CNA Financial Corporation — Q1 2022 Form 10-Q
Business context and period. This unaudited quarterly report covers the three months ended March 31, 2022, compared with Q1 2021. CNA operates commercial property and casualty insurance through Specialty, Commercial and International, as well as Life & Group and Corporate & Other. Loews Corporation owned approximately 89.6% of CNA at quarter-end.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenues | $2.885 billion | $2.866 billion |
| Net earned premiums | $2.059 billion | $1.962 billion |
| Net investment income | $448 million | $504 million |
| Net investment gains (losses) | $(11) million | $57 million |
| Net income | $313 million | $312 million |
| Diluted earnings per share | $1.15 | $1.14 |
| Core income, a non-GAAP measure | $316 million | $263 million |
| Operating cash flow | $645 million | $82 million |
Net income margin was approximately 10.9% of reported revenue in both periods. Core income increased $53 million, chiefly reflecting stronger Property & Casualty results and lower catastrophe losses; lower investment income partially offset the improvement. Net investment income declined $56 million, primarily because limited partnership and common stock returns were lower. Net investment results also weakened, including a $38 million loss on non-redeemable preferred stock.
Property & Casualty combined ratios improved year over year: Specialty 88.7% versus 88.8%; Commercial 94.5% versus 106.7%; International 92.4% versus 95.9%. Catastrophe losses were $19 million, compared with $125 million, primarily due to Winter Storms Uri and Viola in Q1 2021. Favorable prior-year reserve development was $12 million versus $15 million.
Balance sheet, cash flow and capital
- Total assets were $63.792 billion at March 31, down from $66.639 billion at year-end 2021. Total investments were $47.106 billion, down from $50.328 billion.
- Stockholders’ equity declined to $10.817 billion from $12.809 billion. Accumulated other comprehensive income moved from $320 million to a loss of $1.303 billion, principally reflecting $1.615 billion of after-tax unrealized investment losses reported in other comprehensive loss. These valuation changes sharply affected equity despite largely stable net income.
- Long-term debt was unchanged at $2.779 billion. Cash was $361 million, versus $536 million at year-end; the filing reports no borrowings under its $250 million revolving credit facility or from the Federal Home Loan Bank of Chicago.
- Operating cash flow was $645 million, versus $82 million; the company attributed the increase primarily to the prior-year payment of the Excess Workers’ Compensation loss portfolio transfer premium. Investing activities used $129 million, while financing activities used $688 million.
- CNA paid $657 million in common dividends, including a $2.00-per-share special dividend and a $0.40 quarterly dividend, and repurchased 445,000 shares for $21 million. The board subsequently declared a further $0.40-per-share quarterly dividend, payable June 2, 2022.
Material changes, outlook and risks
Written premiums grew across the three P&C segments. Commercial’s combined ratio improved substantially, largely because catastrophe losses fell; its combined ratio excluding catastrophes and prior-year development was nearly unchanged at 92.7% versus 92.8%. Specialty core income declined $7 million, mainly from lower investment income, while Life & Group core income fell $13 million due to lower investment income and higher expenses. Management said current cash flows are sufficient for expected working-capital and debt needs and does not expect this to change in the near term. The filing provides no specific earnings or revenue guidance.
- Investment and market risk: Management attributed much of the fixed-maturity portfolio’s unrealized loss position to interest rates and, to a lesser extent, credit spreads, and said it did not intend to sell the affected securities or expect it would need to sell them before recovery. Fixed-maturity securities had $1.157 billion of gross unrealized losses at quarter-end, versus $112 million at December 31, 2021.
- Reserves and reinsurance: Insurance reserves depend on estimates and may prove insufficient, particularly for long-tail claims, long-term care, asbestos and environmental pollution, and other mass-tort exposures. CNA also identifies the performance of reinsurers and counterparties to legacy loss-transfer arrangements as risks.
- Long-duration accounting: CNA plans to adopt the new long-duration contract standard on January 1, 2023. It expects a $2.2–$2.5 billion decrease in AOCI measured at the January 1, 2021 transition date; using interest rates at March 31, 2022, the estimated transition impact would be a $1.0–$1.3 billion decrease. Management says adoption will not affect statutory capital and surplus, cash flows or underlying business economics.
- Other exposures: Disclosed risk factors include inflation and claim-cost increases, catastrophes and climate-related events, economic and market volatility, competition, regulation, litigation, pandemics, cyber risk and potential mass-tort claims. CNA reported a $1.6 billion potential lifetime guarantee exposure for structured-settlement annuities, but said payments were not considered likely because of a supporting trust. Routine litigation was described as not material based on information then known.
Important facts for investors to verify
- Whether premium growth and underlying underwriting performance continue, apart from the unusually low catastrophe-loss comparison.
- How reserve estimates develop, including long-tail and long-term-care liabilities, and whether reinsurance and legacy loss-transfer counterparties perform as expected.
- How interest rates and credit spreads affect investment valuations, AOCI, capital and the planned accounting-standard transition.
- Whether investment income and returns from limited partnerships and equities recover, and how that affects core income.
- Dividend capacity and liquidity at the holding company, including regulatory limits on insurance-subsidiary dividends and the sustainability of shareholder distributions.