CNA Financial Corporation — Q3 2015 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. CNA is primarily a commercial property and casualty insurer, with Specialty, Commercial and International core segments and Life & Group Non-Core and Corporate & Other Non-Core operations. Loews Corporation owned approximately 90% of CNA’s common stock.
Key financial results
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenue | $2.153B | $2.411B | $6.832B | $7.314B |
| Net earned premiums | $1.751B | $1.810B | $5.173B | $5.427B |
| Net investment income | $354M | $480M | $1.412B | $1.556B |
| Income from continuing operations | $178M | $209M | $549M | $690M |
| Net income | $178M | $213M | $549M | $493M |
| Diluted EPS | $0.66 | $0.79 | $2.03 | $1.82 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1.045B | $1.047B |
For Q3, continuing-operations pretax income was $233M versus $293M; total claims, benefits and expenses were $1.920B versus $2.118B. For nine months, pretax income was $710M versus $955M and total claims, benefits and expenses were $6.122B versus $6.359B. The filing does not provide a consolidated operating margin measure; core-segment combined ratios are summarized below.
- Core segment combined ratios: Specialty was 74.4% for Q3 and 86.6% for nine months (80.8% and 87.4% in 2014); Commercial was 95.8% and 102.1% (110.7% and 113.4%); International was 90.4% and 93.5% (99.0% and 94.1%).
- Balance sheet at September 30: Total assets $54.812B; total liabilities $42.547B; stockholders’ equity $12.265B. Cash was $236M and investments totaled $45.318B.
- Debt and liquidity: Short-term debt was $350M and long-term debt $2.211B, compared with no short-term debt and $2.559B long-term debt at year-end 2014. CNA reported a new $250M five-year unsecured revolving credit facility, with no amount drawn, and stated it expected available cash flows to meet near-term working-capital and debt needs.
Material changes and drivers
- Q3 net income fell $35M year over year, principally as improved operating income was outweighed by a $59M after-tax decline in realized investment results. Nine-month net income rose $56M, largely because 2014 included a $211M after-tax loss on the sale of Continental Assurance Company (CAC); continuing-operations income nevertheless declined $141M.
- Net operating income was $210M in Q3 versus $182M, but $567M for nine months versus $644M. Core property-and-casualty underwriting improved; weaker limited-partnership investment results and increased Life & Group Non-Core losses weighed on results.
- Favorable prior-year development was $180M in Q3 and $198M for nine months, versus $23M and $7M, respectively, in 2014. Reserve releases materially supported reported underwriting results.
- Investment income fell as limited partnerships returned negative 3.2% in Q3 2015, compared with positive 1.0% in Q3 2014; nine-month returns were 2.2% versus 7.4%. Realized investment results were losses of $49M in Q3 and $39M for nine months, including higher other-than-temporary impairment losses.
- Cash from operations was broadly unchanged at $1.045B. Investing cash used was $254M, versus $1.087B; financing cash used was $739M, reflecting higher dividends, including a $2.00-per-share special dividend. Dividends declared and paid during the nine months totaled $2.75 per share.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said near-term liquidity was expected to remain sufficient. The board declared a further $0.25-per-share quarterly dividend payable December 2, 2015; future dividends remain subject to board discretion and regulatory constraints.
- Management cited uncertainty in reserve estimates, particularly long-tail claims and asbestos and environmental pollution (A&EP), as well as investment-market volatility, competition and pricing, inflation in claim costs, reinsurance performance, regulation, and catastrophe exposure.
- The 2010 A&EP loss portfolio transfer with NICO/Berkshire Hathaway remained a significant item. Nine-month A&EP adverse development of $150M was ceded under the agreement; the filing reports a $54M after-tax charge from applying retroactive reinsurance accounting. The unrecognized deferred reinsurance benefit was $251M at September 30. NICO’s collateral trust had a fair value of $2.8B; Berkshire Hathaway guarantees specified obligations, subject to the agreement.
- Catastrophe losses, net of reinsurance, were $14M for Q3 and $103M for nine months, compared with $17M and $147M in 2014. International Q3 underwriting included losses from the Tianjin, China explosion.
- Life & Group Non-Core nine-month operating loss increased to $71M from $35M, primarily due to less favorable long-term-care morbidity experience. In the second quarter, CNA curtailed future accruals under its retirement plan, reducing the benefit obligation by $55M.
- Routine litigation was described as not material based on currently known facts. The filing also disclosed guarantees and indemnities, including approximately $2.0B of potential future payments under structured-settlement annuity guarantees; management said a payable was not likely because of a supporting trust.
Important facts for investors to verify
- Whether favorable prior-year reserve development is sustainable and whether current-year claims experience or reserve reviews could reverse it.
- The performance and assumptions behind long-term-care liabilities and the Life & Group Non-Core results.
- Changes in limited-partnership returns, impairments, realized investment losses, and the sensitivity of the investment portfolio to market conditions.
- The status and recoverability of A&EP reinsurance, including NICO performance, collateral, and remaining exposure outside the loss portfolio transfer.
- Debt maturities, revolving-facility terms and covenants, dividend capacity, and statutory limits on subsidiary dividends.