Loews Corporation — FY2012 Form 10-K
Business context and reporting period. This is Loews Corporation’s annual report for the year ended December 31, 2012, not a standalone fourth-quarter filing. Loews is a holding company with major interests in CNA Financial (90%), Diamond Offshore (50.4%), Boardwalk Pipeline (55%), wholly owned HighMount Exploration & Production, and Loews Hotels. The businesses span insurance, offshore drilling, gas infrastructure, oil and gas production, and hotels.
Key financial results
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $14.552 billion | $14.129 billion |
| Income before income tax | $1.399 billion | $2.226 billion |
| Net income attributable to Loews | $568 million | $1.062 billion |
| Diluted earnings per share | $1.43 | $2.62 |
| Assets | $80.021 billion | $75.268 billion |
| Debt | $9.210 billion | $9.001 billion |
| Shareholders’ equity | $19.459 billion | $18.772 billion |
Revenue rose about 3%, while income attributable to Loews fell about 46%. Book value per share increased to $49.67 from $47.33. The company paid $0.25 per share in dividends for the year.
- Cash flow: Consolidated operating cash flow was $2.854 billion, versus $3.965 billion in 2011. Investing cash outflow was $3.095 billion and financing cash inflow was $336 million; cash increased by $99 million to $228 million. Investing outflows included capital spending and acquisitions.
- Liquidity: Parent-company cash and investments, net of receivables and payables, were $3.9 billion at year-end, compared with $3.3 billion. Loews reported no off-balance-sheet arrangements. Subsidiary cash and borrowing capacity are not freely interchangeable with parent resources.
- Insurance: CNA reported $9.547 billion of revenue and $570 million of net income attributable to Loews. Its property and casualty combined ratio was 105.0%, up from 98.5%; above 100% indicates underwriting losses before investment income.
- Drilling: Diamond Offshore revenue was $3.072 billion and net income attributable to Loews was $337 million, down from $451 million. Its 2012 contract drilling backlog was about $8.6 billion as of February 1, 2013.
- Pipeline: Boardwalk Pipeline revenue was $1.187 billion and net income attributable to Loews was $109 million, up from $77 million. It had $302 million drawn on its $1.0 billion revolving facility at year-end.
- Upstream and hotels: HighMount recorded a $680 million pretax, non-cash property impairment ($433 million after tax) and a $407 million net loss attributable to Loews. Loews Hotels reported $397 million revenue and $7 million net income attributable to Loews.
Material changes versus the prior year
- Lower consolidated earnings primarily reflected HighMount’s impairment, CNA catastrophe losses and reduced favorable prior-year reserve development, and weaker Diamond Offshore results. Higher parent and CNA investment income and improved Boardwalk earnings partly offset these effects.
- CNA’s 2012 catastrophe losses were $243 million after tax and noncontrolling interests, primarily associated with Storm Sandy; favorable prior-year development fell to $239 million from $428 million.
- Diamond Offshore’s contract drilling revenue declined $318 million. Utilization and average daily revenue weakened in deepwater and mid-water fleets; the company also recorded impairment losses on rigs planned for disposal and gains from selling six jack-ups.
- HighMount sales volume and realized prices fell: equivalent sales were 53.7 Bcfe versus 60.6 Bcfe, and realized price including hedges was $5.42 per Mcfe versus $6.30. Proved reserves declined to 825 Bcfe from 1,134 Bcfe.
- Boardwalk Pipeline acquired Louisiana Midstream for approximately $620 million and completed its acquisition of the remaining HP Storage interest. It issued debt and equity to support acquisitions and funding needs.
- Loews repurchased 5.6 million shares for $222 million. Boardwalk unit offerings reduced Loews’ ownership interest from 64% to 55%.
Outlook, risks, contingencies and unusual items
- Outlook: Management expected Boardwalk’s 2013 transportation renewals and available-capacity sales to occur at lower rates, pressuring revenue and distributable cash flow. Diamond Offshore expected 2013 drilling revenue to decline from 2012 levels because of scheduled surveys, mobilizations and other downtime, despite management’s expectation of strong ultra-deepwater and deepwater markets.
- Capital commitments: Diamond Offshore estimated approximately $1.8 billion of 2013 capital expenditures, including new rigs and an announced North Sea upgrade; its newbuild obligations were substantial. Boardwalk forecast approximately $350 million of 2013 capital expenditures. HighMount planned about $270 million of capital spending, focused on oil drilling. Loews Hotels had approximately $520 million of acquisition, development and renovation commitments.
- HighMount financing and commodity exposure: HighMount had $600 million of term loans and $110 million drawn on its revolving facility at year-end. Loews contributed $100 million in 2012, largely to support covenant compliance. Low gas and NGL prices, reserve revisions, and future ceiling-test impairments remain significant risks.
- Insurance and investment risks: CNA’s reserves depend on uncertain claims, inflation, mortality, morbidity and interest-rate assumptions. Catastrophes, reinsurance collectibility, investment losses, ratings changes and regulated dividend limits could affect earnings, capital and cash available to Loews. CNA’s legacy asbestos and environmental liabilities are subject to a $4.0 billion retroactive reinsurance limit; performance and coverage remain risks.
- Other material risks: Offshore drilling is exposed to volatile energy markets, customer concentration, rig oversupply, operating hazards and international regulation. Boardwalk faces competition, contract-renewal and pipeline-safety risks. Environmental and hydraulic-fracturing rules, climate-related effects, litigation, cyber incidents and subsidiary impairments could also adversely affect results.
- Accounting and audit: Loews adopted revised accounting for insurance acquisition costs in 2012 and adjusted comparative information. Deloitte issued unqualified opinions on the consolidated financial statements and internal controls; the audit report includes an explanatory paragraph regarding the accounting change.
Important facts for investors to verify
- Reconcile the year-over-year earnings decline, especially the HighMount impairment, CNA catastrophe losses and reserve development, and Diamond Offshore’s utilization and dayrates.
- Review CNA reserve adequacy, long-term-care and annuity assumptions, reinsurance recoverables, and the remaining protection and limits under the Loss Portfolio Transfer.
- Assess HighMount’s reserve revisions, commodity hedges, debt covenants, borrowing availability and required parent support under varying commodity-price assumptions.
- Check Diamond Offshore’s newbuild costs and delivery schedule, backlog realization, customer concentration—particularly Petrobras—and expected survey downtime.
- Assess Boardwalk’s contract-renewal rates, distributable cash, acquisition performance, debt maturities and planned capital spending.
- Distinguish parent-company liquidity from subsidiary assets and cash, and verify the capacity to fund parent obligations, dividends, repurchases and subsidiary commitments.