CNA Financial Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Interim statements are unaudited. Loews Corporation owned approximately 90% of CNA Financial’s outstanding common stock.
Financial performance and condition
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $2,411 | $2,458 | $7,314 | $7,363 |
| Net earned premiums | $1,810 | $1,825 | $5,427 | $5,389 |
| Net investment income | $480 | $555 | $1,556 | $1,680 |
| Net operating income | $182 | $271 | $644 | $695 |
| Income from continuing operations | $209 | $271 | $690 | $702 |
| Net income | $213 | $272 | $493 | $716 |
| Diluted earnings per share | $0.79 | $1.01 | $1.82 | $2.65 |
Nine-month operating cash flow was $1,047, versus $921 in 2013; investing activities used $1,087, and financing activities provided $95. Cash was $247 at September 30. Total investments were $46,320, including $1,878 of short-term investments. Total assets were $55,731 and stockholders’ equity was $13,034.
Short- and long-term debt totaled $3,108 at quarter-end ($549 and $2,559, respectively), compared with $2,560 at December 31, 2013. The company issued $550 of 3.95% senior notes due 2024 and intended to use the proceeds to retire $549 of 5.85% notes due December 2014. No amounts were drawn on its $250 revolving credit facility. Management said available cash flows were sufficient for expected working-capital and debt needs in the near term.
Common dividends paid during the first nine months were $1.75 per share, including a $1.00 special dividend. A further $0.25 quarterly dividend was declared for payment in December 2014.
Material changes and operating trends
- Q3 net operating income fell $89 year over year, mainly because of lower investment income and less favorable prior-year development. Nine-month net operating income declined $51, principally from the same factors in core segments; improved non-core results partly offset the decline.
- Investment income decreased, with limited partnership income falling to $29 in Q3 from $93 and to $199 for the first nine months from $303. Pretax fixed-maturity portfolio yield was 4.8% for Q3 and 4.9% for the nine-month period, versus 5.0% for both comparable 2013 periods.
- Property-and-casualty segments recorded $23 of favorable net prior-year development in Q3, compared with $76 favorable in 2013; for nine months, development was $7 favorable versus $128 favorable. CNA Commercial had $128 of unfavorable development for nine months, including adverse experience in commercial auto, general liability and workers’ compensation. Management said a significant amount related to exited business, as well as Small Business, where underwriting actions were being taken.
- Segment combined ratios showed divergent performance: CNA Specialty was 81.6% for Q3 and 87.4% for nine months; CNA Commercial was 108.3% and 111.0%; Hardy was 112.9% and 100.5%, respectively. Ratios above 100% indicate underwriting losses before investment income.
- Net catastrophe losses were $17 for Q3 and $147 for nine months, compared with $42 and $146 in 2013. The nine-month figure was concentrated in CNA Commercial, which reported $122 of catastrophe losses.
- The fixed-maturity portfolio was 93% investment grade at September 30, up from 92% at year-end 2013. Total fixed-maturity fair value was $40,700.
Outlook, unusual items, and risks
- CNA completed the sale of Continental Assurance Company on August 1, 2014. The sale resulted in a $211 after-tax loss reported in discontinued operations; the disposal group included $3,550 of assets and $3,297 of liabilities. The transaction also involved a coinsurance agreement on a separate annuity block; management described a $34 after-tax operating loss associated with the funds-withheld arrangement.
- Elimination of certain postretirement medical benefits generated an $86 pretax curtailment gain ($56 after tax) in the first half of 2014. A limited-time pension lump-sum offer to terminated vested participants is expected to produce a Q4 2014 settlement charge; the high end of management’s estimated after-tax charge is approximately $65, dependent on participant acceptance. The charge is expected to have no effect on total stockholders’ equity.
- Life & Group Non-Core is managed as a run-off operation. Its long-term-care results benefited from favorable persistency and morbidity, rate increases, and investment income, but the segment remained loss-making on an operating basis.
- Key uncertainties include adequacy of insurance reserves, long-tail claim severity, reinsurance recoverability, long-term-care assumptions, investment returns and valuations, catastrophe frequency and severity, competition and pricing, and regulatory limits on subsidiary dividends. Management reported no material change in market-risk components during the nine months.
- Routine litigation was described as immaterial. Potential obligations include approximately $60 of future lease payments under a joint-venture guarantee, quantifiable guarantees and indemnifications of $375 and $324, and approximately $1.9 billion of potential payments under structured-settlement annuity guarantees. Management said it did not believe payments under these guarantees were likely; the annuity obligations are supported by a trust.
Important facts for investors to verify
- Whether CNA Commercial’s adverse reserve development and combined ratios improve, particularly for exited lines, Small Business, workers’ compensation, general liability and commercial auto.
- How much Q4 pension settlement charge is ultimately recorded and how participant elections compare with management’s estimate.
- Whether investment income, especially limited partnership returns, stabilizes and how investment valuations and credit performance evolve.
- Final post-closing sale adjustments for Continental Assurance Company and the continuing effects of the annuity coinsurance arrangement.
- Whether reserve estimates, reinsurance recoveries, long-term-care assumptions and subsidiary dividend capacity change materially.