Q2 2021 Loews Corp Earnings Call
Okay.
And ladies and gentlemen, and 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. If you would like to ask a question at that time. Please press star 1 on your Touchtone phone I will now turn the call over to Mary's Cathetus. Please go ahead.
Thank you Chris Allen Good morning, everyone Welcome to Loews Corporation and set our second quarter earnings Conference call a copy of our earnings release earnings supplement and company you may be found on our website Loews Dot com and.
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 and 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 to see statements disclaimer, which is included and the company's filing 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 Tisch, Our CEO Jim over to you.
Thank you Mary and good morning.
And so 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 pick up 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 net income of almost $370 million in the second quarter of this year. The second highest quarterly net income recorded by the company and 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 improvement and the expense ratio.
Cna's P&C business generated gross written premium growth of 8% driven by new business growth of 10 per cent and rate increases of 10 per cent for the quarter.
And they had net investment income and $591 million pretax compared to $534 million and the prior year's quarter.
Limited partnerships.
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.
Those hotels also had a success story on its hands within the context of its come back from the global pandemic that devastated the hospitality industry.
It's no secret that our hotel company, whereas the subsidiary most affected by COVID-19.
That being said over the last few months Loews hotels has continued to see increased demand for leisure travel and are starting to see improving interest for group travel for.
For the second quarter total occupancy rates for owned and joint venture hotels were almost 58 per cent as opposed to about 35% during the first quarter of this year.
Well that is a big jump obviously, we still have a ways to go before we hit pre pandemic occupancy rates or resort hotels considered to continue to do considerably better than our properties and urban settings, all and all the good news is that by the end of the second quarter.
Each and every 1 of our hotels was open for business, albeit while facing challenges filling roles at the property level.
And as the U S economy, and the hotel industry continue their recovery, we firmly believe that Loews hotels, once again and be a growth engine for Loews Corp.
We're confident from the hotel company as a reflection of our belief not only and it's management, but also in its long term growth strategy.
As a reminder that growth strategy is built on 2 pillars.
The first pillar is the core business of Loews hotels, and hotels with 300, plus keys and have ample meeting space.
This first pillar. It takes advantage of Loews is well earned reputation for operating hotels that cater to groups.
These properties are equally attractive to leisure customers and offer unique local experiences.
The second pillar of hotels as growth strategy is this concentration on developing and operating our hotels associated with immersive destinations its partnership with Universal Orlando, which spans more than 2 decades is a great example of the strength of this pillar.
As of the end of the second quarter Loews hotels had 9000 rooms in 8 hotels on your land Universal Orlando Resort campus and all.
All of the properties were open and performing well.
Loews hotels is concentrating on and adding more immersive destinations where demand for hotel rooms, and strong because of the presence of a built in demand generator surcharges and adjacent sports stadium or some other attraction.
1 such hotel that proved to be quite resilient. During the pandemic is the live by Loews and Arlington, Texas, which is located a stone's throw away from 2 professional sports stadiums as well as entertainment venues and draw customers throughout the year.
Another significant differentiator for Loews hotels is its ability to be both the owner and the operator of its properties and when I say owner I generally mean owner and development partner it's.
It's great when we can participate in the design phase and in order to build a hotel to our exacting standards.
Industry giant Nymex generally do not allow for companies and the hotel space to perform both the owner and the operator functions and as a result, Loews hotels is a leader within this niche of the market place.
Playing to these strange for served Loews hotels, as well and we believe it will continue to do so.
Currently there is very little financing available for most hotel developers and the full service hotel space and.
As a result, being a well capitalized owner operator gives loews hotels, a distinct advantage when competing for attractive development projects as always Loews Corp, and thus alongside our subsidiaries, what's and when its and the best interests of our shareholders and we certainly believe that our IND.
Dustmen and Loews hotels has grown strategy will create long term value.
Finally, let me update you briefly and share repurchases.
From April 1st through last Friday, we repurchased 6 and a half a million shares of Loews common stock for just over $350 million.
Year to date, we've bought back 4 and a half per cent of our outstanding shares for $630 million as I've, often often said, we believe that loews still trades at a significant discount to our view of its intrinsic value. So we will continue to let our share repurchase.
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And with that let me hand, the call over to David.
Thank you Jim and good morning, everyone for.
For the second quarter, Loews reported net income of $754 million or $2.86 per share compared to a net loss of $835 million or $2.96 per share and last year's second quarter.
As Jim commented, our second quarter operating results were excellent and driven by CNA and boardwalk, both of which had stellar quarters, while Loews hotels did post a loss. It's 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 40 on 438 million after tax on our sale of a 47% stake and all 3 and packaging.
The investment gain as essentially the sum of the realized gain on the share 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 totaled 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 C N a 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 and.
In the meantime, let me highlight a few salient points.
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<unk> net income of $330.330 million up from 135 million and Q2 'twenty.
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.
The combination of and 11% year over year increase and net earned premium and then almost 2 point improvement and the underlying combined ratio to $91.4 led to a 41% increase and cna's underlying underwriting gain which excludes catastrophe losses and prior year.
Yeah.
Catastrophe losses were modest in the quarter at 54 million pretax and contrast to the elevated level of catastrophe losses booked in Q2, 2020.
Last year's second quarter catastrophe losses were 301 million pre tax and included reserves for Covid.
Civil unrest and weather related events.
C N as all in combined ratio, which includes catastrophe losses and prior year development and.
Prove by over 15 points from 1 O 9 point too in Q2, 2020 to 90 for this year.
The year over year increase and Cna's net investment income was driven mainly by higher returns on its portfolio of limited partnership investments and contrast, net investment gains were lower in Q2, 2021 and then in the prior year quarter.
A quick comment on Cna's second quarter net written premium.
And while net earned premium across all property casualty segments Rose, 11% Cna's net written premium declined 1% overall and 12 per cent and commercial.
The year over year decline and written premium was attributable to our quota share.
Treaty CNA added towards property reinsurance program during the second quarter.
Because the treaty will cover property policies already and force as well as policies written during the Treaty term CNA recorded a 1 time written premium catch up that reduced the quarters net written premium by $122 million predominantly in the commercial segment.
C N a ended the quarter with total assets of $66 billion shareholders' equity of $12.7 billion and consolidated statutory surplus of approximately 10.9 billion.
Turning to Boardwalk book.
<unk> contributed net income of $47 million up from 34 million and Q2 'twenty.
The main driver of the year over year increase was higher natural gas transportation revenue.
Boardwalks more than 5 per cent increase and net operating revenue was driven by growth projects recently placed and serviced and by higher system utilization caused largely by deliveries to LNG markets and power plants.
Through 6 months natural gas transportation throughput increased by 11% year over year.
Turning to Loews hotels.
Loews hotels contributed a net loss of $21 million a dramatic improvement from the 72 million net loss posted in Q2, 2020 adjust.
Adjusted EBITDA, which is defined and our earnings supplement and excludes nonrecurring items rebounded from a 54 million loss last year to a positive $26 million in Q2 'twenty 1.
The year over year improvement was driven by a dramatic revenue increase as most properties were opened for the full quarter and all properties, where operational by quarter and busy.
Business at resort properties benefited, especially from increased leisure travel.
Looking backwards, the second quarter of 'twenty, and 'twenty was exceedingly difficult for Loews hotels as almost all of these properties suspended operations for most of the quarter.
GAAP net operating revenue plummeted and 94% from the second quarter of 2019 and revenue at the company's JV properties, which is not included and get not GAAP net operating revenue declined a similar percentage.
For a good snapshot of Loews is steady operational improvement I.
I would encourage you to review I believe it's page 11 of our quarterly earnings supplement which shows the meaningful increases since Q2 last year and available rooms occupancy and average daily rate.
A quick comment regarding diamond offshore.
We include a diamond offshore as a reporting segment until its bankruptcy filing and deconsolidation in late April 'twenty, and 'twenty or second quarter 2020 results included a net operating loss of $24 million attributed attributable to diamond.
Turning to the corporate segment.
All Jim has been reported as part of the corporate segment since we acquired the company and 2017.
Following our sale of a 47% stake it remains and the corporate segment, but is now accounted for under the equity method.
The corporate segment also includes the unusual items I mentioned earlier, namely a net investment gain this year related to our sale of a 47% stake and all Jim and a net investment loss last year stemming from the bankruptcy and deconsolidation of Diamond offshore.
I would note that this year's second quarter results also reflect a $15 million pre tax write off of our equity investment and diamond upon its emergence from bankruptcy.
The parent company's investment portfolio generated pretax pre tax net investment income of $24 million as compared to 110 million last year.
Last year's results benefited from the significant recovery of the equity markets and the second quarter, a quarter and which the S&P 500 returned almost 21%.
The parent company portfolio of and cash and investments stood at $3.9 billion, a quarter and with about 80% and cash and equivalents.
As Jim mentioned during the quarter, we repurchased 3.9 million shares of our common stock for $219 million, and we received about $92 million and dividends from CNA.
In addition, we received about 410 million and net proceeds from the all Jim transaction during the second quarter.
After a quarter and we repurchased another 2.6 million shares of our common stock for $140 million.
As of last Friday, there were.
Approximately 257 million shares of Loews common stock outstanding down more than 8% from June 30, 2020.
I will now hand, the call back to Mary.
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.
The first question is to Jim Jim can you give us loves this outlook for CNA.
Yeah.
So 390 as outlook is extremely bright, let's take a step back and let's look at the insurance industry as a whole first.
All 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 its improving underwriting margins through focused risk selection and pricing, let's not forget C. And this 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 and 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 third over the past 5 years.
Given CNA strong performance and future outlook, we believe the company is greatly undervalued.
And speaking of undervalued when buying Loews. These shares we are always cognizant of what we call the triple discount and letting.
Let me briefly explain what I mean first loews shares trading 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.
And value companies trade at 12 to 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 Kneisley 11 to 12 times net income actual net income, which can 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 undervaluation and even more so now.
W T F.
Okay. Thank you Jim.
Next question.
Over to David.
Can you give us and update and loved hotels, how much cash will the company and require from Loews Corp, and 2021.
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 contributed 32 million to Loews hotels year to date.
We have made no further cash contributions since that time to Loews hotels.
Those hotels outlook continued to improve during the second quarter, we now anticipate that.
And before considering any proceeds from the divestitures or expenditures on new development projects during the second half of the year.
Those hotels would not require additional cash from the parent company in 2020.1.
I would highlight however.
That if loews hotels does Clos.
Those on 1 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.
Yeah.
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.
So 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 favorable returns Loews hotels received by developing its own <unk>.
Sales.
Many markets and the U S have older full service hotels by building a new hotel with modern spaces were significantly renovating and existing location. We immediately gain a competitive advantage by offering an attractive new product that appeals to both leisure guests and 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.
And the building to suit, we develop hotels and focus on 1 or both of our growth strategy pillars hotels with more than 300 keys that cater to groups and hotels and operator and operate near built in demand generators.
The first pillar of Loews hotels is growth strategy is well earned reputation for excellence and the groups and meetings market and locations attractive to groups as well as the leisure customers guests are also attracted by the unique local experience these properties over the.
The second pillar of growth as long as hotels and focus on immersive destinations such as Universal Studios, Orlando campus, where Loews hotels.
Has 8 hotels with 9000 rooms.
And as hotels has pursued additional and immersive destinations where demand for hotel rooms, and strong because of the presence of a built in demand generator such as many adjacent sports stadiums or other attractions live by Loews and Arlington, Texas is 1 such hotel and has proven to be very resilient and turning the.
Dominic the Arlington Hotel is located near numerous professional sports and entertainment venues.
From 2015 to 2019 Loews hold.
<unk> grew adjusted EBITDA from just under $160 million to almost $230 million with healthy margins 2020 was clearly a very challenging year for our hotel subsidiary and for the industry.
And in 2020, 1 well its hotels has certainly gained ground and while we continue to monitor and the effects of the pandemic on the hospitality industry. We believe that over the long term a hotel company will once again and be a profitable growth engine for Loews Corp.
Yeah.
Great. Thank you Jim.
Next question is for David David can you give us.
But the status isn't been boardwalk trial.
Oh sure closing arguments took place.
On July the 14th 2.
2021 and the judge is now deliberating.
We continue to believe that we have very strong legal and factual arguments is that and that the plaintiffs case is without merit.
But as we all know litigation is inherently unpredictable and Theres really nothing more we can report at this time.
Okay. Thank you David for that update.
Jim and the next question is for you.
Can you give us your outlook for inflation and interest rates and inflation and interest rates.
Yeah.
So the nice thing about getting questions before the earnings call. He said I can prepare a thoughtful response rather than just wing it.
Such is the case with the answer to your question Mary about interest rates and inflation.
Let's start with inflation.
And the last earnings call I talked about a.
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 and the 16th through the early eighties when inflation was much much higher than it is today.
As you can imagine the cycle of inflation relates to a dynamic that takes hold and and economy.
And it relates to increasing prices and the expectation of ever increasing prices, making it such that employees demand higher wagers and maintain their purchasing power and their standard of living those higher wages, then translate into higher cost for producers.
Which causes and the producers to ask for higher prices for their products thus reinforcing.
And the demand for higher wages from labor.
And so the cycle begins and feeds upon itself.
Believe that this cycle of inflation is what we are beginning to experience today.
Now onto scares and just look at the number of companies that can't find employees for their businesses, including Loews forage hotel and packaging businesses.
Certain goods are also scares and there were just a few whose prices have shot up a lot.
Pewter chimps coffee polyethylene pellets, Tim and aluminum soybeans.
Oil and natural gas and yes jet fuel the CRB raw industrials index is up by more than 50% from a year ago.
Dishwashers washing machine dryers and refrigerators are all on months long back orders and housing prices are up approximately 25 per cent 25 per cent in the past year and of course, there's a shortage of labor and the late in the labor market are very very theory.
And a shortage.
And it seemed economist friend of mine said that this year is the 11th time that the core C. P. I has written risen more than 3% and the first 6 months of the year.
And 9 of those 10 previous occasions core CPI inflation for the full year was at least 6%.
So by that measure we're on track for inflation or much more than 6% because for the first 6 months and this year inflation is already at $5.4 per cent and so it's an easy bet that inflation for all of 2021 will greatly surpassed.
Per cent.
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 cost to increase leading to ever higher inflation.
I believe that we are now in a cycle of inflation, rather than a spurt within and otherwise benign inflationary period.
This year, we are moving from and extended area era of less than 2% inflation to a year of more than 6 or a 7% inflation.
And due to increased labor costs, my expect expectation for inflation in 'twenty 2 is for significantly higher inflation than the 2% level, we have seen and the recent past.
This inflation problem won't go away by simply wishing and away, especially with the fed's proverbial foot still on the gas pedal.
Which of course brings us to interest rates.
And the economist Rudi Dornbusch from famously said and the sixties that and economics things take longer to happen. Then do you think they will and then they happen faster than you ever thought that they could such.
Such is the case I believe with interest rates and the United States.
They're too damn low and the reason that they're so low is because in the past year and a half. The fed has purchased over 4 trillion dollars of government Securities. That's 4 trillion dollars of government securities that had been taken out of the market poof.
They're gone.
The fed has created a squeeze a gargantuan proportions and these securities that has rippled through all of 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 and government securities.
Investors won't go near them.
Cause there isn't a bullish case to be made for investing and government securities.
Today, and he's a 10 year note yields less than 1.2%.
If the rate on those nodes goes up just 13 basis points, a little over a 10th of 1% than the entire interest carry 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.
And then the negative real return on a 10 year note will be -4 and 3 quarters per cent, that's -4 and 3 quarters per cent, who would want to own a security like guarantees you'll lose almost 5% of your purchasing power and 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 forecast to be 3 trillion dollars, which means there is no and so the supply of government bonds that need to be issued to finance our govern governments activities.
And with so much issuance of government securities on the way and with a strong economy.
And as inflation running so hot and where the negative real yield so unattractive.
Third may have little choice, but to take their foot off the proverbial gas pedal and take away the punchbowl finally, allowing interest rates to rise.
There's only so long that the fed can delay the inevitable and to me and maybe it's Aruba Rudy joined Bush and Blessed memory that time may soon be upon us.
Thank you Jim Thank you for that perspective.
And thank you David that concludes the Loews call for today as always.
And we wanted to thank you for your continued interest please feel free to reach out to me with any additional questions and ask a fetus at Loews Dot com a replay will be available on our website Loews dot com and approximately 2 hours that concludes the loews call for the day.
This does conclude today's conference call and thank you for your participation and ask that you disconnect.
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