Loews Corporation — Q1 2017 Form 10-Q
Business context and reporting period
Loews is a holding company with four operating subsidiaries: CNA Financial (commercial property and casualty insurance), Diamond Offshore (offshore drilling), Boardwalk Pipeline (natural gas transportation and storage), and Loews Hotels & Co. The unaudited quarter ended March 31, 2017; comparisons are with the three months ended March 31, 2016. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Total revenue | $3,300 | $3,173 |
| Income before tax | $510 | $195 |
| Net income | $391 | $199 |
| Net income attributable to Loews | $295 | $102 |
| Diluted earnings per share | $0.87 | $0.30 |
| Operating cash flow | $(1) | $149 |
| Cash and cash equivalents | $412 at March 31 | $327 at December 31, 2016 |
| Total assets | $77,114 at March 31 | $76,594 at December 31, 2016 |
| Total debt on balance sheet | $10,690 at March 31 | $10,778 at December 31, 2016 |
| Total equity | $23,734 at March 31 | $23,361 at December 31, 2016 |
Revenue rose about 4%; Loews-attributable net income nearly tripled. The improvement reflected higher CNA earnings, better Boardwalk and hotel results, and stronger parent investment income, partly offset by lower Diamond Offshore earnings. Net investment income increased to $604 from $422, and investment gains were $34 versus losses of $28. Interest expense was $142 versus $143. The filing does not present a single consolidated operating margin measure.
Cash from investing activities was $273, including a $366 net cash inflow from changes in short-term investments; financing activities used $188. Parent-company cash and investments, net of receivables and payables, totaled $5.6 billion, versus $5.0 billion at year-end. Loews received $559 in subsidiary dividends, including a $485 special CNA dividend. Its quarterly shareholder dividend remained $0.0625 per share.
Material changes and segment results
- CNA: Loews-attributable income was $234 versus $60. Higher limited-partnership returns, improved realized investment results, lower underwriting expenses, and less adverse A&EP development contributed. CNA’s P&C combined ratio was 97.2%, compared with 96.1%; Commercial was 104.9%, including unfavorable Small Business premium adjustments. Net written premiums declined to $1,632 from $1,668.
- Diamond Offshore: Loews-attributable income fell to $12 from $43 as contract drilling revenue declined to $364 from $444 amid weak offshore demand and lower utilization. Backlog was $3.2 billion as of April 1, down from $3.6 billion at January 1.
- Boardwalk Pipeline: Loews-attributable income rose to $37 from $31, with revenue increasing to $368 from $347, mainly from recently completed growth projects.
- Loews Hotels: Loews-attributable income increased to $10 from $3, helped by a $25 gain on a hotel joint-venture interest sale, partly offset by a $15 impairment charge.
- Corporate: Income was $2 versus a $35 loss, primarily reflecting improved limited-partnership and equity investment performance.
Outlook, risks, contingencies and unusual items
- No consolidated earnings guidance is provided. Management cautions that first-quarter results are not necessarily indicative of full-year results.
- On April 11, 2017, Loews agreed to acquire Consolidated Container Company for approximately $1.2 billion, subject to customary adjustments and closing conditions. The expected second-quarter closing would be funded approximately half with available cash and half with debt at the subsidiary level.
- Offshore drilling conditions remained depressed: management cited rig oversupply, intense dayrate competition, and the possibility of further declines in dayrates and utilization during 2017. Industry stabilization might begin in late 2017 or early 2018, but this was not assured. Diamond budgeted about $145 million in 2017 capital expenditures.
- Boardwalk had about $1.1 billion of growth projects under development, expected to enter service during 2017–2019; total 2017 capital spending was expected to be approximately $850 million. Projects require substantial investment before contributing earnings and cash flow.
- CNA identified Small Business rating errors. It recorded a $42 charge to earned premiums for workers’ compensation refunds in Q1, following a $16 charge in Q4 2016 for multi-peril policies. At March 31, estimated refund liabilities were $50 and $36, respectively, plus $5 of interest. Refund exposure may increase until rating-system changes are implemented; fines or penalties were considered reasonably possible but not expected to be material.
- CNA recorded $60 of unfavorable A&EP prior-year development before the loss portfolio transfer, offset by a $40 retroactive-reinsurance benefit, for a $20 pretax impact. The unrecognized deferred benefit was $354 at quarter-end. CNA stated that additional losses within the reinsurance limit do not have an economic impact over the contract’s life, but accounting recognition affects reported earnings.
- A CNA 401(k) plan class action was in preliminary stages. Loss was considered reasonably possible, but its amount could not be estimated. Other ordinary-course litigation was not expected by management to materially affect results or equity.
- In April, Fitch affirmed Loews’ A unsecured rating but revised the outlook to negative; S&P placed ratings, including its A+ corporate credit rating, on creditwatch with negative implications. Moody’s rating was A3 with a stable outlook. A downgrade could increase capital costs or constrain access to capital.
- Management reported no material market-risk changes and no updates to the risk factors in the 2016 Form 10-K. Disclosure controls were assessed as effective at March 31, 2017.
Important facts for investors to verify
- How sustainable Q1’s investment-driven earnings improvement is, particularly CNA limited-partnership returns and parent investment results.
- Underlying CNA underwriting performance, including the 97.2% combined ratio, premium trends, reserve development, and final refund costs from rating errors.
- Diamond Offshore backlog conversion, utilization and dayrates, as well as the outcome of Petrobras-related Ocean Valor litigation included in backlog.
- Funding, closing conditions, and incremental debt and liquidity effects of the Consolidated Container acquisition.
- Subsidiary dividend capacity and parent liquidity, considering insurance regulation, subsidiary covenants, and the rating outlook changes.
- Cash-flow sustainability: operating cash flow was approximately break-even despite reported net income, with investment activity and working-capital movements affecting cash flows.