Loews Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Loews is a holding company with businesses in insurance, offshore drilling, natural gas transportation and storage, hotels, and rigid plastic packaging. Dollar amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Total revenue | $3,757 | $3,581 |
| Income before income tax | $508 | $405 |
| Net income attributable to Loews | $394 | $293 |
| Diluted earnings per share | $1.27 | $0.89 |
| Operating cash flow | $81 | $513 |
| Investing cash flow | $300 | $56 |
| Financing cash flow | ($449) | ($591) |
| Cash at period end | $339 | $405 at December 31, 2018 |
| Short- and long-term debt | $132 and $11,229 | $17 and $11,359 at December 31, 2018 |
| Total assets / total equity | $80,449 / $21,902 | $78,316 / $21,386 at December 31, 2018 |
Revenue and earnings increased year over year, while operating cash flow fell substantially. Management attributed the earnings improvement primarily to CNA and Boardwalk Pipeline, plus higher parent investment income; Diamond Offshore partially offset the gains. Net income included $31 of investment gains. Other comprehensive income was $549, principally from unrealized investment gains, compared with a $407 loss in Q1 2018.
At March 31, parent-company cash and investments, net of receivables and payables, were $3.4 billion, versus $3.1 billion at year-end. Loews received $596 in subsidiary dividends, including a $485 special dividend from CNA. It repurchased 6.8 million Loews shares for $322 during the quarter; an additional 1.0 million shares costing $47 had been purchased by April 26. The quarterly Loews dividend was $0.0625 per share.
Material changes and segment performance
- CNA: Loews-attributable income rose to $305 from $261. Higher investment income and gains and favorable long-term-care persistency helped; underwriting results were pressured by higher catastrophe losses and less favorable prior-year reserve development. Property and casualty combined ratio worsened to 97.8% from 93.1%; catastrophe losses were $58 versus $34. P&C core income was $314 versus $327.
- Diamond Offshore: Loews-attributable loss was $37 versus income of $10. Contract drilling revenue declined to $227 from $288, reflecting lower average daily revenue, fewer revenue-earning days, and absence of prior-year insurance proceeds. Offshore markets remained oversupplied and dayrates subdued. Backlog was $1.8 billion at April 1, down from $2.0 billion at January 1.
- Boardwalk Pipeline: Loews-attributable income increased to $79 from $36, including the effect of Loews owning 100% versus 51% in the prior-year period. Revenue was $346 versus $337. About 87% of trailing-12-month revenue, excluding retained fuel, came from fixed fees under firm agreements.
- Loews Hotels: Attributable income was $13, unchanged. Revenue declined modestly; operating expense included a $3 impairment charge on a hotel expected to be sold in Q2 2019 for approximately $127.
- Corporate: Income was $34 versus a $27 loss, mainly reflecting improved performance of equity investments in the trading portfolio.
Consolidated insurance premiums were $1,803 versus $1,785; net investment income was $657 versus $506; non-insurance warranty revenue was $281 versus $238; and operating revenues and other declined to $985 from $1,043. Interest expense was $141 in both periods. The filing does not provide a single consolidated operating-margin measure.
Outlook, commentary, risks and unusual items
- No consolidated earnings or revenue guidance is provided. Management cautions that first-quarter results are not necessarily indicative of full-year results.
- Diamond Offshore forecast 2019 capital expenditures of approximately $340–$360, including rig reactivation and upgrade spending. Its filing describes near-term industry challenges: excess rig supply, low dayrates, uncontracted newbuilds, and possible customer contract renegotiations or terminations.
- Boardwalk expected existing capital resources and operating cash flows to fund 2019 operations. Its firm-agreement revenue estimate was approximately $9.8 billion over the remaining terms of agreements as of March 31; this is not a forecast of revenue for a single year and is subject to stated exclusions and conditions.
- Loews adopted lease accounting guidance on January 1, 2019, recording a $642 increase to other assets and other liabilities at adoption. At March 31, operating lease right-of-use assets were $629 and lease liabilities were $705.
- Insurance estimates remain sensitive to claims severity, inflation, litigation, medical and repair costs, and catastrophe experience. CNA recorded favorable prior-year P&C reserve development of $14, compared with $39 in Q1 2018. CNA’s long-term-care business is in run-off; management reported persistency benefits from policyholders lapsing or reducing coverage and morbidity in line with expectations.
- CNA’s A&EP loss portfolio transfer with NICO involved a deferred retroactive reinsurance benefit of $352 at March 31. NICO’s collateral trust fair value was $3.0 billion; Berkshire Hathaway also guarantees specified obligations. The amount ceded under the agreement and future recoveries remain relevant to reserve and earnings outcomes.
- A substitute class-action complaint concerning Boardwalk Pipeline’s 2018 unit purchase named Loews as a defendant; a motion-to-dismiss hearing was scheduled for July 2019. Management said other ordinary-course litigation was not expected to materially affect results or equity.
- Other contingencies include CNA guarantees and indemnities: quantified guarantees of $375, quantified indemnification agreements of $252, and approximately $1.7 billion of potential future payments under structured-settlement annuity guarantees. CNA said payment under the latter guarantees was not believed likely, citing a supporting trust.
- Management reported no material change in market-risk components and concluded disclosure controls were effective as of March 31, 2019.
Important facts for investors to verify
- Whether CNA underwriting performance, catastrophe losses, reserve development, and long-term-care persistency remain consistent with the quarter’s results.
- Whether Diamond Offshore can preserve or convert backlog into revenue amid market oversupply, and whether contracts or rig reactivations affect cash needs.
- Whether Boardwalk’s fixed-fee agreements, growth projects, and regulatory matters support expected cash generation and distributions.
- How the sharp year-over-year decline in operating cash flow, subsidiary dividend capacity, share repurchases, and consolidated debt affect parent-company liquidity.
- Developments in the Boardwalk litigation, CNA reserves and reinsurance recoveries, guarantees, and other contingencies.