CNA Financial Holding Company (NYSE: CNA) is the seventh largest commercial insurance writer and the thirteenth largest property & casualty insurance company in the United States. CNA divides its operations into two main segments. Its core business of property and casualty insurance is divided into Specialty and Standard lines, while its non-core segment is split into Life & Group non-core and Corporation & Other non-core. Their insurance underwriting business has been unprofitable for the last fifteen years, but CNA has been able to turn a profit due to steady performance of its investment portfolio. However, lately, due in part to the 2008 Financial Crisis and CNA's shift to riskier asset-backed securities from bonds and other fixed income securities, CNA has lost the steady investment income it previously had.
Though CNA is the 7th largest insurance writer, it has not been able to achieve a combined ratio below 100% in the last 15 years. In other words, management has not been able to correctly estimate claims payments and has under allocated funds for claims payouts, resulting in losses being recorded on the books due to the mismatch. Despite CNA's inability to underwrite insurance successfully it has been able to post gains due to investment income.
With 9,000 employees and 32 branches, CNA Financial Holding Corp. is the thirteenth largest property and casualty insurance provider in the United States. They provide property and casualty insurance to small and medium businesses, as well as, commercial insurance and risk management services to large corporations through their Standard Lines. CNA provides its core property and casualty products through its two subsidiaries: Continental Casualty Company and Continental Insurance Company.
In 2009, CNA's total revenues were $8.47 billion, an increase from the previous year's revenue of $7.8 billion. More importantly, operating income for CNA in 2009 was $483 million, compared to 2008's operating loss of $251 million. This led to CNA to post a net income of $481 million in 2009, compared to its net loss of $299 million in 2008. This improvement was mostly due to higher net investment income and lower catastrophe losses.
|Business and Financial Metrics (Dollars in Millions)||2Q2009||1Q2009||4Q2008||3Q2008||2Q2008|
|Net Earned Premiums||$1,672||$1,656||$1,765||$1,799||$1,813|
|Net Investment Income||$420||$675||$170||$139||$434|
|Total Claims, Benefits and Expenses||$672||$1,964||$2,074||$2,201||$2,018|
|Trade Ratios--GAAP Basis||2008||2007||2006||2005||2004|
|Loss and loss adjustment expense ratio||78.70%||77.70%||75.70%||89.40%||74.60%|
|Expense ratio (Insurance)||30.10%||30.00%||30.00%||31.20%||31.50%|
A note on the financial metrics selected. The importance of Net Earned Premiums for an insurance company lies in the fact that these are the premiums which the company can claim as revenue from premiums since they have not been paid out for policyholder claims. While premiums written are good indicators of business, they are only potential revenue. Net investment income gauges the health of an insurance company's claims loss provision or its "safety net" which is supposed to mitigate the other risks in their insurance business.
The combined ratio is an integral insurance industry metric. In layman's terms, it's the ratio of how much money is paid out in claims to the money coming in (premiums earned). For example, CNA's most recent 2008 ratio of 109% means that for every $1 that CNA took in from earned premiums it paid out $1.09 in claims. Naturally, the lower the combined ratio, the better. The combined ratio clearly shows any observer how well an insurance company is able to predict claims and set aside reserves for potential claims, because if a company underestimates, as CNA has done for the past 15 years, the company will be paying out more than it planned which results in losses.
Standard Lines encompasses the property and casualty insurance offered to small, medium and large businesses. Property services include standard and excess property coverage as well as marine coverage. Casualty services range from worker's compensation, to general and product liability. 
Compared to 2007, everything was down in 2008. Total net earned premiums and premiums written, fell by 9% or $303 million and $213 million or 6.5%, respectively. Investment income tumbled 42% or $372 million; however, net realized investment losses cut sharply into the already low investment income with losses totaling $317 million.  Due to the falls in premiums earned as well as the steep losses in investment income, standard lines reported a loss of $96 million in 2008 from a gain of $505 million the year before.
The fall in written premiums is blamed on the fall of production in 2008 related to the 2008 financial crisis, which resulted in less demand for CNA's risk management and property and casualty services.  In 2008 catastrophe impacts were also up from $48 million in 2007 to $227 million in 2008. Lower earned/written premiums, coupled with the net realized investment losses and higher catastrophe claims, caused the losses in the net income for standard lines.
There are four business groups that fall under specialty lines: US specialty lines, surety, warranty, and CNA Global. US specialty lines cater to non "traditional" property and casualty needs, for example, professional liability, employment practices, and fidelity coverage. CNA Surety provides fidelity and surety bonds for CNA's surety services, while automobile warranty services make up CNA's warranty offerings. CNA Global encompasses property and casualty insurance offered outside of the US. 
Special Lines was the only business segment that posted positive gains in 2008, with $299 million in net income.  However, in keeping with the downward trend of the Standard Lines segment, Specialty Line 2008 numbers were lower than 2007's as well. Net income was lower by $269 million or 47.5% from 2007.  Net written premiums were down $71 million from 2007, slightly over a 2% decrease. 
Lower net income figures were direct results of lower demand--retention rates for renewable plans hovered at 84%.  On the upside, it is noteworthy to point out that Specialty lines is the only segment that has had a combined ratio that has been below 100% since 2004. 
The Life & Group Non-core segment represents those life and group lines of business that have been sold or place into run off.  They continue to service their payout annuity business and pension deposit business.  Since CNA no longer is writing new premiums, the only premium revenue comes from earned premiums which fell by $6 million in 2008. Losses in this segment increased by $149 million to $344 million in 2008.  Increased losses were attributed to poor performance in the investment portfolio (net realized loss of $236 million) and adverse performance of CNA's pension deposit business. 
Corporate & other non core consists of property and casualty insurance placed into run off such as CNA RE, and certain corporate expenses.  Revenues decreased by 90% in 2008 as compared to 2007, falling $268 million. Total net loss fell from $19 million to $165 million. 
Since 1992, CNA Financial has not had achieved a combined ratio below 100%, in fact, CNA has never had a year in which its ratio fell below 106% using GAAP standards. Over the past sixteen years, CNA has averaged a 126.28% combined ratio. CNA's inability to predict claims payouts over such a long period of operation severely hurts their future ability to write profitable insurance. Its core operations of property and casualty insurance have not been profitable in the least bit, averaging 126.86% for Standard Lines and 114.68% for Specialty Lines over the eleven years from 2008-1997. Poor claims predictions coupled with net earned/written premiums that have fallen every year since 1997, do not evidence signs of a profitable nor viable insurance business. As mentioned earlier, CNA has relied heavily on investment income to make up for its losses in underwriting insurance, but with the credit crunch and housing crisis in 2008, that investment income is no longer able to make up for losses due to poor claims predictions.
CNA's claims loss provision portfolio consists of 82.4% bonds as of the end of 2008.  Bonds are affected inversely to the movement of interest rates. In other words, as interest rates increase, the value of the bond decreases. Although in the short term, interest rate fluctuations are minimal, long term bond holdings are more susceptible to interest rate moments. With over 58% of its bond's not mature for another 5 years, CNA has substantial exposure to interest rate fluctuations.  With this relatively un-diversified investment portfolio, its investment income is at risk to swings in the interest rate.
CNA has $1.2 billion left in reserves set aside specially for asbestos related claims, as of the end of 2008, after ceding $910 million of the reserves during 2008 to reinsurance claims.  Asbestos related claims have risen since 2006, with net claims in 2008 totally $147 million.  A large problem with asbestos claims however is the fact that many of the policy holders have claimed that their policies do not have so called aggregated limits on coverage; in essence, they claim that CNA is liable for all asbestos claims without a cap for a total amount.  However, CNA has taken an aggressive stance in limiting its losses by actively seeking to settle claims quickly, one such example is the Wellington Agreement in which The Continental Insurance Company, a subsidiary of CNA, and 47 other asbestos producers and their insurers reached a settlement on all asbestos related claims pertaining to those 47 producers.  However, litigation involving CNA and its subsidiaries are numerous and wide spread. New suits have been filed against CNA in New York, Montana, Texas, and New Jersey.  The total extent of losses attributable to asbestos claims is not readily available, because of the complications involving the number of new claims, the nature of these claims (i.e. work related, or if there is manifestation of asbestosis), as well as the litigation enviroment (i.e. how juries have historically decided cases) in each of the states that these new claims are filed. 
|FY2008 (Dollars in Millions)||CNA Financial||The Travelers Company||American Financial Group||Arch Capital Group|
|Net Earned Premiums||$7,151||$21,579||$2,867||$2,845|
|Net Investment Income||$1,619||$2,792||$1,123||$468|
|Total Claims, Benefits and Expenses||$8,361||$20,761||$3,976||$2,706|
Of the top 25 insurance companies, CNA ranks fourteenth in market share, with a 1.72% market share.