10-K 1 form10k.htm LOEWS CORPORATION FORM 10-K Unassociated Document
 


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

FORM 10-K

[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2008
OR

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

For the Transition Period From  ____________  to  _____________

Commission File Number 1-6541

LOEWS CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
 
13-2646102
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
667 Madison Avenue, New York, N.Y. 10065-8087
(Address of principal executive offices) (Zip Code)

(212) 521-2000
(Registrant’s telephone number, including area code)

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

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.

 
Yes
X
 
No
   

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 
Yes
   
No
X
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 
Yes
X
 
No
   

Indicate by check mark 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. T.

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

Large accelerated filer
X
 
Accelerated filer
   
Non-accelerated filer
   
Smaller reporting company
   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 
Yes
   
No
X
 
 
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 $15,238,000,000.

As of February 13, 2009, there were 435,136,670 shares of Loews common 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, 2009 are incorporated by reference into Part III of this Report.
 


 
1

 
 
LOEWS CORPORATION

INDEX TO ANNUAL REPORT ON
FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION

For the Year Ended December 31, 2008

Item
   
Page
No.
PART I
No.
           
1
 
Business
3
 
     
CNA Financial Corporation
3
 
     
Diamond Offshore Drilling, Inc.
10
 
     
HighMount Exploration & Production LLC
13
 
     
Boardwalk Pipeline Partners, LP
17
 
     
Loews Hotels Holding Corporation
21
 
     
Separation of Lorillard
22
 
     
Available Information
23
 
1
A
Risk Factors
23
 
1
B
Unresolved Staff Comments
50
 
2
 
Properties
50
 
3
 
Legal Proceedings
50
 
4
 
Submission of Matters to a Vote of Security Holders
51
 
   
Executive Officers of the Registrant
51
 
           
   
PART II
   
           
5
 
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
   
     
Purchases of Equity Securities
51
 
   
Management’s Report on Internal Control Over Financial Reporting
54
 
   
Reports of Independent Registered Public Accounting Firm
55
 
6
 
Selected Financial Data
57
 
7
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
58
 
7
A
Quantitative and Qualitative Disclosures about Market Risk
117
 
8
 
Financial Statements and Supplementary Data
121
 
9
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
205
 
9
A
Controls and Procedures
205
 
9
B
Other Information
205
 
           
   
PART III
   
           
   
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.
   
           
   
PART IV
   
           
15
 
Exhibits and Financial Statement Schedules
206
 

 
2

 
 
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, a 90% owned subsidiary);

· 
 operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc., a 50.4% owned subsidiary);

· 
 exploration, production and marketing of natural gas and natural gas liquids (HighMount Exploration & Production LLC, a wholly owned subsidiary);

· 
 operation of interstate natural gas transmission pipeline systems (Boardwalk Pipeline Partners, LP, a 74% owned subsidiary); and

· 
 operation of hotels (Loews Hotels Holding Corporation, a wholly owned subsidiary).

Please read information relating to our major business segments from which we derive revenue and income contained in Note 24 of the Notes to Consolidated Financial Statements, included under Item 8.

In June of 2008, we disposed of our entire ownership interest in our wholly owned subsidiary, Lorillard, Inc. (“Lorillard”) in two integrated transactions, collectively referred to as the “Separation.” Please read the “Separation of Lorillard” section below for information relating to these transactions.

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 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 58.9%, 69.1% and 75.0% of our consolidated total revenue for the years ended December 31, 2008, 2007 and 2006, respectively.

CNA’s core businesses serves a wide variety of customers, including small, medium and large businesses, associations, professionals and groups with a broad range of insurance and risk management products and services.

CNA’s insurance products primarily include commercial property and casualty coverages. CNA’s services include risk management, information services, warranty and claims administration. CNA’s products and services are marketed through independent agents, brokers and managing general agents.

CNA’s core business, commercial 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 business segments:  Life & 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 domestically primarily to small, middle-market and large businesses and organizations. The Standard Lines operating model focuses on underwriting performance, relationships with selected distribution sources and understanding customer needs. Property products provide standard and excess property coverages, as well as marine coverage, and boiler and machinery. Casualty products provide standard casualty

 
3

 

Item 1. Business
CNA Financial Corporation - (Continued)


insurance products such as workers’ compensation, general and product liability and commercial auto coverage through traditional products. Most insurance programs are provided on a guaranteed cost basis; however, CNA also offers specialized, loss-sensitive insurance programs to those customers viewed as higher risk and less predictable in exposure.

These property and casualty products are offered as part of CNA’s Business and Commercial insurance groups. CNA’s Business insurance group serves its smaller commercial accounts and the Commercial insurance group serves its middle markets and its larger risks. In addition, Standard Lines provides total risk management services relating to claim and information services to the large commercial insurance marketplace, through a wholly owned subsidiary, CNA ClaimPlus, Inc., a third party administrator.

Specialty Lines

Specialty Lines provides professional, financial and specialty property and casualty products and services, both domestically and abroad, 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 companies. Product offerings also include surety and fidelity bonds and vehicle warranty services.

Specialty Lines includes the following business groups:

U.S. Specialty Lines:  U.S. Specialty Lines provides management and professional liability insurance and risk management services, and other specialized property and casualty coverages, 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. U.S. 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 U.S. Specialty Lines are distributed through brokers, agents and managing general underwriters.

U.S. 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.

Also included in U.S. Specialty Lines is Excess and Surplus (“E&S”). 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 brokers.

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 62% of CNA Surety.

Warranty:  Warranty provides vehicle warranty service contracts and related products that protect individuals from the financial burden associated with mechanical breakdown. Products are distributed through independent agents.

CNA Global:  CNA Global consists of subsidiaries operating in Europe, Latin America, Canada and Hawaii. These affiliates offer property and casualty insurance, through brokers, managing general underwriters and independent agencies, to small and medium size businesses and capitalize on strategic indigenous opportunities.

 
4

 
 
Item 1. Business
CNA Financial Corporation - (Continued)


Life & Group Non-Core

The Life & 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 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 business, while considered non-core, continues to be actively marketed. During 2008, CNA exited the indexed group annuity portion of its pension deposit business.

Other Insurance

Other Insurance includes certain corporate expenses, including interest on corporate debt, and the results of certain property and casualty business primarily in run-off, including CNA Re. This segment also includes the results related to the centralized adjusting and settlement of asbestos and environmental pollution (“A&E”) claims.

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
 
2008
   
2007
   
2006
 
                   
Trade Ratios - GAAP basis (a):
                 
Loss and loss adjustment expense ratio
    78.7 %     77.7 %     75.7 %
Expense ratio
    30.1       30.0       30.0  
Dividend ratio
    0.2       0.2       0.3  
Combined ratio
    109.0 %     107.9 %     106.0 %
                         
Trade Ratios - Statutory basis (preliminary) (a):
                       
Loss and loss adjustment expense ratio
    83.8 %     79.8 %     78.7 %
Expense ratio
    30.1       30.0       30.2  
Dividend ratio
    0.3       0.3       0.2  
Combined ratio
    114.2 %     110.1 %     109.1 %

(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 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 future policy benefits 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 policyholders’ dividends incurred to net earned premiums. The dividend ratio, using amounts determined in accordance with SAP, is the ratio of policyholders’ dividends paid to net earned premiums. The combined ratio is the sum of the loss and loss adjustment expense, expense and dividend ratios.

 
5

 

Item 1. Business
CNA Financial Corporation - (Continued)


The following table displays the distribution of direct written premiums for CNA’s operations by geographic concentration.

Year Ended December 31
 
2008
   
2007
   
2006
 
                   
California
    9.2 %     9.5 %     9.7 %
New York
    6.9       7.0       7.5  
Florida
    6.5       7.5       8.0  
Texas
    6.2       6.1       5.8  
Illinois
    3.8       3.8       4.2  
New Jersey
    3.8       3.7       4.0  
Pennsylvania
    3.3       3.4       3.4  
Missouri
    3.1       2.9       3.1  
All other states, countries or political subdivisions (a)
    57.2       56.1       54.3  
      100.0 %     100.0 %     100.0 %

(a)
No other individual state, country or political subdivision accounts for more than 3.0% of direct written premiums.

Approximately 7.4%, 6.9% and 5.9% of CNA’s direct written premiums were derived from outside of the United States for the years ended December 31, 2008, 2007 and 2006. Premiums from any individual foreign country 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 companies. 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.

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 following table include the impact of commutations, but exclude the impact of the provision for uncollectible reinsurance.

 
6

 

Item 1. Business
CNA Financial Corporation - (Continued)


   
Schedule of Loss Reserve Development
 
Year Ended December 31
 
1998
   
1999(a)
   
2000
   
2001(b)
   
2002(c)
   
2003
   
2004
   
2005
   
2006
   
2007
   
2008
 
(In millions of dollars)
                                                                 
                                                                   
Originally reported gross  
  reserves for unpaid claim
                                                                 
 and claim adjustment
                                                                 
  expenses
    28,506       26,850       26,510       29,649       25,719       31,284       31,204       30,694       29,459       28,415       27,475  
Originally reported ceded
                                                                                       
 recoverable
    5,182       6,091       7,333       11,703       10,490       13,847       13,682       10,438       8,078       6,945       6,213  
Originally reported net reserves
                                                                                       
 for unpaid claim and claim
                                                                                       
 adjustment expenses
    23,324       20,759       19,177       17,946       15,229       17,437       17,522       20,256       21,381       21,470       21,262  
Cumulative net paid as of:
                                                                                       
 One year later
    7,321       6,547       7,686       5,981       5,373       4,382       2,651       3,442       4,436       4,308       -  
 Two years later
    12,241       11,937       11,992       10,355       8,768       6,104       4,963       7,022       7,676       -       -  
 Three years later
    16,020       15,256       15,291       12,954       9,747       7,780       7,825       9,620       -       -       -  
 Four years later
    18,271       18,151       17,333       13,244       10,870       10,085       9,914       -       -       -       -  
 Five years later
    20,779       19,686       17,775       13,922       12,814       11,834       -       -       -       -       -  
 Six years later
    21,970       20,206       18,970       15,493       14,320       -       -       -       -       -       -  
 Seven years later
    22,564       21,231       20,297       16,769       -       -       -       -       -       -       -  
 Eight years later
    23,453       22,373       21,382       -       -       -       -       -       -       -       -  
 Nine years later
    24,426       23,276       -       -       -       -       -       -       -       -       -  
 Ten years later
    25,178       -       -       -       -       -       -       -       -       -       -  
Net reserves re-estimated as of:
                                                                                       
 End of initial year
    23,324       20,759       19,177       17,946       15,229       17,437       17,522       20,256       21,381       21,470       21,262  
 One year later
    24,306       21,163       21,502       17,980       17,650       17,671       18,513       20,588       21,601       21,463       -  
 Two years later
    24,134       23,217       21,555       20,533       18,248       19,120       19,044       20,975       21,706       -       -  
 Three years later
    26,038       23,081       24,058       21,109       19,814       19,760       19,631       21,408       -       -       -  
 Four years later
    25,711       25,590       24,587       22,547       20,384       20,425       20,212       -       -       -       -  
 Five years later
    27,754       26,000       25,594       22,983       21,076       21,060       -       -       -       -       -  
 Six years later
    28,078       26,625       26,023       23,603       21,769       -       -       -       -       -       -  
 Seven years later
    28,437       27,009       26,585       24,267       -       -       -       -       -       -       -  
 Eight years later
    28,705       27,541       27,207       -       -       -       -       -       -       -       -  
 Nine years later
    29,211       28,035       -       -       -       -       -       -       -       -       -  
 Ten years later
    29,674       -       -       -       -       -       -       -       -       -       -  
Total net (deficiency)
                                                                                       
  redundancy
    (6,350 )     (7,276 )     (8,030 )     (6,321 )     (6,540 )     (3,623 )     (2,690 )     (1,152 )     (325 )     7       -  
                                                                                         
Reconciliation to gross
                                                                                       
 re-estimated reserves:
                                                                                       
  Net reserves re-estimated
    29,674       28,035       27,207       24,267       21,769       21,060       20,212       21,408       21,706       21,463       -  
  Re-estimated ceded
                                                                                    -  
    recoverable
    8,178       10,673       11,458       16,965       16,313       14,709       13,576       10,935       8,622       7,277       -  
Total gross re-estimated
                                                                                       
  reserves
    37,852       38,708       38,665       41,232       38,082       35,769       33,788       32,343       30,328       28,740       -  
                                                                                         
Net (deficiency) redundancy
                                                                                       
 related to:
                                                                                       
  Asbestos claims
    (2,152 )     (1,576 )     (1,511 )     (739 )     (748 )     (98 )     (43 )     (34 )     (32 )     (27 )     -  
  Environmental claims
    (616 )     (616 )     (559 )     (212 )     (207 )     (134 )     (134 )     (83 )     (84 )     (83 )     -  
Total asbestos and environmental
    (2,768 )     (2,192 )     (2,070 )     (951 )     (955 )     (232 )     (177 )     (117 )     (116 )     (110 )     -  
 Other claims
    (3,582 )     (5,084 )     (5,960 )     (5,370 )     (5,585 )     (3,391 )     (2,513 )     (1,035 )     (209 )     117       -  
Total net (deficiency)
                                                                                       
  redundancy
    (6,350 )     (7,276 )     (8,030 )     (6,321 )     (6,540 )     (3,623 )     (2,690 )     (1,152 )     (325 )     7       -  
 
(a)
Ceded recoverable includes reserves transferred under retroactive reinsurance agreements of $784 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 $1,055 of reserves were transferred from CCC to CNAGLA.
(c)
Effective October 31, 2002, CNA sold CNA Reinsurance Company Limited. As a result of the sale, net reserves were reduced by $1,316.

 
7

 

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 under 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 under Item 8.

Investments

Please read Item 7, MD&A – Investments and Notes 1, 3, 4 and 5 of the Notes to Consolidated Financial Statements, included under 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 2,300 individual companies that sell property and casualty insurance in the United States. Based on 2007 statutory net written premiums, CNA is the seventh largest commercial insurance writer and the thirteenth largest property and casualty insurance organization in the United States of America.

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, quality 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 assessments are levied by the state departments of insurance to cover claims of insolvent insurers. Other insurance-related assessments are generally levied by state agencies to fund various organizations including disaster relief funds, rating bureaus, insurance departments, and workers’ compensation second injury funds, or by industry organizations that assist in the statistical analysis and ratemaking process.

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 in past years as well. 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. For example, some state legislatures are considering legislation addressing direct actions against insurers related to bad faith claims. As a result of this unpredictability in the law, insurance underwriting and rating are expected to continue to be difficult in commercial lines, professional liability

 
8

 
 
Item 1. Business
CNA Financial Corporation assword- (Continued)

and some specialty coverages and therefore could materially adversely affect the Company’s results of operations and equity.

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; federal regulation of insurance; various tax proposals affecting insurance companies; and possible regulatory limitations, impositions and restrictions, as well as potential impacts on the fair value determinations of CNA’s invested assets, arising from the Emergency Economic Stabilization Act of 2008.

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 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, 2008 and 2007, 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 CCC, a wholly owned subsidiary of CNA, serves as the home 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:

 
Size
   
Location
(square feet)
 
Principal Usage
       
333 S. Wabash Avenue
845,567
 
Principal executive offices of CNA
Chicago, Illinois
     
401 Penn Street
170,143
 
Property and casualty insurance offices
Reading, Pennsylvania
     
2405 Lucien Way
124,946
 
Property and casualty insurance offices
Maitland, Florida
     
40 Wall Street
107,607
 
Property and casualty insurance offices
New York, New York
     
1100 Ward Avenue
104,478
 
Property and casualty insurance offices
Honolulu, Hawaii
     
101 S. Phillips Avenue
81,101
 
Property and casualty insurance offices
Sioux Falls, South Dakota
     
600 N. Pearl Street
72,240
 
Property and casualty insurance offices
Dallas, Texas
     
4267 Meridian Parkway
70,004
 
Data Center
Aurora, Illinois
     
675 Placentia Avenue
64,939
 
Property and casualty insurance offices
Brea, California
     
1249 South River Road
57,671
 
Property and casualty insurance offices
Cranbury, New Jersey
     

CNA leases its office space described above except for the Chicago, Illinois building, the Reading, Pennsylvania building, and the Aurora, Illinois building, which are owned.

 
9

 

Item 1. Business


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 45 offshore rigs. Diamond Offshore accounted for 26.3%, 18.3% and 15.2% of our consolidated total revenue for the years ended December 31, 2008, 2007 and 2006, respectively.

Diamond Offshore owns and operates 30 semisubmersible rigs, consisting of 11 high specification and 19 intermediate 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.

Diamond Offshore’s high specification semisubmersible rigs 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 26, 2009, nine of the 11 high specification semisubmersible rigs, including the recently upgraded Ocean Monarch, were located in the U.S. Gulf of Mexico (“GOM”), while the remaining two rigs were located offshore Brazil and Malaysia.

Diamond Offshore’s intermediate semisubmersible rigs generally work in maximum water depths up to 4,000 feet. As of January 26, 2009, Diamond Offshore had 19 intermediate semisubmersible rigs drilling offshore or undergoing contract preparation activities in various offshore locations around the world. Six of these intermediate semisubmersible rigs were located offshore Brazil; four were located in the North Sea, three were located offshore Australia; two each were located in the GOM and offshore Mexico; and one was located each of offshore Libya and Vietnam.

Diamond Offshore has 14 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 26, 2009, six of Diamond Offshore’s 14 jack-up rigs were located in the GOM. Three 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 eight remaining jack-up rigs, all of which are independent-leg cantilevered units, two were located offshore Egypt and Mexico and one was located each of offshore Singapore, Croatia, Australia and Argentina.

Diamond Offshore’s strategy is to economically upgrade its fleet to meet customer demand for advanced, efficient, high-tech rigs, particularly deepwater semisubmersible rigs, in order to maximize the utilization of, and dayrates earned by, the rigs in Diamond Offshore’s fleet. Since 1995, Diamond Offshore has increased the number of its rigs capable of operating in 3,500 feet or more of water from three rigs to 14 (11 of which are high specification units), primarily by upgrading its existing fleet. Seven of these upgrades were to Diamond Offshore’s Victory-class semisubmersible rigs, the design of which is well-suited for significant upgrade projects. Diamond Offshore has two additional Victory-class rigs that are currently operating as intermediate semisubmersible rigs that could potentially be upgraded at some time in the future.

By the end of 2008, Diamond Offshore had completed its most recent fleet enhancement and additions program, which included the upgrade of two of Diamond Offshore’s Victory-class semisubmersible rigs, the Ocean Endeavor (completed in March of 2007) and the Ocean Monarch (completed in December of 2008), to 10,000 foot water depth capability and

 
10

 
 
Item 1. Business
Diamond Offshore Drilling, Inc. - (Continued)


the construction of two high-performance, premium jack-up rigs, the Ocean Shield (completed in May of 2008) and the Ocean Scepter (completed in August of 2008).

Diamond Offshore has one drillship, the Ocean Clipper, which was located offshore Brazil as of January 26, 2009. 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.

Markets:  The principal markets for Diamond Offshore’s contract drilling services are the following:

·  
the Gulf of Mexico, including the United States and Mexico;

·  
Europe, principally in the United Kingdom, or U.K., and Norway;

·  
the Mediterranean Basin, including Egypt, Libya and Tunisia and other parts of Africa;

·  
South America, principally in Brazil and Argentina;

·  
Australia and Asia, including Malaysia, Indonesia and Vietnam; and

·  
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 other international areas in which Diamond Offshore operates, 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 the majority 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 most 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. During 2008, Diamond Offshore performed services for 49 different customers, with Petroleo Brasileiro S.A., (“Petrobras”), accounting for 13.1% of Diamond

 
11

 

Item 1. Business
Diamond Offshore Drilling, Inc. - (Continued)


Offshore’s annual total consolidated revenues. During 2007, Diamond Offshore performed services for 49 different customers, none of which accounted for 10.0% or more of Diamond Offshore’s annual total consolidated revenues. During 2006, Diamond Offshore performed services for 51 different customers with Anadarko Petroleum Corporation (which acquired Kerr-McGee Oil & Gas Corporation in mid – 2006) and Petrobras accounting for 10.6% and 10.4% of Diamond Offshore’s annual total consolidated revenues, respectively.

Competition:  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. Mergers among oil and gas exploration and production companies have reduced the number of available customers. The drilling industry has experienced consolidation in recent years and may experience additional consolidation, which could create additional large competitors. Diamond Offshore competes with offshore drilling contractors that together have more than 600 mobile rigs available worldwide.

Significant new rig construction and upgrades of existing drilling units could also intensify price competition. Diamond Offshore believes that there are currently 170 jack-up rigs and floaters (semisubmersible rigs and drillships) on order and scheduled for delivery between 2009 and 2012. Periods of improving dayrates and expectations of sustained improvements in rig utilization rates and dayrates may result in the construction of additional new rigs. The resulting 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. Presently, not all of the rigs currently under construction have been 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.

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 59.3%, 49.8% and 42.5% of Diamond Offshore’s total consolidated revenues for the years ended December 31, 2008, 2007 and 2006, 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 its corporate headquarters is located, 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, Singapore, Egypt, Argentina, Vietnam, Libya and Mexico to support its offshore drilling operations.

 
12

 
 
Item 1. Business


HIGHMOUNT EXPLORATION & PRODUCTION LLC

On July 31, 2007, HighMount acquired certain exploration and production assets, and assumed certain related obligations from subsidiaries of Dominion Resources, Inc. (“Dominion”) for $4.0 billion, subject to adjustment. HighMount accounted for 5.8% and 2.1% of our consolidated total revenue for the years ended December 31, 2008 and 2007.

We use the following terms throughout this discussion of HighMount’s business, with “equivalent” volumes computed with oil and natural gas liquid (“NGL”) quantities converted to Mcf, on an energy equivalent ratio of one barrel to six Mcf:

Bbl
-
Barrel (of oil or NGLs)
Bcf
-
Billion cubic feet (of natural gas)
Bcfe
-
Billion cubic feet of natural gas equivalent
Mcf 
-
Thousand cubic feet (of natural gas)
Mcfe
-
Thousand cubic feet of natural gas equivalent
MMBbl
-
Million barrels (of oil or NGLs)
MMBtu
-
Million British thermal units
MMcf
-
Million cubic feet (of natural gas)
MMcfe
-
Million cubic feet of natural gas equivalent
Proved reserves
-
Estimated quantities of natural gas, NGLs and oil which, upon analysis of geologic and engineering data, appear with reasonable certainty to be recoverable in the future from known reservoirs under existing economic and operating conditions
Proved developed reserves
-
Proved reserves which can be expected to be recovered through existing wells with existing equipment and operating methods
Proved undeveloped reserves
-
Proved reserves which are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required
Tcf
-
Trillion cubic feet (of natural gas)
Tcfe
-
Trillion cubic feet of natural gas equivalent

In addition, as used in this discussion of HighMount’s business, “gross wells” refers to the total number of wells in which HighMount owns a working interest and “net wells” refers to the sum of each of the gross wells multiplied by the percentage working interest owned by HighMount in such well. “Gross acres” refers to the total number of acres with respect to which HighMount owns or leases an interest and “net acres” is the sum of each unit of gross acres covered by a lease or other arrangement multiplied by HighMount’s percentage mineral interest in such gross acreage.

HighMount is engaged in the exploration, production and marketing of natural gas, NGLs (predominantly ethane and propane) and, to a small extent, oil, primarily in the Permian Basin in Texas, the Antrim Shale in Michigan and the Black Warrior Basin in Alabama. HighMount holds interests in developed and undeveloped acreage, wellbores and well facilities, which generally take the form of working interests in leases that have varying terms. HighMount’s interests in these properties are, in many cases, held jointly with third parties and may be subject to royalty, overriding royalty, carried, net profits, working and other similar interests and contractual arrangements with other parties as is customary in the oil and gas industry. HighMount also owns or has interests in gathering systems which transport natural gas and NGLs, principally from its producing wells, to processing plants and pipelines owned by third parties.


Reserves:  HighMount’s net proved reserves disclosed in this Report represent its share of proved reserves based on its net revenue interest in each property. Estimated proved reserves as of December 31, 2008 are based upon studies for each of HighMount’s properties prepared by HighMount staff engineers. Calculations were prepared using standard geological and engineering methods generally accepted by the petroleum industry and in accordance with Securities and

 
13

 

Item 1. Business
HighMount Exploration & Production LLC - (Continued)


Exchange Commission (“SEC”) guidelines. Ryder Scott Company, L.P., an independent third party petroleum engineering consulting firm, has audited HighMount’s proved reserve estimates in accordance with the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers.

The following table sets forth HighMount’s proved reserves at December 31, 2008, based on prevailing prices as of that date of $5.71 per MMBtu for natural gas, $22.00 per Bbl for NGLs and $44.60 per Bbl for oil.

   
Natural Gas
(MMcf)
   
NGLs
(Bbls)
   
Oil
(Bbls)
   
Natural Gas
Equivalents
(MMcfe)
 
                         
Permian Basin
    1,320,987       78,075,920       6,732,066       1,829,834  
Antrim Shale
    246,547               18,885       246,661  
Black Warrior Basin
    126,285                       126,285  
Total
    1,693,819       78,075,920       6,750,951       2,202,780  

Estimated net quantities of proved natural gas and oil (including condensate and NGLs) reserves at December 31, 2008 and 2007 and changes in the reserves during 2008 and 2007 are shown in Note 17 of the Notes to Consolidated Financial Statements included under Item 8.

HighMount’s properties typically have relatively long reserve lives, high well completion success rates and predictable production profiles. Based on December 31, 2008 proved reserves and HighMount’s average production from these properties during 2008, the average reserve-to-production index of HighMount’s proved reserves is 20 years.

In order to replenish reserves as they are depleted by production, and to increase reserves, HighMount further develops its existing acreage by drilling new wells and, where available, employing new technologies and drilling strategies designed to enhance production from existing wells. HighMount seeks to opportunistically acquire additional acreage in the Permian Basin, Antrim Shale and Black Warrior Basin, as well as other locations where its management has identified an opportunity.

HighMount engaged in the drilling activity presented in the following table. All wells drilled during 2008 and 2007 were development wells.

Year Ended December 31
 
2008
   
2007 (a)
 
   
Gross
   
Net
   
Gross
   
Net
 
                         
Productive Wells
                       
Permian Basin
    369       363.5       196       191.5  
Antrim Shale
    59       22.7       5       3.7  
Black Warrior Basin
    61       42.9       35       24.5  
Total Productive Wells
    489       429.1       236       219.7  
                                 
Dry Wells
                               
Permian Basin
    9       9.0       6       6.0  
Total Dry Wells
    9       9.0       6       6.0  
                                 
Total Completed Wells
    498       438.1       242       225.7  
                                 
Wells in Progress
                               
Permian Basin
    32       31.9       12       12.0  
Antrim Shale
    2       0.2                  
Black Warrior Basin
    1       1.0       7       4.9  
Total Wells in Progress
    35       33.1       19       16.9  

(a)
HighMount commenced operations on July 31, 2007.

 
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Item 1. Business
HighMount Exploration & Production LLC - (Continued)


Acreage:  As of December 31, 2008, HighMount owned interests in developed and undeveloped acreage in the locations set forth in the table below:

   
Developed Acreage
   
Undeveloped Acreage
   
Total Acreage
 
   
Gross
   
Net
   
Gross
   
Net
   
Gross
   
Net
 
                                     
Permian Basin
    601,194       459,577       244,034       99,675       845,228       559,252  
Antrim Shale
    240,478       108,490       12,114       2,300       252,592       110,790  
Black Warrior Basin
    101,293       72,064       415,909       264,634       517,202       336,698  
Total
    942,965       640,131       672,057       366,609       1,615,022       1,006,740  

Production and Sales:  HighMount’s production and sales volumes are as follows:

Year Ended December 31
 
2008
   
2007 (a)
 
             
Production:
           
Gas production (MMcf)
    78,858       34,008  
Gas sales (MMcf)
    72,525       31,420  
NGL (Bbls)
    3,507,384       1,512,877  
Oil (Bbls)
    351,272       114,014  
Equivalent (MMcfe)
    102,010       43,769  
                 
Average daily production:
               
Gas (MMcf)
    215       222  
NGL (Bbls)
    9,583       9,888  
Oil (Bbls)
    960       745  
Equivalent (MMcfe)
    279       286  
                 
Average realized price, without hedging results:
               
Gas (per Mcf)
  $ 8.25     $ 5.95  
NGL (per Bbl)
    51.26       51.02  
Oil (per Bbl)
    95.26       83.37  
Equivalent (Mcfe)
    8.48       6.65  
                 
Average realized price, with hedging results:
               
Gas (per Mcf)
  $ 7.71     $ 6.00  
NGL (per Bbl)
    47.73       46.41  
Oil (per Bbl)
    95.26       83.37  
Equivalent (Mcfe)
    7.94       6.51  
                 
Average cost per Mcfe:
               
Production expenses
  $ 1.04     $ 0.89  
Production and ad valorem taxes
    0.70       0.54  
General and administrative expenses
    0.69       0.58  
Depletion expense
    1.58       1.41  

(a)
HighMount commenced operations on July 31, 2007.

HighMount utilizes its own marketing and sales personnel to market the natural gas and NGLs that it produces to large energy companies and intrastate pipelines and gathering companies. Production is typically sold and delivered directly to a pipeline at liquid pooling points or at the tailgates of various processing plants, where it then enters a pipeline system. Permian Basin sales prices are primarily at a Houston Ship Channel Index, Antrim sales are at a MichCon Index and Black Warrior sales are at a Southern Natural Gas Pipeline Index.

 
15

 

Item 1. Business
HighMount Exploration & Production LLC - (Continued)


To manage the risk of fluctuations in prevailing commodity prices, from time to time HighMount enters into commodity and basis swaps and costless collars for a portion of its anticipated production. In the future, HighMount may enter into other price risk management instruments to hedge pricing risk on a portion of its projected production.

Wells:  As of December 31, 2008, HighMount had an interest in the following producing wells:

   
Natural Gas Producing Wells
 
   
Gross
   
Net
 
             
Permian Basin
    6,022       5,773  
Antrim Shale
    1,806       1,009  
Black Warrior Basin
    1,349       1,100  
Total
    9,177       7,882  

Wells located in the Permian Basin have a typical well depth in the range of 6,000 to 9,000 feet, while wells located in the Antrim Shale and the Black Warrior Basin have typical well depths of 1,200 feet and 2,000 feet, respectively.

Competition:  HighMount competes with other oil and gas companies in all aspects of its business, including acquisition of producing properties and leases and obtaining goods, services and labor, including drilling rigs and well completion services. HighMount also competes in the marketing of produced natural gas and NGLs. Some of HighMount’s competitors have substantially larger financial and other resources than HighMount. Factors that affect HighMount’s ability to acquire producing properties include available funds, available information about the property and standards established by HighMount for minimum projected return on investment. Competition for sales of natural gas and NGLs is also presented by alternative fuel sources, including heating oil, imported liquefied natural gas (“LNG”)and other fossil fuels.

Regulation:  All of HighMount’s operations are conducted onshore in the United States. The U.S. oil and gas industry, and HighMount’s operations, are subject to regulation at the federal, state and local level. Such regulation includes requirements with respect to, among other things:  permits to drill and to conduct other operations; provision of financial assurances (such as bonds) covering drilling and well operations; the location of wells; the method of drilling and completing wells; the surface use and restoration of properties upon which wells are drilled; the plugging and abandoning of wells; the marketing, transportation and reporting of production; and the valuation and payment of royalties; the size of drilling and spacing units (regarding the density of wells which may be drilled in a particular area); the unitization or pooling of properties; maximum rates of production from wells; venting or flaring of natural gas and the ratability of production.

The Federal Energy Policy Act of 2005 amended the Natural Gas Act to prohibit natural gas market manipulation by any entity, directed the Federal Energy Regulatory Commission (“FERC”) to facilitate market transparency in the sale or transportation of physical natural gas and significantly increased the penalties for violations of the Natural Gas Act of 1938 (“NGA”), the Natural Gas Policy Act of 1978, or FERC regulations or orders thereunder. In addition, HighMount owns and operates gas gathering lines and related facilities which are regulated by the U.S. Department of Transportation (“DOT”) and state agencies with respect to safety and operating conditions.

HighMount’s operations are also subject to federal, state and local laws and regulations concerning the discharge of contaminants into the environment, the generation, storage, transportation and disposal of contaminants, and the protection of public health, natural resources, wildlife and the environment. In most instances, the regulatory requirements relate to the handling and disposal of drilling and production waste products, water and air pollution control procedures, and the remediation of petroleum-product contamination. In addition, HighMount’s operations may require it to obtain permits for, among other things, air emissions, discharges into surface waters, and the construction and operation of underground injection wells or surface pits to dispose of produced saltwater and other non-hazardous oilfield wastes. HighMount could be required, without regard to fault or the legality of the original disposal, to remove or remediate previously disposed wastes, to suspend or cease operations in contaminated areas or to perform remedial well plugging operations or cleanups to prevent future contamination.

Properties:  In addition to its interests in oil and gas producing properties, HighMount leases an aggregate of approximately 117,000 square feet of office space in three locations in Houston, Texas, which includes its corporate

 
16

 
 
Item 1. Business
HighMount Exploration & Production LLC - (Continued)


headquarters, and approximately 102,000 square feet of office space in Oklahoma City, Oklahoma and Traverse City, Michigan which is used in its operations. HighMount also leases other surface rights and office, warehouse and storage facilities necessary to operate its business.

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 6.4%, 4.7% and 4.5% of our consolidated total revenue for the years ended December 31, 2008, 2007 and 2006, respectively.

As of February 13, 2009, we owned approximately 74% of Boardwalk Pipeline, comprised of 107,534,609 common units, 22,866,667 class B units and a 2% general partner interest. In November of 2008, all of our 33,093,878 subordinated units converted to common units. A wholly owned subsidiary of ours is the general partner and holds 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.

Boardwalk Pipeline owns and operates three interstate natural gas pipeline systems, with approximately 14,000 miles of pipeline, directly serving customers in 12 states and indirectly serving customers throughout the northeastern and southeastern United States through numerous interconnections with unaffiliated pipelines. In 2008, its pipeline systems transported approximately 1.7 Tcf of gas. Average daily throughput on its pipeline systems during 2008 was approximately 4.8 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 160.0 Bcf.

As discussed below, Boardwalk Pipeline is currently undertaking several significant pipeline and storage expansion projects.

Boardwalk Pipeline conducts all of its operations through three subsidiaries:

·  
Gulf Crossing Pipeline Company LLC (“Gulf Crossing”) operates approximately 350 miles of natural gas pipeline, located in Texas and Louisiana having an initial peak-day delivery capacity of approximately 1.2 Bcf per day.

·  
Gulf South Pipeline Company, L.P. (“Gulf South”) operates approximately 7,700 miles of natural gas pipeline, located in Texas, Louisiana, Mississippi, Alabama and Florida having a peak-day delivery capacity of approximately 5.0 Bcf per day, 38 compressor stations having an aggregate of approximately 378,900 horsepower and two natural gas storage fields located in Louisiana and Mississippi with aggregate designated working gas capacity of approximately 83.0 Bcf.

·  
Texas Gas Transmission, LLC (“Texas Gas”) operates approximately 5,950 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 3.8 Bcf per day, 31 compressor stations having an aggregate of approximately 552,700 horsepower and nine natural gas storage fields located in Indiana and Kentucky with aggregate designated working gas capacity of approximately 77.0 Bcf.

Boardwalk Pipeline transports and stores natural gas for a broad mix of customers, including marketers, local distribution companies (“LDCs”), producers, electric power generation plants, interstate and intrastate pipelines and direct industrial users.

Seasonality:  Boardwalk Pipeline’s revenues can be seasonal in nature, affected by weather and natural gas price volatility. Weather impacts natural gas demand for power generation and heating needs, which in turn influences the short term 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. Peak demand for natural gas typically occurs during the winter months, driven by heating needs. Excluding the impact of Boardwalk Pipeline’s expansion projects that went into service in 2008, during 2008 approximately 54.0% of Boardwalk Pipeline’s total operating revenues were recognized in the first and fourth calendar quarters. The effects of seasonality on Boardwalk Pipeline’s revenues have been mitigated over the past several years due to the increased use of gas-fired power generation in the

 
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Item 1. Business
Boardwalk Pipeline Partners, LP - (Continued)


summer months to meet cooling needs, primarily in the Southeast and Midwest. Generally, revenues from Boardwalk Pipeline’s expansion projects will be less seasonal in nature due to the structure of the contracts and the fact that the capacity is held primarily by producers, who are seeking a market for their production. Boardwalk Pipeline expects the impact of seasonality to further decline in coming years as the full impact of revenues from its expansion projects is taken into account.

Regulation:  FERC regulates pipelines under the 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 and the extension, enlargement or abandonment of facilities under its jurisdiction. Where required, Boardwalk Pipeline’s operating subsidiaries hold certificates of public convenience and necessity issued by FERC covering certain of its facilities, activities and services.

The maximum rates that may be charged by Boardwalk Pipeline for gas transportation are established through FERCs cost-of-service rate-making process. The maximum rates that may be charged by Boardwalk Pipeline for storage services on Texas Gas, with the exception of Phase III of the western Kentucky storage expansion, are also established through FERCs cost-of-service rate-making process. Key determinants in the cost-of-service rate-making process are the costs of providing service, the allowed rate of return, throughput assumptions, the allocation of costs and the rate design. Texas Gas is prohibited from placing new rates into effect prior to November 1, 2010, and neither Gulf South nor Texas Gas has an obligation to file a new rate case. Gulf Crossing will have to either file a rate case or justify its initial firm transportation rates within three years after the pipeline is fully placed in service.

Boardwalk Pipeline is also regulated by the 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. In addition, Boardwalk Pipeline will require authority from the Pipelines and Hazardous Materials Safety Administration (“PHMSA”) to operate its expansion pipelines, under a special permit at higher operating pressures in order to transport all of the volumes Boardwalk Pipeline has contracted for with customers on its expansion projects.

Boardwalk Pipeline’s operations are also subject to extensive federal, state and local laws and regulations relating to protection of the environment. Such regulations impose, among other things, restrictions, liabilities and obligations in connection with the generation, handling, use, storage, transportation, treatment and disposal of hazardous substances and waste and in connection with spills, releases and emissions of various substances into the environment. Environmental regulations also require that Boardwalk Pipeline’s facilities, sites and other properties be operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities.

Competition:   Boardwalk Pipeline competes with numerous interstate and intrastate 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 will compete with several new pipeline projects that are under construction, including the Rockies Express Pipeline that will transport natural gas from northern Colorado to eastern Ohio and the Mid-Continent Express Pipeline that would transport gas from Texas to Alabama. The principal elements of competition among pipelines are available capacity, rates, terms of service, access to supply and flexibility and reliability of service. Boardwalk Pipeline competes with these pipelines to maintain current business levels and to serve new demand and markets. Boardwalk Pipeline also competes with other pipelines for contracts with producers that would support new growth projects such as its pipeline expansion projects discussed elsewhere in this Report. 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 of the regulators’ policies, segmentation and capacity release have created an active secondary market which increasingly competes with Boardwalk Pipeline’s services, particularly on its Texas Gas system. Additionally, natural gas competes with other forms of energy available to customers, including electricity, coal and fuel oils. To the extent usage of natural gas decreases due to competition from other fuel sources, throughput on Boardwalk Pipeline’s system may decrease and the need for customers to contract for its services may decrease. Despite these competitive conditions, substantially all of the operating capacity on Boardwalk Pipeline’s pipeline systems, including its expansion projects, is sold out with a weighted-average contract life of over 6 years.

 
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Item 1. Business
Boardwalk Pipeline Partners, LP - (Continued)


Expansion Projects

Southeast Expansion:  Boardwalk Pipeline has constructed and placed in service 111 miles of 42-inch pipeline and related compression assets, originating near Harrisville, Mississippi and extending to an interconnect with Transcontinental Pipe Line Company (“Transco”) in Choctaw County, Alabama (“Transco Station 85”). The pipeline currently has 1.8 Bcf of peak-day transmission capacity. Boardwalk Pipeline has applied to PHMSA for authority to operate under a special permit that would allow the pipeline to be operated at higher operating pressures, thereby increasing the peak-day transmission capacity to 1.9 Bcf per day. Customers have contracted at fixed rates for substantially all of the operational capacity of this pipeline, with such contracts having a weighted-average term of approximately 9.3 years (including a capacity lease agreement with Gulf Crossing). In February of 2009, Boardwalk Pipeline placed in service the remaining compression assets related to this project and construction on this project is complete.

Gulf Crossing Project:  In the first quarter of 2009, Boardwalk Pipeline completed construction and placed in service the pipeline portion of the assets associated with its Gulf Crossing project, which consists of approximately 357 miles of 42-inch pipeline that begins near Sherman, Texas and proceeds to the Perryville, Louisiana area. Boardwalk Pipeline expects the initial compression to be placed in service during the first quarter of 2009, providing Gulf Crossing with a peak-day transmission capacity of 1.2 Bcf per day. Boardwalk Pipeline has applied to PHMSA for authority to operate under a special permit that would allow the pipeline to be operated at higher operating pressures, thereby increasing its peak-day transmission capacity to 1.4 Bcf per day. The peak-day transmission capacity would increase from 1.4 Bcf per day to 1.7 Bcf per day following the construction of additional compression facilities which Boardwalk Pipeline expects to place in service in the first quarter of 2010, subject to FERC approval. Customers have contracted at fixed rates for substantially all of the operational capacity of this pipeline, with such contracts having a weighted-average term of approximately 9.5 years.

Fayetteville and Greenville Laterals:  Boardwalk Pipeline is constructing two laterals on its Texas Gas pipeline system to transport gas from the Fayetteville Shale area in Arkansas to markets directly and indirectly served by its existing interstate pipelines. The Fayetteville Lateral will originate in Conway County, Arkansas and proceed southeast through the Bald Knob, Arkansas area to an interconnect with its Texas Gas mainline in Coahoma County, Mississippi consisting of approximately 165 miles of 36-inch pipeline. The Greenville Lateral will originate at the Texas Gas mainline near Greenville, Mississippi, and proceed east to the Kosciusko, Mississippi area consisting of approximately 95 miles of 36-inch pipeline. The Greenville Lateral will provide customers access to additional markets, located primarily in the Midwest, Northeast and Southeast.

In December of 2008, Boardwalk Pipeline placed in service the header, or first 66 miles, of the Fayetteville Lateral. In January of 2009, Boardwalk Pipeline placed in service a portion of the Greenville Lateral which originates at the Texas Gas mainline and continues to an interconnect with the Tennessee 800 line in Holmes County, Mississippi. Included in the Fayetteville header is a section of 18-inch pipeline under the Little Red River in Arkansas which will be replaced with 36-inch pipeline once a new horizontal directional drill is completed under the river. Boardwalk Pipeline expects the 36-inch pipeline installation to be completed in the second quarter of 2009. The initial peak-day transmission capacity of each of these laterals is approximately 0.8 Bcf per day.

During 2008, Boardwalk Pipeline executed contracts for additional capacity that will require Boardwalk Pipeline to add compression to increase the peak-day transmission capacity of these laterals to approximately 1.3 Bcf per day for the Fayetteville Lateral and 1.0 Bcf per day for the Greenville Lateral. To meet this requirement Boardwalk Pipeline will add compression facilities to this project and Boardwalk Pipeline has applied to PHMSA for authority to operate under a special permit that would allow the Fayetteville Lateral to be operated at higher operating pressures, in addition to replacing the section of 18-inch pipeline noted above. Boardwalk Pipeline expects the new compression to be in service during 2010, subject to FERC approval. Customers have contracted at fixed rates for substantially all of the operational capacity of these laterals, with such contracts having a weighted-average term of approximately 9.9 years.

Prior to placing a new pipeline or lateral in service, Boardwalk Pipeline conducts extensive tests to ensure that the pipeline can operate safely at normal operating pressures. Further, to operate at higher operating pressures under the PHMSA special permits discussed above, Boardwalk Pipeline designs, builds and conducts additional stringent tests to ensure the pipeline’s integrity. In performing such tests on one of its pipeline expansions, Boardwalk Pipeline discovered some anomalies in a small number of pipe segments installed on the East Texas to Mississippi segment of its Gulf South

 
19

 
 
Item 1. Business
Boardwalk Pipeline Partners, LP - (Continued)


pipeline system (the “East Texas Pipeline”). As a result, and as a prudent operator, Boardwalk Pipeline elected to reduce operating pressure on this pipeline to 20.0% below its previous operating level, which was below the pipeline’s maximum non-special permit operating pressure, while Boardwalk Pipeline investigates further and replaces the affected pipe segments where necessary. Boardwalk Pipeline has notified PHMSA of these anomalies and its ongoing testing and remediation plans, and Boardwalk Pipeline will keep PHMSA informed as its activities progress. See Item 1A – Risk Factors, and Item 7 – MD&A – Results of Operations – Boardwalk Pipeline – Reduction of Operating Pressures on Expansion Pipelines; Applications for Special Permits from PHMSA.

Western Kentucky Storage Expansion Phase III:  Boardwalk Pipeline is developing 8.3 Bcf of new working gas capacity at its Midland storage facility, for which FERC has granted Boardwalk Pipeline market-based rate authority. This expansion is supported by 10-year precedent agreements for 5.1 Bcf of storage capacity. In the fourth quarter of 2008, Boardwalk Pipeline placed in service approximately 5.4 Bcf of storage capacity. Boardwalk Pipeline is in discussion with potential customers for the remaining capacity which it expects to place in service in the fourth quarter of 2009.

Properties:  Boardwalk Pipeline is headquartered in approximately 103,000 square feet of leased office space located in Houston, Texas. Boardwalk Pipeline also has approximately 108,000 square feet of office space in Owensboro, Kentucky in a building that it owns. Boardwalk Pipeline’s operating subsidiaries own their respective pipeline systems in fee. However, 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.

 
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Item 1. Business


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 2.9%, 2.7% and 2.7% of our consolidated total revenue for the years ended December 31, 2008, 2007 and 2006, respectively.

 
Number of
 
Name and Location
Rooms
Owned, Leased or Managed
     
Loews Annapolis Hotel
220
 
Owned
Annapolis, Maryland
     
Loews Coronado Bay Resort
440
 
Land lease expiring 2034
San Diego, California
     
Loews Denver Hotel
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 Resort
493
 
Management contract (d)
Henderson, Nevada
     
Loews Le Concorde Hotel
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.
     
Loews Portofino Bay Hotel,
750
 
Management contract (c)
at Universal Orlando
     
Orlando, Florida
     
Loews Regency Hotel
350
 
Land lease expiring 2013, with renewal option
New York, New York
   
   for 47 years
Loews Royal Pacific Resort
1,000
 
Management contract (c)
at Universal Orlando
     
Orlando, Florida
     
Loews Santa Monica Beach Hotel
340
 
Management contract expiring 2018, with
Santa Monica, California
   
   renewal option for 5 years (a)
Loews Vanderbilt Hotel
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 on land leased by the joint venture from the resort’s owners and are operated by Loews Hotels pursuant to a management contract.
(d)
A Loews Hotels subsidiary is a 25% owner of the hotel through a joint venture with an institutional investor. This hotel is operated by Loews Hotels pursuant to a management contract.

 
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Item 1. Business
Loews Hotels Holding Corporation - (Continued)


The hotels owned by Loews Hotels are subject to mortgage indebtedness totaling approximately $226 million at December 31, 2008 with interest rates ranging from 4.5% to 6.3%, and maturing between 2009 and 2028. In addition, certain hotels are held under leases which are subject to formula derived rental increases, with rentals aggregating approximately $8 million for the year ended December 31, 2008.

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.

In August of 2007, a joint venture, of which a Loews Hotels subsidiary is a 25% owner, entered into an agreement to purchase, when completed, a hotel property currently being constructed as part of a mixed use development project in midtown Atlanta. Loews Hotels expects to open the hotel in 2010 and operate the hotel pursuant to a management contract.

SEPARATION OF LORILLARD

In June of 2008, we disposed of our entire ownership interest in our wholly owned subsidiary, Lorillard, Inc. (“Lorillard”), through the following two integrated transactions, collectively referred to as the “Separation”:

·  
On June 10, 2008, we distributed 108,478,429 shares, or approximately 62%, of the outstanding common stock of Lorillard in exchange for and in redemption of all of the 108,478,429 outstanding shares of our former Carolina Group stock, in accordance with our Restated Certificate of Incorporation (the “Redemption”); and

·  
On June 16, 2008, we distributed the remaining 65,445,000 shares, or approximately 38%, of the outstanding common stock of Lorillard in exchange for 93,492,857 shares of Loews common stock, reflecting an exchange ratio of 0.70 (the “Exchange Offer”).

As a result of the Separation, Lorillard is no longer a subsidiary of ours and we no longer own any interest in the outstanding stock of Lorillard. As of the completion of the Redemption, the former Carolina Group and former Carolina Group stock have been eliminated. In addition, at that time all outstanding stock options and stock appreciation rights (“SARs”) awarded under our former Carolina Group 2002 Stock Option Plan were assumed by Lorillard and converted into stock options and SARs which are exercisable for shares of Lorillard common stock.

The Loews common stock acquired by us in the Exchange Offer was recorded as a decrease in our Shareholders’ equity, reflecting Loews common stock at market value of the shares of Loews common stock delivered in the Exchange Offer. This decline was offset by a $4.3 billion gain to us from the Exchange Offer, which was reported as a gain on disposal of the discontinued business.

Our Consolidated Financial Statements have been reclassified to reflect Lorillard as a discontinued operation. Accordingly, the assets and liabilities, revenues and expenses and cash flows have been excluded from the respective captions in the Consolidated Balance Sheets, Consolidated Statements of Income, and Consolidated Statements of Cash Flows and have been included in Assets and Liabilities of discontinued operations, Discontinued operations, net and Net cash flows - discontinued operations, respectively.

Prior to the Redemption, we had a two class common stock structure:  Loews common stock and former Carolina Group stock. Former Carolina Group stock, commonly called a tracking stock, was intended to reflect the performance of a defined group of Loews’s assets and liabilities referred to as the former Carolina Group. The principal assets and liabilities attributable to the former Carolina Group were our 100% ownership of Lorillard, including all dividends paid by Lorillard to us, and any and all liabilities, costs and expenses arising out of or relating to tobacco or tobacco-related businesses. Immediately prior to the Separation, outstanding former Carolina Group stock represented an approximately 62% economic interest in the performance of the former Carolina Group. The Loews Group consisted of all of Loews’s

 
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Item 1. Business
Separation of Lorillard - (Continued)


assets and liabilities other than those allocated to the former Carolina Group, including an approximately 38% economic interest in the former Carolina Group.

EMPLOYEE RELATIONS

Including our operating subsidiaries as described below, we employed approximately 19,100 persons at December 31, 2008. We, and our subsidiaries, have experienced satisfactory labor relations.

CNA employed approximately 9,000 persons.

Diamond Offshore employed approximately 5,700 persons, including international crew personnel furnished through independent labor contractors.

HighMount employed approximately 650 persons.

Boardwalk Pipeline employed approximately 1,130 persons, approximately 90 of whom are covered by a collective bargaining agreement.

Loews Hotels employed approximately 2,350 persons, approximately 800 of whom are union members covered under collective bargaining agreements.

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 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.

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 income and 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. 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.

 
23

 

Item 1A. Risk Factors


Continued deterioration in the public debt and equity markets could lead to additional investment losses and lower cash balances at the parent company, which could impair our ability to fund acquisitions, share buybacks, dividends or other investments or to fund capital needed by our subsidiaries .

For more than a year, we have been experiencing severe volatility, illiquidity, uncertainty and disruption in the capital and credit markets and the overall economy, including among other things, large bankruptcies, government intervention in a number of large financial institutions, growing levels of defaults on indebtedness, recessionary economic conditions and widening of credit spreads. These conditions resulted in significant realized and unrealized losses and substantially reduced investment income, including a significant decline in income from limited partnership investments, at CNA and the parent company during 2008. Continued deterioration of the economy and the credit and capital markets, including lower pricing levels of fixed income and equity securities, could result in further such losses and further reduced investment income, which would among other things reduce the cash balances available at the parent company.  Please see MD&A under Item 7 of this Report for additional information on our Investments.

Certain of our operating subsidiaries require substantial amounts of capital or other financial support from time to time to fund expansions, enhance capital, refinance indebtedness or satisfy rating agency or regulatory requirements or for other reasons. Sufficient capital to satisfy these needs may not be available to our subsidiaries when needed on acceptable terms from the credit or capital markets or other third parties. In such cases, we have in the past, and may in the future, provide substantial amounts of debt or equity capital to our subsidiaries, which may not be on market terms. Any such investments further reduce the amount of cash available at the parent company which might otherwise be used to fund acquisitions, share buybacks, dividends or other investments or to fund other capital requirements of our subsidiaries. In addition, significantly reduced levels of cash at the parent company could make us unable or unwilling to fund future capital needs of our subsidiaries and result in a downgrade of our ratings by the major credit rating agencies.

We could have liability in the future for tobacco-related lawsuits.

As a result of our ownership of Lorillard prior to the Separation, which was consummated in June 2008, from time to time we have been named as a defendant in tobacco-related lawsuits. We are currently a defendant in four such lawsuits and could be named as a defendant in additional tobacco-related suits, notwithstanding the completion of the Separation. In the Separation Agreement entered into between us and Lorillard and its subsidiaries in connection with the Separation, Lorillard and each of its subsidiaries has agreed to indemnify us for liabilities related to Lorillard’s tobacco business, including liabilities that we may incur for current and future tobacco-related litigation against us. An adverse decision in a tobacco-related lawsuit against us could, if the indemnification is deemed for any reason to be unenforceable or any amounts owed to us thereunder are not collectible, in whole or in part, have a material adverse effect on our financial condition, results of operations and equity. We do not expect that the Separation will alter the legal exposure of either entity with respect to tobacco-related claims. We do not believe that we had or have any liability for tobacco-related claims, and we have never been held liable for any such claims.

Risks Related to Us and Our Subsidiary, CNA Financial Corporation

CNA may continue to incur significant realized and unrealized investment losses and volatility in net investment income arising from the severe disruption in the capital and credit markets.

CNA maintains a large portfolio of fixed income and equity securities, including large amounts of corporate and government issued debt securities, collateralized mortgage obligations, asset-backed and other structured securities, equity and equity-based securities and investments in limited partnerships which pursue a variety of long and short investment strategies across a broad array of asset classes. CNA’s investment portfolio supports its obligation to pay future insurance claims and provides investment returns which are an important part of CNA’s overall profitability.

For more than a year, capital and credit markets have experienced severe levels of volatility, illiquidity, uncertainty and overall disruption. Despite government intervention, market conditions have led to the merger or failure of a number of prominent financial institutions and government sponsored entities, sharply increased unemployment and reduced economic activity. In addition, significant declines in the value of assets and securities that began with the residential sub-prime mortgage crisis have spread to nearly all classes of investments, including most of those held in CNA’s investment portfolio. As a result, during 2008 CNA incurred significant realized and unrealized losses in its investment

 
24

 
 
Item 1A. Risk Factors

 
portfolio and experienced substantial declines in its net investment income which have materially adversely impacted the Company’s results of operations and stockholders’ equity.

In addition, certain categories of CNA’s investments are particularly subject to significant exposures in the current market environment. Although CNA normally expects limited partnership investments to provide higher returns over time, since 2008, they have presented greater risk, greater volatility and higher illiquidity than CNA’s fixed income investments. Commercial mortgage-backed securities (“CMBS”) also present greater risks due to the credit deterioration in the commercial real estate market. Notably, even senior tranches of CMBS have experienced significant price erosion due to market concerns involving the valuation and credit performance of commercial real estate.

If these economic and market conditions persist, CNA may continue to experience reduced investment income and to incur substantial additional realized and unrealized losses on its investments. As a result, the Company’s results of operations, and CNA’s business, insurer financial strength and debt ratings could be materially adversely impacted. Additional information on CNA’s investment portfolio is included in the MD&A under Item 7 and Note 3 of the Notes to Consolidated Financial Statements included under Item 8.

CNA may continue to incur underwriting losses as a result of the global economic crisis.

Overall global economic conditions may continue to be recessionary and highly unfavorable. Although many lines of CNA’s business have both direct and indirect exposure to this economic crisis, the exposure is especially high for the lines of business that provide management and professional liability insurance, as well as surety bonds, to businesses engaged in real estate, financial services and professional services. As a result, CNA has experienced and may continue to experience unanticipated underwriting losses with respect to these lines of business. Additionally, CNA could experience declines in its premium volume and related insurance losses. Consequently, our results of operations, stockholders’ equity and CNA’s business, insurer financial strength and debt ratings could be adversely impacted.

CNA’s valuation of investments and impairment of securities requires significant judgment.

CNA’s investment portfolio is exposed to various risks such as interest rate, market and credit risks, many of which are unpredictable. CNA exercises significant judgment in analyzing these risks and in validating fair values provided by third parties for securities in its investment portfolio that are not regularly traded. CNA also exercises significant judgment in determining whether the impairment of particular investments is temporary or other-than-temporary. Securities with exposure to sub-prime residential mortgage collateral or Alternative A (“Alt-A”) collateral are particularly sensitive to fairly small changes in actual collateral performance and assumptions as to future collateral performance.

During 2008, CNA incurred significant unrealized losses in its investment portfolio. In addition, CNA recorded significant other-than-temporary impairment (“OTTI”) losses primarily in the corporate and other taxable bonds, asset-backed bonds and non-redeemable preferred equity securities sectors.

Due to the inherent uncertainties involved with these types of judgments, CNA may incur further unrealized losses and conclude that further other-than-temporary write downs of its investments are required. As a result, the Company’s results of operations, and CNA’s business, insurer financial strength and debt ratings could be materially adversely impacted. Additional information on CNA’s investment portfolio is included in the MD&A under Item 7 and Note 3 of the Notes to Consolidated Financial Statements included under Item 8.

CNA is unable to predict the impact of governmental efforts taken and proposed to be taken in response to the economic and credit crisis.

The Federal government has implemented various measures, including the establishment of the Troubled Assets Relief Program pursuant to the Emergency Economic Stabilization Act of 2008, in an effort to deal with the ongoing economic and credit crisis.  In addition, there are numerous proposals for further legislative and regulatory actions at both the Federal and state levels, particularly with respect to the financial services industry.  Since these new laws and regulations could involve critical matters affecting CNA’s operations, they may have an impact on CNA’s business and its overall financial condition.  Due to this significant uncertainty, CNA is unable to determine whether its actions in response to

 
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these governmental efforts will be effective or to predict with any certainty the overall impact these governmental efforts will have on it.

CNA may continue to incur significant losses from its investments in financial institutions.

CNA’s investment portfolio includes preferred stock and hybrid debt securities issued by banks and other financial institutions. To date, government sponsored efforts to recapitalize the financial system both in the United States, as well as overseas, have been inconsistent and unpredictable. The uncertainty surrounding these efforts and their potential impact on existing financial institution securities has caused these securities to experience adverse price movement and rating agency downgrades. If this uncertainty continues or if regulatory decisions negatively affect CNA’s investments in financial institutions, CNA may continue to incur significant losses in its investment portfolio. As a result, the Company’s results of operations and CNA’s, business, insurer financial strength and debt ratings could be materially adversely impacted. Additional information on CNA’s investment portfolio is included in the MD&A under Item 7 and Note 3 of the Notes to Consolidated Financial Statements included under Item 8.

Rating agencies may downgrade their ratings for CNA, and thereby adversely affect CNA’s ability to write insurance at competitive rates or at all.

Ratings are an important factor in establishing the competitive position of insurance companies. CNA’s insurance company subsidiaries, as well as its public debt, are rated by rating agencies, namely, A.M. Best Company, Moody’s Investors Service and Standard and Poor’s. 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.

Due to the intense competitive environment in which CNA operates, the severe disruption in the capital and credit markets, 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 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 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.  Recently, Moody’s and A.M. Best have revised their outlook on CNA from stable to negative.

In addition, it is possible 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 CNA’s ratings included in the MD&A under Item 7.

CNA is subject to capital adequacy requirements and, if it is unable to maintain or raise sufficient capital to 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 material 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 material charge against earnings include impairment of its investments or unexpectedly poor claims experience.

During the fourth quarter of 2008, CNA took several actions to replenish its capital position and bolster the statutory surplus of its operating insurance subsidiaries. One of these actions was the November 7, 2008 purchase by Loews of

 
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Item 1A. Risk Factors


12,500 shares of CNA’s non-voting cumulative preferred stock (“2008 Senior Preferred”) for $1.25 billion. Loews, which owned approximately 90% of CNA’s outstanding common stock as of December 31, 2008, has also provided CNA with substantial amounts of capital in prior years. Given the ongoing turmoil in the capital and credit markets, CNA may be limited in its ability to raise significant amounts of capital on favorable terms or at all. In addition, Loews may be restricted in its ability or willingness to provide additional capital support to CNA.  As a result, if CNA is in need of additional capital, CNA may be required to secure this funding from sources other than Loews on terms that are not favorable.

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.

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 its reserves. This is called unfavorable development and results in a charge to CNA’s 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:

·  
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;

·  
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;

 
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·  
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.

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 changes could be substantial and could materially adversely affect the Company’s results of operations and equity and CNA’s business, insurer financial strength and debt ratings.

Loss reserves for asbestos and environmental pollution 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 A&E claim and claim adjustment expenses are subject to uncertainties that are greater than those presented by other claims. Estimating the ultimate cost of both reported and unreported claims are 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;

·  
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 asbestos and environmental pollution claims;

·  
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;

·  
CNA’s ability to recover reinsurance for these claims; and

·  
changes in the legal and legislative environment in which CNA operates.

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 CNA. 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 could materially adversely affect our results of operations and equity and CNA’s business, insurer financial strength and debt ratings. Additional information on A&E claims is included in MD&A under Item 7 and Note 9 of the Notes to Consolidated Financial Statements included under Item 8.

Asbestos claims. The estimation of reserves for asbestos claims is particularly difficult in light of the factors noted above. In addition, CNA’s ability to estimate the ultimate cost of asbestos claims is further complicated by the following:

·  
inconsistency of court decisions and jury attitudes, as well as future court decisions;

·  
interpretation of specific policy provisions;

·  
allocation of liability among insurers and insureds;

 
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Item 1A. Risk Factors