CNA Financial Corp. 10-Q Summary: Period Ended September 30, 2009
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for CNA Financial Corporation (CNAF) for the period ended September 30, 2009. 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: Standard Lines, Specialty Lines, Life & Group Non-Core, and Corporate & Other Non-Core. Loews Corporation owns approximately 90% of CNAF's outstanding common stock.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2009) | Value ($ Millions) |
|---|---|
| Total Revenues | 6,074 |
| Net Earned Premiums | 5,035 |
| Net Investment Income | 1,755 |
| Net Realized Investment Losses | (929) |
| Net Income Attributable to CNAF | 173 |
| Net Operating Income (Non-GAAP) | 785 |
| Basic EPS (Attributable to Common Stockholders) | $0.29 |
| Total Assets | 55,575 |
| Total Liabilities | 44,320 |
| Long-Term Debt | 2,056 |
| Stockholders' Equity | 10,769 |
Material Changes vs. Prior Period
- Profitability Improvement: Net income attributable to CNAF improved significantly to $173 million for the nine months ended September 30, 2009, compared to $37 million in the same period of 2008. This represents a $136 million increase.
- Investment Performance: Net investment income increased to $1,755 million (from $1,449 million in 2008), driven by improved results from limited partnership investments. However, net realized investment losses increased to $929 million (from $813 million in 2008) due to higher other-than-temporary impairment (OTTI) losses recognized in earnings.
- Underwriting Results: Net operating income (excluding realized investment gains/losses) improved by $231 million to $785 million. This was primarily due to significantly lower catastrophe losses ($51 million after-tax in 2009 vs. $233 million in 2008) and a $61 million after-tax gain from a settlement with Willis Limited.
- Premiums: Net earned premiums decreased by $351 million (6.5%) to $5,035 million, reflecting declines in both Standard Lines and Specialty Lines due to economic conditions and lower insured exposures.
- Reserves: Favorable net prior year development of $163 million was recorded, driven by $245 million in favorable claim reserve development, partially offset by $82 million in unfavorable premium development.
Guidance, Outlook, and Risks
- Outlook: Management believes current cash flows are sufficient to fund working capital and debt obligations through 2010. The company maintains an effective shelf registration for up to $2.0 billion of debt or equity securities.
- Investment Portfolio: While market disruption has subsided, fair market values in the asset-backed sector remain depressed. The company holds $7.8 billion in asset-backed securities, with exposure to sub-prime and Alt-A collateral. Management does not currently intend to sell securities in unrealized loss positions.
- Legal and Contingencies:
- Asbestos & Environmental (A&E): Net A&E reserves were $1.3 billion ($1.09 billion asbestos, $226 million environmental). No asbestos-related reserve development was recorded in the first nine months of 2009. Significant litigation remains pending (e.g., A.P. Green, Keasbey, Burns & Roe).
- Antitrust Litigation: CNA is a defendant in multidistrict insurance brokerage antitrust litigation; the company believes it has meritorious defenses.
- Long Term Care: A class action settlement regarding California long-term care pricing is pending appeal.
- Accounting Changes: In Q2 2009, CNA adopted updated accounting guidance for OTTI losses, bifurcating losses into credit and non-credit components. This resulted in a $122 million cumulative effect adjustment to retained earnings.
Key Facts for Investor Verification
- OTTI Exposure: Verify the stability of the $1.16 billion in net OTTI losses recognized in earnings for the nine months ended September 30, 2009, and the company's assessment of future credit losses in asset-backed securities.
- Willis Limited Settlement: Confirm the finalization and cash receipt of the $130 million settlement ($94 million net of reinsurance) with Willis Limited, which significantly boosted Q3 results.
- Asbestos Litigation: Monitor the status of the A.P. Green bankruptcy plan appeal and the Burns & Roe tort system adjudication, as adverse outcomes could materially impact equity.
- Premium Trends: Assess the sustainability of the 6.5% decline in net earned premiums and the impact of economic conditions on retention rates (80-85%) and rate levels.
- Liquidity: Review the holding company's $414 million in short-term investments and its reliance on dividends from subsidiaries to service the $2.056 billion long-term debt and preferred stock dividends.