Loews Corporation — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2017; comparisons are with the corresponding 2016 periods unless stated otherwise. Figures are in millions of dollars except per-share data. Loews is a holding company with insurance, offshore drilling, natural gas pipeline, hotel and packaging operations.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $3,521 | $3,287 | $10,180 | $9,767 |
| Income before tax | $264 | $556 | $1,121 | $475 |
| Net income | $212 | $393 | $881 | $304 |
| Net income attributable to Loews | $157 | $327 | $683 | $364 |
| Diluted earnings per share | $0.46 | $0.97 | $2.02 | $1.08 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1,810 | $1,716 |
- Q3 revenue rose about 7%, but Loews-attributable net income fell about 52%. Nine-month revenue rose about 4% and Loews-attributable net income rose about 88%, reflecting in part much lower Diamond Offshore impairment charges than in 2016.
- Consolidated pre-tax margin was approximately 7.5% in Q3 2017 versus 16.9% in Q3 2016, and 11.0% for the first nine months of 2017 versus 4.9% in 2016.
- At September 30, total assets were $79.5 billion, total liabilities $55.2 billion and total equity $24.4 billion. Cash was $416 million. Short- and long-term debt totaled $11.4 billion, up from $10.8 billion at December 31, 2016.
- For the first nine months, investing cash outflow was $2.1 billion and financing cash inflow was $357 million; cash increased $89 million to $416 million.
- Total investments were $52.1 billion, including $42.5 billion of fixed maturities and $5.0 billion of short-term investments. Loews reported parent-company cash and investments, net of receivables and payables, of $5.1 billion, compared with $5.0 billion at year-end 2016.
- Quarterly dividend remained $0.0625 per Loews share. Nine-month dividends paid to Loews shareholders were $63 million.
Material changes and operating drivers
- Q3 results included $170 million of CNA net catastrophe losses after tax and noncontrolling interests, versus $10 million a year earlier, and a combined $35 million loss on early debt redemptions at CNA and Diamond Offshore. Management said earnings excluding these items increased $25 million year over year.
- Nine-month results included $213 million of CNA net catastrophe losses versus $85 million in 2016; the debt-redemption loss; a $15 million after-tax loss on Boardwalk Pipeline’s asset sale; and $23 million of Diamond Offshore impairment charges versus $267 million in 2016. Excluding these items, management reported earnings growth of $253 million.
- CNA’s nine-month net income attributable to Loews increased to $608 million from $557 million. Higher catastrophe losses and lower favorable reserve development weighed on results; favorable prior-year development was $229 million versus $309 million. CNA’s P&C combined ratio was 103.7% in Q3 and 98.2% year to date, compared with 90.4% and 94.6%, respectively, in 2016.
- Diamond Offshore’s nine-month Loews-attributable income was $25 million, versus a $244 million loss in 2016, largely reflecting lower impairment charges. Its drilling backlog declined to $2.6 billion at October 1, 2017 from $3.6 billion at January 1, 2017.
- Boardwalk Pipeline’s nine-month revenue increased to $987 million from $961 million, while Loews-attributable income was $60 million versus $62 million. Loews Hotels’ attributable income rose to $24 million from $7 million, including a gain on sale of a hotel joint-venture interest and other joint-venture changes.
- Loews completed its May 22 acquisition of Consolidated Container for approximately $1.2 billion, funded with about $620 million of parent cash and $600 million of subsidiary debt financing. Since acquisition, it contributed $293 million of revenue; net income was not significant.
Outlook, risks and unusual items
- Management described offshore drilling conditions as still depressed: rig supply exceeds demand, offshore capital spending remained weak, and any recovery in utilization may not quickly improve dayrates. Diamond’s backlog includes $157 million of Ocean Valor work subject to ongoing litigation with Petrobras; the rig was on standby at a reduced dayrate.
- Boardwalk’s Southwestern Energy agreement reduces expected firm transportation reservation revenue by approximately $70 million over 2017–2020, including about $44 million in 2018 and $15 million in 2019, while establishing longer-term commitments beginning in 2021. Boardwalk had $1.2 billion of growth projects under development, with $556 million invested through September 30; the projects are expected to enter service through 2020. Boardwalk forecast 2017 capital expenditures of approximately $790 million.
- Parent liquidity depends on subsidiary dividends and investment returns. Loews received $719 million of subsidiary dividends in the first nine months, including a $485 million special CNA dividend. CNA’s subsidiary CCC had approximately $120 million of ordinary dividend capacity remaining at September 30, subject to regulatory rules and other constraints.
- Credit ratings are a watch item: Fitch revised Loews’ outlook to negative; S&P lowered Loews’ rating to A with a stable outlook. Diamond Offshore was downgraded by Moody’s and S&P, with negative outlooks reported. The filing warns that further downgrades could raise financing costs or restrict access to capital.
- CNA catastrophe losses included $149 million for Hurricane Harvey, $95 million for Hurricane Irma and $20 million for Hurricane Maria before the filing’s after-tax/noncontrolling-interest presentation. CNA’s estimate of outstanding insurance claims is inherently uncertain; it recorded $229 million of favorable net prior-year development for the first nine months.
- CNA estimated a $61 million liability, including interest, for workers’ compensation policy refunds tied to Small Business rating errors; $37 million of adverse premium development was recognized in the first nine months. Potential fines or penalties were considered reasonably possible but not expected to be material.
- Other items include a $42 million pretax CNA debt-redemption loss, a $35 million pretax Diamond debt-redemption loss, and Boardwalk’s $47 million pretax loss on its processing-plant sale. CNA recorded a best estimate of probable loss in an ERISA class-action matter; management did not expect the ultimate resolution, after insurance, to materially affect the financial statements.
- Management expected adoption of the new revenue-recognition standard to have no material effect overall, though CNA warranty revenue timing and gross presentation would change. Management reported no material change in market-risk components, and disclosure controls were effective at period-end.
Key facts for investors to verify
- How much of the Q3 earnings decline is attributable to catastrophe losses and debt-redemption charges, and whether underlying underwriting performance improves.
- Whether CNA’s catastrophe estimates, reserve development and $61 million refund liability remain adequate as claims and policy audits develop.
- Diamond Offshore’s backlog conversion, liquidity and ability to withstand a prolonged weak offshore market; follow the Ocean Valor litigation.
- Boardwalk’s revised contracted revenue outlook, Southwestern agreement approval, and funding and execution of its growth projects.
- Consolidated Container’s finalized purchase-price allocation, post-acquisition performance and debt costs; the filing says the allocation remained preliminary.
- Subsidiary dividend capacity, parent liquidity, debt maturities and the implications of any further credit-rating changes.