Q2 2022 Loews Corp Earnings Call
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Good day, everyone. Welcome to today's Loews Corporation Q2 earnings Conference call. At this time all participants are in a listen only mode. Please note. This call maybe recorded and I will be standing by should you need any assistance. It is now my pleasure to turn today's call over to Chris Nugent Investor Relations. Please go ahead.
Thank you Ashley and good morning, everyone and welcome to Loews Corporation second quarter earnings Conference call a copy of our earnings release and Investor presentation may be found on our website <unk> Dot com I am joined today by our Chief Executive Officer, Jim Tisch, and Chief Financial Officer Jane Wong.
Following our prepared remarks. This morning, we will have a question and answer session with questions from our 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 statement.
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 may also discuss non-GAAP financial measures. Please refer to our security filings and Investor presentation for a reconciliation to the most comparable GAAP measures.
With that I'd like to turn the call over to Jim Jim over to you. Thank you, Chris and good morning.
It was it was off to a great start in the first half of 2022 with each of our consolidated subsidiaries continuing to produce strong results.
CNA had another quarter of solid underwriting results and boardwalk continues to benefit from robust natural gas flows.
Hotels had a record first half of the year, especially after our resort destinations. Despite the lingering effects of the pandemic on business travel.
She and her team continues to be a success story follows the company's underlying combined ratio improved by 60 basis points to 90.8, driven by a lower expense ratio.
Excluding the impact of the quota share Treaty implemented last June net written premiums grew by 13% in the second quarter due to strong new business and retention.
We donated continues its laser like focus on underwriting and the results speak for themselves.
In the financial markets in the past quarter, two major things happened risk assets dropped dramatically and interest rates rose significantly.
Cna's core income was negatively impacted by lower returns on its private equity hedge fund and common stock portfolios, which went down by $171 million pre tax versus the prior year period.
With respect to the rise in interest rates at the end of the second quarter. CNA is fixed income portfolio had a pretax unrealized loss of $1 $8 billion by comparison at the end of 2021 the portfolio had a pretax unrealized gain of $4 four.
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As a result, Cna's book value per share was about $35 at the end of the second quarter compared to about $47 at the end of 2021.
In fact, it is important to note that regardless of the prevailing interest rates CNA will still receive the same cash flows from the fixed income securities that are currently in its portfolio and the company intends to hold most of those securities to maturity.
The good news is that CNA is now able to invest at significantly higher yields and while book value per share has suffered a decline due to those higher interest rates.
Decline does not imply any deterioration of the credit quality of the portfolio, nor any impairment of the timely collection of principal and interest from our securities.
As I said on the last.
Earnings call over the long term higher interest rates will be generally beneficial for CNA, allowing the company to invest its cash flow at higher rates than it previously cook.
On average CNA reinvest between three and $400 million a month.
And its fixed income portfolio, so higher interest rates will improve that portfolio's yield over time.
Final rates are particularly helpful for Cna's long term care book of business, which has longer duration liabilities in Cna's P&C business.
The company has been able to buy long term securities at higher yields than they previously could allowing us to advantageously lengthen the duration of this portion of its portfolio.
Turning to Loews hotels and cold.
Company has been performing exceptionally well, having just generated its highest quarter with quarterly adjusted EBITDA ever and the amount of $116 million. These impressive results are related to strong leisure travel and rapidly recovering group demand.
Total adjusted EBITDA generated for the first half of the year was $183 million, which is $54 million higher than the pre pandemic first half of 2019.
Several new resort and convention properties developed by Loews hotels have opened over the past few years and the company's favorable performance has certainly been impacted by the addition of these attractively situated properties.
Additionally, I'm happy to report that we had yet another resort hotel opening this November the lowest called Gables hotel.
Look forward to this property is strengthening our brand in South Florida.
As a reminder, loews hotels is one of the very few owner operators in the hotel industry. The company's ability to design. Its unique properties ensures that loews hotels are built to our exacting standards. Additionally, the company's active participation in designing these properties meaning.
These hotels are ideally suited to today's market demands.
To review the hotel company's growth strategy is based on two pillars first catering to greif business and second developing and operating hotels in immersive destination.
The first pillar focuses on the hotels were 300, plus Ts and ample meeting space that also offer unique local experiences that attract group and transient customers alike.
We are very encouraged by the recent pickup in group travel at these locations.
Nearly all locations with significant meeting space.
The properties the Loews hotel owns in partnership with Universal Orlando are a great example of the second pillar of the Loews Hotels' strategy emerge.
Destination with built in demand generators.
Universal Orlando partnership has been highly successful spanning more than two decades, and currently encompassing eight hotels with 9000 rooms.
Additionally, Loews hotels has been focused on building out.
All in Texas, which is an immersive destination that caters to group travel and therefore, it is consistent with both pillars of its growth strategy.
Our current property in Orlando excuse me, our first properly property in Arlington. The live by Loews hotels is within an entertainment district with three professional sports stadiums and performance venues and it's also close to the future home of the National Medal of Honor Museum opening at the end.
A 2024.
This live by Loews Hotel was particularly resilient during the pandemic given our confidence in this market I am pleased to report that we have talked off construction of the new logos, All Linton Hotel and 888 room Hotel is connected via indoor skybridge cause the live by Loews hotels.
This movement in property and will have over 250000 feet of meeting and event space and will be connecting to Arlington's brand New Convention Center.
Those all into an hotel remains on track to open in the first quarter of 2024 together the two hotels in Arlington will have almost 1200 rooms for guests who are visiting this vibrant entertainment district, either for major events well for attending meetings and our top along convention space.
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As the Boardwalk pipeline. The company is operationally strong and we look forward to the resolution of our litigation, whose appeal is currently pending in the Delaware Supreme Court. The case is scheduled to be heard on September 14th we have every hope that this case will be resolved by the end of the year.
If you'd like to know more about my thoughts on the Boardwalk litigation I refer you to my first quarter comments.
Finally concerning share repurchases from April 29th Alaska, We reported share repurchases until today, we have repurchased five 2 million shares of Loews common stock for $310 million year to date, we've bought back 3.1% of our outstanding shares.
$459 million.
I've often said, we believe that low still trades at a significant discount to our view of its intrinsic value. So we'll continue to let our share repurchase activities speak for itself and now over to year, James and welcome to your first earnings call as the CFO of the Loews Corporation. Thank.
Thank you Shannon and good morning, everyone I'm really looking forward to engaging with you all in this niche.
<unk> quarter of 2022, Loews reported net income of $180 million or <unk> 73 per share compared to net income of $754 million or $2, 86%.
$2 86 per share in last year's second quarter net.
Net income for the six month period was $518 million or $2 nine per share versus $1 billion or $3 82 per share for the comparable prior period.
The decrease year over year may seem large, but it's driven by two items that masked a very strong operating performance of our subsidiaries.
First being the non recurrence of last year's $438 million after tax investment gain on the partial sale and consolidation of all T and packaging and the second being lower investment results at both CNA and Loews, which I'll discuss more in detail later.
Book value per share declined from $71.84 at year end 2021 to $62.90 at the end of the second quarter due mainly to the effect of higher interest rates lowering the market value of Cna's fixed income investments.
As a reminder, this unrealized loss sits in accumulated other comprehensive income or a OCI on the balance sheet within shareholders' equity.
You exclude Aoc I book value per share actually increased from $71.09 at year end to $73 26 at the end of June 2022.
Turning first to our largest subsidiary CNA contributed net income of $183 million to lowest this quarter compared to $330 million last year.
The year over year decline, primarily reflects lower net investment income from Lps and common stock, partially offset by improved underwriting results and higher income from fixed income securities.
In addition investment gains and losses declined due to the unfavorable change in the fair value of non redeemable preferred stock.
Putting aside the investment results. We are pleased that CNA showed a significant improvement in their P&C underwriting income this quarter, which grew by over 60%.
This was driven by both topline growth and better profit margins.
Net written premiums grew 13% on an apples to apples basis. When you exclude last year's onetime catch up related to a property quota share treaty.
This was driven by 27% new business growth four points of improvement on retention to 85% and net written rate increase of 6%.
Although written rate increases have decelerated earn rate increases of 8% remain above loss cost trends.
The combined ratio of 91% was three points better than the second quarter of 2021.
This consists of one four points of favorable prior period development, one one points of improvement in the expense ratio and one point of improvement from lower catastrophe losses, offset by half a point of unfavorable underlying loss ratio.
As Jim mentioned CNA has taken advantage of the current interest rate environment to reinvest at attractive rates and extend maturities, particularly within the life and group portfolio.
Just one quarter CNA extended the duration within the life and group portfolio from eight nine years at the end of March to $9 seven years at the end of June .
Moving on to our natural gas pipeline business Boardwalk contributed EBITDA of $193 million this quarter compared to $196 million last year.
Revenues were higher due to an increase in gas storage demand as well as recently completed growth projects connecting to end use markets such as power plants.
That revenue growth has been largely offset by higher cost for maintenance projects due to revised pipeline safety requirements. The.
The decrease in net income from $47 million in last year's second quarter to $39 million. This quarter was driven by higher depreciation expense from recently completed projects.
Turning to Loews hotels.
The company contributed $44 million and net income to loves this quarter versus a loss of $21 million in the second quarter of last year.
Adjusted EBITDA, which is defined and reconciled in our investor presentation on our website was $116 million for the quarter versus $25 million in the second quarter last year.
And as Jim mentioned this quarter's result is an all time high for Loews hotels.
The company has performed exceptionally well this year due to strong leisure demand at its resort properties, especially in Orlando and Miami as well as a pickup in group travel at at City Center Hotel.
The hotel properties at the Universal Orlando resort contributed meaningfully to the period over period improvement as all 9000 rooms were open for the entire quarter versus a year ago. When two properties were still closed for part of the quarter.
Finally for the corporate segment.
<unk> recorded an after tax investment loss of $51 million in the quarter compared to $19 million of income in the prior year's quarter. This loss was driven by declines in our equity portfolio.
Corporate segment also includes our proportionate share of all teens earnings which is accounted for under the equity method.
Our share of all peons income slightly improved this quarter due to price increases offsetting lower volume demand.
From a cash flow perspective, we received $97 million in dividends from CNA this quarter and $681 million a year to date, consisting of two regular quarterly dividends of <unk> 40 per share and a special dividend of $2 per share.
Since we updated you last quarter, we have repurchased an incremental $5 2 million shares at a cost of $310 million.
That brings our total year to date share repurchases through last Friday to seven 7 million shares at a total cost of $459 million.
Loews ended the quarter with $3 $5 billion in cash and short term investments. The majority of these funds are held in treasury bills and less than 20% are held in equities and limited partnerships.
I will now hand, the call back to Chris.
Thank you James moving on to the question and answer portion of the call. We have a number of questions from our shareholders every quarter, we encourage shareholders to send those questions in advance that they would like us to answer on our earnings call. Our first question is for James Jane can you give us an update on the Boardwalk litigation.
Sure we filed both our appeal brief and a reply brief and we expect to argue our case before the court on September 14th we anticipate a decision hopefully by the end of the year.
Great. Thank you James. The next question is also for you to the recent incident at the Freeport LNG liquefaction plant had an impact on boardwalk.
No it did not and just for context in early June there was a fire at Freeport LNG, which is one of the largest LNG export facilities in the U S. Freeport shutdown its operation and does not expect to be back at full capacity until later on this year. However, boardwalks transportation contracts with our Freeport shippers are on a take or pay.
So it was not materially impacted by this incident.
Thank you James next question is for Jim Jim can you provide us with an update on how labor shortages are affecting larger subsidiaries.
Sadly so so a few core of a few quarters ago I discussed labor issues at all Tien Tsin of Loews hotels. Since then for Loews hotels I'm happy to report the labor has become less of a problem increased staffing levels are enabling loews hotels team members to deliver the high quality service.
As to which discuss our custom at.
That all tedium labor continuity continues to be a challenge in some manufacturing locations to address this challenge Alton news offerings sign on retention and employee before bonuses. They have also adjusted base wages to keep up with the market.
These actions have enabled all three of them to close staffing gaps and many facilities.
Overall, we are pleased that both loews hotels, and loyalty and are seeing improvements and stuff.
Thanks, Tim Our final question is also for you would you like to share with US your most recent thoughts on inflation and interest rates.
Sure. So since our last call in May the fed seems to be following through in their fight against inflation.
Time, the yield on the 90 day Treasury bills.
Our market closely tied to the fed funds rate has tripled from about 80 basis points to about two 3% on.
On the other hand during that same time period. The 10 year Treasury note has me darin yield from a yield of 3% to about $2 six 5%.
This price action tells me that the market believes that the fed is delivering on its promise to her not policies to tame inflation.
The prices of some commodities helped to tell the story.
Since the beginning of the year of lumber is down 50%.
It is pretty much unchanged notwithstanding.
<unk> in Ukraine, and Dr. Copper is down about 20%.
Measured from the peaks the prices are down significantly more than from the beginning of the year.
So what does all this mean as I look at what's going on.
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We may be in for what I would call a full employment recession.
The current unemployment rate was three 6% and job growth for the past year and a half has averaged 400000 new jobs per month.
While job openings are about twice the number of job seekers.
So there's plenty of room for decline in the demand for labor, but for unemployed people to still find a new job.
What's been going on for the past year is that wages have not kept pace with inflation. For example in the latest July employment report average hourly earnings were up five 1% versus a year ago, but the CPI was up nine 1% in that time span.
Meaning that workers fell behind inflation by 400 basis points.
The thing that has kept the economy moving forward has been to increase unemployment.
In the past year.
The number of people working has increased by four 3% year over year.
So with respect to aggregate demand increase in the number of people walking has made up for the declines in real earnings stated another way employment is moving up but walkers real incomes are falling behind.
Can see the state of affairs consumer needs for several more quarters will real wages are declining but employment is increasing.
It gives the fed the time it needs to engineer a soft landing whereby unemployment doesn't go above 5% while at the same time inflation is giving them a chance to come down.
No I don't expect that we will see 2% inflation in the coming 12 months, but I can foresee that there will be a significant reduction in inflation in the coming six to 12 months.
We might be able to avoid the truly damaging wage price inflation spiral so so problematic in the 19 seventies.
To accomplish this best of all possible worlds outcome. The fed will have to be steadfast in their fight against inflation and federal spending will have to remain in check.
And as long as I'm prognosticating.
Don't foresee a deep and debilitating recession, rather I can imagine the slowdown will be relatively shallow which would be consistent with a full employment recession.
The reason I've come to this conclusion is that we don't seem to have too many excesses.
Economy or financial institutions that hasnt been rampant.
There hasn't been ramping investments in housing and financial institutions are in reasonably good shape and are seemingly not overextended.
So overall I foresee a recession, but I would characterize as benign.
I have enough self awareness to realize that I'm, an optimist, but I consider myself, a realistic optimist and the idea of a full employment recession as crazy as it might sound seems like a realistic possibility for the coming 12 months, we will see stay tuned for my next update.
Three months from now.
Great. Thank you Jim that concludes the last call for today as always thank you for your continued interest please feel free to reach out to me with any additional questions at sea Nugent Atmos a.
A replay of this call will be available on our site Lowes dot com in approximately two hours. Thank you. So much you may now all disconnect.
Thank you and this does conclude today's program. Thank you for your participation you may disconnect at any time.
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