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LOEWS CORP - Quarter Report: 2018 June (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ____________ to _____________

Commission File Number 1-6541

LOEWS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware       13-2646102
(State or other jurisdiction of       (I.R.S. Employer
incorporation or organization)       Identification No.)

667 Madison Avenue, New York, N.Y. 10065-8087

(Address of principal executive offices) (Zip Code)

(212) 521-2000

(Registrant’s telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes       X                                                                    No                 

    Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes       X                           No                                           Not Applicable                 

    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

    Large accelerated filer   X       Accelerated filer             Non-accelerated filer              Smaller reporting company           

Emerging growth company          

    If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

                

    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes                                                                               No       X      

 

Class

       

      Outstanding at July 20, 2018      

    Common stock, $0.01 par value           315,982,102 shares

 

 

 


Table of Contents

INDEX

 

     Page  
     No.  

Part I. Financial Information

  

Item 1. Financial Statements (unaudited)

  

Consolidated Condensed Balance Sheets
June  30, 2018 and December 31, 2017

     3  

Consolidated Condensed Statements of Income
Three and six months ended June 30, 2018 and 2017

     4  

Consolidated Condensed Statements of Comprehensive Income (Loss)
Three and six months ended June 30, 2018 and 2017

     5  

Consolidated Condensed Statements of Equity
Six months ended June  30, 2018 and 2017

     6  

Consolidated Condensed Statements of Cash Flows
Six months ended June 30, 2018 and 2017

     7  

Notes to Consolidated Condensed Financial Statements

     8  

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

     36  

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

     56  

Item 4.  Controls and Procedures

     56  

Part II. Other Information

     56  

Item 1.  Legal Proceedings

     56  

Item 1A. Risk Factors

     56  

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

     57  

Item 6.  Exhibits

     58  

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

      June 30,
2018
  December 31,
2017
(Dollar amounts in millions, except per share data)         

Assets:

        

Investments:

        

Fixed maturities, amortized cost of $38,568 and $38,861

     $ 40,441     $ 42,133

Equity securities, cost of $1,320 and $1,177

       1,305       1,224

Limited partnership investments

       3,310       3,278

Other invested assets, primarily mortgage loans

       976       945

Short term investments

       4,437       4,646

Total investments

       50,469       52,226

Cash

       453       472

Receivables

       8,217       7,613

Property, plant and equipment

       15,471       15,427

Goodwill

       658       659

Other assets

       4,791       2,555

Deferred acquisition costs of insurance subsidiaries

       673       634

Total assets

     $     80,732     $     79,586
                      

Liabilities and Equity:

        

Insurance reserves:

        

Claim and claim adjustment expense

     $ 21,990     $ 22,004

Future policy benefits

       10,667       11,179

Unearned premiums

       4,410       4,029

Total insurance reserves

       37,067       37,212

Payable to brokers

       311       60

Short term debt

       181       280

Long term debt

       11,290       11,253

Deferred income taxes

       879       749

Other liabilities

       9,146       5,466

Total liabilities

       58,874       55,020

Commitments and contingent liabilities

        

Preferred stock, $0.10 par value:

        

Authorized – 100,000,000 shares

        

Common stock, $0.01 par value:

        

Authorized – 1,800,000,000 shares

        

Issued – 332,684,645 and 332,487,815 shares

       3       3

Additional paid-in capital

       3,809       3,151

Retained earnings

       16,532       16,096

Accumulated other comprehensive loss

       (625 )       (26 )
       19,719       19,224

Less treasury stock, at cost (16,017,088 and 400,000 shares)

       (808 )       (20 )

Total shareholders’ equity

       18,911       19,204

Noncontrolling interests

       2,947       5,362

Total equity

       21,858       24,566

Total liabilities and equity

     $ 80,732     $ 79,586
                      

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended   Six Months Ended
     June 30,   June 30,
      2018   2017   2018   2017
(In millions, except per share data)                 

Revenues:

                

Insurance premiums

     $ 1,815     $ 1,734     $ 3,600     $ 3,379

Net investment income

       551       478       1,057       1,082

Investment gains (losses):

                

Other-than-temporary impairment losses

           (2 )       (6 )       (4 )  

Other net investment gains (losses)

       (3 )       45       12       81

Total investment gains (losses)

       (3 )       43       6       77

Operating revenues and other

       1,227       1,104       2,508       2,121

Total

       3,590       3,359       7,171       6,659

Expenses:

                

Insurance claims and policyholders’ benefits

       1,327       1,280       2,666       2,573

Amortization of deferred acquisition costs

       359       312       655       617

Operating expenses and other

       1,454       1,281       2,854       2,331

Interest

       143       139       284       281

Total

       3,283       3,012       6,459       5,802

Income before income tax

       307       347       712       857

Income tax expense

       (59 )       (69 )       (84 )       (188 )

Net income

       248       278       628       669

Amounts attributable to noncontrolling interests

       (18 )       (47 )       (105 )       (143 )

Net income attributable to Loews Corporation

     $ 230     $ 231     $ 523     $ 526
                                          

Basic net income per share

     $ 0.72     $ 0.69     $ 1.62     $ 1.56
                                          

Diluted net income per share

     $ 0.72     $ 0.69     $ 1.61     $ 1.56
                                          

Dividends per share

     $   0.0625     $   0.0625     $     0.125     $     0.125
                                          

Weighted average shares outstanding:

                

Shares of common stock

       318.87       336.91       323.30       336.90

Dilutive potential shares of common stock

       0.91       0.81       0.93       0.80

Total weighted average shares outstanding assuming dilution

       319.78       337.72       324.23       337.70
                                          

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

     Three Months Ended   Six Months Ended
     June 30,   June 30,
              2018                   2017                   2018                   2017        
(In millions)                 

Net income

     $       248     $       278     $       628     $       669

Other comprehensive income (loss), after tax

                

Changes in:

                

Net unrealized gains (losses) on investments with other-than-temporary impairments

       (1 )           (10 )       (4 )

Net other unrealized gains (losses) on investments

       (159 )       77       (588 )       144

Total unrealized gains (losses) on investments

       (160 )       77       (598 )       140

Unrealized gains on cash flow hedges

       4           14    

Pension liability

       9       7       19       15

Foreign currency translation

       (52 )       42       (41 )       53

Other comprehensive income (loss)

       (199 )       126       (606 )       208

Comprehensive income

       49       404       22       877

Amounts attributable to noncontrolling interests

       2       (60 )       (41 )       (164 )

Total comprehensive income (loss) attributable to Loews Corporation

     $ 51     $ 344     $ (19 )     $ 713
                                          

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF EQUITY

(Unaudited)

 

         Loews Corporation Shareholders    
                      Accumulated   Common    
              Additional       Other   Stock    
         Common    Paid-in   Retained   Comprehensive   Held in       Noncontrolling    
      Total   Stock    Capital   Earnings   Income (Loss)   Treasury   Interests
(In millions)                              

Balance, January 1, 2017

     $ 23,361     $ 3      $ 3,187     $ 15,196     $ (223 )     $ -     $ 5,198

Net income

       669                526               143

Other comprehensive income

       208                    187           21

Dividends paid

       (138 )                (42 )               (96 )

Purchases of Loews treasury stock

       (6 )                        (6 )    

Stock-based compensation

       14            (9 )                   23

Other

       (2 )                            (3 )                           1

Balance, June 30, 2017

     $ 24,106     $ 3      $ 3,178     $ 15,677     $ (36 )     $ (6 )     $ 5,290
                                                                         

Balance, January 1, 2018, as reported

     $     24,566     $             3      $     3,151     $     16,096     $         (26 )     $         (20 )     $         5,362

Cumulative effect adjustments from changes in accounting standards (Note 1)

       (91 )                            (43 )       (28 )                 (20 )

Balance, January 1, 2018, as adjusted

       24,475       3        3,151       16,053       (54 )       (20 )       5,342

Net income

       628                523               105

Other comprehensive loss

       (606 )                    (542 )           (64 )

Dividends paid

       (140 )                (40 )               (100 )

Purchase of Boardwalk Pipeline common units

       (1,715 )            661           (29 )           (2,347 )

Purchases of Loews treasury stock

       (788 )                        (788 )    

Stock-based compensation

       8            1                   7

Other

       (4 )                  (4 )       (4 )                           4

Balance, June 30, 2018

     $ 21,858     $ 3      $ 3,809     $ 16,532     $         (625 )     $ (808 )     $ 2,947
                                                                         

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Six Months Ended June 30    2018   2017
(In millions)         

Operating Activities:

        

Net income

     $ 628     $ 669

Adjustments to reconcile net income to net cash
provided (used) by operating activities, net

       494       614

Changes in operating assets and liabilities, net:

        

Receivables

       (507 )       (223 )

Deferred acquisition costs

       (43 )       (41 )

Insurance reserves

       563       262

Other assets

       (151 )       (108 )

Other liabilities

       (115 )       (79 )    

Trading securities

       1,282       137

Net cash flow operating activities

       2,151       1,231

Investing Activities:

        

Purchases of fixed maturities

           (5,608 )           (4,840 )

Proceeds from sales of fixed maturities

       4,781       3,142

Proceeds from maturities of fixed maturities

       1,306       1,770

Purchases of limited partnership investments

       (73 )       (47 )

Proceeds from sales of limited partnership investments

       94       119

Purchases of property, plant and equipment

       (480 )       (476 )

Acquisitions

       (10 )       (1,222 )

Dispositions

       2       69

Change in short term investments

       (1,104 )       (29 )

Other, net

       (145 )       (40 )

Net cash flow investing activities

       (1,237 )       (1,554 )

Financing Activities:

        

Dividends paid

       (40 )       (42 )

Dividends paid to noncontrolling interests

       (100 )       (96 )

Purchases of Loews treasury stock

       (799 )       (6 )

Principal payments on debt

       (605 )       (908 )

Issuance of debt

       533       1,401

Other, net

       83       (1 )

Net cash flow financing activities

       (928 )       348

Effect of foreign exchange rate on cash

       (5 )       5

Net change in cash

       (19 )       30

Cash, beginning of period

       472       327

Cash, end of period

     $ 453     $ 357
                      

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1. 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 attributable to Loews Corporation” as used herein means Net income attributable to Loews Corporation shareholders.

In the opinion of management, the accompanying unaudited Consolidated Condensed Financial Statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of June 30, 2018 and December 31, 2017, results of operations and comprehensive income for the three and six months ended June 30, 2018 and 2017 and changes in shareholders’ equity and cash flows for the six months ended June 30, 2018 and 2017. Net income for the second quarter and first half of each of the years is not necessarily indicative of net income for that entire year. These Consolidated Condensed Financial Statements should be read in conjunction with the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

The Company presents basic and diluted net income per share on the Consolidated Condensed Statements of Income. Basic net income per share excludes dilution and is computed by dividing net income attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. There were no shares and 0.6 million shares attributable to employee stock-based compensation awards excluded from the diluted weighted average shares outstanding amounts for the three and six months ended June 30, 2018 and 2017 because the effect would have been antidilutive.

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 Other assets by approximately $1.9 billion and Other liabilities by approximately $2.0 billion.

The impact of the new guidance is primarily related to revenue on CNA’s non-insurance warranty products and services, which will be recognized more slowly as compared to the historic revenue recognition pattern. For the warranty products in which CNA acts as principal, Operating revenues and other and Operating expenses and other are increased to reflect the gross amount paid by consumers, including the retail seller’s markup, which is considered a commission to the Company’s agent. This gross-up of revenues and expenses resulted in an increase to Other assets and Other liabilities on the Consolidated Condensed Balance Sheet, as the revenue and expense are recognized over the actuarially determined expected claims emergence pattern. Prior to the adoption of ASU 2014-09, Other assets and Other liabilities would have been $2.7 billion and $7.0 billion as of June 30, 2018, as compared to $2.6 billion and $5.5 billion as of December 31, 2017. The impact of adopting the new guidance resulted in an increase to Operating revenues and other of $143 million and $274 million for the three and six months ended June 30, 2018 and

 

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an increase to Operating expenses and other of $141 million and $274 million for the three and six months ended June 30, 2018. See Note 7 for additional information on revenues from contracts with customers.

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 three and six months ended June 30, 2018, a decrease in the fair value of equity securities of approximately $8 million and $23 million was recognized in the Company’s Consolidated Condensed Statements of Income as a result of this change. For the three and six months ended June 30, 2017, a $2 million and $6 million increase in the fair value of equity securities was recognized in Other comprehensive income.

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. As of January 1, 2018, the Company adopted this updated guidance using the modified retrospective approach with a cumulative effect adjustment of $9 million (after noncontrolling interests) as a decrease to beginning Retained earnings with an offset to a deferred income tax liability.

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.

Recently issued ASUs – In February of 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The updated guidance requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and nonlease components in a contract in accordance with the new revenue guidance in ASU 2014-09. The updated guidance is effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.

In June of 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through net income. The guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements, and expects the primary changes to be the use of the expected credit loss model for the mortgage loan portfolio and reinsurance receivables and the use of the allowance method rather than the write-down method for credit losses within the available-for-sale fixed maturities portfolio. The expected credit loss model will require a financial asset to be presented at the net amount expected to be collected. Under the allowance method for available-for-sale debt securities the Company will record reversals of credit losses if the estimate of credit losses declines.

Income tax reform update Based on the Company’s interpretation of the Tax Act, a non-cash provisional $200 million increase to net income (net of noncontrolling interests) was recorded during the fourth quarter of 2017. This increase included a one-time mandatory repatriation of previously deferred earnings of certain of Diamond Offshore’s non-U.S. subsidiaries inclusive of the utilization of certain tax attributes offset by a provisional liability for uncertain

 

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tax positions related to such attributes. In 2018, the U.S. Department of the Treasury and the Internal Revenue Service issued additional guidance which clarified certain of Diamond Offshore’s tax positions, which resulted in a $23 million increase to net income (net of noncontrolling interests) in the first quarter of 2018 for uncertain tax positions related to the mandatory repatriation toll charges in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 118 (“SAB 118”). SAB 118 allows companies to report the income tax effects of the Tax Act as a provisional amount based on a reasonable estimate, which would be subject to adjustment during a reasonable measurement period, not to exceed twelve months, until the accounting and analysis under ASC 740 is complete.

The Company is still in the process of evaluating the estimate as it relates to the tax effect of: (i) the amount of deferred tax assets and liabilities subject to the income tax rate change from 35% to 21%, including the calculation of the mandatory deemed repatriation aspect of the Tax Act and the state tax effect of adjustments made to the 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 will have 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 will also have no impact on the effective tax rate.

2. Purchase of Boardwalk Pipeline Common Units

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”) 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. The election to exercise the call option resulted in the Boardwalk Pipeline noncontrolling interests being reclassified as mandatorily redeemable equity. The noncontrolling interest liability was removed and $1.5 billion was recorded in Other liabilities on the Consolidated Condensed Balance Sheet as of June 30, 2018. The purchase price of the common units was lower than the carrying value of the noncontrolling interests for Boardwalk Pipeline, resulting in an increase to Additional paid-in capital of $661 million, an increase to deferred income tax liabilities of $211 million and a decrease to AOCI of $29 million, which were recorded as of June 30, 2018. The transaction was completed on July 18, 2018.

Following completion of the transaction on July 18, 2018, Boardwalk Pipelines Holding Corp., a wholly owned subsidiary of Loews Corporation, directly or indirectly owned all of the equity 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.

3. Investments

Net investment income is as follows:

 

     Three Months Ended   Six Months Ended
     June 30,   June 30,
      2018   2017   2018   2017
(In millions)                 

Fixed maturity securities

     $ 444     $ 457     $ 890     $ 912

Limited partnership investments

       60       23       108       139

Short term investments

       11       4       20       8

Equity securities

       12       2       22       3

Income (loss) from trading portfolio (a)

       23       (1 )       20       33

Other

       17       8       28       16

Total investment income

       567       493       1,088       1,111

Investment expenses

       (16 )       (15 )       (31 )       (29 )    

Net investment income

     $         551     $         478     $       1,057     $       1,082
                                          

 

(a)

Net unrealized gains (losses) related to changes in fair value on securities still held were $(4) and $(6) for the three months ended June 30, 2018 and 2017 and $(25) and $19 for the six months ended June 30, 2018 and 2017.

 

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Investment gains (losses) are as follows:

 

    Three Months Ended
June 30,
  Six Months Ended
June 30,
         2018           2017       2018           2017    
(In millions)                

Fixed maturity securities

    $ 4     $ 44     $ 22     $ 76

Equity securities

      (10 )           (25 )    

Derivative instruments

      4       (3 )       9       (2 )     

Short term investments and other

      (1 )       2                 3

Investment gains (a)

    $         (3 )     $         43     $         6     $         77
                                         

 

(a)

Gross realized gains on available-for-sale securities were $37 and $57 for the three months ended June 30, 2018 and 2017 and $106 for the six months ended June 30, 2018 and 2017. Gross realized losses on available-for-sale securities were $33 and $13 for the three months ended June 30, 2018 and 2017 and $84 and $30 for the six months ended June 30, 2018 and 2017. Net unrealized losses related to changes in fair value on non-redeemable preferred stock still held were $11 and $25 for the three and six months ended June 30, 2018.

The components of other-than-temporary impairment (“OTTI”) losses recognized in earnings by asset type are as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
          2018              2017            2018              2017      
(In millions)                          

Fixed maturity securities available-for-sale:

           

Corporate and other bonds

      $ 2      $ 5      $ 4    

Asset-backed

                       1           

Net OTTI losses recognized in earnings

   $ -        $ 2      $ 6      $ 4    
                                     

The amortized cost and fair values of fixed maturity and equity securities are as follows:

 

June 30, 2018    Cost or
Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Estimated
Fair Value
   Unrealized
OTTI Losses
(Gains)
(In millions)                      

Fixed maturity securities:

                     

Corporate and other bonds

     $ 17,883         $ 938     $ 203     $ 18,618     

States, municipalities and political subdivisions

       10,856       1,161       8       12,009     

Asset-backed:

                     

Residential mortgage-backed

       4,961       72       85       4,948      $ (25)      

Commercial mortgage-backed

       2,082       23       33       2,072     

Other asset-backed

       1,557       9       9       1,557           

Total asset-backed

       8,600       104       127       8,577        (25)      

U.S. Treasury and obligations of government- sponsored enterprises

       127       3       3       127     

Foreign government

       436       6       5       437     

Redeemable preferred stock

       9       1                 10           

Fixed maturities available-for-sale

       37,911       2,213       346       39,778        (25)      

Fixed maturities trading

       657       7       1       663           

Total fixed maturity securities

     $     38,568     $   2,220     $   347     $     40,441      $         (25)      
                                                     

 

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December 31, 2017    Cost or
  Amortized  
Cost
   Gross
  Unrealized  
Gains
   Gross
  Unrealized  
Losses
     Estimated  
Fair Value
   Unrealized
  OTTI Losses  
(Gains)
(In millions)                         

Fixed maturity securities:

                        

Corporate and other bonds

     $ 17,210      $ 1,625      $ 28      $ 18,807     

States, municipalities and political subdivisions

       12,478        1,551        2        14,027      $     (11)  

Asset-backed:

                        

Residential mortgage-backed

       5,043        109        32        5,120        (27)  

Commercial mortgage-backed

       1,840        46        14        1,872     

Other asset-backed

       1,083        16        5        1,094           

Total asset-backed

       7,966        171        51        8,086        (27)  

U.S. Treasury and obligations of government- sponsored enterprises

       111        2        4        109     

Foreign government

       437        9        2        444     

Redeemable preferred stock

       10        1                   11           

Fixed maturities available-for-sale

       38,212        3,359        87        41,484        (38)  

Fixed maturities trading

       649        2        2        649           

Total fixed maturities

       38,861        3,361        89        42,133        (38)  

Equity securities:

                        

Common stock

       21        7        1        27     

Preferred stock

       638        31        1        668           

Equity securities available-for-sale

       659        38        2        695        -    

Equity securities trading

       518        92        81        529           

Total equity securities

       1,177        130        83        1,224        -    

Total fixed maturity and equity securities

     $     40,038      $   3,491      $     172      $     43,357      $     (38)  
                                                        

The net unrealized gains on available-for-sale investments included in the tables above are recorded as a component of AOCI. When presented in AOCI, these amounts are net of tax and noncontrolling interests and any required Shadow Adjustments. 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”). As of June 30, 2018 and December 31, 2017, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $1.1 billion and $1.3 billion (after tax and noncontrolling interests).

The available-for-sale securities in a gross unrealized loss position are as follows:

 

    

Less than

12 Months

  

12 Months

or Longer

   Total
June 30, 2018    Estimated
Fair Value
   Gross
Unrealized
Losses
   Estimated
Fair Value
   Gross
Unrealized
Losses
   Estimated
Fair Value
   Gross
Unrealized
Losses

(In millions)

                             

Fixed maturity securities:

                             

Corporate and other bonds

     $ 6,963      $ 192      $ 193      $ 11      $ 7,156      $ 203

States, municipalities and political subdivisions

       723        8        3             726        8

Asset-backed:

                             

Residential mortgage-backed

       3,183        68        344        17        3,527        85

Commercial mortgage-backed

       913        16        228        17        1,141        33

Other asset-backed

       632        6        27        3        659        9

Total asset-backed

       4,728        90        599        37        5,327        127

U.S. Treasury and obligations of government- sponsored enterprises

       49        1        19        2        68        3

Foreign government

       178        3        40        2        218        5

Total fixed maturity securities

     $ 12,641      $       294      $       854      $       52      $ 13,495      $       346
                                                                   

 

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     Less than 12 Months    12 Months or Longer    Total
December 31, 2017    Estimated
Fair
Value
   Gross
Unrealized
Losses
   Estimated
Fair
Value
   Gross
Unrealized
Losses
   Estimated
Fair
Value
   Gross
Unrealized
Losses
(In millions)                              

Fixed maturity securities:

                             

Corporate and other bonds

     $ 1,354      $ 21      $ 168      $ 7      $   1,522      $ 28

States, municipalities and political subdivisions

       72        1        85        1        157        2

Asset-backed:

                             

Residential mortgage-backed

       1,228        5        947        27        2,175        32

Commercial mortgage-backed

       403        4        212        10        615        14

Other asset-backed

       248        3        18        2        266        5

Total asset-backed

       1,879        12        1,177        39        3,056        51

U.S. Treasury and obligations of government- sponsored enterprises

       49        2        21        2        70        4

Foreign government

       166        2        4                   170        2

Total fixed maturity securities

       3,520        38        1,455        49        4,975        87

Equity securities:

                             

Common stock

       7        1                  7        1

Preferred stock

       93        1                              93        1

Total equity securities

       100        2        -        -        100        2

Total fixed maturity and equity securities

     $   3,620      $       40      $     1,455      $       49      $ 5,075      $       89
                                                                   

Based on current facts and circumstances, the Company believes the unrealized losses presented in the June 30, 2018 securities in a gross unrealized loss position table above are not indicative of the ultimate collectibility of the current amortized cost of the securities, but rather are attributable to changes in interest rates, credit spreads and other factors. The Company has no current intent to sell securities with unrealized losses, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost; accordingly, the Company has determined that there are no additional OTTI losses to be recorded as of June 30, 2018.

The following table presents the activity related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held as of June 30, 2018 and 2017 for which a portion of an OTTI loss was recognized in Other comprehensive income.

 

         Three Months Ended    
June 30,
      Six Months Ended    
June 30,
          2018           2017           2018           2017    
(In millions)                 

Beginning balance of credit losses on fixed maturity securities

     $             25     $             32     $             27     $               36

Reductions for securities sold during the period

       (4 )       (2 )       (6 )       (6 )

Ending balance of credit losses on fixed maturity securities

     $ 21     $ 30     $ 21     $         30
                                          

Contractual Maturity

The following table presents available-for-sale fixed maturity securities by contractual maturity.

 

      June 30, 2018    December 31, 2017    
      Cost or
Amortized
Cost
   Estimated
Fair
Value
   Cost or
Amortized
Cost
   Estimated    
Fair    
Value    

(In millions)

                   

Due in one year or less

     $ 1,301      $ 1,322      $ 1,135      $ 1,157    

Due after one year through five years

       8,211        8,421        8,165        8,501    

Due after five years through ten years

       16,138        16,240        16,060        16,718    

Due after ten years

       12,261        13,795        12,852        15,108    

Total

     $   37,911      $   39,778      $   38,212      $   41,484    
                                             

 

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Actual maturities may differ from contractual maturities because certain securities may be called or prepaid. Securities not due at a single date are allocated based on weighted average life.

Derivative Financial Instruments

A summary of the aggregate contractual or notional amounts and gross estimated fair values related to derivative financial instruments follows. The contractual or notional amounts for derivatives are used to calculate the exchange of contractual payments under the agreements and may not be representative of the potential for gain or loss on these instruments. Gross estimated fair values of derivative positions are currently presented in Equity securities, Receivables and Payable to brokers on the Consolidated Condensed Balance Sheets.

 

      June 30, 2018   December 31, 2017
     Contractual/             Contractual/          
     Notional    Estimated Fair Value   Notional    Estimated Fair Value  
      Amount    Asset    (Liability)   Amount    Asset    (Liability)  
(In millions)                             

With hedge designation:

                            

Interest rate swaps

     $     500      $     19          $     500      $ 4     

Without hedge designation:

                            

Equity markets:

                            

Options – purchased

       198        9            224              12     

  – written

       204           $       (8)       290           $       (7)

Futures – short

       148                 265        1     

Commodity futures – long

       51                 44          

Embedded derivative on funds withheld liability

       161        4            167                  (3)

4. Fair Value

Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable:

 

   

Level 1 – Quoted prices for identical instruments in active markets.

 

   

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

 

   

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are not observable.

Prices may fall within Level 1, 2 or 3 depending upon the methodology and inputs used to estimate fair value for each specific security. In general, the Company seeks to price securities using third party pricing services. Securities not priced by pricing services are submitted to independent brokers for valuation and, if those are not available, internally developed pricing models are used to value assets using a methodology and inputs the Company believes market participants would use to value the assets. Prices obtained from third-party pricing services or brokers are not adjusted by the Company.

The Company performs control procedures over information obtained from pricing services and brokers to ensure prices received represent a reasonable estimate of fair value and to confirm representations regarding whether inputs are observable or unobservable. Procedures 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.

 

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Assets and liabilities measured at fair value on a recurring basis are summarized in the following tables. Corporate bonds and other includes obligations of the U.S. Treasury, government-sponsored enterprises and foreign governments and redeemable preferred stock.

 

June 30, 2018      Level 1       Level 2        Level 3        Total  
(In millions)                   

Fixed maturity securities:

                  

Corporate bonds and other

     $ 166     $ 18,932      $ 94      $   19,192     

States, municipalities and political subdivisions

           12,008        1        12,009

Asset-backed

                 8,304        273        8,577

Fixed maturities available-for-sale

       166       39,244        368        39,778

Fixed maturities trading

                 656        7        663

Total fixed maturities

     $ 166     $   39,900      $ 375      $ 40,441
                                            

Equity securities

     $ 683     $ 604      $ 18      $ 1,305

Short term and other

       3,361       1,050             4,411

Receivables

           19             19

Payable to brokers

       (11 )                 (11 )

December 31, 2017

                                          

Fixed maturity securities:

                  

Corporate bonds and other

     $ 128     $ 19,145      $ 98      $ 19,371

States, municipalities and political subdivisions

           14,026        1        14,027

Asset-backed

                 7,751        335        8,086

Fixed maturities available-for-sale

       128       40,922              434        41,484

Fixed maturities trading

       10       635        4        649

Total fixed maturities

     $ 138     $ 41,557      $ 438      $ 42,133
                                            

Equity securities available-for-sale

     $ 91     $ 584      $ 20      $ 695

Equity securities trading

       527                  2        529

Total equity securities

     $ 618     $ 584      $ 22      $ 1,224
                                            
                                            

Short term and other

     $   3,669     $ 958           $ 4,627

Receivables

       1       4             5

Payable to brokers

       (12 )                 (12 )

 

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The following tables present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2018 and 2017:

 

          Net Realized Gains
(Losses) and Net Change
in Unrealized Gains
(Losses)
                            

Unrealized

Gains

(Losses)

Recognized in

Net Income

(Loss) on Level

3 Assets and

          Included in                    Transfers    Transfers        Liabilities
     Balance,    Net Income   Included in                into    out of   Balance,    Held at
2018    April 1    (Loss)   OCI   Purchases    Sales   Settlements   Level 3    Level 3   June 30    June 30

(In millions)

                                            

Fixed maturity securities:

                                            

Corporate bonds and other

     $ 100          $ (1 )     $ 2      $ (5 )     $ (2 )              $ 94     

States, municipalities and political subdivisions

       1                                      1     

Asset-backed

       279                  (1 )       41                  (6 )     $ 13      $ (53 )       273           

Fixed maturities available-for-sale

       380      $ -         (2 )       43        (5 )       (8 )       13        (53 )       368      $ -  

Fixed maturities trading

       7                                                                                7           

Total fixed maturities

     $       387      $             -       $         (2 )     $         43        $        (5     $         (8     $         13      $       (53     $       375      $         -  
                                                                                                          

Equity securities

     $ 20      $ (1 )              $ (1 )                  $ 18      $ (1 )    

 

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          Net Realized Gains
(Losses) and Net Change
in Unrealized Gains
(Losses)
                             

Unrealized

Gains

(Losses)

Recognized in

Net Income

(Loss) on Level

3 Assets and

          Included in                      Transfers    Transfers        Liabilities
     Balance,    Net Income    Included in                 into    out of   Balance,    Held at
2017    April 1    (Loss)    OCI    Purchases    Sales   Settlements   Level 3    Level 3   June 30    June 30

(In millions)

                                              

Fixed maturity securities:

                                              

Corporate bonds and other

     $ 121                         $ (11 )          $ (10 )     $ 100     

States, municipalities and political subdivisions

       1                                        1     

Asset-backed

       256      $ 1      $ 1      $ 13                  (7 )     $ 24        (70 )       218           

Fixed maturities available-for-sale

       378        1        1        13            (18 )       24        (80 )       319      $ -

Fixed maturities trading

       5                                                                                  5        (1 )    

Total fixed maturities

     $       383      $             1      $         1      $         13      $             -     $       (18 )     $       24      $       (80 )     $       324      $         (1 )
                                                                                                            

Equity securities available-for-sale

     $ 19           $ 1           $ (1 )                  $ 19     

Equity securities trading

       1                                                                                  1           

Total equity securities

     $ 20      $ -      $ 1      $ -      $ (1 )     $ -     $ -      $ -     $ 20      $ -
                                                                                                            

Life settlement contracts

     $ 46                     $ (45 )                  $ 1     

 

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Net Realized Gains

(Losses) and Net Change

in Unrealized Gains
(Losses)

                            

Unrealized

Gains

(Losses)

Recognized in

Net Income

(Loss) on Level
3 Assets and

          Included in                    Transfers    Transfers        Liabilities
     Balance,    Net Income   Included in                into    out of   Balance,    Held at
2018    January 1    (Loss)   OCI   Purchases    Sales   Settlements   Level 3    Level 3   June 30    June 30

(In millions)

                                            

Fixed maturity securities:

                                            

Corporate bonds and other

     $ 98      $ (1 )     $ (1 )     $ 2      $ (5 )     $ (4 )     $ 5          $ 94     

States, municipalities and political subdivisions

       1                                      1     

Asset-backed

       335        7       (6 )       71        (72 )       (12 )       13      $ (63 )       273           

Fixed maturities available-for-sale

       434        6       (7 )       73        (77 )       (16 )       18        (63 )       368      $ -

Fixed maturities trading

       4        3                                                                     7        3

Total fixed maturities

     $       438      $             9     $         (7 )     $         73      $         (77 )     $         (16 )     $         18      $         (63 )     $         375      $         3
                                                                                                          

Equity securities

     $ 22      $ (3 )              $ (1 )                  $ 18      $ (3 )    

 

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Net Realized Gains

(Losses) and Net Change

in Unrealized Gains
(Losses)

                             

Unrealized

Gains

(Losses)

Recognized in

Net Income

(Loss) on Level
3 Assets and

          Included in                     Transfers    Transfers        Liabilities
     Balance,    Net Income   Included in                 into    out of   Balance,    Held at
2017    January 1    (Loss)   OCI    Purchases    Sales   Settlements   Level 3    Level 3   June 30    June 30

(In millions)

                                             

Fixed maturity securities:

                                             

Corporate bonds and other

     $ 130          $ 1      $ 5      $ (1 )     $ (25 )          $ (10 )     $ 100     

States, municipalities and political subdivisions

       1                                       1     

Asset-backed

       199      $ 1       3        51                  (13 )     $ 52        (75 )       218           

Fixed maturities available-for-sale

       330        1       4        56        (1 )       (38 )       52        (85 )       319      $ -

Fixed maturities trading

       6        (1 )                                                                      5        (1 )    

Total fixed maturities

     $ 336      $ -     $ 4      $ 56      $ (1 )     $ (38 )     $ 52      $ (85 )     $ 324      $ (1 )
                                                                                                           

Equity securities available-for-sale

     $ 19          $ 2      $ 1      $ (3 )                  $ 19     

Equity securities trading

       1                                                                                 1           

Total equity securities

     $         20      $             -     $         2      $         1      $         (3 )     $             -     $             -      $             -     $         20      $             -
                                                                                                           

Life settlement contracts

     $ 58      $ 6               $ (58 )     $ (5 )              $ 1     

Derivative financial instruments, net

       -        1                 (1 )                    -     

Net realized and unrealized gains and losses are reported in Net income as follows:

 

Major Category of Assets and Liabilities    Consolidated Condensed Statements of Income Line Items

Fixed maturity securities available-for-sale

  

Investment gains (losses)

Fixed maturity securities trading

  

Net investment income

Equity securities

  

Investment gains (losses) and Net investment income

Other invested assets

  

Investment gains (losses) and Net investment income

Derivative financial instruments held in a trading portfolio

  

Net investment income

Derivative financial instruments, other

  

Investment gains (losses) and Operating revenues and other

Life settlement contracts

  

Operating revenues and other

 

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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 three months ended June 30, 2018, there were no transfers between Level 1 and Level 2. During the six months ended June 30, 2018, there were $29 million of transfers from Level 2 to Level 1 and no transfers from Level 1 to Level 2. During the three and six months ended June 30, 2017 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.

Valuation Methodologies and Inputs

The following section describes the valuation methodologies and relevant inputs used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instruments are generally classified.

Fixed Maturity Securities

Level 1 securities include highly liquid and exchange traded bonds and redeemable preferred stock, valued using quoted market prices. Level 2 securities include most other fixed maturity securities as the significant inputs are observable in the marketplace. All classes of Level 2 fixed maturity securities are valued using a methodology based on information generated by market transactions involving identical or comparable assets, a discounted cash flow methodology or a combination of both when necessary. Common inputs for all classes of fixed maturity securities include prices from recently executed transactions of similar securities, marketplace quotes, benchmark yields, spreads off benchmark yields, interest rates and U.S. Treasury or swap curves. Specifically for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data. Fixed maturity securities are primarily assigned to Level 3 in cases where broker/dealer quotes are significant inputs to the valuation, and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. Level 3 securities also include private placement debt securities whose fair value is determined using internal models with inputs that are not market observable.

Equity Securities

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.

Derivative Financial Instruments

Exchange traded derivatives are valued using quoted market prices and are classified within Level 1 of the fair value hierarchy. Level 2 derivatives primarily include currency forwards valued using observable market forward rates. Over-the-counter derivatives, principally interest rate swaps, total return swaps, commodity swaps, equity warrants and options, are valued using inputs including broker/dealer quotes and are classified within Level 2 or Level 3 of the valuation hierarchy, depending on the amount of transparency as to whether these quotes are based on information that is observable in the marketplace.

Short Term and Other Invested Assets

Securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds, treasury bills and exchange traded open-end funds valued using quoted market prices. Level 2 primarily includes commercial paper, for which all inputs are market observable. Fixed maturity securities purchased within one year of maturity are classified consistent with fixed maturity securities discussed above. Short term investments as presented in the tables above differ from the amounts presented in the Consolidated Condensed Balance Sheets because certain short term investments, such as time deposits, are not measured at fair value.

Life Settlement Contracts

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.

 

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Significant Unobservable Inputs

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.

 

June 30, 2018   

Estimated

    Fair Value    

  

Valuation

        Techniques        

  

            Unobservable             

Inputs

   Range
(Weighted
Average)
 
     (In millions)                 

Fixed maturity securities

   $        130    Discounted

cash flow

   Credit spread      1 % –12% (3%) 

December 31, 2017

                       

Fixed maturity securities

   $        136    Discounted

cash flow

   Credit spread      1 % – 12% (3%) 

For fixed maturity securities, an increase to the credit spread assumptions would result in a lower fair value measurement.

Financial Assets and Liabilities Not Measured at Fair Value

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 Condensed 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 Condensed 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.

 

     Carrying      Estimated Fair Value
June 30, 2018    Amount      Level 1    Level 2      Level 3      Total  
(In millions)                                 

Assets:

              

Other invested assets, primarily mortgage loans

   $ 865            $ 850      $ 850  

Liabilities:

              

Short term debt

     178         $ 36        142        178  

Long term debt

     11,273           10,550        631        11,181  

December 31, 2017

                                            

Assets:

              

Other invested assets, primarily mortgage loans

   $ 839            $ 844      $ 844  

Liabilities:

              

Short term debt

     278         $ 156        122        278  

Long term debt

     11,236           10,966        525        11,491  

The fair values of mortgage loans, included in Other invested assets, were based on the present value of the expected future cash flows discounted at the current interest rate for similar financial instruments, adjusted for specific loan risk.

 

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5.  Claim and Claim Adjustment Expense Reserves

CNA’s property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including incurred but not reported (“IBNR”) claims as of the reporting date. CNA’s reserve projections are based primarily on detailed analysis of the facts in each case, CNA’s experience with similar cases and various historical development patterns. Consideration is given to such historical patterns as claim reserving trends and settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions including inflation and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.

Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers’ compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. There can be no assurance that CNA’s ultimate cost for insurance losses will not exceed current estimates.

Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in CNA’s results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of $26 million and $39 million for the three months ended June 30, 2018 and 2017 and $60 million and $73 million for the six months ended June 30, 2018 and 2017. Net catastrophe losses in 2018 and 2017 related primarily to U.S. weather-related events.

Liability for Unpaid Claim and Claim Adjustment Expenses Rollforward

The following table presents a reconciliation between beginning and ending claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves of Other Insurance Operations.

 

Six Months Ended June 30    2018     2017

(In millions)

    

Reserves, beginning of year:

    

Gross

   $ 22,004     $ 22,343  

Ceded

     3,934       4,094  

Net reserves, beginning of year

     18,070       18,249  

Net incurred claim and claim adjustment expenses:

    

Provision for insured events of current year

     2,552       2,443  

Decrease in provision for insured events of prior years

     (112     (159

Amortization of discount

     92       93  

Total net incurred (a)

     2,532       2,377  

Net payments attributable to:

    

Current year events

     (312     (266

Prior year events

     (2,387     (2,331

Total net payments

     (2,699     (2,597

Foreign currency translation adjustment and other

     (70     70  

Net reserves, end of period

     17,833       18,099  

Ceded reserves, end of period

     4,157       4,080  

Gross reserves, end of period

   $     21,990     $     22,179        
               

 

(a)

Total net incurred above does not agree to Insurance claims and policyholders’ benefits as reflected in the Consolidated Condensed 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.

 

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Net Prior Year Development

Changes in estimates of claim and claim adjustment expense reserves net of reinsurance, for prior years are defined as net prior year loss reserve development. These changes can be favorable or unfavorable.

Favorable net prior year development of $59 million and $55 million for the three months ended June 30, 2018 and 2017 and $98 million and $112 million for the six months ended June 30, 2018 and 2017 was recorded for CNA’s commercial property and casualty operations (“Property & Casualty Operations”).

The following table and discussion present details of the net prior year claim and claim adjustment expense reserve development in CNA’s Property & Casualty Operations:

 

     Three Months Ended    Six Months Ended
     June 30,    June 30,
      2018    2017    2018    2017
(In millions)                    

Medical professional liability

     $ 3      $ 2      $ 23      $ 22

Other professional liability and management liability

       (34 )        (37 )        (68 )        (69 )

Surety

       (15 )             (30 )     

Commercial auto

            1        (1 )        (25 )

General liability

       26        1        18        (17 )

Workers’ compensation

       (6 )        (47 )        (12 )        (47 )

Other

       (33 )        25        (28 )        24

Total pretax (favorable) unfavorable development

     $       (59 )      $       (55 )      $       (98 )      $       (112 )  
                          

Three Months

2018

Favorable development in other professional liability and management liability was primarily in professional liability errors and omissions (“E&O”) reflecting lower than expected claim frequency in accident years 2014 through 2016 and favorable severity for accident years 2012 and prior.

Favorable development in surety was driven by continued lower than expected loss emergence on accident years 2015 and prior.

Unfavorable development in general liability was driven by higher than expected claim severity in umbrella in accident years 2013 through 2015.

Favorable development for other coverages was primarily due to lower than expected claim severity from catastrophes in accident year 2017 for property and other and lower than expected frequency in accident years 2015 and prior related to healthcare in Europe in healthcare and technology. This favorable development was partially offset by unfavorable development in property driven by higher than expected severity in Canada and higher than expected frequency in Hardy, both in accident year 2017 and increased severity in accident year 2017 related to professional indemnity in specialty.

2017

Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency in accident years 2013 through 2015 and lower than expected severity in accident years 2014 through 2016 for professional liability.

Favorable development for workers’ compensation was primarily related to decreases in frequency and severity in recent accident years, partially attributable to California reforms related to decreases in medical costs.

Unfavorable development for other coverages was primarily due to higher than expected severity in accident year 2016 for property and other, higher than expected severity in accident year 2015 arising from the management liability business and adverse large claims experience in the Hardy political risks portfolio, relating largely to accident year 2016. This unfavorable development was partially offset by favorable development in accident years 2014 and prior for the management liability business and better than expected frequency in accident years 2014 through 2016, for property.

 

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Six Months

2018

Unfavorable development for medical professional liability was primarily due to higher than expected severity in accident years 2014 and 2017 in CNA’s hospitals business.

Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency for accident years 2013 through 2017 related to financial institutions. Additional favorable development was in professional liability E&O reflecting lower than expected claims frequency in accident years 2014 through 2016 and favorable severity for accident years 2012 and prior.

Favorable development for surety was due to continued lower than expected loss emergence for accident years 2015 and prior.

Unfavorable development in general liability was driven by higher than expected claim severity in umbrella in accident years 2013 through 2015.

The drivers of development for other coverages were consistent with the three month summary above.

2017

Unfavorable development in medical professional liability was primarily due to continued higher than expected frequency in aging services.

Favorable development in other professional liability and management liability was primarily due to favorable settlements on closed claims and a lower than expected frequency of large losses for accident years 2011 through 2016 for professional and management liability, lower than expected claim frequency in accident years 2013 through 2015 for professional liability and lower than expected severity in accident years 2014 through 2016 for professional liability.

Favorable development for commercial auto was primarily due to lower than expected severity in accident years 2013 through 2015.

Favorable development for general liability was due to lower than expected severity in life sciences.

Favorable development for workers’ compensation was primarily related to decreases in frequency and severity in recent accident years, partially attributable to California reforms related to decreases in medical costs.

The drivers of development for other coverages were generally consistent with the three month summary above.

Asbestos and Environmental Pollution (“A&EP”) Reserves

In 2010, Continental Casualty Company (“CCC”) together with several of CNA’s other insurance subsidiaries completed a transaction with National Indemnity Company (“NICO”), a subsidiary of Berkshire Hathaway Inc., under which substantially all of CNA’s legacy A&EP liabilities were ceded to NICO through a loss portfolio transfer (“loss portfolio transfer” or “LPT”). At the effective date of the transaction, CNA ceded approximately $1.6 billion of net A&EP claim and allocated claim adjustment expense reserves to NICO under a retroactive reinsurance agreement with an aggregate limit of $4.0 billion. The $1.6 billion of claim and allocated claim adjustment expense reserves ceded to NICO was net of $1.2 billion of ceded claim and allocated claim adjustment expense reserves under existing third party reinsurance contracts. The NICO LPT aggregate reinsurance limit also covers credit risk on the existing third party reinsurance related to these liabilities. CNA paid NICO a reinsurance premium of $2.0 billion and transferred to NICO billed third party reinsurance receivables related to A&EP claims with a net book value of $215 million, resulting in total consideration of $2.2 billion.

In years subsequent to the effective date of the LPT, CNA recognized adverse prior year development on its A&EP reserves resulting in additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the LPT exceeded the $2.2 billion consideration paid, resulting in the NICO LPT moving into a gain position, requiring retroactive reinsurance accounting. Under retroactive reinsurance accounting, this gain is deferred and only recognized in earnings in proportion to actual paid recoveries under the LPT. Over the life of the contract, there is no economic impact as long as any additional losses incurred are within the limit of the LPT. In a period in which CNA recognizes

 

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a change in the estimate of A&EP reserves that increases or decreases the amounts ceded under the LPT, the proportion of actual paid recoveries to total ceded losses is affected and the change in the deferred gain is recognized in earnings as if the revised estimate of ceded losses was available at the effective date of the LPT. The effect of the deferred retroactive reinsurance benefit is recorded in Insurance claims and policyholders’ benefits in the Consolidated Condensed Statements of Income.

The following table presents the impact of the loss portfolio transfer on the Consolidated Condensed Statements of Income.

 

     Three Months Ended   Six Months Ended
     June 30,   June 30,
      2018   2017   2018   2017

(In millions)

                

Additional amounts ceded under LPT:

                

Net A&EP adverse development before consideration of LPT

     $         -     $ -     $ 113     $ 60

Provision for uncollectible third-party reinsurance on A&EP

                           (16 )          

Total additional amounts ceded under LPT

       -       -       97       60

Retroactive reinsurance benefit recognized

       (15 )       (3 )       (72 )       (43 )    

Pretax impact of deferred retroactive reinsurance

     $         (15 )     $         (3 )     $         25     $         17
                       

Based upon CNA’s annual A&EP reserve review, net unfavorable prior year development of $113 million and $60 million was recognized before consideration of cessions to the LPT for the six months ended June 30, 2018 and 2017. Additionally, in 2018, CNA released a portion of its provision for uncollectible third party reinsurance. The 2018 unfavorable development was driven by higher than anticipated defense costs on direct asbestos environmental accounts and paid losses on assumed reinsurance exposures. The 2017 unfavorable development was driven by modestly higher anticipated payouts on claims from known sources of asbestos exposure. While the unfavorable development was ceded to NICO under the LPT, CNA’s reported earnings in the six month periods were negatively affected due to the application of retroactive reinsurance accounting.

As of June 30, 2018 and December 31, 2017, the cumulative amounts ceded under the LPT were $3.0 billion and $2.9 billion. The unrecognized deferred retroactive reinsurance benefit was $351 million and $326 million as of June 30, 2018 and December 31, 2017.

NICO established a collateral trust account as security for its obligations to CNA. The fair value of the collateral trust account was $3.0 billion and $3.1 billion as of June 30, 2018 and December 31, 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.

 

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6. Shareholders’ Equity

Accumulated other comprehensive income (loss)

The tables below present the changes in AOCI by component for the three and six months ended June 30, 2017 and 2018:

 

      OTTI Gains
(Losses)
   Unrealized
Gains (Losses)
on Investments
  Cash Flow
Hedges
   Pension
Liability
   Foreign
Currency
Translation
   Total
Accumulated
Other
Comprehensive
Income (Loss)
(In millions)                             

Balance, April 1, 2017

     $ 23              $ 636     $ (2)             $ (638)             $ (168)             $ (149)       

Other comprehensive income (loss) before reclassifications, after tax of $1, $(63), $0, $0 and $0

       (1)               108                 42                149        

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $(1), $15, $0, $(3) and $0

       1                (31 )                  7                           (23)       

Other comprehensive income

       -                77       -                7                42                126        

Amounts attributable to noncontrolling interests

                  (8 )                  (1)               (4)               (13)       

Balance, June 30, 2017

     $             23              $             705     $             (2)             $           (632)             $           (130)             $             (36)       
                                                                  

Balance, April 1, 2018

     $ 18              $ 386     $ 10              $ (753)             $ (78)             $ (417)       

Other comprehensive income (loss) before reclassifications, after tax of $1, $45, $0, $0 and $0

       (1)               (156 )       4                     (52)               (205)       

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $1, $0, $(2) and $0

                  (3 )                  9                           6        

Other comprehensive income (loss)

       (1)               (159 )       4                9                (52)               (199)       

Amounts attributable to noncontrolling interests

            17            (2)               5                20        

Purchase of Boardwalk Pipeline common units

                            (1)               (28)                          (29)       

Balance, June 30, 2018

     $ 17              $ 244     $ 13              $ (774)             $ (125)             $ (625)       
                                                                  

 

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      OTTI
Gains
(Losses)
  Unrealized
Gains (Losses)
on Investments
  Cash Flow
Hedges
  Pension
Liability
  Foreign
Currency
Translation
  Total
Accumulated
Other
Comprehensive
Income (Loss)
(In millions)                         

Balance, January 1, 2017

     $ 27     $ 576     $ (2 )     $ (646 )     $ (178 )     $ (223 )

Other comprehensive income (loss) before reclassifications, after tax of $0, $(110), $0, $0 and $0

       (1 )       193       (1 )           53       244

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $1, $24, $0, $(7) and $0

       (3 )       (49 )       1       15                 (36 )      

Other comprehensive income (loss)

       (4 )       144       -       15       53       208

Amounts attributable to noncontrolling interests

                 (15 )                 (1 )       (5 )       (21 )

Balance, June 30, 2017

     $             23     $             705     $           (2 )     $         (632 )     $         (130 )     $         (36 )
                                                              

Balance, January 1, 2018, as reported

     $ 22     $ 673     $ -     $ (633 )     $ (88 )     $ (26 )

Cumulative effect adjustment for adoption of ASU 2016-01 (a), after tax of $0, $8, $0, $0 and $0

           (25 )                   (25 )

Cumulative effect adjustment for adoption of ASU 2018-02 (a)

       4       123                 (130 )                 (3 )

Balance, January 1, 2018, as adjusted

       26       771       -       (763 )       (88 )       (54 )

Other comprehensive income (loss) before reclassifications, after tax of $3, $150, $(2), $0 and $0

       (11 )       (570 )       12           (41 )       (610 )

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $5, $0, $(5) and $0

       1       (18 )       2       19                 4

Other comprehensive income (loss)

       (10 )       (588 )       14       19       (41 )       (606 )

Amounts attributable to noncontrolling interests

       1       61           (2 )       4       64

Purchase of Boardwalk Pipeline common units

                           (1 )       (28 )                 (29 )

Balance, June 30, 2018

     $ 17     $ 244     $ 13     $ (774 )     $ (125 )     $ (625 )
                                                              

 

(a)

For information regarding this accounting standard see Note 1.

Amounts reclassified from AOCI shown above are reported in Net income as follows:

 

Major Category of AOCI

  

Affected Line Item

OTTI gains (losses)

  

Investment gains (losses)

Unrealized gains (losses) on investments

  

Investment gains (losses)

Cash flow hedges

  

Operating revenues and other and Operating expenses and other

Pension liability

  

Operating expenses and other

 

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Treasury Stock

The Company repurchased 15.6 million and 0.1 million shares of Loews common stock at aggregate costs of $788 million and $6 million during the six months ended June 30, 2018 and 2017.

7. Revenue from Contracts with Customers

Disaggregation of revenues Revenue from contracts with customers, other than insurance premiums, is reported within Operating revenues and other on the Consolidated Condensed 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 11:

 

     Three Months Ended    Six Months Ended
     June 30,    June 30,
      2018    2017 (a)    2018    2017 (a)
(In millions)                    

Non-insurance warranty – CNA Financial

     $ 248      $ 98      $ 486      $ 191

Contract drilling – Diamond Offshore

       268        398        564        773

Transportation and storage of natural gas and NGLs and other services – Boardwalk Pipeline

       281        303        612        654

Lodging and related services – Loews Hotels & Co

       200        181        383        348

Rigid plastic packaging and recycled resin – Corporate

       216        91        429        91

Total revenues from contracts with customers

       1,213        1,071        2,474        2,057     

Other revenues

       14        33        34        64

Operating revenues and other

     $   1,227      $   1,104      $   2,508      $     2,121
                                             

(a)    Prior period amounts have not been adjusted under the modified retrospective method of adoption for ASU 2014-09.

CNA’s non-insurance warranty revenues are primarily generated from separately-priced service contracts that provide mechanical breakdown and other coverages to vehicle or consumer goods owners, which generally provide coverage from one month to ten years. Additionally, CNA provides warranty administration services for dealer and manufacturer warranty products. Non-insurance revenues are recognized when obligations under the terms of the contract with CNA’s customers are satisfied, which is generally over time as obligations are fulfilled. CNA recognizes non-insurance warranty revenues over the service period in proportion to the actuarially determined expected claims emergence pattern. Customers pay in full at the inception of the warranty contract. A liability for unearned warranty revenue is recorded when cash payments are received or due in advance of CNA’s performance, including amounts which are refundable upon cancellation.

Diamond Offshore’s contract drilling revenues primarily result from providing a drilling rig and the crew and supplies necessary to operate the rig, mobilizing and demobilizing the rig to and from the drill site and performing rig preparation activities and/or modifications required for the contract. Consideration received for performing these activities may consist of dayrate drilling revenue, mobilization and demobilization revenue, contract preparation revenue and reimbursement revenue for the purchase of supplies, equipment, personnel services and other services requested by the customer. Diamond Offshore accounts for these integrated services provided within its drilling contracts as a single performance obligation satisfied over time and comprised of a series of distinct time increments in which drilling services are provided. The total transaction price is determined for each individual contract by estimating both fixed and variable consideration expected to be earned over the term of the contract. The standard contract term ranges from two to 60 months.

Boardwalk Pipeline primarily earns revenues by providing transportation and storage services for natural gas and natural gas liquids and hydrocarbons (referred to together as “NGLs”) on a firm and interruptible basis and provides interruptible natural gas parking and lending services. The majority of Boardwalk Pipeline’s operating subsidiaries are subject to Federal Energy Regulatory Commission (“FERC”) regulations and certain revenues collected, under certain circumstances, may be subject to possible refunds to its customers. An estimated refund liability is recorded considering regulatory proceedings, advice of counsel and estimated total exposure. The majority of Boardwalk Pipeline’s revenues are from firm service contracts which are accounted for as a single promise to stand ready each month of the contract term to provide the committed capacity for either transportation or storage services. The transaction price is comprised of a fixed fee based on the capacity reserved plus a usage fee paid on the volume of commodity transported or injected and withdrawn from storage. Both the fixed and the usage fees are allocated to the single performance obligation of providing transportation or storage service and recognized over time as control is passed to the customer. These service contracts can range in term from one to 20 years and are invoiced monthly.

 

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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. Management and marketing services revenues are recognized as the services are provided and billed on a monthly basis. In addition, Loews Hotels & Co recognizes revenue for the reimbursement of payroll expenses incurred on behalf of the owners of joint venture and managed hotel properties.

Consolidated Container manufactures rigid plastic packaging and recycled resins and provides packaging solutions to end markets such as beverage, food and household chemicals through a network of manufacturing locations across North America. Consolidated Container recognizes revenue as control is transferred to the customer.

Receivables from contracts with customers – As of June 30, 2018 and January 1, 2018, receivables from contracts with customers were approximately $422 million and $488 million and are included within Receivables on the Consolidated Condensed Balance Sheets.

Deferred revenue – The Company records deferred revenue, which is primarily related to non-insurance warranty contracts, when payment is received in advance of satisfying the performance obligations. As of June 30, 2018 and January 1, 2018, deferred revenue resulting from contracts with customers was approximately $3.2 billion and $3.0 billion and is included in Other liabilities on the Consolidated Condensed Balance Sheets. The increase in deferred revenue is primarily due to cash payments received in advance of satisfying performance obligations, partially offset by cancellations and revenues recognized during the period. Approximately $473 million of revenues recognized during the six months ended June 30, 2018 were included in deferred revenue as of January 1, 2018.

Contract costs – Costs to obtain or fulfill contracts with customers are deferred and recorded as Other assets. These costs are expected to be recoverable over the duration of the contract and are amortized in the same manner the related revenue is recognized. As of June 30, 2018, the Company had approximately $2.4 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 included in Other assets on the Consolidated Condensed Balance Sheet. For the three and six months ended June 30, 2018, amortization expense totaled $179 million and $350 million and is included in Operating expenses and other in the Consolidated Condensed Statement of Income.

For CNA’s non-insurance warranty contract costs, a premium deficiency arises to the extent that estimated future costs associated with these contracts exceed unrecognized revenue. Anticipated investment income is also considered in the determination of the recoverability of deferred costs. CNA evaluates its deferred costs for recoverability as part of its premium deficiency assessment. If necessary, adjustments to deferred costs and a premium deficiency reserve, if any, are recorded in current period results of operations. No premium deficiency was recognized in the six months ended June 30, 2018.

Performance obligations – As of June 30, 2018, approximately $12.3 billion of estimated operating revenues is expected to be recognized in the future related to outstanding performance obligations. The balance relates primarily to revenues for transportation and storage of natural gas and NGLs at Boardwalk Pipeline and non-insurance warranty services at CNA. Approximately $1.1 billion will be recognized during the remaining six months of 2018, $1.9 billion in 2019 and the remainder in following years. The actual timing of recognition may vary due to factors outside of the Company’s control. The Company has elected to exclude variable consideration related entirely to wholly unsatisfied performance obligations and contracts where revenue is recognized based upon the right to invoice the customer. Therefore, the estimated operating revenues exclude contract drilling dayrate revenue at Diamond Offshore and interruptible service contract revenue at Boardwalk Pipeline.

 

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8. Benefit Plans

The Company and its subsidiaries have several non-contributory defined benefit plans and postretirement benefit plans covering eligible employees and retirees.

The following table presents the components of net periodic (benefit) cost for the plans:

 

     Pension Benefits         
     Three Months Ended     Six Months Ended        
     June 30,     June 30,         
      2018     2017   2018     2017         
(In millions)                             

Service cost

     $ 2     $ 2     $ 4     $ 4    

Interest cost

     28       29       55       59    

Expected return on plan assets

     (45     (43     (90     (86  

Amortization of unrecognized net loss

     10       11       21       22    

Settlement charge

     3       1       7       3          

Net periodic (benefit) cost

     $ (2   $ -     $ (3   $ 2          
                                          
     Other Postretirement Benefits         
     Three Months
Ended
    Six Months Ended        
     June 30,     June 30,         
      2018     2017   2018     2017         
(In millions)                             

Interest cost

       $ 1     $ 1    

Expected return on plan assets

     $ (1   $ (1     (2     (2  

Amortization of unrecognized prior service benefit

                     (1     (1        

Net periodic (benefit) cost

     $ (1   $ (1   $ (2   $ (2        
                                          

9. Legal Proceedings

CNA Financial

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 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.

The plaintiff, Defendants and the Plan’s fiduciary insurance carriers have agreed on terms to settle this matter and have executed settlement agreements. The plaintiff and Defendants have proposed a class settlement for court approval, and the court granted preliminary approval subject to a fairness hearing. Based on the executed settlement agreements, management has recorded its best estimate of CNA’s probable loss and does not believe that the ultimate resolution of this matter will have a material impact on its consolidated financial statements.

Other Litigation

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.

 

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10. Commitments and Contingencies

CNA Guarantees

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 June 30, 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 June 30, 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.

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 June 30, 2018, 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.

CNA Small Business Premium Rate Adjustment

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. CNA increased earned premium by $1 million and reduced earned premium by $37 million for three and six months ended June 30, 2017. Interest expense increased for interest due to policyholders on the premium rate adjustments by $1 million and $6 million for the three and six months ended June 30, 2017.

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 in process and are expected to be completed by the end of 2018. Interest expense of $1 million was recorded for the six months ended June 30, 2018. The estimated refund liability, including interest, for the workers’ compensation policies as of June 30, 2018 was $47 million.

11. Segments

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 are included in the Corporate segment for the three and six months ended June 30, 2018 and the period from the acquisition date, May 22, 2017 through June 30, 2017. 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. For additional disclosures regarding the composition of the Company’s segments, see Note 19 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

The following tables present the reportable segments of the Company and their contribution to the Consolidated Condensed Statements of Income. Amounts presented will not necessarily be the same as those in the individual financial statements of the Company’s subsidiaries due to adjustments for purchase accounting, income taxes and noncontrolling interests.

 

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Statements of Income by segment are presented in the following tables.

 

Three Months Ended June 30, 2018    CNA
Financial
     Diamond
Offshore
  Boardwalk
Pipeline
    Loews
Hotels & Co
     Corporate     Total       
(In millions)                                         

Revenues:

                

Insurance premiums

   $   1,815                   $   1,815    

Net investment income

     506          $ 2       $ 1          $ 42       551    

Investment losses

     (3)                    (3  

Operating revenues and other

     256            269     $ 285       200            217       1,227      

Total

     2,574            271       285       201            259       3,590      

Expenses:

                

Insurance claims and policyholders’ benefits

     1,327                     1,327    

Amortization of deferred acquisition costs

     359                     359    

Operating expenses and other

     524                  320       203       169            238       1,454    

Interest

     35            30       43       8            27       143      

Total

     2,245            350       246       177            265       3,283      

Income (loss) before income tax

     329            (79     39       24            (6     307    

Income tax (expense) benefit

     (60)           10       (2     (7)                   (59    

Net income (loss)

     269           (69     37       17            (6     248    

Amounts attributable to noncontrolling interests

     (29)           32       (21                      (18    

Net income (loss) attributable to Loews Corporation

   $ 240          $ (37   $ 16     $ 17          $ (6   $ 230      
                                                        

 

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Three Months Ended June 30, 2017    CNA
Financial
     Diamond
Offshore
  Boardwalk
Pipeline
    Loews
Hotels & Co
     Corporate     Total       
(In millions)                                         

Revenues:

                

Insurance premiums

   $     1,734                   $     1,734    

Net investment income

     475          $ 1          $ 2       478    

Investment gains

     43                     43    

Operating revenues and other

     114            398     $ 318     $ 181            93       1,104    

Total

     2,366            399       318       181            95       3,359      

Expenses:

                

Insurance claims and policyholders’ benefits

     1,280                     1,280    

Amortization of deferred acquisition costs

     312                     312    

Operating expenses and other

     364            381       251       155            130       1,281    

Interest

     40            27       44       6            22       139    

Total

     1,996                  408       295       161            152       3,012      

Income (loss) before income tax

     370            (9     23       20            (57     347    

Income tax (expense) benefit

     (98)           23       (5     (10)           21       (69    

Net income (loss)

     272            14       18       10            (36     278    

Amounts attributable to noncontrolling interests

     (28)           (7     (12          (47  

Net income (loss) attributable to Loews Corporation

   $ 244          $ 7     $ 6     $ 10          $ (36   $ 231      
                                                        

 

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Six Months Ended June 30, 2018    CNA
Financial
     Diamond
Offshore
  Boardwalk
Pipeline
    Loews
Hotels & Co
     Corporate     Total         
(In millions)                                           

Revenues:

                

Insurance premiums

   $     3,600                   $     3,600    

Net investment income

     996          $ 4       $ 1          $ 56       1,057    

Investment gains

     6                     6    

Operating revenues and other

     507            566     $ 622       383            430       2,508          

Total

     5,109                570       622       384            486       7,171          

Expenses:

                

Insurance claims and policyholders’ benefits

     2,666                     2,666    

Amortization of deferred acquisition costs

     655                     655    

Operating expenses and other

     1,042            616       401       325            470       2,854    

Interest

     70            58       87       15            54       284          

Total

     4,433            674       488       340            524       6,459          

Income (loss) before income tax

     676            (104     134       44            (38     712    

Income tax (expense) benefit

     (115)           54       (14     (14)           5       (84        

Net income (loss)

     561            (50     120       30            (33     628    

Amounts attributable to noncontrolling interests

     (60)           23       (68                      (105        

Net income (loss) attributable to Loews Corporation

   $ 501          $ (27   $ 52     $ 30          $ (33   $ 523          
                                                            

 

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Six Months Ended June 30, 2017    CNA
Financial
     Diamond
Offshore
  Boardwalk
Pipeline
    Loews
Hotels & Co
     Corporate     Total         
(In millions)                                           

Revenues:

                

Insurance premiums

   $   3,379                 $ 3,379    

Net investment income

     1,020        $ 1          $ 61       1,082    

Investment gains

     77                   77    

Operating revenues and other

     219          775     $ 686     $ 348           93       2,121    

Total

     4,695          776       686       348           154       6,659          

Expenses:

                

Insurance claims and policyholders’ benefits

     2,573                       2,573    

Amortization of deferred acquisition costs

     617                   617    

Operating expenses and other

     707          705       455       296           168       2,331    

Interest

     83          55       90       13           40       281    

Total

     3,980                  760       545       309           208       5,802          

Income (loss) before income tax

     715          16       141       39           (54     857    

Income tax (expense) benefit

     (182)         21       (28     (19)          20       (188        

Net income (loss)

     533          37       113       20           (34     669    

Amounts attributable to noncontrolling interests

     (55)         (18     (70          (143  

Net income (loss) attributable to Loews Corporation

   $ 478        $ 19     $ 43     $ 20         $ (34   $ 526          
                                                            

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with our Consolidated Condensed Financial Statements included under Item 1 of this Report, Risk Factors included under Part II, Item 1A of this Report, Risk Factors included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 and the Consolidated Financial Statements, Risk Factors, and MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2017. This MD&A is comprised of the following sections:

 

         Page    
     No.

Overview

   36

Results of Operations

   37

Consolidated Financial Results

   37

CNA Financial

   38

Diamond Offshore

   44

Boardwalk Pipeline

   46

Loews Hotels & Co

   48

Corporate

   49

Liquidity and Capital Resources

   50

Parent Company

   50

Subsidiaries

   50

Investments

   51

Critical Accounting Estimates

   55

Accounting Standards Update

   55

Forward-Looking Statements

   55

OVERVIEW

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”) are included in the Corporate segment for the three and six months ended June 30, 2018 and the period from the acquisition date, May 22, 2017 through June 30, 2017. For information on the acquisition of Consolidated Container on May 22, 2017, see Notes 2 and 11 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2017. 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.

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 Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2017) 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.

Unless the context otherwise requires, references in this Report to “Loews Corporation,” “the Company,” “Parent Company,” “we,” “our,” “us” or like terms refer to the business of Loews Corporation excluding its subsidiaries.

 

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RESULTS OF OPERATIONS

Consolidated Financial Results

The following table summarizes net income (loss) attributable to Loews Corporation by segment and net income per share attributable to Loews Corporation for the three and six months ended June 30, 2018 and 2017:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
      2018     2017   2018     2017  
(In millions, except per share data)                       

CNA Financial

   $ 240     $ 244     $ 501     $ 478  

Diamond Offshore

     (37     7       (27     19  

Boardwalk Pipeline

     16       6       52       43  

Loews Hotels & Co

     17       10       30       20  

Corporate

     (6     (36     (33     (34

Net income attributable to Loews Corporation

   $ 230     $ 231     $ 523     $ 526  
                                  

Basic net income per share

   $ 0.72     $ 0.69     $ 1.62     $ 1.56  
                                  

Diluted net income per share

   $ 0.72     $ 0.69     $ 1.61     $ 1.56  
                                  

Net income attributable to Loews Corporation for the three months ended June 30, 2018 was $230 million, or $0.72 per share, compared to $231 million, or $0.69 per share in the 2017 period. Net income attributable to Loews Corporation for the six months ended June 30, 2018 was $523 million, or $1.61 per share, compared to $526 million, or $1.56 per share, in the 2017 period. The increased earnings per share for the quarter and year to date periods reflect share repurchase activity in 2017 and 2018.

Net income for the three months ended June 30, 2018 was essentially unchanged from the prior year period, as lower earnings at Diamond Offshore and CNA were offset by improved results from the parent company investment portfolio and higher earnings at Boardwalk Pipeline and Loews Hotels. Net income for the six months ended June 30, 2018 decreased slightly as compared to the prior year period due primarily to lower earnings at Diamond Offshore.

 

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CNA Financial

The following table summarizes the results of operations for CNA for the three and six months ended June 30, 2018 and 2017 as presented in Note 11 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report. For further discussion of Net investment income and Net realized investment results, see the Investments section of this MD&A.

 

       Three Months Ended         Six Months Ended    
     June 30,     June 30,  
      2018     2017   2018     2017  
(In millions)                       

Revenues:

        

  Insurance premiums

   $ 1,815     $ 1,734     $ 3,600     $ 3,379  

  Net investment income

     506       475       996       1,020  

  Investment gains (losses)

     (3     43       6       77  

  Other revenues

     256       114       507       219  

Total

     2,574       2,366       5,109       4,695  

Expenses:

        

  Insurance claims and policyholders’ benefits

     1,327       1,280       2,666       2,573  

  Amortization of deferred acquisition costs

     359       312       655       617  

  Other operating expenses

     524       364       1,042       707  

  Interest

     35       40       70       83  

Total

     2,245       1,996       4,433       3,980  

Income before income tax

     329       370       676       715  

Income tax expense

     (60     (98     (115     (182

Net income

     269       272       561       533  

Amounts attributable to noncontrolling interests

     (29     (28     (60 )