CNA Financial Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparative period is Q1 2019. Unaudited consolidated statements prepared under U.S. GAAP. Loews Corporation owned approximately 89% of CNA at quarter-end.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenues | $2.291 billion | $2.695 billion |
| Net earned premiums | $1.869 billion | $1.803 billion |
| Net investment income | $329 million | $571 million |
| Net investment gains (losses) | $(216) million | $31 million |
| Net income (loss) | $(61) million | $342 million |
| Diluted earnings (loss) per share | $(0.23) | $1.25 |
| Operating cash flow | $212 million | $287 million |
Management-reported core income, a non-GAAP measure excluding after-tax investment gains/losses and cumulative accounting changes, was $108 million versus $318 million. Pretax core income was $127 million versus $388 million. The decline reflected weaker investment returns, particularly from limited partnerships and common stocks.
Property and casualty combined ratios were 91.3% for Specialty (92.3% prior year), 101.9% for Commercial (101.3%), and 99.9% for International (101.9%). A ratio below 100% indicates underwriting profit before investment income and other items. Net favorable prior-year reserve development was $15 million, versus $14 million.
Balance sheet, liquidity and capital
- At March 31, total assets were $58.405 billion, total liabilities $48.043 billion, and stockholders’ equity $10.362 billion. Equity included accumulated other comprehensive loss of $1.070 billion, compared with $51 million of accumulated other comprehensive income at year-end 2019.
- Cash was $857 million and short-term investments $596 million, down from $242 million and $1.861 billion, respectively, at December 31. CNA reported $5 billion of cash, short-term investments and highly liquid U.S. government agency securities, including $506 million at the holding company.
- Long-term debt was $2.680 billion. No amounts were outstanding on the $250 million revolving credit facility or through the Federal Home Loan Bank of Chicago.
- Investing activities provided $1.087 billion; financing activities used $675 million. Financing included $649 million of common dividends and $18 million of share repurchases. The Q1 dividend included a $0.37-per-share quarterly dividend and a $2.00-per-share special dividend. A further $0.37-per-share quarterly dividend was declared for June payment.
Material changes, outlook and risks
- COVID-19-related market disruption drove investment portfolio declines. Net investment income fell 42%; limited partnership and common stock returns were negative, and pretax impairment losses were $92 million, including $77 million related to energy. Fixed-maturity fair value declined to $40.098 billion from $42.207 billion at year-end; net unrealized gains fell to $2.113 billion from $4.081 billion.
- Management said first-quarter underwriting effects were limited but anticipated possible future premium declines, cancellations or refunds, higher uncollectible receivables, increased claims and litigation, and pressure on loss and expense ratios. It highlighted potential exposure in workers’ compensation, healthcare, commercial property, directors’ and officers’ liability, employment practices liability, and construction surety. The ultimate impact was uncertain; the filing gives no quantified earnings guidance.
- Net catastrophe losses were $75 million, including $13 million attributed to COVID-19, versus $58 million in Q1 2019. CNA recorded a $15 million pretax underwriting impact from COVID-19, including catastrophe claims and increased allowance for uncollectible insurance receivables.
- CNA stated that current cash flows and liquid assets were sufficient for expected working-capital and debt needs and did not anticipate a near-term material liquidity concern. It noted that future cash flows could be affected by lower premiums and increased claims and defense payments.
- Gross unrealized losses on fixed maturities without a credit-loss allowance totaled $1.117 billion. Management attributed most market-value declines to wider credit spreads amid pandemic uncertainty and energy-sector supply shocks, and said it did not intend, and was not more likely than not required, to sell affected securities before recovery. The $49 million allowance for credit losses on fixed maturities and a $13 million increase in the mortgage-loan allowance reflected credit-loss estimates and forecasts.
- The A&EP loss portfolio transfer with NICO had $3.2 billion of cumulative ceded losses and a $378 million unrecognized deferred benefit. The collateral trust’s fair value fell to $2.7 billion from $3.7 billion; the company stated it exceeded 150% of gross LPT reserves at quarter-end. NICO’s obligations are also guaranteed by Berkshire Hathaway, subject to the stated terms and limits.
- Other key uncertainties include insurance reserve estimation, long-term-care liabilities, reinsurance recoverability, regulatory or legislative changes to coverage and premium rules, investment credit and valuation risk, and operational or cybersecurity risks from remote work. The company said controls and procedures were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether investment income and portfolio valuations recover, and whether credit impairments or unrealized losses increase as pandemic-related economic conditions evolve.
- The scale and timing of COVID-19-related claims, litigation, premium reductions or refunds, and receivable losses, including any regulatory or legislative expansion of coverage.
- Development in long-tail insurance and long-term-care reserves, and the adequacy and collectibility of reinsurance, including NICO LPT collateral and recoveries.
- Whether reported liquidity remains available at the holding company and regulated insurance subsidiaries, and how statutory dividend limits affect capital transfers and future shareholder distributions.
- How management’s non-GAAP core income and segment combined ratios reconcile to GAAP results and perform in subsequent quarters.