Loews and CNA

[Myth465]

I have been watching Loews since the posting in the Asset Allocation Thread and would like to get a discussion going on them and CNA in particular. I just bought some Loews today due to the discount in NAV and great Management.

 

I like Loews primarily because in my opinion its a significantly discounted stock with free call options on energy. Its is deeply undervalued when you take into account the CNA BV component.

 

What does everything of CNA as an insurer. They seem to be a Fairfax without the investment gains and have brought in a new CEO from Chubb which I am hoping fixes that. I would expect either consistent underwriting profit or fairly decent investment performance and CNA has neither. I like most of the other pieces of Loews (not crazy about the hotels though) but, cant wrap my arms around CNA. Why the big discount to book. I have only reviewed the Quarter in passing, but would like any additional detail from other board members.

 

 

[Guest Bronco]

I bought some CNA today - as best I can tell, the stock trades at a huge discount because no one really follows this stock.  However, at BV of $35 and the stock at $22, I feel there is enough of a discount that I am comfortable.

 

FYI - The company sold its entire stake in the Verisk IPO - for about $370 million before tax.  The deal went down in Q4 though.

 

The company seems to have also repositioned its portfolio, although there is still some reliance on LP investments (which I am assuming are hedge funds).

 

Relative to my other holdings, I hold a ton of Loews stock as well.  There are 429.6M shares O/S, so at $33.50, the market cap is less than $14.5B.  Back out the $2B in the holding company (net cash) - and you are buying assets of $12.5B

 

With Loew's stake in CNA worth approximately $10B (using book value), the remaining $2.5B gives you a 1/2 stake in DO, 75% stake in BWP, and other assets (hotels and energy holdings).  I am not a huge fan of hotels either - but there is no doubt in my mind that the FMV of the hotels is higher than the cost (book value).

 

Loews is conservative and undervalued.  Management owns a ton of stock, so they have a vested interested in the performance.

 

Good luck to all.

[Myth465]

Here is a very interesting read about CNA's history. It seems like they are have relied on the investment gains to overcome the underwriting losses.

 

http://www.wikinvest.com/stock/CNA_Financial_(CNA)

 

Seems like a heads / tails I win case. If the CEO can turn around the underwriting then you have a great insurer and if not you have a fairly decent discount to book as a buffer.

[bargainman]

I bought some CNA today - as best I can tell, the stock trades at a huge discount because no one really follows this stock.  However, at BV of $35 and the stock at $22, I feel there is enough of a discount that I am comfortable.

 

FYI - The company sold its entire stake in the Verisk IPO - for about $370 million before tax.  The deal went down in Q4 though.

 

The company seems to have also repositioned its portfolio, although there is still some reliance on LP investments (which I am assuming are hedge funds).

 

Relative to my other holdings, I hold a ton of Loews stock as well.  There are 429.6M shares O/S, so at $33.50, the market cap is less than $14.5B.  Back out the $2B in the holding company (net cash) - and you are buying assets of $12.5B

 

With Loew's stake in CNA worth approximately $10B (using book value), the remaining $2.5B gives you a 1/2 stake in DO, 75% stake in BWP, and other assets (hotels and energy holdings).  I am not a huge fan of hotels either - but there is no doubt in my mind that the FMV of the hotels is higher than the cost (book value).

 

Loews is conservative and undervalued.  Management owns a ton of stock, so they have a vested interested in the performance.

 

Good luck to all.

 

Can you give me the info on how you calculated CNA's book value?

 

I was looking here at their latest 10Q:

http://sec.gov/Archives/edgar/data/21175/000095012309056086/c54348e10vq.htm

 

and they say:

Total CNAF stockholders’ equity: 10,769

Noncontrolling interests: 486

Total equity: 11,255

 

10,769/269 shares outstanding = $40

11,255/269 shares outstanding = $41.8

 

So where are you getting $35?  Also what is the Noncontrolling interests item?  Do you know?

 

Thanks

 

 

[Guest Bronco]

Bargainman - take the 10.7 billion amount and reduce it by the 1.25 billion preferred.

Then divide by outstanding shares.

 

Hope this helps!

[bttmline]

I've been watching Loews and invested in it for about 1 year. At one point within the last year they were trading at more than 40% to conservative book value and thats why Loews has been buying back shares. CNA took a beating last year that basically was inline with all the other insurance companies. There alternative investments are less than 5% of investment portfolio. They had Fannie or Fannie Preferred that went bad, but most of the other losses weren't a permanent loss of capital.  Remember that Loews owns 90% of the common and a couple other large funds, so thats why CNA is not largely followed.  As for evaluating detailed level insurance operating performance, I'm not the man and part of the reason I'm on the board to learn more on the insurance side.

 

As for Loews, I wouldn't worry about the hotels as it is a small portion of book value. I have a spreadsheet that I can share with everyone when I get on my other computer that details the percentage of book value that each entity provides to Loews. I think its not strongly followed  because the complexity of following three public entities and the couple private businesses.  

[Buckeye]

Hello All:

 

Can someone help to explain how this Loss Portfolio Transfer with Berkshire works.  I have read and reread it, and as a complete newbie I am trying to understand how this transfer is accounted for, how it's structured and its effects on CNA's financial statements.  Below is the language from Loews annual report:

 

On August 31, 2010, CCC together with several of CNA’s insurance subsidiaries completed a transaction with

National Indemnity Company (“NICO”), a subsidiary of Berkshire Hathaway Inc., under which substantially all of

CNA’s legacy A&EP liabilities were ceded to NICO.

 

Under the terms of the NICO transaction, effective January 1, 2010 CNA ceded approximately $1.6 billion of net

A&EP claim and allocated claim adjustment expense reserves to NICO under a retroactive reinsurance agreement with an aggregate limit of $4.0 billion (“Loss Portfolio Transfer”). Included in the $1.6 billion of net A&EP claim and allocated claim adjustment expense reserves was approximately $90 million of net claim and allocated claim adjustment expense reserves relating to CNA’s discontinued operations. The $1.6 billion of claim and allocated claim adjustment expense reserves ceded to NICO is net of $1.2 billion of ceded claim and allocated claim adjustment expense reserves under existing third party reinsurance contracts. The NICO aggregate reinsurance limit also covers credit risk on the existing third party reinsurance related to these liabilities.

 

CNA paid NICO a reinsurance premium of $2.0 billion and transferred to NICO billed third party reinsurance

receivables related to A&EP claims with a net book value of $215 million (net of an allowance of $100 million for

doubtful accounts on billed third party reinsurance receivables, as discussed further below). As of August 31, 2010, NICO deposited approximately $2.2 billion in a collateral trust account as security for its obligations to CNA. This $2.2 billion will be reduced by the amount of net A&EP claim and allocated claim adjustment expense payments. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the full aggregate reinsurance limit as well as certain of NICO’s performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third party reinsurers related to CNA’s A&EP claims.

 

                                                                                                                        2010

(In millions)

Other operating expenses                                                                            $    (529)

Income tax benefit                                                                                              185

Loss from continuing operations, included in the Other Insurance segment              (344)

Loss from discontinued operations                                                                        (21)

Net loss                                                                                                            (365)

Amounts attributable to noncontrolling interests                                                      37

Net loss attributable to Loews Corporation                                                      $    (328)

 

  In connection with the transfer of billed third party reinsurance receivables related to A&EP claims and the

coverage of credit risk afforded under the terms of the Loss Portfolio Transfer, CNA reduced its allowance for

doubtful accounts on billed third party reinsurance receivables and ceded claim and allocated claim adjustment

expense reserves by $200 million. This reduction is reflected in Other operating expenses presented above. 

 

In its most recent actuarial ground up review of pollution exposure completed in the fourth quarter of 2010, CNA noted adverse development in various pollution accounts due to increases in average account severity. As a result of this review, CNA recorded $80 million of gross unfavorable pollution-related claim and claim adjustment expense reserve development for the year ended December 31, 2010, which has been ceded under the Loss Portfolio Transfer resulting in no net prior year development. The gross A&EP claim and allocated claim adjustment expense reserves ceded under the Loss Portfolio Transfer and other existing third party reinsurance agreements were $2.5 billion at December 31, 2010. The remaining amount available under the $4.0 billion aggregate limit of the Loss Portfolio Transfer was $2.3 billion on an incurred basis at December 31, 2010. The net ultimate losses paid under the Loss Portfolio Transfer were $154 million through December 31, 2010.

 

  The Loss Portfolio Transfer is considered a retroactive reinsurance contract. In the event that the cumulative claim and allocated claim adjustment expenses ceded under the Loss Portfolio Transfer exceed the consideration paid, the resulting gain from such excess would be deferred. A cumulative amortization adjustment would be recognized in earnings in the period such excess arises so that the resulting deferred gain would reflect the balance that would have existed if the revised estimate was available at the inception date of the Loss Portfolio Transfer. 

 

Thank you to anyone who takes the time to explain this to me, I greatly appreciate it!

 

Buckeye