CNA Financial (CNA) recently released its fourth-quarter results. Although the company was affected by a non-economic charge related to asbestos and environmental pollution, the insurance company delivered strong property and casualty (P&C) insurance results.
The P&C segment produced core income of $ 353 million for the fourth quarter of 2021.
Furthermore, the insurer achieved the lowest quarterly and annual combined ratio in five years at 92.9% and 96.2%, respectively. All segments delivered improved margins on a full-year view. 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 has started 2022 on the right foot with the dividend increase, already announced.
P&C Operations’ Improved Margins Fueled Higher Annual Income
The P&C segments posted a quarterly and annual underwriting gain of $ 142 and $ 290 million respectively.
One year ago, CNA Financial suffered from the COVID-19 impacts and were unable to generate underwriting gains.
The trend observed during the fourth quarter, as I expected, was similar to the first three. The trend that began in early 2021 continued, and the changes made by the company paid off.
Sure, the commercial segment remains loss-making with a combined ratio above 100%, but the other two segments (specialty and international) generated impressive underwriting gains.
I was pleasantly surprised by the profits generated by the international segment. For those of you who know CNA Financial, it’s obvious, but the company’s cash machine remains the specialty segment. This segment delivers recurring results, thanks to an excellent combined ratio over the cycle. For 2021, the segment has not failed with an annual combined ratio of 88.7% or an underwriting gain of $ 347 million for 2021 (vs. $ 187 million in 2020).
But as I mentioned earlier, this is not the good surprise of the year. The real news for 2021 is the return to profitability of the international business. Thanks to an active de-risking policy, CNA has been able to turn around and improve the profitability of this portfolio over the quarters.
As a result, the international line of business posted 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% vs. 102.4%) was coupled with a strong increase in premium income, with net premiums up 15% to just over $ 1.1 billion.
The only current downside is the commercial line. I have mentioned this in previous articles, but this portfolio is structurally loss-making, with a combined ratio between 101% and 107% depending on the year.
Some signs are encouraging, such as the decrease in the cost ratio, but real measures still need to be put in place to reduce as much as possible the loss ratio, which keeps on being too high (just over 71%).
While 2020 was marred by COVID-19, 2021 was a year of renewal for CNA Financial, with profitability up sharply, combined with double-digit revenue growth.
Going forward, the company will still deliver strong results from the specialty business. Suppose the international business continues combining growth and resilient margins. In that case, FY2022 underwriting income might be higher than in 2021 if the losses from the commercial segment are reduced via underwriting initiatives to lower the loss ratio.
A Raised Dividend And A Special Dividend To Reward Shareholders
It is now a tradition. Each year, CNA Financial distributes the surplus capital through a special dividend. While the special dividend was lower in 2021, due to COVID-19, the annual special dividend has 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 previously written, 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 shares or invest in other businesses.
What About 2022?
In 2021, the insurance company recorded a post-tax profit of $ 1.2 billion, or 74% higher than in 2020. The underwriting gains and reliable financial income fueled the post-tax profit growth.
A potential increase in interest rates will affect the financial revenues positively, despite the adverse impact on the fixed-income portfolio’s valuation. Furthermore, the insurance company will continue focusing on the underwriting margin improvements, as the insurance portfolio is the primary driver of the company’s profit source.
Although the company is currently fairly-priced, the current shareholders might enjoy a 6% to 8% total return in 2022, depending on the book value growth.