Unless the context otherwise requires, references in this Report to “Loews Corporation,” “the Company,” “Parent Company,” “we,” “our,” “us” or like terms refer to the business of Loews Corporation excluding its subsidiaries.
Consolidated net income for the year ended December 31, 2013 was $595 million, or $1.53 per share, compared to $568 million, or $1.43 per share, in 2012.
Results for the years ended December 31, 2013 and 2012 include the following significant items (after tax and noncontrolling interests):
a ceiling test impairment charge at HighMount related to the carrying value of its natural gas and oil properties of $186 million in 2013 and $433 million in 2012;
Income before ceiling test and goodwill impairment charges, the impact of the LPT charge and net investment gains was $1.3 billion in 2013 as compared to $968 million in 2012. This increase is primarily due to higher earnings at CNA and increased investment income at the Parent Company due to improved performance of equities and limited partnership investments. These increases were partially offset by lower earnings at Diamond Offshore.
Diamond Offshore’s earnings decreased primarily due to lower utilization including downtime for scheduled surveys and shipyard projects and a $27 million charge (after noncontrolling interests) for an uncertain tax position related to Egyptian operations. In addition, Diamond Offshore’s earnings in 2012 included a gain of $32 million (after tax and noncontrolling interests) from the sale of six jack-up rigs.
conditions. Further information on CNA’s reinsurance receivables is included in Note 17 of the Notes to Consolidated Financial Statements included under Item 8.
Future policy benefit reserves for CNA’s life and group products are based on certain assumptions including morbidity, mortality, policy persistency and discount rates. The adequacy of the reserves is 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 reserves may not be adequate, requiring CNA to add to reserves.
A prolonged period during which interest rates remain at levels lower than those anticipated in CNA’s reserving discount rate assumption could result in shortfalls in investment income on assets supporting CNA’s obligations under long term care policies and payout annuity contracts, which may also require changes to CNA’s reserves.
These changes to CNA’s reserves could materially adversely impact our results of operations and equity. The reserving process is discussed in further detail in the Reserves - Estimates and Uncertainties section below.
The level of reserves CNA maintains represents its best estimate, as of a particular point in time, of what the ultimate settlement and administration of claims will cost based on CNA’s assessment of facts and circumstances known at that time. Reserves are not an exact calculation of liability but instead are complex estimates that CNA derives, generally 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. As noted below, CNA reviews its reserves for each segment of its business periodically and any such review could result in the need to increase reserves in amounts which could be material and could adversely impact its results of operations, equity, business and insurer financial strength and corporate debt ratings. Further information on reserves is provided in Note 9 of the Notes to Consolidated Financial Statements included under Item 8.
CNA maintains loss reserves to cover its estimated ultimate unpaid liability for claim and claim adjustment expenses, including the estimated cost of the claims adjudication process, for claims that have been reported but not yet settled (case reserves) and claims that have been incurred but not reported (“IBNR”). Claim and claim adjustment expense reserves are reflected as liabilities and are included on the Consolidated Balance Sheets under the heading “Insurance Reserves.” Adjustments to prior year reserve estimates, if necessary, are reflected in results of operations in the period that the need for such adjustments is determined. The carried case and IBNR reserves as of each balance sheet date are provided in the discussion that follows and in Note 9 of the Notes to Consolidated Financial Statements included under Item 8.
To mitigate the risks posed by CNA’s exposure to A&EP claims and claim adjustment expenses, as further discussed in Note 9 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 CNA’s legacy A&EP liabilities were ceded to NICO effective January 1, 2010 (“Loss Portfolio Transfer”).
The frequency times severity method multiplies a projected number of ultimate claims by an estimated ultimate average loss for each accident or policy year to produce ultimate loss estimates. Since projections of the ultimate number of claims are often less variable than projections of ultimate loss, this method can provide more reliable results for products where loss development patterns are inconsistent or too variable to be relied on exclusively. In addition, this method can more directly account for changes in coverage that impact the number and size of claims. However, this method can be difficult to apply to situations where very large claims or a substantial number of unusual claims result in volatile average claim sizes. Projecting the ultimate number of claims may require analysis of several factors including the rate at which policyholders report claims to CNA, the impact of judicial decisions, the impact of underwriting changes and other factors. Estimating the ultimate average loss may require analysis of
As a result, the effect on reserve estimates of a particular change in assumptions typically cannot be specifically quantified, and changes in these assumptions cannot be tracked over time.
For CNA Commercial workers’ compensation, since many years will pass from the time the business is written until all claim payments have been made, claim cost inflation on claim payments is the most significant factor affecting workers’ compensation reserve estimates. Workers’ compensation claim cost inflation is driven by the cost of medical care, the cost of wage replacement, expected claimant lifetimes, judicial decisions, legislative changes and other factors. If estimated workers’ compensation claim cost inflation increases by 100 basis points for the entire period over which claim payments will be made, CNA estimates that its net reserves would increase by approximately $400 million. If estimated workers’ compensation claim cost inflation decreases by 100 basis points for the entire period over which claim payments will be made, CNA estimates that its net reserves would decrease by approximately $400 million. Net reserves for CNA Commercial workers’ compensation were approximately $4.6 billion at December 31, 2013.
CNA calculates and maintains reserves for policyholder claims and benefits for Life & Group Non-Core based on actuarial assumptions. The determination of these reserves is fundamental to its financial results and requires management to make 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.
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 would be increased to the greater amount. Any such increase would be reflected in CNA’s results of operations in the period in which the need for such adjustment is determined, and could materially adversely affect CNA’s results of operations, equity and business and insurer financial strength and corporate debt ratings.
CNA’s current GAAP payout annuity 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 affect results of operations. The estimated impacts to results of operations in the table below are after consideration of the existing margin.
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.
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 affect results of operations. The estimated impacts to results of operations in the table below are after consideration of the existing margin.
Net income increased $277 million in 2013 as compared with 2012. Net investment income increased $168 million, primarily driven by a significant increase in limited partnership results. These increases were partially offset by a decrease of $33 million ($19 million after tax and noncontrolling interests) in investment gains. See the Investments section of this MD&A for further discussion of net realized investment results and net investment income. Insurance premiums increased $389 million, including an increase of $241 million related to Hardy, which was acquired in July of 2012. Insurance claims and policyholders’ benefits increased $51 million, primarily due to the impact of a $111 million (after tax and noncontrolling interests) deferred gain under retroactive reinsurance accounting and lower aggregate favorable net prior year development, partially offset by lower catastrophe impacts. Further information on net prior year development for 2013 and 2012 is included in Note 9 of the Notes to Consolidated Financial Statements included under Item 8.
Net income increased $13 million in 2012 as compared with 2011. Net investment income increased $228 million, driven by significantly favorable limited partnership results. In addition, investment gains (losses) increased $79 million ($45 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. Insurance premiums also increased $279 million, including the acquisition of Hardy. Insurance claims and policyholders’ benefits increased $407 million, primarily due to higher catastrophe impacts, including $171 million (after tax and noncontrolling interests) from Storm Sandy, and decreased aggregate favorable net prior year development. Further information on net prior year development for 2012 and 2011 is included in Note 9 of the Notes to Consolidated Financial Statements included under Item 8.
The following table summarizes the results of CNA’s property and casualty operations for the years ended December 31, 2013, 2012 and 2011.
The CNA Specialty average rate increased 6% in 2013 as compared with an increase of 5% in 2012 for the policies that renewed in each period. Retention of 85% and 86% was achieved in each period. The CNA Commercial average rate increased 8% in 2013 as compared with an increase of 7% in 2012 for the policies that renewed in each period. Retention of 74% and 77% was achieved in each period. Hardy’s average rate decreased 2% in 2013 as compared with an increase of 1% for 2012 for the policies that renewed in each period. Retention of 70% and 68% was achieved in each period.
The CNA Specialty average rate increased 5% in 2012 as compared to flat average rate in 2011 for the policies that renewed in each period. Retention of 86% and 87% was achieved in each period. The CNA Commercial average rate increased 7% in 2012 as compared with an increase of 2% in 2011 for the policies that renewed in each period. Retention of 77% and 78% was achieved in each period.
The decrease in net loss was also driven by improved results in Life & Group Non-Core life settlement contracts business and the impact of unfavorable performance in 2011 on its remaining pension deposit business.
of activity the drilling rig is performing, as well as the age and condition of the equipment and the regions in which Diamond Offshore’s rigs are working.
The market for deepwater floaters has also weakened and is characterized by intermittent demand, and multiple existing rigs face pockets of idle time throughout 2014 while newbuilds may have challenges securing work. Dayrate fixtures are also moderating in this market and are projected by industry analysts to continue softening in 2014. This market has also seen limited tendering activity in 2014 with an uncertain outlook for the balance of the year.
Strength in the mid-water market also varies significantly by region. In both the U.K. and Norwegian sectors of the North Sea, the mid-water market is showing some signs of weakening, in the form of moderating or decreasing dayrates in part due to an increase in the availability of sublet opportunities being offered for some term contracted rigs. Increasing operator interest in frontier markets across Southeast Asia and South America, including Myanmar, Peru, Nicaragua, Trinidad and Tobago, and Colombia, indicates possible future strengthening in those regions, although opportunities in these areas are not expected to emerge quickly. In the Gulf of Mexico, demand for mid-water rigs is limited, while in Brazil, demand has moderated.
Since 2010, there have been a significant number of orders for newbuild ultra-deepwater and deepwater floaters by established drilling contractors as well as new entrants to the industry. Currently, there are approximately 100 newbuild floater rigs that have been announced, including an estimated 28 rigs potentially to be built on behalf of Petróleo Brasileiro S.A. Excluding these customer-ordered rigs, 31 of the 57 newbuilds scheduled for delivery in 2014 through 2015 are not yet contracted for future work, including two of Diamond Offshore’s four rigs expected to be delivered in 2014 and 2015. The offshore drilling industry has been challenged by the addition of these newbuild rigs, which has increased competition and has resulted in downward pressure on dayrates. The influx of newbuilds into the market, combined with established rigs coming off contract in 2014 and 2015, is expected to continue to weaken the ultra-deepwater and deepwater floater markets.
The offshore drilling industry continues to be challenged by growing regulatory demands and more complex customer specifications, which could disadvantage some lower specification rigs. Additionally, customer focus on completing existing projects, possible reduction or deferral of new investment, reallocation of budgets away from offshore projects and particular customer requirements in certain markets could displace, or reduce demand and result in the migration of some ultra-deepwater rigs to work in deepwater, and likewise, some deepwater rigs to compete against mid-water rigs. Various rigs across all segments could experience lower utilization or idle time and lower specification rigs could be cold stacked or scrapped.
The following table reflects Diamond Offshore’s contract drilling backlog as of February 5, 2014, October 23, 2013 (the date reported in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013) and February 1, 2013 (the date reported in our Annual Report on Form 10-K for the year ended December 31, 2012). Contract drilling backlog as presented below includes only firm commitments (typically represented by signed contracts) and 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) As of February 5, 2014, includes approximately 1,570, 270 and 215 currently known, scheduled shipyard days for rig commissioning, contract preparation, surveys and extended maintenance projects, as well as rig mobilization days for 2014, 2015 and 2016.
Contract drilling revenue decreased $92 million in 2013 as compared with 2012, while contract drilling expense increased $36 million during the same period. Contract drilling revenue was negatively impacted by a decrease in revenue earned by Diamond Offshore’s ultra-deepwater and mid-water fleets, partially offset by favorable revenue variances for its deepwater and jack-up rigs. The increase in contract drilling expense reflects higher labor and personnel related costs primarily as a result of mid-2013 pay increases and costs associated with additional crews for Diamond Offshore’s new rigs expected to be delivered in 2014 and for the Ocean Onyx delivered in the fourth quarter of 2013, higher repairs and maintenance and inspection costs, partially offset by decreased mobilization and freight costs.
Revenue generated by ultra-deepwater floaters decreased $48 million in 2013 as compared with 2012, due to lower average daily revenue of $25 million, a decrease in amortized mobilization revenue of $18 million and decreased utilization of $30 million, partially offset by $25 million of revenue recognized in connection with a settlement agreement entered into with a customer. The settlement agreement related to amounts due to Diamond Offshore during 2013 for which revenue of $56 million was not recognized due to the financial condition of the customer. The decrease in average daily revenue is primarily due to a contract extension for the Ocean Rover at a significantly lower dayrate than previously earned. Amortized mobilization fees decreased primarily due to the recognition of mobilization revenue in the 2012 period associated with the Ocean Monarch’s mobilization to Vietnam. The decrease in revenue earning days is primarily due to incremental unplanned downtime, partially offset by a reduction in downtime for shipyard projects and inspection.
Revenue generated by deepwater floaters increased $19 million in 2013 as compared with 2012, as a result of higher average daily revenue of $52 million, partially offset by a decrease in utilization of $28 million and lower amortized mobilization revenue of $5 million. Average daily revenue increased in 2013 primarily due to the Ocean Valiant and Ocean Victory both working at significantly higher dayrates than those rigs earned in 2012. The decline in revenue earning days is due to incremental unscheduled downtime for repairs, scheduled shipyard projects and mobilization of the Ocean America.
Diamond Offshore’s effective tax rate for 2013 increased as compared with 2012. The higher effective tax rate in 2013 is primarily the result of differences in the mix of Diamond Offshore’s domestic and international pretax earnings and losses, as well as the international jurisdictions in which Diamond Offshore operates and a $57 million ($27 million after noncontrolling interests) charge related to an uncertain tax position for Egyptian operations. The increase in the effective rate is partially offset by the recognition of the impact of The American Taxpayer Relief Act of 2012, which reduced 2013 income tax expense by $28 million ($13 million after noncontrolling interests). The Act, which was signed into law on January 2, 2013, extended through 2013 several expired temporary business provisions, commonly referred to as “extenders” which were retroactively extended to the beginning of 2012.
Contract drilling revenue decreased $318 million and net income decreased $114 million in 2012 as compared with 2011. Contract drilling revenue for 2012 was negatively impacted by a decrease in both revenue earning days and average daily revenue earned by Diamond Offshore’s deepwater and mid-water floaters, partially offset by favorable revenue variances for its ultra-deepwater floaters. Contract drilling expense decreased $12 million primarily due to a decrease in expense for mid-water floaters and jack-ups due to the movement of certain rigs to other operating regions with lower cost structures, lower repair and inspection costs, as well as the absence of operating costs in 2012 for the recently sold jack-up rigs. The decrease in contract drilling expense was partially offset by an increase in costs associated with ultra-deepwater and deepwater floaters, primarily due to higher personnel related, inspection and shorebase support costs in 2012.
Diamond Offshore’s annual effective tax rate for 2012 increased as compared with 2011. The higher effective tax rate in 2012 was primarily the result of differences in the mix of Diamond Offshore’s domestic and international pretax earnings and losses, the mix of international tax jurisdictions in which Diamond Offshore operates and the impact of a tax law provision that expired at the end of 2011. This provision allowed Diamond Offshore to defer recognition of certain foreign earnings for U.S. tax purposes during 2011, which deferral was unavailable in 2012. Diamond Offshore’s 2011 tax expense also included the reversal of $15 million of U.S. income tax expense, originally recognized in 2010, related to Diamond Offshore’s intention at that time to repatriate certain foreign earnings which changed in 2011 subsequent to its decision to build new drillships overseas.
Boardwalk Pipeline derives revenues primarily from the transportation and storage of natural gas and natural gas liquids (“NGLs”) and gathering and processing of natural gas for third parties. Transportation services consist of firm natural gas transportation, where the customer pays a capacity reservation charge to reserve pipeline capacity at certain receipt and delivery points along pipeline systems, plus a commodity and fuel charge on the volume of natural gas actually transported, and interruptible natural gas transportation, where the customer pays to transport gas only when capacity is available and used. Boardwalk Pipeline offers firm natural gas storage services in which the customer reserves and pays for a specific amount of storage capacity, including injection and withdrawal rights, and interruptible storage and parking and lending (“PAL”) services where the customer receives and pays for capacity only when it is available and used. Boardwalk Pipeline’s NGL contracts are generally fee-based and are dependent on actual volumes transported or stored, although in some cases minimum volume requirements apply. Boardwalk Pipeline’s NGL storage rates are market based rates and contracts are typically fixed price arrangements with escalation clauses. Boardwalk Pipeline is not in the business of buying and selling natural gas and NGLs other than for system management purposes, but changes in the level of natural gas and NGL prices may impact the volumes of gas transported and stored on its pipeline systems. Boardwalk Pipeline’s 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.
Boardwalk Pipeline provides natural gas transportation services to customers that are directly connected to its pipeline system and, through interconnects with third party pipelines, to customers that are not directly connected to Boardwalk Pipeline’s system. Transportation rates that Boardwalk Pipeline can charge customers it serves through interconnects with third party pipelines are heavily influenced by current and anticipated basis differentials. Basis
In February of 2014, Boardwalk Pipeline declared a quarterly distribution of $0.10 per unit, which was less than the quarterly distributions of $0.5325 per unit that have been declared and paid in recent prior periods, which reflects the market conditions described above and the resulting cumulative impact on Boardwalk Pipeline’s business from the decline in transportation and storage revenues. Boardwalk Pipeline intends to use the increase in cash that is not distributed to unitholders to fund growth and/or to repay indebtedness. We have offered Boardwalk Pipeline up to $300 million of subordinated loans to fund growth, if it is needed. Boardwalk Pipeline intends to use those sources of capital to fund its growth and reduce its leverage (including its Debt-to-EBITDA ratio) in lieu of issuing additional limited partnership units which would be dilutive to unitholders. Boardwalk Pipeline cannot give assurances that it will complete future growth projects or acquisitions or, if completed, that they will be accretive to its earnings and cash flow, that Boardwalk Pipeline will be successful in reducing its leverage, or that Boardwalk
Operating expenses increased $59 million for 2013, compared to 2012. This increase is primarily due to $38 million of expenses incurred by Louisiana Midstream, higher depreciation and property taxes of $9 million due to an increase in the asset base and increased fuel costs of $6 million due to higher natural gas prices.
Net income decreased $31 million for 2013 as compared with 2012 reflecting higher revenues offset by increased expenses as discussed above. The percentage of income attributable to noncontrolling interests increased as a result of equity offerings in 2012 and 2013 by Boardwalk Pipeline, decreasing our ownership percentage from 59% in 2012 to 54% in 2013.
Operating expenses decreased $43 million in 2012 as compared with 2011. The primary drivers of the decrease were charges incurred in 2011 including a $29 million impairment charge associated with Boardwalk Pipeline’s materials and supplies, an expense of $5 million representing an insurance deductible associated with replacing compressor assets and $4 million of gas losses associated with the Bistineau storage facility. In addition, in the 2012 period there were lower fuel costs of $21 million due to lower natural gas prices, lower general and administrative expenses of $16 million as a result of cost management activities and lower operation and maintenance expenses of $11 million primarily from lower maintenance project costs and outside services. These decreases were partially offset by $38 million of expenses incurred by Petal and Louisiana Midstream and $9 million of asset impairment charges. The 2011 period included a gain of $9 million from the sale of storage gas. Interest expense decreased $7 million for 2012, primarily from a charge recorded in 2011 on the early extinguishment of debt, partially offset by increased debt levels and higher average interest rates.
We use the following terms throughout this discussion of HighMount’s results of operations, with “equivalent” volumes computed with oil and NGL quantities converted to Mcf, on an energy equivalent ratio of one barrel to six Mcf:
The focus on exploring oil producing properties has led to a reduction in natural gas and NGL production and an increase in oil production. Natural gas production at HighMount has declined from 45.4 Bcf in 2011 to 33.0 Bcf in 2013. Revenues from the sale of oil, including the impact of hedges, amounted to 20% of HighMount’s total revenues for the year ended December 31, 2013 as compared to 15% and 7% of its total revenue for the years ended December 31, 2012 and 2011. The price HighMount realizes for its production is also affected by HighMount’s hedging activities, as well as locational differences in market prices.
Presented below are production and sales statistics related to HighMount’s operations for 2013, 2012 and 2011:
For the years ended December 31, 2013 and 2012, HighMount recorded ceiling test impairment charges of $291 million and $680 million ($186 million and $433 million after tax). The 2013 write-downs were primarily attributable to negative reserve revisions due to variability in well performance where HighMount is testing different horizontal target zones and hydraulic fracture designs and due to reduced average NGL prices used in the ceiling test calculations. The 2012 write-downs were the result of declines in natural gas and NGL prices. The December 31, 2013 ceiling test calculation was based on average 2013 prices of $3.67 per MMBtu for natural gas, $35.39 per Bbl for NGLs and $96.94 per Bbl for oil. The December 31, 2012 ceiling test calculation was based on average 2012 prices of $2.76 MMBtu for natural gas, $41.11 per Bbl for NGLs and $94.71 per Bbl for oil. Low natural gas and NGL prices, which are not anticipated to improve in the near term, and high drilling and completion costs of horizontal wells targeting oil reserves, compared to traditional vertical gas wells, as well as lower than anticipated production from recently completed wells, have adversely impacted HighMount’s results of operations and cash flows. The continuation of these factors could result in ceiling test impairment charges in future periods, which may be material.
HighMount had hedges in place as of December 31, 2013 that covered approximately 59.9% and 20.9% of its total estimated 2014 and 2015 natural gas equivalent production at a weighted average price of $5.52 and $4.24 per Mcfe.
Operating expenses increased by $13 million for 2013 as compared with 2012 primarily as a result of an impairment charge of $34 million related to HighMount’s gathering pipelines in the Permian Basin due to low natural gas and NGL prices and decreased production, partially offset by lower DD&A expenses due to the impairment of natural gas and oil properties recorded in 2013 and 2012.
The following table summarizes the results of operations for Loews Hotels for the years ended December 31, 2013, 2012 and 2011 as presented in Note 22 of the Notes to Consolidated Financial Statements included under Item 8:
Operating expenses excluding reimbursables decreased $40 million for 2013 as compared to 2012, primarily due to the closure of the Loews Regency Hotel, partially offset by higher corporate expenses related to hotels recently acquired and under development. In addition, expenses were reduced by $3 million and $7 million in 2013 and 2012 related to recoveries of a loan guarantee payment.
Operating expenses excluding reimbursables increased $33 million in 2012 as compared to 2011, primarily due to expenses from the Loews Hollywood Hotel and $13 million of costs related to the 2013 closure of the Loews Regency Hotel for renovation, partially offset by $7 million related to the partial recovery of a loan guarantee payment.
Interest expense increased $22 million for 2013, primarily due to a May of 2013 public offering of $500 million aggregate principal amount of 2.6% senior notes due May 15, 2023 and $500 million aggregate principal amount of 4.1% senior notes due May 15, 2043.
Net results improved $45 million for 2013 as compared to 2012, primarily due to the change in revenues and expenses discussed above.
CNA’s primary 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, including interest expense on corporate debt. Additionally, cash may be paid or received for income taxes.
Net cash provided by operating activities was $1.7 billion in 2011. Cash flows resulting from reinsurance contract commutations are reported as operating activities. Operating cash flows were increased by $547 million in 2011 related to net cash inflows from commutations.
Net cash used by investing activities was $898 million for 2013, as compared with $934 million and $1.1 billion for 2012 and 2011. The cash flow from investing activities is impacted by various factors such as the anticipated payment of claims, financing activity, asset/liability management and individual security buy and sell decisions made in the normal course of portfolio management.
Cash flows from financing activities may include proceeds from the issuance of debt and equity securities, outflows for shareholder dividends or repayment of debt and outlays to reacquire equity instruments. Net cash used by financing activities was $264 million, $239 million and $644 million for 2013, 2012 and 2011.
Dividends of $0.80 per share of CNA’s common stock were declared and paid in 2013. On February 7, 2014, CNA’s Board of Directors declared a quarterly dividend of $0.25 per share and a special dividend of $1.00 per share, payable March 12, 2014 to shareholders of record on February 24, 2014. The declaration and payment of future dividends is at the discretion of CNA’s Board of Directors and will depend on many factors, including CNA’s earnings, financial condition, business needs, and regulatory constraints.
Ratings are an important factor in establishing the competitive position of insurance companies. CNA’s insurance company subsidiaries are rated by major rating agencies and these ratings reflect the rating agency’s opinion of the insurance company’s financial strength, operating performance, strategic position and ability to meet its obligations to policyholders. Agency ratings are not a recommendation to buy, sell or hold any security, and may be revised or
The table below reflects the various group ratings issued by A.M. Best Company (“A.M. Best”), Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s (“S&P”) for the property and casualty and life companies. The table also includes the ratings for CNA senior debt.
A.M. Best, Moody’s and S&P each maintain a stable outlook on CNA. In June of 2013, S&P upgraded CNA’s property and casualty insurance financial strength ratings to A and upgraded the credit rating on the senior debt of CNA to BBB. In December 2013, Moody’s revised their outlook on CNA’s financial strength rating to stable from positive.
(c) Represents total project expenditures from inception of project to February 5, 2014, excluding project-to-date capitalized interest.
businesses or for general corporate purposes. Diamond Offshore’s ability to access the capital markets by issuing debt or equity securities will be dependent on its results of operations, current financial condition, current market conditions and other factors beyond its control.
In May of 2013, Boardwalk Pipeline sold 12.7 million common units in a public offering and received net proceeds of $377 million, including an $8 million contribution from us to maintain our 2% general partner interest.
As of December 31, 2013, Boardwalk Pipeline had $175 million of borrowings outstanding under its revolving credit facility with a weighted average interest rate of 1.3% and had no letters of credit issued. As of December 31, 2013, Boardwalk Pipeline was in compliance with all covenant requirements under the credit facility.
Boardwalk Pipeline 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. The Pipeline and Hazardous Materials Safety Administration (“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 Pipeline’s ongoing maintenance costs. Due to recent widely-known incidents that have occurred on certain pipelines in the U.S., it is possible that PHMSA may develop more stringent regulations. Boardwalk Pipeline could incur significant additional costs if new or more stringently interpreted pipeline safety requirements are implemented.
In 2013, Boardwalk Pipeline executed a series of agreements with the Williams Companies, Inc. to develop the Bluegrass Project, a joint venture project that would transport NGLs from the Marcellus and Utica shale plays to the petrochemical and export complex in the Lake Charles, Louisiana area, and the construction of related fractionation, storage and liquefied petroleum gas terminal export facilities. In connection with the transaction, Boardwalk Pipeline and Boardwalk Pipelines Holding Corp. (“BPHC”), a wholly owned subsidiary of ours, have entered into separate joint venture arrangements for purposes of funding the project. Boardwalk Pipeline and BPHC have contributed a total of $79 million to the project as of December 31, 2013. Approval and completion of the project is subject to, among other conditions, execution of customer contracts sufficient to support the project, acquisition of right-of-way along the pipeline route, and the parties’ receipt of all necessary approvals, including board approvals and regulatory approvals, such as antitrust clearance under the Hart-Scott-Rodino Antitrust Improvements Act and approvals by the FERC, among others.
Boardwalk Pipeline expects total capital expenditures to be approximately $420 million in 2014, including approximately $90 million for maintenance capital, $249 million related to the Southeast Market Expansion and $23 million related to the Ohio Louisiana Access Project. In 2013, total capital expenditures were $295 million, of which $70 million was recorded as maintenance capital.
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 generated from operations will be adequate to fund its operations, including maintenance capital expenditures. To help fund growth in 2014, we have offered to provide Boardwalk Pipeline with up to $300 million in subordinated debt if it is required. Although Boardwalk Pipeline anticipates that its existing capital resources including the subordinated loan will be adequate to fund its current growth projects, Boardwalk Pipeline may seek to access the capital markets to fund some or all capital expenditures for future growth projects or acquisitions, or to repay or refinance all or a portion of its indebtedness, a significant amount of which matures in the next five years.
At December 31, 2013 and 2012, cash and investments amounted to $29 million and $10 million. Net cash flows provided by operating activities were $104 million and $151 million in 2013 and 2012. Key drivers of net operating cash flows are commodity prices, production volumes and operating costs.
Cash used in investing activities in 2013 was $224 million, compared to $336 million in 2012. Cash used in investing activities in 2013 is net of proceeds received from the sale of HighMount’s assets in the Texas Panhandle of approximately $33 million. In accordance with the full cost method of accounting, proceeds from the sale were accounted for as a reduction of capitalized costs, and recorded as a credit to Accumulated depreciation, depletion and amortization. The primary driver of cash used in investing activities is capital spent developing HighMount’s natural gas and oil reserves. Funds for capital expenditures and working capital requirements are expected to be provided primarily from operating activities and capital contributions from us.
Cash and investments totaled $53 million at December 31, 2013, as compared to $43 million at December 31, 2012. Funds for future capital expenditures, including acquisitions of new properties, renovations and working capital requirements are expected to be provided from operations, newly incurred debt, existing cash balances and advances or capital contributions from us.
Parent Company cash and investments, net of receivables and payables, at December 31, 2013 totaled $4.7 billion, as compared to $3.9 billion at December 31, 2012. In May of 2013, we received net proceeds of $983 million, after deducting the underwriters’ discounts, commissions and offering expenses, in connection with a public offering of $500 million aggregate principal amount of 2.6% senior notes due May 15, 2023 and $500 million aggregate principal amount of 4.1% senior notes due May 15, 2043. In addition, during 2013, we received $736 million in interest and dividends from our subsidiaries. These inflows were partially offset by the payment of $228 million to fund treasury stock purchases, the payment of $97 million of cash dividends to our shareholders and capital contributions of approximately $680 million to our subsidiaries.
On October 9, 2013, all of the 22.9 million class B units of Boardwalk Pipeline were converted by us into common units on a one-for-one basis, pursuant to the terms of the Boardwalk Pipeline partnership agreement. After the conversion we held 125.6 million common units.
At December 31, 2013 and 2012, we did not have any off-balance sheet arrangements.
(b) Claim and claim adjustment expense reserves are not discounted and represent CNA’s estimate of the amount and timing of the ultimate settlement and administration of gross claims based on its assessment of facts and circumstances known as of December 31, 2013. See the Reserves - Estimates and Uncertainties section of this MD&A for further information.
CNA’s fixed maturity portfolio consists primarily of high quality bonds, 92.1% and 91.6% of which were rated as investment grade (rated BBB- or higher) at December 31, 2013 and 2012. The classification between investment grade and non-investment grade is based on a ratings methodology that takes into account ratings from S&P and Moody’s, in that order of preference. If a security is not rated by these agencies, CNA formulates an internal rating. At December 31, 2013 and 2012, approximately 99% and 98% of the fixed maturity portfolio was rated by S&P or Moody’s, or was issued or guaranteed by the U.S. Government, Government agencies or Government-sponsored enterprises.
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 $3.1 billion and $3.4 billion at December 31, 2013 and 2012. The following table summarizes the ratings of this portfolio at fair value:
The following table summarizes available-for-sale fixed maturity securities in a gross unrealized loss position by ratings distribution:
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. 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 (1992). Based on this assessment, our management believes that, as of December 31, 2013, our internal control over financial reporting was effective.
We have audited the accompanying consolidated balance sheets of Loews Corporation and subsidiaries (the “Company”) as of December 31, 2013 and 2012, 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, 2013. 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, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, 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); transportation and storage of natural gas and natural gas liquids and gathering and processing of natural gas (Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”), a 53% owned subsidiary); exploration, production and marketing of natural gas and oil (including condensate and natural gas liquids), (HighMount Exploration & Production LLC (“HighMount”), a wholly owned subsidiary); and the operation of a chain 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) attributable to Loews Corporation” as used herein means Net income (loss) attributable to Loews Corporation shareholders.
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, 2013 and 2012.
Structured settlements have been negotiated for certain property and casualty insurance claims. Structured settlements are agreements to provide fixed periodic payments to claimants. Certain structured settlements are funded by annuities purchased from Continental Assurance Company (“CAC”), a wholly owned and consolidated subsidiary of CNA, for which the related annuity obligations are reported in Future policy benefits reserves. Obligations for structured settlements not funded by annuities are included in claim and claim adjustment expense reserves and carried at present values determined using interest rates ranging from 7.1% to 9.7% at December 31, 2013 and 2012. At December 31, 2013 and 2012, the discounted reserves for unfunded structured settlements were $580 million and $602 million, net of discount of $969 million and $1.0 billion.
Workers’ compensation lifetime claim reserves are calculated using mortality assumptions determined through statutory regulation and economic factors. Accident and health claim reserves are calculated using mortality and morbidity assumptions based on CNA and industry experience. Workers’ compensation lifetime claim reserves and accident and health claim reserves are discounted at interest rates ranging from 3.0% to 6.8% at December 31, 2013 and 3.0% to 6.5% at December 31, 2012. At December 31, 2013 and 2012, such discounted reserves totaled $2.4 billion and $2.2 billion, net of discount of $617 million and $837 million.
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 rate 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 4.5% to 7.9% at December 31, 2013 and from 5.0% to 7.4% at December 31, 2012. Interest rates for payout annuity contracts range from 5.0% to 8.7% at December 31, 2013 and 2012. In 2012, CNA unlocked assumptions related to its payout annuity contracts due to anticipated adverse changes in discount rates, which reflected the then current low interest rate environment and its view of expected investment yields, resulting in loss recognition which increased insurance liabilities by $33 million.
Deferred acquisition costs - Acquisition costs include commissions, premium taxes and certain underwriting and policy issuance costs which are incremental direct costs of successful contract acquisitions. Deferred acquisition costs related to long term care contracts issued prior to January 1, 2004 include costs which vary with and are primarily related to the acquisition of business.
Deferred acquisition costs related to long term care contracts are amortized over the premium-paying period of the related policies using assumptions consistent with those used for computing future policy benefit reserves for such contracts. Assumptions are made at the date of policy issuance or acquisition and are consistently applied during the lives of the contracts. Deviations from estimated experience are included in results of operations when they occur. For these contracts, the amortization period is typically the estimated life of the policy. At December 31, 2013 and 2012, deferred acquisition costs were presented net of Shadow Adjustments of $342 million and $369 million.
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.
The fair value of CNA’s investments in life settlement contracts were $88 million and $100 million at December 31, 2013 and 2012, 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.
Depletion of natural gas and oil producing properties is computed using the units-of-production method. Under the full cost method, the base of costs subject to depletion also 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. The costs of investments in unproved properties including associated exploration-related costs are initially excluded from the depletable base. As the unproved properties are evaluated, a ratable portion of the capitalized costs is periodically reclassified to the depletable base, determined on a property by property basis, over the terms of underlying leases. Once a property has been completely evaluated, any remaining capitalized costs are then transferred to the depletable base. In addition, proceeds from the sale or other disposition of natural gas and oil properties are accounted for as reductions of capitalized cost, unless the sale would significantly alter the relationship between capitalized costs and proved reserves, in which case, a gain or loss is recognized.
Pension and postretirement benefits - The Company recognizes the overfunded or underfunded status of its defined benefit plans in Other assets or Other liabilities in the Consolidated Balance Sheets. Changes in funded status related to prior service costs and credits and actuarial gains and losses are recognized in the year in which the
changes occur through Accumulated other comprehensive income (loss). The Company measures its benefit plan assets and obligations at December 31. Annual service cost, interest cost, expected return on plan assets, amortization of prior service costs and credits and amortization of actuarial gains and losses are recognized in the Consolidated Statements of Income.
For each of the years ended December 31, 2013, 2012 and 2011, approximately 0.9 million, 0.8 million and 0.8 million potential shares attributable to exercises under the Loews Corporation Stock Option Plan were included in the calculation of diluted net income per share. For those same periods, approximately 1.5 million, 2.6 million and 2.0 million Stock Appreciation Rights (“SARs”) were not included in the calculation of diluted net income per share due to the exercise price being greater than the average stock price.
Regulatory accounting - The majority of Boardwalk Pipeline’s operating subsidiaries are regulated by FERC. GAAP for regulated entities requires Texas Gas Transmission, LLC (“Texas Gas”), a wholly owned subsidiary of Boardwalk Pipeline, to report certain assets and liabilities consistent with the economic effect of the manner in which independent third party regulators establish rates. Accordingly, certain costs and benefits are capitalized as regulatory assets and liabilities in order to provide for recovery from or refund to customers in future periods. Regulatory accounting is not applicable to Boardwalk Pipeline’s other FERC regulated entities.
On July 2, 2012, CNA acquired Hardy Underwriting Bermuda Limited (“Hardy”), a specialized Lloyd’s of London (“Lloyd’s”) underwriter. Through Lloyd’s Syndicate 382, Hardy underwrites primarily short-tail exposures in marine and aviation, non-marine property, specialty lines and property treaty reinsurance. Hardy has business operations in the United Kingdom, Bermuda, Bahrain, Guernsey and Singapore. For the year ended December 31, 2011, Hardy reported gross written premiums of $430 million. The purchase price for Hardy was $231 million and resulted in CNA recording $55 million of identifiable indefinite-lived intangible assets, $81 million of identifiable finite-lived intangible assets and $35 million of goodwill.
In 2013, Boardwalk Pipeline executed a series of agreements with the Williams Companies, Inc. (“Williams”) to develop the Bluegrass Project, a joint venture project that would develop a pipeline to transport natural gas liquids from the Marcellus and Utica shale plays to the petrochemical and export complex in the Lake Charles, Louisiana area, and the construction of related fractionation, storage and liquefied petroleum gas terminal export facilities. In connection with the transaction, Boardwalk Pipeline and Boardwalk Pipelines Holding Corp. (“BPHC”), a wholly owned subsidiary of the Company, have entered into separate joint venture arrangements for purposes of funding the project. Boardwalk Pipeline and BPHC have contributed a total of $79 million to the project as of December 31, 2013. Approval and completion of the project is subject to, among other conditions, execution of customer contracts sufficient to support the project, acquisition of right-of-way along the pipeline route, and the parties’ receipt of all necessary approvals, including board approvals and regulatory approvals, such as antitrust clearance under the Hart-Scott-Rodino Antitrust Improvements Act and approvals by the FERC, among others.
In December of 2011, Petal Gas Storage, LLC (formerly referred to as Boardwalk HP Storage Company, LLC) (“Petal”) acquired seven salt dome natural gas storage caverns and associated assets in Mississippi for approximately $550 million. Petal funded the acquisition with proceeds from a $200 million five-year variable rate term loan and equity contributions from BPHC and Boardwalk Pipeline. BPHC contributed $280 million for an 80% interest in Petal and Boardwalk Pipeline contributed $70 million for a 20% interest. Petal recorded $52 million of goodwill and $14 million of identifiable finite-lived intangible assets. In February of 2012, Boardwalk Pipeline acquired BPHC’s 80% interest in Petal for $285 million, which did not result in any significant adjustments to the Consolidated Financial Statements.
The carrying value of limited partnerships as of December 31, 2013 and 2012 was approximately $3.4 billion and $3.1 billion which includes undistributed earnings of $1.2 billion and $828 million. Limited partnerships comprising 73.6% of the total carrying value are reported on a current basis through December 31, 2013 with no reporting lag, 12.8% are reported on a one month lag and the remainder are reported on more than a one month lag. As of December 31, 2013 and 2012, the Company had 93 and 86 active limited partnership investments. 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 representing 17.8% and 13.0% at December 31, 2013 and 2012 were invested in private debt and equity. The remaining were invested in various other partnerships including real estate. The ten largest limited partnership positions held totaled $1.7 billion and $1.6 billion as of December 31, 2013 and 2012. Based on the most recent information available regarding the Company’s percentage ownership of the individual limited partnerships, the carrying value reflected on the Consolidated Balance Sheets represents approximately 4.1% of the aggregate partnership equity at December 31, 2013 and 2012, and the related income reflected on the Consolidated Statements of Income represents approximately 3.7%, 3.3% and 3.9% of the changes in total partnership equity for the years ended December 31, 2013, 2012 and 2011.
Securities with carrying values of approximately $3.3 billion and $3.6 billion were deposited by CNA’s insurance subsidiaries under requirements of regulatory authorities and others as of December 31, 2013 and 2012.
market participants would use to value the assets. Prices obtained from third party pricing services or brokers are not adjusted by the Company.
The Company performs control procedures 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 include (i) the review of pricing service or broker pricing methodologies, (ii) back-testing, where past fair value estimates are compared to actual transactions executed in the market on similar dates, (iii) exception reporting, where changes in price, period-over-period, are reviewed and challenged with the pricing service or broker based on exception criteria, (iv) detailed analysis, where the Company performs an independent analysis of the inputs and assumptions used to price individual securities and (v) pricing validation, where prices received are compared to prices independently estimated by the Company.
Securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and treasury bills. 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.
Gross estimated fair values of derivative positions are currently presented in Equity securities, Receivables and Payable to brokers on the Consolidated Balance Sheets. There would be no significant difference in the balance included in such accounts if the estimated fair values were presented net for the periods ended December 31, 2013 and 2012.
In 2012, Diamond Offshore sold six jack-up rigs for total proceeds of $132 million, resulting in a pretax gain of approximately $76 million, recorded in Other revenues.
Based on the results of the annual impairment tests for all other reporting units, the Company concluded that the fair values of all other reporting units significantly exceeded their carrying values, no other goodwill impairment existed at December 31, 2013.
Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in CNA’s results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of $169 million, $391 million and $222 million for the years ended December 31, 2013, 2012 and 2011. Catastrophe losses in 2012 included Storm Sandy.
Favorable net prior year development of $9 million, $11 million and $29 million was recorded in the Life & Group Non-Core segment for the years ended December 31, 2013, 2012 and 2011.
Overall, favorable development for other professional liability and management liability was primarily due to better than expected loss emergence in accident years 2003 through 2007. Unfavorable development was recorded in CNA’s lawyer coverages in accident years 2010 and 2011 primarily due to increased frequency and severity.
Overall, favorable development for other coverages was primarily due to favorable loss emergence in property and workers’ compensation coverages in accident years 2005 and subsequent. Unfavorable development was recorded in accident year 2009 primarily due to an unfavorable outcome on an individual general liability claim.
Overall, unfavorable development for workers’ compensation was primarily due to increased medical severity in accident years 2010 and 2011 and the recognition of losses related to favorable premium development in accident year 2011. Favorable development was recorded in accident years 2001 and prior reflecting favorable experience.
Overall, favorable development for property and other coverages was due to a favorable outcome on an individual claim in accident year 2005 and favorable loss emergence in non-catastrophe losses in accident years 2009 and 2010. Unfavorable development was recorded in accident year 2011 related to several large losses.
During 2013, 2012 and 2011, unfavorable development was recorded for accident years 2000 and prior related to A&EP claims due to an increase in ultimate claim severity and higher than anticipated claim reporting, as well as increased defense costs. Additionally, in 2013 CNA recognized a provision for uncollectible third party reinsurance which increased the expected recovery from NICO.
The Loss Portfolio Transfer is a retroactive reinsurance contract. In the event that the cumulative claim and allocated claim adjustment expenses ceded under the Loss Portfolio Transfer exceed the consideration paid, the resulting gain from such excess is deferred. A portion of the deferred gain is cumulatively recognized in earnings in the period such excess arises as if the revised estimate was available at the inception date of the Loss Portfolio Transfer.
NICO established a collateral trust account as security for its obligations to CNA. The fair value of the collateral trust account at December 31, 2013 was $3.1 billion. 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.
For 2011 through 2013, the Internal Revenue Service (“IRS”) has accepted the Company into the Compliance Assurance Process (“CAP”), which is a voluntary program for large corporations. Under CAP, the IRS conducts a real-time audit and works contemporaneously with the Company to resolve any issues prior to the filing of the tax
Diamond Offshore, which is not included in the Company’s consolidated federal income tax return, files income tax returns in the U.S. federal, various state and foreign jurisdictions. The examination of Diamond Offshore’s 2010 federal income tax return was completed during 2013. Tax years that remain subject to examination by the various other jurisdictions include years 2003 to 2012.
At December 31, 2013, 2012 and 2011, $76 million, $48 million and $41 million of unrecognized tax benefits related to Diamond Offshore would affect the effective tax rate if recognized.
The Company recognizes interest accrued related to: (i) unrecognized tax benefits in Interest expense and (ii) tax refund claims in Other revenues on the Consolidated Statements of Income. The Company recognizes penalties in Income tax expense on the Consolidated Statements of Income. Interest amounts recorded by the Company were insignificant for the years ended December 31, 2013, 2012 and 2011. The Company recorded income tax expense of $38 million for the year ended December 31, 2013 and income tax benefit of $1 million and $3 million for the years ended December 31, 2012 and 2011 related to penalties.
During 2013, Diamond Offshore received a notification from the Egyptian tax authorities proposing a $1.2 billion increase in taxable income for the years 2006 to 2008. Diamond Offshore disagrees with the tax audit findings and intends to pursue all legal remedies available. A charge to income tax expense of $57 million, inclusive of $31 million of penalties, was recorded due to the inherent uncertainties associated with Egyptian income tax law.
As of December 31, 2013, the Company has federal tax credit carryforwards of $42 million, which have an indefinite life and foreign operating loss carryforwards with a tax effect of approximately $18 million, of which $17 million have an indefinite life with the remaining benefits expiring between 2021 and 2023.
At December 31, 2013, the aggregate of long term debt maturing in each of the next five years is approximately as follows: $840 million in 2014, $948 million in 2015, $1.5 billion in 2016, $977 million in 2017, $337 million in 2018 and $6.3 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 scheduled payments discounted at the specified treasury rate plus a margin.
In May of 2013, the Company completed a public offering of $500 million aggregate principal amount of 2.6% senior notes due May 15, 2023 and $500 million aggregate principal amount of 4.1% senior notes due May 15, 2043. The Company received net proceeds of $983 million, after deducting the underwriters’ discounts and commissions and offering expenses of $17 million, which will be amortized over the life of the notes. The proceeds for this offering will be used for general corporate purposes.
In November of 2013, Diamond Offshore completed a public offering of $250 million aggregate principal amount of 3.5% senior notes due November 1, 2023 and $750 million aggregate principal amount of 4.9% senior notes due November 1, 2043. Diamond Offshore intends to use the net proceeds of $988 million from this offering for general corporate purposes, including the redemption, repurchase or retirement of $250 million principal amount of its 5.2% senior notes due September 1, 2014 and $250 million principal amount of its 4.9% senior notes due July 1, 2015.
Diamond Offshore has a $750 million revolving credit agreement with a maturity date of September 28, 2018. The credit agreement bears interest at Diamond Offshore’s option on either an alternate base rate or Eurodollar rate, as defined in the credit agreement, plus an applicable margin. As of December 31, 2013, there were no borrowings under the credit facility and Diamond Offshore was in compliance with all covenants.
HighMount has a credit agreement governing its term loan and a $250 million revolving credit facility. The credit agreement, which matures on December 1, 2016, bears interest at LIBOR plus an applicable margin. As of December 31, 2013, there were no borrowings under the revolving credit facility. HighMount’s credit agreement contains financial covenants typical for these agreements, including a maximum debt to capitalization ratio and a minimum ratio of the net present value of its projected future cash flows from its proved natural gas and oil reserves to total debt. Due to the decline in proved natural gas and oil reserves and the resulting limited capacity under the credit agreement, HighMount repaid $210 million of its debt in 2013. As of December 31, 2013, HighMount was in compliance with all covenants.
The tables below display the changes in Accumulated other comprehensive income (“AOCI”) by component for the years ended December 31, 2011, 2012 and 2013:
Dividends of $0.25 per share on the Company’s common stock were declared and paid in 2013, 2012 and 2011.
The Company repurchased 4.9 million, 5.6 million and 18.2 million shares of Loews common stock at aggregate costs of $218 million, $222 million and $718 million during the years ended December 31, 2013, 2012 and 2011. Upon retirement, treasury stock is eliminated through a reduction to common stock, APIC and retained earnings.
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. These statutory accounting principles vary in certain respects from GAAP. In converting from statutory accounting principles to GAAP, the more significant adjustments include deferral of policy acquisition costs and the inclusion of net unrealized holding gains or losses in shareholders’ equity relating to certain fixed maturity securities.
Dividends from CCC 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 Department, may be paid only from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As of December 31, 2013, CCC is in a positive earned surplus position, enabling CCC to pay approximately $715 million of dividend payments during 2014 that would not be subject to the Department’s prior
approval. 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.
(b) Information derived from the statutory-basis financial statements to be filed with insurance regulators.
The Hardy insurance entities are not owned by CCC, therefore their regulatory capital is not included in the Statutory Capital and Surplus of the Combined Continental Casualty Companies presented in the table above. At December 31, 2013, Hardy’s capital requirement included $148 million of capital provided by CCC which is included in Combined Continental Casualty Companies’ Statutory Capital and Surplus above.
(a) During 2011, HighMount reduced its proved developed and proved undeveloped reserves by 152 Bcfe as a result of recent higher decline rates of producing wells and economic factors such as lower gas prices and higher operating expenses.
(b) During 2012, HighMount converted 27 Bcfe from probable reserves to proved developed and converted another 48 Bcfe from probable reserves to proved undeveloped as a result of new drilling activity.
(c) During 2012, HighMount reclassified 199 Bcfe of proved undeveloped reserves to a non-proved category as a result of economic factors such as lower gas prices and higher operating expenses. Lower gas prices also resulted in an 80 Bcfe reduction in proved developed reserves due to wells reaching their economic limit sooner than previously anticipated. Additionally, HighMount reduced its proved developed reserves by 49 Bcfe as a result of higher production declines on its producing wells, partly due to the suspension of uneconomic maintenance and recompletion work.
(d) During 2013, HighMount reclassified 79 Bcfe of proved undeveloped reserves to a non-proved category due to variability in well performance and reduction in drilling plans as a result of continued low natural gas and NGL prices. Additionally, HighMount reduced its proved developed reserves by 73 Bcfe primarily as a result of higher production declines on its gas-producing wells, partly due to the suspension of uneconomic maintenance and recompletion work. Higher gas prices resulted in an 89 Bcfe increase in proved developed reserves due to wells reaching their economic limit later than previously anticipated.
The following table represents a calculation of the standardized measure of discounted future net cash flows relating to proved natural gas and oil reserve quantities that HighMount owns:
Pension Plans - The Company has several non-contributory defined benefit plans for eligible employees. Benefits for certain plans are determined annually based on a specified percentage of annual earnings (based on the participant’s age or years of service) and a specified interest rate (which is established annually for all participants) applied to accrued balances. The benefits for another plan which covers salaried employees are based on formulas which include, among others, years of service and average pay. The Company’s funding policy is to make contributions in accordance with applicable governmental regulatory requirements.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. An increase or decrease in the assumed health care cost trend rate of 1% in each year would not have a significant impact on the Company’s service and interest cost as of December 31, 2013. An increase of 1% in each year would increase the Company’s accumulated postretirement benefit obligation as of December 31, 2013 by $2 million and a decrease of 1% in each year would decrease the Company’s accumulated postretirement benefit obligation as of December 31, 2013 by $4 million.
The table below presents the estimated amounts to be recognized from Accumulated other comprehensive income into net periodic cost (benefit) during 2014.
The table below presents the estimated future minimum benefit payments at December 31, 2013.
In 2014, it is expected that contributions of approximately $59 million will be made to pension plans and $5 million to postretirement health care and life insurance benefit plans.
The limited partnership investments are recorded at fair value, which represents the plans’ share of the net asset value of each partnership. The share of the net asset value of each partnership is determined by the General Partner and is based upon the fair value of the underlying investments, which are valued using varying market approaches. Level 2 includes limited partnership investments which can be redeemed at net asset value in 90 days or less. Level 3 includes limited partnership investments with withdrawal provisions greater than 90 days, or for which withdrawals are not permitted until the termination of the partnership. Within hedge fund strategies, approximately 58% are equity related, 36% pursue a multi-strategy approach and 6% are focused on distressed investments at December 31, 2013.
Stock Option Plans - In 2012, 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 increased from 12,000,000 shares to 18,000,000 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.
Included in the direct and ceded earned premiums for the years ended December 31, 2013, 2012 and 2011 are $2.2 billion, $1.8 billion and $1.5 billion related to property business that is 100% reinsured under a significant third party captive program. The third party captives that participate in this program are affiliated with the non-insurance company policyholders, therefore this program provides a means for the policyholders to self-insure this property risk. CNA receives and retains a ceding commission.
Insurance claims and policyholders’ benefits reported on the Consolidated Statements of Income are net of reinsurance recoveries of $1.5 billion, $1.5 billion and $1.3 billion for the years ended December 31, 2013, 2012 and 2011, including $712 million, $814 million and $790 million related to the significant third party captive program discussed above.
As of December 31, 2013 and 2012, CNA has ceded $1.1 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 (loss) for the fourth quarter of 2013 includes a ceiling test impairment charge of $52 million at HighMount related to the carrying value of its natural gas and oil properties, a $398 million goodwill impairment charge and the impact of a $111 million deferred gain under retroactive reinsurance accounting at CNA.
In the course of selling business entities and assets to third parties, CNA has agreed to indemnify purchasers for losses arising out of breaches of representation and warranties with respect to the business entities or assets being sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such indemnification agreements may include provisions that survive indefinitely. As of December 31, 2013, the aggregate amount of quantifiable indemnification agreements in effect for sales of business entities, assets and third party loans was $702 million.
Diamond Offshore is also financially obligated under an agreement for the construction of a moored semisubmersible rig with an expected completion date in the third quarter of 2014. The aggregate cost of the rig, including commissioning, spares and project management costs, is estimated to be approximately $370 million. Remaining contractual payments of $54 million are payable during 2014 as construction milestones are met.
Diamond Offshore entered into a vessel modification agreement for enhancements to a mid-water floater that will enable the rig to work in the North Sea, with an expected completion date in the second quarter of 2014. The total cost of the project is estimated to be approximately $120 million, including shipyard costs, owner-furnished equipment and labor, commissioning and capital spares. Remaining contractual payments of $10 million are payable during 2014 as construction milestones are met.
Boardwalk Pipeline’s future capital commitments are comprised of binding commitments under purchase orders for materials ordered but not received and firm commitments under binding construction service agreements. The commitments as of December 31, 2013 were approximately $85 million, all of which are expected to be settled within the next twelve months.
Loews Hotels has commitments aggregating approximately $175 million for the development and renovation of hotel properties.
The Company’s reportable segments are primarily based on its individual operating subsidiaries. Each of the principal operating subsidiaries are headed by a chief executive officer who is responsible for the operation of its business and has the duties and authority commensurate with that position. Investment gains (losses) and the related income taxes, excluding those of CNA, are included in the Corporate and other segment.
On February 10, 2014, CNA entered into a definitive agreement to sell the majority of its run-off annuity and pension deposit business through the sale of the common stock of CAC and a 100% coinsurance agreement on a separate small block of annuity business outside of CAC.