Loews Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Loews is a holding company with businesses in insurance, offshore drilling, natural gas transportation and storage, hotels, and rigid plastic packaging. Unless stated otherwise, amounts are in millions of dollars.
Financial performance and position
- Third quarter: Revenue was $3,608, up from $3,521; net income attributable to Loews was $278, versus $157; diluted EPS was $0.88, versus $0.46.
- Nine months: Revenue was $10,779, versus $10,180; net income attributable to Loews was $801, versus $683; diluted EPS was $2.49, versus $2.02. Quarterly and year-to-date results are not necessarily indicative of full-year results.
- Revenue mix, nine months: Insurance premiums were $5,453 (up from $5,185); net investment income was $1,551 (down from $1,639); investment gains were $21 (down from $93); operating revenues and other were $3,754 (up from $3,263).
- Cash flow, nine months: Operating cash flow was $3,395, compared with $1,810; investing cash outflow was $717, compared with $2,087; financing cash outflow was $2,575, compared with $357 inflow. Cash increased $99 to $571. The operating cash flow comparison included a $1,499 favorable change in trading securities, versus a $62 use of cash in 2017.
- Balance sheet at September 30: Total assets were $78,725, versus $79,586 at year-end 2017; total liabilities were $56,839, versus $55,020; total equity was $21,886, versus $24,566. Cash was $571 and short-term investments were $3,794. Short-term and long-term debt totaled $11,460, compared with $11,533 at year-end.
- Parent liquidity and capital returns: Parent cash and investments, net of receivables and payables, were $3.2 billion, down from $4.9 billion at year-end. Loews paid $60 in shareholder dividends and repurchased 17.4 million shares for $876 during the nine months. The quarterly dividend remained $0.0625 per share.
- Insurance underwriting: CNA’s property and casualty combined ratio improved to 94.2% for the quarter from 103.7%, and to 93.7% year to date from 98.2%. Below 100% indicates underwriting profit under the stated ratio measure.
Material changes versus the prior comparable periods
- Loews attributed higher consolidated earnings chiefly to stronger CNA results, lower catastrophe losses, the lower U.S. corporate tax rate, and increased Loews ownership of Boardwalk Pipeline. Weaker Diamond Offshore results and lower parent investment income partly offset the gains.
- CNA’s net catastrophe losses fell to $46 in the quarter from $269 and to $106 year to date from $342. Favorable prior-year reserve development also declined: $62 versus $115 for the quarter and $160 versus $227 year to date.
- CNA’s net investment income declined, principally due to lower limited partnership and common-stock returns. Nine-month realized investment gains also fell to $21 from $93.
- Diamond Offshore reported a $27 attributable loss for the quarter, versus $6 income, and a $54 loss year to date, versus $25 income. Lower drilling revenue reflected fewer revenue-earning days and lower average daily revenue; the nine-month period had 701 fewer revenue-earning days.
- Boardwalk Pipeline’s attributable income rose to $28 for the quarter and $80 year to date, from $17 and $60, respectively. Loews completed its purchase of the remaining units in July for approximately $1.5 billion, making Boardwalk wholly owned; increased ownership and lower taxes supported attributable earnings, although pretax earnings declined.
- Loews Hotels’ attributable income increased to $11 for the quarter and $41 year to date, from $4 and $24. Results included a $23 gain on the sale of the Loews Annapolis Hotel and $22 of impairments on two owned properties.
- Accumulated other comprehensive loss widened to $758 from $26 at year-end, largely reflecting a $746 nine-month decline in unrealized investment gains.
Outlook, risks, contingencies, and unusual items
- No consolidated earnings guidance was provided in the supplied filing text. Management cautions that forward-looking statements are subject to risks and actual results may differ.
- Long-term care reserves: CNA’s September gross premium valuation showed an estimated reserve margin of $182, down from $246 at year-end 2017. CNA said it would begin establishing additional future policy benefit reserves in the fourth quarter of 2018 where long-term care business generates core income, to address projected profits followed by losses. The filing gives hypothetical pretax income reductions of $460 for a 5% morbidity increase and $1,103 for a 10% increase, after considering the existing margin. The next valuation was expected in the third quarter of 2019.
- Insurance reserve uncertainty: CNA reported $160 of favorable prior-year development year to date, while recording $113 of adverse A&EP development before reinsurance for the period. Reserve estimates remain sensitive to claims experience, legal outcomes, inflation, and other assumptions. CNA expected another annual A&EP reserve review in the fourth quarter.
- Offshore drilling outlook: Management described weak utilization and dayrates, rig oversupply, and uncertain timing of recovery despite higher oil prices and more tendering activity. Diamond Offshore’s backlog was $2.0 billion as of October 1, down from $2.4 billion at January 1. Its credit ratings were downgraded in August to B by S&P and B2 by Moody’s, both with negative outlooks.
- Pipeline regulation: FERC or customers may challenge Boardwalk pipeline rates following tax-law and FERC policy changes. A successful challenge could materially reduce future revenues on affected cost-of-service pipelines. Boardwalk reported that 87% of its revenue, excluding retained fuel, came from firm agreements over the last twelve months.
- Other notable items: Diamond recorded an $18 charge for settlement of a previously pending legal matter. CNA’s long-term care results included a $24 after-tax reserve benefit from its claims experience study; its other insurance results also included $27 of non-recurring IT transition costs year to date. CNA’s non-insurance warranty revenue presentation changed with adoption of new revenue guidance, increasing operating revenue and expense by $145 in the quarter and $419 year to date, with no equivalent change to prior-period presentation.
- Contingencies: CNA disclosed quantifiable guarantees of $375 and indemnification agreements of $252, as well as approximately $1.8 billion of potential lifetime payments under structured-settlement annuity guarantees; CNA said it did not expect payment under the latter, citing a supporting trust. Management said pending litigation was not expected to materially affect results or equity. No risk-factor updates were reported for the quarter.
Important facts for investors to verify
- Whether CNA’s long-term care assumptions, reserve margin, and planned additional reserves develop as expected, and whether catastrophe and prior-year reserve trends persist.
- Whether Diamond Offshore can improve utilization, dayrates, backlog, and liquidity amid industry oversupply and negative credit-rating outlooks.
- How FERC proceedings or customer challenges may affect Boardwalk’s rates and the value of its firm-contract revenue commitments.
- Whether parent liquidity remains adequate after the Boardwalk purchase and substantial share repurchases, given reliance on subsidiary dividends and regulatory restrictions on insurance-company distributions.
- The effects of investment-market changes on Loews’ portfolio, unrealized losses, and reported equity; and the precise impact of accounting changes, including the revenue gross-up, when comparing periods.