Loews 2008 Annual Report
Transcript of Loews 2008 Annual Report
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Loews Corporation Annual Report
2008
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our company structure
is not complex.Our primary assets include three
publicly traded and two wholly owned
subsidiaries, and a large portfolio of
cash and investments.
One of the largest
commercial property &
casualty insurance
companies in the
United States.
For more information
refer topage 18.
A worldwide deep water
driller, with 45 offshore
drilling rigs.
For more information
refer topage 20.
Engaged in the
exploration and
production of natural
gas, with its primary
holdings in the Permian
Basin in Texas, the
Antrim Shale in
Michigan and the
Black Warrior Basin
in Alabama.
For more information
refer to
page 22.
An operator of interstate
natural gas pipeline
systems and
underground storage.
For more information
refer topage 24.
Among the countrys
top luxury lodging
companies, with
18 hotels and resorts
in the United States
and Canada.
For more information
refer topage 26.
CNA Financial Diamond OffshoreDrilling
Boardwalk PipelinePartners
Loews HotelsHighMount Exploration&Production
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NYSE CHIEF
SUBSIDIARY SYMBOL OWNED INDUSTRY EXECUTIVE OFFICER WEBSITE
CNA Financial Commercial Property&Corporation CNA 90% Casualty Insurance Thomas F. Motamed www.cna.com
Diamond OffshoreDrilling, Inc. DO 50.4% Offshore Drilling Lawrence R. Dickerson www.diamondoffshore.com
HighMountExploration& 100% Energy Exploration Timothy S. Parker www.highmountep.comProduction LLC &Production
Boardwalk PipelinePartners, LP BWP 74% Natural Gas Pipelines Rolf A. Gafvert www.bwpmlp.com
Loews HotelsHolding Corporation 100% Luxury Lodging Jonathan M. Tisch www.loewshotels.com
Other Assets
Net Cash and Investments
CNA Preferred Stock
Boardwalk Pipeline Class B Units
Non-Public Subsidiaries
HighMount
Loews Hotels
Boardwalk Pipeline General Partner
Public Subsidiaries
Common Shares Owned by Loews
CNA: 242.1 million
Diamond Offshore: 70.1 million
Boardwalk Pipeline: 107.5 million
Market valuations of our
stake in publicly traded
subsidiaries totaled
$8.6 billion, or $19.87 per
Loews share, based on
closing stock prices as of
February 25, 2009.
our stock represents more value than just ve subsidiaries.
We believe that Loewss true value is more
than just the sum of its parts. Nonetheless,
the availability of public market valuations
for three of our businesses helps investors
determine an estimated sum-of-the-parts
valuation for Loews common stock.
being a conglomerate allows
diversity and exibility.Operating as a conglomerate gives us exibility that other structures or models
do not possess, including the freedom to own businesses in disparate industries.
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Loewswe represent many things, but most of all we represent the
value of being a conglomerate andthe consequent value we create for our shareholders.
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We are focused on
building enduring value
for our shareholders.
Long termwe believe the only way
to manage our company
is to think long term.we attach a greater priority to generating superior stock-price performance over
the next 12 years than over any single 12-month period.
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200919991989197919691959
energy exploration &production
natural gas pipelines
offshore drilling
insurance
luxury lodging
tobacco
watches &clocks
supertankers
movie theaters
Subsidiaries from 1959 to 2009
we have always been
a conglomerate.
our subsidiaries benet from
our strong fundamentals and
strategic vision.
When setting the strategic course for Loews,we never lose sight of a longer time horizon.
valueWe are philosophically,
practically, and genetically
value investors.
strengthOur balance sheet strength
positions Loews to withstand
adversity and to capitalize on
opportunities when they arise.
opportunityOur approach is to purchase assets
at a discount to their inherent value.
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We maintain a large
balance of net cash and
investments, which provides
an extra measure of security.
Liquiditythrough the years, we have remained
patient and poised,and feel no pressure to invest at any given moment.
we are comfortable maintaining a large amount of liquidity,
which allows us to move quickly when the time is right.
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56%
23%
16%
5%
holding company
cash and investmentsOur priorities in managing holding
company cash and investments are
to protect principal and optimize liquidity.
holdingcompany debtWe maintain relatively low levels of
holding company debt so that we can
easily service our obligations.
which buffers us againstunforeseen events.
we receive cash from a diversity of sources,
Boardwalk Pipeline
Other
Diamond Offshore
CNA Financial
2008 dividends received from subsidiaries
(excluding Lorillard) by percentage
$2.35 billion $0.87 billion
our subsidiaries benet from
our liquid balance sheet.Our decisions are always governed by
the recognition that a conservative capitalstructure is an important element in
generating value for shareholders.
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We advise our subsidiaries on
signicant capital and strategic
initiatives. Implementation is
carried out by the managers
of each subsidiary.
Logicour investment philosophy is conservative.
our decisions are groundedin common sense.
our aim is always to understand the downside risk of an opportunity
before considering the upside.
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1
2
3 4
Shares Outstanding at Year End Since 1971(adjusted for all stock splits)
1980 1990 2000 20091971
manage throughdown cyclesWe view most of our assets as
long-term holdings.
ownsolid assetsWe have historically acquired
companies with substantial
capital or nancial assets that
offer products and services
for which there is enduring, if
sometimes cyclical, demand.
manageconservatively
We make certain that each
subsidiary understands our
conservative and long-term
approach to creating
shareholder value.
maintain liquidityA strong net cash position has not always
been fashionable, but it has enabled Loews to
seize opportunities and to assist subsidiaries.
the long-term value of Loews stock is
supported by the repurchaseof our shares over the years.
common stockoutstanding
The repurchases that we have
made over the years benet
our shareholders by giving them
an increased stake in Loews
and its subsidiaries.
1.3 billion(Dec 31, 1971)
435 million(Feb 13, 2009)
we adhere to
value-investing principles, based on
common sense and logic.Loews approaches the management of our businesses,investments and potential acquisitions in a conservative
manner. Our business principles are sometimes contrary
to current trends.
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50-Year Relative Price Performance of Loews Common Stock(Mar 13,1959 to Dec 31, 2008)
CumulativePercentChange(LogScale)
1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2008
100%
1,000%
10,000%
100,000%
1,000,000%
S&P 500
Loews
The Roman Numeral L
represents 50 the number of
years Loews has been traded on
the New York Stock Exchange.
Fiftyour exible structure has allowed us to
grow and diversify over the past 50 years and
to pursue opportunities.we are value investors with a conservative, long-term philosophy.
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nancial highlights 2008
Year Ended Dec 31, 2008 2007 2006 2005 2004
(in millions, except per-share data)
Results of Operations:
Revenues $ 13,247 $ 14,302 $ 13,844 $ 12,197 $ 11,674Income before income tax and minority interest $ 587 $ 3,195 $ 3,104 $ 676 $ 769Income (loss) from continuing operations $ (182) $ 1,587 $ 1,676 $ 475 $ 582Discontinued operations, net 4,712 902 815 737 634
Net income $ 4,530 $ 2,489 $ 2,491 $ 1,212 $ 1,216
Income (loss) attributable to:Loews common stock:
Income (loss) from continuing operations $ (182) $ 1,587 $ 1,676 $ 475 $ 582Discontinued operations, net 4,501 369 399 486 450
Loews common stock 4,319 1,956 2,075 961 1,032Former Carolina Group stock:
Discontinued operations, net 211 533 416 251 184
Net income $ 4,530 $ 2,489 $ 2,491 $ 1,212 $ 1,216
Diluted Net Income (Loss) per Share:
Loews common stock:Income (loss) from continuing operations $ (0.38) $ 2.96 $ 3.03 $ 0.85 $ 1.05
Discontinued operations, net 9.43 0.69 0.72 0.87 0.80Net income $ 9.05 $ 3.65 $ 3.75 $ 1.72 $ 1.85
Former Carolina Group stock:Discontinued operations, net $ 1.95 $ 4.91 $ 4.46 $ 3.62 $ 3.15
Financial Position:
Investments $ 38,450 $46,669 $52,102 $43,612 $42,726Total assets 69,857 76,115 76,881 70,906 73,720Debt 8,258 7,258 5,572 5,207 6,990Shareholders equity 13,126 17,591 16,502 13,092 11,970Cash dividends per share:
Loews common stock 0.25 0.25 0.24 0.20 0.20Former Carolina Group stock 0.91 1.82 1.82 1.82 1.82
Book value per share of Loews common stock 30.17 32.40 30.14 23.64 21.85Shares outstanding:
Loews common stock 435.09 529.68 544.20 557.54 556.75Former Carolina Group stock 108.46 108.33 78.19 67.97
nancial highlights 2008
Net income for 2008 amounted to
$4.5 billion compared to $2.5 billion
for 2007. Net income includes a tax-free
non-cash gain of $4.3 billion related to the
separation of Lorillard and an after-tax
gain of $75 million from the sale of
Bulova Corporation, both reported as
discontinued operations.
Consolidated results from continuing
operations for the year ended December 31,
2008 amounted to a loss of $182 million,
or $0.38 per share, compared to income from
continuing operations of $1,587 million,
or $2.96 per share, in 2007.
Higher realized investment losses,
lower investment income and increased
catastrophe losses at CNA, primarily
from hurricanes, contributed to the loss
from continuing operations for 2008.
Investment income at the holding company
also included losses in 2008, as compared
to gains in the prior year. The prolonged
and severe disruptions in the debt and
equity markets, including, among other
things, widening of credit spreads,
bankruptcies and government intervention
in a number of large nancial institutions
as well as the global economic downturn,
resulted in signicant realized and
unrealized losses in CNAs investment
portfolio and declines in net investment
income during 2008.
HighMounts results also contributed to
the loss from continuing operations and
include a non-cash impairment charge of
$691 million ($440 million after tax)
related to the carrying value of natural
gas and oil properties, and a non-cash
charge related to the impairment of
goodwill of $482 million ($314 million
after tax). These charges reect declines
in commodity prices and negative reserve
revisions in proved reserve quantities
based on a decline in commodity prices.
There were no comparable charges in 2007
These declines were partially offset
by signicantly improved results at
Diamond Offshore.
Consolidated revenues in 2008 amounted
to $13.2 billion, compared to $14.3 billion
in the prior year. At December 31, 2008,
the book value per share of Loews
common stock was $30.17, as compared
to $32.40 at December 31, 2007.
results of operations
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letter to our shareholdersand employees
Most companies and investors were glad to
turn the page on 2008, a year of extraordinary
nancial and economic turmoil. Although
we were by no means unscathed, Loews
Corporation has withstood the collapse
of the credit markets and the slowing global
economy, aided by our strong and liquid
holding company balance sheet andconservative management philosophy.
Loews reported a loss from continuing operations of
$182 million in 2008, a substantial decline from our
income from continuing operations of $1.6 billion in
2007. While two of our energy subsidiaries Diamond
Offshore and Boardwalk Pipeline posted record
earnings, the results of HighMount, in its rst full year
as part of Loews, were hurt by non-cash impairment
charges caused by the dramatic decline in natural gas
prices that occurred during the latter part of 2008.
CNA Financial turned in solid underwriting results in
its core property and casualty insurance operations,
although losses stemming from its investment portfolio
led to disappointing overall results. Loews Hotels, our
luxury lodging subsidiary, performed solidly, though the
outlook is for a challenging lodging market in 2009.
Ofce of the President[from left to right]
Jonathan M. TischCo-Chairman of the Board,
Chairman and Chief Executive OfcerLoews Hotels
Andrew H. TischCo-Chairman of the Board,
and Chairman of theExecutive Committee
James S. TischPresident and
Chief Executive Ofcer
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During 2008, we completed the tax-free separation
of our tobacco subsidiary, Lorillard, and as part of this
transaction, we reduced our outstanding shares of
common stock by approximately 18 percent through
an exchange offer. We wish much success for our
former colleagues at Lorillard as they move forward
as an independent, publicly traded company.
We also made signicant equity investments in two Loews
subsidiaries CNA and Boardwalk Pipeline supplying
them with needed capital at a time when raising funds in
the illiquid public markets would have been extraordinarily
expensive. CNA and Boardwalk Pipeline are strong
companies with excellent growth prospects, and we believe
our additional investments in them represent value
for Loews shareholders, as well as for those companies
minority shareholders.
It has long been Loewss practice to maintain a strong
balance sheet. Preserving a large net cash balance has
not always been fashionable, but it has enabled us to seize
attractive opportunities and to assist our subsidiaries
when they could not access the capital markets on
reasonable terms. Beneting from our subsidiaries healthy
cash-ow generation, we nished the year with holding
company cash and investments of $2.3 billion, even after
investing $2.5 billion in CNA and Boardwalk Pipeline.
Boardwalk Pipeline
Boardwalk Pipeline has pursued an organic growth
strategy to transport natural gas from the prolic supply
sources in Texas, Oklahoma and Arkansas. Its major pipeline
expansion projects are nearly completed and, when fully
operational, will approximately double pipeline system
capacity since Boardwalk Pipeline went public in 2005.
When fully completed, we estimate that Boardwalk
Pipelines investments in these attractive expansion
projects will total approximately $4.8 billion. The initial
rounds of project nancing were funded through
Boardwalk Pipelines bank credit facility and a series of
public debt and equity offerings. When massive turmoil
in the capital markets raised the cost of nancing to
unreasonable levels, Loews helped Boardwalk Pipeline to
nance the projects using holding company capital.
We invested $700 million in Class B units in the second
quarter of 2008 and another $500 million in common
units in the fourth quarter of 2008.
CNA FinancialCNA continued to make progress during the year with
its disciplined underwriting, stringent expense controls,
better claims practices and other operating improvements.
At the same time, the severe disruptions in the public
securities markets led to losses in the companys investment
portfolio and substantial reductions in investment income.
To help CNA maintain a position of strength during
uncertain times, Loews purchased $1.25 billion of a new
series of CNA senior preferred stock in November 2008.
CNA used the proceeds to increase the statutory surplus
of its principal insurance subsidiary, Continental Casualty
Company, which has been adversely impacted by lossesin its investment portfolio.
While CNAs investment portfolio has incurred signicant
unrealized mark-to-market losses, the insurance holding
company and its subsidiaries possess ample liquidity.
CNAs cash ow from operations, along with cash
generated from its investment portfolio, is more than
sufcient to meet its policyholder claim obligations.
CNA is under no pressure to sell securities at a loss
to satisfy liquidity needs. Over time, assuming these
securities recover in value or are redeemed at maturity,
we expect CNA to recoup most of its unrealized losses and
amortize them back into the companys book value.
We are very pleased that Tom Motamed has joined CNA
as its new Chairman and Chief Executive Ofcer upon
the retirement of Steve Lilienthal at year-end 2008.
Tom served as Vice Chairman and Chief Operating Ofcer
of The Chubb Corporation until June 2008. With his
30-plus years of experience at Chubb, Tom brings to
CNA the experienced leadership of a proven insurance
professional. At the same time, we will miss Steve. Under
his leadership, CNA executed a successful turnaround,
becoming a stronger, more focused and more competitive
commercial property and casualty insurer. We wish him
all the best in his retirement.
We nishedthe year with
$2.3 billionof cash and
investments.
We reducedour outstanding
shares by18 percent.
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other subsidiary performancesBelow are some operational highlights for our
other subsidiaries:
Diamond Offshoreachieved record earnings, thanks
to high utilization rates and record dayrates for its offshore
drilling rigs. The dramatic fall in oil and natural gas prices
during the second half of 2008, however, has begun to
cause some deterioration in the offshore drilling sector.
HighMountcompleted its rst full year of operations
within the Loews family. Natural gas prices have
signicantly declined from a peak of over $14 per
thousand cubic feet (Mcf) in mid-2008 to approximately
$4 per Mcf in February of 2009. If prolonged, this pricedecline will negatively impact prots.
Loews Hotelsreported good results for the year,
although the severe downturn in the economy will exert
pressure on the entire lodging industry in 2009 amid
cutbacks in leisure, business and group travel.
For further discussion of each subsidiarys performance
in 2008, please refer to the year in review section,
beginning on page 18.
2009 outlook
As we put our signatures to this letter, the U.S. andglobal economies are in recession, with the outlook
for 2009 and beyond still highly uncertain. With our
liquid balance sheet and conservative capital structure,
Loews is positioned to weather difcult periods,
as is each of our subsidiary companies.
The decline of major stock market indices over the past
year has been severe, and unfortunately the price of
Loews common stock has not escaped these market
forces. Some reassurance may be found, however, when
reviewing our stock performance over a longer timeframe,
which helps to put any single year in a broader context.
Over the past 50 years, Loews has delivered an annualized
price appreciation of 16.1 percent, versus 5.7 percent for
the S&P 500 Index.
March of 2009 marks the 50th anniversary of Loewss
listing on the New York Stock Exchange. Since 1959,
we have lived through many difcult markets and business
cycles, learned valuable lessons about staying the course
and emerged stronger as a result. We expect that thetroubled economy will ultimately give way to recovery,
and that we and our subsidiaries will benet from
opportunities that will surely emerge.
One important lesson the years have taught us: the
performance of our company depends on the quality
of our people. In that regard, we want to thank the
employees of Loews and our subsidiaries for their
dedication and effort. They, along with our disciplined
approach to managing and investing, will bring us
through these challenging times and allow us to continue
building long-term value for our shareholders.
letter to our shareholders and employees
James S. Tisch
Ofce of the President
February 25, 2009
Andrew H. Tisch Jonathan M. Tisch
Sincerely,
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Loews Corporation is a diversied holdingcompany rooted in the principles of value
investing and focused on building long-term
value as a means of generating wealth for
our shareholders.
As a conglomerate, we have the freedom and exibility
to make investments and acquisitions across a broad
spectrum of industries, wherever we perceive
opportunity. We aim to achieve superior risk-adjusted
returns for our shareholders in three ways: by optimizing
our subsidiaries operating performance and capital
structure; by making opportune investments and
acquisitions; and by effectively managing and al locatingholding company capital. To facilitate each of these
strategies, we maintain a conservatively capitalized
and highly liquid balance sheet.
holding company approach
As a holding company, we closely monitor the
performance of our subsidiaries, but do not participate
in their day-to-day operations. We provide counsel on
signicant capital and strategic initiatives and then rely
on experienced subsidiary management teams to make
fundamental decisions about operating issues, product
and service offerings, marketing, and long-range plans.
Each subsidiary is headed by a chief executive ofcer
who embraces our conservative, long-term approach
to building shareholder value.
We believe that holders of Loews common stock benet
from the fact that three of our subsidiaries Boardwalk
Pipeline, CNA and Diamond Offshore are publicly traded.
We see three primary benets for our shareholders:
Market valuation:Third-party investors value these
companies directly in the public equity markets, providing
an objective measure of value for holders of Loews
common stock.
Disclosure and governance:As public companies, these
subsidiaries provide nancial disclosures in addition to
those offered by the holding company, further enhancing
transparency. Additionally, each publicly traded subsidiary is
overseen by its own board, including independent directors.
Self-nancing:Public subsidiaries can directly access
the capital markets to nance their operations and
expansion plans. While the public markets have not
been a plentiful source of capital during recent months,
our subsidiaries have historically been able to obtain
nancing on attractive terms.
The availability of public market valuations for three
of our businesses also helps investors determine an
estimated sum-of-the-parts valuation for Loews common
stock. While we believe that Loewss true value is more
than just the sum of its parts, such a readily calculable
valuation metric is indeed benecial to investors. On
February 25, 2009, the value of Loewss 90 percent ownership
of CNA common stock, our 50.4 percent ownership of
Diamond Offshore common stock and our 69 percent
limited partnership interest in Boardwalk Pipeline totaled
approximately $8.6 billion, or $19.87 per share of Loews
common stock. Other assets attributed to Loews common
stock include our two wholly owned subsidiaries,
HighMount and Loews Hotels; our 100 percent ownership
of Boardwalk Pipelines general partner; our holding
company cash and investments net of holding company
debt; and our holdings of CNA senior preferred stock
and Boardwalk Pipeline Class B units.
Lorillard separation
In December of 2007, our Board of Directors approvedplans for a tax-free separation of Lorillard Inc. toholders of Loews common stock and Carolina Groupstock. We successfully completed this transaction inJune 2008, creating signicant value for both theholders of Loews common stock and the former holdersof Carolina Group stock. Today, Lorillard is an independentpublicly traded company (NYSE ticker symbol LO).
Loews: a nancial portrait
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ask whether acquisitions are becoming attractive or
whether prices are likely to fall further. Neither we nor
anyone else has the answer at the moment. Perhaps in
a years time we wil l be able to look back and know with
certainty when the markets reached bottom. For now,
however, uncertainty reigns, and in these circumstances
we feel no pressure to invest.
share repurchases
We strive to allocate our capital for superior returns that
will ultimately be reected in the price of Loews common
stock. Over the years, repurchasing our shares has been
an important means of pursuing this goal. In effect, we applythe same value-investing principles to the repurchase of
Loews common stock that we would to any other
investment decision. The repurchases that we have made
over the years have beneted our shareholders by giving
them an increased stake in Loews and its subsidiaries.
In each of the previous three decades the 70s, 80s,
and 90s we repurchased more than 25 percent of our
common shares that were outstanding at the decades
start. As part of the separation of Lorillard in June 2008,
Loews completed an exchange offer that resulted in the
retirement of 93.5 million shares of Loews common
stock, representing 17.6 percent of our outstanding
shares. Including the exchange offer, we have reduced
our outstanding shares of common stock by more than
30 percent since 2000, continuing the trend for a
fourth consecutive decade. Our share buybacks over
the years have supported the long-term performance
of Loews common stock.
patient investorsWe are continually on the lookout for investment
opportunities or acquisitions that will create value for
the holders of Loews common stock. We employ a variety
of metrics to evaluate each potential investment and to
gauge the ongoing success of our subsidiaries. In general,
we are drawn to companies with undervalued assets or
the ability to generate stable cash ows for both internal
reinvestment and the payment of dividends. We review
opportunities across many industries and focus intently
on understanding downside risks before turning our
attention to potential returns.
There is a common thread connecting all of ourinvestments and acquisitions over the years: each
represented attractive value for Loews shareholders.
For example, we acquired a controlling interest in CNA in
1974 at a time when the insurance industry was out of
favor. In the late 1980s, we created a subsidiary to buy
offshore drilling rigs at the historically low prices then
prevailing. We formed Diamond Offshore with these initial
rigs and, in 1995, took the company public. In 2003, we
acquired Texas Gas Transmission at a time when several
owners of natural gas pipelines were experiencing
nancial distress. In 2004, we acquired Gulf South
Pipeline, which t hand-in-glove with Texas Gas, and
a year later we formed Boardwalk Pipeline as a masterlimited partnership. We contributed both Texas Gas and
Gulf South to this partnership and took it public in 2005
while retaining complete ownership of the general partner.
In 2007, we formed a new subsidiary, HighMount
Exploration &Production LLC, which purchased natural
gas exploration and production assets from Dominion
Resources. This acquisition was motivated by our positive
view of the U.S. natural gas industry over the long term.
In these challenging times, preservation of shareholder
value takes precedence over the pursuit of a potentially
ill-timed or risky transaction. Across most asset classes,
valuations have fallen to historic lows, leading some to
Loews: a nancial portrait
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holding company cash ow (in millions)
cash &investments, Jan 1, 2008 $3,758
dividends from subsidiaries 1,263
sale of Bulova 263
repurchase of Loews common stock (33)
debt-related payments, net (35)
other operating cash ow, net (202)
dividends paid (Loews and former Carolina Group stock) (219)
investment in Boardwalk Pipeline securities (1,200)
investment in CNA cumulative senior preferred stock (1,250)
cash
&
investments, Dec 31, 2008 $2,345
to its general partner wholly owned by Loews and
to its limited partners. As Boardwalk Pipeline raises its
distributions, Loews receives an increasing percentage
of the partnerships payout through our ownership of
the general partner. Since going public in late 2005,
Boardwalk Pipeline has increased the distribution per
partnership unit each quarter, including the most recent
unit distribution of $0.48 paid in February 2009.
Prior to Loewss $1.25 billion preferred stock investmentin CNA in November 2008, at which time CNAs common
dividend was suspended, CNA had paid more than
$100 million in common dividends to Loews during 2008.
If the CNA board so declares, the preferred shares will pay
dividends to Loews of 10 percent per annum until the
preferred shares are redeemed or until 2013, when the
dividend rate will be reset to the higher of a oating rate
or 10 percent.
In addition to cash ow received from subsidiaries, Loews
earns interest and dividend income from its portfolio
of cash and investments and generates investment gains
and losses. In 2008, Loews posted investment losses inour trading portfolio.
diversied cash ows
Our holding companys strong liquidity position is made
possible by signicant and diversied cash inows from
our subsidiaries. In 2008, the dividends received from our
subsidiaries totaled $1,263 million, including $491 million
from Lorillard.
Diamond Offshore has a policy of considering the
payment of a special dividend each quarter, in addition to
its regular quarterly dividend. In 2008, the company paid
to Loews $429 million in dividends, of which $394 million
was from special dividends. In February 2009, Diamond
Offshores board declared quarterly dividends representing
$140 million in cash ow to Loews. It is important to note
that in its decision whether to declare a special dividend,
Diamond Offshores board will consider the companys
nancial position, earnings, earnings outlook, capital
spending plans and other relevant factors at that time.
Boardwalk Pipeline is an important source of cash ow
for Loews, contributing more than $180 million in partner
distributions in 2008. As a master limited partnership,
Boardwalk Pipeline makes quarterly cash distributions
Loews receives
signicant cash
inows from our
subsidiaries.
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Loewss and CNAs investments in common stocks are
managed by our equity portfolio managers. We have
allocated a majority of our investments in common stocks
to third-party limited partnerships specializing in a variety
of investment strategies. While investments in limited
partnerships have resulted in losses for the year, historically
these investments have provided attractive returns.
a strong and liquid balance sheet
Financial strength is the cornerstone of Loewss ability to create
value for shareholders, enabling us to withstand adversity
and to capitalize on opportunities as they arise. Our basic
tenets in managing the holding companys capital are:To maintain a substantial balance of cash and liquid
investments and ensure that the portfolio is managed
conservatively, so that cash will be available when needed.
Having cash on hand has repeatedly enabled us to move
rapidly to capitalize on such opportunities as acquisitions
and share repurchases, and to make investments in
subsidiaries when funds were unavailable to them on
acceptable terms in the capital markets.
To maintain relatively low levels of holding company debt
so that we can easily service all holding company
obligations in a distressed nancial environment.
The holding companys balance sheet strength ishighlighted by three 2008 year-end gures: cash and
investments of $2.345 billion; debt of $0.866 billion;
and shareholders equity of $13.126 billion.
investment policyWe manage the holding companys cash and investments
and also provide investment services to our subsidiaries.
Our portfolio management team consists of experienced
investment professionals with expertise in the specic
asset classes they manage.
Our priorities in managing holding company cash and
investments are to protect principal and optimize liquidity.
We attempt to limit excessive market and credit risk
and seek to maintain ready access to funds by investing
primarily in short-term U.S. Treasury and investment-
grade assets. In order to optimize returns, we invest a
relatively small portion of the portfolio in common stocks,which in 2008 suffered signicant mark-to-market losses.
CNAs investment portfolio had a market value of
$35 billion at year-end 2008, with approximately
93 percent composed of xed-maturity securities and
short-term investments, and the balance primarily in
limited partnerships and equities. We largely follow a total
return approach in providing investment services to CNA.
A primary objective in the management of CNAs
investment portfolio is to optimize returns relative to
underlying liabilities and respective liquidity needs.
Two important considerations are the characteristics of
the underlying liabilities and the ability to align the
duration of the portfolio with those liabilities in order to
meet future liquidity needs, minimize interest-rate risk,
and maintain a level of income sufcient to support the
underlying insurance liabilities.
Prevailing conditions in the xed income markets have
resulted in signicant realized and unrealized losses in
CNAs investment portfolio. While the unrealized losses
were substantial, it is important to note that CNA has
expressed the intent and ability to hold the bulk of these
securities until prices recover, either when credit spreads
return to more normal levels or at their maturity.
Loews: a nancial portrait
Financialstrength enablesLoews to create
value over the
long term.
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$2,497
$2,305
$2,898
$5,330
$865
$3,758
$866
$2,345$866
$1,165
04
05
06
07
08
holding company cash and investments vs. debt(in millions of dollars)
total cash and investments*
debt
* net of securities receivable and payable
condensed consolidating balance sheet (in billions)
Diamond Boardwalk Loews CorporateDec 31, 2008 CNA Offshore HighMount Pipeline Hotels and Other* Total
cash &investments $35.0 $0.7 $ $0.3 $0.1 $2.3 $38.4
total assets 51.6 5.0 4.0 6.8 0.5 2.0 69.9
total debt 2.0 0.5 1.7 2.9 0.2 0.9 8.2
total liabilities 44.4 1.6 2.1 3.5 0.3 0.9 52.8
minority interest 0.9 1.7 1.4 4.0
Loewss interest inshareholders equity 6.3 1.7 1.9 1.9 0.2 1.1 13.1
* net of eliminations
Capital strength and liquidity are as important to our
subsidiaries as they are to the holding company, and the
strength of their capital positions reects the conservative
approach that each takes to its own balance sheet.
(The table above is a condensed version of the companys
consolidating balance sheet information presented
in Note 25 on page 200 in the accompanying
Form 10-K Report.)
Our subsidiaries operate in different industries, with
unique business and nancial dynamics warranting
different capital structures. In all cases, we work with our
subsidiaries to ensure that their capital structures arealigned with our conservative, long-term approach
and their particular nancial requirements.
subsidiaries year in review
Our subsidiaries play an integral part in the ongoing
creation of Loews shareholder wealth. The following pages
detail each subsidiarys challenges, opportunities and
contributions to value creation in 2008.
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CNA (for the year ended Dec 31, 2008)
operating income: $533 million
net loss: $(299) million
P&C operations netwritten premium: $6,489 million
employees: 9,000
Property and casualtyinsuranceCNA continues to improve its
core property and casualty insurance operations through
disciplined underwriting, stringent expense controls,
better claims practicesand other operating improvements.
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The prolonged and severe disruptionsin the nancial markets have causedsubstantial investment losses for CNAand for the insurance industry as awhole. In 2008, CNA reported a net lossof $299 million, as compared to net
income of $851 million in the prior year.
Net realized investment losses for theyear were $841 million, including after-tax impairments of $965 million. Theimpairments were primarily recorded incorporate and other taxable bonds,asset-backed bonds and non-redeemablepreferred securities. Pretax net investmentincome for the year declined 33 percentto $1.6 billion.
Premium production in CNAs coreProperty &Casualty Operations decreasedby 4 percent to $6.5 billion in 2008,
reecting CNAs disciplined approach tounderwriting in a competitive market.After several years of declines, commercialinsurance pricing showed signs of
leveling off in the second half of the year.This welcome development was evidentin CNAs production metrics. Price declineson renewal business narrowed to 3 percentin the fourth quarter of 2008 from5 percent in the fourth quarter of 2007.
Over the same timeframe, retention ofrenewal business improved to 85 percentfrom 81 percent. The ability to retainquality business in a competitive marketis a tribute to the discipline of CNAsunderwriters and their strong relationshipswith independent agents and brokers.
Demonstrating CNAs sustained focus onexpense management, the expense ratioof Property &Casualty Operations was29.6 percent in 2008, its third consecutiveyear under 30 percent. CNAs expenselevels have remained competitive with
its peers, even while making investmentsin IT infrastructure, employee trainingand other drivers of future success. In2008, the combined ratio the ratio ofclaim costs and operating expenses topremium revenue was 98.0 percent forProperty&Casualty Operations, the thirdconsecutive year under 100 percent.
Favorable prior year development benetedunderwriting results for Property &CasualtyOperations for the second consecutiveyear, reecting CNAs prudent reservingpractices for policies written in prior years
Catastrophic events, mainly HurricanesGustav and Ike, reduced CNAs after-taxincome by $239 million in 2008, versus$51 million in 2007. For the insuranceindustry as a whole, the 2008 hurricanelosses were the fourth worst on record.
CNA will face many challenges in 2009as the economic slowdown puts continuedpressure on the nancial markets, aswell as on premium growth. CNA is wellpositioned, however, to compete in itstarget markets. CNA enjoys strong ratingsfrom independent rating agencies, asolid reserve position, and a high level
of nancial liquidity.
year in review
CNA Financial Corporation
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Diamond Offshore (for the year ended Dec 31, 2008)
total revenue: $3,544 million
net income: $1,311 million
offshore drilling rigs: 45
employees: 5,700
Offshore drillingDiamond Offshore achieved excellent results,
owing to high utilization ratesand record dayrates for its offshore drilling rigs.
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year in review
Diamond Offshore Drilling, Inc.
Diamond Offshore achieved excellent
results in 2008 and for a time enjoyed a
robust environment for exploration and
development, driven by the rise of crude
oil prices to above $146 per barrel.
After peaking in July, however, oil pricesfell by more than two-thirds before
year end, causing Diamond Offshores
customers to begin reducing their
drilling budgets. As a result, the industry
is experiencing a decline in demand
for offshore drilling rigs and a softening
in dayrates for future contracts.
Offshore drilling is a cyclical industry, and
Diamond Offshore has always tried to
position itself conservatively to weather,
and even take advantage of, downturns.
At the end of 2008, the company had
more than $10 billion in backlog, over
$700 million in cash and marketablesecurities, and no net debt. Instead of
constructing new-build oaters at
inated costs, or repurchasing its stock,
Diamond Offshore has maintained a
strong balance sheet, while returning
earnings directly to shareholders in
the form of special dividends.
Diamond Offshore has continued to makeprudent investments in its eet. In 2008,
construction of two new-build premium
jack-up units,Ocean Shield andOcean
Scepter,was completed for a cost of
approximately $165 million per rig. Each
is now employed on a term contract
in Australia and Argentina, respectively.
Diamond Offshore also completed
the upgrade of its Victory-Class semi-
submersible, Ocean Monarch, to an
increased drilling capability of 10,000-foot
water depth. The total cost of this
upgrade was approximately $310 million,
considerably less than the cost of anew-build. The Monarch will commence
operation in the Gulf of Mexico in
early March under a four-year contract.
Diamond Offshore began these three
projects relatively early in the up-cycle,
allowing it to obtain lower construction
costs and deploy the rigs at favorable
dayrates ahead of the majority of the
new-builds under construction.
Operating costs increased during 2008
and are anticipated to increase further
in 2009, despite the weakening market.
Higher eet utilization and expanded
international operations have increased
costs for maintenance and spare parts,as Diamond Offshore works to preserve
revenue by providing superior performance
for its customers. Diamond Offshore will
continue to exercise strict discipline over
controllable costs, while making the
necessary expenditures required to meet
the highly competitive demands of the
offshore drilling market.
Demand for hydrocarbons may have
waned in recent months, but the worlds
dependence on oil and natural gas will
certainly continue. When global economies
recover, so will the appetite for energy,
driving the need for offshore oil andgas exploration. Diamond Offshore is
positioned to weather the downturn and
to participate fully in an industry recovery.
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HighMount (for the year ended Dec 31, 2008)
total revenue: $770 million
net proved reserves: 2.2 Tcfe
proved developed reserves: 77.0%
net natural gas producing wells: 7,882
average daily production: 279 MMcfe
employees: 650
Energy explorationand productionhaving completed its rst full year of operations within the Loews family,
HighMount has established itselfas an important North American natural gas producer with a
focus on long-term protability and operational excellence.
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year in review
HighMount Exploration &Production LLC
HighMount Exploration &Production LLCstarted operations on July 31, 2007 and hasestablished itself as an important NorthAmerican natural gas producer with a focuson long-term protability and operational
excellence. HighMount owns 2.2 trillioncubic feet equivalent (Tcfe) of provednatural gas and natural gas liquids (NGL)reserves located in company-operatedelds in the Permian Basin in Texas, theAntrim Shale in Michigan and the BlackWarrior Basin in Alabama.
In addition to its 2.2 Tcfe of provedreserves, HighMount recognizes more than2.3 Tcfe of probable and possible reserves,representing more than 15,000 futuredevelopment locations. These assets alsoprovide a base for potential reserve andproduction growth through the application
of new technologies in unconventional gasexploration. Technological advancementsin horizontal drilling, tight-sands, shaleand coalbed methane completions andfacility enhancements are unlocking newreserves and production from these long-lived gas elds.
During 2008, HighMount produced102 billion cubic feet equivalent ofnatural gas, sold at an average realizedprice of $7.94 per thousand cubic feetequivalent (Mcfe), including hedging
activity. HighMounts low-risk drillingprogram yielded 498 gas wells, witha 98 percent success rate, increasing totalproducing wells to almost 9,200.
Increasing commodity prices and the relatedspike in drilling costs during the rst halfof 2008 were followed by severe pricedeclines and a weakening economy, posingunique challenges throughout 2008.Dramatic increases in steel, diesel and E&Pindustry costs put a squeeze on margins,despite record oil and gas prices. Operatingexpenses have fallen along with energyprices, but at a much slower pace. HighMount
has been able to adjust its activity andspending levels to meet these challenges.
HighMounts operating expenses consistedof the following: production expensestotaling $166 million, or $1.74 per Mcfesold, including $67 million of revenue-basedseverance and ad valorem taxes, or $0.70per Mcfe sold; general and administrativecosts totaling $66 million; and depreciation,
depletion and amortization (DD&A)totaling $177 million. DD&A included$162 million for the depletion of provedE&P property costs, representing a $1.58per Mcfe units-of-production rate. Capital
expenditures for 2008 totaled $519 million.Although 2008 was a very challengingyear, HighMount will continue to focus onmaximizing the value of its reserve basethrough its drilling program and productionoptimization projects. HighMount willcontinue to pursue attractively pricedacquisitions in U.S. onshore producingbasins that add value and are consistentwith its long-term natural gas focus.
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Boardwalk Pipeline (for the year ended Dec 31, 2008)
total revenue: $785 million
average daily throughput: 4.8 Bcf
total miles pipeline: 14,000
underground storage elds: 11
employees: 1,130
Natural gas pipelinesBoardwalk Pipeline has pursued an organic growth strategy. its major pipeline
expansion projects are nearly completed,and, when fully operational, will approximately double pipeline
system capacity since Boardwalk Pipeline went public in 2005.
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In 2008, Boardwalk Pipeline enjoyedstrong nancial performance, increasingnet income by 29 percent to $294 million.This growth was mainly attributable toincreased gas transportation revenuesfrom the recently completed East Texas
to Mississippi and Southeast Expansionprojects. Healthy cash ow enabledBoardwalk Pipeline to pay cash distributionsof $1.87 per limited partner unit in 2008,an increase of 8 percent over 2007.
Boardwalk Pipeline has pursued an organicgrowth strategy to transport natural gasfrom the prolic supply sources in theBarnett Shale, Bossier Sands, FayettevilleShale, Caney Woodford Shale andHaynesville Shale. The companys expandedfootprint provides access to theselong-lived natural gas supply sources and
the exibility to deliver to diversiedmarkets. The following expansion projectshave been completed:
The East Texas to Mississippi Expansion,consisting of approximately 242 miles of42-inch pipeline;
Phase III of the Western KentuckyStorage Expansion, which added 5.4 billioncubic feet (Bcf) of storage capacity; and
The Southeast Expansion, consisting of111 miles of 42-inch pipeline originatingnear Harrisville, Mississippi and extendinginto Alabama.
Boardwalk Pipeline is near completionon the following expansion projects:
The Gulf Crossing Pipeline, whichoriginates near Sherman, Texas and runs357 miles to the Perryville, Louisianaarea, was placed in service during early2009. Boardwalk Pipeline expectsthe initial compression facilities to comeon line during the rst quarter of 2009and additional compression facilities tobe placed in service in the rst quarterof 2010.
The 165-mile Fayetteville Lateral andthe 95-mile Greenville Lateral are expectedto be complete in the second quarter of2009. The 66-mile header portion of theFayetteville Lateral and a portionof the Greenville Lateral were placed inservice in December 2008 and January
2009, respectively. Phase III of the Western KentuckyStorage Expansion will be expanded byanother 3.0 Bcf of storage capacityin 2009.
Although 2008 saw a dramatic rise andsubsequent collapse in natural gas prices,a signicant portion of BoardwalkPipelines gas transportation and storageservices are governed by contracts underwhich customers pay monthly capacityreservation charges regardless of actualpipeline or storage capacity utilization.
In 2008, approximately 66 percent ofrevenues were derived from rm capacity
reservation charges and approximately22 percent of revenues were derived fromutilization charges on rm contracts.Additional revenues are derived frominterruptible transportation, interruptiblestorage, parking and lending, and
other services.
Substantially all of Boardwalk Pipelinesoperating capacity, including expansionprojects, is sold out with a weighted-averagecontract life of over six years. Whenthese expansions are fully operational,Boardwalk Pipeline will have essentiallydoubled its capacity from the time of itsInitial Public Offering in late 2005. Theactual volumes of natural gas that can betransported through these new pipelinesdepend on a number of factors, includingthe maximum operating pressures at
which the pipes may operate. BoardwalkPipeline is currently working with itsregulators to determine the maximumoperating pressures that will be permittedfor each of its new pipeline projects.
year in review
Boardwalk Pipeline
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Loews Hotels (for the year ended Dec 31, 2008)
total revenue: $380 million
hotels: 18
guest rooms: 8,073
employees: 2,350
Luxury lodgingLoews Hotels reported good results for the year and
continues to delight guestswith its one-of-a-kind properties.
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year in review
Loews Hotels
In 2008, Loews Hotels reported revenuesof $380 million, a decrease of 1.0 percentfrom the prior year. Earnings beforeincome taxes were $62 million, an increaseof 3.3 percent from the prior year.Occupancy at wholly owned hotels
decreased to 73.3 percent in 2008 from75.4 percent in 2007.
In light of the economic downturn,exacerbated by signicant negativepublicity surrounding conventions andother corporate group events typicallyheld at hotels, luxury hotel bookings for2009 are signicantly reduced fromlevels seen in recent years. As a result,we expect revenue per available roomand operating results at Loews Hotelsto deteriorate in the near term.
Despite a tough economic environment,Loews Hotels is committed to maintainingits properties at Four Diamond or betterstandards. During 2008, the companyinvested in renovations at the LoewsCoronado Bay Resort and in 2009 plans
to perform renovations at the LoewsMiami Beach Hotel, including updates ofguestrooms and bathrooms.
At year-end 2008, Loews Hotels operated18 hotels, with 16 in the U.S. and two inCanada. Located in major city centers andresort destinations from coast to coast,the Loews Hotels portfolio featuresone-of-a-kind properties that go beyondFour Diamond standards to delight guestswith a supremely comfortable, uniquelylocal and vibrant travel experience.Additionally, Loews Hotels continues to
look for expansion opportunities that willgenerate attractive nancial returns.
While 2009 looks to be a difcult yearfor the lodging industry, the companysnancial conservatism and strength inoperations management will help LoewsHotels weather the current economicdownturn and keep Loews Hotels positioned
to benet from an improvement in thegeneral economy.
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price range of Loews common stock
Our common stock is listed on the New York Stock Exchange under the symbol L . The following table sets forth
the reported high and low sales prices in each calendar quarter of 2008 and 2007.
2008 2007 High Low High Low
1st Quarter $51.33 $37.65 $46.32 $40.21
2nd Quarter 51.51 39.89 53.46 45.47
3rd Quarter 49.32 35.00 52.88 42.35
4th Quarter 39.17 19.39 51.10 44.18
dividend information
We have paid quarterly cash dividends on Loews common stock in each year since 1967. Regular dividends
of $0.0625 per share of Loews common stock were paid in each calendar quarter of 2008 and 2007.
annual meeting
The Annual Meeting of Shareholders will be held on Tuesday, May 12, 2009, at 11:00 a.m.
at the Loews Regency Hotel, 540 Park Avenue, New York City.
transfer agent and registrarBNY Mellon Shareowner Services
480 Washington Boulevard
Jersey City, NJ 07310-1900
800-358-9151
www.bnymellon.com/shareowner/isd
independent auditorsDeloitte &Touche LLP
Two World Financial Center
New York, NY 10281-1442
www.deloitte.com
CEO and CFO certicationsIn 2008, Loews Corporation provided the New York Stock Exchange
with the annual certication of its Chief Executive Ofcer
regarding the companys compliance with the corporate
governance listing standards of the New York Stock Exchange.
In addition, Loews Corporation led with the U.S. Securities
and Exchange Commission, as exhibits to its Form 10-K for the
year ended December 31, 2008, the certications of its Chief
Executive Ofcer and Chief Financial Ofcer required by theSarbanes-Oxley Act regarding the quality of the companys
public disclosures.
shareholder information
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Loews Corporation 2008 Annual Report
on form 10-K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-K[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2008OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ____________ to _____________
Commission File Number 1-6541
LOEWS CORPORATION(Exact name of registrant as specified in its charter)
Delaware 13-2646102(State or other jurisdiction of (I.R.S. Employerincorporation or organization) Identification No.)
667 Madison Avenue, New York, N.Y. 10065-8087(Address of principal executive offices) (Zip Code)
(212) 521-2000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Loews Common Stock, par value $0.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes X No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference inPart III of this Form 10-K or any amendment to this Form 10-K. [ X ].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company inRule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer X Accelerated filer Non-accelerated filer Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
The aggregate market value of voting and non-voting common equity held by non-affiliates as of the last business day of theregistrants most recently completed second fiscal quarter was approximately $15,238,000,000.
As of February 13, 2009, there were 435,136,670 shares of Loews common stock outstanding.
Documents Incorporated by Reference:
Portions of the Registrants definitive proxy statement intended to be filed by Registrant with the Commission prior to April 30,2009 are incorporated by reference into Part III of this Report.
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2
LOEWS CORPORATION
INDEX TO ANNUAL REPORT ON
FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 2008
Item Page
No. PART I No.
1 Business 3CNA Financial Corporation 3Diamond Offshore Drilling, Inc. 10HighMount Exploration & Production LLC 13Boardwalk Pipeline Partners, LP 17Loews Hotels Holding Corporation 21
Separation of Lorillard 22Available Information 231A Risk Factors 231B Unresolved Staff Comments 502 Properties 503 Legal Proceedings 504 Submission of Matters to a Vote of Security Holders 51
Executive Officers of the Registrant 51
PART II
5 Market for the Registrants Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities 51
Managements Report on Internal Control Over Financial Reporting 54
Reports of Independent Registered Public Accounting Firm 556 Selected Financial Data 577 Managements Discussion and Analysis of Financial Condition and Results of Operations 587A Quantitative and Qualitative Disclosures about Market Risk 1178 Financial Statements and Supplementary Data 1219 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 2059A Controls and Procedures 2059B Other Information 205
PART III
Certain information called for by Part III (Items 10, 11, 12, 13 and 14) has been omitted asRegistrant intends to file with the Securities and Exchange Commission not later than 120 days
after the close of its fiscal year a definitive Proxy Statement pursuant to Regulation 14A.
PART IV
15 Exhibits and Financial Statement Schedules 206
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3
PART I
Unless the context otherwise requires, references in this Report to Loews Corporation, we, our, us or like
terms refer to the business of Loews Corporation excluding its subsidiaries.
Item 1. Business.
We are a holding company. Our subsidiaries are engaged in the following lines of business:
commercial property and casualty insurance (CNA Financial Corporation, a 90% owned subsidiary);
operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc., a 50.4% owned subsidiary);
exploration, production and marketing of natural gas and natural gas liquids (HighMount Exploration &Production LLC, a wholly owned subsidiary);
operation of interstate natural gas transmission pipeline systems (Boardwalk Pipeline Partners, LP, a 74% owned
subsidiary); and
operation of hotels (Loews Hotels Holding Corporation, a wholly owned subsidiary).
Please read information relating to our major business segments from which we derive revenue and income containedin Note 24 of the Notes to Consolidated Financial Statements, included under Item 8.
In June of 2008, we disposed of our entire ownership interest in our wholly owned subsidiary, Lorillard, Inc.(Lorillard) in two integrated transactions, collectively referred to as the Separation. Please read the Separation ofLorillard section below for information relating to these transactions.
CNA FINANCIAL CORPORATION
CNA Financial Corporation (together with its subsidiaries, CNA) was incorporated in 1967 and is an insuranceholding company. CNAs property and casualty insurance operations are conducted by Continental Casualty Company(CCC), incorporated in 1897, and The Continental Insurance Company (CIC), organized in 1853, and its affiliates.CIC became a subsidiary of CNA in 1995 as a result of the acquisition of The Continental Corporation (Continental).CNA accounted for 58.9%, 69.1% and 75.0% of our consolidated total revenue for the years ended December 31, 2008,2007 and 2006, respectively.
CNAs core businesses serves a wide variety of customers, including small, medium and large businesses,associations, professionals and groups with a broad range of insurance and risk management products and services.
CNAs insurance products primarily include commercial property and casualty coverages. CNAs services include riskmanagement, information services, warranty and claims administration. CNAs products and services are marketedthrough independent agents, brokers and managing general agents.
CNAs core business, commercial property and casualty insurance operations, is reported in two businesssegments: Standard Lines and Specialty Lines. CNAs non-core operations are managed in two business segments: Life& Group Non-Core and Other Insurance. These segments are managed separately because of differences in their productlines and markets.
Standard Lines
Standard Lines works with an independent agency distribution system and network of brokers to market a broad rangeof property and casualty insurance products and services domestically primarily to small, middle-market and largebusinesses and organizations. The Standard Lines operating model focuses on underwriting performance, relationshipswith selected distribution sources and understanding customer needs. Property products provide standard and excessproperty coverages, as well as marine coverage, and boiler and machinery. Casualty products provide standard casualty
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4
Item 1. BusinessCNA Financial Corporation (Continued)
insurance products such as workers compensation, general and product liability and commercial auto coverage throughtraditional products. Most insurance programs are provided on a guaranteed cost basis; however, CNA also offersspecialized, loss-sensitive insurance programs to those customers viewed as higher risk and less predictable in exposure.
These property and casualty products are offered as part of CNAs Business and Commercial insurance groups. CNAsBusiness insurance group serves its smaller commercial accounts and the Commercial insurance group serves its middlemarkets and its larger risks. In addition, Standard Lines provides total risk management services relating to claim andinformation services to the large commercial insurance marketplace, through a wholly owned subsidiary, CNAClaimPlus, Inc., a third party administrator.
Specialty Lines
Specialty Lines provides professional, financial and specialty property and casualty products and services, bothdomestically and abroad, through a network of brokers, managing general underwriters and independent agencies.Specialty Lines provides solutions for managing the risks of its clients, including architects, lawyers, accountants,healthcare professionals, financial intermediaries and public and private companies. Product offerings also include suretyand fidelity bonds and vehicle warranty services.
Specialty Lines includes the following business groups:
U.S. Specialty Lines: U.S. Specialty Lines provides management and professional liability insurance and riskmanagement services, and other specialized property and casualty coverages, primarily in the United States. This groupprovides professional liability coverages to various professional firms, including architects, realtors, small and mid-sizedaccounting firms, law firms and technology firms. U.S. Specialty Lines also provides directors and officers (D&O),employment practices, fiduciary and fidelity coverages. Specific areas of focus include small and mid-size firms as wellas privately held firms and not-for-profit organizations where tailored products for this client segment are offered.Products within U.S. Specialty Lines are distributed through brokers, agents and managing general underwriters.
U.S. Specialty Lines, through CNA HealthPro, also offers insurance products to serve the healthcare delivery system.Products, which include professional liability as well as associated standard property and casualty coverages, aredistributed on a national basis through a variety of channels including brokers, agents and managing general
underwriters. Key customer segments include long term care facilities, allied healthcare providers, life sciences, dentalprofessionals and mid-size and large healthcare facilities and delivery systems.
Also included in U.S. Specialty Lines is Excess and Surplus (E&S). E&S provides specialized insurance and otherfinancial products for selected commercial risks on both an individual customer and program basis. Customers insuredby E&S are generally viewed as higher risk and less predictable in exposure than those covered by standard insurancemarkets. E&Ss products are distributed throughout the United States through specialist producers, program agents andbrokers.
Surety: Surety consists primarily of CNA Surety and its insurance subsidiaries and offers small, medium and largecontract and commercial surety bonds. CNA Surety provides surety and fidelity bonds in all 50 states through acombined network of independent agencies. CNA owns approximately 62% of CNA Surety.
Warranty: Warranty provides vehicle warranty service contracts and related products that protect individuals from thefinancial burden associated with mechanical breakdown. Products are distributed through independent agents.
CNA Global: CNA Global consists of subsidiaries operating in Europe, Latin America, Canada and Hawaii. Theseaffiliates offer property and casualty insurance, through brokers, managing general underwriters and independentagencies, to small and medium size businesses and capitalize on strategic indigenous opportunities.
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Item 1. BusinessCNA Financial Corporation (Continued)
Life & Group Non-Core
The Life & Group Non-Core segment primarily includes the results of the life and group lines of business that haveeither been sold or placed in run-off. CNA continues to service its existing individual long term care commitments, its
payout annuity business and its pension deposit business. CNA also manages a block of group reinsurance and lifesettlement contracts. These businesses are being managed as a run-off operation. CNAs group long term care business,while considered non-core, continues to be actively marketed. During 2008, CNA exited the indexed group annuityportion of its pension deposit business.
Other Insurance
Other Insurance includes certain corporate expenses, including interest on corporate debt, and the results of certainproperty and casualty business primarily in run-off, including CNA Re. This segment also includes the results related tothe centralized adjusting and settlement of asbestos and environmental pollution (A&E) claims.
Please read Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations byBusiness Segment CNA Financial for information with respect to each segment.
Supplementary Insurance Data
The following table sets forth supplementary insurance data:
Year Ended December 31 2008 2007 2006
Trade Ratios - GAAP basis (a):Loss and loss adjustment expense ratio 78.7% 77.7% 75.7%
Expense ratio 30.1 30.0 30.0Dividend ratio 0.2 0.2 0.3
Combined ratio 109.0% 107.9% 106.0%
Trade Ratios - Statutory basis (preliminary) (a):
Loss and loss adjustment expense ratio 83.8% 79.8% 78.7% Expense ratio 30.1 30.0 30.2
Dividend ratio 0.3 0.3 0.2
Combined ratio 114.2% 110.1% 109.1%
(a) Trade ratios reflect the results of CNAs property and casualty insurance subsidiaries. Trade ratios are industry measures of
property and casualty underwriting results. The loss and loss adjustment expense ratio is thepercentage of net incurred claimand claim adjustment expenses to net earned premiums. The primary difference in this ratio between accounting principlesgenerally accepted in the United States of America (GAAP) and statutory accounting practices (SAP) is related to thetreatment of active life reserves (ALR) related to long term care insurance products written in property and casualty insurancesubsidiaries. For GAAP, ALR is classified as future policy benefits reserves whereas for SAP, ALR is classified as unearned
premium reserves. The expense ratio, using amounts determined in accordance with GAAP, is the percentage of underwritingand acquisition expenses (including the amortization of deferred acquisition expenses) to net earned premiums. The expenseratio, using amounts determined in accordance with SAP, is the percentage of acquisition and underwriting expenses (with no
deferral of acquisition expenses) to net written premiums. The dividend ratio, using amounts determined in accordance withGAAP, is the ratio of policyholders dividends incurred to net earned premiums. The dividend ratio, using amounts determinedin accordance with SAP, is the ratio of policyholders dividends paid to net earned premiums. The combined ratio is the sum ofthe loss and loss adjustment expense, expense and dividend ratios.
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Item 1. BusinessCNA Financial Corporation (Continued)
The following table displays the distribution of direct written premiums for CNAs operations by geographicconcentration.
Year Ended December 31 2008 2007 2006
California 9.2% 9.5% 9.7%New York 6.9 7.0 7.5Florida 6.5 7.5 8.0Texas 6.2 6.1 5.8Illinois 3.8 3.8 4.2New Jersey 3.8 3.7 4.0Pennsylvania 3.3 3.4 3.4Missouri 3.1 2.9 3.1All other states, countries or political subdivisions (a) 57.2 56.1 54.3
100.0% 100.0% 100.0%
(a) No other individual state, country or political subdivision accounts for more than 3.0% of direct written premiums.
Approximately 7.4%, 6.9% and 5.9% of CNAs direct written premiums were derived from outside of the UnitedStates for the years ended December 31, 2008, 2007 and 2006. Premiums from any individual foreign country were notsignificant.
Property and Casualty Claim and Claim Adjustment Expenses
The following loss reserve development table illustrates the change over time of reserves established for property andcasualty claim and claim adjustment expenses at the end of the preceding ten calendar years for CNAs property andcasualty insurance companies. The table excludes CNAs life subsidiaries, and as such, the carried reserves will notagree to the Consolidated Financial Statements included under Item 8. The first section shows the reserves as originallyreported at the end of the stated year. The second section, reading down, shows the cumulative amounts paid as of theend of successive years with respect to the originally reported reserve liability. The third section, reading down, showsre-estimates of the originally recorded reserves as of the end of each successive year, which is the result of CNAsproperty and casualty insurance subsidiaries expanded awareness of additional facts and circumstances that pertain tothe unsettled claims. The last section compares the latest re-estimated reserves to the reserves originally established, andindicates whether the original reserves were adequate or inadequate to cover the estimated costs of unsettled claims.
The loss reserve development table for property and casualty companies is cumulative and, therefore, ending balancesshould not be added since the amount at the end of each calendar year includes activity for both the current and prioryears. Additionally, the development amounts in the following table include the impact of commutations, but exclude theimpact of the provision for uncollectible reinsurance.
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Item 1. BusinessCNA Financial Corporation (Continued)
Schedule of Loss Reserve Development
Year Ended December 31 1998 1999(a) 2000 2001(b) 2002(c) 2003 2004 2005 2006 2007 2008
(In millions of dollars)
Originally reported grossreserves for unpaid claimand claim adjustmentexpenses 28,506 26,850 26,510 29,649 25,719 31,284 31,204 30,694 29,459 28,415 27,475
Originally reported ceded
recoverable 5,182 6,091 7,333 11,703 10,490 13,847 13,682 10,438 8,078 6,945 6,213
Originally reported net reservesfor unpaid claim and claimadjustment expenses 23,324 20,759 19,177 17,946 15,229 17,437 17,522 20,256 21,381 21,470 21,262
Cumulative net paid as of:
One year later 7,321 6,547 7,686 5,981 5,373 4,382 2,651 3,442 4,436 4,308 -
Two years later 12,241 11,937 11,992 10,355 8,768 6,104 4,963 7,022 7,676 - -
Three years later 16,020 15,256 15,291 12,954 9,747 7,780 7,825 9,620 - - -
Four years later 18,271 18,151 17,333 13,244 10,870 10,085 9,914 - - - -
Five years later 20,779 19,686 17,775 13,922 12,814 11,834 - - - - -
Six years later 21,970 20,206 18,970 15,493 14,320 - - - - - -
Seven years later 22,564 21,231 20,297 16,769 - - - - - - -Eight years later 23,453 22,373 21,382 - - - - - - - -Nine years later 24,426 23,276 - - - - - - - - -
Ten years later 25,178 - - - - - - - - - -Net reserves re-estimated as of:End of initial year 23,324 20,759 19,177 17,946 15,229 17,437 17,522 20,256 21,381 21,470 21,262
One year later 24,306 21,163 21,502 17,980 17,650 17,671 18,513 20,588 21,601 21,463 -
Two years later 24,134 23,217 21,555 20,533 18,248 19,120 19,044 20,975 21,706 - -
Three years later 26,038 23,081 24,058 21,109 19,814 19,760 19,631 21,408 - - -Four years later 25,711 25,590 24,587 22,547 20,384 20,425 20,212 - - - -
Five years later 27,754 26,000 25,594 22,983 21,076 21,060 - - - - -
Six years later 28,078 26,625 26,023 23,603 21,769 - - - - - -
Seven years later 28,437 27,009 26,585 24,267 - - - - - - -
Eight years later 28,705 27,541 27,207 - - - - - - - -
Nine years later 29,211 28,035 - - - - - - - - -Ten years later 29,674 - - - - - - - - - -Total net (deficiency)redundancy (6,350) (7,276) (8,030) (6,321) (6,540) (3,623) (2,690) (1,152) (325) 7 -
Reconciliation to grossre-estimated reserves:
Net reserves re-estimated 29,674 28,035 27,207 24,267 21,769 21,060 20,212 21,408 21,706 21,463 - Re-estimated ceded -
recoverable 8,178 10,673 11,458 16,965 16,313 14,709 13,576 10,935 8,622 7,277 -Total gross re-estimated
reserves 37,852 38,708 38,665 41,232 38,082 35,769 33,788 32,343 30,328 28,740 -
Net (deficiency) redundancyrelated to:
Asbestos claims (2,152) (1,576) (1,511) (739) (748) (98) (43) (34) (32) (27) -
Environmental claims (616) (616) (559) (212) (207) (134) (134) (83) (84) (83) -
Total asbestos and environmental ( 2,768) (2,192) (2,070) (951) (955) (232) (177) (117) (116) (110) -
Other cla ims (3,582) (5,084) (5,960) (5,370) (5,585) (3,391) (2,513) (1,035) (209) 117 -Total net (deficiency)
redundancy (6,350) (7,276) (8,030) (6,321) (6,540) (3,623) (2,690) (1,152) (325) 7 -
(a) Ceded recoverable includes reserves transferred under retroactive reinsurance agreements of $784 as of December 31, 1999.(b) Effective January 1, 2001, CNA established a new life insurance company, CNA Group Life Assurance Company (CNAGLA). Further, on
January 1, 2001 $1,055 of reserves were transferred from CCC to CNAGLA.(c) Effective October 31, 2002, CNA sold CNA Reinsurance Company Limited. As a result of the sale, net reserves were reduced by $1,316.
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Item 1. BusinessCNA Financial Corporation (Continued)
Please read information relating to CNAs property and casualty claim and claim adjustment expense reserves andreserve development set forth under Item 7, Managements Discussion and Analysis of Financial Condition and Resultsof Operations (MD&A), and in Notes 1 and 9 of the Notes to Consolidated Financial Statements, included under Item8.
Investments
Please read Item 7, MD&A Investments and Notes 1, 3, 4 and 5 of the Notes to Consolidated Financial Statements,included under Item 8.
Other
Competition: The property and casualty insurance industry is highly competitive both as to rate and service. CNAsconsolidated property and casualty subsidiaries compete not only with other stock insurance companies, but also withmutual insurance companies, reinsurance companies and other entities for both producers and customers. CNA mustcontinuously allocate resources to refine and improve its insurance products and services.
Rates among insurers vary according to the types of insurers and methods of operation. CNA competes for businessnot only on the basis of rate, but also on the basis of availability of coverage desired by customers, ratings and quality ofservice, including claim adjustment services.
There are approximately 2,300 individual companies that sell property and casualty insurance in the United States.Based on 2007 statutory net written premiums, CNA is the seventh largest commercial insurance writer and thethirteenth largest property and casualty insurance organization in the United States of America.
Regulation: The insurance industry is subject to comprehensive and detailed regulation and supervision throughoutthe United States. Each state has established supervisory agencies with broad administrative powers relative to licensinginsurers and agents, approving policy forms, establishing reserve requirements, fixing minimum interest rates foraccumulation of surrender values and maximum interest rates of policy loans, prescribing the form and content ofstatutory financial reports and regulating solvency and the type, quality and amount of investments permitted. Suchregulatory powers also extend to premium rate regulations, which require that rates not be excessive, inadequate or
unfairly discriminatory. In addition to regulation of dividends by insurance subsidiaries, intercompany transfers of assetsmay be subject to prior notice or approval by the state insurance regulators, depending on the size of such transfers andpayments in relation to the financial position of the insurance affiliates making the transfer or payment.
Insurers are also required by the states to provide coverage to insureds who would not otherwise be considered eligibleby the insurers. Each state dictates the types of insurance and the level of coverage that must be provided to suchinvoluntary risks. CNAs share of these involuntary risks is mandatory and generally a function of its respective share ofthe voluntary market by line of insurance in each state.
Further, insurance companies are subject to state guaranty fund and other insurance-related assessments. Guarantyfund assessments are levied by the state departments of insurance to cover claims of insolvent insurers. Other insurance-related assessments are generally levied by state agencies to fund various organizations including disaster relief funds,rating bureaus, insurance departments, and workers compensation second injury funds, or by industry organizations that
assist in the statistical analysis and ratemaking process.
Reform of the U.S. tort liability system is another issue facing the insurance industry. Over the last decade, manystates have passed some type of reform. In recent years, for example, significant state general tort reforms have beenenacted in Georgia, Ohio, Mississippi and South Carolina. Specific state legislation addressing state asbestos reform hasbeen passed in Ohio, Georgia, Florida and Texas in past years as well. Although these states legislatures have begun toaddress their litigious environments, some reforms are being challenged in the courts and it will take some time beforethey are finalized. Even though there has been some tort reform success, new causes of action and theories of damagescontinue to be proposed in state court actions or by legislatures. For example, some state legislatures are consideringlegislation addressing direct actions against insurers related to bad faith claims. As a result of this unpredictability in thelaw, insurance underwriting and rating are expected to continue to be difficult in commercial lines, professional liability
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Item 1. BusinessCNA Financial Corporation (Continued)
and some specialty coverages and therefore could materially adversely affect the Companys results of operations andequity.
Although the federal government and its regulatory agencies do not directly regulate the business of insurance, federal
legislative and regulatory initiatives can impact the insurance industry in a variety of ways. These initiatives andlegislation include tort reform proposals; proposals addressing natural catastrophe exposures; terrorism risk mechanisms;federal regulation of insurance; various tax proposals affecting insurance companies; and possible regulatory limitations,impositions and restrictions, as well as potential impacts on the fair value determinations of CNAs invested assets,arising from the Emergency Economic Stabilization Act of 2008.
In addition, CNAs domestic insurance subsidiaries are subject to risk-based capital requirements. Risk-based capital isa method developed by the National Association of Insurance Commissioners to determine the minimum amount ofstatutory capital appropriate for an insurance company to support its overall business operations in consideration of itssize and risk profile. The formula for determining the amount of risk-based capital specifies various factors, weightedbased on the perceived degree of risk, which are applied to certain financial balances and financial activity. Theadequacy of a companys actual capital is evaluated by a comparison to the risk-based capital results, as determined bythe formula. Companies below minimum risk-based capital requirements are classified within certain levels, each of
which requires specified corrective action. As of December 31, 2008 and 2007, all of CNAs domestic insurancesubsidiaries exceeded the minimum risk-based capital requirements.
Subsidiaries with insurance operations outside the United States are also subject to regulation in the countries in whichthey operate. CNA has operations in the United Kingdom, Canada and other countries.
Properties: The 333 S. Wabash Avenue building, located in Chicago, Illinois and owned by CCC, a wholly ownedsu