洛茲集團 (L) 2016 Q1 法說會逐字稿

Good morning. My name is Jackie and I will be your conference operator today. At this time I would like to welcome everyone to the Loews first-quarter 2016 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 would now like to turn the conference over to Mary Skafidas, Vice President of Investor and Public Relations. Please go ahead.

Thank you, Jackie, and welcome everyone to Loews' first-quarter 2016 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 set 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 for 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. The first quarter was my favorite type of quarter. It was relatively quiet with solid performances from each of our subsidiaries. Just to review, CNA had significant reserve releases as well as strong operational results. However, this positive performance was distorted by a non-cash retroactive reinsurance charge relating to the Company's asbestos policies. Investment losses from CNA's LP portfolio also muted what was essentially a good quarter of CNA.

Diamond Offshore continued to manage well through the cyclical downturn and benefited from revenue earned by its new drillships that are on long-term charters. Boardwalk Pipeline has also had a smooth first quarter. Its favorable performance is attributable in part to higher rates taking affect as a result of the Gulf South rate case and booked growth projects that have been placed in service over the last year.

Finally, Loews Hotels & Resorts also performed well. Its properties in Florida remain strong earners as did some of the new hotels added to the chain in the past few years. David Edelson, our CFO, will walk you through the results of each of our subsidiaries in more detail later in our call.

Since the quarter was relatively uneventful, I thought I would use this time to address some questions about the insurance and oil markets that have come up in our discussions with shareholders. Let's start with insurance.

Over the last several years, there has been a significant increase in third-party capital coming into the insurance and reinsurance markets and this capital is increasing competition for the more generic insurance and reinsurance providers. It is having less of an effect on CNA's book of business however because of the Company's extensive been well-established nationwide agency network. This network is a tremendous asset and CNA is one of only a handful of industry players with this type of distribution channel. This web of distributed offices with local underwriters working with local agents is remarkably expensive to duplicate creating high barriers to entry for new players.

The strength of CNA's network did not happen by accident. It has been built up over decades. In recent years, CNA has focused substantial time and resources on bolstering and upgrading its field operations for its commercial lines of business and CNA is also increasing the origination of its specialty business through these offices. The result is that these actions have made CNA's business lines less vulnerable to competition by new players in the industry.

CNA has been concentrating on growing in core customer segments where it has deep underwriting expertise while culling less profitable business lines. This combination has dramatically changed CNA's property and casualty portfolio and underwriting returns. The result is that core customer segments have grown from 71% of the portfolio in 2011 to 80% in the last two years. In the past several years, CNA has had relatively flat topline growth but below the surface the Company has shed unprofitable business.

CNA has two major lines of P&C business, specialty and commercial. The Company's specialty business has always had a market-leading position and has been the envy of its competitors. CNA's commercial lines business however has historically lagged behind specialty. Today the Company's focus on enhancing its underwriting expertise in commercial lines has resulted in more than 10 points of improvement in the underlying loss ratio from 2010 to 2015. This portfolio today is more stable as demonstrated by the retention rate in the mid-80s.

Over the last few years, CNA's operational gains have been offset somewhat by an increasing expense ratio which at 35% in the first quarter is too high. CNA has consciously increased investments in information technology, analytics and talent with a goal of becoming a top quartile underwriter. While these investments put pressure on margins today, we believe they will have a favorable impact on CNA's long-term profitability.

Additionally, CNA has taken a number of actions to strengthen its operations including exiting from nonperforming businesses, selling its life insurance company and actively managing its long-term care runoff business. Over the last decade, CNA has become a company with a fortressed balance sheet. CNA has never been stronger with regard to its capital, its brand and its competitive position.

Now from the good to the bad and the ugly. Let's take a look at the auto market. Since I often get asked about my outlook for oil, I thought I would beat you to the punch today. One of my favorite sayings is he who lives by the crystal ball must learn to eat ground glass. And while I am not a fan of ground glass, I will share with you what I am seeing and forecasting with respect to oil.

The past two months have brought clarity to a couple of points. First, it is now abundantly clear that in the absence of OPEC intervention, US shale oil is the world's swing producer. Shale production can come on quickly and relatively cheaply and is largely developed by nimble, independent producers who have the incentive to quickly respond to changing prices.

The second point that has become clear is that US shale producers are unlikely to experience anytime soon the growth they enjoyed several years ago. In order to simply maintain production when using internally generated cash, our guess is that the US shale industry needs oil prices to be about $50 to $60 per barrel. With current prices at or around $45 per barrel, US production will continue to decline.

So what does this mean for Diamond Offshore and the offshore drilling industry? Today the world is dramatically under-investing in oil exploration and production and the effects of this under-investment will start to be evident over the next two to five years. Oil price declines have largely been driven by the strength of supply, not the weakness of demand. In fact, demand for oil is still growing and remains quite healthy.

If there is a silver lining in this oil price downturn, it is that the lack of drilling activity today will only help speed the recovery of the oil market tomorrow. US shale drilling activity may be the first to turn on when the market rebounds but these onshore resources only produce about five million barrels a day. In contrast, offshore production supplies 25 million to 30 million barrels today or about 30% of global oil production. And when oil prices reach levels where domestic shale production increases, many offshore oil drilling projects will be economic as well.

The $1 million question is when will we arrive at the tipping point when the supply demand fundamentals drive oil prices higher? There is no shortage of opinions expressed on that subject and I'm not going to throw my hat into that race. As I have said before, I would rather predict where oil prices will be two years from now than two months from now.

Now that I have brought it up, my fearless forecast is that oil will be [$65] per barrel or higher by the end of 2018. That is the price that I believe will be required for E&P companies to invest in productive capacity necessary to satisfy demand. It certainly won't happen at $45 per barrel. When you compare today's oil prices with the recent low of $27 per barrel reached in January of 2016, it looks like we could be halfway to my fearless forecast.

While there are many unknowns in relation to the oil and industry markets today, we have no doubt that Diamond Offshore will withstand this tough cyclical downturn and hopefully use it as an opportunity for growth. Diamond has taken a number of steps to maintain its solid balance sheet starting with reducing costs in 2015 by $100 million and scrapping or selling six rigs it believe will not work again.

Additionally, Diamond chose to eliminate its special and regular dividends and action taken from the position of strength so that it could use its financial resources to invest in this depressed market when and if the opportunity arises. Diamond is benefiting from earnings from its new drilling rigs which are all contracted through 2019. With Diamond's strong capitalization and liquidity position, we are confident that Diamond will not only be able to weather the downturn but will emerge well-positioned for the inevitable rebound.

Now to get back to the business at hand, let me turn the call over to David Edelson. David?

Thank you, Jim, and good morning. For the first quarter, Loews reported net income of $102 million or $0.30 per share as compared to $109 million or $0.29 per share in last year's first quarter. As described in our earnings release, Boardwalk's and Diamond's contributions to our net income were up year-over-year while contributions from CNA and Loews Hotels were down. Parent Company investment results were also below prior year.

Let me unpack this quarter's results to highlight four key drivers. One, strong underlying operating results at CNA and Boardwalk. Two, challenged investment results at CNA and the Parent Company. Three, a retroactive reinsurance charge at CNA relating to the Company's agreement to cede asbestos and environmental liabilities to national indemnity. Four, the absence of a rig impairment charge at Diamond this quarter versus a substantial charge last year.

Turning to CNA. In the first quarter, CNA contributed $60 million to our net income which includes $17 million of realized investment losses. This compares to a net income contribution of $210 million in the first quarter of 2015. The decrease was primarily driven by three items; lower net investment income, realized investment losses, and the retroactive reinsurance charge, all offset somewhat by improved operating results.

CNA's limited partnership investments generated a small loss this quarter versus an almost 4% pretax return in last year's first quarter. This swing reduced CNA's year-over-year contribution to our first-quarter net income by $74 million. Additionally, CNA posted realized investment losses this quarter versus realized gains last year which reduced CNA's contribution to our first-quarter net income by an additional $25 million.

Finally, the retroactive reinsurance charge reduced CNA's contribution to our first-quarter net income by $74 million. As a reminder, there was a retroactive reinsurance charge in last year's second quarter that reduced our net income by $49 million.

Let me recap the reason for this non-cash retroactive reinsurance charge. In 2010, CNA and National Indemnity, a subsidiary of Berkshire Hathaway, completed a transaction whereby CNA ceded to National Indemnity substantially all of its legacy asbestos and environmental pollution liabilities subject to an aggregate limit of $4 billion. This reinsurance agreement is commonly referred to as a Loss Portfolio Transfer. Under retroactive reinsurance accounting, CNA is not permitted to recognize the benefit of the national indemnity cover until actual cash recoveries are made by CNA. This means that when CNA increases its asbestos and environmental pollution reserves, it must book a deferred retroactive reinsurance gain which results in a GAAP income statement charge. This gain will ultimately be recognized back into CNA's earnings in the future as losses are paid by National Indemnity.

Think of it as a timing difference. For more information, please review page 14 of CNA's first-quarter earnings presentation.

Setting aside investment results and the reinsurance charge, CNA performed well in the first quarter. The Company posted a property-casualty combined ratio of 96.1, down from 98.9 last year. The combined ratio was helped by a solid 62.0 accident year loss ratio and 3.6 points of favorable prior year development as business written in past years continues to develop well. On the other hand, the combined ratio is hurt by an uptick in the expense ratio as the Company invests in people and systems to position itself for the future.

During the first quarter, CNA's life and group segment, which houses the long-term care business, produced a $2 million net operating loss compared with a $17 million loss in the first quarter of last year. This slight loss was essentially in line with expectations following the unlocking of the Company's long-term care active life reserves at year-end.

As discussed last quarter, these reserves are now based on management's current best estimate actuarial assumptions. The reset assumptions should theoretically produce a breakeven underwriting result for long-term care although some variability in period to period results is likely as quarterly results will reflect any variance between actual experience and the reset best estimate assumptions.

Turning to Diamond; Diamond's contribution to our net income increased dramatically from a loss of $126 million last year to earnings of $43 million this year. Diamond's results last year were negatively impacted by an asset impairment charge relating to eight rigs which reduced our net income by $158 million. Absent this charge, Diamond's contribution to our net income was still up slightly year-over-year despite the dramatic decline in the offshore drilling market.

Let me explain. Diamond's contract drilling revenues were down 26% year-over-year as the Company experienced a 41% decline in revenue earning days. The fact that three of Diamond's new ultradeep water drill ships worked during Q1 2016 but not during the prior year quarter wasn't enough to offset the revenue decline from deepwater, mid-water and jack-up rigs.

Note that during this year's first quarter, Diamond's contract drilling revenues benefited from a one-time $40 million deep mobilization fee. Diamond management has aggressively managed operating expenses in response to the revenue declines and the change in the business environment. Contract drilling expenses were 39% lower in Q1 2016 than in the prior year. Additionally, Diamond's recent rig impairment and sales of rigs have reduced the Company's ongoing depreciation expense.

Diamond remains financially strong. The Company is well positioned from a capital and liquidity standpoint to weather today's storms and continue as a leader in the offshore drilling space.

On a personal note, we would like to thank Gary Krenek, Diamond's CFO, for his tremendous contributions to the Company. Gary is retiring tomorrow and will be replaced by Kelly Youngblood, who is joining Diamond from Halliburton. Thank you, Gary, you will be missed. And welcome, Kelly.

Boardwalk posted a strong first quarter as net revenues were up 8%, EBITDA was up 9%, and net income was up 30%. Boardwalk's contribution to our net income increased from $25 million last year to $31 million this year driven by the strong underlying operating results. The real drivers of Boardwalk's quarter were revenue increases stemming from the Gulf South rate case, the return to service of the Evangeline ethylene pipeline and those growth projects placed into service over the last year.

While earnings for the quarter were very strong, the midstream space is not without its challenges with many natural gas producers under financial pressure. As Boardwalk discussed earlier today, out of its top 50 customers which represent approximately $1 billion of annual revenues, six are rated below investment grade. These customers represent approximately $170 million of annualized revenue. Importantly, these customers are not in default and the Company does not have any material issue with its receivables. This is a situation that Boardwalk will continue to monitor and manage.

At Loews Hotels & Resorts, pretax income was essentially flat with prior year as underlying strength continued to be masked by the impact of new properties entering the chain and ramping up. Adjusted EBITDA increased by $8 million or 23% to $43 million.

Turning to the Parent Company; in the first quarter the Parent Company investment portfolio generated an after-tax loss of $8 million compared with income of $19 million in the prior year quarter. This loss reflects lower performance of alternatives and equities offset somewhat by the gold equities that we hold as a hedge.

We ended the quarter with cash and investments of $4.9 billion and Parent Company debt of $1.8 billion. During the quarter, we received $558 million in dividends from our subsidiaries, $545 million from CNA which included its $2 per share special dividend, and $13 million from Boardwalk.

In March, we issued $500 million of 10-year notes and retired $400 million of maturing notes. Our next debt maturity is not until 2023.

Our share repurchase activity was muted during the quarter. We spent $33 million repurchasing just over 900,000 Loews shares. Additionally, we spent $8 million purchasing 267,000 shares of CNA. Average shares outstanding were 339 million in the first quarter, down 9% from 373 million in Q1 2015.

Let me now hand the call back to Jim.

Thank you, David. Before we open the call up for questions, I want to stress that even in these times of dynamic change, Loews and its subsidiaries remain committed to creating value for shareholders over the long-term. It is a goal that has defined us for more than half a century and it continues to define us today.

Importantly in each of our businesses, we have the leadership horsepower we need to fuel this value creation. All of our CEOs are long-term veterans of their industries with the vision, experience and expertise necessary to position each company for future growth and development.

At CNA, Tom Motamed has overseen the Company's dramatic move toward achieving its goal of becoming a top quartile underwriter and the Company has since 2013, paid out to shareholders more than $2 billion in dividends.

At Diamond Offshore, Marc Edwards is leading the charge with grace under extreme pressure. He is revolutionizing the offshore drilling industry with pressure control by the hour and other innovations which are differentiating Diamond from the competition and cementing close relationships with Diamond's customers along the way.

Stan Horton as Boardwalk is one of the best strategic thinkers in the natural gas pipeline space. He has envisioned and developed a full slate of very attractive investment opportunities which will be coming online in the next few years and will form the foundation for growth.

Finally, at Loews Hotels, Kirk Kinsell is continuing to build on the growth of our hotel business increasing EBITDA and profitability while creating long-term value. Kirk has been focused on expanding the Company's brand equity, attracting and retaining the best talent and most importantly, creating a wonderful experience for our guests.

And while we certainly appreciate the exemplary CEOs at each of our subsidiaries, we know that their efforts are supported and strengthened by their leadership team's deep and talented bench.

Now I would like to turn the call back over to Mary.

Thank you, Jim. Jackie, at this time we would like to open up the call for questions. Could you instruct our listeners on how to do so?

(Operator Instructions). Josh Shanker, Deutsche Bank.

Good morning, everyone. So my first question relates to loving one of your children more than the other ones. And I look at the repurchase of CNA and I look at the repurchase of Loews, two questions. How do you decide that now is the time that you should be putting more emphasis in buying CNA? Two, to what extent are you constrained because you don't want CNA to become a private company? And three, how do you decide whether to buy a Loews share or a CNA share?

So let me just talk about the CNA purchase. It was really simple for us. The stock was trading at $28 a share, the Company for the past two years has paid a $2.00 special dividend and paid a $0.25 quarterly dividend. The stock was yielding in excess of 10% based on historic dividends and that just seemed to us to be too high a yield and too cheap a stock. So we decided that we would buy some shares.

And at that time did you stop buying Loews shares to buy CNA shares?

You know, I let our Loews share purchases stand on their own.

And the extent to which you are constrained because of liquidity, not the lack of liquidity but because you want there to be CNA shares in the market, to what extent even it is the best deal in the world, are you reticent to actually buy back those CNA shares so you can have that tracking stock out there?

First of all, it is not tracking stock but it does give everybody a sense of the worth or value of CNA. But we just bought like 150,000 shares. There wasn't a lot of stock to buy. So as you saw from our Form 4s, we were very price sensitive about those purchases. So we weren't concerned that we were going to substantially dry up liquidity in the stock.

But so you would be willing to buy more even though obviously there is a shrinking amount of shares out there in the market, if the price were right?

Yes, yes.

Okay. And then my second question in terms of CNA just issued some new debt to retire some old debt at a nice discount in the coupon rate. But my guess is that Loews has an even cheaper borrowing cost than CNA. Maybe that is not correct, I'm making that assumption. Can you talk about how CNA thinks about buying debt? Is there some value, could they borrow from Loews because Loews has cheaper debt capacity or how can I think about that?

Think of them as completely separate, that CNA has the capacity to borrow on its own balance sheet and we totally believe that CNA should borrow on the basis of its own balance sheet. If for some reason heaven forbid they were an extremist, then we would consider making a loan to them but only at what we consider to be attractive market rates. So that the Loews shareholders aren't necessarily subsidizing the CNA shareholders. But we hope and expect that each one of our subsidiaries will finance themselves.

That makes sense. I'm just saying from a practical standpoint, what if Loews' cost of borrowing is dramatically cheaper than somebody else's and there is no real strain on the balance sheet, it is not a matter of urgency but it just seems like there might be an arbitrage in there. Or maybe I am thinking about this incorrectly.

Look, I guess we could do that but that is not the way we choose to structure our investment. Loews does not want to be a creditor of CNA and earn on its cash 350 basis points, that is not what we are looking to do with our almost $5 billion of liquidity. We are looking to earn much higher rates of return than that.

Makes sense. Thank you very much.

Bob Glasspiegel, Janney.

Good morning, Loews, and let me say thank you for the expanded commentary on the call on your 33 page timeless principal on the web. Those are very helpful for us.

Thank you for the advertisement for our website.

Right. There was no buyback in April presumably? Given there was no reference in the press release?

No there wasn't. No.

Okay. This question is probably motivated by having watched Buffett over the weekend in Omaha. But are we still totally committed on the partnership hedge fund investments? And I know you think over time it has created value to you but it seems like it is coming under attack from various institutions.

So we have been reducing our hedge fund investments over the past year or year and a half. What I would say is -- I have a slightly different take on this than Buffett. I would say the space has become very crowded and returns have been competed away. When 20 years ago there were one or two or 10 pairs traders, market neutral hedge funds could earn very, very attractive returns. Now that there are hundreds of them, the rate of return that those hedge funds can earn has come down rather dramatically.

While Warren Buffett complained about the fees, instead we are looking at the returns and what we have seen is that in the past number of years and especially more recently, the returns haven't been there. So we have reduced our investment in hedge funds.

What we are doing is we are holding those proceeds for a time when other risk assets seem to be very attractive in the marketplace. That happened between November and February of this year with bank debt and below investment grade bonds but the market recovered very quickly. But my anticipation is that in the future there will be plenty of other opportunities to invest in what we consider to be attractively priced risk assets.

So your hedge funds and partnerships have gone from what to what and where do you want it to be?

It has gone from almost $3 billion in 2014 to about 2.5 now. This is at CNA.

Right. And where do you want it to be?

We will let you know when we get there.

But lower?

Not higher, that is correct.

Okay, thank you very much.

There appear to be no further questions at this time. I would like to turn the floor back over to Mary Skafidas for any additional or closing remarks.

Great. Thank you, Jackie, and thank all of you for your continued interest. A replay of this call will be available on our website, Loews.com, in approximately two hours. That concludes today's call.

Thank you. This concludes today's conference call. You may now disconnect.