CNA Financial Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. CNA is a property-and-casualty insurer with Specialty, Commercial and International operations, plus Life & Group and Corporate & Other. Loews Corporation owned 91.7% of CNA at quarter-end. Figures are unaudited; dollar amounts are in millions unless noted.
Financial performance and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $3,336 | $2,957 | $9,792 | $8,768 |
| Net earned premiums | $2,406 | $2,221 | $7,001 | $6,435 |
| Net investment income | $553 | $422 | $1,653 | $1,302 |
| Net income (loss) | $258 | $(42) | $838 | $443 |
| Diluted EPS | $0.95 | $(0.15) | $3.08 | $1.63 |
| Core income (non-GAAP) | $289 | $43 | $922 | $571 |
- Revenue rose about 13% in Q3 and 12% year to date; premiums grew about 8% in both comparisons. Higher investment income was a significant contributor.
- Operating cash flow was $1,765 for nine months, down from $1,990. Investing activities used $1,537; financing activities used $218. Ending cash was $485.
- At September 30, total assets were $61,952 and stockholders’ equity was $8,563. Short-term debt was $793 and long-term debt $2,480, versus $243 and $2,538, respectively, at year-end 2022. CNA issued $500 of 5.50% senior notes due 2033 during the period.
- Management said current cash flows are sufficient for expected working-capital and debt needs and that it does not expect this to change in the near term. The $250 revolving credit facility and FHLB borrowings were undrawn.
- For P&C operations, Q3 combined ratios were Specialty 90.1%, Commercial 98.9% and International 88.3%; nine-month ratios were 90.3%, 97.1% and 92.5%, respectively. A ratio below 100% indicates underwriting profitability.
Material changes and drivers
- Core income increased by $246 in Q3 and $351 for the first nine months. Management attributed the improvement mainly to higher investment income, better underlying P&C underwriting, and improved Life & Group results versus a particularly adverse 2022 long-term-care assumption review.
- Commercial premiums and new business grew strongly; its Q3 combined ratio improved year over year as catastrophe losses fell. Year-to-date catastrophe losses increased, however, and Commercial’s nine-month combined ratio edged up to 97.1% from 96.6%.
- Specialty’s combined ratio rose to 90.1% in Q3 and 90.3% year to date, largely reflecting less favorable prior-year reserve development and, year to date, higher expenses. International’s Q3 ratio improved to 88.3%; its year-to-date improvement was modest.
- Net prior-year reserve development was unfavorable by $13 in Q3 and $44 for nine months, compared with favorable development of $17 and $2 in the prior-year periods. The 2023 nine-month result included $55 of unfavorable development in Corporate & Other, primarily from legacy mass-tort abuse claims; Commercial recorded favorable development overall, including favorable workers’ compensation development.
- Catastrophe losses, net of reinsurance, were $94 in Q3 and $214 for nine months, primarily from severe weather, compared with $114 and $171 in 2022.
- Net investment losses narrowed to $38 in Q3 and $105 year to date, from $96 and $166. Nonetheless, fixed maturities had $4,492 of net unrealized losses at September 30, compared with $3,404 at year-end 2022; management said these losses were primarily rate-driven and it did not expect to be required to sell the affected securities before recovery.
Outlook, risks and unusual items
- The filing gives no specific earnings or premium guidance. Management expects to continue offering long-term-care policy buyouts for the remainder of 2023 and future years; buyouts generally weigh on core income because payments are linked to higher statutory reserves.
- Annual long-term-care cash-flow assumption updates increased the liability for future policy benefits by $8 pretax in Q3 2023. In addition, adverse development pushed certain cohorts’ net premium ratios above 100%, resulting in charges of $109 in Q3 and $152 year to date; favorable experience reversed $26 and $37, respectively. The equivalent charge was $154 in both the Q3 and nine-month 2022 periods. The net long-term-care future-policy-benefit reserve was $12,654 at quarter-end, down from $13,480 at year-end.
- Long-term-care reserves depend on morbidity, persistency, future premium increases and expenses, and remain subject to significant estimation risk and regulatory approval of rate increases. The filing’s sensitivities estimate that a 2.5% morbidity increase could reduce pretax income by $275, while a 25% decrease in anticipated future premium increases could reduce it by $25.
- CNA adopted long-duration contract accounting (ASU 2018-12) in 2023 and retrospectively adjusted prior periods. The change affects reported reserve measurements and comparability, but CNA says it does not affect statutory capital and surplus, cash flows or underlying business economics.
- A fourth-quarter 2023 office consolidation is expected to result in an approximately $24 pretax charge. CNA paid $2.46 per share in dividends during the first nine months, including a $1.20 special dividend; the board declared a further $0.42 quarterly dividend payable November 30, 2023. Future dividends remain subject to board discretion and regulatory constraints.
- The filing identifies exposure to reserve uncertainty, social and economic inflation, catastrophe events, mass-tort claims, investment-market volatility, reinsurance performance and regulation. CNA reported no material changes in market-risk components during Q3.
- CNA’s legacy asbestos and environmental pollution reinsurance agreement with NICO had $388 of unrecognized deferred benefit at quarter-end; the collateral trust was valued at $2.3 billion. CNA also disclosed $1.5 billion of potential structured-settlement guarantee payments over annuitants’ lifetimes, but said payment was unlikely because a supporting trust is maintained.
Important facts for investors to verify
- Whether long-term-care experience, reserve assumptions and regulatory approvals for premium increases remain consistent with the filing’s estimates, including the effects of the 100% net-premium-ratio cap.
- How legacy mass-tort claims and other adverse reserve development evolve, and whether current P&C pricing and loss trends sustain underwriting results.
- Whether catastrophe activity, commercial real-estate exposures and the portfolio’s unrealized investment losses affect liquidity, earnings or capital.
- The collectability and ongoing protection associated with reinsurance recoverables and the NICO agreement, as well as compliance with insurance-subsidiary dividend restrictions.
- The expected timing and cost of the office consolidation and any continued long-term-care policy buyouts.