CNA Financial Corporation — FY 2011 Form 10-K
Business and reporting period. CNA is an insurance holding company, approximately 90% owned by Loews Corporation. Its core businesses are commercial property and casualty insurance (CNA Specialty and CNA Commercial); life, group and certain property and casualty operations are managed as non-core/run-off businesses. This filing covers the fiscal year ended December 31, 2011; the filing also reports fourth-quarter results.
Financial performance and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenues | $8.947 billion | $9.209 billion |
| Net income attributable to CNA | $614 million | $690 million |
| Basic and diluted EPS attributable to common stockholders | $2.28 | $2.28 |
| Net earned premiums | $6.603 billion | $6.515 billion |
| Net investment income | $2.054 billion | $2.316 billion |
| Net operating cash flow, total | $1.702 billion | $(89) million |
| Total investments | $44.373 billion | $42.655 billion |
| Total assets | $55.179 billion | $55.331 billion |
| Insurance reserves | $37.554 billion | $37.590 billion |
| Short- and long-term debt | $2.608 billion | $2.651 billion |
| CNA stockholders’ equity | $11.557 billion | $10.954 billion |
| Book value per common share | $42.92 | $40.70 |
Fourth-quarter 2011 net income attributable to CNA was $190 million and EPS was $0.70. The quarter included a $115 million after-tax payout-annuity reserve charge.
Core underwriting and segment results
- CNA Specialty: Net operating income was $519 million, down from $625 million. Net written premiums rose to $2.872 billion; the combined ratio deteriorated to 89.9% from 85.0%. Rates were flat and retention was 86%.
- CNA Commercial: Net operating income was $369 million, down from $509 million. Net written premiums increased to $3.350 billion; the combined ratio rose to 105.7% from 102.9%, indicating underwriting losses before investment income. Rates increased 2% and retention was 79%.
- Core segments recorded $428 million of favorable net prior-year development in 2011, versus $600 million in 2010. Consolidated P&C catastrophe losses were $222 million, up from $121 million.
Changes versus the prior year
- Net income fell $76 million year over year. Management attributed weaker operating results principally to lower investment income, less favorable prior-year reserve development, higher catastrophe losses and weaker non-core results. The 2010 comparison included a $365 million after-tax loss on the A&EP loss portfolio transfer; excluding that transaction, management reported a substantially larger year-over-year decline in net income.
- Net earned premiums grew $88 million, while total revenues declined, reflecting lower investment income and investment gains. Net investment income fell $262 million, driven mainly by lower limited-partnership returns and lower fixed-income reinvestment yields.
- Operating cash flow improved markedly, but the comparison is affected by the 2010 A&EP transaction and other cash-flow movements. 2011 cash flow included $547 million of net cash inflows from reinsurance commutations; management estimated cash generated by business operations, excluding specified items, at approximately $1.215 billion.
- During 2011 CNA acquired the remaining noncontrolling interest in CNA Surety for approximately $475 million, making it wholly owned, and sold its 50% interest in First Insurance Company of Hawaii, with a modest after-tax loss. The company paid $0.40 per share in common dividends and resumed dividends after none in 2010.
Outlook, risks and unusual items
- Management said existing cash flows were sufficient for current and expected working-capital and debt needs, with no near-term change expected. No quantified earnings or premium guidance was provided.
- The $250 million revolving credit facility was undrawn at year-end and scheduled to expire in August 2012. CNA reported compliance with debt covenants. Insurance-subsidiary dividends to the parent are subject to statutory limits and, in some cases, regulatory approval; CCC had approximately $990 million of potential 2012 ordinary dividend capacity, subject to management’s decision and regulatory requirements.
- The 2011 payout-annuity reserve assumption update increased reserves by $166 million pretax, including a $115 million after-tax loss recognized in the fourth quarter. A further $33 million after-tax increase was recorded for long-term-care claim reserves. Management’s sensitivities illustrate material exposure to changes in claims severity, workers’ compensation inflation, annuity discount rates and mortality, and long-term-care assumptions.
- Substantially all legacy asbestos and environmental pollution liabilities were ceded to Berkshire Hathaway subsidiary National Indemnity under a 2010 agreement with a $4 billion aggregate limit. At year-end, $2.3 billion of the limit remained available on an incurred basis. CNA retains risk for amounts above the limit, uncovered exposures, or counterparty nonperformance.
- Investment risks include credit and market volatility, low reinvestment rates, limited-partnership illiquidity, and mortgage-backed securities. Fixed maturities were 92% investment grade; gross unrealized losses on available-for-sale fixed maturities were $536 million. The filing identifies catastrophe, reserve adequacy, reinsurance collectibility, competition, regulation, ratings and capital access as significant risks.
- Ratings were A.M. Best A for the property and casualty groups and A.M. Best A- for the life company; S&P revised its outlook to positive from stable in 2011. The filing states a downgrade could impair distribution, increase collateral requirements or raise financing costs.
- Auditors issued an unqualified opinion on the financial statements and internal control over financial reporting. CNA estimated adoption of a new insurance acquisition-cost standard in 2012 would reduce year-end 2011 stockholders’ equity by approximately $70 million after tax.
Important facts for investors to verify
- How much of 2011 earnings depended on favorable prior-year reserve development, and whether current-year loss-cost trends are being matched by earned rate increases.
- The assumptions and sensitivity ranges underpinning payout-annuity and long-term-care reserves, including the fourth-quarter reserve charge and any further premium deficiencies.
- Remaining protection and counterparty performance under the A&EP reinsurance agreement, including the $4 billion limit and remaining capacity.
- The quality, liquidity and impairment exposure of investments, particularly limited partnerships, asset-backed securities and European holdings.
- Parent-company liquidity and dividend capacity after the CNA Surety acquisition, alongside the revolving facility’s August 2012 expiration and insurance-subsidiary dividend restrictions.