Loews Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; financial statements are unaudited. Loews is a holding company with insurance, offshore drilling, pipeline, hotel and packaging operations. Unless noted, amounts are in U.S. dollars.
Financial performance and position
- Revenue: Q2 total revenue was $3.623 billion, up 0.9% from $3.590 billion. First-half revenue was $7.380 billion, up 2.9% from $7.171 billion.
- Profit: Q2 net income attributable to Loews was $249 million ($0.82 per diluted share), versus $230 million ($0.72) a year earlier. First-half attributable net income was $643 million ($2.09 per diluted share), versus $523 million ($1.61). Consolidated income before tax was $275 million in Q2 and $783 million for the first half.
- Cash flow: First-half operating cash flow was $474 million, down from $2.151 billion; investing activities provided $44 million, versus using $1.237 billion; financing used $485 million, versus $928 million. Cash ended the period at $440 million, compared with $405 million at year-end 2018.
- Margins: CNA Property & Casualty’s combined ratio was 95.7% in Q2 versus 93.8%; for the first half it was 96.8% versus 93.5%. A higher combined ratio indicates weaker underwriting performance.
- Debt and liquidity: Balance-sheet short- and long-term debt totaled $11.543 billion at June 30, versus $11.376 billion at December 31. Parent-company cash and investments, net of receivables and payables, were $3.5 billion, versus $3.1 billion. Total assets were $82.277 billion and total equity was $22.394 billion.
- Capital returns: Loews repurchased 9.8 million shares for $473 million in the first half and paid $38 million of shareholder dividends. The declared dividend was $0.0625 per share each quarter.
Material changes and segment results
- Higher CNA and Boardwalk Pipelines earnings drove Loews’ year-over-year profit increase; Diamond Offshore results weakened. Q2 gains were partly offset by lower Parent Company investment income.
- CNA: Loews-attributable income was $249 million in Q2 (up from $240 million) and $554 million for the first half (up from $501 million). First-half core income in Property & Casualty Operations fell to $612 million from $646 million, reflecting higher catastrophe losses and less favorable prior-year reserve development, partly offset by higher investment income. Net catastrophe losses were $96 million for the first half versus $60 million; favorable prior-year development was $45 million versus $98 million.
- Diamond Offshore: Loews-attributable losses increased to $52 million in Q2 from $37 million and to $89 million for the first half from $27 million. First-half contract drilling revenue fell $119 million year over year, primarily due to lower dayrates and fewer revenue-earning days.
- Boardwalk Pipelines: Loews-attributable income rose to $53 million in Q2 from $16 million and to $132 million for the first half from $52 million. The comparison benefited from Loews owning 100% of Boardwalk, versus 51% in the 2018 first half, as well as growth projects.
- Hotels and Corporate: Loews Hotels’ income fell to $12 million in Q2 from $17 million and to $25 million for the first half from $30 million. Corporate earned $21 million for the first half versus a $33 million loss, mainly reflecting improved Parent Company trading-portfolio performance.
Outlook, commentary, risks and unusual items
- No consolidated earnings guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results.
- Diamond Offshore reported a $2.0 billion contract backlog as of July 1, 2019, but described the market as challenging: floater utilization remained low, the market was oversupplied and dayrates remained depressed. Expected 2019 capital expenditures were $360–$380 million, plus about $110 million for the Ocean Onyx reactivation and upgrade and $20 million for the Ocean Endeavor reactivation.
- Boardwalk expected approximately $10.2 billion of revenue from fixed fees under committed firm agreements over their remaining terms; about 88% of its prior-12-month revenue, excluding retained fuel, came from fixed fees under firm agreements. Actual results remain subject to renewals, utilization, regulatory approvals and other factors.
- Loews depends on subsidiary distributions for parent-company funding. Subsidiary dividend capacity is subject to insurance regulation, earnings, liquidity and debt covenants. CNA paid a special dividend, and the filing reports approximately $322 million of additional CCC dividends available without prior regulatory approval at June 30.
- Notable items include a $21 million pretax charge from CNA’s early debt redemption; hotel impairment charges totaling $11 million in the first half; and three Consolidated Container acquisitions costing about $260 million, funded partly with a $250 million term loan. Adoption of lease accounting increased assets and liabilities by $642 million; operating lease liabilities were $702 million at June 30.
- Investment-related other comprehensive income was $989 million for the first half, lifting accumulated other comprehensive income from a loss of $880 million at year-end to income of $3 million. This largely reflects unrealized investment movements, not reported net income.
- Key risks include estimation uncertainty in insurance reserves, catastrophe losses, investment-market and credit risk, and the possibility of contract changes or cancellations in offshore drilling. CNA’s annual A&EP reserve review was planned for Q4 2019. A Boardwalk-related class action naming Loews remained pending; the court had taken a motion to dismiss under advisement. Management reported no material change in market-risk components and no update to previously disclosed risk factors.
Most important facts for investors to verify
- Whether CNA’s catastrophe losses, reserve development and combined-ratio trends persist, and how reserve assumptions evolve.
- Whether Diamond Offshore can maintain backlog and liquidity while funding its stated capital and rig-reactivation plans in a weak market.
- How much of the increase in reported earnings reflects recurring operating performance versus ownership changes, investment returns, tax adjustments and other unusual items.
- The source and sustainability of parent-company liquidity and subsidiary dividends, including regulatory limits and debt covenants.
- The filing’s cash-flow decline and large investment-related OCI movement; operating cash flow was particularly affected by changes in trading securities and other working-capital items.