Loews Corporation
Q4 2016 Earnings Call Transcript

Published: 6 Feb 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Fourth Quarter and Year End Review Conference Call. During the presentation, all participations will be in a listen-only mode. Afterwards, we will open the call for questions. It is now my pleasure to hand the program over to Mary Skafidas, Vice President-Investor Relations.

[Mary Skafidas:]

Thank you, Lorie, and good morning, everyone. A copy of our earnings release, earnings supplement and company overview may be found on our website, loews.com. The earnings supplement is also available through the WebEx. 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 – if a shareholder would like to submit a question for consideration, please email me at [e-mail], again, it's [e-mail]. 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 receive 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, but before he does, Jim Tisch, our CEO will kick-off the call. Jim, over to you.

[James S. Tisch:]

Thank you, Mary, and good morning. I want to start by showing my thoughts on the financial markets, as a backdrop to what guided our approach to capital allocation in 2016. I've been around long enough to have lived through all sorts of markets. I've learned to respect markets, while at the same time being skeptical of conventional wisdom. I've lived through a bond bare market and a gargantuan bond bull market. I've seen bond yields above 15% and below 2%. I've seen inflationary spirals, I've seen deflationary threats, I've seen deregulation and reregulation. I've seen the S&P 500 trade as high as 30 times earnings and I've seen the S&P trade as low as 7 times earnings. With all this experience, that comes with age I might add, here is what I'm seeing in the markets today. In the credit markets, spreads on the high yield securities are approaching historically tight levels, while key credit metrics such as leverage and coverage ratios are showing signs of weakening. The leverage loan market has been overrun by such massive inflows of capital that you could probably get alone to buy a fleet of zeppelins at this point in time. With respect to rates, the 10-year treasury note is currently trading at around 2.5%, up from its recent lows, but still well below historic norms. In my view, the mood of these markets is in stark contrast with the many unknown from our current economic and political landscape, both here and abroad. For me, it's a major disconnect, and it concerns me. The optimism in the rates and credit markets is likewise reflected in the public equity and merger markets. The S&P 500 is trading at roughly 19 times earnings, 3 turns higher than the 50-year average of 2016. These valuations make me uncomfortable, especially given the unknowns in taxation, foreign trade, regulation and more. The merger market is being driven by large pools of private and corporate buyers, the wave of private capital combined with the abundance of available leverage at remarkably low rates has enabled private equity firms to pay big prices for company that haven't already been gobbled up by strategic buyers. To sum up, in my opinion, the markets are priced for perfection, and they have been that way for quite some time, complacency reign supreme. However, my experience has shown me that this state of affairs won't go on indefinitely. So why am I sharing these thoughts with you? Because I know that some of you have wondered why we brought back relatively few Loews shares in 2016 or why Loews hasn't made an acquisition. In terms of the first question, looking back over 2016 with a benefit of 2020 hindsight, I wish we had repurchased more stock in the first half of the year, when Loews shares were trading at lower prices, and when the S&P was 20% lower than recent levels. As the equity market climbed to record heights during the second half of 2016, Loews' common stock moved along with it and we became cautious. And we are more comfortable buying shares back when the market is at its lows rather than when it's hitting new highs. While we remain positive on our shares and see real potential for our subsidiaries, we also know that Loews' stock price is positively correlated to the overall equity markets. Unlike many other companies, we don't have set quotas for share purchases in a given year. We use our judgment to buyback our stock at the lowest price possible. Sometimes we look like heroes, like when we bought 9% of our stock in 2015. And there are other times, having not purchased shares may make us look like we are asleep at the switch, but I promise you, we are not. Over the span of time measured in years and decades, we're proud of our record and we feel that our share repurchases have created significant value for our shareholders. As for the second question about adding another leg to the stool, we continue to kick tires looking for the right company at the right price. One of our shareholders recently asked, if my foot is getting sore and I have to admit it is. Valuations in the merger markets have made our acquisition search difficult and frustrating. We always try to invest only when all the pieces of a transaction from valuation to potential cash flow to future industry dynamics add up to a solid idea. And while I won't comment in detail, last year, we did get pretty far down the road towards making an acquisition. In the end, however, the pieces did not all fit together the way we'd hoped they would. It's a tough market in which to be a disciplined buyer. I assure you that we remain committed to our longstanding philosophy of creating value for all shareholders through prudent capital allocation. Sometimes we accomplish this through share repurchases, sometimes by acquiring a new business, sometimes through an investment in one of our existing subsidiaries, or sometimes we choose to take the action of taking no action. Our liquidity gives us tremendous strategic and financial flexibility. We will never stop using our best judgment to balance risk and reward to build value for all our shareholders. And we are confident that despite today's market exuberance, we will find opportunities in the future that benefit us all. Now, over to our CFO, David Edelson.

[David B. Edelson:]

Thank you, Jim, and good morning, everyone. For the fourth quarter, Loews reported net income of $268 million or $0.79 per share, up meaningfully from a net loss of $201 million or $0.58 per share in last year's fourth quarter. CNA was the major contributor to our net income this quarter, accounting for just over 80% of the total. Let me start by identifying the key drivers of our quarterly year-over-year earnings improvement, after which I will briefly touch on our full year results. Pages 12 and 13 of our earnings supplement set forth the key drivers for both periods. The supplement is available via webcast and is also posted to the Loews' IR website. Our results in the fourth quarter of 2015 were depressed by two unusual items, totaling $359 million. The $177 million charge related to the unlocking of CNA's long-term care active life reserves and the $182 million rig impairment charge at Diamond. Excluding these items, CNA's contribution to our Q4 net income rose $110 million year-over-year. Four main items drove this quarterly increase, the first three of which related to CNA. First, CNA's Life & Group business, which contributed a loss of $40 million in Q4 2015, excluding the reserve charge, contributed $18 million to our net income in Q4 2016, creating a $58 million year-over-year variance. As discussed on prior calls, the unlocking of CNA's long-term care active life reserves at year end 2015 serves to favorably impact subsequent Life & Group operating results. By resetting these reserves based on management's best estimates, long-term care should on average generate breakeven results, if actual experience is in line with those estimates. Additionally, in the fourth quarter of 2016, CNA released long-term care claims reserves, which drove the positive contribution. Even without the claims reserve release, however, the Life & Group segment essentially broke even versus last year's loss. Second, net investment income generated by CNA's P&C and corporate segments accounted for $36 million of the positive year-over-year variance. Higher returns on LP investments were a big driver as was the negative impact on Q4 2015 NII of a change in accounting estimate adopted to better reflect the yield on fixed maturity securities that have call provisions. Third, CNA posted realized investment gains this year versus realized losses in last year's fourth quarter. This swing amounted to $39 million year-over-year. Realized investment results in both years stemmed mostly from normal portfolio actions and other than temporary impairments taken to maintain flexibility. And fourth, Loews parent company net investment company was up $13 million after-tax year-over-year. The increase was largely from alternative investments, offset impart by gold-related equities. The main downdraft in the quarter was Diamond Offshore, as the difficult conditions in the offshore drilling space showed no signs of abating. Diamond's contribution to our Q4 net income, excluding last year's rig impairments declined from $60 million in Q4 2015 to $36 million in Q4 2016. This $24 million negative swing was largely attributable to the 29% revenue decline at Diamond, caused by fewer rig operating and thus fewer revenue earning days, offset partially by a contract dispute settlement with a client. Both Boardwalk and Loews Hotels had strong quarters. Boardwalk experienced a 9% increase in net revenues, that translated into robust profit growth. And at Loews Hotels income was up as most properties experienced year-over-year profit growth and the effect of tax rate declined. Let me now turn to a brief review of the drivers of our full year results. For the full year, Loews reported net income of $632 million or $1.87 per share, up from $260 million or $0.72 per share in the prior year. Again, CNA was the major contributor to our full year net income. The same two unusual items that impacted the quarterly comparison also affected the full year. The long-term care reserve charge booked in Q4 2015 reduced our 2015 net income by a $177 million, and rig impairment charges of Diamond reduced our net income in 2015 by $341 million and by $267 million in 2016. Absent the long-term care reserve charge and rig impairments, our net income increased by $121 million year-over-year. As in Q4, the main positive drivers of this increase were CNA and parent company investment income, with Diamond Offshore being the main counterbalance. CNA benefited from higher earnings in its Life & Group segment, given the positive impact on 2016 earnings of the long-term care reserve unlocking at year end 2015. CNA also benefited from increases in favorable prior-year development, net investment income and realized investment gains. A modest decline in accident year underwriting income partially offset these positives. Parent company net investment income was up substantially year-over-year. Gold-related equities drove the increase with fixed income, alternatives and other equities, also contributing nicely. On the other side of the ledger, Diamond's contribution to our net income absent the impairment charges declined from 2015 to 2016. The deterioration in the offshore drilling market led to fewer working rigs, fewer revenue earning days, and a 35% year-over-year decline in contract drilling revenues. Loews continue to maintain an extremely strong and liquid balance sheet. At year-end, the parent company portfolio totaled $5 billion, broken down as follows; 62% cash and short-term investments, 12% fixed maturities, 17% limited partnership investments and 9% marketable equity securities. And as you know, we maintain a large and liquid portfolio of cash and investments for two principal reasons; to enable us to take advantage of opportunities when they present themselves and to help mitigate risk during uncertain times. During the fourth quarter, we received $74 million in dividends from our subsidiaries, $61 million from CNA and $13 million from Boardwalk. For the full year, we received total dividends of $780 million from CNA and Boardwalk, with CNA contributing $726 million of that total. Today CNA declared a $2 per share special dividend in addition to its regular $0.25 quarterly dividend. Combining the two, Loews will receive $546 million in dividends from CNA this quarter. Our share repurchase activity in the fourth quarter was modest at 456,000 shares. During all of 2016, we repurchased 3.4 million shares of Loews or about 1% of our outstanding at an average price of just under $39 per share. Year-over-year, average shares outstanding were down 2.7% in the quarter and 6.7% for the full year. I will now hand the call back to Jim.

[James S. Tisch:]

Thank you, David. Before we open up the call to questions, I want to take a moment to talk about the leadership that we have in place in each of our subsidiaries. Dino Robusto joined CNA in November of 2016 as its CEO. While we have already seen in this short period of time is his strategic thinking, his operational expertise, and his tremendous drive. He has really energized the employees, brokers and agents of CNA. Marc Edwards and team at Diamond Offshore are in a tough market that it has only gotten tougher. Marc has been doing a phenomenal job in leading Diamond through this turbulent period and certainly deserves combat pay. Stan Horton, at Boardwalk is one of the most respected CEO's in the natural gas transportation space. Under his leadership, Boardwalk has continued to strengthen its balance sheet, while strategically building out the company's transportation system and advantageously utilizing its existing assets. And last but certainly not least, Jon Tisch at Loews Hotels is a star in the hotel industry, and he's leading one of the industry's premier brands into its next phase of growth. I want to thank each of our CEOs for the many contributions they are making to Loews and to its shareholders. Now, back to Mary.

[Mary Skafidas:]

Thank you, Jim. Lorie, at this time, we'd like to open up the call for questions.

[Operator:]

The floor is now opened for questions. Your first question comes from the line of Bob Glasspiegel of Janney.

[Robert Glasspiegel:]

Good morning. Jim, you've been a longtime advocate of sort of slow growth economic scenario. And I'm wondering President Trump election happened after the last quarter conference call, does his ascendancy to the Presidency change your view of what GDP growth is and impact at all how you think about investing? I understand, you think the market's ahead of itself, expensive, et cetera, but does it change your economic outlook at all?

[James S. Tisch:]

I think it's too early to tell. Well, we've seen from some of his statements and some of the executive orders is a push towards reducing cumbersome rules and regulations. And I think that is positive. But what we're really going to have to wait to see is what happens with the major economic legislation that comes before Congress. There's only so much that a President can do and then there's a lot that Congress can do. So we've got to wait and see what happens to fiscal spending. We've got to wait and see what happens to taxation. We've got to wait and see what happens to healthcare and a whole bunch of other legislation. So I would say that I am hopeful, but I think also it's too early to tell. One number that I calculated recently is really, really extraordinary. And that is that, as you know, for the past six, seven years, we've grown at about 2% a year and we have a $20 trillion economy in the United States. The difference between growing at 2% a year and 4% a year in terms of the cumulative additional GDP from 4% versus 2% is $25 trillion. That means that if you grow at 2% rather than 4%, in 10 years, you get the equivalent of 1.25 additional years of GDP. So that's just an indication of how important and how beneficial pro-growth policies will be in the United States. I believe that for the past six or seven years, the malaise that we've seen in the U.S. psyche was due to the fact that we had anemic growth, and I think that stronger growth can make a very significant difference. Now, we'll see if the man in Office and the Republicans in the House and Senate can help create the environment where business can achieve that.

[Robert Glasspiegel:]

So that's a glimmer in daylight of hope that I haven't heard from you in a long time. But bottom-line, what you're saying is nothing to change, investments, capital management, views on valuation, investing, et cetera stay the course on what you've been doing.

[James S. Tisch:]

That's exactly right. As I said in my prepared remarks, there are a lot of unknowns at this point in time. And listen, in the markets you pay a lot for certainty, so you've got to make some bets, but I think there's also a lot of room for uncertainty here.

[Robert Glasspiegel:]

Last question, I know you give out information grudgingly, and I appreciate the disclosure on buyback and your financial disclosures, which I think have been upgraded a lot. I think I remember you saying that you did not want another leg in the energy field, previously that your energy appetite was full. Is that still where you're going? Is there any general area where you might be fishing just services, U.S. domestic versus international, what pond are you...

[James S. Tisch:]

Certainly, U.S. based, preferably with a significant portion of the business in the United States, we're looking to write an equity check of somewhere between say $500 million and $1.5 billion. We're looking either truly down and out businesses, but there aren't so many of them today that we're not already invested in. And then the other thing we're looking at is businesses that don't have to worry too much about technological disruption, businesses where hopefully there is opportunity to make additional investments within the industry to grow the business, they don't have to be in any way sexy, they don't have to be high growth, but we're looking for some level of stability.

[Robert Glasspiegel:]

That's actually a very good roadmap for me and the investment banking world to help service you. Thank you.

[James S. Tisch:]

Thank you.

[Operator:]

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

[Joshua D. Shanker:]

Yeah. Good morning, everyone.

[James S. Tisch:]

Good morning.

[Joshua D. Shanker:]

Good morning. First question, we see another special dividend from CNA. In terms of board level discussions, how important is the special dividend to the way the business is being run at the board level?

[James S. Tisch:]

The board level at CNA or the board level at Loews?

[Joshua D. Shanker:]

So I mean, there are some joint people on both boards, so there might be a relationship between those two questions.

[James S. Tisch:]

But, are you asking how important is the special dividend for CNA or how important...

[Joshua D. Shanker:]

Well, you said the largest owner of CNA is Loews...

[James S. Tisch:]

I'm aware of that.

[Joshua D. Shanker:]

And the extent to which that that informs a decision to give a special versus other capital management ideas – I think that go back about 18 months ago, you said this is a 10% dividend yielding company. Well, it's only a 10% dividend yielding company if that dividend is in perpetuity.

[James S. Tisch:]

Yeah.

[Joshua D. Shanker:]

And so, how – I'm trying to find the board leave discussions about thing, can I intellectually believe that both of these boards look at that dividend in perpetuity?

[James S. Tisch:]

So, from the Loews' board perspective, Loews is receiving the dividend. And so, our board of directors very much likes receiving that cash. From the CNA perspective, the board has determined that based on its business today, based on its capital structure, based on its credit ratings and a whole lot of other issues that it is capable of paying the special dividend and maintaining its strength. The board at CNA has determined that paying that cash out rather than holding it is in the best interest of the shareholders that at this point in time CNA doesn't have the need for that excess cash and capital. Now, can I say that that will remain the case permanently? I have no idea. It all depends upon what happens in the world over the next several years. Economically, it depends on what happens to CNA's earnings. It depends upon what happens to other opportunities that CNA may see for itself. All I know is that this year, the board was very happy to declare that dividend, and that no promises are made with respect to the special dividend for next year.

[Joshua D. Shanker:]

Okay. And now, that actually is very clarifying. Thank you. Another President Trump related question, but probably from a different angle. I look at Loews' Hotels...

[James S. Tisch:]

You know, until you said Trump, I don't think we were going to get picked up in those words or just for having a conference call to discuss the new President.

[Joshua D. Shanker:]

Well, believe me this thing will be discussed in a way that no other conference calls may ask question about the President I assume. It's about the Trump hotel chain as a competitor to the Loews' Hotel chain.

[James S. Tisch:]

Okay.

[Joshua D. Shanker:]

And as you try and grow is – from what I have read in the press that the Trump hotel chain is looking to grow right now, but it seems – so there is some complementary strategies between those two hotels in looking for properties in the market. Is that true? And does that – will it be more difficult for you to find new hotels if you have a small luxury competitor also looking to grow in the same cities you're looking to grow in?

[James S. Tisch:]

It's a really, really big world out there, and I would say that to-date, I don't know that we have ever come across or felt we were competing with the Trump hotel brand, and as we look for properties, as we develop properties, we run in for all source of competition, but the Trump brand is not one that we see often.

[Joshua D. Shanker:]

And, in terms of appetite that you have right now for new properties. If we're looking at a two year plan, how much larger should Loews Hotels be at the end of 2018 than it is at the end of 2016 do you think?

[James S. Tisch:]

Well, so there are two pieces to Loews Hotels. There is our partnership with Universal in Orlando and that partnership is experiencing very significant growth. If you look what's happened over the past 15 years, we've gone from zero rooms to 4,000 rooms, 5,000 rooms or 6,000 rooms. And in fact, 1,000 room hotel just opened up in Orlando. It's owned by that partnership, opened up in Orlando last year. And the year before that a 1,200 room or 1,800 room hotel opened up. So in Orlando, there's very significant growth. And that's driven because the demand driver is right there, it's the theme park, and whereas Disney has tens of thousands of hotel rooms. So far the number of Universal Loews rooms, which are on the Universal campus, is measured at 5,000 rooms or 6,000 rooms. So, as I said, there's room for growth in Orlando. In the rest of the country where we don't have such a large demand driver, then the growth has been and probably will continue to be slower. There we're looking to acquire or develop hotels that are either associated with the demand driver or that have economics of the individual and group business that will give us an attractive return on our investment. So they're two very different parts of the business and together they make up the whole.

[Joshua D. Shanker:]

One further question on natural gas. Does the seeming desire of some politicians to rescue the coal industry change the gas outlook?

[James S. Tisch:]

I don't think it changes it very much. When I think of natural gas and natural gas demand, the real demand driver in my mind is exports of natural gas, which in the course of the next three or four or five years will go from zero LNG to 10 billion cubic feet a day of natural gas for LNG. Combined with that, there's Mexican demand, which I think has been increasing demand from the United States. Exports to Mexico have increased about 1 billion cubic feet a year for the past several years and it looks like that's set to continue increasing. That's all on a base of U.S. production of about 71 billion cubic feet per day. So that it's easy to see – with or without any changes in coal electricity production, it's easy to see that in five years or six years from now, instead of U.S. production being 71 billion cubic feet a day, it could be 80-plus billion cubic feet per day. And the thing I know about that 80 billion cubic feet of natural gas, it's all going to have to move in a natural gas pipeline. And Boardwalk is working very hard in making its strategic plans so that it can capture as much of that natural gas as possible.

[Joshua D. Shanker:]

Okay. That's a very thorough analysis of it. Thank you very much and good luck.

[James S. Tisch:]

Thank you.

[Operator:]

Thank you. I'll now return the call to Mary Skafidas.

[Mary Skafidas:]

Thank you, Lorie. We do have a question from one of our shareholders. The question is, it appears that there's considerable room for improvement when it comes to Loews' corporate overhead. The drag on profitability is in excess of $100 million, since most of the assets are publicly traded and have their own overhead, it can be argued that these expenses relate largely to oversight of the non-publicly traded assets. Even if you want to include the subsidiaries, the expense load is significant. Please provide us with some color regarding why the corporate expense level is high and what you are doing to lower this expense base. And again just to remind our callers, we will not be identifying questioners as per their request.

[James S. Tisch:]

So look we focus a lot on our corporate expenses. I don't think they're exorbitant by any stretch of the imagination. $20 million of the expense relates to RSUs, restricted stock units. We also have the expense of the executives which is fully disclosed in the proxy statement. And again there, I think that if you look at comparable businesses, you'll see that personnel expense, I would think is a bargain. We have an investment department of 30-plus professionals that manages a $50 billion of assets. We have interest on debt. I can tell you that that from my perspective, that expenses are not out of line. I have an expression that goes, sounds good when you say it fast. And when you say it fast, yeah all Loews does is, collect dividends from its subsidiaries and watch over them a bit. But in fact, there is an awful a lot more that's going on. There is a compliance. There is investments. There is monitoring. There is the proverbial, kicking those tires of looking for new businesses. And I'd say before you have a chance to look up, it adds up to a relatively – or what may seem like a large amount of money, but those expenses do get very close scrutiny and we're constantly looking to minimize them.

[Mary Skafidas:]

Thank you, Jim.

[James S. Tisch:]

And the problem with asking a question by email is you don't get to follow-up.

[Mary Skafidas:]

Thank you, Jim. Lorie, that's all the questions we have at this time. We'd like to thank everyone for their continued interest. A replay of this call will be available in about four hours. I'd like to hand the call over back to you to close it.

[Operator:]

Thank you. That does conclude today's fourth quarter and year-end review conference call. You may now disconnect your lines and have a wonderful day.