CNA Financial Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are in millions of dollars except per-share data and ratios. CNA is a commercial property-and-casualty insurer with Specialty, Commercial, International, Life & Group, and Corporate & Other segments. Loews Corporation owned approximately 89.6% of CNA at quarter-end.
Financial highlights
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenues | $2,926 | $3,029 | $5,811 | $5,895 |
| Net earned premiums | $2,155 | $2,035 | $4,214 | $3,997 |
| Net investment income | $432 | $591 | $880 | $1,095 |
| Net investment gains (losses) | $(59) | $38 | $(70) | $95 |
| Net income | $205 | $368 | $518 | $680 |
| Diluted EPS | $0.75 | $1.35 | $1.90 | $2.49 |
| Core income (non-GAAP) | $245 | $341 | $561 | $604 |
- Profitability and drivers: Q2 net income fell 44% year over year; six-month net income fell 24%. Core income declined 28% in Q2 and 7% year to date. Lower limited partnership and common-stock investment returns drove much of the decline, alongside weaker Life & Group results and higher Corporate & Other losses. Higher fixed-income investment income and improved underwriting partly offset these pressures.
- Underwriting: Combined ratios improved year over year in Commercial (93.2% Q2; 93.8% YTD) and International (91.6%; 92.0%). Specialty’s ratios were 88.1% and 88.4%, broadly stable year over year. A combined ratio below 100% indicates underwriting profit before investment income and other items.
- Cash flow and capital: Operating cash flow was $1,253 for the first six months, versus $685 in 2021, primarily because the prior-year period included payment of the Excess Workers’ Compensation loss-portfolio-transfer premium. Investing cash outflow was $431; financing cash outflow was $786. Cash was $560 at June 30.
- Balance sheet and liquidity: Total assets were $62,229, down from $66,639 at year-end; stockholders’ equity was $9,512, down from $12,809. Long-term debt was $2,780, essentially unchanged. The $250 revolving credit facility was undrawn, and CNA reported no Federal Home Loan Bank borrowings. Management said current cash flows are sufficient for expected working-capital and debt needs.
- Investment marks: The portfolio recorded a $3,033 six-month other comprehensive loss, primarily from unrealized investment losses, and accumulated other comprehensive income moved from $320 to a loss of $2,713. Fixed-maturity securities had $2,842 of gross unrealized losses at June 30, compared with $112 at December 31, 2021. Management attributed these largely to higher risk-free rates and wider credit spreads, and said it did not expect to be required to sell the securities before recovery.
- Dividends: CNA paid $765 in common dividends during the first half, including a $2.00-per-share special dividend; total declared dividends were $2.80 per share. After quarter-end, the board declared a $0.40-per-share quarterly dividend payable September 1, 2022.
Changes, outlook, risks, and unusual items
- Premiums grew: net earned premiums increased approximately 6% in Q2 and 5% for the first half. Commercial and Specialty reported higher new business; Commercial also cited improved retention. Reported International growth was partly affected by foreign-exchange movements.
- Six-month catastrophe losses were $57, versus $179 in 2021; Q2 losses were $37, versus $54. Net prior-year reserve development was unfavorable by $15 for the first half, including $64 unfavorable in Corporate & Other, largely associated with legacy mass-tort abuse claims. This was partly offset by favorable development in other segments.
- Claims inflation, reserve-estimation uncertainty, catastrophes, and mass-tort exposures remain important risks. The filing also identifies reinsurance counterparty performance, market and credit volatility, foreign exchange, competition, regulation, litigation, and possible effects of cyber incidents and pandemics as risks.
- The A&EP reinsurance arrangement with NICO had $3.4 billion of cumulative ceded losses and a $406 million unrecognized deferred benefit at June 30; the collateral trust was valued at $2.4 billion. CNA also disclosed approximately $1.6 billion of potential lifetime payments under structured-settlement guarantees, but said payment was not expected because a supporting trust is maintained.
- CNA plans to adopt the long-duration insurance accounting standard on January 1, 2023, using a modified retrospective method. It expects a $2.2–$2.5 billion decrease in AOCI measured at the January 1, 2021 transition date; the filing says the change will not affect statutory capital and surplus or cash flows. No quantified earnings guidance was provided.
Important facts for investors to verify
- Whether investment income and investment marks recover, and how interest rates and credit spreads affect portfolio values, equity, and earnings.
- Whether reserve estimates remain adequate, particularly for legacy abuse and other mass-tort claims, cyber and professional-liability claims, and long-tail exposures.
- Whether premium growth and underwriting performance persist, including the trend in Commercial and Specialty loss ratios excluding catastrophes and reserve development.
- Whether liquidity and capital remain adequate after substantial dividends, and whether insurance-subsidiary dividend capacity or regulatory constraints change.
- The final transition impact and implementation of the long-duration contract accounting standard, including its effects on reported AOCI and earnings patterns.