Loews Corporation (NYSE: L) Q2 2021 earnings call dated Aug. 02, 2021
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
Ladies and gentlemen, thank you for standing by and welcome to the Loews Corporation Second Quarter 2021 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Mary Skafidas. Please go ahead.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Thank you, Crystal, and good morning, everyone. Welcome to Loews Corporation’s second quarter earnings conference call. A copy of our earnings release, earnings supplement and company overview may be 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 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 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 Tisch, our CEO. Jim, over to you.
James S. Tisch — President and Chief Executive Officer
Thank you, Mary, and good morning. Loews had a strong quarter across the board with good performances from each of our consolidated subsidiaries. CNA led the pack with great results and Boardwalk continues to benefit from strong natural gas flows. Loews Hotels, while still recovering from the effects of the pandemic, has bounced back smartly, especially in the resort markets and we’re starting to see some pickup from group business as well. I’m going to focus my remarks today on CNA and Loews Hotels. As for CNA, the company continues to be a success story for Loews.
CNA had net income of almost $370 million in the second quarter of this year, the second highest quarterly net income recorded by the company in the past 20 years. And more importantly, record high core income for the quarter. The company’s underlying combined ratio decreased by almost 2 points over the prior year’s quarter driven by improvement in the expense ratio. CNA’s P&C business generated gross written premium growth of 8% driven by new business growth of 10% and rate increases of 10% for the quarter. CNA had net investment income of $591 million pretax compared to $534 million in the prior year’s quarter.
Limited partnerships had a great quarter and the fixed income portfolio continues to provide consistent earnings even with headwinds from the lower interest rate environment. In other words, CNA’s results were truly strong. Loews Hotels also had a success story on its hands within the context of its comeback from the global pandemic that devastated the hospitality industry. It’s no secret that our hotel company was the subsidiary most affected by COVID-19. That being said, over the last few months Loews Hotels has continued to see increased demand for leisure travel and is starting to see improving interest for group travel.
For the second quarter, total occupancy rates for owned and joint venture hotels were almost 58% as opposed to about 35% during the first quarter this year. While that is a big jump, obviously, we still have a ways to go before we hit pre-pandemic occupancy rates. Our resort hotels continue to do considerably better than our properties in urban settings. All-in-all, the good news is that by the end of the second quarter, each and every one of our hotels was open for business, albeit while facing challenges filling roles at the property level. As the U.S. economy and the hotel industry continue their recovery, we firmly believe that Loews Hotels will once again be a growth engine for Loews Corp.
Our confidence in the hotel company is a reflection of our belief, not only in its management, but also in its long-term growth strategy. As a reminder, that growth strategy is built on two pillars: the first pillar is the core business of Loews Hotels, hotels with 300-plus keys that have ample meeting space. This first pillar takes advantage of Loews’ well-earned reputation for operating hotels that cater to groups. These properties are equally attractive to leisure customers and offer unique local experiences. The second pillar of Hotels’ growth strategy is its concentration on developing and operating the hotels associated with immersive destinations.
Its partnership with Universal Orlando, which spans more than two decades is a great example of the strength of this pillar. As of the end of the second quarter, Loews Hotels had 9,000 rooms in 8 hotels on the Universal Orlando Resort campus and all of the properties were open and performing well. Loews Hotels has concentrated on adding more immersive destinations where demand for hotel rooms is strong because of the presence of a built-in demand generator such as an adjacent sports stadium or some other attraction. One such hotel that proved to be quite resilient during the pandemic is the Live! by Loews in Arlington, Texas, which is located a stone’s throw away from two professional sports stadiums, as well as entertainment venues that draw customers throughout the year.
Another significant differentiator for Loews Hotels is its ability to be both the owner and the operator of its properties. And when I say owner, I generally mean owner and development partner. It’s great when we can participate in the design phase in order to build a hotel to our exacting standards. Industry dynamics generally do not allow for companies in the hotel space to perform both the owner and the operator functions. And as a result, Loews Hotels is a leader within this niche of the market. Playing to these strengths has served Loews Hotels well and we believe it will continue to do so.
Currently, there is very little financing available for most hotel developers in the full service hotel space. As a result, being a well-capitalized owner-operator gives Loews Hotels a distinct advantage when competing for attractive development projects. As always, Loews Corporation invests alongside our subsidiaries when it’s in the best interests of our shareholders. And we certainly believe that our investment in Loews Hotels’ growth strategy will create long-term value.
Finally, let me update you briefly on share repurchases. From April 1 through last Friday, we repurchased 6.5 million shares of Loews common stock for just over $350 million. Year-to-date, we’ve bought back 4.5% of our outstanding shares for $630 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 with that let me hand the call over to David.
David B. Edelson — Senior Vice President and Chief Financial Officer
Thank you, Jim and good morning everyone. For the second quarter, Loews reported net income of $754 million or $2.86 per share compared to a net loss of $835 million or $2.96 per share in last year’s second quarter. As Jim commented, our second quarter operating results were excellent, driven by CNA and Boardwalk both of which had stellar quarters. While Loews Hotels did post a loss, its business has rebounded more strongly than expected especially at its highly desirable resort properties. Our second quarter results both this year and last year were impacted by unusual items.
Absent these unusual items, which I will describe in a moment, our Q2 net income rebounded to $316 million this year from $122 million last year. This year’s second quarter included a net investment gain of $555 million before tax and $438 million after tax on our sale of a 47% stake in Altium Packaging. The investment gain is essentially the sum of the realized gain on the shares sold and the unrealized appreciation on our retained 53% stake. Last year’s second quarter included a net investment loss related to the bankruptcy and concurrent GAAP deconsolidation of Diamond Offshore.
This loss totaled $1.2 billion before tax and $957 million after tax. Setting aside these two unusual items, all three of our consolidated subsidiaries, CNA, Boardwalk, and Loews Hotels, recorded materially higher year-over-year net income contributions with CNA leading the charge. CNA had its earnings call earlier this morning, and I would encourage you to review the transcript for more details on the quarter. In the meantime, let me highlight a few salient points. CNA contributed net income of $330 million, up from $135 million in Q2 ’20. The two main drivers of the year-over-year increase were higher property casualty underwriting income generated by lower catastrophe losses and higher underlying underwriting income, as well as higher net investment income.
The combination of an 11% year-over-year increase in net earned premium and an almost 2-point improvement in the underlying combined ratio to 91.4 led to a 41% increase in CNA’s underlying underwriting gain, which excludes catastrophe losses and prior-year development. Catastrophe losses were modest in the quarter at $54 million pretax in contrast to the elevated level of catastrophe losses booked in Q2 2020. Last year’s second quarter catastrophe losses were $301 million pretax and included reserves for COVID, civil unrest and weather-related events. CNA’s all-in combined ratio, which includes catastrophe losses and prior-year development improved by over 15 points from 109.2 in Q2 2020 to 94 this year.
The year-over-year in CNA’s net investment income was driven mainly by higher returns on its portfolio of limited partnership investments. In contrast, net investment gains were lower in Q2 2021 than in the prior-year quarter. A quick comment on CNA’s second quarter net written premium; while net earned premium across all property casualty segments rose 11%, CNA’s net written premium declined 1% overall and 12% in commercial. The year-over-year decline in written premium was attributable to a quota share treaty CNA added to its property reinsurance program during the second quarter.
Because the treaty will cover property policies already in force as well as policies written during the treaty term, CNA recorded a onetime written premium catch-up that reduced the quarter’s net written premium by $122 million predominantly in the commercial segment. CNA ended the quarter with total assets of $66 billion, shareholders’ equity of $12.7 billion, and consolidated statutory surplus of approximately $10.9 billion. Turning to Boardwalk, Boardwalk contributed net income of $47 million, up from $34 million in Q2 ’20. The main driver of the year-over-year increase was higher natural gas transportation revenue.
Boardwalk’s more than 5% increase in net operating revenue was driven by growth projects recently placed in service and by higher system utilization caused largely by deliveries to LNG markets and power plants. Through six months, natural gas transportation throughput increased by 11% year-over-year. Turning to Loews Hotels; Loews Hotels contributed a net loss of $21 million, a dramatic improvement from the $72 million net loss posted in Q2 2020. Adjusted EBITDA, which is defined in our earnings supplement and excludes nonrecurring items, rebounded from a $54 million loss last year to a positive $26 million in Q2 ’21.
The year-over-year improvement was driven by a dramatic revenue increase as most properties were open for the full quarter and all properties were operational by quarter-end. Business at resort properties benefited especially from increased leisure travel. Looking backwards, the second quarter of 2020 was exceedingly difficult for Loews Hotels as almost all its properties suspended operations for most of the quarter. GAAP net operating revenue plummeted 94% from the second quarter of 2019 and revenue at the company’s JV properties, which is not included in GAAP net operating revenue, declined a similar percentage.
For a good snapshot of Loews’ steady operational improvement, I would encourage you to review, I believe its page 11 of our quarterly earnings supplement, which shows the meaningful increases since Q2 last year in available rooms, occupancy and average daily rate. A quick comment regarding Diamond Offshore; we included Diamond Offshore as a reporting segment until its bankruptcy filing and deconsolidation in late April 2020. Our second quarter 2020 results included a net operating loss of $24 million attributable to Diamond. Turning to the Corporate segment; Altium has been reported as part of the Corporate segment since we acquired the company in 2017.
Following our sale of a 47% stake, it remains in the corporate segment but is now accounted for under the equity method. The Corporate segment also includes the unusual items I mentioned earlier, namely a net investment gain this year related to our sale of a 47% stake in Altium and a net investment loss last year stemming from the bankruptcy and deconsolidation of Diamond Offshore. I would note that this year’s second quarter results also reflect a $15 million pretax write-off of our equity investment in Diamond upon its emergence from bankruptcy. The parent company’s investment portfolio generated pretax net investment income of $24 million as compared to $110 million last year.
Last year’s results benefited from the significant recovery of the equity markets in the second quarter, a quarter in which the S&P 500 returned almost 21%. The parent company portfolio of cash and investments stood at $3.9 billion at quarter-end with about 80% in cash and equivalents. As Jim mentioned, during the quarter we repurchased 3.9 million shares of our common stock for $219 million, and we received about $92 million in dividends from CNA. In addition, we received about $410 million in net proceeds from the Altium transaction during the second quarter. After quarter-end, we repurchased another 2.6 million shares of our common stock for $140 million. As of last Friday, there were approximately 257 million shares of Loews’s common stock outstanding, down more than 8% from June 30, 2020.
I will now hand the call back to Mary.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Thank you, David. Moving on to the Q&A portion of the call, we have a number of questions from shareholders. Every quarter, we encourage shareholders to send us questions in advance that they would like us to answer on our earnings call.
Questions and Answers:
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
The first question is to Jim. Jim, can you give us Loews’ outlook for CNA?
James S. Tisch — President and Chief Executive Officer
So, CNA’s outlook is extremely bright. Let’s take a step back and let’s look at the insurance industry as a whole, first. While interest rates are low, the P&C industry continues to have disciplined capital management. Overall, P&C pricing continues to be healthy. CNA is attracting high-quality new business and it’s improving underwriting margins through focused risk selection and pricing. And let’s not forget, CNA’s management team is top-notch and the company continues to attract high-quality professionals.
The company also has a fortress balance sheet, even after paying almost $5 billion in dividends to its shareholders over the past five years. Additionally, CNA’s long-term care exposure continues to decrease with active policies declining by about one-third over the past five years. Given CNA’s strong performance and future outlook, we believe the company is greatly undervalued. And speaking of undervalued, when buying Loews’ shares, we are always cognizant of what we call the triple discount. Let me briefly explain what I mean.
First, Loews’ shares trade below our view of their intrinsic value. Secondly, the P&C industry tends to be undervalued compared to the stock market. And third, CNA trades at a discount for the P&C industry. Some growth companies trade at 15 times revenue. Some value companies trade at 12 to 15 times EBITDA. That’s EBITDA and not net income. The S&P 500 trades at 20 — greater than 20 times earnings, but some P&C companies trade at a measly 11 to 12 times net income, actual net income, which could be distributed directly to shareholders in the form of dividends. Based on this fact, the undervaluation of the P&C industry seems crazy to me, and CNA’s undervaluation even more so, WTF.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Okay. Thank you, Jim. Next question is over to David. Can you give us an update on Loews Hotels? How much cash will the company require from Loews Corp. in 2021?
David B. Edelson — Senior Vice President and Chief Financial Officer
Thanks, Mary. During our first quarter earnings call, we stated that before considering proceeds from divestitures or expenditures on new development projects, we expect it to contribute less than $80 million of cash to Loews Hotels in 2021. This revised estimate was materially lower than our earlier estimates given the better than anticipated outlook for Loews Hotels’ operating cash flow at the end of the first quarter. At that time, we had contributed $32 million to Loews Hotels year-to-date. We have made no further cash contributions since that time to Loews Hotels.
Loews Hotels outlook continued to improve during the second quarter. We now anticipate that, again before considering any proceeds from the divestitures or expenditures on new development projects during the second half of the year, Loews Hotels would not require additional cash from the parent company in 2021. I would highlight, however, that if Loews Hotels does close on one or more significant development opportunities in the back half of this year, we would likely be required to contribute additional cash to the company in 2021 and for all the right reasons. Thanks, Mary.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Thank you, David. And a good segue into the next question, which is for Jim. Jim, how are you thinking about the Hotel business going forward? Is it time to start looking at potential acquisitions?
James S. Tisch — President and Chief Executive Officer
So, Loews Hotels has never stopped looking for potential acquisitions. Based on current market dynamics, however, acquiring a new hotel doesn’t make economic sense not when you compare the long-term favorable returns Loews Hotels receives by developing its own hotels. Many markets in the U.S. have older full service hotel. By building a new hotel with modern spaces or significantly renovating an existing location, we immediately gain a competitive advantage by offering an attractive new product that appeals to both leisure guests and to meeting planners.
Over the last five years Loews Hotels has added valuable new properties to its portfolio by building to suit our own exacting standards as opposed to buying already developed hotels. By building to suit, we develop hotels that focus on one or both of our growth strategy pillars, hotels with more than 300 keys that cater to groups and hotels that operate near built-in demand generators. The first pillar of Loews Hotels’ growth strategy is its well-earned reputation for excellence in the groups and meetings market in locations attractive to groups as well as to leisure customers. Guests are also attracted by the unique local experience these properties offer.
The second pillar of growth is Loews Hotels is focused on immersive destinations such as Universal Studios Orlando campus where Loews Hotels has 8 hotels with 9,000 rooms. Loews Hotels has pursued additional immersive destinations where demand for hotel rooms is strong because of the presence of our built-in demand generator such as adjacent sports stadiums or other attractions. Live! by Loews in Arlington, Texas is one such hotel that has proven to be very resilient during the pandemic.
The Arlington Hotel is located near numerous professional sports and entertainment venues. From 2015 to 2019, Loews Hotels grew adjusted EBITDA from just under $160 million to almost $230 million with healthy margins. 2020 was clearly a very challenging year for our hotel subsidiary and for the industry. In 2021, Loews Hotels have certainly gained ground. And while we continue to monitor the effects of the pandemic on the hospitality industry, we believe that over the long term the hotel company will once again be a profitable growth engine for Loews Corp.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Great. Thank you, Jim. Next question is for David. David, can you give us what the status is of the Boardwalk trial?
David B. Edelson — Senior Vice President and Chief Financial Officer
Sure. Closing arguments took place on July 14, 2021, and the judge is now deliberating. We continue to believe that we have very strong legal and factual arguments and that the plaintiff’s case is without merit. But as we all know litigation is inherently unpredictable, and there’s really nothing more we can report at this time.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Okay. Thank you, David, for that update. Jim, the next question is for you. Can you give us your outlook for inflation and interest rates, on inflation and interest rates?
James S. Tisch — President and Chief Executive Officer
So the nice thing about getting questions before the earnings call is that I can prepare a thoughtful response rather than just wing it such is the case with the answer to your question, Mary, about interest rates and inflation. Let’s start with inflation. On the last earnings call, I talked about cost push and demand pull inflation. And I said that we are seeing both forms of inflation these days. Today, I want to speak about what used to be called the cycle of inflation. That was a common term in the 60s through the early 80s, when inflation was much, much higher than it is today. As you can imagine, the cycle of inflation relates to a dynamic that takes hold in an economy that relates to increasing prices and the expectation of ever increasing prices, making it such that employees demand higher wages to maintain their purchasing power and their standard of living.
Those higher wages then translate into higher costs for producers, which causes the producers to ask for higher prices for their products thus reinforcing the demand for higher wages from labor. And so the cycle begins and feeds upon itself. I believe that this cycle of inflation is what we are beginning to experience today. Talent is scarce. Just look at the number of companies that can’t find employees for their businesses including Lowes for its hotel and packaging businesses. Certain goods are also scarce. Here are just a few whose prices have shot up a lot. Computer chips, coffee, polyethylene and pellets, tin and aluminum, soybeans, oil, natural gas, and yes, jet fuel.
The CRB Raw Industrials Index is up by more than 50% from a year ago. Dishwashers, washing machine, dryers and refrigerators are all on months’ long back orders. Housing prices are up approximately 25%, 25% in the past year. And, of course, there’s a shortage of labor in the labor market, a very, very serious shortage. An esteemed economist friend of mine said that this year is the 11th time that the core CPI has risen more than 3% in the first six months of the year. On 9 of those 10 previous occasions, core CPI inflation for the full year was at least 6%.
So, by that measure, we’re on track for inflation of much more than 6% because for the first six months of this year, inflation is already at 5.4%. And so, it’s an easy bet that inflation for all of 2021 will greatly surpass 6%. I believe that our current labor shortage is not a temporary phenomenon. And it will only be resolved with significantly higher levels of compensation, causing costs to increase, leading to ever higher inflation. I believe that we are now in a cycle of inflation rather than a spurt within an otherwise benign inflationary period. This year, we are moving from an extended era of less than 2% inflation to a year of more than 6% or 7% inflation.
And due to increased labor costs, my expectation for inflation in ’22 is for significantly higher inflation than the 2% level we have seen in the recent past. This inflation problem won’t go away by simply wishing it away especially with the Fed’s proverbial foot still on the gas pedal, which of course, brings us to interest rates. The economist Rudi Dornbusch famously said in the 60’s that in economics, things take longer to happen than you think they will, and they happen faster than you ever thought that they could. Such is the case, I believe, with interest rates in the United States. They’re too damn low. And the reason that they’re so low is because in the past year and a half, the Fed has purchased over $4 trillion of government securities.
That’s $4 trillion of government securities that had been taken out of the market. Poof, they’re gone. The Fed has created a squeeze of gargantuan proportions in these securities that has rippled through all the fixed income markets. The only people that own U.S. fixed income securities are people who need to own them, like banks and insurance companies, just to name a few. Traders may dabble in government securities, but investors won’t go near them because there isn’t a bullish case to be made for investing in government securities. Today the 10-year note yields less than 1.2%.
If the rate on those notes goes up just 13 basis points, a little over a 10th of 1%, then the entire interest carry on the bond for the year will disappear. That sounds like a miserable investment to me. Getting back to inflation. If the inflation rate this year is 6% — and that’s a low number, I believe — then the negative real return on a 10-year note will be minus 4.75%. That’s minus 4.75%. Who would want to own a security that guarantees that you’ll lose almost 5% of your purchasing power in a single year? Most people have already decided to either hold cash or move out the risk curve rather than lock in a real loss of such large proportions. The issuance of government securities will continue.
For this year, the federal deficit is forecast to be $3 trillion, which means there is no end to the supply of government bonds that need to be issued to finance our government’s activities. And with so much issuance of government securities on the way and with a strong economy and with inflation running so hot and with a negative real yield so unattractive, the Fed may have a little choice but to take their foot off the proverbial gas pedal and take away the punch bowl, finally allowing interest rates to rise. There’s only so long that the Fed can delay the inevitable. And to me, and maybe to Rudi Dornbusch, of blessed memory, that time may soon be upon us.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Thank you, Jim. Thank you for that perspective, and thank you, David. That concludes the Loews call for today and. As always, we want to thank you for your continued interest. Please feel free to reach out to me with any additional questions at mskafidas@loews.com. A replay will be available on our website, loews.com, in approximately two hours. That concludes the Loews call for today.
Operator
[Operator Closing Remarks]