Loews Corporation (L) Q1 2013 Earnings Report, Transcript and Summary

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

Thank you, Jackie, and good morning, everyone. I'd 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 security filings for a 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. After 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 was due to reduced investment income at Loews and slightly lower earnings at Diamond. Let's take a closer look at a result 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 are 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 our CNA portfolio are to protect principal, maintain ample liquidity, employ prudent asset liability management and generate strong and 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 in investment-grade fixed-income securities. To improve our 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 quite 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 5 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-deepwater market. This market's strength is reflected in Diamond's total revenue backlog, which, as of April 25, was $8 billion, with contracts extending into 2019. Diamond has 2 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 BlackHawk, the first of Diamond's 4 new drillships, is scheduled to be delivered midyear and go on day rate in December after moving to the U.S. Gulf of Mexico. At Boardwalk, we had another good quarter, driven by the strength of their latest acquisition, Louisiana Midstream. Boardwalk continues to be an excellent investment for Loews. Since '03 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 6, Boardwalk announced its latest proposed project, the Bluegrass Pipeline, to be built in partnership with the Williams Company. This pipeline, which would use a portion of the existing Texas Gas pipeline, would transport national 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 continued to be negatively affected by ongoing low prices for natural gas. As a result, HighMount has redirected its drilling efforts to locations that should result in higher oil productions, such as its acreage in the eastern portion of the Mississippian Lime in Oklahoma and the Wolfcamp Shale in the Permian Basin in Texas. In both of these areas, oil 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 reservoir characteristics. 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. And finally, some comments on Loews Hotels & 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 enhance 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've repurchased a total of 3.2 million shares of Loews common stock for $141 million. As many as 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 shareholder. As we've 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'd like to turn the call over to Pete Keegan.

Well, thanks, Jim. And good morning, everyone. Loews Corporation today reported net income of $242 million, or $0.62 per share, for the first quarter 2013 as common $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 noncash 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 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 developments. Diamond Offshore's contribution to net income for the first quarter 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 rigs 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 concluded the sale of the jack-up rig Ocean Colombia, resulting in an after-tax gain of approximately $16 million. Diamond's effective tax rate decreased for the 3 months ended March 31, 2013, as compared with 2012. The lower effective tax rate in the current quarter is primarily a result of the extension of several expired or expiring temporary business provisions, which are retroactively extended at 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 to U.S. 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 contribution 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. Boardwalk's 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 noncash cost-centered 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 the ceiling test calculation and negative reserve revisions. HighMount's 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 1,000 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, D.C. 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 subsidiaries. $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. And now I'll turn the call back over to Mary.

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

[Operator Instructions] Your first question comes from the line of Michael Millman with Millman Research.

I actually have 2 questions, one is with Boardwalk. What kind of risk is there in terms of the buyers contracts or some of 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?

Well, first of all, with respect to risk at Boardwalk, tell me specifically what you're referring to?

Well, I'm referring to that 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 -- if 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's something we tend not to worry about too much. In terms of acquisitions, we keep looking, we keep kicking tires. You're 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.

Your next question comes from the line of Bob Glasspiegel with 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 buyback 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. So we've added a bunch of hotels there.

Okay. I haven't seen the Q if it's come out yet. What's your investment in hotels now? Do you have a figure from some of the parts?

I don't have that readily available.

So I'd assume the difference in the data mix is...

[indiscernible] and a small amount into HighMount in the quarter.

I'm sorry?

And a small amount into the HighMount in the quarter.

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

Keep in mind, this is a 4-quarter look back of the prices. In the first quarter, natural gas prices actually went up slightly, and NGL and oil prices went down. And it's that in combination with the calculation of reserves and production. This is a very complicated calculation, which drove that impairment.

Okay. If we just -- 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's -- I mean, if we freeze everything today...

Well, if you freeze prices, it's hard to say because the other part of calculation is reserves and production. So it's really hard to...

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

Yes. But in the accounting, keep in mind, we capitalize all of our spending. So you're constantly increasing the base against which this is calculated.

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

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

Okay. And we're in the maximum phase, right, of the earn...

They're 50%.

The high split, yes.

We're in the high split so -- I mean, it's now just going to grow with their overall dividends, right? There's not a step to that, there's not an accelerator?

There's not another step function in the split, no. That's the highest level it goes to.

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

That isn't part of the formula.

Right. Is there an endgame on -- I mean, is Boardwalk one of these like Buffet, we're going to own it forever, we love it. Is there a way you could capitalize that...

Bob, we love all of our children, and we're very positive about all of them. And we don't think about disposing of any of them.

Okay. I'm just saying you've got sort of -- in your sum of the parts, you used to sort of like try to value the pieces. Now we're sort of left to our own, and so we've got 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're not going to give me any help to think about it or how to think about it?

No, sorry.

Okay, so left to my own volition, I'll take a stab at it, but your insights on that would be appreciated, as always.

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

Jim, can you enlighten us a little bit about the lower investment income from equity performance, given the backdrops 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 have some investments in gold and mining shares. And those penalized the total returns 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?

Yes, 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're at the ceiling, it's really very hard as you look forward to predict what's going to move things. We might have 0 points. So your guess is as good as mine as to what you think is going to happen to pricing in the next quarter.

Okay. And then one other question and the last question for me on HighMount. Can you help us sort of understand, particularly with the effort to go after natural gas liquids and oil, both -- what's the incremental return on investment you think you'll be able to generate? And secondly, what's 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've 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's a lot of production that can come on, assuming that there's demand for the natural gas. However, with respect to oil and NGLs, it's a completely different story. In both the Mississippian Lime and especially in Sonora, we have relatively few oil and NGL wells. We're doing a -- what I would call a major science experiment in both places, trying to -- we know that there are hydrocarbons on our properties, 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'm 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're going to have to invest in the oil and NGL wells that will produce the gas -- the cash flow from those properties. But that over time, if we embark on this investment program, if we're able to figure out how to produce from these areas commercially, then there could be a significant cash flow from the property.

[Operator Instructions] Your next question comes from the line of Andy Baker with Barclays.

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 they move up to the sort of full dividend receipt. So that's before the next time we'll hear from you guys. I just want to see if that's something you actually intend to do to convert those at that time.

Yes, we do.

Okay, great. And then, Jim, just sort of bigger picture-wise, we've 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 6 months. Any sort of anecdotal evidence you're seeing that those people who could perhaps make the transition are making progress in that regard?

It almost sounds like the shale question. I landed in Houston -- no, sorry, I landed in New Orleans for some meetings that I had there, and I was -- 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 look 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's a lot of talks about LNG for trucks and as well for locomotives. And my guess is that's where the growth is going to come from, as well as from inner-city delivery trucks that work the streets during the day and come back to a garage at night. So I'm a believer that we're 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 2, 3 or 4 years.

Just one other thing, with interest rates moving down to the lows here again, just wondering what your sort of thought is on interest rate movement going 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 very low. We're frustrated by how low they are. We'd like them to go higher. We are -- for CNA, we maintain a -- for our non-matched accounts, which represents about 2/3 of the assets at CNA, we maintain a duration of under 5 for the portfolio. And what we're doing is we're basically investing new cash flow in 10-year securities. And as they roll down the yield curve over time, we picked 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's nothing at all exciting about it, and what we'd really like to see is higher interest rates. I think that a lot of the price increases that we're able to see -- that we're seeing now in the insurance market are the -- is the result of such low interest rates. So what the legacy assets are running off, the 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're seeing that in clear view now.

At this time, we have no further questions. I'd now like to turn the floor back over to Mary Skafidas for any closing remarks.

Great. Thank you, Jackie, and thank you, all, for your continued interest in Loews. A replay will be available on our website, loews.com, in approximately 2 hours. That concludes today's call.

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