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0000060086-07-000015.txt : 20070226
0000060086-07-000015.hdr.sgml : 20070226
20070223173913
ACCESSION NUMBER: 0000060086-07-000015
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 13
CONFORMED PERIOD OF REPORT: 20070223
FILED AS OF DATE: 20070226
DATE AS OF CHANGE: 20070223
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: LOEWS CORP
CENTRAL INDEX KEY: 0000060086
STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331]
IRS NUMBER: 132646102
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-06541
FILM NUMBER: 07646999
BUSINESS ADDRESS:
STREET 1: 667 MADISON AVE
CITY: NEW YORK
STATE: NY
ZIP: 10021-8087
BUSINESS PHONE: 212-521-2000
MAIL ADDRESS:
STREET 1: 667 MADISON AVE
CITY: NEW YORK
STATE: NY
ZIP: 10021-8087
10-K
1
form10-k.htm
LOEWS CORP FORM 10K
Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
S
|
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
|
|
|
THE
SECURITIES EXCHANGE ACT OF 1934
For
the Fiscal Year Ended December 31, 2006
OR
£
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
|
|
|
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the Transition Period
From ____________ to _____________
Commission
File Number 1-6541
LOEWS
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
|
13-2646102
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
667
Madison Avenue, New York, N.Y. 10021-8087
(Address
of principal executive offices) (Zip Code)
(212)
521-2000
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
|
Name
of each exchange on which registered
|
Loews
Common Stock, par value $0.01 per share
|
|
New
York Stock Exchange
|
Carolina
Group Stock, par value $0.01 per share
|
|
New
York Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Act.
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.
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this
Form 10-K. [ X ].
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
the
Act).
Large
accelerated filer
|
X
|
|
Accelerated
filer
|
|
|
Non-accelerated
filer
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
The
aggregate market value of voting and non-voting common equity held by
non-affiliates as of the last business day of the registrant’s most recently
completed second fiscal quarter was approximately $20,106,000,000.
As
of
February 9, 2007, there were 543,461,657 shares of Loews common stock and
108,334,056 shares of Carolina Group stock outstanding.
Documents
Incorporated by Reference:
Portions
of the Registrant’s definitive proxy statement intended to be filed by
Registrant with the Commission prior to April 30, 2007 are incorporated by
reference into Part III of this Report.
LOEWS
CORPORATION
INDEX
TO ANNUAL REPORT ON
FORM
10-K FILED WITH THE
SECURITIES
AND EXCHANGE COMMISSION
For
the Year Ended December 31, 2006
Item
No.
|
PART
I
|
Page
No.
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|
|
|
1
|
|
Business
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3
|
|
|
|
Carolina
Group Tracking Stock
|
3
|
|
|
|
CNA
Financial Corporation
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4
|
|
|
|
Lorillard,
Inc.
|
11
|
|
|
|
Boardwalk
Pipeline Partners, LP
|
16
|
|
|
|
Diamond
Offshore Drilling, Inc.
|
19
|
|
|
|
Loews
Hotels Holding Corporation
|
23
|
|
|
|
Bulova
Corporation
|
24
|
|
|
|
Available
information
|
25
|
|
1
|
A
|
Risk
Factors
|
25
|
|
1
|
B
|
Unresolved
Staff Comments
|
55
|
|
2
|
|
Properties
|
55
|
|
3
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|
Legal
Proceedings
|
55
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|
4
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|
Submission
of Matters to a Vote of Security Holders
|
56
|
|
|
|
Executive
Officers of the Registrant
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57
|
|
|
|
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|
|
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|
PART
II
|
|
|
|
|
|
|
|
5
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|
Market
for the Registrant’s Common Equity, Related Stockholder Matters and
Issuer
|
|
|
|
|
Purchases
of Equity Securities
|
57
|
|
|
|
Management’s
Report on Internal Control Over Financial Reporting
|
61
|
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
62
|
|
6
|
|
Selected
Financial Data
|
64
|
|
7
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
65
|
|
7
|
A
|
Quantitative
and Qualitative Disclosures about Market Risk
|
125
|
|
8
|
|
Financial
Statements and Supplementary Data
|
129
|
|
9
|
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
225
|
|
9
|
A
|
Controls
and Procedures
|
225
|
|
9
|
B
|
Other
Information
|
225
|
|
|
|
|
|
|
|
|
PART
III
|
|
|
|
|
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|
Certain
information called for by Part III (Items 10, 11, 12, 13 and 14)
has been
omitted as Registrant intends to file with the Securities and Exchange
Commission not later than 120 days after the close of its fiscal
year a
definitive Proxy Statement pursuant to Regulation 14A.
|
|
|
|
|
|
|
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PART
IV
|
|
|
|
|
|
|
|
15
|
|
Exhibits
and Financial Statement Schedules
|
226
|
|
PART
I
Unless
the context otherwise requires, references in this report to “Loews
Corporation,” “we,” “our,” “us” or like terms refer to the business of Loews
Corporation excluding its subsidiaries.
Item
1. Business.
We
are a
holding company. Our subsidiaries are engaged in the following lines of
business:
|
·
|
commercial
property and casualty insurance (CNA Financial Corporation, an
89% owned
subsidiary);
|
|
·
|
production
and sale of cigarettes (Lorillard, Inc., a wholly owned
subsidiary);
|
|
·
|
operation
of interstate natural gas transmission pipeline systems (Boardwalk
Pipeline Partners, LP, an 80% owned
subsidiary);
|
|
·
|
operation
of offshore oil and gas drilling rigs (Diamond Offshore Drilling,
Inc., a
51% owned subsidiary);
|
|
·
|
operation
of hotels (Loews Hotels Holding Corporation, a wholly owned subsidiary);
and
|
|
·
|
distribution
and sale of watches and clocks (Bulova Corporation, a wholly owned
subsidiary).
|
Please
read information relating to our major business segments from which we derive
revenue and income contained in Note 23 of the Notes to Consolidated Financial
Statements, included in Item 8.
CAROLINA
GROUP TRACKING STOCK
We
have a
two class common stock structure, our common stock and our Carolina Group
stock.
Carolina Group stock, commonly called a tracking stock, reflects the economic
performance of a defined group of our assets and liabilities, referred to
as the
Carolina Group. Please read Note 6 of the Notes to Consolidated Financial
Statements, included in Item 8.
We
have
attributed the following assets and liabilities to the Carolina
Group:
|
·
|
our
100% stock ownership interest in Lorillard, Inc.;
|
|
·
|
notional,
intergroup debt owed by the Carolina Group to the Loews Group,
which we
describe below, bearing interest at the annual rate of 8.0% and,
subject
to optional prepayment, due December 31, 2021 (as of February
9, 2007,
$1.2 billion was outstanding);
|
|
·
|
any
and all liabilities, costs and expenses of ours, and our subsidiaries,
including Lorillard, Inc. and the subsidiaries and predecessors
of
Lorillard, Inc., arising out of or related to tobacco or otherwise
arising
out of the past, present or future business of Lorillard, Inc.
or its
subsidiaries or predecessors, or claims arising out of or related
to the
sale of any businesses previously sold by Lorillard, Inc. or its
subsidiaries or predecessors, in each case, whether grounded in
tort,
contract, statute or otherwise, whether pending or asserted in
the
future;
|
|
·
|
all
net income or net losses arising from the assets and liabilities
that are
reflected in the Carolina Group and all net proceeds from any disposition
of those assets, in each case, after deductions to reflect dividends
paid
to holders of Carolina Group stock or credited to the Loews Group
in
respect of its intergroup interest;
and
|
|
·
|
any
acquisitions or investments made from assets reflected in the Carolina
Group.
|
As
of
February 9, 2007, there were 108,334,056 shares of Carolina Group stock
outstanding representing a 62.3% economic interest in the Carolina
Group.
Item
1. Business
|
Carolina
Group Tracking Stock -
(Continued)
|
The
Loews
Group consists of all of our assets and liabilities other than the 62.3%
economic interest in the Carolina Group represented by the outstanding Carolina
Group stock, and includes as an asset the notional intergroup debt of the
Carolina Group referred to above.
The
creation of the Carolina Group and the issuance of Carolina Group stock does
not
change our ownership of Lorillard, Inc. or Lorillard, Inc.’s status as a
separate legal entity. The Carolina Group and the Loews Group are notional
groups that are intended to reflect the performance of the defined sets of
assets and liabilities of each group.
The Carolina Group and the Loews Group are not separate legal entities and
the
attribution
of our assets and liabilities to the Loews Group or the Carolina Group does
not
affect title to the assets or responsibility for the liabilities so attributed.
Each
outstanding share of Carolina Group Stock has 3/10 of a vote per share. Holders
of our common stock and of Carolina Group stock are shareholders of Loews
Corporation and are subject to the risks related to an equity investment
in
us.
CNA
FINANCIAL CORPORATION
CNA
Financial Corporation (together with its subsidiaries, “CNA”) was incorporated
in 1967 and is an insurance holding company. CNA’s property and casualty
insurance operations are conducted by Continental Casualty Company (“CCC”),
incorporated in 1897, and its affiliates, and The Continental Insurance Company
(“CIC”), organized in 1853, and its affiliates. CIC became a subsidiary of CNA
in 1995 as a result of the acquisition of The Continental Corporation
(“Continental”). CNA accounted for 57.96%, 61.59% and 65.16% of our consolidated
total revenue for the years ended December 31, 2006, 2005 and 2004,
respectively.
CNA
serves a wide variety of customers, including small, medium and large
businesses, associations, professionals, and groups and individuals with
a broad
range of insurance and risk management products and services.
CNA’s
insurance products primarily include property and casualty coverages. CNA
services include risk management, information services, warranty and claims
administration. CNA products and services are marketed through independent
agents, brokers, managing general agents and direct sales.
CNA’s
core business, property and casualty insurance operations, is reported in
two
business segments: Standard Lines and Specialty Lines. CNA’s non-core operations
are managed in two segments: Life and Group Non-Core and Other Insurance.
These
segments are managed separately because of differences in their product lines
and markets.
Standard
Lines
Standard
Lines works with an independent agency distribution system and network of
brokers to market a broad range of property and casualty insurance products
and
services to small, middle-market and large businesses domestically and abroad.
The Standard Lines operating model focuses on underwriting performance,
relationships with selected distribution sources and understanding customer
needs.
Standard
Lines includes Property, Casualty and CNA Global.
Property:
Property
provides standard and excess property coverage, as well as marine coverage
and
boiler and machinery to a wide range of businesses.
Casualty:
Casualty
provides standard casualty insurance products such as workers’ compensation,
general and product liability and commercial auto coverage through traditional
products to a wide range of businesses. Most insurance programs are provided
on
a guaranteed cost basis; however, Casualty has the capability to offer
specialized, loss-sensitive insurance programs to those customers viewed
as
higher risk and less predictable in exposure.
Excess
& Surplus (“E&S”):
E&S
is included in Casualty. E&S provides specialized insurance and other
financial products for selected commercial risks on both an individual customer
and program basis. Customers insured by E&S are generally viewed as higher
risk and less predictable in exposure than those covered by standard insurance
markets. E&S’s products are distributed throughout the United States through
specialist producers, program agents and Property and Casualty’s agents and
brokers.
Item
1. Business
|
CNA
Financial Corporation -
(Continued)
|
Property
and Casualty (“P&C”): P&C’s
field structure consists of 33 branch locations across the country organized
into 4 regions. Each branch provides the marketing, underwriting and risk
control expertise on the entire portfolio of products. The Centralized
Processing Operation for small and middle-market customers, located in Maitland,
Florida, handles policy processing and accounting, and also acts as a call
center to optimize customer service. The claims structure consists of a
centralized claim center designed to efficiently handle property damage and
medical only claims and 18 claim office locations around the country handling
the more complex claims. Also, Standard Lines provides total risk management
services relating to claim and information services to the large commercial
insurance marketplace, through a wholly owned subsidiary, ClaimsPlus, Inc.,
a
third party administrator.
CNA
Global:
CNA
Global consists of subsidiaries operating in Europe, Latin America, Canada
and
Hawaii. These affiliates offer property and casualty insurance to small and
medium size businesses and capitalize on strategic indigenous
opportunities.
Specialty
Lines
Specialty
Lines provides professional, financial and specialty property and casualty
products and services through a network of brokers, managing general
underwriters and independent agencies. Specialty Lines provides solutions
for
managing the risks of its clients, including architects, lawyers, accountants,
healthcare professionals, financial intermediaries and public and private
corporations. Product offerings also include surety and fidelity bonds and
vehicle and equipment warranty services.
Specialty
Lines includes the following business groups: US Specialty Lines, Surety
and
Warranty.
US
Specialty Lines provides management and professional liability insurance
and
risk management services, primarily in the United States. This group provides
professional liability coverages to various professional firms, including
architects, realtors, small and mid-sized accounting firms, law firms and
technology firms. US Specialty Lines also provides directors and officers
(“D&O”), employment practices, fiduciary and fidelity coverages. Specific
areas of focus include small and mid-size firms as well as privately held
firms
and not-for-profit organizations where tailored products for this client
segment
are offered. Products within US Specialty Lines are distributed through brokers,
agents and managing general underwriters.
US
Specialty Lines, through CNA HealthPro, also offers insurance products to
serve
the healthcare delivery system. Products, which include professional liability
as well as associated standard property and casualty coverages, are distributed
on a national basis through a variety of channels including brokers, agents
and
managing general underwriters. Key customer segments include long term care
facilities, allied healthcare providers, life sciences, dental professionals
and
mid-size and large healthcare facilities and delivery systems.
Surety:
Surety
consists primarily of CNA Surety and its insurance subsidiaries and offers
small, medium and large contract and commercial surety bonds. CNA Surety
provides surety and fidelity bonds in all 50 states through a combined network
of independent agencies. CNA owns approximately 63% of CNA Surety.
Warranty:
Warranty
provides vehicle warranty service contracts that protect individuals and
businesses from the financial burden associated with mechanical breakdown,
or
maintenance.
Life
and Group Non-Core
The
Life
and Group Non-Core segment primarily includes the results of the life and
group
lines of business that have either been sold or placed in run-off. CNA sold
its
individual life business on April 30, 2004 and its specialty medical business
on
January 6, 2005. The segment includes operating results for these businesses
in
periods prior to the sales, the realized gain/loss from the sales and the
effects of the shared corporate overhead expenses which continue to be allocated
to the segment. CNA continues to service its existing individual long term
care
commitments, its payout annuity business and its pension deposit business.
CNA
also manages a block of group reinsurance and life settlement contracts.
These
businesses are being managed as a run-off operation. CNA’s group long term care
and Index 500 products, while considered non-core, continue to be actively
marketed.
Item
1. Business
|
CNA
Financial Corporation -
(Continued)
|
Other
Insurance
Other
Insurance includes the results of certain property and casualty lines of
business placed in run-off. CNA Re, formerly a separate property and casualty
operating segment, is in run-off and is included in the Other Insurance segment.
This segment also includes the results related to the centralized adjusting
and
settlement of asbestos and environmental pollution and mass tort (“APMT”)
claims, as well as the results of CNA’s participation in voluntary insurance
pools and various non-insurance operations. Other operations also include
interest expense on corporate borrowings and intercompany
eliminations.
Please
read Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations by Business Segment - CNA Financial” for information with
respect to each segment.
Supplementary
Insurance Data
The
following table sets forth supplementary insurance data:
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions, except ratio information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
Ratios - GAAP basis (a):
|
|
|
|
|
|
|
|
Loss
and loss adjustment expense ratio
|
|
|
75.7
|
%
|
|
89.4
|
%
|
|
74.6
|
%
|
Expense
ratio
|
|
|
30.0
|
|
|
31.2
|
|
|
31.5
|
|
Dividend
ratio
|
|
|
0.3
|
|
|
0.3
|
|
|
0.2
|
|
Combined
ratio
|
|
|
106.0
|
%
|
|
120.9
|
%
|
|
106.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Trade
Ratios - Statutory basis (a):
|
|
|
|
|
|
|
|
|
|
|
Loss
and loss adjustment expense ratio
|
|
|
78.7
|
%
|
|
92.2
|
%
|
|
78.1
|
%
|
Expense
ratio
|
|
|
30.2
|
|
|
30.0
|
|
|
27.2
|
|
Dividend
ratio
|
|
|
0.2
|
|
|
0.5
|
|
|
0.6
|
|
Combined
ratio
|
|
|
109.1
|
%
|
|
122.7
|
%
|
|
105.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Individual
Life and Group Life Insurance Inforce:
|
|
|
|
|
|
|
|
|
|
|
Individual
Life
|
|
$
|
9,866.0
|
|
$
|
10,711.0
|
|
$
|
11,566.0
|
|
Group
Life
|
|
|
5,787.0
|
|
|
9,838.0
|
|
|
45,079.0
|
|
Total
|
|
$
|
15,653.0
|
|
$
|
20,549.0
|
|
$
|
56,645.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Data - Statutory basis (preliminary) (b):
|
|
|
|
|
|
|
|
|
|
|
Property
and casualty companies’ capital and surplus (c)
|
|
$
|
8,137.0
|
|
$
|
6,940.0
|
|
$
|
6,998.0
|
|
Life
companies’ capital and surplus
|
|
|
687.0
|
|
|
627.0
|
|
|
1,177.0
|
|
Property
and casualty companies’ written premiums to surplus
|
|
|
|
|
|
|
|
|
|
|
Ratio
|
|
|
0.9
|
|
|
1.0
|
|
|
1.0
|
|
Life
Company’s capital and surplus-percent to total liabilities
|
|
|
38.9
|
%
|
|
33.1
|
%
|
|
56.0
|
%
|
Participating
policyholders-percent of gross life insurance inforce
|
|
|
4.4
|
%
|
|
3.5
|
%
|
|
1.4
|
%
|
(a)
|
Trade
ratios reflect the results of CNA’s property and casualty insurance
subsidiaries. Trade ratios are industry measures of property and
casualty
underwriting results. The loss and loss adjustment expense ratio
is the
percentage of net incurred claim and claim adjustment expenses
and the
expenses incurred related to uncollectible reinsurance receivables
to net
earned premiums. The primary difference in this ratio between accounting
principles generally accepted in the United States of America (“GAAP”) and
statutory accounting practices (“SAP”) is related to the treatment of
active life reserves (“ALR”) related to long term care insurance products
written in property and casualty insurance subsidiaries. For GAAP,
ALR is
classified as claim and claim adjustment expense reserves whereas
for SAP,
ALR is classified as unearned premium reserves. The expense ratio,
using
amounts determined in accordance with GAAP, is the percentage of
underwriting and acquisition expenses (including the amortization
of
deferred acquisition expenses) to net earned premiums. The expense
ratio,
using amounts determined in accordance with SAP, is the percentage
of
acquisition and underwriting expenses (with no deferral of acquisition
expenses) to net written premiums. The dividend ratio, using amounts
determined in accordance with GAAP, is the ratio of dividends incurred
to
net earned premiums. The dividend ratio, using amounts determined
in
accordance with SAP, is the ratio of dividends paid to net earned
premiums. The combined ratio is the sum of the loss and loss adjustment
expense, expense and dividend
ratios.
|
Item
1. Business
|
CNA
Financial Corporation -
(Continued)
|
(b)
|
Other
data is determined in accordance with SAP. Life and group statutory
capital and surplus as a percent of total liabilities is determined
after
excluding separate account liabilities and reclassifying the statutorily
required Asset Valuation Reserve to
surplus.
|
(c)
|
Surplus
includes the property and casualty companies’ equity ownership of the life
company’s capital and surplus.
|
The
following table displays the distribution of gross written premiums for CNA’s
operations by geographic concentration.
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
California
|
|
|
9.6
|
%
|
|
9.0
|
%
|
|
9.3
|
%
|
Florida
|
|
|
7.9
|
|
|
7.1
|
|
|
7.1
|
|
New
York
|
|
|
7.3
|
|
|
7.9
|
|
|
7.9
|
|
Texas
|
|
|
5.9
|
|
|
5.7
|
|
|
5.4
|
|
New
Jersey
|
|
|
4.4
|
|
|
3.8
|
|
|
5.3
|
|
Illinois
|
|
|
4.1
|
|
|
4.2
|
|
|
5.1
|
|
Pennsylvania
|
|
|
3.4
|
|
|
4.2
|
|
|
4.7
|
|
United
Kingdom
|
|
|
3.2
|
|
|
2.8
|
|
|
2.3
|
|
Missouri
|
|
|
3.0
|
|
|
2.8
|
|
|
1.4
|
|
Massachusetts
|
|
|
2.4
|
|
|
3.3
|
|
|
3.2
|
|
All
other states, countries or political subdivisions (a)
|
|
|
48.8
|
|
|
49.2
|
|
|
48.3
|
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
(a)
|
No
other individual state, country or political subdivision accounts
for more
than 3.0% of gross written
premiums.
|
Approximately
7.1%, 6.1% and 5.0% of CNA’s gross written premiums were derived from outside of
the United States for the years ended December 31, 2006, 2005 and 2004. Premiums
from any individual foreign country excluding the United Kingdom were not
significant.
Property
and Casualty Claim and Claim Adjustment Expenses
The
following loss reserve development table illustrates the change over time
of
reserves established for property and casualty claim and claim adjustment
expenses at the end of the preceding ten calendar years for CNA’s property and
casualty insurance operations. The table excludes CNA’s life subsidiaries, and
as such, the carried reserves will not agree to the Consolidated Financial
Statements included under Item 8. The first section shows the reserves as
originally reported at the end of the stated year. The second section, reading
down, shows the cumulative amounts paid as of the end of successive years
with
respect to the originally reported reserve liability. The third section,
reading
down, shows re-estimates of the originally recorded reserves as of the end
of
each successive year, which is the result of CNA’s property and casualty
insurance subsidiaries’ expanded awareness of additional facts and circumstances
that pertain to the unsettled claims. The last section compares the latest
re-estimated reserves to the reserves originally established, and indicates
whether the original reserves were adequate or inadequate to cover the estimated
costs of unsettled claims.
Item
1. Business
|
CNA
Financial Corporation -
(Continued)
|
The
loss
reserve development table for property and casualty companies is cumulative
and,
therefore, ending balances should not be added since the amount at the end
of
each calendar year includes activity for both the current and prior years.
Additionally, the development amounts in the table below are the amounts
prior
to consideration of any related reinsurance bad debt allowance
impacts.
|
|
Schedule
of Loss Reserve Development
|
|
Year
Ended December 31
|
|
1996
|
|
1997
|
|
1998
|
|
1999(a)
|
|
2000
|
|
2001(b)
|
|
2002(c)
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originally
reported gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves
for unpaid claim
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
claim
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses
|
|
|
29,559
|
|
|
28,731
|
|
|
28,506
|
|
|
26,850
|
|
|
26,510
|
|
|
29,649
|
|
|
25,719
|
|
|
31,284
|
|
|
31,204
|
|
|
30,694
|
|
|
29,459
|
|
Originally
reported ceded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
recoverable
|
|
|
5,385
|
|
|
5,056
|
|
|
5,182
|
|
|
6,091
|
|
|
7,333
|
|
|
11,703
|
|
|
10,490
|
|
|
13,847
|
|
|
13,682
|
|
|
10,438
|
|
|
8,078
|
|
Originally
reported net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
unpaid claim and claim
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
expenses
|
|
|
24,174
|
|
|
23,675
|
|
|
23,324
|
|
|
20,759
|
|
|
19,177
|
|
|
17,946
|
|
|
15,229
|
|
|
17,437
|
|
|
17,522
|
|
|
20,256
|
|
|
21,381
|
|
Cumulative
net paid as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
year later
|
|
|
5,851
|
|
|
5,954
|
|
|
7,321
|
|
|
6,547
|
|
|
7,686
|
|
|
5,981
|
|
|
5,373
|
|
|
4,382
|
|
|
2,651
|
|
|
3,442
|
|
|
-
|
|
Two
years later
|
|
|
9,796
|
|
|
11,394
|
|
|
12,241
|
|
|
11,937
|
|
|
11,992
|
|
|
10,355
|
|
|
8,768
|
|
|
6,104
|
|
|
4,963
|
|
|
-
|
|
|
-
|
|
Three
years later
|
|
|
13,602
|
|
|
14,423
|
|
|
16,020
|
|
|
15,256
|
|
|
15,291
|
|
|
12,954
|
|
|
9,747
|
|
|
7,780
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Four
years later
|
|
|
15,793
|
|
|
17,042
|
|
|
18,271
|
|
|
18,151
|
|
|
17,333
|
|
|
13,244
|
|
|
10,870
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Five
years later
|
|
|
17,736
|
|
|
18,568
|
|
|
20,779
|
|
|
19,686
|
|
|
17,775
|
|
|
13,922
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Six
years later
|
|
|
18,878
|
|
|
20,723
|
|
|
21,970
|
|
|
20,206
|
|
|
18,970
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Seven
years later
|
|
|
20,828
|
|
|
21,649
|
|
|
22,564
|
|
|
21,231
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Eight
years later
|
|
|
21,609
|
|
|
22,077
|
|
|
23,453
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Nine
years later
|
|
|
21,986
|
|
|
22,800
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Ten
years later
|
|
|
22,642
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
reserves re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of initial year
|
|
|
24,174
|
|
|
23,675
|
|
|
23,324
|
|
|
20,759
|
|
|
19,177
|
|
|
17,946
|
|
|
15,229
|
|
|
17,437
|
|
|
17,522
|
|
|
20,256
|
|
|
21,381
|
|
One
year later
|
|
|
23,970
|
|
|
23,904
|
|
|
24,306
|
|
|
21,163
|
|
|
21,502
|
|
|
17,980
|
|
|
17,650
|
|
|
17,671
|
|
|
18,513
|
|
|
20,588
|
|
|
-
|
|
Two
years later
|
|
|
23,610
|
|
|
24,106
|
|
|
24,134
|
|
|
23,217
|
|
|
21,555
|
|
|
20,533
|
|
|
18,248
|
|
|
19,120
|
|
|
19,044
|
|
|
-
|
|
|
-
|
|
Three
years later
|
|
|
23,735
|
|
|
23,776
|
|
|
26,038
|
|
|
23,081
|
|
|
24,058
|
|
|
21,109
|
|
|
19,814
|
|
|
19,760
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Four
years later
|
|
|
23,417
|
|
|
25,067
|
|
|
25,711
|
|
|
25,590
|
|
|
24,587
|
|
|
22,547
|
|
|
20,384
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Five
years later
|
|
|
24,499
|
|
|
24,636
|
|
|
27,754
|
|
|
26,000
|
|
|
25,594
|
|
|
22,983
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Six
years later
|
|
|
24,120
|
|
|
26,338
|
|
|
28,078
|
|
|
26,625
|
|
|
26,023
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Seven
years later
|
|
|
25,629
|
|
|
26,537
|
|
|
28,437
|
|
|
27,009
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Eight
years later
|
|
|
25,813
|
|
|
26,770
|
|
|
28,705
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Nine
years later
|
|
|
26,072
|
|
|
26,997
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Ten
years later
|
|
|
26,305
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
net (deficiency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
redundancy
|
|
|
(2,131
|
)
|
|
(3,322
|
)
|
|
(5,381
|
)
|
|
(6,250
|
)
|
|
(6,846
|
)
|
|
(5,037
|
)
|
|
(5,155
|
)
|
|
(2,323
|
)
|
|
(1,522
|
)
|
|
(332
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
re-estimated
reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
reserves re-estimated
|
|
|
26,305
|
|
|
26,997
|
|
|
28,705
|
|
|
27,009
|
|
|
26,023
|
|
|
22,983
|
|
|
20,384
|
|
|
19,760
|
|
|
19,044
|
|
|
20,588
|
|
|
-
|
|
Re-estimated
ceded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
recoverable
|
|
|
7,619
|
|
|
6,953
|
|
|
7,469
|
|
|
9,810
|
|
|
10,541
|
|
|
15,939
|
|
|
15,298
|
|
|
13,722
|
|
|
12,624
|
|
|
10,094
|
|
|
-
|
|
Total
gross re-estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves
|
|
|
33,924
|
|
|
33,950
|
|
|
36,174
|
|
|
36,819
|
|
|
36,564
|
|
|
38,922
|
|
|
35,682
|
|
|
33,482
|
|
|
31,668
|
|
|
30,682
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(deficiency) redundancy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos
claims
|
|
|
(2,461
|
)
|
|
(2,361
|
)
|
|
(2,120
|
)
|
|
(1,544
|
)
|
|
(1,479
|
)
|
|
(707
|
)
|
|
(707
|
)
|
|
(65
|
)
|
|
(11
|
)
|
|
-
|
|
|
-
|
|
Environmental
and mass tort
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
claims
|
|
|
(807
|
)
|
|
(834
|
)
|
|
(618
|
)
|
|
(722
|
)
|
|
(716
|
)
|
|
(256
|
)
|
|
(263
|
)
|
|
(117
|
)
|
|
(116
|
)
|
|
(63
|
)
|
|
-
|
|
Total
asbestos, environmental
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
mass tort
|
|
|
(3,268
|
)
|
|
(3,195
|
)
|
|
(2,738
|
)
|
|
(2,266
|
)
|
|
(2,195
|
)
|
|
(963
|
)
|
|
(970
|
)
|
|
(182
|
)
|
|
(127
|
)
|
|
(63
|
)
|
|
-
|
|
Other
claims
|
|
|
1,137
|
|
|
(127
|
)
|
|
(2,643
|
)
|
|
(3,984
|
)
|
|
(4,651
|
)
|
|
(4,074
|
)
|
|
(4,185
|
)
|
|
(2,141
|
)
|
|
(1,395
|
)
|
|
(269
|
)
|
|
-
|
|
Total
net (deficiency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
redundancy
|
|
|
(2,131
|
)
|
|
(3,322
|
)
|
|
(5,381
|
)
|
|
(6,250
|
)
|
|
(6,846
|
)
|
|
(5,037
|
)
|
|
(5,155
|
)
|
|
(2,323
|
)
|
|
(1,522
|
)
|
|
(332
|
)
|
|
-
|
|
(a) |
Ceded
recoverable includes reserves transferred under retroactive reinsurance
agreements of $784.0 as of December 31,
1999.
|
(b) |
Effective
January 1, 2001, CNA established a new life insurance company,
CNA Group
Life Assurance Company (“CNAGLA”). Further, on January 1, 2001
approximately $1,055.0 of reserves were transferred from CCC
to
CNAGLA.
|
(c) |
Effective
October 31, 2002, CNA sold CNA Reinsurance Company Limited (“CNA Re
U.K.”). As a result of the sale, net reserves were reduced by
approximately $1,316.0.
|
Item
1. Business
|
CNA
Financial Corporation -
(Continued)
|
Please
read information relating to CNA’s property and casualty claim and claim
adjustment expense reserves and reserve development set forth in Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”), and in Notes 1 and 9 of the Notes to Consolidated
Financial Statements, included in Item 8.
Investments
Please
read Item 7, MD&A - Investments and Notes 1, 2, 3 and 4 of the Notes to
Consolidated Financial Statements, included in Item 8.
Other
Competition: The
property and casualty insurance industry is highly competitive both as to
rate
and service. CNA’s consolidated property and casualty subsidiaries compete not
only with other stock insurance companies, but also with mutual insurance
companies, reinsurance companies and other entities for both producers and
customers. CNA must continuously allocate resources to refine and improve
its
insurance products and services.
Rates
among insurers vary according to the types of insurers and methods of operation.
CNA competes for business not only on the basis of rate, but also on the
basis
of availability of coverage desired by customers, ratings and quality of
service, including claim adjustment services.
There
are
approximately 2,400 individual companies that sell property and casualty
insurance in the United States. CNA’s consolidated property and casualty
subsidiaries ranked as the 13th largest property and casualty insurance
organization and CNA is the seventh largest commercial insurance writer in
the
United States based upon 2005 statutory net written premiums.
Regulation: The
insurance industry is subject to comprehensive and detailed regulation and
supervision throughout the United States. Each state has established supervisory
agencies with broad administrative powers relative to licensing insurers
and
agents, approving policy forms, establishing reserve requirements, fixing
minimum interest rates for accumulation of surrender values and maximum interest
rates of policy loans, prescribing the form and content of statutory financial
reports and regulating solvency and the type and amount of investments
permitted. Such regulatory powers also extend to premium rate regulations,
which
require that rates not be excessive, inadequate or unfairly discriminatory.
In
addition to regulation of dividends by insurance subsidiaries, intercompany
transfers of assets may be subject to prior notice or approval by the state
insurance regulators, depending on the size of such transfers and payments
in
relation to the financial position of the insurance affiliates making the
transfer or payment.
Insurers
are also required by the states to provide coverage to insureds who would
not
otherwise be considered eligible by the insurers. Each state dictates the
types
of insurance and the level of coverage that must be provided to such involuntary
risks. CNA’s share of these involuntary risks is mandatory and generally a
function of its respective share of the voluntary market by line of insurance
in
each state.
Further,
insurance companies are subject to state guaranty fund and other
insurance-related assessments. Guaranty fund and other insurance-related
assessments are levied by the state departments of insurance to cover claims
of
insolvent insurers.
Reform
of
the U.S. tort liability system is another issue facing the insurance industry.
Over the last decade, many states have passed some type of reform. In recent
years, for example, significant state general tort reforms have been enacted
in
Georgia, Ohio, Mississippi and South Carolina. Specific state legislation
addressing state asbestos reform has been passed in Ohio, Georgia, Florida
and
Texas. A few more states will be considering such legislation in the coming
year. Although these states’ legislatures have begun to address their litigious
environments, some reforms are being challenged in the courts and it will
take
some time before they are finalized. Even though there has been some tort
reform
success, new causes of action and theories of damages continue to be proposed
in
state court actions or by legislatures. As a result of this unpredictability
in
the law, insurance underwriting and rating is expected to continue to be
difficult in commercial lines, professional liability and some specialty
coverages.
Item
1. Business
|
CNA
Financial Corporation -
(Continued)
|
Although
the federal government and its regulatory agencies do not directly regulate
the
business of insurance, federal legislative and regulatory initiatives can
impact
the insurance industry in a variety of ways. These initiatives and legislation
include tort reform proposals; proposals addressing natural catastrophe
exposures, terrorism risk mechanisms; and various tax proposals affecting
insurance companies. In 1999, Congress passed the Financial Services
Modernization or “Gramm-Leach-Bliley” Act (“GLB Act”), which repealed portions
of the Glass-Steagall Act and enabled closer relationships between banks
and
insurers. Although “functional regulation” was preserved by the GLB Act for
state oversight of insurance, additional financial services modernization
legislation could include provisions for an alternate federal system of
regulation for insurance companies.
In
addition, CNA’s domestic insurance subsidiaries are subject to risk-based
capital requirements. Risk-based capital is a method developed by the National
Association of Insurance Commissioners (“NAIC”) to determine the minimum amount
of statutory capital appropriate for an insurance company to support its
overall
business operations in consideration of its size and risk profile. The formula
for determining the amount of risk-based capital specifies various factors,
weighted based on the perceived degree of risk, which are applied to certain
financial balances and financial activity. The adequacy of a company’s actual
capital is evaluated by a comparison to the risk-based capital results, as
determined by the formula. Companies below minimum risk-based capital
requirements are classified within certain levels, each of which requires
specified corrective action. As of December 31, 2006 and 2005, all of CNA’s
domestic insurance subsidiaries exceeded the minimum risk-based capital
requirements.
Subsidiaries
with insurance operations outside the United States are also subject to
regulation in the countries in which they operate. CNA has operations in
the
United Kingdom, Canada and other countries.
Properties: The
333
S. Wabash Avenue building, located in Chicago, Illinois and owned by Continental
Assurance Company (“CAC”), a wholly-owned subsidiary of CCC, serves as the
executive office for CNA and its insurance subsidiaries. CNA owns or leases
office space in various cities throughout the United States and in other
countries. The following table sets forth certain information with respect
to
the principal office buildings owned or leased by CNA:
Location
|
Size
(square
feet)
|
|
Principal
Usage
|
|
|
|
|
333
S. Wabash
|
904,990
|
|
Principal
executive offices of CNA
|
Chicago,
Illinois
|
|
|
|
401
Penn Street
|
171,406
|
|
Property
and casualty insurance offices
|
Reading,
Pennsylvania
|
|
|
|
2405
Lucien Way
|
147,815
|
|
Property
and casualty insurance offices
|
Maitland,
Florida
|
|
|
|
40
Wall Street
|
110,131
|
|
Property
and casualty insurance offices
|
New
York, New York
|
|
|
|
675
Placentia Avenue
|
78,655
|
|
Property
and casualty insurance offices
|
Brea,
California
|
|
|
|
600
N. Pearl Street
|
75,544
|
|
Property
and casualty insurance offices
|
Dallas,
Texas
|
|
|
|
1100
Cornwall Road
|
74,067
|
|
Property
and casualty insurance offices
|
Monmouth
Junction, New Jersey
|
|
|
|
3175
Satellite Boulevard
|
48,696
|
|
Property
and casualty insurance offices
|
Duluth,
Georgia
|
|
|
|
405
Howard Street
|
47,195
|
|
Property
and casualty insurance offices
|
San
Francisco, California
|
|
|
|
4150
N. Drinkwater Boulevard
|
37,799
|
|
Property
and casualty insurance offices
|
Scottsdale,
Arizona
|
|
|
|
CNA
leases its office space described above except for the Chicago, Illinois
building and the Reading, Pennsylvania building, which are
owned.
LORILLARD,
INC.
Lorillard,
Inc. (“Lorillard”) is engaged, through its subsidiaries, in the production and
sale of cigarettes. The principal cigarette brand names of Lorillard are
Newport, Kent, True, Maverick and Old Gold. Lorillard’s largest selling brand is
Newport, the second largest selling cigarette brand in the United States
and the
largest selling brand in the menthol segment of the U.S. cigarette market
in
2006. Newport accounted for approximately 91.8% of Lorillard’s sales volume in
2006.
Substantially
all of Lorillard’s sales are in the United States, Puerto Rico and certain U.S.
territories. Lorillard’s major trademarks outside of the United States were sold
in 1977. Lorillard accounted for 21.54%, 22.70% and 22.22% of our consolidated
total revenue for the years ended December 31, 2006, 2005 and 2004,
respectively.
Legislation
and Regulation: Lorillard’s
business operations are subject to a variety of federal, state and local
laws
and regulations governing, among other things, publication of health warnings
on
cigarette packaging, advertising and sales of tobacco products, restrictions
on
smoking in public places and fire safety standards. New legislation and
regulations are proposed and reports are published by government sponsored
committees and others recommending additional regulation of tobacco
products.
Lorillard
cannot predict the ultimate outcome of these proposals, reports and
recommendations. If they are enacted, certain of these proposals could have
a
material adverse effect on Lorillard’s business and our financial position or
results of operations in the future.
Federal
Regulation: The
Federal Comprehensive Smoking Education Act, which became effective in 1985,
requires that cigarette packaging and advertising display one of the following
four warning statements, on a rotating basis:
(1)
“SURGEON GENERAL’S WARNING: Smoking Causes Lung Cancer, Heart Disease,
Emphysema, And May Complicate Pregnancy.”
(2)
“SURGEON GENERAL’S WARNING: Quitting Smoking Now Greatly Reduces Serious Risks
to Your Health.”
(3)
“SURGEON GENERAL’S WARNING: Smoking By Pregnant Women May Result in Fetal
Injury, Premature Birth, and Low Birth Weight.”
(4)
“SURGEON GENERAL’S WARNING: Cigarette Smoke Contains Carbon Monoxide.”
This
law
also requires that each person who manufactures, packages or imports cigarettes
shall annually provide to the Secretary of Health and Human Services a list
of
the ingredients added to tobacco in the manufacture of cigarettes. This list
of
ingredients may be submitted in a manner that does not identify the company
that
uses the ingredients or the brand of cigarettes that contain the
ingredients.
In
addition, bills have been introduced in Congress, including those that would:
|
·
|
prohibit
all tobacco advertising and
promotion;
|
|
·
|
require
new health warnings on cigarette packages and
advertising;
|
|
·
|
authorize
the establishment of various anti-smoking education
programs;
|
|
·
|
provide
that current federal law should not be construed to relieve any
person of
liability under common or state
law;
|
|
·
|
permit
state and local governments to restrict the sale and distribution
of
cigarettes;
|
|
·
|
direct
the placement of advertising of tobacco products;
|
|
·
|
provide
that cigarette advertising not be deductible as a business
expense;
|
Item
1. Business
|
Lorillard,
Inc. - (Continued)
|
|
·
|
prohibit
the mailing of unsolicited samples of cigarettes and otherwise
to restrict
the sale or distribution of cigarettes in retail stores, by mail
or over
the internet;
|
|
·
|
impose
an additional, or increase existing, excise taxes on
cigarettes;
|
|
·
|
require
that cigarettes be manufactured in a manner that will cause them,
under
certain circumstances, to be self-extinguishing;
and
|
|
·
|
subject
cigarettes to regulation in various ways by the U.S. Department
of Health
and Human Services or other regulatory
agencies.
|
In
1996,
the U.S. Food and Drug Administration (“FDA”) published regulations that would
have extensively regulated the distribution, marketing and advertising of
cigarettes, including the imposition of a wide range of labeling, reporting,
record keeping, manufacturing and other requirements. Challenges to the FDA’s
assertion of jurisdiction over cigarettes made by Lorillard and other
manufacturers were upheld by the U.S. Supreme Court in March of 2000 when
that
Court ruled that Congress did not give the FDA authority to regulate tobacco
products under the federal Food, Drug and Cosmetic Act.
Since
the
Supreme Court decision, various proposals and recommendations have been made
for
additional federal and state legislation to regulate cigarette manufacturers,
including a bill introduced by Congress in February 2007. Congressional
advocates of FDA regulation proposed legislation that would give the FDA
regulatory authority over the manufacture, sale, distribution and labeling
of
tobacco products to protect public health. The legislation would allow the
FDA
to reinstate its prior regulations or adopt new or additional
regulations.
In
February of 2001, a committee of the Institute of Medicine, a private,
non-profit organization which advises the federal government on medical issues,
convened and issued a report recommending that Congress enact legislation.
The
committee suggested enabling a suitable agency to regulate tobacco-related
products that purport to reduce exposure to tobacco toxicants or reduce risk
of
disease, and implement other policies designed to reduce the harm from tobacco
use. The report recommended regulation of all tobacco products, including
potentially reduced exposure products, known as PREPs.
In
2002,
certain public health groups petitioned the FDA to assert jurisdiction over
several PREP type products that have been introduced into the marketplace.
These
groups assert that claims made by manufacturers of these products allow the
FDA
to regulate the manufacture, advertising and sale of these products as drugs
or
medical devices under the Food Drug and Cosmetic Act. The agency has received
comments on these petitions but has taken no action.
In
late
2002 Philip Morris U.S.A., the largest U.S. manufacturer of cigarettes, filed
a
request for rulemaking petition with the Federal Trade Commission (“FTC”)
seeking changes in the existing FTC regulatory scheme for measuring and
reporting tar and nicotine to the federal government and for inclusion in
cigarette advertising. The agency has received comments on these petitions
but
has taken no action.
Environmental
tobacco smoke:
Various
publications and studies by governmental entities have reported that
environmental tobacco smoke (“ETS”) presents health risks. In addition, public
health organizations have issued statements on the adverse health effects
of
ETS, and scientific papers have been published that address the health problems
associated with ETS exposure. Various cities and municipalities have restricted
public smoking in recent years, and these restrictions have been based at
least
in part on the publications regarding the health risks believed to be associated
with ETS exposure.
The
governmental entities that have published these reports have included the
Surgeon General of the United States, first in 1986 and again in 2006. The
2006
report, for instance, concluded that there is no risk-free level of exposure
to
ETS; see “Risks Related to Us and Our Subsidiary, Lorillard, Inc.” of this
Report for a discussion of the report issued in 2006 by the United States
Surgeon General. In 2000, the Department of Health and Human Services listed
ETS
as a known human carcinogen. In 1993, the United States Environmental Protection
Agency concluded that ETS is a human lung carcinogen in adults and causes
respiratory effects in children.
Item
1. Business
|
Lorillard,
Inc. - (Continued)
|
Agencies
of state governments also have issued publications regarding ETS, including
reports by California entities that were published in 1997, 1999 and 2006.
In
the 2006 study, the California Air Resources Board determined that ETS is
a
toxic air contaminant. Based on these or other findings, public health concerns
regarding ETS could lead to the imposition of additional restriction on public
smoking, including bans.
State
and Local Regulation: Many
state, local and municipal governments and agencies, as well as private
businesses, have adopted legislation, regulations or policies which prohibit
or
restrict, or are intended to discourage, smoking, including legislation,
regulations or policies prohibiting or restricting smoking in various places
such as public buildings and facilities, stores, restaurants and bars and
on
airline flights and in the workplace. This trend has increased significantly
since the release of the EPA’s report regarding ETS in 1993.
Two
states, Massachusetts and Texas, have enacted legislation requiring each
manufacturer of cigarettes sold in those states to submit an annual report
identifying for each brand sold certain “added constituents,” and providing
nicotine yield ratings and other information for certain brands. Neither
law
allows for the public release of trade secret information.
A
New
York law requires cigarettes sold in that state to meet a mandated standard
for
ignition propensity, which became effective in June of 2004. Lorillard developed
proprietary technology to comply with the standards and was compliant by
the
effective date. Since the passage of the New York law, an additional five
states
have passed similar laws utilizing the same technical standards. The effective
dates of these laws range from May of 2006 to January 2008.
Other
similar laws and regulations have been enacted or considered by other state
and
local governments. Lorillard cannot predict the impact which these regulations
may have on Lorillard’s business, though if enacted, they could have a material
adverse effect on Lorillard’s business and our financial position or results of
operations in the future.
Excise
Taxes and Assessments: Cigarettes
are subject to substantial federal, state and local excise taxes in the United
States and, in general, such taxes have been increasing. The federal excise
tax
on cigarettes is $19.50 per thousand cigarettes (or $0.39 per pack of 20
cigarettes). State excise taxes, which are levied upon and paid by the
distributors, are also in effect in the fifty states, the District of Columbia
and many municipalities. Increases in state excise taxes on cigarette sales
in
2006 ranged from $0.05 per pack to $1.00 per pack in six states and two
municipalities. The average state excise tax increased to $0.96 per pack
(of 20
cigarettes) in 2006 from $0.92 in 2005. Proposals for additional increases
in
federal, state and local excise taxes continue to be considered. The combined
state and municipal taxes range from $0.07 to $3.66 per pack of cigarettes.
A
federal
law enacted in October 2004 repealed the federal supply management program
for
tobacco growers and compensated tobacco quota holders and growers with payments
to be funded by an assessment on tobacco manufacturers and importers. Cigarette
manufacturers and importers are responsible for paying 96.3% of a $10.14
billion
payment to tobacco quota holders and growers over a ten-year period. The
law
provides that payments will be based on shipments for domestic
consumption.
Advertising
and Marketing: Lorillard
advertises its products to adult smokers in magazines, newspapers, direct
mail
and point-of-sale display materials. In addition, Lorillard promotes its
cigarette brands to adult smokers through distribution of store coupons,
retail
price promotions, and personal contact with distributors and retailers. Although
Lorillard’s sales are made primarily to wholesale distributors rather than
retailers, Lorillard’s sales personnel monitor retail and wholesale inventories,
work with retailers on displays and signs, and enter into promotional
arrangements with retailers regularly.
Lorillard
allocates its marketing expenditures among brands on the basis of marketplace
opportunity and profitable return. In particular, Lorillard focuses its
marketing efforts on the premium segment of the U.S. cigarette industry,
with a
specific focus on Newport.
Advertising
of tobacco products through television and radio has been prohibited since
1971.
In addition, on November 23, 1998, Lorillard and the three other largest
cigarette manufacturers entered into a Master Settlement Agreement (“MSA”) with
46 states, the District of Columbia, the Commonwealth of Puerto Rico and
certain
other U.S. territories to settle certain health care cost recovery and other
claims. These manufacturers had previously settled similar claims brought
by the four remaining states which together with the MSA are generally referred
to as the “State
Item
1. Business
|
Lorillard,
Inc. - (Continued)
|
Settlement
Agreements.” Under the State Settlement Agreements, the participating cigarette
manufacturers agreed to severe restrictions on their advertising and promotion
activities. Among other things, the MSA:
|
·
|
prohibits
the targeting of youth in the advertising, promotion or marketing
of
tobacco products;
|
|
·
|
bans
the use of cartoon characters in all tobacco advertising and
promotion;
|
|
·
|
limits
each tobacco manufacturer to one event sponsorship during any twelve-month
period, which may not include major team sports or events in which
the
intended audience includes a significant percentage of
youth;
|
|
·
|
bans
all outdoor advertising of tobacco products with the exception
of small
signs at retail establishments that sell tobacco
products;
|
|
·
|
bans
tobacco manufacturers from offering or selling apparel and other
merchandise that bears a tobacco brand name, subject to specified
exceptions;
|
|
·
|
prohibits
the distribution of free samples of tobacco products except within
adult-only facilities;
|
|
·
|
prohibits
payments for tobacco product placement in various media; and
|
|
·
|
bans
gift offers based on the purchase of tobacco products without sufficient
proof that the intended gift recipient is an
adult.
|
Many
states, cities and counties have enacted legislation or regulations further
restricting tobacco advertising. There may be additional local, state and
federal legislative and regulatory initiatives relating to the advertising
and
promotion of cigarettes in the future. Lorillard cannot predict the impact
of
such initiatives on its marketing and sales efforts.
Lorillard
funds a Youth Smoking Prevention Program, which is designed to discourage
youth
from smoking by promoting parental involvement and assisting parents in
discussing the issue of smoking with their children. Lorillard is also a
founding and principal member of the Coalition for Responsible Tobacco Retailing
which through its “We Card” program trains retailers in how to prevent the
purchase of cigarettes by underage persons. In addition, Lorillard has adopted
guidelines established by the National Association of Attorneys General to
restrict advertising in magazines with large readership among people under
the
age of 18.
Distribution
Methods: Lorillard
sells its products primarily to distributors, who in turn service retail
outlets; chain store organizations; and government agencies, including the
U.S.
Armed Forces. Upon completion of the manufacturing process, Lorillard ships
cigarettes to public distribution warehouse facilities for rapid order
fulfillment to wholesalers and other direct buying customers. Lorillard retains
a portion of its manufactured cigarettes at its Greensboro central distribution
center and Greensboro cold-storage facility for future finished goods
replenishment.
As
of
December 31, 2006, Lorillard had approximately 633 direct buying customers
servicing more than 400,000 retail accounts. Lorillard does not sell cigarettes
directly to consumers. During 2006, 2005 and 2004, sales made by Lorillard
to
McLane Company, Inc., comprised 23%, 21% and 20%, respectively, of Lorillard’s
revenues. No other customer accounted for more than 10% of 2006, 2005 or
2004
sales. Lorillard does not have any backlog orders.
Most
of
Lorillard’s customers buy cigarettes on a next-day-delivery basis. Approximately
90% of Lorillard’s customers purchase cigarettes using electronic funds
transfer, which provides immediate payment to Lorillard.
Raw
Materials and Manufacturing: In
its
production of cigarettes, Lorillard uses domestic and foreign grown burley
and
flue-cured leaf tobaccos, as well as aromatic tobaccos grown primarily in
Turkey
and other Near Eastern countries. A domestic supplier manufactures all of
Lorillard’s reconstituted tobacco.
Lorillard
purchases more than 90% of its domestic leaf tobacco from Alliance One
International, Inc. Lorillard directs Alliance One in the purchase of tobacco
according to Lorillard’s specifications for quality, grade, yield, particle
size, moisture content, and other characteristics. Alliance One purchases
and
processes the whole leaf and then dries and packages it for shipment to and
storage at Lorillard’s Danville, Virginia facility. If Alliance One becomes
unwilling or
Item
1. Business
|
Lorillard,
Inc. - (Continued)
|
unable
to
supply leaf tobacco to Lorillard, Lorillard believes that it can readily
obtain
high-quality leaf tobacco from well-established, alternative industry
sources.
Due
to
the varying size and quality of annual crops and other economic factors,
tobacco
prices have historically fluctuated. In 2004, a federal law eliminated
historical U.S. price supports that accompanied production controls which
inflated the market price of U.S. tobacco. Lorillard believes the elimination
of
production controls and price supports has favorably impacted the cost of
U.S.
tobacco.
Lorillard
stores its tobacco in 29 storage warehouses on its 130-acre Danville, Virginia
facility. To protect against loss, amounts of all types and grades of tobacco
are stored in separate warehouses. Because of the aging requirements for
tobacco, Lorillard maintains large quantities of leaf tobacco at all times.
Lorillard believes its current tobacco supplies are adequately balanced for
its
present production requirements. If necessary, Lorillard can purchase aged
tobacco in the open market to supplement existing inventories.
Lorillard
produces cigarettes at its Greensboro, North Carolina manufacturing plant,
which
has a production capacity of approximately 185 million cigarettes per day
and
approximately 43 billion cigarettes per year. Through various automated systems
and sensors, Lorillard actively monitors all phases of production to promote
quality and compliance with applicable regulations.
Prices:
Lorillard
believes that the volume of U.S. cigarette sales is sensitive to price changes.
Changes in pricing by Lorillard or other cigarette manufacturers could have
an
adverse impact on Lorillard’s volume of units sold and consequently on
Lorillard’s profits and earnings. Lorillard makes independent pricing decisions
based on a number of factors. Lorillard cannot predict the potential adverse
impact of price changes on the following:
|
·
|
industry
volume or Lorillard volume,
|
|
·
|
the
mix between premium and discount
sales,
|
|
·
|
Lorillard’s
market share or
|
|
·
|
Lorillard’s
profits and earnings.
|
In
addition, Lorillard and other cigarette manufacturers engage in significant
promotional activities. These sales promotion costs are accounted for as
a
reduction in net sales revenue and therefore impact average prices.
Properties:
Lorillard’s
manufacturing facility is located on approximately 80 acres in Greensboro,
North
Carolina. This 942,600 square-foot plant contains modern high-speed cigarette
manufacturing machinery. The Greensboro facility also includes a warehouse
with
shipping and receiving areas totaling 54,800 square feet. In addition, Lorillard
owns tobacco receiving and storage facilities totaling approximately 1,400,000
square feet in Danville, Virginia. Lorillard’s executive offices are located in
a 130,000 square-foot, four-story office building in Greensboro. Its 93,800
square-foot research facility is also located in Greensboro.
Lorillard’s
principal properties are owned in fee. With minor exceptions, Lorillard owns
all
of the machinery it uses. Lorillard believes that its properties and machinery
are in generally good condition. Lorillard leases sales offices in major
cities
throughout the United States, a cold-storage facility in Greensboro and
warehousing space in 21 public distributing warehouses located throughout
the
United States.
Competition:
The
domestic U.S. market for cigarettes is highly competitive. Competition is
primarily based on a brand’s price, including level of discounting and other
promotional activities, positioning, consumer loyalty, retail display, quality
and taste. Lorillard’s principal competitors are the two other major U.S.
cigarette manufacturers, Philip Morris (“PM”) and Reynolds American Inc.
(“RAI”).
Lorillard
believes its ability to compete even more effectively has been restrained
by the
Philip Morris Retail Leaders program and the combination of RJ Reynolds Tobacco
Company (“RJR”) and Brown & Williamson (“B&W”) in 2004. The terms of
Philip Morris’ merchandising contracts may effectively limit Lorillard from
obtaining visible space in the
Item
1. Business
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Lorillard,
Inc. - (Continued)
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retail
store to effectively promote its brands. As a result, in a large number of
retail locations, Lorillard either has a severely limited or no opportunity
to
competitively support its promotion programs which limits its sales
potential.
Lorillard’s
9.7% market share of the 2006 U.S. domestic cigarette industry was third
highest
overall. Philip Morris and RAI accounted for approximately 49.2% and 27.9%,
respectively, of wholesale shipments in 2006. Among the three major
manufacturers, Lorillard ranked third behind Philip Morris and RAI with a
12.7%
share of the premium segment in 2006.
Please
read Item 1A, Risk Factors and Item 7, MD&A - Results of Operations -
Lorillard for information regarding the business environment, including selected
market share data for Lorillard.
BOARDWALK
PIPELINE PARTNERS, LP
Boardwalk
Pipeline Partners, LP (“Boardwalk Pipeline”) is engaged in the interstate
transportation and storage of natural gas. Boardwalk Pipeline accounted for
3.45%, 3.57% and 1.74% of our consolidated total revenue for the years ended
December 31, 2006, 2005 and 2004, respectively.
In
November of 2005, Boardwalk Pipeline completed an initial public offering
of
15,000,000 common units representing a 14.5% limited partnership interest.
We
owned 53,256,122 common and 33,093,878 subordinated units representing an
aggregate 83.5% limited partner interest, and a wholly owned subsidiary of
ours
became the general partner of Boardwalk Pipeline and owns a 2.0% general
partnership interest and all of Boardwalk Pipeline’s incentive distribution
rights, which entitle the general partner to an increasing percentage of
the
cash that is distributed by Boardwalk Pipeline in excess of $0.4025 per unit
per
quarter.
In
the
fourth quarter of 2006, Boardwalk Pipeline sold an additional 6,900,000 common
units at a price of $29.65 per unit in a public offering and received net
proceeds of $195.2 million. In addition, we contributed $4.2 million to maintain
our 2.0% general partner interest. As a result, as of December 31, 2006,
we own
80.2% of Boardwalk Pipeline.
Boardwalk
Pipeline owns and operates two interstate natural gas pipeline systems, with
approximately 13,400 miles of pipeline, directly serving customers in 11
states
and indirectly serving customers throughout the northeastern and southeastern
United States through numerous interconnections with unaffiliated pipelines.
In
2006, its pipeline systems transported approximately 1,340 billion cubic
feet
(“Bcf”) of gas. Average daily throughput on its pipeline systems during 2006 was
approximately 3.7 Bcf. Boardwalk Pipeline’s natural gas storage facilities are
comprised of 11 underground storage fields located in four states with aggregate
working gas capacity of approximately 146.0 Bcf.
Boardwalk
Pipeline conducts all of its operation through two subsidiaries:
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·
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Texas
Gas Transmission, LLC (“Texas Gas”) operates approximately 5,900 miles of
natural gas pipeline located in Louisiana, Texas, Arkansas, Mississippi,
Tennessee, Kentucky, Indiana, Ohio, and Illinois having a peak-day
delivery capacity of approximately 3.2 Bcf per day, and nine natural
gas
storage fields located in Indiana and Kentucky with aggregate designated
working gas capacity of approximately 63.0
Bcf.
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·
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Gulf
South Pipeline, LP (“Gulf South”) operates approximately 7,500 miles of
natural gas pipeline, located in Texas, Louisiana, Mississippi,
Alabama
and Florida having a peak-day delivery capacity of approximately
3.5 Bcf
per day, and two natural gas storage fields located in Louisiana
and
Mississippi with aggregate designated working gas capacity of
approximately 83.0 Bcf.
|
Boardwalk
Pipeline transports and stores natural gas for a broad mix of customers,
including local distribution companies (“LDC”s), municipalities, interstate and
intrastate pipelines, direct industrial users, electric power generation
plants,
marketers and producers.
Seasonality:
Boardwalk Pipeline’s revenues are seasonal in nature and are affected by
weather and natural gas price volatility. Weather impacts natural gas demand
for
power generation and heating purposes, which in turn influences the value
of
transportation and storage across its pipeline systems. Colder than normal
winters or warmer than normal summers typically result in increased pipeline
transportation revenues. Natural gas prices are also volatile, influencing
drilling and production which can affect revenues from Boardwalk Pipeline’s
storage and parking and lending (“PAL”)
Item
1. Business
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Boardwalk
Pipeline Partners, LP -
(Continued)
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services.
Peak demand for natural gas occurs during the winter months, caused by the
heating load. During 2006, approximately 56.8% of Boardwalk’s total operating
revenues were realized in the first and fourth calendar quarters.
Regulation: The
Federal Energy Regulatory Commission (the
“FERC”) regulates pipelines under the Natural Gas Act of 1938 (“NGA”) and the
Natural Gas Policy Act of 1978. FERC regulates, among other things, the rates
and charges for the transportation and storage of natural gas in interstate
commerce, the extension, enlargement or abandonment of jurisdictional
facilities, and the financial accounting of certain regulated pipeline
companies. These rates are designed based on certain assumptions to allow
Boardwalk Pipeline the opportunity to recover its costs and earn a reasonable
return on equity, however, there is no assurance that Boardwalk Pipeline
will
recover these costs from its customers. Gulf South is permitted to charge
market-based storage rates pursuant to authority granted by the FERC. Boardwalk
Pipeline is also regulated by the United States Department of Transportation
(“DOT”) under the Natural Gas Pipeline Safety Act of 1968, as amended by Title
I
of the Pipeline Safety Act of 1979, which regulates safety requirements in
the
design, construction, operation and maintenance of interstate natural gas
pipelines.
Where
required, Texas Gas and Gulf South hold certificates of public convenience
and
necessity issued by the FERC covering their facilities, activities and services.
The FERC also prescribes accounting treatment for items for regulatory purposes
and may periodically audit the books and records of Texas Gas and Gulf
South.
The
maximum rates that may be charged by Boardwalk Pipeline for gas transportation
and, in the case of Texas Gas, for storage services, are established through
FERC ratemaking process. Key determinants in the rate-making process are
the
costs of providing service, the allowed rate of return on capital investments,
volume throughput assumptions, the allocation of costs and the rate design.
The
allowed rate of return must be approved by the FERC in each rate case. Texas
Gas
filed a rate case in 2005 which was settled in the second quarter of 2006.
Texas
Gas has no obligation to file a new rate case and is prohibited from placing
new
rates into effect prior to November 1, 2010. Gulf South has no obligation
to
file a new rate case.
Boardwalk
Pipeline’s operations are also subject to extensive federal, state and local
laws and regulations relating to protection of the environment. These laws
include, for example:
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·
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the
Clean Air Act, and analogous state laws which impose obligations
related
to air emissions;
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·
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the
Water Pollution Control Act, commonly referred to as the Clean
Water Act,
and analogous state laws which regulate discharge of wastewaters
from our
facilities into state and federal waters;
|
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·
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the
Comprehensive Environmental Response, Compensation and Liability
Act
commonly referred to as CERCLA, or the Superfund law, and analogous
state
laws which regulate the cleanup of hazardous substances; and
|
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·
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the
Resource Conservation and Recovery Act, and analogous state laws
which
impose requirements for the handling and discharge of solid and
hazardous
waste.
|
Competition:
Boardwalk Pipeline competes with numerous intrastate and interstate pipelines
throughout its service territory to provide transportation and storage services
for its customers. Competition is particularly strong in the Midwest and
Gulf
Coast states where Boardwalk Pipeline competes with numerous existing pipelines
and several new pipeline projects that are under way, including the proposed
Rockies Express Pipeline that would transport natural gas from northern Colorado
to eastern Ohio; the Heartland Gas Pipeline currently being constructed in
Indiana; the proposed Mid-Continent Express pipeline that would transport
gas
from Texas to Alabama; and the proposed Southeast Header Supply System that
would transport gas from Perryville, Louisiana to markets in Florida. The
principal elements of competition among pipelines are rates, terms of service,
access to supply and flexibility and reliability of service. In addition,
regulators’ continuing efforts to increase competition in the natural gas
industry have increased the natural gas transportation options of Boardwalk
Pipeline’s traditional customers. As a result, segmentation and capacity release
have created an active secondary market which increasingly competes with
its
pipeline services, particularly on its Texas Gas system.
Boardwalk
Pipeline’s business is, in part, dependent on the volumes of natural gas
consumed in the United States. Boardwalk Pipeline’s competitors attempt to
either attract new supply to their pipelines or attach new load to
their
Item
1. Business
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Boardwalk
Pipeline Partners, LP -
(Continued)
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pipelines,
including those that are currently connected to markets served by Boardwalk
Pipeline. Boardwalk Pipeline competes with these entities to maintain current
business levels and to serve new demand and markets. In addition, natural
gas
competes with other forms of energy available to its customers, including
electricity, coal and fuel oils.
Expansion
Projects: Boardwalk
Pipeline has constructed a 20.5 mile segment of 42-inch pipeline from Carthage,
Texas to Keatchie, Louisiana which was placed in service in December of 2006.
The current capacity of this loop is 120.0 MMcf per day.
Boardwalk
Pipeline is pursuing a pipeline expansion project consisting of 242 miles
of
42-inch pipeline from DeSoto Parish in western Louisiana to near Harrisville,
Mississippi and approximately 110,000 horsepower of new compression. The
expansion would add approximately 1.7 Bcf per day of new transmission capacity
to the Gulf South pipeline system. The natural gas to be transported on this
expansion will originate primarily from the Barnett Shale and Bossier Sands
producing regions of East Texas. The expansion will transport natural gas
to new
interstate pipeline interconnects in the Perryville, Louisiana area and existing
pipeline interconnects with other pipelines east of the Mississippi River.
This
project is supported by binding precedent agreements with customers who have
contracted, on a long-term basis (with a weighted average term of approximately
7 years), for 1.3 Bcf per day from Carthage, Texas with an option for an
additional 100.0 MMcf per day. On September 1, 2006, Boardwalk Pipeline filed
a
certificate application relating to this project with the FERC. Boardwalk
Pipeline expects this project to be in service during the fall of 2007.
Boardwalk
Pipeline is pursuing construction of a new interstate pipeline that will
begin
near Sherman, Texas and proceed to the Perryville, Louisiana area. The project
will be owned by a new subsidiary, which is referred to as Gulf Crossing
Pipeline, and will consist of approximately 355 miles of 42-inch pipeline
having
capacity of up to approximately 1.6 Bcf per day. Additionally, Gulf Crossing
Pipeline will enter into: (i) an operating lease for at least 1.1 Bcf per
day of
capacity on the Gulf South system (including on the Southeast Expansion and
a
portion of the East Texas and Mississippi Expansion) to make deliveries to
an
interconnect with Transcontinental Pipe Line Company (“Transco”) in Choctaw
County, Alabama and (ii) an operating lease with a third-party intrastate
pipeline which will bring certain gas supplies to its system. This project
is
supported by binding agreements with customers who have contracted for 1.1
Bcf
per day of capacity under firm contracts having terms of 5 to 10 years (with
a
weighted-average term of approximately 9.8 years), and options with certain
of
these customers for an additional 350.0 MMcf per day of capacity. Boardwalk
Pipeline anticipates making the required filings with the FERC by July of
2007
and for the project to be in service during the fourth quarter of 2008.
Boardwalk Pipeline is in negotiations with one of the foundation shippers
supporting this project concerning the purchase of 49.0% of the equity of
Gulf
Crossing Pipeline.
Boardwalk
Pipeline is pursuing a pipeline expansion extending the Gulf South pipeline
system from near Harrisville, Mississippi to an interconnect with Transco
in
Choctaw County, Alabama which will enhance its ability to deliver gas to
the
Northeast through other pipeline interconnects. This expansion will consist
of
approximately 112 miles of 42-inch pipeline having initial capacity of
approximately 1.2 Bcf per day expandable to as much as 2.0 Bcf per day to
accommodate volumes expected to come from the Gulf Crossing leased capacity
discussed above. In addition, Gulf South has executed an operating lease
with
Destin Pipeline Company to access markets in Florida. This project is supported
by binding agreements with customers who have contracted for 660.0 MMcf per
day
of capacity under firm contracts having terms of 5 to 10 years (with a
weighted-average term of 9.2 years), as well as the capacity leased to Gulf
Crossing discussed above. The certificate filing was made with the FERC in
December of 2006 and the project is anticipated to be in service during first
quarter of 2008.
Boardwalk
Pipeline is pursuing the construction of two laterals connected to its Texas
Gas
pipeline system to transport gas from the Fayetteville Shale area in Arkansas
to
markets directly and indirectly served by Texas Gas. The Fayetteville Lateral,
consisting of approximately 165 miles of 36-inch pipeline is anticipated
to have
an initial design capacity of 800.0 MMcf per day and a maximum design capacity
of 1.1 Bcf per day. This lateral will originate in Conway County, Arkansas
and
proceed southeast through the Bald Knob, Arkansas area to an interconnect
with
Texas Gas’s pipeline in Coahoma County, Mississippi. The Greenville Lateral,
consisting of approximately 95 miles of pipeline with an initial design capacity
of 750.0 MMcf per day, will originate at Texas Gas’s mainline near Greenville,
Mississippi and proceed east to the Kosciusko, Mississippi area. The Greenville
Lateral will allow customers to access additional markets primarily in the
Midwest, Northeast and Southeast, including the Henry Hub. Construction of
both
laterals is supported by a binding precedent agreement with Southwestern
Energy
Services Company, a wholly owned subsidiary of Southwestern Energy Company.
The
proposed extensions are subject to FERC approval. In December of 2006, the
FERC
granted Texas Gas’s request to initiate the pre-filing process for this project
and Boardwalk Pipeline anticipates
Item
1. Business
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Boardwalk
Pipeline Partners, LP -
(Continued)
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making
the required certificate filings with the FERC in June of 2007. Boardwalk
Pipeline expects the project to be in service during the first quarter of
2009.
The
total
cost of the pipeline expansion projects discussed above is expected to be
approximately $3.3 billion (before taking into account equity that would
be
contributed by the purchaser of a 49.0% interest in Gulf Crossing referred
to
above). Boardwalk Pipeline constantly seeks to optimize these projects to
reduce
the overall cost. However the actual cost to complete these projects may
exceed
Boardwalk Pipeline’s current estimate as a result of, among other things, higher
labor and material costs due to the large number of pipeline projects under
way
throughout the industry or Boardwalk Pipeline’s need to expand pipeline capacity
if it contracts for additional volumes. For a further discussion of the risks
associated with these projects, please read the section on Risk Factors in
Item
1A of this Report.
In
December of 2006, the FERC issued a certificate approving Texas Gas’s Phase II
storage expansion project which will expand the working gas capacity in its
western Kentucky storage complex by approximately 9.0 Bcf. This project is
supported by binding commitments from customers to contract on a long-term
basis
for the full additional capacity at Texas Gas’s maximum applicable rate.
Boardwalk Pipeline expects this project to cost approximately $40.7 million
and
to be in service by November of 2007. In December of 2006, Texas Gas commenced
an open season related to a potential third expansion of its storage facilities.
Texas Gas has signed one precedent agreement for 2.0 Bcf of capacity. The
ultimate size of the Phase III storage expansion will be determined, in part,
by
the open season. The Phase III storage expansion is subject to the FERC
approvals, including potential market-based rate authority for the new
additional storage capacity being created. Phase I of this project which
expanded working gas capacity by approximately 8.0 Bcf was completed and
in
service in November of 2005.
Boardwalk
Pipeline is currently developing an additional storage cavern near
Napoleonville, Louisiana. During mining operations, certain issues have arisen
causing the mining of the cavern to be suspended. Boardwalk Pipeline is
continuing to conduct operational integrity tests on the caverns. The tests
are
on-going but have been delayed due to lack of equipment availability needed
to
complete the testing. If the test results are favorable, Boardwalk Pipeline
expects the storage facilities to be in service perhaps as early as 2008
with
working gas capacity of 2.0 Bcf, reduced from 6.0 Bcf as originally designed.
If
the test results are not favorable, Boardwalk Pipeline will consider the
options
it has available, including developing a new cavern or the sale or abandonment
of the project.
Properties:
Boardwalk
Pipeline and Texas Gas are headquartered in approximately 108,000 square
feet of
office space in Owensboro, Kentucky in a building that is owned by Texas
Gas.
Gulf South has its headquarters in approximately 55,000 square feet of leased
office space located in Houston, Texas. Due to recent expansion activities,
and
the expiration in May of 2007 of the lease for Gulf South’s current office
space, Gulf South has signed a new ten-year lease for approximately 74,000
square feet of office space in a new location in Houston, Texas. Gulf South
will
begin moving in the new headquarters in April of 2007. Boardwalk Pipeline’s
operating subsidiaries own their respective pipeline systems in fee. A
substantial portion of these systems is constructed and maintained on property
owned by others pursuant to rights-of-way, easements, permits, licenses or
consents.
DIAMOND
OFFSHORE DRILLING, INC.
Diamond
Offshore Drilling Inc. (“Diamond Offshore”), is engaged, through its
subsidiaries, in the business of owning and operating drilling rigs that
are
used in the drilling of offshore oil and gas wells on a contract basis for
companies engaged in exploration and production of hydrocarbons. Diamond
Offshore owns 44 offshore rigs and also has two premium jack-up rigs currently
under construction. Diamond Offshore accounted for 11.74%, 8.07% and 5.49%
of
our consolidated total revenue for the years ended December 31, 2006, 2005
and
2004, respectively.
Diamond
Offshore owns and operates 30 semisubmersible rigs. Semisubmersible rigs
consist
of an upper working and living deck resting on vertical columns connected
to
lower hull members. Such rigs operate in a “semi-submerged” position, remaining
afloat, off bottom, in a position in which the lower hull is approximately
55
feet to 90 feet below the water line and the upper deck protrudes well above
the
surface. Semisubmersible rigs are typically anchored in position and remain
stable for drilling in the semi-submerged floating position due in part to
their
wave transparency characteristics at the water line. Semisubmersible rigs
can
also be held in position through the use of a computer controlled thruster
(“dynamic-positioning”) system to maintain the rig’s position over a drillsite.
Three semisubmersible rigs in Diamond Offshore’s fleet have this
capability.
Item
1. Business
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Diamond
Offshore Drilling, Inc. -
(Continued)
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Diamond
Offshore owns and operates nine high-specification semisubmersible rigs.
These
high specification semisubmersible rigs have high-capacity deck loads and
are
generally capable of working in water depths of 4,000 feet or greater or
in
harsh environments and have other advanced features, as compared to intermediate
semisubmersible rigs. As of January 29, 2007, seven of the nine
high-specification semisubmersible rigs were located in the U.S. Gulf of
Mexico
(“GOM”), while the remaining two high-specification semisubmersible rigs were
located offshore Brazil and Malaysia.
Diamond
Offshore owns and operates 21 intermediate semisubmersible rigs which generally
work in maximum water depths up to 4,000 feet and many have diverse capabilities
that enable them to provide both shallow and deep water service in the U.S.
and
in other markets outside the U.S. As of January 29, 2007, Diamond Offshore
had
19 intermediate semisubmersible rigs, drilling in various offshore locations
around the world. Five of these intermediate semisubmersible rigs were located
in the GOM; three were located offshore Mexico or in the Mexican GOM; four
were
located in the North Sea, two were located offshore Australia, two were located
offshore Brazil and one was located offshore each of New Zealand, Vietnam
and
Egypt.
In
2006,
Diamond Offshore began a major upgrade of the Ocean
Monarch,
a
Victory-class semisubmersible that it acquired in August 2005 for $20.0 million.
The modernized rig is being designed to operate in up to 10,000 feet of water
in
a moored configuration for an estimated cost of approximately $300.0 million.
Through December 31, 2006, Diamond Offshore had spent $33.9 million related
to
this project. The Ocean
Monarch
is
expected to be ready for deepwater service in the fourth quarter of
2008.
In
addition, the shipyard portion of the upgrade of the Ocean
Endeavor
has been
completed. The rig is currently undergoing sea trials and commissioning.
The
unit will remain in Singapore until the arrival of a heavy-lift vessel,
anticipated late in the first quarter of 2007, which will return the rig
to the
GOM. The Ocean
Endeavor is
expected to commence drilling operations in the GOM in mid-2007. Diamond
Offshore estimates that the total cost of the upgrade will be approximately
$253.0 million of which $208.4 million had been spent through December 31,
2006.
Diamond
Offshore owns and operates 13 jack-up drilling rigs. Jack-up rigs are mobile,
self-elevating drilling platforms equipped with legs that are lowered to
the
ocean floor until a foundation is established to support the drilling platform.
The rig hull includes the drilling rig, jacking system, crew quarters, loading
and unloading facilities, storage areas for bulk and liquid materials, heliport
and other related equipment. Diamond Offshore’s jack-up rigs are used for
drilling in water depths from 20 feet to 350 feet. The water depth limit
of a
particular rig is principally determined by the length of the rig’s legs. A
jack-up rig is towed to the drillsite with its hull riding in the sea, as
a
vessel, with its legs retracted. Once over a drillsite, the legs are lowered
until they rest on the seabed and jacking continues until the hull is elevated
above the surface of the water. After completion of drilling operations,
the
hull is lowered until it rests in the water and then the legs are retracted
for
relocation to another drillsite.
As
of
January 29, 2007, nine of Diamond Offshore’s jack-up rigs were located in the
GOM. Six of those rigs are independent-leg cantilevered units, two are
mat-supported cantilevered units, and one is a mat-supported slot unit. Of
Diamond Offshore’s four remaining jack-up rigs, three are internationally based
and are independent-leg cantilevered rigs; one was located offshore Indonesia,
one was located offshore Africa and the other rig was located offshore Qatar.
Diamond Offshore’s remaining jack-up rig was located in the Mexican GOM and is
also an independent-leg cantilever unit.
In
the
second quarter of 2005, Diamond Offshore entered into agreements to construct
two high-performance, premium jack-up rigs. The two new drilling units, the
Ocean
Scepter and
the
Ocean
Shield, are
being
constructed in Brownsville,
Texas and Singapore, respectively, at an aggregate expected cost of
approximately $320.0 million, including
drill pipe and capitalized interest, of which $176.1 million had been spent
through December 31, 2006. Each newbuild jack-up rig will be equipped with
a
70-foot cantilever package, capable of drilling depths of up to 35,000 feet
and
have a hook load capacity of two million pounds. Diamond Offshore expects
delivery of both of these units during the first quarter of 2008.
Diamond
Offshore has one drillship, the Ocean
Clipper,
which
was located offshore Brazil as of January 29, 2007. Drillships, which are
typically self-propelled, are positioned over a drillsite through the use
of
either an anchoring system or a dynamic-positioning system similar to those
used
on certain semisubmersible rigs. Deep water drillships compete in many of
the
same markets as do high-specification semisubmersible rigs.
Item
1. Business
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Diamond
Offshore Drilling, Inc -
(Continued)
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Markets:
The
principal markets for Diamond Offshore’s contract drilling services are the
following:
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the
Gulf of Mexico, including the United States and
Mexico;
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Europe,
principally in the United Kingdom, or U.K., and Norway;
|
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·
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the
Mediterranean Basin, including Egypt, Libya and Tunisia; and other
parts
of Africa;
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·
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South
America, principally in Brazil;
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·
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Australia
and Asia, including Malaysia, Indonesia and Vietnam;
and
|
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·
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the
Middle East, including Kuwait, Qatar and Saudi Arabia.
|
Diamond
Offshore actively markets its rigs worldwide. From time to time Diamond
Offshore’s fleet operates in various other markets throughout the world as the
market demands.
Diamond
Offshore believes its presence in multiple markets is valuable in many respects.
For example, Diamond Offshore believes that its experience with safety and
other
regulatory matters in the U.K. has been beneficial in Australia and in the
Gulf
of Mexico, while production experience gained through Brazilian and North
Sea
operations has potential application worldwide. Additionally, Diamond Offshore
believes its performance for a customer in one market segment or area enables
it
to better understand that customer’s needs and better serve that customer in
different market segments or other geographic locations.
Diamond
Offshore’s contracts to provide offshore drilling services vary in their terms
and provisions. Diamond Offshore typically obtains its contracts through
competitive bidding, although it is not unusual for Diamond Offshore to be
awarded drilling contracts without competitive bidding. Drilling contracts
generally provide for a basic drilling rate on a fixed dayrate basis regardless
of whether or not such drilling results in a productive well. Drilling contracts
may also provide for lower rates during periods when the rig is being moved
or
when drilling operations are interrupted or restricted by equipment breakdowns,
adverse weather conditions or other conditions beyond the control of Diamond
Offshore. Under dayrate contracts, Diamond Offshore generally pays the operating
expenses of the rig, including wages and the cost of incidental supplies.
Historically, dayrate contracts have accounted for a substantial portion
of
Diamond Offshore’s revenues. In addition, from time to time, Diamond Offshore’s
dayrate contracts may also provide for the ability to earn an incentive bonus
from its customers based upon performance.
A
dayrate
drilling contract generally extends over a period of time covering either
the
drilling of a single well or a group of wells, which Diamond Offshore refers
to
as a well-to-well contract, or a fixed term, which Diamond Offshore refers
to as
a term contract, and may be terminated by the customer in the event the drilling
unit is destroyed or lost or if drilling operations are suspended for a period
of time as a result of a breakdown of equipment or, in some cases, due to
other
events beyond the control of either party to the contract. In addition, certain
of Diamond Offshore’s contracts permit the customer to terminate the contract
early by giving notice, and in some circumstances may require the payment
of an
early termination fee by the customer. The contract term in many instances
may
also be extended by the customer exercising options for the drilling of
additional wells or for an additional length of time, generally at competitive
market rates and mutually agreeable terms at the time of the
extension.
Customers:
Diamond Offshore provides offshore drilling services to a customer base
that includes major and independent oil and gas companies and government-owned
oil companies. Several customers have accounted for 10.0% or more of Diamond
Offshore’s annual consolidated revenues, although the specific customers may
vary from year to year. During 2006, Diamond Offshore performed services
for 51
different customers with Anadarko Petroleum Corporation (which acquired
Kerr-McGee Oil & Gas Corporation, or Kerr-McGee, in mid-2006) and Petroleo
Brasileiro S.A., (“Petrobas”) accounting for 10.6% and 10.4% of Diamond
Offshore’s annual consolidation revenues, repectively. During 2005, Diamond
Offshore performed services for 53 different customers with Petrobras and
Kerr
McGee, accounting for 10.7% and 10.3% of Diamond Offshore’s annual total
consolidated revenues, respectively. During 2004, Diamond Offshore performed
services for 53 different customers with Petrobras and PEMEX-Exploracion
Y
Item
1. Business
|
Diamond
Offshore Drilling, Inc. -
(Continued)
|
Produccion,
or PEMEX, accounting for 12.6% and 10.5% of Diamond Offshore’s annual total
consolidated revenues, respectively.
Competition: The
offshore contract drilling industry is highly competitive and is influenced
by a
number of factors, including current and anticipated prices of oil and natural
gas, expenditures by oil and gas companies for exploration and development
of
oil and natural gas and the availability of drilling rigs.
Governmental
Regulation:
Diamond
Offshore’s operations are subject to numerous international, U.S., state and
local laws and regulations that relate directly or indirectly to Diamond
Offshore’s operations, including regulations controlling the discharge of
materials into the environment, requiring removal and clean-up under some
circumstances, or otherwise relating to the protection of the environment.
Operations
Outside the United States:
Diamond
Offshore’s operations outside the United States accounted for approximately
43.0%, 45.0% and 56.0% of Diamond Offshore’s total consolidated revenues for the
years ended December 31, 2006, 2005 and 2004, respectively.
Properties:
Diamond
Offshore owns an eight-story office building containing approximately 182,000
net rentable square feet on approximately 6.2 acres of land located in Houston,
Texas, where Diamond Offshore has its corporate headquarters, two buildings
totaling 39,000 square feet and 20 acres of land in New Iberia, Louisiana,
for
its offshore drilling warehouse and storage facility, and a 13,000 square
foot
building and five acres of land in Aberdeen, Scotland, for its North Sea
operations. Additionally, Diamond Offshore currently leases various office,
warehouse and storage facilities in Louisiana, Australia, Brazil, Indonesia,
Norway, The Netherlands, Malaysia, Qatar, Singapore and Mexico to support
its
offshore drilling operations.
LOEWS
HOTELS HOLDING CORPORATION
The
subsidiaries of Loews Hotels Holding Corporation (“Loews Hotels”), our wholly
owned subsidiary, presently operate the following 18 hotels. Loews Hotels
accounted for 2.07%, 2.19% and 2.07% of our consolidated total revenue for
the
years ended December 31, 2006, 2005 and 2004, respectively.
|
Number
of
|
|
Name
and Location
|
Rooms
|
Owned,
Leased or Managed
|
|
|
|
Loews
Annapolis
|
220
|
|
|
Owned
|
Annapolis,
Maryland
|
|
|
|
Loews
Coronado Bay Resort
|
440
|
|
|
Land
lease expiring 2034
|
San
Diego, California
|
|
|
|
Loews
Denver
|
185
|
|
|
Owned
|
Denver,
Colorado
|
|
|
|
Don
CeSar Beach Resort, a Loews Hotel
|
347
|
|
|
Management
contract (a)(b)
|
St.
Pete Beach, Florida
|
|
|
|
Hard
Rock Hotel,
|
650
|
|
|
Management
contract (c)
|
at
Universal Orlando
|
|
|
|
Orlando,
Florida
|
|
|
|
Loews
Lake Las Vegas Hotel
|
493
|
|
|
Management
contract (d)
|
Henderson,
Nevada
|
|
|
|
|
Loews
Le Concorde
|
405
|
|
|
Land
lease expiring 2069
|
Quebec
City, Canada
|
|
|
|
Loews
Miami Beach Hotel
|
790
|
|
|
Owned
|
Miami
Beach, Florida
|
|
|
|
Loews
New Orleans Hotel
|
285
|
|
|
Management
contract expiring 2018 (a)
|
New
Orleans, Louisiana
|
|
|
|
Loews
Philadelphia Hotel
|
585
|
|
|
Owned
|
Philadelphia,
Pennsylvania
|
|
|
|
The
Madison, a Loews Hotel
|
353
|
|
|
Management
contract expiring 2021 (a)
|
Washington,
D.C.
|
|
|
|
|
Portofino
Bay Hotel,
|
750
|
|
|
Management
contract (c)
|
at
Universal Orlando, a Loews Hotel
|
|
|
|
Orlando,
Florida
|
|
|
|
The
Regency, a Loews Hotel
|
350
|
|
|
Land
lease expiring 2013, with renewal option
|
New
York, New York
|
|
|
|
for
47 years
|
Royal
Pacific Resort
|
1,000
|
|
|
Management
contract (c)
|
at
Universal Orlando, a Loews Hotel
|
|
|
|
Orlando,
Florida
|
|
|
|
Loews
Santa Monica Beach
|
340
|
|
|
Management
contract expiring 2018, with
|
Santa
Monica, California
|
|
|
|
renewal
option for 5 years (a)
|
Loews
Vanderbilt Plaza
|
340
|
|
|
Owned
|
Nashville,
Tennessee
|
|
|
|
Loews
Ventana Canyon Resort
|
400
|
|
|
Management
contract expiring 2019 (a)
|
Tucson,
Arizona
|
|
|
|
Loews
Hotel Vogue
|
140
|
|
|
Owned
|
Montreal,
Canada
|
|
|
(a)
|
These
management contracts are subject to termination
rights.
|
(b)
|
A
Loews Hotels subsidiary is a 20% owner of the hotel, which is being
operated by Loews Hotels pursuant to a management
contract.
|
(c)
|
A
Loews Hotels subsidiary is a 50% owner of these hotels
located
at
the Universal
Orlando theme park,
through
a
joint venture
with Universal Studios and the Rank Group. The hotels are constructed
on
land leased by the joint
venture from the
resort’s owners and are being operated by Loews Hotels pursuant to a
management contract.
|
(d)
|
A
Loews Hotels subsidiary is a 25% owner of the hotel, which is being
operated by Loews Hotels pursuant to a management
contract.
|
Item
1. Business
|
Loews
Hotels Holding Corporation -
(Continued)
|
The
hotels owned by Loews Hotels are subject to mortgage indebtedness totaling
approximately $236.0 million at December 31, 2006 with interest rates ranging
from 4.5% to 6.3%, and maturing between 2007 and 2028. In addition, certain
hotels are held under leases which are subject to formula derived rental
increases, with rentals aggregating approximately $6.4 million for the year
ended December 31, 2006.
Competition
from other hotels and lodging facilities is vigorous in all areas in which
Loews
Hotels operates. The demand for hotel rooms in many areas is seasonal and
dependent on general and local economic conditions. Loews Hotels properties
also
compete with facilities offering similar services in locations other than
those
in which its hotels are located. Competition among luxury hotels is based
primarily on location and service. Competition among resort and commercial
hotels is based on price as well as location and service. Because of the
competitive nature of the industry, hotels must continually make expenditures
for updating, refurnishing and repairs and maintenance, in order to prevent
competitive obsolescence.
BULOVA
CORPORATION
Bulova
Corporation (“Bulova”) is engaged in the distribution and sale of watches and
clocks for consumer use. Bulova accounted for 1.17%, 1.16% and 1.16% of our
consolidated total revenue for the years ended December 31, 2006, 2005 and
2004,
respectively.
Bulova’s
principal watch brands are Bulova, Caravelle, Wittnauer and Accutron. Clocks
are
principally sold under the Bulova brand name. All watches and substantially
all
clocks are purchased from foreign suppliers. Bulova’s principal markets are the
United States, Canada and Mexico. Bulova’s product breakdown includes luxury
watch lines represented by Wittnauer and Accutron, a mid-priced watch line
represented by Bulova, and a lower-priced watch line represented by
Caravelle.
Properties:
Bulova
owns an 80,000 square foot facility in Woodside, New York which it uses for
executive and sales offices, watch distribution, service and warehouse purposes.
Bulova also owns 6,100 square feet of office space in Hong Kong which it
uses
for quality control and sourcing purposes. Bulova leases a 31,000 square
foot
facility in Toronto, Canada, which it uses for watch and clock sales and
service; and a 27,000 square foot office and manufacturing facility in Ontario,
Canada which it uses for its grandfather clock operations. Bulova also leases
facilities in Mexico City, Mexico, and Fribourg, Switzerland.
EMPLOYEE
RELATIONS
Including
our operating subsidiaries as described below, we employed approximately
21,600
persons at December 31, 2006. We, and our subsidiaries, have experienced
satisfactory labor relations.
CNA
employed approximately 9,800 employees.
Lorillard
employed approximately 2,800 persons. Approximately 1,000 of these employees
are
represented by labor unions covered by three collective bargaining
agreements.
Boardwalk
Pipeline employed approximately 1,150 persons, approximately 90 of which
are
covered by a collective bargaining agreement.
Diamond
Offshore employed approximately 4,800 persons including international crew
personnel furnished through independent labor contractors.
Loews
Hotels employed approximately 2,200 persons, approximately 760 of whom are
union
members covered under collective bargaining agreements.
Bulova
employed approximately 500 persons, approximately 150 of whom are union
members.
AVAILABLE
INFORMATION
Our
website address is www.loews.com.
We make
available, free of charge, through the website our Annual Report on Form
10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments
to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934,
as
amended, as soon as reasonably practicable after these reports are
electronically filed with or furnished to the Securities and Exchange Commission
(“SEC”). Copies of our Code of Business Conduct and Ethics, Corporate Governance
Guidelines, Audit Committee charter, Compensation Committee charter and
Nominating and Governance Committee charter have also been posted and are
available on our website.
Item
1A. RISK FACTORS.
Our
business faces many risks. We have described below some of the more significant
risks which we and our subsidiaries face. There may be additional risks that
we
do not yet know of or that we do not currently perceive to be significant
that
may also impact our business or the business of our subsidiaries.
Each
of
the risks and uncertainties described below could lead to events or
circumstances that have a material adverse effect on our business, results
of
operations, cash flows, financial condition or equity and/or the business,
results of operations, financial condition or equity of one or more of our
subsidiaries. In addition, the risks and uncertainties described below relating
to our Carolina Group stock and our Lorillard subsidiary could lead to a
material loss in the value of the Carolina Group stock.
You
should carefully consider and evaluate all of the information included in
this
Report and any subsequent reports we may file with the SEC or make available
to
the public before investing in any securities issued by us. Our subsidiaries,
CNA Financial Corporation, Diamond Offshore Drilling, Inc. and Boardwalk
Pipeline Partners, LP, are public companies and file reports with the SEC.
You
are also cautioned to carefully review and consider the information contained
in
the reports filed by those subsidiaries before investing in any of their
securities.
We
are a holding company and derive substantially all of our cash flow from
our
subsidiaries.
We
rely
upon our invested cash balances and distributions from our subsidiaries to
generate the funds necessary to meet our obligations and to declare and pay
any
dividends to holders of our common stock and Carolina Group stock. Our
subsidiaries are separate and independent legal entities and have no obligation,
contingent or otherwise, to make funds available to us, whether in the form
of
loans, dividends or otherwise. The ability of our subsidiaries to pay dividends
to us is also subject to, among other things, the availability of sufficient
funds in such subsidiaries, applicable state laws, including in the case
of the
insurance subsidiaries of CNA, laws and rules governing the payment of dividends
by regulated insurance companies. Claims of creditors of our subsidiaries
will
generally have priority as to the assets of such subsidiaries over our claims
and our creditors and shareholders.
In
prior years, we have restated our financial results and identified material
weaknesses in our internal control over financial
reporting.
In
May of
2005, we restated our financial results for prior years to correct CNA’s
accounting for several reinsurance contracts, primarily with a former affiliate,
and to correct CNA’s equity accounting for that affiliate. In February of 2006,
we restated our financial results for prior years to correct the accounting
for
discontinued operations acquired by CNA in its merger with The Continental
Corporation in 1995. In addition, in March of 2006, we restated our financial
results for prior years to correct classification errors within our Consolidated
Statements of Cash Flows.
As
a
result of the foregoing restatements, we identified material weaknesses in
our
internal control over financial reporting as of December 31, 2004 and 2005,
respectively. We also determined that our internal control over financial
reporting as of such dates was not effective. Our system of internal control
over financial reporting is a process designed to provide reasonable assurance
to our management, Audit Committee and Board of Directors regarding the
reliability of our financial reporting and the preparation and fair presentation
of our published financial statements. Pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002, and the implementing rules of the Securities
and
Exchange Commission,
the
periodic reports we file with the SEC include information on our system of
disclosure controls and procedures, as well as our overall internal control
over
financial reporting.
While
we
have remediated the referenced material weaknesses, if we fail to maintain
effective internal control over financial reporting, we could be scrutinized
by
regulators in a manner that extends beyond the SEC’s requests for information
relating to the restatements (as further described in the CNA risk factor
titled
CNA
is responding to subpoenas, interrogatories and inquiries relating to insurance
brokers and agents, contingent commissions and bidding practices, and certain
finite-risk insurance products
below).
We could also be scrutinized by securities analysts and investors. As a result
of this scrutiny, we could suffer a loss of public confidence in our financial
reporting capabilities and thereby face adverse effects on our business and
the
market price of our securities.
Risks
Related to an Investment in Our Carolina Group Stock
We
cannot be certain that we will continue to pay dividends on our Carolina
Group
stock.
Determinations
as to the future dividends on Carolina Group stock primarily will depend
on the
dividends paid to us by our subsidiaries, our capital requirements and other
factors that our board of directors considers relevant. The amount of dividends
that legally could be paid on Carolina Group stock if the Carolina Group
were a
separate Delaware corporation may be greater than the amount actually available
for the payment of dividends under Delaware law and our charter. Furthermore,
our ability to pay dividends on Carolina Group stock may be reduced by dividends
that we pay on our common stock.
Our
board
of directors reserves the right to declare and pay dividends on Carolina
Group
stock, and could, in its sole discretion, declare and pay dividends, or refrain
from declaring and paying dividends, on Carolina Group stock. Our board of
directors may take such actions regardless of the amounts available for the
payment of dividends on Carolina Group stock, the amount of prior dividends
declared on Carolina Group stock, the voting or liquidation rights of Carolina
Group stock, or any other factor.
The
independence of the board of directors of Lorillard, Inc. and the board of
directors of its wholly owned subsidiary, Lorillard Tobacco Company, may
affect
Lorillard’s payment of dividends to us and thereby inhibit our ability or
willingness to pay dividends and make other distributions on our Carolina
Group
stock.
Our
ability and willingness to pay dividends and make other distributions on
Carolina Group stock, including dividends and distributions following a
disposition of substantially all of the assets attributed to the Carolina
Group,
will depend on a number of factors, including whether the independent board
of
directors of Lorillard Tobacco Company causes Lorillard Tobacco Company to
declare and pay dividends to its parent, Lorillard, Inc. and whether, in
turn,
the independent board of directors of Lorillard, Inc. causes Lorillard, Inc.
to
declare and pay dividends to us. In the event that Lorillard Tobacco Company
or
Lorillard, Inc. does not distribute its earnings, we are unlikely to pay
dividends on Carolina Group stock. To the extent Lorillard, Inc. does not
distribute net proceeds following the sale of substantially all of the assets
attributed to the Carolina Group, we will not be required to apply the net
proceeds to pay dividends to holders of Carolina Group stock or redeem shares
of
Carolina Group stock.
We
expect
that the boards of directors of each of Lorillard, Inc. and Lorillard Tobacco
Company will continue to function independently of us and will direct the
operations and management of the assets and businesses of those corporations,
respectively. None of the individuals currently serving as directors of
Lorillard, Inc. or Lorillard Tobacco Company are officers, directors or
employees of Loews Corporation. Notwithstanding our right, as sole shareholder,
to elect and remove directors of Lorillard, Inc., we have no present intention
to remove any person currently serving as a director of Lorillard, Inc.
Moreover, we expect that in the event of any future vacancies on the board
of
directors of Lorillard, Inc., we will nominate individuals who are not officers,
directors or employees of Loews Corporation to fill such vacancies.
We
have allocated to the Carolina Group any liabilities or expenses that we
incur
as a result of tobacco-related litigation.
The
Carolina Group has been allocated any and all liabilities, costs and expenses
of
us and Lorillard, Inc. and the subsidiaries and predecessors of Lorillard,
Inc.,
arising out of or related to tobacco or otherwise arising out of the
past,
present
or future business of Lorillard, Inc. or its subsidiaries or predecessors,
or
claims arising out of or related to the sale of any businesses previously
sold
by Lorillard, Inc. or its subsidiaries or predecessors, in each case, whether
grounded in tort, contract, statute or otherwise, whether pending or asserted
in
the future.
Accordingly,
we and/or Lorillard may make decisions with respect to litigation and settlement
strategies designed to obtain our dismissal or release from tobacco-related
litigation or liabilities. Such decisions and strategies could result, for
example, in limitations on payment of dividends by Lorillard to us or an
increase in Lorillard’s exposure in such litigation.
The
Engle Agreement may affect Lorillard’s payment of dividends to us and thereby
inhibit our ability or willingness to pay dividends on our Carolina Group
stock.
Under
the
Engle
Agreement if Lorillard, Inc. does not maintain a balance sheet net worth
of at
least $921.2 million, the stay pursuant to the agreement would terminate.
Because dividends from Lorillard, Inc. to us are deducted from the balance
sheet
net worth of Lorillard, Inc., the Engle
Agreement may affect the payment of dividends by Lorillard, Inc. to us. For
a
description of the Engle
Agreement, please read MD&A under Item 7 and Note 20 of the Notes to
Consolidated Financial Statements included in Item 8.
Holders
of our common stock and Carolina Group stock are shareholders of one company
and, therefore, financial impacts on one group could affect the other group.
Holders
of our common stock and holders of Carolina Group stock are all common
shareholders of Loews Corporation and are subject to risks associated with
an
investment in a single company. Financial effects arising from one group
that
affect our consolidated results of operations or financial condition could,
if
significant, affect the market price of the class of common shares relating
to
the other group. In addition, if we or any of our subsidiaries were to incur
significant indebtedness on behalf of one group, including indebtedness incurred
or assumed in connection with an acquisition or investment, it could affect
the
credit rating of us and our subsidiaries taken as a whole. This, in turn,
could
increase our borrowing costs. Net losses of either group and dividends or
distributions on shares of any class of common or preferred stock will reduce
the funds legally available for payment of future dividends on Carolina Group
stock.
The
complex nature of the terms of our Carolina Group stock, or confusion in
the
marketplace about what a tracking stock is, could materially adversely affect
the market price of Carolina Group stock.
Tracking
stocks like Carolina Group stock are more complex than traditional common
stock
and are not directly or entirely comparable to common stock of stand-alone
companies or companies that have been spun off by their parent companies.
The
complex nature of the terms of Carolina Group stock, and the potential
difficulties investors may have in understanding these terms, may materially
adversely affect the market price of Carolina Group stock. Examples of these
terms include:
|
·
|
the
discretion of our board of directors to make determinations that
may
affect Carolina Group stock and our common stock differently;
|
|
·
|
our
redemption and/or exchange rights under particular circumstances;
and
|
|
·
|
the
disparate voting rights of Carolina Group stock and our common
stock.
|
Confusion
in the marketplace about what a tracking stock is and what it is intended
to
represent, and/or investors’ reluctance to invest in tracking stocks, could
materially adversely affect the market price of Carolina Group stock.
Holders
of our common stock and Carolina Group stock generally vote together as a
single
class.
Holders
of Carolina Group stock generally do not have the right to vote separately
as a
class. Holders of Carolina Group stock have the right to vote as a separate
class only to the extent required by Delaware law. We have not held, and
do not
plan to hold, separate meetings for holders of Carolina Group
stock.
Holders
of our common stock will have significantly greater voting power than holders
of
our Carolina Group stock with respect to any matter as to which all of our
common shares vote together as one class.
Each
share of our common stock has one vote. Each share of Carolina Group stock
is
entitled to 3/10 of a vote, which is disproportionately less than the economic
interest represented by each share of Carolina Group stock. When a vote is
taken
on any matter as to which all of our common shares are voting together as
one
class, holders of our common stock will have significantly greater voting
power
than holders of Carolina Group stock. As of February 9, 2007, holders of
our
common stock controlled approximately 94.4% of our combined voting power
and
holders of Carolina Group stock controlled approximately 5.6% of our combined
voting power. The voting power of Carolina Group stock is subject to adjustment
for stock splits, stock dividends and combinations with respect to either
class
of stock.
Holders
of our Carolina Group stock may have interests different from holders of
our
common stock.
The
existence of separate classes of our common stock could give rise to occasions
when the interests of the holders of our common stock and Carolina Group
stock
diverge or conflict or appear to diverge or conflict. Subject to its fiduciary
duties, our board of directors could, in its sole discretion, from time to
time,
make determinations or implement policies that disproportionately affect
the
groups or the different classes of stock. Our board of directors is not required
to select the option that would result in the highest value for the holders
of
Carolina Group stock. Examples include determinations by our board of directors
to:
|
·
|
pay
or omit the payment of dividends on our common stock or Carolina
Group
stock;
|
|
·
|
redeem
shares of Carolina Group stock;
|
|
·
|
approve
dispositions of our assets attributed to either
group;
|
|
·
|
reallocate
funds or assets between groups and determine the amount and type
of
consideration paid therefore;
|
|
·
|
allocate
business opportunities, resources and personnel;
|
|
·
|
allocate
the proceeds of issuances of Carolina Group stock either to the
Loews
Group, with a corresponding reduction in the intergroup interest,
if and
to the extent there is an intergroup interest, or to the combined
attributed net assets of the Carolina
Group;
|
|
·
|
formulate
public policy positions for us;
|
|
·
|
establish
relationships between the groups;
|
|
·
|
make
financial decisions with respect to one group that could be considered
to
be detrimental to the other group;
and
|
|
·
|
settle
or otherwise seek to resolve actual or potential litigation against
us in
ways that might adversely affect Lorillard.
|
Any
such
decisions by our board of directors could have or be perceived to have a
negative effect on the Carolina Group and could have a negative effect on
the
market price of Carolina Group stock.
If
our Carolina Group stock is not treated as a class of our common stock, several
adverse federal income tax consequences will result.
It
is
possible that the issuance of Carolina Group stock could be characterized
as
property other than our stock for U.S. federal income tax purposes. Such
characterization could require us to recognize taxable gain with respect
to the
issuance of Carolina Group stock and the Carolina Group would be responsible
for
any tax liability attributable thereto. In addition, we would likely no longer
be able to file a consolidated U.S. federal income tax return with the Carolina
Group. These tax liabilities, if they arise, would likely have a material
adverse effect on us and the Carolina Group.
Changes
in the tax law or in the interpretation of current tax law may result in
redemption of the Carolina Group stock or cessation of the issuance of shares
of
Carolina Group stock.
If
there
are adverse tax consequences to us or the Carolina Group resulting from the
issuance of Carolina Group stock, it is possible that we would not issue
shares
of Carolina Group stock even if we would otherwise choose to do so. This
possibility could affect the value of Carolina Group stock then outstanding.
Furthermore, we are entitled to redeem Carolina Group stock for either
(1) cash in an amount equal to 105% of the average market price per share
of Carolina Group stock or (2) our common stock having a value equal to
100% of the ratio of the average market price per share of Carolina Group
stock
to the average market price per share of our common stock, if, based upon
the
opinion of tax counsel, there are adverse federal income tax law developments
related to Carolina Group stock. In each case, the average market price would
be
determined over a specified 20 trading day period.
Our
board of directors may, at any time until the 90th day after the disposition
of
80% of the assets attributed to the Carolina Group, redeem shares of our
Carolina Group stock.
Our
board
of directors may, at any time until the 90th day after the disposition of
80% of
the assets attributed to the Carolina Group, redeem all outstanding shares
of
Carolina Group stock for either (1) cash in an amount equal to 120% of the
average market price per share of Carolina Group stock or (2) our common
stock having a value equal to 115% of the ratio of the average market price
per
share of Carolina Group stock to the average market price per share of our
common stock. In each case, the average market price would be determined
over a
specific 20 trading day period. A decision to redeem the Carolina Group stock
could be made at a time when either or both of our common stock and Carolina
Group stock may be considered to be overvalued or undervalued. In addition,
a
redemption would preclude holders of Carolina Group stock from retaining
their
investment in a security intended to reflect separately the economic performance
of the Carolina Group. It would also give holders of shares of converted
Carolina Group stock an amount of consideration that may be less than the
amount
of consideration a third-party buyer pays or would pay for all or substantially
all of the net assets attributed to the Carolina Group.
If
we choose to redeem our Carolina Group stock for cash, holders of Carolina
Group
stock may have taxable gain or taxable income.
We
may,
under certain circumstances, redeem Carolina Group stock for cash. If we
choose
to do so, holders of Carolina Group stock would generally be subject to tax
on
the excess, if any, of the total consideration they receive for their Carolina
Group stock over their adjusted basis in their Carolina Group stock.
Our
board of directors does not owe a separate duty to holders of Carolina Group
stock.
Principles
of Delaware law established in cases involving differing treatment of two
classes of capital stock or two groups of holders of the same class of capital
stock provide that a board of directors owes an equal duty to all shareholders
regardless of class or series, and does not have separate or additional duties
to either group of shareholders. Thus, holders of Carolina Group stock who
believe that a determination by our board of directors has a disparate impact
on
their class of stock may not be able to obtain a remedy for such a claim.
Our
board of directors may change the Carolina Group policy statement without
shareholder approval.
In
connection with the initial issuance of Carolina Group stock, our board of
directors adopted the Carolina Group policy statement to govern the relationship
between the Loews Group and the Carolina Group. Our board of directors may
modify, suspend or rescind the policies set forth in the Carolina Group policy
statement or make additions or exceptions to them, in the sole discretion
of our
board of directors, without approval of our shareholders. Our board of directors
may also adopt additional policies, depending upon the circumstances. Any
changes to our policies could have a negative effect on the holders of Carolina
Group stock.
Our
directors’ and officers’ disproportionate ownership of our common stock compared
to our Carolina Group stock may give rise to conflicts of interest.
Our
directors and officers own shares of our common stock and have been awarded
stock options with respect to shares of our common stock. As of February
9, 2007
our directors and executive officers beneficially owned
approximately
38.2 million shares of our common stock and no shares of Carolina Group stock,
which represents approximately 6.6% of our combined voting power. Accordingly,
our directors and officers could have an economic incentive to favor the
Loews
Group over the Carolina Group.
Because
it is possible for an acquiror to obtain control of us by purchasing shares
of
our common stock without purchasing any shares of our Carolina Group stock,
holders of Carolina Group stock may not share in any takeover premium.
Because
holders of our common stock have significantly greater voting power than
holders
of Carolina Group stock, a potential acquiror could acquire control of us
by
acquiring shares of our common stock without purchasing any shares of Carolina
Group stock. As a result, holders of Carolina Group stock might not share
in any
takeover premium and Carolina Group stock may have a lower market price than
it
would have if there were a greater likelihood that holders of Carolina Group
stock would share in any takeover premium.
Holders
of our Carolina Group stock may receive less consideration upon a sale of
the
assets attributed to the Carolina Group than if the Carolina Group were a
separate company.
Assuming
the assets attributed to the Carolina Group represent less than substantially
all of our assets as a whole, our board of directors could, in its sole
discretion and without shareholder approval, approve sales and other
dispositions of any amount of our assets attributed to the Carolina Group
because the Delaware General Corporation Law requires shareholder approval
only
for a sale or other disposition of all or substantially all of the assets
of the
entire company. Similarly, the boards of directors of Lorillard, Inc. or
its
subsidiaries could decide to sell or otherwise dispose of the operating and
other assets reflected in the financial statements of the Carolina Group
without
the approval of holders of Carolina Group stock.
If
80% or
more of the assets attributed to the Carolina Group are sold, we may take
one of
the following actions, and if we receive any net proceeds from the sale and
determine not to retain all of such proceeds as tobacco contingency reserves,
we
must take one of the following actions:
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pay
a special dividend to holders of Carolina Group stock in an amount
equal
to their pro rata share of the net proceeds (subject to reduction
for
repayment of notional debt, amounts not distributed from Lorillard
to us
and the creation by us of reserves for tobacco-related contingent
liabilities and future costs) from the disposition in the form
of cash
and/or securities (other than our common
stock);
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redeem
shares of Carolina Group stock for cash and/or securities (other
than our
common stock) in an amount equal to the pro rata share of the net
proceeds
(subject to reduction for repayment of notional debt) from the
disposition
of all of the assets attributable to the Carolina
Group;
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redeem
shares of Carolina Group stock for shares of our common stock at
a 15%
premium based on the respective market values of Carolina Group
stock and
our common stock during the 20 consecutive trading days ending
on the 5th
trading day prior to announcement of the sale; or
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take
some combination of the actions described
above.
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Our
board
of directors has the discretion to choose from the foregoing options. The
value
of the consideration paid to holders of Carolina Group stock in the different
scenarios described above could be significantly different. Our board of
directors would not be required to select the option that would result
in the
distribution with the highest value to the holders of Carolina Group
stock.
If,
on
the 91st day following the sale of 80% or more of the assets attributed to
the
Carolina Group, we have not redeemed all of the outstanding shares of Carolina
Group stock and Lorillard subsequently distributes to us any previously
undistributed portion of the net proceeds and/or we subsequently release
any
amount of net proceeds previously retained by us as a reserve for
tobacco-related contingent liabilities or future costs, we will distribute
the
pro rata share of such amounts to holders of Carolina Group stock. At any
time
after:
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Lorillard
has distributed to us all previously undistributed portions of
the net
proceeds;
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no
amounts remain in reserve in respect of tobacco-related contingent
liabilities and future costs; and
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the
only asset remaining in the Carolina Group is cash and/or cash
equivalents,
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then
we
may redeem all of the outstanding shares of Carolina Group stock for cash
in an
amount equal to the greater of (1) the pro rata share of the remaining
assets of
the Carolina Group and (2) $0.001 per share of Carolina Group
stock.
If
the
Carolina Group were a separate, independent company and its shares were
acquired
by another person, some of the costs of that sale, including corporate
level
taxes, might not be payable in connection with that acquisition. As a result,
shareholders of a separate, independent company might receive an amount
greater
than the net proceeds that would be received by the holders of Carolina
Group
stock. In addition, we cannot assure that the net proceeds per share of
Carolina
Group stock received by its holder in connection with any redemption following
a
sale of Carolina Group assets will be equal to or greater than the market
value
per share of Carolina Group stock prior to or after announcement of a sale
of
assets reflected in the Carolina Group. Nor can we assure that, where
consideration is based on the market value of Carolina Group stock, the
market
value will be equal to or greater than the net proceeds per share of Carolina
Group stock.
We
may cause a mandatory exchange of our Carolina Group stock.
We
may
exchange all outstanding shares of Carolina Group stock for shares of one
or
more of our qualifying subsidiaries. Such an exchange would result in the
qualifying subsidiary or subsidiaries becoming a separate public company
and the
holders of Carolina Group stock owning shares directly in that subsidiary
or
those subsidiaries. If we choose to exchange shares of Carolina Group stock
in
this manner, the market value of the common stock received in that exchange
could be less than the market value of Carolina Group stock exchanged.
If
we are liquidated, amounts distributed to holders of our Carolina Group
stock
may not reflect the value of the assets attributed to the Carolina Group.
In
the
event we are liquidated, we would determine the liquidation rights of the
holders of Carolina Group stock in accordance with the market capitalization
of
the outstanding shares of the Loews Group and the Carolina Group at a specified
time prior to the time of liquidation. However, the relative market
capitalization of the outstanding shares of each group may not correctly
reflect
the value of the net assets remaining and attributed to the groups after
satisfaction of outstanding liabilities. Accordingly, the holders of Carolina
Group stock could receive less consideration upon liquidation than they
would if
the groups were separate entities.
Risks
Related to Us and Our Subsidiary, CNA Financial
Corporation
If
CNA determines that loss reserves are insufficient to cover its estimated
ultimate unpaid liability for claims, CNA may need to increase its loss
reserves.
CNA
maintains loss reserves to cover its estimated ultimate unpaid liability
for
claims and claim adjustment expenses for reported and unreported claims
and for
future policy benefits. Reserves represent CNA management’s best estimate at a
given point in time. Insurance reserves are not an exact calculation of
liability but instead are complex estimates derived by CNA, generally utilizing
a variety of reserve estimation techniques, from numerous assumptions and
expectations about future events, many of which are highly uncertain, such
as
estimates of claims severity, frequency of claims, mortality, morbidity,
expected interest rates, inflation, claims handling and case reserving
policies
and procedures, underwriting and pricing policies, changes in the legal
and
regulatory environment and the lag time between the occurrence of an insured
event and the time of its ultimate settlement. Many of these uncertainties
are
not precisely quantifiable and require significant management judgment.
As
trends in underlying claims develop, particularly in so-called “long tail” or
long duration coverages, CNA is sometimes required to add to our reserves.
This
is called unfavorable development and results in a charge to our earnings
in the
amount of the added reserves, recorded in the period the change in estimate
is
made. These charges can be substantial and can have a material adverse
effect on
our results of operations and equity. Please read additional information
on
CNA’s reserves included in MD&A under Item 7 and Note 9 of the Notes to
Consolidated Financial Statements included under Item 8.
CNA
is
subject to uncertain effects of emerging or potential claims and coverage
issues
that arise as industry practices and legal, judicial, social, and other
environmental conditions change. These issues have had, and may continue
to
have, a negative effect on CNA’s business by either extending coverage beyond
the original underwriting intent or by increasing the number or size of
claims,
resulting in further increases in CNA’s reserves which can have a material
adverse effect on our results of operations and equity. The effects of
these and
other unforeseen emerging claim and coverage issues are extremely hard
to
predict. Examples of emerging or potential claims and coverage issues
include:
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increases
in the number and size of claims relating to injuries from medical
products;
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the
effects of accounting and financial reporting scandals and other
major
corporate governance failures, which have resulted in an increase
in the
number and size of claims, including director and officer and
errors and
omissions insurance claims;
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class
action litigation relating to claims handling and other
practices;
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construction
defect claims, including claims for a broad range of additional
insured
endorsements on policies;
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clergy
abuse claims, including passage of legislation to reopen or extend
various
statutes of limitations; and
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mass
tort claims, including bodily injury claims related to silica,
welding
rods, benzene, lead and various other chemical exposure
claims.
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In
light
of the many uncertainties associated with establishing the estimates and
making
the assumptions necessary to establish reserve levels, CNA reviews and
changes
its reserve estimates in a regular and ongoing process as experience develops
and further claims are reported and settled. In addition, CNA periodically
undergoes state regulatory financial examinations, including review and
analysis
of its reserves. If estimated reserves are insufficient for any reason,
the
required increase in reserves would be recorded as a charge against CNA’s
earnings for the period in which reserves are determined to be insufficient.
These charges can be substantial and can materially adversely affect our
results
of operations and equity.
Loss
reserves for asbestos, environmental pollution and mass torts are especially
difficult to estimate and may result in more frequent and larger additions
to
these reserves.
CNA’s
experience has been that establishing reserves for casualty coverages relating
to APMT claim and claim adjustment expenses is subject to uncertainties
that are
greater than those presented by other claims. Estimating the ultimate cost
of
both reported and unreported asbestos, environmental pollution and mass
tort
claims is subject to a higher degree of variability due to a number of
additional factors, including among others:
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coverage
issues, including whether certain costs are covered under the
policies and
whether policy limits apply;
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inconsistent
court decisions and developing legal
theories;
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increasingly
aggressive tactics of plaintiffs’
lawyers;
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the
risks and lack of predictability inherent in major
litigation;
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changes
in the volume of asbestos, environmental pollution and mass tort
claims
which cannot now be anticipated;
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continued
increases in mass tort claims relating to silica and silica-containing
products;
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the
impact of the exhaustion of primary limits and the resulting
increase in
claims on any umbrella or excess policies CNA has
issued;
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the
number and outcome of direct actions against
CNA;
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CNA’s
ability to recover reinsurance for these claims;
and
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changes
in the legal and legislative environment in which CNA
operates.
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As
a
result of this higher degree of variability, CNA has necessarily supplemented
traditional actuarial methods and techniques with additional estimating
techniques and methodologies, many of which involve significant judgment
on the
part of management. Consequently, CNA may periodically need to record changes
in
its claim and claim adjustment expense reserves in the future in these
areas in
amounts that may be material. The sections below provide more details involving
the specific factors affecting CNA’s estimation of reserves for casualty
coverages relating to environmental pollution and asbestos. Please read
information on APMT included in MD&A under Item 7 and Note 9 of the Notes to
Consolidated Financial Statements included under Item 8.
Environmental
pollution claims. The
estimation of reserves for environmental pollution claims is complicated
by the
assertion by many policyholders of claims for defense costs and indemnification.
CNA and others in the insurance industry are disputing coverage for many
such
claims. Key coverage issues in these claims include:
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whether
cleanup costs are considered damages under the policies (and
accordingly
whether CNA would be liable for these
costs);
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the
trigger of coverage, and the allocation of liability among triggered
policies;
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the
applicability of pollution exclusions and owned property
exclusions;
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the
potential for joint and several liability;
and
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the
definition of an occurrence.
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To
date,
courts have been inconsistent in their rulings on these issues, thus adding
to
the uncertainty of the outcome of many of these claims.
Further,
the scope of federal and state statutes and regulations determining liability
and insurance coverage for environmental pollution liabilities have been
the
subject of extensive litigation. In many cases, courts have expanded the
scope
of coverage and liability for cleanup costs beyond the original intent
of CNA’s
insurance policies. In addition, the standards for cleanup in environmental
pollution matters are unclear, the number of sites potentially subject
to
cleanup under applicable laws is unknown and the impact of various proposals to
reform existing statutes and regulations is difficult to predict.
Asbestos
claims. The
estimation of reserves for asbestos claims is particularly difficult for
many of
the same reasons discussed above for environmental pollution claims, as
well
as:
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inconsistency
of court decisions and jury attitudes, as well as future court
decisions;
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specific
policy provisions;
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allocation
of liability among insurers and
insureds;
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missing
policies and proof of coverage;
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the
proliferation of bankruptcy proceedings and attendant
uncertainties;
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novel
theories asserted by policyholders and their legal
counsel;
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the
targeting of a broader range of businesses and entities as
defendants;
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uncertainties
in predicting the number of future claims and which other insureds
may be
targeted in the future;
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volatility
in claim numbers and settlement
demands;
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increases
in the number of non-impaired claimants and the extent to which
they can
be precluded from making claims;
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the
efforts by insureds to obtain coverage that is not subject to
aggregate
limits;
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the
long latency period between asbestos exposure and disease manifestation,
as well as the resulting potential for involvement of multiple
policy
periods for individual claims;
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medical
inflation trends;
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the
mix of asbestos-related diseases presented;
and
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the
ability to recover
reinsurance.
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In
addition, a number of CNA’s insureds have asserted that their claims against CNA
for insurance are not subject to aggregate limits on coverage. If these insureds
are successful in this regard, CNA’s potential liability for their claims would
be unlimited. Some of these insureds contend that their asbestos claims fall
within the so-called “non-products” liability coverage within their policies,
rather than the products liability coverage, and that this “non-products”
liability coverage is not subject to any aggregate limit. It is difficult
to
predict the extent to which these claims will succeed and, as a result, the
ultimate size of these claims.
Catastrophe
losses are unpredictable.
Catastrophe
losses are an inevitable part of CNA’s business. Various events can cause
catastrophe losses, including hurricanes, windstorms, earthquakes, hail,
explosions, severe winter weather and fires, and their frequency and severity
are inherently unpredictable. In addition, longer-term natural catastrophe
trends may be changing and new types of catastrophe losses may be
developing due
to
climate change, a phenomenon that has been associated with extreme weather
events linked to rising temperatures, and includes effects on global weather
patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain,
and snow. For example, in 2005, CNA experienced substantial losses from
Hurricanes Katrina, Rita and Wilma and in 2004, CNA experienced substantial
losses from Hurricanes Charley, Frances, Ivan and Jeanne. The extent of CNA’s
losses from catastrophes is a function of both the total amount of its insured
exposures in the affected areas and the severity of the events themselves.
In
addition, as in the case of catastrophe losses generally, it can take a long
time for the ultimate cost to CNA to be finally determined. As its claim
experience develops on a particular catastrophe, CNA may be required to adjust
reserves, or take additional unfavorable development, to reflect its revised
estimates of the total cost of claims. CNA believes that it could incur
significant catastrophe losses in the future. Please read information on
catastrophe losses included in the MD&A under Item 7 and Note 9 of the Notes
to Consolidated Financial Statements included under Item 8.
CNA’s
key assumptions used to determine reserves and deferred acquisition costs
for
its long term care product offerings could vary
significantly.
CNA’s
reserves and deferred acquisition costs for its long term care product offerings
are based on certain key assumptions including morbidity, which is the frequency
and severity of illness, sickness and diseases contracted, policy persistency,
which is the percentage of policies remaining in force, interest rates, and/or
future health care cost trends. If actual experience differs from these
assumptions, the deferred acquisition costs may not be fully recovered and
the
reserves may not be adequate, requiring CNA to add to reserves, or take
unfavorable development.
High
levels of retained overhead expenses associated with business lines in run-off
negatively impact CNA’s operating results.
During
the past few years, CNA ceased offering certain insurance products relating
principally to its life, group and reinsurance segments. Many of these business
lines were sold, others have been placed in run-off and, as a result, revenue
will progressively decrease. CNA’s results of operations have been materially,
adversely affected by the high levels of retained overhead expenses associated
with these run-off operations, and will continue to be so affected if CNA
is not
successful in eliminating or reducing these costs.
CNA’s
premium writings and profitability are affected by the availability and cost
of
reinsurance.
CNA
purchases reinsurance to help manage its exposure to risk. Under CNA’s
reinsurance arrangements, another insurer assumes a specified portion of
CNA’s
claim and claim adjustment expenses in exchange for a specified portion of
policy premiums. Market conditions determine the availability and cost of
the
reinsurance protection CNA purchases, which affects the level of CNA’s business
and profitability, as well as the level and types of risk CNA retains. If
CNA is
unable to obtain sufficient reinsurance at a cost CNA deems acceptable, CNA
may
be unwilling to bear the increased risk and would reduce the level of CNA’s
underwriting commitments. Please read information on Reinsurance included
in
MD&A under Item 7 and Note 18 of the Notes to Consolidated Financial
Statements included under Item 8.
CNA
may not be able to collect amounts owed to it by
reinsurers.
CNA
has
significant amounts recoverable from reinsurers which are reported as
receivables in the balance sheets and estimated in a manner consistent with
claim and claim adjustment expense reserves or future policy benefits reserves.
The ceding of insurance does not, however, discharge CNA’s primary liability for
claims. As a result, CNA is subject to credit risk relating to its ability
to
recover amounts due from reinsurers. Certain of CNA’s reinsurance carriers have
experienced deteriorating financial conditions or have been downgraded by
rating
agencies. In addition, reinsurers could dispute amounts which CNA believes
are
due to it. If CNA is not able to collect the amounts due to it from reinsurers,
its claims expenses will be higher. Please read information on reinsurance
included in the MD&A under Item 7 and Note 18 of the Notes to Consolidated
Financial Statements included under Item 8.
Rating
agencies may downgrade their ratings for CNA in the future, and thereby
adversely affect CNA’s ability to write insurance at competitive rates or at
all.
Ratings
are an increasingly important factor in establishing the competitive position
of
insurance companies. CNA’s insurance company subsidiaries, as well as its public
debt, are rated by four major rating agencies, namely, A.M. Best Company,
Inc.,
Standard & Poor’s Rating Services, Moody’s Investors Service, Inc. and
Fitch, Inc. Ratings reflect the rating agency’s opinions of an insurance
company’s financial strength, capital adequacy, operating performance, strategic
position and ability to meet its obligations to policyholders and debtholders.
Agency ratings are not a recommendation to buy, sell or hold any security,
and
may be revised or withdrawn at any time by the issuing organization. Each
agency’s rating should be evaluated independently of any other agency’s
rating.
Due
to
the intense competitive environment in which CNA operates, the uncertainty
in
determining reserves and the potential for CNA to take material unfavorable
development in the future, and possible changes in the methodology or criteria
applied by the rating agencies, the rating agencies may take action to further
lower CNA’s ratings in the future. If CNA’s property and casualty insurance
financial strength ratings were downgraded below current levels, its business
and results of operations could be materially adversely affected. The severity
of the impact on our business is dependent on the level of downgrade and,
for
certain products, which rating agency takes the rating action. Among the
adverse
effects in the event of such downgrades would be the inability to obtain
a
material volume of business from certain major insurance brokers, the inability
to sell a material volume of our insurance products to certain markets, and
the
required collateralization of certain future payment obligations or
reserves.
In
addition, CNA believes that a lowering of our debt ratings by certain of
the
rating agencies could result in an adverse impact on CNA’s ratings, independent
of any change in CNA’s circumstances. CNA has entered into several settlement
agreements and assumed reinsurance contracts that require collateralization
of
future payment obligations and assumed reserves if its ratings or other specific
criteria fall below certain thresholds. The ratings triggers are
generally
more
than
one level below CNA’s current ratings. Please read information on our ratings
included in the MD&A under Item 7.
CNA
is subject to capital adequacy requirements and, if it does not meet these
requirements, regulatory agencies may restrict or prohibit CNA from operating
its business.
Insurance
companies such as CNA are subject to risk-based capital standards set by
state
regulators to help identify companies that merit further regulatory attention.
These standards apply specified risk factors to various asset, premium and
reserve components of CNA’s statutory capital and surplus reported in CNA’s
statutory basis of accounting financial statements. Current rules require
companies to maintain statutory capital and surplus at a specified minimum
level
determined using the risk-based capital formula. If CNA does not meet these
minimum requirements, state regulators may restrict or prohibit CNA from
operating its business. If CNA is required to record a charge against earnings
in connection with a change in estimates or circumstances, CNA may violate
these
minimum capital adequacy requirements unless it is able to raise sufficient
additional capital. Examples of events leading CNA to record a charge against
earnings include impairment of its investments or unexpectedly poor claims
experience.
CNA’s
insurance subsidiaries, upon whom CNA depends for dividends in order to fund
its
working capital needs, are limited by state regulators in their ability to
pay
dividends.
CNA
Financial Corporation is a holding company and is dependent upon dividends,
loans and other sources of cash from its subsidiaries in order to meet its
obligations. Dividend payments, however, must be approved by the subsidiaries’
domiciliary state departments of insurance and are generally limited to amounts
determined by formula, which varies by state. The formula for the majority
of
the states is the greater of 10% of the prior year statutory surplus or the
prior year statutory net income, less the aggregate of all dividends paid
during
the twelve months prior to the date of payment. Some states, however, have
an
additional stipulation that dividends cannot exceed the prior year’s earned
surplus. If CNA is restricted, by regulatory rule or otherwise, from paying
or
receiving inter-company dividends, CNA may not be able to fund its working
capital needs and debt service requirements from available cash. As a result,
CNA would need to look to other sources of capital, which may be more expensive
or may not be available at all.
CNA
is responding to subpoenas, interrogatories and inquiries relating to insurance
brokers and agents, contingent commissions and bidding practices, and certain
finite-risk insurance products.
Along
with other companies in the industry, CNA has received subpoenas,
interrogatories and inquiries from: (i) California, Connecticut, Delaware,
Florida, Hawaii, Illinois, Michigan, Minnesota, New Jersey, New York, North
Carolina, Ohio, Pennsylvania, South Carolina, West Virginia and the Canadian
Council of Insurance Regulators concerning investigations into practices
including contingent compensation arrangements, fictitious quotes, and tying
arrangements; (ii) the SEC, the New York State Attorney General, the United
States Attorney for the Southern District of New York, the Connecticut Attorney
General, the Connecticut Department of Insurance, the Delaware Department
of
Insurance, the Georgia Office of Insurance and Safety Fire Commissioner and
the
California Department of Insurance concerning reinsurance products and finite
insurance products purchased and sold by CNA; (iii) the Massachusetts Attorney
General and the Connecticut Attorney General concerning investigations into
anti-competitive practices; and (iv) the New York State Attorney General
concerning declinations of attorney malpractice insurance. CNA continues
to
respond to these subpoenas, interrogatories and inquiries to the extent they
are
still open.
Subsequent
to receipt of the SEC subpoena, CNA produced documents and provided additional
information at the SEC’s request. In addition, the SEC and representatives of
the United States Attorney’s Office for the Southern District of New York
conducted interviews with several of CNA’s current and former executives
relating to the restatement of its financial results for 2004, including
CNA’s
relationship with and accounting for transactions with an affiliate that
were
the basis for the restatement. The SEC also requested information relating
to
our restatement in 2006 of prior period results.
It is
possible that CNA’s analyses of, or accounting treatment for, finite reinsurance
contracts or discontinued operations could be questioned or disputed by
regulatory authorities. As a result, further restatements of CNA’s financial
results are possible.
CNA’s
investment portfolio, which is a key component of its overall profitability,
may
suffer reduced returns or losses, especially
with respect to its equity in various limited partnership net assets which
are
often subject to greater leverage and volatility.
Investment
returns are an important part of CNA’s overall profitability. General economic
conditions, stock market conditions, fluctuations in interest rates, and
many
other factors beyond CNA’s control can adversely affect the returns and the
overall value of its equity investments and its ability to control the timing
of
the realization of investment income. In addition, any defaults in the payments
due to CNA for its investments, especially with respect to liquid corporate
and
municipal bonds, could reduce CNA’s investment income and realized investment
gains or could cause CNA to incur investment losses. Further, CNA invests
a
portion of its assets in equity investments, primarily through limited
partnerships, which are subject to greater volatility than its fixed income
investments. In some cases, these limited partnerships use leverage and are
thereby subject to even greater volatility. Although limited partnership
investments generally provide higher expected return, they present greater
risk
and are more illiquid than CNA’s fixed income investments. As a result of these
factors, CNA may not realize an adequate return on its investments, may incur
losses on sales of its investments and may be required to write down the
value
of its investments.
CNA
may be adversely affected by the cyclical nature of the property and casualty
business.
The
property and casualty market is cyclical and has experienced periods
characterized by relatively high levels of price competition, less restrictive
underwriting standards and relatively low premium rates, followed by periods
of
relatively lower levels of competition, more selective underwriting standards
and relatively high premium rates.
Risks
Related to Us and Our Subsidiary, Lorillard, Inc.
Lorillard
is a defendant in approximately 2,840 tobacco-related lawsuits, which are
extremely costly to defend, and which could result in substantial judgments
against Lorillard.
Numerous
legal actions, proceedings and claims arising out of the sale, distribution,
manufacture, development, advertising, marketing and claimed health effects
of
cigarettes are pending against Lorillard, and it is likely that similar claims
will continue to be filed for the foreseeable future. Settlements and victories
by plaintiffs in highly publicized cases against Lorillard and other tobacco
companies, together with acknowledgments by Lorillard and other tobacco
companies regarding the health effects of smoking, may stimulate further
claims.
In addition, adverse outcomes in pending cases could have adverse effects
on the
ability of Lorillard to prevail in smoking and health litigation.
Approximately
2,840 tobacco-related cases are pending against Lorillard in the United States.
Punitive damages, often in amounts ranging into the billions of dollars,
are
specifically pleaded in a number of cases in addition to compensatory and
other
damages. It is possible that the outcome of these cases, individually or
in the
aggregate, could result in bankruptcy. It is also possible that Lorillard
may be
unable to post a surety bond in an amount sufficient to stay execution of
a
judgment in jurisdictions that require such bond pending an appeal on the
merits
of the case. Even if Lorillard is successful in defending some or all of
these
actions, these types of cases are very expensive to defend. A material increase
in the number of pending claims could significantly increase defense
costs.
Further,
adverse decisions in actions against tobacco companies other than Lorillard
could have an adverse impact on the industry, including Lorillard. For example,
in 2006 the Oregon Supreme Court affirmed the verdict in Williams
v. Philip Morris USA, Inc.,
in
which plaintiff was awarded approximately $525,000 in compensatory damages
and
$79.5 million in punitive damages, a ratio of more than 150:1. The Oregon
Supreme Court had determined that the ratio of punitive to compensatory damages
was not inconsistent with U.S. Supreme Court precedents in this area. In
February of 2007, the U.S. Supreme Court vacated that decision on other grounds
and returned Williams
to the
Oregon Supreme Court for further consideration. Lorillard is not a party
to
Williams.
Please
read information included in MD&A under Item 7 and Note 20 of the Notes to
Consolidated Financial Statements included in Item 8.
A
substantial judgment has been rendered against Lorillard in the Scott
litigation.
In
June
of 2004, the court entered a final judgment in favor of the plaintiffs in
Scott v. The American Tobacco Company, et al. (District Court, Orleans
Parish, Louisiana, filed May 24, 1996), a class action on behalf of certain
cigarette smokers resident in the State of Louisiana. The jury awarded
plaintiffs approximately $591.0 million to fund
cessation
programs for Louisiana smokers. The court’s final judgment also reflected its
award of prejudgment interest. During February of 2007, the Louisiana Court
of
Appeal issued a ruling that, among other things, reduced the amount of the
award
by approximately $312.0 million; struck the award of prejudgment interest,
which
totaled approximately $440.0 million as of December 31, 2006; and ruled that
the
only class members who are eligible to participate in the smoking cessation
program are those who began smoking by September 1, 1988, and whose claims
accrued by September 1, 1988. The Louisiana Court of Appeal has returned
the
case to the trial court for further proceedings. Lorillard’s share of any
judgment has not been determined. It is possible that the parties will seek
further review of this decision. For additional information on the
Scott case, please read Note 20 of the Notes to Consolidated Financial
Statements included in Item 8 of this report.
The
verdict returned in the federal government’s
reimbursement case, while not final, could impose significant financial burdens
on Lorillard and adversely affect future sales and
profits.
During
August of 2006, a final judgment and remedial order was entered in United
States of America v. Philip Morris USA, Inc., et al.
(U.S.
District Court, District of Columbia, filed September 22, 1999). Lorillard
is
one of the defendants in the case. Although the verdict did not award monetary
damages to the plaintiff, the final judgment and remedial order granted
equitable relief and imposes a number of requirements on the defendants.
Such
requirements include, but are not limited to, corrective statements by
defendants related to the health effects of smoking. The remedial order also
would place certain prohibitions on the manner in which defendants market
their
cigarette products and would eliminate any use of “lights” or similar product
descriptors. It is likely that the remedial order, including the prohibitions
on
the use of the descriptors relating to low tar cigarettes, will negatively
affect Lorillard’s future sales and profits. Defendants, including Lorillard,
have noticed appeals from the final judgment and the remedial order. Plaintiff
also has noticed an appeal from the final judgment. Defendants have received
a
stay of the judgment and remedial order from the District of Columbia Court
of
Appeal that will remain in effect while the appeal is proceeding. As a result
of
the government’s appeal, it is possible that certain of the government’s claims
or damages could be reinstated. While trial was underway, the District of
Columbia Court of Appeals ruled that plaintiff may not seek disgorgement
of
profits, but this appeal was interlocutory in nature and could be reconsidered
in the present appeal. Prior to trial, the government had estimated that
it was
entitled to approximately $280.0 billion from the defendants for its
disgorgement of profits claim. In addition, the government sought during
trial
more than $10.0 billion for the creation of nationwide smoking cessation,
public
education and counter-marketing programs. In its 2006 verdict, the trial
court
declined to award such relief. It is possible that these claims could be
reinstated on appeal. Please read Note 20 of the Notes to Consolidated Financial
Statements included in Item 8 of this Report for detailed information regarding
tobacco litigation.
Lorillard
is a defendant in a case that has been certified as a nationwide class action
and that could result in a substantial verdict.
Schwab
v. Philip Morris USA, Inc., et al.
(U.S.
District Court, Eastern District, New York, filed May 11, 2004), has been
certified by a federal judge as a nationwide class action on behalf of
individuals who purchased “lights” cigarettes. Plaintiffs’ claims in
Schwab
are
based on defendants’ alleged RICO violations in the manufacture, marketing and
sale of “lights” cigarettes. Plaintiffs have estimated damages to the class to
be in the hundreds of billions of dollars. Any damages awarded to the plaintiffs
based on defendants’ violation of the RICO statute would be trebled. The federal
court of appeals has agreed to review the class certification order, and
it has
stayed all activity before the trial court until the appeal is concluded.
Please
read Note 20 of the Notes to Consolidated Financial Statements included in
Item
8 of this Report for detailed information regarding tobacco
litigation.
The
Florida Supreme Court’s approval of an order vacating a $16.3 billion judgment
against Lorillard in the Engle litigation is not
final.
Engle
v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Dade County, Florida,
filed May 5, 1994) was certified as a class action on behalf of Florida
residents, and survivors of Florida residents, who were injured or died from
medical conditions allegedly caused by addiction to cigarettes. During 2000,
a
jury awarded the certified class approximately $16.3 billion in punitive
damages
against Lorillard. This award was part of a verdict against other major tobacco
companies that totaled $145.0 billion in punitive damages. The verdict bears
interest at the rate of 10.0% per year. During 2006, the Florida Supreme
Court
affirmed the 2003 holding of an intermediate appellate court that the $145.0
billion punitive damages award must be vacated. The Florida Supreme Court
also
determined that the case could not
proceed
further as a class action and decertified the class. The Florida Supreme
Court
has formally concluded its consideration of Engle, but the time for
plaintiffs to seek review of the case by the U.S. Supreme Court has not
expired.
In
the
event that the circuit court’s $16.3 billion punitive damages judgment against
Lorillard is reinstated and ultimately upheld, the amount of that judgment
would
significantly exceed the assets of Lorillard. Even if the circuit court’s $16.3
billion punitive damages judgment were reduced, the reduced amount of the
final
judgment might ultimately exceed the assets of Lorillard and result in a
liquidation or bankruptcy of Lorillard. For additional information on the
Engle
case,
please read Note 20 of the Notes to Consolidated Financial Statements included
in Item 8 of this report.
The
Florida Supreme Court’s ruling in Engle could encourage additional litigation
against cigarette manufacturers, including Lorillard.
The
2006
ruling by the Florida Supreme Court in Engle
permits
members of the decertified class to file individual claims, including claims
for
punitive damages. The opportunity for filing such cases concludes during
January
of 2008. The Florida Supreme Court held that these individual plaintiffs
are
entitled to rely on some of the jury’s findings in favor of the plaintiffs in
the first phase of the Engle
trial on
a number of issues including, among other things, that smoking cigarettes
causes
a number of diseases; that cigarettes are addictive or dependence-producing;
and
that the defendants, including Lorillard, were negligent, breached express
and
implied warranties, placed cigarettes on the market that were defective and
unreasonably dangerous, and concealed or conspired to conceal the risks of
smoking. The Supreme Court further held that these first phase jury findings
will be binding on the Engle
defendants, including Lorillard, in any such future case filed by a member
of
the former class. It is possible that a significant number of additional
individual lawsuits will be filed against cigarette manufacturers, including
Lorillard, by former class members. It is not possible to estimate the number
or
ultimate outcome of lawsuits that could be filed as a result of this decision.
In the aggregate, these claims may have a material adverse effect on our
financial condition, results of operations, and cash flows. For additional
information on the Engle
case,
please read Note 20 of the Notes to Consolidated Financial Statements included
in Item 8 of this report.
The
United States Surgeon General has issued a report regarding the risks of
cigarette smoking to non-smokers that could result in additional litigation
against cigarette manufacturers, additional restrictions placed on the use
of
cigarettes, and additional regulations placed on the manufacture or sale
of
cigarettes.
In
a
report entitled “The Health Consequences of Involuntary Exposure to Tobacco
Smoke: A Report of the Surgeon General, 2006,” the United States Surgeon General
summarized conclusions from previous Surgeon General’s reports concerning the
health effects of exposure to second-hand smoke by non-smokers. According
to
this report, scientific evidence now supports six major conclusions:
|
·
|
Second-hand
smoke causes premature death and disease in children and in adults
who do
not smoke.
|
|
·
|
Children
exposed to second-hand smoke are at an increased risk for sudden
infant
death syndrome (SIDS), acute respiratory infections and ear
problems.
|
|
·
|
Exposure
of adults to second-hand smoke has immediate adverse effects on
the
cardiovascular system and causes heart disease and lung
cancer.
|
|
·
|
The
scientific evidence indicates that there is no risk-free level
of exposure
to second-hand smoke.
|
|
·
|
Many
millions of Americans, both children and adults, are exposed to
second-hand smoke in their homes and
workplaces.
|
|
·
|
Eliminating
smoking in indoor spaces fully protects non-smokers from exposure
to
second-hand smoke. Separating smokers from non-smokers, cleaning
the air,
and ventilating buildings cannot eliminate exposures of non-smokers
to
second-hand smoke.
|
This
report could form the basis of additional litigation against cigarette
manufacturers, including Lorillard. The report could be used to support existing
litigation against Lorillard or other cigarette manufacturers. It also is
possible that the
Surgeon
General’s report could result in additional restrictions placed on cigarette
smoking or in additional regulations placed on the manufacture or sale of
cigarettes. It is possible that such additional restrictions or regulations
could result in a decrease in cigarette sales in the United States, including
sales of Lorillard brands. These developments may have a material adverse
effect
on our financial condition, results of operations, and cash flows.
Lorillard
has substantial payment obligations under litigation settlement agreements
which
will materially adversely affect its cash flows and operating income in future
periods.
Lorillard
and other manufacturers of tobacco products are parties to the State Settlement
Agreements with the 50 states, the District of Columbia, the Commonwealth
of
Puerto Rico and other U.S. territories, which settled the asserted and
unasserted health care cost recovery and certain other claims of those states
and territories.
Under
the
State Settlement Agreements, Lorillard is obligated to pay approximately
$925.0
million to $975.0 million in 2007, primarily based on 2006 estimated industry
volume. Annual payments under the State Settlement Agreements are required
to be
paid in perpetuity and are based, among other things, on Lorillard’s domestic
market share and unit volume of domestic shipments in the year preceding
the
year in which payment is due. Please read Note 20 to the Notes to Consolidated
Financial Statements included in Item 8 for additional information regarding
the
State Settlement Agreements.
Concerns
that mentholated cigarettes may pose greater health risks could adversely
affect
Lorillard.
Some
plaintiffs and other sources, including among others, the Center for Disease
Control and Prevention, have claimed that mentholated cigarettes may pose
greater health risks than non-mentholated cigarettes. If such claims were
to be
substantiated, Lorillard, as the leading manufacturer of mentholated cigarettes
in the United States, could face increased exposure to tobacco-related
litigation. Even if those claims are not substantiated, increased concerns
about
the health impact of mentholated cigarettes could adversely affect Lorillard’s
sales, including sales of Newport.
Lorillard
is subject to important limitations on advertising and marketing cigarettes
that
could harm its competitive position.
Television
and radio advertisements of tobacco products have been prohibited since 1971.
Under the State Settlement Agreements, Lorillard generally cannot use billboard
advertising, cartoon characters, sponsorship of concerts, non-tobacco
merchandise bearing its brand names and various other advertising and marketing
techniques. In addition, the Master Settlement Agreement prohibits the targeting
of youth in advertising, promotion or marketing of tobacco products.
Accordingly, Lorillard has determined not to advertise its cigarettes in
magazines with large readership among people under the age of 18. Additional
restrictions may be imposed or agreed to in the future. These limitations
may
make it difficult to maintain the value of an existing brand if sales or
market
share decline for any reason. Moreover, these limitations significantly impair
the ability of cigarette manufacturers, including Lorillard, to launch new
premium brands.
Sales
of cigarettes are subject to substantial federal, state and local excise
taxes.
In
1999,
federal excise taxes were $0.24 per pack and state excise taxes ranged from
$0.03 to $1.00 per pack. In
2006,
the federal excise tax was $0.39 per pack and combined state and local excise
taxes ranged from $0.07 to $3.66 per pack. During 2006, excise tax increases
ranging from $0.05 to $1.00 per pack of 20 cigarettes were implemented in
six
states and two municipalities. Proposals continue to be made to increase
federal, state and local tobacco excise taxes. Lorillard believes that increases
in excise and similar taxes have had an adverse impact on sales of cigarettes
and that future increases, the extent of which cannot be predicted, could
result
in further volume declines for the cigarette industry, including Lorillard,
and
an increased sales shift toward lower priced discount cigarettes rather than
premium brands.
Lorillard
is dependent on the U.S. cigarette business, which we expect to continue
to
contract.
Lorillard’s
U.S. cigarette business is currently its only significant business. The U.S.
cigarette market has generally been contracting and we expect it to continue
to
contract. Lorillard does not have foreign cigarette sales that could offset
these effects, as it sold the international rights to substantially all of
its
brands, including Newport, in 1977. As a result of price increases, restrictions
on advertising and promotions, increases in regulation and excise taxes,
health
concerns, a
decline
in the social acceptability of smoking, increased pressure from anti-tobacco
groups and other factors, U.S. cigarette shipments have decreased at a compound
annual rate of approximately 2.6% over the period 1997 through 2006, as measured
by Management Science Associates. Domestic U.S. cigarette industry shipments
decreased by 2.4% during 2006, as compared to 2005, and 3.2% for 2005, as
compared to 2004, according to information provided by Management Science
Associates.
Lorillard
derives most of its revenue from the sales of one product in the premium
market.
Lorillard’s
largest selling brand, Newport, accounted for approximately 93.3%
of
Lorillard’s sales revenue in 2006. Newport is positioned in the premium segment
of the U.S. cigarette market. Lorillard’s principal strategic plan revolves
around the advertising and promotion of its Newport brand. Lorillard cannot
ensure that it will continue to successfully implement its strategic plan
with
respect to Newport or that implementation of its strategic plan will result
in
the maintenance or growth of the Newport brand.
The
use of significant amounts of promotion expenses and sales incentives in
response to competitive actions and market price sensitivity may have a material
adverse impact on Lorillard.
The
cigarette market over recent years has been very price competitive due to
the
impact of, among other things, higher state and local excise taxes and the
market share of deep discount brands. In response to these and other competitor
actions and pricing pressures, Lorillard has engaged in significant use of
promotional expenses and sales incentives. The cost of these measures could
have
a material adverse impact on Lorillard. Lorillard regularly reviews the results
of its promotional spending activities and adjusts its promotional spending
programs in an effort to maintain its competitive position. Accordingly,
unit
sales volume and sales promotion costs in any period are not necessarily
indicative of sales and costs that may be realized in subsequent
periods.
Several
of Lorillard’s competitors have developed alternative cigarette products.
Certain
of the major cigarette makers are marketing alternative cigarette products.
For
example, Philip Morris has developed an alternative cigarette called Accord
in
which the tobacco is heated rather than burned. Reynolds American has developed
an alternative cigarette called Eclipse in which the tobacco is primarily
heated, with only a small amount of tobacco burned. Vector Tobacco Inc. is
marketing a cigarette offered in several packings with declining levels of
nicotine, called Quest. Philip Morris and Reynolds American have indicated
that
these products may deliver fewer smoke components as compared to conventional
cigarettes. Lorillard has not marketed similar alternative cigarettes. Should
such alternative cigarette products gain a significant share of the U.S.
cigarette market, Lorillard may be at a competitive disadvantage.
Lorillard
may not be able to develop, produce or commercialize competitive new products
and technologies required by regulatory changes or changes in consumer
preferences.
Consumer
health concerns and changes in regulations are likely to require Lorillard
to
introduce new products or make substantial changes to existing products.
For
example, six states have enacted legislation requiring cigarette manufacturers
to reduce the ignition propensity of their products. Lorillard believes that
there may be increasing pressure from public health authorities to develop
a
conventional cigarette or an alternative cigarette that provides a demonstrable
reduced risk of adverse health effects. Lorillard may not be able to develop
a
reduced risk product that is acceptable to consumers. In addition, the costs
associated with developing any such new products and technologies could be
substantial.
The
availability of counterfeit cigarettes could adversely affect Lorillard’s sales.
Sales
of
counterfeit cigarettes in the United States, including counterfeits of
Lorillard’s Newport brand, could adversely impact sales by the manufacturers of
the brands that are counterfeited and potentially damage the value and
reputation of those brands. The availability of counterfeit Newport cigarettes
could have a material adverse effect on Lorillard’s sales volumes, revenue and
profits.
Lorillard
relies on a single manufacturing facility for the production of its cigarettes.
Lorillard
produces all of its cigarettes at its Greensboro, North Carolina manufacturing
facility. If Lorillard’s manufacturing plant is damaged, destroyed or
incapacitated or Lorillard is otherwise unable to operate its manufacturing
facility, Lorillard may be unable to produce cigarettes and may be unable
to
meet customer demand.
Lorillard
relies on a small number of suppliers for certain of its tobacco
leaf.
Lorillard
purchases more than 90% of its domestic leaf tobacco from one supplier, Alliance
One International, Inc. In addition, Lorillard purchases all of its
reconstituted tobacco from one supplier, which is an affiliate of Reynolds
American, Inc., a major competitor of Lorillard. If either of these suppliers
becomes unwilling or unable to supply Lorillard and Lorillard is unable to
find
an alternative supplier on a timely basis, Lorillard’s operations could be
disrupted resulting in lower production levels and reduced sales.
Risks
Related to Us and Our Subsidiary, Boardwalk Pipeline Partners,
LP
Boardwalk
Pipeline’s
expansion projects may not be completed or completed on materially different
terms or timing than initially anticipated. If completed, the expansion project
may not achieve the intended benefits.
Boardwalk
Pipeline has announced significant proposed expansion projects and may consider
additional expansion projects in the future. Boardwalk Pipeline anticipates
that
it will be required to seek additional financing in the future to fund current
and future expansion projects and may not be able to secure such financing
on
favorable terms, or at all. In addition, Boardwalk Pipeline may not be able
to
complete the expansion projects on time as a result of weather conditions,
delays in obtaining or failure to obtain regulatory approvals, delays in
obtaining key materials, labor difficulties and land owner opposition,
difficulties with partners or potential partners or other factors beyond
its
control. If Boardwalk Pipeline does not meet designated schedules for approval
and construction of its expansion projects, certain of its customers may
have
the right to terminate their precedent agreements relating to the expansion
projects. Certain customers may also have the right to receive liquidated
damages. Even if expansion projects are completed, the total cost of the
expansion projects may be higher than anticipated and the performance of
Boardwalk Pipeline’s business following the expansion projects may not meet
expectations. Further, Boardwalk Pipeline may not be able to timely and
effectively integrate the expansion projects into operations, such integration
may result in unforeseen operating difficulties or unanticipated costs and
the
expansion projects might divert the attention of management from other business
concerns. Any of these or other factors could adversely affect Boardwalk
Pipeline’s ability to realize the anticipated benefits from the expansion
projects and thus have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Boardwalk
Pipeline’s natural gas transportation and storage operations are subject to FERC
rate-making policies.
Action
by
the FERC on currently pending matters as well as matters arising in the future
could adversely affect Boardwalk Pipeline’s ability to establish rates, or to
charge rates that would cover future increases in Boardwalk Pipeline’s costs, or
even to continue to collect rates that cover current costs. Boardwalk Pipeline
cannot make assurances that it will be able to recover all of its costs through
existing or future rates. An adverse determination in any future rate proceeding
brought by or against Texas Gas or Gulf South could have a material adverse
effect on our business, financial condition, results of operations and cash
flows.
On
July
20, 2004, the United States Court of Appeals for the District of Columbia
Circuit (“D.C. Circuit”) issued its opinion in BP West Coast Products, LLC
v. FERC (“BP West Coast”) and vacated the portion of the FERC’s decision
applying the FERC’s Lakehead policy to determine an allowance for
income taxes in the regulated cost of service. In its Lakehead
decision, the FERC allowed an oil pipeline limited partnership
to include
in its cost of service an income tax allowance to the extent that its
unitholders were corporations subject to income tax. The D.C. Circuit emphasized
that a regulated pipeline’s cost of service should include only “appropriate
cost[s]” and compared income taxes paid by owners of equity interests in a
pipeline to the costs of bookkeeping paid by such owners, indicating the
court’s
belief that such costs paid by an entity other than the regulated entity
would
not be recoverable in the rates of the pipeline. In May and June 2005, the
FERC
issued a statement of general policy and an order on remand of BP West
Coast, respectively, in which the FERC stated it will permit pipelines to
include in cost-of-service a tax allowance to reflect actual or potential
tax
liability on their public utility income attributable to all partnership
or
limited liability company interests, if the
ultimate
owner of the interest has an actual or potential income tax liability on
such
income. Whether a pipeline’s owners have such actual or potential income tax
liability will be reviewed by the FERC on a case-by-case basis. Although
the new
policy is generally favorable for pipelines that are organized as pass-through
entities, it still entails risk due to the case-by-case review requirement.
In
December 2005, the FERC issued a case-specific review of the income tax
allowance issue in the SFPP, L.P. proceeding. The FERC ruled favorably
to SFPP, L.P. on all income tax issues and set forth guidelines regarding
the
type of evidence necessary for the pipeline to determine its income tax
allowance. The FERC’s BP West Coast remand decision, the new tax
allowance policy, and the December 2005 order have been appealed to the D.C.
Circuit. As a result, the ultimate outcome of these proceedings is not certain
and could result in changes to the FERC’s treatment of income tax allowances in
cost of service. If the FERC were to change its tax allowance policies in
the
future, or if current policy was reversed or changed on appeal by a court,
such
changes could materially and adversely impact the rates Boardwalk Pipeline
is
permitted to charge as future rates are approved for its interstate
transportation services.
Boardwalk
Pipeline’s operations are subject to operational hazards and unforeseen
interruptions for which Boardwalk Pipeline may not be adequately insured.
There
are
a variety of operating risks inherent in Boardwalk Pipeline’s natural gas
transportation and storage operations, such as leaks, explosions and mechanical
problems, all of which could cause substantial financial losses. Any of these
or
other similar occurrences could result in the disruption of Boardwalk Pipeline’s
operations, substantial repair costs, personal injury or loss of human life,
significant damage to property, environmental pollution, impairment of Boardwalk
Pipeline’s operations and substantial revenue losses. The location of pipelines
near populated areas, including residential areas, commercial business centers
and industrial sites, could significantly increase the level of damages
resulting from these risks.
Boardwalk
Pipeline currently possesses property, business interruption and general
liability insurance, but proceeds from such insurance coverage may not be
adequate for all liabilities or expenses incurred or revenues lost. Moreover,
such insurance may not be available in the future at commercially reasonable
costs on commercially reasonable costs and terms.
Because
of the natural decline in gas production from existing wells, Boardwalk
Pipeline’s success depends on its ability to obtain access to new sources of
natural gas.
For
the
years 2003 to 2005, gas production from the Gulf Coast region, which supplies
the majority of Boardwalk Pipeline’s throughput, has declined an average of
approximately 11.0% per year according to the Energy Information Administration
(the “EIA”). A large part of this decline was due to the effects of Hurricanes
Katrina and Rita in 2005. Boardwalk Pipeline cannot give any assurance regarding
the gas production industry’s ability to find new sources of domestic supply.
Production from existing wells and gas supply basins connected to Boardwalk
Pipeline’s systems will naturally decline further over time. The amount of
natural gas reserves underlying these wells may also be less than Boardwalk
Pipeline anticipates, or the rate at which production from these reserves
declines may be greater than Boardwalk Pipeline anticipates. Accordingly,
to
maintain or increase throughput levels on its pipelines, Boardwalk Pipeline
must
continually obtain access to new supplies of natural gas. The primary factors
affecting Boardwalk Pipeline’s ability to obtain new sources of natural gas to
its pipelines include: (1) the level of successful drilling activity near
Boardwalk Pipeline’s pipelines; (2) Boardwalk Pipeline’s ability to compete for
these supplies; (3) the successful completion of new liquefied natural gas
(“LNG”) facilities near Boardwalk Pipeline’s facilities; and (4) Boardwalk
Pipeline’s gas quality requirements.
The
level
of drilling activity is dependent on a number of factors beyond Boardwalk
Pipeline’s control. The primary factor that impacts drilling decisions is the
price of oil and natural gas. A sustained decline in natural gas prices could
result in a decrease in exploration and development activities in the fields
served or to be served by Boardwalk Pipeline, which would lead to reduced
throughput levels on its pipelines. Other factors that impact production
decisions include producers’ capital budget limitations, the ability of
producers to obtain necessary drilling and other governmental permits, the
availability and cost of drilling rigs and other drilling equipment, and
regulatory changes. Because of these factors, even if new natural gas reserves
were discovered in areas served by Boardwalk Pipeline, producers may choose
not
to develop those reserves or may connect them to different pipelines.
Imported
LNG is expected to be a significant component of future natural gas supply
to
the United States. Much of this increase in LNG supply is expected to be
imported through new LNG facilities to be developed over the next decade.
Boardwalk Pipeline cannot predict which, if any, of these projects will be
constructed. If a significant number of these new projects fail to be developed
with their announced capacity, or there are significant delays in such
development, or if they are built in locations where they are not connected
to
Boardwalk Pipeline’s systems or they do not influence sources of supply on its
systems, Boardwalk Pipeline may not realize expected increases in future
natural
gas supply available for transportation through its systems.
If
Boardwalk Pipeline is not able to obtain new supplies of natural gas to replace
the natural decline in volumes from existing supply basins, or if the expected
increase in natural gas supply through imported LNG is not realized, throughput
on its pipeline systems would decline.
Successful
development of LNG import terminals in the eastern or northeastern United
States
could reduce the demand for Boardwalk Pipeline’s services.
Development
of new, or expansion of existing, LNG facilities on the East Coast could
reduce
the need for customers in the northeastern United States to transport natural
gas from the Gulf Coast and other supply basins connected to the Boardwalk
Pipeline’s systems. This could reduce the amount of gas transported by Boardwalk
Pipeline for delivery off-system to other interstate pipelines serving the
northeast. If Boardwalk Pipeline is not able to replace these volumes with
volumes to other markets or other regions, throughput on its pipeline systems
will decline.
Boardwalk
Pipeline may not be able to maintain or replace expiring gas transportation
and
storage contracts at favorable rates.
Boardwalk
Pipeline’s primary exposure to market risk occurs at the time existing
transportation contracts expire and are subject to renegotiation. As of December
31, 2006, approximately 14.0% of the firm contract load on the Boardwalk
Pipeline systems was due to expire on or before December 31, 2007. Upon
expiration, Boardwalk Pipeline may not be able to extend contracts with existing
customers or obtain replacement contracts at favorable rates or on a long-term
basis. A key determinant of the value that customers can realize from firm
transportation on a pipeline is the basis differential, which can be affected
by, among other things, the availability of supply, available capacity, storage
inventories, weather and general market demand in the respective
areas.
The
extension or replacement of existing contracts depends on a number of factors
beyond Boardwalk Pipeline’s control, including:
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existing
and new competition to deliver natural gas to Boardwalk Pipeline’s
markets;
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the
growth in demand for natural gas in Boardwalk Pipeline’s markets;
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whether
the market will continue to support long-term contracts;
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the
reduction of current basis differentials-market price spreads
between two
points across the Boardwalk Pipeline
systems;
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whether
Boardwalk Pipeline’s strategy continues to be successful;
and
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the
effects of state regulation on customer contracting practices.
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The
northeastern terminus of the Texas Gas pipeline system is in Lebanon, Ohio,
where it connects with other interstate natural gas pipelines delivering
natural
gas to East Coast and Midwest metropolitan areas and other indirect markets.
Pipeline capacity into Lebanon is approximately 48.0% greater than pipeline
capacity leaving that point, creating a bottleneck for supply into areas
of high
demand. Approximately 21.0% of Boardwalk Pipeline’s long-term contracts with
firm deliveries to Lebanon expire by the end of 2007. While demand for natural
gas from Boardwalk Pipeline’s Lebanon, Ohio terminus and other interconnects in
that region has remained strong in the past, there can be no assurance regarding
continued demand for gas from the Gulf Coast region, including East Texas,
in
the face of other
sources
of natural gas for various indirect markets, including pipelines from Canada,
a
new proposed pipeline from the Rockies, and new LNG facilities proposed to
be
constructed along the East Coast.
Boardwalk
Pipeline depends on certain key customers for a significant portion of its
revenues.
Boardwalk
Pipeline relies on a limited number of customers for a significant portion
of
its revenues. For the years ended December 31, 2006, 2005 and 2004, ProLiance
Energy, LLC and Atmos Energy accounted for approximately 18.4%, 20.1% and
32.3%
of Boardwalk Pipeline’s total operating revenues. Boardwalk Pipeline may be
unable to negotiate extensions or replacements of these contracts and those
with
other key customers on favorable terms as a result of competition,
creditworthiness or for other reasons.
Boardwalk
Pipeline is exposed to credit risk relating to nonperformance by its customers.
Boardwalk
Pipeline is exposed to credit risk from the nonperformance by its customers
of
their contractual obligations, in large part relating to volumes owed by
customers for imbalances or gas loaned to them, generally under parking and
lending services and no-notice services. If any significant customer of
Boardwalk Pipeline should have credit or financial problems resulting in
a delay
or failure to repay the gas they owe Boardwalk Pipeline, it could have a
material adverse effect on Boardwalk Pipeline’s financial condition, results of
operation and cash flows. Please read information on credit risk included
in
Credit Risk under Item 7A. Quantitative and Qualitative Disclosures about
Market
Risk.
Boardwalk
Pipeline depends on third-party pipelines and other facilities interconnected
to
its pipelines.
Boardwalk
Pipeline depends upon third-party pipelines and other facilities that provide
delivery options to and from its pipelines. For example, Gulf South’s pipeline
system can deliver approximately 500.0 Mcf per day to a major pipeline
connection with Texas Eastern at Kosciusko, Mississippi. If this or any other
pipeline connection were to become unavailable for current or future volumes
of
natural gas due to repairs, damage to the facility, lack of capacity or any
other reason, Boardwalk Pipeline’s ability to continue shipping natural gas to
end markets could be restricted. Any temporary or permanent interruption
at any
key pipeline interconnect could cause a material reduction in volumes
transported on or stored at facilities of Boardwalk Pipeline.
Significant
changes in natural gas prices could affect supply and demand, and reduce
system
throughput.
Higher
natural gas prices could result in a decline in the demand for natural gas
and,
therefore, in the throughput on the Boardwalk Pipeline systems. In addition,
reduced price volatility could reduce the revenues generated by Boardwalk
Pipeline’s parking and lending and interruptible storage services. In general
terms, the price of natural gas fluctuates in response to changes in supply,
changes in demand, market uncertainty and a variety of additional factors
that
are beyond Boardwalk Pipeline’s control. These factors include:
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worldwide
economic conditions;
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weather
conditions and seasonal trends;
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levels
of domestic production and consumer demand;
|
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the
availability of LNG;
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a
material decrease in the price of natural gas could have an adverse
effect
on the shippers who have contracted for capacity on Boardwalk Pipeline’s
planned expansion projects;
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the
availability of adequate transportation capacity;
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the
price and availability of alternative fuels;
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the
effect of energy conservation measures;
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the
nature and extent of governmental regulation and taxation; and
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the
anticipated future prices of natural gas, LNG and other commodities.
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Risks
Related to Us and Our Subsidiary, Diamond Offshore Drilling,
Inc.
Diamond
Offshore’s business depends on the level of activity in the oil and gas
industry, which is significantly affected by volatile oil and gas
prices.
Diamond
Offshore’s business depends on the level of activity in offshore oil and gas
exploration, development and production in markets worldwide. Oil and gas
prices, market expectations of potential changes in these prices and a variety
of political and economic factors significantly affect this level of activity.
However, higher commodity prices do not necessarily translate into increased
drilling activity since Diamond Offshore’s customers’ expectations of future
commodity prices typically drive demand for Diamond Offshore’s rigs. Oil and gas
prices are extremely volatile and are affected by numerous factors beyond
Diamond Offshore’s control, including:
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the
political environment of oil-producing regions, including uncertainty
or
instability resulting from an escalation or additional outbreak
of armed
hostilities in the Middle East or other geographic areas or further
acts
of terrorism in the United States or
elsewhere;
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worldwide
demand for oil and gas;
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the
cost of exploring for, producing and delivering oil and
gas;
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the
discovery rate of new oil and gas
reserves;
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the
rate of decline of existing and new oil and gas
reserves;
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available
pipeline and other oil and gas transportation
capacity;
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the
ability of oil and gas companies to raise
capital;
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weather
conditions in the United States and
elsewhere;
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the
ability of the Organization of Petroleum Exporting Countries,
commonly
called OPEC, to set and maintain production levels and
pricing;
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the
level of production in non-OPEC
countries;
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the
policies of the various governments regarding exploration and
development
of their oil and gas reserves; and
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advances
in exploration and development
technology.
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Diamond
Offshore’s industry is cyclical.
Diamond
Offshore’s industry has historically been cyclical. There have been periods of
high demand, short rig supply and high dayrates (such as Diamond Offshore
is
currently experiencing in the markets in which it operates), followed by
periods
of lower demand, excess rig supply and low dayrates. Periods of excess rig
supply intensify the competition in the industry and often result in rigs
being
idle for long periods of time.
Current
oil and natural gas prices are significantly above historical averages, which
has resulted in higher utilization and dayrates earned by Diamond Offshore’s
drilling units, generally beginning in the third quarter of 2004. However,
Diamond Offshore can provide no assurance that the current industry cycle
of
high demand, short rig supply and higher dayrates will continue. Diamond
Offshore may be required to idle rigs or to enter into lower rate contracts
in
response to market conditions in the future.
Prolonged
periods of low utilization and dayrates could also result in the recognition
of
impairment charges on certain of Diamond Offshore’s drilling rigs if future cash
flow estimates, based upon information available to management at the time,
indicate that the carrying value of these rigs may not be
recoverable.
The
terms of some of Diamond Offshore’s drilling contracts may limit its ability to
benefit from increasing dayrates in a rising market.
The
duration of offshore drilling contracts is generally determined by market
demand
and the respective management strategies of the offshore drilling contractor
and
its customers. In periods of rising demand for offshore rigs, contractors
typically prefer well-to-well contracts that allow contractors to profit
from
increasing dayrates. In contrast, during these periods customers with reasonably
definite drilling programs typically prefer longer term contracts to maintain
dayrate prices at a consistent level. Conversely, in periods of decreasing
demand for offshore rigs, contractors generally prefer longer term contracts
to
preserve dayrates at existing levels and ensure utilization, while customers
prefer well-to-well contracts that allow them to obtain the benefit of lower
dayrates.
To
the
extent possible, Diamond Offshore seeks to have a foundation of long-term
contracts with a reasonable balance of single-well, well-to-well and short-term
contracts to minimize the downside impact of a decline in the market while
still
participating in the benefit of increasing dayrates in a rising market. However,
Diamond Offshore cannot be sure that it will be able to achieve or maintain
such
a balance from time to time. Diamond Offshore’s inability to fully benefit from
increasing dayrates in a rising market due to the long-term nature of its
contracts, may adversely impact its profitability.
The
majority of Diamond Offshore’s contracts for its drilling units are fixed
dayrate contracts, and increases in Diamond Offshore’s operating costs could
adversely affect the profitability of those
contracts.
Diamond
Offshore’s contracts for its drilling units provide for the payment of a fixed
dayrate per rig operating day, although some contracts do provide for a limited
escalation in dayrate due to increased operating costs incurred. Many of
Diamond
Offshore’s operating costs, such as labor costs, are unpredictable and fluctuate
based on events beyond Diamond Offshore’s control. The gross margin that Diamond
Offshore realizes on these fixed dayrate contracts will fluctuate based on
variations in Diamond Offshore’s operating costs over the terms of the
contracts. In addition, for contracts with dayrate clauses, Diamond Offshore
may
be unable to recover increased or unforeseen costs from its
customers.
Diamond
Offshore’s drilling contracts may be terminated due to events beyond Diamond
Offshore’s control.
Diamond
Offshore’s customers may terminate some of their drilling contracts if the
drilling unit is destroyed or lost or if drilling operations are suspended
for a
specified period of time as a result of a breakdown of major equipment or,
in
some cases, due to other events beyond the control of either party. In addition,
some of Diamond Offshore’s drilling contracts permit the customer to terminate
the contract after specified notice periods by tendering contractually specified
termination amounts. These termination payments may not fully compensate
Diamond
Offshore for the loss of a contract. In addition, the early termination of
a
contract may result in a rig being idle for an extended period of time. During
depressed market conditions, Diamond Offshore’s customers may also seek
renegotiation of firm drilling contracts to reduce their
obligations.
Rig
conversions, upgrades or newbuilds may be subject to delays and cost
overruns.
From
time
to time, Diamond Offshore may undertake to add new capacity through conversions
or upgrades to rigs or through new construction. Diamond Offshore has entered
into agreements to upgrade two of its drilling units to ultra-deepwater
capability at an estimated aggregate cost of $553.0 million. The shipyard
portion of the upgrade of one rig has been completed, and Diamond Offshore
expects that the unit will return to the Gulf of Mexico in mid-2007. Diamond
Offshore expects delivery of its other semisubmersible unit during the fourth
quarter of 2008. Diamond Offshore also has entered into agreements to construct
two new jack-up drilling units with delivery expected in the first quarter
of
2008 at an aggregate cost of approximately $320.0 million, including drillpipe
and capitalized interest. These projects and other projects of this type
are
subject to risks of delay or cost overruns inherent in any large construction
project resulting from numerous factors, including the
following:
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shortages
of equipment, materials or skilled labor;
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unscheduled
delays in the delivery of ordered materials and
equipment;
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unanticipated
cost increases;
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difficulties
in obtaining necessary permits or in meeting permit
conditions;
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design
and engineering problems;
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failure
or delay of third party service providers and labor disputes.
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Failure
to complete a rig upgrade or new construction on time, or failure to complete
a
rig conversion or new construction in accordance with its design specifications
may, in some circumstances, result in the delay, renegotiation or cancellation
of a drilling contract.
Diamond
Offshore’s business involves numerous operating hazards and Diamond Offshore is
not fully insured against all of them.
Diamond
Offshore’s operations are subject to the usual hazards inherent in drilling for
oil and gas offshore, such as blowouts, reservoir damage, loss of production,
loss of well control, punchthroughs, craterings and natural disasters such
as
hurricanes or fires. The occurrence of these events could result in the
suspension of drilling operations, damage to or destruction of the equipment
involved and injury or death to rig personnel, damage to producing or
potentially productive oil and gas formations and environmental damage.
Operations also may be suspended because of machinery breakdowns, abnormal
drilling conditions, failure of subcontractors to perform or supply goods
or
services or personnel shortages. In addition, offshore drilling operators
are
subject to perils peculiar to marine operations, including capsizing, grounding,
collision and loss or damage from severe weather. Damage to the environment
could also result from our operations, particularly through oil spillage
or
extensive uncontrolled fires. Diamond Offshore may also be subject to damage
claims by oil and gas companies
or other
parties.
Pollution
and environmental risks generally are not fully insurable, and Diamond Offshore
does not typically retain loss-of-hire insurance policies to cover its rigs.
Diamond Offshore’s insurance policies and contractual rights to indemnity may
not adequately cover its losses, or may have exclusions of coverage for some
losses. Diamond Offshore does not have insurance coverage or rights to indemnity
for all risks, including, among other things, war risk,
liability risk
for
certain amounts of excess coverage and
certain physical damage risk. If a significant accident or other event
occurs
and is not fully covered by insurance or contractual indemnity, it could
adversely affect our financial position, results of operations or cash flows.
There can be no assurance that Diamond Offshore will continue to carry the
insurance it currently maintains or that those parties with contractual
obligations to indemnify Diamond Offshore will necessarily be financially
able
to indemnify it against all these risks. In addition, no assurance can be
made
that Diamond Offshore will be able to maintain adequate insurance in the
future
at rates it considers to be reasonable or that it will be able to obtain
insurance against some risks.
Diamond
Offshore significantly increased its insurance deductibles and has elected
to
self-insure for
a portion of its liability exposure and
for physical damage to rigs and equipment caused by named windstorms in the
U.S.
Gulf of Mexico.
Because
the amount of insurance coverage available to Diamond Offshore has been
significantly limited and the cost for such coverage has increased
substantially, Diamond Offshore has elected to self-insure for a portion
of its
liability exposure and for physical damage to rigs and equipment caused by
named
windstorms in the U.S. Gulf of Mexico. Although Diamond Offshore continues
to
carry physical damage insurance for certain other losses, Diamond Offshore
significantly increased its deductibles to offset or mitigate premium increases.
Diamond Offshore’s deductible for physical damage insurance is currently $150.0
million per occurrence (or lower for some rigs if they are declared a
constructive total loss). Diamond Offshore continues to
carry liability insurance with coverages similar to prior years, except that
Diamond Offshore elected to self-insure for a portion of its excess liability
coverage related to named windstorms in the U.S. Gulf of Mexico. Diamond
Offshore’s deductible for liability coverage generally has increased to $5.0
million per occurrence, but its deductibles arising in connection with certain
liabilities relating to named windstorms in the U.S. Gulf of Mexico have
increased to $10.0 million per occurrence, with no annual aggregate deductible.
To the extent that Diamond Offshore incurs certain liabilities related to
named
windstorms in the U.S. Gulf of Mexico in excess
of
$75.0
million, Diamond Offshore is self-insured for up to a maximum retention of
$17.5
million per occurrence in addition to these deductibles. These changes result
in
a higher risk of losses that are not covered by third party insurance contracts.
If named windstorms in the U.S. Gulf of Mexico cause significant damage to
Diamond Offshore’s rigs or equipment or to the property of others for which it
may be liable, it could have a material adverse effect on our
financial position, results of operations or cash flows.
Diamond
Offshore’s international operations involve additional risks not associated with
domestic operations.
Diamond
Offshore operates in various regions throughout the world that may expose
it to
political and other uncertainties, including risks of:
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terrorist
acts, war and civil disturbances;
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kidnapping
of personnel;
|
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expropriation
of property or equipment;
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foreign
and domestic monetary policy;
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the
inability to repatriate income or
capital;
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regulatory
or financial requirements to comply with foreign bureaucratic
actions;
and
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changing
taxation policies.
|
In
addition, international contract drilling operations are subject to various
laws
and regulations in countries in which Diamond Offshore operates, including
laws
and regulations relating to:
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the
equipping and operation of drilling
units;
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repatriation
of foreign earnings;
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oil
and gas exploration and
development;
|
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taxation
of offshore earnings and earnings of expatriate personnel;
and
|
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use
and compensation of local employees and suppliers by foreign
contractors.
|
No
prediction can be made as to what governmental regulations may be enacted
in the
future that could adversely affect the international drilling industry. The
actions of foreign governments, including initiatives by OPEC, may adversely
affect Diamond Offshore’s ability to compete.
Diamond
Offshore’s
drilling contracts in the Mexican GOM expose it to greater risks than they
normally assume.
As
of the
date of this report, Diamond Offshore has three intermediate semisubmersible
rigs and one jack-up rig drilling offshore Mexico under contract with PEMEX,
the
national oil company of Mexico, and has two additional intermediate
semisubmersibles contracted to begin working for PEMEX in the third quarter
of
2007. The terms of these contracts expose Diamond Offshore to greater risks
than
they normally assume, such as exposure to greater environmental liability,
and
can be terminated by PEMEX on short-term notice, contractually or by statute,
subject to certain conditions. While Diamond Offshore believes that the
financial terms of these contracts and its operating safeguards in place
mitigate these risks, Diamond Offshore can provide no assurance that the
increased risk exposure will not have a negative impact on our future operations
or financial results.
Fluctuations
in exchange rates and nonconvertibility of currencies could result in
losses.
Due
to
Diamond Offshore’s international operations, Diamond Offshore may experience
currency exchange losses where revenues are received and expenses are paid
in
nonconvertible currencies or where it does not hedge an exposure to a foreign
currency. Diamond Offshore may also incur losses as a result of an inability
to
collect revenues because of a shortage of convertible currency available
to the
country of operation, controls over currency exchange or controls over the
repatriation of income or capital. Diamond Offshore can provide no assurance
that financial hedging arrangements will effectively hedge any foreign currency
fluctuation losses that may arise.
Risks
Related to Us and Our Subsidiaries Generally
In
addition to the specific risks and uncertainties faced by our subsidiaries,
as
discussed above, we and all of our subsidiaries face risks and uncertainties
related to, among other things, terrorism, hurricanes and other natural
disasters, competition, government regulation, dependence on key executives
and
employees, litigation, dependence on information technology and compliance
with
environmental laws.
Future
acts of terrorism could harm us and our subsidiaries.
Future
terrorist attacks and the continued threat of terrorism in this country or
abroad, as well as possible retaliatory military and other action by the
United
States and its allies, could have a significant impact on the businesses
of
certain of our subsidiaries, including the following:
CNA.
CNA may
bear substantial losses from future acts of terrorism. The Terrorism Risk
Insurance Extension Act of 2005 (“TRIEA”) extended, until December 31, 2007, the
program established by the Terrorism Risk Insurance Act of 2002. Under this
program, insurers are required to offer terrorism insurance and the federal
government will share the risk of loss by commercial property and casualty
insurers arising from future terrorist attacks. TRIEA does not provide complete
protection for future losses derived from acts of terrorism. Please read
information on TRIEA included in the MD&A under Item 7.
Diamond
Offshore and Boardwalk Pipeline. The
continued threat of terrorism and the impact of retaliatory military and
other
action by the United States and its allies might lead to increased political,
economic and financial market instability and volatility in prices for oil
and
natural gas, which could affect the market for DiamondOffshore’s oil and gas
offshore drilling services and Boardwalk Pipeline’s natural gas transportation,
gathering and storage services. In addition, it has been reported that
terrorists might target domestic energy facilities. While Diamond Offshore
and
Boardwalk Pipeline take steps that they believe are appropriate to increase
the
security of their energy assets, there is no assurance that they can completely
secure their assets, completely protect them against a terrorist attack or
obtain adequate insurance coverage for terrorist acts at reasonable rates.
Loews
Hotels.
The
travel and tourism industry went into a steep decline in the periods following
the 2001 World Trade Center event which had a negative impact on the occupancy
levels and average room rates at Loews Hotels. Future terrorist attacks could
similarly lead to reductions in business travel and tourism which could harm
Loews Hotels.
Certain
of our subsidiaries face significant risks related to the impact of hurricanes
and other natural disasters.
In
addition to CNA’s exposure to catastrophe losses discussed above, the businesses
operated by several of our other subsidiaries are exposed to significant
harm
from the effects of natural disasters, particularly hurricanes and related
flooding and other damage. While much of the damage caused by natural disasters
is covered by insurance, we cannot be sure that such coverage will be available
or be adequate in all cases. These risks include the following:
Boardwalk
Pipeline.
A
substantial portion of the Gulf South pipeline assets and a smaller portion
of
the Texas Gas pipeline assets are located in the Gulf Coast region of the
United
States and, as such, are exposed to the impact of hurricanes, such as Hurricanes
Katrina and Rita which struck that region in 2005. Boardwalk Pipeline
experienced a variety of damage from those storms, including damage to its
physical facilities and rights of way, loss
of
customers, such
as
the City of New Orleans, damaged or destroyed by the storm and loss of natural
gas supply from facilities of suppliers damaged or destroyed by the storm.
In
addition, Boardwalk Pipeline could be required to relocate some of its pipeline
facilities, possibly at its expense, as the Gulf Coast region is
reconstructed.
Diamond
Offshore. Diamond
Offshore operates its offshore rig fleet in waters that can be severely impacted
by hurricanes and other natural disasters, including the U.S. Gulf of Mexico.
In
late August 2005, one of Diamond Offshore’s jack-up drilling rigs, the
Ocean
Warwick,
was
seriously damaged during Hurricane Katrina and other rigs in Diamond’s fleet and
its warehouse in New Iberia, Louisiana sustained lesser damage in Hurricanes
Katrina or Rita, or in some cases both storms. In addition to damaging or
destroying rig equipment, some or all of which may be covered by insurance,
catastrophes of this kind result in additional operating expenses for Diamond,
including the cost of reconnaissance aircraft, rig crew over-time and employee
assistance, hurricane relief supplies, temporary housing and office space
and
the rental of mooring equipment and others which may not be covered by
insurance.
Loews
Hotels. Hotels
operated by Loews Hotels are exposed to damage, business interruption and
reductions in travel and tourism in markets affected by significant natural
disasters such as hurricanes. For example, Loews Hotels’ properties located in
Florida and New
Orleans suffered significant damage from hurricanes and related flooding
during
the past two years.
Certain
of our subsidiaries are subject to extensive federal, state and local
governmental regulations.
The
businesses operated by certain of our subsidiaries are impacted by current
and
potential federal, state and local governmental regulations which imposes
or
might impose a variety of restrictions and compliance obligations on those
companies. Governmental regulations can also change materially in ways that
could adversely affect those companies. Risks faced by our subsidiaries related
to governmental regulation include the following:
CNA.
The
insurance industry is subject to comprehensive and detailed regulation and
supervision throughout the United States. Most insurance regulations are
designed to protect the interests of CNA’s policyholders rather than its
investors. Each state in which CNA does business has established supervisory
agencies that regulate the manner in which CNA does business. Their regulations
relate to, among other things:
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standards
of solvency, including risk-based capital
measurements;
|
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restrictions
on the nature, quality and concentration of
investments;
|
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restrictions
on CNA’s ability to withdraw from unprofitable lines of
insurance;
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the
required use of certain methods of accounting and
reporting;
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the
establishment of reserves for unearned premiums, losses and other
purposes;
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potential
assessments for funds necessary to settle covered claims against
impaired,
insolvent or failed insurance
companies;
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licensing
of insurers and agents;
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approval
of policy forms; and
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limitations
on the ability of CNA’s insurance subsidiaries to pay dividends to
us.
|
Regulatory
powers also extend to premium rate regulations which require that rates not
be
excessive, inadequate or unfairly discriminatory. CNA also is required by
the
states to provide coverage to persons who would not otherwise be considered
eligible by the insurers. Each state dictates the types of insurance and
the
level of coverage that must be provided to such involuntary risks. CNA’s share
of these involuntary risks is mandatory and generally a function of its
respective share of the voluntary market by line of insurance in each
state.
Lorillard.
A wide variety of federal and state laws and local regulations limit the
advertising, sale and use of cigarettes, and these laws have proliferated
in
recent years. If the U.S. Food and Drug Administration (“FDA”) is granted
authority to regulate tobacco products, as has been proposed for many years,
Lorillard believes such regulation would
provide
Philip Morris, as the largest tobacco company in the country, with a competitive
advantage. Lorillard believes that FDA regulations could:
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|
require
larger and more severe health warnings on packs and cartons;
|
|
·
|
ban
the use of descriptors on tobacco products, such as “low-tar” and “light”;
|
|
·
|
require
the disclosure of ingredients and additives to consumers;
|
|
·
|
require
pre-market approval by the FDA for claims made with respect to
reduced
risk or reduced exposure products;
|
|
·
|
allow
the FDA to require the reduction or elimination of nicotine or
any other
compound in cigarettes;
|
|
·
|
allow
the FDA to mandate the use of reduced risk technologies in conventional
cigarettes;
|
|
·
|
place
more severe restrictions on the advertising, marketing and sales
of
cigarettes;
|
|
·
|
permit
state regulation of labeling and advertising and eliminate the
existing
federal preemption of such regulation; and
|
|
·
|
grant
the FDA the authority to impose broad additional restrictions.
|
In
addition, some states have enacted or proposed regulations, including with
respect to mandatory disclosure of ingredients, including flavorings, some
of
which are trade secrets. State and local laws or rules that prohibit or
restrict
smoking in public places and workplaces continue to be enacted and proposed.
Lorillard cannot predict the ultimate impact of these laws or regulatory
proposals, but believes they will continue to reduce sales and increase
costs.
Extensive and inconsistent regulation by multiple states could prove to
be
particularly disruptive to Lorillard’s business.
Boardwalk
Pipeline. Boardwalk
Pipeline’s natural gas transportation, gathering and storage operations are
subject to extensive regulation by the FERC and the United States Department
of
Transportation, among other federal and state authorities. In addition
to the
FERC rules and regulations related to the rates Boardwalk Pipeline can
charge
for its services, the FERC’s regulatory authority also extends to:
|
·
|
operating
terms and conditions of service;
|
|
·
|
the
types of services Boardwalk Pipeline may offer to its customers;
|
|
·
|
construction
of new facilities;
|
|
·
|
acquisition,
extension or abandonment of services or facilities;
|
|
·
|
accounts
and records; and
|
|
·
|
relationships
with affiliated companies involved in all aspects of the natural
gas and
electricity businesses.
|
The
FERC
action in any of these areas or modifications of its current regulations
can
adversely impact Boardwalk Pipeline’s ability to compete for business, the costs
incurred in its operations, the construction of new facilities or Boardwalk
Pipeline’s ability to recover the full cost of operating its pipelines. Another
example is the time the FERC takes to approve the construction of new
facilities, which could give Boardwalk Pipeline’s non-regulated competitors time
to offer alternative projects or raise the costs of Boardwalk Pipeline’s
projects to the point where they are no longer economical.
The
United States Department of Transportation Office of Pipeline Safety has
issued
a final rule requiring pipeline operators to develop integrity management
programs to comprehensively evaluate certain areas along their pipelines
and
take
additional measures to protect pipeline segments located in what the rule
refers
to as high consequence areas (“HCAs”) where a leak or rupture could potentially
do the most harm.
Diamond
Offshore. Diamond
Offshore’s operations are affected from time to time in varying degrees by
governmental laws and regulations. The drilling industry is dependent on
demand
for services from the oil and gas exploration industry and, accordingly,
is
affected by changing tax and other laws relating to the energy business
generally. Diamond Offshore may be required to make significant capital
expenditures to comply with governmental laws and regulations. It is also
possible that these laws and regulations may in the future add significantly
to
Diamond Offshore’s operating costs or may significantly limit drilling
activity.
The
businesses operated by our subsidiaries face intense
competition.
Each
of
the businesses operated by our subsidiaries faces intense competition in
its
industry and will be harmed materially if it is unable to compete effectively.
Certain of the competitive risks faced by those companies include:
CNA.
All
aspects of the insurance industry are highly competitive and CNA must
continuously allocate resources to refine and improve its insurance products
and
services. Insurers compete on the basis of factors including products, price,
services, ratings and financial strength. CNA may lose business to competitors
offering competitive insurance products at lower prices. CNA competes with
a
large number of stock and mutual insurance companies and other entities for
both
distributors and customers. In addition, the Graham-Leach-Bliley Act of 1999
has
encouraged growth in the number, size and financial strength of CNA’s potential
competitors by removing barriers that previously prohibited holding companies
from simultaneously owning commercial banks, insurers and securities
firms.
Lorillard.
The
cigarette market is highly concentrated, as Lorillard’s two major competitors,
Philip Morris USA and Reynolds American, Inc., had a combined market share
of
approximately 77.1% for the year ended December 31, 2006. Reynolds American
owns
the third and fourth leading menthol brands, Kool and Salem, which had a
combined share of the menthol segment of approximately 18.3% for the year
ended
December 31, 2006. This concentration of U.S. market share could make it
more
difficult for Lorillard to compete for shelf space in retail outlets, access
to
which is already exacerbated by the restrictive marketing programs of these
larger competitors, and could impact price competition among menthol
brands.
In
addition to competing with major cigarette makers, Lorillard competes with
a
significant number of smaller competitors, many of which are not subject
to the
same payment obligations under the State Settlement Agreements as Lorillard
and
thereby enjoy competitive cost and pricing advantages. As a result of their
cost
and pricing advantages, the smaller manufacturers have developed meaningful
market share, principally in the deep discount cigarette segment. Lorillard’s
focus on the premium market and its obligations under the State Settlement
Agreements make it very difficult to compete successfully in the deep discount
market.
Diamond
Offshore.
The
offshore contract drilling industry is highly competitive with numerous industry
participants, none of which at the present time has a dominant market share.
Some of Diamond Offshore’s competitors may have greater financial or other
resources than Diamond Offshore. Drilling contracts are traditionally awarded
on
a competitive bid basis. Intense price competition is often the primary factor
in determining which qualified contractor is awarded a job, although rig
availability and location, a drilling contractor’s safety record and the quality
and technical capability of service and equipment may also be considered.
Mergers among oil and natural gas exploration and production companies have
reduced the number of available customers.
Diamond
Offshore’s industry has historically been cyclical. There have been periods of
high demand, short rig supply and high dayrates (such as we are currently
experiencing), followed by periods of lower demand, excess rig supply and
lower
dayrates. Periods of excess rig supply intensify the competition in the industry
and often result in rigs being idle for long periods of time.
Although
oil and natural gas prices are currently significantly above historical
averages, resulting in higher utilization and dayrates earned by Diamond
Offshore’s drilling units, generally beginning in the third quarter of 2004,
Diamond Offshore can provide no assurance that the current industry cycle
of
high demand, short rig supply and higher dayrates will continue. Diamond
Offshore may be required to idle rigs or to enter into lower rate contracts
in
response to market conditions in the future.
Significant
new rig construction and upgrades of existing drilling units could also
intensify price competition. Diamond Offshore believes that there are currently
100 jack-up rigs and floaters (semisubmersible rigs and drillships) on order
and
scheduled for delivery between 2007 and 2010. Improvements in dayrates and
expectations of sustained improvements in rig utilization rates and dayrates
may
result in the construction of additional new rigs. These increases in rig
supply
could result in depressed rig utilization and greater price competition from
both existing competitors, as well as new entrants into the offshore drilling
market. As of the date of this report, not all of the rigs currently under
construction have contracted for future work, which may further intensify
price
competition as scheduled delivery dates occur. In addition, competing
contractors are able to adjust localized supply and demand imbalances by
moving
rigs from areas of low utilization and dayrates to areas of greater activity
and
relatively higher dayrates.
Boardwalk
Pipeline.
Boardwalk Pipeline competes primarily with other interstate and intrastate
pipelines in the transportation and storage of natural gas. Natural gas also
competes with other forms of energy available to Boardwalk Pipeline’s customers,
including electricity, coal and fuel oils. The principal elements of competition
among pipelines are rates, terms of service, access to gas supplies, flexibility
and reliability. The FERC’s policies promoting competition in gas markets are
having the effect of increasing the gas transportation options for Boardwalk
Pipeline’s traditional customer base. Increased competition could reduce the
volumes of gas transported by Boardwalk Pipeline’s systems or, in cases where
Boardwalk Pipeline does not have long-term fixed rate contracts, could force
Boardwalk Pipeline to lower its transportation or storage rates. Competition
could intensify the negative impact of factors that significantly decrease
demand for natural gas in the markets served by Boardwalk Pipeline’s systems,
such as competing or alternative forms of energy, a recession or other adverse
economic conditions, weather, higher fuel costs and taxes or other governmental
or regulatory actions that directly or indirectly increase the cost or limit
the
use of natural gas. Boardwalk Pipeline’s ability to renew or replace existing
contracts at rates sufficient to maintain current revenues and cash flows
could
be adversely affected by the activities of its competitors. Boardwalk Pipeline
also competes against a number of intrastate pipelines which have significant
regulatory advantages over its and other interstate pipelines because of
the
absence of FERC regulation. In view of potential rate increases, construction
and service flexibility available to intrastate pipelines, Boardwalk Pipeline
may lose customers and throughput to intrastate competitors.
We
and our subsidiaries are subject to litigation.
We
and
our subsidiaries are subject to litigation in the normal course of business.
Litigation is costly and time consuming to defend and could result in a material
expense. Please read information on litigation included in the MD&A under
Item 7 and Note 20 of the Notes to Consolidated Financial Statements included
under Item 8. Certain of the litigation risks faced by us and our subsidiaries
are as follows:
CNA.
CNA
faces substantial risks of litigation and arbitration beyond ordinary course
claims and APMT matters, which may contain assertions in excess of amounts
covered by reserves that CNA has established. These matters may be difficult
to
assess or quantify and may seek recovery of very large or indeterminate amounts
that include punitive or treble damages. Accordingly, unfavorable results
in
these proceedings could have a material adverse impact on our results of
operations.
Lorillard.
As
discussed in more detail above, Lorillard is a defendant in a large number
of
tobacco-related cases and other litigation, in some instances seeking damages
from Lorillard ranging into the billions of dollars. We are a defendant in
certain of these cases as well.
We
and our subsidiaries are each dependent on a small number of key executives
and
other key personnel to operate our businesses successfully.
Our
success and the success of our operating subsidiaries substantially depends
upon
each company’s ability to attract and retain high quality executives and other
qualified employees. In many instances, there may be only a limited number
of
available qualified executives in the business lines in which we and our
subsidiaries compete and the loss of one or more key employees or the inability
to attract and retain other talented personnel could impede the successful
implementation of our and our subsidiaries’ business strategies. For example,
Lorillard is currently experiencing difficulty in identifying and hiring
qualified personnel in some areas of its business, due primarily to the health
and social issues associated with the tobacco industry. In addition, Diamond
Offshore has experienced and continues to experience upward pressure on salaries
and wages and increased competition for skilled workers as a result of
the
strengthening
offshore drilling market. Diamond Offshore has also sustained the loss of
experienced personnel to competitors. In response to these market conditions,
Diamond Offshore has implemented retention programs, including increases
in
compensation.
Certain
of our subsidiaries face significant risks related to compliance with
environmental laws.
Certain
of our subsidiaries have extensive obligations and/or financial exposure
related
to compliance with federal, state and local environmental laws or. Laws and
regulations protecting the environment have become increasingly stringent
in
recent years, and may in some cases impose “strict liability,” rendering a
person liable for environmental damage without regard to negligence or fault
on
the part of that person. These laws and regulations may expose us and our
subsidiaries to liability for the conduct of or conditions caused by others
or
for acts that were in compliance with all applicable laws at the time they
were
performed. For example:
|
·
|
as
discussed in more detail above, many of CNA’s policyholders have made
claims for defense costs and indemnification in connection with
environmental pollution matters;
|
|
·
|
as
an operator of mobile offshore drilling units in navigable U.S.
waters and
some offshore areas, Diamond Offshore may be liable for, among
other
things, damages and costs incurred in connection with oil spills
related
to those operations, including for conduct of or conditions caused
by
others or for acts that were in compliance with all applicable
laws at the
time they were performed;
|
|
·
|
the
risk of substantial environmental costs and liabilities is inherent
in
natural gas transportation, gathering and storage, including
with respect
to, among other things, the handling and discharge of solid and
hazardous
waste from Boardwalk’s facilities, compliance with clean air standards and
the abandonment and reclamation of Boardwalk’s facilities, sites and other
properties; and
|
|
·
|
Bulova
no longer manufactures time pieces; however, it has substantial
ongoing
clean-up obligations and will continue to incur substantial costs,
which
could exceed Bulova’s current estimates, related to contaminated
properties that were previously operated by Bulova as manufacturing
sites.
|
Item
1B. Unresolved Staff Comments.
None.
Item
2. Properties.
Information
relating to our properties and our subsidiaries’ properties is contained under
Item 1.
Item
3. Legal Proceedings.
Insurance
Related - Information with respect to insurance related legal proceedings
is
incorporated by reference to Note 20, Legal Proceedings - Insurance Related
of
the Notes to Consolidated Financial Statements included in Item 8.
Tobacco
Related - Approximately 3,960
product
liability cases are pending against cigarette manufacturers in the United
States. Lorillard is a defendant in approximately 2,840
of
these
cases. The Company is a defendant in four of the pending cases. Information
with
respect to tobacco related legal proceedings is incorporated by reference
to
Note 20, Legal Proceedings - Tobacco Related of the Notes to Consolidated
Financial Statements included in Item 8. Additional information regarding
tobacco related legal proceedings is contained below and in Exhibit
99.01.
The
pending product liability cases are composed of the following types of
cases:
Conventional
product liability cases are brought by individuals who allege cancer or other
health effects caused by smoking cigarettes, by using smokeless tobacco
products, by addiction to tobacco, or by exposure to environmental tobacco
smoke. Approximately 1,285 cases are pending, including approximately 200
cases
against Lorillard. The 1,285 cases include approximately 1,000 cases pending
in
a single West Virginia court that have been consolidated for
trial.
Item
3. Legal Proceedings
|
Tobacco
Related - (Continued)
|
Lorillard
is a defendant in approximately 75 of the 1,000 consolidated West Virginia
cases. The Company is a defendant in two of the conventional product liability
cases.
Class
action cases are purported to be brought on behalf of large numbers of
individuals for damages allegedly caused by smoking. Ten of these cases are
pending against Lorillard. One of these cases,
Schwab v. Philip Morris USA, Inc., et al.,
is on
behalf of a purported nationwide class composed of purchasers of light
cigarettes. The Company is a defendant in two of the class action cases.
Lorillard is not a defendant in approximately 35 additional lights class
action
cases that are pending against other cigarette manufacturers. Reference is
made
to Exhibit 99.01 to this Report for a list of pending Class Action Cases
in
which Lorillard is a party.
Reimbursement
cases are brought by or on behalf of entities who seek reimbursement of expenses
incurred in providing health care to individuals who allegedly were injured
by
smoking. Plaintiffs in these cases have included the U.S. federal government,
U.S. state and local governments, foreign governmental entities, hospitals
or
hospital districts, American Indian tribes, labor unions, private companies,
and
private citizens. Lorillard is a defendant in four of the six Reimbursement
cases pending against cigarette manufacturers in the United States. The Company
is not a defendant in any of the Reimbursement cases pending in the U.S.
Lorillard and the Company are defendants in an additional case pending in
Israel. Reference is made to Exhibit 99.01 to this Report for a list of pending
Reimbursement Cases in which Lorillard is a party.
Included
in this category is the suit filed by the federal government,
United States of America v. Philip Morris USA, Inc., et al.,
that
sought disgorgement and injunctive relief. During
August of 2006, U.S. District Court, District of Columbia entered a final
judgment and remedial order following trial of this matter. Although the
verdict
did not award monetary damages to the plaintiff, the final judgment and remedial
order granted equitable relief and imposes a number of requirements on the
defendants. Such requirements include, but are not limited to, corrective
statements by defendants related to the health effects of smoking. The remedial
order also would place certain prohibitions on the manner in which defendants
market their cigarette products and would eliminate any use of “lights” or
similar product descriptors. It is likely that the remedial order, including
the
prohibitions on the use of the descriptors relating to low tar cigarettes,
will
negatively affect Lorillard’s future sales and profits. The parties have noticed
appeals from this judgment. It is possible that the appellate court could
reconsider its order from February
of 2005 that barred the government from seeking disgorgement of profits.
Lorillard
is one of the defendants in the case. The Company is not a party to this
action.
Flight
Attendant cases are brought by non-smoking flight attendants alleging injury
from exposure to environmental smoke in the cabins of aircraft. Plaintiffs
in
these cases may not seek punitive damages for injuries that arose prior to
January 15, 1997. Lorillard is a defendant in each of the approximately 2,625
pending Flight Attendant cases.
Excluding
the flight attendant and the consolidated West Virginia suits, approximately
330
product
liability cases are pending against cigarette manufacturers in U.S. courts.
Lorillard is a defendant in approximately 140 of the 330
cases.
The Company, which is not a defendant in any of the flight attendant or the
consolidated West Virginia matters, is a defendant in four of the
actions.
Other
tobacco-related litigation includes Tobacco Related Anti-Trust Cases. Reference
is made to Exhibit 99.01 to this Report for a list of pending Tobacco Related
Anti-Trust Cases in which Lorillard is a party.
Item
4. Submission of Matters to a Vote of Security Holders.
None.
Item
4. Submission of Matters to a Vote of Security Holders
|
|
EXECUTIVE
OFFICERS OF THE REGISTRANT
Name
|
Position
and Offices Held
|
Age
|
First
Became
Officer
|
|
|
|
|
David
B. Edelson
|
Senior
Vice President
|
47
|
2005
|
Gary
W. Garson
|
Senior
Vice President, General Counsel and Secretary
|
60
|
1988
|
Herbert
C. Hofmann
|
Senior
Vice President
|
64
|
1979
|
Peter
W. Keegan
|
Senior
Vice President and Chief Financial Officer
|
62
|
1997
|
Arthur
L. Rebell
|
Senior
Vice President
|
66
|
1998
|
Andrew
H. Tisch
|
Office
of the President, Co-Chairman of the Board and Chairman of the
Executive
Committee
|
57
|
1985
|
James
S. Tisch
|
Office
of the President, President and Chief Executive Officer
|
54
|
1981
|
Jonathan
M. Tisch
|
Office
of the President and Co-Chairman of the Board
|
53
|
1987
|
Andrew
H.
Tisch and James S. Tisch are brothers and are cousins of Jonathan M. Tisch.
None
of the other officers or directors of Registrant is related to any
other.
All
of
our executive officers except David B. Edelson have been engaged actively
and
continuously in our business for more than the past five years. Prior to
joining
us, Mr. Edelson was employed at JPMorgan Chase & Co. for more than five
years, serving in various positions but most recently as Executive Vice
President and Corporate Treasurer.
Officers
are elected and hold office until their successors are elected and qualified,
and are subject to removal by the Board of Directors.
PART
II
Item
5. Market for the Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
Price
Range of Common Stock
Loews
common stock
Our
common stock is listed on the New York Stock Exchange under the symbol “LTR.” On
May 8, 2006, the Company effected a three-for-one stock split of Loews common
stock to shareholders of record on April 24, 2006. All share and per share
information has been retroactively adjusted to reflect the stock
split.
The
following table sets forth the reported high and low sales prices in each
calendar quarter of 2006 and 2005:
|
|
2006
|
|
2005
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
34.26
|
|
$
|
30.75
|
|
$
|
24.87
|
|
$
|
22.35
|
|
Second
Quarter
|
|
|
36.79
|
|
|
33.24
|
|
|
26.76
|
|
|
22.98
|
|
Third
Quarter
|
|
|
38.79
|
|
|
34.85
|
|
|
31.32
|
|
|
25.57
|
|
Fourth
Quarter
|
|
|
41.92
|
|
|
37.49
|
|
|
32.90
|
|
|
29.17
|
|
Item
5.
|
Market
for the Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity
Securities
|
The
following graph compares the total annual return of our Common Stock, the
Standard & Poor’s 500 Composite Stock Index (“S&P 500 Index”) and our
peer group (“Loews Peer Group”)* for the five years ended December 31, 2006. The
graph assumes that the value of the investment in our Common Stock, the S&P
500 Index and the Loews Peer Group was $100 on December 31, 2001 and that
all
dividends were reinvested.
|
*
|
The
Loews Peer Group consists of the following companies that are industry
competitors of our principal operating subsidiaries: Ace Limited,
Altria
Group, Inc., American International Group, Inc., The Chubb Corporation,
Cincinnati Financial Corporation, Hartford Financial Services Group,
Inc.,
Reynolds American, Inc., Safeco Corporation, St. Paul Companies
(included
through 2003), The St. Paul Travelers Companies, Inc., UST, Inc.
and XL
Capital Ltd.
|
Carolina
Group stock
Carolina
Group stock is listed on the New York Stock Exchange under the symbol “CG.” The
following table sets forth the reported high and low sales prices in each
calendar quarter of 2006 and 2005:
|
|
2006
|
|
2005
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
49.99
|
|
$
|
43.96
|
|
$
|
34.50
|
|
$
|
28.47
|
|
Second
Quarter
|
|
|
52.92
|
|
|
46.44
|
|
|
33.49
|
|
|
29.25
|
|
Third
Quarter
|
|
|
60.94
|
|
|
51.18
|
|
|
40.29
|
|
|
33.10
|
|
Fourth
Quarter
|
|
|
64.72
|
|
|
55.13
|
|
|
46.06
|
|
|
38.72
|
|
|
Item
5. Market for the Registrant’s Common Equity, Related Stockholder
Matters and
Issuer Purchases of Equity
Securities
|
Our
Carolina Group stock commenced trading on February 1, 2002. Accordingly,
the
following graph compares the total annual return of Carolina Group stock,
the
Standard & Poor’s 500 Composite Stock Index and the Standard & Poor’s
Tobacco Index (“S&P Tobacco”) for the period from February 1, 2002 to
December 31, 2006. The graph assumes that the value of the investment in
our
Carolina Group stock and each index was $100 on February 1, 2002 and that
all
dividends were reinvested.
Dividend
Information
We
have
paid quarterly cash dividends on Loews common stock in each year since 1967.
Regular dividends of $0.05 per share of Loews common stock were paid in each
calendar quarter of 2005 and the first quarter of 2006. We increased our
quarterly cash dividend on Loews common stock to $0.0625 per share beginning
in
the second quarter of 2006.
We
have
paid quarterly cash dividends on Carolina Group stock in each year since
inception. Regular dividends of $0.455 per share of Carolina Group stock
were
paid in each calendar quarter of 2006 and 2005.
Item
5.
|
Market
for the Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity
Securities
|
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table provides certain information as of December 31, 2006 with
respect to our equity compensation plans under which our equity securities
are
authorized for issuance.
Plan
category
|
Number
of
securities
to be
issued
upon exercise
of
outstanding
options,
warrants
and
rights
|
|
Weighted
average
exercise
price of
outstanding
options,
warrants
and rights
|
|
Number
of
securities
remaining
available
for future
issuance
under
equity
compensation
plans
(excluding
securities
reflected
in
the first column)
|
|
|
|
|
|
|
Loews
common stock:
|
|
|
|
|
|
Equity
compensation plans approved by
|
|
|
|
|
|
security
holders (a)
|
|
4,110,442
|
|
|
$
|
23.124
|
|
|
|
5,998,991
|
|
Carolina
Group stock:
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by
|
|
|
|
|
|
|
|
|
|
|
|
security
holders (b)
|
|
581,694
|
|
|
$
|
36.237
|
|
|
|
557,500
|
|
Equity
compensation plans not approved
|
|
|
|
|
|
|
|
|
|
|
|
by
security holders (c)
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
(a)
|
Consists
of the Loews Corporation 2000 Stock Option Plan.
|
(b)
|
Consists
of the Carolina Group 2002 Stock Option
Plan.
|
(c)
|
We
do not have equity compensation plans that have not been authorized
by our
stockholders.
|
Approximate
Number of Equity Security Holders
We
have
approximately 1,610 holders of record of Loews common stock and approximately
70
holders of record of Carolina Group stock.
Common
Stock Repurchases
We
repurchased Loews common stock in each quarter of 2006 as follows:
Period
|
|
Total
number of
shares
purchased
|
|
Average
price
paid
per share
|
|
|
|
|
|
|
|
January
1, 2006 - March 31, 2006
|
|
|
1,675,200
|
|
$
|
33.23
|
|
April
1, 2006 - June 30, 2006
|
|
|
5,548,800
|
|
|
34.02
|
|
July
1, 2006 - September 30, 2006
|
|
|
278,500
|
|
|
37.17
|
|
October
1, 2006 - December 31, 2006
|
|
|
6,432,010
|
|
|
39.64
|
|
Loews
common stock repurchases in the fourth quarter of 2006 were as
follows:
Period
|
(a)
Total number
of
shares
purchased
|
(b)
Average
price
paid per
share
|
(c)
Total number of
shares
purchased as
part
of publicly
announced
plans or
programs
|
(d)
Maximum number of shares
(or
approximate dollar value)
of
shares that may yet be
purchased
under the plans or
programs
(in millions)
|
|
|
|
|
|
November
1, 2006 -
|
|
|
|
|
November
30, 2006
|
5,754,500
|
$39.52
|
N/A
|
N/A
|
December
1, 2006 -
|
|
|
|
|
December
31, 2006
|
677,510
|
$40.64
|
N/A
|
N/A
|
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and
15d-15(f)) for us. Our internal control system was designed to provide
reasonable assurance to our management and Board of Directors regarding the
preparation and fair presentation of published financial
statements.
There
are
inherent limitations to the effectiveness of any control system, however
well
designed, including the possibility of human error and the possible
circumvention or overriding of controls. Further, the design of a control
system
must reflect the fact that there are resource constraints, and the benefits
of
controls must be considered relative to their costs. Management must make
judgments with respect to the relative cost and expected benefits of any
specific control measure. The design of a control system also is based in
part
upon assumptions and judgments made by management about the likelihood of
future
events, and there can be no assurance that a control will be effective under
all
potential future conditions. As a result, even an effective system of internal
control over financial reporting can provide no more than reasonable assurance
with respect to the fair presentation of financial statements and the processes
under which they were prepared.
Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2006. In making this assessment, management
used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) in Internal
Control - Integrated Framework.
Based
on this assessment, our management believes that, as of December 31, 2006,
our
internal control over financial reporting was effective.
Deloitte
& Touche LLP, the independent registered public accounting firm that audited
our financial statements included in this report, has issued a report on
our
assessment of our internal control over financial reporting. The report of
Deloitte & Touche LLP follows this report.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders of Loews Corporation:
We
have
audited management’s assessment included in the accompanying Management’s Annual
Report on Internal Control Over Financial Reporting, that Loews Corporation
and
subsidiaries (the “Company”) maintained effective internal control over
financial reporting as of December 31, 2006, based on criteria established
in
Internal
Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. The
Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on
management’s assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected
by the
company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and
the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented
or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future
periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies
or
procedures may deteriorate.
In
our
opinion, management’s assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2006 is fairly stated,
in
all material respects, based on the criteria established in Internal
Control-Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
Also in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, based
on the
criteria established in Internal
Control-Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s consolidated financial statements
and financial statement schedules as of and for the year ended December 31,
2006
and our report dated February 22, 2007, expressed an unqualified opinion
on
those consolidated financial statements and financial statement schedules
and
includes an explanatory paragraph concerning a change in the method of
accounting for defined benefit pension and other postretirement plans in
2006.
DELOITTE
& TOUCHE LLP
New
York,
NY
February
22, 2007
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders of Loews Corporation:
We
have
audited the accompanying consolidated balance sheets of Loews Corporation
and
its subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the
related consolidated statements of income, shareholders’ equity, and cash flows
for each of the three years in the period ended December 31, 2006. Our audits
also included the financial statement schedules listed in the Index at Item
15.
These financial statements and financial statement schedules are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States) (“PCAOB”). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Loews Corporation and its subsidiaries
as of
December 31, 2006 and 2005, and the results of their operations and their
cash
flows for each of the three years in the period ended December 31, 2006,
in
conformity with accounting principles generally accepted in the United States
of
America. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken
as a
whole, present fairly, in all material respects, the information set forth
therein.
As
discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for defined benefit pension and other
postretirement plans in 2006.
We
have
also audited, in accordance with the standards of the PCAOB, the effectiveness
of the Company’s internal control over financial reporting as of December 31,
2006, based on the criteria established in Internal
Control-Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission and
our
report dated February 22, 2007 expressed an unqualified opinion on management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
DELOITTE
& TOUCHE LLP
New
York,
NY
February
22, 2007
Item
6. Selected Financial Data.
The
following table presents selected financial data. The table should be read
in
conjunction with Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations and Item 8. Financial Statements and
Supplementary Data of this Form 10-K.
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
17,911.0
|
|
$
|
16,017.8
|
|
$
|
15,236.9
|
|
$
|
16,459.7
|
|
$
|
17,463.9
|
|
Income
(loss) before taxes and minority
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
|
|
$
|
4,472.1
|
|
$
|
1,846.5
|
|
$
|
1,828.8
|
|
$
|
(1,357.1
|
)
|
$
|
1,666.1
|
|
Income
(loss) from continuing operations
|
|
$
|
2,517.0
|
|
$
|
1,192.9
|
|
$
|
1,235.3
|
|
$
|
(654.0
|
)
|
$
|
993.5
|
|
Discontinued
operations, net
|
|
|
(25.7
|
)
|
|
18.7
|
|
|
(19.5
|
)
|
|
56.8
|
|
|
(33.8
|
)
|
Cumulative
effect of change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
principles, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39.6
|
)
|
Net
income (loss)
|
|
$
|
2,491.3
|
|
$
|
1,211.6
|
|
$
|
1,215.8
|
|
$
|
(597.2
|
)
|
$
|
920.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
$
|
2,100.6
|
|
$
|
941.6
|
|
$
|
1,050.8
|
|
$
|
(769.2
|
)
|
$
|
852.8
|
|
Discontinued
operations, net
|
|
|
(25.7
|
)
|
|
18.7
|
|
|
(19.5
|
)
|
|
56.8
|
|
|
(33.8
|
)
|
Cumulative
effect of change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
principles, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39.6
|
)
|
Loews
common stock
|
|
|
2,074.9
|
|
|
960.3
|
|
|
1,031.3
|
|
|
(712.4
|
)
|
|
779.4
|
|
Carolina
Group stock
|
|
|
416.4
|
|
|
251.3
|
|
|
184.5
|
|
|
115.2
|
|
|
140.7
|
|
Net
income (loss)
|
|
$
|
2,491.3
|
|
$
|
1,211.6
|
|
$
|
1,215.8
|
|
$
|
(597.2
|
)
|
$
|
920.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Per Share (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
3.80
|
|
$
|
1.69
|
|
$
|
1.89
|
|
$
|
(1.38
|
)
|
$
|
1.51
|
|
Discontinued
operations, net
|
|
|
(0.05
|
)
|
|
0.03
|
|
|
(0.04
|
)
|
|
0.10
|
|
|
(0.06
|
)
|
Cumulative
effect of change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
principles, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.07
|
)
|
Net
income (loss)
|
|
$
|
3.75
|
|
$
|
1.72
|
|
$
|
1.85
|
|
$
|
(1.28
|
)
|
$
|
1.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carolina
Group stock
|
|
$
|
4.46
|
|
$
|
3.62
|
|
$
|
3.15
|
|
$
|
2.76
|
|
$
|
3.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Position (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
53,888.8
|
|
$
|
45,396.0
|
|
$
|
44,298.5
|
|
$
|
42,514.8
|
|
$
|
40,136.7
|
|
Total
assets
|
|
|
76,880.9
|
|
|
70,905.8
|
|
|
73,720.3
|
|
|
77,673.9
|
|
|
70,211.0
|
|
Debt
|
|
|
5,572.4
|
|
|
5,206.8
|
|
|
6,990.3
|
|
|
5,820.2
|
|
|
5,651.9
|
|
Shareholders’
equity
|
|
|
16,501.8
|
|
|
13,092.1
|
|
|
11,969.9
|
|
|
10,855.3
|
|
|
10,995.5
|
|
Cash
dividends per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock
|
|
|
0.24
|
|
|
0.20
|
|
|
0.20
|
|
|
0.20
|
|
|
0.20
|
|
Carolina
Group stock
|
|
|
1.82
|
|
|
1.82
|
|
|
1.82
|
|
|
1.81
|
|
|
1.34
|
|
Book
value per share of Loews common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
|
|
|
30.14
|
|
|
23.64
|
|
|
21.85
|
|
|
19.95
|
|
|
20.13
|
|
Shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock
|
|
|
544.20
|
|
|
557.54
|
|
|
556.75
|
|
|
556.34
|
|
|
556.32
|
|
Carolina
Group stock
|
|
|
108.33
|
|
|
78.19
|
|
|
67.97
|
|
|
57.97
|
|
|
39.91
|
|
(a)
|
On
May 8, 2006, the Company effected a three-for-one stock split of
Loews
common stock to shareholders of record on April 24, 2006. All share
and
per share information has been retroactively adjusted to reflect
the stock
split.
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Management’s
discussion and analysis of financial condition and results of operations
is
comprised of the following sections:
|
Page
No.
|
|
|
Overview
|
|
Consolidated
Financial Results
|
66
|
|
Classes
of Common Stock
|
67
|
|
Parent
Company Structure
|
67
|
|
Critical
Accounting Estimates
|
68
|
|
Results
of Operations by Business Segment
|
70
|
|
CNA
Financial
|
70
|
|
Reserves
- Estimates and Uncertainties
|
70
|
|
Reinsurance
|
76
|
|
Terrorism
Insurance
|
77
|
|
Restructuring
|
77
|
|
Standard
Lines
|
78
|
|
Specialty
Lines
|
80
|
|
Life
and Group Non-Core
|
82
|
|
Other
Insurance
|
83
|
|
APMT
Reserves
|
84
|
|
Lorillard
|
90
|
|
Results
of Operations
|
90
|
|
Business
Environment
|
93
|
|
Boardwalk
Pipeline
|
94
|
|
Diamond
Offshore
|
96
|
|
Loews
Hotels
|
99
|
|
Corporate
and Other
|
100
|
|
Liquidity
and Capital Resources
|
101
|
|
CNA
Financial
|
101
|
|
Lorillard
|
104
|
|
Boardwalk
Pipeline
|
105
|
|
Diamond
Offshore
|
106
|
|
Loews
Hotels
|
107
|
|
Corporate
and Other
|
108
|
|
Contractual
Cash Payment Obligations
|
109
|
|
Investments
|
109
|
|
Accounting
Standards
|
117
|
|
Forward-Looking
Statements Disclaimer
|
118
|
|
Supplemental
Financial Information
|
122
|
|
OVERVIEW
We
are a
holding company. Our subsidiaries are engaged in the following lines of
business:
|
·
|
commercial
property and casualty insurance (CNA Financial Corporation (“CNA”), an 89%
owned subsidiary);
|
|
·
|
the
production and sale of cigarettes (Lorillard, Inc. (“Lorillard”), a wholly
owned subsidiary);
|
|
·
|
operation
of interstate natural gas transmission
pipeline systems
(Boardwalk Pipeline Partners, LP
(“Boardwalk Pipeline”),
an 80% owned subsidiary);
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Overview
- (Continued)
|
|
·
|
operation
of offshore oil and gas drilling rigs (Diamond Offshore Drilling,
Inc.
(“Diamond Offshore”), a 51% owned subsidiary);
|
|
·
|
operation
of hotels (Loews Hotels Holding Corporation (“Loews Hotels”), a wholly
owned subsidiary)
and
|
|
·
|
distribution
and sale of watches and clocks (Bulova Corporation (“Bulova”), a wholly
owned subsidiary).
|
Unless
the context otherwise requires, references in this report to “Loews
Corporation,” “we,” “our,” “us” or like terms refer to the business of Loews
Corporation excluding its subsidiaries.
The
following discussion should be read in conjunction with Item 1A, Risk Factors,
of this Form 10-K.
Consolidated
Financial Results
Consolidated
net income (including both the Loews Group and Carolina Group) for the
year
ended December 31, 2006 was $2,491.3 million, compared to $1,211.6 million
in
the prior year. Consolidated revenues in the year ended December 31, 2006
amounted to $17.9 billion, compared to $16.0 billion in the prior
year.
The
following table summarizes the net income and earnings per share
information:
Year
Ended December 31
|
|
2006
|
|
2005
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to Loews common stock:
|
|
|
|
|
|
Income
before net investment gains (losses)
|
|
$
|
2,032.0
|
|
$
|
951.9
|
|
Net
investment gains (losses)
|
|
|
68.6
|
|
|
(10.3
|
)
|
Income
from continuing operations
|
|
|
2,100.6
|
|
|
941.6
|
|
Discontinued
operations, net
|
|
|
(25.7
|
)
|
|
18.7
|
|
Net
income attributable to Loews common stock
|
|
|
2,074.9
|
|
|
960.3
|
|
Net
income attributable to Carolina Group stock (a)
|
|
|
416.4
|
|
|
251.3
|
|
Consolidated
net income
|
|
$
|
2,491.3
|
|
$
|
1,211.6
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
Loews
common stock
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
3.80
|
|
$
|
1.69
|
|
Discontinued
operations, net
|
|
|
(0.05
|
)
|
|
0.03
|
|
Loews
common stock
|
|
$
|
3.75
|
|
$
|
1.72
|
|
Carolina
Group stock
|
|
$
|
4.46
|
|
$
|
3.62
|
|
(a)
|
Reflects
Loews Corporation’s sales of 15 million shares of Carolina Group stock in
each of August and May of 2006 and 10 million shares in November
of 2005.
Net income per share of Carolina Group stock was not impacted
by these
sales.
|
Net
income attributable to Loews common stock for the year ended 2006 amounted
to
$2,074.9 million, or $3.75 per share, compared to $960.3 million, or $1.72
per
share, in the prior year. The results for the year ended December 31, 2005
included catastrophe losses at CNA of $304.8 million (after tax and minority
interest) including the impact from Hurricanes Wilma, Katrina, Rita, Dennis
and
Ophelia and a benefit of $136.5 million related to a federal income tax
settlement due primarily to net refund interest and the release of federal
income tax reserves at CNA. The increase in net income was primarily due
to
improved results at CNA and Diamond Offshore, partially offset by a decrease
in
the share of Carolina Group earnings attributable to Loews common stock,
due to
the sale of additional Carolina Group stock in August and May of
2006.
Net
income attributable to Loews common stock includes net investment gains
of $68.6
million (after tax and minority interest) compared to net investment losses
of
$10.3 million (after tax and minority interest) in the prior year.
Net
income attributable to Carolina Group stock for the year ended 2006 was
$416.4
million, or $4.46 per Carolina Group
share, compared to $251.3 million, or $3.62 per Carolina Group share in
the
prior year. The
increase in net
Item
7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Consolidated
Financial Results
- (Continued)
|
income
attributable to Carolina Group stock was due
to an
increase in Lorillard Inc. net income driven by higher effective unit prices
reflecting lower sales promotion expenses (accounted for as a reduction
to net
sales), increased unit sales and reflects an increase in the number of
Carolina
Group shares outstanding.
Classes
of Common Stock
Our
issuance of Carolina Group stock has resulted in a two class common stock
structure for us. Carolina Group stock, commonly called a tracking stock,
is
intended to reflect the economic performance of a defined group of our
assets
and liabilities referred to as the Carolina Group. The principal assets
and
liabilities attributed to the Carolina Group are:
|
·
|
our
100% stock ownership interest in Lorillard,
Inc.;
|
|
·
|
notional,
intergroup debt owed by the Carolina Group to the Loews Group
($1.2
billion outstanding at December 31, 2006), bearing interest at
the annual
rate of 8.0% and, subject to optional prepayment, due December
31, 2021;
and
|
|
·
|
any
and all liabilities, costs and expenses arising out of or related
to
tobacco or tobacco-related
businesses.
|
As
of
December 31, 2006, the outstanding Carolina Group stock represents a 62.34%
economic interest in the performance of the Carolina Group. The Loews Group
consists of all of our assets and liabilities other than the 62.34% economic
interest represented by the outstanding Carolina Group stock, and includes
as an
asset the notional, intergroup debt of the Carolina Group.
The
existence of separate classes of common stock could give rise to occasions
where
the interests of the holders of Loews common stock and Carolina Group stock
diverge or conflict or appear to diverge or conflict. Subject to its fiduciary
duties, our board of directors could, in its sole discretion, occasionally
make
determinations or implement policies that disproportionately affect the
groups
or the different classes of stock. For example, our board of directors
may
decide to reallocate assets, liabilities, revenues, expenses and cash flows
between groups, without the consent of shareholders. The board of directors
would not be required to select the option that would result in the highest
value for holders of Carolina Group stock.
As
a
result of the flexibility provided to our board of directors, it might
be
difficult for investors to assess the future prospects of the Carolina
Group
based on the Carolina Group’s past performance.
The
creation of the Carolina Group and the issuance of Carolina Group stock
does not
change our ownership of Lorillard, Inc. or Lorillard, Inc.’s status as a
separate legal entity. The Carolina Group and the Loews Group are notional
groups that are intended to reflect the performance of the defined sets
of
assets and liabilities of each such group as described above. The Carolina
Group
and the Loews Group are not separate legal entities and the attribution
of our
assets and liabilities to the Loews Group or the Carolina Group does not
affect
title to the assets or responsibility for the liabilities.
Holders
of our common stock and of Carolina Group stock are shareholders of Loews
Corporation and are subject to the risks related to an equity investment
in
us.
Parent
Company Structure
We
are a
holding company and derive substantially all of our cash flow from our
subsidiaries, principally Lorillard, Boardwalk Pipeline and Diamond Offshore.
We
rely upon our invested cash balances and distributions from our subsidiaries
to
generate the funds necessary to meet our obligations and to declare and
pay any
dividends to our stockholders. The ability of our subsidiaries to pay dividends
is subject to, among other things, the availability of sufficient funds
in such
subsidiaries, applicable state laws, including in the case of the insurance
subsidiaries of CNA, laws and rules governing the payment of dividends
by
regulated insurance companies. Claims of creditors of our subsidiaries
will
generally have priority as to the assets of such subsidiaries over our
claims
and those of our creditors and shareholders (see Liquidity and Capital
Resources
- CNA Financial, below).
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Parent
Company Structure
- (Continued)
|
At
December 31, 2006, the book value per share of Loews common stock was $30.14,
compared to $23.64 at December 31, 2005.
CRITICAL
ACCOUNTING ESTIMATES
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
(“GAAP”) requires us to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and the related notes.
Actual
results could differ from those estimates.
The
consolidated financial statements and accompanying notes have been prepared
in
accordance with GAAP, applied on a consistent basis. We continually evaluate
the
accounting policies and estimates used to prepare the consolidated financial
statements. In general, our estimates are based on historical experience,
evaluation of current trends, information from third party professionals
and
various other assumptions that we believe are reasonable under the known
facts
and circumstances.
We
consider the accounting policies discussed below to be critical to an
understanding of our consolidated financial statements as their application
places the most significant demands on our judgment. Due to the inherent
uncertainties involved with this type of judgment, actual results could
differ
significantly from estimates and may have a material adverse impact on
our
results of operations and/or equity.
Insurance
Reserves
Insurance
reserves are established for both short and long-duration insurance contracts.
Short-duration contracts are primarily related to property and casualty
insurance policies where the reserving process is based on actuarial estimates
of the amount of loss, including amounts for known and unknown claims.
Long-duration contracts typically include traditional life insurance and
long
term care products and are estimated using actuarial estimates about mortality
and morbidity, as well as assumptions about expected investment returns.
The
reserve for unearned premiums on property and casualty and accident and
health
contracts represents the portion of premiums written related to the unexpired
terms of coverage. The inherent risks associated with the reserving process
are
discussed in the Reserves - Estimates and Uncertainties section
below.
Reinsurance
Amounts
recoverable from reinsurers are estimated in a manner consistent with claim
and
claim adjustment expense reserves or future policy benefits reserves and
are
reported as receivables in the Consolidated Balance Sheets. The ceding
of
insurance does not discharge CNA of its primary liability under insurance
contracts written by CNA. An exposure exists with respect to property and
casualty and life reinsurance ceded to the extent that any reinsurer is
unable
to meet its obligations or disputes the liabilities assumed under reinsurance
agreements. An estimated allowance for doubtful accounts is recorded on
the
basis of periodic evaluations of balances due from reinsurers, reinsurer
solvency, CNA’s past experience and current economic conditions.
Reinsurance
accounting allows for contractual cash flows to be reflected as premiums
and
losses, as compared to deposit accounting, which requires cash flows to
be
reflected as assets and liabilities. To qualify for reinsurance accounting,
reinsurance agreements must include risk transfer. Considerable judgment
by
management may be necessary to determine if risk transfer requirements
are met.
CNA believes it has appropriately applied reinsurance accounting principles
in
its evaluation of risk transfer. However, CNA’s evaluation of risk transfer and
the resulting accounting could be challenged in connection with regulatory
reviews or possible changes in accounting and/or financial reporting rules
related to reinsurance, which could materially adversely affect our results
of
operations and/or equity. Further information on CNA’s reinsurance program is
included in the Reinsurance section below and Note 18 of the Notes to
Consolidated Financial Statements included under Item 8.
Tobacco
and Other Litigation
Lorillard
and other cigarette manufacturers continue to be confronted with substantial
litigation. Plaintiffs in most of the cases seek unspecified amounts of
compensatory damages and punitive damages, although some seek damages ranging
into the billions of dollars. Plaintiffs in some of the cases seek treble
damages, statutory damages, disgorgement of profits, equitable and injunctive
relief, and medical monitoring, among other damages.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Critical
Accounting Estimates -
(Continued)
|
Lorillard
believes that it has valid defenses to the cases pending against it. Lorillard
also believes it has valid bases for appeal of the adverse verdicts against
it.
To the extent we are a defendant in any of the lawsuits, we believe that
we are
not a proper defendant in these matters and have moved or plan to move
for
dismissal of all such claims against us. While Lorillard 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, and it is possible that some of these actions could be decided
unfavorably. Lorillard may enter into discussions in an attempt to settle
particular cases if it believes it is appropriate to do so.
Except
for the impact of the State Settlement Agreements as described in Note
20 of the
Notes to Consolidated Financial Statements included in Item 8 of this Report,
management is unable to make a meaningful estimate of the amount or range
of
loss that could result from an unfavorable outcome of pending litigation
and,
therefore, no provision has been made in the Consolidated Financial Statements
for any unfavorable outcome. It is possible that our results of operations,
cash
flows and financial position could be materially adversely affected by
an
unfavorable outcome of certain pending or future litigation.
CNA
is
also involved in various legal proceedings that have arisen during the
ordinary
course of business. CNA evaluates the facts and circumstances of each situation,
and when CNA determines it necessary, a liability is estimated and recorded.
Please read Item 3 - Legal Proceedings and Note 20 of the Notes to Consolidated
Financial Statements included in Item 8.
Valuation
of Investments and Impairment of Securities
Invested
assets are exposed to various risks, such as interest rate, market and
credit
risks. Due to the level of risk associated with certain invested assets
and the
level of uncertainty related to changes in the value of these assets, it
is
possible that changes in risks in the near term could have an adverse material
impact on our results of operations or equity.
CNA’s
investment portfolio is subject to market declines below book value that
may be
other-than-temporary. CNA has an Impairment Committee, which reviews the
investment portfolio on a quarterly basis, with ongoing analysis as new
information becomes available. Any decline that is determined to be
other-than-temporary is recorded as an other-than-temporary impairment
loss in
the results of operations in the period in which the determination occurred.
Further information on CNA’s process for evaluating impairments is included in
Note 2 of the Notes to Consolidated Financial Statements included under
Item
8.
Securities
in the parent company’s investment portfolio that are not part of its cash
management activities are classified as trading securities in order to
reflect
our investment philosophy. These investments are carried at fair value
with the
net unrealized gain or loss included in the Consolidated Statements of
Income.
Long
Term Care Products
Reserves
and deferred acquisition costs for CNA’s long term care products are based on
certain assumptions including morbidity, policy persistency and interest
rates.
The recoverability of deferred acquisition costs and the adequacy of the
reserves are contingent on actual experience related to these key assumptions
and other factors such as future health care cost trends. If actual experience
differs from these assumptions, the deferred acquisition costs may not
be fully
recovered and the reserves may not be adequate, requiring CNA to add to
reserves, or take unfavorable development. Therefore, our financial results
could be adversely impacted.
Pension
and Postretirement Benefit Obligations
We
are
required to make a significant number of assumptions in order to estimate
the
liabilities and costs related to our pension and postretirement benefit
obligations to employees under our benefit plans. The assumptions that
have the
most impact on pension costs are the discount rate, the expected return
on plan
assets and the rate of compensation increases. These assumptions are evaluated
relative to current market factors such as inflation, interest rates and
fiscal
and monetary policies. Changes in these assumptions can have a material
impact
on pension obligations and pension expense.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Critical
Accounting Estimates -
(Continued)
|
In
determining the discount rate assumption, we utilized current market information
and liability information, including a discounted cash flow analysis of
our
pension and postretirement obligations. In particular, the basis for our
discount rate selection was the yield on indices of highly rated fixed
income
debt securities with durations comparable to that of our plan liabilities.
The
Moody’s Aa Corporate Bond Index is consistently used as the basis for the change
in discount rate from the last measurement date with this measure confirmed
by
the yield on other broad bond indices. In addition in 2005, we supplemented
our
discount rate decision with a yield curve analysis. The yield curve was
applied
to expected future retirement plan payments to adjust the discount rate
to
reflect the cash flow characteristics of the plans. The yield curve is
a
hypothetical double A yield curve represented by a series of annualized
discount
rates reflecting bond issues having a rating of Aa or better by Moody’s
Investors Service, Inc. or a rating of AA or better by Standard &
Poor’s.
Further
information on our pension and postretirement benefit obligations is included
in
Note 17 of the Notes to Consolidated Financial Statements included under
Item
8.
RESULTS
OF OPERATIONS BY BUSINESS SEGMENT
CNA
Financial
Insurance
operations are conducted by subsidiaries of CNA Financial Corporation (“CNA”).
CNA is an 89% owned subsidiary.
CNA
manages its property and casualty operations in two operating segments
which
represent CNA’s core operations: Standard Lines and Specialty Lines. The
non-core operations are managed in the Life and Group Non-Core and Other
Insurance segments. Standard Lines includes standard property and casualty
coverages sold to small and middle market commercial businesses primarily
through an independent agency distribution system, and excess and surplus
lines,
as well as insurance and risk management products sold to large corporations
in
the U.S., as well as globally. Specialty Lines includes professional, financial
and specialty property and casualty products and services. Life and Group
Non-Core primarily includes the results of the life and group lines of
business
sold or placed in run-off. Other Insurance includes the results of certain
property and casualty lines of business placed in run-off, including CNA’s
former assumed reinsurance business. This segment also includes the results
related to the centralized adjusting and settlement of Asbestos, Environment
Pollution and Mass Tort (“APMT”) claims as well as the results of CNA’s
participation in voluntary insurance pools, which are primarily in run-off,
and
various other non-insurance operations.
Reserves
- Estimates and Uncertainties
CNA
maintains reserves to cover its estimated ultimate unpaid liability for
claim
and claim adjustment expenses, including the estimated cost of the claims
adjudication process, for claims that have been reported but not yet settled
(“case reserves”) and claims that have been incurred but not reported (“IBNR”).
Claim and claim adjustment expense reserves are reflected as liabilities
and are
included on the Consolidated Balance Sheets under the heading “Insurance
Reserves.” 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. The carried case and IBNR reserves are provided
in
the Segment Results section of this MD&A and in Note 9 of the Notes to
Consolidated Financial Statements included under Item 8.
The
level
of reserves CNA maintains represents its best estimate, as of a particular
point
in time, of what the ultimate settlement and administration of claims will
cost
based on its assessment of facts and circumstances known at that time.
Reserves
are not an exact calculation of liability but instead are complex estimates
that
CNA derives, generally utilizing a variety of actuarial reserve estimation
techniques, from numerous assumptions and expectations about future events,
both
internal and external, many of which are highly uncertain.
CNA’s
experience has been that establishing reserves for casualty coverages relating
to asbestos, environmental pollution and mass tort (“APMT”) claim and claim
adjustment expenses is subject to uncertainties that are greater than those
presented by other claims. Estimating the ultimate cost of both reported
and
unreported APMT claims is subject to a higher degree of variability due
to a
number of additional factors, including among others:
|
·
|
coverage
issues, including whether certain costs are covered under the
policies and
whether policy limits apply;
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - CNA Financial -
(Continued)
|
|
·
|
inconsistent
court decisions and developing legal
theories;
|
|
·
|
continuing
aggressive tactics of plaintiffs’
lawyers;
|
|
·
|
the
risks and lack of predictability inherent in major
litigation;
|
|
·
|
changes
in the volume of APMT claims which cannot now be
anticipated;
|
|
·
|
the
impact of the exhaustion of primary limits and the resulting
increase in
claims on any umbrella or excess policies CNA has
issued;
|
|
·
|
the
number and outcome of direct actions against CNA;
and
|
|
·
|
CNA’s
ability to recover reinsurance for APMT
claims.
|
It
is
also not possible to predict changes in the legal and legislative environment
and the impact on the future development of APMT claims. This development
will
be affected by future court decisions and interpretations, as well as changes
in
applicable legislation. It is difficult to predict the ultimate outcome
of large
coverage disputes until settlement negotiations near completion and significant
legal questions are resolved or, failing settlement, until the dispute
is
adjudicated. This is particularly the case with policyholders in bankruptcy
where negotiations often involve a large number of claimants and other
parties
and require court approval to be effective. A further uncertainty exists
as to
whether a national privately financed trust to replace litigation of asbestos
claims with payments to claimants from the trust will be established and
approved through federal legislation, and, if established and approved,
whether
it will contain funding requirements in excess of CNA’s carried loss
reserves.
Traditional
actuarial methods and techniques employed to estimate the ultimate cost
of
claims for more traditional property and casualty exposures are less precise
in
estimating claim and claim adjustment reserves for APMT, particularly in
an
environment of emerging or potential claims and coverage issues that arise
from
industry practices and legal, judicial and social conditions. Therefore,
these
traditional actuarial methods and techniques are necessarily supplemented
with
additional estimation techniques and methodologies, many of which involve
significant judgments that are required of CNA management. For APMT, CNA
regularly monitors its exposures, including reviews of loss activity, regulatory
developments and court rulings. In addition, CNA performs a comprehensive
ground-up analysis on its exposures annually. CNA’s actuaries, in conjunction
with its specialized claim unit, use various modeling techniques to estimate
its
overall exposure to known accounts. CNA uses this information and additional
modeling techniques to develop loss distributions and claim reporting patterns
to determine reserves for accounts that will report APMT exposure in the
future.
Estimating the average claim size requires analysis of the impact of large
losses and claim cost trend based on changes in the cost of repairing or
replacing property, changes in the cost of legal fees, judicial decisions,
legislative changes, and other factors. Due to the inherent uncertainties
in
estimating reserves for APMT claim and claim adjustment expenses and the
degree
of variability due to, among other things, the factors described above,
CNA may
be required to record material changes in its claim and claim adjustment
expense
reserves in the future, should new information become available or other
developments emerge. See the APMT Reserves section of this MD&A and Note 9
of the Notes to Consolidated Financial Statements included under Item 8
for
additional information relating to APMT claims and reserves.
In
addition, CNA is subject to the uncertain effects of emerging or potential
claims and coverage issues that arise as industry practices and legal,
judicial,
social and other environmental conditions change. These issues have had,
and may
continue to have, a negative effect on CNA’s business by either extending
coverage beyond the original underwriting intent or by increasing the number
or
size of claims. Examples of emerging or potential claims and coverage issues
include:
|
·
|
increases
in the number and size of claims relating to injuries from medical
products;
|
|
·
|
the
effects of accounting and financial reporting scandals and other
major
corporate governance failures, which have resulted in an increase
in the
number and size of claims, including director and officer and
errors and
omissions insurance claims;
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - CNA Financial -
(Continued)
|
|
·
|
class
action litigation relating to claims handling and other practices;
|
|
·
|
construction
defect claims, including claims for a broad range of additional
insured
endorsements on policies;
|
|
·
|
clergy
abuse claims, including passage of legislation to reopen or extend
various
statutes of limitations; and
|
|
·
|
mass
tort claims, including bodily injury claims related to silica,
welding
rods, benzene, lead and various other chemical exposure claims.
|
The
impact of these and other unforeseen emerging or potential claims and coverage
issues is difficult to predict and could materially adversely affect the
adequacy of CNA’s claim and claim adjustment expense reserves and could lead to
future reserve additions. See the Segment Results sections of this MD&A and
Note 9 of the Notes to Consolidated Financial Statements included under
Item 8
for a discussion of changes in reserve estimates and the impact on our
results
of operations.
Establishing
Reserve Estimates
In
developing claim and claim adjustment expense (“loss” or “losses”) reserve
estimates, CNA’s actuaries perform detailed reserve analyses that are staggered
throughout the year. The data is organized at a “product” level. A product can
be a line of business covering a subset of insureds such as commercial
automobile liability for small and middle market customers, it can encompass
several lines of business provided to a specific set of customers such
as
dentists, or it can be a particular type of claim such as construction
defect.
Every product is analyzed at least once during the year, and many products
are
analyzed multiple times. The analyses generally review losses gross of
ceded
reinsurance and apply the ceded reinsurance terms to the gross estimates
to
establish estimates net of reinsurance. In addition to the detailed analyses,
CNA reviews actual loss emergence for all products each quarter.
The
detailed analyses use a variety of generally accepted actuarial methods
and
techniques to produce a number of estimates of ultimate loss. CNA determines
a
point estimate of ultimate loss by reviewing the various estimates and
assigning
weight to each estimate given the characteristics of the product being
reviewed.
The reserve estimate is the difference between the estimated ultimate loss
and
the losses paid to date. The difference between the estimated ultimate
loss and
the case incurred loss (paid loss plus case reserve) is IBNR. IBNR calculated
as
such includes a provision for development on known cases (supplemental
development) as well as a provision for claims that have occurred but have
not
yet been reported (pure IBNR).
Most
of
CNA’s business can be characterized as long-tail. For long tail business, it
will generally be several years between the time the business is written
and the
time when all claims are settled. CNA’s long-tail exposures include commercial
automobile liability, workers’ compensation, general liability, medical
malpractice, other professional liability coverages, assumed reinsurance
run-off
and products liability. Short-tail exposures include property, commercial
automobile physical damage, marine and warranty. Each of CNA’s property/casualty
segments, Standard Lines, Specialty Lines and Other Insurance, contain
both
long-tail and short-tail exposures.
The
methods used to project ultimate loss for both long-tail and short-tail
exposures include, but are not limited to, the following:
|
·
|
Bornhuetter-Ferguson
Using Premiums and Paid Loss,
|
|
·
|
Bornhuetter-Ferguson
Using Premiums and Incurred Loss,
and
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - CNA Financial -
(Continued)
|
The
paid
development method estimates ultimate losses by reviewing paid loss patterns
and
applying them to accident years with further expected changes in paid loss.
Selection of the paid loss pattern requires analysis of several factors
including the impact of inflation on claims costs, the rate at which claims
professionals make claim payments and close claims, the impact of judicial
decisions, the impact of underwriting changes, the impact of large claim
payments and other factors. Claim cost inflation itself requires evaluation
of
changes in the cost of repairing or replacing property, changes in the
cost of
medical care, changes in the cost of wage replacement, judicial decisions,
legislative changes and other factors. Because this method assumes that
losses
are paid at a consistent rate, changes in any of these factors can impact
the
results. Since the method does not rely on case reserves, it is not directly
influenced by changes in the adequacy of case reserves.
For
many
products, paid loss data for recent periods may be too immature or erratic
for
accurate predictions. This situation often exists for long-tail exposures.
In
addition, changes in the factors described above may result in inconsistent
payment patterns. Finally, estimating the paid loss pattern subsequent
to the
most mature point available in the data analyzed often involves considerable
uncertainty for long-tail products such as workers’ compensation.
The
incurred development method is similar to the paid development method,
but it
uses case incurred losses instead of paid losses. Since the method uses
more
data (case reserves in addition to paid losses) than the paid development
method, the incurred development patterns may be less variable than paid
patterns. However, selection of the incurred loss pattern requires analysis
of
all of the factors above. In addition, the inclusion of case reserves can
lead
to distortions if changes in case reserving practices have taken place,
and the
use of case incurred losses may not eliminate the issues associated with
estimating the incurred loss pattern subsequent to the most mature point
available.
The
loss
ratio method multiplies premiums by an expected loss ratio to produce ultimate
loss estimates for each accident year. This method may be useful if loss
development patterns are inconsistent, losses emerge very slowly, or there
is
relatively little loss history from which to estimate future losses. The
selection of the expected loss ratio requires analysis of loss ratios from
earlier accident years or pricing studies and analysis of inflationary
trends,
frequency trends, rate changes, underwriting changes, and other applicable
factors.
The
Bornhuetter-Ferguson using premiums and paid loss method is a combination
of the
paid development approach and the loss ratio approach. The method normally
determines expected loss ratios similar to the approach used to estimate
the
expected loss ratio for the loss ratio method and requires analysis of
the same
factors described above. The method assumes that only future losses will
develop
at the expected loss ratio level. The percent of paid loss to ultimate
loss
implied from the paid development method is used to determine what percentage
of
ultimate loss is yet to be paid. The use of the pattern from the paid
development method requires consideration of all factors listed in the
description of the paid development method. The estimate of losses yet
to be
paid is added to current paid losses to estimate the ultimate loss for
each
year. This method will react very slowly if actual ultimate loss ratios
are
different from expectations due to changes not accounted for by the expected
loss ratio calculation.
The
Bornhuetter-Ferguson using premiums and incurred loss method is similar
to the
Bornhuetter-Ferguson using premiums and paid loss method except that it
uses
case incurred losses. The use of case incurred losses instead of paid losses
can
result in development patterns that are less variable than paid patterns.
However, the inclusion of case reserves can lead to distortions if changes
in
case reserving have taken place, and the method requires analysis of all
the
factors that need to be reviewed for the loss ratio and incurred development
methods.
The
average loss method multiplies a projected number of ultimate claims by
an
estimated ultimate average loss for each accident year to produce ultimate
loss
estimates. Since projections of the ultimate number of claims are often
less
variable than projections of ultimate loss, this method can provide more
reliable results for products where loss development patterns are inconsistent
or too variable to be relied on exclusively. In addition, this method can
more
directly account for changes in coverage that impact the number and size
of
claims. However, this method can be difficult to apply to situations where
very
large claims or a substantial number of unusual claims result in volatile
average claim sizes. Projecting the ultimate number of claims requires
analysis
of several factors including the rate at which policyholders report claims
to
us, the impact of judicial decisions, the impact of underwriting changes
and
other factors. Estimating the ultimate average loss requires analysis of
the
impact of large losses and claim cost trend based on changes in the cost
of
repairing or replacing property, changes in the cost of medical care, changes
in
the cost of wage replacement, judicial decisions, legislative changes and
other
factors.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - CNA Financial -
(Continued)
|
For
other
more complex products where the above methods may not produce reliable
indications, CNA uses additional methods tailored to the characteristics
of the
specific situation. Such products include construction defect losses and
APMT.
For
construction defect losses, CNA’s actuaries organize losses by report year.
Report year groups claims by the year in which they were reported. To estimate
losses from claims that have not been reported, various extrapolation techniques
are applied to the pattern of claims that have been reported to estimate
the
number of claims yet to be reported. This process requires analysis of
several
factors including the rate at which policyholders report claims to CNA,
the
impact of judicial decisions, the impact of underwriting changes and other
factors. An average claim size is determined from past experience and applied
to
the number of unreported claims to estimate reserves for these
claims.
For
many
exposures, especially those that can be considered long-tail, a particular
accident year may not have a sufficient volume of paid losses to produce
a
statistically reliable estimate of ultimate losses. In such a case, CNA’s
actuaries typically assign more weight to the incurred development method
than
to the paid development method. As claims continue to settle and the volume
of
paid loss increases, the actuaries may assign additional weight to the
paid
development method. For most of CNA’s products, even the incurred losses for
accident years that are early in the claim settlement process will not
be of
sufficient volume to produce a reliable estimate of ultimate losses. In
these
cases, CNA will not assign any weight to the paid and incurred development
methods. CNA will use loss ratio, Bornhuetter-Ferguson and average loss
methods.
For short-tail exposures, the paid and incurred development methods can
often be
relied on sooner primarily because our history includes a sufficient number
of
years to cover the entire period over which paid and incurred losses are
expected to change. However, CNA may also use loss ratio, Bornhuetter-Ferguson
and average loss methods for short-tail exposures.
Periodic
Reserve Reviews
The
reserve analyses performed by CNA’s actuaries result in point estimates. Each
quarter, the results of the detailed reserve reviews are summarized and
discussed with CNA senior management to determine the best estimate of
reserves.
This group considers many factors in making this decision. The factors
include,
but are not limited to, the historical pattern and volatility of the actuarial
indications, the sensitivity of the actuarial indications to changes in
paid and
incurred loss patterns, the consistency of claims handling processes, the
consistency of case reserving practices, changes in our pricing and
underwriting, and overall pricing and underwriting trends in the insurance
market.
CNA’s
recorded reserves reflect its best estimate as of a particular point in
time
based upon known facts, current law and our judgment. The carried reserve
may
differ from the actuarial point estimate as the result of CNA’s consideration of
the factors noted above as well as the potential volatility of the projections
associated with the specific product being analyzed and other factors impacting
claims costs that may not be quantifiable through actuarial analysis. This
process results in CNA management’s best estimate which is then recorded as the
loss reserve.
Currently,
CNA’s reserves are slightly higher than the actuarial point estimate. CNA does
not establish a specific provision for uncertainty. For Standard and Specialty
Lines, the difference between CNA’s reserves and the actuarial point estimate is
due to the two most recent complete accident years. The claim data from
these
accident years is very immature. CNA believes it is prudent to wait until
actual
experience confirms that the loss reserves should be adjusted. For Other
Insurance, the carried reserve is slightly higher than the actuarial point
estimate. While the actuarial estimates for APMT exposures reflect current
knowledge, CNA feels it is prudent, based on the history of developments
in this
area, to reflect some margin in the carried reserve until the ultimate
outcome
of the issues associated with these exposures is clearer.
The
key
assumptions fundamental to the reserving process are often different for
various
products and accident years. Some of these assumptions are explicit assumptions
that are required of a particular method, but most of the assumptions are
implicit and cannot be precisely quantified. An example of an explicit
assumption is the pattern employed in the paid development method. However,
the
assumed pattern is itself based on several implicit assumptions such as
the
impact of inflation on medical costs and the rate at which claim professionals
close claims. As a result, the effect on reserve estimates of a particular
change in assumptions usually cannot be specifically quantified, and changes
in
these assumptions cannot be tracked over time.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - CNA Financial -
(Continued)
|
CNA’s
recorded reserves are CNA management’s best estimate. In order to provide an
indication of the variability associated with CNA’s net reserves, the following
discussion provides a sensitivity analysis that shows the approximate estimated
impact of variations in the most significant factor affecting CNA’s reserve
estimates for particular types of business. These significant factors are
the
ones that could most likely materially impact the reserves. This discussion
covers the major types of business for which CNA believes a material deviation
to CNA's reserves is reasonably possible. There can be no assurance that
actual experience will be consistent with the current assumptions or with
the
variation indicated by the discussion. In addition, there can be no assurance
that other factors and assumptions will not have a material impact on CNA’s
reserves.
Within
Standard Lines, the two types of business for which CNA believes a material
deviation to its net reserves is reasonably possible are workers’ compensation
and general liability.
For
Standard Lines workers’ compensation, since many years will pass from the time
the business is written until all claim payments have been made, claim
cost
inflation on claim payments is the most significant factor affecting workers’
compensation reserve estimates. Workers’ compensation claim cost inflation is
driven by the cost of medical care, the cost of wage replacement, expected
claimant lifetimes, judicial decisions, legislative changes and other factors.
If estimated workers’ compensation claim cost inflation increases by one point
for the entire period over which claim payments will be made, CNA estimates
that
its net reserves would increase by approximately $500.0 million. If estimated
workers’ compensation claim cost inflation decreases by one point for the entire
period over which claim payments will be made, CNA estimates that its net
reserves would decrease by approximately $450.0 million. CNA’s net reserves for
Standard Lines workers’ compensation were approximately $4.4 billion at December
31, 2006.
For
Standard Lines general liability, the predominant method used for estimating
reserves is the incurred development method. Changes in the cost to repair
or
replace property, the cost of medical care, the cost of wage replacement,
judicial decisions, legislation and other factors all impact the pattern
selected in this method. The pattern selected results in the incurred
development factor that estimates future changes in case incurred loss.
If the
estimated incurred development factor for general liability increases by
15.0%,
CNA estimates that its net reserves would increase by approximately $370.0
million. If the estimated incurred development factor for general liability
decreases by 13.0%, CNA estimates that its net reserves would decrease
by
approximately $320.0 million. CNA’s net reserves for Standard Lines general
liability were approximately $4.0 billion at December 31, 2006.
Within
Specialty Lines, CNA believes a material deviation to its net reserves
is
reasonably possible for the US Specialty Lines group. This group provides
professional liability coverages to various professional firms, including
architects, realtors, small and mid-sized accounting firms, law firms and
technology firms. US Specialty Lines also provide D&O, employment practices,
fiduciary and fidelity coverages. US Specialty Lines also offers insurance
products to serve the healthcare delivery system. The most significant
factor
affecting US Specialty Lines reserve estimates is claim severity. Claim
severity
for US Specialty Lines is driven by the cost of medical care, the cost
of wage
replacement, legal fees, judicial decisions, legislation and other factors.
Underwriting and claim handling decisions such as the classes of business
written and individual claim settlement decisions can also impact claim
severity. If the estimated claim severity for US Specialty Lines increases
by
7.0%, CNA estimates that US Specialty Lines net reserves would increase
by
approximately $270.0 million. If the estimated claim severity for US Specialty
Lines decreases by 3.0%, CNA estimates that US Specialty Lines net reserves
would decrease by approximately $110.0 million. CNA’s net reserves for US
Specialty Lines were approximately $3.9 billion at December 31,
2006.
Within
Other Insurance, the two types of business for which CNA believes a material
deviation to its net reserves is reasonably possible are CNA Re and
APMT.
For
CNA
Re, the predominant method used for estimating reserves is the incurred
development method. Changes in the cost to repair or replace property,
the cost
of medical care, the cost of wage replacement, the rate at which ceding
companies report claims, judicial decisions, legislation and other factors
all
impact the incurred development pattern for CNA Re. The pattern selected
results
in the incurred development factor that estimates future changes in case
incurred loss. If the estimated incurred development factor for CNA Re
increases
by 21.0%, CNA estimates that its net reserves for CNA Re would increase
by
approximately $150.0 million. If the estimated incurred development factor
for
CNA Re decreases by 21.0%, CNA estimates that it’s net reserves would decrease
by approximately $150.0 million. CNA net reserves for CNA Re were approximately
$1.2 billion at December 31, 2006.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - CNA Financial -
(Continued)
|
For
APMT,
the most significant factor affecting reserve estimates is overall account
size
trend. Overall account size trend for APMT reflects the combined impact
of
economic trends (inflation), changes in the types of defendants involved,
the
expected mix of asbestos disease types, judicial decisions, legislation
and
other factors. If the estimated overall account size trend for APMT increases
by
4 points, CNA estimates that its APMT net reserves would increase by
approximately $700.0 million. If the estimated overall account size trend
for
APMT decreases by 4 points, CNA estimates that its APMT net reserves would
decrease by approximately $400.0 million. CNA’s net reserves for APMT were
approximately $1.9 billion at December 31, 2006.
Given
the
factors described above, it is not possible to quantify precisely the ultimate
exposure represented by claims and related litigation. As a result, CNA
regularly reviews the adequacy of its reserves and reassesses its reserve
estimates as historical loss experience develops, additional claims are
reported
and settled and additional information becomes available in subsequent
periods.
In
light
of the many uncertainties associated with establishing the estimates and
making
the assumptions necessary to establish reserve levels, CNA reviews its
reserve
estimates on a regular basis and make adjustments in the period that the
need
for such adjustments is determined. These reviews have resulted in CNA’s
identification of information and trends that have caused CNA to increase
its
reserves in prior periods and could lead to the identification of a need
for
additional material increases in claim and claim adjustment expense reserves,
which could materially adversely affect CNA’s business and insurer financial
strength and debt ratings and our results of operations and equity. See
the
Ratings section of this MD&A for further information regarding our financial
strength and debt ratings.
Reinsurance
Due
to
significant catastrophes during 2005, the cost of CNA’s catastrophe reinsurance
program has increased. CNA’s catastrophe reinsurance protection cost CNA
premiums of approximately $64.0 million in 2005, including reinstatement
premiums and cost approximately $79.0 million in 2006, which did not include
any
reinstatement premiums. During 2007, CNA’s catastrophe reinsurance program will
cost $89.0 million before the impact of any reinstatement premiums.
The
terms
of CNA’s 2007 catastrophe programs are different than those of its 2006
programs. The Corporate Property Catastrophe treaty provides coverage for
the
accumulation of losses between $300.0 million and $1.0 billion arising
out of a
single catastrophe occurrence in the United States, its territories and
possessions, and Canada. CNA’s co-participation is 50.0% of the first $100.0
million layer and 10.0% of the remaining layer. In addition, CNA previously
purchased an aggregate property catastrophe treaty to obtain reinsurance
protection against the aggregation of losses from multiple catastrophic
events.
CNA did not purchase an aggregate property catastrophe treaty for
2007.
In
certain circumstances, including significant deterioration of a reinsurer’s
financial strength ratings, CNA may engage in commutation discussions with
individual reinsurers. The outcome of such discussions may result in a lump sum
settlement that is less than the recorded receivable, net of any applicable
allowance for doubtful accounts. Losses arising from commutations could
have an
adverse material impact on our results of operations or equity.
In
2001,
CNA entered into a one-year corporate aggregate reinsurance treaty related
to
the 2001 accident year covering substantially all property and casualty
lines of
business in the Continental Casualty Company pool (the “CCC Cover”). The CCC
Cover was fully utilized in 2003. In 2006, CNA commuted its CCC Cover.
This
commutation had no impact on the Consolidated Statements of Income for
the year
ended December 31, 2006.
Also
in
2006, CNA commuted several reinsurance treaties, including several finite
treaties, with a European reinsurance group. This commutation resulted
in a
pretax loss, net of allowance for uncollectible reinsurance, of $48.0 million.
CNA received $35.0 million of cash in connection with this significant
commutation.
As
of
December 31, 2006 and 2005, there were one and thirteen ceded reinsurance
treaties inforce, respectively, that CNA considers to be finite reinsurance.
In
2003, CNA discontinued purchases of such contracts. The remaining treaty
at
December 31, 2006 provides reinsurance protection for the 1999 accident
year on
specified portions of CNA’s domestic property and casualty business and is fully
utilized. Therefore, CNA does not expect to cede any additional losses
under
finite reinsurance contracts in future periods nor incur interest
costs.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - CNA Financial -
(Continued)
|
Further
information on CNA’s reinsurance program is included in Note 18 of the Notes to
Consolidated Financial Statements included under Item 8.
Terrorism
Insurance
CNA
and
the insurance industry incurred substantial losses related to the 2001
World
Trade Center event. The Terrorism Risk Insurance Act of 2002 (“TRIA”)
established a program within the Department of the Treasury under which
insurers
are required to offer terrorism insurance and the federal government will
share
the risk of loss by commercial property and casualty insurers arising from
future terrorist attacks. Although TRIA expired on December 31, 2005, the
Terrorism Risk Insurance Extension Act of 2005 (“TRIEA”) extended this program
through December 31, 2007 with changes such as the lines of business covered,
the deductible amount that must be paid by the insurance company and the
aggregate industry loss prior to federal government assistance becoming
available.
While
TRIEA provides the property and casualty industry with an increased ability
to
withstand the effect of a terrorist event through 2007, given the
unpredictability of the nature, targets, severity or frequency of potential
terrorist events, our results of operations or equity could nevertheless
be
materially adversely impacted by them. CNA is attempting to mitigate this
exposure through its underwriting practices, as well as policy terms and
conditions (where applicable). Under the laws of certain states, CNA is
generally prohibited from excluding terrorism exposure from its primary
workers’
compensation policies. Further, in those states that mandate property insurance
coverage of damage from fire following a loss, CNA is prohibited from excluding
terrorism exposure.
Over
the
past several years, CNA has been underwriting its business to manage its
terrorism exposure through strict underwriting standards, risk avoidance
measures and conditional terrorism exclusions where permitted by law. There
is
substantial uncertainty as to CNA’s ability to effectively contain its terrorism
exposure since, notwithstanding the efforts described above, CNA continues
to
issue forms of coverage, in particular, workers’ compensation, that are exposed
to risk of loss from a terrorism event.
Restructuring
In
2001,
CNA finalized and approved a plan related to restructuring the property
and
casualty segments and Life and Group Non-Core segment, discontinuation
of the
variable life and annuity business and consolidation of real estate locations.
During 2006, CNA reevaluated the sufficiency of the remaining accrual,
which
related to lease termination costs, and determined that the liability is
no
longer required as CNA has completed its lease obligations. As a result,
the
excess remaining accrual was released in 2006, resulting in income of $7.3
million after-tax and minority interest for the year ended December 31,
2006.
Further
information on the restructuring plan is included in Note 15 of the Notes
to
Consolidated Financial Statements included under Item 8.
Segment
Results
The
following discusses the results of operations for CNA’s operating segments. CNA
utilizes the net operating income financial measure to monitor its operations.
Net operating income is calculated by excluding from net income the after-tax
and minority interest effects of (1) net realized investment gains or losses,
(2) income or loss from discontinued operations, and (3) cumulative effects
of
changes in accounting principles. In evaluating the results of the Standard
Lines and Specialty Lines, CNA management utilizes the combined ratio,
the loss
ratio, the expense ratio and the dividend ratio. These ratios are calculated
using GAAP financial results. The loss ratio is the percentage of net incurred
claim and claim adjustment expenses to net earned premiums. The expense
ratio is
the percentage of insurance underwriting and acquisition expenses, including
the
amortization of deferred acquisition costs, to net earned premiums. The
dividend
ratio is the ratio of policyholders’ dividends incurred to net earned premiums.
The combined ratio is the sum of the loss, expense and dividend
ratios.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - CNA Financial -
(Continued)
|
Standard
Lines
The
following table summarizes the results of operations for Standard Lines
for the
years ended December 31, 2006, 2005 and 2004.
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions, except %)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
written premiums
|
|
$
|
4,433.0
|
|
$
|
4,382.0
|
|
$
|
4,582.0
|
|
Net
earned premiums
|
|
|
4,413.0
|
|
|
4,410.0
|
|
|
4,917.0
|
|
Net
investment income
|
|
|
990.6
|
|
|
766.9
|
|
|
495.8
|
|
Net
operating income (loss)
|
|
|
557.9
|
|
|
(37.7
|
)
|
|
201.2
|
|
Net
realized investment gains
|
|
|
48.0
|
|
|
8.5
|
|
|
126.2
|
|
Net
income (loss)
|
|
|
605.9
|
|
|
(29.2
|
)
|
|
327.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
Loss
and loss adjustment expense
|
|
|
70.1
|
%
|
|
87.5
|
%
|
|
70.8
|
%
|
Expense
|
|
|
31.1
|
|
|
32.4
|
|
|
34.6
|
|
Dividend
|
|
|
0.4
|
|
|
0.4
|
|
|
0.2
|
|
Combined
|
|
|
101.6
|
%
|
|
120.3
|
%
|
|
105.6
|
%
|
2006
Compared with 2005
Net
written premiums for Standard Lines increased $51.0 million in 2006 as
compared
with 2005. This increase was primarily driven by favorable new business,
rate
and retention in the Property lines of business. Net earned premiums increased
$3.0 million in 2006 as compared with 2005. Net earned premiums were impacted
by
decreased favorable premium development in 2006 as compared to 2005, as
discussed below. CNA continues to focus on portfolio optimization.
Standard
Lines averaged flat rates for 2006, as compared to average rate decreases
of
1.0% for 2005 for the contracts that renewed during those periods. Retention
rates of 81.0% and 77.0% were achieved for those contracts that were up
for
renewal in each period.
Net
results increased $635.1 million in 2006 as compared with 2005. This increase
was attributable to increases in net operating results and net realized
investment gains. See the Investments section of this MD&A for further
discussion of net investment income and net realized investment
gains.
Net
operating results increased $595.6 million in 2006 as compared with 2005.
This
increase was primarily driven by significantly reduced catastrophe losses
in
2006, an increase in net investment income and a decrease in unfavorable
net
prior year development as discussed below. The
2006
net operating results included catastrophe impacts of $28.0 million after-tax
and minority interest. The 2005 net operating results included catastrophe
impacts of $290.3 million after-tax and minority interest related to Hurricanes
Katrina, Wilma, Rita, Dennis and Ophelia, net of reinsurance
recoveries.
The
combined ratio improved 18.7 points in 2006 as compared with 2005. The
loss
ratio improved 17.4 points due to decreased unfavorable net prior year
development as discussed below and decreased catastrophe losses in 2006.
The
2006 and 2005 loss ratios included 1.3 and 11.1 points related to the impact
of
catastrophes.
The
expense ratio improved 1.3 points in 2006 as compared with 2005. This
improvement was primarily due to a decrease in the provision for insurance
bad
debt. In addition, the 2005 ratio included increased ceded commissions
as a
result of an unfavorable arbitration ruling related to two reinsurance
treaties.
Changes in estimates for premium taxes partially offset these favorable
impacts.
Unfavorable
net prior year development of $69.0 million was recorded in 2006, including
$157.0 million of unfavorable claim and allocated claim adjustment expense
reserve development and $88.0 million of favorable premium development.
Unfavorable net prior year development of $452.0 million, including $559.0
million of unfavorable claim and allocated claim adjustment expense reserve
development and $107.0 million of favorable premium development,
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - CNA Financial -
(Continued)
|
was
recorded in 2005. Further information on Standard Lines Net Prior Year
Development for 2006 and 2005 is included in Note 9 of the Notes to Consolidated
Financial Statements included under Item 8.
During
2006 and 2005, CNA commuted several significant reinsurance contracts that
resulted in unfavorable development of $110.0 million and $285.0 million,
which
is included in the development above, and which was partially offset by
the
release of previously established allowance for uncollectible reinsurance.
These
commutations resulted in an unfavorable after-tax and minority interest
impact
of $28.0 million and $157.9 million in 2006 and 2005. Several of the commuted
contracts contained interest crediting provisions. The interest charges
associated with the reinsurance contracts commuted were $8.1 million and
$31.9
million after-tax and minority interest in 2006 and 2005. The 2005 amount
includes the interest charges associated with the contract commuted in
2006.
There will be no further interest crediting charges related to these commuted
contracts in future periods.
The
following table summarizes the gross and net carried reserves as of December
31,
2006 and 2005 for Standard Lines.
December
31
|
|
2006
|
|
2005
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Case Reserves
|
|
$
|
6,746.0
|
|
$
|
7,033.0
|
|
Gross
IBNR Reserves
|
|
|
8,188.0
|
|
|
8,051.0
|
|
|
|
|
|
|
|
|
|
Total
Gross Carried Claim and Claim Adjustment Expense Reserves
|
|
$
|
14,934.0
|
|
$
|
15,084.0
|
|
|
|
|
|
|
|
|
|
Net
Case Reserves
|
|
$
|
5,234.0
|
|
$
|
5,165.0
|
|
Net
IBNR Reserves
|
|
|
6,632.0
|
|
|
6,081.0
|
|
|
|
|
|
|
|
|
|
Total
Net Carried Claim and Claim Adjustment Expense Reserves
|
|
$
|
11,866.0
|
|
$
|
11,246.0
|
|
2005
Compared with 2004
Net
written premiums for Standard Lines decreased $200.0 million in 2005 as
compared
with 2004. This decrease was primarily driven by decreased premium writings
in
our casualty lines of business, increased reinstatement premium in 2005
related
to catastrophe losses and decreased rates as discussed further below. Net
earned
premiums decreased $507.0 million in 2005 as compared with 2004. This decrease
was primarily driven by the decline in premiums written. The lower premium
is
consistent with CNA’s strategy of portfolio optimization. CNA’s priority is a
diversified portfolio in profitable classes of business.
Standard
Lines averaged rate decreases of 1.0% for 2005, as compared to average
rate
increases of 4.0% for 2004 for the contracts that renewed during those
periods.
Retention rates of 77.0% and 70.0% were achieved for those contracts that
were
up for renewal in each period.
Net
results decreased $356.6 million in 2005 as compared with 2004. This decrease
was attributable to declines in both net operating results and net realized
investment results. See the Investments section of this MD&A for further
discussion of net investment income and net realized investment
results.
Net
operating results decreased $238.9 million in 2005 as compared with 2004.
This
decrease was due primarily to increased unfavorable net prior year development
of $257.3 million after-tax and minority interest including $168.8 million
after-tax and minority interest related to significant commutations in
2005, a
$123.2 million after-tax and minority interest increase in catastrophe
losses,
the decreased earned premium as discussed above and decreased current accident
year results. These unfavorable items were partially offset by a $271.1
million
increase in net investment income and a decrease in the provision for insurance
bad debt.
Unfavorable
net prior year development of $452.0 million was recorded in 2005, including
$559.0 million of unfavorable claim and allocated claim adjustment expense
reserve development and $107.0 million of favorable premium development.
Unfavorable net prior year development of $18.0 million, including $115.0
million of unfavorable claim and allocated claim adjustment expense reserve
development and $97.0 million of favorable premium
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - CNA Financial -
(Continued)
|
development,
was recorded in 2004. Further information on Standard Lines Net Prior Year
Development for 2005 and 2004 is included in Note 9 of the Notes to Consolidated
Financial Statements included under Item 8.
During
2005 and 2004, CNA commuted several significant reinsurance contracts that
resulted in unfavorable development of $285.0 million and $5.0 million,
which is
included in the development above, and which was partially offset by the
release
of previously established allowance for uncollectible reinsurance. These
commutations resulted in an unfavorable impact of $157.9 million after-tax
and
minority interest and favorable impact of $3.7 million after-tax and minority
interest in 2005 and 2004. These contracts contained interest crediting
provisions. The interest charges associated with the reinsurance contracts
commuted were $42.0 million and $110.0 million in 2005 and 2004. There
will be
no further interest crediting charges related to these commuted contracts
in
future periods.
The
impact of catastrophes was $290.3 million and $167.0 million after-tax
and
minority interest for 2005 and 2004, net of anticipated reinsurance recoveries.
The
combined ratio increased 14.7 points in 2005 as compared with 2004. The
loss
ratio increased 16.7 points in 2005 as compared with 2004. These increases
were
primarily due to increased net prior year development, increased catastrophe
losses and decreased current accident year results. Catastrophe losses
of $470.0
million and $260.0 million were recorded in 2005 and 2004.
The
expense ratio improved 2.2 points in 2005 as compared with 2004. This
improvement was primarily due to a decrease in the provision for insurance
bad
debt.
The
dividend ratio increased 0.2 points in 2005 as compared with 2004. The
2004
ratio was impacted by favorable dividend development, partially offset
by
decreased participation in dividend plans and lower dividend amounts related
to
the current accident year.
Specialty
Lines
The
following table summarizes the results of operations for Specialty Lines
for the
years ended December 31, 2006, 2005 and 2004.
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions, except %)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
written premiums
|
|
$
|
2,596.0
|
|
$
|
2,463.0
|
|
$
|
2,391.0
|
|
Net
earned premiums
|
|
|
2,555.0
|
|
|
2,475.0
|
|
|
2,277.0
|
|
Net
investment income
|
|
|
403.1
|
|
|
281.3
|
|
|
245.5
|
|
Net
operating income
|
|
|
419.3
|
|
|
306.7
|
|
|
295.3
|
|
Net
realized investment gains
|
|
|
16.2
|
|
|
10.7
|
|
|
49.6
|
|
Net
income
|
|
|
435.5
|
|
|
317.4
|
|
|
344.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
Loss
and loss adjustment expense
|
|
|
60.5
|
%
|
|
65.3
|
%
|
|
63.3
|
%
|
Expense
|
|
|
26.7
|
|
|
26.1
|
|
|
26.1
|
|
Dividend
|
|
|
0.2
|
|
|
0.2
|
|
|
0.2
|
|
Combined
|
|
|
87.4
|
%
|
|
91.6
|
%
|
|
89.6
|
%
|
2006
Compared with 2005
Net
written premiums for Specialty Lines increased $133.0 million in 2006 as
compared with 2005. This increase was primarily due to improved production
across certain lines of business. Net earned premiums increased $80.0 million
in
2006 as compared with 2005, consistent with the increased premium
written.
Specialty
Lines averaged flat rates for 2006, as compared to average rate increases
of
1.0% for 2005 for the contracts that renewed during those periods. Retention
rates of 87.0% and 86.0% were achieved for those contracts that were up
for
renewal in each period.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - CNA Financial -
(Continued)
|
Net
income increased $118.1 million in 2006 as compared with 2005. This increase
was
attributable to increases in net operating income and realized investment
gains.
See the Investments section of this MD&A for further discussion of net
investment income and net realized investment results.
Net
operating income increased $112.6 million in 2006 as compared with 2005.
This
improvement was primarily driven by an increase in net investment income,
a
decrease in net prior year development as discussed below and reduced
catastrophe impacts in 2006. Catastrophe impacts were $0.9 million after-tax
and
minority interest for the year ended December 31, 2006, as compared to
$14.6
million after-tax and minority interest for the year ended December 31,
2005.
Also, the 2005 results included a $53.9 million loss, after taxes and minority
interests, in the surety line of business related to a large national
contractor. Further information related to the large national contractor
is
included in Note 21 of the Notes to Consolidated Financial Statements included
under Item 8.
The
combined ratio improved 4.2 points in 2006 as compared with 2005. The loss
ratio
improved 4.8 points, due to improved current accident year impacts and
decreased
net prior year development as discussed below. The 2005 loss ratio was
unfavorably impacted by surety losses of $110.0 million, before taxes and
minority interest, related to a national contractor as discussed above.
Partially offsetting this favorable impact was less favorable current accident
year loss ratios across several other lines of business in 2006.
Unfavorable
net prior year development of $15.0 million was recorded in 2006, including
$10.0 million of favorable claim and allocated claim adjustment expense
reserve
development and $25.0 million of unfavorable premium development. Unfavorable
net prior year development of $54.0 million, including $47.0 million of
unfavorable claim and allocated claim adjustment expense reserve development
and
$7.0 million of unfavorable premium development, was recorded in 2005.
Further
information on Specialty Lines Net Prior Year Development for 2006 and
2005 is
included in Note 9 of the Notes to Consolidated Financial Statements included
under Item 8.
The
following table summarizes the gross and net carried reserves as of December
31,
2006 and 2005 for Specialty Lines.
December
31
|
|
2006
|
|
2005
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Case Reserves
|
|
$
|
1,715.0
|
|
$
|
1,907.0
|
|
Gross
IBNR Reserves
|
|
|
3,814.0
|
|
|
3,298.0
|
|
Total
Gross Carried Claim and Claim Adjustment Expense Reserves
|
|
$
|
5,529.0
|
|
$
|
5,205.0
|
|
|
|
|
|
|
|
|
|
Net
Case Reserves
|
|
$
|
1,350.0
|
|
$
|
1,442.0
|
|
Net
IBNR Reserves
|
|
|
2,921.0
|
|
|
2,352.0
|
|
Total
Net Carried Claim and Claim Adjustment Expense Reserves
|
|
$
|
4,271.0
|
|
$
|
3,794.0
|
|
2005
Compared with 2004
Net
written premiums for Specialty Lines increased $72.0 million in 2005 as
compared
with 2004. This increase was primarily due to improved retention across
most
professional liability insurance lines of business. These favorable impacts
were
partially offset by increased ceded premiums for certain professional liability
lines of business and decreased premiums for the warranty business. Due
to a
change in 2005 in the warranty product offering, fees related to the new
warranty product are included within other revenues. Written premiums for
the
warranty line of business decreased $70.0 million in 2005 as compared to
2004.
Net earned premiums increased $198.0 million in 2005 as compared with 2004,
which reflects the increased premium written trend over several prior quarters
in Specialty Lines.
Specialty
Lines averaged rate increases of 1.0% and 9.0% in 2005 and 2004 for the
contracts that renewed during those periods. Retention rates of 86.0% and
83.0%
were achieved for those contracts that were up for renewal in each
period.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - CNA Financial -
(Continued)
|
Net
income decreased $27.5 million in 2005 as compared with 2004. This decrease
was
due primarily to a $38.9 million decrease in net realized investment gains
partially offset by increased net operating income. See the Investments
section
of this MD&A for further discussion of net investment income and net
realized investment results.
Net
operating income increased $11.4 million in 2005 as compared with 2004.
This
increase was primarily driven by an increase in net investment income and
increased earned premiums. These increases to operating income were partially
offset by decreased current accident year results. Additionally, 2004 results
were favorably impacted by the release of a previously established reinsurance
bad debt allowance as the result of a significant commutation. Catastrophe
impacts were $14.6 million and $10.0 million after-tax and minority interest
for
the years ended December 31, 2005 and 2004.
The
combined ratio increased 2.0 points in 2005 as compared with 2004. The
loss
ratio increased 2.0 points. The 2004 loss ratio was favorably impacted
by the
release of reinsurance bad debt reserve as discussed above. Additionally,
the
2005 loss ratio was unfavorably impacted by increased current year accident
losses. This was driven by increased surety losses of $110.0 million related
to
a national contractor, before taxes and minority interest, as discussed
in
further detail in Note 21 of the Consolidated Financial Statements included
under Item 8, partially offset by improved current accident year loss ratios
in
several professional liability lines of business.
Unfavorable
net prior year development of $54.0 million was recorded in 2005, including
$47.0 million of unfavorable claim and allocated claim adjustment expense
reserve development and $7.0 million of unfavorable premium development.
Unfavorable net prior year development of $30.0 million, including $58.0
million
of unfavorable claim and allocated claim adjustment expense reserve development
and $28.0 million of favorable premium development, was recorded in 2004.
Further information on Specialty Lines Net Prior Year Development for 2005
and
2004 is included in Note 9 of the Consolidated Financial Statements included
under Item 8.
The
expense ratio was the same in 2005 as compared with 2004. The 2005 ratio
was
impacted by a change in estimate related to profit commissions in the warranty
line of business, which was offset by the impact of the increased earned
premium
base.
Life
and Group Non-Core
The
following table summarizes the results of operations for Life and Group
Non-Core.
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earned premiums
|
|
$
|
641.0
|
|
$
|
704.0
|
|
$
|
921.0
|
|
Net
investment income
|
|
|
698.3
|
|
|
593.4
|
|
|
691.8
|
|
Net
operating loss
|
|
|
(12.9
|
)
|
|
(46.7
|
)
|
|
(26.2
|
)
|
Net
realized investment losses
|
|
|
(29.9
|
)
|
|
(17.6
|
)
|
|
(349.0
|
)
|
Net
income (loss)
|
|
|
(42.8
|
)
|
|
(64.3
|
)
|
|
(375.2
|
)
|
2006
Compared with 2005
Net
earned premiums for Life and Group Non-Core decreased $63.0 million in
2006 as
compared with 2005. The 2006 and 2005 net earned premiums relate primarily
to
the group and individual long term care businesses.
Net
results increased $21.5 million in 2006 as compared with 2005, driven by
increased net investment income. A significant portion of the increase
in net
investment income was offset by a corresponding increase in the policyholders’
funds reserves supported by the trading portfolio. The portion not offset
by the
policyholders’ funds reserves increased by $22.6 million. Also impacting net
results was $13.6 million of income related to the resolution of contingencies
and the absence of a $15.4 million provision recorded in 2005 for estimated
indemnification liabilities related to the sold individual life business.
Partially offsetting these favorable impacts were increased net realized
investment losses and the absence of income related to agreements with
buyers of
sold businesses which ended as of December 31, 2005. In addition, the 2005
net
results included a change in estimate, which reduced a prior accrual of
state
premium taxes. See the Investments section of this MD&A for further
discussion of net investment income and net realized investment
results.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - CNA Financial -
(Continued)
|
2005
Compared with 2004
Net
earned premiums for Life and Group Non-Core decreased $217.0 million in
2005 as
compared with 2004. The premiums in 2004 include $115.0 million from the
individual life business and $165.0 million from the specialty medical
business.
Net
results improved by $310.9 million in 2005 as compared with 2004. The
improvement in net results related primarily to a $352.9 million realized
loss
on the sale of the individual life business in 2004. Also contributing
to the
improvement in net results was the reduction in 2005 of significant 2004
items
related to certain assumed reinsurance exposures. Additionally, 2005 results
included $11.9 million income related to a service agreement with a purchaser
for sold businesses. These agreements have expired. These results were
partially
offset by a decline in net investment income of $98.4 million. This included
a
decrease of approximately $64.0 million from the trading portfolio which
was
largely offset by a corresponding decrease in the policyholders’ funds reserves
supported by the trading portfolio. In addition, it included the absence
of
favorable results from sold insurance operations. Also unfavorably impacting
the
2005 results was a $15.3 million provision increase for estimated
indemnification liabilities related to the sold individual life business
and
unfavorable results related to the long term care business. See the Investments
section of this MD&A for further discussion of net investment income and net
realized investment results.
Other
Insurance
The
following table summarizes the results of operations for the Other Insurance
segment, including APMT and intrasegment eliminations.
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$
|
320.1
|
|
$
|
250.3
|
|
$
|
246.4
|
|
Revenues
|
|
|
312.1
|
|
|
313.8
|
|
|
358.2
|
|
Net
operating income
|
|
|
14.0
|
|
|
24.4
|
|
|
91.8
|
|
Net
realized investment gains (losses)
|
|
|
28.6
|
|
|
(8.5
|
)
|
|
36.1
|
|
Net
income
|
|
|
42.6
|
|
|
15.9
|
|
|
127.9
|
|
2006
Compared with 2005
Revenues
decreased $1.7 million in 2006 as compared with 2005. Revenues in 2006
and 2005
included interest income related to federal income tax settlements of $4.0
million and $121.0 million as further discussed in Note 11 of the Notes
to
Consolidated Financial Statements included under Item 8. This decrease
was
substantially offset by increased net investment income and improved realized
investment results. See the Investments section of this MD&A for further
discussion of net investment income and net realized investment
results.
Net
results increased $26.7 million in 2006 as compared with 2005. The improvement
was primarily driven by a decrease in unfavorable net prior year development
as
discussed further below. Offsetting this favorable impact was an increase
in
current accident year losses related to mass torts, discontinuation of
royalty
income related to a sold business and increased interest costs related
to the
issuance of $750.0 million of senior notes in August of 2006.
Unfavorable
net prior year development of $88.0 million was recorded during 2006, including
$86.0 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development and $2.0 million of unfavorable premium development.
Unfavorable net prior year development of $306.0 million was recorded in
2005,
including $291.0 million of unfavorable net prior year claim and allocated
claim
adjustment expense reserve development and $15.0 million of unfavorable
premium
development. Further information on Corporate and Other Non-Core’s Net Prior
Year Development for 2006 and 2005 is included in Note 9 of the Notes to
Consolidated Financial Statements included under Item 8.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - CNA Financial -
(Continued)
|
The
following table summarizes the gross and net carried reserves as of December
31,
2006 and 2005 for the Other Insurance segment.
December
31
|
|
2006
|
|
2005
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Case Reserves
|
|
$
|
2,511.0
|
|
$
|
3,297.0
|
|
Gross
IBNR Reserves
|
|
|
3,528.0
|
|
|
4,075.0
|
|
Total
Gross Carried Claim and Claim Adjustment Expense Reserves
|
|
$
|
6,039.0
|
|
$
|
7,372.0
|
|
|
|
|
|
|
|
|
|
Net
Case Reserves
|
|
$
|
1,453.0
|
|
$
|
1,554.0
|
|
Net
IBNR Reserves
|
|
|
1,999.0
|
|
|
1,902.0
|
|
Total
Net Carried Claim and Claim Adjustment Expense Reserves
|
|
$
|
3,452.0
|
|
$
|
3,456.0
|
|
2005
Compared with 2004
Revenues
decreased $44.4 million in 2005 as compared with 2004. The decrease in
revenues
was primarily due to reduced net earned premiums in CNA Re of $134.0 million
due
to the exit from the assumed reinsurance business in 2003 and decreased
net
realized investment results. Partially offsetting these decreases was $121.0
million of interest income related to a federal income tax settlement.
See Note
11 of the Notes to Consolidated Financial Statements included under Item 8
for further information.
Net
results decreased $112.0 million in 2005 as compared with 2004. The decrease
in
net results was primarily due to a $126.9 million after-tax and minority
interest increase in unfavorable net prior year development related primarily
to
commutations and reserve strengthening, a $44.6 million decrease in net
realized
investment results and a decrease in the provision recorded for uncollectible
reinsurance. Net realized investment results for the year ended December
31,
2005 and 2004 included a $20.1 million and $32.9 million after-tax and
minority
interest impairment related to a national contractor. See Note 21 of the
Notes
to Consolidated Financial Statements included under Item 8 for additional
information regarding the national contractor. Partially offsetting these
decreases was a $105.0 million after-tax and minority interest benefit
related
to a federal income tax settlement and release of federal income tax
reserves.
Unfavorable
net prior year development of $306.0 million was recorded during 2005,
including
$291.0 million of unfavorable net prior year claim and allocated claim
adjustment expense reserve development and $15.0 million of unfavorable
premium
development. Unfavorable net prior year development of $93.0 million was
recorded in 2004, including $84.0 million of unfavorable net prior year
claim
and allocated claim adjustment expense reserve development and $9.0 million
of
unfavorable premium development. Further information on Corporate and Other
Non-Core’s Net Prior Year Development for 2005 and 2004 is included in Note 9 of
the Notes to Consolidated Financial Statements included under Item
8.
During
2005 and 2004, CNA commuted several significant reinsurance contracts that
resulted in unfavorable development of $118.0 million and $39.0 million,
which
is included in the development above, and which was partially offset by
the
release in 2004 of a previously established allowance for uncollectible
reinsurance. These commutations resulted in unfavorable impacts of $64.8
million
and $4.6 million after-tax and minority interest in 2005 and 2004. These
contracts contained interest crediting provisions and maintenance charges.
Interest charges associated with the reinsurance contracts commuted were
$11.9
million and $10.0 million after-tax and minority interest in 2005 and 2004.
There will be no further interest crediting charges or other charges related
to
these commuted contracts in future periods.
APMT
Reserves
CNA’s
property and casualty insurance subsidiaries have actual and potential
exposures
related to APMT claims.
Establishing
reserves for APMT claim and claim adjustment expenses is subject to
uncertainties that are greater than those presented by other claims. Traditional
actuarial methods and techniques employed to estimate the ultimate cost
of
claims for more traditional property and casualty exposures are less precise
in
estimating claim and claim adjustment expense reserves for APMT, particularly
in
an environment of emerging or potential claims and coverage issues that
arise
from industry practices and legal, judicial, and social conditions. Therefore,
these traditional actuarial methods and
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - CNA Financial -
(Continued)
|
techniques
are necessarily supplemented with additional estimating techniques and
methodologies, many of which involve significant judgments that are required
on
our part. Accordingly, a high degree of uncertainty remains for CNA’s ultimate
liability for APMT claim and claim adjustment expenses.
In
addition to the difficulties described above, estimating the ultimate cost
of
both reported and unreported APMT claims is subject to a higher degree
of
variability due to a number of additional factors, including among others:
the
number and outcome of direct actions against CNA; coverage issues, including
whether certain costs are covered under the policies and whether policy
limits
apply; allocation of liability among numerous parties, some of whom may
be in
bankruptcy proceedings, and in particular the application of “joint and several”
liability to specific insurers on a risk; inconsistent court decisions
and
developing legal theories; continuing aggressive tactics of plaintiffs’ lawyers;
the risks and lack of predictability inherent in major litigation; enactment
of
state and federal legislation to address asbestos claims; the potential
for
increases and decreases in asbestos, environmental pollution and mass tort
claims which cannot now be anticipated; the potential for increases and
decreases in costs to defend asbestos, pollution and mass tort claims;
the
possibility of expanding theories of liability against CNA’s policyholders in
environmental and mass tort matters; possible exhaustion of underlying
umbrella
and excess coverage; and future developments pertaining to CNA’s ability to
recover reinsurance for asbestos, pollution and mass tort claims.
Due
to
the inherent uncertainties in estimating claim and claim adjustment expense
reserves for APMT and due to the significant uncertainties described related
to
APMT claims, CNA’s ultimate liability for these cases, both individually and in
aggregate, may exceed the recorded reserves. Any such potential additional
liability, or any range of potential additional amounts, cannot be reasonably
estimated currently, but could be material to CNA’s business, insurer financial
strength and debt ratings and our results of operations and equity. Due
to,
among other things, the factors described above, it may be necessary for
CNA to
record material changes in its APMT claim and claim adjustment expense
reserves
in the future, should new information become available or other developments
emerge.
CNA
has
annually performed ground up reviews of all open APMT claims to evaluate
the
adequacy of its APMT reserves. In performing the comprehensive ground up
analysis, CNA considers input from its professionals with direct responsibility
for the claims, inside and outside counsel with responsibility for its
representation and its actuarial staff. These professionals consider, among
many
factors, the policyholder’s present and predicted future exposures, including
such factors as claims volume, trial conditions, prior settlement history,
settlement demands and defense costs; the impact of asbestos defendant
bankruptcies on the policyholder; facts or allegations regarding the policies
CNA issued or are alleged to have issued, including such factors as aggregate
or
per occurrence limits, whether the policy is primary, umbrella or excess,
and
the existence of policyholder retentions and/or deductibles; the policyholders’
allegations; the existence of other insurance; and reinsurance
arrangements.
Further
information on APMT Net Prior Year Development is included in Note 9 of
the
Notes to Consolidated Financial Statements included under Item 8.
The
following table provides data related to CNA’s APMT claim and claim adjustment
expense reserves.
December
31
|
|
2006
|
|
2005
|
|
|
|
Asbestos
|
|
Environmental
Pollution
and
Mass
Tort
|
|
Asbestos
|
|
Environmental
Pollution
and
Mass
Tort
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
reserves
|
|
$
|
2,635.0
|
|
$
|
647.0
|
|
$
|
2,992.0
|
|
$
|
680.0
|
|
Ceded
reserves
|
|
|
(1,183.0
|
)
|
|
(231.0
|
)
|
|
(1,438.0
|
)
|
|
(257.0
|
)
|
Net
reserves
|
|
$
|
1,452.0
|
|
$
|
416.0
|
|
$
|
1,554.0
|
|
$
|
423.0
|
|
Asbestos
In
the
past several years, CNA has experienced, at certain points in time, significant
increases in claim counts for asbestos-related claims. The factors that
led to
these increases included, among other things, intensive advertising campaigns
by
lawyers for asbestos claimants, mass medical screening programs sponsored
by
plaintiff lawyers and the addition of new defendants such as the distributors
and installers of products containing asbestos. In recent years, the rate
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - CNA Financial -
(Continued)
|
of
new
filings has decreased. Various challenges to mass screening claimants have
been
successful. Historically, the majority of asbestos bodily injury claims
have
been filed by persons exhibiting few, if any, disease symptoms. Studies
have
concluded that the percentage of unimpaired claimants to total claimants
ranges
between 66.0% and up to 90.0%. Some courts and some state statutes mandate
that
so-called “unimpaired” claimants may not recover unless at some point the
claimant’s condition worsens to the point of impairment. Some plaintiffs
classified as “unimpaired” continue to challenge those orders and statutes.
Therefore, the ultimate impact of the orders and statutes on future asbestos
claims remains uncertain.
Several
factors are, in CNA’s view, negatively impacting asbestos claim trends.
Plaintiff attorneys who previously sued entities that are now bankrupt
continue
to seek other viable targets. As a result, companies with few or no previous
asbestos claims are becoming targets in asbestos litigation and, although
they
may have little or no liability, nevertheless must be defended. Additionally,
plaintiff attorneys and trustees for future claimants are demanding that
policy
limits be paid lump-sum into the bankruptcy asbestos trusts prior to
presentation of valid claims and medical proof of these claims. Various
challenges to these practices have succeeded in litigation, and are continuing
to be litigated. Plaintiff attorneys and trustees for future claimants
are also
attempting to devise claims payment procedures for bankruptcy trusts that
would
allow asbestos claims to be paid under lax standards for injury, exposure
and
causation. This also presents the potential for exhausting policy limits
in an
accelerated fashion. Challenges to these practices are being mounted, though
the
ultimate impact or success of these tactics remains uncertain.
As
a
result of bankruptcies and insolvencies, CNA had in the past observed an
increase in the total number of policyholders with current asbestos claims
as
additional defendants are added to existing lawsuits and are named in new
asbestos bodily injury lawsuits. During the last few years the rate of
new
bodily injury claims had moderated, and most recently the new claims filing
rate
has decreased although the number of policyholders claiming coverage for
asbestos related claims has remained relatively constant in the past several
years.
CNA
has
resolved a number of its large asbestos accounts by negotiating settlement
agreements. Structured settlement agreements provide for payments over
multiple
years as set forth in each individual agreement.
In
1985,
47 asbestos producers and their insurers, including The Continental Insurance
Company (“CIC”), executed the Wellington Agreement. The agreement was intended
to resolve all issues and litigation related to coverage for asbestos exposures.
Under this agreement, signatory insurers committed scheduled policy limits
and
made the limits available to pay asbestos claims based upon coverage blocks
designated by the policyholders in 1985, subject to extension by policyholders.
CIC was a signatory insurer to the Wellington Agreement.
CNA
has
also used coverage in place agreements to resolve large asbestos exposures.
Coverage in place agreements are typically agreements between CNA and its
policyholders identifying the policies and the terms for payment of asbestos
related liabilities. Claims payments are contingent on presentation of
adequate
documentation showing exposure during the policy periods and other documentation
supporting the demand for claims payment. Coverage in place agreements
may have
annual payment caps. Coverage in place agreements are evaluated based on
claims
filings trends and severities.
CNA
categorizes active asbestos accounts as large or small accounts. CNA defines
a
large account as an active account with more than $100,000 of cumulative
paid
losses. CNA has made closing large accounts a significant management priority.
Small accounts are defined as active accounts with $100,000 or less of
cumulative paid losses. Approximately 79.6% and 81.0% of CNA’s total active
asbestos accounts are classified as small accounts at December 31, 2006
and
2005.
CNA
also
evaluates its asbestos liabilities arising from its assumed reinsurance
business
and its participation in various pools, including Excess & Casualty
Reinsurance Association (“ECRA”).
IBNR
reserves relate to potential development on accounts that have not settled
and
potential future claims from unidentified policyholders.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - CNA Financial -
(Continued)
|
The
tables below depict CNA’s overall pending asbestos accounts and associated
reserves at December 31, 2006 and 2005.
December
31, 2006
|
|
Number
of
Policyholders
|
|
Net
Paid
(Recovered)
Losses
|
|
Net
Asbestos
Reserves
|
|
Percent
of
Asbestos
Net
Reserves
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders
with settlement agreements
|
|
|
|
|
|
|
|
|
|
Structured
settlements
|
|
|
15
|
|
$
|
22.0
|
|
$
|
171.0
|
|
|
11.8
|
%
|
Wellington
|
|
|
3
|
|
|
(1.0
|
)
|
|
14.0
|
|
|
1.0
|
|
Coverage
in place
|
|
|
37
|
|
|
(18.0
|
)
|
|
79.0
|
|
|
5.4
|
|
Fibreboard
|
|
|
1
|
|
|
|
|
|
53.0
|
|
|
3.6
|
|
Total
with settlement agreements
|
|
|
56
|
|
|
3.0
|
|
|
317.0
|
|
|
21.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
policyholders with active accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
asbestos accounts
|
|
|
220
|
|
|
76.0
|
|
|
254.0
|
|
|
17.5
|
|
Small
asbestos accounts
|
|
|
1,080
|
|
|
17.0
|
|
|
101.0
|
|
|
7.0
|
|
Total
other policyholders
|
|
|
1,300
|
|
|
93.0
|
|
|
355.0
|
|
|
24.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
reinsurance and pools
|
|
|
|
|
|
6.0
|
|
|
141.0
|
|
|
9.7
|
|
Unassigned
IBNR
|
|
|
|
|
|
|
|
|
639.0
|
|
|
44.0
|
|
Total
|
|
|
1,356
|
|
$
|
102.0
|
|
$
|
1,452.0
|
|
|
100.0
|
%
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders
with settlement agreements
|
|
|
|
|
|
|
|
|
|
Structured
settlements
|
|
|
13
|
|
$
|
30.0
|
|
$
|
167.0
|
|
|
10.7
|
%
|
Wellington
|
|
|
4
|
|
|
2.0
|
|
|
15.0
|
|
|
1.0
|
|
Coverage
in place
|
|
|
34
|
|
|
13.0
|
|
|
58.0
|
|
|
3.7
|
|
Fibreboard
|
|
|
1
|
|
|
|
|
|
54.0
|
|
|
3.5
|
|
Total
with settlement agreements
|
|
|
52
|
|
|
45.0
|
|
|
294.0
|
|
|
18.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
policyholders with active accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
asbestos accounts
|
|
|
199
|
|
|
68.0
|
|
|
273.0
|
|
|
17.6
|
|
Small
asbestos accounts
|
|
|
1,073
|
|
|
23.0
|
|
|
135.0
|
|
|
8.7
|
|
Total
other policyholders
|
|
|
1,272
|
|
|
91.0
|
|
|
408.0
|
|
|
26.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
reinsurance and pools
|
|
|
|
|
|
6.0
|
|
|
143.0
|
|
|
9.2
|
|
Unassigned
IBNR
|
|
|
|
|
|
|
|
|
709.0
|
|
|
45.6
|
|
Total
|
|
|
1,324
|
|
$
|
142.0
|
|
$
|
1,554.0
|
|
|
100.0
|
%
|
Some
asbestos-related defendants have asserted that their insurance policies
are not
subject to aggregate limits on coverage. CNA has such claims from a number
of
insureds. Some of these claims involve insureds facing exhaustion of products
liability aggregate limits in their policies, who have asserted that their
asbestos-related claims fall within so-called “non-products” liability coverage
contained within their policies rather than products liability coverage,
and
that the claimed “non-products” coverage is not subject to any aggregate limit.
It is difficult to predict the ultimate size of any of the claims for coverage
purportedly not subject to aggregate limits or predict to what extent,
if any,
the attempts to assert “non-products” claims outside the products liability
aggregate will succeed. CNA’s policies also contain other limits applicable to
these claims and CNA has additional coverage defenses to certain claims.
CNA has
attempted to manage its asbestos exposure by aggressively seeking to settle
claims on acceptable terms. There can be no assurance that any of these
settlement efforts will be successful, or that any such claims can be settled
on
terms acceptable to CNA. Where CNA cannot settle a claim on acceptable
terms,
CNA aggressively litigates the claim. However, adverse developments with
respect
to such matters could have a material adverse effect on our results of
operations and/or equity.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - CNA Financial -
(Continued)
|
As
a
result of the uncertainties and complexities involved, reserves for asbestos
claims cannot be estimated with traditional actuarial techniques that rely
on
historical accident year loss development factors. In establishing asbestos
reserves, CNA evaluates the exposure presented by each insured. As part
of this
evaluation, CNA considers the available insurance coverage; limits and
deductibles; the potential role of other insurance, particularly underlying
coverage below any of its excess liability policies; and applicable coverage
defenses, including asbestos exclusions. Estimation of asbestos-related
claim
and claim adjustment expense reserves involves a high degree of judgment
on
CNA’s part and consideration of many complex factors, including: inconsistency
of court decisions, jury attitudes and future court decisions; specific
policy
provisions; allocation of liability among insurers and insureds; missing
policies and proof of coverage; the proliferation of bankruptcy proceedings
and
attendant uncertainties; novel theories asserted by policyholders and their
counsel; the targeting of a broader range of businesses and entities as
defendants; the uncertainty as to which other insureds may be targeted
in the
future and the uncertainties inherent in predicting the number of future
claims;
volatility in claim numbers and settlement demands; increases in the number
of
non-impaired claimants and the extent to which they can be precluded from
making
claims; the efforts by insureds to obtain coverage not subject to aggregate
limits; long latency period between asbestos exposure and disease manifestation
and the resulting potential for involvement of multiple policy periods
for
individual claims; medical inflation trends; the mix of asbestos-related
diseases presented and the ability to recover reinsurance.
CNA
is
involved in significant asbestos-related claim litigation, which is described
in
Note 9 of the Notes to Consolidated Financial Statements included under
Item
8.
Environmental
Pollution and Mass Tort
Environmental
pollution cleanup is the subject of both federal and state regulation.
By some
estimates, there are thousands of potential waste sites subject to cleanup.
The
insurance industry is involved in extensive litigation regarding coverage
issues. Judicial interpretations in many cases have expanded the scope
of
coverage and liability beyond the original intent of the policies. The
Comprehensive Environmental Response Compensation and Liability Act of
1980
(“Superfund”) and comparable state statutes (“mini-Superfunds”) govern the
cleanup and restoration of toxic waste sites and formalize the concept
of legal
liability for cleanup and restoration by “Potentially Responsible Parties”
(“PRPs”). Superfund and the mini-Superfunds establish mechanisms to pay for
cleanup of waste sites if PRPs fail to do so and assign liability to PRPs.
The
extent of liability to be allocated to a PRP is dependent upon a variety
of
factors. Further, the number of waste sites subject to cleanup is unknown.
To
date, approximately 1,500 cleanup sites have been identified by the
Environmental Protection Agency (“EPA”) and included on its National Priorities
List (“NPL”). State authorities have designated many cleanup sites as
well.
Many
policyholders have made claims against CNA for defense costs and indemnification
in connection with environmental pollution matters. The vast majority of
these
claims relate to accident years 1989 and prior, which coincides with CNA’s
adoption of the Simplified Commercial General Liability coverage form,
which
includes what is referred to in the industry as absolute pollution exclusion.
CNA and the insurance industry are disputing coverage for many such claims.
Key
coverage issues include whether cleanup costs are considered damages under
the
policies, trigger of coverage, allocation of liability among triggered
policies,
applicability of pollution exclusions and owned property exclusions, the
potential for joint and several liability and the definition of an occurrence.
To date, courts have been inconsistent in their rulings on these
issues.
CNA
has
made resolution of large environmental pollution exposures a management
priority. CNA has resolved a number of its large environmental accounts
by
negotiating settlement agreements. In its settlements, CNA sought to resolve
those exposures and obtain the broadest release language to avoid future
claims
from the same policyholders seeking coverage for sites or claims that had
not
emerged at the time CNA settled with its policyholder. While the terms
of each
settlement agreement vary, CNA sought to obtain broad environmental releases
that include known and unknown sites, claims and policies. The broad scope
of
the release provisions contained in those settlement agreements should,
in many
cases, prevent future exposure from settled policyholders. It remains uncertain,
however, whether a court interpreting the language of the settlement agreements
will adhere to the intent of the parties and uphold the broad scope of
language
of the agreements.
CNA
classifies its environmental pollution accounts into several categories,
which
include structured settlements, coverage in place agreements and active
accounts. Structured settlement agreements provide for payments over multiple
years as set forth in each individual agreement.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - CNA Financial -
(Continued)
|
CNA
has
also used coverage in place agreements to resolve pollution exposures.
Coverage
in place agreements are typically agreements between CNA and its policyholders
identifying the policies and the terms for payment of pollution related
liabilities. Claims payments are contingent on presentation of adequate
documentation of damages during the policy periods and other documentation
supporting the demand for claims payment. Coverage in place agreements
may have
annual payment caps.
CNA
categorizes active accounts as large or small accounts in the pollution
area.
CNA defines a large account as an active account with more than $100,000
cumulative paid losses. CNA has made closing large accounts a significant
management priority. Small accounts are defined as active accounts with
$100,000
or less cumulative paid losses.
CNA
also
evaluates its environmental pollution exposures arising from its assumed
reinsurance and our participation in various pools, including ECRA.
CNA
carries unassigned IBNR reserves for environmental pollution. These reserves
relate to potential development on accounts that have not settled and potential
future claims from unidentified policyholders.
The
tables below depict CNA’s overall pending environmental pollution accounts and
associated reserves at December 31, 2006 and 2005.
December
31, 2006
|
|
Number
of
Policyholders
|
|
Net
Paid
Losses
|
|
Net
Environmental
Pollution
Reserves
|
|
Percent
of
Environmental
Pollution
Net
Reserve
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders
with Settlement Agreements
|
|
|
|
|
|
|
|
|
|
Structured
settlements
|
|
|
11
|
|
$
|
16.0
|
|
$
|
9.0
|
|
|
3.2
|
%
|
Coverage
in place
|
|
|
18
|
|
|
5.0
|
|
|
14.0
|
|
|
4.9
|
|
Total
with Settlement Agreements
|
|
|
29
|
|
|
21.0
|
|
|
23.0
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Policyholders with Active Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
pollution accounts
|
|
|
115
|
|
|
20.0
|
|
|
58.0
|
|
|
20.4
|
|
Small
pollution accounts
|
|
|
346
|
|
|
9.0
|
|
|
46.0
|
|
|
16.1
|
|
Total
Other Policyholders
|
|
|
461
|
|
|
29.0
|
|
|
104.0
|
|
|
36.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
Reinsurance & Pools
|
|
|
|
|
|
1.0
|
|
|
32.0
|
|
|
11.2
|
|
Unassigned
IBNR
|
|
|
|
|
|
|
|
|
126.0
|
|
|
44.2
|
|
Total
|
|
|
490
|
|
$
|
51.0
|
|
$
|
285.0
|
|
|
100.0
|
%
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - CNA Financial -
(Continued)
|
December
31, 2005
|
|
Number
of
Policyholders
|
|
Net
Paid
Losses
|
|
Net
Environmental
Pollution
Reserves
|
|
Percent
of
Environmental
Pollution
Net
Reserve
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders
with Settlement Agreements
|
|
|
|
|
|
|
|
|
|
Structured
settlements
|
|
|
6
|
|
$
|
10.0
|
|
$
|
17.0
|
|
|
5.1
|
%
|
Coverage
in place
|
|
|
16
|
|
|
10.0
|
|
|
23.0
|
|
|
6.8
|
|
Total
with Settlement Agreements
|
|
|
22
|
|
|
20.0
|
|
|
40.0
|
|
|
11.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Policyholders with Active Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
pollution accounts
|
|
|
120
|
|
|
18.0
|
|
|
63.0
|
|
|
18.8
|
|
Small
pollution accounts
|
|
|
362
|
|
|
15.0
|
|
|
50.0
|
|
|
14.9
|
|
Total
Other Policyholders
|
|
|
482
|
|
|
33.0
|
|
|
113.0
|
|
|
33.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
Reinsurance & Pools
|
|
|
|
|
|
3.0
|
|
|
33.0
|
|
|
9.8
|
|
Unassigned
IBNR
|
|
|
|
|
|
|
|
|
150.0
|
|
|
44.6
|
|
Total
|
|
|
504
|
|
$
|
56.0
|
|
$
|
336.0
|
|
|
100.0
|
%
|
Lorillard
Lorillard,
Inc. and subsidiaries (“Lorillard”). Lorillard, Inc. is a wholly owned
subsidiary.
The
following table summarizes the results of operations for Lorillard for
the years
ended December 31, 2006, 2005 and 2004 as presented in Note 24 of the Notes
to
Consolidated Financial Statements included in Item 8:
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Manufactured
products
|
|
$
|
3,754.9
|
|
$
|
3,567.8
|
|
$
|
3,347.8
|
|
Net
investment income
|
|
|
103.7
|
|
|
63.6
|
|
|
36.6
|
|
Investment
gains (losses)
|
|
|
(0.5
|
)
|
|
(2.1
|
)
|
|
1.4
|
|
Other
|
|
|
|
|
|
6.0
|
|
|
|
|
Total
|
|
|
3,858.1
|
|
|
3,635.3
|
|
|
3,385.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
2,159.5
|
|
|
2,114.4
|
|
|
1,965.6
|
|
Other
operating
|
|
|
354.1
|
|
|
369.1
|
|
|
380.6
|
|
Interest
|
|
|
0.3
|
|
|
0.5
|
|
|
|
|
Total
|
|
|
2,513.9
|
|
|
2,484.0
|
|
|
2,346.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,344.2
|
|
|
1,151.3
|
|
|
1,039.6
|
|
Income
tax expense
|
|
|
518.0
|
|
|
444.9
|
|
|
397.3
|
|
Net
income
|
|
$
|
826.2
|
|
$
|
706.4
|
|
$
|
642.3
|
|
2006
Compared with 2005
Revenues
increased by $222.8 million or 6.1% and net income increased by $119.8
million
or 17.0% in 2006 as compared to 2005.
The
increase in revenues in 2006, as compared to 2005, is primarily due to
higher
net sales of $187.1 million and higher investment income of $41.7 million,
partially offset by a decrease in other income of $6.0 million. Net sales
revenue increased $144.4 million due to increased unit sales volume, assuming
prices were unchanged from the prior
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - Lorillard
- (Continued)
|
year
and
$42.6 million due to higher effective unit prices reflecting lower sales
promotion expenses. Other revenues in 2005 included interest of $6.0 million
relating to a refund of income taxes paid in prior years. Effective December
15,
2006, Lorillard increased the list price of its Newport Brand by $5.00
per
thousand cigarettes ($.10 per pack of 20 cigarettes) and its Kent, True,
Max and
Satin Brands by $3.75 per thousand cigarettes ($.075 per pack of 20
cigarettes).
Net
income increased in 2006, as compared to the prior year, due primarily
to the
higher revenues discussed above, and an $8.3 million reduction in promotional
expenses included in cost of sales and lower pretax charges of $13.1 million
due
to a federal assessment relating to the repeal of the federal supply management
program for tobacco growers, partially offset by higher State Settlement
Agreement costs and higher other operating expenses as described below.
Lorillard
recorded pretax charges of $911.4 million and $876.4 million. ($560.2 million
and $537.7 million after taxes) for 2006 and 2005, to record its obligations
under settlement agreements entered into between the major cigarette
manufacturers, including Lorillard, and each of the 50 states, the District
of
Columbia, the Commonwealth of Puerto Rico and certain U.S. territories
(together, the “State Settlement Agreements”). Lorillard’s portion of ongoing
adjusted settlement payments and related legal fees is based on its share of
domestic cigarette shipments in the year preceding that in which the payment
is
due. Accordingly, Lorillard records its portion of ongoing settlement payments
as part of cost of manufactured products sold as the related sales occur.
The
$35.0 million pretax increase in tobacco settlement costs in 2006, as compared
to 2005, is due to the impact of the inflation adjustment ($24.5 million)
and
charges for higher gross unit sales ($22.6 million), partially offset by
other
adjustments ($12.1 million) under the State Settlement Agreements.
In
April
of 2006, Lorillard commenced a restructuring of its sales and market research
organization and offered an early retirement program to eligible employees.
As a
result, in 2006 Lorillard recorded restructuring costs of $20.1 million
in other
operating expenses primarily for early retirement and curtailment charges
on
pension and other postretirement benefit plans.
Lorillard
regularly reviews results of its promotional spending activities and adjusts
its
promotional spending programs in an effort to maintain its competitive
position.
Accordingly, unit sales volume and sales promotion costs in any particular
period are not necessarily indicative of sales and costs that may be realized
in
subsequent periods.
Overall,
domestic industry unit sales volume decreased 2.4% in 2006, as compared
with the
prior year. Industry sales for premium brands were 72.5% of the total market
in
2006, as compared to 71.1% for 2005.
Lorillard’s
total (domestic, Puerto Rico and certain U.S. Territories) gross unit sales
volume increased 2.6% in 2006, as compared to 2005. Domestic wholesale
volume
increased 2.7% in 2006, as compared to the prior year. Total and domestic
Newport unit sales volume increased 2.9% in 2006, as compared with 2005.
These
results continue to be affected by on-going competitive promotions and
the
availability of deep discount brands.
Deep
discount brands are produced by manufacturers that are subject to lower
payment
obligations under State Settlement Agreements. This cost advantage enables
them
to price their brands more than 50% lower than the list prices of premium
brand
offerings from major manufacturers. As a result of this price differential,
deep
discount brands have grown from an estimated share in 1998 of less than
1.5% to
an estimated 12.4% for 2006. Although deep discount brands have shown a
decrease
of 0.9% for 2006 versus 2005, these brands continue to be a significant
competitive factor in the domestic U.S. market.
The
costs
of litigating and administering product liability claims, as well as other
legal
expenses, are included in other operating expenses. Lorillard’s outside legal
fees and other external product liability defense costs were $57.2 million,
$82.6 million, and $83.5 million for 2006, 2005 and 2004, respectively.
Numerous
factors affect product liability defense costs. The principal factors are
as
follows:
|
·
|
the
number and types of cases filed and
appealed;
|
|
·
|
the
number of cases tried and appealed;
|
|
·
|
the
development of the law;
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - Lorillard
- (Continued)
|
|
·
|
the
application of new or different theories of liability by plaintiffs
and
their counsel; and
|
|
·
|
litigation
strategy and tactics.
|
Please
read Note 20 of the Notes to Consolidated Financial Statements included
in Item
8 of this Report for detailed information regarding tobacco litigation.
The
factors that have influenced past product liability defense costs are expected
to continue to influence future costs. Although Lorillard does not expect
that
product liability defense costs will increase significantly in the future,
it is
possible that adverse developments in the factors discussed above, as well
as
other circumstances beyond the control of Lorillard, could have a material
adverse effect on our financial condition, results of operations or cash
flows.
2005
Compared with 2004
Revenues
increased by $249.5 million, or 7.4% and net income increased by $64.1
million,
or 10.0% in 2005 as compared to 2004.
The
increase in revenues in 2005, as compared to the prior year, is primarily
due to
higher net sales of $220.0 million and higher investment and other income
of
$29.5 million. Net sales revenue increased by $123.0 million due to increased
unit sales volume, assuming prices were unchanged from the prior year and
$97.0
million due to higher effective unit prices reflecting lower sales promotion
expenses (accounted for as a reduction to net sales). Net investment income
increased due primarily to higher yields on invested cash balances and
includes
$16.8 million from limited partnerships in 2005, as compared to $18.0 million
in
2004.
Net
income increased in 2005, as compared to 2004, due primarily to the higher
revenues discussed above and a $26.8 million reduction in promotional expenses
included in cost of sales, partially offset by higher State Settlement
Agreement
costs as described above, and charges of $100.4 million pretax due to a
federal
assessment (including $26.4 million of charges in relation to losses by
grower
related entities from the sale of surplus tobacco) relating to the repeal
of the
federal supply management program for tobacco growers. Lorillard recorded
pretax
charges of $876.4 million and $845.9 million ($537.7 million and $522.6
million
after taxes) for 2005 and 2004, respectively, to record its obligations
under
the State Settlement Agreements. The $30.5 million pretax increase in tobacco
settlement costs in 2005 is due to the impact of the inflation adjustment
($26.2
million), charges for higher gross unit sales ($16.2 million) under the
State
Settlement Agreements and other adjustments ($21.8 million), partially
offset by
the elimination of Lorillard’s payment obligations under the national Tobacco
Growers Settlement Trust ($33.7 million).
Overall,
domestic industry unit sales volume decreased 3.2% in 2005 as compared
with
2004. Industry sales for premium brands were 71.1% of the total market
in 2005
as compared to 69.6% in 2004.
Lorillard’s
total (domestic, Puerto Rico and certain U.S. Territories) gross unit sales
volume increased 1.9% in 2005 as compared to 2004. Domestic wholesale volume
increased 2.0% in 2005 as compared to 2004. Total Newport unit sales volume
increased 2.5% in 2005 and domestic volume increased 2.6% in 2005 as compared
with 2004.
Deep
discount brands are produced by manufacturers that are subject to lower
payment
obligations under the State Settlement Agreements. Deep discount brands
increased from an estimated market share in 1998 of less than 1.5% to an
estimated 13.3% for 2005.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - Lorillard
- (Continued)
|
Selected
Market Share Data
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(Units
in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Lorillard domestic unit volume (1)
|
|
|
36.131
|
|
|
35.193
|
|
|
34.503
|
|
Total
industry domestic unit volume (1)
|
|
|
372.503
|
|
|
381.728
|
|
|
394.487
|
|
|
|
|
|
|
|
|
|
|
|
|
Lorillard’s
share of the domestic market (1)
|
|
|
9.7
|
%
|
|
9.2
|
%
|
|
8.8
|
%
|
Lorillard’s
premium segment as a percentage of its total domestic
|
|
|
|
|
|
|
|
|
|
|
volume
(1)
|
|
|
94.8
|
%
|
|
95.2
|
%
|
|
95.4
|
%
|
Lorillard’s
share of the premium segment (1)
|
|
|
12.7
|
%
|
|
12.3
|
%
|
|
12.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Newport
share of the domestic market (1)
|
|
|
8.9
|
%
|
|
8.4
|
%
|
|
7.9
|
%
|
Newport
share of the premium segment (1)
|
|
|
12.3
|
%
|
|
11.9
|
%
|
|
11.4
|
%
|
Total
menthol segment market share for the industry (2)
|
|
|
27.7
|
%
|
|
27.1
|
%
|
|
26.9
|
%
|
Total
discount segment market share for the industry
(1)
|
|
|
27.5
|
%
|
|
28.9
|
%
|
|
30.4
|
%
|
Newport’s
share of the menthol segment (2)
|
|
|
33.1
|
%
|
|
32.5
|
%
|
|
31.3
|
%
|
Newport
as a percentage of Lorillard’s (3):
|
|
|
|
|
|
|
|
|
|
|
Total
volume
|
|
|
91.8
|
%
|
|
91.6
|
%
|
|
91.0
|
%
|
Net
sales
|
|
|
93.3
|
%
|
|
92.8
|
%
|
|
92.2
|
%
|
Sources:
(1)
|
Management
Science Associates, Inc.
|
(2)
|
Lorillard
proprietary data
|
(3)
|
Lorillard
shipment reports
|
Unless
otherwise specified, market share data in this MD&A is based on data made
available by Management Science Associates, Inc. (“MSAI”), an independent
third-party database management organization that collects wholesale shipment
data from various cigarette manufacturers. MSAI divides the cigarette market
into two price segments, the premium price segment and the discount or
reduced
price segment. MSAI’s information relating to unit sales volume and market share
of certain of the smaller, primarily deep discount, cigarette manufacturers
is
based on estimates derived by MSAI.
Lorillard
management continues to believe that volume and market share information
for
deep discount manufacturers are understated and, correspondingly, share
information for the larger manufacturers, including Lorillard, are overstated
by
MSAI.
Business
Environment
The
tobacco industry in the United States, including Lorillard, continues to
be
faced with a number of issues that have impacted or may adversely impact
the
business, results of operations and financial condition of Lorillard and
us,
including the following:
|
·
|
A
substantial volume
of
litigation seeking compensatory and punitive damages ranging
into the billions
of dollars,
as well as equitable and
injunctive relief, arising out of allegations
of
cancer and other health
effects resulting
from the use
of
cigarettes,
addiction
to smoking
or
exposure to environmental
tobacco smoke,
including claims for reimbursement of health care costs allegedly
incurred
as a result of smoking, as well as other alleged damages. Please
read Item
3 - Legal Proceedings and Note 20 of the Notes to Consolidated
Financial
Statements included in Item 8 of this Report for information
with respect
to litigation and the State Settlement
Agreements.
|
|
·
|
Substantial
annual payments by Lorillard, continuing in perpetuity, and significant
restrictions on marketing and advertising agreed to under the
terms of the
State Settlement Agreements. The State Settlement Agreements
impose a
stream of future payment obligations on Lorillard and the other
major U.S.
cigarette manufacturers and place significant restrictions on
their
ability to market and sell
cigarettes.
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - Lorillard
- (Continued)
|
|
·
|
The
continuing contraction of the U.S. cigarette market, in which
Lorillard
currently conducts its only significant business. As a result
of price
increases, restrictions on advertising and promotions, increases
in
regulation and excise taxes, health concerns, a decline in the
social
acceptability of smoking, increased pressure from anti-tobacco
groups and
other factors, U.S. cigarette shipments have decreased at a compound
annual rate of approximately 2.6% over the period 1997 through
2006
according to information provided by
MSAI.
|
|
·
|
Substantial
federal, state and local excise taxes which are reflected in
the retail
price of cigarettes. In 2006, the federal excise tax was $0.39
per pack
and combined state and local excise taxes ranged from $0.07 to
$3.66 per
pack. In 2006, excise tax increases ranging from $0.05 to $1.00
per pack
were implemented in six states and two municipalities. Proposals
continue
to be made to increase federal, state and local excise taxes.
Lorillard
believes that increases in excise and similar taxes have had
an adverse
impact on sales of cigarettes and that future increases, the
extent of
which cannot be predicted, could result in further volume declines
for the
cigarette industry, including Lorillard, and an increased sales
shift
toward lower priced discount cigarettes rather than premium brands.
In
addition, Lorillard and other cigarette manufacturers are required
to pay
an assessment under a federal law designed to fund payments to
tobacco
quota holders and growers.
|
|
·
|
Substantial
and increasing regulation of the tobacco industry and governmental
restrictions on smoking. Bills have been introduced in the U.S.
Congress
to grant the Food and Drug Administration (“FDA”) authority to regulate
tobacco products. Lorillard believes that FDA regulations, if
enacted,
could among other things result in new restrictions on the manner
in which
cigarettes can be advertised and marketed, and may alter the way cigarette
products are developed and manufactured. Lorillard also believes
that any
such proposals, if enacted, would provide Philip Morris, as the
largest
tobacco company in the country, with a competitive
advantage.
|
Boardwalk
Pipeline
Boardwalk
Pipeline Partners, LP and subsidiaries (“Boardwalk Pipeline”). Boardwalk
Pipeline Partners, LP is an 80% owned subsidiary.
The
following table summarizes the results of operations for Boardwalk Pipeline
for
the years ended December 31, 2006, 2005 and 2004 as presented in Note 24
of the
Notes to Consolidated Financial Statements included in Item 8:
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Operating
|
|
$
|
614.2
|
|
$
|
569.8
|
|
$
|
264.4
|
|
Net
investment income
|
|
|
4.2
|
|
|
1.5
|
|
|
0.7
|
|
Total
|
|
|
618.4
|
|
|
571.3
|
|
|
265.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
358.6
|
|
|
353.1
|
|
|
153.9
|
|
Interest
|
|
|
62.1
|
|
|
60.1
|
|
|
30.1
|
|
Total
|
|
|
420.7
|
|
|
413.2
|
|
|
184.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197.7
|
|
|
158.1
|
|
|
81.1
|
|
Income
tax expense
|
|
|
64.2
|
|
|
60.8
|
|
|
32.3
|
|
Minority
interest
|
|
|
30.3
|
|
|
5.2
|
|
|
|
|
Net
income
|
|
$
|
103.2
|
|
$
|
92.1
|
|
$
|
48.8
|
|
Boardwalk
Pipeline derives revenues primarily from the interstate transportation
and
storage of natural gas for third parties. Transportation and storage services
are provided under firm service and interruptible service agreements.
Transportation and storage rates and general terms and conditions of service
are
established by, and subject to review and revision by, the Federal Energy
Regulatory Commission (“FERC”).
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - Boardwalk
Pipeline - (Continued)
|
Under
firm transportation agreements, customers generally pay a fixed “capacity
reservation” fee to reserve pipeline capacity at certain receipt and delivery
points, plus a commodity and fuel charge paid on the volume of gas actually
transported. Firm storage customers reserve a specific amount of storage
capacity and generally pay a capacity reservation charge based on the amount
of
capacity being reserved plus an injection and/or withdrawal fee. Capacity
reservation revenues derived from a firm service contract is consistent
from
year to year, but is generally higher in winter peak periods (November
through
March) than off-peak periods resulting in a seasonal earnings pattern where
the
majority of earnings are generated in the first and fourth quarters of
a
calendar year.
Interruptible
transportation and storage service is typically short-term in nature and
is
generally used by customers that either do not need firm service or have
been
unable to contract for firm service. Customers pay for interruptible services
when capacity is used.
Boardwalk
Pipeline’s parking and lending (“PAL”) service is an interruptible service
offered to customers providing them the ability to park (inject) or borrow
(withdraw) gas into or out of Boardwalk Pipeline’s storage facilities at a
specific location for a specific period of time. Customers pay for PAL
service
in advance or on a monthly basis depending on the terms of the
agreement.
Operating
expenses typically do not vary significantly based upon the amount of gas
transported with the exception of gas consumed by Gulf South’s compressor
stations. Gulf South’s fuel recoveries are included as part of transportation
revenues.
Revenues
and net income for 2004 reflect operations of Gulf South from December
29, 2004,
the date of acquisition. See Note 14 of the Notes to Consolidated Financial
Statements.
2006
Compared with 2005
Total
revenues increased by $47.1 million to $618.4 million in 2006, compared
to
$571.3 million for 2005. Storage and PAL services improved revenues by
$38.5
million primarily due to favorable natural gas price spreads and volatility
in
forward gas prices. In addition, operating revenues increased due to higher
firm
transportation revenues of $26.0 million, excluding fuel, primarily related
to
higher reservation rates and additional capacity reserved by shippers due
to
higher production in the East Texas region, and $5.3 million due to hurricane
insurance recoveries in 2006 and gas lost in 2005 related to Hurricanes
Katrina
and Rita. These increases were partially offset by the absence of a $12.2
million gain from the sale of storage gas related to Phase I of Boardwalk
Pipeline’s Western Kentucky storage expansion project that occurred in 2005, a
$10.5 million decrease in interruptible transportation services due to
unseasonably warm weather in Boardwalk Pipeline’s market areas during the fourth
quarter of 2006, higher interruptible revenues in the third and fourth
quarters
of 2005 due to supply disruptions caused by Hurricanes Katrina and Rita,
a $7.1
million decrease in fuel retained due to lower realized natural gas prices
and
reduced throughput, and a $5.5 million decrease in revenues for a reduction
in
the amortization of acquired executory contracts.
Net
income increased by $11.1 million to $103.2 million in 2006, as compared
to
$92.1 million in 2005, primarily due to the increased revenues discussed
above,
partially offset by a $25.0 million increase in minority interest expense
and a
$5.5 million increase in operating expenses. Operating expenses in 2006,
as
compared to 2005, include a $12.6 million increase in outside services
and
overhead mainly due to growth in operations and regulatory compliance,
a $10.2
million increase in employee labor and benefits costs due primarily to
a rate
case settlement and a special termination benefit charge recognized as
a result
of an early retirement incentive program. Operating expenses also reflect
a $3.7
million increase in depreciation and amortization and a $2.6 million expense
from the lease of third-party pipeline capacity. These increases were partially
offset by a $18.2 million reduction in hurricane-related expense as compared
to
2005, and a $14.9 million decrease in company-used gas due to operational
efficiencies, lower natural gas prices and reduced throughput resulting
in
decreased usage. Interest expense for 2006 increased by $2.0 million, primarily
due to borrowings under a credit facility that occurred in November of
2005 and
senior notes issued in November of 2006.
2005
Compared with 2004
Total
revenues increased by $306.2 million to $571.3 million for 2005, compared
to
$265.1 million for 2004.
Gas
transportation revenues increased by $273.1 million to $526.6 million for
2005,
substantially all of which was attributable to Gulf South, compared to
$253.5
million for 2004. Revenues at Texas Gas remained essentially flat due to
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - Boardwalk Pipeline -
(Continued)
|
contract
renewals and related discounting at the Lebanon terminus that were partially
offset by new FERC rates, subject to refund, implemented on November 1,
2005,
the completion of the Western Kentucky area storage expansion project on
November 1, 2005 and the associated transportation agreements, contributed
an
increase of approximately $2.0 million in revenues, and the leasing of
additional capacity on a third party pipeline in Carthage, Texas on December
1,
2005 which contributed an increase of approximately $1.0 million in
revenues.
Gas
storage revenues increased by $14.4 million to $21.7 million for 2005,
of which
$16.3 million was attributable to Gulf South, compared to $7.3 million
for 2004.
Storage revenues decreased at Texas Gas by $2.0 million due to unusually
high
interruptible storage revenue generated in 2004 from favorable market
conditions.
Other
revenues increased by $17.9 million to $21.5 million for 2005, of which
$11.1
million was attributable to Gulf South, compared to $3.6 million for 2004.
The
balance of the increase was due primarily to a $12.2 million gain on the
sale of
storage gas related to the Western Kentucky storage expansion.
Operating
expenses increased by $199.2 million to $353.1 million for 2005, of which
$207.4
million was attributable to Gulf South, compared to $153.9 million for
2004.
Interest
expense increased by $30.0 million to $60.1 million for the full year ended
December 31, 2005, due to higher interest expense primarily related to
$575.0
million of debt incurred in 2004 to fund the Gulf South acquisition, compared
to
$30.1 million for 2004.
Diamond
Offshore
Diamond
Offshore Drilling, Inc. and subsidiaries (“Diamond Offshore”). Diamond Offshore
is a 51% owned subsidiary.
The
following table summarizes the results of operations for Diamond Offshore
for
the years ended December 31, 2006, 2005 and 2004 as presented in Note 24
of the
Notes to Consolidated Financial Statements included in Item 8:
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Operating
|
|
$
|
2,064.1
|
|
$
|
1,268.1
|
|
$
|
823.4
|
|
Net
investment income
|
|
|
37.9
|
|
|
26.0
|
|
|
12.2
|
|
Investment
gains (losses)
|
|
|
|
|
|
(1.2
|
)
|
|
0.3
|
|
Total
|
|
|
2,102.0
|
|
|
1,292.9
|
|
|
835.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
1,117.9
|
|
|
901.3
|
|
|
815.2
|
|
Interest
|
|
|
24.0
|
|
|
41.8
|
|
|
30.2
|
|
Total
|
|
|
1,141.9
|
|
|
943.1
|
|
|
845.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
960.1
|
|
|
349.8
|
|
|
(9.5
|
)
|
Income
tax expense
|
|
|
285.0
|
|
|
104.3
|
|
|
3.0
|
|
Minority
interest
|
|
|
323.1
|
|
|
118.6
|
|
|
(3.3
|
)
|
Net
income (loss)
|
|
$
|
352.0
|
|
$
|
126.9
|
|
$
|
(9.2
|
)
|
Diamond
Offshore’s revenues vary based upon demand, which affects the number of days the
fleet is utilized and the dayrates earned. When a rig is idle, no dayrate
is
earned and revenues will decrease as a result. Revenues can also be affected
as
a result of the acquisition or disposal of rigs, required surveys and shipyard
upgrades. In order to improve utilization or realize higher dayrates, Diamond
Offshore may mobilize its rigs from one market to another. However, during
periods of unpaid mobilization, revenues may be adversely affected. As
a
response to changes in demand, Diamond Offshore may withdraw a rig from
the
market by stacking it or may reactivate a rig stacked previously, which
may
decrease or increase revenues, respectively.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - Diamond Offshore -
(Continued)
|
The
two
most significant variables affecting revenues are dayrates for rigs and
rig
utilization rates, each of which is a function of rig supply and demand
in the
marketplace. As utilization rates increase, dayrates tend to increase as
well,
reflecting the lower supply of available rigs, and vice versa. Demand for
drilling services is dependent upon the level of expenditures set by oil
and gas
companies for offshore exploration and development as well as a variety
of
political and economic factors. The availability of rigs in a particular
geographical region also affects both dayrates and utilization rates. These
factors are not within Diamond Offshore’s control and are difficult to
predict.
Diamond
Offshore’s operating income is primarily affected by revenue factors, but is
also a function of varying levels of operating expenses. Diamond
Offshore’s
operating expenses represent all direct and indirect costs associated with
the
operation and maintenance of its drilling equipment. The principal components
of
Diamond Offshore’s operating costs are, among other things, direct and indirect
costs of labor and benefits, repairs and maintenance, freight, regulatory
inspections, boat and helicopter rentals and insurance. Labor and repair
and
maintenance costs represent the most significant components of operating
expenses. In the current period of high, sustained utilization, maintenance
and
repairs costs may increase in order to maintain Diamond Offshore’s equipment in
proper, working order. In general, Diamond Offshore’s labor costs increase
primarily due to higher salary levels, rig staffing requirements, inflation
and
costs associated with labor regulations in the geographic regions in which
Diamond Offshore’s rigs operate. Diamond Offshore has experienced and continues
to experience upward pressure on salaries and wages as a result of the
strengthening offshore drilling market and increased competition for skilled
workers. In response to these market conditions, Diamond Offshore has
implemented retention programs, including increases in compensation. Costs
to
repair and maintain equipment fluctuate depending upon the type of activity
the
drilling unit is performing, as well as the age and condition of the
equipment.
Operating
expenses generally are not affected by changes in dayrates and may not
be
significantly affected by short-term fluctuations in utilization. For instance,
if a rig is to be idle for a short period of time, few decreases in operating
expenses may actually occur since the rig is typically maintained in a
prepared
or “ready stacked” state with a full crew. In addition, when a rig is idle,
Diamond Offshore is responsible for certain operating expenses such as
rig fuel
and supply boat costs, which are typically a cost of the operator when
a rig is
under contract. However, if the rig is to be idle for an extended period
of
time, Diamond Offshore may reduce the size of a rig’s crew and take steps to
“cold stack” the rig, which lowers expenses and partially offsets the impact on
operating income.
Operating
income is also negatively impacted when Diamond Offshore performs certain
regulatory inspections that are due every five years (“5-year survey”) for each
of Diamond Offshore’s rigs as well as intermediate surveys, which are performed
at interim periods between 5-year surveys. Operating revenue decreases
because
these surveys are performed during scheduled down-time in a shipyard. Operating
expenses increase as a result of these surveys due to the cost to mobilize
the
rigs to a shipyard, inspection costs incurred and repair and maintenance
costs.
Repair and maintenance costs may be required resulting from the survey
or may
have been previously planned to take place during this mandatory down-time.
The
number of rigs undergoing a 5-year survey will vary from year to year.
During
2007, Diamond Offshore expects to spend an aggregate of approximately $46.0
million for 5-year surveys and intermediate surveys, including estimated
mobilization costs, but excluding any resulting repair and maintenance
costs,
which could be significant. Costs of mobilizing Diamond Offshore’s rigs to
shipyards for scheduled surveys, which were a major component of its
survey-related costs during 2006, are indicative of higher prices commanded
by
support businesses to the offshore drilling industry. Diamond Offshore
expects
mobilization costs to be a significant component of its survey-related
costs in
2007.
2006
Compared with 2005
Revenues
increased by $809.1 million, or 62.6%, and net income increased by $225.1
million in 2006, as compared to 2005.
Revenues
from high specification floaters and intermediate semisubmersible rigs
increased
by $646.2 million or 71.4% in 2006, as compared to 2005. The increase primarily
reflects increased dayrates of $545.2 million and improved utilization
of $100.9
million.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations - Diamond Offshore -
(Continued)
|
Revenues
from jack-up rigs increased $163.4 million, or 60.1%, in 2006, as compared
to
2005, due primarily to increased dayrates of $197.4 million, partially
offset by
decreased utilization of $24.8 million, respectively. In addition, there
was a
$2.6 million reduction in the amortization of deferred mobilization revenue
for
2006.
In
the
third quarter of 2005, one of Diamond Offshore’s jack-up drilling rigs, the
Ocean
Warwick,
was
damaged beyond repair during Hurricane Katrina and other rigs in Diamond
Offshore’s fleet sustained lesser damage in Hurricanes Katrina or Rita, or in
some cases from both storms. Diamond Offshore believes the physical damage
to
its rigs, as well as any related removal and recovery costs, are covered
by
insurance, after applicable deductibles. Diamond Offshore
recognized a $33.6 million casualty gain during the third quarter of 2005
as a
result of the constructive total loss of the Ocean
Warwick.
During
2005, this drilling unit generated $11.8 million in revenues.
Investment
income increased by $11.9 million for 2006, primarily due to the combined
effect
of higher interest rates earned on higher average cash balances in 2006,
as
compared to the prior year.
Interest
expense decreased $17.8 million in 2006, primarily due to the 2005 redemption
of
zero coupon debentures, partially offset by the additional expense related
to
the 2005 issuance of 4.9% senior unsecured notes. In 2005, interest expense
included a write-off of $6.9 million of debt issuance costs associated
with the
partial repurchase of Diamond Offshore’s Zero Coupon Debentures.
Net
income increased in 2006 due primarily to the increased revenues noted
above,
and reduced interest expense, partially offset by increased contract drilling
expenses driven by higher labor and benefit costs as a result of wage increases
and other compensation enhancement programs implemented subsequent to the
second
quarter of 2005. In addition, Diamond Offshore incurred higher repair and
maintenance costs for most of its rigs primarily due to the high utilization
of
its fleet and higher prices experienced throughout the offshore drilling
industry and support businesses.
2005
Compared with 2004
Revenues
increased by $457.0 million, or 54.7% and net income increased by $136.1
million
in the year ended December 31, 2005, as compared to 2004. Revenues increased
primarily due to an overall increase in rig utilization rates and dayrates
for
all classes of rigs.
Diamond
Offshore recognized a $33.6 million casualty gain during the third quarter
of
2005 as a result of the constructive total loss of the Ocean
Warwick.
During
2005, this drilling unit generated $11.8 million in revenues compared to
$9.3
million in 2004 primarily due to a higher average operating dayrate earned
during 2005, as compared to 2004.
Revenues
from high-specification floaters and other semisubmersible rigs increased
$304.8
million in 2005 due primarily to increased dayrates of $242.0 million as
compared to 2004. Utilization improved in 2005, which generated an additional
$58.3 million in revenue as compared to 2004.
Revenues
from jack-up rigs increased by $93.4 million in the year ended December
31,
2005, as compared to 2004. The increase primarily reflects increased dayrates
of
$89.5 million and improved utilization of $11.3 million, partially offset
by a
decrease of $7.4 million in rig mobilization fees.
Net
investment income increased by $13.8 million, primarily due to interest
earned
on higher average cash and investment balances in 2005 as compared to
2004.
Interest
expense increased $11.6 million in 2005, primarily due to the additional
expense
related to the issuance of 5.2% and 4.9% senior unsecured notes, partially
offset by redemption of zero coupon debentures. In 2005, interest expense
included a write-off of $6.9 million of debt issuance costs associated
with the
partial repurchase of Diamond Offshore’s Zero Coupon Debentures.
Net
income increased in 2005 due primarily to the higher revenues discussed
above,
partially offset by increased contract drilling expenses and interest expense
noted above.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
|
Loews
Hotels
Loews
Hotels Holding Corporation and subsidiaries (“Loews Hotels”). Loews Hotels is a
wholly owned subsidiary.
The
following table summarizes the results of operations for Loews Hotels for
the
years ended December 31, 2006, 2005 and 2004 as presented in Note 24 of
the
Notes to Consolidated Financial Statements included in Item 8:
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Operating
|
|
$
|
370.1
|
|
$
|
344.5
|
|
$
|
312.9
|
|
Net
investment income
|
|
|
1.2
|
|
|
6.0
|
|
|
2.3
|
|
Total
|
|
|
371.3
|
|
|
350.5
|
|
|
315.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
311.4
|
|
|
289.6
|
|
|
278.3
|
|
Interest
|
|
|
11.9
|
|
|
10.9
|
|
|
5.7
|
|
Total
|
|
|
323.3
|
|
|
300.5
|
|
|
284.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48.0
|
|
|
50.0
|
|
|
31.2
|
|
Income
tax expense
|
|
|
18.6
|
|
|
18.8
|
|
|
9.8
|
|
Net
income
|
|
$
|
29.4
|
|
$
|
31.2
|
|
$
|
21.4
|
|
2006
Compared with 2005
Revenues
increased by $20.8 million, or 5.9% and net income decreased by $1.8 million,
or
5.8%, in 2006, as compared to 2005.
Revenues
increased in 2006, as compared with 2005, due primarily to an increase
in
revenue per available room of $16.51, or 10.9%, to $168.40, from $151.89
in the
prior year. Revenue per available room increased due to higher average
room
rates, which increased $20.39, or 10.2%, and a 0.7% increase in occupancy
rates
for 2006. These increases were partially offset by a non-recurring pretax
gain
in 2005 of $4.5 million from the early repayment of a note in connection
with
the sale of a hotel property and lower equity income of $3.6 million due
primarily to higher land rent at the Orlando property.
Revenue
per available room is an industry measure of the combined effect of occupancy
rates and average room rates on room revenues. Other hotel operating revenues
primarily include guest charges for food and beverages.
Net
income for 2006 decreased primarily due to the
non-recurring gain in 2005 discussed
above and increased costs related to linen and service upgrades, partially
offset by the increase in revenue per available room.
2005
Compared with 2004
Revenues
increased by $35.3 million, or 11.2% and net income increased by $9.8 million
in
2005, as compared to 2004.
Revenues
increased in 2005, as compared to 2004, due primarily to an increase in
revenue
per available room of $16.20, or 11.9%, to $151.89 from $135.69 in the
prior
year. Revenue per available room increased due to higher average room rates,
which increased $20.01, or 11.1% and a 0.8% increase in occupancy rates
for
2005. In addition, higher equity income from joint ventures reflecting
increased
average room rates at the Universal Orlando properties and increased investment
income as a result of the early repayment of a note received in connection
with
the sale of a hotel property contributed $7.1 million to the
increase.
Net
income for 2005 increased due to the higher revenues discussed above, partially
offset by increased interest and operating expenses.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
|
Corporate
and Other
Corporate
operations consist primarily of investment income, including investment
gains
(losses) from non-insurance subsidiaries, the operations of Bulova, equity
earnings from Majestic Shipping Corporation (“Majestic”), corporate interest
expenses and other corporate administrative costs. Majestic, a wholly owned
subsidiary, owns a 49% common stock interest in Hellespont Shipping Corporation
(“Hellespont”).
The
following table summarizes the results of operations for Corporate and
Other for
the years ended December 31, 2006, 2005 and 2004 as presented in Note 24
of the
Notes to Consolidated Financial Statements included in Item 8:
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Manufactured
products
|
|
$
|
206.9
|
|
$
|
184.6
|
|
$
|
167.4
|
|
Net
investment income
|
|
|
351.9
|
|
|
109.8
|
|
|
144.0
|
|
Investment
gains (losses)
|
|
|
9.1
|
|
|
(3.4
|
)
|
|
(13.2
|
)
|
Other
|
|
|
11.6
|
|
|
11.7
|
|
|
208.5
|
|
Total
|
|
|
579.5
|
|
|
302.7
|
|
|
506.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
102.2
|
|
|
87.9
|
|
|
79.8
|
|
Operating
|
|
|
147.2
|
|
|
129.7
|
|
|
127.8
|
|
Interest
|
|
|
75.2
|
|
|
126.6
|
|
|
134.2
|
|
Total
|
|
|
324.6
|
|
|
344.2
|
|
|
341.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
254.9
|
|
|
(41.5
|
)
|
|
164.9
|
|
Income
tax expense (benefit)
|
|
|
89.9
|
|
|
(38.0
|
)
|
|
57.6
|
|
Minority
interest
|
|
|
|
|
|
|
|
|
0.3
|
|
Net
income (loss)
|
|
$
|
165.0
|
|
$
|
(3.5
|
)
|
$
|
107.0
|
|
2006
Compared with 2005
Revenues
increased by $276.8 million, or 91.4%, and net income increased by $168.5
million in December 31, 2006, compared to 2005.
Revenues
increased in 2006, as compared to 2005, due primarily to higher net investment
income of $242.1 million and increased investment gains of $12.5 million.
Net
investment income includes income from the trading portfolio of $223.7
million
and $42.8 million ($146.1 million and $27.8 million after taxes) for 2006
and
2005. In addition, interest income in 2006 increased due to improved yields
and
higher invested amounts.
Net
income increased in 2006 due primarily to the increased revenues discussed
above
and the absence of costs ($23.1 million after taxes) incurred in 2005 associated
with the early retirement of our $400.0 million principal amount of 7.0%
senior
notes due 2023 and $1,150.0 million principal amount of 3.1% exchangeable
subordinated notes due 2007, as well as reduced interest expense. Net income
for
2005 also reflected a lower effective tax rate related to the federal income
tax
settlement as discussed below.
The
lower
income tax expense in 2005 was primarily due to a review of tax liabilities
we
performed subsequent to the settlement of our 1998 through 2001 tax returns
with
the Internal Revenue Service. As a result, we reduced our deferred tax
liabilities by $24.4 million in 2005.
2005
Compared with 2004
Revenues
decreased by $204.0 million and net income decreased by $110.5 million
in the
year ended December 31, 2005, compared to 2004.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Results
of Operations
- Corporate and Other -
(Continued)
|
Revenues
decreased in 2005, as compared to 2004, due primarily to a reduction in
equity
income of $188.2 million from shipping operations, and decreased net investment
income of $34.2 million in 2005.
In
2004,
Hellespont sold all of its ultra-large crude oil tankers. We received cash
distributions from Hellespont and recognized income of $179.3 million ($116.5
million after taxes). Hellespont had been engaged in the business of owning
and
operating four ultra-large crude oil tankers that were used primarily to
transport crude oil from the Persian Gulf to a limited number of ports
in the
Far East, Northern Europe and the United States.
Net
investment income includes income from the trading portfolio of $42.8 million
and $105.9 million ($27.8 million and $68.9 million after taxes) for the
years
ended December 31, 2005 and 2004, respectively.
Net
income decreased in 2005 due primarily to the reduced revenues discussed
above,
partially offset by lower income tax expense related to the federal income
tax
settlement discussed above. Net income for 2005 also included charges of
$23.1
million related to the early retirement of our $400.0 million principal
amount
of 7.0% senior notes due 2023 and $1,150.0 million principal amount of
3.1%
exchangeable subordinated notes due 2007. Net income for 2004 included
$11.1
million related to charges from the early retirement of our $300.0 million
principal amount of 7.6% senior notes due 2023.
LIQUIDITY
AND CAPITAL RESOURCES
CNA
Financial
Cash
Flow
CNA’s
principal operating cash flow sources are premiums and investment income
from
its insurance subsidiaries. CNA’s primary operating cash flow uses are payments
for claims, policy benefits and operating expenses.
For
2006,
net cash provided by operating activities was $2,250.0 million as compared
to
$2,169.0 million in 2005. Cash
provided by operating activities was favorably impacted by increased net
sales
of trading securities to fund policyholder withdrawals of investment contract
products issued by CNA and increased investment income receipts. Policyholder
fund withdrawals are reflected as financing cash flows. Cash provided by
operating activities was unfavorably impacted by decreased premium collections,
increased tax payments, and increased loss payments.
For
2005,
net cash provided by operating activities was $2,169.0 million as compared
to
$1,968.0 million in 2004. The increase in cash provided by operations was
primarily driven by a reduction in claims and expense payments, including
the
impact of $446.0 million related to commutations. Also impacting operating
cash
flows were net tax payments of $164.0 million in 2005 as compared with
net tax
refunds of $627.0 million in 2004. In addition, CNA received cash of $121.0
million related to interest on a federal income tax settlement in
2005.
Cash
flows from investing activities include the purchase and sale of financial
instruments, as well as the purchase and sale of businesses, land, buildings,
equipment and other assets not generally held for resale.
Net
cash
used for investing activities was $1,646.0 million, $1,316.0 million, and
$2,084.0 million for 2006, 2005, and 2004. Cash flows used by investing
activities related principally to purchases of fixed maturity securities
and
short term investments.
The
cash
flow from investing activities is impacted by various factors such as the
anticipated payment of claims, financing activity, asset/liability management
and individual security buy and sell decisions made in the normal course
of
portfolio management. A consideration in management of the portfolio is
the
characteristics of the underlying liabilities and the ability to align
the
duration of the portfolio to those liabilities to meet future liquidity
needs
and minimize interest rate risk. For portfolios where future liability
cash
flows are determinable and are generally long term in nature, management
segregates assets and related liabilities for asset/liability management
purposes. The asset/liability management strategy is used to mitigate valuation
changes due to interest rate risk in those specific portfolios. Another
consideration in the asset/liability matched portfolios is to maintain
a level
of income sufficient to support the underlying insurance
liabilities.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Liquidity
and Capital Resources - CNA Financial -
(Continued)
|
For
those
securities in the portfolio that are not part of a segregated asset/liability
management strategy, CNA typically manages the portfolio to a target duration
range dictated by the underlying insurance liabilities. In managing these
portfolios, securities are bought and sold based on individual security
value
assessments made, but with the overall goal of meeting the duration
targets.
For
2006
and 2005, net cash used for financing activities was $605.0 million and
$837.0
million as compared with net cash provided from financing activities of
$61.0
million in 2004. Net cash flows used by financing activities in 2006 were
primarily related to the return of investment contract balances. Additionally,
CNA issued long-term debt and common stock, the proceeds of which were
used to
repurchase the Series H Cumulative Preferred Stock Issue (Series H Issue)
and to
repay its 6.75% notes. See the CNA Series H Preferred Stock section below
for
further discussion.
CNA
believes that its present cash flows from operating, investing and financing
activities are sufficient to fund its working capital needs.
CNA
has
an effective shelf registration statement under which it may issue debt
or
equity securities.
CNA
Series H Preferred Stock
In
December of 2002, CNA sold $750.0 million of a new issue of preferred stock,
the
Series H Issue, to us. The Series H Issue accrued cumulative dividends
at an
initial rate of 8.0% per year, compounded annually. In August of 2006,
CNA
repurchased the Series H Issue for approximately $993.0 million, a price
equal
to the liquidation preference.
CNA
financed the repurchase of the Series H Issue with the proceeds from its
sales
of: (i) 7.0 million shares of CNA’s common stock in a public offering for
approximately $235.5 million; (ii) $400.0 million of new 6.0% five-year
senior
notes and $350.0 million of new 6.5% ten-year senior notes in a public
offering;
and (iii) 7.86 million shares of CNA’s common stock to us in a private placement
for approximately $264.5 million. CNA used the proceeds in excess of the
amount
used to repurchase the Series H Issue to fund the repayment of its $250.0
million outstanding 6.75% senior notes in November of 2006.
Commitments,
Contingencies and Guarantees
CNA
has
various commitments, contingencies and guarantees which it becomes involved
with
during the ordinary course of business. The impact of these commitments,
contingencies and guarantees should be considered when evaluating CNA’s
liquidity and capital resources.
Regulatory
Matters
CNA
previously established a plan to reorganize and streamline its U.S. property
and
casualty insurance legal entity structure in order to realize capital,
operational, and cost efficiencies. Another phase of this multi-year plan
has
been completed with the mergers of thirteen of CNA’s U.S. property and casualty
insurance entities into other CNA insurance entities. Effective December
31,
2006, twelve companies merged, either directly or indirectly, with and
into CIC,
and one company merged directly into CCC. CNA also reduced the number of
states
in which these entities are domiciled as part of this phase. Previous phases
of
this plan served to consolidate CNA’s U.S. property and casualty insurance risks
into CCC, as well as realign the capital supporting these risks. In order
to
facilitate the execution of this plan, CNA has agreed to participate in
a
working group consisting of several states of the NAIC. Pursuant to CNA’s
participation in this working group, CNA has agreed to certain time frames
and
informational provisions in relation to the reorganization plan.
Along
with other companies in the industry, CNA has received subpoenas,
interrogatories and inquiries from: (i) California, Connecticut, Delaware,
Florida, Hawaii, Illinois, Michigan, Minnesota, New Jersey, New York, North
Carolina, Ohio, Pennsylvania, South Carolina, West Virginia and the Canadian
Council of Insurance Regulators concerning investigations into practices
including contingent compensation arrangements, fictitious quotes and tying
arrangements; (ii) the SEC, the New York State Attorney General, the United
States Attorney for the Southern District of New York, the Connecticut
Attorney
General, the Connecticut Department of Insurance, the Delaware Department
of
Insurance, the Georgia Office of Insurance and Safety Fire Commissioner
and the
California Department of Insurance
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Liquidity
and Capital Resources
- CNA Financial - (Continued)
|
concerning
reinsurance products and finite insurance products purchased and sold by
CNA;
(iii) the Massachusetts Attorney General and the Connecticut Attorney General
concerning investigations into anti-competitive practices; and (iv) the
New York
State Attorney General concerning declinations of attorney malpractice
insurance. CNA continues to respond to these subpoenas, interrogatories
and
inquiries to the extent they are still open.
Subsequent
to receipt of the SEC subpoena, CNA produced documents and provided additional
information at the SEC’s request. In addition, the SEC and representatives of
the United States Attorney’s Office for the Southern District of New York
conducted interviews with several of CNA’s current and former executives
relating to the restatement of CNA’s financial results for 2004, including CNA’s
relationship with and accounting for transactions with an affiliate that
were
the basis for the restatement. The SEC also requested information relating
to
CNA’s restatement in 2006 of prior period results. It is possible that CNA’s
analyses of, or accounting treatment for, finite reinsurance contracts
or
discontinued operations could be questioned or disputed by regulatory
authorities. As a result, further restatements of the financial results
is
possible.
Ratings
Ratings
are an important factor in establishing the competitive position of insurance
companies. CNA’s insurance company subsidiaries are rated by major rating
agencies, and these ratings reflect the rating agency’s opinion of the insurance
company’s financial strength, operating performance, strategic position and
ability to meet its obligations to policyholders. Agency ratings are not
a
recommendation to buy, sell or hold any security, and may be revised or
withdrawn at any time by the issuing organization. Each agency’s rating should
be evaluated independently of any other agency’s rating. One or more of these
agencies could take action in the future to change the ratings of CNA’s
insurance subsidiaries.
The
table
below reflects the various group ratings issued by A.M. Best Company (“A.M.
Best”), Standard & Poor’s (“S&P”), Moody’s Investors Service (“Moody’s”)
and Fitch Ratings (“Fitch”) as of January 24, 2007 for the Property and Casualty
and Life companies. The table also includes the ratings for CNA’s senior debt
and Continental senior debt.
|
Insurance
Financial Strength Ratings (a)
|
Debt
Ratings (a)
|
|
Property
& Casualty
|
Life
|
CNA
|
Continental
|
|
CCC
|
|
Senior
|
Senior
|
|
Group
|
CAC
|
Debt
|
Debt
|
A.M.
Best
|
A
|
A-
|
bbb
|
Not
rated
|
Fitch
|
A-
|
A-
|
BBB-
|
BBB-
|
Moody’s
|
A3
|
Baa1
|
Baa3
|
Baa3
|
S&P
|
A-
|
BBB+
|
BBB-
|
BBB-
|
(a)
|
A.M.
Best, Fitch, Moody’s and Standard & Poor’s outlooks are stable for
CNA’s debt and insurance financial strength
ratings.
|
If
CNA’s
property and casualty insurance financial strength ratings were downgraded
below
current levels, CNA’s business and our results of operations could be materially
adversely affected. The severity of the impact on CNA’s business is dependent on
the level of downgrade and, for certain products, which rating agency takes
the
rating action. Among the adverse effects in the event of such downgrades
would
be the inability to obtain a material volume of business from certain major
insurance brokers, the inability to sell a material volume of CNA’s insurance
products to certain markets and the required collateralization of certain
future
payment obligations or reserves.
In
addition, we believe that a lowering of our debt ratings by certain of
these
agencies could result in an adverse impact on CNA’s ratings, independent of any
change in circumstances at CNA. None of the major rating agencies which
rates us
currently maintains a negative outlook or has us on negative Credit
Watch.
CNA
has
entered into several settlement agreements and assumed reinsurance contracts
that require collateralization of future payment obligations and assumed
reserves if CNA’s ratings or other specific criteria fall below certain
thresholds. The ratings triggers are generally more than one level below
CNA’s
current ratings.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Liquidity
and Capital Resources
- CNA Financial - (Continued)
|
Dividend
Paying Ability
CNA’s
ability to pay dividends and other credit obligations is significantly
dependent
on receipt of dividends from its subsidiaries. The payment of dividends
to CNA
by its insurance subsidiaries without prior approval of the insurance department
of each subsidiary’s domiciliary jurisdiction is limited by formula. Dividends
in excess of these amounts are subject to prior approval by the respective
state
insurance departments.
Further
information on CNA’s dividends from subsidiaries is provided in Note 16 of the
Notes to Consolidated Financial Statements included under Item 8.
Lorillard
Lorillard
and other cigarette manufacturers continue to be confronted with substantial
litigation. Plaintiffs in most of the cases seek unspecified amounts of
compensatory damages and punitive damages, although some seek damages ranging
into the billions of dollars. Plaintiffs in some of the cases seek treble
damages, statutory damages, disgorgement of profits, equitable and injunctive
relief, and medical monitoring, among other damages.
Lorillard
believes that it has valid defenses to the cases pending against it. Lorillard
also believes it has valid bases for appeal of the adverse verdicts against
it.
To the extent we are a defendant in any of the lawsuits, we believe that
we are
not a proper defendant in these matters and have moved or plan to move
for
dismissal of all such claims against us. While Lorillard 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, and it is possible that some of these actions could be decided
unfavorably. Lorillard may enter into discussions in an attempt to settle
particular cases if it believes it is appropriate to do so.
Except
for the impact of the State Settlement Agreements as described below, we
are
unable to make a meaningful estimate of the amount or range of loss that
could
result from an unfavorable outcome of pending tobacco related litigation
and,
therefore, no provision has been made in the Consolidated Financial Statements
for any unfavorable outcome. It is possible that our results of operations,
cash
flows and our financial position could be materially adversely affected
by an
unfavorable outcome of certain pending litigation.
The
State
Settlement Agreements require Lorillard
and the
other
Original
Participating Manufacturers (“OPMs”) to make aggregate
annual
payments of $8.4 billion through 2007 and $9.4 billion thereafter, subject
to
adjustment for several factors
described below.
In
addition, the OPMs
are
required to pay plaintiffs’ attorneys’ fees, subject to an aggregate
annual
cap of $500.0 million, as well as an additional aggregate
amount
of
up to $125.0 million in each year through 2008. These payment obligations
are
the several and not joint obligations of each of
the
OPMs.
We
believe that Lorillard’s obligations under the State Settlement Agreements will
materially adversely affect our cash flows and operating income in future
years.
Both
the
aggregate payment
obligations
of the
OPMs, and the payment obligations of Lorillard, individually,
under
the State Settlement Agreements are subject to adjustment for several
factors which include:
|
·
|
aggregate
volume of domestic cigarette shipments;
|
|
·
|
industry
operating income.
|
The
inflation adjustment increases payments on a compounded annual basis by
the
greater of 3.0% or the actual total percentage change in the consumer price
index for the preceding year. The inflation adjustment is measured starting
with
inflation for 1999. The volume adjustment increases or decreases payments
based
on the increase or decrease in the total number of cigarettes shipped in
or to
the 50 U.S. states, the District of Columbia and Puerto Rico by the OPMs
during
the preceding year, as compared to the 1997 base year
shipments.
If
volume has increased, the volume adjustment would increase the annual payment
by
the same percentage as the number of cigarettes shipped exceeds the 1997
base
number.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Liquidity
and Capital Resources - Lorillard
- (Continued)
|
If
volume
has decreased, the volume adjustment would decrease the annual payment
by
98.0%
of
the percentage reduction in volume. In
addition, downward
adjustments to the annual payments for changes in volume may, subject to
specified conditions and exceptions, be reduced in the event of an increase
in
the OPMs aggregate operating income from domestic sales of cigarettes over
base
year levels established in the State Settlement Agreements, adjusted for
inflation. Any adjustments resulting from increases in operating income
would be
allocated among those OPMs who have had increases.
Lorillard’s
cash payment under the State Settlement Agreements in 2006 was $889.9
million including
Lorillard’s deposit of $108.0 million in an interest-bearing escrow account in
accordance with procedures established in the MSA pending resolution of
a claim
by Lorillard and the OPMs that they are entitled to reduce their MSA payments
based on a loss of market share to non-participating manufacturers. Most
of the
states that are parties to the MSA are disputing the availability of the
reduction and Lorillard believes that this dispute will ultimately be resolved
by judicial and arbitration proceedings. Lorillard’s $108.0 million reduction is
based upon the OPMs collective loss of market share in 2003.
Lorillard
and the OPMs have the right to claim additional reductions of MSA payments
in
subsequent years under provisions of the MSA.
Lorillard anticipates the amount payable in 2007 will be approximately
$925.0
million
to $975.0
million,
primarily based on 2006 estimated industry volume.
See
Item
3 - Legal Proceedings and Note 20 of the Notes to Consolidated Financial
Statements included in Item 8 of this Report for additional information
regarding this settlement and other litigation matters.
Lorillard’s
cash and investments, net of receivables and payables, totaled $1,768.7
million
and $1,750.1 million at December 31, 2006 and 2005, respectively. At December
31, 2006, 87.2% of Lorillard’s cash and investments were invested in short-term
securities.
The
principal source of liquidity for Lorillard’s business and operating needs is
internally generated funds from its operations. Lorillard’s operating activities
resulted in a net cash inflow of approximately $778.2 million for the year
ended
December 31, 2006, compared to $820.3 million for the prior year. Lorillard
believes, based on current conditions, that cash flows from operating activities
will be sufficient to enable it to meet its obligations under the State
Settlement Agreements and to fund its capital expenditures. Lorillard cannot
predict the impact on its cash flows of cash requirements related to any
future
settlements or judgments, including cash required to bond any appeals,
if
necessary, or the impact of subsequent legislative actions, and thus can
give no
assurance that it will be able to meet all of those requirements.
Boardwalk
Pipeline
At
December 31, 2006 and 2005, cash and investments amounted to $399.0 million
and
$65.8 million, respectively. Funds from operations for the year ended December
31, 2006 amounted to $255.6 million, compared to $218.7 million in 2005.
In 2006
and 2005, Boardwalk
Pipeline’s capital expenditures were $196.7 million and $83.0 million,
respectively.
In
June
of 2006, Boardwalk Pipeline and certain of its subsidiaries entered into
a
$400.0 million unsecured revolving credit facility which amended and restated
the previous $200.0 million facility entered into at the time of its initial
public offering. Interest on amounts drawn under the credit facility is
payable
at a floating rate equal to an applicable spread per annum over the London
Interbank Offered Rate (“LIBOR”) or a base rate defined as the greater of the
prime rate or the Federal funds rate plus 50 basis points. As of December
31,
2006, Boardwalk Pipeline was in compliance with all the covenant requirements
under its credit agreement and no funds were drawn under this facility.
The
revolving credit facility has a maturity date of June 29, 2011.
In
the
fourth quarter of 2006, Boardwalk Pipeline sold 6,900,000 common units
at a
price of $29.65 per unit in a public offering and received net proceeds
of
$195.2 million. In addition, we contributed $4.2 million to maintain our
2.0%
general partner interest.
In
November of 2006, Boardwalk Pipeline completed an offering of $250.0 million
of
5.9% senior notes due 2016 and received net proceeds of approximately $248.3
million. To hedge the risk attributable to changes in the risk-free component
of
forward 10-year interest rates through December 1, 2006, on October 5,
2006
Boardwalk Pipeline entered
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Liquidity
and Capital Resources
- Boardwalk Pipeline -
(Continued)
|
into
a
Treasury rate lock for a notional amount of $250.0 million of principal.
The
reference rate on the Treasury rate lock was 4.6%. The Treasury rate lock
was
settled at the time of the closing of its debt offering in November of
2006.
Boardwalk Pipeline received $0.9 million from the counterparty as a result
of
the settlement of the Treasury rate lock, which has been recorded as a
component
of accumulated other comprehensive income. The amount of the credit in
accumulated other comprehensive income will be recognized in income as
a
reduction to interest expense on a straight-line basis over the 10-year
term of
the 5.9% senior notes.
The
proceeds of the equity and debt offerings will be used to finance its expansion
activities. Boardwalk Pipeline used $90.0 million of the proceeds to repay
outstanding borrowings under its revolving credit facility which had been
used
to finance expansion activities.
Boardwalk
Pipeline is currently engaged in several major pipeline and storage expansion
projects that will require the investment of approximately $3.3 billion
of
capital resources from 2007 to 2009 (before taking into account equity
that
would be contributed by the purchaser of a 49.0% interest in Gulf Crossing
Pipeline). The pipeline expansion projects will transport natural gas supplies
from the Bossier Sands, Barnett Shale, Fayetteville Shale and the Caney/Woodford
Shale areas in East Texas, Arkansas and Oklahoma to existing or new assets
and
third-party interstate pipeline interconnects. For more information on
Boardwalk
Pipeline’s expansion projects, please read “Expansion Projects” in Item 1 of
this Report.
For
the
year ending December 31, 2007, Boardwalk Pipeline expects to make capital
expenditures of approximately $1.7 billion, of which it expects approximately
$1.6 billion for the expansion projects discussed in Item 1 and approximately
$60.0 million to be for maintenance capital. The amount of expansion capital
Boardwalk Pipeline expends in 2007 could vary significantly depending on
the
progress made with these projects, the number and types of other capital
projects Boardwalk Pipeline decides to pursue, the timing of any of those
projects and numerous other factors beyond Boardwalk Pipeline’s control.
Boardwalk
Pipeline entered into Treasury rate locks with two counterparties in August
of
2006 each for a notional amount of $100.0 million of principal to hedge
the risk
attributable to changes in the risk-free component of forward 10-year interest
rates through August 1, 2007. The reference rates on the Treasury rate
locks
were 5.0%. Under the terms of the Treasury rate locks, settlement amounts
will
be paid to either Boardwalk Pipeline or the counterparties depending on
the
movement of the 10-year Treasury rate versus the reference rates.
Boardwalk
Pipeline expects to fund its 2007 maintenance capital expenditures from
operating cash flows and its 2007 expansion capital expenditures with a
combination of borrowings under the revolving credit facility and proceeds
from
sales of debt and equity securities.
During
the year ended December 31, 2006, Boardwalk Pipeline paid cash distributions
of
$1.3188 per unit. In
February of 2007, Boardwalk Pipeline declared a quarterly distribution
of $0.415
per unit.
Diamond
Offshore
Cash
and
investments, net of receivables and payables, totaled $825.8 million at
December
31, 2006 compared to $844.8 at December 31, 2005. Cash provided by operating
activities was $760.1 million in 2006, compared to $388.6 million in 2005.
The
increase in cash flow from operations in 2006 is the result of higher
utilization and average dayrates earned by Diamond Offshore’s drilling units as
a result of an increase in overall demand for offshore contract drilling
services.
Diamond
Offshore estimates that capital expenditures for rig modifications and
new
construction in 2007 and 2008 will be approximately $456.0 million. As
of
December 31, 2006, Diamond Offshore spent approximately $418.4 million
for the
upgrade of two rigs and construction of two new jack-up rigs.
Diamond
Offshore estimates that capital expenditures in 2007 associated with its
ongoing
rig equipment replacement and enhancement programs and other corporate
requirements will be approximately $316.0 million. In 2006, Diamond Offshore
spent approximately $273.2 million for capital additions.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Liquidity
and Capital Resources - Diamond Offshore -
(Continued)
|
In
November of 2006, Diamond Offshore entered into a $285.0 million syndicated,
5-year senior unsecured revolving credit facility for general corporate
purposes, including loans and performance or standby letters of credit.
As of
December 31, 2006, there were no amounts outstanding under this credit
facility.
Diamond
Offshore’s liquidity and capital requirements are primarily a function of its
working capital needs, capital expenditures and debt service
requirements. Cash
required to meet Diamond Offshore’s capital commitments is determined by
evaluating the need to upgrade rigs to meet specific customer requirements
and
by evaluating Diamond Offshore’s ongoing rig equipment replacement and
enhancement programs, including water depth and drilling capability upgrades.
It
is the opinion of Diamond Offshore’s management that its operating cash flows
and cash reserves will be sufficient to meet these capital commitments;
however,
Diamond Offshore will continue to make periodic assessments based on industry
conditions.
When
Diamond Offshore renewed its principal insurance policies effective May
1, 2006,
coverage for offshore drilling rigs, if available, was offered at substantially
higher premiums than in the past and subject to an increasing number of
coverage
limitations, due in part to underwriting losses suffered by the insurance
industry as a result of damage caused by hurricanes in the Gulf of Mexico
in
2004 and 2005. In some cases, quoted renewal premiums increased by more
than
200%, with the addition of substantial deductibles and limits on the amount
of
claims payable for losses arising from named windstorms. In light of these
factors, Diamond Offshore determined that retention of additional risk
was
preferable to paying dramatically higher premiums for limited coverage.
Accordingly, Diamond Offshore elected to self-insure for physical damage
to rigs
and equipment caused by named windstorms in the U.S. Gulf of Mexico. For
other
physical damage coverage, its deductible is $150.0 million per occurrence.
As a
result of Diamond Offshore’s reduced coverage, premiums for this coverage were
reduced from the amounts paid in 2005 and were lower than the renewal rates
quoted by its insurance carriers. Diamond Offshore also renewed its liability
policies in May of 2006, with an increase in premiums and deductibles.
The new
deductibles under these policies have generally increased to $5.0 million
per
occurrence, but Diamond Offshore’s deductibles arising in connection with
certain liabilities relating to named windstorms in the U.S. Gulf of Mexico
have
increased to $10.0 million per occurrence, with no annual aggregate deductible.
In addition, Diamond Offshore elected to self-insure a portion of its excess
liability coverage related to named windstorms in the U.S. Gulf of Mexico.
To
the extent that Diamond Offshore incurs liabilities related to named windstorms
in the U.S. Gulf of Mexico in excess of $75.0 million, Diamond Offshore
is
self-insured for up to a maximum retention of $17.5 million per occurrence
in
addition to these deductibles. Diamond Offshore is currently in the early
stages
of renewing its insurance policies that expire on May 1, 2007. Diamond
Offshore
is unable to predict what changes, if any, it may make to its insurance
coverage
effective May 1, 2007. If named windstorms in the U.S. Gulf of Mexico cause
significant damage to its rigs or equipment, or to the property of others
for
which Diamond Offshore may be liable, it could have a material adverse
effect on
the Company’s financial position, results of operations or cash
flows.
In
the
first quarter of 2006, Diamond Offshore paid a special cash dividend of
$1.50
per share. In addition, Diamond Offshore paid regular quarterly cash dividends
aggregating $0.50 per share during the year ended December 31, 2006. In
the
first quarter of 2007, Diamond Offshore declared a special cash dividend
of
$4.00 per share of its common stock payable on March 1, 2007 to shareholders
of
record on February 14, 2007.
Subsequent
to December 31, 2006 and through February 14, 2007, the holders of $438.4
million in principal amount of Diamond Offshore’s 1.5% Debentures converted
their outstanding debentures into 8,943,284 shares of Diamond Offshore’s common
stock. As a result of these conversions, $21.5 million aggregate principal
amount of the 1.5% Debentures remained outstanding as of February 14, 2007.
The
cash requirements for the interest payable to holders of its 1.5% debentures
will be reduced due to the decrease in the outstanding principal
amount.
Loews
Hotels
Cash
and
short-term investments increased to $24.5 million at December 31, 2006
from
$19.1 million at December 31, 2005. Funds from operations continue to exceed
operating requirements. Funds for other capital expenditures and working
capital
requirements are expected to be provided from existing cash balances and
operations.
In
October of 2006, Loews Hotels entered into a joint venture with a single
investor to fund acquisitions and/or develop hotels. Loews Hotels will
manage
the operations of all hotels acquired by the joint venture. As of December
31,
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Liquidity
and Capital Resources - Loews
Hotels - (Continued)
|
2006,
Loews Hotels has invested approximately $14.6 million in the joint venture
in
connection with its acquisition of the 493 room Loews Lake Las Vegas
Hotel.
Corporate
and Other
Parent
Company cash
and
investments, net of receivables and payables, at December 31, 2006 totaled
$5.3
billion, as compared to $2.9 billion at December 31, 2005. The increase
in net
cash and investments is primarily due to the receipt of $1,306.4 million
in
dividends from subsidiaries and net proceeds of $728.4 million from CNA’s
repurchase of its Series H preferred stock. We also received net proceeds
of
$876.8 million and $751.5 million from the sale of 15,000,000 shares of
Carolina
Group stock in each of August and May of 2006. During 2006 we paid out
$307.7
million of dividends to our shareholders, $509.8 million to repurchase
Loews
common stock and $300.0 million to repay at maturity our principal amount
of
6.8% senior notes.
As
of
December 31, 2006, there were 544,203,457 shares of Loews common stock
outstanding and 108,325,806 shares of Carolina Group stock outstanding.
Depending on market and other conditions, we may purchase shares of our,
and our
subsidiaries’, outstanding common stock in the open market or otherwise. During
2006, we purchased 13,934,500 shares of Loews common stock at an aggregate
cost
of $509.8 million.
We
have
an effective Registration Statement on Form S-3 registering the future
sale of
an unlimited amount of our debt and equity securities.
We
continue to pursue conservative financial strategies while seeking opportunities
for responsible growth. These include the expansion of existing
businesses, full or partial acquisitions
and dispositions,
and opportunities for efficiencies and economies of scale.
Off-Balance
Sheet Arrangements
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 December 31, 2006,
the
aggregate amount of quantifiable indemnification agreements in effect for
sales
of CNA business entities, assets, and third party loans was $933.0
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 December 31, 2006, CNA
had
outstanding unlimited indemnifications in connection with the sales of
certain
of their business entities or assets that included tax liabilities arising
from
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 statues of limitation
expire, or until the agreed upon contract terms expire. As of December
31, 2006,
CNA has recorded approximately $28.0 million of liabilities related to
the CNA
indemnification agreements.
At
December 31, 2006 and 2005, we had no other off-balance sheet debt or other
arrangements.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
|
Contractual
Cash Payment Obligations
Our
contractual cash payment obligations are as follows:
|
|
Payments
Due by Period
|
|
December
31, 2006
|
|
Total
|
|
Less
than
1
year
|
|
1-3
years
|
|
4-5
years
|
|
More
than
5
years
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
(a)
|
|
$
|
8,672.8
|
|
$
|
317.7
|
|
$
|
1,541.3
|
|
$
|
1,137.9
|
|
$
|
5,675.9
|
|
Operating
leases
|
|
|
381.4
|
|
|
70.0
|
|
|
112.9
|
|
|
83.4
|
|
|
115.1
|
|
Claim
and claim expense reserves (b)
|
|
|
31,398.0
|
|
|
7,147.0
|
|
|
9,341.0
|
|
|
4,810.0
|
|
|
10,100.0
|
|
Future
policy benefits reserves (c)
|
|
|
10,803.0
|
|
|
346.0
|
|
|
348.0
|
|
|
337.0
|
|
|
9,772.0
|
|
Policyholder
funds reserves (c)
|
|
|
994.0
|
|
|
382.0
|
|
|
454.0
|
|
|
9.0
|
|
|
149.0
|
|
Purchase
obligations (d)
|
|
|
949.0
|
|
|
745.3
|
|
|
202.3
|
|
|
0.6
|
|
|
0.8
|
|
Total
|
|
$
|
53,198.2
|
|
$
|
9,008.0
|
|
$
|
11,999.5
|
|
$
|
6,377.9
|
|
$
|
25,812.8
|
|
(a)
|
Includes
estimated future interest payments, but does not include original
issue
discount. Please see Note 25 of the Notes to Consolidated Financial
Statements included in Item 8 of this report and Liquidity and
Capital
Resources-Diamond Offshore, above, for discussion of changes
in Diamond
Offshore’s long-term debt subsequent to December 31,
2006.
|
(b)
|
Claim
and claim adjustment expense reserves are not discounted and
represent
CNA’s estimate of the amount and timing of the ultimate settlement
and
administration of claims based on its assessment of facts and
circumstances known as of December 31, 2006. See the Reserves
- Estimates
and Uncertainties section of this MD&A for further information. Claim
and claim adjustment expense reserves of $12.0 million related
to business
which has been 100% ceded to unaffiliated parties in connection
with the
individual life sale are not
included.
|
(c)
|
Future
policy benefits and policyholder funds reserves are not discounted
and
represent CNA’s estimate of the ultimate amount and timing of the
settlement of benefits based on its assessment of facts and circumstances
known as of December 31, 2006. Future policy benefit reserves
of $891.0
million and policyholder fund reserves of $47.0 million related
to
business which has been 100% ceded to unaffiliated parties in
connection
with the individual life sale are not included. Additional information
on
future policy benefits and policyholder funds reserves is included
in Note
1 of the Notes to Consolidated Financial Statements included
under Item
8.
|
(d)
|
Consists
primarily of obligations aggregating approximately $456.0 million
relating
to Diamond Offshores’ major upgrade of its Ocean
Endeavor
and Ocean
Monarch
rigs and construction of two new jack-up rigs, the Ocean
Scepter
and Ocean
Shield.
In addition, the table above includes $409.1 million related
to Boardwalk
Pipeline’s expansion projects as previously discussed in Item 1. -
Business.
|
In
addition, as previously discussed, Lorillard has entered into the State
Settlement Agreements which impose a stream of future payment obligations
on
Lorillard and the other major U.S. cigarette manufacturers. Lorillard’s
portion of ongoing adjusted settlement payments,
including fees
to
settling plaintiffs’ attorneys,
are
based on a number of factors which are described under “Liquidity and Capital
Resources - Lorillard,” above. Lorillard’s cash payment in 2006 amounted to
approximately $889.9 million and Lorillard estimates its cash payments
in 2007
will be approximately $925.0 million to $975.0 million, primarily based
on 2006
estimated industry volume. Payment obligations are not incurred until the
related sales occur and therefore are not reflected in the above
table.
INVESTMENTS
Investment
activities of non-insurance companies include investments in fixed income
securities, equity securities including short sales, derivative instruments
and
short-term investments, and are carried at fair value. Equity securities,
which
are considered part of our trading portfolio, short sales and derivative
instruments are marked to market and reported as net investment income
in the
Consolidated Statements of Income.
We
enter
into short sales and invest in certain derivative instruments that are
used for
asset and liability management activities, income enhancements to our portfolio
management strategy and 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 our portfolio
strategy.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Investments
- (Continued)
|
Credit
exposure associated with non-performance by the counterparties to derivative
instruments is generally limited to the uncollateralized change in fair
value of
the derivative instruments recognized in the Consolidated Balance Sheets.
We mitigate the
risk
of non-performance
by monitoring the creditworthiness of counterparties and diversifying
derivatives to multiple counter-parties. We occasionally require collateral
from
our derivative investment counterparties depending on the amount of the
exposure
and the credit rating of the counterparty.
We
do not
believe that any of the derivative instruments we use are unusually complex,
nor
do the use of these instruments, in our opinion, result in a higher degree
of
risk. See “Results of Operations,” “Quantitative and Qualitative Disclosures
about Market Risk” and Note 4 of the Notes to Consolidated Financial Statements
included in Item 8 of this Report for additional information with respect
to
derivative instruments, including recognized gains and losses on these
instruments.
Insurance
Net
Investment Income
The
significant components of CNA’s net investment income are presented in the
following table:
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities
|
|
$
|
1,841.9
|
|
$
|
1,607.5
|
|
$
|
1,571.2
|
|
Short-term
investments
|
|
|
248.3
|
|
|
146.6
|
|
|
56.1
|
|
Limited
partnerships
|
|
|
287.6
|
|
|
254.4
|
|
|
212.0
|
|
Equity
securities
|
|
|
23.1
|
|
|
25.0
|
|
|
13.8
|
|
Income
from trading portfolio (a)
|
|
|
102.6
|
|
|
46.7
|
|
|
110.2
|
|
Interest
on funds withheld and other deposits
|
|
|
(68.1
|
)
|
|
(165.8
|
)
|
|
(261.1
|
)
|
Other
|
|
|
18.9
|
|
|
19.7
|
|
|
17.1
|
|
Total
investment income
|
|
|
2,454.3
|
|
|
1,934.1
|
|
|
1,719.3
|
|
Investment
expenses
|
|
|
(42.1
|
)
|
|
(42.2
|
)
|
|
(39.8
|
)
|
Net
investment income
|
|
$
|
2,412.2
|
|
$
|
1,891.9
|
|
$
|
1,679.5
|
|
(a)
|
There
was no change in net unrealized gains (losses) on trading securities
included in net investment income for the year ended December
31, 2006.
The change in net unrealized gains (losses) on trading securities,
included in net investment income, was $(7.0) and $2.0 million
for the
years ended December 31, 2005 and
2004.
|
Net
investment income increased by $520.3 million for 2006 compared with 2005.
The
improvement was primarily driven by interest rate increases across fixed
maturity securities and short term investments, an increase in the overall
invested asset base resulting from improved cash flow and a reduction of
interest expense on funds withheld and other deposits. During 2006 and
2005, CNA
commuted several significant finite reinsurance contracts which contained
interest crediting provisions and as a result, interest expense on funds
withheld has declined significantly. No further interest expense is due
on the
funds withheld on the commuted contracts. The pretax interest expense on
funds
withheld related to these significant commuted contracts was $14.0 million,
$84.0 million and $146.0 million for December 31, 2006, 2005 and 2004,
and was
reflected as a component of Net investment income in our Consolidated Statements
of Income. The 2005 and 2004 amounts include the interest charges associated
with the contract commuted in 2006. See Note 18 of the Notes to Consolidated
Financial Statements included under Item 8 for additional information for
interest costs on funds withheld and other deposits. Also impacting net
investment income was increased income from the trading portfolio of $55.9
million. The increased income from the trading portfolio was largely offset
by a
corresponding increase in the policyholders’ funds reserves supported by the
trading portfolio, which is included in Insurance claims and policyholders’
benefits on the Consolidated Statements of Income.
Net
investment income increased by $212.4 million for 2005 compared with 2004.
This
increase was due to the reduced interest expense on funds withheld and
other
deposits discussed above and improved results across all other
available-for-sale asset classes, especially short term investments, due
to the
improved period over period yields. This improvement was partly offset
by
decreases in investment income from the trading portfolio.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Investments
- (Continued)
|
The
bond
segment of the investment portfolio yielded 5.6% in 2006, 4.9% in 2005
and 4.6%
in 2004.
Net
Realized Investment Gains (Losses)
The
components of CNA’s net realized investment gains (losses) are presented in the
following table:
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
investment gains (losses):
|
|
|
|
|
|
|
|
Fixed
maturity securities:
|
|
|
|
|
|
|
|
U.S.
government bonds
|
|
$
|
61.7
|
|
$
|
(32.8
|
)
|
$
|
10.4
|
|
Corporate
and other taxable bonds
|
|
|
(98.2
|
)
|
|
(86.1
|
)
|
|
122.8
|
|
Tax-exempt
bonds
|
|
|
53.5
|
|
|
12.2
|
|
|
42.4
|
|
Asset-backed
bonds
|
|
|
(8.8
|
)
|
|
13.7
|
|
|
52.8
|
|
Redeemable
preferred stock
|
|
|
(2.9
|
)
|
|
2.5
|
|
|
18.7
|
|
Total
fixed maturity securities
|
|
|
5.3
|
|
|
(90.5
|
)
|
|
247.1
|
|
Equity
securities
|
|
|
15.6
|
|
|
38.2
|
|
|
202.2
|
|
Derivative
securities
|
|
|
18.5
|
|
|
49.1
|
|
|
(84.1
|
)
|
Short-term
investments
|
|
|
(5.5
|
)
|
|
0.5
|
|
|
(3.4
|
)
|
Other
invested assets, including dispositions
|
|
|
58.5
|
|
|
(6.5
|
)
|
|
(597.3
|
)
|
Allocated
to participating policyholders’ and minority interests
|
|
|
(0.5
|
)
|
|
2.7
|
|
|
(9.0
|
)
|
Total
realized investment gains (losses)
|
|
|
91.9
|
|
|
(6.5
|
)
|
|
(244.5
|
)
|
Income
tax (expense) benefit
|
|
|
(20.5
|
)
|
|
(1.3
|
)
|
|
94.1
|
|
Minority
interest
|
|
|
(8.5
|
)
|
|
0.9
|
|
|
13.3
|
|
Net
realized investment gains (losses)
|
|
$
|
62.9
|
|
$
|
(6.9
|
)
|
$
|
(137.1
|
)
|
Net
realized investment results increased by $69.8 million for 2006 compared
with
2005. The increase in net realized investment results was primarily driven
by
improved results in fixed maturity securities, partially offset by increases
in
interest rate related other-than-temporary impairment (“OTTI”) losses for which
CNA did not assert an intent to hold until an anticipated recovery in value.
For
2006, OTTI losses of $101.2 million were recorded primarily in the corporate
and
other taxable bonds sector. Other realized investment gains (losses) for
the
year ended December 31, 2006, included a $33.4 million pretax gain related
to a
settlement received as a result of bankruptcy litigation of a major
telecommunications corporation.
Net
realized investment results improved $130.2 million in 2005 compared with
2004.
This improvement was primarily the result of a 2004 loss of $352.9 million
on
the sale of the individual life insurance business, partly offset by reduced
gains for equities securities. Equity results in 2004 included a gain of
$95.8
million related to CNA’s investment in Canary Wharf Group PLC, a London-based
real estate company. Also impacting results for 2005 versus 2004 were decreased
results in the overall fixed maturity asset class partly offset by improved
results for the derivatives asset class. OTTI losses of $63.9 million were
recorded in 2005 across various sectors, including an OTTI loss of $20.1
million
related to loans made under a credit facility to a national contractor,
that are
classified as fixed maturities. OTTI losses of $54.8 million were recorded
in
2004 across various sectors, including an OTTI loss of $32.9 million related
to
loans to the national contractor. For additional information on loans to
the
national contractor, see Note 21 of the Notes to Consolidated Financial
Statements included under Item 8. Other realized investment gains (losses)
for
the year ended December 31, 2005 and 2004 include gains and losses related
to
the sales of certain operations or affiliates that are described in Note
14 of
the Notes to Consolidated Financial Statements included under Item
8.
A
primary
objective in the management of the fixed maturity and equity portfolios
is to
optimize return relative to underlying liabilities and respective liquidity
needs. CNA’s views on the current interest rate environment, tax regulations,
asset class valuations, specific security issuer and broader industry segment
conditions, and the domestic and global economic conditions, are some of
the
factors that enter into an investment decision. CNA also continually monitors
exposure to issuers of securities held and broader industry sector exposures
and
may from time to time adjust such exposures based on its views of a specific
issuer or industry sector.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Investments
- (Continued)
|
The
investment portfolio is periodically analyzed for changes in duration and
related price change risk. Additionally, CNA periodically reviews the
sensitivity of the portfolio to the level of foreign exchange rates and
other
factors that contribute to market price changes. A summary of these risks
and
specific analysis on changes is included in Item 7A - Quantitative and
Qualitative Disclosures about Market Risk included herein.
CNA
invests in certain derivative financial instruments primarily to reduce
its
exposure to market risk (principally interest rate, equity price and foreign
currency risk) and credit risk (risk of nonperformance of underlying obligor).
Derivative securities are recorded at fair value at the reporting date.
CNA also
uses derivatives to mitigate market risk by purchasing S&P 500 index futures
in a notional amount equal to the contract liability relating to Life and
Group
Non-Core indexed group annuity contracts. CNA provided collateral to satisfy
margin deposits on exchange-traded derivatives totaling $27.0 million as
of
December 31, 2006. For over-the-counter derivative transactions CNA utilizes
International Swaps and Derivatives Association (“ISDA”) Master Agreements that
specify certain limits over which collateral is exchanged. As of December
31,
2006, we provided $31.0 million of cash as collateral for over-the-counter
derivative instruments.
A
further
consideration in the management of the investment portfolio is the
characteristics of the underlying liabilities and the ability to align
the
duration of the portfolio to those liabilities to meet future liquidity
needs,
minimize interest rate risk and maintain a level of income sufficient to
support
the underlying insurance liabilities. For portfolios where future liability
cash
flows are determinable and long term in nature, CNA segregates assets for
asset
liability management purposes.
CNA
classifies its fixed maturity securities (bonds and redeemable preferred
stocks)
and its equity securities as either available-for-sale or trading, and
as such,
they are carried at fair value. The amortized cost of fixed maturity securities
is adjusted for amortization of premiums and accretion of discounts to
maturity,
which is included in net investment income. Changes in fair value related
to
available-for-sale securities are reported as a component of other comprehensive
income. Changes in fair value of trading securities are reported within
net
investment income.
The
following table provides further detail of gross realized gains and losses
on
available-for-sale fixed maturity and equity securities, which include
OTTI
losses:
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gains (losses) on fixed maturity and equity
securities:
|
|
|
|
|
|
|
|
Fixed
maturity securities:
|
|
|
|
|
|
|
|
Gross
realized gains
|
|
$
|
382.2
|
|
$
|
360.7
|
|
$
|
703.9
|
|
Gross
realized losses
|
|
|
(377.0
|
)
|
|
(451.2
|
)
|
|
(456.8
|
)
|
Net
realized gains (losses) on fixed maturity securities
|
|
|
5.2
|
|
|
(90.5
|
)
|
|
247.1
|
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
Gross
realized gains
|
|
|
23.3
|
|
|
73.2
|
|
|
225.3
|
|
Gross
realized losses
|
|
|
(7.6
|
)
|
|
(35.0
|
)
|
|
(23.1
|
)
|
Net
realized gains on equity securities
|
|
|
15.7
|
|
|
38.2
|
|
|
202.2
|
|
Net
realized gains (losses) on fixed maturity and equity
securities
|
|
$
|
20.9
|
|
$
|
(52.3
|
)
|
$
|
449.3
|
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Investments
- (Continued)
|
The
following table provides details of the largest realized losses from sales
of
securities aggregated by issuer including: the fair value of the securities
at
date of sale, the amount of the loss recorded and the period of time that
the
security had been in an unrealized loss position prior to sale. The period
of
time that the security had been in an unrealized loss position prior to
sale can
vary due to the timing of individual security purchases. Also included
is a
narrative providing the industry sector along with the facts and circumstances
giving rise to the loss.
|
|
|
|
|
|
Months
in
|
|
|
|
Fair
Value
|
|
|
|
Unrealized
|
|
|
|
Date
of
|
|
Loss
|
|
Loss
Prior
|
|
Issuer
Description and Discussion
|
|
Sale
|
|
On
Sale
|
|
To
Sale (a)
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Various
notes and bonds issued by the United States
Treasury.
|
|
|
|
|
|
|
|
|
|
|
Securities
sold due to outlook on interest rates and
inflation.
|
|
$
|
4,529.0
|
|
$
|
18.0
|
|
|
0-6
|
|
|
|
|
|
|
|
|
|
|
|
|
State
issued revenue bonds. Positions were sold as part of a
|
|
|
|
|
|
|
|
|
|
|
broader
initiative to reduce municipal holdings.
|
|
|
289.0
|
|
|
6.0
|
|
|
0-12
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
services group that provides property and casualty,
|
|
|
|
|
|
|
|
|
|
|
managed
care, life and various other insurance products in the
|
|
|
|
|
|
|
|
|
|
|
United
States. Position was sold to reduce exposure to the
issuer
|
|
|
|
|
|
|
|
|
|
|
and
sector.
|
|
|
56.0
|
|
|
5.0
|
|
|
0-6
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
in the advertising industry, utilizing various venues
|
|
|
|
|
|
|
|
|
|
|
including
television, radio, outdoor displays, and live
|
|
|
|
|
|
|
|
|
|
|
entertainment.
The company has entered into an agreement
|
|
|
|
|
|
|
|
|
|
|
to
be acquired. Position was reduced in response to
the
|
|
|
|
|
|
|
|
|
|
|
announced
transaction.
|
|
|
66.0
|
|
|
5.0
|
|
|
0-12+
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
develops and operates broadband cable
|
|
|
|
|
|
|
|
|
|
|
communications
networks, high-speed internet service and
|
|
|
|
|
|
|
|
|
|
|
digital
video applications. Position was sold in response to
|
|
|
|
|
|
|
|
|
|
|
newly
issued debt.
|
|
|
92.0
|
|
|
5.0
|
|
|
0-6
|
|
Total
|
|
$
|
5,032.0
|
|
$
|
39.0
|
|
|
|
|
(a)
|
Represents
the range of consecutive months the various positions were in
an
unrealized loss prior to sale. 0-12+ means certain positions
were less
than 12 months, while others were greater than 12
months.
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Investments
- (Continued)
|
Valuation
and Impairment of Investments
The
following table details the carrying value of CNA’s general account
investments:
December
31
|
|
2006
|
|
2005
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
account investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities and obligations of
|
|
|
|
|
|
|
|
|
|
government
agencies
|
|
$
|
5,138.0
|
|
|
11.6
|
%
|
$
|
1,469.0
|
|
|
3.7
|
%
|
Asset-backed
securities
|
|
|
13,677.0
|
|
|
31.0
|
|
|
12,859.0
|
|
|
32.4
|
|
States,
municipalities and political subdivisions-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax-exempt
|
|
|
5,146.0
|
|
|
11.7
|
|
|
9,209.0
|
|
|
23.2
|
|
Corporate
securities
|
|
|
7,132.0
|
|
|
16.2
|
|
|
6,165.0
|
|
|
15.5
|
|
Other
debt securities
|
|
|
3,642.0
|
|
|
8.2
|
|
|
3,044.0
|
|
|
7.7
|
|
Redeemable
preferred stock
|
|
|
912.0
|
|
|
2.1
|
|
|
216.0
|
|
|
0.5
|
|
Options
embedded in convertible debt securities
|
|
|
|
|
|
|
|
|
1.0
|
|
|
|
|
Total
fixed maturity securities available-for-sale
|
|
|
35,647.0
|
|
|
80.8
|
|
|
32,963.0
|
|
|
83.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities and obligations of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
government
agencies
|
|
|
2.0
|
|
|
|
|
|
4.0
|
|
|
|
|
Asset-backed
securities
|
|
|
55.0
|
|
|
0.1
|
|
|
87.0
|
|
|
0.2
|
|
Corporate
securities
|
|
|
133.0
|
|
|
0.3
|
|
|
154.0
|
|
|
0.4
|
|
Other
debt securities
|
|
|
14.0
|
|
|
|
|
|
26.0
|
|
|
0.1
|
|
Total
fixed maturity securities trading
|
|
|
204.0
|
|
|
0.4
|
|
|
271.0
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
452.0
|
|
|
1.0
|
|
|
289.0
|
|
|
0.7
|
|
Preferred
stock
|
|
|
145.0
|
|
|
0.4
|
|
|
343.0
|
|
|
0.9
|
|
Total
equity securities available-for-sale
|
|
|
597.0
|
|
|
1.4
|
|
|
632.0
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities trading
|
|
|
60.0
|
|
|
0.1
|
|
|
49.0
|
|
|
0.1
|
|
Short-term
investments available-for-sale
|
|
|
5,538.0
|
|
|
12.6
|
|
|
3,870.0
|
|
|
9.8
|
|
Short-term
investments trading
|
|
|
172.0
|
|
|
0.4
|
|
|
368.0
|
|
|
0.9
|
|
Limited
partnerships
|
|
|
1,852.0
|
|
|
4.2
|
|
|
1,509.0
|
|
|
3.8
|
|
Other
investments
|
|
|
26.0
|
|
|
0.1
|
|
|
33.0
|
|
|
0.1
|
|
Total
general account investments
|
|
$
|
44,096.0
|
|
|
100.0
|
%
|
$
|
39,695.0
|
|
|
100.0
|
%
|
CNA’s
general account investments consist primarily of asset-backed securities,
corporate securities, short term investments, municipal and U.S. treasury
securities.
A
significant judgment in the valuation of investments is the determination
of
when an OTTI has occurred. CNA analyzes securities on at least a quarterly
basis. Part of this analysis is to monitor the length of time and severity
of
the decline below book value for those securities in an unrealized loss
position. Information on CNA’s OTTI process is set forth in Note 2 of the Notes
to Consolidated Financial Statements included under Item 8.
Investments
in the general account had a total net unrealized gain of $966.0 million
at
December 31, 2006 compared with $787.0 million at December 31, 2005. The
unrealized position at December 31, 2006 was comprised of a net unrealized
gain
of $716.0 million for fixed maturities, a net unrealized gain of $249.0
million
for equity securities, and a net unrealized gain of $1.0 million for short
term
securities. The unrealized position at December 31, 2005 was comprised
of a net
unrealized gain of $618.0 million for fixed maturities, a net unrealized
gain of
$170.0 million for equity securities,
and a net unrealized loss of $1.0 million for short term securities. See
Note 2
of the Notes of
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Investments
- (Continued)
|
Consolidated
Financial Statements included under Item 8 for further detail on the unrealized
position of CNA’s general account investment portfolio.
CNA’s
investment policies for both the general account and separate account emphasize
high credit quality and diversification by industry, issuer and issue.
Assets
supporting interest rate sensitive liabilities are segmented within the
general
account to facilitate asset/liability duration management.
The
following table provides the composition of fixed maturity securities with
an
unrealized loss at December 31, 2006 in relation to the total of all fixed
maturity securities with an unrealized loss by maturity profile. Securities
not
due at a single date are allocated based on weighted average life.
|
|
Percent
of
Market
Value
|
|
Percent
of
Unrealized
Loss
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
|
5.0
|
%
|
|
3.0
|
%
|
Due
after one year through five years
|
|
|
44.0
|
|
|
50.0
|
|
Due
after five years through ten years
|
|
|
33.0
|
|
|
24.0
|
|
Due
after ten years
|
|
|
18.0
|
|
|
23.0
|
|
Total
|
|
|
100.0
|
%
|
|
100.0
|
%
|
CNA’s
non-investment grade fixed maturity securities available-for-sale as of
December
31, 2006 that were in a gross unrealized loss position had a fair value
of
$622.0 million. The following tables summarize the fair value and gross
unrealized loss of non-investment grade securities categorized by the length
of
time those securities have been in a continuous unrealized loss position
and
further categorized by the severity of the unrealized loss position in
10.0%
increments as of December 31, 2006 and 2005.
|
|
|
|
|
|
Gross
|
|
|
|
Estimated
|
|
Fair
Value as a Percentage of Book Value
|
|
Unrealized
|
|
December
31, 2006
|
|
Fair
Value
|
|
90-99%
|
|
80-89%
|
|
70-79%
|
|
<70%
|
|
Loss
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment
grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6
months
|
|
$
|
509.0
|
|
$
|
2.0
|
|
|
|
|
|
|
|
|
|
|
$
|
2.0
|
|
7-12
months
|
|
|
87.0
|
|
|
1.0
|
|
$
|
1.0
|
|
|
|
|
|
|
|
|
2.0
|
|
13-24
months
|
|
|
24.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater
than 24 months
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-investment grade
|
|
$
|
622.0
|
|
$
|
3.0
|
|
$
|
1.0
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4.0
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
investment grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6
months
|
|
$
|
632.0
|
|
$
|
20.0
|
|
$
|
8.0
|
|
$
|
1.0
|
|
|
|
|
$
|
29.0
|
|
7-12
months
|
|
|
118.0
|
|
|
4.0
|
|
|
6.0
|
|
|
|
|
|
|
|
|
10.0
|
|
13-24
months
|
|
|
122.0
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
3.0
|
|
Greater
than 24 months
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-investment grade
|
|
$
|
874.0
|
|
$
|
27.0
|
|
$
|
14.0
|
|
$
|
1.0
|
|
$
|
-
|
|
$
|
42.0
|
|
As
part
of the ongoing OTTI monitoring process, CNA
evaluated the facts and circumstances based on available information for
each of
the non-investment grade securities and determined that the securities
presented
in the above tables were temporarily impaired when evaluated at December
31,
2006 and 2005. This determination was based on a number of factors that
CNA
regularly considers including, but not limited to: the issuers’ ability to meet
current and future interest and principal payments, an evaluation of the
issuers’ financial condition and near term prospects, CNA’s assessment of the
sector outlook and estimates of the fair value of any underlying collateral.
In
all cases where a decline
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Investments
- (Continued)
|
in
value
is judged to be temporary, CNA
has
the intent and ability to hold these securities for a period of time sufficient
to recover the book value of its investment through an anticipated recovery
in
the fair value of such securities or by holding the securities to maturity.
In
many cases, the securities held are matched to liabilities as part of ongoing
asset/liability duration management. As such, CNA continually assesses
its
ability to hold securities for a time sufficient to recover any temporary
loss
in value or until maturity. CNA believes it has sufficient levels of liquidity
so as to not impact the asset/liability management process.
CNA’s
equity securities classified as available-for-sale as of December 31, 2006
that
were in an unrealized loss position had a fair value of $14.0 million and
unrealized losses of $1 million. Under the same process as followed for
fixed
maturity securities, CNA monitors the equity securities for other-than-temporary
declines in value. In all cases where a decline in value is judged to be
temporary, CNA has the intent and ability to hold these securities for
a period
of time sufficient to recover the book value of its investment through
anticipated recovery in the fair value of such securities.
Invested
assets are exposed to various risks, such as interest rate, market and
credit
risk. Due to the level of risk associated with certain invested assets
and the
level of uncertainty related to changes in the value of these assets, it
is
possible that changes in these risks in the near term, including increases
in
interest rates, could have an adverse material impact on our results of
operations or equity.
The
general account portfolio consists primarily of high quality bonds, 90.9%
and
92.1% of which were rated as investment grade (rated BBB or higher) at
December
31, 2006 and 2005. The
following table summarizes the ratings of CNA’s general account bond portfolio
at carrying value:
December
31
|
|
2006
|
|
2005
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and affiliated agency securities
|
|
$
|
5,285.0
|
|
|
15.1
|
%
|
$
|
1,628.0
|
|
|
4.9
|
%
|
Other
AAA rated
|
|
|
16,311.0
|
|
|
46.7
|
|
|
18,233.0
|
|
|
55.2
|
|
AA
and A rated
|
|
|
5,222.0
|
|
|
15.0
|
|
|
6,046.0
|
|
|
18.3
|
|
BBB
rated
|
|
|
4,933.0
|
|
|
14.1
|
|
|
4,499.0
|
|
|
13.7
|
|
Non
investment-grade
|
|
|
3,188.0
|
|
|
9.1
|
|
|
2,612.0
|
|
|
7.9
|
|
Total
|
|
$
|
34,939.0
|
|
|
100.0
|
%
|
$
|
33,018.0
|
|
|
100.0
|
%
|
At
December 31, 2006 and 2005, approximately 96.0% and 95.0% of the general
account
portfolio was issued by U.S. Government agencies or was rated by S&P or
Moody’s. The remaining bonds were rated by other rating agencies or
CNA.
The
following table summarizes the bond ratings of the investments supporting
CNA’s
separate account products, which guarantee principal and a specified rate
of
interest:
December
31
|
|
2006
|
|
2005
|
|
(In
millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
AAA rated
|
|
$
|
111.0
|
|
|
25.6
|
%
|
$
|
120.0
|
|
|
25.8
|
%
|
AA
and A rated
|
|
|
242.0
|
|
|
55.8
|
|
|
193.0
|
|
|
41.4
|
|
BBB
rated
|
|
|
75.0
|
|
|
17.3
|
|
|
142.0
|
|
|
30.4
|
|
Non
investment-grade
|
|
|
6.0
|
|
|
1.3
|
|
|
11.0
|
|
|
2.4
|
|
Total
|
|
$
|
434.0
|
|
|
100.0
|
%
|
$
|
466.0
|
|
|
100.0
|
%
|
At
December 31, 2006 and 2005, 100.0% and 98.0% of the separate account portfolio
was issued by U.S. Government and affiliated agencies or was rated by S&P or
Moody’s. The remaining bonds were rated by other rating agencies or
CNA.
Non
investment-grade bonds, as presented in the tables above, are high-yield
securities rated below BBB by bond rating agencies, as well as other unrated
securities that, in CNA’s opinion, are below investment-grade. High-yield
securities generally involve a greater degree of risk than investment-grade
securities. However, expected returns should
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Investments
- (Continued)
|
compensate
for the added risk. This risk is also considered in the interest rate
assumptions for the underlying insurance products.
The
carrying value of securities that are either subject to trading restrictions
or
trade in illiquid private placement markets at December 31, 2006 was $191.0
million, which represents 0.4% of our total investment portfolio. These
securities were in a net unrealized gain position of $143.0 million at
December
31, 2006. Of these securities, 80.0% are priced by unrelated third party
sources.
Included
in CNA’s general account fixed maturity securities at December 31, 2006 were
$13,732.0 million of asset-backed securities, at fair value, consisting
of
approximately 63.0% in collateralized mortgage obligations (“CMOs”), 21.0% in
corporate asset-backed obligations, 14.0% in corporate mortgage-backed
pass-through certificates and 2.0% in U.S. Government agency issued pass-through
certificates. The majority of CMOs held are actively traded in liquid markets
and are primarily priced by a third party pricing service.
The
carrying value of the components of the general account short-term investment
portfolio is presented in the following table:
December
31
|
|
2006
|
|
2005
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments available-for-sale:
|
|
|
|
|
|
Commercial
paper
|
|
$
|
923.0
|
|
$
|
1,906.0
|
|
U.S.
Treasury securities
|
|
|
1,093.0
|
|
|
251.0
|
|
Money
market funds
|
|
|
196.0
|
|
|
294.0
|
|
Other,
including collateral held related to securities lending
|
|
|
3,326.0
|
|
|
1,419.0
|
|
Total
short-term investments available-for-sale
|
|
|
5,538.0
|
|
|
3,870.0
|
|
|
|
|
|
|
|
|
|
Short-term
investments trading:
|
|
|
|
|
|
|
|
Commercial
paper
|
|
|
43.0
|
|
|
94.0
|
|
U.S.
Treasury securities
|
|
|
2.0
|
|
|
64.0
|
|
Money
market funds
|
|
|
127.0
|
|
|
200.0
|
|
Other
|
|
|
|
|
|
10.0
|
|
Total
short-term investments trading
|
|
|
172.0
|
|
|
368.0
|
|
|
|
|
|
|
|
|
|
Total
short-term investments
|
|
$
|
5,710.0
|
|
$
|
4,238.0
|
|
The
fair
value of collateral held related to securities lending, included in other
short-term investments, was $2,850.9 million and $767.4 million at December
31,
2006 and 2005.
ACCOUNTING
STANDARDS
In
September of 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements.” SFAS
No.
157 defines fair value, establishes a framework for measuring fair value
in
accordance with GAAP and expands disclosures about fair value measurements.
SFAS
No. 157 retains the exchange price notion in the definition of fair value
and
clarifies that the exchange price is the price in an orderly transaction
between
market participants to sell the asset or transfer the liability in the
market in
which the reporting entity would transact for the asset or liability. SFAS
No.
157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement and the fair value measurement should be determined
based on the assumptions that market participants would use in pricing
the asset
or liability. SFAS No. 157 expands disclosures surrounding the use of fair
value
to measure assets and liabilities and specifically focuses on the sources
used
to measure fair value. In instances of recurring use of fair value measures
using unobservable inputs, SFAS No. 157 requires separate disclosure of
the
effect on earnings for the period.
SFAS No.
157 is effective for fiscal years beginning after November 15, 2007. We
are
currently evaluating the impact that adopting SFAS No. 157 will have on
our
results of operations and equity.
In
July
of 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109.” FIN 48
prescribes a comprehensive model for how a company should
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Accounting
Standards - (Continued)
|
recognize,
measure, present, and disclose in its financial statements uncertain tax
positions that the company has taken or expects to take on a tax return.
FIN 48
states that a tax benefit from an uncertain position may be recognized
only if
it is “more likely than not” that the position is sustainable, based on its
technical merits. The tax benefit of a qualifying position is the largest
amount
of tax benefit that is greater than 50 percent likely of being realized
upon
ultimate settlement with a taxing authority having full knowledge of all
relevant information. FIN 48 is effective for fiscal years beginning after
December 15, 2006. We are currently evaluating the impact that adopting
FIN 48
will have and expect an impact to operations and equity of approximately
$40.0
million, after minority interest.
In
March
of 2006, the FASB issued FASB Staff Position (“FSP”) 85-4-1, “Accounting for
Life Settlement Contracts by Third-Party Investors.” A life settlement contract
for purposes of FSP 85-4-1 is a contract between the owner of a life insurance
policy (the “policy owner”) and a third-party investor (“investor”). The
previous accounting guidance, FASB Technical Bulletin (“FTB”) No. 85-4,
“Accounting for Purchases of Life Insurance”, required the purchaser of life
insurance contracts to account for the life insurance contract at its cash
surrender value. Because life insurance contracts are purchased in the
secondary
market at amounts in excess of the policies’ cash surrender values, the
application of guidance in FTB 85-4 created a loss upon acquisition of
the
policy. FSP 85-4-1 provides initial and subsequent measurement guidance
and
financial statement presentation and disclosure guidance for investments
by
third-party investors in life settlement contracts. FSP 85-4-1 allows an
investor to elect to account for its investments in life settlement contracts
using either the investment method or the fair value method. The election
shall
be made on an instrument-by-instrument basis and is irrevocable. FSP 85-4-1
is
effective for fiscal years beginning after June 15, 2006. CNA has elected
to
account for its investment in life settlement contracts using the fair
value
method and the initial expected impact upon adoption under the fair value
method
will be an increase to retained earnings as of January 1, 2007 of approximately
$34.0 million.
In
September 2005, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position
(“SOP”)
05-01, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in
Connection with Modifications or Exchanges of Insurance Contracts.” SOP 05-01
provides guidance on accounting by insurance enterprises for deferred
acquisition costs on internal replacements of insurance and investment
contracts
other than those specifically described in SFAS No. 97, “Accounting and
Reporting by Insurance Enterprises for Certain Long-Duration Contracts
and for
Realized Gains and Losses from the Sale of Investments.” SOP 05-01 defines an
internal replacement as a modification in product benefits, features, rights,
or
coverages that occurs by the exchange of a contract for a new contract,
or by
amendment, endorsement, or rider to a contract, or by the election of a
feature
or coverage within a contract. SOP 05-01 is effective for internal replacements
occurring in fiscal years beginning after December 15, 2006. Adoption of
SOP
05-01 is not expected to have a material impact on our results of operations
or
financial condition.
FORWARD-LOOKING
STATEMENTS DISCLAIMER
Investors
are cautioned that certain statements contained in this document as well
as some
statements in periodic press releases and some oral statements made by
our
officials and our subsidiaries during presentations about us, are
“forward-looking” statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the “Act”). Forward-looking statements include,
without limitation, any statement that may project, indicate or imply future
results, events, performance or achievements, and may contain the words
“expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “will be,”
“will continue,” “will likely result,” and similar expressions. In addition, any
statement concerning
future financial performance (including future revenues, earnings or growth
rates), ongoing business
strategies or prospects, and possible actions taken by us or our subsidiaries,
which may be provided by management are also forward-looking statements
as
defined by the Act.
Forward-looking
statements are based on current expectations and projections about future
events
and are inherently subject to a variety of risks and uncertainties, many
of
which are beyond our control, that could cause actual results to differ
materially from those anticipated or projected. These risks and uncertainties
include, among others:
Risks
and uncertainties primarily affecting us and our insurance
subsidiaries
|
·
|
the
impact of competitive products, policies and pricing and the
competitive
environment in which CNA operates, including changes in CNA’s book of
business;
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Forward-Looking
Statements Disclaimer -
(Continued)
|
|
·
|
product
and policy availability and demand and market responses, including
the
level of CNA’s ability to obtain rate increases and decline or non-renew
underpriced accounts, to achieve premium targets and profitability
and to
realize growth and retention
estimates;
|
|
·
|
development
of claims and the impact on loss reserves, including changes
in claim
settlement policies;
|
|
·
|
the
performance of reinsurance companies under reinsurance contracts
with
CNA;
|
|
·
|
the
effects upon insurance markets and upon industry business practices
and
relationships of current litigation, investigations and regulatory
activity by the New York State Attorney General’s office and other
authorities concerning contingent commission arrangements with
brokers and
bid solicitation activities;
|
|
·
|
legal
and regulatory activities with respect to certain non-traditional
and
finite-risk insurance products, and possible resulting changes
in
accounting and financial reporting in relation to such products,
including
our restatement of financial results in May of 2005 and CNA’s relationship
with an affiliate, Accord Re Ltd., as disclosed in connection
with that
restatement;
|
|
·
|
regulatory
limitations, impositions and restrictions upon CNA, including
the effects
of assessments and other surcharges for guaranty funds and second-injury
funds and other mandatory pooling
arrangements;
|
|
·
|
weather
and other natural physical events, including the severity and
frequency of
storms, hail, snowfall and other winter conditions, as well as
of natural
disasters such as hurricanes and earthquakes, as well as climate
change,
including effects on weather patterns, greenhouse gases, sea,
land and air
temperatures, sea levels, rain and
snow;
|
|
·
|
man-made
disasters, including the possible occurrence of terrorist attacks
and the
effect of the absence or insufficiency of applicable terrorism
legislation
on coverages;
|
|
·
|
the
unpredictability of the nature, targets, severity or frequency
of
potential terrorist events, as well as the uncertainty as to
CNA’s ability
to contain its terrorism exposure effectively, notwithstanding
the
extension until 2007 of the Terrorism Risk Insurance Act of
2002;
|
|
·
|
the
occurrence of epidemics;
|
|
·
|
exposure
to liabilities due to claims made by insureds and others relating
to
asbestos remediation and health-based asbestos impairments, as
well as
exposure to liabilities for environmental pollution, mass tort
and
construction defect claims and exposure to liabilities due to
claims made
by insureds and others relating to lead-based
paint;
|
|
·
|
whether
a national privately financed trust to replace litigation of
asbestos
claims with payments to claimants from the trust will be established
or
approved through federal legislation, or, if established and
approved,
whether it will contain funding requirements in excess of CNA’s
established loss reserves or carried loss
reserves;
|
|
·
|
the
sufficiency of CNA’s loss reserves and the possibility of future increases
in reserves:
|
|
·
|
regulatory
limitations and restrictions, including limitations upon CNA’s ability to
receive dividends from its insurance subsidiaries imposed by
state
regulatory agencies and minimum risk-based capital standards
established
by the National Association of Insurance
Commissioners;
|
|
·
|
the
risks and uncertainties associated with CNA’s loss reserves as outlined in
the Critical Accounting Estimates, Reserves - Estimates and Uncertainties
section of this MD&A;
|
|
·
|
the
level of success in integrating acquired businesses and operations,
and in
consolidating, or selling existing
ones;
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Forward-Looking
Statements Disclaimer -
(Continued)
|
|
·
|
the
possibility of further changes in CNA’s ratings by ratings agencies,
including the inability to access certain markets or distribution
channels, and the required collateralization of future payment
obligations
as a result of such changes, and changes in rating agency policies
and
practices;
|
|
·
|
the
effects of corporate bankruptcies and accounting errors, such
as Enron and
WorldCom, on capital markets and on the markets for directors
and officers
and errors and omissions coverages;
|
|
·
|
general
economic and business conditions, including inflationary pressures
on
medical care costs, construction costs and other economic sectors
that
increase the severity of claims;
|
|
·
|
the
effectiveness of current initiatives by claims management to
reduce the
loss and expense ratios through more efficacious claims handling
techniques; and
|
|
·
|
changes
in the composition of CNA’s operating
segments.
|
Risks
and uncertainties primarily affecting us and our tobacco
subsidiaries
|
·
|
health
concerns, claims and regulations relating to the use of tobacco
products
and exposure to environmental tobacco
smoke;
|
|
·
|
legislation,
including actual and potential excise tax increases, and the
effects of
tobacco litigation settlements on pricing and consumption
rates;
|
|
·
|
continued
intense competition from other cigarette manufacturers, including
significant levels of promotional activities and the presence
of a sizable
deep-discount category;
|
|
·
|
the
continuing decline in volume in the domestic cigarette
industry;
|
|
·
|
increasing
marketing and regulatory restrictions, governmental regulation
and
privately imposed smoking
restrictions;
|
|
·
|
litigation,
including risks associated with adverse jury and judicial determinations,
courts reaching conclusions at variance with the general understandings
of
applicable law, bonding requirements and the absence of adequate
appellate
remedies to get timely relief from any of the foregoing;
and
|
|
·
|
the
impact of each of the factors described under “Results of
Operations—Lorillard” in the MD&A portion of this
Report.
|
Risks
and uncertainties primarily affecting us and our energy
subsidiaries
|
·
|
the
impact of changes in demand for oil and natural gas and oil and
gas price
fluctuations on exploration and production
activity;
|
|
·
|
costs
and timing of rig upgrades;
|
|
·
|
utilization
levels and dayrates for offshore oil and gas drilling
rigs;
|
|
·
|
the
availability and cost of insurance, and the risks associated
with
self-insurance, covering drilling
rigs;
|
|
·
|
regulatory
issues affecting natural gas transmission, including ratemaking
and other
proceedings particularly affecting our gas transmission
subsidiaries;
|
|
·
|
the
ability of Texas Gas and Gulf South to renegotiate, extend or
replace
existing customer contracts on favorable
terms;
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Forward-Looking
Statements Disclaimer -
(Continued)
|
|
·
|
the
successful development and projected cost of planned expansion
projects
and investments; and
|
|
·
|
the
development of additional natural gas reserves and the completion
of
projected new liquefied natural gas facilities and expansion
of existing
facilities.
|
Risks
and uncertainties affecting us and our subsidiaries
generally
|
·
|
general
economic and business conditions;
|
|
·
|
changes
in financial markets (such as interest rate, credit, currency,
commodities
and equities markets) or in the value of specific
investments;
|
|
·
|
changes
in domestic and foreign political, social and economic conditions,
including the impact of the global war on terrorism, the war
in Iraq, the
future outbreak of hostilities and future acts of
terrorism;
|
|
·
|
the
economic effects of the September 11, 2001 terrorist attacks,
other
terrorist attacks and the war in
Iraq;
|
|
·
|
potential
changes in accounting policies by the Financial Accounting Standards
Board
(the “FASB”), the SEC or regulatory agencies for any of our subsidiaries’
industries which may cause us or our subsidiaries to revise their
financial accounting and/or disclosures in the future, and which
may
change the way analysts measure our and our subsidiaries business
or
financial performance;
|
|
·
|
the
impact of regulatory initiatives and compliance with governmental
regulations, judicial rulings and jury
verdicts;
|
|
·
|
the
results of financing efforts;
|
|
·
|
the
closing of any contemplated transactions and agreements;
and
|
|
·
|
the
outcome of pending litigation.
|
Developments
in any of these areas, which are more fully described elsewhere in this
Report,
could cause our results to differ materially from results that have been
or may
be anticipated or projected. Forward-looking statements speak only as of
the
date of this Report and we expressly disclaim any obligation or undertaking
to
update these statements to reflect any change in our expectations or beliefs
or
any change in events, conditions or circumstances on which any forward-looking
statement is based.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
|
SUPPLEMENTAL
FINANCIAL INFORMATION
The
following supplemental condensed financial information reflects the financial
position, results of operations and cash flows of Loews Corporation with
our
investments in CNA and Diamond Offshore accounted for on an equity basis
rather
than as consolidated subsidiaries. It does not purport to present our
financial position, results of operations
and cash
flows
in
accordance with generally accepted accounting principles because it does
not
comply with SFAS No. 94, “Consolidation of All Majority-Owned Subsidiaries.” We
believe, however, that this disaggregated financial data enhances an
understanding of the consolidated financial statements by providing users
with a
format that our management uses in assessing our performance. See Notes
1 and 24
of the Notes to Consolidated Financial Statements included in Item
8.
Condensed
Balance Sheet Information
Loews
Corporation and Subsidiaries
(Including
CNA and Diamond Offshore on the Equity Method)
December
31
|
|
2006
|
|
2005
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
997.4
|
|
$
|
1,006.9
|
|
Investments,
primarily short-term instruments
|
|
|
8,979.0
|
|
|
4,883.2
|
|
Total
current assets and investments in securities
|
|
|
9,976.4
|
|
|
5,890.1
|
|
Investment
in CNA
|
|
|
8,706.3
|
|
|
8,245.2
|
|
Investment
in Diamond Offshore
|
|
|
1,304.8
|
|
|
1,039.7
|
|
Property,
plant and equipment
|
|
|
2,606.6
|
|
|
2,469.3
|
|
Other
assets
|
|
|
560.2
|
|
|
602.4
|
|
Total
assets
|
|
$
|
23,154.3
|
|
$
|
18,246.7
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
2,996.4
|
|
$
|
2,047.8
|
|
Long-term
debt, less current maturities and unamortized discount
|
|
|
2,448.0
|
|
|
2,202.4
|
|
Other
liabilities
|
|
|
1,208.1
|
|
|
904.4
|
|
Total
liabilities
|
|
|
6,652.5
|
|
|
5,154.6
|
|
Shareholders’
equity
|
|
|
16,501.8
|
|
|
13,092.1
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
23,154.3
|
|
$
|
18,246.7
|
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Supplemental
Financial Information -
(Continued)
|
Condensed
Statements of Income Information
Loews
Corporation and Subsidiaries
(Including
CNA and Diamond Offshore on the Equity Method)
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured
products and other
|
|
$
|
4,957.9
|
|
$
|
4,684.4
|
|
$
|
4,304.7
|
|
Net
investment income
|
|
|
461.0
|
|
|
180.9
|
|
|
189.9
|
|
Investment
gains (losses)
|
|
|
8.6
|
|
|
(5.5
|
)
|
|
(11.8
|
)
|
Total
|
|
|
5,427.5
|
|
|
4,859.8
|
|
|
4,482.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of manufactured products sold and other
|
|
|
3,463.4
|
|
|
3,349.0
|
|
|
2,990.0
|
|
Interest
|
|
|
149.5
|
|
|
198.1
|
|
|
176.3
|
|
Income
tax expense
|
|
|
690.8
|
|
|
486.5
|
|
|
497.0
|
|
Total
|
|
|
4,303.7
|
|
|
4,033.6
|
|
|
3,663.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
1,123.8
|
|
|
826.2
|
|
|
819.5
|
|
Equity
in income (loss) of:
|
|
|
|
|
|
|
|
|
|
|
CNA
|
|
|
1,041.2
|
|
|
239.8
|
|
|
425.0
|
|
Diamond
Offshore
|
|
|
352.0
|
|
|
126.9
|
|
|
(9.2
|
)
|
Income
from continuing operations
|
|
|
2,517.0
|
|
|
1,192.9
|
|
|
1,235.3
|
|
Discontinued
operations, net
|
|
|
(25.7
|
)
|
|
18.7
|
|
|
(19.5
|
)
|
Net
income
|
|
$
|
2,491.3
|
|
$
|
1,211.6
|
|
$
|
1,215.8
|
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Supplemental
Financial Information -
(Continued)
|
Condensed
Statements of Cash Flow Information
Loews
Corporation and Subsidiaries
(Including
CNA and Diamond Offshore on the Equity Method)
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,491.3
|
|
$
|
1,211.6
|
|
$
|
1,215.8
|
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Undistributed
earnings of CNA and Diamond Offshore
|
|
|
(984.4
|
)
|
|
(359.1
|
)
|
|
(378.8
|
)
|
Investment
(gains) losses
|
|
|
(8.6
|
)
|
|
5.5
|
|
|
11.8
|
|
Other
|
|
|
253.1
|
|
|
184.7
|
|
|
81.5
|
|
Changes
in assets and liabilities-net
|
|
|
|
|
|
|
|
|
|
|
Trading
securities
|
|
|
(1,848.6
|
)
|
|
(290.6
|
)
|
|
105.8
|
|
Other-net
|
|
|
(109.5
|
)
|
|
136.9
|
|
|
(37.7
|
)
|
Total
|
|
|
(206.7
|
)
|
|
889.0
|
|
|
998.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in investments
|
|
|
(1,690.7
|
)
|
|
(261.5
|
)
|
|
(361.5
|
)
|
Change
in collateral on loaned securities
|
|
|
750.6
|
|
|
|
|
|
|
|
Redemption
of CNA preferred stock
|
|
|
750.0
|
|
|
|
|
|
|
|
Purchase
of CNA common stock
|
|
|
(264.5
|
)
|
|
|
|
|
|
|
Acquisition
of Gas Pipelines-net of cash
|
|
|
|
|
|
|
|
|
(1,111.4
|
)
|
Other
|
|
|
(238.1
|
)
|
|
(116.0
|
)
|
|
(101.4
|
)
|
Net
cash flow investing activities - continuing operations
|
|
|
(692.7
|
)
|
|
(377.5
|
)
|
|
(1,574.3
|
)
|
Net
cash flow investing activities - discontinued operations
|
|
|
|
|
|
8.4
|
|
|
|
|
Net
cash flow investing activities - total
|
|
|
(692.7
|
)
|
|
(369.1
|
)
|
|
(1,574.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid to shareholders
|
|
|
(307.7
|
)
|
|
(239.9
|
)
|
|
(216.8
|
)
|
Dividends
paid to minority interests
|
|
|
(19.8
|
)
|
|
|
|
|
|
|
Purchases
of treasury shares
|
|
|
(509.8
|
)
|
|
|
|
|
|
|
Increase
(decrease) in long-term debt-net
|
|
|
(97.4
|
)
|
|
(1,025.6
|
)
|
|
555.8
|
|
Issuance
of common stock
|
|
|
1,641.8
|
|
|
432.5
|
|
|
287.8
|
|
Proceeds
from subsidiary stock offering
|
|
|
195.2
|
|
|
271.4
|
|
|
|
|
Excess
tax benefits from share-based payment arrangements
|
|
|
4.9
|
|
|
|
|
|
|
|
Total
|
|
|
907.2
|
|
|
(561.6
|
)
|
|
626.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
7.8
|
|
|
(41.7
|
)
|
|
50.9
|
|
Net
cash transactions from:
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations to discontinued operations
|
|
|
|
|
|
8.4
|
|
|
|
|
Discontinued
operations to continuing operations
|
|
|
|
|
|
(8.4
|
)
|
|
|
|
Cash,
beginning of year
|
|
|
31.8
|
|
|
73.5
|
|
|
22.6
|
|
Cash,
end of year
|
|
$
|
39.6
|
|
$
|
31.8
|
|
$
|
73.5
|
|
Item
7A.
|
Quantitative
and Qualitative Disclosures about Market
Risk.
|
We
are a
large diversified financial services company. As such, we and our subsidiaries
have significant amounts of financial instruments that involve market risk.
Our
measure of market risk exposure represents an estimate of the change in
fair
value of our financial instruments. Changes in the trading portfolio are
recognized in the Consolidated Statements of Income. Market risk exposure
is
presented for each class of financial instrument held by us at December
31,
assuming immediate adverse market movements of the magnitude described
below. We
believe that the various rates of adverse market movements represent a
measure
of exposure to loss under hypothetically assumed adverse conditions. The
estimated market risk exposure represents the hypothetical loss to future
earnings and does not represent the maximum possible loss nor any expected
actual loss, even under adverse conditions, because actual adverse fluctuations
would likely differ. In addition, since our investment portfolio is subject
to
change based on our portfolio management strategy as well as in response
to
changes in the market, these estimates are not necessarily indicative of
the
actual results which may occur.
Exposure
to market risk is managed and monitored by senior management. Senior management
approves our overall investment strategy and has responsibility to ensure
that
the investment positions are consistent with that strategy with an acceptable
level of risk. We may manage risk by buying or selling instruments or entering
into offsetting positions.
Interest
Rate Risk - We have exposure to interest rate risk arising from changes
in the
level or volatility of interest rates. We attempt to mitigate our exposure
to
interest rate risk by utilizing instruments such as interest rate swaps,
interest rate caps, commitments to purchase securities, options, futures
and
forwards. We monitor our sensitivity to interest rate risk by evaluating
the
change in the value of our financial assets and liabilities due to fluctuations
in interest rates. The evaluation is performed by applying an instantaneous
change in interest rates by varying magnitudes on a static balance sheet
to
determine the effect such a change in rates would have on the recorded
market
value of our investments and the resulting effect on shareholders’ equity. The
analysis presents the sensitivity of the market value of our financial
instruments to selected changes in market rates and prices which we believe
are
reasonably possible over a one-year period.
The
sensitivity analysis estimates the change in the market value of our interest
sensitive assets and liabilities that were held on December 31, 2006 and
2005
due to instantaneous parallel shifts in the yield curve of 100 basis points,
with all other variables held constant.
The
interest rates on certain types of assets and liabilities may fluctuate
in
advance of changes in market interest rates, while interest rates on other
types
may lag behind changes in market rates. Accordingly, the analysis may not
be
indicative of, is not intended to provide, and does not provide a precise
forecast of the effect of changes of market interest rates on our earnings
or
shareholders’ equity. Further, the computations do not contemplate any actions
we could undertake in response to changes in interest rates.
Our
debt
is
denominated in U.S. Dollars and has been primarily issued at fixed rates,
therefore, interest expense would not be impacted by interest rate shifts.
The
impact of a 100 basis point increase in interest rates on fixed rate debt
would
result in a decrease in market value of $559.9 million and $528.5 million
at
December 31, 2006 and 2005, respectively. The impact of a 100 basis point
decrease would result in an increase in market value of $352.9 million
and
$328.4 million at December 31, 2006 and 2005 respectively.
Equity
Price Risk - We have exposure to equity price risk as a result of our 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
or
indexes. Equity price risk was measured assuming an instantaneous 25% decrease
in the underlying reference price or index from its level at December 31,
2006
and 2005, with all other variables held constant.
Item
7A. Quantitative and Qualitative Disclosures about Market
Risk
|
|
Foreign
Exchange Rate Risk - Foreign exchange rate risk arises from the possibility
that
changes in foreign currency exchange rates will impact the value of financial
instruments. We have foreign exchange rate exposure when we buy or sell
foreign
currencies or financial instruments denominated in a foreign currency.
This
exposure is mitigated by our asset/liability matching strategy and through
the
use of futures for those instruments which are not matched. Our foreign
transactions are primarily denominated in Australian dollars, Canadian
dollars,
British pounds, Japanese yen and the European
Monetary Unit. The sensitivity analysis assumes an instantaneous 20% decrease
in
the foreign currency exchange
rates versus the U.S. dollar from their levels at December 31, 2006 and
2005,
with all other variables held constant.
Commodity
Price Risk - We have exposure to price risk as a result of our investments
in
commodities. Commodity price risk results from changes in the level or
volatility of commodity prices that impact instruments which derive their
value
from such commodities. Commodity price risk was measured assuming an
instantaneous increase in commodity prices of 20% from their levels at
December
31, 2006 and an instantaneous decrease in commodity prices of 20% from
their
levels at December 31, 2005.
Credit
Risk - We are exposed to credit risk which relates to the risk of loss
resulting
from the nonperformance by a customer of its contractual obligations. Boardwalk
Pipeline has exposure related to receivables for services provided, as
well as
volumes owed by customers for imbalances or gas lent by Boardwalk Pipeline
to
them generally under parking and lending services and no-notice services.
Boardwalk Pipeline maintains credit policies intended to minimize this
risk and
actively monitors these policies. Natural gas price volatility has increased
dramatically in recent years, which has materially increased Boardwalk
Pipeline’s credit risk related to gas loaned to its customers. As of December
31, 2006, the amount of gas loaned out was approximately 15.1 trillion
British
thermal units (“TBtu”) and, assuming an average market price during December
2006 of $6.81 per million British thermal units (“MMBtu”), the market value of
gas loaned out at December 31, 2006 would have been approximately $102.8
million. If any significant customer should have credit or financial problems
resulting in a delay or failure to repay the gas it owes Boardwalk Pipeline,
it
could have a material adverse effect on our financial condition, results
of
operations and cash flows.
Item
7A. Quantitative and Qualitative Disclosures about Market
Risk
|
|
The
following tables present our market risk by category (equity markets, interest
rates, foreign currency exchange rates and commodity prices) on the basis
of
those entered into for trading purposes and other than trading
purposes.
Trading
portfolio:
Category
of risk exposure:
|
|
Fair
Value Asset (Liability)
|
|
Market
Risk
|
|
December
31
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
(Amounts
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
markets (1):
|
|
|
|
|
|
|
|
|
|
Equity
securities (a)
|
|
$
|
685.5
|
|
$
|
441.8
|
|
$
|
(171.0
|
)
|
$
|
(110.0
|
)
|
Options - purchased
|
|
|
25.9
|
|
|
33.5
|
|
|
(1.0
|
)
|
|
(1.0
|
)
|
- written
|
|
|
(13.0
|
)
|
|
(9.1
|
)
|
|
9.0
|
|
|
2.0
|
|
Warrants
|
|
|
0.4
|
|
|
0.1
|
|
|
|
|
|
|
|
Short
sales
|
|
|
(61.9
|
)
|
|
(67.3
|
)
|
|
15.0
|
|
|
17.0
|
|
Limited
partnership investments
|
|
|
343.2
|
|
|
371.7
|
|
|
(27.0
|
)
|
|
(25.0
|
)
|
Interest
rate (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
- short
|
|
|
|
|
|
(78.6
|
)
|
|
|
|
|
(7.0
|
)
|
Futures
− long
|
|
|
|
|
|
|
|
|
(29.0
|
)
|
|
|
|
Futures
- short
|
|
|
|
|
|
|
|
|
21.0
|
|
|
(10.0
|
)
|
Interest
rate swaps − long
|
|
|
(0.5
|
)
|
|
|
|
|
(4.0
|
)
|
|
|
|
Interest
rate swaps − short
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
(2.0
|
)
|
Short
sales-foreign
|
|
|
|
|
|
(19.9
|
)
|
|
|
|
|
(2.0
|
)
|
Fixed
maturities
|
|
|
1,921.7
|
|
|
415.7
|
|
|
(38.0
|
)
|
|
3.0
|
|
Short-term
investments
|
|
|
4,385.5
|
|
|
367.7
|
|
|
|
|
|
|
|
Other
derivatives
|
|
|
2.2
|
|
|
0.1
|
|
|
9.0
|
|
|
(3.0
|
)
|
Commodities
(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options - purchased
|
|
|
0.5
|
|
|
0.5
|
|
|
(1.0
|
)
|
|
10.0
|
|
- written
|
|
|
(0.1
|
)
|
|
(0.7
|
)
|
|
1.0
|
|
|
(14.0
|
)
|
Note:
|
The
calculation of estimated market risk exposure is based on assumed
adverse
changes in the underlying reference price or index of (1) a
decrease in
equity prices of 25%, (2) an increase in interest rates of
100 basis
points in 2006 and a decrease in interest rates of 100 basis
points in
2005 and (3) an increase in commodity prices of 20% in 2006
and a decrease
in commodity prices of 20% in 2005. Adverse changes on options
which
differ from those presented above would not necessarily result
in a
proportionate change to the estimated market risk
exposure.
|
|
(a)
|
A
decrease in equity prices of 25% would result in market risk
amounting to
$(162.0) and $(255.0) at December 31, 2006 and 2005, respectively.
This
market risk would be offset by decreases in liabilities to customers
under
variable insurance contracts.
|
Item
7A. Quantitative and Qualitative Disclosures about Market
Risk
|
|
Other
than trading portfolio:
Category
of risk exposure:
|
|
Fair
Value Asset (Liability)
|
|
Market
Risk
|
|
December
31
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
(Amounts
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
markets (1):
|
|
|
|
|
|
|
|
|
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
General
accounts (a)
|
|
$
|
597.0
|
|
$
|
631.8
|
|
$
|
(149.0
|
)
|
$
|
(158.0
|
)
|
Separate
accounts
|
|
|
41.4
|
|
|
43.5
|
|
|
(10.0
|
)
|
|
(11.0
|
)
|
Limited
partnership investments
|
|
|
1,817.3
|
|
|
1,397.3
|
|
|
(143.0
|
)
|
|
(112.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities (a)(b)
|
|
|
35,648.0
|
|
|
32,965.5
|
|
|
(1,959.0
|
)
|
|
(1,897.0
|
)
|
Short-term
investments (a)
|
|
|
8,436.9
|
|
|
8,738.9
|
|
|
(5.0
|
)
|
|
(4.0
|
)
|
Other
invested assets
|
|
|
21.3
|
|
|
27.8
|
|
|
|
|
|
|
|
Other
derivative securities
|
|
|
4.6
|
|
|
3.6
|
|
|
190.0
|
|
|
66.0
|
|
Separate
accounts (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
433.5
|
|
|
466.1
|
|
|
(21.0
|
)
|
|
(23.0
|
)
|
Short-term
investments
|
|
|
21.4
|
|
|
36.2
|
|
|
|
|
|
|
|
Debt
|
|
|
(5,443.0
|
)
|
|
(5,530.0
|
)
|
|
|
|
|
|
|
________
Note:
|
The
calculation of estimated market risk exposure is based on assumed
adverse
changes in the underlying reference price or index of (1) a decrease
in
equity prices of 25% and (2) an increase in interest rates of
100 basis
points.
|
|
(a)
|
Certain
securities are denominated in foreign currencies. An assumed
20% decline
in the underlying exchange rates would result in an aggregate
foreign
currency exchange rate risk of $(283.0) and $(245.0) at December
31, 2006
and 2005, respectively.
|
|
(b)
|
Certain
fixed maturities positions include options embedded in convertible
debt
securities. A decrease in underlying equity prices of 25% would
result in
market risk amounting to $(227.0) and $(54.0) at December 31,
2006 and
2005, respectively.
|
Item
8.
|
Financial
Statements and Supplementary
Data.
|
Financial
Statements and Supplementary Data are comprised of the following
sections:
|
Page
|
|
No.
|
|
|
Consolidated
Balance Sheets
|
130
|
|
Consolidated
Statements of Income
|
132
|
|
Consolidated
Statements of Shareholders’ Equity
|
133
|
|
Consolidated
Statements of Cash Flows
|
134
|
|
Notes
to Consolidated Financial Statements:
|
136
|
|
1.
|
|
Summary
of Significant Accounting Policies
|
136
|
|
2.
|
|
Investments
|
145
|
|
3.
|
|
Fair
Value of Financial Instruments
|
151
|
|
4.
|
|
Derivative
Financial Instruments
|
152
|
|
5.
|
|
Earnings
Per Share
|
156
|
|
6.
|
|
Loews
and Carolina Group Consolidating Condensed Financial
Information
|
157
|
|
7.
|
|
Receivables
|
165
|
|
8.
|
|
Property,
Plant and Equipment
|
166
|
|
9.
|
|
Claim
and Claim Adjustment Expense Reserves
|
166
|
|
10.
|
|
Leases
|
179
|
|
11.
|
|
Income
Taxes
|
180
|
|
12.
|
|
Debt
|
182
|
|
13.
|
|
Comprehensive
Income (Loss)
|
185
|
|
14.
|
|
Significant
Transactions
|
185
|
|
15.
|
|
Restructuring
and Other Related Charges
|
188
|
|
16.
|
|
Statutory
Accounting Practices (Unaudited)
|
188
|
|
17.
|
|
Benefit
Plans
|
189
|
|
18.
|
|
Reinsurance
|
196
|
|
19.
|
|
Quarterly
Financial Data (Unaudited)
|
200
|
|
20.
|
|
Legal
Proceedings
|
201
|
|
|
|
|
Insurance
Related
|
201
|
|
|
|
|
Tobacco
Related
|
203
|
|
21.
|
|
Commitments
and Contingencies
|
211
|
|
22.
|
|
Discontinued
Operations
|
213
|
|
23.
|
|
Business
Segments
|
215
|
|
24.
|
|
Consolidating
Financial Information
|
218
|
|
25.
|
|
Subsequent
Event
|
224
|
|
Loews
Corporation and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31
|
|
2006
|
|
2005
|
|
(Dollar
amounts in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
(Notes 1, 2, 3 and 4):
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities, amortized cost of $36,852.6 and $32,759.0
|
|
$
|
37,569.7
|
|
$
|
33,381.2
|
|
|
|
|
|
|
|
|
|
Equity
securities, cost of $967.0 and $903.5
|
|
|
1,308.8
|
|
|
1,107.2
|
|
|
|
|
|
|
|
|
|
Limited
partnership investments
|
|
|
2,160.5
|
|
|
1,769.0
|
|
|
|
|
|
|
|
|
|
Other
investments
|
|
|
27.4
|
|
|
32.0
|
|
|
|
|
|
|
|
|
|
Short-term
investments
|
|
|
12,822.4
|
|
|
9,106.6
|
|
|
|
|
|
|
|
|
|
Total
investments
|
|
|
53,888.8
|
|
|
45,396.0
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
133.8
|
|
|
153.1
|
|
|
|
|
|
|
|
|
|
Receivables
(Notes 1 and 7)
|
|
|
13,027.3
|
|
|
15,543.9
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment (Notes 1 and 8)
|
|
|
5,501.3
|
|
|
4,951.6
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes (Note 11)
|
|
|
620.9
|
|
|
905.3
|
|
|
|
|
|
|
|
|
|
Goodwill
and other intangible assets (Note 1)
|
|
|
298.9
|
|
|
297.4
|
|
|
|
|
|
|
|
|
|
Other
assets (Notes 1, 14, 17 and 18)
|
|
|
1,716.5
|
|
|
1,909.6
|
|
|
|
|
|
|
|
|
|
Deferred
acquisition costs of insurance subsidiaries (Note 1)
|
|
|
1,190.4
|
|
|
1,197.4
|
|
|
|
|
|
|
|
|
|
Separate
account business (Notes 1, 3 and 4)
|
|
|
503.0
|
|
|
551.5
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
76,880.9
|
|
$
|
70,905.8
|
|
See
Notes to Consolidated Financial Statements.
Loews
Corporation and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31
|
|
2006
|
|
2005
|
|
(Dollar
amounts in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
reserves (Notes 1 and 9):
|
|
|
|
|
|
Claim
and claim adjustment expense
|
|
$
|
29,636.0
|
|
$
|
30,938.0
|
|
Future
policy benefits
|
|
|
6,644.7
|
|
|
6,297.2
|
|
Unearned
premiums
|
|
|
3,783.8
|
|
|
3,705.7
|
|
Policyholders’
funds
|
|
|
1,015.4
|
|
|
1,495.3
|
|
Total
insurance reserves
|
|
|
41,079.9
|
|
|
42,436.2
|
|
Payable
for securities purchased (Note 4)
|
|
|
1,046.7
|
|
|
401.7
|
|
Collateral
on loaned securities (Notes 1 and 2)
|
|
|
3,601.5
|
|
|
767.4
|
|
Short-term
debt (Notes 3 and 12)
|
|
|
4.6
|
|
|
598.2
|
|
Long-term
debt (Notes 3 and 12)
|
|
|
5,567.8
|
|
|
4,608.6
|
|
Reinsurance
balances payable (Notes 1, 14 and 18)
|
|
|
539.1
|
|
|
1,636.2
|
|
Other
liabilities (Notes 1, 3, 15 and 17)
|
|
|
5,140.2
|
|
|
4,755.0
|
|
Separate
account business (Notes 1, 3 and 4)
|
|
|
503.0
|
|
|
551.5
|
|
Total
liabilities
|
|
|
57,482.8
|
|
|
55,754.8
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
2,896.3
|
|
|
2,058.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingent liabilities
|
|
|
|
|
|
|
|
(Notes
1, 2, 4, 9, 10, 11, 12, 14, 15, 16, 17, 18, 20 and 21)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity (Notes 1, 2, 5, 12 and 13):
|
|
|
|
|
|
|
|
Preferred
stock, $0.10 par value:
|
|
|
|
|
|
|
|
Authorized
- 100,000,000 shares
|
|
|
|
|
|
|
|
Loews
common stock, $0.01 par value:
|
|
|
|
|
|
|
|
Authorized
- 1,800,000,000 shares
|
|
|
|
|
|
|
|
Issued
and outstanding - 544,203,457 and 557,540,667 shares
|
|
|
5.4
|
|
|
5.6
|
|
Carolina
Group stock, $0.01 par value:
|
|
|
|
|
|
|
|
Authorized
- 600,000,000 shares
|
|
|
|
|
|
|
|
Issued
- 108,665,806 and 78,531,678 shares
|
|
|
1.1
|
|
|
0.8
|
|
Additional
paid-in capital
|
|
|
4,017.6
|
|
|
2,417.9
|
|
Earnings
retained in the business
|
|
|
12,098.7
|
|
|
10,364.4
|
|
Accumulated
other comprehensive income
|
|
|
386.7
|
|
|
311.1
|
|
|
|
|
16,509.5
|
|
|
13,099.8
|
|
Less
treasury stock, at cost (340,000 shares of Carolina Group stock
as
of
|
|
|
|
|
|
|
|
December
31, 2006 and 2005)
|
|
|
7.7
|
|
|
7.7
|
|
Total
shareholders’ equity
|
|
|
16,501.8
|
|
|
13,092.1
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
76,880.9
|
|
$
|
70,905.8
|
|
See
Notes to Consolidated Financial Statements.
Loews
Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF INCOME
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
(Note 1):
|
|
|
|
|
|
|
|
Insurance
premiums (Note 18)
|
|
$
|
7,603.1
|
|
$
|
7,568.6
|
|
$
|
8,205.2
|
|
Net
investment income (Note 2)
|
|
|
2,911.1
|
|
|
2,098.8
|
|
|
1,875.3
|
|
Investment
gains (losses) (Note 2)
|
|
|
91.5
|
|
|
(13.2
|
)
|
|
(256.0
|
)
|
Gain
on issuance of subsidiary stock (Note 14)
|
|
|
9.0
|
|
|
|
|
|
|
|
Manufactured
products (including excise taxes of $698.5, $676.1
|
|
|
|
|
|
|
|
|
|
|
and
$658.1)
|
|
|
3,961.8
|
|
|
3,752.4
|
|
|
3,515.2
|
|
Other
|
|
|
3,334.5
|
|
|
2,611.2
|
|
|
1,897.2
|
|
Total
|
|
|
17,911.0
|
|
|
16,017.8
|
|
|
15,236.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
(Note 1):
|
|
|
|
|
|
|
|
|
|
|
Insurance
claims and policyholders’ benefits (Notes 9 and 18)
|
|
|
6,046.2
|
|
|
6,998.7
|
|
|
6,445.0
|
|
Amortization
of deferred acquisition costs
|
|
|
1,534.2
|
|
|
1,542.6
|
|
|
1,679.8
|
|
Cost
of manufactured products sold (Note 20)
|
|
|
2,261.7
|
|
|
2,202.3
|
|
|
2,045.4
|
|
Other
operating expenses
|
|
|
3,305.6
|
|
|
3,063.5
|
|
|
2,913.8
|
|
Restructuring
and other related charges (Note 15)
|
|
|
(12.9
|
)
|
|
|
|
|
|
|
Interest
|
|
|
304.1
|
|
|
364.2
|
|
|
324.1
|
|
Total
|
|
|
13,438.9
|
|
|
14,171.3
|
|
|
13,408.1
|
|
|
|
|
4,472.1
|
|
|
1,846.5
|
|
|
1,828.8
|
|
Income
tax expense (Note 11)
|
|
|
1,450.7
|
|
|
490.4
|
|
|
536.2
|
|
Minority
interest
|
|
|
504.4
|
|
|
163.2
|
|
|
57.3
|
|
Total
|
|
|
1,955.1
|
|
|
653.6
|
|
|
593.5
|
|
Income
from continuing operations
|
|
|
2,517.0
|
|
|
1,192.9
|
|
|
1,235.3
|
|
Discontinued
operations, net (Note 22)
|
|
|
(25.7
|
)
|
|
18.7
|
|
|
(19.5
|
)
|
Net
income
|
|
$
|
2,491.3
|
|
$
|
1,211.6
|
|
$
|
1,215.8
|
|
Net
income attributable to (Note 5):
|
|
|
|
|
|
|
|
Loews
common stock:
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
2,100.6
|
|
$
|
941.6
|
|
$
|
1,050.8
|
|
Discontinued
operations, net
|
|
|
(25.7
|
)
|
|
18.7
|
|
|
(19.5
|
)
|
Loews
common stock
|
|
|
2,074.9
|
|
|
960.3
|
|
|
1,031.3
|
|
Carolina
Group stock
|
|
|
416.4
|
|
|
251.3
|
|
|
184.5
|
|
Total
|
|
$
|
2,491.3
|
|
$
|
1,211.6
|
|
$
|
1,215.8
|
|
Basic
and diluted net income per Loews common share (Note
5):
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
3.80
|
|
$
|
1.69
|
|
$
|
1.89
|
|
Discontinued
operations, net
|
|
|
(0.05
|
)
|
|
0.03
|
|
|
(0.04
|
)
|
Net
income
|
|
$
|
3.75
|
|
$
|
1.72
|
|
$
|
1.85
|
|
Basic
and diluted net income per Carolina Group share (Note
5)
|
|
$
|
4.46
|
|
$
|
3.62
|
|
$
|
3.15
|
|
Basic
weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
Loews
common stock
|
|
|
552.68
|
|
|
557.10
|
|
|
556.50
|
|
Carolina
Group stock
|
|
|
93.37
|
|
|
69.40
|
|
|
58.49
|
|
Diluted
weighted average number of
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock
|
|
|
553.54
|
|
|
557.96
|
|
|
556.93
|
|
Carolina
Group stock
|
|
|
93.47
|
|
|
69.49
|
|
|
58.50
|
|
See
Notes to Consolidated Financial Statements.
Loews
Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
|
Comprehensive
Income
(Loss)
|
|
Loews
Common
Stock
|
|
Carolina
Group
Stock
|
|
Additional
Paid-in
Capital
|
|
Earnings
Retained
in
the
Business
|
|
Accumulated
Other
Comprehensive
Income
|
|
Common
Stock
Held
in
Treasury
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2004, as previously
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reported
|
|
|
|
|
$
|
185.4
|
|
$
|
0.6
|
|
$
|
1,513.7
|
|
$
|
8,393.7
|
|
$
|
769.5
|
|
$
|
(7.7
|
)
|
Par
value adjustment, Loews
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stock
|
|
|
|
|
|
(550.7
|
)
|
|
|
|
|
550.7
|
|
|
|
|
|
|
|
|
|
|
Three-for-one
stock split
|
|
|
|
|
|
370.9
|
|
|
|
|
|
(370.9
|
)
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2004 as
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
|
|
|
5.6
|
|
|
0.6
|
|
|
1,693.5
|
|
|
8,393.7
|
|
|
769.5
|
|
|
(7.7
|
)
|
Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,215.8
|
|
|
|
|
|
|
|
|
|
|
|
1,215.8
|
|
|
|
|
|
|
|
Other
comprehensive losses
|
|
|
(172.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(172.1
|
)
|
|
|
|
Comprehensive
income
|
|
$
|
1,043.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock, $0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(111.3
|
)
|
|
|
|
|
|
|
Carolina
Group stock, $1.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(105.5
|
)
|
|
|
|
|
|
|
Issuance
of Loews common stock
|
|
|
|
|
|
|
|
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Carolina Group stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note
6)
|
|
|
|
|
|
|
|
|
0.1
|
|
|
281.3
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
|
|
|
|
5.6
|
|
|
0.7
|
|
|
1,981.2
|
|
|
9,392.7
|
|
|
597.4
|
|
|
(7.7
|
)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,211.6
|
|
|
|
|
|
|
|
|
|
|
|
1,211.6
|
|
|
|
|
|
|
|
Other
comprehensive losses
|
|
|
(286.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(286.3
|
)
|
|
|
|
Comprehensive
income
|
|
$
|
925.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock, $0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(111.4
|
)
|
|
|
|
|
|
|
Carolina
Group stock, $1.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128.5
|
)
|
|
|
|
|
|
|
Issuance
of Loews common stock
|
|
|
|
|
|
|
|
|
|
|
|
15.5
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Carolina Group stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note
6)
|
|
|
|
|
|
|
|
|
0.1
|
|
|
421.2
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
|
|
|
|
5.6
|
|
|
0.8
|
|
|
2,417.9
|
|
|
10,364.4
|
|
|
311.1
|
|
|
(7.7
|
)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,491.3
|
|
|
|
|
|
|
|
|
|
|
|
2,491.3
|
|
|
|
|
|
|
|
Other
comprehensive gains
|
|
|
218.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218.7
|
|
|
|
|
Comprehensive
income
|
|
$
|
2,710.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
to initially apply
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS
No. 158 (Note 17)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(143.1
|
)
|
|
|
|
Dividends
paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock, $0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(131.1
|
)
|
|
|
|
|
|
|
Carolina
Group stock, $1.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176.6
|
)
|
|
|
|
|
|
|
Purchase
of Loews treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(509.8
|
)
|
Retirement
of treasury stock
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
(60.3
|
)
|
|
(449.3
|
)
|
|
|
|
|
509.8
|
|
Issuance
of Loews common stock
|
|
|
|
|
|
|
|
|
|
|
|
17.1
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Carolina Group stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note
6)
|
|
|
|
|
|
|
|
|
0.3
|
|
|
1,630.9
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
|
|
|
$
|
5.4
|
|
$
|
1.1
|
|
$
|
4,017.6
|
|
$
|
12,098.7
|
|
$
|
386.7
|
|
$
|
(7.7
|
)
|
See
Notes to Consolidated Financial Statements.
Loews
Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,491.3
|
|
$
|
1,211.6
|
|
$
|
1,215.8
|
|
Adjustments
to reconcile net income to net cash provided
|
|
|
|
|
|
|
|
|
|
|
(used)
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations
|
|
|
25.7
|
|
|
(18.7
|
)
|
|
19.5
|
|
Provision
for doubtful accounts and cash discounts
|
|
|
210.6
|
|
|
52.7
|
|
|
228.2
|
|
Investment
(gains) losses
|
|
|
(100.5
|
)
|
|
13.2
|
|
|
256.0
|
|
Undistributed
earnings
|
|
|
(205.8
|
)
|
|
(79.2
|
)
|
|
(42.2
|
)
|
Provision
for minority interest
|
|
|
504.4
|
|
|
163.2
|
|
|
57.3
|
|
Amortization
of investments
|
|
|
(407.5
|
)
|
|
(207.6
|
)
|
|
(21.5
|
)
|
Depreciation
and amortization
|
|
|
399.5
|
|
|
382.1
|
|
|
350.8
|
|
Provision
for deferred income taxes
|
|
|
254.5
|
|
|
(109.6
|
)
|
|
55.1
|
|
Other
non-cash items
|
|
|
1.8
|
|
|
(2.3
|
)
|
|
62.4
|
|
Changes
in operating assets and liabilities-net:
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
receivables
|
|
|
2,489.4
|
|
|
3,451.3
|
|
|
(971.7
|
)
|
Other
receivables
|
|
|
(461.1
|
)
|
|
315.1
|
|
|
156.3
|
|
Prepaid
reinsurance premiums
|
|
|
(2.9
|
)
|
|
789.3
|
|
|
233.7
|
|
Deferred
acquisition costs
|
|
|
7.0
|
|
|
70.7
|
|
|
193.6
|
|
Insurance
reserves and claims
|
|
|
(771.1
|
)
|
|
(942.3
|
)
|
|
1,075.4
|
|
Reinsurance
balances payable
|
|
|
(1,097.1
|
)
|
|
(1,344.6
|
)
|
|
(317.8
|
)
|
Other
liabilities
|
|
|
388.5
|
|
|
11.9
|
|
|
465.1
|
|
Trading
securities
|
|
|
(2,023.6
|
)
|
|
(125.7
|
)
|
|
13.1
|
|
Other,
net
|
|
|
22.6
|
|
|
(216.2
|
)
|
|
169.2
|
|
Net
cash flow operating activities - continuing operations
|
|
|
1,725.7
|
|
|
3,414.9
|
|
|
3,198.3
|
|
Net
cash flow operating activities - discontinued operations
|
|
|
(11.0
|
)
|
|
(47.8
|
)
|
|
(16.8
|
)
|
Net
cash flow operating activities - total
|
|
|
1,714.7
|
|
|
3,367.1
|
|
|
3,181.5
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of fixed maturities
|
|
|
(63,517.0
|
)
|
|
(80,805.2
|
)
|
|
(76,690.4
|
)
|
Proceeds
from sales of fixed maturities
|
|
|
52,413.4
|
|
|
68,771.8
|
|
|
60,229.9
|
|
Proceeds
from maturities of fixed maturities
|
|
|
9,090.1
|
|
|
11,298.8
|
|
|
9,257.3
|
|
Purchases
of equity securities
|
|
|
(351.8
|
)
|
|
(482.1
|
)
|
|
(386.8
|
)
|
Proceeds
from sales of equity securities
|
|
|
220.8
|
|
|
317.2
|
|
|
547.8
|
|
Purchases
of property and equipment
|
|
|
(934.6
|
)
|
|
(477.8
|
)
|
|
(267.0
|
)
|
Proceeds
from sales of property and equipment
|
|
|
24.0
|
|
|
85.0
|
|
|
52.7
|
|
Change
in collateral on loaned securities
|
|
|
2,834.1
|
|
|
(150.6
|
)
|
|
476.2
|
|
Change
in short-term investments
|
|
|
(2,272.5
|
)
|
|
(646.4
|
)
|
|
3,307.4
|
|
Sales
of businesses, net of cash
|
|
|
|
|
|
57.3
|
|
|
648.0
|
|
Change
in other investments
|
|
|
(179.3
|
)
|
|
229.2
|
|
|
(123.5
|
)
|
Acquisition
of Gas Pipelines, net of cash
|
|
|
|
|
|
|
|
|
(1,111.4
|
)
|
Net
cash flow investing activities - continuing operations
|
|
|
(2,672.8
|
)
|
|
(1,802.8
|
)
|
|
(4,059.8
|
)
|
Net
cash flow investing activities - discontinued operations
|
|
|
36.1
|
|
|
28.3
|
|
|
18.0
|
|
Net
cash flow investing activities - total
|
|
|
(2,636.7
|
)
|
|
(1,774.5
|
)
|
|
(4,041.8
|
)
|
Loews
Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid
|
|
$
|
(307.7
|
)
|
$
|
(239.9
|
)
|
$
|
(216.8
|
)
|
Dividends
paid to minority interests
|
|
|
(137.7
|
)
|
|
(22.0
|
)
|
|
(14.8
|
)
|
Purchases
of treasury shares
|
|
|
(509.8
|
)
|
|
|
|
|
|
|
Purchases
of treasury shares by subsidiaries
|
|
|
|
|
|
|
|
|
(17.6
|
)
|
Issuance
of common stock
|
|
|
1,641.8
|
|
|
432.5
|
|
|
287.8
|
|
Proceeds
from subsidiary stock offering
|
|
|
429.7
|
|
|
271.4
|
|
|
|
|
Principal
payments on debt
|
|
|
(730.2
|
)
|
|
(3,277.7
|
)
|
|
(606.0
|
)
|
Issuance
of debt
|
|
|
1,096.9
|
|
|
1,460.1
|
|
|
1,747.9
|
|
Receipts
of policyholder account balances on
|
|
|
|
|
|
|
|
|
|
|
investment
contracts
|
|
|
3.7
|
|
|
6.6
|
|
|
180.8
|
|
Withdrawals
of policyholder account balances
|
|
|
|
|
|
|
|
|
|
|
on
investment contracts
|
|
|
(588.9
|
)
|
|
(281.2
|
)
|
|
(479.4
|
)
|
Excess
tax benefits from share-based payment arrangements
|
|
|
6.7
|
|
|
|
|
|
|
|
Other
|
|
|
9.5
|
|
|
5.6
|
|
|
6.5
|
|
Net
cash flow financing activities - continuing operations
|
|
|
914.0
|
|
|
(1,644.6
|
)
|
|
888.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
(8.0
|
)
|
|
(52.0
|
)
|
|
28.1
|
|
Net
cash transactions from:
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations to discontinued operations
|
|
|
13.8
|
|
|
(34.3
|
)
|
|
12.2
|
|
Discontinued
operations to continuing operations
|
|
|
(13.8
|
)
|
|
34.3
|
|
|
(12.2
|
)
|
Cash,
beginning of year
|
|
|
182.0
|
|
|
234.0
|
|
|
205.9
|
|
Cash,
end of year
|
|
$
|
174.0
|
|
$
|
182.0
|
|
$
|
234.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of year:
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
133.8
|
|
$
|
153.1
|
|
$
|
219.9
|
|
Discontinued
operations
|
|
|
40.2
|
|
|
28.9
|
|
|
14.1
|
|
Total
|
|
$
|
174.0
|
|
$
|
182.0
|
|
$
|
234.0
|
|
See
Notes to Consolidated Financial Statements.
Loews
Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1. Summary of Significant Accounting Policies
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”), an 89% owned subsidiary); the production and sale of
cigarettes (Lorillard, Inc. (“Lorillard”), a wholly owned subsidiary); the
operation of interstate natural gas transmission pipeline systems (Boardwalk
Pipeline Partners, LP (“Boardwalk Pipeline”), an 80% owned subsidiary) the
operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling,
Inc.
(“Diamond Offshore”), a 51% owned subsidiary); the operation of hotels (Loews
Hotels Holding Corporation (“Loews Hotels”), a wholly owned subsidiary); and the
distribution and sale of watches and clocks (Bulova Corporation (“Bulova”), a
wholly owned subsidiary). Unless the context otherwise requires, the terms
“Company,” “Loews” and “Registrant” as used herein mean Loews Corporation
excluding its subsidiaries.
On
May 8,
2006, the Company effected a three-for-one stock split of Loews common stock
to
shareholders of record on April 24, 2006. On August 3, 2006, the Company’s
shareholders approved amendments to its certificate of incorporation increasing
the number of shares of Loews common stock authorized for issuance from 600
million to 1.8 billion shares and reducing the par value per share of Loews
common stock from $1.00 to $0.01 per share. All share and per share information
has been retroactively adjusted to reflect these events.
Principles
of consolidation - The consolidated financial statements include all significant
subsidiaries and all material intercompany accounts and transactions have
been
eliminated. The equity method of accounting is used for investments in
associated companies in which the Company generally has an interest of 20%
to
50%.
Accounting
estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
(“GAAP”) requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and the related
notes.
Actual results could differ from those estimates.
Accounting
changes - In
November of 2005, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) No. FAS 115-1 and FAS 124-1, “The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments,” as
applicable to debt and equity securities that are within the scope of Statement
of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain
Investments in Debt and Equity Securities” and equity securities that are
accounted for using the cost method specified in Accounting Principles Board
Opinion No. 18, “The Equity Method of Accounting for Investments in Common
Stock.” FSP 115-1 nullifies certain requirements of Emerging Issues Task Force
(“EITF”) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments,” which provided guidance on determining
whether an impairment is other-than-temporary. FSP 115-1 replaces guidance
set
forth in EITF No. 03-1 with references to existing other-than-temporary
impairment guidance and clarifies that an investor should recognize an
impairment loss no later than when the impairment is deemed
other-than-temporary, even if a decision to sell has not been made. FSP 115-1
carries forward the requirements in EITF No. 03-1 regarding required disclosures
in the financial statements and requires additional disclosure related to
factors considered in reaching the conclusion that the impairment is not
other-than-temporary. In addition, in periods subsequent to the recognition
of
an other-than-temporary impairment loss for debt securities, the discount
or
reduced premium would be amortized over the remaining life of the security
based
on future estimated cash flows. FSP 115-1 was effective for reporting periods
beginning after December 15, 2005 and was adopted by the Company as of January
1, 2006. Adoption of this standard increased income by approximately $3.0
million for the year ended December 31, 2006, related to the amortization
of
discount or reduced premium resulting from prior impairments. The Company
has
included the required additional disclosures in these financial
statements.
In
September of 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” This bulletin summarizes
the SEC staff’s views regarding the process of quantifying financial statement
misstatements. Implementation of SAB No. 108 did not have a material impact
on
the Company’s results of operations or equity.
Notes
to
Consolidated Financial Statements
Note
1. Summary of Significant Accounting Policies - (Continued)
In
September of 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158 requires
an employer to recognize the funded status of a defined benefit postretirement
plan in its statement of financial position and to recognize changes in that
funded status in the year in which the changes occur through comprehensive
income. The Company adopted SFAS No. 158 in December of 2006. Adoption of
the
pronouncement decreased equity by $143.1 million as of December 31, 2006.
See
Note 17 for additional information on the Company’s benefit plans.
Investments
- Investments in securities are carried as follows:
The
Company classifies its fixed maturity securities (bonds and redeemable preferred
stocks) and its equity securities held principally by insurance subsidiaries
as
either available-for-sale or trading, and as such, they are carried at fair
value. Changes
in fair value of trading securities are reported within net investment income.
The amortized cost of fixed maturity securities classified as available-for-sale
is adjusted for amortization of premiums and accretion of discounts to maturity,
which are included in net investment income. Changes in fair value related
to
available-for-sale securities are reported as a component of Other comprehensive
income in Shareholders’ equity. Investments are written down to fair value and
losses are recognized in the income statement when a decline in value is
determined to be other-than-temporary. See Note 2 for information related
to the
Company’s impairment charges.
For
asset-backed securities included in fixed maturity securities, the Company
recognizes income using a constant effective yield based on anticipated
prepayments and the estimated economic life of the securities. When estimates
of
prepayments change, the effective yield is recalculated to reflect actual
payments to date and anticipated future payments. The net investment in the
securities is adjusted to the amount that would have existed had the new
effective yield been applied since the acquisition of the securities. Such
adjustments are reflected in net investment income.
Real
estate investments are carried at the lower of cost or market value. These
items
are included in “Other investments” in the Consolidated Balance
Sheets.
Short-term
investments consist primarily of U.S. government securities, money market
funds
and commercial paper. These investments are generally carried at fair value,
which approximates amortized cost.
All
securities transactions are recorded on the trade date. The cost of securities
sold is generally determined by the identified certificate method.
The
Company’s limited partnership investments are recorded at fair value typically
reflecting a reporting lag of up to three months, with changes in fair value
reported in net investment income. Fair value of the Company’s limited
partnership investments represents the Company’s equity in the partnership’s net
assets as determined by the general partner. The carrying value of the Company’s
limited partnership investments was $2,160.5 million and $1,769.0 million
as of
December 31, 2006 and 2005, respectively. The majority of the limited
partnerships invest in a substantial number of securities that are readily
marketable. The Company is primarily a passive investor in such partnerships
and
does not have influence over the partnerships’ management, who are committed to
operate them according to established guidelines and strategies. These
strategies may include the use of leverage and hedging techniques that
potentially introduce more volatility and risk to the partnerships. In
accordance with FASB Interpretation No. (“FIN”) 46R, “Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51,” the Company consolidated
three limited partnerships, which were previously accounted for using the
equity
method.
Other
investments also include certain derivative securities. Investments in
derivative securities are carried at fair value with changes in fair value
reported as a component of investment gains or losses or other comprehensive
income, depending on their hedge designation. Changes in the fair value of
derivative securities which are not designated as hedges, are reported as
a
component of investment gains or losses in the Consolidated Statements of
Income. A derivative is typically defined as an instrument whose value is
“derived” from an underlying instrument, index or rate, has a notional amount,
requires little or no initial investment, and can be net settled. Derivatives
include, but are not limited to, the following types of investments: interest
rate swaps, interest rate caps and floors, put and call options, warrants,
futures, forwards, commitments to purchase securities, and combinations of
the
foregoing.
Derivatives embedded
within
non-derivative
instruments
(such
as call
options embedded
in
convertible
Notes
to
Consolidated Financial Statements
Note
1. Summary of Significant Accounting Policies - (Continued)
bonds)
must be split from the host instrument when the embedded derivative is not
clearly and closely related to the host instrument.
The
Company’s derivatives are reported as other invested assets or other
liabilities. Embedded derivative instruments subject to bifurcation are reported
together with the host contract, at fair value. If certain criteria are met,
a
derivative may be specifically designated as a hedge of exposures to changes
in
fair value, cash flows or foreign currency exchange rates. The accounting
for
changes in the fair value of a derivative depends on the intended use of
the
derivative, the nature of any hedge designation thereon and whether the
derivative was transacted in a designated trading portfolio.
The
Company’s accounting for changes in the fair value of derivative instruments is
as follows:
Nature
of Hedge Designation
|
Derivative’s
Change in Fair Value Reflected in
|
|
|
No
hedge designation
|
Investment
gains (losses).
|
Fair
value
|
Investment
gains (losses), along with the change in fair value of the hedged
asset or
liability that is attributable to the hedged risk.
|
Cash
flow
|
Other
comprehensive income (loss), with subsequent reclassification to
earnings
when the hedged transaction, asset or liability impacts
earnings.
|
Foreign
currency
|
Consistent
with fair value or cash flow above, depending on the nature of
the hedging
relationship.
|
The
Company formally documents all relationships between hedging instruments
and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedging transactions. The Company also formally assesses
(both at the hedge’s inception and on an ongoing basis) whether the derivatives
that are used in hedging transactions have been highly effective in offsetting
changes in fair value or cash flows of hedged items and whether those
derivatives may be expected to remain highly effective in future periods.
When
it is determined that a derivative for which hedge accounting has been
designated is not (or ceases to be) highly effective, the Company discontinues
hedge accounting prospectively.
Separate
account investments held in designated trading portfolios are carried at
fair
value with changes therein reflected in investment income. Hedge accounting
on
derivatives in these separate accounts is generally not applicable.
Securities
lending and repurchase activities - The Company lends securities to unrelated
parties, primarily major brokerage firms. Borrowers of these securities must
deposit collateral with the Company of at least 102% of the fair value of
the
securities loaned if the collateral is cash or securities. The Company maintains
effective control over all loaned securities and, therefore, continues to
report
such securities as Fixed maturity securities in the Consolidated Balance
Sheets.
Cash
collateral received on these transactions is invested in short-term investments
with an offsetting liability recognized for the obligation to return the
collateral. Non-cash collateral, such as securities or letters of credit,
received by the Company are not reflected as assets of the Company as there
exists no right to sell or re-pledge the collateral. The fair value of
collateral held and included in short-term investments was $3,601.5 million
and
$767.4 million at December 31, 2006 and 2005. The fair value of non-cash
collateral was $385.0 million and $138.0 million at December 31, 2006 and
2005.
Revenue
Recognition
Insurance
premiums on property and casualty and accident and health insurance contracts
are recognized in proportion to the underlying risk insured which principally
are earned ratably over the duration of the policies after deductions for
ceded
insurance premiums. The reserve for unearned premiums on these contracts
represents the portion of premiums written relating to the unexpired terms
of
coverage.
Notes
to
Consolidated Financial Statements
Note
1. Summary of Significant Accounting Policies - (Continued)
An
estimated allowance for doubtful accounts is recorded on the basis of periodic
evaluations of balances due currently or in the future from insureds, including
amounts due from insureds related to losses under high deductible policies,
management’s experience and current economic conditions.
Property
and casualty contracts that are retrospectively rated contain provisions
that
result in an adjustment to the initial policy premium depending on the contract
provisions and loss experience of the insured during the experience period.
For
such contracts, CNA estimates the amount of ultimate premiums that CNA may
earn
upon completion of the experience period and recognizes either an asset or
a
liability for the difference between the initial policy premium and the
estimated ultimate premium. CNA adjusts such estimated ultimate premium amounts
during the course of the experience period based on actual results to date.
The
resulting adjustment is recorded as either a reduction of or an increase
to the
earned premiums for the period.
Premiums
for life insurance products and annuities are recognized as revenue when
due
after deductions for ceded insurance premiums.
Revenue
from cigarette sales is recognized upon shipment of goods, when title and
risk
of loss passes to customers.
Revenue
from dayrate drilling contracts is recognized as services are performed.
In
connection with such drilling contracts, Diamond Offshore may receive lump-sum
fees for the mobilization of equipment. These fees are earned as services
are
performed over the initial term of the related drilling contracts. Absent
a
contract, mobilization costs are recognized currently. From
time
to time, Diamond Offshore may receive fees from its customers for capital
improvements to their rigs. Diamond Offshore defers such fees received and
recognizes these fees into revenue on a straight-line basis over the period
of
the related drilling contract. Diamond Offshore capitalizes the costs of
such
capital improvements and depreciates them over the estimated useful life
of the
improvement.
Revenues
from the transportation of gas are recognized in the period the service is
provided based on contractual terms and the related transported volumes.
Revenues from storage services are recognized over the term of the contract.
Texas Gas is subject to Federal Energy Regulatory Commission (“FERC”)
regulations and, accordingly, certain revenues collected may be subject to
possible refunds upon final orders in pending cases. An estimated refund
liability is recorded considering regulatory proceedings, advice of counsel
and
estimated total exposure.
Insurance
Operations
Claim
and
claim adjustment expense reserves ─ Claim and claim adjustment expense reserves,
except reserves for structured settlements not associated with asbestos and
environmental pollution and mass tort (“APMT”), workers’ compensation lifetime
claims, accident and health claims and certain claims associated with
discontinued operations, are not discounted and are based on 1) case basis
estimates for losses reported on direct business, adjusted in the aggregate
for
ultimate loss expectations; 2) estimates of incurred but not reported losses;
3)
estimates of losses on assumed reinsurance; 4) estimates of future expenses
to
be incurred in the settlement of claims; 5) estimates of salvage and subrogation
recoveries and 6) estimates of amounts due from insureds related to losses
under
high deductible policies. CNA management considers current conditions and
trends
as well as past CNA and industry experience in establishing these estimates.
The
effects of inflation, which can be significant, are implicitly considered
in the
reserving process and are part of the recorded reserve balance. Ceded claim
and
claim adjustment expense reserves are reported as a component of Reinsurance
receivables in the Consolidated Balance Sheets. See Note 22 for further
information on claim and claim adjustment expense reserves for discontinued
operations.
Claim
and
claim adjustment expense reserves are presented net of anticipated amounts
due
from insureds related to losses under high deductible policies of $2.5 billion
and $2.8 billion as of December 31, 2006 and 2005. A portion of these amounts
is
supported by collateral. CNA also has an allowance for uncollectible deductible
amounts, which is presented as a component of the allowance for doubtful
accounts included in the Insurance receivables on the Consolidated Balance
Sheets.
Structured
settlements have been negotiated for certain property and casualty insurance
claims. Structured settlements are agreements to provide fixed periodic
payments
to claimants. Certain structured settlements are funded
by
annuities purchased from Continental Assurance Company (“CAC”) for
which
the
related
annuity
Notes
to
Consolidated Financial Statements
Note
1. Summary of Significant Accounting Policies - (Continued)
obligations
are reported in future policy benefits reserves. Obligations for structured
settlements not funded by annuities are included in claim and claim adjustment
expense reserves and carried at present values determined using interest
rates
ranging from 4.6% to 7.5% at December 31, 2006 and 2005. At December 31,
2006
and 2005, the discounted reserves for unfunded structured settlements were
$814.0 million and $843.0 million, net of discount of $1,250.0 million and
$1,309.0 million.
Workers’
compensation lifetime claim reserves are calculated using mortality assumptions
determined through statutory regulation and economic factors. Accident and
health claim reserves are calculated using mortality and morbidity assumptions
based on Company and industry experience. Workers’ compensation lifetime claim
reserves and accident and health claim reserves are discounted at interest
rates
that range from 3.5% to 6.5% at December 31, 2006 and 2005. At December 31,
2006
and 2005, such discounted reserves totaled $1,284.0 million and $1,238.0
million, net of discount of $416.0 million and $430.0 million.
Future
policy benefits reserves ─ Reserves for long term care products are computed
using the net level premium method, which incorporates actuarial assumptions
as
to interest rates, mortality, morbidity, persistency, withdrawals and expenses.
Actuarial assumptions generally vary by plan, age at issue and policy duration,
and include a margin for adverse deviation. Interest rates range from 6.0%
to
8.6% at December 31, 2006 and 2005, and mortality, morbidity and withdrawal
assumptions are based on CNA and industry experience prevailing at the time
of
issue. Expense assumptions include the estimated effects of inflation and
expenses to be incurred beyond the premium paying period. The net reserves
for
traditional life insurance products (whole and term life products) including
interest-sensitive contracts were ceded on a 100% indemnity reinsurance basis
to
Swiss Re in connection with the sale of the individual life insurance business.
See Note 14 for further information.
Policyholders’
funds reserves ─ Policyholders’ funds reserves primarily include reserves for
investment contracts without life contingencies. For these contracts,
policyholder liabilities are equal to the accumulated policy account values,
which consist of an accumulation of deposit payments plus credited interest,
less withdrawals and amounts assessed through the end of the
period.
Guaranty
fund and other insurance-related assessments ─ Liabilities for guaranty fund and
other insurance-related assessments are accrued when an assessment is probable,
when it can be reasonably estimated, and when the event obligating the entity
to
pay an imposed or probable assessment has occurred. Liabilities for guaranty
funds and other insurance-related assessments are not discounted and are
included as part of Other liabilities in the Consolidated Balance Sheets.
As of
December 31, 2006 and 2005, the liability balances were $189.0 and $185.0
million. As of December 31, 2006 and 2005, included in other assets were
$7.0 million and $10.0 million of related assets for premium tax offsets.
The
related asset is limited to the amount that is able to be assessed on future
premium collections from business written or committed to be
written.
Reinsurance
─ Amounts recoverable from reinsurers are estimated in a manner consistent
with
claim and claim adjustment expense reserves or future policy benefits reserves
and are reported as receivables in the Consolidated Balance Sheets. The cost
of
reinsurance is primarily accounted for over the life of the underlying reinsured
policies using assumptions consistent with those used to account for the
underlying policies. The ceding of insurance does not discharge the primary
liability of CNA. An estimated allowance for doubtful accounts is recorded
on
the basis of periodic evaluations of balances due from reinsurers, reinsurer
solvency, management’s experience and current economic conditions. The expenses
incurred related to uncollectible reinsurance receivables are presented as
a
component of Insurance claims and policyholders’ benefits in the Consolidated
Statements of Income.
Reinsurance
contracts that do not effectively transfer the underlying economic risk of
loss
on policies written by CNA are recorded using the deposit method of accounting,
which requires that premium paid or received by the ceding company or assuming
company be accounted for as a deposit asset or liability. At December 31,
2006
and 2005, CNA had approximately $104.0 million and $171.0 million recorded
as
deposit assets and $71.0 million and $111.0 million recorded as deposit
liabilities.
Notes
to
Consolidated Financial Statements
Note
1. Summary of Significant Accounting Policies - (Continued)
Income
on
reinsurance contracts accounted for under the deposit method is recognized
using
an effective yield based on the anticipated timing of payments and the remaining
life of the contract. When the estimate of timing of payments changes, the
effective yield is recalculated to reflect actual payments to date and the
estimated timing of future payments. The deposit asset or liability is adjusted
to the amount that would have existed had the new effective yield been applied
since the inception of the contract. This adjustment is reflected in other
revenue or other operating expense as appropriate.
Participating
insurance ─ Policyholder dividends are accrued using an estimate of the amount
to be paid based on underlying contractual obligations under policies and
applicable state laws. When limitations exist on the amount of net income
from
participating life insurance contracts that may be distributed to shareholders,
the share of net income on those policies that cannot be distributed to
shareholders is excluded from stockholders' equity by a charge to operations
and
the establishment of a corresponding liability.
Deferred
acquisition costs ─ Acquisition costs include commissions, premium taxes and
certain underwriting and policy issuance costs which vary with and are related
primarily to the acquisition of business. Such costs related to property
and
casualty business are deferred and amortized ratably over the period the
related
premiums are earned.
Deferred
acquisition costs related to accident and health insurance are amortized
over
the premium-paying period of the related policies using assumptions consistent
with those used for computing future policy benefits reserves for such
contracts. Assumptions as to anticipated premiums are made at the date of
policy
issuance or acquisition and are consistently applied during the lives of
the
contracts. Deviations from estimated experience are included in results of
operations when they occur. For these contracts, the amortization period
is
typically the estimated life of the policy.
Anticipated
investment income is considered in the determination of the recoverability
of
deferred acquisition costs. Deferred acquisition costs are recorded net of
ceding commissions and other ceded acquisition costs. CNA evaluates deferred
acquisition costs for recoverability. Adjustments, if necessary, are recorded
in
current results of operations.
Investments
in life settlement contracts and related revenue recognition ─ CNA has purchased
investments in life settlement contracts. Under a life settlement contract,
CNA
obtains the rights of being the owner and beneficiary to an underlying life
insurance policy. The carrying value of each contract at purchase and at
the end
of each reporting period is equal to the cash surrender value of the policy.
Amounts paid to purchase these contracts that are in excess of the cash
surrender value, at the date of purchase, were expensed immediately. Periodic
maintenance costs, such as premiums, necessary to keep the underlying policy
inforce are expensed as incurred and are included in other operating expenses.
Revenue is recognized and included in Other revenue in the Consolidated
Statements of Income when the life insurance policy underlying the life
settlement contract matures. See the New Accounting Pronouncements Not Yet
Adopted section of this note for further discussion of FASB Staff Position
(“FSP”) 85-4-1, “Accounting for Life Settlement Contracts by Third-Party
Investors.”
Separate
Account Business ─ Separate account assets and liabilities represent contract
holder funds related to investment and annuity products, which are segregated
into accounts with specific underlying investment objectives. The assets
and
liabilities of these contracts are legally segregated and reported as assets
and
liabilities of the separate account business. Substantially all assets of
the
separate account business are carried at fair value. Separate account
liabilities are carried at contract values. Net income accruing to CNA related
to separate accounts is primarily included within Other revenue in the
Consolidated Statements of Income.
Tobacco
product inventories - These inventories, aggregating $182.9 million and $181.6
million at December 31, 2006 and 2005, respectively, are stated at the lower
of
cost or market, using the last-in, first-out (LIFO) method and primarily
consist
of leaf tobacco. If the average cost method of accounting had been used for
tobacco inventories instead of the LIFO method, such inventories would have
been
$156.4 million and $161.4 million higher at December 31, 2006 and 2005,
respectively.
Watch
and
clock inventories - These inventories, aggregating $70.3 million and $68.3
million at December 31, 2006 and 2005, respectively, are stated at the lower
of
cost or market, using the first-in, first-out (FIFO) method.
Notes
to
Consolidated Financial Statements
Note
1. Summary of Significant Accounting Policies - (Continued)
Goodwill
and other intangible assets - Goodwill and other intangible assets with
indefinite lives are annually tested for impairment. Goodwill represents
the
excess of purchase price over fair value of net assets of acquired entities.
Impairment losses, if any, are included in the Consolidated Statements of
Income.
Property,
plant and equipment - Property, plant and equipment is carried at cost less
accumulated depreciation. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the various classes
of
properties. Leaseholds and leasehold improvements are depreciated or amortized
over the terms of the related leases (including optional renewal periods
where
appropriate) or the estimated lives of improvements, if less than the lease
term.
The
principal service lives used in computing provisions for depreciation are
as
follows:
|
|
Years
|
|
|
|
|
|
Buildings
and building equipment
|
|
|
40
|
|
Building
fixtures
|
|
|
10
to 20
|
|
Offshore
drilling equipment
|
|
|
15
to 30
|
|
Pipeline
equipment
|
|
|
40
to 50
|
|
Machinery
and equipment
|
|
|
5
to 12
|
|
Hotel
equipment
|
|
|
4
to 12
|
|
Computer
equipment and software
|
|
|
3
to 5
|
|
Impairment
of long-lived assets - The Company reviews its long-lived assets for impairment
when changes in circumstances indicate that the carrying amount of an asset
may
not be recoverable. Long-lived assets and intangibles with finite lives,
under
certain circumstances, are reported at the lower of carrying amount or fair
value. Assets to be disposed of and assets not expected to provide any future
service potential to the Company are recorded at the lower of carrying amount
or
fair value less cost to sell.
Stock
option plans - In December of 2004, the FASB issued a complete replacement
of
SFAS No. 123, “Share-Based Payment” (“SFAS No. 123R”), which covers a wide range
of share-based compensation arrangements, including share options, restricted
share plans, performance-based awards, share appreciation rights, and employee
share purchase plans. SFAS No. 123R requires companies to use the fair value
method in accounting for employee stock options which results in compensation
expense recorded in the income statement. Compensation expense is measured
at
the grant date using an option-pricing model and is recognized over the service
period.
Effective
January 1, 2006, the Company adopted SFAS No. 123R using the modified
prospective transition method. The Company applied the transition method
in
calculating its pool of excess tax benefits available to absorb future tax
deficiencies as provided by FSP FAS 123(R)-3, “Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment Awards.” Adoption of SFAS
No. 123R decreased net income attributable to Loews common stock by $6.5
million
for the year ended December 31, 2006, or $0.01 per Loews common share. Net
income attributable to Carolina Group stock decreased by $0.3 million for
the
year ended December 31, 2006. There was no impact per Carolina Group share.
Several of the Company’s subsidiaries also maintain their own stock option
plans. The amounts reported above include the Company’s share of expense related
to its subsidiaries’ plans as well.
Prior
to
the adoption of SFAS No. 123R, the Company elected to follow Accounting
Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to
Employees” and related interpretations in accounting for its employee stock
options and awards. Under APB No. 25, no compensation expense was recognized
when the exercise prices of options equaled the fair value (market price)
of the
underlying stock on the date of grant. SFAS No. 123, “Accounting for Stock-Based
Compensation,” required the Company to disclose pro forma information regarding
option grants made to its employees. SFAS No. 123 specified certain valuation
techniques that produced estimated compensation charges for purposes of valuing
stock option grants. These amounts were not included in the Company’s
Consolidated Statements of Income, in accordance with APB No. 25. The pro
forma
effect of applying SFAS No. 123 included the Company’s share of expense related
to its subsidiaries’ plans as well. The Company’s pro forma net income and the
related basic and diluted income per Loews common and Carolina Group shares
would have been as follows:
Notes
to
Consolidated Financial Statements
Note
1. Summary of Significant Accounting Policies - (Continued)
Year
Ended December 31
|
|
2005
|
|
2004
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock:
|
|
|
|
|
|
|
|
Net
income as reported
|
|
$
|
960.3
|
|
$
|
1,031.3
|
|
Deduct:
Total stock-based employee compensation expense
|
|
|
|
|
|
|
|
determined
under the fair value based method, net
|
|
|
(5.4
|
)
|
|
(5.2
|
)
|
Pro
forma net income
|
|
$
|
954.9
|
|
$
|
1,026.1
|
|
|
|
|
|
|
|
|
|
Carolina
Group stock:
|
|
|
|
|
|
|
|
Net
income as reported
|
|
$
|
251.3
|
|
$
|
184.5
|
|
Deduct:
Total stock-based employee compensation expense
|
|
|
|
|
|
|
|
determined
under the fair value based method, net
|
|
|
(0.2
|
)
|
|
(0.1
|
)
|
Pro
forma net income
|
|
$
|
251.1
|
|
$
|
184.4
|
|
Basic
and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
1.72
|
|
$
|
1.85
|
|
Pro
forma
|
|
|
1.71
|
|
|
1.84
|
|
|
|
|
|
|
|
|
|
Carolina
Group stock:
|
|
|
|
|
|
|
|
As
reported
|
|
|
3.62
|
|
|
3.15
|
|
Pro
forma
|
|
|
3.62
|
|
|
3.15
|
|
Regulatory
accounting - The FERC regulates the operations of Texas Gas. SFAS No. 71,
“Accounting for the Effects of Certain Types of Regulation,” requires Texas Gas
to report assets and liabilities consistent with the economic effect of the
manner in which independent third-party regulators establish rates. Accordingly,
certain costs and benefits are capitalized as regulatory assets and liabilities
in order to provide for recovery from or refund to customers in future
periods.
Supplementary
cash flow information - Cash payments made for interest on long-term debt,
including capitalized interest and commitment fees, amounted to approximately
$351.7 million, $405.2 million and $295.7 million for the years ended December
31, 2006, 2005 and 2004, respectively. Cash payments (refunds) for federal,
foreign, state and local income taxes amounted to approximately $1,160.4
million, $504.2 million and $(73.7) million for the years ended December
31,
2006, 2005 and 2004, respectively.
New
accounting pronouncements not yet adopted - In
September of 2005, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (“SOP”)
05-01, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in
Connection with Modifications or Exchanges of Insurance Contracts.” SOP 05-01
provides guidance on accounting by insurance enterprises for deferred
acquisition costs on internal replacements of insurance and investment contracts
other than those specifically described in SFAS No. 97, “Accounting and
Reporting by Insurance Enterprises for Certain Long-Duration Contracts and
for
Realized Gains and Losses from the Sale of Investments.” SOP 05-01 defines an
internal replacement as a modification in product benefits, features, rights,
or
coverages that occurs by the exchange of a contract for a new contract, or
by
amendment, endorsement, or rider to a contract, or by the election of a feature
or coverage within a contract. SOP 05-01 is effective for internal replacements
occurring in fiscal years beginning after December 15, 2006. Adoption of
SOP
05-01 is not expected to have a material impact on the Company’s results of
operations or financial condition.
In
January of 2006, the FASB issued SFAS No.155, “Accounting for Certain Hybrid
Financial Instruments.” SFAS No. 155 amends SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.” SFAS No.
155
also resolves issues addressed in SFAS No. 133 Implementation Issue No.
D1,
“Application of Statement
Notes
to
Consolidated Financial Statements
Note
1. Summary of Significant Accounting Policies - (Continued)
133
to
Beneficial Interests in Securitized Financial Assets.” SFAS No. 155 eliminates
the exemption from applying SFAS No.133 to interests in securitized financial
assets so that similar instruments are accounted for similarly regardless
of the
form of the instruments. SFAS No.155 allows a preparer to elect fair value
measurement at acquisition, at issuance, or when a previously recognized
financial instrument is subject to a remeasurement (new basis) event, on
an
instrument-by-instrument basis, in cases in which a derivative would otherwise
have to be bifurcated. SFAS No. 155 is effective for all financial instruments
acquired or issued after the beginning of an entity’s first fiscal year that
begins after September 15, 2006. The fair value election provided for in
paragraph 4(c) of SFAS No. 155 may also be applied upon adoption of SFAS
No. 155
for hybrid financial instruments that had been bifurcated under paragraph
12 of
SFAS No. 133 prior to the adoption of this Statement. Earlier adoption is
permitted as of the beginning of an entity’s fiscal year, provided the entity
has not yet issued financial statements, including financial statements for
any
interim period for that fiscal year. Provisions of SFAS No. 155 may be applied
to instruments that an entity holds at the date of adoption on an
instrument-by-instrument basis. Adoption of this standard is not expected
to
have a material impact on the carrying value of securities held or acquired
subsequent to January 1, 2007.
In
March
of 2006, the FASB issued FSP 85-4-1, “Accounting for Life Settlement Contracts
by Third-Party Investors.” A life settlement contract for purposes of FSP 85-4-1
is a contract between the owner of a life insurance policy (the “policy owner”)
and a third-party investor (“investor”). The previous accounting guidance, FASB
Technical Bulletin (“FTB”) No. 85-4, “Accounting for Purchases of Life
Insurance”, required the purchaser of life insurance contracts to account for
the life insurance contract at its cash surrender value. Because life insurance
contracts are purchased in the secondary market at amounts in excess of the
policies’ cash surrender values, the application of guidance in FTB 85-4 created
a loss upon acquisition of the policy. FSP 85-4-1 provides initial and
subsequent measurement guidance and financial statement presentation and
disclosure guidance for investments by third-party investors in life settlement
contracts. FSP 85-4-1 allows an investor to elect to account for its investments
in life settlement contracts using either the investment method or the fair
value method. The election shall be made on an instrument-by-instrument basis
and is irrevocable. FSP 85-4-1 is effective for fiscal years beginning after
June 15, 2006. CNA has elected to account for its investment in life settlement
contracts using the fair value method and the initial expected impact upon
adoption under the fair value method will be an increase to retained earnings
as
of January 1, 2007 of approximately $34.0 million.
In
July
of 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109.” FIN 48
prescribes a comprehensive model for how a company should recognize, measure,
present, and disclose in its financial statements uncertain tax positions
that
the company has taken or expects to take on a tax return. FIN 48 states that
a
tax benefit from an uncertain position may be recognized only if it is “more
likely than not” that the position is sustainable, based on its technical
merits. The tax benefit of a qualifying position is the largest amount of
tax
benefit that is greater than 50 percent likely of being realized upon ultimate
settlement with a taxing authority having full knowledge of all relevant
information. FIN 48 is effective for fiscal years beginning after December
15,
2006. The Company is currently evaluating the impact that adopting FIN 48
will
have and expects an impact to operations and equity of approximately $40.0
million, after minority interest.
In
September of 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”
SFAS
No.
157 defines fair value, establishes a framework for measuring fair value
in
accordance with GAAP and expands disclosures about fair value measurements.
SFAS
No. 157 retains the exchange price notion in the definition of fair value
and
clarifies that the exchange price is the price in an orderly transaction
between
market participants to sell the asset or transfer the liability in the market
in
which the reporting entity would transact for the asset or liability. SFAS
No.
157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement and the fair value measurement should be determined
based on the assumptions that market participants would use in pricing the
asset
or liability. In addition, the price that would be paid to acquire an asset
or
received to assume a liability should be considered in determining fair value.
SFAS No. 157 expands disclosures surrounding the use of fair value to measure
assets and liabilities and specifically focuses on the sources used to measure
fair value. In instances of recurring use of fair value measures based on
management’s assumptions to set market pricing for the asset or liability
derived from available market data or selected best information, SFAS No.
157
requires separate disclosure of the effect on earnings for the period.
SFAS
No.
157 is effective for fiscal years beginning after November 15, 2007. The
Company
is currently evaluating the impact that adopting SFAS No. 157 will have on
its
results of operations and equity.
Notes
to
Consolidated Financial Statements
Note
1. Summary of Significant Accounting Policies - (Continued)
Reclassifications
- Certain amounts applicable to prior periods have been reclassified to conform
to the classifications followed in 2006.
The
amounts presented on the December 31, 2005 Consolidated Balance Sheet related
to
Receivables and Other liabilities have been corrected from $15,313.7 million
and
$4,524.8 million to $15,543.9 million and $4,755.0 million, to conform to
the
2006 presentation. The correction of $230.2 million relates to balances payable
to insureds that were previously reflected as a deduction from insurance
receivables and are currently reflected as liabilities. The balances are
principally related to amounts deposited with CNA by customers, such as amounts
related to the funding of deductible obligations.
Note
2. Investments
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
income consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities
|
|
$
|
1,860.6
|
|
$
|
1,644.4
|
|
$
|
1,593.1
|
|
Short-term
investments
|
|
|
373.2
|
|
|
191.0
|
|
|
71.8
|
|
Limited
partnerships
|
|
|
313.6
|
|
|
270.7
|
|
|
238.5
|
|
Equity
securities
|
|
|
28.8
|
|
|
30.4
|
|
|
18.4
|
|
Income
from trading portfolio
|
|
|
326.3
|
|
|
89.5
|
|
|
208.5
|
|
Interest
expense on funds withheld and other deposits
|
|
|
(68.1
|
)
|
|
(165.8
|
)
|
|
(261.1
|
)
|
Other
|
|
|
122.1
|
|
|
90.9
|
|
|
57.6
|
|
Total
investment income
|
|
|
2,956.5
|
|
|
2,151.1
|
|
|
1,926.8
|
|
Investment
expenses
|
|
|
(45.4
|
)
|
|
(52.3
|
)
|
|
(51.5
|
)
|
Net
investment income
|
|
$
|
2,911.1
|
|
$
|
2,098.8
|
|
$
|
1,875.3
|
|
Investment
gains (losses) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
$
|
0.9
|
|
$
|
(98.9
|
)
|
$
|
233.7
|
|
Equity
securities, including short positions
|
|
|
21.6
|
|
|
43.2
|
|
|
202.2
|
|
Derivative
instruments
|
|
|
18.5
|
|
|
49.1
|
|
|
(84.1
|
)
|
Short-term
investments
|
|
|
(6.0
|
)
|
|
(2.8
|
)
|
|
(1.5
|
)
|
Other,
including guaranteed separate account business (a)
|
|
|
56.5
|
|
|
(3.8
|
)
|
|
(606.3
|
)
|
Investment
gains (losses)
|
|
|
91.5
|
|
|
(13.2
|
)
|
|
(256.0
|
)
|
Gains
on issuance of subsidiary stock
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
100.5
|
|
|
(13.2
|
)
|
|
(256.0
|
)
|
Income
tax (expense) benefit
|
|
|
(23.5
|
)
|
|
1.2
|
|
|
98.1
|
|
Minority
interest
|
|
|
(8.5
|
)
|
|
1.2
|
|
|
13.3
|
|
Investment
gains (losses), net
|
|
$
|
68.5
|
|
$
|
(10.8
|
)
|
$
|
(144.6
|
)
|
(a)
|
Includes
a pretax loss of $618.6 ($352.9 after tax and minority interest)
related
to CNA’s sale of its individual life insurance business for the year ended
December 31, 2004. See Note 14.
|
Investment
securities are exposed to various risks, such as interest rate, market and
credit. Due to the level of risk associated with certain investment securities
and the level of uncertainty related to changes in the value of investment
securities, it is possible that changes in these risk factors in the near
term
could have an adverse material impact on the Company’s results of operations or
equity.
The
Company’s investment policies emphasize high credit quality and diversification
by industry, issuer and issue. Assets supporting interest rate sensitive
liabilities are segmented within the general account to facilitate
asset/liability duration management.
Realized
investment losses included $173.0 million,
$120.4 million
and $117.5 million of other-than-temporary impairment (“OTTI”) losses for the
years ended December 31, 2006, 2005 and 2004. The 2006, 2005 and 2004 OTTI
losses were recorded across various sectors. The increase in OTTI losses
for
2006 was primarily driven by an
Notes
to
Consolidated Financial Statements
Note
2. Investments - (Continued)
increase
in interest rate related OTTI losses on securities for which the Company
did not
assert an intent to hold until an anticipated recovery in value. The 2005
and
2004 OTTI losses included $47.0 million and $80.5 million related to loans
made
under a credit facility to a national contractor, that are classified as
fixed
maturity securities. See Note 21 for additional information on loans to the
national contractor.
The
amortized cost and market values of securities are as follows:
|
|
|
|
|
|
Gross
Unrealized Losses
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Less
than
|
|
Greater
than
|
|
Fair
|
|
December
31, 2006
|
|
Cost
|
|
Gains
|
|
12
Months
|
|
12
Months
|
|
Value
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government and obligations of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
government
agencies
|
|
$
|
5,055.6
|
|
$
|
86.2
|
|
$
|
2.6
|
|
$
|
1.6
|
|
$
|
5,137.6
|
|
Asset-backed
securities
|
|
|
13,822.8
|
|
|
27.7
|
|
|
20.8
|
|
|
151.0
|
|
|
13,678.7
|
|
States,
municipalities and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions-tax
exempt
|
|
|
4,915.2
|
|
|
236.9
|
|
|
1.2
|
|
|
4.6
|
|
|
5,146.3
|
|
Corporate
|
|
|
6,810.8
|
|
|
337.8
|
|
|
7.5
|
|
|
9.7
|
|
|
7,131.4
|
|
Other
debt
|
|
|
3,442.7
|
|
|
207.6
|
|
|
6.6
|
|
|
2.0
|
|
|
3,641.7
|
|
Redeemable
preferred stocks
|
|
|
885.0
|
|
|
27.8
|
|
|
0.5
|
|
|
|
|
|
912.3
|
|
Fixed
maturities available-for-sale
|
|
|
34,932.1
|
|
|
924.0
|
|
|
39.2
|
|
|
168.9
|
|
|
35,648.0
|
|
Fixed
maturity trading securities
|
|
|
1,920.5
|
|
|
6.0
|
|
|
4.4
|
|
|
0.4
|
|
|
1,921.7
|
|
Total
fixed maturities
|
|
|
36,852.6
|
|
|
930.0
|
|
|
43.6
|
|
|
169.3
|
|
|
37,569.7
|
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities available-for-sale
|
|
|
348.4
|
|
|
249.0
|
|
|
0.2
|
|
|
0.2
|
|
|
597.0
|
|
Equity
securities trading portfolio
|
|
|
618.6
|
|
|
111.6
|
|
|
10.4
|
|
|
8.0
|
|
|
711.8
|
|
Total
equity securities
|
|
|
967.0
|
|
|
360.6
|
|
|
10.6
|
|
|
8.2
|
|
|
1,308.8
|
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments available-for-sale
|
|
|
8,436.9
|
|
|
|
|
|
|
|
|
|
|
|
8,436.9
|
|
Short-term
investments trading portfolio
|
|
|
4,385.2
|
|
|
0.4
|
|
|
0.1
|
|
|
|
|
|
4,385.5
|
|
Total
short-term investments
|
|
|
12,822.1
|
|
|
0.4
|
|
|
0.1
|
|
|
−
|
|
|
12,822.4
|
|
Total
|
|
$
|
50,641.7
|
|
$
|
1,291.0
|
|
$
|
54.3
|
|
$
|
177.5
|
|
$
|
51,700.9
|
|
Notes
to
Consolidated Financial Statements
Note
2. Investments - (Continued)
|
|
|
|
|
|
Gross
Unrealized Losses
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Less
than
|
|
Greater
than
|
|
Fair
|
|
December
31, 2005
|
|
Cost
|
|
Gains
|
|
12
Months
|
|
12
Months
|
|
Value
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government and obligations of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
government
agencies
|
|
$
|
1,357.2
|
|
$
|
119.1
|
|
$
|
3.4
|
|
$
|
1.2
|
|
$
|
1,471.7
|
|
Asset-backed
securities
|
|
|
12,985.8
|
|
|
43.6
|
|
|
136.7
|
|
|
33.1
|
|
|
12,859.6
|
|
States,
municipalities and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions-tax
exempt
|
|
|
9,054.3
|
|
|
192.5
|
|
|
31.2
|
|
|
6.9
|
|
|
9,208.7
|
|
Corporate
|
|
|
5,905.7
|
|
|
322.2
|
|
|
51.9
|
|
|
11.0
|
|
|
6,165.0
|
|
Other
debt
|
|
|
2,830.3
|
|
|
233.9
|
|
|
17.9
|
|
|
2.3
|
|
|
3,044.0
|
|
Redeemable
preferred stocks
|
|
|
213.3
|
|
|
3.5
|
|
|
0.4
|
|
|
0.7
|
|
|
215.7
|
|
Options
embedded in convertible debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
Fixed
maturities available-for-sale
|
|
|
32,347.4
|
|
|
914.8
|
|
|
241.5
|
|
|
55.2
|
|
|
32,965.5
|
|
Fixed
maturity trading securities
|
|
|
411.6
|
|
|
6.7
|
|
|
1.5
|
|
|
1.1
|
|
|
415.7
|
|
Total
fixed maturities
|
|
|
32,759.0
|
|
|
921.5
|
|
|
243.0
|
|
|
56.3
|
|
|
33,381.2
|
|
Equity
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities available-for-sale
|
|
|
461.7
|
|
|
172.6
|
|
|
2.0
|
|
|
|
|
|
632.3
|
|
Equity
securities, trading portfolio
|
|
|
441.8
|
|
|
58.1
|
|
|
15.2
|
|
|
9.8
|
|
|
474.9
|
|
Total
equity securities
|
|
|
903.5
|
|
|
230.7
|
|
|
17.2
|
|
|
9.8
|
|
|
1,107.2
|
|
Short-term
investments available-for-sale
|
|
|
9,106.6
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,106.6
|
|
Total
|
|
$
|
42,769.1
|
|
$
|
1,152.2
|
|
$
|
260.2
|
|
$
|
66.1
|
|
$
|
43,595.0
|
|
The
following table summarizes fixed maturity and equity securities in an unrealized
loss position at December 31, 2006 and 2005, the aggregate fair value and
gross
unrealized loss by length of time those securities have been continuously
in an
unrealized loss position.
December
31
|
|
2006
|
|
2005
|
|
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
|
Estimated
|
|
Unrealized
|
|
Estimated
|
|
Unrealized
|
|
|
|
Fair
Value
|
|
Loss
|
|
Fair
Value
|
|
Loss
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities:
|
|
|
|
|
|
|
|
|
|
Investment
grade:
|
|
|
|
|
|
|
|
|
|
0-6
months
|
|
$
|
9,829.3
|
|
$
|
23.7
|
|
$
|
9,976.0
|
|
$
|
141.7
|
|
7-12
months
|
|
|
1,267.1
|
|
|
11.8
|
|
|
2,739.0
|
|
|
61.0
|
|
13-24
months
|
|
|
5,247.9
|
|
|
127.4
|
|
|
1,400.0
|
|
|
45.0
|
|
Greater
than 24 months
|
|
|
1,021.4
|
|
|
41.1
|
|
|
219.0
|
|
|
7.0
|
|
Total
investment grade
|
|
|
17,365.7
|
|
|
204.0
|
|
|
14,334.0
|
|
|
254.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment
grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6
months
|
|
|
509.0
|
|
|
2.1
|
|
|
632.0
|
|
|
29.0
|
|
7-12
months
|
|
|
87.3
|
|
|
1.5
|
|
|
118.0
|
|
|
10.0
|
|
13-24
months
|
|
|
23.9
|
|
|
0.5
|
|
|
122.0
|
|
|
3.0
|
|
Greater
than 24 months
|
|
|
2.3
|
|
|
|
|
|
2.0
|
|
|
|
|
Total
non-investment grade
|
|
|
622.5
|
|
|
4.1
|
|
|
874.0
|
|
|
42.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed maturity securities
|
|
|
17,988.2
|
|
|
208.1
|
|
|
15,208.0
|
|
|
296.7
|
|
Notes
to
Consolidated Financial Statements
Note
2. Investments - (Continued)
December
31
|
|
2006
|
|
2005
|
|
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
|
Estimated
|
|
Unrealized
|
|
Estimated
|
|
Unrealized
|
|
|
|
Fair
Value
|
|
Loss
|
|
Fair
Value
|
|
Loss
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
0-6
months
|
|
|
9.8
|
|
|
0.2
|
|
|
49.0
|
|
|
2.0
|
|
7-12
months
|
|
|
0.7
|
|
|
|
|
|
1.0
|
|
|
|
|
13-24
months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater
than 24 months
|
|
|
2.9
|
|
|
0.2
|
|
|
3.0
|
|
|
|
|
Total
equity securities
|
|
|
13.4
|
|
|
0.4
|
|
|
53.0
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed maturity and equity securities
|
|
$
|
18,001.6
|
|
$
|
208.5
|
|
$
|
15,261.0
|
|
$
|
298.7
|
|
An
investment is impaired if the fair value of the investment is less than its
cost
adjusted for accretion, amortization, previous OTTI and hedging, otherwise
defined as an unrealized loss. When an investment is impaired, the impairment
is
evaluated to determine whether it is temporary or
other-than-temporary.
A
significant judgment in the valuation of investments is the determination
of
when an OTTI has occurred. CNA follows a consistent and systematic process
for
determining and recording an OTTI. 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 analyzing watch list securities on
at
least a quarterly basis. The watch list includes individual securities that
fall
below certain thresholds or that exhibit evidence of OTTI indicators including,
but not limited to, a significant adverse change in the financial condition
and
near term prospects of the issuer or a significant adverse change in legal
factors, the business climate or credit ratings.
When
a
security is placed on the watch list, it is monitored for further market
value
changes and additional information related to the issuer’s financial condition.
The focus is on objective evidence that may influence the evaluation of OTTI
factors.
The
decision to record an OTTI incorporates both quantitative criteria and
qualitative information. The Impairment Committee considers a number of factors
including, but not limited to: (a) the length of time and the extent to which
the fair value has been less than book value, (b) the financial condition
and
near term prospects of the issuer, (c) the intent and ability of the Company
to
retain its investment for a period of time sufficient to allow for an
anticipated recovery in value, (d) whether the debtor is current on interest
and
principal payments and (e) general market conditions and industry or sector
specific factors.
The
Impairment Committee’s decision to record an OTTI loss is primarily based on
whether the security’s fair value is likely to recover to its book value in
light of all of the factors considered. For securities considered to be OTTI,
the security is adjusted to fair value and the resulting losses are recognized
in Investment gains (losses) on the Consolidated Statements of
Income.
At
December 31, 2006, the carrying value of available-for-sale fixed maturities
was
$35,648.0 million, representing 66.2% of the total investment portfolio.
The net
unrealized position associated with the available-for-sale fixed maturity
portfolio included $208.1 million in gross unrealized losses, consisting
of
asset-backed securities which represented 82.6%, corporate bonds which
represented 8.3%, municipal securities which represented 2.8%, and all other
fixed maturity securities which represented
6.3%. The gross unrealized loss for any single issuer was no greater than
0.1%
of the carrying value of the total available-for-sale fixed maturity portfolio.
The total available-for-sale fixed maturity portfolio gross unrealized losses
included 1,492 securities which were, in aggregate, approximately 1.0% below
amortized cost.
The
gross
unrealized losses on available-for-sale equity securities were less than
$1.0
million, including 105 securities which, in aggregate, were below cost by
approximately 3.0%.
Notes
to
Consolidated Financial Statements
Note
2. Investments - (Continued)
Given
the
current facts and circumstances, the Impairment Committee has determined
that
the securities presented in the above unrealized gain/loss tables were
temporarily impaired when evaluated at December 31, 2006 or December 31,
2005,
and therefore no related realized losses were recorded. A discussion of some
of
the factors reviewed in making that determination is presented below by major
security type. The unrealized loss related to any single issuer is not
considered to be significant.
Asset-Backed
Securities
The
unrealized losses on the Company’s investments in asset-backed securities were
caused primarily by a change in interest rates. This category includes
mortgage-backed securities guaranteed by an agency of the U.S. government.
There
were 477 agency mortgage-backed pass-through securities and 3 agency
collateralized mortgage obligations (“CMOs”) in an unrealized loss position as
of December 31, 2006. The aggregate severity of the unrealized loss on these
securities was approximately 3.0% of amortized cost. These securities do
not
tend to be influenced by the credit of the issuer but rather the characteristics
and projected principal payments of the underlying collateral.
The
remainder of the holdings in this category are corporate mortgage-backed
pass-through, CMOs and corporate asset-backed structured securities. The
holdings in these sectors include 493 securities in an unrealized loss position
with over 92.0% of these unrealized losses related to securities rated AAA.
The
aggregate severity of the unrealized loss was approximately 2.0% of amortized
cost. The contractual cash flows on the asset-backed structured securities
are
pass-through but may be structured into classes of preference. The structured
securities held are generally secured by over collateralization or default
protection provided by subordinated tranches. Within this category, securities
subject to EITF Issue No. 99-20, “Recognition of Interest Income and Impairment
on Purchased and Retained Beneficial Interests in Securitized Financial Assets,”
are monitored for adverse changes in cash flow projections. If there are
adverse
changes in cash flows the amount of accretable yield is prospectively adjusted
and an OTTI loss is recognized. As of December 31, 2006, there was no adverse
change in estimated cash flows noted for the EITF No. 99-20 securities, which
have an aggregate unrealized loss of $9.0 million and an aggregate severity
of
the unrealized loss of approximately 1.0% of amortized cost.
Because
the decline in fair value was primarily attributable to changes in interest
rates and not credit quality and because the Company has the ability and
intent
to hold those investments until an anticipated recovery of fair value, which
may
be maturity, the Company considers these investments to be temporarily impaired
at December 31, 2006.
Corporate
Securities
The
Company’s portfolio management objective for corporate bonds focuses on sector
and issuer exposures and value analysis within sectors. In order to maximize
investment objectives, corporate bonds are analyzed on a risk adjusted basis
compared to other opportunities that are available in the market. Trading
decisions may be made based on an issuer that may be overvalued in the Company’s
portfolio compared to a like issuer that may be undervalued in the market.
The
Company also monitors issuer exposure and broader industry sector exposures
and
may reduce exposures based on its current view of a specific issuer or
sector.
Of
the
unrealized losses in this category, approximately 81.0% relate to securities
rated as investment grade (rated BBB or higher). The total holdings in this
category are diversified across 10 industry sectors and 220 securities. The
aggregate severity of the unrealized loss was approximately 1.0% of amortized
cost. Within corporate bonds, the largest industry sectors were financial
and
consumer cyclical, which as a percentage of total gross unrealized losses
were
approximately 64.0% and 12.0% at December 31, 2006. The decline in fair value
is
primarily attributable to changes in interest rates and macro conditions
in
certain sectors that the market views as temporarily out of favor. Because
the
decline is not related to specific credit quality issues, and because the
Company has the ability and intent to hold those investments until an
anticipated recovery of fair value, which may be maturity, the Company considers
these investments to be temporarily impaired at December 31,
2006.
Notes
to
Consolidated Financial Statements
Note
2. Investments - (Continued)
The
following tables summarize available-for-sale fixed maturity securities by
contractual maturity at December 31, 2006 and 2005. 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.
December
31
|
|
2006
|
|
2005
|
|
|
|
Amortized
|
|
Estimated
|
|
Amortized
|
|
Estimated
|
|
|
|
Cost
|
|
Fair
Value
|
|
Cost
|
|
Fair
Value
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$
|
1,599.2
|
|
$
|
1,601.2
|
|
$
|
953.3
|
|
$
|
954.8
|
|
Due
after one year through five years
|
|
|
13,023.3
|
|
|
13,039.1
|
|
|
11,374.7
|
|
|
11,320.0
|
|
Due
after five years through ten years
|
|
|
9,554.6
|
|
|
9,618.8
|
|
|
6,176.1
|
|
|
6,280.4
|
|
Due
after ten years
|
|
|
10,755.0
|
|
|
11,388.9
|
|
|
13,843.3
|
|
|
14,410.3
|
|
Total
|
|
$
|
34,932.1
|
|
$
|
35,648.0
|
|
$
|
32,347.4
|
|
$
|
32,965.5
|
|
The
carrying value of fixed maturity investments that did not produce income
during
2006 and 2005 was $26.8 million and $42.2 million. At December 31, 2006 and
2005, no investments, other than investments in U.S. government treasury
and
U.S. government agency securities, respectively, exceeded 10.0% of shareholders’
equity.
Investment
Commitments
As
of
December 31, 2006 and 2005, the Company had committed approximately $109.0
million and $191.0 million to future capital calls from various third-party
limited partnership investments in exchange for an ownership interest in
the
related partnerships.
The
Company invests in multiple bank loan participations 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 settlement is made. As of December
31,
2006 and 2005, the Company had commitments to purchase $64.0 million and
$135.3
million and sell $23.7 million and $26.3 million of various bank loan
participations. When loan participation purchases are settled and recorded
they
may contain both funded and unfunded amounts. An unfunded loan represents
an
obligation by the Company to provide additional amounts under the terms of
the
loan participation. The funded portions are reflected on the Consolidated
Balance Sheets, while any unfunded amounts are not recorded until a draw
is made
under the loan facility. As of December 31, 2006 and December 31, 2005, the
Company had obligations on unfunded bank loan participations in the amount
of
$29.0 million and $21.0 million.
Investments
on Deposit
CNA
may
from time to time invest in securities that may be restricted in whole or
in
part. As of December 31, 2006 and 2005, CNA did not hold any significant
positions in investments whose sale was restricted.
Cash
and
securities with carrying values of approximately $2.5 billion and $2.4 billion
were deposited by CNA’s insurance subsidiaries under requirements of regulatory
authorities as of December 31, 2006 and 2005.
The
Company’s investments in limited partnerships contain withdrawal provisions that
typically require advanced written notice of up to 90 days for withdrawals.
The
carrying value of these investments, reported as a separate line item in
the
Consolidated Balance Sheets, is $2,160.5 million and $1,769.0 million as
of
December 31, 2006 and 2005.
Cash
and
securities with carrying values of approximately $11.0 million and $13.0
million
were deposited with financial institutions as collateral for letters of credit
as of December 31, 2006 and 2005. In addition, cash and securities were
deposited in trusts with financial institutions to secure reinsurance
obligations with various third parties. The carrying values of these deposits
were approximately $327.0 million and $356.0 million as of December 31, 2006
and
2005.
Notes
to
Consolidated Financial Statements
Note
3. Fair Value of Financial Instruments
December
31
|
|
2006
|
|
2005
|
|
|
|
Carrying
|
|
Estimated
|
|
Carrying
|
|
Estimated
|
|
|
|
Amount
|
|
Fair
Value
|
|
Amount
|
|
Fair
Value
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
Other
investments
|
|
$
|
12.0
|
|
$
|
12.0
|
|
$
|
3.0
|
|
$
|
3.0
|
|
Separate
account business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities securities
|
|
|
434.0
|
|
|
434.0
|
|
|
466.0
|
|
|
466.0
|
|
Equity
securities
|
|
|
41.0
|
|
|
41.0
|
|
|
44.0
|
|
|
44.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
deposits and annuity contracts
|
|
|
898.0
|
|
|
899.0
|
|
|
1,363.0
|
|
|
1,359.0
|
|
Short-term
debt
|
|
|
4.6
|
|
|
4.6
|
|
|
598.2
|
|
|
603.0
|
|
Long-term
debt
|
|
|
5,567.8
|
|
|
5,438.8
|
|
|
4,608.6
|
|
|
4,926.8
|
|
Separate
account business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
separate accounts
|
|
|
52.0
|
|
|
52.0
|
|
|
53.0
|
|
|
53.0
|
|
Other
|
|
|
448.0
|
|
|
448.0
|
|
|
491.0
|
|
|
491.0
|
|
In
cases
where quoted market prices are not available, fair values are estimated using
present value or other valuation techniques. These techniques are significantly
affected by management’s assumptions, including discount rates and estimates of
future cash flows. The estimates presented herein are not necessarily indicative
of the amounts that the Company could realize in a current market exchange.
The
amounts reported in the Consolidated Balance Sheets for fixed maturity
securities, equity securities, derivative instruments, short-term investments
and collateral on loaned securities are at fair value. As such, these financial
instruments are not shown in the table above. See Note 4 for the fair value
of
derivative instruments. Since the disclosure excludes certain financial
instruments and non-financial instruments such as real estate, deferred
acquisition costs and insurance reserves, the aggregate fair value amounts
cannot be summed to determine the underlying economic value of the
Company.
The
following methods and assumptions were used by the Company in estimating
its
fair value disclosures for financial instruments:
The
fair
values of fixed maturity securities and equity securities were based on quoted
market prices, where available. For securities not actively traded, fair
values
were estimated using values obtained from independent pricing services or
quoted
market prices of comparable instruments.
Other
investments consist of mortgage loans and notes receivable, policy loans,
investments in limited partnerships and various miscellaneous assets. Valuation
techniques to determine fair value of limited partnership investments, other
investments and other separate account assets consisted of discounting cash
flows, obtaining quoted market prices of the investments and comparing the
investments to similar instruments or to the comparable underlying assets
of the
investments.
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 businesses.
Fair
value of debt was based on 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.
Notes
to
Consolidated Financial Statements
Note
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) 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.
CNA
uses
derivatives in the normal course of business, primarily in an attempt to
reduce
its exposure to market risk (principally interest rate risk, equity stock
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). CNA’s principal objective under such risk strategies is to
achieve the desired reduction in economic risk, even if the position will
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.
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 in the Consolidated Balance Sheets.
The Company mitigates 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 arrangements with its derivative investment
counterparties depending on the amount of the exposure and the credit rating
of
the counterparty.
The
Company has exposure to economic losses due to interest rate risk arising
from
changes in the level or volatility of interest rates. The Company attempts
to mitigate
its
exposure to interest rate risk through portfolio management, which includes
rebalancing its existing portfolios of assets and liabilities, as well as
changing the characteristics of investments to be purchased or sold in the
future. 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 investment
contracts, or to hedge (on an economic basis) interest rate risks associated
with investments and variable rate debt. The Company has used these types
of
instruments as designated hedges against specific assets or liabilities on
an
infrequent basis.
The
Company is exposed 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. CNA uses derivatives in one of its separate
accounts to mitigate equity price risk associated with its indexed group
annuity
contracts by purchasing Standard & Poor’s 500 (“S&P 500”) index futures
contracts in a notional amount equal to the contract holder
liability.
Notes
to
Consolidated Financial Statements
Note
4. Derivative Financial Instruments - (Continued)
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 to modify the credit risk
inherent in certain investments. Credit default swaps involve a transfer
of
credit risk from one party to another in exchange for periodic payments.
The
Company infrequently designates these types of instruments as hedges against
specific assets.
Foreign
exchange rate 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, Canadian dollars, British pounds, Japanese
yen and the European Monetary Unit. The Company typically manages this risk
via
asset/liability matching and through the use of foreign currency futures
and
forwards. The Company has infrequently designated these types of instruments
as
hedges against specific assets or liabilities.
The
contractual or notional amounts for derivatives are used to calculate the
exchange of contractual payments under the agreements and are not representative
of the potential for gain or loss on these instruments. Interest rates, equity
prices, foreign currency exchange rates and commodity prices affect the fair
value of derivatives. The fair values generally represent the estimated amounts
that the Company would expect to receive or pay upon termination of the
contracts at the reporting date. Dealer quotes are available for substantially
all of the Company’s derivatives. For derivative instruments not actively
traded, fair values are estimated using values obtained from independent
pricing
services, costs to settle or quoted market prices of comparable
instruments.
The
Company is required to provide collateral for all exchange-traded futures
and
options contracts. These margin requirements are determined by the individual
exchanges based on the fair value of the open positions and are in the custody
of the exchange. Collateral may also be required for over-the-counter contracts
such as interest rate swaps, credit default swaps and currency forwards per
the
ISDA agreements in place. The fair value of collateral provided was $58.0
million at December 31, 2006 and consisted primarily of cash. The fair value
of
the collateral at December 31, 2005 was $66.0 million and consisted primarily
of
U.S. Treasury Bills, which the Company had access to subject to replacement
and
therefore remained recorded as a component of Short term investments on the
Consolidated Balance Sheets.
Notes
to
Consolidated Financial Statements
Note
4. Derivative Financial Instruments - (Continued)
|
|
Contractual/
|
|
Fair
Value
|
|
Recognized
|
|
|
|
Notional
|
|
Asset
|
|
Gain
|
|
December
31, 2006
|
|
Value
|
|
(Liability)
|
|
(Loss)
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
markets:
|
|
|
|
|
|
|
|
Options
- purchased
|
|
$
|
170.9
|
|
$
|
25.9
|
|
$
|
(16.5
|
)
|
-
written
|
|
|
235.6
|
|
|
(13.0
|
)
|
|
6.0
|
|
Index
futures - long
|
|
|
652.3
|
|
|
(2.5
|
)
|
|
66.4
|
|
-
short
|
|
|
14.3
|
|
|
|
|
|
(4.2
|
)
|
Equity
warrants
|
|
|
5.9
|
|
|
2.5
|
|
|
(0.2
|
)
|
Options
embedded in convertible debt securities
|
|
|
9.0
|
|
|
|
|
|
0.1
|
|
Separate
accounts - options written
|
|
|
1.0
|
|
|
|
|
|
0.4
|
|
Currency
forwards
- long
|
|
|
463.2
|
|
|
(2.2
|
)
|
|
(1.9
|
)
|
-
short
|
|
|
116.2
|
|
|
(0.5
|
)
|
|
(4.9
|
)
|
Interest
rate risk:
|
|
|
|
|
|
|
|
|
|
|
Commitments
to purchase government and municipal securities
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
|
|
|
|
|
|
1.8 |
|
Interest
rate swaps - long
|
|
|
4,959.8
|
|
|
(29.7
|
)
|
|
4.9
|
|
- short
|
|
|
|
|
|
|
|
|
13.9
|
|
Options
on government securities - short
|
|
|
|
|
|
|
|
|
1.4
|
|
Futures
- long
|
|
|
1,461.3
|
|
|
0.2
|
|
|
(3.3
|
)
|
-
short
|
|
|
1,771.9
|
|
|
(0.2
|
)
|
|
26.7
|
|
Gold
options - purchased
|
|
|
|
|
|
|
|
|
(1.1
|
)
|
-
written
|
|
|
|
|
|
|
|
|
1.2
|
|
Other
|
|
|
41.8
|
|
|
2.0
|
|
|
(8.2
|
)
|
Total
|
|
$
|
9,903.2
|
|
$
|
(17.5
|
)
|
$
|
82.5
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
markets:
|
|
|
|
|
|
|
|
Options
-
purchased
|
|
$
|
180.3
|
|
$
|
33.5
|
|
$
|
2.3
|
|
-
written
|
|
|
241.0
|
|
|
(9.1
|
)
|
|
4.9
|
|
Index
futures - long
|
|
|
1,019.7
|
|
|
|
|
|
24.0
|
|
-
short
|
|
|
3.9
|
|
|
|
|
|
(0.6
|
)
|
Equity
warrants
|
|
|
5.9
|
|
|
2.5
|
|
|
0.5
|
|
Options
embedded in convertible debt securities
|
|
|
12.0
|
|
|
0.8
|
|
|
(32.9
|
)
|
Separate
accounts - options written
|
|
|
7.0
|
|
|
(0.3
|
)
|
|
0.1
|
|
Currency
forwards - long
|
|
|
456.4
|
|
|
(0.7
|
)
|
|
(22.3
|
)
|
- short
|
|
|
217.2
|
|
|
1.8
|
|
|
12.0
|
|
Interest
rate risk:
|
|
|
|
|
|
|
|
|
|
|
Commitments
to purchase government and municipal securities
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
21.0 |
|
|
|
|
|
1.0 |
|
Interest
rate swaps - long
|
|
|
1,076.7
|
|
|
(7.6
|
)
|
|
37.8
|
|
- short
|
|
|
15.2
|
|
|
|
|
|
(1.7
|
)
|
Futures
-
long
|
|
|
633.4
|
|
|
|
|
|
1.8
|
|
-
short
|
|
|
1,643.9
|
|
|
|
|
|
(6.9
|
)
|
Gold
options
-
purchased
|
|
|
175.5
|
|
|
0.6
|
|
|
(3.3
|
)
|
-
written
|
|
|
342.4
|
|
|
(0.7
|
)
|
|
3.2
|
|
Other
|
|
|
44.0
|
|
|
|
|
|
0.5
|
|
Total
|
|
$
|
6,095.5
|
|
$
|
20.8
|
|
$
|
20.4
|
|
Notes
to
Consolidated Financial Statements
Note
4. Derivative Financial Instruments - (Continued)
|
|
Contractual/
|
|
Fair
Value
|
|
Recognized
|
|
|
|
Notional
|
|
Asset
|
|
Gain
|
|
December
31, 2004
|
|
Value
|
|
(Liability)
|
|
(Loss)
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
markets:
|
|
|
|
|
|
|
|
Options
-
purchased
|
|
$
|
240.2
|
|
$
|
20.5
|
|
$
|
(8.2
|
)
|
-
written
|
|
|
200.1
|
|
|
(2.9
|
)
|
|
10.7
|
|
Index
futures - long
|
|
|
1,155.7
|
|
|
|
|
|
99.0
|
|
Equity
warrants
|
|
|
11.8
|
|
|
1.6
|
|
|
0.5
|
|
Options
embedded in convertible debt securities
|
|
|
700.8
|
|
|
234.3
|
|
|
23.7
|
|
Separate
accounts - options written
|
|
|
8.8
|
|
|
(0.1
|
)
|
|
0.8
|
|
Currency
forwards - long
|
|
|
497.2
|
|
|
6.0
|
|
|
32.9
|
|
- short
|
|
|
140.6
|
|
|
(3.6
|
)
|
|
(0.2
|
)
|
Interest
rate risk:
|
|
|
|
|
|
|
|
|
|
|
Commitments
to purchase government and municipal
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
25.0
|
|
|
|
|
|
(7.8
|
)
|
Interest
rate swaps
|
|
|
989.2
|
|
|
(513.4
|
)
|
|
18.4
|
|
Futures
-
long
|
|
|
715.0
|
|
|
|
|
|
(3.8
|
)
|
-
short
|
|
|
887.2
|
|
|
|
|
|
(107.3
|
)
|
Gold
options
-
purchased
|
|
|
116.0
|
|
|
0.2
|
|
|
(6.6
|
)
|
-
written
|
|
|
225.7
|
|
|
(0.1
|
)
|
|
5.8
|
|
Other
|
|
|
39.2
|
|
|
|
|
|
5.4
|
|
Total
|
|
$
|
5,952.5
|
|
$
|
(257.5
|
)
|
$
|
63.3
|
|
Options
embedded in convertible debt securities are classified as fixed maturity
securities in the Consolidated Balance Sheets, consistent with the host
instruments.
Fair
value hedges -
The
Company’s hedging activities primarily involve hedging risk exposures to
interest rate and foreign currency risks on various assets and liabilities.
The
Company periodically enters into interest rate swaps to modify the interest
rate
exposures of designated invested assets. Changes in the fair value of a
derivative that is highly effective and that is designated and qualifies
as a
fair value hedge, along with the changes in the fair value of the hedged
asset
that are attributable to the hedged risk, are recorded as Investment gains
(losses) in the Consolidated Statements of Income. For the year ended December
31, 2005, CNA recognized a net gain of $0.3 million, which represents the
ineffective portion of all fair value hedges. There was no gain or loss on
the
ineffective portion of the fair value hedges for the years ended December
31,
2006 and 2004, because CNA did not designate derivatives as fair value hedges
in
those years.
Cash
flow
hedges − Boardwalk Pipeline entered into a Treasury rate lock in October of 2006
for a notional amount of $250.0 million of principal to hedge the risk
attributable to changes in the risk-free component of forward 10-year interest
rates through the issuance of its $250.0 million senior unsecured notes,
which
was settled at the time of the closing of the debt offering in November of
2006.
Boardwalk Pipeline received $0.9 million from the counterparty as a result
of
the settlement of the instrument, which was recorded as a component of
Accumulated other comprehensive income and will be recognized in income as
a
reduction to interest expense on a straight-line basis over the 10-year term
of
the 5.9% senior notes.
In
August
of 2006, Boardwalk Pipeline entered into Treasury rate locks with two
counterparties each for a notional amount of $100.0 million of principal
to
hedge the risk attributable to changes in the risk-free component of forward
10-year interest rates through August 1, 2007. The reference rate on the
rate
locks is 5.0%.
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. These
sales resulted in proceeds of $53.8 million and $153.0 million with fair
value
liabilities of $61.9 million and $165.9 million at December 31, 2006 and
2005,
respectively. These positions are marked to market and investment gains or
losses are included in the Consolidated Statements of Income.
Notes
to
Consolidated Financial Statements
Note
5. Earnings Per Share
Companies
with complex capital structures are required to present basic and diluted
earnings per share. Basic earnings per share excludes dilution and is computed
by dividing net income attributable to each class of common stock by the
weighted average number of common shares of each class of common stock
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.
Certain
options were not included in the diluted weighted shares amount due to the
exercise price being greater than the average stock price for the respective
periods. The number of shares not included in the diluted computations is
as
follows:
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Loews
common stock
|
|
|
59,744
|
|
|
59,862
|
|
|
130,848
|
|
Carolina
Group stock
|
|
|
12,650
|
|
|
13,058
|
|
|
207,963
|
|
The
attribution of income to each class of common stock for the years ended December
31, 2006, 2005 and 2004, was as follows:
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
net income
|
|
$
|
2,491.3
|
|
$
|
1,211.6
|
|
$
|
1,215.8
|
|
Less
income attributable to Carolina Group stock
|
|
|
416.4
|
|
|
251.3
|
|
|
184.5
|
|
Income
attributable to Loews common stock
|
|
$
|
2,074.9
|
|
$
|
960.3
|
|
$
|
1,031.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Carolina
Group stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to Carolina Group stock
|
|
$
|
760.2
|
|
$
|
623.1
|
|
$
|
545.9
|
|
Weighted
average economic interest of the Carolina Group
|
|
|
54.78
|
%
|
|
40.34
|
%
|
|
33.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Income
attributable to Carolina Group stock
|
|
$
|
416.4
|
|
$
|
251.3
|
|
$
|
184.5
|
|
For
the
years ended December 31, 2006, 2005, and 2004 net income per common share
attributable to Loews common stock and Carolina Group stock assuming dilution
is
the same as basic net income per share because the impact of securities that
could potentially dilute basic net income per common share was insignificant
or
antidilutive for the periods presented.
Notes
to
Consolidated Financial Statements
Note
6. Loews and Carolina Group Consolidating Condensed Financial
Information
The
issuance of Carolina Group stock has resulted in a two class common stock
structure for the Company. Carolina Group stock, commonly called a tracking
stock, is intended to reflect the economic performance of a defined group
of
assets and liabilities of the Company referred to as the Carolina Group.
The
principal assets and liabilities attributed to the Carolina Group are the
Company’s 100% stock ownership interest in Lorillard, Inc.; notional, intergroup
debt owed by the Carolina Group to the Loews Group ($1.2 billion outstanding
at
December 31, 2006), bearing interest at the annual rate of 8.0% and, subject
to
optional prepayment, due December 31, 2021; and any and all liabilities,
costs
and expenses of the Company and Lorillard arising out of or related to tobacco
or tobacco-related businesses.
As
of
December 31, 2006, the outstanding Carolina Group stock represents a 62.34%
economic interest in the economic performance of the Carolina Group. The
Loews
Group consists of all of the Company’s assets and liabilities other than the
62.34% economic interest represented by the outstanding Carolina Group stock,
and includes as an asset the notional, intergroup debt of the Carolina Group.
Holders of the Company’s common stock and of Carolina Group stock are
shareholders of Loews Corporation and are subject to the risks related to
an
equity investment in Loews Corporation. Each outstanding share of Carolina
Group
stock has 3/10 of a vote per share.
In
August
of 2006, May of 2006, November of 2005 and December of 2004, the Company
sold an
additional 15 million, 15 million, 10 million and 10 million shares of Carolina
Group stock for net proceeds of $876.8 million, $751.5 million, $415.1 million
and $281.9 million, respectively.
The
Company has separated, for financial reporting purposes, the Carolina Group
and
Loews Group. The following schedules present the consolidating condensed
financial information for these individual groups. Neither group is a separate
company or legal entity. Rather, each group is intended to reflect a defined
set
of assets and liabilities.
Notes
to
Consolidated Financial Statements
Note
6. Loews and Carolina Group Consolidating Condensed Financial Information
-
(Continued)
Loews
and
Carolina Group
Consolidating
Condensed Balance Sheet Information
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
Carolina
Group
|
|
Loews
|
|
and
|
|
|
|
December
31, 2006
|
|
Lorillard
|
|
Other
|
|
Consolidated
|
|
Group
|
|
Eliminations
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
1,767.5
|
|
$
|
101.0
|
|
$
|
1,868.5
|
|
$
|
52,020.3
|
|
|
|
|
$
|
53,888.8
|
|
Cash
|
|
|
1.2
|
|
|
0.3
|
|
|
1.5
|
|
|
132.3
|
|
|
|
|
|
133.8
|
|
Receivables
|
|
|
15.6
|
|
|
0.4
|
|
|
16.0
|
|
|
13,028.2
|
|
$
|
(16.9
|
)
(a)
|
|
13,027.3
|
|
Property,
plant and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equipment
|
|
|
196.4
|
|
|
|
|
|
196.4
|
|
|
5,304.9
|
|
|
|
|
|
5,501.3
|
|
Deferred
income taxes
|
|
|
495.7
|
|
|
|
|
|
495.7
|
|
|
125.2
|
|
|
|
|
|
620.9
|
|
Goodwill
and other intangible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets
|
|
|
|
|
|
|
|
|
|
|
|
298.9
|
|
|
|
|
|
298.9
|
|
Other
assets
|
|
|
282.8
|
|
|
|
|
|
282.8
|
|
|
1,433.7
|
|
|
|
|
|
1,716.5
|
|
Investment
in combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
attributed
net assets of the
|
|
|
|
|
|
|
|
|
|
|
|
1,288.3
|
|
|
(1,229.7
|
)
(a)
|
|
|
|
Carolina
Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58.6
|
)
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
acquisition costs of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
insurance
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
1,190.4
|
|
|
|
|
|
1,190.4
|
|
Separate
account business
|
|
|
|
|
|
|
|
|
|
|
|
503.0
|
|
|
|
|
|
503.0
|
|
Total
assets
|
|
$
|
2,759.2
|
|
$
|
101.7
|
|
$
|
2,860.9
|
|
$
|
75,325.2
|
|
$
|
(1,305.2
|
)
|
$
|
76,880.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
reserves
|
|
|
|
|
|
|
|
|
|
|
$
|
41,079.9
|
|
|
|
|
$
|
41,079.9
|
|
Payable
for securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
purchased
|
|
|
|
|
|
|
|
|
|
|
|
1,046.7
|
|
|
|
|
|
1,046.7
|
|
Collateral
on loaned securities
|
|
|
|
|
|
|
|
|
|
|
|
3,601.5
|
|
|
|
|
|
3,601.5
|
|
Short-term
debt
|
|
|
|
|
|
|
|
|
|
|
|
4.6
|
|
|
|
|
|
4.6
|
|
Long-term
debt
|
|
|
|
|
$
|
1,229.7
|
|
$
|
1,229.7
|
|
|
5,567.8
|
|
$
|
(1,229.7
|
)
(a)
|
|
5,567.8
|
|
Reinsurance
balances payable
|
|
|
|
|
|
|
|
|
|
|
|
539.1
|
|
|
|
|
|
539.1
|
|
Other
liabilities
|
|
$
|
1,463.9
|
|
|
11.5
|
|
|
1,475.4
|
|
|
3,681.7
|
|
|
(16.9
|
)
(a)
|
|
5,140.2
|
|
Separate
account business
|
|
|
|
|
|
|
|
|
|
|
|
503.0
|
|
|
|
|
|
503.0
|
|
Total
liabilities
|
|
|
1,463.9
|
|
|
1,241.2
|
|
|
2,705.1
|
|
|
56,024.3
|
|
|
(1,246.6
|
)
|
|
57,482.8
|
|
Minority
interest
|
|
|
|
|
|
|
|
|
|
|
|
2,896.3
|
|
|
|
|
|
2,896.3
|
|
Shareholders’
equity
|
|
|
1,295.3
|
|
|
(1,139.5
|
)
|
|
155.8
|
|
|
16,404.6
|
|
|
(58.6
|
)
(b)
|
|
16,501.8
|
|
Total
liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shareholders’
equity
|
|
$
|
2,759.2
|
|
$
|
101.7
|
|
$
|
2,860.9
|
|
$
|
75,325.2
|
|
$
|
(1,305.2
|
)
|
$
|
76,880.9
|
|
(a)
|
To
eliminate the intergroup notional debt and interest
payable/receivable.
|
(b)
|
To
eliminate the Loews Group’s 37.66% equity interest in the combined
attributed net assets of the Carolina
Group.
|
Notes
to
Consolidated Financial Statements
Note
6. Loews and Carolina Group Consolidating Condensed Financial Information
-
(Continued)
Loews
and
Carolina Group
Consolidating
Condensed Balance Sheet Information
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
Carolina
Group
|
|
Loews
|
|
and
|
|
|
|
December
31, 2005
|
|
Lorillard
|
|
Other
|
|
Consolidated
|
|
Group
|
|
Eliminations
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
1,747.7
|
|
$
|
101.0
|
|
$
|
1,848.7
|
|
$
|
43,547.3
|
|
|
|
|
$
|
45,396.0
|
|
Cash
|
|
|
2.4
|
|
|
0.1
|
|
|
2.5
|
|
|
150.6
|
|
|
|
|
|
153.1
|
|
Receivables
|
|
|
25.5
|
|
|
0.2
|
|
|
25.7
|
|
|
15,540.2
|
|
$
|
(22.0
|
)
(a)
|
|
15,543.9
|
|
Property,
plant and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equipment
|
|
|
213.9
|
|
|
|
|
|
213.9
|
|
|
4,737.7
|
|
|
|
|
|
4,951.6
|
|
Deferred
income taxes
|
|
|
428.5
|
|
|
|
|
|
428.5
|
|
|
476.8
|
|
|
|
|
|
905.3
|
|
Goodwill
and other intangible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets
|
|
|
|
|
|
|
|
|
|
|
|
297.4
|
|
|
|
|
|
297.4
|
|
Other
assets
|
|
|
377.5
|
|
|
|
|
|
377.5
|
|
|
1,532.1
|
|
|
|
|
|
1,909.6
|
|
Investment
in combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
attributed
net assets of the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carolina
Group
|
|
|
|
|
|
|
|
|
|
|
|
1,516.6
|
|
|
(1,626.9
|
)
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110.3 |
(b) |
|
|
|
Deferred
acquisition costs of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
insurance
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
1,197.4
|
|
|
|
|
|
1,197.4
|
|
Separate
account business
|
|
|
|
|
|
|
|
|
|
|
|
551.5
|
|
|
|
|
|
551.5
|
|
Total
assets
|
|
$
|
2,795.5
|
|
$
|
101.3
|
|
$
|
2,896.8
|
|
$
|
69,547.6
|
|
$
|
(1,538.6
|
)
|
$
|
70,905.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
reserves
|
|
|
|
|
|
|
|
|
|
|
$
|
42,436.2
|
|
|
|
|
$
|
42,436.2
|
|
Payable
for securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
purchased
|
|
|
|
|
|
|
|
|
|
|
|
401.7
|
|
|
|
|
|
401.7
|
|
Collateral
on loaned securities
|
|
|
|
|
|
|
|
|
|
|
|
767.4
|
|
|
|
|
|
767.4
|
|
Short-term
debt
|
|
|
|
|
|
|
|
|
|
|
|
598.2
|
|
|
|
|
|
598.2
|
|
Long-term
debt
|
|
|
|
|
$
|
1,626.9
|
|
$
|
1,626.9
|
|
|
4,608.6
|
|
$
|
(1,626.9
|
)
(a)
|
|
4,608.6
|
|
Reinsurance
balances payable
|
|
|
|
|
|
|
|
|
|
|
|
1,636.2
|
|
|
|
|
|
1,636.2
|
|
Other
liabilities
|
|
$
|
1,455.7
|
|
|
14.7
|
|
|
1,470.4
|
|
|
3,306.6
|
|
|
(22.0
|
)
(a)
|
|
4,755.0
|
|
Separate
account business
|
|
|
|
|
|
|
|
|
|
|
|
551.5
|
|
|
|
|
|
551.5
|
|
Total
liabilities
|
|
|
1,455.7
|
|
|
1,641.6
|
|
|
3,097.3
|
|
|
54,306.4
|
|
|
(1,648.9
|
)
|
|
55,754.8
|
|
Minority
interest
|
|
|
|
|
|
|
|
|
|
|
|
2,058.9
|
|
|
|
|
|
2,058.9
|
|
Shareholders’
equity
|
|
|
1,339.8
|
|
|
(1,540.3
|
)
|
|
(200.5
|
)
|
|
13,182.3
|
|
|
110.3
|
(b)
|
|
13,092.1
|
|
Total
liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shareholders’
equity
|
|
$
|
2,795.5
|
|
$
|
101.3
|
|
$
|
2,896.8
|
|
$
|
69,547.6
|
|
$
|
(1,538.6
|
)
|
$
|
70,905.8
|
|
(a)
|
To
eliminate the intergroup notional debt and interest
payable/receivable.
|
(b)
|
To
eliminate the Loews Group’s 54.97% equity interest in the combined
attributed net assets of the Carolina
Group.
|
Notes
to
Consolidated Financial Statements
Note
6. Loews and Carolina Group Consolidating Condensed Financial Information
-
(Continued)
Loews
and
Carolina Group
Consolidating
Condensed Statement of Operations Information
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
Carolina
Group
|
|
Loews
|
|
and
|
|
|
|
Year
Ended December 31, 2006
|
|
Lorillard
|
|
Other
|
|
Consolidated
|
|
Group
|
|
Eliminations
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums
|
|
|
|
|
|
|
|
|
|
|
$
|
7,603.1
|
|
|
|
|
$
|
7,603.1
|
|
Net
investment income
|
|
$
|
103.7
|
|
$
|
8.2
|
|
$
|
111.9
|
|
|
2,914.6
|
|
$
|
(115.4
|
)
(a)
|
|
2,911.1
|
|
Investment
gains (losses)
|
|
|
(0.5
|
)
|
|
|
|
|
(0.5
|
)
|
|
92.0
|
|
|
|
|
|
91.5
|
|
Gain
on issuance of subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
|
|
|
|
|
|
|
|
|
|
|
|
9.0
|
|
|
|
|
|
9.0
|
|
Manufactured
products
|
|
|
3,754.9
|
|
|
|
|
|
3,754.9
|
|
|
206.9
|
|
|
|
|
|
3,961.8
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
3,334.5
|
|
|
|
|
|
3,334.5
|
|
Total
|
|
|
3,858.1
|
|
|
8.2
|
|
|
3,866.3
|
|
|
14,160.1
|
|
|
(115.4
|
)
|
|
17,911.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
claims and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
policyholders’
benefits
|
|
|
|
|
|
|
|
|
|
|
|
6,046.2
|
|
|
|
|
|
6,046.2
|
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition
costs
|
|
|
|
|
|
|
|
|
|
|
|
1,534.2
|
|
|
|
|
|
1,534.2
|
|
Cost
of manufactured products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sold
|
|
|
2,159.5
|
|
|
|
|
|
2,159.5
|
|
|
102.2
|
|
|
|
|
|
2,261.7
|
|
Other
operating expenses
|
|
|
354.1
|
|
|
0.3
|
|
|
354.4
|
|
|
2,951.2
|
|
|
|
|
|
3,305.6
|
|
Restructuring
and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
charges
|
|
|
|
|
|
|
|
|
|
|
|
(12.9
|
)
|
|
|
|
|
(12.9
|
)
|
Interest
|
|
|
0.3
|
|
|
115.3
|
|
|
115.6
|
|
|
303.9
|
|
|
(115.4
|
)
(a)
|
|
304.1
|
|
Total
|
|
|
2,513.9
|
|
|
115.6
|
|
|
2,629.5
|
|
|
10,924.8
|
|
|
(115.4
|
)
|
|
13,438.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,344.2
|
|
|
(107.4
|
)
|
|
1,236.8
|
|
|
3,235.3
|
|
|
-
|
|
|
4,472.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
518.0
|
|
|
(41.4
|
)
|
|
476.6
|
|
|
974.1
|
|
|
|
|
|
1,450.7
|
|
Minority
interest
|
|
|
|
|
|
|
|
|
|
|
|
504.4
|
|
|
-
|
|
|
504.4
|
|
Total
|
|
|
518.0
|
|
|
(41.4
|
)
|
|
476.6
|
|
|
1,478.5
|
|
|
-
|
|
|
1,955.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
826.2
|
|
|
(66.0
|
)
|
|
760.2
|
|
|
1,756.8
|
|
|
|
|
|
2,517.0
|
|
Equity
in earnings of the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carolina
Group
|
|
|
|
|
|
|
|
|
|
|
|
343.8
|
|
|
(343.8
|
)
(b)
|
|
|
|
Income
(loss) from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
|
826.2
|
|
|
(66.0
|
)
|
|
760.2
|
|
|
2,100.6
|
|
|
(343.8
|
)
|
|
2,517.0
|
|
Discontinued
operations, net
|
|
|
|
|
|
|
|
|
|
|
|
(25.7
|
)
|
|
|
|
|
(25.7
|
)
|
Net
income (loss)
|
|
$
|
826.2
|
|
$
|
(66.0
|
)
|
$
|
760.2
|
|
$
|
2,074.9
|
|
$
|
(343.8
|
)
|
$
|
2,491.3
|
|
(a)
|
To
eliminate interest on the intergroup notional
debt.
|
(b)
|
To
eliminate the Loews Group’s intergroup interest in the earnings of the
Carolina Group.
|
Notes
to
Consolidated Financial Statements
Note
6. Loews and Carolina Group Consolidating Condensed Financial Information
-
(Continued)
Loews
and
Carolina Group
Consolidating
Condensed Statement of Operations Information
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
Carolina
Group
|
|
Loews
|
|
and
|
|
|
|
Year
Ended December 31, 2005
|
|
Lorillard
|
|
Other
|
|
Consolidated
|
|
Group
|
|
Eliminations
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums
|
|
|
|
|
|
|
|
|
|
|
$
|
7,568.6
|
|
|
|
|
$
|
7,568.6
|
|
Net
investment income
|
|
$
|
63.6
|
|
$
|
5.0
|
|
$
|
68.6
|
|
|
2,170.6
|
|
$
|
(140.4
|
)
(a)
|
|
2,098.8
|
|
Investment
losses
|
|
|
(2.1
|
)
|
|
|
|
|
(2.1
|
)
|
|
(11.1
|
)
|
|
|
|
|
(13.2
|
)
|
Manufactured
products
|
|
|
3,567.8
|
|
|
|
|
|
3,567.8
|
|
|
184.6
|
|
|
|
|
|
3,752.4
|
|
Other
|
|
|
6.0
|
|
|
|
|
|
6.0
|
|
|
2,605.2
|
|
|
|
|
|
2,611.2
|
|
Total
|
|
|
3,635.3
|
|
|
5.0
|
|
|
3,640.3
|
|
|
12,517.9
|
|
|
(140.4
|
)
|
|
16,017.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
claims and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
policyholders’
benefits
|
|
|
|
|
|
|
|
|
|
|
|
6,998.7
|
|
|
|
|
|
6,998.7
|
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition
costs
|
|
|
|
|
|
|
|
|
|
|
|
1,542.6
|
|
|
|
|
|
1,542.6
|
|
Cost
of manufactured products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sold
|
|
|
2,114.4
|
|
|
|
|
|
2,114.4
|
|
|
87.9
|
|
|
|
|
|
2,202.3
|
|
Other
operating expenses
|
|
|
369.1
|
|
|
0.4
|
|
|
369.5
|
|
|
2,694.0
|
|
|
|
|
|
3,063.5
|
|
Interest
|
|
|
0.5
|
|
|
140.4
|
|
|
140.9
|
|
|
363.7
|
|
|
(140.4
|
)
(a)
|
|
364.2
|
|
Total
|
|
|
2,484.0
|
|
|
140.8
|
|
|
2,624.8
|
|
|
11,686.9
|
|
|
(140.4
|
)
|
|
14,171.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,151.3
|
|
|
(135.8
|
)
|
|
1,015.5
|
|
|
831.0
|
|
|
-
|
|
|
1,846.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
444.9
|
|
|
(52.5
|
)
|
|
392.4
|
|
|
98.0
|
|
|
|
|
|
490.4
|
|
Minority
interest
|
|
|
|
|
|
|
|
|
|
|
|
163.2
|
|
|
|
|
|
163.2
|
|
Total
|
|
|
444.9
|
|
|
(52.5
|
)
|
|
392.4
|
|
|
261.2
|
|
|
-
|
|
|
653.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
706.4
|
|
|
(83.3
|
)
|
|
623.1
|
|
|
569.8
|
|
|
-
|
|
|
1,192.9
|
|
Equity
in earnings of the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carolina
Group
|
|
|
|
|
|
|
|
|
|
|
|
371.8
|
|
|
(371.8
|
)
(b)
|
|
|
|
Income
(loss) from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
|
706.4
|
|
|
(83.3
|
)
|
|
623.1
|
|
|
941.6
|
|
|
(371.8
|
)
|
|
1,192.9
|
|
Discontinued
operations, net
|
|
|
|
|
|
|
|
|
|
|
|
18.7
|
|
|
|
|
|
18.7
|
|
Net
income (loss)
|
|
$
|
706.4
|
|
$
|
(83.3
|
)
|
$
|
623.1
|
|
$
|
960.3
|
|
$
|
(371.8
|
)
|
$
|
1,211.6
|
|
Notes
to
Consolidated Financial Statements
Note
6. Loews and Carolina Group Consolidating Condensed Financial Information
-
(Continued)
Loews
and
Carolina Group
Consolidating
Condensed Statement of Operations Information
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
Carolina
Group
|
|
Loews
|
|
and
|
|
|
|
Year
Ended December 31, 2004
|
|
Lorillard
|
|
Other
|
|
Consolidated
|
|
Group
|
|
Eliminations
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums
|
|
|
|
|
|
|
|
|
|
|
$
|
8,205.2
|
|
|
|
|
$
|
8,205.2
|
|
Net
investment income
|
|
$
|
36.6
|
|
$
|
2.0
|
|
$
|
38.6
|
|
|
1,994.2
|
|
$
|
(157.5
|
)
(a)
|
|
1,875.3
|
|
Investment
gains (losses)
|
|
|
1.4
|
|
|
|
|
|
1.4
|
|
|
(257.4
|
)
|
|
|
|
|
(256.0
|
)
|
Manufactured
products
|
|
|
3,347.8
|
|
|
|
|
|
3,347.8
|
|
|
167.4
|
|
|
|
|
|
3,515.2
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
1,897.2
|
|
|
|
|
|
1,897.2
|
|
Total
|
|
|
3,385.8
|
|
|
2.0
|
|
|
3,387.8
|
|
|
12,006.6
|
|
|
(157.5
|
)
|
|
15,236.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
claims and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
policyholders’
benefits
|
|
|
|
|
|
|
|
|
|
|
|
6,445.0
|
|
|
|
|
|
6,445.0
|
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition
costs
|
|
|
|
|
|
|
|
|
|
|
|
1,679.8
|
|
|
|
|
|
1,679.8
|
|
Cost
of manufactured products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sold
|
|
|
1,965.6
|
|
|
|
|
|
1,965.6
|
|
|
79.8
|
|
|
|
|
|
2,045.4
|
|
Other
operating expenses
|
|
|
380.6
|
|
|
0.5
|
|
|
381.1
|
|
|
2,532.7
|
|
|
|
|
|
2,913.8
|
|
Interest
|
|
|
|
|
|
157.5
|
|
|
157.5
|
|
|
324.1
|
|
|
(157.5
|
)
(a)
|
|
324.1
|
|
Total
|
|
|
2,346.2
|
|
|
158.0
|
|
|
2,504.2
|
|
|
11,061.4
|
|
|
(157.5
|
)
|
|
13,408.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,039.6
|
|
|
(156.0
|
)
|
|
883.6
|
|
|
945.2
|
|
|
-
|
|
|
1,828.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
397.3
|
|
|
(59.6
|
)
|
|
337.7
|
|
|
198.5
|
|
|
|
|
|
536.2
|
|
Minority
interest
|
|
|
|
|
|
|
|
|
|
|
|
57.3
|
|
|
|
|
|
57.3
|
|
Total
|
|
|
397.3
|
|
|
(59.6
|
)
|
|
337.7
|
|
|
255.8
|
|
|
-
|
|
|
593.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
642.3
|
|
|
(96.4
|
)
|
|
545.9
|
|
|
689.4
|
|
|
-
|
|
|
1,235.3
|
|
Equity
in earnings of the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carolina
Group
|
|
|
|
|
|
|
|
|
|
|
|
361.4
|
|
|
(361.4
|
)
(b)
|
|
|
|
Income
(loss) from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
|
642.3
|
|
|
(96.4
|
)
|
|
545.9
|
|
|
1,050.8
|
|
|
(361.4
|
)
|
|
1,235.3
|
|
Discontinued
operations, net
|
|
|
|
|
|
|
|
|
|
|
|
(19.5
|
)
|
|
|
|
|
(19.5
|
)
|
Net
income (loss)
|
|
$
|
642.3
|
|
$
|
(96.4
|
)
|
$
|
545.9
|
|
$
|
1,031.3
|
|
$
|
(361.4
|
)
|
$
|
1,215.8
|
|
(a)
|
To
eliminate interest on the intergroup notional
debt.
|
(b)
|
To
eliminate the Loews Group’s intergroup interest in the earnings of the
Carolina Group.
|
Notes
to
Consolidated Financial Statements
Note
6. Loews and Carolina Group Consolidating Condensed Financial Information
-
(Continued)
Loews
and
Carolina Group
Consolidating
Condensed Statement of Cash Flows Information
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
Carolina
Group
|
|
Loews
|
|
and
|
|
|
|
Year
Ended December 31, 2006
|
|
Lorillard
|
|
Other
|
|
Consolidated
|
|
Group
|
|
Eliminations
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operating
activities
|
|
$
|
778.2
|
|
$
|
(69.4
|
)
|
$
|
708.8
|
|
$
|
1,145.5
|
|
$
|
(139.6
|
)
|
$
|
1,714.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equipment
|
|
|
(29.7
|
)
|
|
|
|
|
(29.7
|
)
|
|
(904.9
|
)
|
|
|
|
|
(934.6
|
)
|
Change
in short-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments
|
|
|
416.8
|
|
|
|
|
|
416.8
|
|
|
(2,689.3
|
)
|
|
|
|
|
(2,272.5
|
)
|
Other
investing activities
|
|
|
(384.9
|
)
|
|
|
|
|
(384.9
|
)
|
|
1,352.5
|
|
|
(397.2
|
)
|
|
570.4
|
|
|
|
|
2.2
|
|
|
-
|
|
|
2.2
|
|
|
(2,241.7
|
)
|
|
(397.2
|
)
|
|
(2,636.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid to shareholders
|
|
|
(783.0
|
)
|
|
466.8
|
|
|
(316.2
|
)
|
|
(131.1
|
)
|
|
139.6
|
|
|
(307.7
|
)
|
Reduction
of intergroup
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
notional
debt
|
|
|
|
|
|
(397.2
|
)
|
|
(397.2
|
)
|
|
|
|
|
397.2
|
|
|
|
|
Excess
tax benefits from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share-based
compensation
|
|
|
1.4
|
|
|
|
|
|
1.4
|
|
|
5.3
|
|
|
|
|
|
6.7
|
|
Other
financing activities
|
|
|
|
|
|
|
|
|
|
|
|
1,215.0
|
|
|
|
|
|
1,215.0
|
|
|
|
|
(781.6
|
)
|
|
69.6
|
|
|
(712.0
|
)
|
|
1,089.2
|
|
|
536.8
|
|
|
914.0
|
|
Net
change in cash
|
|
|
(1.2
|
)
|
|
0.2
|
|
|
(1.0
|
)
|
|
(7.0
|
)
|
|
-
|
|
|
(8.0
|
)
|
Net
cash transactions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
13.8
|
|
|
|
|
|
13.8
|
|
Discontinued
operations to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
|
|
|
|
|
|
|
|
|
(13.8
|
)
|
|
|
|
|
(13.8
|
)
|
Cash,
beginning of year
|
|
|
2.4
|
|
|
0.1
|
|
|
2.5
|
|
|
179.5
|
|
|
|
|
|
182.0
|
|
Cash,
end of year
|
|
$
|
1.2
|
|
$
|
0.3
|
|
$
|
1.5
|
|
$
|
172.5
|
|
$
|
-
|
|
$
|
174.0
|
|
Notes
to
Consolidated Financial Statements
Note
6. Loews and Carolina Group Consolidating Condensed Financial Information
-
(Continued)
Loews
and
Carolina Group
Consolidating
Condensed Statement of Cash Flows Information
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
Carolina
Group
|
|
Loews
|
|
and
|
|
|
|
Year
Ended December 31, 2005
|
|
Lorillard
|
|
Other
|
|
Consolidated
|
|
Group
|
|
Eliminations
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operating
activities
|
|
$
|
820.3
|
|
$
|
(85.2
|
)
|
$
|
735.1
|
|
$
|
2,819.4
|
|
$
|
(187.4
|
)
|
$
|
3,367.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equipment
|
|
|
(31.2
|
)
|
|
|
|
|
(31.2
|
)
|
|
(446.6
|
)
|
|
|
|
|
(477.8
|
)
|
Change
in short-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments
|
|
|
(176.6
|
)
|
|
(0.9
|
)
|
|
(177.5
|
)
|
|
(468.9
|
)
|
|
|
|
|
(646.4
|
)
|
Other
investing activities
|
|
|
0.4
|
|
|
|
|
|
0.4
|
|
|
(406.3
|
)
|
|
(244.4
|
)
|
|
(650.3
|
)
|
|
|
|
(207.4
|
)
|
|
(0.9
|
)
|
|
(208.3
|
)
|
|
(1,321.8
|
)
|
|
(244.4
|
)
|
|
(1,774.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid to shareholders
|
|
|
(646.0
|
)
|
|
330.1
|
|
|
(315.9
|
)
|
|
(111.4
|
)
|
|
187.4
|
|
|
(239.9
|
)
|
Reduction
of intergroup
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
notional
debt
|
|
|
|
|
|
(244.4
|
)
|
|
(244.4
|
)
|
|
|
|
|
244.4
|
|
|
|
|
Other
financing activities
|
|
|
|
|
|
|
|
|
|
|
|
(1,404.7
|
)
|
|
|
|
|
(1,404.7
|
)
|
|
|
|
(646.0
|
)
|
|
85.7
|
|
|
(560.3
|
)
|
|
(1,516.1
|
)
|
|
431.8
|
|
|
(1,644.6
|
)
|
Net
change in cash
|
|
|
(33.1
|
)
|
|
(0.4
|
)
|
|
(33.5
|
)
|
|
(18.5
|
)
|
|
-
|
|
|
(52.0
|
)
|
Net
cash transactions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
(34.3
|
)
|
|
|
|
|
(34.3
|
)
|
Discontinued
operations to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
|
|
|
|
|
|
|
|
|
34.3
|
|
|
|
|
|
34.3
|
|
Cash,
beginning of year
|
|
|
35.5
|
|
|
0.5
|
|
|
36.0
|
|
|
198.0
|
|
|
|
|
|
234.0
|
|
Cash,
end of year
|
|
$
|
2.4
|
|
$
|
0.1
|
|
$
|
2.5
|
|
$
|
179.5
|
|
$
|
-
|
|
$
|
182.0
|
|
Notes
to
Consolidated Financial Statements
Note
6. Loews and Carolina Group Consolidating Condensed Financial Information
-
(Continued)
Loews
and
Carolina Group
Consolidating
Condensed Statement of Cash Flows Information
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
Carolina
Group
|
|
Loews
|
|
and
|
|
|
|
Year
Ended December 31, 2004
|
|
Lorillard
|
|
Other
|
|
Consolidated
|
|
Group
|
|
Eliminations
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
activities
|
|
$
|
631.9
|
|
$
|
(97.4
|
)
|
$
|
534.5
|
|
$
|
2,857.1
|
|
$
|
(210.1
|
)
|
$
|
3,181.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equipment
|
|
|
(50.8
|
)
|
|
|
|
|
(50.8
|
)
|
|
(216.2
|
)
|
|
|
|
|
(267.0
|
)
|
Change
in short-term investments
|
|
|
26.3
|
|
|
|
|
|
26.3
|
|
|
3,281.1
|
|
|
|
|
|
3,307.4
|
|
Other
investing activities
|
|
|
0.6
|
|
|
|
|
|
0.6
|
|
|
(6,921.9
|
)
|
|
(160.9
|
)
|
|
(7,082.2
|
)
|
|
|
|
(23.9
|
)
|
|
-
|
|
|
(23.9
|
)
|
|
(3,857.0
|
)
|
|
(160.9
|
)
|
|
(4,041.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid to shareholders
|
|
|
(574.0
|
)
|
|
258.4
|
|
|
(315.6
|
)
|
|
(111.3
|
)
|
|
210.1
|
|
|
(216.8
|
)
|
Reduction
of intergroup notional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
debt
|
|
|
|
|
|
(160.9
|
)
|
|
(160.9
|
)
|
|
|
|
|
160.9
|
|
|
|
|
Other
financing activities
|
|
|
|
|
|
|
|
|
|
|
|
1,105.2
|
|
|
|
|
|
1,105.2
|
|
|
|
|
(574.0
|
)
|
|
97.5
|
|
|
(476.5
|
)
|
|
993.9
|
|
|
371.0
|
|
|
888.4
|
|
Net
change in cash
|
|
|
34.0
|
|
|
0.1
|
|
|
34.1
|
|
|
(6.0
|
)
|
|
-
|
|
|
28.1
|
|
Net
cash transactions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
12.2
|
|
|
|
|
|
12.2
|
|
Discontinued
operations to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
|
|
|
|
|
|
|
|
|
(12.2
|
)
|
|
|
|
|
(12.2
|
)
|
Cash,
beginning of year
|
|
|
1.5
|
|
|
0.4
|
|
|
1.9
|
|
|
204.0
|
|
|
|
|
|
205.9
|
|
Cash,
end of year
|
|
$
|
35.5
|
|
$
|
0.5
|
|
$
|
36.0
|
|
$
|
198.0
|
|
$
|
-
|
|
$
|
234.0
|
|
Note
7. Receivables
December
31
|
|
2006
|
|
2005
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
$
|
9,947.3
|
|
$
|
12,436.7
|
|
Other
insurance
|
|
|
2,475.8
|
|
|
2,540.8
|
|
Security
sales
|
|
|
325.9
|
|
|
604.9
|
|
Accrued
investment income
|
|
|
331.4
|
|
|
322.2
|
|
Other
|
|
|
810.8
|
|
|
612.6
|
|
Total
|
|
|
13,891.2
|
|
|
16,517.2
|
|
Less: allowance
for doubtful accounts on reinsurance receivables
|
|
|
469.6
|
|
|
519.3
|
|
allowance
for other doubtful accounts and cash discounts
|
|
|
394.3
|
|
|
454.0
|
|
Receivables
|
|
$
|
13,027.3
|
|
$
|
15,543.9
|
|
Notes
to
Consolidated Financial Statements
Note
8. Property, Plant and Equipment
December
31
|
|
2006
|
|
2005
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
71.1
|
|
$
|
77.9
|
|
Buildings
and building equipment
|
|
|
716.6
|
|
|
609.6
|
|
Offshore
drilling rigs and equipment
|
|
|
4,356.4
|
|
|
3,903.0
|
|
Machinery
and equipment
|
|
|
1,412.4
|
|
|
1,268.0
|
|
Pipeline
equipment
|
|
|
2,067.0
|
|
|
1,829.9
|
|
Leaseholds
and leasehold improvements
|
|
|
70.5
|
|
|
66.3
|
|
Total
|
|
|
8,694.0
|
|
|
7,754.7
|
|
Less
accumulated depreciation and amortization
|
|
|
3,192.7
|
|
|
2,803.1
|
|
Property,
plant and equipment
|
|
$
|
5,501.3
|
|
$
|
4,951.6
|
|
Depreciation
and amortization expense, including amortization of intangibles, and capital
expenditures, are as follows:
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
Depr.
&
|
|
Capital
|
|
Depr.
&
|
|
Capital
|
|
Depr.
&
|
|
Capital
|
|
|
|
Amort.
|
|
Expend.
|
|
Amort.
|
|
Expend.
|
|
Amort.
|
|
Expend.
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial
|
|
$
|
41.7
|
|
$
|
131.0
|
|
$
|
41.7
|
|
$
|
45.4
|
|
$
|
61.1
|
|
$
|
40.9
|
|
Lorillard
|
|
|
47.2
|
|
|
29.7
|
|
|
48.3
|
|
|
31.3
|
|
|
39.7
|
|
|
50.8
|
|
Loews
Hotels
|
|
|
24.9
|
|
|
20.5
|
|
|
26.6
|
|
|
16.0
|
|
|
27.3
|
|
|
35.0
|
|
Diamond
Offshore
|
|
|
206.8
|
|
|
551.2
|
|
|
190.1
|
|
|
297.5
|
|
|
184.9
|
|
|
93.7
|
|
Boardwalk
Pipeline
|
|
|
75.1
|
|
|
196.7
|
|
|
72.1
|
|
|
84.5
|
|
|
34.0
|
|
|
41.2
|
|
Corporate
and other
|
|
|
3.8
|
|
|
5.5
|
|
|
3.3
|
|
|
3.1
|
|
|
3.8
|
|
|
5.4
|
|
Total
|
|
$
|
399.5
|
|
$
|
934.6
|
|
$
|
382.1
|
|
$
|
477.8
|
|
$
|
350.8
|
|
$
|
267.0
|
|
Note
9. Claim and Claim Adjustment Expense Reserves
CNA’s
property and casualty insurance claim and claim adjustment expense reserves
represent the estimated amounts necessary to settle 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 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.
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. Catastrophe losses, net of reinsurance, were
$59.0
million, $493.0 million and $278.0 million for the years ended December 31,
2006, 2005 and 2004. The
catastrophe losses in 2005 related
primarily to Hurricanes Katrina, Wilma, Rita, Dennis and Ophelia.
Notes
to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves - (Continued)
The
catastrophe losses in 2004 related primarily to Hurricanes Charley, Frances,
Ivan and Jeanne. There can be no assurance that CNA’s ultimate cost for these
catastrophes will not exceed current estimates.
Commercial
catastrophe losses, gross of reinsurance, were $59.0 million, $976.0 million
and
$308.0 million for the years ended December 31, 2006, 2005 and
2004.
The
table
below provides a reconciliation between beginning and ending claim and claim
adjustment expense reserves, including claim and claim adjustment expense
reserves of the life companies.
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves,
beginning of year:
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
$
|
30,938.0
|
|
$
|
31,523.0
|
|
$
|
31,732.0
|
|
Ceded
|
|
|
10,605.0
|
|
|
13,879.0
|
|
|
14,066.0
|
|
Net
reserves, beginning of year
|
|
|
20,333.0
|
|
|
17,644.0
|
|
|
17,666.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction
of net reserves (a)
|
|
|
|
|
|
|
|
|
(42.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
incurred claim and claim adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
Provision
for insured events of current year
|
|
|
4,840.0
|
|
|
5,516.0
|
|
|
6,062.0
|
|
Increase
in provision for insured events of prior years
|
|
|
361.0
|
|
|
1,100.0
|
|
|
240.0
|
|
Amortization
of discount
|
|
|
121.0
|
|
|
115.0
|
|
|
135.0
|
|
Total
net incurred (b)
|
|
|
5,322.0
|
|
|
6,731.0
|
|
|
6,437.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
payments attributable to:
|
|
|
|
|
|
|
|
|
|
|
Current
year events (c)
|
|
|
784.0
|
|
|
1,341.0
|
|
|
1,936.0
|
|
Prior
year events
|
|
|
3,439.0
|
|
|
2,711.0
|
|
|
4,522.0
|
|
Reinsurance
recoverable against net reserve transferred
|
|
|
|
|
|
|
|
|
|
|
under
retroactive reinsurance agreements
|
|
|
(13.0
|
)
|
|
(10.0
|
)
|
|
(41.0
|
)
|
Total
net payments
|
|
|
4,210.0
|
|
|
4,042.0
|
|
|
6,417.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
reserves, end of year
|
|
|
21,445.0
|
|
|
20,333.0
|
|
|
17,644.0
|
|
Ceded
reserves, end of year
|
|
|
8,191.0
|
|
|
10,605.0
|
|
|
13,879.0
|
|
Gross
reserves, end of year
|
|
$
|
29,636.0
|
|
$
|
30,938.0
|
|
$
|
31,523.0
|
|
(a)
|
In
2004, the net reserves were reduced by $42.0 as a result of the
sale of
the individual life insurance business. See Note 14 for further
discussion
of this sale.
|
(b)
|
Total
net incurred above does not agree to Insurance claims and policyholders’
benefits as reflected in the Consolidated Statements of Income
due to
expenses incurred related to uncollectible reinsurance receivables
and
benefit expenses related to future policy benefits and policyholders’
funds which are not reflected in the table
above.
|
(c)
|
In
2006, net payments were decreased by $935.0 million due to the
impact of
significant commutations. In 2005, net payments were decreased
by $1,581.0
due to the impact of significant commutations. See Note 18 for
further
discussion related to commutations.
|
The
changes in provision for insured events of prior years (net prior year claim
and
claim adjustment expense reserve development) were as follows:
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental
pollution and mass tort
|
|
$
|
63.0
|
|
$
|
53.0
|
|
$
|
1.0
|
|
Asbestos
|
|
|
|
|
|
10.0
|
|
|
54.0
|
|
Other
|
|
|
269.0
|
|
|
1,044.0
|
|
|
179.0
|
|
Property
and casualty reserve development
|
|
|
332.0
|
|
|
1,107.0
|
|
|
234.0
|
|
Life
reserve development in life company
|
|
|
29.0
|
|
|
(7.0
|
)
|
|
6.0
|
|
Total
|
|
$
|
361.0
|
|
$
|
1,100.0
|
|
$
|
240.0
|
|
Notes
to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves - (Continued)
The
following tables summarize the gross and net carried reserves as of December
31,
2006 and 2005.
|
|
|
|
|
|
Life
and
|
|
|
|
|
|
|
|
Standard
|
|
Specialty
|
|
Group
|
|
Other
|
|
|
|
December
31, 2006
|
|
Lines
|
|
Lines
|
|
Non-Core
|
|
Insurance
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Case Reserves
|
|
$
|
6,746.0
|
|
$
|
1,715.0
|
|
$
|
2,366.0
|
|
$
|
2,511.0
|
|
$
|
13,338.0
|
|
Gross
IBNR Reserves
|
|
|
8,188.0
|
|
|
3,814.0
|
|
|
768.0
|
|
|
3,528.0
|
|
|
16,298.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Gross Carried Claim and Claim
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
Expense Reserves
|
|
$
|
14,934.0
|
|
$
|
5,529.0
|
|
$
|
3,134.0
|
|
$
|
6,039.0
|
|
$
|
29,636.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Case Reserves
|
|
$
|
5,234.0
|
|
$
|
1,350.0
|
|
$
|
1,496.0
|
|
$
|
1,453.0
|
|
$
|
9,533.0
|
|
Net
IBNR Reserves
|
|
|
6,632.0
|
|
|
2,921.0
|
|
|
360.0
|
|
|
1,999.0
|
|
|
11,912.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Net Carried Claim and Claim
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
Expense Reserves
|
|
$
|
11,866.0
|
|
$
|
4,271.0
|
|
$
|
1,856.0
|
|
$
|
3,452.0
|
|
$
|
21,445.0
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Case Reserves
|
|
$
|
7,033.0
|
|
$
|
1,907.0
|
|
$
|
2,542.0
|
|
$
|
3,297.0
|
|
$
|
14,779.0
|
|
Gross
IBNR Reserves
|
|
|
8,051.0
|
|
|
3,298.0
|
|
|
735.0
|
|
|
4,075.0
|
|
|
16,159.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Gross Carried Claim and Claim
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
Expense Reserves
|
|
$
|
15,084.0
|
|
$
|
5,205.0
|
|
$
|
3,277.0
|
|
$
|
7,372.0
|
|
$
|
30,938.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Case Reserves
|
|
$
|
5,165.0
|
|
$
|
1,442.0
|
|
$
|
1,456.0
|
|
$
|
1,554.0
|
|
$
|
9,617.0
|
|
Net
IBNR Reserves
|
|
|
6,081.0
|
|
|
2,352.0
|
|
|
381.0
|
|
|
1,902.0
|
|
|
10,716.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Net Carried Claim and Claim
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
Expense Reserves
|
|
$
|
11,246.0
|
|
$
|
3,794.0
|
|
$
|
1,837.0
|
|
$
|
3,456.0
|
|
$
|
20,333.0
|
|
The
following provides discussion of CNA’s Asbestos, Environmental Pollution and
Mass Tort (“APMT”) and core reserves.
APMT
Reserves
CNA’s
property and casualty insurance subsidiaries have actual and potential exposures
related to APMT claims.
Establishing
reserves for APMT claim and claim adjustment expenses is subject to
uncertainties that are greater than those presented by other claims. Traditional
actuarial methods and techniques employed to estimate the ultimate cost of
claims for more traditional property and casualty exposures are less precise
in
estimating claim and claim adjustment expense reserves for APMT, particularly
in
an environment of emerging or potential claims and coverage issues that arise
from industry practices and legal, judicial and social conditions. Therefore,
these traditional actuarial methods and techniques are necessarily supplemented
with additional estimating techniques and methodologies,
many of which involve significant judgments that are required of management.
Accordingly, a high degree of uncertainty remains for CNA’s ultimate liability
for APMT claim and claim adjustment expenses.
In
addition to the difficulties described above, estimating the ultimate cost
of
both reported and unreported APMT claims is subject to a higher degree of
variability due to a number of additional factors, including among others:
the
number and outcome of direct actions against CNA; coverage issues, including
whether certain costs are covered under the policies and whether policy limits
apply; allocation of liability among numerous parties, some of whom may be
in
bankruptcy proceedings, and in particular the application of “joint and several”
liability to specific insurers
on a
risk; inconsistent
court
decisions
and
developing
legal
theories; continuing aggressive
tactics
of
Notes
to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves - (Continued)
plaintiffs’
lawyers; the risks and lack of predictability inherent in major litigation;
enactment of state and federal legislation
to address asbestos claims; increases and decreases in asbestos, environmental
pollution and mass tort claims which cannot now be anticipated; increases
and
decreases in costs to defend asbestos, pollution and mass tort claims;
changing
liability theories against CNA’s policyholders in environmental and mass tort
matters; possible exhaustion of underlying umbrella and excess coverage;
and
future developments pertaining to CNA’s ability to recover reinsurance for
asbestos, pollution and mass tort claims.
CNA
has
annually performed ground up reviews of all open APMT claims to evaluate
the
adequacy of CNA’s APMT reserves. In performing its comprehensive ground up
analysis, CNA considers input from its professionals with direct responsibility
for the claims, inside and outside counsel with responsibility for
representation of CNA and its actuarial staff. These professionals review,
among
many factors, the policyholder’s present and predicted future exposures,
including such factors as claims volume, trial conditions, prior settlement
history, settlement demands and defense costs; the impact of asbestos defendant
bankruptcies on the policyholder; the policies issued by CNA, including such
factors as aggregate or per occurrence limits, whether the policy is primary,
umbrella or excess, and the existence of policyholder retentions and/or
deductibles; the existence of other insurance; and reinsurance
arrangements.
The
following table provides data related to CNA’s APMT claim and claim adjustment
expense reserves.
December
31
|
|
2006
|
|
2005
|
|
|
|
|
|
Environmental
|
|
|
|
Environmental
|
|
|
|
|
|
Pollution
and
|
|
|
|
Pollution
and
|
|
|
|
Asbestos
|
|
Mass
Tort
|
|
Asbestos
|
|
Mass
Tort
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
reserves
|
|
$
|
2,635.0
|
|
$
|
647.0
|
|
$
|
2,992.0
|
|
$
|
680.0
|
|
Ceded
reserves
|
|
|
(1,183.0
|
)
|
|
(231.0
|
)
|
|
(1,438.0
|
)
|
|
(257.0
|
)
|
Net
reserves
|
|
$
|
1,452.0
|
|
$
|
416.0
|
|
$
|
1,554.0
|
|
$
|
423.0
|
|
Asbestos
CNA’s
property and casualty insurance subsidiaries have exposure to asbestos-related
claims. Estimation of asbestos-related claim and claim adjustment expense
reserves involves limitations such as inconsistency of court decisions, specific
policy provisions, allocation of liability among insurers and insureds, and
additional factors such as missing policies and proof of coverage. Furthermore,
estimation of asbestos-related claims is difficult due to, among other reasons,
the proliferation of bankruptcy proceedings and attendant uncertainties,
the
targeting of a broader range of businesses and entities as defendants, the
uncertainty as to which other insureds may be targeted in the future and
the
uncertainties inherent in predicting the number of future claims.
As
of
December 31, 2006 and 2005, CNA carried approximately $1,452.0 million and
$1,554.0 million of claim and claim adjustment expense reserves, net of
reinsurance recoverables, for reported and unreported asbestos-related claims.
CNA recorded no asbestos-related net claim and claim adjustment expense reserve
development for the year ended December 31, 2006. For the years ended December
31, 2005 and 2004, CNA recorded $10.0 million and $54.0 million of unfavorable
asbestos-related net claim and claim adjustment expense reserve development.
The
2004 unfavorable net prior year development was primarily related to a loss
from
the commutation of reinsurance treaties with The Trenwick Group (“Trenwick”).
CNA paid asbestos-related claims, net of reinsurance recoveries, of $102.0
million, $142.0 million and $135.0 million for the years ended December 31,
2006, 2005 and 2004.
Certain
asbestos claim litigation in which CNA is currently engaged is described
below:
The
ultimate cost of reported claims, and in particular APMT claims, is subject
to a
great many uncertainties, including future developments of various kinds
that
CNA does not control and that are difficult or impossible to foresee accurately.
With respect to the litigation identified below in particular, numerous factual
and legal issues remain unresolved. Rulings on those issues by the courts
are
critical to the evaluation of the ultimate cost to CNA. The outcome of the
litigation cannot be predicted with any reliability. Accordingly, the extent
of
losses beyond any amounts that may be accrued are not readily determinable
at
this time.
Notes
to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves - (Continued)
On
February 13, 2003, CNA announced it had resolved asbestos related coverage
litigation and claims involving A.P. Green Industries, A.P. Green Services
and
Bigelow − Liptak Corporation. Under the agreement, CNA is required to pay $74.0
million, net of reinsurance recoveries, over a ten year period commencing
after
the final approval of a bankruptcy plan of reorganization. The settlement
resolves CNA’s liabilities for all pending and future asbestos and silica claims
involving A.P. Green Industries, Bigelow − Liptak Corporation and related
subsidiaries, including alleged “non-products” exposures. The settlement
received initial bankruptcy court approval on August 18, 2003. The court
has
held a confirmation hearing on the bankruptcy plan containing an injunction
to
protect CNA from any future claims and the parties are awaiting a ruling
on
confirmation.
CNA
is
engaged in insurance coverage litigation in New York State Court, filed in
2003,
with a defendant class of underlying plaintiffs who have asbestos bodily
injury
claims against the former Robert A. Keasbey Company (“Keasbey”) (Continental
Casualty Co. v. Employers Ins. of Wausau et al.,
No.
601037/03 (N.Y. County)). Keasbey, a currently dissolved corporation, was
a
seller and installer of asbestos-containing insulation products in New York
and
New Jersey. Thousands of plaintiffs have filed bodily injury claims against
Keasbey; however, Keasbey’s involvement at a number of work sites is a highly
contested issue. Therefore, the defense disputes the percentage of valid
claims
against Keasbey. CNA issued Keasbey primary policies for 1970-1987 and excess
policies for 1972-1978. CNA has paid an amount substantially equal to the
policies’ aggregate limits for products and completed operations claims in the
confirmed CNA policies. Claimants against Keasbey allege, among other things,
that CNA owes coverage under sections of the policies not subject to the
aggregate limits, an allegation CNA vigorously contests in the lawsuit. In
the
litigation, CNA and the claimants seek declaratory relief as to the
interpretation of various policy provisions. The court dismissed a claim
alleging bad faith and seeking unspecified damages on March 21, 2004; that
ruling was affirmed on March 31, 2005 by Appellate Division, First Department.
The trial in the Keasbey coverage action commenced on July 13, 2005; closing
arguments concluded on October 28, 2005. The Court reopened the record in
January 2006 for additional evidentiary submissions and briefing, and additional
closing arguments were held March 27, 2006. It is unclear when CNA will have
a
decision from the trial court. With respect to this litigation in particular,
numerous factual and legal issues remain to be resolved that are critical
to the
final result, the outcome of which cannot be predicted with any reliability.
These factors include, among others: (a) whether CNA has any further
responsibility to compensate claimants against Keasbey under its policies
and,
if so, under which policies; (b) whether CNA’s responsibilities extend to a
particular claimant’s entire claim or only to a limited percentage of the claim;
(c) whether CNA’s responsibilities under its policies are limited by the
occurrence limits or other provisions of the policies; (d) whether certain
exclusions in some of the policies apply to exclude certain claims; (e) the
extent to which claimants can establish exposures to asbestos materials as
to
which Keasbey has any responsibility; (f) the legal theories which must be
pursued by such claimants to establish the liability of Keasbey and whether
such
theories can, in fact, be established; (g) the diseases and damages alleged
by
such claimants; and (h) the extent that such liability would be shared with
other responsible parties. Accordingly, the extent of losses beyond any amounts
that may be accrued are not readily determinable at this time.
CNA
has
insurance coverage disputes related to asbestos bodily injury claims against
a
bankrupt insured, Burns & Roe Enterprises, Inc. (“Burns & Roe”). These
disputes are currently part of coverage litigation (stayed in view of the
bankruptcy) and an adversary proceeding in In
re: Burns & Roe Enterprises, Inc.,
pending in the U.S. Bankruptcy Court for the District of New Jersey, No.
00-41610. Burns & Roe provided engineering and related services in
connection with construction projects. At the time of its bankruptcy filing,
on
December 4, 2000, Burns & Roe asserted that it faced approximately 11,000
claims alleging bodily injury resulting from exposure to asbestos as a result
of
construction projects in which Burns & Roe was involved. CNA allegedly
provided primary liability coverage to Burns & Roe from 1956-1969 and
1971-1974, along with certain project-specific policies from 1964-1970. The
litigation involves disputes over the confirmation of the Plan of Reorganization
in bankruptcy, the scope and extent of coverage, if any, afforded to Burns
&
Roe for its asbestos liabilities. On December 5, 2005, Burns & Roe filed its
Third Amended Plan of Reorganization (“Plan”). A confirmation hearing relating
to that Plan is anticipated in 2007. Coverage issues will be determined in
a
later proceeding. With respect to both confirmation of the Plan and coverage
issues, numerous factual and legal issues remain to be resolved that are
critical to the final result, the outcome of which cannot be predicted with
any
reliability. These factors include, among others: (a) whether CNA has any
further responsibility to compensate claimants against Burns & Roe under its
policies and, if so, under which; (b) whether CNA’s responsibilities under its
policies extend to a particular claimant’s entire claim or only to a limited
percentage of the claim; (c) whether CNA’s responsibilities under its policies
are limited by the occurrence limits or other provisions of the policies;
(d)
whether certain exclusions, including professional liability exclusions,
in some
of CNA’s
policies
apply to exclude certain
claims;
(e)
the
extent to which claimants can
Notes
to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves - (Continued)
establish
exposure to asbestos materials as to which Burns & Roe has any
responsibility; (f) the legal theories which must be pursued by such claimants
to establish the liability of Burns & Roe and whether such theories can, in
fact, be established; (g) the diseases and damages alleged by such claimants;
(h) the extent that any liability of Burns & Roe would be shared with other
potentially responsible parties; and (i) the impact of bankruptcy proceedings
on
claims and coverage issue resolution. Accordingly, the extent of losses
beyond
any amounts that may be accrued are not readily determinable at this
time.
Suits
have also been initiated directly against the CNA companies and numerous
other
insurers in three jurisdictions: Texas, West Virginia and Montana. Lawsuits
were
filed in Texas beginning in 2002, against two CNA companies and numerous
other
insurers and non-insurer corporate defendants asserting liability for failing
to
warn of the dangers of asbestos (E.g. Boson
v. Union Carbide Corp.,
(Nueces
County, Texas)). During 2003, many of the Texas suits were dismissed as
time-barred by the applicable Statute of Limitations. In other suits, the
carriers argued that they did not owe any duty to the plaintiffs or the general
public to advise the world generally or the plaintiffs particularly of the
effects of asbestos and that Texas statutes precluded liability for such
claims,
and two Texas courts dismissed these suits. Certain of the Texas courts’ rulings
were appealed, but plaintiffs later dismissed their appeals. A different
Texas
court denied similar motions seeking dismissal at the pleading stage, allowing
limited discovery to proceed. After that court denied a related challenge
to
jurisdiction, the insurers transferred those cases, among others, to a state
multi-district litigation court in Harris County charged with handling asbestos
cases, and the cases remain in that court. The insurers have petitioned the
appellate court in Houston for an order of mandamus, requiring the
multi-district litigation court to dismiss the cases on jurisdictional and
substantive grounds. With respect to this litigation in particular, numerous
factual and legal issues remain to be resolved that are critical to the final
result, the outcome of which cannot be predicted with any reliability. These
factors include: (a) the speculative nature and unclear scope of any alleged
duties owed to individuals exposed to asbestos and the resulting uncertainty
as
to the potential pool of potential claimants; (b) the fact that imposing
such
duties on all insurer and non-insurer corporate defendants would be
unprecedented and, therefore, the legal boundaries of recovery are difficult
to
estimate; (c) the fact that many of the claims brought to date are barred
by
various Statutes of Limitation and it is unclear whether future claims would
also be barred; (d) the unclear nature of the required nexus between the
acts of
the defendants and the right of any particular claimant to recovery; and
(e) the
existence of hundreds of co-defendants in some of the suits and the
applicability of the legal theories pled by the claimants to thousands of
potential defendants. Accordingly, the extent of losses beyond any amounts
that
may be accrued are not readily determinable at this time.
Continental
Casualty Company (“CCC”) was named in Adams
v. Aetna, Inc., et al.
(Circuit
Court of Kanawha County, West Virginia, Nos, 0-2C-1708 to -1719, filed June
28,
2002), a purported class action against CCC and other insurers, alleging
that
the defendants violated West Virginia’s Unfair Trade Practices Act (“UTPA”) in
handling and resolving asbestos claims against their insureds. In September
2006, CCC entered into a settlement with plaintiffs and on November 15, 2006,
the Circuit Court of Kanawha County dismissed plaintiffs’ claims against CCC.
While no party filed an opposition to the settlement, the time for seeking
leave
to appeal that dismissal order to the West Virginia Supreme Court of Appeals
has
not yet expired. In
the
event the dismissal order is appealed to the West Virginia Supreme Court
and the
dismissal order is set aside, numerous factual and legal issues would determine
the final result in Adams, the outcome of which cannot be predicted with
any
reliability. These
issues include: (a) the legal sufficiency and factual validity of the novel
statutory claims pled by the claimants; (b) the applicability of claimants’
legal theories to insurers who issued excess policies and/or neither defended
nor controlled the defense of certain policyholders; (c) the possibility
that
certain of the claims are barred by various Statutes of Limitation; (d) the
fact
that the imposition of duties would interfere with the attorney-client privilege
and the contractual rights and responsibilities of the parties to CNA’s
insurance policies; (e) whether plaintiffs’ claims are barred in whole or in
part by injunctions that have been issued by bankruptcy courts that are
overseeing, or that have overseen, the bankruptcies of various insureds;
(f)
whether some or all of the named plaintiffs or members of the plaintiff class
have released CCC from the claims alleged in the Amended Complaint when they
resolved their underlying asbestos claims; (g) the appropriateness of the
case
for class action treatment; and (h) the potential and relative magnitude
of
liabilities of co-defendants. Accordingly, the extent of losses beyond any
amounts that may be accrued are not readily determinable at this time.
On
March
22, 2002, a direct action was filed in Montana (Pennock,
et al. v. Maryland Casualty, et al.
First
Judicial District Court of Lewis & Clark County, Montana) by eight
individual plaintiffs (all employees of W.R. Grace
& Co. (“W.R. Grace”)) and their spouses against
CNA,
Maryland Casualty
and the
State of Montana. This
Notes
to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves - (Continued)
action
alleges that the carriers failed to warn of or otherwise protect W.R. Grace
employees from the dangers of asbestos at a W.R. Grace vermiculite mining
facility in Libby, Montana. The Montana direct action is currently stayed
because of W.R. Grace’s pending bankruptcy. With respect to such claims,
numerous factual and legal issues remain to be resolved that are critical
to the
final result, the outcome of which cannot be predicted with any reliability.
These factors include: (a) the unclear nature and scope of any alleged duties
owed to people exposed to asbestos and the resulting uncertainty as to the
potential pool of potential claimants; (b) the potential application of Statutes
of Limitation to many of the claims which may be made depending on the nature
and scope of the alleged duties; (c) the unclear nature of the required nexus
between the acts of the defendants and the right of any particular claimant
to
recovery; (d) the diseases and damages claimed by such claimants; (e) the
extent
that such liability would be shared with other potentially responsible parties;
and (f) the impact of bankruptcy proceedings on claims resolution. Accordingly,
the extent of losses beyond any amounts that may be accrued are not readily
determinable at this time.
CNA
is
vigorously defending these and other cases and believes that it has meritorious
defenses to the claims asserted. However, there are numerous factual and
legal
issues to be resolved in connection with these claims, and it is extremely
difficult to predict the outcome or ultimate financial exposure represented
by
these matters. Adverse developments with respect to any of these matters
could
have a material adverse effect on CNA’s business and insurer financial strength
and debt ratings and the Company’s results of operations and/or
equity.
Environmental
Pollution and Mass Tort
As
of
December 31, 2006 and 2005, CNA carried approximately $416.0 million and
$423.0
million of claim and claim adjustment expense reserves, net of reinsurance
recoverables, for reported and unreported environmental pollution and mass
tort
claims. There was $63.0 million, $53.0 million and $1.0 million of unfavorable
environmental pollution and mass tort net claim and claim adjustment expense
reserve development recorded for the years ended December 31, 2006, 2005
and
2004. CNA recorded $40.0 million, $20.0 million and $15.0 million of current
accident year losses related to mass tort for the years ended December 31,
2006,
2005 and 2004. CNA paid environmental pollution-related claims and mass
tort-related claims, net of reinsurance recoveries, of $110.0 million, $147.0
million and $96.0 million for the years ended December 31, 2006, 2005 and
2004.
In
addition to mass tort claims arising from exposure to asbestos as discussed
above, CNA also has exposure arising from other mass tort claims. Such claims
typically involve allegations by multiple plaintiffs alleging injury resulting
from exposure to or use of similar substances or products over multiple policy
periods. Examples include, but are not limited to, lead paint claims, hardboard
siding, polybutylene pipe, mold, silica, latex gloves, benzene products,
welding
rods, diet drugs, breast implants, medical devices, and various other toxic
chemical exposures. During CNA’s 2006 ground up review, CNA noted adverse
development in various mass tort accounts. The adverse development results
primarily from increases related to defense costs in a small number of accounts
arising out of various substances and products. As a result, CNA increased
mass
tort reserves for prior accident years by $63.0 million in 2006.
CNA
noted
adverse development in various pollution accounts in its 2005 ground up review.
In the course of its review, CNA did not observe a negative trend or
deterioration in the underlying pollution claims environment. Rather, individual
account estimates changed due to changes in liability and/or coverage
circumstances particular to those accounts. As a result, CNA increased pollution
reserves for prior accident years by $50.0 million in 2005.
Net
Prior Year Development
Unfavorable
net prior year development of $185.0 million, including $251.0 million of
unfavorable claim and allocated claim adjustment expense reserve development
and
$66.0 million of favorable premium development, was recorded in 2006.
Unfavorable net prior year development of $807.0 million, including $945.0
million of unfavorable claim and allocated claim adjustment expense reserve
development and $138.0 million of favorable premium development, was recorded
in
2005. Unfavorable net prior year development of $134.0 million, including
$250.0
million of unfavorable claim and allocated claim adjustment expense reserve
development and $116.0 million of favorable premium development, was recorded
in
2004.
Notes
to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves - (Continued)
The
development discussed below includes premium development due to its direct
relationship to claim and claim adjustment expense reserve development. The
development discussed below excludes the impact of the provision for
uncollectible reinsurance, but includes the impact of commutations. See Note
8
for further discussion of the provision for uncollectible
reinsurance.
In
2005
and 2004, CNA recorded favorable or unfavorable premium and claim and claim
adjustment expense reserve development related to the corporate aggregate
reinsurance treaties as movements in the claim and allocated claim adjustment
expense reserves for the accident years covered by the corporate aggregate
reinsurance treaties indicated such development was required. While the
available limit of these treaties was fully utilized in 2003, the ceded premiums
and losses for an individual segment changed in subsequent years because
of the
re-estimation of the subject losses or commutations of the underlying contracts.
In 2005, CNA commuted a significant corporate aggregate reinsurance treaty
and
in 2006, CNA commuted its remaining corporate aggregate reinsurance treaty.
See
Note 18 for further discussion of the corporate aggregate reinsurance treaties.
The
following tables and discussion include the net prior year development recorded
for Standard Lines, Specialty Lines and Other Insurance for the years ended
December 31, 2006, 2005 and 2004. Unfavorable net prior year development
of
$13.0 million was recorded in the Life and Group Non-Core segment for the
year
ended December 31, 2006. Favorable net prior year development of $5.0 million
and $7.0 million was recorded in the Life and Group Non-Core segment for
the
years ended December 31, 2005 and 2004.
|
|
Standard
|
|
Specialty
|
|
Other
|
|
|
|
Year
Ended December 31, 2006
|
|
Lines
|
|
Lines
|
|
Insurance
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
unfavorable (favorable) net prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
year
claim and allocated claim adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
reserve development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
(Non-APMT)
|
|
$
|
157.0
|
|
$
|
(10.0
|
)
|
$
|
23.0
|
|
$
|
170.0
|
|
APMT
|
|
|
|
|
|
|
|
|
63.0
|
|
|
63.0
|
|
Pretax
unfavorable (favorable) net prior year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
before impact of premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
157.0
|
|
|
(10.0
|
)
|
|
86.0
|
|
|
233.0
|
|
Total
unfavorable (favorable) premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
|
(88.0
|
)
|
|
25.0
|
|
|
2.0
|
|
|
(61.0
|
)
|
Total
2006 unfavorable net prior year development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(pretax)
|
|
$
|
69.0
|
|
$
|
15.0
|
|
$
|
88.0
|
|
$
|
172.0
|
|
Notes
to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves - (Continued)
|
|
Standard
|
|
Specialty
|
|
Other
|
|
|
|
Year
Ended December 31, 2005
|
|
Lines
|
|
Lines
|
|
Insurance
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
unfavorable net prior year claim and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
allocated
claim adjustment expense reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
excluding the impact of corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
aggregate
reinsurance treaties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
(Non-APMT)
|
|
$
|
376.0
|
|
$
|
42.0
|
|
$
|
171.0
|
|
$
|
589.0
|
|
APMT
|
|
|
|
|
|
|
|
|
63.0
|
|
|
63.0
|
|
Total
|
|
|
376.0
|
|
|
42.0
|
|
|
234.0
|
|
|
652.0
|
|
Ceded
losses related to corporate aggregate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reinsurance
treaties
|
|
|
183.0
|
|
|
5.0
|
|
|
57.0
|
|
|
245.0
|
|
Pretax
unfavorable net prior year development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
impact of premium development
|
|
|
559.0
|
|
|
47.0
|
|
|
291.0
|
|
|
897.0
|
|
Unfavorable
(favorable) premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development,
excluding impact of corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
aggregate
reinsurance treaties
|
|
|
(101.0
|
)
|
|
(12.0
|
)
|
|
11.0
|
|
|
(102.0
|
)
|
Ceded
premiums related to corporate aggregate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reinsurance
treaties
|
|
|
(6.0
|
)
|
|
19.0
|
|
|
4.0
|
|
|
17.0
|
|
Total
unfavorable (favorable) premium development
|
|
|
(107.0
|
)
|
|
7.0
|
|
|
15.0
|
|
|
(85.0
|
)
|
Total
2005 unfavorable net prior year development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(pretax)
|
|
$
|
452.0
|
|
$
|
54.0
|
|
$
|
306.0
|
|
$
|
812.0
|
|
Year
Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
unfavorable net prior year claim and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
allocated
claim adjustment expense reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
excluding the impact of corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
aggregate
reinsurance treaties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
(Non-APMT)
|
|
$
|
107.0
|
|
$
|
75.0
|
|
$
|
20.0
|
|
$
|
202.0
|
|
APMT
|
|
|
|
|
|
|
|
|
55.0
|
|
|
55.0
|
|
Total
|
|
|
107.0
|
|
|
75.0
|
|
|
75.0
|
|
|
257.0
|
|
Ceded
losses related to corporate aggregate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reinsurance
treaties
|
|
|
8.0
|
|
|
(17.0
|
)
|
|
9.0
|
|
|
|
|
Pretax
unfavorable net prior year development before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
impact
of premium development
|
|
|
115.0
|
|
|
58.0
|
|
|
84.0
|
|
|
257.0
|
|
Unfavorable
(favorable) premium development,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
excluding
impact of corporate aggregate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reinsurance
treaties
|
|
|
(96.0
|
)
|
|
(33.0
|
)
|
|
12.0
|
|
|
(117.0
|
)
|
Ceded
premiums related to corporate aggregate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reinsurance
treaties
|
|
|
(1.0
|
)
|
|
5.0
|
|
|
(3.0
|
)
|
|
1.0
|
|
Total
unfavorable (favorable) premium development
|
|
|
(97.0
|
)
|
|
(28.0
|
)
|
|
9.0
|
|
|
(116.0
|
)
|
Total
2004 unfavorable net prior year development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(pretax)
|
|
$
|
18.0
|
|
$
|
30.0
|
|
$
|
93.0
|
|
$
|
141.0
|
|
2006
Net Prior Year Development
Standard
Lines
Approximately
$119.0 million of unfavorable claim and allocated claim adjustment expense
reserve development was due to reinsurance commutation activity that took
place
in the fourth quarter of 2006. Approximately $82.0 million of unfavorable
claim
and allocated claim adjustment expense reserve development was related to
casualty lines
of
business,
primarily workers’ compensation,
due
to
continued claim
cost
inflation in older accident years,
Notes
to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves - (Continued)
primarily
2002 and prior. The primary drivers of the continuing claim cost inflation
are
medical inflation and advances in medical care.
Favorable
claim and allocated claim adjustment expense reserve development of
approximately $88.0 million was recorded in relation to the short-tail coverages
such as property and marine, primarily in accident years 2004 and 2005. The
favorable results are primarily due to the underwriting actions taken by
CNA
that have significantly improved the results on this business and favorable
outcomes on individual claims.
The
majority of the favorable premium development was due to additional premium
primarily resulting from audits and changes to premium on several ceded
reinsurance agreements. Business impacted included various middle market
liability coverages, workers’ compensation, property, and large accounts. This
favorable premium development was partially offset by approximately $44.0
million of unfavorable claim and allocated claim adjustment expense reserve
development recorded as a result of this favorable premium
development.
Specialty
Lines
Approximately
$55.0 million of unfavorable claim and allocated claim adjustment expense
reserve development was recorded due to increased claim adjustment expenses
and
increased severities in the architects and engineers book of business in
accident years 2003 and prior. Previous reviews assumed that incurred severities
had increased, at least in part, due to increases in the adequacy of case
reserve estimates with relatively minor changes in underlying severity.
Subsequent changes in paid and case incurred losses have shown that more
of the
change was due to underlying increases in verdict and settlement size for
these
accident years rather than increases in case reserve adequacy, resulting
in
higher ultimate losses. One of the primary drivers of these larger verdicts
and
settlements is the continuing general increase in commercial and private
real
estate values.
Approximately
$60.0 million of favorable claim and allocated claim adjustment expense reserve
development was due to improved claim severity and claim frequency in the
healthcare professional liability business, primarily in dental, nursing
home
liability, physicians and other healthcare facilities. The improved severity
and
frequency are due to underwriting changes. CNA no longer writes large national
nursing home chains and focuses on smaller insureds in selected areas of
the
country. These changes have resulted in business that experiences fewer large
claims.
Approximately
$15.0 million of unfavorable claim and allocated claim adjustment expense
reserve development was primarily related to increased severity on individual
large claims from large law firm errors and omissions (“E&O”), and directors
and officers (“D&O”) coverages. These increases result in higher ultimate
loss projections from the average loss methods used by the Company’s
actuaries.
Approximately
$17.0 million of favorable claim and allocated claim adjustment expense reserve
development was recorded in the warranty line of business for accident years
2004 and 2005. The reserves for this business are initially estimated based
on
the loss ratio expected for the business. Subsequent estimates rely more
heavily
on the actual case incurred losses due to the short-tail nature of this
business. The short-tail nature of the business is due to the short period
of
time that passes between the time the business is written and the time when
all
claims are known and settled. Case incurred loss for the most recent accident
year has been lower than indicated by the initial loss ratio.
The
majority of the unfavorable premium development was related to ceded reinsurance
activity.
Other
Insurance
The
majority of the unfavorable claim and allocated claim adjustment expense
reserve
development was related to CNA’s exposure arising from other mass tort claims.
Such claims typically involve allegations by multiple plaintiffs alleging
injury
resulting from exposure to or use of similar substances or products over
multiple policy periods. Examples include, but are not limited to, lead paint
claims, hardboard siding, polybutylene pipe, mold, silica, latex gloves,
benzene
products, welding rods, diet drugs, breast implants, medical devices, and
various other toxic chemical exposures.
During
CNA’s
2006 ground
up
review,
CNA
noted adverse
development in
various
mass tort
Notes
to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves - (Continued)
accounts.
The adverse development results primarily from increases related to defense
costs in a small number of accounts arising out of various substances and
products.
2005
Net Prior Year Development
Standard
Lines
During
the fourth quarter of 2005, CNA executed commutation agreements with certain
reinsurers, including the commutation of a corporate aggregate reinsurance
agreement. These agreements resulted in approximately $285.0 million of
unfavorable claim and allocated claim adjustment expense reserve development.
This unfavorable claim and allocated claim adjustment expense reserve
development was partially offset by a release of a previously established
allowance for uncollectible reinsurance.
Also,
in
the fourth quarter of 2005, reserve reviews of certain products were conducted
and changes in reserve estimates were recorded. Approximately $102.0 million
of
unfavorable claim and allocated claim adjustment expense reserve development
was
due to higher frequency and severity on claims related to excess workers’
compensation, particularly in accident years 2003 and prior. The primary
drivers
of the higher frequency and severity were increasing medical inflation and
advances in medical care. Medical inflation increases the cost of claims
resulting in more claims reaching the excess layers covered by CNA. Medical
inflation also increases the size of claims in CNA’s layers. Similarly, advances
in medical care extend the life expectancies of claimants again resulting
in
additional costs to be covered by CNA as well as more claims reaching the
excess
layers covered by CNA.
In
addition, approximately $4.0 million of unfavorable claim and allocated claim
adjustment expense reserve development was recorded due to increased severity
on
known claims on package policies provided to small businesses in accident
years
2002 and 2003. Approximately $10.0 million of favorable claim and allocated
claim adjustment expense reserve development was due to lower severities
in the
excess and surplus lines runoff business in accident years 2001 and prior.
These
severity changes were driven primarily by judicial decisions and settlement
activities on individual cases.
Approximately
$23.0 million of favorable claim and allocated claim adjustment expense reserve
development was related to favorable loss trends on accident years 2002 and
subsequent in CNA’s international business, specifically Europe and Canada,
primarily in property, cargo and marine coverages. Approximately $4.0 million
of
favorable net prior year claim and allocated claim adjustment expense reserve
development was due to less than expected losses in involuntary
business.
Approximately
$140.0 million of favorable net prior year claim and allocated claim adjustment
expense reserve development was recorded due to improvement in the severity
and
number of claims for property coverages and marine business, primarily in
accident year 2004. The improvements in severity and frequency are substantially
due to underwriting actions taken by CNA that have significantly improved
the
results on this business.
Approximately
$126.0 million of unfavorable net prior year claim and allocated claim
adjustment expense reserve development resulted from increased severity trends
for workers’ compensation, primarily in accident year 2002 and prior. The
primary drivers of the higher severity trends were increasing medical inflation
and advances in medical care. Medical inflation increases the cost of medical
services, and advances in medical care extend the life expectancies of claimants
resulting in additional costs to be covered by CNA.
Approximately
$15.0 million of unfavorable premium development was recorded in relation
to
this unfavorable net prior year claim and allocated claim adjustment expense
reserve development which resulted from additional ceded reinsurance premium
on
agreements where the ceded premium is impacted by the level of ceded
losses.
Approximately
$90.0 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development and $83.0 million of favorable net prior year
premium development resulted from an unfavorable arbitration ruling on two
reinsurance treaties.
Notes
to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves - (Continued)
Approximately
$76.0 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development was attributed to increased severity in liability
coverages for large account policies. These increases are driven by increasing
medical inflation and larger verdicts than anticipated, both of which increase
the severity of these claims.
Approximately
$53.0 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development was related to reviews of liquor liability, trucking
and habitational business that indicated that the number of large claims
was
higher than previously expected in recent accident years. The remainder of
the
favorable net prior year claim and allocated claim adjustment expense reserve
development was primarily a result of improved experience on several coverages
on middle market business, mainly in accident year 2004.
Favorable
net prior year premium development was recorded primarily as a result of
additional premium resulting from audits on recent policies, primarily workers’
compensation.
Additionally,
there was $19.0 million of unfavorable net prior year claim and allocated
claim
adjustment expense reserve development and $6.0 million of favorable premium
development related to the corporate aggregate reinsurance treaties, excluding
the impact of a corporate aggregate reinsurance commutation as discussed
above.
Specialty
Lines
Approximately
$60.0 million of unfavorable claim and allocated claim adjustment expense
reserve development was recorded due to increased claim adjustment expenses
and
increased severities in the architects and engineers book of business, in
accident years 2000 through 2003. Previous reviews assumed that severities
had
increased, at least in part, due to increases in the adequacy of case reserve
estimates. Subsequent changes in paid and incurred loss have shown that more
of
the change was due to larger verdicts and settlements during these accident
years. One of the primary drivers of these larger verdicts and settlements
is
the continuing general increase in real estate values. Favorable net prior
year
premium development of approximately $10.0 million was recorded in relation
to
this unfavorable claim and allocated claim adjustment expense reserve
development.
Approximately
$45.0 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development was related to large D&O claims assumed from a
London syndicate, primarily in accident years 2001 and prior. Approximately
$43.0 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development was recorded due to large claims under excess
coverages provided to health care facilities.
Approximately
$32.0 million of favorable claim and allocated claim adjustment expense reserve
development related to surety business was due to a favorable outcome on
several
specific large claims and lower than expected emergence of additional large
claims related to accident years 1999 through 2003.
Approximately
$30.0 million of unfavorable claim and allocated claim adjustment expense
reserve development was related to a commutation agreement executed in the
fourth quarter of 2005 of a corporate aggregate reinsurance agreement. This
unfavorable claim and allocated claim adjustment expense reserve development
was
partially offset by a release of a previously established allowance for
uncollectible reinsurance.
Approximately
$24.0 million of favorable net prior year claim and allocated claim adjustment
expense reserve development was recorded as a result of improvements in the
claim severity and claim frequency, mainly in recent accident years, from
nursing home businesses. The improved severity and frequency are due to
underwriting changes in this business. CNA no longer writes large national
chains and focuses on smaller insureds in selected areas of the country.
These
changes have resulted in business that experiences fewer large
claims.
Approximately
$14.0 million of favorable net prior year claim and allocated claim adjustment
expense reserve development was recorded due to lower severity in the dental
program. The lower severity is driven by efforts to resolve a higher percentage
of claims without a resulting indemnity payment.
The
remainder of the favorable net prior year claim and allocated claim adjustment
expense reserve development was primarily attributed to favorable experience
in
the warranty line of business, partially offset by unfavorable net prior
year
claim and allocated claim adjustment expense reserve development attributed
to
other large D&O claims.
Notes
to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves - (Continued)
Additionally,
there was approximately $25.0 million of favorable net prior year claim and
allocated claim adjustment expense reserve development and $19.0 million
of
unfavorable premium development related to the corporate aggregate reinsurance
treaties in 2005, excluding the impact of a corporate aggregate reinsurance
commutation as discussed above.
Other
Insurance
Approximately
$157.0 million of unfavorable claim and allocated claim adjustment expense
reserve development was attributable to CNA’s assumed reinsurance operations,
driven by a significant increase in large claim activity during 2005 across
multiple accident years. This development was concentrated in the proportional
liability, excess of loss liability, and professional liability businesses,
which impact underlying coverages that include general liability, umbrella,
E&O and D&O. CNA’s assumed reinsurance operations were put in run-off in
2003.
During
the fourth quarter of 2005, CNA executed significant commutation agreements
with
certain reinsurers, including the commutation of a corporate aggregate
reinsurance agreement. These agreements resulted in approximately $62.0 million
of unfavorable claim and allocated claim adjustment expense reserve
development.
Approximately
$56.0 million of unfavorable claim and allocated claim adjustment expense
reserve development recorded in 2005 was a result of a second quarter
commutation of a finite reinsurance contract put in place in 1992. CNA
recaptured $400.0 million of losses and received $344.0 million of cash.
The
commutation was economically attractive because of the reinsurance agreement’s
contractual interest rate and maintenance charges.
Approximately
$6.0 million of unfavorable claim and allocated claim adjustment expense
reserve
development was related to the corporate aggregate reinsurance treaties,
excluding the impact of a corporate aggregate reinsurance commutation as
discussed above. The unfavorable premium development was driven by $10.0
million
of additional ceded reinsurance premium on agreements where the ceded premium
depends on the ceded loss and $4.0 million of additional premium ceded to
the
corporate aggregate reinsurance treaties.
CNA
noted
adverse development in various pollution accounts in its most recent ground
up
review. In the course of its review, CNA did not observe a negative trend
or
deterioration in the underlying pollution claims environment. Rather, individual
account estimates changed due to changes in liability and/or coverage
circumstances particular to those accounts. As a result, CNA increased pollution
reserves by $50.0 million in 2005.
The
overall unfavorable claim and allocated claim adjustment expense reserve
development was partially decreased by favorable claim and allocated claim
adjustment expense reserve development in various other programs in runoff,
including Financial Guarantee, Guarantee and Credit, and Mortgage Guarantee.
These programs have recently exhibited favorable trends due to offsetting
recoveries and commutations, leading to reductions in the estimated
liabilities.
2004
Net Prior Year Development
Standard
Lines
Approximately
$190.0 million of unfavorable net prior year claim and allocated claim
adjustment expense reserve development recorded during 2004 resulted from
increased severity trends for workers’ compensation on large account policies
primarily in accident years 2002 and prior. The primary drivers of the higher
severity trends were increasing medical inflation and advances in medical
care.
Medical inflation increases the cost of medical services, and advances in
medical care extend the life expectancies of claimants resulting in additional
costs to be covered by CNA. Favorable premium development on retrospectively
rated large account policies of $50.0 million was recorded in relation to
this
unfavorable net prior year claim and allocated claims adjustment expense
reserve
development.
Approximately
$60.0 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development was recorded in involuntary pools in which
CNA’s
participation is mandatory and primarily based on premium
writings. Approximately
$15.0
million of this unfavorable net
prior
year claim
and
allocated claim
Notes
to
Consolidated Financial Statements
Note
9. Claim and Claim Adjustment Expense Reserves - (Continued)
adjustment
expense reserve development was related to CNA’s share of the National Workers’
Compensation Reinsurance Pool (“NWCRP”). During 2004, the NWCRP reached an
agreement with a former pool member to settle their pool liabilities at an
amount less than their established share. The result of this settlement is
a
higher allocation to the remaining pool members, including CNA. The remainder
of
this unfavorable net prior year claim and allocated claim adjustment expense
reserve development was primarily due to increased severity trends for workers’
compensation exposures in older years.
Approximately
$60.0 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development resulted from the change in estimates due to
increased severity trends for excess and surplus business driven by excess
liability, liquor liability and coverages provided to apartment and condominium
complexes. These severity changes were driven primarily by judicial decisions
and settlement activities on individual cases.
Approximately
$105.0 million of favorable net prior year claim and allocated claim adjustment
expense reserve development resulted from reserve studies of commercial auto
liability policies and the liability portion of package policies. The change
was
due to improvement in the severity and number of claims for this business.
This
is primarily due to a lower than expected number of large claims. Approximately
$85.0 million of favorable net prior year claim and allocated claim adjustment
expense reserve development was due to improvement in the severity and number
of
claims for property coverages primarily in accident year 2003. The improvements
in severity and frequency are substantially due to underwriting actions taken
by
the Company that have significantly improved the results on this business.
Other
favorable net prior year premium development of approximately $50.0 million
resulted primarily from higher audit and endorsement premiums on workers’
compensation policies.
During
2004, CNA executed commutation agreements with several members of Trenwick.
These commutations resulted in unfavorable claim and claim adjustment expense
reserve development which was more than offset by a release of a previously
established allowance for uncollectible reinsurance.
Specialty
Lines
CNA
executed commutation agreements with several members of Trenwick during 2004.
These commutations resulted in unfavorable claim and claim adjustment expense
reserve development which was more than offset by a release of a previously
established allowance for uncollectible reinsurance. Additionally, unfavorable
net prior year claim and allocated claim adjustment expense reserve development
resulted from the increased emergence of several large D&O claims, primarily
in recent accident years.
Other
Insurance
In
2004,
CNA executed commutation agreements with several members of Trenwick. These
commutations resulted in unfavorable net prior claim and allocated claim
adjustment expense reserve development partially offset by a release of a
previously established allowance for uncollectible reinsurance. The remainder
of
the unfavorable net prior year claim and allocated claim adjustment expense
reserve development resulted from several other small commutations and increases
to net reserves due to reducing ceded losses, partially offset by a release
of a
previously established allowance for uncollectible reinsurance.
Note
10. Leases
The
Company’s hotels in some instances are constructed on leased land. Other leases
cover office facilities, computer and transportation equipment. Rent expense
amounted to $80.5 million, $97.8 million and $101.4 million for the years
ended
December 31, 2006, 2005 and 2004, respectively. The table below presents
the
future minimum lease payments to be made under non-cancelable operating leases
along with lease and sublease minimum receipts to be received on owned and
leased properties.
Notes
to
Consolidated Financial Statements
Note
10. Leases - (Continued)
|
|
Future
Minimum Lease
|
|
Year
Ended December 31
|
|
Payments
|
|
Receipts
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
70.0
|
|
$
|
6.7
|
|
2008
|
|
|
61.8
|
|
|
6.0
|
|
2009
|
|
|
51.1
|
|
|
5.4
|
|
2010
|
|
|
46.4
|
|
|
5.1
|
|
2011
|
|
|
37.0
|
|
|
3.5
|
|
Thereafter
|
|
|
115.1
|
|
|
5.6
|
|
Total
|
|
$
|
381.4
|
|
$
|
32.3
|
|
Note
11. Income Taxes
The
Company and its eligible subsidiaries file a consolidated federal income
tax
return. The Company has entered into a separate tax allocation agreement
with
CNA, a majority-owned subsidiary in which its ownership exceeds 80%. The
agreement provides that the Company will (i) pay to CNA the amount, if any,
by
which the Company’s consolidated federal income tax is reduced by virtue of
inclusion of CNA in the Company’s return, or (ii) be paid by CNA an amount, if
any, equal to the federal income tax that would have been payable by CNA
if it
had filed a separate consolidated return. The agreement may be canceled by
either of the parties upon thirty days’ written notice.
The
Company’s consolidated federal income tax returns for 2002 through 2004 have
been settled with the Internal Revenue Service (“IRS”), including related
carryback claims for refund which were approved by the Joint Committee on
Taxation. As a result, the Company recorded a federal income tax benefit
of $9.1
million and net refund interest of $2.3 million, net of tax and minority
interest, in the year ended December 31, 2006.
In
2005,
the Company’s consolidated federal income tax returns were settled with the IRS
through 2001 as the tax returns for 1998 through 2001, including related
carryback claims and prior claims for refund, were approved by the Joint
Committee on Taxation in the second quarter of 2005. As a result, the Company
recorded net refund interest of $130.6 million that is included in Other
Revenues in the Consolidated Statements of Income. Subsequent to this
settlement, a review of tax liabilities was performed and the Company reduced
its deferred tax liabilities by $58.5 million for the year ended December
31,
2005. The tax benefit related primarily to the release of federal income
tax
reserves.
The
Company’s consolidated federal income tax return for 2005 is currently under
examination by the IRS. The Company believes the outcome of this examination
will not have a material effect on the financial condition or results of
operations of the Company. In addition, for 2007, the IRS has invited the
Company and its eligible tax consolidated subsidiaries to participate in
the
Compliance Assurance Process (“CAP”) which is a voluntary program for a limited
number of large corporations. Under CAP, the IRS conducts a real-time audit
and
works contemporaneously with the Company to resolve any issues prior to the
filing of the 2007 tax return. The Company has agreed to participate. The
Company believes that this approach should reduce tax-related uncertainties,
if
any.
Provision
has been made for the expected U.S. federal income tax liabilities applicable
to
undistributed earnings of subsidiaries, except for certain subsidiaries for
which the Company intends to invest the undistributed earnings indefinitely,
or
recover such undistributed earnings tax-free. At December 31, 2006, the Company
has not provided deferred taxes of $104.0 million, if sold through a taxable
sale, on $297.0 million of undistributed earnings related to a domestic
affiliate. The determination of the amount of the unrecognized deferred tax
liability related to the undistributed earnings of foreign subsidiaries is
not
practicable.
Total
income tax expense for the years ended December 31, 2006, 2005 and 2004,
was
different than the amounts of $1,565.2 million, $646.3 million and $640.1
million, computed by applying the statutory U.S. federal income tax rate
of 35%
to income before income taxes and minority interest for each of the
years.
Notes
to
Consolidated Financial Statements
Note
11. Income Taxes - (Continued)
A
reconciliation between the statutory federal income tax rate and the Company’s
effective income tax rate as a percentage of income (loss) before income
tax
expense (benefit) and minority interest is as follows:
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Statutory
rate
|
|
|
35
|
%
|
|
35
|
%
|
|
35
|
%
|
Increase
(decrease) in income tax rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
Exempt
interest and dividends received deduction
|
|
|
(2
|
)
|
|
(6
|
)
|
|
(6
|
)
|
State
and city income taxes
|
|
|
1
|
|
|
3
|
|
|
3
|
|
Foreign
earnings indefinitely reinvested
|
|
|
(1
|
)
|
|
|
|
|
|
|
Prior
year tax settlements
|
|
|
|
|
|
(3
|
)
|
|
|
|
Other
|
|
|
(1
|
)
|
|
(2
|
)
|
|
(3
|
)
|
Effective
income tax rate
|
|
|
32
|
%
|
|
27
|
%
|
|
29
|
%
|
The
current and deferred components of income tax expense (benefit), excluding
taxes
on discontinued operations and the cumulative effect of the changes in
accounting principles, are as follows:
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit):
|
|
|
|
|
|
|
|
Federal:
|
|
|
|
|
|
|
|
Current
|
|
$
|
1,072.7
|
|
$
|
521.6
|
|
$
|
425.8
|
|
Deferred
|
|
|
250.7
|
|
|
(117.3
|
)
|
|
43.3
|
|
State
and city:
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
97.9
|
|
|
72.6
|
|
|
54.7
|
|
Deferred
|
|
|
3.8
|
|
|
7.7
|
|
|
11.8
|
|
Foreign
|
|
|
25.6
|
|
|
5.8
|
|
|
0.6
|
|
Total
|
|
$
|
1,450.7
|
|
$
|
490.4
|
|
$
|
536.2
|
|
Deferred
tax assets (liabilities) are as follows:
December
31
|
|
2006
|
|
2005
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
Insurance
reserves:
|
|
|
|
|
|
Property
and casualty claim and claim adjustment expense reserves
|
|
$
|
775.3
|
|
$
|
807.4
|
|
Unearned
premium reserves
|
|
|
244.8
|
|
|
232.4
|
|
Life
reserve differences
|
|
|
132.6
|
|
|
186.6
|
|
Other
insurance reserves
|
|
|
25.9
|
|
|
24.3
|
|
Receivables
|
|
|
247.7
|
|
|
292.2
|
|
Tobacco
settlements
|
|
|
436.0
|
|
|
421.5
|
|
Employee
benefits
|
|
|
347.0
|
|
|
293.6
|
|
Life
settlement contracts
|
|
|
102.0
|
|
|
102.2
|
|
Investment
valuation differences
|
|
|
92.9
|
|
|
130.2
|
|
Net
operating loss carried forward
|
|
|
26.1
|
|
|
56.9
|
|
Basis
differential in investment in subsidiary
|
|
|
33.6
|
|
|
42.2
|
|
Other
|
|
|
247.5
|
|
|
373.7
|
|
Gross
deferred tax assets
|
|
|
2,711.4
|
|
|
2,963.2
|
|
Valuation
allowance
|
|
|
|
|
|
(31.2
|
)
|
Deferred
tax assets after valuation allowance
|
|
$ |
2,711.4
|
|
$ |
2,932.0
|
|
Notes
to
Consolidated Financial Statements
Note
11. Income Taxes - (Continued)
December
31
|
|
2006
|
|
2005
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
Deferred
acquisition costs
|
|
$
|
(647.6
|
)
|
$
|
(651.3
|
)
|
Net
unrealized gains
|
|
|
(364.4
|
)
|
|
(276.6
|
)
|
Property,
plant and equipment
|
|
|
(523.6
|
)
|
|
(545.9
|
)
|
Foreign
and other affiliates
|
|
|
(10.7
|
)
|
|
(15.4
|
)
|
Basis
differential in investment in subsidiary
|
|
|
(230.8
|
)
|
|
(210.4
|
)
|
Contingent
interest
|
|
|
(53.4
|
)
|
|
(42.6
|
)
|
Other
liabilities
|
|
|
(260.0
|
)
|
|
(284.5
|
)
|
Gross
deferred tax liabilities
|
|
|
(2,090.5
|
)
|
|
(2,026.7
|
)
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$
|
620.9
|
|
$
|
905.3
|
|
At
December 31, 2005, a valuation allowance of $31.2 million related to certain
foreign subsidiaries remained outstanding, due to uncertainty in the ability
of
the foreign subsidiaries to generate sufficient future income. During 2006,
the
Company reconsidered the need for this allowance in light of recent earnings
levels and anticipated future earnings and determined the allowance was no
longer required. Therefore, the allowance was released in 2006. Although
realization of deferred tax assets is not assured, management believes it
is
more likely than not that the recognized net deferred tax asset will be realized
through future earnings, including but not limited to future income from
continuing operations, reversal of existing temporary differences, and available
tax planning strategies.
At
December 31, 2006, Diamond Offshore, which is not included in the Company’s
consolidated federal income tax return, had a net operating loss carryforward
of
approximately $7.9 million which will expire by 2010. It is expected that
the
net operating loss carryforward will be fully utilized by Diamond Offshore
in
future years.
Note
12. Debt
|
|
|
|
Unamortized
|
|
|
|
Short-Term
|
|
Long-Term
|
|
December
31, 2006
|
|
Principal
|
|
Discount
|
|
Net
|
|
Debt
|
|
Debt
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
Corporation
|
|
$
|
875.0
|
|
$
|
9.6
|
|
$
|
865.4
|
|
|
|
|
$
|
865.4
|
|
CNA
Financial
|
|
|
2,167.3
|
|
|
11.5
|
|
|
2,155.8
|
|
$
|
0.3
|
|
|
2,155.5
|
|
Diamond
Offshore
|
|
|
965.3
|
|
|
1.0
|
|
|
964.3
|
|
|
|
|
|
964.3
|
|
Boardwalk
Pipeline
|
|
|
1,360.0
|
|
|
9.1
|
|
|
1,350.9
|
|
|
|
|
|
1,350.9
|
|
Loews
Hotels
|
|
|
236.0
|
|
|
|
|
|
236.0
|
|
|
4.3
|
|
|
231.7
|
|
Total
|
|
$
|
5,603.6
|
|
$
|
31.2
|
|
$
|
5,572.4
|
|
$
|
4.6
|
|
$
|
5,567.8
|
|
Notes
to
Consolidated Financial Statements
Note
12. Debt - (Continued)
December
31
|
|
2006
|
|
2005
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Loews
Corporation (Parent Company):
|
|
|
|
|
|
Senior:
|
|
|
|
|
|
|
|
6.8%
notes due 2006 (effective interest rate of 6.8%) (authorized,
$300)
|
|
|
|
|
$
|
300.0
|
|
8.9%
debentures due 2011 (effective interest rate of 9.0%) (authorized,
$175)
|
|
$
|
175.0
|
|
|
175.0
|
|
5.3%
notes due 2016 (effective interest rate of 5.4%) (authorized, $400)
(a)
|
|
|
400.0
|
|
|
400.0
|
|
6.0%
notes due 2035 (effective interest rate of 6.2%) (authorized, $300)
(a)
|
|
|
300.0
|
|
|
300.0
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
Senior:
|
|
|
|
|
|
|
|
6.8%
notes due 2006 (effective interest rate of 6.8%) (authorized,
$250)
|
|
|
|
|
|
250.0
|
|
6.5%
notes due 2008 (effective interest rate of 6.6%) (authorized,
$150)
|
|
|
150.0
|
|
|
150.0
|
|
6.6%
notes due 2008 (effective interest rate of 6.7%) (authorized,
$200)
|
|
|
200.0
|
|
|
200.0
|
|
6.0%
notes due 2011(effective interest rate of 6.1%) (authorized,
$400)
|
|
|
400.0
|
|
|
|
|
8.4%
notes due 2012 (effective interest rate of 8.6%) (authorized,
$100)
|
|
|
69.6
|
|
|
69.6
|
|
5.9%
notes due 2014 (effective interest rate of 6.0%) (authorized
$549)
|
|
|
549.0
|
|
|
549.0
|
|
6.5%
notes due 2016 (effective interest rate of 6.6%) (authorized,
$350)
|
|
|
350.0
|
|
|
|
|
7.0%
notes due 2018 (effective interest rate of 7.1%) (authorized,
$150)
|
|
|
150.0
|
|
|
150.0
|
|
7.3%
debentures due 2023 (effective interest rate of 7.3%) (authorized,
$250)
|
|
|
243.0
|
|
|
243.0
|
|
5.1%
debentures due 2034 (effective interest rate of 5.1%) (authorized,
$31)
|
|
|
30.9
|
|
|
30.9
|
|
Revolving
credit facility due 2008 (effective interest rate of 5.0%)
|
|
|
|
|
|
20.0
|
|
Other
senior debt (effective interest rates approximate 5.0% and
5.8%)
|
|
|
24.8
|
|
|
36.9
|
|
Diamond
Offshore:
|
|
|
|
|
|
|
|
Senior:
|
|
|
|
|
|
|
|
5.2%
notes, due 2014 (effective interest rate of 5.2%) (authorized,
$250)
(a)
|
|
|
250.0
|
|
|
250.0
|
|
4.9%
notes, due 2015 (effective interest rate of 5.0%) (authorized,
$250)
(a)
|
|
|
250.0
|
|
|
250.0
|
|
Zero
coupon convertible debentures due 2020, net of discount of $3.2
|
|
|
|
|
|
|
|
and
$12.2 (effective interest rate of 3.6%) (b)
|
|
|
5.3
|
|
|
18.7
|
|
1.5
% convertible senior debentures due 2031 (effective interest rate
of
1.6%)
|
|
|
|
|
|
|
|
(authorized
$460) (c)
|
|
|
460.0
|
|
|
460.0
|
|
Boardwalk
Pipeline:
|
|
|
|
|
|
|
|
Senior:
|
|
|
|
|
|
|
|
5.9%
notes due 2016 (effective interest of 6.0%) (authorized,
$250)
|
|
|
250.0
|
|
|
|
|
5.5%
notes due 2017 (effective interest rate of 5.6%) (authorized, $300)
(a)
|
|
|
300.0
|
|
|
300.0
|
|
5.2%
notes due 2018 (effective interest rate of 5.4%) (authorized, $185)
(a)
|
|
|
185.0
|
|
|
185.0
|
|
Revolving
credit facility due 2010 (effective interest rate of 5.2%)
|
|
|
|
|
|
42.1
|
|
Texas
Gas:
|
|
|
|
|
|
|
|
Senior:
|
|
|
|
|
|
|
|
4.6%
notes due 2015 (effective interest rate of 5.1%) (authorized, $250)
(a)
|
|
|
250.0
|
|
|
250.0
|
|
7.3%
debentures due 2027 (effective interest rate of 8.1%) (authorized,
$100)
|
|
|
100.0
|
|
|
100.0
|
|
Gulf
South:
|
|
|
|
|
|
|
|
Senior:
|
|
|
|
|
|
|
|
5.1%
notes due 2015 (effective interest rate of 5.2%) (authorized, $275)
(a)
|
|
|
275.0
|
|
|
275.0
|
|
Loews
Hotels:
|
|
|
|
|
|
|
|
Senior
debt, principally mortgages (effective interest rates
approximate
|
|
|
|
|
|
|
|
4.8%
and 4.8%)
|
|
|
236.0
|
|
|
240.1
|
|
|
|
|
5,603.6
|
|
|
5,245.3
|
|
Less
unamortized discount
|
|
|
31.2
|
|
|
38.5
|
|
Debt
|
|
$
|
5,572.4
|
|
$
|
5,206.8
|
|
Notes
to
Consolidated Financial Statements
Note
12. Debt - (Continued)
(a)
|
Redeemable
in whole or in part at the greater of the principal amount or the
net
present value of scheduled payments discounted at the specified
treasury
rate plus a margin.
|
(b)
|
The
debentures are convertible into Diamond Offshore’s common stock at the
rate of 8.6075 shares per one thousand dollars principal amount,
subject
to adjustment. Each debenture will be purchased by Diamond Offshore
at the
option of the holder on the tenth and fifteenth anniversaries of
issuance
at the accreted value through the date of repurchase. The debentures
were
issued on June 6, 2000. Diamond Offshore, at its option, may elect
to pay
the purchase price in cash or shares of common stock, or in certain
combinations thereof. The debentures are redeemable at the option
of
Diamond Offshore at any time at prices which reflect a yield of
3.5% to
the holder.
|
(c)
|
The
debentures are convertible into Diamond Offshore’s common stock at the
rate of 20.3978 shares per one thousand dollars principal amount,
subject
to adjustment in certain circumstances. Upon conversion, Diamond
Offshore
has the right to deliver cash in lieu of shares of its common stock.
Diamond Offshore may redeem all or a portion of the debentures
at any time
on or after April 15, 2008 at a price equal to 100% of the principal
amount. Holders may require Diamond Offshore to purchase all or
a portion
of the debentures on April 15, 2008, at a price equal to 100% of
the
principal amount. Diamond Offshore, at its option, may elect to
pay the
purchase price in cash or shares of common stock, or in certain
combinations thereof.
|
In
June
of 2006, Boardwalk Pipeline entered into a $400.0 million unsecured revolving
credit facility.
In
August
of 2006, CNA issued $400.0 million of 6.0% five-year senior notes due August
15,
2011 and $350.0 million of 6.5% ten-year senior notes due August 15, 2016
in a
public offering. CNA used part of the proceeds to fund repayment of its $250.0
million 6.75% senior notes at maturity in November of 2006.
In
November of 2006, Boardwalk Pipeline issued $250.0 million of 5.9% ten-year
senior notes due November 15, 2016.
In
November of 2006, Diamond Offshore entered into a $285.0 million syndicated,
5-year senior unsecured revolving credit facility, for general corporate
purposes, including loans and performance or standby letters of
credit.
At
December 31, 2006, the aggregate of long-term debt maturing in each of the
next
five years is approximately as follows: $4.6 million in 2007, $814.7 million
in
2008, $71.9 million in 2009, $9.6 million in 2010 and $579.5 million in 2011.
The aggregate of long-term debt maturing in each of the next five years,
after
giving effect to the conversions during 2007 as discussed in Note 25, is
as
follows: $4.6 million in 2007, $376.3 million in 2008, $71.9 million in 2009,
$8.1 million in 2010 and $579.5 million in 2011.
Notes
to
Consolidated Financial Statements
Note
13. Comprehensive Income (Loss)
The
components of accumulated other comprehensive income (loss) are as
follows:
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Unrealized
|
|
|
|
|
|
Other
|
|
|
|
Gains
(Losses)
|
|
Foreign
|
|
Pension
|
|
Comprehensive
|
|
|
|
on
Investments
|
|
Currency
|
|
Liability
|
|
Income
(Loss)
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2004
|
|
$
|
846.0
|
|
$
|
46.0
|
|
$
|
(122.5
|
)
|
$
|
769.5
|
|
Unrealized
holding gains, net of tax of $169.0
|
|
|
244.0
|
|
|
|
|
|
|
|
|
244.0
|
|
Adjustment
for items included in net income,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax of $222.6
|
|
|
(377.2
|
)
|
|
|
|
|
|
|
|
(377.2
|
)
|
Foreign
currency translation adjustment, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax
of $1.6
|
|
|
|
|
|
23.3
|
|
|
|
|
|
23.3
|
|
Minimum
pension liability adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
$37.4
|
|
|
|
|
|
|
|
|
(62.2
|
)
|
|
(62.2
|
)
|
Balance,
December 31, 2004
|
|
|
712.8
|
|
|
69.3
|
|
|
(184.7
|
)
|
|
597.4
|
|
Unrealized
holding gains, net of tax of $87.7
|
|
|
(102.9
|
)
|
|
|
|
|
|
|
|
(102.9
|
)
|
Adjustment
for items included in net income,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax of $71.1
|
|
|
(120.5
|
)
|
|
|
|
|
|
|
|
(120.5
|
)
|
Foreign
currency translation adjustment, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax
of $1.8
|
|
|
|
|
|
(20.8
|
)
|
|
|
|
|
(20.8
|
)
|
Minimum
pension liability adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
$24.2
|
|
|
|
|
|
|
|
|
(42.1
|
)
|
|
(42.1
|
)
|
Balance,
December 31, 2005
|
|
|
489.4
|
|
|
48.5
|
|
|
(226.8
|
)
|
|
311.1
|
|
Unrealized
holding gains, net of tax of $66.6
|
|
|
105.5
|
|
|
|
|
|
|
|
|
105.5
|
|
Adjustment
for items included in net income,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax of $6.3
|
|
|
(10.5
|
)
|
|
|
|
|
|
|
|
(10.5
|
)
|
Foreign
currency translation adjustment, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax
of $0.3
|
|
|
|
|
|
36.7
|
|
|
|
|
|
36.7
|
|
Minimum
pension liability adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
$49.2
|
|
|
|
|
|
|
|
|
87.0
|
|
|
87.0
|
|
Adjustment
to initially apply SFAS No. 158,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax of $77.5
|
|
|
|
|
|
|
|
|
(143.1
|
)
|
|
(143.1
|
)
|
Balance,
December 31, 2006
|
|
$
|
584.4
|
|
$
|
85.2
|
|
$
|
(282.9
|
)
|
$
|
386.7
|
|
Note
14. Significant Transactions
Gain
on Issuance of Subsidiary Stock
In
August
of 2006, CNA completed a public offering of 7.0 million shares of its common
stock. In addition, the Company purchased 7.86 million shares of CNA’s common
stock in a private offering at the same price. As a result of these
transactions, the Company’s ownership percentage in CNA declined from 91% to 89%
and the Company recorded a pretax gain of $9.0 million including purchase
accounting adjustments ($5.9 million after provision for deferred income
taxes).
In
November of 2005, a wholly owned subsidiary of the Company, Boardwalk Pipeline,
completed an initial public offering of 15,000,000 common limited partnership
units at a price of $19.50 per common unit, representing a 14.5% limited
partnership interest. In connection with the closing of this offering,
the
Company contributed, through a wholly owned subsidiary, its ownership interest
in Boardwalk Pipelines, LLC, together with certain of its liabilities to
Boardwalk Pipeline and received 53,256,122 common and 33,093,878 subordinated
units representing an aggregate 83.5% limited partner interest. In addition,
the
Company’s subsidiary received a 2% general partnership interest and incentive
distribution rights, which entitles the Company to an increasing percentage
of
the cash that is distributed
in excess of $0.4025 per unit per quarter. Boardwalk Pipeline used the
net
proceeds of approximately
Notes
to
Consolidated Financial Statements
Note
14. Significant Transactions - (Continued)
$271.4
million to fund the repayment of its intercompany debt ($250.0 million) relating
to the acquisition of Gulf South and to provide additional working
capital.
In
the
fourth quarter of 2006, Boardwalk Pipeline sold an additional 6,900,000 common
units, respectively, at a price of $29.65 per unit in a public offering and
received net proceeds of $195.2 million. In addition, the Company contributed
$4.2 million to maintain its 2.0% general partner interest.
The
subordinated units have secondary distribution rights during the subordination
period and will convert to common units at the earliest date subsequent to
which
Boardwalk Pipeline has paid a $0.35 minimum quarterly distribution for twelve
consecutive quarters, or minimum quarterly distributions in the amount of
$0.525
per unit for four consecutive quarters.
The
issuance prices of the common units exceeded the Company’s carrying amount,
resulting in cumulative pretax gains of approximately $234.6 million and
$133.1
million at December 31, 2006 and 2005, respectively. In accordance with SEC
Staff Accounting Bulletin No. 51, “Accounting for Sales of Stock by a
Subsidiary,” recognition of a gain is only appropriate if the class of
securities sold by the subsidiary does not contain any preference over the
subsidiary’s other classes of securities. As a result, the Company will defer
gain recognition until the subordinated units are converted into common
units.
Acquisition
of Gulf South
The
Company, through its subsidiary Boardwalk Pipelines, LLC acquired Gulf South
Pipeline, LP (“Gulf South”) from Entergy-Koch, LP, a venture between Entergy
Corporation and Koch Energy, Inc., a subsidiary of privately-owned Koch
Industries, Inc., in December of 2004. The Company funded the $1.14 billion
purchase price, including transaction costs and closing adjustments, with
$575.0
million of proceeds from an interim loan and the remaining approximately
$561.0
million from its available cash. In January of 2005, Boardwalk Pipelines,
LLC
and Gulf South issued long-term debt and used the proceeds to repay the $575.0
million interim loan.
Gulf
South owns and operates a 7,500-mile interstate natural gas pipeline and
storage
system located in the states of Texas, Louisiana, Mississippi, Alabama and
Florida. The Gulf South pipeline system is comprised of the interstate
transmission pipeline and 83.0 billion cubic feet (“Bcf”) of working gas storage
capacity.
The
allocation of purchase price to the assets and liabilities acquired was as
follows:
|
|
Gulf
South
|
|
(In
millions)
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
77.4
|
|
Property,
plant and equipment
|
|
|
1,159.0
|
|
Other
non-current assets
|
|
|
28.3
|
|
Current
liabilities
|
|
|
(108.7
|
)
|
Other
liabilities and deferred credits
|
|
|
(34.8
|
)
|
|
|
$
|
1,121.2
|
|
Notes
to
Consolidated Financial Statements
Note
14. Significant Transactions - (Continued)
The
following unaudited pro forma financial information assumes that Gulf South
had
been acquired as of January 1, 2004. The pro forma amounts include certain
adjustments, including an adjustment to depreciation expense based on the
preliminary allocation of purchase price to property, plant and equipment;
adjustment of interest expense to reflect the issuance of debt in the
acquisitions; and the related tax effect of these items.
Year
Ended December 31
|
|
2004
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
15,477.8
|
|
Income
from continuing operations
|
|
|
1,260.0
|
|
Net
income
|
|
|
1,240.5
|
|
|
|
|
|
|
Basic
and diluted income per share of Loews common stock:
|
|
|
|
|
Income
from continuing operations
|
|
$
|
2.26
|
|
Net
income
|
|
|
2.23
|
|
The
pro
forma information does not necessarily reflect the actual results that would
have occurred had the companies been combined during the periods presented,
nor
is it necessarily indicative of future results of operations.
Sale
of Oil Tankers
Hellespont
Shipping Corporation (“Hellespont”), in which the Company, through Majestic
Shipping Corporation (“Majestic”), a wholly owned subsidiary, has a 49% common
stock interest, sold all of its ultra-large crude oil tankers in July of
2004.
Majestic received cash distributions from Hellespont and recognized income
of
$179.3 million ($116.5 million after taxes) for the year ended December 31,
2004.
Specialty
Medical Business
On
January 6, 2005, CNA completed the sale of its specialty medical business
to
Aetna Inc. As a result of the sale, CNA recorded a realized gain of
approximately $8.2 million after-tax and minority interest in 2005. The revenues
of the business sold were $17.0 million and $166.0 million for the years
ended
December 31, 2005 and 2004. Net income related to this business was $16.4
million and $14.6 million for the years ended December 31, 2005 and
2004.
Individual
Life Sale
On
April
30, 2004, CNA completed the sale of its individual life insurance business
to
Swiss Re. The business sold included term, universal and permanent life
insurance policies and individual annuity products. CNA’s individual long term
care and structured settlement businesses were excluded from the sale. Swiss
Re
acquired VFL and CNA’s Nashville, Tennessee insurance servicing and
administration building as part of the sale. In connection with the sale,
CNA
entered into a reinsurance agreement in which CAC ceded its individual life
insurance business to Swiss Re on a 100% indemnity reinsurance basis. Subject
to
certain exceptions, Swiss Re assumed the credit risk of the business that
was
previously reinsured to other carriers. As a result of this reinsurance
agreement with Swiss Re, approximately $1.0 billion of future policy benefit
reserves were ceded to Swiss Re. CNA received consideration of approximately
$700.0 million and recorded a realized investment loss of $622.0 million
pretax
($352.9 million after-tax and minority interest).
The
revenues of the individual life business through the sale date were $151.0
million for the year ended December 31, 2004. The net results for this business
through the sale date were a net loss of $5.5 million for the year ended
December 31, 2004.
Notes
to
Consolidated Financial Statements
Note
15. Restructuring and Other Related Charges
In
2001,
CNA finalized and approved two separate restructuring plans. The first plan
related to CNA’s Information Technology operations. The initial restructuring
and other related charges amounted to $62.0 million in 2001. The remaining
accrual related to this restructuring charge of $3.0 million was released
in
2004.
The
second plan related to restructuring the property and casualty segments and
Life
and Group Non-Core segment, discontinuation of the variable life and annuity
business and consolidation of real estate locations. During the second quarter
of 2006, CNA management reevaluated the sufficiency of the remaining accrual,
which related to lease termination costs, and determined that the liability
is
no longer required as CNA has completed its lease obligations. As a result,
the
excess remaining accrual was released in 2006, resulting in pretax income
of
$12.9 million for the year ended December 31, 2006. During 2005 and 2004,
approximately $1.0 million and $5.0 million of costs were paid. The initial
restructuring and other related charges amounted to $189.0 million in
2001.
Note
16. Statutory Accounting Practices (Unaudited)
CNA’s
domestic insurance subsidiaries maintain their accounts in conformity with
accounting practices prescribed or permitted by insurance regulatory
authorities, which vary in certain respects from GAAP. In converting from
statutory accounting principles to GAAP, typical adjustments include deferral
of
policy acquisition costs and the inclusion of net unrealized holding gains
or
losses in shareholders’ equity relating to certain fixed maturity securities.
The National Association of Insurance Commissioners (“NAIC”) has codified
statutory accounting principles to foster more consistency among the states
for
accounting guidelines and reporting.
CNA’s
insurance subsidiaries are domiciled in various jurisdictions. These
subsidiaries prepare statutory financial statements in accordance with
accounting practices prescribed or permitted by the respective jurisdictions’
insurance regulators. Prescribed statutory accounting practices are set forth
in
a variety of publications of the NAIC as well as state laws, regulations
and
general administrative rules.
CCC
follows a permitted practice related to the statutory provision for reinsurance,
or the uncollectible reinsurance reserve. This permitted practice allows
CCC to
record an additional uncollectible reinsurance reserve amount through a
different financial statement line item than the prescribed statutory
convention. This permitted practice had no effect on CCC’s statutory surplus in
2006 or 2005.
CNA’s
ability to pay dividends and other credit obligations is significantly dependent
on receipt of dividends from its subsidiaries. The payment of dividends to
CNA
by its insurance subsidiaries without prior approval of the insurance department
of each subsidiary’s domiciliary jurisdiction is limited by formula. Dividends
in excess of these amounts are subject to prior approval by the respective
state
insurance departments.
Dividends
from CCC are subject to the insurance holding company laws of the State of
Illinois, the domiciliary state of CCC. Under these laws, ordinary dividends,
or
dividends that do not require prior approval of the Illinois Department of
Financial and Professional Regulation - Division of Insurance (the
“Department”), may be paid only from earned surplus, which is calculated by
removing unrealized gains from unassigned surplus. As of December 31, 2006,
CCC
is in a positive earned surplus position, enabling CCC to pay approximately
$556.0 million of dividend payments during 2007 that would not be subject
to the
Department’s prior approval. The actual level of dividends paid in any year is
determined after an assessment of available dividend capacity, holding company
liquidity and cash needs as well as the impact the dividends will have on
the
statutory surplus of the applicable insurance company.
CNA’s
domestic insurance subsidiaries are subject to risk-based capital requirements.
Risk-based capital is a method developed by the NAIC to determine the minimum
amount of statutory capital appropriate for an insurance company to support
its
overall business operations in consideration of its size and risk profile.
The
formula for determining the amount of risk-based capital specifies various
factors, weighted based on the perceived degree of risk, which are applied
to
certain financial balances and financial activity. The adequacy of a company’s
actual capital is evaluated by a comparison to the risk-based capital results,
as determined by the formula. Companies below minimum risk-based capital
requirements are classified within certain
levels,
each of which requires specified
Notes
to
Consolidated Financial Statements
Note
16. Statutory Accounting Practices (Unaudited) - (Continued)
corrective
action. As of December 31, 2006 and 2005, all of CNA’s domestic insurance
subsidiaries exceeded the minimum risk-based capital requirements.
Combined
statutory capital and surplus and net income, determined in accordance with
accounting practices prescribed or permitted by insurance regulatory
authorities, for the property and casualty and the life and group insurance
subsidiaries, were as follows:
|
|
Statutory
Capital and Surplus
|
|
Statutory
Net Income
|
|
|
|
December
31 (a)
|
|
Year
Ended December 31
|
|
Unaudited
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and casualty companies
|
|
$
|
8,137.0
|
|
$
|
6,940.0
|
|
$
|
721.0
|
|
$
|
550.0
|
|
$
|
694.0
|
|
Life
and group insurance companies
|
|
|
687.0
|
|
|
627.0
|
|
|
67.0
|
|
|
65.0
|
|
|
334.0
|
|
(a) |
Surplus
includes the property and casualty companies’ equity ownership of the life
and company’s capital and surplus.
|
Note
17. Benefit Plans
Pension
Plans - The Company has several non-contributory defined benefit plans for
eligible employees. The benefits for certain plans which cover salaried
employees and certain union employees are based on formulas which include,
among
others, years of service and average pay. The benefits for one plan which
covers
union workers under various union contracts and certain salaried employees
are
based on years of service multiplied by a stated amount. Benefits for another
plan are determined annually based on a specified percentage of annual earnings
(based on the participant’s age) and a specified interest rate (which is
established annually for all participants) applied to accrued balances. 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.
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
Company uses December 31 as the measurement date for the majority of its
plans.
Weighted-average
assumptions used to determine benefit obligations:
|
|
Pension
Benefits
|
|
Other
Postretirement Benefits
|
|
December
31
|
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.7
|
%
|
|
5.6
|
%
|
|
5.9
|
%
|
|
5.7
|
%
|
|
5.5
|
%
|
|
5.9
|
%
|
Rate
of compensation increase
|
|
|
4.0
% to 7.0
|
%
|
|
4.0%
to 7.0
|
%
|
|
4.0%
to 7.0
|
%
|
|
|
|
|
|
|
|
|
|
Notes
to
Consolidated Financial Statements
Note
17. Benefit Plans - (Continued)
Weighted-average
assumptions used to determine net periodic benefit cost:
|
|
Pension
Benefits
|
|
Other
Postretirement Benefits
|
|
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.6
|
%
|
|
5.9
|
%
|
|
6.2%
to 6.3
|
%
|
|
5.5
|
%
|
|
5.9
|
%
|
|
5.9%
to 6.2
|
%
|
Expected
long-term rate of return on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plan
assets
|
|
|
7.0%
to 8.0
|
%
|
|
7.0%
to 8.0
|
%
|
|
7.5%
to 8.0
|
%
|
|
|
|
|
|
|
|
|
|
Rate
of compensation increase
|
|
|
4.0%
to 7.0
|
%
|
|
4.0%
to 7.0
|
%
|
|
4.0%
to 7.0
|
%
|
|
|
|
|
|
|
|
|
|
The
long-term rate of return for plan assets is determined based on widely-accepted
capital market principles, long-term return analysis for global fixed income
and
equity markets as well as the active total return oriented portfolio management
style. Long-term trends are evaluated relative to market factors such as
inflation, interest rates and fiscal and monetary policies, in order to assess
the capital market assumptions as applied to the plan. Consideration of
diversification needs and rebalancing is maintained.
Assumed
health care cost trend rates:
December
31
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
care cost trend rate assumed for next year
|
|
|
4%
to 10.5
|
%
|
|
4%
to 11
|
%
|
|
4%
to 11.5
|
%
|
Rate
to which the cost trend rate is assumed to decline (the
ultimate
|
|
|
|
|
|
|
|
|
|
|
trend
rate)
|
|
|
4%
to 5
|
%
|
|
4%
to 5
|
%
|
|
4%
to 5
|
%
|
Year
that the rate reaches the ultimate trend rate
|
|
|
2007-2018
|
|
|
2006-2018
|
|
|
2005-2018
|
|
Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plans. A one-percentage-point change in assumed health
care
cost trend rates would have the following effects:
|
|
One
Percentage Point
|
|
|
|
Increase
|
|
Decrease
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Effect
on total of service and interest cost
|
|
$
|
2.5
|
|
$
|
(1.4
|
)
|
Effect
on postretirement benefit obligation
|
|
|
20.8
|
|
|
(7.9
|
)
|
Net
periodic benefit cost components:
|
|
Pension
Benefits
|
|
Other
Postretirement Benefits
|
|
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
54.2
|
|
$
|
54.5
|
|
$
|
58.2
|
|
$
|
9.4
|
|
$
|
10.6
|
|
$
|
11.3
|
|
Interest
cost
|
|
|
212.2
|
|
|
212.3
|
|
|
211.7
|
|
|
27.5
|
|
|
30.7
|
|
|
35.7
|
|
Expected
return on plan assets
|
|
|
(244.1
|
)
|
|
(236.6
|
)
|
|
(230.7
|
)
|
|
(4.6
|
)
|
|
(4.6
|
)
|
|
(5.3
|
)
|
Amortization
of unrecognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
loss
|
|
|
33.2
|
|
|
27.5
|
|
|
16.3
|
|
|
4.5
|
|
|
5.1
|
|
|
2.1
|
|
Amortization
of unrecognized prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
service
cost
|
|
|
7.5
|
|
|
7.5
|
|
|
7.5
|
|
|
(33.8
|
)
|
|
(29.8
|
)
|
|
(21.6
|
)
|
Special
termination benefit
|
|
|
6.0
|
|
|
0.4
|
|
|
|
|
|
2.2
|
|
|
|
|
|
|
|
Settlement
loss
|
|
|
|
|
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
Curtailment
loss
|
|
|
|
|
|
|
|
|
|
|
|
3.0
|
|
|
|
|
|
|
|
Regulatory
asset decrease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(increase)
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
7.3
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$
|
65.0
|
|
$
|
65.6
|
|
$
|
67.5
|
|
$
|
15.5
|
|
$
|
12.0
|
|
$
|
22.2
|
|
Notes
to
Consolidated Financial Statements
Note
17. Benefit Plans - (Continued)
Additional
Information:
|
|
Pension
Benefits
|
|
Other
Postretirement Benefits
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in minimum liability included in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(prior
to adoption of SFAS No. 158)
|
|
$
|
(139.1
|
)
|
$
|
67.2
|
|
|
|
|
|
|
|
Increase
(decrease) in SFAS No. 158 liability included in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income
|
|
|
359.3
|
|
|
|
|
$
|
(134.5
|
)
|
|
|
|
Total
increase (decrease)
|
|
$
|
220.2
|
|
$
|
67.2
|
|
$
|
(134.5
|
)
|
$
|
-
|
|
The
following provides a reconciliation of benefit obligations:
|
|
Pension
Benefits
|
|
Other
Postretirement Benefits
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at January 1
|
|
$
|
3,885.1
|
|
$
|
3,700.8
|
|
$
|
575.3
|
|
$
|
535.9
|
|
Service
cost
|
|
|
54.2
|
|
|
54.5
|
|
|
9.4
|
|
|
10.6
|
|
Interest
cost
|
|
|
212.2
|
|
|
212.3
|
|
|
27.5
|
|
|
30.7
|
|
Plan
participants’ contributions
|
|
|
0.4
|
|
|
0.2
|
|
|
14.7
|
|
|
14.7
|
|
Amendments
|
|
|
7.7
|
|
|
1.0
|
|
|
(75.2
|
)
|
|
(3.8
|
)
|
Actuarial
(gain) loss
|
|
|
(59.2
|
)
|
|
134.9
|
|
|
(35.6
|
)
|
|
27.7
|
|
Benefits
paid from plan assets
|
|
|
(221.3
|
)
|
|
(213.5
|
)
|
|
(47.1
|
)
|
|
(40.5
|
)
|
Curtailment
|
|
|
1.6
|
|
|
|
|
|
3.0
|
|
|
|
|
Special
termination benefit
|
|
|
15.7
|
|
|
0.4
|
|
|
2.2
|
|
|
|
|
Foreign
exchange
|
|
|
8.2
|
|
|
(5.5
|
)
|
|
1.3
|
|
|
|
|
Retiree
drug subsidy
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
Benefit
obligation at December 31
|
|
|
3,904.6
|
|
|
3,885.1
|
|
|
475.8
|
|
|
575.3
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at January 1
|
|
|
3,235.8
|
|
|
3,132.6
|
|
|
79.5
|
|
|
76.5
|
|
Actual
return on plan assets
|
|
|
345.7
|
|
|
247.8
|
|
|
6.5
|
|
|
5.2
|
|
Company
contributions
|
|
|
105.4
|
|
|
73.1
|
|
|
26.6
|
|
|
23.6
|
|
Plan
participants’ contributions
|
|
|
0.4
|
|
|
0.3
|
|
|
14.7
|
|
|
14.7
|
|
Curtailment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
paid from plan assets
|
|
|
(221.4
|
)
|
|
(213.5
|
)
|
|
(47.1
|
)
|
|
(40.5
|
)
|
Foreign
exchange
|
|
|
(2.6
|
)
|
|
(4.5
|
)
|
|
|
|
|
|
|
Fair
value of plan assets at December 31
|
|
|
3,463.3
|
|
|
3,235.8
|
|
|
80.2
|
|
|
79.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status
|
|
|
(441.3
|
)
|
|
(649.3
|
)
|
|
(395.6
|
)
|
|
(495.8
|
)
|
Unrecognized
net actuarial loss
|
|
|
|
|
|
753.1
|
|
|
|
|
|
116.5
|
|
Unrecognized
prior service cost (benefit)
|
|
|
|
|
|
36.5
|
|
|
|
|
|
(183.0
|
)
|
(Accrued)
prepaid benefit cost
|
|
$
|
(441.3
|
)
|
$
|
140.3
|
|
$
|
(395.6
|
)
|
$
|
(562.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
recognized in the Consolidated Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sheets
consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
benefit cost
|
|
|
|
|
$
|
204.0
|
|
|
|
|
|
|
|
Other
assets
|
|
$
|
88.9
|
|
|
|
|
$
|
18.6
|
|
|
|
|
Accrued
benefit liability
|
|
|
|
|
|
(454.5
|
)
|
|
|
|
$
|
(562.3
|
)
|
Intangible
asset
|
|
|
|
|
|
12.5
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
(530.2
|
)
|
|
|
|
|
(414.2
|
)
|
|
|
|
Accumulated
other comprehensive income
|
|
|
|
|
|
378.3
|
|
|
|
|
|
|
|
Net
amount recognized
|
|
$
|
(441.3
|
)
|
$
|
140.3
|
|
$
|
(395.6
|
)
|
$
|
(562.3
|
)
|
Notes
to
Consolidated Financial Statements
Note
17. Benefit Plans - (Continued)
|
|
Pension
Benefits
|
|
Other
Postretirement Benefits
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
recognized in Accumulated other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive
income, not yet recognized in net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
periodic
benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
transition asset
|
|
$
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
Prior
service cost (credit)
|
|
|
36.3
|
|
|
|
|
$
|
(223.9
|
)
|
|
|
|
Costs
recoverable from customers
|
|
|
|
|
|
|
|
|
15.5
|
|
|
|
|
Net
actuarial loss
|
|
|
561.5
|
|
|
|
|
|
73.9
|
|
|
|
|
Net
amount recognized
|
|
$
|
597.0
|
|
$
|
-
|
|
$
|
(134.5
|
)
|
$
|
-
|
|
Information
for pension plans with an accumulated benefit obligation in excess of plan
assets:
December
31
|
|
2006
|
|
2005
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
benefit obligation
|
|
$
|
3,178.1
|
|
$
|
3,294.4
|
|
Accumulated
benefit obligation
|
|
|
2,961.8
|
|
|
3,038.4
|
|
Fair
value of plan assets
|
|
|
2,666.3
|
|
|
2,599.0
|
|
As
discussed in Note 1, the Company adopted SFAS No. 158 as of December 31,
2006.
The incremental effect of applying SFAS No. 158 on individual line items
in the
Consolidated Balance Sheet is presented in the following table.
|
|
Before
Application
|
|
|
|
After
Application
|
|
December
31, 2006
|
|
SFAS
No. 158
|
|
Adjustments
|
|
SFAS
No. 158
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
$
|
543.4
|
|
$
|
77.5
|
|
$
|
620.9
|
|
Other
assets
|
|
|
1,826.1
|
|
|
(109.6
|
)
|
|
1,716.5
|
|
Total
assets
|
|
|
76,913.0
|
|
|
(32.1
|
)
|
|
76,880.9
|
|
Other
liabilities
|
|
|
5,025.0
|
|
|
115.2
|
|
|
5,140.2
|
|
Total
liabilities
|
|
|
57,367.6
|
|
|
115.2
|
|
|
57,482.8
|
|
Minority
interest
|
|
|
2,900.5
|
|
|
(4.2
|
)
|
|
2,896.3
|
|
Accumulated
other comprehensive income
|
|
|
529.8
|
|
|
(143.1
|
)
|
|
386.7
|
|
Total
shareholders’ equity
|
|
|
16,644.9
|
|
|
(143.1
|
)
|
|
16,501.8
|
|
The
Company employs a total return approach whereby a mix of equities and fixed
income investments are used to maximize the long-term return of plan assets
for
a prudent level of risk. The intent of this strategy is to minimize plan
expenses by outperforming plan liabilities over the long run. Risk tolerance
is
established through careful consideration of the plan liabilities, plan funded
status and corporate financial conditions. The investment portfolio contains
a
diversified blend of U.S. and non-U.S. fixed income and equity investments.
Alternative investments, including hedge funds, are used judiciously to enhance
risk adjusted long-term returns while improving portfolio diversification.
Derivatives may be used to gain market exposure in an efficient and timely
manner. Investment risk is measured and monitored on an ongoing basis through
annual liability measurements, periodic asset/liability studies and quarterly
investment portfolio reviews.
Notes
to
Consolidated Financial Statements
Note
17. Benefit Plans - (Continued)
The
Company’s pension plan and other postretirement benefit weighted-average asset
allocation at December 31, 2006 and 2005, by asset category are as
follows:
|
|
|
|
Percentage
of
|
|
|
|
Percentage
of
|
|
Other
Postretirement Benefits
|
|
|
|
Pension
Plan Assets
|
|
Plan
Assets
|
|
December
31
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
29.3
|
%
|
|
27.4
|
%
|
|
|
|
|
|
|
Debt
securities
|
|
|
49.4
|
|
|
37.1
|
|
|
100
|
%
|
|
100.0
|
%
|
Limited
Partnerships
|
|
|
17.7
|
|
|
12.1
|
|
|
|
|
|
|
|
Other
|
|
|
3.6
|
|
|
23.4
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100
|
%
|
|
100.0
|
%
|
The
table
below presents the estimated amounts to be recognized from accumulated other
comprehensive income into net periodic benefit cost during 2007.
|
|
Pension
Benefits
|
|
Postretirement
Benefits
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of net actuarial loss
|
|
$
|
16.0
|
|
$
|
3.5
|
|
Amortization
of net transition asset
|
|
|
(0.3
|
)
|
|
(0.1
|
)
|
Amortization
of prior service cost (benefit)
|
|
|
6.8
|
|
|
(27.0
|
)
|
Total
estimated amounts to be recognized
|
|
$
|
22.5
|
|
$
|
(23.6
|
)
|
The
table
below presents the estimated future minimum benefit payments at December
31,
2006.
|
|
|
|
|
|
Less
|
|
|
|
|
|
Pension
|
|
Postretirement
|
|
Medicare
|
|
|
|
Expected
future benefit payments
|
|
Benefits
|
|
Benefits
|
|
Subsidy
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
265.4
|
|
$
|
35.5
|
|
$
|
1.8
|
|
$
|
33.7
|
|
2008
|
|
|
226.6
|
|
|
36.3
|
|
|
1.9
|
|
|
34.4
|
|
2009
|
|
|
230.3
|
|
|
37.3
|
|
|
2.0
|
|
|
35.3
|
|
2010
|
|
|
234.6
|
|
|
38.3
|
|
|
2.1
|
|
|
36.2
|
|
2011
|
|
|
239.7
|
|
|
39.7
|
|
|
2.1
|
|
|
37.6
|
|
Thereafter
|
|
|
1,316.0
|
|
|
205.3
|
|
|
9.1
|
|
|
196.2
|
|
|
|
$
|
2,512.6
|
|
$
|
392.4
|
|
$
|
19.0
|
|
$
|
373.4
|
|
In
2007,
it is expected that contributions of $64.2 million will be made to pension
plans
and $27.3 million to postretirement healthcare and life insurance benefit
plans.
Savings
Plans - The Company and its subsidiaries have several contributory savings
plans
which allow employees to make regular contributions based upon a percentage
of
their salaries. Matching contributions are made up to specified percentages
of
employees’ contributions. The contributions by the Company and its subsidiaries
to these plans amounted to $72.9 million, $40.1 million and $64.4 million
for
the years ended December 31, 2006, 2005 and 2004, respectively.
Stock
Option Plans - In 2005, shareholders approved the amended and restated Loews
Corporation 2000 Stock Option Plan (the “Loews Plan”). The aggregate number of
shares of Loews common stock for which options or stock appreciation rights
(“SARs”) may be granted under the Loews Plan is 12,000,000 shares, and the
maximum number of shares of Loews common stock with respect to which options
or
SARs may be granted to any individual in
any
calendar year is
1,200,000 shares. The exercise price per share may not
be less
than the fair value
of
the
Notes
to
Consolidated Financial Statements
Note
17. Benefit Plans - (Continued)
common
stock on the date of grant. Generally, options and SARs vest ratably over
a
four-year period and expire in ten years.
A
summary
of the stock option and SAR transactions for the Loews Plan
follows:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Number
of
|
|
Exercise
|
|
Number
of
|
|
Exercise
|
|
Number
of
|
|
Exercise
|
|
|
|
Awards
|
|
Price
|
|
Awards
|
|
Price
|
|
Awards
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
outstanding, January 1
|
|
|
3,856,974
|
|
$
|
19.340
|
|
|
3,773,325
|
|
$
|
16.767
|
|
|
3,382,350
|
|
$
|
15.559
|
|
Granted
|
|
|
945,300
|
|
|
35.205
|
|
|
957,825
|
|
|
26.180
|
|
|
919,875
|
|
|
19.174
|
|
Exercised
|
|
|
(597,300
|
)
|
|
17.802
|
|
|
(786,942
|
)
|
|
15.253
|
|
|
(412,575
|
)
|
|
12.119
|
|
Canceled
|
|
|
(94,532
|
)
|
|
23.158
|
|
|
(87,234
|
)
|
|
20.018
|
|
|
(116,325
|
)
|
|
17.165
|
|
Awards
outstanding, December 31
|
|
|
4,110,442
|
|
|
23.124
|
|
|
3,856,974
|
|
|
19.340
|
|
|
3,773,325
|
|
|
16.767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
exercisable, December 31
|
|
|
2,023,065
|
|
$
|
18.361
|
|
|
1,747,083
|
|
$
|
16.791
|
|
|
1,671,075
|
|
$
|
15.417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
available for grant,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31
|
|
|
5,998,991
|
|
|
|
|
|
6,849,759
|
|
|
|
|
|
1,720,350
|
|
|
|
|
The
following table summarizes information about the Company’s stock options and
SARs outstanding in connection with the Loews Plan at December 31,
2006:
|
|
Awards
Outstanding
|
|
Awards
Exercisable
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Remaining
|
|
Average
|
|
|
|
Average
|
|
|
|
Number
of
|
|
Contractual
|
|
Exercise
|
|
Number
of
|
|
Exercise
|
|
Range
of exercise prices
|
|
Shares
|
|
Life
|
|
Price
|
|
Shares
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 10.050
|
|
|
199,500
|
|
|
3.0
|
|
$
|
10.050
|
|
|
199,500
|
|
$
|
10.050
|
|
10.051-16.400
|
|
|
917,675
|
|
|
5.5
|
|
|
15.552
|
|
|
732,575
|
|
|
15.537
|
|
16.401-20.340
|
|
|
1,174,235
|
|
|
6.3
|
|
|
19.329
|
|
|
788,751
|
|
|
19.430
|
|
20.341-30.000
|
|
|
653,922
|
|
|
8.0
|
|
|
24.623
|
|
|
184,806
|
|
|
24.554
|
|
30.001-41.850
|
|
|
1,165,110
|
|
|
8.9
|
|
|
34.310
|
|
|
117,433
|
|
|
33.173
|
|
In
2006,
the
Company awarded SARs totaling 933,300 shares. In accordance with the Loews
Plan,
the Company has the ability to settle SARs in shares or cash and has the
intention to settle in shares. The SARs balance at December 31, 2006 was
922,800
shares with 10,500 shares forfeited during 2006.
The
weighted average remaining contractual terms of awards outstanding and
exercisable as of December 31, 2006, were 7.0 years and 5.8 years. The aggregate
intrinsic values of awards outstanding and exercisable at December 31, 2006
were
$75.4 million and $46.8 million. The total intrinsic value of awards exercised
during 2006 was $10.5 million.
The
Company recorded stock-based compensation expense of $4.9 million related
to the
Loews Plan for the year ended December 31, 2006. The related income tax benefits
recognized were $1.7 million. At December 31, 2006, the compensation cost
related to nonvested awards not yet recognized was $11.6 million, and the
weighted average period over which it is expected to be recognized is 1.6
years.
In
February of 2002, shareholders approved the Carolina Group 2002 Stock Option
Plan (the “Carolina Group Plan”) in connection with the issuance of Carolina
Group stock. The aggregate number of shares of Carolina Group stock for which
options or SARs may be granted under the Carolina Group Plan is 1,500,000
shares; and the maximum number
of
shares
of
Carolina
Group stock with respect to
which
options or SARs may be granted
to
any
Notes
to
Consolidated Financial Statements
Note
17. Benefit Plans - (Continued)
individual
in any calendar year is 200,000 shares. The exercise price per share may
not be
less than the fair value of the stock on the date of the grant. Generally,
options and SARs vest ratably over a four-year period and expire in ten
years.
A
summary
of the stock option and SAR transactions for the Carolina Group Plan
follows:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Number
of
|
|
Exercise
|
|
Number
of
|
|
Exercise
|
|
Number
of
|
|
Exercise
|
|
|
|
Awards
|
|
Price
|
|
Awards
|
|
Price
|
|
Awards
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
outstanding, January 1
|
|
|
536,572
|
|
$
|
28.526
|
|
|
560,000
|
|
$
|
25.230
|
|
|
389,250
|
|
$
|
25.216
|
|
Granted
|
|
|
202,000
|
|
|
50.234
|
|
|
212,000
|
|
|
34.164
|
|
|
209,500
|
|
|
25.181
|
|
Exercised
|
|
|
(134,128
|
)
|
|
27.008
|
|
|
(224,428
|
)
|
|
25.684
|
|
|
(2,250
|
)
|
|
22.740
|
|
Canceled
|
|
|
(22,750
|
)
|
|
33.045
|
|
|
(11,000
|
)
|
|
27.403
|
|
|
(36,500
|
)
|
|
24.947
|
|
Awards
outstanding, December 31
|
|
|
581,694
|
|
|
36.237
|
|
|
536,572
|
|
|
28.526
|
|
|
560,000
|
|
|
25.230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
exercisable, December 31
|
|
|
97,684
|
|
$
|
27.695
|
|
|
45,310
|
|
$
|
25.697
|
|
|
135,750
|
|
$
|
26.276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
available for grant, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31
|
|
|
557,500
|
|
|
|
|
|
736,750
|
|
|
|
|
|
937,750
|
|
|
|
|
The
following table summarizes information about the Company’s stock options and
SARs outstanding in connection with the Carolina Group Plan at December 31,
2006:
|
|
Awards
Outstanding
|
|
Awards
Exercisable
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Remaining
|
|
Average
|
|
|
|
Average
|
|
|
|
Number
of
|
|
Contractual
|
|
Exercise
|
|
Number
of
|
|
Exercise
|
|
Range
of exercise prices
|
|
Shares
|
|
Life
|
|
Price
|
|
Shares
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 22.740
- 27.990
|
|
|
187,566
|
|
|
6.6
|
|
$
|
24.324
|
|
|
48,566
|
|
$
|
23.990
|
|
28.000
- 34.990
|
|
|
154,065
|
|
|
7.5
|
|
|
31.878
|
|
|
42,870
|
|
|
30.209
|
|
35.000
- 44.990
|
|
|
42,063
|
|
|
8.0
|
|
|
39.250
|
|
|
6,248
|
|
|
39.250
|
|
45.000
- 55.350
|
|
|
198,000
|
|
|
9.1
|
|
|
50.275
|
|
|
|
|
|
|
|
During
2006, the Company awarded SARs totaling 202,000 shares. In accordance with
the
Carolina Group Plan, the Company has the ability to settle SARs in shares
or
cash and has the intention to settle in shares. The SARs balance at December
31,
2006 was 198,000 shares with 4,000 shares forfeited during 2006.
The
weighted average remaining contractual term of awards outstanding and
exercisable as of December 31, 2006, was 7.8 years and 6.4 years. The aggregate
intrinsic value of awards outstanding and exercisable at December 31, 2006
was
$16.4 million and $3.6 million. The total intrinsic value of awards exercised
during the year ended December 31, 2006 was $3.2 million.
The
Company recorded stock-based compensation expense of $1.0 million related
to the
Carolina Group Plan during 2006. The related income tax benefits recognized
were
$0.4 million. At December 31, 2006, the compensation cost related to nonvested
awards not yet recognized was $2.9 million, and the weighted average period
over
which it is expected to be recognized is 1.6 years.
Notes
to
Consolidated Financial Statements
Note
17. Benefit Plans - (Continued)
The
fair
value of granted options and SARs for the Loews Plan and Carolina Group Plan
were estimated at the grant date using the Black-Scholes pricing model with
the
following assumptions and results:
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Loews
Plan:
|
|
|
|
|
|
|
|
|
|
|
Expected
dividend yield
|
|
|
0.6
|
%
|
|
0.8
|
%
|
|
1.0
|
%
|
Expected
volatility
|
|
|
23.9
|
%
|
|
19.6
|
%
|
|
23.1
|
%
|
Weighted
average risk-free interest rate
|
|
|
4.7
|
%
|
|
3.9
|
%
|
|
3.4
|
%
|
Expected
holding period (in years)
|
|
|
5.0
|
|
|
5.0
|
|
|
5.0
|
|
Weighted
average fair value of awards
|
|
$
|
10.02
|
|
$
|
6.39
|
|
$
|
4.73
|
|
|
|
|
|
|
|
|
|
|
|
|
Carolina
Group Plan:
|
|
|
|
|
|
|
|
|
|
|
Expected
dividend yield
|
|
|
3.6
|
%
|
|
5.4
|
%
|
|
7.1
|
%
|
Expected
volatility
|
|
|
31.4
|
%
|
|
31.2
|
%
|
|
30.1
|
%
|
Weighted
average risk-free interest rate
|
|
|
4.7
|
%
|
|
3.9
|
%
|
|
3.4
|
%
|
Expected
holding period (in years)
|
|
|
5.0
|
|
|
5.0
|
|
|
5.0
|
|
Weighted
average fair value of awards
|
|
$
|
12.28
|
|
$
|
6.57
|
|
$
|
3.75
|
|
Note
18. Reinsurance
CNA
cedes
insurance to reinsurers to limit its maximum loss, provide greater
diversification of risk, minimize exposures on larger risks and to exit certain
lines of business. The ceding of insurance does not discharge the primary
liability of CNA. Therefore, a credit exposure exists with respect to property
and casualty and life reinsurance ceded to the extent that any reinsurer
is
unable to meet its obligations or to the extent that the reinsurer disputes
the
liabilities assumed under reinsurance agreements. Property and casualty
reinsurance coverages are tailored to the specific risk characteristics of
each
product line and CNA’s retained amount varies by type of coverage. Reinsurance
contracts are purchased to protect specific lines of business such as property,
workers’ compensation and professional liability. Corporate catastrophe
reinsurance is also purchased for property and workers’ compensation exposure.
Most reinsurance contracts are purchased on an excess of loss basis. CNA
also
utilizes facultative reinsurance in certain lines. In addition, CNA assumes
reinsurance as a member of various reinsurance pools and
associations.
The
following table summarizes the amounts receivable from reinsurers at December
31, 2006 and 2005.
December
31
|
|
2006
|
|
2005
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
receivables related to insurance reserves:
|
|
|
|
|
|
Ceded
claim and claim adjustment expense
|
|
$
|
8,191.5
|
|
$
|
10,605.2
|
|
Ceded
future policy benefits
|
|
|
1,050.1
|
|
|
1,192.9
|
|
Ceded
policyholders’ funds
|
|
|
47.7
|
|
|
56.3
|
|
Reinsurance
receivables related to paid losses
|
|
|
658.0
|
|
|
582.3
|
|
Reinsurance
receivables
|
|
|
9,947.3
|
|
|
12,436.7
|
|
Allowance
for uncollectible reinsurance
|
|
|
(469.6
|
)
|
|
(519.3
|
)
|
|
|
|
|
|
|
|
|
Reinsurance
receivables, net of allowance for uncollectible
reinsurance
|
|
$
|
9,477.7
|
|
$
|
11,917.4
|
|
Ceded
claim and claim adjustment expense related reinsurance receivables were reduced
by $1,162.0 million and $2,007.0 million in 2006 and 2005 due to the impact
of
commutations. The funds withheld liability, which is included in Reinsurance
balances payable on the Consolidated Balance Sheets had a corresponding
reduction of $942.0 million and $1,126.0 million in 2006 and 2005. See further
discussion related to commutations below.
The
net
decrease in the allowance for uncollectible reinsurance was primarily due
to a
release of a previously established allowance due to the execution of a
significant commutation agreement, as discussed further below. The provision
for
uncollectible reinsurance was $23.0 million, $35.0 million and $95.0 million
in
2006, 2005 and 2004.
Notes
to
Consolidated Financial Statements
Note
18. Reinsurance - (Continued)
CNA
attempts to mitigate its credit risk related to reinsurance by entering into
reinsurance arrangements with reinsurers that have credit ratings above certain
levels and by obtaining collateral. The primary methods of obtaining collateral
are through reinsurance trusts, letters of credit and funds withheld balances.
Such collateral was approximately $2.6 billion and $4.3 billion at December
31,
2006 and 2005. On a more limited basis, CNA may enter into reinsurance
agreements with reinsurers that are not rated.
In
2001,
CNA entered into a one-year corporate aggregate reinsurance treaty related
to
the 2001 accident year covering substantially all property and casualty lines
of
business in the Continental Casualty Company pool (the “CCC Cover”). The CCC
Cover was fully utilized in 2003 and interest charges accrued on the related
funds held balance at 8.0% per annum. In 2006, CNA commuted the CCC Cover.
This
commutation had no impact on the Consolidated Statements of Income for the
year
ended December 31, 2006.
Also,
in
2006, CNA commuted several reinsurance treaties, including several finite
treaties, with a European reinsurance group. This commutation resulted in
a
pretax loss, net of allowance for uncollectible reinsurance, of $48.0 million.
CNA received $35.0 million of cash in connection with this significant
commutation.
In
2005,
CNA entered into several significant commutation agreements, including the
commutation of the Aggregate Cover, which was a corporate aggregate reinsurance
treaty related to the 1999 through 2001 accident years and covered substantially
all of CNA’s property and casualty lines of business. These commutations
resulted in an unfavorable pretax impact of $399.0 million and CNA received
$446.0 million of cash in connection with these significant commutations.
In
2004,
CNA executed commutation agreements with several members of The Trenwick
Group.
These commutations resulted in unfavorable claim and claim adjustment expense
reserve development which was more than offset by a release of previously
established allowance of uncollectible reinsurance. These commutations resulted
in a pretax favorable impact of $28.0 million and CNA received $69.0 million
of
cash.
CNA’s
largest recoverables from a single reinsurer at December 31, 2006, including
prepaid reinsurance premiums, were approximately $1,574.0 million from
subsidiaries of Swiss Reinsurance Group, $1,013.0 million from subsidiaries
of
The Hartford Life Group Insurance Company, $911.0 million from subsidiaries
of
Muenchener Rueckversicherungs, $574.0 million from The Allstate Corporation
(“Allstate”), and $535.0 million from syndicates of Equitas.
Prior
to
the April 2004 sale of its individual life and annuity business to Swiss
Re, CNA
had reinsured a portion of this business through coinsurance, yearly renewable
term and facultative programs to various reinsurers. As a result of the sale
of
the individual life and annuity business, 100% of the net reserves were
reinsured to Swiss Re. As of December 31, 2006 and 2005, CNA ceded $891.0
million and $968.0 million of future policy benefits to Swiss Re. Subject
to
certain exceptions, Swiss Re assumed the credit risk of the business that
was
previously reinsured to other carriers. As of December 31, 2006 and 2005,
the
assumed credit risk was $28.0 million.
On
December 31, 2003, the Company completed the sale of the majority of its
Group
Benefits business to The Hartford Financial Services Group, Inc. (“The
Hartford”). In connection with the sale, CNA ceded insurance reserves to The
Hartford. As of December 31, 2006 and 2005, ceded claim and claim adjustment
expense reserves, ceded policyholder benefits and ceded policyholder funds
were
$1,029.0 million and $1,347.0 million. Subject to certain exceptions, The
Hartford assumed 50.0% of the credit risk of the business that was previously
reinsured to other carriers. As of December 31, 2006 and 2005, the assumed
credit risk was $21.0 million and $26.0 million.
Insurance
claims and policyholders’ benefits reported in the Consolidated Statements of
Income are net of reinsurance recoveries of $1,314.0 million, $1,459.0 million
and $4,626.0 million for 2006, 2005 and 2004.
Notes
to
Consolidated Financial Statements
Note
18. Reinsurance - (Continued)
The
effects of reinsurance on earned premiums for the years ended December 31,
2006,
2005 and 2004 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
Assumed/
|
|
|
|
Direct
|
|
Assumed
|
|
Ceded
|
|
Net
|
|
Net
%
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and casualty
|
|
$
|
9,125.0
|
|
$
|
120.0
|
|
$
|
2,283.0
|
|
$
|
6,962.0
|
|
|
1.7
|
%
|
Accident
and health
|
|
|
718.0
|
|
|
59.0
|
|
|
138.0
|
|
|
639.0
|
|
|
9.2
|
|
Life
|
|
|
100.0
|
|
|
|
|
|
98.0
|
|
|
2.0
|
|
|
|
|
Total
|
|
$
|
9,943.0
|
|
$
|
179.0
|
|
$
|
2,519.0
|
|
$
|
7,603.0
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and casualty
|
|
$
|
10,354.0
|
|
$
|
186.0
|
|
$
|
3,675.0
|
|
$
|
6,865.0
|
|
|
2.7
|
%
|
Accident
and health
|
|
|
1,040.0
|
|
|
60.0
|
|
|
400.0
|
|
|
700.0
|
|
|
8.6
|
|
Life
|
|
|
140.0
|
|
|
|
|
|
136.0
|
|
|
4.0
|
|
|
|
|
Total
|
|
$
|
11,534.0
|
|
$
|
246.0
|
|
$
|
4,211.0
|
|
$
|
7,569.0
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and casualty
|
|
$
|
10,739.0
|
|
$
|
199.0
|
|
$
|
3,634.0
|
|
$
|
7,304.0
|
|
|
2.7
|
%
|
Accident
and health
|
|
|
1,228.0
|
|
|
63.0
|
|
|
507.0
|
|
|
784.0
|
|
|
8.0
|
|
Life
|
|
|
419.0
|
|
|
|
|
|
298.0
|
|
|
121.0
|
|
|
|
|
Total
|
|
$
|
12,386.0
|
|
$
|
262.0
|
|
$
|
4,439.0
|
|
$
|
8,209.0
|
|
|
3.2
|
%
|
Included
in the direct and ceded earned premiums for the years ended December 31,
2006,
2005 and 2004 are $1,489.0 million, $3,306.0 million and $3,293.0 million
related to business that is 100% reinsured as a result of business dispositions
and a significant captive program.
The
impact of reinsurance on life insurance inforce at December 31, 2006, 2005
and
2004 is shown in the following table:
December
31
|
|
Direct
|
|
Assumed
|
|
Ceded
|
|
Net
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
15,652.0
|
|
$
|
1.0
|
|
$
|
15,633.0
|
|
$
|
20.0
|
|
2005
|
|
|
20,548.0
|
|
|
1.0
|
|
|
20,528.0
|
|
|
21.0
|
|
2004
|
|
|
56,610.0
|
|
|
35.0
|
|
|
54,486.0
|
|
|
2,159.0
|
|
Life
and
accident and health premiums are primarily from long duration contracts;
property and casualty premiums are primarily from short duration
contracts.
Reinsurance
accounting allows for contractual cash flows to be reflected as premiums
and
losses, as compared to deposit accounting, which requires cash flows to be
reflected as assets and liabilities. To qualify for reinsurance accounting,
reinsurance agreements must include risk transfer. To meet risk transfer
requirements, a reinsurance contract must include both insurance risk,
consisting of underwriting and timing risk, and a reasonable possibility
of a
significant loss for the assuming entity. Reinsurance contracts that include
both significant risk sharing provisions, such as adjustments to premiums
or
loss coverage based on loss experience, and relatively low policy limits
as
evidenced by a high proportion of maximum premium assessments to loss limits,
may require considerable judgment to determine whether or not risk transfer
requirements are met. For such contracts, often referred to as finite products,
CNA assesses risk transfer for each contract generally by developing
quantitative analyses at contract inception which measure the present value
of
reinsurer losses as compared to the present value of the related premium.
In
2003, CNA discontinued purchases of finite contracts.
Notes
to
Consolidated Financial Statements
Note
18. Reinsurance - (Continued)
Funds
Withheld Reinsurance Arrangements
CNA’s
overall reinsurance program has included certain property and casualty
contracts, such as the commuted CCC and Aggregate Covers that were entered
into
and accounted for on a “funds withheld” basis and which are deemed to be finite
reinsurance. Under the funds withheld basis, CNA recorded the cash remitted
to
the reinsurer for the reinsurer’s margin, or cost of the reinsurance contract,
as ceded premiums. The remainder of the premiums ceded under the reinsurance
contract not remitted in cash was recorded as funds withheld liabilities.
CNA
was required to increase the funds withheld balance at stated interest crediting
rates applied to the funds withheld balance or as otherwise specified under
the
terms of the contract. The funds withheld liability was reduced by any
cumulative claim payments made by CNA in excess of CNA’s retention under the
reinsurance contract. If the funds withheld liability was exhausted, interest
crediting would cease and additional claim payments would be recoverable
from
the reinsurer. The funds withheld liability is recorded in Reinsurance balances
payable on the Consolidated Balance Sheets.
Interest
cost on reinsurance contracts accounted for on a funds withheld basis is
incurred during all periods in which a funds withheld liability exists
and is included in net investment income. There were no amounts subject to
such interest crediting at December 31, 2006. The amount subject to interest
crediting rates was $1,050.0 million at December 31, 2005.
As
of
December 31, 2006 and 2005, there were one and thirteen ceded reinsurance
treaties inforce respectively that CNA considers to be finite reinsurance.
The
remaining treaty at December 31, 2006 provides reinsurance protection for
the
1999 accident year on specified portions of CNA’s domestic property and casualty
business. The remaining treaty is fully utilized and had no related funds
withheld liability at December 31, 2006. In 2003, CNA discontinued purchases
of
such contracts. The following table summarizes the pretax impact of contracts
accounted for on a funds withheld basis, including the commuted Aggregate
and
CCC Covers discussed above.
|
|
Aggregate
|
|
|
|
|
|
|
|
Year
Ended December 31, 2006
|
|
Cover
|
|
CCC
Cover
|
|
All
Other
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded
earned premium
|
|
|
|
|
|
|
|
$
|
(11.0
|
)
|
$
|
(11.0
|
)
|
Ceded
claim and claim adjustment expense
|
|
|
|
|
|
|
|
|
(113.0
|
)
|
|
(113.0
|
)
|
Ceding
commissions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
charges
|
|
|
|
|
$
|
(40.0
|
)
|
|
(19.0
|
)
|
|
(59.0
|
)
|
Pretax
expense
|
|
$
|
−
|
|
$
|
(40.0
|
)
|
$
|
(143.0
|
)
|
$
|
(183.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded
earned premium
|
|
$
|
(17.0
|
)
|
|
|
|
$
|
48.0
|
|
$
|
31.0
|
|
Ceded
claim and claim adjustment expense
|
|
|
(244.0
|
)
|
|
|
|
|
(154.0
|
)
|
|
(398.0
|
)
|
Ceding
commissions
|
|
|
|
|
|
|
|
|
(27.0
|
)
|
|
(27.0
|
)
|
Interest
charges
|
|
|
(57.0
|
)
|
$
|
(66.0
|
)
|
|
(34.0
|
)
|
|
(157.0
|
)
|
Pretax
expense
|
|
$
|
(318.0
|
)
|
$
|
(66.0
|
)
|
$
|
(167.0
|
)
|
$
|
(551.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded
earned premium
|
|
$
|
(1.0
|
)
|
|
|
|
$
|
(19.0
|
)
|
$
|
(20.0
|
)
|
Ceded
claim and claim adjustment expense
|
|
|
|
|
|
|
|
|
15.0
|
|
|
15.0
|
|
Ceding
commissions
|
|
|
|
|
|
|
|
|
2.0
|
|
|
2.0
|
|
Interest
charges
|
|
|
(82.0
|
)
|
$
|
(91.0
|
)
|
|
(72.0
|
)
|
|
(245.0
|
)
|
Pretax
expense
|
|
$
|
(83.0
|
)
|
$
|
(91.0
|
)
|
$
|
(74.0
|
)
|
$
|
(248.0
|
)
|
Included
in “All Other” above for the year ended December 31, 2006 is $110.0 million of
unfavorable development
resulting from a commutation, which is included in the ceded claim and claim
adjustment expenses
Notes
to
Consolidated Financial Statements
Note
18. Reinsurance - (Continued)
above.
This unfavorable development was partially offset by the release of previously
established allowance for uncollectible reinsurance, resulting in an unfavorable
impact of $48.0 million.
Included
in “All Other” above for the year ended December 31, 2005 is approximately $24.0
million of pretax expense related to Standard Lines which resulted from an
unfavorable arbitration ruling on two reinsurance treaties impacting ceded
earned premiums, ceded claim and claim adjustment expenses, ceding commissions
and interest charges. This unfavorable outcome was partially offset by a
release
of previously established reinsurance bad debt reserves resulting in a net
impact from the arbitration ruling of $10.0 million pretax expense for the
year
ended December 31, 2005.
The
pretax impact by operating segment of CNA’s funds withheld reinsurance
arrangements was as follows:
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard
Lines
|
|
$
|
(155.0
|
)
|
$
|
(399.0
|
)
|
$
|
(185.0
|
)
|
Specialty
Lines
|
|
|
(4.0
|
)
|
|
(41.0
|
)
|
|
(1.0
|
)
|
Other
Insurance
|
|
|
(24.0
|
)
|
|
(111.0
|
)
|
|
(62.0
|
)
|
Pretax
expense
|
|
$
|
(183.0
|
)
|
$
|
(551.0
|
)
|
$
|
(248.0
|
)
|
Note
19. Quarterly Financial Data (Unaudited)
2006
Quarter Ended
|
|
Dec.
31
|
|
Sept.
30
|
|
June
30
|
|
March
31
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
4,882.0
|
|
$
|
4,507.2
|
|
$
|
4,277.3
|
|
$
|
4,244.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
633.4
|
|
|
511.5
|
|
|
477.3
|
|
|
478.4
|
|
Per
share-basic
|
|
|
1.15
|
|
|
0.93
|
|
|
0.86
|
|
|
0.86
|
|
Per
share-diluted
|
|
|
1.15
|
|
|
0.93
|
|
|
0.85
|
|
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net
|
|
|
(24.0
|
)
|
|
5.7
|
|
|
(2.4
|
)
|
|
(5.0
|
)
|
Per
share-basic
|
|
|
(0.04
|
)
|
|
0.01
|
|
|
|
|
|
(0.01
|
)
|
Per
share-diluted
|
|
|
(0.04
|
)
|
|
0.01
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
609.4
|
|
|
517.2
|
|
|
474.9
|
|
|
473.4
|
|
Per
share-basic
|
|
|
1.11
|
|
|
0.94
|
|
|
0.86
|
|
|
0.85
|
|
Per
share-diluted
|
|
|
1.11
|
|
|
0.94
|
|
|
0.85
|
|
|
0.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carolina
Group stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
137.1
|
|
|
117.9
|
|
|
93.8
|
|
|
67.6
|
|
Per
share-basic and diluted
|
|
|
1.26
|
|
|
1.17
|
|
|
1.09
|
|
|
0.86
|
|
Notes
to
Consolidated Financial Statements
Note
19. Quarterly Financial Data (Unaudited) - (Continued)
2005
Quarter Ended
|
|
Dec.
31
|
|
Sept.
30
|
|
June
30
|
|
March
31
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
4,108.0
|
|
$
|
4,137.9
|
|
$
|
4,030.7
|
|
$
|
3,741.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loews
common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
37.8
|
|
|
232.5
|
|
|
378.1
|
|
|
293.2
|
|
Per
share-basic and diluted
|
|
|
0.07
|
|
|
0.42
|
|
|
0.68
|
|
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net
|
|
|
8.2
|
|
|
2.2
|
|
|
1.8
|
|
|
6.6
|
|
Per
share-basic and diluted
|
|
|
0.01
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
46.0
|
|
|
234.7
|
|
|
379.9
|
|
|
299.8
|
|
Per
share-basic and diluted
|
|
|
0.08
|
|
|
0.42
|
|
|
0.68
|
|
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carolina
Group stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
81.6
|
|
|
67.5
|
|
|
55.7
|
|
|
46.5
|
|
Per
share-basic and diluted
|
|
|
1.11
|
|
|
0.99
|
|
|
0.82
|
|
|
0.68
|
|
Note
20. Legal Proceedings
INSURANCE
RELATED
California
Long Term Care Litigation
Shaffer
v. Continental Casualty Company, et al.,
U.S.
District Court, Central District of California, CV06-2235 RGK, is a class
action
on behalf of certain California long-term health care policyholders, alleging
that CCC knowingly used unrealistic actuarial assumptions in pricing these
policies, which according to plaintiff, would inevitably necessitate premium
increases. The plaintiff asserts claims for intentional fraud, negligent
misrepresentation, and violations of various California statutes. On January
26,
2007, the court certified the case to proceed as a class action, although
CCC is
currently seeking review of that decision in the Ninth Circuit Court of Appeals.
CCC has denied the material allegations of the amended complaint and intends
to
vigorously contest the claims. Numerous unresolved factual and legal issues
remain that are critical to the final result, the outcome of which cannot
be
predicted with any reliability. Accordingly, the extent of losses are not
readily determinable at this time. However, based on facts and circumstances
presently known in the opinion of management, an unfavorable outcome would
not
materially adversely affect the equity of the Company, although the results
of
operations may be adversely affected.
Insurance
Brokerage Antitrust Litigation
On
August
1, 2005, CNA and several of its 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 (FSH).
The
plaintiffs in this litigation allege improprieties in the payment of contingent
commissions to brokers and bid rigging in connection with the sale of various
lines of insurance. The plaintiffs further allege the existence of a conspiracy
and assert claims for federal and state antitrust law violations, for violations
of the federal Racketeer Influenced and Corrupt Organizations Act and for
recovery under various state common law theories. By an order entered on
October
3, 2006, the Court required the plaintiffs to supplement their pleadings
with a
statement setting forth the details of their claims. CNA believes it has
meritorious defenses to this action and intends to defend the case
vigorously.
The
extent of losses beyond any amounts that may be accrued are not readily
determinable at this time. However, based on facts and circumstances presently
known, in the opinion of management, an unfavorable outcome will not materially
affect the equity of the Company, although results of operations may be
adversely affected.
Notes
to
Consolidated Financial Statements
Note
20. Legal Proceedings - (Continued)
Global
Crossing Limited Litigation
CCC
has
been named as a defendant in an action brought by the bankruptcy estate of
Global Crossing Limited (“Global Crossing”) in the United States Bankruptcy
Court for the Southern District of New York. In the Complaint, served on
CCC on
May 24, 2005, plaintiff seeks unspecified monetary damages from CCC and the
other defendants for alleged fraudulent transfers and alleged breaches of
fiduciary duties arising from actions taken by Global Crossing while CCC
was a
shareholder of Global Crossing. On August 3, 2006, the Court granted in part
and
denied in part CCC’s motion to dismiss the Estate Representative’s Amended
Complaint. CCC believes it has meritorious defenses to the remaining claims
in
this action and intends to defend the case vigorously.
The
extent of losses beyond any amounts that may be accrued are not readily
determinable at this time. However, based on facts and circumstances presently
known, in the opinion of management, an unfavorable outcome will not materially
affect the equity of the Company, although results of operations may be
adversely affected.
IGI
Contingency
In
1997,
CNA Reinsurance Company Limited (“CNA Re Ltd”.) entered into an arrangement with
IOA Global, Ltd. (“IOA”), an independent managing general agent based in
Philadelphia, Pennsylvania, to develop and manage a book of accident and
health
coverages. Pursuant to this arrangement, IGI Underwriting Agencies, Ltd.
(“IGI”), a personal accident reinsurance managing general underwriter, was
appointed to underwrite and market the book under the supervision of IOA.
Between April 1, 1997 and December 1, 1999, IGI underwrote a number of
reinsurance arrangements with respect to personal accident insurance worldwide
(the “IGI Program”). Under various arrangements, CNA Re Ltd. both assumed risks
as a reinsurer and also ceded a substantial portion of those risks to other
companies, including other CNA insurance subsidiaries and ultimately to a
group
of reinsurers participating in a reinsurance pool known as the Associated
Accident and Health Reinsurance Underwriters (“AAHRU”) Facility. CNA's group
operations business unit participated as a pool member in the AAHRU Facility
in
varying percentages between 1997 and 1999.
A
portion
of the premiums assumed under the IGI Program related to United States workers’
compensation “carve-out” business. Some of these premiums were received from
John Hancock Mutual Life Insurance Company (“John Hancock”) under four excess of
loss reinsurance treaties (the “Treaties”) issued by CNA Re Ltd. While John
Hancock has indicated that it is not able to accurately quantify its potential
exposure to its cedents on business which is retroceded to CNA, John Hancock
has
reported $280.0 million of paid and unpaid losses under these Treaties. John
Hancock is disputing portions of its assumed obligations resulting in these
reported losses, and has advised CNA that it is, or has been, involved in
multiple arbitrations with its own cedents, in which proceedings John Hancock
is
seeking to avoid and/or reduce risks that would otherwise arguably be ceded
to
CNA through the Treaties. John Hancock has further informed CNA that it has
settled several of these disputes, but has not provided CNA with details
of the
settlements. To the extent that John Hancock is successful in reducing its
liabilities in these disputes, that development may have an impact on the
recoveries it is seeking under the Treaties from CNA.
As
indicated, CNA arranged substantial reinsurance protection to manage its
exposures under the IGI Program, including the United States workers’
compensation “carve-out” business ceded from John Hancock and other reinsurers.
While certain reinsurers of CNA, including participants in the AAHRU Facility,
disputed their liabilities under the reinsurance contracts with respect to
the
IGI Program, those disputes have been resolved and substantial reinsurance
coverage exists for those exposures.
CNA
has
instituted arbitration proceedings against John Hancock in which CNA is seeking
rescission of the Treaties as well as access to and the right to inspect
the
books and records relating to the Treaties. Discovery is ongoing in that
arbitration proceeding and a hearing is currently scheduled for April of
2007.
Based on information known at this time, CNA believes it has strong grounds
to
successfully challenge its alleged exposure derived from John Hancock through
the ongoing arbitration proceedings. CNA has also undertaken legal action
seeking to avoid portions of the remaining exposure arising out of the IGI
Program.
CNA
has
established reserves for its estimated exposure under the IGI Program, other
than that derived from John Hancock, and an estimate for recoverables from
retrocessionaires. CNA has not established any reserve for any
Notes
to
Consolidated Financial Statements
Note
20. Legal Proceedings - (Continued)
exposure
derived from John Hancock because, as indicated, CNA believes the contract
will
be rescinded. Although the results of CNA’s various loss mitigation strategies
with respect to the entire IGI Program to date support the recorded reserves,
the estimate of ultimate losses is subject to considerable uncertainty due
to
the complexities described above, and CNA’s inability to guarantee any outcome
in the arbitration proceedings. As a result of these uncertainties, the results
of operations in future periods may be adversely affected by potentially
significant reserve additions. However, the extent of losses beyond any amounts
that may be accrued are not readily determinable at this time. Management
does
not believe that any such reserve additions would be material to the equity
of
the Company. CNA’s position in relation to the IGI Program was unaffected by the
sale of CNA Re Ltd. in 2002.
New
Jersey Wage and Hour Litigation
W.
Curtis Himmelman, individually and on behalf of all others similarly situated
v.
Continental Casualty Company,
Civil
Action: 06-166, District Court of New Jersey (Trenton Division) is a purported
class action and representative action brought on behalf of present and former
CNA environmental claims analysts and workers’ compensation claims analysts
asserting they worked hours for which they should have been compensated at
a
rate of one and one-half times their base hourly wage. The Complaint was
filed
on January 12, 2006. The claims were originally brought under both federal
and
New Jersey state wage and hour laws on the basis that the relevant jobs are
not
exempt from overtime pay because the duties performed are not exempt duties.
On
August 11, 2006, the Court dismissed plaintiff’s New Jersey state law claims.
Under federal law, plaintiff seeks to represent others similarly situated
who
opt in to the action and who also allege they are owed overtime pay for hours
worked over eight hours per day and/or forty hours per workweek for the period
January 5, 2003 to the entry of judgment. Plaintiff seeks “overtime
compensation,” “compensatory, punitive and statutory damages, interest, costs
and disbursements and attorneys’ fees” without specifying any particular amounts
(as well as an injunction). CNA denies the material allegations of the Complaint
and intends to vigorously contest the claims on numerous substantive and
procedural grounds.
The
extent of losses beyond any amounts that may be accrued are not readily
determinable at this time. However, based on facts and circumstances presently
known, in the opinion of management, an unfavorable outcome will not materially
affect the equity of the Company, although results of operations may be
adversely affected.
APMT
Reserves
CNA
is
also a party to
litigation and claims related to APMT cases arising in the ordinary course
of
business. See Note 9 for further discussion.
TOBACCO
RELATED
Tobacco
Related Product Liability Litigation
Approximately
3,960 product liability cases are pending against cigarette manufacturers
in the
United States. Lorillard is a defendant in approximately 2,840 of these
cases.
The
pending product liability cases are composed of the following types of
cases:
“Conventional
product liability cases” are brought by individuals who allege cancer or other
health effects caused by smoking cigarettes, by using smokeless tobacco
products, by addiction to tobacco, or by exposure to environmental tobacco
smoke. Approximately 1,285 cases are pending, including approximately 200
cases
against Lorillard. The 1,285 cases include approximately 1,000 cases pending
in
a single West Virginia court that have been consolidated for trial. Lorillard
is
a defendant in approximately 75 of the approximately 1,000 consolidated West
Virginia cases.
“Flight
Attendant cases” are brought by non-smoking flight attendants alleging injury
from exposure to environmental smoke in the cabins of aircraft. Plaintiffs
in
these cases may not seek punitive damages for injuries that arose prior to
January 15, 1997. Lorillard is a defendant in each of the approximately 2,625
pending Flight Attendant cases.
Notes
to
Consolidated Financial Statements
Note
20. Legal Proceedings - (Continued)
“Class
action cases” are purported to be brought on behalf of large numbers of
individuals for damages allegedly caused by smoking. Ten
of these
cases are pending against Lorillard. In one of these cases,
Schwab v. Philip Morris USA, Inc., et al.,
the
court has certified a nationwide class composed of purchasers of “light”
cigarettes. Lorillard is not a defendant in approximately 35 additional “lights”
class actions that are pending against other cigarette
manufacturers.
“Reimbursement
cases” are brought by or on behalf of entities who seek reimbursement of
expenses incurred in providing health care to individuals who allegedly were
injured by smoking. Plaintiffs in these cases have included the U.S. federal
government, U.S. state and local governments, foreign governmental entities,
hospitals or hospital districts, American Indian tribes, labor unions, private
companies and private citizens. Lorillard is a defendant in four of the six
Reimbursement cases pending against cigarette manufacturers in the United
States. Lorillard and the Company are defendants in an additional case pending
in Israel.
Included
in this category is the suit filed by the federal government,
United States of America v. Philip Morris USA, Inc., et al.,
that
sought disgorgement of profits and injunctive relief. During 2005, an appellate
court ruled that the government may not seek disgorgement of profits. During
August of 2006, the trial court issued its verdict and granted injunctive
relief. The verdict did not award monetary damages. See Reimbursement Cases
below.
Excluding
the flight attendant and the consolidated West Virginia suits, approximately
330
product liability cases are pending against cigarette manufacturers in U.S.
courts. Lorillard is a defendant in approximately 140 of the 330 cases. The
Company, which is not a defendant in any of the flight attendant or the
consolidated West Virginia matters, is a defendant in four of the
actions.
In
addition to the above, “Filter cases” are brought by individuals, including
former employees of Lorillard, who seek damages resulting from their alleged
exposure to asbestos fibers that were incorporated into filter material used
in
one brand of cigarettes manufactured by Lorillard for a limited period of
time
ending more than 50 years ago. Lorillard is a defendant in approximately
30 such
cases.
Plaintiffs
assert a broad range of legal theories in these cases, including, among others,
theories of negligence, fraud, misrepresentation, strict liability, breach
of
warranty, enterprise liability (including claims asserted under the federal
Racketeering Influenced and Corrupt Organizations Act (“RICO”)), civil
conspiracy, intentional infliction of harm, violation of consumer protection
statutes, violation of antitrust statutes, injunctive relief, indemnity,
restitution, unjust enrichment, public nuisance, claims based on antitrust
laws
and state consumer protection acts, and claims based on failure to warn of
the
harmful or addictive nature of tobacco products.
Plaintiffs
in most of the cases seek unspecified amounts of compensatory damages and
punitive damages, although some seek damages ranging into the billions of
dollars. Plaintiffs in some of the cases seek treble damages, statutory damages,
disgorgement of profits, equitable and injunctive relief, and medical
monitoring, among other damages.
CONVENTIONAL
PRODUCT LIABILITY CASES - Approximately 1,285 cases are pending against
cigarette manufacturers in the United States. Lorillard is a defendant in
approximately 200 of these cases. The Company is a defendant in two of the
pending cases.
Approximately
1,000 of the 1,285 cases are pending in a single West Virginia court in a
consolidated proceeding known as West
Virginia Individual Personal Injury Cases
or
“IPIC.” During the third quarter of 2006, the court dismissed Lorillard from
approximately 800 IPIC cases because those plaintiffs had not submitted evidence
that they had smoked a Lorillard product. These dismissals are not final
and it
is possible some or all of these 800 dismissals could be contested in subsequent
appeals noticed by the plaintiffs. Following these dismissals, Lorillard
is a
defendant in approximately 75 of the 1,000 IPIC cases. The Company is not
a
defendant in any of the IPIC cases. The court has entered a trial plan to
govern
the cases, and the first phase of trial is scheduled to begin on March 17,
2008.
Since
January 1, 2005, verdicts have been returned in ten cases. Lorillard was
not a
defendant in any of these cases. Defense verdicts were returned in eight
of the
ten trials, while juries found in favor of the plaintiffs and awarded damages
in
the two other cases. The defendants are pursuing appeals in both of these
cases.
In rulings
Notes
to
Consolidated Financial Statements
Note
20. Legal Proceedings - (Continued)
addressing
cases tried in earlier years, some appellate courts have reversed verdicts
returned in favor of the plaintiffs while other judgments that awarded damages
to smokers have been affirmed on appeal. Manufacturers have exhausted their
appeals in nine Individual cases in recent years and have been required to
pay
damages to plaintiffs. Punitive damages were paid to the smokers in three
of the
nine cases. Lorillard was not a party to these nine matters.
Some
cases against U.S. cigarette manufacturers are scheduled for trial during
2007
and beyond. Lorillard is a defendant in some of the cases scheduled for trial
in
2007. The Company is not a defendant in any of the cases scheduled for trial
in
2007. The trial dates are subject to change.
FLIGHT
ATTENDANT CASES - Approximately 2,625 Flight Attendant cases are pending.
Lorillard and three other cigarette manufacturers are the defendants in each
of
these matters. The Company is not a defendant in any of these cases. These
suits
were filed as a result of a settlement agreement by the parties, including
Lorillard, in
Broin v. Philip Morris Companies, Inc., et al.
(Circuit
Court, Miami-Dade County, Florida, filed October 31, 1991), a class action
brought on behalf of flight attendants claiming injury as a result of exposure
to environmental tobacco smoke. The settlement agreement, among other things,
permitted the plaintiff class members to file these individual suits. These
individuals may not seek punitive damages for injuries that arose prior to
January 15, 1997.
The
judges that have presided over the cases that have been tried have relied
upon
an order entered during October of 2000 by the Circuit Court of Miami-Dade
County, Florida. The October 2000 order has been construed by these judges
as
holding that the flight attendants are not required to prove the substantive
liability elements of their claims for negligence, strict liability and breach
of implied warranty in order to recover damages. The court further ruled
that
the trials of these suits are to address whether the plaintiffs’ alleged
injuries were caused by their exposure to environmental tobacco smoke and,
if
so, the amount of damages to be awarded.
Lorillard
has been a defendant in each of the seven flight attendant cases in which
verdicts have been returned. Defendants have prevailed in six of the seven
trials. In the single trial decided for the plaintiff, the jury awarded $5.5
million in damages. The court, however, reduced this award to $500,000. This
verdict, as reduced by the trial court, was affirmed on appeal and the
defendants have paid the award. Lorillard’s share of the judgment in this
matter, including interest, was approximately $60,000. In one of the six
cases
in which a defense verdict was returned, the court granted plaintiff’s motion
for a new trial and, following appeal, the case has been returned to the
trial
court for a second trial that has not been scheduled. In another of the cases
in
which a defense verdict was returned, plaintiff has appealed.
None
of
the flight attendant cases are scheduled for trial. Trial dates are subject
to
change.
CLASS
ACTION CASES - Lorillard is a defendant in ten
pending
cases. The Company is a defendant in two of these cases. In most of the pending
cases, plaintiffs seek class certification on behalf of groups of cigarette
smokers, or the estates of deceased cigarette smokers, who reside in the
state
in which the case was filed. One of the cases in which Lorillard is a
defendant,
Schwab v. Philip Morris USA, Inc., et al.,
is a
purported national class action on behalf of purchasers of “light” cigarettes in
which plaintiffs’ claims are based on defendants’ alleged RICO violations.
Neither Lorillard nor the Company are defendants in approximately 35 additional
class action cases in which plaintiffs assert claims on behalf of smokers
or
purchasers of “light” cigarettes. These cases are discussed below.
Cigarette
manufacturers, including Lorillard, have defeated motions for class
certification in a total of 35 cases, 13 of which were in state court and
22 of
which were in federal court. Motions for class certification have also been
ruled upon in some of the “lights” cases or in other class actions to which
Lorillard was not a party. In some of these cases, courts have denied class
certification to the plaintiffs, while classes have been certified in other
matters.
The
Engle Case - During 2006, the Florida Supreme Court issued rulings in the
case of Engle v. R.J. Reynolds Tobacco Co., et al. (Circuit Court,
Miami-Dade County, Florida, filed May 5, 1994), that affirmed the 2003 holding
of an intermediate appellate court vacating the $145.0 billion punitive damages
award, including approximately $16.3 billion against Lorillard. Prior to
trial,
Engle was certified as a class action on behalf of Florida residents,
and survivors of Florida residents, who were injured or died from medical
conditions allegedly caused by addiction to cigarettes, and the trial was
governed by a three-phase trial plan. The Florida Supreme Court determined
that
the case could not proceed further as a class action and decertified the
class.
However, the Florida Supreme Court ruling
Notes
to
Consolidated Financial Statements
Note
20. Legal Proceedings - (Continued)
permits
members of the now-decertified class a period of one year to file individual
claims, including claims for punitive damages. This one-year period expires
during January of 2008. The Florida Supreme Court held that these individual
plaintiffs are entitled to rely on some of the jury’s findings in favor of the
plaintiffs in the first phase of the Engle
trial on
a number of issues, including, among other things, that smoking cigarettes
causes a number of diseases; that cigarettes are addictive or
dependence-producing; and that the defendants, including Lorillard, were
negligent, breached express and implied warranties, placed cigarettes on
the
market that were defective and unreasonably dangerous, and concealed or
conspired to conceal the risks of smoking. The 2006 decision by the Florida
Supreme Court also reinstated the actual damages awarded during 2000 to two
of
the three individuals whose claims were heard during the second phase of
trial.
These awards totaled approximately $2.8 million to one smoker and $4.0 million
to the second, and bear interest at the rate of 10.0% per year. Lorillard’s
share of either of these verdicts, if any, has not been determined. The Florida
Supreme Court has formally concluded its consideration of Engle,
but the
opportunity for either the plaintiffs or the defendants to seek review of
the
case by the U.S. Supreme Court has not expired. Plaintiffs have filed a
motion in a Florida trial court seeking an order to publish notice, at
defendants’ expense, to former class members regarding the one-year period for
filing individual claims.
Florida
enacted legislation that limits the amount of an appellate bond required
to be
posted in order to stay execution of a judgment for punitive damages in a
certified class action. While Lorillard believes this legislation is valid
and
that any challenges to the possible application or constitutionality of this
legislation would fail, Lorillard entered into an agreement with the plaintiffs
during May of 2001 in which it contributed $200.0 million to a fund held
for the
benefit of the
Engle
plaintiffs (the “Engle
Agreement”). The $200.0 million contribution included the $100.0 million that
Lorillard posted as collateral for the appellate bond. Accordingly, Lorillard
recorded a pretax charge of $200.0 million in the year ended December 31,
2001.
Two other defendants executed agreements with the plaintiffs that were similar
to Lorillard’s. As a result, the class agreed to a stay of execution, with
respect to Lorillard and the two other defendants on its punitive damages
judgment until appellate review is completed, including any review by the
U.S.
Supreme Court.
The
Engle
Agreement provides that in the event that Lorillard, Inc.’s balance sheet net
worth falls below $921.2 million (as determined in accordance with generally
accepted accounting principles in effect as of July 14, 2000), the stay granted
in favor of Lorillard in the
Engle
Agreement would terminate and the class would be free to challenge the Florida
legislation. As of December 31, 2006, Lorillard, Inc. had a balance sheet
net
worth of approximately $1.3 billion. In addition, the
Engle
Agreement requires Lorillard to obtain the written consent of class counsel
or
the court prior to selling any trademark of or formula comprising a cigarette
brand having a U.S. market share of 0.5% or more during the preceding calendar
year. The
Engle
Agreement also requires Lorillard to obtain the written consent of the
Engle
class
counsel or the court to license to a third party the right to manufacture
or
sell such a cigarette brand unless the cigarettes to be manufactured under
the
license will be sold by Lorillard.
The
Scott case
-
Another class action pending against Lorillard is
Scott v. The American Tobacco Company, et al.
(District Court, Orleans Parish, Louisiana, filed May 24, 1996). During 1997,
the court certified a class composed of certain cigarette smokers resident
in
the State of Louisiana who desire to participate in medical monitoring or
smoking cessation programs and who began smoking prior to September 1, 1988,
or
who began smoking prior to May 24, 1996 and allege that defendants undermined
compliance with the warnings on cigarette packages.
Trial
in
Scott
was
heard in two phases. While the jury in its July 2003 Phase I verdict rejected
medical monitoring, the primary relief requested by plaintiffs, it returned
sufficient findings in favor of the class to proceed to a Phase II trial
on
plaintiffs’ request for a state-wide smoking cessation program.
During
May of 2004, the jury returned its verdict in the trial’s second phase and
awarded approximately $591.0 million to fund cessation programs for Louisiana
smokers. The court’s final judgment, entered during June of 2004, reflects the
jury’s award of damages and also awarded prejudgment interest. During February
of 2007, the Louisiana Court of Appeal issued a ruling that, among other
things,
reduced the amount of the award by approximately $312.0 million; struck the
award of prejudgment interest, which totaled approximately $440.0 million
as of
December 31, 2006; and ruled that the only class members who are eligible
to
participate in the smoking cessation program are those
who
began smoking by September 1, 1988, and whose claims accrued by September
1,
1988. The Louisiana
Notes
to
Consolidated Financial Statements
Note
20. Legal Proceedings - (Continued)
Court
of
Appeal has returned the case to the trial court, for further proceedings.
Lorillard’s share of any judgment has not been determined. It is possible that
the parties will seek further review of this decision.
The
parties filed a stipulation in the trial court agreeing that an article of
the
Louisiana Code of Civil Procedure, and a Louisiana statute governing the
amount
of appellate bonds in civil cases involving a signatory to the Master Settlement
Agreement, required that the amount of the bond for the appeal be set at
$50.0
million for all defendants collectively. The parties further agreed that
the
plaintiffs have full reservations of rights to contest in the trial court,
at a
later date, the sufficiency or amount of the bond on any grounds. The trial
court entered an order setting the amount of the bond at $50.0 million for
all
defendants. Defendants collectively posted a surety bond in that amount,
of
which Lorillard secured 25%, or $12.5 million. While Lorillard believes the
limitation on the appeal bond amount is valid as required by Louisiana law,
and
that any challenges to the amount of the bond would fail, in the event of
a
successful challenge the amount of the appeal bond could be set as high as
150%
of the judgment and judicial interest combined. If such an event occurred,
Lorillard’s share of the appeal bond has not been determined.
Other
class action cases
- Two
additional cases are pending against Lorillard in which motions for class
certification were granted. In one of them, Brown
v. The American Tobacco Company, Inc., et al.
(Superior Court, San Diego County, California, filed June 10, 1997), a
California court granted defendants’ motion to decertify the class. The class
decertification order has been affirmed on appeal, but the California Supreme
Court has agreed to hear the case. The class originally certified in
Brown
was
composed of residents of California who smoked at least one of defendants’
cigarettes between June 10, 1993 and April 23, 2001 and who were exposed
to
defendants’ marketing and advertising activities in California. In the second
case, Daniels
v. Philip Morris, Incorporated, et al.
(Superior Court, San Diego County, California, filed August 2, 1998), the
court
granted defendants’ motion for summary judgment during 2002 and dismissed the
case. Plaintiffs appealed, but the California Court of Appeal affirmed the
dismissal during 2004. Plaintiffs are now pursuing an appeal to the California
Supreme Court. Prior to granting defendants’ motion for summary judgment, the
court had certified a class composed of California residents who, while minors,
smoked at least one cigarette between April of 1994 and December 31, 1999
and
were exposed to defendants’ marketing and advertising activities in California.
It is possible that either or both of these class certification rulings could
be
reinstated as a result of the pending appeals.
As
discussed above, other cigarette manufacturers are defendants in approximately
35 cases in which plaintiffs’ claims are based on the allegedly fraudulent
marketing of “lights” or “ultra-lights” cigarettes. Among those “lights” class
actions in which neither the Company nor Lorillard are defendants is the
case
of
Price v. Philip Morris USA
(Circuit
Court, Madison County, Illinois, filed February 10, 2000). During March of
2003,
the court returned a verdict in favor of the class and awarded it $7.1 billion
in actual damages. The court also awarded $3.0 billion in punitive damages
to
the State of Illinois, which was not a party to the suit, and awarded
plaintiffs’ counsel approximately $1.8 billion in fees and costs. During
December of 2005, the Illinois Supreme Court vacated the damages awards,
decertified the class, and ordered that the case be dismissed. The U.S. Supreme
Court declined to review the case, and the Illinois trial court dismissed
Price
in favor
of Philip Morris during December of 2006. The court has not ruled on the
motion
plaintiffs filed during January of 2007 that seeks an order vacating the
dismissal. Price
is the
only “lights” class action to have been tried, although classes have been
certified in some of the other pending matters.
The
Schwab case -
Lorillard is a defendant in one “lights” class action, Schwab
v. Philip Morris USA, Inc., et al.
(U.S.
District Court, Eastern District, New York, filed May 11, 2004). The Company
is
not a party to this case. Plaintiffs in Schwab
base
their claims on defendants’ alleged violations of the RICO statute in the
manufacture, marketing and sale of “lights” cigarettes. Plaintiffs have
estimated damages to the class in the hundreds of billions of dollars. Any
damages awarded to the plaintiffs based on defendants’ violation of the RICO
statute would be trebled. During September of 2006, the court granted
plaintiffs’ motion for class certification and certified a nationwide class
action on behalf of purchasers of “light” cigarettes. The federal court of
appeals has granted review of the class certification order, and it has ordered
that no activity can proceed before the trial court until the appeal is
concluded.
REIMBURSEMENT
CASES - Although the cases settled by the State Settlement Agreements, as
described below, are concluded, certain matters are pending against cigarette
manufacturers. The pending cases include Reimbursement cases on file in U.S.
courts, a Reimbursement case on file in Israel, and cases challenging the
State
Settlement Agreements. Lorillard is a defendant in four pending Reimbursement
cases in the U.S. and has been named
as
a party to the case in Israel. The Company also is a party to the case in
Israel, but it is not a defendant in
Notes
to
Consolidated Financial Statements
Note
20. Legal Proceedings - (Continued)
any
of
the Reimbursement cases in the U.S. The four cases pending against Lorillard
are
brought by a city government and a group of hospitals; a group of taxpayers;
an
Indian tribe; and the U.S. federal government.
U.S.
Federal Government Action - During August of 2006, the U.S. District Court
for
the District of Columbia issued its final judgment and remedial order in
the
federal government’s reimbursement suit (United
States of America v. Philip Morris USA, Inc., et al.,
U.S.
District Court, District of Columbia, filed September 22, 1999). The verdict
concluded a bench trial that began in September of 2004. Lorillard, other
cigarette manufacturers, two parent companies and two trade associations
are
defendants in this action. The Company is not a party to this case.
The
court
determined that the defendants, including Lorillard, violated certain provisions
of the RICO statute, that there was a likelihood of present and future RICO
violations, and that equitable relief was warranted. Plaintiff was not awarded
monetary damages. The equitable relief included permanent injunctions that
prohibit the defendants, including Lorillard: from engaging in any act of
racketeering, as defined under RICO; from making any material false or deceptive
statements concerning cigarettes; from making any express or implied statement
about health on cigarette packaging or promotional materials (these prohibitions
include a ban on using such descriptors as “low tar,” “light,” “ultra-light,”
“mild,” or “natural”); and from making any statements that “low tar,” “light,”
“ultra-light,” “mild,” or “natural” or low-nicotine cigarettes may result in a
reduced risk of disease. The final judgment and remedial order also requires
the
defendants, including Lorillard, to make corrective statements on their
websites, in certain media, in point-of-sale advertisements, and on cigarette
package “onserts” concerning: the health effects of smoking; the addictiveness
of smoking; that there are no significant health benefits to be gained by
smoking “low tar,” “light,” “ultra-light,” “mild,” or “natural” cigarettes; that
cigarette design has been manipulated to ensure optimum nicotine delivery
to
smokers; and that there are adverse effects from exposure to secondhand smoke.
The text of these statements, which have not been determined, are subject
to the
court’s approval. The final judgment and remedial order also requires the
defendants, including Lorillard, to maintain and to disclose documents on
their
internet websites and to continue to place documents in a document depository
created in the case of State
of Minnesota v. Philip Morris Inc., et al.
The
defendants, including Lorillard, were directed in the final judgment and
remedial order to disclose “disaggregated” marketing data. If the final judgment
and remedial order are not modified or vacated on appeal, the costs to Lorillard
for compliance could exceed $10.0 million. Defendants have noticed an appeal
from the final judgment and remedial order to the U.S. Court of Appeals for
the
District of Columbia Circuit. Defendants have received a stay of the judgment
and remedial order from the District of Columbia Court of Appeal that will
remain in effect while the appeal is proceeding. The government also has
noticed
an appeal from the final judgment. As a result of this appeal, it is possible
that the District of Columbia Court of Appeals could reinstate certain of
the
government’s claims or damages. While trial was underway, the District of
Columbia Court of Appeals ruled that plaintiff may not seek disgorgement
of
profits, but this appeal was interlocutory in nature and could be reconsidered
in the present appeal. Prior to trial, the government had estimated that
it was
entitled to approximately $280.0 billion from the defendants for its
disgorgement of profits claim. In addition, the government sought during
trial
more than $10.0 billion for the creation of nationwide smoking cessation,
public
education and counter-marketing programs. In its 2006 verdict, the trial
court
declined to award such relief. It is possible that these claims could be
reinstated on appeal.
In
another of the cases, a private insurer in Israel, Clalit Health Services,
seeks
damages for providing treatment to individuals allegedly injured by cigarette
smoking in Israel (Clalit
Health Services v. Philip Morris, Inc., et al.,
District Court of Jerusalem, Israel). The Company was dismissed from this
suit
during 2005, although plaintiff has appealed this ruling. The case remains
pending against Lorillard, other cigarette manufacturers, and other
defendants.
SETTLEMENT
OF STATE REIMBURSEMENT LITIGATION - On November 23, 1998, Lorillard, Philip
Morris Incorporated, Brown & Williamson Tobacco Corporation and R.J.
Reynolds Tobacco Company, the “Original Participating Manufacturers,” entered
into a Master Settlement Agreement (“MSA”) with 46 states, the District of
Columbia, the Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands,
American Samoa and the Commonwealth of the Northern Mariana Islands to settle
the asserted and unasserted health care cost recovery and certain other claims
of those states. These settling entities are generally referred to as the
“Settling States.” The Original Participating Manufacturers had previously
settled similar claims brought by Mississippi, Florida, Texas and Minnesota,
which together with the Master Settlement Agreement are generally referred
to as
the “State Settlement Agreements.”
Notes
to
Consolidated Financial Statements
Note
20. Legal Proceedings - (Continued)
The
State
Settlement Agreements provide that the agreements are not admissions,
concessions or evidence of any liability or wrongdoing on the part of any
party,
and were entered into by the Original Participating Manufacturers to avoid
the
further expense, inconvenience, burden and uncertainty of
litigation.
Lorillard
recorded pretax charges of $911.4 million, $876.4 million and $845.9 million
($560.2 million, $537.7 million and $522.6 million after taxes) for 2006,
2005
and 2004, to accrue its obligations under the State Settlement Agreements.
Lorillard’s portion of ongoing adjusted payments and legal fees is based on its
share of domestic cigarette shipments in the year preceding that in which
the
payment is due. Accordingly, Lorillard records its portions of ongoing
settlement payments as part of cost of manufactured products sold as the
related
sales occur.
The
State
Settlement Agreements require that the domestic tobacco industry make annual
payments in the following amounts, subject to adjustment for several factors,
including inflation, market share and industry volume: $8.4 billion through
2007
and $9.4 billion thereafter. In addition, the domestic tobacco industry is
required to pay settling plaintiffs’ attorneys’ fees, subject to an annual cap
of $500.0 million, as well as an additional amount of up to $125.0 million
in
each year through 2008. These payment obligations are the several and not
joint
obligations of each settling defendant.
The
State
Settlement Agreements also include provisions relating to significant
advertising and marketing restrictions, public disclosure of certain industry
documents, limitations on challenges to tobacco control and underage use
laws,
and other provisions. Lorillard and the other Original Participating
Manufacturers have notified the States that they intend to seek an adjustment
in
the amount of payments made in 2003 pursuant to a provision in the MSA that
permits such adjustment if the companies can prove that the MSA was a
significant factor in their loss of market share to companies not participating
in the MSA and that the States failed to diligently enforce certain statutes
passed in connection with the MSA. If the Original Participating Manufacturers
are ultimately successful, any adjustment would be reflected as a credit
against
future payments by the Original Participating Manufacturers under the
agreement.
From
time
to time, lawsuits have been brought against Lorillard and other participating
manufacturers to the MSA, or against one or more of the states, challenging
the
validity of that agreement on certain grounds, including as a violation of
the
antitrust laws. Lorillard is a defendant in one such case, which has been
dismissed by the trial court but has been appealed by the plaintiffs. Lorillard
understands that additional such cases are proceeding against other
defendants.
In
addition, in connection with the MSA, the Original Participating Manufacturers
entered into an agreement to establish a $5.2 billion trust fund payable
between
1999 and 2010 to compensate the tobacco growing communities in 14 states
(the
“Trust”). Payments to the Trust will no longer be required as a result of an
assessment imposed under a new federal law repealing the federal supply
management program for tobacco growers, although the states of Maryland and
Pennsylvania are contending that payments under the Trust should continue
to
growers in those states since the new federal law did not cover them, and
the
matter is being litigated. In 2005 other litigation was resolved over the
Trust’s obligation to return payments made by the Original Participating
Manufacturers in 2004 or withheld from payment to the Trust for the fourth
quarter of 2004, when the North Carolina Supreme Court ruled that such payments
were due to the Trust. Lorillard’s share of payments into the Trust in 2004 was
approximately $30.0 million and its share of the payment due for the last
quarter of that year was approximately $10.0 million. Under the new law,
enacted
in October of 2004, tobacco quota holders and growers will be compensated
with
payments totaling $10.1 billion, funded by an assessment on tobacco
manufacturers and importers. Payments to qualifying tobacco quota holders
and
growers commenced in 2005.
The
Company believes that the State Settlement Agreements will materially adversely
affect its cash flows and operating income in future years. The degree of
the
adverse impact will depend, among other things, on the rates of decline in
U.S.
cigarette sales in the premium price and discount price segments, Lorillard’s
share of the domestic premium price and discount price cigarette segments,
and
the effect of any resulting cost advantage of manufacturers not subject to
significant payment obligations under the State Settlement
Agreements.
FILTER
CASES - In addition to the above, claims have been brought against Lorillard
by
individuals who seek damages resulting from their alleged exposure to asbestos
fibers that were incorporated into filter material used in one
brand
of cigarettes manufactured by Lorillard for a limited period of time ending
more
than 50 years ago.
Notes
to
Consolidated Financial Statements
Note
20. Legal Proceedings - (Continued)
Approximately
30 such matters are pending against Lorillard. The Company is not a defendant
in
any of these matters. Since January 1, 2005, Lorillard has paid, or has reached
agreement to pay, a total of approximately $10.2 million in payments of
judgments and settlements to finally resolve approximately 60 claims. No
such
cases have been tried since January 1, 2005. Trial dates are scheduled in
some
of the pending cases. Trial dates are subject to change.
Other
Tobacco - Related
TOBACCO
-
RELATED ANTITRUST CASES - Indirect Purchaser Suits - Approximately 30 antitrust
suits were filed on behalf of putative classes of consumers in various state
courts against Lorillard and its major competitors. The suits all
alleged
that the
defendants entered into agreements to fix the wholesale prices of cigarettes
in
violation of state antitrust laws which permit indirect purchasers, such
as
retailers and consumers, to sue under price fixing or consumer fraud statutes.
More
than
20
states permit such suits. Lorillard was a defendant in all but one of these
indirect purchaser cases. The Company was also named as a defendant in most
of
these indirect purchaser cases,
but
was
voluntarily dismissed without prejudice from all of them. Three indirect
purchaser suits,
in New
York, Florida and Michigan, were dismissed by courts in their entirety and
the
plaintiffs
withdrew
their
appeals. The
actions
in all other states
except for New Mexico and Kansas,
have
been voluntarily dismissed.
In
the
Kansas case, the District Court of Seward County certified a class
of
Kansas
indirect purchasers in 2002. The
parties
are in the process of litigating certain privilege issues.
On July
14, 2006, the Court issued an order confirming
that
fact discovery is closed, with
the
exception of privilege issues that the Court determines, based on a Special
Master’s report, justify further limited fact discovery. Expert discovery, as
necessary, will take place later this year. No date has as
yet been
set by the Court for dispositive motions and trial.
A
decision granting class certification in New Mexico was affirmed by the New
Mexico Court of Appeals on February 8, 2005. As ordered by the Court, class
notice was sent out on
October
30, 2005. The New Mexico plaintiffs were
permitted to rely on discovery produced in the Kansas case.
On June
30, 2006, the New Mexico Court granted summary judgment to all defendants,
and
the suit was dismissed. An appeal was filed by the plaintiffs on August 14,
2006, and has not yet been heard.
Tobacco
Growers Suit - DeLoach
v. Philip Morris Inc., et al.
(U.S.
District Court, Middle District of North Carolina, filed February 16, 2000).
On
October 1, 2003, the Court approved a settlement by Lorillard with a class
consisting of all persons holding a quota (the licenses that a farmer must
either own or rent to sell the crop) to grow, and all domestic producers
who
sold flue-cured or burley tobacco at anytime from February 1996 to present.
In
addition to payments previously made, Lorillard committed to buy 20 million
pounds of domestic tobacco for each crop year through 2012. Pursuant to the
terms of the settlement agreement, that obligation was subsequently extended
until crop year 2014 as a result of the enactment of the Fair and Equitable
Tobacco Reform Act of 2004.
Lorillard
has also committed to purchase at least 35% of its annual total requirements
for
flue-cured and burley tobacco domestically for the same period. The other
major
domestic tobacco companies and the major leaf buyers were also defendants,
and
all of the defendants with the exception of R.J. Reynolds were parties to
the
settlement agreement entered on October 1, 2003. R.J. Reynolds subsequently
entered into a settlement agreement with the class and that agreement was
approved by the Court. Lorillard contended that the R.J. Reynolds settlement
agreement triggered a clause in Lorillard’s settlement agreement that would
substantially reduce Lorillard’s commitments to buy domestic tobacco. After
Lorillard prevailed on an appeal related to the claimed reduction, the trial
court ruled that the leaf commitment will be reduced for Lorillard by
approximately 60%, effective in 2006.
MSA
Federal Antitrust Suit - Sanders
v. Lockyer, et al.
(U.S.
District Court, Northern District of California, filed June 9, 2004). Lorillard
and the other major cigarette manufacturers, along with the Attorney General
of
the State of California, have been sued by a consumer purchaser of cigarettes
in
a putative class action alleging violations of the Sherman Act and California
state antitrust and unfair competition laws. The plaintiff seeks treble damages
of an unstated amount for the putative class as well as declaratory and
injunctive relief. All claims are based on the assertion that the Master
Settlement Agreement that Lorillard and the other cigarette manufacturer
defendants entered into with the State of California and more than forty
other
states, together with certain implementing legislation enacted by
California, constitute
unlawful
restraints of trade.
On March
28, 2005
the defendants’
motion
Notes
to
Consolidated Financial Statements
Note
20. Legal Proceedings - (Continued)
to
dismiss the suit was granted. Plaintiffs appealed the dismissal to the Court
of
Appeals for the Ninth Circuit. Argument on the appeal is to be heard on February
15, 2007.
Defenses
Lorillard
believes that it has valid defenses to the cases pending against it. Lorillard
also believes it has valid bases for appeal of the adverse verdicts against
it.
To the extent the Company is a defendant in any of the lawsuits described
in
this section, the Company believes that it is not a proper defendant in these
matters and has moved or plans to move for dismissal of all such claims against
it. While Lorillard 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. Plaintiffs have prevailed in
several cases, as noted above. It is possible that one or more of the pending
actions could be decided unfavorably as to Lorillard or the other defendants.
Lorillard may enter into discussions in an attempt to settle particular cases
if
it believes it is appropriate to do so.
Lorillard
cannot predict the outcome of pending litigation. Some
plaintiffs have been awarded damages from cigarette manufacturers at trial.
While some of these awards have been overturned or reduced, other damages
awards
have been paid after the manufacturers have exhausted their appeals. These
awards and other litigation activities against cigarette manufacturers continue
to receive media attention. In
addition, health issues related to tobacco products also continue to receive
media attention. It
is
possible, for example, that the 2006 verdict in United
States of America v. Philip Morris USA, Inc., et al.,
which
made many adverse findings regarding the conduct of the defendants, including
Lorillard, could form the basis of allegations by other plaintiffs or additional
judicial findings against cigarette manufacturers. The 2006 decision by the
Florida Supreme Court in Engle
could
lead to the filing of many new cases against cigarette manufacturers, including
Lorillard. These
events could have an adverse affect on the ability of Lorillard to prevail
in
smoking and health litigation
and
could influence the filing of new suits against Lorillard or the Company.
Lorillard
also cannot predict the type or extent of litigation that could be brought
against it and other cigarette manufacturers in the future.
Except
for the impact of the State Settlement Agreements as described above, management
is unable to make a meaningful estimate of the amount or range of loss that
could result from an unfavorable outcome of pending litigation and, therefore,
no provision has been made in the Consolidated Condensed Financial Statements
for any unfavorable outcome. It is possible that the Company’s results of
operations or cash flows in a particular quarterly or annual period or its
financial position could be materially adversely affected by an unfavorable
outcome or settlement of certain pending litigation.
OTHER
LITIGATION
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.
Note
21. 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 December 31, 2006,
the
aggregate amount of quantifiable indemnification agreements in effect for
sales
of business entities, assets and third party loans was $933.0
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 December 31, 2006, 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
Notes
to
Consolidated Financial Statements
Note
21. Commitments and Contingencies - (Continued)
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. As of December 31, 2006, CNA has recorded
approximately $28.0 million of liabilities related to these indemnification
agreements.
In
connection with the issuance of preferred securities by CNA Surety Capital
Trust
I, CNA Surety, a 63% owned and consolidated subsidiary of CNA, issued a
guarantee of $75.0 million to guarantee the payment by CNA Surety Capital
Trust
I of annual dividends of $1.5 million over 30 years and redemption of $30.0
million of preferred securities.
CNA
Surety
CNA
Surety has provided significant surety bond protection for a large national
contractor that undertakes projects for the construction of government and
private facilities, a substantial portion of which have been reinsured by
CCC.
In order to help this contractor meet its liquidity needs and complete projects
which had been bonded by CNA Surety, commencing in 2003 CNA provided loans to
the contractor through a credit facility. Due to reduced operating cash flow
at
the contractor these loans were fully impaired through realized investment
losses in 2004 and 2005. The Company, through a participation agreement with
CNA, has funded and owns an interest in the credit facility. For the years
ended
December 31, 2005 and 2004, the Company recorded a pretax impairment charge
of
$47.0 million and $80.5 million. CNA no longer provides additional liquidity
to
the contractor and has not recognized interest income related to the loans
since
June 30, 2005.
In
addition to the impairment of loans outstanding under the credit facility,
CNA
determined that the contractor would likely be unable to meet its obligations
under the surety bonds. Accordingly, during 2005, CNA Surety established
$110.0
million of surety loss reserves in anticipation of future loss payments,
$50.0
million of which was ceded to CCC under the reinsurance agreements discussed
below. Further deterioration of the contractor’s operating cash flow could
result in higher loss estimates and trigger additional reserve actions. If
any
such reserve additions were required, CCC would have all further surety bond
exposure through the reinsurance arrangements. During the years ended December
31, 2006 and 2005, CNA Surety paid $34.0 million and $26.0 million related
to
surety losses of the contractor.
CNA
Surety may provide surety bonds on a limited basis on behalf of the contractor
to support its revised restructuring plan, subject to the contractor’s
compliance with CNA Surety’s underwriting standards and ongoing management of
CNA Surety’s exposure in relation to the contractor. All surety bonds written
for the contractor are issued by CCC and its affiliates, other than CNA Surety,
and are subject to underlying reinsurance treaties pursuant to which all
bonds
written on behalf of CNA Surety are 100% reinsured to one of CNA Surety’s
insurance subsidiaries.
CCC
provides reinsurance protection to CNA Surety for losses in excess of an
aggregate of $60.0 million associated with the contractor. This treaty provides
coverage for the life of bonds either in force or written from January 1,
2005
to December 31, 2005. CCC and CNA Surety agreed by addendum to extend this
contract for twenty four months, expiring on December 31, 2007.
CCC
and
CNA Surety continue to engage in periodic discussions with insurance regulatory
authorities regarding the level of surety bonds provided for this contractor
and
will continue to apprise those authorities of the status of their ongoing
exposure to this account.
Indemnification
and subrogation rights, including rights to contract proceeds on construction
projects in the event of default, reduce CNA Surety’s and ultimately the
Company’s exposure to loss. While CNA believes that the contractor’s continuing
restructuring efforts may be successful, the contractor’s failure to ultimately
achieve its extended restructuring plan or perform its contractual obligations
under CNA’s surety bonds could have a material adverse effect on the Company’s
results of operations. If such failures occur, CNA estimates the additional
surety loss, net of indemnification and subrogation recoveries, but before
the
effects of minority interest, could be up to $90.0 million pretax.
Notes
to
Consolidated Financial Statements
Note
21. Commitments and Contingencies - (Continued)
CNA
has
also guaranteed or provided collateral for the contractor’s letters of credit.
As of December 31, 2006 and December 31, 2005, these guarantees and collateral
obligations aggregated $9.0 million and $13.0 million.
CCC
provided an excess of loss reinsurance contract to the insurance subsidiaries
of
CNA Surety over a period that expired on December 31, 2000 (the “stop loss
contract”). The stop loss contract limits the net loss ratios for CNA Surety
with respect to certain accounts and lines of insurance business. In the
event
that CNA Surety’s accident year net loss ratio exceeds 24.0% for 1997 through
2000 (the “contractual loss ratio”), the stop loss contract requires CCC to pay
amounts equal to the amount, if any, by which CNA Surety’s actual accident year
net loss ratio exceeds the contractual loss ratio multiplied by the applicable
net earned premiums. The minority shareholders of CNA Surety do not share
in any
losses that apply to this contract.
Diamond
Offshore Construction Projects
As
of
December 31, 2006, Diamond Offshore had purchase obligations aggregating
approximately $456.0 million related to the major upgrades of the Ocean
Monarch and
the
Ocean
Endeavor
and
construction of two new jack-up rigs, the Ocean
Scepter
and
Ocean
Shield.
Diamond
Offshore anticipates that expenditures related to these shipyard projects
will
be approximately $263.0 million and $193.0 million in 2007 and 2008,
respectively. However, the actual timing of these expenditures will vary
based
on the completion of various construction milestones and the timing of the
delivery of equipment, which are beyond Diamond Offshore’s control.
Regulatory
and Rate Matters
Texas
Gas
filed a rate case with FERC in April of 2005, and implemented the new rates
on
November 1, 2005, subject to refund. As of December 31, 2005, an estimated
refund liability of approximately $5.0 million related to Texas Gas’ open
general rate case was recorded on the Consolidated Balance Sheet. In June
of
2006, the settlement of Texas Gas’ general rate case became final. On June 30,
2006, Texas Gas refunded approximately $6.6 million consisting of $6.4 million
in principal and $0.2 million of interest to its customers. In accordance
with
the terms of the settlement, Texas Gas has no obligation to file a new rate
case
and is prohibited from placing new rates into effect prior to November 1,
2010.
Currently, neither Texas Gas nor Gulf South is involved in an open general
rate
case.
Pipeline
Expansion Projects
Boardwalk
Pipeline is engaged in several major expansion projects that will require
the
investment of significant capital resources. These projects include a 1.7
Bcf
pipeline expansion in East Texas/Mississippi, construction of a 1.6 Bcf
interstate pipeline from Texas to Louisiana, a 1.2 Bcf pipeline expansion
from
Mississippi to Alabama, the construction of two laterals connecting its Texas
Gas pipeline to transport gas for producers operating in Arkansas and
Mississippi and storage expansion projects in western Kentucky and Louisiana.
These projects are subject to FERC approval. As of December 31, 2006, Boardwalk
Pipeline had purchase commitments of $409.1 million primarily related to
its
expansion projects.
Other
In
the
normal course of business, CNA has provided letters of credit in favor of
various unaffiliated insurance companies, regulatory authorities and other
entities. At December 31, 2006 and 2005, there were approximately $27.0 million
and $30.0 million of outstanding letters of credit.
Note
22. Discontinued Operations
CNA
has
discontinued operations which consist of run-off insurance operations acquired
in its merger with The Continental Corporation in 1995. The business consists
of
facultative property and casualty, treaty excess casualty and treaty pro-rata
reinsurance with underlying exposure to a diverse, multi-line domestic and
international book of business encompassing property, casualty, the London
Market and marine liabilities. The run-off operations are concentrated in
the
United Kingdom and Bermuda subsidiaries also acquired in the
merger.
Notes
to
Consolidated Financial Statements
Note
22. Discontinued Operations - (Continued)
CNA
has
initiated and is actively pursuing a plan to sell a portion of the discontinued
operations. CNA expects a sale to be completed in 2007.
Results
of CNA’s discontinued operations were as follows:
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$
|
17.5
|
|
$
|
14.9
|
|
$
|
17.3
|
|
Other
|
|
|
(2.4
|
)
|
|
6.7
|
|
|
(7.8
|
)
|
Total
revenues
|
|
|
15.1
|
|
|
21.6
|
|
|
9.5
|
|
Insurance
related benefits (expenses)
|
|
|
(50.6
|
)
|
|
0.5
|
|
|
(29.7
|
)
|
Income
(loss) before income taxes and minority interest
|
|
|
(35.5
|
)
|
|
22.1
|
|
|
(20.2
|
)
|
Income
tax expense (benefit)
|
|
|
(6.8
|
)
|
|
1.6
|
|
|
1.2
|
|
Minority
interest
|
|
|
(3.0
|
)
|
|
1.8
|
|
|
(1.9
|
)
|
Net
income (loss) from discontinued operations
|
|
$
|
(25.7
|
)
|
$
|
18.7
|
|
$
|
(19.5
|
)
|
The
results for 2006 reflect an impairment loss of $26.2 million, after minority
interest, related to the anticipated sale of a portion of the discontinued
operations. The assets and liabilities that would be subject to a sale were
$239.0 million and $157.0 million at December 31, 2006. Excluding the impairment
loss on the anticipated sale, net loss for this business was $0.9 million
and
$2.7 million for the years ended December 31, 2006 and 2004, and net income
was
$11.9 million for the year ended December 31, 2005. CNA’s subsidiary, The
Continental Corporation, provides a guarantee for a portion of the subject
liabilities related to certain marine products. Any sale is expected to include
provisions that would significantly limit CNA’s exposure related to this
guarantee.
Net
assets of discontinued operations, including the assets and liabilities subject
to the sale discussed above, are included in Other Assets in the Consolidated
Balance Sheets and were as follows:
December
31
|
|
2006
|
|
2005
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Investments
|
|
$
|
317.1
|
|
$
|
357.8
|
|
Reinsurance
receivables
|
|
|
32.8
|
|
|
77.9
|
|
Cash
|
|
|
40.1
|
|
|
28.9
|
|
Other
assets
|
|
|
2.8
|
|
|
6.0
|
|
Total
assets
|
|
|
392.8
|
|
|
470.6
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Insurance
reserves
|
|
|
307.8
|
|
|
337.9
|
|
Other
liabilities
|
|
|
17.2
|
|
|
19.4
|
|
Total
liabilities
|
|
|
325.0
|
|
|
357.3
|
|
|
|
|
|
|
|
|
|
Net
assets of discontinued operations
|
|
$
|
67.8
|
|
$
|
113.3
|
|
The
Accumulated Other Comprehensive Income, net of tax and minority interest,
reported in the Consolidated Balance Sheets includes $0.9 million and $10.1
million related to unrealized gains and $13.6 million and $5.0 million related
to the cumulative foreign currency translation adjustment for discontinued
operations as of December 31, 2006 and 2005.
CNA’s
accounting and reporting for discontinued operations is in accordance with
APB
No. 30, “Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions.” At December 31, 2006 and 2005, the insurance
reserves are net of discount of $94.0 million and $104.9 million. Excluding
the
impairment loss recorded in 2006 discussed above,
the
income (loss)
from
discontinued
operations reported
above
primarily represents the
net
investment
Notes
to
Consolidated Financial Statements
Note
22. Discontinued Operations - (Continued)
income,
realized investment gains and losses, foreign currency gains and losses,
effects
of the accretion of the loss reserve discount and re-estimation of the ultimate
claim and claim adjustment expense of the discontinued operations.
Note
23. 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 Financial,
are
included in the Corporate and other segment.
CNA
manages its property and casualty operations in two operating segments, which
represent CNA’s core operations: Standard Lines and Specialty Lines. The
non-core operations are managed in Life and Group Non-Core segment and Other
Insurance segment. Standard Lines includes standard property and casualty
coverages sold to small and middle market commercial businesses primarily
through an independent agency distribution system, and excess and surplus
lines,
as well as insurance and risk management products sold to large corporations
in
the U.S. and globally. Specialty Lines provides professional, financial and
specialty property and casualty products and services. Life and Group Non-Core
primarily includes the results of the life and group lines of business sold
or
placed in run-off. Other Insurance primarily includes the results of certain
property and casualty lines of business placed in run-off, including CNA
Re.
This segment also includes the results related to the centralized adjusting
and
settlement of APMT claims as well as the results of CNA’s participation in
voluntary insurance pools, which are primarily in run-off and various other
non-insurance operations.
Lorillard
is engaged in the production and sale of cigarettes with its principal products
marketed under the brand names of Newport, Kent, True, Maverick and Old Gold
with substantially all of its sales in the United States.
Boardwalk
Pipeline is engaged in the interstate transportation and storage of natural
gas.
This segment consists of two interstate natural gas pipeline systems originating
in the Gulf Coast area and running north and east through Texas, Louisiana,
Mississippi, Alabama, Florida, Arkansas, Tennessee, Kentucky, Indiana, Ohio
and
Illinois with approximately 13,400 miles of pipeline.
Diamond
Offshore’s business primarily consists of operating 44 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. The majority of these rigs are located
in the Gulf of Mexico region with the remainder operating in Brazil, the
North
Sea, and various other foreign markets.
Loews
Hotels owns and/or operates 18 hotels, 16 of which are in the United States
and
two are in Canada.
The
Corporate and other segment consists primarily of corporate investment income,
including investment gains (losses) from non-insurance subsidiaries, the
operations of Bulova Corporation which distributes and sells watches and
clocks,
equity earnings from shipping operations, as well as corporate interest expenses
and other corporate administrative costs.
The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. 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.
Notes
to
Consolidated Financial Statements
Note
23. Business Segments - (Continued)
The
following tables set forth the Company’s consolidated revenues, income and
assets by business segment:
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
|
Standard
Lines
|
|
$
|
5,575.5
|
|
$
|
5,295.8
|
|
$
|
5,760.8
|
|
Specialty
Lines
|
|
|
3,139.6
|
|
|
2,893.6
|
|
|
2,716.2
|
|
Life
and Group Non-Core
|
|
|
1,354.5
|
|
|
1,361.9
|
|
|
1,093.0
|
|
Other
Insurance
|
|
|
312.1
|
|
|
313.8
|
|
|
358.2
|
|
Total
CNA Financial
|
|
|
10,381.7
|
|
|
9,865.1
|
|
|
9,928.2
|
|
Lorillard
|
|
|
3,858.6
|
|
|
3,637.4
|
|
|
3,384.4
|
|
Boardwalk
Pipeline
|
|
|
618.4
|
|
|
571.3
|
|
|
265.1
|
|
Diamond
Offshore
|
|
|
2,102.0
|
|
|
1,294.1
|
|
|
835.6
|
|
Loews
Hotels
|
|
|
371.3
|
|
|
350.5
|
|
|
315.2
|
|
Corporate
and other
|
|
|
579.0
|
|
|
299.4
|
|
|
508.4
|
|
Total
|
|
$ |
17,911.0
|
|
$
|
16,017.8
|
|
$
|
15,236.9
|
|
|
|
|
|
|
|
|
|
Pretax
income (loss) (a) (c):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
|
Standard
Lines
|
|
$
|
962.6
|
|
$
|
(121.0
|
)
|
$
|
475.4
|
|
Specialty
Lines
|
|
|
767.7
|
|
|
517.8
|
|
|
574.9
|
|
Life
and Group Non-Core
|
|
|
(113.2
|
)
|
|
(139.1
|
)
|
|
(678.9
|
)
|
Other
Insurance
|
|
|
50.1
|
|
|
(78.9
|
)
|
|
150.1
|
|
Total
CNA Financial
|
|
|
1,667.2
|
|
|
178.8
|
|
|
521.5
|
|
Lorillard
(b)
|
|
|
1,344.7
|
|
|
1,153.4
|
|
|
1,038.2
|
|
Boardwalk
Pipeline
|
|
|
197.7
|
|
|
158.1
|
|
|
81.1
|
|
Diamond
Offshore
|
|
|
960.1
|
|
|
351.0
|
|
|
(9.8
|
)
|
Loews
Hotels
|
|
|
48.0
|
|
|
50.0
|
|
|
31.2
|
|
Corporate
and other
|
|
|
254.4
|
|
|
(44.8
|
)
|
|
166.6
|
|
Total
|
|
$
|
4,472.1
|
|
$
|
1,846.5
|
|
$
|
1,828.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) (a)(c):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
|
Standard
Lines
|
|
$
|
605.9
|
|
$
|
(29.2
|
)
|
$
|
327.4
|
|
Specialty
Lines
|
|
|
435.5
|
|
|
317.4
|
|
|
344.9
|
|
Life
and Group Non-Core
|
|
|
(42.8
|
)
|
|
(64.3
|
)
|
|
(375.2
|
)
|
Other
Insurance
|
|
|
42.6
|
|
|
15.9
|
|
|
127.9
|
|
Total
CNA Financial
|
|
|
1,041.2
|
|
|
239.8
|
|
|
425.0
|
|
Lorillard
(b)
|
|
|
826.5
|
|
|
707.8
|
|
|
641.4
|
|
Boardwalk
Pipeline
|
|
|
103.2
|
|
|
92.1
|
|
|
48.8
|
|
Diamond
Offshore
|
|
|
352.0
|
|
|
127.3
|
|
|
(9.3
|
)
|
Loews
Hotels
|
|
|
29.4
|
|
|
31.2
|
|
|
21.4
|
|
Corporate
and other
|
|
|
164.7
|
|
|
(5.3
|
)
|
|
108.0
|
|
Income
(loss) from continuing operations
|
|
|
2,517.0
|
|
|
1,192.9
|
|
|
1,235.3
|
|
Discontinued
operations
|
|
|
(25.7
|
)
|
|
18.7
|
|
|
(19.5
|
)
|
Total
|
|
$
|
2,491.3
|
|
$
|
1,211.6
|
|
$
|
1,215.8
|
|
Notes
to
Consolidated Financial Statements
Note
23. Business Segments - (Continued)
(a) |
Investment
gains (losses) included in Revenues, Pretax income (loss) and Net
income
(loss) are as follows:
|
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
and pretax income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
|
Standard
Lines
|
|
$
|
75.5
|
|
$
|
20.4
|
|
$
|
218.7
|
|
Specialty
Lines
|
|
|
27.9
|
|
|
13.7
|
|
|
83.9
|
|
Life
and Group Non-Core
|
|
|
(50.5
|
)
|
|
(29.6
|
)
|
|
(611.0
|
)
|
Other
Insurance
|
|
|
39.0
|
|
|
(11.0
|
)
|
|
63.9
|
|
Total
CNA Financial
|
|
|
91.9
|
|
|
(6.5
|
)
|
|
(244.5
|
)
|
Corporate
and other
|
|
|
8.6
|
|
|
(6.7
|
)
|
|
(11.5
|
)
|
Total
|
|
$
|
100.5
|
|
$
|
(13.2
|
)
|
$
|
(256.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
|
Standard
Lines
|
|
$
|
48.0
|
|
$
|
8.5
|
|
$
|
126.2
|
|
Specialty
Lines
|
|
|
16.2
|
|
|
10.7
|
|
|
49.6
|
|
Life
and Group Non-Core
|
|
|
(29.9
|
)
|
|
(17.6
|
)
|
|
(349.0
|
)
|
Other
Insurance
|
|
|
28.6
|
|
|
(8.5
|
)
|
|
36.1
|
|
Total
CNA Financial
|
|
|
62.9
|
|
|
(6.9
|
)
|
|
(137.1
|
)
|
Corporate
and other
|
|
|
5.6
|
|
|
(3.9
|
)
|
|
(7.5
|
)
|
Total
|
|
$
|
68.5
|
|
$
|
(10.8
|
)
|
$
|
(144.6
|
)
|
(b)
|
Includes
pretax charges related to the settlement of tobacco litigation
of $911.4,
$876.4 and $845.9 ($560.2, $537.7 and $522.6 after taxes) for the
respective periods.
|
(c)
|
Income
taxes and interest expense are as
follows:
|
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
Income
|
|
Interest
|
|
Income
|
|
Interest
|
|
Income
|
|
Interest
|
|
|
|
Taxes
|
|
Expense
|
|
Taxes
|
|
Expense
|
|
Taxes
|
|
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard
Lines
|
|
$
|
278.5
|
|
$
|
0.9
|
|
$
|
(98.8
|
)
|
$
|
1.5
|
|
$
|
107.0
|
|
$
|
0.9
|
|
Specialty
Lines
|
|
|
254.4
|
|
|
3.7
|
|
|
155.9
|
|
|
3.5
|
|
|
180.0
|
|
|
7.4
|
|
Life
and Group Non-Core
|
|
|
(66.1
|
)
|
|
23.4
|
|
|
(68.6
|
)
|
|
24.2
|
|
|
(267.7
|
)
|
|
24.9
|
|
Other
Insurance
|
|
|
8.2
|
|
|
102.6
|
|
|
(88.9
|
)
|
|
95.1
|
|
|
16.9
|
|
|
90.7
|
|
Total
CNA Financial
|
|
|
475.0
|
|
|
130.6
|
|
|
(100.4
|
)
|
|
124.3
|
|
|
36.2
|
|
|
123.9
|
|
Lorillard
|
|
|
518.2
|
|
|
0.3
|
|
|
445.6
|
|
|
0.5
|
|
|
396.8
|
|
|
|
|
Boardwalk
Pipeline
|
|
|
64.2
|
|
|
62.1
|
|
|
60.8
|
|
|
60.1
|
|
|
32.3
|
|
|
30.1
|
|
Diamond
Offshore
|
|
|
285.0
|
|
|
24.0
|
|
|
104.7
|
|
|
41.8
|
|
|
3.0
|
|
|
30.2
|
|
Loews
Hotels
|
|
|
18.6
|
|
|
11.9
|
|
|
18.8
|
|
|
10.9
|
|
|
9.8
|
|
|
5.7
|
|
Corporate
and other
|
|
|
89.7
|
|
|
75.2
|
|
|
(39.1
|
)
|
|
126.6
|
|
|
58.1
|
|
|
134.2
|
|
Total
|
|
$
|
1,450.7
|
|
$
|
304.1
|
|
$
|
490.4
|
|
$
|
364.2
|
|
$
|
536.2
|
|
$
|
324.1
|
|
|
|
Investments
|
|
Receivables
|
|
Total
Assets
|
|
December
31
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNA
Financial
|
|
$
|
44,094.2
|
|
$
|
39,692.9
|
|
$
|
12,202.4
|
|
$
|
14,952.6
|
|
$
|
60,238.7
|
|
$
|
58,960.2
|
|
Lorillard
|
|
|
1,767.5
|
|
|
1,747.7
|
|
|
15.6
|
|
|
25.5
|
|
|
2,759.2
|
|
|
2,795.5
|
|
Boardwalk
Pipeline
|
|
|
397.9
|
|
|
65.0
|
|
|
87.7
|
|
|
106.8
|
|
|
2,938.1
|
|
|
2,482.1
|
|
Diamond
Offshore
|
|
|
815.6
|
|
|
819.9
|
|
|
567.5
|
|
|
357.1
|
|
|
4,170.4
|
|
|
3,646.3
|
|
Loews
Hotels
|
|
|
9.7
|
|
|
9.5
|
|
|
27.6
|
|
|
21.6
|
|
|
459.1
|
|
|
440.1
|
|
Corporate
and eliminations
|
|
|
6,803.9
|
|
|
3,061.0
|
|
|
126.5
|
|
|
80.3
|
|
|
6,315.4
|
|
|
2,581.6
|
|
Total
|
|
$
|
53,888.8
|
|
$
|
45,396.0
|
|
$
|
13,027.3
|
|
$
|
15,543.9
|
|
$
|
76,880.9
|
|
$
|
70,905.8
|
|
Notes
to
Consolidated Financial Statements
Note
24. Consolidating Financial Information
The
following schedules present the Company’s consolidating balance sheet
information at December 31, 2006 and 2005, and consolidating statements of
income information for the years ended December 31, 2006, 2005 and 2004.
These
schedules present the individual subsidiaries of the Company and their
contribution to the consolidated 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 minority 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. This information also does not reflect the
impact of the Company’s issuance of Carolina Group stock. Lorillard is reported
as a 100% owned subsidiary and does not include any adjustments relating
to the
tracking stock structure. See Note 6 for consolidating information of the
Carolina Group and Loews Group.
The
Corporate and Other column primarily reflects the parent company’s investment in
its subsidiaries, invested cash portfolio, corporate long-term debt and Bulova
Corporation, a wholly owned subsidiary. 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.
Notes
to
Consolidated Financial Statements
Note
24. Consolidating Financial Information - (Continued)
Loews
Corporation
Consolidating
Balance Sheet Information
|
|
CNA
|
|
|
|
Boardwalk
|
|
Diamond
|
|
Loews
|
|
Corporate
|
|
|
|
|
|
December
31, 2006
|
|
Financial
|
|
Lorillard
|
|
Pipeline
|
|
Offshore
|
|
Hotels
|
|
and
Other
|
|
Eliminations
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
44,094.2
|
|
$
|
1,767.5
|
|
$
|
397.9
|
|
$
|
815.6
|
|
$
|
9.7
|
|
$
|
6,803.9
|
|
|
|
|
$
|
53,888.8
|
|
Cash
|
|
|
83.9
|
|
|
1.2
|
|
|
1.1
|
|
|
10.2
|
|
|
14.8
|
|
|
22.6
|
|
|
|
|
|
133.8
|
|
Receivables
|
|
|
12,202.4
|
|
|
15.6
|
|
|
87.7
|
|
|
567.5
|
|
|
27.6
|
|
|
128.6
|
|
$
|
(2.1
|
)
|
|
13,027.3
|
|
Property,
plant and equipment
|
|
|
240.9
|
|
|
196.4
|
|
|
2,024.4
|
|
|
2,653.8
|
|
|
362.5
|
|
|
23.3
|
|
|
|
|
|
5,501.3
|
|
Deferred
income taxes
|
|
|
884.6
|
|
|
495.7
|
|
|
|
|
|
|
|
|
|
|
|
14.8
|
|
|
(774.2
|
)
|
|
620.9
|
|
Goodwill
and other intangible assets
|
|
|
106.0
|
|
|
|
|
|
163.5
|
|
|
21.8
|
|
|
2.6
|
|
|
5.0
|
|
|
|
|
|
298.9
|
|
Investments
in capital stocks of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,313.4
|
|
|
(12,313.4
|
)
|
|
|
|
Other
assets
|
|
|
933.3
|
|
|
282.8
|
|
|
263.5
|
|
|
101.5
|
|
|
41.9
|
|
|
93.5
|
|
|
|
|
|
1,716.5
|
|
Deferred
acquisition costs of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
insurance
subsidiaries
|
|
|
1,190.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,190.4
|
|
Separate
account business
|
|
|
503.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
503.0
|
|
Total
assets
|
|
$
|
60,238.7
|
|
$
|
2,759.2
|
|
$
|
2,938.1
|
|
$
|
4,170.4
|
|
$
|
459.1
|
|
$
|
19,405.1
|
|
$
|
(13,089.7
|
)
|
$
|
76,880.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
reserves
|
|
$
|
41,079.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,079.9
|
|
Payable
for securities purchased
|
|
|
320.0
|
|
|
|
|
|
|
|
|
|
|
$
|
0.2
|
|
$
|
726.5
|
|
|
|
|
|
1,046.7
|
|
Collateral
on loaned securities
|
|
|
2,850.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
750.6
|
|
|
|
|
|
3,601.5
|
|
Short-term
debt
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
4.6
|
|
Long-term
debt
|
|
|
2,155.5
|
|
|
|
|
$
|
1,350.9
|
|
$
|
964.3
|
|
|
231.7
|
|
|
865.4
|
|
|
|
|
|
5,567.8
|
|
Reinsurance
balances payable
|
|
|
539.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
539.1
|
|
Deferred
income taxes
|
|
|
|
|
|
|
|
|
44.4
|
|
|
438.6
|
|
|
50.0
|
|
|
241.2
|
|
$
|
(774.2
|
)
|
|
|
|
Other
liabilities
|
|
|
2,734.1
|
|
$
|
1,463.9
|
|
|
345.4
|
|
|
400.8
|
|
|
4.3
|
|
|
206.7
|
|
|
(15.0
|
)
|
|
5,140.2
|
|
Separate
account business
|
|
|
503.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
503.0
|
|
Total
liabilities
|
|
|
50,182.8
|
|
|
1,463.9
|
|
|
1,740.7
|
|
|
1,803.7
|
|
|
290.5
|
|
|
2,790.4
|
|
|
(789.2
|
)
|
|
57,482.8
|
|
Minority
interest
|
|
|
1,349.6
|
|
|
|
|
|
484.8
|
|
|
1,061.9
|
|
|
|
|
|
|
|
|
|
|
|
2,896.3
|
|
Shareholders’
equity
|
|
|
8,706.3
|
|
|
1,295.3
|
|
|
712.6
|
|
|
1,304.8
|
|
|
168.6
|
|
|
16,614.7
|
|
|
(12,300.5
|
)
|
|
16,501.8
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
60,238.7
|
|
$
|
2,759.2
|
|
$
|
2,938.1
|
|
$
|
4,170.4
|
|
$
|
459.1
|
|
$
|
19,405.1
|
|
$
|
(13,089.7
|
)
|
$
|
76,880.9
|
|
Notes
to
Consolidated Financial Statements
Note
24. Consolidating Financial Information - (Continued)
Loews
Corporation
Consolidating
Balance Sheet Information
|
|
CNA
|
|
|
|
Boardwalk
|
|
Diamond
|
|
Loews
|
|
Corporate
|
|
|
|
|
|
December
31, 2005
|
|
Financial
|
|
Lorillard
|
|
Pipeline
|
|
Offshore
|
|
Hotels
|
|
and
Other
|
|
Eliminations
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
39,692.9
|
|
$
|
1,747.7
|
|
$
|
65.0
|
|
$
|
819.9
|
|
$
|
9.5
|
|
$
|
3,061.0
|
|
|
|
|
$
|
45,396.0
|
|
Cash
|
|
|
96.4
|
|
|
2.4
|
|
|
0.8
|
|
|
24.9
|
|
|
9.6
|
|
|
19.0
|
|
|
|
|
|
153.1
|
|
Receivables
|
|
|
14,952.6
|
|
|
25.5
|
|
|
106.8
|
|
|
357.1
|
|
|
21.6
|
|
|
145.7
|
|
$
|
(65.4
|
)
|
|
15,543.9
|
|
Property,
plant and equipment
|
|
|
148.5
|
|
|
213.9
|
|
|
1,867.4
|
|
|
2,333.7
|
|
|
366.6
|
|
|
21.5
|
|
|
|
|
|
4,951.6
|
|
Deferred
income taxes
|
|
|
1,140.5
|
|
|
428.5
|
|
|
16.6
|
|
|
|
|
|
|
|
|
22.2
|
|
|
(702.5
|
)
|
|
905.3
|
|
Goodwill
and other intangible assets
|
|
|
104.5
|
|
|
|
|
|
163.5
|
|
|
21.8
|
|
|
2.6
|
|
|
5.0
|
|
|
|
|
|
297.4
|
|
Investments
in capital stocks of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,645.1
|
|
|
(11,645.1
|
)
|
|
|
|
Other
assets
|
|
|
1,075.9
|
|
|
377.5
|
|
|
262.0
|
|
|
88.9
|
|
|
30.2
|
|
|
75.1
|
|
|
|
|
|
1,909.6
|
|
Deferred
acquisition costs of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
insurance
subsidiaries
|
|
|
1,197.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,197.4
|
|
Separate
account business
|
|
|
551.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
551.5
|
|
Total
assets
|
|
$
|
58,960.2
|
|
$
|
2,795.5
|
|
$
|
2,482.1
|
|
$
|
3,646.3
|
|
$
|
440.1
|
|
$
|
14,994.6
|
|
$
|
(12,413.0
|
)
|
$
|
70,905.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
reserves
|
|
$
|
42,436.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
42,436.2
|
|
Payable
for securities purchased
|
|
|
226.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
175.2
|
|
|
|
|
|
401.7
|
|
Collateral
on loaned securities
|
|
|
767.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
767.4
|
|
Short-term
debt
|
|
|
252.4
|
|
|
|
|
$
|
42.1
|
|
|
|
|
$
|
3.9
|
|
|
299.8
|
|
|
|
|
|
598.2
|
|
Long-term
debt
|
|
|
1,437.9
|
|
|
|
|
|
1,101.3
|
|
$
|
968.3
|
|
|
236.2
|
|
|
864.9
|
|
|
|
|
|
4,608.6
|
|
Reinsurance
balances payable
|
|
|
1,636.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,636.2
|
|
Deferred
income taxes
|
|
|
|
|
|
|
|
|
|
|
|
456.9
|
|
|
50.2
|
|
|
195.4
|
|
$
|
(702.5
|
)
|
|
|
|
Other
liabilities
|
|
|
2,470.1
|
|
$
|
1,455.7
|
|
|
347.0
|
|
|
335.8
|
|
|
11.5
|
|
|
206.2
|
|
|
(71.3
|
)
|
|
4,755.0
|
|
Separate
account business
|
|
|
551.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
551.5
|
|
Total
liabilities
|
|
|
49,778.2
|
|
|
1,455.7
|
|
|
1,490.4
|
|
|
1,761.0
|
|
|
301.8
|
|
|
1,741.5
|
|
|
(773.8
|
)
|
|
55,754.8
|
|
Minority
interest
|
|
|
936.8
|
|
|
|
|
|
276.5
|
|
|
845.6
|
|
|
|
|
|
|
|
|
|
|
|
2,058.9
|
|
Shareholders’
equity
|
|
|
8,245.2
|
|
|
1,339.8
|
|
|
715.2
|
|
|
1,039.7
|
|
|
138.3
|
|
|
13,253.1
|
|
|
(11,639.2
|
)
|
|
13,092.1
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
58,960.2
|
|
$
|
2,795.5
|
|
$
|
2,482.1
|
|
$
|
3,646.3
|
|
$
|
440.1
|
|
$
|
14,994.6
|
|
$
|
(12,413.0
|
)
|
$
|
70,905.8
|
|
Notes
to
Consolidated Financial Statements
Note
24. Consolidating Financial Information - (Continued)
Loews
Corporation
Consolidating
Statement of Operations Information
|
|
CNA
|
|
|
|
Boardwalk
|
|
Diamond
|
|
Loews
|
|
Corporate
|
|
|
|
|
|
Year
Ended December 31, 2006
|
|
Financial
|
|
Lorillard
|
|
Pipeline
|
|
Offshore
|
|
Hotels
|
|
and
Other
|
|
Eliminations
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums
|
|
$
|
7,603.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.1
|
)
|
$
|
7,603.1
|
|
Net
investment income
|
|
|
2,412.2
|
|
$
|
103.7
|
|
$
|
4.2
|
|
$
|
37.9
|
|
$
|
1.2
|
|
$
|
351.9
|
|
|
|
|
|
2,911.1
|
|
Intercompany
interest and dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,306.4
|
|
|
(1,306.4
|
)
|
|
|
|
Investment
gains (losses)
|
|
|
90.4
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
1.6
|
|
|
|
|
|
91.5
|
|
Gain
on issuance of subsidiary stock
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.5
|
|
|
|
|
|
9.0
|
|
Manufactured
products
|
|
|
|
|
|
3,754.9
|
|
|
|
|
|
|
|
|
|
|
|
206.9
|
|
|
|
|
|
3,961.8
|
|
Other
|
|
|
274.4
|
|
|
|
|
|
614.2
|
|
|
2,064.1
|
|
|
370.1
|
|
|
11.7
|
|
|
|
|
|
3,334.5
|
|
Total
|
|
|
10,381.7
|
|
|
3,858.1
|
|
|
618.4
|
|
|
2,102.0
|
|
|
371.3
|
|
|
1,886.0
|
|
|
(1,306.5
|
)
|
|
17,911.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
claims and policyholders’
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefits
|
|
|
6,046.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,046.2
|
|
Amortization
of deferred acquisition costs
|
|
|
1,534.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,534.2
|
|
Cost
of manufactured products sold
|
|
|
|
|
|
2,159.5
|
|
|
|
|
|
|
|
|
|
|
|
102.2
|
|
|
|
|
|
2,261.7
|
|
Other
operating expenses
|
|
|
1,016.4
|
|
|
354.1
|
|
|
358.6
|
|
|
1,117.9
|
|
|
311.4
|
|
|
147.3
|
|
|
(0.1
|
)
|
|
3,305.6
|
|
Restructuring
and other related charges
|
|
|
(12.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12.9
|
)
|
Interest
|
|
|
130.6
|
|
|
0.3
|
|
|
62.1
|
|
|
24.0
|
|
|
11.9
|
|
|
75.2
|
|
|
|
|
|
304.1
|
|
Total
|
|
|
8,714.5
|
|
|
2,513.9
|
|
|
420.7
|
|
|
1,141.9
|
|
|
323.3
|
|
|
324.7
|
|
|
(0.1
|
)
|
|
13,438.9
|
|
|
|
|
1,667.2
|
|
|
1,344.2
|
|
|
197.7
|
|
|
960.1
|
|
|
48.0
|
|
|
1,561.3
|
|
|
(1,306.4
|
)
|
|
4,472.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
475.0
|
|
|
518.0
|
|
|
64.2
|
|
|
285.0
|
|
|
18.6
|
|
|
89.9
|
|
|
|
|
|
1,450.7
|
|
Minority
interest
|
|
|
151.0
|
|
|
|
|
|
30.3
|
|
|
323.1
|
|
|
|
|
|
|
|
|
|
|
|
504.4
|
|
Total
|
|
|
626.0
|
|
|
518.0
|
|
|
94.5
|
|
|
608.1
|
|
|
18.6
|
|
|
89.9
|
|
|
|
|
|
1,955.1
|
|
Income
from continuing operations
|
|
|
1,041.2
|
|
|
826.2
|
|
|
103.2
|
|
|
352.0
|
|
|
29.4
|
|
|
1,471.4
|
|
|
(1,306.4
|
)
|
|
2,517.0
|
|
Discontinued
operations, net
|
|
|
(25.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25.7
|
)
|
Net
income
|
|
$
|
1,015.5
|
|
$
|
826.2
|
|
$
|
103.2
|
|
$
|
352.0
|
|
$
|
29.4
|
|
$
|
1,471.4
|
|
$
|
(1,306.4
|
)
|
$
|
2,491.3
|
|
Notes
to
Consolidated Financial Statements
Note
24. Consolidating Financial Information - (Continued)
Loews
Corporation
Consolidating
Statement of Operations Information
|
|
CNA
|
|
|
|
Boardwalk
|
|
Diamond
|
|
Loews
|
|
Corporate
|
|
|
|
|
|
Year
Ended December 31, 2005
|
|
Financial
|
|
Lorillard
|
|
Pipeline
|
|
Offshore
|
|
Hotels
|
|
and
Other
|
|
Eliminations
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums
|
|
$
|
7,568.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.1
|
)
|
$
|
7,568.6
|
|
Net
investment income
|
|
|
1,891.9
|
|
$
|
63.6
|
|
$
|
1.5
|
|
$
|
26.0
|
|
$
|
6.0
|
|
$
|
109.8
|
|
|
|
|
|
2,098.8
|
|
Intercompany
interest and dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
937.0
|
|
|
(937.0
|
)
|
|
|
|
Investment
gains (losses)
|
|
|
(6.5
|
)
|
|
(2.1
|
)
|
|
|
|
|
(1.2
|
)
|
|
|
|
|
(3.4
|
)
|
|
|
|
|
(13.2
|
)
|
Manufactured
products
|
|
|
|
|
|
3,567.8
|
|
|
|
|
|
|
|
|
|
|
|
184.6
|
|
|
|
|
|
3,752.4
|
|
Other
|
|
|
411.0
|
|
|
6.0
|
|
|
569.8
|
|
|
1,268.1
|
|
|
344.5
|
|
|
11.8
|
|
|
|
|
|
2,611.2
|
|
Total
|
|
|
9,865.1
|
|
|
3,635.3
|
|
|
571.3
|
|
|
1,292.9
|
|
|
350.5
|
|
|
1,239.8
|
|
|
(937.1
|
)
|
|
16,017.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
claims and policyholders’
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefits
|
|
|
6,998.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,998.7
|
|
Amortization
of deferred acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs
|
|
|
1,542.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,542.6
|
|
Cost
of manufactured products sold
|
|
|
|
|
|
2,114.4
|
|
|
|
|
|
|
|
|
|
|
|
87.9
|
|
|
|
|
|
2,202.3
|
|
Other
operating expenses
|
|
|
1,020.7
|
|
|
369.1
|
|
|
353.1
|
|
|
901.3
|
|
|
289.6
|
|
|
129.8
|
|
|
(0.1
|
)
|
|
3,063.5
|
|
Interest
|
|
|
124.3
|
|
|
0.5
|
|
|
60.1
|
|
|
41.8
|
|
|
10.9
|
|
|
126.6
|
|
|
|
|
|
364.2
|
|
Total
|
|
|
9,686.3
|
|
|
2,484.0
|
|
|
413.2
|
|
|
943.1
|
|
|
300.5
|
|
|
344.3
|
|
|
(0.1
|
)
|
|
14,171.3
|
|
|
|
|
178.8
|
|
|
1,151.3
|
|
|
158.1
|
|
|
349.8
|
|
|
50.0
|
|
|
895.5
|
|
|
(937.0
|
)
|
|
1,846.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
(100.4
|
)
|
|
444.9
|
|
|
60.8
|
|
|
104.3
|
|
|
18.8
|
|
|
(38.0
|
)
|
|
|
|
|
490.4
|
|
Minority
interest
|
|
|
39.4
|
|
|
|
|
|
5.2
|
|
|
118.6
|
|
|
|
|
|
|
|
|
|
|
|
163.2
|
|
Total
|
|
|
(61.0
|
)
|
|
444.9
|
|
|
66.0
|
|
|
222.9
|
|
|
18.8
|
|
|
(38.0
|
)
|
|
|
|
|
653.6
|
|
Income
from continuing operations
|
|
|
239.8
|
|
|
706.4
|
|
|
92.1
|
|
|
126.9
|
|
|
31.2
|
|
|
933.5
|
|
|
(937.0
|
)
|
|
1,192.9
|
|
Discontinued
operations, net
|
|
|
18.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.7
|
|
Net
income
|
|
$
|
258.5
|
|
$
|
706.4
|
|
$
|
92.1
|
|
$
|
126.9
|
|
$
|
31.2
|
|
$
|
933.5
|
|
$
|
(937.0
|
)
|
$
|
1,211.6
|
|
Notes
to Consolidated Financial Statements
|
Note
24. Consolidating Financial Information -
(Continued)
|
Loews
Corporation
Consolidating
Statement of Operations Information
|
|
CNA
|
|
|
|
Boardwalk
|
|
Diamond
|
|
Loews
|
|
Corporate
|
|
|
|
|
|
Year
Ended December 31, 2004
|
|
Financial
|
|
Lorillard
|
|
Pipeline
|
|
Offshore
|
|
Hotels
|
|
and
Other
|
|
Eliminations
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums
|
|
$
|
8,208.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3.7
|
)
|
$
|
8,205.2
|
|
Net
investment income
|
|
|
1,679.5
|
|
$
|
36.6
|
|
$
|
0.7
|
|
$
|
12.2
|
|
$
|
2.3
|
|
$
|
144.0
|
|
|
|
|
|
1,875.3
|
|
Intercompany
interest and dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
919.9
|
|
|
(919.9
|
)
|
|
|
|
Investment
gains (losses)
|
|
|
(244.5
|
)
|
|
1.4
|
|
|
|
|
|
0.3
|
|
|
|
|
|
(13.2
|
)
|
|
|
|
|
(256.0
|
)
|
Manufactured
products
|
|
|
|
|
|
3,347.8
|
|
|
|
|
|
|
|
|
|
|
|
167.4
|
|
|
|
|
|
3,515.2
|
|
Other
|
|
|
284.3
|
|
|
|
|
|
264.4
|
|
|
823.4
|
|
|
312.9
|
|
|
212.2
|
|
|
|
|
|
1,897.2
|
|
Total
|
|
|
9,928.2
|
|
|
3,385.8
|
|
|
265.1
|
|
|
835.9
|
|
|
315.2
|
|
|
1,430.3
|
|
|
(923.6
|
)
|
|
15,236.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
claims and policyholders’
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefits
|
|
|
6,445.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,445.0
|
|
Amortization
of deferred acquisition costs
|
|
|
1,679.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,679.8
|
|
Cost
of manufactured products sold
|
|
|
|
|
|
1,965.6
|
|
|
|
|
|
|
|
|
|
|
|
79.8
|
|
|
|
|
|
2,045.4
|
|
Other
operating expenses
|
|
|
1,158.0
|
|
|
380.6
|
|
|
153.9
|
|
|
815.2
|
|
|
278.3
|
|
|
131.5
|
|
|
(3.7
|
)
|
|
2,913.8
|
|
Interest
|
|
|
123.9
|
|
|
|
|
|
30.1
|
|
|
30.2
|
|
|
5.7
|
|
|
140.5
|
|
|
(6.3
|
)
|
|
324.1
|
|
Total
|
|
|
9,406.7
|
|
|
2,346.2
|
|
|
184.0
|
|
|
845.4
|
|
|
284.0
|
|
|
351.8
|
|
|
(10.0
|
)
|
|
13,408.1
|
|
|
|
|
521.5
|
|
|
1,039.6
|
|
|
81.1
|
|
|
(9.5
|
)
|
|
31.2
|
|
|
1,078.5
|
|
|
(913.6
|
)
|
|
1,828.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
36.2
|
|
|
397.3
|
|
|
32.3
|
|
|
3.0
|
|
|
9.8
|
|
|
57.6
|
|
|
|
|
|
536.2
|
|
Minority
interest
|
|
|
60.3
|
|
|
|
|
|
|
|
|
(3.3
|
)
|
|
|
|
|
0.3
|
|
|
|
|
|
57.3
|
|
Total
|
|
|
96.5
|
|
|
397.3
|
|
|
32.3
|
|
|
(0.3
|
)
|
|
9.8
|
|
|
57.9
|
|
|
-
|
|
|
593.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
425.0
|
|
|
642.3
|
|
|
48.8
|
|
|
(9.2
|
)
|
|
21.4
|
|
|
1,020.6
|
|
|
(913.6
|
)
|
|
1,235.3
|
|
Discontinued
operations, net
|
|
|
(19.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19.5
|
)
|
Net
income (loss)
|
|
$
|
405.5
|
|
$
|
642.3
|
|
$
|
48.8
|
|
$
|
(9.2
|
)
|
$
|
21.4
|
|
$
|
1,020.6
|
|
$
|
(913.6
|
)
|
$
|
1,215.8
|
|
Notes
to
Consolidated Financial Statements
Note
25. Subsequent Event
Subsequent
to December 31, 2006 and through February 14, 2007, the holders of $438.4
million in principal amount of Diamond Offshore’s 1.5% debentures converted
their outstanding debentures into 8,943,284 shares of Diamond Offshore’s common
stock.
Subsequent
to December 31, 2006 and through February 14, 2007, the holders of $1.5 million
accreted value at the dates of conversion, of $2.4 million aggregate principal
amount at maturity, of Diamond Offshore’s Zero Coupon Debentures converted their
outstanding debentures into 20,658 shares of Diamond Offshore’s common
stock.
As
a
result of the conversions of Diamond Offshore’s 1.5% debentures, the Company
will recognize a deferred tax benefit of approximately $50.0 million in 2007
related to the release of a deferred tax liability from the interest expense
imputed on these bonds for U.S. federal income tax return
purposes.
The
Company’s ownership interest in Diamond Offshore declined from approximately 54%
to 51% due to these transactions. The Company estimates it will recognize
a
pretax gain of approximately $135.0 million on the issuance of subsidiary
stock
in the first quarter of 2007.
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
None.
Item
9A.
|
Controls
and Procedures.
|
Disclosure
Controls and Procedures
The
Company maintains a system of disclosure controls and procedures (as
defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as
amended (the “Exchange Act”)) which is designed to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the federal securities laws, including this report is recorded,
processed,
summarized and reported on a timely basis. These disclosure controls
and
procedures include controls and procedures designed to ensure that information
required to be disclosed by the Company under the federal securities
laws is
accumulated and communicated to the Company’s management on a timely basis to
allow decisions regarding required disclosure.
The
Company’s principal executive officer (“CEO”) and principal financial officer
(“CFO”) undertook an evaluation of the Company’s disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
as of the
end of the period covered by this report. CNA has engaged in a number
of efforts
to remediate the two material weaknesses in internal control over financial
reporting, described in our Annual Report on Form 10-K for the period
ended
December 31, 2005. In the opinion of the Company’s management, the revised
control processes have now been operating for a sufficient period of
time so as
to provide reasonable assurance as to their effectiveness and, therefore,
the
control deficiencies have been fully remediated. As a result, the CEO
and CFO
have concluded that the Company’s controls and procedures were effective as of
December 31, 2006.
Internal
Control Over Financial Reporting
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, and the implementing
rules of
the Securities and Exchange Commission, the Company included a report
of
management’s assessment of the design and effectiveness of its internal controls
as part of this Annual Report on Form 10-K for the year ended December
31, 2006.
The independent registered public accounting firm of the Company also
reported
on management’s assessment of the effectiveness of internal control over
financial reporting. Management’s report and the independent registered public
accounting firm’s report are included on pages [58 to 61] under the captions
entitled “Management’s Report on Internal Control Over Financial Reporting” and
“Report of Independent Registered Public Accounting Firm” and are incorporated
herein by reference.
There
were no other changes in the Company’s internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
identified
in connection with the foregoing evaluation that occurred during the
quarter
ended December 31, 2006, that have materially affected or that are reasonably
likely to materially affect the Company’s internal control over financial
reporting.
Item
9B.
|
Other
Information.
|
None.
PART
III
Except
as
set forth below and under Executive Officers of the Registrant in Part
I of this
Report, the information called for by Part III (Items 10, 11, 12, 13
and 14) has
been omitted as Registrant intends to include such information in its
definitive
Proxy Statement to be filed with the Securities and Exchange Commission
not
later than 120 days after the close of its fiscal year.
PART
IV
Item
15.
|
Exhibits
and Financial Statement
Schedules.
|
|
(a)
1.
|
Financial
Statements:
|
The
financial statements appear above under Item 8. The following additional
financial data should be read in conjunction with those financial statements.
Schedules not included with these additional financial data have been
omitted
because they are not applicable or the required information is shown
in the
consolidated financial statements or notes to consolidated financial
statements.
|
Page
|
|
Number
|
2. Financial
Statement Schedules:
|
|
|
|
Loews
Corporation and Subsidiaries:
|
|
Schedule
I-Condensed financial information of Registrant for the years
ended
December 31,
2006, 2005 and 2004
|
L-1
|
Schedule
II-Valuation and qualifying accounts for the years ended December
31,
2006, 2005 and 2004
|
L-3
|
Schedule
V-Supplemental information concerning property-casualty insurance
operations for the years ended December 31, 2006, 2005 and
2004
|
L-4
|
|
|
Exhibit
|
|
Description
|
Number
|
|
|
|
3.
Exhibits:
|
|
|
|
|
(3)
|
Articles
of Incorporation and By-Laws
|
|
|
|
|
|
Restated
Certificate of Incorporation of the Registrant, dated April
16, 2002,
incorporated herein by reference to Exhibit 3 to registrant’s Report on
Form 10-Q for the quarter ended March 31, 2002
|
3.01
|
|
|
|
|
Certificate
of Amendment of Certificate of Incorporation, incorporated
by reference to
Exhibit 3.1 to Registrant’s Report on Form 8-K filed August 3,
2006
|
3.02
|
|
|
|
|
By-Laws
of the Registrant as amended through May 10, 2005, incorporated
herein by
reference to Exhibit 3.1 to Registrant’s Report on Form 8-K filed May 13,
2005
|
3.03
|
|
|
|
|
The
Carolina Group Policy Statement, incorporated herein by reference
to
Exhibit 3.03 to Registrant’s Report on From 10-K for the year ended
December 31, 2005
|
3.04
|
|
|
|
(4)
|
Instruments
Defining the Rights of Security Holders, Including
Indentures
|
|
|
|
|
|
The
Registrant hereby agrees to furnish to the Commission upon
request copies
of instruments with respect to long-term debt, pursuant to
Item
601(b)(4)(iii) of Regulation S-K.
|
|
|
|
Exhibit
|
|
Description
|
Number
|
|
|
|
(10)
|
Material
Contracts
|
|
|
|
|
|
Loews
Corporation Deferred Compensation Plan amended and restated
as of December
31, 2005, incorporated herein by reference to Exhibit 10.01
to
Registrant’s Report on Form 10-K for the year ended December 31,
2005
|
10.01
|
|
|
|
|
Amended
and Restated Loews Corporation Incentive Compensation Plan
for Executive
Officers, incorporated herein by reference to Exhibit B to
Registrant’s
Definitive Proxy Statement filed on March 25, 2005
|
10.02
|
|
|
|
|
Amended
and Restated Loews Corporation 2000 Stock Option Plan, incorporated
herein
by reference to Exhibit A to Registrant’s Definitive Proxy Statement filed
on March 25, 2005
|
10.03
|
|
|
|
|
Amended
and Restated Carolina Group 2002 Stock Option Plan, incorporated
herein by
reference to Exhibit 10.04 to Registrant’s Report on Form 10-K for the
year ended December 31, 2005
|
10.04
|
|
|
|
|
Comprehensive
Settlement Agreement and Release with the State of Florida
to settle and
resolve with finality all present and future economic claims
by the State
and its subdivisions relating to the use of or exposure to
tobacco
products, incorporated herein by reference to Exhibit 10 to
Registrant’s
Report on Form 8-K filed September 5, 1997
|
10.05
|
|
|
|
|
Comprehensive
Settlement Agreement and Release with the State of Texas to
settle and
resolve with finality all present and future economic claims
by the State
and its subdivisions relating to the use of or exposure to
tobacco
products, incorporated herein by reference to Exhibit 10 to
Registrant’s
Report on Form 8-K filed February 3, 1998
|
10.06
|
|
|
|
|
State
of Minnesota Settlement Agreement and Stipulation for Entry
of Consent
Judgment to settle and resolve with finality all claims of
the State of
Minnesota relating to the subject matter of this action which
have been or
could have been asserted by the State, incorporated herein
by reference to
Exhibit 10.1 to Registrant’s Report on Form 10-Q for the quarter ended
March 31, 1998
|
10.07
|
|
|
|
|
State
of Minnesota Consent Judgment relating to the settlement of
tobacco
litigation, incorporated herein by reference to Exhibit 10.2
to
Registrant’s Report on Form 10-Q for the quarter ended March 31,
1998
|
10.08
|
|
|
|
|
State
of Minnesota Settlement Agreement and Release relating to the
settlement
of tobacco litigation, incorporated herein by reference to
Exhibit 10.3 to
Registrant’s Report on Form 10-Q for the quarter ended March 31, 1998
|
10.09
|
|
|
|
|
State
of Minnesota State Escrow Agreement relating to the settlement
of tobacco
litigation, incorporated herein by reference to Exhibit 10.6
to
Registrant’s Report on Form 10-Q for the quarter ended March 31, 1998
|
10.10
|
|
|
|
|
Stipulation
of Amendment to Settlement Agreement and For Entry of Agreed
Order, dated
July 2, 1998, regarding the settlement of the State of Mississippi
health
care cost recovery action, incorporated herein by reference
to Exhibit
10.1 to Registrant’s Report on Form 10-Q for the quarter ended June 30,
1998
|
10.11
|
|
|
Exhibit
|
|
Description
|
Number
|
|
|
|
|
Mississippi
Fee Payment Agreement, dated July 2, 1998, regarding the payment
of
attorneys’ fees, incorporated herein by reference to Exhibit 10.2 to
Registrant’s Report on Form10-Q for the quarter ended June 30, 1998
|
10.12
|
|
|
|
|
Stipulation
of Amendment to Settlement Agreement and For Entry of Consent
Decree,
dated July 24, 1998, regarding the settlement of the Texas
health care
cost recovery action, incorporated herein by reference to Exhibit
10.4 to
Registrant’s Report on Form 10-Q for the quarter ended June 30, 1998
|
10.13
|
|
|
|
|
Texas
Fee Payment Agreement, dated July 24, 1998, regarding the payment
of
attorneys’ fees, incorporated herein by reference to Exhibit 10.5 to
Registrant’s Report on Form 10-Q for the quarter ended June 30, 1998
|
10.14
|
|
|
|
|
Stipulation
of Amendment to Settlement Agreement and For Entry of Consent
Decree,
dated September 11, 1998, regarding the settlement of the Florida
health
care cost recovery action, incorporated herein by reference
to Exhibit
10.1 to Registrant’s Report on Form 10-Q for the quarter ended September
30, 1998
|
10.15
|
|
|
|
|
Florida
Fee Payment Agreement, dated September 11, 1998, regarding
the payment of
attorneys’ fees, incorporated herein by reference to Exhibit 10.2 to
Registrant’s Report on Form 10-Q for the quarter ended September 30, 1998
|
10.16
|
|
|
|
|
Master
Settlement Agreement with 46 states, the District of Columbia,
the
Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands,
American Samoa
and the Northern Marianas to settle the asserted and unasserted
health
care cost recovery and certain other claims of those states,
incorporated
herein by reference to Exhibit 10 to Registrant’s Report on Form 8-K filed
November 25, 1998
|
10.17
|
|
|
|
|
Employment
Agreement dated as of January 1, 1999 between Registrant and
Andrew H.
Tisch, incorporated herein by reference to Exhibit 10.32 to
Registrant’s
Report on Form 10-K for the year ended December 31, 1998
|
10.18
|
|
|
|
|
Amendment
dated January 1, 2002 to Employment Agreement between Registrant
and
Andrew H. Tisch, incorporated herein by reference to Exhibit
10.23 to
Registrant’s Report on Form 10-K for the year ended December 31,
2001
|
10.19
|
|
|
|
|
Amendment
dated January 1, 2003 to Employment Agreement between Registrant
and
Andrew H. Tisch, incorporated herein by reference to Exhibit
10.21 to
Registrant’s Report on Form 10-K for the year ended December 31,
2002
|
10.20
|
|
|
|
|
Amendment
dated January 1, 2004 to Employment Agreement between Registrant
and
Andrew H. Tisch, incorporated herein by reference to Exhibit
10.24 to
Registrant’s Report on Form 10-K for the year ended December 31,
2003
|
10.21
|
|
|
|
|
Amendment
dated February 11, 2005, to Employment Agreement between Registrant
and
Andrew H. Tisch, incorporated herein by reference to Exhibit
10.24 to
Registrant’s Report on Form 10-K for the year ended December 31,
2004
|
10.22
|
|
|
|
|
Amendment
dated February 15, 2007 to Employment Agreement between Registrant
and
Andrew H. Tisch
|
10.23*
|
|
|
Exhibit
|
|
Description
|
Number
|
|
|
|
|
Supplemental
Retirement Agreement dated January 1, 2002 between Registrant
and Andrew
H. Tisch, incorporated herein by reference to Exhibit 10.30
to
Registrant’s Report on Form 10-K for the year ended December 31, 2001
|
10.24
|
|
|
|
|
Amendment
No. 1 dated January 1, 2003 to Supplemental Retirement Agreement
between
Registrant and Andrew H. Tisch, incorporated herein by reference
to
Exhibit 10.33 to Registrant’s Report on Form 10-K for the year ended
December 31, 2002
|
10.25
|
|
|
|
|
Amendment
No. 2 dated January 1, 2004 to Supplemental Retirement Agreement
between
Registrant and Andrew H. Tisch, incorporated herein by reference
to
Exhibit 10.27 to Registrant’s Report on Form 10-K for the year ended
December 31, 2003
|
10.26
|
|
|
|
|
Employment
Agreement dated as of January 1, 1999 between Registrant
and James S.
Tisch, incorporated herein by reference to Exhibit 10.32
to Registrant’s
Report on Form 10-K for the year ended December 31, 1998
|
10.27
|
|
|
|
|
Amendment
dated January 1, 2002 to Employment Agreement between Registrant
and James
S. Tisch, incorporated herein by reference to Exhibit 10.23
to
Registrant’s Report on Form 10-K for the year ended December 31,
2001
|
10.28
|
|
|
|
|
Amendment
dated January 1, 2003 to Employment Agreement between Registrant
and James
S. Tisch, incorporated herein by reference to Exhibit 10.23
to
Registrant’s Report on Form 10-K for the year ended December 31,
2002
|
10.29
|
|
|
|
|
Amendment
dated January 1, 2004 to Employment Agreement between Registrant
and James
S. Tisch, incorporated herein by reference to Exhibit 10.31
to
Registrant’s Report on Form 10-K for the year ended December 31,
2003
|
10.30
|
|
|
|
|
Amendment
dated February 11, 2005, to Employment Agreement between
Registrant and
James S. Tisch, incorporated herein by reference to Exhibit
10.32 to
Registrant’s Report on Form 10-K for the year ended December 31,
2004
|
10.31
|
|
|
|
|
Amendment
dated February 15, 2007 to Employment Agreement between Registrant
and
James S. Tisch
|
10.32*
|
|
|
|
|
Supplemental
Retirement Agreement dated January 1, 2002 between Registrant
and James S.
Tisch, incorporated herein by reference to Exhibit 10.31
to Registrant’s
Report on Form 10-K for the year ended December 31, 2001
|
10.33
|
|
|
|
|
Amendment
No. 1 dated January 1, 2003 to Supplemental Retirement Agreement
between
Registrant and James S. Tisch, incorporated herein by reference
to Exhibit
10.35 to Registrant’s Report on Form 10-K for the year ended December 31,
2002
|
10.34
|
|
|
|
|
Amendment
No. 2 dated January 1, 2004 to Supplemental Retirement Agreement
between
Registrant and James S. Tisch, incorporated herein by reference
to Exhibit
10.34 to Registrant’s Report on Form 10-K for the year ended December 31,
2003
|
10.35
|
|
|
|
|
Employment
Agreement dated as of January 1, 1999 between Registrant
and Jonathan M.
Tisch, incorporated herein by reference to Exhibit 10.33
to Registrant’s
Report on Form 10-K for the year ended December 31, 1998
|
10.36
|
|
|
Exhibit
|
|
Description
|
Number
|
|
|
|
|
Amendment
dated January 1, 2002 to Employment Agreement between Registrant
and
Jonathan M. Tisch, incorporated herein by reference to Exhibit
10.24 to
Registrant’s Report on Form 10-K for the year ended December 31,
2001
|
10.37
|
|
|
|
|
Amendment
dated January 1, 2003 to Employment Agreement between Registrant
and
Jonathan M. Tisch, incorporated herein by reference to Exhibit
10.25 to
Registrant’s Report on Form 10-K for the year ended December 31,
2002
|
10.38
|
|
|
|
|
Amendment
dated January 1, 2004 to Employment Agreement between Registrant
and
Jonathan M. Tisch, incorporated herein by reference to Exhibit
10.38 to
Registrant’s Report on Form 10-K for the year ended December 31,
2003
|
10.39
|
|
|
|
|
Amendment
dated February 11, 2005, to Employment Agreement between Registrant
and
Jonathan M. Tisch, incorporated herein by reference to Exhibit 10.40 to
Registrant’s Report on Form 10-K for the year ended December 31,
2004
|
10.40
|
|
|
|
|
Amendment
dated February 15, 2007, to Employment Agreement between Registrant
and
Jonathan M. Tisch
|
10.41*
|
|
|
|
|
Supplemental
Retirement Agreement dated January 1, 2002 between Registrant
and Jonathan
M. Tisch, incorporated herein by reference to Exhibit 10.32
to
Registrant’s Report on Form 10-K for the year ended December 31, 2001
|
10.42
|
|
|
|
|
Amendment
No. 1 dated January 1, 2003 to Supplemental Retirement Agreement
between
Registrant and Jonathan M. Tisch, incorporated herein by reference
to
Exhibit 10.37 to Registrant’s Report on Form 10-K for the year ended
December 31, 2002
|
10.43
|
|
|
|
|
Amendment
No. 2 dated January 1, 2004 to Supplemental Retirement Agreement
between
Registrant and Jonathan M. Tisch, incorporated herein by reference
to
Exhibit 10.41 to Registrant’s Report on Form 10-K for the year ended
December 31, 2003
|
10.44
|
|
|
|
|
Supplemental
Retirement Agreement dated March 24, 2000 between Registrant
and Peter W.
Keegan, incorporated herein by reference to Exhibit 10.01 to
Registrant’s
Report on Form 10-Q for the quarter ended March 31, 2000
|
10.45
|
|
|
|
|
First
Amendment to Supplemental Retirement Agreement dated June 30,
2001 between
Registrant and Peter W. Keegan, incorporated herein by reference
to
Exhibit 10 to Registrant’s Report on From 10-Q for the quarter ended March
31, 2002
|
10.46
|
|
|
|
|
Second
Amendment to Supplemental Retirement Agreement dated March
25, 2003
between Registrant and Peter W. Keegan and Third Amendment
to Supplemental
Retirement Agreement dated March 31, 2004 between Registrant
and Peter W.
Keegan, incorporated herein by reference to Exhibit 10.44 to
Registrant’s
Report on Form 10-K for the year ended December 31, 2005
|
10.47
|
|
|
|
|
Fourth
Amendment to Supplemental Retirement Agreement dated December
6, 2005
between Registrant and Peter W. Keegan, incorporated herein
by reference
to Exhibit 10.1 to Registrant’s Report on Form 8-K filed December 7,
2005
|
10.48
|
|
|
|
|
Supplemental
Retirement Agreement dated September 21, 1999 between Registrant
and
Arthur L. Rebell, incorporated herein by reference to Exhibit
10.28 to
Registrant’s Report on Form 10-K for the year ended December 31, 1999
|
10.49
|
|
|
Exhibit
|
|
Description
|
Number
|
|
|
|
|
First
Amendment to Supplemental Retirement Agreement dated March
24, 2000
between Registrant and Arthur L. Rebell, incorporated herein
by reference
to Exhibit 10.2 to Registrant’s Report on Form 10-Q for the quarter ended
March 31, 2000
|
10.50
|
|
|
|
|
Second
Amendment to Supplemental Retirement Agreement dated March
28, 2001
between Registrant and Arthur L. Rebell, incorporated herein
by reference
to Exhibit 10.28 to Registrant’s Report on Form 10-K for the year ended
December 31, 2001
|
10.51
|
|
|
|
|
Third
Amendment to Supplemental Retirement Agreement dated February
28, 2002
between Registrant and Arthur L. Rebell, incorporated herein
by reference
to Exhibit 10.33 to Registrant’s Report on Form 10-K for the year ended
December 31, 2001
|
10.52
|
|
|
|
|
Fourth
Amendment to Supplemental Retirement Agreement dated March
31, 2003
between Registrant and Arthur L. Rebell and Fifth Amendment
to
Supplemental Retirement Agreement dated March 31, 2004 between
Registrant
and Arthur L. Rebell, incorporated herein by reference to Exhibit
10.50 to
Registrant’s Report on Form 10-K for the year ended December 31,
2005
|
10.53
|
|
|
|
|
Sixth
Amendment to Supplemental Retirement Agreement dated December
13, 2005
between Registrant and Arthur L. Rebell, incorporated herein
by reference
to Exhibit 10.1 to Registrant’s Report on Form 8-K filed December 14,
2005
|
10.54
|
|
|
|
|
Forms
of Stock Option Certificates for grants to executive officers
and other
employees and to non-employee directors pursuant to the Loews
Corporation
2000 Stock Option Plan, incorporated herein by reference to
Exhibits 10.1
and 10.2, respectively, to Registrant’s Report on Form 8-K filed September
27, 2004
|
10.55
|
|
|
|
|
Form
of Award Certificate for grants of stock appreciation rights
to executive
officers and other employees pursuant to the Loews Corporation
2000 Stock
Option Plan, incorporated herein by reference to Exhibit 10.1
to
Registrant’s Report on Form 8-K filed January 31, 2006
|
10.56
|
|
|
|
(21)
|
Subsidiaries
of the Registrant
|
|
|
|
|
|
List
of subsidiaries of Registrant
|
21.01*
|
|
|
|
(23)
|
Consent
of Experts and Counsel
|
|
|
|
|
|
Consent
of Deloitte & Touche LLP
|
23.01*
|
|
|
|
(31)
|
Rule
13a-14(a)/15d-14(a) Certifications
|
|
|
|
|
|
Certification
by the Chief Executive Officer of the Company pursuant to Rule
13a-14(a)
and Rule 15d-14(a)
|
31.01*
|
|
|
|
|
Certification
by the Chief Financial Officer of the Company pursuant to Rule
13a-14(a)
and Rule 15d-14(a)
|
31.02*
|
|
|
|
(32)
|
Section
1350 Certifications
|
|
|
|
|
|
Certification
by the Chief Executive Officer of the Company pursuant to 18
U.S.C.
Section 1350 (as adopted by Section 906 of the Sarbanes-Oxley
Act of
2002)
|
32.01*
|
|
|
Exhibit
|
|
Description
|
Number
|
|
|
|
|
Certification
by the Chief Financial Officer of the Company pursuant to 18
U.S.C.
Section 1350 (as adopted by Section 906 of the Sarbanes-Oxley
Act of
2002)
|
32.02*
|
|
|
|
(99)
|
Other
|
|
|
|
|
|
Pending
Tobacco Litigation
|
99.01*
|
|
|
|
*
|
Filed
herewith.
|
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by
the undersigned, thereunto duly authorized.
|
LOEWS
CORPORATION
|
|
|
|
|
|
|
Dated:
February 23, 2007
|
By
|
/s/
Peter W. Keegan
|
|
|
(Peter
W. Keegan, Senior Vice President and
|
|
|
Chief
Financial Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report
has been
signed below by the following persons on behalf of the Registrant and
in the
capacities and on the dates indicated.
Dated:
February 23, 2007
|
By
|
/s/
James S. Tisch
|
|
|
(James
S. Tisch, President,
|
|
|
Chief
Executive Officer and Director)
|
|
|
|
|
|
|
Dated:
February 23, 2007
|
By
|
/s/
Peter W. Keegan
|
|
|
(Peter
W. Keegan, Senior Vice President and
|
|
|
Chief
Financial Officer)
|
|
|
|
|
|
|
Dated:
February 23, 2007
|
By
|
/s/
Mark S. Schwartz
|
|
|
(Mark
S. Schwartz, Controller)
|
|
|
|
|
|
|
Dated:
February 23, 2007
|
By
|
/s/
Ann E. Berman
|
|
|
(Ann
E. Berman, Director)
|
|
|
|
|
|
|
Dated:
February 23, 2007
|
By
|
/s/
Joseph L. Bower
|
|
|
(Joseph
L. Bower, Director)
|
|
|
|
Dated:
February 23, 2007
|
By
|
/s/
Charles M. Diker
|
|
|
(Charles
M. Diker, Director)
|
|
|
|
|
|
|
Dated:
February 23, 2007
|
By
|
/s/
Paul J. Fribourg
|
|
|
(Paul
J. Fribourg, Director)
|
|
|
|
|
|
|
Dated:
February 23, 2007
|
By
|
/s/
Walter L. Harris
|
|
|
(Walter
L. Harris, Director)
|
|
|
|
|
|
|
Dated:
February 23, 2007
|
By
|
/s/
Philip A. Laskawy
|
|
|
(Philip
A. Laskawy, Director)
|
|
|
|
|
|
|
Dated:
February 23, 2007
|
By
|
/s/
Gloria R. Scott
|
|
|
(Gloria
R. Scott, Director)
|
|
|
|
|
|
|
Dated:
February 23, 2007
|
By
|
/s/
Andrew H. Tisch
|
|
|
(Andrew
H. Tisch, Director)
|
|
|
|
|
|
|
Dated:
February 23, 2007
|
By
|
/s/
Jonathan M. Tisch
|
|
|
(Jonathan
M. Tisch, Director)
|
SCHEDULE
I
Condensed
Financial Information of Registrant
LOEWS
CORPORATION
BALANCE
SHEETS
ASSETS
December
31
|
|
2006
|
|
2005
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets, principally investment in short-term instruments
|
|
$
|
4,472.7
|
|
$
|
2,581.0
|
|
Investments
in securities
|
|
|
2,470.6
|
|
|
659.7
|
|
Investments
in capital stocks of subsidiaries, at equity
|
|
|
12,313.4
|
|
|
11,645.1
|
|
Other
assets
|
|
|
11.8
|
|
|
11.4
|
|
Total
assets
|
|
$
|
19,268.5
|
|
$
|
14,897.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
928.2
|
|
$
|
737.6
|
|
Collateral
on loaned securities
|
|
|
750.6
|
|
|
|
|
Long-term
debt
|
|
|
865.4
|
|
|
864.9
|
|
Deferred
income tax and other
|
|
|
222.5
|
|
|
202.6
|
|
Total
liabilities
|
|
|
2,766.7
|
|
|
1,805.1
|
|
Shareholders’
equity
|
|
|
16,501.8
|
|
|
13,092.1
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
19,268.5
|
|
$
|
14,897.2
|
|
STATEMENTS
OF INCOME
Year
Ended December 31 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
(In
millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Equity
in income of subsidiaries (a)
|
|
$
|
2,381.3
|
|
$
|
1,208.7
|
|
$
|
1,260.0
|
|
Investment
gains (losses)
|
|
|
9.1
|
|
|
(3.3
|
)
|
|
(13.1
|
)
|
Interest
and other
|
|
|
366.5
|
|
|
133.1
|
|
|
158.7
|
|
Total
|
|
|
2,756.9
|
|
|
1,338.5
|
|
|
1,405.6
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Administrative
|
|
|
61.1
|
|
|
49.7
|
|
|
45.2
|
|
Interest
|
|
|
74.8
|
|
|
125.9
|
|
|
140.2
|
|
Total
|
|
|
135.9
|
|
|
175.6
|
|
|
185.4
|
|
|
|
|
2,621.0
|
|
|
1,162.9
|
|
|
1,220.2
|
|
Income
tax expense (benefit)
|
|
|
104.0
|
|
|
(30.0
|
)
|
|
(15.1
|
)
|
Income
from continuing operations
|
|
|
2,517.0
|
|
|
1,192.9
|
|
|
1,235.3
|
|
Discontinued
operations, net
|
|
|
(25.7
|
)
|
|
18.7
|
|
|
(19.5
|
)
|
Net
income
|
|
$
|
2,491.3
|
|
$
|
1,211.6
|
|
$
|
1,215.8
|
|
SCHEDULE
I
(Continued)
Condensed
Financial Information of Registrant
LOEWS
CORPORATION
STATEMENTS
OF CASH FLOWS
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,491.3
|
|
$
|
1,211.6
|
|
$
|
1,215.8
|
|
Adjustments
to reconcile net income to net cash provided
|
|
|
|
|
|
|
|
|
|
|
(used
) by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Undistributed
earnings of affiliates
|
|
|
(1,033.8
|
)
|
|
(358.4
|
)
|
|
(317.4
|
)
|
Investment
(gains) losses
|
|
|
(9.1
|
)
|
|
3.3
|
|
|
13.1
|
|
Provision
for deferred income taxes
|
|
|
41.2
|
|
|
(14.1
|
)
|
|
(17.9
|
)
|
Changes
in operating assets and liabilities-net
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
13.4
|
|
|
7.3
|
|
|
27.6
|
|
Accounts
payable and accrued liabilities
|
|
|
559.5
|
|
|
69.0
|
|
|
29.3
|
|
Federal
income taxes
|
|
|
(69.1
|
)
|
|
48.9
|
|
|
675.5
|
|
Trading
securities
|
|
|
(1,810.9
|
)
|
|
(264.1
|
)
|
|
105.7
|
|
Other-net
|
|
|
0.6
|
|
|
(2.6
|
)
|
|
(9.6
|
)
|
|
|
|
183.1
|
|
|
700.9
|
|
|
1,722.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
Change
in investments and advances to subsidiaries
|
|
|
(1,948.2
|
)
|
|
249.7
|
|
|
(1,790.1
|
)
|
Change
in collateral on loaned securities
|
|
|
750.6
|
|
|
|
|
|
|
|
Redemption
of CNA Series H preferred stock
|
|
|
750.0
|
|
|
|
|
|
|
|
Purchase
of CNA common stock
|
|
|
(264.5
|
)
|
|
|
|
|
|
|
|
|
|
(712.1
|
)
|
|
249.7
|
|
|
(1,790.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid to shareholders
|
|
|
(307.7
|
)
|
|
(239.9
|
)
|
|
(216.8
|
)
|
Issuance
of common stock
|
|
|
1,641.8
|
|
|
432.5
|
|
|
287.8
|
|
Purchases
of treasury shares
|
|
|
(509.8
|
)
|
|
|
|
|
|
|
Excess
tax benefits from share-based payment arrangements
|
|
|
4.9
|
|
|
|
|
|
|
|
Decrease
in long-term debt
|
|
|
(300.0
|
)
|
|
(1,150.0
|
)
|
|
|
|
|
|
|
529.2
|
|
|
(957.4
|
)
|
|
71.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
0.2
|
|
|
(6.8
|
)
|
|
3.0
|
|
Cash,
beginning of year
|
|
|
0.1
|
|
|
6.9
|
|
|
3.9
|
|
Cash,
end of year
|
|
$
|
0.3
|
|
$
|
0.1
|
|
$
|
6.9
|
|
_____________
Notes:
(a)
|
Cash
dividends paid to the Company by affiliates amounted to $1,306.4,
$937.0,
and $913.6 for the years ended December 31, 2006, 2005 and
2004,
respectively.
|
SCHEDULE
II
LOEWS
CORPORATION AND SUBSIDIARIES
Valuation
and Qualifying Accounts
Column
A
|
|
Column
B
|
|
Column
C
|
|
Column
D
|
|
Column
E
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
Balance
at
|
|
Charged
to
|
|
Charged
|
|
|
|
Balance
at
|
|
|
|
Beginning
|
|
Costs
and
|
|
to
Other
|
|
|
|
End
of
|
|
Description
|
|
of
Period
|
|
Expenses
|
|
Accounts
|
|
Deductions
|
|
Period
|
|
(In
millions)
|
|
|
|
|
|
For
the Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from assets:
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for discounts
|
|
$
|
1.1
|
|
$
|
136.7
|
|
|
|
|
$
|
137.3(1
|
)
|
$
|
0.5
|
|
Allowance
for doubtful accounts
|
|
|
972.2
|
|
|
73.9
|
|
$
|
1.2
|
|
|
183.9
|
|
|
863.4
|
|
Allowance
for deferred taxes
|
|
|
31.2
|
|
|
|
|
|
|
|
|
31.2
|
|
|
−
|
|
Total
|
|
$
|
1,004.5
|
|
$
|
210.6
|
|
$
|
1.2
|
|
$
|
352.4
|
|
$
|
863.9
|
|
|
|
For
the Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from assets:
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for discounts
|
|
$
|
1.1
|
|
$
|
131.6
|
|
|
|
|
$
|
131.6(1
|
)
|
$
|
1.1
|
|
Allowance
for doubtful accounts
|
|
|
1,056.1
|
|
|
114.7
|
|
$
|
0.4
|
|
|
199.0
|
|
|
972.2
|
|
Allowance
for deferred taxes
|
|
|
43.4
|
|
|
|
|
|
|
|
|
12.2
|
|
|
31.2
|
|
Total
|
|
$
|
1,100.6
|
|
$
|
246.3
|
|
$
|
0.4
|
|
$
|
342.8
|
|
$
|
1,004.5
|
|
|
|
For
the Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for discounts
|
|
$
|
1.0
|
|
$
|
135.2
|
|
|
|
|
$
|
135.1(1
|
)
|
$
|
1.1
|
|
Allowance
for doubtful accounts
|
|
|
955.1
|
|
|
317.1
|
|
$
|
5.6
|
|
|
221.7
|
|
|
1,056.1
|
|
Allowance
for deferred taxes
|
|
|
10.2
|
|
|
33.1
|
|
|
0.1
|
|
|
|
|
|
43.4
|
|
Total
|
|
$
|
966.3
|
|
$
|
485.4
|
|
$
|
5.7
|
|
$
|
356.8
|
|
$
|
1,100.6
|
|
SCHEDULE
V
LOEWS
CORPORATION AND SUBSIDIARIES
Supplemental
Information Concerning Property and Casualty Insurance
Operations
Consolidated
Property and Casualty Operations
|
|
|
|
|
|
|
|
|
|
|
|
December
31
|
|
2006
|
|
2005
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
acquisition costs
|
|
$
|
1,190
|
|
$
|
1,197
|
|
Reserves
for unpaid claim and claim adjustment expenses
|
|
|
29,459
|
|
|
30,694
|
|
Discount
deducted from claim and claim adjustment expense
|
|
|
|
|
|
|
|
reserves
above (based on interest rates ranging from 3.5% to 7.5%)
|
|
|
1,648
|
|
|
1,739
|
|
Unearned
premiums
|
|
|
3,784
|
|
|
3,706
|
|
Year
Ended December 31
|
|
2006
|
|
2005
|
|
2004
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
written premiums
|
|
$
|
7,655
|
|
$
|
7,509
|
|
$
|
7,594
|
|
Net
earned premiums
|
|
|
7,595
|
|
|
7,558
|
|
|
7,925
|
|
Net
investment income
|
|
|
2,035
|
|
|
1,595
|
|
|
1,266
|
|
Incurred
claim and claim adjustment expenses related to current
|
|
|
|
|
|
|
|
|
|
|
year
|
|
|
4,837
|
|
|
5,054
|
|
|
5,118
|
|
Incurred
claim and claim adjustment expenses related to prior years
|
|
|
332
|
|
|
1,107
|
|
|
234
|
|
Amortization
of deferred acquisition costs
|
|
|
1,534
|
|
|
1,541
|
|
|
1,641
|
|
Paid
claim and claim adjustment expenses
|
|
|
4,165
|
|
|
3,541
|
|
|
5,401
|
|
L-4
EX-10.23
2
ex10_23.htm
Unassociated Document
Exhibit
10.23
Mr.
Andrew H. Tisch
667
Madison Avenue
New
York,
New York 10021
Dear
Mr.
Tisch:
Reference
is made to your Employment Agreement with Loews Corporation (the “Company”),
dated January 1, 1999, as amended by agreements dated as of January 1, 2002,
January 1, 2003, January 1, 2004 and as of February 11, 2005 (the “Employment
Agreement”).
This
will
confirm our agreement that the Employment Agreement is amended as
follows:
1. Term
of Employment.
The
period of your employment under and pursuant to the Employment Agreement is
hereby extended for an additional period through and including March 31, 2008
upon all the terms, conditions and provisions of the Employment Agreement,
as
hereby amended.
2. Compensation.
You
shall be paid as basic compensation (the “Basic Compensation”) for your services
to the Company and its subsidiaries under and pursuant to the Employment
Agreement a salary at the rate of Nine Hundred Seventy-Five Thousand ($975,000)
Dollars per annum through March 31, 2008. Basic Compensation shall be payable
in
accordance with the Company’s customary payroll practices as in effect from time
to time, and shall be subject to such increases as the Board of Directors of
the
Company, in its sole discretion, may from time to time determine.
3. Incentive
Compensation Plan.
In
addition to receipt of Basic Compensation under the Employment Agreement, you
shall participate in the Incentive Compensation Plan for Executive Officers
of
the Company (the “Compensation Plan”) and shall be eligible to receive incentive
compensation under the Compensation Plan as may be awarded in accordance with
its terms.
4. Other
Compensation.
The
compensation provided pursuant to this Letter Agreement shall be exclusive
of
compensation and fees, if any, to which you may be entitled as an officer or
director of a subsidiary of the Company.
Except
as
herein modified or amended, the Employment Agreement shall remain in full force
and effect.
Mr.
Andrew H. Tisch
As
of
February 15, 2007
Page
2
If
the
foregoing is in accordance with your understanding, would you please sign the
enclosed duplicate copy of this Letter Agreement at the place indicated below
and return the same to us for our records.
|
|
|
Very
truly yours,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOEWS
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Gary W. Garson
|
|
|
|
|
|
Gary
W. Garson
|
|
|
|
|
|
Senior
Vice President
|
|
|
|
|
|
|
|
ACCEPTED
AND AGREED TO:
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Andrew H. Tisch
|
|
|
|
|
|
Andrew
H. Tisch
|
|
|
|
|
|
EX-10.32
3
ex10_32.htm
Unassociated Document
Exhibit
10.32
Mr.
James
S. Tisch
667
Madison Avenue
New
York,
New York 10021
Dear
Mr.
Tisch:
Reference
is made to your Employment Agreement with Loews Corporation (the “Company”),
dated January 1, 1999, as amended by agreements dated as of January 1, 2002,
January 1, 2003, January 1, 2004 and as of February 11, 2005 (the “Employment
Agreement”).
This
will
confirm our agreement that the Employment Agreement is amended as
follows:
1. Term
of Employment.
The
period of your employment under and pursuant to the Employment Agreement is
hereby extended for an additional period through and including March 31, 2008
upon all the terms, conditions and provisions of the Employment Agreement,
as
hereby amended.
2. Compensation.
You
shall be paid as basic compensation (the “Basic Compensation”) for your services
to the Company and its subsidiaries under and pursuant to the Employment
Agreement a salary at the rate of Nine Hundred Seventy-Five Thousand ($975,000)
Dollars per annum through March 31, 2008. Basic Compensation shall be payable
in
accordance with the Company’s customary payroll practices as in effect from time
to time, and shall be subject to such increases as the Board of Directors of
the
Company, in its sole discretion, may from time to time determine.
3. Incentive
Compensation Plan.
In
addition to receipt of Basic Compensation under the Employment Agreement, you
shall participate in the Incentive Compensation Plan for Executive Officers
of
the Company (the “Compensation Plan”) and shall be eligible to receive incentive
compensation under the Compensation Plan as may be awarded in accordance with
its terms.
4. Other
Compensation.
The
compensation provided pursuant to this Letter Agreement shall be exclusive
of
compensation and fees, if any, to which you may be entitled as an officer or
director of a subsidiary of the Company.
Except
as
herein modified or amended, the Employment Agreement shall remain in full force
and effect.
Mr.
James
S. Tisch
As
of
February 15, 2007
Page
2
If
the
foregoing is in accordance with your understanding, would you please sign the
enclosed duplicate copy of this Letter Agreement at the place indicated below
and return the same to us for our records.
|
|
|
Very
truly yours,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOEWS
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Gary W. Garson
|
|
|
|
|
|
Gary
W. Garson
|
|
|
|
|
|
Senior
Vice President
|
|
|
|
|
|
|
|
ACCEPTED
AND AGREED TO:
|
|
|
|
|
|
|
|
|
|
|
|
/s/
James S. Tisch
|
|
|
|
|
|
James
S. Tisch
|
|
|
|
|
|
EX-10.41
4
ex10_41.htm
Unassociated Document
Exhibit
10.41
Mr.
Jonathan M. Tisch
667
Madison Avenue
New
York,
New York 10021
Dear
Mr.
Tisch:
Reference
is made to your Employment Agreement with Loews Corporation (the “Company”),
dated January 1, 1999, as amended by agreements dated as of January 1, 2002,
January 1, 2003, January 1, 2004 and as of February 11, 2005 (the “Employment
Agreement”).
This
will
confirm our agreement that the Employment Agreement is amended as
follows:
1. Term
of Employment.
The
period of your employment under and pursuant to the Employment Agreement is
hereby extended for an additional period through and including March 31, 2008
upon all the terms, conditions and provisions of the Employment Agreement,
as
hereby amended.
2. Compensation.
You
shall be paid as basic compensation (the “Basic Compensation”) for your services
to the Company and its subsidiaries under and pursuant to the Employment
Agreement a salary at the rate of Nine Hundred Seventy-Five Thousand ($975,000)
Dollars per annum through March 31, 2008. Basic Compensation shall be payable
in
accordance with the Company’s customary payroll practices as in effect from time
to time, and shall be subject to such increases as the Board of Directors of
the
Company, in its sole discretion, may from time to time determine.
3. Incentive
Compensation Plan.
In
addition to receipt of Basic Compensation under the Employment Agreement, you
shall participate in the Incentive Compensation Plan for Executive Officers
of
the Company (the “Compensation Plan”) and shall be eligible to receive incentive
compensation under the Compensation Plan as may be awarded in accordance with
its terms.
4. Other
Compensation.
The
compensation provided pursuant to this Letter Agreement shall be exclusive
of
compensation and fees, if any, to which you may be entitled as an officer or
director of a subsidiary of the Company.
Except
as
herein modified or amended, the Employment Agreement shall remain in full force
and effect.
Mr.
Jonathan M. Tisch
As
of
February 15, 2007
Page
2
If
the
foregoing is in accordance with your understanding, would you please sign the
enclosed duplicate copy of this Letter Agreement at the place indicated below
and return the same to us for our records.
|
|
|
Very
truly yours,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOEWS
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Gary W. Garson
|
|
|
|
|
|
Gary
W. Garson
|
|
|
|
|
|
Senior
Vice President
|
|
|
|
|
|
|
|
ACCEPTED
AND AGREED TO:
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/s/
Jonathan M. Tisch
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Jonathan
M. Tisch
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EX-21.01
5
ex21_01.htm
Unassociated Document
Exhibit
21.01
LOEWS
CORPORATION
Subsidiaries
of the Registrant
December
31, 2006
|
Organized
Under
|
|
|
Name
of Subsidiary
|
Laws
of
|
|
Business
Names
|
|
|
|
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CNA
Financial Corporation
|
Delaware
|
)
|
|
The
Continental Corporation
|
New
York
|
)
|
CNA
Insurance |
Continental
Casualty Company
|
Illinois
|
)
|
|
|
|
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Lorillard,
Inc.
|
Delaware
|
)
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Lorillard
|
Lorillard
Tobacco Company
|
Delaware
|
)
|
|
|
|
|
|
Diamond
Offshore Drilling, Inc.
|
Delaware
|
)
|
Diamond
Offshore
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Drilling,
Inc.
|
The
names
of certain subsidiaries which, if considered as a single subsidiary, would
not
constitute a “significant subsidiary” as defined in Regulation S-X, have been
omitted.
EX-23.01
6
ex23_01.htm
Unassociated Document
Exhibit
23.01
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the incorporation by reference in Registration Statements Nos.
333-129772, 333-84084, and 333-33616 on Form S-8 and Registration Statement
No.
333-132334 on Form S-3 of our reports dated February 22, 2007 relating to the
consolidated financial statements and financial statement schedules of Loews
Corporation (which report expresses an unqualified opinion and includes an
explanatory paragraph relating to the change in method of accounting for defined
benefit pension and other postretirement plans as described in Note 1) and
management’s report on the effectiveness of internal control over financial
reporting, appearing in this Annual Report on Form 10-K of Loews Corporation
for
the year ended December 31, 2006.
DELOITTE
& TOUCHE LLP
New
York,
NY
February
22, 2007
EX-31.01
7
ex31_01.htm
Unassociated Document
Exhibit
31.01
I,
James
S. Tisch, certify that:
1. I
have reviewed this
annual report on Form 10-K of Loews Corporation;
2. Based
on my knowledge,
this report does not contain any untrue statement of a material fact or omit
to
state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based
on my knowledge,
the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The
registrant's other
certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
|
(b)
|
Designed
such internal controls over financial reporting, or caused such internal
controls over financial reporting to be designed under our supervision,
to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
(c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
(d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
5. The
registrant’s other
certifying officer(s) and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
Dated: February
23, 2007
|
By:
|
/s/
James S. Tisch
|
|
|
JAMES
S. TISCH
|
|
|
Chief
Executive Officer
|
EX-31.02
8
ex31_02.htm
Unassociated Document
Exhibit
31.02
I,
Peter
W. Keegan, certify that:
1. I
have reviewed this
annual report on Form 10-K of Loews Corporation;
2. Based
on my knowledge,
this report does not contain any untrue statement of a material fact or omit
to
state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based
on my knowledge,
the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The
registrant's other
certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
|
(b)
|
Designed
such internal controls over financial reporting, or caused such internal
controls over financial reporting to be designed under our supervision,
to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
(c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
(d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
5. The
registrant’s other
certifying officer(s) and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
Dated: February
23, 2007
|
By:
|
/s/
Peter W. Keegan
|
|
|
PETER
W. KEEGAN
|
|
|
Chief
Financial Officer
|
EX-32.01
9
ex32_01.htm
Unassociated Document
Exhibit
32.01
Certification
by the Chief Executive Officer
of
Loews
Corporation pursuant to 18 U.S.C. Section 1350
(as
adopted by Section 906 of the
Sarbanes-Oxley
Act of 2002)
Pursuant
to 18 U.S.C. Section 1350, the undersigned chief executive officer of Loews
Corporation (the “Company”) hereby certifies, to such officer’s knowledge, that
the Company’s annual report on Form 10-K for the year ended December 31, 2006
(the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Dated: February
23, 2007
|
By:
|
/s/
James S. Tisch
|
|
|
JAMES
S. TISCH
|
|
|
Chief
Executive Officer
|
EX-32.02
10
ex32_02.htm
Unassociated Document
Exhibit
32.02
Certification
by the Chief Financial Officer
of
Loews
Corporation pursuant to 18 U.S.C. Section 1350
(as
adopted by Section 906 of the
Sarbanes-Oxley
Act of 2002)
Pursuant
to 18 U.S.C. Section 1350, the undersigned chief financial officer of Loews
Corporation (the “Company”) hereby certifies, to such officer’s knowledge, that
the Company’s annual report on Form 10-K for the year ended December 31, 2006
(the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Dated:
February 23, 2007
|
By:
|
/s/
Peter W. Keegan
|
|
|
PETER
W. KEEGAN
|
|
|
Chief
Financial Officer
|
EX-99.01
11
ex99_01.htm
Unassociated Document
Exhibit
99.01
PENDING
TOBACCO LITIGATION
CLASS
ACTION CASES:
The
following Class Action cases were pending against Lorillard as of December
31,
2006, through February 16, 2007:
The
case
of
Willard Brown v. The American Tobacco Company, et al.
(Superior Court, San Diego County, California, filed June 10,
1997).
The
case
of
Cleary v. Philip Morris Incorporated, et al.
(Circuit
Court, Cook County, Illinois, filed June 3, 1998).
The
case
of
Cypret v. The American Tobacco Company, et al.
(Circuit
Court, Jackson County, Missouri, filed May 5, 1999). The Company is a defendant
in the case.
The
case
of
Daniels v. Philip Morris Incorporated, Inc, et al.
(Superior Court, San Diego County, California, filed April 2,
1998).
The
case
of
Engle v. R.J. Reynolds Tobacco Company, et al.
(Circuit
Court, Miami-Dade County, Florida, filed May 5, 1994).
The
case
of
Lowe
v. Philip Morris Incorporated, et al.
(Circuit
Court, Multnomah County, Oregon, filed November 19, 2001). During 2003, the
court granted defendants' motion to dismiss the complaint. Plaintiffs have
appealed.
The
case
of
Parsons v. AC&S Inc., et al.
(Circuit
Court, Ohio County, West Virginia, filed February 27, 1998).
The
case
of
Schwab v. Philip Morris USA, Inc., et al.
(U.S.
District Court, Eastern District, New York, filed May 11, 2004).
The
case
of
Scott v. The American Tobacco Company, et al.
(District Court, Orleans Parish, Louisiana, filed May 24, 1996).
The
case
of
Young v. The American Tobacco Company, Inc., et al.
(District Court, Orleans Parish, Louisiana, filed November 12, 1997). The
Company is a defendant in the case.
REIMBURSEMENT
CASES:
The
following Reimbursement cases were pending against Lorillard as of December
31,
2006, through February [date forthcoming], 2007:
The
case
of
City
of St. Louis [Missouri] v. American Tobacco Co., Inc., et al.
(Circuit
Court, City of St. Louis, Missouri, filed November 25, 1998). As many as 50
Missouri hospitals or hospital districts also are plaintiffs in this
matter.
The
case
of
Crow
Creek Sioux Tribe v. The American Tobacco Company, et al.
(Tribal
Court, Crow Creek Sioux Tribe, filed September 14, 1997).
The
case
of
United Seniors Association, Inc., as a private attorney general v. Philip Morris
USA, et al.
(U.S.
District Court, Massachusetts, filed August 4, 2005). During 2006, the court
granted defendants’ motion to dismiss. Plaintiffs have
appealed.
The
case
of
United States of America v. Philip Morris Incorporated, et al.
(U.S.
District Court, District of Columbia, filed September 22, 1999).
In
addition, a Private Company Reimbursement Case has been filed outside the
U.S.:
Clalit
Health Services v. Philip Morris Inc., et al.
(District Court, Jerusalem, Israel). The
Company is a defendant in this action.
ANTITRUST
CLAIMS -
The
case
of
Romero, et al v. Philip Morris, et al.
(District Court, Rio Arriba County, New Mexico, filed February 9,
2000).
The
case
of
Smith v. Philip Morris, et al.
(District Court, Seward County, Kansas, filed February 7, 2000).
The
case
of
Sanders v. Lockyer, et al.
(N.D.
Cal., filed June 9, 2004).
GRAPHIC
12
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