CNA Financial Corporation - Q1 2011 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2011. CNA Financial Corporation is a commercial insurance organization, ranking as the seventh largest commercial insurance writer in the U.S. based on 2009 statutory net written premiums. The company operates through four primary segments: CNA Specialty, CNA Commercial, Life & Group Non-Core, and Corporate & Other Non-Core. As of March 31, 2011, Loews Corporation owned approximately 90% of CNA's outstanding common stock.
Key Financial Metrics
| Metric (in millions) | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenues | $2,315 | $2,315 |
| Net Earned Premiums | $1,615 | $1,615 |
| Net Investment Income | $620 | $590 |
| Net Income Attributable to CNA | $223 | $245 |
| Net Operating Income (After-Tax) | $216 | $223 |
| Diluted EPS (Attributable to CNA) | $0.83 | $0.82 |
| Total Assets | $55,543 | $55,331 (Dec 31, 2010) |
| Total Liabilities | $43,721 | $43,807 (Dec 31, 2010) |
| Long-Term Debt | $2,647 | $2,251 (Dec 31, 2010) |
| Cash and Short-Term Investments | $1,758 | $2,292 (Dec 31, 2010) |
Material Changes vs. Prior Period
- Net Income Decline: Net income attributable to CNA decreased by $22 million (9%) compared to Q1 2010. This was driven by lower net realized investment results and a slight decrease in net operating income.
- Investment Performance: Net investment income increased by $30 million, primarily due to improved results from limited partnership investments. However, net realized investment gains decreased by $21 million, partly due to a $9 million loss on the early extinguishment of $400 million in senior notes.
- Operating Income: Net operating income decreased by $7 million. Core segments (Specialty and Commercial) saw a $35 million improvement driven by higher investment income and lower expenses (excluding 2010 IT transformation costs), but this was offset by a $42 million decrease in non-core segments and higher catastrophe losses ($55 million in Q1 2011 vs. $40 million in Q1 2010).
- Reserve Development: The company recorded favorable net prior year development of $35 million in both Q1 2011 and Q1 2010.
Guidance, Outlook, and Risks
- Subsequent Event (CNA Surety Acquisition): On April 21, 2011, CNA announced a definitive merger agreement to acquire the remaining 39% of CNA Surety for approximately $475 million ($26.55 per share). The transaction is expected to close by the end of Q2 2011.
- IT Transformation: Costs associated with the IT transformation program were significant in Q1 2010 ($25 million) but were not significant in Q1 2011. The company anticipates future savings from this initiative.
- Investment Portfolio Risks: The company holds $8.1 billion in asset-backed securities, including $435 million in sub-prime and $627 million in Alt-A exposure. While 91% of the fixed maturity portfolio is investment grade, the company notes that additional OTTI losses may be recognized if underlying collateral deteriorates.
- Catastrophe Exposure: Q1 2011 catastrophe losses were driven by the Japanese event and domestic winter storms. The company highlights ongoing risks related to weather events, terrorism, and economic conditions.
- Legal Proceedings: A settlement understanding was reached in March 2011 regarding the Insurance Brokerage Antitrust Litigation, which is not expected to have a material impact on results.
Key Facts for Investor Verification
- Catastrophe Loss Volatility: Verify the impact of the $55 million catastrophe loss on the combined ratio, particularly in the CNA Commercial segment where the loss ratio increased 1.2 points.
- Asset-Backed Securities (ABS) Quality: Review the $28 million in OTTI losses recognized in earnings for asset-backed securities and the company's assessment of the $435 million sub-prime exposure.
- CNA Surety Merger: Confirm the closing conditions and funding sources for the $475 million tender offer to acquire the remaining CNA Surety shares.
- Non-Core Segment Performance: Investigate the $42 million decline in non-core operating income, driven by lower investment income and the absence of a one-time favorable reserve development in 2010.
- Debt Refinancing: Note the issuance of $400 million in new senior notes to redeem existing debt, resulting in a $9 million loss on extinguishment.