CNA Financial

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

CNA Financial is a leading US commercial insurance company, providing property and casualty insurance, life insurance, and a variety of other insurance products primarily to businesses.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

CNA operates in a mature, competitive, and highly regulated market. While they have a history of over a hundred years, that doesn’t mean that they have a strong competitive advantage over their peers. Instead, their strategy is based on providing niche insurance products, and having scale to price offerings better than competitors.

Business Explanation:

  • Revenue Distribution:
    • CNA’s primary source of revenue is its insurance premiums. They generate profits by pricing their insurance policies to have a healthy margin between premium income and incurred losses.
    • They have 3 main operating segments: Specialty, Commercial, International. Each segment has its own unique risks and competitive environment.
      • Specialty operations focuses on the healthcare, construction, professional services, real estate, and transportation industries.
      • Commercial segment offers products for businesses of all sizes.
      • International primarily consists of businesses in Canada, Europe and the UK, often targeting larger businesses.
    • Their primary business includes:
      • Property and Casualty Insurance: Their primary source of revenue. They offer insurance products for a variety of industries and businesses.
      • Life Insurance: Provides insurance services related to life.
  • Industry Trends and Competitive Landscape:
    • The insurance industry is very large and competitive. There are thousands of smaller companies, many of which specialize on a certain niche.
    • Recent trends have included increasing regulation, increased consolidation, and the rise of technology-enabled services to improve efficiency and lower costs for customers.
    • Large national insurers have tried to offer a wide variety of services, which often forces smaller companies to only operate in specific niches.
      • There has also been a recent surge in fintech and insurtech companies, offering new insurance options that are better suited for the 21st century.
    • Insurance is a mature industry, implying there is less rapid growth and more competition. For long term profits, companies need to have high-efficiency operations, and the ability to underprice competitors.
    • The current economic outlook is unclear with looming threat of recession, which greatly affects the profitability of insurance companies as it affects investment income from their cash balances.
  • What Makes CNA Different:
    • CNA is a large publicly traded company that has been in operation for over 100 years. Because of that, they have a long and storied history of providing insurance products. They also have a very large sales force and a wide international distribution network.
    • CNA seems to focus on offering niche insurance products which might limit their ability to fully capture gains that may come from new and promising markets.
      • They operate in areas that are not generally sought by larger players, but may be very lucrative. They seem to be focusing on high profit, niche areas.
    • From the information we can see, it doesn’t appear to have any unique source of competitive advantage. They do not have any unique technology, a very powerful brand, or an incredibly large distribution network that is hard for competitors to replicate.

Financial Analysis:

Their financials in recent years have shown positive results, with the company demonstrating positive revenue growth and improved profit margins.

  • Income Statement
    • The company’s operating revenues for the three months ended September 30, 2022 were $2.6 billion, which is an increase compared to the $2.4 billion reported in the same quarter of 2021. The main driver for the increase seems to be higher net premiums.
    • For the three months ended September 30, 2022, net investment income was at $559 million, which is much better compared to the $9 million loss in 2021. These gains are primarily due to significant interest rate increases and the fact that they had to recognize gains on a specific real-estate investment.
    • The company’s net income for the three months ended September 30, 2022 were $168 million, or $0.63 per share, compared to the $184 million in losses for the same quarter in 2021.
    • Overall, looking at a 9-month comparison, total revenue grew from $7.6 billion to 7.9 billion year over year. The biggest jump in profits appears to come from their net investment gains.
  • Balance Sheet Health:
    • The company has a stable financial position, with $51.1 billion in total assets and $39.7 billion in total liabilities.
    • The company’s leverage is a bit higher than its peers, which gives it a balance sheet health of 3.
    • Their debt balance has remained steady over the last 2 years.
  • Cash Flow:
    • The company had a cash flow from operations of $1.3 billion and a free cash flow of $348 million. This shows that the company has the ability to generate free cash, after the necessary capital expenditures for operation. The current cash balance sits at $2.3 billion, which is quite healthy.

Moat Analysis:

  • Based on their financials, it is clear that their profitability has increased in recent years, but this has mainly been driven by external factors, such as rising interest rates, and not from long lasting competitive advantage.
  • In terms of a competitive advantage, CNA doesn’t seem to have any powerful source of moat. As an insurance provider, its switching costs are fairly low, customers can easily move from one insurance company to another. The company is operating in a very competitive industry.
  • Their brand recognition, although existent, isn’t particularly a driver of moat, and many other companies will be easily able to provide similar services to their.
  • Their scale advantages are also not that great, because although they are large and well-established, it doesn’t appear that this leads to drastically lower operating costs.
  • Overall, after taking a look at these factors, and how easy it is for new players to compete, and the fact that the company doesn’t appear to have an unique proprietary advantage, we assign the company a moat rating of 2 out of 5.

Understandability:

  • The insurance business is not extremely complicated, however, it can be harder to understand due to it having more complex legal language and financial statements compared to companies in other sectors.
  • The company also has multiple operating segments that need their own analysis, making this a relatively harder business to fully grasp.
  • Overall, we assign a understandability score of 3 / 5.

Risks to the Moat:

  • Disruptive Technologies: New entrants that offer a drastically different approach to providing insurance could hurt CNA’s traditional approach to the industry. New technologies that lower costs for these newer players, could also affect the moat and profitability of CNA.

  • Competition: The insurance industry is extremely competitive and changes in pricing strategy from competitors might lead to less profitability for CNA. New competitors can also lead to more market share losses for the company.
  • Governmental regulations: Since the industry is very heavily regulated, any changes to current regulatory frameworks can significantly alter or reduce profitability.
  • Natural Catastrophes: As an insurer, they are obviously exposed to natural disasters that can impact their bottom line. A large catastrophe like a hurricane or an earthquake can lead to higher payouts than planned by their model.

Business Resilience:

  • CNA has demonstrated strong resilience during economic turmoil, with its ability to maintain profitability even during times of recession.
  • They have a large and diversified customer base which gives them added stability during times of economic slowdown.
  • However, the company’s large exposure to large businesses with low credit risk may increase losses, if there is a dramatic recession, or if inflation drives up claims prices.
  • The company’s conservative investment strategy and the diversified portfolio makes them less vulnerable to fluctuations in investment income. The ability to invest in fixed-income markets that have historically shown stability reduces the volatility of their investment income.

Management View:

  • CNA’s management recognizes the importance of maintaining a strong financial position, and has consistently shown a focus on cost control and reducing expenses. In their most recent earnings call, they have stated that they intend to continue focus on profitable growth and efficiency. They are very optimistic in their strategy and they are aggressively going after new segments such as cyber insurance.
  • They are very aware that inflation has been increasing, but are confident that they can offset the costs with price increases in their insurance products.