We are a holding company and have five reportable segments comprised of four individual operating subsidiaries, CNA Financial Corporation (“CNA”), Diamond Offshore Drilling, Inc. (“Diamond Offshore”), Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”) and Loews Hotels Holding Corporation (“Loews Hotels & Co”); and the Corporate segment. The operations of Consolidated Container Company LLC (“Consolidated Container”) since the acquisition date in the second quarter of 2017 are included in the Corporate segment. Each of our operating subsidiaries is headed by a chief executive officer who is responsible for the operation of its business and has the duties and authority commensurate with that position.
The following table summarizes net income attributable to Loews Corporation by segment and net income per share attributable to Loews Corporation for the years ended December 31, 2018, 2017 and 2016:
Net income attributable to Loews Corporation in 2018 decreased as compared to the prior year primarily due to the prior year net benefit of $200 million from the Tax Act. Excluding the impact of the Tax Act, earnings decreased due to lower results at CNA and Diamond Offshore partially offset by higher earnings at Loews Hotels & Co and Boardwalk Pipeline.
The following tables summarize the results of CNA’s Property & Casualty Operations for the years ended December 31, 2018, 2017 and 2016.
International’s combined ratio of 106.5% increased 1.7 points in 2018 as compared with 2017. The loss ratio increased 2.8 points, primarily due to elevated property losses and professional liability losses in CNA’s London operation and lower favorable net prior year loss reserve development partially offset by lower net catastrophe losses. The expense ratio improved 1.1 points in 2018 as compared with 2017 driven by higher net earned premiums partially offset by higher acquisition expenses.
Total net written premiums increased $92 million in 2017 as compared with 2016. Net written premiums for International increased $60 million in 2017 as compared with 2016 due to higher new business, positive renewal premium change and higher retention. Excluding the effect of foreign currency exchange rates and premium development, net written premiums for International increased 8.1% in 2017. Net written premiums for Specialty were consistent with 2016. New business, renewal premium change and retention also remained at consistent levels for Specialty. Net written premiums for Commercial increased $39 million in 2017 as compared with 2016, primarily driven by higher new business within Middle Markets, strong retention and positive renewal premium change. This was partially offset by an unfavorable premium rate adjustment within its Small Business unit as discussed in Note 19 to the Consolidated Financial Statements under Item 8. The change in net earned premiums for Commercial and International was consistent with the trend in net written premiums.
Favorable net prior year loss reserve development of $174 million and $247 million was recorded in 2017 and 2016 for Specialty. Favorable net prior year loss reserve development of $115 million as compared with unfavorable net prior year loss reserve development of $15 million was recorded in 2017 and 2016 for Commercial and favorable net prior year loss reserve development of $9 million and $58 million was recorded in 2017 and 2016 for International. Further information on net prior year development is included in Note 8 of the Notes to Consolidated Financial Statements included under Item 8.
Commercial’s combined ratio improved 1.4 points in 2017 as compared with 2016. The loss ratio improved 0.1 points primarily due to the favorable period over period effect of net prior year loss reserve development, partially offset by higher net catastrophe losses. The loss ratio, excluding catastrophes and development, improved 1.7 points. The expense ratio improved 1.6 points in 2017 as compared with 2016 reflecting both CNA’s ongoing efforts to improve productivity and the actions taken in last year’s third and fourth quarters to reduce expenses.
International’s combined ratio increased 5.7 points in 2017 as compared with 2016. The loss ratio increased 6.0 points primarily due to lower favorable net prior year loss reserve development and higher net catastrophe losses, partially offset by lower current accident year large losses. The loss ratio excluding catastrophes and development improved 3.0 points. The expense ratio improved 0.3 points in 2017 as compared with 2016 primarily due to the higher net earned premiums.
The following table reconciles core income to net income attributable to Loews Corporation for the CNA segment for the years ended December 31, 2018, 2017 and 2016:
In 2016, the United Kingdom (“U.K.”) approved an exit from the European Union (“E.U.”), commonly referred to as “Brexit.” Brexit is scheduled to be completed in early 2019. As treaties between the U.K. and the E.U. have not been finalized, as of January 1, 2019, CNA intends to write business in the E.U. through its recently established European subsidiary in Luxembourg as its U.K.-domiciled subsidiary will presumably no longer provide a platform for CNA’s operations throughout the European continent. As a result of such structural changes and modification to CNA’s European operations, the complexity and cost of regulatory compliance of its European business has increased and will likely continue to result in elevated expenses.
From a supply perspective, industry analysts have reported that during 2018, the global supply of floater rigs decreased for the fourth consecutive year, with 20 floaters being scrapped during the year. Based on these reports, over 200 drilling rigs, including 119 floaters, have been retired since 2014. However, the offshore floater market remains oversupplied, as there are drilling rigs across all water depth categories that are not contracted or that are cold stacked as of the date of this Report. Industry reports also indicate that there remain approximately 40 newbuild
floaters on order with scheduled deliveries in 2019 and 2020, most of which have not yet been contracted for future work. In addition, several rig reactivations were announced during 2018 and in early 2019, including the ongoing reactivations of the Ocean Endeavor and Ocean Onyx that have been brought out of cold stack to fulfill newly-acquired contracts. These factors provide for a continued, challenging offshore drilling market in the near term.
Diamond Offshore’s contract drilling backlog was $2.0 billion, $2.0 billion and $2.4 billion as of January 1, 2019 (based on contract information known at that time), October 1, 2018 (the date reported in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2018) and January 1, 2018 (the date reported in our Annual Report on Form 10-K for the year ended December 31, 2017). The contract drilling backlog by year as of January 1, 2019 is $0.9 billion in 2019, $0.8 billion in 2020 and an aggregate of $0.3 billion in 2021 and 2022. Contract drilling backlog excludes a future gross margin commitment of $30 million in 2019, $30 million in 2020 and an aggregate of $75 million for the 2021 through 2023 payable by a customer in the form of a guarantee of gross margin to be earned on future contracts or by direct payment at the end of each period pursuant to terms of an existing contract.
Contract drilling backlog includes only firm commitments (typically represented by signed contracts) and is calculated by multiplying the contracted operating dayrate by the firm contract period. 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 stated above due to various factors affecting utilization such as weather conditions and unscheduled repairs and maintenance. Contract drilling backlog excludes revenues for mobilization, demobilization, contract preparation and customer reimbursables. Changes in Diamond Offshore’s contract drilling backlog between periods are generally 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. In addition, under certain circumstances, Diamond Offshore’s customers may seek to terminate or renegotiate its contracts, which could adversely affect its reported backlog.
Contract drilling revenue decreased $391 million in 2018 as compared with 2017, primarily due to 955 fewer revenue earning days, combined with the effect of lower average daily revenue earned. Contract drilling expense decreased $79 million in 2018 as compared with 2017, primarily due to reduced costs of $52 million for currently cold-stacked and previously-owned rigs, which had incurred contract drilling expense in 2017, combined with decreased costs for the current rig fleet of $27 million. The decrease in contract drilling expense for the current fleet reflects lower labor and personnel costs and other rig operating costs and the deferral of costs associated with contract preparation activities for rigs as they prepare for new contracts in 2019, partially offset by increased costs for repairs and maintenance and related rig operating costs.
Interest expense decreased $26 million in 2018 as compared with 2017, primarily due to the absence of costs resulting from the redemption of debt in 2017, partially offset by incremental interest expense from senior notes issued in 2017.
Contract drilling revenue decreased $74 million in 2017 as compared with 2016, primarily due to lower average daily revenue, partially offset by the favorable impact of an aggregate 353 incremental revenue earning days. Total contract drilling expense increased $30 million in 2017 as compared with 2016, reflecting higher amortized rig mobilization expense of $25 million and incremental contract drilling costs associated with the drillships of $28 million, partially offset by a net reduction in other rig operating and overhead costs of $23 million.
The income tax provision for the year ended December 31, 2017 includes a $36 million one-time charge related to the Tax Act, which consisted of: (i) a $75 million charge for the mandatory, deemed repatriation of foreign earnings, inclusive of the utilization of certain tax attributes offset by a provisional liability for uncertain tax positions related to such attributes, (ii) a $74 million credit resulting from the remeasurement of net deferred tax liabilities at the lower corporate tax rate and (iii) a $35 million charge recorded at the Loews Corporation level for the difference between the book basis and tax basis in Diamond Offshore.
On June 29, 2018, Boardwalk GP, LP (“General Partner”), the general partner of Boardwalk Pipeline and an indirect wholly owned subsidiary of the Company, elected to exercise its right to purchase all of the issued and outstanding common units representing limited partnership interests in Boardwalk Pipeline not already owned by the General Partner or its affiliates pursuant to Section 15.1(b) of Boardwalk Pipeline’s Third Amended and Restated Agreement of Limited Partnership, as amended (“Limited Partnership Agreement”). On July 18, 2018, the General Partner completed the transaction for a cash purchase price, determined in accordance with the Limited Partnership Agreement, of $12.06 per unit, or approximately $1.5 billion, in the aggregate. For further information on this transaction, see Note 2 of the Notes to Consolidated Financial Statements included under Item 8.
Boardwalk Pipeline also transports and stores NGLs. Contracts for Boardwalk Pipeline’s NGLs services are generally fee based or based on minimum volume requirements, while others are dependent on actual volumes transported. Boardwalk Pipeline’s NGLs storage rates are market-based and contracts are typically fixed price
A substantial portion of Boardwalk Pipeline’s transportation and storage capacity is contracted for under firm agreements. For the year ended December 31, 2018, approximately 87% of Boardwalk Pipeline’s revenues, excluding retained fuel, were derived from fixed fees under firm agreements. The table below shows a rollforward of operating revenues under committed firm agreements in place as of December 31, 2017 to December 31, 2018, including agreements for transportation, storage and other services, over the remaining term of those agreements:
(a) Reflects an increase of $55 million in Boardwalk Pipeline’s actual 2018 revenues recognized from fixed fees under firm agreements as compared with its expected 2018 revenues from fixed fees under firm agreements, including agreements for transportation, storage and other services as of December 31, 2017, primarily due to an increase from contract renewals that occurred in 2018.
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. 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 Pipeline’s ongoing maintenance costs, including maintenance capital and maintenance expense. PHMSA has proposed more prescriptive regulations related to operations of Boardwalk Pipeline’s interstate natural gas and NGLs pipelines which, if adopted as proposed, will cause Boardwalk Pipeline to incur increased capital and operating costs, experience operational delays and result in potential adverse impacts to its ability to reliably serve its customers. While these proposed regulations have not yet been finalized, they are representative of the types of regulatory changes that can be enacted which would affect Boardwalk Pipeline’s operations and the cost of operating its facilities.
Even without action on Boardwalk Pipeline’s informational filings, the FERC and/or its customers could challenge the maximum applicable rates that any of its regulated pipelines are allowed to charge in accordance with Section 5 of the NGA. The Tax Act and the Revised Policy Statement may increase the likelihood of such a challenge. If such a challenge is successful for any of its pipelines, the revenues associated with transportation and storage services the pipeline provides pursuant to cost-of-service rates could materially decrease in the future, which would adversely affect the revenues on that pipeline going forward.
On April 19, 2018, the FERC issued a Certificate Policy Statement NOI, thereby initiating a review of its policies on certification of natural gas pipelines facilities, including an examination of its long-standing Policy Statement on Certification of New Interstate Natural Gas Pipeline Facilities, issued in 1999, that is used to determine whether to grant certificates for new pipeline and storage projects and expansions. Comments on the Certificate Policy Statement NOI were due on July 25, 2018, and Boardwalk Pipeline is unable to predict what, if any, changes may be proposed that will affect its natural gas pipeline business or when such proposals, if any, might become effective. Boardwalk Pipeline does not expect that any change in this policy would affect it in a materially different manner than any other natural gas pipeline company operating in the U.S.
The following table summarizes the results of operations for Boardwalk Pipeline for the years ended December 31, 2018, 2017 and 2016 as presented in Note 20 of the Notes to Consolidated Financial Statements included under Item 8:
Operating expenses decreased $41 million in 2018 as compared with 2017. Excluding items offset in operating revenues and the $47 million loss on sale of a processing plant in 2017, operating expenses increased $34 million primarily due to higher depreciation expense and property taxes from an increased asset base from recently completed growth projects and increased employee related costs.
In 2017, we recorded a one-time decrease to income tax expense of $294 million at the holding company level, as a result of the Tax Act. This decrease was a result of remeasuring the net deferred tax liabilities at the lower corporate tax rate.
Total revenues increased $9 million in 2017 as compared with 2016. Excluding the net effect of $13 million of proceeds received from the settlement of a legal matter in 2016 and items offset in fuel and transportation expense, primarily retained fuel, operating revenues increased $44 million. The increase was driven by growth projects recently placed into service, partially offset by a decrease in storage and PAL revenues, primarily from the effects of unfavorable market conditions on time period price spreads and a decrease in revenues associated with the sale of a processing plant, discussed in Note 6 of the Notes to Consolidated Financial Statements under Item 8, and the Southwestern contract restructuring.
Operating expenses increased $26 million in 2017 as compared with 2016. Excluding items offset in operating revenues and the $47 million loss on sale of a processing plant, operating expenses decreased $5 million primarily due to lower administrative and general expenses due to higher capitalization rates from the increase in capital projects and lower employee incentive costs, largely offset by higher operations and maintenance expenses, primarily due to growth projects recently placed into service and a higher number of maintenance projects. Interest expense decreased $12 million primarily due to higher capitalized interest from growth projects.
Net income attributable to Loews Corporation decreased $16 million. Excluding the effect of the corporate income tax rate change, net income increased approximately $5 million primarily due to the changes discussed above.
Interest expense increased $4 million in 2017 as compared with 2016 primarily due to property-level debt incurred to fund acquisitions in 2016 along with reduced capitalized interest.
Net income increased $52 million primarily due to the changes discussed above.
Corporate operations consist primarily of investment income at the Parent Company, operating results of Consolidated Container from the May 22, 2017 acquisition date, corporate interest expenses and other corporate 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.
The following table summarizes the results of operations for Corporate for the years ended December 31, 2018, 2017 and 2016 as presented in Note 20 of the Notes to Consolidated Financial Statements included under Item 8:
Other revenues increased $368 million in 2018 as compared with 2017 due to Consolidated Container’s revenues reflecting a full year of operations in 2018 as compared with approximately seven months of operations in 2017. In addition, the increase also reflects the pass-through effect of higher year-over-year resin prices. Consolidated Container’s contracts generally provide for resin price changes to be passed through to its customers on a short-term lag, generally about one month. When a pass-through occurs, revenues and expenses generally change by the same amount so that Consolidated Container’s gross margin returns to the same level as prior to the change in prices.
Operating and other expenses increased $487 million in 2017 as compared with 2016 primarily due to $479 million of expenses for Consolidated Container’s operations for the period since the acquisition date. In addition, operating expenses increased due to costs related to the acquisition of Consolidated Container, partially offset by the absence of prior year expenses related to the implementation of the 2016 Incentive Compensation Plan. Interest expense increased $23 million in 2017 as compared with 2016 primarily due to interest expense associated with Consolidated Container’s $605 million term loan from the date of acquisition.
Net results decreased $19 million in 2017 as compared with 2016 primarily due to the changes discussed above.
Future uses of our cash may include investing in our subsidiaries, new acquisitions, dividends and/or repurchases of our and our subsidiaries’ outstanding common stock. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend on many factors, including our earnings, financial condition and business needs.
CNA’s cash provided by operating activities was $1.2 billion in 2018 and $1.3 billion in 2017. Cash provided by operating activities in 2018 reflected higher income taxes paid and higher net claim payments, partially offset by an increase in premiums collected as compared with 2017. In 2017, cash provided by operating activities reflected higher net claim payments and a lower level of distributions on limited partnerships, partially offset by lower IT spend and an increase in premiums collected as compared with 2016.
CNA paid dividends of $3.30 per share on its common stock, including a special dividend of $2.00 per share in 2018. On February 8, 2019, CNA’s Board of Directors declared a quarterly dividend of $0.35 per share and a special dividend of $2.00 per share payable March 14, 2019 to shareholders of record on February 25, 2019. CNA’s declaration and payment of future dividends is at the discretion of its Board of Directors and will depend on many factors, including CNA’s earnings, financial condition, business needs and regulatory constraints. The payment of dividends by CNA’s insurance subsidiaries without prior approval of the insurance department of each subsidiary’s domiciliary jurisdiction is limited by formula. Dividends in excess of these amounts are subject to prior approval by the respective state insurance departments.
Diamond Offshore’s cash provided by operating activities decreased approximately $262 million in 2018 as compared with 2017, primarily due to lower cash receipts for contract drilling services of $312 million, partially offset by a net decrease in cash expenditures for contract drilling services and other working capital requirements of $8 million and lower income tax payments, net of refunds, of $42 million. The decrease in cash flow from operations is primarily the result of reduced demand for Diamond Offshore’s contract drilling services, which continued into 2018, partially offset by its cost control initiatives.
In 2018, S&P downgraded Diamond Offshore’s corporate credit rating to B from B+ with a negative outlook and Moody’s downgraded Diamond Offshore’s corporate credit rating to B2 from Ba3 with a negative outlook. These credit ratings are below investment grade and could raise Diamond Offshore’s cost of financing. As a consequence, Diamond Offshore may not be able to issue additional debt in amounts and/or with terms that it considers to be reasonable. One or more of these occurrences could limit Diamond Offshore’s ability to pursue other business opportunities.
Boardwalk Pipeline’s cash provided by operating activities decreased $71 million in 2018 compared to 2017, primarily due to the change in net income.
For 2018 and 2017, Boardwalk Pipeline’s capital expenditures were $468 million and $708 million, consisting of a combination of growth and maintenance capital. During 2018, Boardwalk Pipeline purchased $19 million of natural gas to be used as base gas for its pipeline system. Boardwalk Pipeline expects total capital expenditures to be approximately $450 million in 2019, including approximately $150 million for maintenance capital and $300 million related to growth projects.
During 2019, Loews Hotels & Co anticipates funding approximately $95 million to its joint venture developments in progress, which will be derived from cash on hand, cash generated from operations and cash contributions from Loews Corporation.
Net investment income before tax and noncontrolling interests decreased $217 million in 2018 as compared with 2017. The decrease was driven by limited partnership and common stock investments, which returned (1.9)% in 2018 as compared with 9.1% in the prior year. The lower return in 2018 included the change in fair value of common stock investments. Despite the decline in limited partnership income, net investment income after tax and noncontrolling interests increased $33 million in 2018 as compared with 2017 driven by the lower federal corporate income tax rate.
Net realized investment results before tax and noncontrolling interests decreased $179 million in 2018 as compared with 2017. The decrease was driven by lower net realized gains on sales of securities and the decline in fair value of non-redeemable preferred stock. Net realized investment gains before tax and noncontrolling interests increased $60 million in 2017 as compared with 2016, driven by lower OTTI losses recognized in earnings.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 13, 2019, expressed an unqualified opinion on the Company’s internal control over financial reporting.
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 89% owned subsidiary); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (“Diamond Offshore”), a 53% owned subsidiary); transportation and storage of natural gas and natural gas liquids (Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”), 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 (Consolidated Container Company LLC (“Consolidated Container”), a 99% 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.
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 decreased $298 million (after tax and noncontrolling interests) and increased $355 million (after tax and noncontrolling interests) for the years ended December 31, 2018 and 2017. As of December 31, 2018 and 2017, net unrealized gains on investments included in Accumulated other comprehensive income (“AOCI”) were correspondingly reduced by Shadow Adjustments of $964 million and $1.3 billion (after tax and noncontrolling interests).
The Company owns certain common stock with the intention of holding the securities primarily for market appreciation and as such, the changes in the fair value of these securities are recorded through Net investment income (loss). Prior to 2018, a portfolio of equity securities were considered available-for-sale with changes in fair value reported as a component of Other comprehensive income (loss).
An available-for-sale security is impaired if the fair value of the security is less than its cost adjusted for accretion, amortization and previously recorded other-than-temporary impairment (“OTTI”) losses, otherwise defined as an unrealized loss. When a security is impaired, the impairment is evaluated to determine whether it is temporary or other-than-temporary.
Loews Hotels & Co provides lodging and related goods and services as well as management and marketing services. Loews Hotels & Co allocates the lodging transaction price to the distinct goods and services based on the market price. Lodging and related revenues are recognized as the guest takes possession of the goods or receives the services.
Consolidated Container manufactures rigid plastic packaging to provide packaging solutions to end markets such as beverage, food and household chemicals through a network of manufacturing locations across North America. In addition, Consolidated Container manufactures commodity and differentiated plastic resins from recycled plastic materials for a variety of end markets. Consolidated Container recognizes revenue as control is transferred to the customer.
Contract costs - Costs to obtain or fulfill contracts with customers are deferred and reported as Deferred non-insurance warranty acquisition expenses on the Consolidated Balance Sheets. These costs are expected to be recoverable over the term of the contract and are amortized in the same manner the related revenue is recognized. For CNA’s deferred non-insurance warranty acquisition expenses, losses under warranty contracts would be recognized when it is probable that estimated future costs exceed unrecognized revenue. CNA evaluates deferred costs for recoverability including consideration of anticipated investment income. Adjustments to deferred costs, if necessary, are recorded in the current period results of operations.
Long term care claim reserves are calculated using mortality and morbidity assumptions based on CNA and industry experience. Long term care claim reserves are discounted at an interest rate of 6.0% as of December 31, 2018 and 2017. As of December 31, 2018 and 2017, such discounted reserves totaled $2.6 billion and $2.4 billion, net of discount of $460 million and $446 million.
Future policy benefit reserves - Future policy benefit reserves represent the active life reserves related to CNA’s long term care policies and are computed using the net level premium method, which incorporates actuarial assumptions as to morbidity, persistency, inclusive of mortality, discount rate, future premium rate adjustments and expenses. Expense assumptions primarily relate to claim adjudication. CNA’s future policy benefit reserves are based on best estimate actuarial assumptions as of the most recent date of loss recognition, which occurred in 2015. If a premium deficiency were to emerge in the future, the assumptions would be unlocked, and the future policy benefit reserves would be adjusted. The gross premium valuation (“GPV”) process was performed in the third quarter of 2018 as compared to the fourth quarter in 2017. The GPV as of September 30, 2018 and December 31, 2017 indicated the carried reserves were sufficient, therefore there was no unlocking of assumptions. Interest rates for long term care active life reserves range from 6.6% to 7.0% as of September 30, 2018 and December 31, 2017.
CNA’s most recent GPV indicated the future policy benefit reserves for the long term care business were not deficient in the aggregate, but profits are expected to be recognized in early years followed by losses in later years. In that circumstance, future policy benefit reserves are increased in the profitable years by an amount necessary to offset losses that are projected to be recognized in later years. The amount of the additional future policy benefit reserves recorded in each quarterly period is determined by applying the ratio of the present value of future losses divided by the present value of future profits from the most recently completed GPV to long term care core income in that period.
Guaranty fund and other insurance-related assessments - Liabilities for guaranty fund and other insurance-related assessments are accrued when an assessment is probable, when it can be reasonably estimated and when the event obligating the entity to pay an imposed or probable assessment has occurred. Liabilities for guaranty funds and other insurance-related assessments are not discounted and are included as part of Other liabilities on the Consolidated Balance Sheets. As of December 31, 2018 and 2017, the liability balances were $108 million and $121 million.
paid losses are written off, any required adjustment to reinsurance receivables related to unpaid losses is recorded as a component of Insurance claims and policyholders’ benefits on the Consolidated Statements of Income.
For each of the years ended December 31, 2018, 2017 and 2016, approximately 0.9 million, 0.9 million and 0.4 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 those same periods, there were no shares and approximately 0.4 million and 3.7 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.
Foreign currency - Foreign currency translation gains and losses are reflected in Shareholders’ equity as a component of Accumulated other comprehensive income (loss). The Company’s foreign subsidiaries’ balance sheet accounts are translated at the exchange rates in effect at each reporting date and income statement accounts are translated at the average exchange rates during the reporting period. There were no foreign currency transaction gains (losses) for the year ended December 31, 2018 and $26 million and $(21) million for the years ended December 31, 2017 and 2016 included in the Consolidated Statements of Income.
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. Effective April 1, 2016, Gulf South Pipeline, LP (“Gulf South”), a wholly owned subsidiary of Boardwalk Pipeline, implemented a fuel tracker pursuant to a FERC rate case settlement,
Supplementary cash flow information - Cash payments made for interest on long term debt, net of capitalized interest, amounted to $558 million, $533 million and $511 million for the years ended December 31, 2018, 2017 and 2016. Cash payments for federal, foreign, state and local income taxes amounted to $101 million, $166 million and $114 million for the years ended December 31, 2018, 2017 and 2016. Investing activities exclude $15 million and $18 million of accrued capital expenditures for the years ended December 31, 2018 and 2016 and include $87 million of previously accrued capital expenditures for the year ended December 31, 2017.
Accounting changes - In May of 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The core principle of the new accounting guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new accounting guidance provides a five-step analysis of transactions to determine when and how revenue is recognized and requires enhanced disclosures about revenue. The standard excludes from its scope the accounting for insurance contracts, financial instruments and certain other agreements that are subject to other guidance in the FASB Accounting Standards Codification, which limits the impact of this change in accounting for the Company.
On January 1, 2018, the Company adopted the updated accounting guidance using the modified retrospective method, with a cumulative effect adjustment to the opening balance sheet. Upon adoption, the new guidance was applied to all contracts subject to the standard that were not completed as of the date of adoption. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance. At adoption, the cumulative effect adjustment decreased beginning Retained earnings by $62 million (after tax and noncontrolling interests), resulted in a deferred tax asset of $23 million and increased Deferred non-insurance warranty acquisition expenses by approximately $1.9 billion and Deferred non-insurance warranty revenue by approximately $2.0 billion.
In January of 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The updated accounting guidance requires changes to the reporting model for financial instruments. The guidance primarily changes the model for equity securities by requiring changes in the fair value of equity securities (except those accounted for under the equity method of accounting, those without readily determinable fair values and those that result in consolidation of the investee) to be recognized through the income statement. With the adoption of the new guidance, equity securities are no longer classified as available-for-sale or trading. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance. As of January 1, 2018, the Company adopted the updated accounting guidance and recognized a cumulative effect adjustment of $25 million (after tax and noncontrolling interests) as an increase to beginning Retained earnings. For the year ended December 31, 2018, the Company recognized pretax losses of approximately $96 million in the Consolidated Statements of Income for the decrease in the fair value of equity securities as a result of this change. For the years ended December
31, 2017 and 2016, an increase of $33 million and a decrease of $2 million in the fair value of equity securities was recognized in Other comprehensive income (“OCI”).
In February of 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”). Current accounting guidance requires the remeasurement of deferred tax liabilities and assets due to a change in tax laws or rates with the effect included in Net income in the reporting period that includes the enactment date. Because the remeasurement of deferred taxes due to a reduction in the federal corporate income tax rate under the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) is required to be included in Net income, the tax effects of items within Accumulated Other Comprehensive Income (“AOCI”) do not reflect the appropriate rate (referred to as “stranded tax effects”). The updated accounting guidance allows a reclassification from AOCI to Retained earnings for the stranded tax effects resulting from the Tax Act. The Company early adopted the updated guidance effective January 1, 2018 and elected to reclassify the stranded tax effects from AOCI to Retained earnings. 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. The Company releases tax effects from AOCI utilizing the security-by-security approach for investments and using enacted tax rates based on the pretax adjustments for pension and postretirement benefits.
In August of 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” The updated accounting guidance requires changes to the disclosures for fair value measurement by adding, removing and modifying certain disclosures. The Company early adopted the updated guidance in September of 2018 and modified the fair value disclosures in Note 4, including added disclosures on changes in unrealized gains (losses) on Level 3 assets recognized in Other comprehensive income as well as the weighted average rate used to develop significant inputs utilized in the fair value measurements of Level 3 assets. The Company also eliminated disclosures on transfers between Level 1 and Level 2 assets and the policy for timing of transfers between levels.
Recently issued ASUs - In February of 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” and in July of 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements.” The updated guidance requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance provides lessors with an election to combine the lease and non-lease components of a contract, if certain conditions are met, and account for the combined component in accordance with the new revenue guidance in ASU 2014-09 if the non-lease component is the prominent component of the contract. The updated guidance is effective for interim and annual periods beginning after December 15, 2018 and requires using a modified retrospective transition method. However, the Company has elected to apply a practical expedient offered in the updated guidance which allows entities to apply the guidance on January 1, 2019 and comparative periods are not restated. The Company also expects to elect the transition practical expedient package available in the guidance whereby we will not reassess whether any of our expired or existing contracts contain a lease, the classification for any expired or existing leases or the initial direct costs for any existing leases. The Company is finalizing its evaluation of its operating lease inventory and other provisions of the updated guidance, but currently anticipates that the lease asset and lease liability will be approximately $620 million at the adoption date. Based on the Company’s assessment, the impact of adoption of the updated guidance is not expected to have a material effect on its results of operations.
Following completion of the transaction on July 18, 2018, Boardwalk Pipelines Holding Corp. (“BPHC”), a wholly owned subsidiary of Loews Corporation, holds, directly or indirectly, all of the limited partnership interests of Boardwalk Pipeline. As a result of the transaction, Boardwalk Pipeline has withdrawn the common units from listing on the New York Stock Exchange and from registration under Section 12(b) of the Securities Exchange Act of 1934.
On May 22, 2017, the Company acquired CCC Acquisition Holdings, Inc. for $1.2 billion. CCC Acquisition Holdings, Inc., through its wholly owned subsidiary, Consolidated Container, is a rigid plastic packaging and recycled resins manufacturer that provides packaging solutions to end markets such as beverage, food and household chemicals through a network of manufacturing locations across North America. The results of Consolidated Container are included in the Consolidated Financial Statements since the acquisition date in the Corporate segment. Consolidated Container’s revenues were $868 million in 2018 and $498 million in 2017 for the period since the acquisition date. Net income for 2018 and 2017 was not significant.
The acquisition was funded with approximately $620 million of Parent Company cash and debt financing proceeds at Consolidated Container of $600 million. The following table summarizes the allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value as of the acquisition date.
Customer relationships were valued using an income approach, which values the intangible asset at the present value of the related incremental after tax cash flows. The customer relationships intangible asset will be amortized over a useful life of 21 years. The trade name was valued using an income approach, which values the intangible asset based on an estimate of cost savings, or a relief from royalty. The trade name will be amortized over a useful life of 10 years. Goodwill includes value associated with the assembled workforce and Consolidated Container’s future growth and profitability. The assets acquired and liabilities assumed as part of the acquisition did not result in a step up of tax basis and approximately $94 million of goodwill is deductible for tax purposes. See Note 7 for additional information on goodwill and intangible assets.
In 2018, Loews Hotels & Co received proceeds of $40 million for the sale of a hotel. In 2017, Loews Hotels & Co received proceeds of $31 million for the sale of two hotels, in which Loews Hotels & Co had joint venture interests. Loews Hotels & Co paid approximately $84 million to acquire a hotel in 2016. This acquisition was funded with a combination of cash and property-level debt.
(a) Net unrealized gains (losses) related to changes in fair value on securities still held were $(121), $39 and $44 for the years ended December 31, 2018, 2017 and 2016.
As of December 31, 2018, the Company held no non-income producing fixed maturity securities. As of December 31, 2017, the Company held $2 million of non-income producing fixed maturity securities. As of December 31, 2018 and 2017, 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.
The following table presents the activity related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at December 31, 2018, 2017 and 2016 for which a portion of an OTTI loss was recognized in Other comprehensive income.
The Company’s limited partnership investments contain withdrawal provisions that generally limit liquidity for a period of thirty days up to one year and in some cases do not permit withdrawals until the termination of the partnership. Typically, withdrawals require advance written notice of up to 90 days.
As of December 31, 2018, the Company had committed approximately $574 million to future capital calls from various third party limited partnership investments in exchange for an ownership interest in the related partnerships.
The Company invests in various privately placed debt securities, including bank loans, as part of its overall investment strategy and has committed to additional future purchases, sales and funding. Purchases and sales of privately placed debt securities are recorded once funded. As of December 31, 2018, the Company had commitments to purchase or fund additional amounts of $230 million and sell $78 million under the terms of such securities.
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 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, (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.
The tables below present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2018 and 2017:
Level 1 securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily valued using pricing for similar securities, recently executed transactions and other pricing models utilizing market observable inputs. Level 3 securities are primarily priced using broker/dealer quotes and internal models with inputs that are not market observable.
CNA sold its life settlement contracts to a third party in 2017. The valuation of the life settlement contracts was based on the terms of sale. The contracts were classified as Level 3 as there was not an active market for life settlement contracts.
The carrying amount, estimated fair value and the level of the fair value hierarchy of the Company’s financial assets and liabilities which are not measured at fair value on the Consolidated Balance Sheets are presented in the following tables. The carrying amounts and estimated fair values of short term debt and long term debt exclude capital lease obligations. The carrying amounts reported on the Consolidated Balance Sheets for cash and short term investments not carried at fair value and certain other assets and liabilities approximate fair value due to the short term nature of these items.
The balance of other property, plant and equipment as of December 31, 2017 includes $366 million for Consolidated Container.
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. At December 31, 2018, Diamond Offshore evaluated one drilling rig with indicators of impairment. Based on the assumptions and analysis, Diamond Offshore determined that the undiscounted probability-weighted cash flow of the rig was in excess of its carrying value. As a result, Diamond Offshore concluded that no impairment of the rig had occurred at December 31, 2018. As of December 31, 2018, there were 12 rigs in the drilling fleet not previously written down to scrap, for which there were no current indicators that their carrying amounts may not be recoverable and, thus, were not evaluated for impairment. If market fundamentals in the offshore oil and gas industry deteriorate further or a projected market recovery is further delayed, Diamond Offshore may be required to recognize additional impairment losses in future periods.
A summary of the net carrying amount of other intangible assets is as follows:
(c) The Other Insurance Operations reinsurance receivables are primarily related to A&EP claims covered under the loss portfolio transfer.
(a) Total net incurred above does not agree to Insurance claims and policyholders’ benefits as reflected on the Consolidated Statements of Income due to amounts related to retroactive reinsurance deferred gain accounting, uncollectible reinsurance and loss deductible receivables and benefit expenses related to future policy benefits, which are not reflected in the table above.
Stochastic modeling: The stochastic modeling produces a range of possible outcomes based on varying assumptions related to the particular product being modeled.
CNA maintains both claim and claim adjustment expense reserves as well as future policy benefit reserves for policyholder benefits for CNA’s Other Insurance Operations. 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 the long term care policies, CNA’s actuaries perform a detailed claim experience study on an annual basis. The study reviews the sufficiency of existing reserves for policyholders currently on claim and includes an evaluation of expected benefit utilization and claim duration. CNA’s recorded claim and claim adjustment expense reserves reflect management’s best estimate after incorporating the results of the most recent study. In addition, claim and claim adjustment expense reserves are also maintained for the structured settlement obligations. Both elements of the Other Insurance Operations reserves are discounted as discussed in Note 1.
For CNA’s Property & Casualty Operations, the following tables present further detail and commentary on the development reflected in the financial statements for each of the periods presented. Also presented are loss reserve development tables that illustrate the change over time of reserves established for claim and allocated claim adjustment expenses arising from short duration insurance contracts for certain lines of business within CNA’s commercial property and casualty insurance operations (“Property & Casualty Operations”). Not all lines of business are presented based on their context to CNA’s overall loss reserves, calendar year reserve development, or calendar year net earned premiums. Insurance contracts are considered to be short duration contracts when the contracts are not expected to remain in force for an extended period of time. The Cumulative Net Incurred Claim and Allocated Claim Adjustment Expenses tables, reading across, show the cumulative net incurred claim and allocated claim adjustment expenses relating to each accident year at the end of the stated calendar year. Changes in the cumulative amount across time are the result of CNA’s expanded awareness of additional facts and circumstances that pertain to the unsettled claims. The Cumulative Net Paid Claim and Allocated Claim Adjustment Expenses tables, reading across, show the cumulative amount paid for claims in each accident year as of the end of the stated calendar year. The Net Strengthening or (Releases) of Prior Accident Year Reserves tables, reading across, show the net increase or decrease in the cumulative net incurred accident year claim and allocated claim adjustment expenses during each stated calendar year and indicates whether the reserves for that accident year were strengthened or released.
Favorable development in surety coverages was primarily due to lower than expected frequency of large losses in accident years 2014 and prior.
The table below presents the net liability for unpaid claim and claim adjustment expenses, by line of business for Property & Casualty Operations:
The following table presents the impact of the loss portfolio transfer on the Consolidated Statements of Income.
CNA completed reserve reviews in both the first and fourth quarters of 2018 and going forward, intends to perform a single annual review in the fourth quarter. Net unfavorable prior year development of $178 million, $60 million and $200 million was recognized before consideration of cessions to the LPT for the years ended December 31, 2018, 2017 and 2016. Additionally, in 2018, CNA released a portion of its provision for uncollectible third party reinsurance.
NICO established a collateral trust account as security for its obligations to CNA. The fair value of the collateral trust account was $2.7 billion and $3.1 billion as of December 31, 2018 and 2017. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the aggregate reinsurance limit as well as certain of NICO’s performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third-party reinsurers related to CNA’s A&EP claims.
The Securities and Exchange Commission Staff Accounting Bulletin No. 118 (“SAB 118”) allowed companies to report the income tax effects of the Tax Act as a provisional amount based on a reasonable estimate, subject to adjustment during a reasonable measurement period, not to exceed twelve months, until the accounting and analysis under ASC 740 is complete. Although further guidance and clarification from the relevant authorities is expected to continue into 2019, in accordance with SAB 118’s twelve month measurement period, we have completed our analysis of the income tax effect of the Tax Act including: (i) the amount of deferred tax assets and liabilities subject to the income tax rate change from 35% to 21%, including, but not limited to, the calculation of the mandatory deemed repatriation aspect of the Tax Act and the state tax effect of adjustments made to federal temporary differences, (ii) the ability to more likely than not realize the benefit of deferred tax assets, including net operating losses and foreign tax credits, (iii) the effect of re-computing CNA’s insurance reserves and the transition adjustment from existing law, the effects of which had no impact on the effective tax rate and (iv) the special accounting method provisions for recognizing income for U.S. federal income tax purposes no later than financial accounting purposes and the transition adjustment from existing law, which also had no impact on the effective tax rate.
The 2018 addition to prior year tax positions is primarily due to recent proposed regulations on the offsetting of the deemed repatriation with certain tax attributes and the reduction for prior year tax positions is due to clarification issued by the Internal Revenue Service regarding tax attributes available to offset the deemed repatriation. The $51 million addition to current year tax positions for 2017 is attributable to a provisional liability associated with the use of tax attributes on the deemed, mandatory repatriation of the Tax Act. In 2016, the $20 million in reductions for tax positions related to a prior year, is primarily from the devaluation of the Egyptian pound. At December 31, 2018, 2017 and 2016, $82 million, $102 million and $36 million of unrecognized tax benefits related to Diamond Offshore would affect the effective tax rate if recognized.
(a) Includes $37 and $25 of deferred tax assets reflected in Other assets in the Consolidated Balance Sheets at December 31, 2018 and 2017.
At December 31, 2018, the aggregate long term debt maturing in each of the next five years is approximately as follows: $17 million in 2019, $605 million in 2020, $846 million in 2021, $1.3 billion in 2022, $1.3 billion in 2023 and $7.4 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.
Boardwalk Pipeline has a revolving credit facility having aggregate lending commitments of $1.5 billion maturing May 26, 2022. As of December 31, 2018, Boardwalk Pipeline had $580 million of outstanding borrowings under its credit agreement and was in compliance with all covenants.
Consolidated Container has a $125 million asset based lending facility (“ABL facility”) maturing May 23, 2022. As of December 31, 2018, Consolidated Container had $9 million of outstanding borrowings under its ABL facility and was in compliance with all covenants.
The tables below present the changes in AOCI by component for the years ended December 31, 2016, 2017 and 2018:
Dividends of $0.25 per share on the Company’s common stock were declared and paid in 2018, 2017 and 2016.
Disaggregation of revenues - Revenue from contracts with customers, other than insurance premiums, is reported as Non-insurance warranty revenue and within Operating revenues and other on the Consolidated Statements of Income. The following table presents revenues from contracts with customers disaggregated by revenue type along with the reportable segment and a reconciliation to Operating revenues and other as reported in Note 20:
Contract costs - As of December 31, 2018, the Company had approximately $2.6 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, 2018, amortization expense totaled $744 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, 2018.
CNA has a prescribed practice as it relates to the accounting under Statement of Statutory Accounting Principles No. 62R (“SSAP No. 62R”), Property and Casualty Reinsurance, paragraphs 67 and 68 in conjunction with the 2010 loss portfolio transfer with NICO which is further discussed in Note 8. The prescribed practice allows CNA to aggregate all third party A&EP reinsurance balances administered by NICO in Schedule F and to utilize the LPT as collateral for the underlying third-party reinsurance balances for purposes of calculating the statutory reinsurance penalty. This prescribed practice increased statutory capital and surplus by $88 million and $63 million at December 31, 2018 and 2017.
The statutory capital and surplus presented above for CCC was approximately 266% and 264% of company action level RBC at December 31, 2018 and 2017. Company action level RBC is the level of RBC which triggers a heightened level of regulatory supervision. The statutory capital and surplus of CCC’s foreign insurance subsidiaries, which is not significant to the overall statutory capital and surplus, also met or exceeded their respective regulatory and other capital requirements.
Pension Plans - The Company and its subsidiaries have 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 and its subsidiaries’ funding policy is to make contributions in accordance with applicable governmental regulatory requirements.
The Company and its subsidiaries employ a total return approach whereby a mix of equity and fixed maturity securities are used to maximize the long term return of plan assets for a prudent level of risk and to manage cash flows according to plan requirements. The target allocation of plan assets is 40% to 60% invested in equity securities and limited partnerships, with the remainder primarily invested in fixed maturity securities. The intent of this strategy is to minimize expenses by generating investment returns that exceed the growth of the plan liabilities over the long run. Risk tolerance is established after careful consideration of the plan liabilities, plan funded status and corporate financial conditions. The investment portfolio contains a diversified blend of fixed maturity, equity and short term securities. Alternative investments, including limited partnerships, are used to enhance risk adjusted long term returns while improving portfolio diversification. At December 31, 2018, the Company and its subsidiaries had committed $99 million to future capital calls from various third party limited partnership investments in exchange for an ownership interest in the related partnerships. Investment risk is monitored through annual liability measurements, periodic asset/liability studies and quarterly investment portfolio reviews.
In 2019, it is expected that contributions of approximately $14 million will be made to pension plans and $2 million to postretirement health care and life insurance benefit plans.
The limited partnership investments held within the plans are recorded at fair value, which represents the plans’ shares of the net asset value of each partnership, as determined by the general partner. Limited partnerships comprising 82% and 86% of the carrying value as of December 31, 2018 and 2017 employ hedge fund strategies that generate returns through investing in marketable securities in the public fixed income and equity markets and the remainder were primarily invested in private debt and equity. Within hedge fund strategies, approximately 66% were equity related, 28% pursued a multi-strategy approach and 6% were focused on distressed investments at December 31, 2018.
There were no Level 3 assets at December 31, 2018 and 2017.
Time-based Restricted Stock Units: Time-based restricted stock units (“RSUs”) are granted under the 2016 Loews Plan and represent the right to receive one share of the Company’s common stock for each vested RSU. Generally, RSUs vest 50% on the second anniversary of the grant date and 50% on the third anniversary of the grant date.
Included in the direct and ceded earned premiums for the years ended December 31, 2018, 2017 and 2016 are $3.7 billion, $3.9 billion and $3.9 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 $2.8 billion, $3.1 billion and $3.0 billion for the years ended December 31, 2018, 2017 and 2016, including $1.9 billion, $2.5 billion and $2.6 billion related to the significant third party captive program discussed above.
(a) Net loss for the fourth quarter of 2018 includes a loss on limited partnership and common stock investments of $97 million (after tax and noncontrolling interests), catastrophe losses of $96 million (after tax and noncontrolling interests) and net investment losses of $57 million (after tax).
(c) Net income for the fourth quarter of 2017 includes the impact of a $200 million net benefit resulting from the enactment of the Tax Act.
On May 25, 2018, plaintiffs Tsemach Mishal and Paul Berger (on behalf of themselves and the purported class, “Plaintiffs”) initiated a purported class action in the Court of Chancery of the State of Delaware (the “Court”) against the following defendants, Boardwalk Pipeline, the General Partner, Boardwalk GP, LLC and BPHC (together, “Defendants”), regarding the potential exercise by the General Partner of its right to purchase all of the issued and outstanding common units representing limited partnership interests in Boardwalk Pipeline not already owned by the General Partner or its affiliates pursuant to Section 15.1(b) of the Limited Partnership Agreement. 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 the Partnership within a period specified by the Proposed Settlement. As discussed in Note 2, 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 Pipeline not already owned by the General Partner or its affiliates pursuant to Section 15.1(b) of the Limited Partnership Agreement within the period specified by the Proposed Settlement. The transaction was completed on July 18, 2018. On September 28, 2018, the Court denied approval of the Proposed Settlement. On February 11, 2019, a substitute verified class action complaint was filed in this proceeding. The Company is evaluating its response to this new complaint.
In the course of selling business entities and assets to third parties, CNA agreed to guarantee the performance of certain obligations of previously owned subsidiaries and to indemnify purchasers for losses arising out of breaches of representations and warranties with respect to the business entities or assets sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such guarantee and indemnification agreements in effect for sales of business entities, assets and third party loans may include provisions that survive indefinitely. As of December 31, 2018, the aggregate amount related to quantifiable guarantees was $375 million and the aggregate amount related to quantifiable indemnification agreements was $252 million. In certain cases, should CNA be required to make payments under any such guarantee, it would have the right to seek reimbursement from an affiliate of a previously owned subsidiary.
In addition, CNA has agreed to provide indemnification to third party purchasers for certain losses associated with sold business entities or assets that are not limited by a contractual monetary amount. As of December 31, 2018, CNA had outstanding unlimited indemnifications in connection with the sales of certain of its business entities or assets that included tax liabilities arising prior to a purchaser’s ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. Certain provisions of the indemnification agreements survive indefinitely while others survive until the applicable statutes of limitation expire, or until the agreed upon contract terms expire.
In 2016 and 2017, CNA identified rating errors related to its multi-peril package product and workers’ compensation policies within its Small Business unit and determined that it would voluntarily issue premium refunds along with interest on affected policies. After the rating errors were identified, written and earned premium were reported net of any impact from the premium rate adjustments.
For the year ended December 31, 2016, CNA recorded a charge which reduced earned premium by $16 million. For the year ended December 31, 2017, earned premium was reduced by $36 million. For the year ended December 31, 2018 earned premium increased by $6 million, as a result of a change in estimate of the refund payments to policyholders. Additionally, Interest expense recognized for interest due to policyholders on the premium rate adjustments was $1 million and $7 million for the years ended December 31, 2018 and 2017.
Diamond Offshore provides contract drilling services to the energy industry around the world with a fleet of 17 offshore drilling rigs consisting of four drillships and 13 semisubmersible rigs.
Boardwalk Pipeline 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 14,230 miles of pipeline.
The Corporate segment consists of investment income from the Parent Company’s cash and investments, interest expense, other unallocated expenses and the results of Consolidated Container since the acquisition date. Purchase accounting adjustments have been pushed down to the appropriate subsidiary.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1.
Statements of Income and Total assets by segment are presented in the following tables.