CNA Financial Corporation — Q3 2017 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2017, compared with the same 2016 periods. CNA is a commercial insurer with Specialty, Commercial and International core segments, plus Life & Group Non-Core and Corporate & Other Non-Core operations. Loews Corporation owned approximately 89% of CNA’s common stock.
Key financial results
| Metric (in millions, except per-share data and ratios) | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $2,398 | $2,433 | $7,094 | $6,976 |
| Net earned premiums | $1,806 | $1,767 | $5,185 | $5,196 |
| Net investment income | $509 | $524 | $1,529 | $1,461 |
| Net realized investment gains (losses) | $(24) | $46 | $62 | $26 |
| Net income | $144 | $343 | $676 | $618 |
| Diluted EPS | $0.53 | $1.26 | $2.48 | $2.28 |
| Net operating income (management-defined, non-GAAP) | $159 | $311 | $633 | $603 |
| Operating cash flow | Not presented by quarter | $894 | $1,120 |
- Underwriting and margins: Q3 combined ratios were 82.3% Specialty, 117.2% Commercial and 125.9% International, versus 79.9%, 99.8% and 93.2%, respectively, a year earlier. For the nine months, the ratios were 87.4%, 105.9% and 107.8%, compared with 84.9%, 101.7% and 103.4%.
- Balance sheet and debt: At September 30, total assets were $56.6 billion, total liabilities $44.4 billion and stockholders’ equity $12.2 billion. Short-term debt was $150 million and long-term debt $2.707 billion, versus no short-term debt and $2.710 billion long-term at year-end 2016.
- Cash and liquidity: Cash was $283 million, up from $271 million at year-end. Nine-month investing cash flow was a $218 million use and financing cash flow a $673 million use. Management said existing cash flows were sufficient for expected working capital and debt needs; the $250 million revolving credit facility had no borrowings outstanding.
Material changes versus comparable periods
- Q3 net income fell $199 million year over year, while net operating income declined $152 million. CNA attributed the operating decline mainly to substantially higher catastrophe losses, partly offset by improved non-catastrophe current-year underwriting.
- Net catastrophe losses were $269 million in Q3 and $342 million for the nine months, compared with $16 million and $137 million in the respective 2016 periods. Q3 2017 losses included $149 million for Hurricane Harvey, $95 million for Hurricane Irma and $20 million for Hurricane Maria.
- For the nine months, net operating income increased $30 million. Higher catastrophe losses and lower favorable prior-year reserve development pressured core operations; higher investment income and improved non-core results partly offset these effects.
- Core segments recorded favorable prior-year development of $134 million in Q3 and $229 million for the nine months, compared with $137 million and $309 million in 2016.
- Net investment income rose for the nine months, led by stronger limited partnership returns; Q3 investment income declined, principally due to lower limited partnership returns. Q3 realized results included a $42 million pretax loss on redemption of $350 million of senior notes.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management noted that interim results are not necessarily indicative of full-year results and said liquidity was adequate for current expected needs.
- In Q3, CNA issued $500 million of 3.45% senior notes due 2027 and redeemed $350 million of 7.35% notes due 2019. The early redemption generated a $42 million pretax realized loss. Nine-month dividends declared per share were $2.80, including a $2.00 special dividend; the board also declared a $0.30 quarterly dividend payable in November 2017.
- Small Business rating errors led to $37 million of adverse premium development in the first nine months and a $61 million estimated workers’ compensation refund liability at quarter-end, including interest. The multi-peril package refunds were issued during Q3. Potential fines or penalties were considered reasonably possible but not expected to be material.
- The A&EP Loss Portfolio Transfer with NICO had $2.9 billion of cumulative ceded losses and an unrecognized deferred reinsurance benefit of $334 million at quarter-end. The filing notes uncertainty around A&EP reserve estimates and counterparty performance; collateral and a Berkshire Hathaway guarantee support NICO’s obligations.
- Other risks include catastrophe severity and frequency, reserve estimation, reinsurance recoverability, investment-market and credit risks, long-term-care assumptions, competition and regulation. CNA also expected Brexit to require changes to its European operating platform, including establishment of a Luxembourg subsidiary, with added compliance complexity and cost.
- A 401(k) plan fiduciary class action was in mediation; no class had been certified. Management recorded its best estimate of probable loss and did not expect the matter to materially affect results or financial position after insurance, while acknowledging uncertainty.
Important facts for investors to verify
- How Q4 and full-year catastrophe losses, especially hurricane claims and reinsurance recoveries, compare with the reported estimates.
- Whether favorable prior-year reserve development continues, and how sensitive long-tail reserves are to revised assumptions.
- Progress on the $61 million Small Business refund liability and any related penalties or further premium adjustments.
- Performance and credit quality of the A&EP reinsurance arrangements, including NICO’s obligations and the deferred benefit accounting.
- Whether the Commercial and International combined ratios recover from the catastrophe-affected Q3 levels, and whether the reported expense improvements persist.
- Debt, dividend capacity and cash generation, including the effect of dividends from insurance subsidiaries subject to regulatory limits.