CNA Financial Corporation — Q2 2020 Form 10-Q
Business context and reporting period. CNA is a property-and-casualty insurer with Specialty, Commercial and International operations, plus Life & Group and Corporate & Other businesses. This unaudited filing covers the quarter and six months ended June 30, 2020, compared with 2019. Loews Corporation owned approximately 89.6% of CNA’s common stock.
Key financial results
| Metric ($ millions, except per-share data) | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | 2,766 | 2,610 | 5,057 | 5,305 |
| Net earned premiums | 1,850 | 1,824 | 3,719 | 3,627 |
| Net investment income | 534 | 515 | 863 | 1,086 |
| Net investment gains (losses) | 69 | (18) | (147) | 13 |
| Net income | 151 | 278 | 90 | 620 |
| Diluted EPS | $0.55 | $1.02 | $0.33 | $2.28 |
| Core income, non-GAAP | 99 | 294 | 207 | 612 |
Q2 revenue rose 6%, while net income fell 46%; first-half revenue declined 5% and net income fell 85%. First-half operating cash flow was $650 million, versus $514 million. Investing activities provided $475 million; financing activities used $776 million, including $750 million of common dividends and $18 million of share repurchases.
At June 30, cash was $586 million and total investments were $47.8 billion. CNA reported $6 billion of cash, short-term investments and highly liquid U.S. government securities and agency securities; $518 million was at the holding company. Long-term debt was $2.68 billion, essentially unchanged from year-end 2019. Stockholders’ equity was $11.65 billion, down from $12.22 billion. The board declared a $0.37-per-share quarterly dividend payable in September; future dividends remain discretionary.
Material changes and operating performance
- Catastrophe losses, net of reinsurance, were $301 million in Q2 and $376 million for the first half, compared with $38 million and $96 million, respectively, in 2019. COVID-19 accounted for $182 million in Q2 and $195 million year to date; civil unrest contributed $61 million year to date.
- Property & Casualty core income fell $202 million in Q2 and $394 million in the first half. In Q2, Specialty, Commercial and International combined ratios were 104.2%, 118.5% and 115.3%, respectively, versus 90.7%, 99.7% and 97.5% a year earlier. A combined ratio above 100% indicates underwriting losses.
- First-half net investment income declined $223 million, mainly from weaker limited partnership and common-stock returns and lower fixed-income yields. First-half net investment losses were $147 million, including $103 million of available-for-sale security impairment losses and $13 million of mortgage-loan credit losses.
- Unfavorable prior-year reserve development was $22 million in Q2 and $7 million in the first half, versus favorable development of $31 million and $45 million in the comparable 2019 periods. Commercial included a $50 million charge related primarily to New York reviver-statute mass-tort claims.
- Q2 other comprehensive income was $1.224 billion, principally from unrealized investment gains; first-half other comprehensive income was $103 million.
Outlook, risks and contingencies
The filing gives no quantified earnings or revenue guidance. Management said COVID-19’s ultimate direct and indirect effects remain highly uncertain and may not be reflected fully in first-half results. Lower economic activity reduced estimated audit premiums and may continue to pressure written and earned premiums, expense ratios and premium collections. Higher costs on renewed reinsurance treaties and additional purchased coverage are expected to affect earned premiums in future quarters. Management noted modest lower-frequency benefits in some lines, partly offset by higher severity and premium effects.
Potential further COVID-19 losses, claim litigation and regulatory actions—including premium refunds, cancellation restrictions, business-interruption coverage proposals and expanded workers’ compensation presumptions—could materially affect results. Investment markets remain exposed to volatility, credit deterioration and low interest rates. The company reported no material liquidity concern, citing liquid assets and expected cash flows, and no borrowings under its $250 million revolving credit facility. It also warned that reserves, including long-tail and mass-tort exposures, rely on estimates and could require future revision.
The A&EP loss portfolio transfer with NICO had $3.2 billion of cumulative ceded losses and a $358 million unrecognized deferred reinsurance benefit at June 30, 2020; collateral trust assets were $3.3 billion. CNA disclosed approximately $1.7 billion of potential lifetime payments under guarantees of structured-settlement annuities, but management said payment was not considered likely because of a supporting trust. The filing says other pending litigation is not material based on currently known facts.
Most important facts for investors to verify
- How COVID-19 claims develop, including IBNR estimates, coverage litigation and any regulatory changes.
- Whether commercial mass-tort and other prior-year reserve estimates require further strengthening.
- Whether premium growth, audit-premium adjustments, reinsurance costs and collection allowances stabilize as economic conditions evolve.
- Investment portfolio credit quality, impairments and returns, especially in sectors exposed to pandemic-related stress.
- Insurer subsidiary dividend capacity, holding-company liquidity and the board’s future dividend decisions.