LOEWS CORP quarterly report, Q2 FY2014

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Loews Corporation 10-Q Summary

Business context and reporting period

Quarter ended June 30, 2014; financial statements are unaudited. Loews is a holding company with interests in CNA Financial (90%), Diamond Offshore (51%), Boardwalk Pipeline (53%) and wholly owned Loews Hotels. The filing reports three- and six-month results against the comparable 2013 periods.

Financial results and position

Amounts are in millions except per-share data. Consolidated revenue was $3,593 in Q2 2014 versus $3,616 in Q2 2013, and $7,281 in the first half versus $7,234. Income before tax was $546 versus $566 for Q2 and $1,060 versus $1,203 for the first half.

  • Loews-attributable income from continuing operations: Q2 $303 ($0.79 per share), compared with $261 ($0.67); first half $568 ($1.47), compared with $583 ($1.49).
  • Loews-attributable net income: Q2 $116 ($0.30 per share), compared with $269 ($0.69); first half $175 ($0.45), compared with $511 ($1.31). Discontinued operations reduced attributable income by $187 in Q2 and $393 in the first half of 2014.
  • Cash flow, first half: operating cash flow $1,192 versus $503; investing cash flow use $1,159 versus $1,293; financing cash flow use $41 versus $734. Cash ended the period at $277, down from $294 at year-end 2013.
  • Balance sheet at June 30: total assets $82,894; total liabilities $57,539; total equity $25,355. Investments were $52,951. Short- and long-term debt totaled approximately $10,802, versus $10,344 at year-end 2013.
  • Shareholder measures: book value per share was $51.85, up from $50.25 at year-end 2013; excluding AOCI it was $49.74 versus $49.38. Quarterly dividend was $0.0625 per share, unchanged from 2013.
  • Insurance underwriting: CNA’s combined ratio was 101.3% in Q2 and 101.4% for the first half, versus 101.5% in both comparable 2013 periods. The first-half ratio included unfavorable prior-year development and higher catastrophe losses.

Material changes versus comparable periods

  • Q2 continuing income attributable to Loews increased, mainly on higher CNA earnings and improved parent investment income, partly offset by lower Diamond Offshore earnings. First-half continuing income declined, principally reflecting Diamond Offshore weakness and the $55 after-tax-and-noncontrolling-interest Bluegrass project write-off.
  • Net income fell sharply because HighMount and CNA’s annuity/pension deposit business were reported as discontinued operations and incurred impairment charges. HighMount’s Q2 impairment was $259 pretax ($167 after tax); CNA recorded a $193 after-tax-and-noncontrolling-interest impairment related to the CAC sale in Q1.
  • Diamond Offshore revenue and earnings declined: Q2 contract drilling revenue was $650 versus $745 and Loews-attributable segment income was $42 versus $87. Lower utilization and higher drilling, depreciation and interest costs outweighed higher dayrates in some rig categories.
  • CNA’s first-half net investment income was $1,076 versus $1,125, while its Q2 amount was $550 versus $534. CNA also recorded a $50 million after-tax-and-noncontrolling-interest postretirement plan curtailment gain in Q2.
  • Loews Hotels’ revenue rose to $112 in Q2 from $101; RevPAR increased to $199.57 from $177.21. Boardwalk Pipeline’s Q2 revenue decreased to $295 from $304, while first-half revenue rose to $652 from $633.

Outlook, commentary, risks and unusual items

  • No consolidated earnings guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results.
  • Loews expected an auction process to result in a HighMount sale. The eventual sale price and transaction costs could cause further positive or negative impairment adjustments; additional exit and disposal costs were expected. CNA completed the CAC sale on August 1, 2014; a separate coinsurance transaction was expected to produce an approximately $31 million after-tax-and-noncontrolling-interest loss in Q3.
  • Diamond Offshore described offshore drilling markets as weakening, with rig oversupply, fewer bidding opportunities, lower dayrates and potential idle time. Its contract backlog was $6.243 billion as of July 23, 2014, down from $6.829 billion in February. The company budgeted about $2.0 billion of 2014 capital expenditures, including rig construction. It also disclosed a customer’s termination of the Ocean Vanguard contract and intends to contest it.
  • Boardwalk Pipeline cited pressure on transportation contract renewals and storage/PAL demand from narrower market spreads and changing gas flows. It planned approximately $420 million of 2014 capital expenditures, including a fully contracted expansion project. The Bluegrass project was abandoned after insufficient customer commitments and higher estimated costs.
  • Potential contingencies include Diamond Offshore’s disputed Egyptian tax matter (about $50 million of additional tax and penalties if its position fails), potential UK tax increases under legislation enacted in July, and possible material reimbursement exposure relating to Petrobras’ Brazilian withholding-tax assessments. CNA also disclosed indemnification agreements, including some without contractual monetary limits.
  • Management identified estimation uncertainty in insurance reserves, investment valuations, long-term-care and annuity obligations, HighMount reserves and income taxes. CNA reported $130 million of catastrophe losses, net of reinsurance, for the first half. Loews stated no material market-risk changes and no updates to the risk factors in its 2013 Form 10-K.

Important facts for investors to verify

  • Final HighMount sale proceeds, transaction costs and any additional impairment or disposal charges.
  • Q3 recognition and subsequent accounting for the estimated $31 million CAC-related coinsurance loss.
  • Diamond Offshore utilization, dayrates, backlog conversion, rig delivery costs and outcome of the Ocean Vanguard contract dispute.
  • CNA reserve development, catastrophe claims and investment income trends, including the sustainability of the Q2 benefit from the curtailment gain.
  • Resolution of the Egyptian, UK and Brazilian tax matters, and Boardwalk’s ability to renew contracts and finance planned projects.