CNA Financial Corporation — FY2017 Form 10-K
Reporting period: Year ended December 31, 2017. CNA is an insurance holding company focused mainly on commercial property-and-casualty insurance, with run-off long-term-care operations. Loews Corporation owned approximately 89% of CNA’s common stock. Financial amounts are in U.S. dollars; amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Total revenue | $9,542 | $9,366 | Up 1.9%; includes realized investment gains |
| Net earned premiums | $6,988 | $6,924 | Up 0.9% |
| Net investment income | $2,034 | $1,988 | Up 2.3%, supported by limited-partnership returns |
| Net income | $899 | $859 | Up 4.7%; diluted EPS was $3.30 versus $3.17 |
| Core income (non-GAAP) | $919 | $824 | Up $95; excludes realized investment results and the tax remeasurement |
| Operating cash flow | $1,254 | $1,416 | Down $162 |
| Total assets / equity | $56,567 / $12,244 | $55,233 / $11,969 | Book value per share was $45.15, up from $44.25 |
| Total debt | $2,858 | $2,710 | Includes $150 short-term debt and $2,708 long-term debt |
Operating revenues were $9,449, excluding $93 of net realized investment gains. Net cash used in investing and financing activities was $424 and $755, respectively. Cash at year-end was $355. Management said available cash flows were sufficient for expected working-capital and debt needs; no borrowings were outstanding under the $250 revolving credit facility or from the Federal Home Loan Bank. Insurance reserves totaled $37,212, including $22,004 of claim and claim-adjustment reserves and $11,179 of future policy benefits.
Underwriting and material year-over-year changes
- Property-and-casualty core income declined $23 to $959, mainly because of higher catastrophe losses, partly offset by better non-catastrophe current-year underwriting. Consolidated net catastrophe losses were $380 pretax, versus $165 in 2016; $256 related to Hurricanes Harvey, Irma and Maria.
- Favorable net prior-year development across Specialty, Commercial, International and Corporate & Other was $312 pretax, compared with $314 in 2016. Life & Group also recorded $79 of favorable prior-year development.
- Specialty: core income was $610 (down $40); combined ratio was 88.0%, versus 85.0%. Catastrophe losses and lower favorable reserve development weighed on results.
- Commercial: core income was $341 (up $30); combined ratio improved to 103.7% from 105.8%, but remained above 100%. Catastrophe losses were $267, or 9.4 points of the loss ratio. Favorable prior-year development was $59, versus $53 unfavorable in 2016.
- International: core income fell to $8 from $21; combined ratio rose to 104.8% from 99.1%, reflecting higher catastrophe losses and lower favorable development.
- Life & Group: core income improved to $50 from $20, principally on favorable morbidity and higher claim-reserve releases, partly offset by unfavorable persistency. This segment primarily comprises run-off long-term-care business.
- Corporate & Other core loss narrowed to $90 from $178, mainly due to lower adverse A&EP reserve development under the loss portfolio transfer.
Outlook, risks and notable items
- Tax reform: The enacted reduction in the federal corporate tax rate from 35% to 21% caused an $83 non-cash tax expense in 2017. Management expects lower future effective taxes and improved after-tax earnings and cash flow. It also reduced the tax benefit supporting long-term-care reserve discount assumptions.
- Long-term-care reserves: The 2017 gross premium valuation showed a $246 margin in recorded reserves over indicated required reserves. Outcomes remain sensitive to morbidity, persistency, interest rates and approved premium increases. Hypothetical 5% higher morbidity would reduce pretax income by an estimated $408 after the existing margin; a 100-basis-point decline in future interest rates would reduce it by $633.
- Claims and reinsurance: Management states carried P&C reserves are modestly above actuarial point estimates, but reserve estimates are uncertain, particularly for long-tail claims. Net reserves have material sensitivities to claim severity and workers’ compensation inflation. CNA’s A&EP transfer to NICO has a $4 billion aggregate limit; cumulative ceded amounts were $2.9 billion at year-end. The filing identifies counterparty performance and uncovered or excess-limit claims as risks.
- Commercial premium refunds: Rating errors in Small Business led to $36 of adverse premium development and $7 of interest expense in 2017. An estimated $60 liability, including interest, remained for workers’ compensation refunds expected in 2018. Potential fines or penalties were considered reasonably possible but not expected to be material.
- Dividend and capital: CNA declared $3.10 per common share in 2017, including a $2.00 special dividend. In February 2018, the board declared a $0.30 quarterly dividend and another $2.00 special dividend. Future dividends remain subject to board discretion, subsidiary dividend limits and business needs. CCC statutory capital and surplus was $10.726 billion, approximately 264% of company-action-level RBC.
- Other risks and outlook: The filing gives no quantified earnings or revenue guidance. Key risks include catastrophe and systemic losses, reserve adequacy, investment-market volatility, reinsurance collectibility, competition, regulatory changes, cybersecurity and operational disruption. CNA expected Brexit to require changes to its European platform and had begun establishing a Luxembourg subsidiary, with added compliance complexity and cost anticipated.
- Accounting and oversight: Adoption of revenue-recognition guidance in 2018 was expected to reduce retained earnings by about $65 at transition and gross up annual revenue and expenses by about $500, with no material effect on results or financial position expected. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether P&C favorable prior-year reserve development persists and whether long-tail claims emerge within recorded estimates.
- Long-term-care experience and reserve margin, especially morbidity, policy persistency, discount rates and regulator-approved rate increases.
- Catastrophe loss development, reinsurance recoveries and remaining capacity under the NICO A&EP agreement.
- Commercial underwriting profitability and the completion and final cost of Small Business policyholder refunds.
- Cash generation, debt service and dividend capacity given reliance on regulated insurance-subsidiary distributions.
- Actual effects of tax reform, accounting-standard adoption and Brexit-related restructuring compared with management’s expectations.