Loews Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012. The filing is unaudited. Loews is a holding company with businesses in insurance, offshore drilling, natural-gas pipelines, oil and gas production, and hotels.
Financial results
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $3.715B | $3.438B | $10.847B | $10.648B |
| Income before tax | $409M | $439M | $1.364B | $1.744B |
| Net income attributable to Loews | $177M | $162M | $600M | $791M |
| Diluted EPS | $0.45 | $0.40 | $1.51 | $1.94 |
| Dividends per share | $0.0625 | $0.0625 | $0.1875 | $0.1875 |
- Q3 revenue rose 8%; Loews-attributable net income rose 9%. For nine months, revenue increased 2%, while attributable net income declined 24%.
- Management cited stronger CNA results and parent investment income as drivers of Q3 improvement, partly offset by lower Diamond Offshore earnings. Nine-month results also benefited from Boardwalk Pipeline; HighMount impairment charges and lower Diamond Offshore earnings weighed on results.
- Management’s income before net investment gains and impairment charges was $339M for Q3 2012 versus $177M in Q3 2011, and $901M for the first nine months versus $782M. These are management-presented figures, not GAAP net income.
- Book value per share was $50.41 at September 30, up from $47.33 at December 31, 2011.
Cash flow, balance sheet and liquidity
- For the first nine months, operating cash flow was $2.102B (2011: $2.024B); investing cash flow was $(1.902)B (2011: $(353)M); financing cash flow was $(163)M (2011: $(1.662)B). Cash ended the period at $169M.
- At September 30, total assets were $79.554B, total liabilities $54.692B, and total equity $24.862B. Total investments were $52.914B.
- Short- and long-term debt totaled about $8.866B ($18M short-term; $8.848B long-term), compared with about $9.001B at year-end 2011. The filing reports long-term debt fair value of $9.978B.
- Parent-company cash and investments, net of receivables and payables, were $3.8B, versus $3.3B at year-end. Loews says it relies substantially on subsidiary distributions; those distributions are subject to regulatory, covenant and other restrictions.
- Insurance reserves totaled $39.151B. Fixed-maturity investments had $4.360B of gross unrealized gains and $210M of gross unrealized losses; management attributed unrealized losses principally to market conditions and said it did not expect to be required to sell affected securities before recovery.
Material business and period changes
- CNA: Loews-attributable CNA income was $200M in Q3 (2011: $69M) and $577M for nine months (2011: $381M), primarily reflecting higher investment income and lower catastrophe losses. CNA recorded favorable prior-year development of $47M in Q3 and $165M year to date. It acquired Hardy, a Lloyd’s underwriter, on July 2 for $231M.
- Diamond Offshore: Loews-attributable income fell to $83M in Q3 (2011: $121M) and $264M for nine months (2011: $363M), as lower utilization and dayrates reduced drilling revenue. The company sold six jack-up rigs, recording a $76M pretax gain. Contract backlog was $8.746B as of October 17, 2012.
- Boardwalk Pipeline: Loews-attributable income increased to $19M in Q3 (2011: $18M) and $78M for nine months (2011: $56M). It issued $300M of 4.0% notes, repaid a $200M term loan and $225M of 5.8% notes, and had $350M drawn under a $1.0B revolving facility, with $650M available.
- HighMount: Recorded non-cash pretax ceiling-test impairments of $261M in Q3 and $527M year to date, due to lower natural gas and NGL prices. After-tax charges were $166M and $336M. Its nine-month Loews-attributable loss was $319M, versus income of $50M in 2011.
- Hotels and other: Loews Hotels acquired the Hollywood hotel in June; revenue increased, but Q3 earnings were approximately breakeven. Boardwalk-related unit sales reduced Loews’ ownership interest in Boardwalk Pipeline; it was 55% at September 30 and fell further after an October offering.
Outlook, risks and unusual items
- HighMount said that if prices remained unchanged through year-end, it likely would record an additional non-cash after-tax impairment of approximately $50M–$100M in Q4. The amount depends on measurement-date prices, costs and reserve assumptions.
- Diamond Offshore described strong demand in ultra-deepwater and deepwater markets, but noted limited near-term rig availability, industry newbuilds and uncontracted future capacity. It had approximately $2.0B remaining to pay on four drillships scheduled for delivery in 2013–2014, plus estimated construction costs of $670M for two semisubmersible rigs.
- Boardwalk warned that new gas supply, competing pipelines and compressed basis spreads may pressure transportation pricing and contract renewals. A greater-than-recent amount of capacity was due for renewal in 2013, with outcomes uncertain and renewals potentially at lower rates.
- Loews Regency was scheduled to close for renovation beginning January 2013, with estimated costs of about $85M and up to $10M of closure costs expected in Q4 2012. Loews Hotels also expected about $70M of cash contributions to a new Orlando hotel joint venture.
- Key risks include insurance reserve estimation and catastrophe losses, investment and interest-rate volatility, commodity prices and further impairments, offshore rig utilization/dayrates and construction commitments, and pipeline contract renewals and financing access. Loews reported no material change in market-risk components and said disclosure controls were effective.
- The company adopted updated insurance acquisition-cost accounting guidance in 2012 and restated comparative information; management said the change had no material effect on the presented 2011 net income or cash flows.
- Loews disclosed two pending tobacco-related cases, contested jurisdiction and said it did not expect a material effect; Lorillard agreed to indemnify Loews for covered tobacco-related claims. The filing notes that litigation outcomes remain uncertain.
Important facts for investors to verify
- Whether HighMount’s commodity-price assumptions result in additional impairments, and how production, reserves and hedges perform.
- CNA’s investment income sustainability, reserve development, catastrophe experience and long-term-care results.
- Diamond Offshore’s utilization, realized dayrates, future contract coverage and funding of rig construction obligations.
- Boardwalk Pipeline’s 2013 contract renewals, pricing, available liquidity and the performance and financing of expansion projects.
- Parent-company liquidity and the amount of subsidiary distributions available after regulatory and debt-covenant restrictions.
- Integration and results of the Hardy, Hollywood hotel and Boardwalk Louisiana Midstream transactions, including post-quarter developments.