Annual Statements Open main menu

LOEWS CORP - Quarter Report: 2020 September (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

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 incorporation or organization)
 
(I.R.S. Employer Identification No.)

667 Madison Avenue, New York, NY 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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.01 per share
L
New York Stock Exchange

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 
 
No
   

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes 
 
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 
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 
   

As of October 23, 2020, there were 274,872,872 shares of the registrant’s common stock outstanding.





INDEX

Page
No.
 
   
 
   
3
 
   
4
 
   
5
 
   
6
 
   
8
 
   
9
   
39
   
62
   
62
   
62
   
62
   
62
   
67
   
68

2



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.

Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)

 
September 30, 2020
   
December 31, 2019
 
(Dollar amounts in millions, except per share data)
           
             
Assets:
           
             
Investments:
           
Fixed maturities, amortized cost of $38,979 and $38,157, less allowance for credit loss of $47 and $0
 
$
43,917
   
$
42,240
 
Equity securities, cost of $1,391 and $1,244
   
1,368
     
1,306
 
Limited partnership investments
   
1,758
     
2,004
 
Other invested assets, primarily mortgage loans, less allowance for credit loss of $21 and $0
   
1,176
     
1,072
 
Short term investments
   
4,553
     
4,628
 
Total investments
   
52,772
     
51,250
 
Cash
   
886
     
336
 
Receivables
   
7,850
     
7,675
 
Property, plant and equipment
   
10,468
     
15,568
 
Goodwill
   
765
     
767
 
Deferred non-insurance warranty acquisition expenses
   
2,998
     
2,840
 
Deferred acquisition costs of insurance subsidiaries
   
697
     
662
 
Other assets
   
3,028
     
3,145
 
Total assets
 
$
79,464
   
$
82,243
 
                 
Liabilities and Equity:
               
                 
Insurance reserves:
               
Claim and claim adjustment expense
 
$
22,534
   
$
21,720
 
Future policy benefits
   
12,978
     
12,311
 
Unearned premiums
   
5,020
     
4,583
 
Total insurance reserves
   
40,532
     
38,614
 
Payable to brokers
   
466
     
108
 
Short term debt
   
35
     
77
 
Long term debt
   
10,373
     
11,456
 
Deferred income taxes
   
913
     
1,168
 
Deferred non-insurance warranty revenue
   
3,951
     
3,779
 
Other liabilities
   
4,574
     
5,111
 
Total liabilities
   
60,844
     
60,313
 
                 
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 – 291,393,899 and 291,210,222 shares
   
3
     
3
 
Additional paid-in capital
   
3,379
     
3,374
 
Retained earnings
   
14,437
     
15,823
 
Accumulated other comprehensive income (loss)
   
238
     
(68
)
     
18,057
     
19,132
 
Less treasury stock, at cost (16,353,956 and 240,000 shares)
   
(685
)
   
(13
)
Total shareholders’ equity
   
17,372
     
19,119
 
Noncontrolling interests
   
1,248
     
2,811
 
Total equity
   
18,620
     
21,930
 
Total liabilities and equity
 
$
79,464
   
$
82,243
 

See accompanying Notes to Consolidated Condensed Financial Statements.

3



Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2020
   
2019
   
2020
   
2019
 
(In millions, except per share data)
                       
                         
Revenues:
                       
Insurance premiums
 
$
1,953
   
$
1,890
   
$
5,672
   
$
5,517
 
Net investment income
   
540
     
525
     
1,347
     
1,733
 
Investment gains (losses) (Note 2)
   
46
     
8
     
(1,312
)
   
41
 
Non-insurance warranty revenue
   
317
     
292
     
926
     
858
 
Operating revenues and other
   
609
     
960
     
2,241
     
2,906
 
Total
   
3,465
     
3,675
     
8,874
     
11,055
 
                                 
Expenses:
                               
Insurance claims and policyholders’ benefits
   
1,616
     
1,614
     
4,683
     
4,323
 
Amortization of deferred acquisition costs
   
360
     
345
     
1,046
     
1,025
 
Non-insurance warranty expense
   
293
     
278
     
859
     
801
 
Operating expenses and other
   
876
     
1,234
     
3,894
     
3,614
 
Interest
   
137
     
144
     
404
     
449
 
Total
   
3,282
     
3,615
     
10,886
     
10,212
 
Income (loss) before income tax
   
183
     
60
     
(2,012
)
   
843
 
Income tax (expense) benefit
   
(21
)
   
(21
)
   
284
     
(183
)
Net income (loss)
   
162
     
39
     
(1,728
)
   
660
 
Amounts attributable to noncontrolling interests
   
(23
)
   
33
     
400
     
55
 
Net income (loss) attributable to Loews Corporation
 
$
139
   
$
72
   
$
(1,328
)
 
$
715
 
                                 
Basic and diluted net income (loss) per share
 
$
0.50
   
$
0.24
   
$
(4.70
)
 
$
2.34
 
                                 
Weighted average shares outstanding:
                               
Shares of common stock
   
279.40
     
301.65
     
282.63
     
305.08
 
Dilutive potential shares of common stock
   
0.09
     
0.70
             
0.65
 
Total weighted average shares outstanding assuming dilution
   
279.49
     
302.35
     
282.63
     
305.73
 

See accompanying Notes to Consolidated Condensed Financial Statements.

4


Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2020
   
2019
   
2020
   
2019
 
(In millions)
                       
                         
Net income (loss)
 
$
162
   
$
39
   
$
(1,728
)
 
$
660
 
                                 
Other comprehensive income (loss), after tax
                               
Changes in:
                               
Net unrealized gains (losses) on investments with an allowance for credit losses
   
6
             
(3
)
       
Net unrealized gains on other investments
   
207
     
41
     
354
     
1,007
 
Total unrealized gains on investments
   
213
     
41
     
351
     
1,007
 
Unrealized gains (losses) on cash flow hedges
   
1
     
(4
)
   
(18
)
   
(16
)
Pension and postretirement benefits
   
7
     
10
     
27
     
25
 
Foreign currency translation
   
38
     
(31
)
   
(17
)
   
(11
)
                                 
Other comprehensive income
   
259
     
16
     
343
     
1,005
 
                                 
Comprehensive income (loss)
   
421
     
55
     
(1,385
)
   
1,665
 
                                 
Amounts attributable to noncontrolling interests
   
(49
)
   
31
     
363
     
(53
)
                                 
Total comprehensive income (loss) attributable to Loews Corporation
 
$
372
   
$
86
   
$
(1,022
)
 
$
1,612
 

See accompanying Notes to Consolidated Condensed Financial Statements.

5


Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF EQUITY
(Unaudited)

       
Loews Corporation Shareholders
       
   
Total
   
Common
Stock
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Common
Stock
Held in
Treasury
   
Noncontrolling
Interests
 
(In millions)
                                         
                                           
Balance, July 1, 2019
 
$
22,394
   
$
3
   
$
3,612
   
$
16,374
   
$
3
   
$
(478
)
 
$
2,880
 
Net income
   
39
                     
72
                     
(33
)
Other comprehensive income
   
16
                             
14
             
2
 
Dividends paid ($0.0625 per share)
   
(29
)
                   
(19
)
                   
(10
)
Purchases of Loews Corporation treasury stock
   
(169
)
                                   
(169
)
       
Purchases of subsidiary stock from noncontrolling interests
   
(2
)
                                           
(2
)
Stock-based compensation
   
9
             
8
                             
1
 
Balance, September 30, 2019
 
$
22,258
   
$
3
   
$
3,620
   
$
16,427
   
$
17
   
$
(647
)
 
$
2,838
 
                                                         
Balance, July 1, 2020
 
$
18,413
   
$
3
   
$
3,371
   
$
14,316
   
$
5
   
$
(491
)
 
$
1,209
 
Net income
   
162
                     
139
                     
23
 
Other comprehensive income
   
259
                             
233
             
26
 
Dividends paid ($0.0625 per share)
   
(27
)
                   
(17
)
                   
(10
)
Purchases of Loews Corporation treasury stock
   
(195
)
                                   
(195
)
       
Stock-based compensation
   
8
             
8
                                 
Other
   
-
                     
(1
)
           
1
         
Balance, September 30, 2020
 
$
18,620
   
$
3
   
$
3,379
   
$
14,437
   
$
238
   
$
(685
)
 
$
1,248
 

See accompanying Notes to Consolidated Condensed Financial Statements.

6


Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF EQUITY
(Unaudited)

       
Loews Corporation Shareholders
       
   
Total
   
Common
Stock
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Common
Stock
Held in
Treasury
   
Noncontrolling
Interests
 
(In millions)
                                         
                                           
Balance, January 1, 2019
 
$
21,386
   
$
3
   
$
3,627
   
$
15,773
   
$
(880
)
 
$
(5
)
 
$
2,868
 
Net income
   
660
                     
715
                     
(55
)
Other comprehensive income
   
1,005
                             
897
             
108
 
Dividends paid ($0.1875 per share)
   
(145
)
                   
(57
)
                   
(88
)
Purchases of Loews Corporation treasury stock
   
(642
)
                                   
(642
)
       
Purchases of subsidiary stock from noncontrolling interests
   
(18
)
                                           
(18
)
Stock-based compensation
   
17
             
(5
)
                           
22
 
Other
   
(5
)
           
(2
)
   
(4
)
                   
1
 
Balance, September 30, 2019
 
$
22,258
   
$
3
   
$
3,620
   
$
16,427
   
$
17
   
$
(647
)
 
$
2,838
 
                                                         
Balance, December 31, 2019, as reported
 
$
21,930
   
$
3
   
$
3,374
   
$
15,823
   
$
(68
)
 
$
(13
)
 
$
2,811
 
Cumulative effect adjustment from change in accounting standards (Note 1)
   
(5
)
                   
(5
)
                       
Balance, January 1, 2020, as adjusted
   
21,925
     
3
     
3,374
     
15,818
     
(68
)
   
(13
)
   
2,811
 
Net loss
   
(1,728
)
                   
(1,328
)
                   
(400
)
Other comprehensive income
   
343
                             
306
             
37
 
Dividends paid ($0.1875 per share)
   
(141
)
                   
(53
)
                   
(88
)
Deconsolidation of Diamond Offshore
   
(1,087
)
                                           
(1,087
)
Purchases of Loews Corporation treasury stock
   
(673
)
                                   
(673
)
       
Purchases of subsidiary stock from noncontrolling interests
   
(37
)
           
5
                             
(42
)
Stock-based compensation
   
17
             
(1
)
                           
18
 
Other
   
1
             
1
                     
1
     
(1
)
Balance, September 30, 2020
 
$
18,620
   
$
3
   
$
3,379
   
$
14,437
   
$
238
   
$
(685
)
 
$
1,248
 

See accompanying Notes to Consolidated Condensed Financial Statements.

7



Loews Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

Nine Months Ended September 30,
 
2020
   
2019
 
(In millions)
           
             
Operating Activities:
           
             
Net income (loss)
 
$
(1,728
)
 
$
660
 
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities, net
   
2,503
     
747
 
Changes in operating assets and liabilities, net:
               
Receivables
   
(273
)
   
179
 
Deferred acquisition costs
   
(36
)
   
(37
)
Insurance reserves
   
1,479
     
337
 
Other assets
   
(411
)
   
(386
)
Other liabilities
   
238
     
315
 
Trading securities
   
(481
)
   
(544
)
Net cash flow provided by operating activities
   
1,291
     
1,271
 
                 
Investing Activities:
               
                 
Purchases of fixed maturities
   
(8,466
)
   
(7,053
)
Proceeds from sales of fixed maturities
   
5,023
     
4,872
 
Proceeds from maturities of fixed maturities
   
2,706
     
2,116
 
Purchases of limited partnership investments
   
(144
)
   
(167
)
Proceeds from sales of limited partnership investments
   
305
     
680
 
Purchases of property, plant and equipment
   
(584
)
   
(743
)
Acquisitions
   
-
     
(257
)
Dispositions
   
47
     
137
 
Deconsolidation of Diamond Offshore
   
(483
)
   
-
 
Change in short term investments
   
706
     
26
 
Other, net
   
(218
)
   
(95
)
Net cash flow used by investing activities
   
(1,108
)
   
(484
)
                 
Financing Activities:
               
                 
Dividends paid
   
(53
)
   
(57
)
Dividends paid to noncontrolling interests
   
(88
)
   
(88
)
Purchases of Loews Corporation treasury stock
   
(678
)
   
(643
)
Purchases of subsidiary stock from noncontrolling interests
   
(37
)
   
(18
)
Principal payments on debt
   
(1,157
)
   
(1,796
)
Issuance of debt
   
2,393
     
1,870
 
Other, net
   
(13
)
   
(15
)
Net cash flow provided (used) by financing activities
   
367
     
(747
)
                 
Effect of foreign exchange rate on cash
   
-
     
(3
)
                 
Net change in cash
   
550
     
37
 
Cash, beginning of period
   
336
     
405
 
Cash, end of period
 
$
886
   
$
442
 

See accompanying Notes to Consolidated Condensed Financial Statements.
8




Loews Corporation and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation


Loews Corporation is a holding company. Its consolidated subsidiaries are engaged in the following lines of business: commercial property and casualty insurance (CNA Financial Corporation (“CNA”), a 89.6% owned subsidiary); transportation and storage of natural gas and natural gas liquids (Boardwalk Pipeline Partners, LP (“Boardwalk Pipelines”), a wholly owned subsidiary); the operation of a chain of hotels (Loews Hotels Holding Corporation (“Loews Hotels & Co”), a wholly owned subsidiary); and the manufacture of rigid plastic packaging solutions (Altium Packaging LLC (“Altium Packaging”), a 99% owned subsidiary). Unless the context otherwise requires, the term “Company” as used herein means Loews Corporation including its consolidated subsidiaries and the term “Net income (loss) attributable to Loews Corporation” as used herein means Net income (loss) attributable to Loews Corporation shareholders.


In the second quarter of 2020, Diamond Offshore Drilling, Inc. (“Diamond Offshore”) was deconsolidated from the Company’s consolidated financial statements. See Note 2 for further discussion.


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 September 30, 2020 and December 31, 2019 and results of operations, comprehensive income and changes in shareholders’ equity for the three and nine months ended September 30, 2020 and 2019 and cash flows for the nine months ended September 30, 2020 and 2019. Net income (loss) for the third quarter and first nine months of each of the years is not necessarily indicative of net income (loss) 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, 2019.


The Company presents basic and diluted net income (loss) per share on the Consolidated Condensed Statements of Operations. Basic net income (loss) per share excludes dilution and is computed by dividing net income (loss) 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. For the three months ended September 30, 2020 there were 0.4 million shares attributable to employee stock-based compensation awards excluded from the diluted weighted average shares outstanding amounts because the effect would have been antidilutive. For the three months ended September 30, 2019 and the nine months ended September 30, 2020 and 2019 there were no shares attributable to employee stock-based compensation awards excluded from the diluted weighted average shares outstanding amounts because the effect would have been antidilutive.


Accounting changes – In June of 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. For financial assets measured at cost, the expected credit loss model requires immediate recognition of estimated credit losses over the life of the asset and presentation of the asset at the net amount expected to be collected. This new guidance applies to mortgage loan investments, reinsurance and insurance receivables and other financing and trade receivables. For available-for-sale fixed maturity securities carried at fair value, estimated credit losses will continue to be measured at the present value of expected cash flows, however, the other than temporary impairment (“OTTI”) concept has been eliminated. Under the previous guidance, estimated credit impairments resulted in a write down of amortized cost. Under the new guidance, estimated credit losses are recognized through an allowance and reversals of the allowance are permitted if the estimate of credit losses declines. For available-for-sale fixed maturity securities where there is an intent to sell, impairment will continue to result in a write down of amortized cost.


On January 1, 2020, the Company adopted the updated guidance using a modified retrospective method with a cumulative effect adjustment recorded to beginning Retained earnings. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance. A prospective transition approach is required for available-for-sale fixed maturity securities that were purchased with credit deterioration (“PCD assets”) or have recognized an OTTI write down prior to the effective date. The cumulative effect of the accounting change resulted in a $5 million decrease in Retained earnings, after tax and noncontrolling interests.

9


The allowance for doubtful accounts for insurance, reinsurance and trade receivables was unchanged as a result of adopting the new guidance. At adoption, an allowance for credit losses of $6 million was established for available-for-sale fixed maturity securities that were PCD assets, with a corresponding increase to amortized cost, resulting in no adjustment to the carrying value of the securities. Below is a summary of the significant accounting policies impacted by the adoption of ASU 2016-13.


The allowance for credit losses is a valuation account that is reported as a reduction of a financial asset’s cost basis and is measured on a pool basis when similar risk characteristics exist. The allowance is estimated using relevant available information from both internal and external sources. Historical credit loss experience provides the basis for the estimation of expected credit losses and adjustments may be made to reflect current conditions and reasonable and supportable forecasts. Adjustments to historical loss information are made for additional factors that come to the Company’s attention. This could include significant shifts in counterparty financial strength ratings, aging of past due receivables, amounts sent to collection agencies, or other underlying portfolio changes. Current and forecast economic conditions are considered, using a variety of economic metrics and forecast indices. The sensitivity of expected credit losses relative to changes to the forecast of economic conditions can vary by financial asset class. A reasonable and supportable forecast period is up to 24 months from the balance sheet date. After the forecast period, the Company reverts to historical credit experience. Collateral arrangements such as letters of credit and amounts held in beneficiary trusts to mitigate credit risk are considered in the estimate of the net amount expected to be collected.


A policy election has been made to present accrued interest balances separately from the amortized cost basis of assets, and a practical expedient has been elected to exclude the accrued interest from the tabular disclosures for mortgage loans and available-for-sale securities. An election has been made not to estimate an allowance for credit losses on accrued interest receivables. The accrual of interest income is discontinued and the asset is placed on nonaccrual status within 90 days of the interest becoming delinquent. Interest accrued but not received for assets on nonaccrual status is reversed through Net investment income. Interest received for assets that are on nonaccrual status is recognized as payment is received. The asset is returned to accrual status when the principal and interest amounts contractually due are brought current, and future payments are expected. Interest receivables are presented in Receivables on the Consolidated Condensed Balance Sheet.


See Notes 3 and 10 for more information on credit losses.


Recently issued ASUs – In August of 2018, the FASB issued ASU 2018-12, “Financial Services – Insurance (Topic 944):  Targeted Improvements to the Accounting for Long-Duration Contracts.” The updated accounting guidance requires changes to the measurement and disclosure of long-duration contracts. The guidance requires entities to update annually cash flow assumptions, including morbidity and persistency, and update quarterly discount rate assumptions using an upper-medium grade fixed-income instrument yield. The effect of changes in cash flow assumptions will be recorded in Net income and the effect of changes in discount rate assumptions will be recorded in Other comprehensive income (“OCI”). This guidance is effective for interim and annual periods beginning after December 15, 2021, however the FASB has approved a one year deferral of the effective date. Early adoption is permitted. The Company may elect to apply the guidance using either a modified retrospective transition method or a full retrospective transition method. The guidance requires restatement of prior periods presented. The Company plans to use the modified retrospective transition method at adoption and is currently evaluating the effect the updated guidance will have on its consolidated financial statements, including increased disclosure requirements. The annual updating of cash flow assumptions is expected to increase income statement volatility. While the requirements of the new guidance represent a material change from existing accounting guidance, the underlying economics of the business and related cash flows will be unchanged.

2.  Deconsolidation of Diamond Offshore


On April 26, 2020 (the “Filing Date”), Diamond Offshore and certain of its direct and indirect subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the Southern District of Texas seeking relief under Chapter 11 of the United States Bankruptcy Code (the “Chapter 11 Filing”). As a result of Diamond Offshore’s Chapter 11 Filing and applicable U.S. generally accepted accounting principles, Loews Corporation no longer controls Diamond Offshore for accounting purposes and, therefore, Diamond Offshore was deconsolidated from its consolidated financial statements effective as of the Filing Date. See Note 14 for Diamond Offshore’s revenues and expenses through the Filing Date.

10


Through the Filing Date, Diamond Offshore’s results were included in Loews Corporation’s consolidated financial statements and Loews Corporation recognized in its earnings its proportionate share of Diamond Offshore’s losses through such date. The deconsolidation resulted in the recognition of a loss of $1.2 billion ($957 million after tax) during the nine months ended September 30, 2020, which is reported within Investment gains (losses) on the Consolidated Condensed Statements of Operations. This loss represents the difference between the carrying value and the estimated fair value, which was immaterial, of Loews Corporation’s investment in equity securities of Diamond Offshore as of the Filing Date.

3. Investments


Net investment income is as follows:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30
 
 
2020
   
2019
   
2020
   
2019
 
(In millions)
                       
                         
Fixed maturity securities
 
$
432
   
$
452
   
$
1,300
   
$
1,362
 
Limited partnership investments
   
71
     
16
     
26
     
140
 
Short term investments
   
2
     
13
     
11
     
42
 
Equity securities
   
18
     
16
     
24
     
62
 
Income from trading portfolio (a)
   
22
     
34
             
144
 
Other
   
14
     
13
     
44
     
39
 
Total investment income
   
559
     
544
     
1,405
     
1,789
 
Investment expenses
   
(19
)
   
(19
)
   
(58
)
   
(56
)
Net investment income
 
$
540
   
$
525
   
$
1,347
   
$
1,733
 

(a)
Net unrealized gains (losses) related to changes in fair value on securities still held were $11 and $17 for the three months ended September 30, 2020 and 2019 and $13 and $55 for the nine months ended September 30, 2020 and 2019.


Investment gains (losses) are as follows:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30
 
 
2020
   
2019
   
2020
   
2019
 
(In millions)
                       
                         
Fixed maturity securities
 
$
26
   
$
3
   
$
(32
)
 
$
(6
)
Equity securities
   
25
     
7
     
(45
)
   
60
 
Derivative instruments
   
(2
)
   
(2
)
   
(7
)
   
(13
)
Short term investments and other
   
(3
)
           
(17
)
       
Deconsolidation of Diamond Offshore (see Note 2)
                   
(1,211
)
       
Investment gains (losses) (a)
 
$
46
   
$
8
   
$
(1,312
)
 
$
41
 

(a)
Gross investment gains on available-for-sale securities were $44 and $34 for the three months ended September 30, 2020 and 2019 and $175 and $98 for the nine months ended September 30, 2020 and 2019. Gross investment losses on available-for-sale securities were $18 and $31 for the three months ended September 30, 2020 and 2019 and $207 and $104 for the nine months ended September 30, 2020 and 2019. During the three and nine months ended September 30, 2020, $25 of investment gains and $44 of investment losses were recognized due to the change in fair value of non-redeemable preferred stock still held as of September 30, 2020. During the three and nine months ended September 30, 2019, $7 and $60 of investment gains were recognized due to the change in fair value of non-redeemable preferred stock still held as of September 30, 2019.



The allowance for credit loss related to available-for-sale fixed maturity securities is the difference between the present value of cash flows expected to be collected and the amortized cost basis. All available evidence is considered when determining whether an investment requires a credit loss write-down or allowance to be recorded. Examples of such evidence may include the financial condition and near term prospects of the issuer, whether the issuer is current with interest and principal payments, credit ratings on the security or changes in ratings over time, general market conditions and industry, sector or other specific factors and whether it is likely that the amortized cost will be recovered through the collection of cash flows. Changes in the allowance are presented as a component of Investment gains (losses) on the Consolidated Condensed Statements of Operations.
11



The following tables present the activity related to the allowance on available-for-sale securities with credit impairments and PCD assets. Accrued interest receivables on available-for-sale fixed maturity securities totaled $390 million and is excluded from the estimate of expected credit losses and the amortized cost basis in the tables within this Note.

Three months ended September 30, 2020
 
Corporate and
Other Bonds
   
Asset-
backed
   
Total
 
(In millions)
                 
                   
Allowance for credit losses:
                 
Balance as of July 1, 2020
 
$
39
   
$
12
   
$
51
 
Additions to the allowance for credit losses:
                       
For securities for which credit losses were not previously recorded
   
4
             
4
 
For available-for-sale securities accounted for as PCD assets
   
1
             
1
 
                         
Reductions to the allowance for credit losses:
                       
Securities sold during the period (realized)
   
9
             
9
 
                         
Additional increases or (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period
   
(1
)
   
1
         
Total allowance for credit losses
 
$
34
   
$
13
   
$
47
 

Nine months ended September 30, 2020
                 
                   
Allowance for credit losses:
                 
Balance as of December 31, 2019
 
$
-
   
$
-
   
$
-
 
Additions to the allowance for credit losses:
                       
Impact of adopting ASC 326
   
6
             
6
 
For securities for which credit losses were not previously recorded
   
62
     
12
     
74
 
For available-for-sale securities accounted for as PCD assets
   
3
             
3
 
                         
Reductions to the allowance for credit losses:
                       
Securities sold during the period (realized)
   
15
             
15
 
Intent to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis
   
1
             
1
 
                         
Additional increases or (decrease) to the allowance for credit losses on securities that had an allowance recorded in a previous period
   
(21
)
   
1
     
(20
)
Total allowance for credit losses
 
$
34
   
$
13
   
$
47
 


The components of available-for-sale impairment losses recognized in earnings by asset type are presented in the following table. The table includes losses on securities with an intention to sell and changes in the allowance for credit losses on securities since acquisition date:

 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2020
   
2019
   
2020
   
2019
 
(In millions)
                       
                         
Fixed maturity securities available-for-sale:
                       
Corporate and other bonds
 
$
4
   
$
12
   
$
94
   
$
24
 
Asset-backed
   
1
     
2
     
14
     
10
 
Impairment losses recognized in earnings
 
$
5
   
$
14
   
$
108
   
$
34
 

12


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

September 30, 2020
 
Cost or
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Allowance
for Credit
Losses (a)
   
Estimated
Fair Value
 
(In millions)
                             
                               
Fixed maturity securities:
                             
Corporate and other bonds
 
$
20,734
   
$
3,047
   
$
89
   
$
34
   
$
23,658
 
States, municipalities and political subdivisions
   
9,459
     
1,766
     
1
             
11,224
 
Asset-backed:
                                       
Residential mortgage-backed
   
3,796
     
153
     
1
             
3,948
 
Commercial mortgage-backed
   
2,048
     
85
     
70
     
13
     
2,050
 
Other asset-backed
   
2,097
     
76
     
19
             
2,154
 
Total asset-backed
   
7,941
     
314
     
90
     
13
     
8,152
 
U.S. Treasury and obligations of government-sponsored enterprises
   
347
     
4
     
1
             
350
 
Foreign government
   
481
     
29
                     
510
 
Fixed maturities available-for-sale
   
38,962
     
5,160
     
181
     
47
     
43,894
 
Fixed maturities trading
   
17
     
6
                     
23
 
Total fixed maturity securities
 
$
38,979
   
$
5,166
   
$
181
   
$
47
   
$
43,917
 

December 31, 2019
 
Cost or
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair Value
   
Unrealized
OTTI Losses
(Gains) (a)
 
                               
Fixed maturity securities:
                             
Corporate and other bonds
 
$
19,789
   
$
2,292
   
$
32
   
$
22,049
       
States, municipalities and political subdivisions
   
9,093
     
1,559
             
10,652
       
Asset-backed:
                                     
Residential mortgage-backed
   
4,387
     
133
     
1
     
4,519
   
$
(17
)
Commercial mortgage-backed
   
2,265
     
86
     
5
     
2,346
     
1
 
Other asset-backed
   
1,925
     
41
     
4
     
1,962
     
(3
)
Total asset-backed
   
8,577
     
260
     
10
     
8,827
     
(19
)
U.S. Treasury and obligations of government-sponsored enterprises
   
146
     
1
     
2
     
145
         
Foreign government
   
491
     
14
     
1
     
504
         
Redeemable preferred stock
   
10
                     
10
         
Fixed maturities available-for-sale
   
38,106
     
4,126
     
45
     
42,187
     
(19
)
Fixed maturities trading
   
51
     
2
             
53
         
Total fixed maturities
 
$
38,157
   
$
4,128
   
$
45
   
$
42,240
   
$
(19
)

(a)
On January 1, 2020, the Company adopted ASU 2016-13; see Note 1. The Unrealized OTTI Losses (Gains) column that tracked subsequent valuation changes on securities for which a credit loss had previously been recorded has been replaced with the Allowance for Credit Losses column. Prior period amounts were not adjusted for the adoption of this standard.


The net unrealized gains on available-for-sale investments included in the tables above are recorded as a component of Accumulated other comprehensive income (loss) (“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 (loss) (“Shadow Adjustments”). As of September 30, 2020 and December 31, 2019, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $2.3 billion and $2.0 billion (after tax and noncontrolling interests).
13



The available-for-sale securities in a gross unrealized loss position for which an allowance for credit losses has not been recorded are as follows:

 
Less than
12 Months
   
12 Months
or Longer
   
Total
 
September 30, 2020
 
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
 
$
1,579
   
$
86
   
$
56
   
$
3
   
$
1,635
   
$
89
 
States, municipalities and political subdivisions
   
154
     
1
                     
154
     
1
 
Asset-backed:
                                               
Residential mortgage-backed
   
98
     
1
     
13
             
111
     
1
 
Commercial mortgage-backed
   
693
     
69
     
19
     
1
     
712
     
70
 
Other asset-backed
   
432
     
18
     
13
     
1
     
445
     
19
 
Total asset-backed
   
1,223
     
88
     
45
     
2
     
1,268
     
90
 
U.S. Treasury and obligations of government-sponsored enterprises
   
25
     
1
                     
25
     
1
 
Foreign government
   
20
                             
20
         
Total fixed maturity securities
 
$
3,001
   
$
176
   
$
101
   
$
5
   
$
3,102
   
$
181
 
                                                 
December 31, 2019
                                               
                                                 
Fixed maturity securities:
                                               
Corporate and other bonds
 
$
914
   
$
21
   
$
186
   
$
11
   
$
1,100
   
$
32
 
States, municipalities and political subdivisions
   
34
                             
34
         
Asset-backed:
                                               
Residential mortgage-backed
   
249
     
1
     
30
             
279
     
1
 
Commercial mortgage-backed
   
381
     
3
     
20
     
2
     
401
     
5
 
Other asset-backed
   
449
     
3
     
33
     
1
     
482
     
4
 
Total asset-backed
   
1,079
     
7
     
83
     
3
     
1,162
     
10
 
U.S. Treasury and obligations of government-sponsored enterprises
   
62
     
2
     
2
             
64
     
2
 
Foreign government
   
59
     
1
     
1
             
60
     
1
 
Total fixed maturity securities
 
$
2,148
   
$
31
   
$
272
   
$
14
   
$
2,420
   
$
45
 


Based on current facts and circumstances, the Company believes the unrealized losses presented in the September 30, 2020 securities in a gross unrealized loss position table above are not indicative of the ultimate collectability 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 impairment losses to be recorded as of September 30, 2020.

Contractual Maturity


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

 
September 30, 2020
   
December 31, 2019
 
   
Cost or
Amortized
Cost
   
Estimated
Fair
Value
   
Cost or
Amortized
Cost
   
Estimated
Fair
Value
 
(In millions)
                       
                         
Due in one year or less
 
$
1,372
   
$
1,392
   
$
1,334
   
$
1,356
 
Due after one year through five years
   
11,955
     
12,625
     
9,746
     
10,186
 
Due after five years through ten years
   
13,026
     
14,359
     
14,892
     
15,931
 
Due after ten years
   
12,609
     
15,518
     
12,134
     
14,714
 
Total
 
$
38,962
   
$
43,894
   
$
38,106
   
$
42,187
 


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.

14

Mortgage Loans


The allowance for expected credit losses on mortgage loans is developed by assessing the credit quality of pools of mortgage loans in good standing using debt service coverage ratios (“DSCR”) and loan-to-value (“LTV”) ratios. The DSCR compares a property’s net operating income to its debt service payments, including principal and interest. The LTV ratio compares the current unpaid principal balance of the loan to the estimated fair value of the underlying property collateralizing the loan. The pools developed to measure the credit loss allowance use increments of DSCR and LTV to draw distinctions between risk levels. Changes in the allowance for mortgage loans are presented as a component of Investment gains (losses) on the Consolidated Condensed Statements of Operations. Mortgage loans are included in Other invested assets on the Consolidated Condensed Balance Sheets.


The following table presents the amortized cost basis of mortgage loans for each credit quality indicator by year of origination:

 
Mortgage Loans Amortized Cost Basis by Origination Year (a)
 
As of September 30, 2020
 
2020
   
2019
   
2018
   
2017
   
2016
   
Prior
   
Total
 
(In millions)
                                         
                                           
DSCR ≥1.6x
                                         
LTV less than 55%
 
$
75
   
$
33
   
$
19
   
$
85
   
$
33
   
$
161
   
$
406
 
LTV 55% to 65%
           
33
     
29
     
55
     
12
             
129
 
LTV greater than 65%
           
5
                             
12
     
17
 
DSCR 1.2x - 1.6x
                                                       
LTV less than 55%
           
31
     
10
     
13
     
16
     
79
     
149
 
LTV 55% to 65%
   
20
     
54
     
32
     
24
                     
130
 
LTV greater than 65%
   
48
     
103
                                     
151
 
DSCR ≤1.2x
                                                       
LTV less than 55%
                                                       
LTV 55% to 65%
           
14
     
14
                             
28
 
LTV greater than 65%
           
23
             
45
     
24
     
7
     
99
 
Total
 
$
143
   
$
296
   
$
104
   
$
222
   
$
85
   
$
259
   
$
1,109
 

(a)
The values in the table above reflect DSCR on a standardized amortization period and LTV based on the most recent appraised values trended forward using changes in a commercial real estate price index.

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 related 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.

 
September 30, 2020
   
December 31, 2019
 
   
Contractual/
Notional
 
Estimated Fair Value
   
Contractual/
Notional
   
Estimated Fair Value
 
   
Amount
 
Asset
 
(Liability)
   
Amount
   
Asset
   
(Liability)
 
(In millions)
                               
                                 
With hedge designation:
                               
                                 
Interest rate swaps
 
$
675
     
$
(28
)
 
$
715
         
$
(8
)
                                         
Without hedge designation:
                                       
                                         
Equity Options – purchased
                     
57
   
$
1
         
         – written
                     
100
             
(1
)
Interest rate swaps
   
80
       
(3
)
                       
Embedded derivative on funds withheld liability
   
193
       
(16
)
   
182
             
(7
)

15

Investment Commitments

As part of the overall investment strategy, investments are made in various assets which require future purchase, sale or funding commitments. These investments are recorded once funded, and the related commitments may include future capital calls from various third-party limited partnerships, signed and accepted mortgage loan applications and obligations related to private placement securities. As of September 30, 2020, commitments to purchase or fund were approximately $1.2 billion and to sell were approximately $55 million under the terms of these investments.

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.


Control procedures are performed over information obtained from pricing services and brokers to ensure prices received represent a reasonable estimate of fair value and to confirm representations regarding whether inputs are observable or unobservable. Procedures may include: (i) the review of pricing service methodologies or broker pricing qualifications, (ii) back-testing, where past fair value estimates are compared to actual transactions executed in the market on similar dates, (iii) exception reporting, where period-over-period changes in price are reviewed and challenged with the pricing service or broker based on exception criteria and (iv) detailed analysis, where the Company performs an independent analysis of the inputs and assumptions used to price individual securities.


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, foreign governments and redeemable preferred stock.

September 30, 2020
 
Level 1
   
Level 2
   
Level 3
   
Total
 
(In millions)
                       
                         
Fixed maturity securities:
                       
Corporate bonds and other
 
$
372
   
$
23,452
   
$
694
   
$
24,518
 
States, municipalities and political subdivisions
           
11,179
     
45
     
11,224
 
Asset-backed
           
7,917
     
235
     
8,152
 
Fixed maturities available-for-sale
   
372
     
42,548
     
974
     
43,894
 
Fixed maturities trading
           
15
     
8
     
23
 
Total fixed maturities
 
$
372
   
$
42,563
   
$
982
   
$
43,917
 
                                 
Equity securities
 
$
655
   
$
674
   
$
39
   
$
1,368
 
Short term and other
   
4,379
     
56
             
4,435
 
Payable to brokers
   
(40
)
   
(31
)
           
(71
)
16


December 31, 2019
 
Level 1
   
Level 2
   
Level 3
   
Total
 
(In millions)
                       
                         
Fixed maturity securities:
                       
Corporate bonds and other
 
$
175
   
$
22,065
   
$
468
   
$
22,708
 
States, municipalities and political subdivisions
           
10,652
             
10,652
 
Asset-backed
           
8,662
     
165
     
8,827
 
Fixed maturities available-for-sale
   
175
     
41,379
     
633
     
42,187
 
Fixed maturities trading
           
49
     
4
     
53
 
Total fixed maturities
 
$
175
   
$
41,428
   
$
637
   
$
42,240
 
                                 
Equity securities
 
$
629
   
$
658
   
$
19
   
$
1,306
 
Short term and other
   
3,138
     
1,383
             
4,521
 
Receivables
           
2
             
2
 
Payable to brokers
   
(18
)
   
(10
)
           
(28
)
17



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 nine months ended September 30, 2020 and 2019:

       
Net Realized
Investment Gains
(Losses) and Net Change
in Unrealized Investment
Gains (Losses)
                                       
Unrealized
Gains
(Losses)
Recognized in
Net Income
(Loss) on Level
3 Assets and
   
Unrealized
Gains
(Losses)
Recognized in
Other
Comprehensive
Income (Loss)
on Level 3
Assets and
 
2020
 
Balance,
July 1
   
Included in
Net Income
(Loss)
   
Included in
OCI
   
Purchases
   
Sales
   
Settlements
   
Transfers
into
Level 3
   
Transfers
out of
Level 3
   
Balance,
September 30
   
Liabilities
Held at
September 30
   
Liabilities
Held at
September 30
 
(In millions)
                                                                 
                                                                   
Fixed maturity securities: