Loews Corporation (L) reported its second-quarter 2011 adjusted net income of 59 cents per share, lagging the Zacks Consensus Estimate by 16 cents. Results were also below 87 cents earned in the prior-year quarter. Adjusted net income was $240 million, 34% lower than $365 million in second-quarter 2010.
Lower favorable net prior year development at CNA Financial Corporation (CNA) coupled with higher catastrophe losses induced the soft performance in the quarter. However, higher earnings at Diamond Offshore (DO) reflecting increase in utilization of high specification floaters somewhat dwarfed the negative impacts.
Including net investment gains of $12 million, Loews reported net income of $252 million or 62 cents per share, down from $366 million or 87 cents per share in the year-ago quarter. The prior-year quarter includes net investment gains of $1 million.
Operational Performance
Total revenue at Loews in the second quarter was $3.54 billion, improving 1.6% from $3.49 billion in the prior-year quarter. The improvement was primarily led by higher contract drilling revenues.
Total expense in the quarter increased 11.5% year over year to $2.99 billion. An increase in insurance claims as well as higher contract drilling revenues largely inflated the cost.
Loews Hotels recorded the highest growth in revenue in the quarter. Revenue increased 9.9% over the prior-year period to $89 million in the quarter. Earnings surged 50% over prior year quarter to $6 million in the quarter under review.
Diamond Offshore’s revenue increased 8.4% year over year to $892 million. Earnings also improved 20% year over year to $125 million in the quarter.
High Mount Exploration revenue was $98 million, improving 6.7% year over year. Reported earnings of $15 million were substantially higher than $5 million in the year-ago quarter.
The Boardwalk Pipeline’s revenue increased 2.7% to $263 million from the prior-year level. Earnings plummeted to $5 million from $21 million reported in the second quarter of 2010.
However, CNA Financial’s revenue inched down by 1% over the prior-year period to $2.18 billion in the quarter. Net loss attributable to Loews Corp. plunged 58% year over year to $103 million in the quarter.
Book value as of June 30, 2011, was $46.81 per share, up 2.8% from $45.54 as of March 31, 2011.
Loews spent $228 million in the quarter to buy back 5.5 million shares. Subsequent to the second quarter through July, the company bought back another 1.0 million shares for $41 million.
Peer Comparison
The Travelers Companies (TRV), which competes with Loews, reported an operating loss of 91 cents per share in the second quarter, wider than the Zacks Consensus Estimate of a loss of 62 cents. Results were far behind earnings of $1.39 in the prior year quarter.
The company suffered hugely due to catastrophe losses. Catastrophe losses in the quarter totaled $1.09 billion or $2.56 per share.
Our Take
CNA Financial’s agreement with National Indemnity has helped it shed all its asbestos and environmental liabilities thus, imparting stability. Also, Boardwalk’s increased capacity and expansion projects and improved financial market conditions bode well. A strong balance sheet with low leverage and adequate cash are the other positives.
However, lower earnings at the operating subsidiaries, volatile natural gas and oil prices and a challenging economic environment keep us cautious. We maintain our Neutral recommendation on Loews over the long term. The quantitative Zacks #4 Rank (short-tem Sell rating) for the company indicates downward pressure on the shares over the near term.
