Although second-quarter net income fell 9 percent for CNA, with investment losses hurting the bottom line, property-casualty operating earnings surged 17 percent, the Chicago-based insurer reported this morning.

Second-quarter net income was $217 million, or 80 cents per share, compared with $239 million, or 86 per share, for the same quarter in 2006.

Net operating income, which excludes realized investment losses, rose 4.7 percent to $318 million in the second quarter.

Realized investment losses of $91 million and $10 million of losses from discontinued operations erased some of the momentum for operating gains, pushing income on the bottom line to the $217 million total reported.

Breaking down the investment losses during a conference call this morning, Chief Financial Officer Craig Mense explained that the bulk of the losses--$114 million--related to the company's conformity with an accounting rule. The rule requires mark downs of securities that are held in a loss position in situations where the company is uncertain of its intent to hold onto the securities until they recover their value.

Some of this $114 million loss, referred to as "other than temporary impairments," was offset by gains from derivative investments amounting to $75 million, he said. He noted that CNA also recognized $50 million of securities sold during the quarter as the company acted to reposition parts of its investment portfolio.

Mr. Mense disclosed that $20 million of the $114 million for "other than temporary impairments" was attributable to securities with exposure to subprime mortgage collateral.

Commenting on results beyond those related to investment activities, CNA Chairman and Chief Executive Officer Stephen Lilienthal said during a conference call this morning that the $318 million net operating income result was the best the company has reported in more than a decade.

For property-casualty operations alone, second-quarter operating income was $325 million in the quarter, up 17.3 percent from $277 million in the same quarter a year ago.

Net investment income (from interest and dividends on investments held by the company) gave a significant boost to operating income, rising by $119 million, or 21.6 percent, to $671 million in the quarter.

The combined ratio for the quarter--94.7--was roughly the same as in second-quarter 2006, when the combined ratio came in at 95.2.

While gross written premiums grew 3.6 percent in the quarter, James Lewis, CEO of property-casualty operations, disclosed that most of the growth was attributable to a single program covering cell phones. He also said premium related to this program is fully ceded to a captive.

The cession, together with changes in CNA's reinsurance for specialty lines, meant that net written premiums fell in the quarter even though gross premiums increased, he said.

In total, net premiums written fell less than 1 percent to $1.8 billion in the quarter, with standard lines premiums falling 2.5 percent to $1.1 billion and specialty lines premiums rising just over 2 percent to $639 million.

Still, Mr. Lewis said that while CNA expects there to be pressure on the top line given current market conditions, external rate surveys that put average rate decreases in the midteens do not reflect the profile of the business his company is writing.

"CNA's sweet spot is the smaller and midsized risks, which are generally less price-driven and more loyal," he said.

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