CNA Financial Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing; it also reports fourth-quarter results. CNA is a property and casualty and run-off life and group insurer. Loews Corporation owned approximately 89.6% of CNA’s common stock at year-end.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenues | $10.808 billion | $10.767 billion |
| Net earned premiums | $7.649 billion | $7.428 billion |
| Net investment income | $1.935 billion | $2.118 billion |
| Net income | $690 million | $1.000 billion |
| Diluted earnings per share | $2.53 | $3.67 |
| Core income (non-GAAP) | $735 million | $979 million |
| Net cash provided by operating activities | $1.775 billion | $1.140 billion |
- Net income declined 31%; core income fell 25%. Higher catastrophe losses and lower investment income were principal pressures, partly offset by improved non-catastrophe current-year underwriting in property and casualty operations.
- Net catastrophe losses were $550 million, versus $179 million in 2019: $294 million primarily from severe weather, $195 million from COVID-19 and $61 million from civil unrest. Net prior-year reserve development was favorable by $20 million, compared with $73 million favorable in 2019.
- Segment combined ratios were 93.5% for Specialty, 106.9% for Commercial and 102.4% for International. Commercial’s ratio worsened from 100.8%; Specialty’s from 90.2%; International’s from 101.8%. A ratio above 100% indicates underwriting losses before investment income.
- Total investments were $50.293 billion; total assets were $64.026 billion; insurance reserves were $41.143 billion; and stockholders’ equity was $12.707 billion. Book value per share was $46.82, up from $45.00.
- Debt carrying value was $2.776 billion. Cash was $419 million and short-term investments were $1.907 billion. CNA reported no borrowings under its $250 million revolving credit facility or from the Federal Home Loan Bank of Chicago.
Material changes and notable items
- COVID-19 reduced some insured exposures and estimated audit premiums, while contributing to claims, litigation and market uncertainty. CNA recorded $195 million of pandemic-related catastrophe losses; it stated the estimate remained subject to substantial uncertainty.
- Investment income fell 9%, reflecting lower fixed-income yields and lower limited-partnership and common-stock returns. CNA reported a $54 million net investment loss, compared with a $29 million gain in 2019.
- Specialty and Commercial grew gross written premiums excluding third-party captives, supported by higher rates and new business. Commercial’s results also included $43 million of unfavorable prior-year reserve development, including a $50 million charge for mass-tort exposures, primarily New York reviver-statute claims.
- The long-term-care gross premium valuation identified a $74 million pretax deficiency, primarily from lower expected reinvestment rates; the resulting after-tax charge was $59 million. The comparable 2019 after-tax charge was $170 million.
- CNA issued $500 million of 2.05% senior notes due 2030 and redeemed $400 million of 5.75% notes due 2021. It paid $950 million of common dividends in 2020, including a $2.00-per-share special dividend.
- A legacy excess workers’ compensation reinsurance transaction with Cavello closed February 5, 2021. CNA ceded approximately $690 million of net liabilities, subject to a $1 billion limit, and expected an approximately $12 million after-tax loss in first-quarter 2021.
- CNA recorded a $14 million reduction in earned premiums in anticipation of refunds after identifying experience-rating calculation discrepancies on certain general liability policies. Possible fines or penalties were disclosed, but no amount could be estimated.
Outlook, risks and contingencies
Management said it believed the predominant financial effects of the pandemic had been incurred by year-end, but emphasized that the duration and magnitude of remaining impacts could not be determined. The filing provides no specific earnings or revenue guidance. CNA stated that current cash flows were expected to meet near-term working-capital and debt needs.
- Key uncertainties include COVID-19 claims and coverage litigation, economic effects on premiums and insured exposures, and regulatory actions such as premium refunds or changes to coverage requirements.
- Reserve adequacy is a major risk, particularly for long-tail property and casualty claims, long-term care, asbestos and environmental claims, and mass tort exposures. CNA’s sensitivity analysis estimated that a 9% increase in severity for specified professional, management liability and surety products could raise net reserves by approximately $400 million; a 100-basis-point increase in workers’ compensation claim-cost inflation could raise net reserves by approximately $350 million.
- Investment risks include low interest rates, credit losses, market volatility and limited liquidity in some partnership investments. CNA estimated a $3.026 billion decline in asset fair value under a modeled 100-basis-point interest-rate increase, before considering liability and accounting offsets.
- CNA depends on dividends from regulated insurance subsidiaries to fund holding-company obligations. CCC paid CNAF $975 million in 2020; ordinary subsidiary dividends are subject to regulatory limits and approvals.
- The legacy asbestos and environmental loss portfolio transfer with NICO had a $4 billion aggregate limit; cumulative amounts ceded were $3.3 billion at year-end. CNA disclosed continued potential exposure if limits are exceeded, uncovered claims arise, or counterparties fail to perform.
- Other risks include catastrophe and reinsurance availability, cybersecurity and operational disruption, ratings changes, regulatory compliance, Brexit-related costs, and CNA’s control by Loews.
Important facts for investors to verify
- How COVID-19 claims, litigation and audit-premium adjustments develop, and whether the $195 million pandemic-loss estimate changes.
- Whether property and casualty reserve development remains favorable, especially in commercial general liability, mass torts and long-tail lines.
- Long-term-care reserve assumptions, future premium-rate approvals and the next gross premium valuation expected in the third quarter of 2021.
- Commercial underwriting performance and the path of its combined ratio, alongside the effect of rate increases and retention trends.
- Investment income, portfolio credit quality and liquidity, including the effect of low rates and private investment commitments.
- The status and financial impact of the Cavello transaction and the general liability premium refunds, including any regulatory penalties.
- Dividend capacity and holding-company liquidity given regulated subsidiary distributions and CNA’s debt obligations.