CNA Financial Corporation 2010 10-K Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2010. CNA Financial Corporation (CNA) is a property and casualty insurance holding company, with approximately 90% of its common stock owned by Loews Corporation. The company operates through four segments: CNA Specialty and CNA Commercial (core operations), and Life & Group Non-Core and Corporate & Other Non-Core (non-core/run-off operations). CNA serves small, medium, and large businesses through independent agents, brokers, and managing general underwriters.
Key Financial Metrics
| Metric (in millions) | 2010 | 2009 |
|---|---|---|
| Total Revenues | $9,209 | $8,472 |
| Net Income Attributable to CNA | $690 | $419 |
| Net Operating Income (Continuing Ops) | $660 | $982 |
| Net Realized Investment Gains | $51 | $(561) |
| Total Assets | $55,331 | $55,298 |
| Total Debt | $2,651 | $2,303 |
| Stockholders' Equity | $10,954 | $10,660 |
| Book Value Per Share | $40.70 | $35.91 |
Note: Net operating income excludes net realized investment gains/losses and discontinued operations.
Material Changes vs. Prior Period
- Net Income Improvement: Net income increased by $271 million (65%) compared to 2009. This was primarily driven by a significant improvement in net realized investment results ($612 million improvement), which offset a decrease in net operating income.
- Loss Portfolio Transfer (LPT): In August 2010, CNA completed a transaction ceding substantially all legacy asbestos and environmental pollution (A&EP) liabilities to National Indemnity Company (a Berkshire Hathaway subsidiary). This resulted in an after-tax loss of $365 million ($344 million from continuing operations) but significantly mitigated future reserve risk and eliminated credit risk on $1.2 billion of third-party A&EP recoverables.
- Underwriting Performance: Core segments (Specialty and Commercial) saw improved favorable net prior year development ($594 million in 2010 vs. $208 million in 2009). However, current accident year underwriting results were pressured by higher catastrophe losses ($79 million after-tax in 2010 vs. $58 million in 2009) and decreased net earned premiums ($206 million decrease).
- IT Transformation: CNA incurred $36 million in costs related to a major IT transformation program, with total expected costs of approximately $38 million.
Guidance, Outlook, and Risks
- Outlook: Management expects the IT transformation to yield significant annual savings, with a portion realized in 2011 and full savings in 2012. The LPT transaction is expected to improve earnings outlook and financial stability by removing A&EP volatility.
- Dividends: No common stock dividends were declared in 2010. On February 4, 2011, the Board declared a quarterly dividend of $0.10 per share.
- Key Risks:
- Reserve Uncertainty: Significant judgment is required for loss reserves, particularly for long-tail lines (e.g., workers' compensation, professional liability). Unfavorable development could materially impact earnings.
- Investment Volatility: The portfolio is exposed to interest rate, credit, and market risks. While 2010 saw reduced other-than-temporary impairment (OTTI) losses, future market conditions could lead to write-downs.
- Regulatory Environment: The Dodd-Frank Act and Affordable Care Act may increase operating costs and underwriting losses, particularly in workers' compensation and professional liability lines.
- Reinsurance Credit Risk: While the LPT mitigated A&EP credit risk, CNA remains exposed to the solvency of other reinsurers.
Investor Verification Checklist
- Loss Reserve Adequacy: Verify the assumptions used for net prior year development, particularly in long-tail lines like workers' compensation and professional liability, given the sensitivity to claim severity and inflation.
- LPT Transaction Terms: Review the specific terms of the Loss Portfolio Transfer with National Indemnity Company to understand the $4 billion aggregate limit and the remaining exposure to A&EP claims.
- Investment Portfolio Quality: Assess the composition of the fixed maturity portfolio, specifically the exposure to asset-backed securities (RMBS/CMBS) and the level of unrealized losses ($795 million gross unrealized loss on fixed maturities as of Dec 31, 2010).
- IT Transformation ROI: Monitor the realization of the projected annual savings from the IT transformation program against the $38 million total cost.
- Reinsurance Concentration: Note the significant recoverables from Berkshire Hathaway subsidiaries ($2.8 billion) and Swiss Re ($1.1 billion) and the associated credit risk.