CNA Financial Corporation — Q3 2020 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and nine months ended September 30, 2020. CNA operates Specialty, Commercial and International property-and-casualty businesses, as well as Life & Group and Corporate & Other. Loews Corporation owned approximately 89.6% of CNA’s common stock.
Financial performance and position
- Third quarter: Total revenue was $2.82 billion, up from $2.69 billion. Net income was $213 million ($0.79 diluted EPS), versus $107 million ($0.39) a year earlier. Core income, a non-GAAP measure excluding after-tax investment gains or losses and accounting-change effects, was $193 million versus $102 million.
- First nine months: Total revenue was $7.88 billion versus $7.99 billion. Net income was $303 million ($1.11 diluted EPS), down from $727 million ($2.67); core income was $400 million versus $714 million. Net earned premiums rose to $5.67 billion from $5.52 billion, while net investment income fell to $1.38 billion from $1.57 billion.
- Investment results: Net investment gains were $27 million in Q3, compared with $7 million; for the nine months, CNA recorded a $120 million net investment loss versus a $20 million gain. Nine-month results included $108 million of available-for-sale investment impairment losses and $16 million of mortgage-loan credit losses. Q3 net investment income benefited from stronger limited-partnership and common-stock returns; nine-month investment income was lower amid weaker returns and lower fixed-income yields.
- Underwriting: Q3 combined ratios were 89.5% for Specialty, 111.5% for Commercial and 98.1% for International. Nine-month ratios were 95.0%, 110.6% and 104.2%, respectively. Commercial’s elevated ratios reflected catastrophe losses; Specialty and International remained below 100% for Q3. The filing does not provide a consolidated combined ratio.
- Cash flow and liquidity: Operating cash flow for the nine months was $1.41 billion, up from $980 million. Cash was $442 million at September 30, versus $242 million at year-end 2019. CNA reported $5.5 billion of cash, short-term investments and highly liquid U.S. government securities, including $517 million at the holding company. Its $250 million revolving credit facility was undrawn.
- Debt and equity: Long-term debt was $2.78 billion, compared with $2.68 billion at year-end. CNA issued $500 million of 2.05% notes due 2030 and redeemed $400 million of 5.75% notes due 2021, recognizing a $20 million redemption loss. Stockholders’ equity was $12.02 billion versus $12.22 billion at year-end.
- Capital returns: CNA paid $850 million in common dividends during the nine months, including a $2.00-per-share special dividend; it also repurchased $18 million of shares. The board declared a further $0.37-per-share quarterly dividend for payment in December 2020.
Material changes and unusual items
- Net catastrophe losses were $160 million in Q3 and $536 million for the first nine months, versus $32 million and $128 million in the comparable 2019 periods. Nine-month 2020 losses included $273 million primarily from severe weather, $195 million related to COVID-19 and $68 million from civil unrest. COVID-19 losses were substantially recorded as incurred-but-not-reported reserves.
- Prior-year reserve development was favorable by $15 million in Q3 and $8 million for the nine months. Commercial nevertheless recorded $42 million of unfavorable nine-month development, including a $50 million charge for mass-tort exposures, primarily claims associated with New York reviver statutes.
- Life & Group’s third-quarter long-term-care gross premium valuation identified a $74 million pretax premium deficiency, primarily driven by lower expected reinvestment rates; the segment reported a $59 million charge in core results. Updated assumptions and annual studies also increased structured-settlement claim reserves by $46 million and reduced long-term-care claim reserves by $37 million pretax.
- At adoption of the expected-credit-loss accounting standard, CNA recorded a $5 million reduction to opening retained earnings. The filing states that a new long-duration insurance accounting standard is expected to increase income-statement volatility, though the underlying economics and cash flows are expected to be unchanged.
Outlook, commentary and risks
Management said the full effects of COVID-19 remain uncertain and that first-nine-month impacts may not indicate future results. Economic weakness may depress insured exposures, audit premiums and premium volume, increase uncollectible receivables and pressure expense ratios. CNA also cautioned that claims, litigation and regulatory actions—including possible changes to business-interruption coverage, premium refunds and workers’ compensation rules—could increase losses. Additional pandemic-related claims and investment volatility or losses remain possible.
Management said current cash flows and liquid assets were sufficient for expected working-capital and debt needs and did not indicate a material near-term liquidity concern. This is not earnings guidance; the filing provides no specific forward earnings forecast. Other key risks include reserve-estimation uncertainty, long-term-care assumptions, mass-tort claims, catastrophe exposure, reinsurer performance and low interest rates. CNA reported no material change in market-risk components during the nine months.
Important facts for investors to verify
- Whether COVID-19 claims develop beyond the $195 million recorded through September, particularly in long-tail lines and incurred-but-not-reported reserves.
- Whether Commercial underwriting and mass-tort reserve pressures persist, and how catastrophe frequency affects combined ratios.
- Whether long-term-care assumptions—including discount rates, morbidity, persistency and premium-rate increases—support the recorded reserves at the next annual valuation.
- How investment income, credit impairments and portfolio valuations respond to low rates and continued market volatility.
- That liquidity and dividend capacity remain adequate, including the availability of subsidiary dividends subject to insurance regulation.