CNA Financial Corporation — FY 2015 Form 10-K
Business context and reporting period
Annual report for the year ended December 31, 2015. CNA is a property-and-casualty insurance holding company, with core Specialty, Commercial and International operations and non-core long-term-care and run-off businesses. Loews Corporation owned approximately 90% of CNA at year-end. CNA completed the sale of Continental Assurance Company (CAC) in August 2014; 2015 results are from continuing operations.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $9.101 billion | $9.692 billion |
| Net earned premiums | $6.921 billion | $7.212 billion |
| Net investment income | $1.840 billion | $2.067 billion |
| Net operating income | $515 million | $849 million |
| Net income | $479 million | $691 million |
| Diluted EPS | $1.77 | $2.55 |
| Operating cash flow | $1.387 billion | $1.440 billion |
| Total assets / stockholders’ equity | $55.047 billion / $11.756 billion | $55.566 billion / $12.794 billion |
| Total debt | $2.562 billion | $2.559 billion |
- Core segment combined ratios: Specialty 88.7% (87.6% in 2014), Commercial 101.5% (109.3%), and International 97.6% (92.4%). A ratio below 100% generally indicates underwriting profit.
- Cash and short-term investments totaled approximately $2.047 billion at year-end. CNA reported no borrowings on its $250 million revolving credit facility or from the Federal Home Loan Bank of Chicago; management said existing cash flows were sufficient for expected working-capital and debt needs.
- Common dividends declared were $3.00 per share, including a $2.00 special dividend. Book value per share was $43.49, down from $47.39.
Material changes versus 2014
- Net operating income fell $334 million. Core operating income declined $44 million, mainly because of lower investment income, partly offset by better underwriting; non-core results declined $290 million.
- Long-term-care results included a $296 million pretax premium-deficiency charge and a $9 million claim-reserve deficiency; the combined after-tax effect was $198 million. CNA wrote off the $289 million long-term-care deferred acquisition cost asset and increased active-life reserves by $7 million.
- Net investment income fell $227 million before tax, principally reflecting limited-partnership returns of 3.0% versus 9.7% in 2014. CNA also recorded a $67 million pretax net realized investment loss, compared with a $57 million gain in 2014.
- Commercial underwriting improved materially, while Specialty’s combined ratio worsened modestly and International’s worsened due to large losses and less favorable development. Catastrophe losses were $141 million net of reinsurance, versus $156 million in 2014.
- Other comprehensive loss was $715 million, largely reflecting a $552 million after-tax decline in unrealized gains on investments. CNA’s GAAP stockholders’ equity decreased by $1.038 billion.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said it expected liquidity to remain sufficient in the near term; future common dividends remain subject to the board’s discretion and insurance-subsidiary dividend limits.
- Long-term-care active-life reserves now reflect management’s best estimates with no margin for adverse deviation. The filing identifies morbidity, persistency, interest rates and regulatory approval of future premium increases as important uncertainties; further adverse experience could require additional charges.
- Property-and-casualty reserves are estimates subject to claim severity, inflation, medical costs, litigation and other uncertainties. Prior-year development was favorable by $218 million pretax in the core and Corporate & Other segments; workers’ compensation development was unfavorable by $80 million in Commercial.
- Legacy asbestos and environmental pollution liabilities are covered by a 2010 loss portfolio transfer with NICO, subject to a $4 billion aggregate limit. Cumulative amounts ceded were $2.6 billion at year-end; the company noted uncertainty around recoveries, coverage and counterparty performance.
- Investment risks include interest-rate, credit, equity and foreign-currency movements. Fixed-maturity securities had $7.950 billion of fair value in an unrealized-loss position, with $388 million of gross unrealized losses; CNA said it did not intend, and was not more likely than not required, to sell those securities before recovery.
- An accounting estimate change adopted in Q4 2015 for callable fixed-maturity securities reduced 2015 net investment income and amortized cost by $39 million and EPS by $0.09. Q4 net loss was $70 million, including the long-term-care premium-deficiency charge.
- CNA reported effective internal control over financial reporting and received an unqualified audit opinion. The filing describes routine litigation as not material based on information then known.
Key facts for investors to verify
- Whether long-term-care morbidity, persistency and approved premium-rate increases track the assumptions now embedded in reserves.
- How much future reserve development may arise in workers’ compensation, professional liability, general liability and asbestos/environmental claims.
- The collectibility and timing of reinsurance recoveries, especially under the NICO loss portfolio transfer and other large recoverables.
- Whether limited-partnership investment returns and net investment income stabilize, and the effect of market movements on equity and liquidity.
- Subsidiary dividend capacity, near-term debt maturities, and the board’s subsequent dividend decisions.