Loews Corp. (L) Chief Executive Officer James Tisch, whose company oversees $43 billion in bonds from insurer CNA Financial Corp. (CNA), said he’s counting on hedge funds to boost investment returns amid near-record-low interest rates.
Loews manages about $2.5 billion of hedge-fund investments for CNA, Tisch, 60, said yesterday in an interview at Bloomberg headquarters in New York. The investments have returned 5 to 10 percentage points more than three-month Treasuries for more than a decade, he said.
“That’s where we get some zip into our insurance-company portfolio,” said Tisch, whose New York-based company owns about 90 percent of CNA. “It’s certainly not from fixed income.”
The Federal Reserve has held interest rates near zero since December 2008 and expanded its balance sheet to more than $3 trillion through bond purchases to stimulate the economy. That’s hurt insurers because they rely on fixed-income securities to back policyholder liabilities and coupon payments to boost profit. Rates are so low that they make Treasuries, municipal debt, corporate bonds and below-investment-grade securities unattractive, Tisch said.
“It’s an ugly contest,” he said. “Everything is really carefully picked over.”
Five-year Treasuries yielded about 0.77 percent yesterday. Similar-maturity junk bonds in the U.S. are yielding about 7.1 percent, compared with 1.28 percent for municipal and 2.13 percent for investment-grade corporate debt, according to Bank of America Merrill Lynch index data.
Loews’s hedge-fund investments have included market-neutral stock strategies and funds that invest in middle-market loans, Tisch said. Hedge funds returned 3.6 percent annually, on average, in the four years ended Dec. 31, according to data compiled by Bloomberg.
Loews was built out of the partnership of Tisch’s late father, Laurence, and uncle, Robert, who started out with a single hotel in Lakewood, New Jersey, in 1946. Their business interests once included cigarette-maker Lorillard and a chain of movie theaters. Today, the holding company comprises the CNA stake, a luxury hotel chain and energy subsidiaries.
That collection of businesses plus other assets make Loews worth more than $50 a share, Tisch said. The stock closed yesterday at $43.08.
“The bad news is it’s not $50,” Tisch said. “The good news is it gives us an opportunity to buy in the shares.”
Loews has done just that, repurchasing $1.3 billion of its stock since the end of 2009. Tisch said his company remains “unabashedly a conglomerate” even though its operations span industries that may make it harder for some analysts to value.
“The thing that I find most attractive about a conglomerate, especially today, is it’s a place where you can invest your money, go away for 10 years, and come back, and hopefully it will have appreciated in value,” he said.
Loews sees value in hotels. The company hired Paul Whetsell as CEO of the unit last year and, since November, has struck deals to purchase properties in Boston and Washington. The company is focusing on larger North American cities as it looks for deals.
Loews expects to grow mostly through individual transactions rather than purchases of portfolios, Tisch said. The company’s strategy is to put up 50 percent or less equity for hotels by bringing in institutional investors as partners, he said. It also may take over the management of existing hotels for the Loews brand.
Loews’s HighMount Exploration & Production LLC has been switching to oil drilling amid a slump in natural-gas prices. New technology has made it possible for energy companies to extract gas from shale formations and caused a glut of supply. The U.S. produced a record 29.8 trillion cubic feet of gas in 2012, according to the Energy Information Administration.
Tisch has advocated exports of liquefied natural gas and said yesterday that building facilities to ship the fuel around the world wouldn’t raise prices that much for consumers. It will create jobs, he said.
“Selling natural gas overseas is modestly good for Loews,” Tisch said. “It’s really good for the country.”
Loews won’t invest in an LNG export facility, he said, because of concerns that demand outside the U.S. could decrease before the 10- to 30-year period for payback on such a project. China or other nations may make the same advances in production that the U.S. has seen, he said.
“I can’t believe that God only put shale gas and oil under these United States of America,” he said.
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