CNA Financial Corporation — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. CNA is an insurance holding company focused on commercial property and casualty insurance, with run-off long-term-care and other non-core businesses. Loews Corporation owned approximately 90% of CNA at year-end.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $9.692 billion | $9.932 billion |
| Net earned premiums | $7.212 billion | $7.271 billion |
| Net investment income | $2.067 billion | $2.282 billion |
| Income from continuing operations | $888 million | $915 million |
| Net income | $691 million | $937 million |
| Diluted EPS | $2.55 | $3.47 |
| Operating cash flow | $1.440 billion | $1.204 billion |
| Total investments | $46.262 billion | $46.107 billion |
| Total assets | $55.566 billion | $57.194 billion |
| Long-term debt | $2.559 billion | $2.011 billion |
| CNA stockholders’ equity | $12.794 billion | $12.651 billion |
2014 net income included a $197 million loss from discontinued operations, principally a $211 million after-tax loss on the sale of Continental Assurance Company (CAC). Continuing-operations income was down 3% year over year; net income fell about 26%. Cash used in investing activities was $918 million and cash used in financing activities was $519 million. Year-end cash was $190 million.
Net operating income from continuing operations, CNA’s non-GAAP operating measure, was $849 million, down from $901 million. Pretax operating income was $1.150 billion. Favorable net prior-year development was $53 million for Specialty, Commercial, International and Corporate & Other Non-Core combined, versus $160 million in 2013. Property and casualty catastrophe losses were $156 million net of reinsurance, compared with $169 million in 2013.
Material changes and segment trends
- Specialty: Net operating income declined to $634 million from $668 million. Net earned premiums increased 2% to $2.838 billion; the combined ratio edged up to 87.6% from 87.1%. Favorable prior-year development was $149 million, down from $210 million.
- Commercial: Net operating income declined to $307 million from $448 million. Net earned premiums fell 3% to $2.906 billion, and the combined ratio was 109.3% versus 109.5%. Unfavorable prior-year development was $156 million, compared with $114 million. 2013 results included a $31 million after-tax legal settlement benefit.
- International: Net operating income was unchanged at $69 million; the combined ratio improved to 92.4% from 93.1%. Net written premiums decreased, partly reflecting a Hardy commutation and termination of a Canadian managing general underwriter relationship.
- Non-core: Life & Group Non-Core reported a $69 million operating loss, while Corporate & Other Non-Core reported a $92 million operating loss. Corporate results included a $56 million after-tax postretirement-plan curtailment benefit, largely offset by a $55 million after-tax pension settlement charge.
Management realigned reporting in the fourth quarter: CNA Europe and Canada were moved into International, and prior segment disclosures were conformed. CAC was sold on August 1, 2014. A separate 100% coinsurance transaction involving a small annuity block generated a $34 million after-tax operating loss.
Liquidity, capital and shareholder returns
- Management said existing cash flows were sufficient for expected working-capital and debt needs. No amounts were outstanding under the $250 million revolving credit facility or through the Federal Home Loan Bank of Chicago.
- Insurance subsidiaries paid CNAF $650 million in dividends in 2014. CNA reported CCC statutory capital and surplus of $11.155 billion, approximately 270% of company-action-level risk-based capital.
- 2014 common dividends were $2.00 per share, including a $1.00 special dividend. In February 2015, the board declared a $0.25 quarterly dividend and a $2.00 special dividend.
- Investment-grade securities represented 93% of the fixed-maturity portfolio at year-end. A 100-basis-point rate increase was estimated to reduce the fair value of total securities by $2.674 billion; this sensitivity is not a forecast of realized losses.
- Ratings at year-end included A.M. Best A, Moody’s A3 and S&P A for the CCC group; all three agencies maintained stable outlooks. CNAF senior debt ratings were bbb, Baa2 and BBB, respectively.
Outlook, risks and unusual items
The filing provides no specific earnings or premium guidance. Management cited competitive market conditions and lower new-business levels, particularly in Commercial, alongside continuing rate increases. Commercial’s average renewal rate increase slowed to 5% in 2014 from 9% in 2013; Specialty’s increase slowed to 3% from 6%.
- Reserves: Loss reserves depend on estimates of claim frequency, severity, inflation, legal trends and settlement patterns. CNA reported net carried property and casualty claim reserves of $18.927 billion. Management stated carried reserves were modestly above actuarial point estimates. Sensitivity analysis indicated that specified adverse changes could raise net reserves by about $500 million for professional/management liability severity, $400 million for workers’ compensation inflation, or $200 million for general-liability severity.
- Long-term care: The active-life reserve margin was approximately $100 million at year-end, down about $250 million. Hypothetical assumption changes could reduce pretax income by $640 million for a 50-basis-point discount-rate decline or $474 million for a 5% morbidity increase, after considering the existing margin. Results depend on actual experience and regulatory approval of premium increases.
- Asbestos and environmental pollution: The fourth-quarter 2014 reserve review was incomplete pending further reinsurance analysis; CNA expected completion in the first half of 2015. Under the NICO loss portfolio transfer, cumulative ceded amounts were $2.5 billion against a $4 billion aggregate limit; $176 million of deferred retroactive reinsurance benefit remained unrecognized at year-end. The collateral trust fair value was $3.4 billion, and Berkshire Hathaway guaranteed specified NICO obligations.
- Other exposures: Risks include catastrophes and terrorism, reinsurance and deductible receivable collectibility, low interest rates and investment-market volatility, regulatory limits on subsidiary dividends, cybersecurity and operational disruption, and potential reserve strengthening. CNA disclosed routine litigation that it did not consider material. It also disclosed approximately $1.9 billion of potential guarantees relating to structured-settlement annuities, which management said were unlikely to require payment.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Completion and findings of the expected 2015 asbestos/environmental reserve review, and subsequent development of the NICO recoveries and remaining deferred benefit.
- Whether long-term-care assumptions, premium-rate approvals and the reduced reserve margin remain adequate as experience develops.
- Commercial reserve development, premium retention and pricing trends, and whether current underwriting improvement offsets lower investment income.
- The quality and liquidity of investment returns, especially limited-partnership performance and exposure to interest-rate or credit-market changes.
- Post-CAC-sale balance-sheet comparability, future subsidiary dividend capacity, and the effect of special dividends on holding-company liquidity and capital.