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Moving down the structure in Loews/CNA notes

| June 7, 2019

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

At current valuation, CNA Financial (CNA: Baa2/BBB+/BBB+) bondholders are well compensated with the available spread pick to the parent company Loews (L: A3/A/A). Though L maintains a strong balance sheet and cash flow diversity, those benefits are somewhat offset by CNA’s priority claim on subsidiary level assets, and their relative insulation from commodity risk. Those risks have occasionally commanded center stage, particularly when fellow subsidiary Diamond Offshore (DO) deteriorated from a single-A credit to a single-B credit in the past 4 years.

Exhibit 1: P&C insurance – intermediate curve (g-spread); Relative flatness in this part of the curve; CNA paper can offer > 40 bp pick up to parent Loews

Source: Bloomberg/TRACE BVAL indications, Amherst Pierpont Securities

Summary

Valuation of the relationship between CNA Financial (CNA: Baa2/BBB+/BBB+) and parent company Loews (L: A3/A/A) is often debated among active investors in the sector. The relationship has changed over time, reflecting various pressure points for the involved credits – namely CNA and the other material businesses held under the L umbrella, midstream MLP Boardwalk Pipeline Partners LP (BWP: Baa3/BBB-/BBB-) and Oil & Gas driller Diamond Offshore (DO: B2/B), as well as the smaller Consolidated Container Company.

Exhibit 2: CNA 27s and L 26s – historical relationship (g-spread); though off the recent peak, available spread pick steadily rose over the past two years

Source: Bloomberg/TRACE BVAL indications

All of the subsidiary debt is non-recourse to Loews, and the rating agencies view the standalone credit strength at the parent as an offset to the structural subordination of its debt obligations, relative to the assets and income streams at the various subsidiaries. Though there are no explicit guarantees in place, L implicitly lends support to the various subsidiaries. This was demonstrated in recent years when L helped form joint ventures to fund capital projects and has scaled back upstream distribution to enable the subsidiaries to improve balance sheets when necessary.

Exhibit 3: CNA 26s and L 26s – historical relationship (g-spread); though off the recent peak, available spread pick steadily rose over the last two years.

Source: Bloomberg/TRACE BVAL indications

CNA is by far the largest component of the L conglomerate, representing about two thirds of the overall portfolio held. CNA has also accounted for the vast majority of dividend income streaming to the parent – as high as 95% in recent years. Given their dominant position, much of Loews’ operating risk profile resides with the P&C insurer. Furthermore, while L’s business diversity remains a critical asset and risk mitigate, volatile energy markets in past years have demonstrated the parent’s exposure to commodity risk. Those risks do not flow through as directly to CNA – in part because it is supported by its own balance sheet and bondholders maintain priority on CNA assets, and also because the regulatory nature of the insurance industry makes it unlikely that the parent L would be able to raid its insurance subsidiary were it stressed for capital.

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