Business Context and Reporting Period
Company: Loews Corporation (a holding company)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2010
Primary Segments:
- CNA Financial: Commercial property and casualty insurance (90% owned).
- Diamond Offshore: Offshore oil and gas drilling rigs (50.4% owned).
- HighMount: Natural gas exploration and production (wholly owned).
- Boardwalk Pipeline: Interstate natural gas pipeline systems (66% owned).
- Loews Hotels: Hotel operations (wholly owned).
Key Financial Metrics
| Metric (in millions) | Q2 2010 | Q2 2009 | 6M 2010 | 6M 2009 |
|---|---|---|---|---|
| Total Revenues | $3,486 | $3,534 | $7,199 | $6,557 |
| Net Income (Consolidated) | $541 | $559 | $1,164 | $86 |
| Net Income Attributable to Loews | $366 | $340 | $786 | $(307) |
| Diluted EPS (Loews) | $0.87 | $0.78 | $1.87 | $(0.70) |
| Total Assets | $75,059 | N/A | N/A | N/A |
| Total Liabilities | $52,332 | N/A | N/A | N/A |
| Shareholders' Equity | $18,205 | N/A | N/A | N/A |
| Long-Term Debt | $8,809 | N/A | N/A | N/A |
| Cash & Short-Term Investments | $5,713 | N/A | N/A | N/A |
Note: Balance sheet data is as of June 30, 2010. Prior year balance sheet data is not provided in the summary tables.
Material Changes vs. Prior Period
- Profitability Turnaround: Net income attributable to Loews for the six months ended June 30, 2010, was $786 million, a significant improvement from a net loss of $307 million in the same period in 2009. This reversal was primarily driven by the absence of a $1.036 billion non-cash impairment charge on HighMount's natural gas properties recorded in Q1 2009.
- Investment Performance: Net investment gains for the six months of 2010 were $32 million, compared to net investment losses of $828 million in 2009. This improvement is largely due to significantly lower other-than-temporary impairment (OTTI) losses at CNA ($117 million in 2010 vs. $1,009 million in 2009).
- Segment Performance:
- CNA Financial: Net income attributable to Loews improved to $484 million (6M 2010) from a loss of $71 million (6M 2009), driven by favorable prior year reserve development ($300 million) and improved investment results.
- Diamond Offshore: Net income attributable to Loews decreased to $240 million (6M 2010) from $344 million (6M 2009) due to lower dayrates and utilization rates, exacerbated by the Gulf of Mexico drilling moratorium.
- HighMount: Net income attributable to Loews was $37 million (6M 2010) compared to a loss of $612 million (6M 2009), excluding the prior year impairment charge.
- Asset Sales: HighMount sold assets in Michigan and Alabama for approximately $500 million in net proceeds, which were used to reduce debt. Diamond Offshore sold the Ocean Shield rig for $186 million in July 2010 (subsequent event).
Guidance, Outlook, Risks, and Unusual Items
- Subsequent Event (A&E Reinsurance): On July 14, 2010, CNA entered into an agreement with National Indemnity Company (NICO), a Berkshire Hathaway subsidiary, to cede approximately $1.6 billion of net asbestos and environmental pollution (A&E) liabilities. CNA will pay a $2.0 billion premium and expects to recognize a loss of approximately $340 million (after tax) upon closing, expected in Q3 2010.
- Gulf of Mexico Moratorium: Diamond Offshore faces uncertainty due to the U.S. government moratorium on deepwater drilling following the Macondo well blowout. This has led to a freeze on floater activity and reduced jack-up activity, impacting utilization and dayrates. The company is mobilizing rigs to international locations to mitigate revenue loss.
- Health Care Reform: CNA anticipates potential increased operating costs and underwriting losses due to the Patient Protection and Affordable Care Act, particularly affecting workers' compensation and long-term care products.
- Regulatory Reform: The Dodd-Frank Act introduces new federal oversight of the insurance industry, the impact of which CNA cannot currently predict.
- IT Transformation: CNA is undergoing a significant IT transformation program with total estimated costs of $41 million, of which $29 million was incurred through Q2 2010.
Investor Verification Checklist
- A&E Reinsurance Closing: Verify the timing and final terms of the CNA/NICO transaction and the impact of the expected $340 million loss on Q3 2010 results.
- Gulf of Mexico Impact: Monitor the duration of the drilling moratorium and the success of Diamond Offshore in redeploying rigs to international markets to maintain dayrates.
- Investment Portfolio Quality: Review CNA's exposure to asset-backed securities and sub-prime/Alt-A collateral, noting that while OTTI losses have decreased, unrealized losses remain significant ($921 million gross).
- HighMount Hedging: Assess the effectiveness of HighMount's hedging program given the volatility in natural gas prices and the recent discontinuation of hedge accounting for certain instruments.
- Regulatory Compliance: Track the implementation of new safety regulations for Diamond Offshore and the impact of health care reform on CNA's underwriting margins.