CNA Financial Corporation — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. CNA is an insurance holding company focused primarily on commercial property and casualty insurance, with warranty services and a run-off long-term-care business. Loews Corporation owned approximately 90% of CNA’s common stock at year-end.
Financial performance and position
| Metric | 2022 | 2021 |
|---|---|---|
| GAAP total revenue | $11.879 billion | $11.908 billion |
| Net earned premiums | $8.667 billion | $8.175 billion |
| Net investment income | $1.805 billion | $2.159 billion |
| Net income | $894 million | $1.202 billion |
| Diluted earnings per share | $3.28 | $4.41 |
| Core income (non-GAAP) | $1.048 billion | $1.106 billion |
| Net cash provided by operating activities | $2.502 billion | $1.997 billion |
Net investment losses were $199 million in 2022, versus $120 million of gains in 2021. Core income excludes after-tax investment gains and losses and is a non-GAAP measure. Total assets were $60.927 billion, total liabilities $52.102 billion, and stockholders’ equity $8.825 billion at year-end. Equity fell from $12.809 billion, largely reflecting a $3.877 billion other comprehensive loss; accumulated other comprehensive loss was $3.557 billion versus income of $320 million a year earlier.
Total investments were $43.177 billion, down from $50.328 billion. Fixed maturities had $3.404 billion of net unrealized losses at year-end, primarily attributed by the Company to interest-rate changes and wider credit spreads. Debt was $2.781 billion carrying value ($243 million short-term and $2.538 billion long-term). Cash was $475 million. CNA reported no borrowings on its $250 million revolving credit facility and said current cash flows were sufficient for expected working-capital and debt needs.
Consolidated catastrophe losses, net of reinsurance, declined to $247 million from $397 million. The Company recorded $32 million of favorable net prior-year reserve development, versus $11 million unfavorable in 2021. Net claim and claim-adjustment reserves were $19.908 billion; gross reserves were $25.099 billion.
Business trends and material changes
- Property & Casualty Operations: Core income increased $56 million overall, supported by improved underwriting and higher fixed-income investment income, partly offset by weaker limited-partnership and common-stock results.
- Commercial: Core income rose to $466 million from $394 million. The combined ratio improved to 97.3% from 103.1%, mainly due to lower catastrophe losses and better prior-year development. Net earned premiums increased to $3.923 billion.
- Specialty: Core income declined to $668 million from $704 million, primarily reflecting lower investment income. The combined ratio was 88.6%, compared with 88.7%.
- International: Core income rose to $106 million from $86 million; the combined ratio improved to 91.8% from 94.8%. Foreign-exchange movements were a headwind.
- Life & Group: Core results declined to a $9 million loss from $126 million income, mainly because limited-partnership investment income fell. Long-term-care claim reviews produced a $25 million pretax reserve reduction, including release of remaining COVID-19-related IBNR reserves, partly offset by higher claim severity and care-cost inflation.
- Net investment income from limited partnerships and common stocks moved to a $31 million loss from $402 million of income. Fixed-income income increased to $1.829 billion from $1.750 billion.
- The fourth-quarter novation of the legacy annuity block reduced associated gross and ceded future-policy-benefit reserves. 2022 dividends were $3.60 per share, including a $2.00 special dividend; the Board subsequently declared a $0.42 quarterly dividend and $1.20 special dividend, payable in March 2023.
Outlook, risks and unusual items
- No full-year earnings or revenue guidance is provided. CNA anticipated a 2023 net pension cost of approximately $12 million, compared with a $55 million pension benefit in 2022; management expected some adverse effect on the expense ratio.
- Beginning January 1, 2023, CNA planned to adopt long-duration insurance accounting changes (ASU 2018-12). The Company estimated an approximately $2.3 billion decrease to AOCI at the January 1, 2021 transition date under its expected transition calculation; using rates at December 31, 2022 would imply an approximately $250 million decrease. The change does not affect statutory capital and surplus, cash flows, or underlying business economics, according to the filing.
- Key uncertainties include long-tail casualty reserve adequacy, social and economic inflation, long-term-care morbidity and persistency, the timing and approval of premium increases, catastrophe frequency and severity, climate-related exposures, and reinsurance availability and collectibility. CNA’s stated reserve sensitivities include an estimated $500 million increase in net reserves for a 9% increase in severity for specified professional, management-liability and surety products; $350 million for a 100-basis-point increase in workers’ compensation claim-cost inflation; and $200 million for a 6% increase in general-liability severity.
- Long-term-care reserves remain sensitive to assumptions. A hypothetical 5% increase in morbidity was estimated to reduce pretax income by $500 million after considering the existing margin; the September 2022 reserve valuation showed an estimated $125 million margin.
- The 2010 asbestos and environmental loss portfolio transfer to NICO had a $4 billion aggregate limit; cumulative amounts ceded were $3.5 billion at year-end. The Company also identified legacy mass-tort exposure, including abuse-related claims; 2022 Corporate & Other recorded $64 million of unfavorable prior-year development, largely associated with legacy mass tort claims.
- CNA disclosed a March 2021 ransomware attack that disrupted systems and involved copying some personal information. It does not expect its cyber-insurance coverage to cover all cyber-attack losses and expects higher future coverage costs. Other risks include COVID-related claims and litigation, market and investment volatility, regulatory changes, competition, and potential conflicts related to Loews control.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective. The auditor identified property-and-casualty claim reserves and long-term-care future-policy-benefit reserves as critical audit matters.
Investor verification priorities
- Assess reserve adequacy and development by segment and line, particularly casualty severity, workers’ compensation inflation, legacy mass tort, asbestos and environmental exposures, and long-term care.
- Review the 2023 adoption effects of ASU 2018-12, including AOCI and earnings impacts, alongside the assumptions underlying the stated transition estimates.
- Evaluate fixed-income unrealized losses, portfolio credit quality and liquidity, and the volatility and liquidity of limited-partnership investments.
- Verify reinsurance recoverables, collateral and counterparty performance, including remaining limits and protections under the NICO and Cavello loss portfolio transfers.
- Monitor statutory capital and dividend capacity: CCC paid CNAF $990 million in 2022, while insurance-subsidiary dividends are subject to regulatory limits and approvals.
- Consider dividend sustainability, given the special dividends, and governance implications of Loews’ approximately 90% ownership.