Loews Corporation — 2017 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2017, filed February 15, 2018. Loews is a holding company with controlling interests in CNA Financial (insurance), Diamond Offshore (offshore drilling), Boardwalk Pipeline (natural gas and NGL transportation and storage), Loews Hotels, and, from May 22, 2017, Consolidated Container (rigid plastic packaging). CNA generated 69.8% of consolidated revenue.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $13.735 billion | $13.105 billion |
| Income before income tax | $1.582 billion | $936 million |
| Net income | $1.412 billion | $716 million |
| Net income attributable to Loews | $1.164 billion; $3.45 diluted EPS | $654 million; $1.93 diluted EPS |
| Cash from operating activities | $2.590 billion | $2.253 billion |
| Total assets | $79.586 billion | $76.594 billion |
| Debt | $11.533 billion | $10.778 billion |
| Shareholders’ equity | $19.204 billion | $18.163 billion |
Consolidated cash was $472 million and investments totaled $52.226 billion at year-end. Parent Company cash and investments, net of receivables and payables, were $4.9 billion, versus $5.0 billion a year earlier. Loews received $804 million in subsidiary dividends, including a $485 million special dividend from CNA. It paid $84 million in common dividends ($0.25 per share for the year) and spent $216 million on share repurchases. Investing cash flow was negative $2.655 billion; financing cash flow was positive $201 million. The filing reports no off-balance-sheet arrangements.
2017 net income included a $200 million, or $0.59 per share, net benefit from the Tax Act. Excluding that item, management reported net income of $964 million, up from $654 million in 2016. The 2017 consolidated effective tax expense was $170 million; the Tax Act amounts were provisional and subject to adjustment during 2018.
Material changes versus 2016
- Revenue rose about 5%, while net income attributable to Loews rose to $1.164 billion from $654 million. Beyond the Tax Act benefit, management cited higher earnings at CNA, Loews Hotels and Diamond Offshore.
- Segment net income attributable to Loews: CNA $801 million versus $774 million; Diamond Offshore loss of $27 million versus $186 million; Boardwalk Pipeline $380 million versus $89 million; Loews Hotels $64 million versus $12 million; Corporate loss of $54 million versus $35 million. Boardwalk’s result included a $294 million one-time tax benefit at the holding-company level.
- Diamond Offshore’s contract drilling revenue fell to $1.451 billion from $1.525 billion, despite a lower impairment charge: $100 million versus $680 million. Its backlog declined to $2.4 billion from $3.6 billion at January 1, 2017.
- Boardwalk operating revenue increased modestly, but contracted transportation revenue is expected to decline: $970 million for 2018 and $950 million for 2019, compared with $1.070 billion recognized in 2017. Expiring expansion contracts and a customer contract restructuring are key factors.
- CNA’s property and casualty combined ratio increased to 97.1% from 95.9%. Net catastrophe losses were $380 million in 2017, including $256 million from Hurricanes Harvey, Irma and Maria. Favorable prior-year reserve development was $302 million, down from $316 million.
Outlook, risks and unusual items
- Acquisition: Loews acquired Consolidated Container for approximately $1.2 billion, funded with about $620 million of Parent Company cash and $600 million of subsidiary debt financing. The acquired business contributed $498 million of revenue after acquisition; net income was not significant. Purchase-price allocation remained preliminary.
- Business outlook: No consolidated earnings guidance is provided. Management expected depressed offshore drilling conditions to continue in the near term. Diamond Offshore budgeted approximately $220 million of 2018 capital expenditures. Boardwalk expected approximately $550 million of 2018 capital expenditures and said existing resources were expected to fund operations; it also estimated $320 million of 2018 pipeline maintenance spending. Boardwalk’s expected contracted transportation revenues and project timing remain exposed to market and execution conditions.
- Insurance and reserves: CNA’s reserves rely on estimates with significant uncertainty, particularly for long-tail claims, long-term care, and asbestos and environmental claims. CNA’s 2017 long-term-care reserve margin was approximately $246 million; the filing gives materially adverse sensitivities to morbidity, interest rates and other assumptions. The A&EP loss portfolio transfer to NICO had a $4.0 billion limit, with $2.9 billion cumulatively ceded at year-end.
- Industry, customer and funding risks: Diamond Offshore faces rig oversupply, low utilization and dayrates, customer concentration and potential contract cancellations; its credit ratings were downgraded below investment grade in 2017. Boardwalk faces contract expirations, lower transportation rates, producer credit risk and refinancing needs. Loews Hotels faces cyclical demand, competition, development costs and Florida concentration. Consolidated Container faces resin-price volatility, customer self-manufacturing and significant debt.
- Other notable matters: CNA recorded $36 million of adverse premium development and $7 million of interest expense for Small Business rating errors; $60 million was accrued for workers’ compensation policyholder refunds expected in 2018. Diamond Offshore and CNA incurred losses on early debt redemptions. Deloitte issued unqualified opinions on the consolidated financial statements and internal control; management also assessed controls as effective.
Important facts for investors to verify
- How much of 2017 earnings growth is repeatable after excluding the $200 million Tax Act benefit and other one-time items?
- Whether CNA’s favorable reserve development, long-term-care assumptions and catastrophe experience remain supportive of future underwriting results.
- Whether Diamond Offshore can renew or replace contracts and sustain liquidity as backlog runs off, given rig-market weakness and below-investment-grade ratings.
- How Boardwalk replaces expiring transportation contracts, meets its capital plan and refinances upcoming debt while preserving cash flow.
- Consolidated Container’s post-acquisition profitability, leverage, interest costs and ability to pass through raw-material price changes.
- Parent Company liquidity and future subsidiary dividend capacity, including regulatory limits on insurance-company distributions.