Q4 2019 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to Loews Corporation Q4, 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 those times.

We 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 Lori good morning, everyone and welcome to Loews Corporation fourth quarter, a yearend earnings conference call a copy of our earnings release earnings supplement and company overview may be found on our website those dot com on the call. This morning, we have our Chief Executive Officer, Jim Tisch, and our Chief Financial Officer, David though.

Following our prepared remarks. This morning, we will have a question answer session with questions submitted by shareholders. Before we begin however, I will remind you that this conference call. My 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.

Due to a wide range of risks and uncertainties, including those set forth in our FCC filings forward looking statements reflect circumstances at the time, they're made the company expressly disclaims any obligation to update or revise any forward looking statements. This disclaimer is only a brief summary.

And the company's statutory forward looking statement statements disclaimer, which is included in the company's filings with the FCC. During the call. Today. We may also discuss non-GAAP financial measures. Please refer to our security filings and earning supplement for a reconciliation to the most comparable GAAP measures.

In a few minutes, our CFO, David Edelson will walk you through key drivers for the quarter in the here before he does Jim Tisch, our CEO will kick off the call Jim over to you.

Thank you Mary and good morning.

Before we got into the details of the quarter about your end result, I want to mention share repurchases.

Those of you who follows closely I must sound like a broken record.

I've been saying for a while the we believe loves the star looks cheap and trades at a deep discounts or or view of its intrinsic value.

I've been complain we're back good from January 1st of 2018 through Friday, we repurchased more than 45 million shares of lows common stock for total cost of just under two Warner order billion dollars that represents more than 15% of our current.

<unk> outstanding shares.

Typically most of the phones, we used to repurchase our shares have come from dividends paid the loads for most subsidiaries and in recent years most of those dividends would come from C. N a.

However, dividends paid to loans represent only a portion of the free cash flow generated by our subsidiaries.

Our businesses May also decided to use their free cash flow either to fund growth or to pay down debt.

And to the extent that they held 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 or they'll distribute that cash.

[noise] to pull back the curtain a bit on this process and 29 team lows 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 really 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 work to the extent that the who don't company of economically attractive projects and when they're in which to one death, we want them to do so.

This year, we are reasonable hotels opening in Saint Louis Orlando and Kansas City.

These hotels represent more than 3000, new keys for our company. These properties will either be focused on transient and group business like the new lows, Kansas City.

Which is attached to the Kansas City Convention center or they will built in demand generators like the endless summer hotel and Orlando.

Additionally, in late December 29 team Loews hotels received the necessary approvals from the Arlington, Texas City Council to build a $550 million 880, a room hotel there will be connected to a new Convention center.

The Arlington Convention Center complex, which will be up the base ATM fees, the and globalized field, well over 216000 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 nussle 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 the $227 million last year, we believe the company's future is bright and that it will be a strong growth engine for the pound company.

In other subsidiary news those of you look at our earnings supplement may noticed that CCC packaging and packaging subsidiary recently changed its name to Olivia.

The rationale for the change is that CCC had been well known would be in the industry as the water and not container company, but their product lines and capabilities are much broader with all seems recent acquisitions. The company has expanded even further the number of segments of the packaging industry. The conservis.

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 at all results for 2019.

Loans had a good year driven by solar results, it's zero nine as well as good investment income at the parent company level.

It is underlying combined ratio continued to improve in 2019, despite the competitive environment. Since 2016, DNA is underlying combined ratio improved by more than three point. Additionally, DNA grew net written premiums by 5% for 29 team driven by predict.

Really strong growth in commercial lines rates increased 5% for soon a PMC operation left here.

It goes without saying that we remain very bullish on Sienna both on the fundamentals of the insurance industry and don't see on the is growth trajectory within the industry.

Yeah. They will continue to focus on maintaining and improving its strong underwriting culture and building on its expertise in areas of deep specialisation.

These ducs will helps you in a reach its goal of sustaining top quartile <unk> underwriting performance DNA represents a significant portion of lows and some of the parts and as such our repurchases underscore our confidence in our reinsurance business.

With that I'd like to turn the call over to David. Thank you, Jim and good morning today, We reported fourth quarter net income of 217 million or 73 cents per share compared to a net loss of 165 million or 53 cents 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 dollar 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. It both CNN and the parent company as well as higher PNC underwriting income at CNN.

CNH that income contribution swung from a 75 million loss in Q4 2018 to income of 244 million an improvement of 319 million.

Returns on CNS holdings of Lps in 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.

PNC underwriting income at CNS, Hey accounted for 119 million of our year over year net income increase driven by lower cat losses, and stronger underlying underwriting results.

Dnase 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 and improved 3.1 points to 94 point not.

Like San Jose Bose is 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.

Those hotels and CNH corporate segment were the main year over year negatives.

Those hotels incurred a 69 million after tax charge from the impairment of two hotel properties in Q4.

Absent this charge and other nonrecurring items, such as pre opening expenses on properties under development.

As hotels contribution to our net income would have been up around 20% as operating results continued to be robust.

CNS booked at 48 million after tax charge in Q4 related to its legacy asbestos and environmental pollution reserves, which reduced our net income by 43 million.

And last year's fourth quarter, DNA incurred or a net retroactive reinsurance charge that reduced our net income by 24 million.

As a reminder.

2010, DNA 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.

C N a boardwalk and the parent company investment portfolio drove the increase with diamond and Loews hotels posting year over year declines.

Let me start with DNA, whose net income contribution rose 23% in 2019, the 894 million as CNH itself posted net income of 1 billion.

Favorable investment performance propelled the increase net investment income rose thanks to Lps in common stock investments, while net investment gains swung from swung from losses in 2018 to gains in 2019, the swing and net investment gains was dominated by.

The change in market value of CNN is holdings of non redeemable preferred stock.

PNC underwriting income was essentially flat year over year as better underlying underwriting income and lower catastrophe losses were offset by a lower level of favorable net prior year development. In 2019, then in the prior year.

For the year CNO posted an underlying combined ratio of 94.8, marking its third consecutive year of improvement.

This result included an underlying loss ratio of 61.

While Sienna 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 third quarter was the main to tractor from CNH 2019 results.

During 2019, DNA unlocked and strengthened as long term care active life reserves and action it hadn't taken since year end 2015, this charge reduced lows as net income by 151 million.

When factoring in long term care claims reserve releases in both years. However, LTC reserve actions accounted for 833 million year over year reduction in CNS contribution to our net income.

The bottom line is this.

Ciena is balance sheet is strong.

It's underwriting performance continues to improve with opportunities for further premium growth and a combined ratio reduction.

And as 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 pretax 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.

The tax income was up 50 million in 29 team 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 180 188 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 flipside Diamond and Loews hotels, both showed year to year income decline.

Diamond had a tough year, but its pre tax loss growing from 226 million in 2018 to 402 million in 29 team.

Diamonds 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 Kron track 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 and its fleet to ensure its rigs 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 declined to 950 million later this year.

Those hotels had a strong year operationally, but its contribution to our reported income was impacted by impairment charges and nonrecurring pre opening expenses.

The company reported an annual net loss of 31 million versus net income last year, a 48 million.

Excluding impairments and other nonrecurring items those hotels net income increased 8% from 49 million to 53 million.

Well those hotels adjusted EBITDA, which is defined in disclosed in our quarterly earnings supplement was essentially flat from 2018 to 29 team at 227 million.

However, when properties at 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 Sienna and 25 million from Boardwalk for the full year. We received total dividends of 927 million from CNN boardwalk within a contributing 800 and try at 825 million of that amount.

Out.

Today, saying, they declare to $2 per share special dividend and an increased regular quarterly dividend of 37 cents.

Combining the two bodes well received 575 million in dividends from C. N. A this quarter.

Please note that since boardwalk is now wholly owned it will no longer payloads, a fixed quarterly dividend and will likely pay an annual dividend toward the end. The year. We currently expect boardwalks dividend to lows in 2022 approximate 29 teens 100 million.

I would highlight that we have worked diligently over the past couple of years to streamline the parent company.

Corporate operating expenses, which include investment expenses now netted against investment income and exclude corporate interest expense dropped about 20% from 2018 to 29 team.

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 and a half million shares 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 Thank.

Thank you David we'd like to.

Moved to our question and answer portion on the call Lori would you please take us through the prompt.

Once again, if you'd like to ask your question. Please press Star then the number one on your telephone keypad again that is star one.

Thank you Laurie.

Our first question.

This is why doesn't lows.

Purchased the outstanding public shares of Cnf.

What is the benefit of maintaining Sina is a public company.

All right. So we believe that the public float and see an AWOL 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 stub for CNH.

Number two it's a barometer for all lows shareholders of just what the market is valuing CNH.

And I Dare say, if you see on a war public then a lot of people would be asking why don't we take a public so that they can actually see what the value of Sienna 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 daresay of C. N. A weren't public if we didnt have those shares directly reflecting the value of CNH it might be more difficult to attract a the best in the top talent.

One of the thing that I'd I'd add is that as long as lows owns over 80% of Cnf and right now it owns close to 90%, but as long as we own over 80%, we can do attacks consolidation and get all the benefits of owning.

100% of stock. So there's absolutely no penalty. These are the cash income taxes, resulting from a lows only 90% instead of 80% of the stock.

The 90% I'm, sorry, instead of 100% of the stock.

Jim Second question is what has been the impact of the Corona virus unless this hotel business.

So at this point in time, it hasn't had much of an impact at all yes. The the virus is affecting areas like China and Asia dramatically, but we haven't seen so much of an impact or 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 one person of our business. So if the status quo continues to hold I don't see.

The they're being much effect.

Of Corona virus on our hotel business.

Next question relates to timing.

What's the role of Diamond.

In the loan portfolio.

So.

Simon May have a big impact on a GAAP sense or a lows as result, but our downside is really limited to our stake in the company, which to see represents less than one dollar per Loews Corporation share I would say that.

Oh, the current share price diamonds is really trading more like an option then it is like a stock.

We go into the onshore drilling industry in 89, knowing that it was highly cyclical when the current downturn started in 14.

We thought we'd seen this movie before having weathered a number.

Drilling a cycle downturn. However, this downturn narrow has lasted much longer than we or.

Oh, I daresay anyone could have anticipated.

Nevertheless, Simon a they the management continues to focus managing its costs and maximizing earnings potential on the assets through diversification and good operating performance.

One other thing I think they bearishness in diamond.

Is really.

Has been around just since the beginning of the year.

At the end of last year oil prices, a 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 moved down to $50.

<unk>, which was due in large part to the Corona virus 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.

Two factors have caused a dark bearishness too.

Overcome the whole offshore drilling industry.

I could easily foresee.

At some point oil prices getting back to the 60 and 65 dollar barrel level I think that shale oil oil cannot be.

The growth will not in shale oil production will not grow significantly at those prices and I ultimately say next year could see oil prices at the 65 to $70 a barrel level, which was good I believe leading to significant.

Improvement.

And the offshore drilling industry.

What's happened now is that a this isn't.

An industry wide phenomenon.

What's going on is not just affecting.

Diamond offshore.

Lower day rates are going to affect all companies and in order for.

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 formal sometime.

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 website <unk> dot com and approximately two hours.

This concludes your let us call for today.

Thank you for participating in the Loews Corporation Q4, 2019 earnings Conference call you May now disconnect.

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