Loews Corporation
Q1 2021 Earnings Call Transcript

Published: 3 May 2021

[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. Please be advised that today's conference is being recorded. 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.

[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 cap 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 is able to deliver gas to each 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.

[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, risk -- 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.

[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, the 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 cyber attack 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.