Loews Corporation (L) Q1 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Loews Corporation's First Quarter 2018 Earnings Conference Call. [Operator Instructions]. Thank you. It is now my pleasure to turn the call over to Mary Skafidas to begin. Please go ahead.

Thank you, Maria, and good morning, everyone, and welcome to Loews Corporation's first quarter earnings conference call. A copy of our earnings release, earnings supplement and company overview may be found on our website, loews.com. On the call this morning, we have our Chief Executive Officer, Jim Tisch; and our Chief Financial Officer, David Edelson. Following our prepared remarks this morning, we will have a question-and-answer session. Before we begin, however, I will remind you that this conference call might include statements that are forward-looking in nature. Actual results achieved by the company may differ materially from those made or implied in any forward-looking statements due to a wide range of risks and uncertainties, including those set forth in our SEC filings. Forward-looking statements reflect circumstances at the time they are made. The company expressly disclaims any obligation to update or revise any forward-looking statements. This disclaimer is only a brief summary of the company's statutory forward-looking statements disclaimer, which is included in the company's filings with the SEC. During the call today, we might also use non-GAAP financial measures. Please refer to our Security filings and earnings supplement for reconciliation to the most comparable GAAP measures. In a few minutes, our CFO, David Edelson, will walk you through the key drivers for the quarter. But before he does, Jim Tisch, our CEO, will kick off the call. Jim, over to you.

Thank you, Mary. Loews had a solid first quarter, but before I get into any specifics about our earnings, I want to mention something that those of you who listened to Boardwalk's call this morning will have already heard. The Federal Energy Regulatory Commission recently announced a policy change that eliminates an MLP's ability to include an income tax allowance in determining the maximum applicable rates it is allowed to charge customers on its interstate pipelines. The recent tax reform legislation, coupled with FERC's subsequent actions, have sparked a review as to whether Boardwalk should remain a publicly traded master limited partnership. It appears that FERC's action would materially decrease the maximum applicable rates Boardwalk could charge in the future. The effect on max rates may result in Loews being able to exercise a call right under the terms of the Boardwalk partnership agreement. Those terms allow Loews to purchase Boardwalk's outstanding LP units at a formula price. The formula price would be based on the average of the daily closing prices of Boardwalk's common units for a 180-day period prior to the day when and if we exercise our purchase right. This purchase right is further described both in our 10-Q and Boardwalk's 10-Q as well as in Boardwalk's past SEC filings. It is also discussed in Loews' amended Form 13D, which will be filed later today. We at Loews are exploring all our options regarding these developments. Although we expect to be able to make a decision sometime this year, no decisions have yet been made. As you can imagine, we'll have to let our documents speak for themselves since we are constrained from answering any questions on this topic. Luckily, we have other subsidiaries and capital allocation actions that we can discuss. In particular, the earnings for CNA and Loews Hotels have been impressive, so I'd like to give you some color on what's happening in each of these companies. CNA had another phenomenal quarter, delivering a combined ratio of 93.1%, the lowest quarterly underlying combined ratio it's had in over a decade. While the recent tax cuts contributed to its quarterly performance, CNA's substantial earnings increase was primarily due to the strength of its underwriting results. For the quarter, CNA had a pretax underwriting gain of $113 million versus $43 million in the corresponding quarter last year, and adjusted net written premium likewise grew 8%. The company's growth was driven by rate, exposure change and a strong increase in new business as CNA continues to make great strides with its distribution network. While pleased with the strong results, CNA remains committed to further improving its underwriting performance, continuing to strengthen relationships with distributors and diligently managing its expense ratio. Loews and CNA both feel that the company is poised for ongoing responsible growth. And speaking of ongoing responsible growth, Loews Hotels also had a terrific quarter and is off to a great start for the year. A stronger-than-usual tourism market in Florida benefited our recently renovated Loews Miami Beach Hotel. Additionally, in Orlando, our joint venture properties with Universal Studios continued to perform remarkably well. Loews Hotels' adjusted EBITDA was up 30% from last year's first quarter, and this growth was not based solely on the hotel chain's expansion but also on the strong performance of its existing properties. Same-store RevPAR also grew 8% from $188 in last year's first quarter to $203 during the first quarter of 2018. Loews Hotels continues to concentrate on highly profitable, distinguished hotels in the upper upscale market that cater to group business. The company also seeks out properties that have partners who bring with them unique built-in demand generators as it has done so successfully in its long-term partnership at the Universal Orlando resort. The company's flexibility, its agile operating philosophy and its willingness and ability to invest in its own projects all represent competitive advantages. We're confident in this strategy and Loews Hotels' leadership and in the company's ability to create value for our shareholders over the long term. Before I turn the call over to our CFO, David Edelson, I want to talk about share repurchases. Over the past 7 months, Loews has repurchased approximately 18.6 million shares or about 5.5% of our outstanding shares at a cost -- at a total cost of almost $1 billion. These buybacks reflect our confidence in our underlying businesses. It's safe to say that share repurchases remain one of our major capital allocation levers for creating long-term value for our shareholders. David, over to you.

Thank you, Jim, and good morning. For the first quarter, Loews reported net income of $293 million or $0.89 per share compared to $295 million or $0.87 per share in last year's first quarter. Average shares outstanding declined 3% year-over-year, resulting in higher earnings per share despite a slight reduction in net income. Now let me walk through the ins and outs of the quarter. I will start with CNA, which contributed almost 90% of our net income this quarter and accounted for the biggest year-over-year positive earnings variance. CNA contributed net income of $261 million, up 12% from the first quarter of 2017. There were two main drivers of the increase, improved underwriting income and higher after-tax investment income. CNA posted outstanding P&C underwriting results in the quarter. This strength was broad-based and spanned all 3 P&C segments, commercial, specialty and international. While CNA once again experienced favorable prior year development, its underwriting results in Q1 2018 were robust even before prior year development and catastrophe losses. During the first quarter, CNA's P&C combined ratio was 93.1 and its underlying combined ratio, which excludes prior year development and catastrophe losses, was almost identical at 93.2. Both represented over 4 points of improvement versus last year's first quarter. Let me highlight CNA's loss ratio, which is a component of its combined ratio. CNA posted an underlying loss ratio of 60 in Q1, an improvement of more than 2 points from last year's first quarter and 1 point better than full year 2017. CNA's loss ratio shows real improvement and compares favorably to peers. The meaningful decline in CNA's combined ratio led to a significant increase in the company's P&C underwriting income, which climbed more than 160% pretax and even more after-tax given the lower corporate tax rate. Net investment income was lower year-over-year on a pretax basis due entirely to LP income, but the reduced corporate tax rate resulted in an increase in after-tax net investment income. Despite the year-over-year decline in LP income, CNA's LP portfolio returned a respectable 1.2% in a quarter during which the S&P 500 returned negative 1.2%. Before leaving CNA, I will note that CNA completed its review of its asbestos and environmental pollution liabilities in the first quarter and booked a noneconomic retroactive reinsurance charge related to the 2010 loss portfolio transfer. This charge, which is essentially a deferred gain, reduced CNA's contribution to our net income by $28 million this year and by $12 million last year. Diamond Offshore. Diamond Offshore made a $10 million positive contribution to our net income in the first quarter despite a $25 million pretax loss. The pretax loss was an outgrowth of the continuing difficult conditions in the global offshore drilling market. Diamond experienced a 21% year-over-year decline in contract drilling revenues caused by a similar decline in revenue earning days. The swing from a pretax loss to positive net income was caused by a tax benefit as Diamond reversed an uncertain tax position it had booked in Q4 2017 related to the deemed repatriation of previously deferred non-U.S. earnings. Further guidance issued by the U.S. Treasury and the IRS in the first quarter clarified certain provisions in the Tax Act, permitting Diamond to reverse its liability for this uncertain tax position. Boardwalk's net income contribution was essentially flat year-over-year despite a decline in pretax income. The reduction in pretax income was precipitated by a 5% decline in net revenues as incremental revenues from growth projects recently placed into service and the benefits of colder weather did not make up for the near-term negative revenue impact of the previously announced restructuring of existing firm transportation agreements with Southwestern Energy as well as a decline in storage and parking and lending revenues caused by unfavorable market conditions. The lower corporate tax rate booked at the Loews level resulted in Boardwalk's after-tax earnings being almost flat with the prior year. Moving on to Loews Hotels. As Jim mentioned, Loews Hotels posted excellent results in Q1 as many of its properties, including Loews Miami Beach Hotel and the properties at the Universal Orlando Resort, posted strong operational and financial results. Loews Hotels contributed net income of $13 million, up from $10 million in Q1 2017. The quarterly comparison looks even better once last year's results are adjusted for the $10 million pretax, $6 million after-tax net gain attributable to the sale of a JV property and the write-down of another JV property. Loews Hotels' adjusted EBITDA, which is reported and defined in our quarterly earnings summary available on our IR website, was $57 million in the quarter, up $13 million from last year's first quarter. Turning to the parent company. Pretax and after-tax investment income were down from an exceptionally strong quarter in Q1 2017 with lower returns on equities and LP investments driving the year-to-year decline. The bulk of the portfolio continues to be invested in cash and equivalents. The Corporate and other segment improved $10 million on a pretax basis for two main reasons, the absence of transaction-related expenses incurred in 2017 in connection with the acquisition of Consolidated Container and income generated by Consolidated Container in the first quarter of 2018. The parent company balance sheet continues to be extremely strong and liquid. At March 31, the parent company portfolio of cash and investments totaled just under $4.9 billion, was slightly more than 50% in cash and short-term investments and the remainder in fixed maturities, marketable equity securities and a diversified portfolio of limited partnership investments. We received $571 million in dividends from our subsidiaries during the first quarter; $558 million from CNA, which includes the $0.30 regular quarterly dividend and the $2 special dividend; and $13 million from Boardwalk. We repurchased 9.9 million shares of our common stock during the first quarter for a total of $497 million. After quarter end, we've purchased an additional 4-plus million shares for a total of $207 million. Taken together, we have repurchased over 4% of our shares outstanding since year-end 2017. I will now hand the call back to Mary.

Thank you, David. Before we begin our question-and-answer session, I'd like to reiterate that Loews is constrained from answering any questions related to the call right under the Boardwalk partnership agreement. For additional information on this topic, please refer to Loews SEC documents that will be filed later today. Now I will hand the call over to Maria to open up the call for questions. Maria, over to you.

[Operator Instructions]. Our first question comes from the line of Bob Glasspiegel of Janney.

Is there any takeaways from this Boardwalk to how we should think about the CNA and Diamond Offshore minority positions or majority positions that you have? And -- or is this just a mechanical fallout of FERC rules that is driving the process and has nothing to do with maximizing intrinsic value to Loews?

So, no, neither Diamond nor CNA have anything resembling this right that we have at Boardwalk.

I'm sorry, I was asking a different question. We're not allowed to ask about Boardwalk, so I'm just trying to flip it around a little bit. It sounds like the Boardwalk decision was driven by this MLP rule change, but I'm trying to -- was there any sort of maximizing value to Loews in the thought process that might...

Bob, I said in my comment that no decision has been made. So no decision has been made. And as for the rest of your question, I really have to let our filings speak for themselves. They run multiple pages. They are very informative and they should be able to answer all the questions you have.

No, they're very helpful. Getting fully inside your head is still not possible completely from the disclosure, but I appreciate your answer. One bookkeeping question. Your Page 4 of your slides where you say parent debt is $1.8 billion. And in Page 15 you have long-term debt of $2,361,000,000 under Corporate. What's the difference between those 2 numbers?

I believe the difference is Consolidated Container, which is in the Corporate and other segment.

Our next question comes from the line of Josh Shanker of Deutsche Bank.

So the share repurchase has been going rather aggressively recently. How do you weigh share repurchase from operational cash flow versus perhaps increasing the leverage at the company through debt issuance given where we are in the interest rate cycle?

So what I'd say is that, right now, we have no need to issue additional debt. As David said, at the end of the quarter, we have 4 point -- just about $4.9 billion of cash and investments at the holding company level. And from my perspective, that's plenty of capital to do what we want to do.

Okay. And on the hotels, can you talk about the difference in revenues and profits from a hotel that's under renovation, [indiscernible] Miami, versus coming out of renovation? What happens to the income statement of a hotel going through that transition?

Well, in the case of the Miami Beach Hotel, it wasn't closed down, but there were very, very few guests there because it was a major construction site. So we went from very, very little revenues and negative income to very strong income now that the hotel is fully back.

For example, when it was under -- occupancy is down and rate is down. And for example, group business doesn't come to a property under that level of renovation.

And so my question, I guess, comes -- how much of the profitability and revenue success at the hotel segment now is year-over-year the difference of Miami being off -- being partially off-line to being at full throttle right now?

In terms of the uptick in income, how much of it is solely attributable to Miami?

Or I mean, I know you won't get -- you can talk about it in general terms. I know you don't talk specific number per hotel, but yes, how much of the change is really Miami-related in the qualitative sense, I guess?

Yes, there was a lot going on and the hotel had, I think, just come back in the first quarter. And additionally, Miami and Florida tourism was affected by Zika last year and that hasn't been an issue this year. So I don't have the specific numbers for the hotel, but there was a significant increase in EBITDA margin that came from those hotels this year compared to last year.

It was no means the entire uplift. The uplift in income was attributable to Miami for sure, but also Orlando and other properties.

And with Loews San Francisco, that property, is that fully online? Or are there renovations to be done there?

There were some minor renovations being done, but that's it. It's fully online.

[Operator Instructions]. Our next question comes from the line of Michael Millman of Millman Research.

Could you update us on your thinking of the impact of the Tax Act now that you've had a chance to study it some more? I mean, I suppose in some ways what you talked about with Boardwalk has an impact, but outside of that, in terms of what you might want to hold or not hold or have the ability to buy or sell? And secondly, in terms of your thinking regarding the parent's portfolio?

So the Tax Act will benefit Loews. It will help us at basically all of our subsidiaries and so we should be seeing the benefits of that coming through in our income statements. In terms of the parent company and our investments, it's -- we're paying lower tax on gains and investment income, but otherwise it hasn't changed the way that we invest those funds.

I was kind of thinking more about, I think, in the past, you talked about how the tax -- or the previous tax laws restricted your ability to do some things, buying and selling some properties. And I was kind of hoping that question would be -- this question would sort of update us on your current thinking.

Yes, so my current thinking is that the reduction of the corporate tax rate from 35% to 21% will make a very -- cause there to be a significant change in corporate behavior across the economy. In terms of Loews, yes, you have a good memory. About 10 years ago, we thought that the level of the capital gains tax -- corporate capital gains tax at 35% really prevented a lot of transactions from occurring. And now that we're down to a tax rate of 21%, I think that, economy-wide, it will foster transactions to occur that otherwise might not have happened with a 35% tax.

And ladies and gentlemen, that does conclude the Q&A portion of the call. I will turn the call back over to Mary.

Thank you, Maria. As always, thank you for your continued interest. A replay will be available on our website, loews.com, in approximately two hours. Thanks for joining us today.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.