CNA Financial Corporation — Q2 2012 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2012, compared with the same periods in 2011. CNA operates commercial property and casualty businesses through CNA Specialty and CNA Commercial, alongside Life & Group Non-Core and Corporate & Other Non-Core operations. Loews Corporation owned approximately 90% of CNA at quarter-end. Amounts are in millions of dollars except per-share data and ratios.
Financial results and position
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Total revenue | $2,246 | $2,198 | $4,647 | $4,513 |
| Net earned premiums | $1,668 | $1,595 | $3,317 | $3,210 |
| Net investment income | $470 | $517 | $1,118 | $1,137 |
| Income from continuing operations attributable to CNA | $166 | $124 | $416 | $345 |
| Net income attributable to CNA | $166 | $124 | $416 | $344 |
| Net operating income attributable to CNA | $152 | $114 | $378 | $327 |
| Diluted earnings per share | $0.62 | $0.46 | $1.54 | $1.28 |
- Revenue rose about 2% in Q2 and 3% in the first half year over year; net earned premiums increased in both periods. CNA reported higher net income, supported by improved net operating income and, for the first half, higher realized investment gains.
- Net investment income fell $47 million in Q2 and $19 million in the first half. Management attributed the decline primarily to weaker limited partnership results; first-half fixed-maturity income increased but was partly offset by reinvestment at lower market rates.
- Underwriting: CNA Specialty’s combined ratio was 94.4% in Q2 and 95.8% for the first half, versus 92.2% and 93.6%. CNA Commercial’s ratio improved to 108.1% and 107.2%, from 118.3% and 113.0%, but remained above 100%. Favorable prior-year development totaled $75 million in Q2 and $118 million in the first half.
- Cash flow and liquidity: First-half operating cash flow was $618 million versus $412 million; investing activities used $510 million versus providing $97 million; financing activities used $83 million versus $504 million. Cash was $100 million at June 30, compared with $75 million at year-end.
- Balance sheet and debt: Total assets were $56.5 billion and total liabilities $44.3 billion. Short-term debt was $83 million and long-term debt $2.526 billion. CNA stockholders’ equity was $12.214 billion. Fixed-maturity securities had a fair value of $41.367 billion; 92% of the portfolio was investment grade.
Material changes and notable items
- Premium growth reflected higher written premiums and rate increases in the core businesses. Renewal rates increased 5% at Specialty and 7% at Commercial in Q2; retention was 86% and 77%, respectively.
- Lower catastrophe losses supported improved core-segment results. Net catastrophe losses, after reinsurance, were $68 million for Q2 and $96 million for the first half, versus $100 million and $155 million in 2011. Favorable prior-year reserve and premium development also contributed to results; the amount and composition of such development can vary between periods.
- In Q2, CNA adopted updated insurance acquisition-cost accounting guidance. The change reduced 2012 net income by approximately $1 million for the quarter and $3 million for the first half; comparative information was adjusted. The filing notes that adoption was not fully retrospective for certain older contracts.
- On July 2, 2012, after quarter-end, CNA completed its approximately $230 million acquisition of Hardy Underwriting Bermuda Limited, a specialized Lloyd’s underwriter. Hardy reported $430 million of gross written premiums for 2011. Purchase accounting was not finalized; CNA estimated identifiable intangible assets of $135 million and goodwill of approximately $35 million.
- CNA declared and paid a Q2 dividend of $0.15 per share, up from $0.10 a year earlier. A further $0.15 dividend was declared July 27, payable August 29, 2012. Future dividends remain subject to board discretion and other factors.
Outlook, risks and contingencies
- No numerical earnings or revenue guidance is provided. Management stated that current cash flows were sufficient for expected working-capital and debt needs and that it did not expect this to change in the near term. Hardy was funded from existing liquidity.
- A new four-year, $250 million unsecured revolving credit facility was established; it had no borrowings at June 30. It includes minimum-net-worth and leverage covenants. The company may increase commitments by up to $100 million, subject to the agreement.
- Management emphasizes uncertainty in insurance reserve estimates, including long-tail claims, asbestos and environmental pollution exposures, and the collectibility and performance of reinsurance. Actual ultimate claim costs may exceed current estimates.
- Other risks include catastrophe severity and frequency, investment-market volatility and credit risk, lower reinvestment yields, competition and pricing, regulatory changes, and the ability to integrate acquisitions. The filing reported $314 million of gross unrealized losses on available-for-sale fixed maturities and $50 million of net OTTI losses recognized in earnings for the first half; management said no additional impairment was required for securities in an unrealized-loss position at June 30.
- Contingencies include a joint-venture office-lease guarantee with maximum potential future payments of approximately $125 million beyond amounts recorded, and $758 million of quantifiable indemnification agreements. Recorded indemnification liabilities were approximately $14 million. Routine litigation was described as not material.
Investor facts to verify
- Whether favorable reserve development and lower catastrophe losses persist, and how reserve assumptions—especially for long-tail and legacy exposures—change.
- Whether premium growth and rate increases are sufficient to improve CNA Commercial’s combined ratio below 100%, while maintaining retention and underwriting discipline.
- How limited partnership returns, interest rates, credit spreads and portfolio impairments affect investment income, realized results and book value.
- Hardy’s finalized purchase accounting, integration, operating contribution and effect on capital and liquidity.
- Compliance with the revolving-credit covenants, insurance-subsidiary dividend capacity, reinsurance recoverability, and the potential realization of disclosed guarantees and indemnities.