Loews Corp (NYSE: L) Q4 2019 Earnings Conference Call
February 10, 2020
Corportate Participants:
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
James S. Tisch — Chief Executive Officer
David Edelson — Senior Vice President & Chief Financial Officer
Presentation:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Loews Corporation Q4 2019 Earnings Conference Call. [Operator Instructions] Thank you.
I will now turn the call over to Mary Skafidas, Vice President of Investor Relations and Corporate Communications.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Thank you, Laurie. Good morning, everyone. And welcome to Loews Corporation’s Fourth Quarter and Year-End 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 with question committed by shareholders.
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 security filings and earnings supplement for reconciliation to the most comparable GAAP measures. In a few minutes, our CFO, David Edelson will walk you through key drivers for the quarter and the year. Before he does, Jim Tisch, our CEO, will kick off the call.
Jim, over to you.
James S. Tisch — Chief Executive Officer
Thank you, Mary, and good morning. Before we get into the details of the quarter and our year end results, I want to mention share repurchases. For those of you who follow Loews closely, I must sound like a broken record. I’ve been saying for a while that we believe Loews’ stock looks cheap and trades at a deep discount to our view of its intrinsic value. Rather than complain, we have acted.
From January 1st of 2018 through Friday, we repurchased more than 45 million shares of Loews’ common stock for total cost of just under $2.25 billion. That represents more than 15% of our currently outstanding shares. Typically, most of the funds we’ve used to repurchase our shares have come from dividends paid to Loews from our subsidiaries. And in recent years, most of those dividends have come from CNA. However, dividends paid to Loews represent only a portion of the free cash flows generated by our subsidiaries.
Our businesses may also decide to use their free cash flow, either to fund growth or to pay down debt. And to the extent that they have the opportunity to profitably reinvest their cash flow into their businesses, we encourage them to do so. However, if there is no other productive use for their free cash flow, more often than not, they’ll distribute that cash.
To pull back the curtain a bit on this process, in 2019, Loews received more than $180 million from Loews hotels. This cash came both from the sale of hotels and free cash flow from operations, both after Loews hotels invested around $70 million into construction of new properties, we expect Loews hotels to return capital again in 2020, but the amount will likely be smaller because the hotel companies will continue to invest in its own development and we expect fewer proceeds from the sale of hotel properties. No matter what, to the extent that the hotel company has economically attractive projects in which to invest, we want them to do so.
This year, we have three new hotels opening in St.Louis, Orlando and Kansas City. These hotels represent more than 3,000 new keys for our company. These properties will either be focused on transient and group business, like the new Loews Kansas City, which is attached to the Kansas City Convention Center. Or they will have built in demand generators like the Endless Summer Hotel in Orlando.
Additionally, in late December of 2019, Loews Hotels received the necessary approvals from the Arlington Texas City Council to build a $550 million (888) room hotel that will be connected to a new convention center. The Arlington Convention Center Complex, which will be at the base of AT&T Stadium and Globe Life field will offer 216,000 square feet of meeting and outdoor function space. It’s part of an overall effort by the city to increase convention and tourism business in Arlington, which is nestled between Dallas and Fort Worth and 15 minutes from the DFW airport. Since 2013, Loews Hotels has more than tripled its adjusted EBITDA, going from $68 million back then to $227 million last year.
We believe the company’s future is bright and that it will be a strong growth engine for the parent company. In other subsidiary news, those of you who look at our earnings supplement may notice that CCC, our packaging subsidiary, recently changed its name to Altium. The rationale for the change is that CCC had been well known with the industry as the water and milk container company, but their product lines and capabilities are much broader. With Altium’s recent acquisitions, the company has expanded even further the number of segments of the packaging industry, it can service.
The new name is meant to underscore the company’s diverse capabilities and help to continue to grow its customer base. Before turning the call over to David, I want to briefly talk about our results for 2019. Loews had a good year driven by seller results at CNA as well as good investment income at the parent company level. CNA’s underlying combined ratio continued to improve in 2019 despite a competitive environment.
Since 2016, CNA’s underlying combined ratio improved by more than three points. Additionally, CNA grew net written premiums by 5% for 2019 and driven by particularly strong growth in commercial lines, rate increased 5% for CNA’s P&C operations last year. It goes without saying that we remain very bullish on CNA, both on the fundamentals of the insurance industry and on CNA’s growth trajectory within the industry. CNA will continue to focus on maintaining and improving its strong underwriting culture and building on its expertise in areas of deep specialization.
These steps will help CNA reach its goal of sustaining top quartile underwriting performance. CNA represents a significant portion of Loews’ sum of the parts, and as such, our repurchases underscore our confidence in our insurance business.
With that, I’d like to turn the call over to David.
David Edelson — Senior Vice President & Chief Financial Officer
Thank you, Jim, and good morning. Today, we reported fourth-quarter net income of $217 million or $0.73 per share compared to a net loss of $165 million or $0.53 per share in last year’s fourth quarter. For the full year, we reported net income of $932 million or $3.07 per share, up from $636 million or $1.99 per share in 2018. I will start by summarizing our much improved fourth-quarter results and then turn to the full year.
The earnings turnaround in Q4 was driven mainly by investment results at both CNA and the parent company as well as higher P&C underwriting income at CNA. CNA’s net income contribution swung from a $75 million loss in Q4 2018 to income of $244 million, an improvement of $319 million. Returns on CNA’s holdings of LPs and common stocks accounted for $146 million of the improvement and a pivot from net investment losses to net investment gains accounted for another $61 million. P&C underwriting income at CNA accounted for $119 million of our year-over-year net income increase, driven by lower losses and stronger underlying underwriting results.
CNA’s overall combined ratio declined almost 10 points from Q4 2018 to 95.6. And its underlying combined ratio, which excludes cats and prior year development, improved 3.1 points to 94.9. Like CNA, Loews’ parent company investment results benefited from more favorable equity market conditions as they swung from a $57 million after-tax loss to income of $67 million in Q4. Loews Hotels and CNA’s corporate segment were the main year-over-year negatives.
Loews Hotels incurred a $69 million after-tax charge from the impairment of two hotel properties in Q4. Absent discharge and other nonrecurring items such as preopening expenses on properties under development, Loews Hotels contribution to our net income would have been up around 20% as operating results continued to be robust. CNA booked a $48 million after-tax charge in Q4 related to its legacy asbestos and environmental pollution reserves, which reduced our net income by $43 million. In last year’s fourth quarter, CNA incurred a net retroactive reinsurance charge that reduced our net income by $24 million.
As a reminder, in 2010, CNA ceded substantially all its legacy asbestos and environmental pollution liabilities to national indemnity, pursuant to a loss portfolio transfer. Before turning to the full year, one last observation on the quarter. Average shares outstanding declined about 6% from last year’s fourth quarter, reflecting our ongoing share repurchase activity. Now for our full-year results.
We reported net income of $932 million, up 47% over 2018. CNA, Boardwalk and the parent company investment portfolio drove the increase with Diamond and Loews Hotels posting year-over-year declines. Let me start with CNA, whose net income contribution rose 23% in 2019 to $894 million, as CNA itself posted net income of $1 billion. Favorable investment performance propelled the increase.
Net investment income rose thanks to LPs and common stock investments, while net investment gains swung from losses in 2018 to gains in 2019. The swing in net investment gains was dominated by the change in market value of CNA’s holdings of non redeemable preferred stock.
P&C underwriting income was essentially flat year-over-year as better underlying underwriting income and lower catastrophe losses were offset by lower level of favorable net prior development in 2019 than in the prior year. For the year, CNA posted an underlying combined ratio of 94.8, marking its third consecutive year of improvement. This result included an underline loss ratio of 61. While CNA has already made great strides in enhancing its underwriting profitability, it remains laser focused on further reducing both its loss and expense ratios.
The long-term care reserve charge taken in the third quarter was the main detractor from CNA’s 2019 results. During 2019, CNA unlocked and strengthened its long-term care active life reserves and action it hadn’t taken since year-end 2015. This charge reduced Loews’ net income by $151 million. When factoring in long-term care claims reserve releases in both years, however, LTC reserve actions accounted for $133 million year-over-year reduction in CNA’s contribution to our net income.
The bottom line is this, CNA’s balance sheet is strong, its underwriting performance continues to improve with opportunities for further premium growth and combined ratio reduction. And its long-term care business continues to be aggressively and prudently managed to reduce risk and improve results. Boardwalk also had a good year as reflected by the significant increases in its contribution to our pre-tax and net income. Since the increase in net income contribution is due in large part to increasing our ownership from 51% to 100% in July of 2018, I will focus my comments on pre-tax income.
Pre-tax income was up $50 million in 2019 to $281 million as revenues generated by growth projects more than offset net revenue losses from contract restructurings, expirations and renewals. Also, about half of the year-over-year increase was from proceeds received when a customer filed for bankruptcy.
The parent company portfolio of cash and investments was the final driver of our year-over-year improvement. This portfolio generated $188 million of after tax income in 2019 versus an $8 million loss in 2018. The beat was almost entirely attributable to returns on equity holdings.The parent company portfolio of cash and investments averaged $3.9 billion in 2018 and $3.4 billion in 2019.
On the flip side, Diamond and Loews hotels, both showed year-to-year income declines. Diamond had a tough year with its pre-tax loss growing from $226 million in 2018 to $402 million in 2019. Diamond’s 2019 can be summarized by two statistics, revenue earning days up 4% but average daily rate down 17%. As a result, contract drilling revenues were down 12% and contract drilling margin declined from 32% to 15%. Contract drilling expenses were up almost 10%, largely due to the mix of rigs working in 2019 versus 2018, as well as the accelerated amortization of contract preparation costs on several rigs. In 2019, Diamond invested approximately $325 million in its fleet to ensure its raise continue to be considered top tier by customers. The company expects significantly reduced capital spending in 2020. Diamond ended the year with an undrawn revolver of almost $1.2 billion. Revolver capacity will decline to $950 million later this year. Loews hotels had a strong year operationally, but its contribution to our reported income was impacted by impairment charges and non-recurring pre-opening expenses.
The company reported an annual net loss of $31 million versus net income last year of $48 million. Excluding impairments and other nonrecurring items, Loews hotels’ net income increased 8% from $49 million to $53 million. Loews hotels’ adjusted EBITDA, which is defined and disclosed in our quarterly earnings supplement, was essentially flat from 2018 to 2019 at $227 million. However, when properties that Loews hotels’ no longer owns are excluded in both years, adjusted EBITDA was up about 2%.
Turning to the parent company. We continue to maintain an extremely strong and liquid balance sheet. At year end, the parent company portfolio totaled $3.3 billion with 77% in cash and equivalents and 22% in LP investments and marketable equity securities. During the fourth quarter, we received $110 million in dividends from our subsidiaries, $85 million from CNA and $25 million from Boardwalk. For the full year, we received total dividends of $927 million from CNA and Boardwalk with CNA contributing $825 million of that amount. Today, CNA declared a $2 per share special dividend and an increased regular quarterly dividend of $0.37. Combining the two, Loews will receive $575 million in dividends from CNA this quarter.
Please note that since Boardwalk is now wholly owned, it will no longer pay Loews a fixed quarterly dividend and will likely pay an annual dividend toward the end of the year. We currently expect Boardwalk’s dividend to Loews in 2020 to approximate 2019’s $100 million. I would highlight that we have worked diligently over the past couple of years to streamline the parent company.
Net corporate operating expenses, which include investment expenses, now netted against investment income and exclude corporate interest expense, dropped about 20% from 2018 to 2019. While some of this decrease relates to slightly higher allocations to our subsidiaries, much of it relates to parent company efficiencies. We repurchased 8.3 million shares in the fourth quarter for $417 million and 21.5 million during all of 2019 for $1 billion. Since year end, we have repurchased an additional 3.3 million shares for a total of $172 million.
I will now hand the call back to Mary.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Thank you, David. We’d like to move to our question-and-answer portion of the call. Laurie, would you please take us through the prompt?
Operator
[Operator Instructions]
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Thank you, Laurie. Our first question is why doesn’t Loews purchase the outstanding public shares of CNA? What is the benefit of maintaining CNA as a public company?
James S. Tisch — Chief Executive Officer
So right now, we believe that the public floating CNA while small is very important for a number of reasons. First of all, it provides transparency. Transparency for credit agencies and regulators, which I think they value very much and they like seeing a public start for CNA. Number two, it’s a barometer for all Loews shareholders just what the market is valuing CNA. And I dare say if CNA went public, then a lot of people would be asking why don’t we take it public so that they can actually see what the value of CNA is in the free market. Additionally, in order to attract the best talent, it’s important to have public shares so that it can be, those shares can be used for employee compensation plans. And I dare to say if CNA weren’t public, if we didn’t have those shares directly reflecting the value of CNA it might be more difficult to attract the best and the top talent.
One other thing that I’d add is that as long as Lowes owns over 80% of CNA, and right now it owns close to 90%. But as long as we own over 80%, we can do a tax consolidation and get all the benefits of owning 100% of the stock. So there’s absolutely no penalty vis-a-vis cash income taxes, resulting from Loews’ owning 90% instead of 80% of the stock – 90% I’m sorry instead of 100% of the stock.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Jim, second question is, what has been the impact of the coronavirus on Loews hotels business?
James S. Tisch — Chief Executive Officer
So at this point in time, it hasn’t had much of an impact at all. Yes, the virus is affecting areas like China and Asia dramatically, but we haven’t seen so much of an impact here in the United States. Our hotel people are continuing to monitor the situation. In terms of inbound travel to Loews hotels from China represents less than 1% of our business. So if the status quo continues to hold, I don’t see there being much effect of coronavirus on our hotel business.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Next question relates to Diamond. What’s the role of Diamond in the Loews portfolio?
James S. Tisch — Chief Executive Officer
So Diamond may have a big impact in a GAAP sense on Loews results. But our downside is really limited to our stake in the company, which today represents less than $1 per Loews corporation share. I would say that the current share price Diamond is really trading more like an option than it is like a stock. Regarding the offshore drilling industry in ’89, knowing that it was highly cyclical when the current downturn started in ’14, we thought we’ve seen this movie before having weathered a number of drilling cycles downside. However, this downturn now has lasted much longer than we are, I dare say anyone could have anticipated.
Nevertheless, Diamond, like the management continues to focus managing its cost and maximizing earnings potential on the assets through diversification and good operating performance. One other thing, I think the bearishness in Diamond is really – has been around just since the beginning of the year. At the end of last year, oil prices West Texas Intermediate was $61 a barrel, it traded up to $63 a barrel in early January and now as you all know it’s down to $50.
And I think that move down to $50, which was due in large part to the coronavirus and also a sense that the world production capacity would be a bit higher than demand this year, but not in the future. So those two factors have caused a dark bearishness to overcome the whole offshore drilling industry. I could easily foresee at some point oil prices getting back to the $60 barrel and $65 barrel level. I think that, shale oil cannot be, the growth will not — in shale oil production, will not grow significant at those prices. And I ultimately say next year next year could see oil prices at the $65 to $70 a barrel level, which would I believe lead to significant improvement in the offshore drilling industry.
What happened now is that this is an industry-wide phenomenon. What’s going on is not just affecting Diamond offshore, the day rates are going to affect all companies and in order for day rates to improve, I think we need to see an increase in oil prices, which as I said I think is coming in as we say the fullness of time.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Thank you. We have no further questions at this time. We want to thank all of you for your continued interest. A replay will be available on our Web site loews.com in approximately two hours. This concludes Loews call for today.
Operator
[Operator Closing Remarks]