CNA Financial Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise noted. Amounts are in millions of dollars, except per-share data and ratios. Loews Corporation owned approximately 90% of CNA.
Business context and results
CNA’s core operations comprise CNA Specialty, CNA Commercial and Hardy; its non-core operations include run-off life and group businesses and corporate items. CNA reported total revenue of $2,463, up 0.3%. Net earned premiums rose to $1,806 from $1,764, while net investment income declined to $526 from $591.
- Profit: Income from continuing operations was $220, down from $241. Net operating income, CNA’s measure excluding realized investment results and discontinued operations, was $190 versus $225. Net income was $13 versus $250, primarily reflecting a $214 after-tax impairment on the pending sale of Continental Assurance Company (CAC). Diluted EPS was $0.05 versus $0.93; continuing-operations diluted EPS was $0.81 versus $0.89.
- Investment results: Pretax realized investment gains were $46 versus $23. Net investment income fell mainly because limited partnership income declined to $73 from $131. The fixed-maturity portfolio was 92% investment grade.
- Insurance margins: Combined ratios were 94.4% for Specialty (95.0% prior year), 109.8% for Commercial (106.8%), and 87.1% for Hardy (105.5%). Ratios above 100% indicate underwriting losses before investment income and other items.
- Cash flow: Operating cash flow was $168 versus $191; investing cash flow used $354 versus $161; financing provided $210 versus using $56. Cash at quarter-end was $206.
Financial position and liquidity
At March 31, 2014, total assets were $58.2 billion and stockholders’ equity was $12.6 billion. Short- and long-term debt totaled $3.107 billion, up from $2.560 billion at year-end, largely reflecting a $550 million senior-note issuance. CNA said it intended to use the proceeds to retire $549 million of 5.85% notes due December 2014; the new 3.95% notes mature in 2024. Short-term investments were $2.070 billion. The $250 million revolving credit facility was undrawn. Management stated that existing cash flows were expected to meet current and anticipated working-capital and debt needs.
Material changes and management commentary
- Core net operating income declined $38 million. Management cited lower investment income, higher catastrophe losses and less favorable prior-year development, partly offset by improved non-catastrophe current-year underwriting.
- Net catastrophe losses were $74 million versus $39 million, mainly from U.S. winter weather. Favorable net prior-year development fell to $6 million from $39 million.
- Commercial’s combined ratio worsened as catastrophe losses and reduced favorable prior-year development outweighed improved current-year underwriting. Specialty’s ratio improved modestly. Hardy’s results improved, including from reinsurance commutations and an associated release of allowance for uncollectible reinsurance.
- On February 10, CNA agreed to sell most of its run-off annuity and pension deposit business through the sale of CAC. The transaction remained subject to regulatory approvals and other closing conditions and was expected to close in Q2 2014. The business was classified as discontinued operations and held for sale; reported held-for-sale assets were $3.486 billion and liabilities $3.250 billion after the sale impairment.
- CNA paid a quarterly dividend of $0.25 per share and a special dividend of $1.00 per share in Q1. The board declared another $0.25 quarterly dividend payable in May; future dividends remain subject to board discretion and other constraints.
Risks, contingencies and outlook
The filing provides no specific earnings or revenue guidance. Management’s near-term liquidity assessment is positive, but results remain exposed to reserve-estimation uncertainty, reinsurance recoverability, catastrophe severity and frequency, investment returns and credit-market conditions, competition and pricing, and regulatory limits on subsidiary dividends. CNA reported routine litigation that it did not consider material. It also disclosed a potential $77 million of future lease payments and related costs under a joint-venture guarantee, in excess of amounts recorded, and indemnification obligations; recorded indemnification liabilities were approximately $7 million. Management cautioned that actual loss-reserve outcomes may differ materially from estimates.
Most important facts for investors to verify
- Whether the CAC sale closed on the expected timetable and whether final proceeds or adjustments differed from the estimated impairment.
- Whether reserve development, particularly Commercial auto and workers’ compensation, and catastrophe losses evolve as reported.
- Whether CNA retires the December 2014 notes as intended and how debt, liquidity and subsidiary dividend capacity change.
- Whether investment income—especially limited partnership returns—and portfolio values recover or weaken further.
- Whether underwriting performance and rate/retention trends support sustained improvement in segment combined ratios.