Summary
- Continued recovery in business performance of core subsidiaries which started last quarter. Discount to NAV of 23% and more than 56% if we use a more optimistic estimate for NAV (not market based valuation).
- Pace of buyback accelerated to $195mn during 3Q20 (compared to just $33mn in 2Q20) which indicates growing confidence of management in the business and strong financial position. Consider buying own shares at current levels (c. $34-37) to be the most attractive option compared to two others (acquiring new businesses or investing in subsidiaries).
- Net cash at $1.2bn ($1.3bn as of 2Q20), $90mn received as dividends from subsidiaries.
- Further improvement in the insurance business with lower combined ratio and stronger rates. Hotel business does not require any cash contribution by Loews due to improved performance.
- Book value per share at $62.3, up from $61.3 in 2Q20, down slightly from a year ago ($64.85 in 3Q19). P/B ratio at 0.6x.
- The stock remains significantly undervalued with management taking advantage of this through more active buyback programme. Should definitely keep the stock in my portfolio. Considering significantly better external environment and lower downside risks, I should buy more of this stock.
Segment results
CNA Financial
- Very strong performance, net income doubled YoY to $192mn driven by 89% growth in core income (excluding investment gains).
- Underlying combined ratio of the P&C insurance at 92.6% (93% in 2Q20, 94.8% for 2019 and 94.6% for 3Q19) due to improved loss and expense ratios. Property and casualty pricing momentum continues with rates increasing over 12% (11% in 2Q20 and just under 6% for 3Q19).
View long-term care as a significant reason for undervaluation of CNA. Very comfortably internally with reserves that CNA has set up for long-term care. Loews CEO believes that CNA is taking a conservative view on future interest rates, which 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. Over the past seven years CNA has been laser-focused and immersed in their long-term care book of business. 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.
Issued $500mn 10-year bonds at 2.08% yield.
$0.37/share quarterly dividend declared (52% 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 $42.8 ($42.3 in 2Q20 and $45.0 as of 4Q19).
Boardwalk Pipelines
The marginal decline in revenue relative to last year (-2%) to $288mn as some old contracts expired and were re-contracted at lower rates, partially offset by revenue from new pipeline and storage capacity put into operation. With higher costs as asset base expanded, EBITDA declined 5% to $167mn, while net income declined 31% due to extra taxes. Importantly, most of contracts have been renegotiated, so going forward revenue should start growing to reflect higher asset base. Issued $500mn 10-year bonds at 3.4% yield.
Loews Hotels
Believe that 2Q was the bottom for the travel industry, have seen some improvement since then, 21 out of 27 hotels have resumed operations by end of 3Q20. With better cost management, do not expect material cash needs by Loews Hotel in the future. EBITDA was negative at -$38mn during the period (-$54mn during 2Q20).
Altium
Demand and sales remained strong, some weakness in automotive and commercial food service. Recycling business has experienced strongest quarter ever. Net income was actually negative due to accelerated amortisation of a trademark (to be fully amortised by the end of this year) and higher resin prices which were not fully passed to customers as contract prices have some lag.
Q&A
Q: How is CNA dealing with extraordinary year for the insurance industry?
A: (James Tisch, CEO of Loews): I'm impressed by how the P&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 $400mn of core income and $300mn of net income through the third quarter 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 the territory in the property and casualty industry, and we believe that CNA is effectively managing its cat exposure, while also getting strong rate increases on cat-exposed businesses.
Also made a comment that the sector is becoming more disciplined in capital management which supports overall profitability in the industry.
Q: How strong financially are Boardwalk’s customers?
A: Boardwalkhas been diversifying its customer base, now over 70% of backlog comes from investment grade customers. David Edelson, CFO: “In 2020, 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 re-market any return capacity, these bankruptcies will not have a material financial impact on the company. At the end of the third quarter, Boardwalk had well over $9bn in contracted revenues with over $600mn of net new contracts added to backlog during 2020”.
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.
