Loews Corp. (NYSE: L) Q1 2022 earnings call dated May. 02, 2022
Corporate Participants:
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
James S. Tisch — President and Chief Executive Officer
David B. Edelson — Senior Vice President and Chief Financial Officer
Presentation:
Operator
Good day, everyone and welcome to today’s Loews Corporation Q1 Earnings Conference Call. [Operator Instructions] Please note that this call maybe recorded and I will be standing by if you need any assistance.
It is now my pleasure to turn the conference over to Mary Skafidas, Vice President of Investor Relations and Corporate Communications.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Great. Thank you, Katie, and good morning, everyone. Welcome to Loews Corporation’s first quarter earnings conference call. A copy of our earnings release, earnings supplement and company overview maybe found on our website, loews.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 this morning, 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 to the 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 might also discuss non-GAAP financial measures. Please refer to our security filings and earnings supplement for 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, Mary and good morning. Loews is off to a tremendous start in 2022 with each of our consolidated subsidiaries continuing to produce solid results in the first quarter.
Before we talk about the financial performance of our subsidiaries though, I want to give you an update on the ongoing Boardwalk litigation in Delaware. As some of you already know, four months ago, the Delaware Court of Chancery found that Loews improperly utilized a call right embedded in Boardwalk’s Master Limited Partnership agreement when we bought in the minority unitholder shares of Boardwalk. Astoundingly, we were found liable for damages of almost $700 million plus interest, which amounts to more than a 60% premium to the unaffected price of Boardwalk in 2018. I have been told that this is the largest class damages award in Delaware court history.
We were shocked by the decision. Why? There are three basic reasons. First, the decision disregarded and dismissed a well-supported opinion of counsel, a document to which the Delaware courts traditionally give great deference; second, the numerous well-reputed lawyers who advised us on this matter were found to have participated in a corrupt scheme to deliver what was called a contrivance; and finally, we were assessed the damage number that in terms of both dollars and premium flies in the face of established Delaware precedent that market price should serve as a barometer in assessing the value of a public company.
Those who know me and know Loews will understand why I’m outraged and frustrated by this outcome. At Loews, we have always believed that operating ethically and with integrity is paramount. The notion that we might have been so duplicitous in our dealings with the minorities’ unitholders of Boardwalk is simply not true.
So where do we stand now? Currently, our case is on appeal at the Delaware Supreme Court, and we have every reason to believe the court should be taking this appeal very seriously. There are numerous precedent-setting legal findings made in our case that, in our opinion, would create significant difficulties for corporations and their lawyers in the State of Delaware if they were to be upheld. We believe the Delaware Supreme Court has spoken loudly and clearly in previous cases on the issue of damages and that throwing out years of precedent would create uncertainty and confusion for companies that rely on the Delaware courts to provide consistent and thoughtful rulings.
On timing, we have already filed our appeal brief and reply brief, and we expect to argue our case before the court in the third quarter. We anticipate a decision hopefully by the end of the year. I don’t think we’ll have too much more to report before then. Today, I simply wanted to let you know where we stand and how I feel.
Moving on to happier topics. On today’s call, I’d like to focus on the performance of CNA and Loews Hotels. CNA continues to be a success story for Loews. CNA had an outstanding quarter, delivering its strongest property and casualty combined ratio and underwriting profit since the third quarter of 2016. The underlying loss ratio was flat compared to the underlying loss ratio of the prior year’s quarter and generally flat for all of 2021.
Total renewal premiums increased by 9% for the quarter, driven by 7 points of rate and 2 points of exposure growth. Rates continued to be ahead of loss cost trends and exposure growth is up as the economy expands. CNA’s keen focus on underwriting has served them well and their balance sheet remains strong and stable. We continue to be extremely pleased with the company’s performance.
While higher interest rates will have a negative effect on the market value of CNA’s fixed income portfolio, those same higher rates will be beneficial over the long term. The good news is that the company 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 does not imply that there’s been any impairment of the timely collection of principal and interest. Higher interest rates have also been favorable for CNA’s long-term care book of business, allowing CNA to buy long-term securities at higher yields than was previously available. The company is now beginning to lengthen the duration of its long-term care portfolio.
As for Loews Hotels, the company delivered its highest first quarter adjusted EBITDA ever, clocking in at $68 million as pent-up demand for post-COVID leisure travel coinciding with this year’s timing of spring break. When comparing first quarter results with those from the first quarter of 2019, adjusted EBITDA is $7 million higher. Loews Hotels’ favorable performance is, of course, partially impacted by the mix of hotels in the portfolio as several more resort hotels have opened over that three-year time period. Additionally, we have exited several urban market hotels with minimal meeting space. Resort destinations continued to lead the way, and we are seeing a steady return of group business. The missing piece of the puzzle is a rebound in corporate travel, the lack of which continues to negatively affect hotels in urban centers. And while occupancy rates still lag pre-COVID levels in some locations, for most of our hotels, the average daily room rate is on par with or exceeds pre-COVID levels.
Next I want to update you on our share repurchases. During the first four months of the year, the company repurchased about 1% of our shares outstanding or a bit more than 2.4 million shares for approximately $148 million.
Before I hand the call over to David, I want to mention that this will be his last earnings call as CFO of Loews Corporation. However, don’t rush to say goodbye. He’s staying on through the end of June to ensure a smooth transition and will then continue with the company as a senior adviser. I thank David for his tremendous efforts on behalf of Loews over the past 17 years during which time he has been an invaluable member of Loews’ senior leadership team. His sound judgment, strategic acumen and laser-like attention to detail, has been an enormous benefit to Loews and we have been fortunate to have him as a colleague and as a friend.
Jane Wang will officially take over as CFO on May 10. Jane joined the company in 2006 and has steadily and brilliantly worked her way up the ranks at Loews and I look forward to hosting our next earnings call with her. David, you are still on the hook for today. So without further ado, over to you.
David B. Edelson — Senior Vice President and Chief Financial Officer
Thank you, Jim, for those kind words. Working with you and the whole Loews team since 2005 has been a tremendously gratifying professional and personal experience.
This morning, Loews reported first quarter net income of $338 million, a 30% increase from net income of $261 million in last year’s first quarter. Earnings per share rose 40% to $1.36, spurred on by a 7% year-over-year reduction in average shares outstanding, thanks to our share repurchase activity.
All three of our consolidated subsidiaries, CNA Financial, Boardwalk Pipelines and Loews Hotels posted excellent results in the first quarter. While CNA accounted for the bulk of our Q1 net income, the earnings increase was driven by significantly improved results at Loews Hotels as well as by the absence of non-recurring charges related to Altium Packaging that depressed last year’s first quarter results. Partially offsetting these positives was a decline in parent company investment income as equity markets sold off in Q1.
Before I walk through our subsidiaries results, let me touch on the impact on our earnings of recent financial market turbulence. The S&P 500 was down 4.6% in Q1, and the NASDAQ 100 was down almost twice that at 8.9%. In fixed income, the 10-year treasury yield increased 83 basis points to 2.34%, and the Bloomberg Barclays U.S. Aggregate Bond Index was down about 6% in the first quarter.
Since both CNA and the Loews parent company hold equity securities and LP investments correlated to equities, the decline in equity markets had a negative impact on earnings in these two portfolios. The decline in bond prices caused by higher fixed income yields, however, did not negatively affect current period net investment income at either CNA or the Loews parent company. At the parent company, almost 83% of the portfolio is made up of cash and short-term investments with equity securities comprising the remainder. Changes in interest rates have a little impact on the value of our cash and short-term holdings.
As Jim discussed, rising interest rates and yields did cause a decline in the value of CNA’s large portfolio of fixed income investments. While these market value changes reduced CNA’s net book value, they did not run through current period net investment income. In fact, as Jim mentioned, over time, higher yields should enable CNA to enhance net investment income through higher returns on new fixed income investments.
CNA’s net investment gains and losses, on the other hand, can be negatively affected by rising fixed income yields. For example, CNA’s portfolio of non-redeemable preferred stock is mark-to-market through net investment gains and losses. Overall, the decline in CNA’s net unrealized gains during the quarter reduced CNA’s common equity by $1.6 billion or just under $6 per share.
Let me return to our quarterly results. CNA contributed net income of $281 million, in line with last year’s $279 million. That said, the makeup of CNA’s earnings differed year-over-year. CNA’s net investment income declined because of the selloff in equity markets. Additionally, net investment gains, which were meaningful in last year’s first quarter, swung to a slight loss this year, driven by the unfavorable change in fair value of non-redeemable preferred stock and lower net investment gains on disposals of fixed income securities.
Much improved property casualty underwriting results offset the negative earnings impact of financial markets. Continued earned premium growth and underwriting discipline led to a 10% plus increase in P&C underwriting income, excluding catastrophe losses. Earned premium was up 5% year-over-year, and the underlying combined ratio improved 50 basis points to 91.4. CNA’s expense ratio, which, together with the loss ratio makes up the combined ratio, declined to 31 which was 50 basis points better than in Q1 ’21 and in line with full year ’21. The company’s expense ratio improvement over the past few years is notable and results from both expense management and premium growth.
Catastrophe losses declined materially year-over-year. Last year, the winter freeze in Texas resulted in significant cat losses, whereas cat losses were unusually modest this year. Catastrophe losses added 6.8 points to the combined ratio last year as compared to only 1 point in this year’s first quarter. Overall, CNA posted a combined ratio of 91.9% in Q1 ’22 as compared to 98.1% last year.
In summary, CNA’s results were strong despite a challenging quarter in financial markets, driven by favorable underlying P&C underwriting results and modest catastrophe losses.
Boardwalk contributed net income of $91 million, up from $85 million in last year’s first quarter. EBITDA, which is defined and reconciled in our earnings supplement, was $261 million in the quarter compared to $249 million in Q1 ’21. Boardwalk’s net operating revenues increased more than 3% year-over-year, driven by growth projects recently placed in service. Loews Hotels continues its impressive rebound, as Jim mentioned, driven by its resort properties as well as having all properties open for the entire first quarter of 2022. The company posted net income of $15 million versus a net loss of $43 million in Q1 ’21.
Let me unpack the results a bit further. GAAP operating revenue before reimbursables was $123 million, up from $39 million last year. Given the requirements of joint venture accounting, however, much of the company’s business is not captured in its GAAP revenues. Factoring in its pro rata revenues from its joint venture properties, including all the properties at the Universal Orlando Resort, Loews Hotels revenues in Q1 were about 3 times last year’s level.
Pre-tax equity income from joint venture properties was $26 million as compared to a $12 million loss last year. Consolidated pre-tax income was $22 million, a sharp increase from last year’s $55 million loss. Adjusted EBITDA, which is defined and reconciled in our earnings supplement, was $68 million in the quarter, up from a $13 million loss last year. The company’s 9,000 rooms in Orlando, together with the Loews Miami Beach Hotel, continued to be the major earnings contributors and the primary drivers of the year-over-year increase.
I would highlight, as Jim did, that Q1 ’22 represents the all-time high for first quarter adjusted EBITDA, surpassing the $61 million earned in 2019.
Turning to the Corporate segment. The parent company’s investment portfolio generated a net pre-tax loss of $16 million compared to income of $46 million last year. Like at CNA, negative returns on equity securities caused this year’s loss. The remainder of the corporate sector generated a $36 million after-tax loss in the quarter versus last year’s $96 million loss. Last year’s results included two non-recurring charges related to Altium Packaging, a debt extinguishment charge in connection with Altium’s recapitalization and a deferred tax liability resulting from the then-pending sale of a 47% stake in Altium.
A few words about the parent company. The parent company portfolio of cash and investments stood at $3.8 billion at quarter end, with over 80% in cash and short-term investments. During the quarter, we received $584 million in dividends from CNA, including the $0.40 per share regular quarterly dividend and the $2 per share special dividend.
As Jim mentioned, we spent about $129 million repurchasing 2.15 million shares of our common stock at an average price of just over $60 per share. Our repurchase after quarter end was modest at just under 300,000 shares.
Before I turn the call back to Mary, let me thank all of you for your interest in Loews and for your questions and suggestions over the years. It has been a privilege to spend the past 17 years at Loews, serving as CFO since 2014. I am thrilled to be able to hand the baton to Jane, who joined the company 16 years ago and is more than ready to take on this role.
And with that, I will return the call to Mary.
Questions and Answers:
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Thank you so much, David. We are now going to move on to the Q&A portion of the call. We have a number of questions from shareholders. Our first question is for Jim. Jim, how should we think about the future of natural gas in light of the war in the Ukraine?
James S. Tisch — President and Chief Executive Officer
So, let me start by saying that I am horrified by the images that I see on the news. I hope and pray that sanity and peace can be restored, but the cost in terms of human lives is already way too high. Because of Europe’s dependence on Russian hydrocarbons, energy has become a focus of many discussions surrounding this conflict. I believe the war in Ukraine has made it clear that we should be encouraging drilling for natural gas along with LNG export development in the United States. We want to be able to supply LNG to Europe and other countries and the world who previously were supplied by Russia. We are fortunate that natural gas is a very abundant resource in the United States and we have more than enough to maintain our energy independence and still be able to safely export large volumes to those who need it. The companies that make the significant investments for LNG facilities will need long-term contracts from Europeans and others in order to make this happen.
Looking at the broader picture, I also want to discuss the transition to renewable energy in the U.S. and the world. The increased use of natural gas has meaningfully reduced greenhouse gas emissions worldwide. Globally, natural gas has an important role to play in reducing emissions through the displacement of coal and as a backup to renewable energy by providing reliable power for times when the sun doesn’t shine and the wind doesn’t blow. In the United States, CO2 emissions from power generation are down by 40% over the last 20 years as power plants have switched from coal to natural gas. As the U.S. develops reasonably-priced natural gas exports, we can help wean the world off of coal.
Currently, global demand for natural gas is driven by China and India, where coal still accounts for more than 60% of their power generation. Energy transition targets in those countries will likely accelerate natural gas demand to replace coal usage. In the coming decades, the need for electricity will increase because of the electrification of automobiles and heating. Gas power generation will be needed because the wind and solar resources are intermittent, and current battery technology is unlikely to fill the gap.
Gas power generation is reliable, dispatchable and natural gas can be stored safely and inexpensively. And while the world is focused on our reliance on carbon-based fuel for power generation, natural gas is also a raw material for a number of items that we rely on every day. There is no easy replacement for natural gas as a raw material.
Boardwalk is well positioned to take advantage of higher demand for natural gas and growth in the LNG export market. The company continues to work to make its operations more environmentally friendly by focusing on reducing methane emissions. We believe that natural gas will continue to be an important fuel and raw material for the U.S. and the world, and forecasters predict that worldwide natural gas consumption will increase at least over the next 10 years and probably longer.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Great. Thank you, Jim. Next question for you, Jim. You and David covered this a little bit on the call, but can you comment further about how interest rates will affect CNA’s portfolio going forward?
James S. Tisch — President and Chief Executive Officer
Sure. At the end of ’21, unrealized gains for the CNA portfolio were $4.4 billion. At the end of the first quarter of ’22, unrealized gains were $1 billion, primarily due to higher prevailing interest rates. Over the long term, however, higher interest rates will generally be beneficial for CNA, allowing the company to invest its cash flow at higher rates than it previously could. On average, CNA invests between $300 million and $400 million a month in its fixed income portfolio, so higher interest rates will improve that portfolio’s return over time.
Also, the increase in the general level of interest rates has been very beneficial for CNA’s long-term care book of business. In the current environment, CNA has been able to invest at rates significantly higher than was previously possible. Additionally, until now, the long-term care book of businesses operated at the lower end of its targeted duration. With the current increase in rates above its targeted rate, CNA is now buying long-term securities at yields that previously it could only hope for and has begun the process of lengthening the duration of the long-term care portfolio.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Great. Thank you, Jim. Last question. Jim, for the past several quarters, you have ended our earnings conference calls with your views on inflation and interest rates. Could you please update us on these topics?
James S. Tisch — President and Chief Executive Officer
Sure can. First of all, kudos to Jay Powell for finally recognizing the seriousness of the inflation problem. Some may argue whether the next Fed funds rate increase should be 25 basis points, 50 basis points or even 75 basis points, but Powell has stayed out 50 basis points. And to me, it seems perfectly reasonable in the context of more rate increases in the near future as needed. The age of yield curve intervention has ended. Since 2008, the Fed has basically controlled not only the short end of the yield curve, but also the entire maturity spectrum in the fixed income markets.
How did we get here? In 2008, I believe the Fed acted appropriately when it intervened in a time of financial emergency. However, the intervention went on for way too long. The Fed’s control of the yield curve by means of quantitative easing squelched any signals that the markets might have sent through price moves in fixed income securities. In other words, the Fed was implicitly saying that their judgments on the shape of the yield curve were better and wiser than the markets. As we now see, that strategy has had disastrous results with regard to today’s level of inflation. We are left with the highest level of inflation in 40 years, brought about by zero-cost money, loose, loose, loose fiscal policy and COVID, all of which caused the inflation genie to come gushing out of the bottle. And unfortunately, the Fed kept the proverbial punchbowl out for so long that there are no easy solutions to the inflation problem that the Fed is currently trying to fix.
The market now is in the beginning stages of a big adjustment as investors, and not the Fed, determine term interest rates. Lots of people have guesses, but no one knows where the yield curve will ultimately settle out in the coming months and years. As a result of the high inflation and the Fed no longer controlling the yield curve, the Fed put, which basically guaranteed that the stock market would not decline by unacceptable amounts, is now gone. That put was ushered in by Alan Greenspan and was a great comfort to equity markets for multiple decades.
Also washed away in this inflation tsunami is modern monetary theory. MMT was the notion that the U.S. government could spend unlimited amounts of money with no negative repercussions. After the past two years, we have seen that, that pipe dream was exactly that, a pipe dream. Now we have seen that there is a limited amount to how much the government debt can be issued and subsequently purchased by the Central Bank. The long and short of the past year in the fixed income markets is that the signals that come from a free market should not be stifled. The Fed imposing its judgment in the place of the market’s judgment, while sometimes necessary in a moment of crisis, is fraught with enormous danger as a long-term policy. This is a lesson that I hope future Fed chairs will remember.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Great. Thank you, Jim. And 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 mskafidas@loews.com. A replay of this call will be available on our site, loews.com, in approximately two hours. Thanks so much. You may now all disconnect.
Operator
[Operator Closing Remarks]