Loews Q4 2021 Earnings Call Transcript

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February 7, 2022

Key Takeaways

  • Loews is appealing a Delaware Chancery Court ruling that it breached the Boardwalk partnership agreement, which awarded former unitholders approximately $690 million plus interest.
  • The CNA subsidiary delivered record core income of $1.1 billion in 2021, improved its underlying combined ratio by 1.7 points, grew P&C net written premiums by ~5%, and reinstated a $2 special dividend.
  • Loews Hotels swung to an adjusted EBITDA of $135 million in 2021 from a $103 million loss in 2020, with Q4 occupancy near 70% and average daily rates up over 6% year-on-year.
  • Consolidated fourth-quarter net income was $343 million ($1.37/share) and full-year net income was $1.58 billion ($6.07/share), a sharp turnaround from the 2020 net loss of $931 million.
  • Loews repurchased 21.1 million shares for $1.1 billion in 2021 (8% of shares outstanding) and has reduced shares by 25% over the past four years, prioritizing buybacks when stock trades below its intrinsic value.
AI Generated. May Contain Errors.
Earnings Conference Call
Loews Q4 2021
00:00 / 00:00

There are 4 speakers on the call.

Operator

Good day, everyone, and welcome to today's Loews Corporation Q4 2021 Earnings Conference Call. Please note this call may be recorded and I will be standing by should you need any audio assistance. It is now my pleasure to turn today's call over to Mary Scoffidis, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Speaker 1

Thank you, Ashley, and good morning, everyone. Welcome to the Loews 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.

Speaker 1

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.

Speaker 1

During the call today, we might also discuss non GAAP financial measures. Please refer to our security filings and earnings supplement for reconciliations to the most comparable GAAP measures. With that, I'd like to turn the call over to Jim. Jim, over to you.

Speaker 2

Thank you, Mary, and good morning. Lowe's had a strong 4th quarter year with our consolidated subsidiaries making good progress in 2021. What's more, these positive results were achieved in a period marred by the persistence of the COVID-nineteen pandemic, Global supply chain disruptions and the return of inflation. More on inflation later in the Q and A. Before we talk about the financial performance of our subsidiaries, I'd like to provide an update concerning the ongoing Boardwalk litigation.

Speaker 2

Many shareholders are familiar with the class action litigation relating to our 2018 acquisition of the minority master limited partnership interests in Boardwalk Pipelines. In November, the Delaware Court of Chancery issued a decision stating that Loews breached the Boardwalk Partnership Agreement, A decision with which we vehemently disagree. The same court then awarded the class Former Boardwalk unitholders, approximately $690,000,000 plus interest. LOTUS has appealed this ruling to the Delaware Supreme Court Since we firmly believe that the Chancery Court misapplied the factual underpinnings of the case and misinterpreted the applicable law. There's a lot more I'd like to say, but on advice of counsel, I'm going to limit myself to this brief statement.

Speaker 2

Moving on to other happier topics, on today's call, I'd like to focus on the performance of CNA and Loews Hotels. CNA continues to be a success story for Loews, producing record core income of $1,100,000,000 for the year In no small part due to the company's laser light focus on underwriting, CNA's underlying combined ratio decreased by 1.7 points in 2021 driven by the expense ratio. The underlying loss ratio for the year was Flat at about 60%. Needless to say, we're pleased with CNA's operational progress. In 2021, CNA benefited from the rate increases resulting in significant premium growth.

Speaker 2

The company's P and C gross written premiums increased approximately 10% and net written premiums increased about 5%. As I've mentioned before, the increase in net written premiums is lower than the increase in gross written premiums Due to additional reinsurance that the company purchased in its strategy to protect the insurance portfolio from large loss events, Rate increased more than 9% overall for the year, which is a solid increase. As CNA mentioned on their call earlier today, They expect rate to stay ahead of loss cost trends in 2022. CNA's pretax investment income was up from the prior year due to limited partnerships and common stocks, which increased $258,000,000 On average, CNA reinvests between $300,000,000 $400,000,000 a month into its fixed income portfolio. So higher interest rates would improve the portfolio's yield over time.

Speaker 2

Additionally, CNA announced special dividend of $2 per CNA share, up from $0.75 per share in 2021. As a reminder, from 2015 through 2020, CNA paid a $2 special dividend. In 2021, however, the Board reduced the dividend because CNA's earnings were lower due to the effects of the pandemic And other catastrophes. The return of the $2 special dividend is reflective of CNA's strong earnings performance As well as its financial strength and fortress balance sheet. The company also announced a common dividend of $0.40 per share.

Speaker 2

These dividends represent the payment of $584,000,000 to Lowe's in the Q1 of this year. At Loews Hotels, what a difference a year makes. The company reported adjusted EBITDA of $135,000,000 for 2021, A significant turnaround from the adjusted EBITDA loss of $103,000,000 posted in 2020. Loews Hotels continues to rebound from the impact of COVID-nineteen with all hotel properties up and running by the end of the Q2 of 2021. We believe the hotel company will continue to recover from the effects of the pandemic, Even though it may be some time before it sees pre pandemic levels of occupancy.

Speaker 2

Loews Hotels has continued to see increased demand for leisure travel as well as improving interest for group travel. For the Q4, owned and joint venture hotels had approximately a 70% occupancy rate, largely in line with the 3rd quarter. However, over that same period, The average daily room rate increased by more than 6%. The company's resort hotels continue to do considerably better urban properties and happily nearly 2 thirds of Loews Hotels rooms are in resort destinations. Loews Hotels' distinctive position as an owner and an operator has also played a part in the company's recovery.

Speaker 2

To illustrate this point, Since the beginning of 2019, a year in which the company earned adjusted EBITDA of $227,000,000 Loews Hotels has added about 3,700 rooms to its system. However, the pandemic has prevented the company from realizing full earnings potential of these new rooms, the majority of which are in destinations with built in demand generators like Orlando. As the pandemic wanes and Loews Hotels continues to grow, its unique role as an owner and operator Should continue to accelerate the recovery that the company has already begun to experience. Before I turn the call over to David, I want to mention share repurchases. In 2021, the company repurchased just over 21,000,000 shares of our common stock For about $1,100,000,000 which represents almost 8% of the shares outstanding at the beginning of the year.

Speaker 2

Each year for the last 4 years, we have spent approximately $1,000,000,000 on share repurchases. Over the last 4 years, We have decreased our shares outstanding by 25%. We feel that share repurchases are a great use of the company's capital Aimed at creating value over the medium to long term for our shareholders. As long as our shares trade below our view Of their intrinsic value, we will continue to buy them in. And with that, let me turn the call over to David.

Speaker 3

Thank you, Jim, and good morning, everyone. Today, we reported 4th quarter net income of $343,000,000 or $1.37 per share compared to $397,000,000 or $1.45 per share in last year's Q4. For the full year, we reported net income of $1,580,000,000 or $6.07 per share, while in 2020, We posted a net loss of $931,000,000 or $3.32 per share. I will briefly review our 4th quarter results and then turn to the full year. The year over year decline in our 4th quarter net income Obscured impressive operating improvements at CNA and Boardwalk Pipelines as well as a continued rebound at Loews Hotels.

Speaker 3

Underwriting results in CNA's core P and C business were outstanding. CNA's pretax Underwriting gain rose 13% on the back of an 8% increase in net earned premium and a 50 basis point Year over year improvement in the combined ratio to 92.9%. The underlying combined ratio, Which excludes catastrophe losses in prior year development, improved 1.4 points to 91.2% in this year's 4th quarter. CNA's consolidated net investment income was basically flat compared to the prior year quarter. By segment, it was higher in Life and Group and lower in P&C and Corporate.

Speaker 3

The decline in CNA's year over year contribution to our net income Was mainly due to lower net investment gains as well as to the Life and Group and Corporate segments. Investment gains were significant in last year's Q4, driven mainly by the mark to market on CNA's holdings of non redeemable preferred stock. Gains were de minimis this year. In the Life and Group segment, the long term care block experienced slightly adverse morbidity trends this year after experiencing favorable morbidity last year. And in the corporate segment, aside from the previously mentioned drop in net investment income, Two other factors contributed to the year over year decline: a higher non economic charge relating to CNA's loss portfolio transfer with National Indemnity and unfavorable net prior year development on legacy mass tort exposures.

Speaker 3

The bottom line is that CNA had another strong quarter in its core P and C Underwriting business with all its segments, Specialty, Commercial and International reporting strong premium growth and improved year over year underlying combined ratios. Boardwalk Pipeline's net income contribution declined from $83,000,000 in last year's Q4 to $65,000,000 Last year's Q4 results included $26,000,000 after tax of settlement proceeds related to a customer bankruptcy. Absent this non recurring item, Boardwalk's net income contribution increased year over year driven by revenue from growth projects Recently placed in service and higher system utilization. Loews Hotels continued its strong rebound, Posting net income of $37,000,000 versus a net loss of $68,000,000 in Q4 2020. Please note, however, That net income in the quarter benefited by $26,000,000 from the acceleration of government grant payments used to retire outstanding debt prior to maturity for a recent development project.

Speaker 3

Loews Hotels' adjusted EBITDA, which excludes unusual items and is defined in our earnings supplement, was $64,000,000 in Q4, up markedly from a $27,000,000 loss in Q4 2020. As you can see on Page 11 of our earnings supplement, occupancy was about double last year's 4th quarter and essentially flat with the 3rd quarter. Average daily rate rose 24% over last year's Q4. And with all hotel properties fully open during the quarter, Available rooms were 44% higher than Q4 2020. Before turning to the full year, One last observation on the quarterly comparison.

Speaker 3

The parent company investment portfolio generated less income in the 4th quarter than in the prior year period, Driven by lower returns on our holdings of equities and limited partnership investments. For full year 2021, We reported net income of $1,580,000,000 a sharp rebound from last year's net loss of $931,000,000 Excluding the 2nd quarter gain on the deconsolidation of Altium Packaging, our net income for 2021 was $1,140,000,000 CNA and Boardwalk posted strong operating results And Loews Hotels experienced a dramatic rebound from 20 twenty's dismal pandemic induced results. CNA contributed almost $1,100,000,000 to our 2021 net income.

Speaker 2

The

Speaker 3

core P and C business Experienced strong earned premium growth and a combined ratio of 96.2%, almost 4 points better than the prior year. The decline in the combined ratio was driven by a 1.5 point improvement in the expense ratio and lower catastrophe losses. The underlying combined ratio improved 1.7 points to 91.4%. CNA's net investment income was buoyed by strong returns on limited partnership and common stock investments. Both the P&C and Life and Group segments benefited from these strong returns.

Speaker 3

Net investment gains also contributed the year over year increase in CNA's net income. The company swung from losses last year to after tax gains of almost $100,000,000 this year. The Life and Group segment benefited from good underlying results and an uplift in net investment income Driven by LP Investments. Additionally, for the year, the segment experienced a $38,000,000 pretax net reserve release versus pretax net reserve charges of $83,000,000 in the prior year. Reserve actions in both years related mostly to the company's long term care book of business.

Speaker 3

CNA's Corporate segment showed a year over year earnings decline Due to several factors, including lower net investment income, a larger non economic charge related to CNA's loss portfolio transfer with National Indemnity and higher unfavorable net prior year development on legacy mass tort exposures. CNA ended the year with total assets of $67,000,000,000 a $50,000,000,000 investment portfolio, stockholders' equity of $12,800,000,000 and book value per share of $47.20 CNA's balance sheet remains rock solid. Its decision to pay a $2 special dividend and raise its regular quarterly dividend by 5% $235,000,000 to our 'twenty one net income, up from $206,000,000 in 2020. Excluding the $26,000,000 customer bankruptcy settlement proceeds received last year, Boardwalk's net income contribution increased $55,000,000 year over year. Boardwalk's EBITDA, which is defined in our earnings supplement, was $843,000,000 in 2021 versus $785,000,000 last year, excluding the settlement proceeds.

Speaker 3

Boardwalk's year over year earnings improvement, excluding the settlement proceeds, was driven by a 6 plus percent increase in net operating revenues against a 4% increase in operating expenses, including depreciation and amortization. A reduction in interest expense and its dramatic improvement over 2020. Those hotels contributed a pre tax loss of $12,000,000 versus a $274,000,000 loss in 2020. Both periods included non recurring items such as impairments, Gains on sale and the previously mentioned acceleration of a government grant. Stripping these out, Loews Hotels pretax loss declined from $261,000,000 in 2020 to a loss of $44,000,000 in 2021.

Speaker 3

Adjusted EBITDA, which excludes all these non recurring items, swung from a loss of $103,000,000 in 2020 to earnings of $135,000,000 in 2021. All properties contributed to this dramatic increase with the Universal Orlando Resort leading the charge. Loews Hotels business strengthened as the year progressed Adjusted EBITDA was negative $13,000,000 in Q1, followed by $25,000,000 in Q2, dollars 59,000,000 in Q3 $64,000,000 this past quarter. Turning now to our corporate segment, let me unpack the numbers for you. Net investment income increased year over year, driven by higher returns on equities and limited partnership investments.

Speaker 3

Corporate expenses were flat year over year with higher interest expense offset by lower other corporate expenses. Corporate also includes the operating results of Altium, which were consolidated through Q1 'twenty one and then, Once deconsolidated, have been accounted for under the equity method. Certain non recurring items related to the Finally, corporate includes 2 large unusual items. In 2021, a $438,000,000 after tax gain on the deconsolidation of Altium Packaging following our sale of a 47% stake And in 2020, a $957,000,000 after tax loss on the deconsolidation of Diamond Offshore precipitated by its bankruptcy filing. Our 2020 consolidated results also include A $476,000,000 net operating loss attributable to Diamond Offshore, which represented our share of Diamond's results up to the deconsolidation date.

Speaker 3

Excluding Diamond's impact on 2020 and the Altium gain in 2021, Our net income more than doubled from $502,000,000 last year to $1,140,000,000 in 2021. Now for the parent company. The parent company portfolio of cash and investments stood at $3,450,000,000 at year end With about 77% in cash and equivalents. During the Q4, we received $194,000,000 in dividends from our subsidiaries, dollars 92,000,000 from CNA and $102,000,000 from Boardwalk, which represented Boardwalk's only dividend to Loews in 2021. For the full year, we received dividends of $550,000,000 from CNA $102,000,000 from Boardwalk and a $199,000,000 dividend from Altium as part of its recapitalization.

Speaker 3

We also received net pre tax proceeds of $411,000,000 upon the sale of a 47% Based on today's CNA dividend declarations, Loews will receive a total of $584,000,000 in special and regular dividends from CNA this quarter. We repurchased 5,400,000 shares in the 4th quarter for 306,201,000,000 shares during all of 2021

Speaker 2

for $1,130,000,000

Speaker 3

Since year end, our share repurchase activity has been negligible. I will now hand the call back to Mary. Thank you.

Speaker 1

Great. Thank you, David. We are going to move on to the Q and A portion We have a number of questions from shareholders. The first question is for Jim. Jim, Can you please give us more color on your view of share repurchases?

Speaker 2

I sure can. Lowe's long established policy of share represents a key element of our capital allocation strategy. In 2021, we bought back 21,100,000 shares of Loews common stock for a total of $1,100,000,000 which was the equivalent of almost 8% of the shares outstanding At the start of the year, during the 10 year period from January of 2012 through December of 2021, Loews has spent $6,800,000,000 on repurchases, retiring about 37% of our common shares outstanding At the beginning of 2012, stated another way, 10 years ago, we had about 60% more shares outstanding In certain political circles, share buybacks have come under fire, especially over the last few months. It is our strong belief that restricting companies' ability to repurchase their shares would be detrimental to all investors. Stock repurchases benefit investors, promote efficient capital allocation and significantly reduce volatility in the market.

Speaker 2

The market stabilization that results from allowing companies to buy back their shares benefits all shareholders, including retail investors. Capital that flows to shareholders from these repurchases may be reinvested not just in S and P 500 Companies, But rather in companies of all shapes and sizes. We believe actions that limit or restrict allocation of capital, Either through regulation or by tax will have a negative effect on stock market valuations.

Speaker 1

Great. Thank you, Jim. Next question has to do with Boardwalk. Over the past several years, there has been an increased focus on the importance of reducing methane emissions, Both by regulators and by the public, can you please share with us what Boardwalk has done to reduce their emissions?

Speaker 2

Sure. Boardwalk is focused on reducing methane emissions from its natural gas pipeline system, Not only because it's the right thing to do for the environment, but also because we believe it's the right thing to do for Boardwalk's business. Boardwalk has been focused on meeting and in certain cases exceeding regulatory obligations by reducing emissions from its pipeline and storage assets. In 2020, Boardwalk achieved about a 30% year over year reduction in methane emissions at certain key of total natural gas produced nationwide. Boardwalk uses a number of strategies to reduce their methane emissions.

Speaker 2

These strategies include replacing older compression equipment as appropriate with Low emission fuel efficient units, modifying older fuel systems as necessary on certain reciprocating compression equipment To lower fuel consumption and emissions and conducting emission surveys and performing maintenance and repairs on identified component leaks, Reducing methane emissions is and will remain a priority for Boardwalk.

Speaker 1

Great. Thank you, Jim. The next question, has to do with how Lowe's computes the value of its non publicly traded assets, Specifically for its hotel business and its interest in Altium.

Speaker 2

So we look at a number of factors when determining intrinsic value, When evaluating the industry outlook, we consider cyclical opportunities and risks, potential for technological disruption And how the subsidiary is positioned compared to its peers. When looking at growth potential, We evaluate both organic and inorganic growth opportunities and consider whether or not the subsidiary can self fund those opportunities. In terms of operational efficiency, we analyze potential opportunities for improvements And the role of technology in driving efficiency. Our assessment of the value of our subsidiaries is not static, But rather is adjusted as markets and circumstances change. Each subsidiary has metrics that are specific to its industry.

Speaker 2

For example, one important metric for Loews Hotels is adjusted EBITDA, Which we believe is more meaningful to the lodging industry than net income. Keep in mind, however, that in the last full year of non pandemic affected operations for our hotels in 2019. Since then, Loews Hotels has added about 3,700 rooms and the full earnings potential of these rooms have yet to be realized. We believe that in 2022, Those hotels will continue to recover from the effects of the pandemic, but it's still uncertain when occupancy rates We'll return to pre pandemic levels. In terms of Altium Packaging, we don't make a lot of Information public.

Speaker 2

Instead, we report Altium as part of the corporate segment. Altium does not have A material impact on Loews, not only due to the size of the company, but also as a result of our reduced stake Since the sale of 47% of this subsidiary. However, we continue to believe in the long term growth potential of the business.

Speaker 1

Great. Thank you, Jim. Next question, some of our shareholders are starting to call the dessert of our earnings which has to do with inflation. So Jim, for the past three quarters, you have ended our earnings conference call with your views on inflation and interest rates. Can you please update us on these topics?

Speaker 2

Mary, I'd be delighted to give you my rant. First, Let me recap my comments over the past year. On the earnings call for the Q1 of 2021, I spoke about the nascent cost push and demand pull inflation that was going to be brought about by the easy monetary policy and big deficit spending. For the Q2, I spoke about the cycle of inflation that was developing along with growing labor shortages. On the Q3 call, I spoke about the wage price spiral and how interest rates were too damn low.

Speaker 2

At the time, the inflation rate was 5.4% and the Fed still had their head in the sand with respect to the almost 0% Fed funds rate And their monthly $120,000,000,000 purchase of federal and mortgage securities. So here we are on the 4th quarter call And the Fed has finally woken up to the problem that they should have foreseen a year ago. The problem now is that the Fed is taking its Sweet Time putting in place their action plan to deal with the skyrocketing inflation and the overheating economy. Instead of doing something about the 7% year over year increase in the CPI, the Fed is only talking about it. And the Fed has led the market to perceive that they will raise Fed funds rates 4 times in the course of this year.

Speaker 2

That's 100 basis points this year, meaning that at this pace, it will take them 7 years to get Fed funds to the current level of inflation. Well, I don't think that inflation will stay at the 7% level. I do believe that with our quicker and more decisive action by the Fed, The proverbial punch bowl is still there for all market participants to grab a drink. I understand that the Fed doesn't want to cause a panic And that they have to be careful about what they say. But still, there's something to be said for acknowledging the scope of the problem I'm beginning the process of interest rate normalization.

Speaker 2

For example, the Fed is still executing its policy of quantitative Easing by purchasing government and mortgage securities. As they say, when you're in a hole, the first thing to do is to stop digging. The Fed is still digging. The good news is that it seems that additional fiscal stimulus is off the table, spending. Hopefully, fiscal stimulus will stay off the table.

Speaker 2

As it stands now, federal Spending will be down this year compared to last year, but much of the federal money that was allocated last year is just now beginning to be spent. State coffers are now overflowing with the federal largess, So I'm not worried about the economy slowing down due to a lack of real final demand. For 2022, I foresee an economy that will continue growing with short term interest rates that will begin their slow rise As the quarterly 25 basis point increases in Fed funds start to accumulate, inflation will continue to be a major issue As we will still have the dual problems of cost push and demand pull inflation. My guess is that unless the Fed moves quicker, We can expect inflation to stay at elevated levels for this year and likely next. As for fixed income securities, my view is that even though the government 10 year notes are up 80 basis points In yield in the past year, they are still more than 500 basis points below the year over year CPI increase And they are 120 basis points below where they were as little as 3 years ago when inflation was 2%.

Speaker 2

There's lots more room for the 10 year notes to go up in yield. And my guess is that the longer it is seen that the Fed isn't serious about controlling inflation, the higher the ultimate peak in 10 year notes will be. In forecasting out a year, I wouldn't be surprised to see 10 year notes yielding between 2.5% 3% at the end of this year. So that's it for my economic ramp and forecast. Stay tuned next quarter for another quarterly economic update.

Speaker 1

Great. That concludes the Lowe's call for today. As always, thank you, Jim. Thank you, David, and thanks to all of you for your continued interest. Please feel free to reach out to me with any additional questions atmscopidis@lowes.com.

Speaker 1

A replay will be available on our website, lowes.com,

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