Loews Corporation’s ( ) second quarter income from continuing operations came in at $0.78 per share, substantially short of the Zacks consensus estimate of $1.09. This compares to net income of $1.00 in the year-ago quarter.

The lower-than-expected results primarily reflect higher net investment losses partially offset by an increase in net investment income at CNA Financial Corporation and strong results at Diamond Offshore Drilling, Inc. However, the underwriting performance was impressive during the quarter. Also, the results reflect a strong rebound in investment income, primarily from improved limited partnership results.

Net income from continuing operations decreased 33.3% year over year to $341 million.? This includes after tax net investment losses of $178 million, compared to $64 million in the prior year quarter. Net investment losses in the reported quarter primarily resulted from other-than-temporary impairment losses recognized in CNA’s available-for-sale portfolio.

CNA Financial Corporation’s operating income increased 22.5% year over year to $278 million. In its core property and casualty operations, CNA performed steadily to achieve a 98.1% combined ratio. It also experienced favorable rate trends, renewal retention and solid new business underwriting during the quarter.

Diamond Offshore experienced a strong quarter with $181 million of earnings. However, the earnings were down 6.7% year over year. For the reported quarter, average day rates and utilization for Diamond’s fleet were strong.

HighMount’s earnings decreased 39.6% year over year to $29 million. The results deteriorated due primarily to lower natural gas prices. However, its hedging program helped to partially offset the decline.

Boardwalk Pipeline’s earnings decreased 71.4% year over year. Reported earnings for the quarter were significantly reduced by the need to shut down portions of its pipeline as part of its remediation efforts, and by operation and reduced pipeline pressures.

Net investment income from the holding company came in at $40 million, down 48.1% from $77 million in the prior year quarter. The decrease primarily reflects a lower cash balance and historically low interest rates.

Reported book value increased to $34.60 per share at Jun 30, 2009 from $30.73 at Mar 31, 2009 and $30.18 at Dec 31, 2008. The increase was due primarily to a $1.2 billion (after tax) improvement in fair value of the company’s fixed maturities investment portfolio.

While the spin-off of Lorillard in the second quarter of 2008 has helped eliminate the overhang of tobacco litigation on the company, permitting an increased focus on broadening hydrocarbon interests, we think that the continued stressed economic environment will be a drag on the top-line growth of the company.

Until the current overhangs are eliminated, we see few catalysts for further significant upside potential near-term. As such, our current recommendation on the shares is Underperform.