Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Loews Corporation Q3, 2019 earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question. During this time.
Simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press the pound key. Thank you I'll now turn the call over to Mary Skafidas, Vice President of Investor Relations and corporate communications.
Thank you Laurie and good morning, everyone. Welcome to Loews Corporation third quarter earnings Conference call a copy of our earnings release earnings supplement and company overview may be found on our website <unk> dot com.
On the <unk>. This morning, we have our Chief Executive Officer, Jim Tisch, and our Chief Financial Officer Officer, David Adelson.
Following our prepared remarks. This morning, we will have a question and answer session, which will include questions from 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.
Repair to provide your conference I'd number.
In summary of the company's statutory forward looking statements disclaimer.
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Included in the company's filings with the SEC.
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I will today, we might also discuss non-GAAP financial measures.
This call may be.
Further our security filings and earning supplement for a reconciliation to the most comparable GAAP measures.
I will walk you through the key drivers for the quarter, but before he does.
Jim Tisch, our CEO will kick off the call Jim over to.
Yes.
What was had a much broader quarter then the numbers might indicate.
As we close.
Two subsidiaries seen a contributing positively to our results.
DNA is continuing to see solid growth in rate.
This isn't it.
Increased about 6% across the PMC business.
Even as rate increased retention remained in line with past quarters at 83%.
New business also increased 10% over last year's third quarter wall, Hulu rates, and new business growth or already flowing through net written premiums, which are up about 8% compared to the prior year Billfold positive impact will take time to be reflected in earned premium.
Additionally, the third quarter two is the time when CNN reviews, its long term care book of business.
For the first time since 2015, CNS assumptions were unlocked, resulting in a third quarter after tax charge at CN a over $170 million.
George predominantly relates to expectations for lower interest rates in both short and long term as a reminder, this is a GAAP charge that has no impact on statutory capital also this charge was partially offset by a 44 million dollar after tax relief from Sienna is low.
Long term care claims reserves.
Hi. This is my custom every quarter I pick a few key topics talk about.
This quarter I'd like to focus on capital allocation and the growth prospects for several of our subsidiaries.
Those typically our kids capital at the holding company in three ways share repurchases investing in our subsidiaries and acquiring the new subsidiary over the past five years, we've allocated capital using all three of these levers.
As anyone who follows us knows stock buybacks or primary capital allocation tool and the significant means of creating shareholder value at Lowe's.
In 2014, those had 30% more shares outstanding then at the end of this quarter.
In 2018, most spent a little over a billion dollars to repurchase about 20 million of its shares.
So far in 29 team, we've spent about $725 million to repurchase approximately 14 and a half million shares.
That means that over the past 22 months, we've repurchased over 10% of our outstanding float.
As you might imagine we believe these purchases will prove to be accretive for long term loan shareholders.
Our second capital allocation lovers investing in our subsidiaries the businesses in industries, we know best.
Those corporations recent investments in Loews hotels provide a good illustration of this lever.
Since 2014, the parent company has supported Loews hotels group, we have an investment of $820 million and as a received over 80% back from the hotel company for a net investment of nearly $140 million through the end of the third quarter of 2019.
During this period of expansion in development Loews hotels has grown grown its adjusted EBITDA from $123 million in 2000 $14 million to $228 million in 20 years.
Those hotels continues to focus on its strategy of attracting group business as well as developing properties near demand generators, such as sports stadiums and the Universal Orlando theme parks and pursuing this strategy. The hotel company has found its nish as a developer owner and operator.
Since most of its competitors are not able to fulfill all three of these functions Loews hotels has a unique seat sweet spot has a partner for municipalities and developers. It has the capacity to co invest and provide meaningful input on the design and development of new construction and to.
A managed the hotels operations upon completion.
As a portfolio of hotels continues to grow through ground up development. It will take time for these investments to produce a noticeable return has development costs preopening expenses and ramp up periods for each new hotel somewhat obscure initial results.
Our third level for capital allocation is adding another leg to the proverbial stool.
In 2017, we acquired consolidated container company for approximately $1.2 billion, consisting of $600 million in cash and $600 million of debt at the CCC level.
This acquisition, Dave lows, our toehold in the packaging industry over the past two years CCC is added to six tuck in acquisitions, all of which were funded at the CCC level. These acquisitions added scale at extremely attractive post synergy multiples and increase Ccs.
These presence in higher growth pharmaceutical segments.
It's worth, noting noting that lows does not frequently acquire subsidiaries and given the sky high valuations in today's market I don't see that changing multiples have moved higher as the private equity world has become accustom to easy money low interest rates, leading to cheap and readily available debt finance.
Dancing make levered acquisitions possible even at these precipitous multiples again that we are unwilling to play.
Now I want to talk briefly about growth prospects of Cnf and diamond.
A few may we remain very bullish both on the fundamentals of the insurance industry and on CNN is growth trajectory, which was fueled by the strength of the team that they have put together.
We will continue to focus our maintaining and improving its strong underwriting culture recruiting and retaining top talent.
Leveraging technology and expanding distribution.
These steps will enable CNH to capitalize on its organic growth opportunities. If you talk to Dino Robusto Cneighty CEO CEO he'll tell you that there was plenty of room for organic growth.
The focus were diamond offshore is quite different the company is less occupied with growth and more occupied with managing its liquidity diamond continues to concentrate on controlling its cost structure strengthening its balance sheet and building its revenue backlog, even as diamond has kept its foundation solid it continues to develop.
Process innovation that make it more efficient and the value added partner fluids customers.
Finally, less last year, we began making more detailed information available on our web sites, the belleli subsidiary strategies and mid to long term prospects for growth.
In response to your requests we have updated and re posted these presentations for CCC CNN Diamond offshore and Loews hotels, all narrated by their respective Ceos and leadership teams. We're happy to provide these virtual investor day style presentations and we encourage you to listen to.
Them and reach out to us if you have any questions.
And without further and further do I'll hand, the call over to David Edelson lows as CFO . Thank you Jim Good morning, everyone for the third quarter Loews reported net income of 72 million or 24 cents per share down from 278 million or 88 cents per share in last year's third quarter page 13 of our earnings.
Supplement sets forth the key quarterly drivers a quick summary of the quarter.
DNA accounted for most of the year over year decline in net income largely due to the strengthening of its long term care active life reserves.
In age property casualty results also reflected in modest reserve charge this year compared to a meaningful reserve release in Q3 last year importantly, however, underlying PNC underwriting results at CN, a continued to show improvement.
Boardwalks earnings contribution was essentially flat with the prior year, whereas contributions from diamond in Loews hotels were down for reasons I'll explain shortly.
Parent company investment income showed a nice year over year quarterly increase.
Mainly by better returns on equities and short term investments.
Now for more detail.
Sina is after tax earnings contribution was 96 million down from 300 million in Q3 2018.
Let me start by focusing on the positive which is continued progress in CNH core PNC business. The underlying combined ratio is 94.6. This the same as last quarter and almost one point better than full year 2018.
Net written premium was up 8% in the quarter and rate was up almost 6%.
And what is typically a heavy quarter for catastrophe losses, DNA incurred only 1.8 points of cat losses, compared to 2.6 points in last year's third quarter and Threed, Paul 3.7 points for full year 2018.
The year over year comparison for PNC, However was hurt by modest adverse prior year development compared to meaningful favorable prior year development in last year's third quarter. This adverse development was driven by legacy Mastercard exposures in commercial and healthcare in specialty.
Several several other lines in commercial and specialty however, including surety and management liability posted reserve releases during the quarter.
Absent the impact of prior year development in both periods CNS after tax PNC underwriting income increased 33% from Q3 2018 to Q3 2019.
DNA completed its review of its long term care reserves this past quarter.
As a reminder, CNH DAP long term care reserves have two components.
Future policy benefit reserves, commonly referred to as active life reserves as well as claims and claims adjustment expense reserves.
During the quarter CN, a strengthened is active life reserves by 216 million pretax and released 56 million pre tax from his claims and claims adjustment expense reserves.
To put these numbers in perspective at June 32019, DNA had over 9 billion of gap active life reserves and almost 3 billion of GAAP claims reserves.
CNS assesses the adequacy of its GAAP long term care active life reserves annually by performing what's known as a gross premium valuation for GPV.
In the GPV management uses its current best estimate actuarial assumptions to calculate required reserves if the required reserves exceed recorded reserves and unlocking occurs and active life reserves are increased based on the current thus on the current best estimate assumptions.
CN as Jim said CN, a last unlocked its LTC active life reserves at year end 2015. The company subsequently conducted reviews of these reserves in each of 2016, 2017, and 28, Jane and concluded that no unlocking was necessary.
In this year's third quarter when CNS applied its current best estimate actuarial assumptions to its LTC active life reserves. The result was an approximate 400 million increase in required reserves.
The interest rate environment caused DNA to lower it's assumed future new money rates and thus it's discount rate. While there were gives and takes with respect to other actuarial assumptions such as morbidity persistency and premium rate actions lowering the discount rate drove the unlocking.
Given that CN add 182 million of margin in its active life reserves before the review. This 400 million reserve increase resulted in a 216 million pre tax strengthening of Cnf is active life reserves.
Note that this is a GAAP reserve charge and does not impact seeing a statutory long term care reserves.
The strengthening of the active life reserves and the release from the claims and claims adjustment expense reserves taken together reduced loads as net income by 112 million in Q3.
Recall that in last year's third quarter send a booked a claims reserve release that added 21 million to our net income.
CNN has disclosed more information about as long term care business and its quarterly investor presentation.
Which can be found on its IR website.
In summary, Sienna is underlying PNC results were healthy.
But its contribution to our Q3 results was hurt by the interest rate driven LTC active life reserve charge and the modest adverse prior year development in PNC.
Turning to diamond offshore.
Diamond contributed a net loss of 48 million in Q3 2019 as compared to a net loss of 27 million last year, reflecting the continued difficult conditions in the offshore drilling market.
Contract drilling revenues declined 14%, while diamonds contract drilling expenses increased 7%.
Revenue, earning days were actually up 14%, but this was more than offset by a 24%.
Decline in average daily revenue earned.
The drivers of the revenue decline were rigs working at lower day rates as well as shipyard time for two of the company's high spec Drillships, which had previously been earning day rates well above current market.
As a reminder.
Diamond incurred the cost of a legal settlement in last year's third quarter, which reduced our net income in that quarter by 8 million.
Boardwalks contribution to our net income was basically flat year over year at 29 million as revenue declines from contract expirations and restructurings were more than offset by revenues from growth projects recently placed into service.
Operating margins declined somewhat however in part due to the timing of maintenance expenses.
Those hotels had a noisy third quarter as it contributed 3 million to our net income in Q3 down from 11 million in last year's third quarter.
There are two main reasons for the year over year decline in net income contribution.
The first was the substantial disruption caused by the threat of Hurricane Doran, which caused widespread cancellations that the company's properties in Orlando and Miami Beach.
And the second were Preopening expenses incurred in connection with properties under development, including properties in Orlando, Kansas City, and Arlington, Texas.
As Jim said and I'd remind you that was so much hotel development activity taking place the company's underlying earnings will continue to be massed by preopening and startup costs.
Loews hotels, adjusted EBITDA, which is disclosed in our quarterly earnings supplement also declined year over year.
The hurricane related disruption at the company's Florida properties was a major factor. Additionally, three pop properties were divested since last year's third quarter with one property, leaving that Jane altogether and to becoming managed only hotels.
Despite what appears to be a week quarter Loews hotels continues to expand its footprint and posted improved results at many of its properties.
Turning to the parent company.
Pretax investment income was 36 million up 31 million from prior years third quarter, driven by returns on equities and short term investments.
During Q3 2019, we received 111 million in dividends from our subsidiaries 85 million from Sienna and 26 million from Boardwalk.
We repurchased 3.4 million shares during the third quarter at an aggregate cost of 168 million. We purchased an additional 1.8 million shares since quarter end for about 90 million.
We have repurchased 15 million shares during 2019 for just over 730 million, representing almost 5% of our shares outstanding at year end 2018.
Those ended the quarter with 3.5 billion in parent company cash and investments with cash and equivalents accounting for over 75% of the portfolio. Let me now turn it back to Mary.
Thank you David before we open up the call for questions. We have a couple of questions diminished from our share.
First question.
Deals with CNN.
Jim how do you feel about senior management of their long term care business, especially in light of their Q3 unlocking.
So all of us at Lowe's.
We are extremely comfortable with how the CN a management team is managing the long term care business.
Rob we're impressed by the operational discipline that they brought to the business.
And we're also impressed by their efforts to mitigate.
The rest of this business.
Quarters Reserve unlocking which was caused by the current interest rate outlook.
It doesn't change our view in anyway.
Let me start backing give you a bit of history.
About a dozen years ago, the CNN management team decided that more of a long term care block of business is in run off it's still needs to be vigorously and strategically manage.
So seeing a selected some of the best and brightest within the company to run the business as a business.
Actively managing it from every angle.
They looked at it from operations claims actuarial were more.
The goal was to aggressively mitigates the risk and can manage the liability.
Changing the mindset from it being a runoff business to an active business has been critical in this whole process.
So the new team said about gaming a deeper understanding of the business not lot just actuarially, but every facet of the business. This understanding has led to the led.
The blended team to identify opportunities to mitigate the risks such as more supportable rate increased filings and offerings to policyholders that benefit them, while also enabling cneighty to reduce risk.
I truly believe that Cnis actuarial understanding of its block of business is much deeper than it has ever been.
Just two years ago Cneighty moved to whats called first principles reserving.
And that gave us the ability to slice and dice dice the block much more.
Equally then they previously could.
One huge advantage of the company's actuarial advances has been the avila ability to support ratings increases with much more targeted and credible data.
Including data from over 100000 claims.
The company has already processed.
When I when I take a look at the assumptions made in the company's last unlocking in 2015 compared to the current unlocking what I see on net is a business that is actually pretty reasonably predictable in the medium term I don't want them I don't want to diminish the.
Long term tail risk, but over the medium term our block of business has performed basically inline with our expectations with a major exception of interest rates.
Here are some stats that I'd find compelling so since the end of 2015 total claims paid up 2% lower than expected.
Our active policy count is 5% lower than expected and the total claim count during that period is slightly lower than expected.
These broad measures helped to define the risk in the block and they were all core predicted quite accurately in the context of a five year timeframe.
So what CNS got wrong was the interest rate and the spread environment a problem that's being addressed this quarter.
So while I understand there's a lot of noise around the various long term care blocks.
What I have seen first hand at CN a is that with.
The right data with the management focus and with the appropriate resources thrown at the problem are these blocks are more predictable then I think most outsiders have come to believe.
Thank you Jim.
Next question submit Bay shareholder it has to do with diamond with the prolonged downturn in offshore drilling continuing do you feel diamond is well managed from a cost perspective.
Absolutely.
I think the Diamond has done a really good job of managing its costs, it's cut expenses by.
About 50% that's at the home office and also across the company.
I would say that the headcount is as low as possible, while also operating efficiently and safely.
No expense categories have been spared.
There has been cuts in just about everything including.
Employee benefits.
As well is free coffee within.
At the home office so.
They are there aggressively aggressively managing their expenses in the the company is doing its best to manage in what is a very difficult environment.
Thank you Jim.
Sorry, we'd like to turn the call back over to you for questions in the queue. Your next question comes from the line of Josh Shanker Deutsche Bank.
Yes, good morning, everybody Hey, good morning, Josh Good morning on the when the third quarter began on July 1st.
I know this isn't necessary, how you value the company, but if I take the value of low subscribed to by the market and subtract out the public values of Cnf and diamond.
What I called the stub value was trading at about $5 billion.
Two months later.
Given the decline in lowest price, but the relative stability of Cnis price the stub value had fallen 45% over those two months.
When you think about buying back low stocks are you thinking that.
The parts that are not publicly valued our dramatically undervalued by the market or you thinking that cnis dramatically undervalued I know the answers both but on a relative basis. There are difference between buying the stock on July 1st you in buying the stock on August Thirtyth.
Now really.
And I think of it that both CNH is undervalued and.
The stub is undervalued, so and we've talked about this an awful lot.
And that's what.
Makes me so bullish on the stock.
Is it is there anything that we can detect in your repurchase appetite that at certain points, there's certain valuation stays that you're doing that make you more or less anxious to buy stocks over short period of time.
Well you have to look.
That is how much stock we buy in a particular quarter and that will give you a pretty good insight into what our appetite as.
So if I look back over let's say on the last 18 months.
I mean, I don't always if it has the has your appetite change over the past 18 months or is it been studied the whole time.
Generally been steady we bought a billion dollars.
Stock in 2018 and 29 team.
Through now we're just about at three quarters of $1 billion.
So yeah.
Look I'm I'm frustrated.
I think the stock has a lot of value we haven't been shy about.
Saying that and notwithstanding that this to me the stock still looks very cheap but.
Markets are markets and so then I'm going ask you got anything question actually last quarter I was talking about where interest rates were.
Talking about if you'd be willing to issue more debt simply because the markets were attractive.
With your appetite in mine for your own stock isn't that a good trade right now to issue debt for the purpose of accelerating your repurchase.
Yes.
I don't think so a first of all if we issued debt. If you read the rating agency reports they want us to hold as much cash as we have debt. So is nothing so exciting about.
Issuing debt secondly, there isn't enormous volume in low shares sold is just.
Ill limit to how much.
You can buy.
So.
I don't know that.
Issuing debt would really do us any good. Additionally on.
We have about three and a half billion dollars of cash now if we wanted to and if the opportunity presented itself. We could use a good portion of that to repurchase more shares.
Okay, and then on another trucking or you've talked many many times on many calls about the market being overvalued for the purchase purpose of buying both public companies and buying private companies competing with private equity.
Well I haven't heard you say two off which might be the same answer is hotel starts right. Now if you want to build a hotel or by hotel has private equity and slated those values to the point, where theyre generally on track to as well.
So.
Your first things first.
I don't think the public equities are expensive I think that.
Valuations in private equity land are expensive and take out price of public equity I mean, if you want to take my Okay. I don't think yes, okay, yes, no doubt I agree with respect to hotels.
We are operating in the a very discrete.
Nish in the hotel industry.
So we're we're.
Let's let's put aside Orlando for a second we are not developing.
Motels were not developing low service hotels were developing what we call in what the market calls upper upscale hotels and agenda, we were marketing.
We're building those hotels with significant meeting space too.
To fit into the core competencies that we have.
So we're building hotels with meeting space near demand.
Drivers and we're also doing it generally.
We've held for one sort or another from.
The local municipalities.
To make it so that only tell that without that help just would not be.
Economic to one that is economic with or without help.
In order to do that you have to have a long term view because it's not a matter of just.
Putting a shovel in the ground, it's a matter of working with a community.
And.
Negotiating a transaction that's both good for the hotel company as well as the community.
And so it's not and this is not an area where we've seen.
Private equity.
And.
Participate so no they're not they're not a factor in this and if I could just add Josh we're not as.
As you see we're not going out and just buying existing hotels, we are developing hotels frequently as Jim said in conjunction with a municipality or or or with other partners. So and what we bring is the ability to manage that hotel and our own capital. So.
It's a it's a very different thing than just going out and.
Buying the existing hotel in some sort of auction.
Okay.
Those are all very complete and through answers I appreciate it. Thank you.
Thank you.
Thank you Josh.
And thank everyone for listening that concludes closes third quarter 2019 earnings call a replay will be available on our website lose dotcom and approximately two hours.
Thank you participating in the latest Corporation Q3 2019 earnings Conference call. You May now disconnect your lines and have a wonderful. Thanks.