Loews Corp L
Q1 2013 Earnings Call Transcript
Transcript Call Date 04/29/2013

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 Loews First Quarter 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

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

Mary Skafidas - IR: Thank you Jackie, and good morning everyone. We'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 obligations 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 securities 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 - Office of the President, President and CEO: Thank you, Mary. Good morning and thank you all for joining us 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. Absent 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 is due to reduced investment income at Loews and slightly lower earnings at Diamond.

Let's take a closer look at the results and progress at each of our subsidiaries, starting with CNA. CNA had a good quarter and continued to improve its underwriting performance through risk reduction and pricing discipline, while generating premium growth. Excluding catastrophes and prior year development, CNA saw continued improvement in P&C combined ratio with a year-over-year decrease of just over 1 point and 2.2 point improvement over the last quarter. Overall, net premium growth for the Company's core P&C operation 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 holiday in the first quarter contributed approximately 3 points of CNA's 10% premium growth. While we're pleased with CNA's growth momentum, we expect CNA to remain focused on improving its underwriting margin. As you're 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 though our in-house Investment Management Group. Our priorities in managing the CNA portfolio are to protect principal, maintain ample liquidity, employ prudent asset liability management, and generate strong 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 an investment grade fixed income securities.

To improve overall returns, about 5% of the portfolio is allocated to a diverse mix of limited partnerships. This allocation provides CNA with attractive equity life 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 quiet 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 five year 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 the level that supports robust drilling activity across all water depth particularly in the ultra-deepwater market. This market strength is reflected in Diamond's total revenue backlog which as of April 25, was $8 million with contracts extending into 2019.

Diamond has two 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 all new drill drillships is scheduled to be delivered mid-year and go on day rate in December after moratorium of U.S. Gulf of Mexico.

At Boardwalk, they 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 5, Boardwalk announced its latest proposed project, the Bluegrass Pipeline to be built in partnership with the Williams Companies. This pipeline which reviews a portion of the existing Texas Gas Pipeline to transport natural gas liquids produced in the Marcellus and Utica shale 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 William.

As CEO, Stan Horton mentioned on Boardwalk's call this morning, there are 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, pursuit of regulatory approval and approvals of both the Boardwalk and Williams Board.

HighMount's Operating results continue 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 production, such as its acreage in eastern portion of the Mississippian line 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. And in this line primarily horizontal drilling will be used. In the Wolfcamp both horizontal and vertical well designs are being tested and (considered). Although 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 that 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 chains for growth and enhanced 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 of you on the call know, although we do not broadcast our share repurchase plan, 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' shareholders. As we have said before, we've repurchased our shares at prices below our view of intrinsic value. Not to offset stock option issuance, but we will be intent on 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.

Peter W. Keegan - SVP and CFO: Thanks Jim and good morning everyone. Loews Corporation today reported 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 first quarter of 2012. As Jim mentioned, net income in the first quarter includes an after-tax ceiling test impairment 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 non-cash 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 of 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 development.

Diamond Offshore's contribution to net income for the first quarter of 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 to scheduled rig surveys, which resulted in fewer revenue earning days for the quarter. The Ocean Whtttington and Ocean Ambassador are currently stacked while both were working in 2012. In addition, the prior year quarter included the sale of the jack-up rig Ocean Columbia, resulting in an after-tax gain of approximately $16 million.

Diamond's effective tax rate decreased for the three 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 to 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 contributions 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 non-cash (cost center's) 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 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 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 DC 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 dividend from our subsidiary; 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 continue to repurchase shares after the quarter ended and through April 26, we repurchased the total of 3.2 million shares of Loews common stock for $141 million.

And now I will turn the call back over to Mary.

Mary Skafidas - IR: Thank you, Pete. Jackie at this time we would like to open up the call for questions.

Transcript Call Date 04/29/2013

Operator: Michael Millman, Millman Research.

Michael Millman - Millman Research Associates: I actually have two questions. One is with Boardwalk, what kind of risk is there in terms of the buyers contracts or so the contracts failing in some way. And second is more broadly now that the market has continued to go up, acquisitions eve looking less positive to you then they might have a couple of years ago?

James S. Tisch - Office of the President, President and CEO: First of all with respect to risk at Boardwalk. Tell me specifically what you're referring to?

Michael Millman - Millman Research Associates: Well, I'm referring to that there're contracts out there and I don't know if something goes wrong with the supplier, the field blows up or if the buyer, it's bankruptcy, what kind of protection…

James S. Tisch - Office of the President, President and CEO: 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 checking 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 just right for us.

Operator: Robert Glasspiegel, Langen McAlenney.

Robert Glasspiegel - 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?

Peter W. Keegan - SVP and CFO: We are contributing money to hotels to help on their growth plan. We've added a bunch of hotels there.

Robert Glasspiegel - Langen McAlenney: I haven't seen the Q if it has come out yet. What's your investment in hotels now? Do you have a figure from some of the parts?

Peter W. Keegan - SVP and CFO: I don’t have that readily available.

Robert Glasspiegel - Langen McAlenney: So I'd assume the difference in the stated mix is…

Peter W. Keegan - SVP and CFO: And a small amount in the HighMount in the quarter.

Robert Glasspiegel - Langen McAlenney: I'm sorry.

Peter W. Keegan - SVP and CFO: And a small amount in the HighMount in the quarter.

Robert Glasspiegel - Langen McAlenney: Okay. You said the impairment charge was driven by lower oil prices did you say and lower reserves.

Peter W. Keegan - SVP and CFO: Keep in mind, this is a four 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 calculation of reserves and production, this is a very complicated calculation, which drove that impairment.

Robert Glasspiegel - Langen McAlenney: Okay. If we freeze prices where they are today, are there more impairments coming or are we through the – there's a (indiscernible) tunnel and there's – if we freeze everything today…?

Peter W. Keegan - SVP and CFO: Well, if you freeze prices, it's hard to say because the other part of the calculation is reserves and production. So it's really hard…

Robert Glasspiegel - Langen McAlenney: Okay, well, you made your best guess on reserves and production today, right, so that shouldn't wiggle if we freeze that?

Peter W. Keegan - SVP and CFO: In the accounting, keep in mind, we capitalize all of our spending, so you're constantly increasing the base against which this is calculated.

Robert Glasspiegel - Langen McAlenney: Okay. Can you remind me what the Boardwalk general partnership dividends you're running on quarter, or what they were last year?

Peter W. Keegan - SVP and CFO: GP, do we have that?

James S. Tisch - Office of the President, President and CEO: Yeah, I have that here. For the general partner we received about $10 million a quarter.

Robert Glasspiegel - Langen McAlenney: Okay. And we're in the maximum phase, right, of the earn, so...

Peter W. Keegan - SVP and CFO: They're 50%.

James S. Tisch - Office of the President, President and CEO: The high plus, yes.

Robert Glasspiegel - Langen McAlenney: We're in the high split. So, I mean, it's now just going to grow with the overall dividend, right. There is not a step to that. It's not accelerated.

Peter W. Keegan - SVP and CFO: Step function in the split, no. That’s the highest level it goes to.

James S. Tisch - Office of the President, President and CEO: The only split beyond 50% is everything and I don't think we are ever going to get there.

Peter W. Keegan - SVP and CFO: That isn't part of the formula.

Robert Glasspiegel - Langen McAlenney: Is there an endgame on - I mean, is Boardwalk – what are these like buffet we are going to own it forever, we love it. Is there a way you could capitalize that?

James S. Tisch - Office of the President, President and CEO: We love all our children, and we are very positive about all of them and we don't think about disposing of any of them.

Robert Glasspiegel - Langen McAlenney: You've got sort of – in your some of the products, you used to sort of like creating value to pieces, now, we are sort of left to our own, and so we got a $40 million growing annual earnings power that…

James S. Tisch - Office of the President, President and CEO: You mean in the GP?

Robert Glasspiegel - Langen McAlenney: Right.

James S. Tisch - Office of the President, President and CEO: Okay.

Robert Glasspiegel - Langen McAlenney: I'm just trying to think of how we should think of that as an asset growing $40 million dividend base annually. You are not going to give me any help to think about it or how to think about it?

James S. Tisch - Office of the President, President and CEO: Nope, sorry.

Operator: David Adelman, Morgan Stanley.

David Adelman - 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? Yeah. 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 return for the quarter.

David Adelman - Morgan Stanley: 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?

Peter W. Keegan - SVP and CFO: Yeah, 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 with 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, (which might add) zero points. So, your guess is as good as mine as to what you think is going to happen to pricing in the next quarter.

David Adelman - Morgan Stanley: And then one other question and 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?

James S. Tisch - Office of the President, President and CEO: So for both the Mississippian line 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 is demand for the natural gas. However, with respect to oil and NGLs, it's a completely different story. In both the Mississippian line and especially in Sonora, we have relatively few oil and NGL wells. We are doing a, what I would call, a major science experiment in both places. 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 he 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 years because we're going to have to invest in the oil and NGL wells that will produce the cash flow from those properties, but over time if we embark on this investment program before able to figure out how to produce from these areas commercially then there could be a significant cash flow from the property.

Operator: (Andrew Baker, Barclays Capital).

Andrew Baker - Barclays Capital: Couple of questions, just want to make sure I haven't missed something along the way, the Boardwalk buying 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 will hear from you guys, just want to see if that’s something you actually intent to do to convert those at that time.

James S. Tisch - Office of the President, President and CEO: Yes, we do.

Andrew Baker - Barclays Capital: And then Jim, just sort of your bigger picture-wise, I'm we talked in the past about how the industrial economy in general could look to convert over towards natural gas and overtime, significantly increase the demand side of that equation. I think we haven't discussed this about six months. Any sort of anecdotal evidence you are seeing that those people who could perhaps make the transition or making progress in that regard.

James S. Tisch - Office of the President, President and CEO: It almost sounds like a shallow question. I landed in Houston – sorry I landed in New Orleans for some meetings that I had there and I was getting into the car, the driver opened, popped opened the trunk of the car and I was just about to throw my bags in and in mirror I saw what looked 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 linking town cars running on propane gas, but if you read the trade press, you can see that there's a lot of talk about LNG for trucks and as well as for locomotives, and my guess is that's where the growth is going to come from as well as from intercity delivery trucks that are 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 two, three or four years.

Andrew Baker - Barclays Capital: Just one other thing, with interest rates moving down to the lows here again, just wondering what your sort of thoughts is on interest rate moving going forward and how that could potentially impact your investments on the credit side?

James S. Tisch - Office of the President, President and CEO: I think interest rates as I said in my comments are – it's already low. We're frustrated by how low they are. We like them to go higher. We are – for CNA, we maintain a – for our non-matched accounts which represents about two-thirds 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 pick up pretty good rate of return on those investments. But investing with that type of strategy is truly a (indiscernible) type of strategy. There is nothing at all exciting about it and what we 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 is the result of such low interest rate, so that the legacy assets are running off, our 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.

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

Mary Skafidas - IR: 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 two hours. That concludes today's call.

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