Loews Corporation 2016 Form 10-K Summary
Business context and reporting period
Loews Corporation is a holding company reporting for the fiscal year ended December 31, 2016; this is an annual report, not a standalone fourth-quarter filing. Its four operating subsidiaries are CNA Financial (90% owned), Diamond Offshore (53%), Boardwalk Pipeline Partners (51%) and Loews Hotels (wholly owned), alongside the Corporate segment. CNA generated 71.6% of consolidated revenue.
Financial results and position
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $13.105 billion | $13.415 billion |
| Income before tax | $936 million | $244 million |
| Income from continuing operations | $716 million | $287 million |
| Net income attributable to Loews | $654 million; $1.93 per diluted share | $260 million; $0.72 per diluted share |
| Operating cash flow | $2.253 billion | $3.547 billion |
| Investing cash flow | $(2.187) billion | $(1.935) billion |
| Financing cash flow | $(166) million | $(1.525) billion |
| Total assets | $76.594 billion | $76.006 billion |
| Debt | $10.778 billion | $10.560 billion |
| Shareholders’ equity | $18.163 billion | $17.561 billion |
Consolidated investments were $50.711 billion and cash was $327 million at year-end. Parent-company cash and investments, net of receivables and payables, totaled $5.0 billion, versus $4.3 billion a year earlier. Loews paid $0.25 per share in dividends for the year. The filing reports no off-balance-sheet arrangements. Contractual obligations total $72.319 billion, including insurance reserves and estimated future interest; this is not directly comparable to balance-sheet debt.
Segment net income attributable to Loews was: CNA $774 million (2015: $433 million); Diamond Offshore loss of $186 million (loss of $156 million); Boardwalk Pipeline $89 million ($74 million); Loews Hotels $12 million ($12 million); and Corporate loss of $35 million (loss of $103 million). CNA’s 2016 property-and-casualty combined ratio was 95.9%, compared with 95.4% in 2015.
Material changes versus prior year
- Revenue declined about 2.3%, mainly reflecting weaker Diamond Offshore drilling revenue. Diamond’s contract drilling revenue fell to $1.525 billion from $2.360 billion.
- Loews-attributable income increased to $654 million from $260 million. The comparison benefited from CNA’s $177 million after-tax and noncontrolling-interest long-term-care reserve charge in 2015 and lower Diamond impairment charges in 2016. Excluding those identified charges, management said income increased $143 million, reflecting stronger CNA and Boardwalk results and improved Parent Company investment performance, partly offset by weaker Diamond results.
- Diamond recognized $680 million of pretax rig impairment charges in 2016, compared with $861 million in 2015. Its reported contract backlog declined to $3.6 billion at January 1, 2017 from $4.1 billion at October 1, 2016 and $5.2 billion at February 16, 2016.
- Boardwalk’s revenue rose to $1.316 billion from $1.254 billion, supported by growth projects, a Gulf South rate settlement and higher storage/PAL revenue. Loews Hotels revenue rose with hotel acquisitions and openings, but net income remained $12 million.
- Net cash from operations fell by $1.294 billion. The filing attributes the comparison in part to changes in working capital and trading securities, as well as subsidiary operating cash-flow trends.
Outlook, risks, contingencies and unusual items
- Outlook: Loews provided no consolidated earnings guidance. Management described offshore drilling markets as weak and expected industry offshore exploration and development spending in 2017 to be below 2016. Boardwalk forecast approximately $850 million of 2017 capital expenditures and approximately $340 million of pipeline maintenance spending. It had $1.3 billion of growth projects under development expected to enter service in 2017 and 2018.
- Diamond Offshore: Low utilization, dayrates, rig oversupply and customer contract terminations or renegotiations remain significant risks; ten rigs were cold-stacked as of January 30, 2017. Petrobras’s attempted termination of the Ocean Valor contract was being disputed in court; a preliminary injunction was in place and appealed. Diamond’s credit ratings were below investment grade, with S&P’s outlook negative.
- CNA reserves and catastrophe exposure: Reserve estimates are judgmental and susceptible to adverse development, particularly in long-tail lines and long-term care. CNA’s long-term-care gross premium valuation showed a $255 million reserve margin at year-end, following a $296 million indicated premium deficiency in 2015. CNA also recorded $200 million of pretax adverse A&EP development before the loss portfolio transfer in 2016; retroactive reinsurance accounting limited the recognized benefit. Catastrophe losses and reinsurance collectibility are additional risks.
- Boardwalk: A substantial amount of firm transportation contracts is due to expire in 2018–2020; renewal rates and terms may be less favorable. Producer-customer credit risk, pipeline safety and environmental regulation, and refinancing needs could affect results and funding.
- Unusual items and contingencies: CNA identified rating errors in a small-business package product, recorded a $16 million earned-premium reduction and anticipated approximately $30 million of voluntary refunds, with further refunds and regulatory fines or penalties possible but not estimable. A CNA 401(k) plan class action was at a preliminary stage; loss was reasonably possible but not estimable. CNA also disclosed $375 million of quantifiable guarantees and $258 million of quantifiable indemnifications, plus certain unlimited indemnifications. Diamond’s Ocean Valor dispute remains material to backlog realization.
- Other risks: Loews relies on subsidiary distributions to fund parent obligations and dividends; subsidiary distributions can be constrained by regulation, financing covenants and available earnings. Other disclosed risks include interest-rate and investment-market movements, cybersecurity, environmental liabilities, hotel seasonality and competition, and potential asset impairments.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded internal controls were effective as of December 31, 2016.
Important facts for investors to verify
- Whether CNA’s favorable prior-year reserve development and long-term-care reserve margin persist, and whether future experience or premium-rate approvals require reserve strengthening.
- Diamond’s contract backlog, utilization, dayrates, cold-stacked rig outlook, impairment risk, liquidity and the outcome of the Petrobras contract dispute.
- Boardwalk’s contract renewals and pricing for the 2018–2020 expirations, growth-project execution and funding, customer credit quality and debt maturities.
- The final cost, timing and regulatory response to CNA’s premium-rating corrections and refunds, as well as developments in the CNA 401(k) litigation and A&EP recoveries.
- Parent-company liquidity and the sustainability of subsidiary dividends, given regulatory restrictions and the holding-company structure.
- Reconcile reported debt with the filing’s contractual-obligations table, which includes estimated future interest and insurance obligations.