CNA Financial Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unless otherwise noted, amounts are in millions. Comparative figures are for Q1 2011; prior-period figures were adjusted for the company’s deferred acquisition cost accounting change.
Business context and results
CNA is primarily a commercial property-and-casualty insurer, with two core segments—CNA Specialty and CNA Commercial—and run-off/non-core life and other operations. Loews Corporation owned approximately 90% of CNA at quarter-end.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Total revenue | $2,401 | $2,315 |
| Net earned premiums | $1,649 | $1,615 |
| Net investment income | $648 | $620 |
| Net income attributable to CNA | $250 | $220 |
| Diluted EPS attributable to CNA common stockholders | $0.93 | $0.82 |
| Net operating income attributable to CNA | $226 | $213 |
| Operating cash flow | $312 | $112 |
Net income rose $30, primarily on higher realized investment gains and net operating income. Net realized investment gains attributable to CNA were $24 after tax, versus $8. Operating income before tax was $364; income tax expense was $114. The company paid a $0.15-per-share dividend, up from $0.10.
Segment performance and material changes
- CNA Specialty: Net earned premiums increased to $706 from $669; net operating income was $132 versus $128. The combined ratio worsened to 97.3% from 95.1%, including a higher current-accident-year loss ratio; management said anticipated loss-cost trends exceeded earned rate levels. Renewal average rate increased 3%; retention was 87%.
- CNA Commercial: Net earned premiums were $803 versus $802; net operating income rose to $139 from $130. The combined ratio improved to 106.2% from 108.0%, helped by lower catastrophe losses and more favorable prior-year development, partly offset by higher expenses. Renewal average rate increased 5%; retention was 78%.
- Non-core operations: Life & Group Non-Core reported a net loss of $11 versus $21, mainly reflecting improved realized investment results. Corporate & Other Non-Core reported a $23 loss versus $31.
- Net catastrophe losses were $28 before tax, compared with $55 in Q1 2011. Favorable prior-year development totaled $43 versus $35, including $31 favorable in CNA Commercial and $15 favorable in CNA Specialty, partly offset by $3 unfavorable in Corporate & Other Non-Core.
Financial position, cash flow and liquidity
- Total assets were $56.0 billion at March 31, 2012, versus $55.1 billion at December 31, 2011; total liabilities were $44.0 billion and CNA stockholders’ equity was $12.0 billion.
- Total investments were $45.5 billion, including $40.8 billion of fixed maturities. The fixed-maturity portfolio was 92% investment grade. Net unrealized investment gains increased, contributing to Q1 comprehensive income of $534.
- Cash was $59, down from $75 at year-end. Operating cash flow was $312; investing activities used $287 and financing activities used $42. Operating cash flow benefited from higher investment-income receipts and a $75 federal income tax refund.
- Short-term debt was $83 and long-term debt was $2.526 billion, broadly unchanged from year-end. Long-term debt fair value was reported at $2.794 billion. CNA had no borrowings under its existing credit agreement at quarter-end.
- Management said existing cash flows were sufficient for expected working-capital and debt needs. CNA expected to fund the Hardy acquisition from existing liquidity. On April 19, it entered a new four-year, $250 million unsecured revolving credit facility, with potential commitments of up to an additional $100 million, subject to terms and consents.
Outlook, risks, contingencies and unusual items
- CNA agreed to acquire Hardy Underwriting Bermuda Limited, a specialized Lloyd’s underwriter, for approximately $227 million in cash. Closing was expected in Q2 2012, subject to regulatory approvals and other conditions. Hardy wrote approximately $430 million of gross premiums in 2011; $230 million of CNA short-term investments was held in escrow for the purchase.
- No specific earnings or revenue guidance was provided. Management noted that interim results are not necessarily indicative of full-year results.
- Insurance reserve estimates remain a key uncertainty, especially for long-tail claims, asbestos and environmental pollution exposures, and long-term care. Catastrophes, claims inflation, litigation, reinsurance performance, competition, regulation, credit-market conditions, investment valuations, and rating changes could affect results.
- Fixed-maturity securities included $330 million of gross unrealized losses at quarter-end. CNA reported $14 million of pretax OTTI losses on asset-backed securities; further collateral deterioration could result in additional impairments. Sub-prime and Alt-A holdings had fair values of $266 million and $543 million, respectively.
- The company’s European fixed-maturity exposure had fair value of $3.908 billion, including $379 million in Greece, Italy, Ireland, Portugal and Spain. CNA stated there were no material changes in market-risk components during the quarter.
- An insurance brokerage antitrust settlement was approved in March 2012; objectors appealed in April. CNA said the settlement was not expected to materially affect results and it did not believe there was material ongoing exposure. Other routine litigation was described as immaterial. A joint-venture lease guarantee could require payments of up to approximately $134 million beyond recorded amounts, though CNA said this was not likely.
- Adoption of revised deferred acquisition cost guidance reduced Q1 2012 net income by approximately $2 million and EPS by $0.01; comparative financial information was adjusted. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether earned rate increases keep pace with loss-cost trends, particularly in CNA Specialty, and whether CNA Commercial’s combined ratio improves sustainably.
- Reserve adequacy, the sources and persistence of favorable prior-year development, and exposure to long-tail, asbestos and environmental claims.
- Investment portfolio credit quality, unrealized losses, asset-backed collateral performance, and exposure to European and non-investment-grade issuers.
- Completion, funding and integration of the Hardy acquisition, plus the terms and covenant compliance of the new revolving credit facility.
- Capital and liquidity needs, including subsidiary dividend capacity and the sustainability of operating cash flows and common dividends.