Loews Corp (L) — Q2 2022 Earnings Call Transcript

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’m 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 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 filing and investor presentation for a reconciliation to the most comparable GAAP measures. With that, I’d like to turn the call over to Jim. Jim, over to you.

Thank you, Chris and good morning. 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 Loews. 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 focused approach 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 low 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. Importantly, regardless of the prevailing interest rates, CNA will still receive the same cash flows from the fixed income securities 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. While book value per share has suffered a decline due to those higher interest rates, this does not imply any deterioration in the credit quality of the portfolio or any impairment of the timely collection of principal and interest from our securities. Over the long-term, higher interest rates will generally benefit CNA, allowing the company to invest its cash flow at higher rates than previously achievable. On average, CNA reinvests between $300 million and $400 million a month in its fixed income portfolio, thus higher interest rates will improve that portfolio's yield over time. Higher rates are particularly beneficial for CNA's long-term care book of business, which has longer duration liabilities than CNA's P&C business. The company has been able to buy long-term securities at higher yields than previously attainable, allowing it to lengthen the duration of this portion of its portfolio. Moving to Loews Hotels & Co., the company has been performing exceptionally well, having just generated its highest quarterly adjusted EBITDA ever at $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 enhanced by the addition of these attractively situated properties. I am also pleased to announce 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 the very few owner-operators in the hotel industry. The company's ability to design its unique properties ensures that Loews Hotels are built to our exacting standards. Furthermore, the company's active participation in designing these properties means that they are ideally suited to today's market demands. To summarize, 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 upturn in group travel at these locations, and indeed at all locations with significant meeting space. The properties that Loews Hotels owns in partnership with Universal Orlando are a great illustration of the second pillar of Loews Hotels' strategy, immersive destinations with built-in demand generators. The Universal Orlando partnership has proven highly successful, spanning over two decades and currently encompassing eight hotels with 9,000 rooms. Additionally, Loews Hotels has been focused on developing our first property in Arlington, Texas, an immersive destination catering to group travel, thus aligning with both pillars of our growth strategy. The Live! by Loews Hotel is situated within an entertainment district with three professional sports stadiums and performance venues, and is also close to the future home of the National Medal of Honor Museum, expected to open at the end of 2024. This Live! by Loews Hotel was particularly resilient during the pandemic. Given our confidence in this market, I'm delighted to report that we have recently topped off construction of the new Loews Arlington Hotel, an 888-room hotel connected via an indoor skybridge to the Live! by Loews Hotel. This new property will feature over 250,000 square 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, these two hotels in Arlington will provide nearly 1,200 rooms for guests visiting this dynamic entertainment area, either for major events or for meetings in our premier convention space. As for Boardwalk Pipeline, 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 hope this case will be resolved by the end of the year. 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 a total of $459 million. As stated previously, we believe that Loews still trades at a significant discount to our view of its intrinsic value, and we will continue to let our share repurchase activity speak for itself. Now, over to you, Jane, and welcome to your first earnings call as the CFO of Loews Corporation.

Thank you, Jim, and morning, everyone. I'm really looking forward to engaging with you all in this new role. For the 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 appear substantial, 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 in more 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 reducing 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. Starting with 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 limited partnerships and common stocks, partially offset by improved underwriting results and higher income from fixed income securities. Additionally, investment gains and losses declined due to the unfavorable change in the fair value of non-redeemable preferred stock. Setting aside the investment results, we are pleased that CNA achieved 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 improved profit margins. Net written premiums grew 13% on an apples-to-apples basis when excluding last year's one-time catch-up related to a property quota share treaty. This was fueled by 27% new business growth, a 4 point improvement in retention to 85%, and a net written rate increase of 6%. Although rate increases have decelerated, earned rate increases of 8% remain above loss cost trends. The combined ratio of 91% was 3 points better than in 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 points 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. However, that revenue growth has largely been offset by higher costs from maintenance projects due to revised pipeline safety requirements. The decrease in net income from $47 million in the second quarter of last year to $39 million this quarter was driven by higher depreciation expense resulting from recently completed projects. As for Loews Hotels, the company contributed $44 million in net income to Loews this quarter compared to 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 compared to $25 million in the same period last year. As Jim mentioned, this quarter's result represents an all-time high for Loews Hotels. The company has performed exceptionally well this year due to strong leisure demand at its resort properties, particularly 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 significantly contributed to the period-over-period improvement as all 9,000 rooms were open for the entire quarter, in contrast to a year ago when two properties were closed for part of the quarter. Finally, regarding the Corporate segment, Loews reported an after-tax investment loss of $51 million in the quarter, compared to $19 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 additional 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, with the majority of these funds held in treasury bills and less than 20% in equities and limited partnerships. I will now hand the call back to Chris.

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?

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.

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?

No, it did not. 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 operations and does not expect to be back at full capacity until later 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.

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

Gladly. A few quarters ago, I discussed labor issues at Altium and at Loews Hotels. Since then, for Loews Hotels, I'm pleased to report that labor has become less of a problem. Increased staffing levels are enabling Loews Hotels team members to deliver the high-quality service to which our guests are accustomed. 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.

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?

Sure. 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 funds rate, has tripled from about 80 basis points to about 2.3%. However, in the same time period, the 10-year treasury note has decreased in yield from approximately 3% to about 2.65%. This price action indicates that the market believes that the Fed is delivering on its promise to enact policies to tame inflation. Prices of certain commodities help illustrate the story. Since the beginning of the year, lumber is down 50%. Wheat is virtually unchanged, notwithstanding the war in Ukraine, and oil is down about 20%. As measured from their peaks, prices are down significantly more than from the beginning of the year. What does all of this signify? I suspect we may be entering a period I would call a full employment recession. The current unemployment rate is 3.6%, with job growth for the past 1.5 years averaging 400,000 new jobs per month. While job openings are about twice the number of job seekers, there's plenty of room for a decrease in demand for labor while unemployed individuals can still find new employment. For the past year, wages have not kept pace with inflation. For example, in the latest July employment report, average hourly earnings were up 5.1% compared to 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 increase in employment has kept the economy moving forward, despite the decline in real earnings. The number of people working has grown by 4.3% year-over-year. With respect to aggregate demand, this increase has compensated for the decline in real wages. In essence, employment is rising while workers' real incomes are lagging. I foresee this scenario continuing for several more quarters, where real wages decline but employment rises. This may afford the Fed the time necessary to engineer a soft landing, where unemployment doesn't surpass 5%, while allowing inflation to decrease. I don't expect that we will see 2% inflation in the coming 12 months, but I predict a significant drop in inflation over the next 6 to 12 months, possibly avoiding the damaging wage-price inflation spiral that was so troublesome in the 1970s. To achieve this optimal outcome, the Fed must remain steadfast in their fight against inflation while federal spending needs to remain in check. Additionally, I don't forecast a deep and debilitating recession, but I can envision a slowdown that will be relatively shallow, which aligns with a full employment recession. I believe this conclusion is reasonable, given that there are not many excesses in the economy or our financial institutions. Ramping investment in housing is not evident, and the financial institutions appear to be stable and not overextended. Overall, I predict a recession that could be classified as benign. I recognize that I am an optimist, but I strive to be a realistic optimist. The idea of a full employment recession, as unconventional as it may sound, appears to be a realistic possibility for the upcoming 12 months. We will see. Stay tuned for my next update in three months from now.

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 2 hours. Thank you so much. You may now all disconnect.