CNA - CNA Financial Corporation: For The Dividend Investor This Is A Great Pick

2023-07-20 19:42:09 ET

Summary

• CNA Financial Corporation's share price has dropped since its last quarterly report, but its low p/e and p/b ratios make it an attractive dividend addition to an income portfolio.
• The company's operations span internationally, and its core ROE was at 10.8% in 2023, with its Commercial segment showing a 19% YoY increase in net written premium.
• Despite the risk of catastrophe losses, CNA's prudent management has kept its combined ratio below the 10-year average for Q1, and its dividend payout ratio is a reasonable 41%.

Introduction

Since the release of the last quarterly report from CNA Financial Corporation ( CNA ), the share price action has been quite disappointing, down from around $39 per share on May 1, 2023, when the report was released. But I think the poor action of the share price has opened up a great opportunity for investors to benefit from. The p/e and p/b sit below the historical average and the sector as well on both metrics. I think this limits the downside and makes CNA a dividend addition to an income portfolio seems very intriguing.

On July 31 CNA is set to release its Q2 report for 2023, and I am comfortable rating the company a buy ahead of this. The dividend has grown significantly over the last few years and with solid I think it looks sustainable. Rating CNA as a buy for investors seeking a dividend income play with a reasonable valuation.

Company Structure

Like many companies in the financial sector, their history dates back a long time, and CNA they were founded in 1853 and has grown into a formidable position now. The market cap now sits at over $10 billion and has an investment portfolio valued at $44 billion .

The quality of the investment portfolio is in my view very good with a good portion of it in solid investment-graded assets. The majority of the invested assets are in fixed-income securities which helps create a solid foundation of income for the business.

The operations of CNAs span internationally, and they operate through a few different segments. Those being, Specialty, Commercial, International, Life & Group, and corporate & Other.

I think the performance through the business has been solid as showcased in Q1 of 2023. The core ROE was at 10.8%, which is a 1.1 pts expansion from the year prior. This is in my opinion setting the tone for what type of value CNA can provide investors with.

One of the most significant parts of the business is the Commerical segment, where above we can see the net written premium increasing at a solid rate, 19% YoY. This has unfortunately not translated into a lower loss ratio for CNA. The loss ratio as of Q1 2023 sits at 65.7%, a climb upwards from 63.3% in Q1 2022. Viewing the development of this will make it easier to see whether or not CNAs can provide stronger ROE growth than what they already have. As I see it, with interest rates climbing still and not set to significantly decline in the short term CNA has the potential for more strong earnings reports if they get their expense ratio down.

Earnings Transcript

From the earnings call that happened on May 1, 2023, there were some comments from the CEO Dino Robusto of CNA that I made note of.

• Written rate increase was 5% in the quarter, up a point compared to the fourth quarter with acceleration in commercial, where rates were up 2 points to 7%, and commercial rates were up a full 3 points compared to the third quarter of last year. These higher levels of written rate will favorably impact earned rate throughout the year .

This comment very well highlights in my opinion why we can expect even stronger earnings reports going forward. The higher rates are favorable impacting CNA's earnings and expecting to see stronger net premiums and a lower loss ratio seems reasonable.

Valuation & Comparison

Over the last 3 years, the stock price for CNA has been quite disappointing when compared to the SPY, posting a 26% gain whilst the SPY grew 40%. This isn't accounting for the around 4% dividend yield that CNA has, which flattens out the difference between the two slightly. But as I am bullish on the prospects of CNA still, I think for the next 3 years, CNA might be able to outperform, backed by catalysts such as solid earnings results thanks to higher interest rates.

Highlighting the solid dividend opportunity that is CNA the model above shows that buying the share price now will yield a solid return. Under $82 per share and is reasonable to assume that a 10% annual return and a dividend growth rate of 6% can be applied. I view CNA as a company in which you add a little every month and treat it like an index fund with a good dividend yield. I have a required return of 10% which is enough to beat the market during the long run, but a higher one can be applied to which would give a higher margin of safety for any purchase.

Risk Associated

Catastrophe risk is a concern to insurance companies. Natural disasters or large-scale events can result in a surge of insurance claims, straining the company's financial reserves and solvency.

The CEO made some comments about the impacts of this on the earnings of the business, " Against a backdrop of elevated industry catastrophe losses in the first quarter, the all-in combined ratio was very strong at 93.9% with pre-tax catastrophe losses of $52 million, or 2.4 points of the combined ratio, which is well below our 10-year first quarter average of 3.1 points, which we believe is strongly reflective of our prudent management of catastrophe exposures ".

This shows that CNAs are very capable of facing such challenges and not letting them drag down earnings significantly. Seeing the combined ratio of 2.4 is below the 10-year average for the first quarters is reassuring to investors and highlights the solid fundamentals of the business.

Investor Takeaway

CNA has grown its portfolio into a solid state and with interest rates remaining quite high till I think the coming few quarters will show strength. As hinted by the management in the Q1 report, the higher written rates are expected to very favorable impact on the full year of 2023 earnings.

As far as a dividend play, CNA offers good potential in my eyes. The payout ratio isn't unreasonably high, sitting at 41% right now. With a 6.45% historical growth rate for the dividend, I think CNA has much more to give. The current share price is also valued under historical metrics at an FWD p/e of 8.8, 20% below CNA's 5-year average. As a result of all these positives I see with CNA, I am rating them a buy.

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