洛茲集團 (L) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Loews fourth-quarter year-end conference call.

(Operator Instructions)

It is now my pleasure to hand our program over to Mary Skafidas, Vice President of investor and Media Relations. Please go ahead.

Thank you, Kristin. Good morning everyone and welcome to Loews Corporation's fourth-quarter and year-end 2015 earnings conference call.

A copy of our earnings release, earnings snapshot 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 projections made in any forward-looking statements.

Forward-looking statements reflect circumstances at the time they are made and 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 for a reconciliation to the most comparable GAAP measures.

I will now turn the call over to Loews' Chief Executive Officer Jim Tisch.

Thank you, Mary, and good morning everyone. Last quarter I spent a great deal of time talking about the decline in the share prices of each of our publicly traded subsidiaries, starting my remarks by referring to these declines as the proverbial elephant in the room. Well, unfortunately that elephant has not gone away and chaos continues to reign over the energy markets.

Case in point, on November 2, the day of our last earnings call, oil was trading just below $47 a barrel. Although we didn't like that number then it looks pretty good compared to today since oil prices have continued to plummet.

On January 20, oil dropped below $27 a barrel, far below its replacement cost. If these pricing levels persist over the next two years we'll be in a drastically undersupplied oil market.

Natural gas market is under the same dark cloud as the entire energy industry is being affected by this precipitous downturn which has led to a steep decline in capital spending by exploration and production companies. Oil price declines have largely been driven by the exceptional strength of supply, not by the weakness of demand. In fact, demand for oil is still growing and remains quite healthy.

If there is any bright spot on which to focus, it's that the lack of drilling activity today will only help speed up the recovery in the oil market tomorrow. As they say in the oil business, the best cure for low prices is low prices.

While we wait for a market rebalancing in oil prices, the reality for offshore drilling companies is stark. The drop in oil prices is causing oil companies to slash exploration and development budgets and reduce or cancel drilling contracts, decimating dayrates and idling rigs. The market for rigs of all types, including new ultra-deepwater drillships, is currently and will for the immediate future be drastically oversupplied.

And although Diamond Offshore's conservative financial management has allowed it to enter this downturn on solid footing, it's not immune from these challenging industry dynamics. Diamond has had to make some tough decisions regarding its own fleet, writing down nine rigs in the fourth quarter. David Edelson will provide more details later on in the call.

I did want to point out that the Ocean Confidence represents about 65% of the write-down. The rig is currently stacked but we believe it will be a viable rig once the offshore drilling market comes back. And I believe that that market will come back, it's just a question of when.

By some estimates offshore oil production supplies up to 30% of the world's oil, a significant percentage that cannot be replaced by conventional onshore drilling or shale production. Despite this severe downturn, Diamond continues to work tirelessly to navigate these troubled waters having made the difficult decision to cut its dividend. This action will bolster Diamond's already strong balance sheet and allow the company to capitalize on possible opportunities to acquire rig assets in the future at a substantial discount to shipyard prices.

Turning to the natural gas markets and Boardwalk, over the last few years despite low prices natural gas production has grown significantly. This growth was supported by two key dynamics.

The first was the increase in oil production from shale plays. A majority of oil wells in these plays also yield significant amounts of natural gas as a byproduct of oil production. This associated gas accounted for nearly half of all the growth in gas production in the country.

The second dynamic was the discovery and rapid development of the Marcellus Shale. Well economics in the Marcellus were heavily subsidized by the production of natural gas liquids which are sold at prices linked to oil.

As a result, about a year ago companies could break even when drilling a Marcellus well even with natural gas priced below $2 per Mcf. As a result, the market was flooded with lots of cheap gas.

Today these two dynamics have changed dramatically. As oil prices have collapsed oil production from shale plays has started to decline with associated gas production following suit. Natural gas production growth is stalling everywhere as producers cut drilling activity in response to the steep drop in NGL and natural gas prices.

Midstream companies have been particularly affected by the pall hanging over the E&P industry. The share price of some of these companies has dropped by over 75% in the past eight months as the effects of reduced drilling and weakened financials have rippled through the industry.

Two years ago Boardwalk made the painful but important decision to reduce its distribution, a decision that many of its competitors are making now. In retrospect this was a wise choice as Boardwalk has been using its internally generated cash flow to fund organic growth projects and position the company for the future.

We believe that the new projects that Boardwalk has lined up are good investments and we're hopeful that they will provide Boardwalk with an unlevered double-digit rate of return on assets as they are completed over the next one to three years. Although Boardwalk continues to face market headwinds the company remains financially sound and continues to focus on future growth and capital generation for its shareholders.

CNA is a bright spot in Loews' portfolio of businesses right now, even though the numbers this quarter may obscure that light. There were lots of moving parts in CNA's fourth-quarter results, most significantly a reserve charge in its long-term care business. The silver lining of the LTC charge is that it should mitigate future losses in CNA's long-term care book of business.

Despite the noise in the results I want to stress that CNA's underlying businesses are solid and it continues to maintain its strong capital position. CNA's commercial lines business made steady progress with a full-year combined ratio improvement of almost 8 points due to a combination of favorable loss development and underlying loss ratio improvement.

CNA's specialty lines continue to perform well although market conditions in certain areas are more challenged. CNA's balance sheet remains stellar, ending the year with statutory capital of over $10.7 billion and GAAP shareholders' equity of almost $11.8 billion. As a result of its robust capital position and stable P&C earnings, CNA announced today a $2 per share special dividend which is in addition to its regular $0.25 quarterly dividend.

As a point of reference last year's CNA also paid a $2 per share special dividend. As a final note, in November of 2015 CNA announced that Dino Robusto will become it's next CEO. Dino will join CNA towards the end of 2016 when Tom Motamed retires.

The CNA that Dino will inherit is poised for continued improvement and further value creation. At a later date I will spend more time talking about Tom's many accomplishments at the company. But for now we're looking forward to another great year at CNA with him at the helm.

Now let's take a look at Loews' cash position. We ended the year with $4.3 billion in cash and investments, having spent $1.3 billion during the year buying back Loews stock. In fact, we repurchased more of our own shares in 2015 than any single year since 1993.

CNA's special dividend payment to Loews when received in March will increase our cash and investments by about $500 million. Assuming the regular dividend is paid each quarter CNA will pay Loews dividend totaling about $730 million in 2016.

Most of our most effective lever for value creation in 2015 was repurchasing our own shares. Our other two levers are making opportune investments at the holding company level and investing in our subsidiaries. Over the years each of these levers has contributed greatly to creating long-term value for our shareholders.

The foundation for all of Loews' long-term value creation is, however, our commitment to maintaining our financial strength and stability. Our prudent capital management will ensure that the financial house we have built out of bricks can continue to withstand whatever economic hufffing and puffing may come our way.

Now I would like to turn the call over to our CFO, David Edelson.

Thank you, Jim, and good morning. Loews reported a fourth-quarter net loss of $201 million, or $0.58 per share. Both CNA Financial and Diamond Offshore posted quarterly losses driven by unusual items.

Excluding unusual items, which I will describe more fully, Loews' income from continuing operations declined from $264 million in Q4 2014 to $183 million in Q4 2015. For the full year Loews had income from continuing operations of $260 million, or $0.72 per share, compared to $962 million, or $2.52 per share, for the prior year. Unusual items and lower operating results at CNA and Diamond were the main drivers of the year-over-year decline.

Excluding unusual items, our income from continuing operations declined from $1.1 billion in 2014 to $858 million in 2015.

I'll start by reviewing our fourth-quarter results and then return to the full year. CNA's earnings in Q4 2015 were reduced by a reserve charge as Jim mentioned related to its long-term care business as well as by a change in accounting estimates adopted to better reflect the yield on fixed maturity securities that have call provisions. The long-term care reserve charge and the accounting change reduced Loews' income from continuing operations by $177 million and $22 million respectively.

Absent these two unusual items in 2015, and a nonrecurring pension settlement charge in 2014, CNA's fourth-quarter net operating income decreased by 35% versus Q4, 2014. Several factors contributed to the fourth-quarter year-over-year decline in net operating income at CNA excluding these unusual items: lower LP income, higher catastrophe losses, less favorable prior-year development and lower non-cat accident year underwriting income, driven by higher loss ratios in specialty and international and an expense ratio that was about 2 points above the Company's run rate. Partially offsetting these negative factors was the continued market improvement in commercial's loss ratio.

Let me take a moment to discuss the long-term care reserve charge. CNA concluded its annual LTC reserve review during the fourth quarter.

When CNA applied its current best estimate actuarial assumptions to its long-term care reserve the result was a $396 million increase in reserve estimate. Given that CNA had $100 million of margin before the review, this increase resulted in what's known as an unlocking and a $296 million pre-tax reserve charge at the CNA level.

I would note that this is a GAAP reserve charge. The unlocking does not impact CNA's statutory surplus.

CNA's LTC active life reserves are now based on its current best estimate assumptions. Future periodic income for long-term care will reflect any variance between actual experience and the recent assumptions contemplated in CNA's best estimate reserves.

The recent assumptions should theoretically produce a breakeven underwriting result for long-term care, although there will undoubtedly be variability in CNA's future periodic results.

Diamond Offshore's fourth quarter reflects the challenging market conditions that Jim referred to earlier. Diamond's results in Q4 2015 were dominated by a $499 million pre-tax asset impairment charge which reduced Loews' income from continuing operations by $182 million.

Diamond wrote down nine rigs in the fourth quarter: five jackups, two midwater floaters and two deepwater floaters. Setting aside the rig impairment charges, Diamond contributed $60 million to our Q4 income from continuing operations, up 28% from the fourth quarter of 2014.

While contract drilling revenues were down meaningfully after-tax earnings benefited from expense reductions and a favorable tax rate. Diamond management is working hard to control expenses in the face of such difficult market conditions.

Boardwalk posted a strong quarter as its contribution to our income from continuing operations increased from $11 million in Q4 2014 to $19 million in the fourth quarter of 2015. Boardwalk's net operating revenues were up 10% in the quarter and its expenses were essentially flat, resulting in a significant increase in its net income.

Several factors drove Boardwalk's revenue increase including the Gulf South rate case, the Evangeline pipeline being back in service and growth projects coming online.

Loews Hotels contributed a slight loss to our income from continuing operations in the fourth quarter. The Company's net income was hampered by an impairment charge on a joint venture equity interest in a hotel property as well as by hotel opening expenses, higher depreciation, losses posted at certain recently acquired properties and some unusual tax items.

Remember that for acquired properties there is typically a transition period as the property becomes a Loews branded hotel. Loews Hotels adjusted EBITDA which is disclosed in our earning snapshot increased from $35 million in Q4 of 2014 to $38 million in Q4 2015.

Let me now turn to a brief discussion of the full year. CNA and Diamond accounted for the bulk of the year-over-year earnings decline. Reduced parent company investment income also contributed to the decline.

CNA contributed $433 million to our income from continuing operations in 2015, down from $802 million in 2014. Included in these results are after-tax realized investment losses of $34 million in 2015 versus realized investment gains of $32 million in 2014. Unusual items figured prominently in the year-over-year decline.

The fourth-quarter long-term care reserve charge and accounting change and the second quarter retroactive reinsurance charge combined to reduce CNA's earnings contribution by $237 million in 2015. In 2014 unusual items reduced CNA's earnings contribution by $30 million, resulting in a $207 million year-on-year negative swing.

Absent unusual items CNA's net operating income was down 12% in 2015. Key drivers of this NOI decline were significantly lower LP income, slightly lower non-cat accident year underwriting income and higher operating losses in the life and group segment caused largely by adverse morbidity in the long-term care business. Partially offsetting the decline was higher favorable net prior-year development.

Diamond contributed a $156 million loss to our income from continuing operations in 2015 whereas in 2014 it contributed income of $183 million. During 2015 Diamond booked $870 million of pre-tax asset impairment and restructuring charges which reduced Loews' income from continuing operations by $344 million.

Additionally, earlier in 2015 Loews wrote off $20 million of goodwill associated with Diamond. In 2014, Diamond's asset impairment reduced Loews' after-tax income by $55 million.

Absent the impairment and restructuring charges and goodwill write-off Diamond's contribution to our income from continuing operations declined by $30 million to $208 million, reflecting the substantial decline in revenues from fewer rigs operating.

Boardwalk Pipeline's contribution income from continuing operations rose to $74 million in 2015 from the prior year's $18 million. While strong operating results helped, the biggest driver of the year-over-year increase was the write-off in 2014 of capitalized costs associated with a terminated project which reduced Loews' 2014 income from continuing operations by $55 million.

Loews Hotels contributed $12 million to our 2015 income, up from $11 million in 2014. Profitability was hampered by the results at a few recently acquired hotels and hotels with operational challenges. On the other hand, numerous properties including the properties at the Universal Orlando Resort were up nicely versus 2014.

Adjusted EBITDA for Loews Hotels is up 29% year over year to $158 million. For the full-year parent company after-tax investment income was down from $63 million in 2014 to $16 million in 2015, reflecting lower performance of equities and alternatives.

As Jim mentioned at year-end cash and investments totaled $4.3 billion as compared to $4.8 billion at the end of September and $5.1 billion at the end of 2014. Jim already mentioned our substantial share repurchases during Q4 in the full-year but let me reiterate. During the fourth quarter we spent $632 million repurchasing 17 million shares.

For the full year we bought back 33.3 million shares for a total of $1.26 billion. This represents just under 9% of our shares outstanding at the beginning of 2015.

Thus far during 2016 we have repurchased 919,000 additional shares. During the fourth quarter we received $83 million in dividends from our subsidiaries: $61 million from CNA, $9 million from Diamond and $13 million from Boardwalk. During all of 2015 we received $816 million in dividends from our subsidiaries, up from $782 million in 2014.

As Jim mentioned today CNA declared a $2 per share special dividend which is in addition to its regular $0.25 per share quarterly dividend. Combining the two, Loews expects to receive $545 million in dividends from CNA this quarter.

Let me now hand the call back to Jim.

Thank you, David. Before we proceed to our Q&A let me review why I'm confident about the long-term prospects of each of our businesses.

CNA has improved its underwriting performance and paid significant dividends to shareholders while maintaining its strong capital position. Diamond is in a tough market and although we can't predict when its market will turn around Diamond is ready to weather the storm. It's been conserving its financial resources and maintaining its position as the strongest offshore drilling company in terms of finance, innovation and leadership. Hopefully during these challenging times for the offshore drilling industry Diamond will be able to add productive rig assets at attractive valuations.

Boardwalk has made smart capital decisions that should allow it to fund its announced growth projects without having to issue equity in 2016. And Loews Hotels continues to grow its change steadily with an eye towards profitability. Whether confronting headwinds or aided by tailwinds Loews' strategic imperative remains the same: creating value for shareholders over the long term.

And now I'd like to turn the call back to Mary Skafidas.

Thanks, Jim. Kristin, we're ready to begin the Q&A portion of our call. Could you please give participants the instructions on how they can participate?

(Operator Instructions) Josh Shanker, Deutsche Bank.

Good morning everyone. So my first question I guess it's a Boardwalk question. I'd like to talk about the investment cycle versus the distribution cycle and how you think about how long Boardwalk will invest and when you might be seeing dividends begin to increase?

So as you know Boardwalk right now has about $1.6 billion of investments that it's funding. Hopefully this year it will find more attractive projects to do.

It is also working to bring down the ratio of debt to EBITDA and it's been very successful with that this past year in 2015. It would be very nice for Boardwalk to be able to increase its distribution and by the way Loews would be the biggest beneficiary of such an increase.

But Boardwalk will not do that until such time as it has the distributable cash flow available to it and total access to markets in order that the dividend could be increased responsibly. I cannot give you a date for when that's going to happen. But even without the dividend, we believe that the management of Boardwalk is building tremendous value with these new projects that it's embarked upon.

So Jim, I'm not asking for a date so much but in board level meetings is there a general sense that there's an investment stage followed by a distribution stage? And is it part of a cycle or is this very Boardwalk specific?

I think this is Boardwalk specific. You're asking about what's going on in the Boardwalk board meetings. I am not a board member there and I think you should ask the management of Boardwalk that.

That's very reasonable. Hotels I noticed that the earnings power is much stronger in the first half of the year. As you grow is there a seasonality to earnings?

Yes, there's some modest seasonality but we also have a pretty balanced portfolio so that when city hotels may not be doing well then for example over Christmas then resort hotels do do well. But overall there isn't dramatic seasonality to the business.

So in terms of I'm not really asking as a modeling question, just thinking that what looks like seasonality for 2015 could totally be less apparent in 2016?

Yes, I think what you're seeing is more the impact of pre-opening expenses at hotels, a new hotel coming in and ramping up, etc., less seasonality.

Okay, that makes sense. Then I think in the past you've said that back in the financial crisis public equities got cheap but private equity never got cheap enough to act on new investment the way you like. You're sitting on a lot of potentially optionality I guess with the cash you have.

Do you have a market appetite and are you looking at private equity or public equity saying this is a market for Loews and I'd like to make something happen in the next 12 months, 18 months? I don't know, how do you think about that?

We look at what's available to buy. A lot of the assets that the companies that become available to buy especially in the strike zone that we're looking at are owned by private equity firms. Those companies, those firms have the ability to time when they want to sell their assets.

So one would think that right now prices of companies that private equity firms might want to sell are coming down because the financing markets have become so much more expensive. But in fact what we're seeing is not too much that's on the market, in fact because now is not a particularly attractive time to be selling those businesses. If the financial markets that we have today continue for another several quarters, then it's entirely possible that we could see assets that come on the market that could be attractively priced.

Okay, well good luck in finding something. We'd love to see it.

In the meantime, though, we spent $1.3 billion repurchasing our own shares. So that was a significant use of our cash over 2015.

I understand there's more of them available.

Yes.

Take care. Thank you.

Bob Glasspiegel, Janney Capital.

Good morning, Loews. A quick numbers question. What was the impairment in hotels?

It hit by $3 million after-tax.

Okay. A question, too, on the CNA call when I asked them about partnerships, their partnerships were down about $400 million year over year and they said they've been selling ahead of this market weakness, reducing partnerships and would continue to reduce, reflecting sort of a cautious view on equities and that sort of asset class. I was wondering if I assume that's consistent with or perhaps even driven by your outlook, I thought maybe you could expand on that strategy and where you are with the market down 10% year to date.

Sure. CNA manages its risk assets very carefully because CNA wants to make sure that risk assets do not become too big a percentage of its equity. And additionally, Loews in helping to manage those assets for CNA also is seeing attractive risk investments beyond the hedge fund market.

So for example if you look at bank loans that are available in the marketplace there's been a tremendous selloff in many names that now to us are seemingly good investments. So the move out of hedge funds was made in order to make room for additional risk assets that CNA can acquire that we think will be more attractive investments than the hedge funds have been. For the past 20 years hedge funds have been a very, very attractive investment of risk assets and what we're seeing now is just that there are other places where we can invest and get good returns.

We'll have to go back to the transcript but I thought they had said they had a cautious view towards equities before the selloff and were likely to continue to reduce exposure to equities. But that doesn't square necessarily with them and you publicly want to say about equities at this point?

So actually my comment was pretty consistent with that. I was talking about attractive investments that we're seeing in the bank loan and fixed income markets.

And listen, from my own personal point of view, the more equities go down the more attractive they get. So at Loews as the stock market has been going down we've been modestly increasing our exposure to equities.

I got it. You've been right on sort of your macro view that the economy is going to grow grudgingly and slowly and positively, as far as the eye could see I think was your comment originally five years ago. And are you still in that camp?

I am. I'm doing better than a stopped clock.

A stopped clock is right twice a day, my 2% forecast for the economy has been right for five years. So why change it now?

Well, there are people a little bit nervous about some more risks out there and beyond energy, European credit. But these --

There's a lot to be worried about in the world. But I also think that those of us that are on Wall Street can sometimes be overwhelmed by the problems that we see on the horizon and I think from time to time it's important to step back, take off your Wall Street glasses and put on industrial America glasses. And I think things don't look as bad when you look with that lens.

I'm in your camp too. I just wanted to make sure you were still there. Thank you.

(Operator Instructions) Michael Millman, Millman Research.

So what do you suggest or should investors rather than buying Diamond for example be buying crude and buying gas futures, or crude futures I should say and gas futures rather than Boardwalk to get a pure play and maybe quicker upside when and if there is upside?

You know, I am not a registered rep. I don't give out public investment advice. There are an awful lot of different ways to play what I think I and you are describing as the improvement in oil and natural gas prices.

And it all depends on the risk parameters that you're willing to take and the amount of leverage that you want, a whole host of factors that I think it's inappropriate for me to opine on right now.

Does Loews at all invest in futures of this type?

Yes, in fact Loews has plenty of exposure to crude oil and to gas through Boardwalk and as well through Diamond Offshore. And to the extent that Loews commodities go up in price for long enough then we should see improvement in Diamond's business and hopefully an increase in Diamond's share price. And likewise we should see improvements in Boardwalk's business and its share price as well.

Beyond that yes, we've invested in some futures in the oil markets. We're sort of like the guy who ran for mayor he said the rent is too damn low -- too damn high. We say oil prices are too damn low.

And it's our belief that in a number of years, I'm not making a prediction for the next number of months, but in the next number of years we think that oil prices will be significantly higher than the levels they are at today.

Okay, I appreciate the color. Thank you.

Ladies and gentlemen, that concludes our Q&A session for today. I would like to hand the program back over to Mary Skafidas for any closing remarks.

Thank you, Kristin, and thanks all of you who dialed in and joined us today. A replay will be available on our website, Loews.com, in approximately two hours. That concludes our call today.

Ladies and gentlemen, thank you for joining us. You may now disconnect your lines.