Rate increases and a large gain from limited partnership investments drove earnings higher in CNA Financials’ second quarter. Operating income increased to $0.75 per share, a 34% increase over last year’s second quarter. Net written premiums were up 7% in property-casualty operations year over year as the firm increased rates 7% in the specialty segment and 9% in the commercial segment.
The combined ratio was essentially flat with last year’s quarter, which had much higher favorable reserve development than this year. CNA was able to keep the combined ratio steady largely because of a 1.2 point drop in underwriting expense. Investment income was the primary driver of earnings. While the fixed-income portfolio returns were essentially flat, as expected, investment income from limited partnerships added $79 million to earnings in the quarter.
CNA appears to be making progress in its attempt to increase underwriting margins. The Specialty segment loss ratio fell 1.6 points to 60.6%, driving the combined ratio down to 90.4% from 94.4%. Commercial insurance, which has been the source of most of CNA’s under-performance in insurance profitability in recent years, has improved slightly as the firm has exited some unprofitable lines which reduced the underwriting loss but at the cost of lower premiums.
Still, CNA’s return on operating equity remained low at 7.5% in the first half and analysts think it will take time to bring the number more in line with its peers. Encouragingly, management seems focused on walking away from unprofitable business, but a quick cure is difficult for such a large insurer.
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