CNA Financial Corp. 10-Q Summary: Period Ended June 30, 2010
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2010, and the six months ended June 30, 2010, for CNA Financial Corporation (CNA). CNA is a commercial insurance organization, ranking as the seventh largest commercial insurance writer 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 (Six Months Ended June 30, 2010) | 2010 (in millions) | 2009 (in millions) |
|---|---|---|
| Total Revenues | $4,548 | $3,734 |
| Net Earned Premiums | $3,223 | $3,328 |
| Net Investment Income | $1,111 | $1,095 |
| Net Realized Investment Gains (Losses) | $63 | $(829) |
| Net Income Attributable to CNA | $528 | $(90) |
| Net Operating Income (Excluding Realized Gains/Losses) | $492 | $454 |
| Long-Term Debt | $2,254 | $2,303 |
| Total Assets | $55,674 | $55,298 |
| Cash and Short-Term Investments | $3,112 | $4,089 |
Note: Net Operating Income is a non-GAAP measure used by management to monitor insurance operations, excluding net realized investment gains/losses.
Material Changes vs. Prior Period
- Profitability Surge: Net income attributable to CNA improved by $618 million year-over-year, turning from a loss of $90 million in 2009 to a profit of $528 million in 2010. This was primarily driven by a $578 million improvement in net realized investment results.
- Investment Performance: Net realized investment gains of $63 million in 2010 contrasted sharply with losses of $829 million in 2009. The improvement was due to significantly lower other-than-temporary impairment (OTTI) losses recognized in earnings ($117 million in 2010 vs. $1,009 million in 2009).
- Premium Decline: Net earned premiums decreased by $105 million (3.2%) compared to the prior year, driven by a $87 million decrease in the CNA Commercial segment due to competitive market conditions and decreased insured exposures.
- Underwriting Results: Net operating income increased by $38 million, aided by $300 million in favorable net prior year development (reserve releases), partially offset by higher catastrophe losses ($88 million in 2010 vs. $56 million in 2009) and increased IT transformation costs.
Guidance, Outlook, and Risks
- A&E Reinsurance Transaction: On July 14, 2010, CNA entered into an agreement to cede approximately $1.6 billion of net Asbestos and Environmental Pollution (A&E) liabilities to National Indemnity Company (NICO), a Berkshire Hathaway subsidiary. The transaction involves a $2 billion reinsurance premium payment and is expected to close in Q3 2010. CNA expects to recognize an after-tax loss of approximately $375 million upon closing.
- IT Transformation: CNA commenced a program to transform its IT organization, with total estimated costs of $41 million. Approximately $29 million was incurred through June 30, 2010. The company anticipates significant annual savings once the program is fully operational in 2012.
- Investment Risks: The company holds $8.0 billion in asset-backed securities, including $527 million in sub-prime and $694 million in Alt-A exposure. While management believes unrealized losses are temporary, continued deterioration in collateral could trigger additional OTTI losses.
- Regulatory Risks: The company faces potential increased operating costs and underwriting losses due to the Patient Protection and Affordable Care Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Key Facts for Investor Verification
- OTTI Accounting: Verify the bifurcation of OTTI losses between credit components (recognized in earnings) and non-credit components (recognized in OCI) under the updated accounting guidance adopted in 2009.
- A&E Transaction Closing: Monitor the regulatory approval status and closing date of the $2 billion reinsurance deal with NICO, which will impact Q3 2010 earnings.
- Reserve Development: Assess the sustainability of the $300 million favorable net prior year development recorded in the first half of 2010, particularly in the CNA Specialty and Commercial segments.
- Limited Partnership Volatility: Review the significant decline in limited partnership investment income (from $95 million in 2009 to $68 million in 2010) and its impact on future investment income projections.
- Debt Repayment: Note the repayment of $50 million of an outstanding credit facility in Q2 2010 and the company's liquidity position relative to the upcoming $2 billion reinsurance premium payment.