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 September 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 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        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 October 26, 2018    

    Common stock, $0.01 par value            314,190,649 shares

 

 

 


Table of Contents

INDEX

 

     Page
No.
 

Part I. Financial Information

  

Item 1. Financial Statements (unaudited)

  

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

     3  

Consolidated Condensed Statements of Income
Three and nine months ended September 30, 2018 and 2017

     4  

Consolidated Condensed Statements of Comprehensive Income
Three and nine months ended September 30, 2018 and 2017

     5  

Consolidated Condensed Statements of Equity
Nine months ended September 30, 2018 and 2017

     6  

Consolidated Condensed Statements of Cash Flows
Nine months ended September 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

     37  

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

     59  

Item 4.  Controls and Procedures

     59  

Part II. Other Information

     59  

Item 1.  Legal Proceedings

     59  

Item 1A. Risk Factors

     59  

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

     60  

Item 6.  Exhibits

     61  

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

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

Assets:

    

Investments:

    

Fixed maturities, amortized cost of $38,237 and $38,861

       $ 39,819       $ 42,133  

Equity securities, cost of $1,306 and $1,177

     1,267       1,224  

Limited partnership investments

     2,832       3,278  

Other invested assets, primarily mortgage loans

     983       945  

Short term investments

     3,794       4,646  

Total investments

     48,695       52,226  

Cash

     571       472  

Receivables

     7,836       7,613  

Property, plant and equipment

     15,467       15,427  

Goodwill

     657       659  

Other assets

     4,845       2,555  

Deferred acquisition costs of insurance subsidiaries

     654       634  

Total assets

       $ 78,725       $ 79,586  
   

Liabilities and Equity:

    

Insurance reserves:

    

Claim and claim adjustment expense

       $ 21,604       $ 22,004  

Future policy benefits

     10,605       11,179  

Unearned premiums

     4,289       4,029  

Total insurance reserves

     36,498       37,212  

Payable to brokers

     217       60  

Short term debt

     149       280  

Long term debt

     11,311       11,253  

Deferred income taxes

     911       749  

Other liabilities

     7,753       5,466  

Total liabilities

     56,839       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 – 332,739,088 and 332,487,815 shares

     3       3  

Additional paid-in capital

     3,813       3,151  

Retained earnings

     16,790       16,096  

Accumulated other comprehensive loss

     (758     (26
     19,848       19,224  

Less treasury stock, at cost (17,795,538 and 400,000 shares)

     (896     (20

Total shareholders’ equity

     18,952       19,204  

Noncontrolling interests

     2,934       5,362  

Total equity

     21,886       24,566  

Total liabilities and equity

       $ 78,725       $ 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
September 30,
    Nine Months Ended
September 30,
 
      2018     2017     2018     2017  
(In millions, except per share data)                         

Revenues:

        

Insurance premiums

   $ 1,853     $ 1,806     $ 5,453     $ 5,185  

Net investment income

     494       557       1,551       1,639  

Investment gains (losses):

        

Other-than-temporary impairment losses

     (3     (5     (9     (9

Other net investment gains

     18       21       30       102  

Total investment gains

     15       16       21       93  

Operating revenues and other

     1,246       1,142       3,754       3,263  

  Total

     3,608       3,521       10,779       10,180  

Expenses:

        

Insurance claims and policyholders’ benefits

     1,312       1,480       3,978       4,053  

Amortization of deferred acquisition costs

     337       309       992       926  

Operating expenses and other

     1,459       1,245       4,313       3,576  

Interest

     146       223       430       504  

  Total

     3,254       3,257       9,713       9,059  

Income before income tax

     354       264       1,066       1,121  

Income tax expense

     (65     (52     (149     (240

Net income

     289       212       917       881  

Amounts attributable to noncontrolling interests

     (11     (55     (116     (198

Net income attributable to Loews Corporation

   $ 278     $ 157     $ 801     $ 683  
   

Basic net income per share

   $ 0.88     $ 0.46     $ 2.50     $ 2.03  
   

Diluted net income per share

   $ 0.88     $ 0.46     $ 2.49     $ 2.02  
   

Dividends per share

   $ 0.0625     $ 0.0625     $ 0.1875     $ 0.1875  
   

Weighted average shares outstanding:

        

Shares of common stock

     315.90       336.91       320.81       336.90  

Dilutive potential shares of common stock

     0.91       0.88       0.92       0.83  

Total weighted average shares outstanding assuming dilution

     316.81       337.79       321.73       337.73  
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
      2018     2017     2018     2017  
(In millions)                         

Net income

   $ 289     $ 212     $ 917     $ 881  

Other comprehensive income (loss), after tax

        

Changes in:

        

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

     (1     1       (11     (3

Net other unrealized gains (losses) on investments

     (158     23       (746     167  

Total unrealized gains (losses) on investments

     (159     24       (757     164  

Unrealized gains on cash flow hedges

       1       14       1  

Pension liability

     8       11       27       26  

Foreign currency translation

             41       (41     94  

Other comprehensive income (loss)

     (151     77       (757     285  

Comprehensive income

     138       289       160       1,166  

Amounts attributable to noncontrolling interests

     7       (64     (34     (228

Total comprehensive income attributable to Loews Corporation

   $ 145     $ 225     $ 126     $ 938  
   

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      
      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, 2017

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

Net income

     881            683           198  

Other comprehensive income

     285              255         30  

Dividends paid

     (180          (63         (117

Purchases of Loews treasury stock

     (6              (6  

Stock-based compensation

     24          (8           32  

Other

     (4              2       (5                     (1

Balance, September 30, 2017

   $ 24,361     $ 3      $ 3,181     $ 15,811     $ 32     $ (6   $ 5,340  
                           

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

     917            801           116  

Other comprehensive loss

     (757            (675       (82

Dividends paid

     (170          (60         (110

Purchase of Boardwalk Pipeline common units

     (1,718        658         (29       (2,347

Purchases of Loews treasury stock

     (876              (876  

Stock-based compensation

     19          10             9  

Other

     (4              (6     (4                     6  

Balance, September 30, 2018

   $       21,886     $             3      $ 3,813     $     16,790     $ (758   $ (896   $ 2,934  
                           

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Nine Months Ended September 30    2018   2017
(In millions)         

Operating Activities:

    

Net income

   $ 917     $ 881  

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

     1,121       959  

Changes in operating assets and liabilities, net:

    

Receivables

     18       19  

Deferred acquisition costs

     (24     (34

Insurance reserves

     108       248  

Other assets

     (169     (85 )     

Other liabilities

     (75     (116

Trading securities

     1,499       (62

Net cash flow operating activities

     3,395       1,810  

Investing Activities:

    

Purchases of fixed maturities

     (8,244     (6,877

Proceeds from sales of fixed maturities

     6,622       4,167  

Proceeds from maturities of fixed maturities

     1,838       2,635  

Purchases of limited partnership investments

     (381     (85

Proceeds from sales of limited partnership investments

     382       179  

Purchases of property, plant and equipment

     (731     (735

Acquisitions

     (14     (1,218

Dispositions

     110       68  

Change in short term investments

     (126     (85

Other, net

     (173     (136

Net cash flow investing activities

     (717     (2,087

Financing Activities:

    

Dividends paid

     (60     (63

Dividends paid to noncontrolling interests

     (110     (117

Purchases of Loews treasury stock

     (889     (6

Purchase of Boardwalk Pipeline common units

     (1,504  

Principal payments on debt

     (780     (2,249

Issuance of debt

     693       2,808  

Other, net

     75       (16

Net cash flow financing activities

     (2,575     357  

Effect of foreign exchange rate on cash

     (4     9  

Net change in cash

     99       89  

Cash, beginning of period

     472       327  

Cash, end of period

   $         571     $         416  
   

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 September 30, 2018 and December 31, 2017, results of operations and comprehensive income for the three and nine months ended September 30, 2018 and 2017 and changes in shareholders’ equity and cash flows for the nine months ended September 30, 2018 and 2017. Net income for the third quarter and first nine months 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 0.4 million shares attributable to employee stock-based compensation awards excluded from the diluted weighted average shares outstanding amounts for the three and nine months ended September 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 is recognized more slowly as compared to the historic revenue recognition pattern. For the warranty products where 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 $5.5 billion as of September 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 $145 million and $419 million for the three and nine months ended September 30,

 

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2018 and an increase to Operating expenses and other of $149 million and $423 million for the three and nine months ended September 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 nine months ended September 30, 2018, an increase in the fair value of equity securities of approximately $1 million and a decrease of approximately $22 million was recognized in the Company’s Consolidated Condensed Statements of Income as a result of this change. For the three and nine months ended September 30, 2017, a $2 million and an $8 million increase in the fair value of equity securities was recognized in Other comprehensive income (“OCI”).

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.

In August of 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement.” The updated accounting guidance requires changes to the disclosures for fair value measurement by adding, removing and modifying certain disclosures. The Company early adopted the updated guidance in September of 2018 and modified the fair value disclosures in Note 4, including added disclosures on changes in unrealized gains (losses) on Level 3 assets recognized in Other comprehensive income as well as the weighted average rate used to develop significant inputs utilized in the fair value measurements of Level 3 assets. The Company also eliminated disclosures on transfers between Level 1 and Level 2 assets and the policy for timing of transfers between levels.

Recently issued ASUs – In February of 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” and in July of 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements.” The updated guidance requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance provides lessors with an election to separate lease and nonlease components, if certain conditions are met, 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 and requires using a modified retrospective transition method. However, the updated guidance allows entities to elect a practical expedient and apply the guidance prospectively beginning with the adoption date. The Company has elected to apply this practical expedient and is currently in the process of evaluating its operating lease inventory and the lease assets and lease liabilities to be recorded as of January 1, 2019. The Company continues to evaluate other provisions of the updated guidance.

 

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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.

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 standard requires entities to annually update cash flow assumptions, including morbidity and persistency and update discount rate assumptions quarterly 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 OCI.

This guidance is effective for interim and annual periods beginning after December 15, 2020, and requires restatement of the prior periods presented. Early adoption is permitted. The Company is currently evaluating the method and timing of adoption and the effect the updated guidance will have on its consolidated financial statements. The annual updating of cash flow assumptions is expected to increase income statement volatility. The quarterly change in the discount rate is expected to increase volatility in the Company’s Shareholders’ equity, but that will be somewhat mitigated because Shadow Adjustments are eliminated under the new guidance. See Note 3 for further information on Shadow Adjustments.

In August of 2018, the FASB issued ASU 2018-14, “Compensation Retirement Benefits Defined Benefit Plans General (Subtopic 715-20): Disclosure Framework Changes to the Disclosure Requirements for Defined Benefit Plans.” The updated accounting guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing, adding and clarifying certain disclosures. The guidance is effective for annual periods ending after December 15, 2020 and the Company plans to early adopt this standard in December of 2018.

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 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.

 

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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 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 $658 million, an increase to deferred income tax liabilities of $213 million and a decrease to AOCI of $29 million.

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
September 30,
    Nine Months Ended
September 30,
 
      2018     2017     2018     2017  
(In millions)                         

Fixed maturity securities

   $ 449     $ 455     $ 1,339     $ 1,367  

Limited partnership investments

     34       67       142       206  

Short term investments

     10       5       30       13  

Equity securities

     10       1       32       4  

Income (loss) from trading portfolio (a)

     (7     34       13       67  

Other

     12       10       40       26  

Total investment income

     508       572       1,596       1,683  

Investment expenses

     (14     (15     (45     (44 )     

Net investment income

   $ 494     $ 557     $ 1,551     $ 1,639  
   

 

(a)

Net unrealized gains (losses) related to changes in fair value on securities still held were $(23) and $22 for the three months ended September 30, 2018 and 2017 and $(66) and $35 for the nine months ended September 30, 2018 and 2017.

Investment gains (losses) are as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
      2018      2017     2018     2017  
(In millions)                          

Fixed maturity securities

   $ 10      $ 16     $ 32     $ 92  

Equity securities

     2          (23  

Derivative instruments

     1        (1     10       (3 )     

Short term investments and other

     2        1       2       4  

Investment gains (a)

   $ 15      $ 16     $ 21     $ 93  
   

 

(a)

Gross realized gains on available-for-sale securities were $42 and $34 for the three months ended September 30, 2018 and 2017 and $148 and $140 for the nine months ended September 30, 2018 and 2017. Gross realized losses on available-for-sale securities were $32 and $18 for the three months ended September 30, 2018 and 2017 and $116 and $48 for the nine months ended September 30, 2018 and 2017. Net realized gains of $2 and net realized losses of $23 were recognized due to the change in fair value of non-redeemable preferred stock still held for the three and nine months ended September 30, 2018.

 

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
      2018      2017      2018      2017  
(In millions)                            

Fixed maturity securities available-for-sale:

           

  Corporate and other bonds

   $ 1      $ 4      $ 6      $ 8  

  Asset-backed

     2        1        3        1  

Net OTTI losses recognized in earnings

   $ 3      $ 5      $ 9      $ 9  
   

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

 

September 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

   $ 18,348        $ 887        $ 215        $ 19,020       

States, municipalities and political subdivisions

     10,171          994          20          11,145       

Asset-backed:

                      

Residential mortgage-backed

     5,024          62          115          4,971        $ (24

Commercial mortgage-backed

     2,165          23          36          2,152       

Other asset-backed

     1,732          6          9          1,729             

Total asset-backed

     8,921          91          160          8,852          (24

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

     145          2          2          145       

Foreign government

     457          4          6          455       

Redeemable preferred stock

     9          1                     10             

Fixed maturities available-for-sale

     38,051          1,979          403          39,627          (24

Fixed maturities trading

     186          6                     192             

Total fixed maturity securities

   $ 38,237        $ 1,985        $ 403        $ 39,819        $ (24
              

December 31, 2017

                                                    

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
              

 

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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 OCI (“Shadow Adjustments”). As of September 30, 2018 and December 31, 2017, the net unrealized gains on investments included in AOCI were correspondingly reduced by Shadow Adjustments of $997 million 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
September 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

   $ 7,546      $ 197      $ 342      $ 18      $ 7,888      $ 215  

States, municipalities and political subdivisions

     807        19        2        1        809        20  

Asset-backed:

                 

Residential mortgage-backed

     3,409        89        501        26        3,910        115  

Commercial mortgage-backed

     968        15        322        21        1,290        36  

Other asset-backed

     953        9        45                 998        9  

Total asset-backed

     5,330        113        868        47        6,198        160  

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

     35           42        2        77        2  

Foreign government

     188        4        64        2        252        6  

Total fixed maturity securities

   $ 13,906      $ 333      $ 1,318      $ 70      $ 15,224      $ 403  
                     

December 31, 2017

                                                     

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 September 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 September 30, 2018.

 

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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 September 30, 2018 and 2017 for which a portion of an OTTI loss was recognized in OCI.

 

         Three Months Ended    
September 30,
               Nine Months Ended    
September 30,
      2018       2017                2018       2017    
(In millions)                         

Beginning balance of credit losses on fixed maturity securities

   $ 21     $ 30           $ 27     $ 36  

Reductions for securities sold during the period

     (2     (2                 (8     (8

Ending balance of credit losses on fixed maturity securities

   $ 19     $ 28           $ 19     $ 28  
   

Contractual Maturity

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

 

      September 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

   $ 1,457        $ 1,473             $ 1,135        $ 1,157  

Due after one year through five years

     8,017          8,197               8,165          8,501  

Due after five years through ten years

     16,453          16,475               16,060          16,718  

Due after ten years

     12,124          13,482                     12,852          15,108  

Total

   $ 38,051        $ 39,627             $ 38,212        $   41,484    
   

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.

 

      September 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      $     22        $   500      $ 4     

Without hedge designation:

                

Equity markets:

                

Options – purchased

     222        9          224        12     

– written

     201           $ (6     290             $ (7 )     

Futures – short

     154             265        1     

Commodity futures – long

     47        1          44        

Embedded derivative on funds withheld liability

     174        6          167           (3

 

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Table of Contents

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.

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

Fixed maturity securities:

                 

Corporate bonds and other

     $ 183      $   19,259        $ 188        $ 19,630  

States, municipalities and political subdivisions

          11,145               11,145  

Asset-backed

                8,554          298          8,852  

Fixed maturities available-for-sale

       183        38,958          486          39,627  

Fixed maturities trading

                186          6          192  

Total fixed maturities

     $ 183      $ 39,144        $        492        $ 39,819  
   

Equity securities

     $ 623      $ 625        $ 19        $ 1,267  

Short term and other

           2,678        1,074               3,752  

Receivables

          23               23  

Payable to brokers

       (13                (13

 

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Table of Contents
December 31, 2017      Level 1    Level 2      Level 3      Total
(In millions)                          

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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Table of Contents

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, 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

 

Unrealized
Gains

(Losses)
Recognized in
Other
Comprehensive
Income (Loss)
on Level 3
Assets and

2018    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:

                                                 

Corporate bonds and other

     $ 94               $ 67          $ (3 )     $ 30          $ 188         

States, municipalities and political subdivisions

       1                          (1 )                -         

Asset-backed

       273      $ (2 )                  55                  (25 )       29      $ (32 )       298      $ (2 )     $ 1

Fixed maturities  available-for-sale

       368        (2 )     $ -        122      $             -       (29 )       59        (32 )       486        (2 )       1

Fixed maturities trading

       7                                        (1 )                                      6                     

Total fixed maturities

     $       375      $ (2 )     $             -      $         122      $ (1 )     $         (29 )     $           59      $         (32 )     $         492      $         (2 )     $             1
                                                                            

Equity securities

     $ 18      $             1                                $ 19      $ 1    

 

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Table of Contents
          Net Realized Gains
(Losses) and Net Change
in Unrealized Gains
(Losses)
                              

Unrealized
Gains

(Losses)
Recognized in
Net Income
(Loss) on Level
3 Assets and

2017    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

(In millions)                                                

Fixed maturity securities:

                                               

Corporate bonds and other

     $ 100      $ 1      $ 1      $ 13          $ (11 )     $ 15           $ 119     

States, municipalities and political subdivisions

       1                                         1     

Asset-backed

       218                   1        39                  (13 )       101                   346           

Fixed maturities available-for-sale

       319        1        2        52      $ -       (24 )       116      $ -        466      $ -

Fixed maturities trading

       5                                                                                   5           

Total fixed maturities

     $ 324      $ 1      $ 2      $ 52      $ -     $ (24 )     $ 116      $ -      $ 471      $ -
                                                                   

Equity securities available-for-sale

     $ 19                                       $ 19     

Equity securities trading

       1                            $ 1                                                  2           

Total equity securities

     $           20      $             -      $             -      $             1      $             -     $             -     $             -      $             -      $         21      $             -
                                                                   

Life settlement contracts

     $ 1                     $ (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

 

Unrealized
Gains

(Losses)
Recognized in
Other
Comprehensive
Income (Loss)
on Level 3
Assets and

2018    Balance,
January 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:

                                                

Corporate bonds and other

     $ 98      $ (1 )     $ (1 )     $ 69      $ (5 )     $ (7 )     $ 35          $ 188          $ (2 )

States, municipalities and political subdivisions

       1                         (1 )                -         

Asset-backed

       335        5       (6 )       126        (72 )       (37 )       42      $ (95 )       298      $ (2 )       (2 )

Fixed maturities available-for-sale

       434        4       (7 )       195        (77 )       (45 )       77        (95 )       486        (2 )       (4 )

Fixed maturities trading

       4        3                            (1 )                                      6        2          

Total fixed maturities

     $ 438      $ 7     $         (7 )     $         195      $         (78 )     $         (45 )     $           77      $         (95 )     $         492      $             -     $           (4 )
                                                                            

Equity securities

     $           22      $             (2 )              $ (1 )                  $ 19      $ (2 )    

 

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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

2017    Balance,
January 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

(In millions)                                              

Fixed maturity securities:

                                             

Corporate bonds and other

     $ 130      $ 1     $ 2      $ 18      $ (1 )     $ (36 )     $ 15      $ (10 )     $ 119     

States, municipalities and political subdivisions

       1                                       1     

Asset-backed

       199        1       4        90                  (26 )       153        (75 )       346           

Fixed maturities available-for-sale

       330        2       6        108        (1 )       (62 )       168        (85 )       466      $ -

Fixed maturities trading

       6        (1 )                                                                      5        (1 )

Total fixed maturities

     $ 336      $ 1     $ 6      $ 108      $ (1 )     $ (62 )     $ 168      $ (85 )     $ 471      $ (1 )
                                                                  

Equity securities available-for-sale

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

Equity securities trading

       1                             1                                                 2           

Total equity securities

     $ 20      $ -     $           2      $           2      $         (3 )     $ -     $             -      $           -     $ 21      $           -
                                                                  

Life settlement contracts

     $           58      $         6               $ (59 )     $         (5 )              $           -     

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.

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. The weighted average rate is calculated based on fair value.

 

September 30, 2018   

Estimated

Fair Value

  

Valuation

Techniques

  

Unobservable

Inputs

  

Range

(Weighted

Average)

 
     (In millions)                 

Fixed maturity securities

   $        198    Discounted cash flow    Credit spread      1% – 12% (2%)  

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

Assets:

              

Other invested assets, primarily mortgage loans

   $ 868            $ 847      $ 847  

Liabilities:

              

Short term debt

     146         $ 6        140        146  

Long term debt

     11,295           10,537        630        11,167  

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 $46 million and $269 million for the three months ended September 30, 2018 and 2017 and $106 million and $342 million for the nine months ended September 30, 2018 and 2017. Net catastrophe losses in 2018 included $35 million related to Hurricane Florence. The remaining catastrophe losses in 2018 resulted primarily from U.S. weather-related events. Net catastrophe losses in 2017 included $149 million related to Hurricane Harvey, $95 million related to Hurricane Irma and $20 million related to Hurricane Maria and also required reinsurance reinstatement premium of $6 million. The remaining catastrophe losses in 2017 resulted primarily from 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.

 

Nine Months Ended September 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

     3,866          3,949  

Decrease in provision for insured events of prior years

     (173        (284

Amortization of discount

     136          138  

Total net incurred (a)

     3,829          3,803  

Net payments attributable to:

       

Current year events

     (658        (560

Prior year events

     (3,415        (3,401

Total net payments

     (4,073        (3,961

Foreign currency translation adjustment and other

     (80        110  

Net reserves, end of period

     17,746          18,201  

Ceded reserves, end of period

     3,858          4,008  

Gross reserves, end of period

   $     21,604        $     22,209  
   

 

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(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.

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 $62 million and $115 million for the three months ended September 30, 2018 and 2017 and $160 million and $227 million for the nine months ended September 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
September 30,
    Nine Months Ended
September 30,
 
      2018     2017     2018     2017  
(In millions)                         

Medical professional liability

   $ 15     $ 8     $ 38     $ 30  

Other professional liability and management liability

     (45     (19     (113     (88

Surety

     (20     (82     (50     (82

Commercial auto

     1       (12       (37

General liability

     (5     (2     13       (19

Workers’ compensation

     (2     9       (14     (38

Other

     (6     (17     (34     7  

Total pretax (favorable) unfavorable development

   $ (62   $ (115   $ (160   $ (227
   

Three Months

2018

Unfavorable development in medical professional liability was primarily driven by higher than expected frequency and severity in aging services in accident years 2014 through 2017.

Favorable development in other professional liability and management liability was primarily driven by favorable outcomes on individual claims in accident years 2013 and prior in financial institutions.

Favorable development in surety was due to continued lower than expected loss emergence for accident years 2017 and prior.

2017

Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency in accident years 2012 through 2015, primarily for professional liability products.

Favorable development in surety coverages was primarily due to lower than expected frequency of large losses in accident years 2015 and prior.

Nine 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 and higher than expected frequency and severity in aging services in accident years 2014 through 2017.

 

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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 and professional liability errors and omissions (“E&O”). Favorable severity for accident years 2012 and prior related to professional liability E&O, and favorable outcomes on individual claims in financial institutions in accident years 2013 and prior.

Favorable development for surety was due to lower than expected loss emergence for accident years 2017 and prior.

Favorable development for other coverages was due to lower than expected claim severity in catastrophes in accident year 2017 for property, better than expected frequency in the liability portion of the package business in Canada and general liability in Europe for casualty, better than expected large loss frequency in the energy book in recent accident years for energy and marine and lower than expected frequency in accident years 2015 and prior related to healthcare in Europe for healthcare and technology. This favorable development was partially offset by unfavorable development driven by higher than expected severity in Canada and higher than expected frequency in CNA Hardy, both in accident year 2017, for property and increased severity in accident year 2017 related to professional indemnity.

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 frequency of large losses for accident years 2011 through 2016 for professional and management liability, lower than expected claim frequency in accident years 2012 through 2015 for professional liability and lower than expected severity in accident years 2014 through 2016 for professional liability.

Favorable development in surety coverages was primarily due to lower than expected frequency of large losses in accident years 2015 and prior.

Favorable development for commercial auto was primarily due to lower than expected severity in accident years 2013 through 2016, as well as a large favorable recovery on a claim in accident year 2012.

Favorable development for 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. This was partially offset by unfavorable development related to an adverse arbitration ruling on reinsurance recoverables from older accident years as well as the recognition of loss estimates associated with favorable premium development.

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 have 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 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

 

25


Table of Contents

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
September 30,
    Nine Months Ended
September 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

     (12     (17     (84     (60 )   

Pretax impact of deferred retroactive reinsurance

   $ (12   $ (17   $         13     $             -  
   

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 nine months ended September 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. CNA expects to complete another A&EP reserve review in the fourth quarter of 2018 and intends to maintain that timing going forward annually.

As of September 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 $339 million and $326 million as of September 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 $3.2 billion and $3.1 billion as of September 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 nine months ended September 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, July 1, 2017

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

Other comprehensive income (loss) before reclassifications, after tax of $0, $(20), $0, $0 and $0

     1       35       (2       41       75  

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $0, $4, $0, $(6) and $0

             (12     3       11               2  

Other comprehensive income

     1       23       1       11       41       77  

Amounts attributable to noncontrolling interests

             (3     (1     (1     (4     (9

Balance, September 30, 2017

   $ 24     $ 725     $ (2   $ (622   $ (93     $ 32  
                   

Balance, July 1, 2018

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

Other comprehensive loss before reclassifications, after tax of $0, $40, $(2), $0 and $0

     (1     (148           (149

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

             (10             8               (2

Other comprehensive income (loss)

     (1     (158     -       8       -       (151

Amounts attributable to noncontrolling interests

             17               1               18  

Balance, September 30, 2018

   $         16     $ 103     $         13     $         (765   $ (125     $ (758
                   

 

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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, $(130), $0, $0 and $0

       228       (3       94       319  

Reclassification of (gains) losses from accumulated other comprehensive income, after tax of $1, $28, $0, $(13) and $0

     (3     (61     4       26               (34

Other comprehensive income (loss)

     (3     167       1       26       94       285  

Amounts attributable to noncontrolling interests

             (18     (1     (2     (9     (30

Balance, September 30, 2017

   $ 24     $ 725     $ (2   $ (622   $ (93     $ 32  
                   

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, $190, $(4), $0 and $0

     (12     (718     12         (41     (759

Reclassification of (gains) losses from accumulated other comprehensive loss, after tax of $0, $7, $0, $(6) and $0

     1       (28     2       27               2  

Other comprehensive income (loss)

     (11     (746     14       27       (41     (757

Amounts attributable to noncontrolling interests

     1       78         (1     4       82  

Purchase of Boardwalk Pipeline common units

                     (1     (28             (29

Balance, September 30, 2018

   $         16     $ 103     $         13     $         (765   $ (125     $ (758
                   

 

(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 17.4 million and 0.1 million shares of Loews common stock at aggregate costs of $876 million and $6 million during the nine months ended September 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
September 30,
     Nine Months Ended
September 30,
 
      2018      2017 (a)      2018      2017 (a)  
(In millions)                            

Non-insurance warranty – CNA Financial

   $ 258      $ 99      $ 744      $ 290  

Contract drilling – Diamond Offshore

     287        366        851        1,139  

Transportation and storage of natural gas and NGLs and other

           

services – Boardwalk Pipeline

     274        290        886        944  

Lodging and related services – Loews Hotels & Co

     167        162        550        510  

Rigid plastic packaging and recycled resin – Corporate

     223        202        652        293  

Total revenues from contracts with customers

     1,209        1,119        3,683        3,176  

Other revenues

     37        23        71        87  

Operating revenues and other

   $   1,246      $   1,142      $   3,754      $   3,263      
   

 

(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 September 30, 2018 and January 1, 2018, receivables from contracts with customers were approximately $415 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 September 30, 2018 and January 1, 2018, deferred revenue resulting from contracts with customers was approximately $3.4 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 $685 million of revenues recognized during the nine months ended September 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 September 30, 2018, the Company had approximately $2.5 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 nine months ended September 30, 2018, amortization expense totaled $202 million and $552 million and is included in Operating expenses and other in the Consolidated Condensed Statement of Income.

For CNA’s non-insurance warranty contract costs, losses under warranty contracts shall be recognized when it is probable that estimated future costs exceed unrecognized revenue. CNA evaluates deferred costs for recoverability including consideration of anticipated investment income. Adjustments to deferred costs, if necessary, are recorded in the current period results of operations. No adjustments were recorded for the nine months ended September 30, 2018.

Performance obligations – As of September 30, 2018, approximately $12.4 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 $0.6 billion will be recognized during the remaining three months of 2018, $2.0 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
September 30,
     Nine Months Ended
September 30,
      2018      2017      2018      2017
(In millions)                          

Service cost

   $ 2        $ 2        $ 6        $ 6  

Interest cost

     27          30          82          89  

Expected return on plan assets

     (44        (43        (134        (129 )     

Amortization of unrecognized net loss

     11          10          32          32  

Settlement charge

                7          7          10  

Net periodic (benefit) cost

   $ (4      $ 6        $ (7      $ 8  
   
     Other Postretirement Benefits
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
      2018      2017      2018      2017
(In millions)                          

Interest cost

   $ 1        $ 1        $ 2        $ 2  

Expected return on plan assets

     (1        (1        (3        (3

Amortization of unrecognized prior service benefit

     (1        (1        (2        (2

Amortization of unrecognized net gain

     (1                   (1           

Net periodic (benefit) cost

   $ (2      $ (1      $ (4      $ (3 )     
   

9.  Legal Proceedings

The Company and its subsidiaries are from time to time parties to 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.

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 September 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 September 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.

 

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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 September 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 were reported net of any impact from the premium rate adjustments.

The policyholder refunds for the multi-peril package product were issued in the third quarter of 2017. The policyholder refunds for workers’ compensation policies were largely completed in the third quarter of 2018.

For the nine months ended September 30, 2017, earned premium was reduced by $37 million. Earned premium increased by $6 million for the three and nine months ended September 30, 2018 as a result of a change in estimate of the refund payments to policyholders. Additionally, Interest expense increased for interest due to policyholders on the premium rate adjustments by $1 million and $7 million for the three and nine months ended September 30, 2017 and $1 million for the nine months ended September 30, 2018.

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 nine months ended September 30, 2018 and the period from the acquisition date, May 22, 2017 through September 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 September 30, 2018    CNA
Financial
   Diamond
Offshore
   Boardwalk
Pipeline
   Loews
Hotels & Co
   Corporate    Total
(In millions)                              

Revenues:

                             

Insurance premiums

     $     1,853                          $     1,853

Net investment income

       487      $             2                $             5        494

Investment gains

       15                            15

Operating revenues and other

       267        287      $           279      $             190        223        1,246

Total

       2,622        289        279        190        228        3,608

Expenses:

                             

Insurance claims and policyholders’ benefits

       1,312                            1,312

Amortization of deferred acquisition costs

       337                            337

Operating expenses and other

       538        311        197        169        244        1,459

Interest

       34        34        44        7        27        146

Total

       2,221        345        241        176        271        3,254

Income (loss) before income tax

       401        (56 )        38        14        (43 )        354

Income tax (expense) benefit

       (66 )        5        (10 )        (3 )        9        (65 )

Net income (loss)

       335        (51 )        28        11        (34 )        289

Amounts attributable to noncontrolling interests

       (35 )        24        -        -        -        (11 )    

Net income (loss) attributable to Loews Corporation

     $ 300      $ (27 )      $ 28      $ 11      $ (34 )      $ 278
                         

 

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

Revenues:

                             

Insurance premiums

     $     1,806                          $     1,806

Net investment income

       509                     $ 48        557

Investment gains

       16                            16

Operating revenues and other

       110      $           368      $           301      $           162                    201        1,142

Total

       2,441        368        301        162        249        3,521

Expenses:

                             

Insurance claims and policyholders’ benefits

       1,480                            1,480

Amortization of deferred acquisition costs

       309                            309

Operating expenses and other

       379        307        191        147        221        1,245

Interest

       83        64        41        7        28        223

Total

       2,251        371        232        154        249        3,257

Income (loss) before income tax

       190        (3 )        69        8        -        264

Income tax (expense) benefit

       (44 )        14        (18 )        (4 )                   (52 )

Net income

       146        11        51        4        -        212

Amounts attributable to noncontrolling interests

       (16 )        (5 )        (34 )                              (55 )    

Net income attributable to Loews Corporation

     $ 130      $ 6      $ 17      $ 4      $ -      $ 157
                         

 

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Table of Contents
Nine Months Ended September 30, 2018    CNA
Financial
   Diamond
Offshore
   Boardwalk
Pipeline
   Loews
Hotels & Co
   Corporate    Total
(In millions)                              

Revenues:

                             

Insurance premiums

     $     5,453                          $     5,453

Net investment income

       1,483      $             6           $ 1      $ 61        1,551

Investment gains

       21                            21

Operating revenues and other

       774        853      $           901                  573                  653        3,754

Total

       7,731        859        901        574        714        10,779

Expenses:

                             

Insurance claims and policyholders’ benefits

       3,978                            3,978

Amortization of deferred acquisition costs

       992                            992

Operating expenses and other

       1,580        927        598        494        714        4,313

Interest

       104        92        131        22        81        430

Total

       6,654        1,019        729        516        795        9,713

Income (loss) before income tax

       1,077        (160 )        172        58        (81 )        1,066

Income tax (expense) benefit

       (181 )        59        (24 )        (17 )        14        (149 )

Net income (loss)

       896        (101 )        148        41        (67 )        917

Amounts attributable to noncontrolling interests

       (95 )        47        (68 )        -        -        (116 )    

Net income (loss) attributable to Loews Corporation

     $ 801      $ (54 )      $ 80      $ 41      $ (67 )      $ 801
                         

 

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Table of Contents
Nine Months Ended September 30, 2017    CNA
Financial
   Diamond
Offshore
   Boardwalk
Pipeline
   Loews
Hotels & Co
   Corporate    Total
(In millions)                              

Revenues:

                             

Insurance premiums

     $     5,185                          $     5,185

Net investment income

       1,529      $ 1                $           109        1,639

Investment gains

       93                            93

Operating revenues and other

       329              1,143      $           987      $           510        294        3,263

Total

       7,136        1,144        987        510        403        10,180

Expenses:

                             

Insurance claims and policyholders’ benefits

       4,053                            4,053

Amortization of deferred acquisition costs

       926                            926

Operating expenses and other

       1,086        1,012        646        443        389        3,576

Interest

       166        119        131        20        68        504

Total

       6,231        1,131        777        463        457        9,059

Income (loss) before income tax

       905        13        210        47        (54 )        1,121

Income tax (expense) benefit

       (226 )        35        (46 )        (23 )        20        (240 )

Net income (loss)

       679        48        164        24        (34 )        881

Amounts attributable to noncontrolling interests

       (71 )        (23 )        (104 )                              (198 )    

Net income (loss) attributable to Loews Corporation

     $ 608      $ 25      $ 60      $ 24      $ (34 )      $ 683
                         

 

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Table of Contents

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

   37

Results of Operations

   38

Consolidated Financial Results

   38

CNA Financial

   38

Diamond Offshore

   45

Boardwalk Pipeline

   48

Loews Hotels & Co

   50

Corporate

   51

Liquidity and Capital Resources

   52

Parent Company

   52

Subsidiaries

   52

Investments

   54

Critical Accounting Estimates

   57

Accounting Standards Update

   57

Forward-Looking Statements

   58

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 nine months ended September 30, 2018 and the period from the acquisition date, May 22, 2017 through September 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 nine months ended September 30, 2018 and 2017:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
      2018     2017      2018     2017  
(In millions, except per share data)                          

CNA Financial

   $ 300     $ 130      $ 801     $ 608  

Diamond Offshore

     (27     6        (54     25  

Boardwalk Pipeline

     28       17        80       60  

Loews Hotels & Co

     11       4        41       24  

Corporate

     (34              (67     (34 )     

Net income attributable to Loews Corporation

   $ 278     $ 157      $ 801     $ 683  
   

Basic net income per share

   $ 0.88     $ 0.46      $ 2.50     $ 2.03  
   

Diluted net income per share

   $ 0.88     $ 0.46      $ 2.49     $ 2.02  
   

Net income for the three and nine months ended September 30, 2018 increased as compared to the prior year periods, due to higher earnings at CNA, Boardwalk and Loews Hotels. Lower results at Diamond Offshore and the parent company investment portfolio partially offset the year-over-year improvement.

CNA Financial

The following table summarizes the results of operations for CNA for the three and nine months ended September 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
September 30,
    Nine Months Ended
September 30,
 
      2018     2017     2018     2017  
(In millions)                         

Revenues:

        

Insurance premiums

   $ 1,853     $ 1,806     $ 5,453     $ 5,185  

Net investment income

     487       509       1,483       1,529  

Investment gains

     15       16       21       93  

Other revenues

     267       110       774       329  

Total

     2,622       2,441       7,731       7,136  

Expenses:

        

Insurance claims and policyholders’ benefits

     1,312       1,480       3,978       4,053  

Amortization of deferred acquisition costs

     337       309       992       926  

Other operating expenses

     538       379       1,580       1,086  

Interest

     34       83       104       166  

Total

     2,221       2,251       6,654       6,231  

Income before income tax

     401       190       1,077       905  

Income tax expense

     (66     (44     (181     (226

Net income

     335       146       896       679  

Amounts attributable to noncontrolling interests

     (35     (16     (95     (71 )     

Net income attributable to Loews Corporation

   $ 300     $ 130     $ 801     $ 608  
   

 

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Three Months Ended September 30, 2018 Compared to 2017

Net income attributable to Loews increased $170 million for the three months ended September 30, 2018 as compared with the 2017 period. Net income increased due to lower net catastrophe losses and the reduction in the corporate income tax rate, partially offset by lower favorable net prior year loss reserve development and lower net investment income driven by limited partnership returns. Favorable net prior year development of $62 million and $115 million was recorded in the three months ended September 30, 2018 and 2017.

Nine Months Ended September 30, 2018 Compared to 2017

Net income attributable to Loews increased $193 million for the nine months ended September 30, 2018 as compared with the 2017 period primarily due to lower net catastrophe losses and the reduction in the corporate income tax rate, partially offset by lower favorable net prior year loss reserve development and lower net investment income driven by limited partnership returns. Earnings were also impacted by lower net realized investment results driven by lower net realized investment gains on sales of securities. Favorable net prior year development of $160 million and $227 million was recorded in the nine months ended September 30, 2018 and 2017.

CNA’s Property & Casualty and Other Insurance Operations

CNA’s commercial property and casualty insurance operations (“Property & Casualty Operations”) include its Specialty, Commercial and International lines of business. CNA’s Other Insurance Operations outside of Property & Casualty Operations include its long term care business that is in run-off, certain corporate expenses, including interest on CNA’s corporate debt, and certain property and casualty businesses in run-off, including CNA Re and Asbestos and Environmental Pollution (“A&EP”). CNA’s products and services are primarily marketed through independent agents, brokers and managing general underwriters to a wide variety of customers, including small, medium and large businesses, insurance companies, associations, professionals and other groups. We believe the presentation of CNA as one reportable segment is appropriate in accordance with applicable accounting standards on segment reporting. However, for purposes of this discussion and analysis of the results of operations, we provide greater detail with respect to CNA’s Property & Casualty Operations and Other Insurance Operations to enhance the reader’s understanding and to provide further transparency into key drivers of CNA’s financial results.

In assessing CNA’s insurance operations, the Company utilizes the core income (loss) financial measure. Core income (loss) is calculated by excluding from net income (loss) (i) net realized investment gains or losses, (ii) income or loss from discontinued operations, (iii) any cumulative effects of changes in accounting guidance and (iv) deferred tax asset and liability remeasurement as a result of an enacted U.S. federal tax rate change. In addition, core income (loss) excludes the effects of noncontrolling interests. The calculation of core income (loss) excludes net realized investment gains or losses because net realized investment gains or losses are generally driven by economic factors that are not necessarily consistent with key drivers of underwriting performance, and are therefore not considered an indication of trends in insurance operations. Core income (loss) is deemed to be a non-GAAP financial measure and management believes this measure is useful to investors as management uses this measure to assess financial performance.

Property & Casualty Operations

In evaluating the results of Property & Casualty Operations, CNA utilizes the loss ratio, the expense ratio, the dividend ratio and the combined ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders’ dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios. In addition, CNA also utilizes renewal premium change, rate, retention and new business in evaluating operating trends. Renewal premium change represents the estimated change in average premium on policies that renew, including rate and exposure changes. Rate represents the average change in price on policies that renew excluding exposure changes. Exposure represents the measure of risk used in the pricing of the insurance product. Retention represents the percentage of premium dollars renewed in comparison to the expiring premium dollars from policies available to renew. Renewal premium change, rate and retention presented for the prior period are updated to reflect subsequent activity on policies written in the period. New business represents premiums from policies written with new customers and additional policies written with existing customers.

 

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Effective January 1, 2018, CNA changed the presentation of its life sciences business and technology and media related errors and omissions (“E&O”) business within the Specialty and Commercial businesses as a result of a change in management responsibility. The life sciences business, with approximately $110 million of net written premium for the year ended December 31, 2017, provides product liability and other coverages such as property and workers compensation associated with the life sciences industry. This business, which was previously reported as part of the Specialty business, is now reported as part of the Commercial business. The technology and media related E&O business, with approximately $70 million of net written premium for the year ended December 31, 2017, provides network security and privacy, media and E&O coverage primarily for technology risks. This business, which was previously reported as part of the Commercial business, is now reported as part of the Specialty business. Data for prior reporting periods has been adjusted to reflect the new presentation.

The following tables summarize the results of CNA’s Property & Casualty Operations for the three and nine months ended September 30, 2018 and 2017:

 

Three Months Ended September 30, 2018    Specialty    Commercial    International    Total
(In millions, except %)                    

Net written premiums

   $           688      $           697      $           196      $         1,581  

Net earned premiums

     684        782        255        1,721  

Net investment income

     124        144        14        282  

Core income

     177        127        1        305  

Other performance metrics:

           

Loss and loss adjustment expense ratio

     54.5      63.5      67.6      60.5

Expense ratio

     32.3        33.2        36.3        33.3  

Dividend ratio

     0.2        0.7                 0.4  

Combined ratio

     87.0      97.4      103.9      94.2 %     
   

Rate

     2      2      3      2

Renewal premium change

     3        3        8        4  

Retention

     84        84        67        82  

New business

   $ 93      $ 123      $ 72      $ 288  

Three Months Ended September 30, 2017

                                   

Net written premiums

   $ 695      $ 697      $ 207      $ 1,599  

Net earned premiums

     692        752        226        1,670  

Net investment income

     129        166        13        308  

Core income (loss)

     173        32        (38      167  

Other performance metrics:

           

Loss and loss adjustment expense ratio

     51.7      81.2      88.4      69.9

Expense ratio

     31.2        34.2        37.5        33.5  

Dividend ratio

     0.2        0.5                 0.3  

Combined ratio

     83.1      115.9      125.9      103.7
   

Rate

     0      0      1      0

Renewal premium change

     1        2        3        2  

Retention

     90        86        76        87  

New business

   $ 60      $ 138      $ 69      $ 267  

 

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Nine Months Ended September 30, 2018    Specialty    Commercial    International    Total
(In millions, except %)                    

Net written premiums

   $         2,062      $         2,339      $           762      $         5,163  

Net earned premiums

     2,039        2,278        739        5,056  

Net investment income

     376        450        43        869  

Core income

     531        403        17        951  

Other performance metrics:

           

Loss and loss adjustment expense ratio

     55.1      63.0      65.0      60.1

Expense ratio

     31.8        33.3        36.8        33.2  

Dividend ratio

     0.2        0.7                 0.4  

Combined ratio

     87.1      97.0      101.8      93.7 %