CNA Financial Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; interim financial statements are unaudited. CNA is an insurance and warranty-services company; Loews Corporation owned approximately 89% of its common stock.
Financial results and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenues | $2.610bn | $2.574bn | $5.305bn | $5.109bn |
| Net income | $278m | $270m | $620m | $561m |
| Diluted EPS | $1.02 | $0.99 | $2.28 | $2.06 |
| Core income (non-GAAP) | $294m | $270m | $612m | $551m |
| Net investment income | $515m | $506m | $1.086bn | $996m |
Operating cash flow was $514m for the first half, versus $354m a year earlier. Investing activities provided $233m; financing activities used $788m. Cash ended the period at $271m, down from $310m at year-end 2018. At June 30, total investments were $46.747bn, total assets $59.963bn, and stockholders’ equity $12.087bn. Long-term debt was $2.678bn, nearly unchanged from $2.680bn at year-end. The filing gives no conventional consolidated margin measure; P&C combined ratios are shown below.
Changes and operating trends
- First-half revenue increased about 4% and net income increased about 11% year over year. Core income rose $61m; management attributed the improvement partly to stronger Life & Group and Corporate & Other results, while P&C core income declined $34m, mainly from lower underwriting income.
- Q2 P&C combined ratios were Specialty 90.7% (86.8% prior year), Commercial 99.7% (96.6%), and International 97.5% (104.7%). First-half ratios were 91.5% (87.2%), 100.5% (96.8%), and 99.7% (100.8%), respectively. Ratios below 100% indicate underwriting profit before investment income.
- First-half net catastrophe losses rose to $96m from $60m. Favorable prior-year reserve development declined to $45m from $98m. Commercial’s first-half combined ratio exceeded 100%, reflecting current-year underwriting results and higher catastrophe losses.
- Net earned premiums were $3.627bn for the first half, up modestly from $3.600bn. Specialty and Commercial net written premiums grew; International net written premiums declined, partly due to CNA’s exit from certain Hardy business classes.
- First-half net investment income increased $90m. Management cited improved limited partnership and common-stock returns; after-tax net investment income rose $64m.
Liquidity, capital and notable items
- CNA issued $500m of 3.90% senior notes due May 2029 and redeemed $500m of 5.875% notes due August 2020. The redemption contributed a $21m pretax investment loss ($16m after tax). The $250m revolving credit facility was undrawn, and there were no FHLB borrowings.
- Dividends declared and paid in the first half totaled $2.70 per share, including a $2.00 special dividend. On August 2, the board declared a further $0.35 quarterly dividend. CNA repurchased 365,695 shares for $16m in the first half.
- Investment-market gains lifted other comprehensive income by $998m in the first half; accumulated other comprehensive income moved from a loss of $878m at year-end to income of $120m at June 30. This is primarily a change in unrealized investment values, not operating income.
- Management said current cash flows should be sufficient for expected working-capital and debt needs. It provided no specific earnings or revenue guidance in the supplied filing text.
Risks, contingencies and accounting
- Insurance reserve estimates are judgmental and may change; the filing highlights long-tail claims, long-term care, asbestos and environmental pollution (A&EP), reinsurance collectibility, catastrophes, and investment valuation as areas of uncertainty.
- The A&EP loss portfolio transfer to Berkshire Hathaway subsidiary NICO had $3.1bn of cumulative ceded amounts and a $338m unrecognized deferred reinsurance benefit at June 30. The collateral trust was valued at $3.1bn; Berkshire Hathaway guarantees specified obligations. CNA planned its annual A&EP reserve review for Q4 2019.
- Structured-settlement annuity guarantees could require approximately $1.7bn of payments over annuitants’ lifetimes, but management said payment was not considered likely because a supporting trust is expected to cover the discounted reserves. Routine litigation was described as not material; recorded guarantee and indemnification liabilities were about $5m.
- Catastrophe losses and reserve development can cause period-to-period volatility. Management also cited competition, claim-cost inflation, market and credit conditions, regulatory constraints, and Brexit-related compliance costs as risks. No material change in market-risk components was reported for the first half.
- New accounting standards on credit losses and long-duration insurance contracts were pending adoption; CNA was evaluating their effects. The filing states that long-duration guidance may increase income and equity volatility.
Key facts for investors to verify
- Whether reserve adequacy and the decline in favorable prior-year development persist, especially for medical professional liability, Commercial, and International claims.
- How catastrophe experience and Commercial underwriting affect the combined ratio, which was 100.5% for the first half.
- Investment return sustainability and exposure to unrealized valuation changes, credit losses, and limited partnerships.
- Progress and protection under the NICO A&EP reinsurance arrangement, including collateral and recoveries against the aggregate limit.
- Capital and dividend capacity, including the special dividend’s effect on holding-company liquidity and regulated subsidiary dividend limits.