Loews Corp (L) — Q4 2022 Earnings Call Transcript

Loews had a strong fourth quarter, finishing the year with our consolidated subsidiaries producing stellar results. Before discussing these financial results, however, I'd like to provide an update concerning the litigation related to our 2018 acquisition of the minority interest in Boardwalk Pipelines. We are pleased to report that in late December of 2022 the Delaware Supreme Court ruled in Loews's favor, reversing the lower Court of Chancery's ruling that had awarded former Boardwalk minority unitholders damages in the amount of $690 million, plus interest - or just over $900 million in total. With the main issue settled and behind us, there remain three unresolved issues still under consideration in the litigation process. In December, the case was remanded to the Chancery Court so that the Court could rule on these three remaining items. Turning back to Loews's financial results, let's take a look at our property and casualty insurance subsidiary, CNA Financial. CNA's performance was strong, with underwriting results at or near its top quartile peers. The company reported a fourth quarter and full year underlying combined ratio of 91.2%, which is in line with the company's excellent performance in 2021. CNA's all-in combined ratio increased slightly in the fourth quarter to 93.7% due to higher catastrophe losses from winter storm Elliott. For the full year, however, the all-in combined ratio improved from the prior year by 3.0 points to 93.2% driven by lower catastrophes and more favorable prior year development. In more good news, net written premiums grew 9% in 2022, due to improved retention and strong new business, which grew by 13%. Last year's substantial interest rate increase was also positive for CNA, since it is enabling the company to reinvest its cash flow at significantly higher yields. And while book value per share has suffered a decline due to those higher interest rates, this decline does not imply any deterioration in the credit quality of the portfolio. On average, CNA reinvests about $300 million a month in its fixed-income portfolio, and higher interest rates will improve that portfolio's yield over time. Higher rates are particularly helpful for CNA's long-term care book of business, which has longer duration liabilities than CNA's P&C business. During 2022, the company was able to buy long-term securities at higher yields than it previously could, allowing it to advantageously lengthen the duration of this portion of its portfolio. Given the company's strong underwriting performance, CNA raised its regular quarterly dividend from $0.40 per share to $0.42 per share. Additionally, the company also announced a special dividend of $1.20 per share. Including regular dividends paid in 2022, these dividends represent about 85% of its net income, a percentage that is generally consistent with the last three-year average. Loews Hotels had a phenomenal year. The company reported full year adjusted EBITDA of $345 million, far exceeding its pre-pandemic 2019 results. 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 positively impacted by the addition of these attractively situated properties. This past November, Loews Hotels expanded its presence in the South Florida market with the addition of the Loews Coral Gables Hotel. Loews Hotels owns a 20% interest in this 242-room property. The company now owns and/or operates 26 hotels and resorts across the US and Canada. Construction also continues on the Loews Arlington Hotel, the company's nearly 900-room property in Arlington, Texas, slated to open in the first quarter of 2024. With these additions, roughly 70% of the company's over-16,000 rooms are at resort properties. Boardwalk Pipelines also had a great year, reporting full year 2022 EBITDA of $892 million. The company benefited from stronger natural gas flows and improved pricing. Natural gas remains an essential part of our nation's energy future because of its ability to fuel dispatchable electricity. We are happy that, over the course of the year, Boardwalk grew its revenue backlog by about $65 million to $9.1 billion, more than 70% of which is with investment grade customers. We also believe that Boardwalk has done an exceptional job of transforming its customer base from mostly marketers to mostly end users. In 2015, 36% of the company's revenue was derived from end users; today, approximately 70% of its customers are end users - primarily power generators, LNG exporters and industrial companies. Next I'd like to provide a quick update on our capital allocation decisions during 2022. At Loews, one of our major capital allocation levers is investing in the companies we know best - namely, our subsidiaries. These companies tend to finance their own growth, but at times Loews invests in major projects, and in 2022 this was indeed the case. Last year our packaging subsidiary Altium completed a major acquisition and Loews provided $79 million of the $270 million purchase price. Loews Corp. invested $33 million with Loews Hotels to fund new developments, primarily the construction of the Loews Arlington Hotel. This was only 10% of the $316 million invested by Hotels in its own growth in 2022. Boardwalk also made substantial investments in its own business this year, spending $344 million on capital projects to maintain and expand service to its customers. Share repurchases remained Loews's largest capital allocation lever in 2022. We repurchased nearly 12.7 million shares for a total cost of about $738 million, which represents about 5% of the shares outstanding at the beginning of the year. We were conservative in the amount we allocated to share repurchases in 2022 in view of the judgment then pending against Loews in Delaware that was reversed in late December. Over the past five years, we have repurchased over 97 million shares of Loews stock and reduced our share count by about 29%. We feel that share repurchases are a great use of the company's capital and that they create value for our shareholders over the medium to long term. As long as our shares trade below our view of their intrinsic value, we will continue to repurchase them. In conclusion, let me emphasize that it is no accident that Loews and our subsidiaries have had such a good year, given the talent, hard work, and dedication of our employees. I am incredibly grateful for their contributions and look forward to another successful year of creating value for all our stakeholders.

For the fourth quarter of 2022, Loews reported net income of $364 million or $1.53 per share, which compares favorably to net income of $343 million or $1.36 per share in last year's fourth quarter. This year-over-year increase was driven by higher investment income from the parent company and higher income from Boardwalk, partially offset by lower net income from CNA. For the full year, Loews reported net income of $1.012 billion or $4.16 per share compared to $1.578 billion or $6.07 per share in 2021. Last year's results included a $438 million after-tax investment gain from the partial sale and deconsolidation of Altium Packaging. Putting aside lower investment income at both CNA and Loews, all of our subsidiaries posted strong growth in operating performance, which I will discuss in more detail later. Book value per share declined from $71.84 at the end of 2021 to $61.86 at the end of 2022 due to the effect of higher interest rates lowering the fair value of CNA's fixed income investments. Excluding accumulated other comprehensive income, where this unrealized loss sits, book value per share increased by nearly 7% from $71.09 to $75.78. The increase was driven by 2022's earnings and accretive share repurchases. Turning to our insurance subsidiary: CNA contributed net income of $223 million to Loews in the fourth quarter of 2022, compared to $239 million in 2021. The slight year-over-year decrease was driven by lower investment results and higher catastrophes due to Winter Storm Elliott, partially offset by higher underlying underwriting income. The fourth quarter of 2022 also benefited from lower adverse reserve development on CNA's loss portfolio transfer related to asbestos and environmental liabilities. For the full year, CNA contributed net income of $802 million to Loews versus $1.077 billion in 2021. The decrease was driven by unfavorable results in the company's LP and common stock portfolios, which masked a record year of P&C underwriting income for CNA. For the year, LPs and common stocks in the CNA portfolio together posted a negative 1.4% return, versus a positive return of 22.3% in 2021. Additionally, in 2022, CNA experienced investment losses driven by unfavorable changes in the fair value of nonredeemable preferred stock and realized losses on sales related to portfolio repositioning activities. CNA was able to increase duration on its Life & Group investment portfolio from 9.2 years at the end of 2021 to 9.9 years at the end of 2022. In 2022 CNA posted its highest year of P&C underwriting income ever, up 93% from 2021. This increase was driven by continued profitable growth in this hard insurance market. Net written premiums grew by 9% in 2022, driven by three factors: first, new business grew by 13%; second, retention increased by 4 points to 86%; and third, while net written rate increases decelerated to 5%, exposure growth increased to nearly 3%. The company's 2022 combined ratio of 93.2% is a 3.0 point improvement over 2021, driven by 2.1 points of improvement in catastrophe losses and a 0.7-point improvement in favorable prior year development. Catastrophe losses in 2021 included both Hurricane Ida and Winter Storm Uri. Beginning in Q1 2023, long-term care will be accounted for under the new GAAP accounting standard of 'long duration targeted improvement', otherwise known as LDTI. Under this accounting, changes in discount rate and operating assumptions will decouple as discount rates will run through the balance sheet under AOCI, and changes in operating assumptions will run through the income statement. Discount rate assumptions will be based on single A-rated yields and updated on a quarterly basis. Operating assumptions such as morbidity and persistency will be reviewed at least annually. While the change is effective January 1, 2023, CNA, as well as Loews, will be applying these changes from the transition date of January 1, 2021. In other words, there will be one year of restated financial results in our quarterly reports and two years of restated financial results in our annual 10-K filing. More to come on this topic next quarter, but the main point to note is that this change in accounting has no impact on the cash flows or underlying economics of CNA's long-term care business, nor does it impact capital and surplus under statutory accounting practices. These are the highlights for CNA. Please refer to CNA's Investor Relations website for more details on their results and further discussion on the LDTI accounting change. Moving to our natural gas pipeline business: Boardwalk contributed EBITDA of $248 million in the fourth quarter compared to $207 million in the fourth quarter of 2021. For the full year, EBITDA increased from $834 million in 2021 to $892 million in 2022. This outstanding performance was driven by higher revenues from recently completed growth projects, higher recontracting rates and higher utilization of pipeline and storage assets. This revenue growth was partially offset by higher costs from maintenance projects due to revised pipeline safety requirements. Boardwalk's 2022 fourth quarter and full year net income also increased by $18 million and $12 million to $83 million and $247 million, respectively. The positive change in net income was smaller than the increase in EBITDA due to higher depreciation expense from recently completed projects. Loews Hotels had a record year in 2022. The company contributed $117 million of net income to Loews in 2022 versus a $14 million loss in 2021. These improvements were driven by robust leisure travel demand, as well as a pickup in group travel. For the fourth quarter of 2022, Hotels contributed $33 million of net income versus $37 million in the fourth quarter of 2021. The negative comparison is due to the acceleration of a local government grant of $26 million in 2021's fourth quarter, which was substantially offset by the company's strong operating performance in 2022. The company posted Adjusted EBITDA of $85 million in the fourth quarter of 2022 versus $64 million in the fourth quarter of 2021. Full year Adjusted EBITDA improved by over $200 million from $135 million in 2021 to $345 million in 2022. Occupancy increased from 55% in 2021 to 79% in 2022. Finally, turning to the corporate segment: Loews recorded investment income of $72 million in the fourth quarter of 2022 compared to $46 million in the prior year's quarter, driven by improvement in equity returns. However, full year 2022 had lower investment returns compared to 2021. The corporate segment also includes our proportionate share of Altium's earnings, which is accounted for under the equity method. Altium's 2022 results improved year-over-year due to improvement in inflationary cost pressures and contribution from acquisitions, partially offset by volume declines. From a cash flow perspective, we received $97 million in dividends from CNA in the fourth quarter of 2022. For the full year 2022, CNA paid Loews $876 million, consisting of four regular quarterly dividends of $0.40 per share and a special dividend of $2 per share. We also received $102 million in dividends from Boardwalk Pipelines. From October 31 through December 31, we repurchased 1.5 million shares of our common stock at a cost of $86 million. That brings our total 2022 share repurchases to 12.7 million shares at a total cost of $738 million. From January 1 through February 3 of 2023, Loews repurchased an additional 1.0 million shares for a total cost of $58 million. Loews ended the year with $3.2 billion in cash and short-term investments. Today, CNA announced that they increased their regular dividend to $0.42 and declared a special dividend of $1.20, which amounts to $395 million for Loews, which we expect to receive in March.

Every quarter, we encourage shareholders to send us questions in advance of earnings that they would like us to answer in our remarks. Please see below for the questions we have received, along with some additional questions we found relevant. CNA just declared a special dividend of $1.20 versus $2.00 last year. Does this change impact your outlook for the company? This change is attributable to lower investment income from losses in the LP and common stock portfolios. The increase in the company's regular quarterly dividend from $0.40 to $0.42 is a reflection of the CNA Board's confidence in the future performance of CNA. The company remains operationally strong, and we are very bullish on the company's prospects. Not only do we believe that CNA will benefit from higher interest rates, we also believe the company will continue to produce strong underlying results. CNA's management team has done a tremendous job over the past several years transforming CNA into a top quartile underwriter. Since Dino Robusto took over, the company's underlying combined ratio has improved from 97.9% in 2016 to 91.2% in 2022. How will a potential recession impact your subsidiaries? Overall, our subsidiaries operate in fairly recession-resilient industries. That said, we would expect a recession to have some impact, which we'll outline subsidiary by subsidiary. Insurance is an essential service that businesses need regardless of the broader economic environment. In fact, a recession may benefit the insurance industry by bringing down loss cost inflation. The industry is currently feeling the effects of high inflation, which we would expect to moderate in a recession. However, growth in certain insurance lines may be impacted by a slowdown in business activity. For example, workers compensation premiums would likely be lower if there are fewer individuals in the workplace. Boardwalk is perhaps our most recession-resilient business, as its backlog primarily consists of firm contracts with investment-grade customers. Historically in recessions, there's not a significant decline in demand for natural gas. Boardwalk's contracts are also take-or-pay so it would not be significantly impacted by lower throughput. Loews Hotels is the most likely to feel the impact of a recession. Although we have not seen any slowdown in demand yet, a recession would likely result in a reduction of both leisure and business travel. Altium is also highly recession-resistant since most of the end markets that it serves are consumer staples. The company, and the manufacturing sector in general, may also benefit from a recession if the recession results in lower labor turnover. How have higher interest rates impacted your subsidiaries? For the most part our subsidiaries have fixed rate debt. The one exception is Altium, which has some floating rate debt. CNA has been positively impacted by higher rates as it is able to re-invest its portfolio at more attractive yields. How will the 1% tax on share repurchases impact your capital allocation strategy? The share repurchase tax will go into effect for the 2023 taxable year and will levy a tax of 1% of the fair market value of any stock repurchased less the fair value of any stock issued during the year. This tax is estimated to raise $55 billion to over $100 billion of revenue over the next ten years. These estimates take into account a modest shift towards dividends in response to the tax. At 1%, this tax will not change our capital allocation strategy. However, at higher levels, Loews and many other corporations may reevaluate their share repurchase allocations.

Jim, would you like to share your latest thoughts on the economy, interest rates, and inflation? I looked back in my notes and observed that this is the eighth time I will have discussed the economy and interest rates over the past few years. I'm happy to say that, so far, I haven't embarrassed myself with my forecasts. I will quickly summarize my remarks to illustrate how my perspective has evolved in response to the Fed's actions. I began in early May 2021 by expressing concerns about inflation, highlighting higher commodity prices along with warnings of cost-push and demand-pull inflation. At that point, I mentioned that the Fed seemed unaware of the inflation situation. I also criticized politicians and economists for believing in Modern Monetary Theory, which suggests unlimited federal spending and loose monetary policy without negative economic consequences. In subsequent discussions, I noted that inflation warning signs were increasing, mentioning worries about inflation cycles and labor shortages. I warned against easy monetary policies in a strengthening economy, highlighting the danger of a near-zero Fed funds rate. I indicated that the pressure on Treasuries caused by quantitative easing was a red flag, as was the significant rise in M2 at over a 20% growth rate. By February 2022, however, I adjusted my views as the Fed appeared to finally acknowledge they had a problem. It became clear that fiscal stimulus combined with easy monetary policy had pushed the year-over-year CPI to 7.5%, heading towards 9% in June 2022, prompting the Fed to take notice. In May 2022, I commended Chairman Powell for recognizing this issue, stating that the era of yield curve intervention had concluded. Fiscal stimulus, loose money, easing Covid restrictions, and a high savings rate had unleashed inflation. I remarked that the Fed's overstepping its role in the market, though sometimes necessary in a crisis, poses significant long-term risks. That brings us to the present. Before Friday's stellar unemployment numbers, I believed the Fed was trying to make up for having been too lax for years by adopting an ultra-tight stance. If I were a member of the FOMC last week, I would have argued for a pause of three or four months to assess whether the rate hikes had sufficiently slowed the economy and reduced inflation. Over-tightening can lead to risks, potentially triggering a crisis in the financial markets similar to what occurred with Long Term Capital Management in 1998. However, given Friday's data, I have reassessed my position and commend the Chairman for the Fed's continued tightening. Regarding future rate moves, I would closely monitor the data and lean towards a pause to mitigate the risks of excessive tightening. As for a possible recession, my current forecast is a shallow full-employment recession in 2023, with unemployment remaining below 5 percent. Despite my view that the Fed has made commendable strides in the past year, I am not optimistic about term government securities. The ten-year Treasury note currently yields about 3.55%, meaning that even if inflation reaches the Fed's target of 2 percent, the ten-year notes will still offer a real yield of 135 basis points. Historically, ten-year note yields over the past 40 years traded with a real yield of 200 to 400 basis points until 2007, but since 2008, real yields have frequently been zero or negative due to prolonged loose monetary policy. I believe that period is over, and quantitative easing and zero interest rate policies are behind us. Instead, with the Fed raising short rates and engaging in quantitative tightening last year, they have reintroduced policies that will yield positive real returns for investors. Rather than buying $1 trillion of term securities annually, the Fed is now selling that amount. The bond market will need to adjust to this increased supply. Unless a financial catastrophe occurs, I do not foresee the Fed returning to zero interest rates or quantitative easing for a considerable time, so my advice to investors is to approach Treasuries cautiously. Treasuries are certainly a more attractive investment now than at any point in the last 15 years, and I believe they will continue to improve as they are likely to offer higher real yields in the future. That’s my current perspective on the Fed and the fixed income investing environment. Stay tuned in three months for another update.