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L > SEC Filings for L > Form 10-Q on 29-Oct-2013All Recent SEC Filings

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Form 10-Q for LOEWS CORP


29-Oct-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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, 2012. This MD&A is comprised of the following sections:

Page No.

Overview 39 Consolidated Financial Results 39 Parent Company Structure 40 Critical Accounting Estimates 40 Results of Operations by Business Segment 41 CNA Financial 41 Diamond Offshore 45 Boardwalk Pipeline 50 HighMount 53 Loews Hotels 56 Corporate and Other 57 Liquidity and Capital Resources 58 CNA Financial 58 Diamond Offshore 59 Boardwalk Pipeline 59 HighMount 60 Loews Hotels 60 Corporate and Other 61 Investments 61 Forward-Looking Statements 65

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);

- transportation and storage of natural gas and natural gas liquids and gathering and processing of natural gas (Boardwalk Pipeline Partners, LP ("Boardwalk Pipeline"), a 53% owned subsidiary);

- exploration, production and marketing of natural gas and oil (including condensate and natural gas liquids) (HighMount Exploration & Production LLC ("HighMount"), a wholly owned subsidiary); and

- operation of a chain 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," "Parent Company," "we," "our," "us" or like terms refer to the business of Loews Corporation excluding its subsidiaries.

Consolidated Financial Results

Net income for the third quarter of 2013 was $282 million, or $0.73 per share, compared to $177 million, or $0.45 per share, in the third quarter of 2012. Net income for the third quarter of 2013 and 2012 includes after tax non-cash ceiling test impairment charges of $42 million and $166 million at HighMount related to the carrying value of its natural gas and oil properties. Excluding these non-cash impairment charges, Loews adjusted net income for the third quarter of 2013 and 2012 would have been $324 million and $343 million. The decrease in net income is primarily


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due to lower earnings at Diamond Offshore and lower investment income at the Parent Company. These decreases were partially offset by higher earnings at CNA.

CNA's earnings increased primarily from improved non-catastrophe current accident year underwriting results and higher favorable net prior year development. These increases were partially offset by higher catastrophe losses and reduced results from the Life & Group Non-Core segment as a result of unfavorable morbidity in the long term care business.

Diamond Offshore's earnings decreased primarily due to lower utilization and $35 million (after tax and noncontrolling interests) of lost revenue and bad debt write-offs relating to termination of rig contracts due to payment defaults by two customers. The decrease in utilization during 2013 is primarily due to downtime for scheduled surveys and shipyard projects. These decreases were partially offset by higher dayrates.

Boardwalk Pipeline's earnings were flat as compared with the prior year. The contribution of results from Louisiana Midstream, acquired in October of 2012, and the sale of storage gas in 2013 were substantially offset by lower transportation revenues as a result of unfavorable contract renewal conditions.

Net income for the nine months ended September 30, 2013 was $793 million or $2.03 per share as compared to $600 million, or $1.51 per share in the prior year period. Net income for the nine months ended September 30, 2013 and 2012 includes after tax non-cash ceiling test impairment charges of $134 million and $336 million at HighMount. Excluding these non-cash impairment charges, Loews adjusted net income for the nine months ended September 30, 2013 and 2012 would have been $927 million and $936 million. The decrease in net income is primarily due to the reasons discussed in the three month comparison above for Diamond Offshore as well as a prior year gain of $32 million (after tax and noncontrolling interests) from the sale of six jack-up rigs in 2012, partially offset by higher earnings at CNA.

Book value per share decreased to $49.99 at September 30, 2013 from $50.41 at September 30, 2012 and increased from $49.67 at December 31, 2012. Book value per share excluding accumulated other comprehensive income ("AOCI") increased to $49.94 at September 30, 2013 from $47.96 at September 30, 2012 and $47.94 at December 31, 2012.

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 earnings and 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 and compliance with covenants in their respective loan agreements. 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.

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 and Other Receivables

- Litigation

- Valuation of Investments and Impairment of Securities


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- Long Term Care Products

- Payout Annuity Contracts

- Pension and Postretirement Benefit Obligations

- Valuation of HighMount's Proved Reserves

- Impairment of Long-Lived Assets

- 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 Annual Report on Form 10-K for the year ended December 31, 2012 for further information.

RESULTS OF OPERATIONS BY BUSINESS SEGMENT

Unless the context otherwise requires, references to net operating income
(loss), net realized investment results and net income (loss) reflect amounts attributable to Loews Corporation shareholders.

CNA Financial

The following table summarizes the results of operations for CNA for the three
and nine months ended September 30, 2013 and 2012 as presented in Note 12 of the
Notes to Consolidated Condensed Financial Statements included in Item 1 of this
Report:



                                                Three Months Ended                Nine Months Ended
                                                   September 30,                    September 30,

                                                2013            2012            2013            2012

(In millions)

Revenues:
Insurance premiums                           $    1,825       $  1,781       $   5,389       $   5,098
Net investment income                               597            601           1,808           1,719
Investment gains                                      5              8              15              62
Other                                                77             75             288             233

Total                                             2,504          2,465           7,500           7,112

Expenses:
Insurance claims and policyholders'
benefits                                          1,414          1,435           4,364           4,164
Amortization of deferred acquisition
costs                                               341            333           1,004             937
Other operating expenses                            329            340             987             970
Interest                                             42             43             125             128

Total                                             2,126          2,151           6,480           6,199

Income before income tax                            378            314           1,020             913
Income tax expense                                 (104)           (92)           (300)          (272)
Amounts attributable to noncontrolling
interests                                           (27)           (22)            (72)           (64)

Net income attributable to Loews
Corporation                                  $      247       $    200       $     648       $     577

Three Months Ended September 30, 2013 Compared to 2012

Net income increased $47 million for the three months ended September 30, 2013 as compared with the same period in 2012, primarily due to improved non-catastrophe current accident year underwriting results and higher favorable net prior year development, partially offset by higher catastrophe losses and reduced results from the Life & Group Non-Core segment as a result of unfavorable morbidity in the long term care business. See the Investments section of this MD&A for further discussion of net realized investment results and net investment income.

Nine Months Ended September 30, 2013 Compared to 2012

Net income increased $71 million for the nine months ended September 30, 2013 as compared with the same period in 2012. Insurance premiums increased $291 million and included an increase of $162 million related to Hardy, which was acquired in July of 2012. Net income improved from the prior year primarily due to improved non-catastrophe current accident year underwriting results, higher net investment income and a settlement benefit of


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$27 million (after tax and noncontrolling interests) related to workers' compensation residual market litigation. These favorable items were partially offset by lower favorable net prior year development and increased catastrophe losses.

CNA Property and Casualty Insurance Operations

CNA's property and casualty insurance operations consist of professional, financial, specialty property and casualty products and services and commercial insurance and risk management products.

In the evaluation of the results of the property and casualty businesses, CNA 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.

The following tables summarize the results of CNA's property and casualty operations for the three and nine months ended September 30, 2013 and 2012:

                                              CNA               CNA
Three Months Ended September 30, 2013      Specialty        Commercial           Hardy             Total

(In millions, except %)

Net written premiums                     $       778       $       760       $        81       $   1,619
Net earned premiums                              768               832                86           1,686
Net investment income                            159               219                 1             379
Net operating income                             170               118                11             299
Net realized investment gains                                        1                                 1
Net income                                       170               119                11             300

Ratios:
Loss and loss adjustment expense                 55.6%             67.9%             40.5%           60.9%
Expense                                         29.4              34.8              44.6            32.9
Dividend                                         0.3               0.3                               0.2

Combined                                         85.3%            103.0%             85.1%           94.0%


Three Months Ended September 30, 2012


Net written premiums                     $       723       $       811       $        56       $   1,590
Net earned premiums                              738               840                64           1,642
Net investment income                            159               230                 2             391
Net operating income                             121               113                 3             237
Net realized investment gains (losses)             1                 6               (1)               6
Net income                                       122               119                 2             243

Ratios:
Loss and loss adjustment expense                 62.5%             70.5%             33.3%           65.4%
Expense                                         31.0              35.2              52.5            34.1
Dividend                                         0.2               0.3                               0.2

Combined                                         93.7%            106.0%             85.8%           99.7%


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                                              CNA               CNA
Nine Months Ended September 30, 2013       Specialty        Commercial           Hardy             Total

(In millions, except %)

Net written premiums                     $     2,337       $     2,504       $       274       $   5,115
Net earned premiums                            2,237             2,509               226           4,972
Net investment income                            480               680                 3           1,163
Net operating income                             428               331                 2             761
Net realized investment gains (losses)           (1)               (3)                 1             (3)
Net income                                       427               328                 3             758

Ratios:
Loss and loss adjustment expense                 60.1%             72.1%             47.3%           65.6%
Expense                                         29.8              34.9              48.1            33.2
Dividend                                         0.2               0.2                               0.2

Combined                                         90.1%            107.2%             95.4%           99.0%


Nine Months Ended September 30, 2012


Net written premiums                     $     2,206       $     2,543       $        56       $   4,805
Net earned premiums                            2,163             2,452                64           4,679
Net investment income                            446               646                 2           1,094
Net operating income                             336               289                 3             628
Net realized investment gains (losses)            11                20               (1)              30
Net income                                       347               309                 2             658

Ratios:
Loss and loss adjustment expense                 63.6%             71.3%             33.3%           67.3%
Expense                                         31.5              35.2              52.5            33.6
Dividend                                                           0.3                               0.2

Combined                                         95.1%            106.8%             85.8%          101.1%

Three Months Ended September 30, 2013 Compared to 2012

Net written premiums increased $29 million for the three months ended September 30, 2013 as compared with the same period in 2012. This increase was primarily driven by increased rate and an increase related to Hardy, partially offset by previous underwriting actions taken in certain business classes in CNA Commercial. Net earned premiums increased $44 million for the three months ended September 30, 2013 as compared with the same period in 2012, primarily driven by the increase in net written premiums over recent quarters for CNA Specialty and Hardy, partially offset by a decrease for CNA Commercial.

CNA Specialty's average rate increased 6% for the three months ended September 30, 2013 as compared with an increase of 5% for the three months ended September 30, 2012, for the policies that renewed in each period. Retention of 85% was achieved in each period. CNA Commercial's average rate increased 8% for the three months ended September 30, 2013 as compared with an increase of 7% for the three months ended September 30, 2012, for the policies that renewed in each period. Retention of 71% and 77% was achieved in each period. Hardy's average rate decreased 5% for the three months ended September 30, 2013 as compared with an increase of 1% for the three months ended September 30, 2012, for the policies that renewed in each period. Retention of 75% and 73% was achieved in each period.

Net operating income increased $62 million for the three months ended September 30, 2013 as compared with the same period in 2012. The increase in net operating income was primarily due to improved underwriting results and higher favorable net prior year development, partially offset by higher catastrophe losses. Catastrophe losses were $25 million (after tax and noncontrolling interests) for the three months ended September 30, 2013 as compared to catastrophe losses of $16 million (after tax and noncontrolling interests) for the same period in 2012.

Favorable net prior year development of $78 million and $49 million was recorded for the three months ended September 30, 2013 and 2012. Further information on net prior year development is included in Note 5 of the Notes to Consolidated Condensed Financial Statements included under Item 1.


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CNA Specialty's combined ratio improved 8.4 points for the three months ended September 30, 2013 as compared with the same period in 2012. The loss ratio improved 6.9 points, due to higher favorable net prior year development and an improved non-catastrophe current accident year loss ratio, partially offset by higher catastrophe losses. The expense ratio improved 1.6 points, primarily due to the impact of lower underwriting expenses and a higher net earned premium base.

CNA Commercial's combined ratio improved 3.0 points for the three months ended September 30, 2013 as compared with the same period in 2012. The loss ratio improved 2.6 points, primarily due to an improved current accident year loss ratio.

Hardy's combined ratio improved 0.7 points for the three months ended September 30, 2013 as compared with the same period in 2012. The loss ratio increased 7.2 points, primarily due to higher catastrophe losses. The expense ratio improved 7.9 points, primarily due to the higher net earned premium base.

Nine Months Ended September 30, 2013 Compared to 2012

Net written premiums increased $310 million for the nine months ended September 30, 2013 as compared with the same period in 2012. Net written premiums for 2013 included an increase of $218 million related to Hardy. Excluding Hardy, the increase in net written premiums was primarily driven by increased rate in CNA Specialty, partially offset by previous underwriting actions taken in certain business classes in CNA Commercial, including a transfer of $44 million of in-force business. Net earned premiums increased $293 million for the nine months ended September 30, 2013 as compared with the same period in 2012, including an increase of $162 million related to Hardy. Excluding Hardy, the increase in net earned premiums was primarily driven by the increase in net written premiums over recent quarters.

CNA Specialty's average rate increased 6% for the nine months ended September 30, 2013 as compared with an increase of 4% for the nine months ended September 30, 2012 for the policies that renewed in each period. Retention of 85% and 86% was achieved in each period. CNA Commercial's average rate increased 9% for the nine months ended September 30, 2013 as compared with an increase of 6% for the nine months ended September 30, 2012, for the policies that renewed in each period. Retention of 74% and 77% was achieved in each period.

Net operating income increased $133 million for the nine months ended September 30, 2013 as compared with the same period in 2012. The increase in net operating income was primarily due to improved underwriting results, higher net investment income and a settlement benefit of $27 million (after tax and noncontrolling interests) in CNA Commercial. These favorable items were partially offset by unfavorable net prior year development in 2013 for CNA Commercial, which includes $21 million (after tax and noncontrolling interests) recorded for workers' compensation in response to legislation related to the New York Fund for Reopened Cases and higher catastrophe losses. Catastrophe losses were $86 million (after tax and noncontrolling interests) for the nine months ended September 30, 2013 as compared with $72 million (after tax and noncontrolling interests) for the same period in 2012.

Favorable net prior year development of $129 million and $167 million was recorded for the nine months ended September 30, 2013 and 2012. Further information on net prior year development is included in Note 5 of the Notes to Consolidated Condensed Financial Statements included under Item 1.

CNA Specialty's combined ratio improved 5.0 points for the nine months ended September 30, 2013 as compared with the same period in 2012. The loss ratio improved 3.5 points, due to higher favorable net prior year development and an improved non-catastrophe current accident year loss ratio, partially offset by higher catastrophe losses. The expense ratio improved 1.7 points, primarily due to the impact of lower underwriting expenses and a higher net earned premium base.

CNA Commercial's combined ratio increased 0.4 points for the nine months ended September 30, 2013 as compared with the same period in 2012. The loss ratio increased 0.8 points, primarily due to unfavorable net prior year development, partially offset by an improved current accident year loss ratio.

Life & Group Non-Core and Other Operations

Life & Group Non-Core primarily includes the results of the life and group lines of business that are in run-off. Other primarily includes certain CNA corporate expenses, including interest on corporate debt and the results of certain property and casualty business in run-off, including CNA Re and asbestos and environmental pollution ("A&EP").


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The following tables summarize the results of CNA's Life & Group Non-Core and Other operations for the three and nine months ended September 30, 2013 and 2012:

                                           Life & Group
  Three Months Ended September 30, 2013      Non-Core          Other           Total

  (In millions)

  Net earned premiums                        $     140                      $     140
  Net investment income                            209       $      9             218
  Net operating loss                              (31)           (24)            (55)
  Net realized investment gains                                     2               2
  Net loss                                        (31)           (22)            (53)

  Three Months Ended September 30, 2012


  Net earned premiums                        $     141                      $     141
  Net investment income                            201       $      9             210
  Net operating loss                              (19)           (23)            (42)
  Net realized investment gains (losses)           (2)              1             (1)
  Net loss                                        (21)           (22)            (43)

  Nine Months ended September 30, 2013


  Net earned premiums                        $     419                      $     419
  Net investment income                            620       $     25             645
  Net operating loss                              (64)           (58)           (122)
  Net realized investment gains                      8              4              12
  Net loss                                        (56)           (54)           (110)

  Nine Months Ended September 30, 2012


  Net earned premiums                        $     421                      $     421
  Net investment income                            600       $     25             625
. . .
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