Loews Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015; filed November 3, 2015. Unaudited consolidated results cover CNA Financial (90%-owned), Diamond Offshore (53%), Boardwalk Pipeline (51%), Loews Hotels, and corporate operations. Amounts are in U.S. dollars; financial figures are generally in millions unless noted.
Financial performance and position
- Third quarter: Revenue was $3.169 billion, down from $3.523 billion in 2014. Net income attributable to Loews was $182 million, or $0.50 per share, versus $208 million, or $0.55 per share. Continuing-operations income attributable to Loews was $182 million versus $179 million.
- First nine months: Revenue was $10.082 billion, down from $10.804 billion. Net income attributable to Loews was $461 million, or $1.25 per share, versus $383 million, or $1.00 per share. Continuing-operations income attributable to Loews fell to $461 million from $747 million; 2014 results included a $364 million loss from discontinued operations.
- Revenue mix, nine months: Insurance premiums were $5.173 billion versus $5.427 billion; net investment income was $1.419 billion versus $1.625 billion; contract drilling revenue was $1.816 billion versus $2.063 billion. Investment gains shifted to a $42 million loss from a $65 million gain.
- Cash flow, nine months: Operating cash flow was $2.195 billion versus $2.096 billion; investing cash flow was negative $1.587 billion versus negative $965 million; financing cash flow was negative $638 million versus negative $785 million. Cash ended the period at $328 million, compared with $364 million at year-end 2014.
- Balance sheet: Total assets were $77.532 billion, down from $78.367 billion at December 31, 2014. Investments totaled $50.550 billion. Total liabilities were $53.379 billion and total equity was $24.153 billion. Short- and long-term debt totaled $10.770 billion, versus $10.668 billion at year-end. Parent-company cash and investments, net of receivables and payables, were $4.8 billion, versus $5.1 billion.
- Capital returns and book value: Loews repurchased 16.3 million shares for $633 million during the nine months and paid $0.1875 per share in dividends. Book value per share was $52.52 at September 30, versus $51.70 at year-end; excluding AOCI, it was $52.59 versus $50.95.
- Insurance underwriting: CNA’s property-and-casualty combined ratio was 94.3% for the nine months, improving from 99.7%; the third-quarter ratio was 85.7% versus 96.1%. CNA recorded $198 million of favorable pretax prior-year development for the nine months. These results benefited from reserve releases, while investment results weakened.
Material changes and notable items
- Third-quarter continuing-operations income improved slightly year over year, principally from higher Diamond Offshore and Boardwalk Pipeline earnings. For the nine months, continuing income fell substantially, reflecting lower CNA and Diamond Offshore earnings and weaker parent-company investment results.
- Diamond Offshore recorded $361 million of rig impairment losses for the nine months, including a $359 million first-quarter charge, and Loews recorded a separate $20 million charge to write off all Diamond Offshore goodwill. Diamond’s nine-month result attributable to Loews was a $34 million loss, versus $136 million of income in 2014.
- CNA’s results included a $49 million after-tax and noncontrolling-interest charge associated with retroactive reinsurance accounting for adverse development on its asbestos and environmental pollution portfolio. CNA also recorded a $55 million curtailment that reduced its pension benefit obligation; 2014 benefited from a separate $50 million postretirement curtailment gain.
- Boardwalk Pipeline’s nine-month earnings benefited from the absence of a $55 million after-tax charge in 2014 for the terminated Bluegrass project, growth-project revenue, and a Gulf South rate-case benefit. The 2015 period also included a $10 million franchise-tax refund in the third quarter.
- Loews Hotels’ revenue grew with hotel acquisitions and higher income from Universal Orlando joint ventures. Loews Hotels paid about $330 million to acquire two hotels during 2015; the filing also reports approximately $360 million of hotel-property and joint-venture acquisitions funded with parent contributions.
- Market-driven changes reduced AOCI: other comprehensive loss was $339 million for the nine months, and AOCI moved from positive $280 million at year-end to negative $23 million at September 30, mainly reflecting unrealized investment and foreign-currency losses.
Outlook, risks, and contingencies
- Diamond Offshore: Management described offshore drilling conditions as depressed and expected adverse conditions to continue. Lower oil prices, reduced customer spending, rig oversupply, falling dayrates, contract cancellations and renegotiations, and low utilization may further pressure revenue, cash flow, and asset values. Contract backlog declined to $5.709 billion as of October 1, 2015 from $6.840 billion in February; 15 rigs were not under contract as of October 19. Moody’s downgraded Diamond’s rating to Baa2 with a negative outlook in October. The company budgeted about $920 million of 2015 capital expenditures; the Ocean GreatWhite was expected to be delivered in the second quarter of 2016, with an estimated total project cost of $764 million and $440 million remaining due at delivery.
- Boardwalk Pipeline: Changing gas flows, lower basis differentials, contract renewals at lower rates, and weaker storage spreads may pressure revenues and distributable cash flow. Growth projects have an estimated aggregate cost of about $1.6 billion and may face delays, cost overruns, regulatory approvals, or changes. Management expected approximately $20 million of 2015 net revenue from the Gulf South rate case and approximately $30 million in 2016, subject to customer elections and final FERC approval. Estimated 2015 capital expenditures were reduced to $410 million.
- CNA and insurance risks: Reserve estimates, long-term care losses, reinsurance recoverability, investment performance, catastrophes, and regulatory limits on subsidiary dividends remain important uncertainties. CNA reported $103 million of catastrophe losses, net of reinsurance, for the nine months. Management said CNA’s current cash flows were sufficient for expected working capital and debt needs.
- Liquidity and parent-company dependence: Loews relies substantially on subsidiary distributions and invested cash to fund obligations and dividends. Subsidiary distributions are subject to earnings, legal and regulatory restrictions, and debt covenants. Diamond expected to use commercial paper and credit facilities for near-term needs; its short-term borrowings were expected to increase over the next 12 months.
- Contingencies: CNA disclosed $375 million of quantifiable guarantees and $260 million of indemnification agreements, as well as certain unlimited indemnifications. Potential future payments under guarantees for structured-settlement annuities were approximately $2.0 billion; CNA said payment was not considered likely, citing a supporting trust. CNA’s A&EP loss portfolio transfer has a $4.0 billion aggregate limit, with $2.6 billion ceded cumulatively and a $2.8 billion collateral trust at September 30. Diamond remains obligated to pay $440 million upon delivery of the Ocean GreatWhite.
- Management reported no material change in market-risk components, no updates or additions to the 2014 Form 10-K risk factors, no material litigation expected to affect results or equity, and effective disclosure controls as of September 30. The filing provides no consolidated earnings guidance.
Most important facts for investors to verify
- Whether offshore drilling demand, contract backlog, utilization, dayrates, and Diamond’s credit profile deteriorate further—and whether additional rig or goodwill impairments occur.
- Whether CNA’s favorable reserve development persists and whether long-term care, A&EP, catastrophe, or reinsurance outcomes require additional charges.
- Whether Boardwalk’s Gulf South settlement receives final FERC approval, customer capacity elections affect expected benefits, and growth projects stay on schedule and budget.
- How subsidiary dividend capacity, parent liquidity, debt maturities, and capital spending affect Loews’ ability to fund its commitments, repurchases, and dividends.
- Whether investment-market volatility, unrealized losses, and weaker limited-partnership returns continue to weigh on earnings and equity.