Loews Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; comparisons are with the same 2015 periods unless stated otherwise. Loews is a holding company with principal operations in property and casualty insurance (CNA), offshore drilling (Diamond Offshore), natural gas pipelines (Boardwalk Pipeline) and hotels (Loews Hotels). Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenues | $3.287bn | $3.169bn | $9.767bn | $10.082bn |
| Income before income tax | $556m | $348m | $475m | $748m |
| Net income attributable to Loews | $327m | $182m | $364m | $461m |
| Diluted earnings per share | $0.97 | $0.50 | $1.08 | $1.25 |
| Operating cash flow | Not presented for the quarter | $1.716bn | $2.195bn |
For the nine-month period, investing cash flow was a use of $1.846bn (versus $1.587bn used in 2015), financing cash flow provided $42m (versus $638m used), and cash declined $96m to $344m. Parent-company cash and investments, net of receivables and payables, were $5.0bn at September 30, versus $4.3bn at year-end 2015.
At September 30, total assets were $78.508bn, total liabilities $55.102bn and total equity $23.406bn. Investments totaled $52.385bn. Short-term and long-term debt were $185m and $10.737bn, respectively, compared with $1.040bn and $9.520bn at December 31, 2015. Book value per share rose to $54.22 from $51.67. Loews paid $0.1875 per share in dividends during the first nine months; its quarterly dividend was $0.0625 per share.
Material changes and segment results
- Third-quarter earnings attributable to Loews rose $145m year over year, mainly on stronger CNA results and improved parent investment returns; lower Diamond Offshore earnings partly offset the gains.
- Nine-month earnings attributable to Loews fell $97m, primarily because of Diamond Offshore’s weaker results and impairment charges. CNA, Boardwalk Pipeline and the parent investment portfolio improved; hotel results declined.
- Diamond Offshore recorded $680m of pretax asset impairment in the first nine months, including $672m in Q2; the after-tax and noncontrolling-interest impact was $267m. Its nine-month loss before tax was $550m versus $42m in 2015. Q3 pretax income was $36m versus $139m.
- Offshore drilling revenue fell to $340m in Q3 from $599m and to $1.141bn year to date from $1.816bn, reflecting reduced rig activity and utilization. Backlog was $4.082bn as of October 1, down from $5.195bn in February.
- CNA’s Q3 net income attributable to Loews increased to $308m from $161m; nine-month results rose to $557m from $495m. Its P&C combined ratio was 90.4% in Q3 versus 85.7%, and 94.6% year to date versus 94.3%. Favorable prior-year development was $137m in Q3 and $309m year to date, versus $180m and $198m, respectively, in 2015.
- Boardwalk Pipeline’s nine-month net income attributable to Loews increased to $62m from $55m, supported by growth projects, rate changes and the Evangeline pipeline returning to service. Loews Hotels’ nine-month attributable income fell to $7m from $15m, including a $13m impairment of a joint-venture hotel interest.
Management commentary, outlook and risks
- Management said Diamond Offshore’s depressed market is expected to persist. The company cited falling floater utilization, contract cancellations, weak tendering, oversupply, pressure on dayrates and possible further declines in 2017. Ten rigs were cold-stacked at October 1; additional rigs were being marketed for sale. Diamond Offshore’s 2016 capital expenditure budget was approximately $625m.
- Diamond Offshore reported that Petrobras sought to terminate the Ocean Valor contract. A Brazilian court issued a preliminary injunction keeping the contract in effect pending the contract term or further court order; Petrobras appealed. The outcome remains uncertain. BP’s decision not to proceed with its Great Australian Bight campaign was stated not to affect the Ocean GreatWhite contract.
- Boardwalk Pipeline warned that changing gas flows, lower commodity prices, contract renewals at lower rates, and customer credit or bankruptcy risks could adversely affect revenue and distributable cash flow. Its growth projects had an estimated aggregate cost of about $1.2bn. 2016 capital spending was expected to be about $700m; the filing reported $432m spent in the first nine months.
- CNA’s A&EP reserve review produced $200m of net adverse development before reinsurance in Q1 2016, ceded under the NICO loss portfolio transfer. Retroactive reinsurance accounting limited the immediate earnings benefit: a $94m benefit was recognized in the first nine months, with a $106m pretax impact from the unrecognized deferred benefit. The unrecognized benefit was $347m at September 30; the collateral trust was valued at $2.5bn.
- CNA reported catastrophe losses, net of reinsurance, of $137m for the first nine months, primarily from U.S. weather events and the Fort McMurray wildfires. Management noted uncertainty in insurance reserve estimates and stated ultimate claims may exceed current estimates.
- CNA’s organization review included $11m of Q3 termination costs; annual salary and related-cost savings were estimated at about $50m, with an expected half-point reduction in its 2017 P&C expense ratio. CNA also cited non-recurring IT transition and platform costs.
- Loews reported a September 2016 class-action lawsuit concerning the CNA 401(k) Plus Plan. Loss was considered reasonably possible, but the amount, if any, could not be estimated. CNA also disclosed guarantees and indemnities, including approximately $1.9bn of potential future structured-settlement guarantee payments, which it said it did not expect to make.
- Loews said it relies on subsidiary distributions and investment returns to meet parent obligations. Subsidiary dividends are subject to earnings, debt covenants and regulatory limits. Moody’s downgraded Loews’ unsecured debt rating from A2 to A3 in March; Diamond Offshore also reported ratings downgrades. CNA’s international business may face added regulatory complexity and costs following Brexit.
- No quantified consolidated earnings guidance was provided in the supplied filing text. Management stated it continued to pursue conservative financial strategies and opportunities for growth.
Key facts investors should verify
- How much of the year-to-date earnings decline is attributable to Diamond Offshore impairments versus continuing deterioration in drilling activity, and whether additional impairments may be required.
- The status and enforceability of the Ocean Valor contract, the Ocean GreatWhite’s start of operations, and the timing and proceeds of planned rig sales.
- CNA reserve adequacy, future prior-year development, catastrophe exposure, and the timing and collectibility of deferred A&EP reinsurance benefits.
- Boardwalk Pipeline project spending, customer credit exposure, capacity commitments and the effect of contract renewals on cash generation.
- Parent liquidity and subsidiary capacity to upstream dividends, alongside debt maturities, borrowing costs and any further credit-rating changes.