洛茲集團 (L) 2010 Q3 法說會逐字稿

Good morning. My name is Julianne, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Loews third quarter 2010 earnings conference call. (Operator Instructions) Thank you.

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

Thank you, operator. Good morning, everyone.

Welcome to Loews Corporation's third quarter 2010 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, Chief Executive Officer of Loews, and Peter Keegan, 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 would 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.

And with that, I will now turn the call over to Loews' Chief Executive Officer, Jim Tisch.

Thank you, Darren. Good morning, and thanks for joining us on our call today.

For the third quarter, Loews reported net income of $36 million versus $468 million in the prior year's third quarter. The decline primarily reflects a $328 million after-tax charge related to CNA's previously reported agreement to cede its legacy asbestos and pollution liabilities to a subsidiary of Berkshire Hathaway.

Additionally, all results reflect lower net income from Diamond Offshore, which saw lower rig utilization rates, due primarily to the Deepwater Horizon accident and its aftermath.

Apart from the charge associated with the legacy asbestos and pollution liability loss portfolio transfer, net operating income SG&A declined, in large part as a result of decreased limited partnership income. This was partially offset by favorable prior-year reserve development of $93 million in CNA's property and casualty operations, which lowered the calendar year loss ratio by over six points. This was CNA's fifteenth consecutive quarter of favorable prior-year reserve development, reflecting disciplined underwriting and reserving practices.

CNA's investment portfolio continued to perform well, with its unrealized gain position improving by $1.2 billion from the end of the second quarter. Over the same period, CNA's book value increased 6% to $42.76. But before you celebrate too much, I would caution that increases in interest rates and credit spreads can negatively impact CNA's unrealized gain position and book value per share.

During the third quarter, CNA completed a $500 million debt offering with proceeds going towards paying down the $1 billion of outstanding senior preferred stock held by Loews. Additionally, CNA today announced that it intends to redeem, out of internally generated funds, the remaining $500 million of preferred stock during the fourth quarter. The full redemption of the $1.25 billion of preferred securities issued just two years ago reflects the strong financial position of CNA.

This morning, CNA also announced that it has proposed to acquire, for $22 per share, all of the outstanding shares of common stock of its 62% owned subsidiary, CNA Surety Corporation, that are currently not owned by CNA. This offer, representing a 14% premium to the closing price on Friday, provides CNA Surety's minority shareholders the opportunity to monetize their investment at a substantial premium to the current and historical stock price.

For CNA, the transaction represents an investment in a business that it knows well and, at the proposed price, is expected to be modestly accretive to earnings and have only a slight impact on its capital position. The transaction offers compelling benefits for the shareholders of both companies and is consistent with CNA's strategic objective to grow its specialty franchise.

Diamond Offshore's third quarter results were negatively impacted by the US Gulf of Mexico drilling moratorium, which has caused a contractual force majeur dispute with a customer, related to the Ocean Monarch. Aside from rigs being idle in the Gulf, Diamond's results for the quarter also reflect higher than normal rig down-time, related to special surveys, shipyard maintenance and acceptance testing, as well as the mobilization of rigs out of the US Gulf. Although the moratorium has been lifted, the Bureau of Energy -- Ocean Energy Management has issued drilling permits at a markedly slower pace than before the moratorium. Drilling cannot commence unless companies obtain these permits. And Diamond believes the permitting process will be slow for the foreseeable future, especially for new, deep-water oil wells.

Fortunately for Diamond, it only has three marketed floating rigs remaining in the US Gulf, and all of these rigs have had their blow-out preventers independently certified in accordance with regulations, and have had the certifications accepted by the DOEM. While a degree of uncertainty persists in the US Gulf, international markets remain relatively stable, supported by healthy oil prices. Diamond's Board of Directors recently declared regular and special dividends amounting to $0.875 per share, payable in the fourth quarter, which is the same amount that was paid in the prior quarter. These dividends represent over $60 million of cash to be received by Loews in the fourth quarter.

Boardwalk Pipeline's third quarter results reflect higher revenues, mainly attributable to gas transportation on its major pipeline expansion projects. An important market dynamic is the basis spread between (inaudible) receipt and delivery locations on Boardwalk's pipeline systems. These spreads have narrowed adversely, affecting the transportation rates that Boardwalk is able to charge on the spot market. However, strong long-term demand for new pipeline capacity has created opportunities for expansion projects that yield high utilization rates from these new assets.

One such expansion project, the Haynesville project, was placed into service last month. Customers have contracted substantially all of the firm capacity on this project, at a weighted average contract life of more than 12 years.

Another project, the Clarence compression project, has received FERC approval to proceed and is expected to be in service late next year. Customer contracts for this project have a weighted average life of approximately 11 years.

Last month, Boardwalk received approval from the Pipeline and Hazardous Material Safety Administration to operate its Fayetteville lateral at the higher operating pressure for which it was designed. With this final approval from [FEMSA] in place, all of Boardwalk's major pipeline expansion projects have now been approved to operate at their full design capacity.

Boardwalk declared a quarterly distribution of $0.515 per unit, continuing its track record of increasing cash distributions to unit holders each quarter since its initial public offering in 2005. Limited and general partner distributions represent approximately $66 million of cash to be received by Loews in the fourth quarter.

At HighMount Exploration & Production, we were pleased that the Company has named Steve Hinchman as President and Chief Executive Officer. Steve possesses 30 years of experience in the E&P industry, most recently as Chief Operating Officer of Callon Petroleum Company, and prior to that, as Senior Vice President of Worldwide Production for Marathon Oil Company. His leadership and experience will be of great value to HighMount's ongoing success.

And finally, during the quarter we repurchased 2.3 million shares of Loews common stock, at a total cost of $84 million or an average of about $36.50 per share. This brings the number of outstanding shares to 416.2 million as of September 30.

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

Thanks, Jim, and good morning, everyone.

For the third quarter, Loews reported earnings of $0.09 per share, versus $1.08 per share in the prior year quarter. During the quarter, book value per Loews common share increased 4% to $45.31, primarily as a result of the performance of CNA's investment portfolio.

In the quarter, investment gains at CNA were $37 million, after-tax and noncontrolling interest, versus investment losses of $61 million in the prior year quarter. Improvement was driven by net transaction activity and lower other than temporary impairment losses, as compared to the 2009 period. CNA contributed a net loss of $140 million to Loews' operating income for the quarter versus income of $304 million in the prior year quarter.

Results in CNA's core P&C operations improved but were offset primarily by the following items. A $309 million charge, net of tax and non-controlling interest, for the previously discussed loss portfolio transaction, reduced limited partnership investment income, which was $68 million pretax versus $145 million in the prior year quarter, and the third quarter of 2009 included a $55 million gain, net of tax and non-controlling interest, from a settlement that resolved litigation related to the placement of personal accident reinsurance. These items were partially offset by favorable prior year reserve development of $93 million, pretax.

Diamond Offshore's contribution to Loews' net income for the quarter declined to $93 million from $170 million in the third quarter of 2009. Diamond's total revenue decreased to $833 million from $919 million in the prior year quarter, while total expense increased to $535 million from $445 million. The decrease in revenue was primarily related to lower day rates combined with an overall decrease in average utilization, which was particularly affected by a decline in drilling activity in the US Gulf of Mexico. Diamond's revenue for the quarter includes a pretax gain of approximately $31 million related to the sale of a jack-up rig, Ocean Shield, on July 7, 2010. The rig was sold for a gross purchase price of $186 million.

HighMount reported third quarter net income of $19 million, versus $40 million in the prior year quarter. The decline reflects the sale in the second quarter of 2010 of exploration and production assets located in Michigan and Alabama, which represented approximately 17% of HighMount's assets at year-end 2009.

HighMount's operating revenues for the quarter decreased to $98 million from $144 million in the prior year period. Of the decline in revenues, $35 million is attributable to the sale of assets, and $11 million is due to lower realized sales prices and a reduction in drilling activities.

HighMount's third quarter production volumes are as follows. Natural gas production was 12.4 billion cubic feet, at an average realized price of $5.56 per thousand cubic feet. The natural gas liquids production was 759.3000 barrels, at an average realized price of $35.81 per barrel. And oil production was 59.5000 barrels, at an average price of $69.61 per barrel.

As of September 30, HighMount had hedges in place for approximately 82% of its estimated fourth quarter natural gas equivalent production, at an equivalent price of $6.43 per Mcfe, and 68% of estimated 2011 production, at an equivalent price of $6.31 per Mcfe.

Boardwalk Pipeline's contribution to Loews' net income for the quarter increased to $21 million from $9 million in the prior year third quarter. Revenues increased to $264 million from $206 million in the prior year quarter, primarily due to additional gas transportation through-put on pipeline expansion projects. Operating expenses in the quarter increased to $172 million from $155 million, primarily from an increase in natural gas prices and consumed fuel related to the pipeline expansion.

Loews hotels reported a net loss of $2 million, versus a loss of $15 million in the third quarter 2009, which included impairment charges of $12 million after-tax related to two hotel properties. Revenue per available room increased to $143.90 from $128.27 in the third quarter of 2009. Occupancy also increased to 74.6% from 71.5% in the prior year third quarter.

As of September 30, holding company cash and investments totaled $4 billion. During the quarter, we received $500 million from the repayment of senior preferred stock by CNA, we received $147 million in dividends and interest from its subsidiaries, we repurchased $84 million of common stock, and we paid $26 million of dividends to our shareholders. During the fourth quarter, we expect to receive $500 million from CNA upon redemption of the preferred stock that remains outstanding.

And now, I will turn the call back over to Darren.

Thank you, Pete.

Operator, at this time, we will open it up for questions.

Thank you. (Operator Instructions). Your first question is from the line of Bob Glasspiegel with Langen McAlenney.

Bob, before you say anything, I want to give our operator an award. I think that is the first time I have ever heard your name and your firm's name pronounced correctly. Congratulations.

I don't know if I deserve any credit on that, but I will take it.

Let's see. On the use of proceeds from the billion dollars that you are picking up from the preferred, does that have any implications to how you think about excess capital at the parent? I think, over the last two or three years, there was a belief that maybe some of the capital cushion was to keep around just in case Diamond and CNA might need the money. Now that it is clear that both of those companies are -- I'm sorry, Boardwalk and CNA. Now it is clear that both of those companies are clearly on their feet, without the parent's help, does it have any implications to how you think about capital at the parent?

First of all, just for clarification, we received $500 million redemption in the third quarter, and we anticipate that we will receive the remaining $500 million redemption in the fourth quarter.

I also think you are referring back to the period from say the second half of 2008 through, say, the first half of 2009. That was a period of -- if you remember, and most of us cannot forget, of enormous financial distress and markets that were closed to just about everyone, including AAA issuers.

And so, we said at the time that we wanted to make sure that all of our subsidiaries were entirely covered in terms of their financial needs before we would use our cash for anything else. Since that occurred, we have now, by the end of the year, hopefully, will be repaid in full by CNA, and the funds that we had put into Boardwalk, some of them we've received back through the sale of Boardwalk shares, and the rest we own at a substantial gain.

In terms of our attitude now, it is similar to what it was back then. Number one, we still want to make sure that we have more than enough liquidity at Loews to handle all of our needs. But also, obviously, with $4.5 billion potentially on our balance sheet by the end of the year, that is more than I could see us needing for any internal issues. So we continue to look for opportunities to deploy that cash.

But, as I like to say all the time, we won't let cash burn a hole in our pockets. And so we will be very patient and will not let the accumulation of the cash on the balance sheet put us in a position where we do a transaction that is not in the shareholder's best interest.

Okay. Thank you for the thoughtful answer.

Hotels? Can you give us a minute or two on the state of the business? It seems like the occupancy and price bars are going in the right direction. The accounting, I assume, is just a function of catching up to history and hard asset value, but are things getting better or worse, in general? Is this a potential source of acquisitions or divestitures? More on the margin --

I would say things are getting somewhat better. Somewhat better is in between marginally better and a lot better. We have seen average room rates increase somewhat. We have seen pretty good occupancy, and that has come about generally from the transient traveler, as opposed to the group traveler.

We are starting to see some signs of life again from the group travelers. If you remember, the group travel business was pretty much killed off in 2008 as people in Washington were criticizing AIG and others -- AIG and Citibank and others, for having group meetings. As I said, that is now coming back, but it is nowhere near where it was.

When we look at RevPAR, which is the revenue per available room, we see that it has improved versus its low, but it is still about 20% below the levels that it achieved in 2007. So there is still plenty of room for improvement.

More a buyer than a seller?

I would say neither. It is sort of unbalanced.

Okay. Thank you.

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

Good morning, Jim.

Good morning.

First, can you comment as a follow-up to the earlier question, about your sort of broad assessment of the acquisition environment? Do you think -- what do you think about pricing in the marketplace of transactions that you've passed on or looked at, the financing environment, and so forth?

I think those folks from BlackRock actually said it pretty good. Many things that we have seen have traded at very significant prices. I think that is because many of the private equity firms are hungry to invest what funds they have, and so we have seen prices at relatively high levels. That, combined with the fact that the financing markets, both the bank market as well as the high yield market, have also improved rather significantly. It means that private equity funds can pay pretty high prices. Combined with the fact that there are really aren't a lot of transactions that are taking place. Overall, I would say that prices are pretty high.

Okay.

And then secondly, at HighMount, can you talk sort of conceptually about what approach or what the business may be doing differently in light of low natural gas prices? Whether it is things that can be done operationally or strategically to try to enhance value.

We are doing a few things. I will fill in more of the blanks next quarter, after Steve Hinchman has had a chance to be at the Company for more than a month.

A few things that we are doing now is that we are being very careful, in terms of our drilling program and the number of rigs that we are using in order to drill in our Sonora field.

And the other thing we're doing is that we are focusing, like a number of other gas exploration and production companies, on drilling what we would call wet gas. That is gas that has a significant amount of natural gas liquid in the mix. A number of the constituents of natural gas liquids trade off of oil prices as opposed to gas prices. And so by drilling for wet gas now, you are able to achieve better economics than if you go simply for dry gas.

Let me talk more on the strategy of HighMount in the next quarter.

Okay. Thank you.

Your next question is from the line of Adrian Day with Adrian Day Asset Management.

Good morning. I had a couple of questions, if I may, on the cash at the Company level. I just want to make clear, I am not in any way suggesting you should go out and spend it, if you don't see anything that is worth buying. I have total confidence in your management. I was just wondering, with more cash on the balance sheet, are you finding you're managing that money more actively, or doing more with it, or is it still pretty much the same?

The other question I had, actually, was on the dividend. You know, I'm a long-term investor, because I have total confidence in your management, I would truly like to be getting a little bit more of a sort of income from your stock so that I could, indeed, hold it forever and never have to sell it. Have you thought about that?

Let me talk about the management of the cash, first of all. Our portfolio has not changed significantly. We have equity securities representing between 10% and 15% of the $4 billion that Loews has on its balance sheet. And then we also have an investment in limited partnerships, which are fairly liquid, that also represents another 10% to 15% of the portfolio.

Okay.

And then beyond that, we have the standard run of securities, many of which yield close zero, repo's, and other short-term investments. And then just some modest fixed tern investments.

This quarter, the increase that you saw in investment income at the Loews level was due primarily to the change in market value of that portfolio's equity securities as well as the limited partnership investments.

Okay.

In terms of dividends, that is an issue that, obviously, is entirely up to the Board of Directors. As you know, historically, Loews has not been a company that pays out a high percentage of its net income in the form of dividends, but instead we've used the cash in order to, number one, repurchase our shares, and number two, make acquisitions.

Just to remind you of our long and glorious history of share repurchases, today we have outstanding about one third of the number of shares that were outstanding in 1970. It is my belief that the significant outperformance of Loews versus the S&P 500 over those years was due significantly to the share repurchases that took place over that time period.

That is all a long way of saying that it is in our DNA to use the Loews cash very selectively in order to increase asset values. In my mind, whether the Company pays a dividend or -- a higher dividend or a lower dividend, the value will be reflected in the shares of the stock. So to the extent that you'd want the Company to pay a higher dividend and it's not paying it, then by selling off 1% or 2% of your shares every year, you should be able to achieve the same economics as if the Company had paid a higher dividend.

Right, right. It is very painful every time I put a sell in, by the way.

I can't help you on that. Maybe you need to talk to your shrink about it.

Got you. Thank you.

(Operator Instructions). Your next question is from the line of Mike Shinnick with Wasatch.

Hi, Jim.

Good morning.

The question is a follow up there on how you think of capital allocation. You mention share buyback as, in a sense, kind of the first priority. I was wondering if you could talk a little more in terms of your willingness to be more aggressive on the buyback versus buying other passive investment equities or more type control positions. Are you looking at, you know, some other hard assets particularly in the nat gas space or others are right now? Just how you think about that mix of opportunities.

We have a general rule that we don't talk about our share repurchases, other than to basically report what we have repurchased at the end of the quarter. I can't give you any help as to whether we are more or less aggressive.

Let me just say that in deciding how to allocate the Company's capital at the holding company level, we try to weigh carefully acquisitions, share repurchases, or just retaining the cash in the Company itself. And there is no set formula for that, but it is something that we talk about constantly.

Okay. In particular, you gave an interview to Bloomberg maybe about a month ago, and you were talking about finding value in global multinationals, good balance sheets, high dividend yields, et cetera, versus bonds, and I was wondering if you could comment some more on that. Are you, in essence, buying more equities just from a passive position where you wouldn't move to a control?

Well, now that you mention it, all I can tell you is, I was right. In the past month or six weeks, since we mentioned that, stocks are up significantly and you see the result of that, in fact, in the returns on investment income -- the investment income results for Loews for the past quarter, that reflects what is going on in the equity markets, and primarily the stocks that we've owned, which have been oftentimes large-cap dividend paying stocks, where at the time that we bought them, the dividends were close to or in excess of the yield on 10-year Treasury securities.

Okay. Thank you for that.

And there are no further questions at this time. I will now turn the floor back to Darren Daugherty for any closing comments.

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