CNA

CNA Financial Corp. 10-Q Summary (Period Ended Sept 30, 2008)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for CNA Financial Corporation (CNAF) for the period ended September 30, 2008. CNAF is a commercial insurance organization, primarily operating through its property and casualty subsidiaries (Continental Casualty Company, The Continental Insurance Company, and Continental Assurance Company). As of September 30, 2008, Loews Corporation owned approximately 90% of CNAF's outstanding common stock. The company reported a net loss for the quarter, driven significantly by investment impairments and catastrophe losses.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: Net income swung from a profit of $174 million in Q3 2007 to a loss of $331 million in Q3 2008. For the nine-month period, net income dropped from $687 million in 2007 to $37 million in 2008.
• Investment Losses: Realized investment losses surged to $651 million in Q3 2008 (compared to $57 million in Q3 2007) and $813 million for the nine months (compared to $217 million in 2007). These losses were primarily driven by other-than-temporary impairment (OTTI) charges related to credit issues in non-redeemable preferred equity securities, corporate bonds, and asset-backed securities. Significant losses were recorded for securities issued by Fannie Mae, Freddie Mac, Washington Mutual, and Icelandic banks.
• Catastrophe Losses: Catastrophe losses net of reinsurance were $248 million for Q3 2008 and $348 million for the nine months, primarily due to Hurricanes Gustav and Ike. This compares to $10 million and $54 million for the same periods in 2007.
• Premiums: Net earned premiums decreased by 4.4% in Q3 2008 and 4.1% for the nine months compared to the prior year, reflecting competitive market conditions and rate decreases.
• Reserve Development: The company recorded favorable net prior year development of $60 million in Q3 2008 and $93 million for the nine months, primarily in Standard and Specialty Lines, offsetting some underwriting pressures.

Guidance, Outlook, and Risks

• Capital Raise: Subsequent to the reporting period (October 27, 2008), CNAF agreed to sell $1.25 billion of non-voting cumulative senior preferred stock to Loews Corporation. Proceeds will be used to purchase a $1.0 billion surplus note from its principal subsidiary, Continental Casualty Company (CCC), to bolster statutory capital.
• Dividend Suspension: In October 2008, the company suspended its quarterly dividend payment on common stock. No dividends may be declared on common stock until the preferred stock dividends are paid in full.
• Market Risk: Management highlighted that prolonged disruptions in public debt and equity markets, including widening credit spreads and government intervention in financial institutions, have resulted in significant realized and unrealized losses. Continued deterioration could lead to additional substantial losses.
• Legal and Contingencies: Significant uncertainties remain regarding Asbestos and Environmental Pollution (A&E) reserves. The company is involved in major litigation (e.g., A.P. Green, Keasbey, Burns & Roe) where outcomes are difficult to predict. Net A&E reserves were $1,409 million ($1,215 million asbestos, $194 million environmental) as of September 30, 2008.
• Liquidity: The company maintains short-term investments of approximately $710 million and believes current cash flows are sufficient to meet working capital and debt obligations. However, a downgrade in credit ratings could trigger additional collateral requirements of approximately $90 million.

Key Facts for Investor Verification

• Investment Portfolio Quality: Verify the extent of unrealized losses in the fixed maturity portfolio ($3.5 billion gross unrealized losses) and the company's assessment of whether these are temporary or other-than-temporary.
• Sub-prime Exposure: Confirm the specific exposure to sub-prime and Alt-A collateral within the asset-backed securities portfolio ($1.378 billion fair value, or 4% of total invested assets).
• Asbestos Litigation Outcomes: Monitor the status of key asbestos litigation cases (Keasbey, Burns & Roe, A.P. Green) which could materially impact future reserves.
• Statutory Capital Status: Verify the impact of the $1.0 billion surplus note on the statutory capital and surplus of Continental Casualty Company (CCC), which was in a negative earned surplus position prior to the transaction.
• Reinsurance Recoveries: Assess the collectibility of reinsurance receivables ($7.6 billion net), particularly given the financial distress of some reinsurers during the 2008 crisis.