Business context and reporting period
Loews Corporation is a holding company with major businesses in commercial insurance (CNA, 90% owned), offshore drilling (Diamond Offshore, 53%), natural-gas and liquids pipelines (Boardwalk Pipeline, 51%), and hotels (wholly owned). This 10-K covers the fiscal year ended December 31, 2015; it is not a standalone fourth-quarter filing. CNA generated 67.8% of consolidated revenue.
Financial performance and position
- Revenue and earnings: Revenue was $13.415 billion, down 6% from $14.325 billion. Income from continuing operations attributable to Loews was $260 million, or $0.72 per diluted share, versus $962 million, or $2.52, in 2014. Consolidated net income was $287 million. Fourth-quarter results included a $201 million net loss and $0.58 loss per share.
- Cash flow: Net cash provided by operating activities was $3.547 billion; investing activities used $1.935 billion and financing activities used $1.525 billion. Capital expenditures were $1.718 billion. Parent-company cash and investments, net of receivables and payables, were $4.3 billion at year-end.
- Balance sheet and liquidity: Total assets were $76.029 billion, investments $49.400 billion, debt $10.583 billion, and Loews shareholders’ equity $17.561 billion. The company reported $440 million of cash. Debt figures are carrying values; contractual debt payments including estimated interest totaled $15.208 billion. Parent liquidity depends substantially on subsidiary distributions, which may be restricted.
- Margins and segment measures: CNA property-and-casualty combined ratio was 95.4% (2014: 97.7%); Commercial was 101.5%, Specialty 88.7%, and International 97.6%. Diamond Offshore reported a $402 million pretax loss; Boardwalk Pipeline reported $227 million pretax income; Loews Hotels reported $28 million pretax income. These segment figures are not directly comparable margins.
- Shareholder returns: Loews paid $0.25 per share in dividends and repurchased 33.3 million shares for approximately $1.3 billion. Shares outstanding fell to about 339.9 million from 372.9 million.
Material changes versus prior year
- Continuing-operations income fell by $702 million, primarily from CNA’s long-term-care reserve charge, Diamond Offshore impairments and weaker parent investment income.
- CNA recorded a $296 million pretax long-term-care premium deficiency and a $9 million claim-reserve deficiency; their combined effect on Loews earnings was $177 million after tax and noncontrolling interests. The long-term-care active-life reserves now use management’s best estimates with no margin for adverse deviation.
- Diamond Offshore recorded $861 million of pretax rig impairments, including $499 million in the fourth quarter, and a $20 million goodwill impairment. Contract drilling revenue fell to $2.360 billion from $2.737 billion; utilization weakened sharply across mid-water and jack-up fleets.
- Boardwalk Pipeline’s net income attributable to Loews rose to $74 million from $18 million, largely because 2014 included a $55 million after-tax charge related to the terminated Bluegrass project. Loews Hotels revenue grew with acquisitions, while earnings increased only slightly.
- Book value per share was $51.67, compared with $51.70; excluding accumulated other comprehensive income, it was $52.72, up from $50.95. Other comprehensive loss attributable to Loews was $378 million.
Outlook, commentary, risks and unusual items
- Diamond Offshore: Management described the offshore drilling market as depressed and expected adverse conditions to continue for the foreseeable future. Low oil prices, oversupply, falling dayrates, contract cancellations or renegotiations, idle rigs and further impairments are material risks. Backlog was $5.195 billion as of February 16, 2016, down from $6.840 billion a year earlier; only 45% of floater rig days were committed for 2016. The regular quarterly dividend was discontinued in February 2016.
- CNA: Reserve adequacy remains sensitive to claims severity, medical-cost inflation, long-term-care morbidity and persistency, interest rates, and approval and timing of premium increases. The $4.0 billion A&EP loss-portfolio-transfer limit and reinsurer performance are important contingencies. CNA’s 2015 favorable P&C prior-year development was $218 million pretax; the filing cautions that reserve estimates may change materially.
- Boardwalk Pipeline: Management cited pressure on transportation and storage pricing from narrower basis and seasonal spreads, contract renewals, producer-customer credit risk, and regulation. It planned approximately $850 million of 2016 capital expenditures and described multiple growth projects, several subject to regulatory approval. One foundation shipper failed to provide required credit support for the Northern Supply Access project. Gulf South’s rate settlement was expected to produce approximately $30 million of net revenue in 2016.
- Hotels and parent: Loews Hotels planned about $75 million of 2016 capital improvements, with temporary adverse effects on revenue and earnings. Loews stated it would continue conservative financial strategies while pursuing growth opportunities; no consolidated earnings guidance was provided.
- Other exposures and items: Risks include insurance reserve and investment volatility, energy prices, project execution, environmental and pipeline-safety rules, cyber and operational disruptions, foreign operations, and subsidiary dividend restrictions. The filing reports no material legal proceeding under Item 3; ordinary-course litigation was not expected by management to materially affect results or equity. An accounting estimate change for callable fixed-income securities reduced 2015 net investment income by $39 million and EPS by $0.06. Auditors issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether CNA’s long-term-care morbidity, persistency, discount-rate and premium-increase assumptions remain supportable, and whether further reserve strengthening is required.
- Diamond Offshore’s current contract status, backlog realization, liquidity and debt access, and potential for further rig impairments or contract renegotiations.
- Boardwalk Pipeline’s customer credit exposure, refinancing and distribution capacity, project commitments and approvals, and renewal pricing—particularly ahead of sizable 2018–2019 contract expirations.
- Parent-company liquidity and the availability of subsidiary dividends to fund debt service, buybacks and the regular dividend.
- Reinsurance collectibility and the remaining A&EP protection within the $4.0 billion limit; also reconcile the filing’s consolidated debt carrying value with contractual payments that include estimated interest.