Q3 2020 Loews Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Loews Corporation third quarter 2020 earnings Conference call. At this time, all participants have been placed in a listen only mode and the floor will be opened for your questions. Following the presentation. If you would like to ask a question.
At that time, Please press star one on your Touchtone phone if at any point. Your question has been answered you may remove yourself from the queue by pressing the pound key if you should require operator assistance. Please press star Zero I will now turn the call over to Mary Skafidas, Vice President of Investor Relations and corporate communications.
For Lowe's.
Thank you Lori and good morning, everyone and welcome to Loews Corporation's third quarter earnings Conference call.
Copy of our earnings release earnings supplement and company overview may be found on our website.
Lowes Dot 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, we will have a question and answer session with 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.
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 disk.
Lamers, which is included in the Companys 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.
There has been a slight modification to our earnings call format that was made in response to shareholder feedback for a number of years now we have taking questions from shareholders on an earnings call either by incorporating the answers into our prepared remarks or answering them directly during our Q and a session.
Recently, we've heard from shareholders that they prefer that we answer questions in the queue in a portion of the call instead of leaving them into the prepared remarks and were happy to comply with this request as a result.
We will have longer Q and a session with that I'd like to turn the call over to our CEO, Jim Jim over to you.
Thank you Mary and good morning.
Let me start by focusing on capital allocation, specifically share buybacks.
During the second quarter conference call I Am frantically stated my strong belief that the market was significantly undervaluing lows the shares.
I also stated double those plans to maintain a substantial liquidity position as our rainy day fund. We also would take advantage of the market's discount and continue to buyback our stock.
During the third quarter, we did just that purchasing over 5.4 million shares of Loews for about $195 million, while preserving ample liquidity and ending the quarter with about three and a half billion dollars in cash and investments.
Maintaining high levels of liquidity is fundamental to our business model because it lets us both capture opportunity and withstand uncertainty and it's like any portfolio manager, we have to bell the balance retaining or liquidity, we've taken advantage of investment opportunities as they arise.
Hi, guys.
Buying back shares is one of those three capital allocation tools will be other two being investing in our subsidiaries and bonding and other business.
With our stock trading considerably below our view of its intrinsic value share repurchases have recently been our most attractive capital allocation option.
That being said our decision to buy back stock has not come at the expense of any of our subsidiaries. For example, we have provided capital to Loews hotels to help but rather the effects of colder on the hospitality industry.
Our three other subsidiaries Cnos boardwalk and opium packaging.
Im not recently required parent company capital instead boardwalk in opium have largely use their free cash flow to finance growth opportunities.
You know who's chosen to pay dividends since it hasn't hasn't had a need for additional capital.
As Mary mentioned during the Q and a we will be discussing topics submitted by our shareholders. However, I did want to highlight two key items upfront cnos long term care business and the situation to Loews hotels.
Starting with CNH before we got into long term care, let me emphasize that cnis under our underlying property casualty underwriting performance for the quarter was stellar the company had an underlying combined ratio of 92.6 compared with 94.6 in line.
Last year's third quarter due to improved loss and expense ratios.
Property and casualty pricing momentum continues with rates increasing over 12% in the third quarter compared to an increase of just under 6% for the same period last year.
With respect to long term care. My guess is that Cnos long term care exposure is a significant reason why cnis valuation lags its peers.
We are at lows are comfortable with the reserves at CNN has set up for long term care become.
The company has been proactive in managing their long term care book of business and prudent in their approach to setting LTC reserves.
In the third quarter CNH took an LTC net reserve charge of $37 million before tax.
Comprising 74 million dollar active life reserves deficiency offset by a $37 million claim reserve release.
The active life reserve deficiency resulted from the continued low interest rate environment and its impact on future assumed reinvestment rates in my opinion Sienna is taking a conservative view on future interest rates, which hopefully means that they will not have to adjust for lower end.
Mr rates again going forward.
Since the end of 2015, Cnas overall exposure to long term care has been reduced by 31% with the number of active policies declining from 419000 to 288000.
So why are we so confident in Cnas management of long term care, even in the face of the market skepticism, but.
Because we know that over the past seven years CNN has been laser focused and immersed in their long term care book of business.
For the six years prior to becoming Cnis Chief Financial Officer.
Miraculous was head of long term care at the company I'll did an outstanding job mitigating the LTC risk for CMV and the team in place today continues to do so.
DNA has managed more than 100000 long term care claims to date, providing CFA with reliable claims experience across all policy types and age cohorts.
Three in a reviews its long term care reserves in the third quarter of every year and they pose significant information regarding their review on the CNL website.
If you have not already done so please take a look at the information that they make available.
Now for the second topic, our topic I want to cover Loews hotels.
The fallout from the covered pandemic continues to negatively affect the travel and tourism industry and Loews hotels is no exception.
We believe and hope that the second quarter was the bottom for the hotel industry and we have seen business pick up a loews hotels since then.
While occupancy rates are still low by any historical standard 21 of Loews hotels 27 properties had resumed operations by the end of the third quarter.
The resumption of operations combined with significant expense controls inactive by Loews Hotels' management.
Have improved the company's cash flow situation.
When the pandemic struck and Loews hotels substantially suspended operations, we estimated that the company would generate negative cash flow of approximately $25 million per month.
While still negative Loews hotels, whose cash flow is much improved going forward. We do not expect loews hotels is cash needs to be material to loews corp.'s balance sheet.
And with that let me turn the call over to David.
Thank you Jim and good morning, everyone for the third quarter Loews reported net income of 139 million or 50 cents per share up from 70 to 72 million or 24 cents per share in last year's third quarter.
The quarterly increase was driven by CNH, who is net income contribution doubled to $192 million.
Let me provide some brief highlights on CNS quarter for more details. We encourage you to review the transcript from the Companys Investor call earlier this morning.
The year over year earnings increase at CN I was driven by two main factors one lower net reserve charges in his life and group business associated with a long term care and structural structured settlement businesses and to higher net investment income and net investment gains.
As Jim mentioned CNS core property casualty business posted robust premium growth and strong underlying profitability in the quarter House.
However, total PNC underwriting results declined from Q3, 2019, because of higher weather related catastrophe losses.
Catastrophe losses for the entire us property casualty industry were elevated during the quarter.
Led by.
Three hurricanes and the Midwest Duraid show.
The Western wildfires were also an industry event, but had little impact on Santa Fe.
Before leaving Santa Fe I would draw your attention to the company is rock solid investment portfolio, which at quarter end had a market value of $49 billion and average credit rating of single a and a net unrealized gain of $5 billion.
About 94% of CNS fixed maturity investment portfolio is investment grade.
Again, please see CNH transcript and shareholder materials for more details.
Even though diamond offshore ceased being a consolidated subsidiary of Loews in this year's second quarter that helped drive our third quarter year over year earnings increase.
During last year's third quarter Diamond contributed a net loss of $48 million. While this year Diamond's results were no longer included in our consolidated net income.
Let me now turn to our wholly owned subsidiaries Boardwalk Loews hotels, and all Tim packaging.
Boardwalks net income contribution declined declined from $29 million in the prior year to 20 million the company generated quarterly EBITDA of 167 million versus $175 million last year.
Net operating revenues were down slightly expire.
Expiring natural gas transportation contracts were re contracted at lower rates, which was expected and planned for.
Revenues from growth projects recently placed in service together with storage and parking and lending revenues offset much but not all of the decline.
As a reminder, boardwalk has experienced contract expirations and restructurings over the past few years related to pipelines placed into service 10 to 12 years ago. This.
This re contracting activity essentially concluded by year end 2019.
Boardwalks increased asset base from its growth projects.
Led to an increase in expenses, especially higher depreciation and property taxes.
Additionally, the expiration of property tax abatements contributed to the year over year increase in expenses.
Despite the COVID-19 pandemic and significant hurricane activity along the Gulf Coast.
Boardwalks operations were minimally disruptive during the quarter and the overall financial impact was negligible.
The hurricanes and resulting power disruptions did impact certain customers, but the revenue impact of these disruptions on boardwalk was immaterial.
Let me highlight that both CNS and Boardwalk took advantage of the robust fixed income market in Q3 to raise money at attractive rates both.
Both companies issued $500 million of 10 year notes with CNN is yielding to dot Oh, 8% and boardwalks three dot for 1% both.
Both deals were vastly oversubscribed and reflected investors confidence in their respective credits.
Yes.
Jim already spoke about Loews hotels, so I will be brief the.
The business reported a net loss of $47 million in the quarter excuse.
Excluding unusual items, the net loss was $55 million.
Adjusted EBITDA, which excludes unusual items and includes Loews hotels pro rata share of EBITDA in JV properties was a loss of 38 million.
Loews Hotels' management is focused on two interrelated objectives, one reducing the cash flow drag and to resuming operations judiciously and effectively.
The company has aggressively reduced expenses.
Rightsize this capital spend and worked with lenders to defer interest and principal pay downs. It is reopening properties when management projects that doing so will improve cash flow.
As Jim mentioned, we believe that Loews hotels turned the corner in Q2 and is on an upward trajectory.
The average monthly cash flow drag is well below the 25 million we estimated during our Q1 earnings call the.
The exact timing of a return to profitability and positive operating cash flow. However depends on the overall travel environment.
But we believe Loews hotels' properties, such as those in Orlando, Arlington, Texas, and Miami Beach.
Our especially well positioned to participate in the travel upswing that has already begun.
Also in packaging, which is included in corporate and other had another good quarter.
Demand for the company's products continue to be strong overall higher uncovered 19 related product segments, such as head of household chemicals beverages, and personal care and somewhat weaker in segments, such as automotive commercial foodservice and school dairy.
Moreover, in vision, which is the Companys recycling business has been experiencing its best performance since it was acquired by all Tim in 2014.
Driving this performance has been stronger demand for recycled plastic also known as post consumer resin.
All Jim contributed a slight net loss despite its robust EBITDA I.
I would highlight three factors depressing net income.
One significant depreciation and amortization expense attributable to the company's recent acquisitions.
To accelerated amortization of the consolidated container trade name, which will be fully amortized by the end of the year and three the effect of rising resin prices in Q3.
Since there is a contractual lag in all teams ability to pass through these cost to customers the company absorb the cost in the quarter without recognizing the offsetting revenue this.
This lag is temporary and will reverse as the costs are passed through to customers.
All teams focused on new business is bearing fruit and should benefit results in future periods. The company has been very successful over the past months in gaining new accounts by demonstrating reliability continued innovation and customer focus during this difficult covidien.
Period.
Turning to the parent company.
Pre tax net investment income was $23 million down from $36 million last year, and 110 million last quarter.
The year over year and linked quarter declines were driven by returns on equities and LP investments.
During Q3 2020, we received 90 million in dividends from Santa Fe.
We expect to receive dividends from both CNH and boardwalk during the fourth quarter.
We repurchased 5.4 million shares of Loews common stock during the quarter at an aggregate cost of $195 million.
We purchased an additional 667000 shares since quarter end.
Those ended the quarter with three and a half billion in parent company cash investments with cash and equivalents accounting for over 80% of the portfolio.
Let me now turn the call back to Mary.
Great. Thank you David.
Let's move on to the queue in a section of the call leaving.
We have a number of questions to respond to some shareholders. The first one is from four Jim.
Have you considered buying in the outstanding shares of CNH to take advantage of the discount in the stock.
So well.
Closes always believed that by having a public valuation marker for C.N.A. It's.
It's really important especially to our low shareholders.
In a very rough basis CNS comprises about half of the value of lows.
The other half being our net cash the our our assessment of the value of boardwalk of all team and our our hotel business.
But it would be even beyond just being a marker there are other reasons to keep CFA as a public company.
First.
Being public is important to attracting top talent.
The top top executives want it top executives in any company want at least a portion of their compensation to be based on the performance of the shares of their company and by being public CN Abel is to to provide that incentive to its top talent.
Secondly, and.
We think this is very important the transparency that comes from being public is important to cnas regulators as well as to rating agencies.
As everybody knows I think the TNT trades at a ridiculous free low valuation and that the PNC industry stocks Likewise traded a crazy valuations.
And finally.
Our share repurchases of low stock allows us to take advantage of the discount valuation that Sienna is trading as well as the discount in loews shares for its non cneighty assets.
That all adds up but to work we like to call a very significant double discount in our share repurchases.
Great. Thank you Kim.
The next question has to do with the exceptional year.
For catastrophe losses in the insurance business, Jim would you. Please discuss have seen a and the insurance industry are managing through these challenges.
Well Mary Youre certainly right. This has certainly been a banner year for cat and cat losses are not only for CN, a buck for the industry overall.
There have been only four quarters over the past 40, 40 quarters, where cnf has experienced net costs coming in at or above.
$160 million.
And two of those four quarters over the past 10 years.
Occurred in 2020.
At CN, a through the through the third quarter.
Our pre tax cat losses were more than $530 million.
Compared to just $128 million last year.
Even if you exclude the losses from Cove, it and from civil unrest, which were roughly about say $250 million.
Cnis year to date cat losses would still be running at more than twice last years level and of course, well ahead of their plan.
But despite these these are really exceptional events and catastrophes I'm impressed by how.
The PNC industry and also CNS they are managing through it all if.
If someone had told me in January that 2020 would be filled with storms fires civil unrest and depend on mix I would have told you that cdna would have a miserable year as a result.
However, despite this litany of events CNH is still quite profitable with $400 million of core income and $300 million of net income through the third quarter and it continues to find profitable avenues for growth.
All the more so thanks to the hard rate market that the insurance industry is currently experiencing.
Cat losses come with the territory in the property and casualty industry we.
We believe that Sienna is effectively managing its cat exposure, while also getting strong rate increases on cat exposed.
Businesses.
So.
Let me end this by adding one stray far.
The insurance industry hasn't hasn't always been financially prudent and this is the advantage of being associated with it.
Particular industry for over 40 years.
I have a little historical perspective here.
There were years back in the seventies eighties and nineties when the industry did not have true capital discipline and they would write business at just about any price today. The industry is reacting to catastrophic events and low interest rates by.
Getting rate increases where they are justified in my view. This change is a result of an increased demand from equity investors for profitability, which has led to insurance manager management increased focus on capital efficiency.
Great. Thank you. Jim next question also has to do with DNA focusing on C. needs long term business, Jim could you tell us.
If you add your assessment of Cienas long term care business and the risks that it poses to see any until that.
Sure.
As I said in my prepared remarks, Sienna is long term care. Our exposure is likely the biggest reason, while where I see in a valuation lags its peers.
And as I also said for the past seven years cdna has been actively managing its long term care book of business in order to reduce risk and also in order to optimize results.
Since 2015, Cnis exposure to long term care has been materially reduced willing number of active policies declining by over 30%.
Additionally over the past few years DNA has been able to further reduce.
Its risk profile of its long term care block of business by achieving meaningful premium rate increases and also offering policyholders attractive options to reduce benefits in return for reduced future premiums.
Dino Robusto anomalous on their call today focused on long term care and.
I suggested everyone reviewed their remarks and look at the significant information on long term care that's posted on Cnas website.
Let me make two additional comments on the net reserve charge that CNN took in the third quarter.
First and a really very significantly a $37 million net charge on a block this size is actually quite modest.
And secondly, the charge was attributable to the historically low level of renewed interest rates that were currently experiencing.
With these latest estimated changes going forward cdna is assuming that a 10 year Treasury note will trade at slightly over 1% three years from now and like likely Likewise in 2030, Sienna is assuming that the 10 year note will you.
Year old weren't historically is a paltry two and three quarter percent.
In my opinion, Sienna is taking a very very conservative view on future interest rates, which hopefully means that they will have to adjust for lower interest rates again going forward.
Thank you Jim. The next question also staying on the CNH topic.
Does the lows expect to get special dividends from CMS.
So we still have a quarter to go in 2020, so it's really too early to be making any specific comments.
About whether or not.
Cdna will pay a special dividend and it's been an extraordinary year for cat losses, that's for sure I can't speak for the sea in a board, which hasn't had a discussion yet about special dividends and we still have four months to go until the board actually makes.
A decision on special dividends. So I guess, we'll just have to wait and see what happens.
Okay, we're switching to boardwalk.
The shareholder would like to now our growth projects flowing in the midstream space can you comment on that Jim.
Yes from everything that Boardwalk is saying, it's very likely that there will be a slow down in fact, I would say we're in the middle of the slowdown for larger scale projects.
Because our customers are.
Our moving out there our final investment decisions. However.
However, boardwalk expects to continue seeing smaller growth opportunities with power and industrial comp customers, primarily due to a boardwalk pipelines proximity proximity.
To some of our industrial gas customers.
Thank you. The next question is for David.
David There have been several recent bankruptcies of exploration and production companies can you. Please comment on the financial strength Boardwalk customers sure Mary Thanks over the past several years.
Boardwalk has phone.
Focused on diversifying its customer base to include more end users such as power plants industrial customers and LNG off takers a strategy that proved beneficial this year by diversifying in this way boardwalk has been able to strengthen the overall credit profile.
Its customer base.
More than 70% of Boardex revenue backlog is derived from investment grade companies.
And boardwalk has letters of credit or other types of collateral from some of its customers that are not investment grade or unrated, which provide an additional measure of security.
In 2020 in this year, one of boardwalks customers declared bankruptcy and another seems to be on the verge.
Because of the credit protections in place for these customers.
And importantly, the ability to re market any return capacity.
These bankruptcies will not have a material financial impact on the company.
Stepping back since the pandemic hit in mid March.
Boardwalk has maintained uninterrupted service to its customers while simultaneously taking measures to ensure the safety of its employees and its operations.
At the end of the third quarter Boardwalk had well over $9 billion in contracted revenues.
With over 600 million of net new contracts added to backlog during 2020.
Great. We have another question for our CFO, David can you provide.
Provide an update on the cash needs of Loews hotels.
Absolutely and Jim already comment on it but let me just provide a little more detail.
When those hotels suspended operations that almost all its properties in the early spring, we estimated that negative cash flow would average around 25 million per month.
We went on to say that management would reopen the property if doing so was expected to improve that propertys cash flow.
Loews hotels has responded to that pandemic induce sudden downturn by transforming its operating model, including dramatically reducing property level and management company expenses.
As we all know properties began coming back online during the second quarter.
13 properties resumed operations during Q2, another six during Q3.
And one more hotel last week.
As anticipated Loews hotels cash flow has improved.
These properties have resumed operations expenses have been managed aggressively and capital spending has been right sized for the current environment.
While the company continues to generate negative cash flow. It is significantly less than the 25 million per month cited in April.
I'd be remiss in not mentioning how difficult the past eight months of Ben for Loews hotels team members.
Thousands of employees were furloughed, when the pandemic struck and less than half of the furloughed team members have returned to active duty.
Early on most hotels put programs in place to assist us affected team members, including a multimillion dollar relief fund as.
As well as as well as continuing to provide medical insurance for furloughed employees for several months.
Additionally, Loews hotels is instituted enhance safety and well being standards and protocols for team members and guests.
And as a reminder, in solidarity with all those hotels team members being financially impacted by this crisis all.
All three members of our office of the President, Jim John and Andrew Tesh reduce their salaries by 50% as of April 1st and their bonuses by 50% for the entire year back to Mary.
Thank you David.
England close hotels.
Tim. This next question is for you is those hotels looking to buy or sell any hotels and how have co that impacted its development projects.
So first let me talk about Loews hotels is long term growth strategy.
Company as we've said before is focused on growth in two ways. The first one.
By investing in and developing hotels with built in demand drivers like it has done so successfully with Universal Studios and also in Arlington, Texas.
And secondly.
The company is focused on developing and operating hotels for the group business.
While the hotel recovery recovery is currently powered by leisure travel.
We really do believe that the corporate travel along with meetings and events will come back as a pandemic wings.
But before the pandemic head Loews hotels had begun to evaluate their portfolio and to sell a few hotels that didn't align with the current growth strategy and they continue to do so opportunistically, including one hotel that.
Were sold earlier this year in Canada.
At the start of this year Loews hotels had three projects under development and scheduled for opening this week this year.
Two loews hotels, the the live by Lowes in Saint Louis and the lows, Kansas City a hotel.
Already opened in the hotels are doing just fine in light of the current environment for hotels.
The third hotel under development is the thousand room endless summer dockside in in suites, which is located in Universal Universal's Orlando theme Park. This property is in the final stage of development its and its opening date will be announced very soon.
The hotel will be our Ace hotel on the Universal campus and will bring our universal room count to nearly 9000 rooms or just about half of the total rooms in the Loews hotels systems system Loews hotels that they continue to.
Our main focus on its strategy of developing hotels in markets that have unique built in demand generators and potential for group business.
Thank you Jim the next one is for you as well can you. Please comment on when you expect to see the hotel industry recover from the effects of the pandemic with Lowe's is loews hotels is recovery lead or lag the industry's recovery.
Yeah, I'm reminded of the old, saying, he who lives by the Crystal ball must learn to in ground glass, but all Sally forth anyway.
Industry analysts believe that a full recovery is anywhere from two to five years in the future, but the truth is a recovery in hospitality is highly dependent upon how and when the pandemic is contained.
At the end of the third quarter is as we said before Loews hotels had 21 hotels that had already resumed operations. While there has been a steady increase in demand occupancy rates still remain considerably below historic norms.
It's really important occupancy rates are still below historic norms.
Recovery is currently being led by a leisure business and more than half of Loews hotels assets fit well into that category such as our properties on the Universal Orlando campus as well as other assets like the Loews, Miami Beach Hotel and realized by Lowes in oil.
Income taxes, which.
Just hosted the World series, we're seeing in fact, a lot more driving business than weve really ever seen before.
Urban center properties are still lagging due to a reduction in corporate travel.
But we believe the Loews hotels' properties with unique demand generators will recover more quickly.
In our urban properties.
Okay. Thank you Jim and our last question is for David.
David how has because it 19 affected your packaging business RPM can you. Please give us an update sure I mentioned this in my remarks, but let me go over it again.
Demand for the company's products has been strong overall.
There are certain products that benefited from cove it actually.
Product segments, such as household chemicals beverages, and personal care and there are others that.
Who are somewhat weakened by.
Co that those would include automotive commercial.
Foodservice and school dairy, although I would point out that the weaker segments big.
Began to rebound in the third quarter.
Two bright spots this year for all Tim are envisioned the company's recycling business and all TM healthcare a business created from recent acquisitions that Diversifies, all Tim Evans with a growing pharmaceutical packaging market.
And as I mentioned earlier envision has been experiencing its best performance since 2014.
And as as for all Sam healthcare, it's exceeding expectations due to strong synergies as well as continued progress on operational efficiencies and other savings initiatives.
As a result, all Sam healthcare is ahead of plan for the year. Despite.
Cove at 19, so I would say net net the company's overall results are running modestly above plan a plan that was finalized pre pandemic.
And I would go on to say that commercially all teams new business efforts have been very successful over the past few months.
I think the company is winning new accounts by differentiating itself by demonstrating reliability continued innovation and customer focus.
During this difficult coated period, so we hope that this.
Focus on new business, and the new business wins should benefit financial results in future periods back to Mary.
Thanks, David Thank you David and Jim.
This concludes let us call as always thanks to all of you for your continued interest please feel free to reach out to me with any additional questions at EM Skafidas at Lowes Dot Com a replay will be available on our website lowes dot com in approximately two hours.
Over to you to end the call.
Thank you for participating in the Loews Corporation third quarter 2020 earnings Conference call. You May now disconnect your lines and have a wonderful day.
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Ladies and gentlemen, thank you for standing by and welcome to the Loews Corporation third quarter 2020 earnings Conference call.
This time, all participants have been placed in a listen only mode and the floor will be opened for your questions. Following the presentation.
He would like to ask a question at that time. Please press star one on your Touchtone phone if at any point. Your question has been answered email moved yourself from the queue by pressing the pound key if you should require operator assistance. Please press star Zero I will now turn the call over to Mary Skafidas, Vice President of Investor Relations.
In corporate communications for Lowe's.
Thank you Lori and good morning, everyone and welcome to Loews Corporation's third quarter earnings Conference call a copy of our earnings release earnings supplement and company overview may be found on our website.
Lowes Dot com on the call. This morning, we have our Chief Executive Officer, Jim Tisch, and our Chief Financial Officer, David Adelson.
Following our prepared remarks, we will have a question and answer session with 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.
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.
Gamers, which is included in the Companys 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.
There has been a slight modification to our earnings call format that was made in response to shareholder feedback for a number of years now we have taking questions from shareholders on an earnings call either by incorporating the answers into our prepared remarks or answering them directly during our Q and a session.
Certainly we've heard from shareholders that they prefer that we answer questions in the queue in a portion of the call instead of leaving them into the prepared remarks and were happy to comply with this request as a result.
We will have longer Q and a session with that I'd like to turn the call over to our CEO, Jim Jim over to you.
Thank you Melanie and good morning.
Let me start by focusing on capital allocation, specifically share buybacks.
During our second quarter conference call I Am Sonically stated my strong belief that the market was significantly undervaluing lows the shares.
I also stated double those plans to maintain a substantial liquidity position as our rainy day fund. We also would take advantage of the market's discount and continue to buyback our stock.
During the third quarter, we good just thought purchasing over 5.4 million shares of loans for about $195 million, while preserving ample liquidity and ending the quarter with about three and a half billion dollars in cash and investments.
Maintaining high levels of liquidity is fundamental to our business model because a lot sales both capture opportunity and withstand uncertainty.
And just like any portfolio manager, we have to build the balance retaining our liquidity with taking advantage of investment opportunities as they arise.
Buying back shares is one of those three capital allocation tools will be other two being investing in our subsidiaries and buying another business.
With our stock trading considerably below our view of the intrinsic value share repurchases have recently been on most attractive capital allocation option.
That being said our decision to buy back stock has not come at the expense of any of our subsidiaries. For example, we are providing capital to loews hotels to help but rather the effects of colder on the hospitality industry.
Three other subsidiaries boardwalk and opium packaging I've, not recently required parent company capital.
Instead boardwalk in old him have largely U.S they'll free cash flow to finance growth opportunities. Both for you and I was chosen for pay dividend since it hasn't hasn't had a need for additional capital.
As Mary mentioned during the Q1 day, we will be discussing topics submitted by our shareholders. However, I did want to highlight two key items upfront.
As long term care business and the situation the Loews hotels.
Starting with.
Okay before we got into long term care, let me emphasize it's nave underwear underlying property casualty underwriting performance for the quarter was stellar the company had an underlying combined ratio of 92.6 compared with 94.6 in last year's third quarter.
Due to improved loss and expense ratios.
Property and casualty pricing momentum continues with rates increasing over 12% in the third quarter compared to an increase of just under 6% for the same period last year.
With respect to long term care. My guess is that seeing those long term care exposure is a significant reason why feelings valuation wise its peers.
We have laws are comfortable with the reserves that she has set up for long term care.
The company has been proactive in managing the long term care book of business and prudent in our approach to setting LTC reserves.
In the third quarter fear they took an L.P.C. net reserve charge of $37 million before tax.
Comprising $74 million active life reserves deficiency, offset by a $37 million claim reserve release.
The active life reserve deficiency, resulting from the continued low interest rate environment and its impact on future assumed reinvestment rates in my opinion Sienna is taking a conservative view on future interest rates, which hopefully means that they will not have to adjust for lower into.
Just wage again going forward.
Since the end of 2015, Cnos overall exposure to long term care has been reduced by 31% with the number of active policies declining from 419000 to 288000.
So why are we so confident in seeing these management of long term care, even in the face of the market's skepticism but.
Because we know that over the past seven years DNA has been laser focused and immersed in their long term care book of business.
For the six years prior to becoming CEO Nice Chief Financial Officer, Elmo analysts was head of long term care, what the company I'll did an outstanding job mitigating the LTC risk for CMV and the team in place today continues to do so.
DNA has managed more than 100000 long term care claims to date, providing CFA with reliable claims experience across all policy types and age cohorts.
DNA reviews, its long term care reserves in the third quarter of every year and they pose significant information regarding their review on the CNL website.
If you have not already done so please take a look at the information that they make available.
Now for the second topic topic I want to cover Loews hotels.
A follow up from the colder dependent continues to negatively affect the travel and tourism industry and Loews hotels is no exception.
We believe and hope that the second quarter was the bottom for the hotel industry and we have seen business picked up a loews hotels since then.
While occupancy rates are still low by any historical standard 21 of Loews hotels 27 properties had resumed operations by the end of the third quarter.
The resumption of operations combined with significant expense controls enacted by Loews Hotels' management.
Have improved the company's cash flow situation.
When the pandemic struck and Loews hotels substantially suspended operations, we estimated that the company would generate negative cash flow of approximately $25 million per month.
While still negative Loews hotels is cash flow is much improved going forward. We do not expect loews hotels is cash needs to be material to loews corp.'s balance sheet.
And with that let me turn the call over to David.
Thank you Jim and good morning, everyone for the third quarter Loews reported net income of 139 million or 50 cents per share up from 70 to 72 million or 24 cents per share in last year's third quarter.
The quarterly increase was driven by Santa Fe, whose net income contribution doubled to 192 million.
Let me provide some brief highlights on seeing nice quarter for more details. We encourage you to review the transcript from the Companys Investor call earlier this morning.
The year over year earnings increase at CNN. It was driven by two main factors one lower net reserve charges in CNS is life and group business associated with a long term care and structural structured settlement businesses and to higher net investment income and net investment gains.
As Jim mentioned sales.
DNA is core property casualty business posted robust premium growth and strong underlying profitability in the quarter.
However, total PNC underwriting results declined from Q3, 2019, because of higher weather related catastrophe losses.
Catastrophe losses for the entire us property casualty industry were elevated during the quarter.
Led by.
Three hurricanes and the Midwest direct show.
The Western wildfires were also an industry event, but had little impact on Santa Fe.
Before leaving Santa Fe I would draw your attention to the company is rock solid investment portfolio, which at quarter end had a market value of 49 billion.
An average credit rating of single, a and a net unrealized gain of $5 billion of.
About 94% of CN as fixed maturity investment portfolio is investment grade.
Again, please see CNH transcript and shareholder materials for more details.
Even though diamond offshore ceased being a consolidated subsidiary of Loews in this year's second quarter that helped drive our third quarter year over year earnings increase.
During last year's third quarter Diamond contributed a net loss of $48 million, while this year.
These results were no longer included in our consolidated net income.
Let me now turn to our wholly owned subsidiaries Boardwalk Loews hotels, and all Tim packaging.
Boardwalks net income contribution declined declined from $29 million in the prior year to $20 million the company generated quarterly EBITDA of $167 million versus $175 million last year.
Net operating revenues were down slightly expire.
Expiring natural gas transportation contracts were re contracted at lower rates, which was expected and planned for.
Revenues from growth projects recently placed in service together with storage and parking and lending revenues offset much but not all of the decline.
As a reminder, boardwalk has experienced contract expirations and restructurings over the past few years related to pipelines placed into service 10 to 12 years ago.
This re contracting activity essentially concluded by year end 2019.
Boardwalks increased asset base from its growth projects led to an increase in expenses, especially higher depreciation and property taxes I'd.
Additionally, the expiration of property tax abatements contributed to the year over year increase in expenses.
Despite the COVID-19 pandemic and significant hurricane activity, along the Gulf Coast Boardwalks operations were minimally disruptive during the quarter and the overall financial impact was negligible.
The hurricanes and resulting power disruptions did impact certain customers, but the revenue impact of these disruptions on boardwalk was immaterial.
Let me highlight that both CNH and Boardwalk took advantage of the robust fixed income market in Q3 to raise money at attractive rates both.
Both companies issued $500 million of 10 year notes with DNA is yielding to dot Oh, 8% and boardwalk three dot for 1% both.
Both deals were vastly oversubscribed and reflected investors confidence in their respective credits.
Yes.
Jim already spoke about Loews hotels, so I will be brief the.
The business reported a net loss of 47 million in the quarter excuse.
Excluding unusual items, the net loss was $55 million Ajay.
Adjusted EBITDA, which excludes unusual items and includes Loews hotels pro rata share of EBITDA in JV properties was a loss of $38 million.
Loews Hotels' management is focused on two interrelated objectives, one reducing the cash flow drag and to resuming operations judiciously and effectively.
The company has aggressively reduced expenses.
Right sized this capital spend and worked with lenders to defer interest and principal pay downs it.
It is reopening properties when management projects that doing so will improve cash flow.
As Jim mentioned, we believe that Loews hotels turned the corner in Q2 and is on an upward trajectory.
The average monthly cash flow drag is well below the 25 million we estimated during our Q1 earnings call.
The exact timing of a return to profitability and positive operating cash flow. However depends on the overall travel environment.
But we believe Loews hotels' properties, such as those in Orlando, Arlington, Texas, and Miami Beach are especially well positioned to participate in the travel upswing that has already begun.
Also in packaging, which is included in corporate another had another good quarter.
Demand for the company's products continued to be strong overall.
They are uncovered 19 related product segments, such as household chemicals beverages, and personal care and somewhat weaker in segments, such as automotive commercial foodservice and schools Aerie.
Moreover, in vision, which is the Companys recycling business has been experiencing its best performance since it was acquired by all Tim in 2014 dry.
Driving this performance has been stronger demand for recycled plastic also known as post consumer resin.
All Jim contributed a slight net loss despite its robust EBITDA I.
I would highlight three factors depressing net income.
One significant depreciation and amortization expense attributable to the company's recent acquisitions.
Through accelerated amortization of the consolidated container trade name, which will be fully amortized by the end of the year and three.
The effect of rising resin prices in Q3 since.
Since there is a contractual lag in all teams ability to pass through these cost to customers the company absorb the cost in the quarter without recognizing the offsetting revenue.
This slide is temporary and will reverse as the costs are passed through to customers.
All teams focus on new business is bearing fruit and should benefit results in future periods. The company has been very successful over the past months in gaining new accounts by demonstrating reliability continued innovation and customer focus during this difficult covert.
Period.
Turning to the parent company.
Pre tax net investment income was 23 million down from $36 million last year and $110 million last quarter of.
The year over year and linked quarter declines were driven by returns on equities and LP investments.
During Q3 2020, we received 90 million in dividends from Santa Fe.
We expect to receive dividends from both CNH and boardwalk during the fourth quarter.
We repurchased 5.4 million shares of Loews common stock during the quarter at an aggregate cost of 195 million.
We purchased an additional 667000 shares since quarter end.
Well as ended the quarter with three and a half billion in parent company cash investments with cash and equivalents accounting for over 80% of the portfolio.
Let me now turn the call back to Mary.
Great. Thank you David.
Let's move on to the queue in a section of the call.
We have a number of questions respond to some shareholders. The first one is for Jim.
Have you considered buying in the outstanding shares of CNH could take advantage of the discount in the stock.
So well.
Flows is always believed that by having a public valuation marker for C.N.A. It's.
It's really important especially to our low shareholders.
In a very rough basis DNA comprises about half of the value of lows.
The other half being our net cash.
We are our assessment of the value of boardwalk of all team and our our hotel business.
Yes, but it would be even beyond just being a marker there are other reasons to keep cdna as a public company.
First.
Being public is important to attracting top talent.
The top top executives want it top executives in any company want at least a portion of their compensation to be based on the performance of the shares of their company and by being public CN Abel is.
To provide that incentive to its top talent.
Secondly.
And we think this is very important the transparency that comes from being public is important to CNH regulators as well as to rating agencies.
As everybody knows I think that CNH raise at a ridiculously low valuation and that the PNC industry stocks Likewise traded a crazy valuations.
And finally, our share repurchases low stock allows us to take advantage of the discount valuation that cnova is trading as well as the discount in loews shares for its non CNS assets.
All our job, but to what we like to call a very significant double discount in our share repurchases.
Great. Thank you Tim.
The next question has to do with the exceptional year.
For catastrophe losses in the insurance business, Jim would you please discuss how cdna and the insurance industry are managing through these challenges.
Well Mary Youre certainly right. This has certainly been a banner year for cat and cat losses.
Not only for CN, a buck for the industry overall.
There have been only four quarters over the past 40, 40 quarters, where cnf has experienced net cuts coming in or above.
Hundred $60 million.
Two of those four quarters over the past 10 years UC.
Occurred in 2020.
Thats DNA through the through the third quarter.
Our pre tax cat losses were more than $530 million.
Compared to just $128 million last year.
Even if you exclude the losses from Covidien from civil unrest, which were roughly about.
$250 million.
CNV year to date cat losses would still be running at more than twice last years level and of course, well ahead of their plan.
But despite these these are really exceptional events and catastrophes I'm impressed by how.
The PNC industry and also see an a. are managing through it all.
Someone had told me in January that 2020 would be filled with storms fires civil unrest and depend on mix I would have told you that season. They would have a miserable year as a result.
However, despite this litany of events DNA.
DNA is still quite profitable with $400 million of core income and $300 million of net income through the third quarter and it continues to find profitable avenues for growth.
All the more so thanks to the hard rate market that the insurance industry is currently experiencing.
Cat losses come with the territory in the property and casualty industry.
We believe that Sienna is effectively managing its cat exposure, while also getting strong rate increases on cat exposed.
Businesses.
So.
Let me end this by adding one stray far.
The insurance industry has not hasn't always been financially prudent and this is the advantage of being associated with it.
Particular industry for over 40 years I have a little historical perspective here.
Three years back in the seventies eighties and nineties when the industry did not have true capital discipline and they would write business at just about any price.
Today, the industry is reacting to catastrophic events and low interest rates by getting rate increases where they are justified in my view. This change is a result of an increase demand from equity investors for profitability, which has led to insurance manage.
Management increased focus on capital efficiency.
Great. Thank you. Jim next question also has to do with DNA focusing on teenagers long term business, Jim could you tell us if.
If you your assessment of Cienas long term care business and the risks that it poses to cdna until the.
Sure.
As I said in my prepared remarks, Sienna is long term care exposure is likely the biggest reason why why cnis valuation lags its peers.
And as I also said for the past seven years cdna has been actively managing its long term care book of business in order to reduce risk and also in order to optimize results.
Since 2015, DNA is exposure to long term care has been materially reduced with the number of active policies declining by over 30%.
Additionally over the past few years DNA has been able to further reduce.
Its risk profile of its long term care block of business by achieving meaningful premium rate increases and also offering policyholders attractive options to reduce benefits in return for reduced future premiums.
Dino Robusto will now morale is on their call today focused on long term care and.
I suggest everyone reviewing their remarks and look at the significant information on long term care that's posted on Cnas website.
Let me make two additional comments on the net reserve charge that CNN took in the third quarter.
First and they really vary significantly a $37 million net charge on a block this size is actually quite modest.
And secondly, the charge was attributable to the historically low level of renewed interest rates that were currently experiencing.
With these latest estimated changes going forward cdna is assuming that a 10 year Treasury note will trade at slightly over 1% three years from now and like White glove. Likewise in 2030, Sienna is assuming that the 10 year note will you.
Year old one historically is a paltry two and three quarter percent.
In my opinion, Sienna is taking a very very conservative view on future interest rates, which hopefully means that they won't have to adjust for lower interest rates again going forward.
Thank you Jim. The next question also staying on the CNH topic.
Does the lows expect to get special dividends from CMS.
So we still have a quarter to go in 2020, so it's really too early to be making any specific comments.
About whether or not.
CNO will pay a special dividend, it's been an extraordinary year for cat losses, that's for sure I can't speak for the CNH Board, which hasn't had a discussion yet about special dividends and we still have four months to go until the board actually mix.
A decision on special dividends. So I guess, we'll just have to wait and see what happens.
Okay.
Switching to boardwalk.
The shareholder would like to know our growth projects flowing in the midstream space can you comment on that Jim.
Yes from everything that Boardwalk is saying, it's very likely that there will be a slow down in fact, I would say we're in the middle of a slowdown for larger scale projects.
Because our customers are moving out their final investment decisions. However.
However, boardwalk expects to continue seeing smaller growth opportunities with power and industrial customers, primarily due to a boardwalk pipelines proximity proximity.
To some of our industrial gas customers.
Thank you. The next question is for David.
David There have been several recent bankruptcies of exploration and production companies can you. Please comment on the financial strength boardwalks customers sure Mary Thanks over.
Over the past several years.
Boardwalk has.
Focused on diversifying its customer base to include more end users such as power plants industrial customers and LNG off takers a strategy that proved beneficial this year by diversifying in this way boardwalk has been able to strengthen the overall credit profile.
Of its customer base.
More than 70% of Boardex revenue backlog is derived from investment grade companies.
And boardwalk has letters of credit or other types of collateral from some of its customers that are not investment grade or unrated, which provide an additional measure of security.
In 2020, and this year one of boardwalks customers declared bankruptcy and another seems to be on the verge.
Because of the credit protections in place for these customers and importantly, the ability to re market any return capacity. These bankruptcies will not have a material financial impact on the company.
Stepping back since the pandemic hit in mid March.
Boardwalk has maintained on interrupted service to its customers while simultaneously taking measures to ensure the safety of its employees and its operations.
At the end of the third quarter Boardwalk had well over $9 billion and contracted revenues.
With over 600 million of net new contracts added to backlog during 2020.
Great. We have another question for our CFO, David can you provide.
Provide an update on the cash needs of Loews hotels.
Absolutely and Jim already comment on it but let me just provide a little more detail.
When those hotels suspended operations that almost all its properties in the early spring.
We estimated that negative cash flow with average around 25 million per month.
We went on to say that management would reopen the property if doing so was expected to improve that propertys cash flow.
Loews hotels has responded to the pandemic can do sudden downturn.
Hi, transforming its operating model, including dramatically, reducing property level and management company expenses.
As we all know properties began coming back on line during the second quarter.
13 properties resumed operations during Q2, another six during Q3.
And one more hotel last week.
As anticipated Loews hotels cash flow has improved as properties have resumed operations expenses have been managed aggressively and capital spending has been right sized for the current environment.
While the company continues to generate negative cash flow. It is significantly less than the 25 million per month cited in April.
I'd be remiss in not mentioning how difficult the past eight months. It then for Loews hotels team members.
Thousands of employees were furloughed, when the pandemic struck and less than half of the furlough team members have returned to active duty.
Early on most hotels put programs in place to assist us affected team members, including a multi million dollar relief fund as.
As well as as well as continuing to provide medical insurance for furloughed employees for several months.
Additionally, Loews hotels is instituted enhance safety and well being standards and protocols for team members and guests.
And as a reminder, in solidarity with all those hotels team members being financially impacted by this crisis all.
All three members of our office of the President, Jim John and Andrew Tesh reduce their salaries by 50% as of April 1st and their bonuses by 50% for the entire year back to Mary.
Thank you David.
Staying with Loews hotels.
Tim. This next question is for you is loews hotels looking to buy or sell any hotels and how his co that impacted its development projects.
So first let me talk about Loews hotels is long term growth strategy.
Company as we've said before is focused on growth in two ways. The first one bye.
By investing in and developing hotels with built in demand drivers like it has done so successfully with Universal Studios and also in Arlington, Texas.
And secondly, Oh, the company is focused on developing and operating hotels for the group business.
While the hotel recovery recovery is currently powered by leisure travel.
We really do believe that the corporate travel along with meetings and events will come back as a pandemic wings.
But before the pandemic head Loews hotels had begun to evaluate their portfolio and to sell a few hotels that didn't align with the current growth strategy and they continue to do so opportunistically, including one hotel that was.
It was sold earlier this year in Canada.
At the start of this year Loews hotels had three projects under development and scheduled for opening this week this year.
Two loews hotels, the the live by Lowes in Saint Louis and the lows, Kansas City a hotel.
Already opened in the hotels is doing just fine in light of the current environment for hotels.
The third hotel under development is the styles in room endless summer dockside in in suites, which is located in Universal Universal's Orlando theme Park. This property is in the final stage of development its and its opening date will be announced very soon.
The hotel will be our Ace hotel on the Universal campus and will bring our universal room down to nearly 9000 rooms or just about half of the total rooms in the Loews hotels systems system Loews hotels, and then continue to rise.
A main focus on its strategy of developing hotels in markets that have unique built in demand generators and potential for group business.
Thank you Jim the next one is for you as well can you. Please comment on when you expect to see the hotel industry recover from the effects of the pandemic with Lowe's is loews hotels is recovery lead or lag the industry's recovery.
Yeah, I'm reminded of the old, saying, he who lives by the Crystal ball must learn to ground glass, but also the fourth anyway.
Industry analysts believe that a full recovery is anywhere from two to five years in the future, but the truth is a recovery in hospitality is highly dependent upon how and when the pandemic is contained.
At the end of the third quarter is as we said before Loews hotels had 21 hotels that had already resumed operations. All there has been a steady increase in demand occupancy rates still remain considerably below historic norms that's real.
The important occupancy rates are still below historic norms.
The recovery is currently being led by leisure business and more than half of Loews hotels assets fit well into that category such as our properties on the Universal Orlando campus as well as other assets like the Loews Miami Beach Hotel and are alive by Lowes and long.
Adelington, Texas, which.
Just hosted the World series, we're seeing in fact, a lot more driving business that we really ever seen before urban.
Urban center properties are still lagging due to a reduction in corporate travel.
We believe the Loews hotels' properties with unique demand generators will recover more quickly.
In our urban properties.
Okay. Thank you Jim and our last question is for David.
David how has COVID-19 affected your packaging business RPM can you please give us an update.
Sure I mentioned this in my remarks, but let me go over it again.
[music].
Demand for the company's products has been strong overall.
There are certain products that benefited from cove it actually.
Product segments, such as household chemicals beverages, and personal care and there are others that.
Who are somewhat weakened by.
Co that those would include automotive commercial.
Foodservice and school dairy, although I would point out that the weaker segments bigger.
Began to rebound in the third quarter.
Two bright spots this year for all Tim are envisioned the company's recycling business and also some health care a business created from recent acquisitions that Diversifies, all Tim Evans with a growing pharmaceutical packaging market.
And as I mentioned earlier envision has been experiencing its best performance since 2014.
And as as for all Sam healthcare, it's exceeding expectations due to strong synergies as well as continued progress on operational efficiencies and other savings initiatives.
As a result, all jam healthcare is ahead of plan for the year. Despite.
We had 19, so I would say net net the company's overall results are running modestly above plan a plan that was finalized pre pandemic.
And I would go on to say that commercially all teams new business efforts have been very successful over the past few months.
I think that the company is winning new accounts by differentiating itself by demonstrating reliability continued innovation and customer focus.
During this difficult cobot period, so we hope that this.
Focus on new business, and the new business wins should benefit financial results in future periods back to Mary.
Thanks, David Thank you David and Jim.
This concludes the lows call as always thanks to all of you for your continued interest please feel free to reach out to me with any additional questions and its casitas at Lowes Dot com a replay will be available on our website lowes dot com in approximately two hours Larry over to you to end the call.
Thank you for participating in the Loews Corporation third quarter 2020 earnings Conference call. You May now disconnect your lines and have a wonderful day.