Loews Corporation — Q2 2016 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2016, compared with the corresponding 2015 periods. Loews is a holding company with major businesses in property and casualty insurance (CNA), offshore drilling (Diamond Offshore), natural gas pipelines (Boardwalk Pipeline) and hotels (Loews Hotels). Unless stated otherwise, amounts are in U.S. dollars.
Financial results and key metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $3.307 billion | $3.435 billion | $6.480 billion | $6.913 billion |
| Income (loss) before tax | $(276) million | $295 million | $(81) million | $400 million |
| Net income (loss) attributable to Loews | $(65) million | $170 million | $37 million | $279 million |
| Diluted earnings (loss) per share | $(0.19) | $0.46 | $0.11 | $0.75 |
| Operating cash flow | Not separately provided | Not separately provided | $771 million | $1.087 billion |
- Six-month investing cash flow was $(1.117) billion and financing cash flow was $260 million. Cash declined $92 million from year-end 2015 to $348 million.
- At June 30, total assets were $79.183 billion, total liabilities $56.152 billion and total equity $23.031 billion. Short-term and long-term debt were $330 million and $10.735 billion, respectively, versus $1.040 billion and $9.520 billion at December 31, 2015.
- Total investments were $52.359 billion, including $42.307 billion of fixed maturities and $5.334 billion of short-term investments. Parent-company cash and investments, net of receivables and payables, were $4.9 billion, compared with $4.3 billion at year-end.
- Book value per share excluding AOCI was $52.84, up from $52.72 at December 31, 2015. The quarterly dividend was $0.0625 per share.
Material changes versus prior periods
- Q2 revenue declined about 4% year over year; first-half revenue declined about 6%. Contract drilling revenue fell $260 million in Q2 and $416 million for the first half, reflecting fewer operating rigs and lower utilization.
- Diamond Offshore recorded a substantial rig impairment after reassessing the timing and prospects for an offshore-market recovery. The filing reports the gross charge as $672 million in a note and $680 million in segment results; the after-tax and noncontrolling-interest impact was $267 million. Diamond Offshore’s Loews-attributable loss was $294 million in Q2 and $251 million for the first half.
- CNA’s Loews-attributable earnings rose to $189 million in Q2 from $124 million, helped by favorable prior-year development and comparison with a 2015 LPT-related charge. First-half earnings fell to $249 million from $334 million, principally due to lower limited-partnership investment returns, realized investment losses versus gains, and a higher LPT-related charge; favorable prior-year development partly offset the decline.
- CNA reported favorable net prior-year development of $106 million in Q2 and $172 million for the first half, compared with $20 million and $18 million, respectively, in 2015. Its overall property-and-casualty combined ratio was 97.4% in Q2 versus 98.4%, and 96.8% for the first half versus 98.6%.
- Boardwalk Pipeline’s Loews-attributable earnings increased to $17 million in Q2 from $12 million and to $48 million for the first half from $37 million, supported by a rate case, growth projects and a one-time legal settlement. Loews Hotels’ earnings declined to $1 million in Q2 from $8 million, partly due to a $13 million joint-venture property impairment.
Outlook, management commentary, risks and unusual items
- Offshore drilling: Management said adverse market conditions were expected to continue for the foreseeable future. Industry utilization, dayrates and customer tenders remained weak; contract cancellations and renegotiations, cold-stacking and scrap decisions, and further impairments were risks. Diamond Offshore had 17 rigs cold-stacked as of August 1, 2016. Its backlog was $4.416 billion, down from $5.195 billion in February 2016. Its 2016 capital-expenditure budget was approximately $650 million.
- Pipeline business: Boardwalk cited lower renewal rates and shorter contract terms amid changing natural-gas flows and market conditions. Producer-customer credit quality and contract performance, including a bankruptcy-related contract rejection, posed risks. Planned 2016 capital expenditures were approximately $760 million, including growth projects.
- Insurance and reinsurance: CNA’s reserve estimates are inherently uncertain; catastrophe losses were $121 million net of reinsurance for the first half, versus $89 million in 2015. CNA recorded $200 million of first-half adverse A&EP development before the LPT, with amounts ceded under the agreement; the reported retroactive-reinsurance benefit was $82 million pretax for the first half. The filing describes a $74 million after-tax and noncontrolling-interest LPT-related charge for the period.
- Other risks: The U.K. Brexit vote could increase the complexity and cost of CNA’s European regulatory compliance or affect its ability to write business there. Loews depends on subsidiary distributions to meet parent obligations; distributions are subject to subsidiary cash availability, insurance regulation and debt covenants. Moody’s downgraded Loews’s unsecured rating from A2 to A3 in March 2016. Diamond Offshore also faced credit-rating downgrades and potential constraints on capital-market access.
- Capital and contingencies: CNA disclosed approximately $2.0 billion of potential future payments under guarantees for structured-settlement annuities, but said payment was not considered likely given the supporting trust. CNA also has quantifiable guarantees and indemnities and certain uncapped indemnifications. Management said ordinary-course litigation was not expected to materially affect results or equity.
- No company-wide earnings guidance is stated in the provided filing text. Management said it continued to pursue conservative financial strategies and opportunities for responsible growth. The filing states disclosure controls were effective and reports no material changes to internal control over financial reporting in the quarter.
Important facts for investors to verify
- Reconcile the reported gross Diamond Offshore impairment amount: $672 million in the note versus $680 million in segment results; confirm the $267 million after-tax and noncontrolling-interest effect.
- Assess Diamond Offshore’s contract backlog, cold-stacked fleet, customer termination exposure, liquidity and ability to fund the stated capital program if offshore conditions remain weak.
- Review CNA’s reserve assumptions and the LPT accounting, including the difference between gross adverse development, ceded amounts, recognized benefits and the after-tax earnings impact.
- Monitor CNA investment returns, catastrophe losses and favorable prior-year reserve development, which materially affected comparisons.
- Evaluate Boardwalk’s customer credit exposure, renewal economics and funding needs for growth projects, and the effect of regulatory and market changes on future cash flows.
- Consider parent-company reliance on subsidiary dividends, rating changes and the distinction between consolidated cash and cash available to Loews at the parent level.