Loews Corporation (NYSE: L) Q3 2021 earnings call dated Nov. 01, 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
Good day everyone and welcome to today’s Loews Corporation Q3 2021 Earnings Conference Call. [Operator Instructions]
It is now my pleasure to turn today’s call over to Mary Skafidas, Vice President of Investor Relations and Corporate Communications. Please go ahead.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Thank you, Ashley, and good morning everyone and welcome to Loews Corporation’s third quarter earnings conference call. A copy of our earnings release, earnings supplement and company overview may be found on our website loews.com. Also posted on the homepage of Loews’ website is the company’s 2021 Virtual Investor Day presentations from Loews and CNA. The Loews presentation narrated by Jim Tisch, the company’s CEO, focuses on strategic capital allocation. CNA’s strategic discussion is hosted by its CEO, Dino Robusto and its interim CFO, Larry Haefner. We invite you each to access these presentations. We look forward to your feedback and hope you find the presentations informative.
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 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 our SEC filings. Forward-looking statements reflects 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. Before we review the quarter, I want to acknowledge someone who has been instrumental to Loews’ success. Andrew Tisch has decided to step away from his executive responsibilities at Loews Corporation at the end of December. I could not have asked for a better partner than Andy who has served Loews with complete dedication for the last 50 years. During his tenure, he has successfully led a number of our subsidiaries and functional areas, while also fostering open communication, collaboration and respect throughout the organization. We are all fortunate to have been the beneficiaries of his wisdom and expertise and we are grateful that he will continue to serve as Co-Chairman of the Loews Board and as a member of the CNA Board.
Turning to earnings. Loews had another strong quarter across the board with good performance from each of our consolidated subsidiaries. CNA continues to be a success story for Loews. The company’s underlying combined ratio decreased by 1.5 points, driven by the expense ratio, which was 30.7% compared to 31.8% in the prior year quarter. The underlying loss ratio was also lower at 60.2% compared to 60.5% in the prior year.
CNA’s P&C gross written premiums increased by 10% and net written premiums increased by 5%. Note that the increase in net written premiums is lower than for gross written premiums due to additional reinsurance that the company has purchased in its strategy to protect the insurance portfolio from large loss events. The value of this incremental protection was fully on display this past quarter with the mitigated losses CNA reported on Hurricane Ida. CNA had pre-tax investment income of $513 million, pretty much flat with 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 historically low interest rate environment. We continue to be very pleased with CNA’s results.
In other news, Loews Hotels made an exciting announcement in early October. The company broke ground on the Loews Arlington Hotel and Convention Center, a new project in the tried and true entertainment hub of Arlington, Texas, which sits between Dallas and Fort Worth. When it opens in early 2024, the hotel will have 888 rooms and over 250,000 square feet of meeting and event space. For those not schooled in the hotel industry, that’s a whole lot of rooms and a whole lot of meeting space. Once again, Loews Hotels is acting both as the owner and the operator of this project. Industry dynamics generally do not allow for companies in the hotel space to perform this double role, 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.
This will be Loews Hotels’ second property in Arlington following in the strong footsteps of Live! by Loews which has had a successful opening in 2019 and whose occupancy rate has generally remained strong throughout the pandemic; a testament to this market’s resilience and the team’s focus. The new hotel is consistent with Loews Hotels growth strategy, which is built on two pillars. The first pillar is owning and operating hotels associated with immersive destinations. Loews Hotels’ two decades long partnership with Universal Orlando is a great example of the strength of this pillar. Our hotels in Arlington will also clearly benefit from built-in demand drivers since our guests will have access to all the sports and entertainment destinations close to the hotels, including the Dallas Cowboys AT&T Stadium and the Texas Rangers Globe Life Field.
The second pillar of Loews Hotels growth strategy is the company’s focus on owning and operating hotels with 300-plus keys that have strong group business and ample meeting space. Loews Hotels has a well-earned reputation for successfully operating hotels that cater to this type of business. The two Arlington Hotels combined will offer nearly 1,200 guestrooms and more than 300,000 square feet of meeting and event space and these properties offer unique local experiences and are equally attractive to leisure and good customers.
Loews Hotels has continued to see strong demand for leisure travel and improving interest for group travel. For the third quarter, the occupancy rate for owned and joint venture hotels was almost 72% as opposed to about 35% in the first quarter of this year. Our resort hotels continue to do considerably better than our properties in urban settings, and about 60% of Loews Hotels’ rooms are in resort destinations. As the U.S. economy and the hotel industry continue their recovery, we are confident that Loews Hotels will once again be a growth engine for Loews Corp.
Next I wanted to talk about Boardwalk. The demand for natural gas is increasing and Boardwalk is well-positioned to take advantage of this change. We see the increased demand coming from increased domestic consumption and from international markets via LNG exports. Boardwalk transports natural gas under fixed fee take-or-pay contracts with mostly investment-grade customers which limits its commodity and volumetric risk. The company currently has $9 billion of revenue backlog with a weighted average contract life of seven years. As the transition towards clean energy unfolds, we believe that gas will continue to be an important fuel used the world over.
Finally, let me update you briefly on share repurchases. From July 1 through last Friday, we repurchased 6.2 million shares of Loews common stock for just over $337 million. Year-to-date, we’ve bought back 15.7 million shares for $830 million, which is 5.85% of the shares outstanding at the beginning of the year. 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 third quarter, Loews reported net income of $220 million or $0.85 per share compared to net income of $139 million or $0.50 per share in last year’s third quarter.
Let me describe the quarter in a nutshell before getting into more detail. CNA’s performance was driven by strong property casualty underwriting income before catastrophe losses, healthy net investment income, and a net reserve release in the Life & Group segment. These positives were partially offset by significant weather-related catastrophe losses. Boardwalk’s operating results benefited from strong transportation revenues generated by its growth projects and increased utilization throughout its system. And Loews Hotels continue to emerge from the COVID-induced downturn with its resort properties, especially those in Florida, leading the charge. Loews Hotels generated positive net income for the first time since the fourth quarter of 2019.
Let me now dig more deeply into the third quarter and the year-over-year comparison. 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 held its earnings call earlier this morning. I would encourage you to review the transcript for more details. In the meantime, let me provide a few highlights. CNA contributed net income of $229 million, up from $192 million in Q3 2020. The main drivers of the year-over-year increase were higher property casualty underwriting income before cat losses and the absence of three charges that occurred last year, two of which were in the Life & Group segment, a charge from the unlocking of the long-term care active life reserve, a charge from strengthening the structured settlement claim reserve, and a less significant charge from the early retirement of debt. Conversely, higher catastrophe losses than in last year’s third quarter detracted from the year-over-year comparative results.
Focusing on property casualty underwriting income. The combination of a 6% increase in net earned premium and a 1.5 point improvement in the underlying combined ratio led to a 27% increase in CNA’s underlying underwriting gain, which excludes cat losses and prior year development. Net cat losses in the quarter were $178 million pre-tax, including $114 million for Hurricane Ida. Last year’s Q3 cat losses were modestly lower at $160 million pre-tax driven by three Southeast hurricanes and the Midwest derecho. CNA’s expense ratio, which just a few years ago hovered in the mid-30s, came in below 31%, down from 31.8% in Q3 2020 and 31.6% last quarter. This is the lowest expense ratio posted by CNA in about 13 years.
CNA’s consolidated after-tax net investment income was essentially flat year-over-year as returns on limited partnership and common stock investments were robust in both periods. CNA conducts its annual reserve reviews for its Life & Group segment in the third quarter. Last year, the company booked a net reserve charge of $83 million pre-tax for its long-term care and structured settlement books of business. This year, the comparable number was a net reserve release of $38 million pre-tax as CNA had no change in its long-term care active life reserve, a $40 million pre-tax release from its long-term care claims reserve, and a de minimis charge related to structured settlements. We consider this favorable outcome a further indication of CNA’s enhanced insight into and prudent reserving around the long-term care business. CNA ended the quarter with total assets of $66.5 billion, shareholders’ equity of $12.7 billion and consolidated statutory surplus of approximately $11.1 billion.
Turning to Boardwalk. Boardwalk contributed net income of $38 million, up from $20 million in Q3 2020. The main driver of the year-over-year increase was higher natural gas transportation revenue, driven, like last quarter, by growth projects recently placed in service and higher system utilization. Boardwalk’s EBITDA, which is shown and defined in our quarterly earnings supplement, was $186 million in the quarter and $635 million year-to-date. Through nine months, natural gas transportation throughput increased by more than 11% year-over-year across the system.
Turning to Loews Hotels. Loews Hotels contributed net income of $13 million; a dramatic improvement from the $47 million net loss posted in Q3 2020. Adjusted EBITDA, which is defined in our earnings supplement and excludes non-recurring items, rebounded from a $38 million loss last year to a positive $59 million in Q3 2021; close to $100 million swing. The year-over-year improvement was driven by a dramatic revenue increase as all properties, including all 9,000 rooms at the Universal Orlando Resort, were open for the full quarter. This was the first time all 9,000 rooms in Orlando were open for a full quarter.
On Page 11 of our quarterly earnings supplement, there is a good snapshot of Loews Hotels year-over-year and sequential operational improvement, which highlights the drivers of the company’s revenue increases during this COVID period. With more available rooms, higher occupancy and healthy average daily rates, revenues have climbed markedly since the depths of the pandemic. We have invested $32 million in Loews Hotels year-to-date, all in the first quarter. Given the company’s stronger than expected cash flow, the parent company does not expect to invest any further cash in Loews Hotels during the remainder of this year.
Turning to the Corporate segment. The parent company’s investment portfolio generated a pre-tax net investment loss of $30 million as compared to income of $23 million last year. The loss stemmed from the performance of the equity portfolio. The parent company portfolio of cash and investments stood at $3.6 billion at quarter end with about 80% in cash and equivalents.
During the quarter, as Jim mentioned, we repurchased 6.2 million shares of our common stock for $333 million and we received about $92 million in dividends from CNA. After quarter end, we spent less than $5 million repurchasing our stock. As of last Friday, there were under 254 million shares of Loews common stock outstanding, down about 6% since the beginning of the year and about 25% over the past five years.
Loews continues to be characterized by strong cash flow into the parent company and an extremely liquid balance sheet with cash and investments far exceeding parent company debt.
I will now hand the call back to Jim. Jim?
James S. Tisch — President and Chief Executive Officer
Thank you, David. Before we go to the Q&A, we announced this morning that David will be stepping down as CFO in May of 2022 and will be succeeded by Loews veteran Jane Wang, who is a subsidiary liaison and corporate development executive. We’ve got plenty more time with David as CFO, so more about him and Jane at a later date.
And now, Mary, back to you.
Questions and Answers:
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Thanks, Jim. Moving to the Q&A portion of the call. We have a number of questions from shareholders. The first one is to you, Jim. What do you believe will be the role of natural gas in the transition to clean energy?
James S. Tisch — President and Chief Executive Officer
Well, as I think about the transition to renewable energy in the U.S. and also in the world, it’s my strong belief that we will not be able to snap on metaphorical fingers and get it done overnight. 70% of energy consumed in the U.S. is from oil and natural gas and the notion that we can replace that amount of energy with renewables in just a few short years is, in my opinion, a pipe dream. I believe this transition will be measured in decades. I’m not alone in my belief that, over the next several years, demand for natural gas will increase both domestically and also internationally. Most forecasts call for natural gas production in the United States to increase over the next three decades by anywhere from 15% to 40%.
Natural gas is an important energy source that has meaningfully reduced greenhouse gas emissions. In the U.S., CO2 emissions from power generation are down 40% over the last 20 years as power plants switched from coal to natural gas. Energy production needs to be low-cost, reliable and green. We need to approach the energy transition in a rational and balanced way and natural gas is playing an important role in the clean, low-cost, reliable option.
Currently, global demand growth 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. U.S. LNG is well-positioned to meet that demand. In the U.S., 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 coming decades, the need for electricity will increase because of the electrification of automobiles. Gas power generation will be needed because wind and solar resources are intermittent. As I said, the wind doesn’t always blow and the sun doesn’t always shine and current battery technology cannot provide more than several hours of electrical service. That’s hardly enough storage.
Gas power generation is reliable, dispatchable and gas can be stored safely and cost effectively. 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 replacement for natural gas as a raw material.
Boardwalk is well-positioned to take advantage of higher industrial demand for natural gas and growth in the LNG export market. Boardwalk has also invested in making operations more environmentally-friendly by reducing methane emissions. Considering the productive life of oil and natural gas wells, we, as a nation, are going to have to continue adding productive hydrocarbon capacity for years and years to come. We believe that natural gas will continue to be an important fuel and raw material for the U.S. and the world.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Thank you, Jim. Next question is also to you. Can you please comment on the performance of CNA share price?
James S. Tisch — President and Chief Executive Officer
Sure. I’m disappointed by CNA’s share price level. At the end of 2017, CNA traded about $53 per share, whereas on Friday, it traded for less than $45 per share. The stock price notwithstanding, CNA today is a much stronger company than it was three and a half years ago. Over that time, CNA has meaningfully reduced its expense ratio, has made steady improvement in its underlying loss ratio, has built a deep underwriting culture, optimized distribution by expanding its broker network and continues to attract, develop and retain top talent. Additionally, the company maintains a robust balance sheet through its conservative capital structure and debt profile. The company has ample liquidity and what S&P refers to as AAA level of capital. Its investment portfolio has a carrying value of about $50 billion. We work with CNA to maintain a high-quality portfolio with an average A credit rating.
The portfolio also has consistent fixed income earnings, solid limited partnerships and common equity returns. Of course, no discussion of CNA would be complete without talking about long-term care. The company has worked tirelessly to mitigate the risk there; something, I believe, the stock market does not give CNA enough credit for.
On their call earlier today, CNA announced the findings of their annual review of long — the long-term care book of business. Here are some of the highlights. CNA has actively managed the portfolio to reduce policy count and level of benefits while working to provide better care for their policyholders. The company closed the group book of business in 2016, so no new policies have been issued since then, which has helped drive a 35% reduction in policies-in-force since year-end 2015. CNA has initiated several innovative benefit reduction strategies, resulting in over 60,000 policyholders electing to reduce their benefits since 2017.
In conclusion, and to finally answer your question, over the last 12 months, CNA earned about $1.2 billion, which means that CNA is trading at about 10 times net income. In the context of the S&P 500 trading at more than twice that multiple, CNA seems to me to be dirt-cheap.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Thank you, Jim. Next question relates to Boardwalk. David, this one is for you. Can you please tell us how Boardwalk was impacted by recent hurricanes?
David B. Edelson — Senior Vice President and Chief Financial Officer
Sure, Mary. The Board and our team did an incredible job. Many, many planning hours were dedicated to preparation and it’s pipelines had no major disruptions as the hurricanes swept through this year. The company is continually focused on operating its pipelines safely and reliably for its customers. And let me also note that Boardwalk has invested in making its operations more environmentally-friendly by reducing methane emissions through upgrading equipment and improving leak detection efforts. So, back to you, Mary.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
Okay. Thank you, David. Next question is for Jim. Jim, labor shortages are affecting a number of industries. Are these shortages affecting any of Loews’ subsidiaries?
James S. Tisch — President and Chief Executive Officer
Yeah, so both Altium and Loews Hotels have had labor shortages. For example, at one point during the pandemic, the management teams at some of Loews Hotels’ properties were making beds and cleaning rooms. Luckily, that situation is improving. Loews Hotels has had a 20% increase in headcount since the end of the second quarter and more than double the active headcount at the beginning of the year. Two-thirds of Loews Hotels’ current workforce was with the company prior to the pandemic. So while onboarding team members is an ongoing effort, the company is lucky to have had so many team members remain active throughout the pandemic or return to Loews after a leave of absence.
In terms of 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 have also adjusted base wages to keep up with the market. Overall, while labor shortages have impacted a few of our subsidiaries, we are seeing gradual improvement in the labor situation.
And, Mary, I think that’s the end of our questions. So I’d just like to make a few comments on what I see going on in the economy.
For the past two quarters, I’ve spoken about inflation and interest rates. Both times, I spoke about how I thought we are beginning a cycle of inflation and how interest rates were much too low. And even though interest rates on 10-year notes have basically doubled in the past 12 months, those rates are still too low. Although it’s been developing for several quarters, what is currently in plain view are shortages. Just take a look at what’s happening from the likes of computer chips, to containers, to labor, to trucking and to shipping. There is no quick fix to any of these in the short term.
Along with shortages come higher prices, which means inflation. The current CPI is at 5.4% on a trailing 12-month basis. That’s the highest 12 month CPI growth rate since December of 1990. That’s almost 31 years ago. When the CPI was at that level in 1990, 10-year notes yielded 8%. Today, they are 1.6%. The old saying apply here — applies here: when you find yourself in a hole, the first thing to do is stop digging. We are still digging our hole deeper and deeper by adding monetary and fiscal stimulus to our economy. Currently, there has been over $5 trillion of fiscal stimulus to the economy since the start of the pandemic. Additionally, the Fed has purchased $5 trillion of government securities in that time, and that quaint statistic called money supply has increased that in annual rate of over 20% since the start of the pandemic.
Certainly, for those who remember him, Milton Friedman would be appalled. As a country, the Fed has hooked us on an opiate called cheap money. This has been going on since the financial crisis of ’08, and 13 years later, we’re still hooked on it. Today, Fed funds are at 7 basis points. That’s in the context of 5.4% inflation. To be any more stimulative, Fed funds would have to be negative. Both the Fed and Congress have been too stimulative. The economy has responded in textbook fashion to all the stimulus. It has powered ahead. In fact, arguably, it has responded too well, such that we have had high inflation for the past year.
But as I made clear in my prior comments, this isn’t one and done for inflation. We are in a cycle of inflation where higher prices lead to higher wage demands, which leads to higher costs for businesses, which leads to higher prices and so the cycle continues.
So what can be done? There are two things. First, the Fed needs to stop buying government securities and move interest rates higher, that means beginning the process of raising short-term interest rates so that, over time, interest rates will normalize. After all, even though the current level of interest rates would ordinarily indicate that the economy is on life support, we are at the polar opposite. There is strong growth in the economy. It’s long past time to correct this divergence.
The second thing to do is to stop the fiscal stimulus. The pandemic stimulus, so far, has been highly successful. The economy has been growing well for the past few quarters and the 24-month average savings rate is 14%. That’s the highest level that statistic has ever been since the series was started in 1959. Think of this high savings rate as fuel that the consumer has in their tank to power the consumption for the next several quarters. So there is no more need for stimulus with so much accumulative — accumulated savings. Additional stimulus will only exacerbate the inflationary problems that now plague us.
So, there you have it. We have a problem with inflation and the cures come from simple implementation of basic monetary and fiscal policies that are well known to all. The time to act is now. The longer the inflation is allowed to fester and grow, the deeper will be our problems in the future. Neither the Fed nor the administration are doing us any favors in their delay.
Back to you, Mary.
Mary Skafidas — Vice President, Investor Relations and Corporate Communications
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 mskafidas@loews.com. A replay will be available on our website, loews.com, in approximately two hours.
Operator
[Operator Closing Remarks]