CNA Financial (CNA): Investing with the Tisch family
In his BullMarket.com financial newsletter, he explains, "Impressively, CNA has grown its book value over the past three years despite all the financial turmoil in the market place, and we expect it to continue to grow in 2010." Here's his analysis.
"CNA is the 7th largest commercial insurer and the 13th largest property & casualty insurer in the U.S., covering more than one million businesses and professionals in the U.S. and internationally.
"The company is a unit of Loew's Corp., which is the holding company that represent's the interests of New York's Tisch family. The Tisch's have proven to be astute value investors over the years.
"While Loew's 90% ownership of CNA might keep the company under the radar of many investors, the Tisch family's involvement removes some of the risk associated with owning the company.
"For starters, at the depth of the credit crisis in late 2008, when what frightened investors the most were concerns about the liquidity of companies, Loew's stepped in to backstop CNA by purchasing $1 billion in preferred stock. The cash infusion onto CNA's balance sheet by and large eliminated the credit risk.
"The tradeoff was that the cash needed to pay the preferred dividends prevents the payment of a common dividend, but that should change once the preferred is repaid. Loew's said it favors having the preferred repaid as soon as it is practical without adding unnecessary risk to CNA's balance sheet.
"CNA posted third-quarter net income of $263 million, or 86 cents a share, compared with a year-ago net loss of -$331 million, or -$1.23 per share.
"Net operating income, which is the measure more closely watched by Wall Street, increased to $1.23 per share, up from 31 cents in 3Q2008, as the insurer's net realized investment losses narrowed to -25 cents per share compared to -$1.57 the year before.
"Improvement in the performance of the company's portfolio helped increase book value per common share by 29% to $35.38 over the course of the quarter. Management's focus has been on reducing portfolio risk. One way it has done so is shift more of its investments into limited partnerships (LPs) instead of equities.
"Other efforts to reduce portfolio risk included buying $2.6 billion of investment grade corporate bonds during the quarter, which increased its holdings of corporate debt to 39% of the total portfolio from 24% at the beginning of the year.
"It also bought a little more than $400 million in agency collateralized pass-throughs and CMOs and took advantage of favorable conditions to reduce its holdings of high yield corporate bonds by more than $350 million in the quarter and $1 billion year to date.
"CNA cut its holdings of non-agency mortgage-backed securities by a total of -$1.3 billion through the first nine months.
"We like CNA's focus on being primarily a business insurer. Exiting the annuities business was a smart move in our view as open-ended annuities marketed to individuals add an element of risk.
"What we like about CNA is the potential to grow along with seasoned investors like the Tisch's. Trading at around a -33% discount to book at current levels, we think the stock can move back to its more historical range of trading at 80%-90% of book value. (Note that CNA typically trades at a small discount to book because of a lack of a takeover premium resulting from the ownership position of the Tisch family.
"We are going to start CNA with a 'Buy' Rating and place a conservative price target of $30 on the stock, which is 85% of the Q3 book value (which, as we said, we expect to continue to grow at a decent pace through 2010)."
The Stock Advisors