CNA Financial Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. CNA is a property-and-casualty and life insurer, with Loews Corporation owning approximately 89% of its common stock.
Financial performance
- Revenue: Total revenues were $2.695 billion, up 6.3% from $2.535 billion. Net earned premiums rose 1.0% to $1.803 billion; net investment income increased 16.5% to $571 million; non-insurance warranty revenue rose to $281 million from $238 million.
- Profit: Net income was $342 million, up 17.5% from $291 million. Diluted EPS was $1.25 versus $1.07. Core income, a non-GAAP measure, increased to $318 million from $281 million. Net investment gains after tax contributed $24 million, versus $10 million.
- Underwriting: Property & Casualty segments recorded $14 million of favorable prior-year reserve development, compared with $39 million favorable a year earlier. Net catastrophe losses rose to $58 million from $34 million. Combined ratios worsened to 92.3% in Specialty (87.5% prior year), 101.3% in Commercial (97.1%), and 101.9% in International (96.6%).
- Cash flow: Operating cash flow was $287 million, versus $218 million; investing cash flow was $289 million, versus $489 million; financing used $665 million, versus $781 million. Cash ended the quarter at $223 million, down from $310 million at year-end.
- Balance sheet and liquidity: Total assets were $58.477 billion and stockholders’ equity $11.455 billion at March 31. Long-term debt was $2.681 billion, essentially unchanged from year-end. Total investments were $45.639 billion. CNA reported no borrowings on its $250 million revolving credit facility or from the Federal Home Loan Bank of Chicago, and management said expected cash flows are sufficient for near-term needs.
- Shareholder returns: CNA paid $643 million in dividends during the quarter, including a $2.00-per-share special dividend and $0.35 quarterly dividend. It repurchased 317,508 shares for $14 million. A further $0.35-per-share quarterly dividend was declared for payment in May.
Material changes and management commentary
- Core income increased $37 million year over year: higher investment income and a $54 million improvement in the Corporate & Other core loss more than offset lower Property & Casualty core income and a $4 million decline in Life & Group.
- Investment income growth was driven primarily by limited partnership and common-stock returns. Limited partnership and common-stock return was 4.5%, versus 1.3% in Q1 2018. The fixed-income portfolio’s pretax effective yield was 4.8%, versus 4.7%.
- Commercial and International combined ratios exceeded 100%. International net written premiums declined, partly reflecting exits from certain Hardy business classes and higher ceded reinsurance. Specialty reported stronger retention and new business, but higher loss and expense ratios.
- Unrealized investment gains materially improved other comprehensive income: OCI was $554 million, compared with a $416 million loss in Q1 2018. The fair value of fixed maturities was $40.553 billion, with $2.613 billion of net unrealized gains.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management said it expects current cash flows to fund near-term working-capital and debt needs; future dividends remain subject to board discretion and regulatory constraints.
- Reserve estimates are inherently uncertain and may change as claims develop. The company recorded $14 million of favorable prior-year development overall, including $14 million of unfavorable development in International; net catastrophe losses increased year over year.
- Legacy asbestos and environmental pollution liabilities are subject to a loss portfolio transfer with National Indemnity Company. The unrecognized deferred retroactive reinsurance benefit was $352 million. The filing identifies counterparty performance, reserve estimation, and coverage outside the agreement as risks; Berkshire Hathaway guarantees specified obligations, and collateral trust assets had a $3.0 billion fair value.
- Other stated risks include reinsurance recoverability, long-tail and long-term-care reserve uncertainty, catastrophe exposure, investment-market and credit risks, litigation, competition, regulation, and Brexit-related compliance costs. Routine litigation was described as not material based on currently known facts.
- CNA adopted lease accounting on January 1, 2019, recognizing operating lease right-of-use assets of $233 million and lease liabilities of $308 million at quarter-end; adoption did not affect the income statement. The company is evaluating upcoming credit-loss and long-duration insurance accounting standards; the latter may increase earnings and equity volatility.
Important facts for investors to verify
- Whether underwriting trends improve, particularly Commercial and International combined ratios and catastrophe losses.
- Whether favorable reserve development persists and whether the $352 million deferred A&EP reinsurance benefit and related recoveries remain supportable.
- How much of core-income growth is sustained by underwriting versus variable investment returns.
- Dividend capacity and subsidiary regulatory constraints, especially after the special dividend and $643 million of quarterly dividend payments.
- Future effects of long-duration insurance accounting changes, reserve revisions, and investment valuation movements on earnings and equity.