Ladies and gentlemen, thank you for standing by, and welcome to the Loews Corporation Third Quarter 2020 Earnings Conference Call. I will now turn the call over to Mary Scafidas, Vice President of Investor Relations and Corporate Communications for Loews.
Thank you, Laurie, and good morning, everyone, and welcome to Loews Corporation's 3rd quarter earnings conference call. A copy of our earnings release, earnings supplement and company overview may be found on our website, lowes.com. On the call this morning, we have our Chief Executive Officer, Jim Tisch and our Chief Financial Officer, David Edelson. Following our prepared remarks, 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 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 statements. This disclaimer is only a brief summary of the company's statutory forward looking statements disclaimers, which is included in the company's filings 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. There has been a slight modification to our earnings call format that was made in response to shareholder feedback. For a number of years now, we have taken questions from shareholders on our earnings call, either by incorporating the answers into our prepared remarks or answering them directly during our Q and A session. Recently, we've heard from shareholders that they prefer that we answer questions in the Q and A portion of the call instead of weaving them into the prepared remarks, and we're happy to comply with this request. As a result, we will have a longer Q and A session.
With that, I'd like to turn the call over to our CEO, Jim. Jim, over to you.
Thank you, Mary, and good morning. Let me start by focusing on capital allocation, specifically share buybacks. During our Q2 conference call, I emphatically stated my strong belief that the market was significantly undervaluing Loews' shares. I also stated that while Loews plans to maintain a substantial liquidity position as our rainy day fund, we also would take advantage of the market's discount and continue to buy back our stock. During the Q3, we did just that, purchasing over 5,400,000 shares of Lowe's for about $195,000,000 while preserving ample liquidity and ending the quarter with about $3,500,000,000 in cash and investments.
Maintaining high levels of liquidity is fundamental to our business model because it lets us both capture opportunity and withstand uncertainty. And like any portfolio manager, we have to balance retaining our liquidity with taking advantage of investment opportunities as they arise. Buying back shares is one of Loews' 3 capital allocation tools with the other 2 being investing in our subsidiaries and buying another business. With our stock trading considerably below our view of its intrinsic value, share repurchases have recently been our most attractive capital allocation option. That being said, our decision to buy back stock has not come at the expense of any of our subsidiaries.
For example, we have provided capital to those hotels to help it ride out the effects of COVID on the hospitality industry. Our 3 other subsidiaries, CNA, Boardwalk and Altium Packaging have not recently required parent company capital. Instead, Boardwalk and Altium have largely used their free cash flow to finance growth opportunities and CNA has chosen to pay dividends since Sid hasn't had a need for additional capital. As Mary mentioned, during the Q and A, we will be discussing topics submitted by our shareholders. However, I did want to highlight 2 key items upfront, CNA's long term care business and the situation The company had an underlying combined ratio of 92.6 compared with 94.6 in last year's Q3 due to improved loss and expense ratios.
Property and casualty pricing momentum continues with rates increasing over 12% in the 3rd quarter compared to an increase of just under 6% for the same period last year. With respect to long term care, my guess is that CNA's long term care exposure is a significant reason why CNA's valuation lags its peers. We at Lowe's are comfortable with the reserves that CNA has set up for long term care. The company has been proactive in managing the long term care book of business and prudent in their approach to setting LTC reserves. In the Q3, CNA took an LTC net reserve charge of $37,000,000 before tax, comprising a $74,000,000 active life reserve deficiency, offset by a $37,000,000 claim reserve release.
The active life reserve deficiency resulted from the continued low interest rate environment and its impact on future assumed reinvestment rates. In my opinion, CNA is taking a conservative view on future interest rates, which hopefully means that they will not have to adjust for lower interest rates again going forward. Since the end of 2015, CNA's overall exposure to long term care has been reduced by 31% with the number of active policies declining from 419,000 to 288,000. So why are we so confident in CNA's management of long term care even in the face of the market skepticism? Because we know that over the past 7 years, CNA has been laser focused and immersed in their long term care book of business.
For the 6 years prior to becoming CNA's Chief Financial Officer, Al Morales was Head of Long Term Care at the company. Al did an outstanding job mitigating the LTC risk for CNA and the team in place today continues to do so. CNA has managed more than 100,000 long term care claims to date, providing CNA with reliable claims experience across all policy types and age cohorts. CNA reviews its long term care reserves in the Q3 of every year and they post significant information regarding their review on the CNA website. If you have not already done so, please take a look at the information that they make available.
Now for the 2nd topic I want to cover, Loews Hotels. The fallout from the COVID pandemic continues to negatively affect the travel and tourism industry and Loews Hotels is no exception. We believe and hope that the Q2 was the bottom for the hotel industry and we have seen business pick up at Loews Hotels since then. While occupancy rates are still low by any historical standard, 21 of Loews Hotels' 27 properties had resumed operations by the end of the third quarter. The resumption of operations combined with significant expense controls enacted by Loews Hotels Management have improved the company's cash flow situation.
When the pandemic struck and Loews Hotels substantially suspended operations, we estimated that the company would generate negative cash flow of approximately $25,000,000 per month. While still negative, Loews Hotels' cash flow is much improved. Going forward, we do not expect Loews Hotels' cash needs to be material to Loews Corporation's balance sheet. And with that, let me turn the call over to David.
Thank you, Jim, and good morning, everyone. For the Q3, Loews reported net income of $139,000,000 or $0.50 per share, up from $72,000,000 or $0.24 per share in last year's Q3. The quarterly increase was driven by CNA, whose net income contribution doubled to $192,000,000 Let me provide some brief highlights on CNA's quarter. For more details, we encourage you to review the transcript from the company's investor call earlier this morning. The year over year earnings increase at CNA was driven by 2 main factors: 1, lower net reserve charges in CNA's Life and Group business associated with the long term care and structured settlement businesses and 2, higher net investment income and net investment gains.
As Jim mentioned, CNA's core property casualty business posted robust premium growth and strong underlying profitability in the quarter. However, total P and C underwriting results declined from Q3 2019 because of higher weather related catastrophe losses. Catastrophe losses for the entire U. S. Property casualty industry were elevated during wildfires were also an industry event, but had little impact on CNA.
Before leaving CNA, I would draw your attention to the company's rock solid investment portfolio, which at quarter end had a market value of 49,000,000,000 dollars an average credit rating of A and a net unrealized gain of $5,000,000,000 About 94% of CNA's fixed maturity investment portfolio is investment grade. Again, please see CNA's transcript and shareholder materials for more details. Even though Diamond Offshore ceased being a consolidated subsidiary of Lowe's in this year's Q2, it helped drive our Q3 year over year earnings increase. During last year's Q3, Diamond contributed a net loss of $48,000,000 while this year, Diamond's results were no longer included in our consolidated net income. Let me now turn to our wholly owned subsidiaries, Boardwalk, Loews Hotels and Altium Packaging.
Boardwalk's net income contribution declined from $29,000,000 in the prior year to 20,000,000 The company generated quarterly EBITDA of $167,000,000 versus $175,000,000 last year. Net operating revenues were down slightly. Expiring natural gas transportation contracts were re contracted at lower rates, which was expected and planned for. Revenues from growth projects recently placed in service, together with storage and parking and lending revenues offset much, but not all of the decline. As a reminder, Boardwalk has experienced contract expirations and restructurings over the past few years related to pipelines placed into service 10 to 12 years ago.
This re contracting activity essentially concluded by year end 2019. Boardwalk's increased asset base from its growth projects led to an increase in expenses, especially higher depreciation and property taxes. Additionally, the expiration of property tax abatements contributed to the year over year increase in expenses. Despite the COVID-nineteen pandemic and significant hurricane activity along the Gulf Coast, Boardwalk's operations were minimally disrupted during the quarter and the overall financial impact was negligible. The hurricanes and resulting power disruptions did impact certain customers, but the revenue impact of these disruptions on Boardwalk was immaterial.
Let me highlight that both CNA and Boardwalk took advantage of the robust fixed income market in Q3 to raise money at attractive rates. Both companies issued $500,000,000 of 10 year notes with CNAs yielding 2.08 percent and Boardwalk's 3.41 percent. Both deals were vastly oversubscribed and reflected investors' confidence in their respective credits. Jim already spoke about Loews Hotels, so I will be brief. The business reported a net loss of $47,000,000 in the quarter.
Excluding unusual items, the net loss was 55,000,000 dollars Adjusted EBITDA, which excludes unusual items and includes Loews Hotels' pro rata share of EBITDA in JV Properties, was a loss of $38,000,000 Loews Hotels management is focused on 2 interrelated objectives: 1, reducing the cash flow drag and 2, resuming operations judiciously and effectively. The company has aggressively reduced expenses, right sized its capital spend and worked with lenders to defer interest and principal pay downs. It is reopening properties when management projects that doing so will improve cash flow. As Jim mentioned, we believe that Loews Hotels turned the corner in Q2 and is on an upward trajectory. The average monthly cash flow drag is well below the $25,000,000 we estimated during our Q1 earnings call.
The exact timing of a return to profitability and positive operating cash flow, however, depends on the overall travel environment. But we believe Loews Hotels properties such as those in Orlando, Arlington, Texas and Miami Beach are especially well positioned to participate in the travel upswing that has already begun. Altium Packaging, which is included in corporate and other, had another good quarter. Demand for the company's products continued to be strong overall, higher on COVID-nineteen related product segments such as household chemicals, beverages and personal care and somewhat weaker in segments such as automotive, commercial food service and school dairy. Moreover, Envision, which is the company's recycling business, has been experiencing its best performance since it was acquired by Altium in 2014.
Driving this performance has been stronger demand for recycled plastic, also known as post consumer resin. Altium contributed a slight net loss despite its robust EBITDA. I would highlight 3 factors depressing net income. 1, significant depreciation and amortization expense attributable to the company's recent acquisitions 2, accelerated amortization of the consolidated container trade name, which will be fully amortized by the end of the year and 3, the effect of rising resin prices in Q3. Since there is a contractual lag in Altium's ability to pass through these costs to customers, the company absorbed the cost in the quarter without recognizing the offsetting revenue.
This lag is temporary and will reverse as the costs are passed through to customers. Altium's focus on new business is bearing fruit and should benefit results in future periods. The company has been very successful over the past months in gaining new accounts by demonstrating reliability, continued innovation and customer focus during this difficult COVID period. Turning to the parent company. Pretax net investment income was $23,000,000 down from $36,000,000 last year and $110,000,000 last quarter.
The year over year and linked quarter declines were driven by returns on equities and LP Investments. During Q3 2020, we received $90,000,000 in dividends from CNA. We expect to receive dividends from both CNA and Boardwalk during the Q4. We repurchased 5,400,000 shares of Loews common stock during the quarter at an aggregate cost of 195,000,000 We purchased an additional 667,000 shares since quarter end. Loews ended the quarter with $3,500,000,000 in parent company cat investments with cash and equivalents accounting for over 80% of the portfolio.
Let me now turn the call back to Mary.
Great. Thank you, David. Let's move on to the Q and A section of the call. We have a number of questions to respond to from shareholders. The first one is from for Jim.
Jim, have you considered buying in the outstanding shares of CNA to take advantage of the discount in the stock?
So Lowe's has always believed that by having a public valuation marker for CNA, it's really important, especially to our Lowe's shareholders. On a very rough basis, CNA comprises about half of the value of Loews with the other half being our net cash, our assessment of the value of Boardwalk of Altium and our hotel business. But even beyond just being a marker, there are other reasons to keep CNA as a public company. 1st, being public is important to attracting top talent. The top executives want and top executives in any company want at least a portion of their compensation to be based on the performance of the shares of their company.
And by being public, CN ABL is to provide that incentive to its top talent. Secondly, and we think this is very important, the transparency that comes from being public is important to CNA's regulators as well as to rating agencies. As everybody knows, I think that CNA trades at a ridiculously low valuation and that the P and C industry stocks likewise traded a crazy valuation. And finally, our share repurchases of Lowe's stock allows us to take advantage of the discount valuation that CNA is trading at as well as the discount in Loews' shares for its non CNA assets. That all adds up to what we like to call a very significant double discount in our share repurchases.
Great. Thank you, Jim. The next question has to do with the exceptional year for catastrophe losses in the insurance business. Jim, would you please discuss how CNA and the insurance industry are managing through these challenges?
Well, Mary, you're certainly right. This has certainly been a banner year for cats and cat losses, not only for CNA, but for the industry overall. There have been only 4 quarters over the past 40 quarters where CNA has experienced net cats coming in at or above $160,000,000 and 2 of those 4 quarters over the past 10 years occurred in 2020. At CNA through the Q3, our pre tax cat losses were more than $530,000,000 compared to just $128,000,000 last year. Even if you exclude the losses from COVID and from civil unrest, which were roughly about say $250,000,000 CNA's year to date cat losses would still be running at more than twice last year's level and of course well ahead of their plan.
But despite these really exceptional events and catastrophes, I'm impressed by how the P and C industry and also CNA are managing through it all. If someone had told me in January that 2020 would be filled with storms, fires, civil unrest and the pandemic, I would have told you that CNA would have a miserable year as a result. However, despite this litany of events, CNA is still quite profitable with $400,000,000 of quarter income and $300,000,000 of net income through the Q3. And it continues to find profitable avenues for growth, all the more so thanks to the hard rate market that the insurance industry is currently experiencing. Cat losses come with a territory in the property and casualty industry.
We believe that CNA is effectively managing its cat exposure, while also getting strong rate increases on cat exposed businesses. So let me end this by adding one stray thought. The insurance industry hasn't always been financially prudent and this is the advantage of being associated with a particular industry for over 40 years. I have a little historical perspective here. There were years back in the 70s, 80s 90s when the industry did not have true reacting to catastrophic events and low interest rates by getting rate increases where they are justified.
In my view, this change is a result of an increased demand from equity investors for profitability, which has led to insurance management's increased focus on capital efficiency.
Great. Thank you, Jim. Next question also has to do with CNA, focusing on CNA's long term business. Jim, could you tell us if you your assessment of CNA's long term care business and the risks that it poses to CNA and to Loews?
Sure. As I said in my prepared remarks, CNA's long term care exposure is likely the biggest reason why CNA's valuation lags its peers. And as I also said for the past 7 years, CNA has been 2015, CNA's exposure to long term care Since 2015, CNA's exposure to long term care has been materially reduced with the number of active policies declining by over 30%. Additionally, over the past few years, CNA has been able to further reduce its risk profile of its long term care block of business by achieving meaningful premium rate increases and also offering policyholders attractive options to reduce benefits in return for reduced future premiums. Dino Robusto and Al Morales on their call today focused on long term care and I suggest that everyone review their remarks and look at the significant information on long term care that's posted on CNA's website.
Let me make 2 additional comments on the net reserve charge that CNA took in the 3rd quarter. First and really very significantly, a $37,000,000 net charge on a block this size is actually quite modest. And secondly, the charge was attributable to the historically low level of rich interest rates that we're currently experiencing. With these latest estimated changes going forward, CNA is assuming that a 10 year treasury note will trade at slightly over 1% 3 years from now. And likewise, in 2,030, CNA is assuming that the 10 year note will yield what historically is a poultry 2.75%.
In my opinion, CNA is taking a very, very conservative view on future interest rates, which hopefully means that they won't have to adjust for lower interest rates again going forward.
Thank you, Jim. The next question also staying on the CNA topic. Does the Loews expect to get a special dividend from CNA?
So we still have a quarter to go in 2020. So it's really too early to be making any specific comments about whether or not CNA will pay a special dividend. It's been an extraordinary year for cat losses, that's for sure. I can't speak for the CNA Board, which hasn't had a discussion yet about special dividends. And we still have 4 months to go until the Board actually makes a decision on special dividends.
So I guess we'll just have to wait and see what happens.
Okay. We're switching to Boardwalk. The shareholder would like to know are growth projects slowing in the midstream space. Can you comment on that, Jim?
Yes. From everything that Boardwalk is seeing, it's very likely that there will be a slowdown. In fact, I would say we're in the middle of a slowdown for larger scale projects because our customers are moving out their final investment decisions. However, Boardwalk opportunities with power and industrial customers primarily due to Boardwalk's pipelines proximity to some of our industrial gas customers.
Thank you. The next question is for David. David, there have been several recent bankruptcies of exploration production companies. Can you please comment on the financial strength of Boardwalk's customers?
Sure, Mary. Thanks. Over the past several years, Boardwalk has focused on diversifying its customer base to include more end users, such as power plants, industrial customers and LNG off takers, a strategy that proved beneficial this year. By diversifying in this way, Boardwalk has been able to strengthen the overall credit profile of its customer base. More than 70% of Boardwalk's revenue backlog is derived from investment grade companies.
And Boardwalk has letters of credit or other types of collateral from some of its customers that are not investment grade or are unrated, which provide an additional measure of security. In 2020, in this year, one of Boardwalk's customers declared bankruptcy and another seems to be on the verge. Because of the credit protections in place for these customers and importantly, the ability to remarket any return capacity, these bankruptcies will not have a material financial impact on the company. Stepping back, since the pandemic hit in mid March, Boardwalk has maintained uninterrupted service to its customers while simultaneously taking measures to ensure the safety of its employees and its operations. At the end of the Q3, Boardwalk had well over $9,000,000,000 in contracted revenues with over $600,000,000 of net new contracts added to backlog during 2020.
Great. We have another question for our CFO. David, can you provide an update on cash needs of Loews Hotels?
Absolutely. And Jim already commented on it, but let me just provide a little more detail. When Loews Hotels suspended operations at almost all its properties in the early spring, we estimated that negative cash flow would average around $25,000,000 per month. We went on to say that management would reopen a property if doing so was expected to improve that property's cash flow. Loews Hotels has responded to the pandemic induced sudden downturn by transforming its operating model, including dramatically reducing property level and management company expenses.
As we all know, properties began coming back online during the Q2. 13 properties resumed operations during Q2, another 6 during Q3 and one more hotel last week. As anticipated, Loews Hotels cash flow has improved as properties have resumed operations, expenses have been managed aggressively and capital spending has been right sized for the current environment. While the company continues to generate negative cash flow, it is significantly less than the $25,000,000 per month cited in April. I'd be remiss in not mentioning how difficult the past 8 months have been for Loews Hotels team members.
Thousands of employees were furloughed when the pandemic struck and less than half of the furloughed team members have returned to active duty. Early on, Loews Hotels put programs in place to assist its affected team members, including a multimillion dollar relief fund as well as continuing to provide medical insurance for furloughed employees for several months. Additionally, Loews Hotels has instituted enhanced safety and well-being standards and protocols for team members and guests. And as a reminder, in solidarity with all those hotels' team members being financially impacted by this crisis, all three members of our Office of the President, Jim, John and Andrew Tisch, reduced their salaries by 50% as of April 1 and their bonuses by 50% for the entire year. Back to you, Mary.
Thank you, David. Staying with Loews Hotels, Jim, this next question is for you. Is Loews Hotels looking to buy or sell any hotels? And how has COVID impacted its development projects?
So first, let me talk about Loews Hotels' long term growth strategy. The company, as we've said before, is focused on growth in 2 ways. The first one, by investing in and developing hotels with built in demand drivers, like it has done so successfully with Universal Studios and also in Arlington, Texas. And secondly, the company is focused on developing and operating hotels for the group business. While the hotel recovery is currently powered by leisure travel, we really do believe that the corporate travel along with meetings and events will come back as a pandemic wanes.
But before the pandemic hit, Loews Hotels had begun to evaluate their portfolio and to sell a few hotels that didn't align with the current growth strategy. And they continue to do so opportunistically, including one hotel that was sold earlier this year in Canada. At the start of this year, Loews Hotels had 3 projects under development and scheduled for opening this week this year. 2 of those hotels, the Live by Loews in St. Louis and the Loews Kansas City Hotel have already opened and the hotels are doing just fine in light of the current environment for hotels.
The 3rd hotel under development is the 1,000 Room Endless Summer Dockside Inn and Suites, which is located in Universal's Orlando theme park. This property is in the final stage of development and its opening date will be announced very soon. The hotel will be our 8th hotel on the Universal Campus and will bring our universal room count to nearly 9,000 rooms or just about half of the total rooms in the Loews Hotel system. Our Loews Hotels, they continue to remain focused on its strategy of developing hotels in markets that have unique built in demand generators and potential for group business.
Thank you, Jim. The next one is for you as well. Can you please comment on when you expect to see the hotel industry recover from the effects of the pandemic? Would Lowe's Hotels' recovery lead or lag the industry's recovery?
I'm reminded of the old saying, he who lives by the crystal ball must learn to eat ground glass, but I'll sally forth anyway. Industry analysts believe that a full recovery is anywhere from 2 to 5 years in the future. But the truth is a recovery in hospitality is highly dependent upon how and when the pandemic is contained. At the end of the Q3, as we said before, Loews Hotels had 21 hotels that had already resumed operations. While there has been a steady increase in demand, occupancy rates still remain considerably below historic norms.
That's really important. Occupancy rates are still below historic norms. The recovery is currently being led by leisure business and more than half of Loews Hotels assets that well into that category, such as our properties on the Universal Orlando campus, as well as other assets like the Loews Miami Beach Hotel and Live by Loews in Arlington, Texas, which just hosted the World Series. We're seeing in fact a lot more driving business than we've really ever seen before. Urban center properties are still lagging due to a reduction in corporate travel, but we believe that Loews Hotels properties with unique demand generators will recover more quickly than our urban properties.
Okay. Thank you, Jim. And our last question is for David. David, how has COVID-nineteen affected your packaging business, Altium? Can you please give us an update?
Sure. I mentioned this in my remarks, but let me go over it again. Demand for the company's products has been strong overall. There are certain products that benefited from COVID actually, product segments such as household chemicals, beverages and personal care. And there were others that were somewhat weakened by COVID.
Those would include automotive, commercial, foodservice and school dairy. Although I would point out that the weaker segments began to rebound in the Q3. 2 bright spots this year for Altium are Envision, the company's recycling business and Altium Healthcare, a business created from recent acquisitions that diversifies Altium into the growing pharmaceutical packaging market. And as I mentioned earlier, Envision has been experiencing its best performance since 2014. And as for Altium Healthcare, it's exceeding expectations due to strong synergies as well as continued progress on operational efficiencies and other savings initiatives.
As a result, Altium Healthcare is ahead of plan for the year despite COVID-nineteen. So I would say net net, the company's overall results are running modestly above plan, a plan that was finalized pre pandemic. And I would go on to say that commercially Altium's new business efforts have been very successful over the past few months. I think the company is winning new accounts by differentiating itself by demonstrating reliability, continued innovation and customer focus during this difficult COVID period. So we hope that this focus on new business and the new business wins should benefit financial results in future periods.
Back to you, Mary.
Thanks, David. Thank you, David and Jim. This concludes the Loews call. As always, thanks to all of you for your continued interest. Please feel free to reach out to me with any additional questions at mscafidaslowes.com.
A replay will be available on our website, lowes.com, in approximately 2 hours. Laurie, over to you to end the call.
Thank you for participating in the Loews Corporation Third Quarter 2020 Earnings Conference Call. You may now disconnect your lines and have a wonderful day.