Loews Corporation — Form 10-Q summary
Reporting period: Three and six months ended June 30, 2015; filed August 4, 2015. Loews is a holding company with principal businesses in property and casualty insurance (CNA), offshore drilling (Diamond Offshore), natural gas pipelines (Boardwalk Pipeline) and hotels (Loews Hotels). Figures below are consolidated unless noted; dollar amounts are in millions except per-share data.
Financial results
| Metric | Q2 2015 | Q2 2014 | H1 2015 | H1 2014 |
|---|
| Total revenue | $3,435 | $3,593 | $6,913 | $7,281 |
| Income before income tax | $295 | $546 | $400 | $1,060 |
| Income from continuing operations attributable to Loews | $170 | $303 | $279 | $568 |
| Net income attributable to Loews | $170 | $116 | $279 | $175 |
| Net income per share | $0.46 | $0.30 | $0.75 | $0.45 |
| Dividends per share | $0.0625 | $0.0625 | $0.125 | $0.125 |
- Revenue declined about 4% year over year in Q2 and 5% in H1. Insurance premiums, net investment income and drilling revenue were lower.
- Loews-attributable continuing income fell 44% in Q2 and 51% in H1. The comparison in total net income is affected by 2014 discontinued-operation losses: $187 million in Q2 and $393 million in H1.
- Q2 results included an $84 million pretax CNA charge tied to its asbestos and environmental pollution loss portfolio transfer ($49 million after tax and noncontrolling interests). H1 Diamond Offshore results included a $359 million pretax rig impairment charge ($158 million after tax and noncontrolling interests).
Cash flow, balance sheet and liquidity
| Metric | June 30, 2015 | December 31, 2014 |
|---|
| Total assets | $78,015 | $78,367 |
| Total liabilities | $53,683 | $53,717 |
| Total equity | $24,332 | $24,650 |
| Cash | $249 | $364 |
| Total investments | $51,048 | $52,032 |
| Short-term debt | $1,061 | $335 |
| Long-term debt | $9,791 | $10,333 |
- For H1 2015, operating cash flow was $1,087 million, investing cash flow was $(1,034) million and financing cash flow was $(166) million, compared with $1,192 million, $(1,159) million and $(41) million, respectively, in H1 2014.
- Capital expenditures were $1,227 million, principally reflecting investment by the energy businesses. Cash declined $115 million during the half year to $249 million.
- Loews reported parent-company cash and investments, net of receivables and payables, of $5.1 billion. The company depends substantially on subsidiary distributions; subsidiary dividends are subject to regulatory, covenant and other restrictions.
- Book value per share was $51.91 at June 30, versus $51.70 at year-end 2014. Book value excluding accumulated other comprehensive income was $51.77 versus $50.95.
Material changes and business performance
- CNA: H1 net operating income for property and casualty operations rose to $450 million from $409 million, with the combined ratio improving to 98.6% from 101.4%. Commercial underwriting improved, while lower investment income and weaker results in Other Non-Core weighed on overall results. CNA recorded favorable net prior-year development of $18 million in H1, versus unfavorable development of $16 million a year earlier.
- Diamond Offshore: H1 Loews-attributable results were a loss of $81 million, versus income of $111 million. Drilling revenue declined to $1,217 million from $1,335 million; lower rig utilization and the impairment charge were key factors. Backlog was $5.934 billion at July 1, down from $6.840 billion in February. Fourteen rigs lacked customer contracts as of July 20.
- Boardwalk Pipeline: H1 Loews-attributable income was $37 million versus a $1 million loss, largely because 2014 included a $55 million after-tax charge for the terminated Bluegrass project. Lower storage and parking/lending revenue remained a headwind.
- Loews Hotels: H1 income increased to $13 million from $8 million, supported by hotel acquisitions and stronger joint-venture property earnings. Loews Hotels acquired two hotels during the first half.
- Loews repurchased 7.6 million shares for $305 million in H1 and purchased 0.9 million Diamond Offshore shares for $24 million. Boardwalk Pipeline issued units, reducing Loews’ ownership interest from 53% to 51%; Loews’ Diamond Offshore ownership rose from 52% to 53%.
Outlook, risks and contingencies
- The filing provides no consolidated earnings or revenue guidance. Management described conservative financial strategies while pursuing responsible growth.
- Management expected depressed offshore drilling conditions to continue for the foreseeable future. Lower oil prices, reduced customer capital spending, rig oversupply, falling dayrates, contract cancellations and possible further rig impairments pose material risks. Loews also warned that Diamond Offshore goodwill could require impairment if market deterioration continued after quarter-end.
- Boardwalk faces lower transportation rates on contract renewals and weak storage/PAL economics from narrow price spreads. It had about $1.6 billion of growth projects underway; projects carry execution, regulatory, cost-overrun and timing risks. The outcome of its Gulf South FERC rate case remained uncertain.
- Diamond Offshore’s Ocean GreatWhite construction project was estimated to cost $764 million, with $440 million payable on delivery expected in Q2 2016. A disputed Brazilian withholding-tax reimbursement matter involving Petrobras had no estimable loss range; an adverse outcome could materially affect results and cash flows.
- CNA’s legacy asbestos and environmental pollution reserves and reinsurance recoveries remain uncertain. The filing reports $255 million of unrecognized deferred retroactive reinsurance benefit at June 30 and a $3.1 billion collateral trust supporting NICO’s obligations.
- CNA disclosed guarantees of approximately $2.0 billion relating to structured settlement annuities, which it does not believe are likely to require payment, and quantifiable guarantees and indemnifications of $375 million and $260 million, respectively. Some other indemnifications have no contractual monetary limit.
- Management said ordinary-course litigation was not expected to materially affect results or equity. Disclosure controls were deemed effective, with no material change in internal control over financial reporting. No material changes to market-risk components were reported.
Most important facts for investors to verify
- Whether Diamond Offshore’s rig utilization, backlog, customer contracts and impairment exposure worsen as offshore market conditions evolve.
- How CNA’s asbestos/environmental reserves, reinsurance recoveries and remaining exposure develop, and whether the deferred reinsurance benefit is recognized over time as expected.
- Whether CNA’s commercial underwriting improvement persists despite premium declines and weaker investment returns.
- Boardwalk’s rate-case resolution, contract-renewal economics, storage/PAL revenues, and funding and returns on its growth projects.
- Loews’ parent-company liquidity and ability to receive subsidiary distributions while funding buybacks, dividends, acquisitions and subsidiary capital needs.
- The status and potential financial impact of the Petrobras tax dispute, Diamond Offshore rig construction commitments, and other disclosed guarantees and indemnities.
