Loews Corporation (NYSE:L)
Q2 2014 Earnings Conference Call
August 4, 2014 11:00 a.m. ET
James Tisch – President, Chief Executive Officer
David Edelson - Chief Financial Officer
Mary Skafidas – VP of Investor and Public Relations
Michael Millman – Millman Research Associates
Josh Shanker – Deutsche Bank
Ladies and gentlemen thank you for standing by, and welcome to the Loews’ second quarter 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’ll now turn the call over to Mary Skafidas, Vice President of Investor and Public Relations. Please go ahead.
Thank you, Laurent. Good morning everyone. Welcome to the Loews Corporation second quarter 2014 earnings conference call. A copy of our earnings release and earnings snapshot slides may be found on our website loews.com.
On the call this morning we have our Chief Executive Officer Jim Tisch and our Chief Financial Officer, David Edelson. Following our prepared remarks this morning, we will have a question and answer session. Before we begin, however, I will remind you that this conference call might include statements that are forward-looking in nature. Actual results achieved by the company may differ materially from those projections made in any forward-looking statements. Forward-looking statements reflect circumstances at the time they are made and 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 for reconciliation to the most comparable GAAP measures.
I will now turn the call over to Loews’s Chief Executive Officer Jim Tisch.
Thank you, Mary. Good morning and thank you for joining us on our call today. Loews had net income from continuing operations of $303 million, or $0.79 per share, compared to $261 million or $0.67 per share for the second quarter of 2013.
Before we go into specifics about this quarter, I want to take a moment to focus on HighMount. When Loews acquired HighMount in ’07, we considered it a low risk gas manufacturing business. Since then, the shale revolution and most notably the Marcellus and Utica plays have dramatically changed the U.S. natural gas market.
When we bought HighMount, gas was trading at $7 per Mcf, and was thought to be a finite commodity. A year later it hit $14. Since then it has hit lows of $2 per Mcf and it is now at about $3.85.
In light of the changing circumstances in the natural gas market, last quarter we announced that we would conduct a strategic review of HighMount, which could include the sale of the company. We are currently evaluating proposals for the sale of HighMount assets and can't say much more about the process at this time.
Later on in the call, David Edelson, our CFO, will give you more details on the accounting ramifications of moving HighMount to held for sale status. We will be the first to tell you that HighMount is not the most successful investment we’ve ever made. We are certainly not always right but over the years, fortunately we've been more right than wrong.
Now let’s take a look at about the performance of our other subsidiaries. At CNA, underlying property casualty underwriting results continued to improve. The non-cat accident year loss ratio is down almost 1.5 points versus the same quarter last year. CNA's property casualty business continues to trend in the right direction, albeit at a slower pace than I would like. While CNA's specialty is performing well and producing strong accident year underwriting results and favorable prior year development, CNA commercial’s progress has been more measured, being hampered by certain lines of business that the company is exiting or re-underwriting. The impact of these course corrections will take time to say.
The sale of Continental Assurance Company closed last week, CNA's long-term care run-off business now comprises the vast majority of CNA’s life and group segment. Long term care results for the first of 2014 have improved over prior years. However in this line of business, two quarters of results does not necessarily constitute a trend. CNA is trying to build on these improving results and is actively managing the business.
Turning to Diamond Offshore. The outlook for the offshore drilling market remains uncertain. This market has become more competitive as rigs enter the worldwide fleet and oil companies reduce their exploration and production spending to improve cash flow. My sense is that over the next several years, oil companies will start to take advantage of reduced day rates as well as the softening of other services costs and that rig demand will subsequently increase.
Diamond maintains the highest credit ratings than any offshore driller in the industry and it’s prepared to capitalize on whatever market conditions may prevail. We’re pleased to report that Diamond has negotiated a 9-month contract with Murphy Oil for a third drillship, the Ocean BlackRhino at a day rate of $550,000 a day. This charter will in effect substitute the BlackRhino for the Ocean Confidence, which is undergoing an extensive special survey. Murphy will have an option to convert this contract into a multi-year term.
Over the past several years, Diamond has committed to the construction of four new drillship, the construction of a new harsh environment semi-submersible rig and the reconstruction of two older semi-submersibles. All these rigs, with the exception of one drillship, are now contracted at attractive day rates.
Moving on to Boardwalk. As we’ve discussed previously, the natural gas industry remains in a period of transition as shale plays continue to develop and transform gas flows in the United States. The good news is that this transformation is creating attractive investment opportunities to expand Boardwalk’s existing pipeline infrastructure. However these opportunities will not bear fruit overnight. This process will take some time and patience.
As Stan Horton mentioned on the Boardwalk call earlier today, he is encouraged by the deal flow that he is seeing. Boardwalk’s assets are either attached to, or located near many diversified shale plays. They’re also located near major natural gas users, such as proposed gas-fired power generation and petrochemical plants and LNG export facilities. Boardwalk’s proximity to these shale plays and demand drivers is positively impacting its ability to take advantage of opportunities and make attractive investments.
Earlier today, Boardwalk highlighted that it is pursuing projects which represent approximately 2 billion cubic feet per day of demand. Most of these projects involve repurposing existing pipeline capacity. These include projects which came about due to the increased demand to transport Marcellus and Utica shale gas supplies from north to south.
Additionally, Boardwalk southeast market expansion goes into service in the fourth quarter of this year and will transport natural gas to growing areas of demand, including the industrial and power generation markets in Mississippi, Alabama and Florida. All of these investment opportunities result from increased natural gas supplies in the United States and should benefit Boardwalk as natural gas production continues to increase in the coming years.
Last but not least, let’s turn to Loews Hotels & Resorts. Loews Hotels has been focused on growing its brand and broadening its consumer base through the addition of new properties in gateway cities. Additionally, the company is reaping the benefits of the extensive renovations completed over the past year. In the last three years, Loews Hotels has acquired properties in Boston, Washington DC, Minneapolis, Los Angeles and most recently in Rosemont, Illinois near the O'Hare airport.
Loews Hotels is also developing the 400-room Loews Chicago Hotel that is scheduled to open in early 2015. These properties expand Loews Hotels’ footprint while maintaining the four plus star quality that is customers know and expect.
And finally, Loews Hotels continues to build on its 15 year relationship with Universal Studios in Orlando. In late June, we opened the final phase of our first three star product, 1800-room Cabana Bay Beach Resort. Early results are positive and our three original hotels continue to perform well. Book soon if you want a room.
At the Loews Holding company, we ended the quarter with cash and investments of $4.9 billion. The company has also repurchased 3.9 million shares of Loews common stock in the second quarter and 2.45 million shares since July 1. The company spent $302 million on the 6.9 million shares repurchased in this year.
Now I’d like to turn the call over to David.
Thank you, Jim, and good morning. For the second quarter of 2014, Loews reported income from continuing operations of $303 million or $0.79 per share, compared to $261 million or $0.67 per share last year. Net income, which includes a loss of $187 million from discontinued operations, was $116 million for the quarter.
Let me spend a moment on discontinued operation. As Jim mentioned, in May, we announced that HighMount is pursuing strategic alternative, including a potential sale of the business. We initiated a process during the quarter that we expect will result in the sale of HighMount. Accordingly HighMount assets and liabilities have been reclassified as held for sale as of June 30, 2014 and are reported at estimated fair value, based mainly on market response to date. The associated impairment, together with the results of operations of HighMount have been classified as discontinued operation.
During the second quarter, Loews recognized an after-tax loss from discontinued operations of $192 million related to HighMount, which includes an impairment loss of $167 million to reflect the excess carrying value of HighMount over its estimated fair value. Additionally, this impairment loss reflects certain estimated exit and disposal costs. We expect that the impairment will be subject to subsequent adjustment, which could be positive or negative as the sale process reaches its conclusion. HighMount’s operating results are also included in discontinued operations and will continue to be until the close of the transaction.
Finally, discontinued operations in the second quarter included after-tax income of $5 million from Continental Assurance Company, CNA's run-off annuity and pension deposit business. As Jim mentioned, the sale of CAC closed last week.
For the six months ended June 30, 2014, income from continuing operations was $568 million or $1.47 per share as compared to $583 million or $1.49 per share in the prior year period. CNA's contribution to income from continuing operations, including net realized losses, was $235 million in the second quarter of 2014 versus $172 million last year. The main positive factors impacting CNA's year-over-year increase were improved result in CNA specialty business and in its life and group segment, together with a one-time curtailment gain from the elimination of certain postretirement medical benefits. Offsetting these positives were lower earnings in CNA Commercial, stemming from unfavorable prior year development.
Additionally, CNA's second quarter earnings in 2013 benefited from a legal settlement attributable to CNA Commercial.
Diamond Offshore’s contribution to income from continuing operations for the second quarter of 2014 was $42 million, compared to $87 million in the prior year quarter. Diamond’s year-over-year earnings decrease was primarily due to reduced contract drilling revenues as diamond experienced more rig downtime because of scheduled surveys and rigs being sacked [ph]. Higher contract drilling expenses relating mainly to the surveys also contributed to the profit decline.
Boardwalk Pipeline’s contribution to income from continuing operations was $17 million in this year’s second quarter as compared to $22 million in Q2 2013. Boardwalk income was basically flat year-over-year, excluding gains on the sale of operating gas, which were significant in last year’s second quarter.
I would also note that last week, Loews entered into a 10-year $300 million subordinated debt agreement with Boardwalk, under which Boardwalk has the right to borrow at any time until year-end 2015. The purpose of this facility is to help Boardwalk finance various growth projects.
Loews Hotels & Resorts contributed $5 million to income from continuing operations, up from 1 million in the second quarter of 2013. The earnings improvement was driven by a 12% year-over-year increase in RevPAR in owned and joint venture hotels, with much of the improvement coming from properties that have recently undergone renovation.
Holding company cash and investments at quarter end totaled $4.9 billion as compared to $5 billion at the end of March. We received $135 million in dividends from our subsidiaries in the second quarter of 2014 which breaks down as follows: $61 million from CAN, $61 million from Diamond, and $13 million from Boardwalk.
During the first half of 2014, we received $512 million in dividends from our subsidiaries, up from $364 million for the first half of 2013. As a reminder, CNA paid a $1 per share special dividend during this year's first quarter.
In terms of returning capital to Loews’ shareholders, we paid $24 million in cash dividends during the second quarter of 2014 and spent $171 million buying back 3.9 million shares of Loews common stock. We continue to repurchase shares after the quarter ended. From July 1 through August 1, we bought back a further 2.45 million shares of Loews common stock for $107 million.
I will now hand the call back to Jim.
Thank you, David. Before we open up the call for the questions, I wanted to add that over the last few years the industries in which our subsidiaries operate have certainly witnessed tremendous changes. We all know that change brings both risk and importantly opportunity. Our experience with HighMount unquestionably has been disappointing, we believe that each of our other subsidiaries, CAN, Boardwalk, Diamond Offshore and Loews Hotels have real opportunities ahead that should in the long-term benefit all Loews shareholders.
Now I’d like to turn the call back over to Mary.
Thank you, Jim. Lorri, at this time we’d like to open the call up for questions. Can you please give participants instructions on how to do that?
(Operator Instructions) Your first question comes from the line of Michael Millman of Millman Research Associates.
Michael Millman – Millman Research Associates
Thank you. Assuming that you are able to dispose HighMount roughly we have it on the books, would that actually create a tax loss that you could use if you decided to sell some other assets?
Mike, I don’t want to comment that at what price we might be selling HighMount. But yes, we would expect that the sale to generate additional tax benefits that we should be able to utilize in the future.
Michael Millman – Millman Research Associates
And also again what’s your plan on -- assuming you sell with the cash proceeds in the near-term
We have no plans. We currently have $4.9 billion. For the past several quarters we’ve had roughly $5 billion and as I am fond of saying over a long period of time we don't let cash burn a hole in our pockets.
(Operator Instructions) Your next question comes from the line of Josh Shanker of Deutsche Bank.
Josh Shanker – Deutsche Bank
Jim, can you talk a little bit about the bond market right now and what you're doing – and are you concerned, are there opportunities –
To quote myself, I think from sometime before, the yield is too darn low. The yield on 10-year note right now is about 2.5%, inflation is about 2% based on the CPI and in a normal world you would expect to see a 10-year note probably 150 to 250 basis points higher than the current yield. But CNA is in the business of managing a fixed income portfolio. We can’t have all our assets and starks. And we just have to grin and bear it at CNA with respect to the relatively low yields the we’re able to obtain.
For our non-matched portfolio we’re trying to keep that portfolio as short as we can and the benefit of the rolldown in the yield curves as the securities and we owned securities. With respect to our match portfolio, we were fortunate enough a year ago at this time to be buying a lot of municipal bonds which have worked to be very attractive investments for us. We were able to lots of securities with four, five and thin-film 6% coupons and those have gone up dramatically in pricing, have been used –we pre-bought those securities because it was such a good margin and have been using that to fund some of our match liabilities.
Josh Shanker – Deutsche Bank
Is there anything that you can do with derivatives to protect yourself from rising rates?
Not really. CNA has the ability and intent to hold securities surprise recovery. So we just don't worry about it.
At this time, there are no further questions. I would now like to turn the call to Mary Skafidas just for anything or closing remarks.
Thanks, Lorri and thank you for all joining our call. Replay will available on our their loews.com in approximately two years. That conclude today’s call.
Thank you participation in the Loews’ second quarter earnings conference call. You may now disconnect.
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