CNA FINANCIAL CORP annual report, FY2022

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

Metric20222021
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

  1. 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.
  2. Review the 2023 adoption effects of ASU 2018-12, including AOCI and earnings impacts, alongside the assumptions underlying the stated transition estimates.
  3. Evaluate fixed-income unrealized losses, portfolio credit quality and liquidity, and the volatility and liquidity of limited-partnership investments.
  4. Verify reinsurance recoverables, collateral and counterparty performance, including remaining limits and protections under the NICO and Cavello loss portfolio transfers.
  5. Monitor statutory capital and dividend capacity: CCC paid CNAF $990 million in 2022, while insurance-subsidiary dividends are subject to regulatory limits and approvals.
  6. Consider dividend sustainability, given the special dividends, and governance implications of Loews’ approximately 90% ownership.