Loews (L) Q2 2016 Results - Earnings Call Transcript

| About: Loews Corporation (L)

Loews Corp. (NYSE:L)

Q2 2016 Earnings Call

August 01, 2016 11:00 am ET

Executives

Mary Skafidas - Loews Corp.

James S. Tisch - Loews Corp.

David B. Edelson - Loews Corp.

Analysts

Josh D. Shanker - Deutsche Bank Securities, Inc.

Robert Glasspiegel - Janney Montgomery Scott LLC

Michael Millman - Millman Research Associates

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Loews Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question-and-answer session. Thank you.

I would now turn the conference over to Ms. Mary Skafidas. Please go ahead.

Mary Skafidas - Loews Corp.

Thank you, Kristal, and good morning, everyone. Welcome to Loews Corporation second quarter earnings conference call. A copy of our earnings release, earnings snapshot, and company overview may be found on our website, loews.com. On the call this morning, we have our Chief Executive Officer, Jim Tisch; and our Chief Financial Officer, David Edelson. Following our prepared remarks this morning, we will have a question-and-answer session.

Before we begin, however, I will remind you that this conference call might include statements that are forward-looking in nature. Actual results achieved by the company may differ materially from those projections made in any forward-looking statements, due to wide range of risks and uncertainties, including those set forth in our SEC filings. Forward-looking statements reflect circumstances at the time they are made, 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 reconciliation to the most comparable GAAP measures.

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

James S. Tisch - Loews Corp.

Thank you, Mary, and good morning. We're going to change the format of this call slightly today just to mix things up a bit. Our CFO, David Edelson, will start by walking you through Loews' second quarter results, and then I'll talk about our view of the medium-term to long-term prospects for each of our businesses.

Okay, David, over to you.

David B. Edelson - Loews Corp.

Thank you, Jim, and good morning. Loews reported a net loss of $65 million or $0.19 per share in Q2 2016 as opposed to net income of $170 million or $0.46 per share in last year's second quarter. Year-to-date, we have generated net income of $37 million or $0.11 per share.

Our second quarter earnings were dominated by asset impairments at Diamond Offshore, which overwhelmed favorable results posted by CNA Financial and Boardwalk Pipeline, as well as good returns generated by our parent company investment portfolio. The impairments at Diamond, which totaled $678 million pre-tax on its books reduced our net income by $267 million.

Before I drill into Diamond's results, let me summarize the year-over-year quarterly net income contribution by each of our subsidiaries and by the parent company investment portfolio. Two of our subsidiaries, CNA and Boardwalk, posted significant increases in net income contribution over the prior year. CNA contributed $189 million including realized gains up 52% from last year and Boardwalk's contribution rose from $12 million last year to $17 million this year.

In addition, the parent company investment portfolio generated $56 million of after tax income this year, a big swing from the last quarter's $8 million loss and the $7 million gain in Q2 2015. Our remaining two subsidiaries, Diamond and Loews Hotels, posted year-over-year declines in each case driven by unusual items. Diamond contributed a $290 million net loss in Q2 2016 versus net income of $45 million last year and Loews Hotels essentially broke even this quarter, down from net income of $8 million in the prior year. Loews Hotels' results this quarter were significantly affected by the write-down of an equity investment in a joint venture hotel property. But clearly, Diamond drove our disappointing second quarter results, so let me start by explaining Diamond's second quarter.

The offshore drilling market continues to be extremely challenged with limited new drilling opportunities and an oversupply of rigs. In addition, customers are choosing not to extend current contracts and in some cases, seeking ways to early terminate existing contracts.

Diamond assessed its rig fleet for impairment at the end of the quarter and in light of the difficult market environment and Diamond management's evolving view of the length and severity of the downturn, eight rigs have been written down to substantially lower net book values. These rigs are a mix of third generation, fourth generation and fifth generation semi-submersibles. Four of the eight rigs being impaired are stacked, two are still on contract and two are being scrapped.

There are four key drivers of the write-downs on the six rigs not being scrapped. Number one, longer lapse time until the rigs are projected to return to work. Number two, higher cost to reactivate the stacked rigs and ready them to return to work. Number three, lower expected future day rates once the rigs return to work. And finally, lower assumed utilization once the rigs return to work. Absent its asset impairments, Diamond's operating income was relatively weak during the quarter. The combination of fewer rigs on contract and an unexpectedly high amount of unscheduled downtime on its new build drillships led to a 42% decline in contract drilling revenues versus the second quarter of 2015. Diamond's net income in Q2 was further reduced by a valuation allowance for current and prior year tax assets associated with foreign tax credits as Diamond no longer expects to be able to utilize these tax credits to offset income taxes in the U.S.

Jim will provide further thoughts on Diamond's prospects shortly. I would just emphasize that Diamond remains financially strong and is well-positioned from a capital and liquidity standpoint to weather today's storms, continue as a leader in the offshore drilling space, and seek to turn adversity into opportunity.

Turning to CNA, in the second quarter, CNA contributed a $189 million to our net income, which includes $6 million of realized investment gains. This compares to a net income contribution of $124 million in the second quarter of 2015. This substantial increase was primarily driven by three items. Number one, higher favorable prior development this year, emanating from all three P&C businesses: specialty, commercial and international. Number two, the absence in this year's second quarter of a retroactive reinsurance charge, associated with a Loss Portfolio Transfer of CNA's asbestos and environmental liabilities with National Indemnity. And three, improved results in the Life & Group segment, reflective of the Q4 2015 reserve unlocking that reset the underlying actuarial assumptions on the long-term care reserves.

CNA's core P&C business posted net operating income for the quarter, down slightly from the prior year, despite a solid one point improvement in the calendar year combined ratio. From an underwriting standpoint, the impact of higher favorable prior development was offset by an increase in CNA international's accident year combined ratio. This increase was driven by higher catastrophe losses as well as lower accident year of non-cat underwriting profit attributable mostly to large loss activity.

Additionally, P&C's net operating income during Q2 2016 was negatively affected by currency exchange rates. Last year, retroactive reinsurance charge reduced CNA's contribution to our second quarter net income by $49 million. There was no such charge in this year's second quarter as CNA completed its asbestos and environmental reserve reviews this year in the first quarter.

During the second quarter, CNA's Life & Group segment which houses the long-term care business produced a $4 million net operating loss, compared with a $24 million operating loss in the second quarter of last year. This slight loss was essentially in line with expectations, following the unlocking of the company's long-term care active life reserves at year-end 2015.

As a reminder, the financial results for CNA's long-term care business, reflect a variance between actual experience and management's best estimate actuarial assumptions. On a year-to-date basis, the Life & Group segment has posted a $6 million net operating loss versus a loss of $41 million in the first half of 2015.

On to Boardwalk, Boardwalk posted a strong second quarter as net revenues were up 8% year-over-year, just as they were in Q1. EBITDA was up 14% and net income was up 63%. Boardwalk's contribution to our net income increased from $12 million last year to $17 million this year, driven by the strong underlying operating results. A reconciliation of Boardwalk's EBITDA to its net income can be found in its Q2 earnings release. The main drivers of Boardwalk's strong revenue quarter were the return to service of the Evangeline ethylene pipeline in mid-2015, recently completed growth projects placed into service over the last year, and improved revenues from parking and lending and storage.

This year's second quarter revenues were favorably impacted by a $13 million legal settlement, whereas last year's second quarter benefited from the receipt of $6 million of business interruption insurance proceeds. I wanted to highlight two developments with respect to Boardwalk's funding profile. First, Loews agreed to extend the borrowing period under our $300 million subordinated loan agreement by two years from December 2016 to December 2018. All other terms remain the same. Boardwalk has yet to utilize this facility.

And second, Boardwalk exercised a one-year extension option on its credit facility, extending the maturity date for May 2020 to May 2021, although one bank participated in the extension, resulting in $1.475 billion being extended to May 2021. Currently, Boardwalk is not drawn on its credit facility.

Now for a quick review of Loews Hotels, which contributed pre-tax income of $4 million, down from $14 million in the second quarter of 2015. The company's operational strides were masked by the write-down of an equity investment in one of its joint venture hotel properties. Adjusted EBITDA, which excludes this write-down increased over the prior quarter. A reconciliation of adjusted EBITDA to net income can be found in the Loews quarterly snapshot on loews.com. Please note that we expect the hotel company's second half results to be somewhat muted by recently commenced renovations at the Loews Miami Beach Hotel.

Let me turn to the parent company. In the second quarter, the parent company investment portfolio generated after-tax income of $56 million compared with income of $7 million in the prior year quarter. Equities, including gold-related equity investments accounted for the bulk of the income in the year-over-year increase. We ended the quarter with parent company cash and investments of $4.9 billion and debt of $1.8 billion.

During the quarter, we received $74 million in dividends from our subsidiaries, $61 million from CNA and $13 million more Boardwalk. Year-to-date, we have received total dividends of $632 million combined from CNA and Boardwalk. Our share repurchase activity since last quarter has been modest. We repurchased 1.9 million shares from April 1 through the end of July spending $76 million. Year-to-date, we have spent just under a $109 million repurchasing 2.8 million shares.

Average shares outstanding were 339 million in the second quarter, down 8.5% from 370 million in Q2, 2015.

And now, I will hand the call back to Jim.

James S. Tisch - Loews Corp.

Thank you, David. I'd like to talk about the medium-term to long-term prospects of each of our subsidiaries. Actually, I think it's much – a much more fitting conversation for us to have since at Loews quarterly results are not necessarily indicative of the long-term performance and ultimate value of our businesses.

While we take notice of the near-term developments, we rarely measure the significance of an event or the returns on an investment over the short-term. As always, we are focused on a long-term value we can deliver to shareholders.

First, let's turn to Diamond Offshore. I want to start out by addressing the proverbial elephant in the room. Diamond's results this quarter were severely impacted by the rig impairment charges David mentioned earlier in the call. Keep in mind that the severe downturn in the offshore drilling market, combined with the difficulty in predicting the timing and degree of this inevitable recovery precipitated these impairments. It's important to note however, that Diamond is scrapping only two of the eight rigs being impaired today. Having been in the offshore drilling business for nearly 30 years and the supertanker business for seven years prior to that, I've seen cyclical downturns before. I'm hopeful that in this case, and similar to prior cases, the rigs being stacked today will work again and earn an attractive rate of return in the future.

Holding on to and ultimately reactivating capable older rigs is a strategy that Diamond has employed historically to create value and to differentiate itself from its competitors. There is no doubt that an oversupply of sixth-generation drillships currently exists. However, I believe that the older semisubmersibles being stacked today may indeed find work as the market recovers on jobs for which these third-generation, fourth-generation and fifth-generation rigs are better suited.

Diamond's innovative strategies, along with its financial strength and conservative capital management should enable the company to emerge from this turbulent market cycle stronger than any of its competitors. As I've said before, if there is a silver lining to this oil price downturn, it's that the lack of drilling activity today will only help speed the recovery of oil prices tomorrow. The effects of the current underinvestment in oil drilling are already starting to be evident, and will play out in the coming years. Demand for oil is still growing and remains quite healthy. With all its new rigs contracted at least through 2019, I'm confident in Diamond's medium-term to long-term prospects. While today the situation may seem bleak, we've seen this movie's prequel before and remember well how it ended.

Now, let's turn to our other energy subsidiary, Boardwalk Pipeline Partners. When discussing the future prospects of the pipeline space, I hear a lot about the challenges the industry faces, commodity pricing exposure, re-contracting issues, ballooning Marcellus production and slowing gas demand growth. While all of these factors are important, we believe that demand for U.S. natural gas will once again reaccelerate, both domestically and internationally.

As we know, exports of natural gas are increasing and the U.S. has the capability to produce an enormous amount of low cost natural gas. As of today, there are commitments to build LNG export plants with capacity of 8.5 billion cubic feet per day. The majority of these plants are located on the Gulf Coast and are scheduled to come online before 2020. Pipeline exports to Mexico are also increasing. Last year, these exports grew by nearly 1 billion cubic feet per day, which represents 1.5% of U.S. supply. Those exports are on track for a similar increase this year.

Additionally, industrial demand for natural gas and liquids is growing spurred by petrochemical production. This growth is a boon for Boardwalk, which provides services to the Gulf Coast petrochemicals industry and has key assets located in Louisiana's industrial hub.

Boardwalk is capitalizing on these trends with several natural gas and liquids projects already underway, all of which are on schedule and on budget. As these projects come into service over the next several years, they will also help offset possible revenue declines from renewals of certain legacy contracts and contribute to Boardwalk's cash generation.

Turning to the insurance market in CAN, you're familiar with some of the challenges facing this sector, including industry consolidation, a slow growth global economy, persistently low interest rates and decelerating premium rates. While not immune from these challenges, CNA has continued to make progress on its major strategic effort to become a top quartile underwriter. CNA is also aided by the fact that it's operating at a time when the insurance industry's capital management is extremely disciplined. Over the last few earnings calls, I've spent time explaining why I strongly believe that CNA can compete effectively in this environment, while also delivering strong operating profits.

Just to review, CNA has a strong foundation built on financial strength, outstanding human capital that is continually improving, a strong branch network and rigorous underwriting disciplines that have resulted in improved risk selection. So while the insurance industry may face some headwinds, CNA has never been stronger with regard to its capital, its brand and its competitive position.

And last but not least, let's take a look at Loews Hotels. The hotel industry continues to enjoy favorable market fundamentals albeit at a slowing pace. For the last six years, hotel room demand has outstripped supply and while both continue to grow, supply has been catching up. The increasing supply of rooms does create a more competitive environment, but there's still plenty of growth to be had. Another industry dynamic is the trend towards consolidation of major hotel companies. We believe that this trend can be a good thing for smaller and more nimble companies such of Loews Hotels.

After all, it's much easier for our chain of 25 properties to roll out and deliver innovative new services and offers for our guests. Loews Hotels will remain focused on opportunistically growing the chain in key markets. The focus of our growth will be on the group hotels, our sweet spot, as well as resort destinations such as Orlando.

Just two weeks ago, Loews opened its fifth hotel in Orlando, the 1,000 room Sapphire Falls Hotel bringing our key count there to sub 5,200. The grand opening of this new property is just the latest development in what has been an exceptionally successful partnership with Universal Orlando Resorts.

Before we proceed to our Q&A, let me review why I'm confident about the medium-term to long-term prospects of each of our businesses. CNA has improved its underwriting performance and paid significant dividends to shareholders while maintaining its strong capital position. Diamond is currently in a very tough market, and although we can't predict when the market will turn, Diamond is weathering the storm well. It's been conserving its financial resources and maintaining its position as the strongest offshore drilling company in terms of credit rating, finance, innovation and leadership.

Boardwalk has made smart capital decision that should allow it to fund its announced growth projects and to contribute to its cash flow once these projects come online. And Loews Hotels continues to grow its chain steadily with an eye towards increased profitability and cash flow. As for Loews Corporation, we have always maintained a fortress balance sheet. Our parent company cash and investments exceed our debt just as they have for the vast majority of the last four decades. Despite the current turbulence in the energy sector, our financial position remains ironclad and allows us to take advantage of opportunities as they arrive. Whatever the environment Loews and its subsidiaries are operating in, our strategic imperative remains the same, creating value for shareholders over the long-term.

And now, I'd like to turn the call back to Mary Skafidas.

Mary Skafidas - Loews Corp.

Thank you, Jim. Kristal, at this time, we'd like to open up the call for any questions.

Question-and-Answer Session

Operator

And your first question comes from the line of Josh Shanker with Deutsche Bank.

Josh D. Shanker - Deutsche Bank Securities, Inc.

Hey. Good morning, everyone.

James S. Tisch - Loews Corp.

Good morning.

Josh D. Shanker - Deutsche Bank Securities, Inc.

So, I want to throw a bunch of things out there and have you sort of explained to me relative valuations for various things. Back about a year ago when oil was priced at around, I think, $35 a barrel and Diamond's stock was trading below $30 you bought back some stock, I am sure with an eye on where you thought two-year oil was going to be. About a quarter ago, with CNA stock dropping below $30, and trying to, I guess, capture what you expect to be about a 10% dividend yield, you bought back stock. So, both Diamond and CNA might be attractive to you – not as attractive, but can we talk about the price of oil, the price of a 10% dividend yield and your willingness to buy back subsidiary stock as opposed to your own?

James S. Tisch - Loews Corp.

Okay. Let's start with Diamond. When we bought back the shares of Diamond, I think that, we did not anticipate that the decline in offshore drilling would be as bad as it has been. We didn't anticipate that oil prices would go into the $20s, we didn't anticipate that oil companies would cut back their capital budget so dramatically. And we certainly didn't anticipate that utilization today of drilling rigs would be at the levels that they're at. So, I think we were surprised and I daresay that the rest of the market was surprised by what's happened in the offshore drilling industry. But now, I think, we recognized very clearly exactly where we are in that business.

With respect to CNA, I would say it's just the opposite of Diamond. Things have worked out pretty much as we have expected. CNA continues to improve on its underwriting, its earnings have come in very strong and when we bought CNA's stock in the $20s we said then and we say now the stock is just too damn cheap. You're right, when we bought it, it did represent a 10% yield when you look at – look in the rearview mirror and take into account the special dividend along with the regular dividend. And we believe very much in the strength of CNA's business. As I said in my remarks, we believe strongly in the capital level that CNA has and we believe strongly in the improvements that are taking place at CNA.

Josh D. Shanker - Deutsche Bank Securities, Inc.

And so – and versus Loews' stock – the return on Loews' stock, I guess.

James S. Tisch - Loews Corp.

So when I think about what I do, the primary – I think my primary job is that of capital allocator. We allocate capital to Loews share repurchases to purchases of subsidiary shares. We allocate capital from time-to-time to our subsidiaries to the extent that they might need capital from Loews and it represents a good return to Loews. And then, we also allocate capital to – less often, but in bigger amounts to repurchase – to purchase, sorry, new businesses. So, these are just the types of capital allocation issues that we have the competition for our capital. And from my perspective and the Loews Corporation perspective, we are constantly making judgments every day, what is the best place for our capital, and the times when we bought CNA shares and the times when we bought Diamond shares, at those points in time, without the benefit of rearview mirror today, we decided to purchase those shares.

Josh D. Shanker - Deutsche Bank Securities, Inc.

And just backtracking, do you have a view on two-year oil?

James S. Tisch - Loews Corp.

I like it a lot. I think the – as I said in my remarks, I think oil companies in the world in general are dramatically under-investing in oil production capacity, I think that – I think, I believe, I know that depletion is real that oil wells do not continue producing forever, some of them decline at 70% a year, some of them decline at 5% a year, but all of them decline. And to the extent that the world is not reinvesting in new productive capacity, those declines in production will be felt in the coming years. Combined with that even though some say that oil demand growth is sluggish, oil demand is still continuing to increase every year generally on the order by about 1 million barrels a day or about 1%. So, as you add a few years together of underinvestment, combined with continued demand growth, I think you can see that in a few years time, prices will have to go up in order to provide the investment returns needed by oil companies in order to make the investment in more productive capacity. And I think that in two years' time, that will certainly happen. I recall – I – in prior calls, I've said that $65 was my fearless forecast, for year-end 2018 oil, I think there is a good chance that oil will be significantly higher than that on the order of, say, $10 a barrel.

Josh D. Shanker - Deutsche Bank Securities, Inc.

Okay. And in terms of the, I guess, cash flows to Loews Corp right now, as you look at your appetite for deploying dividends, repurchases and other opportunities, is there a corporate outlook about how much cash flow you expect your businesses to generate to you in the next 12 months?

James S. Tisch - Loews Corp.

Yes. Yeah, yeah. We think about that all the time. We don't...

Josh D. Shanker - Deutsche Bank Securities, Inc.

And the CNA dividend coming, I guess, do you consider the special part of the dividend part of that capital management or that cash flow forecast?

James S. Tisch - Loews Corp.

We take all the sources of capital that we anticipate coming into Loews into account. The thing that Loews doesn't do nor do our subsidiaries do is make forward-looking statements as to what specifically those amounts are.

Josh D. Shanker - Deutsche Bank Securities, Inc.

Okay. Thank you for answering all the questions and good luck with the remainder of the year.

James S. Tisch - Loews Corp.

Thank you.

Operator

The next question comes from the line of Bob Glasspiegel, Janney.

Robert Glasspiegel - Janney Montgomery Scott LLC

Good morning, Loews.

James S. Tisch - Loews Corp.

Good morning.

Robert Glasspiegel - Janney Montgomery Scott LLC

The parent investment income was relatively robust, relative to recent run rates in a period where the stock market was not that robust. What was the source of the $56 million?

James S. Tisch - Loews Corp.

As I say, you die by the sword, you live by the sword. We had for a number of quarters, even years, suffered with gold investments. And what's happened in this most recent quarter is that our gold investments came to life. And the investment income in the quarter is primarily attributable to our gold investments.

Robert Glasspiegel - Janney Montgomery Scott LLC

How big a commitment do you have to gold?

James S. Tisch - Loews Corp.

It is surprisingly small. It's about $150 million maybe, this is not – it's not so big. We've had on our gold investments, this quarter, this year-to-date, more than a 100% rate of return, not annualized, just in the six months 100% rate of – greater than a 100% rate of return on those gold investments.

Robert Glasspiegel - Janney Montgomery Scott LLC

Okay. Second question is – you said you are going to have a drag on hotels in the second half because of – was it Miami investments? What's the order of magnitude of that drag or investment spending?

David B. Edelson - Loews Corp.

Well, this is David. Miami is undergoing a renovation and occupancy, RevPAR will be way down during that period of time. So we don't break out the earnings of Miami, or any of our individual properties. So suffice it to say though that Miami is quite a profitable property and the lack of profitability from that will be a drag on earnings.

James S. Tisch - Loews Corp.

I'd say differently....

Robert Glasspiegel - Janney Montgomery Scott LLC

Was it $3 million to $5 million or much bigger than that?

James S. Tisch - Loews Corp.

We're not going to give a range, but let me just say...

Robert Glasspiegel - Janney Montgomery Scott LLC

Okay.

James S. Tisch - Loews Corp.

Miami is a significant contributor to Loews Hotels' income, and its earnings during this capital improvement time will be dramatically affected by the work that's being done. But we strongly believe that the hotel that will be seen by the public, when the work is completed will be a dramatic improvement over an already very profitable hotel.

Robert Glasspiegel - Janney Montgomery Scott LLC

Okay. How long is the renovation period again?

David B. Edelson - Loews Corp.

(34:08) it's planned to be concluded at the end of November, the first part of December.

Robert Glasspiegel - Janney Montgomery Scott LLC

Okay. And last question, Jim, over the last several years your economic view of like 2% GDP growth has proven to be a very valid forecast. We are limping along a little bit below that. Any concerns about the near-term economic outlook? Are you revising sort of your consistent?

James S. Tisch - Loews Corp.

I'm staying with my forecast and when you said growth has been a bit below it, below my 2% mark, I'm reminded of what Larry Lindsey said to me and he may have been quoting some other economists, but he said that economists use decimal points to show the world that they have a sense of humor. So...

Robert Glasspiegel - Janney Montgomery Scott LLC

I get that.

James S. Tisch - Loews Corp.

...I'm going to stick with my 2% growth forecast.

Robert Glasspiegel - Janney Montgomery Scott LLC

There is nothing as far as the election or Brexit or the macro stuff that has happened that makes you pause on that forecast?

James S. Tisch - Loews Corp.

My forecast – my forecast takes all of that and more into account.

Robert Glasspiegel - Janney Montgomery Scott LLC

Great. Okay, that makes me feel a little bit better. Thank you.

James S. Tisch - Loews Corp.

My pleasure.

Operator

And your next question comes from the line of Michael Millman with Millman Research Associates.

Michael Millman - Millman Research Associates

Thank you. So given that you see and that maybe the industry sees some improvement in oil prices the next couple years, that would suggest that there is no rush to dump rigs, I guess, like the Yankees selling. Where does that leave Diamond's strategy?

James S. Tisch - Loews Corp.

So, Diamond is scrapping two rigs, but we believe that even in a robust recovery that there won't be work for those two rigs. Those rigs are generally very old and have served their useful productive lives, but we do have a number of rigs that are stacked, that will be able to come out of stack mode and operate when, as and if, the oil – offshore oil drilling industry improves.

Michael Millman - Millman Research Associates

I guess maybe I didn't ask my question well. In the past, you have indicated that a big turning point is when the industry gets so discouraged or out of money that they are dumping rigs as an opportunity to pick them up. Do you see that occurring in this cycle of two years, five years, whatever it may be?

James S. Tisch - Loews Corp.

So the primary market for third-generation, fourth-generation and fifth-generation rigs, I believe, will be in the shallower water depths where sixth-generation dynamically positioned rigs cannot compete. They just technically cannot compete there. So I think that there will be in the future, a good market for those third-generation, fourth-generation and fifth-generation rigs, but it will be a relatively small market, certainly not as big as it was in prior decades. So we are very comfortable – Diamond is very comfortable with the exposure that it has to that class of rigs.

Michael Millman - Millman Research Associates

So, do you see – maybe I am not understanding your answer. Do you see a dumping, so as to speak, of rigs by the industry creating good opportunity – better opportunities for pricing rigs?

James S. Tisch - Loews Corp.

Yeah. So, I don't foresee Diamond purchasing any third-generation, fourth-generation and fifth-generation rigs. When you look at the economics of purchasing a third-generation, fourth-generation and fifth-generation rig, what you quickly realize is that the purchase price of the rig is really incidental and very small in comparison to the cost of re-commissioning the rig and going through a special survey. So the – in my opinion, the cycle is different, slightly different this time than last time, because in the cycle, say, in the late 1980s, early 1990s, you were able to buy rigs, re-commission them for very little and bingo, you would be back in business. This time, the cost to re-commission the rig after it's been in stacked mode for a few years can, in some instances, be measured – can be greater than a $100 million.

So it doesn't – the economics aren't – are not driven by whether you pay $5 million for the rig or $7 million for the rig. We feel that we have enough of that class of rigs that when and if the industry comes back, we will make a lot of money from those rigs, and we would anticipate making money then from sixth-generation and later rigs if the market truly improves.

Michael Millman - Millman Research Associates

I see. Okay. Slightly different on the gold. With a 2% forecast for economic growth, that would not suggest a lot of inflation, which would seem to argue against gold investments.

James S. Tisch - Loews Corp.

So, I don't want to argue the merits of gold, I would just say that, for us gold has, and our portfolio has been a very good hedge that when stocks are down, gold tends to outperform and when stocks are in – are up, gold tends to underperform. And so, it's been, I think, a very good balance for our portfolio. I am not, nor is anybody else here at Loews what you would call a gold bug, but it was – it is interesting to me that in the first half of this year, we have a relatively modest investment in gold securities we've been able to earn an outsized rate of return on that investment.

Michael Millman - Millman Research Associates

Okay. Thank you.

James S. Tisch - Loews Corp.

Thank you.

Operator

That concludes the Q&A portion of today's call. I will now turn it back to Mary Skafidas.

Mary Skafidas - Loews Corp.

Great. Thank you, Kristal. And thank you all of you 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.

Operator

That concludes today's conference call. You may now disconnect.

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