CNA Financial Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparative figures are for the same periods in 2020. Amounts are in U.S. dollars. The interim statements are unaudited. CNA is a property-and-casualty insurer with Life & Group and warranty operations; Loews Corporation owned approximately 89.6% of CNA at quarter-end.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $2.959B | $2.820B | $8.854B | $7.877B |
| Net earned premiums | $2.059B | $1.953B | $6.056B | $5.672B |
| Net investment income | $513M | $517M | $1.608B | $1.380B |
| Net income | $256M | $213M | $936M | $303M |
| Diluted earnings per share | $0.94 | $0.79 | $3.43 | $1.11 |
| Core income (non-GAAP) | $237M | $193M | $841M | $400M |
| Operating cash flow | Not separately stated for the quarter | $1.354B | $1.408B |
Q3 revenue and net income increased year over year. Nine-month net investment income rose, primarily on stronger limited partnership and common stock returns, while fixed-income portfolio yields were lower. Nine-month net investment gains were $117M, versus a $120M loss in 2020. Conversely, comprehensive income fell to $93M from $470M in Q3 and to $479M from $663M for the nine months, reflecting investment-related other comprehensive losses, including lower unrealized gains.
Underwriting and segment performance
- Specialty: Q3 combined ratio improved to 88.2% from 89.5%; nine-month ratio improved to 88.3% from 95.0%. Nine-month core income increased to $531M from $354M, supported by lower catastrophe losses, improved current-year underwriting and investment returns.
- Commercial: Q3 combined ratio was 111.6% versus 111.3%, reflecting higher catastrophe losses; nine-month ratio improved to 106.0% from 108.3%. Nine-month core income increased to $233M from $113M, with higher investment income and improved underwriting results. Catastrophes remained a significant drag.
- International: Nine-month combined ratio improved to 94.8% from 104.2%, and core income increased to $67M from $15M, mainly due to lower catastrophe losses and improved underwriting.
- Life & Group: Core income was $41M in Q3 versus a $35M loss; nine-month core income was $120M versus a $17M loss. The 2021 quarter included a favorable reduction in long-term-care claim reserves and no active-life reserve unlocking event.
- Corporate & Other: Nine-month core loss widened to $110M from $65M, reflecting lower investment income, cyber-incident expenses, the EWC loss portfolio transfer loss and lower A&EP deferred-gain amortization.
Consolidated net catastrophe losses were $178M in Q3 and $357M for the nine months, versus $160M and $536M, respectively, in 2020. Q3 2021 included $114M for Hurricane Ida; nine-month losses also reflected Winter Storms Uri and Viola. Nine-month prior-year reserve development was $4M unfavorable, compared with $8M favorable in 2020. The filing reports $40M of unfavorable Corporate & Other development for older mass-tort exposures, primarily abuse-related.
Financial position, cash flow and capital
- At September 30, 2021, total assets were $66.5B, total liabilities $53.9B and stockholders’ equity $12.7B. Total investments were $50.2B; cash was $625M and short-term investments were $1.135B.
- Long-term debt was $2.778B, broadly unchanged from $2.776B at year-end 2020. No borrowings were outstanding under the $250M revolving credit facility or through the Federal Home Loan Bank of Chicago.
- Nine-month operating cash flow was $1.354B. Cash used in investing activities was $597M and cash used in financing activities was $545M. Cash at period-end was $625M.
- CNA paid $518M in common dividends during the first nine months, including a special dividend; it also repurchased $18M of stock. After quarter-end, the board declared a $0.38-per-share quarterly dividend payable December 2, 2021.
- Management stated that available cash flows were sufficient for current and expected working-capital and debt needs, with no near-term change expected. Dividends from the insurance subsidiary remain subject to regulatory limits.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management expects cybersecurity remediation and infrastructure investment expenses to continue, but said it did not then expect the March 2021 ransomware incident to have a material financial impact; it cautioned that the full costs, insurance recovery and potential legal or regulatory consequences remained under assessment.
- The cyber incident disrupted systems and involved unauthorized copying of personal information. The company also reported a third-party administrator data breach affecting a limited number of claimants. Management warned that insurance may not cover all cyber-related losses and that coverage costs may rise.
- Long-term-care reserves are sensitive to morbidity, persistency, discount rates and premium increases subject to regulatory approval. The 2021 annual valuation showed an estimated $72M pretax reserve margin. Hypothetical assumption changes, after that margin, included a $300M pretax income reduction from a 2.5% morbidity increase and $100M from a 25-basis-point decline in new-money rates.
- Insurance reserves are estimates subject to uncertainty, including inflation, litigation, claim severity and long-tail exposure. The company’s legacy A&EP and excess workers’ compensation liabilities are ceded under loss portfolio transfers; recoveries depend on reinsurer performance and contract terms. The A&EP deferred benefit was $368M, and collateral trust fair value was $2.9B at quarter-end.
- The company reported approximately $1.6B of potential future payments under guarantees for structured-settlement annuities, payable over annuitants’ lifetimes. Management considered payment unlikely because of a supporting trust.
- CNA plans to adopt the long-duration insurance accounting standard in 2023. It expects annual cash-flow assumption updates to increase income-statement volatility, although the underlying economics and cash flows are expected to be unchanged.
Most important facts for investors to verify
- Whether premium growth and improved nine-month core income persist after separating investment returns, catastrophe effects and reserve development.
- Commercial segment catastrophe exposure and whether pricing and underwriting improvements can offset future severe-weather losses.
- Long-term-care reserve assumptions, the $72M margin and sensitivity to experience changes and regulatory approval of premium increases.
- Final costs, insurance recoveries, litigation or regulatory exposure, and ongoing expense effects from the cyber incidents.
- Collectability and limits of the A&EP and EWC reinsurance arrangements, alongside development in legacy mass-tort reserves.
- Investment portfolio valuation and interest-rate sensitivity, including the impact of unrealized losses on equity and comprehensive income.