CNA Financial Corporation — FY 2016 Form 10-K
Business context and reporting period
Annual report for the year ended December 31, 2016. CNA is a commercial property-and-casualty insurer with Specialty, Commercial and International core segments, plus run-off Life & Group and other non-core businesses. Loews Corporation owned approximately 90% of CNA at year-end.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $9.366 billion | $9.101 billion |
| Net earned premiums | $6.924 billion | $6.921 billion |
| Net investment income | $1.988 billion | $1.840 billion |
| Income from continuing operations / net income | $859 million | $479 million |
| Diluted EPS | $3.17 | $1.77 |
| Net operating income (non-GAAP) | $824 million | $515 million |
| Operating cash flow | $1.416 billion | $1.387 billion |
| Total assets / stockholders’ equity | $55.233 billion / $11.969 billion | $55.045 billion / $11.756 billion |
| Debt at year-end | $2.710 billion | $2.560 billion |
Net income increased 79% year over year, while revenue rose 3%. Net realized investment gains were $50 million, versus a $67 million loss in 2015. Total investments were $45.420 billion; cash was $271 million. Net cash used in investing and financing activities was $846 million and $673 million, respectively.
Segment combined ratios: Specialty 85.0% (2015: 88.7%); Commercial 105.8% (101.5%); International 99.1% (97.6%). A ratio below 100% generally indicates underwriting profit before investment income and other items. Favorable prior-year development across the property-and-casualty and run-off segments totaled $359 million pretax, including $314 million in the four segments included in CNA’s consolidated prior-year development measure and $45 million in Life & Group Non-Core.
Material changes and unusual items
- Net operating income improved $309 million, mainly because 2015 included a $198 million after-tax long-term-care reserve charge. The 2016 Life & Group Non-Core segment reported $20 million net operating income versus a $314 million loss in 2015; results are not directly comparable after the 2015 reserve assumption reset.
- Commercial underwriting weakened: its combined ratio rose 4.3 points, with higher current-year large losses and unfavorable prior-year development. Workers’ compensation reserve strengthening was a significant contributor.
- Specialty improved on favorable prior-year development, but its expense ratio rose 0.9 points. International profit declined, reflecting weaker underwriting and foreign-exchange losses.
- Catastrophe losses were $165 million net of reinsurance for 2016, versus $141 million in 2015; management cited U.S. weather events and the Fort McMurray wildfires.
- CNA issued $500 million of 4.50% senior notes due 2026 and redeemed $350 million of 6.50% notes due 2016. CCC paid $765 million in dividends to CNAF. CNA declared $3.00 per common share for 2016, including a $2.00 special dividend; a further $2.00 special dividend was declared in February 2017.
- A 2016 organization review eliminated about 370 positions and incurred $19 million of termination costs. CNA sold its Chicago headquarters building for $107 million and leased it back pending an expected 2018 relocation.
- CNA identified small-business package-product rating errors, recorded a $16 million earned-premium reduction and anticipated $30 million of refunds; additional 2017 refunds, fines or penalties were possible but not estimable.
Outlook, risks and contingencies
No quantitative earnings or premium guidance is provided. Management stated that current cash flows were sufficient for expected working-capital and debt needs in the near term. CNA reported no borrowings under its $250 million revolving credit facility or from the Federal Home Loan Bank of Chicago at year-end. The board declared a $0.25 quarterly dividend and $2.00 special dividend payable in March 2017; future dividends remain discretionary and depend partly on regulated subsidiary distributions.
- Reserves: Management says carried property-and-casualty reserves were modestly above actuarial point estimates, but estimates are highly uncertain. Sensitivity disclosures include a potential $400 million increase in workers’ compensation net reserves from a 100-basis-point increase in assumed claim-cost inflation. The long-term-care active-life reserve GPV margin was approximately $255 million; adverse assumption changes could materially reduce earnings.
- Asbestos and environmental claims: The NICO loss portfolio transfer has a $4 billion aggregate limit; cumulative ceded amounts reached $2.8 billion. CNA recorded $200 million of adverse A&EP development before the transfer and a $107 million retroactive reinsurance benefit in 2016. The unrecognized deferred benefit was $334 million at year-end. Counterparty performance, coverage and limits remain relevant risks.
- Other key exposures: Catastrophes, medical and claims inflation, investment-market and interest-rate volatility, reinsurance and policyholder credit risk, regulatory constraints on rates and subsidiary dividends, cybersecurity, and competitive pressures. CNA also noted that Brexit could require changes to its European operating platform and increase compliance costs.
- Contingencies: A 401(k) plan class action was in preliminary stages; loss was reasonably possible but not estimable. CNA reported approximately $1.9 billion of potential payments under guarantees for structured-settlement annuities, which management considered unlikely to be required because of supporting trust assets.
Important facts for investors to verify
- Whether favorable reserve development continues and whether current accident-year loss trends—especially Commercial and workers’ compensation—stabilize.
- Long-term-care reserve assumptions, achievement and regulatory approval of premium increases, and the adequacy of the $255 million GPV margin.
- Future A&EP reserve revisions, recoveries under the NICO agreement, and remaining protection versus the $4 billion limit.
- Final premium refunds and any regulatory findings, penalties or additional rating errors arising from the small-business issue.
- Insurer statutory capital and dividend capacity: CCC’s statutory capital was approximately 270% of company-action-level RBC; subsidiary dividends remain regulator-limited.
- Investment portfolio sensitivity, liquidity of limited partnerships, and debt maturities. The filing’s commitments table reports $3.519 billion of debt obligations including estimated future interest, distinct from $2.710 billion of year-end debt principal.