Loews Corp (L) — Q2 2023 Earnings Call Transcript

Good morning. Loews is off to a great start in the first half of 2023, with each of our consolidated subsidiaries performing very well. CNA had another strong quarter, its results reflecting the long and arduous re-underwriting process led by Dino Robusto over the past six years since he became CEO. In a quarter when industry catastrophe losses were more than double their historical average, CNA managed to record only 3.1 points of such losses, further evidence that the management team's steadfast focus on underwriting continues to produce stellar results. Growth at CNA was also robust in the second quarter, with net written premiums increasing 10% excluding currency fluctuations compared to the same period last year. That growth was driven by over 7 points of renewal premium change and strong new business, which was 11% higher than during the same period last year. As a reminder, renewal premium change consists of two components: rate and exposure growth. Rate is the change in price if the coverage remains the same. Exposure growth captures underwriting changes (i.e., changes in deductibles, etc.), as well as changes in the insured's characteristics, such as changes to payroll, revenue or property values. For the second quarter, higher rates contributed 5 points of renewal premium change and exposure growth added another 2 points. All in all, we are pleased with CNA's continuing solid performance. Moving on to Boardwalk, the company reported EBITDA of $213 million, which represents an increase of over 10% compared to $193 million in the second quarter of 2022. This year-over-year increase was driven both by strong volumes and higher rates. As I said last quarter, Boardwalk has very limited exposure to the spot price of natural gas, other than the extent to which price affects the volume of gas consumed. Loews Hotels continued to take advantage of strong travel demand. The company's second quarter operating revenues increased compared to the second quarter of 2022. However, the hotel company's adjusted EBITDA declined by $15 million to $100 million in the second quarter, compared to $115 million in the second quarter of 2022. This was due to the impact of higher operating expenses, notably increased labor expenses. It bears repeating that last year's extraordinary performance was due in part to demand recovering faster than staffing levels. Across the lodging industry, staffing levels have normalized as compared to what they were during the pandemic when hotel properties struggled to fill open positions. We remain optimistic about Loews Hotels' growth prospects over the coming years. Construction of the Loews Arlington Hotel in Arlington, Texas continues, on time and on budget. This nearly 900-room resort property is slated to be completed in the first quarter of next year and will include 250,000 square feet of best-in-class meeting and event space. While the hotel will not open until February of 2024, the company has seen incredibly strong interest and there are already close to 150,000 group room-nights booked for future dates. Loews Hotels also has three properties with a total of 2,000 rooms under development at Universal's new Epic Universe theme park in Orlando. Those hotels are expected to be completed in 2025, at which point Loews Hotels will have a 50% interest in a total of 11 hotels with 11,000 rooms at Universal Orlando. As our stock continues to trade at a significant discount to our view of its intrinsic value, share repurchases remain Loews Corporation's primary capital allocation lever. Since the end of the first quarter, Loews repurchased 2.4 million of its own shares for a total cost of $144 million. As of last Friday, July 28th, Loews has bought back 10.6 million shares this year, or over 4% of our outstanding shares at the beginning of the year, at a cost of $630 million. Loews currently has just over 225 million shares outstanding, which represents a nearly one-third reduction of shares outstanding since the end of 2017. We will continue to repurchase our shares as long as we believe they trade at a discount to our view of their intrinsic value.

For the second quarter of 2023, Loews reported net income of $360 million or $1.58 per share, compared with net income of $167 million or $0.68 per share in last year's second quarter. This year-over-year increase was driven by higher income from our consolidated subsidiaries and higher net investment income at the parent company. As a reminder and consistent with the first quarter, prior period results have been restated to reflect the adoption of the new GAAP accounting standard of 'long-duration contracts targeted improvements,' or LDTI. Book value per share increased from $60.81 at the end of 2022 to $64.59 at the end of the second quarter of 2023. Book value per share excluding AOCI (Accumulated Other Comprehensive Income) increased from $74.88 at the end of 2022 to $78.56 at the end of the second quarter. This increase was driven by earnings and accretive share repurchases in the first half of the year. Our largest subsidiary, CNA, contributed net income of $255 million to Loews in the second quarter compared to $170 million in last year's second quarter. The $85 million year-over-year increase was primarily driven by higher net investment income. The increase in net investment income was driven by higher interest rates on fixed income securities and improved returns on limited partnerships and common stocks. The pre-tax yield on the company's fixed income portfolio increased 30 basis points from 4.3% in the second quarter of 2022 to 4.6% in the second quarter of 2023. CNA continued to post profitable growth in this hard insurance market, with net written premiums increasing 10% excluding currency fluctuations. That growth enabled CNA to produce its highest ever underlying underwriting income in the second quarter of this year. The company's underlying combined ratio of 91.1% increased slightly compared to 90.8% in the second quarter of last year due to higher employee-related costs included in the expense ratio. The all-in combined ratio of 93.8% was 2.8 points higher than the second quarter of 2022, which had particularly mild catastrophe activity. CNA continued to de-risk its long-term care reserves through policyholder buyouts. Year-to-date, CNA has spent $121 million to buy out 4,100 policies. These cash buyouts are related to the policies' statutory reserves, which are generally higher than GAAP reserves, resulting in a small GAAP charge. We believe this is the right strategy, as it reduces GAAP reserves and de-risks the business over the long term. Additionally, CNA's results include a loss from unfavorable legacy mass tort claims, although this loss is less than the amount in the prior year's second quarter. Moving on to our natural gas pipeline business, Boardwalk contributed net income of $57 million to Loews in the second quarter, which represents an increase of $18 million from $39 million in last year's second quarter. The company's revenues increased as a result of higher recontracting rates, greater utilization of its pipeline and storage assets and recently completed growth projects. Net income also benefited from lower interest expense due to lower borrowings compared to last year's second quarter. That increase was partially offset by higher operation and maintenance expenses related to pipeline safety compliance rules, higher employee-related costs and higher depreciation expense. At Loews Hotels, the company contributed $74 million of net income to Loews in the quarter versus $44 million in the second quarter of last year. The year-over-year increase was driven by a $36 million after-tax gain related to Loews Hotels' acquisition of an additional equity interest in Live! By Loews in Arlington, Texas, which was an unconsolidated joint venture prior to this transaction. As a result of the consolidation, the carrying value of the hotel was revalued to the fair value of the asset. Excluding this gain, net income declined by $6 million to $38 million in the second quarter. The year-over-year decline was driven by higher operating expenses due to the return to normalized staffing levels. Finally, turning to the corporate segment: Loews recorded after-tax investment income of $9 million this quarter compared to a $51 million loss in the prior year's second quarter. This improvement was driven by better performance within the company's common stock and LP portfolio as well as higher interest rates on our cash and short-term investment portfolio. From a cash flow perspective, we received $102 million in dividends from CNA in the second quarter of 2023. Since the end of the first quarter, Loews has repurchased an incremental 2.4 million shares at a cost of $144 million. That brings our total year-to-date share repurchases through last Friday to 10.6 million shares at a total cost of $630 million. In the second quarter, Loews also repaid its $500 million bond that matured in May of this year with cash on hand. Loews ended the quarter with $2.5 billion in cash and short-term investments and $1.8 billion of parent company debt.

Every quarter, we invite shareholders to submit questions in advance of earnings for us to address during our remarks. Below are the questions we've received, along with a few additional relevant questions. Are you planning to make a significant investment in Loews Hotels this year to support its growth projects? Loews Hotels is continuing to invest heavily in its growth. Last year, it completed a $222 million equity investment in the construction of the Loews Arlington. This year, Loews Hotels expects to make nearly a $200 million equity investment to develop three new properties in Orlando. Thanks to strong internal cash flow generation, Loews Hotels mostly funded its investment in the Loews Arlington itself and we believe it will largely self-fund most of its growth projects in 2023. The equity requirement from the parent company is minimal; Loews Corporation made a $33 million equity contribution to Loews Hotels last year and plans to invest a similar amount in 2023. Recently, Bloomberg published a story regarding the lack of analyst coverage for Loews. Why is there no coverage from Wall Street analysts? Is coverage something you would like? Does this absence of coverage affect Loews's valuation? The article points out that Loews had analyst coverage in the past, which was lost as analysts retired or moved to different firms. In response to the decrease in coverage, we've reached out to various firms to encourage them to start covering Loews, but to no avail. We think investment banks may be hesitant to cover Loews because its multi-industry holding company structure does not align with their sector-specific coverage models. As I have previously mentioned, we believe Loews is trading at a significant discount to our assessment of its intrinsic value, which could partly stem from the lack of research coverage. Therefore, we urge our investors to contact banks and request they initiate coverage, and as a reminder, investors can always reach out to us with any questions. Meanwhile, we are willing to repurchase our shares when they are undervalued. As I noted earlier, Loews has just over 225 million shares outstanding, which represents nearly a one-third reduction in shares since the end of 2017. There has been much discussion about the current state of the reinsurance market. How does a hard reinsurance market affect CNA? CNA's catastrophe losses in its property business have been significantly lower than those of the broader insurance industry due to its focus on underwriting. Analysts predict U.S. catastrophe losses will range from $20 to $27 billion in the second quarter of this year, much higher than the 10-year median second quarter catastrophe loss of under $12.5 billion. In comparison, CNA reported 3.1 points of catastrophe losses, aligning with its 10-year average for the second quarter. CNA definitely felt the effects of increased reinsurance pricing at the June 1 renewal, but relative to the industry, CNA's rate hikes were less drastic. It's also important to note that increased reinsurance spending will likely be offset by premium rate increases. Jim, do you have any comments or predictions regarding the current state of the economy and its future trajectory?

This quarter, instead of discussing inflation or the economy, I want to share my long-term perspective on interest rates. I believe we are experiencing the consequences of the 14 years of Zero Interest Rate Policy and Quantitative Easing that took place from late 2008 until 2022. There was a small increase in rates starting in 2016, but it was halted by COVID in early 2020. Throughout this prolonged period, the Fed not only influenced short-term rates but also set rates across the entire yield curve through extensive Quantitative Easing. Both Zero Interest Rate Policy and Quantitative Easing persisted for too long, demonstrating a belief by the Fed that they understood better than the market what appropriate interest rates should be. I felt as early as 2011 that the Fed should have started raising rates above zero to prepare the markets for borrowing costs. Instead, I observed with concern how Zero Interest Rate Policy and Quantitative Easing continued, leading both the markets and the government to get used to zero money market rates and unrealistically low term rates. Ten-year notes reached a low of around 50 basis points in 2020 and averaged about 2% from 2009 to 2021. During this time, federal interest expense only grew by a third from $313 billion in 2007 to $412 billion in 2020, even though the national debt tripled from $9.2 trillion to $27.7 trillion. Furthermore, from 2011 to 2021, the Fed transferred over $900 billion to the Treasury, around $84 billion per year, facilitated by the spread it earned on its large balance sheet. This spread was the difference between the yield on its fixed income portfolio, which comprised about $8 trillion in government debt, and the zero costs of financing those purchases. However, those favorable times for the Fed are behind us: financing costs for low coupon debt have surged to over 5%, resulting in significant losses for the Fed and the absence of its annual $84 billion remittances to the government. The Fed's assets, which were under $1 trillion before the 2008 financial crisis, swelled to nearly $4.5 trillion by late 2014. Its balance sheet remained around $4 to $4.5 trillion until COVID struck in early 2020, when it more than doubled to approximately $9 trillion. Despite recent quantitative tightening, the Fed's balance sheet still exceeds $8 trillion, more than eight times its size before the Great Financial Crisis. This poses a significant challenge, as the Fed is now experiencing substantial losses instead of earning on the gap between floating and fixed rates. Describing the period from 2009 to 2021 as one of monetary excess would be an understatement. However, the markets were complacent, and the consequences were largely ignored until they couldn't be. Moving forward, it seems we are reverting to an environment of real interest rates, where interest rates are above the inflation rate, for U.S. Treasury and other issuers. Prior to the financial crisis, positive real interest rates were common and fixed income sometimes offered attractive alternatives to equity investments. From 2008 until recently, the only fixed income investors were those compelled to invest in it, like insurance companies and pension funds. Investment committees at universities and other organizations moved away from fixed income as equities became far more profitable. Currently, fixed income has regained its status as a viable asset class. With a solid investment-grade fixed income portfolio, an endowment can meet its annual 5% withdrawal rate and still grow its funds. Given the need to finance a federal deficit of around $2 trillion per year and to absorb $1 trillion per year from the Fed's sales of Treasury securities obtained during the easy money era, interest rates will likely need to remain elevated to attract private investment. I believe this suggests a return to the historical norm of 100-200 basis points of real return on term Treasury securities before 2008. I anticipate that this situation will persist for the foreseeable future, implying that even if inflation drops to 2%, term securities will trade at rates of 3% to 4%, not too far from current levels. While Treasury securities will offer a decent real return, do not expect significant capital gains, as yields are unlikely to drop considerably. That’s my view for now. More updates next quarter.