The Carolina Group and Carolina Group stock were eliminated as part of the separation of Lorillard.
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.
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.
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.
The following table summarizes the gross and net carried reserves for Specialty Lines:
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).
HighMount Exploration & Production LLC (“HighMount”). HighMount is a wholly owned subsidiary.
In December 2008, CNA contributed $500 million of cash and short term investments from CNA’s holding company to CCC.
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.
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.
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.
The components of CNA’s net realized investment results for available-for-sale securities are presented in the following table:
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.
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.
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.
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.
The asset-backed securities in an unrealized loss position by ratings distribution are as follows:
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.
samples its past fair value estimates and compares the valuations to actual transactions executed in the market on similar dates.
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.
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:
In 2006, net payments were decreased by $935 due to the impact of significant commutations. See Note 19 for further discussion related to commutations.
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.
Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Natural Gas and Oil Reserves
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 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.