Loews Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Loews is a holding company with insurance, offshore drilling, natural gas pipeline, hotel and corporate operations. Consolidated Container Company (CCC), acquired May 22, is included in Corporate from that date. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $3,359 | $3,307 | $6,659 | $6,480 |
| Income (loss) before tax | $347 | ($276) | $857 | ($81) |
| Net income (loss) attributable to Loews | $231 | ($65) | $526 | $37 |
| Basic and diluted earnings (loss) per share | $0.69 | ($0.19) | $1.56 | $0.11 |
| Operating cash flow | Not presented for quarter | $1,231 | $771 |
- Revenue increased 2% in Q2 and 3% in the first half. First-half net income attributable to Loews improved substantially from 2016, when Diamond Offshore recorded large impairment charges.
- Insurance: CNA’s property-and-casualty combined ratio was 93.5% in Q2 versus 97.4% a year earlier, and 95.3% for the first half versus 96.8%. Favorable prior-year reserve development was $63 million in Q2 and $95 million for the first half.
- Cash and investments totaled $51.6 billion at June 30, 2017; cash was $357 million. Total assets were $79.1 billion and total equity was $24.1 billion. Short- and long-term debt totaled $11.3 billion, up from $10.8 billion at December 31, 2016.
- Parent-company cash and investments, net of receivables and payables, were $5.0 billion, unchanged from year-end. Loews received $633 million in subsidiary dividends, including a $485 million special dividend from CNA. Consolidated cash increased $30 million during the first half.
- Loews paid $42 million in shareholder dividends in the first half; the declared dividend was $0.0625 per share for Q2, unchanged year over year.
Material changes and unusual items
- Loews completed the CCC acquisition for approximately $1.2 billion, subject to closing adjustments. CCC contributed $91 million of revenue after acquisition; net income was not significant after purchase-accounting charges and acquisition costs. The preliminary purchase-price allocation included $299 million of goodwill and $500 million of customer relationships and trade name intangible assets.
- Diamond Offshore recorded a $72 million pretax impairment charge in Q2 2017, compared with $680 million in Q2 2016. Loews-attributable after-tax and noncontrolling-interest-adjusted impairment charges were $23 million and $267 million, respectively.
- Boardwalk Pipeline recorded a $47 million loss on the sale of a processing plant and related assets for approximately $65 million. Loews Hotels’ first-half results included a $25 million gain on sale of an interest in the Loews Don CeSar Hotel joint venture, partly offset by a $15 million joint-venture impairment.
- CNA estimated $96 million of refunds for rating errors affecting certain Small Business policies; the liability may increase until rating-system changes are fully implemented. Required changes were completed for multi-peril policies in Q2 and were expected by the end of Q3 for workers’ compensation.
- CNA’s first-half results included $60 million of adverse A&EP reserve development before reinsurance; retroactive reinsurance accounting reduced the reported impact. The associated deferred reinsurance benefit was $351 million at June 30.
Outlook, risks and management commentary
- No consolidated earnings guidance was provided. Management said results for the quarter and first half are not necessarily indicative of full-year results.
- Diamond Offshore described persistently weak offshore-drilling conditions, excess rig supply, volatile oil prices and continued pressure on industry spending. Its backlog was $2.9 billion at July 1, 2017, down from $3.6 billion at January 1. It budgeted approximately $145 million in 2017 capital expenditures. Management warned further deterioration or a delayed recovery could require additional impairments.
- Boardwalk Pipeline had $1.1 billion of growth projects under development, expected to enter service during 2017–2019; $425 million had been invested by June 30. It expected 2017 capital expenditures of approximately $790 million and said available resources were expected to fund 2017 operations.
- CCC’s $605 million variable-rate term loan matures in 2024; swaps hedge $500 million and effectively fix that portion at approximately 5.6%. CCC had no borrowings under its $125 million asset-based facility at quarter-end. The filing identifies debt service, covenant, raw-material-price, supply, customer-concentration and customer self-manufacturing risks.
- Loews’ unsecured debt ratings were A3 stable at Moody’s, A at S&P (lowered from A+ in June, stable outlook), and A at Fitch (negative outlook). Management cautioned that downgrades could raise borrowing costs or restrict access to capital.
- Other risks include insurance reserve-estimation uncertainty and catastrophe exposure; a CNA 401(k) fiduciary lawsuit with loss described as reasonably possible but not expected to materially affect the financial statements; and potential delays or disputes in subsidiary projects and contracts. Diamond Offshore’s Ocean Valor contract remains subject to ongoing Petrobras litigation.
Important facts for investors to verify
- Whether CNA can sustain underwriting performance and favorable reserve development, and how the $96 million Small Business refund estimate evolves.
- Diamond Offshore’s utilization, dayrates, backlog conversion, liquidity and potential for further asset impairments.
- CCC’s post-acquisition cash generation, debt-service capacity, covenant headroom and ability to pass through resin-cost changes.
- Boardwalk Pipeline project spending, completion schedules and expected returns, alongside the company’s capital and dividend needs.
- How much of the reported earnings improvement reflects recurring operations versus investment gains, prior-year reserve effects, impairments and other one-time items.