Loews Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. Loews is a holding company with insurance, offshore drilling, natural gas production and pipelines, and hotel operations. Comparisons are with Q1 2010 unless otherwise noted. Dollar amounts are in millions except per-share data.
Financial results and liquidity
- Revenue: $3,668, down 1.2% from $3,713. Insurance premiums were $1,615, unchanged; contract drilling revenue declined to $789 from $844.
- Profit: Income before tax was $761, versus $896; net income was $565, versus $623. Net income attributable to Loews was $382, down from $420, and diluted EPS was $0.92 versus $0.99. Management reported income before net investment gains of $370 versus $409.
- Cash flow: Operating cash flow was $1,129 versus $294; investing cash outflow was $816 versus $411; financing cash outflow was $312 versus inflow of $64. Cash was $123 at quarter-end, compared with $120 at year-end 2010. Operating cash flow included a $522 net cash inflow from trading securities, making the period’s cash-flow comparison sensitive to investment activity.
- Balance sheet and debt: Total assets were $75,967 and total equity $23,445 at March 31. Short- and long-term debt totaled $9,493, compared with $9,477 at December 31, 2010. Total investments were $48,632. Book value per share rose to $45.54 from $44.51.
- Parent liquidity and capital returns: Parent-company cash and investments, net of receivables and payables, were $4.6 billion. Loews repurchased 4.4 million shares for $187 and paid $26 in dividends; the quarterly dividend remained $0.0625 per share. It repaid $175 of debentures at maturity on April 15, after quarter-end.
Material changes and business performance
- CNA Financial: Loews-attributable net income fell to $202 from $225. Higher claims and catastrophe losses and lower realized investment gains more than offset increased investment income. Catastrophe losses were $55 net of reinsurance, versus $40, primarily related to Japan and U.S. winter storms. CNA Specialty’s combined ratio worsened to 94.9% from 92.5%; CNA Commercial’s improved to 107.7% from 109.8%, but remained above 100%.
- Diamond Offshore: Loews-attributable net income declined to $117 from $136. Drilling revenue fell 6.5%; fleet utilization averaged 71% versus 74%, with lower dayrates and weaker jack-up activity. April 18 contract backlog was approximately $6.1 billion, down from $6.6 billion on February 1.
- HighMount: Loews-attributable net income was $19 versus $24. Production and sales volumes fell following the 2010 sale of Michigan and Alabama properties and reduced drilling activity. Approximately 72% of estimated 2011 natural-gas-equivalent production was hedged.
- Boardwalk Pipeline: Loews-attributable net income was $33 versus $38. Higher transportation revenue was offset by weaker storage and parking revenues, operating costs, and interest expense, including a $7 debt-extinguishment loss.
- Hotels and corporate: Hotels earned $2 versus a $1 loss, with revenue per available room rising to $152.07 from $144.65. Corporate and other earned $9 versus a $10 loss, mainly reflecting higher investment income.
Outlook, risks, contingencies, and unusual items
- No consolidated earnings guidance was provided. Management described a cautious growth and capital-allocation approach; first-quarter earnings are not necessarily indicative of full-year results.
- Diamond Offshore cited continuing Gulf of Mexico permitting and regulatory uncertainty following the Macondo incident, potential rig moves and dayrate pressure, and reduced marine liability insurance limits. It had ordered two drillships, with total expected cost of approximately $1.2 billion and delivery scheduled in 2013.
- Insurance results remain exposed to reserve-estimation uncertainty, catastrophe claims, reinsurance collectability, competition, and investment-market volatility. CNA recorded $41 of net OTTI losses in earnings. Management stated that it identified no further required OTTI at quarter-end, but additional collateral deterioration could cause further losses.
- HighMount is exposed to natural-gas and NGL price volatility, production levels, and reserve estimates. Boardwalk faces competition and weak pipeline basis spreads, which can pressure contract renewals and short-term capacity and storage revenues.
- On April 21, CNA agreed to tender for the CNA Surety shares it does not own at $26.55 per share, for an estimated $475 total purchase price, subject to conditions and shareholder acceptance. Completion was anticipated by the end of Q2 2011.
- CNA reached a settlement understanding in insurance-brokerage litigation, subject to final terms and court approval; as structured, management expected no material impact. Loews also disclosed tobacco-related lawsuits and stated that it expects indemnification from Lorillard under a separation agreement. CNA’s quantifiable sale-related indemnification agreements totaled $719, in addition to certain unlimited indemnifications.
- Management reported no material change in market-risk components and concluded disclosure controls were effective as of March 31, 2011.
Most important facts for investors to verify
- Whether CNA’s reserve estimates, catastrophe experience, and investment impairment assumptions remain adequate as claims and asset values develop.
- Whether Diamond Offshore can maintain utilization, dayrates, and backlog amid Gulf of Mexico restrictions and global rig-supply changes, and how the drillship spending will be funded.
- Whether HighMount’s production and realized prices, and Boardwalk’s contract renewals and storage economics, stabilize or deteriorate.
- The final terms, financing, timing, and completion of CNA’s proposed CNA Surety tender offer.
- The availability of parent-company funds from subsidiaries, whose distributions are subject to regulatory, legal, covenant, and operating constraints.