Q3 2022 Loews Corp Earnings Call
Let's start there.
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Good day, everyone and welcome to today's Loews Corporation Q3, 2022 earnings Conference call. At this time all participants are in a listen only mode. Please note. This call is recorded.
Standing by niche need any assistance. It is now my pleasure to turn the conference over to Mr. Chris Nugent.
Thank you Shelby good morning, everyone and welcome to Loews Corporation's third quarter earnings Conference call a copy of our earnings release and Investor presentation may be found on our website Lowes dot com.
On the call. This morning, we will have our Chief Executive Officer, Jim Tisch, and Chief Financial Officer Jane Wong.
Following our prepared remarks. This morning, we will have a question and answer session with questions from our shareholders. Before we begin however, I will remind you that this conference call may 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 state.
And due to a wide range of risks and uncertainties, including those set forth in our SEC filings.
Forward looking statements reflect circumstances at the time. They are made the company expressly disclaims any obligation to update or revise any forward looking statements.
This disclaimer is only a brief summary of the company's statutory forward looking statements disclaimer, which is included in the company's filings with the SEC.
During the call today, we May also discuss non-GAAP financial measures. Please refer to our security filings and Investor presentation for a reconciliation to the most comparable GAAP measures with that I'd like to turn the call over to Jim Jim over to you.
Thank you, Chris and good morning, before I discuss our financial results I'd like to tell you about some executive changes that are taking place at Loews hotels.
On January 1st of next year, Jon Tisch will become the executive chairman of Loews hotels, and Alex tissue will assume the role of president and CEO .
John will also continue to be a member of the office of the President of Loews Corp, and the co chairman of the Loews Corporation Board of directors, along with Andrew Tisch.
And is 43 years of Loews hotels, John This engineering, the company's expansion in our margins as the leading hotel business in particular, John was instrumental in building Loews hotels has longstanding partnership in Orlando with Universal Studios, while also having the foresight to develop the iconic.
Loews Miami Beach Hotel.
As a result, Loews hotels now has nearly 10000 rooms in the sought after Florida market.
Additionally, John created a corporate culture that places a high value on empowering team members satisfying customers and contributing to communities. John has successfully guided the company through several of the most turbulent periods in the hospitality industry. Most recently the Covid pandemic.
Loews hotels is now stronger than it has ever been as evidenced by the company's outstanding financial results. We are deeply grateful for John's contributions to the company and his continued presence will be of tremendous value to loews hotels.
Alex test join Loews hotels in June of 2017 after working at Loews Corp. Since 20, Oh wait.
Over the last five years, Alex has been instrumental in the creation and execution of the company's highly effective growth strategy and has proven himself to be a dynamic leader and a talented hotel executives Alex oversaw the development of Loews hotels is 800 room property in Kansas City and was integral.
In developing key partnerships such as the company's partnership with the city of Arlington, Texas.
I am confident that Alex will continue to chart a course for sustained growth at Loews hotels, and we are excited to welcome him into this new leadership role.
Yeah.
Moving onto our third quarter financial results, our subsidiaries performed very well this quarter, which led to good consolidated results for the company.
Before we discuss the financials I'd like to acknowledge our employees, who were impacted by hurricane Ian and thank them for their strength and dedication. During these trying times in particular I want to give a big shout out to the almost 2000 employees, who moved into our properties in Orlando.
In order to help our approximately 20000 guests and displaced residents on the universal countless who are fleeing the storm. Thank you very much guys.
I'm happy to report that Loews hotels experienced minimum financial impact from hurricane in both leisure and group travel has bounced back dramatically from the pandemic levels and the company continues to benefit from its five resort and convention properties.
Opened during the past few years very soon we'll be able to add the loans called cable cables hotels to that list.
The new property will formally opened in November I think to Loews hotels has presence in south Florida.
With the addition of called cables the company will have approximately 16500 guestrooms.
Loews hotels adjusted EBITDA for the third quarter was $77 million up $18 million compared to the third quarter of 2021 and for the nine months ending September 30th Loews hotels reported $261 million of adjusted EBITDA, which is higher than the company's pre COVID-19 full year.
For 2019, adjusted EBITDA of $227 million.
In Texas construction continues on schedule and on budget for the nearly 900 room Lowes Arlington hotels slated to open in the first quarter of 2024. This prop property epitomize Loews hotels' strategy of owning and operating hotels with high quality meeting and event space.
That also has built in demand generators, but lowes Arlington will be within walking distance of three professional sports and performance venues as well as the National Medal of Honor Museum among other attractions.
We remain committed to growth in this area of the hotel and hospitality industry.
Moving on to CNA Cna's core income of $213 million. During the third quarter includes 80 million $87 million and pre tax catastrophe losses related to hurricane Ian.
<unk> continued to be strong with CNA reporting and underlying combined ratio of $91. One during the third quarter CNA.
<unk> all in combined ratio, including catastrophe losses was $95 eight an improvement of four two points over the prior year net written premiums grew by 8% due to improved retention and new business.
Despite CNA stellar performance over the past several years, we believe the company still trades at a substantial discount to its peers.
Furthermore, I believe the property and casualty insurance industry itself is undervalued by the market.
While the S&P 500 trades at around 17 times 2022 earnings the.
The commercial P&C insurance industry trades in the lung double digits and the show of support for CNA its strategy and its management team and the third quarter Lowes bought about 670000 shares of CNA common stock for approximately $26 million.
Thus for Boardwalk pipelines. The company continues to perform well and grow revenue. We look forward to the resolution of our litigation, whose appeal is currently pending in the Delaware Supreme Court.
The case was heard on September 14th we continue to have every hope that this case will be resolved positively by the end of this year, if you'd like to know more about our thoughts on the Boardwalk litigation I refer you to my remarks from the first quarter earnings call of this year.
Our plastic packaging company Altium completed the $270 million acquisition of plastic industries in the second quarter, which was funded with $150 million of equity, including $79 million from lowes and $128 million of debt.
<unk> industries is a blow molding packaging manufacture manufacturer that was headquartered in Nashville, New Hampshire Ultimate purchased the company for approximately nine times EBITDA and we anticipate that that multiple will be stocked several turns lower after operational synergies are realized.
Concerning share repurchases from 29 from July 29, the last day, we reported share repurchases until today, we have repurchased approximately three 5 million shares of lowes common stock for $193 million.
Year to date, we've bought back four 5% of our outstanding shares for $652 million since.
Since we believe the lowes trades at a significant discount to our view of its intrinsic value. We are very enthusiastic about purchasing our shares at these levels.
However, with the Boardwalk litigation pending we believe it's prudent to moderate our share repurchase activity until the case is fully resolved.
Finally, we understand that most of you are reading a transcript of this call as opposed to listening to the live broadcast for this reason we are considering simply posting a transcript and discontinuing the call in the future. We welcome your feedback on this option. Thank you and stay tuned for more details.
And now I'd like to hand, the call over to our CFO Jane Wong.
Thank you Jim and good morning, everyone.
For the third quarter of 2022, Loews reported net income of $130 million or <unk> 54 per share compared to the net income of $220 million or <unk> 85 per share in last year's third quarter.
This year over year decrease was driven mainly by CNA is lower net investment income and higher investment losses.
While hurricane impact of CNA and in hotels, both companies posted another quarter of strong profitable growth.
Boardwalk continue its consistent robust performance and the lowest parent company navigated through volatile equity capital markets.
Book value per share declined from $71.84 at year end 2021 to $58 14 at the end of the third quarter due to the effect of higher interest rates lowering the market value of CNA fixed income investments.
Excluding accumulated other comprehensive income or this unrealized loss at book value per share actually increased from $71 nine at year end to $74.11 on September 30th.
This increase was driven by our current year's earnings and accretive share repurchases.
Turning to our largest subsidiary.
<unk> contributed net income of $115 million to lowes this quarter compared to $229 million last year the.
The year over year decline, primarily reflects a $68 million decrease in net investment income attributable to lowes driven.
Driven by lower net investment income from Lps, and common stocks, partially offset by higher earnings from the fixed income portfolio.
During the third quarter Lps and common stocks together returned negative two 1% versus the S&P 500, which had a negative four 9% return.
In comparison in last year's third quarter Lps and common stocks returned a positive three 8%.
In addition investment gains and losses declined driven in part by realized losses from the sale of short dated bonds.
Strategically by longer dated bonds at higher rates.
On the underwriting side CNA again posted another quarter of strong profitable growth contributing $61 million of incremental underwriting income to lowes.
Net written premiums grew 8% driven by several factors first new business grew by 12%.
Retention increased four points to 85% and third while net written rate increases decelerated to 5% exposure growth has increased to three 3%.
The all in combined ratio of 95, 8% was 4.2 points better than the third quarter of 2021.
This included five five points of catastrophe and <unk> eight points of favorable development. So the underlying combined ratio was 91, 1% flat to last year's third quarter.
Underwriting actions and incremental reinsurance have serve CNA will.
Even with the $87 million impact from Hurricanes in catastrophe losses were lower year over year as last year's quarter was impacted by Hurricane Ida and incremental office from Winter Storm Yuri.
Expense ratio was steady at 38%.
In our life and group segment CNA continues to proactively manage its run off long term care business.
The annual gross premium reserve valuation performed in the third quarter resulted in an increase in the active life reserve margin from $72 million last year to $125 million this year.
The long term care claim reserve review also resulted in a pretax net reserve release of $25 million.
We are highly confident in cna's prudent reserving philosophy and active management to further reduce the risk profile of this block.
DNA is unrealized loss position has increased to $4 1 billion from $1 $8 billion last quarter as higher interest rates and wider spreads continue to lower the market value of cna's fixed income investments.
As we discussed last quarter. This decline does not imply any deterioration in the credit quality of the portfolio and.
In fact the rate the increase in rates is favorable as CNA is able to continue reinvesting at higher rates, while also extending the duration of the life and group portfolio.
These are the highlights of Cna's performing this quarter. Please refer to Cna's Investor Relations website for more details on their quarter.
Moving to our natural gas pipeline business Boardwalk contributed EBITDA of $192 million this quarter compared to $184 million last year.
Revenue increased due to recently completed growth projects higher re contracting rates and higher utilization of its pipeline and storage assets.
That revenue growth has been largely offset by higher costs for maintenance projects due to revised pipeline safety requirements.
The decrease in net income from $38 million in last year's third quarter to $34 million. This quarter was driven by higher depreciation expense from recently completed projects and a $5 million impairment due to the retirement of an old asset.
Turning to Loews hotels.
Despite facing hurricane in at the end of September the company had another strong quarter growing adjusted EBITDA from $59 million in last year's third quarter to $77 million in this year's third quarter as a reminder.
Minder adjusted EBITDA as reconciled in our Investor presentation posted to the website.
The company contributed $25 million and net income to lowes this quarter versus $13 million in the third quarter of last year driven by continued strong performance across the board due to robust leisure demand a significant pick up in group travel and the return of business travel Aki.
Occupancy has increased from 71, 5% in last year's third quarter to.
To 84, 7% this quarter.
The financial impact from Hurricane Ian was very minimal.
Wrapping up with the corporate segment.
<unk> recorded an after tax impairment loss of $15 million in the quarter compared to a $23 million loss in the prior year's quarter.
Both losses were driven by declines in our equity portfolio.
The corporate segment also includes our proportionate share of all teams earnings which is accounted for under the equity method.
Our share of all teams income improved this quarter, driven by a favorable lag and passing through lower resin prices versus last year's quarter, we're increasing resin prices resulted in an unfavorable resin lag.
Pricing initiatives helped to offset inflationary cost pressures and lower volume demand.
From a cash flow perspective, we received $97 million in dividends from CNA this quarter and $778 million year to date, consisting of three regular quarterly dividends of <unk> 40 per share and a special dividend of $2 per share.
Since June 30, we have repurchased an incremental four 8 million shares of lowes at a cost of $268 million that brings our total year to date share repurchases through last Friday to 11 2 million shares at a total cost of $652 million.
As Jim mentioned, we also purchased 670000 shares of CNA for a total of $26 million.
Lowes ended the quarter with $3 $2 billion in cash and short term investments. The majority of these funds are held in treasury bills and less than 20% are held in equities and limited partnerships.
I will now hand, the call back to Chris.
Thank you Jane moving on to the Q&A portion of the call. We have a number of questions from our shareholders every quarter, we encourage shareholders to send those questions in advance that they would like us to answer on our earnings call. Our first question is for James Jane Jim Foote and provided an update on the Boardwalk litigation and.
Referred to his prior comments earlier in the year are you able to give us any further updates on this litigation.
Well as Jim mentioned, we argued our case before the Delaware Supreme Court on September 14th we really appreciate the support of our legal team of advisers and along with them. We're hopeful that a decision will be released by the end of the year.
Thanks J. Our next question is for Jim.
Jim does Alex his promotion to president and CEO of Loews hotels signal any shift in Loews hotels strategy no.
There is no change in Loews Hotels' strategy leadership change and seamless and will support the hotels company's current growth strategy.
Let me repeat that strategy is based on two core pillars first catering to group travel at high quality destinations and second developing and operating hotels and immersive destinations.
The first pillar focuses on hotels with 300, plus keys and ample meeting space that all also offer a unique experience to a trust group and transient customers alike.
We are very encouraged by the recent pickup in group travel at these locations and all of our locations with significant meeting space.
The properties that Loews hotels owns and in.
In partnership with Universal Orlando are a great example of the second pillar of the Loews Hotels' strategy immersive destinations with built in demand generators.
Universal Orlando partnership has been highly successful spanning more than two decades, and currently including eight hotels with 9000 rooms.
Regarding Alex.
He assumed the position of President in September of 2020 and has been instrumental in executing the strategy.
Laid out and it is driving our strong results for Loews hotels.
His leadership Loews hotels strengthen the partnership with Universal and made advances and leveraging data analytics to drive growth. This promotion recognizes the many.
Contributions he has made over the last several years and reflects our confidence in his ability to lead Loews hotels is future growth.
Thank you Jim. Our final question is also for you would you like to update us on your thoughts about interest rates inflation and the economy as we head into the final quarter of 2000 and Tony to shore.
When I started sharing my observations about inflation in the economy in the first quarter of 2021. It was very obvious at least to me that the fed should be tightening monetary policy at that time. The economy was running very hot and interest rates will ridiculously low 12 months ago.
Over your CPI was running at over 5% and so far this year, it's running at over 8%.
At the end of the first quarter of this year the fed abandoned the word transitory and finally kicked into gear. The fed started to steadily increase the fed funds rate and more recently to shrink its balance sheet.
In the past seven months.
Fed funds have moved from almost zero to more than 3% with expectations of another 125 basis point increase in the next two months.
And the bond market as exemplified by the 10 year note has move smartly higher from one 5% at the beginning of this year to around 4% now.
There's no doubt in my mind that the rate increases we have seen in the past year will translate into a slower economy and likewise a reduction in the inflation rate home.
Home mortgage rates have moved up from 3% at the beginning of the year to over 7% now.
This increase in mortgage rates means that the monthly cost of buying a new home has more than doubled in the past 10 months.
As a result of the increasing the cost of homeownership, we will begin to see a significant reduction in home prices and the fall in the number of housing starts will continue to accelerate all leading to a weakening GDP.
Likewise other sectors of the economy will react negatively to higher interest rates as well so far we haven't seen that reduction in inflation, but as you know inflation tends to respond to increases in interest rates with a lag and my guess is that the end of that lag is.
Almost upon us so I would expect to see weaker GDP numbers in the coming quarters, along with the slowing of inflation as measured by the CPI.
In the meantime, a number of commodity prices are declining as a result of tightening by the fed cut.
Copper prices are down 25% lumber prices are down almost 60% from their highs in March and oil prices are almost 30%.
From their peak in June .
In my mind, the easy part of the Fed's tightening process will be complete by the end of the year at that point the fed funds rate will be over 4% and the fed will have clawed back some of their inflation fighting credibility.
The Big question for everyone is whenever the increases in short rates in 2020, two will be to quell inflation or whether the fed will feel it has to continue to raise short rates in 2023.
Not alone in my opinion that the fed should pause at the beginning of 'twenty, three and see how effective their tightening has been.
They will still be in quantitative tightening mode, which means they will be selling term government securities at a rate of more than a trillion dollars of year.
And as I said before the lags in fed policy or unknown, even to the wisest economists. Additionally over tightening by the fed can cause a financial calamity that makes a recession much worse.
It would not be unreasonable for the fed to say after the December <unk> meeting that they will be pausing rate hikes for three months to assess the effects of their 400 basis point increase in short rates. They can warn that if inflation does not begin to come down in that period tightening will continue but.
I expect we will see a slowing of economic indicators and a reduction in the rate of increase in prices.
In terms of my Fearless forecast as I said previously our foresee what I call a full employment recession, whereby economic growth will be negative for a few quarters, but unemployment will remain below 5%.
This can happen because labor will be earning less than the rate of inflation. So that workers collectively will have less real income, which will be the cause of the recession.
I don't think the recession will be cataclysmic like an OLED in Illinois.
Government spending has been enormous in the past two years, we do have the private sector excesses that can cause a deep and extended recession.
I know I've changed my view the fed in the past year and a half, but that's because eight months ago. The fed finally became serious about fighting inflation and they are now on the path to a slowing economy and reduced inflation.
As I said I feel a pause and tightening in short term rates at the beginning of 2023 is warranted and hopefully the fed won't be badger.
Excess of tightening, which could have negative ramifications for the economy.
If they were to follow my advice the fed should made clear that it is pausing the move to higher short rates in order to evaluate the economy for a few months before possibly resuming tightening if necessary.
So that's the way I see things as of now stay tuned next quarter for any changes or reactions to the to the ensuing events that I may have.
Thank you Jim we have no further questions. So that concludes our call for today as always we appreciate your continued interest please feel free to reach out to me with any questions. My email is seen eugen at Lowes Dot com a replay of this call will be available on our website Bose dot com in approximately two hours.
Thank you again, you may now all disconnect.
Yeah.
That concludes today's teleconference. Thank you for your participation you may now disconnect.
Okay.
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