CNA Financial Corporation — Q1 2017 Form 10-Q
Business context and reporting period. This unaudited report covers the three months ended March 31, 2017, compared with Q1 2016. CNA is a commercial insurer with Specialty, Commercial and International core segments and Life & Group Non-Core and Corporate & Other Non-Core segments. Loews Corporation owned approximately 90% of CNA’s common stock.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $2.330 billion | $2.195 billion |
| Net earned premiums | $1.645 billion | $1.699 billion |
| Net investment income | $545 million | $435 million |
| Net realized investment gains (losses) | $36 million | $(36) million |
| Net operating income (non-GAAP) | $235 million | $91 million |
| Net income | $260 million | $66 million |
| Diluted EPS | $0.96 | $0.24 |
| Operating cash flow | $282 million | $334 million |
Revenue increased about 6%, while net earned premiums declined about 3%. Net income improved substantially, reflecting higher investment income, a swing to realized investment gains, and lower claims and expenses. Net investment income growth was notably supported by limited partnerships, which returned 3.8% versus a 0.6% loss in Q1 2016. The fixed-maturity portfolio’s pretax effective income yield was 4.8%, unchanged year over year.
Segments and underwriting
- Specialty: Net operating income was $154 million, up from $127 million; combined ratio was 90.2% versus 89.4%. Net written premiums were $679 million versus $684 million.
- Commercial: Net operating income was $94 million, up from $74 million; combined ratio worsened to 104.9% from 101.9%, largely reflecting Small Business premium adjustments. Excluding those adjustments, the filing says the combined ratio improved 3.6 points.
- International: Net operating income was $20 million versus $6 million; combined ratio improved to 95.1% from 99.0%.
- Life & Group Non-Core: Net operating income was $4 million versus a $2 million loss. Corporate & Other Non-Core: Net operating loss narrowed to $37 million from $114 million, mainly due to lower A&EP-related adverse development.
Financial position, liquidity and capital
At March 31, 2017, total assets were $55.201 billion, total liabilities $43.508 billion, and stockholders’ equity $11.693 billion. Investments totaled $45.279 billion and cash was $299 million. Short-term debt was $150 million, compared with none at year-end; long-term debt was $2.560 billion, down from $2.710 billion. The filing reports no borrowings under its $250 million revolving credit facility. Operating cash flow was $282 million; investing activities provided $354 million; financing activities used $609 million, including $609 million of common dividends paid. Cash ended the quarter at $299 million.
The company declared and paid a $0.25 quarterly dividend and a $2.00 special dividend per share in Q1. On April 28, 2017, the board declared another $0.25-per-share quarterly dividend. Management stated that current cash flows are expected to meet working-capital and debt needs in the near term; future dividends remain subject to board discretion and regulatory and business constraints.
Material changes, outlook and risks
- Net favorable prior-year development in the core segments was $32 million, compared with $66 million in Q1 2016. Catastrophe losses, net of reinsurance, were $34 million versus $36 million.
- Small Business rating errors led to Q1 earned-premium reductions of $42 million for workers’ compensation, in addition to a $16 million multi-peril adjustment recorded in Q4 2016. Estimated refund liabilities at March 31 were $36 million for multi-peril and $50 million for workers’ compensation, plus $5 million of interest. CNA said the refund amount could rise until rating-process changes are implemented, expected by the end of May and September, respectively. Potential fines or penalties were considered reasonably possible but not expected to be material.
- A&EP reserves had $60 million of net adverse development before the Loss Portfolio Transfer (LPT); a $40 million retroactive reinsurance benefit reduced the pretax impact to $20 million. The unrecognized deferred LPT benefit was $354 million. Reserve adequacy, uncertain long-tail claims, and NICO/reinsurer performance remain important risks.
- A CNA 401(k) plan class action is at a preliminary stage; loss is reasonably possible, but the amount, if any, cannot currently be estimated.
- No formal earnings or operating guidance was provided. Management highlighted exposure to reserve-estimation uncertainty, investment-market conditions, competition and pricing, catastrophic events, regulation, and potential additional European compliance costs related to Brexit. Management reported no material change in market-risk components during the quarter.
Important facts for investors to verify
- Whether Small Business refunds, related interest, and implementation of rating-system corrections develop as estimated.
- Whether favorable core reserve development and reported reserve balances persist, particularly for long-tail claims and A&EP liabilities.
- How sustainable limited-partnership investment returns and the rise in investment income prove to be.
- Whether Commercial underwriting performance improves after excluding the premium adjustments, and whether premium growth and retention stabilize.
- Dividend capacity, insurance-subsidiary regulatory constraints, debt levels, and cash generation; CNA reported approximately $200 million of additional CCC dividends available without prior regulatory approval at quarter-end.