CNA Financial Corporation — 2011 Q2 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and six months ended June 30, 2011, compared with the same periods in 2010. CNA is primarily a commercial property-and-casualty insurer, with Specialty and Commercial operations and non-core life and other businesses. Loews Corporation owned approximately 90% of CNA at quarter-end.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $2,198 million | $2,233 million | $4,513 million | $4,548 million |
| Net income attributable to CNA | $126 million | $283 million | $349 million | $528 million |
| Net operating income attributable to CNA | $116 million | $269 million | $332 million | $492 million |
| Basic and diluted EPS | $0.47 | $0.96 | $1.30 | $1.78 |
| Net cash from operating activities | Not separately reported for the quarter | $412 million | $581 million |
Revenue and earnings drivers. Q2 net earned premiums were $1,595 million, down 1% year over year; six-month premiums were $3,210 million, also down slightly. Net investment income was $517 million in Q2, down from $521 million, and $1,137 million for six months, up from $1,111 million, reflecting stronger limited-partnership results offset by lower fixed-income income. Six-month net realized investment gains were $28 million versus $63 million. Claims, benefits and expenses rose to $2,019 million in Q2 from $1,787 million; for six months they were $3,999 million versus $3,745 million.
Underwriting and margins. Combined ratios worsened: CNA Specialty was 92.2% in Q2 and 93.5% for six months, versus 79.0% and 85.7%; CNA Commercial was 117.7% and 112.6%, versus 98.4% and 104.1%. Ratios above 100% indicate underwriting losses before investment income and other items. Specialty net operating income fell to $114 million in Q2 from $168 million; Commercial fell to $39 million from $125 million. The filing attributes the declines mainly to less favorable prior-year reserve development and higher catastrophe losses.
Financial position, liquidity and capital
- At June 30, total assets were $55.8 billion and total equity was $11.7 billion. Investments totaled $43.4 billion, including $38.6 billion of fixed maturities; cash was $84 million.
- Long-term debt was $2.648 billion, with no short-term debt outstanding, compared with $2.251 billion of long-term and $400 million of short-term debt at year-end 2010. CNA issued $400 million of 5.75% senior notes due 2021 and redeemed $400 million of 6.00% notes due 2011, recording a $9 million pretax extinguishment loss. The company also repaid $100 million of a surplus note; $400 million remained outstanding.
- Six-month financing cash outflow was $504 million, including approximately $475 million to acquire CNA Surety’s remaining publicly held shares, $54 million of common dividends, and debt activity. CNA said operating, investing and financing cash flows were sufficient for current and expected near-term needs; its $250 million revolving facility was undrawn.
- Common equity dividends were $0.10 per share for the quarter; another $0.10 dividend was declared for payment in August. Future dividends remain subject to board discretion and regulatory constraints.
Material changes, outlook and risks
- Acquisition: CNA completed its acquisition of CNA Surety’s noncontrolling interest on June 10 for approximately $475 million, making it wholly owned. The cash purchase and consolidation affect period comparisons and equity.
- Catastrophes and reserves: Net catastrophe losses were $100 million in Q2 and $155 million for six months, primarily from domestic storms and the Japanese event. The company recorded favorable pretax prior-year development of $72 million in Q2 and $107 million for six months, substantially below the respective 2010 amounts of $265 million and $300 million.
- Investments: Six-month other-than-temporary impairment losses recognized in earnings were $103 million, including $74 million on asset-backed securities. At quarter-end, gross unrealized losses on available-for-sale fixed maturities were $519 million. Management reported no additional impairment required based on its current assessments, but further collateral deterioration could cause additional losses.
- Management outlook: The filing provides no specific earnings or premium guidance. Management said liquidity should remain sufficient in the near term. A technology transformation was expected to cost $37 million in total; $36 million had been incurred in 2010, and 2011 costs were not significant. Expected savings were to be reinvested in technology and other business needs.
- Key risks and contingencies: Results depend on estimates of long-tail insurance reserves, catastrophe frequency and severity, reinsurance recoveries, investment values and credit performance, market conditions, and regulatory and competitive developments. CNA had $154 million of limited-partnership capital-call commitments and a potential maximum $164 million exposure under a joint-venture lease guarantee, which management did not consider likely to be triggered.
- Legal matter: CNA and other defendants reached a settlement in the insurance brokerage antitrust litigation; preliminary court approval was granted in June 2011. A fairness hearing was scheduled for September, and CNA did not expect a material effect on results.
Most important facts for investors to verify
- Whether catastrophe losses, especially domestic storm losses, and the materially lower level of favorable reserve development continue to pressure combined ratios and earnings.
- Whether favorable reserve development is repeatable and whether long-tail reserves remain adequate as claims emerge.
- Investment portfolio credit quality and valuation, including mortgage-backed exposures, unrealized losses, and further impairment risk.
- The effects of the CNA Surety acquisition, refinancing and surplus-note repayment on future earnings, leverage and capital flexibility.
- Final approval and terms of the brokerage litigation settlement, along with developments in the disclosed guarantee and investment commitments.