洛茲集團 (L) 2010 Q4 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 fourth-quarter 2010 earnings conference call. (Operator Instructions). Thank you. I would now like to turn the call over to Darren Daugherty, Director of Investor Relations. Please go ahead.

Thank you, Jackie. Good morning, everyone. Welcome to Loews Corporation's fourth-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, the Chief Financial Officer of Loews. Following our prepared remarks this morning, we will have a question-and-answer session.

Before we begin, however, I will remind you that this conference call might include 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, which is included in the Company's 10-K and 10-Q filings with the SEC.

During the call today, we might also discuss certain non-GAAP financial measures. Please refer to our security filings for reconciliations to the most comparable GAAP measures.

I will now turn the call over to Loews Chief Executive Officer Jim Tisch.

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

Results for the quarter and the full year reflect growth at Boardwalk Pipeline, steady performance at CNA, and some ongoing challenges facing Diamond Offshore, HighMount E&P, and Loews Hotels.

CNA reported good results for the fourth quarter, benefiting from increased investment income and favorable prior-year developments in its core property and casualty operations. CNA has reported favorable prior-year reserve development for 16 consecutive quarters. CNA's results for both the quarter and the full year demonstrate its strong P&C underwriting and the progress it has made on its profit-improvement strategies.

CNA's underwriting discipline is demonstrated by five consecutive quarters of rate increases in the commercial segment, as well as continued strength of the specialty segment. CNA finished the year with a strong balance sheet and with a book value per share increasing by 13% during 2010.

During the fourth quarter, however, CNA's book value per share decreased by 5%, reflecting declines in CNA's net unrealized gain position, primarily as a result of higher interest rates.

I'm sure that most everyone understands the impact of interest rates on a fixed-income portfolio. Nonetheless, I want to reiterate that in the future, interest rates in the U.S. could and probably will rise, and if this occurs, CNA, along with most P&C insurance companies, would likely see a negative impact on the market value of their fixed-income investment portfolio, which would in turn negatively impact GAAP book value.

But there is a silver lining to our higher interest-rate environment. CNA will have the ability to invest its significant cash flows into higher-yielding securities.

CNA finished the year with a strong capital position, which allowed it in the fourth quarter to redeem the remaining $500 million of the $1.25 billion of preferred stock that was purchased by Loews in November of 2008. Additionally, given its strong capital position and solid insurance operations, CNA today announced the initiation of a $0.10 per share quarterly dividend. This action will deliver cash to CNA shareholders, including roughly $24 million to Loews in dividends in the first quarter of this year.

Turning to the offshore drilling industry, during the first quarter, Diamond Offshore announced it has entered into a contract with Hyundai Heavy Industries to build two ultra-deepwater drill ships. They are scheduled for delivery in 2013. These dynamically-positioned drill ships are designed to operate in up to 12,000 feet of water.

The total cost per rig, including conditioning, spares, and project management, is expected to be approximately $590 million. Two or three years ago, these ships would've cost more than $750 million.

To enhance its ultra-deepwater capabilities at attractive capital costs, over the last four years Diamond has purchased, ordered, or upgraded seven rigs capable of operating in ultra-deep waters of 10,000 feet. Upon completion of these latest two drill ships, Diamond will have 16 deepwater and ultra-deepwater rigs in its fleet.

Diamond's results for the quarter and the full year were negatively impacted by the U.S. Gulf of Mexico drilling moratorium. Although the moratorium was technically lifted in October, the Bureau of Ocean Energy Management has issued what I call a permit-torium. It is issuing very few drilling permits, so in effect, the U.S. Gulf of Mexico remains under a de facto drilling ban for the foreseeable future, especially for new deepwater oil wells.

Our orders for new drill ships, however, demonstrate Diamond's confidence in the strength of the international deepwater markets in the years ahead.

Moving to our natural gas E&P business, I'd like to take a moment to review the top three initiatives that HighMount will be focusing on in 2011. Since we initially formed our HighMount subsidiary in 2007, gas prices have been lower than we originally hoped or forecasted.

We remain optimistic, however, about natural gas over the long term, but where we sit today is with an abundant domestic gas supply and prices well under $5.00 per MCF. Given this pricing environment, HighMount's first initiative is to optimize its base business, which is located in the Sonora Field in the Permian Basin in Texas.

HighMount's second initiative is to utilize technology to exploit organic growth opportunities in the Sonora Field. These technologies include increased use of horizontal drilling and 3-D seismic to identify development opportunities. HighMount will continue to apply its expertise with unconventional reservoirs to identify new opportunities within the Sonora Field.

And the third initiative for HighMount in 2011 is to grow and diversify its portfolio through acquisitions. The focus will be on adding liquids to the mix, both wet gas and oil, which should offer better economics, given their strong pricing relative to dry gas. Additionally, HighMount will look for opportunities to take advantage of industry cyclicality by acquiring hydrocarbon assets at attractive prices.

At the holding company level, our cash and investments as of December 31, 2010, stood at $4.6 billion, or more than $11.00 per Loews share. During the fourth quarter of 2010, through January of this year, we bought 2.7 million shares of Loews common stock for a total cost of $104 million. And during all of 2010, through January of this year, we bought 11.9 million shares, or 2.8% of our outstanding common stock, for a total cost of $442 million.

Finally, in the next few weeks, a blog written by yours truly will appear on the Loews website. The blog will give you a chance to sound off on a panoply of issues, mostly related to Loews. Stay tuned for posts on current events, taxes, fracking, accounting, and whatever else may cross my mind. Comments and criticism will always be welcome, and I look forward to a lively interaction with members of the extended Loews Corp. community.

And now, I'll turn the call over to Peter Keegan, our Chief Financial Officer. Pete?

Thanks, Jim, and good morning, everyone.

For the fourth quarter, Loews's net income increased to $466 million from $403 million in the prior-year quarter. For the full year, Loews's net income increased to $1.3 billion from $564 million in 2009.

Full-year results include a few one-time charges. 2010 results include a charge of $328 million after tax and non-controlling interest related to CNA's lost portfolio transfer agreement with National Indemnity Company. And results for 2009 include an impairment charge of $660 million after tax related to the carrying value of HighMount's natural gas and oil properties.

For the quarter, Loews reported net investment losses of $22 million after tax and non-controlling interest, as compared to net investment gains of $46 million after tax and non-controlling interest in last year's fourth quarter. Negatively impacting the quarter were increased losses at CNA and sales of securities resulting from continued management of portfolio risk.

Net investment gains in the fourth quarter of 2009 included a $217 million gain from the sale of CNA's common stock holdings in Verisk Analytics.

For the full year, net investment gains were $27 million after tax and non-controlling interest, compared to net investment losses of $503 million in 2009. Net investment gains in 2010 were driven by improvements in capital markets, and included OTTI losses of $136 million versus OTTI losses in 2009 of $791 million, primarily consisting of residential and commercial mortgage-backed securities in CNA's investment portfolio.

For the fourth quarter, CNA's contribution to Loews's operating income improved to $297 million from $182 million in the prior-year quarter. The improvement was primarily driven by increased favorable net prior-year development. Additionally, investment income increased, primarily from higher limited partnership income and an investment shift during 2010 from lower-yielding, short-term, and tax-exempt securities to higher-yielding, taxable, fixed-maturity securities.

For the full year, CNA's contribution to Loews's operating income decreased to $609 million from $904 million in 2009. Excluding the charge associated with the loss portfolio transfer, CNA's contribution to Loews's 2010 operating income increased to $918 million. Operating income increased due to favorable net prior-year development, partially offset by decreased current accident-year underwriting results, including higher catastrophe losses.

For the fourth quarter, Diamond Offshore's contribution to net income decreased to $113 million from $128 million in the prior-year quarter. For the full year, Diamond's contribution to net income decreased to $446 million from $642 million in 2009. This decrease was primarily related to lower average day rates and utilization, which have been negatively impacted by the reduction in drilling in the U.S. Gulf of Mexico.

HighMount reported net income of $21 million for the quarter, versus $35 million in the prior-year fourth quarter. HighMount's net income for the full year was $77 million. Net income for 2009 as adjusted, excluding impairment charges of $650 million after tax, was $123 million.

The declines for both periods primarily resulted from the sale of non-core assets located in the Antrim Shale in Michigan and the Black Warrior Basin in Alabama during the second quarter of 2010. As a result of the Michigan and Alabama asset sales, a portion of HighMount's interest rate and commodity hedging activities were no longer probable of occurring, and hedge accounting was discontinued. This resulted in an after-tax loss during the first half of 2010 of $19 million, which is recorded under corporate and other investment gains and losses.

In the fourth quarter, HighMount's total production in the Permian Basin increased slightly to 17.5 billion cubic feet equivalent from 17.4 BCFE in the prior-year fourth quarter. However, the average realized price decreased to $6.12 per MCFE from $7.09 per MCFE for the same period.

Production details for the fourth quarter of 2010 are as follows. Natural gas production of 12.4 billion cubic feet at an average realized price of $5.93 per thousand cubic feet. Natural gas liquids production of 777,000 barrels at an average realized price of $35.84 per barrel. And oil production of 66,000 barrels at an average price of $80.05 per barrel.

As of December 31, HighMount had hedges in place that cover approximately 75.1% of its estimated 2011 natural gas equivalent production at an equivalent price of $6.35 per MCFE and 37.4% of estimated 2012 production at an equivalent price of $5.65 per MCFE.

As of December 31, 2010, HighMount owned 1.3 trillion cubic feet equivalent of net proved reserves, of which 78% were classified as proved developed.

Boardwalk's contribution to Loews's fourth-quarter net income increased to $34 million from $28 million in the prior-year quarter. For the full year, Boardwalk's contribution to net income increased to $114 million from $67 million in 2009. Boardwalk's results for the quarter and the year benefited from increased gas transportation revenues, primarily from pipeline expansion projects.

Distributable cash flow in 2010 increased to $448 million from $314 million in 2009. Boardwalk has declared a cash distribution for the fourth quarter of $0.52 per unit, continuing its track record of increasing cash distributions to unitholders each quarter since its initial public offering in 2005.

Loews Hotels' results for the quarter were breakeven, versus a loss of $4 million in the prior year. For the full year, net income was $1 million, versus a loss of $34 million in 2009. Results for 2009 included impairment charges of $16 million after tax related to the write-down of Loews Hotels' investment in a hotel property and $12 million after tax related to two hotel properties.

Average room rates for the quarter increased to $225 from $217 in the prior-year quarter, and occupancy increased to 67% from 62%, resulting in a 13% increase in revenue per available room.

For the quarter, net investment income from Loews's trading portfolio increased to $56 million from $16 million in the prior-year fourth quarter. For the full year, investment income was $123 million, versus $113 million in 2009. Improvements were primarily from larger invested cash balances and improved performance in the trading portfolio.

As of December 31, 2010, holding company cash and investments totaled $4.6 billion. During the year, we received $720 million in interest and dividends from our subsidiaries, $1 billion from the repayment of senior preferred stock by CNA, and proceeds of $333 million from the sale of 11.5 million Boardwalk Pipeline common units in February of 2010. During 2010, we repurchased $405 million of our common stock and paid $105 million of dividends to our shareholders.

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

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

(Operator Instructions). Robert Glasspiegel, Langen McAlenney.

If he's there, we can't hear him.

I'm sorry, Jimmy, I thought you said that you think that interest rates are going to likely go up. Do you think that's going to be driven by higher inflation or just supply/demand considerations? And is that affecting how you are positioning the portfolio duration-wise?

There are a whole host of reasons why I believe that interest rates are going to go up. Another one is a fear of inflation. Number two is just the dynamics in the market because at some point in time the Fed's quantitative easing is going to have to end, and when it does, that will be a $600 billion or $900 billion purchaser of fixed-income securities exiting the market.

So, for those reasons and a lot of others, at some point in time it is inevitable that interest rates will go up.

We are positioning the CNA portfolio to try to stay as short as we can, but also to recognize that we have liabilities that have to be matched. One-third of our liabilities reflect long-term care and other long-term liabilities that we match very close together. That's got about a 10-year duration to it. And then, the rest of the portfolio is -- runs about a five-year duration, and that's reflective of the liabilities that -- or the reserves that CNA has on its books for its bread-and-butter property and casualty business.

Thank you. Thoughtful answer. I was wondering if you could give us some guidance on how big of acquisition you theoretically could consider within the gas area?

You know, I don't know the exact size that we would look for. The thing that I know and believe is that in the course of the next few years, there will be plenty of opportunities to acquire gas and liquids properties.

And I believe that with the right management, there will be good opportunities to earn very good rates of return on funds invested in the business. And we are ready, willing, able to make the commitment of those funds.

But (multiple speakers) I don't want to give you a size for what we're looking at. Obviously, we're not looking to do a $10 billion transaction. So, beyond that, I can't really say what we're looking to do.

I think HighMount was originally $4 billion in total. Could you do something that big? You certainly have the cash available if you did want to.

You know, I'd prefer not to get into a game of narrowing down the size.

Okay. We've got the bread basket lower than $10 billion, though, you said, right?

A lot lower, yes.

David Adelman, Morgan Stanley.

Jim, just as a follow-up to that, do -- would you be willing to use holding company resources, financial resources to do a transaction, or would you limit an acquisition at HighMount to what HighMount on its own could finance?

No, we would use our Loews Corporation cash.

Okay. Secondly, during the quarter, was there any material change in the makeup of the holding company's cash and equivalent holdings? In other words, how you -- how you're investing it?

I wouldn't say there were significant changes. I would imagine that our investment in stocks increased because the stock market went up. And likewise, our investment in hedge funds probably increased because they, too, earned a few percentage points during the quarter. But otherwise, there were no real significant changes.

Okay. And then, on Loews Hotels, just out of curiosity, with RevPar up considerably, why isn't that business unit operating more profitably?

It's still a slow recovery, David. Keep in mind that what hasn't come booming back yet is the -- what I'll call the convention business, but the large business travelers paying high rates and spending money in hotels. So, while the business clearly has passed the bottom and is improving, it's got a ways to go before we start seeing that in the bottom line fully.

(Operator Instructions). Michael Millman, Millman Research.

I guess two related questions. And that is, how much -- or is there such a thing as having too much cash? We know about your asbestos pockets, but maybe even that has some holes in it. And to what extent is your repurchases determined by how much cash you have available?

First of all, is it possible to have too much cash? Yes, I guess so, but I would say that I don't think that we're there. So, this -- that's not a problem that I'm worried about.

In the past, we have had more cash than we have today. Although at the time, we had more shares, so on a per-share basis, we're probably at the high point.

But I still don't feel that we're drowning in cash, and I believe that over the next few quarters and years, we'll have plenty of opportunities to use that cash.

The time that -- by corporate philosophy, we like having a lot of cash on our balance sheet. We understand that it is a drag on return on equity and other statistics. But it's been the cash that's been on the balance sheets that's given us the opportunities to really do value-creating transactions.

In 2008, it allowed us to invest in CNA and Boardwalk at a time when, if the markets would've been open to them, they would've been open at a very, very high price. It gave us the opportunity to buy Texas Gas Transmission in 2003 and Gulf South Pipelines in 2004. It allowed us to get into the gas exploration and production business in 2007, and going back to the 1980s and early 1990s, it was the cash on the balance sheet that allowed us to jump into the opportunity of buying offshore drilling rigs when nobody else wanted them.

So, we like to have cash and not have to go to bankers and other financers when we want to buy what I would call -- make value-creating investments.

With respect to share repurchases, all I will say is that there is a minimum amount of cash that we want to have on the balance sheet that will determine that we won't -- if we go below that minimum amount of cash, we would not buy shares, but to the extent that we're above that amount, and we are today, obviously, then we'll buy shares based on our assessment of whether we think it's attractive value for all of our shareholders.

So in other words, more shares wouldn't necessarily -- more cash wouldn't necessarily increase your repurchases.

Correct.

Amit Kumar, Macquarie Research Equities.

Thanks, and congrats on the quarter. I guess, just staying on that discussion on capital, can you sort of just talk about your ownership of CNA? You've had this since 1974. And I'm just wondering, when you look at the returns, do you still sort of intend to hold it long term or has that thought process changed at this time? Thanks.

We absolutely, positively intend to hold it long term. We think that -- we have been long-term holders of CNA as generally we are long-term holders of all of our subsidiaries. That's number one.

Number two, I believe that we have a terrific management team in place and we have -- not just in terms of the CEO leadership, but also in terms of the entire senior staff. So I think that CNA is really poised for growth.

Additionally, we're coming off of three or four or five years of price declines in the insurance industry, and I believe that at some point hopefully in the not-too-distant future, we're going to see price increases. And in fact, in our commercial insurance line, for the past five quarters, we've had price increases. So, I think CNA is poised for growth.

It trades at a very low -- a very big discount to its book value. It -- in terms of its financial strength, it has the strength of a company that would be AA-rated by some of the rating agencies. So, we are very pleased with CNA. We are long-term holders, and I'm looking forward to many years of good earnings from the company.

Got it. Thanks for the detailed answer, and congrats once again.

(Operator Instructions). [Steve Spencer], private investor.

Could you please comment on the announcement this morning from Ensco and Pride Petroleum, please?

So, apparently this morning Ensco announced that it was going to buy Pride for -- using a combination of cash and stock. And they -- according to the release that I saw, they will now become the second largest offshore drilling rig operator in the world.

I've been involved in this industry for over 20 years, and I've seen lots of mergers and conglomerations. And this is the one industry where I can very firmly say that if you are at least of a minimum size, that you can compete with the biggest rig owners out there, and for sure, Diamond Offshore qualifies as having enough scale in order to be able to compete.

When you look at the release, it says they anticipate about $50 million of savings by putting the two companies together. Now, on the one hand, $50 million is a lot of money, but on the other hand, in the context of the size and scope of the transaction, I think it's about a $7.5 billion transaction, the notion that you're getting $50 million of synergy makes it plain that the reason for the transaction was not to gain those synergies.

I have no doubt that Diamond Offshore can easily compete, just as we have no trouble competing against Transocean and the other large offshore drilling operators.

Mike Shinnick, Wasatch Advisors Inc..

My question relates to capital allocation as well. Some of the earlier comments and questions kind of presumed doing something else in the energy sector. Could you comment in terms of -- you think Loews's circle of competence, what other industry groups you might be open to in terms of purchasing a stake in a private or public company?

I can't give you any specific industries, per se. What I can do is tell you what I think that we bring to the party when we acquire a company.

When we acquire a business, we look at the business from a very neutral perspective. We look at it from the perspective of the only thing we're looking to do is to maximize the value of that business over the intermediate to long term. We think carefully about strategy and the strategy that the management of the acquired company sets out for their business. We challenge them on that strategy, and then we are closely involved in the allocation of capital and the capital spending and the investment within the business.

And we like to think that that disciplined look at strategy and capital allocation yields results for all the shareholders that are beneficial over the long term.

I think our -- that was felt, for example, in the offshore drilling business where we're constantly leaning against the wind. When others are out buying rigs, we were instead upgrading rigs at less than half the price and in half the time. We bought rigs when others didn't want to buy rigs when we bought the Courage and the Valor 2.5 years ago.

And I believe that we're able to do that because we provide for the company a long-term strategic view. We are accustomed to cyclical markets and we are accustomed to leaning against the wind, so to do generally what the other participants in the market are not doing at that point in time.

That's helpful. Maybe I'll come from a different direction. How about in terms of sectors or groups where you see attractive valuations, say tangible assets, given your view on interest rates? Would you return to, say, the oil tanker market, dry bulk, or timber? What types of things look attractive?

Yes, I don't want to get into specific industries. So, I'm just going to leave my answer with what I said.

That was our final question. I'll now turn the floor back over to Mr. Daugherty for any closing remarks.

Thank you for joining us on the call today. A replay 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.