洛茲集團 (L) 2008 Q3 法說會逐字稿

Good morning. My name is Christie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Loews third quarter 2008 earning 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 session. (Operator Instructions) Thank you.

I would now like to turn the conference over to Mr. Darren Daugherty, Director of Investor Relations. Please go ahead, sir.

Thank you Christie. Good morning, everyone. Welcome to Loews Corporation's third quarter 2008 earnings conference call. A copy of the earnings release may be found on our website, loews.com.

On the call this morning are Jim Tisch, the Chief Executive Officer of Loews, and Peter Keegan, the Chief Financial Officer of Loews. Before we begin, I'd like to make a few brief disclosures concerning forward-looking statements. This conference call will include the use of statements that are forward-looking in nature. Actual results achieved by the Company may differ materially from those projections made in any forward-looking statements.

Forward-looking statements reflect circumstances at the time they are made, and the Company expressly disclaims any obligation to update or revise any forward-looking statements. 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. Please refer to our security filings for reconciliation to the most comparable GAAP measures.

After Jim and Peter 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.

And finally, I would like to remind you that on November 5 in New York, Loews will hold its 2008 investor meeting which will include presentations by Loews' senior management, as well as the senior managements of our subsidiary companies. If you have not already registered to attend, please let us know and we can send you registration information. I will now turn the call over to Loews' Chief Executive Officer, Jim Tisch.

Thank you, Darren. Good morning everyone, and thank you for joining us on our call.

For the third quarter, the excellent results of Diamond Offshore, HighMount E&P and Boardwalk were not enough to offset the catastrophe losses suffered by CNA, primarily from Hurricanes Gustav and Ike, or the figurative hurricanes in the financial markets that contributed to CNA's realized investment losses.

While our third quarter results no doubt disappoint all of us, I want to emphasize that each of our subsidiaries is fundamentally solid. None of our businesses faces a liquidity problem, and at the holding company we possess a strong liquid and flexible balance sheet.

Today we announced that Loews plans to purchase $1.25 billion of a new class of CNA non-voting cumulative senior preferred stock. Our investment will help CNA strengthen the statutory capital of its principal insurance subsidiary, Continental Casualty Company, which has been adversely impacted by the ongoing disruption in the capital markets. CNA will use $1 billion of the proceeds to increase the statutory surplus of Continental Casualty and the remaining $250 million will augment CNA's already robust holding company liquidity. Loews expects to complete the purchase of the new preferred stock before the end of the year. This addition to CNA's capital base, while not mandatory, will provide strong support to the Company during this period of unprecedented turmoil in the financial markets.

The underlying performance of CNA's core property and casualty insurance operations was solid during the third quarter as measured by a 91.3% combined ratio before catastrophe losses. CNA has maintained its focus on disciplined underwriting and expense management which has served it well in the softening insurance markets.

We also announced today that the Loews board of directors has approved a commitment to purchase from Boardwalk Pipeline up to $1 billion of equity securities which will fully fund the completion of its pipeline expansion projects. Loews will provide equity capital to Boardwalk to the extend that external funding is otherwise unavailable on reasonable terms. Boardwalk anticipates that it will require a portion of this equity capital prior to the end of the year and the balance during the first half of '09.

We continue to expect that the expansion projects, once completed over the next two quarters, will produce strong operating and financial results. As a reminder, these projects transport natural gas from prolific shale and other nonconventional plays in the Gulf Coast and mid-continent producing areas. These are attractive projects that will put Boardwalk in a strong cash generating position for years to come.

With our large net cash balance and continuing healthy cash distributions from our subsidiaries, Loews is in a strong position to weather these disfunctional markets. We sleep well knowing that we are able, if necessary, to held down our subsidiaries under the Loews Financial umbrella.

Earlier in the year, CNA announced that Steve Lilienthal will be retiring in June of '09 and handing over the reins to Tom Motamed. We are subsequently reaching agreement with Chubb Corporation which will allow Tom Motamed to begin on January 1 of '09 and therefore, Steve will be stepping down as Chairman and CEO at year end.

I would like to take a moment to thank Steve Lilienthal for his almost seven years of masterful leadership at CNA. CNA has been beyond fortunate to have had Steve at the helm. While we will miss Steve, we are delighted that a smooth strength-to-strength transition is taking place. And with that, I will now turn over our call to Peter Keegan, our Chief Financial Officer. Pete?

Thanks Jim, and good morning, everyone.

For the third quarter, Loews reported a loss from continuing operations of $0.33 per share as compared to income from continuing operations of $0.58 per share from the prior year third quarter. The loss for the quarter primarily resulted from CNA's realized net investment losses which totaled $379 million after tax and minority interest versus losses of $33 million in the prior year quarter. These losses included the impact of other than temporary impairments of $341 million after tax and minority interest driven by credit deterioration within the equity securities and corporate and other taxable bond sectors.

CNA's contribution to Loews' net income before investment losses decreased to $76 million from $189 million in the prior year third quarter. While underlying operational performance was solid, catastrophe losses totaled $151 million for the quarter after tax and minority interest. Also negatively impacting CNA's results was a decline in investment income primarily reflecting losses from limited partnership investments.

Diamond's revenue backlog -- excuse me. Diamond Offshore's contribution to net income increased to $145 million from $95 million in the third quarter of 2007 and was driven by increased day rates from mid water and deepwater semi-submersible rigs, along with higher average utilization. Diamond's revenue backlog currently stands at over $11 billion, which includes the recently announced two-year contract totaling $452 million for Diamond's semi submersible rig, Ocean Valiant.

Last week, Diamond's board of directors declared a special quarterly dividends of $1.75 per share in addition to the regular quarterly dividend of $0.125 per share. Together, these dividends represent a cash payment to Loews of approximately $140 million.

In the third quarter, HighMount reported net income of $47 million on revenues of $200 million. Net income of $19 million in the prior year third quarter represented only a partial quarter as HighMount did not commence operations until July 31, 2007.

HighMount reported natural gas production of 19.7 billion cubic feet at an average realized price of $7.85 per thousand cubic feet. Natural gas liquids production of 805,900 barrels at an average realized price of $56.41 per barrel and oil production of 86,600 barrels at an average price of $114.38 per barrel. During the quarter, HighMount completed 117 gas wells at a success rate of 98% and for an aggregate drilling cost of $93 million.

Boardwalk Pipeline's contribution to net income for the quarter was $31 million versus $19 million in the prior year third quarter. Results benefited from higher gas transportation revenues generated by Boardwalk's East Texas to Mississippi expansion and southeast expansion projects, as well as from higher interruptable service. Boardwalk has declared a quarterly cash dividend of $0.475 per common and subordinated unit and $0.30 per class B unit, which represents a cash payment to Loews of approximately $49 million.

Loews Hotels' net income increased to $6 million from $4 million in the third quarter of last year. Revenue per available room was up slightly to $180.59 from $180.10 in the prior year third quarter.

For the third quarter, net investment losses from Loews' trading portfolio totaled $57 million versus investment income of $39 million in the prior year third quarter. As of September 30, 2008, holding company cash and investments totaled $4.1 billion. During the third quarter, we received $177 million of dividends from our subsidiaries and we paid $27 million of dividends to shareholders.

After making the investments in Boardwalk and CNA this quarter, described by Jim, Loews expects to have in excess of $2 billion in holding company cash at year end 2008. I'll now turn the call back over to Darren.

Thank you, Pete. Operator, at this time we'll open it up for questions.

(Operator Instructions) Your first question comes from David Adelman with Morgan Stanley.

Jim, a few things. First, given that this is the holding company's second large cash injection into, or support of CNA in probably the last six or seven years, does that cause you -- realizing that it is an unprecedented period of time to rethink the long term commitment to that company and to that industry.

Absolutely not, David. You said it, these are unprecedented times, and in these unprecedented times where you will have bond spreads blow out to unimaginable levels, where you have enormous numbers -- amounts of dislocations in all financial markets, what I see is, very simply, that CNA needs to get through this period, and that on the other side of it there is a very sound and solid business there.

Remember, CNA's stock probably a little over a year ago traded at over $50 a share. Today it's under $15, and I believe that when this financial crisis is over, that CNA stock will again be a very, very -- trading at a very attractive valuation.

There is -- when we strengthened the capital five or six years ago, that was a period where CNA's insurance operations were problematic. That has been totally fixed. The insurance company had a combined ratio before catastrophe loss of 92% -- under 92%. So what it says to me is that the insurance operation is not broken, and the key to surviving these financial markets is just to have the ability and the wherewithal to outlast it.

And we've said before, and I say again, that CNA is a strong company. Loews is there to support it if need be, and that is our -- the primary thing that we want to do at this point in time.

And the thought process, Jim, behind the preferred investment being so much larger than the actual loss in the quarter for CNA is what?

It's just to be 100% sure that CNA will have all the capital that it needs. Look, this is permanent financing because this is preferred stock with no maturity date. So in one sense it is permanent financing, but we are also hopeful that it will be a more like bridge financing, that CNA's capital will, when the markets come back to some sanity, be in a position that it can return this cash to Loews. When Loews put in cash previously into CNA, again, we got a lot of it back in the form of cash and some of it back in the form of stock, but I'm hopeful that we will get this investment back sooner rather than later.

Just as an aside Jim, do you think of that investment at all as rather than having Loews invest capital in market dislocations, have CNA do it? Or is that -- it's really sized right size for CNA period full stop?

Explain what you mean. I don't --

Sure. In other words, with all the dislocations in the market, at the holding company level, you could elect to seize on some opportunities in your own investment portfolio. Is there any element in which you sort of look at this as an opportunity for CNA to take advantage of that rather than the holding company?

We are going to let CNA invest primarily in the financial markets. They have a bigger portfolio than us. They have like a $38 billion or $39 billion portfolio, and those investments historically have been done in CNA, and we are going to keep them there.

And then looking at the likelihood of Loews contributing up to $1 billion at Boardwalk, what is Loews' -- would Loews be supportive of Boardwalk doing an equity capital raise in the public markets at something within the range of its current limited partnership trading price?

Repeat that again.

Sure. If Boardwalk had as an option -- would you be supportive of Boardwalk doing an equity capital raise, not with Loews, but with third parties at something close to its current stock price?

Absolutely. But the problem is very simply that if we announce that Boardwalk was going to raise $500 million in the fourth quarter of this year, the stock will probably trade down to $15, $16 or $17. It's a crazy valuation. Even at $20 a share, I think it's a crazy valuation. It yields close -- between 9% and 10% at these levels. And that's basically all tax free because shareholders get the cash distribution, which is the yield, plus they also get a tax deduction, which is almost equal to the amount of the cash distribution.

So it's a phenomenal investment and we are only here at these values, I believe, because there is enormous liquidation taking place in the MLP marketplace, combined with the fact that as you -- if any MLP tries to access the markets for liquidity, the market exacts an enormous, enormous price. And what Loews is saying is that we are willing to step in front of the market and buy these securities because we think they are very, very attractive.

Lastly, Jim, given these two likely capital commitments, what are the practical ramifications for Loews as it relates to its capacity or interest or willingness to either do a large share repurchase or to make at the holding company level, a large acquisition? As a practical matter, is that probably off the table for some period of time?

I'm not going to take anything off the table. I will just tell you that we manage this company conservatively. We like having the cash. We still have very significant cash flow coming into Loews. All the cash that is going out is not going out tomorrow. So our cash balances will reach a minimum of somewhere between $2 billion and $2.5 billion. But we'll grow throughout the year, and so we are constantly looking for the best way to build shareholder value for all shareholders, combined with my desire to sleep well at night.

Your next question comes from Bob Glasspiegel with Langen McAlenney.

Good morning, and they got both names right. What was your -- behind your thinking, Jimmy, of investing preferred money into CNA when buying out the minority stubs would have cost about one-third the valuation?

Buying out the minority stubs would not have -- first of all, would not have added capital to CNA, which was the primary goal.

Second, we think that CNA being public is very, very important. I think it's good for CNA, I think it's good for Loews. If CNA weren't public, all the analysts would probably be complaining to us that there's no transparency to Loews and they don't know what's doing at our subsidiary with the largest balance sheet.

So we like the fact that CNA is public, that it's transparent, that everybody can see what is going on. And that you have got to take the good with the bad. Shareholders of Loews are able to compute on a minute by minute basis, the sum of the parts valuation of Loews.

Now my view is, the reason I said you have got to take the good with the bad is that usually, that is a good thing. On a day like today when CNA stock, to me, is trading at crazy ridiculous levels, it just means that the sum of the parts is also at crazy levels. But we'll deal with that nonetheless.

I'm not sure I buy -- I respect your judgment and it's certainly well thought. I think I might quibble with both of your points. The rating agencies -- if CNA was a sub, I would submit that the strength of the Loews parent would be more tightly factored into the ratings, a la Berkshire Hathaway, which is certainly able to operate with more leverage in their insurance subs than stand-alone companies.

More substantively, though, your stock, CNA stock as you say, has gone from $50 to $14.50. Unfortunately, stocks don't just measure reality, they influence reality. That's got to be a little bit alarming to distributors, employees, management. And if the craziness of these markets continue, if I pushed it further and said, okay, the stock is $5 nine months from now, there's a point where having it trade public becomes a real operating nuisance. You disagree?

Yes, I -- listen, I'm not going to contemplate CNA trading at $5 a share.

I don't mean to -- just to throw that out there.

CNA has a strong, strong business. And I'm just confident that having it trade publicly is in the long-term good of Loews shareholders and CNA shareholders. And I don't want to do anything based on some crazy pricing that is taking place over the short-term.

You seem to think that CNA is substantially under valued here. I never heard you make such strong statements.

Look at your own earnings valuation for CNA. What is it trading at? Six times earnings?

Yes.

Okay.

There's a lot of cheap stocks. Your stock is definitely selling at a stress price level, which makes me wonder why putting -- earning 10% return on preferred is better than buying the common. But I understand -- I hear your arguments. I'm not sure I totally agree with them.

Any general comments on what you've done on the investment portfolio, on the trading portfolio? Are you increasing the risk, de-risking --?

We've hunkered down. Everything that we buy, we buy with the expectation that worse comes to worse, we will hold it to maturity. We have -- at CNA, we have two different classes of assets. We have assets in our asset liability account, which is a matched portfolio, which reflects scheduled payments that we have. And that has a duration of, I think, 12 or 13 years.

That has a significant mark-to-market loss in it, but there is also a corresponding unrealized mark-to-mark gain in the liability related to those assets. So I don't worry at all about that mark-to-market loss.

In our asset account, we have a duration of about five years. That represents about 70% of the portfolio. That's got a five-year duration. So with the duration being so short, it's providing us with significant amounts of cash flow on a monthly basis to reinvest in the marketplace. And so we find that we are able to buy municipal, ten-year municipal notes we were able to buy at over 5%. We were able to buy A-rated corporate bonds at 100% of -- twice the yield of government bonds.

These are absolutely bonanza type returns that we are able to earn in the investment portfolio. And we are buying good quality merchandise that worse comes to worse, we'll be happy to own until they mature. But there are, just as we have this mark-to-market loss, what it means is that there are great investment opportunities in the marketplace and we are taking advantage of it.

So you'd say you are increasing the risk in the portfolio and the margin slowly?

No. We are buying only very high quality merchandise.

Okay.

You don't have to tiptoe out the risk curve in order to get good returns here.

Okay, I guess I understand what your point is. Thank you.

Your next question comes from Andy Baker with Jefferies & Company.

Hey, guys. Most of my questions were actually asked by the first two callers. I just wanted to make sure -- I don't know if I heard the answer to the question of in terms of your investment in CNA, why 10% preferred if the stock is trading at one-third of where it was, and you think further significant gains to the upside on these common, why not -- without buying out the public, why not buy new common shares and just get the full benefit of the stock depreciation there, while still providing the equity to the -- the capital to the company?

There are a few reasons. Number one, because Loews would like to get this money back at some point in time. So when CNA's capital is strengthened, we are hopeful that the board of CNA will repay this preferred stock so that they can pay dividends on the common stock.

Additionally, we like to -- we bend over backwards at Loews to treat all our minority shareholders at all our subsidiaries fairly on the theory that in treating them as fairly as possible, to go the extra step for them, that the marketplace will recognize that and provide superior valuation for those shares.

And if the marketplace does that, that will then come back to benefit Loews, because for many of you, Loews is viewed as the sum of the parts. Currently, Loews owns 90% of CNA, so the idea of picking up a few extra percentage points, which may have been viewed as doing so at the detriment to the minority shareholders, just wasn't of interest to us.

Fair enough. Thanks a lot. I will see you next week.

Okay.

Your next question comes from Steven McSorley with Instinet.

Good morning, guys. I was just looking at the class B share issue that you had taken in Boardwalk back in March and was wondering if there was anything in the charter documents or anything that would preclude you from going back to that well again?

We haven't fully decided how we are going to put the equity capital into Boardwalk. So it's too early to tell.

But with the 4% payout there, would we have to reset our thinking from that level, or is that something you think could still be on the table with those assets?

Repeat again, please.

The 4% yield you are getting on those class Bs, is that a level we would look at again there, or is it something that would have to reset in light of everything that is going on in the market?

Like I said, we don't -- we have not yet had a negotiation with Boardwalk to determine the exact nature of the investment. And again, if the public markets are there, then I'm sure the company would be very happy to sell additional units to the public.

Okay. Thanks.

(Operator Instructions) Your next question comes from Michael Millman, Soleil Securities.

Thank you. Just to clarify before asking some other questions, on the investment in CNA, that is 10% for five years and then 17% or more after five years?

No, that's wrong. It's 10% for five years and then it resets to 700 basis points over Treasury ten-year notes, and it resets either the higher of either that reset amount or 10%.

I see. And so there continues to be in a sense of in a lower interest environments for them to repurchase. You didn't give your debt, is that still about $825 million?

No, it's $865 million.

Okay, and moving on to some more on CNA, the other side of the coin is that this stock tends to be somewhat cyclic or secular, and it was $50 and now you held it and now it's $14, not that necessarily any of us were smarter, but does this suggest the next time around you think about taking some money off the table by reducing your position?

When we do that, we'll let you know by press release. It is not appropriate for us to talk about what we are going to do in terms of our ownership of any of our subsidiaries.

Is there anything that suggests that reducing your ownership in any of your subsidiaries is off the table?

I am not going to answer that. I am not going to talk about the disposition of any of our subsidiary shares. And likewise, I am also not going to talk about what factors we might take into account in order to come to that conclusion.

With your gross amount of $2 billion to $2.5 billion before debt remaining after these two investments, is that potentially going to be used to take some positions in other things, or is there a concern that in this crazy market, you might need to husband more of that to support subsidiaries?

I'll tell you what I said to David, which is that we like to sleep at night, and what that means is at the Loews parent company, we are very conservative in our investments.

So does that mean that you would not invest it at all outside of --

I'm just going to leave that comment as it is. I don't want to get into any more details about how we are investing the parent company cash.

(Operator Instructions) At this time there are no further questions.

Thank you for joining us on the call today. A replay and a downloadable MP3 file will be available on our website, loews.com, in approximately two hours. That concludes today's call.

Thank you. This concludes today's conference call. You may now disconnect.