Loews Corporation
Q4 2020 Earnings Call Transcript

Published: 8 Feb 2021

[Operator:]

Good morning. My name is Sia and I will be the conference operator today. At this time, I would like to welcome everyone to the Loews Corporation Q4 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Thank you. At this time, I would like to turn the conference over to Mary Skafidas, Vice President of Investor Relations and Corporate Communication for Loews. Please go ahead ma'am.

[Mary Skafidas:]

Thank you, Sia. Good morning, everyone and welcome to Loews Corporation's fourth quarter earnings conference call. The copy of our earnings release, earnings supplement and Company overview maybe 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 our shareholders.

[Jim Tisch:]

Thank you, Mary, and good morning. 2020 was a year of extraordinary challenges. The coronavirus changed our lives with astonishing speed and what began as a promising year quickly and dramatically morphed into a global health and economic crisis. In addition to the harsh toll on human lives and livelihoods, the pandemic has brought about changes in society and business that are likely to be felt for years to come. Before I speak about Loews, I want to acknowledge and to thank everyone on the front lines of the fight against this pandemic, especially the medical professionals, the first responders, and people in every industry who are risking their own safety to provide essential products and safety. While we can never sufficiently express our gratitude for their bravery and their compassion, Loews and our subsidiaries have provided philanthropic support to various organizations supplying relief and aiding recovery efforts in their community. We also want to recognize our Loews corporate and subsidiary employees who rose to this ongoing challenge with determination, focus, and professionalism. Across the organization, our people have done their part to make sure that businesses had insurance and claims were paid that natural gas was available to heat homes, schools, and medical facilities, that packaging was available for water and medicine bottles, where that a meal was delivered to a family in a hotel room. Each of our subsidiaries went to impressive lengths to ensure the health and safety of their employees and customers. These efforts enabled us to meet the needs of our customers and communities at a critical time while continuing to move Loews forward. Let's look at the operational impact of COVID on each of our subsidiaries over the course of 2020 starting with CNA.

[David Edelson:]

Thank you very much, Jim and good morning, everyone. Today we reported fourth quarter net income of $397 million or $1.45 per share compared to $217 million or $0.73 per share in last year's fourth quarter. For the full year, we reported a net loss of $931 million or $3.32 per share while in 2019 our net income was $932 million or $3.07 per share. I will briefly summarize our strong fourth quarter results and then turn to the full year. CNA drove the year-over-year increase in our fourth quarter income with an assist from Boardwalk. The absence of results from Diamond Offshore which last year posted a fourth quarter loss also helped. Let me share some highlights on CNA's fourth quarter. For more details, check out the transcript from today's CNA Investor Call. CNA's net income contribution to Loews rose 42% to $346 million making up the bulk of our consolidated fourth quarter net income of $398 million. The core P&C business performed extremely well. Net written premium grew 12% year-over-year. Thanks to robust new business together with rate increases averaging over 12%. The combined ratio improved 2.1 points to 93.5 driven by lower expense and underlying loss ratios as well as reduced cat losses.

[A - Mary Skafidas:]

Great. 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 that they would like us to answer on our earnings call. Our first question is for Jim. And it's a topic that it is always of interest to Loews' shareholders. Jim, can you walk us through how you think of intrinsic value?

[Jim Tisch:]

Sure. So, one of the good things about getting the questions in advance is, I can prepare thoughtful and detailed answers, as I have especially on this one. So, we assess Loews' some of the parts value based on our view of the intrinsic value of each of our subsidiaries. Intrinsic value is our view of what our subsidiaries are worth based on our medium to long range outlook. And the valuation can and often does differ from the current market value of those enterprises. Our outlook for each subsidiaries is informed by our view of the industry in which it operates and the competitive strengths and weaknesses of our subsidiaries. So, let's take a look at these subsidiary by subsidiary. Starting with CNA. The primary indicators that we look at our core earnings, the combined ratio, we look at earnings per share, dividend capacity, pricing, and loss trends. Based on these metrics, we believe CAN is undervalued compared to its peers and even more so compared to the overall markets. We are bullish on the commercially property and casualty insurance industry, and we also believe that CNA will be able to continue to take advantage of the current hard market. For Boardwalk, the factors that we consider for assessing intrinsic value are EBITDA, free cash flow, natural gas volumes, regulatory environment, industrial demand for both gas and gas liquids, the revenue backlog, organic growth potential along with several other measures and characteristics. We're positive on the natural gas industry and believe the gas will be an important transition fuel for a greener economy. When we think about Loews Hotels, we consider adjusted EBITDA, cash flow, comparable asset valuations and occupancy and room rates. Loews Hotels has a unique business model since it's both an owner and an operator of its hotel properties. This differentiator has enabled Loews Hotels to successfully compete for attractive projects over demand, near demand generators such as Orlando, Arlington, Texas. Although the hotel industry has been hard hit by COVID, we believe that Loews Hotels is uniquely positioned to succeed in a post-COVID world. And finally for Altium, we primarily look at organic volume growth, EBITDA and cash flow as well as the Company's ability to make accretive acquisitions in diversified end-markets. Since we purchased Altium, the Company has made seven accretive acquisitions of compelling multiples that have diversified our businesses into higher growth end-markets such as pharma. These factors are just the beginning of how we come to our assessment of each of our subsidiaries’ intrinsic value. Additionally, we assess the businesses, management teams, the Company's competitive position within its industry, and the long-term outlook for each of those industry.

[Mary Skafidas:]

Great. Thank you, Jim. Next question is on CNA's dividend. Jim, CNA's special dividend has been $2 for the last few years compared to the $0.75 special dividend declared today. Can you comment on the change?

[Jim Tisch:]

Sure. So, I think the Board made the right call here. CNA's board declared a $0.75 special dividend and increased its common dividend by $0.01 to $0.38 per share. The increase in the common dividend is reflected of the CNA Board's confidence in the Company's ongoing operational improvements. The reduction in the special dividends reflects events of 2020 that reduced CNA's earnings. 2020 was a terrible year for the insurance industry. With the impact of COVID, hurricanes, with civil unrest, the industry experienced unprecedented cat losses. In spite of all that though, CNA came through the year very well. One of our highest priorities is for CNA to retain its rock-solid capital position. Heading into 2021, we think that CNA is setting up for a very good year. Operationally and financially, CNA ended 2020 very strong with the continuing hard market. Rate increases are robust, retentions are good, and there's solid new business generation. All this points to 2021 being a much more successful year for CNA than 2020.

[Mary Skafidas:]

The next question is on capital allocation. Jim, you touched on this in your prepared remarks, but can you comment about how you're thinking about capital allocation at Loews going forward?

[Jim Tisch:]

Sure. So when we think about how to best allocate capital, we traditionally think of it in four ways. And I think many people on the call have heard this before. We can invest in our existing subsidiaries. We can make an acquisition. We can repurchase our shares or as I like to say if there is nothing to do, we can do nothing. With our stock trading considerably below our view of its intrinsic value, share repurchases have been almost compelling capital allocation option. As I said in my remarks, our decision to buyback stock has not come at the expense of investing in any of our subsidiaries. For example, we've provided capital to Loews Hotels to help it write out the effects of COVID on its business. Our three other subsidiaries’ CNA, Boardwalk, and Altium Package have not recently required parent company capital, and in fact they've returned capital to the parent company. In terms of adding a new subsidiary, I think valuations are still too damn high. When buying a new business, there's no amount of due diligence that we can do that will result in the same knowledge that we have of our own businesses, and considering where valuations are today when you compare allocating capital towards a new business with buying in shares when our stock is trading so far below our view of its intrinsic value, well, it's really a no-brainer. When we think about allocating capital, we really think of it from the perspective of a shareholder. After all, management's interests are totally aligned with those of our shareholders since senior management has significant shareholdings and the Tisch family overall owns about one-third of the Company.

[Mary Skafidas:]

Okay, thank you. The next question is for David and is on Loews Hotel. David, can you give us an update on the impact of COVID-19 on the subsidiary?

[David Edelson:]

Sure, Mary. Happy to. The economic aftershocks of the pandemic have caused revenue of Loews Hotels to decline precipitously. Both Jim and I mentioned that in our prepared remarks. If one looks just at the last three quarters of 2020, operating revenue was down 86% from 2019. The three main drivers of Loews Hotels business, leisure travel, business travel and group meetings were all stopped in their tracks by COVID. Leisure travel is slowly returning mainly in drive-in markets for our resort properties. Loews Hotels responded to the sudden downturn by temporarily suspending operations at all four of its properties and taking tough actions to reduce property level and management Company expenses. Early on, the hotel company established programs to assist its affected team members, including a multimillion-dollar relief fund, and continuing to provide medical insurance benefits for furloughed team members for extended timeframes. Additionally, in solidarity with Loews Hotels team members, the three members of our Office of the President Jim, Jon and Andrew Tisch reduced their 2020 salaries by 50% and their 2020 bonuses by the same amount. As properties began resuming operations in May, the Company put in place significantly enhanced safety and well-being standards and protocols for team members and guests. Now let me comment on the hotel company's cash flow. On our first quarter earnings call, I noted that as long as operations, we're almost completely suspended. The hotel company would likely have negative cash flow of about $25 million monthly. I also noted that management intended to reopen properties only when doing so improved earnings and cash flow. As anticipated, cash flow has improved as properties have resumed operations, expenses have been aggressively managed and capital spending has been rightsized. Today 22 out of 27 properties are operating albeit at depressed occupancy rates. The Company continues to generate negative cash flow, although significantly better than the $25 million per month sited in early May. During 2020, the Loews parent company contributed $151 million of cash to Loews Hotels to fund working capital and other capital needs. We will contribute cash again in '21 for working capital to fund operations. Although, we expect such amounts to be less than in 2020. Because of the Company's improved cash flow, we also expect the contributions to be skewed towards the first half of the year. One last note. If financially attractive hotel development opportunities surfaced in 2021, we would certainly consider helping Loews Hotels fund them. Back to you, Mary.

[Mary Skafidas:]

Thank you, David. Jim, going back to CNA for a moment. Loews manages CNA's portfolio. Can you talk a little bit about your philosophical approach to managing this portfolio?

[Jim Tisch:]

Sure. At year-end 2020, the CNA portfolio had a market value of about $50 billion. It had an average credit rating of A and had net unrealized gain of about $5.7 billion. Additionally 89% of the portfolio is made up of fixed maturity securities and 94% of CNA's fixed maturity securities are investment grade. Loews maintains high coordination with CNA to align the management of the portfolio to CNA's broader strategy. Managing the investment portfolio internally rather than outsourcing its management gives us a better ability to act on dislocations in markets when they occur. Additionally, we can carefully focus on objectives and constraints including managing portfolio book yield as well as capital considerations. Almost every year we have met objectives as agreed upon with CNA with a focus on stability of income as well as outperforming indices across broad asset classes. Our goal is to create stable and growing investment income throughout a balanced risk return approach. We don't focus on hitting home runs. Our approach is more like Moneyball. We hit a lot of singles and don't strike out very often. We try to be opportunistic in the face of market volatility and fluctuations, seeking assets that fit within our risk profile. In the beginning of 2020, we took advantage of market dislocations to reallocate assets into corporate high grade securities when they were trading at a relatively widespread. In the spring of 2020, the muni market had a dislocation that lasted about a week or so, but we were able to actually put a lot of money into work and it paid off for CNA by being so quick on the trigger there. We have built parameters around volatility and risk with a focus on consistent returns. For example, we maintain single issue position limits by rating, which generally speaking keep us from being hurt by surprises in the credit world. These credit limits result in a diversified portfolio that has served CNA very well. I also want to comment briefly on the short squeeze of game stock and other stocks that resulted in losses for several hedge funds. In late 2018, we began to rebalance CNA's alternatives portfolio meaningfully reducing hedge fund investments. Over the last three years, CNA has reduced its investments in hedge funds by half and as of year-end 2020, the portfolio only had about $800 million invested in hedge funds. We expect these funds to report normal January returns.

[Mary Skafidas:]

Great. Thank you, Jim. David question on Boardwalk. What is the step of the shareholder litigation related to the purchase of the units previously owned by Loews?

[David Edelson:]

Mary, the litigation is ongoing. Trial date in the Delaware Court of Chancery has been scheduled for late this month. Beyond that, we really can't comment.

[Mary Skafidas:]

Okay. Thank you, David. Next one is also for you came in early this morning. Can you bring us up-to-date on Altium Packaging including the recent recapitalization?

[David Edelson:]

Sure. Altium had an excellent year with record operating revenues of more than $1 billion, up almost 10% from 2019. The revenue increase came from several areas, mainly the full year impact of 2019 acquisitions, including Altium Healthcare. Stellar performance from the recycled plastics business, organic volume growth and new business and higher year-over-year resin prices passed through to customers on a lagged basis. The Company also posted record EBITDA and cash flow. When we acquired what was then Consolidated Container in 2017, a key plank of our thesis related to tuck-in acquisitions. We saw fragmented industry, numerous targets, and the opportunity for purchasing and expense synergies. In November, Altium completed its seventh acquisition under our ownership. A privately held company specializing in the blow molding of industrial containers. This acquisition had only a small impact on 2020 revenue, but will benefit all of 2021. Acquisitions completed in 2019 accounted for about 70% of Altium's 2020 revenue growth. Altium Healthcare, the company's pharmaceutical packaging business acquired in June of 2019 led the charge. Altium continues to look for accretive tuck-in acquisitions to add further scale and diversification. Altium had record new business awards in 2020 as the company's reputation for reliability, innovation, and customer service continued to differentiate Altium in the market. This new business will mainly benefit revenue in 2021 and beyond. Envision the Company's recycled plastics arm had its best performance in 2020 since Altium acquired the business in 2014. Demand for recycled plastic has been robust as Altium's end markets focus more and more on sustainability. In January, Altium recapitalized its debt structure, replacing its roughly $850 million of debt with a new $1.05 billion seven-year term loan. The deal price strongly at LIBOR plus 275 with a 50 basis point LIBOR floor. The recapitalization raises Altium's interest expense only very slightly and should not impair its ability to grow organically or execute tuck-in deals. Altium's key bank credit ratios are essentially in line with or slightly better than they were when Loews acquired the company. Loews received $199 million dividend last week out of the excess proceeds representing the return of about one-third of our initial equity investment. We posted on our website this morning, the lender presentation used in conjunction with Altium's term loan financing. The presentation includes both business and financial information about the Company and we hope you find it helpful. Thanks, Mary.

[Mary Skafidas:]

Great. Thank you, David. Our last question is for Jim. More of a big picture question. Jim, how do you think the Biden administration will affect Loews and its businesses going forward?

[David Edelson:]

So we're looking at how the new administration will handle a number of issues over the long term. First off, the administration's climate agenda has created some new risks for the natural gas sector by implementing a pause on new natural gas leases on federal lands and also on offshore waters. In my view, natural gas is an important transition fuel to cleaner energy in the US and it is also a growing export opportunity to help the rest of the world meet their similar climate change goals. The recent executive orders, in my mind, are troubling sign of new federal restrictions that may make it more difficult to access this plentiful American resource. Additionally, the Federal Energy Regulatory Commission that regulates Boardwalk is changing. While it's too early to know exactly what impact these changes will be, will have, we believe that there will continue to be increased pressure on the industry's ability to build pipelines. However, the administration is focused on the environment could be beneficial for Envision, Altium's Packaging, Recycled Resin business as well as for Dura-Lite, the plastic packaging Altium has designed that uses significantly less resin without compromising the strength of the container. Certainly, the Biden administration's focus on stemming the tide of the virus should be beneficial to Loews Hotels and help increase demand for the travel and tourism industry. While our largest subsidiary CNA is mostly regulated through the stage, the new administration and Congress pose some policy challenges and opportunities. For example, changes to the corporate tax code would affect Loews and our subsidiaries, but such changes aren't expected until later in the year when there is more evidence of economic recovery. And from what we understand corporate taxes probably will not go back to their pre-2017 levels. We're going to continue to watch these issues as they develop. It's only been a few weeks now and we've just got to wait and see what happens.

[Mary Skafidas:]

Great. Thank you, Jim, and thank you, David. That concludes the Loews call for today. As always, we thank you for your continued interest. Please feel free to reach out to me with any additional questions at [e-mail]. A replay will be available on our website loews.com in approximately two hours. You may disconnect.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.