Loews Corporation — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 23, 2015. The filing is an annual report, not a standalone fourth-quarter report. Loews is a holding company with major operations in CNA insurance, Diamond Offshore drilling, Boardwalk Pipeline, and Loews Hotels. CNA generated 67.7% of consolidated revenue.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $14.325 billion | $14.613 billion |
| Income before income tax | $1.810 billion | $2.277 billion |
| Income from continuing operations | $1.353 billion consolidated; $962 million attributable to Loews | $1.621 billion consolidated; $1.149 billion attributable to Loews |
| Net income attributable to Loews | $591 million; diluted EPS $1.55 | $595 million; diluted EPS $1.53 |
| Operating / investing / financing cash flow | $2.990 billion / $(1.470) billion / $(1.442) billion | $2.096 billion / $(3.298) billion / $1.271 billion |
| Total assets | $78.367 billion | $79.939 billion |
| Debt on balance sheet | $10.668 billion | $10.344 billion |
| Shareholders’ equity / book value per share | $19.280 billion / $51.70 | $19.458 billion / $50.25 |
Investments were $52.032 billion and cash was $364 million at year-end. Parent-company cash and investments, net of receivables and payables, were $5.1 billion, versus $4.7 billion a year earlier. The company paid $0.25 per share in common dividends and repurchased 14.6 million Loews shares for $622 million. The filing reports no off-balance-sheet arrangements.
Material changes and segment developments
- Revenue declined about 2%, pretax income about 21%, and Loews-attributable continuing income about 16%. Net income attributable to Loews was nearly flat, as discontinued-operation losses narrowed.
- CNA: Segment revenue was $9.692 billion, down from $9.932 billion; net income attributable to Loews was $625 million, down from $847 million. Lower investment income and favorable prior-year reserve development weighed on results; current-year underwriting improved and catastrophe losses fell. Property-and-casualty combined ratio was 97.7%, compared with 97.9%.
- Diamond Offshore: Revenue was $2.825 billion, versus $2.926 billion; net income attributable to Loews was $183 million, versus $257 million. Utilization fell materially, including ultra-deepwater utilization from 82% to 65% and deepwater from 84% to 55%.
- Boardwalk Pipeline: Revenue was $1.236 billion, roughly flat; net income attributable to Loews fell to $18 million from $78 million. Higher operating costs and a Bluegrass project write-off offset weather-related and project revenue.
- Loews Hotels: Revenue rose to $475 million from $380 million, and net income attributable to Loews was $11 million versus a $3 million loss. Acquisitions and the reopening of the renovated Loews Regency contributed to growth.
Outlook, risks, contingencies and unusual items
- Offshore drilling outlook: Management said falling oil prices, customer capital-spending cuts, excess rig supply and weaker dayrates were expected to continue through 2015 and likely into 2016 or longer. Eight rigs were without contracts as of February 9, 2015. Diamond Offshore reported $6.840 billion of contract backlog then, but backlog depends on firm commitments, utilization and contract performance.
- Pipeline outlook and execution: Boardwalk expected about $570 million of 2015 capital expenditures and stated that available resources, including a $300 million subordinated loan agreement with Loews, were expected to fund 2015 operations and planned spending. Narrower gas basis and seasonal price spreads were pressuring renewals and storage/PAL revenues. A Gulf South rate case remained pending; proposed rates were subject to refund.
- Pipeline incidents: A January 2015 rupture on Gulf South’s system led to repairs and required PHMSA approval before return to service. The acquired Evangeline ethylene pipeline was also taken out of service after a leak; inspection and remediation timing remained uncertain.
- Insurance reserve risk: CNA’s estimates are sensitive to claims severity, medical inflation, long-tail claims, and long-term-care morbidity, persistency, interest rates and approved premium increases. CNA’s long-term-care reserve margin was about $100 million at year-end, down about $250 million. Its fourth-quarter 2014 A&EP reserve review was unfinished and expected to be completed in the first half of 2015.
- Disposals and charges: CNA sold Continental Assurance Company on August 1, 2014, recording a $189 million after-tax loss. Loews sold HighMount on September 30 for $787 million net proceeds and recorded a $138 million after-tax sale loss; $480 million of HighMount bank debt was repaid from proceeds. Boardwalk recorded a $94 million pretax write-off of Bluegrass development costs. Diamond Offshore recorded a $109 million pretax impairment on rigs slated for retirement or scrapping.
- Contract and legal exposure: After year-end, Diamond Offshore disclosed customer termination or cancellation activity involving PEMEX and Petrobras, and a termination notice concerning the Ocean Nomad; it disputed certain terminations. A Petrobras-related Brazilian withholding-tax reimbursement claim was not estimable and could be material if the company’s position is not upheld. Loews also disclosed potential tobacco-related suits, with an indemnity from Lorillard whose enforceability and collectibility could matter.
- Other risks: Key risks include catastrophe and insurance reserve losses, investment-market and interest-rate exposure, reinsurance collectibility, regulatory changes, environmental and pipeline safety obligations, cyber incidents, foreign operating and tax risks, and possible asset impairments. Management and Deloitte reported effective internal control over financial reporting; Deloitte issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Review the full-year earnings bridge, especially CNA investment income and reserve development, Diamond Offshore utilization and contract status, and Boardwalk’s project and maintenance costs.
- Track CNA’s pending A&EP reserve review, long-term-care assumptions and reserve margin, and any subsequent reserve changes.
- Verify Diamond Offshore backlog realization, customer termination outcomes, newbuild spending and the effect of oil prices and rig oversupply.
- Monitor Boardwalk’s PHMSA approvals and repair timelines, Gulf South rate-case outcome, pipeline integrity spending, contract renewals and access to financing.
- Assess parent liquidity and subsidiary dividend capacity, including regulatory limits, debt maturities, planned capital expenditures and share repurchases.
- Reconcile discontinued-operation results and sale proceeds with the reported losses, and assess the stated legal, tax and indemnification contingencies.