洛茲集團 (L) 2009 Q3 法說會逐字稿

Good morning. My name is Melissa, and I will be your conference operator today. At this time I would like to welcome everyone to the Loews third quarter 2009 earnings 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 will now turn the call over to Darren Daugherty, Director of Investor Relations. Sir, you may begin.

Thank you, Melissa. Good morning, everyone. Welcome to Loews Corporation's third quarter 2009 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 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'll 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'll now turn the call over to Loews Chief Executive Officer, Jim Tisch.

Thank you, Darren. And good morning, everyone, and thank you for joining us on our call today. Loews reported a solid quarter, reflecting improved results at CNA, continued strong results at Diamond Offshore and higher investment income in the holding company portfolio.

During the third quarter, Loews's book value per common share increased by over 14%, primarily as a result of the $1.7 billion increase in the mark-to-market value of CNA's investment portfolio. What a difference a quarter makes.

CNA reported another quarter of solid operating income, driven by improved investment income and low catastrophe losses. In its core property and casualty operation, CNA continues to focus on growing its specialty lines of business, as well as improving performance in its standard lines of business. CNA's specialty lines continues to be the most profitable business in CNA's portfolio, benefiting from diversification by product, geography and industry class.

With respect to its standard lines, Tom Motamed has brought in new leadership to focus intently on improving profitability. A key part of that process is improving underwriting results and growing the topline in the small and middle market space, while maintaining competitive expense levels.

Perhaps most significantly, CNA's investment portfolio continued the strong recovery that began earlier this year. At the end of the third quarter, CNA's book value per share stood at $35.38, compared to $20.92 at year end '08. This improvement was primarily the result of narrowing credit spreads in the fixed income market. While we are quite pleased to see the improvement in CNA's balance sheet, the volatility of fixed income security prices over the past year underscores how one could be potentially mislead by mark-to-market market accounting, especially with respect to unrealized losses at property and casualty insurance companies.

Each quarter CNA goes through an expensive and rigorous process of recognizing losses on securities that it judges to be credit impaired or that it intends to sell. These losses run through CNA's income statement. Mark-to-market losses on all other securities are reflected solely on CNA's balance sheet.

Since the beginning of this year, after-tax net unrealized losses, included in accumulated other comprehensive income or AOCI, has moved from a loss of $3.4 billion to a gain of of $127 million as of quarter end. Not only is this a welcomed improvement to CNA's balance sheet, it is also consistent with what we have expected all along, that the bulk of the securities held by CNA would ultimately recover in value. This is why we tend to focus on book value per share before unrealized gains and losses, especially given the rigor of CNA's impairment process.

The rules of accounting may seem out of place on an earnings call, but the reality is that the volatility of securities market values and their impact on book value per share have received enormous focus recently within the P&C insurance industry. In managing the CNA portfolio, the imperative is to own credit worthy securities that match the duration and liquidity requirements of our insurance liabilities. Recognizing these unrealized losses on the balance sheet has been unpleasant over the past few quarters, but it has been our expectation that the vast majority of securities in the portfolio would recover in value. And they have.

And with that, I'll get off my accounting soapbox and get back to our results. Diamond Offshore reported another quarter of excellent results. The big story for the quarter was Diamond's purchase of the Ocean Valor, a newly constructed, dynamically positioned drilling rig that is capable of operating in 7,500 feet of water. Diamond was able to acquire the rig at auction for approximately $490 million, well below the recent cost to construct a similar new build rig.

The rig is being actively marketed for work commencing in early 2010, which by our calculations is a lot better than waiting three years for the completion of a new build rig. This acquisition is consistent with Diamond's successful strategy of buying attractive assets at time when purchases are possible at favorable pricing.

To replenish available cash after the rig acquisition, Diamond used its strong balance sheet to go to the debt markets, and was able to issue $500 million of long-term debt due in 30 years at the very attractive rate of 5.75%. Diamond's Board of Directors recently declared regular and quarterly dividends, which together totaled $2 per share, and market continuation of Diamond's policy of paying out special cash dividends reflecting the earnings and financial position of the Company.

For Boardwalk Pipelines, its net income for the quarter was negatively impacted by work to repair anomalies on some of its expansion pipelines. New pipelines have been remediated, and all of Boardwalk's pipeline expansion projects are now in service at normal operating pressures. Additionally, its legacy pipeline system continues to be a steady performer.

Boardwalk continues to work with PHMSA to obtain approval to operate the expansion pipelines at higher operating pressures, which would effectively increase pipeline capacity. Construction on its remaining compression projects is progressing well, and although the Company faces some risks as discussed in its SEC filings, Boardwalk is looking forward to leveraging what we believe to be one of the best pipeline footprints in the industry.

In the third quarter, Boardwalk issued over $500 million of both debt and equity, each on attractive terms. These financings should provide Boardwalk with the liquidity to complete all of its announced expansion projects. Additionally, it will allow Boardwalk to repay to Loews $100 million of subordinated debt that Loews had previously lent to Boardwalk. Boardwalk declared a third quarter distribution of $0.495 per unit, continuing its track record of increasing cash distributions to unit holders each quarter since its initial public offering in '05.

And with that, I will turn over the call and my soapbox to Pete Keegan, our Chief Financial Officer. Pete?

Thanks, Jim. And good morning, everyone.

For the third quarter, Loews reported income from operations before investment losses of of $530 million, as compared to $235 million in the prior-year third quarter. Net investment losses for the quarter of $61 million after tax and non-controlling interest, are primarily from other than temporary impairments in CNA's available for sale investment portfolio. In the 2008 third quarter, net investment losses were $379 million.

CNA's contribution to Loews's net income before investment losses increased to $304 million from $76 million in the prior-year third quarter. CNA's operating income increased in both its core property and casualty operations, as well as non-core operations. The improvement reflects lower catastrophe losses, increased investment income and a $55 million after-tax gain from its settlement that resolved litigation related to the placement of personal accident reinsurance.

Investment income benefited from improved results from limited partnership investments, but was negatively impacted by lower short-term interest rates. Diamond Offshore's contribution to net income increased to $170 million versus $145 million in the third quarter of 2008.

Diamond's revenue backlog currently stands at over $8.7 billion, including the contract for Diamond's deepwater rig Ocean Courage, which is currently en route to the Gulf of Mexico where it will begin work in early February of 2010 for Petrobras.

In the third quarter, HighMount reported net income of $40 million versus $47 million in last year's third quarter. The decline reflects lower production volumes and realized prices. HighMount reported natural gas sales of 17.4 billion cubic feet at an average realized price of $6.72 per thousand cubic feet. Natural gas liquids production of 762.3 thousand barrels at an average realized price of $27.32 per barrel, and oil production of 81.5 thousand barrels at an average price of $63.51 per barrel.

As of September 30, HighMount had hedges in place that cover approximately 67% of its remaining 2009 natural gas equivalent production at an equivalent price of $7.18 per Mcfe, and 54% for 2010 production at an equivalent price of $6.51per Mcfe.

Boardwalk Pipeline's contribution to net income for the quarter was $9 million versus $31 million in the prior year third quarter. Revenue from gas transportation was reduced by approximately $47 million as a result of remediation of pipe anomalies which required some temporary pipeline shutdowns and reductions in operating pressures on expansion pipelines. Additionally, Boardwalk's results in the 2008 quarter were favorably impacted by gains of $36 million from gas sales related to Boardwalk's western Kentucky storage expansion, as well as the disposition of coal reserves.

Boardwalk's operating expenses increased by $41 million, primarily from expenses associated with the expansion such as depreciation, property taxes and interest expense.

Loews Hotels reported a loss of of $15 million, which includes a $12 million after-tax impairments charge related to two hotel properties. For the third quarter, revenue per available room decreased to $128.97 from $180.59 in the prior-year third quarter. The change in RevPAR for the third quarter reflects a decline in occupancy rates to 71.5% from 77.5%, and a decrease in average room rates to $179.51 from $233.09.

For the third quarter, net investment income from Loews's trading portfolio totaled $41 million versus investment losses of $57 million in the prior-year third quarter. Investment income benefited from higher limited partnership results, but lower short-term interest rates had a negative impact.

As of September 30, 2009, holding company cash and investments totaled $2.7 billion. During the third quarter we received $241 million of interest and dividends from our subsidiaries, and we paid $27million of dividends to shareholders. Boardwalk repaid $100 million of subordinated loans with the resulting loan balance now standing at $100 million.

During the quarter, we repurchased 3.5 million shares of common stock for approximately $111 million, and between the end of the quarter and October 28, we repurchased approximately 1 million shares for $33 million.

And with that, I'll now turn the call back over to Darren. Darren?

Thank you, Pete. Operator, at this time we'll take questions.

(Operator Instructions). Our first question comes from Bob Glasspiegel with Langen McAlenney.

Good morning, gentlemen. It seems like the body language from Boardwalk is more positive and there is light at the end of pipeline as far as this not being a future need of cash from Loews. Is that a correct read?

Yes. But I would just say that that's been our view for the past several quarters, so it's not new this quarter.

Okay. And HighMount, I'm trying to learn sort of the seasonality of the business. What would have caused Q3 to be up from Q2, given the sort of pressures that I thought might have been in place with gas prices? Was this exacting the hedges or -- .

Tim Parker, who is the CEO of HighMount, is on the line. Let's let him answer that question.

Well, in terms of production volumes, we were basically very close to in line. We did see a slight decrease in overall price. The big difference that we would have between the quarters would be the impairment that we had at the end of the first quarter. But other than that, I don't quite see the variation that you are looking at.

I was looking at Q3 versus Q2 sequentially, but maybe you can tell me -- what seasonality is there in the business as we think about modeling.

There's really not much seasonality. Our production is very stable. And in terms of variations, one season to the next, there just isn't much at all.

Okay. And Jimmy, I was wondering if you could give us a little bit about your overall investment posture and how the parent portfolio has been positioned.

Yes. We are positioned very conservatively. We still have a lot of cash at the parent company level. The cash, treasury bills, REPO's and fixed maturities make up about two thirds of the entire investment portfolio. And so we're not being heros here.

Okay. I assume there's no change in the current debt, which wasn't disclosed, Pete.

There was no change.

No change.

Okay, thank you.

Thank you.

Our next question comes from David Adelman with Morgan Stanley.

Good morning.

Good morning, David.

Jim, can you talk about the feasibility and the timing of CNA repaying its preferred investment to Loews? And is that contingent at all on an improvement in CNA's credit rating?

We would like CNA to pay off the preferred as rapidly as possible. And likewise, CNA would like to do that as well. The issue relates to, earnings that CNA has relates to the credit rating that CNA has, and potentially improvements in that credit rating. And the availability of the financial markets to CNA. But we have no specific timetable for that.

Do you envision that ultimately being paid off out of cash generation of CNA? Or could they finance it through third parties? Are you indifferent between the two of those?

I would say all of the above. We -- the CNA Board will do whatever is in the best interests of CNA. And I know that the Board would like to pay that off as rapidly as possible, because once that is paid off, then that removes an impediment to paying common dividends to CNA shareholders.

Okay. And then on a different topic, Jim, you mentioned the investment portfolio, can you speak to how your assessment of the economy and of the capital markets overall impacts your relative appetite for making an acquisition?

When you talk about the investment portfolio, I wasn't sure if you were going to talk -- I thought you were going to talk about the CNA investment portfolio, but are you instead talking about Loews?

Yes. The holding company making sort of a new platform acquisition.

We are always looking. The issue right now though, I believe, is exactly what's going to happen in the economy. My guess is that the economy is going to be very sluggish for a long time. Maybe on the order of, if we're lucky, 1% to 2% growth. And I don't see this as a typical recession. And I don't see this as a period where we're going to have 4% to 6% growth for the next year or so. I think it will be very sluggish. And I think that additional taxes and mandates will just be additional headwinds for the economy.

I say all that as preamble because, if we were to buy anything, I would not want to pay up in price anticipating that the economy and therefore business and the business cycle will resume. So, like it said on the front page of the Wall Street Journal, jittery companies stash cash. You can count Loews Corporation as one of those companies.

Okay. Thank you very much.

Our next question comes from Steven McSorley at Instanet. I'm sorry, our next question comes from Michael Millman of Millman Research Associates.

Thank you, its actually Michael Millman. Sort of following up on some of these acquisitions, maybe you've talked about hotels in the past where we are seeing some -- or may see some improvement. Can you talk about, if you're looking for assets in hotel purchases or are you looking for brands or either one?

We're not looking for brands. We believe we have a very, very good brand. What we would be looking for would be hotel assets to add to our brand.

There was an enormous growth in upper -- what they call upper, upscale hotel properties over the past decade. A number of those have gotten into financial distress of one sort or another. And we think that over the coming few years there will be opportunities to make acquisitions of those properties at attractive prices. But as I just said to David Adelman, our anticipation would be to buy those properties based on the current state of business, not somebody's assumption that business going forward is going to improve substantially.

Well, the other side of that coin is selling properties. And would you be a seller, A, generally, and B, would you be a seller if there wasn't a big capital gain tax involved? And so -- .

Well, there is a capital gains tax involved, so it's difficult to say what we would do. In terms of whether we're a seller, no, we're very happy with our portfolio.

Thank you.

Our next question comes from Steven McSorley of Instanet. Steven, your line is open. Our next question comes from Steve Velgot of SFG.

Yes, Jim, I had a question about the strategic rationale for CNA as part of the holding company, if -- . I imagine that Loews will continue to be a holding company for the foreseeable future, but can you just relate for us again, why it's important to maintain ownership in

Sure. CNA is an integral part of Loews. Loews has owned or controlled CNA for almost 35 years now. And we describe ourselves as unabashedly a conglomerate. And we think that in that context, CNA fits in very well with Loews. We like the outlook and prospects for CNA. And so it's staying where it is.

And if I could just elaborate then, I had -- from various investors who, as I'm sure you're aware, note that Loews stock trades below where even the public holdings trade.

Right.

I don't expect that that situation would remain indefinitely. But is there a point at which either the Management or the Board might look to do something strategic in order to change what's -- that situation in the market?

Well, there are two things you can do. You can complain about the price of the stock and the value of the stock, or you can do something about it. And there are multiple ways to do something about it. One is as, I guess as you suggest, is to cast some holdings overboard. We're not looking to do that.

The other way to deal with that is to buy in shares, and in the past four months, the Company's bought in 4.5 million shares. It's, as I like to say about our share repurchase history, we have a long and glorious history of share repurchases, buying in shares when the stock trades at a discount.

Just to get on my soapbox again and provide an advertisement, Loews's stock has appreciated, Loews shareholders for the past 50 years have had a 16% rate of return on their shares, compared to 9% for the S&P 500. So if you had $1 50 years ago and you invested it in the S&P 500, it would be worth about $75 now. On the other hand, that $1, if you had invested it in Loews at 16%, would be worth $1,600 or $1,700. So the appreciation of Loews has been quite extraordinary.

And one reason for that has been that we have aggressively bought in the shares. In 1970 we had the equivalent of 1.3 billion shares outstanding, today it's below 430 million.

For the life of me, I do not understand why the market values Loews so cheaply. But having said that, I'm not complaining about it. Instead we're buying in the shares and we're using that as an opportunity to create long-term value for all Loews shareholders.

Beyond buying in the shares and doing what we're doing, I don't know what else we can do to close that valuation gap. It is a great frustration to me. But also I see it as a great opportunity

And, Peter, could you provide us with the specific holding company position of cash equivalents and REPO's at the end of the quarter.

Just cash equivalents and REPO's?

Well, what you typically -- I think the non-long-term investments that are at the holding company.

Well, we have treasury bills and government REPO's and short-term investments of about $1.8 billion.

Great, thanks.

And then we have another $750 million of fixed maturity treasuries, and then the rest is other odds and ends.

Thank you.

(Operator Instructions). Your next question comes from Adrian Day of Adrian Day Asset Management.

Yes, good morning. I had a question on hotels, I know you've had a couple of comments on that. You talked about the comparisons with last year, but I'm wondering if you are seeing any recent trends, not so much at the beginning of this year, but say, over the summer and into the fall. Are you noticing anything in particular?

No, we are not seeing significant improvement in the business. It's still sluggish. The most sluggish part is the group business, especially at resort hotels. Because of what's happened in the past year with criticism coming from our elected officials, it is -- corporations now view it almost as taboo to have a meeting at a resort hotel. And there's not much that we can do about that, other than market as aggressively as possible.

City hotels are doing marginally better, but overall the business is still, in no way robust nor is it seeming to be moving in that direction.

Okay, okay. Thank you.

At this time there are no further questions. I'll turn it back to Management for closing remarks.

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

Thank you for participating in today's conference call. You may now disconnect.