Loews Corp.: Insurance on Long Term Upside 9 comments
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Loews Corp. (L – $27.50), sometimes referred to as a mini Berkshire Hathaway (BRK.A) (BRK.B), “is a diversified holding company rooted in the principles of value investing and focused on building long-term value as a means of generating wealth for our shareholders.” It is attractively priced and has provided long term shareholders with excellent returns. “Over the past 50 years, Loews has delivered annualized price appreciation of 16.10 %, versus 5.70% for the S&P 500 Index.” (Annual Report 2008)
6 Reasons to Consider Loews as a Long Term Investment
Loews Corp. has a market capitalization that is favorable for long term growth. It does not take an enormous amount of retained earnings to move a $12 billion market capitalization company. Currently, about $1 billion in annualized dividends is collected from the publicly traded subsidiaries. Size can hinder total performance. The law of large numbers suggests that as a company grows, its chances of sustaining a large percentage in growth diminish. Loews’ policy of opportunistic share buy backs keeps the company’s market capitalization at a more favorable growth level.
High Insider ownership. The Tisch family controls about 25% of the shares outstanding as of the most recent proxy. Insiders invest alongside shareholders.
A prudent balance sheet with plenty of excess cash to fund all subsidiary cash needs and additional acquisitions. Management follows a disciplined contrarian value philosophy which has kept the company out of the hyped up-bubble valued investments of the past decade while preserving shareholder value. Cash and liquid investments has been a strategic asset for Loews over the years to seize opportunities in distressed times and to be self sufficient in its funding requirements.
Diversified holding company with a broad range of industry exposure to energy, insurance and hotel/real estate. As a conglomerate, management has the freedom and the flexibility to make investments and acquisitions across a broad spectrum of industries. A diversified cash flow stream is a result of such a corporate structure. Management believes that shareholders benefit from the ownership of publicly traded subsidiaries since market valuations are set by third party investors daily, disclosure and governance is independent of the holding company and usually the public subsidiaries can access capital markets to finance their operations and expansion plans.
Shareholder friendly management. Share count outstanding has decreased over the years. In December 1971, the share count was 1.3 billion. Today, the share count is 435 million shares outstanding. This approach to share reduction/capital allocation has kept the company’s size at a manageable level while rewarding long term shareholders. Rather than squandering precious assets on pricey buybacks, the management is opportunistic when they buy back shares, only buying in when prices are attractively valued. Even though I dislike stock options as a form of compensation, stock compensation is very reasonable. There are no signs of executives feeding at the stock option trough here.
Ownership of hard assets across the energy sector will combat inflationary conditions in the future. Offshore drilling rigs, natural gas pipelines and Natural gas and oil assets in the ground should maintain their value in inflationary times.
Loews Corp holding company consists of several public traded companies and some wholly owned subsidiaries.
Loews Ownership %
- Diamond Offshore (DO) - 51%
- CNA Financial (CNA) - 92%
- Boardwalk Pipelines (BWP) - 74%
- Highmount Exploration & Production – 100%
- Loews Hotel - 100%
Loews Estimated 2009 Subsidiary Cashflow Contribution %
- Diamond Offshore (DO) - 52%
- Boardwalk Pipeline (BWP) – 25%
- CNA Financial (CNA) – 11%
- Investment Other income – 12%
In the case of the three publicly traded subsidiaries, Loews Corp receives dividends on a quarterly basis. Recently, Diamond Offshore paid out a special dividend of $1.875 and a regular dividend of .125 for a total of $144 million. Boardwalk Pipelines paid out a dividend per unit of .485 or $63 mil and C NA Financial paid out a dividend on the $1.25 billion preferred stock owned by Loews for $31 mil. A total dividend of $238 mil was received by Lowes Corp last quarter. This is close to $1 billion on an annual basis.
The largest holding is Diamond Offshore (DO), mainly an offshore drilling company specializing in semi-submersible rigs as well as a few jackup rigs. Diamond owns 30 semi-submersible rigs and 15 jackup rigs, which have all been upgraded over the years at much cheaper rates than buying new. The company is highly opportunistic in expanding its rig fleet.
Normally Diamond Offshore will expand its offshore fleet in industry downturns where the pricing for the rigs is much more favorable to higher returns on invested capital. I expect Diamond with its huge cash position and strong balance sheet to acquire a few rigs at distressed prices from speculative new build owners. DO is trading at about 8 times consensus earnings estimates and has a $9.6 billion sales backlog.
Boardwalk Pipelines (BWP) Boardwalk Pipeline Partners, LP, is a limited partnership engaged, through its subsidiaries, Gulf Crossing Pipeline Company LLC, Gulf South Pipeline Company, LP, and Texas Gas Transmission, LLC, in the interstate transportation and storage of natural gas. Boardwalk’s interstate natural gas pipeline systems have approximately 14,200 miles of pipeline and underground storage fields having aggregate working gas capacity of approximately 160 Bcf. This limited partnership currently is paying about a 10% dividend yield.
CNA Financial (CNA) an "A" rated property and casualty carrier provides commercial insurance products, including standard and specialty lines, surety, marine and other coverages, nationally and internationally.
Recently, CNA has hired a new Chairman and Chief Executive Officer with 30 years experience from Chubb Corporation (CB). This new management should help take CNA to the next level of performance. The insurer has had some recent issues with its investment portfolio which has decreased in value due to the credit market upheaval. Management is confident that many of the fixed income securities that have unrealized losses will return to par at maturity.
Also, since policy liabilities match bond maturities there will be no forced selling of depressed fixed income securities to meet obligations. The insurer has performed quite well in the most recent quarter as its combined ratio was 98.2% and unrealized losses in the investment portfolio have improved by over $500 million. CNA trades at a fairly large discount to its current book value of $21.57.
Highmount Exploration and Production owned 2.2 Tcfe of net proved reserves, of which 77% were classified as proved developed. Loews paid $4 billion in cash and debt for the company in 2007.
Loews Hotel operates 18 hotels. The company owns or land leases 8 hotels, 3 are partially owned while the remaining 7 have management contracts that expire at various times. In addition, the company has a management contract and owns a 25% stake in an Atlanta mixed use development project expected to open in 2010. The hotel business represents a small % of sales, but does add intrinsic value through its management contracts and hard asset land/building ownership.
This is a sector that management has mentioned potential future investment opportunities.
Fortress Like Balance Sheet
Currently, Loews Corp. has cash and liquid investments of $2.5 billion and debt of $865 million for a net cash position of $1.635 billion. The debt is spaced out at favorable time periods; $175 mil due 2011, $400 mil due 2016 and $300 mil due 2035. In addition, Loews owns a $1.25 billion preferred stock with CNA Financial which pays out 10%.
Eventually, when CNA Financial is able to pay back the preferred stock and this must be done first before C NA can pay a common dividend, Loews will have an additional $1.25 billion of liquidity.
As I had mentioned above, Loews is receiving about $250 mil a quarter in dividends from its subsidiaries. Loews has committed to investing another $500 mil into BWP for pipeline expansion projects, so cash should start accumulating rapidly once this is complete.
Loews should be able to build a tremendous amount of shareholder value in this difficult economic environment either by buying in stock at big discounts, making tuck in acquisitions to enhance current holdings or acquiring new businesses.
Sum of the Parts Analysis
Since Loews is a holding company, many investors including myself look at the total value of all the holdings. Based on our reasonable asset assumptions, Loews Corp. is trading at a 34% discount at its current stock price to its approximate $41.50 (6/2/09 close) asset value. Of course, the discount and the net asset value fluctuate daily with the stock prices.
According to our valuation at the depths of the most recent market plunge, Loews traded at a discount as high as 43%. Usually Loews, which is a conglomerate, trades at a 15-20% discount due to possible taxes associated with the holdings. Therefore, a fair value based on current market prices appears to be much higher in our opinion. In addition, the publicly traded subsidiaries are trading at very favorable valuations so you get the double play valuation by closing the gap between the Loews stock and the subsidiary discounts over time.
From the 2008 Annual Report:
On February 25, 2009, the value of Loews’ 90% ownership of CNA common stock, our 50.4% ownership of Diamond Offshore commons stock and our 69% limited partnership interest in Boardwalk Pipeline totaled approximately $8.6 billion, or $19.87 per share of Loews common stock. Other assets attributed to Loews common stock include our two wholly owned subsidiaries, Highmount and Loews Hotels; our 100% ownership of Boardwalk Pipeline’s general partner; our holding company cash and investments net of holding company debt; and our holdings of CNA senior preferred stock and Boardwalk Pipeline Class B units.
In the sum of parts analysis, I have made various assumptions regarding the value of wholly owned assets (Highmount, Boardwalk General Partner, and Hotels). In my opinion, I have taken a moderately conservative approach to valuing these assets.
Loews’ stock price, at times, can be volatile due to the potential arbitrage opportunities between it and its subsidiary stock holdings. In addition, the subsidiary businesses are cyclical and subject to economic conditions. The energy sector is subject to cyclical movements of oil and natural gas.
Further risks do remain to the CNA Financial investment portfolio that Loews may have to make additional investments in the insurer to fortify its financial position. I am sure that realized losses will be taken in the investment portfolio in the future, but the management feels confident that CNA is in a solid position to weather the storm. Patience is required as the unrealized losses in its debt securities mature over time.
Loews is definitely one company you can comfortably sleep well at night owning and feel confident that it can survive through difficult periods while opportunistically adding shareholder value with its strong balance sheet.
Disclosure: Long position in Bread & Butter Fund (BABFX), separate accounts and personal accounts.
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This article has 9 comments:
This is the intended title of the article. Just for the record, the editors altered the title without my input.
The insurance segment has become a much smaller component of Loews. As you can see in the article, DO and BWP make up a substantial portion of the dividend contributions (77%) to Loews.
I have trouble finding other stocks that include all of the following:
1) margin of safety
2) good, conservative management
3) potential upside in earnings
I think CNA is WAY undervalued - problem is, the stock doesn't trade much. I believe there are less than 3,000 shareholders (but don't quote me on that one).
On Jun 04 03:39 PM Jamie Potkul wrote:
> In my current estimation, the insurance unit only represents about
> 27.25% of the total NAV of Loews. Of course, this can change with
> price fluctuation of the underlying holdings.
Our portfolio showed signs of recovery in the first quarter led by tax exemption corporates. Pricing improvements were seen across all sectors except mortgage-backed and asset-backed products. The recovery continued in the month of April when the market value of our core securities increased by approximately $550 million."
From CNA Q1'09 CC
See very few similarities between FFH and L except both are run by very smart people. L is a holding company with both investments and operating cos like BRK, while ffh is mainly reinsurer relying heavily on the investment portfolio for returns.
As I mentioned on this website - Loews is my biggest position. Therefore, you won't find a bigger fan of the company.
For a second, I would like to focus on CNA again. Book value at 3/31/2009 is around $7 billion. From the call, we might be able to tack on $500 million to that. So we have book value of $7.5 billion and CNA trades for $4 billion?
I realize that if you buy CNA stock directly - more than $1 billion of that $7 billion equity belongs to Loews the parent in the form of a preferred. I still can't figure out why "L" trades so cheaply...with $7 billion of book value in CNA and $5 billion FMV in D.O. - seems like Loews market cap is covered by CNA and DO alone. You almost could argue you get 1.5 billion in net cash, Highmount, Hotels, and 70% stake in BWP for free.
I just keep buying...and put my money where my mouth is.