CNA Financial Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; unaudited. Amounts are in millions except per-share data and ratios. Loews Corporation owned approximately 90% of CNA.
Financial results and key metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenues | $2,175 | $2,363 | $6,688 | $6,911 |
| Net earned premiums | $1,732 | $1,645 | $4,942 | $4,868 |
| Net investment income | $394 | $581 | $1,531 | $1,692 |
| Income from continuing operations before tax | $124 | $(167) | $638 | $636 |
| Net income attributable to CNA | $75 | $(140) | $424 | $388 |
| EPS attributable to common stockholders | $0.28 | $(0.59) | $1.58 | $1.19 |
| Net cash from operating activities | — | $813 | $(673) |
- Core underwriting combined ratios: CNA Specialty was 94.7% for Q3 and 93.9% year to date, compared with 88.5% and 86.6%. CNA Commercial was 103.0% and 109.3%, compared with 105.8% and 104.7%.
- Net prior-year development was favorable by $72 in Q3 and $179 for nine months, versus $93 and $393 in 2010.
- Catastrophe losses, net of reinsurance, were $50 in Q3 and $205 for nine months. Limited partnerships recorded a $93 pretax loss in Q3 versus $68 income in 2010; nine-month income was $32 versus $136.
- Other-than-temporary investment impairment losses recognized in earnings were $77 in Q3 and $180 for nine months, compared with $44 and $161.
Balance sheet, debt and liquidity
- At September 30, total assets were $55,844 and total liabilities $43,888; CNA stockholders’ equity was $11,808 and total equity $11,956.
- Cash was $84 and short-term investments $1,730. Short-term debt was $100 and long-term debt $2,538, for total reported debt of $2,638. The $250 revolving credit facility was undrawn.
- Operating cash flow was $813 for the first nine months, versus cash use of $673 in 2010. Investing activities used $217 and financing activities used $588. Ending cash was $84.
- CNA said current cash flows were sufficient for expected working-capital and debt needs. It paid a $0.10-per-share quarterly dividend in August and declared another $0.10 dividend for November, subject to board discretion and regulatory constraints.
Material changes and management commentary
- Reported earnings comparisons are affected by the 2010 NICO loss portfolio transfer (LPT), which produced a $365 after-tax loss. Excluding that LPT loss, management said net income decreased $150 in Q3 and $329 for nine months; net operating income decreased $95 and $255, respectively.
- Management attributed weaker underlying comparisons chiefly to lower investment income, volatile limited partnership results, higher catastrophe losses and, year to date, less favorable prior-year reserve development. Fixed-maturity portfolio effective income yield was 5.5% for nine months versus 5.6% in 2010.
- CNA Specialty premiums grew, but management said loss-cost trends exceeded earned rate levels. CNA Commercial reported improved non-catastrophe current-year underwriting results, offset by catastrophe losses and other factors. Year-to-date combined ratios remained above 100% for CNA Commercial.
- CNA completed its purchase of CNA Surety’s noncontrolling interest for approximately $475. It also repaid $250 of a $1,000 CCC surplus note, leaving $250 outstanding. CNA issued $400 of 5.75% senior notes due 2021 and redeemed $400 of 6.00% notes due 2011.
- The planned sale of CNA’s 50% interest in First Insurance Company of Hawaii was subject to regulatory approval, expected to close in Q4 2011 and expected to generate a modest gain. CNA recorded $22 of additional income tax expense related to the sale.
- No formal earnings or operating guidance was provided. CNA said results for interim periods are not necessarily indicative of full-year results.
Risks, contingencies and unusual items
- Key uncertainties include adequacy of insurance reserves, including long-tail claims; catastrophe frequency and severity; reinsurance recoverability and counterparty performance; investment-market volatility and credit impairment; and regulatory, litigation, tax and competitive developments.
- CNA reported $3,722 of European fixed-maturity exposure, including $439 fair value in Greece, Ireland, Italy, Portugal and Spain. Sub-prime and Alt-A securities had fair values of $368 and $553; further collateral deterioration could result in additional impairment losses.
- A real-estate joint-venture lease guarantee could require CNA to pay up to approximately $142 beyond amounts recorded if other shareholders failed to fund their obligations; CNA said this was not considered likely.
- Quantifiable sale-related indemnification agreements totaled $719; recorded liabilities were approximately $16. A proposed settlement in insurance-brokerage antitrust litigation was preliminarily approved; final approval remained pending, and CNA did not expect a material impact.
- CNA was assessing an accounting change for insurance acquisition costs, preliminarily estimating that capitalized costs at September 30 could have been $75–$130 lower under the updated guidance, before related deferred-tax effects.
Investor facts to verify
- Whether reserve adequacy and favorable prior-year development persist, especially in light of higher current-year loss trends and catastrophe losses.
- Whether limited partnership investment performance recovers and how market volatility, credit spreads and illiquidity affect portfolio income and valuations.
- Completion and proceeds of the First Insurance Company of Hawaii sale, including the anticipated modest gain and regulatory approval.
- Progress on debt repayment, capital and dividend capacity, and the remaining $250 CCC surplus note.
- Any changes in European, mortgage-backed or other credit exposures that could lead to additional impairments or affect liquidity.