CNA Financial Corporation — FY 2018 Form 10-K
Business context and reporting period. CNA Financial Corporation is an insurance holding company primarily focused on commercial property and casualty insurance, with warranty services and a run-off long-term-care business. Loews Corporation owned approximately 89% of CNA at December 31, 2018. This annual filing covers the year ended December 31, 2018; fourth-quarter results are identified where provided.
Financial performance and condition
- Revenue and earnings: Total GAAP revenue was $10.134 billion, up 6.2% from $9.542 billion. Net income fell to $813 million from $899 million; diluted EPS was $2.98 versus $3.30. Core income, a non-GAAP measure, was $845 million, down from $919 million.
- Revenue comparability: Net earned premiums rose to $7.312 billion from $6.988 billion. Non-insurance warranty revenue increased to $1.007 billion from $390 million, substantially reflecting adoption of the new revenue-recognition standard and gross presentation of certain warranty transactions. The 2018 standard adoption reduced net income by $6 million and opening retained earnings by $66 million; prior-year amounts were not recast.
- Underwriting and segments: Specialty reported a combined ratio of 88.2% and core income of $629 million; Commercial’s combined ratio was 101.1% and core income was $357 million; International’s combined ratio was 106.5% and it recorded a $19 million core loss. Life & Group recorded $43 million core income; Corporate & Other recorded a $165 million core loss.
- Investment income and catastrophe losses: Pretax net investment income declined to $1.817 billion from $2.034 billion, largely because limited partnership and common-stock returns were negative in 2018 versus positive returns in 2017. Net catastrophe losses declined to $252 million from $380 million. Favorable net prior-year reserve development was $181 million, versus $308 million in 2017.
- Fourth quarter: CNA reported an $84 million net loss. The quarter included $109 million of losses on limited partnership and common-stock investments and $107 million of net catastrophe losses, including impacts from Hurricane Michael and California wildfires.
- Cash flow and liquidity: Operating cash flow was $1.227 billion, compared with $1.254 billion in 2017. Cash was $310 million at year-end. Management said expected cash flows were sufficient for current and anticipated working-capital and debt needs. No borrowings were outstanding under the $250 million revolving credit facility or from the Federal Home Loan Bank of Chicago.
- Debt and capital: Year-end debt was $2.680 billion, down from $2.858 billion; total assets were $57.152 billion and stockholders’ equity was $11.217 billion, down from $12.244 billion. The equity decline included an $894 million after-tax other comprehensive loss, principally reflecting investment valuation changes. CCC statutory capital and surplus was $10.411 billion, or 266% of company-action-level risk-based capital.
- Shareholder returns: CNA declared and paid $3.30 per share in 2018, including a $2.00 special dividend. In February 2019, the board declared a $0.35 quarterly dividend and a $2.00 special dividend, payable in March 2019. No share repurchases were made in 2018.
Material changes, outlook, and risks
- Core income decreased despite lower catastrophe losses, primarily due to reduced investment returns and less favorable prior-year reserve development. International underwriting weakened, while Specialty’s combined ratio improved modestly and Commercial remained above 100%.
- Long-term-care reserves remain sensitive to morbidity, persistency, discount rates, and regulatory approval of future premium increases. The 2018 gross premium valuation indicated a reserve margin of approximately $182 million, down from $246 million in 2017. Management disclosed substantial hypothetical adverse sensitivities, including a $460 million pretax income reduction for a 5% morbidity increase, after considering the existing margin.
- Legacy asbestos and environmental pollution liabilities are covered by a loss portfolio transfer to NICO, subject to a $4 billion aggregate limit. Cumulative amounts ceded were $3.1 billion at year-end 2018; the filing reports $178 million of 2018 adverse A&EP development before the transfer and a $48 million pretax impact after deferred reinsurance accounting. Remaining limit, uncovered exposures, and reinsurer performance remain relevant risks.
- Other key risks include reserve-estimation uncertainty, catastrophe and systemic losses, investment-market volatility, reinsurance and policyholder collectibility, regulation and capital requirements, cybersecurity and operational interruptions, competition, and Loews-related governance conflicts. CNA also identified Brexit-related European restructuring and elevated compliance costs; EEA business began being written through a Luxembourg subsidiary effective January 1, 2019.
- The filing provides no specific earnings or revenue guidance. CNA stated it believed liquidity was adequate in the near term. It expected approximately $230 million of additional assets and liabilities upon adoption of the lease standard in 2019, with no material earnings impact expected. The auditor issued an unqualified opinion and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- How much of reported revenue growth reflects warranty-accounting adoption and gross presentation, rather than underlying business growth.
- Whether investment returns, prior-year reserve development, and segment combined ratios improve or deteriorate, especially in Commercial and International.
- Long-term-care reserve assumptions and margin, premium-rate approvals, and actual morbidity and persistency experience.
- Remaining capacity and collectibility under the NICO A&EP transfer, including exposures outside its coverage and the $4 billion cap.
- Insurance-subsidiary dividend capacity, statutory capital, debt maturities, and the sustainability of special dividends.
- Execution and costs of the European restructuring, alongside catastrophe, market, reinsurance, and cybersecurity exposures.