Loews Corp (L) Q1 2020 earnings call dated May 04, 2020
Corporate Participants:
Mary Skafidas — Vice President of Investor Relations and Corporate Communications
James S. Tisch — President and Chief Executive Officer
David B. Edelson — Senior Vice President and Chief Financial Officer
Presentation:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to Loews Corporation’s First Quarter 2020 Earnings Conference Call.
[Operator Instructions]. Thank you. It is now my pleasure to turn the call over to Mary Skafidas to begin. Please go ahead.
Mary Skafidas — Vice President of Investor Relations and Corporate Communications
Thank you, Maria, and good morning, everyone, and welcome to Loews Corporation’s first quarter earnings conference call. A copy of our earnings release, earnings supplement and Company overview may be found on our website, loews.com.
On the call this morning, we have our Chief Executive Officer, Jim Tisch and our Chief Financial Officer, David Edelson. Questions that have been submitted by shareholders will be addressed during this call.
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, you may also discuss — we may also discuss non-GAAP financial measures. Please refer to our security filings and earnings supplement for reconciliation to the most comparable GAAP measures.
Now let me hand the call over to Jim Tisch, our CEO, who will kick off the call. Jim, over to you.
James S. Tisch — President and Chief Executive Officer
Thank you, Mary, and good morning. Before we discuss how Loews is addressing the many challenges presented by the coronavirus, I want to take a moment to acknowledge everyone on the front lines of the fight against this pandemic. They are true heroes. I speak for all of us at Loews Corporation, when I thank them for their bravery, for their selflessness and for everything they are doing to save lives.
To express our thanks a bit more concretely, I’m proud to announce that Loews has donated $1 million that has been allocated between several different funds that provide direct support to these frontline health care heroes. I’m glad we’re able to help these individuals who are risking their own lives to help others.
It’s astonishing how quickly the coronavirus has altered our lives. Loews’ 2019 Letter to Shareholders is dated February 11th of this year. In it, we described the dramatic changes brought about over the last decade by disruptive technologies, shifting trade relations and an array of market and geopolitical forces. Little did I know when we completed our letter that the most dramatic change was directly ahead. What started out as a promising year has quickly and dramatically morphed into a global economic free-fall.
Like so many other companies, Loews and its subsidiaries started operating remotely overnight as travel restrictions and shelter-in-place orders were issued by governments around the world. Since Loews and our subsidiaries had already put into place the enhanced IT infrastructure required for a quick and efficient transition to remote operations, our Company’s move to working from home went even more smoothly than I would have expected. Our employees rose to the challenge with resilience and focus. I want to thank them all for their dedication, which has enabled Loews to move forward.
So back to our operations. The coronavirus has impacted each of Loews’ businesses in different ways. Some of our subsidiaries have been hard hit, and others have not. Specifically, Diamond Offshore and Loews Hotels have felt the most pain. Let me lead off with Diamond Offshore and the sequence of events that resulted in the Company’s Chapter 11 announcement on April 26th.
It’s no secret that the offshore drilling industry has been experiencing a protracted downturn since 2014. It’s been a long, hard road for the offshore drillers, plagued by an oversupply of rigs, coupled with persistently low oil prices. Earlier this year, however, we thought we saw the sun start to break through the clouds.
At the beginning of January, oil was priced at $60 a barrel and global oil demand was expected to grow. Unfortunately, that sunny moment was short-lived. Over the first quarter, Saudi Arabia and Russia failed to reach a production agreement, and global demand experienced a sudden and cataclysmic decline due to the spread of COVID-19.
These factors caused oil prices to drop to about $20 per barrel. That’s a two-thirds decline in price in a three-month period. In response, oil companies significantly reduced their capital budgets. Travel bans further complicated offshore drillers’ ability to staff their rigs, and E&P companies used every opportunity they could to cancel or renegotiate contracts. Talk about impeccably bad timing.
Keep in mind that even before this unfortunate confluence of events, Loews’ exposure to Diamond was limited to our equity stake, which by mid-March, had a market value of between $100 million and $200 million. Later in this call, our CFO, David Edelson, will walk you through the GAAP impact to Loews of the Diamond Chapter 11 filing. But it’s important to remember that while the GAAP deconsolidation loss is significant, it’s a non-cash loss. Loews’ balance sheet remains strong, ending the quarter with $3.1 billion in cash and investments.
While we are incredibly disappointed about the sequence of world events that led Diamond to make its April 26th announcement, I am very proud of the work that Diamond offshore has done over the years. Diamond has been a leader in the offshore drilling industry. The Company’s CEO, Marc Edwards, has been outstanding, and his team has worked hard in a very tough environment. Diamond is comprised of talented and resilient individuals facing extraordinary circumstances. We hope for a brighter future for the company in the years to come.
Moving on to the rest of the Loews portfolio, I’d like to do a quick review of our businesses and their operations today, how they are faring and functioning in this ever changing new normal world. As you know, for the last couple of years, it has been our practice to take questions from shareholders. Since the questions we have received over the last months have been very consistent, I’m going to address them as part of my prepared remarks and in the context of this review.
First up is CNA. Operationally, CNA’s performance has been quite strong. The Company’s underlying combined ratio for the quarter was slightly better than in the first quarter of 2019, driven primarily by a reduction in the expense ratio. CNA also had solid rate increases of 8% as the hard market continued. All in all, CNA has the balance sheet, the business mix, management team and infrastructure to manage adeptly through this crisis.
In terms of the pandemic’s impact on CNA’s future earnings, it’s too early to make concrete statements. But we imagine that the P&C industry will face some headwinds. These will include low interest rates and lower premium levels as a result of the decline in GDP. CNA is monitoring the situation closely as it unfolds, and we have a lot of confidence in the expertise and judgment of CNA’s CEO, Dino Robusto, and his senior management team.
Our shareholders’ questions for CNA focused on two topics: business interruption insurance and the effects of the turbulent markets on CNA’s investment portfolio. Let me address each one of these. On their call earlier this morning, Dino made some very clear statements regarding business interruption insurance, which I will reiterate here.
Dino said, and I quote, “CNA’s property policies require direct physical damage to the property from a covered peril for coverage to attach. Additionally, the property policies, whether issued in the United States or internationally, have exclusion borrowing coverage for viruses. There are a very few policies where coverage may exist on small participations in our Loews — Lloyd’s operations, but the total limits exposed are de minimis. So with respect to property business interruption insurance, CNA’s policy language does not cover COVID-19 in virtually all cases, and the company never collected premiums for it.”
In terms of CNA’s investment portfolio, in the first quarter, CNA’s unrealized gain position declined from $4 billion at the end of 2019 to $2 billion at the end of the first quarter. To put this in context, CNA’s unrealized gain position has typically varied between $2 billion and $4 billion since 2011, with $4 billion being the high watermark.
Since the end of this year’s first quarter, the unrealized gain in CNA’s portfolio has rebounded off its lows and is now about $3 billion. Interest rates across asset classes other than treasuries went up at the end of the first quarter due to spread widening that provided CNA with a rare opportunity to add high-quality assets at attractive yields.
This opportunity has since diminished somewhat as the fixed income markets have come roaring back. Over the last several years, CNA has been reducing its exposure to risk assets, including equities, hedge funds and below investment-grade securities to the lowest level in over a decade.
Next up is Boardwalk Pipelines. The company is operationally sound and benefiting from growth projects coming online. While revenue declined slightly in the first quarter, the decline was due to the now completed re-contracting of Boardwalk’s expansion projects placed in service in the 2008 to 2010 time frame. Shareholders have asked us about the effect of lower oil prices on Boardwalk. Additionally, we’ve gotten questions about the financial stability of Boardwalk’s customers. Let me address both of these queries.
Boardwalk’s business has not been significantly impacted by the drop in oil prices. In the first quarter of 2020, Boardwalk’s natural gas throughput and liquids volume increased slightly from the comparable period last year. Since the crisis hit in mid-March, Boardwalk has maintained uninterrupted service to its customers while also taking measures to ensure the safety of its employees and to maintain efficient operations.
At the end of the first quarter, Boardwalk had a backlog of well over $9 billion in contracted revenues with about $370 million of new contracts added in the first quarter. More than 70% of Boardwalk’s revenue backlog is derived from investment-grade companies. Boardwalk has letters of credit from some of its customers that are not investment-grade or not rated, which provide an additional measure of security.
To reiterate, so far, Boardwalk’s operations and financial performance have not been materially impacted by the coronavirus or the drop in oil prices. Boardwalk anticipates another solid year of financial performance. Almost 90% of Boardwalk’s revenues are backed by fixed fee take-or-pay agreements. Revenue in 2020 is expected to be about $60 million lower than 2019, due primarily to the expiration of the legacy contracts.
At the end of 2020, Boardwalk should have a debt-to-EBITDA ratio below 5 times leverage. With industry veteran, Stan Horton at the helm, leading a seasoned team of senior managers, the company expects to finance its capital needs this year, primarily, by using internally-generated cash flow.
Let’s move on to Altium, our plastic packaging manufacturer. Altium is actually benefiting from the ongoing surge in their consumer retail segment, primarily due to increased purchases of beverage and cleaning products. Under the top-notch leadership of the company’s CEO, Sean Fallmann, Altium has taken a number of precautions to ensure the safety of its employees and its manufacturing plants.
These precautions include making sure employees comply with social distancing protocols, installing sanitizing stations, distributing masks and gloves, taking temperatures pre-shift and increasing employee sick days. These new measures have helped Altium’s manufacturing plants operate smoothly, even with the increase in volume. We expect Altium’s EBITDA to be up nicely this year, with a good portion coming from completed acquisitions as well as from organic growth.
Finally, let me comment on Loews Hotels. We had great hotel — we had great expectations for our hotel business in 2020. But today’s reality couldn’t be further from what we had envisioned. Travel bans, shelter-in-place orders and social distancing protocols have had a profound effect on Loews Hotels as well as on all of its competitors. The company went from being in growth mode to being forced to do everything it could to contain costs.
Due to the COVID-19 pandemic and resulting government mandates to halt the spread of the virus, most of Loews Hotels — most of Loews’ hotels have temporarily suspended operations. Only four hotels remain operational, and those have very limited occupancy. Unfortunately, the catastrophic loss of business made it necessary to further [Phonetic] nearly 90% of Loews Hotels’ employees. This was a painful decision made in order to ensure that the company could continue to operate over the long term.
Having taken this tough step, Loews Hotels then followed up with significant assistance for its furloughed team members. The company has set up a multimillion-dollar relief fund for affected employees and has also continued to cover medical insurance costs for up to three 3months for employees enrolled in company benefits. Additionally, in solidarity with all Loews Hotels team members who are being impacted financially by the crisis, the members of the office of the President, me, Andrew Tisch, and Loews Hotel’s CEO Tisch, reduced our salaries by 50% as of April 1st and reduced our bonuses by 50% for the entire year.
At this point in time, it’s difficult to predict when Loews Hotels will resume normal operations. We expect that circumstances will vary by hotel property, with occupancy at hotels increasing gradually as the industry recovers from the effects of the pandemic.
Before turning the call over to David, I want to comment on the parent company and our current view of the world. We have always said that we like to sleep at night, and that is still true today. In our current circumstances as we experience so much uncertainty, we plan to maintain a substantial cash position as our rainy day fund.
With over $3 billion in cash and investments and no significant calls on those resources, Loews remains strong. We will re-evaluate our capital allocation strategies once we have more clarity as to the path forward for our company, our subsidiaries, and our country.
And now I’d like to hand the call over to our CFO, David Edelson.
David B. Edelson — Senior Vice President and Chief Financial Officer
Thank you, Jim, and good morning, everyone. For the first quarter, Loews reported a net loss of $632 million or $2.20 per share, compared to net income of $394 million or $1.27 per share in last year’s first quarter. This year’s first quarter loss and the substantial year-over-year decline had two main causes: investment losses at CNA and the parent company, which were caused by financial market disruptions as the COVID-19 pandemic spread; and rig impairments at Diamond Offshore. Also worth noting, as Jim did, is the dramatic falloff in results at Loews Hotels caused by the pandemic.
Let me start by providing more details about the quarter, focusing on these three items. I will also discuss the accounting implications of Diamond’s recent Chapter 11 bankruptcy filing as well as some of the issues we are monitoring as the pandemic impacts our businesses.
The financial markets experienced tremendous volatility in March in response to the spreading coronavirus pandemic and its economic fallout. Equity markets plummeted and credit spreads widened. Both CNA and the parent company suffered investment losses as a result. At CNA, after-tax net investment income declined $186 million from last year, with common stocks and limited partnership investments accounting for almost 95% of that amount.
Common stocks and LPs earned $96 million pretax in Q1 2019, but lost $125 million in this year’s first quarter. Additionally, CNA swung from net investment gains of $24 million after-tax last year to losses of $169 million this year. This year’s losses were mainly attributable to the decline in market value of nonredeemable preferred stock, as well as impairment losses on corporate bonds.
The parent Company’s investment portfolio generated net after-tax loss of $130 million in the quarter versus income of $67 million last year, driven by declines in public equities. In total, investment activities at CNA and the parent Company were responsible for $536 million of the year-over-year decline in our first quarter net income. I would hasten to point out that some of these losses were recouped in April as financial markets became more favorable.
Diamond’s financial outlook deteriorated as the quarter progressed, ultimately causing Diamond to impair four of its drilling rigs and take a $774 million pretax impairment charge. The steep and rapid decline in oil prices during the quarter, especially since early March, has pushed Diamond’s customers to slash their capital budgets, including their offshore drilling programs. This chain of events caused Diamond management to take a more pessimistic view of the prospects for these 4 rigs. Diamond’s impairment charge reduced our first quarter net income by $408 million. There were no rig impairments during last year’s first quarter.
Loews Hotels business was strong during January and February and into the first week of March, only to decline precipitously thereafter. So precipitously in fact, that most of their properties temporarily suspended operations between March 19th and the end of the quarter.
By way of example, the Universal Orlando Theme park closed on March 15th, and our hotels on that campus suspended operations on March 20th. The Loews Miami Beach hotel suspended operations on March 23rd, pursuant to a requirement to close issued by the county and city.
After outperforming its plan during the first two months of the quarter, Loews Hotels posted a quarterly net loss of $25 million, as compared to net income of $13 million last year, for a negative swing of $38 million. The hotel company’s adjusted EBITDA, which is defined in our earnings supplement, decreased $44 million year-over-year to $17 million.
Stepping back, these three items, investment results at CNA and the parent company, rig impairments at Diamond and Loews Hotels, comprised 96% of the sizable year-over-year decline in our first quarter net income.
Turning to Diamond’s Chapter 11 filing. Diamond and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S. bankruptcy code on April 26th. Loews has determined that as of that date, we no longer control Diamond, and thus, we will no longer consolidate Diamond for GAAP purposes.
Going forward, we will account for Diamond on the cost method and hold our stake in Diamond at fair value. Our Diamond stake will be included in parent company cash and investments just as we do with all our non-control equity holdings.
Our second quarter results will include a significant loss related to Diamond. Let me briefly explain the main moving pieces in the second quarter. We will consolidate our share of Diamond’s losses through the bankruptcy filing date. We will then deconsolidate Diamond effective April 26, at which time we will record a loss equal to the difference between our then carrying value of Diamond, and the fair value of our interest in Diamond immediately following the bankruptcy filing.
Our GAAP carrying value of Diamond at quarter-end was approximately $1 billion. The fair value of our stake immediately after the filing was about $15 million. If the fair value remains the same through June 30, our net loss in Q2 attributable to Diamond will be around $1 billion. Importantly, this will be a non-cash loss.
Jim previously highlighted several bright spots in the quarter. Let me reiterate just a few. P&C underwriting results at CNA continued their positive momentum. Rates increased an average of 8% across the book. The underlying combined ratio was 93.9%, which was better than full year 2019, and new business was robust.
At Boardwalk, natural gas throughput and liquid volumes increased more than 10% from the first quarter of 2019. While revenues were down slightly due largely to expiring contracts being re-contracted at lower rates, the company has essentially completed the process of re-contracting its pipeline projects placed in service 10 to 12 years ago. Boardwalk’s EBITDA and income were slightly ahead of management’s expectations and its debt metrics improved during the quarter.
And Altium experienced strong growth in EBITDA as it benefited from its recent acquisitions, namely its pharmaceutical packaging business as well as increased demand for such core products as water, milk, household products and specialty chemicals. Volume was robust at Altium, rising about 8% in the quarter over the prior year period.
Before I conclude my remarks, I wanted to add briefly to Jim’s comments about the COVID-19 pandemic. All our subsidiaries have been and will continue to be affected by COVID-19 and the related economic impacts. We are focused on ensuring that our subsidiaries implement effective policies and procedures to protect the safety and health of their employees. Loews’ long-term success rests on the success of our subsidiaries. So the well-being of their employees is our foremost concern.
We are also focused on ensuring that our subsidiaries identify and manage the risks and opportunities caused by this terrible pandemic. On its call today, CNA discussed many risks, including risks to the investment portfolio and underwriting risks, including pressure on premiums and COVID-related losses. Of course, CNA is also looking for opportunities to better service its clients in this changed world.
As Jim mentioned, Boardwalk’s business has thus far been relatively unaffected by the pandemic. Yet management is actively monitoring such risks as the credit quality of its customers, as the declines in crude oil and natural gas prices could cause the financial condition of one or more of its producer customers to deteriorate.
Loews Hotels took dramatic action to temporarily suspend operations at most of its properties in response to the pandemic. Going forward, the critical decisions for Loews Hotels will be when to reopen those properties and how to refine its operations to ensure the continued health and safety of its employees and guests while meeting guests’ expectations. Decisions to reopen properties will be made case by case, considering such factors as governmental public health restrictions and when management believes enough demand exists to resume operations rather than remain suspended.
Even though Loews Hotels has aggressively reduced its cost structure, the huge revenue decline has caused the company to begin generating negative cash flow. As such, we will invest cash in Loews Hotels this year, although the exact amount is uncertain, given the unknowns around property reopening and ramp up schedules.
What we do know is this, during each month, operations are almost completely suspended, as they are now. Management forecasts that the hotel company will generate negative cash flow of about $25 million. Once properties begin reopening however, that monthly amount should decline as management intends to reopen properties only when doing so improves cash flow. So while the COVID-related negative cash flow situation at Loews Hotels is unfortunate, it is entirely manageable given our parent company liquidity.
Altium has on that, benefited from increased demand for certain of its products as the pandemic reached North America. The company is focused on serving its customers with packaging solutions so its customers can meet today’s demand while also being prepared for an uncertain future.
Finally, a few words about the state of the parent company. As always, and as Jim mentioned, we are focused on maintaining a strong and highly liquid balance sheet. At quarter end, the parent Company portfolio of cash and investments totaled $3.1 billion, with about 80% in cash and equivalents, and the remainder mainly in marketable equity securities and a small portfolio of limited partnership investments.
We received $575 million in dividends from CNA during the first quarter, which includes the $0.37 regular quarterly dividend and the $2 special dividend. As a reminder, Boardwalk has adopted an annual dividend policy.
We repurchased 9.7 million shares of our common stock during the first quarter for a total of $445 million. We repurchased no shares following quarter end. As Jim mentioned, we are prioritizing liquidity during these uncertain times.
I will now hand the call back to Mary.
Mary Skafidas — Vice President of Investor Relations and Corporate Communications
Thank you, David. We want to thank all of you for your continued interest. Please feel free to reach out to me with any additional questions at mskafidas@loews.com. A replay will be available on our website, loews.com, in approximately two hours.
With no questions waiting in queue, we conclude the Loews call. Thank you.
Operator
[Operator Closing Remarks]