CNA Surety Corporation is an insurance holding company in the United States. Through its insurance subsidiaries, CNA Financial Corporation (“CNAF”) owns approximately 61% of the outstanding common stock of CNA Surety Corporation. Loews Corporation owns approximately 90% of the outstanding common stock of CNAF. The following is a discussion and analysis of CNA Surety Corporation and its subsidiaries’ (collectively, “CNA Surety” or the “Company”) operating results, liquidity and capital resources and financial condition. The most significant risks and uncertainties impacting the operating performance and financial condition of the Company are discussed in Item 1A., Risk Factors, of this Form 10-K. This discussion should be read in conjunction with the Consolidated Financial Statements of CNA Surety and Notes thereto.
The favorable development in 2008 primarily resulted from several significant case reserve reductions, favorable indemnity recoveries and a low level of new loss activity for accident years 2006 and prior. These favorable developments were somewhat offset by adverse development related to the 2007 accident year which was recorded in response to economic conditions at December 31, 2008. Also, the initial estimates of losses for accident year 2008 reflected the Company’s expectations of the impact of continued deterioration of these economic conditions.
various exposure management initiatives. With respect to risks on large commercial accounts, the Company generally limits its exposure to $50.0 million per account, but will selectively accept higher exposures.
The Company believes that total invested assets, including cash and short-term investments, are sufficient in the aggregate and have suitably scheduled maturities to satisfy all policy claims and other operating liabilities, including dividend and income tax sharing payments of its insurance subsidiaries. If cash requirements unexpectedly exceed cash inflows, the Company may raise additional cash by liquidating fixed income securities ahead of their scheduled maturity. Depending on the interest rate environment at that time, the Company could generate realized gains or losses that would increase or decrease net income for the period. The extent of these gains or losses
Reflects unfunded postretirement benefit plans and long-term incentive plan payments to certain executives.
The dividends that may be paid without prior regulatory approval are determined by formulas established by the applicable insurance regulations, as described above. The formulas that determine dividend capacity in the current year are dependent on, among other items, the prior year’s ending statutory surplus and statutory net income. Dividend capacity for 2011 is based on statutory surplus and income at and for the year ended December 31, 2010. Without prior regulatory approval in 2011, Western Surety may pay dividends of $140.2 million to CNA Surety. CNA Surety received no dividends from its insurance subsidiaries in 2010. CNA Surety received dividends of $5.0 million and $3.0 million from its insurance subsidiaries during 2009 and 2008, respectively. CNA Surety received dividends of $0.5 million from its non-insurance subsidiaries during 2010. CNA Surety did not receive any dividends from its non-insurance subsidiaries during 2009 and 2008.
The Consolidated Financial Statements include the accounts of CNA Surety and all majority-owned subsidiaries.
When a security is placed on the watch list, it is monitored for further market value changes and additional news related to the issuer’s financial condition. The focus is on objective evidence that may influence the evaluation of impairment factors. The decision to record an other-than-temporary impairment loss incorporates both quantitative criteria and qualitative information.
Based on the Company’s evaluation of this quantitative criteria and qualitative information, the Company recorded no OTTI losses on equity securities in 2010. In 2009 and 2008, the Company recorded other-than-temporary impairment losses of less than $0.1 million and $0.4 million, respectively, on the equity securities that are related to the Company’s nonqualified deferred compensation plan.
At December 31, 2010, the Company holds 276 fixed income securities with a total estimated fair value of $1,149.9 million in a gross unrealized gain position of $59.5 million in the aggregate.
Policy acquisition costs deferred and the related amortization of deferred policy acquisition costs were as follows (dollars in thousands):
Favorable development in 2010 was primarily related to accident years 2008, 2007 and 2006. Loss experience for the 2007 and 2006 accident years continued to be lower than expected, particularly for large losses.
Board of Directors. Allocation is based upon separate return calculations in accordance with the Internal Revenue Code of 1986 with current credit being given to separate company net losses.
The liabilities for postretirement benefits at December 31, 2010 and 2009 were as follows (dollars in thousands):
The plans’ combined net periodic postretirement benefit cost for the last three fiscal years included the following components (dollars in thousands):
The following is a summary of the quarterly results of operations for the years ended December 31, 2010 and 2009 (dollars in thousands, except per share amounts):
During the fourth quarter of 2010, the Company recorded net loss reserve development for prior accident years which resulted in a decrease of the estimated liability for unpaid loss and loss adjustment expense of $54.3 million with a corresponding increase to income before income taxes.