Loews Corporation (L)

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Loews Corp. (L)

Q2 2010 Earnings Call

August 2, 2010; 11:00 am ET


Jim Tisch - Chief Executive Officer

Peter Keegan - Chief Financial Officer

Darren Daugherty - Director of Investor Relations


Robert Glasspiegel - Langen McAlenney

Michael Millman - Millman Research Associates

David Adelman - Morgan Stanley

Josh Class - Manikay Partners



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 second quarter earnings conference call (Operator Instructions)

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

Darren Daugherty

Thank you Jackie. Good morning everyone. Welcome to Loews Corporation’s, second quarter 2010 earnings conference call. A copy of the earnings release maybe found on our website at www.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 our non-GAAP financial measures. Please refer to our security filings for a reconciliation to the most comparable GAAP measures. After Jim and Peter have discussed our results, we will have a question-and-answer session.

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

James Tisch

Thank you Darren and good morning and thanks all of you for joining us on our call today.

For the second quarter, Loews net income increased to $356 million from $340 in the second quarter of 2009. This increase reflects an investment gain of $1 million this year, versus a net investment loss of $178 million in the second quarter of 2009. Those reported income before the investment gains and losses of $365 million versus $518 million in the second quarter of 2009. This decline is primarily the result of decreased earnings from Diamond Offshore, CNA and HighMount and a lower investment incomes from Loews trading portfolio.

CNA reported overall solid operating and financial performance for the second quarter, although it’s net operating income declined versus the prior year quarter. The primary drivers of this decline was decreased limited partnership results and decreased current accident year underwriting results, which were partially offset by favorable net prior year development.

Subsequent to the close of the quarter, CNA announced an agreement to transform its legacy asbestos and pollution liability for National Indemnity, a subsidiary of Berkshire Hathaway. We believe that this transaction will effectively eliminate CNA’s asbestos and pollution reserve risks, as well as any reinsurance dispute and credit risks.

In the past, our earnings conference call has given me an opportunity to do a quarterly lectures theory on current topics in insurance accounting, and I consider the proposed changes to the accounting rules proposed by the FASB to be a worthy topic for today. On May 26 the FASB published an exposure draft of an accounting standards updates that would significantly change mark-to-market accounting rules for insurance companies and other financial institutions.

The proposed rule changes would require insurance companies to mark substantiate all of their investments to markets each quarter through the income states. Fluctuations in the market place of new securities would therefore flow through both the quarterly income statement and balance sheet, instead just the balance sheet has now occurred under the current rules. Importantly this new methodology would apply to securities currently classified as available for sale.

So let’s examine the impact of the proposed rules on CNA’s reported earnings during the promotion of market conditions of 2008 and 2009. If the proposed rules had been in effect in ’08, Loews and CNA would have recognized through the income statement, additional investment losses of approximately $5 billion. When CNA’s portfolio recovered in value in 2009, the proposed rules would have resulted in investment gains along those $5 billion being reported on the income statement.

From ‘08 to ’09, Loews’s and CNA’s reported results would have swung by $10 billion, when in our view not much had really changed with respect to the underlying insurance business. The problem with the expanded use of mark-to-market accounting, is that this methodology does not reflect the way an insurance business is run; the way that we and other insurance managements think about or manage our businesses.

The wild and unpredictable swings in unrealized investment gains and losses, will often times draw out the business’s under writing results and net investment income, notwithstanding the insurance company’s ability and intent to hold the investment security through recovery. While the stated goals for these rules is to enhance transparency, mark-to-market will prove the opposite, by obscuring and camouflaging the under lying operating results.

If these new accounting rules are imposed, I predict that the first thing a security analyst will do when an insurance company announces its results, is adjust the reported earnings for the unrealized investment gains or losses to get to the underlying operating income number, as it is currently reported under existing accounting rules.

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