洛茲集團 (L) 2013 Q1 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 first-quarter 2013 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).

I would now like to turn the call over to Mary Skafidas, Vice President of Investor and Public Relations. Please go ahead.

Good morning, everyone. We would like to welcome you to Loews Corporation's first-quarter 2013 earnings conference call. A copy of our earnings release may be found on our website, Loews.com.

On this call this morning, we have our Chief Executive Officer, Jim Tisch, and our Chief Financial Officer, Peter Keegan. Following their 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 filings with the SEC.

During the call today we might also discuss non-GAAP financial measures. Please refer to our securities filings for reconciliation to the most comparable GAAP measures.

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

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

Loews had net income of $242 million or $0.62 per share for the first quarter of 2013 as compared to $367 million or $0.92 per share for the same quarter last year. Results for the quarter were impacted by an after-tax ceiling test impairment charge at HighMount of $92 million as compared to an impairment charge of $28 million in the prior year. Absent these charges, which Pete will describe in more detail later in the call, our net income for the quarter would have been $334 million or $0.85 per share in 2013 as compared to $395 million or $0.99 per share in the first quarter of 2012.

The decrease in net income for the quarter is due to reduced investment income at Loews and slightly lower earnings at Diamond.

Let's take a closer look at the results and progress of each of our subsidiaries starting with CNA. CNA had a good quarter and continued to improve its underwriting performance through risk selection and pricing discipline while generating premium growth. Excluding catastrophes and prior-year development, CNA saw continued improvement in the P&C combined ratio with a year-over-year decrease of just over 1 point and a 2.2 point improvement over the last quarter. Overall, net premium growth for the Company's core P&C operations exceeded 10%. Rate increases contributed to this premium growth averaging 7.7% across P&C operations for the quarter as contrasted to 4% during the first quarter of 2012.

The inclusion of Hardy in the first quarter contributed approximately 3 points of CNA's 10% premium growth. While we were pleased with CNA's growth momentum, we expect CNA to remain focused on improving its underwriting margin. As you have heard on recent CNA calls, this margin improvement is expected to come from rate increases, writing profitable new business in target segments, and cycling off of inadequately priced business.

I also want to touch on CNA's investment portfolio. Loews provides investment management services to CNA through our in-house investment management group. Our priorities in managing the CNA portfolio are to protect principle, maintain ample liquidity, employ prudent asset liability management and generate strong risk-adjusted returns.

CNA's investment portfolio had a market value of $47.6 billion at the end of the quarter. The vast majority of the portfolio is an investment grade fixed income securities.

To improve overall returns, about 5% of the portfolio is allocated to a diverse mix of limited partnerships. This allocation provides CNA with attractive equity like returns with less volatility than the overall equity market. Over the past 15 years, this portfolio has had an annualized total return of 11%.

In the first quarter of 2013, LP Investments returned 5.4%, double the historic rate of return. In this current interest-rate environment we have slightly increased our allocation to these alternative investments. We are very comfortable with the mix and quality of CNA's portfolio but frustrated that overall interest rates are so low.

At Diamond Offshore, this quarter was a relatively quiet one. Revenues and net income were down versus the prior year primarily due to an increase in planned downtime for special surveys. These surveys are required for rigs every five years and it just so happens that 2013 is the year in which the fleet has a large number of surveys. Fewer special surveys are scheduled for 2014 and 2015.

Demand in the offshore drilling market continues to be very strong with oil prices remaining at a level that supports robust drilling activity across all water depths particularly in the ultra deep water market. This market strength is reflected in Diamond's total revenue backlog which as of April 25 was $8 billion with contracts extending into 2019.

Diamond has two new rigs going on day rate this year. The rebuilt Ocean Onyx is scheduled for delivery from the shipyard late in the third quarter and will go on day rate shortly thereafter. The Ocean Black Hawk, the first of Diamond's four new drill ships is scheduled to be delivered midyear and go on day rate in December after moving to the US Gulf of Mexico.

At Boardwalk, they had another good quarter driven by the strength of their latest acquisition, Louisiana Midstream. Boardwalk continues to be an excellent investment for Loews. Since 2003 when we acquired Texas Gas Transmission, our first pipeline, Loews has invested a total of $3.2 billion in Boardwalk. We have received all of our cash back while still owning 53% of the limited partnership interest which is worth approximately $3.6 billion as well as 100% of the general partner.

On March 5, Boardwalk announced its latest proposed project, the Bluegrass Pipeline to be a built in partnership with the Williams Company. This pipeline which would use a portion of the existing Texas Gas Pipeline would transport natural gas liquids produced in the Marcellus and Utica shales to new fractionation and storage facilities in Louisiana, home of the petrochemical industry.

At this point in the process, Boardwalk is performing cost assessments and due diligence as well as negotiating terms of the joint venture and related agreements with Williams. As CEO Stan Horton mentioned on Boardwalk's call this morning, there are a number of conditions that must be met for this project to be approved including negotiating a definitive joint venture agreement, execution of customer contracts sufficient to support the project, receipt of regulatory approval and approval of both the Boardwalk and Williams Boards.

HighMount's operating results continue to be negatively affected by ongoing low prices for natural gas. As a result, HighMount has redirected its billing efforts to locations that should result in higher oil production such as its acreage in eastern portion of the Mississippian Lime in Oklahoma and the Wolfcamp shale in the Permian basin in Texas. In both of these areas, auto and natural gas liquids can make up 70% to 80% of the hydrocarbons produced from a well.

HighMount continues to improve its understanding of both plays. They are working to determine optimal drilling and completion techniques for each area as well as to identify a reservoir characteristic. The drilling programs in both plays involve an extensive inventory of drilling locations.

In the Miss Lime, primarily horizontal drilling will be used. In the Wolfcamp, both horizontal and vertical well designs are being tested and considered. Both of these programs are in the early development stage and although success cannot be guaranteed, we are hopeful.

Finally some comments on Loews' Hotels and Resorts. This is a transition year for Loews Hotels which has the twin goals of one, broadening its customer base by adding properties in gateway cities. And two, improving the profitability of its existing properties. There is substantial progress towards these goals but you will not see that progress reflected in quarterly earnings during 2013.

In the past year, Loews Hotels has added properties in Boston, Washington and Los Angeles. Overall revenues and income are being negatively impacted however by the existing renovations at a number of our hotels, most notably the Loews Regency in New York which has been closed since January as well as our properties in Nashville, Hollywood, and Philadelphia.

We believe the actions taken by Loews Hotels in 2013 will position our change for growth and enhanced profitability in the years to come.

At the holding company, Loews ended the quarter with net cash and investments of $3.7 billion. We repurchased 2.1 million shares of Loews common stock for $92 million during the quarter. We continued to repurchase shares after the quarter ended and year-to-date through April 26; we repurchased a total of 3.2 million shares of Loews' common stock for $141 million.

As many of you on the call know, although we do not broadcast our share repurchase plans we have historically been prolific buyers of our own stock. Since 2010, we have spent about $1.5 billion repurchasing Loews' common stock. Share repurchases have been an important part of our effort to build long-term value for Loews shareholders.

As we have said before, we repurchase our shares at prices below our view of intrinsic value not to offset stock option issuance but with the intent of enhancing the long-term value of Loews' common stock.

Our strong belief is that share repurchases have greatly contributed to the outperformance of our stock versus the S&P 500 over the long term.

And with that, I would like to turn the call over to Pete Keegan.

Thanks, Jim, and good morning, everyone. Loews Corporation today reported net income of $242 million or $0.62 per share for the first quarter of 2013 as compared to $367 million or $0.92 per share for the first quarter of 2012.

As Jim mentioned, net income in the first quarter includes an after tax ceiling test impairment charge at HighMount of $92 million related to its carrying value of natural gas and oil properties as compared to an impairment charge of $28 million for the prior year quarter.

Excluding the non-cash ceiling test impairment charges, the decrease in Loews' net income is due to slightly lower earnings at Diamond and reduced investment income at the parent company.

Investment income decreased by $45 million after tax primarily due to lower performance of equity-based investments partially offset by improved performance of fixed income investments in the trading portfolio.

CNA's contribution to Loews net income for the first quarter was $226 million which was also its contribution in the first quarter of 2012. Earnings were consistent with prior year primarily due to improved current year non-catastrophe underwriting results offset by lower investment income, higher catastrophe losses including non-cat related weather losses and a slight decrease in net favorable prior-year development.

Diamond Offshore's contribution to net income for the first quarter of 2013 was $82 million compared to $87 million in the prior year quarter. Results for the first quarter were impacted by lower utilization primarily from an increase in planned downtime due to scheduled rig surveys which resulted in fewer revenue earning days for the quarter. The Ocean Whittington and the Ocean Ambassador are currently stacked while both were working in 2012. In addition the prior-year quarter included the sale of the jack-up rig, Ocean Columbia, resulting in an after-tax gain of approximately $16 million.

Diamond's effective tax rate decreased for the three months ended March 31, 2013 as compared with 2012. The lower effective tax rate in the current quarter is primarily a result of the expansion of several expired or expiring temporary business provisions which are retroactively extended since the beginning of 2012 under the American Taxpayer Relief Act of 2012 which was signed into law on January 2, 2013.

One of the extenders will again allow Diamond Offshore to defer recognition of certain foreign earnings for US tax purposes.

Boardwalk Pipeline's contribution to net income for the first quarter was $33 million as compared to $35 million in the prior-year quarter. The decrease in Boardwalk's contributions to Loews net income is simply because we own a slightly smaller stake in the company than we did this time last year -- 55% ownership currently as compared to about 62% for the same quarter last year.

Boardwalks operating revenues increased due to the acquisition of Louisiana Midstream which contributed $19 million in net revenues for the quarter. This revenue increase was partly offset by lower revenues associated with firm contract renewals.

Highmount recorded a net loss of $88 million for the first quarter of 2013 compared to a net loss of $22 million in the first quarter of 2012. As we stated earlier, the lower results were due to a non-cash cost center ceiling test impairment charge of $92 million after taxes. The 2013 write down was attributable to reduced average NGL and oil prices used in the ceiling test calculation and negative reserve revisions.

HighMounts first-quarter production volumes and realized prices which included the benefits of hedges are as follows. Natural gas production was 8.6 billion cubic feet at an average realized price of $4.10 per thousand cubic feet; natural gas liquids production was 503,000 barrels at an average realized price of $37.33 per barrel; and oil production was 158,000 barrels at an average price of $90.60 per barrel. HighMount had hedges in place as of March 31, 2013 that covered approximately 64.6% and 32.3% of its total estimated 2013 and 2014 natural gas equivalent production at an average weighted -- at a weighted average price of $6.48 and $5.89 per Mcfe.

Loews Hotels operated on a breakeven basis for the first quarter of 2013 as compared to net income of $4 million for the first quarter of 2012. Results were primarily due to the Loews Regency Hotel in New York which will be closed for the majority of the year for extensive renovations and the sale of the Loews Denver Hotel in the fourth quarter of 2012 partially offset by the additions of hotels in Washington, DC and Boston.

Holding Company cash and investments as of March 31, 2013 totaled $3.7 billion as compared to $3.9 billion at December 31, 2012. We received $182 million in dividends from our subsidiary, $48 million from CNA, $62 million from Diamond and $72 million from Boardwalk. We paid $24 million in cash dividends to our shareholders during the first quarter of 2013 and bought back 2.1 million shares of Loews common stock for $92 million.

As Jim mentioned, we continued to repurchase shares after the quarter ended and through April 26, we repurchased a total of 3.2 million shares of Loews common stock for $141 million.

Now I will turn the call back over to Mary.

Thank you, Pete. Jackie, at this time we would like to open up the call for questions.

(Operator Instructions). Michael Millman, Millman Research.

Thank you. I actually have two questions. One is with Boardwalk, what kind of risk is there in terms of the buyers or the contracts failing in some way?

And second is more broadly now that the market has continued to go up, are acquisitions even looking less positive to you than they might have a couple of years ago?

First of all with respect to risk at Boardwalk, tell me specifically what you are referring to?

I am referring to there are contracts out there and I don't know if something goes wrong with the supplier, the field blows up or if the buyer -- bankruptcy -- what kind of protection --?

So historically, we have -- credit quality has not been a problem for us at Boardwalk that all of our customers have generally paid on time and that has not been an issue for us. So it is something that we tend not to worry about too much.

Okay.

In terms of acquisitions, we keep looking, we keep kicking tires. You are right, equity values have gone up but interest rates are still very low and we haven't given up in our quest to look for something and find something that fits us and is just right for us.

Okay, thank you.

Bob Glasspiegel, Langen McAlenney.

Pete, you went through the role of the cash too quickly for me. It looked like your dividends were $70 million more than buy back plus dividends paid but your cash went down by $200 million. Was there a debt payment or something else in there?

No, we are contributing money to hotels to help on their growth plan and we have added a bunch of hotels there.

Okay, I haven't seen the Q if it has come out yet. What is your investment in hotels now? Do you have a figure for my sum of the parts?

I don't have that readily available.

So I would assume the difference in the dynamics is it (multiple speakers)

And a small amount into HighMount in the quarter.

I am sorry.

And a small amount into HighMount in the quarter.

Okay. You said you had -- the impairment charge was driven by lower oil prices did you say and lower reserves?

Yes, keep in mind this is a fourth-quarter look back at prices. In the first quarter natural gas prices actually went up slightly and NGL and oil prices went down and that in combination with calculation and reserves and production is a very complicated calculation which drove that impairment.

Okay, if we freeze prices where they are today, are there more impairments coming or are we through the -- is there light at the end of the tunnel and there is -- I mean if we freeze everything today?

Well, if you freeze prices, it is hard to say because the other part of the calculation is reserves and production so it is really hard (multiple speakers)

Well you made your best guess on reserves and production today, right? So that shouldn't wiggle if we freeze that.

In the accounting keep in mind we capitalized all of our spending so you are constantly increasing the base against which this is calculated.

Okay. Can you remind me of what the Boardwalk general partnership dividends are running a quarter or what they were last year?

I have that here. For the general partner, we received about $10 million a quarter.

Okay. We are in the maximum phase, right, of the earned -- so --?

No, they are (inaudible) %.

The high splits, yes.

We are in the high splits so now it is just going to grow. It is now just going to grow with the overall dividends, right? There is not a step to that? There's an accelerator?

(multiple speakers) step function in the split, no. That is the highest level it goes to.

The only split beyond 50% is everything and I don't think we are ever going to get there.

Right.

That isn't part of the formula.

Is there an end game on -- I mean is Boardwalk one of these like [Buffet], we are going to own it forever, we love it. Is there a way you could capitalize that?

We love all our children and we are very positive about all of them and we'd don't think about disposing of any of them.

I am just saying you have got sort in the your sum of the parts you used to sort of like try to value the pieces. Now we are sort of left to our own and so we have about a $40 million growing annual earnings power that --

You mean in the GP.

Right.

Okay.

I'm just trying to think of how we should think of that as an asset, a growing $40 million dividend base annually. You are not going to give me any help to think about it or how to think about it?

No. Sorry.

Okay. Left to my own volition I will take a stab at it. But your insights on that would be appreciated as always. Thank you.

Thank you.

David Adelman, Morgan Stanley.

Good morning, everyone. Jim, can you enlighten us a little bit about the lower investment income from equity performance given the backdrop that the S&P did quite well in the first quarter?

Yes, we had some investments in bread and butter S&P 500 stocks but we also had some investments in gold and mining shares and those penalized the total return for the quarter.

Okay. And then in the discussion, Pete, with the potential prospects of additional impairment through the remainder of the year, I think last year after the first quarter, you indicated sort of what it would likely be the remainder of the year. Is there a reason you're not doing that now for the rest of the year?

The reason we could do it last year is there was a clear trend of pricing, David, and so we knew what was coming because of the way you calculate this thing or at least you could get within a reasonable range of what was coming.

Where prices are right now and when you are at the ceiling, it is really very hard as you look forward to predict what is going to move things when you are right at zero point. So your guess is as good as mine as to what you think is going to happen with pricing in the next quarter.

Okay. And then one other question and a last question from me on HighMount. Can you help us understand particularly with the effort to go after natural gas liquids and oil, both what is from -- what is the incremental return on investment you think you will be able to generate? And secondly, what is the scale of the potential opportunity? In other words, what can the ongoing cash flow get towards in the current commodity environment?

So for both the Mississippian Lime and also Sonora, the cash flow right now is driven primarily by gas prices and as you have heard me say, I don't think that gas prices are going to increase significantly from here. I think between $4 and $5 for natural gas we are at what I would call an equilibrium price where there is a lot of production that can come on assuming that there's demand for the natural gas.

However with respect to oil and NGL, it is a completely different story in both the Mississippian Lime and especially in Sonora, we have relatively few oil and NGL wells. We are doing what I would call a major science experiment in both places trying to --. We know that there are hydrocarbons on our property and we can produce them and now we are trying to figure out how to produce them commercially and economically. And if we do figure out how to do that, and I am hopeful that we will over the next few years, then there will be significant investment opportunities for us to invest in development wells on these properties.

So you asked about cash flow. My guess is that there won't be significant operating cash flow from those properties for the next several years because we are going to have to invest in the oil and NGL wells that will produce the cash flow from those properties but that over time, if we embark on this investment program, if we are able to figure out how to produce from these areas commercially, then there could be significant cash flow from the properties.

Okay, thank you.

(Operator Instructions). Andy Baker, Barclays.

Thank you. Good morning, guys. A couple of questions. One, just want to make sure I haven't missed something along the way. The Boardwalk Pipeline Class B shares I believe they are convertible after June 30 of this year and then move up to the full dividend receipt if that is before the next time we will hear from you guys. Just want to see if that is something you actually intend to do to convert those at that time?

Yes, we do.

Okay, great. Jim, just sort of bigger picture-wise, we have talked in the past about how the industrial economy in general could look to convert over towards natural gas and over time significantly increase the demand side of that equation. I think we haven't discussed this really in about six months. Any sort of anecdotal evidence you are seeing that those people who could perhaps make the transition are making progress in that regard?

It almost sounds like a (inaudible) question. I landed in Houston -- sorry -- I landed in New Orleans for some meetings that I had there and as I was getting into the car, the driver opened -- popped open the trunk of the car and I was just about to throw my bags in and there I saw what looked like a big scuba tank and it said propane. And so I asked the driver about it and in fact that was a propane fueled automobile.

Now I don't think that growth in natural gas liquids is going to come from Lincoln Town cars running on propane gas but if you read the trade press, you can see that there is a lot of talk about LNG for trucks and as well for locomotives. My guess is that is where the growth is going to come from as well as from inner-city delivery trucks that are -- work the streets during the day and come back to a garage at night.

So I am a believer that we are going to see significant increases in demand for our natural gas and I also think that significant demand increase is going to come from the exportation of natural gas which should begin in the next two, three, or four years.

Great, thanks. One other thing, with interest rates moving down to the lows here again, just wondering what your sort of thought is on interest-rate moving forward and how that could potentially impact your investments particularly on the credit side?

I think interest rates as I said in my comments are fairly low. We are frustrated by how low they are. We would like them to go higher. We are for CNA, we maintain for our non-matched accounts which represents about two-thirds of the assets at CNA, we maintain a duration of under five for the portfolio. And what we are doing is we are basically investing new cash flow in 10-year securities and as they roll down the yield curve over time, we pick up a pretty good rate of return on those investments.

But investing in with that type of strategy is truly a kiss your sister type of strategy. There is nothing at all exciting about it and what we would really like to see is higher interest rates.

I think that a lot of the price increases that we are able to see that we are seeing now in the insurance market is the result of such low interest rate so that the legacy assets are running off. Our companies need to earn a rate of return on their capital and since they can't get it from their investing operations they have to get it from their underwriting operations. And so I think we are seeing that in clearer view now.

Great. Thank you very much.

At this time we have no further questions. I would now like to turn the floor back over to Mary Skafidas for any closer remarks.

Great. Thank you, Jackie. Thank you all for your continued interest in Loews. 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.