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We are upgrading our recommendation on the shares of Loews Corp. (NYSE:L) to Neutral. The company’s third-quarter earnings of $1.08 per share was well ahead of the Zacks Consensus Estimate of 87 cents a share. Loews reported a loss of 33 cents a share in the year-ago quarter.

The improved earnings were driven by increased investment income and a considerable reduction in investment losses at CNA Financial Corp. (NYSE:CNA), besides strong results at Diamond Offshore Drilling Inc. (NYSE:DO).

While the spin-off of Lorillard in 2008 eliminated the company’s overhang of tobacco litigation and the strong rebound in investment income is impressive, we think that the continuation of a stressed economic environment will have a restrictive effect on the top-line growth of the company.

The recent financial market appreciation bodes well for Loews. Both the holding company as well as the subsidiary, CNA, has experienced significant improvements in their investment income. Increase in the mark-to-market value of the investment portfolio has also resulted in considerable expansion of the company’s book value.

Diamond Offshore experienced a strong quarter with $170 million of earnings, up 17% year over year. Though it is currently experiencing a weak demand brought about by the fall in oil and natural gas prices, we think that Diamond's existing contract backlog should help mitigate the impact of the softening demand in the marketplace.

Also, in September, Diamond Offshore purchased a newly constructed, dynamically positioned drilling rig that is capable of operating in 7,500 feet of water. This rig has been named Ocean Valor This acquisition is consistent with Diamond's successful strategy of buying attractive assets at a time when pricing is favorable. Diamond was able to acquire the rig for approximately $490 million at an auction, well below the current cost to construct a similar new build rig.

While the management at CNA Financial has begun to focus on profitability instead of revenue generation, CNA’s operating income over the past few quarters has remained under pressure as a result of lower net investment income, economic slowdown and higher catastrophe losses. Though with the appreciation of the financial markets, the company is able to experience improved investment income, the premium volume still remains restricted as a result of the economic slowdown.

In June 2008, Loews had disposed of its entire ownership interest in Lorillard Inc. through the redemption of Carolina Group stock in exchange for Lorillard common stock and an exchange of its remaining Lorillard common stock for Loews common stock. In the recent years, Loews is looking to grow in areas such as natural gas exploration. So this spin-off decision was in line with the company’s strategy.

Loews, a holding company, is one of the largest diversified corporations in the United States. Its principal subsidiaries are CNA Financial Corp., a 90% owned subsidiary; Diamond Offshore Drilling Inc., a 50.4% owned subsidiary; HighMount Exploration & Production LLC, a wholly owned subsidiary; Boardwalk Pipeline Partners LP (NYSE:BWP), a 72% owned subsidiary; and Loews Hotels, a wholly owned subsidiary.

Source: Loews Upgraded on Improved Earnings