L vs Brk vs FFH

[nwoodman]

The recent decline in Diamond Offshore and discussions on this board got me thinking about Loews as an investment possibility.  I thought it would be interesting to compare it to my two benchmark companies in terms of book value growth over a period of approximately 20 years (1991-2010).  I realise that past performance is no guarantee how any of these companies will do in the future. 

 

Company	Comp Book Growth	Ave P/B	Current P/B	Disc from average book

Loews	10%	1.1	0.8	-25%

Berkshire	15%	1.7	1.3	-21%

 

Fairfax	18%	1.4	1.0	-29%

 

 

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S&P Index during period compounded at 5% plus divs

 

P/B  is a very coarse metric but on the whole the market seems to have normalised valuations of these companies to around a 10% return if you bought at the average book multiple (give or take).  It goes without saying that the real value was to be had when the prices departed from their average multiples of book.  Going forwards it is unlikely that Berkshire will be able to achieve the same level of compounding that it has in the past, although I wouldn’t be all that surprised if they came close.  I ascribe a valuation of around 1.6x’s which gives an answer inline with many other intrinsic value estimates ($130-140k).

I am reasonably comfortable with a fair value on Fairfax at 1.4x’s book and will be looking to buy more sub book.  I also believe if CNA can be fixed then Loews offers good value at current valuations, as in the longer term it should trade at around 1.3 to 1.4x’a book.  I picked up a small stake in Loews on this basis.

 

I realise this won’t be all that illuminating to many of the keen minds on this board but after reading so many great posts I thought I would upload it anyway.  Spreadsheet attached and  apologies in advance for the sea of spaghetti in the graph.

 

 

[twacowfca]

That's a great chart.  Thanks for sharing it with us and for all the time it took to prepare it.  :)

[UhuruPeak]

I'll second twacowfca, good stuff (& time consuming I'm sure). I hope you won't mind what I just did though: since the BV has increased so much over the time period, I changed the left axis to a log; it shows that FFH's BV is still significantly more volatile than either of the two others' (we all knew that), but BRK & L look more similar now - which was not obvious from the original chart.

 

Thx again for sharing this work!

[Myth465]

Thanks for the data, I am a big Loews fan and think this new volatility will be quite profitable for them. Big opportunities with Cash / Market Downturn, DO, and CNA.

[Ballinvarosig Investors]

CNA Surety anyone?

 

It's hard to argue with SUR. Combined ratio well-under 100% for as far back as you can go, selling at 0.8 of book value, averaging 15% book value growth in the last 5 years, book value itself is strong, comprising mostly of safe, fixed income securities.

[Myth465]

CNA Surety anyone?

 

It's hard to argue with SUR. Combined ratio well-under 100% for as far back as you can go, selling at 0.8 of book value, averaging 15% book value growth in the last 5 years, book value itself is strong, comprising mostly of safe, fixed income securities.

 

I would pick them over CNA, but not over Loews.

[nwoodman]

I'll second twacowfca, good stuff (& time consuming I'm sure). I hope you won't mind what I just did though: since the BV has increased so much over the time period, I changed the left axis to a log; it shows that FFH's BV is still significantly more volatile than either of the two others' (we all knew that), but BRK & L look more similar now - which was not obvious from the original chart.

 

Thx again for sharing this work!

 

No problems at all and a nice touch.  It certainly makes the seven lean years just that bit more obvious vs BRK as the benchmark. 

 

I guess it goes without saying that they are all pretty good answers, but if you can cop the lumpiness, then 18% compound plus divs certainly makes you just that bit richer vs the 15%  :P.  I just wish I had perservered in my initial research on FFH when I first started to notice them back in 2002-2003.  This and the previous board certainly helped me get my head around them, so thanks Sanjeev.  Still even if the returns might not be as high going forwards I am ultra comfortable with management and I certainly share their view of what the investment landscape might look like over the next few years of deleveraging (possible debt deflation) followed by an almost inevitable period of inflation.

 

Also thanks Myth, I think it might have been one of your posts that helped me join the dots on Loews.

[Guest Bronco]

I think as an overall business, BRK is the best.  Maybe Loews next, but FFH nearby.

 

That being said, I only own Loews right now.  It is my biggest position.  It just has more value in my opinion than the others.  The cash at the parent + almost 9-10 billion in book value at CNA that Loews owns is close to the FMV of Loews stock alone.  That is just too silly for me to ignore. 

 

That being said, I feel like Loews is a cursed stock, getting killed at CNA 2 years ago with various preferred investments (ie AIG) and now the RIG/BP disaster impacting DO.  It isn't like nat gas prices and the luxury hotel business cycle is in their favor either.

 

In terms of just the insurance companies, I would rank BRK#1, FFH#2, and CNA #3.  But in terms of overall value of the entire companies, my bet is on Loews. 

 

That being said, I am back in the BRK B's at $65.  I love the cash flow machine that quirky Omaha guy has built - those preferreds were a great decision during the crisis and there is plenty of FCF for the BRK team to invest.

[biaggio]

" I only own Loews right now.  It is my biggest position." 

 

If you don't mind me asking, what % of your holdings do you have in Loews?

 

I have been sucking my thumb, waiting to buy some L. I don t know what I am waiting for.

 

I have listened to their conference calls + I will really like what I hear.

 

I have tried to read their 10K's and 10Q's, I have found them hard to read.

[biaggio]

With interest rates being very low are their any concerns with future book values of these securities, especially seeing that they all hold large % of their book value in bonds, Would L, BK, L just hold these bonds + collect interest.

 

10 year  rates ~ 3% currently. Is anyone thinking that this could go up to 6% over next 5 years which would cut the book value of 10 year bond in half, would it not? I guess if interest rates rose it would indicate more inflation, which would probably result in higher underwriting profits, as these companies would be able to charge more for insurance.

 

I have heard that deflation, and subsequently lower interest rates is possible, though I have a hard time accepting this. I can t stop believing that the government will manipulate and do everything possible to get inflation.

[ERICOPOLY]

Is anyone thinking that this could go up to 6% over next 5 years which would cut the book value of 10 year bond in half, would it not?

 

A 10 yr bond today will effectively only be a 5 yr bond (5 years from now).  So if you are worried about what the 10 yr rate would be, that's a different story.

 

If the 10yr rate is going to be 6%, then the 5 yr rate would be what... 4% or 5%?  So that's only 1% or 2% extra yield per year vs the present 3% yield, so the bonds purchased today at par would be trading (five years from now) roughly 5% or 10% below par (somewhere in that ballpark).

[Myth465]

Also thanks Myth, I think it might have been one of your posts that helped me join the dots on Loews.

 

No prob, I have learned so much on this board. FFH leaps have more than made up for anything I have offered.

 

I have tried to read their 10K's and 10Q's, I have found them hard to read.

 

Loews 10k is garbage. I found it best to look at the businesses separately.

 

CNA - Crappy but improving insurer. Trades significantly under book. They have a Chubb CEO who is trying to fix it. $40 billion portfolio, I think its worth book LT, but not now with great insurers trading under book. They should sell the runoff and buy Surety.

 

DO - Great cash flow, industry is under stress at the moment. Trades significantly down from highs and the gulf issues is a blip in the records. They will move the rigs or drill in the US. The CEO says they are working on moving their deep water assets right now. I also think with Loews directing them they will be buying back stock or making acquisitions given the weakness in the industry.

 

BWP - Cash cow, will generate extremely high returns once the IDRs kick in. Very stable business.

 

Highmount - Paid a high price but still a great asset. If nat gas gets over $8 they will look like geniuses.

 

Hotels - Too small to matter, poor cash flow, great locations and net worth.

 

Cash - Just waiting to be allocated.

 

 

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Many argue about the discount to NAV but that discount will always exist. Its not worth pursuing unless you do a stub and short out the public components. I call Loews a double double, you get a double discount especially now. All of their businesses are under pressure (except BWP). So you are getting 2 separate discounts, a pile of cash, and skilled allocators in a choppy market.

 

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Interest rates are what the Tisches worry about. CNA will suffer due to the huge bond portfolio but will be able to invest the new float to earn a great return. I think they may sell some of the runoff to reduce the float at CNA (reaching for yield by buying MBS early into the crash). I think in 2008 they got hit with weakness at CNA and also said they couldnt / didnt deploy cash due to the rapid downturn (too much uncertainty) followed by the rapid upturn (prices rose too fast). I am excited because they can put some cash to work at DO now with the selloff there and are raising cash for something inmo. They have sold bits of highmount and BWP.

 

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I only hold a small piece of Loews right now. I want more and want my FFH back after hurricane season. BRK is too big inmo for a poor guy like me.

[biaggio]

Myth + ericopoly, thanks, that makes sense.

 

 

[Myth465]

Interview with James Tisch, provides a very good summary of Loews history and philosophy.

 

http://feedproxy.google.com/~r/trillianmedia/JVWE/~3/eZQnn1VqnAA/WealthTrack_702_07-09-10.mp3

 

 

[NormR]

Interview with James Tisch, provides a very good summary of Loews history and philosophy.

http://feedproxy.google.com/~r/trillianmedia/JVWE/~3/eZQnn1VqnAA/WealthTrack_702_07-09-10.mp3

 

Thumbs up!  Thanks

[Guest Bronco]

In hindsight, I don't know if the Lorillard deal (split off/stock redemption) worked out so well for them. 

 

That was a cash machine.

 

 

[Myth465]

I think it opened them up. Removed the liability and opened them up to more investors.

 

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It was a very interesting history lesson. I like the way the Tisch guys think and also believe they are onto something with the MLPs. I could see a Highmount MLP spinoff at some point. The IDRs for Boardwalk and Highmount would be cash flow machines. DO has done quite well and I believe if they can pull off a big buyback or do something strategic it will work out great.

 

The main weak link is CNA, Hopefully the new CEO can turn it around. Thats some nice float. It would be amazing to watch someone like Prem working with it.

[Myth465]

Looks like CNA is finally starting to sell off some risks / float.

 

http://cornerofberkshireandfairfax.ca/forum/index.php?topic=2614.0

 

I think its a good move. The giant portfolio has been more of a liability then an asset.

[Myth465]

Loews had a decent quarter and an interesting call. As an auditor, I like to hear Jim Tiches rants on FASB changes and find him to be a very interesting leader. They appear to be building a huge cash pile and it will be interesting to see what they do with it. CNA also appears to be turning and may pay back preferred shares sooner rather than later.

[nwoodman]

Loews had a decent quarter and an interesting call. As an auditor, I like to hear Jim Tiches rants on FASB changes and find him to be a very interesting leader. They appear to be building a huge cash pile and it will be interesting to see what they do with it. CNA also appears to be turning and may pay back preferred shares sooner rather than later.

 

Results were pleasing.  Although I must confess to being disappointed that they didn't buy back more of their shares during the qtr .  In the CC, they stated  that this was due to the CNA/NICO deal.  Can anyone explain why this would be the case?  Is it considered insider trading?  Also can this issue be resolved by outsourcing the buyback (with limits) to a third party similar to what LRE does? 

 

Thanks in advance

 

nwoodman

[Guest Bronco]

Nwoodman - don't know the answer to your question, but I accepted it as factual.  But don't worry, you will see 400 million shares soon enough.  Interesting that JT said they are above the cash threshhold they deem as a safety net. 

 

Unfortunately, in regards to cash allocation, we will never know what they will do until they do it.  The quarter was decent, but RIG/BP really hurt them.  If not for the disaster, this would have been a great quarter. 

 

How long can CNA last under an $8B market cap with these kind of earnings?  We'll see. 

 

When will CNA pay back the preferreds?  If CNA does, Loews will have $4.5B in cash and $3.5B in net cash. 

 

Interesting if CNA paid back the dividend, then Loews would have very little dividend income coming in.  Boardwalks is probably $200M per year (guess) and Diamdonds has been signifcantly reduced.  I still miss Lorillard.

 

 

[nwoodman]

Thanks Bronco,

 

I thought these comments from Jim Tisch gave a little color to what it could mean if CNA paid back the preferreds

 

"The Berkshire transaction significantly de-risks the CNA balance sheet by taking hopefully forever CNA’s, the fastest liabilities off the table, and I think that a number of CNA’s regulatory and rating constituencies understand that as well. We Loews, are hopeful that CNA will pay down the preferred.

 

Its nice to receive the 10% dividend on that preferred, and it will be missed when the preferred is paid down, but remember once that preferred is paid down then depending upon a lot of factor, but CNA could be capable of paying a dividend to all its shareholders, and so Loews could receive cash flow from a CNA dividend on its commonly stock as opposed to dividend on its preferred stock.

 

So, I heard the CNA call, I heard people worrying that the repayment of Loews preferred had to be mutually agreed by Loews and CNA and I’ll just remind everyone that CNA has already paid off $250 million of that preferred by mutual agreement of the two companies."

 

Cheers

 

NW