CNA Financial Corporation — Q2 2021 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2021. CNA operates Specialty, Commercial and International property and casualty businesses, Life & Group, and Corporate & Other. Loews Corporation owned approximately 89.6% of CNA at quarter-end.
Financial performance
| Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Total revenues | $3.029B | $2.766B | $5.895B | $5.057B |
| Net earned premiums | $2.035B | $1.850B | $3.997B | $3.719B |
| Net investment income | $591M | $534M | $1.095B | $863M |
| Net income | $368M | $151M | $680M | $90M |
| Diluted EPS | $1.35 | $0.55 | $2.49 | $0.33 |
| Core income, non-GAAP | $341M | $99M | $604M | $207M |
| Operating cash flow | — | $685M | $650M |
Revenue and income figures are reported in millions or billions as shown. Q2 pretax income was $462M versus $182M; H1 pretax income was $840M versus $93M. Core income excludes after-tax investment gains or losses and cumulative accounting changes.
Underwriting: Q2 combined ratios were 87.9% for Specialty, 99.6% for Commercial and 93.0% for International; H1 ratios were 88.3%, 103.1% and 94.4%, respectively. Lower catastrophe losses and improved current-year underwriting contributed to stronger results. Company-wide net catastrophe losses were $54M in Q2 and $179M in H1, compared with $301M and $376M in the comparable 2020 periods.
Balance sheet and liquidity: At June 30, total assets were $66.207B, total liabilities $53.539B and stockholders’ equity $12.668B. Long-term debt was $2.777B, little changed from year-end 2020. Cash was $462M and short-term investments were $1.465B. Management said operating, investing and financing cash flows were sufficient for current and expected working-capital and debt needs in the near term; no borrowings were outstanding under its $250M revolver or through its Federal Home Loan Bank membership.
Material changes and unusual items
- H1 net investment income increased $232M year over year, principally on higher limited partnership and common stock returns. The fixed-income portfolio effective yield declined to 4.4% from 4.6% in H1 2020.
- Net investment gains were $95M in H1 2021 versus losses of $147M in H1 2020. Q2 gains were $38M versus $69M.
- H1 net prior-year reserve development was unfavorable by $14M versus $7M in 2020. Corporate & Other recorded $40M of unfavorable development in both H1 periods, primarily from older mass-tort/abuse exposures; Specialty and International recorded favorable development.
- In February 2021, CNA ceded certain legacy excess workers’ compensation liabilities under a loss portfolio transfer and recognized an approximately $12M after-tax loss. CNA also changed segment presentation for certain legacy reserves, moving them from Commercial to Corporate & Other; prior periods were conformed.
- A new property quota-share reinsurance treaty effective June 1 reduced Q2 net written premiums by a $122M one-time catch-up for previously written unearned premiums. Commercial net written premiums fell 12% year over year in Q2, but excluding that catch-up they declined $6M.
- H1 dividends paid were $414M, including a special dividend; share repurchases cost $18M. The board declared a further $0.38-per-share quarterly dividend payable September 2, 2021, subject to the stated record date.
Outlook, commentary and risks
The filing provides no quantified earnings or revenue guidance. Management said near-term liquidity is expected to remain adequate. It cautioned that interim results are not necessarily indicative of full-year results. Management cited improved P&C underwriting and lower catastrophe losses, while noting that reserve estimates, investment returns and catastrophe activity can cause volatility.
- Cyber incident: A March 2021 ransomware attack disrupted systems and affected premium production, particularly Commercial retention and new business in Q2. The investigation found that personal information of certain employees, dependents, contractors and other persons, including some policyholders, was copied. Notifications were made in July. CNA said it did not then expect a material financial impact, but could not assure the outcome; investigations, claims, fines, uncovered costs and insurance disputes remain possible.
- Insurance reserves: Long-tail claims, including workers’ compensation, long-term care, asbestos/environmental and mass-tort exposures, depend on estimates and may develop adversely. The A&EP reinsurance arrangement had $376M of unrecognized deferred benefit at June 30; collateral trust fair value was $2.9B. The EWC treaty had $310M remaining under its $1B limit.
- Other exposures: Catastrophes, inflation in claim costs, COVID-19-related effects, reinsurance counterparty performance, market and credit conditions, regulation, litigation and rating changes could affect results. CNA disclosed approximately $1.6B of potential lifetime payments under structured-settlement guarantees, but said payment was not considered likely because of supporting trust assets.
- Accounting: CNA expects to adopt the long-duration insurance accounting standard in 2023 using modified retrospective transition and is evaluating the impact; annual cash-flow assumption updates are expected to increase income-statement volatility.
Most important facts for investors to verify
- Whether premium retention and new business recover from the cyber-related disruption, and the eventual costs, claims, insurance recoveries and regulatory consequences of the incident.
- Whether current loss reserves remain adequate, especially for long-tail, mass-tort, cyber, workers’ compensation and long-term-care exposures; monitor future prior-year development.
- How recurring underwriting performance compares with reported results that benefited from lower catastrophe losses and stronger investment returns; review segment combined ratios and catastrophe experience.
- Whether reinsurance counterparties perform as contracted and the extent of CNA’s net exposure under the A&EP and EWC loss portfolio transfers.
- Cash generation, investment portfolio credit quality and valuation, statutory dividend capacity, and the sustainability of shareholder distributions.