L - Loews

[Foreign Tuffett]

Looks like Loews is considering a very minority shareholder unfriendly course of action.

 

https://www.businesswire.com/news/home/20180508006231/en/TAM-Capital-Management-Sends-Open-Letter-Boards

[Spekulatius]

Not much going on here, maybe time for a review?

They invested ~$1.5B to purchase the remaining ~49% in Boardwalk. They got these units for a very cheap price, invoking a buyout clause ($12/unit)

 

Invested ~$1.2B in CC , a packaging company. There is a presentation available , if you sign up. CCC generated ~$1.88B in EBITDA run rate and ~120M in run rate FCF, so I think they bought it at a low price. I like this business.

 

Hotels are having lumpy results, but the results seem good. They plan on investing another  $2B here in the next few years.

 

DO went from bad to terrible.

 

CNA plugs along. It went from being a lousy to a mediocre insurer. They distribute a lot of cash upstream via special dividends. L owns almost 90% of it trades it trades around book value. Might be a good value, but if we ever get a decline in share price, L will probably just buy out the remaining shares.

 

They bought back a lot of stock over the years. looks like they are on track to retire > 5% of their shares this year. balance sheet is still rock sold it with $1.7B in net cash.

 

https://loews.com/FileStore/2019-Q3---Company-Overview.pdf

 

I don’t own it (never did, except maybe a short trade) but I think it looks more and more interesting. The Hotel and the packaging business are good places to put capital in. They did a terrible deal when they entered Highmount (E&P), but to their credit, they exited in 2014 and took their losses, but got ~$800M out and this would probably be a zero at this point.

 

My review was spurred by a Motley Fool podcast I listened too, which is a good primer into this stock:

https://podcasts.apple.com/us/podcast/industry-focus/id717428711?i=1000460215671

 

 

[HJ]

Thank you for the summary.  I have been following the story for a bit, and haven't pulled the trigger, with primarily 2 questions.

 

1) Presently, overwhelming percentage of its value is in CNA, where the results have been good and improving ever since the previous CEO.  The question on CNA is always the long term care portfolio where it's part of corporate and not discussed much other than the annual review to decide whether the assumptions on that need to get "unlocked".  How does one bracket a valuation on that part of the business?  It's the same business that partly attributed to GE's downfall, so I am quite leery of it, especially in today's low rate environment.

 

2) Regarding Boardwalk, it's actually not entirely clear to me the price they paid to take out the public shares is necessarily "very cheap".  Natural gas flow in the United States has gone through pretty seismic changes over the past 5 years.  It actually looks to me that their main asset in this business is quite adversely affected by this change.  Can you share you thoughts on how you value Boardwalk now?

[Spekulatius]

Thank you for the summary.  I have been following the story for a bit, and haven't pulled the trigger, with primarily 2 questions.

 

1) Presently, overwhelming percentage of its value is in CNA, where the results have been good and improving ever since the previous CEO.  The question on CNA is always the long term care portfolio where it's part of corporate and not discussed much other than the annual review to decide whether the assumptions on that need to get "unlocked".  How does one bracket a valuation on that part of the business?  It's the same business that partly attributed to GE's downfall, so I am quite leery of it, especially in today's low rate environment.

 

2) Regarding Boardwalk, it's actually not entirely clear to me the price they paid to take out the public shares is necessarily "very cheap".  Natural gas flow in the United States has gone through pretty seismic changes over the past 5 years.  It actually looks to me that their main asset in this business is quite adversely affected by this change.  Can you share you thoughts on how you value Boardwalk now?

 

Regarding 1) CNA had a moderate hit to earnings for LTC lines this year, but nothing existential.

 

regarding 2) It is correct that some of BWP  assets weren’t well positioned, especially those that were driven by supply. BWP bought these assets back at a distressed price, way below replacement value and at ~8x EBITDA. They have been reconfiguring the assets for more demand driven customers and it looks like operating earning started to rise, which seems to mean that they bought this out at the business trough and at a trough valuation. I think they transferred quite a bit of value from the LP’s to the cop erste entity. I was holding BWP units at the time of the takeout and certainly wasn’t thrilled about getting bought out at the prevailing price back then.

[HJ]

My only knowledge on their Long Term Care business comes from their disclosure, so would really appreciate any knowledge that can be used to derive more comfort on this book of business.  The latest Q shows "future policy benefit" of $12.3 billion, but that's a discounted number.  The "undercounted number" was disclosed in the 10-K as something like $26+billion.  The latest quarter adjustment that they took, a little more than half was because of adjustment to discount rate, and the other half was due to "changes in persistency assumption".  What was previously a positive margin of $182MM all of a sudden turns into a deficiency of $216MM.  They didn't re-establish a $182MM margin either even with the hit in the Q.  But as a percent of the total future policy benefit, the adjustment is just 3% if using discounted number, and something like 1-2% if using undiscounted number from previous year end. All it took was something like a 5% decrease in average active life mortality and lapse assumption.  Is this a very big margin in life insurance land?  I don't really know.  There seems to be very little ability to bracket this $12.3 billion number with any meaningful confidence, the bulk of it is also > 5 years out.  All of this against an equity capital base of $12billion.  When reading this disclosure in conjunction with all the negative publicity on GE an Genworth's long term care business, this insurance liability book just doesn't feel as comfortable as some of the other insurance liabilities that's out there. 

 

As for the midstream pipeline business, from the time they bought out BWP to today, all the pipelines are more or less flat to down, the weaker ones are down meaningfully.  Is there reason to believe BWP was mispriced at $12 back then vs. the cohorts?  I don't think replacement cost is a good metric when a good portion of those pipes are going to serve very little purpose.  it seems that longer term, a larger portion of the Chicago market will be served by Marcellus rather than mid continent, resulting in a lot of underutilization for a big portion of their pipes in the ground?

 

All this said, L is arguably on the cheaper side vs visible public market valuation of its components.  But looking at its long history, the total return on the stock hasn't been that inspiring over the recent decades vs. the more distant past. 

 

 

[oscarazocar]

You can buy good businesses at fair or eve nhigh prices and do well if you hold them for a long time (Berkshire).  You can do well if you buy bad or cyclical businesses at very cheap prices, especially if you are creative with minimizing taxes, as long as you sell them when the selling is good (Leucadia).  However, you can not do well buying bad businesses at even very cheap prices if you hold them forever.  Jim Tisch does not appear to have learned this lesson.

 

None of L's businesses are particularly good, and the returns since the current generation of Tisch's took over are poor.  Since they took over in 1998, they have managed to swap out 100% ownership in a highly lucrative tobacco company for a hodgepodge of mediocre insurance and energy businesses.  If you compare current value of the assets they swapped, the tobacco assets are up many multiples and what they have bought has barely budged.

 

It's an interesting bigger thing to consider - L purchased Lorillard for $450-500 milllion in 1968 when had roughly $31 million net income.  That was one of the great acquisitions of the past 50 years, so kudos to them for that.  However if you strip that out, I believe that the returns on every other Loews investment cumulatively is below average.  The acquisition counts, and they are billionaires because of it.  But when you are analyzing management's capital allocation abilities, it's not reassuring, especially the current generation who had nothing to do with it.

[Cigarbutt]

My only knowledge on their Long Term Care business comes from their disclosure, so would really appreciate any knowledge that can be used to derive more comfort on this book of business.  The latest Q shows "future policy benefit" of $12.3 billion, but that's a discounted number.  The "undercounted number" was disclosed in the 10-K as something like $26+billion.  The latest quarter adjustment that they took, a little more than half was because of adjustment to discount rate, and the other half was due to "changes in persistency assumption".  What was previously a positive margin of $182MM all of a sudden turns into a deficiency of $216MM.  They didn't re-establish a $182MM margin either even with the hit in the Q.  But as a percent of the total future policy benefit, the adjustment is just 3% if using discounted number, and something like 1-2% if using undiscounted number from previous year end. All it took was something like a 5% decrease in average active life mortality and lapse assumption.  Is this a very big margin in life insurance land?  I don't really know.  There seems to be very little ability to bracket this $12.3 billion number with any meaningful confidence, the bulk of it is also > 5 years out.  All of this against an equity capital base of $12billion.  When reading this disclosure in conjunction with all the negative publicity on GE an Genworth's long term care business, this insurance liability book just doesn't feel as comfortable as some of the other insurance liabilities that's out there. 

 

As for the midstream pipeline business, from the time they bought out BWP to today, all the pipelines are more or less flat to down, the weaker ones are down meaningfully.  Is there reason to believe BWP was mispriced at $12 back then vs. the cohorts?  I don't think replacement cost is a good metric when a good portion of those pipes are going to serve very little purpose.  it seems that longer term, a larger portion of the Chicago market will be served by Marcellus rather than mid continent, resulting in a lot of underutilization for a big portion of their pipes in the ground?

 

All this said, L is arguably on the cheaper side vs visible public market valuation of its components.  But looking at its long history, the total return on the stock hasn't been that inspiring over the recent decades vs. the more distant past.

I agree with the above bolded part and with what oscarazocar said above but the following has to do specifically with the long term care insurance part.

The bulk of the policies were written during a period when they essentially had to guess most of the key assumptions in a context where they wanted to build significant market share in a business with a very long tail and with regulators holding a short leash on premium increases. Long term care reserves have now made it to headlines (GE, Penn Treaty failure etc) but the 'industry' has amassed a sufficient amount of data now and have refined the assumptions to more relevant numbers. It's possible (and IMO impossible to prove dissecting disclosures) that reserves are still materially understated and 'surprises' form embedded variability in these long-term contracts may arise periodically but I suspect it is unlikely the reserve (liability) adjustments become existential. However, the main residual risk may lie in the possibility of maintained low interest rates and disappointing forward returns in their portfolios. So, even if the liability number ends up following a more predictable runoff course, the company may end up with quite a shortfall when this aspect will be recognized.

I don't think Berkshire Hathaway will enter into a reinsurance transaction because of the residual liability uncertainty, unless the terms are extremely favorable. It may be reasonable to expect an acquisition of the entire book of business (acquisition of the runoff with liabilities and matched assets) because the asset risk mentioned above would be mitigated and perhaps could help balance the residual liability risk.

[txvalue]

I check in on this a few times a year and am interested to see how it plays out over the next few months. Looks broadly exposed to the market issues going on right now. On the hotel side I think they have a lot of negative pressure with conferences cancelling & travel down on virus news/fears. They are also exposed the energy market issues with Diamond Offshore which has been hit quite hard recently (from 8/sh to 1.6/sh today).  I know they recently bought the "container" company from Bain but I don't think that moved the needle too much.

 

Curious to see if they try to make a big move in this environment or if it is just the normal buyback stock protocol.

 

Largely agree with Oscar's thoughts from December.

 

 

[Gamecock-YT]

Diamond Offshore Drilling files for bankruptcy

 

https://www.ft.com/content/8e35d2a7-6157-491d-9e89-2918bc94ce33

 

 

[thepupil]

Loews trades for $8.5 billion. 90% of CNA is $7.1 billion at market (trades ~70% of book), so all other assets/liabilities at $1.4 billion (BWP Equity, Hotels, CCC, $3 billion of cash, equities, and LP investments), Diamond Offshore is gone though maybe L does the DIP and regains control*), ParentCo has debt of $1.8 billion.

 

EDIT: ParentCo just issued $500 million of 3.2% 2030 bonds so increase cash/debt by $500 million. They now have $3 billion of cash (+$500 million of stocks and LP investment) on hand and their ParentCo debt is low cost and long duration. In the context of the $8.5 billion market cap, that's quite the war chest.

 

EDIT II: thought this may be to pay off their 2023 ParentCo notes so it represents an extension in maturity rather than increase in cash/debt

 

I kind of despise management. Feel free to read my thoughts over the years.

 

You can call it being rational and responding to a lower valuation in the appropriate way, or you could call it being a glutton for punishment who doesn't learn from mistakes, but I'd potentially buy a little of the stock at the current levels 50-60 cents of real ParentCo book. Current book is $17 billion. There is a pending DO related write down of about $1-$1.2 billion. Write off hotels by the equity of $600mm, maybe real-ish book is $15-$15.5 billion.

 

will re-check the num's soon, just a high level overview. 

 

*I think they should buy VAL bonds at 10 cents and provide the DIP, do the same with DO, and just own the whole rig market with an equity only cap structure, but they'll probably just move on...DO was a huge win for them over the very long haul even though it's bankrupt

 

[vinod1]

Loews trades for $8.5 billion. 90% of CNA is $7.1 billion at market (trades ~70% of book), so all other assets/liabilities at $1.4 billion (BWP Equity, Hotels, CCC, $3 billion of cash, equities, and LP investments), Diamond Offshore is gone though maybe L does the DIP and regains control*), ParentCo has debt of $1.8 billion.

 

EDIT: ParentCo just issued $500 million of 3.2% 2030 bonds so increase cash/debt by $500 million. They now have $3 billion of cash (+$500 million of stocks and LP investment) on hand and their ParentCo debt is low cost and long duration. In the context of the $8.5 billion market cap, that's quite the war chest.

 

I kind of despise management. Feel free to read my thoughts over the years.

 

You can call it being rational and responding to a lower valuation in the appropriate way, or you could call it being a glutton for punishment who doesn't learn from mistakes, but I'd potentially buy a little of the stock at the current levels 50-60 cents of real ParentCo book. Current book is $17 billion. There is a pending DO related write down of about $1-$1.2 billion. Write off hotels by the equity of $600mm, maybe real-ish book is $15-$15.5 billion.

 

will re-check the num's soon, just a high level overview. 

 

*I think they should buy VAL bonds at 10 cents and provide the DIP, do the same with DO, and just own the whole rig market with an equity only cap structure, but they'll probably just move on...DO was a huge win for them over the very long haul even though it's bankrupt

 

Why Loews when you can get Fairfax about equally cheap and management not as bad?

 

Vinod

[Spekulatius]

Loews trades for $8.5 billion. 90% of CNA is $7.1 billion at market (trades ~70% of book), so all other assets/liabilities at $1.4 billion (BWP Equity, Hotels, CCC, $3 billion of cash, equities, and LP investments), Diamond Offshore is gone though maybe L does the DIP and regains control*), ParentCo has debt of $1.8 billion.

 

EDIT: ParentCo just issued $500 million of 3.2% 2030 bonds so increase cash/debt by $500 million. They now have $3 billion of cash (+$500 million of stocks and LP investment) on hand and their ParentCo debt is low cost and long duration. In the context of the $8.5 billion market cap, that's quite the war chest.

 

I kind of despise management. Feel free to read my thoughts over the years.

 

You can call it being rational and responding to a lower valuation in the appropriate way, or you could call it being a glutton for punishment who doesn't learn from mistakes, but I'd potentially buy a little of the stock at the current levels 50-60 cents of real ParentCo book. Current book is $17 billion. There is a pending DO related write down of about $1-$1.2 billion. Write off hotels by the equity of $600mm, maybe real-ish book is $15-$15.5 billion.

 

will re-check the num's soon, just a high level overview. 

 

*I think they should buy VAL bonds at 10 cents and provide the DIP, do the same with DO, and just own the whole rig market with an equity only cap structure, but they'll probably just move on...DO was a huge win for them over the very long haul even though it's bankrupt

 

Why Loews when you can get Fairfax about equally cheap and management not as bad?

 

Vinod

 

And why deal with FFH, when you can buy BRK with better insurance better utility ( ca BWP)  operations, a better balance sheet and a better operating companies without any dilution risk.

In the current environment, I take quality over a bit of a valuation edge any time.

[thepupil]

ya...I went back and read my 2014 comments and it's like...what's changed? there's now less downside in Diamond Offshore (because it went to $0), they bought the packaging company, they took in BWP at a probably unfair price, CNA has a few more years of showing improvement and stability in profits/dividends being sent to mother ship, they just termed out their parent debt to be 10 years and 23 years assuming the recent offering was to pay off the '23's, the valuation is significantly lower, but it's still unclear to me if the valuation is RELATIVELY better than Berkshire at the current prices.

 

Because I don't want to increase FIRE allocation (Finance Insurance Real Estate) the money would have to come from Berkshire or something else and I need true cigar butt pricing on Loews to get there.

 

I have no desire to look into Fairfax; Loews management isn't great but is kind of predictable. From what I've seen of Fairfax, I don't really understand what they are doing in a lot of cases.

 

bottom line, revisit at lower prices if we get there.

[Liberty]

Why would anyone invest in this if they haven't been able to make money for shareholders in 15 years, even in times when they had tailwinds? There's bound to be better investments, even if you're looking for a cheap "hairy" company...

[thepupil]

I don’t like Loews for the reasons stated, but there has been a significant turnaround at CNA. I just eyeballed it’s so I could be wrong but I think in the past 10 years CNA has paid out about $20 / share in divvies, has had a combined ratio below 100 in 9/10 years, has earns an okay ROE after years of problems (like a decade). There is new uncertainty with Covid 19 (CNA reporter good results and isn’t indicate anything crazy but I think the market is skeptical given past history and general uncertainty about covid 19, credit market losses etc,. But buying a (maybe now decent) insurer for 7x earnings is attractive.

 

I think Loews managed DO very well; they underinvested (they built a couple of shiny drill ships with borrowed money but never injected equity into it) and paid out a bunch of dividend over time, borrowed at ridiculously good terms when they could, and rationally filed for BK.

 

Loews took under BWP using a technicality. This was extractive va minorities, but appears rational and a decent use of capital.

 

The hotel capital is impaired and they’ve sunk too much money; it’s their baby.

 

As measured by BVPS, they have not knocked it out of the park, but 15 years of no return is end point sensitive and only uses stock price, When things de-rate dramatically it looks overly dire. You may be not counting the spin of Lorrilard which I think was 2005 ish?

 

I’d invest at a lower price, but like BRK at around 1x better

 

 

 

[Spekulatius]

^ If you like CNA, then just buy CNA. With a bit luck, L will buy you out at a decent premium. I actually think it is bound to happen some day.

 

I do agree they CNA as made progress, but they also still have some iffy long tail exposure. Again, with insurance, there are plenty of cheap other options about there.

[oscarazocar]

The Lorillard spin-off is included in current results.  The company exchanged the Lorillard stake (Carolina Group) for shares in Loews, i.e. a repurchase of about 1/3rd of the company's stock in 2007.  The decision to swap out shares in the tobacco company for a collection of mediocre insurance/pipeline/offshore drilling assets was, in hindsight, a terrible one.  The assets they traded for have gone down in value and what they gave up has multiplied in value many times.

 

https://www.nytimes.com/2007/12/18/business/18tobacco.html

http://www.annualreports.com/HostedData/AnnualReportArchive/l/NYSE_L_2007.pdf

[thepupil]

Great point, Oscar; my memory was faulty on that one.

 

So here’s the record

 

1. Moved on from Lorrilard (huge loss/opportunity cost)

2. Sucked Diamond Offshore dry with dividends (makes sense to me)

3. May have turned around CNA

4. Lost 100% on highmount Natural Gas

5. Hotels = blah, look real bad right now, but not good before

6. BWP looks okay but haven’t tracked it; thought the takeover at $12 was shrewd but extractive/not going down in the record books of fair treatment of minorities

7. Packaging is early days

8. Their management of DO gets dinged a little bit because they were buying back shares and pointing to the public prices of their subs as evidence of cheapness; if they actually thought DO was going to $0, they we’re paying a lower discount in actuality

 

Pretty rough!!

 

 

 

 

 

 

[oscarazocar]

Don't forget their "primary lever for capital allocation, share repurchases".  Since 2007, L has spent $7.4 billion to repurchase 154 million shares at an average cost of $48/share vs. current price of $29/share, a net $3 billion loss.

[Liberty]

Don't forget their "primary lever for capital allocation, share repurchases".  Since 2007, L has spent $7.4 billion to repurchase 154 million shares at an average cost of $48/share vs. current price of $29/share, a net $3 billion loss.

 

What's the evidence that management is good at capital allocation again?

[thepupil]

the entirety of this thread is a discussion of them being poor at capital allocation.

[thepupil]

Spekulatius,

As a disappointed Loews shareholder of 3.5 years, I have to agree with you. This was once a 30% position for me and felt like a no-brainer (it is now a 8% position, and should be a 0% as i continue to find better places to put my money, but I'm in no rush to sell at 0.88 NAV on lower valuations of BWP and DO, my NAV assigns no value to Hotels or Highmount and values the GP conservatively).

 

It was a good way to learn about investing w/o losing money though. I have made 10% on some lots and over 30% on others, but the holding has been a big drag. I can handle underperformance if I feel management is growing earnings power and intrinsic value. But I don't feel that way. The Tisch's just seem too static, the cash generation or asset conversion activities too meager.

 

I though was getting a solid shareholder aligned management team at a 20-30% discount to a growing NAV. But what I did not realize was

 

a) Diamond Offshore was overvalued and poorly positioned (lots of old rigs that are about to be obsolete) so my discount was not as big as i thought. My fault for accepting market price as a rough proxy of intrinsic value.

b) CNA is undergoing what has to be the slowest turnaround in history. It looks just a little better each quarter and year.. Just enough to give one hope, but never enough to give one conviction.

c) What you said about boardwalk

d) Corporate overhead is actually not all that low and negates a surprisingly large amount of subsidiary cash generation

d) the Tisch's would go on a hotel acquisition and renovation spree, which may prove a good use of capital but for now just looks like they poured more money into a subsidiary that generates no cash or earnings and the market values at 0

 

Loews is kind of stuck. They are dedicated to always having a multi-billion dollar pile of cash, which is fine, but the underlying businesses don't generate enough cash to move the needle enough in terms of growing earnings power or diversifying from a melting ice cube fleet of old drillers, an obsolete network of pipelines, and a traditionally shitty insurance company that might be getting a little better.

 

Let's play the "I'm 25 years old and obviously know everything and will tell experienced business men what to do" game. This is what I think the Tisch's should do with Loews.

 

1) Roll the Boardwalk GP into the LP and sell Boardwalk Pipeline to a large MLP that has a much lower cost of capital in a stock for stock tax efficient transaction; there are still some good assets in there and BWP trades for an 8+% yield while its peers do not. This would monetize the GP (that the market values at 0) and get Loews out of this business that has made them a just okay return.

 

2) Use the shares of acquirer MLP to retire more stock in a stock for stock exchange w/ parentco.

 

3) let DO die the slow death that it already is, upgrade and buy new rigs when it makes sense, don't when it doesn't. i actually think they've played their cards right with this one in sitting out the rig building fest.

 

4) sell cleaned up turned around CNA for a slight premium to book in a stock for stock transaction (tax efficiency)

 

5) use insurer acquirer shares to retire more shares.

 

7) Take the company private with everything that is left, sit in the Loews Regency, eat power breakfasts, go on CNBC way too often, and just chill and not have to deal with shareholders like myself who don't accept a sub 5% ROE. 

 

The brothers Tisch just aren't building earnings power enough to justify Loews in its current form. They need to do something. Otherwise they should just stop being in this business and enjoy being rich.

 

Plan B (from brother Thomas Tisch):

 

1) Load up on SHLD options, bonds, and stock, announce plan to buy out minority shareholders of SHLD and cause short squeeze

 

2) Profit.

 

going on 6,7,10 years of discussing that the Tischs' kind of suck. LOL

 

Everyone would be better off if they followed the plan:

 

7) Take the company private with everything that is left, sit in the Loews Regency, eat power breakfasts, go on CNBC way too often, and just chill and not have to deal with shareholders like myself who don't accept a sub 5% ROE. 

 

I could really use a power breakfast at the Regency.

[Liberty]

the entirety of this thread is a discussion of them being poor at capital allocation.

 

Exactly..? So why have them manage you capital?

[thepupil]

Well there are extremes of valuation where I’ll own anything.

 

On 3/31/2009, L was at 0.5x P/B

 

Today it hit 0.43x (but we know big writedowns are coming so it’s not quite that cheap)

 

Loews Corp is an A rated credit which just raised 10-year money at 3.2% a few days ago.CNA’s bonds do not indicate financial distress; BWP’s do trade ~600 over, but there isn’t any indication at this time of huge coming impairment at L.

 

I think it’s worth at least paying attention when profitable insurers* are trading at 0.4x book and have a large portion of the parentCo balance sheet in cash and liquid investments and are able to borrow money on good terms. Particularly in the context of a company that has spent the entirety of its 5 decade history buying back shares.

 

I was not picking stocks in 2009. In some ways today is scarier, maybe. In other ways it isn’t. It’s not 100% clear that this is much worse as 08/09 (or better), so I’m not saying it’s a slam dunk and don’t own the stock, but surely there is some price at which it is worth considering (unless one thinks CNA goes BK, which could happen, given the uncertainty in insurance right now)

 

*to be clear L is not just an insurer, it is also a midstream energy company, hotelier, and packaging company, how glamorous!

[thepupil]

LOL at this jim tisch rant about his stock price!

 

the DO writedown has come through so, it's now about 0.6x

 

Thank you, Mary, and good morning, everyone. Rather than getting into specifics about the quarter, I want to use this call today as an opportunity to get something off my chest. I am beyond frustrated with where the stock market has been pricing Loews and CNA, and I can't believe how undervalued the stocks are.

 

Loews' market capitalization as of this morning is about $9.8 billion and our stake in CNA plus net cash alone account for more than $9.4 billion of that number that leaves the market's valuation of our non-publicly traded subsidiaries; Boardwalk, Loews Hotels, and Altium at less than $500 million which to my mind is patently absurd. I also think CNA's value is patently absurd, but more on that later.

 

Let's look at each of Loews' privately held subsidiaries to see if I can demonstrate to you that collectively they are worth dramatically more than $500 million. First, let's look at 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. Keep in mind that Loews in litigation over Boardwalk with the trial date set for January of 2021, so we can get into too much detail.

 

However, since the time of our purchase of Boardwalk's remaining public float, nothing has occurred with the performance of the company that would lead us to reconsider that purchase. Boardwalk has successfully made it through the challenge of re-contracting, and since going private, has reinvested a majority of its distributable cash flow in order to reduce the risk and volatility of future earnings. And since July of 2018, EBITDA for the business is essentially flat, despite the significant re-contracting headwinds the company has experienced. While future growth projects have become more difficult to complete in the current regulatory environment, Boardwalk benefits from its base of 14,000 miles of pipe in the ground.

 

Boardwalk also benefits from stable 60 contracts. 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.

 

For all the reasons I've just outlined, I'm very disappointed by the market's implied value of Boardwalk. Clearly, the company is worth much more than the market gives us credit for now.

 

Let's take a look at Loews Hotels. At the risk of stating the obvious, this year will be a washout for the entire hotel and travel industry. And Loews Hotels is no exception to the rule. During my first quarter remarks, I had made note of the fact that there were only four Loews Hotels open at the time. Today, many more of our hotels are operational, but occupancy rates remain (inaudible), especially for our properties located in city centers.

 

Our resort hotels are doing a bit better, but since many of them are located in COVID hotspots, there is plenty of room for improvement. I believe that over time, whether through a vaccine or other mitigants, the travel industry will recover, and Loews Hotels will once again be a growth engine for Loews. One last one on hotels. As I mentioned, the market currently values our privately held subsidiaries at about $500 million. We make available on the parent company website, Loews Hotels' adjusted EBITDA and adjusted mortgage debt. When looking at these numbers, however, keep in mind that the hotel company has invested equity in projects that have recently opened or have yet to open. And the true earning power of these hotels has never been reflected in Loews Hotels' historical EBITDA. It's clear that even if you did a back-of-the-envelope valuation for Loews Hotels, you would see that in any sort of hotel industry recovery, the equity we have in Loews Hotels would be measured in the billions of dollars.

 

Before getting to CNA, let me address our privately held subsidiary, Altium. Altium became Loews' subsidiary in 2017. At that time, Loews paid $1.2 billion for Altium, consisting of $600 million in equity and $600 million in subsidiary debt. When we acquired the company, Altium's net sales were about $800 million. Now, Altium's net sales have grown to about $1 billion, driven mostly by six accretive acquisitions funded with internally generated cash flow and additional debt at the subsidiary level. With everything we are seeing, we think this will be a good year for Altium, as year-to-date organic EBITDA has grown by about 13% and total EBITDA has grown about 35%.

 

Judging from the increase in sales and improved earnings, it's clear that our equity value in Altium is worth more than what we paid for a few years ago. After the survey of our privately held subsidiaries and the description of how we think about each of them, hopefully you will understand why I feel the market is asleep at the switch when it comes to low stock.

 

Last, but certainly not least, I want to talk about our publicly held subsidiary CNA. So far, I will focus my remarks on how long the market has been in valuing our privately held subsidiaries, but that doesn't mean the market has gotten CNA's valuation right. CNA trades at a substantial discount to its peers despite its stellar underwriting performance, and while CNA trades at a discount, I believe the commercial property and casualty insurance industry itself is undervalued by the market.

 

While the S&P trades at around 20 times next year's earnings, the commercial P&C industry trades in the high-single to low-double digits. In a show of support for CNA and its management team and to signal our displeasure with the market's valuation of the company, Loews brought about 0.5 million shares of CNA in the second quarter. In speaking of the second quarter, I want to take a moment to commend CNA's management team on delivering strong underlying results, especially considering the challenging economic environment.

 

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 also had a good quarter, reflecting the markets rebound. The CNA investment portfolio had $4.4 billion in unrealized gains. At the end of the second quarter, the portfolio has bounced back nicely and its unrealized gain was near its prior high. The downside of such large unrealized gains is that the market yields are low. The yield on 10-year treasury notes is currently below 60 basis points. For entities like insurance companies that make money on float, such low rates can become a drag on earnings. All else being equal, a 100-basis point increase in market yields would reduce CNA's unrealized gains by about $2.7 billion. However, investment income would go up dramatically.

 

In short, CNA would have lower unrealized gains that would have higher earnings in the intermediate to long term.

 

Finally, I want to talk about capital allocation at Loews. Over the last quarter, we bought a little under 1 million shares of Loews stock, and as I mentioned, about 0.5 million shares of CNA. We bought the CNA shares because we wanted to send a signal to the market that we think the company is trading at too steep to discount. 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 phase set over the last two years.

 

Right now, as we experience so much uncertainty in the world and the financial markets, our focus is on maintaining a substantial cash position as are rainy day fund. At Loews, we are constantly reevaluating our capital allocation strategy and making adjustments accordingly, and 2020 is no different.

 

And now, I'd like to hand the call over to our CFO, David Edelson.