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CNA Financial Gains From Solid Premiums Amid Cost Concerns

Zacks Equity Research
·4 min read

CNA Financial Corporation CNA is well-poised for growth, driven by higher retention, new business opportunities, higher yields in fixed income portfolio and lower net catastrophe losses.

The stock has seen its estimates for 2021 move up 3.4% in the past 60 days, reflecting investor optimism.

The Zacks Consensus Estimate for 2021 earnings is pegged at $3.93, indicating a year-over-year increase of 70.6%.

Factors Driving CNA Financial

CNA Financial is well-poised to gain from renewal premium change, rate increases across property and casualty lines of business, higher retention, and new business opportunities, which continues to contribute to premium growth across its Specialty, Commercial and International segments.

Given positive returns from limited partnership, common stock returns, favorable non-catastrophe current accident year underwriting results, higher yields in fixed income portfolio and favorable net prior period loss reserve development in the current year, investment income is expected to improve despite the current low interest rate environment.

Such premium growth from the company’s business segments as well as improving investment income have been driving the top line of the company, which witnessed a five-year CAGR (2014-2019) of 2.1%. The Zacks Consensus Estimate for the company’s 2020 and 2021 revenues is pegged at $9.5 billion and $10.3 billion, indicating a year-over-year increase of 0.01% and 7.7%, respectively.

Despite a tough operating environment, CNA Financial has been able to maintain underlying combined ratio below 95% for consecutive six quarters. Given improved current accident year underwriting results, higher underlying underwriting profit, and lower net catastrophe losses and claim-handling expenses, we expect combined ratio to improve in the near term.

Based on operational excellence, CNA Financial boasts a strong balance sheet and cash flows, which enable it to engage in capital deployment strategies. The company increased its dividend at a six-year (2014-2020) CAGR of 6.8% and currently yields 4.7% compared with the industry average of 0.4%. These make the stock appealing to yield-seeking investors.

Moreover, return on equity (ROE), reflecting the company’s efficient utilization of its shareholders’ funds to generate earnings, has been increasing over the past several years. Its trailing 12-month ROE of 6.8% betters the industry average of 6.2%.

However, shares of this property and casualty insurer, currently carrying a Zacks Rank #3 (Hold), have lost 29.6% year to date compared with the industry’s decline of 7.6%. However, we remain concerned about the company’s high expenses incurred, which has been putting pressure on margins. Notably, in the second quarter, net margin contracted 390 basis points (bps) year over year.

 

 

Stocks to Consider

Investors interested in the property and casualty industry may look at Donegal Group Incorporation DGICA, Fidelity National Financial Inc., FNF and Markel Corporation MKL, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Donegal surpassed estimates in each of the last four quarters, the average being 86.44%.

Fidelity National surpassed estimates in each of the last four quarters, the average being 32.13%.

Markel surpassed estimates in three of the last four quarters, the average being 50.01%.

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CNA Financial Corporation (CNA) : Free Stock Analysis Report
 
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Donegal Group, Inc. (DGICA) : Free Stock Analysis Report
 
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