洛茲集團 (L) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Loews third-quarter 2016 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mary Skafidas. You may begin your call.

Thank you, Paula; and good morning, everyone, and welcome to Loews Corporation's third-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 which will include a selection of questions submitted via email by our shareholders. If shareholders would like to submit a question for consideration, please email me at mskafidas@loews.com.

Before we begin, however, I will remind you that this conference call might include statements that are forward-looking in nature. Actual results achieved by the Company may differ materially from those made or implied in any forward-looking statements due to a wide range of risks and uncertainties, including those set forth in our SEC filings.

Forward-looking statements reflect circumstances at the time they are made. The Company expressly disclaims any obligation to update or revise any forward-looking statements.

This disclaimer is only a brief summary of the Company's statutory forward-looking statements disclaimer, which is included in the Company's filings with the SEC.

During the call today we might also discuss non-GAAP financial measures. Please refer to our securities filings and earnings supplement for a 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, as well as the quarterly progress of each of our subsidiaries in detail. But before he does, Jim Tisch, our CEO, will kick off the call. Jim, over to you.

Thank you, Mary, and good morning. The contrasting fortunes of CNA and Diamond Offshore are the proverbial corporate Tale of Two Cities -- well, not exactly, but almost. While it may be the worst of times for Diamond in the offshore drilling industry, for CNA we hope and expect to see even more improvement from its already stellar performance. Let's focus on the positive first and take a look at CNA and the commercial property casualty insurance market.

CNA has come a long way since 2009 when Tom Motamed first took over as its CEO. Today, CNA is a consistently profitable insurance carrier with strong operating results and an intense focus on underwriting fundamentals.

As previously announced, Tom will be retiring next month, and today marks his last CNA quarterly conference call -- on which I made a surprise cameo appearance to sing his praises. I don't want to say that Tom took CNA from worst to first, but there certainly has been a vast improvement on his watch, and I think it's abundantly clear that this improvement is due to the Herculean efforts of Tom and his team.

While I could spend the entire call listing all of Tom's accomplishments, let's focus on just a few key highlights. During his tenure, Tom has strengthened CNA's branch network; enhanced CNA's competitive position; dramatically upgraded CNA's talent; tremendously improved the commercial lines business; maintained specialty lines' preeminent market standing; mitigated operational and financial risks; significantly fortified CNA's balance sheet -- and oh, yes: paid out about $2.5 billion of dividends in the past five years.

Tom would be the first one to point out that there is still work to be done. However, the indisputable fact remains that Tom leaves CNA at a time when its capital, competitive position, and its brand have never been stronger. I want to thank Tom for his many contributions and wish him continued success as he moves on to the next chapter in his life.

And the good news for CNA continues with the arrival of Dino Robusto as the Company's new CEO next month. Dino will take the helm on November 21, when his garden leave officially comes to an end. I'm confident that I speak for the rest of the CNA Board when I say how much we look forward to working with Dino. The CNA that Dino inherits is poised for continued improvement in further value creation, and we fully believe that Dino and the CNA team will fulfill that potential.

Alas, all of life cannot be light and happiness. And with that in mind, let's move on to Diamond Offshore and the offshore drilling industry, where they are experiencing the aforementioned worst of times.

It is clear that this industry is facing one of the sharpest downturns in its history, with canceled contracts, below operating cross day rates, and customers seemingly unwilling to take advantage of these discounts. Despite the pain, Diamond Offshore's CEO Mark Edwards and his team continue to navigate these troubled waters with tireless, focused skill and determination.

Just in the past few weeks, Mark has been in Singapore, Australia, Dubai, Rio de Janeiro, and France -- not to mention New York and Houston -- all in the quest of maintaining and generating business for Diamond Offshore. And while the offshore drilling industry continues to operate in a depressed environment, the price of oil, the commodity to which the offshore drilling industry is most closely tied, seems to have begun its recovery.

At the beginning of this year, oil dropped to about $27 a barrel, a new low in recent history. Two weeks ago, oil was nearly double that price at almost $52 a barrel. And while oil prices may have partially recovered, day rates for offshore drilling rigs certainly have not. I am hopeful that within the next several quarters, we will start to see an uptick in inquiries for offshore drilling rigs, a necessary precursor to improve day rates in the future.

While there were still many unknowns with regard to the oil and energy markets today, we have no doubt that Diamond Offshore will withstand this tough cyclical downturn. Diamond's innovative strategies -- along with its financial strength, conservative capital management, and stellar management team -- should enable the Company to emerge from this turbulent market cycle stronger and more resilient than ever.

Before I turn the call over to David Edelson, I wanted to mention that John Tisch has resumed the duties of CEO of Loews Hotels. Many of you may know that Kirk Kinsell has decided to leave the Company. Loews Hotels is in strong shape, and the Loews Hotels team looks forward to building on the strong base already in place. The Company is in great hands with John, who has been shepherding the expansion and strategic direction of Loews Hotels for the past 30 years.

And now over to David.

Thank you, Jim, and good morning. For the third quarter, Loews reported net income of $327 million or $0.97 per share as compared to net income of $182 million or $0.50 per share in last year's third quarter. The year-over-year increase in our third-quarter earnings came almost entirely from higher contributions from CNA Financial and from the parent Company investment portfolio.

Let me start by walking through the key drivers of our year-over-year quarterly improvement. For your information, these key drivers are set forth on page 12 of our Q3 2016 earnings supplement, which can be found on loews.com.

The first key driver was net investment income, both at the parent Company and at CNA. The parent Company portfolio generated a pretax gain of $36 million in Q3 2016 versus a pretax loss of $35 million last year. The gain was driven by alternative investments and gold-related equities, while last year's loss was primarily caused by equities, including gold-related equities, and alternatives. The $71 million pretax improvement accounted for a $46 million after-tax improvement year-over-year.

At CNA, the year-over-year swing in net investment income of $170 million pretax was driven by LP investments, which swung from a $93 million pretax loss in Q3 2015 to a $65 million gain this past quarter. This $158 million pretax swing resulted in a $92 million increase in net income at the Loews level.

The second key driver was the meaningful improvement in CNA's life and group segment, which swung from a $30 million after-tax loss in last year's third quarter to net operating income of $6 million this year. This $36 million year-over-year improvement was mostly attributable to the long-term care reserve unlocking at year-end 2015 that reset the underlying actuarial assumptions in the long-term care reserves. The turnaround in CNA's life in group segment accounted for a $32 million increase in net income at the Loews level.

The third key driver was realized investment gains and losses at CNA. CNA posted pretax realized gains of $46 million in Q3 2016 versus realized losses of $49 million in last year's third quarter. This $95 million pretax improvement accounted for $56 million of the year-over-year increase in Loews's third-quarter net income.

The fourth and fifth key drivers partially offset the first three positives. CNA's P&C underwriting income was down year-over-year as CNA's combined ratio rose from 85.7% in Q3 2015 to 90.4% this past quarter. Let me pause and simply note that both of these combined ratios are extremely strong and result in substantial underwriting income. As a reminder, underwriting income reflects earned premium less the sum of losses, loss adjustment expenses, and acquisition and underwriting expenses.

While CNA's accident year loss ratio, including cat losses, was a solid 62.8 in both periods, the Company booked 11 points of favorable prior-year development last year against 8 points this year. Also, CNA incurred higher expenses, attributable to both ongoing and nonrecurring costs. The combination of less favorable development and higher expenses caused CNA's P&C underwriting income to decline $73 million pretax year-over-year, accounting for a $43 million decline in net income at the Loews level.

The last key driver was the substantial year-over-year falloff in Diamond's operating results. With fewer working rigs and elevated unscheduled downtime, Diamond's contract drilling revenue declined 43% year-over-year, and its net income dropped to $14 million from $136 million in last year's third quarter.

At the Loews level, Diamond's contribution to our net income fell $40 million, from $47 million in Q3 2015 to $7 million this past quarter. These five drivers -- net investment income, CNA's life and group segment, realized investment results at CNA, CNA's P&C underwriting income, and Diamond's operating results -- netted to a positive $143 million after-tax, essentially accounting for the $145 million year-over-year increase in Loews's third-quarter net income.

Let me now briskly walk through our earnings by business segment. CNA contributed $308 million to our net income in Q3 2016 -- $281 million of net operating income, and $27 million of realized investment gains. This compares to $161 million in the third quarter of 2015, net operating income of $190 million, and $29 million of realized investment losses.

As I've already mentioned, the key drivers of the net operating income improvement were net investment income -- specifically, returns on healthy investments; and improved results in the life group segment, partially offset by the decline in P&C underwriting income.

Before leaving CNA, I must highlight CNA's progress in generating underwriting profit. CNA posted a 90.4% combined ratio in the third quarter and 94.6% year to date. All three P&C businesses -- specialty, commercial, and international -- posted sub-100 combined ratios in the quarter. As Jim noted, under Tom's leadership, CNA has made tremendous strides.

On to Diamond. Diamond contributed $7 million to our net income in Q3 2016, down from $47 million last year. Diamond itself posted net income of $14 million versus $136 million in Q3 2015.

Let me remind you that in last year's third quarter, we wrote off $20 million of goodwill associated with our carrying value of Diamond. Without this goodwill charge, Diamond's contribution to our Q3 2015 net income would have been $67 million.

We have discussed the difficult conditions in the offshore drilling market previously, and Jim just mentioned them, and these conditions showed no signs of abating in the third quarter. Contract drilling revenues in Q3 were down 43% on a 44% decline in revenue earning days. The bulk of the revenue decline was attributable to fewer rigs working this year versus last year. Additionally, the Company experienced unscheduled downtime due to unanticipated customer and operational issues.

I would note that Diamond continues to be the highest rated company in the offshore drilling space. The Company's liquidity position is solid, with $1.3 billion available today under its $1.5 billion revolving credit facility; no debt maturities until 2019; and no capital expenditure commitments for undelivered rigs.

Turning to Boardwalk, the Company posted a strong third quarter, as net revenues were up 6% year-over-year; EBITDA was up 9%; and net income was up 23%. The main drivers of Boardwalk's strong revenue quarter, which flowed through to EBITDA and net income, were favorable natural gas transportation, primarily from growth projects; and improved revenues from parking and lending and storage. Please note that a reconciliation of Boardwalk's EBITDA to its net income can be found in its Q3 earnings release.

Despite Boardwalk's strong quarter, you can see that its contribution to our net income declined by $4 million year-over-year. The reason is that in last year's third quarter, Loews benefited from a $6 million after-tax franchise tax refund related to Boardwalk. Excluding this nonrecurring item at the Loews level, Boardwalk's net income contribution was up $2 million from the prior year.

As you know, Boardwalk is undertaking various growth projects to position it for the future. The Company recently placed into service four projects that represent approximately $320 million in CapEx. An additional $1.2 billion of projects are underway and expected to be placed into service between now and 2018. We are pleased that the four projects placed in service in 2016 came in approximately 9% below budget, reflecting management's keen focus on project execution.

Finally, S&P recently raised the issue level ratings on Boardwalk's unsecured debt, including its revolving credit facility, from BB+ to BBB-. This means that all of Boardwalk's senior debt now carries investment-grade ratings from each of the major rating agencies.

Let me now touch on Loews Hotels, which contributed net income of $3 million, up from $2 million in the third quarter of 2015. The Company's adjusted EBITDA in Q3 was $37 million, up from $30 million in Q3 2015. A reconciliation of adjusted EBITDA to net income can be found in our Q3 2016 earnings supplement.

Contributing to the increase in adjusted EBITDA were improved results across the chain, including the Loews Regency New York and the Orlando properties, offset somewhat by muted results at the Loews Miami Beach hotel, which is under renovation. Third-quarter results were also negatively impacted by preopening expenses related to the new 1,000-room Loews Sapphire Falls in Orlando, which opened in July.

Turning to the parent Company, as previously mentioned, the parent Company investment portfolio generated after-tax income of $24 million compared with a loss of $22 million in the prior-year quarter. At quarter-end, the parent Company portfolio totaled $5 billion, broken down as follows: just over 60% in cash and short-term investments, 17% in limited partnership investments, another 9% in marketable equity securities, and the bulk of the remainder in fixed maturities.

We maintain a large and liquid portfolio of cash and investments for two mutually reinforcing reasons: to enable us to take advantage of opportunities when they present themselves, and to help mitigate risk during tough times. Capital deployment opportunities can take such forms as acquiring new businesses, helping our subsidiaries pursue those strategies, and repurchasing our shares.

Our liquidity, combined with our relatively low level of parent Company debt and the extended maturity schedule of that debt, give us a valuable optionality and protection. During the third quarter, we received $74 million in dividends from our subsidiaries, $61 million from CNA and $13 million from Boardwalk. Year to date we received total dividends of $706 million combined from CNA and Boardwalk.

Our share repurchase activity since last quarter has been modest. We repurchased 440,000 shares from July 1 through this past Friday, spending approximately $17 million. Year-to-date we have spent approximately $115 million repurchasing 3 million shares. Average shares outstanding were $338 million in the third quarter, down 6.5% from $361 million in Q3 2015.

And with that, I will now handle call back to Mary.

Thank you, David. Paula, at this time we would like to open up the call for questions.

(Operator Instructions) Bob Glasspiegel, Janney.

Quick question on hotels. Is there a search on place for a permanent CEO, or is John going to be it for --?

So John is currently the CEO, and we are very happy with the way it's running like that. So that's where it is.

Okay. Your year-to-date share repurchase of 3 million shares -- I went back to 2007; that's the least active you've been through nine months for at least that long, if not longer. Curious -- you mentioned -- I think David mentioned in the press release acquisitions are a possibility.

Years back, you said that the acquisitions were expensive and not that interesting, although you are kicking a lot of tires all the time. Wonder if you could sort of -- where are we in your desire, need, or opportunity to do a deal?

We are completely unchanged in terms of our desire or need to do a deal. We kick -- as I have said previously, we kick lots of tires. We look at lots of things. We do due diligence and explore different options. But to date, we haven't found anything in the past few years that fully make sense for us at a price that also makes sense for us.

But in terms of desire or need, that's not a factor in our looking at businesses nor in setting prices for them. The sole thing that we think about when evaluating different opportunities is whether we believe it will create good value over the intermediate to long-term for those shareholders.

And on that score, I admit we have been wholly unsuccessful in executing a transaction. But you can be sure that we put 100% of our effort into looking for that transaction.

Am I overanalyzing, Jimmy, by just connecting the dots of no share repurchase? And I thought David mentioning acquisitions in his text for the first time in a while -- when you put those two dots -- connect those two dots, the chance that you are looking at a deal certainly seems to be a possibility for explaining it.

You know, over the years, I would say that trying to evaluate what we're thinking in terms of share repurchases by looking at what we've done is akin to looking at the entrails or the tea leaves. It is just -- there is no one factor that can fully describe or explain why it is we buy or don't buy -- repurchase our shares.

When we think about share repurchases, there are an enormous number of factors that go into the equation. There's the price of Loews; there's the price of our subsidiaries; there is value that we ascribe to our nonpublic businesses. There are times when even if we want to buy in the shares, for one reason or another, we are not allowed to repurchase the shares.

There is what's going on in the wider market -- both the market for interest rates and the market for shares. And there's not just what's going on today, but our outlook for the future.

So we put all of these factors and more into our own special computer, which is collectively the brains of a few people around here, and we discuss it and decide what to do with respect to share repurchases. Like acquisitions, the one thing -- the one factor that drives us in determining whether to repurchase shares or not is our assessment of how it will contribute to the intermediate to long-term value for the remaining Loews shareholders.

So it's all a long way of saying that we look at lots and lots of factors in determining whether to purchase shares. And as I like to say, we have a long and glorious history of share repurchases, where we have -- I think 80% of the shares outstanding -- I'm sorry, 20% -- 30% of the shares outstanding today that we had in the 1970s. And just since 2007, we have purchased 40% of the shares outstanding in 2007.

So my advice: try not to make too much of what we do one quarter or one year. Look at the long-term picture, because that's what we're looking at as well.

You answer hasn't changed too much over the last quarter-century. Thank you.

Josh Shanker, Deutsche Bank.

More hard questions about acquisitions or whatnot. Is there an overarching philosophy -- you know, Buffett says that he wants to be the buyer of choice for things that will never sell anything. So when you think about Diamond, whether -- when shares were at $100, did you have the right size holding in Diamond? Now that shares are at $20, do you have the right size holding in them?

You could buy the whole thing, and you would still have less of a stake in the overall Loews empire than it was back when the stock was more pricey. How should we think of what the right amount of Diamond, or any other stock, for that matter, that Loews should be owning?

So we are very happy with our ownership in Diamond. A fun fact is that from 2006 to today, Diamond has paid more than twice the current share price of Diamond in dividends. So we have -- we and all other diamond shareholders since 2006 have gotten over $40 in dividends from Diamond. I'm pleased to say that notwithstanding those dividends, Diamond is still in very good, very strong financial shape.

In terms of our desire to acquire more Diamond shares, I don't want to comment on it, because we let our actions speak for themselves. But I can just tell you that we are very pleased with our current level of holdings in Diamond Offshore. And there's no doubt in my mind that when/as/if the offshore drilling market improves, and shares of Diamond follow that, that Loews shareholders will be beneficiaries of it.

So put another way, is there a correct amount of Loews capital that should be exposed to the energy sector? And are you below that?

Or was there ever a thought to that -- at a certain point, maybe in retrospect, you realized that at peak pricing, maybe the capital was overexposed? But how does that calculus go into your thinking of the right size of the holding?

So we don't feel a need to be invested in energy. We happen to have significant investments in energy, as denoted by our shares of Diamond and our shares of Boardwalk. And we are very happy with those investments. We think that they will return very good returns for our shareholders over the coming years. But like I said, we don't feel that we have to be in energy, per se, or that we have to add to our investments in energy.

But for an investment you already have, at the right place, you would not be against it?

Say again?

At the right price, you wouldn't be against owning more of something you already have that you know very well?

That's not what I said. I'm not -- I am saying that we are very comfortable with what we own now. And I'm not stating whether or not we want to own more now or in the future.

Okay. All right, I will let it rest.

In the noncontrolling parts of the investment portfolio, what are the benchmarks that you are using to determine whether or not you're being successful in bond investing and whatnot? Is there -- and then do you think that you have done a good job? And how do you measure it?

So are you referring primarily to the CNA investment portfolio?

So that would be CNA and the $5 billion or so of change you have over at Loews.

So we are constantly comparing both those portfolios to different indices of performance. At CNA, I would say there is less latitude for significant outperformance, because we have very strict benchmarks of the amount of equity-like and -- equity-like investments that we can have at CNA. So most of the portfolio is investment-grade.

And also, we have important guidelines for duration for the different portfolios within CNA, so that when we measure the performance of CNA versus the benchmarks that we use to measure the performance, outperformance could mean 100 basis points of outperformance. So the numbers aren't -- the numbers in terms of outperformance are not that significant.

With respect to our noninvestment-grade investments and our equity investments at Loews and at CNA, we use all manner of different indices. We look at hedge fund returns -- industry hedge fund returns. We look at high-yield bond returns. We look at equity returns.

And overall, I would say that we are very pleased with the returns that we've had in all our portfolios. Yes, from time to time we see underperformance in one portfolio or another. But like I said, overall we are very pleased with where we are.

And then coming back to Bob's question, is there any time that you didn't necessarily have a large acquisition in mind, but you prefer to make a investment in the noncontrolling area of Loews rather than use the cash to buy back stock?

Repeat that again.

Is there a period of time when you are not looking to take a controlling stake in the business, that you do find something out there in the market that's attractive from a noncontrolling perspective that would keep you from buying your own shares?

That generally doesn't happen.

Okay. Thank you very much.

At this time, there are no further audio questions. I will turn the floor back over to Mary for any pre-submitted questions.

Great. Thank you, Paula. We do have a few questions from our shareholders. The first one has to do with capital allocation. Jim, when allocating capital, how do you think about share repurchases versus other investments?

So I guess I -- I think I already answered the question vis-a-vis share repurchases. Let me just talk about how we think about buying businesses for Loews.

And our benchmark that we use is whether an acquisition would be accretive in terms of value over the intermediate to long-term for all our shareholders. As I said before and I'll say again, there are things we do look at and other things that we don't look at.

The things we don't look at are things where a bad CEO in the course of a year or two could cause tremendous damage to a business. So we tend not to look at retailing businesses. We tend not to look at businesses where technological disruption could be an important factor. We tend not to look at technology businesses where, if you mess one relatively quick cycle in terms of the technology, you could be out of business.

So we are looking for businesses that we believe can stand the test of time and be with us for a long time to create value. We are also generally looking for businesses that are based here in the United States. They could have international operations, but we'd like them to be based here in the US.

And as I said before, we have kicked an awful lot of tires. We have gone down the path pretty far with a number of businesses, but in recent history we haven't been able to close anything.

When we think about buying businesses versus share repurchases, that's an important comparison that we make. We think about what is the future for Loews with the business, and what would be the future for Loews without the business. And we think whether -- we think how compelling it is to repurchase shares at any point in time versus the value that we can get in buying a business that we don't already control.

And we also think very carefully about what we don't know concerning any business that we might buy, and we compare that to what we do know about our own businesses that we own and control with respect to share repurchases. There is no given formula that we use in assessing repurchases -- purchases of businesses, just as there is no formula that we use in assessing whether to repurchase shares.

But I would say that what we're doing is generally what any other portfolio manager does when they think about adding new securities to their portfolio. That's how I was trained; that's how a lot of people here were trained; and that is how we think about buying new businesses, repurchasing our own shares, or investing in any of our individual businesses.

Thank you, Jim. That was very helpful.

The next question has to do with CNA: even though CNA had another strong quarter, it is still trading at such a discount to its book value per share. What do you think accounts for that discount?

I think there are a number of things that account for the discount to book value per share. First of all, CNA stock -- CNA shares have moved up rather significantly, almost 20% in the past few months or quarters. And I ascribe that to the fact that people are starting to recognize that CNA is a changed company; that it's got underwriting discipline -- all the things that I spoke about with respect to my comments about Tom and CNA.

Additionally, I think a very important factor is that people are starting to see that the dividend that CNA has paid out, which is -- for the past two years, at least, have total $3 a share, makes it that at $30 per share, CNA was trading at a 10% yield, which is just too high a yield to be passed up. So I think that the 20% improvement over the past several quarters has been a recognition of those factors.

I think a problem for people investing in CNA is that there is not significant liquidity. Loews owns 90% of CNA. We don't worry about the price from day to day, week to week, or month to month. But a seeming lack of liquidity, I think, has kept a number of large purchasers from CNA.

I think the other reason is that some people might be concerned about the long-term care book of business. I would say that we at Loews are very comfortable with it, but there's no doubt that some investors may be scared off a bit by it.

The thing I would say is that the long-term care book of business at CNA is being very aggressively managed in terms of the attention that it is -- the management attention that it is getting and the focus on the part of senior management. I think all that, and who knows what other factors may be out there that are affecting the overall valuation of CNA.

Great, wonderful. Thank you, Jim.

Thank you, Jim and David. That is all the time we have for today. And thank you all, always, for your continued interest in Loews. A replay will be available at our website, loews.com, in approximately two hours. That concludes Loews's call for today.

Thank you. This does conclude today's conference. You may now disconnect.