CNA Financial Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unaudited results; comparisons are with the three months ended March 31, 2020. CNA operates property and casualty insurance, life and group insurance, and warranty businesses. Loews Corporation owned approximately 89.5% of CNA at quarter-end.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Total revenue | $2.866 billion | $2.291 billion |
| Net earned premiums | $1.962 billion | $1.869 billion |
| Net investment income | $504 million | $329 million |
| Net investment gains (losses) | $57 million | $(216) million |
| Net income (loss) | $312 million; diluted EPS $1.14 | $(61) million; diluted EPS $(0.23) |
| Core income, a non-GAAP measure | $263 million | $108 million |
| Operating cash flow | $82 million | $212 million |
| Cash | $588 million | $419 million at Dec. 31, 2020 |
| Total assets / stockholders’ equity | $63.713 billion / $12.089 billion | $64.026 billion / $12.707 billion at Dec. 31, 2020 |
| Long-term debt | $2.777 billion | $2.776 billion at Dec. 31, 2020 |
Operating revenues were $2.809 billion, up from $2.507 billion. The company attributed higher core income chiefly to stronger limited partnership and common-stock returns and improved non-catastrophe underwriting. Net investment income rose $175 million year over year; the fixed-income portfolio’s effective income yield was 4.4%, versus 4.6%.
Property and casualty combined ratios were 88.8% for Specialty (91.3% prior year), 106.7% for Commercial (101.6%), and 95.9% for International (99.9%). Commercial’s deterioration reflected higher catastrophe losses. Net catastrophe losses totaled $125 million, compared with $75 million, primarily due to Winter Storms Uri and Viola. Favorable net prior-year reserve development was $15 million in both periods.
Material changes and notable items
- Net income turned positive from a prior-year loss, reflecting the improvement in investment gains and higher core income.
- Other comprehensive loss was $616 million, largely from a $627 million after-tax reduction in unrealized investment gains. Total comprehensive loss was $304 million.
- Operating cash flow fell to $82 million from $212 million, primarily because of the premium paid for the excess workers’ compensation loss portfolio transfer (LPT), partly offset by lower net claim payments and higher premiums collected. Investing activities provided $408 million; financing activities used $321 million.
- In February, CNA ceded about $690 million of legacy excess workers’ compensation reserves to Cavello under a $1 billion aggregate-limit LPT. The transaction generated an approximately $12 million after-tax loss; $310 million of limit remained available on an incurred basis at March 31.
- The company paid $310 million in common dividends, including a $0.75-per-share special dividend and a $0.38 quarterly dividend. A further quarterly dividend of $0.38 per share was declared for payment in June. It repurchased 66,000 shares for $3 million.
Liquidity, outlook and risks
Management said existing cash flows were sufficient for current and expected working-capital and debt needs and did not expect a near-term change. No amounts were outstanding under the $250 million revolving credit facility or through the Federal Home Loan Bank of Chicago. Insurance-subsidiary dividend capacity is subject to regulatory restrictions. The filing provides no specific earnings or revenue guidance.
Management reported better-than-expected long-term-care morbidity in Q1, including lower new claim frequency, higher claim terminations and more favorable severity amid COVID-19 effects. Given uncertainty about trends as the pandemic abates, CNA increased IBNR reserves in anticipation of increased claim activity.
CNA disclosed a sophisticated ransomware cyberattack in March 2021 that disrupted its network and affected certain systems. Systems had been restored and normal operations resumed by the filing date; the investigation and assessment of the full impact continued. Possible consequences include notification obligations, claims, regulatory inquiries, costs, fines or penalties. CNA said it did not then expect a material financial impact, but provided no assurance; cyber insurance may not cover all losses.
Other significant exposures include uncertainty in insurance and long-term-care reserves, catastrophe losses, investment valuation and market movements, reinsurance counterparty performance, and potential claims related to legacy asbestos and environmental pollution and mass-tort liabilities. The company reported no material change in market-risk components during the quarter. It described routine litigation as not material based on currently known facts. Potential payments under structured-settlement guarantees were approximately $1.6 billion over annuitants’ lifetimes; CNA said payment was not considered likely because of a supporting trust.
Important facts for investors to verify
- Whether the March 2021 cyber incident led to further operational disruption, data exposure, claims, regulatory action or uninsured costs.
- How catastrophe losses, reserve development and long-tail claims affect underwriting results and reserve adequacy in subsequent quarters.
- Whether long-term-care claim activity changes as COVID-19 effects recede, and the resulting reserve implications.
- The investment portfolio’s performance and sensitivity to rates, credit spreads and unrealized valuation changes, including effects on equity.
- Performance and collateral adequacy of the excess workers’ compensation and asbestos/environmental LPTs, and CNA’s reinsurance recoverables.
- Cash generation, capital needs, and the capacity of insurance subsidiaries to support future dividends and holding-company obligations.