洛茲集團 (L) 2010 Q2 法說會逐字稿

Good morning, my name is Jackie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Loews second quarter earnings conference call.

(Operator Instructions)

After the speakers', remarks there will be a question-and-answer session.

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

Thank you, Jackie. Good morning, everyone. Welcome to Loews Corporation's second quarter 2010 earnings conference call. A copy of the earnings release may be found on our web site, 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 reconciliations for those comparable GAAP measures. After Jim and Peter have discussed our results we'll have a question-and-answer session. I'll now turn the call over to Loews Chief Executive Officer, Jim Tisch.

Thank you, Darren, and good morning. And thanks all of you for joining us on the call today. For the second quarter, Loews net income increased to $366 million from $340 million in the second quarter of 2009. This increase reflects an investment gain of $1 million this year versus a net investment loss of $178 million in the second quarter of '09. Loews reported income before investment gains and losses of $365 million versus $518 million in the second quarter of '09. This decline is primarily the result of decreased earnings from Diamond Offshore, CNA and HighMount, and lower investment income from Loews' trading portfolio.

CNA reported overall solid operating and financial performance for the second quarter, although it's net operating income declined versus the prior year quarter. The primary drivers of this decline were decreased limited partnership results and decreased current accident year underwriting results, which were partially offset by favorable net prior year development. Subsequent to the close of the quarter, CNA announced an agreement to transfer its legacy asbestos and pollution liabilities to National Indemnity, a subsidiary of Berkshire Hathaway. We believe that this transaction will effectively eliminate CNA's asbestos and pollution reserve risk, as well as any reinsured dispute and credit risk.

In the past, our earnings conference calls has given me an opportunity to do a quarterly lecture series on current topics in insurance accounting, and I consider the proposed changes to the accounting rules put forward by the FASB to be a worthy topic for today. On May 26, the FASB published an exposure draft of an accounting standards update that would significantly change mark to market accounting rules for insurance companies and other financial institutions. The proposed rule change - - rule changes would require insurance company to mark substantially all of their investments to market, each quarter, through the income statement. Fluctuations in the market price of these securities would, therefore, flow through both the quarterly income statement and balance sheet, instead of just the balance sheet, as now occurs under the current rules. Importantly, this new methodology would apply to securities currently classified as available for sale.

So let's examine the impact of the proposed rules on CNA's reported earnings during the tumultuous market conditions of '08 and '09. If the proposed rules had been in effect in '08, Loews and CNA would have recognized, through the income statement, additional investment losses of approximately $5 billion. When CNA's portfolio recovered in value in '09, the proposed rules would have resulted in investment gains of almost $5 billion being reported on the income statement. From '08 to '09, Loews' and CNA's reported results would have swung by $10 billion when, in our view, not much had really changed with respect to the underlying insurance business.

The problem was the extended use of mark to market accounting is that this methodology does not reflect the way an insurance business is run. The way that we, and other insurance managements, think about or manage our businesses. The wild and unpredictable swings in unrealized investment gains and losses will oftentimes dwarf the businesses' underwriting results and net investment income, not within the insurance companies' ability and intent to hold the investment security to recovery. While the stated goals of these rules is to enhance transparency, mark to market will do the opposite by obscuring and camouflaging the underlying operating results. If these new accounting rules are imposed, I predict that the first thing that security analysts will do when an insurance company announces its results is adjust the reported earnings for the unrealized investment gains or losses to get to the underlying operating income number. As it is currently reported under existing accounting rules.

The comment period for the FASB's proposed accounting standards update extends through September 30. I encourage you to send your cards and letters and, if we want to get with the 21st century, your emails, as well, to let them know that the proposed rules do nothing to improve transparency, and they do a lot to obscure operating results. And, now back to our regularly scheduled programming.

For the second quarter, Diamond Offshore reported a reduction in revenue that was largely the result of the decline in renewal contract day rates from peak levels and a decrease in overall average fleet utilization. Given these factors, along with a continuing uncertainty caused by the drilling moratorium in the US Gulf of Mexico, Diamond has announced a reduction in its quarterly special dividends. Its regular, and special dividends payable, in the third quarter were reduced to a total of $0.875 from a total of $1.50 in the prior quarter. Diamond stated that it felt that it was prudent to retain cash to maintain financial strength and strategic flexibility, as well as to position itself for potential rig acquisition opportunities.

In July, Diamond announced the sale of its high-specification jackup rig, the "Ocean Shield" to Ensco for $186 million. This rig is currently working for Apache Corporation in Australia under a tone contract, which Ensco will assume. This was a one off opportunistic transaction that Diamond made in order to increase its funds for potential investment in deepwaters assets, such as last year's purchase of the Ocean Valor and the Ocean Courage.

Loews finished the quart with holding company cash and investments of $3.4 billion. During the quarter, we repurchased 1.5 million shares of our common stock, which is considerably less than our share repurchases in the prior three quarters. While we typically do not comment on the factors that guide our decisions to buy back our stock in any given quarter, I will point out that CNA's discussions with National Indemnity, regarding the loss portfolio transfer transaction, prevented us from repurchasing our stock during much of the quarter. Absent that factor, the total would probably have been higher than the 1.5 million shares purchased. And with that, I will now turn the call over to Peter Keegan, our Chief Financial Officer. Pete?

Thanks, Jim, and good morning, everyone. For the quarter, earnings per share improved to $0.87 from $0.78 in the prior year quarter, primarily as the result of realized investment gains at CNA compared to investment losses in the prior period. Offsetting this were a decline in results of three of our subsidiary companies and a decline in holding company investment income.

Book value for Loews common share increased to $43.53 as of June 30 from $39.76 at the beginning of the year. For the quarter, realized investment gains at CNA totaled $12 million after tax and noncontrolling interest, versus realized investment losses of $178 million in the prior year quarter. The driver of improvement was a reduction in other than temporary impairment losses. CNA's contribution to Loews' net income before investment gains and losses decreased to $247 million for the quarter, from $277 million in the prior year quarter. The decrease resulted mainly from lower investment income, which included a significant decrease in limited partnership results versus the prior year period in which CNA recorded exceptional limited partnership investment results. CNA's results for the quarter benefited from a favorable net prior year development in its core property and casualty operations.

The second quarter combined ratio for PNC operations was 89.4 compared with 98.1 in the second quarter 2009. With the difference primarily attributable to 18.4 points of favorable prior-year development. CNA has reported favorable prior-year development for 14 consecutive quarters, reflecting disciplined underwriting and reserving practices.

In his comments, Jim mentioned that CNA's entered into an agreement with National Indemnity under which CNA's legacy asbestos and environmental pollution liabilities will be reinsured. The closing of the transaction is expected to occur in the third quarter of 2010, at which time Loews expects to recognize a loss of approximately $340 million after tax and noncontrolling interest. Diamond Offshore's contribution to net income for the quarter declined to $104 million from $181 million in the second quarter 2009. Compared to the prior year second quarter, operating revenues decreased by $111 million to $812 million, while contract drilling expense increased by $43 million to $349 million. The decline in revenue primarily relates to a decrease in day rates and an overall decrease in average utilization from 80% during the second quarter of 2009 to 76% for the second quarter of 2010. This increase in operating expense is primarily due to the addition of the Ocean Courage and Ocean Valor to Diamond's fleet, as well as higher amortization mobile expenses. And higher operating costs from rigs exiting the US Gulf of Mexico to operate internationally, where the operating cost structure is generally higher.

HighMount reported second quarter net operating income of $5 million versus $29 million in the prior year quarter. During the quarter, HighMount completed the sale of exploration and production assets located in the Antrim Shale in Michigan and the Black Warrior Basin in Alabama. HighMount's remaining natural gas exploration and production operations are primarily located in the Permian Basin in Texas. Compared to the second quarter of 2009, HighMount's operating revenues decreased by $42 million to $105 million. The sale of assets in Michigan and Alabama decreased revenues by $24 million, and the reduction in drilling activity in the Permian Basin, as well as lower average prices, decreased revenues by $19 million. Aside from discontinuing hedge accounting on derivative positions, no significant investment gains or losses were recognized on the sale of High Mount's Antrim Shale or Black Warrior Basin assets. Because HighMount utilizes the full cost method on of accounting, no gain or loss is recognized on the sale of reserve and sales proceeds reduced to capitalized cost pool.

During the quarter, HighMount's aggregate production volumes for Permian, Antrim, and Black Warrior assets are as follows. Natural gas production of 15 billion cubic feet at an average realized price of $5.19 per 1,000 cubic feet. Natural gas liquids production of 738,000 barrels, and an average realized price of $33.20 per barrel. And oil production of 68,000 barrels, at an average price of $71.08 per barrel. HighMount's production volumes for the Permian Basin are as follows -- natural gas production of 12.4 billion cubic feet, natural gas liquids production of just under 738,000 barrels, and oil production of 60,000 barrels. As of June 30, HighMount had hedges in place for approximately 79% of its estimated 2010 natural gas equivalent production, at an equivalent price of $6.26 per MCFE and 60% of estimated 2011 production at an equivalent price of $6.32 per MCFE. Boardwalk Pipeline's contribution to net income for the quarter increased to $21 million from $8 million in the prior year second quarter. Versus the prior year second quarter, revenues increased by $55 million to $256 million, primarily due to pipeline expansion projects. These increases were partially offset by a $10 million decrease in interruptible and short-term firm transportation services caused by lower basin spreads between delivery points and Boardwalk Pipeline's pipeline system. Operating expenses in the quarter increased by $15 million to $165 million, primarily from an increase in natural gas prices and consumed fuel related to the pipeline expansion.

In the second quarter, Loews' hotels income net increased to $4 million from $3 million in the prior year quarter. Revenue per available room increased to $152.82 from $139.21 in the second quarter of 2009. Occupancy for the quarter also increase to 73.6% from 69.8%. As of June 30, holding company cash and investments totaled $3.4 billion. During the quarter, we received $200 million in dividends and interest from our subsidiaries, we repurchased 1.5 million shares of our common stock for $56 million, and we paid $27 million of dividends to our shareholders. And, now, I'll turn the call back over to Darren. Darren?

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

(Operator Instructions)

At this time, we'd like to inform everyone in order to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Bob Glasspiegel with Langen & McAlenney.

Thank you for your monologue and accounting. I testified to FASB against realized gains and losses going above the line of income statement a long time ago, and I can tell you they seem to have very little interest in usability and functionality for insurance analysts and insurance investors in their thought process. So, I'm pessimistic that you'll be able to change their thought process, but I agree with the -- with the intent. And your prediction of what will happen is certainly right on.

Well, if you want to be pessimistic, then don't send your cards and letters. If you want a chance at changing it, then let your voice be heard because my guess is that a lot of (inaudible) are expressing their opinions loud and clear to the FASB. But, investment professionals who are actually responsible for managing money and doing serious published investment analysis are not being heard. And those are the people that really need to communicate with the FASB.

Okay. On Diamond, are properties starting to float around yet, or is this just a prediction for the future? Is there much traffic yet?

I assume you're talking about the rigs available for sale?

Right.

The for sale signs are not out. But, having said that, there are indicators that seem to be signaling that rig transactions will take place over the next six months to a year.

First of all, day rates are down significantly from their peak. There have been -- there are a number of rigs, floaters, that are in the yards, scheduled to come out of the yards that don't have contracts. There are many rigs where the owners are highly levered. And, now, with this latest event, the blowout in the Gulf of Mexico, that I believe has sent fifth and sixth generation rig rates down yet even lower. And, so, all of those factors lead me to believe that, as I said, over the next six to 12 months there will be rigs that become available for sale.

Would Loews be willing to commit more money to Diamond if there was an opportunity that was too big for Diamond itself to finance?

You know, I don't know. I-- never say never. And I don't like answering hypothetical questions. What I should say is that Diamond has already bought two rigs.

With the current - - with the current dividend policy, Diamond will continue to accumulate significant amounts of cash. And, my thinking, and I think the Board of Diamond, their thinking, is that Diamond will have the wherewithal to be able to make acquisitions on the road without any outside help.

Okay, last question. Is HighMount's quarter sort of representative of the run rate of current earnings? Or was there something -- I know their seasonality is well, but just looking at the year-over-year trends, should we look for -- if the current status of the markets continue sort of rough comparisons --

As a function of what our drilling program going forward is going to be. So I don't think -- and you don't know what that is, and we're not going to state what that is. We're not going to make a projection going forward. But, so I wouldn't assume that this is necessarily a run rate. Obviously , Bob, there's also noise in the quarter for the departure of the Michigan and Alabama

There was cause sort of for the disposition --

No.

Just you have the noise of the revenue decline because the assets left in the quarter. So that would be totally settled out in the third quarter.

Okay. I think I understand your answer. Thank you.

Thank you. And don't forget, send your cards and letters.

Your next question comes from the line of Michael Millman with Millman Research Associates.

Thank you. Sort of followup on the last. The company's $3.4 billion, it doesn't appear that at this point -- maybe I should ask this question. Is there -- do you see any of the subs needing -- maybe need is too strong, using some of the company's $3.4 billion?

Look, each of our subsidiaries are -- their marching orders are to finance their own capital needs, and what happened in '08 were really extraordinary events. And I -- I would expect that only in very, very extraordinary times will the subsidiaries need to come to the parent hat-in-hand looking for financing. Otherwise, for the public subsidiaries, we expect them to finance themselves.

So is it fair to say, then, that, that cash will accumulate until the company finds some outside investment?

As we've said before, we obviously hold some cashing reserve just because you never know what's going to happen in this world. But, we have cash in excess of that reserve amount that we feel we need, and that can be used to repurchase shares. It can be used to buy other assets, either companies or individual assets. Or, it can just stay and accumulate on our balance sheet. We don't let it burn a hole in our pockets.

And regarding the whole REVPAR, if I've got the right numbers, it looks like it was up about 10%, and, yet the earnings were up very little. Was there something else going on?

Nothing material to talk about, no.

Is there any reason for us to believe that if REVPAR is up 10%, earnings should grow better than $1 million?

There's nothing extraordinary to talk about.

Okay. Thank you.

Your next question comes from the line of David Adelman with Morgan Stanley.

Hi, good morning.

Good morning, David.

Were there any noteworthy change, first of all, in the make-up of the holding company investment portfolio during the quarter?

No, nothing -- nothing of any great significance.

Okay. And then Jim, from time to time the last couple of years, you've updated the marketplace on your sort of overall views about the economy and sort of the -- the appetite internally for acquisitions. Could you just bring us up to date on your thinking there as we stand today?

Jim, my view on the economy, actually, is the same that it's been for the past two or three years. That we are in a -- we had the decline that we had in '08, and going into '09, came about because of an overleverred US economy, and that as a result of the economy being -- economy being overlerred, it is very difficult to get that bounce off the bottom that you would ordinarily expect from a recession.

So we're -- we're now growing probably, the last quarter -- the second quarter I think came in at 2.4%. And, many analysts are now forecasting that going forward in the second half of the year we could have growth of less than that amount because of the fiscal drag coming about from state governments as well as the -- the way the stimulus money starts to ebb, as well. So, I'm generally in agreement.

I think that the second half of the year, (inaudible) should probably be in the 0% to 2%. And, I think going forward, it's going to be very difficult to get this economy cranking at a faster rate of growth because of the continued high levels of debt. So, when we factor that into our forecasts for individual companies, I just don't understand how the bottoms up -- bottoms up analysis of earning that gets you to the enormous growth in S&P earnings is actually going to come to fruition. And, so, when we think about acquisitions, we think about it in the context of a slow growth economy as opposed to an economy that's going to take off.

Okay. Thank you.

Thank you.

Again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of Josh Class with Manikay Partners.

Hi, Jim. I was wondering if you could update us to the extent the DNA transaction with Berkshire expedites CNA's ability to repay the preferred shares?

Well, that -- the Berkshire transaction significantly de-risks the CNA balance sheet by taking, hopefully forever, CNA's asbestos liability off the table. And, I think that a number of our -- a number of CNA's regulatory and rating constituencies understand that, as well. We are -- we, Loews, are hopeful that CNA will pay down the preferred. CNA owns -- it's nice to receive the 10% dividend on that preferred. And, it will be missed when the preferred is paid down.

But, remember, once that preferred is paid down, then, depending upon a lot of factors -- but CNA could be capable of paying a dividend to all its shareholders. And, so, Loews could receive cash flow from a CNA dividend on its common stock, as opposed to a dividend on its preferred stock. So, I heard the -- I heard the CNA call, I heard people worrying that the -- the repayment of the Loews preferred had to be mutually agreed by Loews and CNA. And, I'll just remind everyone that CNA has already paid off $250 million of that preferred by mutual agreement of the two companies.

Great, thank you.

Thank you. At this time, we have no further questions. So, I'll now turn the call back over to Darren Daugherty for any closing remarks.

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

Thank you.

(Operator Instructions)

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