Loews Corporation (L) Q3 2008 Earnings Report, Transcript and Summary

Good morning. My name is Christie and I will be your conference operator today. At this time I would like to welcome everyone to the Loews Third Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be question-and-answer session. [Operator Instructions]. Thank you. I would now like to turn the conference over to Mr. Darren Daugherty, Director of Investor Relations. Please go ahead sir. Darren Daugherty – Director of Investor Relation: Thank you Christie, good morning everyone. Welcome to Loews Corporations' third quarter 2008 earnings conference call. A copy of the earnings release maybe found on our website loews.com. On the call this morning are Jim Tisch, the Chief Executive Officer of Loews and Peter Keegan, the Chief Financial Officer of Loews. Before we begin, I would 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 reflects 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 reconciliations to the most comparable GAAP measures. After Jim, Peter have discussed their results, we will have a question-and-answer session. If you would like to ask questions and are listening via the website please use the dial-in number to participate, 877-692-2592. And finally, I would like to remind you that on November 1st in New York Loews will post its 2008 investor meeting which will include presentations by Loews Senior Management as well as the senior management of our subsidiary companies. If you have not already register to attend please do this now and we can send you registration information. I will now turn the call over to Loews Chief Executive Officer, Jim Tisch. James S. Tisch – Chief Executive Officer and President: Thank you gentlemen. Good morning everyone and thank you for joining us on our call. For the fourth quarter the excellent results of Diamond Offshore, HighMount, EMTV and Boardwalk and the auto master offset the catastrophe losses suffered by CNA primarily from Hurricane's 2008 or the future events hurricane in the financial market that contributed to CNA's real life investment. While our fourth quarter results no doubt disappoint all of us I want to emphasize that each of our subsidiaries is fundamentally fall, none of our businesses faces a liquidity problem, and holding company will process a strong record and flexible balance sheet. Today we announced the lowest time to purchase $11/4 billion of a new class of CNA non-building cumulative senior preferred stock. Our investment will have CNA's strengthen, the statutory capital and the full support of insurance subsidiaries continent supplies of the company which had been adversely impact by the ongoing disruption in the capital markets. Here though we use $1 billion of the proceeds to increase the statutory surplus of continental casualty and remaining $250 million will augment CNA's already rolled out holding company liquidity. Those expect to complete the purchase of the new proposed stock before the end of the year. With addition to CNA's Capital base while mandatory will provide strong support to the company during this period of unprecedented churn off in the financial markets. The underlying performance of CNA's core property and casualty insurance operations with our generic third quarter as measured by at 91.3% combined ratio before catastrophe losses. Here we have maintained the focus on disciplined underwriting and expense management which is subject well in softening insurance markets. We also launched today that the Loews' Board of Directors have approved a commitment of purchase from both our pipeline up to $1 billion of equity securities which will fully fund the completion of its pipeline expansion projects. Loews will provide equity capital the board want you to spend that external funding is otherwise unavailable on reasonable terms. Well we want to anticipate that we will require a portion of this equity capital prior to the MNA yield and the balance during the first half of '09. We continue to expect that the expansion projects once completed over the next two quarters will produce strong operating and financial results. As a reminder these projects transport natural gas from politic shale and other non-conventional play in the Gulf Coast and Mid Continent producing areas. These are attractive projects that will put Boardwalk in a strong cash generating position for US economy. With our large net cash balance and continually healthy cash distributions from our subsidiaries Loews is in a strong position to whether these dysfunctional markets. We finished all knowing that we are able, if necessary to help out our subsidiaries under the Loews financial umbrella. I would like to take a moment to thank Steve Lilienthal for his almost 7 years of master forward leadership at CNA. Here though we have been beyond fortunate to have had Steve at the helm. All will miss Steve; we are delighted that such a smooth strength of showing transition is taking place. And with that I will now turn over our call Pete Keegan, our Chief Financial Officer. Pete.

Thanks Jim and good morning everyone. For the first quarter Loews reported a loss from continuing operations of $0.33 per share, as compared to income from continuing operations of $0.58 per share from the prior year third quarter. The loss for the quarter primarily resulted from CNA's realized net investment losses which totaled 379 million after tax and minority interest versus losses of 33 million in the prior year quarter. These losses included the impact of other than temporary impairments of 341 million after tax and minority interest driven by credit deterioration within the equity securities and corporate and other tax or bond sectors. CNA's contribution allows its net income before investment losses decreased to 76 million from 189 million in the prior year third quarter. While underwriting operational performance was solid, catastrophe losses totaled a 151 million for the quarter after tax and minority interest. Also negatively impacting CNA's results was the decline in investment income primarily reflecting losses from limited partnership investments. Diamond Offshore's contribution to net income increased to 145 million from 95 million in the third quarter of 2007 and was driven by increased day rates for mid-water and deep-water semi-submersible rigs along with higher average utilization. Diamond's revenue backlog $11 billion, which includes the recently announced three-year contract totaling $452 million for Diamond’s semisubmersible rigs Ocean value. Last week Diamond's Board of Directors declared a special quarterly dividend of $1.75 per share in addition to the regular quarterly dividend of $0.125 per share. Together these dividends represent a cash payment to loads of approximately $140 million. In the third quarter, HighMount reported net income of $47 million on revenues of 200 million. Net income of $19 million in the prior year third quarter represented only a partial quarter as HighMount did not commenced operations until July 31, 2007. HighMount reported natural gas production of 19.7 billion cubic feet at an average realized price of $7.85 per 1000 cubic feet. Natural gas liquids production of 805,900 barrels at an average realized prize of $56.41 per barrel. And oil production of 86,600 barrels at an average prize of $114.48 per barrel. During the quarter, HighMount completed 117 gas wells at a success rate of 98% and for an aggregate drilling cost of $93 million. Boardwalk Pipeline’s contribution to net income for the quarter was 31 million versus 19 million in the prior year third quarter. It was also benefited from higher gas transportation revenues generated by Boardwalk’s East Texas to Mississippi Expansion and Southeast Expansion projects as well as from higher interruptible service. Boardwalk has declared a quarterly cash dividend of $0.475 per common and subordinated unit and $0.30 per FASB unit, which represents a cash payment to Loews of approximately $49 million. Loews Hotels' net income increased to 6 million from 4 million in the third quarter of last year. Revenue per available room was up slightly to $180.59 from $180.10 in the prior year’s third quarter. For the third quarter, net investment losses from Loews portfolio totaled 57 million versus investment income of 39 million in the prior year third quarter. As of September 30, 2008, holding company's cash and investments totaled $4.1 billion. During the third quarter, we received $177 million of dividends from our subsidiaries and we paid $27 million of dividends to shareholders. After making investments in Boardwalk and CNA this quarter described by Jim, Loews expects to have in excess of $2 billion in holding company cash at year-end 2008. I will now turn the call back over to Darren.

Thank you, Pete. Operator, at this point, we will open it up for questions.

Thank you. [Operator instructions]. Your first question will come from David Edelman with Morgan Stanley.

Good morning Jim and Pete.

Hello, good morning.

Jim, a few things first. Given that this is the holding company’s second large cash injection into – or support of CNA, and probably the last six or seven years, does that cause you at realizing that it’s an unprecedented period of time to sort of rethink the long-term commitment to that company and to that industry?

That’s not my point, you said it, these are unprecedented times and in these unprecedented times where you have bomb spreads, blowout to unimaginable levels where you have enormous numbers of – amounts of dislocation in all financial markets, what I think is very simply that CNA needs to get through this period and that on the other side, others, there is a very sound and sound business there. Remember, CNA stock probably all of a year ago traded at around $50 a share. Today’s it’s under $50 and I believe that while this financial crisis is over that CNA stock will again be very very – trading at a very attractive valuation. There is – when we strengthened the capital five or six years ago that was a period where in short operations were problematic. That has been totally flexed the insurance company had a combined ratio before catastrophe losses of under 92%. So what it first is to me is that the insurance operation is not broken and the key to provide any financial market is just to have the ability in the role of all to outlast it and we have said before and I say again that CNA is a strong company, Loews is there to support it will be and that is the primary that we want to do at this point in time.

And the processes behind the preferred investment being so much larger than the actual loss in the quarter for CNA as what?

It is just to be a 100% sure that CNA will have all the capital that is need. Well this is a permanent financing because this is preferred stock with no maturity date. So, in one sense it is permanent financing. But, we also are hopeful that it will be a more like financing that CNA's capital were when the market comes back to some sanity be in a position where it can return with cash to Loews. When Loews put in cash previously into CNA again we got lot of this back in the form of cash and some of it back in the form of stock, but I am hopeful that the we will get this investment back soon rather than later.

And just in the side Jim, do you think of that investment at all as rather than having Loews invest capital in market dislocations have CNA doers or is that, its really size ride for CNA period full stop?

Its – I am not sure ….

In other words, all the dislocations in the market, at the holding company however you could elect to seize on some opportunities in your own investment portfolio. So is there element in which you sort of look at this as an opportunity for CNA to take advantage to do that rather than the holding company?

We’re going to let CNA invest primarily in the financial market, they have a bigger portfolio enough, they have like a $38 billion or $49 billion portfolio and those investment historically have been done in CNA and we are going to keep them there.

Okay. And then looking at the likelihood of Loews contributing up to billion dollars at Boardwalk, what is Loews is? Would Loews be a supportive of Boardwalk doing a equity capital raise with -- in the public market at something within the range of its current limited partnership trading price?

Can you repeat that again?

Boardwalk had an option, I mean, would you be supportive of Boardwalk doing a equity capital raise not with Loews but with third party at something close to its current stock price?

Absolutely, but the problem is very simply that is we announced that Boardwalk was going to raise $500 million in the fourth quarter of this year, as stock would probably trade down to 15,16 or 17, it’s a crazy valuation, even at $20 a share, I think it’s a crazy valuation, it yields close between 9% and 10% at these levels, and that’s basically all tax free because shareholders get the cash distribution which is the yields, we also get a attach deduction which is almost equal to the amount of cash distribution. So it’s a phenomenal investment, and we are only here at these values I believe because there is enormous liquidation taking place in the MLP marketplace, combined with the fact that as you – if any MLP tries to access the market. For liquidity the market exacts in a enormous, enormous price, and what is Loews saying is that we are vowing to step in front of the market and buy these securities because we think that is all attractive.

Okay. And then lastly Jim given these two likely capital commitments what are the fact or ramification for Loews as it relates to its capacity or interest or willingness to either do a large share repurchase to make at the holding company level a large acquisition, as a fact to the matters that probably off the table for some period of time?

I am not going to take anything off the table. I will just tell you that we managed this company conservatively, we weren’t having the cash, we still have very significant cash flow coming into those, all the cash that’s going out is not going out tomorrow. So we are – our cash balances will reach a minimum of somewhere $2 and $2.5 billion but we will grow throughout the year, and so, we are constantly looking for the best ways to build shareholder value for all shareholders combined with my desire to seek what it might.

Right. Okay, thank you very much.

Our pleasure.

Your next question comes from Robert Glasspiegel - Langen McAlenney.

Good morning and you get both names right. What was behind you are taking Jimmy investing preferred money in the CNA with – why not the minority stubs would have cost third the valuation?

I note the minority steps would not have, first of all was not a valid capital for CNA which was the primary goal. Second, we think that CNA being public is very, very important. I think its good for CNA, I think its good for Loews, if CNA weren’t public all the others are probably be complaining to us but there is not transparency to Loews, we don’t what’s being our subsidiary over largest balance sheet. So we like the fact that CNA is public, that is transparent that anybody can see what’s going on and that no doubt think the good with the bad, shareholders of loan were able to compute on a unit by minute basis with some of parts valuation of Loews. Now my view is – we like said the good with the bad is that -- usually that’s the good thing, and the goal like today was the CNA stock to reinitiating with McKenzie with this levels, it just means that some of the parts is also at Kenzie levels, but we are viewing that nonetheless.

I am not sure by – I respect your judgment and certainly well thought, I think I might gribble with both of your pulling, very – CNA was a stub, I would submit that the strength of the lowest pair would be more tentatively factored into the ratings I will have to make sure happily which is certainly able to operate with more leverage insurance sides in the loan companies. More Subsequently your CNA stock you say is growing from $50 to 1450, unfortunately stock measure really the influence reality and, I mean, that’s got to be a little bit alarming to distributors, employees, management, and if the craziness of this market continue, I pushed and pull the stock liabilities nine months from now, there is point we’re having a trade public a real operating new sense, you disagree it?

You know, yes, I am not going to contemplate CNA trading a $5 a share.

I don’t mean the pulling out there?

CNA has a strong, strong business and I am just confident that having trade publically is in the long term goal of low shareholder and CNA shareholder and I don’t want to do anything based on some crazy fighting is taking place over the short term.

You have seen the thing that there is, that CNA is substantially under, I know they heard to make such strong statements.

Let it your own earnings valuation for CNA what you are trading at? Fixed times earnings?

Yep.

Okay.

No, there is a lot of chief stuck, I mean, your stock is definitely showing at stress price level, but which makes me wonder, why, putting 10% return is better than buying the government, but I hear your argument, I am not sure I totally agree them. Any general comments on what you’ve done on the investment portfolio and the trading portfolio are you increasing the risk, de-risk?

We’ve hunk again anything that we buy, we buy with the expectation that words comes to words we hold to maturity. We have – we have two different classes of assets, we have assets in our asset liability account which is a matched portfolio which reflect scheduled payments that we have and that has a duration of I think 12 to 13 minutes, that has a significant mark-to-market loss in it, but there is also a corresponding unrealized mark-to-mark gain in the liability, we rated to those assets. So I don’t worry more about that mark-to-market loss. In our asset account we have a duration of about 5 mins, that represents about 70% of the portfolio, that’s got a five year duration, so the duration being full short is providing us to be a significant amount of cash flow on a monthly basis to reinvest in the marketplace, and so, we find that we are able to buy municipals 10 year, municipals note who are able to buy over five year. We are able of A rated corporate bonds at a 100% of – 100% twice the means of government bonds, these are absolutely a demand type return that you are able to found in the investment portfolio and we are buying good quality merchandise, but words comes to comes we would be happy to own and show the initial. But they definitely have this mark-to-market loss, what it means is that there are great investment opportunities in the marketplace and we are taking advantage of it?

So it’s the – you are increasing the risk and the portfolio and the margin slowly or?

No, no we are buying only very high quality merchandise.

Okay.

We don’t have to sellout the notice against good returns.

Okay. I guess I understand what your point is. Thank you.

And your next question comes from Andy Baker with Jefferies & Company.

Hi guys. Most of my questions actually were asked by the first two callers. I just wanted to make sure, I don’t know if I heard the answer to the question of – in terms of your investment in CNA why 10% preferred of the stock is trading a third of where it wasn’t you think, your significant gains to the upside on these comment, when I was – one of our new common share and just get the full benefit of the stock depreciation, I was still providing the equity to the capitals of the company?

There are two reasons. #1) because our loans would like to get this money doc at some point in time, and so, when CNA capital is strengthened we are hopeful that we bond this CNA well, we are paying this preferred stock so that they can pay dividend on a common stock. Additionally, we are likely re-bending the backlogs at Loews to treat on all our minority shareholder, all of our subsidiaries steadily. On the theory they have been treating them as fairly as possible to go to the next stop to hold on, they are being with what the marketplace will recognize that and provide superior valuation who has low share, and if the marketplace told that, that will then comeback to benefit Loews because for many of you Loews has viewed has the sum of the part. Currently Loews owns 90% at CNA. So the idea of picking up for fuel as a percentage points, which more of them viewed as giving so at the betterment to minority shareholders just one of the interest it was.

Fair enough. Thanks a lot. See you next week.

Okay.

Your next question comes from [Stephen McPhilemy] with [Instanet].

Hi. Good morning guys. I was just looking at the Class B share issue that you have taken in Boardwalk back in March. And I was wondering if there was anything in the car back if there was anything that would preclude you from going back to that level again?

Well, I apologize, we are really willing to put the excess capital into Boardwalk, first it’s too early to tell.

So is it the 4% payout that we have to kind of reset our thinking from that level or is there something you think it’s sold beyond the table of those assets?

Can you repeat that please?

The 4% you are getting on those Class B, is that kind of level we would look at again there, or is it something you would have to reset and what’s going on in the market?

Like I said we don’t – we have not yet had any negotiation with Boardwalk to determine the exact nature of the investment. And again it’s the public markets, although I am sure the company would be very happy to tell additional dividends to the public.

Okay, thanks.

[Operator Instructions]. Your next question comes from Michael Millman with Soleil Securities.

Thank you. Just to clarify before asking some other questions. On the investment in CNA, less 10% to five years and then 17% or more after five years?

Well, it’s 10% for five years and then it resets to 700 basis points over charging ten-year loads and it resets – the higher of either reset amount or 10%.

I see. And so there is continuous to be in a sense of -- in a lower interest environment for them to repurchase. You didn’t give your debt. Is that still about 825 million?

865.

Okay. And moving on to some CNA, I guess the other side of coin is that this stock tends to be somewhat cyclic or secular? And it was 50 and you held – not it’s 14, not necessarily any of us was smarter. But does this suggest the next time around you think about taking some money off the table by reducing your position?

Let me do not – we will let you know by press release. It is not appropriate for us talk to about what has been the interest of our ownership of any of our subsidiaries.

Is there anything that suggest that reducing your ownership and subsidiaries is off the table?

I am not going to answer that. I am not going to talk about the disposition of any of our shares, any of our subsidiary shares. And likewise, I am also not going to talk about what factors we might take into account in order to come to that conclusion.

I guess your gross amount of 2 to 2.5 billion before debt remaining after these two investments, is that potentially going to be used to take some positions in other things or is there concern that in this crazy market you might need to husband more of that to support subsidiaries?

Our full yield when I said to David, which is that we would like to fleece it and what that means is as the lowest parent company we are very conservative in our own investment.

So, does that mean that you would not invest it side off?

I will just leave that comment as it is, I don’t want to get into any more details about how we are investing the pound company cash.

Okay, thank you.

Thank you.

[Operator Instructions]. And at this time there are no further questions.

Thank you for joining us on the call today. A replay and a MP3 file 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.