CNA Financial Corporation — Q2 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2023, compared with the same 2022 periods. CNA operates Specialty, Commercial and International property-and-casualty businesses, along with Life & Group and Corporate & Other. Loews Corporation owned approximately 90% of CNA’s common stock at quarter-end. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenues | $3,304 | $2,926 | $6,456 | $5,811 |
| Net earned premiums | $2,347 | $2,155 | $4,595 | $4,214 |
| Net investment income | $575 | $432 | $1,100 | $880 |
| Net income | $283 | $190 | $580 | $485 |
| Diluted EPS | $1.04 | $0.69 | $2.13 | $1.78 |
| Core income (non-GAAP) | $308 | $230 | $633 | $528 |
- Revenue rose about 13% in Q2 and 11% for the first half year over year; net income increased about 49% and 20%, respectively. Core income excludes after-tax investment gains and losses.
- At June 30, assets were $63.1 billion, liabilities $54.4 billion and stockholders’ equity $8.7 billion. Cash was $358 million, down from $475 million at December 31, 2022.
- Debt totaled $3.18 billion: $792 million short-term and $2.38 billion long-term, compared with $2.78 billion at year-end. CNA issued $400 million of 5.50% senior notes due June 2033 during Q2.
- For the first six months, operating cash flow was $937 million versus $1.25 billion in 2022; investing activities used $858 million and financing activities used $200 million. Cash dividends paid were $559 million, including a special dividend; CNA repurchased $24 million of shares.
- CNA said current cash flows are sufficient for expected working-capital and debt needs in the near term. Its $250 million revolving credit facility and Federal Home Loan Bank borrowings had no outstanding balance.
Margins and material changes
- Property-and-casualty combined ratios were: Specialty 90.9% in Q2 and 90.4% for the first half; Commercial 96.3% and 96.2%; International 92.2% and 94.6%. Ratios below 100% indicate underwriting profit before investment income and other items.
- Core income increased primarily with higher investment income and improved underlying underwriting results in property-and-casualty operations. However, catastrophe losses rose to $68 million in Q2 and $120 million for the first half, versus $37 million and $57 million in 2022.
- First-half net prior-year reserve development was $31 million unfavorable, versus $15 million unfavorable in 2022. Q2 development was $18 million unfavorable, compared with $27 million unfavorable a year earlier. The Q2 2023 amount included $35 million of unfavorable development in Corporate & Other, primarily from higher frequency and severity of legacy abuse claims.
- Net investment income benefited from higher fixed-income income and limited partnership and common-stock returns. Net investment losses were $32 million in Q2 and $67 million for the first half.
- Commercial grew premiums and new business, with renewal premium change of 11% in Q2 and 10% for the first half. Specialty’s gross written premiums excluding third-party captives were slightly lower year over year for both periods; International premiums increased, while renewal premium change moderated.
Outlook, risks and unusual items
- The filing provides no specific consolidated earnings or revenue guidance. Management expects to continue offering long-term-care policy buyouts through the remainder of 2023 and future years; it says underwriting results excluding buyouts are generally in line with expectations.
- Long-term-care results remain sensitive to morbidity, persistency, expenses, premium-rate approvals and discount rates. The new long-duration-contract accounting standard was adopted retrospectively. Adverse experience that pushed the net premium ratio above 100% generated immediate charges of $29 million in Q2 and $42 million in the first half of 2023; comparable 2022 charges were less than $1 million. Management cautions the accounting change does not affect statutory capital and surplus, cash flows or underlying economics.
- Fixed-maturity securities had $3.09 billion of net unrealized losses at June 30, down from $3.40 billion at year-end. CNA attributed losses primarily to interest rates and wider credit spreads, and said it did not intend to sell affected securities and was not likely to be required to sell before recovery.
- Commercial real estate exposure includes $1.58 billion fair value of commercial mortgage-backed securities and $1.01 billion net mortgage loans; the mortgage-loan allowance was $30 million. CNA reported no direct real-estate investments. It also had approximately $1.48 billion of investment purchase/funding commitments.
- Legacy risks include asbestos and environmental-pollution claims, mass tort and abuse claims, long-tail insurance reserves, reinsurance recoverability, and catastrophe losses. The A&EP reinsurance arrangement with NICO had $402 million of deferred benefit unrecognized at quarter-end and $2.4 billion of collateral trust assets. CNA also disclosed approximately $1.5 billion of potential structured-settlement guarantee payments over annuitants’ lifetimes, which it considers unlikely to be required.
- Other noted pressures include social and medical inflation, construction costs, litigation severity, weather events, market and credit volatility, regulatory limits on premium increases or subsidiary dividends, and cyber risks. Management reported no material change in market-risk components during the quarter.
- Deferred non-insurance warranty revenue was $4.7 billion. CNA expects to recognize approximately $0.9 billion in the remainder of 2023, $1.2 billion in 2024, $0.9 billion in 2025 and $1.7 billion thereafter.
Most important facts for investors to verify
- Whether stronger investment income and premium growth persist, and how catastrophe losses affect Commercial’s elevated combined ratio.
- Future reserve development, particularly long-tail Commercial claims and legacy mass-tort abuse exposures.
- Long-term-care experience, premium-rate approvals and the impact of the 100% net-premium-ratio cap on reported earnings.
- Debt, liquidity and dividend capacity, including the effect of subsidiary regulatory restrictions and future capital needs.
- Investment-portfolio credit quality, unrealized losses and commercial-real-estate exposures, as well as performance and collateral support under reinsurance arrangements.