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Loews Corporation (NYSE:L)

Q2 2009 Earnings Call

August 3, 2009 11:00 am ET

Executives

Darren Daugherty – Director of Investor Relations

James S. Tisch – Chief Executive Officer

Peter W. Keegan – Chief Financial Officer

Analysts

Robert Glasspiegel - Langen McAlenney

David Adelman - Morgan Stanley

Andy Baker - Jefferies & Company

Michael Millman - Millman Research Associates

Operator

Good morning. My name is [JulieAnn] and I will be your conference operator today. At this time I would like to welcome everyone to the Loews second quarter 2009 earnings conference call. (Operator Instructions)

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

Darren Daugherty

Thank you JulieAnn. Good morning everyone. Welcome to Loews Corporation’s second quarter 2009 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, the Chief Executive Officer of Loews and Peter Keegan, the Chief Financial Officer of Loews.

Before we begin, I’d like to make a few brief disclosures concerning forward-looking statements. This conference call will include the use of statements that are forward-looking in nature. Actual results achieved by the company may differ materially from those projections made in any forward-looking statements. Forward-looking statements reflect circumstances at the time they are made, and the company expressly disclaims any obligation to update or revise any forward-looking statements. This disclaimer is only a brief summary of the company’s statutory forward-looking statements disclaimer. We urge you to read the full disclaimer, which is included in the company’s 10-K and 10-Q filings with the SEC.

I’d also like to remind you that during this call today we may discuss certain non-GAAP financial measures. Please refer to our security filings for reconciliation to the most comparable GAAP measures.

After Jim and Peter have discussed our results, we will have a question-and-answer session. If you would like to ask questions and are listening via the webcast, please use the dial in number to participate, 877-692-2592.

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

James S. Tisch

Thank you very much Darren and good morning everyone, and thank you for joining us on our call today. In the second quarter of ’09 Loews’ income before net investment losses was $519 million versus $575 million in the same period of ’08. We had a solid quarter although our results reflect a mix of factors.

CNA achieved must improved results, reporting a 22% increase in operating income over the prior year. In its core property and casualty operations, CNA had another quarter of steady performance, reporting a 98.1% combined ratio. It also had favorable rate trends and renewal retention, as well as strength in writing new business. Further reinforcing CNA’s underwriting discipline and conservatism, the company reported favorable reserve development for the 10th consecutive quarter.

We have seen continuing improvement in the financial markets and as of June 30, CNA’s book value per share had included by more than 31% since the beginning of the year, even after taking into account the quarter’s realized losses. The recovery in the market value of CNA’s portfolio was primarily led by corporate and municipal bonds. Peter Keegan will provide some additional commentary on the CNA investment portfolio when I’m finished.

Diamond Offshore had an excellent quarter, reporting its second highest earnings on record. For the quarter, average day rates and utilization for Diamond’s fleet were strong. Its revenue backlog currently stands at approximately $8.7 billion. Diamond recently completed the acquisition of its newest rig, the Ocean Courage. This new build, sixth generation rig was purchased through a foreclosure auction for $460 million. Last year, prices for similar new build rigs peaked at approximately $750 million. We feel comfortable that this acquisition represents an excellent opportunity that is consistent with Diamond’s proven strategy of acquiring and upgrading rigs at times when the market is well off of its cyclical peak.

Diamond’s board of directors recently declared a special quarterly dividend in addition to the regular quarterly dividend which together totaled $2.00 per share. This marks a continuation of Diamond’s policy of paying out special cash dividends, reflecting the earnings and the financial position at Diamond.

HighMount’s earnings were significantly impacted by lower natural gas prices, although its hedging program helped to mitigate the decline. In the first half of ’09 HighMount curtailed its drilling program when spot natural gas prices made drilling uneconomical. The decline in gas prices has led to reduced drilling activity across the EMP industry, as reflected in the Baker Hughes natural gas rig count, which is down by more than 55% from its peak. As a result, the cost to drill a well had declined significantly along with the market prices for drilling services and commodities such as tubular steel and diesel fuel.

While natural gas spot prices are currently low, forward prices are significantly higher. Putting these factors together, HighMount has developed a limited drilling program to capture the attractive economics of reduced drilling costs and relatively robust forward natural gas prices. HighMount has contracted with its drilling and completion service suppliers to lock in favorable pricing by committing to drill 100 wells in the Permian Basin. These wells, for the most part, will be drilled but not currently completed. In other words, the gas will not begin to flow until the first quarter of 2010. Production volume from these wells has been substantially hedged, and are expected to deliver a very attractive return on investment for HighMount.

Boardwalk has completed remediation of pipe anomalies on all of its 42 inch diameter pipelines, including the Golf Crossing, East Texas and Southeast Pipeline expansions. All of these systems are now in service at standard operating pressures after receiving from the Regulatory Authority [SEMSA]. Boardwalk continues to work with SEMSA in order to obtain approval to operate the expansion pipelines at higher operating pressures which would effectively boost their capacity. Testing of Boardwalk’s 36 inch diameter project, the Fayetteville and Greenville Lateral, has revealed some anomalies and therefore these systems will continue to operate at lower than normal operating pressures until remediation is completed. Despite the costs incurred to correct anomalies on the expansion projects, Boardwalk anticipates that total project costs will not exceed the construction budget established early last year.

Boardwalk’s reported earnings for the quarter were significantly reduced by the need to shut down portions of its pipeline as part of its remediation efforts, and by operation and reduced pipeline pressures. Despite these issues, cash flow from Boardwalk expansion projects along with legacy pipeline systems have allowed the company to announce a quarterly cash distribution of $0.49 per limited partner unit, it’s 14th consecutive increase.

So notwithstanding a lousy economy, because of the strength of CNA and Diamond’s earnings, Loews turned in a very respectable quarter. In fact, it was the best one since the second quarter of ’08.

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

Peter W. Keegan

Thanks Jim and good morning everyone. For the second quarter Loews reported income from continuing operations of $0.78 a share as compared to $1.00 a share in the prior year second quarter. CNA’s contribution to Loews net income before investment losses increased to $278 million from $227 million in the prior year’s second quarter.

In addition to solid underwriting performance, this increase reflects a strong rebound in investment income, primarily from improved limited partnership results. As Jim mentioned, the market value of CNA’s portfolio has recovered significantly, increasing both its GAAP equity and regulatory capital. CNA’s realized net investment losses in the second quarter totaled $178 million after tax and non-controlling interests versus losses of $65 million in the prior year quarter. These losses primarily consist of other than temporary impairments that were largely driven by the deterioration of underlying collateral and asset backed holdings, primarily residential and commercial mortgage backed securities.

Diamond Offshore’s contribution to net income decreased to $181 million versus its highest ever quarter of $194 million in 2008. HighMount reported net income of $29 million versus $48 million in the second quarter of 2008. The decline reflects lower realized prices on slightly increased production volume. HighMount reported natural gas production of 20.3 billion cubic feet at an average realized price of $6.40 per 1,000 cubic feet, natural gas liquids production of 891.6 thousand barrels at an average realized price of $24.31 per barrel and oil production of 107.1 thousand barrels at an average realized price of $54.04 per barrel. As of June 30, HighMount had hedges in place for 56% of its estimated total production for the remainder of 2009 and 31% of estimated total production for 2010.

Boardwalk’s contribution to net income was $8 million versus $28 million in the second quarter of 2008. Its expansion projects generated additional gas transportation revenues over the prior year’s second quarter. However, these pipelines operated at reduced pressures and some were temporarily shut down to repair pipe anomalies. Because of these factors, Boardwalk estimates that the second quarter revenue was negatively impacted by approximately $58 million excluding fuel.

Additionally, operating expenses increased by approximately $41 million, primarily from expenses associated with the expansions such as depreciation, property taxes and interest expense, which are now being recognized.

During the quarter, Loews invested $200 million in Boardwalk under a subordinated loan facility and $150 million in newly issued common units. Investments in Boardwalk totaled $850 million si9nce November of 2008, when Loews announced its willingness to invest up to $1 billion to fully fund completion of the expansion projects. Our total ownership interest in Boardwalk now stands at 75%, including our general partner interest.

Loews hotels reported net income of $3 million versus $19 million in the second quarter of last year. Average room rates for the quarter decreased to $199.77 from $253.82 and occupancy for the quarter decreased to 69.7% from 79.1% from the same quarter 2008. Additionally, hotels earnings from the second quarter of 2008 included an $11 million pretax gain related to an adjustment in the carrying value of our 50% interest in a joint venture investment.

Net investment income from the holding company trading portfolio totaled $40 million versus investment income of $77 million in the prior year’s second quarter. The decrease primarily reflects a lower cash balance and historically low interest rates. During the quarter, Loews book value per share of common stock increased to $34.60 from $30.73 as of March 31. At the end of the quarter, holding company cash and investments totaled $2.4 billion. During the quarter we received $236 million of dividends from our subsidiaries, invested $350 million in Boardwalk and paid $27 million of dividends to shareholders.

Also during the quarter, we repurchased 1,195,900 shares of common stock for $32 million and subsequent to June 30 we repurchased an additional 1 million shares for $26 million.

And now I’ll turn the call back over to Darren. Darren?

Darren Daugherty

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Robert Glasspiegel - Langen McAlenney.

Robert Glasspiegel - Langen McAlenney

On the share repurchase, can we read any sense that maybe you have a greater confidence that you don’t need to keep the money available for Boardwalk and CNA to the same extent you thought a quarter ago?

James S. Tisch

Bob, I read your report earlier today, and I don’t want to disappoint you. I have no comment.

Robert Glasspiegel - Langen McAlenney

Let me compliment you, by the way, with how patient you were with Becky this morning as she tried to quiz you on the earnings mess. I don’t think she quite figured out how realized gains and losses flow through the income statement. I guess the Dow Jones had the same general problem. Hotels. How do you manage through the current situation? Are you looking around for opportunities to buy things in the current depressed state? Or just sort of run with what you’ve got?

James S. Tisch

No, you’re exactly right. Number one in terms of the operations of the hotels, they have been focused on cutting costs dramatically, so in an attempt to improve the operating margin. And in fact, occupancy is doing very well, or reasonably well. The real problem is average room rate, which is down, depending on the property, anywhere between 20 and 35%. And so that’s causing the decline in RevPAR. The good news is that it’s not just happening to us, that this is an industry wide phenomenon. And I’m sure you’ve read in the newspapers of certain hotels being taken back by the mortgage holders. So it’s my guess that at some point in time, we are going to see a significant number of hotels hit the market for sale and we will view that as an opportunity to acquire some property at attractive prices.

For the past 10 or 15 years at least, hotels have traded at real premium prices. And I’ve said that they are the equivalent of the poor man’s football team. If you can’t own the football team in town, you might as well own the best hotel. And as a result, as I said they’ve traded at very steep prices. It’s my expectation that in the coming quarters, we will see hotels that can be acquired at more attractive prices.

Robert Glasspiegel - Langen McAlenney

My last question, Jimmy, if I put a gun to your head and said Loews Corporate portfolio, are you de-risking, re-risking or running with what you’ve got? Which option would you take?

James S. Tisch

You don’t have to put the gun to my head. We’re de-risking.

Robert Glasspiegel - Langen McAlenney

You’re de-risking?

James S. Tisch

Yes.

Robert Glasspiegel - Langen McAlenney

I saw your comments with Becky. Is that sort of drives your thought process that the debt’s got to get de-leveraged?

James S. Tisch

Yes. In terms of the portfolio, we’re reducing our exposure to municipals, we’re increasing our exposure to corporate. This is all in primarily in CNA. We’re also reducing our asset backs, and at Loews we really haven’t taken substantial credit risk in our portfolio in a long time. Rather from time to time we’ll foray into the government bond market, but otherwise we keep our cash relatively short.

Operator

Your next question comes from David Adelman - Morgan Stanley.

David Adelman - Morgan Stanley

Jim, could you sort of outline the likely pathway you see to having CNA ultimately repay the preferred investment you made last year?

James S. Tisch

That was a $1.25 billion preferred stock with a 10% coupon. We would like CNA to be able to pay that back as soon as possible. But before CNA can pay that back, they have to get their ratings into better shape. First of all, statistically CNA we believe CNA should be one or two notches rated higher by one or two notches. And we believe that the combination of the good reserving at CNA as shown by the 10th consecutive quarter of releasing reserves, as well as the strong management team should begin to get the rating agencies to move.

Combined with that is that accumulated earnings over the coming quarters should also substantially boost property and casualty company statutory surplus. So at some point in time, and I don’t know exactly when it is and I won’t put a date on it, at some point in time CNA should be able to begin paying down that deferred and ultimately it should all be repaid.

David Adelman - Morgan Stanley

Second question, Diamond’s purchase of this rig during the quarter, is there a broader statement one can read from that, vis a vie, Loews general view towards sort of the economic and financial state of the world?

James S. Tisch

This was a terrific rate. Is a terrific rate. It is, as I said in my remarks, if you had ordered it last year, chances are you’d pay $750 million for the rig. We were able to buy it for $460 million and we’re not going to have to wait a long time to put it to work. If you ordered it last year at $750 million you have to wait three years to actually get it on the payroll with the customer, because it takes so long to build. So we just view this as a very attractive purchase for Diamond.

In terms of what conclusions can you draw about the shape of what’s going on in the offshore drilling business and in the world, it shows what happens, number one, when people are over levered. This was an auction of the rig by the yard because they were not paid by the owner of the rig. And in terms of the world, I think it reflects the fact that people are somewhat concerned that oil prices are down. Now it all matters on your perspective. Oil prices are down from $140, down by 50%, but they’re up by 100% from $35 a barrel I guess in the first quarter of this year. I don’t have a forecast on where oil prices are going, but at today’s prices of $70 a barrel, my guess is that drilling is still very economic for the major oil companies. So we’re looking forward to operating the rig at attractive day rates.

David Adelman - Morgan Stanley

And then lastly on HighMount, do you have available to share with us the average price at which you’ve hedged the natural gas production that you reference for ’09 and 2010? And also do you see any realistic scenarios where Loews would have to put additional capital into HighMount excluding sort of an affirmative decision to either significantly ramp up the drilling activity and/or an acquisition?

James S. Tisch

Okay. So the weighted average price of our hedge for the third and fourth quarter of ’09 is $7.79 and for 2010 it’s $6.99. In terms of Loews putting in more cash into HighMount, we have no expectation of having to do that at all. That’s not in our game plan.

Operator

Your next question comes from Andy Baker - Jefferies & Company.

Andy Baker - Jefferies & Company

A couple of questions. First I guess is it’s next quarter so time for me to ask, $2.4 billion in holding company cash, we have to look at, you know, your desire to sleep at night. We have to look at your requirements of your current portfolio. We have to look at where your stock price is. We look at where assets are. I mean stock prices are back up, maybe asset prices are still coming down. How should we think about over the next, you know, how you might look to deploy this, if at all, over the next, you know, 12 to 18 months?

James S. Tisch

You know, Andy, not only have you dialed into the calls, you’ve also been listening carefully and I think I can’t add anything to it. We are looking for opportunities. We constantly kick tires. But the one thing is that you didn’t quote me on and I’ll quote myself now is, “If there’s nothing to do, do nothing.” So we’re constantly looking. We constantly see that cash there. We’re constantly thinking about what to do with it. And as soon as we figure it out, we’ll issue a press release.

Andy Baker - Jefferies & Company

As sort of a take off on that, you know, the market has, you know, for a while seemed to give you credit. Following the spinoff of Lorillard, it seemed to give you credit, you know, for your assets, both public and private. You know you were trading at a nice premium to the value of your public holdings. I mean the market was giving some real value to your private. And it seems like you have sort of whittled away over the course of the past year. And any thoughts on, you know, how important is it to you to reduce the discounts NAV or is the real goal just to increase NAV and let the market ultimately give you credit for that?

James S. Tisch

You know from my perspective it’s really frustrating. The stock, as you said the stock trades recently as much as $1 below the value of the public pieces. That doesn’t take into account the nonpublic pieces. And the nonpublic pieces include our cash net of debt. So $2.4 billion less the $867 million of long term debt. It includes our GP interest in Boardwalk Pipeline. It includes Loews Hotels. It includes our investment in HighMount Exploration. It includes $200 million that we have in debt of Boardwalk Pipeline. And it includes $1.25 billion of CNA preferred stock. So sometimes I feel, when I think about Loews, like the guy who’s hawking something on TV saying, “But there’s more. And there’s more. And there’s more.” And listen, the market is well aware of that but it selects not to pay attention to it.

The market is also well aware, I’m sure, of although I’ll reiterate it now just to make sure, the market is well aware of number one, our quest to build long term value, our track record in doing that. The last number I saw was a 16% compound annual rate of return over the past 49 or 50 years. And if you go back more recently, I saw a figure from 1981 of a 19% compound annual rate of return.

So I’m not complaining, because rather than complain what we have done from time to time when the market doesn’t recognize the value is repurchase shares. And just to repeat one more time, we have a history of repurchasing shares going back to the seventies and every decade, we have purchased at least 25% of our outstanding shares in that decade. So that in 1970 we started off with the equivalent today of 1.300 billion shares and at last count that’s down to about 433 million.

So thank you for that question allowing me to stand up on my soapbox and give a little rant.

Andy Baker - Jefferies & Company

Thank you. I’m right there with you on that soapbox.

Operator

Your next question comes from Michael Millman - Millman Research Associates.

Michael Millman - Millman Research Associates

Actually following up on that last is that I guess on a previous call you had said that you were super cautious on use of cash because of subsidiary or potential subsidiary needs. And so wanted to get an idea of what you thought subsidiary needs might be at this point.

James S. Tisch

I am hopeful that subsidiary needs from Loews are zero. That’s my hope and expectation.

Michael Millman - Millman Research Associates

Would you run your cash portfolio on that basis?

James S. Tisch

Yes. But even if there are needs from the subsidiaries, I mean, we’re talking a small percent of the $2.4 billion that Loews has.

Michael Millman - Millman Research Associates

I guess you didn’t repeat that you have asbestos pockets. Should we assume that?

James S. Tisch

Yes, my pockets are still asbestos lined and money doesn’t burn a hole in them.

Michael Millman - Millman Research Associates

Okay. Great. We wanted to make sure nothing has changed.

James S. Tisch

Nothing has changed.

Operator

There are no further questions at this time. I’ll now turn the call back over to Mr. Daugherty for any closing remarks.

Darren Daugherty

Thank you for joining us on the call today. A replay and a downloadable mp3 file will be available on our website, loews.com, in approximately two hours. That concludes today’s call.

Operator

Thank you all for participating in today’s Loews second quarter 2009 earnings conference call. You may now disconnect.

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