On April 26, 2020 (the “Filing Date”), Diamond Offshore and certain of its direct and indirect subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the Southern District of Texas seeking relief under Chapter 11 of the United States Bankruptcy Code (the “Chapter 11 Filing”). As a result of the Chapter 11 Filing and applicable U.S. generally accepted accounting principles, Loews Corporation no longer controls Diamond Offshore for accounting purposes. Therefore, Diamond Offshore was deconsolidated from the Company’s consolidated financial statements, effective as of the Filing Date, resulting in the recognition of a loss of $1.2 billion ($957 million after tax) during the year ended December 31, 2020. Results of operations for Diamond Offshore through the Filing Date included an aggregate asset impairment charge of $774 million ($408 million after tax and noncontrolling interests) recognized in the first quarter of 2020. For further information see the Diamond Offshore section of this MD&A.
Unless the context otherwise requires, the term “Company” as used herein means Loews Corporation including its subsidiaries, the terms “Parent Company,” “we,” “our,” “us” or like terms as used herein mean Loews Corporation excluding its subsidiaries, the term “Net income (loss) attributable to Loews Corporation” as used herein means Net income (loss) attributable to Loews Corporation shareholders and the term “subsidiaries” means the Loews Corporation’s consolidated subsidiaries.
The net loss for 2020 was driven by six main factors: (i) an investment loss of $1.2 billion ($957 million after tax) caused by the write down of the carrying value of our interest in Diamond Offshore as a result of its deconsolidation upon its bankruptcy filing on April 26, 2020; (ii) drilling rig impairment charges at Diamond Offshore during the first quarter of 2020 when it was a consolidated subsidiary; (iii) operating losses in 2020 as compared to operating income in 2019 at Loews Hotels; (iv) a reduction in CNA’s and the parent company’s net investment income; (v) net investment losses at CNA in 2020 as compared to net investment gains in 2019; and (vi) lower property and casualty underwriting income at CNA caused mainly by higher catastrophe losses.
The following table summarizes the results of operations for CNA for the years ended December 31, 2020 and 2019 as presented in Note 20 of the Notes to Consolidated Financial Statements included under Item 8. For further discussion of Net investment income and Investment gains (losses), see the Investments section of this MD&A.
Net income attributable to Loews Corporation decreased $276 million for 2020 as compared with 2019. The decrease was primarily due to net catastrophe losses of $550 million ($388 million after tax and noncontrolling interests) for 2020 as compared to $179 million ($126 million after tax and noncontrolling interests) in 2019, lower net investment income and investment losses in 2020 as compared with investment gains in 2019. Net catastrophe losses for 2020 include $294 million primarily related to severe weather-related events, $195 million related to COVID-19 and $61 million related to civil unrest. The decrease in net investment income was driven by lower yields in the fixed income portfolio and lower limited partnership and common stock returns. Investment losses were driven by higher impairment losses and the unfavorable change in fair value of non-redeemable preferred stock, partially offset by higher gains on sales of fixed maturity securities. These decreases were partially offset by improved non-catastrophe current accident year underwriting results and a $74 million charge ($52 million after tax and noncontrolling interests) in the third quarter of 2020 as compared to a $216 million charge ($151 million after tax and noncontrolling interests) in the third quarter of 2019 related to recognition of a premium deficiency as a result of the gross premium valuation (“GPV”) review.
On December 30, 2020, CNA entered into an agreement with Cavello Bay Reinsurance Limited (“Cavello”), a subsidiary of Enstar Group Limited, under which Cavello reinsured a legacy portfolio of excess workers’ compensation policies. The transaction closed on February 5, 2021 and is based on reserves in place as of January 1, 2020 and adjusted for any subsequent claim activity. This business will be reclassified from the Commercial business to Other Insurance Operations, better reflecting the manner in which CNA is organized for purposes of making operating decisions and assessing performance. The new classifications will be presented in the period ending March 31, 2021, and prior periods presented will conform to the new presentation. Further information on CNA’s retroactive reinsurance agreement is provided in Note 21 of the Notes to Consolidated Financial Statements included under Item 8.
The following tables summarize the results of CNA’s Property & Casualty Operations for the years ended December 31, 2020 and 2019.
Total gross written premiums increased $695 million in 2020 as compared with 2019. Total net written premiums increased $432 million in 2020 as compared with 2019.
Gross written premiums, excluding third party captives, for Specialty increased $281 million in 2020 as compared with 2019 driven by strong rate and higher new business. Net written premiums for Specialty increased $192 million in 2020 as compared with 2019. The increase in net earned premiums in 2020 was consistent with the trend in net written premiums for Specialty.
Gross written premiums for Commercial increased $393 million in 2020 as compared with 2019 driven by strong rate and higher new business. Net written premiums for Commercial increased $250 million in 2020 as compared with 2019. The increase in net earned premiums in 2020 for Commercial was consistent with the trend in net written premiums partially offset by a reduction in estimated audit premiums as a result of the economic slowdown arising from COVID-19 and premium rate adjustments impacting certain general liability policies. For further information on the general liability premium rate adjustments see Note 19 of the Notes to Consolidated Financial Statements included under Item 8.
Gross written premiums for International increased $22 million in 2020 as compared with 2019 driven by growth in Europe and Canada partially offset by the impact of the strategic exit from certain Lloyd’s business classes. Net written premiums decreased $10 million in 2020 as compared with 2019. The decrease in net earned premiums in 2020 was consistent with the trend in net written premiums for International.
Favorable net prior year loss reserve development of $20 million and $73 million was recorded in 2020 and 2019. In 2020 and 2019, Specialty recorded favorable net prior year loss reserve development of $61 million and $92 million, Commercial recorded unfavorable net prior year loss reserve development of $43 million as compared with favorable net prior year loss reserve development of $2 million and International recorded favorable net prior year loss reserve development of $2 million as compared with unfavorable net prior year loss reserve development of $21 million. Further information on net prior year loss reserve development is included in Note 8 of the Notes to Consolidated Financial Statements included under Item 8.
International’s combined ratio increased 0.6 points in 2020 as compared with 2019 due to a 2.8 point increase in the loss ratio, partially offset by a 2.2 point improvement in the expense ratio. The increase in the loss ratio was driven by higher net catastrophe losses, which were 7.1 points of the loss ratio in 2020, as compared with 1.1 points of the loss ratio in 2019, partially offset by favorable net prior year loss reserve development in the current year. The improvement in the expense ratio was driven by lower acquisition and underwriting expenses.
Core loss improved $112 million in 2020 as compared with 2019. Core loss in 2020 included a $59 million charge related to the recognition of an active life reserve premium deficiency for long term care policies primarily driven by actions taken on discount rate assumptions. The normative risk free rate (the projection of the 10-year U.S. Treasury rate in the long term) was lowered by 100 basis points to 2.75% and the time period to grade up to the normative rate was extended from 6 years to 10 years. Core loss in 2020 also included a $36 million charge related to an increase in the structured settlement claim reserves and a $30 million benefit related to a reduction in long term care claim reserves, both resulting from the annual claim reserve reviews in the third quarter of 2020. Core loss in 2019 included a $170 million charge related to the recognition of an active life reserve premium deficiency and a $44 million benefit related to a reduction in long term care claim reserves resulting from the annual claim reserve reviews in the third quarter of 2019. Excluding the impacts of the GPV and claim reserve reviews, core results in 2020 were favorable, driven by better than expected morbidity in the long term care business and higher net investment income. The increase in net investment income was driven by the allocation of a portion of limited partnership income to Other Insurance Operations beginning in the fourth quarter of 2020. Further, during 2020, relative to expectations, CNA experienced lower new claim frequency, higher claim terminations and more favorable claim severity amid the effects of COVID-19. Given the uncertainty of these trends, CNA increased its IBNR reserves in anticipation of increased claim activity as the COVID-19 pandemic abates.
Boardwalk Pipelines operates in the midstream portion of the natural gas and natural gas liquids (“NGLs”) industry, providing transportation and storage for those commodities. Boardwalk Pipelines is not in the business of buying and selling natural gas and NGLs other than for system management purposes, but changes in natural gas and NGLs prices may impact the volumes of natural gas or NGLs transported and stored by customers on its systems. Due to the capital-intensive nature of its business, Boardwalk Pipelines’ operating costs and expenses typically do not vary significantly based upon the amount of products transported, with the exception of fuel consumed at its compressor stations and not included in a fuel tracker.
During 2020, Boardwalk Pipelines entered into approximately $1.3 billion of new firm agreements, of which approximately 55% were from new growth projects executed in 2020, but will not be placed into commercial service until 2024 or later years. As of December 31, 2020, Boardwalk Pipelines’ top ten customers holding firm capacity under firm agreements comprised approximately 40% of its total projected operating revenues. Additionally, the credit profile associated with Boardwalk Pipelines’ customers comprising the total projected operating revenues under firm agreements as of December 31, 2020 was 75% rated as investment grade, 4% rated as non-investment grade and 21% not rated.
Each year a portion of Boardwalk Pipelines’ firm transportation and storage agreements expire. The rates Boardwalk Pipelines is able to charge customers are heavily influenced by market trends (both short and longer term), including the available supply, geographical location of natural gas production, the competition between producing basins, competition with other pipelines for supply and markets, the demand for gas by end-users such as power plants, petrochemical facilities and LNG export facilities and the price differentials between the gas supplies and the market demand for the gas (basis differentials). Boardwalk Pipelines’ storage rates are additionally impacted by natural gas price differentials between time periods, such as winter to summer (time period price spreads), and the volatility in time period price spreads. Demand for firm service is primarily based on market conditions which can vary across Boardwalk Pipelines’ pipeline systems. While Boardwalk Pipelines has not seen a decrease in the demand for its transportation services as a result of the COVID-19 pandemic or the volatility in energy prices during 2020, if these conditions were to remain for an extended period of time or worsen, Boardwalk Pipelines could see a decline in the demand for its services. Boardwalk Pipelines focuses its marketing efforts on enhancing the value of the capacity that is up for renewal and works with customers to match gas supplies from various basins to new and existing customers and markets, including aggregating supplies at key locations along its pipelines to provide end-use customers with attractive and diverse supply options. If the market perceives the value of Boardwalk Pipelines’ available capacity to be lower than its long term view of the capacity, Boardwalk Pipelines may seek to shorten contract terms until market perception improves.
Boardwalk Pipelines incurs substantial costs for ongoing maintenance of its pipeline systems and related facilities, including those incurred for pipeline integrity management activities, equipment overhauls, general upkeep and repairs. These costs are not dependent on the amount of revenues earned from its transportation services. PHMSA 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. These regulations have resulted in an overall increase in Boardwalk Pipelines’ ongoing maintenance costs, including maintenance capital and maintenance expense. In 2019, PHMSA issued the first part of its gas Mega Rule, which became effective on July 1, 2020. This regulation imposed numerous requirements, including MAOP reconfirmation through re-verification of all historical records for pipelines in service, which re-certification process may require natural gas pipelines installed before 1970 (previously excluded from certain pressure testing obligations) to be pressure tested, the periodic assessment of additional pipeline mileage outside of HCAs (in MCAs as well as Class 3 and Class 4 areas), the reporting of exceedances of MAOP and the consideration of seismicity as a risk factor in integrity management. The remaining rulemakings comprising the gas Mega Rule have not been published yet and Boardwalk Pipelines cannot predict when they will be finalized, however, they are expected to include revised pipeline repair criteria as well as more stringent corrosion control requirements. It is expected that these new rules will cause Boardwalk Pipelines to incur increased capital and operating costs, experience operational delays and result in potential adverse impacts to its ability to reliably serve its customers as described under Item 1A. Risk Factors of this Report.
Maintenance costs may be capitalized or expensed, depending on the nature of the activities. For any given reporting period, the mix of projects that Boardwalk Pipelines undertakes will affect the amounts we record as property, plant and equipment on the Consolidated Balance Sheets or recognize as expenses, which impacts earnings. In 2021, Boardwalk Pipelines expects to spend approximately $370 million to maintain its pipeline systems, of which approximately $150 million is expected to be maintenance capital. In 2020, Boardwalk Pipelines spent $361 million to maintain its pipeline systems, of which $149 million was recorded as maintenance capital.
Due to the COVID-19 pandemic and efforts to mitigate the spread of the virus, beginning in March of 2020, Loews Hotels & Co temporarily suspended operations at the majority of its owned and/or operated hotels. Since then, most hotels have resumed operations, but occupancy rates remain considerably lower than those from the prior year, or even occupancy rates prior to March of 2020. As such, Loews Hotels & Co has actively managed the operations of its hotel portfolio, in partnership with each hotel’s stakeholders, to minimize the financial loss at each property and accommodate available demand. Although Loews Hotels & Co has enacted significant measures to adjust the operating cost structure of each hotel during suspensions of operations, deferred most capital expenditures and reduced the operating costs of its management company, these measures could not offset the impact of significant lost revenues. Loews Hotels & Co has therefore incurred significant operating losses since the start of the pandemic.
Loews Hotels & Co considers events or changes in circumstances that indicate the carrying amount of its assets may not be recoverable. In 2020, Loews Hotels & Co recorded impairment charges of $36 million to reduce the carrying value of certain assets to their estimated fair value compared to impairment charges of $99 million in 2019.
Interest expense for 2020 increased $11 million as compared with 2019 primarily due to the increase in aggregate debt balances and less capitalized interest related to hotel development projects.
Corporate operations consist primarily of investment income at the Parent Company, operating results of Altium Packaging, Parent Company interest expense and other Parent Company administrative costs. Investment income includes earnings on cash and short term investments held at the Parent Company to meet current and future liquidity needs, as well as results of limited partnership investments and the trading portfolio held at the Parent Company.
The following table summarizes the results of operations for Corporate for the years ended December 31, 2020 and 2019 as presented in Note 20 of the Notes to Consolidated Financial Statements included under Item 8:
Net investment income for the Parent Company decreased $171 million in 2020 as compared with 2019 as a result of the significant decline in the performance of equity based and short term investments in response to the COVID-19 pandemic and related containment measures.
Operating revenues and other include Altium Packaging revenues of $1,022 million and $932 million for 2020 and 2019. The increase of $90 million in 2020 as compared with 2019 reflects an increase of $63 million related to the full year impact of acquisitions in 2019, an acquisition in November of 2020, higher volumes and higher year-over-year resin prices. Altium Packaging’s contracts with its customers provide for price adjustments for changes in resin prices on a prospective basis. Due to fluctuations in resin prices, over time resin raw material costs are generally offset by the change in revenues, so that Altium Packaging’s gross margins return to the same level as prior to the change in prices.
Interest expenses increased $12 million in 2020 as compared with 2019 due to the issuance in May of 2020 of the Parent Company’s $500 million aggregate principal amount of 3.2% senior notes due May 15, 2030 and incremental borrowings by Altium Packaging to fund its 2019 acquisitions.
Contract drilling revenues were $287 million and $935 million for 2020 and 2019. Contract drilling expenses were $254 million and $793 million for 2020 and 2019. Results for 2020 included in our Consolidated Financial Statements reflect only the period through the April 26, 2020 deconsolidation. Operating and other expenses for 2020 include an aggregate asset impairment charge of $774 million ($408 million after tax and noncontrolling interests) recognized in the first quarter of 2020.
In May of 2020, we completed a public offering of $500 million aggregate principal amount of 3.2% senior notes due May 15, 2030. The proceeds of this offering are available for general corporate purposes.
CNA’s cash provided by operating activities was $1.8 billion in 2020 and $1.1 billion in 2019. The increase in cash provided by operating activities was driven by an increase in premiums collected, lower net claim payments and lower income taxes paid, partially offset by a lower level of distributions from limited partnerships.
In August of 2020, CNA completed a public offering of $500 million aggregate principal amount of its 2.1% senior notes due August 15, 2030 and used the net proceeds to redeem the entire $400 million outstanding aggregate principal balance of its 5.8% senior notes due August 15, 2021 and for general corporate purposes. CNA has an effective shelf registration statement on file with the SEC under which it may publicly issue debt, equity or hybrid securities from time to time.
Dividends from Continental Casualty Company (“CCC”), a subsidiary of CNA, are subject to the insurance holding company laws of the State of Illinois, the domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require prior approval by the Illinois Department of Insurance (the “Department”), are determined based on the greater of the prior year’s statutory net income or 10% of statutory surplus as of the end of the prior year, as well as the timing and amount of dividends paid in the preceding 12 months. Additionally, ordinary dividends may only be paid from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As of December 31, 2020, CCC was in a positive earned surplus position. The maximum allowable dividend CCC could pay during 2021 that would not be subject to the Department’s prior approval is $1,070 million, less dividends paid during the preceding twelve months measured at that point in time. CCC paid dividends of $975 million in 2020. The actual level of dividends paid in any year is determined after an assessment of available dividend capacity, holding company liquidity and cash needs as well as the impact the dividends will have on the statutory surplus of the applicable insurance company.
CNA has a financial strength rating of A and senior debt rating of bbb+ from A.M. Best Company (“A.M. Best”), a financial strength rating of A2 and senior debt rating of Baa2 from Moody’s, a financial strength rating of A+ and senior debt rating of A- from S&P and financial strength rating of A+ and senior debt rating of BBB+ from Fitch. A.M. Best, Moody’s, S&P and Fitch maintain stable outlooks across CNA’s financial strength and senior debt credit ratings.
Boardwalk Pipelines’ cash provided by operating activities decreased $21 million in 2020 compared to 2019, primarily due to the change in net income and the timing of receivables.
For 2020 and 2019, Boardwalk Pipelines’ capital expenditures were $438 million and $429 million, consisting primarily of a combination of growth and maintenance capital. Boardwalk Pipelines expects total capital expenditures to be approximately $340 million in 2021, including approximately $150 million for maintenance capital and $190 million related to growth projects.
In November of 2020, Boardwalk Pipelines paid a distribution of $102 million to the Company.
Boardwalk Pipelines has a senior debt rating of BBB- with a stable outlook from S&P, a senior debt rating of Baa3 with a stable outlook from Moody’s and a senior debt rating of BBB- with a positive outlook from Fitch.
Certain of the hotels wholly or partially owned by Loews Hotels & Co are financed by debt facilities, with a number of different lenders. Each of the loan agreements underlying these facilities contain a variety of financial and operational covenants. As a result of the impacts of COVID-19, Loews Hotels & Co has proactively requested certain lenders, where applicable, to (1) temporarily waive certain covenants to avoid an event of default and/or further restriction of the hotel’s cash balances through the establishment of lockboxes and other measures; (2) temporarily allow funds previously restricted directly or indirectly under the hotel’s underlying loan agreement for the renewal, replacement and addition of building improvements, furniture and fixtures to be used instead for hotel operations and maintenance; and/or (3) defer certain interest and/or principal payments while the hotels operations are temporarily suspended or significantly impacted by a decline in occupancy. Loews Hotels & Co also continues to work with lenders on loans that are being reviewed for extension. These discussions with lenders are ongoing and may require Loews Hotels & Co to make principal paydowns or provide guaranties of a subsidiary’s debt to otherwise avoid an event of default. Through the date of this Report, Loews Hotels & Co is not in default on any of its loans.
In 2020 Loews Hotels & Co received capital contributions of $151 million from Loews Corporation to fund working capital and growth projects. Due to the ongoing impact of the COVID-19 pandemic to the travel and hospitality industry, Loews Hotels & Co will require additional funding from Loews Corporation during 2021. The amount needed will depend on numerous factors, including how quickly properties are able to return to sustainable operating levels.
(b) The claim and claim adjustment expense reserves reflected above are not discounted and represent CNA’s estimate of the amount and timing of the ultimate settlement and administration of gross claims based on its assessment of facts and circumstances known as of December 31, 2020. See the Insurance Reserves section of this MD&A for further information.
The significant components of CNA’s net investment income are presented in the following table. Fixed income securities, as presented, include both fixed maturity securities and non-redeemable preferred stock.
CNA’s net investment income decreased $183 million in 2020 as compared with 2019 driven by lower yields in the fixed income portfolio and lower limited partnership and common stock returns.
CNA’s investment gains (losses) decreased $84 million in 2020 as compared with 2019. The decrease was driven by higher impairment losses and the unfavorable change in fair value of non-redeemable preferred stock partially offset by higher net realized investment gains on sales of fixed maturity securities.
Further information on CNA’s investment gains and losses is set forth in Note 3 of the Notes to Consolidated Financial Statements included under Item 8.
As of December 31, 2020 and 2019, 1% of CNA’s fixed maturity portfolio was rated internally. AAA rated securities included $1.8 billion and $1.5 billion of pre-funded municipal bonds as of December 31, 2020 and 2019.
A primary objective in the management of CNA’s investment portfolio is to optimize return relative to the 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 as well as domestic and global economic conditions, are some of the factors that enter into an investment decision. CNA also continually monitors exposure to issuers of securities held and broader industry sector exposures and may from time to time adjust such exposures based on its views of a specific issuer or industry sector.
The effective durations of CNA’s fixed income securities and short term investments are presented in the following table. Amounts presented are net of payable and receivable amounts for securities purchased and sold, but not yet settled.
CNA’s investment portfolio is periodically analyzed for changes in duration and related price risk. Certain securities have duration characteristics that are variable based on market interest rates, credit spreads and other factors that may drive variability in the amount and timing of cash flows. 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 the Quantitative and Qualitative Disclosures about Market Risk included under
We have audited the internal control over financial reporting of Loews Corporation and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Our audit procedures related to P&C claim and claim adjustment expense reserves included the following, among others:
• We tested the effectiveness of controls related to the determination of P&C claim and claim adjustment expense reserves, including those controls related to the estimation of and management’s review of P&C claim and claim adjustment expense reserves.
o We compared our prior year estimates of expected incurred losses to actual experience during the most recent year to identify potential bias in the Company’s determination of P&C claim and claim adjustment expense reserves.
Future policy benefit reserves - Long Term Care - Refer to Notes 1 and 8 to the consolidated financial statements
Estimating future experience for long term care policies is subject to significant estimation risk as the required projection period spans several decades. Morbidity and persistency experience can be volatile while discount rates and premium rate increases can be difficult to predict. Modest changes in each of these assumptions can materially impact the valuation of these liabilities.
Given the significant judgments made by management in estimating LTC future policy benefit reserves, auditing LTC future policy benefit reserves required a high degree of auditor judgment and an increased extent of effort, including the involvement of our actuarial specialists.
Given the significant judgments made by management to identify indicators of impairment and to prepare probability-weighted cash flow analyses to determine if potential impairments exist and to measure fair value, auditing these impairment analyses required a high degree of auditor judgment, including the involvement of fair value specialists, and increased extent of effort related to evaluating indicators of impairment, including the utilization and dayrate assumptions used in the probability-weighted cash flow analyses.
o Evaluating the reasonableness of the utilization and dayrate assumptions utilized in the Company’s probability-weighted cash flow analyses by evaluating potential drilling rig opportunities and considering industry reports and data.
Basis of presentation − Loews Corporation is a holding company. Its consolidated subsidiaries are engaged in the following lines of business: commercial property and casualty insurance (CNA Financial Corporation (“CNA”), an 89.6% owned subsidiary); transportation and storage of natural gas and natural gas liquids (Boardwalk Pipeline Partners, LP (“Boardwalk Pipelines”), a wholly owned subsidiary); the operation of a chain of hotels (Loews Hotels Holding Corporation (“Loews Hotels & Co”), a wholly owned subsidiary); and the manufacture of rigid plastic packaging solutions (Altium Packaging LLC (“Altium Packaging”), a 99% owned subsidiary). Unless the context otherwise requires, the term “Company” as used herein means Loews Corporation including its consolidated subsidiaries, the term “Net income (loss) attributable to Loews Corporation” as used herein means Net income (loss) attributable to Loews Corporation shareholders and the term “subsidiaries” means Loews Corporation’s consolidated subsidiaries.
In the second quarter of 2020, Diamond Offshore Drilling, Inc. (“Diamond Offshore”) was deconsolidated from the Company’s consolidated financial statements. See Note 2 for further discussion.
The cost of fixed maturity securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts, which are included in Net investment income on the Consolidated Statements of Operations. The amortization of premium and accretion of discount for fixed maturity securities takes into consideration call and maturity dates that produce the lowest yield.
To the extent that unrealized gains on fixed maturity securities supporting long term care products and structured settlements not funded by annuities would result in a premium deficiency if those gains were realized, a related increase in Insurance reserves is recorded, net of tax and noncontrolling interests, as a reduction of net unrealized gains through Other comprehensive income (“Shadow Adjustments”). Shadow Adjustments increased $515 million (after tax and noncontrolling interests) and $1.0 billion (after tax and noncontrolling interests) for the years ended December 31, 2020 and 2019. As of December 31, 2020 and 2019, net unrealized gains on investments included in Accumulated other comprehensive income (“AOCI”) were correspondingly reduced by Shadow Adjustments of $2.5 billion (after tax and noncontrolling interests) and $2.0 billion (after tax and noncontrolling interests).
An available-for-sale security is impaired if the fair value of the security is less than its cost adjusted for accretion, amortization and allowance for credit losses. When a security is impaired, it is evaluated to determine whether CNA intends to sell the security before recovery of amortized cost or whether a credit loss exists. Losses on securities that CNA intends to sell are recognized as impairment losses within Investment gains (losses) on the Consolidated Statements of Operations. If a credit loss exists, an allowance is established and the corresponding amount is recognized as an impairment loss within Investment gains (losses) on the Consolidated Statements of Operations. The allowance for credit losses related to available-for-sale fixed maturity securities is the difference between the present value of cash flows expected to be collected and the amortized cost basis. In subsequent periods, the allowance is reviewed, with any changes in the allowance presented as a component of Investment gains (losses) on the Consolidated Statements of Operations. Changes in the difference between the amortized cost basis, net of the allowance, and the fair value, are recognized in Other comprehensive income.
Significant judgment is required in the determination of whether an impairment loss has occurred for a security. CNA follows a consistent and systematic process for determining and recording an impairment loss, including the evaluation of securities in an unrealized loss position and securities with an allowance for credit losses on at least a quarterly basis.
CNA’s assessment of whether an impairment loss has occurred incorporates both quantitative and qualitative information. A credit loss exists if the present value of cash flows expected to be collected is less than the amortized cost basis. Significant assumptions enter into these cash flow projections including delinquency rates, probable risk of default, loss severity upon a default, over collateralization and interest coverage triggers and credit support from lower level tranches. CNA considers all available evidence when determining whether an investment requires a credit loss write-down or allowance to be recorded. Examples of such evidence may include the financial condition and near-term and long-term prospects of the issuer, whether the issuer is current with interest and principal payments, credit ratings on the security or changes in ratings over time, general market conditions and industry, sector or other specific factors and whether it is likely that CNA will recover its amortized cost through the collection of cash flows.
Prior to 2020, CNA’s assessment of whether an impairment loss occurred also incorporated both quantitative and qualitative information. Fixed maturity securities in an unrealized loss position that CNA intended to sell, or it more likely than not would be required to sell before recovery of amortized cost, were considered to be impaired and the entire difference between the amortized cost basis and fair value of the security was recognized as an impairment loss in earnings as a direct write-down of amortized cost. The remaining fixed maturity securities in an unrealized loss position were evaluated to determine if a credit loss existed. If a credit loss was determined to exist, the credit loss was recognized in earnings as a direct write-down of amortized cost.
Revenue recognition - Premiums on property and casualty insurance contracts are recognized in proportion to the underlying risk insured and are principally earned ratably over the term of the policies. Premiums on long term care contracts are earned ratably over the policy year in which they are due. The reserve for unearned premiums represents the portion of premiums written relating to the unexpired terms of coverage.
Property and casualty contracts that are retrospectively rated or subject to audit premiums contain provisions that result in an adjustment to the initial policy premium depending on the contract provisions. These provisions stipulate the adjustment due to loss experience of the insured during the coverage period, or changes in the level of exposure to insurance risk. For such contracts, CNA estimates the amount of ultimate premiums that it may earn upon completion of the coverage period and recognizes either an asset or a liability for the difference between the initial policy premium and the estimated ultimate premium. CNA either adjusts such estimated ultimate premium amounts during the course of the coverage period based on actual results to date or by conducting premium audits after the policy has expired to determine the final exposure to insured risks. The resulting adjustment is recorded as either a reduction of or an increase to the earned premiums for the period.
CNA’s non-insurance warranty revenues are primarily generated from separately-priced service contracts that provide mechanical breakdown and other coverages to vehicle or consumer goods owners, which generally provide coverage from one month to ten years. For warranty products where CNA acts as the principal in the transaction, Non-insurance warranty revenue is reported on a gross basis, with amounts paid by customers reported as Non-insurance warranty revenue and commissions paid to agents reported as Non-insurance warranty expense on the Consolidated Statements of Operations. Additionally, CNA provides warranty administration services for dealer and manufacturer warranty products. Non-insurance revenues are recognized when obligations under the terms of the contract with CNA’s customers are satisfied, which is generally over time as obligations are fulfilled. CNA recognizes non-insurance warranty revenue over the service period in proportion to the actuarially determined expected claims emergence pattern. Customers pay in full at the inception of the warranty contract. The liability for unearned warranty revenue, reported as Deferred non-insurance warranty revenue on the Consolidated Balance Sheets, represents the unearned portion of revenue in advance of CNA’s performance, including amounts which are refundable upon cancellation.
Claim and claim adjustment expense reserves - Claim and claim adjustment expense reserves, except reserves for structured settlements not associated with asbestos and environmental pollution (“A&EP”), workers’ compensation lifetime claims and long term care claims, are not discounted and are based on (i) case basis estimates for losses reported on direct business, adjusted in the aggregate for ultimate loss expectations; (ii) estimates of incurred but not reported losses; (iii) estimates of losses on assumed reinsurance; (iv) estimates of future expenses to be incurred in the settlement of claims; (v) estimates of salvage and subrogation recoveries and (vi) estimates of amounts due from insureds related to losses under high deductible policies. Management considers current conditions and trends as well as past CNA and industry experience in establishing these estimates. The effects of inflation, which can be significant, are implicitly considered in the reserving process and are part of the recorded reserve balance. Ceded claim and claim adjustment expense reserves are reported as a component of Receivables on the Consolidated Balance Sheets.
Policyholder dividends - Policyholder dividends are paid to participating policyholders within the workers’ compensation and surety lines of business. Net written premiums for participating dividend policies were approximately 1% of total net written premiums for each of the years ended December 31, 2020, 2019 and 2018. Dividends to policyholders are accrued according to CNA’s best estimate of the amount to be paid in accordance with contractual provisions and applicable state laws. Dividends to policyholders are presented as a component of Insurance claims and policyholders’ benefits on the Consolidated Statements of Operations and Other liabilities on the Consolidated Balance Sheets.
Impairment of long-lived assets -Long-lived and finite-lived intangible assets are reviewed for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets and intangibles with finite lives, under certain circumstances, are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value less cost to sell.
Net income per share - Basic net income per share excludes dilution and is computed by dividing net income attributable to common stock by the weighted average number of Loews Corporation common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue Loews Corporation common stock were exercised or converted into common stock.
For the year ended December 31, 2020, approximately 0.1 million potential shares attributable to issuances and exercises under the Loews Corporation 2016 Incentive Compensation plan and the prior plan were excluded in the calculation of diluted net income per share because the effect would have been antidilutive due to the net loss position of the Company. In addition, there were 0.2 million shares attributable to employee stock-based compensation awards excluded from the calculation of diluted net income per share because the effect would have been antidilutive. For the years ended December 31, 2019 and 2018, 0.7 million and 0.9 million potential shares attributable to issuances and exercises under the Loews Corporation 2016 Incentive Compensation Plan and the prior plan were included in the calculation of diluted net income per share. For the years ended December 31, 2019 and 2018, there were no shares attributable to employee stock-based compensation awards excluded from the calculation of diluted net income per share because the effect would have been antidilutive.
Supplementary cash flow information - Cash payments made for interest on long term debt, net of capitalized interest, amounted to $463 million, $560 million and $558 million for the years ended December 31, 2020, 2019 and 2018. Cash payments for federal, foreign, state and local income taxes amounted to $20 million, $190 million and $101 million for the years ended December 31, 2020, 2019 and 2018. Investing activities include $63 million of previously accrued capital expenditures for the year ended December 31, 2020 and exclude $17 million and $15 million of accrued capital expenditures for the years ended December 31, 2019 and 2018.
On January 1, 2020, the Company adopted the updated guidance using a modified retrospective method with a cumulative effect adjustment recorded to beginning Retained earnings. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance. A prospective transition approach is required for available-for-sale fixed maturity securities that were purchased with credit deterioration (“PCD assets”) or have recognized an OTTI write down prior to the effective date. The cumulative effect of the accounting change resulted in a $5 million decrease in Retained earnings, after tax and noncontrolling interests.
See the accounting policy discussion within this note as well as Notes 3 and 16 for additional information on credit losses.
On January 1, 2018 the Company adopted ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” The updated guidance amended the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The Company adopted this updated guidance using the modified retrospective approach with a cumulative effect adjustment of $9 million (after noncontrolling interests) as a decrease to beginning Retained earnings with an offset to a deferred income tax liability.
On January 1, 2018 the Company early adopted ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”). The updated accounting guidance allowed a reclassification from AOCI to Retained earnings for certain tax effects resulting from the Tax Cuts and Jobs Act of 2017. The impact of the change resulted in a $3 million (after noncontrolling interests) increase in Retained earnings and a corresponding decrease in AOCI. The decrease in AOCI is comprised of a $130 million (after noncontrolling interests) decrease in pension liability and a $127 million (after noncontrolling interests) increase in unrealized gains (losses) on investments.
Recently issued ASUs - In August of 2018, the FASB issued ASU 2018-12, “Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts.” The updated accounting guidance requires changes to the measurement and disclosure of long-duration contracts. The guidance requires entities to update annually cash flow assumptions, including morbidity and persistency, and update quarterly discount rate assumptions using an upper-medium grade fixed-income instrument yield. The effect of changes in cash flow assumptions will be recorded in Net income and the effect of changes in discount rate assumptions will be recorded in Other comprehensive income (“OCI”). This guidance is effective for interim and annual periods beginning after December 15, 2022. Early adoption is permitted. The Company may elect to apply the guidance using either a modified retrospective transition method or a full retrospective transition method. The guidance requires restatement of prior periods presented. The Company plans to use the modified retrospective transition method at adoption and is currently evaluating the effect the updated guidance will have on its consolidated financial statements, including increased disclosure requirements. The annual updating of cash flow assumptions is expected to increase income statement volatility. While the requirements of the new guidance represent a material change from existing accounting guidance, the underlying economics of the business and related cash flows will be unchanged.
On April 26, 2020 (the “Filing Date”), Diamond Offshore and certain of its direct and indirect subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the Southern District of Texas seeking relief under Chapter 11 of the United States Bankruptcy Code (the “Chapter 11 Filing”). As a result of Diamond Offshore’s Chapter 11 Filing and applicable U.S. generally accepted accounting principles, effective as of the Filing Date, Loews Corporation no longer controlled Diamond Offshore for accounting purposes. Therefore, Diamond Offshore was deconsolidated from its consolidated financial statements effective as of the Filing Date. See Note 20 for Diamond Offshore’s revenues and expenses through the Filing Date.
In 2019, Altium Packaging paid approximately $260 million for three acquisitions of plastic packaging manufacturers located in the U.S. and Canada, including the acquisition in June of 2019 of Altium Healthcare Inc. (formerly known as Tri State Distribution, Inc.), a retail pharmaceutical packaging solutions provider. For the years ended December 31, 2020 and 2019, revenues for the three acquisitions since acquisition were $135 million and $76 million and net results were not significant. The allocation of the purchase prices for the three acquisitions resulted in the recognition of approximately $99 million of goodwill and approximately $87 million of intangible assets, primarily related to customer relationships. The acquisitions were funded with approximately $250 million of debt financing at Altium Packaging and available cash.
As of December 31, 2020 and 2019, no investments in a single issuer exceeded 10% of shareholders’ equity, other than investments in securities issued by the U.S. Treasury and obligations of government-sponsored enterprises.
(a) Gross investment gains on available-for-sale securities were $220, $125 and $168 for the years ended December 31, 2020, 2019 and 2018. Gross investment losses on available-for-sale securities were $220, $131 and $164 for the years ended December 31, 2020, 2019 and 2018. For the year ended December 31, 2020, $3 of investment losses were recognized due to the change in fair value of non-redeemable preferred stock still held as of December 31, 2020. For the year ended December 31, 2019, $66 of investment gains were recognized due to the change in fair value of non-redeemable preferred stock still held as of December 31, 2019.
The following table presents the activity related to the allowance on available-for-sale securities with credit impairments and PCD assets. Accrued interest receivables on available-for-sale fixed maturity securities totaled $371 million and is excluded from the estimate of expected credit losses and the amortized cost basis in the tables within this Note.
The components of available-for-sale impairment losses recognized in earnings by asset type are presented in the following table. The table includes losses on securities with an intention to sell and changes in the allowance for credit losses on securities since acquisition date:
The amortized cost and fair values of fixed maturity securities are as follows:
(a) On January 1, 2020, the Company adopted ASU 2016-13; see Note 1. The Unrealized OTTI Losses (Gains) column that tracked subsequent valuation changes on securities for which a credit loss had previously been recorded has been replaced with the Allowance for Credit Losses column. Prior period amounts were not adjusted for the adoption of this standard.
The carrying value of limited partnerships as of December 31, 2020 and 2019 was approximately $1.8 billion and $2.0 billion, which includes net undistributed earnings of $252 million and $297 million. Limited partnerships comprising 54% of the total carrying value are reported on a current basis through December 31, 2020 with no reporting lag, 9% of the total carrying value are reported on a one month lag and the remainder are reported on more than a one month lag. The number of limited partnerships held and the strategies employed provide diversification to the limited partnership portfolio and the overall invested asset portfolio.
Limited partnerships comprising 56% and 66% of the carrying value as of December 31, 2020 and 2019 employ hedge fund strategies. Limited partnerships comprising 36% and 29% of the carrying value at December 31, 2020 and 2019 were invested in private debt and equity and the remainder were primarily invested in real estate strategies. Hedge fund strategies include both long and short positions in fixed income, equity and derivative instruments. These hedge fund strategies may seek to generate gains from mispriced or undervalued securities, price differentials between securities, distressed investments, sector rotation or various arbitrage disciplines. Within hedge fund strategies, approximately 46% were equity related, 36% pursued a multi-strategy approach, 11% were focused on distressed investments and 7% were fixed income related as of December 31, 2020.
(a) The values in the table above reflect DSCR on a standardized amortization period and LTV based on the most recent appraised values trended forward using changes in a commercial real estate price index.
Securities with carrying values of approximately $3.0 billion and $2.7 billion were deposited by CNA’s insurance subsidiaries under requirements of regulatory authorities and others as of December 31, 2020 and 2019.
Prices may fall within Level 1, 2 or 3 depending upon the methodology and inputs used to estimate fair value for each specific security. In general, securities are priced using third party pricing services. Securities not priced by pricing services are submitted to independent brokers for valuation and, if those are not available, internally developed pricing models are used to value assets using a methodology and inputs that market participants presumably would use to value the assets. Prices obtained from third-party pricing services or brokers are not adjusted.
Control procedures are performed over information obtained from pricing services and brokers to ensure prices received represent a reasonable estimate of fair value and to confirm representations regarding whether inputs are observable or unobservable. Procedures may include: (i) the review of pricing service methodologies or broker pricing qualifications, (ii) back-testing, where past fair value estimates are compared to actual transactions executed in the market on similar dates, (iii) exception reporting, where period-over-period changes in price are reviewed and challenged with the pricing service or broker based on exception criteria and (iv) detailed analysis, where an independent analysis is performed of the inputs and assumptions used to price individual securities.
The following tables 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, 2020 and 2019:
Net investment gains and losses are reported in Net income as follows:
Level 1 securities include highly liquid government securities and exchange traded bonds valued using quoted market prices. Level 2 securities include most other fixed maturity securities as the significant inputs are observable in the marketplace. All classes of Level 2 fixed maturity securities are valued using a methodology based on information generated by market transactions involving identical or comparable assets, a discounted cash flow methodology or a combination of both when necessary. Common inputs for all classes of fixed maturity securities include prices from recently executed transactions of similar securities, marketplace quotes, benchmark yields, spreads off benchmark yields, interest rates and U.S. Treasury or swap curves. Specifically for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data. Fixed maturity securities are primarily assigned to Level 3 in cases where broker/dealer quotes are significant inputs to the valuation, and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. Level 3 securities also include private placement debt securities whose fair value is determined using internal models with some inputs that are not market observable.
Securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds, treasury bills and exchange traded open-end funds valued using quoted market prices. Level 2 primarily includes commercial paper, for which all inputs are market observable. Fixed maturity securities purchased within one year of maturity are classified consistent with fixed maturity securities discussed above. Short term investments as presented in the tables above differ from the amounts presented in the Consolidated Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.
The fair values of debt were based on observable market prices when available. When observable market prices were not available, the fair values of debt were based on observable market prices of comparable instruments adjusted for differences between the observed instruments and the instruments being valued or is estimated using discounted cash flow analyses, based on current incremental borrowing rates for similar types of borrowing arrangements.
(a) Amounts presented for Diamond Offshore reflect the periods prior to deconsolidation. See Notes 2 and 20 for further discussion.
During 2018, Diamond Offshore recorded an asset impairment charge of $27 million ($12 million after tax and noncontrolling interests) to recognize a reduction in fair value of the Ocean Scepter. Diamond Offshore estimated the fair value of the impaired rig using a market approach based on a signed agreement to sell the rig, less estimated costs to sell. This valuation approach is considered to be a Level 3 fair value measurement due to the level of estimation involved as the sale had not yet been completed at the time of the analysis.
CNA’s commercial property and casualty insurance operations (“Property & Casualty Operations”) include its Specialty, Commercial and International lines of business. CNA’s Other Insurance Operations outside of Property & Casualty Operations include its long term care business that is in run-off, certain corporate expenses, including interest on CNA’s corporate debt, and certain property and casualty businesses in run-off, including CNA Re and A&EP.
(a) Other Insurance Operations amounts are primarily related to long term care claim reserves, which are long duration insurance contracts, but also include amounts related to unfunded structured settlements arising from short duration insurance contracts.
(b) Reinsurance receivables presented are gross of the allowance for uncollectible reinsurance and do not include reinsurance receivables related to paid losses.
In developing claim and claim adjustment expense (“loss” or “losses”) reserve estimates, CNA’s actuaries perform detailed reserve analyses that are staggered throughout the year. Every reserve group is reviewed at least once during the year, but most are reviewed more frequently. The analyses generally review losses gross of ceded reinsurance and apply the ceded reinsurance terms to the gross estimates to establish estimates net of reinsurance. Factors considered include, but are not limited to, the historical pattern and volatility of the actuarial indications, the sensitivity of the actuarial indications to changes in paid and incurred loss patterns, the consistency of claims handling processes, the consistency of case reserving practices, changes in CNA’s pricing and underwriting, pricing and underwriting trends in the insurance market and legal, judicial, social and economic trends. In addition to the detailed analyses, CNA reviews actual loss emergence for all products each quarter.
In developing the loss reserve estimates for property and casualty contracts, CNA generally projects ultimate losses using several common actuarial methods as listed below. CNA reviews the various indications from the various methods and applies judgment to select an actuarial point estimate. The carried reserve may differ from the actuarial point estimate as a result of CNA’s consideration of the factors noted above as well as the potential volatility of the projections associated with the specific product being analyzed and other factors affecting claims costs that may not be quantifiable through traditional actuarial analysis. The indicated required reserve is the difference between the selected ultimate loss and the inception-to-date paid losses. The difference between the selected ultimate loss and the case incurred or reported loss is IBNR. IBNR includes a provision for development on known cases as well as a provision for late reported incurred claims. The most frequently utilized methods to project ultimate losses include the following:
For many exposures, especially those that are considered long-tail, a particular accident or policy 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 or policy 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 may not assign any weight to the paid and incurred development methods. CNA may use the loss ratio, Bornhuetter-Ferguson and frequency times severity methods. For short-tail exposures, the paid and incurred
The information in the tables is reported on a net basis after reinsurance and does not include the effects of discounting. The information contained in calendar years 2019 and prior is unaudited. To the extent CNA enters into a commutation, the transaction is reported on a prospective basis. To the extent that CNA enters into a disposition, the effects of the disposition are reported on a retrospective basis by removing the balances associated with it.
Unfavorable development in medical professional liability was primarily due to higher than expected frequency of large losses in recent accident years and unfavorable outcomes on specific claims in older accident years.
Unfavorable development in commercial auto was due to higher than expected claim severity in CNA’s middle market and construction business in recent accident years.
Unfavorable development in property and other was primarily due to higher than expected large loss activity in accident year 2019 in CNA’s middle market, national accounts and marine business units.
Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency and favorable outcomes on individual claims in accident years 2017 and prior related to financial institutions, lower than expected large claim losses in recent accident years in CNA’s public company directors and officers liability business and lower than expected loss adjustment expenses across accident years 2010 through 2018.
Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency in recent accident years related to financial institutions and professional liability errors and omissions (“E&O”), favorable severity in accident years 2015 and prior related to professional liability E&O and favorable outcomes on individual claims in financial institutions in accident years 2013 and prior.
The table below presents information about average historical claims duration as of December 31, 2020 and is presented as required supplementary information, which is unaudited.
Average Annual Percentage Payout of Ultimate Net Incurred Claim and Allocated Claim Adjustment Expenses in Year:
In years subsequent to the effective date of the LPT, adverse prior year development on A&EP reserves was recognized resulting in additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the LPT have exceeded the $2.2 billion consideration paid, resulting in the NICO LPT moving into a gain position, requiring retroactive reinsurance accounting. Under retroactive reinsurance accounting, this gain is deferred and only recognized in earnings in proportion to actual paid recoveries under the LPT. Over the life of the contract, there is no economic impact as long as any additional losses incurred are within the limit of the LPT. In a period in which a change in the estimate of A&EP reserves is recognized that increases or decreases the amounts ceded under the LPT, the proportion of actual paid recoveries to total ceded losses is affected and the change in the deferred gain is recognized in earnings as if the revised estimate of ceded losses was available at the effective date of the LPT. The effect of the deferred retroactive reinsurance benefit is recorded in Insurance claims and policyholders’ benefits on the Consolidated Statements of Operations.
The unfavorable development in 2020 and 2019 was driven by higher than anticipated defense and indemnity costs on known direct asbestos and environmental accounts and a reduction in estimated reinsurance recoverable. The unfavorable development in 2018 was driven by higher than anticipated defense and indemnity costs on known direct asbestos and environmental accounts and by paid losses on assumed reinsurance exposures. Additionally, in 2020, 2019 and 2018, $25 million, $25 million and $16 million of the provision for uncollectible third-party reinsurance was released.
CNA’s Life & Group business includes its run-off long term care business as well as structured settlement obligations not funded by annuities related to certain property and casualty claimants. Long term care policies provide benefits for nursing homes, assisted living facilities and home health care subject to various daily and lifetime caps. Generally, policyholders must continue to make periodic premium payments to keep the policy in force and CNA has the ability to increase policy premiums, subject to state regulatory approval.
CNA maintains both claim and claim adjustment expense reserves as well as future policy benefit reserves for policyholder benefits for its Life & Group business. Claim and claim adjustment expense reserves consist of estimated reserves for long term care policyholders that are currently receiving benefits, including claims that have been incurred but are not yet reported. In developing the claim and claim adjustment expense reserve estimates for long term care policies, CNA’s actuaries perform a detailed claim reserve review on an annual basis. The review analyzes the sufficiency of existing reserves for policyholders currently on claim and includes an evaluation of expected benefit utilization and claim duration. In addition, claim and claim adjustment expense reserves are also maintained for the structured settlement obligations. In developing the claim and claim adjustment expense reserve estimates for structured settlement obligations, CNA’s actuaries monitor mortality experience on an annual basis. CNA’s recorded claim and claim adjustment expense reserves reflect management's best estimate after incorporating the results of the most recent reviews. Claim and claim adjustment expense reserves for long term care policies and structured settlement obligations are discounted as discussed in Note 1.
CNA completed its annual claim reserve reviews in the third quarters of 2020, 2019 and 2018. CNA’s 2020 claim reserve reviews resulted in a $46 million pretax increase in claim and claim adjustment expense reserve estimates for structured settlement obligations primarily due to lower discount rate assumptions and mortality assumption changes and a $37 million pretax reduction in claim and claim adjustment expense reserves for long term care policies primarily due to lower claim severity than anticipated in the reserve estimates. CNA’s 2019 and 2018 claim reserve reviews resulted in $56 million and $31 million pretax reductions in claim and claim adjustment expense reserves for long term care policies primarily due to lower claim severity than anticipated in the reserve estimates.
Future policy benefit reserves consist of the active life reserves related to CNA’s long term care policies for policyholders that are not currently receiving benefits and represent the present value of expected future benefit payments and expenses less expected future premium. The determination of these reserves requires management to make estimates and assumptions about expected investment and policyholder experience over the life of the contract. Since many of these contracts may be in force for several decades, these assumptions are subject to significant estimation risk.
The actuarial assumptions that management believes are subject to the most variability are morbidity, persistency, discount rates and anticipated future premium rate increases. Morbidity is the frequency and severity of injury, illness, sickness and diseases contracted. Persistency is the percentage of policies remaining in force and can be affected by
Annually, in the third quarter, management assesses the adequacy of its long term care future policy benefit reserves by performing a GPV to determine if there is a premium deficiency. Under the GPV, management estimates required reserves using best estimate assumptions as of the date of the assessment without provisions for adverse deviation. The GPV required reserves are then compared to the existing recorded reserves. If the GPV required reserves are greater than the existing recorded reserves, the existing assumptions are unlocked and future policy benefit reserves are increased to the greater amount. Any such increase is reflected in the Company’s results of operations in the period in which the need for such adjustment is determined. If the GPV required reserves are less than the existing recorded reserves, assumptions remain locked in and no adjustment is required.
Periodically, management engages independent third parties to assess the appropriateness of its best estimate assumptions. The most recent third party assessment, performed in 2019, validated the assumption setting process and confirmed the best estimate assumptions appropriately reflected the experience data at that time.
The GPV for the long term care future policy benefit reserves performed in the third quarters of 2020 and 2019 indicated a premium deficiency primarily driven by lower discount rate assumptions. Recognition of the premium deficiencies resulted in $74 million and $216 million pretax increases in policyholders’ benefits reflected in the Company’s results of operations for the years ended December 31, 2020 and 2019. CNA’s 2018 GPV for the long term care future policy benefit reserves indicated the reserves were not deficient and no adjustment was required.
Operating lease right of use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The discount rate used to determine the commencement date present value of lease payments is typically the Company’s secured borrowing rate, as most of the Company’s leases do not provide an implicit rate. The Company’s operating lease right of use asset was $370 million and $573 million and the Company’s operating lease liability was $501 million and $694 million at December 31, 2020 and 2019.
Loews Corporation and its eligible subsidiaries file a consolidated federal income tax return. Loews Corporation has entered into a separate tax allocation agreement with CNA, a majority-owned subsidiary in which its ownership exceeds 80%. The agreement provides that Loews Corporation will: (i) pay to CNA the amount, if any, by which Loews Corporation’s consolidated federal income tax is reduced by virtue of inclusion of CNA in Loews Corporation’s return or (ii) be paid by CNA an amount, if any, equal to the federal income tax that would have been payable by CNA if it had filed a separate consolidated return. The agreement may be canceled by either of the parties upon thirty days written notice.
As of December 31, 2020, no deferred taxes are required on the undistributed earnings of subsidiaries subject to tax.
The Company recognizes interest accrued related to unrecognized tax benefits and tax refund claims in Income tax expense (benefit) on the Consolidated Statements of Operations. The Company recognizes penalties in Income tax expense (benefit) on the Consolidated Statements of Operations. Interest expense (benefit) amounts recorded by the Company were insignificant for the years ended December 31, 2020, 2019 and 2018. Penalty amounts recorded by the Company were insignificant for the years ended December 31, 2020, 2019 and 2018.
Although realization of deferred tax assets is not assured, management believes it is more likely than not that the recognized deferred tax assets will be realized through recoupment of ordinary and capital taxes paid in prior carryback years and through future earnings, reversal of existing temporary differences and available tax planning strategies. Due to the mix of state tax jurisdictions in which our subsidiaries operate, as of December 31, 2020, a valuation allowance of $13 million was recorded related primarily to state net operating losses.
At December 31, 2020, the aggregate long term debt maturing in each of the next five years is approximately as follows: $37 million in 2021, $650 million in 2022, $1.1 billion in 2023, $2.0 billion in 2024, $7 million in 2025 and $6.4 billion thereafter. Long term debt is generally redeemable in whole or in part at the greater of the principal amount or the net present value of remaining scheduled payments discounted at the specified treasury rate plus a margin.
In May of 2020, Loews Corporation completed a public offering of $500 million aggregate principal amount of 3.2% senior notes due May 15, 2030. The proceeds of this offering are available for general corporate purposes.
In 2019, CNA amended and restated its existing credit agreement with a syndicate of banks. The agreement provides a five-year $250 million senior unsecured revolving credit facility which is intended to be used for general corporate purposes. At CNA’s election, the commitments under the amended and restated credit agreement may be increased from time to time up to an additional aggregate amount of $100 million, and two one-year extensions are available prior to any anniversary of the closing date, each subject to applicable consents. As of December 31, 2020, CNA had no outstanding borrowings under the credit agreement and was in compliance with all covenants.
In August of 2020, Boardwalk Pipelines completed a public offering of $500 million aggregate principal amount of its 3.4% senior notes due February 15, 2031. Boardwalk Pipelines used the proceeds to retire the outstanding $440 million aggregate principal amount of its 4.5% senior notes due 2021 in November of 2020, to fund growth capital expenditures and for general corporate purposes. Initially, the proceeds were used to reduce outstanding borrowings under its revolving credit facility.
The tables below present the changes in AOCI by component for the years ended December 31, 2018, 2019 and 2020:
(a) On January 1, 2020, the Company adopted ASU 2016-13; see Note 1. The Net Unrealized Gains (Losses) on Investments with OTTI Losses column that tracked the change in unrealized gains (losses) on investments with OTTI losses has been replaced with the Net Unrealized Gains (Losses) on Investments with an Allowance for Credit Losses column. The balance as of January 1, 2020 in the Net Unrealized Gains (Losses) on Investments with OTTI Losses column is now reported in the Net Unrealized Gains (Losses) on Other Investments column. Prior period amounts were not adjusted for the adoption of this standard.
Loews Corporation declared and paid dividends of $0.25 per share in the aggregate on its common stock in 2020, 2019 and 2018.
There are no restrictions on Loews Corporation’s retained earnings or net income with regard to payment of dividends. However, as a holding company, Loews Corporation relies upon invested cash balances and distributions from its subsidiaries to generate the funds necessary to declare and pay any dividends to holders of its common stock. The ability of Loews Corporation’s subsidiaries to pay dividends is subject to, among other things, the availability of sufficient earnings and funds in such subsidiaries, compliance with covenants in their respective credit agreements and applicable state laws, including in the case of the insurance subsidiaries of CNA, laws and rules governing the payment of dividends by regulated insurance companies. See Note 14 for a discussion of the regulatory restrictions on CNA’s availability to pay dividends.
Loews Corporation repurchased 22.0 million, 21.5 million and 20.3 million shares of its common stock at aggregate costs of $0.9 billion, $1.1 billion and $1.0 billion during the years ended December 31, 2020, 2019 and 2018. As of December 31, 2020, 22.0 million shares were retired. The remaining shares will be retired in 2021. Upon retirement, treasury stock was eliminated through a reduction to common stock, APIC and retained earnings.
Receivables from contracts with customers - As of December 31, 2020 and 2019, receivables from contracts with customers were approximately $246 million and $458 million and are included within Receivables on the Consolidated Balance Sheets.
Deferred revenue - As of December 31, 2020 and 2019, deferred revenue resulting from contracts with customers was approximately $4.1 billion and $3.9 billion and is reported as Deferred non-insurance warranty revenue and within Other liabilities on the Consolidated Balance Sheets. Approximately $1.1 billion and $1.0 billion of revenues recognized during the year ended December 31, 2020 and 2019 were included in deferred revenue as of January 1, 2020 and 2019.
Contract costs - As of December 31, 2020 and 2019, the Company had approximately $3.1 billion and $2.9 billion of costs to obtain contracts with customers, primarily related to CNA for amounts paid to dealers and other agents to obtain non-insurance warranty contracts, which are reported as Deferred non-insurance warranty acquisition expenses on the Consolidated Balance Sheets. For the year ended December 31, 2020 and 2019, amortization expense totaled $907 million and $912 million is included in Non-insurance warranty expense and Operating expenses and other in the Consolidated Statement of Income. There were no adjustments to deferred costs recorded for the year ended December 31, 2020 and 2019.
Other Postretirement Benefit Plans - The Company has several postretirement benefit plans covering eligible employees and retirees. Participants generally become eligible after reaching age 55 with required years of service. Actual requirements for coverage vary by plan. Benefits for retirees who were covered by bargaining agreements vary by each unit and contract. Benefits for certain retirees are in the form of a Company health care account.
The Company funds certain of these benefit plans and accrues postretirement benefits during the active service of those employees who would become eligible for such benefits when they retire. The Company uses December 31 as the measurement date for their plans.
In determining the discount rate assumption, current market and liability information is utilized, including a discounted cash flow analysis of the pension and postretirement obligations. In particular, the basis for the 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.
A total return approach is employed whereby a mix of equity, limited partnerships and fixed maturity securities are used to maximize the long term return of plan assets for a prudent level of risk and to manage cash flows according to plan requirements. The target allocation of plan assets is 40% to 60% invested in equity securities and limited partnerships, with the remainder primarily invested in fixed maturity securities. The intent of this strategy is to minimize expenses by generating investment returns that exceed the growth of the plan liabilities over the long run. Risk tolerance is established after careful consideration of the plan liabilities, plan funded status and corporate financial conditions. The investment portfolios contain a diversified blend of fixed maturity, equity and short term securities. Alternative investments, including limited partnerships, are used to enhance risk adjusted long term returns while improving portfolio diversification. At December 31, 2020, $192 million is committed to fund future capital calls from various third party limited partnership investments in exchange for an ownership interest in the related partnerships. Investment risk is monitored through annual liability measurements, periodic asset/liability studies and quarterly investment portfolio reviews.
The table below presents the estimated future minimum benefit payments at December 31, 2020.
Performance-based Restricted Stock Units: Performance-based RSUs (“PSUs”) are granted under the 2016 Loews Plan and represent the right to receive one share of Loews Corporation common stock for each vested PSU, subject to the achievement of specified performance goals by the Company. Generally, performance-based RSUs vest, if performance goals are satisfied, 50% on the second anniversary of the grant date and 50% on the third anniversary of the grant date.
CNA has established an allowance for doubtful accounts on voluntary 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 following table summarizes the outstanding amount of voluntary reinsurance receivables, gross of any collateral arrangements, by financial strength rating:
(a) Expected credit losses for legacy A&EP receivables are ceded to NICO and the reinsurance limit on the LPT has not been exhausted, therefore no allowance is recorded for these receivables and they are excluded from the table above. See Note 8 for more information on the LPT. Also excluded are receivables from involuntary pools.
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. Receivables from captive reinsurers are backed by collateral arrangements and comprise the majority of the voluntary reinsurance receivables within the B- to B++ rating distribution in the table above. The primary methods of obtaining collateral are through reinsurance trusts, letters of credit and funds withheld balances. Such collateral, limited by the balance of open recoverables, was approximately $3.3 billion and $3.2 billion at December 31, 2020 and 2019.
Included in the direct and ceded earned premiums for the years ended December 31, 2020, 2019 and 2018 are $3.5 billion, $3.6 billion and $3.7 billion related to property business that is 100% reinsured under a significant third party captive program. The third party captives that participate in this program are affiliated with the non-insurance company policyholders, therefore this program provides a means for the policyholders to self-insure this property risk. CNA receives and retains a ceding commission.
(d) Net income for the fourth quarter of 2019 included net investment income of $116 million (after tax and noncontrolling interests) related to limited partnerships and equity securities partially offset by asset impairment charges of $69 million (after tax).
(e) Net income for the third quarter of 2019 included a $151 million (after tax and noncontrolling interests) charge related to the recognition of an active life reserve premium deficiency as a result of the third quarter GPV.
On June 25, 2018, Plaintiffs and Defendants entered into a Stipulation and Agreement of Compromise and Settlement, subject to the approval of the Court (the “Proposed Settlement”). Under the terms of the Proposed Settlement, the lawsuit would be dismissed, and related claims against the Defendants would be released by the Plaintiffs, if BPHC, the sole member of the General Partner, elected to cause the General Partner to exercise its right to purchase the issued and outstanding common units of Boardwalk Pipelines pursuant to Boardwalk Pipelines’ Third Amended and Restated Agreement of Limited Partnership, as amended (“Limited Partnership Agreement”), within a period specified by the Proposed Settlement. On June 29, 2018, the General Partner elected to exercise its right to purchase all of the issued and outstanding common units representing limited partnership interests in Boardwalk Pipelines not already owned by the General Partner or its affiliates pursuant to the Limited Partnership Agreement within the period specified by the Proposed Settlement. The transaction was completed on July 18, 2018.
The Company and its subsidiaries also are from time to time parties to other litigation arising in the ordinary course of business. While it is difficult to predict the outcome or effect of any litigation, management does not believe that the outcome of any pending litigation, including the Boardwalk Pipelines matter described above, will materially affect the Company’s results of operations or equity.
CNA has provided guarantees, if the primary obligor fails to perform, to holders of structured settlement annuities issued by a previously owned subsidiary. As of December 31, 2020, the potential amount of future payments CNA could be required to pay under these guarantees was approximately $1.7 billion, which will be paid over the lifetime of the annuitants. CNA does not believe any payment is likely under these guarantees, as CNA is the beneficiary of a trust that must be maintained at a level that approximates the discounted reserves for these annuities.
CNA recently became aware of discrepancies in the experience rating calculation of certain general liability policies. These calculation discrepancies resulted in certain policyholders being undercharged while others were overcharged. CNA has made corrections to its systems and processes to address the issue. CNA recorded a charge which reduced earned premium by $14 million in anticipation of voluntarily issuing premium refunds in connection with policies written from January 1, 2018 through December 31, 2020 which were overcharged. CNA has contacted regulators in states with a significant anticipated volume of premium refunds. Fines or penalties related to the foregoing are reasonably possible, but the amount of such fines, if any, cannot be estimated at this time.
Boardwalk Pipelines is engaged in the interstate transportation and storage of natural gas and NGLs. This segment consists of interstate natural gas pipeline systems located in the Gulf Coast region, Oklahoma, Arkansas and the midwestern states of Tennessee, Kentucky, Illinois, Indiana and Ohio, natural gas storage facilities in four states and NGL pipelines and storage facilities in Louisiana and Texas, with approximately 14,095 miles of pipeline.
Loews Hotels & Co operates a chain of 27 hotels, 26 of which are in the United States and one of which is in Canada.
The Corporate segment consists of investment income from the Parent Company’s cash and investments, Parent Company interest expense, other unallocated Parent Company expenses and the results of Altium Packaging. Purchase accounting adjustments have been pushed down to the appropriate subsidiary.
Statements of Operations and Total assets by segment are presented in the following tables.
(a) Amounts presented for Diamond Offshore reflect the periods prior to the deconsolidation.