CNA Financial Corporation: Q1 2010 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2010. CNA Financial Corporation is a commercial insurance writer, ranking as the seventh largest commercial insurer and 13th largest property and casualty organization in the U.S. based on 2008 statutory net written premiums. The company operates through four segments: CNA Specialty, CNA Commercial, Life & Group Non-Core, and Corporate & Other Non-Core.
Key Financial Metrics
| Metric (in millions) | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenues | $2,315 | $1,638 |
| Net Earned Premiums | $1,615 | $1,672 |
| Net Investment Income | $590 | $420 |
| Net Realized Investment Gains (Losses) | $34 | $(532) |
| Net Income (Loss) Attributable to CNA | $245 | $(195) |
| Net Operating Income (After-Tax) | $223 | $149 |
| Earnings Per Share (Diluted) | $0.82 | $(0.84) |
| Total Assets | $55,679 | $55,298 |
| Long-Term Debt | $2,304 | $2,303 |
| Cash and Short-Term Investments | $2,579 | $4,089 |
Material Changes vs. Prior Period
- Turnaround in Net Income: Net income attributable to CNA improved by $440 million, shifting from a loss of $195 million in Q1 2009 to a profit of $245 million in Q1 2010.
- Investment Performance: Net realized investment results improved by $366 million, driven by a significant reduction in other-than-temporary impairment (OTTI) losses. OTTI losses recognized in earnings dropped from $614 million in Q1 2009 to $60 million in Q1 2010.
- Operating Income Growth: Net operating income increased by $74 million, primarily due to higher net investment income ($170 million increase), partially offset by $25 million in costs related to an IT Transformation program.
- Premium Decline: Net earned premiums decreased by $57 million year-over-year, largely due to a $47 million decline in the CNA Commercial segment caused by competitive market conditions and decreased insured exposures.
- Catastrophe Losses: Catastrophe losses (net of reinsurance) were $40 million in Q1 2010 compared to $13 million in Q1 2009, primarily due to winter storms and the Chilean earthquake.
Guidance, Outlook, and Risks
- IT Transformation: The company is executing a program to transform its IT organization, with total estimated costs of $41 million. $25 million was incurred in Q1 2010. The program is expected to be completed by December 2011, with significant annual savings anticipated in 2011 and full savings in 2012.
- Investment Outlook: The fixed maturity portfolio remains high quality, with 90% rated investment grade. Management expects continued improvement in the corporate bond market but notes that continued deterioration in underlying collateral for asset-backed securities could trigger additional OTTI losses.
- Key Risks:
- Reserve Uncertainty: Significant exposure to Asbestos and Environmental (A&E) claims, with net reserves of $1.37 billion. Ultimate costs are subject to litigation outcomes and legal interpretations.
- Market Conditions: Recessionary conditions continue to pressure premium levels and retention rates, particularly in construction and professional liability lines.
- Catastrophes: Inherent risk of weather-related events and natural disasters impacting loss ratios.
Investor Verification Checklist
- OTTI Methodology: Verify the assumptions used to determine that remaining unrealized losses on asset-backed securities are temporary rather than other-than-temporary.
- A&E Reserve Adequacy: Review the status of pending litigation (e.g., A.P. Green, Montana direct action) and its potential impact on the $1.37 billion net A&E reserve.
- IT Transformation ROI: Monitor the realization of projected annual savings from the IT outsourcing initiative against the $41 million total cost.
- Premium Retention: Assess whether the decline in net written premiums and retention rates (79% for Commercial, 86% for Specialty) stabilizes in subsequent quarters.
- Investment Yield: Confirm the sustainability of the 5.2% pretax effective income yield on fixed maturity and short-term investments in a low-rate environment.