. The tax benefit of a qualifying position is the largest
amount of tax benefit that is greater than 50 percent likely of being realized
upon ultimate settlement with a taxing authority having full knowledge of all
relevant information. The Company adopted FIN No. 48 on January 1, 2007 and
recorded a decrease to retained earnings of approximately $37 million, net of
minority interest. See Note 11 for additional information on the provision for
income taxes.
In September of 2006, the FASB issued
SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans.” SFAS No. 158 requires an employer to recognize the funded
status of a defined benefit postretirement plan in its statement of financial
position and to recognize changes in that funded status in the year in which the
changes occur through comprehensive income. The Company adopted SFAS No. 158 in
December of
Notes to
Consolidated Financial Statements
Note
1. Summary of Significant Accounting Policies – (Continued)
2006.
Adoption of the pronouncement decreased equity by $143 million, after tax and
minority interest, as of December 31, 2006. See Note 18 for additional
information on the Company’s benefit plans.
Investments – The Company
classifies its fixed maturity securities and its equity securities, held
principally by insurance subsidiaries, as either available-for-sale or trading,
and as such, they are carried at fair value.Changes in fair value of trading
securities are reported within Net investment income. The amortized cost of
fixed maturity securities classified as available-for-sale is adjusted for
amortization of premiums and accretion of discounts to maturity, which are
included in Net investment income. Changes in fair value related to
available-for-sale securities are reported as a component of Accumulated other
comprehensive income (loss). Investments are written down to fair value and
losses are recognized in the Consolidated Statements of Income when a decline in
value is determined to be other-than-temporary. See Note 3 for information
related to the Company’s impairment charges.
For asset-backed securities included
in fixed maturity securities, the Company recognizes income using an effective
yield based on anticipated prepayments and the estimated economic life of the
securities. When estimates of prepayments change, the effective yield is
recalculated to reflect actual payments to date and anticipated future payments.
The net investment in the securities is adjusted to the amount that would have
existed had the new effective yield been applied since the acquisition of the
securities. Such adjustments are reflected in Net investment income. Interest
income on lower rated beneficial interests in securitized financial assets is
determined using the prospective yield method.
Short term investments consist primarily
of U.S. government securities, repurchase agreements, money market funds and
commercial paper. These investments are generally carried at fair value, which
approximates amortized cost.
All securities transactions are recorded
on the trade date. The cost of securities sold is generally determined by the
identified certificate method.
The Company’s carrying value of
investments in limited partnerships is its share of the net asset value of each
partnership, as determined by the general partner. Certain partnerships for
which results are not available on a timely basis are reported on a lag,
primarily one month. Changes in net asset values are accounted for under the
equity method and recorded within Net investment income. The majority of the
limited partnerships employ strategies to generate returns through investing in
a substantial number of securities that are readily marketable. These strategies
may include the use of leverage and hedging techniques that potentially
introduce more volatility and risk to the partnerships.
Real estate investments are carried at
the lower of cost or fair value. These items are included in Other investments
in the Consolidated Balance Sheets.
Investments in derivative securities are
carried at fair value with changes in fair value reported as a component of
Investment gains (losses), Income (loss) from trading portfolio, or Accumulated
other comprehensive income (loss), depending on their hedge designation. Changes
in the fair value of derivative securities which are not designated as hedges,
are reported in the Consolidated Statements of Income. A derivative is typically
defined as an instrument whose value is “derived” from an underlying instrument,
index or rate, has a notional amount, requires little or no initial investment
and can be net settled. Derivatives include, but are not limited to, the
following types of investments: interest rate swaps, interest rate caps and
floors, put and call options, warrants, futures, forwards, commitments to
purchase securities, credit default swaps and combinations of the foregoing.
Derivatives embedded within non-derivative instruments (such as call options
embedded in convertible bonds) must be split from the host instrument when the
embedded derivative is not clearly and closely related to the host
instrument.
The Company’s derivatives are reported
as a component of Receivable from or Payable to brokers. Embedded derivative
instruments subject to bifurcation are reported together with the host contract,
at fair value. If certain criteria are met, a derivative may be specifically
designated as a hedge of exposures to changes in fair value, cash flows or
foreign currency exchange rates. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative, the nature of any
hedge designation thereon and whether the derivative was transacted in a
designated trading portfolio.
Notes to
Consolidated Financial Statements
Note
1. Summary of Significant Accounting Policies – (Continued)
The Company’s accounting for changes in
the fair value of derivative instruments is as follows:
Nature
of Hedge Designation
|
Derivative’s
Change in Fair Value Reflected in
|
|
|
No
hedge designation
|
Investment
gains (losses) or Income (loss) from trading portfolio.
|
Fair
value
|
Investment
gains (losses), along with the change in fair value of the hedged
asset or liability that is attributable to the hedged
risk.
|
Cash
flow
|
Accumulated
other comprehensive income (loss), with subsequent reclassification
to earnings when the hedged transaction, asset or liability impacts
earnings.
|
Foreign
currency
|
Consistent
with fair value or cash flow above, depending on the nature of the
hedging
relationship.
|
The Company formally documents all
relationships between hedging instruments and hedged items, as well as its
risk-management objective and strategy for undertaking various hedging
transactions. The Company also formally assesses (both at the hedge’s inception
and on an ongoing basis) whether the derivatives that are used in hedging
transactions have been highly effective in offsetting changes in fair value or
cash flows of hedged items and whether those derivatives may be expected to
remain highly effective in future periods. When it is determined that a
derivative for which hedge accounting has been designated is not (or ceases to
be) highly effective, the Company discontinues hedge accounting
prospectively.
The Company and certain of its
subsidiaries periodically enter into derivative contracts to manage exposure to
commodity price risk. A significant portion of the Company’s hedge strategies
represents cash flow hedges of the variable price risk associated with the
purchase and sale of natural gas and other energy-related products. The Company
also uses interest rate swaps to hedge its exposure to variable interest rates
on long term debt. Any ineffectiveness is recorded currently in the Consolidated
Statements of Income.
Derivatives held in designated
trading portfolios are carried at fair value with changes therein reflected in
Net investment income. These derivatives are generally not designated as
hedges.
Securities lending activities
– The Company lends securities to unrelated parties, primarily major brokerage
firms, through two programs: an internally managed program and an external
program managed by the Company’s lead custodial bank as agent. The securities
lending program is for the purpose of enhancing income. The Company does not
lend securities for operating or financing purposes. Borrowers of these
securities must initially deposit collateral with the Company of at least 102%
and maintain collateral of no less than 100% of the fair value of the securities
loaned, regardless of whether the collateral is cash or securities. Only cash
collateral is accepted for the Company’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. The Company maintains effective control over all loaned securities and,
therefore, continues to report such securities as Fixed maturity securities on
the Consolidated 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 the Company’s lending agreements,
securities on loan are returned immediately to the Company upon notice. Cash
collateral received on these transactions is invested in short term investments
with an offsetting liability recognized for the obligation to return the
collateral. Non-cash collateral, such as securities received by the Company, is
not reflected as an asset of the Company as there exists no right to sell or
repledge the collateral. The fair value of collateral held related to securities
lending, included in Short term investments on the Consolidated Balance Sheets,
was $53 million at December 31, 2007. There was no cash collateral held at
December 31, 2008. The fair value of non-cash collateral was $348 million and
$273 million at December 31, 2008 and 2007.
Gain on issuance of subsidiary
stock – Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin Topic 5-H, “Accounting for Sales of Stock by a Subsidiary” (“SAB No.
51”), provides guidance on accounting for
Notes to
Consolidated Financial Statements
Note
1. Summary of Significant Accounting Policies – (Continued)
the
effect of issuances of a subsidiary’s stock on the parent’s investment in that
subsidiary. SAB No. 51 allows registrants to elect an accounting policy of
recording such increases or decreases in a parent’s investment (SAB No. 51 gains
or losses, respectively) either in income or in shareholders’ equity. In
accordance with the election provided in SAB No. 51, the Company’s policy is to
record such SAB No. 51 gains or losses directly to the income
statement.
Revenue recognition –
Insurance premiums on property and casualty insurance contracts are recognized
in proportion to the underlying risk insured which principally are earned
ratably over the duration of the policies. Premiums on accident and health
insurance contracts are earned ratably over the policy year in which they are
due. The reserve for unearned premiums on these contracts represents the portion
of premiums written relating to the unexpired terms of coverage.
An estimated allowance for doubtful
accounts is recorded on the basis of periodic evaluations of balances due
currently or in the future from insureds, including amounts due from insureds
related to losses under high deductible policies, management’s experience and
current economic conditions.
Property and casualty contracts that
are retrospectively rated contain provisions that result in an adjustment to the
initial policy premium depending on the contract provisions and loss experience
of the insured during the experience period. For such contracts, CNA estimates
the amount of ultimate premiums that CNA may earn upon completion of the
experience period and recognizes either an asset or a liability for the
difference between the initial policy premium and the estimated ultimate
premium. CNA adjusts such estimated ultimate premium amounts during the course
of the experience period based on actual results to date. The resulting
adjustment is recorded as either a reduction of or an increase to the earned
premiums for the period.
Contract drilling revenue from dayrate
drilling contracts is recognized as services are performed. In connection with
such drilling contracts, Diamond Offshore may receive fees (either lump-sum or
dayrate) for the mobilization of equipment. These fees are earned as services
are performed over the initial term of the related drilling contracts. Absent a
contract, mobilization costs are recognized currently. From time to time,
Diamond Offshore may receive fees from its customers for capital improvements to
their rigs. Diamond Offshore defers such fees received and recognizes these fees
into revenue on a straight-line basis over the period of the related drilling
contract. Diamond Offshore capitalizes the costs of such capital improvements
and depreciates them over the estimated useful life of the
improvement.
HighMount’s natural gas and natural gas
liquids (“NGLs”) production revenue is recognized based on actual volumes sold
to purchasers. Sales require delivery of the product to the purchaser, passage
of title and probability of collection of purchaser amounts owed. Natural gas
and NGL production revenue is reported net of royalties. HighMount uses the
sales method of accounting for gas imbalances. An imbalance is created when the
volumes of gas sold by HighMount pertaining to a property do not equate to the
volumes produced to which HighMount is entitled based on its interest in the
property. An asset or liability is recognized to the extent that HighMount has
an imbalance in excess of the remaining reserves on the underlying
properties.
Revenues from the transportation of
natural gas are recognized in the period the service is provided based on
contractual terms and the related transported volumes. Revenues from storage
services are recognized over the term of the contract. Boardwalk Pipeline’s
operating subsidiaries are subject to Federal Energy Regulatory Commission
(“FERC”) regulations and, accordingly, certain revenues collected may be subject
to possible refunds to its customers. An estimated refund liability is recorded
considering regulatory proceedings, advice of counsel and estimated total
exposure.
Claim and claim adjustment expense
reserves – Claim and claim adjustment expense reserves, except reserves
for structured settlements not associated with asbestos and environmental
pollution (“A&E”), workers’ compensation lifetime claims, accident and
health claims and certain claims associated with discontinued operations, are
not discounted and are based on (i) case basis estimates for losses reported on
direct business, adjusted in the aggregate for ultimate loss expectations; (ii)
estimates of incurred but not reported losses; (iii) estimates of losses on
assumed reinsurance; (iv) estimates of future expenses to be incurred in the
settlement of claims; (v) estimates of salvage and subrogation recoveries and
(vi) estimates of amounts due from insureds related to losses under high
deductible policies. Management considers current conditions and trends as well
as past CNA and industry experience in establishing these estimates. The effects
of inflation, which can be significant, are implicitly
Notes to
Consolidated Financial Statements
Note
1. Summary of Significant Accounting Policies – (Continued)
considered
in the reserving process and are part of the recorded reserve balance. Ceded
claim and claim adjustment expense reserves are reported as a component of
Receivables on the Consolidated Balance Sheets. See Note 23 for further
information on claim and claim adjustment expense reserves for discontinued
operations.
Claim and
claim adjustment expense reserves are presented net of anticipated amounts due
from insureds related to losses under deductible policies of $2.0 billion and
$2.2 billion as of December 31, 2008 and 2007. A significant portion of these
amounts is supported by collateral. CNA also has an allowance for uncollectible
deductible amounts, which is presented as a component of the allowance for
doubtful accounts included in Receivables on the Consolidated Balance Sheets.
See Note 7. In 2008, the amount due from policyholders related to losses under
deductible policies within Standard Lines was reduced by $90 million for
insolvent insureds. The reduction of this amount, which is reflected as
unfavorable net prior year reserve development, had no effect on 2008 results of
operations as CNA had previously recognized provisions in prior years. These
impacts were reported in Insurance claims and policyholders’ benefits in the
2008 Consolidated Statement of Income.
Structured settlements have been
negotiated for certain property and casualty insurance claims. Structured
settlements are agreements to provide fixed periodic payments to claimants.
Certain structured settlements are funded by annuities purchased from
Continental Assurance Company (“CAC”), a wholly owned and consolidated
subsidiary of CNA, for which the related annuity obligations are reported in
future policy benefits reserves. Obligations for structured settlements not
funded by annuities are included in claim and claim adjustment expense reserves
and carried at present values determined using interest rates ranging from 4.6%
to 7.5% at December 31, 2008 and 2007. At December 31, 2008 and 2007, the
discounted reserves for unfunded structured settlements were $756 million and
$786 million, net of discount of $1.1 billion and $1.2 billion.
Workers’ compensation lifetime claim
reserves are calculated using mortality assumptions determined through statutory
regulation and economic factors. Accident and health claim reserves are
calculated using mortality and morbidity assumptions based on CNA and industry
experience. Workers’ compensation lifetime claim reserves and accident and
health claim reserves are discounted at interest rates that range from 3.0% to
6.5% for the years ended December 31, 2008 and 2007. At December 31, 2008 and
2007, such discounted reserves totaled $1.6 billion and $1.4 billion, net of
discount of $482 million and $438 million.
Future policy benefits
reserves – Reserves for long term care products are computed using the
net level premium method, which incorporates actuarial assumptions as to
interest rates, mortality, morbidity, persistency, withdrawals and expenses.
Actuarial assumptions generally vary by plan, age at issue and policy duration,
and include a margin for adverse deviation. Interest rates range from 6.0% to
8.6% at December 31, 2008 and 2007, and mortality, morbidity and withdrawal
assumptions are based on CNA and industry experience prevailing at the time of
issue. Expense assumptions include the estimated effects of inflation and
expenses to be incurred beyond the premium paying period.
Policyholders’ funds reserves
– Policyholders’ funds reserves primarily include reserves for investment
contracts without life contingencies, including reserves related to the indexed
group annuity portion of CNA’s pension deposit business. For these contracts,
policyholder liabilities are equal to the accumulated policy account values,
which consist of an accumulation of deposit payments plus credited interest,
less withdrawals and amounts assessed through the end of the period. During
2008, CNA exited the indexed group annuity portion of its pension deposit
business and settled the related liabilities with policyholders with no material
impact to results of operations. Cash flows related to the settlement of the
liabilities with policyholders are presented on the Consolidated Statements of
Cash Flows in Cash flows from financing activities, as Return of investment
contract account balances. Cash flows related to proceeds from the liquidation
of the related assets supporting the policyholder liabilities are presented on
the Consolidated Statements of Cash Flows in Cash flows from operating
activities, as Trading securities.
Guaranty fund and other
insurance-related assessments – Liabilities for guaranty fund and other
insurance-related assessments are accrued when an assessment is probable, when
it can be reasonably estimated, and when the event obligating the entity to pay
an imposed or probable assessment has occurred. Liabilities for guaranty funds
and other insurance-related assessments are not discounted and are included as
part of Other liabilities on the Consolidated Balance Sheets. As of December 31,
2008 and 2007, the liability balances were $170 million and $178 million. As of
December 31, 2008 and 2007, included in Other assets on the Consolidated Balance
Sheets were $6
Notes to
Consolidated Financial Statements
Note
1. Summary of Significant Accounting Policies – (Continued)
million
and $6 million of related assets for premium tax offsets. This asset is limited
to the amount that is able to be offset against premium tax on future premium
collections from business written or committed to be written.
Reinsurance – Amounts
recoverable from reinsurers are estimated in a manner consistent with claim and
claim adjustment expense reserves or future policy benefits reserves and are
reported as Receivables on the Consolidated Balance Sheets. The cost of
reinsurance is primarily accounted for over the life of the underlying reinsured
policies using assumptions consistent with those used to account for the
underlying policies or over the reinsurance contract period. The ceding of
insurance does not discharge the primary liability of CNA. An estimated
allowance for doubtful accounts is recorded on the basis of periodic evaluations
of balances due from reinsurers, reinsurer solvency, management’s experience and
current economic conditions. The expenses incurred related to uncollectible
reinsurance receivables are presented as a component of Insurance claims and
policyholders’ benefits on the Consolidated Statements of Income.
Reinsurance contracts that do not
effectively transfer the underlying economic risk of loss on policies written by
CNA are recorded using the deposit method of accounting, which requires that
premium paid or received by the ceding company or assuming company be accounted
for as a deposit asset or liability. At December 31, 2008 and 2007, CNA had $25
million and $40 million recorded as deposit assets and $110 million and $117
million recorded as deposit liabilities.
Income on reinsurance contracts
accounted for under the deposit method is recognized using an effective yield
based on the anticipated timing of payments and the remaining life of the
contract. When the estimate of timing of payments changes, the effective yield
is recalculated to reflect actual payments to date and the estimated timing of
future payments. The deposit asset or liability is adjusted to the amount that
would have existed had the new effective yield been applied since the inception
of the contract. This adjustment is reflected in Other revenues or Other
operating expenses on the Consolidated Statements of Income as
appropriate.
Participating insurance –
Policyholder dividends are accrued using an estimate of the amount to be paid
based on underlying contractual obligations under policies and applicable state
laws. When limitations exist on the amount of net income from participating life
insurance contracts that may be distributed to shareholders, the share of net
income on those policies that cannot be distributed to shareholders is excluded
from shareholders’ equity by a charge to operations and the establishment of a
corresponding liability.
Deferred acquisition costs –
Acquisition costs include commissions, premium taxes and certain underwriting
and policy issuance costs which vary with and are related primarily to the
acquisition of business. Such costs related to property and casualty business
are deferred and amortized ratably over the period the related premiums are
earned.
Deferred acquisition costs related to
accident and health insurance are amortized over the premium-paying period of
the related policies using assumptions consistent with those used for computing
future policy benefit reserves for such contracts. Assumptions as to anticipated
premiums are made at the date of policy issuance or acquisition and are
consistently applied during the lives of the contracts. Deviations from
estimated experience are included in results of operations when they occur. For
these contracts, the amortization period is typically the estimated life of the
policy.
CNA evaluates deferred acquisition
costs for recoverability. Adjustments, if necessary, are recorded in current
results of operations. Anticipated investment income is considered in the
determination of the recoverability of deferred acquisition costs. Deferred
acquisition costs are recorded net of ceding commissions and other ceded
acquisition costs. Unamortized deferred acquisition costs relating to contracts
that have been substantially changed by a modification in benefits, features,
rights or coverages are no longer deferred and are included as a charge to
operations in the period during which the contract modification
occurred.
Separate Account Business –
Separate account assets and liabilities represent contract holder funds related
to investment and annuity products for which the policyholder assumes
substantially all the risk and reward. The assets are segregated into accounts
with specific underlying investment objectives and are legally segregated from
CNA. All assets of the separate account business are carried at fair value with
an equal amount recorded for separate account liabilities. Certain of the
separate account investment contracts related to CNA’s pension deposit business
guarantee principal and a minimum rate of interest, for which additional amounts
may be recorded in Policyholders’
Notes to
Consolidated Financial Statements
Note
1. Summary of Significant Accounting Policies – (Continued)
funds
should the aggregate contract value exceed fair value of the related assets
supporting the business at any point in time. Most of these contracts are
subject to a fair value adjustment if terminated by the policyholder. During
2008, CNA recorded $68 million of additional amounts in Policyholders’ funds due
to declines in the value of the related assets. To the extent the related assets
supporting the business recover in value in the future, the amount of any such
recovery will accrue to CNA’s benefit and will reduce the related liability in
Policyholders’ funds. Fee income accruing to CNA related to separate accounts is
primarily included within Other revenue on the Consolidated Statements of
Income.
CNA’s employee savings plan allows
employees to make contributions to an investment fund that is supported in part
by an investment contract purchased from CAC. CAC will not accept any further
deposits under this contract. The contract value of CAC’s liability to the
savings plan was $327 million and $308 million at December 31, 2008 and 2007,
and is included in Separate account business and Policyholders’ funds in the
Consolidated Balance Sheets.
Goodwill and other intangible
assets – Goodwill represents the excess of purchase price over fair value
of net assets of acquired entities. Goodwill and other intangible assets with
indefinite lives are annually tested for impairment or when certain triggering
events require such tests. Impairment losses, if any, are included in the
Consolidated Statements of Income. As a result of recording a ceiling test
impairment of natural gas and oil properties (see Note 8), which was caused by
declines in commodity prices, HighMount tested its goodwill at December 31, 2008
and determined it had been impaired. As a result, a non-cash impairment charge
of $482 million ($314 million after tax) was recorded in 2008.
Property, plant and equipment
– Property, plant and equipment is carried at cost less accumulated
depreciation. Depreciation is computed principally by the straight-line method
over the estimated useful lives of the various classes of properties. Leaseholds
and leasehold improvements are depreciated or amortized over the terms of the
related leases (including optional renewal periods where appropriate) or the
estimated lives of improvements, if less than the lease term.
The
principal service lives used in computing provisions for depreciation are as
follows:
|
Years
|
|
|
Buildings
and building equipment
|
30
to 50
|
Leaseholds
and leasehold improvements
|
10
to 20
|
Offshore
drilling equipment
|
15
to 30
|
Pipeline
equipment
|
30
to 50
|
Machinery
and equipment
|
4
to 30
|
Computer
equipment and software
|
3
to 5
|
HighMount follows the full cost
method of accounting for natural gas and oil exploration and production
activities prescribed by the SEC. Under the full cost method, all direct costs
of property acquisition, exploration and development activities are capitalized.
These capitalized costs are subject to a quarterly ceiling test. Under the
ceiling test, amounts capitalized are limited to the present value of estimated
future net revenues to be derived from the anticipated production of proved
natural gas and oil reserves, assuming period-end pricing adjusted for cash flow
hedges in place. If net capitalized costs exceed the ceiling test at the end of
any quarterly period, then a permanent write-down of the assets must be
recognized in that period. A write-down may not be reversed in future periods,
even though higher natural gas and NGL prices may subsequently increase the
ceiling. Approximately 2.3% (unaudited) of HighMount’s total proved reserves as
of December 31, 2008 is hedged by qualifying cash flow hedges, for which hedge
adjusted prices were used to calculate estimated future net revenue. Future cash
flows associated with settling asset retirement obligations that have been
accrued in the Consolidated Balance Sheets are excluded from HighMount’s
calculations of discounted cash flows under the ceiling test. See Note
17.
Depletion of natural gas and oil
producing properties is computed using the units-of-production method. Under the
full cost method, the depletable base of costs subject to depletion also
includes estimated future costs to be incurred in developing proved natural gas
and oil reserves, as well as capitalized asset retirement costs, net of
projected salvage values. The costs of investments in unproved properties
including associated exploration-related
Notes to
Consolidated Financial Statements
Note
1. Summary of Significant Accounting Policies – (Continued)
costs are
initially excluded from the depletable base. Until the properties are evaluated,
a ratable portion of the capitalized costs is periodically reclassified to the
depletable base, determined on a property by property basis, over terms of
underlying leases. Once a property has been evaluated, any remaining capitalized
costs are then transferred to the depletable base. In addition, gains or losses
on the sale or other disposition of natural gas and oil properties are not
recognized, unless the gain or loss would significantly alter the relationship
between capitalized costs and proved reserves.
Impairment of long-lived
assets – The Company reviews its long-lived assets for impairment when
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Long-lived assets and intangibles with finite lives, under
certain circumstances, are reported at the lower of carrying amount or fair
value. Assets to be disposed of and assets not expected to provide any future
service potential to the Company are recorded at the lower of carrying amount or
fair value less cost to sell.
Income taxes - The Company and its
eligible subsidiaries file a consolidated tax return. The Company accounts for
taxes under the asset and liability method. Under this method, deferred income
taxes are recognized for temporary differences between the financial statement
and tax return bases of assets and liabilities. Future tax benefits are
recognized to the extent that realization of such benefits is more likely than
not, and a valuation allowance is established for any portion of a deferred tax
asset that management believes may not be realized.
Pension and postretirement
benefits – The Company recognizes the overfunded or underfunded status of
its defined benefit plans in Other assets or Other liabilities in the
Consolidated Balance Sheets and recognizes changes in that funded status in the
year in which the changes occur through Accumulated other comprehensive income
(loss). The Company measures its benefit plan assets and obligations at December
31st.
Stock option plans – The
Company records compensation expense upon issuance of share-based payment awards
for all awards it grants, modifies, repurchases or cancels primarily on a
straight-line basis over the requisite service period, generally four years. The
share-based payment awards are valued using the Black-Scholes option pricing
model. The application of this valuation model involves assumptions that are
judgmental and highly sensitive in the valuation of stock options. These
assumptions include the term that the options are expected to be outstanding, an
estimate of the volatility of the underlying stock price, applicable risk-free
interest rates and the dividend yield of the Company’s stock.
The Company recognized compensation
expense that decreased net income attributable to Loews common stock by $12
million, $9 million and $7 million, after tax and minority interest for the
years ended December 31, 2008, 2007 and 2006. Several of the Company’s
subsidiaries also maintain their own stock option plans. The amounts reported
above include the Company’s share of expense related to its subsidiaries’ plans
as well.
Foreign currency – Foreign
currency translation gains and losses are reflected in Shareholders’ equity as a
component of Accumulated other comprehensive income (loss). The Company’s
foreign subsidiaries’ balance sheet accounts are translated at the exchange
rates in effect at each year end and income statement accounts are translated at
the average exchange rates. Foreign currency transaction gains (losses) of
$(101) million, $(7) million and $3 million were included in the Consolidated
Statements of Income for the years ended December 31, 2008, 2007 and
2006.
Regulatory accounting – FERC
regulates the operations of Boardwalk Pipeline. SFAS No. 71, “Accounting for the
Effects of Certain Types of Regulation,” requires Texas Gas Transmission, LLC
(“Texas Gas”), a wholly owned subsidiary of Boardwalk Pipeline, to report
certain assets and liabilities consistent with the economic effect of the manner
in which independent third party regulators establish rates. Accordingly,
certain costs and benefits are capitalized as regulatory assets and liabilities
in order to provide for recovery from or refund to customers in future
periods.
Supplementary cash flow
information – Cash payments made for interest on long term debt, net of
capitalized interest, amounted to $429 million, $299 million and $352 million
for the years ended December 31, 2008, 2007 and 2006. Cash payments for federal,
foreign, state and local income taxes amounted to $655 million, $974 million and
$571 million for the years ended December 31, 2008, 2007 and 2006. Accrued
capital expenditures amounted to $186 million, $215 million and $30 million for
the years ended December 31, 2008, 2007 and 2006.
Notes to
Consolidated Financial Statements
Note
1. Summary of Significant Accounting Policies – (Continued)
New accounting pronouncements not yet
adopted – In December of 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial Statements.” This standard
will improve, simplify, and converge internationally the reporting of
noncontrolling interests in consolidated financial statements. SFAS No. 160
requires all entities to report noncontrolling (minority) interests in
subsidiaries as a component of equity in the Consolidated Financial Statements.
Therefore, the noncontrolling interest in the equity section will include the
appropriate reclassification of balances for CNA, Diamond Offshore and Boardwalk
Pipeline currently recognized in Minority interest on the Consolidated Balance
Sheets. 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, on
January 1, 2009, upon adoption of SFAS No. 160, the Company’s deferred gains
related to the issuances of Boardwalk Pipeline common units ($536 million at
December 31, 2008) will be reclassified from Minority interest liability to the
Shareholders’ equity section of the Consolidated Balance Sheets.
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.
The adoption of SFAS No. 161 will have no impact on the Company’s financial
condition or results of operations.
In May of 2008, the FASB issued 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. The adoption of FSP No. APB 14-1 will
not have a material effect on the Company’s results of operations and
equity.
In December of 2008, the SEC approved
revisions to its oil and gas reporting requirements that are intended to provide
investors with a more meaningful and comprehensive understanding of oil and gas
reserves. The new requirements, among other things: (i) permit the
use of new technologies to determine proved reserves if those technologies have
been demonstrated empirically to lead to reliable conclusions about reserves
volumes; (ii) permit disclosure of probable and possible reserves, whereas
current rules limit disclosure to proved reserves; (iii) require disclosure
regarding the objectivity and qualifications of a reserves preparer or auditor,
if the company represents that it has enlisted a third party to conduct a
reserves audit, and that the company file a report of such third party as an
exhibit to the relevant registration statement or report; and (iv) revise the
pricing mechanism for oil and gas reserves by using a 12-month
average price, rather than a single day year end price, to increase the
comparability of oil and gas reserves disclosures among companies and to
mitigate the additional volatility that a single day price may have on reserve
estimates. The foregoing revisions to the SEC’s oil and gas reporting
requirements are effective January 1, 2010 and will apply to registration
statements filed on or after such date and to annual reports for fiscal years
ending on or after December 31, 2009. The Company is currently evaluating the
impact that adopting the revisions will have on its results of operations and
equity.
In December of 2008, the FASB issued
FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan
Assets,” which requires additional disclosures regarding plan assets and how
investment allocation decisions are made, including the factors that are
pertinent to an understanding of investment policies and procedures, the major
categories of plan assets, the inputs and valuation techniques used to measure
the fair value of plan assets, the effect of fair value measurements using
significant unobservable inputs (Level 3 of the SFAS No. 157 hierarchy) on
changes in plan assets for the period, and significant concentrations of risk
within plan assets. The additional disclosures required by this FSP are
effective for fiscal years ending after December 15, 2009. The adoption of this
standard will have no impact on the Company’s financial condition or results of
operations.
Notes to
Consolidated Financial Statements
Note
2. Separation of Lorillard
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 Shareholders’
equity, reflecting the 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% economic
interest in the former Carolina Group.
Note
3. Investments
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities
|
|
$ |
1,984 |
|
|
$ |
2,047 |
|
|
$ |
1,861 |
|
Short
term investments
|
|
|
162 |
|
|
|
303 |
|
|
|
296 |
|
Limited
partnerships
|
|
|
(379 |
) |
|
|
183 |
|
|
|
288 |
|
Equity
securities
|
|
|
80 |
|
|
|
25 |
|
|
|
29 |
|
Income
(loss) from trading portfolio
|
|
|
(234 |
) |
|
|
207 |
|
|
|
326 |
|
Interest
on funds withheld and other deposits
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(68 |
) |
Other
|
|
|
21 |
|
|
|
74 |
|
|
|
120 |
|
Total
investment income
|
|
|
1,632 |
|
|
|
2,838 |
|
|
|
2,852 |
|
Investment
expenses
|
|
|
(51 |
) |
|
|
(53 |
) |
|
|
(46 |
) |
Net
investment income
|
|
$ |
1,581 |
|
|
$ |
2,785 |
|
|
$ |
2,806 |
|
Notes to
Consolidated Financial Statements
Note
3. Investments – (Continued)
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
gains (losses) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
$ |
(831 |
) |
|
$ |
(478 |
) |
|
$ |
1 |
|
Equity
securities, including short positions
|
|
|
(490 |
) |
|
|
117 |
|
|
|
22 |
|
Derivative
instruments
|
|
|
(19 |
) |
|
|
64 |
|
|
|
19 |
|
Short
term investments
|
|
|
35 |
|
|
|
9 |
|
|
|
(5 |
) |
Other,
including guaranteed separate account business
|
|
|
9 |
|
|
|
12 |
|
|
|
56 |
|
Investment
gains (losses)
|
|
|
(1,296 |
) |
|
|
(276 |
) |
|
|
93 |
|
Gains
on issuance of subsidiary stock
|
|
|
2 |
|
|
|
141 |
|
|
|
9 |
|
|
|
|
(1,294 |
) |
|
|
(135 |
) |
|
|
102 |
|
Income
tax (expense) benefit
|
|
|
455 |
|
|
|
46 |
|
|
|
(24 |
) |
Minority
interest
|
|
|
85 |
|
|
|
22 |
|
|
|
(9 |
) |
Investment
gains (losses), net
|
|
$ |
(754 |
) |
|
$ |
(67 |
) |
|
$ |
69 |
|
Net realized investment losses
included $1,484 million, $741 million and $173 million of
other-than-temporary impairment (“OTTI”) losses for the years ended
December 31, 2008, 2007 and 2006. The 2008 OTTI losses were recorded
primarily in the corporate and other taxable bonds, asset-backed bonds and
non-redeemable preferred equity securities sectors. The 2007 OTTI losses were
recorded primarily in the asset-backed bonds and corporate and other taxable
bonds sectors. The 2006 OTTI losses were recorded primarily in the corporate and
other taxable bonds sector.
The 2008 OTTI losses were driven
primarily by deteriorating world-wide economic conditions and the resulting
disruption of the financial and credit markets. Additional factors that
contributed to recognizing impairments in 2008 were the conservatorship of the
government sponsored entities Federal National Mortgage Association (“Fannie
Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the failure
of several financial institutions. The 2007 OTTI losses were driven mainly by
credit market conditions and disruption caused by issues surrounding the
sub-prime residential mortgage (sub-prime) crisis. The OTTI losses for 2006 were
primarily driven by an increase in interest rate related OTTI losses on
securities for which the Company did not assert an intent to hold until an
anticipated recovery in value.
An investment is impaired if the fair
value of the investment is less than its cost adjusted for accretion,
amortization and OTTI, otherwise defined as an unrealized loss. When an
investment is impaired, the impairment is evaluated to determine whether it is
temporary or other-than-temporary.
Significant judgment is required in
the determination of whether an OTTI has occurred for an investment. CNA follows
a consistent and systematic process for determining and recording an OTTI loss.
CNA has established a committee responsible for the OTTI process. This
committee, referred to as the Impairment Committee, is made up of three officers
appointed by CNA’s Chief Financial Officer. The Impairment Committee is
responsible for analyzing all securities in an unrealized loss position on at
least a quarterly basis.
The Impairment Committee’s assessment
of whether an OTTI loss should be recognized incorporates both quantitative and
qualitative information. The Impairment Committee considers a number of factors
including, but not limited to: (i) the length of time and the extent to
which the fair value has been less than amortized cost, (ii) the financial
condition and near term prospects of the issuer, (iii) the intent and
ability of CNA to retain its investment for a period of time sufficient to allow
for an anticipated recovery in value, (iv) whether the debtor is current on
interest and principal payments and (v) general market conditions and
industry or sector specific outlook.
As part of the Impairment Committee’s
review of impaired asset-backed securities it also considers results and
analysis of cash flow modeling. The focus of this analysis is on assessing the
sufficiency and quality of the underlying collateral and timing of cash flows
based on various scenario tests. This additional data provides the Impairment
Committee with additional context to evaluate current market conditions to
determine if the impairment is temporary in nature.
Notes to
Consolidated Financial Statements
Note
3. Investments – (Continued)
For securities considered to be OTTI,
the security is adjusted to fair value and the resulting losses are recognized
in Investment gains (losses) on the Consolidated Statements of
Income.
The significant credit spread
widening in 2008 negatively impacted the fair value of several asset classes
resulting in material unrealized losses and impacted the unrealized loss aging
as presented in the tables below. CNA’s assertion to hold until a recovery in
value takes into account a view on the estimated recovery horizon which in some
cases may include maturity. Given the prolonged nature of the current market
downturn, the duration and severity of the unrealized losses has progressed well
beyond historical norms. The Company will continue to monitor these losses and
will assess all facts and circumstances as they become known which may result in
changes to the conclusions reached based on current facts and circumstances and
additional OTTI losses.
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 December 31, 2008 Consolidated Balance
Sheets.
The amortized cost and market values
of securities are as follows:
|
|
|
|
|
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Less
than
|
|
|
12
Months
|
|
|
Fair
|
|
December
31, 2008
|
|
Cost
|
|
|
Gains
|
|
|
12
Months
|
|
|
or
Greater
|
|
|
Value
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and obligations
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
government agencies
|
|
$ |
2,862 |
|
|
$ |
69 |
|
|
$ |
1 |
|
|
|
|
|
$ |
2,930 |
|
Asset-backed
securities
|
|
|
9,670 |
|
|
|
24 |
|
|
|
961 |
|
|
$ |
969 |
|
|
|
7,764 |
|
States, municipalities and
political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions-tax exempt
|
|
|
8,557 |
|
|
|
90 |
|
|
|
609 |
|
|
|
623 |
|
|
|
7,415 |
|
Corporate and other
debt
|
|
|
12,993 |
|
|
|
275 |
|
|
|
1,164 |
|
|
|
1,374 |
|
|
|
10,730 |
|
Redeemable preferred
stocks
|
|
|
72 |
|
|
|
1 |
|
|
|
23 |
|
|
|
3 |
|
|
|
47 |
|
Fixed
maturities available-for-sale
|
|
|
34,154 |
|
|
|
459 |
|
|
|
2,758 |
|
|
|
2,969 |
|
|
|
28,886 |
|
Fixed
maturities, trading
|
|
|
613 |
|
|
|
1 |
|
|
|
19 |
|
|
|
30 |
|
|
|
565 |
|
Total
fixed maturities
|
|
|
34,767 |
|
|
|
460 |
|
|
|
2,777 |
|
|
|
2,999 |
|
|
|
29,451 |
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
available-for-sale
|
|
|
1,018 |
|
|
|
195 |
|
|
|
16 |
|
|
|
324 |
|
|
|
873 |
|
Equity securities,
trading
|
|
|
384 |
|
|
|
52 |
|
|
|
78 |
|
|
|
46 |
|
|
|
312 |
|
Total
equity securities
|
|
|
1,402 |
|
|
|
247 |
|
|
|
94 |
|
|
|
370 |
|
|
|
1,185 |
|
Short
term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investments
available-for-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sale
|
|
|
4,999 |
|
|
|
11 |
|
|
|
3 |
|
|
|
|
|
|
|
5,007 |
|
Short term investments,
trading
|
|
|
1,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,022 |
|
Total
short term investments
|
|
|
6,021 |
|
|
|
11 |
|
|
|
3 |
|
|
|
- |
|
|
|
6,029 |
|
Total
|
|
$ |
42,190 |
|
|
$ |
718 |
|
|
$ |
2,874 |
|
|
$ |
3,369 |
|
|
$ |
36,665 |
|
Notes to
Consolidated Financial Statements
Note
3. Investments – (Continued)
|
|
|
|
|
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Less
than
|
|
|
12
Months
|
|
|
Fair
|
|
December
31, 2007
|
|
Cost
|
|
|
Gains
|
|
|
12
Months
|
|
|
or
Greater
|
|
|
Value
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and other
debt
|
|
|
13,010 |
|
|
|
454 |
|
|
|
197 |
|
|
|
16 |
|
|
|
13,251 |
|
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, for
available-for-sale fixed maturity securities, preferred stocks and common stocks
in an unrealized loss position at December 31, 2008 and 2007, the aggregate fair
value and gross unrealized loss by length of time those securities have been
continuously in an unrealized loss position.
Notes to
Consolidated Financial Statements
Note
3. Investments – (Continued)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
December
31
|
|
Fair
Value
|
|
|
Loss
|
|
|
Fair
Value
|
|
|
Loss
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
and non-redeemable preferred stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6
months
|
|
$
|
39 |
|
|
$ |
26 |
|
|
$ |
893 |
|
|
$ |
143 |
|
7-11
months
|
|
|
43 |
|
|
|
12 |
|
|
|
104 |
|
|
|
28 |
|
12-24
months
|
|
|
497 |
|
|
|
324 |
|
|
|
|
|
|
|
|
|
Total
redeemable and non-redeemable preferred stocks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-for-sale
|
|
|
579 |
|
|
|
362 |
|
|
|
997 |
|
|
|
171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6
months
|
|
|
5 |
|
|
|
1 |
|
|
|
34 |
|
|
|
1 |
|
7-11
months
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
12-24
months
|
|
|
9 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
Greater
than 24 months
|
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
Total
equity securities available-for-sale
|
|
|
17 |
|
|
|
4 |
|
|
|
38 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed maturity and equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-for-sale
|
|
$ |
21,148 |
|
|
$ |
6,067 |
|
|
$ |
13,636 |
|
|
$ |
875 |
|
At December 31, 2008, the fair value
of the available-for-sale fixed maturities was $28,886 million, representing
75.1% of the total investment portfolio. The gross unrealized loss for any
single issuer was less than 0.6% of the carrying value of CNA’s total fixed
maturity portfolio. The total fixed maturity portfolio gross unrealized losses
included 2,335 securities which were, in aggregate, 22.0% below amortized
cost.
The gross unrealized losses on equity
securities were $340 million, including 171 securities which were, in aggregate,
38.0% below cost.
The classification between investment
grade and non-investment grade is based on a ratings methodology that takes into
account ratings from the three major providers, Standard and Poors, Moody’s
Investor Services and Fitch Ratings in that order of preference. If a security
is not rated by any of the three, the Company formulates an internal
rating.
Given the current facts and
circumstances, the Impairment Committee has determined that the securities
presented in the above unrealized gain/loss tables were temporarily impaired
when evaluated at December 31, 2008 and 2007, and therefore no related realized
losses were recorded. A discussion of some of the factors reviewed in making
that determination as of December 31, 2008 is presented below.
Decreases in the fair value of fixed
maturity securities during 2008 were primarily driven by a sharp increase in
risk premium related to credit, structure, liquidity, and other risks as opposed
to changes in interest rates. The decline in fair values was aggravated by a
general deterioration in liquidity with widening bid/ask spreads and significant
portfolio liquidations of assets as the financial system sought to reduce
leverage. These declines in fair value were most severe for longer duration
assets as credit spread curves steepened dramatically. Declines were
particularly severe for structured securities, financial sector obligations and
the obligations of non-investment grade credits.
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 that began
with the sub-prime issue, but then also extended into other asset-backed
securities in the Company’s portfolio related to reasons as discussed
above.
Notes to
Consolidated Financial Statements
Note
3. Investments – (Continued)
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 (“ABS”). The holdings in these sectors include 515
securities in a gross unrealized loss position aggregating $1,928 million. The
aggregate severity of the unrealized loss was 23.0% 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 the Company’s particular holdings. The structured securities held are
generally secured by over collateralization or default protection provided by
subordinated tranches. For the year ended December 31, 2008, there were OTTI
losses of $465 million recorded on asset-backed securities.
The remainder of the holdings in this
category includes mortgage-backed securities guaranteed by an agency of the U.S.
Government. There were 272 agency mortgage-backed pass-through securities and 2
agency CMOs in an unrealized loss position aggregating $2 million as of December
31, 2008. The cumulative unrealized losses on these securities were 2.0% 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. For the year ended December 31, 2008, there were no OTTI
losses recorded for mortgage-backed securities guaranteed by an agency of the
U.S. Government.
The asset-backed securities in an
unrealized loss position by ratings distribution are as follows:
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
Unrealized
|
|
December
31, 2008
|
|
Cost
|
|
|
Fair
Value
|
|
|
Loss
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
$ |
6,810 |
|
|
$ |
5,545 |
|
|
$ |
1,265 |
|
AA
|
|
|
568 |
|
|
|
318 |
|
|
|
250 |
|
A
|
|
|
437 |
|
|
|
186 |
|
|
|
251 |
|
BBB
|
|
|
327 |
|
|
|
264 |
|
|
|
63 |
|
Non-investment
grade
|
|
|
289 |
|
|
|
188 |
|
|
|
101 |
|
Total
|
|
$ |
8,431 |
|
|
$ |
6,501 |
|
|
$ |
1,930 |
|
The Company believes the decline in
fair value was primarily attributable to broader deteriorating market
conditions, liquidity concerns and widening bid/ask spreads brought about as a
result of portfolio liquidations 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
December 31, 2008.
States,
Municipalities and Political Subdivisions – Tax-Exempt Securities
The unrealized losses on the
Company’s investments in tax-exempt municipal securities were caused by overall
market conditions, changes in credit spreads, and to a lesser extent, changes in
interest rates. Market conditions in the tax-exempt sector were driven by
significant selling pressure in the market particularly in the second half of
2008. 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 742
securities in a gross unrealized loss position aggregating $1,232 million with
all of these unrealized losses related to investment grade securities (rated
BBB- or higher).
Notes to
Consolidated Financial Statements
Note
3. Investments – (Continued)
The ratings distribution of
tax-exempt securities in an unrealized loss position are as
follows:
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
Unrealized
|
|
December
31, 2008
|
|
Cost
|
|
|
Fair
Value
|
|
|
Loss
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
$ |
2,044 |
|
|
$ |
1,780 |
|
|
$ |
264 |
|
AA
|
|
|
2,566 |
|
|
|
2,213 |
|
|
|
353 |
|
A
|
|
|
1,080 |
|
|
|
831 |
|
|
|
249 |
|
BBB
|
|
|
862 |
|
|
|
496 |
|
|
|
366 |
|
Total
|
|
$ |
6,552 |
|
|
$ |
5,320 |
|
|
$ |
1,232 |
|
The portfolio consists primarily of
special revenue and assessment bonds representing 82.0% of the overall portfolio
followed by general obligation political subdivision bonds at 12.0% and state
general obligation bonds at 6.0%.
The largest exposures at December 31,
2008 as measured by unrealized losses were special revenue bonds issued by
several states backed by tobacco settlement funds with unrealized losses of $360
million and several separate issues of Puerto Rico sales tax revenue bonds with
unrealized losses of $118 million. All of these securities are investment grade.
Based on the Company’s current evaluation of these securities and its ability
and intent to hold them until an anticipated recovery in value, the Company does
not consider these to be other-than-temporarily impaired at December 31,
2008.
The aggregate severity of the total
unrealized losses was 18.8% 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 December 31, 2008. For the year ended December 31, 2008,
there were OTTI losses of $1 million recorded on tax-exempt municipal
securities.
Corporate
and Other Taxable Bonds
The holdings in this category include
794 securities in a gross unrealized loss position aggregating $2,538 million.
The aggregate severity of the unrealized losses was 25.4% of amortized
cost.
The Corporate and Other Taxable Bonds
in an unrealized loss position across industry sectors and by rating
distribution are as follows:
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
Unrealized
|
|
December
31, 2008
|
|
Cost
|
|
|
Fair
Value
|
|
|
Loss
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications
|
|
$ |
1,408 |
|
|
$ |
1,088 |
|
|
$ |
320 |
|
Consumer,
Cyclical
|
|
|
1,372 |
|
|
|
947 |
|
|
|
425 |
|
Consumer,
Non-cyclical
|
|
|
928 |
|
|
|
761 |
|
|
|
167 |
|
Energy
|
|
|
1,090 |
|
|
|
867 |
|
|
|
223 |
|
Financial
|
|
|
2,229 |
|
|
|
1,509 |
|
|
|
720 |
|
Industrial
|
|
|
843 |
|
|
|
616 |
|
|
|
227 |
|
Utilities
|
|
|
1,285 |
|
|
|
1,028 |
|
|
|
257 |
|
Other
|
|
|
819 |
|
|
|
620 |
|
|
|
199 |
|
Total
|
|
$ |
9,974 |
|
|
$ |
7,436 |
|
|
$ |
2,538 |
|
Notes to
Consolidated Financial Statements
Note
3. Investments – (Continued)
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
Unrealized
|
|
December
31, 2008
|
|
Cost
|
|
|
Fair
Value
|
|
|
Loss
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
$ |
116 |
|
|
$ |
99 |
|
|
$ |
17 |
|
AA
|
|
|
156 |
|
|
|
138 |
|
|
|
18 |
|
A
|
|
|
2,223 |
|
|
|
1,769 |
|
|
|
454 |
|
BBB
|
|
|
4,335 |
|
|
|
3,303 |
|
|
|
1,032 |
|
Non-investment
grade
|
|
|
3,144 |
|
|
|
2,127 |
|
|
|
1,017 |
|
Total
|
|
$ |
9,974 |
|
|
$ |
7,436 |
|
|
$ |
2,538 |
|
The Company has invested in
securities with characteristics of both debt and equity investments, often
referred to as hybrid debt securities. Such securities are typically issued with
long or extendable maturity dates, may provide for the ability to defer interest
payments without defaulting and are usually lower in the capital structure of
the issuer than traditional bonds. The financial industry sector presented above
includes hybrid debt securities with an aggregate fair value of $595 million and
an aggregate amortized cost of $1,004 million.
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. 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 December 31, 2008. For the year ended December 31,
2008, there were OTTI losses of $585 million recorded on corporate and other
taxable bonds.
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. Gross unrealized losses in
this category include 85.0% from securities issued by financial institutions,
8.0% from utilities and 7.0% from communications. The holdings in this category
include 40 securities in a gross unrealized loss position aggregating $362
million, with 93.0% of these unrealized losses attributable to non-redeemable
preferred stocks.
Preferred stocks by ratings
distribution is as follows:
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
Unrealized
|
|
December
31, 2008
|
|
Cost
|
|
|
Fair
Value
|
|
|
Loss
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
$ |
338 |
|
|
$ |
217 |
|
|
$ |
121 |
|
BBB
|
|
|
537 |
|
|
|
324 |
|
|
|
213 |
|
Non-investment
grade
|
|
|
66 |
|
|
|
38 |
|
|
|
28 |
|
Total
|
|
$ |
941 |
|
|
$ |
579 |
|
|
$ |
362 |
|
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
Notes to
Consolidated Financial Statements
Note
3. Investments – (Continued)
circumstances,
the remaining issuers in this sector with unrealized losses 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 December 31, 2008. This evaluation was
made on the basis that these securities possess characteristics similar to debt
securities. For the year ended December 31, 2008, there were OTTI losses of $264
million recorded on preferred stock, primarily on Fannie Mae and Freddie
Mac.
Contractual
Maturity
The following table summarizes
available-for-sale fixed maturity securities by contractual maturity at December
31, 2008 and 2007. Actual maturities may differ from contractual maturities
because certain securities may be called or prepaid with or without call or
prepayment penalties. Securities not due at a single date are allocated based on
weighted average life.
|
|
2008
|
|
|
2007
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
Amortized
|
|
|
Estimated
|
|
December
31
|
|
Cost
|
|
|
Fair
Value
|
|
|
Cost
|
|
|
Fair
Value
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$ |
3,105 |
|
|
$ |
2,707 |
|
|
$ |
2,685 |
|
|
$ |
2,678 |
|
Due
after one year through five years
|
|
|
10,295 |
|
|
|
9,210 |
|
|
|
12,219 |
|
|
|
12,002 |
|
Due
after five years through ten years
|
|
|
5,929 |
|
|
|
4,822 |
|
|
|
6,150 |
|
|
|
6,052 |
|
Due
after ten years
|
|
|
14,825 |
|
|
|
12,147 |
|
|
|
13,158 |
|
|
|
13,349 |
|
Total
|
|
$ |
34,154 |
|
|
$ |
28,886 |
|
|
$ |
34,212 |
|
|
$ |
34,081 |
|
As of December 31, 2008 and 2007, the
Company did not hold any non-income producing fixed maturity securities. As of
December 31, 2008, no investments, other than investments in U.S. Treasury and
U.S. Government agency securities, exceeded 10.0% of shareholders’ equity. As of
December 31, 2007, no investments exceeded 10.0% of shareholders’
equity.
Limited
Partnerships
The carrying value of limited
partnerships as of December 31, 2008 and 2007 was $1.8 billion and $2.3
billion.At December 31, 2008, limited partnerships comprising 44.0% of the total
carrying value are reported on a current basis through December 31, 2008 with no
reporting lag, 41.6% are reported on a one month lag and the remainder are
reported on more than a one month lag. As of December 31, 2008 and 2007, the
Company had 85 and 88 active limited partnership investments. The number of
limited partnerships held and the strategies employed provide diversification to
the limited partnership portfolio and the overall invested asset portfolio. Of
the limited partnerships held, 89.5% or $1.6 billion in carrying value at
December 31, 2008 and 91.2% or $2.1 billion at December 31, 2007 employ
strategies that generate returns through investing in securities that are
marketable while engaging in various risk management techniques primarily in
fixed and public equity markets. Some of these limited partnership investment
strategies may include low levels of leverage and hedging that potentially
introduce more volatility and risk to the partnership returns. Limited
partnerships representing 7.1% or $126 million at December 31, 2008 and 5.8% or
$133 million at December 31, 2007 were invested in private equity. The remaining
3.4% or $61 million at December 31, 2008 and 3.1% or $71 million at December 31,
2007 were invested in various other partnerships including real estate. The ten
largest limited partnership positions held totaled $915 million and $1.2 billion
as of December 31, 2008 and 2007. Based on the most recent information available
regarding the Company’s percentage ownership of the individual limited
partnerships, the carrying value and related income reflected in the Company’s
2008 and 2007 Consolidated Financial Statements represents 3.4% and 4.3% of the
aggregate partnership equity and 3.1% and 2.2% of the changes in partnership
equity for all limited partnership investments.
Notes to
Consolidated Financial Statements
Note
3. Investments – (Continued)
Investment
Commitments
The Company’s investments in limited
partnerships contain withdrawal provisions that typically require advanced
written notice of up to 90 days for withdrawals. As of December 31, 2008,
the Company had committed $302 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 December 31, 2008, the Company had commitments to
purchase $16 million and sell $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 Balance Sheets, while any
unfunded amounts are not recorded until a draw is made under the loan facility.
As of December 31, 2008, the Company had obligations on unfunded bank loan
participations in the amount of $19 million.
Investments
on Deposit
CNA may from time to time invest in
securities that may be restricted in whole or in part. As of December 31,
2008 and 2007, CNA did not hold any significant positions in investments whose
sale was restricted.
Cash and securities with carrying
values of approximately $2.1 billion and $2.5 billion were deposited by CNA’s
insurance subsidiaries under requirements of regulatory authorities as of
December 31, 2008 and 2007.
Cash and securities with carrying
values of $10 million and $8 million were deposited with financial institutions
as collateral for letters of credit as of December 31, 2008 and 2007. In
addition, cash and securities were deposited in trusts with financial
institutions to secure reinsurance and other obligations with various third
parties. The carrying values of these deposits were approximately $284 million
and $323 million as of December 31, 2008 and 2007.
Note
4. Fair Value
Fair value is the price that would be
received upon sale of an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The following
fair value hierarchy is used in selecting inputs, with the highest priority
given to Level 1, as these are the most transparent or reliable:
|
·
|
Level
1 – Quoted prices for identical instruments in active
markets.
|
|
·
|
Level
2 – Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs are observable in
active markets.
|
|
·
|
Level
3 – Valuations derived from valuation techniques in which one or more
significant inputs are not
observable.
|
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
Notes to
Consolidated Financial Statements
Note
4. Fair Value – (Continued)
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 are included in Other assets. Assets and liabilities measured at fair
value on a recurring basis are summarized below:
December
31, 2008
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities
|
|
$ |
2,358 |
|
|
$ |
24,383 |
|
|
$ |
2,710 |
|
|
$ |
29,451 |
|
Equity
securities
|
|
|
881 |
|
|
|
94 |
|
|
|
210 |
|
|
|
1,185 |
|
Short
term investments
|
|
|
5,421 |
|
|
|
608 |
|
|
|
|
|
|
|
6,029 |
|
Receivables
|
|
|
|
|
|
|
182 |
|
|
|
40 |
|
|
|
222 |
|
Life
settlement contracts
|
|
|
|
|
|
|
|
|
|
|
129 |
|
|
|
129 |
|
Separate
account business
|
|
|
40 |
|
|
|
306 |
|
|
|
38 |
|
|
|
384 |
|
Payable
to brokers
|
|
|
(168 |
) |
|
|
(260 |
) |
|
|
(112 |
) |
|
|
(540 |
) |
Discontinued
operations investments, included in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued
operations
|
|
|
83 |
|
|
|
59 |
|
|
|
15 |
|
|
|
157 |
|
Non-financial instruments such as real
estate, deferred acquisition costs, property and equipment, deferred income
taxes and intangibles, and certain financial instruments such as insurance
reserves and leases are excluded from the fair value disclosures. Therefore, the
fair value amounts disclosed in this note cannot be aggregated to determine the
underlying economic value of the Company.
The table below presents a
reconciliation for all assets and liabilities measured at fair value on a
recurring basis using significant unobservable inputs (Level 3):
|
|
Fixed
|
|
|
|
|
|
|
|
|
Life
|
|
|
Separate
|
|
|
Liabilities
of
|
|
|
Derivative
|
|
|
|
Maturity
|
|
|
Equity
|
|
|
Short
Term
|
|
|
Settlement
|
|
|
Account
|
|
|
Discontinued
|
|
|
Financial
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Investments
|
|
|
Contracts
|
|
|
Business
|
|
|
Operations
|
|
|
Instruments,
Net
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2008
|
|
$ |
2,909 |
|
|
$ |
199 |
|
|
$ |
85 |
|
|
$ |
115 |
|
|
$ |
30 |
|
|
$ |
42 |
|
|
$ |
(19 |
) |
Total
net realized gains(losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and net change in
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains (losses) on
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Net income
(loss)
|
|
|
(412 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
(1 |
) |
|
|
(16 |
) |
Included in
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income (loss)
|
|
|
(505 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
36 |
|
Purchases,
sales, issuances and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
settlements
|
|
|
(152 |
) |
|
|
23 |
|
|
|
|
|
|
|
(34 |
) |
|
|
(18 |
) |
|
|
(4 |
) |
|
|
(73 |
) |
Net
transfers in (out) of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
870 |
|
|
|
(1 |
) |
|
|
(85 |
) |
|
|
|
|
|
|
26 |
|
|
|
(17 |
) |
|
|
|
|
Balance,
December 31, 2008
|
|
$ |
2,710 |
|
|
$ |
210 |
|
|
$ |
- |
|
|
$ |
129 |
|
|
$ |
38 |
|
|
$ |
15 |
|
|
$ |
(72 |
) |
Notes to
Consolidated Financial Statements
Note
4. Fair Value – (Continued)
The table below summarizes 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:
|
|
Fixed
|
|
|
|
|
|
Life
|
|
|
Liabilities
of
|
|
|
Derivative
|
|
|
|
|
|
|
Maturity
|
|
|
Equity
|
|
|
Settlement
|
|
|
Discontinued
|
|
|
Financial
|
|
|
|
|
Year
Ended December 31, 2008
|
|
Securities
|
|
|
Securities
|
|
|
Contracts
|
|
|
Operations
|
|
|
Instruments,
Net
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment loss
|
|
$ |
(28 |
) |
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
|
$ |
(29 |
) |
Investment
losses
|
|
|
(384 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
|
$ |
(10 |
) |
|
|
(410 |
) |
Other
revenues
|
|
|
|
|
|
|
|
|
|
$ |
48 |
|
|
|
|
|
|
(6 |
) |
|
|
42 |
|
Discontinued
operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1 |
) |
|
|
|
|
|
|
(1 |
) |
Total
|
|
$ |
(412 |
) |
|
$ |
(17 |
) |
|
$ |
48 |
|
|
$ |
(1 |
) |
|
$ |
(16 |
) |
|
$ |
(398 |
) |
The table below summarizes changes in
unrealized gains or losses recorded in Net income (loss) for Level 3 assets and
liabilities still held at December 31, 2008:
|
|
Fixed
|
|
|
|
|
|
Life
|
|
|
Derivative
|
|
|
|
|
|
|
Maturity
|
|
|
Equity
|
|
|
Settlement
|
|
|
Financial
|
|
|
|
|
Year
Ended December 31, 2008
|
|
Securities
|
|
|
Securities
|
|
|
Contracts
|
|
|
Instruments,
Net
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment loss
|
|
$ |
(21 |
) |
|
|
|
|
|
|
|
|
|
|
$ |
(21 |
) |
Investment
losses
|
|
|
(370 |
) |
|
$ |
(4 |
) |
|
|
|
|
$ |
(89 |
) |
|
|
(463 |
) |
Other
revenues
|
|
|
|
|
|
|
|
|
|
$ |
17 |
|
|
|
|
|
|
|
17 |
|
Total
|
|
$ |
(391 |
) |
|
$ |
(4 |
) |
|
$ |
17 |
|
|
$ |
(89 |
) |
|
$ |
(467 |
) |
For the year ended December 31, 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. Unobservable inputs include the maturity
assumption.
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 maturity 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 87.6% 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.
Notes to
Consolidated Financial Statements
Note
4. Fair Value – (Continued)
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
forward rates. Over-the-counter derivatives, principally credit default and
interest rate swaps, and options are valued using inputs including broker/dealer
quotes and are classified within Level 2 or Level 3 of the valuation hierarchy,
depending on the amount of transparency as to whether these quotes are based on
information that is observable in the marketplace.
Short
Term Investments
The valuation of securities that are
actively traded or have quoted prices are classified as Level 1. These
securities include money market funds, repurchase agreements and U.S. 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.
Assets
and Liabilities Not Measured at Fair Value
The Company did not have any
financial instrument assets which are not measured at fair value. The carrying
amount and estimated fair value of the Company’s financial instrument
liabilities which are not measured at fair value on the Consolidated Balance
Sheets are listed in the table below.
December
31
|
|
2008
|
|
|
2007
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair
Value
|
|
|
Amount
|
|
|
Fair
Value
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
deposits and annuity contracts
|
|
$ |
111 |
|
|
$ |
113 |
|
|
$ |
826 |
|
|
$ |
826 |
|
Short
term debt
|
|
|
71 |
|
|
|
71 |
|
|
|
358 |
|
|
|
358 |
|
Long
term debt
|
|
|
8,187 |
|
|
|
7,166 |
|
|
|
6,900 |
|
|
|
6,846 |
|
The following methods and assumptions
were used in estimating the fair value of these financial
liabilities.
Premium deposits and annuity contracts
were valued based on cash surrender values, estimated fair values or
policyholder liabilities, net of amounts ceded related to sold
businesses.
Fair value of debt was based on
quoted market prices when available. When quoted market prices were not
available, the fair value for debt was based on quoted market prices of
comparable instruments adjusted for differences between the quoted instruments
and the instruments being valued or is estimated using discounted cash flow
analyses, based on current incremental borrowing rates for similar types of
borrowing arrangements.
Notes to
Consolidated Financial Statements
Note
5. Derivative Financial Instruments
The Company invests in certain
derivative instruments for a number of purposes, including: (i) asset and
liability management activities, (ii) income enhancements for its portfolio
management strategy, and (iii) 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 the Company’s
portfolio strategy.
The Company does not believe that any of
the derivative instruments utilized by it are unusually complex, nor do these
instruments contain embedded leverage features which would expose the Company to
a higher degree of risk.
The Company uses derivatives in the
normal course of business, primarily in an attempt to reduce its exposure to
market risk (principally interest rate risk, equity stock price risk, commodity
price risk and foreign currency risk) stemming from various assets and
liabilities and credit risk (the ability of an obligor to make timely payment of
principal and/or interest). The Company’s principal objective under such risk
strategies is to achieve the desired reduction in economic risk, even if the
position will not receive hedge accounting treatment.
CNA’s use of derivatives is limited by
statutes and regulations promulgated by the various regulatory bodies to which
it is subject, and by its own derivative policy. The derivative policy limits
the authorization to initiate derivative transactions to certain personnel.
Derivatives entered into for hedging, regardless of the choice to designate
hedge accounting, shall have a maturity that effectively correlates to the
underlying hedged asset or liability. The policy prohibits the use of
derivatives containing greater than one-to-one leverage with respect to changes
in the underlying price, rate or index. The policy also prohibits the use of
borrowed funds, including funds obtained through securities lending, to engage
in derivative transactions.
The Company has exposure to economic
losses due to interest rate risk arising from changes in the level or volatility
of interest rates. The Company attempts to mitigate its exposure to interest
rate risk through portfolio management, which includes rebalancing its existing
portfolios of assets and liabilities, as well as changing the characteristics of
investments to be purchased or sold in the future. In addition, various
derivative financial instruments are used to modify the interest rate risk
exposures of certain assets and liabilities. These strategies include the use of
interest rate swaps, interest rate caps and floors, options, futures, forwards
and commitments to purchase securities. These instruments are generally used to
lock interest rates or market values, to shorten or lengthen durations of fixed
maturity securities or investment contracts, or to hedge (on an economic basis)
interest rate risks associated with investments and variable rate debt. The
Company has used these types of instruments as designated hedges against
specific assets or liabilities on an infrequent basis.
The Company is exposed to equity price
risk as a result of its 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. The Company attempts to mitigate its exposure
to such risks by limiting its investment in any one security or index. The
Company may also manage this risk by utilizing instruments such as options,
swaps, futures and collars to protect appreciation in securities
held.
The Company has exposure to credit risk
arising from the uncertainty associated with a financial instrument obligor’s
ability to make timely principal and/or interest payments. The Company attempts
to mitigate this risk by limiting credit concentrations, practicing
diversification, and frequently monitoring the credit quality of issuers and
counterparties. In addition, the Company may utilize credit derivatives such as
credit default swaps (“CDS”) to modify the credit risk inherent in certain
investments. CDS involve a transfer of credit risk from one party to another in
exchange for periodic payments. The Company infrequently designates these types
of instruments as hedges against specific assets.
Foreign exchange rate risk arises from
the possibility that changes in foreign currency exchange rates will impact the
fair value of financial instruments denominated in a foreign currency. The
Company’s foreign transactions are primarily denominated in Australian dollars,
Brazilian reais, British pounds, Canadian dollars and the European
Notes to
Consolidated Financial Statements
Note
5. Derivative Financial Instruments – (Continued)
Monetary
Unit. The Company typically manages this risk via asset/liability currency
matching and through the use of foreign currency futures and forwards. The
Company has infrequently designated these types of instruments as hedges against
specific assets or liabilities.
In addition to the derivatives used
for risk management purposes described above, the Company will also use CDS to
sell credit protection against a specified credit event. In selling credit
protection, CDS are used to replicate fixed income securities when credit
exposure to certain issuers is not available or when it is economically
beneficial to transact in the derivative market compared to the cash market
alternative. Credit risk includes both the default event risk and market value
exposure due to fluctuations in credit spreads. In selling CDS protection, the
Company receives a periodic premium in exchange for providing credit protection
on a single name reference obligation or a credit derivative index. If there is
an event of default as defined by the CDS agreement, the Company is required to
pay the counterparty the referenced notional amount of the CDS contract and in
exchange the Company is entitled to receive the referenced defaulted security or
the cash equivalent.
At December 31, 2008, the Company had
$198 million notional value of outstanding CDS contracts where the Company sold
credit protection. The maximum payment related to these CDS contracts is $198
million assuming there is no residual value in the defaulted securities that the
Company would receive as part of the contract terminations. The current fair
value of these contracts is a liability of $82 million which represents the
amount that the Company would have to pay to exit these derivative
positions.
The table below summarizes credit
default swap contracts where the Company sold credit protection. The largest
single reference obligation in the table below represents 25.3% of the total
notional value and is rated BB.
|
|
Fair
Value of
Credit
Default
Swaps
|
|
|
Maximum
Amount of
Future
Payments under
Credit
Default Swaps
|
|
|
Weighted
Average
Years
To
Maturity
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA/AA/A
|
|
$ |
(8 |
) |
|
$ |
40 |
|
|
|
12.3 |
|
BBB
|
|
|
(4 |
) |
|
|
55 |
|
|
|
3.1 |
|
BB
|
|
|
(39 |
) |
|
|
50 |
|
|
|
8.1 |
|
B
|
|
|
(2 |
) |
|
|
8 |
|
|
|
4.1 |
|
CCC
and lower
|
|
|
(29 |
) |
|
|
45 |
|
|
|
4.5 |
|
Total
|
|
$ |
(82 |
) |
|
$ |
198 |
|
|
|
6.6 |
|
Credit exposure associated with
non-performance by the counterparties to derivative instruments is generally
limited to the uncollateralized fair value of the asset related to the
instruments recognized on the Consolidated Balance Sheets. The Company attempts
to mitigate the risk of non-performance by monitoring the creditworthiness of
counterparties and diversifying derivatives to multiple counterparties. The
Company generally requires that all over-the-counter derivative contracts be
governed by an International Swaps and Derivatives Association (“ISDA”) Master
Agreement, and exchanges collateral under the terms of these agreements with its
derivative investment counterparties depending on the amount of the exposure and
the credit rating of the counterparty. The Company does not offset its net
derivative positions against the fair value of the collateral provided. The fair
value of cash collateral provided by the Company was $99 million and $84 million
at December 31, 2008 and 2007. The fair value of cash collateral received from
counterparties was $6 million and $10 million at December 31, 2008 and
2007.
See Note 4 for information regarding
the fair value of derivative instruments and Note 1 for information regarding
the Company’s accounting policy.
Notes to
Consolidated Financial Statements
Note
5. Derivative Financial Instruments – (Continued)
The contractual or notional amounts
for derivatives are used to calculate the exchange of contractual payments under
the agreements and may not be representative of the potential for gain or loss
on these instruments. A summary of the aggregate contractual or notional amounts
and estimated fair values related to derivative financial instruments are as
follows:
December
31
|
|
2008
|
|
|
2007
|
|
|
|
Contractual/
|
|
|
|
|
|
Contractual/
|
|
|
|
|
|
|
Notional
|
|
|
Estimated
Fair Value
|
|
|
Notional
|
|
|
Estimated
Fair Value
|
|
|
|
Amount
|
|
|
Asset
|
|
|
(Liability)
|
|
|
Amount
|
|
|
Asset
|
|
|
(Liability)
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With
hedge designation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
swaps
|
|
$ |
1,600 |
|
|
|
|
|
$ |
(183 |
) |
|
$ |
1,600 |
|
|
|
|
|
$ |
(80 |
) |
Treasury rate lock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150 |
|
|
|
|
|
|
(8 |
) |
Commodities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forwards – short
|
|
|
524 |
|
|
$ |
158 |
|
|
|
(1 |
) |
|
|
596 |
|
|
$ |
36 |
|
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without
hedge designation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options – purchased
|
|
|
199 |
|
|
|
66 |
|
|
|
|
|
|
|
174 |
|
|
|
35 |
|
|
|
|
|
–
written
|
|
|
304 |
|
|
|
|
|
|
|
(62 |
) |
|
|
287 |
|
|
|
|
|
|
|
(16 |
) |
Index futures – long
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
682 |
|
|
|
|
|
|
|
(4 |
) |
–
short
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
428 |
|
|
|
|
|
|
|
|
|
Currency
forwards – long
|
|
|
229 |
|
|
|
6 |
|
|
|
(4 |
) |
|
|
376 |
|
|
|
2 |
|
|
|
(3 |
) |
– short
|
|
|
392 |
|
|
|
2 |
|
|
|
(47 |
) |
|
|
188 |
|
|
|
4 |
|
|
|
(1 |
) |
Interest
rate risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
|
963 |
|
|
|
|
|
|
|
(66 |
) |
|
|
515 |
|
|
|
|
|
|
|
(27 |
) |
Credit default swaps –
purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
protection
|
|
|
455 |
|
|
|
59 |
|
|
|
(3 |
) |
|
|
978 |
|
|
|
79 |
|
|
|
(4 |
) |
– sold
protection
|
|
|
198 |
|
|
|
|
|
|
|
(82 |
) |
|
|
276 |
|
|
|
1 |
|
|
|
(47 |
) |
Futures – long
|
|
|
1,132 |
|
|
|
|
|
|
|
|
|
|
|
1,242 |
|
|
|
|
|
|
|
|
|
–
short
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
1,685 |
|
|
|
|
|
|
|
|
|
Other
|
|
|
86 |
|
|
|
4 |
|
|
|
|
|
|
|
82 |
|
|
|
2 |
|
|
|
(1 |
) |
Total
|
|
$ |
6,158 |
|
|
$ |
295 |
|
|
$ |
(448 |
) |
|
$ |
9,259 |
|
|
$ |
159 |
|
|
$ |
(216 |
) |
Options
embedded in convertible debt securities are classified as Fixed maturity
securities in the Consolidated Balance Sheets, consistent with the host
instruments.
Notes to
Consolidated Financial Statements
Note
5. Derivative Financial Instruments – (Continued)
A summary of the recognized gains (losses) related to derivative financial
instruments without hedge designation follows:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
markets:
|
|
|
|
|
|
|
|
|
|
Options
– purchased
|
|
$ |
29 |
|
|
$ |
1 |
|
|
$ |
(16 |
) |
– written
|
|
|
(86 |
) |
|
|
12 |
|
|
|
6 |
|
Futures
– long
|
|
|
(162 |
) |
|
|
(1 |
) |
|
|
66 |
|
–
short
|
|
|
152 |
|
|
|
28 |
|
|
|
(4 |
) |
Currency
forwards – long
|
|
|
(9 |
) |
|
|
45 |
|
|
|
(2 |
) |
– short
|
|
|
(21 |
) |
|
|
(36 |
) |
|
|
5 |
|
Interest
rate risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
|
(60 |
) |
|
|
11 |
|
|
|
19 |
|
Credit
default swaps – purchased protection
|
|
|
103 |
|
|
|
121 |
|
|
|
|
|
– sold protection
|
|
|
(57 |
) |
|
|
(66 |
) |
|
|
|
|
Futures – long
|
|
|
52 |
|
|
|
4 |
|
|
|
(3 |
) |
– short
|
|
|
(36 |
) |
|
|
(47 |
) |
|
|
27 |
|
Commodities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forwards –
short
|
|
|
|
|
|
|
32 |
|
|
|
|
|
Other
|
|
|
13 |
|
|
|
7 |
|
|
|
(4 |
) |
Total
|
|
$ |
(82 |
) |
|
$ |
111 |
|
|
$ |
94 |
|
Cash flow hedges − A significant
portion of the Company’s hedge strategies represents cash flow hedges of the
variable price risk associated with the purchase and sale of natural gas and
other energy-related products. The Company and certain of its subsidiaries also
use interest rate swaps and Treasury rate locks to hedge its exposure to
variable interest rates or risk attributable to changes in interest rates on
long term debt. Any ineffectiveness is recorded currently in the Consolidated
Statements of Income. The effective portion of the hedges is amortized to
interest expense over the term of the related notes. For each of the years ended
December 31, 2008, 2007 and 2006, the net amounts recognized due to
ineffectiveness were less than $1 million.
The following table summarizes the
net derivative gains or losses included in Accumulated other comprehensive
income (loss) and reclassified into Net income for derivatives designated as
cash flow hedges:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1
|
|
$ |
(94 |
) |
|
$ |
8 |
|
|
|
|
Net
gains (losses) from change in fair value of derivatives
|
|
|
(41 |
) |
|
|
(101 |
) |
|
$ |
19 |
|
Net
losses (gains) realized in Net income
|
|
|
109 |
|
|
|
(1 |
) |
|
|
(11 |
) |
Balance,
December 31
|
|
$ |
(26 |
) |
|
$ |
(94 |
) |
|
$ |
8 |
|
The Company also enters into short sales
as part of its portfolio management strategy. Short sales are commitments to
sell a financial instrument not owned at the time of sale, usually done in
anticipation of a price decline. These sales resulted in proceeds of $120
million and $91 million with fair value liabilities of $106 million and $84
million at December 31, 2008 and 2007, respectively. These positions are marked
to market and investment gains or losses are included in the Consolidated
Statements of Income.
Note
6. 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.
Notes to
Consolidated Financial Statements
Note
6. Earnings Per Share – (Continued)
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.
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:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock
|
|
|
5,252,011 |
|
|
|
352,583 |
|
|
|
59,744 |
|
Former
Carolina Group stock
|
|
|
255,983 |
|
|
|
50,684 |
|
|
|
12,650 |
|
The attribution of income to each class
of common stock was as follows:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net
income
|
|
$ |
4,530 |
|
|
$ |
2,489 |
|
|
$ |
2,491 |
|
Less income attributable to
former Carolina Group stock
|
|
|
211 |
|
|
|
533 |
|
|
|
416 |
|
Income attributable to Loews
common stock
|
|
$ |
4,319 |
|
|
$ |
1,956 |
|
|
$ |
2,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former
Carolina Group stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to former
Carolina Group stock
|
|
$ |
339 |
|
|
$ |
855 |
|
|
$ |
760 |
|
Weighted average economic
interest of the former Carolina Group
|
|
|
62.4 |
% |
|
|
62.4 |
% |
|
|
54.8 |
% |
Income attributable to former
Carolina Group stock
|
|
$ |
211 |
|
|
$ |
533 |
|
|
$ |
416 |
|
The following is a reconciliation of
basic weighted shares outstanding to diluted weighted shares:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding-basic
|
|
|
477.23 |
|
|
|
534.79 |
|
|
|
552.68 |
|
Stock
options and SARs (a)
|
|
|
- |
|
|
|
1.21 |
|
|
|
0.86 |
|
Weighted
average shares outstanding-diluted
|
|
|
477.23 |
|
|
|
536.00 |
|
|
|
553.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former
Carolina Group stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding-basic
|
|
|
108.47 |
|
|
|
108.43 |
|
|
|
93.37 |
|
Stock
options and SARs
|
|
|
0.13 |
|
|
|
0.14 |
|
|
|
0.10 |
|
Weighted
average shares outstanding-diluted
|
|
|
108.60 |
|
|
|
108.57 |
|
|
|
93.47 |
|
(a)
|
For
the year ended December 31, 2008, common equivalent shares, consisting
solely of stock options and SARs, are excluded from the calculation of
diluted net income per share as their effects are
antidilutive.
|
Notes to
Consolidated Financial Statements
Note
7. Receivables
December
31
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
$ |
7,761 |
|
|
$ |
8,689 |
|
Other
insurance
|
|
|
2,039 |
|
|
|
2,284 |
|
Receivable
from brokers
|
|
|
936 |
|
|
|
163 |
|
Accrued
investment income
|
|
|
360 |
|
|
|
340 |
|
Federal
income taxes
|
|
|
382 |
|
|
|
|
|
Other
|
|
|
844 |
|
|
|
791 |
|
Total
|
|
|
12,322 |
|
|
|
12,267 |
|
Less: allowance
for doubtful accounts on reinsurance receivables
|
|
|
366 |
|
|
|
461 |
|
allowance for other doubtful
accounts
|
|
|
284 |
|
|
|
337 |
|
Receivables
|
|
$ |
11,672 |
|
|
$ |
11,469 |
|
Note
8. Property, Plant and Equipment
December
31
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
70 |
|
|
$ |
70 |
|
Buildings
and building equipment
|
|
|
635 |
|
|
|
670 |
|
Offshore
drilling equipment
|
|
|
5,649 |
|
|
|
4,540 |
|
Machinery
and equipment
|
|
|
1,375 |
|
|
|
1,313 |
|
Pipeline
equipment
|
|
|
3,978 |
|
|
|
2,445 |
|
Natural
gas and oil proved and unproved properties
|
|
|
3,345 |
|
|
|
2,869 |
|
Construction
in process
|
|
|
2,210 |
|
|
|
1,423 |
|
Leaseholds
and leasehold improvements
|
|
|
75 |
|
|
|
79 |
|
Total
|
|
|
17,337 |
|
|
|
13,409 |
|
Less
accumulated depreciation, depletion and amortization
|
|
|
4,461 |
|
|
|
3,191 |
|
Property,
plant and equipment
|
|
$ |
12,876 |
|
|
$ |
10,218 |
|
Depreciation, depletion and amortization
(“DD&A”) expense, including amortization of intangibles, and capital
expenditures, are as follows:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
Capital
|
|
|
|
|
|
Capital
|
|
|
|
DD&A
|
|
|
Expend.
|
|
|
DD&A
|
|
|
Expend.
|
|
|
DD&A
|
|
|
Expend.
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial
|
|
$ |
66 |
|
|
$ |
104 |
|
|
$ |
53 |
|
|
$ |
160 |
|
|
$ |
42 |
|
|
$ |
131 |
|
Diamond
Offshore
|
|
|
291 |
|
|
|
683 |
|
|
|
241 |
|
|
|
647 |
|
|
|
207 |
|
|
|
551 |
|
HighMount
|
|
|
177 |
|
|
|
519 |
|
|
|
67 |
|
|
|
185 |
|
|
|
|
|
|
|
|
|
Boardwalk
Pipeline
|
|
|
127 |
|
|
|
2,812 |
|
|
|
80 |
|
|
|
1,214 |
|
|
|
75 |
|
|
|
197 |
|
Loews
Hotels
|
|
|
26 |
|
|
|
15 |
|
|
|
26 |
|
|
|
27 |
|
|
|
25 |
|
|
|
21 |
|
Corporate
and other
|
|
|
5 |
|
|
|
30 |
|
|
|
4 |
|
|
|
14 |
|
|
|
3 |
|
|
|
4 |
|
Total
|
|
$ |
692 |
|
|
$ |
4,163 |
|
|
$ |
471 |
|
|
$ |
2,247 |
|
|
$ |
352 |
|
|
$ |
904 |
|
Capitalized interest related to the
construction and upgrade of qualifying assets amounted to approximately $113
million, $56 million and $12 million for the years ended December 31, 2008, 2007
and 2006.
Notes to
Consolidated Financial Statements
Note
8. Property, Plant and Equipment – (Continued)
Diamond
Offshore Construction Projects
At December 31, 2007, Construction in
process included $187 million related to the major upgrade of the Ocean Monarch to
ultra-deepwater service and $266 million related to the construction of two new
jack-up drilling units, the Ocean Scepter and the Ocean Shield. As of December
31, 2008, these projects had been completed and the related assets placed in
service. At December 31, 2008, there were no ongoing construction
projects.
HighMount
Impairment of Natural Gas and Oil Properties
At December 31, 2008, HighMount
recorded a non-cash ceiling test impairment charge of $691 million ($440 million
after tax) related to its carrying value of natural gas and oil properties. The
impairment was recorded as a credit to Accumulated depreciation, depletion and
amortization. The write-down was the result of declines in commodity prices and
negative revisions in HighMount’s proved reserve quantities during 2008. The
negative revisions were primarily a result of lower commodity prices. Had the
effects of HighMount’s cash flow hedges not been considered in calculating the
ceiling limitation, the impairment would have been $873 million ($555 million
after tax). No such impairment was required during the year ended December 31,
2007.
Costs
Not Being Amortized
HighMount excludes from amortization
the cost of unproved properties, the cost of exploratory wells in progress and
major development projects in progress. Natural gas and oil property and
equipment costs not being amortized as of December 31, 2008, are as follows, by
the year in which such costs were incurred:
|
|
Total
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
costs
|
|
$ |
380 |
|
|
$ |
12 |
|
|
$ |
368 |
|
Exploration
costs
|
|
|
9 |
|
|
|
6 |
|
|
|
3 |
|
Capitalized
interest
|
|
|
33 |
|
|
|
24 |
|
|
|
9 |
|
Total
excluded costs
|
|
$ |
422 |
|
|
$ |
42 |
|
|
$ |
380 |
|
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. Boardwalk Pipeline also placed in service the pipeline
assets and two compressor stations related to the Southeast Expansion project,
the pipeline assets associated with the first 66 miles of the Fayetteville
Lateral and Phase III of the western Kentucky storage expansion. Due to these
expansion projects being placed in service, approximately $1.5 billion was
transferred from Construction in process to Pipeline equipment during 2008. The
assets will generally be depreciated over a term of 35 years.
Note
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
Notes to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves – (Continued)
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. CNA reported catastrophe losses, net of reinsurance, of $358 million,
$78 million and $59 million for the years ended December 31, 2008, 2007 and 2006
for events occurring in those years. The catastrophe losses in 2008 related
primarily to Hurricanes Gustav and Ike. There can be no assurance that CNA’s
ultimate cost for catastrophes will not exceed current estimates.
The table below provides a
reconciliation between beginning and ending claim and claim adjustment expense
reserves, including claim and claim adjustment expense reserves of the life
company.
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves,
beginning of year:
|
|
|
|
|
|
|
|
|
|
Gross
|
|
$ |
28,588 |
|
|
$ |
29,636 |
|
|
$ |
30,938 |
|
Ceded
|
|
|
7,056 |
|
|
|
8,191 |
|
|
|
10,605 |
|
Net
reserves, beginning of year
|
|
|
21,532 |
|
|
|
21,445 |
|
|
|
20,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
incurred claim and claim adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for insured events of
current year
|
|
|
5,193 |
|
|
|
4,939 |
|
|
|
4,840 |
|
(Decrease) increase in
provision for insured events of prior years
|
|
|
(5 |
) |
|
|
231 |
|
|
|
361 |
|
Amortization of
discount
|
|
|
123 |
|
|
|
120 |
|
|
|
121 |
|
Total
net incurred (a)
|
|
|
5,311 |
|
|
|
5,290 |
|
|
|
5,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
payments attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
events
|
|
|
1,034 |
|
|
|
867 |
|
|
|
835 |
|
Prior year
events
|
|
|
4,328 |
|
|
|
4,447 |
|
|
|
3,439 |
|
Reinsurance recoverable against
net reserve transferred
|
|
|
|
|
|
|
|
|
|
|
|
|
under
retroactive reinsurance agreements
|
|
|
(10 |
) |
|
|
(17 |
) |
|
|
(13 |
) |
Total
net payments (b)
|
|
|
5,352 |
|
|
|
5,297 |
|
|
|
4,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(186 |
) |
|
|
94 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
reserves, end of year
|
|
|
21,305 |
|
|
|
21,532 |
|
|
|
21,445 |
|
Ceded
reserves, end of year
|
|
|
6,288 |
|
|
|
7,056 |
|
|
|
8,191 |
|
Gross
reserves, end of year
|
|
$ |
27,593 |
|
|
$ |
28,588 |
|
|
$ |
29,636 |
|
(a)
|
Total
net incurred above does not agree to Insurance claims and policyholders’
benefits as reflected in the Consolidated Statements of Income due to
expenses incurred related to uncollectible reinsurance and loss deductible
receivables and benefit expenses related to future policy benefits and
policyholders’ funds which are not reflected in the table
above.
|
(b)
|
In
2006, net payments were decreased by $935 due to the impact of significant
commutations. See Note 19 for further discussion related to
commutations.
|
Notes to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves – (Continued)
The changes in provision for insured
events of prior years (net prior year claim and claim adjustment expense reserve
development) were as follows:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos
and environmental pollution
|
|
$ |
110 |
|
|
$ |
7 |
|
|
|
|
Other
|
|
|
(117 |
) |
|
|
213 |
|
|
$ |
332 |
|
Property
and casualty reserve development
|
|
|
(7 |
) |
|
|
220 |
|
|
|
332 |
|
Life
reserve development in life company
|
|
|
2 |
|
|
|
11 |
|
|
|
29 |
|
Total
|
|
$ |
(5 |
) |
|
$ |
231 |
|
|
$ |
361 |
|
The following tables summarize the gross
and net carried reserves:
|
|
|
|
|
|
|
|
Life
&
|
|
|
|
|
|
|
|
|
|
Standard
|
|
|
Specialty
|
|
|
Group
|
|
|
Other
|
|
|
|
|
December
31, 2008
|
|
Lines
|
|
|
Lines
|
|
|
Non-Core
|
|
|
Insurance
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Case Reserves
|
|
$ |
6,158 |
|
|
$ |
2,719 |
|
|
$ |
2,473 |
|
|
$ |
1,823 |
|
|
$ |
13,173 |
|
Gross
IBNR Reserves
|
|
|
5,890 |
|
|
|
5,563 |
|
|
|
389 |
|
|
|
2,578 |
|
|
|
14,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Gross Carried Claim and Claim
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment Expense
Reserves
|
|
$ |
12,048 |
|
|
$ |
8,282 |
|
|
$ |
2,862 |
|
|
$ |
4,401 |
|
|
$ |
27,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Case Reserves
|
|
$ |
4,995 |
|
|
$ |
2,149 |
|
|
$ |
1,656 |
|
|
$ |
1,126 |
|
|
$ |
9,926 |
|
Net
IBNR Reserves
|
|
|
4,875 |
|
|
|
4,694 |
|
|
|
249 |
|
|
|
1,561 |
|
|
|
11,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Net Carried Claim and Claim
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment Expense
Reserves
|
|
$ |
9,870 |
|
|
$ |
6,843 |
|
|
$ |
1,905 |
|
|
$ |
2,687 |
|
|
$ |
21,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Case Reserves
|
|
$ |
5,988 |
|
|
$ |
2,585 |
|
|
$ |
2,554 |
|
|
$ |
2,159 |
|
|
$ |
13,286 |
|
Gross
IBNR Reserves
|
|
|
6,060 |
|
|
|
5,818 |
|
|
|
473 |
|
|
|
2,951 |
|
|
|
15,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Gross Carried Claim and Claim
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment Expense
Reserves
|
|
$ |
12,048 |
|
|
$ |
8,403 |
|
|
$ |
3,027 |
|
|
$ |
5,110 |
|
|
$ |
28,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Case Reserves
|
|
$ |
4,750 |
|
|
$ |
2,090 |
|
|
$ |
1,583 |
|
|
$ |
1,328 |
|
|
$ |
9,751 |
|
Net
IBNR Reserves
|
|
|
5,170 |
|
|
|
4,527 |
|
|
|
297 |
|
|
|
1,787 |
|
|
|
11,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Net Carried Claim and Claim
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment Expense
Reserves
|
|
$ |
9,920 |
|
|
$ |
6,617 |
|
|
$ |
1,880 |
|
|
$ |
3,115 |
|
|
$ |
21,532 |
|
The following provides discussion of
CNA’s Asbestos and Environmental Pollution (“A&E”) and core
reserves.
A&E
Reserves
CNA’s property and casualty insurance
subsidiaries have actual and potential exposures related to A&E
claims.
Establishing reserves for A&E claim
and claim adjustment expenses is subject to uncertainties that are greater than
those presented by other claims. Traditional actuarial methods and techniques
employed to estimate the ultimate cost of claims for more traditional property
and casualty exposures are less precise in estimating claim and claim adjustment
expense reserves for A&E, particularly in an environment of emerging or
potential claims and
Notes to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves – (Continued)
coverage
issues that arise from industry practices and legal, judicial and social
conditions. Therefore, these traditional actuarial methods and techniques are
necessarily supplemented with additional estimating techniques and
methodologies, many of which involve significant judgments that are required of
management. Accordingly, a high degree of uncertainty remains for CNA’s ultimate
liability for A&E claim and claim adjustment expenses.
In addition to the difficulties
described above, estimating the ultimate cost of both reported and unreported
A&E claims is subject to a higher degree of variability due to a number of
additional factors, including among others: the number and outcome of direct
actions against CNA; coverage issues, including whether certain costs are
covered under the policies and whether policy limits apply; allocation of
liability among numerous parties, some of whom may be in bankruptcy proceedings,
and in particular the application of “joint and several” liability to specific
insurers on a risk; inconsistent court decisions and developing legal theories;
continuing aggressive tactics of plaintiffs’ lawyers; the risks and lack of
predictability inherent in major litigation; enactment of state and federal
legislation to address asbestos claims; increases and decreases in asbestos and
environmental pollution claims which cannot now be anticipated; increases and
decreases in costs to defend asbestos and pollution claims; changing liability
theories against CNA’s policyholders in environmental matters; possible
exhaustion of underlying umbrella and excess coverage; and future developments
pertaining to CNA’s ability to recover reinsurance for asbestos and pollution
claims.
CNA has annually performed ground up
reviews of all open A&E claims to evaluate the adequacy of its A&E
reserves. In performing its comprehensive ground up analysis, CNA considers
input from its professionals with direct responsibility for the claims, inside
and outside counsel with responsibility for representation of CNA and its
actuarial staff. These professionals review, among many factors, the
policyholder’s present and predicted future exposures, including such factors as
claims volume, trial conditions, prior settlement history, settlement demands
and defense costs; the impact of asbestos defendant bankruptcies on the
policyholder; the policies issued by CNA, including such factors as aggregate or
per occurrence limits, whether the policy is primary, umbrella or excess, and
the existence of policyholder retentions and/or deductibles; the existence of
other insurance; and reinsurance arrangements.
The following table provides data
related to CNA’s A&E claim and claim adjustment expense
reserves.
December
31
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Environmental
|
|
|
|
|
|
Environmental
|
|
|
|
Asbestos
|
|
|
Pollution
|
|
|
Asbestos
|
|
|
Pollution
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
reserves
|
|
$ |
2,112 |
|
|
$ |
392 |
|
|
$ |
2,352 |
|
|
$ |
367 |
|
Ceded
reserves
|
|
|
(910 |
) |
|
|
(130 |
) |
|
|
(1,030 |
) |
|
|
(125 |
) |
Net
reserves
|
|
$ |
1,202 |
|
|
$ |
262 |
|
|
$ |
1,322 |
|
|
$ |
242 |
|
Asbestos
CNA’s property and casualty insurance
subsidiaries have exposure to asbestos-related claims. Estimation of
asbestos-related claim and claim adjustment expense reserves involves
limitations such as inconsistency of court decisions, specific policy
provisions, allocation of liability among insurers and insureds, and additional
factors such as missing policies and proof of coverage. Furthermore, estimation
of asbestos-related claims is difficult due to, among other reasons, the
proliferation of bankruptcy proceedings and attendant uncertainties, the
targeting of a broader range of businesses and entities as defendants, the
uncertainty as to which other insureds may be targeted in the future and the
uncertainties inherent in predicting the number of future claims.
CNA recorded $27 million and $6
million of unfavorable asbestos-related net claim and claim adjustment expense
reserve development for the years ended December 31, 2008 and 2007. CNA recorded
no asbestos-related net claim and claim adjustment expense reserve development
recorded for the year ended December 31, 2006. CNA paid asbestos-related claims,
net of reinsurance recoveries, of $147 million, $136 million and $102 million
for the years ended December 31, 2008, 2007 and 2006.
Notes to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves – (Continued)
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. On July 25, 2008, the
District Court affirmed the Bankruptcy Court’s ruling. Several insurers have
appealed that ruling to the Third Circuit Court of Appeals; 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 December 30, 2008, a New York
appellate court entered a unanimous decision in favor of CNA on multiple
alternative grounds including findings that claims arising out of Keasbey’s
asbestos insulating activities are included within the products hazard/completed
operations coverage, which has been exhausted; and that the defendant claimant
class is subject to the affirmative defenses that CNA may have had against
Keasbey, barring all coverage claims. The parties have the right to seek further
appellate review of the decision.
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
Notes to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves – (Continued)
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. Burns & Roe requested a confirmation hearing before the
Bankruptcy Court and District Court jointly, and that hearing was held in
December of 2008. There has been no ruling. 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: (i) whether
CNA has any further responsibility to compensate claimants against Burns &
Roe under its policies and, if so, under which; (ii) whether CNA’s
responsibilities under its policies extend to a particular claimant’s entire
claim or only to a limited percentage of the claim; (iii) whether CNA’s
responsibilities under its policies are limited by the occurrence limits or
other provisions of the policies; (iv) whether certain exclusions, including
professional liability exclusions, in some of CNA’s policies apply to exclude
certain claims; (v) the extent to which claimants can establish exposure to
asbestos materials as to which Burns & Roe has any responsibility; (vi) 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; (vii) the diseases and damages alleged by such claimants; (viii)
the extent that any liability of Burns & Roe would be shared with other
potentially responsible parties; (ix) whether the Plan, which includes the
Addendum, will be approved by the Bankruptcy Court in its current form; and (x)
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: (i) 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; (ii) 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; (iii) 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; (iv) the unclear nature of the required nexus between the acts of the
defendants and the right of any particular claimant to recovery; and (v) 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.
Notes to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves – (Continued)
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. The confirmation hearing is
currently scheduled to begin in April 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: (i) 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; (ii) 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; (iii) the unclear nature of the required nexus between the acts
of the defendants and the right of any particular claimant to recovery; (iv) the
diseases and damages claimed by such claimants; (v) the extent that such
liability would be shared with other potentially responsible parties; and (vi)
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 $83 million and $1
million of unfavorable environmental pollution net claim and claim adjustment
expense reserve development for the years ended December 31, 2008 and 2007.
There was no environmental pollution net claim and claim adjustment expense
reserve development recorded for the year ended December 31, 2006. CNA paid
environmental pollution-related claims, net of reinsurance recoveries, of $63
million, $44 million and $51 million for the years ended December 31, 2008, 2007
and 2006.
Net
Prior Year Development
Changes in estimates of claim and
allocated claim adjustment expense reserves and premium accruals, net of
reinsurance, for prior years are defined as net prior year development. These
changes can be favorable or unfavorable. The following tables and discussion
include the net prior year development recorded for Standard Lines, Specialty
Lines and Other Insurance segments for the years ended December 31, 2008, 2007
and 2006. The net prior year development presented below includes premium
development due to its direct relationship to claim and claim adjustment expense
reserve development. The net prior year development presented below includes the
impact of commutations, but excludes the impact of increases or decreases in the
allowance for uncollectible reinsurance. See Note 19 for further discussion of
the provision for uncollectible reinsurance.
Unfavorable net prior year
development of $15 million, $147 million and $13 million was recorded in the
Life & Group Non-Core segment for the years ended December 31, 2008, 2007
and 2006. The 2007 net prior year development primarily related to the
settlement of the IGI contingency. The IGI contingency related to reinsurance
arrangements with respect to personal accident insurance coverages provided
between 1997 and 1999 which were the subject of arbitration proceedings. CNA
reached agreement in 2007 to settle the arbitration matter for a one-time
payment of $250 million, which resulted in an incurred loss, net of reinsurance,
of $167 million pretax.
Notes to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves – (Continued)
|
|
Standard
|
|
|
Specialty
|
|
|
Other
|
|
|
|
|
Year
Ended December 31, 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)
|
|
$ |
(34 |
) |
|
$ |
(164 |
) |
|
$ |
13 |
|
|
$ |
(185 |
) |
A&E
|
|
|
|
|
|
|
|
|
|
|
110 |
|
|
|
110 |
|
Pretax
unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development before impact of
premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
(34 |
) |
|
|
(164 |
) |
|
|
123 |
|
|
|
(75 |
) |
Pretax favorable premium
development
|
|
|
16 |
|
|
|
(20 |
) |
|
|
(1 |
) |
|
|
(5 |
) |
Total
pretax unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
$ |
(18 |
) |
|
$ |
(184 |
) |
|
$ |
122 |
|
|
$ |
(80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
unfavorable (favorable) net prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
year claim and allocated claim
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense reserve
development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
(Non-A&E)
|
|
$ |
(104 |
) |
|
$ |
(25 |
) |
|
$ |
84 |
|
|
$ |
(45 |
) |
A&E
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
7 |
|
Pretax
unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development before impact of
premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
(104 |
) |
|
|
(25 |
) |
|
|
91 |
|
|
|
(38 |
) |
Pretax favorable premium
development
|
|
|
(19 |
) |
|
|
(11 |
) |
|
|
(5 |
) |
|
|
(35 |
) |
Total
pretax unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
$ |
(123 |
) |
|
$ |
(36 |
) |
|
$ |
86 |
|
|
$ |
(73 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
unfavorable (favorable) net prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
year claim and allocated claim
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense reserve
development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
(Non-A&E)
|
|
$ |
208 |
|
|
$ |
(61 |
) |
|
$ |
86 |
|
|
$ |
233 |
|
A&E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development before impact of
premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
208 |
|
|
|
(61 |
) |
|
|
86 |
|
|
|
233 |
|
Pretax unfavorable (favorable)
premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
(58 |
) |
|
|
(5 |
) |
|
|
2 |
|
|
|
(61 |
) |
Total
pretax unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
$ |
150 |
|
|
$ |
(66 |
) |
|
$ |
88 |
|
|
$ |
172 |
|
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, $259 million in favorable
claim and allocated claim adjustment expense reserve development was due to
decreased frequency and severity of claims across multiple
Notes to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves – (Continued)
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 $150 million of favorable development
was primarily the result of decreased frequency and severity in recent years.
The $150 million of favorable property and marine development includes
approximately $46 million due to favorable outcomes on claims relating to
catastrophes, primarily in accident year 2005. 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 $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.
In 2008, the amount due from
policyholders related to losses under deductible policies within Standard Lines
was reduced by $90 million for insolvent insureds. The reduction of this amount,
which is reflected as unfavorable net prior year reserve development, had no
effect on 2008 results of operations as CNA had previously recognized provisions
in prior years. These impacts were reported in Insurance claims and
policyholders’ benefits in the 2008 Consolidated Statement of
Income.
Specialty
Lines
The favorable claim and allocated
claim adjustment expense reserve development was primarily due to favorable
experience in medical professional liability, surety business and CNA Global
affiliates’ property and financial lines, 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. Approximately $16 million of unfavorable development
was recorded for professional liability primarily reflecting an increase in the
frequency of large claims related to large law firms in accident years 1998
through 2005 and fidelity claims in accident year 2007, partially offset by
favorable development related to favorable outcomes on individual claims related
to small accounting firms in accident years 2004 through 2006. Favorable
development of approximately $36 million for surety coverages was due to better
than expected frequency in accident years 2002 through 2006.
Approximately $30 million of
favorable claim and allocated claim adjustment expense reserve development was
primarily due to decreased frequency and severity of claims in CNA’s excess and
surplus program covering facilities that provide services to developmentally
disabled individuals.
In accident years 2000 through 2004,
approximately $60 million of favorable claim and allocated claim adjustment
expense reserve development was primarily due to favorable incurred loss
emergence in the CNA Global affiliates’ property and financial lines in accident
years 2006 and prior. This favorability was driven primarily by decreased
severity in the overall book of business.
Favorable premium development is
primarily the result of a change in ultimate premiums within a CNA Global
affiliate’s property and financial lines.
Notes to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves – (Continued)
Other
Insurance
In its most recent ground up review,
CNA noted adverse development in various pollution accounts due to changes in
liability and/ or coverage circumstances. These changes in turn increased CNA’s
estimates for incurred but not reported claims. As a result, CNA increased
pollution reserves by $83 million in 2008.
The remainder of the unfavorable
claim and allocated claim adjustment expense reserve development was primarily
related to commutations of ceded reinsurance arrangements. The unfavorable
development was substantially offset by a release of a previously established
allowance for uncollectible reinsurance.
2007
Net Prior Year Development
Standard
Lines
Approximately $184 million of
favorable claim and allocated claim adjustment expense reserve development was
due to decreased frequency and severity on claims within the general liability
exposures in accident years 2005 and prior, as well as lower frequency in
accident years 1997 and prior related to construction defect. There was
approximately $17 million of favorable premium development resulting from audits
on recent policies.
Approximately $140 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. Included in this favorable
development is approximately $39 million related to the 2005
hurricanes.
Approximately $16 million of
favorable claim and allocated claim adjustment expense reserve development was
recorded in marine exposures, due primarily to decreased frequency in accident
year 2006, and decreased severity in accident years 2005 and prior.
Approximately $16 million of
unfavorable premium development was recorded related to CNA’s participation in
involuntary pools. This unfavorable premium development was partially offset by
$9 million of favorable claim and allocated claim adjustment expense reserve
development.
Approximately $257 million of
unfavorable claim and allocated claim adjustment expense reserve development was
recorded due to increased severity in workers’ compensation exposures, primarily
on large claims in accident years 2003 and prior, as a result of continued claim
cost inflation in older accident years, driven by increasing medical inflation
and advances in medical care. This was partially offset by $12 million of
favorable premium development.
Specialty
Lines
Approximately $39 million of
unfavorable claim and allocated claim adjustment expense reserve development was
recorded for large law firm exposures. The change was due to increased severity
estimates on large claims in accident years 2005 and prior. The increase in
severity was due to a comprehensive case by case claim review for large law firm
exposures, causing an overall increase in estimated ultimate loss.
Approximately $59 million of
favorable claim and allocated claim adjustment expense reserve development was
recorded in CNA’s foreign operations. This favorable development was recorded
primarily due to decreased severity and frequency in accident years 2003 through
2006.
Approximately $37 million of
favorable claim and allocated claim adjustment expense reserve development was
recorded on claims for healthcare facilities across several accident years. This
was primarily due to decreased severity on claims within the general liability
exposures and decreased incurred losses as a result of changes in individual
claims reserve estimates.
Approximately $67 million of
unfavorable claim and allocated claim adjustment expense reserve development was
recorded on claims for architects and engineers. This unfavorable development
was primarily due to large loss emergence in accident years 1999 through
2004.
Notes to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves – (Continued)
Approximately $16 million of
favorable claim and claim adjustment expense reserve development was recorded
due primarily to better than expected loss experience in the vehicle warranty
coverages in accident year 2006. The reserves for this business were initially
estimated based on the loss ratio expected for the business. Subsequent
estimates rely more heavily on the actual case incurred losses, which have been
significantly lower than expected.
Approximately $24 million of
favorable claim and claim adjustment expense reserve development was related to
surety business resulting from better than expected salvage and subrogation
recoveries from older accident years and a lack of emergence of large claims in
more recent accident years.
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.
Approximately $70 million of
unfavorable claim and allocated claim adjustment expense reserve development was
recorded due to higher than anticipated litigation costs related to
miscellaneous chemical exposures, primarily in accident years 1997 and
prior.
2006
Net Prior Year Development
Standard
Lines
Approximately $119 million of
unfavorable claim and allocated claim adjustment expense reserve development was
due to commutation activity that took place in the fourth quarter of 2006.
Approximately $102 million of unfavorable claim and allocated claim adjustment
expense reserve development was related to casualty lines of business, primarily
workers’ compensation, due to continued claim cost inflation in older accident
years, primarily 2002 and prior. The primary drivers of the continuing claim
cost inflation were medical inflation and advances in medical care.
Favorable claim and allocated claim
adjustment expense reserve development of approximately $88 million was recorded
in relation to the short-tail coverages such as property and marine, primarily
in accident years 2004 and 2005. The favorable results were primarily due to the
underwriting actions taken by CNA that significantly improved the results on
this business and favorable outcomes on individual claims.
The majority of the favorable premium
development was due to additional premium primarily resulting from audits and
changes to premium on several ceded reinsurance agreements. Business impacted
included various middle market liability coverages, workers’ compensation,
property, and large accounts. This favorable premium development was partially
offset by approximately $44 million of unfavorable claim and allocated claim
adjustment expense reserve development recorded as a result of this favorable
premium development.
Specialty
Lines
Approximately $55 million of
unfavorable claim and allocated claim adjustment expense reserve development was
recorded due to increased claim adjustment expenses and increased severities in
the architects and engineers book of business in accident years 2003 and prior.
Previous reviews assumed that incurred severities had increased, at least in
part, due to increases in the adequacy of case reserve estimates with relatively
minor changes in underlying severity. Subsequent changes in paid and case
incurred losses have shown that more of the change was due to underlying
increases in verdict and settlement size for these accident years rather than
increases in case reserve adequacy, resulting in higher ultimate losses. One of
the primary drivers of these larger verdicts and settlements was the then
continuing general increase in commercial and private real estate
values.
Approximately $60 million of
favorable claim and allocated claim adjustment expense reserve development was
due to improved claim severity and claim frequency in the healthcare
professional liability business, primarily in dental, nursing home liability,
physicians and other healthcare facilities. The improved severity and frequency
were
Notes to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves – (Continued)
due to
underwriting changes. CNA no longer writes large national nursing home chains
and focuses on smaller insureds in selected areas of the country. These changes
resulted in business that experiences fewer large claims.
Approximately $15 million of
unfavorable claim and allocated claim adjustment expense reserve development was
primarily related to increased severity on individual large claims from large
law firm errors and omissions (“E&O”) and directors and officers (“D&O”)
coverages. These increases resulted in higher ultimate loss projections from the
average loss methods used by CNA’s actuaries.
Approximately $17 million of
favorable claim and allocated claim adjustment expense reserve development was
recorded in the warranty line of business for accident years 2004 and 2005. The
reserves for this business were initially estimated based on the loss ratio
expected for the business. Subsequent estimates relied more heavily on the
actual case incurred losses due to the short-tail nature of this business. The
short-tail nature of the business is due to the short period of time that passes
between the time the business is written and the time when all claims are known
and settled. Case incurred loss for the then most recent accident year was lower
than indicated by the initial loss ratio.
Approximately $43 million of
favorable claim and allocated claim adjustment expense reserve development was
related to favorable loss trends on accident years 2002 through 2005 in CNA’s
foreign operations, primarily Europe and Canada, in the marine, casualty, and
property coverages.
Approximately $30 million of
favorable claim and allocated claim adjustment expense reserve development was
related to lower severities on the excess and surplus lines business in accident
years 2000 and subsequent. These severity changes were driven primarily by
favorable judicial decisions and settlement activities on individual
cases.
Other
Insurance
The majority of the unfavorable claim
and allocated claim adjustment expense reserve development was primarily related
to CNA’s exposure arising from claims typically involving allegations by
multiple plaintiffs alleging injury resulting from exposure to or use of similar
substances or products over multiple policy periods. Examples include, but are
not limited to, lead paint claims, hardboard siding, polybutylene pipe, mold,
silica, latex gloves, benzene products, welding rods, diet drugs, breast
implants, medical devices and various other toxic chemical exposures. During
CNA’s 2006 ground up review, CNA noted adverse development in various accounts.
The adverse development resulted primarily from increases related to defense
costs in a small number of accounts arising out of various substances and
products.
Note
10. Leases
Leases cover office facilities,
machinery and computer equipment. The Company’s hotels in some instances are
constructed on leased land. Rent expense amounted to $98 million, $79 million
and $72 million for the years ended December 31, 2008, 2007 and 2006. The table
below presents the future minimum lease payments to be made under non-cancelable
operating leases along with lease and sublease minimum receipts to be received
on owned and leased properties.
|
|
Future
Minimum Lease
|
|
Year
Ended December 31
|
|
Payments
|
|
|
Receipts
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$ |
85 |
|
|
$ |
3 |
|
2010
|
|
|
61 |
|
|
|
3 |
|
2011
|
|
|
52 |
|
|
|
3 |
|
2012
|
|
|
44 |
|
|
|
3 |
|
2013
|
|
|
33 |
|
|
|
2 |
|
Thereafter
|
|
|
57 |
|
|
|
|
|
Total
|
|
$ |
332 |
|
|
$ |
14 |
|
Notes to
Consolidated Financial Statements
Note
11. Income Taxes
The Company and its eligible
subsidiaries file a consolidated federal income tax return. The Company has
entered into a separate tax allocation agreement with CNA, a majority-owned
subsidiary in which its ownership exceeds 80%. The agreement provides that the
Company will (i) pay to CNA the amount, if any, by which the Company’s
consolidated federal income tax is reduced by virtue of inclusion of CNA in the
Company’s return, or (ii) be paid by CNA an amount, if any, equal to the federal
income tax that would have been payable by CNA if it had filed a separate
consolidated return. The agreement may be canceled by either of the parties upon
thirty days written notice.
For 2009, 2008 and 2007, the Internal
Revenue Service (“IRS”) has invited the Company to participate in the Compliance
Assurance Process (“CAP”), which is a voluntary program for a limited number of
large corporations. Under CAP, the IRS conducts a real-time audit and works
contemporaneously with the Company to resolve any issues prior to the filing of
the tax return. The Company has agreed to participate. The Company
believes this approach should reduce tax-related uncertainties, if any. In 2008,
the IRS completed its review of the Company’s federal income tax return for 2007
and has made no changes to the reported tax.
The Company’s federal income tax return
for 2006 is subject to examination by the IRS. The Company settled its 2005
federal income tax return with the IRS in 2007. The outcome of this examination
did not have a material effect on its financial condition or results of
operations. In 2006, the Company’s consolidated federal income tax returns for
2002 through 2004 were settled with the IRS, including related carryback claims
for refund which were approved by the Joint Committee on Taxation. As a result,
the Company recorded a federal income tax benefit of $9 million and net refund
interest of $2 million, after tax and minority interest, in the year ended
December 31, 2006.
The Company and/or its subsidiaries
also file income tax returns in various state, local and foreign jurisdictions.
These returns, with few exceptions, are no longer subject to examination by the
various taxing authorities before 2004.
As discussed in Note 1, the Company
adopted the provisions of FIN No. 48, “Accounting for Uncertainty in Income
Taxes,” on January 1, 2007. As a result of the implementation of FIN No. 48, the
Company recognized a decrease to beginning retained earnings on January 1, 2007
of $37 million. The total amount of unrecognized tax benefits for continuing
operations as of the date of adoption was approximately $20 million. Included in
the balance at January 1, 2007, were $18 million of tax positions that if
recognized would affect the effective tax rate.
A reconciliation of the beginning and
ending amount of unrecognized tax benefits is as follows:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1
|
|
$ |
20 |
|
|
$ |
20 |
|
Additions
based on tax positions related to the current year
|
|
|
6 |
|
|
|
4 |
|
Reductions
for tax positions related to the current year
|
|
|
|
|
|
|
(5 |
) |
Lapse
of statute of limitations
|
|
|
(2 |
) |
|
|
|
|
Settlements
|
|
|
|
|
|
|
1 |
|
Balance
at December 31
|
|
$ |
24 |
|
|
$ |
20 |
|
The Company anticipates that there
will be no payments due to the conclusion of state income tax examinations
within the next 12 months. Additionally, certain state and foreign income tax
returns will no longer be subject to examination and as a result, there is a
reasonable possibility that the amount of unrecognized tax benefits will
decrease by $12 million. At December 31, 2008, there were $24 million of tax
benefits that if recognized would affect the effective rate.
The Company recognizes interest
accrued related to: (i) unrecognized tax benefits in Interest expense and (ii)
tax refund claims in Other revenues on the Consolidated Statements of Income.
The Company recognizes penalties in Income tax expense (benefit) on the
Consolidated Statements of Income. During 2008, the Company
recorded
Notes to
Consolidated Financial Statements
Note
11. Income Taxes – (Continued)
charges
of approximately $1 million for interest expense and $1 million for penalties.
As of December 31, 2008, the Company recognized a liability for interest of $7
million and penalties of $9 million.
Provision has been made for the
expected U.S. federal income tax liabilities applicable to undistributed
earnings of subsidiaries, except for certain subsidiaries for which the Company
intends to invest the undistributed earnings indefinitely, or recover such
undistributed earnings tax-free. At December 31, 2008, the Company has not
provided deferred taxes of $147 million, if sold through a taxable sale, on $419
million of undistributed earnings related to a domestic affiliate. The
determination of the amount of the unrecognized deferred tax liability related
to the undistributed earnings of foreign subsidiaries is not
practicable.
In connection with a non-recurring
distribution of $850 million to Diamond Offshore in 2007 from a foreign
subsidiary, a portion of which consisted of earnings of the subsidiary that had
not previously been subjected to U.S. federal income tax, Diamond Offshore
recognized $59 million of U.S. federal income tax expense as a result of the
distribution. Except for certain foreign sourced activities which Diamond
Offshore plans to distribute, it is Diamond Offshore’s intention to indefinitely
reinvest future earnings of the subsidiary to finance foreign
activities.
Total income tax expense for the years
ended December 31, 2008, 2007 and 2006, was different than the amounts of $205
million, $1,118 million and $1,086 million, computed by applying the statutory
U.S. federal income tax rate of 35% to income before income taxes and minority
interest for each of the years.
A reconciliation between the statutory
federal income tax rate and the Company’s effective income tax rate as a
percentage of income before income tax expense (benefit) and minority interest
is as follows:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
rate
|
|
|
35 |
% |
|
|
35 |
% |
|
|
35 |
% |
Increase
(decrease) in income tax rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exempt investment
income
|
|
|
(20 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
State and city income
taxes
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Foreign earnings indefinitely
reinvested
|
|
|
(15 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
Taxes related to domestic
affiliate
|
|
|
8 |
|
|
|
1 |
|
|
|
1 |
|
Partnership earnings not
subject to taxes
|
|
|
(5 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
Domestic production activities
deduction
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
Taxes related to foreign
distribution
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Other
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
Effective
income tax rate
|
|
|
1 |
% |
|
|
31 |
% |
|
|
30 |
% |
The current and deferred components of
income tax expense (benefit), excluding taxes on discontinued operations, are as
follows:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
195 |
|
|
$ |
876 |
|
|
$ |
619 |
|
Deferred
|
|
|
(368 |
) |
|
|
12 |
|
|
|
268 |
|
State and city:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
22 |
|
|
|
22 |
|
|
|
7 |
|
Deferred
|
|
|
(10 |
) |
|
|
6 |
|
|
|
7 |
|
Foreign
|
|
|
168 |
|
|
|
79 |
|
|
|
23 |
|
Total
|
|
$ |
7 |
|
|
$ |
995 |
|
|
$ |
924 |
|
Notes to
Consolidated Financial Statements
Note
11. Income Taxes – (Continued)
The following table summarizes deferred
tax assets (liabilities). The amounts presented for 2007 for life reserves
(included in Other liabilities below), Investment valuation differences and
Deferred acquisition costs have been corrected from $89 million, $286 million
and $(635) million to $(17) million, $8 million and $(251) million. These
corrections, which relate to the presentation of certain components of deferred
taxes following the sale of an entity in a prior year, had no impact on the net
deferred tax assets at December 31, 2007.
December
31
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Insurance
reserves:
|
|
|
|
|
|
|
Property and casualty claim and
claim adjustment expense reserves
|
|
$ |
731 |
|
|
$ |
771 |
|
Unearned premium
reserves
|
|
|
234 |
|
|
|
243 |
|
Other insurance
reserves
|
|
|
24 |
|
|
|
24 |
|
Receivables
|
|
|
169 |
|
|
|
231 |
|
Employee
benefits
|
|
|
373 |
|
|
|
199 |
|
Life settlement
contracts
|
|
|
70 |
|
|
|
73 |
|
Investment valuation
differences
|
|
|
303 |
|
|
|
8 |
|
Net operating loss carried
forward
|
|
|
28 |
|
|
|
22 |
|
Net unrealized
losses
|
|
|
1,988 |
|
|
|
35 |
|
Basis differential in
investment in subsidiary
|
|
|
43 |
|
|
|
31 |
|
Other
|
|
|
396 |
|
|
|
215 |
|
Deferred
tax assets
|
|
|
4,359 |
|
|
|
1,852 |
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
Deferred acquisition
costs
|
|
|
(241 |
) |
|
|
(251 |
) |
Net unrealized
gains
|
|
|
|
|
|
|
(26 |
) |
Property, plant and
equipment
|
|
|
(568 |
) |
|
|
(546 |
) |
Basis differential in
investment in subsidiary
|
|
|
(298 |
) |
|
|
(283 |
) |
Other
liabilities
|
|
|
(321 |
) |
|
|
(305 |
) |
Deferred
tax liabilities
|
|
|
(1,428 |
) |
|
|
(1,411 |
) |
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$ |
2,931 |
|
|
$ |
441 |
|
Although realization of deferred tax
assets is not assured, management believes it is more likely than not that the
recognized net deferred tax asset will be realized through recoupment of
ordinary and capital taxes paid in prior carryback years and future earnings,
reversal of existing temporary differences, and available tax planning
strategies. As a result, no valuation allowance was recorded at December 31,
2008 and 2007.
At December 31, 2008, Diamond Offshore,
which is not included in the Company’s consolidated federal income tax return,
had a net operating loss carryforward of approximately $2.6 million which will
expire by 2010. It is expected that the net operating loss carryforward will be
fully utilized by Diamond Offshore in future years. Diamond Offshore files
income tax returns in the U.S. federal jurisdiction, various state jurisdictions
and various foreign jurisdictions. Tax years that remain subject to examination
by these jurisdictions include years 2000 to 2007. Diamond Offshore is currently
under audit by the IRS for 2004 through 2006. Diamond Offshore’s 2007 return
remains subject to examination.
Notes to
Consolidated Financial Statements
Note
12. Debt
December
31
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
Corporation (Parent Company):
|
|
|
|
|
|
|
Senior:
|
|
|
|
|
|
|
8.9%
debentures due 2011 (effective interest rate of 9.0%) (authorized,
$175)
|
|
$ |
175 |
|
|
$ |
175 |
|
5.3%
notes due 2016 (effective interest rate of 5.4%) (authorized, $400)
(a)
|
|
|
400 |
|
|
|
400 |
|
6.0%
notes due 2035 (effective interest rate of 6.2%) (authorized, $300)
(a)
|
|
|
300 |
|
|
|
300 |
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
Senior:
|
|
|
|
|
|
|
|
|
6.5%
notes due 2008 (effective interest rate of 6.6%) (authorized,
$150)
|
|
|
|
|
|
|
150 |
|
6.6%
notes due 2008 (effective interest rate of 6.7%) (authorized,
$200)
|
|
|
|
|
|
|
200 |
|
6.0%
notes due 2011(effective interest rate of 6.1%) (authorized,
$400)
|
|
|
400 |
|
|
|
400 |
|
8.4%
notes due 2012 (effective interest rate of 8.6%) (authorized,
$100)
|
|
|
70 |
|
|
|
70 |
|
Variable
rate revolving credit facility due 2012 (effective interest rate of
2.7%)
|
|
|
250 |
|
|
|
|
|
5.9%
notes due 2014 (effective interest rate of 6.0%) (authorized
$549)
|
|
|
549 |
|
|
|
549 |
|
6.5%
notes due 2016 (effective interest rate of 6.6%) (authorized,
$350)
|
|
|
350 |
|
|
|
350 |
|
7.0%
notes due 2018 (effective interest rate of 7.1%) (authorized,
$150)
|
|
|
150 |
|
|
|
150 |
|
7.3%
debentures due 2023 (effective interest rate of 7.3%) (authorized,
$250)
|
|
|
243 |
|
|
|
243 |
|
5.1%
debentures due 2034 (effective interest rate of 5.1%) (authorized,
$31)
|
|
|
31 |
|
|
|
31 |
|
Other
senior debt (effective interest rates approximate 5.0% and
5.1%)
|
|
|
24 |
|
|
|
24 |
|
Diamond
Offshore:
|
|
|
|
|
|
|
|
|
Senior:
|
|
|
|
|
|
|
|
|
5.2%
notes, due 2014 (effective interest rate of 5.2%) (authorized, $250)
(a)
|
|
|
250 |
|
|
|
250 |
|
4.9%
notes, due 2015 (effective interest rate of 5.0%) (authorized, $250)
(a)
|
|
|
250 |
|
|
|
250 |
|
Zero
coupon convertible debentures due 2020, net of discount of $2 and
$3
|
|
|
|
|
|
|
|
|
(effective interest rate of 3.6% and 3.5%) (b)
|
|
|
4 |
|
|
|
3 |
|
1.5%
convertible senior debentures due 2031 (effective interest rate of
1.6%)
|
|
|
|
|
|
|
|
|
(authorized $460) (c)
|
|
|
|
|
|
|
4 |
|
HighMount:
|
|
|
|
|
|
|
|
|
Senior:
|
|
|
|
|
|
|
|
|
Variable rate term loans due
2012 (effective interest rate of 5.8%)
|
|
|
1,600 |
|
|
|
1,600 |
|
Variable rate revolving credit
facility due 2012 (effective interest rate of 3.3% and
5.6%)
|
|
|
115 |
|
|
|
47 |
|
Boardwalk
Pipeline:
|
|
|
|
|
|
|
|
|
Senior:
|
|
|
|
|
|
|
|
|
Variable
rate revolving credit facility due 2012 (effective interest rate of
4.5%)
|
|
|
285 |
|
|
|
|
|
5.9%
notes due 2016 (effective interest of 6.0%) (authorized, $250)
(a)
|
|
|
250 |
|
|
|
250 |
|
5.5%
notes due 2017 (effective interest rate of 5.6%) (authorized, $300)
(a)
|
|
|
300 |
|
|
|
300 |
|
5.2%
notes due 2018 (effective interest rate of 5.4%) (authorized, $185)
(a)
|
|
|
185 |
|
|
|
185 |
|
Texas
Gas:
|
|
|
|
|
|
|
|
|
Senior:
|
|
|
|
|
|
|
|
|
Variable
rate revolving credit facility due 2012 (effective interest rate of
4.4%)
|
|
|
190 |
|
|
|
|
|
5.5%
notes due 2013 (effective interest rate 5.3%) (authorized $250)
(a)
|
|
|
250 |
|
|
|
|
|
4.6%
notes due 2015 (effective interest rate of 5.1%) (authorized, $250)
(a)
|
|
|
250 |
|
|
|
250 |
|
7.3%
debentures due 2027 (effective interest rate of 8.1%) (authorized,
$100)
|
|
|
100 |
|
|
|
100 |
|
Gulf
South:
|
|
|
|
|
|
|
|
|
Senior:
|
|
|
|
|
|
|
|
|
Variable
rate revolving credit facility due 2012 (effective interest rate of
1.9%)
|
|
|
317 |
|
|
|
|
|
5.8%
notes due 2012 (effective interest rate of 5.9%) (authorized, $225)
(a)
|
|
|
225 |
|
|
|
225 |
|
5.1%
notes due 2015 (effective interest rate of 5.2%) (authorized, $275)
(a)
|
|
|
275 |
|
|
|
275 |
|
6.3%
notes due 2017 (effective interest rate of 6.4%) (authorized, $275)
(a)
|
|
|
275 |
|
|
|
275 |
|
Loews
Hotels:
|
|
|
|
|
|
|
|
|
Senior
debt, principally mortgages (effective interest rates approximate
4.8%)
|
|
|
226 |
|
|
|
234 |
|
|
|
|
8,289 |
|
|
|
7,290 |
|
Less
unamortized discount
|
|
|
31 |
|
|
|
32 |
|
Debt
|
|
$ |
8,258 |
|
|
$ |
7,258 |
|
(a)
|
Redeemable
in whole or in part at the greater of the principal amount or the net
present value of scheduled payments discounted at the specified treasury
rate plus a margin.
|
Notes to
Consolidated Financial Statements
Note
12. Debt – (Continued)
(b)
|
The
debentures are convertible into Diamond Offshore’s common stock at the
rate of 8.6075 shares per one thousand dollars principal amount, subject
to adjustment. Each debenture will be purchased by Diamond Offshore at the
option of the holder on the tenth and fifteenth anniversaries of issuance
at the accreted value through the date of repurchase. The debentures were
issued on June 6, 2000. Diamond Offshore, at its option, may elect to pay
the purchase price in cash or shares of common stock, or in certain
combinations thereof. The debentures are redeemable at the option of
Diamond Offshore at any time at prices which reflect a yield of 3.5% to
the holder.
|
(c)
|
The
debentures were converted into Diamond Offshore’s common stock at the rate
of 20.3978 shares per one thousand dollars principal amount, subject to
adjustment in certain circumstances. During the period from January 1,
2008 to April 14, 2008, the holders of $4 million in aggregate principal
amount of Diamond Offshore’s 1.5% Debentures elected to convert their
outstanding debentures into shares of Diamond Offshore’s common stock.
Diamond Offshore issued 71,144 shares of its common stock pursuant to
these conversions. On April 15, 2008, Diamond Offshore completed the
redemption of all of their outstanding 1.5% Debentures, and, as a result,
redeemed for cash the remaining aggregate principal amount of Diamond
Offshore’s 1.5% Debentures.
|
|
|
|
|
|
Unamortized
|
|
|
|
|
|
Short
Term
|
|
|
Long
Term
|
|
December
31, 2008
|
|
Principal
|
|
|
Discount
|
|
|
Net
|
|
|
Debt
|
|
|
Debt
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
Corporation
|
|
$ |
875 |
|
|
$ |
9 |
|
|
$ |
866 |
|
|
|
|
|
|
$ |
866 |
|
CNA
Financial
|
|
|
2,067 |
|
|
|
9 |
|
|
|
2,058 |
|
|
|
|
|
|
|
2,058 |
|
Diamond
Offshore
|
|
|
504 |
|
|
|
|
|
|
|
504 |
|
|
|
|
|
|
|
504 |
|
HighMount
|
|
|
1,715 |
|
|
|
|
|
|
|
1,715 |
|
|
|
|
|
|
|
1,715 |
|
Boardwalk
Pipeline
|
|
|
2,902 |
|
|
|
13 |
|
|
|
2,889 |
|
|
|
|
|
|
|
2,889 |
|
Loews
Hotels
|
|
|
226 |
|
|
|
|
|
|
|
226 |
|
|
$ |
71 |
|
|
|
155 |
|
Total
|
|
$ |
8,289 |
|
|
$ |
31 |
|
|
$ |
8,258 |
|
|
$ |
71 |
|
|
$ |
8,187 |
|
On August 1, 2007, CNA entered into a
credit agreement with a syndicate of banks and other lenders. The credit
agreement established a five-year $250 million senior unsecured revolving credit
facility which is intended to be used for general corporate purposes. Borrowings
under the revolving credit facility bear interest at the London Interbank
Offered Rate (“LIBOR”) plus CNA’s credit risk spread of 0.54% which was equal to
2.74%, at December 31, 2008. CNA used $200 million of the proceeds to retire its
6.60% Senior Notes due December 15, 2008.
Under the credit agreement, CNA is
required to pay certain fees, including a facility fee and a utilization fee,
both of which would adjust automatically in the event of a change in CNA’s
financial ratings. The credit agreement includes covenants regarding maintenance
of a minimum consolidated net worth and a specified ratio of consolidated
indebtedness to consolidated total capitalization. As of December 31, 2008, CNA
was in compliance with all covenants.
Diamond Offshore maintains a $285
million syndicated, senior unsecured revolving credit facility, for general
corporate purposes, including loans and performance or standby letters of credit
which bears interest at a rate per annum equal to, at its election, either (i)
the higher of the prime rate or the federal funds rate plus 50 basis points or
(ii) the London Interbank Offered Rate, or LIBOR, plus an applicable margin,
based on Diamond Offshore’s current credit ratings. As of December 31, 2008,
there were no loans outstanding under the credit facility; however, $58 million
in letters of credit were issued which reduced the available capacity under the
facility. As of December 31, 2008, Diamond Offshore was in compliance with all
covenants.
HighMount maintains $1.6 billion of
variable rate term loans which bear interest at LIBOR plus an applicable margin.
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%. The loans also provide for a five year, $400
million revolving credit facility. Borrowings under the credit facility bear
interest at LIBOR plus an applicable margin or a base rate defined as the
greater of the prime rate or the federal funds rate plus 50 basis points. Among
other customary covenants, HighMount cannot exceed a predetermined total debt to
capitalization ratio. As of December 31, 2008, $115 million was outstanding
under the facility. In addition, $9 million in letters of credit were issued,
which reduced the available capacity to $276 million. A financial institution
which has a $30 million funding commitment under the revolving credit facility
has not funded its portion of HighMount’s borrowing requests since September of
2008. All other lenders met their revolving commitments on HighMount’s
borrowings. If the financial institution 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 $255 million from $276
million. At December 31, 2008, HighMount is in compliance with all of its debt
covenants under the credit agreement.
Notes to
Consolidated Financial Statements
Note
12. Debt – (Continued)
Boardwalk Pipeline and its operating
subsidiaries maintain aggregate lending commitments of a $1.0 billion revolving
credit facility under which Boardwalk Pipeline, Gulf South and Texas Gas each
may borrow funds, up to applicable sub-limits. 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 the borrowing request since that time. Borrowings under the credit
facility bear interest at a rate per annum equal to at its election, either (i)
the higher of the prime rate or the Federal funds rate plus 50 basis points or
(ii) LIBOR plus an applicable margin. Among other customary covenants, each of
the borrowers must maintain a minimum ratio, as of the last day of each fiscal
quarter, of consolidated total debt to consolidated earnings before interest,
income taxes and depreciation and amortization (as defined in the agreement),
measured for the preceding twelve months, of not more than five to
one.
As of December 31, 2008, Boardwalk
Pipeline and its operating subsidiaries had $792 million of loans outstanding
under the revolving credit facility with a weighted-average interest rate on the
borrowings of 3.4% and had no letters of credit issued. As of December 31, 2008,
Boardwalk Pipeline and its operating subsidiaries were in compliance with all
covenant requirements under the credit facility.
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.
At December 31, 2008, the aggregate
of long term debt maturing in each of the next five years is approximately as
follows: $71 million in 2009, $9 million in 2010, $580 million in 2011, $3,056
million in 2012, $255 million in 2013 and $4,318 million
thereafter.
Notes to
Consolidated Financial Statements
Note
13. 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, 2006
|
|
$ |
489 |
|
|
$ |
49 |
|
|
$ |
(227 |
) |
|
$ |
311 |
|
Unrealized
holding gains, after tax of $67
|
|
|
106 |
|
|
|
|
|
|
|
|
|
|
|
106 |
|
Adjustment
for items included in Net income,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
after tax of $6
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
(11 |
) |
Foreign
currency translation adjustment, after tax
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
37 |
|
Minimum
pension liability adjustment, after tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of $49
|
|
|
|
|
|
|
|
|
|
|
87 |
|
|
|
87 |
|
Adjustment
to initially apply SFAS No. 158,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
after tax of
$78
|
|
|
|
|
|
|
|
|
|
|
(143 |
) |
|
|
(143 |
) |
Balance,
December 31, 2006
|
|
|
584 |
|
|
|
86 |
|
|
|
(283 |
) |
|
|
387 |
|
Unrealized
holding losses, after tax of $258
|
|
|
(413 |
) |
|
|
|
|
|
|
|
|
|
|
(413 |
) |
Adjustment
for items included in Net income,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
after tax of
$87
|
|
|
(159 |
) |
|
|
|
|
|
|
|
|
|
|
(159 |
) |
Foreign
currency translation adjustment, after tax
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
31 |
|
Pension
liability adjustment, after tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of $52
|
|
|
|
|
|
|
|
|
|
|
89 |
|
|
|
89 |
|
Balance,
December 31, 2007
|
|
|
12 |
|
|
|
117 |
|
|
|
(194 |
) |
|
|
(65 |
) |
Unrealized
holding losses, after tax of $1,964
|
|
|
(3,211 |
) |
|
|
|
|
|
|
|
|
|
|
(3,211 |
) |
Adjustment
for items included in Net income,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
after tax of $55 and
$20
|
|
|
91 |
|
|
|
|
|
|
|
34 |
|
|
|
125 |
|
Foreign
currency translation adjustment, after
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax
|
|
|
|
|
|
|
(145 |
) |
|
|
|
|
|
|
(145 |
) |
Pension
liability adjustment, after tax of $201
|
|
|
|
|
|
|
|
|
|
|
(343 |
) |
|
|
(343 |
) |
Disposal
of discontinued operations, after tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of $33
|
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
53 |
|
Balance,
December 31, 2008
|
|
$ |
(3,108 |
) |
|
$ |
(28 |
) |
|
$ |
(450 |
) |
|
$ |
(3,586 |
) |
Note
14. Significant Transactions
Acquisition
of business
On July 31, 2007, HighMount acquired,
through its subsidiaries, certain exploration and production assets and assumed
certain related obligations, from subsidiaries of Dominion Resouces, Inc. for
$4.0 billion, subject to adjustment. The acquired 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 (unaudited). These properties produce predominantly natural gas and
related natural gas liquids and are characterized by long reserve lives and high
well completion success rates. The amount of tax deductible goodwill is $1.0
billion. The acquisition was funded with approximately $2.4 billion in cash and
$1.6 billion of debt.
Notes to
Consolidated Financial Statements
Note
14. Significant Transactions – (Continued)
The allocation of purchase price to the
assets and liabilities acquired was as follows:
(In
millions)
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$ |
2,961 |
|
Deferred
income taxes
|
|
|
15 |
|
Goodwill
and other intangibles
|
|
|
1,066 |
|
Other
assets
|
|
|
43 |
|
Other
liabilities
|
|
|
(55 |
) |
|
|
$ |
4,030 |
|
Diamond
Offshore
In 2007, the holders of $456 million in
principal amount of Diamond Offshore’s 1.5% debentures converted their
outstanding debentures into 9.3 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 at maturity 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 SAB No. 51, the Company recognized a pretax
gain of $143 million ($93 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 $29 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 December 31, 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. Upon adoption of SFAS No. 160 in
2009, these deferred gains will be reclassified from Minority interest to
Additional paid-in capital.
Note
15. Restructuring and Other Related Charges
In 2001, CNA finalized and approved a
restructuring plan related to the property and casualty segments and Life &
Group Non-Core segment, discontinuation of its variable life and annuity
business and consolidation of real estate locations. During 2006, management
reevaluated the sufficiency of the remaining accrual, which related to lease
termination costs, and determined that the liability was no longer required as
CNA had completed its lease obligations. As a result, the excess remaining
accrual was released in 2006, resulting in pretax income of $13 million for the
year ended December 31, 2006.
Note
16. Statutory Accounting Practices (Unaudited)
CNA’s
domestic insurance subsidiaries maintain their accounts in conformity with
accounting practices prescribed or permitted by insurance regulatory
authorities, which vary in certain respects from GAAP. In converting from
statutory accounting principles to GAAP, the more significant adjustments
include deferral of
Notes to
Consolidated Financial Statements
Note
16. Statutory Accounting Practices (Unaudited) – (Continued)
policy
acquisition costs and the inclusion of net unrealized holding gains or losses in
stockholders’ equity relating to certain fixed maturity securities.
CNA’s insurance subsidiaries are
domiciled in various jurisdictions. These subsidiaries prepare statutory
financial statements in accordance with accounting practices prescribed or
permitted by the respective jurisdictions’ insurance regulators. Prescribed
statutory accounting practices are set forth in a variety of publications of the
National Association of Insurance Commissioners (“NAIC”) as well as state laws,
regulations and general administrative rules.
CCC has been granted a permitted
practice for one year related to the accounting for its deferred income taxes.
This permitted practice allows CCC to admit a greater portion of its deferred
tax assets than what is allowed under the prescribed statutory accounting
guidance. This permitted practice resulted in an approximate $700 million
increase in CCC’s statutory surplus at December 31, 2008, the first reporting
period for which the permitted practice was effective. The permitted practice
will remain in effect for the first, second and third quarter 2009 reporting
periods.
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 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 December 31, 2008, CCC is in a positive earned surplus
position, enabling CCC to pay approximately $100 million of dividend payments
during 2009 that would not be subject to the Department’s prior approval. The
actual level of dividends paid in any year is determined after an assessment of
available dividend capacity, holding company liquidity and cash needs as well as
the impact the dividends will have on the statutory surplus of the applicable
insurance company.
CNA’s domestic insurance subsidiaries
are subject to risk-based capital requirements. Risk-based capital is a method
developed by the NAIC to determine the minimum amount of statutory capital
appropriate for an insurance company to support its overall business operations
in consideration of its size and risk profile. The formula for determining the
amount of risk-based 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
December 31, 2008 and 2007, all of CNA’s domestic insurance subsidiaries
exceeded the minimum risk-based capital requirements.
Preliminary 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
|
|
|
Statutory
Net Income (Loss)
|
|
|
|
December
31
|
|
|
Year
Ended December 31
|
|
Unaudited
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and casualty companies (a)
|
|
$ |
8,002 |
|
|
$ |
8,511 |
|
|
$ |
(89 |
) |
|
$ |
575 |
|
|
$ |
721 |
|
Life
company
|
|
|
487 |
|
|
|
471 |
|
|
|
(51 |
) |
|
|
27 |
|
|
|
67 |
|
(a)
|
Surplus
includes the property and casualty companies’ equity ownership of the life
company’s capital and surplus.
|
Notes to
Consolidated Financial Statements
Note
16. Statutory Accounting Practices (Unaudited) – (Continued)
In November of 2008, the Company
purchased 12,500 shares of non-voting CNA cumulative senior preferred stock for
$1.25 billion. The new preferred stock accrues cumulative dividends at the rate
of 10.0% 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 10.0% or the 10-year U.S. Treasury rate at such
time plus 7.0%. No dividends may be declared on CNA’s common stock while the new
preferred stock is outstanding.
CNA used the majority of the proceeds
from the new preferred stock to increase the statutory surplus of its principal
insurance subsidiary, Continental Casualty Company (“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 Department. The
surplus note of CCC has a term of 30 years and accrues interest at a rate of
10.0% per year. Interest on the note is payable quarterly.
Note
17. Supplemental Natural Gas and Oil Information (Unaudited)
Users of this information should be
aware that the process of estimating quantities of proved and proved developed
natural gas, NGLs and crude oil reserves is very complex, requiring significant
subjective decisions in the evaluation of all available geological, engineering
and economic data for each reservoir. The data for a given reservoir may also
change substantially over time as a result of numerous factors including, but
not limited to, additional development activity, evolving production history and
continual reassessment of the viability of production under varying economic
conditions. As a result, revisions to existing reserve estimates may occur from
time to time. Although every reasonable effort is made to ensure reserve
estimates reported represent the most accurate assessments possible, the
subjective decisions and variances in available data for various reservoirs make
these estimates generally less precise than other estimates included in the
financial statement disclosures.
Proved reserves represent estimated
quantities of natural gas, NGLs and crude oil that geological and engineering
data demonstrate, with reasonable certainty, to be recoverable in future years
from known reservoirs under economic and operating conditions in effect when the
estimates were made. Proved developed reserves are proved reserves expected to
be recovered through wells and equipment in place and under operating methods
used when the estimates were made.
Estimates
of reserves as of December 31, 2008 and 2007 are based upon studies for each of
HighMount’s properties prepared by HighMount staff engineers. Calculations were
prepared using standard geological and engineering methods generally accepted by
the petroleum industry and in accordance with SEC guidelines. Ryder Scott
Company, L.P., an independent third party petroleum engineering consulting firm,
has audited HighMount’s proved reserve estimates in accordance with the
Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves
Information promulgated by the Society of Petroleum Engineers. All proved
reserves are located in the United States of America.
Notes to
Consolidated Financial Statements
Note
17. Supplemental Natural Gas and Oil Information (Unaudited) –
(Continued)
Reserves
Estimated net quantities of proved
natural gas and oil (including condensate and NGLs) reserves at December 31,
2008 and 2007 and changes in the reserves during 2008 and 2007 are shown in the
schedule below:
|
|
Natural
|
|
|
NGLs
and
|
|
|
Natural
Gas
|
|
Proved
Developed and Undeveloped Reserves
|
|
Gas (a)
|
|
|
Oil
|
|
|
Equivalents
|
|
|
|
(Bcf)
|
|
|
(thousands
|
|
|
(Bcfe)
|
|
|
|
|
|
|
of
barrels)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
1, 2007
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Changes
in reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
Extensions, discoveries and other
additions
|
|
|
62 |
|
|
|
3,877 |
|
|
|
85 |
|
Revisions of previous
estimates
(b)
|
|
|
(51 |
) |
|
|
2,164 |
|
|
|
(38 |
) |
Production
|
|
|
(34 |
) |
|
|
(1,627 |
) |
|
|
(43 |
) |
Purchases of reserves in
place
|
|
|
1,919 |
|
|
|
91,868 |
|
|
|
2,470 |
|
December
31, 2007
|
|
|
1,896 |
|
|
|
96,282 |
|
|
|
2,474 |
|
Changes
in reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
Extensions, discoveries and other
additions
|
|
|
56 |
|
|
|
3,140 |
|
|
|
75 |
|
Revisions of previous
estimates
(c)
|
|
|
(185 |
) |
|
|
(10,925 |
) |
|
|
(251 |
) |
Production
|
|
|
(79 |
) |
|
|
(3,859 |
) |
|
|
(102 |
) |
Sales of reserves in
place
|
|
|
(1 |
) |
|
|
(54 |
) |
|
|
(1 |
) |
Purchases of reserves in
place
|
|
|
7 |
|
|
|
243 |
|
|
|
8 |
|
December
31, 2008
|
|
|
1,694 |
|
|
|
84,827 |
|
|
|
2,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved
developed reserves at:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
|
1,394 |
|
|
|
67,371 |
|
|
|
1,798 |
|
December 31,
2008
|
|
|
1,310 |
|
|
|
64,175 |
|
|
|
1,695 |
|
(a)
|
Excludes
reserves associated with Volumetric Production Payment (“VPP”) delivery
obligations.
|
(b)
|
The
2007 revision is primarily attributable to lower than expected NGL
recovery yield on some of HighMount’s gas that is processed by third
parties, as well as the aggregate result of revisions to individual wells
based upon engineering and geologic
analyses.
|
(c)
|
The
2008 revision is primarily attributable to lower commodity prices at
December 31, 2008 as compared to December 31, 2007. The pricing at
December 31, 2008 caused the reclassification of some proven
undeveloped reserves to a non-proved category to adhere to SEC proved
reserve requirements. Additionally, higher operating costs in 2008
resulted in a reduction of remaining proven developed producing
reserves.
|
Capitalized
Costs
The aggregate amounts of costs
capitalized for natural gas and oil producing activities, and related aggregate
amounts of accumulated depletion follow:
December
31
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject
to depletion
|
|
$ |
2,923 |
|
|
$ |
2,443 |
|
Costs
excluded from depletion
|
|
|
422 |
|
|
|
426 |
|
Gross
natural gas, NGL and oil properties
|
|
|
3,345 |
|
|
|
2,869 |
|
Less
accumulated depletion
|
|
|
915 |
|
|
|
62 |
|
Net
natural gas, NGL and oil properties
|
|
$ |
2,430 |
|
|
$ |
2,807 |
|
Notes to
Consolidated Financial Statements
Note
17. Supplemental Natural Gas and Oil Information (Unaudited) –
(Continued)
The following costs were incurred in
natural gas and oil producing activities:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of properties
|
|
|
|
|
|
|
Proved
|
|
$ |
8 |
|
|
$ |
2,245 |
|
Unproved
|
|
|
36 |
|
|
|
431 |
|
Subtotal
|
|
|
44 |
|
|
|
2,676 |
|
Exploration
costs
|
|
|
10 |
|
|
|
7 |
|
Development
costs (a)
|
|
|
425 |
|
|
|
186 |
|
Total
|
|
$ |
479 |
|
|
$ |
2,869 |
|
(a)
|
Development
costs incurred for proved undeveloped reserves were $139 and $60 in 2008
and 2007, respectively.
|
Standardized
Measure of Discounted Future Net Cash Flows Relating to Proved Natural Gas and
Oil Reserves
The following table has been prepared
utilizing SFAS No. 69, “Disclosures About Oil and Gas Producing Activities,”
rules for disclosure of a standardized measure of discounted future net cash
flows relating to proved natural gas and oil reserve quantities that HighMount
owns:
December
31
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future
cash inflows (a)
(b)
|
|
$ |
10,120 |
|
|
$ |
17,235 |
|
Less:
|
|
|
|
|
|
|
|
|
Future production
costs
|
|
|
3,461 |
|
|
|
3,565 |
|
Future development
costs
|
|
|
986 |
|
|
|
1,159 |
|
Future income tax
expense
|
|
|
1,120 |
|
|
|
3,594 |
|
Future cash
flows
|
|
|
4,553 |
|
|
|
8,917 |
|
Less
annual discount (10% a year)
|
|
|
2,990 |
|
|
|
5,907 |
|
Standardized
measure of discounted future net cash flows
|
|
$ |
1,563 |
|
|
$ |
3,010 |
|
(a)
|
2008
and 2007 amounts exclude the effect of derivative instruments designated
as hedges of future sales of production at year
end.
|
(b)
|
The
following current prices were used in the determination of standardized
measure of discounted future net cash
flows.
|
December
31
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Gas
(per million British thermal units)
|
|
$ |
5.71 |
|
|
$ |
6.80 |
|
NGL
(per barrel)
|
|
|
22.00 |
|
|
|
62.16 |
|
Oil
(per barrel)
|
|
|
44.60 |
|
|
|
96.00 |
|
In the foregoing determination of future
cash inflows, sales prices for natural gas and oil were based on contractual
arrangements or market prices at year end. Future costs of developing and
producing the proved natural gas and oil reserves reported at the end of each
year shown were based on costs determined at each such year end, assuming the
continuation of existing economic conditions. Future income taxes were computed
by applying the appropriate year end or future statutory tax rate to future
pretax net cash flows, less the tax basis of the properties involved, and giving
effect to tax deductions, permanent differences and tax credits.
It is not intended that the FASB’s
standardized measure of discounted future net cash flows represent the fair
market value of HighMount’s proved reserves. The disclosures shown above are
based on estimates of proved reserve quantities and future production schedules
which are inherently imprecise and subject to revision, and the 10% discount
rate is prescribed by the SEC. In addition, costs and prices as of the
measurement date are used in the determinations, and no value may be assigned to
probable or possible reserves.
Notes to
Consolidated Financial Statements
Note
17. Supplemental Natural Gas and Oil Information (Unaudited) –
(Continued)
Changes
in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Natural Gas and Oil Reserves
The following table is a summary of
changes between the total standardized measure of discounted future net cash
flows at the beginning and end of each year:
(In
millions)
|
|
|
|
|
|
|
|
Standardized
measure of discounted future net cash flows at January 1,
2007
|
|
$ |
- |
|
Changes
in the year resulting from:
|
|
|
|
|
Sales and transfers of natural
gas and oil produced during the year, less
|
|
|
|
|
production
costs
|
|
|
(209 |
) |
Extensions, discoveries and
other additions, less production and development costs
|
|
|
177 |
|
Revisions of previous quantity
estimates
|
|
|
(230 |
) |
Net changes in purchases and
sales of proved reserves in place
|
|
|
4,184 |
|
Accretion of
discount
|
|
|
166 |
|
Income taxes
|
|
|
(1,078 |
) |
Standardized
measure of discounted future net cash flows at December 31,
2007
|
|
|
3,010 |
|
Changes
in the year resulting from:
|
|
|
|
|
Sales and transfers of natural
gas and oil produced during the year, less
|
|
|
|
|
production
costs
|
|
|
(594 |
) |
Net changes in prices and
development costs
|
|
|
(2,205 |
) |
Extensions, discoveries and
other additions, less production and development costs
|
|
|
69 |
|
Previously estimated
development costs incurred during the period
|
|
|
170 |
|
Revisions of previous quantity
estimates
|
|
|
(94 |
) |
Net changes in purchases and
sales of proved reserves in place
|
|
|
11 |
|
Accretion of
discount
|
|
|
408 |
|
Income taxes
|
|
|
821 |
|
Net changes in production rates
and other
|
|
|
(33 |
) |
Standardized
measure of discounted future net cash flows at December 31,
2008
|
|
$ |
1,563 |
|
Note
18. 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.The
Company uses December 31 as the measurement date for its plans.
Notes to
Consolidated Financial Statements
Note
18. Benefit Plans – (Continued)
Weighted-average assumptions used to
determine benefit obligations:
|
|
Pension
Benefits
|
|
|
Other
Postretirement Benefits
|
|
December
31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.3 |
% |
|
|
6.0 |
% |
|
|
5.7 |
% |
|
|
6.3 |
% |
|
|
6.0 |
% |
|
|
5.7 |
% |
Rate
of compensation increase
|
|
3.0%
to 5.8%
|
|
|
4.0%
to 7.0%
|
|
|
4.0%
to 7.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used to
determine net periodic benefit cost:
|
|
Pension
Benefits
|
|
|
Other
Postretirement Benefits
|
|
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.0 |
% |
|
|
5.7 |
% |
|
|
5.6 |
% |
|
|
5.9 |
% |
|
|
5.6 |
% |
|
|
5.5 |
% |
Expected
long term rate of return on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plan assets
|
|
7.5%
to 8.0%
|
|
|
7.0%
to 8.0%
|
|
|
7.0%
to 8.0%
|
|
|
|
6.2 |
% |
|
|
6.2 |
% |
|
|
6.2 |
% |
Rate
of compensation increase
|
|
4.0%
to 7.0%
|
|
|
4.0%
to 7.0%
|
|
|
4.0%
to 7.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The long term rate of return for plan
assets is determined based on widely-accepted capital market principles, long
term return analysis for global fixed income and equity markets as well as the
active total return oriented portfolio management style. Long term trends are
evaluated relative to market factors such as inflation, interest rates and
fiscal and monetary policies, in order to assess the capital market assumptions
as applied to the plan. Consideration of diversification needs and rebalancing
is maintained.
Assumed health care cost trend
rates:
December
31
|
2008
|
2007
|
2006
|
|
|
|
|
Health
care cost trend rate assumed for next year
|
4.0%
to 9.5%
|
4.0%
to 10.0%
|
4.0%
to 10.5%
|
Rate
to which the cost trend rate is assumed to decline (the
ultimate
|
|
|
|
trend rate)
|
4.0%
to 5.0%
|
4.0%
to 5.0%
|
4.0%
to 5.0%
|
Year
that the rate reaches the ultimate trend rate
|
2009-2018
|
2008-2017
|
2007-2018
|
Assumed health care cost trend rates
have a significant effect on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects:
|
|
One
Percentage Point
|
|
|
|
Increase
|
|
|
Decrease
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
on total of service and interest cost
|
|
|
|
|
|
$ |
(1 |
) |
Effect
on postretirement benefit obligation
|
|
$ |
5 |
|
|
|
(9 |
) |
Net periodic benefit cost
components:
|
|
Pension
Benefits
|
|
|
Other
Postretirement Benefits
|
|
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
30 |
|
|
$ |
32 |
|
|
$ |
35 |
|
|
$ |
2 |
|
|
$ |
3 |
|
|
$ |
4 |
|
Interest
cost
|
|
|
165 |
|
|
|
162 |
|
|
|
159 |
|
|
|
13 |
|
|
|
13 |
|
|
|
16 |
|
Expected
return on plan assets
|
|
|
(194 |
) |
|
|
(189 |
) |
|
|
(177 |
) |
|
|
(5 |
) |
|
|
(4 |
) |
|
|
(4 |
) |
Amortization
of unrecognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net loss
|
|
|
6 |
|
|
|
13 |
|
|
|
27 |
|
|
|
1 |
|
|
|
3 |
|
|
|
4 |
|
Amortization
of unrecognized prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
service cost
|
|
|
|
|
|
|
2 |
|
|
|
3 |
|
|
|
(24 |
) |
|
|
(26 |
) |
|
|
(32 |
) |
Special
termination benefit
|
|
|
|
|
|
|
4 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Settlement
loss
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory
asset (increase)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
decrease
|
|
|
|
|
|
|
(2 |
) |
|
|
(4 |
) |
|
|
5 |
|
|
|
6 |
|
|
|
7 |
|
Net
periodic benefit cost
|
|
$ |
7 |
|
|
$ |
26 |
|
|
$ |
49 |
|
|
$ |
(8 |
) |
|
$ |
(5 |
) |
|
$ |
(4 |
) |
Notes to
Consolidated Financial Statements
Note
18. Benefit Plans – (Continued)
The following provides a reconciliation
of benefit obligations:
|
|
Pension
Benefits
|
|
|
Other
Postretirement Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at January 1
|
|
$ |
2,804 |
|
|
$ |
2,924 |
|
|
$ |
231 |
|
|
$ |
255 |
|
Service
cost
|
|
|
30 |
|
|
|
32 |
|
|
|
2 |
|
|
|
3 |
|
Interest
cost
|
|
|
165 |
|
|
|
162 |
|
|
|
13 |
|
|
|
13 |
|
Plan
participants’ contributions
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
8 |
|
Amendments
|
|
|
5 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
Actuarial
(gain) loss
|
|
|
|
|
|
|
(94 |
) |
|
|
(17 |
) |
|
|
(25 |
) |
Benefits
paid from plan assets
|
|
|
(161 |
) |
|
|
(155 |
) |
|
|
(23 |
) |
|
|
(23 |
) |
Foreign
exchange
|
|
|
(21 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
Settlement
|
|
|
(1 |
) |
|
|
(58 |
) |
|
|
|
|
|
|
|
|
Benefit
obligation at December 31
|
|
|
2,821 |
|
|
|
2,804 |
|
|
|
214 |
|
|
|
231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at January 1
|
|
|
2,521 |
|
|
|
2,495 |
|
|
|
84 |
|
|
|
80 |
|
Actual
return on plan assets
|
|
|
(380 |
) |
|
|
202 |
|
|
|
(16 |
) |
|
|
6 |
|
Company
contributions
|
|
|
80 |
|
|
|
33 |
|
|
|
14 |
|
|
|
13 |
|
Plan
participants’ contributions
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
8 |
|
Benefits
paid from plan assets
|
|
|
(161 |
) |
|
|
(155 |
) |
|
|
(23 |
) |
|
|
(23 |
) |
Foreign
exchange
|
|
|
(22 |
) |
|
|
4 |
|
|
|
|
|
|
|
|
|
Settlement
|
|
|
(1 |
) |
|
|
(58 |
) |
|
|
|
|
|
|
|
|
Fair
value of plan assets at December 31
|
|
|
2,037 |
|
|
|
2,521 |
|
|
|
67 |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status
|
|
$ |
(784 |
) |
|
$ |
(283 |
) |
|
$ |
(147 |
) |
|
$ |
(147 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
recognized in the Consolidated Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sheets consist
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
2 |
|
|
$ |
3 |
|
|
|
14 |
|
|
$ |
27 |
|
Other
liabilities
|
|
|
(786 |
) |
|
|
(286 |
) |
|
|
(161 |
) |
|
|
(174 |
) |
Net
amount recognized
|
|
$ |
(784 |
) |
|
$ |
(283 |
) |
|
$ |
(147 |
) |
|
$ |
(147 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
recognized in Accumulated other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive income (loss),
not yet recognized in net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
periodic (benefit)
cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
transition asset
|
|
|
|
|
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
Prior
service cost (credit)
|
|
$ |
3 |
|
|
|
25 |
|
|
$ |
(168 |
) |
|
$ |
(190 |
) |
Net
actuarial loss
|
|
|
869 |
|
|
|
411 |
|
|
|
51 |
|
|
|
45 |
|
Net
amount recognized
|
|
$ |
872 |
|
|
$ |
435 |
|
|
$ |
(117 |
) |
|
$ |
(145 |
) |
Information for pension plans with an
accumulated benefit obligation in excess of plan assets:
December
31
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
benefit obligation
|
|
$ |
292 |
|
|
$ |
346 |
|
Accumulated
benefit obligation
|
|
|
2,579 |
|
|
|
297 |
|
Fair
value of plan assets
|
|
|
1,946 |
|
|
|
228 |
|
The Company employs a total return
approach whereby a mix of equities and fixed income investments are used to
maximize the long term return of plan assets for a prudent level of risk. The
intent of this strategy is to minimize plan expenses by outperforming plan
liabilities over the long run. Risk tolerance is established through careful
consideration of the plan liabilities, plan funded status and corporate
financial conditions. The investment portfolio
Notes to
Consolidated Financial Statements
Note
18. Benefit Plans – (Continued)
contains
a diversified blend of U.S. and non-U.S. fixed income and equity investments.
Alternative investments, including hedge funds, are used judiciously to enhance
risk adjusted long term returns while improving portfolio diversification.
Derivatives may be used to gain market exposure in an efficient and timely
manner. Investment risk is measured and monitored on an ongoing basis through
annual liability measurements, periodic asset/liability studies and quarterly
investment portfolio reviews.
The Company’s pension plan and other
postretirement benefit weighted-average asset allocation by asset category are
as follows:
|
|
|
|
|
Percentage
of
|
|
|
|
Percentage
of
|
|
|
Other
Postretirement Benefits
|
|
|
|
Pension
Plan Assets
|
|
|
Plan
Assets
|
|
December
31
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities |
|
|
17.1 |
% |
|
|
19.1 |
% |
|
|
14.9 |
% |
|
|
22.1 |
% |
Debt
securities
|
|
|
35.2 |
|
|
|
26.9 |
|
|
|
48.7 |
|
|
|
40.4 |
|
Limited
partnerships
|
|
|
32.3 |
|
|
|
27.4 |
|
|
|
26.1 |
|
|
|
25.2 |
|
Commingled
funds
|
|
|
0.9 |
|
|
|
1.1 |
|
|
|
7.6 |
|
|
|
|
|
Short
term investments and other
|
|
|
14.5 |
|
|
|
25.5 |
|
|
|
2.7 |
|
|
|
12.3 |
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
The table below presents the
estimated amounts to be recognized from Accumulated other comprehensive income
into net periodic benefit cost during 2009.
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of net actuarial loss
|
|
$ |
29 |
|
|
$ |
3 |
|
Amortization
of prior service cost (benefit)
|
|
|
|
|
|
|
(23 |
) |
Total
estimated amounts to be recognized
|
|
$ |
29 |
|
|
$ |
(20 |
) |
The table
below presents the estimated future minimum benefit payments at December 31,
2008.
|
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
Medicare
|
|
|
|
|
Expected
future benefit payments
|
|
Benefits
|
|
|
Benefits
|
|
|
Subsidy
|
|
|
Net
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$ |
181 |
|
|
$ |
17 |
|
|
|
|
|
|
$ |
17 |
|
2010
|
|
|
180 |
|
|
|
17 |
|
|
|
|
|
|
|
17 |
|
2011
|
|
|
186 |
|
|
|
17 |
|
|
|
|
|
|
|
17 |
|
2012
|
|
|
193 |
|
|
|
18 |
|
|
|
|
|
|
|
18 |
|
2013
|
|
|
200 |
|
|
|
18 |
|
|
|
|
|
|
|
18 |
|
Thereafter
|
|
|
1,113 |
|
|
|
84 |
|
|
$ |
1 |
|
|
|
83 |
|
|
|
$ |
2,053 |
|
|
$ |
171 |
|
|
$ |
1 |
|
|
$ |
170 |
|
In 2009, it is expected that
contributions of $70 million will be made to pension plans and $12 million to
postretirement healthcare and life insurance benefit plans.
Savings Plans – The Company and its
subsidiaries have several contributory savings plans which allow employees to
make regular contributions based upon a percentage of their salaries. Matching
contributions are made up to specified percentages of employees’ contributions.
The contributions by the Company and its subsidiaries to these plans amounted to
$91 million, $68 million and $68 million for the years ended December 31, 2008,
2007 and 2006, respectively.
Notes to
Consolidated Financial Statements
Note
18. Benefit Plans – (Continued)
Stock Option Plans – In 2005,
shareholders approved the amended and restated Loews Corporation 2000 Stock
Option Plan (the “Loews Plan”). The aggregate number of shares of Loews common
stock for which options or SARs may be granted under the Loews Plan is
12,000,000 shares, and the maximum number of shares of Loews common stock with
respect to which options or SARs may be granted to any individual in any
calendar year is 1,200,000 shares. The exercise price per share may not be less
than the fair value of the common stock on the date of grant. Generally, options
and SARs vest ratably over a four-year period and expire in ten
years.
A summary of the stock option and SAR
transactions for the Loews Plan follows:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Number
of
|
|
|
Exercise
|
|
|
|
Awards
|
|
|
Price
|
|
|
Awards
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
outstanding, January 1
|
|
|
4,787,041 |
|
|
$ |
28.085 |
|
|
|
4,110,442 |
|
|
$ |
23.124 |
|
Granted
|
|
|
980,000 |
|
|
|
43.629 |
|
|
|
959,250 |
|
|
|
46.397 |
|
Exercised
|
|
|
(226,695 |
) |
|
|
19.958 |
|
|
|
(270,641 |
) |
|
|
17.562 |
|
Canceled
|
|
|
(164,946 |
) |
|
|
41.964 |
|
|
|
(12,010 |
) |
|
|
30.132 |
|
Awards
outstanding, December 31
|
|
|
5,375,400 |
|
|
|
30.836 |
|
|
|
4,787,041 |
|
|
|
28.085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
exercisable, December 31
|
|
|
3,262,981 |
|
|
$ |
24.098 |
|
|
|
2,600,032 |
|
|
$ |
20.839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
available for grant,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
4,236,697 |
|
|
|
|
|
|
|
5,051,751 |
|
|
|
|
|
The following table summarizes
information about the Company’s stock options and SARs outstanding in connection
with the Loews Plan at December 31, 2008:
|
|
Awards
Outstanding
|
|
|
Awards
Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
of
|
|
|
Exercise
|
|
Range
of exercise prices
|
|
Shares
|
|
|
Life
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 10.01-20.00
|
|
|
1,710,605 |
|
|
|
3.5 |
|
|
$ |
16.725 |
|
|
|
1,710,605 |
|
|
$ |
16.725 |
|
20.01-30.00
|
|
|
767,050 |
|
|
|
5.9 |
|
|
|
23.762 |
|
|
|
618,868 |
|
|
|
23.549 |
|
30.01-40.00
|
|
|
1,314,245 |
|
|
|
7.3 |
|
|
|
35.226 |
|
|
|
635,432 |
|
|
|
34.063 |
|
40.01-50.00
|
|
|
1,359,000 |
|
|
|
8.6 |
|
|
|
45.243 |
|
|
|
231,432 |
|
|
|
44.930 |
|
50.01-60.00
|
|
|
224,500 |
|
|
|
8.1 |
|
|
|
51.080 |
|
|
|
66,644 |
|
|
|
51.080 |
|
In 2008, the Company awarded SARs
totaling 980,000 shares. In accordance with the Loews Plan, the Company has the
ability to settle SARs in shares or cash and has the intention to settle in
shares. The SARs balance at December 31, 2008 was 2,684,548 shares.
The weighted average remaining
contractual terms of awards outstanding and exercisable as of December 31, 2008,
were 6.3 years and 5.1 years. The aggregate intrinsic values of awards
outstanding and exercisable at December 31, 2008 were each $23 million. The
total intrinsic value of awards exercised during 2008 was $6
million.
The Company recorded stock-based
compensation expense of $11 million, $8 million and $5 million related to the
Loews Plan for the years ended December 31, 2008, 2007 and 2006. The related
income tax benefits recognized were $4 million, $3 million and $2 million. At
December 31, 2008, the compensation cost related to nonvested awards not yet
recognized was $20 million, and the weighted average period over which it is
expected to be recognized is 2.5 years.
Notes to
Consolidated Financial Statements
Note
18. Benefit Plans – (Continued)
The fair value of granted options and SARs for the Loews Plan were estimated at
the grant date using the Black-Scholes pricing model with the following
assumptions and results:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Loews
Plan:
|
|
|
|
|
|
|
|
|
|
Expected dividend
yield
|
|
|
0.6 |
% |
|
|
0.5 |
% |
|
|
0.6 |
% |
Expected
volatility
|
|
|
40.2 |
% |
|
|
24.0 |
% |
|
|
23.9 |
% |
Weighted average risk-free
interest rate
|
|
|
2.9 |
% |
|
|
4.6 |
% |
|
|
4.7 |
% |
Expected holding period (in
years)
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
Weighted average fair value of
awards
|
|
$ |
16.10 |
|
|
$ |
13.45 |
|
|
$ |
10.02 |
|
Note
19. 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.
Reinsurance accounting allows for
contractual cash flows to be reflected as premiums and losses, as compared to
deposit accounting, which requires cash flows to be reflected as assets and
liabilities. To qualify for reinsurance accounting, reinsurance agreements must
include risk transfer. To meet risk transfer requirements, a reinsurance
contract must include both insurance risk, consisting of underwriting and timing
risk, and a reasonable possibility of a significant loss for the assuming
entity.
The following table summarizes the
amounts receivable from reinsurers:
December
31
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
receivables related to insurance reserves:
|
|
|
|
|
|
|
Ceded claim and claim
adjustment expense
|
|
$ |
6,288 |
|
|
$ |
7,056 |
|
Ceded future policy
benefits
|
|
|
903 |
|
|
|
987 |
|
Ceded policyholders’
funds
|
|
|
39 |
|
|
|
43 |
|
Reinsurance
receivables related to paid losses
|
|
|
531 |
|
|
|
603 |
|
Reinsurance
receivables
|
|
|
7,761 |
|
|
|
8,689 |
|
Less
allowance for uncollectible reinsurance
|
|
|
366 |
|
|
|
461 |
|
|
|
|
|
|
|
|
|
|
Reinsurance
receivables, net of allowance for uncollectible
reinsurance
|
|
$ |
7,395 |
|
|
$ |
8,228 |
|
CNA has established an allowance for
uncollectible reinsurance receivables. The expense (release) for uncollectible
reinsurance was $(47) million, $1 million and $23 million for the years ended
December 31, 2008, 2007 and 2006. Changes in the allowance for uncollectible
reinsurance receivables are presented as a component of Insurance claims and
policyholders’ benefits on the Consolidated Statements of Income.
CNA attempts to mitigate its credit
risk related to reinsurance by entering into reinsurance arrangements with
reinsurers that have credit ratings above certain levels and by obtaining
collateral. The primary methods of obtaining collateral are through reinsurance
trusts, letters of credit and funds withheld balances. Such collateral was
approximately $2.1 billion and $2.4 billion at December 31, 2008 and 2007. On a
more limited basis, CNA may enter into reinsurance agreements with reinsurers
that are not rated.
Notes to
Consolidated Financial Statements
Note
19. Reinsurance – (Continued)
CNA’s largest recoverables from a
single reinsurer at December 31, 2008, including prepaid reinsurance
premiums, were approximately $1,450 million from subsidiaries of Swiss Re Group,
$900 million from subsidiaries of Munich Re Group and $700 million from
subsidiaries of Hartford Insurance Group.
The effects of reinsurance on earned
premiums are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed/
|
|
|
|
Direct
|
|
|
Assumed
|
|
|
Ceded
|
|
|
Net
|
|
|
Net
%
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and casualty
|
|
$ |
8,496 |
|
|
$ |
164 |
|
|
$ |
2,121 |
|
|
$ |
6,539 |
|
|
|
2.5 |
% |
Accident
and health
|
|
|
592 |
|
|
|
46 |
|
|
|
28 |
|
|
|
610 |
|
|
|
7.5 |
|
Life
|
|
|
99 |
|
|
|
|
|
|
|
98 |
|
|
|
1 |
|
|
|
|
|
Earned premiums
|
|
$ |
9,187 |
|
|
$ |
210 |
|
|
$ |
2,247 |
|
|
$ |
7,150 |
|
|
|
2.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and casualty
|
|
$ |
9,097 |
|
|
$ |
118 |
|
|
$ |
2,349 |
|
|
$ |
6,866 |
|
|
|
1.7 |
% |
Accident
and health
|
|
|
658 |
|
|
|
76 |
|
|
|
119 |
|
|
|
615 |
|
|
|
12.4 |
|
Life
|
|
|
76 |
|
|
|
|
|
|
|
75 |
|
|
|
1 |
|
|
|
|
|
Earned premiums
|
|
$ |
9,831 |
|
|
$ |
194 |
|
|
$ |
2,543 |
|
|
$ |
7,482 |
|
|
|
2.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and casualty
|
|
$ |
9,125 |
|
|
$ |
120 |
|
|
$ |
2,283 |
|
|
$ |
6,962 |
|
|
|
1.7 |
% |
Accident
and health
|
|
|
718 |
|
|
|
59 |
|
|
|
138 |
|
|
|
639 |
|
|
|
9.2 |
|
Life
|
|
|
100 |
|
|
|
|
|
|
|
98 |
|
|
|
2 |
|
|
|
|
|
Earned premiums
|
|
$ |
9,943 |
|
|
$ |
179 |
|
|
$ |
2,519 |
|
|
$ |
7,603 |
|
|
|
2.4 |
% |
Life and accident and health premiums
are primarily from long duration contracts; property and casualty premiums are
primarily from short duration contracts.
Insurance claims and policyholders’
benefits reported on the Consolidated Statements of Income are net of
reinsurance recoveries of $1.8 billion, $1.4 billion and $1.3 billion for the
years ended December 31, 2008, 2007 and 2006.
The
impact of reinsurance on life insurance inforce is shown in the following
table:
December
31
|
|
Direct
|
|
|
Assumed
|
|
|
Ceded
|
|
|
Net
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$ |
10,805 |
|
|
|
|
|
$ |
10,790 |
|
|
$ |
15 |
|
2007
|
|
|
14,089 |
|
|
$ |
1 |
|
|
|
14,071 |
|
|
|
19 |
|
2006
|
|
|
15,652 |
|
|
|
1 |
|
|
|
15,633 |
|
|
|
20 |
|
As of December 31, 2008 and 2007, CNA
has ceded $1.5 billion and $1.8 billion of claim and claim adjustment expense
reserves, future policy benefits and policyholders’ funds as a result of
business operations sold in prior years. Subject to certain exceptions, the
purchasers assumed the credit risk of the sold business that was primarily
reinsured to other carriers. The assumed credit risk was $47 million and $49
million for the years ended December 31, 2008 and 2007.
Notes to
Consolidated Financial Statements
Note
20. Quarterly Financial Data (Unaudited)
2008
Quarter Ended
|
|
Dec.
31
|
|
|
Sept.
30
|
|
|
June
30
|
|
|
March
31
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
2,743 |
|
|
$ |
2,970 |
|
|
$ |
3,922 |
|
|
$ |
3,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
(958 |
) |
|
|
(144 |
) |
|
|
511 |
|
|
|
409 |
|
Per
share-basic
|
|
|
(2.20 |
) |
|
|
(0.33 |
) |
|
|
1.00 |
|
|
|
0.77 |
|
Per
share-diluted
|
|
|
(2.20 |
) |
|
|
(0.33 |
) |
|
|
1.00 |
|
|
|
0.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations,
net
|
|
|
- |
|
|
|
7 |
|
|
|
4,348 |
|
|
|
146 |
|
Per
share-basic
|
|
|
- |
|
|
|
0.02 |
|
|
|
8.56 |
|
|
|
0.28 |
|
Per
share-diluted
|
|
|
- |
|
|
|
0.02 |
|
|
|
8.54 |
|
|
|
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
(a)
|
|
|
(958 |
) |
|
|
(137 |
) |
|
|
4,859 |
|
|
|
555 |
|
Per
share-basic
|
|
|
(2.20 |
) |
|
|
(0.31 |
) |
|
|
9.56 |
|
|
|
1.05 |
|
Per
share-diluted
|
|
|
(2.20 |
) |
|
|
(0.31 |
) |
|
|
9.54 |
|
|
|
1.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former Carolina Group
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations,
net
|
|
|
- |
|
|
|
- |
|
|
|
104 |
|
|
|
107 |
|
Per
share-basic
|
|
|
- |
|
|
|
- |
|
|
|
0.97 |
|
|
|
0.98 |
|
Per
share-diluted
|
|
|
- |
|
|
|
- |
|
|
|
0.96 |
|
|
|
0.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Quarter Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
3,592 |
|
|
$ |
3,525 |
|
|
$ |
3,517 |
|
|
$ |
3,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
|
295 |
|
|
|
309 |
|
|
|
422 |
|
|
|
561 |
|
Per
share-basic
|
|
|
0.56 |
|
|
|
0.58 |
|
|
|
0.78 |
|
|
|
1.03 |
|
Per
share-diluted
|
|
|
0.56 |
|
|
|
0.58 |
|
|
|
0.78 |
|
|
|
1.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations,
net
|
|
|
89 |
|
|
|
100 |
|
|
|
91 |
|
|
|
89 |
|
Per
share-basic
|
|
|
0.16 |
|
|
|
0.19 |
|
|
|
0.17 |
|
|
|
0.17 |
|
Per
share-diluted
|
|
|
0.16 |
|
|
|
0.19 |
|
|
|
0.17 |
|
|
|
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
384 |
|
|
|
409 |
|
|
|
513 |
|
|
|
650 |
|
Per
share-basic
|
|
|
0.72 |
|
|
|
0.77 |
|
|
|
0.95 |
|
|
|
1.20 |
|
Per
share-diluted
|
|
|
0.72 |
|
|
|
0.77 |
|
|
|
0.95 |
|
|
|
1.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former Carolina Group
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net
(b)
|
|
|
128 |
|
|
|
146 |
|
|
|
141 |
|
|
|
118 |
|
Per
share-basic
|
|
|
1.18 |
|
|
|
1.34 |
|
|
|
1.31 |
|
|
|
1.09 |
|
Per
share-diluted
|
|
|
1.18 |
|
|
|
1.34 |
|
|
|
1.30 |
|
|
|
1.08 |
|
The sum of the quarterly per share
amounts may not equal per share amounts reported for year-to-date periods. This
is due to changes in the number of weighted average shares outstanding and the
effects of rounding for each period.
Notes to
Consolidated Financial Statements
Note
20. Quarterly Financial Data (Unaudited) – (Continued)
(a)
|
Net
loss attributable to Loews common stock for the fourth quarter of 2008
includes realized investment losses at CNA of $283 (after tax and minority
interest), a $440 after tax non-cash impairment charge related to the
carrying value of HighMount’s natural gas and oil properties reflecting
commodity prices at December 31, 2008 and a $314 after tax non-cash
goodwill impairment charge related to HighMount. Net income
attributable to Loews common stock for the fourth quarter of 2007 included
net investment losses of $52 (after tax and minority
interest).
|
(b)
|
Net
income attributable to former Carolina Group stock for the fourth quarter
of 2007 included a $46 charge after tax, related to
litigation.
|
Note
21. Legal Proceedings
INSURANCE
RELATED
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. At present the appeal is being briefed. No oral
argument has yet been scheduled. CNA believes it has meritorious defenses to
this appeal and intends to defend the appeal vigorously. The agreement did not
have a material impact on the Company’s results of operations, 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. In 2009, the
parties negotiated a settlement in principle, which involves a dismissal with
prejudice of all claims against CCC. The settlement is subject to certain
contingencies, including among others, the negotiation and execution of
definitive agreements and entry by the Court of an order barring all claims
against CCC under certain conditions and subject to certain limitations. The
negotiated amount approximates the amount accrued at December 31,
2008.
Notes to
Consolidated Financial Statements
Note
21. Legal Proceedings – (Continued)
A&E
Reserves
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.
TOBACCO
RELATED
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; the court has scheduled trial
of Cochran to begin on
March 15, 2010. In Cypret vs.
The American Tobacco Company, Inc. et al. (1998, Circuit Court, Jackson
County, Missouri), the Company would contest jurisdiction and make use of all
available defenses 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
initially permitted plaintiff to serve the Company outside the jurisdiction but
it cancelled the leave of service in response to the Company’s application, 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.
While the Company intends to defend
vigorously all tobacco products liability litigation, it is not possible to
predict the outcome of any of this litigation. Litigation is subject to many
uncertainties. It is possible that one or more of the pending actions could be
decided unfavorably.
OTHER
LITIGATION
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.
Note
22. 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 December 31, 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 December 31, 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.
Notes to
Consolidated Financial Statements
Note
22. Commitments and Contingencies – (Continued)
As of December 31, 2008 and 2007, CNA
has recorded liabilities of approximately $22 million and $27 million related to
indemnification agreements and does not believe that it is likely that any
future indemnity claims will be significantly greater than the amounts
recorded.
CNA has also guaranteed certain
collateral obligations of a large national contractor’s letters of credit. As of
December 31, 2008 these guarantees aggregated $4 million. Payment under these
guarantees is reasonably possible based on various factors, including the
underlying credit worthiness of the contractor.
In connection with the issuance of
preferred securities by CNA Surety Capital Trust I (“Issuer Trust”), CNA Surety,
a 62% owned and consolidated subsidiary of CNA, has also guaranteed the dividend
payments and redemption of the preferred securities issued by the Issuer Trust.
The maximum amount of undiscounted future payments CNA could make under the
guarantee is approximately $74 million, consisting of annual dividend payments
of approximately $2 million over 26 years and the redemption value of $30
million. Because payment under the guarantee would only be required if CNA does
not fulfill its obligations under the debentures held by the Issuer Trust, CNA
has not recorded any additional liabilities related to this guarantee. There has
been no change in the underlying assets of the trust and CNA does not believe
that a payment is likely under this guarantee.
CNA
Surety
CCC provided an excess of loss
reinsurance contract to the insurance subsidiaries of CNA Surety over a period
that expired on December 31, 2000 (the “stop loss contract”). The stop loss
contract limits the net loss ratios for CNA Surety with respect to certain
accounts and lines of insurance business. In the event that CNA Surety’s
accident year net loss ratio exceeds 24.0% for 1997 through 2000 (the
“contractual loss ratio”), the stop loss contract requires CCC to pay amounts
equal to the amount, if any, by which CNA Surety’s actual accident year net loss
ratio exceeds the contractual loss ratio multiplied by the applicable net earned
premiums. The minority shareholders of CNA Surety do not share in any losses
that apply to this contract.
Diamond
Offshore Construction Projects
As of December 31, 2008, Diamond
Offshore had purchase obligations aggregating approximately $23 million related
to the major upgrade of the Ocean Monarch. Diamond
Offshore expects to complete funding of this project in 2009. Diamond Offshore
had no other purchase obligations for major rig updates or any other significant
obligations at December 31, 2008, except for those related to its direct rig
operations, which arise during the normal course of business.
HighMount
Volumetric Production Payment Transactions
As part
of the acquisition of exploration and production assets from Dominion, HighMount
assumed an obligation to deliver approximately 15 Bcf of natural gas through
February 2009 under previously existing 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 December 31, 2008, the remaining obligation under these agreements
is approximately 1.5 Bcf of natural gas.
Pipeline
Expansion Projects
As discussed in Note 8, Boardwalk
Pipeline is engaged in several major expansion projects that will require the
investment of significant capital resources. As of December 31, 2008, Boardwalk
Pipeline had purchase commitments of $199 million primarily related to its
expansion projects.
Notes to
Consolidated Financial Statements
Note
23. Discontinued Operations
The results of discontinued
operations are as follows:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Net investment
income
|
|
$ |
22 |
|
|
$ |
120 |
|
|
$ |
122 |
|
Manufactured
products
|
|
|
1,750 |
|
|
|
4,176 |
|
|
|
3,962 |
|
Investment gains
(losses)
|
|
|
3 |
|
|
|
9 |
|
|
|
(3 |
) |
Other
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
Total
(a)
|
|
|
1,775 |
|
|
|
4,306 |
|
|
|
4,082 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance related
expenses
|
|
|
10 |
|
|
|
25 |
|
|
|
51 |
|
Cost of manufactured products
sold
|
|
|
1,039 |
|
|
|
2,408 |
|
|
|
2,262 |
|
Other operating
expenses
|
|
|
175 |
|
|
|
478 |
|
|
|
437 |
|
Total
|
|
|
1,224 |
|
|
|
2,911 |
|
|
|
2,750 |
|
Income
before income tax and minority interest
|
|
|
551 |
|
|
|
1,395 |
|
|
|
1,332 |
|
Income
tax expense
|
|
|
(200 |
) |
|
|
(494 |
) |
|
|
(520 |
) |
Minority
interest
|
|
|
(1 |
) |
|
|
1 |
|
|
|
3 |
|
Results
of discontinued operations
|
|
|
350 |
|
|
|
902 |
|
|
|
815 |
|
Gain
on disposal (net of tax of $51)
|
|
|
4,362 |
|
|
|
|
|
|
|
|
|
Net
income from discontinued operations
|
|
$ |
4,712 |
|
|
$ |
902 |
|
|
$ |
815 |
|
(a)
|
Lorillard’s
revenues amounted to 99.4%, 94.7% and 94.5% of total revenues of
discontinued operations for the years ended December 31, 2008, 2007 and
2006. Lorillard’s pretax income amounted to 100%, 99.1% and 100% of total
pretax income of discontinued operations for the years ended December 31,
2008, 2007 and 2006.
|
The components of discontinued
operations included in the Consolidated Balance Sheets are as
follows:
December
31
|
|
2008
|
|
|
2007
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
of discontinued operations:
|
|
|
|
|
|
|
Investments
|
|
$ |
157 |
|
|
$ |
1,495 |
|
Cash
|
|
|
|
|
|
|
20 |
|
Receivables
|
|
|
6 |
|
|
|
293 |
|
Reinsurance
receivables
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
(174 |
) |
Transfer to
liabilities
|
|
|
(164 |
) |
|
|
|
|
Assets
of discontinued operations (a)
|
|
$ |
- |
|
|
$ |
2,841 |
|
|
|
|
|
|
|
|
|
|
Liabilities
of discontinued operations:
|
|
|
|
|
|
|
|
|
Transfer of assets to
liabilities
|
|
$ |
(164 |
) |
|
|
|
|
Insurance
reserves
|
|
|
162 |
|
|
|
|
|
Other
liabilities
|
|
|
8 |
|
|
$ |
1,637 |
|
Liabilities
of discontinued operations (a)
|
|
$ |
6 |
|
|
$ |
1,637 |
|
Notes to
Consolidated Financial Statements
Note
23. Discontinued Operations – (Continued)
(a)
|
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 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 net as $6 million in Liabilities
of discontinued operations at December 31, 2008 and as $23 million in
Assets of discontinued operations at December 31, 2007 in the Consolidated
Balance Sheets. At December 31, 2008 and 2007, the insurance reserves are
net of discounts of $75 million and $73
million.
|
Lorillard
As discussed in Note 2, in June of
2008, the Company disposed of its entire ownership interest in Lorillard. The
Consolidated 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 Balance Sheets, Consolidated Statements of Income,
and Consolidated 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 December 31, 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 above 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.
On May 4, 2007, CNA sold Continental
Management Services Limited (“CMS”), its United Kingdom discontinued operations
subsidiary. In anticipation of the 2007 sale, the Company recorded an impairment
loss of $26 million, after tax and minority interest, in 2006. After closing the
transaction in 2007, the loss was reduced by approximately $4 million. Net loss
for the business through the date of the sale in 2007 was $1 million. Excluding
the impairment loss, net loss for the business was $1 million for the year ended
December 31, 2006. During 2008, CNA recognized a change in estimate of the tax
benefit related to the CMS sale.
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 year ended
December 31, 2008.
Note
24. Business Segments
The Company’s reportable segments are
primarily based on its individual operating subsidiaries. Each of the principal
operating subsidiaries are headed by a chief executive officer who is
responsible for the operation of its business and has the duties and authority
commensurate with that position. Investment gains (losses) and the related
income taxes, excluding those of CNA 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
Notes to
Consolidated Financial Statements
Note
24. Business Segments – (Continued)
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
that have been sold or placed in run-off. Other Insurance primarily includes
certain corporate expenses, including interest on corporate debt, and the
results of certain property and casualty lines of business placed in run-off,
including CNA Re. This segment also includes the results related to the
centralized adjusting and settlements of A&E.
Diamond
Offshore’s business primarily consists of operating 45 offshore drilling rigs
that are chartered on a contract basis for fixed terms by companies engaged in
exploration and production of hydrocarbons. Offshore rigs are mobile units that
can be relocated based on market demand. On December 31, 2008, 17 of these rigs
were located in the Gulf of Mexico region with the remainder operating in
Brazil, the North Sea, Australia 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 2.2 trillion
cubic feet equivalent.
Boardwalk Pipeline is engaged in the
interstate transportation and storage of natural gas. This segment consists of
three interstate natural gas pipeline systems originating in the Gulf Coast area
and running north and east through Texas, Louisiana, Mississippi, Alabama,
Florida, Arkansas, Tennessee, Kentucky, Indiana, Ohio, Illinois and Oklahoma
with approximately 14,000 miles of pipeline.
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 expense and other
unallocated expenses.
The accounting policies of the segments
are the same as those described in the summary of significant accounting
policies. In 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.
Notes to
Consolidated Financial Statements
Note
24. Business Segments – (Continued)
The following tables set forth the
Company’s consolidated revenues, income and assets by business
segment:
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
Standard Lines
|
|
$ |
3,141 |
|
|
$ |
4,155 |
|
|
$ |
4,513 |
|
Specialty Lines
|
|
|
3,867 |
|
|
|
4,212 |
|
|
|
4,153 |
|
Life & Group
Non-Core
|
|
|
761 |
|
|
|
1,220 |
|
|
|
1,355 |
|
Other Insurance
|
|
|
30 |
|
|
|
299 |
|
|
|
361 |
|
Total
CNA Financial
|
|
|
7,799 |
|
|
|
9,886 |
|
|
|
10,382 |
|
Diamond
Offshore
|
|
|
3,486 |
|
|
|
2,617 |
|
|
|
2,102 |
|
HighMount
|
|
|
770 |
|
|
|
274 |
|
|
|
|
|
Boardwalk
Pipeline
|
|
|
848 |
|
|
|
671 |
|
|
|
618 |
|
Loews
Hotels
|
|
|
380 |
|
|
|
384 |
|
|
|
371 |
|
Corporate
and other
|
|
|
(36 |
) |
|
|
470 |
|
|
|
371 |
|
Total
|
|
$ |
13,247 |
|
|
$ |
14,302 |
|
|
$ |
13,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income tax and minority interest (a)(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard Lines
|
|
$ |
(205 |
) |
|
$ |
728 |
|
|
$ |
726 |
|
Specialty Lines
|
|
|
495 |
|
|
|
902 |
|
|
|
1,005 |
|
Life & Group
Non-Core
|
|
|
(587 |
) |
|
|
(351 |
) |
|
|
(113 |
) |
Other Insurance
|
|
|
(253 |
) |
|
|
(45 |
) |
|
|
49 |
|
Total
CNA Financial
|
|
|
(550 |
) |
|
|
1,234 |
|
|
|
1,667 |
|
Diamond
Offshore
|
|
|
1,843 |
|
|
|
1,239 |
|
|
|
960 |
|
HighMount
|
|
|
(890 |
) |
|
|
92 |
|
|
|
|
|
Boardwalk
Pipeline
|
|
|
292 |
|
|
|
229 |
|
|
|
198 |
|
Loews
Hotels
|
|
|
62 |
|
|
|
60 |
|
|
|
48 |
|
Corporate
and other
|
|
|
(170 |
) |
|
|
341 |
|
|
|
231 |
|
Total
|
|
$ |
587 |
|
|
$ |
3,195 |
|
|
$ |
3,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) (a)(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard Lines
|
|
$ |
(85 |
) |
|
$ |
449 |
|
|
$ |
446 |
|
Specialty Lines
|
|
|
266 |
|
|
|
503 |
|
|
|
596 |
|
Life & Group
Non-Core
|
|
|
(309 |
) |
|
|
(174 |
) |
|
|
(43 |
) |
Other Insurance
|
|
|
(140 |
) |
|
|
(8 |
) |
|
|
43 |
|
Total
CNA Financial
|
|
|
(268 |
) |
|
|
770 |
|
|
|
1,042 |
|
Diamond
Offshore
|
|
|
612 |
|
|
|
396 |
|
|
|
352 |
|
HighMount
|
|
|
(575 |
) |
|
|
57 |
|
|
|
|
|
Boardwalk
Pipeline
|
|
|
125 |
|
|
|
106 |
|
|
|
103 |
|
Loews
Hotels
|
|
|
40 |
|
|
|
36 |
|
|
|
29 |
|
Corporate
and other
|
|
|
(116 |
) |
|
|
222 |
|
|
|
150 |
|
Income
(loss) from continuing operations
|
|
|
(182 |
) |
|
|
1,587 |
|
|
|
1,676 |
|
Discontinued
operations, net
|
|
|
4,712 |
|
|
|
902 |
|
|
|
815 |
|
Total
|
|
$ |
4,530 |
|
|
$ |
2,489 |
|
|
$ |
2,491 |
|
Notes to
Consolidated Financial Statements
Note
24. Business Segments – (Continued)
(a)
|
Investment
gains (losses) included in Revenues, Income (loss) before income tax and
minority interest and Net income (loss) are as
follows:
|
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
and income (loss) before income tax and minority
|
|
|
|
|
|
|
|
|
|
interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
Standard Lines
|
|
$ |
(487 |
) |
|
$ |
(149 |
) |
|
$ |
72 |
|
Specialty Lines
|
|
|
(289 |
) |
|
|
(81 |
) |
|
|
32 |
|
Life & Group
Non-Core
|
|
|
(363 |
) |
|
|
(56 |
) |
|
|
(51 |
) |
Other Insurance
|
|
|
(158 |
) |
|
|
(24 |
) |
|
|
39 |
|
Total
CNA Financial
|
|
|
(1,297 |
) |
|
|
(310 |
) |
|
|
92 |
|
Corporate
and other
|
|
|
3 |
|
|
|
175 |
|
|
|
10 |
|
Total
|
|
$ |
(1,294 |
) |
|
$ |
(135 |
) |
|
$ |
102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard Lines
|
|
$ |
(285 |
) |
|
$ |
(87 |
) |
|
$ |
41 |
|
Specialty Lines
|
|
|
(167 |
) |
|
|
(47 |
) |
|
|
23 |
|
Life & Group
Non-Core
|
|
|
(212 |
) |
|
|
(33 |
) |
|
|
(30 |
) |
Other Insurance
|
|
|
(92 |
) |
|
|
(13 |
) |
|
|
29 |
|
Total
CNA Financial
|
|
|
(756 |
) |
|
|
(180 |
) |
|
|
63 |
|
Corporate
and other
|
|
|
2 |
|
|
|
113 |
|
|
|
6 |
|
Total
|
|
$ |
(754 |
) |
|
$ |
(67 |
) |
|
$ |
69 |
|
(b)
|
Income
taxes and interest expense are as
follows:
|
Year
Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Income
|
|
|
Interest
|
|
|
Income
|
|
|
Interest
|
|
|
Income
|
|
|
Interest
|
|
|
|
Taxes
|
|
|
Expense
|
|
|
Taxes
|
|
|
Expense
|
|
|
Taxes
|
|
|
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard Lines
|
|
$ |
(108 |
) |
|
|
|
|
$ |
223 |
|
|
|
|
|
$ |
232 |
|
|
|
|
Specialty Lines
|
|
|
141 |
|
|
$ |
2 |
|
|
|
289 |
|
|
$ |
3 |
|
|
|
300 |
|
|
$ |
5 |
|
Life & Group
Non-Core
|
|
|
(243 |
) |
|
|
23 |
|
|
|
(155 |
) |
|
|
23 |
|
|
|
(66 |
) |
|
|
23 |
|
Other Insurance
|
|
|
(96 |
) |
|
|
109 |
|
|
|
(36 |
) |
|
|
114 |
|
|
|
8 |
|
|
|
103 |
|
Total
CNA Financial
|
|
|
(306 |
) |
|
|
134 |
|
|
|
321 |
|
|
|
140 |
|
|
|
474 |
|
|
|
131 |
|
Diamond
Offshore
|
|
|
582 |
|
|
|
10 |
|
|
|
429 |
|
|
|
19 |
|
|
|
285 |
|
|
|
24 |
|
HighMount
|
|
|
(315 |
) |
|
|
76 |
|
|
|
46 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
Boardwalk
Pipeline
|
|
|
79 |
|
|
|
58 |
|
|
|
68 |
|
|
|
61 |
|
|
|
65 |
|
|
|
62 |
|
Loews
Hotels
|
|
|
22 |
|
|
|
11 |
|
|
|
24 |
|
|
|
11 |
|
|
|
19 |
|
|
|
12 |
|
Corporate
and other
|
|
|
(55 |
) |
|
|
56 |
|
|
|
107 |
|
|
|
55 |
|
|
|
81 |
|
|
|
75 |
|
Total
|
|
$ |
7 |
|
|
$ |
345 |
|
|
$ |
995 |
|
|
$ |
318 |
|
|
$ |
924 |
|
|
$ |
304 |
|
Notes to
Consolidated Financial Statements
Note
24. Business Segments – (Continued)
|
|
Investments
|
|
|
Receivables
|
|
|
Total
Assets
|
|
December
31
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial
|
|
$ |
34,980 |
|
|
$ |
41,789 |
|
|
$ |
10,290 |
|
|
$ |
10,672 |
|
|
$ |
51,624 |
|
|
$ |
56,719 |
|
Diamond
Offshore
|
|
|
701 |
|
|
|
633 |
|
|
|
575 |
|
|
|
523 |
|
|
|
4,955 |
|
|
|
4,371 |
|
HighMount
|
|
|
46 |
|
|
|
34 |
|
|
|
225 |
|
|
|
136 |
|
|
|
4,012 |
|
|
|
4,421 |
|
Boardwalk
Pipeline
|
|
|
313 |
|
|
|
316 |
|
|
|
92 |
|
|
|
87 |
|
|
|
6,817 |
|
|
|
4,142 |
|
Loews
Hotels
|
|
|
70 |
|
|
|
58 |
|
|
|
23 |
|
|
|
22 |
|
|
|
496 |
|
|
|
499 |
|
Corporate
and eliminations
|
|
|
2,340 |
|
|
|
3,839 |
|
|
|
467 |
|
|
|
29 |
|
|
|
1,953 |
|
|
|
5,963 |
|
Total
|
|
$ |
38,450 |
|
|
$ |
46,669 |
|
|
$ |
11,672 |
|
|
$ |
11,469 |
|
|
$ |
69,857 |
|
|
$ |
76,115 |
|
Note
25. Consolidating Financial Information
The following schedules present the
Company’s consolidating balance sheet information at December 31, 2008 and 2007,
and consolidating statements of income information for the years ended December
31, 2008, 2007 and 2006. These schedules present the individual subsidiaries of
the Company and their contribution to the consolidated financial statements.
Amounts presented will not necessarily be the same as those in the individual
financial statements of the Company’s subsidiaries due to adjustments for
purchase accounting, income taxes and 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, 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.
Notes to
Consolidated Financial Statements
Note
25. Consolidating Financial Information – (Continued)
Loews
Corporation
Consolidating
Balance Sheet Information
|
|
CNA
|
|
|
Diamond
|
|
|
|
|
|
Boardwalk
|
|
|
Loews
|
|
|
Corporate
|
|
|
|
|
|
|
|
December
31, 2008
|
|
Financial
|
|
|
Offshore
|
|
|
HighMount
|
|
|
Pipeline
|
|
|
Hotels
|
|
|
and
Other
|
|
|
Eliminations
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$ |
34,980 |
|
|
$ |
701 |
|
|
$ |
46 |
|
|
$ |
313 |
|
|
$ |
70 |
|
|
$ |
2,340 |
|
|
|
|
|
$ |
38,450 |
|
Cash
|
|
|
85 |
|
|
|
36 |
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
5 |
|
|
|
|
|
|
131 |
|
Receivables
|
|
|
10,290 |
|
|
|
575 |
|
|
|
225 |
|
|
|
92 |
|
|
|
23 |
|
|
|
482 |
|
|
$ |
(15 |
) |
|
|
11,672 |
|
Property,
plant and equipment
|
|
|
327 |
|
|
|
3,413 |
|
|
|
2,771 |
|
|
|
5,972 |
|
|
|
350 |
|
|
|
43 |
|
|
|
|
|
|
|
12,876 |
|
Deferred
income taxes
|
|
|
3,532 |
|
|
|
|
|
|
|
306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(907 |
) |
|
|
2,931 |
|
Goodwill
and other intangible assets
|
|
|
105 |
|
|
|
20 |
|
|
|
584 |
|
|
|
163 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
875 |
|
Investments
in capital stocks of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,973 |
|
|
|
(11,973 |
) |
|
|
- |
|
Other
assets
|
|
|
796 |
|
|
|
210 |
|
|
|
79 |
|
|
|
275 |
|
|
|
48 |
|
|
|
6 |
|
|
|
(1 |
) |
|
|
1,413 |
|
Deferred
acquisition costs of insurance subsidiaries
|
|
|
1,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,125 |
|
Separate
account business
|
|
|
384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
384 |
|
Total
assets
|
|
$ |
51,624 |
|
|
$ |
4,955 |
|
|
$ |
4,012 |
|
|
$ |
6,817 |
|
|
$ |
496 |
|
|
$ |
14,849 |
|
|
$ |
(12,896 |
) |
|
$ |
69,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
reserves
|
|
$ |
38,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1 |
) |
|
$ |
38,770 |
|
Payable
to brokers
|
|
|
124 |
|
|
$ |
37 |
|
|
$ |
191 |
|
|
|
|
|
|
$ |
1 |
|
|
$ |
326 |
|
|
|
|
|
|
|
679 |
|
Collateral
on loaned securities
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Short
term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
71 |
|
Long
term debt
|
|
|
2,058 |
|
|
|
504 |
|
|
|
1,715 |
|
|
$ |
2,889 |
|
|
|
155 |
|
|
|
866 |
|
|
|
|
|
|
|
8,187 |
|
Reinsurance
balances payable
|
|
|
316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
316 |
|
Deferred
income taxes
|
|
|
|
|
|
|
450 |
|
|
|
|
|
|
|
103 |
|
|
|
46 |
|
|
|
308 |
|
|
|
(907 |
) |
|
|
- |
|
Liabilities
of discontinued operations
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Other
liabilities
|
|
|
2,726 |
|
|
|
579 |
|
|
|
188 |
|
|
|
571 |
|
|
|
12 |
|
|
|
255 |
|
|
|
(15 |
) |
|
|
4,316 |
|
Separate
account business
|
|
|
384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
384 |
|
Total
liabilities
|
|
|
44,391 |
|
|
|
1,570 |
|
|
|
2,094 |
|
|
|
3,563 |
|
|
|
285 |
|
|
|
1,755 |
|
|
|
(923 |
) |
|
|
52,735 |
|
Minority
interest
|
|
|
952 |
|
|
|
1,660 |
|
|
|
|
|
|
|
1,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,996 |
|
Shareholders’
equity
|
|
|
6,281 |
|
|
|
1,725 |
|
|
|
1,918 |
|
|
|
1,870 |
|
|
|
211 |
|
|
|
13,094 |
|
|
|
(11,973 |
) |
|
|
13,126 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
51,624 |
|
|
$ |
4,955 |
|
|
$ |
4,012 |
|
|
$ |
6,817 |
|
|
$ |
496 |
|
|
$ |
14,849 |
|
|
$ |
(12,896 |
) |
|
$ |
69,857 |
|
Notes to
Consolidated Financial Statements
Note
25. Consolidating Financial Information – (Continued)
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 |
|
Notes to
Consolidated Financial Statements
Note
25. Consolidating Financial Information – (Continued)
Loews
Corporation
Consolidating
Statement of Income Information
|
|
CNA
|
|
|
Diamond
|
|
|
|
|
|
Boardwalk
|
|
|
Loews
|
|
|
Corporate
|
|
|
|
|
|
|
|
Year
Ended December 31, 2008
|
|
Financial
|
|
|
Offshore
|
|
|
HighMount
|
|
|
Pipeline
|
|
|
Hotels
|
|
|
and
Other
|
|
|
Eliminations
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums
|
|
$ |
7,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1 |
) |
|
$ |
7,150 |
|
Net
investment income
|
|
|
1,619 |
|
|
$ |
12 |
|
|
|
|
|
$ |
3 |
|
|
$ |
1 |
|
|
$ |
(54 |
) |
|
|
|
|
|
|
1,581 |
|
Intercompany
interest and dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,263 |
|
|
|
(1,263 |
) |
|
|
- |
|
Investment
gains (losses)
|
|
|
(1,297 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,296 |
) |
Gain
on issuance of subsidiary stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Contract
drilling revenues
|
|
|
|
|
|
|
3,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,476 |
|
Other
|
|
|
326 |
|
|
|
(2 |
) |
|
$ |
770 |
|
|
|
845 |
|
|
|
379 |
|
|
|
16 |
|
|
|
|
|
|
|
2,334 |
|
Total
|
|
|
7,799 |
|
|
|
3,487 |
|
|
|
770 |
|
|
|
848 |
|
|
|
380 |
|
|
|
1,227 |
|
|
|
(1,264 |
) |
|
|
13,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
claims and policyholders’ benefits
|
|
|
5,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,723 |
|
Amortization
of deferred acquisition costs
|
|
|
1,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,467 |
|
Contract
drilling expenses
|
|
|
|
|
|
|
1,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,185 |
|
Other
operating expenses
|
|
|
1,025 |
|
|
|
448 |
|
|
|
411 |
|
|
|
498 |
|
|
|
307 |
|
|
|
79 |
|
|
|
(1 |
) |
|
|
2,767 |
|
Impairment
of natural gas and oil properties
|
|
|
|
|
|
|
|
|
|
|
691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
691 |
|
Impairment
of goodwill
|
|
|
|
|
|
|
|
|
|
|
482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
482 |
|
Interest
|
|
|
134 |
|
|
|
10 |
|
|
|
76 |
|
|
|
58 |
|
|
|
11 |
|
|
|
56 |
|
|
|
|
|
|
|
345 |
|
Total
|
|
|
8,349 |
|
|
|
1,643 |
|
|
|
1,660 |
|
|
|
556 |
|
|
|
318 |
|
|
|
135 |
|
|
|
(1 |
) |
|
|
12,660 |
|
Income
(loss) before income tax and minority interest
|
|
|
(550 |
) |
|
|
1,844 |
|
|
|
(890 |
) |
|
|
292 |
|
|
|
62 |
|
|
|
1,092 |
|
|
|
(1,263 |
) |
|
|
587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
(306 |
) |
|
|
582 |
|
|
|
(315 |
) |
|
|
79 |
|
|
|
22 |
|
|
|
(55 |
) |
|
|
|
|
|
|
7 |
|
Minority
interest
|
|
|
24 |
|
|
|
650 |
|
|
|
|
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
762 |
|
Total
|
|
|
(282 |
) |
|
|
1,232 |
|
|
|
(315 |
) |
|
|
167 |
|
|
|
22 |
|
|
|
(55 |
) |
|
|
- |
|
|
|
769 |
|
Income
(loss) from continuing operations
|
|
|
(268 |
) |
|
|
612 |
|
|
|
(575 |
) |
|
|
125 |
|
|
|
40 |
|
|
|
1,147 |
|
|
|
(1,263 |
) |
|
|
(182 |
) |
Discontinued
operations, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of
operations
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
341 |
|
|
|
|
|
|
|
350 |
|
Gain on
disposal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,362 |
|
|
|
|
|
|
|
4,362 |
|
Net
income (loss)
|
|
$ |
(259 |
) |
|
$ |
612 |
|
|
$ |
(575 |
) |
|
$ |
125 |
|
|
$ |
40 |
|
|
$ |
5,850 |
|
|
$ |
(1,263 |
) |
|
$ |
4,530 |
|
Notes to
Consolidated Financial Statements
Note
25. Consolidating Financial Information – (Continued)
Loews
Corporation
Consolidating
Statement of Income Information
|
|
CNA
|
|
|
Diamond
|
|
|
|
|
|
Boardwalk
|
|
|
Loews
|
|
|
Corporate
|
|
|
|
|
|
|
|
Year
Ended December 31, 2007
|
|
Financial
|
|
|
Offshore
|
|
|
HighMount
|
|
|
Pipeline
|
|
|
Hotels
|
|
|
and
Other
|
|
|
Eliminations
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums
|
|
$ |
7,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2 |
) |
|
$ |
7,482 |
|
Net
investment income
|
|
|
2,433 |
|
|
$ |
34 |
|
|
|
|
|
$ |
21 |
|
|
$ |
2 |
|
|
$ |
295 |
|
|
|
|
|
|
|
2,785 |
|
Intercompany
interest and dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,844 |
|
|
|
(1,844 |
) |
|
|
- |
|
Investment
gains (losses)
|
|
|
(310 |
) |
|
|
2 |
|
|
$ |
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(276 |
) |
(Loss)
gain on issuance of subsidiary stock
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144 |
|
|
|
|
|
|
|
141 |
|
Contract
drilling revenues
|
|
|
|
|
|
|
2,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,506 |
|
Other
|
|
|
279 |
|
|
|
77 |
|
|
|
274 |
|
|
|
650 |
|
|
|
382 |
|
|
|
2 |
|
|
|
|
|
|
|
1,664 |
|
Total
|
|
|
9,886 |
|
|
|
2,616 |
|
|
|
306 |
|
|
|
671 |
|
|
|
384 |
|
|
|
2,285 |
|
|
|
(1,846 |
) |
|
|
14,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
claims and policyholders’ benefits
|
|
|
6,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,009 |
|
Amortization
of deferred acquisitioncosts
|
|
|
1,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,520 |
|
Contract
drilling expenses
|
|
|
|
|
|
|
1,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,004 |
|
Other
operating expenses
|
|
|
983 |
|
|
|
355 |
|
|
|
150 |
|
|
|
381 |
|
|
|
313 |
|
|
|
76 |
|
|
|
(2 |
) |
|
|
2,256 |
|
Interest
|
|
|
140 |
|
|
|
19 |
|
|
|
32 |
|
|
|
61 |
|
|
|
11 |
|
|
|
55 |
|
|
|
|
|
|
|
318 |
|
Total
|
|
|
8,652 |
|
|
|
1,378 |
|
|
|
182 |
|
|
|
442 |
|
|
|
324 |
|
|
|
131 |
|
|
|
(2 |
) |
|
|
11,107 |
|
Income
before income tax and minority interest
|
|
|
1,234 |
|
|
|
1,238 |
|
|
|
124 |
|
|
|
229 |
|
|
|
60 |
|
|
|
2,154 |
|
|
|
(1,844 |
) |
|
|
3,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
321 |
|
|
|
429 |
|
|
|
46 |
|
|
|
68 |
|
|
|
24 |
|
|
|
107 |
|
|
|
|
|
|
|
995 |
|
Minority
interest
|
|
|
143 |
|
|
|
415 |
|
|
|
|
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
613 |
|
Total
|
|
|
464 |
|
|
|
844 |
|
|
|
46 |
|
|
|
123 |
|
|
|
24 |
|
|
|
107 |
|
|
|
- |
|
|
|
1,608 |
|
Income
from continuing operations
|
|
|
770 |
|
|
|
394 |
|
|
|
78 |
|
|
|
106 |
|
|
|
36 |
|
|
|
2,047 |
|
|
|
(1,844 |
) |
|
|
1,587 |
|
Discontinued
operations, net
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
907 |
|
|
|
|
|
|
|
902 |
|
Net
income
|
|
$ |
765 |
|
|
$ |
394 |
|
|
$ |
78 |
|
|
$ |
106 |
|
|
$ |
36 |
|
|
$ |
2,954 |
|
|
$ |
(1,844 |
) |
|
$ |
2,489 |
|
Notes to
Consolidated Financial Statements
Note
25. Consolidating Financial Information – (Continued)
Loews
Corporation
Consolidating
Statement of Income Information
|
|
CNA
|
|
|
Diamond
|
|
|
Boardwalk
|
|
|
Loews
|
|
|
Corporate
|
|
|
|
|
|
|
|
Year
Ended December 31, 2006
|
|
Financial
|
|
|
Offshore
|
|
|
Pipeline
|
|
|
Hotels
|
|
|
and
Other
|
|
|
Eliminations
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums
|
|
$ |
7,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,603 |
|
Net
investment income
|
|
|
2,412 |
|
|
$ |
38 |
|
|
$ |
4 |
|
|
$ |
1 |
|
|
$ |
351 |
|
|
|
|
|
|
2,806 |
|
Intercompany
interest and dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,306 |
|
|
$ |
(1,306 |
) |
|
|
- |
|
Investment
gains (losses)
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
93 |
|
Gain
on issuance of subsidiary stock
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
9 |
|
Contract
drilling revenues
|
|
|
|
|
|
|
1,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,987 |
|
Other
|
|
|
275 |
|
|
|
77 |
|
|
|
614 |
|
|
|
370 |
|
|
|
10 |
|
|
|
|
|
|
|
1,346 |
|
Total
|
|
|
10,382 |
|
|
|
2,102 |
|
|
|
618 |
|
|
|
371 |
|
|
|
1,677 |
|
|
|
(1,306 |
) |
|
|
13,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
claims and policyholders’ benefits
|
|
|
6,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,047 |
|
Amortization
of deferred acquisition costs
|
|
|
1,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,534 |
|
Contract
drilling expenses
|
|
|
|
|
|
|
805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
805 |
|
Other
operating expenses
|
|
|
1,016 |
|
|
|
313 |
|
|
|
358 |
|
|
|
311 |
|
|
|
65 |
|
|
|
|
|
|
|
2,063 |
|
Restructuring
and other related charges
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13 |
) |
Interest
|
|
|
131 |
|
|
|
24 |
|
|
|
62 |
|
|
|
12 |
|
|
|
75 |
|
|
|
|
|
|
|
304 |
|
Total
|
|
|
8,715 |
|
|
|
1,142 |
|
|
|
420 |
|
|
|
323 |
|
|
|
140 |
|
|
|
- |
|
|
|
10,740 |
|
Income
before income tax and minority interest
|
|
|
1,667 |
|
|
|
960 |
|
|
|
198 |
|
|
|
48 |
|
|
|
1,537 |
|
|
|
(1,306 |
) |
|
|
3,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
474 |
|
|
|
285 |
|
|
|
65 |
|
|
|
19 |
|
|
|
81 |
|
|
|
|
|
|
|
924 |
|
Minority
interest
|
|
|
151 |
|
|
|
323 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
504 |
|
Total
|
|
|
625 |
|
|
|
608 |
|
|
|
95 |
|
|
|
19 |
|
|
|
81 |
|
|
|
- |
|
|
|
1,428 |
|
Income
from continuing operations
|
|
|
1,042 |
|
|
|
352 |
|
|
|
103 |
|
|
|
29 |
|
|
|
1,456 |
|
|
|
(1,306 |
) |
|
|
1,676 |
|
Discontinued
operations, net
|
|
|
(26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
841 |
|
|
|
|
|
|
|
815 |
|
Net
income
|
|
$ |
1,016 |
|
|
$ |
352 |
|
|
$ |
103 |
|
|
$ |
29 |
|
|
$ |
2,297 |
|
|
$ |
(1,306 |
) |
|
$ |
2,491 |
|