CNA - CNA Financial

[WhoIsWarren]

I've been mulling over an investment in Loews for a number of months.  Every time I read about the Tisch family philosophy, their focus on the long term, their patience.....I start to salivate, Pavlov's dog-style!  Valuation on the face of it doesn't look demanding.  What's not to like?

 

Most of you have probably read these two articles on the Tisch's from earlier this year, but just in case....

 

http://www.bloomberg.com/news/2012-05-04/tisch-beats-buffett-with-8-return-citing-diana-ross.html

http://www4.gsb.columbia.edu/filemgr?&file_id=7312109

 

However, every time I start to do some detailed work on Loews, it's not long before I get to the issue of CNA and how poor its returns have been historically.  This has resulted in growth in book value per share over the last 20 years of just 2.6% per annum.  The Brooklyn Investor blog did a write up on CNA a few months back and highlighted this very point.

 

http://brooklyninvestor.blogspot.ie/2012/05/cna-one-of-parts-of-loews.html?showComment=1352192601910#c3229479134094272860

 

The case of CNA really is a really puzzling one for me.  The Tisch family has essentially had control over CNA since 1974, so they've clearly had ample time to assess the business properly.  If painful restructuring decisions were needed, for the long-term betterment of the company's profitability, I have no doubt that the Tisch's would have carried them out.

 

Some people are excited about current CEO Thomas Motamed, a Chubb vetern.  He was appointed in 2009 but it's far too early to tell how he's doing.  Besides, similar hope was held out for previous CEO Stephen Lilienthal, appointed in 2002, and that turned out to be another false dawn.  Maybe Motamed is special, but I can't help thinking that the issue at CNA is more fundamental.

 

So my question is, what is it about CNA that has proved so difficult to turn in a decent profit?  Why is it that Chubb and Travelers (and many others) have been so much more profitable?  Can it simply be that the Tisch's judgement of managers appointed at the top of CNA in the past was poor?  There's got to be a deeper problem and I was wondering if anyone could shed some light on it.  I've tried to dig around this issue but have come up with nothing concrete.

 

Thanks

[nwoodman]

This is a great question and one that I would love to be able to answer convincingly but unfortunately as an outsider I am only speculating. As far as I am concerned the the problem resides in their CNA Commercial division.

 

CRs over the last 3 years for CNA commercial, who provide P&C to in the following areas:

• Workers comp
   
  
• 
  commercial auto
   
  
• 
  umbrella coverages
   
  
• General and product liability
  

have been, as you rightly point out, pretty ordinary:

 

	2012	2012	2010
NPW	3,350	3,208	3,448
CR	105.7%	102.9%	106%

 

However, their other division CNA Specialty, that provides professional and management liability and other coverages thru P&C products and services recorded the following during the same period:

 

	2012	2012	2010
NPW	2,872	2,691	2,684
CR	89.97%	85.0%	86.5%

 

 

Based on their 10Q's,  which you have obviously read,, they offer both lines  thru brokers. Perhaps it is as simple as not having the ability to regulate the culture as closely as the better insurers in the business. Is this likely to change, I have no idea, and hope is a poor substitute

 

Just to put my interest in the company in context,  I first starting looking at Loews a couple of years back after Diamond Offshore got sold off due to the Deepwater Horizon incident.  Having owned a few insurers LRE, UNAM, FFH, BRK and having a cursory understanding of where we lay in the insurance cycle,  I figured the discount to book was acceptable.  They were also buying back stock at a reasonable rate and this was also pretty appealing at the time.  Overall they seemed to be able to grow L book value at around 10% pa.  Trading at around 0.7-0.8 x's book seemed like a good margin of safety.

 

Results to date for CNA indicate that they seem to be improving along with the overall insurance market firming.  I think Motamed is making a difference, and I was pleased to see him sign on for a few more years.  Are they going to do as well as the competition?....No!.  Are they trading at a discount that provides an appropriate margin of safety if a regression  back to book value is possible as the market hardens, I believe yes.  I also think Highmount may actually be worth something too :)

 

cheers

 

nwoodman

 

 

 

[FrankArabia]

I used to own diamond and CNA surety (which was acquired by CNA Financial). Loews is an efficient operator and conservative allocator of capital. But they often times fail to invest in the businesses aggressively (as in the case of diamond relative to competitors) so over the years their assets have lagged the competition. They look to preserve capital more than getting a good return. I don't think you will lose money with Loews but the returns are not going to be spectacular.

[Palantir]

I used to own diamond and CNA surety (which was acquired by CNA Financial). Loews is an efficient operator and conservative allocator of capital. But they often times fail to invest in the businesses aggressively (as in the case of diamond relative to competitors) so over the years their assets have lagged the competition. They look to preserve capital more than getting a good return. I don't think you will lose money with Loews but the returns are not going to be spectacular.

 

This. Loews is chronically undervalued and a good company, but nothing shows that it will drive a great return in the future. Given the discount to NAV, they should be aggressively buying back stock if they really cared that much. So while you could do worse, IMO you could do better. There already is a thread on Loews though, check it out.

 

As the OP noted though, if the firm's management says, "long term, shareholder capital appreciation, patience, and value", value investors start having unmentionable fantasies....  :o

[FrankArabia]

Lowes is quite similar to the Power companies out of Canada except they actually pay a fat dividend. They all say the same thing long term shareholder friendly etc. the numbers say otherwise. You gotta remember, these are old rich guys that don't see eye to eye with guys like you and I who look to make an above average return due to our below average wealth.

[WhoIsWarren]

Thanks for responding nwoodman.  It is true that CNA seems to have something in the specialty business, which is backed up by longer term numbers.  Median combined ratio numbers over period 2000-2011 are 90% in specialised lines versus 106% in standard lines.  [These numbers are very rough.  Firstly they've 'restructured / restated' things a couple of times along the way.  Secondly using median isn't affected by the couple of WILD looking numbers along the way].  I guess what I'm trying to say is that Motamed inherited a good specialty lines business and hasn't turned around the standard lines, so I can't see much evidence of him working any magic.  Anyway, surely it's too early to tell one way or the other?

 

FrankArabia / Palantir, you are both suggesting that there's probably more that Loews could do -- more aggressive capital allocation, share buybacks etc.  And you guys might be right, but actually that's one of the attractions of the company for me.  How many other "aggressive" companies do we read about that eventually run into trouble?  I was just talking to a colleague about Seadrill, a competitor of Diamond Offshore.  He was saying that Seadrill aggressively ordered new drillships in 2008/09, without having contracts in place and really levered up the balance sheet in the process.  Now their gamble paid off in the end as the market recovered, but give me an "underachiever" like Loews any day ;)

 

Anyway, a lack of ambition doesn't really address why CNA's returns appear structurally low.  The reason why this is -- despite the undoubted efforts of the Tisch's -- is what I'm trying to understand.

 

There already is a thread on Loews though, check it out.

 

I read the thread, but I didn't see any discussion about why CNA historic returns are low.  Did I miss something related?  Apologies if people feel this thread should have been included there, but I thought this discussion was more CNA, less Loews, related.

 

 

 

 

 

[StubbleJumper]

I read the thread, but I didn't see any discussion about why CNA historic returns are low.  Did I miss something related?  Apologies if people feel this thread should have been included there, but I thought this discussion was more CNA, less Loews, related.

 

I haven't looked at CNA's financials in the past year or two, but I'd recommend that you look at the "loss triangles" and you'll see significant, chronic adverse development.  They've had trouble underwriting, and worse yet, they've seemingly had trouble understanding that they have had trouble underwriting.

 

A couple of years ago, I concluded that CNA might be appropriately priced for the quality of their operations.  Maybe they're better now?

[WhoIsWarren]

I read the thread, but I didn't see any discussion about why CNA historic returns are low.  Did I miss something related?  Apologies if people feel this thread should have been included there, but I thought this discussion was more CNA, less Loews, related.

 

I haven't looked at CNA's financials in the past year or two, but I'd recommend that you look at the "loss triangles" and you'll see significant, chronic adverse development.  They've had trouble underwriting, and worse yet, they've seemingly had trouble understanding that they have had trouble underwriting.

 

A couple of years ago, I concluded that CNA might be appropriately priced for the quality of their operations.  Maybe they're better now?

 

You've hit the nail on the head there StubbleJumper.

 

One has got to be very careful when investing in insurance companies.  Not only should you have worries about the asset side of the balance sheet (possible investment write-downs), but the liabilities side too.  Reserves for Outstanding Claims are only a best guess of future losses.  I get comfort from Berkshire, Markel and Fairfax with the way they try to reserve for future losses -- the aim is to have write backs as more knowledge of the losses becomes available.  When I see an insurer with a history of reserve deficiencies, I'm immediately suspicious.

 

Actually, I think CNA's had some sizeable reserve releases in the last 3/4 years, but I'd be looking to see that sort of a trend over 10 years or more!

 

I think it was Prem Watsa who said something like the following: Insurance is a business where you are selling a product, the cost of which you don't yet know.