Loews Corporation — Q2 2018 Form 10-Q
Business context and reporting period
Loews is a holding company with businesses in property and casualty insurance (CNA), offshore drilling (Diamond Offshore), natural gas transportation and storage (Boardwalk Pipeline), hotels, and rigid plastic packaging (Consolidated Container, reported within Corporate). This filing covers the quarter and six months ended June 30, 2018; dollar amounts are in millions unless noted.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenues | $3,590 | $3,359 | $7,171 | $6,659 |
| Income before tax | $307 | $347 | $712 | $857 |
| Net income attributable to Loews | $230 | $231 | $523 | $526 |
| Diluted earnings per share | $0.72 | $0.69 | $1.61 | $1.56 |
| Operating cash flow | Not separately provided | Not separately provided | $2,151 | $1,231 |
- Revenue rose about 7% in Q2 and 8% in the first half. The company reported that adoption of new revenue rules added $143 million and $274 million, respectively, to operating revenues and other, with substantially corresponding expense increases; prior-year amounts were not restated.
- Net income attributable to Loews was nearly unchanged in Q2 and slightly lower year over year for the first half. EPS increased, reflecting share repurchases and lower weighted-average shares.
- Q2 consolidated pretax margin was approximately 8.6%, versus 10.3% a year earlier; first-half margin was approximately 9.9%, versus 12.9%. CNA’s P&C combined ratio was 93.8% in Q2 (93.5% in 2017) and 93.5% for the first half (95.3% in 2017).
- At June 30, total assets were $80.7 billion, total liabilities $58.9 billion, and total equity $21.9 billion. Cash was $453 million; investments totaled $50.5 billion. Balance-sheet short- and long-term debt totaled $11.5 billion.
- Six-month investing cash outflow was $1.24 billion and financing cash outflow $928 million. Loews repurchased 15.6 million shares for $788 million during the first half; total treasury-stock purchases in the cash flow statement were $799 million.
Changes versus prior period and segment results
- CNA’s Loews-attributable earnings were $240 million in Q2, down from $244 million; first-half earnings were $501 million, up from $478 million. Premiums increased, while investment results varied: Q2 investment gains turned to a small loss, and first-half gains fell to $6 million from $77 million. First-half P&C underwriting improved overall, including favorable prior-year reserve development of $98 million versus $112 million.
- Diamond Offshore reported a Loews-attributable Q2 loss of $37 million versus income of $7 million; first-half loss was $27 million versus income of $19 million. Lower revenue-earning days and lower average dayrates reduced drilling revenue. Asset impairment expense was $27 million in both Q2 and first-half 2018, versus $72 million in the comparable 2017 periods.
- Boardwalk Pipeline earnings attributable to Loews rose to $16 million in Q2 from $6 million and to $52 million for the first half from $43 million. Revenue declined, but lower expenses—including the absence of a $47 million 2017 plant-sale loss—supported results.
- Loews Hotels earnings increased to $17 million in Q2 from $10 million and to $30 million for the first half from $20 million, reflecting improved performance at several hotels. Corporate’s Q2 loss narrowed to $6 million from $36 million, partly on stronger investment results and the timing of Consolidated Container operations.
- Other comprehensive loss attributable to Loews was $19 million for the first half, compared with comprehensive income of $713 million in 2017, mainly reflecting investment fair-value losses and foreign-currency translation.
Outlook, risks, contingencies, and unusual items
- No consolidated earnings or revenue guidance was provided. Diamond Offshore described continued industry rig oversupply and intense competition, while noting increased tenders for work commencing in 2019 and later. Its drilling backlog was $2.2 billion at July 1, 2018, down from $2.4 billion at January 1.
- On July 18, 2018, Loews completed its purchase of remaining Boardwalk Pipeline common units for approximately $1.5 billion, funded with available cash. After the purchase and subsequent share repurchases, parent-company cash and investments, net of receivables and payables, were approximately $3.1 billion, versus $4.7 billion at June 30 before those transactions.
- Boardwalk faces potential challenges to regulated pipeline rates following FERC actions on income-tax allowances and tax reform. A successful rate challenge could materially reduce affected pipeline revenues. Boardwalk reported approximately 88% of trailing-twelve-month revenue, excluding retained fuel, came from fixed fees under firm agreements.
- CNA’s insurance reserves require estimates and may develop adversely. The filing reports $113 million of first-half 2018 A&EP adverse development before the NICO loss-portfolio-transfer effects; reserve and retroactive-reinsurance accounting affected reported results. Catastrophe losses were $60 million for the first half, versus $73 million in 2017.
- Other items include a $23 million first-quarter increase to net income from updated tax guidance; a $47 million estimated workers’ compensation premium-refund liability at CNA; and $1.8 billion of potential future structured-settlement guarantee payments, which CNA said it did not expect to make. Management did not expect pending litigation to materially affect results or equity.
- Loews identified no updated or additional risk factors in this quarter’s filing and reported no material changes in market-risk components. Management concluded disclosure controls were effective at June 30, 2018.
Important facts for investors to verify
- How much of reported revenue growth reflects the accounting gross-up for CNA warranty contracts, and how comparable are year-over-year figures?
- Whether CNA reserve development, catastrophe experience, and A&EP recoveries remain consistent with estimates, and how underlying underwriting trends compare with reported results.
- Diamond Offshore’s contract utilization, dayrates, backlog conversion, and exposure to rig oversupply and contract rollovers.
- The post-acquisition effect of the Boardwalk purchase on Loews liquidity, debt, and capital allocation, along with any eventual FERC rate changes.
- The assumptions and remaining measurement-period adjustments for Tax Act accounting, and the effect of share repurchases on per-share earnings and available liquidity.