CNA Financial Corporation — Q3 2022 Form 10-Q
Business context and reporting period. CNA is an insurance and warranty company with Specialty, Commercial, and International property-and-casualty operations, a run-off Life & Group business that includes long-term care, and Corporate & Other. Loews Corporation owned approximately 90% of CNA at September 30, 2022. This unaudited quarterly report covers the three and nine months ended September 30, 2022; amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $2,957 | $2,959 | $8,768 | $8,854 |
| Net earned premiums | $2,221 | $2,059 | $6,435 | $6,056 |
| Net investment income | $422 | $513 | $1,302 | $1,608 |
| Net investment losses (gains) | $(96) | $22 | $(166) | $117 |
| Net income | $128 | $256 | $646 | $936 |
| Diluted EPS | $0.47 | $0.94 | $2.37 | $3.43 |
| Core income, non-GAAP | $213 | $237 | $774 | $841 |
Premium growth was offset by lower investment income and investment losses. Nine-month operating cash flow was $1,990, versus $1,354 in 2021; management attributed the increase primarily to the prior-year payment of the Excess Workers’ Compensation loss portfolio transfer premium. Investing cash outflow was $1,072 and financing cash outflow was $924. Cash ended the period at $503.
Total assets were $60,215 at September 30, 2022, down from $66,639 at year-end 2021; stockholders’ equity fell to $8,094 from $12,809. AOCI moved from income of $320 to a loss of $4,139, primarily reflecting investment-related unrealized losses. Fixed-maturity securities had net unrealized losses of $4,076 at quarter-end. Long-term debt was $2,780, with estimated fair value of $2,563. CNA reported no outstanding borrowings under its $250 revolving credit facility or from the Federal Home Loan Bank of Chicago.
Material changes and operating trends
- Property & Casualty underwriting: For the first nine months, combined ratios improved year over year in Commercial (96.6% versus 106.0%) and International (92.8% versus 94.8%); Specialty was broadly stable (88.5% versus 88.3%). Commercial’s Q3 combined ratio was 101.9%, including catastrophe losses of $103, while Specialty and International reported 88.7% and 94.4%, respectively.
- Catastrophes and reserves: Net catastrophe losses were $114 in Q3 and $171 year to date, including $87 for Hurricane Ian. The comparable 2021 amounts were $178 and $357. Nine-month net prior-year reserve development was favorable by $2, compared with unfavorable development of $4 in 2021, but included $64 of unfavorable Corporate & Other development, largely tied to legacy mass-tort abuse claims.
- Investments: Fixed-income investment income increased, but losses from limited partnerships and common stocks contributed to lower total net investment income. The nine-month limited partnership and common-stock return was negative 2.4%, compared with a positive 16.4% in 2021.
- Life & Group: Nine-month core income fell to $7 from $120. Q3 results included a $25 pretax reserve reduction from the long-term-care claim review and a $5 reduction in structured-settlement claim reserves. The long-term-care active-life reserve valuation showed a $125 pretax margin, versus $72 a year earlier.
Outlook, risks, and unusual items
- Outlook and liquidity: CNA provided no specific earnings or revenue guidance. Management said current cash flows were sufficient for expected working-capital and debt needs in the near term. The board declared a $0.40-per-share quarterly dividend payable December 1, 2022. Dividends remain subject to board discretion, earnings, financial condition, business needs, and regulatory constraints.
- Long-duration insurance accounting: CNA planned to adopt the new long-duration contract standard on January 1, 2023, using a modified retrospective method. The company estimated an approximately $2.3 billion decrease in AOCI at the transition date of January 1, 2021; using September 30, 2022 interest rates in the transition calculation would make the impact approximately zero. Management said the standard would not affect statutory capital and surplus, cash flows, or underlying business economics, but could change earnings patterns and materially expand disclosures.
- Reserve sensitivity: Long-term-care assumptions, including morbidity, persistency, discount rates, care-cost inflation, and regulatory approval and timing of premium increases, can materially affect reserves. CNA’s illustrative sensitivities show potential pretax income reductions after the existing reserve margin, including $200 for a 2.5% morbidity increase and $500 for a 5% increase.
- Other exposures: Risks include future catastrophe losses, inflation-driven claim severity, uncertain long-tail and mass-tort claims, reinsurance counterparty performance, investment-market and credit-spread volatility, foreign exchange movements, and regulatory restrictions on insurer dividends. CNA disclosed a $1.6 billion potential lifetime obligation under structured-settlement guarantees, but said payment was not considered likely because a supporting trust is maintained.
- Unusual investment item: Q3 investment losses included a $35 non-economic loss associated with the expected novation of a legacy annuity coinsurance agreement and its funds-withheld embedded derivative.
- Controls and contingencies: Management concluded disclosure controls were effective as of September 30, 2022 and reported no material change in internal control over financial reporting during the quarter. CNA said its pending litigation was not material based on currently known facts.
Important facts for investors to verify
- Whether premium growth and P&C underwriting performance persist, particularly in Commercial, and how catastrophe losses and rate changes affect combined ratios.
- How investment income, portfolio marks, and interest-rate or credit-spread movements affect earnings, AOCI, and equity.
- Whether long-term-care and other long-tail reserves remain adequate as claim severity, care costs, morbidity, and persistency develop.
- Developments in legacy mass-tort claims, including the Diocese of Rochester matter, and the collectibility and performance of reinsurance recoveries.
- The final transition disclosures and accounting effects of the 2023 long-duration contract standard, including the stated AOCI estimate.
- Capital and holding-company liquidity after dividends, including the capacity of insurance subsidiaries to pay dividends under state regulation.