洛茲集團 (L) 2005 Q4 法說會逐字稿

Good morning ladies and gentlemen. My name is Ian and I will be your conference facilitator today. At this time I would like to welcome everyone to the Loews Corporation fourth quarter and year-end conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host Mr. Josh Kahn. Sir, you may begin your conference.

Thank you Ian. Good morning everyone and welcome to Loews Corporation's fourth quarter and full year 2005 earnings conference call. I am Joshua Kahn, the Investor Relations Director for Loews. If you have not yet received a copy of today's Loews Corporation and Carolina Group earnings releases and would like either one please go to our website Loews.com.

Jim Tisch, the Chief Executive Officer and Peter Keegan the Chief Financial Officer of Loews will lead today's discussion and will be joined by Marty Orlowsky 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 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. We urge you to read the full disclaimer which is included in the Company's 10-K and 10-Q filings with the SEC.

I would also like to remind you during this call today that we may discuss certain non-GAAP financial measures such as operating income. With regard to such financial measures please refer to our earnings release for reconciliation to the most comparable GAAP measure. There will be time for questions after Jim Peter and Marty have discussed our results. For those of you who tuned in via website please call 877-692-2592 during the Q&A session if you would like to ask a question. Now I would like to turn the call over to our CEO, Jim Tisch.

Thank you Josh. Loews earnings performance in the fourth quarter of '05 put a bit of a damper on what was otherwise a great year for the Company. However the setback in the fourth quarter which was the product of charges at CNA does not change the fact that all of our underlying businesses are performing well, including our commercial property casualty insurer. CNA's loss in the quarter is the result of the commutation of reinsurance finite contracts and reserve strengthening charges. While these events are disappointing and unwelcome the finite commutations at least are for the advantage to CNA that it will no longer bear the interest expense that had been associated with the contract. This will amount to a benefit of $55 million after taxes in '06 as well as significant but lesser amounts in subsequent years.

It is also important to highlight that the other adverse development charges that CNA took in the quarter primarily relate to business written in 2001 and earlier. It is CNA's policy to address quickly and forthrightly any issues that identifies with its reserves. In that vein I am pleased that CNA took the measure it did this past quarter, the impact to net income notwithstanding. I am also encouraged that absent the charges the Company's performance continues to be strong. The underwriting environment for commercial property casualty insurers is sound and CNA is writing business in a disciplined and intelligent fashion.

Meanwhile rising short-term interest rates have also helped it to generate more investment income. CNA's fourth quarter charges have not changed the financial condition of the Company. Its credit profile and position the marketplace remain very solid. Lorillard as you know by now had a terrific fourth quarter and year on the strength of its flagship Newport brand. The Company reduced its promotional spending over the course of '05 and while volumes declined slightly during the fourth quarter strong underlying fundamentals still resulted in improved profitability for the period. For the full year both Newport and Lorillard increased volume market share and profit. Lorillard's CEO Marty Orlowsky will join us momentarily to provide more detail.

Four more pipelines had a banner 2005 highlighted by the IPO of the Company as a master limited partnership in November. This transaction marked the culmination of the successful set of acquisitions by Loews in the pipeline area over the past few years. The IPO of Boardwalk not only returned Loews some of the capital it had invested, but it also served to add even more transparency to Loews. Today four of Loews' six operating subsidiaries have publicly traded equity securities that investors can use to more easily assess the combined value of the Company.

It is also worth noting that the new master limited partnership structure is particularly advantageous for Boardwalk because it allows earnings after maintenance expenses to be distributed to the public holders of its limited partnership unit without having to pay taxes at the corporate level. Earlier this month Boardwalk declared its first distribution payable to unit holders on February 23.

There was also a great deal of activity during the year at the operating level of Boardwalk; specifically the Company made good progress to capture operating efficiencies between Texas Gas and Gulf South units. It completed a number of projects including an expansion of its natural gas storage capacity. The added storage capacity was quickly contracted at maximum rates allowing the Company to announce a second phase for the project that will again expand storage capacity by an equal amount. The first phase is expected to add about $8 million of revenue to Boardwalk in 2006. During the year Boardwalk also established two interconnects that will allow the Texas Gas and Gulf South pipeline systems to exchange gas in South Louisiana, positioning the Company to take better advantage of rate differentials between gas producing areas in the Gulf Coast region. Meanwhile Texas Gas increased its takeaway gas capacity from the Carthage Texas (technical difficulty) by leasing a third-party pipeline which had contributed about $4 million annually to Boardwalk's operating results.

Diamond Offshore performed extremely well in the fourth quarter and full year '05 as the offshore drilling market went into boom mode. The company's contribution to Loews' fourth quarter net income improved by a factor of more than 12, while for the year it reached almost $130 million of net income versus a slight loss in '04. The Company's fifth-generation rigs are currently being contracted at day rates ranging from $270,000 to as high as $390,000 while its other semi submersibles are seeing rates between $125,000 and $285,000 per day. The jack up market is just as robust with rates up to $140,000 per day. These rates are about four times as high as the beginning of the boom 18 months ago and mark record territory for the industry. As these prices would indicate most of the available rig fleet in the Gulf of Mexico, Southeast Asia and just about everywhere around the world has been contracted through '06 and much of '07.

Given Diamond Off shore's robust performance its Board of Directors recently declared a special dividend of $1.50 per share payable in early March. Loews will receive approximately $105 million from this distribution at effective tax rates, reduced materially by its eligibility for the corporate dividends received deduction. It is our expectation that Diamond Offshore will continue to be a significant source of cash flow for Loews in coming years.

Loews Hotels again benefited from a very strong lodging market this past quarter and year returning the Company to operating levels it last experienced in 2000. The results reported for Loews Hotels today do not reflect this reality as there were unusual items that unfavorably impacted the Company's fourth quarter earnings. Nevertheless for the quarter average room rates were 10% higher while the occupancy slipped a little less than 2 percentage points yielding a RevPAR increase of 7.5%. For the full year '05 both average room rate and occupancy increased 11% and 1% respectively. Loews Hotels in New York and Miami properties were again the units that showed the greatest strength during the year.

And with that I would like to turn the call over to our CFO Peter Keegan who will review our annual results.

Thanks Jim and good morning everyone. Net income for Loews common stock was 46 million or $0.25 per share in the fourth quarter of 2005 compared to net income of $444.2 million or $2.39 per share in the fourth quarter 2004. For the full year 2005 Loews reported net income for Loews common stock of $960.3 million or $5.16 per share versus $1,031,000,000 or $5.56 per share in 2004. Results for the fourth quarter and full year 2004 reflect restatements Loews will make to its financial results to correct the accounting for discontinued operations that were required by CNA in its acquisition of Continental Corporation in 1995. The decline in fourth quarter and full year net income for Loews common stock was primarily due to a loss related to CNA's commutation of finite reinsurance contracts and non-commutation related adverse net development. The impact from the commutation of the finite contracts was an unfavorable $203.5 million after-tax and minority interest for the fourth quarter and full year 2005. The non-commutation related adverse net development had $126.9 million unfavorable impact after taxes and minority interest.

Net investment losses were $49 million in the fourth quarter 2005 versus a gain of $85.6 million in the fourth quarter 2004. While Loews recorded a net investment loss of $10.3 million the full year 2005 versus investment losses of $144.9 million for the full year 2004. The investment results for the full year 2004 include $352.9 million in losses after-tax for minority interest related to CNA sale of its individual life insurance business. Net operating income excluding net investment gains or losses and adjustments for discontinued operations was $86.8 million in the fourth quarter 2005 versus $359.7 million in the fourth quarter 2004. And was $951.9 million in the full year 2005 versus $1,195,000,000 in 2004.

Net income for Carolina Group stock was $81.6 million or $1.11 per Carolina Group share in the fourth quarter 2005 versus $56.1 million or $0.93 per Carolina Group share in the fourth quarter 2004. Full year 2005 net income for Carolina Group stock was $251.3 million or $3.62 per Carolina Group share. In 2004 net income for Carolina Group stock was $184.5 million or $3.15 per Carolina Group share. Net income per share of Carolina Group stock increased in the fourth quarter 2005 as net sales increased $83.5 million despite a 1.5% decline in total cigarette volumes. For the full year income per share of Carolina Group stock also improved versus that of 2004 as cigarette volumes increased.

As a result of the sale of 10 million shares of Carolina Group stock by Loews in December 2004 and again in November 2005, the weighted average number of Carolina Group shares outstanding increased from 60.07 million in the fourth quarter 2004 to 73.51 million in the fourth quarter 2005. And from 58.5 million for all of 2004 to 69.49 million for all of 2005. Loews Group currently holds 54.97% of the total shares and share equivalents of Carolina Group.

Lorillard contributed 128.9 million to net income for Loews common stock in the fourth quarter of 2005 versus $128.8 million in the fourth quarter 2004. For the full year Lorillard contributed $455.8 million to net income for Loews common stock in 2005 versus $457.1 million in 2004. The slight changes to Lorillard's quarterly and annual contributions came as its earnings increased in both periods offset by Loews Group's decreased interest in Carolina Group stock.

Lorillard recorded charges of $537.7 million and $522.6 million after taxes for the years ended December 31, 2005 and 2004 respectively, to accrue its obligation under various state settlement agreements. Lorillard's after-tax settlement charges were $135.7 million in the fourth quarter 2005 and $124.3 million in the fourth quarter 2004.

CNA contributed a loss of $153.4 million to Loews' net operating income in the fourth quarter 2005 versus income of $186.5 million in the fourth quarter 2004. For the year 2005 CNA contributed income of $246.7 million to Loews' net operating results versus income of $562.1 million in 2004. The decline for both the quarter and year related primarily to CNA's significant commutation of finite reinsurance contracts and non-commutation related adverse net development mentioned earlier.

Loews' interest in CNA's net realized investment gains and losses declined to a loss of $49 million in the fourth quarter of 2005 from a gain of $94.5 million in the fourth quarter 2004, and improved to a loss of $6.9 million in the full year 2005 from a loss of $137.1 million in 2004. CNA's quarterly net investment results declined primarily as a result of losses recorded in its fixed income portfolio. The full year improvement was largely the product of the absence of the 352.9 million impairment loss after-tax and minority interest related to CNA sale of its individual life insurance business in 2004.

Diamond Offshore's contribution to net profits improved to $52.6 million in the fourth quarter 2005 from $4.2 million in the fourth quarter 2004. Diamond Offshore's net profit contribution for the year improved to $127.3 million in 2005 from a loss of $9.3 million in 2004. These results reflect the strength of the offshore drilling market during 2005. Day rates were significantly higher for all of Diamond Offshore's rig categories in the quarter. Utilization rates were also generally higher with the exception of the high specification rig category which saw utilizations decline on account of rig mobilization activity during the quarter.

Loews Hotels recorded a net loss of $1.5 million in the fourth quarter 2005 versus income of $7.4 million in the fourth quarter 2004, primarily as a result of higher rent and interest expense at its Florida properties and tax expense related to a hotel disposition. Loews Hotels net income for 2005 improved to $31.2 million from $21.4 million in 2004. Occupancy for all owned hotels was 70.1% in the fourth quarter 2005 versus 71.8% in the fourth quarter 2004. While average room rates increase 10.2% against last year's quarter to $212.42 from $192.83.

Boardwalk Pipelines was converted to a master limited partnership in late 2005 and an interest representing 14.5% of the limited partnership was subsequently sold to the public. Boardwalk's $36 million contribution to the fourth quarter 2005 net income reflects Loews's common subordinated and general partner interest in Boardwalk Pipeline partner LLP. The $16.8 million net income that Boardwalk contributed in the fourth quarter of 2004 primarily reflects the results of Texas Gas, the initial pipeline property purchased by Loews in the creation of Boardwalk Pipelines prior to the formation of Boardwalk Pipeline partners LP. Loews acquired Gulf South the second pipeline property comprising Boardwalk during the last few days of 2004.

Net investment income and Other which is comprised of Loews' investment income including investment gains and losses from a corporate trading portfolio, corporate interest expense, income from operations of Bulova and shipping and other unallocated expenses improved from $16 million in the fourth quarter of 2004 to $24.2 million in the fourth quarter 2005. And declined from $115.6 million for the full year 2004 to a loss of $1.2 million for the full year of 2005. Full year 2004 included income of $116.5 million after taxes from affiliate sale of four ultra large crude oil tankers.

At December 31, 2005 total cash and investments at Loews was $2.9 billion. Loews and Loews Hotels together had $1.4 billion of debt at the end of the year, $240.1 million of which related specifically to hotels. At December 31, 2005 Lorillard had $1.75 billion in cash and investments. The Carolina Group's notional debt balance at the end of the year was $1.6 billion and currently stands at $1.53 billion.

That concludes my remarks and now I will turn it over to Marty Orlowsky of Lorillard.

Thanks Peter. Good morning everyone. Lorillard's fourth quarter of '05 operating and net income of [319] (technical difficulty) million and $210.5 million were up 14.7% and 13.6% respectively as compared with the fourth quarter of '04. For the full year of 2005 operating and net incomes of $1.084 billion and $706 million were up 8.2% and 10% respectively as compared with 2004. Included in 2005 was a charge of $26.4 million related to the sell-off of [Surf Plus] lease as part of the tobacco grower buyout legislation. Excluding this charge operating and net incomes were up 10.8% and 12.5% respectively compared with 2004. Higher wholesale shipments and lower promotional expenses for the full year 2005 were the primary contributors to the gain in operating income. Although the fourth quarter of '05 compared with the fourth quarter of '04 experienced slightly lower volume, profits were up for the same period as mentioned earlier.

Excluding higher Newport shipments achieved in the fourth quarter of '04 as a result of advanced buying by wholesalers anticipating pricing changes and incremental Newport promotional units in the pipeline in that same quarter but not factored in the fourth quarter of '05, Newport shipment performance comparison would result in a positive quarter-over-quarter performance. In addition to the above stated factors affecting 2005 option income affecting operating income net income for the full year was also affected by a substantial increase in investment income. As we frequently stated, Lorillard continually evaluates competitive marketplace factors to achieve its core objectives and that is maintain and improve Newport's market share. As such the promotion spending levels in effect either during the fourth quarter of '05 or for the full year 2005 may not be reflective of future spending patterns in any given quarter or for total year.

We continue to pursue long-term strategy of balancing profit generation and market share performance and we will adjust our spending tactics accordingly. Total Lorillard wholesale units shipped for the fourth quarter of '05 were down 1.5% and up 1.9% for the full year 2005 as compared with the same period for 2004. Lorillard's domestic U.S. wholesale shipments were down 1.1% in the fourth quarter of '05 versus the fourth quarter of '04 and up 2% for the full year '05 versus 2004. Industry 2005 domestic shipments declined by 3.4% versus 2004 and for the fourth quarter of '05 were off by 5.2% as compared with the fourth quarter of '04. Lorillard's domestic shipment market share for 2005 was 9.24% up 0.49 points over 2004 and Newport achieved an 8.44% market share, a gain of one-half share point versus 2004. Lorillard's data database reflecting unit volume movement from wholesalers to their retail accounts reflects the following comparative results for 2005 versus 2004. Total market share for Lorillard was up 0.37 points to 9.6% of the market. Newport was up 0.39 points to 8.78% of the market and the total menthol segment accounted for about 27.1% of the market, up two-tens of a point. And Newport achieved 32.5% of the menthol market, an increase of 1.2 segment share points.

Thank you and turn it back to Josh.

Thank you Marty. Ian we would like to take questions at this point please.

(OPERATOR INSTRUCTIONS). Our first question comes from Bob Glasspiegel with Langen McAlenney.

It seems like we are getting an increase amount of cash at the holding company with the combination of the Boardwalk Pipelines, the Carolina Group, Diamond Offshore liquidity coming in. Should we think about maybe this should be a time to think about restructuring the CNA capital contribution where you aren't getting any cash from them? Their being burdened by significant earnings drains that perhaps are affecting their ratings in the perspective with the ROE they are generating? How should we think about that inter-company loan today?

Well, first of all, it is not an inter-company loan

Investment -- excuse me.

That's a series H preferred stock that Loews bought a number of years ago when CNA was in need of some additional capital. First of all, we want CNA to begin paying a dividend and we want it to be able to pay a consistent dividend and I believe that it is on a path to being able to do that. The fourth quarter was a small bump in the road but there some positive aspects including the elimination of the finite reinsurance, the commutation of it. And also just underneath the numbers the good run rate that CNA had in its property casualty business in the quarter. So that makes me feel good about the possibility for CNA to begin paying a dividend at some point in the future.

With respect to the series H you can be sure that that is something that people at CNA and at Loews are looking at carefully. But beyond that I don't want to comment.

Could you quantify the hotel tax item that sounded like it was nonrecurring?

Well I can give you the period change that relates to what I mentioned is about $5.7 million. Also some increased interest costs that are in hotels which is permanent. That was refinancing that took place at both our Miami hotel and there was refinancing that took place at the Orlando hotel.

I couldn't type fast enough but do you mind repeating just the corporate holding company cash and debt?

At the end of the year Loews had $2.9 billion of cash and the debt totaled 1.4 and that includes the Loews hotel mortgages and debt which accumulated to $240 million.

$2.9 billion included how much for Lorillard?

Nothing. That's just Loews. Lorillard is independent of that had 1.75 billion in (multiple speakers).

Last question. Any thought what we are going to do with all this liquidity at the holding company?

You've heard me say it before; we are not going to let it burn a hole in our pocket.

Share repurchase a possibility?

Anything is a possibility.

Judy Hong with Goldman Sachs.

Marty, I want to start with a few questions for you. First, can you just clarify whether there is a reversal of the surplus tobacco pool cost in the fourth quarter? Because my understanding was it has been running around $43 million year-to-date, and it looks like you ended the year at $26 million.

It was a (technical difficulty) reversal we accrued whatever we had that we accrued prior to '05 and we converted that -- we never really reversed it and then we applied it against the lease costs ongoing. So there was no reversal that took place.

So was there the surplus cost in the fourth quarter specifically?

It was I think about a very minor amount. I believe about $400,000.

And then just in terms of looking at your promotional spending in the fourth quarter obviously you had a big step down in the fourth quarter versus the third quarter. And to the extent that you can talk about whether you think that you are at the appropriate discounting level at this point, can you just comment on that issue?

Well I am not going to comment in terms of going further other than what I said that we -- and I have said this I think for the last I don't know how many quarters -- that we will -- we make adjustments on the quarter-to-quarter basis or year-to-year basis predicated on what we think the competitive factors are. And the trends relative to Newport's business. What occurred in the fourth quarter of '05 was essentially a combination of those variables. And I think you have commented on your note this morning that we had a very strong first half of '05. Obviously there is a fair amount of stability that is occurring in the terms of the good dynamic between deep discounting premium brands and we felt that there was a base of Newport's trend and the overall market itself that the fourth quarter represented an opportunity to further adjust our spending in promotion. That does not apply necessarily that that same pattern would occur in the future. It may. Again it is going to depend on the circumstances at a point in time.

I guess in relation to that just looking out 2006, if you look at your operating profit growth in 2005 excluding the surplus cost it was about 10% plus. I am just wondering what are the factors that you can think of that may impact that numbers to weaken in 2006?

Clearly promotional spending is a factor in our financial performance. And as I said we lowered our promotion for the full-year 2005 versus '04 and we were substantially reduced the spending in the fourth quarter. Depending on what that level (technical difficulty) and the response to the spending levels on the shipping side that will dictate the end results. Whether or not the same pattern will exist in the future remains to be seen. I really can't comment beyond that.

And then just a question for Jim. Carolina Group's earnings continue to go up but (technical difficulty) really hasn't gone up since I guess 2002 and now the payout ratio is below 50%. Can you share with us what you're thinking in terms of the dividend policy at Carolina Group?

I can tell you what I think the Board is thinking and it is the Board that really determines the dividend policy of Carolina Group. There are basically two uses for the excess cash that comes up to Carolina Group after the payment of the interest on the debt. The cash can either be used to increase the dividend or the cash can be used to pay down the notional intergroup debt. Remember once all the intergroup debt has been paid down entirely then the only place where the cash goes is basically into dividend payments. So the Board by its actions is obviously embarked on a strategy of paying down the intergroup debt as quickly as possible so that all the shareholders can get that significantly increased dividend as soon as that debt is all paid down.

Just one other point to that add to that Judy, the debt todate has been paid down by approximately $1 billion from inception. And that has decreased pretax expense at the CG level by about $80 million a year.

David Edelman with Morgan Stanley.

Jim can I just follow-up on Judy's question? Is the implication from vis-a-vis CG's dividend that it is a practical matter, probably won't go up until the intercompany debt is either entirely paid down or close to that?

You know I don't want to speak for the Board on that. That is an issue that comes up quarterly at the Board and that is really their prerogative.

And on Boardwalk Pipeline I was curious with the legal structural change being now an MLP and your general partnership interest, do you obviously participate disproportionately in the growth of the cash flow of that business. And I was curious the structural change at all affect how you think about the strategic evolution of the business? In other words does it make you more keen than would otherwise be the case to have that business make an acquisition as an example?

I think somewhat so. I think that by having the MLP it gives Boardwalk a cheaper source of capital than it might otherwise have if it were held by us simply as a C Corporation. We have shareholders that are interested in the dividend that they receive; right now the yield on the stock is I think about 7.5%. And we want -- we very much want to increase the dividend beyond that but remember that dividend is a pretax 7.5%. And when we bought both Texas Gas and Gulf South we were talking about double-digit after-tax cash on cash returns. So we have a somewhat lower bogey and as a result of that we have we think the ability to do transactions that we otherwise might not do if we were doing as a loan. As you mentioned we do as a general partner get higher, what they call in the business splits, as the dividend is increased and that will go to benefit the Loews shareholders.

And Jim can you talk about at the Loews level, it was referenced earlier, the gross and net cash levels at the highest level in many many years. And I am just curious as you look at opportunities to put that cash to work can you describes sort of the relative attraction of large-scale investments that come across your desk now versus perhaps a year ago?

Well, let's compare to now versus the past. Rather than just a year ago because now an awful lot of stuff is very well picked over and very competitive. But we believe that the world is cyclical and when we got into the offshore drilling business nobody was competing with us. When we got into the shipping business nobody was competing with us. Even when we got into Texas Gas there wasn't significant competition. So there are times to buy and now times just to hold your powder and be prepared for the day when opportunities come along. And it only takes, it really only takes one opportunity to make a significant change and we don't feel the pressure to invest the cash. We like having it because as by having that cash it gives us the ability to take advantage of opportunities when they come along.

And now I am going to ask Marty two things. Marty, you gave the retail market share for Newport for the year. Could you share with us that statistic for the fourth quarter please?

In the fourth quarter Newport's share was 8.42% at the retail level, and it was down 1/10 over the fourth quarter of '04.

And Marty, I mean there was obviously a precipitous drop in the promotional spending in the fourth quarter which I applaud. But I am just curious; I mean my read was that the marketplace dynamics weren't much different in the third quarter than in the fourth quarter. So I'm trying to understand what triggered the decision to bring spending down over that period of time.

It was more along the lines as opposed to the pure marketplace dynamic; it was more aligned to Newport's prior performance. If our core strategy is to find this balance we felt we could significantly decrease the spending in the fourth quarter and basis the strength of the brand coming into the fourth quarter. And it also provided us an opportunity to assess what a significant decrease in promotional spending, what effect it might have on our market performance as well. So it was more related to Newport's relative to Newport itself, its prior performance than anything else.

And do you prefer the trade off in the fourth quarter to how you sort of delivered total share and profits in the first nine months?

When we say prefer it, I don't know if I would conclude that I prefer it. I think it does demonstrate a very strong underlying fundamental performance factor behind Newport for it to be able to hold its market share relatively speaking in face of in the fourth quarter very heavy use of free promotional units by two of our major competitors. Which so I think what it demonstrated was if the brand has a fair degree of an equity foundation in the marketplace. Now whether or not one would look ahead and say that is the best place to be, I think again it goes back to what I said before. We have to look at a combination of the brand's performance and its trends and the general marketplace dynamics. So it really, is it is not an isolated kind of situation where we make decisions sort of looking at one thing versus another. We look at the combination of things and what we think were the greatest leverages. We felt there was leverage in opportunity.

And when you were referencing Marty the higher competitive promotional spending you meant on menthol brands, correct?

That's correct. Kool and Marlboro menthol.

Christine Farkas with Merrill Lynch.

Just a couple of quick follow-up questions for Marty. Firstly can you just speak a little bit to the SG&A expense? That has been coming down nicely year over year with the exception of the third quarter, and we did see a bit of a drop in the fourth. Can you just remind us what the nature of that is and what your overall goal or target might be for '06 in those trends?

Well our SG&A is influenced mainly by legal expense and as we calculated the consumer promotion expense is among other things. And in all other areas, administrative costs, selling costs, related to the sales force and merchandising expense we have been able to either maintain less than inflation increases. And/or in some instances we have been able to decrease it. The legal expense for the year '05 versus '04 was about flat but it was pretty low in '04. So we are either holding some of the areas or we're showing some declines. Principally in '05 the decline was related to consumer promotion on that level.

And the consumer promotion which is different than your pricing strategy or reduced promotions I will say at the net sales line, this consumer promotion line would move down if you continue to reduce your promotional efforts, would that be fair?

Well it's not different. We account for it in our internal income statement. Consumer promotion which is the buydown dollars in any free goods expense etc. in SG&A. If you exclude that because it does reduce net sales -- if you exclude that than what I have said is that we're looking at a pretty stable pattern here.

Marty could you tell us what the cost of the growers payment was in the quarter? Was that what you were referring to early was the $400,000 or is there a different number?

No there is a different -- the total grower expense in the fourth quarter was $21.8 million.

Great. I think you have elaborated on the pricing and the sustainability or outlook of the reduced promotions in the fourth quarter but my final question is really simply on option expenses. Just to confirm that there would actually be effectively no impact from option expenses on the Lorillard group in '06?

We don't account for it at the CG Loews issue and -- Peter.

Christine we will be, and you will see that in 2006, you will see the impact of option expenses in our income statement. Not in '05.

But would there be an impact or a line item for Carolina Group or will it all held at the parent?

There will be an impact at the CG level and there will be an impact at the Loews level in 2006 going forward.

Is there any way to get the magnitude of that impact at this stage?

No there isn't.

Well I want to say Christine that neither Loews nor CG are from the world of big option grantors. So my suspicion is that the charge will be less than for most of the companies that you follow.

Michael Millman with Soleil Securities.

I have a couple of questions. On the hotels you explained the bottom line but could you explain the top line which grew, seemingly grew much less than RevPAR grew?

We are looking here.

While you're looking some other related questions on hotels, you indicated that you are in no rush to spend your cash because basically the market is too high. Well if the market is too high, why aren't you taking advantage and selling something and in that connection you also talked about you wanted more transparency in hotels, it would seem a dead-end in both those groups?

Michael you have been on that kick I see. Listen I don't know where you came up with the idea that we weren't going to sell the hotel business or take it public, but there is an awful lot that goes into any decision to take a company public or to sell it. There are size questions. There are lots of tax questions and there are questions as to simply whether strategically even if all those factors are appropriate, whether it makes sense at any given point in time. And notwithstanding what you have written at this point in time we just don't see the benefit of monetizing our hotel interests.

Okay.

I don't have a complete answer on your question on revenues but I can give you some sort of a top side answer that first of all RevPAR that we reported is for owned hotels. It does not have anything to do with managed hotels. So there is a piece that you don't have there.

Secondly as I just look at individual hotels, one hotel Miami, declined in the fourth quarter by about 6%. That's a big hotel, that's about $1.3 million. I don't have a great explanation at the moment but some of that could have been related to the impact of Hurricane Wilma in the fourth quarter. Which obviously would have pulled down revenues.

Also as someone asked about the notional debt, why isn't some of that one point or a bigger chunk of that $1.75 billion at Lorillard being used to pay down I guess the 1.5 --

That number -- I think we have said this on previous calls -- the Lorillard cash number fluctuates pretty extremely during the year. Because the bulk of the MSA and other related payments are either made at or around year end or at the end of the first quarter. So actually the peak cash for Lorillard hits right before year-end and then it comes down. The low point is at the end of the first quarter. So you are looking at the year-end peak. The average cash throughout the year at the Lorillard level usually stays in the 1.2 to $1.3 billion level. And as you know we keep cash related to the Engle agreement and the settlement that we (technical difficulty) roughly $921 million of net worth related to that. And a certain minimum cushion on top of that which gets us to sort of maintaining net worth balance today of between 1.2 and $1.3 billion.

Don't confuse cash with net worth at Lorillard's.

So if Engle finally goes away does that suggest that you might be more willing to take a bigger chunk out of the notional debt.

Remember the notional debt is not the debt of Lorillard. The notional debt is just as I like to call it, it is a an algorithm for the computation -- for the allocation of cash between Loews and the CG shareholders. And the notional debt is paid down by cash dividends that are received by Loews from Lorillard and those dividends are determined by the Board Of directors of Lorillard Inc.

And finally, could you give for the noninsurance analysts among us the 30-second definition of commutation of reinsurance finite contracts, and non- commutation of related adverse net developments?

Forget the non-commutation, that was just a way to describe the difference between commuting the finites and other charges which occurred in the fourth quarter. Finite agreements are agreements that were put in place several years ago which were reinsurance contracts and the effect of those contracts among other things were that you incur interest charges going forward in relation to those contracts. So those contracts have put a drag on the future earnings of the insurance company. In commuting those contracts the company took a charge in 2005 but the effect going forward -- and you can go back and get the numbers off the CNA call -- was that it reduces interest expense going forward. Which is why management characterized that as a good thing and it is generally viewed as a good thing by rating agencies and other constituencies, that the company has finally eliminated those finite agreements or by and large eliminated them. The other charges I was referring to are just the adverse development, the non-commutation costs where the adverse development that CNA incurred in the fourth quarter 2005.

Was that a cash payment?

No. It may be there are always cash payments around these but these were book entries and cash payments related to them would occur in the future periods.

So there is no cash impact?

There is some cash impact but the charges we took did not directly relate to an immediate cash payment.

Mark Cohen with Merrill Lynch.

I think this is for Peter. Can you just clarify going back to the question about the cash at Carolina Group, that $1.75 billion of cash, is there any of that cash that is available to pay down the notional debt? I know (indiscernible) 921 million you set aside for Engle and you have approved the settlement payments. But beyond that is there any part of that at all that is available for reducing that debt?

Let me answer. That is cash of Lorillard. The intergroup debt is not a liability of Lorillard. It is an agreement between Loews and CG for the payment of cash out of the dividend that Loews received from CG and that cash goes back to Loews. And does not then go to the CG shareholders.

I see. So it's not really available. The only way that could be paid down is out of the cash flow.

Out of the dividend that Lorillard pays up to Loews.

At this time it appears we have no further questions; I would like to turn it back to the management team for any closing remarks.

Thank you for joining us this morning. As a reminder a replay of this call is available on our website in about two hours. The earnings conference call held earlier this morning by CNA is also available on their website CNA.com. Thank you for joining us this morning.

Thank you. This concludes today's Loews Corporation conference call. You may now disconnect your lines and have a great day.