Summary
- Continued recovery in business performance of core subsidiaries which started last quarter. Discount to NAV of 19% and 45% if we use a more optimistic estimate for NAV (not market based valuation).
- Pace of buyback accelerated to $244mn during 4Q20 (compared to just $195mn in 3Q20) which accounts for 2.5% of total outstanding shares (10% if 4Q buyback amount is annualised). Shares outstanding are down 8% since end of 2019, 19% since 2017.
- Management highlighted that Loews share price is considerably below their estimate of intrinsic value, hence share repurchases remain the most attractive capital allocation option.
- Net cash remained unchanged QoQ at $1.2bn, with $192mn dividends received from subsidiaries during the quarter.
- Further improvement across all 4 subsidiaries. Cat losses at CNA, lower investment income at Loews and CNA reduced Loews’ profits by $611mn.
- Book value per share at $64.2, up from $62.3 in 3Q20 and down slightly from last year ($65.9 in 4Q19). P/B ratio at 0.7x.
Segment results
CNA Financial
- Strong performance continued, core net income up 26% YoY to $335mn.
- CNA announced a special dividend of $0.75/share (1.8% yield) and raised quarterly dividend to $0.38 (from $0.37). which represents 3.6% annualised yield. CNA distributed about 90% of its 2020 earnings in dividends. Special dividend in 2019 ($2) was even higher, COVID led to extra losses and reduced earnings in 2020.
- Underlying combined ratio of the P&C insurance at 92.7% (92.6% in 3Q20). For the full year, the ratio was 93.1%, better than 94.8% in 2019. Property and casualty pricing momentum continues with rates increasing over 12% (11% in 2Q20 and just under 6% for 3Q19).
- Pricing improved further rising over 12%, while retention rate improved to 85% (82% in 3Q20). New business grew 17%, net premiums written were up 12%.
- 2020 saw more catastrophes than normally with $550mn losses incurred due to that ($179mn in 2019). Weather contributed to half of those losses, remainder came from civil unrest.
Book value per share at $43.9 ($42.8 in 3Q20 and $45.0 as of 4Q19).
Boardwalk Pipelines
Revenue and EBITDA up 15% and 24% YoY, respectively in 4Q20. For the full year both revenue and EBITDA were flat, despite challenging environment. Loews sees less growth opportunities going forward, but is comfortable with its long-term fixed contracts. Contract backlog at $9bn ($1.3bn new contracts added in 2020), annual revenue is covered 7x by backlog.
Loews Hotels
During December of 2020, occupancy rates for owned and JV hotels that were operational had risen to almost 38% with 22 out of 27 Loews Hotels open. Leisure travel is recovering at a somewhat faster pace than business travel, but it is still difficult to predict when Loews Hotels will resume normal operations. Loews provided $150mn of capital to Loews Hotel during 2020. Expecting normalisation in 2022.
Altium
Altium Packaging completed a debt recapitalization in January of 2021, which resulted in a $199mn payment to Loews - returning a third of Loews equity since acquisition in 2017 (yet Loews maintains 100% ownership of the business). Revenue increased 10% in 2020 due to effects of past acquisitions and improved pricing. About 70% of revenue growth came from acquisitions made in 2019. Seventh acquisition was made in November 2020 which would contribute to growth in 2021.
Q&A
Q: Can you walk us through how you think of Loews intrinsic value?
A: (James Tisch, CEO of Loews): We assess Loews' some of the parts value based on our view of the intrinsic value of each of our subsidiaries. Intrinsic value is our view of what our subsidiaries are worth based on our medium to long range outlook.
Our outlook for each subsidiary is informed by our view of the industry in which it operates and the competitive strengths and weaknesses of our subsidiaries. So let's take a look at these subsidiary by subsidiary.
Starting with CNA. The primary indicators that we look at our core earnings, the combined ratio. We look at earnings per share, dividend capacity, pricing and loss trends. Based on these metrics, we believe CNA's undervalued compared to its peers and even more so compared to the overall markets. We are bullish on the commercial property and casualty insurance industry and we also believe that CNA will be able to continue to take advantage of the current hard market.
For Boardwalk, the factors that we consider for assessing intrinsic value are EBITDA, free cash flow, natural gas volumes, regulatory environment, industrial demand for both gas and gas liquids, the revenue backlog, organic growth potential, along with several other measures and characteristics. We're positive on the natural gas industry and believe the gas will be an important transition fuel for a greener economy.
When we think about Loews Hotels, we consider adjusted EBITDA, cash flow, comparable asset valuation, and occupancy and room rates. Loews Hotels has a unique business model since it's both an owner and an operator of its hotel properties. This differentiator has enabled Loews Hotels to successfully compete for attractive projects over demand, near demand generators such as Orlando, Arlington, Texas. Although the hotel industry has been hard hit by COVID, we believe that Loews Hotels is uniquely positioned to succeed in a post-COVID world.
And finally for Altium. We primarily look at organic volume growth, EBITDA, and cash flow as well as the company's ability to make accretive acquisitions in diversified end-markets. Since we purchased Altium, the company has made seven accretive acquisitions at compelling multiples that have diversified our businesses into higher growth end-markets such as pharma.
These factors are just the beginning of how we come to our assessment of each of our subsidiaries intrinsic value. Additionally, we assess the businesses, management teams, the company's competitive position within its industry and the long-term outlook for each of those industry.
Q: Can you comment about how you're thinking about capital allocation at Loews going forward?
A: So when we think about how to best allocate capital, we traditionally think of it in four ways. We can invest in our existing subsidiaries. We can make an acquisition. We can repurchase our shares or as I like to say if there is nothing to do, we can do nothing. With our stock trading considerably below our view of its intrinsic value, share repurchases have been almost compelling capital allocation option.
As I said in my remarks, our decision to buy back stock has not come at the expense of investing in any of our subsidiaries. For example, we've provided capital to Loews Hotels to help it right out the effects of COVID on its business. Our three other subsidiaries CNA, Boardwalk, and Altium Package have not recently required parent company capital and in fact they've returned capital to the parent company.
In terms of adding a new subsidiary, I think valuations are still too damn high. When buying a new business, there's no amount of due diligence that we can do, that will result in the same knowledge that we have of our own businesses and considering where valuations are today when you compare allocating capital towards a new business with buying in shares when our stock is trading so far below our view of its intrinsic value, well, it's really a no-brainer.
When we think about allocating capital, we really think of it from the perspective of a
shareholder. After all, management's interests are totally aligned with those of our shareholders since senior management has significant shareholdings and the Tisch family
overall owns about 1/3 of the company.
Q: Can you provide an update on the Hotels business?
A: On our first quarter earnings call, I noted that as long as operations, we're almost completely suspended. The hotel company would likely have negative cash flow of about $25 million monthly. I also noted that management intended to reopen properties only when doing so improved earnings and cash flow. As anticipated, cash flow has improved as properties have resumed operations, expenses have been aggressively managed and capital spending has been rightsized.
Today 22 out of 27 properties are operating albeit at depressed occupancy rates. The company continues to generate negative cash flow, although significantly better than the $25 million per month sited in early May. During 2020, the Loews parent company contributed $151 million of cash to Loews Hotels to fund working capital and other capital needs. We will contribute cash again in '21 for working capital to fund operations.
Although, we expect such amounts to be less than in 2020. Because of the company's improved cash flow, we also expect the contributions to be skewed towards the first half of the year. One last note. If financially attractive hotel development opportunities surfaced in 2021, we would certainly consider helping Loews Hotels fund them.
Q: how do you think the Biden administration will affect Loews and its businesses going
forward?
A: First off, the administration's climate agenda has created some new risks for the natural gas sector by implementing a pause on new natural gas leases on federal lands and also on offshore waters.
In my view, natural gas is an important transition fuel to cleaner energy in the US and it's also a growing export opportunity to help the rest of the world meet their similar climate change goals. The recent executive orders, in my mind, are troubling sign of new federal restrictions that may make it more difficult to access this plentiful American resource.
Additionally, the Federal Energy Regulatory Commission that regulates Boardwalk is changing. While it's too early to know exactly what impact these changes will be, will have, we believe that there will continue to be increased pressure on the industry's ability to build pipelines.
However, the administration is focused on the environment could be beneficial for Envision, Altium's Packaging, Recycled Resin business as well as for Dura-Lite, the plastic packaging Altium has designed that uses significantly less resin without compromising the strength of the container. Certainly, the Biden administration's focus on stemming the tide of the virus should be beneficial to Loews Hotels and help increase demand for the travel and tourism industry. While our largest subsidiary CNA is mostly regulated through the stage, the new administration and Congress pose some policy challenges and opportunities.
For example changes to the corporate tax code would affect Loews and our subsidiaries, but such changes aren't expected until later in the year when there is more evidence of economic recovery. And from what we understand corporate taxes probably will not go back to their pre-2017 levels.
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.
