Net loss attributable to Loews Corporation for 2020 was $931 million, or $3.32 per share, compared to net income attributable to Loews Corporation of $932 million, or $3.07 per share, in 2019.
COVID-19 related conditions had a significant impact across CNA during 2020. During the first quarter of 2020, CNA experienced significant declines in the value of its investment portfolio. While financial markets broadly recovered by the end of 2020, CNA’s Net investment income and Investment gains (losses) are lower for 2020 as compared with 2019. CNA also recorded significant catastrophe losses during 2020 related to COVID-19 and recorded a reduction in its estimated audit premiums due to lower exposure. The Company’s 2020 consolidated financial statements reflect its best estimate of the impacts related to COVID-19.
In evaluating the results of Property & Casualty Operations, CNA utilizes the loss ratio, the loss ratio excluding catastrophes and development, the expense ratio, the dividend ratio, the combined ratio and the combined ratio excluding catastrophes and development. 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 loss ratio excluding catastrophes and development excludes net catastrophes losses and changes in estimates of claim and claim adjustment expense reserves, net of reinsurance, for prior years from the loss ratio. 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. The combined ratio excluding catastrophes and development is the sum of the loss ratio excluding catastrophes and development, the expense ratio and the dividend ratio. In addition, renewal premium change, rate, retention and new business are also utilized in evaluating operating trends. Renewal premium change represents the estimated change in average premium on policies that renew, including rate and exposure changes. Rate represents the average change in price on policies that renew excluding exposure change. For certain products within Small Business, where quantifiable, rate includes the influence of new business as well. Exposure represents the measure of risk used in the pricing of the insurance product. Retention represents the percentage of premium dollars renewed in comparison to the expiring premium dollars from policies available to renew. Renewal premium change, rate and retention presented for the prior year are updated to reflect subsequent activity on policies written in the period. New business represents premiums from policies written with new customers and additional policies written with existing customers. Gross written premiums, excluding third party captives, excludes business which is ceded to third party captives, including business related to large warranty programs.
Specialty’s combined ratio increased 3.3 points in 2020 as compared with 2019 primarily due to a 4.6 point increase in the loss ratio partially offset by a 1.2 point improvement in the expense ratio. The increase in the loss ratio was primarily due to higher net catastrophe losses, which were 4.3 points of the loss ratio in 2020, as compared with 0.5 points of the loss ratio in 2019. The improvement in the expense ratio was driven by lower underwriting expenses and higher net earned premiums.
The following table reconciles core income to net income attributable to Loews Corporation for the years ended December 31, 2020 and 2019:
In 2020, the COVID-19 pandemic and measures to mitigate the spread of COVID-19 significantly impacted the world and the United States. An excess supply of energy products also led to disruptions in the energy sector and volatility in energy prices early in 2020, with a partial recovery of prices and demand occurring in the latter half of 2020. Boardwalk Pipelines’ operations are considered essential critical infrastructure under current Cybersecurity and Infrastructure Security Agency guidelines, which allowed Boardwalk Pipelines to remain open during the pandemic. As a result, the impacts from COVID-19 and the volatile energy prices have not been significant to Boardwalk Pipelines’ business, though some of its customers have been and continue to be directly impacted by COVID-19 and the volatility in commodity prices. In 2020, Boardwalk Pipelines transported approximately 3.2 Tcf of natural gas, or an 8% increase from 2019.
The following table summarizes the results of operations for Boardwalk Pipelines for the years ended December 31, 2020 and 2019 as presented in Note 20 of the Notes to Consolidated Financial Statements included under Item 8:
Gain on sale of assets of $37 million in 2020 related to an owned hotel and an office building.
The Parent Company enters into short sales and invests in certain derivative instruments that are used for asset and liability management activities, income enhancements to its portfolio management strategy and to benefit from anticipated future movements in the underlying markets. If such movements do not occur as anticipated, then significant losses may occur. Monitoring procedures include senior management review of daily reports of existing positions and valuation fluctuations to seek to ensure that open positions are consistent with the portfolio strategy.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated February 9, 2021, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company's change in its method of accounting for measurement of credit losses on financial instruments in 2020.
o We assessed the Company’s projection of future cash flows to evaluate the reasonableness of the 2020 charge related to unlocking LTC future policy benefit reserves to recognize a premium deficiency as a result of the most recently completed GPV.
A policy election has been made to present accrued interest balances separately from the amortized cost basis of assets, and a practical expedient has been elected to exclude the accrued interest from the tabular disclosures for mortgage loans and available-for-sale securities. An election has been made not to estimate an allowance for credit losses on accrued interest receivables. The accrual of interest income is discontinued and the asset is placed on nonaccrual status within 90 days of the interest becoming delinquent. Interest accrued but not received for assets on nonaccrual status is reversed through Net investment income. Interest received for assets that are on nonaccrual status is recognized as payment is received. The asset is returned to accrual status when the principal and interest amounts contractually due are brought current, and future payments are expected. Interest receivables are presented in Receivables on the Consolidated Balance Sheet.
Joint venture investments -Loews Hotels & Co has interests in operating joint ventures related to hotel properties over which it exercises significant influence, but does not have control over them. Loews Hotels & Co uses the equity method of accounting for these investments. Loews Hotels & Co’s investment in these entities was $299 million and $356 million as of December 31, 2020 and 2019 and is reported in Other assets on the Consolidated Balance Sheets. Equity income (loss) for these investments was $(73) million, $69 million and $73 million for the years ended December 31, 2020, 2019 and 2018 and is reported in Operating expenses and other on the Consolidated Statements of Operations. These equity method investments are reviewed for impairment when changes in circumstances indicate that the carrying value of the asset may not be recoverable.
On January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The updated guidance required lessees to recognize lease assets and lease liabilities for most operating leases. The Company has elected to apply an exemption for short term leases whereby leases with initial lease terms of one year or less are not recorded on the balance sheet. At adoption, the cumulative effect adjustment increased Other assets and Other liabilities by $642 million reflecting operating lease right of use assets, lease liabilities and the derecognition of deferred rent related primarily to lease agreements for office space and machinery and equipment. See Note 9 for additional information on leases.
On June 29, 2018, Boardwalk GP, LP (“General Partner”), the general partner of Boardwalk Pipelines and an indirect wholly owned subsidiary of Loews Corporation, elected to exercise its right to purchase all of the issued and outstanding common units representing limited partnership interests in Boardwalk Pipelines not already owned by the General Partner or its affiliates pursuant to Section 15.1(b) of Boardwalk Pipelines’ Third Amended and Restated Agreement of Limited Partnership, as amended (“Limited Partnership Agreement”) for a cash purchase price, determined in accordance with the Limited Partnership Agreement, of $12.06 per unit, or approximately $1.5 billion, in the aggregate. The purchase price of the common units was lower than the carrying value of the noncontrolling interests for Boardwalk Pipelines, resulting in an increase to Additional paid-in capital of $658 million, an increase to deferred income tax liabilities of $213 million and a decrease to AOCI of $29 million.
In addition to the derivatives used for risk management purposes described above, the Company may also use derivatives for purposes of income enhancement. Income enhancement transactions include interest rate swaps, call options, put options, credit default swaps, index futures and foreign currency forwards. See Note 4 for information regarding the fair value of derivative instruments.
The following tables present quantitative information about the significant unobservable inputs utilized in the fair value measurement of Level 3 assets. Valuations for assets and liabilities not presented in the tables below are primarily based on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of unobservable inputs from these broker quotes is neither provided nor reasonably available. The weighted average rate is calculated based on fair value.
Changes in estimates of claim and claim adjustment expense reserves, net of reinsurance, for prior years are defined as net prior year loss reserve development. These changes can be favorable or unfavorable.
Favorable development in other coverages was driven by lower than expected claim severity in catastrophes in accident year 2017 for property in Commercial, better than expected frequency in the liability portion of the package business in Canada and general liability in Europe in casualty, and for accident years 2015 and prior in Europe in healthcare and technology for International. This was partially offset by unfavorable development primarily driven by increased loss severity in the accident year 2017 in Europe professional indemnity in specialty for International.
For 2018 through 2020, the Company participates in the Internal Revenue Service (“IRS”) Compliance Assurance Process (“CAP”), which is a voluntary program for large corporations. Under CAP, the IRS conducted a real-time audit and worked contemporaneously with the Company to resolve any issues prior to the filing of the 2018 and 2019 tax returns. The 2018 and 2019 examinations are completed. For 2020, the Company was selected to participate in the phase of CAP reserved for taxpayers whose risk of noncompliance does not support use of IRS resources. The Company believes this approach should reduce tax-related uncertainties, if any. Although the outcome of tax audits is always uncertain, the Company believes that any adjustments resulting from audits will not have a material impact on its results of operations, financial position or cash flows. 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 2016.
CNA has a prescribed practice as it relates to the accounting under Statement of Statutory Accounting Principles No. 62R (“SSAP No. 62R”), Property and Casualty Reinsurance, paragraphs 88 and 89 in conjunction with the 2010 loss portfolio transfer with NICO which is further discussed in Note 8. The prescribed practice allows CNA to aggregate all third party A&EP reinsurance balances administered by NICO in Schedule F and to utilize the LPT as collateral for the underlying third-party reinsurance balances for purposes of calculating the statutory reinsurance penalty. This prescribed practice increased statutory capital and surplus by $91 million at December 31, 2020 and 2019.
In 2020, Loews Corporation granted an aggregate of 219,571 RSUs and PSUs at a weighted average grant-date fair value of $49.99 per unit. No RSUs were forfeited during the year. 2,062,256 SARs were outstanding at December 31, 2020 with a weighted average exercise price of $41.65.
On December 30, 2020, CNA entered into an agreement with Cavello Bay Reinsurance Limited (“Cavello”), a subsidiary of Enstar Group Limited, under which Cavello reinsured a legacy portfolio of excess workers’ compensation policies. The transaction closed on February 5, 2021. Under the terms of the transaction, based on reserves in place as of January 1, 2020, and adjusted for any subsequent claim activity, CNA ceded to Cavello approximately $690 million of net excess workers’ compensation liabilities relating to business written in 2007 and prior under a retroactive reinsurance agreement with an aggregate limit of $1 billion. A loss of approximately $11 million (after tax and noncontrolling interests) will be recognized in the first quarter of 2021.