Our corporate headquarters is located in approximately 148,000 square feet of leased office space in New York City. Information relating to our subsidiaries’ properties is contained under Item 1.
(a) Includes losses of $309 million (after tax and noncontrolling interests) in continuing operations and $19 million (after tax and noncontrolling interests) in discontinued operations for the year ended December 31, 2010 related to CNA’s Loss Portfolio Transfer transaction as discussed elsewhere in this MD&A.
Net income also included net investment losses of $31 million (after tax and noncontrolling interests) in 2011 as compared to net investment gains of $27 million in the prior year. Net investment losses in 2011 were primarily driven by lower gains on sales of securities partially offset by lower other-than-temporary impairment losses at CNA.
An exposure exists with respect to the collectibility of property and casualty and life reinsurance ceded to the extent that any reinsurer is unable to meet its obligations or disputes the liabilities CNA has ceded under reinsurance agreements. An allowance for doubtful accounts on reinsurance receivables is recorded on the basis of periodic evaluations of balances due from reinsurers, reinsurer solvency, CNA’s past experience and current economic conditions. Further information on CNA’s reinsurance receivables is included in Note 16 of the Notes to Consolidated Financial Statements included under Item 8.
CNA’s investment portfolio is subject to market declines below amortized cost that may be other-than-temporary and therefore result in the recognition of impairment losses in earnings. Factors considered in the determination of whether or not a decline is other-than-temporary include a current intention or need to sell the security or an indication that a credit loss exists. Significant judgment exists regarding the evaluation of the financial condition and expected near-term and long term prospects of the issuer, the relevant industry conditions and trends, and whether CNA expects to receive cash flows sufficient to recover the entire amortized cost basis of the security. CNA has an Impairment Committee which reviews the investment portfolio on at least a quarterly basis, with ongoing analysis as new information becomes available. Further information on CNA’s process for evaluating impairments is included in Note 3 of the Notes to Consolidated Financial Statements included under Item 8.
Future policy benefit reserves for CNA’s long term care products and payout annuity contracts and deferred acquisition costs for CNA’s long term care products are based on certain assumptions including morbidity, mortality, policy persistency and discount rates, which are impacted by expected investment yields. The recoverability of deferred acquisition costs and the adequacy of the reserves are contingent on actual experience related to these key assumptions, which were generally established at time of issue. If actual experience differs from these assumptions, the deferred acquisition costs may not be fully realized and the reserves may not be adequate, requiring CNA to add to reserves. Therefore, our results of operations and/or equity could be adversely impacted. The inherent risks associated with the reserving process are discussed in the Reserves - Estimates and Uncertainties section below.
We make a significant number of assumptions in order to estimate the liabilities and costs related to our pension and postretirement benefit obligations to employees under our benefit plans. The assumptions that have the most impact on pension costs are the discount rate and the expected long term rate of return on plan assets. These assumptions are evaluated relative to current market factors such as inflation, interest rates and fiscal and monetary policies. Changes in these assumptions can have a material impact on pension obligations and pension expense.
In determining the discount rate assumption, we utilized current market information and liability information, including a discounted cash flow analysis of our pension and postretirement obligations. In particular, the basis for our discount rate selection was the yield on indices of highly rated fixed income debt securities with durations comparable to that of our plan liabilities. The yield curve was applied to expected future retirement plan payments to adjust the discount rate to reflect the cash flow characteristics of the plans. The yield curves and indices evaluated in the selection of the discount rate are comprised of high quality corporate bonds that are rated AA by an accepted rating agency.
Further information on our pension and postretirement benefit obligations is included in Note 15 of the Notes to Consolidated Financial Statements included under Item 8.
HighMount follows the full cost method of accounting for natural gas and oil exploration and production activities. Under the full cost method, all direct costs of property acquisition, exploration and development activities are capitalized and subsequently depleted using the units-of-production method. The depletable base of costs includes estimated future costs to be incurred in developing proved natural gas and oil reserves, as well as capitalized asset retirement costs, net of projected salvage values. Capitalized costs in the depletable base are subject to a ceiling test. The test limits capitalized amounts to a ceiling, the present value of estimated future net revenues to be derived from the production of proved natural gas and oil reserves, using calculated average prices adjusted for any cash flow hedges in place. If net capitalized costs exceed the ceiling test at the end of any quarterly period, then a write-down of the assets must be recognized in that period. A write-down may not be reversed in future periods, even though higher natural gas and oil prices may subsequently increase the ceiling. At March 31, 2009, total capitalized costs exceeded the ceiling and HighMount recognized non-cash impairment charges of $1.0 billion ($660 million after tax) related to the carrying value of natural gas and oil properties, as discussed further in Note 7 of the Notes to Consolidated Financial Statements included under Item 8. In addition, gains or losses on the sale or other disposition of natural gas and oil properties are not recognized unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves.
At December 31, 2011, HighMount had $584 million of goodwill recorded in conjunction with its acquisition of certain exploration and production assets. HighMount performs its annual goodwill impairment test each April 30th and no impairment was determined at April 30, 2011. As a result of low natural gas prices and the potential ceiling test impairment discussed above, HighMount performed a goodwill impairment test as of December 31, 2011. No impairment charge was required based on that test.
Unless the context otherwise requires, references to net operating income (loss), net realized investment results and net income (loss) reflect amounts attributable to Loews Corporation.
utilizing a variety of actuarial reserve estimation techniques, from numerous assumptions and expectations about future events, both internal and external, many of which are highly uncertain.
the effects of worldwide economic conditions, which have resulted in an increase in the number and size of certain claims including both directors and officers (“D&O”) and errors and omissions (“E&O”) insurance claims related to corporate failures, as well as other coverages;
mass tort claims, including bodily injury claims related to welding rods, benzene, lead, noise induced hearing loss, injuries from various medical products including pharmaceuticals and various other chemical and radiation exposure claims.
Most of CNA’s business can be characterized as long-tail. For long-tail business, it will generally be several years between the time the business is written and the time when all claims are settled. CNA’s long-tail exposures include
For many exposures, especially those that can be considered long-tail, a particular accident year may not have a sufficient volume of paid losses to produce a statistically reliable estimate of ultimate losses. In such a case, CNA’s actuaries typically assign more weight to the incurred development method than to the paid development method. As claims continue to settle and the volume of paid loss increases, the actuaries may assign additional weight to the paid development method. For most of CNA’s products, even the incurred losses for accident years that are early in the claim settlement process will not be of sufficient volume to produce a reliable estimate of ultimate losses. In these cases, CNA will not assign any weight to the paid and incurred development methods. CNA will use the loss ratio, Bornhuetter-Ferguson and frequency times severity methods. For short-tail exposures, the paid and incurred development methods can often be relied on sooner primarily because CNA’s history includes a sufficient number of years to cover the entire period over which paid and incurred losses are expected to change. However, CNA may also use the loss ratio, Bornhuetter-Ferguson and frequency times severity methods for short-tail exposures.
of CNA’s consideration of the factors noted above as well as the potential volatility of the projections associated with the specific product being analyzed and other factors impacting claims costs that may not be quantifiable through traditional actuarial analysis. This process results in management’s best estimate which is then recorded as the loss reserve.
Within CNA Specialty, CNA believes a material deviation to its net reserves is reasonably possible for professional liability and related business. This business includes professional liability coverages provided to various professional firms, including architects, real estate agents, small and mid-sized accounting firms, law firms and technology firms. This business also includes D&O, employment practices, fiduciary and fidelity coverages as well as insurance products serving the health care delivery system. The most significant factor affecting reserve estimates for this business is claim severity. Claim severity is driven by the cost of medical care, the cost of wage replacement, legal fees, judicial decisions, legislative changes and other factors. Underwriting and claim handling decisions such as the classes of business written and individual claim settlement decisions can also impact claim severity. If the estimated claim severity increases by 9%, CNA estimates that the net reserves would increase by approximately $450 million. If the estimated claim severity decreases by 3%, CNA estimates that net reserves would decrease by approximately $150 million. CNA’s net reserves for this business were approximately $4.9 billion at December 31, 2011.
replacement, judicial decisions, legislation and other factors. If the estimated claim severity for general liability increases by 6%, CNA estimates that its net reserves would increase by approximately $200 million. If the estimated claim severity for general liability decreases by 3%, CNA estimates that its net reserves would decrease by approximately $100 million. Net reserves for CNA Commercial general liability were approximately $3.6 billion at December 31, 2011.
Annually, management assesses the adequacy of its GAAP reserves by product group by performing premium deficiency testing. In this test, reserves computed using best estimate assumptions as of the date of the test without provisions for adverse deviation are compared to the recorded reserves. If reserves determined based on management’s current best estimate assumptions are greater than the existing net GAAP reserves (i.e. reserves net of any Deferred acquisition costs asset), the existing net GAAP reserves are adjusted to the greater amount.
The actuarial assumptions that management believes are subject to the most variability are discount rates, morbidity, and persistency, which can be impacted by policy lapses and death. The table below summarizes the estimated pretax impact on CNA’s results of operations from various hypothetical revisions to its assumptions. CNA has assumed that revisions to such assumptions would occur in each policy type, age and duration within each policy group. Although such hypothetical revisions are not currently required or anticipated, CNA believes they could occur based on past variances in experience and its expectations of the ranges of future experience that could reasonably occur.
It should be noted that CNA’s current GAAP long term care reserves contain a level of margin in excess of management’s current best estimates. Any required increase in the net GAAP reserves resulting from the hypothetical revisions in the table below would first reduce the margin before they would impact results of operations. The estimated impact to results of operations in the table below are after consideration of the existing margin.
As further discussed in Note 8 of the Notes to Consolidated Financial Statements included under Item 8, on August 31, 2010, CNA completed a transaction with NICO, a subsidiary of Berkshire Hathaway Inc., under which substantially all of its legacy A&EP liabilities were ceded to NICO (“Loss Portfolio Transfer”). We recognized a loss of $328 million (after tax and noncontrolling interests) in the third quarter of 2010, of which $309 million related to our continuing operations and $19 million related to our discontinued operations.
Net income decreased $77 million in 2011 as compared with 2010. Excluding the loss associated with the Loss Portfolio Transfer, net income decreased $405 million in 2011 as compared with 2010. Net investment income decreased $262 million, reflecting significant unfavorable limited partnership results. In addition, investment gains (losses) decreased $105 million ($56 million after tax and noncontrolling interests). See the Investments section of this MD&A for further discussion of net realized investment results and net investment income. Partially offsetting these decreases was an $88 million increase in Insurance premiums. Insurance claims and policyholders’ benefits increased $504 million, primarily due to a lower level of favorable net prior year development, higher catastrophe losses and decreased results in CNA’s payout annuity business. CNA’s payout annuity business was negatively impacted by a $104 million (after tax and noncontrolling interests) increase in insurance reserves, due to unlocking actuarial reserve assumptions for anticipated adverse changes in mortality and discount rates, which reflect the current low interest rate environment and CNA’s view of expected investment yields, as discussed in Life & Group Non-Core Policyholders Reserves above. Further information on net prior year development for 2011 and 2010 is included in Note 8 of the Notes to Consolidated Financial Statements included under Item 8.
In 2010, CNA commenced a program to significantly transform its Information Technology (“IT”) organization and delivery model. The total costs for this program were $37 million, of which $36 million was incurred through December 31, 2010.
CNA utilizes the net operating income financial measure to monitor its operations. Net operating income is calculated by excluding from net income the effects of (i) net realized investment gains or losses, (ii) income or loss from discontinued operations and (iii) any cumulative effects of changes in accounting guidance. In evaluating the results of the CNA Specialty and CNA Commercial segments, CNA utilizes the loss ratio, the expense ratio, the dividend ratio and the combined ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders’ dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios.
Changes in estimates of claim and allocated claim adjustment expense reserves and premium accruals, net of reinsurance, for prior years are defined as net prior year development within this MD&A. These changes can be favorable or unfavorable. Net prior year development does not include the impact of related acquisition expenses. Further information on CNA’s reserves is provided in Note 8 of the Notes to Consolidated Financial Statements included under Item 8.
Net written premiums for CNA Specialty increased $181 million in 2011 as compared with 2010, primarily driven by new business. Net earned premiums increased $117 million in 2011 as compared with 2010, consistent with increases in net written premiums in recent quarters and favorable premium development in 2011.
Net income decreased $117 million in 2011 as compared with 2010. This decrease was due to lower net operating income and decreased net realized investment results.
Favorable net prior year development of $245 million and $344 million was recorded in 2011 and 2010. Further information on CNA Specialty’s net prior year development for 2011 and 2010 is included in Note 8 of the Notes to Consolidated Financial Statements included under Item 8.
Net written premiums for CNA Specialty increased $7 million in 2010 as compared with 2009. Net written premiums increased in CNA’s professional management and liability lines of business. This increase was partially offset by continued decreased insured exposures and lower rates in CNA’s architects & engineers and CNA HealthPro lines of business due to economic and competitive market conditions. Net earned premiums decreased $18 million as compared with the same period in 2009, due to the impact of decreased net written premiums in prior quarters.
CNA Specialty’s average rate decreased 2.2% for 2010, as compared to a decrease of 1.6% in 2009 for policies that renewed in each period. Retention of 85.7% and 84.3% was achieved in each period.
Net income improved $159 million in 2010 as compared with 2009. This increase was due to improved net realized investment results and improved net operating income.
The expense ratio improved 1.2 points in 2011 as compared with 2010, primarily due to the favorable impact of recoveries in 2011 on insurance receivables written off in prior years and the impact of IT costs incurred in 2010.
Net income improved $212 million in 2010 as compared with 2009. This improvement was primarily due to improved net realized investment results.
Net operating income improved $14 million in 2010 as compared with 2009. This increase was primarily due to increased favorable net prior year development, partially offset by lower net investment income and higher catastrophe losses.
The expense ratio increased 0.5 points in 2010 as compared with 2009, primarily due to the unfavorable impact of the lower net earned premium base. Underwriting expenses include the unfavorable impact of IT costs.
(a) Reserve amounts are net of $1.4 billion and $1.5 billion of ceded reserves and exclude $627 million and $235 million of future policy benefits relating to Shadow Adjustments as of December 31, 2011 and 2010, as further discussed in Note 1 of the Notes to Consolidated Financial Statements included under Item 8. Reserves at December 31, 2011 also exclude $95 million of claim and claim adjustment expenses relating to Shadow Adjustments.
Net earned premiums for Life & Group Non-Core decreased $13 million in 2010 as compared with 2009.
Net loss decreased $103 million in 2010 as compared with 2009. This improvement was primarily due to improved net realized investment results. In addition, 2009 results included the unfavorable impact of a $25 million (after tax and noncontrolling interests) legal accrual. The accrual was subsequently decreased in 2010 resulting in a favorable impact of $11 million (after tax and noncontrolling interests). Favorable reserve development arising from a commutation of an assumed reinsurance agreement in 2010 also contributed to the improvement.
The following table summarizes the results of operations for the Other Insurance segment, including A&EP and intersegment eliminations:
Demand affects the number of days Diamond Offshore’s fleet is utilized and the dayrates earned. As utilization rates increase, dayrates tend to increase as well, reflecting the lower supply of available rigs. Conversely, as utilization rates decrease, dayrates tend to decrease as well, reflecting the excess supply of rigs. When a rig is idle, no dayrate is earned and revenues will decrease as a result. Revenues can also be affected as a result of the acquisition or disposal of rigs, required surveys and shipyard upgrades. In order to improve utilization or realize higher dayrates, Diamond Offshore may mobilize its rigs from one market to another. However, during periods of mobilization, revenues may be adversely affected. As a response to changes in demand, Diamond Offshore may withdraw a rig from the market by stacking it or may reactivate a rig stacked previously, which may decrease or increase revenues.
Operating expenses generally are not affected by changes in dayrates, and short term reductions in utilization do not necessarily result in lower operating expenses. For instance, if a rig is to be idle for a short period of time, few decreases in operating expenses may actually occur since the rig is typically maintained in a prepared or “warm stacked” state with a full crew. In addition, when a rig is idle, Diamond Offshore is responsible for certain operating expenses such as rig fuel and supply boat costs, which are typically costs of the operator when a rig is under contract. However, if the rig is to be idle for an extended period of time, Diamond Offshore may reduce the size of a rig’s crew and take steps to “cold stack” the rig, which lowers expenses and partially offsets the impact on operating income. Diamond Offshore recognizes, as incurred, operating expenses related to activities such as inspections, painting projects and routine
Operating income is negatively impacted when Diamond Offshore performs certain regulatory inspections, which it refers to as a 5-year survey, or special survey, that are due every five years for each of Diamond Offshore’s rigs. Operating revenue decreases because these special surveys are performed during scheduled downtime in a shipyard. Operating expenses increase as a result of these special surveys due to the cost to mobilize the rigs to a shipyard, inspection costs incurred and repair and maintenance costs. Repair and maintenance activities may result from the special survey or may have been previously planned to take place during this mandatory downtime. The number of rigs undergoing a 5-year survey will vary from year to year, as well as from quarter to quarter.
Diamond Offshore’s floating rigs accounted for approximately 94% of its contract drilling revenue during 2011. Industry wide floater utilization is greater than 90%, and, as of February 1, 2012, Diamond Offshore’s floating rigs were committed for approximately 75% of the days remaining in 2012 and 54% of 2013.
Market strength for ultra-deepwater and deepwater rigs varies among geographic regions. Upcoming drilling programs offshore Brazil will require a number of additional ultra-deepwater rigs. This demand may be met by rigs constructed
domestically in Brazil, including 33 deepwater floaters ordered by Petrobras. However, additional demand for ultra-deepwater rigs could develop if Brazilian drilling programs, including those of Petrobras, are accelerated prior to delivery of domestically-constructed rigs. In addition, successful exploration and development programs in West Africa have given rise to a robust market for deepwater and ultra-deepwater rigs in that region.
Market strength for mid-water floaters is stable or improving depending on the geographic market. In the North Sea, the mid-water market is strong, with signs of increasing dayrates, and in the Mediterranean region, demand remains solid. The Southeast Asia and Australia markets also remain steady.
The following table reflects Diamond Offshore’s contract drilling backlog as of February 1, 2012, October 17, 2011 (the date reported in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011) and February 1, 2011 (the date reported in our Annual Report on Form 10-K for the year ended December 31, 2010). Contract drilling backlog is calculated by multiplying the contracted operating dayrate by the firm contract period and adding one-half of any potential rig performance bonuses. Diamond Offshore’s calculation also assumes full utilization of its drilling equipment for the contract period (excluding scheduled shipyard and survey days); however, the amount of actual revenue earned and the actual periods during which revenues are earned will be different than the amounts and periods shown in the tables below due to various factors. Utilization rates, which generally approach 92% - 98% during contracted periods, can be adversely impacted by downtime due to various operating factors including, but not limited to, weather conditions and unscheduled repairs and maintenance. Contract drilling backlog excludes revenues for mobilization, demobilization, contract preparation and customer reimbursables. No revenue is generally earned during periods of downtime for regulatory surveys. Changes in Diamond Offshore’s contract drilling backlog between periods are a function of the performance of work on term contracts, as well as the extension or modification of existing term contracts and the execution of additional contracts.
(a) Includes $1.9 billion attributable to contracted operations offshore Brazil for the years 2012 to 2015 and $1.8 billion attributable to future work for two of Diamond Offshore’s drillships under construction as of February 1, 2012.
(b) Includes $787 million attributable to contracted operations offshore Brazil for the years 2012 to 2016 as of February 1, 2012.
(c) Includes $220 million, $222 million and $149 million for the years 2012 to 2014, and $196 million in the aggregate for the years 2015 to 2016, attributable to contracted operations offshore Brazil.
(d) Includes $631 million, $477 million, $368 million and $86 million for the years 2012 to 2015, attributable to contracted operations offshore Brazil.
The following table reflects the percentage of rig days committed by year as of February 1, 2012. The percentage of rig days committed is calculated as the ratio of total days committed under contracts, 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). Total available days have been calculated based on the expected final commissioning dates for rigs under construction.
(a) As of February 1, 2012, includes approximately 1,100 and 500 currently known, scheduled shipyard, survey and mobilization days for 2012 and 2013.
(b) Utilization is calculated as the ratio of total revenue earnings days divided by the total calendar days in the period for all rigs in Diamond Offshore’s fleet (including cold stacked rigs).
(c) Average daily revenue is defined as contract drilling revenue (excluding revenue for mobilization, demobilization and contract preparation) per revenue earning day.
The following table summarizes the results of operations for Diamond Offshore for the years ended December 31, 2011, 2010 and 2009 as presented in Note 21 of the Notes to Consolidated Financial Statements included under Item 8:
Revenue from ultra-deepwater floaters increased $123 million in 2011 as compared with 2010, primarily due to increased utilization of $184 million, partially offset by a decrease in dayrates of $36 million. In addition, during the third quarter of 2010 Diamond Offshore received a $31 million contract termination fee related to the Ocean Endeavor. Revenue earning days increased by 514, primarily due to the Ocean Courage and Ocean Valor, which were under contract in Brazil for all of 2011 and worked a combined 353 incremental revenue earning days, compared to 2010, generating $162 million in incremental revenue. However, aggregate revenue earned by Diamond Offshore’s six other ultra-deepwater rigs decreased $39 million due to a lower average daily revenue earned, partially offset by an increase in revenue earning days due to downtime in 2010 associated with the relocation of three rigs from the GOM to international locations. Contract drilling expense for Diamond Offshore’s ultra-deepwater floaters increased $173 million primarily due to incremental contract drilling expense from the operation of the Ocean Courage and Ocean Valor, incremental mobilization expense and higher costs associated with operating rigs internationally.
Revenue from deepwater floaters increased $169 million in 2011 as compared with 2010. This increase was primarily due to a $152 million increase in utilization and $25 million increase in dayrates, partially offset by an $8 million decrease in amortized mobilization fees. Revenue earning days increased by 376 in 2011, primarily due to 209 fewer non-operating days for repairs, inspections and contract preparation activities, 87 fewer rig mobilization days and 80 fewer days in which rigs were warm stacked between contracts. Contract drilling expense for deepwater floaters increased $8 million primarily due to the Ocean America operating offshore Australia for all of 2011 compared to the prior year when the rig commenced drilling operations in June. This amount was partially offset by a reduction in recognized mobilization costs due to the full amortization of previously deferred costs as rigs completed their initial contracts.
Revenue from mid-water floaters decreased $197 million in 2011 as compared with 2010, primarily due to decreased utilization of $153 million, decreased dayrates of $59 million and decreased amortized mobilization fees of $9 million, partially offset by a $24 million demobilization fee received in relation to the Ocean Yorktown’s completion of its contract offshore Brazil. Revenue earning days decreased by 546, primarily attributable to 963 additional cold stacked days in 2011 compared to 2010, partially offset by 282 less warm stacked days between contracts, 84 less days for unpaid downtime for repairs and 51 less rig mobilization days. Contract drilling expense for mid-water floaters decreased $9 million and included a reduction in costs associated with cold stacked rigs, partially offset by an increase in personnel related costs, repairs and maintenance expense, shorebase support and overhead costs, including costs associated with the demobilization of the Ocean Yorktown to the GOM.
Revenue from jack-up rigs decreased $71 million in 2011 as compared with 2010, primarily due to decreased utilization of $71 million and decreased dayrates of $13 million, partially offset by a $13 million increase in amortized mobilization fees. Revenue earning days decreased by 810, reflecting the impact of cold stacking rigs during the period, the sale of the Ocean Shield in July 2010 and an increase in warm stacked days in between contracts, partially offset by a decrease in the number of non-revenue earning days for repairs and mobilization of rigs. Contract drilling expense for jack-ups decreased $21 million primarily due to reduced expense for cold stacked rigs and the Ocean Shield, partially offset by higher rig mobilization costs, inspection costs and hull insurance.
Net income increased in 2011 as compared with 2010, primarily due to the changes in contract drilling revenue and expense discussed above. In addition, interest expense decreased $18 million, primarily due to interest capitalized in 2011 on Diamond Offshore’s three drillships under construction. In 2010, Diamond Offshore recognized a pretax gain of $33 million related to the sale of the Ocean Shield.
Revenue from deepwater floaters increased $38 million in 2010 as compared with 2009, primarily due to a $21 million increase in amortized mobilization fees and a $17 million increase in utilization. Revenue earning days increased by 44 in 2010 as compared with 2009 resulting from 165 fewer warm stacked days between contracts, partially offset by 80 additional non-revenue earning days due to scheduled shipyard time for inspections, repairs and contract preparation activities and 45 incremental rig mobilization days. Contract drilling expense for deepwater floaters increased $47 million primarily due to incremental mobilization expense, including amortized mobilization costs, increased personnel-related costs, higher revenue-based fees and shorebase support costs, which included costs related to Diamond Offshore’s Angola operations and higher costs related to its expanded operations offshore Brazil.
Revenue from mid-water floaters decreased $128 million in 2010 as compared with 2009, primarily due to a $114 million decrease in utilization and a $40 million decrease in dayrates, partially offset by a $26 million increase in amortized mobilization fees. Revenue earning days decreased by 397 primarily due to increased downtime during 2010 for repairs and the cold stacking of rigs, partially offset by fewer mobilization and warm stacked days. Contract drilling expense for mid-water floaters increased $59 million primarily due to higher personnel-related expenses, rig mobilization costs, including amortized mobilization expenses, revenue-based fees and taxes and shorebase support (Brazil and the Falkland Islands) and overhead costs.
Net income decreased in 2010 as compared with 2009, primarily due to the changes in contract drilling revenue and expense discussed above. In addition, other operating expenses include an increase in depreciation of $47 million in 2010 due to a higher depreciable asset base, including depreciation on the Ocean Courage and Ocean Valor, which were placed in service in September 2009 and March 2010, but did not begin drilling operations until 2010. Interest expense increased $41 million due to a full year of interest expense in 2010 for Diamond Offshore’s issuance of 5.9% senior notes in May of 2009, and the issuance of 5.7% senior notes in October of 2009.
production, as well as appreciated property values. HighMount calculates depletion using the units-of-production method, which depletes the capitalized costs and future development costs associated with evaluated properties based on the ratio of production volumes for the current period to total remaining reserve volumes for the evaluated properties. HighMount’s depletion expense is affected by its capital spending program and projected future development costs, as well as reserve changes resulting from drilling programs, well performance and revisions due to changing commodity prices.
As discussed in Valuation of HighMount’s Proved Reserves in Critical Accounting Estimates, a ceiling test calculation is performed at the end of each quarterly period. HighMount’s December 31, 2011, ceiling test calculation was based on average 2011 prices of $4.12 per MMBtu for natural gas, $55.18 per Bbl for NGLs and $96.19 per Bbl for oil. Using these prices, total capitalized cost did not exceed the ceiling. The price of natural gas has declined from $4.41 per MMBtu on January 1, 2011 to $2.99 per MMBtu on January 1, 2012. If prices remain static throughout 2012, and holding all other assumptions constant, it is likely that HighMount would incur one or more material non-cash ceiling test impairments during the year. The potential impairment charge would be based on actual pricing at each measurement date.
HighMount’s operating revenues decreased $65 million in 2011 as compared with 2010. Operating revenues decreased by $46 million due to the sale of HighMount’s assets in Michigan and Alabama in 2010. Permian Basin operating revenues decreased by $19 million on sales volumes of 60.6 Bcfe in 2011 compared to 66.5 Bcfe in 2010. Average prices realized per Mcfe for Permian Basin sales were $6.30 in 2011 compared to $6.02 in 2010, which reflects hedging activities. The decrease in Permian Basin sales volume is primarily due to the reduction in HighMount’s drilling activity in response to lower natural gas prices.
In connection with refinancing its $1.1 billion variable rate term loans a pretax loss of $34 million was recorded in the fourth quarter of 2011, reflecting derivative losses from termination of interest rate hedge activities. As a result of the Michigan and Alabama asset sales in 2010, HighMount recognized a pretax loss of $30 million in Investment losses related to its interest rate and commodity hedging activities. HighMount used the proceeds from the basin sales to reduce the outstanding debt under its term loans by $500 million, which resulted in a $15 million decrease in interest expense in 2011.
Operating expenses decreased $13 million in 2011 as compared with 2010. The decline reflects a $21 million decrease related to the sale of HighMount’s assets in Michigan and Alabama, partially offset by an $8 million increase in operating expenses in the Permian Basin. The increase in operating expenses is due to higher DD&A expenses, partially offset by lower general and administrative expenses.
HighMount’s operating revenues decreased $165 million in 2010 as compared with 2009. Operating revenues decreased by $88 million due to the sale of HighMount’s assets in Michigan and Alabama. Permian Basin operating revenues decreased by $77 million on sales volumes of 66.5 Bcfe in 2010 compared to 74.6 Bcfe in 2009. Average
Operating expenses decreased $85 million in 2010 as compared with 2009. The decline reflects a $39 million decrease related to the sale of HighMount’s assets in Michigan and Alabama, partially offset by an $11 million adjustment to property impairment recorded in 2009. During 2009, HighMount incurred non-recurring operating expenses of $32 million related to fees for early termination rights on drilling rig contracts and a tubular inventory impairment charge. In addition, operating expenses in the Permian Basin decreased $25 million due to lower DD&A expenses, lower production and ad valorem taxes and cost cutting efforts in 2010.
Boardwalk Pipeline’s ability to market available transportation capacity is impacted by supply and demand for natural gas, competition from other pipelines, natural gas price volatility, the price differential between physical locations on its pipeline systems (“basis spreads”), economic conditions and other factors. Over the past several years, new sources of natural gas have been identified throughout the U.S. and new pipeline infrastructure has been developed, which has led to changes in pricing dynamics between supply basins, pooling points and market areas and an overall weakening of basis spreads across its pipeline systems.
The following table summarizes the results of operations for Boardwalk Pipeline for the years ended December 31, 2011, 2010 and 2009 as presented in Note 21 of the Notes to Consolidated Financial Statements included under Item 8:
Total revenues increased $15 million in 2011 as compared with 2010. Gas transportation revenues, excluding fuel, increased $60 million primarily from increased capacities resulting from the completion of several compression projects in 2010 and operating the Fayetteville Lateral at its design capacity. PAL and storage revenues decreased $22 million due to decreased parking opportunities from unfavorable natural gas price spreads between time periods and fuel retained decreased $16 million primarily due to lower natural gas prices.
Total revenues increased $219 million in 2010 as compared with 2009. Gas transportation revenues, excluding fuel, increased $199 million and fuel retained increased $31 million, primarily due to the pipeline expansion projects. In addition, there was an $18 million gain from the sale of gas related to the western Kentucky storage expansion project and a reduction in storage gas needed to support no-notice services. These increases were partially offset by $14 million of lower interruptible and short term firm transportation services resulting from lower basis spreads between delivery points on Boardwalk Pipeline’s pipeline systems. PAL and storage revenues decreased $9 million due to decreased parking opportunities from unfavorable natural gas price spreads between time periods.
Net income increased $47 million in 2010 as compared with 2009 due to higher revenues from transportation services primarily from the pipeline expansion projects and a gain on gas sales, partially offset by increased operating expenses related to higher depreciation and property taxes associated with the pipeline expansion projects and increased interest expense. In 2009, gas transportation revenues and throughput were negatively impacted due to operating the pipeline expansion projects at reduced operating pressures and portions of the pipeline expansion projects being shut down for periods of time following the discovery and remediation of anomalies in certain joints of pipe.
The following table summarizes the results of operations for Loews Hotels for the years ended December 31, 2011, 2010 and 2009 as presented in Note 21 of the Notes to Consolidated Financial Statements included under Item 8:
Revenues increased by $29 million, or 9.4%, in 2011 as compared to 2010. Net income increased by $12 million as compared to 2010.
Revenue per available room increased $15.29 to $163.18 in 2011 as compared to 2010. The increase in revenue per available room reflects improving occupancy and average room rates. Occupancy rates increased to 73.6% in 2011 from 70.1% in 2010. Average room rates increased by $10.46, or 5.0%, in 2011 as compared to 2010.
Operating expenses in 2009 included aggregate pretax charges of $47 million due to the impact of the contracting U.S. economy. These charges included $27 million for the impairment of an investment in a Loews Hotels property, $10 million related to a development project commitment and $10 million for a loan guarantee at a managed hotel.
The following table summarizes the results of operations for Corporate and Other for the years ended December 31, 2011, 2010 and 2009 as presented in Note 21 of the Notes to Consolidated Financial Statements included under Item 8:
CNA’s principal operating cash flow sources are premiums and investment income from its insurance subsidiaries. CNA’s primary operating cash flow uses are payments for claims, policy benefits and operating expenses. Additionally, cash may be paid or received for income taxes.
Net cash provided by operating activities was $1.3 billion in 2009. Operating cash flows were decreased by $164 million in 2009 related to net cash outflows which increased the size of the trading portfolio held at December 31, 2009.
Cash flows from financing activities include proceeds from the issuance of debt and equity securities, outflows for stockholder dividends or repayment of debt and outlays to reacquire equity instruments.
Net cash used by financing activities was $644 million, $742 million and $120 million for 2011, 2010 and 2009. During 2011, CNA purchased the noncontrolling interest of CNA Surety and resumed payment of common stock dividends. Net cash used by financing activities in 2010 was primarily related to payments to redeem the outstanding 2008 Senior Preferred as discussed below.
CNA believes that its present cash flows from operations, investing activities and financing activities are sufficient to fund its current and expected working capital and debt obligation needs and CNA does not expect this to change in the near term. There are currently no amounts outstanding under CNA’s revolving credit facility, which provides for a total commitment of up to $250 million. This credit facility expires in August of 2012.
The table below reflects the various group ratings issued by A.M. Best Company (“A.M. Best”), Moody’s and S&P for the property and casualty and life companies. The table also includes the ratings for CNA senior debt and The Continental Corporation (“Continental”) senior debt.
A.M. Best and Moody’s maintain a stable outlook on CNA. In 2011, S&P revised their outlook on CNA’s rating to positive from stable.
Cash provided by operating activities in 2011 was $1.4 billion, compared to $1.3 billion in 2010. Cash used in investing activities in 2011 increased $604 million compared to 2010. This increase was primarily due to capital expenditures related to the construction of Diamond Offshore’s three new drillships, as discussed below, as well as $186 million in proceeds received in relation to the sale of the Ocean Shield in 2010.
For 2012, Diamond Offshore has budgeted approximately $220 million for capital expenditures associated with the construction of its new drillships and the Ocean Onyx and an additional $330 million for capital expenditures associated with its ongoing rig equipment replacement and enhancement programs and other corporate requirements. Diamond Offshore expects to finance its 2012 capital expenditures through the use of existing cash balances or internally generated funds.
Diamond Offshore’s liquidity and capital requirements are primarily a function of its working capital needs, capital expenditures and debt service requirements. Diamond Offshore determines the amount of cash required to meet its capital commitments by evaluating the need to upgrade rigs to meet specific customer requirements, its ongoing rig equipment replacement and enhancement programs and its obligations relating to the construction of its three new drillships. As a result of Diamond Offshore’s intention to indefinitely reinvest the earnings of its wholly owned subsidiary, Diamond Offshore International Limited (“DOIL”), to finance its foreign activities, Diamond Offshore does not expect such earnings to be available for distribution to its stockholders or to finance its domestic activities. However, Diamond Offshore believes that the operating cash flows generated by and cash reserves of DOIL, and the operating cash flows available to and cash reserves of Diamond Offshore Drilling, Inc., will be sufficient to meet both its working capital requirements and its capital commitments over the next twelve months. Diamond Offshore will, however, continue to make periodic assessments based on industry conditions and will adjust capital spending programs if required.
At December 31, 2011 and 2010, cash and investments amounted to $85 million and $130 million. Net cash flows provided by operating activities were $140 million and $197 million in 2011 and 2010. Key drivers of net operating cash flows are commodity prices, production volumes and operating costs.
On December 1, 2011, HighMount refinanced its $1.1 billion term loans due on July 26, 2012 with proceeds from a new credit agreement and a $400 million capital contribution from us. The new credit agreement consists of a $600 million five year variable rate term loan and a five year $250 million revolving credit facility. At December 31, 2011, HighMount had $600 million of term loans and $100 million of revolving loans outstanding under its credit facility. As a result of the refinancing of its term loans in the fourth quarter of 2011, HighMount paid $38 million to terminate its interest rate swaps. For information regarding the refinancing see Note 11 of the Notes to Consolidated Financial Statements included in Item 8. In 2010 HighMount used proceeds from the sale of its assets in Michigan and Alabama to reduce the outstanding debt under its term loans by $500 million to $1.1 billion.
HighMount’s credit agreement governing its term loans and revolving credit facility contains financial covenants typical for these types of agreements, including a maximum debt to capitalization ratio and a minimum present value of proved natural gas and oil reserves to total debt ratio. The credit agreement also contains customary restrictions or limitations on HighMount’s ability to engage in certain transactions, including transactions with affiliates. At December 31, 2011, HighMount was in compliance with all of its covenants under the credit agreement.
At December 31, 2011 and 2010, cash and investments amounted to $23 million and $59 million. Funds from operations for the year ended December 31, 2011 amounted to $453 million, compared to $465 million in 2010. In 2011 and 2010, Boardwalk Pipeline’s capital expenditures were $142 million and $227 million.
In addition to the growth expenditures described below, in the next twelve months, Boardwalk Pipeline’s revolving credit facility and $225 million of 5.8% senior notes are due to mature. Boardwalk Pipeline’s ability to access the capital markets for debt and equity financing under reasonable terms depends on its financial condition, credit ratings and market conditions. Boardwalk Pipeline anticipates that its existing capital resources, including the revolving credit facility and future cash flows will be adequate to fund its operations, including its maintenance capital expenditures. Boardwalk Pipeline expects to issue and sell debt and/or equity securities for general corporate purposes, including to refinance outstanding debt or to fund potential acquisitions and new growth opportunities.
In January and June of 2011, Boardwalk Pipeline issued $325 million and $115 million aggregate principal amount of 4.5% senior notes due February 1, 2021. The net proceeds of the offering were used to reduce borrowings under the revolving credit facility and redeem 5.5% Notes due April 1, 2013.
In June of 2011, Boardwalk Pipeline sold 6 million common units at a price of $29.33 per unit in a public offering and received net proceeds of $174 million, including a $4 million contribution by us to maintain our 2% general partner interest. The Company’s percentage ownership interest in Boardwalk Pipeline declined as a result of this transaction, from 66% to 64%. The issuance price of the common units exceeded the Company’s carrying amount, resulting in an increase to additional paid-in capital of $28 million.
Boardwalk Pipeline incurs substantial costs for ongoing maintenance of its pipeline systems and related facilities, some of which reflect increased regulatory requirements applicable to all interstate pipelines. These costs include those incurred for pipeline integrity management activities, equipment overhauls, general upkeep and repairs. The Pipeline and Hazardous Materials Safety Administration has developed regulations that require transportation pipeline operators to implement integrity management programs to comprehensively evaluate certain areas along pipelines and take additional measures to protect pipeline segments located in highly populated areas. A recently enacted pipeline safety bill could result in increased regulatory requirements.
South Texas Eagle Ford Expansion: In 2012, Boardwalk Pipeline expects to spend approximately $180 million to construct a gathering pipeline and a cryogenic processing plant in south Texas.
Marcellus Gathering System: Boardwalk Pipeline expects to spend approximately $90 million to construct a gathering pipeline in Pennsylvania, of which it expects to spend approximately $70 million in 2012.
HP Storage: In 2012, HP Storage expects to spend approximately $35 million to leach a new salt dome storage cavern with a working gas capacity of approximately 5.0 Bcf. Boardwalk Pipeline currently owns a 20% equity interest in HP Storage. Boardwalk Pipeline could seek to acquire the remaining 80% equity interest in HP Storage that it does not currently own, if it makes economic sense for Boardwalk Pipeline and BPHC. Neither Boardwalk Pipeline nor BPHC is under any obligation with respect to such a transaction.
Parent Company cash and investments, net of receivables and payables, at December 31, 2011 totaled $3.3 billion, as compared to $4.6 billion at December 31, 2010. During 2011, we paid $718 million to fund treasury stock purchases, repaid at maturity the entire $175 million principal amount of our 8.9% debentures and paid $101 million of cash dividends to our shareholders. These cash outflows were partially offset by the receipt of $624 million in interest and dividends from our subsidiaries.
As of December 31, 2011, there were 396,585,226 shares of Loews common stock outstanding. Depending on market and other conditions, we may purchase shares of our and our subsidiaries’ outstanding common stock in the open market or otherwise. During the year ended December 31, 2011, we purchased 18,205,438 shares of Loews common stock at an aggregate cost of $718 million.
At December 31, 2011 and 2010, we did not have any off-balance sheet arrangements.
(d) Diamond Offshore has entered three separate turnkey contracts for the construction of three ultra-deepwater drillships with
deliveries scheduled in 2013 and 2014. The aggregate cost of the three drillships is expected to be approximately $1.8 billion, of which $478 million was paid in 2011. The final installments of the contracted price are payable upon delivery of each vessel. Diamond Offshore has also entered into a construction contract to upgrade an existing rig. The upgrade is expected to be completed in 2013 at an aggregate cost of approximately $300 million.
(e) Does not include expected contribution of approximately $114 million to the Company’s pension and postretirement plans in 2012.
Net investment income decreased $262 million in 2011 as compared with 2010. The decrease was primarily driven by a significant decrease in limited partnership results as well as lower fixed maturity security income. Limited partnership
Net realized investment gains decreased $56 million for 2011 compared with 2010. Net realized investment results improved $551 million for 2010 as compared with 2009, driven by significantly lower other-than-temporary impairment (“OTTI”) losses recognized in earnings. Net realized investment results include OTTI losses of $140 million, $151 million, and $879 million for 2011, 2010 and 2009. Further information on CNA’s realized gains and losses, including CNA’s OTTI losses and impairment decision process, is set forth in Note 3 of the Notes to Consolidated Financial Statements included under Item 8. During the second quarter of 2009, the Company adopted updated accounting guidance, which amended the OTTI loss model for fixed maturity securities, as discussed in Note 1 of the Notes to Consolidated Financial Statements included under Item 8.
CNA’s fixed maturity portfolio consists primarily of high quality bonds, 92.1% and 90.6% of which were rated as investment grade (rated BBB- or higher) at December 31, 2011 and 2010. The classification between investment grade and non-investment grade is based on a ratings methodology that takes into account ratings from two major providers,
Non-investment grade fixed maturity securities, as presented in the table below, include high-yield securities rated below BBB- by bond rating agencies and other unrated securities that, according to CNA’s analysis, are below investment grade. Non-investment grade securities generally involve a greater degree of risk than investment grade securities. The amortized cost of CNA’s non-investment grade fixed maturity bond portfolio was $3.2 billion and $3.5 billion at December 31, 2011 and 2010. The following table summarizes the ratings of this portfolio at fair value.
A primary objective in the management of the 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 the domestic and global economic conditions, are some of the factors that enter into an investment decision. CNA also continually monitors exposure to issuers of securities held and broader industry sector exposures and may from time to time adjust such exposures based on its views of a specific issuer or industry sector.
The investment portfolio is periodically analyzed for changes in duration and related price risk. Additionally, CNA periodically reviews the sensitivity of the portfolio to the level of foreign exchange rates and other factors that contribute to market price changes. A summary of these risks and specific analysis on changes is included in
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework. Based on this assessment, our management believes that, as of December 31, 2011, our internal control over financial reporting was effective.
We have audited the internal control over financial reporting of Loews Corporation and subsidiaries (the “Company”) as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying management’s report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We have audited the accompanying consolidated balance sheets of Loews Corporation and subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2011. Our audits also included the financial statement schedules listed in the Index at Item 15. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedules based on our audits.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Loews Corporation and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
Basis of presentation - Loews Corporation is a holding company. Its subsidiaries are engaged in the following lines of business: commercial property and casualty insurance (CNA Financial Corporation (“CNA”), a 90% owned subsidiary); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (“Diamond Offshore”), a 50.4% owned subsidiary); exploration, production and marketing of natural gas and oil (including condensate and NGLs), (HighMount Exploration & Production LLC (“HighMount”), a wholly owned subsidiary); interstate transportation and storage of natural gas (Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”), a 61% owned subsidiary); and the operation of hotels (Loews Hotels Holding Corporation (“Loews Hotels”), a wholly owned subsidiary). Unless the context otherwise requires, the terms “Company,” “Loews” and “Registrant” as used herein mean Loews Corporation excluding its subsidiaries and the term “Net income (loss) - Loews” as used herein means Net income (loss) attributable to Loews Corporation.
Securities lending activities - The Company lends securities for the purpose of enhancing income or to finance positions to unrelated parties who have been designated as primary dealers by the Federal Reserve Bank of New York. Borrowers of these securities must deposit and maintain collateral with the Company of no less than 100% of the fair value of the securities loaned. U.S. Government securities and cash are accepted as collateral. The Company maintains effective control over loaned securities and, therefore, continues to report such securities as investments on the Consolidated Balance Sheets.
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, 2011 and 2010.
Revenue recognition - Premiums on property and casualty insurance contracts are recognized in proportion to the underlying risk insured which principally are earned ratably over the duration of the policies. Premiums on accident and health insurance contracts are earned ratably over the policy year in which they are due. The reserve for unearned premiums on these contracts represents the portion of premiums written relating to the unexpired terms of coverage.
HighMount’s natural gas and oil production revenue is recognized based on actual volumes of natural gas and oil sold to purchasers. Sales require delivery of the product to the purchaser, passage of title and probability of collection of purchaser amounts owed. Natural gas and oil production revenue is reported net of royalties. HighMount uses the sales method of accounting for gas imbalances. An imbalance is created when the volumes of gas sold by HighMount pertaining to a property do not equate to the volumes produced to which HighMount is entitled based on its interest in the property. An asset or liability is recognized to the extent that HighMount has an imbalance in excess of the remaining reserves on the underlying properties.
Claim and claim adjustment expense reserves are presented net of anticipated amounts due from insureds related to losses under deductible policies of $1.4 billion as of December 31, 2011 and 2010. A significant portion of these amounts are supported by collateral. CNA also has an allowance for uncollectible deductible amounts, which is presented as a component of the allowance for doubtful accounts included in Receivables on the Consolidated Balance Sheets.
Future policy benefits reserves - Reserves for long term care products and payout annuity contracts are computed using the net level premium method, which incorporates actuarial assumptions as to morbidity, mortality, persistency, discount rates, which are impacted by expected investment yields and expenses. Expense assumptions include the estimated effects of expenses to be incurred beyond the premium paying period. Actuarial assumptions generally vary by plan, age at issue and policy duration. The initial assumptions are determined at issuance, include 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. Interest rates for long term care products range from 5.0% to 7.5% at December 31, 2011 and from 6.0% to 7.6% at December 31, 2010. Interest rates for payout annuity contracts range from 5.4% to 7.5% at December 31, 2011 and from 2.8% to 10.2% at December 31, 2010. In 2011, CNA unlocked assumptions related to its payout annuity contracts due to anticipated adverse changes in mortality and discount rates, which reflect the current low interest rate environment and CNA’s view of expected investment yields, resulting in loss recognition which increased insurance reserves by $166 million.
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, 2011 and 2010, the liability balances were $152 million and $160 million. As of December 31, 2011 and 2010, included in Other assets on the Consolidated Balance Sheets were $2 million and $3 million of related assets for premium tax offsets. This asset is limited to the amount that is able to be offset against premium tax on future premium collections from business written or committed to be written.
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, management’s 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 are generally less than 5% of total
Participating insurance - Policyholder dividends are accrued using an estimate of the amount to be paid based on underlying contractual obligations under policies and applicable state laws. Limitations exist on the amount of income from participating life insurance contracts that may be distributed to shareholders, and therefore the share of income on these policies that cannot be distributed to shareholders is excluded from Shareholders’ Equity by a charge to Income and Other comprehensive income and the establishment of a corresponding liability.
CNA evaluates deferred acquisition costs for recoverability. Anticipated investment income is considered in the determination of the recoverability of deferred acquisition costs. Adjustments, if necessary, are recorded in current results of operations. Deferred acquisition costs are presented net of ceding commissions and other ceded acquisition costs. Unamortized deferred acquisition costs relating to contracts that have been substantially changed by a modification in benefits, features, rights or coverages that were not anticipated in the original contract are not deferred and are included as a charge to operations in the period during which the contract modification occurred.
CNA accounts for its investments in life settlement contracts using the fair value method. Under the fair value method, each life settlement contract is carried at its fair value at the end of each reporting period. The change in fair value, life insurance proceeds received and periodic maintenance costs, such as premiums, necessary to keep the underlying policy in force, are recorded in Other revenues on the Consolidated Statements of Income. The fair value of CNA’s investments in life settlement contracts were $117 million and $129 million at December 31, 2011 and 2010, and are included in Other assets on the Consolidated Balance Sheets. The cash receipts and payments related
to life settlement contracts are included in Cash flows from operating activities on the Consolidated Statements of Cash Flows.
Separate Account Business - Separate account assets and liabilities represent contract holder funds related to investment and annuity products for which the policyholder assumes substantially all the risk and reward. The assets are segregated into accounts with specific underlying investment objectives and are legally segregated from CNA. All assets of the separate account business are carried at fair value with an equal amount recorded for separate account liabilities. Fee income accruing to CNA related to separate accounts is primarily included within Other revenues on the Consolidated Statements of Income.
For the years ended December 31, 2011, 2010 and 2009, approximately 0.8 million, 0.8 million and 0.6 million potential shares attributable to exercises under the Loews Corporation Stock Option Plan were included in the calculation of diluted earnings per share. For those same periods, approximately 2.0 million, 2.4 million and 3.4 million Stock Appreciation Rights (“SARs”) were not included in the calculation of diluted earnings per share due to the exercise price being greater than the average stock price.
Updated accounting guidance not yet adopted - In October of 2010, the FASB issued updated accounting guidance that limits the capitalization of costs incurred to acquire or renew insurance contracts to those that are incremental direct costs of successful contract acquisitions. The updated accounting guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011 with prospective or retrospective application allowed. Effective January 1, 2012, the Company will adopt this updated accounting guidance retrospectively and estimates the cumulative effect as of December 31, 2011 will reduce shareholders’ equity by $63 million (after tax and noncontrolling interests).
In December of 2011, Boardwalk HP Storage Company, LLC (“HP Storage”) acquired seven salt dome natural gas storage caverns and associated assets in Mississippi for approximately $550 million. HP Storage funded the acquisition with proceeds from a $200 million five year variable rate term loan and equity contributions from Boardwalk Pipelines Holding Corp. (“BPHC”) and Boardwalk Pipeline. BPHC, a wholly owned subsidiary of the Company, contributed $280 million for an 80% interest in HP Storage and Boardwalk Pipeline contributed $70 million for a 20% interest. HP Storage consolidated results are included in the Boardwalk Pipeline segment.
In the fourth quarter of 2011, HighMount acquired working interests in oil and gas properties located in Oklahoma. The oil and gas properties acquired are primarily undeveloped and HighMount believes that they contain oil and liquid reserves which can be produced through horizontal drilling. The purchase price was approximately $106 million in cash and is included primarily in the cost of unproved properties within Property, plant and equipment in the Consolidated Balance Sheets.
Includes net unrealized gains (losses) related to changes in fair value on trading securities still held of $(58), $88 and $94 for the years ended December 31, 2011, 2010 and 2009.
As of December 31, 2011, the Company held nine non-income producing fixed maturity securities aggregating $3 million of fair value. As of December 31, 2010, the Company held seven non-income producing fixed maturity securities aggregating $3 million of fair value. As of December 31, 2011 and 2010, no investments in a single issuer exceeded 10% of shareholders’ equity other than investments in U.S. Treasury and obligations of government-sponsored enterprises.
Includes gross realized gains of $299, $525 and $973 and gross realized losses of $322, $435 and $1,897 on available-for-sale securities for the years ended December 31, 2011, 2010 and 2009.
The Impairment Committee’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 by the Impairment Committee include: (i) the financial condition and near 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. The focus of the analysis for asset-backed securities is on assessing the sufficiency and quality of underlying collateral and timing of cash flows based on scenario tests. If the present value of the modeled expected cash flows equals or exceeds the amortized cost of a security, no credit loss is judged to exist and the asset-backed security is deemed to be temporarily impaired. If the present value of the expected cash flows is less than amortized cost, the security is judged to be other-than-temporarily impaired for credit reasons and that shortfall, referred to as the credit component, is recognized as an OTTI loss in earnings. The difference between the adjusted amortized cost basis and fair value, referred to as the non-credit component, is recognized as OTTI in Other comprehensive income. In subsequent reporting periods, a change in intent to sell or further credit impairment on a security whose fair value has not deteriorated will cause the non-credit component originally recorded as OTTI in Other comprehensive income to be recognized as an OTTI loss in earnings.
Prior to the adoption of the updated accounting guidance related to OTTI in the second quarter of 2009, CNA applied the impairment model described in the paragraph above to both fixed maturity and equity securities.
The unrealized losses on the Company’s investments in this category primarily relate to bonds within the financial industry sector. The financial industry sector holdings in this category include bonds with an aggregate fair value of $1.7 billion and an aggregate amortized cost of $1.8 billion as of December 31, 2011.
Commercial mortgage-backed securities included 61 securities that had at least one trade lot in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 8.9% of amortized cost. Other asset-backed securities included 51 securities that had at least one trade lot in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 1.0% of amortized cost.
The Company believes the unrealized losses are primarily attributable to broader economic conditions, changes in interest rates, wider than historical bid/ask spreads and uncertainty with regard to the timing and amount of ultimate collateral realization, but are not indicative of the ultimate collectibility of the current carrying values of the securities. The Company has no current intent to sell these securities, 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, 2011.
Of the limited partnerships held, 84.1% and 87.4% at December 31, 2011 and 2010, employ hedge fund strategies that generate returns through investing in securities that are marketable while engaging in various management techniques primarily in public fixed income and equity markets. These hedge fund strategies include both long and short positions in fixed income, equity and derivative instruments. The 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 41.4% were equity related, 39.5% pursued a multi-strategy approach, 15.2% were focused on distressed investments and 3.9% were fixed income related at December 31, 2011.
As of December 31, 2011, the Company had committed approximately $129 million to future capital calls from various third party limited partnership investments in exchange for an ownership interest in the related partnerships.
The tables below present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2011 and 2010:
Net realized and unrealized gains and losses are reported in Net income as follows:
The Company enters into interest rate swaps, futures and commitments to purchase securities to manage interest rate risk. Credit derivatives such as credit default swaps are entered into to modify the credit risk inherent in certain investments. Forward contracts, futures, swaps and options are used primarily to manage foreign currency and commodity price risk.
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 are entered into with the intention of providing additional income or yield to a particular portfolio segment or asset class. 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.
Derivatives without hedge designation - For derivatives not held in a trading portfolio, new derivative transactions entered into totaled approximately $359 million in notional value while derivative termination activity totaled approximately $262 million during the year ended December 31, 2011. The activity during the year ended December 31, 2011 was primarily attributable to interest rate swaps, forward commitments for mortgage-backed securities and foreign currency forwards. New derivative transactions entered into totaled approximately $1.2 billion in notional value while derivative termination activity totaled approximately $1.2 billion during the year ended December 31, 2010. The activity during the year ended December 31, 2010 was primarily attributable to interest rate futures and forward commitments for mortgaged-backed securities.
A summary of the recognized gains (losses) related to derivative financial instruments without hedge designation follows. Changes in the fair value of derivatives not held in a trading portfolio are reported in Investment gains (losses) and changes in the fair value of derivatives held for trading purposes are reported in Net investment income on the Consolidated Statements of Income.
In connection with HighMount refinancing its $1.1 billion variable rate term loans in 2011 a pretax loss of $34 million was recorded in Investment gains (losses) in the Consolidated Statements of Income for the year ended December 31, 2011, reflecting the reclassification of net derivative losses from AOCI to earnings. As a result of the sale of certain gas producing properties in 2010, HighMount recognized losses of $36 million in Investment gains (losses) in the Consolidated Statements of Income for the year ended December 31, 2010, reflecting the reclassification of net derivative losses from AOCI to earnings.
In December of 2011, HP Storage acquired seven salt dome natural gas storage caverns and associated assets in Mississippi for $550 million of which $486 million was allocated to Pipeline equipment. See Note 2 for additional information related to this purchase.
In 2011, Diamond Offshore recorded $490 million in Construction in process for three new, ultra-deepwater drillships with delivery expected in the second and fourth quarters of 2013 and in the second quarter of 2014. The total cost of the three drillships, including commissioning, spares and project management, is expected to be $1.8 billion.
HighMount excludes from amortization the cost of unproved properties, the cost of exploratory wells in progress and major development projects in progress. Natural gas and oil property and equipment costs not being amortized as of December 31, 2011, are as follows, by the year in which such costs were incurred:
The table below provides a reconciliation between beginning and ending claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves of the life company:
(a) Total net incurred above does not agree to Insurance claims and policyholders’ benefits as reflected in the Consolidated Statements of Income due to amounts related to uncollectible reinsurance and loss deductible receivables, and benefit expenses related to future policy benefits and policyholders’ funds, which are not reflected in the table above.
The changes in provision for insured events of prior years (net prior year claim and claim adjustment expense reserve development) were as follows:
On August 31, 2010, Continental Casualty Company (“CCC”) together with several of CNA’s insurance subsidiaries completed a transaction with National Indemnity Company (“NICO”), a subsidiary of Berkshire Hathaway Inc., under which substantially all of CNA’s legacy A&EP liabilities were ceded to NICO (“Loss Portfolio Transfer”).
Under the terms of the NICO transaction, effective January 1, 2010 CNA ceded approximately $1.6 billion of net A&EP claim and allocated claim adjustment expense reserves to NICO under a retroactive reinsurance agreement with an aggregate limit of $4.0 billion. Included in the $1.6 billion of net A&EP claim and allocated claim
CNA paid NICO a reinsurance premium of $2.0 billion and transferred to NICO billed third party reinsurance receivables related to A&EP claims with a net book value of $215 million (net of an allowance of $100 million for doubtful accounts on billed third party reinsurance receivables, as discussed further below). As of August 31, 2010, NICO deposited approximately $2.2 billion in a collateral trust account as security for its obligations to CNA. This $2.2 billion will be reduced by the amount of net A&EP claim and allocated claim adjustment expense payments. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the full aggregate reinsurance limit as well as certain of NICO’s performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third party reinsurers related to CNA’s A&EP claims.
The gross A&EP claim and allocated claim adjustment expense reserves ceded under the Loss Portfolio Transfer and other existing third party reinsurance agreements was $2.3 billion and $2.5 billion at December 31, 2011 and 2010. The remaining amount available under the $4.0 billion aggregate limit of the Loss Portfolio Transfer was $2.3 billion on an incurred basis at December 31, 2011. These amounts include $138 million of adverse prior year development since the contract effective date of January 1, 2010. The net ultimate paid losses ceded under the Loss Portfolio Transfer were $351 million through December 31, 2011.
allowance for doubtful accounts on reinsurance receivables. See Note 16 for further discussion of the allowance for doubtful accounts on reinsurance receivables.
For the year ended December 31, 2011, favorable premium development was recorded for CNA Specialty primarily due to changes in estimates of exposures in medical professional liability tail coverages. Unfavorable premium development for CNA Commercial was recorded due to a further reduction of ultimate premium estimates relating to retrospectively rated policies, partially offset by premium adjustments on auditable policies due to increased exposures.
Overall, favorable development for medical professional liability was primarily due to lower than expected frequency of large losses, primarily in accident years 2007 and prior. This development amount also included unfavorable development in accident years 2008 and 2009 due to increased frequency of large losses related to medical products.
Overall, favorable development for other professional liability was recorded primarily in accident years 2007 and prior in D&O and E&O coverages due to several factors, including reduced frequency of large claims and the result of reviews of large claims. This development amount also included unfavorable development in employment practices liability, E&O and D&O coverages recorded in accident years 2008 and 2009, driven by the economic recession and higher unemployment.
Favorable development for other professional liability was primarily in financial institutions, accountants and lawyers, D&O and life agents coverages. For financial institutions, favorable development was due to favorable experience on a number of large claims in accident years 2003 and prior and decreased frequency of large claims in accident years 2007 and prior. Favorable development in accountants and lawyers was due to better than expected large claim frequency in accident years 2004 through 2006. Favorable development in D&O and life agents coverages was due to lower than expected large claim frequency. Additionally, favorable development in CNA’s European book of business was primarily due to favorable emergence relative to expectations in non-financial D&O and E&O coverages.
Favorable development was recorded in auto coverages, primarily driven by decreased frequency in CNA’s Hawaiian book of business.
Unfavorable development was recorded related to asbestos. CNA noted adverse development in various asbestos accounts due to increases in average claim severity and defense expense arising from increased trial activity. Additionally, CNA had not seen a decline in the overall emergence of new accounts.
Leases cover office facilities, machinery and computer equipment. The Company’s hotels in some instances are constructed on leased land. Rent expense amounted to $91 million, $92 million and $95 million for the years ended December 31, 2011, 2010 and 2009. The table below presents the future minimum lease payments to be made under non-cancelable operating leases along with lease and sublease minimum receipts to be received on owned and leased properties.
At December 31, 2011 and 2010, there were $41 million and $46 million of tax benefits related to Diamond Offshore that if recognized would affect the effective rate.
The Company recognizes interest accrued related to: (i) unrecognized tax benefits in Interest expense and (ii) tax refund claims in Other revenues on the Consolidated Statements of Income. The Company recognizes penalties in Income tax expense on the Consolidated Statements of Income. Penalties and interest amounts recorded by the Company were insignificant for the years ended December 31, 2011, 2010 and 2009.
As of December 31, 2011, the Company has federal loss carryforwards with a tax effect of approximately $29 million which expire in 2014 and 2030 and federal tax credit carryforwards of $68 million, of which $63 million expire between 2019 and 2021. Diamond Offshore has foreign operating loss carryforwards with a tax effect of approximately $27 million, of which $8 million have an indefinite life with the remaining benefits expiring between 2014 and 2021.
CNA has a $250 million credit agreement with a syndicate of banks and other lenders. The credit agreement term extends to August 1, 2012 and is intended to be used for general corporate purposes. Borrowings under the revolving credit facility bear interest at the London Interbank Offered Rate (“LIBOR”) plus CNA’s credit risk spread. Under the credit agreement, CNA is required to pay certain fees, including a facility fee and a utilization fee, both of which would adjust automatically in the event of a change in CNA’s financial ratings. The credit agreement includes covenants regarding maintenance of a minimum consolidated net worth and a specified ratio of consolidated indebtedness to consolidated total capitalization. There is no outstanding amount due under this credit agreement as of December 31, 2011, leaving the full limit of $250 million available as of December 31, 2011. CNA’s remaining debt obligations contain customary covenants for investment grade insurers. As of December 31, 2011, CNA was in compliance with all covenants.
In November of 2011, CNA redeemed the outstanding $31 million plus accrued and unpaid interest of the CNA Surety debenture originally due April 29, 2034.
In December of 2011, HighMount entered into a credit agreement with a syndicate of banks for a $600 million variable rate term loan and a $250 million revolving credit facility. The credit agreement is for a period of five years and bears interest at LIBOR plus an applicable margin. As of December 31, 2011, HighMount had $100 million outstanding under the revolving credit facility. The proceeds from the loan plus $400 million of cash received from the Company were utilized to repay the $1.1 billion of variable rate term loans due in July 2012.
HighMount has entered into interest rate swaps for a notional amount of $300 million to hedge its exposure to fluctuations in LIBOR. These swaps effectively fix the interest rate on the hedged portion of the term loan to 1.1% plus an applicable margin. Among other customary covenants, HighMount must meet a maximum predetermined total debt to capitalization ratio and a minimum present value of proved natural gas and oil reserves to total debt ratio. At December 31, 2011, HighMount was in compliance with all of its debt covenants under the credit agreement.
Boardwalk Pipeline maintains a $950 million revolving credit facility under which Boardwalk Pipeline and its operating subsidiaries each may borrow funds, up to applicable sub-limits. Borrowings under the credit facility bear interest at a rate per annum equal to at its election, either; (i) the higher of the prime rate or the Federal funds rate plus 50 basis points or (ii) LIBOR plus an applicable margin. Among other customary covenants, each of the borrowers must maintain a minimum ratio, as of the last day of each fiscal quarter, of consolidated total debt to consolidated earnings before interest, income taxes and depreciation and amortization (as defined in the agreement), measured for the preceding twelve months, of not more than five to one.
In January and June of 2011, Boardwalk Pipeline issued $325 million and $115 million aggregate principal amount of 4.5% senior notes due February 1, 2021. The net proceeds of the offerings were used to reduce borrowings under the revolving credit facility and redeem 5.5% Notes due April 1, 2013.
principal amount or the net present value of scheduled payments discounted at the specified treasury rate plus a margin.
In June of 2011, Boardwalk Pipeline sold 6 million common units at a price of $29.33 per unit in a public offering and received net proceeds of $174 million, including a $4 million contribution by the Company to maintain its 2% general partner interest. The Company’s percentage ownership interest in Boardwalk Pipeline declined as a result of this transaction, from 66% to 64%. The issuance price of the common units exceeded the Company’s carrying amount, resulting in an increase to additional paid-in capital of $28 million.
CNA’s insurance subsidiaries are domiciled in various jurisdictions. These subsidiaries prepare statutory financial statements in accordance with accounting practices prescribed or permitted by the respective jurisdictions’ insurance regulators. Domestic prescribed statutory accounting practices are set forth in a variety of publications of the National Association of Insurance Commissioners (“NAIC”) as well as state laws, regulations and general administrative rules.
corrective action. As of December 31, 2011 and 2010, all of CNA’s domestic insurance subsidiaries exceeded the minimum risk-based capital requirements.
Combined statutory capital and surplus and net income (loss), determined in accordance with accounting practices prescribed or permitted by insurance regulatory authorities for the Combined Continental Casualty Companies and the life company, were as follows:
Estimated net quantities of proved natural gas and oil (including condensate and NGLs) reserves at December 31, 2011, 2010 and 2009 and changes in the reserves during 2011, 2010 and 2009 are shown in the schedule below:
(a) The 2009 revision is primarily attributable to lower 2009 average prices as compared to December 31, 2008. The lower 2009 average prices caused the reclassification of some proven undeveloped reserves.
(b) HighMount added 238 Bcfe of proved undeveloped reserves from non-proved categories in 2010. These additions pertain to locations HighMount expects to drill during the next five years. Additionally, HighMount added 42 Bcfe primarily through drilling and the remaining 51 Bcfe in additions were associated with the Alabama and Michigan properties prior to sale.
(a) 2011, 2010 and 2009 amounts exclude the effect of derivative instruments designated as hedges of future sales of production at year end.
The accumulated benefit obligation for all defined benefit pension plans was $3.3 billion and $3.0 billion at December 31, 2011 and 2010.
The table below presents the estimated future minimum benefit payments at December 31, 2011.
In 2012, it is expected that contributions of approximately $107 million will be made to pension plans and $7 million to postretirement health care and life insurance benefit plans.
Savings Plans - The Company and its subsidiaries have several contributory savings plans which allow employees to make regular contributions based upon a percentage of their salaries. Matching contributions are made up to specified percentages of employees’ contributions. The contributions by the Company and its subsidiaries to these plans amounted to $100 million, $104 million and $98 million for the years ended December 31, 2011, 2010 and 2009.
Stock Option Plans - In 2005, shareholders approved the amended and restated Loews Corporation 2000 Stock Option Plan (the “Loews Plan”). The aggregate number of shares of Loews common stock for which options or SARs may be granted under the Loews Plan is 12,000,000 shares, and the maximum number of shares of Loews common stock with respect to which options or SARs may be granted to any individual in any calendar year is 1,200,000 shares. The exercise price per share may not be less than the fair market value of the common stock on the date of grant. Generally, options and SARs vest ratably over a four-year period and expire in ten years.
The following table summarizes information about the Company’s stock options and SARs outstanding in connection with the Loews Plan at December 31, 2011:
In 2011, the Company awarded SARs totaling 910,200 shares. In accordance with the Loews Plan, the Company has the ability to settle SARs in shares or cash and has the intention to settle in shares. The SARs balance at December 31, 2011 was 5,112,179 shares. There were 1,813,211 shares and 2,500,784 shares available for grant as of December 31, 2011 and 2010.
The weighted average remaining contractual terms of awards outstanding and exercisable as of December 31, 2011, were 5.6 years and 4.5 years. The aggregate intrinsic values of awards outstanding and exercisable at December 31, 2011 were $37 million and $31 million. The total intrinsic value of awards exercised was $6 million, $9 million and $8 million for the years ended 2011, 2010 and 2009. The total fair value of shares vested was $11 million, $12 million and $10 million for the years ended 2011, 2010 and 2009.
CNA cedes insurance to reinsurers to limit its maximum loss, provide greater diversification of risk, minimize exposures on larger risks and to exit certain lines of business. The ceding of insurance does not discharge the primary liability of CNA. A credit exposure exists with respect to property and casualty and life reinsurance ceded to the extent that any reinsurer is unable to meet its obligations or to the extent that the reinsurer disputes the liabilities assumed under reinsurance agreements. Property and casualty reinsurance coverages are tailored to the specific risk characteristics of each product line and CNA’s retained amount varies by type of coverage. Reinsurance contracts are purchased to protect specific lines of business such as property and workers’ compensation. Corporate catastrophe reinsurance is also purchased for property and workers’ compensation exposure. Currently most reinsurance contracts are purchased on an excess of loss basis. CNA also utilizes facultative reinsurance in certain lines. In addition, CNA assumes reinsurance as a member of various reinsurance pools and associations.
CNA has established an allowance for doubtful accounts on reinsurance receivables. In 2011, CNA reduced its allowance for doubtful accounts by $15 million due to a change in estimate. The additional reduction in the allowance primarily related to write-offs of reinsurance receivable balances.
CNA attempts to mitigate its credit risk related to reinsurance by entering into reinsurance arrangements with reinsurers that have credit ratings above certain levels and by obtaining collateral. On a limited basis, CNA may enter into reinsurance agreements with reinsurers that are not rated, primarily captive reinsurers. The primary methods of obtaining collateral are through reinsurance trusts, letters of credit and funds withheld balances. Such collateral was approximately $3.6 billion and $4.0 billion at December 31, 2011 and 2010.
CNA’s largest recoverables from a single reinsurer at December 31, 2011, including prepaid reinsurance premiums, were approximately $2.5 billion from subsidiaries of Berkshire Hathaway Group, $1.0 billion from subsidiaries of Swiss Re Group and $400 million from subsidiaries of the Hartford Insurance Group. The recoverable from the Berkshire Hathaway Group includes amounts related to third party reinsurance for which a subsidiary of Berkshire Hathaway has assumed the credit risk under the terms of the Loss Portfolio Transfer as discussed in Note 8.
As of December 31, 2011 and 2010, CNA has ceded $1.2 billion and $1.3 billion of claim and claim adjustment expense reserves, future policy benefits and policyholders’ funds as a result of business operations sold in prior years. Subject to certain exceptions, the purchasers assumed the third party reinsurance credit risk of the sold business.
(a) Net income for the fourth quarter of 2011 was impacted by CNA unlocking assumptions related to its payout annuity contracts, resulting in a loss recognition of $104 million (after tax and noncontrolling interests), as further discussed in Note 1.
In August 2005, CNA and certain insurance subsidiaries were joined as defendants, along with other insurers and brokers, in multidistrict litigation pending in the United States District Court for the District of New Jersey, In re Insurance Brokerage Antitrust Litigation, Civil No. 04-5184 (“GEB”). The plaintiffs’ consolidated class action complaint alleged bid rigging and improprieties in the payment of contingent commissions in connection with the sale of insurance. After various motions and preliminary court rulings providing for further proceedings, all parties executed final settlement documents and the plaintiffs filed a motion for preliminary approval of the settlement in May 2011. In June 2011, the Court entered an order preliminarily approving the settlement. A fairness hearing was held in September 2011 to determine final approval of the settlement. The Court took the matter under advisement and will issue a ruling in due course. As currently structured, the settlement will not have a material impact on the Company’s results of operations or equity. In addition, the Company does not believe it has any material ongoing exposure relating to this matter.
Jerusalem District Court of Israel), had been dismissed previously by the District Court. In January 2012 the Supreme Court of Israel denied plaintiff’s request for an additional hearing on a separate appeal, which ended the case. A fourth case, Luciano vs. Alcoa Inc., et al. (2011, Supreme Court, New York County, New York), was dismissed in October 2011.
The Company does not believe it is a proper defendant in any tobacco related cases and as a result, does not believe the outcome will have a material affect on its results of operations or equity. Further, pursuant to the Separation Agreement dated May 7, 2008 between the Company and Lorillard Inc. and its subsidiaries, Lorillard Inc. and its subsidiaries have agreed to indemnify and hold the Company harmless from all costs and expenses based upon or arising out of the operation or conduct of Lorillard’s business, including among other things, smoking and health claims and litigation such as the cases described above.
In December of 2011, Diamond Offshore entered into an agreement for the construction of a moored semisubmersible rig designed to operate in water depths up to 6,000 feet. The rig will be constructed utilizing the hull of one of Diamond Offshore’s mid-water floaters and is estimated to cost approximately $300 million, including commissioning, spares and project management costs.
HighMount’s business consists primarily of natural gas exploration and production operations located primarily in the Permian Basin in Texas, with estimated proved reserves totaling approximately 1.1 trillion cubic feet equivalent. In the second quarter of 2010, HighMount sold substantially all of its exploration and production assets located in the Antrim Shale in Michigan and the Black Warrior Basin in Alabama. The Michigan and Alabama properties represented approximately 17%, in aggregate, of HighMount’s total proved reserves as of December 31, 2009.
Boardwalk Pipeline is engaged in the interstate transportation and storage of natural gas. This segment consists of three interstate natural gas pipeline systems originating in the Gulf Coast region, Oklahoma and Arkansas, and extending north and east through the midwestern states of Tennessee, Kentucky, Illinois, Indiana and Ohio, with approximately 14,200 miles of pipeline.
The following schedules present the Company’s consolidating balance sheet information at December 31, 2011 and 2010, and consolidating statements of income information for the years ended December 31, 2011, 2010 and 2009. These schedules present the individual subsidiaries of the Company and their contribution to the consolidated financial statements. Amounts presented will not necessarily be the same as those in the individual financial statements of the Company’s subsidiaries due to adjustments for purchase accounting, income taxes and noncontrolling interests. In addition, many of the Company’s subsidiaries use a classified balance sheet which also leads to differences in amounts reported for certain line items.