Business Context and Reporting Period
Company: Loews Corporation (Delaware holding company)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2008
Key Business Segments: Commercial property and casualty insurance (CNA Financial), offshore oil and gas drilling (Diamond Offshore), natural gas exploration/production (HighMount), natural gas transmission (Boardwalk Pipeline), and hotels (Loews Hotels).
Major Event: In June 2008, the Company completed the "Separation" of Lorillard, Inc. (tobacco subsidiary), distributing shares to former Carolina Group stockholders and exchanging remaining shares for Loews common stock. Lorillard is now reported as a discontinued operation.
Key Financial Metrics (Six Months Ended June 30, 2008)
| Metric | 2008 (6 Months) | 2007 (6 Months) |
|---|---|---|
| Total Revenues | $7,534 million | $7,185 million |
| Net Income (Total) | $5,625 million | $1,422 million |
| Net Income (Continuing Ops) | $920 million | $983 million |
| Net Income (Discontinued Ops) | $4,705 million | $439 million |
| Net Income Attributable to Loews Common | $5,414 million | $1,163 million |
| Diluted EPS (Loews Common) | $10.41 | $2.15 |
| Total Assets | $74,782 million | $76,115 million |
| Total Liabilities | $53,747 million | $54,626 million |
| Long-Term Debt | $7,137 million | $6,900 million |
| Cash and Cash Equivalents | $168 million | $140 million |
| Operating Cash Flow (Total) | $2,831 million | $2,312 million |
Material Changes vs. Prior Period
- Discontinued Operations Impact: Net income increased significantly due to a $4.3 billion non-cash gain on the disposal of Lorillard (Discontinued Operations). Excluding this, income from continuing operations decreased slightly ($920M vs $983M) primarily due to lower investment income and underwriting results at CNA.
- Investment Performance: Net investment income declined to $1,176 million (from $1,518 million) due to lower yields and trading portfolio results. Net investment losses were $162 million (vs losses of $129 million in 2007), driven by other-than-temporary impairment (OTTI) losses of $256 million, primarily in asset-backed bonds related to the sub-prime crisis.
- Segment Performance:
- Diamond Offshore: Revenues increased 38% to $1,762 million and net income increased 47% to $330 million, driven by higher dayrates and utilization.
- CNA Financial: Net income decreased due to lower investment income, higher catastrophe losses ($100 million net of reinsurance), and unfavorable underwriting results in Standard Lines.
- Boardwalk Pipeline: Revenues increased 20% to $419 million due to expansion projects and higher gas transportation revenues.
- Capital Structure: The former Carolina Group stock was eliminated. The Company repurchased 2.65 million shares of CNA common stock and purchased $686 million of Boardwalk Pipeline Class B units.
Guidance, Outlook, Risks, and Contingencies
- Investment Risks: The Company faces significant exposure to asset-backed and sub-prime mortgage securities ($10.1 billion fair value). While management believes remaining unrealized losses are temporary, continued market deterioration could trigger additional OTTI charges.
- Insurance Reserves: CNA maintains significant reserves for Asbestos and Environmental (A&E) claims ($1.229 billion net asbestos reserves). Management notes that ultimate costs are subject to uncertainty and litigation outcomes (e.g., Keasbey, Burns & Roe cases).
- Energy Sector Risks: Diamond Offshore and Boardwalk Pipeline face risks related to commodity price fluctuations, rig utilization rates, and the timing/cost of expansion projects. Boardwalk expects to incur $1.8 billion in expansion capital expenditures for the remainder of 2008.
- Tobacco Litigation: Although Lorillard was separated, Loews remains a defendant in four tobacco-related lawsuits. Lorillard has agreed to indemnify Loews, but there is a risk that indemnification may be unenforceable or uncollectible.
- Accounting Changes: The Company adopted SFAS No. 157 (Fair Value Measurements) and FSP No. FIN 39-1. Future adoption of SFAS No. 160 will change the reporting of noncontrolling interests and deferred gains on subsidiary equity issuances.
Investor Verification Checklist
- Discontinued Operations Gain: Verify the non-recurring nature of the $4.3 billion gain from the Lorillard separation when assessing core earnings power.
- Investment Portfolio Quality: Review the composition of asset-backed securities and the severity of unrealized losses to assess potential future OTTI charges.
- Catastrophe Exposure: Monitor CNA's catastrophe loss estimates and reserve adequacy given the volatility in weather-related events.
- Capital Expenditures: Track Boardwalk Pipeline's ability to fund its $1.8 billion remaining expansion costs and Diamond Offshore's rig upgrade expenditures.
- Indemnification Status: Confirm the enforceability of the indemnification agreement with Lorillard regarding tobacco-related liabilities.