Here's Why Hold Strategy is Apt for CNA Financial (CNA)

Zacks Equity Research
·4-min read

CNA Financial Corporation CNA has been gaining momentum on the back of higher retention and new business opportunities, higher underlying underwriting profit and lower net catastrophe losses.

Growth Projections

The Zacks Consensus Estimate for 2021 and 2022 earnings per share is pegged at $3.98 and $4.38, indicating year-over-year increase of nearly 47.4% and 10%, respectively. The expected long-term earnings growth is pegged at 5%.

Earnings Surprise History

CNA Financial surpassed estimates in three of the last four reported quarters, with the average beat being 0.5%.

Zacks Rank & Price Performance

CNA Financial currently carries a Zacks Rank #3 (Hold). In the past year, the stock has rallied 41.9%, outperforming the industry’s increase of 30.6%.

Style Score

The company is well poised for progress, as is evident from its favorable VGM Score of B. Here V stands for Value, G for Growth and M for Momentum, with the score being a weighted combination of all three factors.

Return on Equity (ROE)

The company’s ROE for the trailing 12 months is 6.3%, better than the industry average of 5.7%, reflecting the company’s efficiency in utilizing shareholders’ fund.

Business Tailwinds

Continued premium growth and rate momentum are likely to drive the property and casualty insurer’s top-line results. CNA Financial is well-poised to gain from renewal premium change, higher retention and new business opportunities, which continue to contribute to premium growth across its Specialty, Commercial and International segments.

The Zacks Consensus Estimate for the company’s 2021 and 2022 revenues is pegged at $11.6 billion and $12.4 billion, indicating a year-over-year increase of 21.4% and 6.2%, respectively.

Given more favorable returns from limited partnership and common equity portfolios relative to the prior year, higher reinvestment yields 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.

Combined ratio is likely to improve in the near term on the back of improved current accident year underwriting results, higher underlying underwriting profit, and lower net catastrophe losses and claim-handling expenses. The improvement in the underlying combined ratio came from both the loss ratio and the expense ratio.

The expense ratio should continue to improve courtesy expense management and meaningful investments in talent, technology and analytics.

By virtue of improved current accident year underwriting profitability and a lower level of paid losses, operating cash flow increased 63.3% year over year in 2020. In addition to strong operating cash flow, it maintained liquidity in the form of cash and short-term investments and has sufficient liquidity to meet obligations and withstand significant business variability. The company continues to maintain capital above target levels in support of ratings. Its debt to capital of 17.9% betters the industry average of 20.6%.

Notably, CNA Financial’s dividend payments have witnessed a CAGR of 24.1% in the past seven years (2014-2021) and currently yield 3.3%, which is better than the industry average of 0.4%. This makes the stock an attractive pick for yield-seeking investors.

Stocks to Consider

Some better-ranked stocks in the property and casualty include Alleghany Y, Cincinnati Financial Corporation CINF and First American Financial Corporation FAF, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Alleghany’s bottom line surpassed estimates in two of the last four quarters and missed in the other two, the average beat being 34.08%.

Cincinnati Financial surpassed earnings estimates in two of the last four quarters, with the average surprise being 4.10%.

First American Financial’s bottom line surpassed estimates in three of the last four quarters and missed in one, the average beat being 15.86%.

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