CNA Financial Corporation — Q3 2019 Form 10-Q
Business context and period: CNA is a commercial property-and-casualty insurer with Specialty, Commercial and International operations, plus Life & Group and Corporate & Other. This unaudited filing covers the three and nine months ended September 30, 2019. Loews Corporation owned approximately 89% of CNA’s common stock.
Financial results and key metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenues | $2.685 billion | $2.622 billion | $7.990 billion | $7.731 billion |
| Net income | $107 million | $336 million | $727 million | $897 million |
| Diluted EPS | $0.39 | $1.23 | $2.67 | $3.29 |
| Core income (non-GAAP) | $102 million | $317 million | $714 million | $868 million |
| Net investment income | $487 million | $487 million | $1.573 billion | $1.483 billion |
- Premiums earned were $1.890 billion in Q3, up 2% year over year, and $5.517 billion for nine months, up 1%. Non-insurance warranty revenue was $292 million in Q3 and $858 million year to date.
- Q3 income before tax was $127 million versus $402 million a year earlier; nine-month income before tax was $888 million versus $1.078 billion. Q3 included a $20 million income tax benefit; the filing reports nine-month income tax expense of $161 million.
- Q3 catastrophe losses, net of reinsurance, were $32 million versus $46 million; nine-month losses were $128 million versus $106 million. Prior-year reserve development was unfavorable by $16 million in Q3, compared with $62 million favorable in Q3 2018; it was favorable by $29 million for nine months, versus $160 million favorable in 2018.
- Property-and-casualty combined ratios: Specialty 89.8% in Q3 and 90.9% year to date; Commercial 101.6% and 100.9%; International 107.4% and 102.2%. Ratios above 100% indicate underwriting losses before investment income.
- Operating cash flow was $980 million for nine months, up from $868 million. Investing activities used $60 million; financing activities used $887 million. Cash at September 30 was $340 million.
- Total investments were $47.535 billion; total assets $60.450 billion; stockholders’ equity $12.123 billion. Long-term debt was $2.678 billion. The company reported no borrowings on its $250 million revolving credit facility or from the Federal Home Loan Bank of Chicago.
Material changes versus prior periods
- Net income and core income declined materially, primarily reflecting weaker underwriting and a Life & Group reserve charge. Q3 core income fell by $215 million year over year; nine-month core income fell by $154 million.
- The third-quarter long-term-care gross premium valuation identified a $216 million pretax premium deficiency, primarily due to lower discount-rate assumptions. This drove a $170 million Q3 core-income charge. The annual long-term-care claim study separately reduced claim reserves by $56 million pretax.
- Commercial’s combined ratio deteriorated to 101.6% for Q3, reflecting unfavorable prior-year development; its nine-month ratio was 100.9%. International remained above 100% in both periods. Specialty remained profitable on an underwriting basis, though its ratio worsened from 2018.
- Net investment income increased 6% for nine months, supported by limited partnership and common-stock returns. Net investment gains were $20 million for nine months, down from $25 million; 2019 included a $21 million pretax loss on redemption of $500 million of senior notes.
- CNA issued $500 million of 3.90% senior notes due 2029 and redeemed $500 million of 5.875% notes due 2020. Nine-month dividends paid were $834 million in cash; declared dividends totaled $3.05 per share, including a $2.00 special dividend. CNA repurchased 415,695 shares for $18 million.
Outlook, risks and unusual items
- The filing provides no quantitative earnings or revenue guidance. Management said operating cash flows were expected to be sufficient for current and expected working-capital and debt needs in the near term.
- The next long-term-care gross premium valuation was expected in Q3 2020. Management stated the 2019 valuation left active-life reserves at its best estimate without a margin for adverse deviation. The filing illustrates significant sensitivity to assumptions: a 50-basis-point decline in new-money rates was estimated to reduce pretax income by $309 million; a 5% morbidity increase by $664 million. These are hypothetical sensitivities, not forecasts.
- Key uncertainties include insurance reserve adequacy, long-tail claims and mass torts, long-term-care morbidity, persistency, discount rates and regulated premium increases; catastrophe frequency and severity; reinsurance collectibility; investment-market and credit conditions; competition and pricing; regulation; and Brexit-related compliance costs.
- The legacy asbestos and environmental pollution loss portfolio transfer with NICO has a $4 billion aggregate limit. Cumulative amounts ceded were $3.1 billion, with a $331 million unrecognized deferred retroactive reinsurance benefit. NICO’s collateral trust had a fair value of $3.3 billion; Berkshire Hathaway also guarantees specified obligations. The company plans its annual A&EP reserve review in Q4 2019.
- Potential payments under guarantees for structured-settlement annuities were approximately $1.7 billion over annuitants’ lifetimes; CNA said payment was not considered likely because a supporting trust is maintained. Routine litigation was not considered material based on currently known facts.
Important facts for investors to verify
- Whether long-term-care assumptions, premium actions and discount rates evolve consistently with the 2019 valuation and disclosed sensitivity ranges.
- Whether Commercial and International underwriting results improve, and whether prior-year reserve development or catastrophe losses materially change.
- The quality and duration of investment returns, including unrealized gains, credit exposure and the sustainability of limited partnership returns.
- Cash, debt and capital distributions after the senior-note refinancing, special dividend and insurance-subsidiary dividend restrictions.
- Developments in the NICO A&EP reinsurance arrangement, collateral and deferred benefit, as well as reinsurance recoverability generally.