Loews Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Loews is a holding company with businesses in insurance, offshore drilling, natural-gas transportation and storage, hotels, and rigid-plastic packaging. Consolidated Container, acquired in May 2017, is included in the Corporate segment for the quarter.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total revenues | $3.581 billion | $3.300 billion |
| Income before tax | $405 million | $510 million |
| Net income | $380 million | $391 million |
| Net income attributable to Loews | $293 million | $295 million |
| Diluted earnings per share | $0.89 | $0.87 |
| Operating cash flow | $513 million | $(1) million |
| Cash | $451 million | $472 million at Dec. 31, 2017 |
| Total assets | $80.786 billion | $79.586 billion at Dec. 31, 2017 |
| Total debt on balance sheet | $11.468 billion | $11.533 billion at Dec. 31, 2017 |
| Total equity | $23.848 billion | $24.566 billion at Dec. 31, 2017 |
Revenue increased about 8.5%, while Loews-attributable net income was nearly flat. Lower investment income and weaker results at Diamond Offshore and Boardwalk Pipeline were largely offset by higher CNA and Loews Hotels earnings. Earnings per share benefited from share repurchases. Income-tax expense fell to $25 million from $119 million, reflecting the lower corporate tax rate and other tax items.
Operating cash flow improved substantially year over year. Investing activities provided $56 million, while financing activities used $591 million, including $497 million for treasury-share purchases. Loews reported parent-company cash and investments, net of receivables and payables, of $4.9 billion at both quarter-end and year-end. It received $571 million in subsidiary dividends, including a $485 million special dividend from CNA. Loews repurchased 9.9 million shares for $497 million during the quarter and another 3.1 million shares for $155 million through April 20. Quarterly dividends were $0.0625 per share.
Segments and material changes
- CNA: Loews-attributable earnings rose to $261 million from $234 million. Property and casualty premiums grew; the combined ratio improved to 93.1% from 97.2%. Property and casualty core income was $327 million versus $268 million, though the comparison benefited from tax-rate changes; excluding that tax effect, core income increased about $4 million. Investment income declined, mainly because limited-partnership returns were lower. CNA recorded $39 million of favorable prior-year reserve development in property and casualty operations.
- Diamond Offshore: Loews-attributable earnings were $10 million versus $12 million. Contract-drilling revenue declined $76 million, mainly due to 226 fewer revenue-earning days and lower average daily revenue. The offshore market remained oversupplied; backlog was $2.2 billion as of April 1, down from $2.4 billion on January 1.
- Boardwalk Pipeline: Loews-attributable earnings were $36 million versus $37 million. Revenue fell $31 million, including lower transportation revenue following a customer contract restructuring and weaker storage and parking activity. About 88% of trailing-12-month revenue, excluding retained fuel, came from fixed fees under firm agreements.
- Loews Hotels: Earnings increased to $13 million from $10 million, with improved performance at several owned hotels. Joint-venture income was lower than in a prior-year quarter that included a net benefit from property-sale and impairment items.
- Corporate: A $27 million loss compared with $2 million of income, reflecting lower investment returns and the inclusion of Consolidated Container operations and related expenses. Consolidated Container contributed $213 million of operating revenue.
Outlook, risks, contingencies and unusual items
- Management provided no consolidated earnings guidance. Diamond Offshore budgeted approximately $220 million of 2018 capital expenditures; Boardwalk Pipeline expected approximately $550 million. Boardwalk Pipeline anticipated existing resources would fund 2018 operations and capital needs.
- Boardwalk Pipeline faces uncertainty from FERC actions on tax allowances and pipeline rates following federal tax reform. The company said it did not expect a material near-term revenue effect based on its preliminary assessment, but successful rate challenges could materially reduce future revenues. Loews was evaluating whether Boardwalk Pipeline should remain a publicly traded master limited partnership and was seriously considering its contractual right to purchase its outstanding common units if specified conditions are met.
- Boardwalk Pipeline also faces contract-renewal risk: certain major expansion agreements expire during 2018–2020, and management expects revenues from affected capacity to be materially lower after expiration, although it is pursuing replacement business.
- Diamond Offshore described persistent rig oversupply, intense competition, and uncertain future utilization despite a recent increase in tenders. Backlog assumes full utilization and may not equal actual revenue; customer termination or renegotiation could reduce it.
- CNA’s asbestos and environmental pollution (A&EP) reserves had $113 million of unfavorable prior-year development before reinsurance in Q1, partly offset by a $57 million deferred retroactive-reinsurance benefit. The NICO loss portfolio transfer limits covered losses, but retroactive accounting delays recognition of the benefit. CNA’s reserve estimates remain subject to uncertainty.
- CNA recorded a $23 million increase to net income in Q1 related to updated tax guidance on Diamond Offshore’s mandatory-repatriation tax positions. Loews said its Tax Act accounting remained provisional in certain respects.
- Adoption of revenue-recognition guidance increased Q1 operating revenues and expenses by $131 million and $133 million, respectively, primarily from CNA warranty-contract presentation; it also increased reported other assets and liabilities. The filing reports a $3.1 billion deferred-revenue balance related to customer contracts at March 31.
- Unrealized investment losses drove other comprehensive loss of $407 million; Loews-attributable comprehensive loss was $70 million. Accumulated other comprehensive loss widened to $417 million. Management attributed unrealized security losses principally to interest rates, credit spreads and other factors, and stated it did not intend, and was not more likely than not required, to sell affected securities before recovery.
- CNA’s workers’ compensation premium-refund liability, including interest, was $60 million at March 31; refunds were expected in the second half of 2018. CNA also disclosed guarantees and indemnifications, including approximately $1.8 billion of potential future structured-settlement payments, which it said were not expected to be called. A proposed ERISA class settlement was being finalized for court approval; management did not expect a material impact.
Important facts for investors to verify
- Whether CNA’s favorable underwriting trends and reserve development persist, and how A&EP reserve estimates and recoveries under the NICO agreement evolve.
- FERC’s final actions and any rate challenges affecting Boardwalk Pipeline, including the implications for its MLP structure and potential call right.
- Diamond Offshore’s contract awards, utilization, realized dayrates and conversion of its stated backlog into cash revenue.
- Boardwalk Pipeline’s replacement of expiring transportation contracts and the impact of market and contract repricing.
- Loews’ subsidiary dividend capacity, parent-company liquidity, debt levels, and continued pace and cost of share repurchases.
- Final tax-reform accounting adjustments and the effects of new accounting standards and investment-market movements.