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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning. This name is Kristy, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Loews Corporation Q4 2017 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 will now turn the call over to Mary Skafidas. Please go ahead.
Thank you, Kristy, and good morning everyone. A copy of the Loews' earnings release, earnings supplement, and company overview may be found on our Web site, 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 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 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. Before he does, Jim Tisch, our CEO, will kick off our call. Jim, over to you.
Thank you, Mary. Loews had a strong quarter and a good year, with each of our subsidiaries contributing to our overall success. Our CFO, David Edelson, will go into the details about our results later in the call, as well as discussing the implications of the recently-passed tax cuts for Loews and our subsidiaries. Before he does however, I'd like to talk about CNA and share repurchases. CNA has steadily improved over the past 15 years under a series of strong leadership teams. The company has taken steps to focus on its core competencies in commercial property casualty insurance by transforming itself from a not-so-focused multi-line insurance company into a highly-focused commercial property casualty company.
This transformation obviously didn't happen overnight, and in fact, it required enormous effort and discipline by the management teams at both CNA and Loews. Specifically, from 1999 to 2010, CNA disposed of a number of its businesses including reinsurance, personal automobile insurance, life insurance, and group health. Additionally, the company reinsured its asbestos and pollution liabilities to reduce balance sheet risk.
Since joining the company in November of 2016 as CEO, Dino Robusto has turbocharged CNA's evolution. On his leadership the CNA team has been pulling a number of levers to improve underwriting performance. They have enhanced risk selection, retooled their claims department, and continue to upgrade their underwriting talent.
CNA has provided a stable market for agents and brokers, a factor in the company's ability to strengthen its relationships with distributors in a time of industry change. And the company has focused intently on reducing its expense ratio while also investing in the business. Dino and the team at CNA believe that there is even more room for improvement in each of these areas, and we agree. Also, CNA continues to actively manage its long-term care book of business, mitigating risk by diligently managing claims, and obtaining rate increases from state regulators when necessary. Additionally, CNA is exploring new strategies to lessen the effects of rate increases on policy holders.
On the talent front, CNA added significantly to its bench in 2017 across many areas, including underwriting, technology, operations, and claims. All of these new senior executives are highly successful industry veterans with outstanding track records and expertise. Earlier today, in light of CNA's 2017 results, its fortress balance sheet, and the CNA board's outlook, CNA announced a $0.30 quarterly dividend as well as a $2.00 special dividend. In March of this year, Loews will receive $558 million in dividends from CNA. And over the last four years, including the upcoming March dividend payment, Loews will have received $3.2 billion in dividends from CNA.
As we look back over the last decade CNA's success comes as no surprise to Loews. Although we understood that it would take time and lots of hard work to turn CNA around, we had a vision for what the company could be and held steadfast to that vision. Also, and very importantly, we were able to recruit the right CEO for each stage of CNA's evolution. To sum up, we believe that the company is poised to continue to profitably and responsibly grow its business. And that moving forward, CNA can and will deliver even stronger operating results.
Moving on from CNA, I want to give a quick update on share repurchases. In the fourth quarter of 2017 we repurchased 4.6 million Loews shares at a cost of about $230 million. This trend continued into the first quarter of 2018 when we purchased another 4.3 million shares through February 9th, with the benefit of 20/20 hindsight we could have bought in more shares over the last two years. However, since the third quarter, we've bought back almost nine million shares representing almost 3% of the company. We began repurchasing our stock because of the wide discount between the stock price and our assessment of the intrinsic sum-of-the-parts valuations.
Additionally, we believe that CNA will continue to grow and prosper, and that the outlook for our four other businesses is improving. Looking beyond the past year or two, in the past decade we have acquired almost 40% of our outstanding shares, continuing our nearly half-century practice of substantial share repurchases.
And now, I'd like to turn the call over to David.
Thank you, Jim, and good morning everyone. We reported fourth quarter net income of $481 million or $1.43 per share, up from $290 million or $0.86 per share in last year's fourth quarter. Included in our fourth quarter net income was a $200 million net benefit related to the passage in December of the Tax Cut and Jobs Act. The benefit, which had no cash impact, stems largely from the re-measurement of our net deferred tax liability.
Absent the $200 million benefit, our net income was $281 million or $0.83 per share, down $9 million from last year's fourth quarter. Before I discuss the drivers of fourth quarter net income, I'd like to draw your attention to page seven of our earnings release and page five of our earnings supplement, where we show the impact of tax reform by reporting segment for the fourth quarter and full-year.
Let me briefly summarize the impact by segment. CNA booked a charge in the fourth quarter as it wrote down its deferred tax asset due to the lower tax rate. In 2018 and beyond, tax reform should be quite positive for CAN. For Diamond itself tax reform had offsetting impacts. The company benefited as it wrote down its deferred tax liability because of the lower tax rate, while it also took a charge for the one-time mandatory deemed repatriation of foreign earnings. I would note that this charge had no cash impact. At the Loews level however we did book a charge in the Diamond segment reflecting the impact of changing tax rates on the differential between our book basis and tax basis in Diamond. As a reminder, Diamond is not included in our consolidated tax return.
For Boardwalk, Loews booked a substantial benefit as the lower tax rate caused us to write down the deferred tax liability we had built up over the past decade from Boardwalk's capital projects. And for those hotels we also benefited from the lower tax rate through the write-down of a deferred tax liability. Going forward, excluding any changes in marketplace behavior, corporate tax reform especially the reduction in the federal corporate rate should be positive for Loews on a consolidated basis.
Turning to the quarter, rather than plough through each segment's year-over-year quarterly variance, let me instead highlight the key drivers of fourth quarter earnings and what caused the slight decline from Q4 2016. These highlights will exclude the previously noted impact of tax reform. Diamond Offshore drove our slight year-to-year earnings decline with net income contribution down $74 million from Q4 2016.
Contract drilling revenues were up 12%, and rig margin declined substantially, largely due to fewer rigs working and lower day rates on re-contracted rigs. In addition, during the quarter the company impaired one of its rigs and booked restructuring and separation costs as it continues to [technical difficulty] expense base.
On the bright side, CNA had a strong quarter to top off a strong year. Its quarterly net income contribution was up $54 million year-over-year, driven mainly by a substantial increase in underwriting income. CNA posted a combined ratio of 94 in Q4 2017, down from 99.9 in last year's fourth quarter. As a reminder, when it comes to combined ratios lower is better. Excluding catastrophe losses and prior year development, the underlying combined ratio improved, from 98.3 to 95.8. And for the full-year, the underlying combined ratio was 95.5, down 2.4 points from 97.9 in 2016. Jim mentioned the focus at CNA on underwriting excellence as the key lever to improving underwriting profitability. The fourth quarter and full-year combined ratios demonstrate the progress being made.
Another bright spot was Loews Hotels, which posted net income of $13 million in Q4, up from $5 million last year. The joint ventures at the Universal Orlando Resort posted excellent results, as did the Loews Miami Beach, which was just completely a renovation during last year's fourth quarter. As Jim outlined during last quarter's remarks, Loews Hotels appears to be hit its stride operationally and strategically.
Boardwalk's contribution to our net income was essentially flat on the quarter as were the earnings generated by the parent company investment portfolio. Corporate, which includes our newest subsidiary Consolidated Container, improved versus the prior year largely due to the timing of compensation accruals.
Let me now turn to a brief review of the drivers of our full-year results. Loews reported 2017 net income of 1.16 billion or $3.45 per share, up from 654 million or $1.93 per share last year. Excluding the 200 million net benefit related to tax reform, our net income was 964 million or $2.86 per share, up 310 million from the prior year.
Again rather than walk through each segment in detail, let me highlight a few key drivers of the substantially year-over-year increase. Lower rig impairments at Diamond offshore accounted for 235 million of the earnings improvement. Excluding impairments, Diamond's earnings contribution declined 40 million year-over-year reflecting the weaker operating environment and some unusual items.
CNA in the aggregate accounted for 105 million of the increase attributable mainly to improvements in non-cat underwriting income and life and group results. Additionally, 2016 results were impacted by adverse development related to the 2010 last portfolio transfer. Net investment income and realized gains were also up over the prior year.
Partially offsetting these improvements were elevated catastrophes losses in 2017 given the high incidence of natural catastrophes during the year. Loews Hotels contributed to the net income increase thanks to improving operating performance and a gain on the sale of a joint venture hotel property in 2017. Boardwalk's net income contribution was essentially flat year-over-year. However, absent the loss Boardwalk took in 2017 on the sale of a processing facility, its net income contribution would have been up $12 million.
Parent company net investment income was flat year-over-year, and the elevated cost in corporate and other for full-year 2017 are almost entirely attributable to cost incurred in connection with the acquisition of Consolidated Container. We continue to maintain an extremely strong and liquid balance sheet. At year-end, the parent company portfolio totaled 4.9 billion with 57% in cash and equivalent, 20% in LP investments, 13% mixed maturities and 10% marketable equity securities.
During the fourth quarter, we received 86 million in dividend from our subsidiaries, 73 million from CNA, and 13 million from Boardwalk. For the full-year, we received total dividend of 804 million from CNA and Boardwalk with CNA contributing the lion share of that amount. Today, CNA declared a $2 per share special dividend in addition to its regular $0.30 quarterly dividend. Combining the two, Loews will receive approximately 560 million in dividend from CNA this quarter.
As Jim mentioned, we repurchased 4.6 million shares in the fourth quarter for $231 million. Since year end, we have repurchased an additional 4.3 million shares for $218 million. Shares outstanding adjusted for all share repurchase activity currently stand at around 328 million.
I will now hand the call back to Jim.
Thank you, David. Before I turn the call back to Mary, I want to reflect on the fact that one of the most important responsibilities that we have at Loews is the selection of CEOs for our underlying business, and I cannot think of a time in Loews' history when we have had a more talented and effective group of such individuals.
As already mentioned, Dino Robusto's super-charged performance at CAN; needless to say, we are thrilled with his leadership and the direction in which he is taking the company. All of our CEOs are equally outstanding. Marc Edwards at Diamond continues to expertly steer the company through a protracted downturn in the offshore drilling industry maintaining Diamond's financial stability while differentiating the company from its competition.
Stan Horton at Boardwalk is one of the best CEOs in the midstream market. With his strategic vision and deep industry knowledge, Boardwalk is working to mitigate its re-contracting risks while adding profitable organic growth projects. Sean Fallmann, the CEO of our newest subsidiary CCC, has demonstrated his forward-looking approach and extensive expertise in the packaging industry, and we have great expectations for his leadership of the company.
And finally, we have the highest level of confidence in Jon Tisch, the CEO of Loews Hotels. Under Jon, Loews Hotels has embarked upon a new strategic direction by focusing on what we do best, group travel and immersive destinations. While Loews is the holding company, we don't have a lot of bureaucracy. We put the right people in leadership positions at our subsidiaries and let them do their jobs. Where we have engaged with our subsidiaries are the areas where we think we can add value, such as major capital allocation decisions, accessing the capital markets, and the ratification of our subsidiaries' mid to long-term strategies. This approach has served Loews shareholders very well over the past 50 years, and we expect it to continue to do so for the foreseeable future.
And now, back to Mary.
Thank you, Jim.
Kristy, we're ready for the question-and-answer portion of the call.
Thank you. [Operator Instructions] And your first question is from Michael Millman with Millman Research.
Thank you. So want to talk about a little -- your intrinsic value, what's that based on? Related to that, you have for -- you have past 12 months or more said that the -- you thought the equity market was too high, and therefore you didn't want to buy back shares. The market is higher, yet you bought back shares. Kind of related to that, you or the company over the past several months has bought a lot of GE, for example, and kind of wondered if you thought that either the market was going up even more or GE was hugely undervalued?
So, first things first, I don't want to comment on the stock price of General Electric. There are lots of people that are doing it, and I don't think that it's my place as a director to be doing that. With respect to Loews, in fact I mentioned specifically in my remarks that we look at the intrinsic sum of the parts value. And what that means is that we look at what we think are the values of each of our subsidiaries. We take a lot into account in doing that. We look at what the market price of the subsidiaries are, we look at what the prospects are, we try to assess whether we think the market is right or wrong in its assessment of the value of the companies. We look at the value of our nonpublic subsidiaries, hotels, and CCC, and the Boardwalk general partner. And we put all that into our thinking and calculations, and come out with a value that we think the whole company is worth. And when it gets to the right level of -- when the company gets the right level of discount then we feel comfortable buying the shares. And, starting in the fourth quarter, we felt comfortable doing that.
So, your comfort was to some extent or the difference was to some extent based upon what the market was doing. Thus I assume that you thought that market price was reasonable, no longer overpriced. Is that a fair assumption of what you're saying, a fair…
No, I'm not -- do not mistake our repurchase of Loews shares for giving any guidance as to our view of the level of the stock market. I'm not making any statement about that. We just felt comfortable repurchasing our own shares at these levels.
I see. And then to switch, another question, if I may, sort of on DO, the prices for oil are going up, are you seeing any demand for drilling or are those prices really based upon a reduction in production?
So, in fact we are seeing just the beginning of some green shoots in the offshore drilling garden. We're seeing it specifically for more [ph] rigs. We're seeing it in Asia, in Australia, and also in the North Sea. And what I think is happening is that there was extensive scrapping of rigs in that space, and then just a little bit of increase in demand. The demand is there I think because the projects that we're doing where we're seeing work are development projects where there can be a quick payback to the capital investment in the project. My strong guess is that in the coming year we're also going to start to see a pickup in enquiry for drill ships which generally tend to do work that takes longer to generate cash returns for the oil companies.
But there's no doubt that they have seriously underinvested in productive oil capacity. And I think the move up in oil prices reflects that underinvestment in productive capacity. And my general guess is that oil will continue to move up, tempting oil companies to start to spend more on their exploration and production.
Great. Thank you very much.
Our pleasure.
Your next question comes from Josh Shanker with Deutsche Bank.
Yes, thank you. So, Jim, can we talk a little about dividends from Consolidated Container, whether or not you want them to reinvest their earnings into the company, and who pays for bolt-ons in that business as it goes forward?
So, CCC is doing very well. They have their own development people that go out and look for deals. There are two that are in the process of being done now. CCC will be able to finance those transactions with its own balance sheet and using the loan that was used to purchase CCC. So we do not anticipate that the current transactions under consideration will rely on the Loews treasury for financing.
And, Josh, I would just remind that we -- when I think in our second quarter call, when we first talked about CCC, we mentioned that we did not expect to receive dividends from CCC initially because we expected them to use their cash flow to either pay down debt or do these sorts of bolt-on acquisitions.
And are there some acquisitions that are large in nature that would require you to loan further money to CCC to do them or the strategy is that they'll all be self financed?
No, it's possible that there could be acquisitions that would require some equity funding from Loews, but we're very comfortable doing that. We have a lot of confidence in the management, in the company, and the industry.
And when do you think that you would look to all the investment mature such that you'll receive dividends from it?
I don't know. We've got to see what's available in the marketplace; we got to see how their own organic growth is going. There are just an awful lot of factors. But what I do know is that we're pleased with where CCC is, its position in the industry, the maturity of its management, and the opportunity set that they're seeing. But just because there's an opportunity set doesn't necessarily mean that transactions will get completed, but they're working hard to do that.
But if they can use their free cash flow to invest at attractive returns on invested capital then we're happy to have them do that.
All right. And then when I look at noncore -- I guess the non mostly owned companies, that CCC, Hotels, CNA, Boardwalk, and Diamond out of the picture, do you have any thoughts on how I might benchmark performance for the Loews investment portfolio, and any recommendations to track performance over time and whether you're doing a good job or whatnot?
We have -- all right, let's talk about what we have in the Loews portfolio. We have $250 million of equities; we have another billion dollars or so of hedge funds. My guess is it's very difficult for you as an investor to be able to track those, but what I can tell you is that their performance is doing reasonably well. Our equities this past year I think exceeded the S&P 500 better than a lot of mutual funds I know. And we are very, very comfortable and pleased with our asset managers.
And in terms -- would you be interested in providing disclosure that would help us track it over time? Is there any like sort of way you think that we can play with the numbers you give up to sort of track it?
Josh, we're a $15 billion company. We have a portfolio of over $50 billion. You're asking us to provide more disclosure on a $250 million equity portfolio. That sounds crazy to me.
Well, I mean I'd look at it as though you have more cash -- there's billions of dollars of cash you manage on the balance sheet though.
Yes, but remember, on average, let's say 60% to 65% -- we're not at 57%. But 60% to 65% of it has been cash and equivalents. So you know the return we're getting on that.
Yes.
So when you look at the investment income generated by the parent company you can, if you wanted to, you could assume what we're earning on our cash, and then you could intuit what the yield or what the earnings are on the remainder.
All right, I'll give it a try. Thank you very much for the answers.
Sure.
Thank you. [Operator Instructions] And your next question comes from Bob Glasspiegel with Janney.
Good morning, Loews.
Good morning, Janney.
The hotels, you're excited about the strategic direction. You had a really nice earnings and EBITDA improvement. And I know the earnings don't always match the sort of underlying dynamics in that business, but are we in a position where we're going to start to see a similar sort of growth as we had this quarter, seems like the tax rate will be able to help on your after tax earnings. Just some general comments about where we're going from a reported basis, and what are the strategic positives that the Jon is bringing?
Well, you're talking about hotels specifically, Bob?
Hotels, yes.
Okay. Yes, I mean, you saw the quarter, you saw the year. I think we've talked in the past, and you can see in the company in the material that we've put out today that we have a number of hotels in the offing in Kansas City, Arlington, Texas, St. Louis, in Orlando itself, again adding to the Universal Orlando joint venture. We only have one new hotel opening in 2018. That's a hotel at Universal Orlando. So the benefits of some of the exciting developments underway won't be shown really in our financial statements for another few years. You will see the opening dates on those properties and of course their pre-opening and those sorts of things associated with them as well. So, yes, we are building momentum, but always tempered by the fact that some of these growth projects are a couple of years out.
Robert, let me add a little to provide a little bit depth to that. In my comments, I said that we are focusing on what we do best at Loews Hotels, group travel and immersive destinations. Kansas City is all about group travel. We are going to have an 800 room hotel atop - or alongside the Kansas City Convention Center. We will be the newest hotel in Kansas City in decades. Newest Convention Hotel and we expect that hotel to do very well as a major regional convention center hotel. We think that the demand is built in by the location and the newness of the hotel. In Arlington, St. Louis and Orlando, that's all about immersive destination that there are -- those are venues where we believe people will naturally gravitate, want to go to. And for all of those, we see the hotels that we are building as hotels that can cater to the people that coming to these locations.
The strategy has been proven to us many times over in Orlando and also in Miami Beach where we are able to achieve especially in Orlando occupancy rates and room rates that is substantially above what is available to others in the market. And we think there is a good opportunity for that to occur in the other immersive destinations in which we are building. The problem is that you can't build a hotel overnight. It takes some time. And so, these hotels won't be coming online in '18. Some of them will just be starting up in 2019. So, it will take some time to show up in the numbers.
Good, long answer. I appreciate it. Tax rate that's gone down to 20s or is there something that should we thinking about differently?
Well, we are consolidated with all but Diamond. And so, I think we do benefit from the lowering of the corporate tax rate. But, CNA is a big piece of that. And I think you understand what its tax position is and that sort of then gets consolidated into hours.
I was just talking about hotels.
Oh, I am sorry. Hotels, yes…
I think it's been 30s and it should go down…
It's also impacted by state and local taxes in the jurisdictions where it operates. So, it's not just a pure federal rate.
Okay. And that's been running higher than 35 as best I can determine it's been sort of low 30s, but maybe I am looking at it incorrectly. Appreciate all your answers. Thank you.
Our pleasure.
Thank you. At this time, there are no further questions. I will return the call back to Mary Skafidas for any additional or closing remarks.
Thanks, Kristy, and thanks to all of you for your continued interest. A replay will be available on our Web site at loews.com in approximately two hours. That concludes Loews' call for today.
Thank you. This does conclude today's conference call. You may now disconnect.