CNA Financial Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. CNA is a commercial property and casualty insurer with Specialty, Commercial and International segments, as well as non-core operations. Loews Corporation owned approximately 90% of CNA’s common stock.
Financial results and position
Amounts in millions, except per-share data and ratios.
| Metric | Q1 2016 | Q1 2015 / prior period |
|---|---|---|
| Total revenue | $2,195 | $2,352 |
| Net earned premiums | $1,699 | $1,687 |
| Net investment income | $435 | $558 |
| Net realized investment gains (losses) | $(36) | $10 |
| Net operating income | $91 | $225 |
| Net income | $66 | $233 |
| Diluted earnings per share | $0.24 | $0.86 |
| Operating cash flow | $334 | $94 |
Net investment income fell mainly because limited partnership investments returned negative 0.6%, versus positive 3.9% a year earlier. Fixed-maturity portfolio pretax yield was 4.8% in both periods. The company reported $66 million of favorable net prior-year development, compared with $2 million unfavorable in Q1 2015; catastrophe losses were $36 million pretax, versus $29 million.
Underwriting: Specialty’s combined ratio improved to 89.4% from 94.6%; Commercial improved to 101.9% from 103.3%; International edged up to 99.0% from 98.3%. A ratio below 100% indicates underwriting profit before investment income and other items. Core-segment net operating income declined overall, primarily due to lower investment income, partly offset by better underwriting.
Balance sheet at March 31, 2016: Total assets were $55.5 billion; total liabilities, $44.0 billion; stockholders’ equity, $11.5 billion. Cash was $242 million and total investments were $45.4 billion. Short-term debt was nil and long-term debt was $2.7 billion, up from $2.2 billion at year-end 2015. CNA issued $500 million of 4.50% senior notes due 2026 and redeemed $350 million of 6.50% notes due 2016. Operating cash flow was $334 million; investing activities used $9 million and financing activities used $469 million, including $609 million of common dividends paid.
Material changes and unusual items
- Q1 net income and net operating income declined substantially year over year, reflecting lower investment income, investment losses, and a significant A&E reserve-related charge.
- CNA recorded $200 million of unfavorable asbestos and environmental pollution (A&EP) reserve development, ceded under its 2010 NICO loss portfolio transfer. Under retroactive reinsurance accounting, only $73 million of the ceded amount was recognized as a current-period benefit; the remaining $127 million is expected to be recognized in earnings as paid recoveries occur. The charge reduced reported results by $83 million after tax.
- Other-than-temporary impairment losses were $23 million, versus $12 million. Net realized losses also included costs related to redeeming the $350 million senior notes.
- Other comprehensive income was $259 million, principally from unrealized investment gains; total comprehensive income was $325 million.
- CNA sold its principal executive offices for $107 million during the quarter. Cash dividends included a $0.25 quarterly dividend and a $2.00 special dividend per share; the board later declared another $0.25 quarterly dividend payable in June.
Outlook, risks and contingencies
CNA gave no specific earnings or premium guidance. Management stated that current cash flows should be sufficient for expected working-capital and debt needs and that it did not expect this to change in the near term. No borrowings were outstanding under its $250 million revolving credit facility. Future dividends remain subject to board discretion and regulatory and financial constraints.
Key risks include uncertainty in insurance reserves—especially long-tail, A&EP and long-term-care claims—reinsurer performance, investment returns and market valuations, catastrophe losses, competition and pricing, economic and claims-cost trends, regulation, and access to capital. CNA said it did not intend to sell securities in unrealized loss positions and did not expect to be required to sell them before recovery; it recorded no additional impairment for those positions. A joint-venture guarantee had a maximum potential loss of approximately $18 million beyond amounts recorded. CNA also disclosed approximately $2.0 billion of potential future payments under guarantees for structured settlement annuities, which it considers unlikely to be called, and other indemnities and guarantees.
Management reported effective disclosure controls as of March 31, 2016, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Review the assumptions and subsequent development of A&EP reserves and the timing of the remaining $127 million LPT benefit.
- Assess reserve adequacy and sustainability of favorable prior-year development, including in the core segments.
- Track limited partnership returns, investment income, realized losses and portfolio credit exposure.
- Confirm debt maturities, liquidity, subsidiary dividend capacity and the sustainability of the special-dividend level.
- Review the full filing’s disclosures on long-term-care assumptions, reinsurance recoverables, guarantees and other contingencies.