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 March 31, 2011

OR

 

¨

  

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From                          to                        

Commission File Number 1-6541

LOEWS CORPORATION

(Exact name of registrant as specified in its charter)

 

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

667 Madison Avenue, New York, 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

  Yes        x          No      ¨       Not Applicable      ¨  

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

 

Large accelerated filer

  x      Accelerated filer    ¨      Non-accelerated filer   ¨      Smaller reporting company   ¨

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 April 22, 2011

Common stock, $0.01 par value     408,821,504 shares

 

 

 


Table of Contents

INDEX

 

     Page
No.
 

Part I.  Financial Information

  

Item 1.  Financial Statements (unaudited)

  

Consolidated Condensed Balance Sheets
March 31, 2011 and December 31, 2010

     3   

Consolidated Condensed Statements of Income
Three months ended March 31, 2011 and 2010

     4   

Consolidated Condensed Statements of Comprehensive Income
Three months ended March  31, 2011 and 2010

     5   

Consolidated Condensed Statements of Equity
Three months ended March 31, 2011 and 2010

     6   

Consolidated Condensed Statements of Cash Flows
Three months ended March 31, 2011 and 2010

     7   

Notes to Consolidated Condensed Financial Statements

     9   

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

     39   

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

     63   

Item 4.  Controls and Procedures

     63   

Part II.  Other Information

     64   

Item 1.  Legal Proceedings

     64   

Item 1A.  Risk Factors

     64   

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

     64   

Item 6.  Exhibits

     65   

 

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PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

      March 31,
2011
    December 31,
2010
 
(Dollar amounts in millions, except per share data)             

Assets:

    

Investments:

    

Fixed maturities, amortized cost of $37,188 and $36,677

   $ 38,423      $ 37,814   

Equity securities, cost of $905 and $979

     1,025        1,086   

Limited partnership investments

     3,025        2,814   

Other invested assets

     133        113   

Short term investments

     6,026        7,080   
   

Total investments

     48,632        48,907   

Cash

     123        120   

Receivables

     10,182        10,142   

Property, plant and equipment

     12,543        12,636   

Deferred income taxes

     125        289   

Goodwill

     856        856   

Other assets

     1,959        1,798   

Deferred acquisition costs of insurance subsidiaries

     1,098        1,079   

Separate account business

     449        450   
   

Total assets

   $ 75,967      $ 76,277   
   

Liabilities and Equity:

    

Insurance reserves:

    

Claim and claim adjustment expense

   $ 25,352      $ 25,496   

Future policy benefits

     8,842        8,718   

Unearned premiums

     3,321        3,203   

Policyholders’ funds

     165        173   
   

Total insurance reserves

     37,680        37,590   

Payable to brokers

     419        685   

Short term debt

     197        647   

Long term debt

     9,296        8,830   

Other liabilities

     4,481        4,969   

Separate account business

     449        450   
   

Total liabilities

     52,522        53,171   
   

Preferred stock, $0.10 par value:

    

Authorized – 100,000,000 shares

    

Common stock, $0.01 par value:

    

Authorized – 1,800,000,000 shares

    

Issued – 415,136,329 and 414,930,507 shares

     4        4   

Additional paid-in capital

     3,671        3,667   

Retained earnings

     14,919        14,564   

Accumulated other comprehensive income (loss)

     294        230   
   
     18,888        18,465   

Less treasury stock, at cost (4,817,055 and 384,400 shares)

     (202     (15
   

Total shareholders’ equity

     18,686        18,450   

Noncontrolling interests

     4,759        4,656   
   

Total equity

     23,445        23,106   
   

Total liabilities and equity

   $ 75,967      $ 76,277   
   

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 March 31    2011     2010  
(In millions, except per share data)             

Revenues:

    

Insurance premiums

   $ 1,615      $ 1,615   

Net investment income

     661        617   

Investment gains (losses):

    

Other-than-temporary impairment losses

     (20     (90

Portion of other-than-temporary impairment losses recognized in Other comprehensive income (loss)

     (21     30   
   

Net impairment losses recognized in earnings

     (41     (60

Other net investment gains

     64        81   
   

Total investment gains

     23        21   

Contract drilling revenues

     789        844   

Other

     580        616   
   

Total

     3,668        3,713   
   

Expenses:

    

Insurance claims and policyholders’ benefits

     1,364        1,308   

Amortization of deferred acquisition costs

     345        342   

Contract drilling expenses

     362        305   

Other operating expenses

     685        732   

Interest

     151        130   
   

Total

     2,907        2,817   
   

Income before income tax

     761        896   

Income tax expense

     (196     (273
   

Net income

     565        623   

Amounts attributable to noncontrolling interests

     (183     (203
   

Net income attributable to Loews Corporation

   $ 382      $ 420   
   

Basic and diluted net income per share

   $ 0.92      $ 0.99   
   

Dividends per share

   $ 0.0625      $ 0.0625   
   

Weighted-average shares outstanding:

    

Common stock

     412.90        422.77   

Dilutive potential shares of common stock

     0.93        0.87   
   

Total weighted-average shares outstanding assuming dilution

     413.83        423.64   
   

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 March 31    2011     2010  
(In millions)             

Net income

   $ 565      $ 623   
   

Other comprehensive income (loss)

    

Changes in:

    

Net unrealized gains on investments with other-than-temporary impairments

     38        25   

Net other unrealized gains on investments

     23        307   
   

Total unrealized gains on available-for-sale investments

     61        332   

Unrealized gains (losses) on cash flow hedges

     (17     61   

Foreign currency

     26        (10

Pension liability

       2   
   

Other comprehensive income

     70        385   
   

Comprehensive income

     635        1,008   

Amounts attributable to noncontrolling interests

     (189     (245
   

Total comprehensive income attributable to Loews Corporation

   $ 446      $ 763   
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENT 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, 2010

   $ 21,085      $ 4       $ 3,637      $ 13,693      $ (419   $ (16   $ 4,186   

Sale of subsidiary common units

     279           83          1          195   

Net income

     623             420            203   

Other comprehensive income

     385               343          42   

Dividends paid

     (192          (26         (166

Purchase of Loews treasury stock

     (197              (197  

Issuance of Loews common stock

     1           1           

Stock-based compensation

     6           5              1   

Other

     3           19        (2         (14
   

Balance, March 31, 2010

   $ 21,993      $ 4       $ 3,745      $ 14,085      $ (75   $ (213   $ 4,447   
   

Balance, January 1, 2011

   $ 23,106      $ 4       $ 3,667      $ 14,564      $ 230      $ (15   $ 4,656   

Net income

     565             382            183   

Other comprehensive income

     70               64          6   

Dividends paid

     (124          (26         (98

Purchase of Loews treasury stock

     (187              (187  

Issuance of Loews common stock

     4           4           

Stock-based compensation

     6           5              1   

Other

     5           (5     (1         11   
   

Balance, March 31, 2011

   $ 23,445      $ 4       $ 3,671      $ 14,919      $ 294      $ (202   $ 4,759   
   

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Three Months Ended March 31    2011     2010  
(In millions)             

Operating Activities:

    

Net income

   $ 565      $ 623   

Adjustments to reconcile net income to net cash provided by operating activities, net

     165        175   

Changes in operating assets and liabilities, net:

    

Reinsurance receivables

     123        254   

Other receivables

     15        (4

Deferred acquisition costs

     (19     (1

Insurance reserves

     45        (135

Other liabilities

     (297     (42

Trading securities

     522        (584

Other, net

     10        8   
   

Net cash flow operating activities – total

     1,129        294   
   

Investing Activities:

    

Purchases of fixed maturities

     (3,480     (5,351

Proceeds from sales of fixed maturities

     1,893        2,737   

Proceeds from maturities of fixed maturities

     965        846   

Purchases of equity securities

     (34     (42

Proceeds from sales of equity securities

     128        25   

Purchases of property, plant and equipment

     (150     (212

Deposits for construction of offshore drilling equipment

     (309  

Change in short term investments

     277        1,628   

Change in other investments

     (114     (52

Other, net

     8        10   
   

Net cash flow investing activities – total

     (816     (411
   

 

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Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - (Continued)

(Unaudited)

 

Three Months Ended March 31    2011     2010  
(In millions)             

Financing Activities:

    

Dividends paid

   $ (26   $ (26

Dividends paid to noncontrolling interests

     (98     (166

Purchases of treasury shares

     (188     (188

Issuance of common stock

     4        1   

Proceeds from sale of subsidiary stock

     6        333   

Principal payments on debt

     (913     (1

Issuance of debt

     904        125   

Other, net

     (1     (14
   

Net cash flow financing activities – total

     (312     64   
   

Effect of foreign exchange rate on cash

     2        (2
   

Net change in cash

     3        (55

Cash, beginning of period

     120        190   
   

Cash, end of period

   $ 123      $ 135   
   

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 90% owned subsidiary); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (“Diamond Offshore”), a 50.4% owned subsidiary); exploration, production and marketing of natural gas and natural gas liquids (HighMount Exploration & Production LLC (“HighMount”), a wholly owned subsidiary); the operation of interstate natural gas pipeline systems (Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”), a 66% owned subsidiary); and the operation of hotels (Loews Hotels Holding Corporation (“Loews Hotels”), a wholly owned subsidiary). Unless the context otherwise requires, the terms “Company,” “Loews” and “Registrant” as used herein mean Loews Corporation excluding its subsidiaries and the term “Net income (loss) – Loews” as used herein means Net income (loss) attributable to Loews Corporation.

In the opinion of management, the accompanying unaudited Consolidated Condensed Financial Statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 31, 2011 and December 31, 2010 and the results of operations, comprehensive income and changes in cash flows for the three months ended March 31, 2011 and 2010.

Net income for the first quarter of each of the years is not necessarily indicative of net income for that entire year.

Reference is made to the Notes to Consolidated Financial Statements in the 2010 Annual Report on Form 10-K which should be read in conjunction with these Consolidated Condensed Financial Statements.

The Company presents basic and diluted earnings per share on the Consolidated Condensed Statements of Income. Basic earnings per share excludes dilution and is computed by dividing net income (loss) attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted earnings 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. Stock appreciation rights (“SARs”) of 1.9 million and 2.4 million shares were not included in the diluted weighted average shares amount for the three months ended March 31, 2011 and 2010 due to the exercise price being greater than the average stock price.

2. Investments

 

Three Months Ended March 31    2011     2010  
(In millions)             

Net investment income consisted of:

    

Fixed maturity securities

   $ 506      $ 510   

Short term investments

     3        7   

Limited partnerships

     134        80   

Equity securities

     6        10   

Income from trading portfolio (a)

     23        21   

Other

     4        3   
   

Total investment income

     676        631   

Investment expenses

     (15     (14
   

Net investment income

   $ 661      $ 617   
   

 

(a) Includes net unrealized gains related to changes in fair value on trading securities still held of $21 million and $22 million for the three months ended March 31, 2011 and 2010.

 

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Three Months Ended March 31    2011     2010  
(In millions)             

Investment gains (losses) are as follows:

    

Fixed maturity securities

   $ 20      $ 27   

Equity securities

       3   

Derivative instruments

     (1     (13

Short term investments

     2        3   

Other

     2        1   
   

Investment gains (a)

   $ 23      $ 21   
   

 

(a) Includes gross realized gains of $93 million and $102 million and gross realized losses of $73 million and $72 million on available-for-sale securities for the three months ended March 31, 2011 and 2010.

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

 

Three Months Ended March 31    2011      2010  
(In millions)              

Fixed maturity securities available-for-sale:

     

Asset-backed:

     

Residential mortgage-backed

   $ 28       $ 26   

Commercial mortgage-backed

        2   
   

Total asset-backed

     28         28   

States, municipalities and political subdivisions

        14   

Corporate and other bonds

     9         18   
   

Total fixed maturities available-for-sale

     37         60   
   

Equity securities available-for-sale:

     

Common stock

     3      

Preferred stock

     1      
   

Total equity securities available-for-sale

     4           
   

Net OTTI losses recognized in earnings

   $ 41       $ 60   
   

A security is impaired if the fair value of the security is less than its cost adjusted for accretion, amortization and previously recorded OTTI losses, otherwise defined as an unrealized loss. When a security is impaired, the impairment is evaluated to determine whether it is temporary or other-than-temporary.

Significant judgment is required in the determination of whether an OTTI loss has occurred for a security. CNA follows a consistent and systematic process for determining and recording an OTTI loss. CNA has established a committee responsible for the OTTI process. This committee, referred to as the Impairment Committee, is made up of three officers appointed by CNA’s Chief Financial Officer. The Impairment Committee is responsible for evaluating all securities in an unrealized loss position on at least a quarterly basis.

The Impairment Committee’s assessment of whether an OTTI loss has occurred incorporates both quantitative and qualitative information. Fixed maturity securities that CNA intends to sell, or it more likely than not will be required to sell before recovery of amortized cost, are considered to be other-than-temporarily impaired and the entire difference between the amortized cost basis and fair value of the security is recognized as an OTTI loss in earnings. The remaining fixed maturity securities in an unrealized loss position are evaluated to determine if a credit loss exists. The factors considered by the Impairment Committee include: (i) the financial condition and near term prospects of the issuer, (ii) whether the debtor is current on interest and principal payments, (iii) credit ratings of the securities and (iv) general market conditions and industry or sector specific outlook. CNA also considers results and analysis of cash flow modeling for asset-backed securities, and when appropriate, other fixed maturity securities.

 

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The focus of the analysis for asset-backed securities is on assessing the sufficiency and quality of underlying collateral and timing of cash flows based on scenario tests. If the present value of the modeled expected cash flows equals or exceeds the amortized cost of a security, no credit loss is judged to exist and the asset-backed security is deemed to be temporarily impaired. If the present value of the expected cash flows is less than amortized cost, the security is judged to be other-than-temporarily impaired for credit reasons and that shortfall, referred to as the credit component, is recognized as an OTTI loss in earnings. The difference between the adjusted amortized cost basis and fair value, referred to as the non-credit component, is recognized as OTTI in Other comprehensive income. In subsequent reporting periods, a change in intent to sell or further credit impairment on a security whose fair value has not deteriorated will cause the non-credit component originally recorded as OTTI in Other comprehensive income to be recognized as an OTTI loss in earnings.

CNA performs the discounted cash flow analysis using stressed scenarios to determine future expectations regarding recoverability. For asset-backed securities, significant assumptions enter into these cash flow projections including delinquency rates, probable risk of default, loss severity upon a default, over collateralization and interest coverage triggers, credit support from lower level tranches and impacts of rating agency downgrades.

CNA applies the same impairment model as described above for the majority of non-redeemable preferred stock securities on the basis that these securities possess characteristics similar to debt securities and that the issuers maintain their ability to pay dividends. For all other equity securities, in determining whether the security is other-than-temporarily impaired, the Impairment Committee considers a number of factors including, but not limited to: (i) the length of time and the extent to which the fair value has been less than amortized cost, (ii) the financial condition and near term prospects of the issuer, (iii) the intent and ability of CNA to retain its investment for a period of time sufficient to allow for an anticipated recovery in value and (iv) general market conditions and industry or sector specific outlook.

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

 

March 31, 2011    Cost or
Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Unrealized
OTTI
Losses (Gains)
 
(In millions)                                   

Fixed maturity securities:

              

U.S. Treasury and obligations of government agencies

   $ 120       $ 14          $ 134      

Asset-backed:

              

Residential mortgage-backed

     6,194         91       $ 209         6,076       $ 60   

Commercial mortgage-backed

     1,078         60         28         1,110         (6

Other asset-backed

     886         17         7         896      
   

Total asset-backed

     8,158         168         244         8,082         54   

States, municipalities and political subdivisions

     8,552         176         400         8,328      

Foreign government

     631         15         1         645      

Corporate and other bonds

     19,442         1,562         50         20,954      

Redeemable preferred stock

     48         5         1         52      
   

Fixed maturities available-for-sale

     36,951         1,940         696         38,195         54   

Fixed maturities, trading

     237            9         228      
   

Total fixed maturities

     37,188         1,940         705         38,423         54   
   

Equity securities:

              

Common stock

     101         25         1         125      

Preferred stock

     229         4         2         231      
   

Equity securities available-for-sale

     330         29         3         356           

Equity securities, trading

     575         123         29         669      
   

Total equity securities

     905         152         32         1,025           
   

Total

   $ 38,093       $ 2,092       $ 737       $ 39,448       $ 54   
   

 

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December 31, 2010    Cost or
Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Unrealized
OTTI
Losses (Gains)
 
(In millions)                                   

Fixed maturity securities:

              

U.S. Treasury and obligations of government agencies

   $ 122       $ 16       $ 1       $ 137      

Asset-backed:

              

Residential mortgage-backed

     6,255         101         265         6,091       $ 114   

Commercial mortgage-backed

     994         40         41         993         (2

Other asset-backed

     753         18         8         763      
   

Total asset-backed

     8,002         159         314         7,847         112   

States, municipalities and political subdivisions

     8,157         142         410         7,889      

Foreign government

     602         18            620      

Corporate and other bonds

     19,503         1,603         70         21,036      

Redeemable preferred stock

     47         7            54      
   

Fixed maturities available-for-sale

     36,433         1,945         795         37,583         112   

Fixed maturities, trading

     244            13         231      
   

Total fixed maturities

     36,677         1,945         808         37,814         112   
   

Equity securities:

              

Common stock

     90         25            115      

Preferred stock

     332         2         9         325      
   

Equity securities available-for-sale

     422         27         9         440           

Equity securities, trading

     557         123         34         646      
   

Total equity securities

     979         150         43         1,086           
   

Total

   $ 37,656       $ 2,095       $ 851       $ 38,900       $ 112   
   

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

 

     Less than 12 Months      Greater than 12 Months      Total  
March 31, 2011    Estimated
Fair Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
 
(In millions)                                          

Fixed maturity securities:

                 

Asset-backed:

                 

Residential mortgage-backed

   $ 2,167       $ 73       $ 1,442       $ 136       $ 3,609       $ 209   

Commercial mortgage-backed

     270         6         263         22         533         28   

Other asset-backed

     140            61         7         201         7   
   

Total asset-backed

     2,577         79         1,766         165         4,343         244   

States, municipalities and political subdivisions

     2,861         160         624         240         3,485         400   

Foreign Government

     110         1         18            128         1   

Corporate and other bonds

     1,920         28         335         22         2,255         50   

Redeemable preferred stock

           5         1         5         1   
   

Total fixed maturities available-for-sale

     7,468         268         2,748         428         10,216         696   
   

Equity securities available-for-sale:

                 

Common stock

     8         1               8         1   

Preferred stock

     76         1         19         1         95         2   
   

Total equity securities available-for-sale

     84         2         19         1         103         3   
   

Total

   $ 7,552       $ 270       $ 2,767       $ 429       $ 10,319       $ 699   
   

 

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     Less than 12 Months      Greater than 12 Months      Total  
December 31, 2010    Estimated
Fair Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
 
(In millions)                                          

Fixed maturity securities:

                 

U.S. Treasury and obligations of government agencies

   $ 8       $ 1             $ 8       $ 1   

Asset-backed:

                 

Residential mortgage-backed

     1,800         52       $ 1,801       $ 213         3,601         265   

Commercial mortgage-backed

     164         3         333         38         497         41   

Other asset-backed

     122         1         60         7         182         8   
   

Total asset-backed

     2,086         56         2,194         258         4,280         314   

States, municipalities and political subdivisions

     3,339         164         745         246         4,084         410   

Corporate and other bonds

     1,719         34         405         36         2,124         70   
   

Total fixed maturities available-for-sale

     7,152         255         3,344         540         10,496         795   

Equity securities available-for-sale:

                 

Preferred stock

     175         5         70         4         245         9   
   

Total

   $ 7,327       $ 260       $ 3,414       $ 544       $ 10,741       $ 804   
   

The amount of pretax net unrealized gains on available-for-sale securities reclassified out of Accumulated other comprehensive income (“AOCI”) into earnings was $21 million and $32 million for the three months ended March 31, 2011 and 2010.

The following table summarizes the activity for the three months ended March 31, 2011 and 2010 related to the pretax credit loss component reflected in Retained earnings on fixed maturity securities still held at March 31, 2011 and 2010 for which a portion of an OTTI loss was recognized in Other comprehensive income.

 

Three Months Ended March 31,    2011     2010  
(In millions)             

Beginning balance of credit losses on fixed maturity securities

   $ 141      $ 164   

Additional credit losses for which an OTTI loss was previously recognized

     10        11   

Credit losses for which an OTTI loss was not previously recognized

     1        5   

Reductions for securities sold during the period

     (25     (9

Reductions for securities the Company intends to sell or more likely than not will be required to sell

     (14  
   

Ending balance of credit losses on fixed maturity securities

   $ 113      $ 171   
   

Based on current facts and circumstances, the Company has determined that no additional OTTI losses related to the securities in an unrealized loss position presented in the table above are required to be recorded. A discussion of some of the factors reviewed in making that determination is presented below.

The classification between investment grade and non-investment grade presented in the discussion below is based on a ratings methodology that takes into account ratings from two major providers, Standard & Poor’s and Moody’s Investors Service, Inc. in that order of preference. If a security is not rated by these providers, the Company formulates an internal rating. For securities with credit support from third party guarantees, the rating reflects the greater of the underlying rating of the issuer or the insured rating.

 

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Asset-Backed Securities

The fair value of total asset-backed holdings at March 31, 2011 was $8,082 million which was comprised of 2,072 different securities. The fair value of these securities does not tend to be influenced by the credit of the issuer but rather the characteristics and projected cash flows of the underlying collateral. Each security has deal-specific tranche structures, credit support that results from the unique deal structure, particular collateral characteristics and other distinct security terms. As a result, seemingly common factors such as delinquency rates and collateral performance affect each security differently. Of these securities, 147 have underlying collateral that is either considered sub-prime or Alt-A in nature. The exposure to sub-prime residential mortgage collateral and Alternative A residential mortgages that have lower than normal standards of loan documentation collateral is measured by the original deal structure.

Residential mortgage-backed securities include 159 non-agency structured securities that have at least one trade lot in a gross unrealized loss position. In addition, there were 99 agency mortgage-backed securities guaranteed by agencies of the U.S. Government that have at least one trade lot in a gross unrealized loss position. The aggregate severity of the gross unrealized loss for residential mortgage-backed securities was approximately 5.3% of amortized cost.

Commercial mortgage-backed securities include 49 securities that have at least one trade lot in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 5.1% of amortized cost. Other asset-backed securities include 16 securities that have at least one trade lot in a gross unrealized loss position. The aggregate severity of the gross unrealized loss was approximately 3.4% of amortized cost.

The asset-backed securities in a gross unrealized loss position by ratings distribution are as follows:

 

March 31, 2011    Amortized
Cost
     Estimated
Fair Value
     Gross
Unrealized
Losses
 
(In millions)                     

U.S. Government Agencies

   $ 1,758       $ 1,698       $ 60   

AAA

     1,281         1,233         48   

AA

     406         377         29   

A

     158         152         6   

BBB

     223         195         28   

Non-investment grade and equity tranches

     761         688         73   
   

Total

   $ 4,587       $ 4,343       $ 244   
   

The Company believes the unrealized losses are primarily attributable to broader economic conditions, changes in interest rates and wider than historical bid/ask spreads, and are not indicative of the quality of the underlying collateral. The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost. Generally, non-investment grade securities consist of investments which were investment grade at the time of purchase but have subsequently been downgraded and primarily consist of holdings senior to the equity tranche. Additionally, the Company believes that the unrealized losses on these securities were not due to factors regarding the ultimate collection of principal and interest, collateral shortfalls, or substantial changes in future cash flow expectations; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at March 31, 2011.

States, Municipalities and Political Subdivisions

The fair value of total states, municipalities and political subdivisions holdings at March 31, 2011 was $8,328 million. These holdings consist of both tax-exempt and taxable bonds, 71.3% of which are special revenue and assessment bonds, followed by general obligation political subdivision bonds at 19.8% and state general obligation bonds at 8.9%.

 

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The unrealized losses on the Company’s investments in this category are primarily due to the impact of interest rate increases, as well as market conditions for tax-exempt bonds. Securities with maturity dates that exceed 20 years comprise 69.4% of the gross unrealized losses. The holdings for all securities in this category include 534 securities that have at least one trade lot in a gross unrealized loss position. The aggregate severity of the total gross unrealized losses was approximately 10.3% of amortized cost.

The states, municipalities and political subdivisions securities in a gross unrealized loss position by ratings distribution are as follows:

 

March 31, 2011    Amortized
Cost
     Estimated
Fair Value
     Gross
Unrealized
Losses
 
(In millions)                     

AAA

   $ 752       $ 705       $ 47   

AA

     2,126         1,885         241   

A

     908         811         97   

BBB

     70         57         13   

Non-investment grade

     29         27         2   
   

Total

   $ 3,885       $ 3,485       $ 400   
   

The largest exposures at March 31, 2011 as measured by gross unrealized losses were several separate issues of Puerto Rico sales tax revenue bonds with gross unrealized losses of $104 million and several separate issues of New Jersey transit revenue bonds with gross unrealized losses of $56 million. All of these securities are rated investment grade.

The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost. Additionally, the Company believes that the unrealized losses on these securities were not due to factors regarding the ultimate collection of principal and interest; accordingly, the Company has determined that there are no additional OTTI losses to be recorded at March 31, 2011.

Contractual Maturity

The following table summarizes available-for-sale fixed maturity securities by contractual maturity at March 31, 2011 and December 31, 2010. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid with or without call or prepayment penalties. Securities not due at a single date are allocated based on weighted average life.

 

      March 31, 2011      December 31, 2010  
      Amortized
Cost
     Estimated
Fair Value
     Amortized
Cost
     Estimated
Fair Value
 
(In millions)                            

Due in one year or less

   $ 1,553       $ 1,564       $ 1,515       $ 1,506   

Due after one year through five years

     11,449         11,908         11,198         11,653   

Due after five years through ten years

     9,862         10,280         10,034         10,437   

Due after ten years

     14,087         14,443         13,686         13,987   
   

Total

   $ 36,951       $ 38,195       $ 36,433       $ 37,583   
   

Investment Commitments

As of March 31, 2011, the Company had committed approximately $193 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.

 

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The Company invests in various privately placed debt securities, including bank loans, as part of its overall investment strategy and has committed to additional future purchases and sales. The purchase and sale of these investments are recorded on the date that the legal agreements are finalized and cash settlements are made. As of March 31, 2011, the Company had commitments to purchase $208 million and sell $131 million of such investments.

As of March 31, 2011, the Company had mortgage loan commitments of $56 million representing signed loan applications received and accepted. The mortgage loans are recorded once funded.

3. 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.

The Company attempts to establish fair value as an exit price in an orderly transaction consistent with normal settlement market conventions. The Company is responsible for the valuation process and seeks to obtain quoted market prices for all securities. When quoted market prices in active markets are not available, the Company uses a number of methodologies to establish fair value estimates, including discounted cash flow models, prices from recently executed transactions of similar securities or broker/dealer quotes, utilizing market observable information to the extent possible. In conjunction with modeling activities, the Company may use external data as inputs. The modeled inputs are consistent with observable market information, when available, or with the Company’s assumptions as to what market participants would use to value the securities. The Company also uses pricing services as a significant source of data. The Company monitors all the pricing inputs to determine if the markets from which the data is gathered are active. As further validation of the Company’s valuation process, the Company samples past fair value estimates and compares the valuations to actual transactions executed in the market on similar dates.

 

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Table of Contents

The fair values of CNA’s life settlement contracts are included in Other assets. Equity options purchased are included in Equity securities, and all other derivative assets are included in Receivables. Derivative liabilities are included in Payable to brokers. Assets and liabilities measured at fair value on a recurring basis are summarized in the tables below:

 

March 31, 2011    Level 1     Level 2     Level 3     Total  
(In millions)                         

Fixed maturity securities:

        

U.S. Treasury securities and obligations of government agencies

   $ 74      $ 60        $ 134   

Asset-backed:

        

Residential mortgage-backed

       5,338      $ 738        6,076   

Commercial mortgage-backed

       1,022        88        1,110   

Other asset-backed

       451        445        896   
   

Total asset-backed

            6,811        1,271        8,082   

States, municipalities and political subdivisions

       8,140        188        8,328   

Foreign government

     118        527          645   

Corporate and other bonds

       20,378        576        20,954   

Redeemable preferred stock

     3        49          52   
   

Fixed maturities available-for-sale

     195        35,965        2,035        38,195   

Fixed maturities, trading

       46        182        228   
   

Total fixed maturities

   $ 195      $ 36,011      $ 2,217      $ 38,423   
   

Equity securities available-for-sale

   $ 203      $ 123      $ 30      $ 356   

Equity securities, trading

     663          6        669   
   

Total equity securities

   $ 866      $ 123      $ 36      $ 1,025   
   

Short term investments

   $ 5,539      $ 460      $ 27      $ 6,026   

Other invested assets

       6        9        15   

Receivables

       56        1        57   

Life settlement contracts

         127        127   

Separate account business

     28        382        39        449   

Payable to brokers

     (73     (67     (37     (177

Discontinued operations investments, included in Other liabilities

     13        56          69   

 

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Table of Contents
December 31, 2010    Level 1     Level 2     Level 3     Total  
(In millions)                         

Fixed maturity securities:

        

U.S. Treasury securities and obligations of government agencies

   $ 76      $ 61        $ 137   

Asset-backed:

        

Residential mortgage-backed

       5,324      $ 767        6,091   

Commercial mortgage-backed

       920        73        993   

Other asset-backed

       404        359        763   
   

Total asset-backed

            6,648        1,199        7,847   

States, municipalities and political subdivisions

       7,623        266        7,889   

Foreign government

     115        505          620   

Corporate and other bonds

       20,412        624        21,036   

Redeemable preferred stock

     3        48        3        54   
   

Fixed maturities available-for-sale

     194        35,297        2,092        37,583   

Fixed maturities, trading

       47        184        231   
   

Total fixed maturities

   $ 194      $ 35,344      $ 2,276      $ 37,814   
   

Equity securities available-for-sale

     288        126        26        440   

Equity securities, trading

     640          6        646   
   

Total equity securities

   $ 928      $ 126      $ 32      $ 1,086   
   

Short term investments

   $ 6,079      $ 974      $ 27      $ 7,080   

Other invested assets

         26        26   

Receivables

       74        2        76   

Life settlement contracts

         129        129   

Separate account business

     28        381        41        450   

Payable to brokers

     (328     (79     (23     (430

Discontinued operations investments, included in Other liabilities

     11        60          71   

 

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Table of Contents

The tables below present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2011 and 2010:

 

2011

  

Balance,

January 1

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

(Losses)
   

Purchases

    

Sales

   

Settlements

   

Transfers

into
Level 3

    

Transfers

out of
Level 3

   

Balance,
March 31

   

Unrealized
Gains (Losses)
Recognized in
Net Income on
Level 3 Assets
and Liabilities

Held at
March 31

 
    

Included in

Net Income

    Included
in OCI
                 
(In millions)                                                                         

Fixed maturity securities:

                      

Asset-backed:

                      

Residential mortgage-backed

   $ 767      $ 1      $ 2      $ 47       $ (26   $ (22      $ (31   $ 738     

Commercial mortgage- backed

     73        3        16           (4            88     

Other asset-backed

     359        4          200         (87     (31          445     
   

Total asset-backed

     1,199        8        18        247         (117     (53        (31     1,271     

States, municipalities and political subdivisions

     266          1             (79          188     

Corporate and other bonds

     624        4        (5     41         (20     (27   $ 9         (50     576     

Redeemable preferred stock

     3        3        (3        (3                
   

Fixed maturities available-for-sale

     2,092        15        11        288         (140     (159     9         (81     2,035     

Fixed maturities, trading

     184        1          1         (4            182     
   

Total fixed maturities

   $ 2,276      $ 16      $ 11      $ 289       $ (144   $ (159   $ 9       $ (81   $ 2,217      $   
   

Equity securities available-for-sale

   $ 26      $ (1   $ (1   $ 15       $ (9          $ 30      $ (3

Equity securities trading

     6                        6     

Short term investments

     27            12         $ (2      $ (10     27     

Other invested assets

     26        2             (19            9        1   

Life settlement contracts

     129        3               (5          127        (1

Separate account business

     41               (2            39     

Derivative financial instruments, net

     (21     (8     (15          8             (36  

 

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Table of Contents

2010

  

Balance,
January 1

    Net Realized Gains
(Losses) and Net Change

in Unrealized Gains
(Losses)
   

Purchases,
Sales,
Issuances

and
Settlements

   

Transfers

into Level 3

    

Transfers

out of
Level 3

   

Balance,
March 31

   

Unrealized

Gains (Losses)

Recognized in

Net Income on

Level 3 Assets

and Liabilities

Held at

March 31

 
     Included in
Net Income
    Included
in OCI
            
(In millions)                                                          
                 

Fixed maturity securities:

                 

Asset-backed:

                 

Residential mortgage-backed

   $ 629      $ (10   $ 26      $ 42         $ (8   $ 679      $ (11

Commercial mortgage-backed

     123        (1     (4     (5   $ 7         (8     112        (2

Other asset-backed

     348        4        21        (5          368     
   

Total asset-backed

     1,100        (7     43        32        7         (16     1,159        (13

States, municipalities and political subdivisions

     756          2        (21          737     

Corporate and other bonds

     609        2        29        55        9         (24     680     

Redeemable preferred stock

     2          2               4     
   

Fixed maturities available-for-sale

     2,467        (5     76        66        16         (40     2,580        (13

Fixed maturities, trading

     197        6          13             216        6   
   

Total fixed maturities

   $ 2,664      $ 1      $ 76      $ 79      $ 16       $ (40   $ 2,796      $ (7
   

Equity securities available-for-sale

   $ 11            $ 2       $ (5   $ 8     

Short term investments

             1           1     

Life settlement contracts

     130      $ 10        $ (9          131      $ 3   

Separate account business

     38            2             40     

Discontinued operations investments

     16        $ 1        (2          15     

Derivative financial instruments, net

     (48     (8     14        15             (27  

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 available-for-sale    Investment gains (losses)
Equity securities, trading    Net investment income
Other invested assets    Investment gains (losses)
Derivative financial instruments held in a trading portfolio    Net investment income
Derivative financial instruments, other    Investment gains (losses) and Other revenues
Life settlement contracts    Other revenues

 

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Table of Contents

Securities shown in the Level 3 tables may be transferred in or out of Level 3 based on the availability of observable market information used to verify pricing sources or used in pricing models. The availability of observable market information varies based on market conditions and trading volume and may cause securities to move in and out of Level 3 from reporting period to reporting period. There were no significant transfers between Level 1 and Level 2 during the three months ended March 31, 2011. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods.

The following section describes the valuation methodologies 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 government bonds and securities issued by foreign governments for which quoted market prices are available. The remaining fixed maturity securities are valued using pricing for similar securities, recently executed transactions, cash flow models with yield curves, broker/dealer quotes and other pricing models utilizing observable inputs. The valuation for most fixed maturity securities is classified as Level 2. Level 2 securities may also include securities that have firm sale commitments and prices that are not recorded until the settlement date. Securities are generally 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 tax-exempt and taxable auction rate certificates. Fair value of auction rate securities is determined utilizing a pricing model with three primary inputs. The interest rate and spread inputs are observable from like instruments while the maturity date assumption is unobservable due to the uncertain nature of the principal prepayments prior to maturity.

Equity Securities

Level 1 securities include publicly traded securities valued using quoted market prices. Level 2 securities are primarily non-redeemable preferred stocks and common stocks valued using pricing for similar securities, recently executed transactions, broker/dealer quotes and other pricing models utilizing observable inputs. Level 3 securities are priced using 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 include currency forwards valued using observable market forward rates. Over-the-counter derivatives, principally interest rate swaps, total return swaps, commodity swaps, credit default 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 Investments

The valuation of securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and treasury bills. Level 2 primarily includes commercial paper, for which all inputs are observable. Level 3 securities include fixed maturity securities purchased within one year of maturity where broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency to the market inputs used.

Life Settlement Contracts

The fair values of life settlement contracts are determined as the present value of the anticipated death benefits less anticipated premium payments based on contract terms that are distinct for each insured, as well as CNA’s own assumptions for mortality, premium expense, and the rate of return that a buyer would require on the contracts, as no comparable market pricing data is available.

 

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Table of Contents

Discontinued Operations Investments

Assets relating to CNA’s discontinued operations include fixed maturity securities and short term investments. The valuation methodologies for these asset types have been described above.

Separate Account Business

Separate account business includes fixed maturity securities, equities and short term investments. The valuation methodologies for these asset types have been described above.

Financial Assets and Liabilities Not Measured at Fair Value

The carrying amount and estimated fair value of the Company’s financial instrument assets and liabilities which are not measured at fair value on the Consolidated Condensed Balance Sheets are listed in the table below.

 

      March 31, 2011      December 31, 2010  
      Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 
(In millions)                            

Financial assets:

           

Other invested assets

   $ 118       $ 119           $ 87       $ 86       

Financial liabilities:

           

Premium deposits and annuity contracts

   $ 103       $ 105           $ 104       $ 105       

Short term debt

     197         197             647         662       

Long term debt

     9,296         9,770             8,830         9,243       

The following methods and assumptions were used in estimating the fair value of these financial assets and liabilities.

The fair values of 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.

Premium deposits and annuity contracts were valued based on cash surrender values, estimated fair values or policyholder liabilities, net of amounts ceded related to sold business.

Fair value of debt was based on observable quoted market prices when available. When quoted market prices were not available, the fair value for debt was based on quoted market prices of comparable instruments adjusted for differences between the quoted instruments and the instruments being valued or is estimated using discounted cash flow analyses, based on current incremental borrowing rates for similar types of borrowing arrangements.

4. Derivative Financial Instruments

The Company invests in certain derivative instruments for a number of purposes, including: (i) asset and liability management activities, (ii) income enhancements for its portfolio management strategy and (iii) to benefit from anticipated future movements in the underlying markets. If such movements do not occur as anticipated, then significant losses may occur.

Monitoring procedures include senior management review of daily detailed reports of existing positions and valuation fluctuations to ensure that open positions are consistent with the Company’s portfolio strategy.

The Company does not believe that any of the derivative instruments utilized by it are unusually complex, nor do these instruments contain embedded leverage features which would expose the Company to a higher degree of risk.

 

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The Company uses derivatives in the normal course of business, primarily in an attempt to reduce its exposure to market risk (principally interest rate risk, equity price risk, commodity price risk and foreign currency risk) stemming from various assets and liabilities and credit risk (the ability of an obligor to make timely payment of principal and/or interest). The Company’s principal objective under such risk strategies is to achieve the desired reduction in economic risk, even if the position does not receive hedge accounting treatment.

CNA’s use of derivatives is limited by statutes and regulations promulgated by the various regulatory bodies to which it is subject, and by its own derivative policy. The derivative policy limits the authorization to initiate derivative transactions to certain personnel. Derivatives entered into for hedging, regardless of the choice to designate hedge accounting, shall have a maturity that effectively correlates to the underlying hedged asset or liability. The policy prohibits the use of derivatives containing greater than one-to-one leverage with respect to changes in the underlying price, rate or index. The policy also prohibits the use of borrowed funds, including funds obtained through securities lending, to engage in derivative transactions.

The Company has exposure to economic losses due to interest rate risk arising from changes in the level of, or volatility of, interest rates. The Company attempts to mitigate its exposure to interest rate risk in the normal course of portfolio management, which includes rebalancing its existing portfolios of assets and liabilities. In addition, various derivative financial instruments are used to modify the interest rate risk exposures of certain assets and liabilities. These strategies include the use of interest rate swaps, interest rate caps and floors, options, futures, forwards and commitments to purchase securities. These instruments are generally used to lock interest rates or market values, to shorten or lengthen durations of fixed maturity securities or to hedge (on an economic basis) interest rate risks associated with investments and variable rate debt. The Company infrequently designates these types of instruments as hedges against specific assets or liabilities.

The Company has exposure to equity price risk as a result of its investment in equity securities and equity derivatives. Equity price risk results from changes in the level or volatility of equity prices, which affect the value of equity securities, or instruments that derive their value from such securities. The Company attempts to mitigate its exposure to such risks by limiting its investment in any one security or index. The Company may also manage this risk by utilizing instruments such as options, swaps, futures and collars to protect appreciation in securities held.

The Company has exposure to credit risk arising from the uncertainty associated with a financial instrument obligor’s ability to make timely principal and/or interest payments. The Company attempts to mitigate this risk by limiting credit concentrations, practicing diversification, and frequently monitoring the credit quality of issuers and counterparties. In addition, the Company may utilize credit derivatives such as credit default swaps (“CDS”) to modify the credit risk inherent in certain investments. CDS involve a transfer of credit risk from one party to another in exchange for periodic payments.

Foreign currency risk arises from the possibility that changes in foreign currency exchange rates will impact the fair value of financial instruments denominated in a foreign currency. The Company’s foreign transactions are primarily denominated in Australian dollars, Brazilian reais, British pounds, Canadian dollars and the European Monetary Unit. The Company typically manages this risk via asset/liability currency matching and through the use of foreign currency forwards.

In addition to the derivatives used for risk management purposes described above, the Company may also use derivatives for purposes of income enhancement. Income enhancement transactions are entered into with the intention of providing additional income or yield to a particular portfolio segment or instrument. Income enhancement transactions are limited in scope and primarily involve the sale of covered options in which the Company receives a premium in exchange for selling a call or put option.

The Company will also use CDS to sell credit protection against a specified credit event. In selling credit protection, CDS are used to replicate fixed income securities when credit exposure to certain issuers is not available or when it is economically beneficial to transact in the derivative market compared to the cash market alternative. Credit risk includes both the default event risk and market value exposure due to fluctuations in credit spreads. In selling CDS protection, the Company receives a periodic premium in exchange for providing credit protection on a single name reference obligation or a credit derivative index. If there is an event of default as defined by the CDS

 

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agreement, the Company is required to pay the counterparty the referenced notional amount of the CDS contract and in exchange the Company is entitled to receive the referenced defaulted security or the cash equivalent.

The tables below summarize open CDS contracts where the Company sold credit protection as of March 31, 2011 and December 31, 2010. The fair value of the contracts represents the amounts that the Company would receive or pay at those dates to exit the derivative positions. The maximum amount of future payments assumes no residual value in the defaulted securities that the Company would receive as part of the contract terminations and is equal to the notional value of the CDS contracts.

 

March 31, 2011    Fair Value
of Credit
Default
Swaps
     Maximum
Amount of
Future
Payments
under Credit
Default
Swaps
     Weighted
Average
Years To
Maturity
 
(In millions of dollars)                     

BB-rated

   $ 1       $ 5         2.2   

B-rated

        3         1.2   
   

Total

   $ 1       $ 8         1.9   
   

December 31, 2010

        
   

BB-rated

   $ 1       $ 5         2.5   

B-rated

        3         1.5   
   

Total

   $ 1       $ 8         2.1   
   

Credit exposure associated with non-performance by the counterparties to derivative instruments is generally limited to the uncollateralized fair value of the asset related to the instruments recognized on the Consolidated Condensed Balance Sheets. The Company attempts to mitigate the risk of non-performance by monitoring the creditworthiness of counterparties and diversifying derivatives to multiple counterparties. The Company generally requires that all over-the-counter derivative contracts be governed by an International Swaps and Derivatives Association (“ISDA”) Master Agreement, and exchanges collateral under the terms of these agreements with its derivative investment counterparties depending on the amount of the exposure and the credit rating of the counterparty. The Company does not offset its net derivative positions against the fair value of the collateral provided. The fair value of cash collateral provided by the Company was $2 million at March 31, 2011 and December 31, 2010. The fair value of cash collateral received from counterparties was $1 million at March 31, 2011 and December 31, 2010.

The agreements governing HighMount’s derivative instruments contain certain covenants, including a maximum debt to capitalization ratio reviewed quarterly. If HighMount does not comply with these covenants, the counterparties to the derivative instruments could terminate the agreements and request payment on those derivative instruments in net liability positions. The aggregate fair value of HighMount’s derivative instruments that are in a liability position was $100 million at March 31, 2011. HighMount was not required to post any collateral under the governing agreements. At March 31, 2011, HighMount was in compliance with all of its covenants under the derivatives agreements.

See Note 3 for information regarding the fair value of derivative instruments.

 

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A summary of the aggregate contractual or notional amounts and gross estimated fair values related to derivative financial instruments follows. Equity options purchased are included in Equity securities, and all other derivative assets are reported as Receivables. Derivative liabilities are included in Payable to brokers on the Consolidated Condensed Balance Sheets. 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.

 

     March 31, 2011     December 31, 2010  
   
     Contractual/            Contractual/                
   Notional      Estimated Fair Value     Notional      Estimated Fair Value  
     Amount      Asset      (Liability)     Amount      Asset      (Liability)  
   
(In millions)                                         

With hedge designation:

                

Interest rate risk:

                

Interest rate swaps

   $ 1,095          $ (64   $ 1,095          $ (75

Commodities:

                

Forwards – short

     422       $ 49         (38     487       $ 70         (24

Foreign exchange:

                

Currency forwards – short

     142         7           140         4      

Without hedge designation:

                

Equity markets:

                

Options – purchased

     208         22           207         30      

Options – written

     269            (10     340            (10

Futures – short

     101                 

Interest rate risk:

                

Interest rate swaps

     5              5            (1

Credit default swaps – purchased protection

     20            (2     20            (2

Credit default swaps – sold protection

     8         1           8         1      

Foreign exchange:

                

Currency forwards – short

     18                 

Derivatives without hedge designation – For derivatives not held in a trading portfolio, new derivative transactions entered into totaled approximately $14 million in notional value while derivative termination activity totaled approximately $23 million during the three months ended March 31, 2011. This activity was primarily attributable to currency forwards. During the three months ended March 31, 2010, new derivative transactions entered into totaled approximately $104 million in notional value while derivative termination activity totaled approximately $149 million. This activity was primarily attributable to credit default swaps and forward commitments for mortgage-backed securities.

 

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A summary of the recognized gains (losses) related to derivative financial instruments without hedge designation follows. Changes in the fair value of derivatives not held in a trading portfolio are reported in Investment gains (losses) and changes in the fair value of derivatives held for trading purposes are reported in Net investment income on the Consolidated Condensed Statements of Income.

 

Three Months Ended March 31    2011     2010  
   
(In millions)             

Included in Net investment income:

    

Equity risk:

    

Equity options – purchased

   $ (6   $ (13

Equity options – written

     5        6   

Futures – long

       1   

Futures – short

     (2     (4

Foreign exchange:

    

Currency options – short

       2   

Interest rate risk:

    

Futures – long

       3   

Futures – short

       3   

Other

     (1     (1
   
     (4     (3
   

Included in Investment gains (losses):

    

Interest rate swaps

       (26

Currency forwards – short

     (1  

Commodity forwards – short

       13   
   
     (1     (13
   

Total

   $ (5   $ (16
   

Cash flow hedges – A significant portion of the Company’s hedge strategies represents cash flow hedges of the variable price risk associated with the purchase and sale of natural gas and other energy-related products. As of March 31, 2011, approximately 73.3 billion cubic feet of natural gas equivalents was hedged by qualifying cash flow hedges. The effective portion of these commodity hedges is reclassified from AOCI into earnings when the anticipated transaction affects earnings. Approximately 57% of these derivatives have settlement dates in 2011 and 34% have settlement dates in 2012. As of March 31, 2011, the estimated amount of net unrealized gains associated with commodity contracts that will be reclassified into earnings during the next twelve months was $19 million. However, these amounts are likely to vary materially as a result of changes in market conditions. Foreign currency forward exchange contracts are used to reduce exposure to future foreign currency expenditures. The effective portion of these hedges is reclassified from AOCI into earnings when the hedged transaction affects earnings or it is determined that the hedged transaction will not occur. As of March 31, 2011, the estimated amount of net unrealized gains associated with these contracts that will be reclassified into earnings over the next twelve months was $7 million. The Company also uses interest rate swaps to hedge its exposure to variable interest rates or risk attributable to changes in interest rates on long term debt. The effective portion of the hedges is amortized to interest expense over the term of the related notes. As of March 31, 2011, the estimated amount of net unrealized losses associated with interest rate swaps that will be reclassified into earnings during the next twelve months was $55 million. However, this is likely to vary as a result of changes in LIBOR. For the three months ended March 31, 2011 and 2010, the net amounts recognized due to ineffectiveness were less than $1 million.

As a result of the sale of certain gas producing properties in 2010, HighMount recognized losses of $22 million in Investment gains (losses) in the Consolidated Condensed Statements of Income for the three months ended March 31, 2010, reflecting the reclassification of net derivative losses from AOCI to earnings.

 

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The following table summarizes the effective portion of the net derivative gains or losses included in OCI and the amount reclassified into Income for derivatives designated as cash flow hedges and for de-designated hedges:

 

Three Months Ended March 31    2011     2010  
   
(In millions)             

Amount of gain (loss) recognized in OCI:

    

Commodities

   $ (19   $ 104   

Foreign exchange

     5     

Interest rate

     (2     (22
   

Total

   $ (16   $ 82   
   

Amount of gain (loss) reclassified from AOCI into income:

    

Commodities

   $ 20      $ 30   

Foreign exchange

     2        2   

Interest rate

     (14     (46
   

Total

   $ 8      $ (14
   

Location of gain (loss) reclassified from AOCI into income:

 

Type of cash flow hedge    Consolidated Condensed Statements of Income line items
 
Commodities    Other revenues and Investment gains (losses)
Foreign exchange    Contract drilling expenses
Interest rate    Interest expense and Investment gains (losses)

The Company also enters into short sales as part of its portfolio management strategy. Short sales are commitments to sell a financial instrument not owned at the time of sale, usually done in anticipation of a price decline. Short sales resulted in proceeds of $55 million and $308 million with fair value liabilities of $63 million and $317 million at March 31, 2011 and December 31, 2010. These positions are marked to market and investment gains or losses are included in Net investment income in the Consolidated Condensed Statements of Income.

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 claims that are incurred but not reported (“IBNR”) 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 field reserving trends and claims settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions 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 all 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.

 

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Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in the Company’s results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of $55 million and $40 million for the three months ended March 31, 2011 and 2010. Catastrophe losses in the first quarter of 2011 related primarily to the event in Japan and domestic winter storms.

Net Prior Year Development

The following tables and discussion include the net prior year development recorded for CNA Specialty, CNA Commercial and Other Insurance. Unfavorable net prior year development of $7 million was recorded in the Life & Group Non-Core segment for the three months ended March 31, 2011, compared to favorable net prior year development of $9 million for the same period in 2010. The 2010 favorable net prior year development included favorable reserve development of $24 million arising from a commutation of an assumed reinsurance agreement.

 

Three Months Ended March 31, 2011   CNA
Specialty
    CNA
Commercial
    Other
Insurance
    Total  
(In millions)                        

Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development

  $ (15   $ (7   $ 3      $     (19

Pretax (favorable) unfavorable premium development

    (7     (8     (1     (16
   

Total pretax (favorable) unfavorable net prior year development

  $ (22   $ (15   $ 2      $     (35
   

Three Months Ended March 31, 2010

                               

Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development

  $ (25   $ (28   $ 2      $     (51

Pretax (favorable) unfavorable premium development

    (4     21        (1     16   
   

Total pretax (favorable) unfavorable net prior year development

  $ (29   $ (7   $ 1      $     (35
   

CNA Specialty

The following table and discussion provides further detail of the net prior year claim and allocated claim adjustment expense reserve development recorded for the CNA Specialty segment:

 

Three Months Ended March 31    2011     2010  
   
(In millions)             

Medical Professional Liability

   $ (14   $ (4

Other Professional Liability

     6        (23

Surety

       (2

Warranty

     (10  

Other

     3        4   
   

Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development

   $ (15   $ (25
   

 

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2011

Favorable development for medical professional liability was primarily due to favorable loss emergence in aging services, physicians and excess institutions in accident years 2007 and prior.

Favorable development in warranty was driven by favorable policy year experience on an aggregate stop loss treaty covering CNA’s non-insurance warranty subsidiary.

2010

Favorable development was primarily due to favorable incurred loss emergence in several professional liability lines of business primarily in accident years 2007 and prior. This favorability was partially offset by unfavorable development in the employee practices liability line driven by higher unemployment, primarily in accident years 2008 and 2009.

CNA Commercial

The following table and discussion provides further detail of the net prior year claim and allocated claim adjustment expense reserve development recorded for the CNA Commercial segment:

 

Three Months Ended March 31    2011     2010  
   
(In millions)             

Commercial Auto

   $ 10      $ (9

General Liability

     22        (43

Workers Compensation

     8        10   

Property and Other

     (47     14   
   

Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development

   $ (7   $ (28
   

2011

Favorable development for property and marine coverages was due to lower than expected frequency in commercial multi-peril coverages primarily in accident year 2010 and a favorable settlement on an individual claim in accident year 2003 in the equipment breakdown book.

The unfavorable development in the general liability coverages is primarily due to two large claim outcomes on umbrella claims in accident year 2001.

2010

Favorable development was recorded in general liability primarily due to favorable emergence in CNA’s European casualty programs in accident years 2000 through 2003. Additional favorable development was recorded in commercial multi-peril coverages, primarily in accident year 2009.

Unfavorable development for property and marine coverages was due to non-catastrophe related commercial multi-peril coverages, primarily in accident year 2009. Favorable development was recorded due to favorable experience in non-catastrophe related property coverages in accident years 2007 and prior.

6. Benefit Plans

Pension Plans - The Company has several non-contributory defined benefit plans for eligible employees. Benefits for certain plans are determined annually based on a specified percentage of annual earnings (based on the participant’s age or years of service) and a specified interest rate (which is established annually for all participants) applied to accrued balances. The benefits for another plan which cover salaried employees are based on formulas which include, among others, years of service and average pay. The Company’s funding policy is to make contributions in accordance with applicable governmental regulatory requirements.

Other Postretirement Benefit Plans - The Company has several postretirement benefit plans covering eligible employees and retirees. Participants generally become eligible after reaching age 55 with required years of service. Actual requirements for coverage vary by plan. Benefits for retirees who were covered by bargaining units vary by each unit and contract. Benefits for certain retirees are in the form of a Company health care account.

 

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Benefits for retirees reaching age 65 are generally integrated with Medicare. Other retirees, based on plan provisions, must use Medicare as their primary coverage, with the Company reimbursing a portion of the unpaid amount; or are reimbursed for the Medicare Part B premium or have no Company coverage. The benefits provided by the Company are basically health and, for certain retirees, life insurance type benefits.

The Company funds certain of these benefit plans and accrues postretirement benefits during the active service of those employees who would become eligible for such benefits when they retire.

The components of net periodic benefit cost are as follows:

 

     Pension Benefits     Other
Postretirement Benefits
 
        
Three Months Ended March 31    2011     2010     2011     2010  
   
(In millions)                         

Service cost

   $ 7      $ 6        $ 1   

Interest cost

     41        42      $ 2        3   

Expected return on plan assets

     (47     (44     (1     (1

Amortization of unrecognized net loss

     7        7        1        1   

Amortization of unrecognized prior service benefit

         (7     (6

Regulatory asset decrease

         1        1   
   

Net periodic benefit cost

   $ 8      $ 11      $ (4   $ (1
   

7. Business Segments

The Company’s reportable segments are primarily based on its individual operating subsidiaries. Each of the principal operating subsidiaries are 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. Investment gains (losses) and the related income taxes, excluding those of CNA, are included in the Corporate and other segment.

CNA’s core property and casualty commercial insurance operations are reported in two business segments: CNA Specialty and CNA Commercial. CNA Specialty provides a broad array of professional, financial and specialty property and casualty products and services, primarily through insurance brokers and managing general underwriters. CNA Commercial includes property and casualty coverages sold to small businesses and middle market entities and organizations primarily through an independent agency distribution system. CNA Commercial also includes commercial insurance and risk management products sold to large corporations primarily through insurance brokers.

CNA’s non-core operations are managed in two segments: Life & Group Non-Core and Other Insurance. Life & Group Non-Core primarily includes the results of the life and group lines of business that are in run-off. Other Insurance primarily includes certain corporate expenses, including interest on corporate debt, and the results of certain property and casualty business primarily in run-off, including CNA Re and asbestos and environmental pollution.

Diamond Offshore’s business primarily consists of operating 46 offshore drilling rigs that are chartered on a contract basis for fixed terms by companies engaged in exploration and production of hydrocarbons. Offshore rigs are mobile units that can be relocated based on market demand. On March 31, 2011, Diamond Offshore’s drilling rigs were located offshore 13 countries in addition to the United States.

HighMount’s business consists primarily of natural gas exploration and production operations located primarily in the Permian Basin in Texas. In the second quarter of 2010, HighMount sold substantially all of its exploration and production assets located in the Antrim Shale in Michigan and the Black Warrior Basin in Alabama. The Michigan and Alabama properties represented approximately 17%, in aggregate, of HighMount’s total proved reserves as of December 31, 2009.

Boardwalk Pipeline is engaged in the interstate transportation and storage of natural gas. This segment consists of three interstate natural gas pipeline systems originating in the Gulf Coast region, Oklahoma and Arkansas, and extending north and east through the midwestern states of Tennessee, Kentucky, Illinois, Indiana and Ohio, with approximately 14,200 miles of pipeline.

Loews Hotels owns and/or operates 18 hotels, 16 of which are in the United States and two are in Canada.

 

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The Corporate and other segment consists primarily of corporate investment income, including investment gains (losses) from non-insurance subsidiaries, corporate interest expense and other unallocated expenses.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. In addition, CNA does not maintain a distinct investment portfolio for each of its insurance segments, and accordingly, allocation of assets to each segment is not performed. Therefore, net investment income and investment gains (losses) are allocated based on each segment’s carried insurance reserves, as adjusted.

The following tables set forth the Company’s consolidated revenues and income (loss) attributable to Loews Corporation by business segment:

 

Three Months Ended March 31    2011     2010  
   
(In millions)             

Revenues (a):

    

CNA Financial:

    

CNA Specialty

   $ 891      $ 866   

CNA Commercial

     1,094        1,076   

Life and Group Non-Core

     326        320   

Other Insurance

     13        53   
   

Total CNA Financial

     2,324        2,315   

Diamond Offshore

     809        862   

HighMount

     104        148   

Boardwalk Pipeline

     311        301   

Loews Hotels

     80        75   

Corporate and other

     40        12   
   

Total

   $ 3,668      $ 3,713   
   

Income (loss) before income tax and noncontrolling interests (a):

    

CNA Financial:

    

CNA Specialty

   $ 216      $ 216   

CNA Commercial

     214        164   

Life and Group Non-Core

     (48     (21

Other Insurance

     (46     1   
   

Total CNA Financial

     336        360   

Diamond Offshore

     296        405   

HighMount

     29        57   

Boardwalk Pipeline

     82        88   

Loews Hotels

     3        (1

Corporate and other

     15        (13
   

Total

   $ 761      $ 896   
   

Net income (loss) - Loews (a):

    

CNA Financial:

    

CNA Specialty

   $ 122      $ 123   

CNA Commercial

     127        101   

Life and Group Non-Core

     (19     (3

Other Insurance

     (28     4   
   

Total CNA Financial

     202        225   

Diamond Offshore

     117        136   

HighMount

     19        32   

Boardwalk Pipeline

     33        38   

Loews Hotels

     2        (1

Corporate and other

     9        (10
   

Total

   $ 382      $ 420   
   

 

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(a) Investment gains (losses) included in Revenues, Income (loss) before income tax and noncontrolling interests and Net income (loss) - Loews are as follows:

 

Three Months Ended March 31    2011     2010  
   

Revenues and Income (loss) before income tax and noncontrolling interests:

    

CNA Financial:

    

CNA Specialty

   $ 8      $ 13   

CNA Commercial

     17        21   

Life and Group Non-Core

     (4     (4

Other Insurance

     1        4   
   

Total CNA Financial

     22        34   

Corporate and other

     1        (13
   

Total

   $ 23      $ 21   
   

Net income (loss) - Loews:

    

CNA Financial:

    

CNA Specialty

   $ 5      $ 8   

CNA Commercial

     9        12   

Life and Group Non-Core

     (2     (4

Other Insurance

       3   
   

Total CNA Financial

     12        19   

Corporate and other

       (8
   

Total

   $ 12      $ 11   
   

8. Legal Proceedings

In August 2005, CNA and certain insurance subsidiaries were joined as defendants, along with other insurers and brokers, in multidistrict litigation pending in the United States District Court for the District of New Jersey, In re Insurance Brokerage Antitrust Litigation, Civil No. 04-5184 (“GEB”). The plaintiffs’ consolidated class action complaint alleges bid rigging and improprieties in the payment of contingent commissions in connection with the sale of insurance that violated federal and state antitrust laws, the federal Racketeer Influenced and Corrupt Organizations (“RICO”) Act and state common law. After discovery, the District Court dismissed the federal antitrust claims and the RICO claims, and declined to exercise supplemental jurisdiction over the state law claims. The plaintiffs appealed the dismissal of their complaint to the Third Circuit Court of Appeals. In August 2010, the Court of Appeals affirmed the District Court’s dismissal of the antitrust claims and the RICO claims against CNA and certain insurance subsidiaries, but vacated the dismissal of one portion of those claims against some other parties and remanded them for further proceedings on motions to dismiss. The Court of Appeals also vacated and remanded the dismissal of the state law claims against CNA and certain insurance subsidiaries and other parties to allow for further proceedings relating to motions to dismiss before the District Court. In November 2010, CNA and certain insurance subsidiaries filed in the district court a motion to dismiss the remaining state law claims pending against them. In March 2011, CNA and certain insurance subsidiaries, along with certain other defendants, entered into a memorandum of settlement understanding with the plaintiffs to settle all claims asserted, or which could have been asserted, in the class action lawsuit. The settlement is subject to negotiation of additional terms, execution of a settlement agreement and court approval of the settlement. As currently structured, the settlement will not have a material impact on the Company’s results of operations.

The Company has been named as a defendant in the following four cases alleging substantial damages based on alleged health effects caused by smoking cigarettes or exposure to tobacco smoke, all of which also name a former subsidiary, Lorillard, Inc. or one of its subsidiaries, as a defendant. In Cypret vs. The American Tobacco Company, Inc. et al. (1998, Circuit Court, Jackson County, Missouri), the Company would contest jurisdiction and make use of all available defenses in the event it receives personal service of this action. In Clalit vs. Philip Morris, Inc., et al. (1998, Jerusalem District Court of Israel), the court initially permitted plaintiff to serve the Company outside the jurisdiction but it cancelled the leave of service in response to the Company’s application, and plaintiff’s appeal is pending. In Young vs. The American Tobacco Company, Inc. et al. (1997, Civil District Court, Orleans Parish, Louisiana), the Company filed an exception for lack of personal jurisdiction during 2000, which remains pending. In Luciano vs. Alcoa Inc., et al. (2011, Supreme Court, New York County, New York), the Company filed an answer to plaintiff’s complaint during April 2011 denying any liability to plaintiff in this matter.

 

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The Company does not believe it is a proper defendant in any tobacco related cases and as a result, does not believe the outcome will have a material affect on its results of operations or equity. Further, pursuant to the Separation Agreement dated May 7, 2008 between the Company and Lorillard Inc. and its subsidiaries, Lorillard, Inc. and its subsidiaries have agreed to indemnify and hold the Company harmless from all costs and expenses based upon or arising out of the operation or conduct of Lorillard’s business, including among other things, smoking and health claims and litigation such as the four cases described above.

While the Company intends to defend vigorously all tobacco products liability litigation, it is not possible to predict the outcome of any of this litigation. Litigation is subject to many uncertainties. It is possible that one or more of the pending actions could be decided unfavorably.

The Company and its subsidiaries are also parties to other litigation arising in the ordinary course of business. The outcome of this other litigation will not, in the opinion of management, materially affect the Company’s results of operations or equity.

9. Commitments and Contingencies

Guarantees

In the course of selling business entities and assets to third parties, CNA has agreed to indemnify purchasers for losses arising out of breaches of representation and warranties with respect to the business entities or assets being sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such indemnification provisions generally survive for periods ranging from nine months following the applicable closing date to the expiration of the relevant statutes of limitation. As of March 31, 2011, the aggregate amount of quantifiable indemnification agreements in effect for sales of business entities, assets and third party loans was $719 million.

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 March 31, 2011, 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. These indemnification agreements survive until the applicable statutes of limitation expire, or until the agreed upon contract terms expire.

10. Consolidating Financial Information

The following schedules present the Company’s consolidating balance sheet information at March 31, 2011 and December 31, 2010, and consolidating statements of operations information for the three months ended March 31, 2011 and 2010. These schedules present the individual subsidiaries of the Company and their contribution to the consolidated condensed financial statements. 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. In addition, many of the Company’s subsidiaries use a classified balance sheet which also leads to differences in amounts reported for certain line items.

The Corporate and Other column primarily reflects the parent company’s investment in its subsidiaries, invested cash portfolio and corporate long term debt. The elimination adjustments are for intercompany assets and liabilities, interest and dividends, the parent company’s investment in capital stocks of subsidiaries, and various reclasses of debit or credit balances to the amounts in consolidation. Purchase accounting adjustments have been pushed down to the appropriate subsidiary.

 

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Loews Corporation

Consolidating Balance Sheet Information

 

March 31, 2011    CNA
Financial
     Diamond
Offshore
     HighMount      Boardwalk
Pipeline
     Loews
Hotels
     Corporate
and Other
     Eliminations     Total  
(In millions)                                                       

Assets:

                      

Investments

   $ 42,830       $ 961       $ 115       $ 31       $ 43       $ 4,652         $ 48,632   

Cash

     81         33            4         5              123   

Receivables

     9,372         573         86         69         45         147       $ (110     10,182   

Property, plant and equipment

     271         4,233         1,373         6,284         343         39           12,543   

Deferred income taxes

     578            547                  (1,000     125   

Goodwill

     86         20         584         163         3              856   

Investments in capital stocks of subsidiaries

                    15,609         (15,609       

Other assets

     728         802         26         358         30         15           1,959   

Deferred acquisition costs of insurance subsidiaries

     1,098                          1,098   

Separate account business

     449                          449   
   

Total assets

   $ 55,493       $ 6,622       $ 2,731       $ 6,909       $ 469       $ 20,462       $ (16,719   $ 75,967   
   

Liabilities and Equity:

                      

Insurance reserves

   $ 37,680                        $ 37,680   

Payable to brokers

     223          $ 116       $ 2          $ 78           419   

Short term debt

               $ 22         175           197   

Long term debt

     2,647       $ 1,488         1,100         3,270         198         693       $ (100     9,296   

Deferred income taxes

        518            429         54         545         (1,546       

Other liabilities

     2,721         599         74         318         13         220         536        4,481   

Separate account business

     449                          449   
   

Total liabilities

     43,720         2,605         1,290         4,019         287         1,711         (1,110     52,522   
   

Total shareholders’ equity

     10,092         2,038         1,441         1,791         182         18,751         (15,609     18,686   

Noncontrolling interests

     1,681         1,979            1,099                 4,759   
   

Total equity

     11,773         4,017         1,441         2,890         182         18,751         (15,609     23,445   
   

Total liabilities and equity

   $ 55,493       $ 6,622       $ 2,731       $ 6,909       $ 469       $ 20,462       $ (16,719   $ 75,967   
   

 

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Loews Corporation

Consolidating Balance Sheet Information

 

December 31, 2010    CNA
Financial
     Diamond
Offshore
     HighMount      Boardwalk
Pipeline
     Loews
Hotels
     Corporate
and Other
     Eliminations     Total  
(In millions)                                                       

Assets:

                      

Investments

   $ 42,655       $ 1,055       $ 128       $ 52       $ 57       $ 4,960         $ 48,907   

Cash

     77         22         2         7         10         2           120   

Receivables

     9,224         671         109         71         33         169       $ (135     10,142   

Property, plant and equipment

     286         4,291         1,350         6,326         347         36           12,636   

Deferred income taxes

     699            548                  (958     289   

Goodwill

     86         20         584         163         3              856   

Investments in capital stocks of subsidiaries

                    15,314         (15,314       

Other assets

     724         678         27         339         24         6           1,798   

Deferred acquisition costs of insurance subsidiaries

     1,079                          1,079   

Separate account business

     450                          450   
   

Total assets

   $ 55,280       $ 6,737       $ 2,748       $ 6,958       $ 474       $ 20,487       $ (16,407   $ 76,277   
   

Liabilities and Equity:

                      

Insurance reserves

   $ 37,590                        $ 37,590   

Payable to brokers

     239          $ 115       $ 2          $ 329           685   

Short term debt

     400                $ 72         175           647   

Long term debt

     2,251       $ 1,487         1,100         3,252         148         692       $ (100     8,830   

Deferred income taxes

        533            410         54         522         (1,519       

Other liabilities

     2,877         831         93         372         21         249         526        4,969   

Separate account business

     450                          450   
   

Total liabilities

     43,807         2,851         1,308         4,036         295         1,967         (1,093     53,171   
   

Total shareholders’ equity

     9,838         1,972         1,440         1,815         179         18,520         (15,314     18,450   

Noncontrolling interests

     1,635         1,914            1,107                 4,656   
   

Total equity

     11,473         3,886         1,440         2,922         179         18,520         (15,314     23,106   
   

Total liabilities and equity

   $ 55,280       $ 6,737       $ 2,748       $ 6,958       $ 474       $ 20,487       $ (16,407   $ 76,277   
   

 

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Loews Corporation

Consolidating Statement of Income Information

 

Three Months Ended March 31, 2011    CNA
Financial
    Diamond
Offshore
    HighMount     Boardwalk
Pipeline
    Loews
Hotels
    Corporate
and Other
    Eliminations     Total  
(In millions)                                                 

Revenues:

                

Insurance premiums

   $ 1,615                  $ 1,615   

Net investment income

     620              $ 41          661   

Intercompany interest and dividends

               155      $ (155       

Investment gains

     22      $ 1                  23   

Contract drilling revenues

       789                  789   

Other

     67        20      $ 104      $ 311      $ 80        1        (3     580   
   

Total

     2,324        810        104        311        80        197        (158     3,668   
   

Expenses: