Loews Corp (L) Q2 2022 Earnings Call Transcript

Loews Corp (NYSE: L) Q2 2022 earnings call dated Aug. 01, 2022

Corporate Participants:

Chris Nugent — Investor Relations

James S. Tisch — President and Chief Executive Officer

Jane Wang — Senior Vice President and Chief Financial Officer

Presentation:

Operator

Good day, everyone, and welcome to today’s Loews Corporation Q2 Earnings Conference Call. [Operator Instructions]. Please note, this call may be recorded, and I will be standing by should you need any assistance.

It is now my pleasure to turn today’s call over to Chris Nugent, Investor Relations. Please go ahead.

Chris Nugent — Investor Relations

Thank you, Ashley. Good morning, everyone, and welcome to Loews Corporation’s second quarter earnings conference call. A copy of our earnings release and investor presentation may be found on our website, loews.com. I am joined today by our Chief Executive Officer, Jim Tisch; and Chief Financial Officer, Jane Wang. 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 might include statements that are forward-looking in nature. Actual results achieved by the company may differ materially from those made or implied in any forward-looking statements due to a wide range of risks and uncertainties, including those set forth in the 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.

James S. Tisch — President and Chief Executive Officer

Thank you, Chris, and good morning. Loews is off to a great start in the first half of 2022, with each of our consolidated subsidiaries continuing to produce strong results. CNA had another quarter of solid underwriting results and Boardwalk continues to benefit from robust natural gas flows. Loews Hotels had a record first half of the year, especially at the resort destinations despite the lingering effects of the pandemic on business travel. CNA continues to be a success story for Loew’s. The company’s underlying combined ratio improved by 60 basis points to 90.8%, driven by a lower expense ratio.

Excluding the impact of the quota share treaty implemented last June, net written premiums grew by 13% in the second quarter due to strong new business and retention. CNA continues its laser-like focus on underwriting, and the results speak for themselves. In the financial markets in the past quarter, two major things happened: risk assets dropped dramatically; and interest rates rose significantly. CNA’s core income was negatively impacted by lower returns on its private equity, hedge fund and common stock portfolios, which were down by $171 million pre-tax versus the prior year period.

With respect to the rise in interest rates, at the end of the second quarter, CNA’s fixed income portfolio had a pre-tax unrealized loss of $1.8 billion. By comparison, at the end of 2021, the portfolio had a pre-tax unrealized gain of $4.4 billion. As a result, CNA’s book value per share was about $35 at the end of the second quarter compared to about $47 at the end of 2021. In fact, it is important to note that regardless of the prevailing interest rates, CNA will still receive the same cash flows from the fixed income securities that are currently in its portfolio, and the company intends to hold most of those securities to maturity.

The good news is that CNA is now able to invest at significantly higher yields. And while book value per share has suffered a decline due to those higher interest rates, this decline does not imply any deterioration of the credit quality of the portfolio nor any impairment of the timely collection of principal and interest from our securities.

As I said on our last earnings call, over the long-term, higher interest rates will be generally beneficial for CNA, allowing the company to invest its cash flow at higher rates than it previously could. On average, CNA reinvests between $300 million and $400 million a month in its fixed income portfolio. So higher interest rates will improve that portfolio’s yield over time. Higher rates are particularly helpful for CNA’s long-term care book of business, which has longer duration liabilities in CNA’s P&C business. The company has been able to buy long-term securities at higher yields than it previously could, allowing it to advantageously lengthen the duration of this portion of its portfolio.

Turning to Loews Hotels & Co. The company has been performing exceptionally well, having just generated its highest quarterly adjusted EBITDA ever in the amount of $116 million. These impressive results are related to strong leisure travel and rapidly recovering group demand. Total adjusted EBITDA generated for the first half of the year was $183 million, which is $54 million higher than the pre-pandemic first half of 2019. Several new resort and convention properties developed by Loews Hotels have opened over the past few years, and the company’s favorable performance has certainly been impacted by the addition of these attractively situated properties.

Additionally, I’m happy to report that we had yet another resort hotel opening this November, the Loews Coral Gables Hotel. We look forward to this property strengthening our brand in South Florida. As a reminder, Loews Hotels is one of very few owner operators in the hotel industry. The company’s ability to design its unique properties ensures that Loew’s hotels are built to our exacting standards. Additionally, the company’s active participation in designing these properties means that these hotels are ideally suited to today’s market demands. To review, the hotel company’s growth strategy is based on two pillars. First, catering to group business; and second, developing and operating hotels in immersive destinations.

The first pillar focuses on hotels with 300 plus keys and ample meeting space that also offer unique local experiences that attract group and transient customers alike. We are very encouraged by the recent pickup in group travel at these locations and really all locations with significant meeting space. The properties that Loews Hotel owns 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. The Universal Orlando partnership has been highly successful, spending more than two decades and currently encompassing eight hotels with 9,000 rooms.

Additionally, Loews Hotels has been focused on building out Arlington, Texas, which is an immersive destination that caters to group travel and therefore, is consistent with both pillars of its growth strategy. Our current property in Orlando — excuse me, our first property in Arlington, the Live! By Loews hotels is within an entertainment district with three professional sports stadiums and performance venues, and it’s also close to the future home of the national Medal of Honor Museum, opening at the end of 2024. This Live! By Loews Hotel was particularly resilient during the pandemic. Given our confidence in this market, I’m pleased to report that we have topped off construction of the new Loews Arlington Hotel, an 888 room hotel connected via indoor SkyBridge to the Live! By Loews Hotel.

This new property will have over 250,000 feet of meeting and event space and will be connected to Arlington’s brand-new convention center. The Loews Arlington hotel remains on track to open in the first quarter of 2024. Together, the two hotels in Arlington will have almost 1,200 rooms for guests who are visiting this vibrant entertainment district either for major events or for attending meetings in our top-of-the-line convention space.

As for Boardwalk Pipelines, the company is operationally strong, and we look forward to the resolution of our litigation whose appeal is currently pending in the Delaware Supreme Court. The case is scheduled to be heard on September 14. We have every hope that this case will be resolved by the end of the year. If you’d like to know more about my thoughts on the Boardwalk litigation, I refer you to my first quarter comments.

Finally, concerning share repurchases, from April 29, the last day we reported share repurchases until today, we have repurchased 5.2 million shares of Loews common stock for $310 million. Year-to-date, we’ve bought back 3.1% of our outstanding shares for $459 million. As I’ve often said, we believe that Loews still trades at a significant discount to our view of its intrinsic value, so we’ll continue to let our share repurchase activity speak for itself.

And now over to you, Jane, and welcome to your first earnings call as the CFO of the Loews Corporation.

Jane Wang — Senior Vice President and Chief Financial Officer

Thank you, Jim, and morning, everyone. I’m really looking forward to engaging with you all in this new role. Second quarter of 2022, Loews reported net income of $180 million or $0.73 per share compared to net income of $754 million or $2.86 per share in last year’s second quarter. Net income for the six month period was $518 million or $2.09 per share versus $1 billion or $3.82 per share for the comparable prior period. The decrease year-over-year may seem large, but it’s driven by two items that masked a very strong operating performance of our subsidiaries.

The first being the non-recurrence of last year’s $438 million after-tax investment gain on the partial sale and deconsolidation of Altium Packaging; and the second being lower investment results at both CNA and Loews, which I’ll discuss more in detail later. Book value per share declined from $71.84 at year-end 2021 to $62.90 at the end of the second quarter, due mainly to the effect of higher interest rates, lowering the market value of CNA’s fixed income investments. As a reminder, this unrealized loss sits in accumulated other comprehensive income or AOCI on the balance sheet within shareholders’ equity. If you exclude AOCI, book value per share actually increased from $71.09 at year-end to $73.26 at the end of June 2022.

Turning first to our largest subsidiary. CNA contributed net income of $183 million to Loews this quarter compared to $330 million last year. The year-over-year decline primarily reflects lower net investment income from LPs and common stocks, partially offset by improved underwriting results and higher income from fixed income securities. In addition, investment gains and losses declined due to the unfavorable change in the fair value of non-redeemable preferred stock.

Putting aside the investment results, we are pleased that CNA showed a significant improvement in their P&C underwriting income this quarter, which grew by over 60%. This was driven by both top line growth and better profit margins. Net written premiums grew 13% on an apples-to-apples basis when you exclude last year’s one-time catch-up related to a property quota share treaty. This was driven by 27% new business growth, 4 points of improvement on retention to 85% and net written rate increase of 6%. Although written rate increases have decelerated, earned rate increases of 8% remain above loss cost trends.

The combined ratio of 91% was 3 points better than the second quarter of 2021. This consists of 1.4 points of favorable prior period development, 1.1 points of improvement in the expense ratio and 1 point of improvement from lower catastrophe losses, offset by 0.5 point of unfavorable underlying loss ratio. As Jim mentioned, CNA has taken advantage of the current interest rate environment to reinvest at attractive rates and extend maturities, particularly within the Life & Group portfolio. In just one quarter, CNA extended the duration within the Life & Group portfolio from 8.9 years at the end of March to 9.7 years at the end of June.

Moving on to our natural gas pipeline business. Boardwalk contributed EBITDA of $193 million this quarter compared to $196 million last year. Revenues were higher due to an increase in gas storage demand as well as recently completed growth projects connecting to end-use markets such as power plants. That revenue growth has been largely offset by higher costs from maintenance projects due to revised pipeline safety requirements. The decrease in net income from $47 million in last year’s second quarter to $39 million this quarter was driven by higher depreciation expense from recently completed projects.

Turning to Loews Hotels. The company contributed $44 million in net income to Loews this quarter versus a loss of $21 million in the second quarter of last year. Adjusted EBITDA, which is defined and reconciled in our investor presentation on our website, was $116 million for the quarter versus $25 million in the second quarter of last year. And as Jim mentioned, this quarter’s result is an all-time high for Loews Hotels. The company has performed exceptionally well this year due to strong leisure demand at its resort properties, especially in Orlando and Miami as well as a pickup in group travel at its city center hotels.

The hotel properties at the Universal Orlando Resorts contributed meaningfully to the period-over-period improvement as all 9,000 rooms were opened for the entire quarter versus a year ago when two properties were still closed for part of the quarter. Finally, for the Corporate segment. Loews reported an after-tax investment loss of $51 million in the quarter compared to $19 [Phonetic] million of income in the prior year’s quarter. This loss was driven by declines in our equity portfolio. The Corporate segment also includes our proportionate share of Altium’s earnings, which is accounted for under the equity method.

Our share of Altium’s income slightly improved this quarter due to price increases offsetting lower volume demand. From a cash flow perspective, we received $97 million in dividends from CNA this quarter and $681 million year-to-date, consisting of two regular quarterly dividends of $0.40 per share and a special dividend of $2 per share. Since we updated you last quarter, we have repurchased an incremental 5.2 million shares at a cost of $310 million. That brings our total year-to-date share repurchases through last Friday to 7.7 million shares at a total cost of $459 million. Loews ended the quarter with $3.5 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.

Questions and Answers:

Chris Nugent — Investor Relations

Thank you, Jane. Moving on to the question-and-answer portion of the call. We have a number of questions from our shareholders. Every quarter, we encourage shareholders to send us questions in advance that they would like us to answer on our earnings call. Our first question is for Jane. Jane, can you give us an update on the Boardwalk litigation?

Jane Wang — Senior Vice President and Chief Financial Officer

Sure. We filed both our appeal brief and our reply brief, and we expect to argue our case before the court on September 14. We anticipate a decision hopefully by the end of the year.

Chris Nugent — Investor Relations

Great. Thank you, Jane. The next question is also for you. Did the recent incident at the Freeport LNG liquefaction plant have an impact on Boardwalk?

Jane Wang — Senior Vice President and Chief Financial Officer

No, it did not. And just for context, in early June, there was a fire at Freeport LNG, which is one of the largest LNG export facilities in the U.S. Freeport shut down its operation and does not expect to be back at full capacity until later on this year. However, Boardwalk’s transportation contracts with the Freeport shippers are on a take-or-pay basis, so it was not materially impacted by this incident.

Chris Nugent — Investor Relations

Thank you, James. Next question is for Jim. Jim, can you provide us with an update on how labor shortages are affecting Loews’ subsidiaries?

James S. Tisch — President and Chief Executive Officer

Gladly. So, a few quarters ago, I discussed labor issues at Altium and at Loews Hotels. Since then, for Loews Hotels, I’m happy to report the labor has become less of a problem. Increased staffing levels are enabling Loews Hotels team members to deliver the high-quality service to which its guests are a custom. At Altium, labor continuity continues to be a challenge in some manufacturing locations. To address this challenge, Altium is offering sign-on retention and employee referral bonuses. They’ve also adjusted base wages to keep up with the market. These actions have enabled Altium to close staffing gaps in many facilities. Overall, we are pleased that both Loews Hotels and Altium are seeing improvements in staffing.

Chris Nugent — Investor Relations

Great. Thanks, Jim. Our final question is also for you. Would you like to share with us your most recent thoughts on inflation and interest rates?

James S. Tisch — President and Chief Executive Officer

Sure. So since our last call in May, the Fed seems to be following through in their fight against inflation. At that time, the yield on 90-day treasury bills, a market closely tied to the Fed fund rate, has tripled from about 80 basis points to about 2.3%. On the other hand, in that same time period, the 10 year treasury note has moved down in yield from a yield of 3% to about 2.65%. This price action tells me that the market believes that the Fed is delivering on its promise to enact policies to tame inflation.

The prices of some commodities helped to tell the story. Since the beginning of the year, lumber is down 50%. Wheat is pretty much unchanged, notwithstanding the war in Ukraine, and Dr. Copper is down about 20%. As measured from the peaks, the prices are down significantly more than from the beginning of the year. So what does all of this mean? As I look at what’s going on, I have a hunch that we may be in for what I would call a full employment recession. The current unemployment rate is 3.6% and job growth for the past 1.5 years has averaged 400,000 new jobs per month.

While job openings are about twice the number of job seekers, so there’s plenty of room for a decline in the demand for labor, but for unemployed people to still find a new job. What’s been going on for the past year is that wages have not kept pace with inflation. For example, in the latest July employment report, average hourly earnings were up 5.1% versus a year ago, but the CPI was up 9.1% in that time span, meaning that workers fell behind inflation by 400 basis points. The thing that has kept the economy moving forward has been the increase in employment.

In the past year, the number of people working has increased by 4.3% year-over-year. So with respect to aggregate demand, the increase in the number of people working has made up for the decline in real earnings. Stated another way, employment is moving up, but workers’ real incomes are falling behind. I can see the state of affairs continuing for several more quarters where real wages are declining, but employment is increasing. This might give the Fed the time it needs to engineer a soft landing, whereby unemployment doesn’t go above 5%, while at the same time, inflation is given a chance to come down.

No, I don’t expect that we will see 2% inflation in the coming 12 months. But I can foresee that there will be a significant reduction in inflation in the coming six to 12 months and that we might be able to avoid the truly damaging wage price inflation spiral that was so problematic in the 1970s. To accomplish this best of all possible world’s outcome, the Fed will have to be steadfast in their fight against inflation, and federal spending will have to remain in check. And as long as I’m prognosticating, I don’t foresee a deep and debilitating recession. Rather, I can imagine that the slowdown will be relatively shallow, which would be consistent with a full employment recession.

The reason I’ve come to this conclusion is that we don’t seem to have too many excesses in the economy or our financial institutions. There hasn’t been rampant investment in housing and the financial institutions are in reasonably good shape and are seemingly not overextended. So overall, I foresee a recession that I would characterize as benign. I have enough self awareness to realize that I’m an optimist. But I consider myself a realistic optimist. And the idea of a full employment recession, as crazy as it might sound, seems like a realistic possibility for the coming 12 months. We’ll see. Stay tuned for my next update in three months from now.

Chris Nugent — Investor Relations

Great. Thank you, Jim. That concludes the Loews call for today. As always, thank you for your continued interest. Please feel free to reach out to me with any additional questions at cnugent@loews.com. A replay of this call will be available on our site, loews.com, in approximately two hours Thank you so much. You may now all disconnect.

Operator

[Operator Closing Remarks]