Summary
- General improvement in all core businesses relative to 1Q20, Hotel lagging and is still loss-making although on smaller scale.
- Insurance business incurred $301mn cat losses mostly due to COVID-19 and civil unrest, unlikely to be anything significant beyond that. Rates and written premiums increased.
- $33mn spent on buyback (1mn shares), generally management remains conservative, not actively looking for new assets, cautious about spending too much capital on buyback.
- CEO openly said that he was extremely frustrated with market valuation of Loews and CNA, pointed out that the market is valuing private businesses of Loews at less than $500mn (Boardwalk Pipelines alone is worth at least $3bn based on the buyout price for minorities in July 2018).
- Loews (at $37) remains considerably undervalued, I should keep the stock in the portfolio and potentially add more on weakness.
Segment results
CNA Financial
CNA has generally performed well with rising rates, premiums written and recovering investment portfolio. The only negative factor has been $301mn cat loss mainly due to COVID-19 and civil unrest. Further details are as follows:
- Underlying combined ratio was 93.4%.
- Revenue increased by 6% YoY to $2,766mn in 2Q20 driven by higher gross written premiums (+7%) in the Property & Casualty segment (P&C) and rate hikes (+11%, 3p.p. higher than in 1Q20 in the P&C segment).
- Net income declined 46% YoY to $151mn. Main reason for that was $301mn cat losses made up from $182mn related to COVID-19, $61mn related to civil unrest and $58mn related to severe weather events. Underlying combined ratio was at a solid 93% (94.8% for the full year 2019).
$0.37/share quarterly dividend declared (67% payout ratio), flat QoQ and up 6% YoY. CNA’s dividend yield is 4.6% on annualised basis if special dividend is not included (10.7% with special dividends).
Book value per share at $42.3 compared to $45.0 as of 4Q19.
Boardwalk Pipelines
In July of 2018, Loews purchased the outstanding common units of Boardwalk that we didn't already own for $1.5 billion, putting the total equity value of Loews' ownership stake in Boardwalk at $3 billion. EBITDA remained flat since 2018, not much changed to reconsider that valuation. 1H performance slightly ahead of guidance made post 1Q results.
The company has over $9 billion of contractual backlog or seven times Boardwalk's annual revenues. Essentially, I'm comfortable with the guidance I gave last quarter for Boardwalk. The company is currently tracking slightly better than forecast for the first half of the year. Its low volumes are up, the pipes are doing well, and storage revenues are strong. At the end of 2020, Boardwalk should continue to have a debt to EBITDA ratio below five times.
Loews Hotels
More hotels have reopened, but occupancy remains low. Expect hotel and travel industry to recover eventually. Equity investments in new hotels not reflected in past EBITDA.
Altium
13% organic growth in 1H20, 35% total sales growth (including impact from acquisitions). Equity value ($0.6bn acquisition price - $1.2bn less $0.6bn debt) should be more than a few years ago.
CNA is trading at a single PE compared to 20x PE for S&P 500. Loews purchased 0.6mn shares of CNA shares (0.2% of total shares, $19mn) during 2Q in a show of support of the business and its management, displeasure with market valuation.
When you strip out all the noise in the quarter, the company's underlying combined ratio was 93.4%. CNA continues to benefit from a strong premium rate environment. Rates increased by 3 percentage points from the first quarter of 2020 to about 11% in the second quarter, and the company is actively managing its long-term care business, taking actions to reduce risk now and into the future.
CNA’s investment portfolio delivered strong results, unrealised gains reached $4.4bn almost at prior highs.
Capital allocations – purchased almost 1mn of Loews shares, 0.6mn of CNA.
With over $3.6 billion in cash and investments on our balance sheet, we are willing to continue to highlight how egregiously our shares and CNA shares are being priced. That means that share repurchases are certainly not off the table, but we won't be buying in shares at the pace set over the last two years.
Q&A
Q: What is the rationale for keeping CNA public?
A: CNA would remain public despite Loews seeing it at as extremely undervalued. Key benefits for keeping it public include more transparency for regulators and credit agencies as well as tools to attract talent (stock based compensation). Cost savings from taking CNA private are almost zero.
Q: Plans for new acquisitions.
A: Not looking at making new deals (strange, opposite to Berkshire), focus on conserving cash. Consider both Loews and CNA to be so cheap that looking for alternative outside investments does not make a lot of sense. Remain open minded and if relative values change (Loews / CNA vs third-party assets) may consider new acquisitions.
Q: Conditions in the travel industry.
A: Expect 2021 to be much better for the travel industry and 2022 to improve further. Leisure travel, driving is picking up, business travel is lagging. Occupancy is rising from a few months ago, but remains very low at 10, 20, 30, 40%. Still losing money with opened hotels, but losses are smaller than when hotels are completely closed.
Q: Capital allocation, views on buyback.
A: Would keep cash and investments above debt for credit ratings. Given high uncertainty would prioritise liquidity, but may consider buyback if things start to change. [look too conservative and pro-cyclical, better to buy now then when shares are much higher. I think this is tactical, they don’t want to signal to the market their intention to buy so that they can buy more shares at lower prices. Back in May, management answered similarly indicating no plans to buy back shares but ended up spending about $33mn on purchasing own shares].
DISCLAIMER: this publication is not investment advice. The main purpose of this publication is to keep track of my thought process to better assess future information and improve my decision making process. Readers should do their own research before making decisions. Information provided here may have become outdated by the time you read it. All content in this document is subject to the copyright of Hidden Value Gems. The author held a position in the stock discussed above at the time of writing. Please read the full version of Disclaimer here.
