Loews Corporation — Form 10-Q Summary
Reporting period: Three months ended March 31, 2010; comparative period is the three months ended March 31, 2009. The filing was signed May 4, 2010. Loews is a holding company with businesses in property and casualty insurance, offshore drilling, natural gas exploration and production, gas pipelines, and hotels.
Financial results and position
| Metric | Q1 2010 | Q1 2009 / prior date |
|---|---|---|
| Revenue | $3.713 billion | $3.023 billion |
| Income (loss) before tax | $896 million | $(868) million |
| Net income (loss) attributable to Loews | $420 million; $0.99 per share | $(647) million; $(1.49) per share |
| Net investment income | $617 million | $447 million |
| Investment gains (losses), pretax | $21 million | $(531) million |
| Cash from operating activities | $294 million | $1.138 billion |
| Cash from investing activities | $(411) million | $(1.108) billion |
| Cash from financing activities | $64 million | $(21) million |
| Total assets at March 31 | $75.855 billion | $74.070 billion at December 31, 2009 |
| Total debt at March 31 | $9.611 billion, including $62 million short-term | $9.485 billion at December 31, 2009 |
| Cash and investments at March 31 | $47.637 billion, including $6.187 billion short-term investments | $46.224 billion at December 31, 2009 |
| Shareholders’ equity / book value per common share | $17.546 billion / $41.80 | $16.899 billion / $39.76 at December 31, 2009 |
Revenue and earnings improved substantially year over year, principally because Q1 2009 included a $1.036 billion noncash HighMount oil and gas property impairment charge, and because CNA investment income and investment results improved. Q1 2010 operating cash flow was lower than the prior-year quarter. Cash at period-end was $135 million, down from $190 million at year-end 2009. Loews reported parent-company cash and investments, net of receivables and payables, of $3.4 billion.
Loews paid a quarterly dividend of $0.0625 per share, unchanged from the prior-year quarter. It repurchased 5.4 million Loews shares for $197 million during Q1 and repurchased a further 1.2 million shares for $47 million from April 1 through April 28.
Material changes and business performance
- CNA Financial: Loews-attributable net income was $225 million versus a $170 million loss. Higher investment income and substantially improved realized investment results were partly offset by higher catastrophe losses, lower favorable prior-year reserve development, and IT transformation costs. CNA Specialty’s combined ratio rose to 92.5% from 89.1%; CNA Commercial’s rose to 109.5% from 105.0%. Written premiums declined in both segments.
- Diamond Offshore: Loews-attributable income was $136 million versus $163 million. Lower utilization and weaker jack-up revenues, higher drilling costs, depreciation, and interest expense weighed on results. Contract backlog was approximately $9.1 billion as of April 19, 2010, following 14 new contracts signed during Q1.
- HighMount: Loews-attributable income was $24 million versus a $641 million loss, largely reflecting the absence of the prior-year impairment. Operating revenue declined to $148 million from $175 million amid lower production volumes. On April 30, HighMount completed the sale of substantially all Antrim Shale assets for approximately $330 million, subject to adjustment; proceeds were used to reduce term-loan debt. It also agreed to sell its Black Warrior Basin assets for approximately $210 million, subject to adjustment. The two properties together represented about 17% of HighMount proved reserves.
- Boardwalk Pipeline: Loews-attributable income increased to $38 million from $22 million, as expansion projects lifted transportation revenue, partly offset by higher operating and interest costs. Approximately 70% of capacity associated with about $101 million of annual reservation charges due to expire in 2010 had been renewed or resold, at about 85% of prior rates.
- Loews Hotels: The segment’s net loss narrowed to $1 million from $18 million. Occupancy rose to 65.3% from 62.4%, and revenue per available room increased to $144.65 from $137.56. Q1 2009 included a $27 million pretax impairment of the Loews Lake Las Vegas investment.
Outlook, risks and unusual items
- The filing provides no consolidated earnings or revenue guidance. Management said Q1 results are not necessarily indicative of full-year results.
- CNA estimated total IT transformation costs of approximately $41 million, including $25 million incurred in Q1. It anticipated savings beginning in 2011 and full annual savings in 2012, while noting some savings may be reinvested.
- Diamond Offshore cited a weak and uncertain global economy, potential further pressure on dayrates and demand, and additional rig supply as risks. Its Q1 backlog was expected to help mitigate market conditions in 2010. The April 20 Deepwater Horizon disaster occurred after quarter-end; the company said its effects on regulation and Diamond Offshore’s future operations or results could not then be predicted.
- Boardwalk Pipeline’s ability to market capacity and renew contracts is challenged by competition and narrower gas-price differentials. It also continued seeking authorization to operate the Fayetteville Lateral at higher pressure; without approval, planned transportation growth could be constrained and system upgrades might be needed.
- Insurance reserves remain estimation-sensitive. At March 31, CNA’s net asbestos reserves were $1.096 billion and net environmental pollution reserves were $272 million. CNA disclosed uncertainty around asbestos and environmental claims and related litigation. Q1 catastrophe losses, net of reinsurance, were $40 million versus $13 million a year earlier.
- Q1 net other-than-temporary impairment losses recognized in earnings were $60 million pretax, compared with $614 million in Q1 2009. Management said it identified no additional impairment losses required on securities in unrealized-loss positions at March 31, but future deterioration in underlying collateral could prompt further losses.
- HighMount had $1.6 billion of term loans; its agreements include financial covenants. It reported compliance at March 31. Boardwalk Pipeline had $679 million drawn under its revolving facility and $271 million of available borrowing capacity; it reported covenant compliance.
- Other disclosed risks include CNA’s investment and credit exposures, reserve development, reinsurance and regulatory constraints; energy-price and drilling-market volatility; and litigation and indemnification contingencies. Management reported disclosure controls effective as of March 31 and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether earnings improvement persists without the prior-year HighMount impairment and despite ongoing investment-market volatility.
- CNA’s reserve adequacy, catastrophe exposure, premium trends, combined ratios, and the effect and cost of its IT transformation.
- Diamond Offshore’s backlog conversion, utilization and dayrates, and any operational or regulatory consequences following the Deepwater Horizon disaster.
- Completion and proceeds from the Black Warrior Basin sale, use of HighMount divestiture proceeds, and HighMount’s post-sale production and debt profile.
- Boardwalk Pipeline’s expiring contract renewals, Fayetteville operating authorization, expansion performance, and debt capacity.
- Parent-company liquidity and capital allocation, including share repurchases, dividends, and dependence on subsidiary distributions subject to legal and lender restrictions.
- Potential additional investment impairments, asbestos and environmental claim developments, and other material litigation or indemnification exposures.