L

Business Context and Reporting Period

Company: Loews Corporation (Holding Company)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Segments: Commercial property and casualty insurance (CNA Financial), offshore oil and gas drilling (Diamond Offshore), natural gas exploration/production (HighMount), natural gas transmission (Boardwalk Pipeline), and hotels (Loews Hotels).

Key Financial Metrics

Material Changes vs. Prior Period

• Net Loss vs. Net Income: The Company reported a net loss of $307 million for the six months ended June 30, 2009, compared to net income of $5,625 million in the prior year. The 2008 prior year period included a significant non-cash gain of $4.3 billion from the disposal of Lorillard, Inc. (discontinued operations).
• Investment Losses: Net investment losses increased significantly to $828 million (from $162 million in 2008), driven primarily by other-than-temporary impairment (OTTI) losses of $1,009 million recognized in earnings, largely related to asset-backed and financial sector securities.
• HighMount Impairment: HighMount Exploration & Production recorded a non-cash ceiling test impairment charge of $1,036 million ($660 million after-tax) in the first quarter of 2009 due to declines in natural gas and oil commodity prices.
• Revenue Decline: Total revenues decreased 13% year-over-year, impacted by lower insurance premiums, reduced contract drilling revenues, and lower commodity prices in the energy sector.

Guidance, Outlook, and Risks

• Investment Portfolio: Management notes that while market disruption subsided moderately in Q2 2009, economic conditions remain challenging. The Company adopted new accounting standards (FSP No. FAS 115-2) requiring bifurcation of OTTI losses into credit and non-credit components.
• Energy Sector Outlook:
  • Diamond Offshore: Faces deteriorating demand and pricing due to the global recession. However, an extensive contract backlog is expected to mitigate impacts through 2010. The company acquired a new rig (Ocean Courage) for $460 million.
  • HighMount: Substantially reduced 2009 drilling activity due to low commodity prices. Future impairments are possible if prices continue to decline.
  • Boardwalk Pipeline: Expansion projects are facing delays and reduced throughput due to pipeline anomalies requiring remediation and regulatory approval (PHMSA) to operate at higher pressures. This has adversely impacted revenues and cash flow.
• Insurance Risks: CNA faces ongoing risks related to asbestos and environmental pollution (A&E) reserves, catastrophe losses, and the sufficiency of loss reserves. The company recorded favorable prior year development of $116 million for the six months ended June 30, 2009.
• Liquidity: The Company maintains significant cash and short-term investments ($2.4 billion at the parent level). Subsidiaries have access to credit facilities, though some lenders have not funded commitments since 2008.

Key Facts for Investor Verification

• OTTI Loss Composition: Verify the breakdown of the $1,009 million OTTI loss recognized in earnings, specifically the portion attributed to asset-backed securities ($480 million) and corporate bonds ($284 million).
• HighMount Impairment: Confirm the impact of the $1,036 million impairment on HighMount's future production volumes and the sensitivity of future earnings to natural gas price fluctuations.
• Boardwalk Pipeline Remediation: Monitor the timeline and cost for remediation of pipeline anomalies and the regulatory status of operating at higher pressures, as this directly impacts revenue realization from expansion projects.
• Discontinued Operations: Note that the 2008 comparison is heavily skewed by the $4.3 billion gain on the Lorillard disposal; focus on "Income from Continuing Operations" for operational trend analysis.
• Debt Covenants: Review compliance with debt covenants for HighMount and Boardwalk Pipeline, particularly regarding debt-to-capitalization ratios and liquidity requirements.