Loews Is The Insurance Company That Diversified Correctly

Key Points

• The typical insurance business needs proper diversification from policy premium dependencies; Loews Corporation has achieved a seemingly right balance between cash flow expectancy and upside potential.
• Applying its growing free cash flow base to dividend payouts and share buybacks, management has kept investors front and center. Still, further acquisitions and reinvestment of subsidiaries bring unlocked value.
• An overlooked natural gas pipeline contracted backlog may sweep markets off their feet once it is realized by 2025 and represents double-digit revenue growth. 
• Loews has outperformed the S&P 500 for 14 months; these fundamental levels suggest investors can find other juice to squeeze out of this stock.

Insurance companies like Progressive NYSE: PGR, Allstate Insurance NYSE: ALL, and even American International Group NYSE: AIG are, by their very nature, heavily dependent on the volumes of policy issues and the premiums collected upon said premiums. So Warren Buffett had a brilliant idea when he bought a significant stake in Geico Insurance to diversify the company's float (the accumulated cash collected from insurance premiums) and invest it into higher-performing vehicles instead of just money.

One company that has been trying to replicate this structure to create additional value for shareholders and other business owners is LoewsNYSE: L. Most of the revenue for Loews comes from CNA, one of the largest U.S. commercial property and casualty insurance companies, with, according to the first quarter 2023 earnings presentation, carries a stable credit outlook and rating of A+ by S&P.

However, shares of Loews are trading higher by 4.45% as of the market close to kicking off the week; perhaps investors and markets alike took notice of the other streams of high-quality cash flows acquired with CNA's float.

Risk-Adjusted Returns by Risk Assessors 

Insurance deals with and monetizes risk in endeavors like personal property and life. It is no surprise, then, that Loews management has adopted a rigid capital allocation discipline to achieve the best returns they can for shareholders while assuming as little risk as possible.

Through maintaining a solid balance sheet, carrying $3.1 billion as of the latest Loews Financials reporting, the company does not only return cash to stakeholders via dividend payouts and share buybacks but also - and arguably more importantly - acquire and reinvest in new or existing subsidiaries for other returns to the overall company.

Loews retired fifteen million shares from the open market during the past twelve-month period from the first quarter of 2022 to the first quarter of 2023. Additionally, Loews' dividend stands at a mere 0.42%. A low dividend yield may be of little to no attraction to investors; however, this also means that the company is utilizing what would be dividend payouts and instead investing these funds into other businesses that will appreciate and provide further cash flow.

Apart from operating in the insurance business, Loews owns a joint venture throughout the United States and Canada, Loews Hotels & Co. This joint venture operates managed hotels and focuses on further developing exclusive locations such as the Universal Orlando resorts chain in Orlando, Florida. As of March 31, 2023, Loews Hotels & Co operated 25 hotels and has four new developments to be fully operational by 2025.

This segment currently accounts for $24 million of net income, which grew by 60% yearly, partly due to the high volumes of tourism the city of Orlando experiences and a national economic recovery from the trends seen throughout the COVID-19 pandemic.

Markets would grow natural suspicion if all were growing and well within this low-flier business, its final division pertaining to the transportation and pipeline networks of natural gas and liquids. While the net income within this division did see a near 5% decline annually, the division reportedly has an $8.9 billion contracted firm backlog expected to be realized by 2025.

Shareholder Value 

With backlogs in natural gas contracts, which would accrue toward a 61.7% potential revenue increase, there is tremendous value to be unlocked within this company. Loew's analyst ratings suggest no diversified ratings pointing to consensus targets, as only one analyst from Morningstar is pointing to a $63.01 price target, fairly valuing the company now. 

Markets are missing the bigger picture concerning trying to value this business. The following chart comparison will show that Loews stock has outperformed the S&P 500 benchmark by 17.38% on a 14-month period, which could be taken as investors finding reassured safety and upside higher than that perceived for the overall U.S. equity market. 

Topping the uptrend support seen in the stock chart since September 2022, fundamentally, Loews has a book value per share of $65.56, allowing investors to gain exposure to the upside stemming from natural gas pipeline backlogs at a discount. Indeed, once the backlog is realized, there will be a significant bump to additional book value per share underreported due to the lack of analyst coverage. A seemingly conservative bump of book value per share of 10% may seem reasonable, considering that the stock hit its all-time high at around $68 per share.