Loews Corporation — Q3 2010 Form 10-Q
Business context and reporting period. Loews is a holding company with major operations in commercial insurance (CNA), offshore drilling (Diamond Offshore), natural gas exploration and production (HighMount), pipelines (Boardwalk Pipeline), and hotels. This unaudited filing covers the quarter and nine months ended September 30, 2010; comparisons are with the same 2009 periods unless noted. Dollar amounts are in millions except per-share data.
Financial results and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $3,701 | $3,738 | $10,900 | $10,295 |
| Income before tax | $258 | $958 | $1,957 | $847 |
| Net income attributable to Loews | $36 | $468 | $822 | $161 |
| Diluted EPS | $0.09 | $1.08 | $1.96 | $0.37 |
| Net cash from operating activities, total | Not presented by quarter | $895 | $2,764 | |
| Net cash from investing activities, total | Not presented by quarter | $(426) | $(2,687) | |
| Net cash from financing activities | Not presented by quarter | $(527) | $(60) |
- Q3 net income included a $328 after-tax, after-noncontrolling-interest charge from CNA’s legacy asbestos and environmental pollution (A&EP) reinsurance transaction. Management reported Q3 net income of $364 excluding that charge, versus $468 in Q3 2009.
- Nine-month results improved substantially from 2009, which included a $1.036 billion pretax ($660 million after-tax) noncash impairment of HighMount oil and gas properties. CNA investment impairment losses also fell sharply: net OTTI losses recognized in earnings were $161 for the first nine months of 2010 versus $1.157 billion in 2009.
- Net investment income declined to $654 in Q3 from $726 and to $1.797 billion for nine months from $1.908 billion, primarily reflecting lower limited-partnership income. Total investment gains were $62 in Q3 and $94 for nine months, versus losses of $100 and $928 in the respective 2009 periods.
- At September 30, total assets were $76.821 billion, total equity $23.499 billion, cash $132, and investments $48.842 billion. Short- and long-term debt totaled $9.476 billion ($647 short-term; $8.829 billion long-term), compared with $9.485 billion at year-end 2009. Parent-company cash and investments, net of receivables and payables, were $4.0 billion, versus $3.0 billion at year-end.
- Book value per share rose to $45.31 from $39.76 at December 31, 2009; substantial unrealized investment gains contributed to higher accumulated other comprehensive income. The quarterly dividend remained $0.0625 per share.
Material changes by business
- CNA: Nine-month favorable prior-year reserve development was $393, compared with $163 in 2009. Core insurance results benefited, although premiums fell and investment income was lower. CNA ceded substantially all legacy A&EP liabilities to National Indemnity Company (NICO) under a $4.0 billion aggregate-limit agreement; the $2.0 billion premium and related accounting resulted in the reported Loews charge. CNA’s nine-month operating cash flow was negative $673, partly due to the transaction’s initial net cash settlement.
- Diamond Offshore: Q3 drilling revenue fell 15% to $749; average utilization declined to 65% from 76%. Nine-month Loews-attributable income fell to $333 from $514. The Gulf of Mexico moratorium, lower dayrates and utilization weighed on results. Backlog was approximately $7.5 billion as of October 18, 2010, including $394 related to the Ocean Monarch contract the customer sought to terminate.
- HighMount: Nine-month revenue was $351 versus $466, with lower production following asset sales and reduced drilling. It sold Michigan and Alabama properties for approximately $500 combined and used proceeds to reduce term-loan debt; outstanding term loans were $1.1 billion at September 30. No 2010 ceiling-test impairment was recorded.
- Boardwalk Pipeline: Nine-month revenue rose to $821 from $631 and Loews-attributable income to $80 from $39, mainly as expansion projects contributed. Capacity marketing and contract renewals remain exposed to narrower pipeline basis spreads and competition. The company had $704 of revolver borrowings and $246 of available capacity at quarter-end.
- Loews Hotels: Nine-month revenue increased to $230 from $213 and the segment moved to $1 net income from a $30 loss. Occupancy and room rates improved; 2009 included development, loan-guarantee and property impairment charges.
Outlook, risks and unusual items
- The filing provides no consolidated earnings or revenue guidance. CNA expected savings from its approximately $41 million IT transformation program, with a significant portion anticipated in 2011 and full annual savings in 2012; the filing cautions that some savings may be reinvested.
- Diamond Offshore cited continuing uncertainty over Gulf of Mexico permitting and enhanced safety rules after the Macondo incident, potential rig redeployment, dayrates, utilization and insurance costs. A customer asserted force majeure and sought termination of the Ocean Monarch contract; Diamond Offshore disputes the claim and intends to defend the contract.
- HighMount’s results remain sensitive to natural gas and NGL prices, production, reserve estimates and hedging. Boardwalk’s revenues depend partly on basis spreads, competition and renewals of expiring capacity contracts.
- Insurance reserve estimates, catastrophe losses, investment valuations and reinsurance recoverability involve significant judgment. CNA reported $12 of catastrophe losses in Q3 and $100 for nine months, net of reinsurance. CNA stated that it did not expect additional OTTI losses on securities in the reported unrealized-loss positions based on then-current facts, but further collateral deterioration could prompt additional impairments.
- Other matters include a proposed CNA purchase of the remaining CNA Surety shares for $22 per share, announced November 1, 2010, with no assurance it would close; litigation involving insurance brokerage claims and other proceedings; and indemnification commitments, including some without contractual monetary limits. Management said the remanded brokerage claims could adversely affect results, though it did not expect a material effect on equity based on known facts.
- Management reported disclosure controls were effective as of September 30, 2010 and no material change in internal control over financial reporting during the quarter. The filing reported no material change in market-risk components for the nine-month period.
Key facts for investors to verify
- Reconcile the $328 Loews-attributable A&EP transaction charge to the transaction’s $2.0 billion premium, collateral trust, remaining reinsurance limit and subsequent claim payments; assess counterparty performance and residual exposure.
- Assess whether CNA’s favorable prior-year reserve development is repeatable and how current accident-year losses, catastrophe experience and premium trends are evolving.
- Track Diamond Offshore’s Gulf of Mexico permits, rig utilization and dayrates, the Ocean Monarch dispute, and conversion of the stated backlog into actual revenue.
- Review HighMount’s debt, production and commodity hedges, and Boardwalk’s revolver availability, basis spreads and contract renewals.
- Distinguish parent-company liquidity from subsidiary funds, which may be subject to creditor priority, insurance regulation, covenants or other restrictions; note that consolidated operating cash flow was materially lower year over year.
- Monitor investment impairment assumptions and exposure to mortgage-backed, asset-backed and below-investment-grade securities, as well as the proposed CNA Surety acquisition and outstanding legal contingencies.