CNA Financial Corporation — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a standalone fourth-quarter filing. CNA is a commercial property-and-casualty insurer with life and group businesses largely in run-off; Loews Corporation owned approximately 90% at year-end.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $9.547 billion | $8.949 billion |
| Net earned premiums | $6.882 billion | $6.603 billion |
| Net investment income | $2.282 billion | $2.054 billion |
| Net income attributable to CNA | $628 million | $612 million |
| Diluted EPS | $2.33 | $2.27 |
| Net operating income | $587 million | $610 million |
| Operating cash flow | $1.250 billion | $1.702 billion |
| Total assets | $58.522 billion | $55.110 billion |
| Total CNA stockholders’ equity | $12.314 billion | $11.488 billion |
| Total debt on balance sheet | $2.570 billion | $2.608 billion |
Net income increased modestly, helped by a $41 million after-tax gain on realized investments, while net operating income declined. Cash and short-term investments totaled approximately $2.0 billion at year-end; the $250 million revolving credit facility was undrawn. CNA reported that current cash flows were sufficient for expected working-capital and debt needs. Common dividends declared and paid were $0.60 per share, up from $0.40.
Material changes and segment results
- Net earned premiums rose $279 million, reflecting the Hardy acquisition, growth in CNA Specialty and CNA Commercial, and premium development.
- CNA acquired Hardy Underwriting Bermuda Limited on July 2, 2012, for $231 million. Hardy contributed $120 million of earned premiums and a $24 million net loss for the post-acquisition period; its results included $43 million of pretax intangible amortization.
- Catastrophe impacts increased substantially: $270 million after tax in 2012 versus $144 million in 2011. Storm Sandy accounted for $190 million after tax in the core-segment discussion; the fourth-quarter disclosure reports $280 million of catastrophe impacts related to Sandy, net of reinsurance and including reinstatement premiums.
- Favorable net prior-year development fell to $251 million from $431 million. Total catastrophe losses, net of reinsurance, were $391 million in 2012 versus $222 million in 2011.
- CNA Specialty: Net operating income was $504 million versus $517 million; combined ratio was 94.8% versus 89.9%. Average renewal rates rose 5% and retention was 86%.
- CNA Commercial: Net operating income was $277 million versus $367 million; combined ratio was 113.5% versus 105.8%. Average renewal rates rose 7%; catastrophe losses were $356 million, including $241 million from Sandy.
- Hardy: Combined ratio was 117.5% for the post-acquisition period; Sandy losses were $17 million.
- Life & Group Non-Core: Net loss improved to $90 million from $208 million, but included a $24 million after-tax payout-annuity reserve charge and a $20 million after-tax increase to long-term-care claim reserves.
Outlook, risks and unusual items
- No specific numerical earnings or premium guidance is provided. Management said Hardy was intended to support global expansion through the Lloyd’s marketplace and described liquidity as adequate for near-term needs.
- Reserve estimates remain a major uncertainty. Management reported carried reserves modestly above actuarial point estimates. Sensitivity examples include a possible $500 million increase in CNA Specialty net reserves from a 9% increase in estimated claim severity, and a $450 million increase in CNA Commercial workers’ compensation reserves from a 100-basis-point increase in claim-cost inflation.
- Low interest rates pose risk to long-term-care and payout-annuity reserves. Hypothetical sensitivities show potentially significant pretax earnings impacts if discount-rate, morbidity, mortality or persistency assumptions change.
- Legacy asbestos and environmental liabilities were substantially ceded to a Berkshire Hathaway subsidiary under a $4 billion aggregate-limit loss portfolio transfer. The filing reports $2.0 billion of remaining limit on an incurred basis at year-end and a $2.5 billion collateral trust value; counterparty performance, coverage limits and excluded exposures remain risks.
- Investment risks include market, credit, interest-rate and liquidity exposures. Ninety-two percent of fixed-maturity securities were investment grade. Limited partnership income rose sharply to $251 million from $48 million, contributing materially to higher investment income.
- Other risks include catastrophe frequency and severity, reinsurance collectibility, regulatory limits on subsidiary dividends, competition, ratings changes and long-tail claims. CNA reported all domestic insurance subsidiaries exceeded minimum risk-based capital requirements.
- The fourth quarter of 2012 recorded a $9 million net loss and a loss of $0.03 per diluted share, despite full-year net income of $628 million. The filing attributes significant fourth-quarter catastrophe impacts to Sandy.
- Deloitte issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Hardy was excluded from the 2012 internal-control assessment while integration was underway; management expected integration to be completed by June 30, 2013.
Important facts for investors to verify
- How much of future underwriting performance depends on favorable prior-year reserve development, and whether that development continues to decline.
- The ultimate cost of Sandy and other catastrophe claims, including reinsurance recoveries and reinstatement premiums.
- Reserve adequacy for professional liability, workers’ compensation, general liability, long-term care and payout annuities under adverse assumptions.
- The collectibility and remaining protection under the NICO loss portfolio transfer, including the $4 billion limit and collateral arrangements.
- Whether Hardy integration, underwriting results and control integration meet management’s expectations.
- The sustainability and liquidity of limited-partnership returns, and the effect of investment yields on earnings and insurance liabilities.
- Holding-company liquidity and dividend capacity, given reliance on regulated insurance-subsidiary distributions and Loews ownership.