CNA Financial Stock: Earnings ended very well in 2021 (NYSE: CNA)


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CNA Financial (CNA) recently released its fourth quarter results. Although the company was affected by a non-economic burden related to asbestos and environmental pollution, the insurance company recorded strong results in P&C insurance.

The P&C segment generated base revenue of $353 million for the fourth quarter of 2021.

Financial performance of the P&C segment

CNA financial presentation

Additionally, the insurer achieved the lowest quarterly and annual combined ratio in five years at 92.9% and 96.2%, respectively. All segments improved their margins over the full year. As a result, the insurance company increased its quarterly dividend and declared an annual special dividend of $2 per share.

CNA Financial ended 2021 very well and started 2022 on the right foot with the dividend increase, already announced.

Improved margins in P&C operations fueled higher annual revenue

The P&C segments recorded a quarterly and annual underwriting gain of $142 million and $290 million respectively.

Performance of P&C operations

CNA financial presentation

A year ago, CNA Financial suffered from the impacts of COVID-19 and was unable to generate underwriting gains.

The trend seen in the fourth quarter, as I expected, was similar to the first three. The trend that started in early 2021 has continued and the changes made by the company have paid off.

Admittedly, the commercial segment remains loss-making with a combined ratio above 100%, but the other two segments (specialized and international) generated impressive underwriting gains.

I was pleasantly surprised by the profits generated by the international segment. For those of you familiar with CNA Financial, it’s obvious, but the company’s ATM remains the niche segment. This segment delivers recurring results, thanks to an excellent combined ratio over the cycle. For 2021, the segment did not weaken with an annual combined ratio of 88.7%, i.e. a technical gain of $347 million for 2021 (vs $187 million in 2020).

Bar chart of leased line combined ratio

Financial reports (aggregated figures by author)

But as I mentioned above, this is not the good surprise of the year. The real novelty for 2021 is the return to international profitability. Thanks to an active policy of de-risking, CNA was able to recover and improve the profitability of this portfolio over the quarters.

As a result, the international business segment recorded an underwriting gain of $55 million for 2021, with fourth quarter results contributing $14 million, for a quarterly combined ratio of 94.8%.

The improvement in the annual combined ratio (94.8% against 102.4%) was accompanied by a strong increase in turnover, with net premiums increasing by 15% to just over 1.1 billion $.

Financial data of international activities

CNA financial presentation

The only current downside is the commercial line. I mentioned it in previous articles, but this portfolio is structurally loss-making, with a combined ratio of between 101% and 107% depending on the year.

Data table of historical combined ratio of business activities

CNA financial reports (aggregated figures by author)

Some signs are encouraging, such as the drop in the cost ratio, but real measures still need to be put in place to reduce the loss ratio as much as possible, which remains too high (just over 71%).

Commercial enterprise loss ratio data

CNA financial presentation

While 2020 was marked by COVID-19, 2021 was a year of renewal for CNA Financial, with sharply rising profitability, combined with double-digit revenue growth.

Going forward, the company will continue to deliver strong specialty results. Assume that the international business continues to combine growth and resilient margins. In this case, underwriting income in fiscal 2022 could be higher than in 2021 if commercial segment losses are reduced through underwriting initiatives aimed at reducing the loss ratio.

An increased dividend and a special dividend to reward shareholders

It is now a tradition. Each year, CNA Financial distributes excess capital through a special dividend. While the special dividend was lower in 2021, due to COVID-19, the annual special dividend returned to a pre-COVID level of $2 per share.

In addition, the insurer increased its quarterly dividend by 5.3% to $0.4 per share.

As noted earlier, this dividend increase coupled with the special distribution serves the interests of its majority shareholder, Loews, Inc. (L) which uses CNA’s dividend payments to buy back its stock or invest in other businesses.

What about 2022?

In 2021, the insurance company reported after-tax profit of $1.2 billion, 74% higher than in 2020. Underwriting gains and reliable financial income fueled after-tax profit growth.

A possible rise in interest rates will positively affect financial income, despite the negative impact on the valuation of the bond portfolio. In addition, the insurance company will continue to focus on improving the underwriting margin, as the insurance portfolio is the main driver of the company’s profit source.

Although the company is currently fairly priced, current shareholders could enjoy a total return of 6% to 8% in 2022, depending on book value growth.


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