洛茲集團 (L) 2002 Q4 法說會逐字稿

Good morning, and welcome to the Loews fourth quarter and full year, 2002, earnings conference call. All participants have been placed in a listen-only mode and the floor will be open for questions and answers following the presentation.

It is now my pleasure to turn the floor over to Josh Kahn, Director of Investor Relations.

Thank you, operator. Good morning, everyone. This is Josh Kahn, the Manager of Investor Relations at Loews. I'd like to welcome you to the Loews Corporation fourth quarter and full year, 2002, earnings conference call.

By now, you should have received a copy of our earnings release. If not, you may get a copy from our Web site at Loews.com. Carolina Group also issued a press release early this morning announcing its results for the fourth quarter and full year of 2002. The Carolina Group release is also available at the Loews Web site.

The Chief Executive Officer of Loews, Jim Tisch, and the Chief Financial Officer of Loews, Peter Keegan, will lead today's discussion and we'll be joined by Martin Orlowski of Lorillard.

Before we begin, I'd like to make a few brief disclosures concerning forward-looking statements. This conference call will include the use of statements that are forward-looking in nature. Actual results achieved by the company may differ materially from those projections made in any forward-looking statements. Forward-looking statements reflect circumstances at the time they are made, and the company expressly disclaims any obligation to update or revise any forward-looking statements made during this call. This disclaimer is only a brief summary of the company's statutory forward-looking statements disclaimer. You are urged to read this disclaimer, which is included in the company's 10K and 10Q filings with the SEC, in full.

There will be a time for questions after Jim, Peter and Marty have discussed our results. For those of you who have tuned in via our Web site, please call 787-692-2592 during the Q&A session if you'd like to ask a question. Now, I'd like to turn the call over to our Chief Executive Officer, Jim Tisch.

Good morning, everybody. In the context of a difficult economic and financial landscape, Loews had a relatively good year in 2002. As you can see from our earnings release, and will hear more about in Pete Keegan's discussion of our financial results in a few moments, Loews recorded net earnings of $290m for the fourth quarter and $941m for the year. Worthy of mentioning in today's operating climate is that all five of Loews' major subsidiaries were profitable for both the quarter and the year. Book value per share rose to $61.68 at the end of 2002, up from $49.24 at the end of 2001.

Primarily due to the purchase of $750m of preferred equity from CNA in the fourth quarter of 2002, Loews did not buy back any shares in the fourth quarter. For all of '02, Loews spent a little more than $340m to repurchase approximately 6.1 million shares of stock. Loews repurchases its shares opportunistically, but as many of you know it may at times be precluded from buying its shares for a number of reasons, including certain corporate events.

Most of the funds from Loews's purchase of preferred stock from CNA will be used by CNA to pay down its maturing debt, while a portion will be allocated to improve the statutory surplus of Continental Casualty Company, CNA's primarily property casualty subsidiary. Loews will receive an initial dividend of 8 percent per year from its preferred equity investment which will be adjusted quarterly at a rate equal to 400 basis points above the 10-year U.S. Treasury rate. CNA could have refinanced its debt in the capital markets, but credit spreads were a bit too wide for CNA's taste. Hopefully, CNA will find the corporate bond market more accommodative in the future. In the meantime, this arrangement will help to improve CNA's earning power and its standard with its rating agencies.

There are many positive developments that have taken place this past year at CNA and there are many that are still going on. Prices across CNA's property casualty lines increased 27 percent year over year in '02 which brings the compound annual change of prices over the past two years to almost 22 percent. From CNA's vantage point, there are no signs that this trend will let up any time soon. At the same time retention rates averaged 70 percent in '02 and increased progressively over the course of the year, as CNA completed initiatives to shed unprofitable classes of business. CNA also found a good number of opportunities to write new business under favorable terms.

Much has been made of the reserve actions taken by other property casualty insurers in the last few days and weeks. CNA increased its reserves substantially more than a year and a half ago on account of the developments that many of its competitors are only now acknowledging. CNA remains comfortable with the level of its reserves. For more about CNA, please go to the CNA Web site and listen to the conference call that it held earlier this morning.

Lorillard performed well in 2002, even though the marketplace became much more competitive for tobacco companies during the year. It's net income declined only slightly as Newport managed to increase its overall market share on slightly lower volumes. I'm not going to go into many details on Lorillard because Marty Orlowski, the CEO of Lorillard, will discuss the company's performance and the current pricing environment for tobacco products in just a few minutes.

Diamond Offshore is currently in contract discussions with potential customers for both the Ocean Baroness which was recently upgraded to fifth generation capacity and the Ocean Rover which is currently undergoing a similar conversion to fifth generation status. Day rates for these rigs are expected to be in the six-figure territory and should yield annual cash on cash returns of about 15 percent on a combined investment of about $380m. Although it is encouraging that Diamond Offshore's equipment is generally finding acceptance with customers, the offshore drilling market remains very weak. Oil and gas prices are at levels that should justify more exploration and production activity, but energy companies are apparently still wary of future price volatility and have been very selective in developing new drilling programs. As a result, Diamond Offshore recorded only a small profit in the fourth quarter.

Diamond Offshore has used the cyclical weakness in its market to repurchase its stock and to acquire assets. It recently bought two third-generation rigs in the fourth quarter at very low prices, about 35 or 40 percent below prices that it would have had to pay two years ago. It has also tried to distance itself from its competitors during this period of market weakness by using the strength of its balance sheet to enhance its fleet. In addition to the upgrades that it has performed on the Ocean Baroness and the Ocean Rover, a good part of Diamond Offshore's jackup fleet is undergoing significant capital improvements.

For Loews Hotels, the lodging business has not been particularly robust of late. For the year, occupancy rates were roughly flat compared to '01, but room rates were somewhat softer. In the fourth quarter of '02, slightly higher room rates versus the year earlier period led to weaker occupancy figures.

Despite the sluggish hotel market, Loews Hotels has been able to find attractive opportunities by which to expand its portfolio. It recently entered a contract to open and manage the Loews New Orleans Hotel which is expected to open in the fall of '03. This past summer, Loews Hotels successfully opened the Royal Pacific Hotel in Orlando in collaboration with Universal Rank Hotel Partners. The Royal Pacific located at Universal Orlando Amusement Park has so far exceeded all projections and if all of you on the phone would go to some of our hotels we'd do yet even better.

The weakness in consumer spending patterns did not impact Bulova too severely in the quarter and the year. Bulova's performance was helped by the strength of the Whittnauer brand which it added to its portfolio in late '01. Also, there was the success of its license agreement with the Harley Davidson brand and significant increases in unit sales of the Caravelle brand. In '02, Bulova also acquired certain assets of Heirloom, a custom woodworking company that specializes in the manufacture of grandfather clocks. Heirloom, which is located in Ontario, Canada, will operate as a subsidiary of Bulova under the name, The Art of Time, and will produce high quality, custom-made Bulova grandfather clocks for sale in the U.S., Canada and Mexico.

Bulova continued to develop its exposure to international markets in '02. After successfully launching a subsidiary in Mexico, Bulova opened an office in Fribourg, Switzerland, this past year to use as a springboard to the European market. Active discussions with distributors in other parts of the world where Bulova is not yet represented are also ongoing. Aggregate gains for the year in our investment portfolio were the result of an overweighted exposure to fixed income securities which generally performed very well in 2002. In the fourth quarter, the portfolios were repositioned to reflect our more cautious view on the direction of long-term interest rates. Towards the end of the year, we also began to tiptoe-I said tiptoe, back into common stocks.

In sum, 2002 posed many challenges for Loews and its subsidiaries, but we are pleased with the way that these challenges were met and think that we are well positioned for future success in each of our businesses. I'd now like to turn the discussion over to Pete Keegan who will talk about the finances of Loews.

Thanks, Jim, and good morning, everybody. Loews reported net income of $1.37 per share in the fourth quarter of 2002 compared to net income of 99 cents per share in 2001. For the full year, 2002, Loews reported net income of $4.27 per share versus a net loss of $3.01 cents per share in 2001. Loews' 2001 results include a restatement of previously reported financial results related to the life settlement business of its CNA Financial Corporation subsidiary.

Earnings for the fourth quarter and full year, 2001, reflect charges at CNA related to restructuring activities, reserve strengthening actions, the attack on the World Trade Center, Enron-related losses and other events that took place in 2001. These charges reduced Loews' fourth quarter and full year, 2001, net income by $218.1m and $2.1b, respectively.

Fourth quarter, 2002, results exclude net income attributable to Carolina Group stock of $36.9m or 92 cents per Carolina Group share. Full year, 2002, results exclude net income attributable to Carolina Group stock of $140.7m or $3.50 per Carolina Group share. Fourth quarter, 2002, net investment gains were $4.7m versus gains of $235.5m in the fourth quarter of 2001. Net investment losses for the full year, 2002, were $93.1m versus gains of $789.9m in 2001. The full year loss is primarily the result of investment-related impairment charges at CNA. Net operating income, excluding net investment gains or losses and adjustments for discontinued operations was $248.6m in the fourth quarter of '02 versus a loss of $47.2m in the fourth quarter of '01. For all of 2002, net operating income excluding net investment gains or losses and adjustments for discontinued operations were $963.9m in 2002 versus a loss of $1.3b in 2001.

Lorillard contributed $151.8m in the fourth quarter of '02 to net income available to Loews' common stockholders. This represents Loews' 76.99 percent interest in the earnings of Carolina Group of which Lorillard is the principle asset in addition to interest income after taxes on notional intergroup debt. Lorillard’s fourth quarter, '01, net income contribution to Loews of $197.8m represents the 100 percent economic interest Lorillard held by Loews at that time.

For all of 2002, Lorillard contributed $630.4m to net income available to Loews' common stockholders. This represents Loews' 76.88 percent weighted average interest in the earnings of Carolina Group in the 11 months since its inception, interest income after taxes on outstanding notional intergroup debt and Loews' 100 percent interest in the earnings of Lorillard for January, 2002. This does not include Lorillard's investment gains which appear as part of Loews' investment gains on a pro rata basis.

Lorillard recorded charges of $646.1m and $694.2m after taxes for the years ended December 31st, '02, and '01, respectively, to accrue its obligations under various settlement agreements. Lorillard's after-tax settlement charges were $135.5m in the fourth quarter of '02 and $152m in the fourth quarter of '01.

Carolina Group also reported net income for the fourth quarter and the year ended December 31st, '02. Net income attributable to Carolina Group stock was $36.9m or 92 cents per share for the quarter and $140.7m or $3.50 per share for the 11 months of 2002 that Carolina Group existed. Because the IPO of Carolina Group stock by Loews took place in early February of '02, there are no actual year-over-year comparative results for the Carolina Group. However, we have provided pro forma results which treat Carolina Group as if it had existed at the beginning of 2001 on page four of the Carolina Group release. On this basis, Carolina Group net income per share was 96 cents in the fourth quarter of '01 while net income per share for the full year 2002 was $3.85 versus $3.17 for the year 2001.

Carolina Group's $150m reserve for general corporate purposes remains fully funded. If the level of dividends paid by the Carolina Group remains unchanged in the fourth quarter, it is anticipated that roughly $63m could be used to pay down notional debt in the first quarter of 2003 at the time that any fourth quarter dividends are paid.

CNA contributed $102.2m to Loews' net operating income in the fourth quarter of '02 versus a loss of $252.4m in the fourth quarter of '01. Fourth quarter '01 results include the charges of $218.1m mentioned earlier. CNA contributed $363.4m to Loews' net operating income in 2002 versus a loss of $2.1b in 2001. Two thousand one results include the charges of $2.1b also mentioned earlier.

Excluding the 2001 charges, CNA's contribution in the fourth quarter and full year increased as a result of higher insurance prices and improvements in loss and expense ratios. Loews's interest in CNA's net realized investment gains and losses declined to a loss of $27.2m in the fourth quarter of '02 from a gain of $236.1m in the fourth quarter of '01 and declined to a loss of $104.1m in the full year 2002 from a gain of $714.8m in 2001.

Diamond Offshore's contribution to net profits declined to $.9m in the fourth quarter of '02 from $15.8m in the fourth quarter of '01. Diamond Offshore's net profit contribution for the year fell to $14.1m in 2002 from $71m in 2001. These results reflect the continued weakness of the offshore drilling market. Day rates and utilization rates were lower year over year across all of Diamond's offshore rig categories.

Loews Hotels, on account of continued weakness in the travel and leisure industry, recorded net income of $.1m in the fourth quarter, '02, as against net income of $4.3m in the fourth quarter of '01. For the year 2002, Loews Hotels net income was $12.7m versus $19.5m in 2001. Occupancy rates were down 1.8 percentage points for the quarter year over year and were flat year over year for 2002 as a whole. Average room rates for all Loews Hotel properties was up about 6 percent in the fourth quarter, 2002, versus the fourth quarter of 2001, and decreased 4.1 percent for the full year, 2002, versus 2001.

Net investment income and "other" improved from a loss of $12.7m in the fourth quarter of '01 to a loss of $6.4m in the fourth quarter of '02 but fell to a loss of $56.7m for all of 2002 from a loss of $7.1m in 2001.

At December 31st, 2002, total cash and investments excluding CNA and Diamond Offshore was $3.79b; $1.94b of cash investments are at the holding company level. Excluding CNA and Diamond Offshore, Loews had $2.43b of long-term debt at the end of the year. Loews expects to receive $2.44b from Carolina Group as it pays down its intergroup debt over time.

And now I'll turn the call over to Marty Orlowski at Lorillard. Marty?

Thank you, Peter. Good morning, everyone. This morning I'd like to make comments in two parts. One, to characterize the fourth quarter of '02 performance as well as the full year, 2002, and then I will provide a bit of an overview of our outlook for 2003.

With respect to the fourth quarter of last year, we have witnessed generally similar trends with respect to wholesale shipments that we saw during the third quarter of 2002. The effects of increased state excise taxes, the generally poor economy and certainly the presence of deep discounted brands have combined to create a difficult environment. Lorillard reported through the Loews Carolina Group release this morning that we had a decrease of 9.2 percent shipment-domestic wholesale shipments and for the full year a 5.8 percent decrease.

Newport for the same periods experienced total domestic shipment decreases of 6.7 percent and 2.2 percent respectively for the same periods of time. Old Gold and Maverick, our two discount brands, continued their negative performance of -33.3 percent in shipments and -35.5 percent for the year and-I'm sorry, -33.3 percent for the quarter. And this obviously has disproportionately affected our overall wholesale shipments for both the fourth quarter and the full year. I might add that wholesalers have generally continued to maintain very low inventories. That obviously contributed to some extent to our performance results.

As I stated during a previous call, Lorillard's promotional spending for the fourth quarter was not expected to have a substantive affect on our general shipment patterns. We said previously that we would modestly increase our back half of 2002 promotional spending. Given this, and looking at our retail movement based on data we receive from distributors which reflect their shipments to their retail accounts, Newport's performance can be characterized as more than holding its own.

For the full year, 2002, Newport gained .14 share points to 7.78 percent market share. Although the fourth quarter -this is again our retail movement- although the fourth quarter was down about .19 points, given, as I said, the low promotional price support that was implemented, we believe this is a reasonable level of performance.

Within the menthol segment, Newport increased its overall share of the category by .1 of a share points and ended the year with a 29.7 percent share of the menthol segment, again, as measured by our retail movement data.

With respect to the principle competitors in the menthol segment, Kool was up one menthol segment share point to 11.6 percent, Marlboro Menthol was down .2 of a menthol segment share to 10.4 percent and Salem was down one menthol segment share point to end the year at 9.1 percent.

On a total market basis, again using our retail movement, Newport, as I said earlier, was up .14. Kool was up .30, Marlboro Menthol had no change in its share, overall market share year over year, and Salem was down .23.

I'd also point out as far as MSA reported shipments for domestic U.S., our overall share was 9.05 percent for 2002 as compared with 9.26 percent for 2001, a decrease of .21 share points. Newport's shipment share, domestic shipment share of the premium segment for 2002 was 10.9 percent and that was up .3 percent versus 2001.

And now I'd like to make some comments about our outlook-Lorillard's outlook for 2003. We've stated on previous occasions that our primary objective for the business in 2003 is to defend and grow Newport's market share. Achieving this goal will likely be affected by what is generally expected to be the continued price pressure at the retail store level experienced throughout the second half of 2002 and its impact on wholesale shipments as well as market share.

The current dynamic of the domestic U.S. cigarette industry has taken a different course than has been the case traditionally. The emergence of new price segments and other pricing pressures on the market has caused the relative predictability of brand responsiveness to marketing initiatives to be less reliable than in the past. Given the nature of this external environment, it is difficult today to foresee what affect several key elements may have on Newport's ability to meet our goal. While Lorillard entered 2003 with what we feel is a competitive level of support to sustain Newport's market share position, at this time the affects of several marketplace variables may result in additional adjustments to our spending as the year unfolds. This makes it somewhat difficult to forecast with any precision the order of magnitude of the financial resources that may be required to achieve this objective.

The factors in the market that can potentially influence Newport's trends and thereby the level of support for the brand include the following -future state excise tax increases; the possible affects of competitive promotional spending levels; and the continuing trends for deep discounted brands. As such, Lorillard will assess the influence of each of these variables over time and implement whatever actions are felt to be appropriate to further Newport's share objective. Lorillard is committed to ensuring the long-term growth and vitality of its principle brand, Newport. This may require additional short-term promotional investments behind the brand to strengthen its ability to achieve long-term success.

And those are my prepared comments. Thank you.

OK. Operator, we'd like to open up the call to some questions, please.

Thank you. The floor is now open for questions. If you do have a question, please press the numbers one followed by four on your touchtone phone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received and we do ask that while you pose your question to please pick up your handset to provide optimum sound quality. Once again, that is one followed by four to register your question at this time.

Our first question is coming from David Adelman(ph) of Morgan Stanley. Please go ahead with your question.

Good morning, everyone.

Good morning.

Marty, I want to ask you a couple of questions. First, do you look at the EDLP shift or Phillip Morris' move to off invoice promotions at the 65 cents per pack level as a net escalation in the competitive spending that you're facing?

No, I don't. I think you said 55 cents.

Sixty-five. Sorry.

And then 75, another 10 cents per pack in their higher merchandising plan stores. No, I don't think it's an escalation necessarily. First of all, the level of spending that they announced is not different in principle than, for the most part, than what they executed during 2002; and secondly, the fact that they're going to cover more volume, 100% of their volume for their four focus brands 100% of the time during the period that they announced this promotion to take affect doesn't really escalate anything other than discounting their brands in more stores. We're much more targeted by virtue of the buy-down approach that we take and we think we get a better return on our investment by focusing our allocation of promotional price support in stores where we think we can get a greater result.

OK. And can you characterize, Marty, your promotional spending levels coming into '03 versus where you were in the fourth quarter? Are you spending broadly at similar rates?

Our rate of spending-our per-pack discount is slightly increased versus what it was in 2002.

OK. And then one last thing-on the MSA cost, could you give us a pre-tax cost in the fourth quarter? And also, did you benefit from in effect a reversal of your earlier accruals in the year because of less of a negative impact from the profit offset adjustment to the volume offset?

Yes, we did. And for quarter four, the pre-tax for 2002 was $219m versus $250m in fourth quarter 2001.

And is that differential largely the reversal-the decline year over year?

Yeah. To a large extent, it is, yes.

OK. And you'll benefit in '03 versus what your earlier expectations would have been 12 months ago at the MSA level because of lower industry levels of aggregate profitability in all likelihood, correct?

Yes. The combination of the step down in the up-front payment and the lower industry profit should favorably impact us.

OK. And then a last question, actually. Peter and Jim, was there any preclusion on your of Carolina Group purchasing its own stock for its own account during the fourth quarter?

Was there any preclusion?

Yes.

You know, I don't really want to talk about the times that we're precluded and the specific times when we're not.

OK. Fair enough. Thank you all.

Thank you. Our next question is coming from Martin Feldman (ph) of Merrill Lynch. Please go ahead with your question.

Thanks. Good morning, everyone. Good morning, Marty.

Good morning.

Hi. Marty, just following on, on that same theme of the performance during 2002, clearly Newport had a very strong performance during the year relative to the overall market and relative to the premium segment. But its performance in the fourth quarter was slightly less strong than it was for the full year yet in the fourth quarter it still outperformed other premium brands. Why should the level of discounting that you just referred to need to rise, if at all, in going into '03? I know you've said you would and clearly to make sure you don't lose share. But you still outperformed the market in the last quarter when your competitors were particularly active and the deep discount market was obviously very competitive for you.

Well, there are two factors that affected that decision. One, we-our trend for the second half of 2002 was not as positive for the first half of 2002 and we have to look at trends over time obviously with respect to decision making. The second element was the key factor or variable that affected in our minds the second half was the increase-the substantial increases in state excise taxes. And that's going to carry through into 2003, and as we all are aware, there are a number of states that are contemplating either additional taxes and/or new increases. Anticipating that factor as well as looking at the back half of 2002 trends, our decision was that we needed to-in line with protecting and/or growing Newport market share, we felt it was appropriate to slightly increase our promotional support.

Marty, if the environment was to stay similar to what it is right now in terms of the competition and on average state excise taxes were to rise, say, 20 cents to 25 cents over the course of the year, do you think it's a fair estimate to assume that the increase in additional promotional activity you might need over the course of '03 would be the same as the increase perhaps between the first half of '02 and the second half of '02?

Well, you know, that's hard to answer specifically. I can only go back to what I said in the second part of my comments, that we will make whatever adjustments we believe are appropriate and we will base that on two things, trends, the responsiveness of our current allocations for promotional support on Newport, as well as-the result of that as well as what we anticipate the future pressures to be. So, you know, is it possible- you know, we will make adjustments if we feel they're necessary.

Right. Right. Just on a housekeeping point, can you give us either the fourth quarter or the full year worldwide volumes-in other words including Puerto Rico and the possessions?

Yeah. Bear with me one second here. You're talking about total Lorillard?

Yeah. Total Lorillard.

Yeah. The total Lorillard volumes for the year were about $36.1b.

OK. That's great. And then I think a question perhaps for Peter or Jim in terms of the debt pay down. I mean debt came down within the Carolina Group by, if I'm correct, $100m during the year and, Peter, I think you were indicating that you might be in the position to pay down $63m in the first quarter of this year. Given the strength of Carolina's balance sheet, given that the $150m cushion is now I believe fully funded-I mean would you agree or is it accurate to assume that there's certainly potential to pay down more than just 63 during the course of '03?

Well, it's a function of what the dividends are. So I can't really project what they are. But-

If the dividend was to remain unchanged.

The only place for cash in excess of dividends to go-so-

No, no. It can go to repay debt. It can go to increase the dividend. It can stay in the $150m bank or it could be used to repurchase shares.

OK. Can you remind us what your dividend policy is?

The dividend-we're coming up on the fourth quarter of the dividend and then it will be reviewed by the directors in May of this year.

And am I right in saying at the time of the IPO you said that the dividend would grow at least in line with EPS growth? Was that the original policy or is that still the policy?

I think so, yes.

OK. Thank you very much.

And just one clarification. If the dividend-if the debt pay down was as I had indicated, then the debt would be paid down when that happened to about 2.375. But you had said $100m today. I just didn't want you to have a miscorrect assumption.

OK. Thanks, Peter, for that.

Thank you. Our next question is coming from Robert Glasspiegel (ph) of Langen McAlenney (ph). Please go ahead with your question.

Good morning. It looks like Bulova has gotten folded into investment income. I don't see it broken out in the P&L. Is that a correct assumption?

Very good. And you get the prize. You noticed it.

OK. Well, you can guess my question because I'm pretty consistent on trying to flush through the noise in investment income in the quarter and maybe you can go through-

We haven't broken it out because Bulova wasn't quite ready to release its earnings. It probably will be ready next week-within a week.

OK. So you won't tell me what Bulova's earnings were, but maybe you could tell me-

[crosstalk] those numbers, but we don't want to break it out right now until they can publicly release their earnings. It is in that line.

Well, I mean there was a pretty good decrease sequentially in corporate expenses, and-

I can address the- [crosstalk]

Sequentially.

What do you want to address? The quarter or the year?

Just the delta sequentially from Q4 versus Q3.

Yeah. In the-well, I'm addressing the quarter. I don't have it compared to the third quarter, just on a year-over-year basis, the changes come from shipping and a change in our investment income.

OK. Then going from-

[crosstalk] -shipping, we've made a lot of money in the last year in-both in the quarter and in the year. It's pretty much break even in '02.

OK. Your corporate invested assets-just give me the number again. Is it $2b excluding the Lorillard [inaudible]?

Yeah, it's 1936 roughly, excluding Lorillard and Diamond.

Is that still $1.8b or-

Pardon?

Is that still a billion-what's the-

Lorillard?

Yeah.

Lorillard is about a-a little over $1.6b.

OK, $1.6b. OK and Diamond Offshore? Do you have that?

I don't have that available.

OK. Well, as far as investment income prospectively-you're going to now have the yield from the CNA preferred which I assume there's an 85 percent exclusion with no tax laws-change in taxes. Is that right?

No. We have 100% exclusion.

A 100% exclusion?

--taxes on that.

OK. So that's an after-tax number? What's the embedded portfolio yielding roughly? The $1.9b?

The $1.9b? You know, it changes all the time. We could be moving into five-year notes one day. We could be moving out of them the next day and investing in Treasury bills.

Let me ask the question-what was the investment income piece of the $1.9b in the third quarter? Then I can calculate the yield.

Say again?

What was your investment income off the $1.9b in the third quarter and fourth quarter? Then I can calculate the-

Well, we're just looking it up, here.

I just want to figure out what the rough positive carry from the-

It's about $11.8m.

In the quarter?

In the quarter.

OK. So 4% or 5% after tax. Thanks.

OK.

Thank you. Our next question is coming from Robert Cambinino (ph) of Prudential Securities. Please go ahead with your question.

Good morning, gentlemen.

Good morning.

Good morning.

Listening to the conference calls during this earnings season, one of your competitors mentioned that their weakness in the back half of the year was due to coupon drops by another competitor. Is that a reasonable explanation perhaps for some of the weakness that you saw in Newport beginning in November?

I don't believe so. I'm not acquainted with what was meant by-it's a pretty general observation- by coupon drops. If it was referring to Phillip Morris' direct marketing efforts-

I believe it was.

--third quarter, no. Because if you look at the Marlboro Menthol share which is most directly competitive to Newport, it certainly didn't-Marlboro Menthol's share progression certainly didn't have much of an overall market impact. So I can't attribute any of the softness on Newport in the second half to that.

OK. And also, just-can you comment anecdotally on what your share trends have been? I don't know if you've measured this or have the ability to measure it. But in your share trends- have been within New York City subsequent to Mike Bloomberg's municipal excise tax increase?

Well, I can't speak to the share trend. Well, I don't have that data. I can just-so I can't refer to it very specifically. But I can say obviously that not only was our volume affected in terms of how we look at retail-wholesalers' shipments to their retail accounts, but the industry volume was affected very substantially. So all brands in New York City specifically were very negatively affected on shipments.

OK. And one last question. The overall share of-the overall menthol share-you may have said this, of the market in the fourth quarter and for 2002, the full year?

I don't think I referenced overall. Menthol was about-based on our numbers, about 26% of the market and it really didn't vary very much through the year. A couple of tenths. So it was about 26%.

Given the weak economic conditions, have you been surprised at all by the resiliency of the menthol segment?

The menthol segment over the past 25 years has been very stable and in fact I did look at the deep discount affect on menthol and they had very modest growth in terms of gain. They gained about-less than [inaudible] in the aggregate. This is, you know, 100-plus companies with menthol versions including the discount menthol packings of the major companies discount entries. So there really hasn't been a very significant overall shift there.

And then one last bit of housekeeping. I apologize if I did miss this. The cash balance at the parent?

Say again?

The cash balance at Loews?

Was $1.93b.

Thank you very much, gentlemen. You have a good day.

You too.

Thank you. Our next question is coming from [Bonny Herzog] of Salomon Smith Barney. Please go ahead with your question.

Good morning. Actually, it's [Kate McShane] calling in for [Bonny Herzog] today. My question concerns really comparing how much your average buy down amount was during the fourth quarter for Newport and comparing that to how much Kool was during the quarter, on average.

Well, I don't have precise figures for that, but Kool clearly was significantly higher on average than Newport was. Kool was discounting through the buy down up to $1 a pack and that was far greater than-in absolute terms, than what Newport was doing. And also, during the fourth quarter I would have to guess that Kool was discounting in a larger percentage of their volume than certainly Newport was. So obviously the net would be that their average discount would be greater.

OK. And then for 2003-I know you're still trying to figure out how much total spending will be on promotions, but do you know in what form those promotions will take, whether it be-you know, the majority of buy downs or buy-some-get-some-free promotions?

Right. Well, let me just add-while I said that we're subject to making adjustments, we do know how much we're going to-at the moment, what we expect to spend. So it's not a mystery in those terms. The principle form of our promotion will continue to be buy downs. They have been for years, the past few years. And in addition to that, we do utilize other promotional vehicles to support the brand. But clearly buy downs will be the major area.

OK. And then the very last question I have, jumping back to excise taxes since they will have a major impact on prices this year. Do you have any plans to lobby any states about their proposals?

Yes. And we have actively attempted to influence the outcomes of proposed legislation with respect to excise tax increases. I can't say that either our track record or any other company's track record has been hugely successful in this area. But, yes. We will continue to do whatever we can to point out to the states that might be considering these excise tax increases that it may not result in a net revenue gain for them and in the long run it may be more negative than positive. So we will continue that effort.

OK. Thank you very much.

Thank you.

Thank you. Our next question is coming from Sam Robosky(ph) of SER Assets. Please go ahead with your question.

No, I'm sorry. I don't have a question. Thank you.

Thank you. Our next question is coming from Richard Whitman (ph) of [Palisade Capital]. Please go ahead with your question.

Yeah. I guess the question would be for Jim. It looks like the average price of shares bought back during the year was roughly $56.60 with the stock lower, profits better and a pretty sharp discount to book. Question one-will you be more aggressive on the buy back? And number two, in lieu of the proposed legislation on dividends, are you looking at an increase also in the cash dividend?

Well, with respect to the dividends, we haven't done anything on that. We're going to wait and see what legislation is ultimately enacted. With respect to buy backs, we treat the-the way we buy back our shares is top secret. So I don't want to make any comments about when, where and under what conditions we would buy back our shares.

Next question, please?

Thank you. Our next question is coming from Ross Haberman(ph) of Haberman Brothers (ph). Please go ahead with your question.

Good morning, gentlemen. A quick question or two for Peter. Peter, you touched upon I guess an intra-company receivable from Lorillard. Could you just-you glossed over that real quickly. Could you just go over that?

Well, that's what we call the notional intergroup debt. And as part of the IPO we put $2.5b in notional debt on the Carolina Group which is paid out of the excess cash from the Lorillard distributions to the Carolina Group. So that as Jim mentioned, after dividends are paid, after interest on that debt is paid, after any share repurchase that takes place is taken care of, if there is any, and after we've funded, if we want to, this $150m cushion, which we have, the excess cash would pay down that notional debt.

And that's held as a receivable on Loews' balance sheet?

Well, it eliminates in consolidation-

But it's used for allocating the cash flows to Carolina Group, so once the debt is paid down, then there's no more interest expense and there is no more debt repayment. Then the cash flows will go according to percentage ownership of Carolina Group which is currently 77% Loews, 23% public shareholders. Currently, because of the payments to Loews for the debt and the interest expense, Loews receives well over 90% of the cash flow from Carolina Group. So it provides for the Carolina Group shareholders a means of financial leverage which is not dissimilar to that of our competitors.

OK. OK, and could you just touch upon the profitability of the shipping and what your expectations for the coming year on Diamond Offshore are?

The shipping has been very profitable. Most recently, as many of you know, tanker rates coming from the Persian Gulf doubled in about one week from about break even to a nice profit between the first and second week of October. Then they just about doubled again as we moved [inaudible] to January. That was caused, I believe, by the shutdown of Venezuelan production. Now that Venezuelan production is coming back online, we've seen tanker rates move down somewhat and it's now down to about the same level that it was at after the initial doubling of rates in October.

With respect to profitability at Diamond Offshore, we don't make forecasts for any of our companies, but right now, as I said in my opening remarks, the market for rigs in general is sort of bouncing along at pretty much break-even rates. The reason that we're in the offshore drilling business is because like the tanker business, rates can move very rapidly when supply and demand come into balance and from the "hope springs eternal" department, we're hopeful that at some point during this year the market for offshore drilling rigs will rebound and we'll be able to see some significant improvements in profitability.

And just one follow up question for Peter. The income for the tankers are thrown into that-

The net investment line, and just one further clarification because my comments and Jim's are a little out of sync. We report our interest on shipping on a one-quarter-lag basis. So Jim was giving you current-time comments and the result-the economic results of the financial statements are quarter lagged.

OK. Thank you.

One clarification. Before the next question I want to come back with-on the CNA preferred, that is a-that preferred-the payment of dividends on that preferred is contingent on a series of ratings increases. And I won't go through the whole provision but at the current level of CNA's ratings, no dividends can be paid on that preferred. No cash dividends can be paid on that preferred.

OK, next question, please.

Thank you. As a reminder, the floor is still open for questions. If you do have a question, please press the numbers one followed by four on your touchtone phone.

Thank you. Our next question is coming from Jason Momen (ph) of Farallon (ph). Please go ahead with your question.

Hi. What did you say the debt level was at the holding company?

About $2.4b.

Two point four. Thank you.

OK. Do we have any other questions?

Thank you. We are showing a follow-up question coming from Robert Glasspiegel of Langen McAlenney.

I just want to make sure I understand, Pete, your clarification on the dividend from CNA.

There is a ratings contingency in the preferred stock which says CNA ratings have to increase by certain rating levels before any cash dividends can be paid. Then dividends can be-will be paid cumulatively if and when that happens.

I understand that. But you're not anticipating my question correctly. Just from first quarter P&L, are you going to accrue as a positive item?

[crosstalk] -affect on the financial statements.

I'm sorry?

There's no impact on the financial statements.

So we should assume that the financial statements will show the preferred dividend booked in the income statement.

There's no impact on the financial statements. It really has no impact. It eliminates the consolidation through the company. You're not going to see anything.

I hear you. But I gutted my CNA estimate so I just want to make sure that I'm consistent. I should either have them both in or both out. So it does affect-

I don't know what you're going to do with your models.

Right.

I think you should leave it out.

Leave it out?

Leave it out, yes.

Probably.

OK. Appreciate it.

Pleasure.

Any more questions, operator?

Gentlemen, at this time we're showing no further questions. I would like to turn the floor back over for any additional or closing comments.

OK, thanks. I just want to thank you for joining us this morning. As a reminder, in about two hours a replay of this call will be available through our Web site until February 20th, 2002. CNA's call will also be archived later in the day for replay on its Web site, cna.com until February 20th. And once again, thank you very much.

Ladies and gentlemen, thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.