To Our Shareholders
At Loews, while history certainly influences our decisions and actions, our focus is on the future and on creating value for the long term. We study the world around us, thinking about what’s happening today and what may happen in the days, months and years to come — and then we analyze how those potential outcomes may affect our businesses and the investments we make. We believe it is essential to maintain this wide-angle perspective as a basis for our business strategy and our investment decisions.
Because our focus is broad, we understand that one of our most important responsibilities is the selection of the CEOs for our underlying businesses. We rely on their vision, deep industry expertise and leadership — as well as that of their teams — to make each business as successful as possible. Our CEOs concentrate on strategy, operations and responsible growth, focusing all the while on their appropriate key financial metrics, such as earnings per share and EBITDA. And while we understand the importance of quarterly results, we make clear that sound business decisions should not be determined by a company’s need to meet its quarterly numbers.
We give ourselves high marks for the current roster of outstanding chief executives running our five businesses today. We believe we have the right people in these leadership positions, each with tremendous management skills, vision and domain knowledge. We engage with them in key areas — specifically, reviewing major capital allocation decisions and medium- to long-term strategic plans, and providing financial planning and capital markets guidance.
The Value of a Long-Term View
Over the years, there have been many occasions when, guided by the Loews perspective, our subsidiaries’ leadership teams were able to plan for the long term instead of merely reacting to short-term market conditions.
Diamond Offshore provides a case in point. From 2006 through 2014, during the oil industry’s most recent boom years, oil companies expanded their exploration and production budgets. In response, offshore drillers and other speculators ordered an estimated 125 drilling rigs, flooding the market with additional rig capacity. Despite the temptation to dramatically expand during an up-cycle that seemed like it would never end, Diamond Offshore was guided by Loews’s experience in the cyclical supertanker industry, and instead used its strong cashflow to selectively renew and upgrade its fleet, while also returning capital to shareholders through dividends. During that time, Diamond Offshore paid regular and special dividends of more than $5 billion to shareholders, including Loews, substantially cushioning the recent dramatic price declines of offshore drilling shares.
More recently, our long-term approach has helped guide Loews Hotels to hone its strategy and focus on what the company does best: owning and operating hotels. The owner/operator business model is increasingly rare for hotel companies and gives Loews Hotels a distinct competitive advantage. With the financial support of the parent company, Loews Hotels is able to invest in its own projects, making it an attractive partner for developers, “immersive destination” owners and municipalities alike. Over the coming years, Loews Hotels will leverage its solid industry standing, continue to focus on delivering strong operating results and seek to invest in projects with above-market returns, while cultivating new and existing partnerships.
Loews’s long-term perspective also influenced Boardwalk Pipeline Partners’ recent decision to restructure its existing firm transportation agreements with Southwestern Energy Company. While the restructured agreements have negatively affected EBITDA in the short term, this action is helping Boardwalk to achieve greater long-term revenue generation and future revenue upside.
A Strong Corporate Parent
Loews’s long-term viewpoint is backed by its financial strength and liquid balance sheet, adding further value to our subsidiaries. During the financial crisis a decade ago, many companies such as CNA experienced substantial declines in their investment portfolios, seemingly overnight. To shore up their balance sheets, other companies were forced to raise significant amounts of equity, causing massive dilution for their shareholders. CNA, however, had access to capital through Loews, which invested $1.25 billion in CNA by purchasing non-voting cumulative senior preferred stock with a 10.0% dividend. By 2010, these shares had been redeemed in their entirety.
Over the last 15 years, CNA Financial has worked hard to transform itself from an un-focused multiline insurance company into a highly-focused commercial property and casualty company. This transformation didn’t happen overnight — it required enormous discipline by the management team at CNA, guided by Loews’s strategic insights.
Today, CNA common shares are up by a factor of almost seven times from their low in 2009. The company has a fortress balance sheet in terms of both capital and liquidity. Over the last four years, Loews has received $3.2 billion in dividends from CNA. The capital allocation decision to invest in CNA has certainly benefited Loews shareholders. Although it took time and hard work to turn CNA around, we and CNA’s management had a vision for what the company could be — and we were able to support that vision with capital when it mattered.
Our other subsidiaries have also benefited from the backing of a strong corporate parent at different points in their industries’ cycles. Since 2010 Loews has invested more than $1.5 billion of holding company cash to help facilitate transactions for Boardwalk and Loews Hotels — and has been repaid for more than two-thirds of that amount. Our conservatively-managed and liquid balance sheet has helped our subsidiaries meet challenges and take advantage of market opportunities in order to emerge stronger and better positioned.
Currently CNA provides the lion’s share of dividends from the subsidiaries to the parent company. It was not too long ago, however, that Diamond and Boardwalk contributed the majority of dividends to Loews. This evolution underscores the benefit to our shareholders of a portfolio of diverse businesses.
Driving Value Through Capital Allocation
Investing in our existing subsidiaries is just one way we deploy capital to build shareholder value at Loews. While it doesn’t happen often, we also may allocate capital by acquiring a business in a new industry — and last year we purchased Consolidated Container Company (CCC), a rigid plastics manufacturer based in Atlanta, Georgia.
CCC is an outstanding company that checked all the Loews acquisition criteria boxes, including the fragmentation of the industry, its defensive position in consumer end markets, strong cash-on-cash returns, and — last but certainly not least — a highly-qualified management team.
With the acquisition of CCC, Loews added a new industry to its already diverse portfolio of businesses — one that will provide a great foundation for expansion through organic growth and bolt-on acquisitions. These add-on acquisitions should afford CCC substantial revenue and operating synergies.
Another important capital allocation lever at Loews has been and continues to be share repurchases. In the fourth quarter of 2017, we recognized that our shares were trading at a particularly compelling discount to our view of their intrinsic value. We also believed that our publicly-traded subsidiaries offered attractive value. Both of these factors influenced our decision to repurchase 4.6 million Loews shares. This trend continued in the first quarter, and in the first two months of 2018 we repurchased another 6 million shares. Since October 31, 2017 we’ve bought back 10.6 million shares at a cost of $534 million, representing 3% of the company’s shares outstanding. Repurchasing shares at a significant discount to their intrinsic value inures to the benefit of all Loews shareholders. In the past decade, we have acquired almost 40% of our outstanding shares — continuing our nearly half-century practice of substantial share buy-backs.
In Conclusion, Our Thanks
As always, we are thankful to the executive teams and the employees of our subsidiaries, as well as to all Loews employees, for their dedication and professionalism, and we thank our board of directors for their sound guidance. We also thank you, our shareholders, for your support and trust. As shareholders ourselves, our interests align with yours — in fact, members of the Tisch family own more than 30% of the company. As we look toward the future, we affirm our commitment to stay focused on making decisions that best position Loews and its subsidiaries for sustainable long-term value creation, an approach that has guided this company for well over half a century.
Loews’s assets currently consist of three publicly-traded subsidiaries: CNA Financial, Diamond Offshore Drilling, and Boardwalk Pipeline Partners; and two non-public operating subsidiaries: 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.