TO OUR SHAREHOLDERS
At Loews, we believe that effective capital allocation is one of the most powerful tools we have to create value for shareholders over the long term. With cash and investments totaling $3.1 billion at the end of 2018, as well as a diversified portfolio of attractive businesses, Loews has ample capital with which to pursue a range of investment opportunities.
Over the past five years, we have allocated about $6 billion in capital with the sole objective of creating long-term value for our shareholders. We have typically deployed our capital in three ways:
In this letter we want to highlight Loews’s philosophy of capital allocation, and the various avenues we have to generate a superior return on that capital.
RETURNING CAPITAL THROUGH SHARE REPURCHASES
Share repurchases have been a significant means of delivering shareholder value at Loews, and the majority of the capital we have allocated in recent years has been devoted to this lever. Loews’s practice of share buybacks dates back to the 1970s and reflects our commitment to build value for long-term holders of our stock. Since early 2014, we have allocated $3.3 billion to buybacks, repurchasing almost 20% of our outstanding shares. In 2018 alone, we repurchased more than 20 million shares of Loews common stock (or more than 6% of our outstanding shares) at a cost of just over $1 billion. We do not have an automatic share repurchase program because we are sensitive to the price at which we buy back our shares. We repurchase Loews stock when it is trading below our view of its intrinsic value. We believe this capital allocation tool is one of the best ways to create value for all Loews shareholders over the intermediate- to long-term.
Our largest subsidiary, CNA Financial, currently represents more than 70% of the value of each Loews share, so our repurchases also represent a vote of confidence in our insurance business. In recent years, CNA has successfully worked to strengthen its underwriting talent, enhance its technology infrastructure, and expand its distribution network, all while paying a significant dividend and maintaining a strong balance sheet.
The positive impact of these initiatives is made clear by the improvement in CNA’s loss ratio and capital position, its bench strength, and its success in writing profitable new business in targeted areas. CNA is also making strides in mitigating the risk from its run-off Life & Group segment by managing its long-term care (LTC) book of business. We are confident that CNA is handling its LTC business appropriately, and our share repurchases reflect that confidence.
INVESTING IN OUR SUBSIDIARIES
Another important way in which we deploy capital is by investing in our subsidiaries. For example, we have made a net investment of about $300 million in Loews Hotels & Co over the past five years to help the business execute its growth strategy. This strategy is based on two main objectives. The first is creating highly profitable, distinguished hotels that support group business. We have found that these properties play to Loews Hotels’ strengths in the group meetings market while also being less vulnerable to disruptors such as the sharing economy.
The second objective is establishing partnerships that leverage unique, built-in demand generators, as exemplified by the successful, long-term partnership with Universal Parks & Resorts in Orlando, Florida. More than 20 years ago, Loews Hotels’ CEO Jon Tisch set this strategy in motion with the company’s initial 50-50 partnership with Universal to develop hotels on their Orlando theme park campus. This partnership has resulted in a highly profitable, mutually beneficial long-term joint venture for Loews Hotels and Universal Orlando. Starting with the Loews Portofino Bay Hotel in 1999 and just 750 rooms, the partnership now includes six properties on the Orlando campus and 6,200 rooms. There are another 2,800 rooms under construction, the first 750 of which are set to open in June of this year. These hotels in Orlando dramatically outperform their competitive set in average daily rate, occupancy rate and RevPAR.
We hope to continue our success in managing themed concepts and one-of-a-kind destinations with our new Live! by Loews hotels. The Live! by Loews hotel in Arlington, Texas, being developed in partnership with The Cordish Companies and the Texas Rangers, is set to open this summer at the base of Globe Life Park and next to AT&T Stadium. In early 2020, the Live! by Loews in St. Louis will open next to Busch Stadium. We are partnering with The Cordish Companies on this hotel as well, along with the St. Louis Cardinals.
Turning to Boardwalk Pipeline Partners, in 2018 Loews increased its ownership interest in the company today we own 100% of Boardwalk, as compared to owning 51% a year ago. In March of 2018 the Federal Energy Regulatory Commission (FERC) reversed its longstanding policy and eliminated the ability of master limited partnerships (MLPs) to include an income tax allowance in their cost-of-service rates.
This policy change materially decreased the maximum allowable rates Boardwalk would be able to charge its customers in the future, if it had remained an MLP. As a result, this action by FERC triggered a call right under the Boardwalk partnership agreement that allowed Loews to purchase the outstanding Boardwalk LP units we did not already own. The purchase was made in the summer of 2018 at a formula price of $12.06 per unit, for a total cost to Loews of approximately $1.5 billion.
With respect to our Diamond Offshore subsidiary, in light of the difficult environment buffeting the Offshore drilling industry, the current strategy has primarily been one of retaining capital and liquidity. That being said, as described in detail in the Subsidiaries’ Performance Highlights section, Diamond has been in the forefront of technological developments in its industry and is well positioned for a more favorable market turn.
In addition to investing in our subsidiaries, we also offer them experienced counsel with regard to mid- to long term strategic planning and major capital allocation decisions, along with financial planning and capital markets guidance. However, we are not operators — and that is why one of the most important ways in which we engage with our subsidiary businesses is to help select their CEOs. We are confident that the talented individuals who lead our businesses have the vision, deep industry expertise and specific skills to deliver on our commitment to creating shareholder value.
ADDING A NEW BUSINESS
Loews is highly selective about deploying capital to acquire a new business and we have done so only rarely. In 2017, however, we did purchase Consolidated Container Company (CCC), a leading rigid plastic packaging manufacturer, for approximately $1.2 billion — $600 million in cash and a comparable amount of debt. The business was attractive to us due to its defensive position in consumer end-markets, its highly qualified management team, and the opportunity for add-on investments in a fragmented industry. With the acquisition of CCC, Loews not only added a new sector to our already diverse portfolio of businesses, but also another potential platform for growth.
IN CONCLUSION, OUR THANKS
Whether we are repurchasing shares, helping existing subsidiaries to finance their growth, or acquiring a new business, it is important to underscore that the talented employees at Loews are critical to our long-term success. We are grateful not only to our CEOs but to all our team members for their hard work and professionalism, and to our board of directors for its wise guidance and counsel. Our directors’ diverse skill sets and backgrounds complement one another. The more tenured members of our board have superior knowledge of the five different industries in which we operate, while our newer board members offer a welcome, fresh perspective. We also want to thank you, our shareholders, for entrusting us with your investment. The Tisch family owns more than 30% of the company, and as shareholders ourselves, our interests are aligned with yours. Rest assured that we will continue to allocate our capital, and to dedicate our efforts, to creating long-term value for you.
Loews’s assets currently consist of businesses in the insurance, energy, hospitality and packaging industries. Our subsidiaries are: CNA Financial (NYSE: CNA), Diamond Offshore Drilling (NYSE: DO), and Boardwalk Pipeline Partners, Loews Hotels & Co and Consolidated Container Company; as well as a large portfolio of cash and investments.
Our unique structure gives us the freedom to make investments and acquisitions across a broad spectrum of industries, wherever we see opportunity. Loews is traded on the New York Stock Exchange under the symbol L.