July
14,
2006
Ms.
Ibolya Ignat
United
States Securities and Exchange Commission
Division
of Corporation Finance
450
Fifth
Street, N.W.
Washington,
D.C. 20549
Re:
Loews
Corporation (the “Company”)
Comment
Letter dated April 21, 2006 (the “Comment Letter”)
Form
10-K
for fiscal year ended December 31, 2005
Filed
on
March 10, 2006
File
No.
001-06541
VIA EDGAR FILING AND FACSIMILE TRANSMISSION - 202-772-9217
Dear
Ms.
Ignat:
This
letter contains our responses to the Staff’s follow-up comments (received
verbally from you by our subsidiary, CNA Financial Corporation (“CNA”) on June
7, 2006) to our May 17, 2006 letter responding to the Staff’s April 21, 2006
comment letter. Our responses, as set forth below are consistent with the
responses to be provided separately by our subsidiary, CNA, and are organized
by
reference to numbers used in the follow-up comments. For your convenience,
the
Staff’s follow-up comments have been repeated herein and are followed by our
respective responses.
| 1. |
In
reference to your response to comment 1 of your letter dated May
17, 2006,
in addition to the information that you have proposed related to
CNA’s
reserves, please provide the following additional discussions and
address
specifically the key assumptions and the effects that these key
assumptions have on CNA’s reserves:
|
| a. |
Please
identify and describe those key assumptions that materially affect
the
estimate for reserves for losses and loss adjustment expenses. In
addition, please disclose the
following:
|
| 1. |
For
each of your key assumptions and for your provision for uncertainty,
quantify and explain what caused them to change historically over
the
periods presented.
|
| 2. |
Discuss
whether and to what extent management has adjusted each of the key
assumptions and the provision for uncertainty used in calculating
the most
recent estimate of the reserves given the historical reserve changes,
current trends, and/or other factors observed in 1. above. This discussion
should reconcile the historical changes, the current trends and/or
other
factors observed to what management has calculated as its most recent
assumptions.
|
| b. |
In
order to show investors the potential variability in the most recent
estimate of your loss reserves, quantify and present, preferably
in a
tabular format, the effect that reasonably likely changes in the
key
assumptions identified may have on reported results, financial position
and liquidity. Explain why management believes that the scenarios
quantified are reasonably likely.
|
Company
Response
Our
May
17, 2006 letter responding to the Staff’s April 21, 2006 comment letter provided
additional information regarding the key judgments that are an essential part
of
estimating CNA’s loss reserves. In response to the Staff’s follow-up comments,
we have added further information to the May 17 response. We believe this
additional information clarifies CNA management’s approach to estimating loss
reserves for CNA and provides useful information to investors consistent with
the Staff’s comments. In addition, our future filings will integrate this
information including an explanation of material changes in key assumptions.
The
following is the May 17 response with changes.
In
developing loss and loss adjustment expense (“loss” or “losses”) reserve
estimates, CNA’s actuaries perform detailed reserve analyses that are staggered
throughout the year. The data is organized at a “product” level. A product can
be a line of business covering a subset of insureds such as commercial
automobile liability for small and middle market customers, it can encompass
several lines of business provided to a specific set of customers such as
dentists, or it can be a particular type of claim such as construction defect.
Every product is analyzed at least once during the year, and many products
are
analyzed multiple times. The analyses generally review losses gross of ceded
reinsurance and apply the ceded reinsurance terms to the gross estimates to
establish estimates net of reinsurance. In addition to the detailed analyses,
CNA reviews actual losses emerged for all products each quarter.
The
detailed analyses use a variety of generally accepted actuarial methods and
techniques to produce a number of estimates of ultimate loss. CNA’s actuaries
determine a point estimate of ultimate loss by reviewing the various estimates
and assigning weight to each estimate given the characteristics of the product
being reviewed. The reserve estimate is the difference between the estimated
ultimate loss and the losses paid to date. The difference between the estimated
ultimate loss and the case incurred loss (paid loss plus case reserve) is IBNR
(incurred but not reported). IBNR calculated as such includes a provision for
development on known cases (supplemental development) as well as a provision
for
claims that have occurred but have not yet been reported (pure IBNR).
Most
of
CNA’s business can be characterized as long-tail. For long-tail business, it
will generally be several years between the time the business is written and
the
time when all claims are settled. CNA’s long-tail exposures include commercial
automobile liability, workers compensation, general liability, medical
malpractice, other professional liability coverages, assumed reinsurance
run-off, and products liability. Short-tail exposures include property,
commercial automobile physical damage, marine and warranty. Each
of
CNA’s property/casualty segments, Standard Lines, Specialty Lines and Corporate
and Other Non-Core, contain both long-tail and short-tail exposures.
The
methods used to project ultimate loss for both long-tail and short-tail
exposures include, but are not limited to, the following:
| · |
Paid
Development,
|
| · |
Incurred
Development,
|
2
| · |
Loss
Ratio,
|
| · |
Bornhuetter-Ferguson
Using Premiums and Paid Loss,
|
| · |
Bornhuetter-Ferguson
Using Premiums and Incurred Loss,
and
|
| · |
Average
Loss.
|
The
paid
development method estimates ultimate losses by reviewing paid loss patterns
and
applying them to accident years with further expected changes in paid loss.
Selection of the paid loss pattern requires analysis of several factors
including the impact of inflation on claims costs, the rate at which claims
professionals make claim payments and close claims, the impact of judicial
decisions, the impact of underwriting changes, the impact of large claim
payments, and other factors. Claim cost inflation itself requires evaluation
of
changes in the cost of repairing or replacing property, changes in the cost
of
medical care, changes in the cost of wage replacement, judicial decisions,
legislative changes, and other factors. Because this method assumes that losses
are paid at a consistent rate, changes in any of these factors can impact the
results. Since the method does not rely on case reserves, it is not directly
influenced by changes in the adequacy of case reserves.
For
many
products, paid loss data for recent periods may be too immature or erratic
for
accurate predictions. This situation often exists for long-tail exposures.
In
addition, changes in the
factors described above
may
result in inconsistent payment patterns. Finally, estimating the paid loss
pattern subsequent to the most mature point available in the data analyzed
often
involves considerable uncertainty for long-tail products such as workers
compensation.
The
incurred development method is similar to the paid development method, but
it
uses case incurred losses instead of paid losses. Since the method uses more
data (case reserves in addition to paid losses) than the paid development
method, the incurred development patterns may be less variable than paid
patterns. However, selection
of the incurred loss pattern requires analysis of all of the factors above.
In
addition,
the
inclusion of case reserves can lead to distortions if changes in case reserving
practices have taken place, and the use of case incurred losses may not
eliminate the issues associated with estimating the incurred loss pattern
subsequent to the most mature point available.
The
loss
ratio method multiplies premiums by an expected loss ratio to produce ultimate
loss estimates for each accident year. This method may be useful if loss
development patterns are inconsistent, losses emerge very slowly, or there
is
relatively little loss history from which to estimate future losses. The
selection
of the
expected
loss ratio
requires
analysis of loss ratios from
earlier
accident years or pricing studies and
analysis of
inflationary trends, frequency trends, rate changes, underwriting changes,
and
other applicable factors.
The
Bornhuetter-Ferguson using premiums and paid loss method is a combination of
the
paid development approach and the loss ratio approach. The method normally
determines expected loss ratios similar
to the approach used to estimate the expected loss ratio for the loss ratio
method and requires analysis of the same factors described above.
The
method assumes that only future losses will develop at the expected loss ratio
level. The percent of paid loss to ultimate loss implied from the paid
development method is used to determine what percentage of ultimate loss is
yet
to be paid. The
use
of the pattern from the paid loss development method requires consideration
of
all the factors listed in the description of the paid loss development
method.
The
estimate of losses yet to be paid is added to current paid losses to estimate
the ultimate loss for each year. This method will react very slowly if actual
ultimate loss ratios are different from expectations due to changes not
accounted for by the expected loss ratio calculation.
3
The
Bornhuetter-Ferguson using premiums and incurred loss method is similar to
the
Bornhuetter-Ferguson using premiums and paid loss method except that it uses
case incurred losses. The use of case incurred losses instead of paid losses
can
result in development patterns that
are
less variable than paid patterns. However, the inclusion of case reserves can
lead to distortions if changes in case reserving have taken place, and
the
method requires analysis of all the factors that need to be reviewed for the
loss ratio and incurred development methods.
The
average loss method multiplies a projected number of ultimate claims by an
estimated ultimate average loss for each accident year to produce ultimate
loss
estimates. Since projections of the ultimate number of claims are often less
variable than projections of ultimate loss, this method can provide more
reliable results for products where loss development patterns are inconsistent
or too variable to be relied on exclusively. In addition, this method can more
directly account for changes in coverage that impact the number and size of
claims. However, this method can be difficult to apply to situations where
very
large claims or a substantial number of unusual claims result in volatile
average claim sizes. Projecting
the ultimate number of claims requires analysis of several factors including
the
rate at which policyholders report claims to CNA, the impact of judicial
decisions, the impact of underwriting changes, and other factors. Estimating
the
ultimate average loss requires analysis of the impact of large losses and claim
cost trend based on changes in the cost of repairing or replacing property,
changes in the cost of medical care, changes in the cost of wage replacement,
judicial decisions, legislative changes, and other factors.
For
other
more complex products where the above methods may not produce reliable
indications, CNA uses additional methods tailored to the characteristics of
the
specific situation. Such products include construction defect losses and
asbestos, pollution, and mass tort (APMT).
For
construction defect losses, CNA’s actuaries organize losses by report year.
Report year groups claims by the year in which they were reported. To estimate
losses from claims that have not been reported, various extrapolation techniques
are applied to the pattern of claims that have been reported to estimate the
number of claims yet to be reported. This
process requires analysis of several factors including the rate at which
policyholders report claims to CNA, the impact of judicial decisions, the impact
of underwriting changes, and other factors.
An
average claim size is determined from past experience and applied to the number
of unreported claims to estimate reserves for these claims. Estimating
the average claim size requires analysis of the impact of large losses and
claim
cost trend based on changes in the cost of repairing or replacing property,
changes in the cost of legal fees, judicial decisions, legislative changes,
and
other factors.
For
APMT,
CNA regularly monitors its exposures, including reviews of loss activity,
regulatory developments and court rulings. In addition, CNA performs a
comprehensive ground-up analysis on its exposures annually. CNA’s actuaries, in
conjunction with CNA’s specialized claim unit, use various modeling techniques
to estimate CNA’s overall exposure to known accounts. CNA’s actuaries use this
information and additional modeling techniques to develop loss distributions
and
claim reporting patterns to determine reserves for accounts that will report
APMT exposure in the future.
For
many
exposures, especially those that can be considered long-tail, a particular
accident year may not have a sufficient volume of paid losses to produce a
statistically reliable estimate of ultimate losses. In such a case, CNA’s
actuaries typically assign more weight to the incurred development method than
to the paid development method. As claims continue to settle and the volume
of
paid loss increases, the actuaries may assign additional weight to the paid
development method. For most of CNA’s products, even the incurred losses for
accident years that are early in the claim settlement process will not be of
sufficient volume to produce a reliable estimate of ultimate losses. In these
cases, CNA’s actuaries will not assign any weight to the paid and incurred
development methods. The actuaries will use loss ratio, Bornhuetter-Ferguson
and
average loss methods. For short-tail exposures, the paid and incurred
development methods can often be relied on sooner primarily because CNA’s
history includes a sufficient number of years
4
to
cover
the entire period over which paid and incurred losses are expected to change.
However, CNA’s actuaries may also use loss ratio, Bornhuetter-Ferguson and
average loss methods for short-tail exposures.
Each
quarter, the results of the detailed reserve reviews are summarized and
discussed with CNA’s senior management to determine the best estimate of
reserves. This group considers many factors in making this decision. The factors
include, but are not limited to, the historical pattern and volatility of the
actuarial indications, the sensitivity of the actuarial indications to changes
in paid and incurred loss patterns, the consistency of claims handling
processes, the consistency of case reserving practices, changes in CNA’s pricing
and underwriting, and overall pricing and underwriting trends in the insurance
market. This process results in CNA management’s best estimate which is then
recorded as the loss reserve.
Currently,
CNA’s reserves are slightly higher than the actuarial point estimate.
CNA
does
not establish a specific provision for uncertainty.
For
Standard and Specialty Lines, the difference between
CNA’s reserves and the actuarial point estimate
is due
to the two most recent complete accident years. The claim data from these
accident years is very immature. CNA believes it is prudent to wait until actual
experience confirms that the loss reserves should be adjusted. For Corporate
and
Other Non-Core, the carried reserve is slightly higher than the actuarial point
estimate. While the actuarial estimates for APMT exposures reflect current
knowledge, CNA feels it is prudent, based on the history of developments in
this
area, to reflect some volatility in the carried reserve until the ultimate
outcome of the issues associated with these exposures is clearer.
The
key
assumptions fundamental to the reserving process are often different for various
products and accident years. Some of these assumptions are explicit assumptions
that are required of a particular method, but most of the assumptions are
implicit and can not be precisely quantified. An example of an explicit
assumption is the pattern employed in the paid development method. However,
the
assumed pattern is itself based on several implicit assumptions such as the
impact of inflation on medical costs and the rate at which claim professionals
close claims. As a result, the effect on reserve estimates of a particular
change in assumptions usually can not be specifically quantified, and changes
in
these assumptions can not be tracked over time.
CNA’s
reserves are CNA management’s best estimate. In order to provide an indication
of the variability associated with CNA’s net reserves, the following discussion
provides a sensitivity analysis that shows the approximate estimated impact
of
variations in the most significant factor affecting CNA’s reserve estimates for
particular types of business. These significant factors are the ones that could
most likely materially impact the reserves. This discussion covers the major
types of business for which CNA believes a material deviation to its reserves
is
reasonably possible. There can be no assurance that actual experience will
be
consistent with the current assumptions or with the variation indicated by
the
discussion. In addition, there can be no assurance that other factors and
assumptions will not have a material impact on CNA’s reserves.
Within
Standard Lines, the two types of business for which CNA believes a material
deviation to its net reserves is reasonably possible are workers compensation
and general liability.
For
Standard Lines workers compensation, since many years will pass from the time
the business is written until all claim payments have been made, claim cost
inflation on claim payments is the most significant factor affecting workers
compensation reserve estimates. Workers compensation claim cost inflation is
driven by the cost of medical care, the cost of wage replacement, expected
claimant lifetimes, judicial decisions, legislative changes, and other factors.
If workers compensation claim cost inflation increases by one point for the
entire period over which claim payments will be made, CNA estimates that its
net
reserves would increase by $450 million. If workers compensation claim cost
inflation decreases by one point for the entire period over which claim payments
will be made, CNA estimates that its net reserves would decrease by
approximately $400
5
million.
CNA’s net reserves for Standard Lines workers compensation are approximately
$3.9 billion.
For
Standard Lines general liability, the predominant method used for estimating
reserves is the incurred development method. Changes in the cost to repair
or
replace property, the cost of medical care, the cost of wage replacement,
judicial decisions, legislation, and other factors all impact
the pattern selected in this method. The pattern selected results in the
incurred development factor that estimates future changes in case incurred
loss.
If the incurred development factor for general liability increases by 15.0%,
CNA
estimates that its net reserves would increase by approximately $380 million.
If
the estimated incurred development factor for general liability decreases by
14.0%, CNA estimates that its net reserves would decrease by approximately
$340
million. CNA’s net reserves for Standard Lines general liability are
approximately $4.1 billion.
Within
Specialty Lines, CNA believes a material deviation to CNA’s net reserves is
reasonably possible for the Professional Liability Insurance (CNA Pro) group.
CNA Pro provides professional liability coverages to various professional firms
as well as directors and officers (D&O), errors and omissions, employment
practices, fiduciary and fidelity coverages. CNA Pro also offers insurance
products to serve the healthcare delivery system. The most significant factor
affecting CNA Pro reserve estimates is claim severity. Claim severity for CNA
Pro is driven by the cost of medical care, the cost of wage replacement, legal
fees, judicial decisions, legislation, and other factors. Underwriting and
claim
handling decisions such as the classes of business written and individual claim
settlement decisions can also impact claim severity. If the estimated claim
severity for CNA Pro increases by 7%, CNA estimates that CNA Pro net reserves
would increase by approximately $250 million. If the estimated claim severity
for CNA Pro decreases by 4%, CNA estimates that CNA Pro net reserves would
decrease by approximately $140 million. CNA’s net reserves for CNA Pro are
approximately $3.4 billion.
Within
Corporate and Other Non-Core, the two types of business for which CNA
believes a material deviation to its net reserves is reasonably possible are
CNA
Re and APMT.
For
CNA
Re, the predominant method used for estimating reserves is the incurred
development method. Changes in the cost to repair or replace property, the
cost
of medical care, the cost of wage replacement, the rate at which ceding
companies report claims, judicial decisions, legislation, and other factors
all
impact the incurred development pattern for CNA Re. The pattern selected results
in the incurred development factor that estimates future changes in case
incurred loss. If the incurred development factor for CNA Re increases by 20.0%,
CNA estimates that its net reserves for CNA Re would increase by approximately
$170 million. If the incurred development factor for CNA Re decreases by 19.0%,
CNA estimates that its net reserves would decrease by approximately $150
million. CNA’s net reserves for CNA Re are approximately $1.3
billion.
For
APMT,
the most significant factor affecting reserve estimates is overall account
size
trend. Overall account size trend for APMT reflects the combined impact of
economic trends (inflation), changes in the types of defendants involved, the
expected mix of asbestos disease types, judicial decisions, legislation and
other factors. If the estimated overall account size trend for APMT increases
by
6 points, CNA estimates that its APMT net reserves would increase by
approximately $700 million. If the estimated overall account size trend for
APMT
decreases by 9 points, CNA estimates that its APMT net reserves would decrease
by approximately $450 million. CNA’s net reserves for APMT are approximately
$2.0 billion.
| 2. |
Please
discuss and quantify the effects that CNA’s ceded reinsurance activities
had on financial position, results of operations and cash flows for
the
periods presented. Also discuss changes CNA has made to CNA’s past
reinsurance strategies in developing CNA’s current strategies and the
expected effect that those changes may have on CNA’s financial position,
results of operations and
|
6
cash
flows. Describe any limitations on CNA’s ability
to cede future losses on a basis consistent with historical results and their
expected effect on financial position, operating results and cash flows.
Such
limitations could relate to changes in reinsurance market conditions,
restructuring of reinsurance treaties, or the absence of remaining limits for
specific accident years under existing treaties.
Company
Response
Our
disclosures related to reinsurance on pages 74 to 76 of Management’s Discussion
and Analysis and in Note 18 to the financial statements on pages 200 to 204
of
our 2005 10-K were intended to provide investors with an understanding of CNA’s
use of reinsurance, its impact on our financial statements and any significant
changes in CNA’s use of reinsurance in the years presented.
As
disclosed in our periodic filings, CNA purchased several finite reinsurance
treaties from 1999 to 2002, and ceased all new purchases of finite reinsurance
after that timeframe. Since the historical impact of the funds withheld finite
reinsurance treaties had been quantified and disclosed (see table on page 203),
a reader of our financial statements could determine the impact of that
change.
On
page
75 of MD&A we provided additional specific disclosure of the structure and
cost of CNA’s catastrophe reinsurance. This reinsurance protection has had a
significant impact on CNA’s results of operations in 2004 and 2005 because of
the impact of the major hurricanes in those periods. In addition, this component
of CNA’s overall reinsurance program has experienced the most significant cost
volatility.
Aside
from the changes noted above, CNA has not significantly changed its use of
reinsurance or the net exposure retained in the years presented. In addition,
CNA has not encountered any significant problems placing their reinsurance
with
reinsurance carriers that meet their credit quality standards.
We
believe that the disclosures noted above describe the material changes to CNA’s
reinsurance program in the years presented. In future filings we will provide
additional disclosure of any material changes to CNA’s use of reinsurance.
| 3. |
In
reference to your response to comment 4 of your letter dated May
17, 2006,
in addition to the funds withheld disclosures referenced related
to these
contracts, please provide to us in disclosure-type format an enhanced
discussion of CNA’s remaining finite contracts. Disclose the amount of
these contracts, along with the business reasons and objectives for
entering into these types of arrangements. Include a discussion of
how the
losses attach to these agreements along with a discussion of any
other
provisions that are not generally included in other reinsurance
contracts.
|
Company
Response
In
Note
18 to the financial statements, specifically on pages 202 to 204 of our 2005
10-K CNA provided disclosure of the impact of funds withheld finite reinsurance
contracts on all periods presented. Per these disclosures, the primary impact
on
CNA’s results of operations in 2004 was the interest credited on funds withheld
balances. In 2005, in addition to the interest credited on funds withheld,
results of operations were unfavorably impacted by several commutations and
an
adverse arbitration ruling. The impact of the significant commutations was
separately disclosed on pages 75 and 76 of Management’s Discussion and
Analysis.
The
remaining finite reinsurance contracts relate to portions of CNA’s property and
casualty business for accident years 1999 to 2002. Given the relative maturity
of these years and the amount of remaining limit under the contracts, CNA does
not expect to cede a material amount of losses to these contracts in the future.
7
In
future
filings, we will expand our disclosures related to the remaining finite
reinsurance contracts. The paragraphs that follow reflect the substance of
additional disclosures CNA intends to add to its reinsurance
disclosures.
As
of
December 31, 2005 there were 13 ceded reinsurance treaties in force that CNA
considers to be finite reinsurance. These treaties provide reinsurance
protection for individual accident years 1999 through 2002 on specified portions
of CNA’s domestic property and casualty business. All of these contracts are
accounted for on a funds withheld basis. CNA has not purchased any reinsurance
that it considers to be finite reinsurance in any period subsequent to 2002.
Given
the
relative maturity of the covered accident years and the amount of remaining
limit under the contracts, CNA does not expect to cede a material amount of
losses to these contracts in the future. The interest credited on funds withheld
will continue until the funds withheld balance is exhausted by ceded paid claims
or the contracts are commuted. As of December 31, 2005, the amount subject
to
such interest crediting was $1,050 million.
*********
The
Company acknowledges that:
| § |
the
Company is responsible for the adequacy and accuracy of the disclosure
in
its filing;
|
| § |
staff
comments or changes to disclosure in response to staff comments do
not
foreclose the Commission from taking any action with respect to the
Company’s filing; and
|
| § |
the
Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
|
Although
we are of course amenable to enhancing our disclosures in the context of the
Comment Letter and the staff’s follow-up comments, these responses should not be
considered an indication that we believe any disclosures in the captioned Form
10-K filing were inadequate or incorrect in any material respect.
If
you
have any questions or further comments, please feel free to contact me at
212-521-2950, or via fax at 212-521-2329.
|
Very
truly yours,
|
|||
|
By:
|
/s/
Peter W. Keegan
|
||
|
Peter
W. Keegan
|
|||
|
Senior
Vice President
|
|||
|
and
Chief Financial
|
|||
|
Officer
|
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8