CNA Financial Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. CNA is a commercial property and casualty insurer, with Specialty, Commercial and International core segments and non-core operations. Loews Corporation owned approximately 90% of CNA’s outstanding common stock.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Total revenues | $2,352 million | $2,463 million | Down $111 million |
| Net earned premiums | $1,687 million | $1,806 million | Down $119 million |
| Net investment income | $558 million | $526 million | Up $32 million; limited partnership income was higher |
| Income from continuing operations | $233 million | $220 million | Up $13 million |
| Net income | $233 million | $13 million | Prior-year figure included a $207 million after-tax discontinued-operations loss, including a $214 million impairment on the sale of Continental Assurance Company (CAC) |
| Net operating income | $225 million | $190 million | Up $35 million; a company-defined measure excluding after-tax realized investment gains/losses and discontinued operations |
| Diluted EPS | $0.86 | $0.05 | Continuing-operations diluted EPS was $0.86 versus $0.81 |
| Net cash from operating activities | $94 million | $168 million | Down $74 million |
Net realized investment gains were $10 million, versus $46 million in Q1 2014; after tax, gains were $8 million versus $30 million. Q1 2015 included $12 million of other-than-temporary impairment losses recognized in earnings, compared with $2 million a year earlier.
Insurance results and material changes
- Specialty: Net operating income was $135 million, versus $129 million. The combined ratio rose to 94.6% from 94.1%; net earned premiums fell 2% to $680 million.
- Commercial: Net operating income increased to $120 million from $74 million. The combined ratio improved to 103.3% from 111.3%, principally reflecting a lower current-accident-year loss ratio and lower catastrophe losses. Net earned premiums fell to $678 million from $735 million.
- International: Net operating income declined to $9 million from $16 million. The combined ratio worsened to 98.3% from 93.5%; lower premiums reflected foreign exchange, unfavorable premium development at Hardy and a terminated Canadian managing general underwriter relationship.
- Non-core operations: Life & Group Non-Core reported a $17 million net operating loss, versus a $2 million loss, mainly due to unfavorable long-term-care morbidity. Corporate & Other Non-Core reported a $22 million net operating loss, versus $27 million.
- Company-reported catastrophe losses, net of reinsurance, were $29 million pretax ($19 million after tax) in Q1 2015, versus $74 million pretax ($48 million after tax) in Q1 2014. Total net prior-year development was $2 million unfavorable, compared with $6 million favorable in Q1 2014.
Financial position, cash flow and capital
- At March 31, 2015, total assets were $55.465 billion, total liabilities $43.028 billion and stockholders’ equity $12.437 billion. Long-term debt was $2.560 billion, broadly unchanged from year-end 2014.
- Cash was $201 million and short-term investments were $1.506 billion. Cash from investing activities was $526 million, versus $354 million used in Q1 2014. Cash used in financing was $603 million, mainly reflecting dividends; Q1 2014 included $550 million of senior-note issuance.
- CNA paid a $0.25 quarterly dividend and a $2.00 special dividend per common share in Q1; total common dividends paid were $608 million. The board declared a further $0.25-per-share quarterly dividend payable June 3, 2015.
- Management stated that cash flows were sufficient for current and expected working-capital and debt needs. No amounts were outstanding under the $250 million revolving credit facility or through the Federal Home Loan Bank of Chicago. CNA’s insurance subsidiary CCC paid a $600 million dividend to its parent in Q1; approximately $216 million of additional ordinary dividends could be paid without prior regulatory approval as of March 31.
- Approximately 93% of the fixed-maturity portfolio was investment grade. Its fair value was $40.605 billion at quarter-end, versus $40.768 billion at December 31, 2014.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management cited improved current-year underwriting in core segments and higher limited-partnership income, while noting premium declines and increased non-core long-term-care losses.
- The fourth-quarter 2014 asbestos and environmental pollution reserve review remained incomplete pending further analysis of reinsurance recoveries. CNA expected to complete it in Q2 2015 but said it could not estimate any potential financial-statement impact.
- Results depend on estimates of insurance reserves, reinsurance collectibility, investment valuations and long-term-care liabilities. Management warned that actual outcomes may differ materially; catastrophe frequency and severity, claims inflation, competition, market conditions, regulation and reinsurer performance are among the stated risks.
- Guarantee exposures include approximately $2.0 billion of potential future payments under guarantees of structured-settlement annuities; management considered payment unlikely because a trust is maintained to support the discounted reserves. Other quantified guarantees were $375 million and indemnification agreements were $324 million; certain indemnifications are unlimited. A joint-venture lease guarantee had maximum potential future payments of approximately $41 million, which management did not believe likely to be required.
- Routine litigation was described as immaterial based on currently known facts. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress and any eventual impact of the pending asbestos and environmental pollution reserve review, including the related reinsurance recoveries.
- Whether the improvement in Commercial underwriting and overall net operating income persists as premiums decline; monitor renewal rates, retention and combined ratios across segments.
- Long-term-care morbidity trends and the adequacy of associated reserves.
- Investment portfolio performance, limited-partnership income, credit quality and impairment losses.
- Capital and liquidity after the special dividend, along with regulatory limits on subsidiary dividends and the scope of guarantee and indemnification obligations.