CNA - CNA Financial: A Good Candidate For Dividend Seekers

2023-11-02 09:06:45 ET

Summary

• CNA Financial reports consistent net income of $258 million in Q3, contributing to a year-to-date profit increase.
• Positive earnings driven by higher yields on fixed-income securities and robust underwriting performance.
• Commercial and international business segments show strong performance, while specialty business experiences slight deterioration.

Result Summary

CNA Financial ( CNA ) recently released its third-quarter financial results, reporting a consistent net income of $258 million.

This contributed to a year-to-date post-tax profit of $838 million, a substantial increase compared to $443 million for the same period the previous year.

During the quarter, CNA Financial experienced positive earnings due to higher yields on its fixed-income securities, with the effective income yield on fixed income rising from 4.4% to 4.7% year-over-year. The fixed-income portfolio generated a pre-tax income of $500 million. Additionally, the underwriting performance remained robust, resulting in a quarterly underwriting gain of $131 million.

Furthermore, the insurer conducted a review of its long-term care portfolio, which had been closed to new individual policies in 2004 and group policy renewals in 2016. This review of the reserve level had a neutral impact on the company's overall financials.

Despite concerns related to inflation and catastrophe losses, CNA Financial managed to maintain steady financial results. However, the year-to-date stock performance has been lackluster, with a modest gain of 1.19%, factoring in dividends.

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.

Steady Underwriting Performance In Challenging Markets

The property and casualty segments recorded a quarterly underwriting gain of $131 million, resulting from a combined ratio of 94.3%.

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 both the commercial and overseas insurance businesses.

However, on a year-to-date basis, the combined ratio stood at 94%, which marked a 1-point deterioration from the same period one year ago. This decline in the year-to-date combined ratio was influenced by lower positive run-off gains and increased catastrophe losses.

The decline in the underwriting margin can be mostly attributed to the increase in the combined ratio within the specialty lines of business.

Overview of Specialty Business:

The specialty business, a significant component of the insurance portfolio, maintained a steady 90.1% combined ratio compared to 88.7% in the same period of the previous year.

Over the year-to-date period, there was a 1.8-point increase in the combined ratio, moving from 88.5% to 90.3%. This decrease in year-to-date underwriting income, which stood at $237 million as of September 2023, was primarily due to reduced positive prior-year claims development, even though the attritional loss ratio remained relatively stable at 58.5%.

Furthermore, the deterioration of the loss ratio, influenced by lower positive run-off, combined with a 0.9-point increase in the expense ratio to 31.9%, had an adverse impact on the year-to-date combined ratio.

Overview of Commercial Business:

In the third quarter, CNA Financial's commercial business exhibited robust top-line performance, experiencing a 14% premium growth on a net basis after reinsurance. This growth was propelled by an 8% rate change and an 83% retention rate.

Within this segment, there was a positive underwriting gain of $13 million, primarily attributable to an improved combined ratio, with the reduction in the loss ratio playing a significant role.

However, on a year-to-date basis, the pre-tax underwriting income remained nearly unchanged compared to the same period one year ago.

Overview of International Business:

During the third quarter, the underwriting gains of CNA Financial's international activities more than doubled. With this favorable performance in the third quarter, the year-to-date underwriting gains exceeded those of the previous year during the same period.

This improvement in underwriting performance can be largely attributed to the reduction in the expense ratio, which decreased by 1.8 points to 30.3%.

Higher Yields Fueling Investment Income

CNA Financial, like other insurers, benefited from the rise in average yields of fixed-income investments. About 90% of the investment portfolio is allocated to fixed-income securities with an average credit rating of "A."

The positive impact of higher yields on fixed income securities continued to boost earnings significantly. In the quarter, pre-tax investment income reached $553 million, compared to $422 million in Q3 2022.

Looking at the year-to-date figures, pre-tax income from the investment portfolio was over $300 million higher than the previous year, totaling $1.6 billion.

Going forward, the investment portfolio will continue to be a significant earnings tailwind.

Current Valuation

CNA Financial's book value per share currently stands at $31.61, indicating a price-to-book valuation of around 1.29.

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 influenced by its significant ownership by Loews ( L ), which accounts for approximately 90% of its ownership. As a result, the insurer's prospects are closely intertwined with 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.

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.

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