洛茲集團 (L) 2003 Q3 法說會逐字稿

Good morning and welcome to the Loews Corporation third quarter 2003 earnings conference call. All participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation.

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

Thank you, Jackie. Good morning, everyone. This is Josh Kahn, the Investor Relations Manager for Loews.

I'd like to welcome you to Loews third quarter 2003 conference call. By now you should have received a copy of our earnings release. If not, you may get a copy from our Website, Loews.com. Carolina group also issued a release this morning, announcing its results for third quarter 2003. That release is also at the Loews Website. The Chief Executive Officer of Loews, James Tisch, and the Chief Financial Officer of Loews, Peter Keegan, will lead today's discussion and will be joined by Martin Orlowski (ph) of Lorillard.

Before we begin I would 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 advise any forward-looking statements made during this call.

This disclaimer is only a brief summary of the company's statutory disclaimer. You are urged to read the disclaimer, which is included in the company's 10K and 10Q filings with the SEC in full.

I would also like to remind you that during this call today, we may also discuss certain non-GAAP financial measures such as operating income. Please refer to our earnings release for (inaudible) the most comparable GAAP measures.

There will be time for questions after Jim, Peter, and Marty have discussed our results. For those of you who have tuned in via our Website, please call 877-692-2592 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.

Thank you Josh. It's with a fair dose of disappointment that we report Loews' third quarter results today. As you've surely seen from our release, Loews recorded a significant net loss in the quarter due to reserve strengthening actions at our CNA subsidiary.

The charges at CNA are the product of a thorough, bottoms up, third party review of reserves relating to company’s asbestos, environmental pollution and (inaudible) exposures, as well as its construction defects and other volatile exposures. These charges will necessitate a further strengthening of CNA's capital base, which as is detailed in our earnings release this morning, will primarily be achieved through a capital plan that includes substantial support from Loews.

In particular, Loews will purchase $750 million of a new series of CNA non-voting convertible preferred stock that is economically the equivalent of CNA common stock. Loews will also be offered up to an additional $500 million of additional capital support, to can, through the purchase of surplus notes of its principal insurance subsidiary, Continental Casualty, in case certain additions to Continental Casualty's statutory capital are not achieved by February 26, 2004.

Loews has also indicated its commitment to provide up to an additional $150 million by March 31st, '04, in a form yet to be determined to support the statutory capital of Continental Casualty company in the event of additional shortfalls in relation to business and asset sales.

CNA's capital plan also includes the October 2003 sale of CNA’s reinsurance renewal rates and withdrawal from the assumed reinsurance business and CNA's previously announced initiative to reduce operating expenses by $200 million and plan changes in the ownership structure of certain insurance subsidiaries to align statutory capital more efficiently. We believe this to be a very robust capital plan, and we are pleased that CNA's rating agencies seem to agree. All four agencies have today reaffirmed their ratings of the Continental Casualty Company pool.

Loews is optimistic about the prospects for CNA on the grounds that CNA's reserve and balance sheet adjustments are primarily related to the 2000 accident year and prior, while more recent accident years continue to be characterized by strength. CNA's property casualty business again showed improvement in this past quarter as new business production was brisk and rates increased by 18%.

CNA has been effective in focusing operations on core property and casualty operations, as evidenced by the recent successful exit from the reinsurance business. CNA is led by an extremely competent management team, one that Loews is confident will lead the company through its current challenges to a streamlined and consistently profitable [PNC] platform.

In sum, as painful as our disclosure is today, we believe CNA has dealt forthrightly and entirely with its legacy issues and that going forward it is poised to meet a reasonable rate of return on its core property and casualty business. One additional note, If you haven't yet listened to CNA's discussion of these issues during the third quarter conference call, I urge you to do so. A replay of that call will be available shortly on the Investor Relations sector of CNA's corporate Website.

And now on to our other businesses. Lorillard’s third quarter earnings reflect improved sales volumes. Total Lorillard volumes grew 6.4% sequentially, and 4.9% year over year. In spite of significant promotional expenditures, and less favorable investment results, Lorillard contributed 6.5% more in net earnings to Loews than in the previous quarter. But since Marty Orlowski, Lorillard's CEO, is on the line today, I'll let him do the rest talking on this subject in just a few moments.

Diamond Offshore, which recorded a third quarter loss, continues to suffer from weakness in the offshore drilling market. But there continue to be signs of life in the market nonetheless. Demand for intermediate depth Gulf of Mexico semi-submersibles, although still soft, yielded slight sequential improvements in day rates.

Meanwhile, Diamond Offshore’s deep water semi-submersibles saw utilization climb year over year, and day rates rise sequentially. And the Gulf of Mexico jackup market has shown steady improvement throughout the year, driving average day rates for Diamond Offshore's jackup fleet to $27,000.

Bulova reported lower net income in the quarter as weak consumer spending patterns led to lower sales volumes for all its core brands, except Accutron and Harley-Davidson. Loews Hotels began to benefit from the early stages of a rebound in the lodging market this past quarter. Both average room rates and occupancy rates were higher against the same quarter last year, while New York and Miami properties registered the strongest revenue gains.

Early in the quarter Loews Hotels sold the metropolitan Hotel, a New York hotel it had owned since 1961. The results of this transaction are carried as gains from discontinued operations in today's earnings release.

Texas Gas, the natural gas pipeline that we acquired in the second quarter, performed well in its first full quarter as a part of Loews. Revenues and income were lower in the third quarter as a result of revenue recognized in 2002 relating to the settlement of a general rate case.

And now I'd like to turn the call over to our CFO, Pete Keegan, who will provide some more insight into the financial performance of Loews.

Thanks, Jim. Loews reported a consolidated net loss of $1.383 billion in the third quarter of 2003, compared to net income of $239.1 million in the third quarter of 2002. The net loss related to Loews common stock was $1.410 billion, or a loss of $7.60 per share in the third quarter 2003 versus net income of $194.7 million, or $1.05 per share in the third quarter of 2002.

The loss is related to charges resulting from significant insurance reserves strengthening actions in the third quarter of 2003 by CNA Financial, our insurance subsidiary. $1.346 billion of net prior year development charges included $880.4 million related to core reserves and $465.4 million related to asbestos, environmental, pollution, and mass tort reserves.

In addition, CNA took a $298.9 million charge related to bad debt reserves for insurance and reinsurance receivables. CNA contributed a loss of $1.676 billion, excluding investment gains and losses, to Loews's third quarter 2003 net loss, versus income of $35.6 million in the third quarter of 2002. Loews's interest in CNA's net realized investment gains improved from $14.8 million in the third quarter 2002 to $94.7 million in the third quarter 2003.

Net income related to Carolina Group's stock measured $26.8 million, or 67 cents per Carolina Group’s share in the third quarter 2003, against $44.4 million, or $1.10 per Carolina Group share in the third quarter 2002. On a sequential quarter basis Carolina Group earnings improved $1.8 million, from $25 million in the second quarter of 2003, on a 7.2% increase in domestic volumes. Carolina group's earnings declined year over year as net revenues fell $121 million as a result of increased promotional activity, offset somewhat by 6.1% higher domestic volumes. Lorillard contributed $121.9 million to net income attributable to Loews common stock in the third quarter 2003 versus $165.9 million in the third quarter 2002. This represents Loews's 76.99% interest in the net income of Carolina Group, of which Lorillard is the principal asset, as well as interest income relating to Carolina Group's [notional] debt.

Loews Hotels' net income improved from a loss of $0.5 million in the third quarter of 2002 to break even in the third quarter 2003. Average room rates for all hotels increased by 1.9% while occupancy was up to 77.9% in the third quarter 2003 versus 73% in the previous year's quarter.

Diamond Offshore's contribution to Loews's net loss in the quarter declined to a loss of $5.1 million from income of $2.8 million in the third quarter 2002. Day rates were lower year over year in the floater markets but higher for the company's jackup rig segment. Utilization was slightly lower year over year in all rig segments except high spec floaters, which improved 10 percentage points.

Texas Gas recorded income of $2.2 million in its first complete quarter of operations as a Loews subsidiary. Given that Loews acquired Texas Gas in May this year, there's no readily comparable year ago numbers.

Bulova's net income decreased to $1.6 million from $2.3 million in the third quarter 2002. Watch and clock product volumes declined 2.7% and 33.6% respectively, as selling prices for watches decreases 9.7% and increased 34.3% for clocks versus the year earlier quarter.

Net investment income in other declined from an expense of $17.6 million in the third quarter 2002 to an expense of $18.4 million in the third quarter of 2003.

And now I'll turn the call over to Marty.

Thanks, Peter. Good morning, everyone. Third quarter 2003 financial and unit shipment performance is consistent with Lorillard's previously stated strategy of striking a balance between stabilization of market share trends and profitability. Of significance, unit shipments and market share results for the third quarter reflect continuing growth for Newport on a sequential basis as we move through 2003. Total domestic units shipped during the third quarter, as you've heard, of 2003 were up 6.1% versus the same period a year ago. Total Lorillard units, which includes Puerto Rico and certain U.S. (inaudible) were up 4.9%. Newport's domestic shipments increased 8.8% in the third quarter of this year versus the third quarter last year. And given the weak shipments a year ago, a more relevant comparison of Newport's improving performance is to view quarter 3-03 with quarter 2-03, and this represents an increase of 7.8%.

Total Lorillard shipment share of the domestic market improved by .95 share points for the third quarter of this year, versus the third quarter of 2002. And it went from 8.57 share share to 9.52. Newport's shipment share for the third quarter of '03 improved 1.1 share points quarter over quarter from 7.5% to 8.6%. Sequentially, Newport increased its share of shipments in the third quarter over the second quarter of '03 by .56 share points--from 8.04% to 8.60%.

The Maverick brand, as a result of its price repositioning last may, saw its shipment volume in the third quarter increase almost [22%] versus the previous year for the same period. Although this was on top of a relatively low base. Nonetheless, this is a positive indication of the effects of the price reduction itself. Lorillard's retail data base, representing shipments from wholesalers to their retail accounts, provides another view of the progress being made through the third quarter of 2003 regarding Newport's steadily improving position.

According to this data, Newport improved its share of the market in the third quarter of this year as compared to with the third quarter of last year by .75 share points, moving from 7.50% to 8.25%, and was up .20 share points over the second quarter of this year. Newport achieved a 30.7 (inaudible) share of the menthol retail segment in the third quarter, and that was up 2 segment -- retail share points over the same period a year ago.

Lorillard's premium price brands accounted for an 8.74% retail share of the total market, an increase of .68 share points as compared with the third quarter in '02. Newport continued its selective promotional strategy, focusing on markets and stores that offered the greatest return in terms of opportunity.

Now I'll turn back to Jim. Thank you.

Thank you, Marty. Operator, I think we're willing to take some questions at this point.

Thank you. (Operator’s instructions) Your first question is coming from David Adelman of Morgan Stanley.

Good morning, everyone. Marty, I had a few questions for you. First, could you talk about the overall balance you think you're achieving between market share and profitability? And given the strong share performance do you think maybe you're sacrificing too much profitability given the response to the Newport brands promotional spending?

Good morning, David. Well, I think that our operating income, when you compare the third quarter with the second quarter, is about equal. So on that level -- although we did have a very strong third quarter in terms of shipments -- on that basis, we think that we're in a reasonable sort of range of stabilization.

Whether or not we're sacrificing too much profit, I think that our approach, as I've said, is to defend and/or grow market share, and I think that we're in a reasonable level of response in terms of our spending. So I really don't think it's too much profit.

Hopefully, we'll be able to, if possible, and depending on market conditions, if that comes to pass, we can improve at some point in the future. But right now that's the picture.

Can you comment, Marty, secondly on deep discount dynamics? Are you seeing any -- some of your competitors have talked about stabilization within that segment. Is that how you would also characterize it?

You know, in the aggregate, as we've -- you know, no one actually, as we all I think recognize, no one has the true actual growth or numbers for the discounts. But certainly from a trend standpoint, we can approximate it either on our retail share database or others.

So in a sense that the deep discount segment has sort of stabilized in the aggregate, in terms of their growth which is not as great as it has been, that's true. However, I would point out, and I've said this before. I would make two points. One, there's still a huge amount of volume out there, and business that's being transacted in the deep discount segment. And so they're a presence that cannot be ignored.

And secondly, there are individual brands that crop up each quarter depending on what their selling price is at retail. And they crop up either as a brand and in certain markets that tend to show some growth while others decline. So there's a general state of stabilization, but there's -- the issue remains that they're there and they are a factor to be accounted for.

Lastly, Marty, are you seeing any benefit in those states that have enacted incremental MSA enforcement legislation in the overall deep discount dynamics within -- on a state by State basis?

The only state that we've seen any real tangible shift is in the state of Minnesota, where they enacted an additional, I believe it was 35 cents per pack tax increase, beyond the major companies. And there we have seen a much better competitive landscape in terms of being able to, both for the premium brands and discount brands of the major companies, being able to compete more effectively with the deep discount brands. And I would think that's the only state where we've seen that happen.

Thank you very much.

Thank you.

Thank you. Your next question is coming from Martin Feldman of Merrill Lynch. Please state your question.

Thanks. Good morning, everyone.

Good morning.

Hi. Marty -- well, perhaps a question for Jim first. Jim, can you give any color at all to the $8.8 million of investment losses? Hello?

I'm here.

Oh. I guess -- I guess he --

I'm sorry. I'm here.

Oh, Jim, I was just -- did you hear the question?

-- losses in Carolina Group?

Correct.

Yes, in that portfolio we invest in securities up to about ten years in duration. And for about four or five quarters we had had consistent, good, what I will call guerrilla attacks in the longer end of the market, buying the longer end of the market, then selling, then buying, then selling.

This past quarter we got nipped for some losses. Right now the portfolio is very defensive. And in pretty good shape..

Should we expect you to stick pretty much with the same policy in the coming quarters?

Yes. In coming quarters from time to time we'll invest in longer-duration securities other than the overnight rate of money which is about 1%.

Right now we can get about 4.40 on 10-year notes, and so if we get tempted out there ,we may make some investments there in order to try to maximize our total returns on our cash.

Okay. Thanks for that, Jim. Marty, a question for you.

I think David asked the main question in terms of the share, and I guess I was just surprised to see the volume swing factor for your premium brand -- I mean for Newport versus industry premium volumes being a positive 11.2 in the quarter. I suppose you would say that was the balance you were looking for correct?

Well, we didn't have a target necessarily, obviously. And the thing is I did indicate I do believe the third quarter was particularly strong for us and the results speak for themselves.

Going back to David's question, it's kind of difficult to fine-tune promotional support and correlate it to market share results because you're not in control of your own destiny, obviously. We're in a very competitive environment, and I think what some of our competitors do from time to time, obviously, as well, affects our results.

Now, again, in the third quarter Newport performed extremely well and based on any number of the variables that we're confronted with.

Right. Right. I suppose as you say it's tough to fine-tune it.

You just don't dial it in, obviously.

Right. Clearly. And moving on a little bit, the Marlboro menthol extension in the fourth quarter, do you expect that to have any particular change on the marketplace?

Well, in point of fact, no. Because as far as I know and based on their publicly announced information, it's only going to test market. I believe it will be in Chicago and I can't remember the other location. So it's going to -- unless they change their minds, or have changed their minds, but I'm not aware of that, it's only going to be in a couple of limited geographies.

Consequently, I don't think it's going to have any material impact.

And when that brand is supposed to get launched, it's too early to say?

It's very early to say. Other than what I've read about their descriptions of what it is it's kind of hard to figure out what it is.

And until we see in a more definitive sense what the brand and how they're positioning it and what they're intending -- what the brand is supposed to accomplish relative to a smoker benefit, it's hard to determine what it's going to be.

Okay, Marty. Thanks for that. My last question, if -- a little speculation from you, if you don't mind.

If the Reynolds American deal goes through as announced, and of course no one knows whether it will. But if the company was not required to give up any volumes, which is clearly what the parties are hoping for, so that the merged entity was able to keep both Salem and cool, how do you think that that might affect the menthol segment in the longer term?

Well, as you've said, there's a lot of ifs in this whole issue and frankly, I'd rather not speculate. Certainly, we're assessing any number of potential implications of this kind of combination, but it's really at this point almost premature to really speculate on what the potential impacts might be for Salem cool under one roof or, for that matter what the deal might represent as further concentration in an already concentrated industry. So right at this point I'm not going to make any further comment on it.

If they were required to get rid of any of those volumes, could you consider acquiring either of them?

Again, we're in a very hypothetical state here. s if Reynolds can't keep Salem and Cool on the basis of an FTC decision, I don't think that the FTC would likely grant permission for Lorillard to keep Newport and one of those brands since we would have even greater market share and segment share in the menthol segment.

So I don't think that's a realistic, frankly, consideration. But what we may or may not do in the future will obviously always depend on what the circumstances are that we're dealing with, and at this point as a -- you know, it really is too hypothetical.

Okay. Thanks very much, Marty.

Thank you. Your next question is coming from Bonnie Herzog of Smith Barney. Please state your question.

Good morning. I guess I have a follow-on question on the competitive landscape. And Marty, I know you talked a lot about this. Just the promotional spending on Newport in the quarter.

Can you just share with us in terms of the free product that you offered on Newport in this quarter during the third quarter can you talk about that relative to Q2 and then even of this year and then relative to the year-ago period? I'm just interested in hearing from you if that's increased. And this is the buy some, get some free program.

Right. Hi, Bonnie.

Hi.

No. We've been pretty steady on free goods promotions. We did not have a major increase over the second quarter. And now, in the first quarter we did not have a promotion there of that nature.

But we're pretty consistent year over year, quarter over quarter, with respect to our free goods promotions. We have tended historically to be the least involved with those kinds of promotions. I will comment based, again, on our information that in general with some exceptions free goods promotions have, competitively, anyway, seem to have abated somewhat.

That's probably consistent with what I'm seeing, especially for your company, but if you look at of course how much your volume was up for Newport and the share gains that you saw, which is good on one hand, but again the next thing to look at is profitability and that's down, so I think that's leading us all to assume that promotional spending was quite heavy in the quarter, and we're just trying to understand, is that something we should expect going forward?

And then, thinking about how the menthol segment may change. It's come up on the call today, of course, the [RJR] combination, and then depending on what happens there and what brands are kept, think of RJR's renewed focus on Salem and then with Marlboro entering the market I know it's only two test markets.

You know, just kind of trying to understand from your position because Newport's so important to you, how you're going to approach this going forward, how you're going to position this, and are you going to be defending your brand to keep the share?

Bonnie, let me step in for a second. Newport's been defending its share for the past 30 years, and in all of that time its market share has gone up. It's already dealt with the entrance of Marlboro into the menthol market, and its share has gone up, and it's dealt with the repositioning of Salem and Cool many times, and nonetheless the market share has gone up.

So I don't really see anything so different now than we've seen over the past 20 or 30 years.

But maybe what's changing, Jim, are the profits per stick are declining?

Let me address that for a second. First of all, just to be more precise in terms of the context of Newport spending, we announced the last call, and even earlier than that, that we were going to increase the promotional support for Newport, which we've done, but I think you have to make a distinction in looking at Newport spending.

Certainly, comparing third quarter of 2003 with third quarter of 2002, there's a significant difference. We did not increase our spending last year, as did other companies on their brands, not just menthol. And so the comparison quarter over quarter clearly is not very good. But I think you have to more significantly and more relevantly look at the sequential pattern. And as I think I pointed out, our operating income for the third quarter was just about equal to our operating income for the second quarter.

And that doesn't -- I'm not sitting here saying that that will be the case in the future, either, but the fact remains that we said we would get to a level of spending and make decisions about how we support Newport, and that's what we've done.

So I think the more important way of looking at Newport's relative position spendingwise is, what have we been doing recently? And as I said, we're pretty consistent there.

With respect to competitive factors, as Jim pointed out, Newport has grown for the last 35, 40 years each year in market share terms. The brand increased, as I indicated, its share of the menthol segment in light of heavy promotional support for Cool.

Keep in mind I think, as many of you are aware, they lowered their list price and have been aggressively promoting the brand for at least a year. Salem, as Jim also pointed out, and when I was at RJ Reynolds 100 years ago, while I was there I think we repositioned Salem about 10 times. And since I left, they probably repositioned it another 20 times. And each time we've seen a blip, if you will, a temporary lift in market share, which we're seeing right now. A lot of it is driven by the promotional support attendant to repositioning. And then it resumes its long-term state of decline. Marlboro's new line extension, as I indicated to Martin, is not of major concern.

And I will also point out that Marlboro menthol is a heavy user and highly dependent on free goods promotion, more so than most other menthol brands. So there's a lot of noise out there. But when you look at it on the substantive level and analyze what our most recent actions have been in terms of spending support, I think that as I started out my prepared comments to say, that we are being consistent with what we've said and there are no major deviations in terms of our actions.

The fact that we had such strong (inaudible) does not indicate anything other than what I also indicated--that from a competitive standpoint the variables were such in the third quarter that Newport continued on an above-average base to gain market share. It does not mean we necessarily spent disproportionately greater amounts of dollars to achieve that than we did in the previous quarter although we did increase it slightly.

That's very helpful. I appreciate all of that. And thanks for your time.

Thank you. Your next question is coming from Rob Capanino of Prudential Capital Group. Please state your question.

Good morning, gentlemen.

Good morning.

Jim or Pete, can you speak to the cash and debt balances at the corporate level just as a matter of housekeeping.

Loews-- at the Loews Corporation level has about $2.2 billion in cash and we also have about $2.4 billion in December.

The $2.2 billion is ex the Lorillard cash?

Excluding the Lorillard cash. Correct.

Which is?

The Lorillard cash is about $1.7 billion.

And the current level of notional debt is $2.16 billion per the release, correct?

Yes.

Marty, just two quick questions. First of all, going back to something you said about brands cropping up at various points within a particular quarter, would it be fair to suggest that those brands are now competing, as they have in the past, largely on the basis of price?

Oh, absolutely. These are deep discount brands that appear in the market and it's strictly price, and they're affecting, you know, some of the larger share deep discount brands.

For example, USA Gold, the commonwealth brand, which is still the largest single deep discount, has been without question affected by a lot of these brands--mostly the brands that are being imported from other countries.

Would it be fair to suggest, then, that if this number could be calculated at the average price of the deep discount because of the continuous (inaudible) deduction of these brands has not increased appreciably during the course of the year?

You know, I don't know. I don't have that information to reach that conclusion. I think the average price -- I'm just going to give you sort of a -- without having a lot of facts here. But I would think the average price of deep discount brands has in fact increased somewhat over the past year.

I don't think these brands have captured significant volumes to affect the fact that both Liggett and Commonwealth with their deep discount brands, Liggett Select primarily and USA Gold have increased prices. And those two companies still account for a significant portion of the deep discount segment. Just those two brands sharewise.

So I would think the prices on average have gone up. And something I’ll point out, that a lot of these brands that crop up that I'm referring to do not have national distribution. They're in a limited geographic distribution, and therefore really don't have the weight as a result of that to affect the total deep discount segment. But it does affect the competitive sort of framework.

Okay. One last question. In response to Bonnie's question regarding free product, by my analysis as an absolute number and as a percent of your total volume, your free product was down Q2 to Q3.

I don't have that number handy, but our free product promotions are year to date would not be as great as they were last year.

And just a quick follow-up question on promotions. You're at $7.50 to $10.00 per cart Okay, depending upon tier. Does that sound about right?

Marty, are you there?

I'm here.

Did you hear me?

We didn't. Oh, I'm sorry. $7.50 to $10 per carton is correct.

And just in comparison to Cool, I have Cool as much as $11.50 in some markets, if all the discounts are applied. Again, does that seem correct to you?

To be honest, Rob, I don't know. I know they're certainly as high as $10.00. Whether or not they're adding to that in certainly markets, I don't know. I can't verify that.

Thank you very much, gentlemen.

Thank you. Mr. Medway, please state your question.

I'm sorry. I didn't hear you. My question relates -- it's for Jim.

To the press release from SNP. I think what they said was you could put another 900 million of cash from your cash balances into CNA without jeopardizing your credit rating, however, your capital plan is above and beyond that potentially.

And I was wondering what assets or other options Loews has to raise some cash if it needs to from asset sales that are miscellaneous assets on the balance sheet or what you're planning to do.

I don't want to go into that right now. We're just continuing all the options, and we'll make an assessment as the facts unfold. Over the next period of time.

Could you just explain, if you don't mind, what would be the circumstance where if you are putting -- if you're not going to put the capital in what would CNA have to do? They'd have to sell assets that would create the capital?

Yes. That's right.

And would they have to sell their assets above the book value to create, you know, the capital, or if they just sold an asset and got cash instead of having, you know, the book value that would count?

It's generally assets above book value.

Thank you.

By the way, that's statutory book value, not GAAP book value.

That's helpful. Thank you.

And typically, statutory book value is much lower than GAAP book value.

Okay.

Thank you. Your next question is coming from Judy Hong of Goldman Sachs. Please state your question.

Good morning, everyone. I guess my first question is for Jim. And this may sound like a naive question, but is there any reason why Loews would not want to own 100% of CNA common stock?

You know, we've considered that for a long time. We think it's a good thing to have the -- number one, it's a good barometer for us. It's a way of compensating CNA executives through option plans. And it also highlights the distinction that CNA is a separate and distinct company from Loews.

And all those, I think, are pretty powerful reasons why CNA-- why we haven't taken in the rest of CNA.

Okay. And then my second question is for Marty. Maybe a bigger picture question is once you sort of lap over the period where you're increasing the promotional spending and you look out the latter part of next year, I guess the question is when do we start to see your operating profit growing again?

It seems that until the dynamics in the deep discount segment really stabilize to the level that the major companies feel comfortable taking price increases you're not going to really see the price increases.

So the way you get margin expansion or profit growth is through improving product mix, lowering cost, or maybe some of the new product innovations. And some of your [competitors] may be doing more in terms of lowering costs and trying to improve margin. And I'm just wondering whether you can comment on what you're looking at as you look at your company opportunities to improve cost and improving margin?

Let me just, Judy, respond to the last part of your question, or statement. Yes, some of our competitors are reducing cost through various approaches such as no longer taking a returned goods back and also lowering their so-called back end allowance payments so wholesalers although that is subject to change as the new year begins.

Relative so Lorillard, fundamentally, I don't think it's a real good idea to lower your cost by lowering your quality of product in the marketplace. And I think that those companies that are deciding to not take back old product that's sitting out there may run the risk of affecting the equity of their brands.

So they are lowering their cost, but at what price are they lowering their cost? And on the back half, on the back end payments, Lorillard has never been a prolific payer of allowances in the same sense that some of our competitors have been. So we don't have as much out there in terms of those dollars. And that too will affect some of the companies in the fourth quarter and affected their third quarter earnings.

Now, whether or not we do those types of things in the future, obviously remains something that we would have to evaluate and decide and, but I think there are some negatives to some of the actions some of our competitors are taking to lower their cost.

With respect to the outlook you know very well, Judy, we don't provide any sort of guidance, and in terms of our future performance obviously there are any number of factors that affect, as I indicated, competitive factors that affect how much we spend and how much that impacts our bottom line.

All I can say to you is that we will be -- our basic philosophy at Lorillard is and has been, and I can reasonably assure will be, to optimize our profitability. And what that means is that we consistently attempt to ensure that our cost structure is as efficient and as effective as it can possibly be.

And it also implies that our support of the business will be in our judgment the most appropriate kinds of -- we'll take the most appropriate action that's we think will in effect support the long-term nature of the business.

We are not in a quarter to quarter--and I've said this before, we're not -- Lorillard's not in a quarter to quarter mode of managing its business. We are a long-term player. We believe in making decisions that will position us for the best, to be a high performer over the long haul. And so whatever actions we're taking today will be along those lines.

Okay. Just one more question. Can you talk about line extension opportunities that you see for Newport?

We're always looking at line extension opportunities. There are pros and cons to line extensions. Sometimes manufacturers line extend products to artificially enhance a brand's market share. We don't really want to do that. That's not good business.

But clearly, we're always evaluating and I'm not going to speak specifically to anything, any one project we may be dealing with currently. But we are always looking for that and that's always a possibility.

Okay. Thank you.

Thank you. Your next question is coming from David Adelman of Morgan Stanley. Please state your question.

Two follow-ups. Marty, there was about a 5 cent per pack sequential increase from the second quarter in MSA accrual. Do you know why that was the case?

In accruals?

Yeah. In other words, it looked like the per pack accrual in the MSA in the second quarter, 42 cents a pack, and then the third quarter it was 37 cents a pack.

Well, part of it was -- I think most of it is volume-related. Let me just check.

It's a per stick fee. In other words, did you alter your forecast of industry profitability, which would affect your per-pack accrual?

I don't know. On an expense basis we actually -- or payments were $25 million -- not overt second quarter. I don't have the second quarter comparison. But volume certainly would affect, since our volumes were greater in the third quarter than the second quarter, that would affect the settlement --

Right. I was just looking on a per-pack basis. Okay.

Yeah.

And then secondly, when do you anticipate the -- being in a position where now longer have to maintain the $921 million net worth at the Lorillard level?

I've stated before that we would not make any decision affecting that until [literally the Ingel appellate] process went through its full course, and that would mean depending on circumstances if it meant an appeal all the way up to the U.S. Supreme Court that would mean the ultimate factor that would affect what our holdback is on that net worth covenant.

Will it go to the Supreme Court? We have to find out if it will go to the Florida state Supreme Court. So timing is a difficult one to predict. But in general terms we will abide by that agreement until the appellate process is completed.

And the intent would be to dividend up the excess cash once you can, is that correct?

We've not made any decision about the disposition of the dollars. That remains to be seen. The Lorillard board would have to consider that at the appropriate time.

Okay. Thank you.

Thank you. Your next question is coming from Myron Masternach (ph) of Eagle Rock Capital. Please state your question.

What are the terms of the preferred stock investment in CNA? In particular, how are you setting the conversion price?

The conversion price is going to be equal to the share price of CNA stock for the five days immediately following the release of the 10Q. So it's going to be an averaging process.

And when are you releasing the 10Q?

Either probably tomorrow night or Friday morning.

Okay. Thank you.

Operator, we'd like to make that our last question, please.

Thank you. This does conclude the question and answer session. I'd like to turn the floor back to the speakers for any closing or further comments.

Thank you. Thank you for joining us this morning.

As a reminder, in about two hours a replay of this call will be available at our Website. Until November 19th, 2003. CNA's call will also be archived later in the day for replay on CNA's Website, CNA.com, until November 19th.

Once again, thanks a lot.

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