Loews Q3 2022 Earnings Call Transcript

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October 31, 2022

Key Takeaways

  • Loews Hotels will have a leadership transition on January 1 with John Tisch becoming Executive Chairman and Alex Tisch assuming the roles of President & CEO, continuing its growth strategy.
  • In Q3, Loews Hotels delivered $77 million in adjusted EBITDA (up $18 million YoY) with occupancy rising to 84.7% and minimal impact from Hurricane Ian, while CNA reported core income of $213 million and an improved combined ratio of 91.1% with net written premiums up 8%.
  • Boardwalk Pipelines posted EBITDA of $192 million but remains subject to a pending Delaware Supreme Court litigation, with a decision anticipated by year-end.
  • Altium completed a $270 million acquisition of Plastic Industries, initially valued at roughly 9x EBITDA, and expects to realize operational synergies that will reduce this multiple.
  • Year-to-date, Loews repurchased 11.2 million shares for $652 million, but plans to moderate buybacks until the Boardwalk litigation is fully resolved.
AI Generated. May Contain Errors.
Earnings Conference Call
Loews Q3 2022
00:00 / 00:00

There are 4 speakers on the call.

Operator

Good day, everyone, and welcome to today's Loews Corporation Q3 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. Please note this call is recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr.

Operator

Chris Nugent.

Speaker 1

Thank you, Shelby. Good morning, everyone, and welcome to Loews Corporation's 3rd quarter earnings conference call. A copy of our earnings release and investor presentation may be found on our website, loews.com. On the call this morning, we will have our Chief Executive Officer, Jim Tisch and Chief Financial Officer, Jane Wong. Following our prepared remarks this morning, we will have a question and answer session with questions from our shareholders.

Speaker 1

Before we begin, however, I will remind you that this conference call may 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 may also discuss non GAAP financial measures. Please refer to our security filings and investor presentation for a reconciliation to the most comparable GAAP measures. With that, I'd like to turn the call over to Jim. Jim, over to you.

Speaker 2

Thank you, Chris, and good morning. Before I discuss our financial results, I'd like to tell you about some executive changes that are taking place at Loews Hotels. On January 1 next year, John Tisch will become the Executive Chairman of Loews Hotels and Alex Tisch will assume the role of President and CEO. John will also continue to be a member of the Office of the President of Loews Corp. And the Co Chairman of the Loews Corporation Board of Directors along with Andrew Tisch.

Speaker 2

In his 43 years at Loews Hotels, John has engineered the company's expansion and emergence As a leading hotel business, in particular, John was instrumental in building Loews Hotels' long standing partnership in Orlando with Universal Studios, while also having the foresight to develop the iconic Loews Miami Beach Hotel. As a result, Loews Hotels now has nearly 10,000 rooms in the sought after Florida market. Additionally, John created a corporate culture that places a high value on empowering team members, satisfying customers and Contributing to Communities. John has successfully guided the company through several of the most turbulent periods in the hospitality industry, most recently the COVID pandemic. Loews Hotels is now stronger than it has ever been As evidenced by the company's outstanding financial results, we are deeply grateful for John's contributions to the company and his continued presence will be of tremendous value to Loews Hotels.

Speaker 2

Alex Tisch joined Loews Hotels in June of 2017 after working at Lowe's Corp. Since 2008. Over the last 5 years, Alex has been instrumental in the creation and execution of the company's highly effective growth strategy and has proven himself to be a dynamic leader and a talented hotel executive. Alex oversaw the development of Loews Hotels' 800 Room property in Kansas City and was integral in developing key partnerships such as the company's partnership with the city of Arlington, Texas. I'm confident that Alex will continue to chart A course for sustained growth at Loews Hotels and we are excited to welcome him into this new leadership role.

Speaker 2

Moving on to our Q3 financial results, our subsidiaries performed very well this quarter, which led to good consolidated results for the company. Before we discuss the financials, I'd like to acknowledge our employees who were impacted by Hurricane Ian and thank them for their strength and dedication during these trying times. In particular, I want to give a big shout out to the almost 2,000 employees who moved into our properties in Orlando in order to help our approximately 20,000 guests And displaced residents on the Universal Campus who were fleeing the storm. Thank you very much, guys. I'm happy to report that Loews Hotels experienced minimum financial impact from Hurricane Ian.

Speaker 2

Both leisure and group travel have bounced dramatically from the pandemic levels and the company continues to benefit from its 5 resort and convention properties that opened during the past few years. Very soon, we'll be able to add the Loews Coral Gables Hotel to that list. The new property will formally open in November, adding to Loews Hotels' presence in South Florida. With the addition of Carl Gables, the company will have approximately 16,500 guestrooms. Loews Hotels' adjusted EBITDA for the Q3 was $77,000,000 up $18,000,000 compared to the Q3 of 2021.

Speaker 2

And for the 9 months ending September 30, Loews Hotels reported $261,000,000 of adjusted EBITDA, which is higher than the company's pre COVID full year 2019 adjusted EBITDA of $227,000,000 In Texas, construction continues on schedule and on budget for the nearly 900 Room Loews Arlington Hotel. With high quality meeting and event space that also have built in demand generators. The Loews Arlington will be within walking 3 professional sports and performance venues as well as the National Medal of Armor Museum among other attractions. We remain committed to growth in this area of the hotel and hospitality industry. Moving on to CNA.

Speaker 2

CNA's core income of $213,000,000 during the Q3 includes $87,000,000 combined ratio of 91.1 during the Q3. CNA's all in combined ratio, including catastrophe losses, was 95.8, an improvement of 4.2 points over the prior year. Net written premiums grew by 8% due to improved retention and new business. Despite CNA's stellar performance over the past several years, We believe the company still trades at a substantial discount to its peers. Furthermore, I believe the property and casualty insurance industry itself is undervalued by the market.

Speaker 2

While the S and P 500 trades at around 17 times 2022 earnings, The commercial P and C Insurance industry trades in the low double digits. In a show of support for CNA, its strategy and its management team, in the Q3, Loews bought about 670,000 shares of CNA common stock for approximately $26,000,000 As for Boardwalk Pipelines, the company continues to perform well and grow revenue. We look forward to the resolution of our litigation whose appeal is currently pending in the Delaware Supreme Court. That case was heard on September 14. We continue to have every hope that this case will be resolved positively by the end of this year.

Speaker 2

If you'd like to know more about our thoughts on the Boardwalk litigation, I refer you to my remarks from the Q1 earnings call of this year. Our plastic packaging company, Altium, completed the $270,000,000 Acquisition of Plastic Industries in the 2nd quarter, which was funded with $150,000,000 of equity, including $79,000,000 from Lowe's and $120,000,000 of debt. Plastic Industries is a blow molding packaging Manufacturer that was headquartered in Nashua, New Hampshire. Altium purchased the company for approximately 9 times EBITDA and we anticipate That multiple will be several turns lower after operational synergies are realized. Concerning share repurchases from July 29, the last day we reported share repurchases until today, We have repurchased approximately 3,500,000 shares of Loews common stock for $193,000,000 Year to date, we've bought back 4.5 percent of our outstanding shares for $652,000,000 Since we believe that Lowe's trades at a significant discount to our view of its intrinsic value, we are very enthusiastic about purchasing our shares at these levels.

Speaker 2

However, with the Boardwalk litigation pending, we believe it's prudent to moderate our share repurchase activity until the case is fully resolved. Finally, we understand that most of you are reading a transcript of this call as opposed to the live broadcast. For this reason, we are considering simply posting a transcript and discontinuing the call in the future. We welcome your feedback on this option. Thank you and stay tuned for more details.

Speaker 2

And now I'd like to hand the call over to our CFO, Jane

Speaker 3

Wong? Thank you, Jim, and good morning, everyone. For the Q3 of 2022, Loews reported net income of $130,000,000 or $0.54 per share compared to the net income of $220,000,000 or $0.85 per share in last year's Q3. This year over year decrease was driven mainly by CNA's lower net investment income and higher investment losses. While Hurricane Ian impacted CNA and Hotels, both companies posted another quarter of strong profitable growth.

Speaker 3

Boardwalk continued its consistent robust performance and the Lowe's parent company navigated through volatile equity capital markets. Book value per share declined from $71.84 at year end 2021 to $58.14 at the end of the 3rd quarter due to the effect of higher interest rates lowering the market value of CNA's fixed income investments. Excluding accumulated other comprehensive income where this unrealized loss sits. Book value per share actually increased from $71.09 at year end to $74.11 on September 30. This increase was driven by our current year's earnings and accretive share repurchases.

Speaker 3

Turning to our largest subsidiary. CNA contributed net income of $115,000,000 to Loews this quarter compared to $229,000,000 last year. The year over year decline primarily reflects a $68,000,000 decrease in net investment income attributable to Loews, driven by lower net investment income from LPs and common stocks, partially offset by higher earnings from the fixed income portfolio. During the Q3, LPs and common stocks together returned negative 2.1% versus the S and P 500, which had a negative 4.9% return. In comparison in last year's Q3, LPs and common stocks returned a positive 3.8%.

Speaker 3

In addition, investment gains and losses declined, driven in part by realized losses from the sale of short dated bonds, Strategically by longer dated bonds at higher rates. On the underwriting side, CNA again posted another quarter of strong profitable growth, contributing $61,000,000 of incremental underwriting income to Loews. Net written premiums grew 8% driven by several factors. 1st, new business grew by 12% 2nd, retention increased 4 points to 85% and third, While net written rate increases decelerated to 5%, exposure growth has increased to 3.3%. The all in combined ratio of 95.8 percent was 4.2 points better than the Q3 of 2021.

Speaker 3

This included 5.5 points of catastrophe and 0.8 points of favorable development. So the underlying combined Was 91.1 percent flat to last year's Q3. Underwriting actions and incremental reinsurance have served CNA well. Even with the $87,000,000 impact from Hurricane Ian, catastrophe losses were lower year over year as last year's quarter was impacted by Hurricane Ida and incremental losses from Winter Storm Yuri. The expense ratio was steady at 30.8%.

Speaker 3

In the Life and Group segment, CNA continues to proactively manage its runoff long term care business. The annual gross premium reserve valuation performed in the 3rd quarter resulted in an increase in the active life reserve margin from $72,000,000 last year to $125,000,000 this year. The long term care claim reserve review also result In a pre tax net reserve release of $25,000,000 We are highly confident in CNA's prudent reserving philosophy in active management to further reduce the risk profile of this block. D and A's unrealized loss position has increased to $4,100,000,000 from $1,800,000,000 last quarter as higher interest rates and wider spreads continue to lower the market value of CNA's fixed income investments. As we discussed last quarter, this decline does not imply any deterioration in the credit quality of the portfolio.

Speaker 3

In fact, the rate the increase in rates is favorable as CNA is able to continue reinvesting at higher rates while also extending the duration of the Life and Group portfolio. These are the highlights of CNA's performance this quarter. Please refer to CNA's Investor Relations website for more details on their quarter. Moving to our Natural Gas Pipeline business. Boardwalk contributed EBITDA of $192,000,000 this quarter compared to $184,000,000 last year.

Speaker 3

Revenue increased due to recently completed growth projects, higher recontracting rates and higher utilization of its pipeline and storage assets. That revenue growth has been largely offset by higher costs from maintenance projects due to revised pipeline safety requirements. The decrease in net income from $38,000,000 in last year's Q3 to $34,000,000 this quarter was driven by higher depreciation from recently completed projects and a $5,000,000 impairment due to the retirement of an old asset. Turning to Loews Hotels. Despite facing Hurricane Ian at the end of September, the company had another strong quarter, growing adjusted EBITDA from $59,000,000 in last year's Q3 to $77,000,000 in this year's Q3.

Speaker 3

As a reminder, adjusted EBITDA is reconciled in our investor presentation posted to the website. The company contributed $25,000,000 of net income to Lowe's this quarter versus $13,000,000 in the Q3 of last year, driven by continued strong performance across the board due to robust leisure demand, a significant pickup in group travel and the return of business travel. Occupancy has increased from 71.5% in last year's Q3 to 84.7% this quarter. The financial impact from Hurricane Ian was very minimal. Wrapping up with the corporate segment.

Speaker 3

Lowe's recorded an after tax impairment loss of portfolio. The corporate segment also includes our proportionate share of Altium's earnings, which is accounted for under the equity method. Our share of Altium's income improved this quarter driven by a favorable lag in passing through lower resin prices versus last year's quarter, where increasing resin prices resulted in an unfavorable resin lag. Pricing initiatives helped to offset inflationary From a cash flow perspective, we received $97,000,000 in dividends from C and A this quarter and $778,000,000 year to date consisting of 3 regular quarterly dividends of $0.40 per share and a special dividend of $2 per share. Since June 30, we have repurchased an incremental 4,800,000 shares of Loews at a cost of $268,000,000 That brings our total year to date share repurchases through last Friday to 11,200,000 shares at a total cost of $652,000,000 As Jim mentioned, we also purchased 670,000 shares for a total of $26,000,000 Lowe's ended the quarter with $3,200,000,000 in cash and short term investments.

Speaker 3

The majority of these funds are held in treasury bills and less than 20% are held in equities and limited partnerships. I will now hand the call back to Chris.

Speaker 1

Thank you, Jane. Moving on to the Q and A portion of the call. We have a number of questions from our shareholders. Every quarter, we encourage shareholders to send us questions in advance that they would like us to answer on our earnings call. Our first question is for Jane.

Speaker 1

Jane, Jim provided an update on the Boardwalk litigation and referred us to his prior comments earlier in the year. Are you able to give us any further updates on this litigation?

Speaker 3

Well, as Jim mentioned, we argued our case before the Delaware Supreme Court on September We really appreciate the support of our legal team of advisers and along with them we're hopeful that a decision will be released by the end of the year.

Speaker 1

Thanks, Jane. Our next question is for Jim. Jim, does Alex's promotion to President and CEO of Loews Hotels

Speaker 2

No, there is no change in the Loews Hotel strategy. The leadership change is seamless and will support the hotel company's current growth strategy. Let me repeat, That strategy is based on 2 core pillars: 1st, catering to group travel at high quality destinations and second, developing and operating hotels in immersive destinations. The first pillar focuses on hotels with 300 plus keys and ample meeting space that also offer a unique experience to attract group and transient customers alike. We are very encouraged by the recent pickup in group travel at these locations and all our locations with significant meeting space.

Speaker 2

The properties that Loews Hotels owns in partnership with Universal Orlando are a great example of the second pillar of the Loews Hotel Strategy, immersive destinations with built in demand generators. The Universal Orlando partnership has been highly successful spending more than 2 decades and currently including 8 hotels with 9,000 rooms. Regarding Alex, He assumed the position of President in September of 2020 and has been instrumental in executing the strategy that I just laid out and he is driving our strong results for Loews Hotels. Under his leadership, Loews Hotels strengthened the partnership with Universal and made advances in leveraging data analytics to drive growth. This promotion recognizes the many contributions He's made over the last several years and reflects our confidence in his ability to lead Lowe's Hotels' future growth.

Speaker 1

Thank you, Jim. Our final question is also for you. Would you like to update us on your thoughts about interest rates, inflation and the economy as we head into the final quarter of 2022.

Speaker 2

Sure. When I started sharing my observations about Inflation and the economy in the Q1 of 2021, it was very obvious, at least to me, that the Fed should be tightening monetary policy. At that time, the economy was running very hot and interest rates were ridiculously low. 12 months ago, Year over year CPI was running at over 5%. And so far this year, it's running at over 8%.

Speaker 2

At the end of the Q1 of this year, the Fed abandoned the word transitory and finally kicked into gear. The Fed started to steadily increase the Fed funds rate and more recently to shrink its balance sheet. In the past 7 months, Fed funds have moved from almost 0 to more than 3% with expectations of another 125 basis point increase in the next 2 months. And the bond market, as exemplified by the 10 year note, has moved smartly higher from 1.5% at the beginning of this year to around 4% now. There's no doubt in my mind that the rate increases we have seen in the past year will translate into a slower economy and likewise A reduction in the inflation rate.

Speaker 2

Home mortgage rates have moved up from 3% at the beginning of the year to over 7% now. This increase in mortgage rates means that the monthly cost of buying a new home has more than doubled in the past 10 months. As a result of the increase in the cost of homeownership, we will begin to see a significant reduction in home prices And the fall in the number of housing starts will continue to accelerate, all leading to a weakening GDP. Likewise, other sectors of the economy will react negatively to higher interest rates as well. So far, We haven't seen that reduction in inflation, but as you know, inflation tends to respond to increases in interest rates with a lag.

Speaker 2

And my guess is that the end of that lag is almost upon us. So I would expect to see weaker GDP numbers in the coming quarters along with the slowing of inflation as measured by the CPI. In the meantime, a number of commodity prices are declining as a result tightening by the Fed. Copper prices are down 25%, lumber prices are down almost 60% from their highs in March, And oil prices are almost 30% from their peak in June. In my mind, The easy part of the Fed's tightening process will be complete by the end of the year.

Speaker 2

At that point, the Fed funds rate will be over 4% and the Fed will have clawed back some of their inflation fighting credibility. The big question for everyone is whether the increases in short rates In 2022, we'll be enough to quell inflation or whether the Fed will feel it has to continue to raise short rates in 2023. I'm not alone in my opinion that the Fed should pause at the beginning of 2023 and see how effective their tightening has been. They will still be in quantitative tightening mode, which means they will be selling term government securities at a rate of more than $1,000,000,000,000 a year. And as I said before, the lags in Fed policy are unknown even to the wisest Economists, additionally, over tightening by the Fed can cause a financial calamity that makes a recession much worse.

Speaker 2

So it would not be unreasonable for the Fed to say after their December FOMC meeting that they will be pausing rate hikes for 3 months to assess the effects of their 400 basis point increase in short rates. They can warn that if Does not begin to come down in that period tightening will continue. But I expect we will see a slowing of economic indicators and a reduction in the rate of increase in prices. In terms of my fearless forecast, as I said previously, I foresee what I call a full employment recession whereby economic growth will be negative for a few quarters, but unemployment will remain below 5%. This can happen because labor will be earning less than the rate of inflation, so that workers collectively will have less real income, which will be the cause of the recession.

Speaker 2

I don't think the recession will be cataclysmic Like in 'eight and 'nine, while government spending has been enormous in the past 2 years, we don't have the private sector excesses that can cause a deep and extended recession. I know I've changed my view of the Fed in the past year and a half, But that's because 8 months ago, the Fed finally became serious about fighting inflation, and they are now on the path to a slowing economy and reduced inflation. As I said, I feel a pause in tightening short term rates at the beginning of 2023 is warranted And hopefully, the Fed won't be badgered into excessive tightening, which could have serious negative ramifications for the economy. If they were to follow my advice, the Fed should make clear that it is pausing the move to higher short rates in order to evaluate the economy for a few months before possibly resuming tightening if necessary. So that's the way I see things as of now.

Speaker 1

Thank you, Jim. We have no further questions, so that concludes our call for today. As always, we appreciate your continued interest. Please feel free to reach out to me with any questions. My e mail is cnugentlowes.com.

Speaker 1

A replay of this call will be available on our website,

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