LOEWS CORP annual report, FY2010

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Loews Corporation — 2010 Form 10-K

Reporting period: Fiscal year ended December 31, 2010; the filing also reports fourth-quarter results. Loews is a holding company with major operations in commercial insurance, offshore drilling, natural gas production and transmission, and hotels. CNA contributed 63% and Diamond Offshore 23% of consolidated revenue in 2010.

Financial results and position

  • Revenue: $14.615 billion, up 3.5% from $14.117 billion in 2009. Income before tax was $2.902 billion, versus $1.730 billion.
  • Profit: Net income attributable to Loews was $1.288 billion, or $3.07 diluted earnings per share, compared with $564 million, or $1.30 per share. Income from continuing operations attributable to Loews was $1.307 billion, versus $566 million. Fourth-quarter net income was $466 million, or $1.12 per share, versus $403 million, or $0.94 per share.
  • Cash flow: Consolidated net cash used by operating activities was $47 million, compared with $4.591 billion provided in 2009. Investing activities provided $664 million; financing activities used $688 million. The filing attributes significant cash-flow volatility to investment trading activity and CNA’s $1.9 billion initial net cash settlement for its loss portfolio transfer.
  • Balance sheet and liquidity: Total assets were $76.277 billion; investments were $48.907 billion and cash was $120 million. Debt was $9.477 billion, broadly unchanged from $9.485 billion in 2009. Shareholders’ equity was $18.450 billion, up from $16.899 billion; book value per Loews common share rose to $44.51 from $39.76. Parent-company cash and investments, net of receivables and payables, were $4.6 billion.
  • Shareholder returns: Loews paid $0.25 per common share in dividends for 2010 and repurchased 10.96 million shares for $405 million.

Material changes and segment performance

  • CNA: Net income attributable to Loews rose to $636 million from $397 million. Results benefited from a $551 million after-tax improvement in realized investment results and $594 million of favorable net prior-year development. Net earned premiums declined, reflecting weaker commercial exposures and competition. The combined ratio improved to 85.0% at CNA Specialty and 102.9% at CNA Commercial.
  • Diamond Offshore: Revenue fell 8% to $3.361 billion and net income attributable to Loews declined to $446 million from $643 million. Lower rig utilization and dayrates, Gulf of Mexico disruption, higher operating costs and interest expense weighed on results. Contract backlog was $6.645 billion as of February 1, 2011, down from $8.456 billion a year earlier.
  • HighMount: Revenue fell to $455 million from $620 million, while net income attributable to Loews was $58 million versus a $537 million loss. The prior-year loss included a $660 million after-tax property impairment. HighMount sold Michigan and Alabama assets for approximately $540 million and applied net proceeds of about $500 million to term-loan debt. Proved reserves fell to 1.3 Tcfe from 1.964 Bcfe-equivalent in 2009, reflecting asset sales, production and negative revisions.
  • Boardwalk Pipeline: Revenue increased to $1.129 billion from $910 million, primarily as expansion projects contributed more transportation revenue. Net income attributable to Loews rose to $114 million from $67 million. Narrower basis spreads and competition continued to pressure contract renewals and short-term capacity pricing.
  • Loews Hotels: Revenue increased 8.5% to $308 million and the segment returned to $1 million of net income from a $34 million loss. Occupancy improved to 70.1% from 66.4%, and revenue per available room rose to $147.89 from $134.60.

Outlook, risks and unusual items

  • No consolidated earnings or revenue guidance is provided. Management describes a conservative financial strategy while pursuing responsible growth, including expansion, acquisitions, dispositions and efficiency opportunities.
  • CNA completed a retroactive reinsurance agreement with Berkshire Hathaway subsidiary National Indemnity Company, transferring substantially all legacy asbestos and environmental pollution liabilities, subject to a $4.0 billion aggregate limit. The transaction reduced reserve exposure but generated a $328 million after-tax loss attributable to Loews. Coverage limits, counterparty performance and liabilities outside the agreement remain relevant risks.
  • The Macondo incident and Gulf of Mexico regulatory changes created uncertainty over permitting, rig deployment, utilization and insurance costs. Diamond Offshore also disclosed a customer’s attempt to terminate the Ocean Monarch contract; litigation was pending.
  • Diamond Offshore ordered two ultra-deepwater drillships, with expected aggregate project cost of about $1.2 billion and scheduled deliveries in 2013. It expected 2011 capital expenditures of approximately $320 million, in addition to construction spending.
  • HighMount remains exposed to commodity prices, production declines and reserve estimation. Management said a decline of more than 15% in the prices used for its December 2010 ceiling test could potentially trigger impairment.
  • Boardwalk faces competition from new pipelines and supply basins, basis-spread uncertainty, regulatory rate-setting and customer concentration. Gulf Crossing must file a rate case or cost-and-revenue study by the end of the first quarter of 2012.
  • Other key risks include insurance reserve uncertainty, investment valuation and credit risk, catastrophe losses, reinsurance recoverables, subsidiary dividend restrictions, environmental and climate regulation, and potential asset impairments. Loews remained a defendant in three tobacco-related lawsuits; it stated it does not believe it is liable and cited Lorillard’s indemnification agreement.
  • Auditors issued unqualified opinions on the consolidated financial statements and internal controls; management concluded internal control over financial reporting was effective. The filing notes accounting-method changes, including for noncontrolling interests, oil and gas reserves, and investment impairments.

Important facts for investors to verify

  • How much of 2010’s earnings improvement is sustainable after excluding investment gains, reserve releases and the prior-year HighMount impairment?
  • Whether CNA’s favorable reserve development continues, and whether the $4.0 billion A&EP reinsurance limit and associated recoverables adequately contain remaining exposure.
  • Diamond Offshore’s Gulf of Mexico permitting, Ocean Monarch dispute, customer concentration and ability to convert backlog into revenue and cash flow.
  • HighMount’s reserve revisions, production trajectory, hedging coverage and ability to refinance or repay its $1.1 billion term loans due in 2012.
  • Boardwalk’s contract renewal rates, basis spreads, leverage and compliance with facility covenants, along with the effect of planned debt refinancing.
  • Parent-company liquidity and cash available for dividends or repurchases, recognizing that subsidiary cash may be restricted by regulation, covenants or creditor claims.