Loews Corporation (L) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Loews Corporation Q4 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to Mary Skafidas to begin.

Thank you, Laurie, and good morning, everyone. Welcome to Loews Corporation’s fourth quarter and year-end earnings 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, which will include questions from our shareholders. 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 discuss 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 and the year. But before he does, Jim Tisch, our CEO, will kick off the call. Jim, over to you.

Thank you, Mary, and good morning. Loews had a disappointing fourth quarter, results negatively affected by higher than expected catastrophe losses at CNA and severe declines in the stock market at the end of 2018, impacting both Loews’ and CNA’s investment portfolios. Specifically with regard to CNA, let’s put these equity related losses in context. While the stock market declined 14% in the fourth quarter, CNA’s limited partnership and common equity portfolios were down 5.7% or about a $138 million, counterbalancing CNA’s fourth quarter investment performance, underlying operations for the full year were strong. In 2018, net written premiums grew by 4% and rate increased by 2.6%. CNA’s underlying combined ratio improved for the second straight year and while CNA’s loss ratio ticked up slightly in 2018, it’s essentially on par with its top quartile peers. Additionally, CNA has reduced its expense ratio by 2 points over the past two years, while still making necessary investments in technology, analytics and talents. Earlier today, in light of the full year 2018 results and its strong balance sheet and the CNA Board’s positive outlooks, CNA declared a $0.35 quarterly dividend as well as a $2 special dividend. These dividend payments will result in Loews receiving $570 million in dividends from CNA in March of this year. Over the last five years, including the upcoming March dividend payment, Loews will have received almost $4 billion in dividends from CNA. Moving on to Loews Hotels, I’m happy to report that the company had a stellar year. In 2018, Loews Hotels adjusted EBITDA grew by 15% and has nearly doubled since 2014. This tremendous progress is due to operational improvements and the Company’s ongoing commitment to grow in two focus areas. First, Loews Hotels is concentrating on highly profitable distinguished hotels that cater to group business. These hotels are better able to withstand disruptors such as the sharing economy. These hotels typically have between 300 and 800 rooms along with significant meeting space, properties such as our hotels in Chicago and Miami Beach, as well as the soon to be opened Loews Kansas City hotel. The other area of focus for Loews Hotels continues to be developing hotel properties that have unique built-in demand generators. More than 20 years ago, Loews Hotels CEO, John Tisch set this strategy in motion with the Company’s initial 50-50 partnership with NBCUniversal in developing hotels on their Orlando theme park campus, a partnership that has resulted in a highly profitable long-term joint venture for Loews Hotels and Universal. Starting with the Loews Portofino Bay Hotel in 1999 with 750 rooms, the partnership now has six properties on the Orlando campus with 6,200 rooms. There are another 2,800 rooms under construction, the first 750 of which are set to open in June of this year. These hotels in Orlando dramatically outperformed their competitive set in average daily rate occupancy rate and therefore RevPAR. We hope to continue our success in managing themed concepts and one-of-a-kind destinations with our Live! By Loews Hotels. The Live! By Loews Hotel in Arlington, Texas being developed in partnership with The Cordish Companies and the Texas Rangers is set to open this summer at the base of Globe Life Park and next to AT&T Stadium. In early 2020, the Live! By Loews in St. Louis will open. We are partnering with The Cordish Companies on this hotel as well along with the St. Louis Cardinals. The property will be located next to Busch Stadium. Before turning the call over to David, I want to discuss share repurchases, which I believe have been and will continue to be a significant means of creating value for Loews shareholders. In 2018, we repurchased a little over 20 million shares of Loews common stock for just over $1 billion, which was equivalent of about 6% of our outstanding shares. We don’t have an automatic share repurchase program, because we’re sensitive to the price at which we buy back our shares. We repurchased Loews stock only when it’s trading below our view of its true, intrinsic value. We believe this capital allocation tools is one of the best ways to create value for all Loews shareholders over the intermediate to long-term. And on that note, David over to you.

Thank you, Jim, and good morning. Today we reported fourth quarter net loss of $165 million or $0.53 per share, as compared to net income of $481 million or $1.43 per share in last year’s fourth quarter. For the full year, we reported net income of $636 million or $1.99 per share, down from $1.16 billion or $3.45 per share in 2017. As a reminder, included in last year’s fourth quarter and full year net income was a $200 million net benefit related to the passage of the Tax Cuts and Jobs Act. We have included a table in our earnings supplement laying out the impact of this net benefit by reporting segment. In my ensuing remarks, I will speak to results before the Q4 2017 impact of the Tax Act. Note that the year-over-year comparisons were also affected by the ongoing impact of the lower U.S. corporate tax rate. Let me start by discussing the key drivers of our fourth quarter loss and then turn my attention to our full year results. As Jim mentioned, the two main drags on our earnings in Q4 were investment results at both CNA and the parent company caused by difficult equity market conditions and catastrophe losses at CNA caused primarily by Hurricane Michael and the California wildfires. At CNA, the Company’s limited partnership and common stock investments lost ground in the fourth quarter, yielding a negative return versus positive results in Q4 2017. This swing accounted for $126 million of the decline in CNA’s contribution to our net income. As Jim highlighted, negative returns in a quarter when the S&P 500 was down 14% are no surprise. Additionally at CNA, the company had realized investment losses in the fourth quarter versus realized gains last year. This change accounted for another $73 million of the decline in CNA’s net income contribution. The Loews parent company portfolio of limited partnership and common stock investments also lost ground in Q4, accounting for $82 million of the decline in after-tax investment income. A lower level of invested assets in 2018 also contributed to the year-over-year decline. As for catastrophe losses, CNA booked $146 million of pre-tax losses in the fourth quarter, as compared to just $38 million in last year’s fourth quarter. CNA is in the business of assuming risk, so it fully expects to absorb catastrophe losses in the quarter with such significant catastrophe activity. The higher level of catastrophe losses at CNA accounted for $81 million of the year-over-year decline in CNA’s contribution to our net income. To summarize, the factors cited above in total accounted for over 80% of the year-over-year decline in our quarterly net income, excluding the one-time impact of the Tax Act. A couple more observations on the quarter before turning to the full year. Average shares outstanding declined 7% from last year’s fourth quarter, reflecting our share repurchase activity and the reduction in the corporate tax rate, actually exaggerated the size of the year-to-year quarterly variance in our after-tax results given the pre-tax losses at CNA, Diamond and the parent company. Now let me review our full year results. As I mentioned earlier, our net income of $636 million in 2018 was lower than the $964 million we earned in 2017, which excludes the $200 million one-time impact of the Tax Act. CNA’s core underwriting results were strong in 2018, as it posted a consistent underlying combined ratio of 95.4% and net written premium growth of 4%. Catastrophe losses were actually down on an annual basis, but offsetting this, the company posted a lesser amount of favorable prior year development. All in all, at CNA, pre-tax underwriting income was up modestly. The main drivers therefore, of the year-to-year decline in CNA’s contribution to our net income were net realized investment losses, lower P&C net investment income and increased charges related to the loss portfolio transfer. Let me touch on [indiscernible] CNA swung from realized gains in 2017 to losses in 2018. This swing reduced our net income by $112 million relative to last year. P&C investment income for 2018 was hurt by a $42 million pre-tax loss generated by limited partnership and common stock investments, as compared to $207 million of pre-tax gains in the prior year. This change reduced our net income by $150 million versus last year. Finally CNA’s Corporate segment contributed to the year-to-year decline, largely due to prior year development on the loss portfolio transfer with National Indemnity. As a reminder, in 2010, CNA sees a substantially all of its legacy asbestos and environmental liabilities to National Indemnity, through a loss portfolio transfer. Activity under the loss portfolio transfer is accounted for using retroactive reinsurance accounting, which is described in all its glory in our 10-K. CNA recorded adverse net prior year reserve development under the loss portfolio transfer in 2018, which reduced Loews’ year-over-year net income by $34 million. Turning to Diamond. Diamond Offshore reported a pre-tax loss of $226 million as compared to a loss of $22 million in 2017. Stripping out non-recurring items, such as asset impairments in both years and a loss on the early extinguishment of debt in 2017, the year-to-year pre-tax comparison is a pre-tax loss of $176 million in 2018, against pre-tax income of $118 million in 2017. Diamond continued to experience a fall-off in revenues in 2018, given the difficult market conditions and the effects of contract renegotiations. Contract drilling revenues fell 27% at both revenue earning days and average daily revenue declined. Operating expenses excluding non-recurring items declined only 6%, resulting in a swing from pre-tax operating income in 2017 to an operating loss in 2018. As we’ve discussed, Diamond is positioning itself for an eventual upturn. In 2019, Diamond will be investing approximately $350 million in its fleet to ensure its race continue to be considered top tier by customers. Diamond ended the year with over $450 million in cash and equivalents. The company has over $1.2 billion of revolver capacity until 2020 and $950 million of capacity into 2023. Boardwalk experienced a 32% decline in pre-tax income in 2018, which excludes the loss on the sale of a processing plant in 2017. Net revenues declined 5%, as transportation revenues from growth projects and higher system utilization were more than offset by unfavorable parking loan and storage revenues, as well as the net negative impact of transportation contract expirations, renewals and restructurings. Moreover, expenses were up given higher depreciation expense from new growth projects, resulting in pre-tax margins declining from 27% to 20%. Despite the decline in pre-tax income, Boardwalk’s contribution to our net income, excluding the loss on sale and one-time Tax Act impacts rose from $101 million in 2017 to $135 million in 2018. The increased net income contribution relates to our purchase in July of 2018 of the outstanding publicly held common units of Boardwalk. For the second half of the year, we included 100% of Boardwalk’s earnings in our net income, versus just 50% – 51% during all of 2017 and the first half of 2018. As Jim mentioned, Loews Hotels had a strong year, generating pre-tax income of $73 million, up from $65 million in 2017. Excluding all non-recurring items such as impairments, disposition gains and losses and pre-opening expenses, pre-tax income increased from $54 million in 2017 to $72 million in 2018. The extent of Loews Hotels non-recurring items primarily relates to ongoing portfolio management along with the development of new properties, all consistent with the company’s strategic focus on group meetings hotels and immersive destinations. Loews Hotels adjusted EBITDA, which is defined and disclosed in our quarterly earnings supplement, rose 15% in 2018 to $228 million. Numerous properties, including the six hotels at the Universal Orlando Resort, the Loews Miami Beach and the Loews Philadelphia to name just a few performed well during the year. Parent company net investment income was down meaningfully in 2018. The small loss we posted for the year, stemmed from disappointing returns on our holdings of equity securities and LPs, again, largely attributable to the equity market drop in Q4. Also, our portfolio of cash and investments averaged $3.9 billion in 2018, down from an average of over $5 billion in 2017. Share repurchase activity and the purchase of the Boardwalk units, caused the decrease. We continue to maintain an extremely strong and liquid balance sheet. At year-end, the parent company portfolio totaled $3.1 billion with 62% in cash and equivalents, 33% in LPs and marketable equity securities and the remaining 5% in fixed maturities. During the fourth quarter, we received $110 million in dividends from our subsidiaries. $85 million from CNA and $25 million from Boardwalk. For the full year, we received total dividends of $878 million from CNA and Boardwalk, with CNA contributing $801 million of that amount. Today CNA declared a $2 per share special dividend in addition to its regular $0.35 quarterly dividend. Combining the two, Loews will receive $570 million in dividends from CNA this quarter. We repurchased 2.9 million shares in the fourth quarter for a $135 million and 20.3 million shares during all of 2018 for just over $1 billion. Since year-end, we have repurchased an additional 0.9 million shares at an average price of about $46.50. I will now hand the call back to Mary.

Thank you, David. We’ll now go to questions from shareholders.

Our first question is, CNA’s earnings this quarter are pretty ugly. Can you add to your prepared remarks and comment further on their results?

Sure, Mary. First of all, earnings were very ugly, but it was driven by two main factors, one was catastrophe losses and in that department, our catastrophe losses for the quarter were $146 million versus $38 million in the prior year. I should add that the $146 million of catastrophe losses that we had in the quarter was in no way disproportionate to the size of CNA. On a combined ratio basis, that was 8.6 points versus 2.3 points in the prior year for the quarter. Aside from catastrophe losses, the other thing that hurt CNA’s earnings significantly was the investment results, and specifically the results from our LP portfolio and common stocks, which was a $138 million loss in the quarter versus the fourth quarter of the prior year, which was a $50 million gain. And in my opinion, those two temporary factors are overshadowing a lot of the good things that are going on at CNA. Net written premiums for the year last year were up 4%, gross written premiums were up 7% and the difference between the 7% and the 4% is the additional reinsurance that CNA is purchasing. The underlying combined ratio was 95.4% about the same as last year. CNA paid a dividend – announced the dividend – announced the quarterly – regular quarterly dividend as well as the $2 special dividend, in my opinion, reflecting the Board’s confidence in the results of CNA and the way that the company is operating and proceeding. CNA continues to achieve significant rate increases across a number of lines. So from my perspective, things at CNA, notwithstanding the relatively ugly quarter, are really going pretty well.

Thank you, Jim for that additional clarification. Our next question is on Loews Hotels. Loews Hotels has a number of development projects under way. Can you expand on the Loews Hotels strategy?

Sure. What we’ve seen is that there is a generational shift in spending, where the millennial generation is moving more toward experiences rather than things. We see this play out especially in Orlando, with our joint venture with Universal theme parks. We have six hotels there and we’re building a seventh hotel now that has 2,800 rooms. On the Comcast earnings call, Brian Roberts reported something that we already knew that the occupancy ratio of our Orlando hotels is over 90%. And as I mentioned in my remarks, as a result of the occupancy ratio and the higher than market average daily rate, we’re able to achieve extraordinary RevPAR numbers in that market. So what we’ve done is we’ve taken the learnings that we have from Orlando and we’ve applied it to the rest of our business. First, we are striving to be close to demand generators, whether it’s a sports arena, a stadium or a convention center. Secondly, we are working hard to leverage our unique position in the hotel business. We own our own hotels, we’re not a manager of hotels. And therefore, we are willing to put up money to develop hotel properties and as a result, we find that partners are very willing to work with us. And those partners are financial partners as well as municipal partners. And as a result, we’re able – we find to procure for ourselves very attractive development opportunities, which we’re now moving forward with in St. Louis, in Arlington and Kansas City. When investing holding company cash, we’re very, very cognizant of the need to earn good rates of return, and we believe that the hotels that we’re investing in are doing just that. We have a team that’s continuing to look for additional opportunities, and I suspect that in the coming years, we’ll see opportunities that is attractive to us as what we’re doing in these three new markets that we’re developing right now.

Great. Thank you, Jim. Next question is on Diamond Offshore. How do you feel about the offshore drilling market is recovering on the horizon? Why hasn’t Diamond taken part in industry consolidation?

So, one of the nice things about having been in the business for over 40 years is that you’ve seen a lot of things. And I like to think that with respect to offshore drilling, I’ve seen this movie before in the supertanker business. In the supertanker business, there was a glut of supertankers in the early ’80s. Through scrapping, deterioration of the rigs and a slight increase in demand, we saw a whipsaw recovery in the mid to late 1980s. And I see for offshore drilling a similar thing that’s happening now. First of all, all the offshore drilling companies are managing to one thing and one thing only at this point in time. And that is to cash. Cash is the thing that they’re not earning that they desperately need in order to stay in business. So for the rigs that are not operating, it’s a big lift for them to spend cash on maintaining those rigs with no business opportunities in sight. And what happens, I’ve seen very clearly from the tanker industry and also from offshore drilling is that when ships, rigs, drillships are left on the water and they are not operating, then they can deteriorate very rapidly. Combined with that right now, oil prices are relatively low at about $52 a barrel for WTI, and about $61 a barrel for Brent oil. My belief is that with an increase in oil prices, which I see happening, I think we could see over the coming years, a pretty significant increase in demand and that demand increase will first go to rigs that are already operating and then, later on to rigs that are stacked. Our estimation is that the cost to recommission a rig, that’s been stacked for a number of years can easily be in excess of $100 million per rig and that cash today just doesn’t exist in the industry to recommission more than a few rigs. So I think that the recommissioning of rigs will be slow, especially in view of the fact that our customers tend to like to use rigs that have already been working, rather than rigs that are being recommissioned. So I think it’s going to be a long time for rigs to come back to meet the demand that I foresee going forward. In terms of Diamond. Diamond has a relatively long runway within the industry. Diamond had at the end of the quarter about $450 million in cash and it has an additional borrowing capacity of about $1 billion. So it’s got close to $1.5 billion of liquidity that really is the runway for Diamond, which is substantially in excess of a lot of our other competitors. In terms of consolidation, we’ve looked for opportunities, but what I would say is the – we have not been able to find any transactions that would be accretive to value for all Diamond shareholders. So we continue to look for opportunities. I would say that the spread between bid and ask for drilling assets is very wide, and the only transactions that really seem to get done these days are transactions where somebody gives their shares in return for buying other shares. But we continue to scour the earth to have discussions, but to date, there’s not much to report.

Okay. Thank you, Jim. Laurie, we’d like to turn the call over to you to open up the call for additional questions.

[Operator Instructions] Our first question comes from the line of Josh Shanker of Deutsche Bank.

Yes. Good morning, everybody.

Good morning.

Hi.

Good morning. Jim, I think I have asked you this question before, but it takes, I guess, a new sort of meaning. CNA says they’re going to be getting out of a bunch of hedge funds that they put money into, and I kind of feel you may disagree that a good part of CNA’s money is your money. What is the investment philosophy around risk assets that make sense for Loews? And in terms of like being in those hedge funds, not in those hedge funds, I know you have also a pool – a small pool of money at Loews you run with risk on it. What is the overriding way that you think about trying to allocate portfolios to risk assets?

Sure. So first, let me address the issue of results. At Loews, in the first five weeks, five or six weeks of this year, we have earned back all that we lost in the fourth quarter of last year. So we reported a loss of about $70 million in our portfolio in the fourth quarter of last year, and the portfolio was up by more than that at Loews. At CNA, they’ve recovered over 60% of their losses. But let me take a minute and talk about the different types of things that people can be invested in. You can invest in stocks, you can invest in hedge funds, you can invest in private equity. And one of the things that’s – that’s struck me in this past – in the past few months is that in the fourth quarter, the S&P 500 was down 14%, our hedge funds were down about 6%, and generally, across the board private equity firms have reported no loss at all. And I actually find that quite incredulous. It’s what I would call a self-graded exam. There was a temporary drop in the market and the private equity firms didn’t report a loss. It’s inconceivable to me that stocks could be down 14% and that there is no loss in private equity. So CNA is in some ways bearing the pain of being mark-to-market, whereas in private equity, there is more of what I would call a mark to moving average, but it’s just something that we have to deal with. In terms of the strategy, CNA’s had a very good run with hedge funds as has Loews. We’re starting to de-emphasize them because we think that, number one, there’s an awful lot of capital that’s invested in them. We think the returns has been competed down. Additionally, in today’s – over the past 10 years, you were able to earn zero on your cash balances. Today you can easily earn 2.5% to 3%. So simply investing in cash is not such a terrible alternative to hedge funds. We’re looking at risk assets that go beyond hedge funds and private equity. We’re looking at certain debt instruments. We’re looking at certain, what I would call, nontraditional private equity investments. We’re just trying to figure out over the coming year what will be the best vehicles for risk assets for both CNA and for Loews.

And, Josh, let me just add that if you look at the quarter, obviously, it looks pretty ugly on the year. This portfolio was down just under 2%. The prior year it made 9% returns. And the year before that, it made 6% returns. So clearly, just focusing in solely on the fourth quarter it’s an aberration.

Okay. Thank you. And if I can get one more in. Changing gears, can we talk about acquisition pipeline and how it looks for Consolidated Container?

There’s a – they made, I think three acquisition last year, and each one relatively small. And there are a number of other opportunities that’s in their pipeline and they’re continuing to kick tires. What we found is that our thesis is proving out that we’re able to acquire smaller manufacturers of containers at say, 8 or 9 times EBITDA, and as a result, own it, because of our economies of scale at 6 and 7 times EBITDA. So we’re very pleased with the acquisition market, and we’re also pleased with our overall investment in CCC.

Would all acquisitions that CCC does be self-funded?

To date, they have been, and based on the set of opportunities that we’re looking at, we continue to believe that they will be self-funding.

Okay. Thank you very much.

Thank you.

Thank you. That does conclude the Q&A portion of the conference. I’ll now return the call to Mary Skafidas for any closing comments.

Thank you, Laurie. As always, thank you, everyone for your continued interest. A replay of this call will be available on our website, loews.com in approximately two hours. That concludes Loews call for today.

Thank you for participating in the Loews Corporation Q4 2018 earnings conference call. You may now disconnect.