Loews Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011; comparative periods are the three and six months ended June 30, 2010. Loews is a holding company with principal operations in insurance, offshore drilling, natural gas production and pipelines, and hotels. The unaudited statements consolidate subsidiaries, including CNA (90% owned), Diamond Offshore (50.4%), and Boardwalk Pipeline (64%). Amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Total revenue | $3,542 | $3,486 | $7,210 | $7,199 |
| Income before tax | $551 | $803 | $1,312 | $1,699 |
| Net income attributable to Loews | $252 | $366 | $634 | $786 |
| Diluted earnings per share | $0.62 | $0.87 | $1.54 | $1.87 |
| Dividends per share | $0.0625 | $0.0625 | $0.125 | $0.125 |
First-half operating cash flow was $916, versus $800 in 2010; investing cash flow was $373, versus cash use of $152; and financing cash flow was a use of $1,263, versus $745. Cash at June 30 was $148, compared with $120 at year-end 2010. Parent-company cash and investments, net of receivables and payables, were $4.3 billion, down from $4.6 billion at year-end.
Total assets were $76.1 billion and total equity $23.5 billion at June 30. Short- and long-term debt totaled $9.169 billion, down from $9.477 billion at December 31, 2010; long-term debt was $9.163 billion. Total investments were $48.9 billion. Book value per share was $46.81, versus $44.51 at year-end.
Material changes and business drivers
- Insurance: CNA’s Loews-attributable net income fell to $115 in Q2 from $259, and to $317 for the first half from $484. Lower favorable prior-year reserve development and higher catastrophe losses were principal causes. CNA catastrophe losses, net of reinsurance, were $100 in Q2 and $155 in the first half, compared with $48 and $88 in 2010. Total favorable prior-year development was $72 in Q2 and $107 for the first half, versus $265 and $300.
- CNA underwriting: CNA Specialty’s combined ratio was 92.2% in Q2 and 93.5% for the first half, up from 79.0% and 85.7%. CNA Commercial’s was 117.7% and 112.6%, up from 98.4% and 104.1%; catastrophe losses and reduced reserve releases weighed on results.
- Diamond Offshore: Loews-attributable income rose to $125 in Q2 from $104 and was $242 for the first half versus $240. Higher utilization of high-specification floaters supported Q2 results; weaker utilization and lower dayrates for other rig classes were offsets.
- Other operations: HighMount earned $15 in Q2 versus a $6 loss, but first-half income declined to $34 from $18? The filing reports $34 in 2011 and $18 in 2010. Boardwalk Pipeline income attributable to Loews fell to $5 from $21 in Q2 and $38 from $59 for the first half. Loews Hotels’ income improved to $6 from $4 in Q2 and $8 from $3 for the first half.
- Investment results: Consolidated investment gains were $19 in Q2 and $42 for the first half, versus $11 and $32. CNA’s net investment income increased $26 for the first half, mainly from limited partnership results, partly offset by lower fixed-income income.
Outlook, risks, contingencies, and unusual items
- No consolidated earnings guidance is provided. Management says results for the first half are not necessarily indicative of full-year results. The company describes a continuing strategy of conservative financial management while pursuing growth, acquisitions, dispositions, and efficiencies.
- Diamond Offshore reported contract backlog of approximately $8.65 billion as of July 21, 2011, up from $6.65 billion on February 1. Management cited continuing Gulf of Mexico permitting and regulatory uncertainty and possible market weakness through 2011; international tender activity and demand were more encouraging. Three new drillships are under construction at an expected aggregate cost of about $1.8 billion, with $478 paid in initial installments.
- HighMount’s lower drilling activity continued to reduce gas production. Its hedges covered approximately 76% of estimated 2011 and 53% of 2012 natural-gas-equivalent production. Commodity prices, production, reserve revisions, and costs remain significant uncertainties.
- Boardwalk Pipeline faces competitive pressure from new gas supplies and pipelines, weaker basis and seasonal price spreads, and difficulty renewing some contracts at attractive rates. It recorded a $28 impairment charge on materials and supplies. Management expected 2011 pipeline maintenance costs of about $250, including $82 of maintenance capital expenditures.
- Diamond Offshore’s new-build drillship commitments, CNA’s insurance reserve estimates, catastrophe exposure, investment valuation and credit risks, and subsidiary access to financing are material areas of uncertainty. HighMount had $1.1 billion of variable-rate term loans due July 2012 and expected to refinance, use cash, or receive parent support.
- CNA completed its acquisition of CNA Surety’s remaining noncontrolling interests on June 10 for approximately $475. Boardwalk Pipeline issued $440 of 2021 notes and sold 6 million common units for net proceeds of about $174. Loews repurchased 9.9 million shares for $415 during the first half and a further 1.0 million shares for $41 through July 28.
- An insurance brokerage antitrust settlement was preliminarily approved; a fairness hearing was scheduled for September 2011. CNA said the settlement, as structured, was not expected to have a material impact. Loews reported tobacco-related litigation but said it did not expect a material effect and cited Lorillard’s indemnification obligations. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether CNA’s reserve development and catastrophe losses continue to pressure underwriting results, particularly CNA Commercial’s combined ratio above 100%.
- Diamond Offshore’s realized utilization and dayrates, Gulf permitting conditions, backlog conversion, and funding needs for its drillship program.
- HighMount’s 2012 refinancing progress and the sensitivity of production, cash flow, and reserves to gas prices and reduced drilling.
- Boardwalk Pipeline’s contract renewals, storage and transportation revenue trends, maintenance spending, and borrowing levels; its revolver borrowings were $359 as of July 29, versus $269 at June 30.
- The quality and valuation of CNA’s investment portfolio, including mortgage-backed and other asset-backed exposures, and the assumptions behind insurance reserves and litigation contingencies.