CNA

CNA Financial Corp. 10-Q Summary (Period Ended Sept 30, 2010)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for CNA Financial Corporation (CNA) for the period ended September 30, 2010. CNA is a commercial insurance organization with core operations in CNA Specialty and CNA Commercial segments, alongside non-core Life & Group and Corporate segments. The reporting period covers the three and nine months ended September 30, 2010, compared to the same periods in 2009.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Improvement: Net income attributable to CNA increased by $215 million (124%) for the nine months ended Sept 30, 2010, compared to 2009. This was primarily driven by a significant improvement in net realized investment results ($685 million improvement) due to lower other-than-temporary impairment (OTTI) losses.
• Operating Income Decline: Net operating income decreased by $451 million. This decline was largely due to a one-time after-tax net loss of $344 million associated with the Loss Portfolio Transfer (LPT) of Asbestos and Environmental Pollution (A&EP) liabilities to National Indemnity Company (NICO).
• Premiums: Net earned premiums decreased by $167 million (3.3%) year-over-year, driven by a $142 million decrease in the CNA Commercial segment due to lower insured exposures and competitive market conditions.
• Investment Portfolio: Net investment income decreased by $63 million, primarily due to less favorable income from limited partnership investments. However, net realized investment gains turned positive ($125 million) compared to a loss of $929 million in the prior year.
• Debt Structure: In Q3 2010, CNA issued $500 million of 5.875% ten-year senior notes and used the proceeds to redeem $500 million of its 2008 Senior Preferred stock.

Guidance, Outlook, and Risks

• Loss Portfolio Transfer (LPT): On August 31, 2010, CNA ceded approximately $1.6 billion of net A&EP reserves to NICO (Berkshire Hathaway) for a $2 billion premium. This resulted in a significant one-time loss but removes legacy liabilities from the balance sheet. $2.4 billion of the $4 billion aggregate limit remains available.
• IT Transformation: CNA is undergoing an IT transformation program expected to cost approximately $41 million total. $34 million has been incurred through Q3 2010. The program aims to improve efficiency and is expected to generate significant annual savings starting in 2011.
• Subsequent Event: On November 1, 2010, CNA proposed to acquire the remaining 38% of CNA Surety Corporation it does not own for $22 per share (approx. $375 million total).
• Risks: Key risks include the impact of federal health care reform legislation (Patient Protection and Affordable Care Act) on operating costs and underwriting losses, uncertainty regarding the Dodd-Frank Act's impact on insurance regulation, and continued volatility in capital and credit markets affecting investment returns.
• Reserves: Favorable net prior year development of $393 million was recorded for the nine months ended Sept 30, 2010, primarily in CNA Specialty and CNA Commercial segments.

Investor Verification Checklist

• LPT Impact: Verify the long-term impact of the $344 million loss from the A&EP transfer and the remaining $2.4 billion capacity under the NICO agreement.
• Investment Quality: Review the composition of the fixed maturity portfolio, specifically the 10% non-investment grade holdings and the exposure to sub-prime/Alt-A asset-backed securities ($555 million and $680 million fair value, respectively).
• Underwriting Trends: Monitor the CNA Commercial segment's premium decline and combined ratio (104.5% for nine months 2010) to assess if rate increases can offset lower exposures.
• IT Costs vs. Savings: Track the realization of anticipated annual savings from the IT transformation program against the $41 million total cost.
• CNA Surety Acquisition: Confirm the consummation and final pricing of the proposed acquisition of the remaining CNA Surety shares.