Loews Corporation 10-Q Summary: Quarter Ended September 30, 2007
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2007. Loews Corporation is a diversified holding company with principal subsidiaries including CNA Financial (insurance), Lorillard (tobacco), Diamond Offshore (drilling), HighMount (energy exploration), Boardwalk Pipeline (gas transmission), Loews Hotels, and Bulova (watches). A significant event during the period was the July 31, 2007, acquisition of HighMount Exploration & Production assets from Dominion Resources for approximately $4.0 billion.
Key Financial Metrics
| Metric (in millions) | Q3 2007 | Q3 2006 | 9M 2007 | 9M 2006 |
|---|---|---|---|---|
| Total Revenues | $4,653.3 | $4,507.2 | $13,950.3 | $13,029.0 |
| Net Income | $555.7 | $635.1 | $1,977.4 | $1,744.8 |
| Net Income (Loews Common) | $410.0 | $517.2 | $1,572.4 | $1,465.5 |
| Net Income (Carolina Group) | $145.7 | $117.9 | $405.0 | $279.3 |
| EPS (Loews Common - Diluted) | $0.77 | $0.94 | $2.92 | $2.64 |
| EPS (Carolina Group) | $1.34 | $1.17 | $3.73 | $3.16 |
| Operating Cash Flow (9M) | $4,374.2 (2007) vs $1,683.6 (2006) | |||
| Total Assets | $78,964.9 (Sep 30, 2007) vs $76,880.9 (Dec 31, 2006) | |||
| Total Debt (Short + Long) | $7,232.2 (Sep 30, 2007) vs $5,572.4 (Dec 31, 2006) |
Material Changes vs. Prior Period
- Net Income Decline (Q3): Consolidated net income decreased 12.5% year-over-year. This was primarily driven by a $96.4 million after-tax charge at CNA Financial related to the settlement of an arbitration proceeding (IGI Contingency) and net investment losses of $31.1 million (after tax) compared to gains in the prior year.
- Net Income Increase (9M): Consolidated net income increased 13.3% year-over-year, driven by improved results at Diamond Offshore (higher dayrates/utilization), increased investment income, and higher Lorillard results, partially offset by the CNA settlement charge.
- Investment Performance: The company recorded significant Other-Than-Temporary Impairment (OTTI) losses of $188.0 million in Q3 and $451.0 million for the nine months, primarily in corporate and asset-backed bonds due to sub-prime market disruption. However, these were partially offset by a $141.9 million pretax gain from the conversion of Diamond Offshore debentures into common stock.
- Acquisition Impact: The HighMount acquisition added significant assets ($3.0 billion in PP&E, $1.0 billion in goodwill) and debt ($1.6 billion term loans) to the balance sheet.
Guidance, Outlook, and Risks
- Outlook: Management expects competitive market conditions to continue putting pressure on CNA's premium and income levels. Lorillard faces ongoing volume declines in the domestic cigarette market and increasing costs from State Settlement Agreements. Diamond Offshore anticipates continued high utilization and dayrates.
- Legal Contingencies:
- CNA: Significant exposure remains regarding Asbestos, Environmental Pollution, and Mass Tort (APMT) claims. A $167.0 million pretax loss was recorded in Q3 for the IGI Contingency settlement. Litigation regarding the California Long Term Care policies was settled in October 2007 with no material adverse effect.
- Lorillard: Faces approximately 2,900 pending product liability cases, including "Engle progeny" cases in Florida. The company is subject to perpetual payments under State Settlement Agreements, which increased by $105.1 million pretax in the first nine months of 2007.
- Unusual Items:
- Boardwalk Pipeline: Recorded a $14.7 million impairment charge in Q2 2007 for the abandonment of the Magnolia storage cavern.
- Bulova Sale: In October 2007, Loews agreed to sell Bulova for $250.0 million, expecting a pretax gain of approximately $105.0 million (closing expected Jan 2008).
Key Facts for Investor Verification
- OTTI Exposure: Verify the extent of unrealized losses in the asset-backed securities portfolio ($395.0 million gross unrealized loss on 561 securities) and management's assertion that these are temporary impairments.
- HighMount Integration: Monitor the integration of the $4.0 billion HighMount acquisition and the impact of natural gas price volatility on its "ceiling test" impairment requirements.
- CNA Reserve Development: Review the $92.0 million favorable net prior year development recorded in the nine months ended Sept 30, 2007, and the sustainability of loss ratio improvements in Standard and Specialty Lines.
- Lorillard Settlement Costs: Confirm the trajectory of State Settlement Agreement payments, which are subject to inflation and volume adjustments, and their impact on future cash flows.
- Debt Levels: Note the increase in total debt to $7.2 billion, largely due to the HighMount acquisition financing, and monitor interest rate exposure on the new floating-rate term loans.