Loews Corporation — Q3 2019 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2019; balance-sheet comparisons are with December 31, 2018. Loews is a holding company with businesses in property and casualty insurance (CNA), offshore drilling (Diamond Offshore), natural gas transportation and storage (Boardwalk Pipelines), hotels (Loews Hotels & Co), and rigid plastic packaging (Consolidated Container, included in Corporate).
Financial performance and position
Unless noted otherwise, amounts are in millions of dollars. Loews-attributable results include its ownership interests in subsidiaries.
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $3,675 | $3,608 | $11,055 | $10,779 |
| Income before tax | $60 | $354 | $843 | $1,066 |
| Consolidated net income | $39 | $289 | $660 | $917 |
| Net income attributable to Loews | $72 | $278 | $715 | $801 |
| Diluted earnings per share | $0.24 | $0.88 | $2.34 | $2.49 |
| Operating cash flow | Not provided for quarter | $1,271 | $3,395 |
At September 30, total assets were $82.5 billion, total liabilities $60.2 billion, and total equity $22.3 billion. Cash was $442 million; investments totaled $51.4 billion. Short- and long-term debt totaled approximately $11.5 billion ($87 million and $11.4 billion, respectively). Parent Company cash and investments, net of receivables and payables, were $3.5 billion, up from $3.1 billion at year-end 2018. The filing does not present a consolidated current ratio or a single consolidated margin measure.
- Insurance premiums rose to $1.89 billion in Q3 and $5.52 billion for 9M. Net investment income was $525 million and $1.73 billion, respectively.
- CNA Property & Casualty combined ratios were 97.6% for Q3 and 97.1% for 9M, versus 94.2% and 93.7% in 2018. A ratio below 100% indicates underwriting profit before investment income.
- Loews repurchased 13.2 million shares for $642 million in the first nine months. It paid $57 million in shareholder dividends. After quarter-end, it repurchased another 1.8 million shares for $90 million through October 25.
Material changes versus prior periods
- Loews-attributable Q3 income fell $206 million year over year. Results included a $151 million after-tax, noncontrolling-interest-adjusted CNA long-term-care reserve charge; excluding that charge, management attributed the decline mainly to lower CNA and Diamond Offshore results, partly offset by higher parent investment income.
- For 9M, Loews-attributable income decreased $86 million. The long-term-care charge, lower CNA favorable prior-year reserve development, and a $15 million after-tax debt-retirement charge weighed on results. Boardwalk earnings benefited from Loews owning 100% of it in 2019, versus 51% for part of 2018.
- Operating cash flow decreased $2.12 billion year over year, including a substantial change in trading securities cash flows: a $544 million use in 2019 versus a $1.50 billion source in 2018.
- Investment values increased: fixed maturities were $42.5 billion at fair value, versus $39.7 billion at year-end 2018. After-tax other comprehensive income for 9M was $1.01 billion, versus a $757 million loss in 2018, largely reflecting investment valuation changes.
Outlook, management commentary, risks and unusual items
- CNA long-term care: The Q3 gross premium valuation identified a $216 million pretax premium deficiency, primarily driven by lower discount-rate assumptions and also affected by persistency assumptions. CNA said the active-life reserves now reflect its best estimate with no margin for adverse deviation; the next valuation is expected in Q3 2020. Reserves are sensitive to morbidity, persistency, investment yields, and regulatory approval and timing of premium increases.
- Insurance risk: CNA recorded $128 million of net catastrophe losses in 9M 2019 versus $106 million a year earlier. Prior-year reserve development was favorable by $29 million, compared with $158 million favorable in 2018; Q3 development was unfavorable by $16 million. Management cautions that ultimate claim costs can exceed estimates.
- Diamond Offshore: Management described the offshore drilling market as oversupplied and challenging. Industry utilization was about 66%, below the approximately 80% level analysts cited as potentially needed for contractor pricing power. Backlog was $1.8 billion as of October 1, 2019, down from $2.0 billion at January 1. Diamond forecast 2019 capital expenditures of $360–$380 million and Q4 spending of $110–$130 million. Its credit ratings were below investment grade; S&P downgraded its corporate and senior unsecured ratings to CCC+ in September, while Moody’s outlook was negative.
- Other businesses: Boardwalk reported that about 88% of trailing-12-month revenue, excluding retained fuel, came from fixed-fee firm agreements and estimated $10.3 billion of future fixed-fee revenue under agreements in place at quarter-end. These estimates are subject to contract, tariff, regulatory and utilization conditions. Loews Hotels’ revenue and income were affected by renovations, hotel sales, asset impairments, and lower joint-venture income. Consolidated Container completed three acquisitions for approximately $260 million, funded primarily with debt.
- Debt and liquidity: CNA issued $500 million of 3.9% notes due 2029 and redeemed $500 million of 5.9% notes due 2020, recording a $21 million pretax loss. Boardwalk issued $500 million of 4.8% notes due 2029. Consolidated Container borrowed $250 million at LIBOR plus 3.5%, due 2026. Loews relies on subsidiary distributions, which may be constrained by regulation, subsidiary liquidity, and debt covenants. CNA’s CCC subsidiary had approximately $327 million of dividend capacity without prior regulatory approval as of September 30.
- Contingencies and accounting: A Boardwalk-related class action survived in part after an October 2019 court ruling; remaining claims were expected to go to trial in early 2021. CNA disclosed approximately $1.7 billion of potential future structured-settlement guarantee payments over annuitants’ lifetimes, but said payments were not considered likely because of a supporting trust. Loews adopted lease accounting in 2019, recording $612 million of operating lease assets and $694 million of liabilities at September 30. Management did not expect the upcoming credit-loss accounting standard to have a material impact; it was still evaluating the insurance-contract standard.
- The filing states that there were no material changes in market-risk components and no updates to previously disclosed risk factors. Management reported disclosure controls were effective at September 30, 2019. No company-wide earnings guidance was provided.
Important facts for investors to verify
- Track CNA’s long-term-care assumptions, future reserve reviews, premium-rate approvals, and sensitivity to interest rates and policyholder experience.
- Assess CNA underwriting trends, especially the rising combined ratio, catastrophe losses, and reduced favorable reserve development.
- Review Diamond Offshore’s liquidity, below-investment-grade ratings, contract backlog, capital needs, and ability to renew or secure work in a persistently oversupplied market.
- Evaluate how much operating cash flow is recurring versus affected by portfolio trading and working-capital movements; 9M cash flow was materially lower year over year.
- Confirm subsidiary dividend capacity and debt obligations, and monitor the remaining Boardwalk litigation and other disclosed contingencies.