Loews Q2 2021 Earnings Call Transcript

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August 2, 2021

Key Takeaways

  • Net income of $754 million in Q2 compared to a net loss of $835 million last year, driven by strong performances from CNA and Boardwalk.
  • CNA reported record high core income and improved its combined ratio to 91.4, with 8% gross written premium growth and higher net investment income.
  • Loews Hotels’ occupancy rebounded to nearly 58% in Q2 from 35% in Q1, led by resort markets, and no additional cash support is expected in H2 2021.
  • Loews repurchased 6.5 million shares for over $350 million in Q2 (4.5% of shares YTD) and maintains that its stock trades below intrinsic value.
  • Management warns of a mounting inflation cycle (expected above 6% in 2021) and anticipates interest rate increases, which could pressure costs and fixed‐income returns.
AI Generated. May Contain Errors.
Earnings Conference Call
Loews Q2 2021
00:00 / 00:00

There are 4 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Loews Corporation Second Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I will now turn the call over to Mary Scoffitis. Please go ahead.

Speaker 1

Thank you, Chriselle, and good morning, everyone. Welcome to Loews Corporation's 2nd quarter earnings conference 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 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 filing with the SEC. During the call today, we might also discuss non GAAP financial measures.

Speaker 1

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 Tisch, our CEO. Jim, over to you.

Speaker 2

Thank you, Mary, and good morning. Lowe's had a strong quarter across the board with good performances from each of our consolidated subsidiaries. CNA led the pack with great results and Boardwalk continues to benefit from strong natural gas flows. Those hotels, while still recovering from the effects of the pandemic, has bounced back smartly, especially in the resort markets, And we're starting to see some pickup from group business as well. I'm going to focus my remarks today on CNA and Loews Hotels.

Speaker 2

As for CNA, the company continues to be a success story for Loews. CNA had net income And more importantly, record high core income for the quarter. The company's underlying combined ratio decreased by almost 2 points over the prior year's quarter, driven by improvement in the expense ratio. CNA's PMC business generated gross written premium growth of 8%, driven by new business growth of 10% and rate increases of 10% for the quarter. CNA had net investment income of $591,000,000 pretax compared to $534,000,000 in the prior year's quarter.

Speaker 2

Limited Partnerships had a great quarter And the fixed income portfolio continues to provide consistent earnings even with headwinds from the lower interest rate environment. In other words, CNA's results were truly strong. Rose Hotels also had a success story on its hands within the context of its comeback from the global pandemic that devastated the hospitality industry. It's no secret that our hotel company was the subsidiary most affected by COVID-nineteen. That being said, over the last few months, Loews Hotels has continued to see increased demand for leisure travel and is starting to see improving interest for group travel.

Speaker 2

For the Q2, total occupancy rates for owned and joint venture hotels We're almost 58% as opposed to about 35% during the Q1 of this year. While that is a big jump, obviously, we still have a ways to go before we hit pre pandemic occupancy rates. Our resort hotels continue to do considerably better than our properties in urban settings. All in all, the good news is that by the end of the second quarter, each and every one of our hotels was open for business, albeit while facing challenges filling roles at the property level. As the U.

Speaker 2

S. Economy And the hotel industry continue their recovery, we firmly believe that Loews Hotels will once again be a growth engine for Loews Corp. Our confidence in the hotel company is a reflection of our belief not only in its management, but also in its long term growth strategy. As a reminder, that growth strategy is built on 2 pillars. The first pillar is the core business of Loews Hotels, hotels with 300 plus keys that have ample meeting space.

Speaker 2

This first pillar takes advantage of Lowe's's well earned reputation for operating hotels that cater to groups. These properties are equally attractive to leisure customers and offer unique local experiences. The second pillar of Hotels' growth strategy is its concentration on developing and operating hotels associated with immersive destinations. Its partnership with Universal Orlando, which spans more than 2 decades, It's a great example of the strength of this pillar. As of the end of the second quarter, Loews Hotels had 9,000 rooms In 8 hotels on the Universal Orlando Resort Campus and all of the properties were open and performing well.

Speaker 2

Lowe's Hotels has concentrated on adding more immersive destinations where demand for hotel rooms is strong because of the presence of a built in demand generator such as an adjacent sports stadium or some other attraction. One such hotel that proved to be quite resilient during the pandemic is the Live by Lowe's in Arlington, Texas, which is located a stone's throw away from 2 professional sports stadiums as well as entertainment venues that draw customers throughout the year. Another significant differentiator for Loews Hotels is its ability to be both the owner and the operator of its properties. And when I say owner, I generally mean owner and development partner. It's great When we can participate in the design phase in order to build a hotel to our exacting standards.

Speaker 2

Industry Dynamics generally do not allow for companies in the hotel space to perform both the owner and the operator functions. And as a result, Loews Hotels is a leader within this niche of the market, playing to these strengths to serve Loews Hotels well, And we believe it will continue to do so. Currently, there is very little financing available for most hotel developers in the full service hotel space. As a result, being a well capitalized owner operator gives Loews Hotels a distinct advantage When competing for attractive development projects. As always, Loews Corporation invests alongside our subsidiaries When it's in the best interest of our shareholders and we certainly believe that our investment in Loews Hotels' growth strategy will create long term value.

Speaker 2

Finally, let me update you briefly on share repurchases. From April 1 through last Friday, we repurchased 6,500,000 shares of Loews common stock For just over $350,000,000 year to date, we've bought back 4.5% of our outstanding shares for $630,000,000 As I've often said, we believe that Lowe's 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.

Speaker 3

Thank you, Jim, and good morning, everyone. For the 2nd quarter, Lowe's reported net income of $754,000,000 or $2.86 per share compared to a net loss of $835,000,002.96 per share in last year's Q2. As Jim commented, our 2nd quarter operating results were excellent, driven by CNA and Boardwalk, both of which had stellar quarters. While Loews Hotels did post a loss, Its business has rebounded more strongly than expected, especially at its highly desirable resort properties. Our 2nd quarter results both this year and last year were impacted by unusual items.

Speaker 3

Absent these unusual items, which I will describe in a moment, our Q2 net income rebounded to $316,000,000 this year from $122,000,000 last year. This year's Q2 included a net investment gain of $555,000,000 before tax and $438,000,000 after tax on our sale of a 47% stake in Altium Packaging. The investment gain is essentially the sum of the realized gain on the shares sold and the unrealized appreciation on our retained 53% stake. Last year's Q2 included a net investment loss related to the bankruptcy and concurrent GAAP Deconsolidation of Diamond Offshore. This loss totaled $1,200,000,000 before tax and $957,000,000 after tax.

Speaker 3

Setting aside these two unusual items, 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 had its earnings call earlier this morning, and I would encourage you to review the transcript for more details on the quarter. In the meantime, let me highlight a few salient points. CNA contributed net income of $330,000,000 up from $135,000,000 in Q2 2020. The two main drivers of the year over year increase as well as higher net investment income.

Speaker 3

The combination of an 11% year over year increase in net earned premium And an almost 2 point improvement in the underlying combined ratio to 91.4 led to a 41% increase and CNA's underlying underwriting gain, which excludes catastrophe losses and prior year development. Catastrophe losses were modest in the quarter at $54,000,000 pretax in contrast to the elevated level of Catastrophe losses booked in Q2 2020. Last year's 2nd quarter catastrophe losses were $301,000,000 pretax and included reserves for COVID, civil unrest and weather related events. CNA's all in combined ratio, which includes catastrophe losses in prior year development, improved by over 15 points from 109.2 in Q2 2020 to 94 this year. The year over year increase in CNA's net investment income was driven mainly by higher returns on its portfolio of limited partnership investments.

Speaker 3

In contrast, net investment gains were lower in Q2 2021 than in the prior year quarter. A quick comment on CNA's 2nd quarter net written premium. While net earned premium across all property casualty segments rose 11%. CNA's net written premium declined 1% overall and 12% in commercial. The year over year decline in written premium was attributable to a quota share treaty CNA added to its property reinsurance program during the Q2.

Speaker 3

Because the treaty will cover property policies already in force as well as policies written during the treaty term, CNA recorded a one time written premium catch up that reduced the quarter's net written premium by 122,000,000 predominantly in the commercial segment. CNA ended the quarter with total assets of $66,000,000,000 Shareholders' equity of $12,700,000,000 and consolidated statutory surplus of approximately 10,900,000,000 Turning to Boardwalk. Boardwalk contributed net income of $47,000,000 up from $34,000,000 in Q2 2020. The main driver of the year over year increase was higher natural gas transportation revenue. Boardwalk's more than 5% increase in net operating revenue was driven by growth projects recently placed in service and by higher system utilization caused largely by deliveries to LNG Markets and Power Plants.

Speaker 3

Through 6 months, natural gas transportation throughput increased by 11% year over year. Turning to Loews Hotels. Loews Hotels contributed a net loss of 21,000,000 A dramatic improvement from the $72,000,000 net loss posted in Q2 2020. Adjusted EBITDA, which is defined in our earnings supplement and excludes non recurring items, rebounded from a $54,000,000 loss last year to a positive $26,000,000 in Q2 2021. The year over year improvement was driven by a dramatic revenue increase As most properties were open for the full quarter and all properties were operational by quarter end, business at Resort Properties benefited especially from increased leisure travel.

Speaker 3

Looking backwards, the Q2 of 2020 was exceedingly difficult for Loews Hotels As almost all its properties suspended operations for most of the quarter, GAAP net operating revenue plummeted 94 from the Q2 of 2019 and revenue at the company's JV properties, which is not included in GAAP net operating revenue, declined a similar percentage. For a good snapshot of Lowe's steady operational improvement, I would encourage you to review, I believe it's Page 11 of our quarterly earnings supplement, which shows the meaningful increases since Q2 last year in available rooms, occupancy and average daily rate. A quick comment regarding Diamond Offshore. We included Diamond Offshore as a reporting segment until its bankruptcy filing and deconsolidation in late April 2020. Our Q2 2020 results included a net operating loss of $24,000,000 attributable to Diamond.

Speaker 3

Turning to the corporate segment. Altium has been reported as part of the corporate segment since we acquired the company in 2017. Following our sale of a 47% stake, it remains in the corporate segment, but is now accounted for under the equity method. The corporate segment also includes the unusual items I mentioned earlier, namely a net investment gain this year related to our sale of a I would note that this year's 2nd quarter results also reflect a $15,000,000 pretax write off of our equity investment in Diamond upon its emergence from bankruptcy. The parent company's investment portfolio generated Pre tax net investment income of $24,000,000 as compared to $110,000,000 last year.

Speaker 3

Last year's results benefited from recovery of the equity markets in the 2nd quarter, a quarter in which the S and P 500 returned almost 21%. The parent company portfolio of cash and investments stood at $3,900,000,000 at quarter end with about 80% in cash and equivalents. As Jim mentioned, during the quarter, we repurchased 3,900,000 shares of our common stock for $219,000,000 and we received about $92,000,000 in dividends from CNA. In addition, we received about $410,000,000 in net proceeds from the Altium transaction during the Q2. After quarter end, we repurchased another 2,600,000 shares of our common stock for $140,000,000 As of last Friday, there were approximately 257,000,000 shares of Loews Common Stock Outstanding, down more than 8% from June 30, 2020.

Speaker 3

I will now hand the call back to Mary.

Speaker 1

Thank you, David. Moving on to the Q and A portion of the call. We have a number of questions from shareholders. Every quarter, we encourage shareholders to send us The first question is to Jim. Jim, can you give us Lowe's outlook for CNA.

Speaker 2

So CNA's outlook is extremely bright. Let's take a step back and let's look at the insurance industry as a whole first. While interest rates are low, The P and C industry continues to have disciplined capital management. Overall, P and C pricing continues to be healthy. CNA is attracting high quality new business and it's improving underwriting margins through focused risk selection and pricing.

Speaker 2

And let's not forget, CNA's management team is top notch and the company continues to attract high quality professionals. The company also has a fortress balance sheet even after paying almost $5,000,000,000 in dividends to its shareholders over the past 5 years. Additionally, CNA's long term care exposure continues to decrease with active is declining by about 1 third over the past 5 years. Given CNA's strong performance and future outlook, we believe the company is greatly undervalued. And speaking of undervalued, when buying Loews' shares, we are always cognizant of what we call The triple discount.

Speaker 2

Let me briefly explain what I mean. 1st, low shares trade below our view of their intrinsic value. Secondly, the P and C industry tends to be undervalued compared to the stock market. And 3rd, CNA trades at a discount to the P and C industry. Some growth companies trade at 15x revenue, some value companies trade at 12x to 15x EBITDA, That's EBITDA and not net income.

Speaker 2

The S and P 500 trades at 20 greater than 20 times earnings, But some P and C companies trade at a measly 11 to 12 times net income. Actual net income, which could be distributed directly to shareholders in the form of dividends. Based on this fact, the undervaluation of the P and C industry

Speaker 1

Okay. Thank you, Jim. Next question is over to David. Can you give us an update on Loews Hotels? How much cash will the company require from Loews Corp.

Speaker 1

In 2021?

Speaker 3

Thanks, Mary. During our Q1 earnings call, we stated that before considering proceeds from divestitures For expenditures on new development projects, we expect it to contribute less than $80,000,000 of cash to Loews Hotels in 2021. This revised estimate was materially lower than our earlier estimates Given the better than anticipated outlook for Loews Hotels operating cash flow at the end of the first quarter, At that time, we had contributed $32,000,000 to Loews Hotels year to date. We have made no further cash contributions since that time to Loews Hotels. Loews Hotels' outlook continued to improve during the Q2.

Speaker 3

We now anticipate that, again, before considering any proceeds from divestitures or expenditures on new development projects during the second half of the year, Loews Hotels would not require additional cash from the parent company in 2021. I would highlight, however, that if Loews Hotels does Close on 1 or more significant development opportunities in the back half of this year, we would likely be required

Speaker 1

Thank you, David. And a good segue into the next question, which is for Jim. Jim, how are you thinking about The hotel business going forward, is it time to start looking at potential acquisitions?

Speaker 2

So Lowe's Hotels has never stopped Looking for potential acquisitions, based on current market dynamics, however, acquiring a new hotel doesn't make economic sense, Many markets in the U. S. Have older full service hotels. By building a new hotel with modern spaces or significantly renovating In existing location, we immediately gained a competitive advantage by offering an attractive new product that appeals to both leisure guests and to meeting planners. Over the last 5 years, Loews Hotels has added valuable new properties to its portfolio by building to suit our own exacting standards as opposed to buying already developed hotels.

Speaker 2

By building to suit, we develop hotels that focus on 1 or both of our growth strategy pillars, The first pillar of Loews Hotels' growth strategy is its well earned reputation for excellence in the groups and meetings market, In locations attractive to groups as well as to leisure customers, guests are also attracted by the unique local experience these properties offer. The second pillar of growth is Loews Hotels' focus on immersive destinations such as Universal Studios, Orlando Campus, Well, Rose Hotels has 8 hotels with 9,000 rooms. Rose Hotels has Pursued additional immersive destinations where demand for hotel rooms is strong because of the presence of a built in demand generator such as an adjacent sports stadiums or other attractions. Live by Lowe's in Arlington, Texas is one such hotel that has Proving to be very resilient during the pandemic, the Arlington Hotel is located near numerous professional sports and entertainment venues. From 2015 to 2019, Loews Hotels grew adjusted EBITDA from just under $160,000,000 to almost $230,000,000 with healthy margins.

Speaker 2

2020 was clearly a very challenging year for our hotel subsidiary and for the industry. In 2021, Loews Hotels has certainly gained ground and while we continue to monitor the effects of the pandemic on the Hospitality Industry, we believe that over the long term, the hotel company will once again be a profitable growth engine for Loews Corp.

Speaker 1

Great. Thank you, Jim. Next question is for David. David, can you give us What the status is of the Boardwalk trial?

Speaker 3

Sure. Closing arguments took place On July 14, 2021, and the judge is now deliberating. We continue to believe that we have very strong legal and factual arguments and that the plaintiff's case is without merit. But as we all know, litigation is inherently unpredictable, and there's really nothing more we can report at this time.

Speaker 1

Okay. Thank you, David, for that update. Jim, the next question is for you. Can you give us your outlook for inflation and interest rates on inflation and interest rates?

Speaker 2

So the nice thing about getting questions before the earnings call is that I can prepare a thoughtful response rather than just wing it, Such is the case with the answer to your question, Mary, about interest rates and inflation. Let's start with inflation. On the last earnings call, I talked about cost push and demand pull inflation. And I said that we are seeing both Today, I want to speak about what used to be called the cycle of inflation. That was a common term in the 60s through the early 80s when inflation was much, much higher than it is today.

Speaker 2

As you can imagine, the cycle of inflation relates to a dynamic that takes hold in an economy. It relates to increasing prices and the expectation of ever increasing prices, making it such Employees demand higher wagers to maintain their purchasing power and their standard of living. Those higher wages then translate into higher costs for producers, which causes the producers to ask for higher prices for their products, thus reinforcing the demand for higher wages from labor. And so the cycle begins And feeds upon itself. I believe that this cycle of inflation is what we are beginning to experience today.

Speaker 2

Talent is scarce. Just look at the number of companies that can't find employees for their businesses, including Lowe's for its Hotel and Packaging Businesses. Certain goods are also scarce. Here are just a few whose prices have shot up a lot. Computer chips, coffee, polyethylene pellets, tin and aluminum, soybeans, Oil, natural gas and yes jet fuel, the CRB raw industrials index Is up by more than 50% from a year ago.

Speaker 2

Dishwashers, washing machine, dryers and refrigerators Are all on months long back orders. Housing prices are up approximately 25% in the past year. And of course, there's a shortage of labor in the labor market, a very, very serious shortage. An esteemed economist friend of mine said that this year is the 11th time that the core CPI has risen more than 3% in the 1st 6 months of the year. On 9 of those 10 previous occasions, core CPI inflation for the full year was at least 6%.

Speaker 2

So by that measure, we're on track for inflation of much more than 6% Because for the 1st 6 months of this year, inflation is already at 5.4%. And so it's an easy bet that inflation for all of 2021 will greatly surpass 6%. I believe that our current labor shortage is not a temporary phenomenon and it will only be resolved With significantly higher levels of compensation causing costs to increase leading to ever higher inflation. I believe that we are now in a cycle of inflation rather than a spurt within an otherwise benign inflationary period. This year, we are moving from an extended era of less than 2% inflation to a year of more than 6% or 7% inflation.

Speaker 2

And due to increased labor costs, my expectation for inflation in 2022 It's for significantly higher inflation than the 2% level we have seen in the recent past. This inflation problem won't go away by simply wishing it away, especially with the Fed's proverbial foot still on the gas pedal, which of course brings us to interest rates. The economist, Rudy Dornbusch famously said in the 60s That in economics, things take longer to happen than you think they will, and then they happen faster than you ever thought that they could. Such is the case, I believe, with interest rates in the United States. They're too damn low.

Speaker 2

And the reason that they're so low is because in the past year and a half, the Fed has purchased over $4,000,000,000,000 Of government securities, that's $4,000,000,000,000 of government securities that have been taken out of the market. Poof, they're gone. The Fed has created a squeeze of gargantuan proportions in these securities That has rippled through all the fixed income markets. The only people that own U. S.

Speaker 2

Fixed income securities are people who need to own them, like banks and insurance companies, just to name a few. Traders may dabble in government securities, Investors won't go near them because there isn't a bullish case to be made for investing in government securities. Today, the 10 year note yields less than 1.2%. If the rate on those notes goes up just 13 basis points, a little over a tenth of 1%, then the entire interest carry on the bond for the year Will disappear. That sounds like a miserable investment to me.

Speaker 2

Getting back to inflation, If the inflation rate this year is 6% and that's a low number I believe, Then the negative real return on a 10 year note will be minus 4.75%. That's minus 4.75%. Who would want to own a security that guarantees you'll lose almost 5% of your purchasing power in a single year. Most people have already decided to either hold cash or move out the risk curve Rather than lock in a real loss of such large proportions, the issuance of government securities will continue. For this year, the federal deficit is forecast to be $3,000,000,000,000 which means there is no end to the supply of government bonds that need to be issued to finance our government's activities.

Speaker 2

And with so much issuance of government securities on the way And with a strong economy and with inflation running so hot and with a negative real yield so unattractive, The Fed may have little choice but to take their foot off the proverbial gas pedal and take away the punch bowl, Finally allowing interest rates to rise. There's only so long that the Fed can delay the inevitable and to me And maybe to Rudy Doernbusch of blessed memory that time may soon be upon us.

Speaker 1

Thank you, Jim. Thank you for that perspective, and thank you, David. That concludes the Lowe's call for today. As always, We want to thank you for your continued interest. Please feel free to reach out to me with any additional questions at mscoffitislowes.com.

Speaker 1

A replay will be available on our website, loews.com, in approximately 2 hours. That concludes the Lowe's call for the day.

Operator

This does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.

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