CNA Financial Corporation 2009 10-K Summary
Business Context and Reporting Period
This report covers the fiscal year ended December 31, 2009. CNA Financial Corporation (CNA) is an insurance holding company, approximately 90% owned by Loews Corporation. Its core operations consist of commercial property and casualty insurance, reported in two segments: CNA Specialty (professional, financial, and specialty lines) and CNA Commercial (small to large business lines). Non-core operations include run-off life and group lines and corporate expenses.
Key Financial Metrics
| Metric (in millions) | 2009 | 2008 |
|---|---|---|
| Total Revenues | $8,472 | $7,799 |
| Net Income Attributable to CNA | $419 | $(299) |
| Net Operating Income | $982 | $533 |
| Net Realized Investment Losses | $(561) | $(841) |
| Total Assets | $55,298 | $51,688 |
| Total Investments | $41,996 | $35,003 |
| Long and Short Term Debt | $2,303 | $2,058 |
| Stockholders' Equity | $10,660 | $6,877 |
| Book Value Per Share | $35.91 | $20.92 |
Note: Net Operating Income excludes net realized investment gains/losses and discontinued operations.
Material Changes vs. Prior Period
- Profitability Turnaround: Net income attributable to CNA improved by $718 million, moving from a loss of $299 million in 2008 to a profit of $419 million in 2009.
- Investment Performance: Net realized investment losses decreased by $280 million (from $841 million to $561 million). This improvement was driven by a $370 million realized gain from the sale of Verisk Analytics Inc. holdings and reduced other-than-temporary impairment (OTTI) charges.
- Underwriting Results: Net operating income increased $449 million. Catastrophe losses dropped significantly to $58 million (after-tax) in 2009 compared to $239 million in 2008. However, net earned premiums declined $430 million due to economic conditions reducing insured exposures.
- Reserve Development: The company recorded $208 million in favorable net prior year development in 2009, compared to $80 million in 2008. This was partially offset by $184 million in unfavorable development related to Asbestos and Environmental (A&E) claims.
Guidance, Outlook, and Risks
- Outlook: Management expects 2010 pension and postretirement plan expenses to moderate. The company maintains a stable outlook on its financial strength ratings (A.M. Best: A, Moody's: A3, S&P: A-).
- Investment Risks: Significant judgment is required regarding the valuation of investments, particularly asset-backed securities. While market conditions improved in 2009, fair values in the asset-backed sector remain depressed. The company holds $1.1 billion in non-investment grade fixed maturity securities.
- Reserve Uncertainty: A&E reserves remain highly uncertain. In 2009, the company recorded $155 million in unfavorable A&E development ($79 million asbestos, $76 million environmental) due to increased claim severity and defense costs.
- Liquidity: The holding company held $395 million in short-term investments and had $100 million available via a revolving credit facility. Dividends from subsidiaries are restricted by state regulators but are deemed sufficient to fund debt service and preferred stock dividends through 2010.
- Regulatory Risks: The company faces extensive state and federal regulation, including risk-based capital requirements and potential impacts from health care reform legislation.
Key Facts for Investor Verification
- Preferred Stock Obligation: Verify the impact of the $1.0 billion 2008 Senior Preferred Stock (10% dividend rate) on common shareholder returns; no common dividends were paid in 2009.
- A&E Reserve Adequacy: Monitor future developments in asbestos and environmental pollution reserves, which showed $155 million in unfavorable development in 2009 despite overall favorable prior year development.
- Investment Portfolio Quality: Review the composition of the $1.1 billion non-investment grade fixed maturity portfolio and potential for future OTTI charges, particularly in asset-backed securities.
- Premium Volume Trends: Assess the sustainability of premium growth given the 6.4% decline in net earned premiums in 2009 driven by recessionary economic conditions.
- Reinsurance Credit Risk: Evaluate the $6.6 billion in reinsurance receivables and the $351 million allowance for uncollectible reinsurance in the context of reinsurer financial stability.