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| L > SEC Filings for L > Form 10-Q on 4-May-2009 | All Recent SEC Filings |
4-May-2009
Quarterly Report
Management's discussion and analysis of financial condition and results of operations ("MD&A") should be read in conjunction with our Consolidated Condensed Financial Statements included in Item 1 of this Report, Risk Factors included in Part II, Item 1A of this Report, and the Consolidated Financial Statements, Risk Factors, and MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2008. This MD&A is comprised of the following sections:
Page
No.
Overview 43
Consolidated Financial Results 44
Parent Company Structure 44
Critical Accounting Estimates 45
Results of Operations by Business Segment 45
CNA Financial 45
Standard Lines 46
Specialty Lines 47
Life and Group Non-Core 48
Other Insurance 49
A&E Reserves 50
Diamond Offshore 52
HighMount 55
Boardwalk Pipeline 57
Loews Hotels 60
Corporate and Other 61
Liquidity and Capital Resources 61
CNA Financial 61
Diamond Offshore 62
HighMount 63
Boardwalk Pipeline 63
Loews Hotels 65
Corporate and Other 65
Investments 65
Accounting Standards 73
Forward-Looking Statements 73
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OVERVIEW
We are a holding company. Our subsidiaries are engaged in the following lines of business:
· commercial property and casualty insurance (CNA Financial Corporation ("CNA"), a 90% owned subsidiary);
· operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. ("Diamond Offshore"), a 50.4% owned subsidiary);
· exploration, production and marketing of natural gas, natural gas liquids and, to a lesser extent, oil (HighMount Exploration & Production LLC ("HighMount"), a wholly owned subsidiary);
· operation of interstate natural gas transmission pipeline systems including integrated storage facilities (Boardwalk Pipeline Partners, LP ("Boardwalk Pipeline"), a 74% owned subsidiary); and
· operation of hotels (Loews Hotels Holding Corporation ("Loews Hotels"), a wholly owned subsidiary).
Unless the context otherwise requires, references in this report to "Loews Corporation," "the Company," "we," "our," "us" or like terms refer to the business of Loews Corporation excluding its subsidiaries.
Consolidated Financial Results Net income (loss) and earnings (loss) per share information attributable to Loews common stock and former Carolina Group stock is summarized in the table below. Three Months Ended March 31 2009 2008 (In millions, except per share data) Net income (loss) attributable to Loews common stock: Income (loss) from continuing operations $ (647 ) $ 409 Discontinued operations, net 146 Net income (loss) attributable to Loews common stock (647 ) 555 Net income attributable to former Carolina Group stock - Discontinued operations 107 Net income (loss) attributable to Loews Corporation $ (647 ) $ 662 Net income (loss) per share: Loews common stock: Income (loss) from continuing operations $ (1.49 ) $ 0.77 Discontinued operations, net 0.28 Loews common stock $ (1.49 ) $ 1.05 Former Carolina Group stock - Discontinued operations $ - $ 0.98 |
Consolidated results for the first quarter of 2009 amounted to a Net loss attributable to Loews common stock of $647 million, or $1.49 per share, compared to Net income attributable to Loews common stock of $555 million, or $1.05 per share in the first quarter of 2008.
Loss from continuing operations attributable to Loews common stock in the first quarter of 2009 was $647 million, or $1.49 per Loews common share, as compared to income from continuing operations of $409 million, or $0.77 per Loews common share, in the first quarter of 2008.
Results for 2009 reflect a non-cash impairment charge of $1.0 billion ($660 million after tax) related to the carrying value of HighMount's natural gas and oil properties. This charge reflects declines in commodity prices at March 31, 2009. There were no comparable charges in the prior year period.
Higher investment losses and lower investment income at CNA also contributed to the loss from continuing operations for the first quarter of 2009, as compared to the first quarter of 2008. The continuing volatility in the capital markets and continued economic slowdown resulted in realized losses of $532 million ($310 million after tax and noncontrolling interest) in CNA's investment portfolio and a decline in net investment income during the first quarter of 2009.
These declines were partially offset by improved results at Diamond Offshore.
In June 2008, the Company disposed of its entire ownership interest in Lorillard, Inc. ("Lorillard") through the redemption of Carolina Group stock in exchange for Lorillard common stock and an exchange of our remaining Lorillard common stock for Loews common stock. The Carolina Group and Carolina Group stock have been eliminated. The Company also sold Bulova Corporation ("Bulova") in January 2008. Lorillard's results of operations and the gain on disposal of Bulova have been classified as discontinued operations.
Parent Company Structure
We are a holding company and derive substantially all of our cash flow from our subsidiaries. We rely upon our invested cash balances and distributions from our subsidiaries to generate the funds necessary to meet our obligations and to declare and pay any dividends to our shareholders. The ability of our subsidiaries to pay dividends is subject to, among other things, the availability of sufficient funds in such subsidiaries, applicable state laws, including in the case of the insurance subsidiaries of CNA, laws and rules governing the payment of dividends by regulated insurance companies (see Liquidity and Capital Resources -CNA Financial, below). Claims of creditors of our subsidiaries will generally have priority as to the assets of such subsidiaries over our claims and those of our creditors and shareholders.
At March 31, 2009, the book value per share of Loews common stock was $30.73 compared to $30.18 at December 31, 2008. Book value increased primarily due to the recognition of $536 million of deferred gains in additional paid-in capital, upon adoption of Statement of Financial Accounting Standards No. 160, "Noncontrolling Interests in Consolidated Financial Statements." See Note 1 of the Notes to Consolidated Condensed Financial Statements included
under Item 1. The increase was also due to unrealized investment gains recorded in other comprehensive income (loss) partially offset by the net loss for the three months ended March 31, 2009.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the consolidated condensed financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. Actual results could differ from those estimates.
The consolidated condensed financial statements and accompanying notes have been prepared in accordance with GAAP, applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the consolidated condensed financial statements. In general, our estimates are based on historical experience, evaluation of current trends, information from third party professionals and various other assumptions that we believe are reasonable under the known facts and circumstances.
We consider the accounting policies discussed below to be critical to an understanding of our consolidated condensed financial statements as their application places the most significant demands on our judgment.
· Insurance Reserves
· Reinsurance
· Litigation
· Valuation of Investments and Impairment of Securities
· Long Term Care Products
· Pension and Postretirement Benefit Obligations
· Valuation of HighMount's Proved Reserves
· Goodwill
· Income Taxes
Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from estimates, which may have a material adverse impact on our results of operations or equity. See the Critical Accounting Estimates section and the Results of Operations by Business Segment † CNA Financial † Reserves † Estimates and Uncertainties section of our MD&A included under Item 7 of our Form 10-K for the year ended December 31, 2008 for further information.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Unless the context otherwise requires, references to net operating income
(loss), net realized investment results, net income (loss) and net results
reflect amounts attributable to Loews Corporation.
CNA Financial
Insurance operations are conducted by subsidiaries of CNA Financial Corporation ("CNA"). CNA is a 90% owned subsidiary.
CNA's core property and casualty commercial insurance operations are reported in two business segments: Standard Lines and Specialty Lines. Standard Lines includes standard property and casualty coverages sold to small businesses and middle market entities and organizations in the U.S. primarily through an independent agency distribution system. Standard Lines also includes commercial insurance and risk management products sold to large corporations in the U.S. primarily through insurance brokers. Specialty Lines provides a broad array of professional, financial and specialty property and casualty products and services, including excess and surplus lines, primarily through insurance brokers and managing general underwriters. Specialty Lines also includes insurance coverages sold globally through CNA's foreign operations ("CNA Global"). The non-core operations are managed in Life & Group Non-Core segment and Other Insurance segment. Life & Group Non-Core primarily includes the results of the life and group lines of business sold or placed in run-off. Other Insurance primarily includes the results of certain property and casualty lines of business placed in run-off, including CNA Reinsurance Company Limited. This segment also includes the results related to the centralized adjusting and settlements of A&E claims.
Segment Results
The following discusses the results of continuing operations for CNA's operating
segments. CNA utilizes the net operating income financial measure to monitor its
operations. Net operating income is calculated by excluding from net income
(loss) the after tax and noncontrolling interest effects of (i) net realized
investment gains or losses, (ii) income or loss from discontinued operations and
(iii) any cumulative effects of changes in accounting principles. In evaluating
the results of CNA's Standard Lines and Specialty Lines segments, CNA's
management utilizes the loss ratio, the expense ratio, the dividend ratio, and
the combined ratio. These ratios are calculated using GAAP financial results.
The loss ratio is the percentage of net incurred claim and claim adjustment
expenses to net earned premiums. The expense ratio is the percentage of
insurance underwriting and acquisition expenses, including the amortization of
deferred acquisition costs, to net earned premiums. The dividend ratio is the
ratio of policyholders' dividends incurred to net earned premiums. The combined
ratio is the sum of the loss, expense and dividend ratios.
Standard Lines The following table summarizes the results of operations for Standard Lines. Three Months Ended March 31 2009 2008 (In millions, except %) Net written premiums $ 763 $ 771 Net earned premiums 710 783 Net investment income 120 164 Net operating income 55 86 Net realized investment losses (105 ) (10 ) Net income (loss) (50 ) 76 Ratios: Loss and loss adjustment expense 71.8 % 73.7 % Expense 34.0 30.2 Dividend 0.5 0.5 Combined 106.3 % 104.4 % |
Three Months Ended March 31, 2009 Compared to 2008
Net written premiums for Standard Lines decreased $8 million for the three months ended March 31, 2009 as compared with the same period in 2008. Despite higher retention and new business in the current year period, premiums written were unfavorably impacted by lower premium rates and general economic conditions resulting in decreased production, as compared with the first quarter of 2008, across both CNA's Business and Commercial Insurance groups. The current economic conditions have led to decreased industry insured exposures, particularly in the construction industry with smaller payrolls and reduced sales levels. This, along with the competitive market conditions, may continue to put ongoing pressure on premium and income levels, and the expense ratio. Net earned premiums decreased $73 million for the three months ended March 31, 2009 as compared with the same period in 2008, consistent with the trend of lower net written premiums in 2008 as compared to 2007.
Standard Lines averaged rate decreases of 2.0% for the three months ended March 31, 2009, as compared to decreases of 6.0% for the three months ended March 31, 2008 for the contracts that renewed during those periods. Retention rates of 83.0% and 81.0% were achieved for those contracts that were available for renewal in each period.
Net results decreased $126 million for the three months ended March 31, 2009 as compared with the same period in 2008. This decrease was due to higher net realized investment losses and decreased net operating income. See the Investments section of this MD&A for further discussion of the net realized investment results and net investment income.
Net operating income decreased $31 million for the three months ended March 31, 2009 as compared with the same period in 2008. This decrease was primarily due to lower net investment income and decreased underwriting results.
The combined ratio increased 1.9 points for the three months ended March 31, 2009 as compared with the same period in 2008. The expense ratio increased 3.8 points for the three months ended March 31, 2009 as compared with the same period in 2008, primarily related to increased underwriting expenses and a lower net earned premium base. Underwriting expenses increased due to higher employee-related costs, including increased pension expense.
The loss ratio improved 1.9 points primarily due to decreased catastrophe losses. Catastrophe losses were $12 million, or 1.7 points of the loss ratio, in the first quarter of 2009 as compared to $53 million, or 6.8 points of the loss ratio, in the first quarter of 2008. This favorability was partially offset by an increase in the current accident year loss ratio driven by a number of large property losses in the three months ended March 31, 2009, and the impact of decreased favorable net prior year development.
Favorable net prior year development of $13 million was recorded for the three months ended March 31, 2009, reflecting $30 million of favorable claim and allocated claim adjustment expense reserve development and $17 million of unfavorable premium development. Favorable net prior year development of $26 million, reflecting $35 million of favorable claim and allocated claim adjustment expense reserve development and $9 million of unfavorable premium development, was recorded for the three months ended March 31, 2008. Further information on Standard Lines net prior year development for the three months ended March 31, 2009 and 2008 is included in Note 8 of the Notes to Consolidated Condensed Financial Statements included under Item 1.
The following table summarizes the gross and net carried reserves for Standard Lines.
March 31, December 31,
2009 2008
(In millions)
Gross Case Reserves $ 6,090 $ 6,158
Gross IBNR Reserves 5,803 5,890
Total Gross Carried Claim and Claim Adjustment Expense Reserves $ 11,893 $ 12,048
Net Case Reserves $ 4,886 $ 4,995
Net IBNR Reserves 4,885 4,875
Total Net Carried Claim and Claim Adjustment Expense Reserves $ 9,771 $ 9,870
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Specialty Lines The following table summarizes the results of operations for Specialty Lines. Three Months Ended March 31 2009 2008 (In millions, except %) Net written premiums $ 829 $ 848 Net earned premiums 812 873 Net investment income 108 132 Net operating income 107 112 Net realized investment losses (66 ) (5 ) Net income 41 107 Ratios: Loss and loss adjustment expense 61.4 % 64.8 % Expense 29.2 26.8 Dividend 0.4 0.8 Combined 91.0 % 92.4 % |
Three Months Ended March 31, 2009 Compared to 2008
Net written premiums for Specialty Lines decreased $19 million for the three months ended March 31, 2009 as compared with the same period in 2008. After adjusting for foreign exchange, net written premiums increased modestly, primarily due to increased production in CNA Global. Despite higher retention and new business in the current year period, premiums written were unfavorably impacted by foreign exchange and lower premium rates as compared with the first quarter of 2008. The current economic conditions have led to decreased industry insured exposures, particularly in the surety bond, architects, engineers and realtors professional liability marketplace. This, along with the competitive market conditions, may continue to put ongoing pressure on premium and income levels, and the expense ratio. Net earned premiums decreased $61 million for the three months ended March 31, 2009 as compared with the same period in 2008, consistent with the trend of lower net written premiums in 2008 as compared to 2007.
Specialty Lines averaged rate decreases of 2.0% for the three months ended March 31, 2009 as compared to decreases of 3.0% for the three months ended March 31, 2008 for the contracts that renewed during those periods. Retention rates of 86.0% and 84.0% were achieved for those contracts that were available for renewal in each period.
Net income decreased $66 million for the three months ended March 31, 2009 as compared with the same period in 2008. This decrease was primarily due to higher net realized investment losses. See the Investments section of this MD&A for further discussion of the net realized investment results and net investment income.
Net operating income decreased $5 million for the three months ended March 31, 2009 as compared with the same period in 2008. This decrease was primarily due to lower net investment income, partially offset by improved underwriting results.
The combined ratio improved 1.4 points for the three months ended March 31, 2009 as compared with the same period in 2008. The loss ratio improved 3.4 points, primarily due to increased favorable net prior year development for the three months ended March 31, 2009 as compared with the same period in 2008. This was partially offset by higher current accident year loss ratios recorded in several lines of business.
The expense ratio increased 2.4 points for the three months ended March 31, 2009 as compared with the same period in 2008. The increase primarily related to increased underwriting expenses and the lower net earned premium base. Underwriting expenses increased due to higher employee-related costs, including increased pension expense.
Favorable net prior year development of $43 million, reflecting $41 million of favorable claim and allocated claim adjustment expense reserve development and $2 million of favorable premium development, was recorded for the three months ended March 31, 2009. Favorable net prior year development of $2 million, reflecting $17 million of unfavorable claim and allocated claim adjustment expense reserve development and $19 million of favorable premium development, was recorded for the three months ended March 31, 2008. Further information on Specialty Lines net prior year development for the three months ended March 31, 2009 and 2008 is included in Note 8 of the Notes to Consolidated Condensed Financial Statements included under Item 1.
The following table summarizes the gross and net carried reserves for Specialty Lines.
March 31, December 31,
2009 2008
(In millions)
Gross Case Reserves $ 2,621 $ 2,719
Gross IBNR Reserves 5,669 5,563
Total Gross Carried Claim and Claim Adjustment Expense Reserves $ 8,290 $ 8,282
Net Case Reserves $ 2,095 $ 2,149
Net IBNR Reserves 4,775 4,694
Total Net Carried Claim and Claim Adjustment Expense Reserves $ 6,870 $ 6,843
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Life & Group Non-Core The following table summarizes the results of operations for Life & Group Non-Core. Three Months Ended March 31 2009 2008 (In millions) Net earned premiums $ 150 $ 157 Net investment income 159 84 Net operating loss (20 ) (2 ) Net realized investment losses (111 ) (10 ) Net loss (131 ) (12 ) |
Three Months Ended March 31, 2009 Compared to 2008
Net earned premiums for Life & Group Non-Core decreased $7 million for the three months ended March 31, 2009 as compared with the same period in 2008. Net earned premiums relate primarily to the group and individual long term care businesses.
Net loss increased $119 million for the three months ended March 31, 2009 as compared with the same period in 2008. The increase in net loss was primarily due to increased net realized investment losses and adverse performance on CNA's remaining pension deposit business. Certain of the separate account investment contracts related to CNA's pension deposit business guarantee principal and a minimum rate of interest, for which CNA recorded an additional pretax liability of $13 million in Policyholders' funds during the first quarter of 2009. Additionally, CNA's long term care, payout annuity and life-settlement contract business lines experienced favorable results in 2008.
Net investment income for the three months ended March 31, 2008 included trading portfolio losses of $68 million, which were substantially offset by a corresponding decrease in the policyholders' funds reserves supported by the trading portfolio. The trading portfolio supported the indexed group annuity portion of CNA's pension deposit business which was exited during 2008. That business had a net loss of $4 million during the three months ended March 31, 2008. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.
Other Insurance The following table summarizes the results of operations for the Other Insurance segment, including A&E and intrasegment eliminations. Three Months Ended March 31 2009 2008 (In millions) Net investment income $ 33 $ 54 Revenues (12 ) 51 Net operating income (loss) (2 ) 4 Net realized investment losses (28 ) (4 ) Net income (loss) (30 ) |
Three Months Ended March 31, 2009 Compared to 2008
Revenues decreased $63 million for the three months ended March 31, 2009 as compared with the same period in 2008. Revenues were unfavorably impacted by lower net investment income and higher net realized investment losses. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.
Net results decreased $30 million for the three months ended March 31, 2009 as compared with the same period in 2008. The decrease was primarily due to decreased revenues as discussed above.
There was $1 million of unfavorable claim and allocated claim adjustment expense reserve development and $1 million of favorable premium development, resulting in no net prior year development recorded for the three months ended March 31, 2009. Unfavorable net prior year development of $4 million was recorded for the three months ended March 31, 2008, reflecting $5 million of unfavorable claim and allocated claim adjustment expense reserve development and $1 million of favorable premium development.
The following table summarizes the gross and net carried reserves for Other Insurance.
March 31, December 31,
2009 2008
(In millions)
. . .
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