Loews Corporation 10-Q Summary: Quarter Ended March 31, 2009
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2009. Loews Corporation is a holding company with primary subsidiaries engaged in commercial property and casualty insurance (CNA Financial), offshore oil and gas drilling (Diamond Offshore), natural gas exploration and production (HighMount), natural gas transmission (Boardwalk Pipeline), and hotel operations (Loews Hotels). The company disposed of its tobacco subsidiary, Lorillard, in June 2008, and its results are reported as discontinued operations.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $3,023 million | $3,612 million |
| Net Income (Loss) Attributable to Loews | $(647) million | $662 million |
| EPS (Basic & Diluted) | $(1.49) | $1.05 |
| Net Investment Income | $447 million | $479 million |
| Investment Losses (Realized) | $(531) million | $(51) million |
| Total Assets | $69,667 million | $69,870 million |
| Total Liabilities | $52,771 million | $52,735 million |
| Long-Term Debt | $8,402 million | $8,187 million |
| Cash and Short-Term Investments | $7,701 million | $6,160 million |
Material Changes vs. Prior Period
- Significant Net Loss: The company reported a net loss of $647 million compared to net income of $662 million in the prior year. This swing was primarily driven by two major factors:
- HighMount Impairment: A non-cash ceiling test impairment charge of $1,036 million ($660 million after-tax) was recorded due to declines in natural gas and oil commodity prices.
- Investment Losses: CNA Financial recorded $531 million in net realized investment losses, a sharp increase from $51 million in Q1 2008. This included $614 million in Other-Than-Temporary Impairment (OTTI) losses, primarily in asset-backed securities, corporate bonds, and preferred stocks due to credit market disruptions.
- Revenue Decline: Total revenues decreased by $589 million (16.3%) year-over-year, driven by lower insurance premiums, reduced contract drilling revenues in certain markets, and lower energy commodity prices.
- Segment Performance:
- CNA Financial: Reported a loss of $170 million (vs. $171 million income in 2008) due to investment losses, despite favorable underwriting development in Standard and Specialty lines.
- Diamond Offshore: Reported net income of $163 million (vs. $136 million in 2008), benefiting from high utilization and dayrates on its floater fleet, partially offset by downtime for surveys.
- HighMount: Reported a loss of $641 million (vs. $47 million income in 2008) almost entirely due to the impairment charge.
- Loews Hotels: Reported a loss of $18 million (vs. $11 million income in 2008) due to a 24.7% revenue decline and a $27 million impairment charge on the Loews Lake Las Vegas Resort.
Guidance, Outlook, and Risks
- Investment Portfolio: Management continues to monitor unrealized losses in the investment portfolio. While $614 million in OTTI losses were recorded, management asserts that remaining unrealized losses are temporary, citing the intent and ability to hold securities until recovery. However, continued market deterioration could trigger additional impairments.
- Energy Sector Outlook: HighMount reduced its 2009 drilling activity in response to low commodity prices. If natural gas prices continue to decline, future ceiling test impairments are possible. Diamond Offshore faces risks from prolonged declines in commodity prices, which could lead to customer credit issues, contract terminations, and reduced dayrates.
- Boardwalk Pipeline: Expansion projects are operational but currently flowing at reduced pressures due to pipe anomalies discovered during testing. This limits throughput and revenue until remediation is complete and regulatory approval for higher pressures is obtained. The company anticipates needing approximately $500 million in additional financing to complete expansion projects.
- Liquidity: The company maintains significant cash and short-term investments ($7.7 billion). CNA believes its cash flows are sufficient to fund operations and debt obligations. Diamond Offshore and Boardwalk Pipeline have access to credit facilities, though one lender for each has not funded commitments since 2008.
- Legal Proceedings: Significant ongoing litigation includes asbestos and environmental pollution claims (A&E), California long-term care litigation, and insurance brokerage antitrust litigation. Management believes unfavorable outcomes in these matters will not materially affect equity, though results of operations could be impacted.
Key Facts for Investor Verification
- OTTI Loss Sustainability: Verify the assumptions regarding the "temporary" nature of the remaining $5.4 billion in gross unrealized losses on fixed maturity securities and whether further credit deterioration will force additional write-downs.
- HighMount Commodity Exposure: Monitor natural gas and NGL price trends to assess the risk of further impairment charges on proved reserves.
- Boardwalk Pipeline Remediation: Track the timeline and cost for remedying pipe anomalies and obtaining PHMSA approval to operate expansion pipelines at full capacity.
- CNA Underwriting Ratios: Review the combined ratio trends for Standard and Specialty lines to ensure underwriting profitability remains resilient despite investment headwinds.
- Debt Covenants: Confirm continued compliance with debt covenants for HighMount and Boardwalk Pipeline, particularly given the reduced cash flows in the energy sector.