We rely upon our invested cash balances and distributions from our subsidiaries to generate the funds necessary to meet our obligations and to declare and pay any dividends to our shareholders. The ability of our subsidiaries to pay dividends is subject to, among other things, the availability of sufficient earnings and funds in such subsidiaries, applicable state laws, including in the case of the insurance subsidiaries of CNA, laws and rules governing the payment of dividends by regulated insurance companies (see Note 13 of the Notes to Consolidated Financial Statements included under Item 8) and compliance with covenants in their respective loan agreements. Claims of creditors of our subsidiaries will generally have priority as to the assets of such subsidiaries over our claims and those of our creditors and shareholders.
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, 2017, 2016 and 2015:
The following table summarizes the results of operations for CNA for the years ended December 31, 2017, 2016 and 2015 as presented in Note 19 of the Notes to Consolidated Financial Statements included under Item 8. For further discussion of Net investment income and Net realized investment results, see the Investments section of this MD&A.
Net income increased $380 million in 2016 as compared with 2015, primarily as a result of a $305 million ($177 million after tax and noncontrolling interests) charge in 2015 related to increasing long term care active life and claim reserves. As the active life reserve assumptions were unlocked in 2015, long term care results in 2016 improved significantly. Results in 2016 also reflect favorable net prior year development of $314 million as compared to $218 million recorded in 2015. Further information on net prior year development is included in Note 8 of the Notes to Consolidated Financial Statements under Item 8. In addition, net investment income increased $148 million and investment results improved $133 million in 2016 as compared with 2015, driven by improved limited partnership investments and fixed maturity securities income, lower other-than-temporary impairment (“OTTI”) losses recognized in earnings and higher net realized investment gains on sales of securities. These increases were partially offset by an increase in the current accident year loss ratio and higher underwriting expenses.
CNA’s Property and Casualty Operations include its Specialty, Commercial and International lines of business. CNA’s Other Insurance Operations outside of Property and Casualty Operations include its long term care business that is in run-off, certain corporate expenses, including interest on CNA’s corporate debt, and certain property and casualty businesses in run-off, including CNA Re and A&EP. CNA’s products and services are primarily marketed through independent agents, brokers and managing general underwriters to a wide variety of customers, including small, medium and large businesses, insurance companies, associations, professionals and other groups. We believe the presentation of CNA as one reportable segment is appropriate in accordance with applicable accounting standards on segment reporting. However, for purposes of this discussion and analysis of the results of operations, we provide greater detail with respect to CNA’s Property and Casualty Operations and Other Insurance Operations to enhance the reader’s understanding and to provide further transparency into key drivers of CNA’s financial results.
Core income decreased $23 million in 2017 as compared with 2016. The decrease was due to lower favorable net prior year loss reserve development and higher net catastrophe losses, partially offset by improved non-catastrophe current accident year underwriting results and higher net investment income. In addition, results reflect the favorable period over period effect of foreign currency exchange. Net catastrophe losses were $259 million (after tax) in 2017 as compared to net catastrophe losses of $111 million (after tax) in 2016.
Favorable net prior year development of $302 million and $316 million was recorded in 2017 and 2016. In 2017 and 2016, Specialty recorded favorable net prior year development of $216 million and $305 million. Commercial recorded favorable net prior year development of $59 million as compared with unfavorable net prior year development of $53 million in 2016. International recorded favorable net prior year development of $27 million and $64 million in 2017 and 2016. Further information on net prior year development is included in Note 8 of the Notes to Consolidated Financial Statements included under Item 8.
Specialty’s combined ratio increased 3.0 points in 2017 as compared with 2016. The loss ratio increased 3.0 points primarily due to lower favorable net prior year loss reserve development and higher net catastrophe losses. Net catastrophe losses were $49 million, or 1.8 points of the loss ratio, in 2017 as compared with $18 million, or 0.6 points of the loss ratio, in 2016. The loss ratio, excluding catastrophes and development, improved 1.3 points. The expense ratio in 2017 was consistent with 2016.
Commercial’s combined ratio improved 2.1 points in 2017 as compared with 2016. The loss ratio improved 0.8 points primarily due to the favorable period over period effect of net prior year loss reserve development, partially offset by higher net catastrophe losses. Net catastrophe losses were $267 million, or 9.4 points of the loss ratio, in 2017, as compared with $116 million, or 4.1 points of the loss ratio, in 2016. The loss ratio, excluding catastrophes and development, improved 1.9 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.
Commercial’s combined ratio increased 4.3 points in 2016 as compared with 2015. The loss ratio increased 3.6 points due to the unfavorable period over period effect of net prior year reserve development and a higher current accident year loss ratio due to higher large losses. Commercial’s expense ratio increased 0.7 points in 2016 as compared with 2015 due to higher employee costs and higher IT spending primarily related to a new underwriting platform.
Core loss was $40 million in 2017, an improvement of $118 million as compared with 2016. This improvement was primarily driven by lower adverse prior year reserve development in 2017 for A&EP under the loss portfolio transfer, as further discussed in Note 8 of the Notes to Consolidated Financial Statements included under Item 8. In addition, the improvement also reflects a higher release of long term claim reserves resulting from the annual claims experience study as compared with 2016, higher net investment income and improved results in the long term care business driven by favorable morbidity partially offset by unfavorable persistency.
In 2016, the long term care business recorded Core income of $20 million, driven by a favorable release of claim reserves resulting from the annual claims experience study and higher net investment income due to an increase in the invested asset base. The long term care results were generally in line with expectations, as the impact of favorable morbidity was partially offset by unfavorable persistency. In 2015, results of CNA’s long term care business reflected variances between actual experience and actuarial assumptions that were locked-in at policy issuance. As a result of the reserve assumption unlocking, the 2016 and 2015 results are not comparable. For further discussion of the GPV and premium deficiency, see the Insurance Reserves section of this MD&A.
Given the oversupply of rigs, competition for the limited number of offshore drilling jobs remains intense. In some cases, dayrates have been negotiated at break-even or below-cost levels in order to enable the drilling contractor to recover a portion of operating costs for rigs that would otherwise be uncontracted or cold stacked. In addition, customers have indicated a preference for “hot” rigs rather than reactivated cold-stacked rigs. This preference incentivizes the drilling contractor to contract rigs at lower rates for the sole purpose of maintaining the rigs in an active state and allowing for at least partial cost recovery.
Diamond Offshore’s results of operations and cash flows for the three years ended December 31, 2017 have been materially impacted by continuing depressed market conditions in the offshore drilling industry. Diamond Offshore currently expects that these adverse market conditions will continue for the near term, which could result in more of Diamond Offshore’s rigs being without contracts, contracted at lower rates than the rigs are currently earning and/or cold stacked or scrapped. These events, if they were to occur, could further materially and adversely affect its financial condition, results of operations and cash flows. When Diamond Offshore cold stacks or elects to scrap a rig, it evaluates the rig for impairment. During 2017, 2016 and 2015, Diamond Offshore recognized aggregate impairment charges of $100 million (three rigs), $680 million (eight rigs and related spare parts) and $861 million (17 rigs).
Diamond Offshore’s pretax operating income (loss) is primarily a function of contract drilling revenue earned less contract drilling expenses incurred or recognized. The two most significant variables affecting Diamond Offshore’s contract drilling revenues are dayrates earned and rig utilization rates achieved by its rigs, each of which is a function of rig supply and demand in the marketplace. Revenues are also affected by the acquisition or disposal of rigs, rig mobilizations, required surveys and shipyard projects.
The following table summarizes the results of operations for Diamond Offshore for the years ended December 31, 2017, 2016 and 2015 as presented in Note 19 of the Notes to Consolidated Financial Statements included under Item 8:
Net results improved $159 million in 2017 as compared with 2016, primarily due to a lower aggregate impairment charge recognized in 2017 of $100 million ($32 million after taxes and noncontrolling interests) as compared with $680 million ($267 million after taxes and noncontrolling interests) in 2016 and reduced depreciation expense, primarily due to a lower depreciable asset base as a result of asset impairments recognized in 2016 and 2017. In addition, results reflect a net reduction in rig operating results for the floater and jack-up rigs and an increase in interest expense due to a loss of $35 million ($11 million after tax and noncontrolling interests) related to the redemption of debt in 2017, as discussed in Note 11 of the Notes to Consolidated Financial Statements included under Item 8, and a reduction in interest capitalized during 2017 due to the completion of construction projects in 2016.
Net results decreased $30 million in 2016 as compared with 2015, primarily due to lower utilization of the rig fleet, which reduced both contract drilling revenue and expense for the year. Results for 2016 also reflected an aggregate impairment charge of $680 million ($267 million after taxes and noncontrolling interests) compared to impairment charges aggregating $861 million ($341 million after taxes and noncontrolling interests) in 2015. The results were also impacted by a $12 million ($4 million after tax and noncontrolling interests) loss on an investment in privately-held corporate bonds. These unfavorable variances were partially offset by decreased depreciation expense, as a result of the impairment charges in 2015 and 2016 and resulting lower depreciable asset base, the absence of a $20 million impairment charge in 2015 to write-off all goodwill associated with the Company’s investment in Diamond Offshore and a favorable $43 million tax adjustment primarily related to Diamond Offshore’s Egyptian liability for uncertain tax positions related to the devaluation of the Egyptian pound.
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 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 natural gas and NGLs prices may impact the volumes of natural gas or NGLs transported and stored by customers on its systems. Due to the capital intensive nature of its business, Boardwalk 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 and not included in a fuel tracker.
A substantial portion of Boardwalk Pipeline’s transportation capacity is contracted for under firm transportation agreements. The table below sets forth the approximate expected revenues from capacity reservation and minimum bill charges under committed firm transportation agreements in place as of December 31, 2017, for 2018 and 2019, as well as the actual comparative amount recognized in revenues for 2017. The table does not include additional revenues Boardwalk Pipeline has recognized and may receive under firm transportation agreements based on actual utilization of the contracted pipeline capacity, any expected revenues for periods after the expiration dates of the existing agreements, execution of precedent agreements associated with growth projects or other events that occurred or will occur subsequent to December 31, 2017.
In the third quarter of 2017, Boardwalk Pipeline executed an agreement regarding capacity on its Fayetteville and Greenville Laterals with Southwestern Energy Company (“Southwestern”), the largest firm transportation customer on those laterals. The agreement, which was approved by the FERC, but is subject to a rehearing request filed with the FERC by Fayetteville Express Pipeline LLC, reduces contracted volumes (or the amount of capacity under contract) on the Fayetteville Lateral for the remaining contract term and commits Southwestern to new firm transportation agreements on its Fayetteville and Greenville Laterals that begin January 1, 2021, and expire on December 31, 2030, and to an interim agreement on the Greenville Lateral from April of 2019 through 2020. The agreement also provides Boardwalk Pipeline the opportunity to transport natural gas produced from committed properties in the Fayetteville and Moorefield shales that are connected to its Fayetteville Lateral through 2030. Although the transaction will result in a reduction of firm transportation reservation revenues of approximately $70 million from 2017 to 2020, including reductions in 2018 and 2019 of approximately $44 million and $15 million, it provides longer-term revenue generation by adding ten years of firm transportation service commitments on both laterals and offers potential additional commodity fee revenue from Southwestern’s volume commitment.
The table below shows a reconciliation of the actual committed firm transportation revenues for 2017 and expected revenues under committed firm transportation agreements for 2018 from the table shown above to the amounts disclosed in the Results of Operations - Boardwalk Pipeline section of our MD&A included under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016, taking into account the Southwestern transaction discussed above, the sale of a processing plant and related assets in the second quarter of 2017 discussed in Note 6 of the Notes to Consolidated Financial Statements included under Item 8 and contracts entered into since December 31, 2016. The table does not include additional revenues Boardwalk Pipeline has recognized and may receive under firm transportation agreements based on actual utilization of the contracted pipeline capacity, any expected revenues for periods after the expiration dates of the existing agreements, execution of precedent agreements associated with growth projects or other events that occurred or will occur subsequent to December 31, 2017.
Partially as a result of the increase in overall gas supplies, demand markets, primarily in the Gulf Coast area, are growing due to new natural gas export facilities, power plants and petrochemical facilities and increased exports to Mexico. These developments have resulted in significant growth projects for Boardwalk Pipeline. As of December 31, 2017, Boardwalk Pipeline has placed several growth projects into service since 2016 and has additional growth projects under development that are expected to be fully placed into service through the end of 2020. These projects have lengthy planning and construction periods. As a result, these projects will not contribute to Boardwalk Pipeline’s earnings and cash flows until they are fully placed into service. The revenues that are expected to be realized in 2018 and 2019 from these growth projects are included in the estimates of expected revenues from capacity reservation and minimum bill charges under committed firm transportation agreements shown above.
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. 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 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.
The following table summarizes the results of operations for Boardwalk Pipeline for the years ended December 31, 2017, 2016 and 2015 as presented in Note 19 of the Notes to Consolidated Financial Statements included under Item 8:
As a result of the Tax Act, we recorded a one-time decrease to income tax expense of $294 million at the holding company level. This decrease was a result of remeasuring the net deferred tax liabilities at the lower corporate tax rate.
Net income increased $291 million in 2017 as compared with 2016, primarily due to the changes discussed above.
Total revenues increased $62 million in 2016 as compared with 2015. Excluding the net effect of $13 million of proceeds received from the settlement of a legal matter in 2016, $9 million of proceeds received from a business interruption claim in 2015 and items offset in fuel and transportation expense, primarily retained fuel, operating revenues increased $83 million. The increase was driven by an increase in transportation revenues of $71 million, which resulted primarily from growth projects placed into service, incremental revenues from the Gulf South rate case of $18 million and a full year of revenues from the Evangeline pipeline. Storage and PAL revenues were higher by $17 million primarily from the effects of favorable market conditions on time period price spreads.
The following table summarizes the results of operations for Loews Hotels & Co for the years ended December 31, 2017, 2016 and 2015 as presented in Note 19 of the Notes to Consolidated Financial Statements included under Item 8:
Equity income from joint ventures increased $40 million in 2017 as compared with 2016 primarily due to a $25 million gain on the sale of an equity interest in the Loews Don CeSar Hotel, a joint venture hotel property, in February of 2017, increased equity income from Universal Orlando joint venture properties and the absence of a $13 million impairment charge related to an equity interest in a joint venture hotel property in the 2016 period. These increases were partially offset by a $15 million impairment charge in 2017 related to an equity interest in a joint venture hotel property.
Operating revenues increased $30 million in 2016 as compared with 2015 primarily due to the acquisition of one hotel during 2016 and the acquisition of two hotels during 2015, partially offset by a decrease in revenue at the Loews Miami Beach Hotel due to renovations during 2016.
Operating and depreciation expenses increased $22 million and $9 million in 2016 as compared with 2015 primarily due to the acquisition of one hotel during 2016 and the acquisition of two hotels during 2015.
Equity income from joint ventures in 2016 was impacted by costs associated with opening one new hotel during 2016 and the $13 million impairment of an equity interest in a joint venture hotel property.
Corporate operations consist primarily of investment income at the Parent Company, operating results of Consolidated Container since 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.
Operating 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 investment income increased $124 million in 2016 as compared with 2015 primarily due to improved performance of equity based investments and fixed income investments in the trading portfolio and improved results from limited partnership investments.
Net results improved $68 million in 2016 as compared with 2015 primarily due to the changes discussed above.
In April of 2017, Fitch Ratings, Inc. affirmed our unsecured debt rating at A, with the rating outlook revised to negative from stable and in June of 2017, S&P Global Ratings (“S&P”) lowered our corporate credit and senior debt ratings from A+ to A with a stable outlook. Our current unsecured debt rating is A3 for Moody’s Investors Service, Inc. (“Moody’s”), with a stable outlook. Should one or more rating agencies downgrade our credit ratings from current levels, or announce that they have placed us under review for a potential downgrade, our cost of capital could increase and our ability to raise new capital could be adversely affected.
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.
operating activities reflected lower income taxes paid and increased receipts relating to returns on limited partnerships offset by higher net claim and expense payments.
CNA paid dividends of $3.10 per share on its common stock, including a special dividend of $2.00 per share in 2017. On February 9, 2018, CNA’s Board of Directors declared a quarterly dividend of $0.30 per share and a special dividend of $2.00 per share payable March 14, 2018 to shareholders of record on February 26, 2018. 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.
Dividends from Continental Casualty Company (“CCC”), a subsidiary of CNA, are subject to the insurance holding company laws of the State of Illinois, the domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require prior approval by the Illinois Department of Insurance (the “Department”), are determined based on the greater of the prior year’s statutory net income or 10% of statutory surplus as of the end of the prior year, as well as timing and amount of dividends paid in the preceding 12 months. Additionally, ordinary dividends may only be paid from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As of December 31, 2017, CCC is in a positive earned surplus position. The maximum allowable dividend CCC could pay during 2018 that would not be subject to the Department’s prior approval is $1.1 billion, less dividends paid during the preceding 12 months measured at that point in time. CCC paid dividends of $955 million in 2017. 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.
As of December 31, 2017, Diamond Offshore had no outstanding borrowings under its credit agreement and was in compliance with all covenant requirements thereunder. As of February 9, 2018, Diamond Offshore had no outstanding borrowings and $1.5 billion available under its credit agreement to provide short term liquidity for payment obligations.
In July of 2017, Moody’s downgraded Diamond Offshore’s corporate credit rating to Ba3 with a negative outlook from Ba2 with a stable outlook. In October of 2017, S&P downgraded Diamond Offshore’s corporate credit rating to B+ from BB- with a negative outlook. Market conditions and other factors, many of which are outside of Diamond Offshore’s control, could cause its credit ratings to be lowered further. Any downgrade in Diamond Offshore’s credit ratings could adversely impact its cost of issuing additional debt and the amount of additional debt that it could issue, and could further restrict its access to capital markets and its ability to raise funds by issuing additional debt. 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.
Diamond Offshore will make periodic assessments of its capital spending programs based on industry conditions and will make adjustments if it determines they are required. Diamond Offshore, may, from time to time, issue debt or equity securities, or a combination thereof, to finance capital expenditures, the acquisition of assets and 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 credit ratings, current market conditions and other factors beyond its control.
Boardwalk Pipeline’s cash provided by operating activities increased $36 million in 2017 compared to 2016, primarily due to increased net income, excluding the effects of non-cash items such as depreciation, amortization and the loss on the sale of operating assets. This increase also reflects the settlement of the Gulf South rate refund in 2016.
For 2017 and 2016, Boardwalk Pipeline’s capital expenditures were $708 million and $590 million, consisting of a combination of growth and maintenance capital. Boardwalk Pipeline expects total capital expenditures to be approximately $550 million in 2018 related to growth projects and pipeline system maintenance expenditures.
(c) Future policy benefit reserves are not discounted and represent CNA’s estimate of the ultimate amount and timing of the settlement of benefits based on its assessment of facts and circumstances known as of December 31, 2017. Additional information on future policy benefit reserves is included in Note 1 of the Notes to Consolidated Financial Statements included under Item 8.
(d) Does not include expected contribution of approximately $26 million to the Company’s pension and postretirement plans in 2018.
Further information on our commitments, contingencies and guarantees is provided in the Notes to Consolidated Financial Statements included under Item 8.
Credit exposure associated with non-performance by counterparties to our derivative instruments is generally limited to the uncollateralized change in fair value of the derivative instruments recognized in the Consolidated Balance Sheets. We mitigate the risk of non-performance by monitoring the creditworthiness of counterparties and diversifying derivatives by using multiple counterparties. We occasionally require collateral from our derivative investment counterparties depending on the amount of the exposure and the credit rating of the counterparty.
Net investment income after tax and noncontrolling interests increased $28 million in 2017 as compared with 2016. The increase was driven by limited partnership investments, which returned 9.1% in 2017 as compared with 6.3% in the prior year.
Net realized investment gains improved $34 million in 2017 as compared with 2016, primarily driven by lower OTTI losses recognized in earnings. Net realized investment results improved $73 million in 2016 as compared with 2015, driven by lower OTTI losses recognized in earnings and higher net realized investment gains on sales of securities. Further information on CNA’s realized gains and losses, including CNA’s OTTI losses and derivative gains (losses), as well as CNA’s impairment decision process, is set forth in Notes 1 and 3 of the Notes to Consolidated Financial Statements included under Item 8.
As of December 31, 2017 and 2016, only 2% of CNA’s fixed maturity portfolio was rated internally.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. 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 (2013). Based on this assessment, our management believes that, as of December 31, 2017, our internal control over financial reporting was effective.
We have audited the internal control over financial reporting of Loews Corporation and subsidiaries (the “Company”) as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
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, 2017, 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 15, 2018, 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 51% 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 income securities supporting long term care products and structured settlements not funded by annuities would result in a premium deficiency if those gains were realized, a related increase in Insurance reserves is recorded, net of tax and noncontrolling interests, as a reduction of net unrealized gains through Other comprehensive income (“Shadow Adjustments”). Shadow Adjustments increased $355 million (after tax and noncontrolling interests) and decreased $87 million (after tax and noncontrolling interests) for the years ended December 31, 2017 and 2016. As of December 31, 2017 and 2016, net unrealized gains on investments included in Accumulated other comprehensive income (“AOCI”) were correspondingly reduced by Shadow Adjustments of $1.3 billion and $909 million (after tax and noncontrolling interests).
Insurance receivables include balances due currently or in the future, including amounts due from insureds related to losses under high deductible policies, and are presented at unpaid balances, net of an allowance for doubtful accounts. Amounts are considered past due based on policy payment terms. The allowance is determined based on
periodic evaluations of aged receivables, management’s experience and current economic conditions. Insurance receivables and any related allowance are written off after collection efforts are exhausted or a negotiated settlement is reached.
Structured settlements have been negotiated for certain property and casualty insurance claims. Structured settlements are agreements to provide fixed periodic payments to claimants. CNA’s 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 5.5% to 8.0% at December 31, 2017 and 2016. At December 31, 2017 and 2016, the discounted reserves for unfunded structured settlements were $527 million and $544 million, net of discount of $798 million and $841 million. For the years ended December 31, 2017, 2016 and 2015, the amount of interest recognized on the discounted reserves of unfunded structured settlements was $41 million, $42 million and $42 million. This interest accretion is presented as a component of Insurance claims and policyholders’ benefits on the Consolidated Statements of Income but is excluded from the disclosure of prior year development.
Workers’ compensation lifetime claim reserves are calculated using mortality assumptions determined through statutory regulation and economic factors. At December 31, 2017 and 2016, workers’ compensation lifetime claim reserves are discounted at a 3.5% interest rate. As of December 31, 2017 and 2016, the discounted reserves for workers’ compensation lifetime claim reserves were $346 million and $371 million, net of discount of $190 million and $202 million. For the years ended December 31, 2017, 2016 and 2015, the amount of interest accretion recognized on the discounted reserves of workers’ compensation lifetime claim reserves was $19 million, $17 million and $20 million. This interest accretion is presented as a component of Insurance claims and policyholders’ benefits on the Consolidated Statements of Income, but is excluded from the Company’s disclosure of prior year development.
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% at December 31, 2017 and interest rates ranging from 4.5% to 6.8% at December 31, 2016. At December 31, 2017 and 2016, such discounted reserves totaled $2.4 billion and $2.2 billion, net of discount of $446 million and $529 million.
allowance analysis. Changes in the allowance for doubtful accounts on reinsurance receivables are presented as a component of Insurance claims and policyholders’ benefits on the Consolidated Statements of Income.
Reinsurance contracts that do not effectively transfer the economic risk of loss on the underlying policies are recorded using the deposit method of accounting, which requires that premium paid or received by the ceding company or assuming company be accounted for as a deposit asset or liability. CNA had $8 million and $3 million recorded as deposit assets at December 31, 2017 and 2016, and $4 million and $6 million recorded as deposit liabilities as of December 31, 2017 and 2016. Income on reinsurance contracts accounted for under the deposit method is recognized using an effective yield based on the anticipated timing of payments and the remaining life of the contract. When the anticipated timing of payments changes, the effective yield is recalculated to reflect actual payments to date and the estimated timing of future payments. The deposit asset or liability is adjusted to the amount that would have existed had the new effective yield been applied since the inception of the contract.
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. As noted under Future policy benefit reserves, all of the long term care deferred acquisition costs of $289 million were written off as of December 31, 2015 in recognition of a premium deficiency.
For each of the years ended December 31, 2017, 2016 and 2015, approximately 0.9 million, 0.4 million and 0.3 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, approximately 0.4 million, 3.7 million and 4.8 million shares attributable to employee stock-based compensation awards were not included in 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. Foreign currency transaction gains (losses) of $26 million, $(21) million and $(8) million for the years ended December 31, 2017, 2016 and 2015 were included in the Consolidated Statements of Income.
Supplementary cash flow information - Cash payments made for interest on long term debt, net of capitalized interest, amounted to $533 million, $511 million and $513 million for the years ended December 31, 2017, 2016 and 2015. Cash payments for federal, foreign, state and local income taxes amounted to $166 million, $114 million and $110 million for the years ended December 31, 2017, 2016 and 2015. Investing activities include $87 million of previously accrued capital expenditures for the year ended December 31, 2017 and exclude $18 million and $3 million of accrued capital expenditures for the years ended December 31, 2016 and 2015.
Accounting changes - In March of 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The updated accounting guidance simplifies the accounting for share-based payment award transactions, including income tax consequences and classification on the statement of cash flows. As of January 1, 2017, the Company adopted the updated accounting guidance and began recognizing excess tax benefits or deficiencies on vesting or settlement of awards as an income tax benefit or expense within net income and classifying the related cash flows within operating activities. The change impacted the amount and timing of income tax expense recognition as well as the calculation of diluted earnings per share. The accounting change did not have a material effect on the consolidated financial statements.
Recently issued ASUs - In May of 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” 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 guidance is effective for interim and annual reporting periods beginning after December 15, 2017, and may be adopted either retrospectively or on a modified basis, with a cumulative effect adjustment to the opening balance sheet at the date of adoption. The Company expects to adopt this updated guidance using the modified retrospective method. The adoption of the revenue standard will result in additional disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This will include additional quantitative and qualitative disclosures regarding contracts with customers, including the nature of the related performance obligations, the contract asset and liability balances for customer contracts, including significant changes to these balances and significant judgments made in applying the guidance.
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. Upon adoption, the Company expects the impact to be related primarily to revenue on CNA’s warranty products and services, which will be recognized more slowly under the new guidance than under the current revenue recognition pattern. At adoption, the Company anticipates a cumulative effect adjustment that will decrease Retained earnings by approximately $58 million (after tax and noncontrolling interests). In addition, Other revenues and Other operating expenses on the Company’s Consolidated
Statements of Income will increase significantly for those contracts for which CNA has concluded it is a principal, as the retail sellers’ mark-up will now be reflected as revenue and commission expense. The estimated annual gross-up of other revenues and other operating expenses will be approximately $500 million. The related gross-up effect on the Consolidated Balance Sheet at adoption will be an increase of Other assets and Other liabilities of approximately $1.7 billion. Based on the Company’s assessment, the impact of adoption of the updated guidance will not have a material effect on its results of operations or financial position.
In October of 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” The updated guidance amends the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company will adopt this updated guidance using the modified retrospective approach with a cumulative effect adjustment that will decrease Retained earnings by approximately $10 million (after tax and non-controlling interests) with an offset to a deferred income tax liability.
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 as of December 31, 2017.
(a) Gross realized gains on available-for-sale securities were $187, $209 and $133 for the years ended December 31, 2017, 2016 and 2015. Gross realized losses on available-for-sale securities were $65, $160 and $222 for the years ended December 31, 2017, 2016 and 2015.
While the Company generally does not invest in highly leveraged partnerships, there are risks inherent in limited partnership investments which may result in losses due to short-selling, derivatives or other speculative investment practices. The use of leverage increases volatility generated by the underlying investment strategies.
As of December 31, 2017, the Company had committed approximately $384 million to future capital calls from various third party limited partnership investments in exchange for an ownership interest in the related partnerships.
The tables below present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2017 and 2016:
Securities may be transferred in or out of levels within the fair value hierarchy based on the availability of observable market information and quoted prices used to determine the fair value of the security. The availability of observable market information and quoted prices varies based on market conditions and trading volume. During the year ended December 31, 2017 there were $10 million of transfers from Level 1 to Level 2 and no transfers from Level 2 to Level 1. During the year ended December 31, 2016, there were no transfers between Level 1 and Level 2. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods.
Historically, the fair value of life settlement contracts was determined as the present value of the anticipated death benefits less anticipated premium payments based on contract terms that are distinct for each insured, as well as CNA’s own assumptions for mortality, premium expense and the rate of return that a buyer would require on the contracts. As of December 31, 2016 CNA reached an agreement on terms to sell the portfolio and the purchase and sale agreement related to the portfolio was executed on March 7, 2017. At December 31, 2016, the valuation of the life settlement contracts was based on the terms of the sale of the contract to a third party. Despite the sale, the contracts were classified as Level 3 as there is not an active market for life settlement contracts.
The following tables present quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurement of Level 3 assets. Valuations for assets and liabilities not presented in the tables below are primarily based on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of unobservable inputs from these broker quotes is neither provided nor reasonably available to the Company. The valuation of life settlement contracts was based on the terms of the sale of the contracts to a third party; therefore the contracts are not included in the tables below.
In 2016, Diamond Offshore entered into a ten-year agreement with a subsidiary of GE Oil & Gas (“GE”) to provide services with respect to certain blowout preventer and related well control equipment on four drillships. Such services include management of maintenance, certification and reliability with respect to such equipment. In connection with the contractual services agreement with GE, Diamond Offshore completed four sale and leaseback transactions with a GE affiliate during 2016 with respect to the well control equipment on its four drillships and received an aggregate of $210 million in proceeds, which was less than the carrying value of the equipment. The resulting difference was recorded as prepaid rent with no gain or loss recognized on the transactions, and will be amortized over the terms of the operating leases. Future commitments under the operating leases and contractual services agreements are estimated to aggregate approximately $550 million over the remaining term of the agreements.
During 2017, in response to continued depressed market conditions for the offshore contract drilling industry, Diamond Offshore’s expectations that a market recovery is not likely to occur in the near term, as well as decisions by management to market certain rigs for sale, Diamond Offshore evaluated ten of its drilling rigs with indications that their carrying values may not be recoverable. Based on its analyses, Diamond Offshore determined that the carrying values of three rigs were impaired, consisting of one ultra-deepwater semisubmersible, one deepwater semisubmersible and one jack-up rig.
During 2017, Boardwalk Pipeline sold a processing plant and related assets for approximately $64 million, including customary adjustments. The sale resulted in a loss of $47 million ($15 million after tax and noncontrolling interests) and is reported within Other operating expenses on the Consolidated Statements of Income.
The increase in the goodwill balance as of December 31, 2017 primarily reflects the acquisition of Consolidated Container. See Note 2 for further discussion on the acquisition.
The balance of finite-lived intangible assets as of December 31, 2017 includes assets from the acquisition of Consolidated Container.
CNA’s actuarial reserve analyses result in point estimates. Each quarter, the results of detailed reserve reviews are summarized and discussed with CNA’s senior management to determine management’s best estimate of reserves. CNA’s senior management considers many factors in making this decision. The factors include, but are not limited to, the historical pattern and volatility of the actuarial indications, the sensitivity of the actuarial indications to changes in paid and incurred loss patterns, the consistency of claims handling processes, the consistency of case reserving practices, changes in CNA’s pricing and underwriting, pricing and underwriting trends in the insurance market and legal, judicial, social and economic trends. CNA’s recorded reserves reflect its best estimate as of a particular point in time based upon known facts, consideration of the factors cited above and its judgment. The carried reserve differs from the actuarial point estimate as the result of CNA’s consideration of the factors noted above as well as the potential volatility of the projections associated with the specific product being analyzed and other factors affecting claims costs that may not be quantifiable through traditional actuarial analysis.
The loss reserve development tables presented herein 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 Property and 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.
disposition, the effects of the disposition are reported on a retrospective basis by removing the balances associated with it.
In the loss reserve development tables, IBNR includes reserves for incurred but not reported losses and expected development on case reserves.
Changes in estimates of claim and claim adjustment expense reserves and premium accruals, net of reinsurance, for prior years are defined as net prior year development. These changes can be favorable or unfavorable. Favorable net prior year development of $302 million, $316 million and $218 million was recorded for Property and Casualty Operations for the years ended December 31, 2017, 2016 and 2015.
Favorable net prior year development of $89 million, $43 million and $50 million was recorded for Other Insurance Operations for the years ended December 31, 2017, 2016 and 2015. The favorable net prior year development for the year ended December 31, 2017 was driven by lower than expected claim severity.
Premium development can occur in the Property and Casualty Operations when there is a change in exposure on auditable policies or when premium accruals differ from processed premium. Audits on policies usually occur in a period after the expiration date of the policy.
The following table and discussion presents detail of the net prior year claim and claim adjustment expense reserve development in CNA’s Property and Casualty Operations:
Favorable development for commercial auto was primarily due to lower than expected severity in accident years 2013 through 2016, as well as a large favorable recovery on a claim in accident year 2012.
Favorable development for workers’ compensation was primarily related to decreases in frequency and severity in recent accident years, partially attributable to California reforms impacting medical costs. This was partially offset by unfavorable development related to an adverse arbitration ruling on reinsurance recoverables from older accident years as well as the recognition of loss estimates associated with favorable premium development.
Unfavorable development for workers’ compensation was primarily due to higher than expected severity for Defense Base Act contractors that largely resulted from a reduction of expected future recoveries from the U.S. Department of Labor under the War Hazard Act. Further unfavorable development was due to the impact of recent Florida court rulings for accident years 2008 through 2015. These were partially offset by favorable development related to lower than expected frequencies related to the ongoing Middle Market and Small Business results for accident years 2009 through 2014.
Favorable development for other coverages was due to better than expected claim frequency and claim severity in accident years 2010 through 2015, better than expected loss frequency in accident years 2013 through 2015, better than expected severity on the December 2015 United Kingdom floods, better than expected attritional losses and large loss experience on accident years 2013 through 2015 for Hardy business and favorable settlements on claims in accident years 2013 and prior related to CNA’s Canadian package business. Additional favorable development was due to a commutation of exposures in marine run-off classes on CNA’s Europe business and lower than expected frequency of large losses related to CNA’s Europe business in accident years 2013 and 2015. This was partially offset by unfavorable development related to higher than expected severity from a fourth quarter 2015 catastrophe event.
The table below reconciles the net liability for unpaid claim and claim adjustment expenses for Property and Casualty Operations to the amount presented in the Consolidated Balance Sheets.
only recognized in earnings in proportion to actual paid recoveries under the LPT. Over the life of the contract, there is no economic impact as long as any additional losses incurred are within the limit of the LPT. In a period in which CNA recognizes a change in the estimate of A&EP reserves that increases the amounts ceded under the LPT, the proportion of actual paid recoveries to total ceded losses is affected and the change in the deferred gain is recognized in earnings as if the revised estimate of ceded losses was available at the effective date of the LPT. The effect of the deferred retroactive reinsurance benefit is recorded in Insurance claims and policyholders’ benefits in the Consolidated Statements of Income.
Based upon CNA’s annual A&EP reserve review, net unfavorable prior year development of $60 million, $200 million and $150 million was recognized before consideration of cessions to the LPT for the years ended December 31, 2017, 2016, and 2015. The 2017 unfavorable development was driven by modestly higher anticipated payouts on claims from known sources of asbestos exposure. The 2016 unfavorable development was driven by an increase in anticipated future expenses associated with determination of coverage, higher anticipated payouts associated with a limited number of historical accounts having significant asbestos exposures and higher than expected severity on pollution claims. The 2015 unfavorable development was recorded to reflect a decrease in anticipated future reinsurance recoveries related to asbestos claims and higher than expected severity on pollution claims. While the unfavorable development was ceded to NICO under the LPT, CNA’s reported earnings in the periods were negatively affected due to the application of retroactive reinsurance accounting.
As of December 31, 2017 and 2016, the cumulative amounts ceded under the LPT were $2.9 billion and $2.8 billion. The unrecognized deferred retroactive reinsurance benefit was $326 million and $334 million as of December 31, 2017 and 2016.
NICO established a collateral trust account as security for its obligations to CNA. The fair value of the collateral trust account was $3.1 billion and $2.8 billion as of December 31, 2017 and 2016. 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.
Leases primarily cover office facilities, machinery and computer equipment. Hotel properties, in some instances, are constructed on leased land. Rent expense amounted to $113 million, $97 million and $85 million for the years ended December 31, 2017, 2016 and 2015. The table below presents the future minimum lease payments to be made under non-cancelable operating leases along with lease and sublease minimum receipts to be received on owned and leased properties.
The Company and its eligible subsidiaries file a consolidated federal income tax return. The Company has entered into a separate tax allocation agreement with CNA, a majority-owned subsidiary in which its ownership exceeds 80%. The agreement provides that the Company will: (i) pay to CNA the amount, if any, by which the Company’s consolidated federal income tax is reduced by virtue of inclusion of CNA in the Company’s return or (ii) be paid by CNA an amount, if any, equal to the federal income tax that would have been payable by CNA if it had filed a separate consolidated return. The agreement may be canceled by either of the parties upon thirty days written notice.
Diamond Offshore, which is not included in the Company’s consolidated federal income tax return, files income tax returns in the U.S. federal and various state and foreign jurisdictions. Tax years that remain subject to examination by these jurisdictions include years 2009 to 2016.
U.S. federal income tax purposes no later than financial accounting purposes and the transition adjustment from existing law, which will also have no impact on the effective tax rate.
Any adjustments to these provisional amounts will be reported as a component of Income tax (expense) benefit in the reporting period in which such adjustments are determined, which will be no later than the fourth quarter of 2018.
The Company currently intends to indefinitely reinvest the earnings of its foreign subsidiaries. Except to the extent of the U.S. tax provided under the Tax Act or other required U.S. tax provision, the Company has not provided tax on any withholding or other tax that may be applicable should a future distribution be made from any unremitted earnings. It is not practical to estimate this potential liability.
(a) Includes $25 and $15 of deferred tax assets reflected in Other assets in the Consolidated Balance Sheets at December 31, 2017 and 2016.
Federal net operating loss carryforwards of $51 million expire between 2033 and 2037. Net operating loss carryforwards in foreign tax jurisdictions of $42 million expire between 2021 and 2027 and $76 million can be carried forward indefinitely. Federal tax credit carryforwards of $171 million can be utilized to offset future current tax liabilities or will ultimately be refundable no later than 2021. Foreign tax credit carryforwards of $28 million will expire in 2019 and 2024 to 2027.
In the third quarter of 2017, CNA completed a public offering of $500 million aggregate principal amount of its 3.5% senior notes due August 15, 2027 and used a portion of the net proceeds to redeem the entire $350 million outstanding principal amount of its 7.4% senior notes due November 15, 2019. The redemption of the $350 million senior notes resulted in a loss of $42 million ($24 million after tax and noncontrolling interests) and is included in Interest expense on the Consolidated Statements of Income for the year ended December 31, 2017.
In the third quarter of 2017, Diamond Offshore completed a public offering of $500 million aggregate principal amount of its 7.9% senior notes due August 15, 2025 and used the net proceeds together with cash on hand to redeem the entire $500 million outstanding principal amount of its 5.9% senior notes due May 1, 2019. The redemption of this debt resulted in a loss of $35 million ($11 million after tax and noncontrolling interests) and is included in Interest expense on the Consolidated Statements of Income for the year ended December 31, 2017.
Diamond Offshore has a $1.5 billion senior unsecured revolving credit facility that matures in October of 2020, except for $40 million of commitments that mature in March of 2019 and $60 million of commitments that mature in October of 2019. In addition, Diamond Offshore also has the option to increase the revolving commitments under the revolving credit facility by up to an additional $500 million from time to time, upon receipt of additional commitments from new or existing lenders, and to request one additional one-year extension of the maturity date. Up to $250 million of the facility may be used for the issuance of performance or other standby letters of credit and up to $100 million may be used for swingline loans. As of December 31, 2017, there were no outstanding borrowings under the credit agreement and Diamond Offshore was in compliance with all covenants.
In the first quarter of 2017, Boardwalk Pipeline completed a public offering of $500 million aggregate principal amount of its 4.5% senior notes due July 15, 2027 and used the net proceeds to repay the entire $275 million outstanding principal amount of its 6.3% senior notes due August 15, 2017 and to fund growth capital expenditures.
Boardwalk Pipeline has a revolving credit facility having aggregate lending commitments of $1.5 billion. During the third quarter of 2017, Boardwalk Pipeline extended the maturity date of the revolving credit facility by one year to May 26, 2022. As of December 31, 2017, there were borrowings of $385 million under the credit agreement and Boardwalk Pipeline was in compliance with all covenants.
In the second quarter of 2017, Consolidated Container entered into a credit agreement providing for a $605 million term loan and a five year $125 million asset based lending facility (“ABL facility”) in conjunction with the acquisition discussed in Note 2. The term loan is a variable rate facility which bears interest at a floating rate equal to the London Interbank Offered Rate (“LIBOR”) plus an applicable margin of 3.5%, subject to a 1.0% floor. Consolidated Container entered into interest rate swaps for a notional amount of $500 million to hedge its cash flow exposure to the variable rate debt by fixing the interest rate on the hedged portion of the term loan. As of December 31, 2017, the term loan had a weighted average effective interest rate of 5.5%, including the effects of the interest rate swaps. The term loan matures on May 22, 2024 and requires annual principal amortization of 1.0% of the original loan amount beginning December 31, 2017. Consolidated Container recorded approximately $19 million of debt issuance costs, which will be amortized over the terms of the facilities. As of December 31, 2017, Consolidated Container had no outstanding borrowings under its ABL facility. In February of 2018, Consolidated Container repriced its term loan to bear interest at a floating rate equal to LIBOR plus an applicable margin of 3.0%, subject to a 1.0% floor.
Dividends of $0.25 per share on the Company’s common stock were declared and paid in 2017, 2016 and 2015.
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 $63 million and $67 million at December 31, 2017 and 2016.
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 Illinois Department of Insurance (the “Department”) are determined based on the greater of the prior year’s statutory net income or 10% of statutory surplus as of the end of the prior year, as well as timing and amount of dividends paid in the preceding 12 months. Additionally, ordinary dividends may only be paid from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As of December 31, 2017, CCC is in a positive earned surplus position. The maximum allowable dividend CCC could pay during 2018 that would not be subject to the Department’s prior approval is $1.1 billion, less dividends paid during the preceding 12 months measured at that point in time. CCC paid dividends of $955 million in 2017. 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.
Combined statutory capital and surplus and statutory net income for the Combined Continental Casualty Companies are presented in the table below, determined in accordance with accounting practices prescribed or permitted by insurance and/or other regulatory authorities.
CNA’s domestic insurance subsidiaries are subject to risk-based capital (“RBC”) requirements. RBC is a method developed by the NAIC to determine the minimum amount of statutory capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The formula for determining the amount of RBC specifies various factors, weighted based on the perceived degree of risk, which are applied to certain financial balances and financial activity. The adequacy of a company’s actual capital is evaluated by a comparison to the RBC results, as determined by the formula. Companies below minimum RBC requirements are classified within certain levels, each of which requires specified corrective action.
Other Postretirement Benefit Plans - The Company and its subsidiaries have several postretirement benefit plans covering eligible employees and retirees. Participants generally become eligible after reaching age 55 with required years of service. Actual requirements for coverage vary by plan. Benefits for retirees who were covered by
bargaining units vary by each unit and contract. Benefits for certain retirees are in the form of a Company health care account.
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 service and interest cost as of December 31, 2017. An increase of 1% in each year would increase the accumulated postretirement benefit obligation as of December 31, 2017 by $2 million and a decrease of 1% in each year would decrease the accumulated postretirement benefit obligation as of December 31, 2017 by $2 million.
In 2015, CNA eliminated future benefit accruals associated with the CNA Retirement Plan effective June 30, 2015. This amendment resulted in a $55 million curtailment which is a decrease in the plan benefit obligation liability and a reduction of the unrecognized actuarial losses included in AOCI.
The table below presents the estimated future minimum benefit payments at December 31, 2017.
In 2018, it is expected that contributions of approximately $24 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 86% of the carrying value as of December 31, 2017 and 2016 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 62% were equity related, 32% pursued a multi-strategy approach and 6% were focused on distressed investments at December 31, 2017.
For a discussion of the valuation methodologies used to measure fixed maturity securities, equities and short term investments, see Note 4.
There were no Level 3 assets at December 31, 2017 and 2016.
Time-based Restricted Stock Units: Time-based restricted stock units (“RSUs”) were 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.
(b) Net loss for the second quarter of 2016 includes the impact of a $267 million asset impairment charge at Diamond Offshore.
In September of 2016, a class action lawsuit was filed against CCC, Continental Assurance Company (“CAC”) (a former subsidiary of CCC), CNA, the Investment Committee of the CNA 401(k) Plus Plan (“Plan”), The Northern Trust Company and John Does 1-10 (collectively “Defendants”) related to the Plan. The complaint alleges that Defendants breached fiduciary duties to the Plan and caused prohibited transactions in violation of the Employee Retirement Income Security Act of 1974 when the Plan’s Fixed Income Fund’s annuity contract with CAC was canceled. The plaintiff alleges he and a proposed class of the Plan participants who had invested in the Fixed Income Fund suffered lower returns in their Plan investments as a consequence of these alleged violations and seeks relief on behalf of the putative class. The Plan trustees have provided notice to their fiduciary coverage insurance carriers.
Through mediation, the plaintiff, Defendants and the Plan’s fiduciary insurance carriers reached an agreement in principle to settle this matter. Upon completion of a definitive settlement agreement, plaintiff and Defendants will propose a class settlement for court approval. Based on the agreement in principle, management has recorded its best estimate of CNA’s probable loss and the Company does not believe that the ultimate resolution of this matter will have a material impact on its condensed consolidated financial statements.
The Company and its subsidiaries are from time to time parties to other litigation arising in the ordinary course of business. While it is difficult to predict the outcome or effect of any litigation, management does not believe that the outcome of any such pending litigation will materially affect the Company’s results of operations or equity.
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 representation 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, 2017, 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.
CNA also provided guarantees, if the primary obligor fails to perform, to holders of structured settlement annuities provided by a previously owned subsidiary. As of December 31, 2017, the potential amount of future payments CNA could be required to pay under these guarantees was approximately $1.8 billion, which will be paid over the lifetime of the annuitants. CNA does not believe any payment is likely under these guarantees, as CNA is the beneficiary of a trust that must be maintained at a level that approximates the discounted reserves for these annuities.
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 have been reported net of any impact from the premium rate adjustments. For the year ended December 31, 2017, CNA recognized $36 million of adverse premium development and also increased interest expense by $7 million for interest due to policyholders on the premium rate adjustments. For the year ended December 31, 2016 CNA recorded a charge which reduced earned premium by $16 million.
The policyholder refunds for the multi-peril package product were issued in the third quarter of 2017. The policyholder refunds for workers’ compensation policies are expected to be refunded in 2018. The estimated refund liability, including interest, for the workers’ compensation policies as of December 31, 2017 was $60 million. Any fines or penalties related to the foregoing are reasonably possible, but are not expected to be material to the Company’s financial statements.
The Company has five reportable segments comprised of four individual operating subsidiaries, CNA, Diamond Offshore, Boardwalk Pipeline and Loews Hotels & Co; and the Corporate segment. The operations of Consolidated Container since the acquisition date are included in the Corporate segment. Each of the 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.
Boardwalk Pipeline is engaged in the interstate transportation and storage of natural gas and NGLs. This segment consists of interstate natural gas pipeline systems originating in the Gulf Coast region, Oklahoma and Arkansas, and extending north and east through the midwestern states of Tennessee, Kentucky, Illinois, Indiana and Ohio, natural gas storage facilities in four states and NGL pipelines and storage facilities in Louisiana and Texas, with approximately 14,335 miles of pipeline.
Loews Hotels & Co operates a chain of 24 hotels, 22 of which are in the United States and two of which are in Canada.