Loews Corporation (NYSE:L) Q1 2021 Earnings Conference Call May 3, 2021 10:00 AM ET

Company Participants

Mary Skafidas - IR
Jim Tisch - CEO
David Edelson - CFO

Conference Call Participants

Operator

Good day, and thank you for standing by. Welcome to the Loews' Corporation First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be a question and answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to Mary Skafidas Vice President of Investor Relations and Corporate Communications for Loews.

Mary Skafidas

Thank you, Laurie, and good morning, everyone. Welcome to Loews Corporation's first 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.

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.

During the call today, we might also discuss non-GAAP financial measures. 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. Jim, over to you.

Jim Tisch

Thank you, Mary, and good morning. What a difference a year makes? 12 months ago, we were all facing tremendous uncertainty about the future. A year later, while the personal, social and economic effects of COVID-19 are still impacting each of us individually and collectively, the outlook at Loews has significantly improved. Each of our subsidiaries has been affected differently by the pandemic, but across the board, their responses have been extraordinary, and each business has found its footing in 2021.

First, let's look at our largest subsidiary CNA. The company's operational strength and resilience is evident, not only in its underlying combined ratio and rate increases, but also in its ability to respond nimbly to ongoing challenges. In the first quarter, CNA did experience higher than usual cat losses from what I call the Texas freeze off, but its basic business continued to perform well. CNA's underlying combined ratio of 91.9 improved nearly 2 points over the prior year quarter of 93.7, with a 1.6 percentage point improvement in the expense ratio. Rate continues to be strong with an 11% increase in the quarter.

CNA's investment portfolio ended the quarter with $4.3 billion in unrealized gains, down from a high of $5.7 billion last quarter, primarily due to higher interest rates. Over the long term, higher interest rates will be beneficial to CNA, allowing it to invest its cash flow at higher rates than today.

Boardwalk Pipelines has substantial operations in Texas, but the February storm had little financial impact on the company. Boardwalk's revenues slightly increased due to higher system utilization during the freeze off, as was the case with other companies in the natural gas transportation industry. The company's solid performance during this crisis was not a lucky accident, rather, it was a result of significant preparation, planning and hard work by the Boardwalk team. The company's considerable efforts paid off and Boardwalk was able to deliver gas to its customer with minimal disruption. Boardwalk’s revenue increase to $370 million in the first quarter of 2021 was due to growth projects that have been placed into service and the colder winter weather.

Of all our subsidiaries, Loews Hotels has been hit the hardest by the pandemic. However, as travel picks up across the country, we are seeing gradual progress at Loews Hotels, especially at the company's resort destinations. By the end of the first quarter of '21, 23 of the company's 27 hotels were open. And further good news, the company expects to have hotels open in all its markets by the end of the second quarter. Comparing the first quarter of 2021 to the final quarter of 2020, we saw continued improvement in trends. The average daily room rate of our owned and JV hotels that are open increased by 25% to $234.

Leisure travel continues to improve at a faster pace than business travel, and while we expect that circumstances will vary by hotel property, occupancy at hotels should increase gradually as the economy recovers from the pandemic. Loews Hotels has an ownership interest in nearly 15,000 rooms, approximately 11,000 of which are located in resort destinations. So we think that Loews Hotels is well positioned to benefit from this leisure led recovery.

When acquiring a subsidiary, our long-term goal is to have that subsidiary return capital to Loews when the time is appropriate. Loews acquired Altium in 2017 for $1.2 billion that was $600 million in equity and $600 million in debt at the Altium level. In February of 2021, Altium refinanced its term loans and replaced its roughly $850 million of debt with a new $1050 million, 7-year term loan, allowing the company to pay $200 million dividend to Loews. And a month later, on April 1, Loews sold a 47% stake in Altium to GIC, a Singapore Wealth Fund, for gross cash proceeds of $422 million. With these two transactions, Loews has recouped its entire initial investment in Altium, while still retaining a 53% ownership interest in the company. From a portfolio optimization standpoint, we felt the time was right for us to monetize a portion of Loews' ownership stake in Altium. We believe strongly in the long-term prospects of Altium's business, and it's our opinion that the Altium management team is second to none in the industry.

By retaining a majority ownership position, Loews will be able to capitalize on the future growth trajectory of the company. Additionally, we have gained a strong and like-minded partner in GIC. Under the new ownership structure, Altium has increased its financial flexibility when it comes to larger acquisitions.

Finally, so far in 2021, Loews has purchased more than 6,150,000 shares of our common stock at an average price of $49.58 per share, for a total of $305 million, representing 2.3% of our outstanding shares. Many a time, you've heard me bemoan the discount at which Loews trades. So I'll spare you the rant this time and just let our repurchase activity speak for itself.

David, over to you.

David Edelson

Thank you, Jim, and good morning, everyone. For the first quarter, Loews reported net income of $261 million or $0.97 per share, a sharp rebound from last year's first quarter net loss of $632 million or $2.20 per share. As a reminder, last year's net loss had two main drivers. One, investment results at CNA and the Loews parent company, stemming from financial market disruptions as the pandemic spread; and second, rig impairments at our former consolidated subsidiary, Diamond Offshore.

This year's first quarter benefited from dramatically improved investment results at CNA and the parent company, strong P&C underwriting income at CNA, before catastrophe losses and favorable results posted by Boardwalk Pipelines. Also, the year-over-year comparison benefited from the absence of losses from Diamond Offshore.

Conversely, losses at Loews Hotels reduced quarterly results, as the pandemic continued to mute travel and thus, hotel demand. Additionally, earnings in the corporate segment were reduced by some items related to Altium, our packaging subsidiary.

Let me get into more detail about the quarter. CNA contributed net income of $279 million, up dramatically from a $55 million net loss in Q1 2020. The year-over-year turnaround was driven primarily by investment results, both net investment income and net investment gains. But before I discuss investment results, I wanted to highlight CNA's continued solid property casualty underwriting performance.

CNA's core property casualty business posted terrific underwriting results before catastrophe losses. Net earned premium was up almost 6% year-over-year and the combined ratio, excluding CAT losses, was 91.3%, 1.7 points better than last year's first quarter and 1.1 points better than full year 2020. The loss ratio, excluding CATs, was 59.5%, an excellent result that was in line with last year's first quarter and with full year 2020.

I would note that prior development was comparable this year and last, with less than 1 point of favorable development in both periods. CNA's expense ratio, which, together with the loss ratio makes up the combined ratio, declined to 31.5%, which was 1.6 points better than in Q1, 2020. The company's expense ratio improvement is notable and results from both expense management and premium growth. As a historical footnote, the company's expense ratio in, say, 2017 was over 34%. So you can see how far CNA has come in a few short years.

Catastrophe losses, however, were elevated during this year's first quarter thanks largely to winter storms Uri and Viola in Texas. CNA booked 6.8 points of CAT losses in Q1, up from 4.3 points in last year's first quarter. As a result, the company's overall combined ratio was up slightly to 98.1 from 97.3 last year. I would highlight that CNA's Q1 CAT losses were essentially in line with its market share in the affected areas.

CNA's after-tax net investment income increased $133 million or 48% from last year, with common stocks and limited partnership investments accounting for the entire improvement. The S&P 500 returned 6.2% in this year's first quarter as compared to a negative 19.6% total return in Q1 of last year.

The turnaround in CNA's net investment gains was substantial, swinging from net pretax investment losses of $216 million in Q1 '20 to investment gains of $57 million in Q1 '21. Last year's large losses were mainly attributable to market value declines of nonredeemable preferred stock as well as impairment losses on corporate bonds.

Taken together, the uplift in CNA's net investment income and the turnaround in its net investment gains benefited Loews' year-over-year net income by $306 million. In summary, CNA's investment and non-CAT underwriting results were strong during the quarter with CNA and its peers, impacted by an unusually high level of natural catastrophes.

Boardwalk posted an over 8% increase in net revenue and a net income contribution of $85 million, up from $65 million in last year's first quarter.

Turning to Loews Hotels. While the company continues to suffer from the COVID-induced downturn in travel, business is gradually improving, as Jim described. The company posted a net loss of $43 million in the quarter versus a net loss of $25 million in Q1 '20. GAAP operating revenue was $39 million, down from $109 million last year, and the pretax equity loss from joint venture properties was $12 million as opposed to a $4 million loss last year.

In last year's first quarter, business was quite strong during January and February and into the first week of March, only to decline precipitously thereafter. So precipitously, in fact, that most properties suspended operations between March 19 and the end of the quarter. To provide a comparative sense of the hotel company's results, let's look at adjusted EBITDA, which is defined and reconciled in our earnings supplement. It includes all properties and excludes nonrecurring items.

Adjusted EBITDA was $61 million in Q1 of 2019, declined to $17 million in Q1 of 2020, and was a loss of $13 million in this year's first quarter. The low point for profitability was last year's second quarter when Loews Hotels posted an adjusted EBITDA loss of $54 million. Adjusted EBITDA has improved steadily since that low point as business has steadily come back.

For a good snapshot of this operational improvement, I would encourage you to review Page 11 of our quarterly earnings supplement, which shows the increase in available rooms occupancy and average daily rate since Q2 last year. We currently expect absent any divestitures or development projects to make a net cash contribution to Loews Hotels of less than $80 million in 2021, down materially from our earlier estimates given better-than-anticipated cash flow. During the first quarter, we invested $32 million in Loews Hotels.

Turning to the corporate segment. The parent company's investment portfolio generated net pretax income of $46 million as compared to a loss of $166 million last year. Like at CNA, equities and alternatives led the decline last year and the rebound this year. The remainder of the corporate sector generated a $75 million pretax and $106 million after-tax loss in the quarter. Two main factors, both connected to Altium, drove this larger-than-normal loss.

One, Altium undertook a recapitalization during the quarter, refinancing its existing term loans with a single $1.05 billion term loan. The company booked a $14 million pretax debt extinguishment charge in connection with the recap. And second, the sale of a 47% stake in Altium to GIC, which was pending at quarter end, required Loews to book a $35 million deferred tax liability, which impacted net income, but not pretax income.

Diamond Offshore materially affected our year-over-year earnings comparison, given Diamond's $452 million net loss in last year's first quarter, driven largely by rig impairments. Diamond was consolidated effective April 26, 2020, and had no impact on our results this past quarter.

A few words about the parent company. As always, we remain determined to maintain a strong and liquid balance sheet. During the quarter, we repurchased 5.6 million shares of our common stock for $274 million, and we received about $274 million in dividends from CNA in the quarter, including the $0.38 regular quarterly dividend and the $0.75 special dividend. We also received, as Jim mentioned, a $199 million dividend from Altium, pursuant to its recapitalization. The parent company portfolio of cash and investments stood at $3.6 billion at quarter end, with about 80% in cash and equivalents. After quarter end, we received about $410 million in net proceeds from the sale of 47% of Altium, and have repurchased another 599,000 shares of common stock for about $32 million.

Finally, let me clarify some details relating to the sale of a stake in Altium to GIC. The transaction price implied a total enterprise value of $2 billion for the company and a total equity value of about $900 million. As a reminder, we purchased the company for a total enterprise value of $1.2 billion in 2017 and have not invested any additional capital in Altium since the acquisition.

In the second quarter, upon deconsolidation, we will book a net pretax gain of approximately $560 million, which reflects both the net realized gain on the stake sold to GIC and the unrealized gain on our retained 53% stake. The 53% stake will be held as an equity investment in a nonconsolidated subsidiary at approximately $475 million, reflecting the valuation implied by the price paid by GIC for its 47% stake.

I will now hand the call back to Mary.

Question-and-Answer Session

A - Mary Skafidas

Thank you, David. Moving on to the Q&A portion of the call. We have a number of questions from shareholders. Every quarter, we encourage shareholders to send us questions in advance, they would like us to address in our earnings call.

The first question goes to Jim. Jim, would you please comment on CNA's recent cyber attack?

Jim Tisch

Sure, Mary. On CNA's earnings call earlier today, Dino Robusto, the CEO of CNA, mentioned that in March of 2021 that CNA had sustained, what he called, a sophisticated cybersecurity attack. The attack caused a network disruption and impacted some of CNA's systems. As soon as they detected the attack, CNA took steps to address the incident including, among other things, engaging a team of third-party forensic experts and notifying law enforcement and also key regulators. CNA has restored the network systems and resumed full normal operations. The company is continuing to assess the full extent of the impact from the incident, as well as determining any additional actions that it might take in order to improve its existing systems.

Based on what CNA knows now, it does not appear, it's important, it does not appear that the cyberattack will have a material impact on CNA's business, either financially or operationally.

Mary Skafidas

Great. Thank you, Jim. The next question is also for you. Can you tell us why Loews decided to sell a piece of Altium?

Jim Tisch

Sure. That's a reasonable question. There were a number of reasons, especially from a portfolio optimization standpoint, that we felt that the time was right for us to monetize a portion of our ownership in Altium. As I said in my remarks, our goal when acquiring a new subsidiary is to have it return capital to Loews when the time is right, and we thought the time was right now. Through Altium's dividend recap in February of this year, and then with the sale of a 47% stake of the company to GIC, the Singapore Wealth Fund, we have recouped our entire initial equity investment in Altium. And we still own 53% of the company, which allows us to be able to participate in the company's future growth.

So we fully believe in Altium's long-term prospects. And I think the management team at Altium is truly top-notch. And we've also added a strong partner in GIC and the new ownership structure provides financial flexibility for Altium, especially if they pursue larger acquisitions.

Mary Skafidas

Okay. Great. Thank you. The next question is for David. David, can you please give us an update on the Boardwalk trial?

David Edelson

Sure, Mary. Not much to say here. The Boardwalk trial was held the week of February 22. Post-trial oral arguments are scheduled for July 14 this year, after which the judge will deliberate. And there's really nothing more to report at this time.

Mary Skafidas

Okay. Thanks for the update. Next question is for Jim, also Boardwalk related. Jim, can you talk to us about Boardwalk's performance during the Texas storms?

Jim Tisch

Or as I call it, the Texas freeze off. So the impact of February winter storm in Texas was devastating for the people of Texas, leaving many people without power or heat for the duration of the storm. The Boardwalk team did an incredible job, though, due in large part to many planning hours that were dedicated to the preparation for such an event. And as a result, the company was ready to deliver gas to customers on time during and after the storm. Through careful operational management and increased staffing in a number of key areas, Boardwalk was able to successfully meet their customers' need for gas despite low inflows into the Boardwalk Pipelines system. As was with the rest of the area, the Boardwalk system faced historically low temperatures and widespread power outages, but was able to continue operating on backup power when necessary. So they really performed admirably during that event.

Mary Skafidas

Great. The next question is for David, and this question has become almost standard since the beginning of the pandemic. David, can you please give us an update on Loews Hotels on its business as well as cash required from the parent company?

David Edelson

Sure, Mary. I'll be a bit redundant with some of my prepared remarks. Loews Hotels cash flow has improved materially since the onset of the pandemic. Properties have resumed operations, management company and property level expenses have been managed aggressively and capital spending has been rightsized for the current environment.

The low point in Loews Hotels results was last year's second quarter, when GAAP revenue was just $9 million and adjusted EBITDA was a loss of $54 million. During this year's first quarter, GAAP revenue was $39 million, and the adjusted EBITDA loss had been shrunk to just $13 million.

And as I noted in my remarks, the table on Page 11 of our earnings supplement does show how available rooms occupancy and average daily rate have all increased quite markedly from last year's second quarter.

Now as a reminder, in terms of cash, during all of last year, the Loews parent company contributed net cash of just over $150 million to Loews Hotels. For 2021, the year we're currently in, we currently expect, absent any divestitures or development projects, to make a net cash contribution to Loews Hotels of less than $80 million. This is down materially, of course, from our earlier estimates given better-than-anticipated cash flow at Loews Hotels. And we've contributed in the first quarter, $32 million to the company.

Overall, travel is picking up. Confidence is growing as vaccination rates increase both domestically and internationally. While business travel and group meetings have yet to gain real momentum, leisure travel to resort destinations, in particular, has picked up and is driving Loews Hotels' evolving rebound. And as Jim mentioned, with so many of its rooms located in resort destinations, such as Orlando and Miami Beach, Loews Hotels is well positioned to continue benefiting as we move through the spring into the summer. Thanks, Mary.

Mary Skafidas

Thank you, David. Our last question is for Jim. Jim, and this is kind of a broader question, not Lowes related necessarily, but can you give us an update on how you think the economy is doing? You don't like to look into your crystal ball, typically, but if we persuade you to what would it show you?

Jim Tisch

It reminds me of the old saying, he who lives by the crystal ball and must learn to eat ground glass, but I will persevere nonetheless. So in my opinion, the economy is doing very well, thank you. There's enormous pent-up consumer demand and with the combination of government stimulus and vaccines, that will add yet more fuel to this fire in the economy, this growth in the economy. For many in the middle and upper income classes, there was very little to spend on during the lockdowns. There was no travel. There were no restaurants. There was no entertainment other than Netflix. And the savings rates for the past year has been at all-time highs at close to 20%, which is extraordinary, considering that the norm is about 7.5%.

In our hotel business, we're seeing the beginnings of the increase in travel. In some areas, one of the chief constraints to increasing our occupancy rate is staffing. Staffing is also a constraint in our packaging subsidiary, Altium. So what I can foresee are double-digit increases in GDP, driven by consumer demand, but I can also see significant inflation coming from two very distinct sources. The first source is cost push inflation. Especially at the lower end of the pay grade, I see significant increases in wages needed to get people back on to the job. As I said, we're having trouble finding people to work at Altium, and likewise, Loews Hotels, and to combat that, there's been serious increases in wages.

The other thing that's adding to the cost push inflation is that commodities of all sorts are breaking out on the upside. There's copper, there's corn, iron ore, wood, lumber, you name it, commodities are rallying. So businesses are experiencing a lot of increases in their inputs into what they sell.

The second part of the inflation story, in my mind, comes from the demand pull inflation. I see -- I foresee significant consumer inflation coming from the easing of the pandemic and people making up for a lost year last year of spending. So inflation that was 1.5% to 2%, in my opinion, could be significantly higher in the coming years, because of the dramatic increase in demand, combined with the dramatic increase in costs at businesses.

So with this as my base, for the life of me, I don't understand what the Fed and what the Biden administration are doing. Let's start with the Fed. They've got their heads in the sand, in my opinion. The economy is starting to boom, yet we have 0% short-term interest rates, 0%, and inflation is moving up. And they're still managing -- the Fed is still managing both medium and long-term rates. So that 10-year notes are now under 160. Inflation is significantly over that and typically, 10-year notes traded at 200 basis points to 300 basis point premium to inflation. So as a result, no one wants to own term treasury securities. And in fact, the only people who are buying them are people who need to own them, for example, insurance companies that have to have fixed income securities. And the other major, major purchaser of those securities is the Fed itself. My fear -- my fear is that the Fed is keeping the proverbial punch ball out for the revelers for much too long. In fact, they've said that, that's exactly what they're doing. The Fed said that. And to me, it seems crazy.

With respect to fiscal policy, there are so many trillion-dollar proposals out there that I can't keep them straight. In Washington, D.C., modern monetary theory is the new paradigm. Modern monetary theory says that basically, deficits don't matter. That the government can spend whatever it wants. My view, these politicians and economists are truly kidding themselves. We as a nation are in an extended sugar high that is being elongated by the Fed and the administration's policies, and I'm concerned that at some point down the road, we, as a nation, are going to have to pay a serious price for it.

So just to sum up, as a result of increased consumer demand coming out of the pandemic and also the dramatically increasing government spending, and as I mentioned, the cost push pressures and also the demand pull pressures, as a result of all of these factors, I see very strong growth for at least the next several quarters, combined with relatively high inflation, which makes me bearish on intermediate and long-term interest rates.

So Mary, that's a brief summary of my view of where we are in the economy and where I see it going.

Mary Skafidas

Thank you, Jim. And thank you all for joining us today. That concludes Loews' call. As always, we appreciate your continued interest. Please feel free to reach out to me with any additional questions at mskafidasloews.com. A replay will be available on our website of this call, lowes.com, in approximately two hours. You may now disconnect.