洛茲集團 (L) 2007 Q2 法說會逐字稿

Good day, and welcome to this conference call to discuss Loews Corporation acquisition of Natural Gas E&P Operation. At this time, all lines have been placed in listen-only mode. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS)

It is now my pleasure to turn the call over to Darren Daugherty, Director of Investor Relations for Loews. Please go ahead, sir.

Thank you, Melissa. Good morning, everyone, and welcome to Loews Corporation second quarter 2007 earnings conference call. A copy of the earnings releases for Loews Corporation and Carolina Group may be found on our website, Loews.com. Also on the call this morning are Jim Tisch, the Chief Executive Officer of Loews, and Peter Keegan, the Chief Financial Officer of Loews. And they will be joined by Marty Orlowsky, Chief Executive Officer 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'd also like to remind you that during this call today, we may discuss certain non-GAAP financial measures. With regard to such, please refer to our Security filings for reconciliation to the most comparable GAAP measures. After Jim, Peter, and Marty have discussed our results, we will have a question-and-answer session. If you would like to ask questions and are listening via the Webcast, please use the dial-in number to participate, 877-692-2592. I would now like to turn the call over to Loews' Chief Executive Officer, Jim Tisch.

Thank you, Darren, and good morning, everybody. Judging by the stock market reaction to our reported earnings, you'd think we had a miserable quarter. But in fact, Loews and all its subsidiaries reported excellent second quarter results, with positive underlying trends from previous quarters remaining intact. Earnings per Loews common share increased to $0.95, up from $0.85 in the second quarter of last year. Strong results from Diamond Offshore and improved investment income were the primary drivers, although each of our subsidiaries is performing well. Earnings per share of Carolina Group increased to $1.30 from $1.09 in the second quarter of last year. CNA reported another very strong quarter, reflecting the Company's continued focus on improving operating fundamentals. Net operating income was the highest ever reported, and the combined ratio for P&C operations decreased by over 100 basis points to 94.9% for the first half of '07 versus the first half of last year. As the insurance market softens, CNA is well-positioned to manage through the business cycle with disciplined underwriting and claims management in its well diversified portfolio of commercial property casualty products and services.

Diamond Offshore achieved another quarter of record revenues and earnings. The international markets for semisubmersibles and jackups remains quite healthy and are characterized by strong, leading edge dayrates and improving duration of contract term. In contrast, the Gulf of Mexico jackup market continues to exhibit some pricing weakness. Accordingly, Diamond has announced that another of its jackup rigs, the Ocean King, has departed for the international market where dayrates are stronger. Also announced was a 10,000 foot water depth capable semisubmersible, Ocean Endeavor, has commenced operating under a four-year contract in the Gulf of Mexico after completion of its two-year upgrade and commissioning. The combination of increased average dayrates and the willingness of operators to enter into longer-term contracts have enabled Diamond to steadily increase its revenue backlog, which currently stands at $9 billion.

Carolina Group net income in the second quarter was the highest of any quarter since the issuance of Carolina Group stock in 2002. Benefiting from the sales strength of its Newport brand, Lorillard posted a 3.6% volume increase, while also increasing unit profitability versus prior-year second quarter. In a few moments, Marty Orlowsky will discuss operating results for Lorillard in greater detail.

Boardwalk Pipeline Partners recorded strong results that benefited from favorable market fundamentals. Earnings were driven by higher storage revenue and increased rates for transportation. Boardwalk also continues to make progress on its pipeline expansion projects, which are expected to contribute to the Company's continued growth as they are brought on line. Boardwalk has announced a cash distribution of $0.44 per unit for the second quarter, which represents a 16% increase over last year's second quarter distribution, and is the sixth consecutive quarterly increase since going public. Loews Hotels had a good quarter, posting a 15% increase in net income. Revenue per available room increased by 7.8%, reflecting ongoing market strength in the luxury and upper upscale hotel segment.

In June we announced plans to buy natural gas exploration and production assets from Dominion Resources. Our newest Company will be called Highmount Exploration and Production, and will operate as a wholly-owned subsidiary of Loews Corporation. We expect the transaction to close soon. As of June 30, our Holding Company cash and investments totalled $5.8 billion. During the second quarter, we received $273 million in dividends from our subsidiary companies, and paid out $83 million in dividends to our shareholders. Also during the quarter, Loews repurchased over 1.4 million shares of our common stock at an aggregate cost of approximately $70 million. Now I'll hand things over to our CFO, Pete Keegan, who will provide additional detail on our financial results. Pete?

Thanks, Jim, and good morning, everyone. In the second quarter, Loews Corporation reported consolidated net income of $653.4 million versus $568.7 million in the prior-year second quarter. Net income for Loews' common stock was $511.7 million, a 7.7% increase over net income of $474.9 million in the second quarter of 2006. Net investment losses were $78.6 million versus losses of $55 million in the prior year's second quarter. These relate primarily to CNA's investment portfolio, which I will discuss in just a moment. Net income attributable to Carolina Group stock increased to $141.7 million from $93.8 million in the second quarter of 2006. The main drivers were higher effective unit pricing, increased unit sales volume, and the increased weighted average number of Carolina Group shares outstanding after the sale of Carolina Group stock in May and August of last year. The change in the number of shares outstanding does not affect the quarter's per-share results.

Lorillard contributed $97.1 million to net income for Loews common stock during the quarter versus $110.5 million in the prior year's second quarter. As I just described, Lorillard's contribution was impacted by the reduction of Loews' economic interest in the Carolina Group. As of June 30tg, Loews Corporation owned 65.4 million share equivalents, representing a 37.6% economic interest in Carolina Group. Lorillard recorded charges of $172.4 million and $144 million after taxes for the second quarter of 2007 and 2006, respectively, to accrue for obligations under the states' settlement agreements. CNA contributed $284.9 million to Loews' operating income in the second quarter versus $281.4 million in the prior year's second quarter. Operating income benefited from disciplined underwriting and increased net investment income. Loews' interest in CNA's net realized investment losses were $80.6 million versus losses of $57.9 million in the prior year's second quarter. Investment losses were primarily driven by other than temporary impairment losses taken on fixed maturity securities that declined in value in response to increasing interest rates.

And now I want to go off script just for a second to follow through on some comments that Craig Mense made in the CNA call about an hour ago. So you all understand, for GAAP purposes, the majority of CNA's investment portfolio is carried as available for sale. What that means is that gains and losses that occur in the quarter go to unrealized gains and losses on the balance sheet, not through the income statement. And the only time actions go through the income statement is when the Company buys or sells securities at a loss, and then you'd have a realized loss on the income statement. Every quarter, CNA reviews its securities that are in an unrealized loss position to determine whether or not it has the intent to hold those maturities -- those securities to maturity. If for any reason it determines it does not plan to hold those securities to maturity, it impairs those securities, and therefore the losses go through the income statement and they come -- rather than just through the balance sheet. The effect on the balance sheet is the same whether those securities are a realized loss or an unrealized loss. The only difference is when we impair them, when CNA impairs them, they move to the income statement. And the statement to -- the intent to hold to recovery is a determination the Company makes mainly so that it can maintain the flexibility to trade the portfolio appropriately in the future, depending on its view of market circumstances at that time.

Boardwalk Pipeline reported a contribution to Loews' second quarter net income of $16.4 million versus $16.5 million in the second quarter of 2006. The primary drivers of results were higher revenues from increased demand for firm transportation services and a healthy demand for gas storage services. Partially offsetting these factors was a pretax impairment charge of approximately $15 million related to Boardwalk's Magnolia Storage Project. Affecting the comparison of results between the second quarters of 2007 and 2006 are secondary equity offerings by Boardwalk executed during the fourth quarter of 2006 and the first quarter this year, to help finance its announced expansion projects. The increase in limited partner units has reduced Loews' total ownership interest in Boardwalk to 75% from 85% in the prior-year second quarter. It is important to note that Loews maintains its 100% ownership of the general partner.

Diamond Offshore's contribution to net income rose to $117.6 million from $87.6 million in the second quarter of 2006. As we stated during our first quarter earnings conference call, Loews' ownership interest in Diamond Offshore decreased to 51% from 54% as the result of an increase in the total number of shares outstanding upon conversion of Diamond's 1.5% debentures due in 2031. Loews Hotels net income for the second quarter was $13.8 million versus $12 million in the prior year's second quarter. Investment income and other rose to $84.2 million from $37.3 million in the prior year's second quarter, primarily due to favorable results from Loews' trading portfolio.

As of June 30th, 2007, total cash and investments at the Holding Company totalled $5.8 billion, while Loews Corporation's debt of $865 billion remain unchanged from the previous quarter. We expect to finance the purchase of natural gas exploration and production assets by our new Highmount subsidiary with cash provided by the Holding Company of about $2.4 billion and approximately $1.6 billion in a Highmount term loan. Holding Company cash will be reduced by approximately $2.4 billion as a result of the acquisition. Lorillard ended the quarter with $1.6 billion in cash and investments, while Carolina Group notional debt amounted to $978 million. And now, I'll turn things over to Marty Orlowsky at Lorillard. Marty?

Thanks, Peter. Good morning, everyone. As you've heard, Lorillard's operating income of $359 million and net income of $239 million for the second quarter of '07 as compared with the second quarter of '06 was up 13.7% and 16.9%, respectively. And as you've also heard, contributing to these results were higher unit pricing as a result of a price increase taken in December of '06, increased wholesale unit shipments, lower promotional spending, partially offset by an increase in expenses for state settlement agreements. Additionally, the second quarter of '06 included a charge of $15.5 million related to restructuring expenses. Total Lorillard wholesale units shipped were up 3.6% for the second quarter of '07 versus the second quarter of '06. Total domestic Lorillard and Newport wholesale units shipped were up 4.3% and 3.6%, respectively, comparing the same periods.

Lorillard outperformed the total domestic industry during the second quarter of '07. Industry shipments were down 4.6% for the second quarter of '07 as compared with the second quarter of '06. Lorillard's domestic shipment share was 10.22% for the second quarter of '07, which was an increase of just over 0.8% compared with the second quarter of '06. Newport's domestic share of shipments for the second quarter of '07 was 9.41%, which was also an increase of about eight-tenths of a share point when comparing the same quarters. Lorillard's retail share for the second quarter of '07 was 10.33%, representing an increase of just over a half a share point over the second quarter of 2006, and Newport's retail share also increased by just over a half a share point to 9.50% for the same periods of comparison. Newport achieved a 33.6% share of the menthol segment as of the second quarter of 2007, which was an increase of nine-tenths of a segment share point over the second quarter of '06.

Lorillard continued to be, during the second quarter of '07, the only major tobacco Company to reflect positive unit volume and market share improvement as compared with the second quarter of '06. Lorillard's marketing strategy continues to attempt to balance Newport's market share performance and overall profitability. Promotional spending in support of Newport is subject to change, depending on the brands' trends and competitive factors. Thank you.

Thank you, Marty. Operator, at this time we would like to start the question-and-answer session.

(OPERATOR INSTRUCTIONS) Bob Glasspiegel, Langen McAlenney.

Marty, let me say I appreciate your answer. And Jimmy, I share your confusion at the stock reaction today. I do sense from investors, sort of a nervousness about the overall investment picture and your Company's exposure to what's happened in the third quarter. So I was wondering if you would be willing to share with us any sort of incremental changes in the portfolio to date in the third quarter with the treasury rally, were you well positioned to benefit from it, as I expect? And whether you're playing offense or defense on the margin with the significant changes that have happened in July?

Well, I'm not going to talk about what we've done in our portfolio since the end of the quarter, but I think that a lot of the reaction of Loews' and CNA's stock to our earnings report related to the other than temporary impairments that we took. And Pete explained it once, but let me just add a little bit to this discussion. We manage today, and for the past 30 years, we have managed CNA's portfolio differently than most other insurance companies manage their portfolio. Typically, when an insurance company manages a portfolio, they buy an asset, they put it there, they buy a bond, they put it in their portfolio, and they wake up five, ten, or 20 years later, or whatever, and the bond matures. That is typically not what happens in the CNA portfolio. When we manage the portfolio, we are -- we have a more active portfolio management style. We buy securities and we sell securities. And the reason that we do this is because we believe that we can add value by moving from one security to another, from one sector of the market to another. And so as I said, that's been our modus operandi for 30 years. And I would happily stack up our performance record versus those of our peers in the insurance industry.

What's happened more recently is that the accounting rules have been tweaked and changed slightly, and the result of it is that most of the portfolio that we have, we carry as available for sale. And the way the rules work today on securities that are carried available for sale is that if at the end of the quarter that individual security is at a loss, doesn't matter if it's a $0.01, a point, or 20 points. If it's at a loss, you have to state an intention to hold that security to recovery of the loss. And if you can't make that assertion, then you have to take an impairment loss, what's called an other than temporary impairment loss. The result of this is that we very much want to keep as much of our portfolio available for sale so that we can trade it to capitalize on changes in the markets. So therefore, we take as big an impairment charge as we can so that we can keep as much of our portfolio open and available for sale. And so what you're seeing is an impairment charge that took place due to the significant increase in interest rates that occurred in the second quarter, and very little of that impairment charge actually resulted from deteriorating credit in our portfolio.

There's also at this time, I understand, tremendous sensitivity about CDOs and subprime securities, and let me just review for a minute the mortgage portfolio that we have at CNA. CNA has a mortgage portfolio of just under $11.7 billion. Of that, 3.8% is in CDO debt. But of that that's in CDO debt, a substantial portion -- in fact, most of that is in commercial CDOs, and mostly rated Single A. We also have about a -- just under $700 million of asset-backed securities that are backed by subprime mortgages. And that is a portfolio that we are, in fact, very comfortable with. Additionally, because we recognized when we bought these securities, that there was some risk to them, we have also entered into shorts in derivatives to offset some of the risk from those subprime mortgages. So, yes, some of those subprime mortgages are down in price, but the other thing offsetting that is significant increases in the hedge that we had put on to counterbalance those subprime mortgages. That's my answer, Bob, and I'm sticking to it.

Well, that's a very good answer. I worry that having you teach me accounting probably isn't helpful for the stock, but it's definitely helpful for my knowledge of the facts. I appreciate it. What's the size of your short portfolio, roughly?

I don't want to go into that. I don't want to talk about individual securities.

Okay. You're not willing to talk about any of these positives that are happening, but you're outlining the all the negatives fully, consistent with your historic conservatism. Thank you.

Judy Hong, Goldman Sachs.

Jim, just on the Loews trading portfolio part of it, I know that you've always said it's mostly in cash and government bonds. But can you clarify that none of the Loews trading portfolio really is exposed to any subprime or CDO market?

We have very little exposure to subprime and CDO and the Loews' portfolio.

Is it fair to say it's much less than what CNA is exposed to?

Say again?

Is it fair to say that the exposure is much less than what CNA is exposed to?

Oh, yes.

Okay. And then just some questions for you, Marty. First, in terms of just looking at your COGS per case -- sorry, COGS per unit in the second quarter, excluding MSA payments and the buyout expenses, it looks like in the second quarter it was up much more than what we've seen recently. So can you just talk about what drove that increase in the second quarter?

Well, in part it was increased excise taxes related to the higher volumes. And secondly, we had some promotion expense was included due to the nature of the expense in the cost of sales or the cost of goods. However, overall, our promotional spending, if you include what does not get accounted for in cost of goods, was down. So mostly, it's due to the promotional expense.

Okay. So the nature of the promotional expenses that hurt the COGS in the quarter, is that related to higher percentage of free goods promotions in the second quarter?

That's correct. Yes.

Okay. And then just in relation to that, could you just talk about the competitive landscape in the menthol segment? We've heard Reynolds talk about the competitive activity heating up a little bit in the second quarter. Could you just talk about what you're seeing more recently as it relates to the menthol competitive dynamics?

Well, I don't -- other than a couple of line extensions that have been introduced by Reynolds and Philip Morris and the associated promotional activity that goes along with that, those introductions, essentially I don't see any major, major changes. There's still a fair amount of buydowns, or off invoice and buydown programs on the part of Philip Morris on your menthol packings, and Reynolds is pretty actively supporting through promotion Camel Menthol as well as some, as I mentioned, some of the line extensions for KOOL. Other than that, I don't really see anything hugely different. It's still very competitive in a general sense.

Okay. And then just thirdly, in terms of the industry demand picture, obviously, the first half of the year was weaker than what we've seen in recent years. Do you think that the decline of the consumption would moderate in the second half of the year?

Well I don't know if I could attribute whatever weaknesses are reflected in the numbers for the second quarter to consumption declines. I think from a shipment perspective, on the wholesale level, a lot of the -- there's a lot of distortion that occurred during the second quarter, in comparing the second quarter of '07 with '06, not necessarily that affected us, but certainly the industry itself. And by that I mean there were differences in promotional volumes on the part of some of the competition, there was a difference in terms of shipment patterns because of different systems changes. So there's a lot of noise in the wholesale level. I think the -- so the underlying numbers, I don't think are quite as weak for the industry as what were reflected in terms of what was reported. With respect to consumption, we don't measure consumption. I don't think anyone really has a particularly good handle on consumption, so I can't really speak to that.

David Adelman, Morgan Stanley.

Jim, let me ask you a follow-up question to the comments you made about the hedge positions for CNA on some of their subprime-related exposure. To the extent that they make money on one of those hedge positions, does that reduce or moderate at all the mark to market P&L impact that was incurred during the quarter?

Yes, it does. Those derivatives are mark to market every quarter.

Okay. And then a bigger picture, Jim. If you take the hypothetical that there were to be significant stress in the capital markets over some period of time, would you be willing to have the corporation borrow money, a significant amount of money, to make an acquisition or to incur a credit rating downgrade?

I don't want to talk about hypotheticals like that. I just want to say, though, that where I thought you were going was if there was a meltdown of the financial markets, I think that the CNA portfolio is in terrific shape in order to take advantage of that. And in fact, we've been doing that in certain markets now that have seen particular stress, we've been allocating more and more capital to those markets. So we actually -- we're actually having a pretty good time in these markets, notwithstanding the stress, or in fact because of the stress.

Okay. And then Pete, you might have said it and I missed it. What was the quarter end gross cash balance at the Holding Company?

It's $5.8 billion, David.

Okay. $5.8 billion. And then Marty, I wanted to ask you a few questions, please. One was, did you have any -- was there any material change from the quarter start to the quarter end in your trade inventory levels?

No.

Okay. And -- okay, that was the principal thing I wanted to ask you. Thank you.

Nik Modi, UBS.

Marty, just one quick question in terms of Newport M. Can you just give some perspective on that, if you've shipped that already, and if some of the promotional goods that you shipped were related to the new product launch? Thanks.

Yes, we went into test market effective the first week of July, and it's in a limited test market. It's --obviously, it's one of the rare -- we're not big on line extending. But we feel that this particular blend may have an opportunity to build some incremental competitive business for us, gains. Some of the activity, it was very minor, was promotional and shipped in the late second quarter, but it was really relatively insignificant in the scheme of things.

Thank you very much.

Filippe Goossens, Credit Suisse.

Again, congrats on a good quarter here on the Lorillard side. Jim or Pete, just as a follow-up on Judy's question, the marketable securities at Carolina Group, if I recall correctly from past SEC filings, some of that is in limited partnerships. We should not be concerned that any of these marketable securities carry significant mark to market risk, correct?

Well, those securities are basically mark to market every quarter, and they have generated extraordinary earnings for Carolina Group, just as the $1 billion-plus portfolio of partnership investments for CNA has generated extraordinary investments for them. We don't see anything extraordinary in the negative sense coming from those investments.

Okay. And then on the tax rate, the rate was down for year-over-year. Anything in particular behind that decline, and what should we assume for the second half of the year there?

Pete's got the information on the tax rate.

I don't have that readily available. I've got the Loews consolidated.

Are you looking for Loews consolidated?

Are you talking about Carolina Group or Loews?

Carolina Group.

Carolina Group, the tax rate was 39.10% and it went down to 37.34%. And the principal decline was attributable to an increase in the manufacturer's deduction. And that 37.34% is about our current estimate.

Okay. And then Marty, we had recently Swedish Match announce that they're going to take Red Man into Snus. Can you give us an update at this juncture in terms of what a joint venture may be working on with regard to the smokeless side? Thanks.

The only thing that I'm going to say is that we continue to work on a project, which we announced a while back. I don't really have anything more specific to add at this point.

Okay. And then my final question is for Jim and Pete again. I want to ask more questions on the potential dividend review. But that being said, if the net worth test, if it gets lifted, based on my calculations, if you were to pay down all the intercompany debt, it looks like you may be sitting on a sizable amount of excess cash on the balance sheet. Should we kind of assume that that's most likely going to be a return to shareholders in the form of a special dividend? Or are there other uses of cash that we have not spoken about so far? Thanks.

As you know, the basic modus operandi of the Company has been to pay down the notional debt as quickly as possible. And then once that's done, to pay dividends -- pay as much as possible in dividends, while also maintaining the financial strength and solvency of Lorillard, and also keeping Carolina Group on a good, financial balance. So we have no plans beyond that.

But if you're sitting on excess cash, Jim, I would assume that you will return that to shareholders, no?

Well, Filippe, you've got to be careful. Not only do we have to look at cash, but we also have to look at shareholder's equity. And we always want to run Lorillard so that it has a significant amount of shareholder equity so that it can operate as a strong and solvent Company.

Okay. Thanks so much, Jim.

Christine Farkas, Merrill Lynch.

Marty, I'm wondering if I could follow-up a little bit on your operating expenses, and perhaps you highlighted this a little bit earlier. Even if we were to pull out the charges from a year ago, there's still about 300 basis points of operating leverage. How much of that improvement came through with the promotional expense that was in the COGS line versus any other timing of expenses or overall cost savings associated with your cost cuts put in place last year?

Well, when you say operating expenses, you're talking about SG&A?

Correct, yes.

Yes. Most of the -- I'd say it was a combination -- most of the positives on SG&A was derived through lower promotional spending. And then secondarily, lower costs attributable to the sales restructuring that we took -- that took place -- the ongoing reduction in expense. I'm not sure I quite understand your question.

Just earlier, you mentioned the higher cost of goods. Part of that had to do with the nature of your promotional expense in the quarter. So I guess the flip side would be, is do you get a benefit of that in the SG&A line because it came through above the -- in the COGS line?

If you add up total promotional dollars -- forget the accounting rule. But just in terms of total promotional spending, we were down in the second quarter of '06 versus -- I'm sorry, '07 versus '06. We spent less in promotion, overall. From an accounting standpoint, we lowered the cost -- it goes -- some expense goes into the cost of goods sold. But -- again, I'm not clear on -- .

That's helpful. And your second point, or a clarification that there were some cost savings that came through in the quarter.

Okay.

And then just some housekeeping items, which we always try to get out of you. Would you have the tobacco growers -- ?

It sounds like I never answer the question.

For which question, the first one?

No, no, go ahead.

No, you do always give it to us. Sorry. The tobacco growers payments and the depreciation expense for the quarter. Thanks.

All right. The grower expense was $27.4 million in the second quarter of '07. And our depreciation was 10.3 or 4 -- 10.3.

Okay, thanks.

10.3.

That's helpful. Thanks so much.

Ann Gurkin, Davenport.

Just one thing left. I didn't know if you had any comments on potential FDA regulation or FET tax increases? And then also, I think it was Senator Enzi has been floating a bill that would propose eliminating the entire menthol segment. So I didn't know if you had any comments on any of that?

Well, the only comment can I make is on the FET right now, the activity on the house side was for a $0.45 increase. But the way the Congress has evolved lately, one never knows where it's going to go, but that's where it seems to be heading. On the FDA side, they're going to resume committee meetings on Wednesday. There's a laundry list of amendments that Enzi and others either have already proposed or may propose. And it's very difficult to comment on how -- what the basis of the potential of any of those amendments are. I think a lot of it is -- remember, this is all at the committee level. A lot of it is maneuvering and jockeying around for some kind of position on the legislation. Beyond that, there really isn't much I can comment on.

Great. Thank you.

Michael Millman, Soleil Securities.

That's Soleil Securities. Sorry, more CNA. And thank you, it was very helpful explanations. But from reading the press release,CNA seems to be saying that net operating income included the $119 million net investment gain, and in fact, the improvement in net operating income was primarily due to increased net investment income, and that operating income from -- in fact, may have been negative. Can you clarify those comments?

Sure. Net operating income includes investment income, but does not include capital gain or loss. So the net operating income of $318 million is what was earned in the insurance business, including the investment income on the portfolio. And then, additional to that -- additionally to that, there was a net $91 million loss on capital transactions within the CNA portfolio, so that resulted in a net income from continuing operations of $227 million.

So if we just look at the operations excluding that net investment income, it was -- it might have been more like $200 million compared down from about $305 million?

No. No, no, no. CNA earned from its insurance operations, which includes interest and investment income, earned $318 million. Which I might add, is the most that CNA has ever earned in a quarter from its operating business.

Okay. But that included the investment income?

That includes investment income, yes. It always does.

Okay. And investment income -- ?

By the way, investment income is an integral part of the business model, not only of CNA, but of every insurance company. And if you read Warren Buffet's annual report, he refers to it as float, and how important that float is in the income for him and every other insurance company.

So we should not be concerned that the mix this quarter was more skewed to investment income?

There was a significant increase in investment income. I leave it to you to decide whether or not you should be concerned about it. I'm comfortable with it.

Okay. Just can you give us again the Lorillard debt figure you said -- ?

The notional debt I think is $975 million.

$978 million.

That was the notional. What about Lorillard -- sorry, Loews' debt?

$865 million.

Okay. And can you give us an idea of what you expect for your long-term return on your investment in gas exploration production?

We don't even own it yet.

Can you give us an idea of what your long-term growth return is expected to be once you own it?

No. We don't make forecasts.

Do you see it as being maybe relative to what you saw when you first got into gas pipelines?

I don't want to characterize the rates of return that we think we're going to earn. We are a Company that goes about our business. We have a sense of what the value that we bought. But we don't want to put ourselves in a position where we're making projections and estimates for investors, because that can only come back to haunt the Company in one way or another.

Okay, thank you.

Filippe Goossens, Credit Suisse.

Yes, Marty. Just a follow-up, please, if I may, this morning. In the last -- if my memory serves me right, in the last couple of the quarters, your operating earnings benefited from lower litigation expense. Am I right to assume that that was still the case this quarter? And when will you actually anniversary those lower expenses? Thank you.

Well, yes, our expenses are -- our expenses were basically flat in legal second quarter of '07 with the second quarter of '06. So we have about flattened out at this point. Where it's going to go in the future, I think as I've explained in the past, is totally dependent on the number of trials and cases that one deals with. So there's a degree of unpredictability associated with that, other than in general terms, clearly the legal landscape has, so to speak, calmed down a bit. Certainly major class actions are not as much of an issue as they have been in the past, and therefore the expenses have gone down related to that. So right now, it was about a flat comparison.

And then, Marty, since I have you, in terms of the arbitration for the disputed payments, do you have any feel for what the time line may be to have that all resolved?

No, not at all. In fact, there has been no agreement on arbitration of any consequence. So we've -- the industry has been successful in virtually every one of these issues that were brought into the trial court, and in many instances, at the appellate level in the individual states. However, there's no way to predict when any of the states are going to agree to attempt to arbitrate the issue, as per the agreement itself. So I can't give you any kind of time line.

Okay. Thanks so much, Marty, again.

Thank you. There appear to be no further questions. I would like to turn the floor back over to management for any closing comments.

Thank you for joining us today. A replay of this call, as well as the downloadable podcast, will be available on our website, Loews.com, in approximately two hours. That concludes today's call.

Thank you. That concludes today's teleconference. You may now disconnect.