Loews Corporation — 2009 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2009; unaudited. Loews is a holding company with businesses in property and casualty insurance (CNA), offshore drilling (Diamond Offshore), natural gas production (HighMount), gas pipelines (Boardwalk Pipeline), and hotels. Lorillard was sold in 2008 and is reported as discontinued operations.
Financial performance and position
| Metric | Q3 2009 | Nine months 2009 | Prior-year comparison |
|---|---|---|---|
| Total revenue | $3.738 billion | $10.295 billion | Q3: $2.970 billion; nine months: $10.504 billion |
| Continuing-operations income attributable to Loews | $469 million; $1.08 per share | $163 million; $0.37 per share | Q3: loss of $144 million; nine months: $776 million income |
| Net income attributable to Loews | $468 million | $161 million | Q3: loss of $137 million; nine months: $5.488 billion income, including major 2008 discontinued-operation gains |
| Net investment income | $726 million | $1.908 billion | Q3: $355 million; nine months: $1.531 billion |
| Investment losses | $100 million | $928 million | Q3: $650 million; nine months: $812 million |
| Operating cash flow | Not separately stated for the quarter | $2.764 billion | $1.377 billion for nine months 2008 |
For the first nine months, investing cash flow was negative $2.687 billion and financing cash flow was negative $60 million. At September 30, total assets were $75.112 billion, total equity $21.186 billion, cash $156 million, short-term debt $9 million and long-term debt $8.695 billion. Insurance reserves totaled $38.362 billion. Parent-company cash and investments, net of receivables and payables, were $2.7 billion. Book value per common share rose to $39.54 from $30.18 at December 31, 2008, aided by improved fair values of CNA’s fixed-maturity portfolio.
Segment indicators: CNA’s Q3 net income attributable to Loews was $243 million, versus a $303 million loss; Diamond Offshore contributed $170 million, versus $145 million; Boardwalk Pipeline contributed $9 million, versus $31 million; and Loews Hotels recorded a $15 million loss, versus $6 million income. HighMount reported a $572 million nine-month loss attributable to Loews, including a $660 million after-tax noncash impairment.
Material changes versus prior periods
- Q3 continuing income swung to a profit, reflecting higher investment income—especially limited partnership results—and lower investment impairment losses than in Q3 2008. Q3 investment losses attributable to Loews were $61 million after tax and noncontrolling interests, versus $379 million a year earlier.
- Nine-month continuing income fell from $776 million to $163 million, primarily due to HighMount’s first-quarter impairment and higher year-to-date investment losses. The 2008 comparison also included a $4.362 billion after-tax Lorillard disposal gain and a $75 million after-tax Bulova sale gain.
- At CNA, nine-month net investment income increased, but OTTI losses recognized in earnings totaled $1.157 billion before tax and noncontrolling interests, versus $840 million in 2008. Favorable net prior-year development was $163 million across the cited core insurance segments, before tax.
- Insurance premiums declined to $5.035 billion for nine months from $5.385 billion. Standard Lines’ Q3 combined ratio improved to 112.2% from 129.3%, while Specialty Lines’ ratio worsened to 91.9% from 87.8%.
- Hotels remained under pressure: nine-month revenue fell 27.1% and occupancy declined to 67.8% from 75.8%. Diamond Offshore’s contract backlog was $8.760 billion as of October 22, 2009, down from $10.259 billion reported in February.
Outlook, management commentary, risks and unusual items
- No consolidated earnings guidance was provided. Management said quarterly and nine-month results are not necessarily indicative of full-year results.
- Management described financial markets as improved in Q3, with narrower credit spreads, but noted continuing economic challenges and depressed asset-backed security values. CNA sold its Verisk Analytics shares in the October IPO; the resulting $370 million pretax gain was expected to be recognized in Q4 2009.
- HighMount reduced drilling and curtailed production amid weak gas prices; management noted that further price declines could trigger another ceiling-test impairment. Hedges covered about 67% of estimated remaining 2009 and 54% of 2010 gas-equivalent production, at stated weighted-average prices of $7.18 and $6.51 per Mcfe, respectively.
- Boardwalk’s expansion pipelines had anomalies requiring testing and remediation. Normal-pressure operations had resumed on the projects described, but higher-pressure operation required PHMSA approval. Reduced pressure and shutdowns lowered expansion-project revenue by approximately $117 million versus expectations for the first nine months. The company estimated approximately $670 million of remaining expansion and remediation capital expenditure, mostly by end-2010.
- Loews Hotels expected near-term revenue per available room and operating results to remain significantly below prior-period levels. Q3 included $10 million pretax charges for a development commitment and a managed-hotel loan guarantee; the nine-month period included a $27 million pretax impairment of its Loews Lake Las Vegas investment.
- Diamond Offshore cited weak industry demand, customer credit and contract-renegotiation risks, and new rig supply. It self-insured physical damage to rigs and equipment from named Gulf of Mexico windstorms, exposing it to potentially material uninsured losses.
- Insurance risks include uncertain asbestos and environmental claims, reserve estimation, catastrophe losses, investment-credit deterioration and possible collateral requirements following ratings downgrades. CNA’s net asbestos and environmental reserves were $1.091 billion and $226 million, respectively; ultimate exposure beyond recorded amounts was not readily determinable.
- Loews reported $254 million of future limited-partnership capital-call commitments and $145 million of Boardwalk purchase commitments. CNA also disclosed potentially unlimited indemnification obligations from certain business sales; material losses were not stated as probable.
Most important facts for investors to verify
- Separate recurring operating performance from HighMount’s impairment, investment marks and other unusual items; confirm the timing and realization of the expected $370 million Verisk gain.
- Review CNA’s investment-credit quality, OTTI assumptions, asset-backed and non-investment-grade exposures, and the sensitivity of insurance reserves to claims development.
- Track PHMSA testing, remediation costs and approvals for Boardwalk’s pipelines, as well as the remaining project spending and capacity available under existing contracts.
- Assess HighMount’s commodity-price exposure, hedge coverage and potential for further impairment, alongside Diamond Offshore’s backlog, utilization and customer credit conditions.
- Monitor hotel demand and the continuing effects of its disclosed charges, and consider subsidiary-level debt and liquidity separately from the parent’s reported cash and investments.