Loews Corporation
Q2 2021 Earnings Call Transcript

Published: 2 Aug 2021

[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 Skafidas. Please go ahead.

[Mary Skafidas:]

Thank you, Crystel (ph), and good morning, everyone. Welcome to Loews Corporation's Second 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 Chief Financial Officer, David Edelson.

[Jim Tisch:]

Thank you, Mary, and good morning. Loews 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. Loews Hotels, while still recovering from the effects of the pandemic, has bounced back smartly, especially on 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. As for CNA, the Company continues to be a success story for Loews. CNA had a net income of almost $370 million in the Second Quarter of this year. The second-highest quarterly net Income recorded by the Company in the past 20 years. 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 an improvement in the expense ratio. CNA 's P&C 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 a net investment income of $591 million pre-tax, compared to $534 million in the prior year's quarter. 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. Loews Hotels also had a success story on its end, within the context of its comeback from the global pandemic that devastated the hospitality industry.

[David Edelson:]

Thank you, Jim, and good morning, everyone. For the second quarter, Loews reported a Net Income of 754 million or $2.86 per share compared to a Net Loss of 835 million or $2.96 per share in last year's second quarter. As Jim commented, our second-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 Second Quarter results both this year and last year were impacted by unusual items. Absent these unusual items, which I will describe in a moment, our Q2 Net Income rebounded to $316 million this year from $122 million last year. This year's Second Quarter included a Net investment gain of $555 million before tax and $438 million 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 Second Quarter included a Net investment loss related to the bankruptcy and concurrent GAAP deconsolidation of Diamond Offshore. This loss totalled $1.2 billion before tax and $957 million after-tax. Setting aside these 2 unusual items, all 3 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 million, up from a $135 million in Q2 '20. The 2 main drivers of the year-over-year increase were higher property-casualty underwriting income generated by lower catastrophe losses and higher underlying underwriting income, as well as higher net investment income.

[Q - 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 that they would like us to answer on our Earnings Call. The first question is to Jim. Jim, can you give us Loews ' outlook for CNA?

[Jim Tisch:]

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&C Industry continues to have disciplined capital management. Overall, P&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. 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 billion in Dividends to its shareholders over the past 5 years. Additionally, CNA's Long-term care exposure continues to decrease with active policies declining by about 1/3 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're always cognizant of what we call the Triple Discount. Let me briefly explain what I mean. First, low shares trade below our view of their intrinsic value. Secondly, the P&C industry tends to be undervalued compared to the stock market. And third, CNA trades at a discount to the P&C industry. Some growth Companies trade at 15 times revenue. Some value Companies trade at 12-15 times EBITDA. That's EBITDA and not net income. The S&P 500 trades at 20 -- greater than 20 times earnings. But some P&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&C Industry seems crazy to me. And CNA's undervaluation even more so. WTF.

[Mary Skafidas:]

Okay. Thank you, Jim. The 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. in 2021?

[David Edelson:]

Thanks, Mary. During our first-quarter earnings call, we stated that before considering proceeds from divestitures or expenditures on new development projects, we expect it to contribute less than 80 million 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 million 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 second quarter. 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 one or more significant development opportunities in the back half of this year, we would likely be required to contribute additional cash to the Company in 2021 and for all the right reasons. Thanks, Mary.

[Mary Skafidas:]

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?

[Jim Tisch:]

Loews Hotels has never stopped looking at -- for potential acquisitions. Based on current market dynamics, however, acquiring a new hotel doesn't make economic sense, not when you compare the long-term favourable returns Loews Hotels receives by developing its own hotels. Many markets in the U.S. have older full-service hotels. By building a new hotel with modern spaces or significantly renovating an existing location, we immediately gain 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. By building to suit, we developed hotels that focus on one or both of our growth strategy pillars. Hotels with more than 300 keys to cater to groups. And hotels that operate near built-in demand generators. 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 the leisure customers. Guests are also attracted by the unique local experience these properties offer. The 2nd pillar of growth is Loews Hotels ' focus on immersive destinations, such as Universal Studios Orlando Campus, where Loews Hotels, as -- has eight hotels with 9,000 rooms. Loews Hotels has pursued additional immersive destinations where demand for hotel rooms is strong because of the precedence of our built-in demand generators, such as an adjacent sports stadium or other attractions. Live! by Loews in Arlington, Texas is one such hotel that is proven 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 million to almost $230 million with a healthy margin. 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.

[Mary Skafidas:]

Great. Thank you, Jim. The next question is for David. David, can you give us what the status is of the Boardwalk trial?

[David Edelson:]

Sure. Closing arguments took place on July 14th, 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.

[Mary Skafidas:]

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

[Jim Tisch:]

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 as 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 forms of inflation these days. 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. As you can imagine, the cycle of inflation rates to a dynamic that takes hold in an economy. That relates to increasing prices and the expectation of ever-increasing prices, making it such that employees demand higher wages 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. Talent is scarce. Just look at the number of Companies that can find employees for their businesses, including Loews 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. Dishwashers, washing machine driers, and refrigerators are all on backorders. Housing prices are up approximately 25%, 25% percent in the past year. And of course, there is the shortage of labor in the late -- 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 written risen more than 3% in the first 6 months of the year. On 9 of those 10 previous occasions, core CPI inflation for the full year was at least 6%. By that measure, we are on track for inflation of much more than 6% because for the first 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. And due to increased labor costs, my expectation for inflation in '22 is 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 Rudi Dombusch, 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 as the case, I believe with interest rates in the United States. They're too damn low. And the reason that they are so low is because, in the past year-and-a-half, the Fed has purchased over $4 trillion of government securities. That's $4 trillion 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 have rippled through all the fixed income markets. The only people that own U.S. 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, but 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 1/10th of 1% then the entire interest carries on the bond for the year will disappear. That sounds like a miserable investment to me. 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 -4.75%. That's -4.75%. Who would want to own 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 forecasted to be $3 trillion, which means there is no end to the supply of government bonds that need to be issued to finance our government's activities. And with so much issuance of government securities on the way, and with a strong economy, and with inflation running so hot, and with the 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 Ruby -- Rudi Dombusch, a blessed memory that time may soon be upon us.

[Mary Skafidas:]

Thank you, Jim. Thank you for that perspective. And thank you, David (ph). That concludes the Loews 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 mskafidas@ loews.com A replay will be available on our website, loews.com in approximately 2 hours. That concludes Loews call for the day.

[Operator:]

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