2008 Loews Corporation Annual Report

Transcription

1 2008 Loews Corporation Annual Report

2 contents financial highlights 9 letter to our shareholders and employees 10 Loews: a financial portrait 13 year in review 18 shareholder information annual report on form10-k 29 open for our company at a glance stands for this year s results reflect the economic recession and disruptions in the financial markets. $14.3 $13.8 $12.2 $11.7 $13.2 $3.03 $2.96 $73.7 $70.9 $76.9 $76.1 $69.9 $21.85 $23.64 $30.14$32.40 $30.17 $1.05 $0.85 $(0.38) Revenues* Income (Loss) per Share from Continuing Operations Total Assets* Book Value per Share of Loews Common Stock * in billions of dollars

3 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. CNA Financial Diamond Offshore Drilling HighMount Exploration & Production Boardwalk Pipeline Partners Loews Hotels One of the largest commercial property & casualty insurance companies in the United States. For more information refer to page 18. A worldwide deep water driller, with 45 offshore drilling rigs. For more information refer to page 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. An operator of interstate natural gas pipeline systems and underground storage. For more information refer to page 24. Among the country s top luxury lodging companies, with 18 hotels and resorts in the United States and Canada. For more information refer to page 26. For more information refer to page 22.

4 our stock represents more value than just five subsidiaries. We believe that Loews s 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. Other Assets Net Cash and Investments CNA Preferred Stock Boardwalk Pipeline Class B Units Non-Public Subsidiaries HighMount Loews Hotels Boardwalk Pipeline General Partner 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, Public Subsidiaries Common Shares Owned by Loews CNA: million Diamond Offshore: 70.1 million Boardwalk Pipeline: million being a conglomerate allows diversity and flexibility. Operating as a conglomerate gives us flexibility that other structures or models do not possess, including the freedom to own businesses in disparate industries. NYSE CHIEF SUBSIDIARY SYMBOL OWNED INDUSTRY EXECUTIVE OFFICER WEBSITE CNA Financial Commercial Property & Corporation CNA 90% Casualty Insurance Thomas F. Motamed Diamond Offshore Drilling, Inc. DO 50.4% Offshore Drilling Lawrence R. Dickerson HighMount Exploration & 100% Energy Exploration Timothy S. Parker Production LLC & Production Boardwalk Pipeline Partners, LP BWP 74% Natural Gas Pipelines Rolf A. Gafvert Loews Hotels Holding Corporation 100% Luxury Lodging Jonathan M. Tisch

5 Loews we represent many things, but most of all we represent the value of being a conglomerate and the consequent value we create for our shareholders. 1

6 We are focused on building enduring value for our shareholders. Long term we 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. 2 Loews Corporation 2008 Annual Report

7 our subsidiaries benefit from our strong fundamentals and strategic vision. When setting the strategic course for Loews, we never lose sight of a longer time horizon. value We are philosophically, practically, and genetically value investors. strength Our balance sheet strength positions Loews to withstand adversity and to capitalize on opportunities when they arise. opportunity Our approach is to purchase assets at a discount to their inherent value. we have always been a conglomerate. energy exploration & production natural gas pipelines offshore drilling insurance luxury lodging tobacco watches & clocks supertankers movie theaters Subsidiaries from 1959 to

8 We maintain a large balance of net cash and investments, which provides an extra measure of security. Liquidity through 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. 4 Loews Corporation 2008 Annual Report

9 our subsidiaries benefit from our liquid balance sheet. Our decisions are always governed by the recognition that a conservative capital structure is an important element in generating value for shareholders. holding company cash and investments Our priorities in managing holding company cash and investments are to protect principal and optimize liquidity. $2.35 billion $0.87 billion holding company debt We maintain relatively low levels of holding company debt so that we can easily service our obligations. we receive cash from a diversity of sources, which buffers us against unforeseen events. Diamond Offshore 23% Boardwalk Pipeline 56% 5% Other 16% CNA Financial 2008 dividends received from subsidiaries (excluding Lorillard) by percentage 5

10 We advise our subsidiaries on significant capital and strategic initiatives. Implementation is carried out by the managers of each subsidiary. Logic our investment philosophy is conservative. our decisions are grounded in common sense. our aim is always to understand the downside risk of an opportunity before considering the upside. 6 Loews Corporation 2008 Annual Report

11 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. manage conservatively We make certain that each subsidiary understands our conservative and long-term approach to creating shareholder value. 1 2 own solid assets We have historically acquired companies with substantial capital or financial assets that offer products and services for which there is enduring, if sometimes cyclical, demand. maintain liquidity A strong net cash position has not always been fashionable, but it has enabled Loews to seize opportunities and to assist subsidiaries. 3 4 manage through down cycles We view most of our assets as long-term holdings. the long-term value of Loews stock is supported by the repurchase of our shares over the years. 1.3 billion (Dec 31, 1971) Shares Outstanding at Year End Since 1971 (adjusted for all stock splits) common stock outstanding The repurchases that we have made over the years benefit our shareholders by giving them an increased stake in Loews and its subsidiaries million (Feb 13, 2009) 7

12 The Roman Numeral L represents 50 the number of years Loews has been traded on the New York Stock Exchange. Fifty our flexible 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. 1,000,000% Cumulative Percent Change (Log Scale) 100,000% 10,000% 1,000% Loews S&P % Year Relative Price Performance of Loews Common Stock (Mar 13,1959 to Dec 31, 2008) 8 Loews Corporation 2008 Annual Report

13 financial highlights 2008 Year Ended Dec 31, (in millions, except per-share data) Results of Operations: Revenues $ 13,247 $ 14,302 $ 13,844 $ 12,197 $ 11,674 Income before income tax and minority interest $ 587 $ 3,195 $ 3,104 $ 676 $ 769 Income (loss) from continuing operations $ (182) $ 1,587 $ 1,676 $ 475 $ 582 Discontinued operations, net 4, 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 $ 582 Discontinued operations, net 4, Loews common stock 4,319 1,956 2, ,032 Former Carolina Group stock: Discontinued operations, net 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 Net 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 $42,726 Total assets 69,857 76,115 76,881 70,906 73,720 Debt 8,258 7,258 5,572 5,207 6,990 Shareholders equity 13,126 17,591 16,502 13,092 11,970 Cash dividends per share: Loews common stock Former Carolina Group stock Book value per share of Loews common stock Shares outstanding: Loews common stock Former Carolina Group stock results of operations Net income for 2008 amounted to $4.5 billion compared to $2.5 billion for 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 Higher realized investment losses, lower investment income and increased catastrophe losses at CNA, primarily from hurricanes, contributed to the loss from continuing operations for 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 financial institutions as well as the global economic downturn, resulted in significant realized and unrealized losses in CNA s investment portfolio and declines in net investment income during HighMount s 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 reflect 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 These declines were partially offset by significantly 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,

14 Office of the President [from left to right] Jonathan M. Tisch Co-Chairman of the Board, Chairman and Chief Executive Officer Loews Hotels Andrew H. Tisch Co-Chairman of the Board, and Chairman of the Executive Committee James S. Tisch President and Chief Executive Officer letter to our shareholders and employees Most companies and investors were glad to turn the page on 2008, a year of extraordinary financial 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 and conservative 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 While two of our energy subsidiaries Diamond Offshore and Boardwalk Pipeline posted record earnings, the results of HighMount, in its first 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 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 Loews Corporation 2008 Annual Report

15 We reduced our outstanding shares by 18 percent. We finished the year with $2.3 billion of cash and investments. 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 significant 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 Loews s 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. Benefiting from our subsidiaries healthy cash-flow generation, we finished 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 prolific 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 When fully completed, we estimate that Boardwalk Pipeline s investments in these attractive expansion projects will total approximately $4.8 billion. The initial rounds of project financing were funded through Boardwalk Pipeline s bank credit facility and a series of public debt and equity offerings. When massive turmoil in the capital markets raised the cost of financing to unreasonable levels, Loews helped Boardwalk Pipeline to finance 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 CNA Financial CNA 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 company s 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 CNA used the proceeds to increase the statutory surplus of its principal insurance subsidiary, Continental Casualty Company, which has been adversely impacted by losses in its investment portfolio. While CNA s investment portfolio has incurred significant unrealized mark-to-market losses, the insurance holding company and its subsidiaries possess ample liquidity. CNA s cash flow from operations, along with cash generated from its investment portfolio, is more than sufficient 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 company s book value. We are very pleased that Tom Motamed has joined CNA as its new Chairman and Chief Executive Officer upon the retirement of Steve Lilienthal at year-end Tom served as Vice Chairman and Chief Operating Officer of The Chubb Corporation until June 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. 11

16 letter to our shareholders and employees other subsidiary performances Below are some operational highlights for our other subsidiaries: Diamond Offshore achieved 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. HighMount completed its first full year of operations within the Loews family. Natural gas prices have significantly declined from a peak of over $14 per thousand cubic feet ( Mcf ) in mid-2008 to approximately $4 per Mcf in February of If prolonged, this price decline will negatively impact profits. Loews Hotels reported 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 subsidiary s performance in 2008, please refer to the year in review section, beginning on page outlook As we put our signatures to this letter, the U.S. and global 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 difficult 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 Loews s listing on the New York Stock Exchange. Since 1959, we have lived through many difficult markets and business cycles, learned valuable lessons about staying the course and emerged stronger as a result. We expect that the troubled economy will ultimately give way to recovery, and that we and our subsidiaries will benefit 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. Sincerely, James S. Tisch Office of the President February 25, 2009 Andrew H. Tisch Jonathan M. Tisch 12 Loews Corporation 2008 Annual Report

17 Loews: a financial portrait Loews Corporation is a diversified holding company 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 flexibility 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 allocating holding 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 significant 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 officer who embraces our conservative, long-term approach to building shareholder value. We believe that holders of Loews common stock benefit from the fact that three of our subsidiaries Boardwalk Pipeline, CNA and Diamond Offshore are publicly traded. We see three primary benefits 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 financial 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-financing: Public subsidiaries can directly access the capital markets to finance 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 financing 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 Loews s true value is more than just the sum of its parts, such a readily calculable valuation metric is indeed beneficial to investors. On February 25, 2009, the value of Loews s 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 Pipeline s 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 approved plans for a tax-free separation of Lorillard Inc. to holders of Loews common stock and Carolina Group stock. We successfully completed this transaction in June 2008, creating significant value for both the holders of Loews common stock and the former holders of Carolina Group stock. Today, Lorillard is an independent publicly traded company (NYSE ticker symbol LO ). 13

18 Loews: a financial portrait patient investors We 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 flows 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 our investments 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 financial distress. In 2004, we acquired Gulf South Pipeline, which fit hand-in-glove with Texas Gas, and a year later we formed Boardwalk Pipeline as a master limited 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 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 year s time we will 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 reflected 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 apply the 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 benefited 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 decade s 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. 14 Loews Corporation 2008 Annual Report

19 holding company cash flow (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 flow, 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 Loews receives significant cash inflows from our subsidiaries. diversified cash flows Our holding company s strong liquidity position is made possible by significant and diversified cash inflows 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 Offshore s board declared quarterly dividends representing $140 million in cash flow to Loews. It is important to note that in its decision whether to declare a special dividend, Diamond Offshore s board will consider the company s financial position, earnings, earnings outlook, capital spending plans and other relevant factors at that time. Boardwalk Pipeline is an important source of cash flow for Loews, contributing more than $180 million in partner distributions in As a master limited partnership, Boardwalk Pipeline makes quarterly cash distributions 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 partnership s 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 Prior to Loews s $1.25 billion preferred stock investment in CNA in November 2008, at which time CNA s common dividend was suspended, CNA had paid more than $100 million in common dividends to Loews during 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 floating rate or 10 percent. In addition to cash flow 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 in our trading portfolio. 15

20 Loews: a financial portrait investment policy We manage the holding company s cash and investments and also provide investment services to our subsidiaries. Our portfolio management team consists of experienced investment professionals with expertise in the specific 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 investmentgrade assets. In order to optimize returns, we invest a relatively small portion of the portfolio in common stocks, which in 2008 suffered significant mark-to-market losses. CNA s investment portfolio had a market value of $35 billion at year-end 2008, with approximately 93 percent composed of fixed-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 CNA s 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 sufficient to support the underlying insurance liabilities. Prevailing conditions in the fixed income markets have resulted in significant realized and unrealized losses in CNA s 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 s and CNA s 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 Loews s 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 company s 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 financial environment. The holding company s balance sheet strength is highlighted by three 2008 year-end figures: cash and investments of $2.345 billion; debt of $0.866 billion; and shareholders equity of $ billion. Financial strength enables Loews to create value over the long term. 16 Loews Corporation 2008 Annual Report

21 condensed consolidating balance sheet (in billions) Diamond Boardwalk Loews Corporate Dec 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 total debt total liabilities minority interest Loews s interest in shareholders equity * 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 reflects the conservative approach that each takes to its own balance sheet. (The table above is a condensed version of the company s 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 financial dynamics warranting different capital structures. In all cases, we work with our subsidiaries to ensure that their capital structures are aligned with our conservative, long-term approach and their particular financial requirements. subsidiaries year in review Our subsidiaries play an integral part in the ongoing creation of Loews shareholder wealth. The following pages detail each subsidiary s challenges, opportunities and contributions to value creation in holding company cash and investments vs. debt (in millions of dollars) $865 $866 $1,165 $866 $2,497 $2,305 total cash and investments* debt $2,898 $2,345 * net of securities receivable and payable $3,758 $5,330 17

22 CNA (for the year ended Dec 31, 2008) operating income: $533 million net loss: $(299) million P&C operations net written premium: $6,489 million employees: 9,000 Property and casualty insurance CNA continues to improve its core property and casualty insurance operations through disciplined underwriting, stringent expense controls, better claims practices and other operating improvements. 18 Loews Corporation 2008 Annual Report

23 year in review CNA Financial Corporation The prolonged and severe disruptions in the financial markets have caused substantial investment losses for CNA and for the insurance industry as a whole. In 2008, CNA reported a net loss of $299 million, as compared to net income of $851 million in the prior year. Net realized investment losses for the year were $841 million, including aftertax impairments of $965 million. The impairments were primarily recorded in corporate and other taxable bonds, asset-backed bonds and non-redeemable preferred securities. Pretax net investment income for the year declined 33 percent to $1.6 billion. Premium production in CNA s core Property & Casualty Operations decreased by 4 percent to $6.5 billion in 2008, reflecting CNA s disciplined approach to underwriting in a competitive market. After several years of declines, commercial insurance pricing showed signs of leveling off in the second half of the year. This welcome development was evident in CNA s production metrics. Price declines on renewal business narrowed to 3 percent in the fourth quarter of 2008 from 5 percent in the fourth quarter of Over the same timeframe, retention of renewal business improved to 85 percent from 81 percent. The ability to retain quality business in a competitive market is a tribute to the discipline of CNA s underwriters and their strong relationships with independent agents and brokers. Demonstrating CNA s sustained focus on expense management, the expense ratio of Property & Casualty Operations was 29.6 percent in 2008, its third consecutive year under 30 percent. CNA s expense levels have remained competitive with its peers, even while making investments in IT infrastructure, employee training and other drivers of future success. In 2008, the combined ratio the ratio of claim costs and operating expenses to premium revenue was 98.0 percent for Property & Casualty Operations, the third consecutive year under 100 percent. Favorable prior year development benefited underwriting results for Property & Casualty Operations for the second consecutive year, reflecting CNA s prudent reserving practices for policies written in prior years. Catastrophic events, mainly Hurricanes Gustav and Ike, reduced CNA s after-tax income by $239 million in 2008, versus $51 million in For the insurance industry as a whole, the 2008 hurricane losses were the fourth worst on record. CNA will face many challenges in 2009 as the economic slowdown puts continued pressure on the financial markets, as well as on premium growth. CNA is well positioned, however, to compete in its target markets. CNA enjoys strong ratings from independent rating agencies, a solid reserve position, and a high level of financial liquidity. 19

24 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 drilling Diamond Offshore achieved excellent results, owing to high utilization rates and record dayrates for its offshore drilling rigs. 20 Loews Corporation 2008 Annual Report

25 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 prices fell by more than two-thirds before year end, causing Diamond Offshore s 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 marketable securities, and no net debt. Instead of constructing new-build floaters at inflated 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 make prudent investments in its fleet. In 2008, construction of two new-build premium jack-up units, Ocean Shield and Ocean 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 semisubmersible, 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 a new-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 fleet 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 world s 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 and gas exploration. Diamond Offshore is positioned to weather the downturn and to participate fully in an industry recovery. 21

26 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 exploration and production having completed its first full year of operations within the Loews family, HighMount has established itself as an important North American natural gas producer with a focus on long-term profitability and operational excellence. 22 Loews Corporation 2008 Annual Report

27 year in review HighMount Exploration & Production LLC HighMount Exploration & Production LLC started operations on July 31, 2007 and has established itself as an important North American natural gas producer with a focus on long-term profitability and operational excellence. HighMount owns 2.2 trillion cubic feet equivalent ( Tcfe ) of proved natural gas and natural gas liquids ( NGL ) reserves located in company-operated fields in the Permian Basin in Texas, the Antrim Shale in Michigan and the Black Warrior Basin in Alabama. In addition to its 2.2 Tcfe of proved reserves, HighMount recognizes more than 2.3 Tcfe of probable and possible reserves, representing more than 15,000 future development locations. These assets also provide a base for potential reserve and production growth through the application of new technologies in unconventional gas exploration. Technological advancements in horizontal drilling, tight-sands, shale and coalbed methane completions and facility enhancements are unlocking new reserves and production from these longlived gas fields. During 2008, HighMount produced 102 billion cubic feet equivalent of natural gas, sold at an average realized price of $7.94 per thousand cubic feet equivalent ( Mcfe ), including hedging activity. HighMount s low-risk drilling program yielded 498 gas wells, with a 98 percent success rate, increasing total producing wells to almost 9,200. Increasing commodity prices and the related spike in drilling costs during the first half of 2008 were followed by severe price declines and a weakening economy, posing unique challenges throughout Dramatic increases in steel, diesel and E&P industry costs put a squeeze on margins, despite record oil and gas prices. Operating expenses have fallen along with energy prices, but at a much slower pace. HighMount has been able to adjust its activity and spending levels to meet these challenges. HighMount s operating expenses consisted of the following: production expenses totaling $166 million, or $1.74 per Mcfe sold, including $67 million of revenue-based severance and ad valorem taxes, or $0.70 per Mcfe sold; general and administrative costs totaling $66 million; and depreciation, depletion and amortization ( DD&A ) totaling $177 million. DD&A included $162 million for the depletion of proved E&P property costs, representing a $1.58 per Mcfe units-of-production rate. Capital expenditures for 2008 totaled $519 million. Although 2008 was a very challenging year, HighMount will continue to focus on maximizing the value of its reserve base through its drilling program and production optimization projects. HighMount will continue to pursue attractively priced acquisitions in U.S. onshore producing basins that add value and are consistent with its long-term natural gas focus. 23

28 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 fields: 11 employees: 1,130 Natural gas pipelines Boardwalk 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 Loews Corporation 2008 Annual Report

29 year in review Boardwalk Pipeline In 2008, Boardwalk Pipeline enjoyed strong financial performance, increasing net income by 29 percent to $294 million. This growth was mainly attributable to increased gas transportation revenues from the recently completed East Texas to Mississippi and Southeast Expansion projects. Healthy cash flow enabled Boardwalk Pipeline to pay cash distributions of $1.87 per limited partner unit in 2008, an increase of 8 percent over Boardwalk Pipeline has pursued an organic growth strategy to transport natural gas from the prolific supply sources in the Barnett Shale, Bossier Sands, Fayetteville Shale, Caney Woodford Shale and Haynesville Shale. The company s expanded footprint provides access to these long-lived natural gas supply sources and the flexibility to deliver to diversified markets. The following expansion projects have been completed: The East Texas to Mississippi Expansion, consisting of approximately 242 miles of 42-inch pipeline; Phase III of the Western Kentucky Storage Expansion, which added 5.4 billion cubic feet ( Bcf ) of storage capacity; and The Southeast Expansion, consisting of 111 miles of 42-inch pipeline originating near Harrisville, Mississippi and extending into Alabama. Boardwalk Pipeline is near completion on the following expansion projects: The Gulf Crossing Pipeline, which originates near Sherman, Texas and runs 357 miles to the Perryville, Louisiana area, was placed in service during early Boardwalk Pipeline expects the initial compression facilities to come on line during the first quarter of 2009 and additional compression facilities to be placed in service in the first quarter of The 165-mile Fayetteville Lateral and the 95-mile Greenville Lateral are expected to be complete in the second quarter of The 66-mile header portion of the Fayetteville Lateral and a portion of the Greenville Lateral were placed in service in December 2008 and January 2009, respectively. Phase III of the Western Kentucky Storage Expansion will be expanded by another 3.0 Bcf of storage capacity in Although 2008 saw a dramatic rise and subsequent collapse in natural gas prices, a significant portion of Boardwalk Pipeline s gas transportation and storage services are governed by contracts under which customers pay monthly capacity reservation charges regardless of actual pipeline or storage capacity utilization. In 2008, approximately 66 percent of revenues were derived from firm capacity reservation charges and approximately 22 percent of revenues were derived from utilization charges on firm contracts. Additional revenues are derived from interruptible transportation, interruptible storage, parking and lending, and other services. Substantially all of Boardwalk Pipeline s operating capacity, including expansion projects, is sold out with a weighted-average contract life of over six years. When these expansions are fully operational, Boardwalk Pipeline will have essentially doubled its capacity from the time of its Initial Public Offering in late The actual volumes of natural gas that can be transported through these new pipelines depend on a number of factors, including the maximum operating pressures at which the pipes may operate. Boardwalk Pipeline is currently working with its regulators to determine the maximum operating pressures that will be permitted for each of its new pipeline projects. 25

30 Loews Hotels (for the year ended Dec 31, 2008) total revenue: $380 million hotels: 18 guest rooms: 8,073 employees: 2,350 Luxury lodging Loews Hotels reported good results for the year and continues to delight guests with its one-of-a-kind properties. 26 Loews Corporation 2008 Annual Report

31 year in review Loews Hotels In 2008, Loews Hotels reported revenues of $380 million, a decrease of 1.0 percent from the prior year. Earnings before income taxes were $62 million, an increase of 3.3 percent from the prior year. Occupancy at wholly owned hotels decreased to 73.3 percent in 2008 from 75.4 percent in In light of the economic downturn, exacerbated by significant negative publicity surrounding conventions and other corporate group events typically held at hotels, luxury hotel bookings for 2009 are significantly reduced from levels seen in recent years. As a result, we expect revenue per available room and operating results at Loews Hotels to deteriorate in the near term. Despite a tough economic environment, Loews Hotels is committed to maintaining its properties at Four Diamond or better standards. During 2008, the company invested in renovations at the Loews Coronado Bay Resort and in 2009 plans to perform renovations at the Loews Miami Beach Hotel, including updates of guestrooms and bathrooms. At year-end 2008, Loews Hotels operated 18 hotels, with 16 in the U.S. and two in Canada. Located in major city centers and resort destinations from coast to coast, the Loews Hotels portfolio features one-of-a-kind properties that go beyond Four Diamond standards to delight guests with a supremely comfortable, uniquely local and vibrant travel experience. Additionally, Loews Hotels continues to look for expansion opportunities that will generate attractive financial returns. While 2009 looks to be a difficult year for the lodging industry, the company s financial conservatism and strength in operations management will help Loews Hotels weather the current economic downturn and keep Loews Hotels positioned to benefit from an improvement in the general economy. 27