CNA

CNA Financial Corporation 2003 10-K Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2003. CNA Financial Corporation (CNA) is an insurance holding company primarily engaged in property and casualty (P&C) and life and group insurance operations. During 2003, CNA completed a strategic review and decided to concentrate efforts on its P&C business. Consequently, the company initiated a capital plan to replenish statutory capital following significant charges related to unfavorable net prior year development and increased provisions for reinsurance receivables. Major divestitures included the sale of the majority of its Group Benefits business to Hartford Financial Services Group, Inc. and an agreement to sell its individual life insurance business to Swiss Re.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Loss: CNA reported a net loss of $1,433 million in 2003, a decline of $1,588 million from the $155 million net income in 2002. The decline was primarily driven by:
  • Unfavorable Net Prior Year Development: $2,952 million pretax ($1,849 million after-tax) recorded in 2003, compared to $126 million in 2002. This included $2,409 million in claim reserve development and $543 million in premium development.
  • Bad Debt Provision: A $396 million after-tax increase in the provision for reinsurance and insurance receivables due to the deterioration of reinsurer financial strength ratings.
  • Catastrophe Losses: Increased by $55 million after-tax compared to 2002.
• Investment Results: Net realized investment results improved by $434 million after-tax in 2003 compared to 2002, driven by a reduction in impairment losses and increased realized gains, partially offset by a $130 million after-tax loss on the sale of the Group Benefits business.
• Premiums: Net earned premiums decreased $999 million in 2003, largely due to the transfer of the National Postal Mail Handlers Union group benefits plan in 2002 and increased ceded premiums related to reinsurance treaties.

Guidance, Outlook, and Risks

• Capital Plan: To address capital shortfalls, CNA sold $750 million of convertible preferred stock to Loews Corporation (its 90% owner) in November 2003. Loews also committed up to $650 million in additional capital support via surplus notes if asset sales (Group Benefits and Individual Life) did not generate sufficient surplus. As of February 2004, Loews had purchased $346 million in surplus notes.
• Divestitures:
  • Group Benefits: Sold to Hartford for approximately $530 million (completed Dec 31, 2003).
  • Individual Life: Agreed to sell to Swiss Re for approximately $690 million (expected completion by March 31, 2004).
  • CNA Re: Withdrew from assumed reinsurance business; sold renewal rights to Folksamerica.
• Restructuring: CNA implemented a $200 million expense reduction initiative, achieving a 5% workforce reduction and recording $28 million in severance costs in 2003.
• Risks and Contingencies:
  • APMT Reserves: Significant uncertainty remains regarding Asbestos, Environmental Pollution, and Mass Tort (APMT) claims. CNA recorded $795 million in unfavorable APMT development in 2003. Future reserve additions could be material.
  • Reinsurance Credit Risk: Increased allowance for doubtful accounts on reinsurance receivables ($573 million at year-end) due to downgrades of reinsurers like Trenwick and Gerling.
  • Legal Proceedings: Ongoing litigation regarding asbestos, environmental pollution, and mass tort claims, as well as wage and hour class actions.

Key Facts for Investor Verification

• Reserve Adequacy: Verify the adequacy of the $31.7 billion in claim and claim adjustment expense reserves, particularly the $1.77 billion net asbestos reserve and $577 million net environmental/mass tort reserve, given the high volatility and uncertainty in APMT claims.
• Reinsurance Recoverability: Assess the collectibility of the $16.3 billion in reinsurance receivables, noting the $573 million allowance for doubtful accounts and the specific exposure to downgraded reinsurers.
• Capital Plan Execution: Monitor the completion of the Individual Life sale to Swiss Re and the subsequent repayment of the surplus notes purchased by Loews, as this is critical to CNA's statutory capital position.
• Dividend Restrictions: Note that the principal P&C subsidiary, Continental Casualty Company (CCC), is in a negative earned surplus position, requiring regulatory approval for all dividends to the parent company.
• Related Party Transactions: Review the $55 million credit exposure to a national contractor (net of Loews participation) and the potential surety loss exposure of up to $200 million if the contractor fails to restructure successfully.