Loews Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Loews is a holding company with interests in CNA Financial (90%), Diamond Offshore (50.4%), HighMount, Boardwalk Pipeline (64%) and Loews Hotels. Unless stated otherwise, financial amounts are in millions of dollars.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenues | $3,438 | $3,701 | $10,648 | $10,900 |
| Income before income tax | $439 | $258 | $1,751 | $1,957 |
| Net income attributable to Loews | $162 | $36 | $796 | $822 |
| Diluted earnings per share | $0.40 | $0.09 | $1.95 | $1.96 |
- Balance sheet at September 30: Total assets were $76.3 billion; investments $49.6 billion; cash $128 million; total equity $23.6 billion, including $19.0 billion of Loews shareholders’ equity. Short-term and long-term debt totaled $9.2 billion ($1.2 billion and $8.0 billion, respectively), versus $9.5 billion at December 31, 2010.
- Cash flow, nine months: Operating cash flow was $2.024 billion, versus $895 million in 2010; investing cash flow was negative $353 million, versus negative $426 million; financing cash flow was negative $1.662 billion, versus negative $527 million. Cash ended at $128 million. Parent-company cash and investments, net of receivables and payables, were $4.0 billion, down from $4.6 billion at year-end 2010.
- Insurance: CNA reported net investment income of $394 million in Q3 and $1.531 billion for nine months, down from $581 million and $1.692 billion. Net catastrophe losses were $50 million for Q3 and $205 million for nine months, versus $12 million and $100 million in 2010. CNA’s combined ratios were 94.7% at Specialty and 103.0% at Commercial in Q3; nine-month ratios were 93.9% and 109.3%, respectively.
- Other operating indicators: Diamond Offshore reported Q3 contract drilling revenue of $861 million and Loews-attributable income of $121 million. Loews Hotels’ revenue rose 10.8% in Q3, with revenue per available room increasing to $161.76. HighMount’s nine-month equivalent production fell to 48.2 Bcfe from 59.5 Bcfe.
Material changes versus the prior comparable periods
- Q3 net income attributable to Loews increased $126 million year over year, primarily because 2010 included a $328 million after-tax and noncontrolling-interest charge related to CNA’s transfer of legacy asbestos and environmental pollution liabilities to National Indemnity Company (NICO). Excluding that charge, management said Q3 earnings declined, chiefly due to weaker limited-partnership investment results and higher catastrophe losses, partly offset by stronger Diamond Offshore earnings.
- For the first nine months, Loews-attributable income declined $26 million. Excluding the 2010 loss-portfolio-transfer charge, management said results decreased, reflecting weaker investment income, lower investment gains, higher catastrophe losses and less favorable CNA prior-year development.
- CNA’s combined ratio deteriorated year over year at Specialty (up 6.2 points in Q3; 7.3 points for nine months), while Commercial improved 2.8 points in Q3 but worsened 4.6 points for nine months. Commercial’s nine-month deterioration reflected greater catastrophe losses and less favorable prior-year development.
- Diamond Offshore’s Q3 revenue and Loews-attributable income increased as high-specification floater utilization improved. Boardwalk Pipeline’s nine-month Loews-attributable income declined to $56 million from $80 million, with higher operating and interest costs, including a $29 million materials-and-supplies impairment.
- Loews bought back 17.4 million shares for $690 million during the first nine months. Book value per share was $47.75 at September 30, versus $44.51 at December 31, 2010.
Outlook, management commentary, risks and unusual items
- No consolidated earnings or revenue guidance is provided. Management described a conservative financial approach while pursuing growth opportunities and said net income for interim periods is not necessarily indicative of full-year results.
- Diamond Offshore cited slow U.S. Gulf of Mexico permitting after the Macondo incident, warning that market weakness could persist through the remainder of 2011 and into 2012. Eight rigs were cold-stacked, with another jack-up rig expected to be stacked. The company reported $8.1 billion of contract backlog as of October 17, 2011; backlog is not a guarantee of revenue.
- HighMount had $1.1 billion of variable-rate term loans due July 2012, classified as short-term debt. Management expected to refinance them before maturity, using refinancing, cash and parent support; covenant compliance was reported at quarter-end. Commodity prices, production and reserve estimates remain key sensitivities.
- Boardwalk faced narrowing transportation basis spreads and lower storage and parking revenues. It expected approximately $250 million of 2011 pipeline maintenance costs and said higher maintenance spending would continue in 2012. A $29 million impairment was recorded on surplus materials and supplies.
- Planned and subsequent transactions include a roughly $100 million HighMount property acquisition funded by Loews; a Boardwalk storage venture’s planned $550 million acquisition, with $280 million parent equity and a new $200 million loan; and a 15-year Pennsylvania gas-gathering agreement expected to require about $90 million of construction spending over several years.
- CNA’s pending sale of its 50% interest in First Insurance Company of Hawaii led to a $22 million tax charge in Q3; closing was expected in Q4 and a modest realized gain was anticipated upon closing. The filing also estimates that a forthcoming accounting change could reduce capitalized insurance acquisition costs by $75 million to $130 million before related tax effects.
- Key risks include insurance reserve estimation and reinsurance recoverability; investment-market and limited-partnership volatility and illiquidity; catastrophe losses; energy prices and drilling demand; Gulf permitting and regulation; pipeline competition and integrity costs; refinancing and subsidiary dividend restrictions. CNA’s reserve and investment valuations involve significant estimates. The filing reported pending litigation, including a broker antitrust settlement awaiting final court approval and tobacco-related cases; management did not expect material effects and cited Lorillard indemnification for tobacco claims, but outcomes remain uncertain.
- Management concluded disclosure controls were effective as of September 30, 2011 and reported no material change in internal control over financial reporting during the quarter. The filing stated there were no updates or additions to the risk factors in the 2010 Form 10-K.
Most important facts for investors to verify
- How much of Q3’s earnings improvement reflects the nonrecurring 2010 NICO transaction charge, and how investment returns and catastrophe losses evolve.
- CNA reserve adequacy, prior-year development, catastrophe exposure, and the performance and limits of the NICO reinsurance arrangement.
- HighMount’s ability to refinance the $1.1 billion term loans before July 2012, including terms, covenants and any required Loews support.
- Diamond Offshore backlog conversion, Gulf of Mexico permitting, rig utilization and remaining drillship construction costs and commitments.
- Boardwalk’s maintenance and impairment costs, financing of planned acquisitions and projects, and ability to renew or price transportation and storage contracts.
- Cash available at the parent level after share repurchases and planned subsidiary contributions, and the subsidiaries’ capacity to distribute funds subject to regulatory and debt restrictions.