Loews Corporation — FY 2018 Form 10-K Summary
Business context and reporting period
Loews is a diversified holding company reporting for the fiscal year ended December 31, 2018. Its principal businesses are CNA Financial (commercial property and casualty insurance), Diamond Offshore (offshore drilling), Boardwalk Pipeline (natural gas and NGL transportation and storage), Loews Hotels, and Consolidated Container (rigid plastic packaging). CNA generated 72.0% of consolidated revenue. Consolidated Container, acquired in May 2017, is included in the Corporate segment.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $14.066 billion | $13.735 billion |
| Income before tax | $834 million | $1.582 billion |
| Net income attributable to Loews | $636 million | $1.164 billion |
| Diluted earnings per share | $1.99 | $3.45 |
| Operating cash flow | $4.222 billion | $2.590 billion |
| Investing cash flow | $(1.444) billion | $(2.655) billion |
| Financing cash flow | $(2.835) billion | $201 million |
| Total assets | $78.316 billion | $79.586 billion |
| Debt | $11.376 billion | $11.533 billion |
| Shareholders’ equity | $18.518 billion | $19.204 billion |
Cash ended the year at $405 million, down from $472 million. Parent Company cash and investments, net of receivables and payables, were $3.1 billion, compared with $4.9 billion a year earlier. Total investments were $48.186 billion, down from $52.226 billion. The annual dividend remained $0.25 per share. Loews repurchased 20.3 million shares for approximately $1.0 billion.
Consolidated net income margin was approximately 5.0% in 2018 versus 10.3% in 2017, based on net income attributable to Loews and revenue. CNA Property & Casualty Operations reported a 96.7% combined ratio, compared with 97.1% in 2017.
Material changes and segment results
- Net income attributable to Loews fell $528 million year over year. The comparison was substantially affected by a $200 million net Tax Act benefit recognized in 2017. Excluding that benefit, Loews cited lower results at CNA and Diamond Offshore, partly offset by higher results at Boardwalk Pipeline and Loews Hotels.
- CNA net income attributable to Loews was $726 million, down from $801 million. Property & Casualty core income was $967 million versus $959 million; lower investment income and less favorable prior-year reserve development were offsets to lower catastrophe losses. Net catastrophe losses were $252 million, compared with $380 million.
- Diamond Offshore recorded a $112 million attributable loss versus a $27 million loss. Contract drilling revenue declined $391 million, principally from 955 fewer revenue-earning days and lower average daily revenue. Backlog was $2.0 billion at January 1, 2019, versus $2.4 billion a year earlier. The company recorded a $27 million asset impairment in 2018.
- Boardwalk Pipeline attributable income was $135 million versus $380 million. The 2017 result included a $294 million tax benefit. Loews completed its purchase of the remaining common units for approximately $1.5 billion in July 2018, bringing ownership to 100%. Boardwalk revenue declined $98 million, reflecting contract expirations and renewals at lower rates and weaker storage/PAL conditions, partly offset by growth projects and higher utilization.
- Loews Hotels attributable income was $48 million versus $64 million; 2018 included a $23 million gain on sale of the Annapolis hotel and $22 million of impairments at owned hotels. Consolidated Container revenue was $867 million in 2018, compared with $498 million for its partial-year contribution in 2017; revenue and expenses reflect a full year of operations in 2018.
Fourth-quarter 2018 revenue was $3.287 billion and net loss was $165 million, or $0.53 per share. The filing attributes the quarter’s loss in part to investment losses, catastrophe losses and net investment losses.
Outlook, risks, contingencies and unusual items
- Management expects Boardwalk to spend approximately $450 million on capital expenditures in 2019, including $150 million maintenance capital and $300 million growth capital. Its projects under construction are expected to require approximately $480 million through 2022; management stated existing resources and operating cash flow should fund 2019 needs.
- Boardwalk expects approximately $365 million of pipeline-system maintenance spending in 2019. It warns that a higher-than-normal volume of expansion-contract expirations through 2020 could reduce transportation revenue if contracts renew at current market rates. FERC rate challenges and pipeline-safety rules are additional uncertainties.
- Diamond Offshore expects 2019 capital expenditures of approximately $340–$360 million, including reactivation and upgrades of the Ocean Onyx and Ocean Endeavor. Management described offshore drilling as challenging: rig supply remains excessive and dayrates low, despite increased tendering and activity. Diamond had $2.0 billion of senior notes and below-investment-grade ratings with negative outlooks; it reported no revolver borrowings at February 8, 2019 and $1.3 billion of available capacity.
- Loews Hotels expected several projects to open in 2019–2020. Risks include lodging cyclicality, competition, development cost and timing, labor costs and geographic concentration; seven hotels, representing about 55% of system rooms, were in Florida.
- CNA’s key exposures include reserve uncertainty, long-term-care assumptions, catastrophe and systemic losses, A&EP claims, investment volatility, reinsurance collectibility and regulatory limits on subsidiary dividends. Its long-term-care gross premium valuation showed an estimated reserve margin of $182 million at September 30, 2018; sensitivity scenarios indicate materially adverse changes in assumptions could affect earnings.
- For the A&EP loss portfolio transfer, cumulative amounts ceded to NICO were $3.1 billion at year-end 2018, against a $4.0 billion aggregate limit. The deferred retroactive reinsurance benefit was $374 million. Performance and recoverability remain relevant risks, although the filing reports collateral and a Berkshire Hathaway guarantee.
- 2018 investment results were pressured by a loss in limited partnership and common stock returns; net investment income before tax and noncontrolling interests decreased $217 million. Other comprehensive loss was $892 million, primarily reflecting unrealized investment losses.
- Accounting changes affected comparability: adoption of revenue guidance increased 2018 warranty revenue and expense by $587 million and $595 million, respectively, and equity-security accounting changes resulted in approximately $96 million of pretax losses. The filing reports no off-balance-sheet arrangements. A new class-action complaint concerning the Boardwalk unit purchase was filed in February 2019; the company was evaluating its response.
Important facts for investors to verify
- Separate the 2017 Tax Act benefit and accounting changes from recurring performance; confirm the effect of the warranty revenue gross-up on comparisons.
- Track CNA reserve development, long-term-care assumptions and the remaining A&EP reinsurance limit, collateral and recoverables.
- Test Diamond Offshore’s backlog realization, contract renewals, utilization, dayrates, capital needs, debt covenants and ratings against market conditions.
- Assess Boardwalk’s contract-renewal exposure, rate-case risk, project spending and customer commitments, as well as available liquidity.
- Reconcile the Parent Company’s liquidity and subsidiary dividend capacity with share repurchases, the Boardwalk buyout and future obligations.
- Review debt and contractual obligations in context: reported debt was $11.376 billion, while contractual debt payments including estimated future interest were $16.183 billion.