CNA Financial Corporation — 2013 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2013. CNA is a commercial property and casualty insurer, with remaining life and group insurance operations largely in run-off. Core segments are CNA Specialty, CNA Commercial and Hardy; Loews Corporation owned approximately 90% of CNA’s common stock.
Financial performance and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $10.113 billion | $9.547 billion |
| Net earned premiums | $7.271 billion | $6.882 billion |
| Net investment income | $2.450 billion | $2.282 billion |
| Net income attributable to CNA | $937 million | $628 million |
| Diluted earnings per share | $3.47 | $2.33 |
| Net cash provided by operating activities | $1.204 billion | $1.250 billion |
| Total assets | $57.194 billion | $58.522 billion |
| Total insurance reserves | $38.394 billion | $40.005 billion |
| Total debt | $2.560 billion | $2.570 billion |
| CNA stockholders’ equity | $12.651 billion | $12.314 billion |
Core-segment combined ratios were 86.9% for CNA Specialty, 108.3% for CNA Commercial and 93.4% for Hardy; ratios below 100% indicate underwriting profit. The company reported $169 million of net catastrophe losses in 2013, versus $391 million in 2012. Fixed-maturity investments totaled $41.233 billion, with 92% rated investment grade. Cash was $195 million and short-term investments were $1.407 billion at year-end.
Material changes versus the prior year
- Net income rose $309 million, primarily as core-segment operating income improved by $427 million, reflecting stronger current-year underwriting and higher investment income. Lower catastrophe losses helped; lower favorable prior-year development partly offset the improvement.
- Net investment income increased $168 million, mainly because limited-partnership income rose to $451 million from $251 million. Fixed-maturity income declined to $1.998 billion from $2.022 billion amid reinvestment at lower market rates.
- CNA Specialty’s combined ratio improved from 94.8% to 86.9%. CNA Commercial improved from 113.5% to 108.3%, but remained above 100%; it recorded $95 million of unfavorable net prior-year development, compared with $81 million favorable in 2012.
- Operating cash flow declined $46 million. Total assets and investments decreased, while stockholders’ equity increased. The 2013 decline in comprehensive income to $548 million from $979 million included a $673 million after-tax reduction in net unrealized investment gains.
- Favorable net prior-year development across the specified segments totaled $160 million in 2013, versus $251 million in 2012. The P&C reserve reconciliation separately reports $115 million of favorable prior-year claim development.
Outlook, management commentary, risks and unusual items
- No quantified earnings or premium guidance is provided. Management said existing cash flows were sufficient for current and expected working-capital and debt needs in the near term.
- On February 10, 2014, CNA agreed to sell most of its run-off annuity and pension-deposit business. The sale, subject to approvals and closing conditions, was expected to close in the first half of 2014. CNA disclosed an expected after-tax impairment of approximately $220 million in first-quarter 2014; the business had $3.4 billion of gross reserves at year-end.
- The A&EP loss portfolio transfer with National Indemnity Company has a $4 billion limit. Cumulative ceded amounts exceeded the $2.2 billion consideration in 2013, creating a $189 million deferred pretax gain to be recognized in future periods as recoveries occur. CNA reported a $3.1 billion collateral trust securing the arrangement and a Berkshire Hathaway guarantee, subject to the transaction terms.
- Long-tail claim reserves are inherently uncertain. CNA’s sensitivity analysis estimated that a 9% increase in severity for specified Specialty products could increase net reserves by about $550 million; a 100-basis-point increase in workers’ compensation claim-cost inflation could add about $400 million. For long-term care, a 100-basis-point discount-rate decline could reduce pretax income by an estimated $1.041 billion and a 10% morbidity increase by $724 million, after existing reserve margins.
- Other material exposures include catastrophe frequency and severity, asbestos and environmental claims, reinsurance and deductible recoverability, low interest rates, investment valuation and liquidity, regulatory capital and dividend restrictions, and competitive pricing. The Terrorism Risk Insurance Program was scheduled to expire December 31, 2014 unless reauthorized.
- CNA declared and paid $0.80 per common share in 2013. In February 2014, the Board declared a $0.25 quarterly dividend and a $1.00 special dividend. The $250 million revolving credit facility was undrawn; CCC had no FHLB borrowings. CCC statutory capital and surplus was reported at approximately 265% of company-action-level RBC.
Important facts for investors to verify
- Whether CNA Commercial’s combined ratio falls below 100% and whether current accident-year underwriting gains persist without relying on reserve releases.
- Whether long-tail, workers’ compensation and long-term-care reserves remain adequate as claims, inflation, morbidity and interest-rate experience develops.
- The closing terms and final financial impact of the annuity and pension-deposit business sale, including the expected impairment and transfer of reserves.
- The recoverability, collateral and limit utilization of the A&EP reinsurance agreement, and the timing of deferred-gain recognition.
- Investment returns and liquidity, especially limited-partnership performance and withdrawal restrictions, and the effect of market-rate changes on assets and liabilities.
- Insurance-subsidiary dividend capacity, statutory capital and ratings, given CNAF’s reliance on subsidiary distributions to meet holding-company needs.