Loews Corp (L) — Q1 2018 Earnings Call Transcript

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, and before I get into specifics about our earnings, I want to mention something that listeners of Boardwalk's call this morning heard. The Federal Energy Regulatory Commission recently announced a policy change that removes an MLP's ability to include an income tax allowance when determining the maximum applicable rates that can be charged to customers on its interstate pipelines. This policy change, along with recent tax reform legislation, has prompted a review on whether Boardwalk should stay a publicly traded master limited partnership. It seems that the FERC's action would significantly reduce the maximum rates Boardwalk could charge in the future, which might allow Loews to exercise a call right under the terms of the Boardwalk partnership agreement. This agreement permits Loews to purchase Boardwalk's outstanding LP units at a formula price based on the average daily closing prices of Boardwalk's common units for a 180-day period prior to exercising our purchase right. This purchase right is detailed in our 10-Q and Boardwalk's 10-Q, as well as its previous SEC filings. It is also addressed in Loews' amended Form 13D, which will be filed later today. We at Loews are looking into all our options regarding these developments. While we expect to make a decision this year, no decisions have been made yet. As you can understand, we need to let our documents convey the information since we're unable to answer questions on this topic. Fortunately, we have other subsidiaries and capital allocation actions to discuss. Specifically, the earnings from CNA and Loews Hotels have been impressive, so I would like to share some insights about each of these companies. CNA had another outstanding quarter, achieving a combined ratio of 93.1%, its best quarterly underlying combined ratio in over a decade. While the recent tax cuts contributed to its performance, CNA's significant earnings boost primarily stemmed from strong underwriting results. For the quarter, CNA reported a pretax underwriting gain of $113 million compared to $43 million in the same quarter last year, and adjusted net written premium also grew by 8%. The company's growth came from rate adjustments, changes in exposure, and a robust increase in new business as CNA continues to enhance its distribution network. Although pleased with these strong results, CNA remains committed to improving its underwriting performance, strengthening distributor relationships, and managing its expense ratio carefully. Both Loews and CNA believe the company is well-positioned for responsible growth. Speaking of responsible growth, Loews Hotels also had an excellent quarter and a strong start to the year. The tourism market in Florida has been particularly strong, benefiting our newly renovated Loews Miami Beach Hotel. In Orlando, our joint venture properties with Universal Studios have continued to perform exceptionally well. Loews Hotels' adjusted EBITDA rose by 30% compared to last year's first quarter, with this growth not reliant solely on hotel expansion but also on the strong performance of existing properties. Same-store RevPAR increased 8% from $188 in last year's first quarter to $203 in this year's first quarter. Loews Hotels focuses on profitable, distinguished hotels in the upper upscale market catering to group business. The company seeks properties that feature partners with built-in demand generators, as seen in our successful partnership with Universal Orlando. The company’s flexibility, agile operations, and readiness to invest in its projects represent competitive advantages. We are confident in this strategy and in Loews Hotels' leadership, trusting in the company's ability to create long-term value for shareholders. Before handing over to our CFO, David Edelson, I want to address share repurchases. In the past seven months, Loews has repurchased roughly 18.6 million shares, about 5.5% of our outstanding shares, at a total expenditure of nearly $1 billion. These buybacks demonstrate our confidence in our underlying businesses. It’s fair to say that share repurchases are a key capital allocation strategy for generating long-term value for our shareholders. David, the call is yours.

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 three 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 four 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 two points from last year's first quarter and one 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 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, with 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 four-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.

Are there any insights from the Boardwalk that could inform how we should view the minority or majority positions in CNA and Diamond Offshore? Or is this just a consequence of FERC regulations that doesn't relate to optimizing the intrinsic value for 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 inquire about Boardwalk, so I'm attempting to approach it from a different angle. It seems that the decision regarding Boardwalk was influenced by the MLP rule change, but I want to know if there was any consideration of maximizing value for Loews in that decision-making process.

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 two numbers?

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

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 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.

Can you discuss the difference in revenues and profits for a hotel that is undergoing renovation in Miami compared to one that has just completed renovations? How does this transition affect the hotel's income statement?

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 occupancy is down and rates are down, group business does not come to a property undergoing that level of renovation.

My question is how much of the profitability and revenue success in the hotel segment this year is due to the difference from last year, with Miami transitioning from being partially offline to now operating at full capacity?

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

I understand you can't provide specific numbers for each hotel, but could you share in general terms how much of the change is related to Miami qualitatively?

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 by 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.

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?

The Tax Act will benefit Loews and assist all of our subsidiaries, leading to positive impacts in our income statements. For the parent company and our investments, we are experiencing lower taxes on gains and investment income, but it has not altered our investment strategy.

I was thinking about how the previous tax laws limited your ability to buy and sell properties. I was hoping to get an update on your current thoughts regarding this.

Yes, my current perspective is that the reduction of the corporate tax rate from 35% to 21% will lead to a significant change in corporate behavior across the economy. Regarding Loews, you remember correctly. About 10 years ago, we believed that the corporate capital gains tax rate of 35% hindered many transactions. Now that the tax rate has been reduced to 21%, I believe this will encourage transactions that may not have occurred with the higher tax rate.

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.