A Review Of CNA Financial’s Recent Performance (NYSE:CNA)

Result Summary

CNA Financial (NYSE:CNA) released its first-quarter financial results in May, reporting a consistent net income of $338 million.

During the quarter, CNA Financial experienced positive earnings due to higher investment income, up 16% year over year. The effective income yield on fixed income increased to 4.7% from 4.6% year-over-year, driven by the continued impact of higher reinvestment rates. Additionally, the underwriting performance remained robust, amounting to $126 million.

Despite concerns related to inflation and catastrophe losses, which resulted in a small deterioration in the combined ratio from a year-over-year point of view, CNA Financial managed to maintain steady financial results. CNA Financial started 2024 on the right foot, with the renewal premium change of +6% and a steady retention rate of 85%.

While the current valuation may not be particularly appealing to investors seeking aggressive returns, the insurance company has consistently delivered steady results, enabling it to provide regular dividends to shareholders.

CNA Financial’s Underwriting Performance: Consistently Reliable

The property and casualty segments recorded a quarterly underwriting gain of $126 million, resulting from a combined ratio of 94.6%.

This positive quarterly performance of the insurance portfolio can be attributed to the steady, albeit slightly deteriorated, underwriting performance of the specialty insurance business and the improved margins of the overseas insurance businesses.

However, the year-to-date combined ratio stood at 94.6%, which marked a 0.7-point deterioration from the same period one year ago. This decline in the year-to-date combined ratio was influenced by negative run-off losses and increased catastrophe losses, which represented a 4.0-point adverse impact on the combined ratio in total.

Overview of Specialty Business:

The specialty business, a significant component of the insurance portfolio, maintained a steady 90.7% combined ratio compared to 90% in the same period of the previous year.

The deterioration in the combined ratio was driven by the worsening of the underlying combined ratio, which increased by 1.3 points, partially offset by the favorable prior years’ claims development impact improving the loss ratio by 0.6 points, compared with no net prior period development in the prior year quarter.

Overview of Commercial Business:

During the first quarter of 2024, CNA Financial’s commercial business exhibited robust top-line performance, experiencing a 15% premium growth on a net basis after reinsurance. This growth was propelled by an 8% rate change and an 85% retention rate.

Within this segment, there was a positive underwriting gain of $29 million, or a 12 million reduction on a year-over-year basis. The lower underwriting gain was primarily attributable to a deteriorated combined ratio, with a 3.1-point increase in the loss ratio. The commercial insurance portfolio was affected by higher catastrophe losses, which amounted to $82 million, or 6.8 points of the loss ratio in the quarter compared with $44 million, or 4.2 points of the loss ratio, for the prior year quarter.

Despite the lower underwriting gains, the insurance company pushed for higher pricing in the U.S. commercial casualty lines. In the first quarter, commercial auto rate increases were up 14%, excess casualty was up 11% and primary general liability was up mid-single digit with renewal premium change of high single digit due to rising revenues and payrolls. These rate increases are double what they were 6 quarters ago.

Overview of International Business:

In Q1 2024, the pre-tax underwriting gains of CNA Financial’s international activities more than doubled, amounting to $21 million, despite lower new business, which resulted in a drop in the gross written premiums.

Nonetheless, the underwriting performance improved, with a combined ratio reducing from 97.2% to 93.3%. Most of the improved underwriting performance was driven by no unfavorable prior claims’ development.

Given the cumulative rate increases and extensive re-underwriting actions the insurance carrier took for the last several years, CNA Financial’s management expects the international operations to be an increasingly consistent contributor to the company’s overall profitable growth.

Non-Fixed Income Performance Fueling Investment Income

CNA Financial, like other insurers, benefited from the rise in average yields of fixed-income investments over the last years. However, yields have reached a plateau, as the year-over-year interest rate yield was almost stable from 4.6% to 4.7%. Nonetheless, net investment income increased $84 million for the first quarter of 2024 as compared with prior year quarter.

The increase was driven by favorable limited partnership and common stock returns and higher income from fixed income securities as a result of favorable reinvestment rates.

Going forward, the investment earnings should continue growing, as the invested asset base should continue growing and benefiting from the 4%+ interest yield. Hence, the investment portfolio will continue to be a significant earnings tailwind.

For the full year 2024, current shareholders may expect about $2.175 billion or a 5% increase as compared to the full year 2023 which would result in the total portfolio effective yield to approach 4.8% by the end of 2024.

2024 Outlook

Over the last eight years, the average combined ratio has ranged from 93% to 97%, excluding the 2020 performance, which was affected by COVID-19.

Although 2022 and 2023 were significantly better in terms of underwriting performance compared to preceding years, it would be imprudent to forecast FY2024 earnings solely based on those years.

CNA Financial’s management has made steady efforts to improve the performance of the insurance portfolio over the last few years. Hence, a combined ratio around 93% is possible but should be seen as an optimistic scenario if the underwriting measures on both international and commercial insurance segments bear fruit.

A base-case scenario would see an underwriting margin of 3 to 5 points, implying a combined ratio oscillating between 95% and 97%. In terms of premium volume, a $10 billion earned premium target remains achievable for 2024.

Thus, the pre-tax underwriting gain for the property and casualty operations might reach $300 to $500 million in 2024. Additionally, the pre-tax losses from the run-off long-term care portfolio are expected to be around $1 billion.

With an anticipated investment income of $2.175 billion from both life and non-life segments, the total pre-tax earnings would range between $1.5 to $1.7 billion. Assuming a 21% corporate tax rate, this would result in a post-tax income of approximately $1.19 to $1.34 billion.

Therefore, the company appears to be well-positioned to continue delivering steady results and distributing excess capital to shareholders via dividends, without compromising its financial health, despite carrying a debt load of $3 billion.

Debt Position: A More Than Manageable Debt Burden

As of December 2023, The debt consisted of fixed-rate instruments, with 85% of the total debt maturing between 2026 and 2033.

In 2024, the company issued $500 million in 5.125% senior unsecured notes due February 15, 2034, to repay the 3.95% notes maturing in May 2024. Although the debt cost has increased slightly, impacting the operating profit by approximately $1 million annually, it remains more than acceptable. Simply put, the increased debt burden is manageable and is likely to be offset by higher investment income.

Current Valuation

CNA Financial’s book value per share currently stands at $35.62, indicating a price-to-book valuation of around 1.25.

This valuation suggests that the company may be relatively attractively priced compared to other property and casualty insurers, as they typically trade at 1.5 times their book value or higher.

However, CNA’s valuation is heavily influenced by its substantial ownership by Loews (L), which holds approximately 90% of the company. Consequently, CNA’s prospects are closely tied to Loews’ management and capital allocation decisions.

Closing Thoughts

As mentioned in previous articles, CNA Financial may not be a rapidly growing or significantly undervalued stock. Nevertheless, it offers the potential for consistent cash flows due to its stable positions in niche markets. Investors should bear in mind that CNA is largely owned by Loews, which makes it dependent on Loews’ decisions regarding capital allocation.

Investors should remember that CNA is largely owned by Loews, making it dependent on Loews’ decisions regarding capital allocation.

While the upside potential may be somewhat limited, the company’s consistent performance makes it an attractive option for retirees or investors focused on dividends and seeking reliable returns. For these investors, purchasing the stock at around 1.0 times the book value can provide a safety margin.