filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with our Consolidated Condensed Financial Statements included under Item 1 of this Report and the Consolidated Financial Statements, Risk Factors, and MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2021. This MD&A is comprised of the following sections:
OVERVIEW
Loews Corporation is a holding company and has four reportable segments comprised of three individual consolidated operating subsidiaries, CNA Financial Corporation (“CNA”), Boardwalk Pipeline Partners, LP (“Boardwalk Pipelines”) and Loews Hotels Holding Corporation (“Loews Hotels & Co”); and the Corporate segment. The Corporate segment is primarily comprised of Loews Corporation, excluding its operating subsidiaries, the consolidated operations of Altium Packaging LLC (“Altium Packaging”) for the three months ended March 31, 2021 and the equity method of accounting for Altium Packaging for the three months ended March 31, 2022. For information regarding the deconsolidation of Altium Packaging, see Note 2 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021.
Unless the context otherwise requires, the term “Company” as used herein means Loews Corporation including its consolidated subsidiaries, the terms “Parent Company,” “we,” “our,” “us” or like terms as used herein mean Loews Corporation excluding its subsidiaries, the term “Net income (loss) attributable to Loews Corporation” as used herein means Net income (loss) attributable to Loews Corporation shareholders and the term “subsidiaries” means Loews Corporation’s consolidated subsidiaries.
We rely upon our invested cash balances and distributions from our subsidiaries to generate the funds necessary to meet our obligations and to declare and pay any dividends to our shareholders. The ability of our subsidiaries to pay dividends is subject to, among other things, the availability of sufficient earnings and funds in such subsidiaries, applicable state laws, including in the case of the insurance subsidiaries of CNA, laws and rules governing the payment of dividends by regulated insurance companies (see Note 14 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021) and compliance with covenants in their respective loan agreements. Claims of creditors of our subsidiaries will generally have priority as to the assets of such subsidiaries over our claims and those of our creditors and shareholders.
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RESULTS OF OPERATIONS
Consolidated Financial Results
The following table summarizes net income (loss) attributable to Loews Corporation by segment and net income (loss) per share attributable to Loews Corporation for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31 | 2022 | 2021 | |||||||||
| (In millions, except per share data) | |||||||||||
| CNA Financial | $ | 281 | $ | 279 | |||||||
| Boardwalk Pipelines | 91 | 85 | |||||||||
| Loews Hotels & Co | 15 | (43) | |||||||||
| Corporate | (49) | (60) | |||||||||
| Net income attributable to Loews Corporation | $ | 338 | $ | 261 | |||||||
| Basic net income per share | $ | 1.36 | $ | 0.98 | |||||||
| Diluted net income per share | $ | 1.36 | $ | 0.97 |
Net income attributable to Loews Corporation for the three months ended March 31, 2022 was $338 million, or $1.36 per share, compared to net income attributable to Loews Corporation of $261 million, or $0.97 per share in the comparable 2021 period.
Net income attributable to Loews Corporation increased for the three months ended March 31, 2022 compared to the comparable prior year period as CNA, Boardwalk Pipelines, and Loews Hotels & Co all generated strong operating results. CNA experienced higher property & casualty non-catastrophe underwriting results and lower catastrophe losses, offset by lower net investment income and investment losses compared to investment gains in the comparable prior year period. Loews Hotels & Co’s results improved significantly as the company continues its recovery from reduced travel during the COVID-19 pandemic, and Boardwalk Pipelines’ earnings increased due to higher revenues from growth projects recently placed into service. The parent company generated lower net investment income than in the comparable prior year period.
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CNA Financial
The following table summarizes the results of operations for CNA for the three months ended March 31, 2022 and 2021 as presented in Note 11 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report. For further discussion of Net investment income and Investment gains (losses), see the Investments section of this MD&A.
| Three Months Ended March 31 | 2022 | 2021 | |||||||||
| (In millions) | |||||||||||
| Revenues: | |||||||||||
| Insurance premiums | $ | 2,059 | $ | 1,962 | |||||||
| Net investment income | 448 | 504 | |||||||||
| Investment gains (losses) | (11) | 57 | |||||||||
| Non-insurance warranty revenue | 382 | 338 | |||||||||
| Other revenues | 7 | 5 | |||||||||
| Total | 2,885 | 2,866 | |||||||||
| Expenses: | |||||||||||
| Insurance claims and policyholders’ benefits | 1,455 | 1,506 | |||||||||
| Amortization of deferred acquisition costs | 344 | 359 | |||||||||
| Non-insurance warranty expense | 354 | 311 | |||||||||
| Other operating expenses | 326 | 285 | |||||||||
| Interest | 28 | 28 | |||||||||
| Total | 2,507 | 2,489 | |||||||||
| Income before income tax | 378 | 377 | |||||||||
| Income tax expense | (65) | (66) | |||||||||
| Net income | 313 | 311 | |||||||||
| Amounts attributable to noncontrolling interests | (32) | (32) | |||||||||
| Net income attributable to Loews Corporation | $ | 281 | $ | 279 |
Net income attributable to Loews Corporation increased $2 million for the three months ended March 31, 2022 as compared with the comparable 2021 period. Net income increased due to lower catastrophe losses and improved non-catastrophe underwriting results for the three months ended March 31, 2022 as compared with the comparable 2021 period. Catastrophe losses were $19 million ($13 million after tax and noncontrolling interests) for the three months ended March 31, 2022 as compared with $125 million ($88 million after tax and noncontrolling interests) in the comparable 2021 period. Catastrophe losses for the three months ended March 31, 2022 were primarily related to severe weather related events. Catastrophe losses for the three months ended March 31, 2021 were primarily driven by Winter Storms Uri and Viola. These increases to net income were offset by lower net investment income and investment losses for the three months ended March 31, 2022 as compared with investment gains in the comparable 2021 period. Lower net investment income was driven by lower limited partnership and common stock returns and investment losses were driven by the unfavorable change in the fair value of non-redeemable preferred stock and lower investment gains on disposals of fixed maturity securities.
CNA’s Property & Casualty and Other Insurance Operations
CNA’s commercial property and casualty insurance operations (“Property & Casualty Operations”) include its Specialty, Commercial and International lines of business. CNA’s Other Insurance Operations outside of Property & Casualty Operations include its long term care business that is in run-off, certain corporate expenses, including interest on CNA’s corporate debt, and the results of certain property and casualty businesses in run-off, including CNA Re, asbestos and environmental pollution (“A&EP”), a legacy portfolio of excess workers’ compensation (“EWC”) policies and certain legacy mass tort reserves. We believe the presentation of CNA as one reportable segment is appropriate in accordance with applicable accounting standards on segment reporting. However, for purposes of this discussion and analysis of the results of operations, we provide greater detail with respect to CNA’s Property & Casualty Operations and Other Insurance
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Operations to enhance the reader’s understanding and to provide further transparency into key drivers of CNA’s financial results.
In assessing its insurance operations, CNA utilizes the core income (loss) financial measure. Core income (loss) is calculated by excluding from net income (loss), investment gains or losses and any cumulative effects of changes in accounting guidance. In addition, core income (loss) excludes the effects of noncontrolling interests. The calculation of core income (loss) excludes investment gains or losses because investment gains or losses are generally driven by economic factors that are not necessarily reflective of CNA’s primary insurance operations. Core income (loss) is deemed to be a non-GAAP financial measure and management believes this measure is useful for investors to evaluate its insurance operations. Please see the non-GAAP reconciliation of core income (loss) to net income (loss) that follows in this MD&A.
Property & Casualty Operations
In evaluating the results of Property & Casualty Operations, CNA utilizes the loss ratio, the loss ratio excluding catastrophes and development, the expense ratio, the dividend ratio, the combined ratio and the combined ratio excluding catastrophes and development. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The loss ratio excluding catastrophes and development excludes catastrophes losses and changes in estimates of claim and claim adjustment expense reserves, net of reinsurance, for prior years from the loss ratio. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders’ dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios. The combined ratio excluding catastrophes and development is the sum of the loss ratio excluding catastrophes and development, the expense ratio and the dividend ratio. In addition, renewal premium change, rate, retention and new business are also utilized in evaluating operating trends. Renewal premium change represents the estimated change in average premium on policies that renew, including rate and exposure changes. Rate represents the average change in price on policies that renew excluding exposure change. For certain products within Small Business, where quantifiable, rate includes the influence of new business as well. Exposure represents the measure of risk used in the pricing of the insurance product. Retention represents the percentage of premium dollars renewed in comparison to the expiring premium dollars from policies available to renew. Renewal premium change, rate and retention presented for the prior period are updated to reflect subsequent activity on policies written in the period. New business represents premiums from policies written with new customers and additional policies written with existing customers. Gross written premiums, excluding third-party captives, excludes business which is ceded to third-party captives, including business related to large warranty programs.
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The following tables summarize the results of CNA’s Property & Casualty Operations for the three months ended March 31, 2022 and 2021.
| Three Months Ended March 31, 2022 | Specialty | Commercial | International | Total | |||||||||||||||||||
| (In millions, except %) | |||||||||||||||||||||||
| Gross written premiums | $ | 1,846 | $ | 1,208 | $ | 363 | $ | 3,417 | |||||||||||||||
| Gross written premiums excluding third-party captives | 885 | 1,206 | 363 | 2,454 | |||||||||||||||||||
| Net written premiums | 771 | 1,001 | 251 | 2,023 | |||||||||||||||||||
| Net earned premiums | 772 | 904 | 264 | 1,940 | |||||||||||||||||||
| Net investment income | 103 | 118 | 14 | 235 | |||||||||||||||||||
| Core income | 163 | 132 | 26 | 321 | |||||||||||||||||||
| Other performance metrics: | |||||||||||||||||||||||
| Loss ratio excluding catastrophes and development | 58.9 | % | 61.5 | % | 58.6 | % | 60.1 | % | |||||||||||||||
| Effect of catastrophe impacts | 1.8 | 1.2 | 1.0 | ||||||||||||||||||||
| Effect of development-related items | (1.3) | (0.5) | |||||||||||||||||||||
| Loss ratio | 57.6 | % | 63.3 | % | 59.8 | % | 60.6 | % | |||||||||||||||
| Expense ratio | 30.9 | 30.7 | 32.6 | 31.0 | |||||||||||||||||||
| Dividend ratio | 0.2 | 0.5 | 0.3 | ||||||||||||||||||||
| Combined ratio | 88.7 | % | 94.5 | % | 92.4 | % | 91.9 | % | |||||||||||||||
| Combined ratio excluding catastrophes and development | 90.0 | % | 92.7 | % | 91.2 | % | 91.4 | % | |||||||||||||||
| Rate | 9 | % | 5 | % | 9 | % | 7 | % | |||||||||||||||
| Renewal premium change | 10 | 8 | 10 | 9 | |||||||||||||||||||
| Retention | 85 | 85 | 73 | 83 | |||||||||||||||||||
| New business | $ | 145 | $ | 228 | $ | 78 | $ | 451 |
| Three Months Ended March 31, 2021 | |||||||||||||||||||||||
| Gross written premiums | $ | 1,794 | $ | 1,113 | $ | 343 | $ | 3,250 | |||||||||||||||
| Gross written premiums excluding third-party captives | 816 | 1,111 | 343 | 2,270 | |||||||||||||||||||
| Net written premiums | 742 | 960 | 235 | 1,937 | |||||||||||||||||||
| Net earned premiums | 735 | 855 | 252 | 1,842 | |||||||||||||||||||
| Net investment income | 117 | 148 | 14 | 279 | |||||||||||||||||||
| Core income | 170 | 69 | 24 | 263 | |||||||||||||||||||
| Other performance metrics: | |||||||||||||||||||||||
| Loss ratio excluding catastrophes and development | 59.4 | % | 60.8 | % | 59.6 | % | 60.1 | % | |||||||||||||||
| Effect of catastrophe impacts | 0.7 | 13.4 | 2.0 | 6.8 | |||||||||||||||||||
| Effect of development-related items | (2.1) | 0.5 | (0.1) | (0.6) | |||||||||||||||||||
| Loss ratio | 58.0 | % | 74.7 | % | 61.5 | % | 66.3 | % | |||||||||||||||
| Expense ratio | 30.6 | 31.4 | 34.4 | 31.5 | |||||||||||||||||||
| Dividend ratio | 0.2 | 0.6 | 0.3 | ||||||||||||||||||||
| Combined ratio | 88.8 | % | 106.7 | % | 95.9 | % | 98.1 | % | |||||||||||||||
| Combined ratio excluding catastrophes and development | 90.2 | % | 92.8 | % | 94.0 | % | 91.9 | % | |||||||||||||||
| Rate | 11 | % | 10 | % | 14 | % | 11 | % | |||||||||||||||
| Renewal premium change | 12 | 11 | 12 | 11 | |||||||||||||||||||
| Retention | 86 | 83 | 75 | 83 | |||||||||||||||||||
| New business | $ | 103 | $ | 211 | $ | 80 | $ | 394 |
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Gross written premiums, excluding third-party captives, for Specialty increased $69 million for the three months ended March 31, 2022 as compared with the comparable 2021 period driven by higher new business and rate. Net written premiums for Specialty increased $29 million for the three months ended March 31, 2022 as compared with the comparable 2021 period. The increase in net earned premiums for the three months ended March 31, 2022 was consistent with the trend in net written premiums for Specialty.
Gross written premiums for Commercial increased $95 million for the three months ended March 31, 2022 as compared with the comparable 2021 period driven by rate and retention. Net written premiums for Commercial increased $41 million for the three months ended March 31, 2022 as compared with the comparable 2021 period. The increase in net earned premiums for the three months ended March 31, 2022 was consistent with the trend in net written premiums for Commercial.
Gross written premiums for International increased $20 million for the three months ended March 31, 2022 as compared with the comparable 2021 period. Excluding the effect of foreign currency exchange rates, gross written premiums increased $30 million driven by rate. Net written premiums for International increased $16 million for the three months ended March 31, 2022 as compared with the comparable 2021 period. Excluding the effect of foreign currency exchange rates, net written premiums increased $26 million for the three months ended March 31, 2022 as compared with the comparable 2021 period. The increase in net earned premiums for the three months ended March 31, 2022 was consistent with the trend in net written premiums for International.
Core income increased $58 million for the three months ended March 31, 2022 as compared with the comparable 2021 period due to lower catastrophe losses and improved non-catastrophe current accident year underwriting results, partially offset by lower net investment income driven by limited partnership and common stock returns.
Total catastrophe losses were $19 million for the three months ended March 31, 2022 as compared with $125 million for the comparable 2021 period. For the three months ended March 31, 2022 and 2021, Specialty had no catastrophe losses and $5 million of catastrophe losses, Commercial had catastrophe losses of $16 million and $115 million and International had catastrophe losses of $3 million and $5 million.
Favorable net prior year loss reserve development of $12 million and $15 million was recorded for the three months ended March 31, 2022 and 2021. For the three months ended March 31, 2022 and 2021, Specialty recorded favorable net prior year loss reserve development of $10 million and $15 million. For the three months ended March 31, 2022, Commercial recorded favorable net prior year loss reserve development of $2 million as compared with no net prior year loss reserve development in the comparable 2021 period. Further information on net prior year loss reserve development is included in Note 4 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report.
Specialty’s combined ratio improved 0.1 point for the three months ended March 31, 2022 as compared with the comparable 2021 period due to a 0.4 point improvement in the loss ratio largely offset by a 0.3 point increase in the expense ratio. The improvement in the loss ratio was primarily driven by improved current accident year underwriting results partially offset by lower favorable net prior year loss reserve development. There were no catastrophe losses for the three months ended March 31, 2022, as compared with catastrophe losses comprising 0.7 points of the loss ratio in the comparable 2021 period. The increase in the expense ratio was driven by higher underwriting expenses partially offset by higher net earned premiums.
Commercial’s combined ratio improved 12.2 points for the three months ended March 31, 2022 as compared with the comparable 2021 period primarily due to a 11.4 point improvement in the loss ratio and a 0.7 point improvement in the expense ratio. The improvement in the loss ratio was primarily due to lower catastrophe losses which were 1.8 points of the loss ratio for the three months ended March 31, 2022, as compared with 13.4 points of the loss ratio in the comparable 2021 period. The combined ratio excluding catastrophes and development improved 0.1 point for the three months ended March 31, 2022 as compared with the comparable 2021 period. The improvement in the expense ratio of 0.7 points was driven by higher net earned premiums and lower acquisition costs partially offset by an increase in underwriting expenses. The loss ratio excluding catastrophes and development increased 0.7 points due to a shift in mix of business associated with the property quota share treaty purchased during the second quarter of 2021. CNA’s property coverages, which have a lower underlying loss ratio than most other commercial coverages, now represent a smaller proportion of net earned premiums. On a mix adjusted basis, there was no change in the underlying loss ratio.
International’s combined ratio improved 3.5 points for the three months ended March 31, 2022 as compared with the comparable 2021 period due to a 1.8 point improvement in the expense ratio and a 1.7 point improvement in the loss ratio. The improvement in the expense ratio was driven by lower acquisition costs and higher net earned premiums. The improvement in the loss ratio was driven by improved current accident year underwriting results. Catastrophe losses were
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1.2 points of the loss ratio for the three months ended March 31, 2022, as compared with 2.0 points of the loss ratio in the comparable 2021 period.
Other Insurance Operations
The following table summarizes the results of CNA’s Other Insurance Operations for the three months ended March 31, 2022 and 2021.
| Three Months Ended March 31 | 2022 | 2021 | |||||||||
| (In millions) | |||||||||||
| Net earned premiums | $ | 120 | $ | 120 | |||||||
| Net investment income | 213 | 225 | |||||||||
| Core income (loss) | (5) | — |
Core results decreased $5 million for the three months ended March 31, 2022 as compared with the comparable 2021 period primarily due to lower net investment income and higher expenses, partially offset by the recognition of a $12 million loss resulting from the legacy excess workers’ compensation loss portfolio transfer (“EWC LPT”) in the three months ended March 31, 2021. For further information on the EWC LPT see Note 8 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021.
Non-GAAP Reconciliation of Core Income to Net Income
The following table reconciles core income to net income attributable to Loews Corporation for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31 | 2022 | 2021 | |||||||||
| (In millions) | |||||||||||
| Core income (loss): | |||||||||||
| Property & Casualty Operations | $ | 321 | $ | 263 | |||||||
| Other Insurance Operations | (5) | ||||||||||
| Total core income | 316 | 263 | |||||||||
| Investment gains (losses) | (3) | 49 | |||||||||
| Consolidating adjustments including noncontrolling interests | (32) | (33) | |||||||||
| Net income attributable to Loews Corporation | $ | 281 | $ | 279 |
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Boardwalk Pipelines
A significant portion of Boardwalk Pipelines’ revenues are fee-based, being derived from capacity reservation charges under firm agreements with customers, which do not vary significantly period to period, but are impacted by longer term trends in its business such as lower pricing on contract renewals and other factors. Boardwalk Pipelines’ operating costs and expenses do not vary significantly based upon the amount of products transported, with the exception of costs recorded in fuel and transportation expense, which are netted with fuel retained on our Consolidated Condensed Statements of Operations. For further information on Boardwalk Pipelines’ revenue recognition policies see Note 1 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021.
The following table summarizes the results of operations for Boardwalk Pipelines for the three months ended March 31, 2022 and 2021 as presented in Note 11 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report:
| Three Months Ended March 31 | 2022 | 2021 | |||||||||
| (In millions) | |||||||||||
| Revenues: | |||||||||||
| Operating revenues and other | $ | 381 | $ | 372 | |||||||
| Total | 381 | 372 | |||||||||
| Expenses: | |||||||||||
| Operating and other | 217 | 217 | |||||||||
| Interest | 42 | 41 | |||||||||
| Total | 259 | 258 | |||||||||
| Income before income tax | 122 | 114 | |||||||||
| Income tax expense | (31) | (29) | |||||||||
| Net income attributable to Loews Corporation | $ | 91 | $ | 85 |
Total revenues increased $9 million for the three months ended March 31, 2022 as compared with the comparable 2021 period. Including the items in fuel and transportation expense, operating revenues increased $13 million, primarily driven by an increase in natural gas transportation revenues from recently completed growth projects.
Operating expenses were flat for the three months ended March 31, 2022 as compared with the comparable 2021 period. Excluding items offset with operating revenues, operating expenses increased $4 million, primarily due to higher employee-related costs and an increased asset base from recently completed growth projects.
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Loews Hotels & Co
The following table summarizes the results of operations for Loews Hotels & Co for the three months ended March 31, 2022 and 2021 as presented in Note 11 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report:
| Three Months Ended March 31 | 2022 | 2021 | |||||||||
| (In millions) | |||||||||||
| Revenues: | |||||||||||
| Operating revenue | $ | 123 | $ | 39 | |||||||
| Revenues related to reimbursable expenses | 29 | 18 | |||||||||
| Total | 152 | 57 | |||||||||
| Expenses: | |||||||||||
| Operating and other: | |||||||||||
| Operating | 108 | 58 | |||||||||
| Reimbursable expenses | 29 | 18 | |||||||||
| Depreciation | 15 | 16 | |||||||||
| Equity (income) loss from joint ventures | (26) | 12 | |||||||||
| Interest | 4 | 8 | |||||||||
| Total | 130 | 112 | |||||||||
| Income (loss) before income tax | 22 | (55) | |||||||||
| Income tax (expense) benefit | (7) | 12 | |||||||||
| Net income (loss) attributable to Loews Corporation | $ | 15 | $ | (43) |
Loews Hotels & Co’s results have significantly improved for the three months ended March 31, 2022 as compared with the comparable 2021 period as overall travel demand and resulting business levels were considerably higher in 2022. Travel, particularly to resort destinations, has significantly rebounded from the impacts of the COVID-19 pandemic causing overall occupancy rates to improve. However, occupancy rates have not reached pre-pandemic levels at some hotels owned and/or operated by Loews Hotels & Co, notably those located in city centers.
Operating revenues improved by $84 million and operating expenses increased by $50 million for the three months ended March 31, 2022 as compared with the comparable 2021 period. The increase in operating revenues was driven by stronger occupancy levels and higher average daily rates at many hotels in 2022 as compared to 2021. Operating expenses have likewise increased to support the higher demand levels and resumption of additional pre-pandemic services. As additional hotels continue to achieve greater occupancy levels, operating expenses may continue to increase.
Equity (income) loss from joint ventures improved $38 million for the three months ended March 31, 2022 as compared with the comparable 2021 period. This improvement was the result of having all 9,000 rooms available at the Universal Orlando Resort along with greater occupancy levels and higher average daily rates, particularly at the Universal Orlando Resort.
Interest expense for the three months ended March 31, 2022 decreased $4 million as compared with the comparable 2021 period due primarily to the increase in fair value of an interest rate cap that was executed in the first quarter of 2022, capitalized interest on a project under development, and lower average debt balances.
Corporate
Corporate operations consist primarily of investment income, interest expense and administrative costs at the Parent Company. Investment income includes earnings on cash and short term investments held at the Parent Company to meet current and future liquidity needs, as well as results of the trading portfolio held at the Parent Company. Corporate also includes Altium Packaging recorded under the equity method of accounting for the three months ended March 31, 2022 and includes the consolidated operating results of Altium Packaging for the three months ended March 31, 2021.
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The following table summarizes the results of operations for Corporate for the three months ended March 31, 2022 and 2021 as presented in Note 11 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report:
| Three Months Ended March 31 | 2022 | 2021 | |||||||||
| (In millions) | |||||||||||
| Revenues: | |||||||||||
| Net investment income (loss) | $ | (16) | $ | 46 | |||||||
| Operating revenues and other | 281 | ||||||||||
| Total | (16) | 327 | |||||||||
| Expenses: | |||||||||||
| Operating and other | 22 | 308 | |||||||||
| Interest | 22 | 48 | |||||||||
| Total | 44 | 356 | |||||||||
| Loss before income tax | (60) | (29) | |||||||||
| Income tax (expense) benefit | 11 | (31) | |||||||||
| Net loss attributable to Loews Corporation | $ | (49) | $ | (60) |
Net investment loss for the Parent Company was $16 million for the three months ended March 31, 2022 as compared with income of $46 million for the comparable 2021 period, primarily due to a decline in the fair value of equity based investments.
Operating revenues and other for the three months ended March 31, 2021 include $280 million of consolidated operating revenues for Altium Packaging.
Operating and other expenses decreased for the three months ended March 31, 2022 as compared with the comparable 2021 period, primarily due to $279 million of consolidated operating expenses for Altium Packaging during the three months ended March 31, 2021 as compared with the equity method of accounting for Altium Packaging during the three months ended March 31, 2022. Operating and other expenses also include lower legal and other corporate overhead expenses at the Parent Company for the three months ended March 31, 2022 as compared with the comparable 2021 period.
Interest expenses decreased $26 million for the three months ended March 31, 2022 as compared with the comparable 2021 period, primarily due to $26 million of consolidated interest expenses for Altium Packaging for the three months ended March 31, 2021, which included a charge of approximately $14 million to write off debt issuance costs for the early retirement of debt.
Income tax expense for the three months ended March 31, 2021 included the recognition of a $35 million deferred tax liability resulting from the asset held for sale designation of Altium Packaging.
LIQUIDITY AND CAPITAL RESOURCES
Parent Company
Parent Company cash and investments, net of receivables and payables, totaled $3.8 billion at March 31, 2022 as compared to $3.4 billion at December 31, 2021. During the three months ended March 31, 2022, we received $584 million in cash dividends from CNA, including a special cash dividend of $486 million. Cash outflows during the three months ended March 31, 2022 included the payment of $132 million to fund treasury stock purchases and $15 million of cash dividends to our shareholders. As a holding company we depend on dividends from our subsidiaries and returns on our investment portfolio to fund our obligations. We also have an effective shelf registration statement on file with the Securities and Exchange Commission (“SEC”) registering the future sale of an unlimited amount of our debt and equity securities from time to time. We are not responsible for the liabilities and obligations of our subsidiaries and there are no Parent Company guarantees.
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Depending on market and other conditions, we may purchase our shares and shares of our subsidiaries outstanding common stock in the open market, in privately negotiated transactions or otherwise. During the three months ended March 31, 2022, we purchased 2.1 million shares of Loews Corporation common stock. As of April 29, 2022, we had purchased an additional 0.3 million shares of Loews Corporation common stock in 2022 at an aggregate cost of $19 million. As of April 29, 2022, there were 246,108,045 shares of Loews Corporation common stock outstanding.
Future uses of our cash may include investing in our subsidiaries, new acquisitions, dividends and/or repurchases of our and our subsidiaries’ outstanding common stock. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend on many factors, including our earnings, financial condition and business needs.
Subsidiaries
CNA’s cash provided by operating activities was $645 million for the three months ended March 31, 2022 and $82 million for the comparable 2021 period. The increase in cash provided by operating activities was driven by the prior year payment of the EWC LPT premium.
CNA paid a cash dividend of $2.40 per share on its common stock, including a special cash dividend of $2.00 per share, during the three months ended March 31, 2022. On April 29, 2022, CNA’s Board of Directors declared a quarterly cash dividend of $0.40 per share payable June 2, 2022 to shareholders of record on May 16, 2022. CNA’s declaration and payment of future dividends is at the discretion of its Board of Directors and will depend on many factors, including CNA’s earnings, financial condition, business needs and regulatory constraints. CNA believes that its present cash flows from operating, investing and financing activities are sufficient to fund its current and expected working capital and debt obligation needs and does not expect this to change in the near term.
Dividends from Continental Casualty Company (“CCC”), a subsidiary of CNA, are subject to the insurance holding company laws of the State of Illinois, the domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require prior approval by the Illinois Department of Insurance (the “Department”), are determined based on the greater of the prior year’s statutory net income or 10% of statutory surplus as of the end of the prior year, as well as the timing and amount of dividends paid in the preceding 12 months. Additionally, ordinary dividends may only be paid from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As of March 31, 2022, CCC was in a positive earned surplus position. CCC paid dividends of $535 million and $330 million during the three months ended March 31, 2022 and 2021. The actual level of dividends paid in any year is determined after an assessment of available dividend capacity, holding company liquidity and cash needs as well as the impact the dividends will have on the statutory surplus of the applicable insurance company.
CNA has an effective shelf registration statement on file with the SEC under which it may publicly issue debt, equity or hybrid securities from time to time.
Boardwalk Pipelines’ cash provided by operating activities increased $13 million for the three months ended March 31, 2022 compared to the comparable 2021 period, primarily due to the change in net income.
For the three months ended March 31, 2022 and 2021, Boardwalk Pipelines’ capital expenditures were $60 million and $53 million, consisting of growth capital expenditures of $35 million and $34 million and maintenance capital expenditures of $18 million and $19 million. Boardwalk Pipelines also paid $7 million for natural gas to be used in its integrated natural gas pipeline system in the 2022 period.
Boardwalk Pipelines anticipates that its existing capital resources, including its cash on hand, revolving credit facility and cash flows from operating activities, will be adequate to fund its operations and capital expenditures for 2022 and to retire the outstanding $300 million aggregate principal amount of its 3.4% senior notes due in February of 2023. Boardwalk Pipelines also has an effective shelf registration statement on file with the SEC under which it may publicly issue $1.0 billion of debt securities, warrants or rights from time to time. In February of 2022, Boardwalk Pipelines completed a public offering of $500 million aggregate principal amount of its 3.6% senior notes due September 1, 2032, which utilized $500 million of capacity under its shelf registration statement. Boardwalk Pipelines used the proceeds to retire the outstanding $300 million aggregate principal amount of its 4.0% senior notes due June 2022 in March of 2022, to fund growth capital expenditures and for general corporate purposes. As of March 31, 2022, Boardwalk Pipelines had no outstanding borrowings and all of the $1.0 billion available borrowing capacity under its revolving credit facility.
During 2022, Loews Hotels & Co anticipates funding its development projects in progress with cash on hand, cash generated from operations, and, if necessary, cash contributions from Loews Corporation.
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As of March 31, 2022, Loews Hotels & Co, through its subsidiaries, has loans that mature within twelve months and is actively working with lenders to refinance $93 million in current maturities of long term debt. Extending these loans, along with certain loans of unconsolidated joint venture partnerships, may require Loews Hotels & Co to make principal pay downs, establish restricted cash reserves or provide guaranties of a subsidiary’s debt. Through the date of this Report, none of Loews Hotels & Co’s subsidiaries are in default on any of their loans.
INVESTMENTS
Investment activities of our non-insurance subsidiaries primarily consist of investments in fixed income securities, including short term investments. The Parent Company portfolio also includes equity securities, including short sales and derivative instruments, and investments in limited partnerships. Certain of these types of investments generally have greater volatility, less liquidity and greater risk than fixed income investments and are included within Results of Operations – Corporate.
The Parent Company enters into short sales and invests in certain derivative instruments that are used for asset and liability management activities, income enhancements to its portfolio management strategy and to benefit from anticipated future movements in the underlying markets. If such movements do not occur as anticipated, then significant losses may occur. Monitoring procedures include senior management review of daily reports of existing positions and valuation fluctuations to seek to ensure that open positions are consistent with the portfolio strategy.
Credit exposure associated with non-performance by counterparties to derivative instruments is generally limited to the uncollateralized change in fair value of the derivative instruments recognized in the Consolidated Condensed Balance Sheets. The risk of non-performance is mitigated by monitoring the creditworthiness of counterparties and diversifying derivatives by using multiple counterparties. Collateral is occasionally required from derivative investment counterparties depending on the amount of the exposure and the credit rating of the counterparty.
Insurance
CNA maintains a large portfolio of fixed maturity and equity securities, including large amounts of corporate and government issued debt securities, residential and commercial mortgage-backed securities, other asset-backed securities and investments in limited partnerships which pursue a variety of long and short investment strategies across a broad array of asset classes. CNA’s investment portfolio supports its obligation to pay future insurance claims and provides investment returns which are an important part of CNA’s overall profitability.
Net Investment Income
The significant components of CNA’s net investment income are presented in the following table. Fixed income securities, as presented, include both fixed maturity securities and non-redeemable preferred stock.
| Three Months Ended March 31 | 2022 | 2021 | |||||||||
| (In millions) | |||||||||||
| Fixed income securities: | |||||||||||
| Taxable fixed income securities | $ | 368 | $ | 359 | |||||||
| Tax-exempt fixed income securities | 73 | 80 | |||||||||
| Total fixed income securities | 441 | 439 | |||||||||
| Limited partnership and common stock investments | 8 | 61 | |||||||||
| Other, net of investment expense | (1) | 4 | |||||||||
| Net investment income | $ | 448 | $ | 504 |
| Effective income yield for the fixed income securities | |||||||||||
| portfolio | 4.3 | % | 4.4 | % | |||||||
| Limited partnership and common stock return | 0.4 | % | 3.4 | % |
CNA’s net investment income decreased $56 million for the three months ended March 31, 2022 as compared with the comparable 2021 period driven by lower limited partnership and common stock returns.
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Investment Gains (Losses)
The components of CNA’s investment gains (losses) are presented in the following table:
| Three Months Ended March 31 | 2022 | 2021 | |||||||||
| (In millions) | |||||||||||
| Investment gains (losses): | |||||||||||
| Fixed maturity securities: | |||||||||||
| Corporate and other bonds | $ | 3 | $ | 36 | |||||||
| States, municipalities and political subdivisions | 3 | (1) | |||||||||
| Asset-backed | (8) | 3 | |||||||||
| Total fixed maturity securities | (2) | 38 | |||||||||
| Non-redeemable preferred stock | (38) | 2 | |||||||||
| Short term and other | 29 | 17 | |||||||||
| Total investment gains (losses) | (11) | 57 | |||||||||
| Income tax (expense) benefit | 8 | (8) | |||||||||
| Amounts attributable to noncontrolling interests | (5) | ||||||||||
| Investment gains (losses) attributable to Loews Corporation | $ | (3) | $ | 44 |
CNA’s investment results decreased $68 million for the three months ended March 31, 2022 as compared with the comparable 2021 period, driven by the unfavorable change in fair value of non-redeemable preferred stock and lower net investment gains on disposals of fixed maturity securities.
Further information on CNA’s investment gains and losses is set forth in Note 2 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report.
Portfolio Quality
The following table presents the estimated fair value and net unrealized gains (losses) of CNA’s fixed maturity securities by rating distribution:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Estimated Fair Value | Net Unrealized Gains (Losses) | Estimated Fair Value | Net Unrealized Gains (Losses) | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| U.S. Government, Government agencies and Government-sponsored enterprises | $ | 2,497 | $ | (107) | $ | 2,600 | $ | 42 | |||||||||||||||
| AAA | 3,513 | 97 | 3,784 | 360 | |||||||||||||||||||
| AA | 7,243 | 160 | 7,665 | 823 | |||||||||||||||||||
| A | 9,062 | 366 | 9,511 | 1,087 | |||||||||||||||||||
| BBB | 17,497 | 552 | 18,458 | 2,043 | |||||||||||||||||||
| Non-investment grade | 2,133 | (34) | 2,362 | 91 | |||||||||||||||||||
| Total | $ | 41,945 | $ | 1,034 | $ | 44,380 | $ | 4,446 |
As of March 31, 2022 and December 31, 2021, 1% of CNA’s fixed maturity portfolio was rated internally. AAA rated securities included $1.5 billion and $1.7 billion of pre-refunded municipal bonds as of March 31, 2022 and December 31, 2021.
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The following table presents CNA’s available-for-sale fixed maturity securities in a gross unrealized loss position by ratings distribution:
| March 31, 2022 | Estimated Fair Value | Gross Unrealized Losses | |||||||||
| (In millions) | |||||||||||
| U.S. Government, Government agencies and Government-sponsored enterprises | $ | 2,095 | $ | 116 | |||||||
| AAA | 993 | 105 | |||||||||
| AA | 2,809 | 269 | |||||||||
| A | 3,300 | 205 | |||||||||
| BBB | 6,073 | 392 | |||||||||
| Non-investment grade | 1,254 | 70 | |||||||||
| Total | $ | 16,524 | $ | 1,157 |
The following table presents the maturity profile for these available-for-sale fixed maturity securities. Securities not due to mature on a single date are allocated based on weighted average life:
| March 31, 2022 | Estimated Fair Value | Gross Unrealized Losses | |||||||||
| (In millions) | |||||||||||
| Due in one year or less | $ | 238 | $ | 4 | |||||||
| Due after one year through five years | 3,081 | 97 | |||||||||
| Due after five years through ten years | 7,754 | 465 | |||||||||
| Due after ten years | 5,451 | 591 | |||||||||
| Total | $ | 16,524 | $ | 1,157 |
Duration
A primary objective in the management of CNA’s investment portfolio is to optimize return relative to the corresponding liabilities and respective liquidity needs. CNA’s views on the current interest rate environment, tax regulations, asset class valuations, specific security issuer and broader industry segment conditions as well as domestic and global economic conditions, are some of the factors that enter into an investment decision. CNA also continually monitors exposure to issuers of securities held and broader industry sector exposures and may from time to time adjust such exposures based on its views of a specific issuer or industry sector.
A further consideration in the management of CNA’s investment portfolio is the characteristics of the corresponding liabilities and the ability to align the duration of the portfolio to those liabilities and to meet future liquidity needs, minimize interest rate risk and maintain a level of income sufficient to support the underlying insurance liabilities. For portfolios where future liability cash flows are determinable and typically long term in nature, CNA segregates investments for asset/liability management purposes. The segregated investments support the long term care and structured settlement liabilities in Other Insurance Operations.
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The effective durations of CNA’s fixed income securities and short term investments are presented in the following table. Amounts presented are net of payable and receivable amounts for securities purchased and sold, but not yet settled.
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Estimated Fair Value | Effective Duration (Years) | Estimated Fair Value | Effective Duration (Years) | ||||||||||||||||||||
| (In millions of dollars) | |||||||||||||||||||||||
| Investments supporting Other Insurance Operations | $ | 16,868 | 8.9 | $ | 18,458 | 9.2 | |||||||||||||||||
| Other investments | 27,045 | 5.0 | 28,915 | 4.9 | |||||||||||||||||||
| Total | $ | 43,913 | 6.5 | $ | 47,373 | 6.6 |
CNA’s investment portfolio is periodically analyzed for changes in duration and related price risk. Certain securities have duration characteristics that are variable based on market interest rates, credit spreads and other factors that may drive variability in the amount and timing of cash flows. Additionally, CNA periodically reviews the sensitivity of the portfolio to the level of foreign exchange rates and other factors that contribute to market price changes. A summary of these risks and specific analysis on changes is included in the Quantitative and Qualitative Disclosures about Market Risk included under Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021.
CRITICAL ACCOUNTING ESTIMATES
Certain accounting policies require us to make estimates and judgments that affect the amounts reflected in the Consolidated Condensed Financial Statements. Such estimates and judgments necessarily involve varying, and possibly significant, degrees of uncertainty. Accordingly, certain amounts currently recorded in the financial statements will likely be adjusted in the future based on new available information and changes in other facts and circumstances. See the Critical Accounting Estimates and the Insurance Reserves sections of our MD&A included under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021 for further information.
ACCOUNTING STANDARDS UPDATE
In August 2018, the Financial Accounting Standards Board issued Accounting Standards Update 2018-12, “Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts.” The updated accounting guidance requires changes to the measurement and disclosure of long-duration contracts. For the Company, this includes CNA’s Long term care and fully-ceded single premium immediate annuity business.
The most significant impact will be the effect of updating the discount rate assumption quarterly to reflect an upper-medium grade fixed-income instrument yield, rather than the expected investment portfolio yield. This will be partially offset by the de-recognition of Shadow Adjustments associated with long-duration contracts. The net impact of these changes is expected to be a $2.0 billion - $2.3 billion (after tax and noncontrolling interests) decrease in Accumulated other comprehensive income as of the transition date of January 1, 2021. To illustrate the sensitivity of this adjustment, had the interest rates in effect as of March 31, 2022 been used in the calculation, the transition impact would have been a $0.9 billion - $1.2 billion (after tax and noncontrolling interests) decrease in Accumulated other comprehensive income.
For a discussion of accounting standards updates that have been adopted or will be adopted in the future, please read Note 1 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report.
FORWARD-LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this Report as well as in other of our and our subsidiaries’ SEC filings and periodic press releases and certain oral statements made by us and our subsidiaries and our and their officials during presentations may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements include, without limitation, any statement that does not directly relate to any historical or current fact and may project, indicate or imply future results, events, performance or achievements. Such statements may contain the words “expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “will be,” “will continue,” “will likely result,” and similar expressions. In addition, any statement concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by us or our subsidiaries are also forward-looking statements as defined by the Act. Forward-looking
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statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond our control, that could cause actual results to differ materially from those anticipated or projected.
Developments in any of the risks or uncertainties facing us or our subsidiaries, including those described under Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021 and in our and our subsidiaries’ other filings with the SEC, could cause our and our subsidiaries’ results to differ materially from results that have been or may be anticipated or projected. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date they are made and we and our subsidiaries expressly disclaim any obligation or undertaking to update these statements to reflect any change in expectations or beliefs or any change in events, conditions or circumstances on which any forward-looking statement is based.
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