Our corporate headquarters is located in approximately 136,000 square feet of leased office space in two buildings in New York City. We also lease approximately 21,000 square feet of office space in one building in White Plains, New York. Information relating to our subsidiaries’ properties is contained under Item 1.
We are a holding company and have five reportable segments comprised of four individual operating subsidiaries, CNA Financial Corporation (“CNA”), Diamond Offshore Drilling, Inc. (“Diamond Offshore”), Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”) and Loews Hotels Holding Corporation (“Loews Hotels & Co”); and the Corporate segment. The operations of Consolidated Container Company LLC (“Consolidated Container”) since the acquisition date are included in the Corporate segment. Each of our operating subsidiaries is headed by a chief executive officer who is responsible for the operation of its business and has the duties and authority commensurate with that position.
Net income attributable to Loews in 2017 increased as compared to the prior year partially due to the net benefit from the Tax Act discussed above. Absent this benefit, net income increased $310 million primarily from higher earnings at CNA, Loews Hotels & Co and Diamond Offshore. Net income for 2017 and 2016 included asset impairment charges at Diamond Offshore of $32 million and $267 million (both after tax and noncontrolling interests).
Net income attributable to Loews Corporation in 2016 increased compared to the prior year primarily due to the impact of the reserve charge at CNA in 2015 and the asset impairment charges at Diamond Offshore which were lower in 2016 compared to 2015. Absent these charges, net income increased $143 million due to higher earnings at CNA and Boardwalk Pipeline and improved results from the Parent Company investment portfolio. These increases were partially offset by lower earnings at Diamond Offshore.
Net income increased $27 million in 2017 as compared with 2016 primarily due to improved non-catastrophe current accident year underwriting results, lower adverse prior year reserve development recorded under the 2010 asbestos and environmental pollution (“A&EP”) loss portfolio transfer, higher net investment income and higher net realized investment results. These increases were partially offset by higher net catastrophe losses in 2017, and a loss of $24 million (after tax and noncontrolling interests) on the early redemption of debt in 2017. As a result of the Tax Act, CNA’s net deferred tax assets were remeasured as of the date of enactment, resulting in a one-time decrease to net income of $87 million ($78 million after noncontrolling interests).
What we previously referred to as Net operating income (loss) for CNA in our public disclosures, is now called Core income (loss). With this terminology change, Non-Core operations is now called Other Insurance Operations. The fourth quarter 2017 net deferred tax asset remeasurement was excluded from core income (loss) for the year ended December 31, 2017. Otherwise, there were no changes to the calculation of this measure. In assessing CNA’s insurance operations, the Company utilizes the core income (loss) financial measure. Core income (loss) is calculated by excluding from net income (loss) (i) net realized investment gains or losses, (ii) income or loss from discontinued operations, (iii) any cumulative effects of changes in accounting guidance and (iv) deferred tax asset and liability remeasurement as a result of an enacted U.S. federal tax rate change. In addition, core income (loss) excludes the effects of noncontrolling interests. The calculation of core income (loss) excludes net realized investment gains or losses because net realized investment gains or losses are generally driven by economic factors that are not necessarily consistent with key drivers of underwriting performance, and are therefore not considered an indication of trends in insurance operations. Core income (loss) is deemed to be a non-GAAP financial measure and management believes this measure is useful to investors as management uses this measure to assess financial performance.
In evaluating the results of the Property and Casualty Operations, CNA utilizes the loss ratio, the expense ratio, the dividend ratio and the combined ratio. These ratios are calculated using GAAP financial results. The loss ratio is
the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders’ dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios. In addition, CNA also utilizes renewal premium change, rate, retention and new business 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 changes. 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.
The following tables summarize the results of CNA’s Property and Casualty Operations for the years ended December 31, 2017, 2016 and 2015.
(a) Includes Hardy new business of $151 million and $133 million for the years ended December 31, 2017 and 2016. Prior year amounts are not included for Hardy.
Total net written premiums increased $92 million in 2017 as compared with 2016. Net written premiums for International increased $60 million in 2017 as compared with 2016 due to higher new business, positive renewal premium change and higher retention. Excluding the effect of foreign currency exchange rates and premium development, net written premiums for International increased 6.7% in 2017. Net written premiums for Specialty were consistent with 2016. New business, renewal premium change and retention also remained at consistent levels for Specialty. Net written premiums for Commercial increased $41 million in 2017 as compared with 2016, primarily driven by higher new business within Middle Markets, strong retention and positive renewal premium change. This was partially offset by an unfavorable premium rate adjustment within its Small Business unit as discussed in Note 18 to the Consolidated Financial Statements under Item 8. The change in net earned premiums for Commercial and International was consistent with the trend in net written premiums.
International’s combined ratio increased 5.7 points in 2017 as compared with 2016. The loss ratio increased 6.0 points primarily due to lower favorable net prior year loss reserve development and higher net catastrophe losses, partially offset by lower current accident year large losses. Net catastrophe losses were $64 million, or 7.9 points of the loss ratio, in 2017, as compared to $31 million, or 3.9 points of the loss ratio, in 2016. The loss ratio excluding catastrophes and development improved 3.0 points. The expense ratio improved 0.3 points in 2017 as compared with 2016 primarily due to the higher net earned premiums.
Net written premiums increased $21 million in 2016 as compared with 2015. Net written premiums for Commercial increased $23 million in 2016 as compared with 2015, driven by strong retention in Middle Markets, partially offset by a decrease in Small Business, which included a premium rate adjustment, as discussed in Note 18 of the Notes to Consolidated Financial Statements under Item 8. Net written premiums for Specialty in 2016 were consistent with 2015 as growth in warranty was offset by a decrease in management and professional liability and health care due to underwriting actions undertaken in certain business lines. Net written premiums for International in 2016 were consistent with 2015 and include favorable period over period premium development of $24 million. Excluding the effect of foreign currency exchange rates and premium development, net written premiums increased 1.4% in 2016 in International. The increase in net earned premiums was consistent with the trend in net written premiums in Commercial. Excluding the effect of foreign currency exchange rates and premium development, the increase in net earned premiums was consistent with the trend in net written premiums in International.
International’s combined ratio increased 1.5 points in 2016 as compared with 2015. The loss ratio increased 1.5 points primarily due to an increase in the current accident year loss ratio driven by a higher level of large losses related to political risk, property and financial institutions, partially offset by higher favorable net prior year development. International’s expense ratio was consistent with 2015.
The following table summarizes the results of CNA’s Other Insurance Operations for the years ended December 31, 2017, 2016 and 2015.
The effective tax rate for the long term care business is generally a function of the U.S. federal corporate income tax rate and the relative proportion of tax exempt investment income on municipal bonds supporting liabilities to the overall pretax income of the business. The reduction in the U.S. federal corporate income tax rate effective January 1, 2018 will reduce the tax benefit on the long term care business’s pretax losses.
The following table reconciles core income (loss) to net income attributable to Loews Corporation for the CNA segment for the years ended December 31, 2017, 2016 and 2015:
In 2016, the United Kingdom (“U.K.”) held a referendum in which voters approved an exit from the European Union (“E.U.”), commonly referred to as “Brexit.” As a result of the referendum, in 2017 the British government formally commenced the process to leave the E.U. and began negotiating the terms of treaties that will govern the U.K.’s future relationship with the E.U. Although the terms of any future treaties are unknown, CNA believes changes in its international operating platform will be required to allow CNA to continue to write business in the E.U. after the completion of Brexit. Therefore CNA has begun the process of establishing a new European subsidiary in Luxembourg. As a result of these changes, the complexity and cost of regulatory compliance of CNA’s European business is likely to increase.
Industry analysts have reported that in 2017, for the third consecutive year, the global supply of floater rigs decreased with 30 floaters being scrapped during the year, for a total of over 80 floaters retired since 2015. Despite these events, the oversupply of drilling rigs in the floater markets continues to persist as drilling rigs across all water depth categories continue to be cold stacked as they come off contract with no immediate future work. Industry reports indicate that there remain approximately 40 newbuild floaters on order with scheduled deliveries between 2018 and 2021. Industry analysts predict that the 2018 delivery dates may be deferred.
Historically, the longer a drilling rig remains cold stacked, the higher the cost of reactivation and, depending on the age, technological obsolescence and condition of the rig, the lower the likelihood that the rig will be reactivated at a future date. As of January 29, 2018, five rigs in Diamond Offshore’s fleet were cold stacked.
Diamond Offshore’s contract drilling backlog was $2.4 billion, $2.6 billion and $3.6 billion as of January 1, 2018 (based on contract information known at that time), October 1, 2017 (the date reported in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2017) and January 1, 2017 (the date reported in our Annual Report on Form 10-K for the year ended December 31, 2016). The contract drilling backlog by year as of January 1, 2018 is $1.1 billion in 2018, $1.0 billion in 2019 and $0.3 billion in 2020.
Contract drilling revenue decreased $74 million in 2017 as compared with 2016, primarily due to lower average daily revenue earned by all rig types, partially offset by the favorable impact of an aggregate 353 incremental revenue earning days. Total contract drilling expense increased $30 million in 2017 as compared with 2016, reflecting higher amortized rig mobilization expense of $25 million and incremental contract drilling costs associated with the drillships of $28 million, partially offset by a net reduction in other rig operating and overhead costs of $23 million.
The income tax provision for the year ended December 31, 2017 includes a $36 million one-time charge related to the Tax Act, which consisted of: (i) a $75 million charge for the mandatory, deemed repatriation of foreign earnings, inclusive of the utilization of certain tax attributes offset by a provisional liability for uncertain tax positions related to such attributes, (ii) a $74 million credit resulting from the remeasurement of net deferred tax liabilities at the lower corporate tax rate and (iii) a $35 million charge recorded at the Loews level for the difference between the book basis and tax basis in Diamond Offshore.
Contract drilling revenue decreased $835 million in 2016 as compared with 2015 due to depressed market conditions in all floater markets and for the jack-up rig, reflecting an aggregate of 2,577 fewer revenue earning days and lower average daily revenue earned by the ultra-deepwater and deepwater floater fleets. Average daily revenue increased for the mid-water and jack-up fleets primarily due to the favorable settlement of a contractual dispute and
receipt of loss-of-hire insurance proceeds, each in 2016. Contract drilling expense decreased $456 million in 2016 as compared with 2015, reflecting Diamond Offshore’s lower cost structure due to additional rigs idled, cold stacked or retired during 2015 and 2016, as well as the favorable impact of cost control initiatives.
Boardwalk Pipeline offers firm natural gas storage services in which the customer reserves and pays for a specific amount of storage capacity, including injection and withdrawal rights, and interruptible storage and parking and lending (“PAL”) services where the customer receives and pays for capacity only when it is available and used. The value of Boardwalk Pipeline’s storage and PAL services (comprised of parking gas for customers and/or lending gas to customers) is affected by natural gas price differentials between time periods, such as between winter and summer (time period price spreads), price volatility of natural gas and other factors. Boardwalk Pipeline’s storage and parking services have greater value when the natural gas futures market is in contango (a positive time period price spread, meaning that current price quotes for delivery of natural gas further in the future are higher than in the nearer term), while its lending service has greater value when the futures market is backwardated (a negative time period price spread, meaning that current price quotes for delivery of natural gas in the nearer term are higher than further in the future). The value of both storage and PAL services may also be favorably impacted by increased volatility in the price of natural gas, which allows Boardwalk Pipeline to optimize the value of its storage and PAL capacity.
In the 2018 to 2020 timeframe, the agreements associated with the East Texas to Mississippi Pipeline, Southeast Expansion, Gulf Crossing Pipeline and Fayetteville and Greenville Laterals, which were placed into service in 2008 and 2009, will expire. These projects were large, new pipeline expansions, developed to serve growing production in Texas, Oklahoma, Arkansas and Louisiana and anchored primarily by ten-year firm transportation agreements with producers. Since these projects went into service, gas production from the Utica and Marcellus area in the Northeast has grown significantly and has altered the flow patterns of natural gas in North America. Over the last few years, gas production from other basins such as Barnett and Fayetteville, which primarily supported two of these expansions, has declined because the production economics in those basins are not as competitive as other production basins. These market dynamics have resulted in less production from certain basins tied to Boardwalk Pipeline’s system and a narrowing of basis differentials across portions of its pipeline systems, primarily for capacity associated with natural gas flows from west to east. Total revenues generated from these expansion projects’ capacity will be materially lower when these contracts expire. For example, as shown directly above, revenues under committed firm transportation agreements for 2018 are expected to be approximately $100 million lower than the actual amount for 2017. This reduction is mainly a result of (i) expansion contracts on the Gulf South system that expired in early 2018, which comprises approximately 60% of the $100 million reduction of revenues, and (ii) the Southwestern contract restructuring, which is responsible for the remaining 40% reduction. While some of the Gulf South capacity has been remarketed at lower rates and for shorter terms, Boardwalk Pipeline believes that the current market rates are not indicative of the long-term value of that capacity. Boardwalk Pipeline continues to focus its marketing efforts on enhancing the value of the remaining expansion capacity and is working with customers to match gas supplies from various basins to new and existing customers and markets, including aggregating supplies at key locations along its pipelines to provide end-use customers with attractive and diverse supply options.
Maintenance costs may be capitalized or expensed, depending on the nature of the activities. For any given reporting period, the mix of projects that Boardwalk Pipeline undertakes will affect the amounts it records as property, plant and equipment on its balance sheet or recognize as expenses, which impacts Boardwalk Pipeline’s earnings. In 2018, Boardwalk Pipeline expects to spend approximately $320 million to maintain its pipeline systems, of which approximately $120 million is expected to be maintenance capital. In 2017, Boardwalk Pipeline spent $342 million, of which $138 million was recorded as maintenance capital.
Operating revenues increased $20 million and operating expenses increased $13 million in 2017 as compared with 2016 primarily due to an increase in revenue and expenses upon completion of renovations at the Loews Miami Beach Hotel.
Loews Hotels & Co recorded a $27 million decrease to income tax expense resulting from the effect of the lower U.S. federal corporate tax rate on its net deferred tax liabilities.
Interest expense increased $3 million in 2016 as compared with 2015 primarily due to new property-level debt incurred to fund acquisitions.
The following table summarizes the results of operations for Corporate for the years ended December 31, 2017, 2016 and 2015 as presented in Note 19 of the Notes to Consolidated Financial Statements included under Item 8:
Other revenues increased $496 million in 2017 as compared with 2016 primarily due to $498 million of revenue from Consolidated Container’s operations for the period since the acquisition date.
Corporate recorded an $8 million increase to income tax expense resulting from the effect of the lower corporate tax rate on net deferred tax assets.
Operating expenses increased $15 million in 2016 as compared with 2015 primarily due to expenses related to the 2016 Incentive Compensation Plan, which was approved by shareholders on May 10, 2016.
As of February 2, 2018, there were 328,825,271 shares of Loews common stock outstanding. Depending on market and other conditions, we may purchase our shares and shares of our subsidiaries’ outstanding common stock in the open market or otherwise. In 2017, we purchased 4.8 million shares of Loews common stock. As of February 9, 2018, we had purchased an additional 4.3 million shares of Loews common stock in 2018 at an aggregate cost of $218 million. We have an effective Registration Statement on Form S-3 on file with the Securities and Exchange Commission (“SEC”) registering the future sale of an unlimited amount of our debt and equity securities.
CNA’s cash provided by operating activities was $1.3 billion in 2017 and $1.4 billion in 2016. Cash provided by operating activities in 2017 reflected higher net claim payments and a lower level of distributions on limited partnerships, partially offset by lower IT spend and an increase in premiums collected. In 2016, cash provided by
Diamond Offshore’s cash provided by operating activities decreased approximately $153 million in 2017 as compared with 2016, primarily due to lower cash receipts from contract drilling services of $245 million and higher taxes paid, net of refunds of $26 million, partially offset by a $119 million net decrease in cash payments for contract drilling and general and administrative expenses, including personnel-related, maintenance and other rig operating costs. The decline in cash receipts and cash payments related to the performance of contract drilling services reflects continued depressed market conditions in the offshore drilling industry, as well as positive results from focusing on controlling costs.
In 2017 and 2016, Boardwalk Pipeline declared and paid distributions to its common unitholders of record of $0.40 per common unit and an amount to the general partner on behalf of its 2% general partner interest. In February of 2018, the Partnership declared a quarterly cash distribution to unitholders of record of $0.10 per common unit.
As of February 13, 2018, Boardwalk Pipeline had $445 million of outstanding borrowings under its revolving credit facility. During 2017, Boardwalk Pipeline extended the maturity date of its revolving credit facility by one year to May 26, 2022. Boardwalk Pipeline has a subordinated loan agreement with a subsidiary of the Company under which it could borrow up to $300 million until December 31, 2018. As of February 13, 2018, Boardwalk Pipeline had no outstanding borrowings under the subordinated loan agreement.
Boardwalk Pipeline anticipates that for 2018 its existing capital resources, including its revolving credit facility, subordinated loan and cash flows from operating activities, will be adequate to fund its operations. Boardwalk Pipeline may seek to access the capital markets to fund some or all capital expenditures for growth projects, acquisitions or for general business purposes. Boardwalk Pipeline’s ability to access the capital markets for equity and debt financing under reasonable terms depends on its current financial condition, current credit ratings and current market conditions.
At December 31, 2017 and 2016, we did not have any off-balance sheet arrangements.
(b) 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, 2017. See the Insurance Reserves section of this MD&A for further information.
Investment activities of non-insurance subsidiaries primarily include investments in fixed income securities, including short term investments. The Parent Company portfolio also includes equity securities, including short sales and derivative instruments, and investments in limited partnerships. These types of investments generally present greater volatility, less liquidity and greater risk than fixed income investments and are included within Results of Operations - Corporate.
The significant components of CNA’s net investment income are presented in the following table. Fixed income securities, as presented, include both fixed maturity and equity securities, which substantially consist of preferred stock.
Net investment income after tax and noncontrolling interests increased $88 million in 2016 as compared with 2015. The increase was driven by limited partnership investments, which returned 6.3% in 2016 as compared with 3.0% in the prior year. Income from fixed income securities increased by $40 million, after tax and noncontrolling interests, primarily due to an increase in the invested asset base and a charge in 2015 related to a change in estimate effected by a change in accounting principle.
The following table presents the estimated fair value and net unrealized gains (losses) of CNA’s fixed maturity securities by rating distribution:
The following table presents the maturity profile for these available-for-sale fixed maturity securities. Securities not due to mature on a single date are allocated based on weighted average life:
A primary objective in the management of CNA’s investment portfolio is to optimize return relative to corresponding 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 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.
The effective durations of CNA’s fixed maturity securities, non-redeemable preferred stock and short term investments are presented in the following table. Amounts presented are net of payable and receivable amounts for securities purchased and sold, but not yet settled.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2017, of the Company and our report dated February 15, 2018, expressed an unqualified opinion on those financial statements.
We have audited the accompanying consolidated balance sheets of Loews Corporation and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income (loss), equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes and the schedules listed in the Index at Item 15(a)2 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
The cost of fixed maturity securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts, which are included in Net investment income on the Consolidated Statements of Income. The amortization of premium and accretion of discount for fixed maturity securities takes into consideration call and maturity dates that produce the lowest yield. In 2015, the Company changed its accounting principle as previously the amortization of premiums was to maturity. This change in estimate, effected by a change in accounting principle was adopted in the fourth quarter of 2015 and decreased Net investment income by $39 million in the Consolidated Statements of Income for the year ended December 31, 2015. The decrease to Net investment income included a $22 million cumulative adjustment relating to prior periods. The total adjustment decreased basic and diluted net income per share by $0.06 for the year ended December 31, 2015.
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 three months or less. These investments are accounted for under the equity method and changes in net asset values are recorded within Net investment income on the Consolidated Statements of Income.
CNA’s assessment of whether an OTTI loss has occurred incorporates both quantitative and qualitative information. Fixed maturity securities that CNA intends to sell, or it more likely than not will be required to sell before recovery of amortized cost, are considered to be other-than-temporarily impaired and the entire difference between the amortized cost basis and fair value of the security is recognized as an OTTI loss in earnings. The remaining fixed maturity securities in an unrealized loss position are evaluated to determine if a credit loss exists. The factors considered include: (i) the financial condition and near term and long term prospects of the issuer, (ii) whether the debtor is current on interest and principal payments, (iii) credit ratings of the securities and (iv) general market conditions and industry or sector specific outlook. CNA also considers results and analysis of cash flow modeling for asset-backed securities, and when appropriate, other fixed maturity securities.
retain its investment for a period of time sufficient to allow for an anticipated recovery in value and (iv) general market conditions and industry or sector specific outlook.
Joint venture investments - The Company had approximately 20% to 50% interests in operating joint ventures related to hotel properties that are accounted for under the equity method. The Company’s investment in these entities was $237 million and $217 million for the years ended December 31, 2017 and 2016 and reported in Other assets on the Company’s Consolidated Balance Sheets. Equity income for these investments was $81 million, $41 million and $43 million for the years ended December 31, 2017, 2016 and 2015 and reported in Other operating expenses on the Company’s Consolidated Statements of Income. Some of these investments are variable interest entities (“VIE”) as defined in the accounting guidance because the entities will require additional funding from each equity owner throughout the development and construction phase and are accounted for under the equity method since the Company is not the primary beneficiary. The maximum exposure to loss for the VIE investments is $273 million, consisting of the amount of the investment and debt guarantees.
Securities lending is typically done on a matched-book basis where the collateral is invested to substantially match the term of the loan. This matching of terms tends to limit risk. In accordance with the Company’s lending agreements, securities on loan are returned immediately to the Company upon notice. Collateral is not reflected as an asset of the Company. There was no collateral held at December 31, 2017 and 2016.
Future policy benefit reserves - Future policy benefit reserves represent the active life reserves related to CNA’s long term care policies and are computed using the net level premium method, which incorporates actuarial assumptions as to morbidity, persistency, inclusive of mortality, discount rate, future premium rate adjustments and expenses. Expense assumptions primarily relate to claim adjudication. Actuarial assumptions generally vary by plan, age at issue policy duration and gender. The initial assumptions are determined at issuance, including a margin for adverse deviation, and are locked in throughout the life of the contract unless a premium deficiency develops. If a premium deficiency emerges, the assumptions are unlocked and deferred acquisition costs, if any, and the future policy benefit reserves are adjusted. The December 31, 2015 gross premium valuation (“GPV”) indicated a premium deficiency of $296 million. The indicated premium deficiency necessitated a charge to income that was effected by the write off of the entire long term care deferred acquisition cost asset of $289 million and an increase to active life reserves of $7 million. The GPV as of December 31, 2017 and 2016 indicated the carried reserves were sufficient, therefore there was no unlocking of assumptions. Interest rates for long term care active life reserves range from 6.6% to 7.0% as of December 31, 2017 and 2016.
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, 2017 and 2016, the liability balances were $121 million and $125 million.
CNA has established an allowance for doubtful accounts on reinsurance receivables which relates to both amounts already billed on ceded paid losses as well as ceded reserves that will be billed when losses are paid in the future. The allowance for doubtful accounts on reinsurance receivables is estimated on the basis of periodic evaluations of balances due from reinsurers, reinsurer solvency, industry experience and current economic conditions. Reinsurer financial strength ratings are updated and reviewed on an annual basis or sooner if CNA becomes aware of significant changes related to a reinsurer. Because billed receivables generally approximate 3% or less of total reinsurance receivables, the age of the reinsurance receivables related to paid losses is not a significant input into the
Impairment of long-lived assets -Long-lived assets are reviewed 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.
Net income per share - Companies with complex capital structures are required to present basic and diluted net income per share. Basic net income per share excludes dilution and is computed by dividing net income attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net income 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.
In January of 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The updated accounting guidance requires changes to the reporting model for financial instruments. The guidance is effective for interim and annual periods beginning after December 15, 2017. The Company expects the primary change to be the requirement for CNA’s equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The Company will recognize a cumulative effect adjustment to Retained earnings and AOCI for the amount of unrealized investment gains and losses, after tax and noncontrolling interests, related to available-for-sale equity securities at the date of adoption. At adoption, the Company estimates this new guidance will result in an increase to Retained earnings and a decrease to AOCI of $25 million (after tax and noncontrolling interests). Subsequent to adoption, changes in the fair value of CNA’s equity securities will be reported as Investment gains (losses) on the Company’s Consolidated Statements of Income, which will introduce additional volatility to the Company’s results of operations.
In February of 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The updated guidance requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and nonlease components in a contract in accordance with the new revenue guidance in ASU 2014-09. The updated guidance is effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.
In June of 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through net income. The guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements, and expects the primary changes to be the use of the expected credit loss model for the mortgage loan portfolio and reinsurance receivables and the presentation of credit losses within the available-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down. The expected credit loss model will require a financial asset to be presented at the net amount expected to be collected. Under the allowance method for available-for-sale debt securities the Company will record reversals of credit losses if the estimate of credit losses declines.
On May 22, 2017, the Company acquired CCC Acquisition Holdings, Inc. for $1.2 billion, subject to post-closing adjustments. CCC Acquisition Holdings, Inc., through its wholly owned subsidiary, Consolidated Container, is a rigid plastic packaging and recycled resins manufacturer that provides packaging solutions to end markets such as beverage, food and household chemicals through a network of manufacturing locations across North America. The results of Consolidated Container are included in the Consolidated Financial Statements since the acquisition date in the Corporate segment. For the period since the acquisition date, Consolidated Container’s revenues were $498
million and net income was not significant. For the year ended December 31, 2016, Consolidated Container reported total revenues of $788 million.
The acquisition was funded with approximately $620 million of Parent Company cash and debt financing proceeds at Consolidated Container of $600 million, as discussed in Note 11. The following table summarizes the preliminary allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value as of the acquisition date and is subject to change within the measurement period. The primary areas that are not yet finalized relate to working capital at closing and determination of tax bases of net assets acquired.
In 2017, Loews Hotels & Co received proceeds of $31 million for the sale of two hotels, in which Loews Hotels & Co had joint venture interests. Loews Hotels & Co paid approximately $84 million to acquire a hotel in 2016 and approximately $330 million to acquire two hotels in 2015. These acquisitions were funded with a combination of cash and property-level debt.
(a) Net unrealized gains (losses) related to changes in fair value on trading securities still held were $39, $44 and $(46) for the years ended December 31, 2017, 2016 and 2015.
Based on current facts and circumstances, the Company believes the unrealized losses presented in the December 31, 2017 securities in a gross unrealized loss position table above are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are attributable to changes in interest rates, credit spreads and other factors. The Company has no current intent to sell securities with unrealized losses, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at December 31, 2017.
The following table presents the activity related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at December 31, 2017, 2016 and 2015 for which a portion of an OTTI loss was recognized in Other comprehensive income.
Limited partnerships comprising 78.8% and 76.6% of the carrying value as of December 31, 2017 and 2016 employ hedge fund strategies. Limited partnerships comprising 18.1% and 19.8% of the carrying value at December 31, 2017 and 2016 were invested in private debt and equity and the remainder were primarily invested in real estate strategies. Hedge fund strategies include both long and short positions in fixed income, equity and derivative instruments. These hedge fund strategies may seek to generate gains from mispriced or undervalued securities, price differentials between securities, distressed investments, sector rotation or various arbitrage disciplines. Within hedge fund strategies, approximately 64.5% were equity related, 20.7% pursued a multi-strategy approach, 11.1% were focused on distressed investments and 3.7% were fixed income related as of December 31, 2017.
The ten largest limited partnership positions held totaled $1.5 billion as of December 31, 2017 and 2016. Based on the most recent information available regarding the Company’s percentage ownership of the individual limited partnerships, the carrying value reflected on the Consolidated Balance Sheets represents approximately 2.9% and 3.5% of the aggregate partnership equity at December 31, 2017 and 2016, and the related income reflected on the Consolidated Statements of Income represents approximately 3.0%, 4.0% and 2.8% of the changes in aggregate partnership equity for the years ended December 31, 2017, 2016 and 2015.
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 but are not limited to 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.
Assets and liabilities measured at fair value on a recurring basis are summarized in the following tables. Corporate bonds and other includes obligations of the U.S. Treasury, government-sponsored enterprises and foreign governments and redeemable preferred stock.
The following section describes the valuation methodologies and relevant inputs used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instruments are generally classified.
The fair values of mortgage loans, included in Other invested assets, were based on the present value of the expected future cash flows discounted at the current interest rate for similar financial instruments, adjusted for specific loan risk.
For the years ended December 31, 2017 and 2016, Diamond Offshore recognized $62 million and $34 million in aggregate expense related to the well control equipment leases and contractual services agreement.
Diamond Offshore estimated the fair value of two of the impaired rigs using an income approach, in which the fair value was estimated based on a calculation of the rig’s discounted future net cash flows over its remaining economic life, which utilized significant unobservable inputs, including assumptions related to estimated dayrate revenue, rig utilization, estimated reactivation and regulatory survey costs, as well as estimated proceeds that may be received on ultimate disposition of the rig. The fair value of the other impaired rig was estimated using a market approach, which required Diamond Offshore to estimate the value that would be received for the rig in the principal or most advantageous market for that rig in an orderly transaction between market participants. This estimate was primarily based on an indicative bid to purchase the rig, as well as our evaluation of other market data points; however, the rig has not been sold. These fair value estimates were representative of Level 3 fair value measurements due to the significant level of estimation involved and the lack of transparency as to the inputs used. During the year ended December 31, 2017, Diamond Offshore recorded asset impairment charges in the aggregate of $100 million ($32 million after tax and noncontrolling interests).
Diamond Offshore recorded aggregate asset impairment charges of $672 million ($263 million after tax and noncontrolling interests for the year ended December 31, 2016. See Note 6 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for further discussion of Diamond Offshore’s 2016 asset impairments. Diamond Offshore recorded aggregate asset impairment charges of $861 million ($341 million after tax and noncontrolling interests) for the year ended December 31, 2015. See Note 6 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for further discussion of Diamond Offshore’s 2015 asset impairments. The asset impairment charges recorded during the years ended December 31, 2017, 2016 and 2015 are reported within Other operating expenses on the Consolidated Statements of Income.
An impairment charge of $20 million was recorded in Other operating expenses in 2015 to write off all goodwill attributable to Diamond Offshore.
Amortization expense for the years ended December 31, 2017, 2016 and 2015 of $20 million, $3 million and $3 million is reported in Other operating expenses on the Company’s Consolidated Statements of Income. At December 31, 2017, estimated amortization expense in each of the next five years is approximately $32 million in 2018, $32 million in 2019, $31 million in 2020, $30 million in 2021 and $30 million in 2022.
Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in CNA’s results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of $380 million, $165 million and $141 million for the years ended December 31, 2017, 2016 and 2015. Net catastrophe losses for the year ended December 31, 2017 included $256 million related to Hurricanes Harvey, Irma and Maria. Catastrophe-related reinsurance reinstatement premium was $4 million for the year ended December 31, 2017. The remaining net catastrophe losses in 2017 resulted primarily from the California wildfires and U.S. weather-related events. Net catastrophe losses in 2016 related primarily to U.S. weather-related events and the Fort McMurray wildfires. Net catastrophe losses in 2015 related primarily to U.S. weather-related events.
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. Every reserve group is reviewed at least once during the year. 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. In developing the loss reserve estimates for property and casualty contracts, CNA generally projects ultimate losses using several common actuarial methods as listed below. CNA reviews the various indications from the various methods and applies judgment to select an actuarial point estimate. The indicated required reserve is the difference between the selected ultimate loss and the inception-to-date paid losses. The difference between the selected ultimate loss and the case incurred or reported loss is IBNR. IBNR includes a provision for development on known cases as well as a provision for late reported incurred claims. Further, CNA does not establish case reserves for allocated loss adjustment expenses (“ALAE”), therefore ALAE reserves are included in its estimate of IBNR. The most frequently utilized methods to project ultimate losses include the following:
Reserves for policyholder benefits for Other Insurance Operations, which primarily includes long term care, are based on actuarial assumptions which include estimates of morbidity, persistency, inclusive of mortality, discount rates, future premium rate increases and expenses over the life of the contracts. Under GAAP, the best estimates of the actuarial assumptions at the date the contract was issued are locked-in throughout the life of the contract unless a premium deficiency develops, which occurred in 2015. As a result, CNA updated the assumptions to represent management’s best estimates at the time of the premium deficiency and these revised assumptions are locked-in unless another premium deficiency is identified.
The information in the tables is reported on a net basis after reinsurance and does not include the effects of discounting. The information contained in the years preceding calendar year 2016 is unaudited. To the extent CNA enters into a commutation, the transaction is reported on a prospective basis. To the extent that CNA enters into a
Unfavorable development in medical professional liability was primarily due to continued higher than expected frequency in aging services and higher than expected severity for hospitals in recent accident years. This was partially offset by favorable development in life sciences and hospitals in prior accident years as well as favorable development related to unallocated claim adjustment expenses.
Unfavorable development for other coverages was primarily due to higher than expected severity in accident year 2016 and higher than expected large claim frequency in the Hardy Political Risks portfolio relating largely to accident year 2016. This unfavorable development was largely offset by favorable development due to better than expected frequency in accident years 2014 through 2015, better than expected emergence in Canadian run-off business in accident years 2014 and prior, several favorable settlements relating to large claims in the Europe Professional Indemnity portfolio and lower than expected large loss frequency in the Europe Financial Institutions portfolio.
Favorable development for medical professional liability was primarily due to lower than expected severities for individual health care professionals, allied facilities and hospitals in accident years 2011 and prior and better than expected severity in medical products liability in accident years 2010 through 2015. This was partially offset by unfavorable development in accident years 2012 and 2013 related to higher than expected large loss emergence in hospitals and higher than expected frequency and severity in accident years 2014 and 2015 in the aging services business.
Favorable development for commercial auto was primarily due to favorable settlements on claims in accident years 2010 through 2014 and lower than expected severities in accident years 2012 through 2015.
Overall, favorable development for medical professional liability was related to lower than expected severity in accident years 2012 and prior. Unfavorable development was recorded related to increased claim frequency and severity in the aging services business in accident years 2013 and 2014.
Unfavorable development for workers’ compensation was primarily due to higher than expected severity related to Defense Base Act contractors in accident years 2008 through 2014.
Favorable development for other coverages was due to better than expected claim frequency in accident year 2014, better than expected claim emergence from 2012 and 2014 catastrophe events, better than expected large loss emergence in accident years 2012 and prior and better than expected individual large loss emergence and favorable settlements on large claims in accident years 2013 and 2014. This was partially offset by unfavorable development due to higher than expected large losses in financial institutions and political risk, primarily in accident year 2014.
The table below presents the net liability for unpaid claim and claim adjustment expenses, by line of business for Property and Casualty Operations:
(a) Data presented for these calendar years is required supplemental information, which is unaudited.
(a) Other Insurance Operations include amounts primarily related to long term care claim reserves, which are long duration insurance contracts, but also include amounts related to unfunded structured settlements arising from short duration insurance contracts.
The table below presents information about average historical claims duration as of December 31, 2017 and is presented as required supplementary information, which is unaudited.
For 2015 through 2017, the Internal Revenue Service (“IRS”) has accepted the Company into the Compliance Assurance Process (“CAP”), which is a voluntary program for 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 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 and 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 2013.
On December 22, 2017, H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018,” previously known as “The Tax Cuts and Jobs Act” was signed into law (the “Tax Act”). The Tax Act amended the Internal Revenue Code in several areas that had a direct and immediate effect on the Company’s results of operations and statement of financial position as of and for the year ended December 31, 2017 including, among other things, a reduction in the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018, eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized, and a one-time mandatory deemed repatriation of accumulated earnings of foreign subsidiaries as of December 31, 2017, inclusive of the utilization of certain tax attributes offset by a provisional liability for uncertain tax positions related to such attributes. The Tax Act is subject to further clarification by the issuance of future technical guidance by the U.S. Department of Treasury and/or future technical correction legislation.
The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”) which allows companies to report the income tax effects of the Tax Act as a provisional amount based on a reasonable estimate, which would be subject to adjustment during a reasonable measurement period, not to exceed twelve months, until the accounting and analysis under ASC 740 is complete. Due to the timing of the enactment of the Tax Act, there continues to be a significant amount of uncertainty as to the appropriate application of a number of the underlying provisions, pending further guidance and clarification from the relevant authorities. The Company will continue to monitor developments in this area and adjust its provisional estimates throughout the year in 2018, as and if necessary, as additional guidance and clarification becomes available.
The Company recorded a one-time non-cash provisional $200 million increase to net income (net of noncontrolling interests) for the year ended December 31, 2017 related to the Tax Act. This increase includes a $268 million income tax benefit due to the adjustment of net deferred tax assets and liabilities related to the reduction of the U.S. federal corporate income tax rate from 35% to 21% partially offset by a $78 million charge mostly related to the one-time mandatory repatriation of previously deferred earnings of certain of Diamond Offshore’s non-U.S. subsidiaries, inclusive of the utilization of certain tax attributes offset by a provisional liability for uncertain tax positions related to such attributes. The Company is still in the process of evaluating the estimate as it relates to the tax effect of: (i) the amount of deferred tax assets and liabilities subject to the income tax rate change from 35% to 21%, including the calculation of the mandatory deemed repatriation aspect of the Tax Act and the state tax effect of adjustments made to federal temporary differences, (ii) the ability to more likely than not realize the benefit of deferred tax assets, including net operating losses and foreign tax credits, (iii) the effect of re-computing CNA’s insurance reserves and the transition adjustment from existing law, the effects of which will have no impact on the effective tax rate and (iv) the special accounting method provisions for recognizing income for
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 on the Consolidated Statements of Income. Interest amounts recorded by the Company were insignificant for the years ended December 31, 2017, 2016 and 2015. The Company recorded income tax benefit of $2 million and $23 million for the years ended December 31, 2017 and 2016 and income tax expense of $2 million for the year ended December 31, 2015 related to penalties.
Although realization of deferred tax assets is not assured, management believes it is more likely than not that the recognized deferred tax assets will be realized through recoupment of ordinary and capital taxes paid in prior carryback years and through future earnings, reversal of existing temporary differences and available tax planning strategies. As of December 31, 2017, Diamond Offshore recorded a valuation allowance of $169 million related to net operating losses of $111 million, foreign tax credits of $27 million, and other deferred tax assets of $31 million.
At December 31, 2017, the aggregate long term debt maturing in each of the next five years is approximately as follows: $280 million in 2018, $449 million in 2019, $556 million in 2020, $846 million in 2021, $955 million in 2022 and $8.6 billion thereafter. Long term debt is generally redeemable in whole or in part at the greater of the principal amount or the net present value of remaining scheduled payments discounted at the specified treasury rate plus a margin.
CNA is a member of the Federal Home Loan Bank of Chicago (“FHLBC”). FHLBC membership provides participants with access to additional sources of liquidity through various programs and services. As a requirement of membership in the FHLBC, CNA held $5 million of FHLBC stock as of December 31, 2017, giving it access to approximately $111 million of additional liquidity. As of December 31, 2017 and 2016, CNA had no outstanding borrowings from the FHLBC.
CNA has a five-year $250 million senior unsecured revolving credit facility with a syndicate of banks which may be used for general corporate purposes. At CNA’s election, the commitments under the credit agreement may be increased from time to time up to an additional aggregate amount of $100 million. As of December 31, 2017, there were no outstanding borrowings under the credit agreements and CNA was in compliance with all covenants.
In the first quarter of 2017, Boardwalk Pipeline retired at maturity the $300 million outstanding aggregate principal amount of its 5.5% senior notes.
The tables below present the changes in AOCI by component for the years ended December 31, 2015, 2016 and 2017:
The Company repurchased 4.8 million, 3.4 million and 33.3 million shares of its common stock at aggregate costs of $237 million, $134 million and $1.3 billion during the years ended December 31, 2017, 2016 and 2015. As of December 31, 2017, 4.4 million shares were retired. The remaining 0.4 million shares will be retired in 2018. Upon retirement, treasury stock was eliminated through a reduction to common stock, APIC and retained earnings.
The 2015 long term care premium deficiency discussed in Note 1 was recorded on a GAAP basis. There was no premium deficiency for statutory accounting purposes. Statutory accounting principles requires the use of prescribed discount rates in calculating the reserves for long term care future policy benefits which are lower than the discount rates used on a GAAP basis and results in higher carried reserves relative to GAAP reserves.
The statutory capital and surplus presented above for CCC was approximately 264% and 270% of company action level RBC at December 31, 2017 and 2016. Company action level RBC is the level of RBC which triggers a heightened level of regulatory supervision. The statutory capital and surplus of CCC’s foreign insurance subsidiaries, which is not significant to the overall statutory capital and surplus, also met or exceeded their respective regulatory and other capital requirements.
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 and its subsidiaries 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 and its subsidiaries are basically health and, for certain retirees, life insurance type benefits.
The accumulated benefit obligation for all defined benefit pension plans was $3.2 billion and $3.1 billion at December 31, 2017 and 2016.
The Company and its subsidiaries employ a total return approach whereby a mix of equity and fixed maturity securities are used to maximize the long term return of plan assets for a prudent level of risk and to manage cash flows according to plan requirements. The target allocation of plan assets is 40% to 60% invested in equity securities and limited partnerships, with the remainder primarily invested in fixed maturity securities. The intent of this strategy is to minimize expenses by generating investment returns that exceed the growth of the plan liabilities over the long run. Risk tolerance is established after careful consideration of the plan liabilities, plan funded status and corporate financial conditions. The investment portfolio contains a diversified blend of fixed maturity, equity and short term securities. Alternative investments, including limited partnerships, are used to enhance risk adjusted long term returns while improving portfolio diversification. At December 31, 2017, the Company and its subsidiaries had committed $107 million to future capital calls from various third party limited partnership investments in exchange for an ownership interest in the related partnerships. Investment risk is monitored through annual liability measurements, periodic asset/liability studies and quarterly investment portfolio reviews.
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 $105 million, $107 million and $115 million for the years ended December 31, 2017, 2016 and 2015.
In 2017, the Company granted an aggregate of 274,500 RSUs and PSUs at a weighted average grant-date fair value of $45.91 per unit. 17,033 RSUs were forfeited during the year. 4,266,050 SARs were outstanding at December 31, 2017 with a weighted average exercise price of $40.05.
CNA’s largest recoverables from a single reinsurer, including ceded unearned premium reserves as of December 31, 2017 were approximately $2.1 billion from a subsidiary of Berkshire Hathaway Insurance Group, $395 million from the Gateway Rivers Insurance Company and $230 million from subsidiaries of Wilton Re. These amounts are substantially collateralized. The recoverable from the Berkshire Hathaway Insurance Group includes amounts related to third party reinsurance for which NICO has assumed the credit risk under the terms of the loss portfolio transfer as discussed in Note 8.
Included in the direct and ceded earned premiums for the years ended December 31, 2017, 2016 and 2015 are $3.9 billion, $3.9 billion and $3.3 billion related to property business that is 100% reinsured under a significant third party captive program. The third party captives that participate in this program are affiliated with the non-insurance company policyholders, therefore this program provides a means for the policyholders to self-insure this property risk. CNA receives and retains a ceding commission.
Insurance claims and policyholders’ benefits reported on the Consolidated Statements of Income are net of reinsurance recoveries of $3.1 billion, $3.0 billion and $2.6 billion for the years ended December 31, 2017, 2016 and 2015, including $2.5 billion, $2.6 billion and $2.3 billion related to the significant third party captive program discussed above.
(a) Net income for the fourth quarter of 2017 includes the impact of a $200 million net benefit resulting from the enactment of the Tax Act.
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, 2017, 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. Certain provisions of the indemnification agreements survive indefinitely while others survive until the applicable statutes of limitation expire, or until the agreed upon contract terms expire.
CNA’s business is the sale of property and casualty insurance coverage primarily through a network of independent agents, brokers and managing general underwriters. CNA’s operations also include its long term care business that is in run-off, certain corporate expenses, including interest on CNA’s corporate debt, and certain property and casualty businesses in run-off, including CNA Re and A&EP.
Diamond Offshore provides contract drilling services to the energy industry around the world with a fleet of 17 offshore drilling rigs consisting of four drillships and seven ultra-deepwater, four deepwater and two mid-water semisubmersible rigs.