Loews Corporation — 2011 Form 10-K
Business context and reporting period. Loews is a holding company reporting for the fiscal year ended December 31, 2011; the filing also reports fourth-quarter results. Its principal businesses are CNA Financial (90% owned), Diamond Offshore (50.4%), wholly owned HighMount Exploration & Production and Loews Hotels, and Boardwalk Pipeline Partners (approximately 61%). CNA generated 63.4% of consolidated revenue and Diamond Offshore 23.6% in 2011.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $14.127 billion | $14.615 billion |
| Income before income taxes | $2.232 billion | $2.902 billion |
| Net income attributable to Loews | $1.064 billion | $1.288 billion |
| Diluted earnings per share | $2.63 | $3.07 |
| Operating cash flow, consolidated | $3.965 billion | $(47) million |
| Total assets | $75.375 billion | $76.277 billion |
| Debt on balance sheet | $9.001 billion | $9.477 billion |
| Shareholders’ equity | $18.835 billion | $18.450 billion |
| Book value per share | $47.49 | $44.51 |
Fourth-quarter 2011 revenue was $3.479 billion and net income attributable to Loews was $268 million, or $0.67 per diluted share, versus $3.715 billion and $466 million, or $1.12 per diluted share, in fourth-quarter 2010. Consolidated net investment income was $2.063 billion in 2011, down from $2.508 billion; investment losses were $52 million versus gains of $56 million. The regular Loews common dividend remained $0.25 per share annually. The parent reported $3.3 billion of cash and investments, net of receivables and payables, at year-end, down from $4.6 billion.
Operating cash flow improved sharply from 2010, but comparisons are affected by the 2010 CNA Loss Portfolio Transfer cash settlement, investment-security trading and other working-capital movements. Total contractual payment obligations were $72.997 billion, including estimated future interest, insurance reserves and other commitments; this is not equivalent to balance-sheet debt.
Material changes versus 2010
- Loews-attributable net income fell $224 million. Excluding the $328 million after-tax and noncontrolling-interest charge for CNA’s 2010 Loss Portfolio Transfer, management said 2011 net income declined $552 million, chiefly from weaker CNA limited-partnership investment returns, higher catastrophe losses, less favorable prior-year reserve development and a $104 million after-tax reserve increase for payout annuities, as well as weaker parent trading results.
- CNA revenue declined to $8.961 billion from $9.208 billion, and its net income attributable to Loews fell to $559 million from $636 million. Net investment income fell $262 million; insurance claims and policyholder benefits rose $504 million, including higher catastrophe losses and less favorable reserve development.
- Diamond Offshore revenue eased to $3.335 billion from $3.361 billion; net income attributable to Loews increased to $451 million from $446 million. Floater revenue improved, but jack-up revenue and utilization weakened; contract drilling expense rose 11.4%.
- HighMount revenue fell to $356 million from $425 million and net income to $41 million from $58 million. Equivalent production dropped to 63.3 Bcfe from 77.0 Bcfe. Proved reserves fell 166 Bcfe to 1.134 Tcfe, primarily from higher well decline rates, lower gas prices and higher operating costs.
- Boardwalk Pipeline revenue rose slightly to $1.144 billion from $1.129 billion, but net income attributable to Loews fell to $77 million from $114 million. Higher operating and interest expense, including a $29 million materials-and-supplies impairment and a $13 million early debt-extinguishment charge, weighed on results.
- Loews Hotels revenue rose 9.4% to $337 million and net income attributable to Loews was $13 million versus $1 million. Occupancy increased to 73.6% from 70.1% and revenue per available room to $163.18 from $147.89.
Outlook, risks and unusual items
- Diamond Offshore: Management expected 2012 contract drilling revenue to decline from 2011, citing planned survey, mobilization and shipyard downtime and some rigs’ lower-rate contract commitments. Eleven rigs were scheduled for five-year surveys; the company estimated about 660 days of downtime for those surveys and additional downtime for other work. It budgeted approximately $550 million of 2012 capital expenditures, including construction of three drillships and the Ocean Onyx. The drillships’ aggregate cost was estimated at $1.8 billion, with delivery in 2013–2014.
- HighMount: Planned 2012 capital expenditures were approximately $320 million, focused on oil and liquids opportunities. Management warned that, if natural-gas prices remained at January 2012 levels and other assumptions held, one or more material non-cash ceiling-test impairments were likely during 2012. The company had refinanced $1.1 billion of term loans in December 2011; year-end debt under its new facility was $700 million, including $100 million drawn on the revolver.
- Insurance and investments: CNA’s results depend on uncertain claims reserves, investment returns, catastrophe experience and reinsurance recoverability. CNA recorded $222 million of net catastrophe losses in 2011, compared with $121 million in 2010. Its payout-annuity reserve assumptions were revised in 2011, contributing a $104 million after-tax earnings reduction. Reserves and future policy benefits are estimates that may require further adjustment.
- Other financing and projects: Boardwalk had $458 million outstanding on its revolving credit facility at year-end; the facility was due to mature in June 2012, with an option to convert outstanding loans to term loans. Boardwalk expected spending on pipeline integrity, maintenance and growth projects. Loews repurchased 18.2 million shares for $718 million in 2011 and contributed $506 million to HighMount for refinancing and property acquisitions, in addition to funding its HP Storage investment.
- Other unusual items: A $34 million pretax HighMount derivative loss was recorded upon refinancing. Boardwalk acquired seven Mississippi salt-dome storage caverns through a joint venture for approximately $550 million. Loews reported no off-balance-sheet arrangements. The auditor issued an unqualified opinion on the financial statements and internal controls; the filing notes a change in accounting for other-than-temporary impairments and estimates a retrospective 2012 accounting change that would reduce equity by $63 million after tax and noncontrolling interests.
- Principal risks: CNA reserve adequacy, catastrophe exposure, reinsurance and investment risk; offshore drilling demand, dayrates, customer concentration, safety, environmental and insurance exposure; HighMount commodity-price and reserve-replacement risks; and Boardwalk contract-renewal, basis-spread, regulatory and customer-credit risks. Loews also depends on subsidiary distributions, which may be limited by regulation, debt covenants or subsidiary cash needs.
Important facts for investors to verify
- Reconcile the $3.965 billion consolidated operating-cash-flow figure with the holding company’s standalone cash flows and the material effects of reinsurance commutations, receivables, trading securities and working capital.
- Review CNA reserve development and the assumptions underlying payout annuity, long-term-care and property-and-casualty reserves; assess the remaining protection and counterparty performance under the $4.0 billion A&EP reinsurance limit.
- Track HighMount gas prices, production declines, hedge coverage, reserve revisions, debt covenants and the potential 2012 ceiling-test impairment.
- Assess Diamond Offshore’s 2012 downtime and revenue outlook, customer concentration in Brazil, contract backlog realization, construction spending and insurance coverage.
- Review Boardwalk’s debt maturities and refinancing, contract renewals and rates, pipeline project costs, and ability to sustain cash flows and distributions.
- Distinguish Loews parent liquidity from consolidated subsidiary assets and cash, and evaluate the effects of share repurchases, subsidiary capital needs and restrictions on distributions.