Loews Corporation
Q4 2010 Earnings Call Transcript

Published: 7 Feb 2011

[Operator:]

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 Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Darren Daugherty, Director of Investor Relations. Please go ahead.

[Darren Daugherty:]

Thank you, Jackie. Good morning, everyone. Welcome to Loews Corporation's Fourth Quarter 2010 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, Chief Executive Officer of Loews; and Peter Keegan, the Chief Financial Officer of Loews. 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. 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 10-K and 10-Q filings with the SEC. During the call today, we might also discuss certain non-GAAP financial measures. Please refer to our security filings for reconciliations to the most comparable GAAP measures. I will now turn the call over to Loews' Chief Executive Officer, Jim Tisch.

[James Tisch:]

Thank you, Darren. Good morning, and thank you for joining us on our call today. Results for the quarter and the full year reflect growth at Boardwalk Pipeline, steady performance at CNA and some ongoing challenges facing Diamond Offshore, HighMount E&P and Loews Hotels. CNA reported good results for the fourth quarter benefiting from increased investment income and favorable prior-year development in its core property and casualty operations. CNA has reported favorable prior-year reserve development for 16 consecutive quarters. CNA's results for both the quarter and the full year demonstrate a strong P&C underwriting and the progress it has made on its profit-improvement strategy. CNA's underwriting discipline is demonstrated by five consecutive quarters of rate increases in the Commercial segment as well as continued strength of the Specialty segment. CNA finished the year with a strong balance sheet and with a book value per share increasing by 13% during 2010. During the fourth quarter, however, CNA's book value per share decreased by 5%, reflecting declines in CNA's net unrealized gains position, primarily as the result of higher interest rates. I'm sure that most everyone understand the impact of interest rates on fixed income portfolio. Nonetheless, I want to reiterate that in the future, interest rates in the U.S. could and probably will rise. And if this occurs, CNA, along with most P&C insurance companies, would likely see a negative impact on the market value of their fixed income investment portfolios, which would in turn negatively impact GAAP book value. But there is a silver lining to a higher interest rate environment

[Peter Keegan:]

Thanks, Jim, and good morning, everyone. For the fourth quarter, Loews' net income increased to $466 million from $403 million in the prior year quarter. For the full year, Loews' net income increased to $1.3 billion from $564 million in 2009. Full year results include a few one-time charges. 2010 results include a charge of $328 million after tax and non-controlling interests related to CNA's Loss Portfolio Transfer agreement with National Indemnity Company. And results for 2009 include an impairment charge of $660 million after tax related to the carrying value of HighMount's natural gas and oil properties. For the quarter, Loews' reported net investment losses of $22 million after tax and non-controlling interests as compared to net investment gains of $46 million after tax and non-controlling interests in last year's fourth quarter. Negatively impacting the quarter were increased losses at CNA and sales of securities resulting from continued management of portfolio risk. Net investment gains in the fourth quarter of 2009 included a $217 million gain from the sale of CNA's common stock holdings in Verisk Analytics. For the full year, net investment gains were $27 million after tax and non-controlling interests compared to net investment losses of $503 million in 2009. Net investment gains in 2010 were driven by improvements in capital markets and included OTTI losses of $136 million versus OTTI losses in 2009 of $791 million, primarily consisting of residential and commercial mortgage-backed securities in CNA's investment portfolio. For the fourth quarter, CNA's contribution to Loews' operating income improved to $297 million from $182 million in the prior-year quarter. The improvement was primarily driven by increased favorable net prior-year development. Additionally, investment income increased primarily from higher limited partnership income and an investment shift during 2010 from lower-yielding, short-term and tax-exempt securities to higher-yielding, taxable, fixed-maturity securities. For the full year, CNA's contribution to Loews' operating income decreased to $609 million from $904 million in 2009. Excluding the charge associated with the Loss Portfolio Transfer, CNA's contribution to Loews' 2010 operating income increased to $918 million. Operating income increased due to favorable net prior-year development, partially offset by decreased current accident year underwriting results, including higher catastrophe losses. For the fourth quarter, Diamond Offshore's contribution to net income decreased to $113 million from $128 million in the prior-year quarter. For the full year, Diamond's contribution to net income decreased to $446 million from $642 million in 2009. This decrease was primarily related to lower average day rates and utilization, which have been negatively impacted by the reduction in drilling in the U.S. Gulf of Mexico. HighMount's reported net income of $21 million for the quarter versus $35 million in the prior-year fourth quarter. HighMount's net income for the full year was $77 million. Net income for 2009 as adjusted, excluding impairment charges of $660 million after tax, was $123 million. The declines for both periods primarily resulted from the sale of non-core assets located in the Antrim Shale in Michigan and the Black Warrior Basin in Alabama during the second quarter of 2010. As a result of the Michigan and Alabama asset sales, a portion of HighMount's interest rate and commodity hedging activities were no longer probable of occurring and hedge accounting was discontinued. This resulted in an after-tax loss during the first half of 2010 of $19 million, which is reported under corporate and other investment gains and losses. In the fourth quarter, HighMount's total production in the Permian Basin increased slightly to 17.5 billion cubic feet equivalent from 17.4 Bcfe in the prior-year fourth quarter. However, the average realized price decreased to $6.12 per Mcfe from $7.09 per Mcfe for the same period. Production details for the fourth quarter of 2010 are as follows

[Darren Daugherty:]

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

[Operator:]

[Operator Instructions] Your first question comes from the line of Robert Glasspiegel with Langen McAlenney.

[Robert Glasspiegel:]

I thought you said that you think that interest rates are going to likely go up. Do you think that's going to be driven by higher inflation or just supply/demand considerations? And is that affecting how you are positioning the portfolio duration-wise?

[James Tisch:]

There are a whole host of reasons why I believe that interest rates are going to go up

[Robert Glasspiegel:]

I was wondering if you could give us some guidance on how big of acquisition you theoretically consider within the gas area.

[James Tisch:]

I don't know the exact size that we would look for. The thing that I know and believe is that in the course of the next few years, there will be plenty of opportunities to acquire gas and liquid properties. And I believe that with the right management, there will be good opportunities to earn very good rates of return on funds invested in the business. And we are ready, willing, able to make the commitment of those funds. But I don't want to give you a size for what we're looking at. Obviously, we're not looking to do a $10 billion transaction. So beyond that, I can't really state what we're looking to do.

[Robert Glasspiegel:]

I think HighMount was originally $4 billion in total. I mean, could you do something that big? I mean, you just certainly have the cash available if you did want to.

[James Tisch:]

I’d prefer not to get into a game of narrowing down the size.

[Robert Glasspiegel:]

We got the breadbasket lower than $10 billion, though, you said, right?

[James Tisch:]

A lot lower, yes.

[Operator:]

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

[David Adelman:]

Jim, just as a follow-up to that, would you be willing to use holding company resources, financial resources, to do a transaction? Or would you limit an acquisition at HighMount to what HighMount on its own could finance?

[James Tisch:]

No, we would use Loews Corporation cash.

[David Adelman:]

Secondly, during the quarter, was there any material change in the makeup of the holding company's cash and equivalent holdings? In other words, how you’re investing it.

[James Tisch:]

I wouldn't say there were significant changes. I would imagine that our investment in stocks increased because the stock market went up. And likewise, our investment in hedge funds probably increased because they, too, earned a few percentage points during the quarter. But otherwise, there were no real significant changes.

[David Adelman:]

And then, on Loews Hotels, just out of curiosity, with RevPAR up considerably, why isn't that business unit operating more profitably?

[Peter Keegan:]

Well, it still a slow recovery, David. And keep in mind that what hasn't come booming back yet is the, well I'll call it convention business, but the large business travelers paying high rates and spending more money on hotels. So while the business clearly has passed the bottom and is improving, it's got a ways to go before we start seeing that in the bottom line fully.

[Operator:]

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

[Michael Millman:]

Is there such a thing as having too much cash? We know about your asbestos pockets, but maybe even that has some holes in it. And to what extent is your repurchases determined by how much cash you have available?

[James Tisch:]

First of all, is it possible to have too much cash? Yes, I guess so. But I would say that I don't think that we're there. So that's not a problem that I'm worried about. In the past, we have had more cash than we have today. Although at the time, we had more shares. So on a per-share basis, we're probably at the high point. But I still don't feel that we're drowning in cash. And I believe that over the next few quarters and years, we'll have plenty of opportunities to use that cash. At the time that -- by corporate philosophy, we like having a lot of cash on our balance sheet. We understand that it is a drag on return on equity and other statistics. But it's been the cash that's been on the balance sheet that's given us the opportunities to really do value-creating transactions. In a way, it allowed us to invest in CNA and Boardwalk at a time when if the markets would've been open to them, they would've been open at a very, very high price. It gave us the opportunity to buy Texas Gas Transmission in '03 and Gulf South Pipeline in '04. It allowed us to get into the Gas Exploration and Production business in '07. And going back to the 80s and early 90s, it was the cash on the balance sheet that allowed us to jump into the opportunity of buying offshore drilling rigs when nobody else wanted them. So we like to have cash and not have to go to bankers and other financiers when we want to buy what I would call -- make value-creating investment. With respective to our share repurchases, all I will say is that there is a minimum amount of cash that we want to have on the balance sheet that will determine that we won't -- -- if we go below that minimum amount of cash, we would not buy shares. But to the extent that we're above that amount, and we are to today, obviously, then we'll buy shares based on our assessment of whether we think it's attractive value for all of our shareholders.

[Michael Millman:]

So in other words, more cash wouldn't necessarily increase your repurchases?

[James Tisch:]

Correct.

[Operator:]

Your next question comes from the line of Amit Kumar with Macquarie.

[Amit Kumar:]

I guess just staying on the discussion on capital. Can you sort of just talk about your ownership of CNA? You've had this since 1974. And I'm just wondering, when you look at the returns, do you still sort of intend to hold it long term? Or has to that thought process changed at this time?

[James Tisch:]

We absolutely positively intent to hold it long term. We have been long-term holders of CNA, as generally we are long-term holders of all of our subsidiaries. That's number one. Number two, I believe that we have a terrific management team in place and we have -- not just in terms of the CEO leadership, but also in terms of the entire senior staff. So I think that CNA is really poised for growth. Additionally, we're coming off of three or four or five years of price declines in the insurance industry. And I believe that at some point, hopefully in the not-too-distant future, we're going to see price increases. And in fact, in our commercial insurance line for the past five quarters, we've had price increases. So I think CNA is poised for growth. It trades at a very big discount to its book value. In terms of its financial strength, it has the strength of a company that would be AA rated by some of the rating agencies. So we are very pleased with CNA. We're long-term holders, and I'm looking forward to many years of good earnings from the company.

[Operator:]

[Operator Instructions] Your next question comes from the line of Steve Spencer [ph], private investor.

[Unknown Speaker:]

Could you please comment on the announcement this morning from Ensco and Pride petroleum please?

[James Tisch:]

Apparently, this morning Ensco announced that it was going to buy Pride using a combination of cash and stock. And according to the release that I saw, they will now become the second largest offshore drilling rig operator in the world. I've been involved in this industry for over 20 years, and I've seen lots of mergers and conglomerations. And this is the one industry where I can very firmly say that if you are at least of a minimum size, that you can compete with the biggest rig owners out there. And for sure, Diamond Offshore qualifies as having enough scale in order to be able to compete. When you look at the release, it says they anticipate about $50 million of savings by putting the two companies together. Now on the one hand, $50 million is a lot of money, but on the other hand, in the context of the size and scope of the transaction, I think it's about a $7.5 billion transaction, the notion that you're getting $50 million of synergies makes it plain that the reason for the transaction was not to gain those synergies. I have no doubt that Diamond Offshore can easily compete just as we have no trouble competing against Transocean and the other large offshore drilling operators.

[Operator:]

Your next question comes from the line of Mike Shinnick with Wasatch.

[Michael Shinnick:]

My question relates to capital allocation as well. Some of the earlier comments and question kind of presume doing something else in the energy sector. Could you comment in terms of you think Loews' circle of competence, what other industry groups you might be open to in terms of purchasing a stake in private or public company?

[James Tisch:]

I can't give you any specific industries per se. What I can do is tell you what I think that we bring to the party when we acquire a company. When we acquire a business, we look at the business from a very neutral perspective. We look at it from the perspective of the only thing we're looking to do is to maximize of the value of that business over the intermediate to long term. We think carefully about strategy and the strategy that the management of the acquired company sets out for their business. We challenge them on that strategy. And then we're closely involved in the allocation of capital and the capital spending and the investment within the business. And we like to think that, that discipline look at strategy and capital allocation yields results for all the shareholders that are beneficial over the long term. I think that was felt, for example, in the Offshore Drilling business, where we're constantly leaning against the wind. When others are out buying rigs, we were instead upgrading rigs at less than half the price and in half the time. We bought rigs when others didn't want to buy rigs, when we bought the Courage and the Valor two and a half years ago. And I believe that we're able to do that because we provide for the company a long-term strategic view. We're accustomed to cyclical markets, and we're accustomed to leaning against the wind so to do generally what the other participants in the market are not doing at that point in time.

[Michael Shinnick:]

Maybe I'll come from a different direction. How about in terms of sectors or groups where you see attractive valuations, say tangible assets given your view on interest rates. Would you return to say the oil tanker marker, dry bulk or timber? What types of things look attractive?

[James Tisch:]

I don't want to get into specific industries. So I'm just going to leave my answer with what I said.

[Operator:]

That was our final question. I'll now turn the floor but back over to Mr. Daugherty for any closing remarks.

[Darren Daugherty:]

Thank you for joining us on the call today. A replay will be available on our website, loews.com, in approximately two hours. That concludes today's call.

[Operator:]

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