LOEWS CORP quarterly report, Q3 FY2014

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Loews Corporation — Q3 2014 Form 10-Q

Business context and period. This unaudited filing covers the quarter and nine months ended September 30, 2014, compared with the same 2013 periods. Loews is a holding company with major businesses in commercial insurance (90%-owned CNA), offshore drilling (51%-owned Diamond Offshore), natural gas pipelines (53%-owned Boardwalk Pipeline), and hotels (wholly owned Loews Hotels). HighMount and CNA’s Continental Assurance Company (CAC) are reported as discontinued operations.

Financial performance and position

  • Revenue: Q3 revenue was $3.523 billion, down from $3.597 billion. Nine-month revenue was $10.804 billion versus $10.831 billion.
  • Earnings: Q3 income from continuing operations attributable to Loews was $179 million ($0.47 per diluted share), versus $318 million ($0.82). Net income attributable to Loews was $208 million ($0.55 per diluted share), versus $282 million ($0.73). For nine months, continuing-operations income attributable to Loews was $747 million ($1.94 per diluted share), versus $901 million ($2.31); net income attributable to Loews was $383 million ($1.00 per diluted share), versus $793 million ($2.03).
  • Cash flow: For the first nine months, operating cash flow was $2.096 billion (2013: $1.329 billion), investing cash flow was negative $965 million (negative $1.865 billion), and financing cash flow was negative $785 million (positive $568 million). Cash rose to $637 million from $294 million at year-end 2013.
  • Balance sheet and debt: At September 30, total assets were $78.529 billion, total liabilities $53.413 billion, and total equity $25.116 billion. Short-term debt was $850 million and long-term debt $10.051 billion. Total investments were $52.644 billion. Parent-company cash and investments, net of receivables and payables, were $5.2 billion.
  • Book value and distributions: Book value per share was $52.01, compared with $50.25 at December 31, 2013; excluding AOCI, it was $50.32 versus $49.38. The quarterly dividend was $0.0625 per share. Loews repurchased 9.6 million shares for $415 million during the nine months.
  • Insurance underwriting: CNA’s property-and-casualty combined ratio was 96.1% in Q3 versus 94.0% in Q3 2013, and 99.7% for nine months versus 99.0%. Ratios above 100% indicate underwriting losses before investment income.

Material changes and notable items

  • Lower CNA and Diamond Offshore earnings and weaker parent-company investment results were the main factors in the year-over-year decline in Q3 continuing-operations income. CNA’s limited partnership income fell; Diamond Offshore faced lower utilization and recorded a rig impairment.
  • CNA’s net investment income declined to $480 million in Q3 from $555 million and to $1.556 billion for nine months from $1.680 billion, primarily due to lower limited partnership returns. CNA recorded $37 million of investment gains in Q3 and $65 million for nine months.
  • Diamond Offshore recorded a $109 million pretax impairment ($55 million after tax and noncontrolling interests) on semisubmersible rigs. Its nine-month contract drilling revenue fell to $2.063 billion from $2.136 billion; Loews-attributable net income fell to $136 million from $213 million.
  • Boardwalk Pipeline’s nine-month results included a $94 million Bluegrass Project write-off ($55 million after tax and noncontrolling interests); the project entities were dissolved in Q3. Boardwalk acquired the Evangeline ethylene pipeline system in October for $295 million, funded with revolving-credit borrowings.
  • HighMount was sold on September 30 for net proceeds of $794 million, subject to closing adjustments; $480 million of its bank debt was repaid from the proceeds. The Q3 impairment charge was reduced by $60 million ($30 million after tax). CAC’s August sale resulted in a reported $189 million after-tax loss attributable to Loews, and a related coinsurance transaction generated a separate $31 million after-tax, noncontrolling-interest-adjusted loss.
  • A CNA postretirement-plan curtailment generated a $50 million after-tax and noncontrolling-interest-adjusted gain during the first nine months. Investment-related AOCI increased year to date, while Q3 comprehensive income was affected by investment and foreign-currency losses.

Outlook, commentary and risks

  • Diamond Offshore: Management described offshore drilling conditions as adverse, with rig oversupply, reduced customer exploration budgets, weak demand, and pressure on utilization and dayrates expected to persist through at least 2015 and possibly into 2016. Six mid-water rigs were planned for retirement and scrapping. Diamond expected 2014 capital expenditures of approximately $2.1 billion, including about $1.8 billion for rig construction and related projects.
  • Boardwalk Pipeline: Narrowing gas-price basis and storage spreads were pressuring contract-renewal rates and storage/PAL demand; management said these trends could materially adversely affect revenue, earnings, and distributable cash flow. The company expected approximately $420 million of 2014 capital expenditures. It reported $485 million of revolving-credit borrowings and $515 million of available capacity as of November 4, after the Evangeline acquisition borrowing.
  • Other forward items: Loews Hotels had approximately $170 million of commitments for the planned Chicago hotel and approximately $60 million for its Sapphire Falls joint-venture development. CNA expected a fourth-quarter pension-settlement charge, dependent on participant elections, with an estimated high end of approximately $60 million after tax and noncontrolling interests; the charge was expected to have no effect on total shareholders’ equity.
  • Contingencies and risks: Diamond Offshore disputed Brazilian withholding-tax reimbursement claims by Petrobras; an adverse outcome could be material. A remaining Egyptian tax dispute could increase tax expense and related penalties by approximately $50 million. CNA disclosed guarantees and indemnifications, including an estimated $1.9 billion of potential future payments under structured-settlement annuity guarantees, though it said payment was not considered likely because of a supporting trust. Insurance reserve estimates, catastrophe losses, market conditions, regulation, and access to capital also remain significant risks.
  • The filing reported no material changes in market-risk components for the nine months and no updates or additions to the company’s 2013 Form 10-K risk factors. Management concluded disclosure controls were effective at September 30, 2014.

Investor verification priorities

  1. Reconcile the year-over-year earnings decline, separating recurring continuing operations from CAC and HighMount discontinued-operation results and other unusual charges or gains.
  2. Assess CNA reserve development and underwriting trends, particularly CNA Commercial’s unfavorable prior-year development and combined ratio.
  3. Check Diamond Offshore utilization, dayrates, newbuild delivery and contract assumptions, capital spending, and the implications of persistent rig oversupply.
  4. Review Boardwalk’s contract renewals, basis and storage spreads, capital commitments, post-acquisition borrowings, and available credit capacity.
  5. Track the CNA pension-settlement charge, the remaining Egyptian tax matter, Petrobras-related claims, and material indemnification and guarantee exposures.