CNA Financial: 25% Option Opportunity

Includes: CNA, L
by: Dan Braem

CNA Financial Corporation (NYSE:CNA) is a property and casualty insurer that trades for around $10 per share. At the $10 per share price, the market capitalization is under $3 billion.

Here is what I find interesting:

  1. Book value as of 12/31/2008 is slightly under $7 billion.
  2. CNA is 90% owned by Loews (NYSE:L), a conglomerate run by the Tisch family.
  3. Net income for years ended 12/31/06 and 12/31/07 was $1.1 billion and $.85 billion.

CNA had a difficult 2008, with both a rough hurricane season and asset write-downs (AIG, FNMA, and Freddie Mac preferred shares). The net loss for 2008 was $300 million.

Loews invested an additional $1 billion in CNA in 2008 to shore up CNA's capital base.

In the long-term, I find little downside in these shares. For one, the shares already trade at less than half of book value. Second, Loews has demonstrated that it will not allow CNA to fail. Third, the upside for the stock price is huge - if the stock trades for book value, it will more than double. With limited downside and huge upside, I find CNA to be an attractive investment.

Maybe more interesting than the CNA shares are the January 2010 puts. The $7.50 puts would fetch nearly $1.50, so selling these contracts would yield $150 per contract. If CNA shares did hit $7.50 per share, the market cap of CNA would be $2 billion. A true bargain in my opinion.

Even better, the break even price would be $6, calculated by taking the $7.5 strike less the $1.5o premium. At $6, the stock is a steal. Of course, if the stock under $10, the premium on the put should go higher.

Note: I would recommend having $600 of liquid investments or cash for every contract written, such that any necessary funds would be available if necessary. If the put doesn't get exercised, you will have made 25% on your "cash". In other words, you would have received $150 for keeping $600 on reserve. Of course, your real gain is 100% since your basis is zero. If the contract is exercised - be patient. In my opinion, CNA is highly undervalued right now.

Disclosure: I own both CNA shares, Loews Shares, and have written the $7.50 January 2010 puts.