CNA Financial Corporation — 2019 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2019; quarterly figures are unaudited. CNA is a commercial property and casualty insurer with Specialty, Commercial and International operations, plus a run-off Life & Group business that primarily consists of long-term care policies. Loews Corporation owned approximately 89% of CNA at year-end.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $10.767 billion | $10.134 billion |
| Net income | $1.000 billion | $813 million |
| Diluted earnings per share | $3.67 | $2.98 |
| Core income (non-GAAP) | $979 million | $845 million |
| Net earned premiums | $7.428 billion | $7.312 billion |
| Net investment income | $2.118 billion | $1.817 billion |
| Net cash from operating activities | $1.140 billion | $1.227 billion |
| Total investments | $47.744 billion | $44.486 billion |
| Long-term debt | $2.679 billion | $2.680 billion |
| Stockholders’ equity | $12.215 billion | $11.217 billion |
| Book value per common share | $45.00 | $41.32 |
- 2019 total revenue included $29 million of net investment gains, compared with a $52 million net investment loss in 2018. Core income excludes investment gains and losses and other specified items.
- Property and casualty combined ratios were 90.2% for Specialty (88.2% in 2018), 100.8% for Commercial (101.1%) and 101.8% for International (106.5%). A ratio below 100% indicates underwriting profit before investment income.
- Net catastrophe losses declined to $179 million from $252 million. Favorable prior-year P&C reserve development was $73 million, versus $181 million in 2018.
- Cash and short-term investments were $2.103 billion at year-end. CNA reported no borrowings under its $250 million revolving credit facility. Operating cash flow fell year over year, reflecting a pension contribution, lower limited-partnership distributions and higher claim payments, partly offset by increased premiums collected.
- Common dividends paid totaled $929 million; the 2019 declared dividend was $3.40 per share, including a $2.00 special dividend. In February 2020, the board declared a further $2.00 special dividend and a $0.37 quarterly dividend.
Material changes versus the prior comparable period
- Net income rose to $1.000 billion from $813 million, and core income increased to $979 million from $845 million. Higher investment income—especially returns from limited partnerships and common stocks—and stronger current-year P&C underwriting contributed to the improvement.
- Life & Group core results moved to a $109 million loss from $43 million of income. A $170 million charge followed the 2019 long-term care gross premium valuation, which identified a $216 million pretax premium deficiency; lower-than-expected claim severity partly offset the charge.
- International core results improved to $30 million from a $19 million loss, while premiums declined amid foreign-exchange effects and Hardy’s exit from certain business classes. Commercial and Specialty premiums increased.
- Net investment income increased by $301 million, including a substantial improvement in limited-partnership and common-stock returns. Net unrealized investment gains also lifted other comprehensive income; year-end AOCI improved from a loss of $878 million to income of $51 million.
- Reported warranty revenue and expense are affected by the accounting treatment adopted in 2018, which grosses up revenue and expense and recognizes them over time. This affects year-over-year comparability of those line items.
- CNA issued $500 million of 3.90% senior notes due 2029 and redeemed $500 million of 5.875% notes due 2020. Total debt was broadly unchanged.
Outlook, risks and unusual items
- CNA gave no specific earnings or revenue guidance. Management stated it believes current cash flows are sufficient for expected working-capital and debt needs in the near term.
- Long-term care assumptions are a major uncertainty. The 2019 reserve deficiency was driven primarily by lower expected reinvestment rates and revised persistency assumptions, partly offset by premium-rate actions and favorable morbidity and expense assumptions. The filing’s sensitivity analysis shows material potential pretax income effects from changes in morbidity, persistency, discount rates or approved premium increases; the next annual valuation was expected in the third quarter of 2020.
- Management identifies P&C reserve estimates—particularly long-tail professional and management liability, workers’ compensation and general liability—as sensitive to severity, inflation, legal developments and claims experience. Illustrative sensitivities include approximately $400 million of higher net reserves from a 9% increase in severity for certain professional, management liability and surety products, and approximately $350 million from a 100-basis-point increase in workers’ compensation claim-cost inflation.
- Legacy asbestos and environmental pollution liabilities remain a risk. The NICO loss portfolio transfer has a $4 billion aggregate limit; $3.2 billion had been ceded cumulatively by year-end 2019. CNA reported $150 million of gross adverse A&EP reserve development before the transfer in 2019, partly offset by the deferred retroactive reinsurance benefit. NICO’s collateral trust was valued at $3.7 billion, and Berkshire Hathaway guarantees specified obligations.
- Other principal risks include catastrophe losses, mass tort and emerging claims, reinsurance and policyholder collectibility, investment-market volatility, regulation and capital requirements, cyber and operational disruption, and competition. TRIPRA’s federal terrorism backstop was extended through 2027, subject to program terms and limits.
- CCC’s statutory capital and surplus was approximately 291% of company-action-level risk-based capital at year-end. Insurance-subsidiary dividends are regulated and are an important source of cash for the holding company. CNA’s major rating agencies reported stable outlooks; S&P and A.M. Best upgraded specified ratings in 2019.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Property and casualty reserves and long-term care future policy benefit reserves were identified as critical audit matters because of the judgment and uncertainty involved.
Important facts for investors to verify
- Whether long-term care claims, persistency, discount rates and approved premium increases support the assumptions underlying the $12.3 billion of gross future policy benefit reserves.
- Whether current and future P&C reserve development, especially general liability, professional liability and workers’ compensation, remains consistent with management’s estimates.
- The remaining capacity and collectibility of the NICO A&EP transfer, including exposure to claims outside its terms or above its limit.
- How much 2019 earnings growth reflects repeatable underwriting and investment performance versus variable limited-partnership and common-stock returns.
- The sustainability of dividends and special distributions given holding-company reliance on regulated subsidiary dividends and substantial insurance obligations.
- Warranty revenue comparability and future cash-flow conversion, given deferred warranty revenue of $3.8 billion and deferred acquisition costs of $2.8 billion at year-end.