Business Context and Reporting Period
Company: Loews Corporation (a diversified holding company)
Reporting Period: Quarter and nine months ended September 30, 2008
Key Business Segments: Commercial property and casualty insurance (CNA Financial), offshore drilling (Diamond Offshore), natural gas exploration/production (HighMount), natural gas transmission (Boardwalk Pipeline), and hotels (Loews Hotels).
Major Corporate Event: In June 2008, Loews completed the separation of Lorillard, Inc. (tobacco business), which is now reported as a discontinued operation. This transaction resulted in a significant non-cash gain.
Key Financial Metrics (Nine Months Ended Sept 30, 2008)
| Metric | 2008 (9 Months) | 2007 (9 Months) |
|---|---|---|
| Total Revenues | $10,504 million | $10,710 million |
| Net Income (Total) | $5,488 million | $1,977 million |
| Net Income (Continuing Ops) | $776 million | $1,292 million |
| Net Income (Discontinued Ops) | $4,712 million | $685 million |
| Net Investment Income | $1,531 million | $2,165 million |
| Investment Losses | $(812) million | $(183) million |
| Total Assets | $73,417 million | $76,115 million |
| Total Liabilities | $53,508 million | $54,626 million |
| Long-Term Debt | $7,401 million | $6,900 million |
| Cash and Short-Term Investments | $8,909 million | $8,370 million |
Material Changes vs. Prior Period
- Discontinued Operations Impact: The dramatic increase in total net income ($5.49B vs $1.98B) is primarily driven by a $4.36 billion gain on the disposal of Lorillard, Inc. Excluding this gain, continuing operations net income declined significantly.
- Investment Performance: Net investment income decreased by $634 million (29.3%) due to lower interest rates and poor performance in limited partnerships. Investment losses surged to $812 million (from $183 million) due to other-than-temporary impairment (OTTI) charges on fixed maturities and equity securities, particularly in the financial sector (Fannie Mae, Freddie Mac, Washington Mutual).
- Insurance Segment (CNA): CNA reported a loss from continuing operations of $16 million for the nine months, compared to income of $1,019 million in 2007. This was driven by higher catastrophe losses (Hurricanes Gustav and Ike), increased investment losses, and lower investment income.
- Energy Segment Performance:
- Diamond Offshore: Net income increased 49.4% to $475 million due to higher dayrates and utilization.
- HighMount: Net income increased to $142 million (from $40 million) driven by higher commodity prices and production volumes.
- Boardwalk Pipeline: Net income increased 32.4% to $98 million due to expansion projects and higher throughput.
Guidance, Outlook, Risks, and Unusual Items
- Capital Markets Disruption: Management warns that continued deterioration in public debt and equity markets could lead to substantial additional realized and unrealized investment losses. Subsequent to the quarter end, limited partnership investments indicated a pretax loss of approximately $110 million to be recognized in Q4.
- Catastrophe Exposure: CNA recorded $348 million in catastrophe losses for the nine months ended Sept 30, 2008, primarily from Hurricanes Gustav and Ike. Future catastrophe losses remain a significant risk.
- Asbestos and Environmental (A&E) Reserves: CNA maintains significant reserves for A&E claims ($1.215B net asbestos, $194M net environmental). Management notes that ultimate costs are subject to significant uncertainty and litigation outcomes.
- Subsequent Event - CNA Preferred Stock: On October 27, 2008, Loews agreed to purchase $1.25 billion of CNA's non-voting cumulative senior preferred stock. CNA will use $1.0 billion of proceeds to purchase a surplus note from its subsidiary, Continental Casualty Company (CCC), to strengthen statutory capital. CNA has suspended its common stock dividend.
- Boardwalk Pipeline Expansion: Boardwalk expects to incur approximately $0.9 billion in expansion capital expenditures in the remainder of 2008 and 2009. Loews has committed to provide up to $1.0 billion in equity capital if external funds are unavailable.
- Diamond Offshore Rig Damage: The rig Ocean Tower sustained significant damage during Hurricane Ike and is expected to be out of service through Q3 2009. Repair costs are being assessed.
Investor Verification Checklist
- Investment Portfolio Quality: Verify the extent of unrealized losses in the fixed maturity and equity portfolios, specifically regarding exposure to sub-prime, Alt-A, and financial sector securities (Fannie Mae, Freddie Mac, AIG).
- CNA Statutory Capital: Confirm the impact of the $1.25 billion preferred stock issuance and the $1.0 billion surplus note on CNA's risk-based capital ratios and dividend-paying capacity.
- Discontinued Operations Gain: Ensure the $4.36 billion gain from the Lorillard separation is excluded when analyzing core operating performance and future earnings potential.
- Energy Sector Outlook: Assess the sustainability of high dayrates for Diamond Offshore and natural gas prices for HighMount given the global economic slowdown and falling oil prices noted in late 2008.
- Boardwalk Pipeline Funding: Monitor the execution of Boardwalk's expansion projects and the potential need for Loews to inject the committed $1.0 billion in equity capital.
- Asbestos Litigation: Review updates on major asbestos litigation (e.g., Keasbey, Burns & Roe) and the adequacy of current reserves against potential "non-products" liability claims.