2007 ANNUAL REPORT
Loews Corporation, a holding company, is one of the                                                                       ...
FINA NCIA L H IGH LIGH TS


                                                 Net income attributable to Loews com-        ...
Year Ended December 31                                   2007         2006           2005         2004                    ...
Office of the President (from left to right): Andrew H. Tisch, Co-Chairman of the
Board and Chairman of the Executive Comm...
LeTTeR TO OUR S H A R eH OL de R S AN d e M p L O y e e S




A
                                                          ...
wherever opportunities exist – without                 n Boardwalk Pipeline commenced ser-                                ...
prepared to take advantage of potential
                                             35 percent of our common shares that
...
LOewS : A FINA NC IA L pORT R AI T




    L
                                                    a tracking stock, reflect...
and a year later we created Boardwalk
                                                  common stock. We do not have a set...
CNA’s initiation of a regular quarterly cash
                                                   year. The company’s first ...
Condensed Consolidating Balance Sheet
(in billions)

                             CNA                             Diamond ...
with our subsidiaries to ensure that their   Book Value Per Share of Loews Common Stock
     capital structures are aligne...
Y EA R IN R E v I E w
                                                                            C N A F I N AN C I AL C ...
Y EAR I N REvIEw
       LORIL L A R d



     N
                                                                          ...
loews LTR_2007ARx10k
loews LTR_2007ARx10k
loews LTR_2007ARx10k
loews LTR_2007ARx10k
loews LTR_2007ARx10k
loews LTR_2007ARx10k
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Transcript of "loews LTR_2007ARx10k"

  1. 1. 2007 ANNUAL REPORT
  2. 2. Loews Corporation, a holding company, is one of the Revenues (in billions of dollars) largest diversified corporations in the United States. 2003 2004 2005 2006 2007 18.4 17.7 16.3 15.8 15.1 CNA Financial Corporation (89 percent owned) is one of the largest commer- cial property-casualty insurance companies in the United States. (NYSE: CNA) www.cna.com Lorillard, Inc. (100 percent owned) is America’s oldest tobacco company. Its principal products are marketed under the brand names Newport, Kent, True, Maverick and Old Net Income (Loss) Gold. Substantially all of its sales are in the United States. www.lorillard.com (in billions of dollars) 2003 2004 2005 2006 2007 2.5 2.5 Diamond Offshore Drilling, Inc. (51 percent owned) is one of the world’s largest off- shore drilling companies, offering comprehensive drilling services to the energy industry around the world. The company owns and operates 44 offshore drilling rigs. (NYSE: DO) www.diamondoffshore.com 1.2 1.2 HighMount Exploration & Production LLC (100 percent owned) is engaged in the ex- (0.6) ploration and production of natural gas. HighMount’s primary holdings are located in the Permian Basin in Texas, the Antrim Shale in Michigan and the Black Warrior Basin in Alabama. Total Assets (in billions of dollars) 2003 2004 2005 2006 2007 Boardwalk Pipeline Partners, LP (70 percent owned) is engaged in the operation of interstate natural gas pipeline systems. (NYSE: BWP) www.bwpmlp.com 76.1 76.9 77.7 73.7 70.9 Loews Hotels (100 percent owned) is one of the country’s top luxury lodging companies. It owns and operates hotels and resorts in the United States and Canada. www.loewshotels.com Shareholders’ Equity Table of Contents (in billions of dollars) 2003 2004 2005 2006 2007 Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 17.6 Letter to Our Shareholders and Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 16.5 Loews: A Financial Portrait. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 13.1 12.0 10.9 Year in Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Corporate Directory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Shareholder Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2007 Annual Report on Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
  3. 3. FINA NCIA L H IGH LIGH TS Net income attributable to Loews com- Net income per share of Carolina Group Results of Operations stock for 2007 was $4.91 compared to Consolidated net income for 2007 was mon stock included net investment losses $4.46 in the prior year. The increase in $2,489 million, compared to $2,491 mil- of $67 million (after tax and minority inter- net income per share was primarily due to lion in the prior year. est) in 2007, compared to net investment higher effective unit prices resulting from gains of $69 million (after tax and minority Net income attributable to Loews com- price increases in December 2006 and interest) in the prior year. The net invest- mon stock in 2007 amounted to $1,956 September 2007, lower sales promotion ment losses in 2007 were primarily driven million, or $3.65 per share, compared to expenses and a lower effective tax rate, by $428 million (after tax and minority $2,075 million, or $3.75 per share, in the partially offset by an increase in expenses interest) of other-than-temporary impair- for the State Settlement Agreements and prior year. The decrease in net income ment losses at CNA that were partially a charge related to litigation. reflected reduced investment income, offset by a gain of $93 million (after tax) reduced results at CNA and a decrease in Consolidated revenues in 2007 amounted related to a reduction in the Company’s the share of Carolina Group earnings at- to $18.4 billion, compared to $17.7 bil- ownership interest in Diamond Off- tributable to Loews common stock, due lion in the prior year. At December 31, shore from the conversion of Diamond to the sale by Loews of Carolina Group 2007, the book value per share of Loews Offshore’s 1.5% convertible debt into stock in August and May of 2006, partially common stock was $32.40, compared to offset by higher results from Lorillard. Diamond Offshore common stock. $30.14 at December 31, 2006. 2 L O E W S C O R P O R AT I O N
  4. 4. Year Ended December 31 2007 2006 2005 2004 2003 (In millions, except per share data) Results of Operations: Revenues $ 18,380 $ 17,702 $ 15,832 $ 15,060 $ 16,293 Income (loss) before taxes and minority interest 4,575 4,448 1,827 1,808 (1,375) Income (loss) from continuing operations 2,481 2,502 1,181 1,224 (666) Discontinued operations, net 8 (11) 31 (8) 69 Net income (loss) $ 2,489 $ 2,491 $ 1,212 $ 1,216 $ (597) Income (loss) attributable to: Loews common stock: Income (loss) from continuing operations $ 1,948 $ 2,086 $ 930 $ 1,040 $ (781) Discontinued operations, net 8 (11) 31 (8) 69 Loews common stock 1,956 2,075 961 1,032 (712) Carolina Group stock 533 416 251 184 115 Net income (loss) $ 2,489 $ 2,491 $ 1,212 $ 1,216 $ (597) Diluted Net Income (Loss) Per Share: Loews common stock: Income (loss) from continuing operations $ 3.64 $ 3.77 $ 1.67 $ 1.87 $ (1.40) Discontinued operations, net 0.01 (0.02) 0.05 (0.02) 0.12 Net income (loss) $ 3.65 $ 3.75 $ 1.72 $ 1.85 $ (1.28) Carolina Group stock $ 4.91 $ 4.46 $ 3.62 $ 3.15 $ 2.76 Financial Position: Investments $ 47,923 $ 53,870 $ 45,360 $ 44,272 $ 42,513 Total assets 76,079 76,881 70,906 73,720 77,674 Debt Parent Company debt 866 865 1,165 2,305 2,299 Subsidiary debt 6,392 4,707 4,042 4,685 3,521 Shareholders’ equity 17,591 16,502 13,092 11,970 10,855 Cash dividends per share: Loews common stock 0.25 0.24 0.20 0.20 0.20 Carolina Group stock 1.82 1.82 1.82 1.82 1.81 Book value per share of Loews common stock 32.40 30.14 23.64 21.85 19.95 Shares outstanding: Loews common stock 529.68 544.20 557.54 556.75 556.34 Carolina Group stock 108.46 108.33 78.19 67.97 57.97 L O E W S C O R P O R AT I O N 3
  5. 5. Office of the President (from left to right): Andrew H. Tisch, Co-Chairman of the Board and Chairman of the Executive Committee; James S. Tisch, President and Chief Executive Officer; Jonathan M. Tisch, Co-Chairman of the Board, Chairman and Chief Executive Officer, Loews Hotels.
  6. 6. LeTTeR TO OUR S H A R eH OL de R S AN d e M p L O y e e S A company’s unique strategic priorities. The gas and related natural gas liquids totaling s we are fond of saying, Loews transaction is also expected to improve approximately 2.5 trillion cubic feet equiv- Corporation exists for a simple rea- the long-term financial strength and risk alent, are located in Texas, Michigan and son: to build value for our share- profile of Loews. Alabama. We evaluated the natural gas holders. At Loews, our value-creation exploration and production sector for objectives are decidedly long term, and Holders of Loews common stock who some time before finding this outstanding we attach a much greater priority to gen- wish to invest directly in Lorillard can opportunity. erating superior stock price performance elect to participate in our planned ex- over the next twelve years than over any change offer, the terms of which we In addition to our favorable long-term single twelve-month period. expect to announce during the second view of natural gas pricing, we believe quarter. Participants will receive Lorillard HighMount can generate solid returns The twelve months of 2007 were good common shares in exchange for their for Loews shareholders because of its ones for our company, despite turbulent shares of Loews common stock at a to- long-lived reserves, its high success rates financial markets and an increasingly un- be-determined ratio. Holders of Caro- for well completion and its relatively low certain economic outlook. During 2007, lina Group stock will receive one share of drilling and operating costs. Even so, we we continued to focus on our three prima- Lorillard common stock in exchange for would have been hesitant to make the ry means of creating value: optimizing the each share they own and will benefit from acquisition had it not included top-notch structure and performance of each Loews the elimination of any tracking stock management and outstanding technical, subsidiary, making well-timed acquisitions discount that might have existed for financial and field employees. and repurchasing shares of Loews com- Carolina Group stock. (See page 8 for mon stock at favorable prices. HighMount gives us a platform to take more details.) advantage of growth opportunities in the Loews recorded consolidated net income exploration and production industry, in- of $2.5 billion, matching last year’s re- Bulova Sale cluding reinvesting cash flow into the cord. Net income attributable to Loews In January 2008, we closed on the sale of development of existing fields, exploit- common stock declined from $2.1 billion Bulova Corporation, our watch and clock ing new development opportunities and to $2.0 billion, while Carolina Group net subsidiary, to Citizen Watch Company for acquiring producing assets. The explora- income increased from $416 million to approximately $250 million. Bulova had tion and production business plays to our $533 million. Lorillard, Diamond Offshore been a part of Loews since 1979 and, strengths in capital allocation and financial and Boardwalk Pipeline all reported record while small in comparison to our other discipline. earnings, while CNA realized near-record subsidiaries, was a highly regarded part net operating income. Several items, of our company. Though we will miss our Lorillard Separation most notably realized investment losses Bulova colleagues, they stand to benefit In December 2007, our Board of Direc- at CNA, offset our subsidiaries’ overall from being part of a global leader in quality tors approved plans for a tax-free spin-off strong operating performance. timepieces. of Lorillard to holders of Loews common We completed a $4.0 billion acquisition stock and Carolina Group stock. Upon The Loews Business Model of natural gas exploration and production completion of this separation, which is Our acquisition of natural gas exploration assets and announced plans for the tax- subject to various conditions, Lorillard, and production assets and our planned free separation of Lorillard from Loews. now a wholly owned Loews subsidiary, separation of Lorillard raise an obvious Benefiting from strong cash generation by will become a separate publicly traded question: is Loews now intent on becom- our subsidiaries, we finished the year with company. ing a diversified energy company? Our $3.8 billion in holding company cash and emphatic answer is no. We are no more We created Carolina Group tracking investments, even after deploying $2.4 an energy company than we are an insur- stock in 2002 to highlight the value of our billion in the natural gas exploration and ance company or a tobacco company; tobacco business. The tracking stock production acquisition and repurchasing rather, we are unabashedly and proudly structure has been beneficial for holders $672 million of Loews common stock. a conglomerate – what some might call a of both Carolina Group stock and Loews diversified holding company – deeply root- common stock. Because of significant The HighMount Acquisition ed in the principles of value investing. changes now taking place in the U.S. to- During the third quarter, our newly formed Being a conglomerate offers numerous bacco market, we believe the separation subsidiary, HighMount Exploration & Pro- advantages that other corporate struc- will benefit both companies. The separa- duction LLC, acquired natural gas explo- tures do not. Above all, it gives us the free- tion will allow the management teams of ration and production operations from dom and flexibility to make acquisitions Lorillard and Loews to focus their efforts Dominion Resources. These properties, across the broad spectrum of industries – and deploy their capital based on each with estimated proved reserves of natural L O E W S C O R P O R AT I O N 5
  7. 7. wherever opportunities exist – without n Boardwalk Pipeline commenced ser- to gauge the ongoing success of our sub- sidiaries. In general, however, we are worrying that we might be straying from vice on its expansion project from drawn to companies with undervalued some perceived “core business.” We East Texas to Mississippi and con- assets or the ability to generate stable make no attempt to fit into a single indus- tinued working on other previously cash flows for both internal reinvestment try category; instead, we believe that each announced expansion projects. In- and the payment of dividends. of our companies can deliver value for our creased construction costs across the shareholders. domestic pipeline industry, however, We believe that our shareholders will ben- are unfavorably impacting the cost to efit if we continue to buy solid, durable As a conglomerate, we strive to maintain complete these projects. companies at attractive prices, without diversified sources of cash flow. While we resorting to financial alchemy, such as n HighMount successfully began opera- will no longer receive cash dividends from employing outsized levels of debt, to jus- tions in the third quarter as our newest Lorillard following the separation, our other tify our acquisitions. We also spend far subsidiary. sources of cash flow have increased and more time evaluating the downside risks diversified. In 2007, dividends from our n Loews Hotels posted strong earn- of each acquisition than dreaming about nontobacco subsidiaries and earnings de- ings, benefiting from a healthy lodg- its upside potential. rived from our holding company cash and ing market. investments totaled $868 million, a sub- Our objectives and our perspective are For further discussion of each subsid- stantial increase from $92 million in 2002. long term. We refrain from chasing quar- iary’s performance in 2007, please turn terly performance targets to the detriment We believe that value creation can stem to “Loews Corporation: Year in Review,” of longer-term goals, nor do we compro- from buying undervalued assets or busi- mise our financial principles as market beginning on page 13. nesses, from financial restructuring and conditions change. We are patient inves- from providing management with growth Common Thread tors who firmly subscribe to an invest- capital. This has been our business model The common thread connecting our ac- ment adage that requires considerable since it was established by Larry and Bob quisitions over the years is that each has discipline: “When there is nothing to do, Tisch almost 50 years ago, and judging by represented attractive value for Loews do nothing.” We feel no pressure to buy the 14.8 percent annualized return on our shareholders. We employ a variety of assets at any given moment and are com- stock price over the past 25 years, it has metrics to evaluate each investment and fortable maintaining a large amount of li- withstood the test of time. Strong Subsidiary performances We do not manage our subsidiaries’ day- 25 Year Relative Price Performance of Loews Common Stock to-day business operations; rather, we December 1982 = 100 percent ensure that each has an exceptionally ca- 3,900 pable management team with whom we 3,000 work on matters of strategy and capital Loews Common Stock 2,300 allocation. The solid results delivered in S&P 500 Index 2007 speak for themselves: 1,700 Cumulative Percent Change (Log Scale) 1,300 n At CNA, disciplined underwriting, 1,000 stringent expense controls and other operating improvements contributed 760 to another year of strong net operat- 580 ing earnings, offset in part by realized 440 investment losses. 330 n Lorillard posted its highest ever rev- 250 enues and profits, maintaining indus- 190 try-leading per unit profitability while 140 increasing market share. 100 n Diamond Offshore turned in another year of record results in a strong mar- 70 ket for offshore drillers. 1982 1987 1992 1997 2002 2007 6 L O E W S C O R P O R AT I O N
  8. 8. prepared to take advantage of potential 35 percent of our common shares that quidity, which allows us to move quickly when the time is right. had been outstanding at the decade’s investment opportunities. start. As a result, there were 530 million Our patient, value-oriented approach has In short, we are focused on ensuring that shares of Loews common stock outstand- worked well over the years. If you pur- we are properly positioned to endure any ing at year-end 2007, compared with 1.3 chased Loews common stock at almost near-term storms – and we are equally pre- billion split-adjusted shares in 1971. any point during the past quarter century pared to embrace the opportunities that and held it through year-end 2007, chanc- may present themselves. Given Loews’s 2008 Outlook es are you have had an attractive, market- financial strength and long-term focus, we As we write this letter, the financial mar- beating return. Over the 25 year period view difficult environments like this one kets are unusually volatile and the eco- from 1982 through 2007, Loews common as periods of opportunity – times during nomic outlook is uncertain, with major stock appreciated at a 14.8 percent com- which we can make the investments that financial institutions announcing substan- pound annual rate versus 9.8 percent for will continue to reward Loews sharehold- tial asset write-downs amid weakening the S&P 500 Index. ers long after current market turbulence credit conditions. The U.S. consumer is has passed. clearly feeling greater stress and less Share Buybacks confidence than at any time in recent We believe that properly allocating our As always, it is the talent and dedication of years. What do these conditions portend capital will ultimately benefit holders of Loews employees and those of our sub- for Loews? our common stock. We pursue this goal sidiaries that drive our company forward. not only by acquiring businesses that we This year, we particularly want to thank While our subsidiaries are not immune to intend to own for the long term, but also the people of Bulova and Lorillard and a slowing economy and the current credit through purchases of Loews common wish them every continued success in crisis, our company’s structural diversifica- stock when we can buy it at prices we re- the future. We also want to welcome the tion, liquid balance sheet and conservative gard as favorable. In 2007, we responded employees of HighMount into the Loews capital structure should serve to buffer to such opportunities by repurchasing family. We firmly believe that the quality of the impact of this challenging environ- 14.8 million Loews common shares at a Loews’s people, along with our disciplined ment. With $3.8 billion in holding com- total cost of $672 million. approach to managing and in vesting, will pany cash and investments at the end of help us continue creating value for Loews During each of the 1970s, 1980s and 2007 and a favorable outlook for dividends shareholders for the long term. 1990s, we repurchased between 25 and from our subsidiaries this year, we are Sincerely, James S. Tisch Andrew H. Tisch Jonathan M. Tisch Office of the President February 27, 2008 L O E W S C O R P O R AT I O N 7
  9. 9. LOewS : A FINA NC IA L pORT R AI T L a tracking stock, reflects the economic of Lorillard common stock; final approval oews Corporation is a diversified performance of the Carolina Group. The by our Board of Directors; the absence of holding company focused on building creation of the Carolina Group did not any material changes or developments; value over the long term as a means change our ownership of Lorillard, Inc., and market conditions. of generating wealth for our shareholders. which remains a wholly owned subsidiary We aim to achieve superior risk-adjusted A True Holding Company of Loews Corporation. returns for our shareholders in three ways: We monitor the performance of our sub- by optimizing the operating performance In December 2007, we announced that our sidiaries but do not participate in their day- and capital structure of our subsidiaries, by Board of Directors had approved a plan to to-day operations. We rely on experienced making opportune acquisitions and other dispose of our entire ownership interest in subsidiary management teams to make investments, and by effectively managing Lorillard, Inc. to holders of Carolina Group fundamental decisions about operating and allocating holding company capital. stock and Loews common stock in a tax- issues, product and service offerings, To facilitate each of these strategies, we free transaction. When the separation is marketing and long-range plans. Each maintain a conservatively capitalized and completed, probably in mid-2008, Lorillard subsidiary is headed by a chief executive highly liquid balance sheet. will be an independent public company, officer who embraces our conservative, and Carolina Group will cease to exist. We have six operating subsidiaries: CNA long-term approach to building sharehold- Financial Corporation, one of the largest er value. Holding company management The transaction will be accomplished commercial property-casualty insurers in provides counsel on significant capital and through the following integrated steps: the U.S.; Diamond Offshore Drilling, Inc., strategic initiatives, but we leave it to the one of the world’s largest offshore drilling n We will redeem all of the outstand- managers of each subsidiary to implement companies; Lorillard, Inc., America’s old- ing Carolina Group stock in exchange their strategies. Additionally, each publicly est tobacco company; HighMount Explora- for shares of Lorillard common stock. traded subsidiary is overseen by a board tion & Production LLC, a domestic natural The Lorillard shares distributed in the that includes independent directors. gas exploration and production company; redemption of the Carolina Group We believe that holders of Loews com- Boardwalk Pipeline Partners, LP, an op- stock will constitute approximately 62 mon stock benefit from the fact that three erator of interstate natural gas pipeline percent of Lorillard’s outstanding com- of our subsidiaries – Boardwalk Pipeline, systems; and Loews Hotels, one of the mon stock, which is the percentage CNA and Diamond Offshore – are publicly country’s top luxury lodging companies. In of the economic interest in the Caro- traded companies. We see three primary January 2008, we completed the sale of lina Group represented by outstanding benefits for our common shareholders: Bulova Corporation, a distributor and mar- Carolina Group stock. keter of watches and clocks, which had n Market valuation: Third-party investors n We will distribute our remaining 38 been a Loews subsidiary since 1979. value these companies directly in the percent ownership of Lorillard’s out- public equity markets, providing an ob- We have two classes of common stock: standing common stock through an jective measure for holders of Loews Loews common stock (NYSE: LTR) and exchange offer for shares of Loews common stock. Carolina Group stock (NYSE: CG). In 2002, common stock, if we determine that we created the Carolina Group, to which market conditions are acceptable for n Disclosure: As public companies, these we attributed our 100 percent ownership an exchange. If we determine not to subsidiaries provide financial disclo- interest in Lorillard and all tobacco-related effect the exchange offer or if the ex- sures in addition to those offered by liabilities, and began referring to our other change offer is not fully subscribed, the holding company, further enhanc- assets and liabilities as the Loews Group. the remaining shares of Lorillard will ing transparency. The Carolina Group includes a liability be distributed as a pro rata dividend to termed notional intergroup debt, which is n Self-financing: Subsidiaries can directly the holders of Loews common stock. payable to the Loews Group. At the time access the capital markets to finance The consummation of the transaction is the Carolina Group was created, the no- their operations and expansion plans. conditioned on, among other things, our tional intergroup debt was $2.5 billion. As receipt of a favorable ruling from the In- Holders of Loews common stock have also of February 12, 2008, the balance had de- ternal Revenue Service and an opinion of benefited from the existence of Carolina clined to $218 million, reflecting dividends counsel as to the tax-free nature of the Group stock. We created Carolina Group from Lorillard to Loews Corporation that separation; the effectiveness of the regis- stock in order to have a publicly traded have been applied to the reduction of the tration statement filed with the Securities security that would reflect the value and Carolina Group notional debt. and Exchange Commission by Lorillard performance of Lorillard. Through Carolina Carolina Group stock, commonly called with respect to our distribution of shares Group stock, holders of Loews common 8 L O E W S C O R P O R AT I O N
  10. 10. and a year later we created Boardwalk common stock. We do not have a set stock have had a clear view of Lorillard’s Pipeline as a master limited partnership. formula, fixed valuation metrics or a spe- market value. We contributed both Texas Gas and Gulf cific set of target industries; instead, we The availability of public market valua- South to this partnership and took it public review opportunities across many indus- tions for each of our four largest busi- in 2005 while retaining complete owner- tries and focus intently on understanding nesses helps investors determine an ship of the general partner. potential downside risks before turning estimated sum-of-the-parts valuation for our attention to the returns we might ul- In 2007, our new subsidiary, HighMount Loews common stock. As of February timately realize. Loews common stock’s Exploration & Production LLC, purchased 26, 2008, the value of the Loews Group’s 25 year track record of outperforming natural gas exploration and production as- 38 percent economic interest in Carolina the S&P 500 Index is largely attributable sets from Dominion Resources. This ac- Group, its 89 percent ownership of CNA to our willingness to search aggressively, quisition was motivated by our positive common stock, its 51 percent ownership but wait patiently, until attractive acquisi- long-term view of the U.S. natural gas of Diamond Offshore common stock and tion opportunities arise. industry and belief that natural gas prices its 68 percent limited partnership inter- would, over the long term, increase faster One thing that all of our subsidiaries have est in Boardwalk Pipeline totaled approxi- than inflation. We believe that the $4.0 in common is that each was acquired at an mately $23.1 billion, or $43.56 per share billion purchase price represented reason- attractive price. For example, we acquired of Loews common stock. Other assets able value for HighMount’s low-risk, long- Lorillard in 1968 and a controlling interest attributed to Loews common stock in- lived natural gas assets and the outstand- in CNA in 1974 – at times when their re- clude our two wholly owned subsidiaries ing management team that joined us from spective industries were out of favor. In – HighMount and Loews Hotels – as well Dominion. HighMount gives us a solid the late 1980s, we created a subsidiary as our 100 percent ownership of Board- growth platform within the exploration to buy a number of offshore drilling rigs walk Pipeline’s general partner, and hold- and production sector as future opportuni- at historically low prices. We formed Dia- ing company cash and investments, net of ties present themselves. mond Offshore from these initial rigs and, holding company debt. in 1995, took the company public. In 2003, We never know when we might encoun- Awaiting the Right we acquired Texas Gas Transmission at a ter another acquisition opportunity. In the Acquisition Opportunities time when several owners of pipelines meantime, however, we will continue to We continually seek acquisitions that will were experiencing financial distress. In build value for shareholders by helping our create value for the holders of Loews 2004, we acquired Gulf South Pipeline, subsidiaries achieve their strategic and fi- nancial goals, by prudently managing the holding company’s investment portfolio Shares Outstanding at Year End Since 1971 and by engaging in capital markets ac- (in millions and adjusted for all stock splits) tivities, including share repurchases, that 1,400 serve the interests of our shareholders. 1,200 Share Repurchases Our objective is to allocate our capital for superior returns that will ultimately be 1,000 reflected in the price of Loews common stock. We pursue this goal not only by ac- 800 quiring businesses at attractive prices and managing them for the long term, but also by repurchasing shares of Loews com- 600 mon stock when we consider them to be attractively priced. In effect, we apply the 400 same value investing principles that guide our acquisition efforts and the manage- 200 ment of our investment portfolio to the repurchase of Loews common stock. The Loews Common Stock repurchases that we have made over the 0 years have benefited our shareholders by 1971 1980 1990 2000 2007 L O E W S C O R P O R AT I O N 9
  11. 11. CNA’s initiation of a regular quarterly cash year. The company’s first quarterly special giving them an increased stake in Loews dividend during the second quarter of dividend was $1.25 per share in the fourth and its subsidiaries. 2007 highlights the progress that CNA has quarter of 2007. That, combined with the As shown in the chart on the previous made over the past few years in strength- regular quarterly dividends of $0.125 per page, in each of the last three decades ening its capital position and improving its share and the $4.00 per share annual we repurchased more than 25 percent operating results. CNA paid a $0.10 per special dividend paid in the first quarter of of the Loews common shares that were share regular quarterly dividend during the 2007, resulted in Loews receiving more outstanding at the decade’s start. As a re- second and third quarters, subsequently than $400 million in dividends from Dia- sult, on a split-adjusted basis, the number raising its dividend per share to $0.15 in the mond Offshore during the year. In Febru- of outstanding shares of Loews common fourth quarter. At the current dividend rate, ary 2008, Diamond Offshore’s board de- stock declined from 1.3 billion in 1971 to we stand to receive approximately $145 clared another special quarterly dividend 530 million at year-end 2007. Our share million in dividends from CNA annually. of $1.25 per share in addition to its regular buybacks, combined with our subsidiar- $0.125 per share quarterly dividend. In addition to cash flow received from ies’ strong performances, have supported subsidiaries, holding company cash and the superior long-term performance of Boardwalk Pipeline is another increasingly investments generate interest and divi- Loews common stock. important source of cash flow for Loews, dend income, which contribute to the contributing $156 million in partner distri- diversified Cash Flows holding company’s available cash and butions in 2007. As a master limited part- Our holding company’s strong liquidity investments. During 2007, holding com- nership, Boardwalk makes quarterly cash position is made possible by significant pany cash and investments generated distributions to limited partners and to the cash inflows. The primary sources of this $295 million of interest and dividends. general partner, which is wholly owned by cash flow are dividends received from our Loews. When Boardwalk Pipeline’s quar- Investment policy subsidiaries, the earnings on the holding terly distributions per limited partner unit We manage the holding company’s cash company’s cash and investments, and, exceed $0.4025, its partnership agree- and investments and provide investment from time to time, capital markets trans- ment specifies that an increasing percent- services to our subsidiaries. In all cases, actions. age of the cash it distributes be paid to the we seek to maximize financial flexibility general partner in the form of incentive dis- While we will not receive cash dividends and limit potential losses. tribution rights. Thus, the increased quar- from Lorillard following the separation, terly distributions have resulted in a higher Our priorities in managing holding com- our other sources of cash flow have portion of the partnership’s payout com- pany cash and investments are to protect become more diversified in recent years. ing to Loews. Boardwalk’s quarterly dis- principal and optimize liquidity. We seek In 2007, dividends received from our to maintain ready access to our cash and tribution of $0.46 per partnership unit paid nontobacco subsidiaries, together with investments and are averse to subjecting in February 2008 represented the eighth the earnings on holding company cash our shareholders to excessive market or consecutive distribution increase since and investments, were $868 million, a credit risk. substantial increase from $92 million in the partnership went public in late 2005. 2002. This improvement was largely due to increased dividends paid by Diamond Offshore, higher quarterly distributions by Holding Company Cash Flow Boardwalk Pipeline and CNA’s initiation of (in millions) a regular quarterly cash dividend. Cash and investments, 1/1/07 $ 5,330 Diamond Offshore paid annual special cash dividends during the first quarters Dividends from subsidiaries 1,844 of 2006 and 2007, in addition to the com- Other operating cash flow, net 52 pany’s regular quarterly dividend, reflect- Debt related payments, net (35) ing the strength of its financial condition and prospects. During the fourth quarter Dividends paid (CG & LTR) (331) of 2007, the Diamond Offshore board Repurchase of Loews common stock (672) announced that it would consider paying Acquisition of HighMount business (2,430) special dividends on a quarterly basis, su- perseding its prior policy of considering Cash and investments, 12/31/07 $ 3,758 special dividend payments only once per 10 L O E W S C O R P O R AT I O N
  12. 12. Condensed Consolidating Balance Sheet (in billions) CNA Diamond Boardwalk Loews Corporate December 31, 2007 Financial Lorillard Offshore HighMount Pipeline Hotels and Other* Total Cash & Investments $41.9 $1.3 $0.6 $– $0.3 $ 0.1 $3.8 $48.0 Total Assets 56.7 2.6 4.4 4.4 4.1 0.5 3.4 76.1 Total Debt 2.2 – 0.5 1.6 1.8 0.2 0.9 7.2 Total Liabilities 46.2 1.6 1.5 1.9 2.4 0.3 0.7 54.6 Minority Interest 1.5 – 1.4 – 1.0 – – 3.9 Loews’s Interest in Shareholders’ Equity 9.0 1.0 1.5 2.5 0.7 0.2 2.7 17.6 *Net of eliminations presented in Note 25 on page 228 in the CNA’s investment portfolio stood at just we do know that strong companies are accompanying Form 10-K Report.) best positioned to withstand adversity under $42 billion at year-end 2007, with and to capitalize on opportunities when approximately 93 percent comprised of Our subsidiaries operate in different in- they arise. fixed maturity securities and short-term dustries, with unique business and finan- investments. We provide investment cial dynamics warranting different capital Our basic tenets in managing the holding services to CNA and largely follow a total structures. In all cases, however, we work company’s capital are: return approach. A primary objective in the n Maintain substantial liquidity in the management of CNA’s fixed maturity and form of a large portfolio of cash and in- equity portfolios is to optimize return rela- Holding Company Cash and vestments and ensure that the portfo- tive to underlying liabilities and respective Investments vs. Debt lio is managed conservatively, so that liquidity needs. Two important consider- (in millions) cash will be available when needed. ations are the characteristics of the under- Having cash on hand has repeatedly lying liabilities and the ability to align the Total Cash and enabled us to move rapidly to capital- duration of the portfolio to those liabilities Investments* 2003 ize on opportunities such as acquisi- to meet future liquidity needs, minimize Debt tions and share repurchases. interest rate risk and maintain a level of income sufficient to support the underly- n Maintain relatively low levels of hold- ing insurance liabilities. ing company debt so that we can ser- 2004 vice all holding company obligations in Our portfolio management team consists any foreseeable financial environment of experienced investment profession- without difficulty. als with expertise in their specific asset classes. We have allocated a relatively 2005 The holding company’s balance sheet small portion of our investments to the strength is highlighted by three 2007 year- equity market, which is managed by our end figures: cash and investments of $3.8 equity portfolio managers, and a some- billion, debt of $0.9 billion and sharehold- what larger amount to third-party limited 2006 ers’ equity of $17.6 billion. partnerships specializing in a variety of Capital strength and liquidity are as im- investment strategies. portant to our subsidiaries as they are to A Strong and Liquid Balance Sheet the holding company, and the strength 2007 The cornerstone of our ability to create of their capital positions reflects the con- value for our shareholders is our financial servative approach that each takes to its strength. We never know when markets own balance sheet. (The table above is $0 $2,000 $4,000 $6,000 a condensed version of the Company’s will experience a downturn or when new consolidating balance sheet information opportunities will present themselves, but *Net of securities receivables and payables. L O E W S C O R P O R AT I O N 11
  13. 13. with our subsidiaries to ensure that their Book Value Per Share of Loews Common Stock capital structures are aligned with their $35 particular financial requirements. One way to measure our success in build- $30 ing shareholder value is through the in- crease in book value per share of Loews $25 common stock. Book value per share has limitations as a financial measure, given $20 that it reflects a blend of historic costs and current market values; nonetheless, it $15 is a useful proxy for per share value mea- surement. Over the past 25 years, book $10 value per share of Loews common stock has increased at a compound annual rate of 13.4 percent, which closely tracks the $5 14.8 percent compound annual increase in the market price of Loews common $0 stock over the same period. During 2007, 1982 1987 1992 1997 2002 2007 our book value per share increased by 7.5 percent. Subsidiaries’ year in Review An integral part of the process of grow- ing shareholder wealth – for holders of both Loews common stock and Carolina Group stock – is the performance of our subsidiaries. The section beginning on the following page lends perspective to the contributions these companies made to Loews in 2007. 12 L O E W S C O R P O R AT I O N
  14. 14. Y EA R IN R E v I E w C N A F I N AN C I AL C O R p O RAT ION I n 2007, CNA reported net income of $851 million, aided by another mild hur- ricane season. The company’s under- writing and expense management efforts continued to yield improvements, while investment income remained strong. Net operating income totaled $1,060 million, nearly matching last year’s record. Net income of $851 million included real- ized investment losses of $203 million, pri- marily derived from other-than-temporary impairment losses. Further dampening net income was an adverse reinsurance settlement of $108 million in CNA’s life and group insurance run-off operations. In line with its solid financial performance, CNA paid a dividend to common share- holders for the first time in more than 30 years. Furthermore, CNA’s balance sheet strength, solid earnings and market posi- relationships with independent agents Net investment income of $2.4 billion was tion were recognized by Fitch Ratings, slightly ahead of 2006. The company’s and brokers. New business represented which upgraded CNA’s Property & Casu- fixed income portfolio continued to pro- approximately 18 percent of total premi- alty ratings to A from A-. duce steady results and also benefited um volume. from lower interest expense on funds Premium production was down 4 per- CNA’s cross-selling efforts – the sale of withheld. Invested assets grew by $1.1 cent from the prior year, in line with dis- additional products to its customers – billion to $41.3 billion, reflective of contin- ciplined underwriting in an environment continued to provide a significant lift to ued positive cash flow. of declining rates. Average rates were new business. In 2007, cross-selling ac- CNA continued to strengthen its balance counted for $458 million in premium, or sheet by reducing its reliance on reinsur- 38 percent of new business. Not only ance. In 2007, the company reduced its does cross-selling deepen client relation- reinsurance recoverables by $1.3 billion ships, which helps drive retention, it en- to $8.7 billion. Since 2003, CNA has taken ables CNA to gain more data about a cli- more than $7 billion of reinsurance recov- ent’s risk profile, which helps with pricing erables off of its balance sheet. Not only CNA is well positioned and selection. has this added to CNA’s invested assets, it to manage through the has significantly reduced credit risk. CNA’s continued focus on reducing costs cycle, with disciplined over the past several years has yielded Going forward, CNA continues to face an expense ratio for Property & Casualty underwriting and stringent many challenges, such as competitive pric- Operations – 29.5 percent in 2007 – that expense controls. ing pressures and the risks posed by natu- is now competitive with its peers. The ral catastrophes. CNA is well positioned most important indicator of profitable to confront the challenges it faces given underwriting is the combined ratio – the its strong financial position, disciplined ratio of claim costs and operating expens- down 4 percent while premium retention operating focus, diversified commercial es to premium revenue. The combined remained above 80 percent. The ability insurance portfolio, cross-sell momentum ratio for CNA’s Property & Casualty Op- and targeted growth in profitable market to retain quality business in a competi- erations in 2007 was 94.8 percent, versus segments, including small business and tive market is a tribute to the discipline 96.4 percent in 2006. specialty lines. of CNA’s underwriters and their strong L O E W S C O R P O R AT I O N 13
  15. 15. Y EAR I N REvIEw LORIL L A R d N prior years. Lorillard prevailed in the only et income for 2007 was $898 mil- case that proceeded to a trial against it in lion, an 8.7 percent increase over 2007, winning a defense verdict, along net income of $826 million in 2006. with the other tobacco company defen- Lorillard was the only major cigarette dants, in a case brought by a flight atten- manufacturer to increase overall market dant for alleged injuries from environmen- share as well as its share of both the pre- tal tobacco smoke in airplanes. mium and discount price segments of the Lorillard maintained domestic market. industry-leading unit Meanwhile, there were some develop- ments in major cases that have been Lorillard’s business strategy is to focus profitability, while gaining pending against Lorillard for many years. on the menthol premium price segment market share. The former Engle class members were and to leverage Newport’s strong brand given until January of 2008 to file individu- equity in the marketplace. Lorillard adjusts al claims under the 2006 Florida Supreme Newport’s promotional spending with the Lorillard’s total wholesale shipments (do- Court ruling which overturned the class goal of balancing profitability and main- mestic, Puerto Rico and certain U.S. ter- punitive damage award. Through February taining its leadership position in the highly ritories) decreased by 0.8 percent during 26, 2008, approximately 3,000 of these competitive menthol segment. The com- 2007. Domestic wholesale unit shipments individual claims have been served on pany achieved its objective in 2007 and decreased by 0.8 percent versus an indus- Lorillard and other tobacco companies; reported solid earnings, along with market try decline of 5.0 percent, which resulted however, the time to serve claims that share gains. in an increase of 0.4 of a domestic share have been filed by the January 2008 dead- Newport maintained its dominant posi- point over 2006 and brought Lorillard’s line will not expire until second quarter tion in the menthol category by achieving share to 10.0 percent of the market. 2008. It is possible that some of these a 32.9 percent market share, an increase cases may come to trial this year, and Newport accounted for 91.8 percent of of 0.7 of a share point over 2006. New- Lorillard intends to vigorously defend each Lorillard’s total sales volume, while pre- port’s segment share was approximately one of them. mium brands together accounted for 94.4 equal in size to its next three largest men- percent. Lorillard’s share of the premium There was no new activity in 2007 in the thol competitors combined. Newport re- price segment increased 0.3 of a share appeal in Washington, D.C. from the trial mained the second largest cigarette brand point to 13.0 percent. court’s 2006 ruling in the U.S. Department in the U.S. market with an overall whole- of Justice’s case against Lorillard and sale market share of 9.2 percent, a gain of Litigation against the tobacco industry other tobacco companies. The trial court’s 0.4 of a share point versus 2006. generally continued the favorable trend of verdict imposed an injunction against the defendants, but it did not award monetary damages. The appellate court has stayed all proceedings pending the ongoing appeal. In another important case, the Supreme Court of Louisiana declined to accept re- view of the February 2007 ruling by the Louisiana Court of Appeal in the Scott class action. That court’s ruling substan- tially reduced monetary damages award- ed by the trial court in 2004, but it upheld the certification of the class and the right of the class to receive smoking cessation assistance. The case has been sent back to the trial court, and further appeals from any final decision by the trial court may be pursued. In the fourth quarter of 2007, Lorillard recorded a pretax provision in the amount of approximately $66 million for this matter. 14 L O E W S C O R P O R AT I O N

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