CNA(CNA) - 2021 Q4 - Annual Report

PART I Business CNA Financial Corporation, an insurance holding company majority-owned by Loews Corporation, primarily operates in commercial property and casualty insurance, is subject to extensive regulation, and emphasizes human capital development - CNA Financial Corporation is an insurance holding company primarily conducting property and casualty and remaining life and group insurance operations. Loews Corporation owned approximately 89.6% of its outstanding common stock as of December 31, 2021[6] - The company's commercial property and casualty insurance operations are managed and reported in three business segments: Specialty, Commercial, and International. Operations outside of P&C are reported in two segments: Life & Group and Corporate & Other[6] - The insurance industry is subject to extensive and detailed regulation by various domestic and foreign agencies, including the State of Illinois Department of Insurance (global group-wide supervisor), and authorities in the U.K., Canada, Luxembourg, and Bermuda[7] - As of December 31, 2021, the company had approximately 5,600 employees and focuses on talent attraction, retention, development, diversity, and inclusion as strategic imperatives[13][14][16] Current Regulation The company operates under comprehensive regulation from multiple domestic and foreign supervisory agencies, with broad powers over licensing, policy forms, reserve requirements, capital adequacy, and investment activities - The insurance industry is subject to detailed regulation and supervision concerning licensing, policy forms, reserve requirements, capital adequacy, and investment permissions[7] - Key supervisory agencies include the State of Illinois Department of Insurance (global group-wide supervisor), the U.K. Prudential Regulatory Authority, the Office of Superintendent of Financial Institutions in Canada, and the Bermuda Monetary Authority[7] - Hardy, the company's Lloyd's underwriter, is also supervised by the Council of Lloyd's, which has wide discretionary powers to regulate underwriting and capital requirements for syndicate participation[9] Regulation Outlook The regulatory landscape is evolving with new global and U.S. capital standards, elimination of reinsurance collateral requirements, and an increasing focus on ESG frameworks - The IAIS is developing a global insurance capital standard (ICS) for IAIGs, while the NAIC is working on a comparable Group Capital Calculation (GCC) and Aggregation Method (AM) for U.S. groups[10] - The U.S.-E.U. and U.S.-U.K. Covered Agreements require U.S. states to eliminate reinsurance collateral requirements for qualified reinsurers from those jurisdictions by September 2022, or risk federal preemption[10][12] - Regulators at state, federal, and international levels are increasingly focusing on Environment, Social, and Governance (ESG) frameworks, prompting the company to establish an internal ESG Committee and Task Force[12] Human Capital CNA employed approximately 5,600 people at year-end 2021, focusing on talent attraction, retention, and development through various programs, with Diversity and Inclusion as a strategic imperative - CNA focuses on attracting and retaining a highly talented workforce through trainee programs, flexible work arrangements (including hybrid work), tuition reimbursement, and mentoring[14] - Diversity and Inclusion (D&I) is a strategic priority, with initiatives including allyship and inclusive leadership training, a talent sponsorship program to accelerate diverse employees' development, and partnerships with D&I-focused organizations[16] - In response to the COVID-19 pandemic, CNA pivoted to a remote working environment in 2020, which largely remained in place through 2021, with enhanced office safety protocols and a focus on employee physical and mental health[18] Risk Factors The company faces material risks including insufficient insurance reserves, significant catastrophe losses, intense industry competition, investment portfolio volatility, and operational vulnerabilities like cybersecurity threats Insurance Risks CNA is exposed to significant insurance risks, including potential insufficiency of reserves for long-tail and long-term care policies, material losses from catastrophes, and ongoing uncertainty from legacy asbestos and environmental pollution claims - The company's insurance reserves are complex estimates, and if they prove insufficient, it could result in substantial charges to earnings. This risk is higher for long-tail coverages like workers' compensation and professional liability[23] - Active life reserves for long term care policies are highly uncertain and depend on assumptions about morbidity, persistency, discount rates, and future premium increases. Adverse deviations could require substantial reserve increases[23][25] - The company is vulnerable to material losses from natural and man-made disasters, such as hurricanes, earthquakes, and pandemics. The COVID-19 pandemic has led to increased claims and litigation risk across several lines of business[26][28] - CNA has significant exposure to asbestos and environmental pollution (A&EP) claims, which were largely ceded to NICO under a Loss Portfolio Transfer subject to a $4 billion aggregate limit. If this limit is exceeded, CNA could face substantial charges[29] Strategic Risks The company faces strategic risks from intense industry competition, the cyclical nature of the P&C market, reliance on reinsurance, technological changes, and potential conflicts of interest due to single stockholder control - The insurance industry is highly competitive and cyclical, which can lead to price competition and less restrictive underwriting standards, potentially impacting premium levels and profitability[32][33] - CNA's underwriting strategies rely on reinsurance, exposing the company to risks such as the inability to obtain acceptable terms, counterparty credit risk, and the potential for ineffective coverage in the event of major catastrophes[33] - Loews Corporation's beneficial ownership of approximately 89.6% of CNA's common stock gives it control over key corporate actions and creates potential conflicts of interest[36] Financial Risks CNA's financial results are exposed to significant risks from its investment portfolio, including market volatility from interest rates, credit spreads, equity prices, and foreign currency rates, potentially leading to investment losses - The company's investment portfolio is exposed to various market risks, including interest rate, credit spread, issuer default, equity price, and foreign currency fluctuations, which can adversely affect the value of investments and investment income[37] - Significant holdings in fixed maturity investments are sensitive to interest rate changes. Rising rates can reduce the value of existing bonds, while falling rates can lower income from new investments[39] - Investments in limited partnerships and common stock are subject to greater market volatility than fixed income securities. The commercial mortgage loan portfolio is subject to credit risk related to the recoverability of loan balances[39] Operational Risks CNA's operations are subject to risks from reliance on analytical models, IT system disruptions including cybersecurity attacks, employee misconduct, loss of key vendor relationships, and extensive governmental regulations - The company relies on analytical models for pricing, reserving, and catastrophe risk management; mispricing or underestimation of risks due to model limitations could materially affect financial condition[40] - CNA sustained a sophisticated cybersecurity attack involving ransomware in March 2021, which caused a network disruption. The investigation revealed that an unauthorized third party copied some personal information, leading to notifications to impacted individuals and regulators[42] - The company is a holding company dependent on dividends from its insurance subsidiaries to meet its obligations. These dividends are limited by insurance regulators, which could restrict the ability to fund corporate obligations or pay stockholder dividends[46] - Ratings from agencies like A.M. Best, Moody's, and S&P are crucial for competitive positioning. A downgrade could adversely affect the ability to write insurance at competitive rates and increase the cost of capital[46][48] Properties The company leases its principal executive offices in Chicago, Illinois, and other P&C insurance offices across the U.S., Canada, the U.K., and Continental Europe, all considered adequate for business operations - CNA leases its main executive offices in Chicago, Illinois, and other offices across the U.S., Canada, the U.K., and Continental Europe for its business operations[50] Legal Proceedings Information regarding the company's legal proceedings is detailed in Note F to the Consolidated Financial Statements, which is included under Item 8 of this report - Details on legal proceedings are provided in Note F to the Consolidated Financial Statements[50] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities CNA's common stock is listed on the NYSE, with Loews Corporation owning approximately 89.6% of outstanding shares, and its five-year total return underperformed the S&P 500 but outperformed the S&P 500 Property & Casualty Insurance Index - As of February 4, 2022, Loews Corporation owned approximately 89.6% of CNA's 271,365,221 outstanding shares of common stock[52] Total Return Performance | Company / Index | Base Period | 2017 | 2018 | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | CNA Financial Corporation | $100.00 | $136.94 | $121.65 | $133.19 | $126.01 | $149.96 | | S&P 500 Index | $100.00 | $121.83 | $116.49 | $153.17 | $181.35 | $233.41 | | S&P 500 Property & Casualty Insurance Index | $100.00 | $122.39 | $116.64 | $146.82 | $157.04 | $187.31 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results, detailing critical accounting estimates, consolidated and segment performance, investment results, and liquidity and capital resources for 2021 compared to 2020 Critical Accounting Estimates The company's critical accounting estimates involve significant judgment and uncertainty, particularly for insurance reserves, investment valuation, reinsurance collectibility, and deferred tax assets, where actual results may differ materially - Key critical accounting estimates include Insurance Reserves (for both P&C and long term care), Reinsurance and Insurance Receivables, Valuation of Investments and Impairment of Securities, and Income Taxes[59][60][62] - Long term care reserves are based on assumptions about morbidity, persistency, discount rates, and future premium rate increases. Adverse changes in these assumptions could materially impact results[61] - The valuation of fixed maturity and equity securities at fair value, and the assessment for impairment or credit losses, requires significant judgment, especially in illiquid markets[65] Reserves - Estimates and Uncertainties The company's reserves for P&C and long-term care are complex estimates subject to significant uncertainty, with P&C reserves modestly higher than actuarial point estimates and long-term care reserves showing an improved margin in 2021 - The company's recorded reserves are modestly higher than the actuarial point estimate, driven by uncertainty in immature accident years, inflation, and potential volatility in run-off exposures[80] Sensitivity Analysis of Net P&C Reserves (as of Dec 31, 2021) | Sensitivity Analysis of Net P&C Reserves (as of Dec 31, 2021) | Net Reserves | Change in Assumption | Estimated Impact on Net Reserves | | :--- | :--- | :--- | :--- | | Professional/Management Liability & Surety | ~$5.0B | +9% claim severity | +$450M | | Workers' Compensation | ~$3.9B | +100 bps claim cost inflation | +$350M | | General Liability | ~$3.2B | +6% claim severity | +$200M | - The September 30, 2021 Gross Premium Valuation (GPV) for long term care active life reserves indicated a margin of approximately $72 million, an improvement from a zero margin in 2020, primarily due to favorable changes in discount rate and morbidity assumptions[89][90] Catastrophes and Related Reinsurance Net catastrophe losses decreased to $397 million in 2021, driven by severe weather, with the company managing exposure through significant reinsurance programs including a North American Property Treaty and the federal TRIPRA program Catastrophe Losses (Net of Reinsurance) | Catastrophe Losses (Net of Reinsurance) | 2021 | 2020 | | :--- | :--- | :--- | | Total Net Catastrophe Losses | $397M | $550M | | Breakdown (2020) | | | | Severe Weather | | $294M | | COVID-19 Pandemic | | $195M | | Civil Unrest | | $61M | - Key reinsurance programs at January 1, 2022 include a North American Property Treaty covering losses from $190 million up to $900 million and a Workers' Compensation Treaty providing $275 million for natural catastrophes and $475 million for terrorism events[94][95] - The Terrorism Risk Insurance Program Reauthorization Act of 2019 (TRIPRA) provides the principal reinsurance protection against large-scale terrorist attacks, with an estimated company deductible of $915 million for 2022[96][97] Consolidated Operations CNA's core income increased by $371 million to $1,106 million in 2021, driven by stronger underwriting results and higher net investment income, with net income rising to $1,202 million Consolidated Financial Performance | (In millions) | 2021 | 2020 | | :--- | :--- | :--- | | Total operating revenues | $11,788 | $10,862 | | Total claims, benefits and expenses | $10,424 | $9,987 | | Core income | $1,106 | $735 | | Net investment gains (losses), after tax | $96 | $(45) | | Net income | $1,202 | $690 | - The $371 million increase in core income in 2021 was primarily due to a $344 million increase in Property & Casualty Operations' core income, driven by improved underwriting and higher limited partnership and common stock returns[101] Segment Results The company's three Property & Casualty segments collectively saw core income rise by $344 million in 2021, while the Life & Group segment improved by $117 million, and the Corporate & Other segment's loss increased due to cybersecurity attack expenses - The company is managed across five segments: three Property & Casualty Operations (Specialty, Commercial, International) and two others (Life & Group, Corporate & Other)[104] - Effective January 1, 2021, a legacy portfolio of excess workers' compensation policies and certain legacy mass tort reserves were moved from the Commercial segment to the Corporate & Other segment, with prior periods conformed to the new presentation[104] Investments Net investment income increased by $224 million to $2.16 billion in 2021, driven by strong returns from limited partnership and common stock investments, with the $44.4 billion fixed maturity portfolio remaining high quality Net Investment Income | (In millions) | 2021 | 2020 | | :--- | :--- | :--- | | Total fixed income securities | $1,750 | $1,770 | | Limited partnership and common stock investments | $402 | $144 | | Net investment income | $2,159 | $1,935 | - The limited partnership and common stock portfolio returned 22.3% in 2021, compared to 8.3% in 2020[145] - The fixed maturity portfolio of $44.4 billion is predominantly investment grade, with non-investment grade securities representing $2.4 billion, or about 5.3% of the total[150] - The effective duration of the total fixed income and short-term investment portfolio was 6.6 years as of December 31, 2021, up from 6.3 years at the end of 2020[155] Liquidity and Capital Resources Net cash from operating activities increased to $2.0 billion in 2021, with management confident in meeting obligations, and the company declared significant dividends while maintaining strong financial strength ratings from major agencies - Net cash provided by operating activities was $1,997 million in 2021, an increase from $1,775 million in 2020, driven by higher net premiums collected and lower net claim payments[157] - In 2021, the company paid cash dividends of $2.27 per share. On February 4, 2022, the Board declared a quarterly dividend of $0.40 per share and a special cash dividend of $2.00 per share[160] Insurer and Senior Debt Ratings | Rating Agency | Insurer Financial Strength Ratings | Senior Debt Ratings | | :--- | :--- | :--- | | A.M. Best | A | bbb+ | | Moody's | A2 | Baa2 | | S&P | A+ | A- | | Fitch | A+ | BBB+ | Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks including interest rate, equity price, and foreign currency risk, with sensitivity analysis showing a hypothetical 100 basis point interest rate increase would decrease total asset fair value by approximately $3.1 billion Estimated Decrease in Fair Value of Total Assets (as of Dec 31, 2021) | Market Risk Scenario (as of Dec 31, 2021) | Estimated Decrease in Fair Value of Total Assets | | :--- | :--- | | +100 basis point increase in interest rates | $3,136 million | | 10% decline in S&P 500 | $101 million | | 10% decline in foreign currency exchange rates | $293 million | Estimated Decrease in Fair Value of Total Assets (as of Dec 31, 2021) | Market Risk Scenario (as of Dec 31, 2021) | Estimated Decrease in Fair Value of Total Assets | | :--- | :--- | | +150 basis point increase in interest rates | $4,701 million | | 25% decline in S&P 500 | $252 million | | 20% decline in foreign currency exchange rates | $585 million | Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2021, 2020, and 2019, including statements of operations, balance sheets, and cash flows, along with detailed notes and independent auditor reports Consolidated Financial Summary | (In millions, except per share data) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total revenues | $11,908 | $10,808 | $10,767 | | Net income | $1,202 | $690 | $1,000 | | Diluted earnings per share | $4.41 | $2.53 | $3.67 | Consolidated Balance Sheet Summary | (In millions) | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total investments | $50,328 | $50,293 | | Total assets | $66,639 | $64,026 | | Total liabilities | $53,830 | $51,319 | | Total stockholders' equity | $12,809 | $12,707 | Consolidated Cash Flow Summary | (In millions) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net cash flows provided by operating activities | $1,997 | $1,775 | $1,140 | | Net cash flows used by investing activities | $(1,228) | $(705) | $(225) | | Net cash flows used by financing activities | $(648) | $(902) | $(988) | Notes to Consolidated Financial Statements The notes provide comprehensive details supporting the consolidated financial statements, covering significant accounting policies, investment portfolio breakdowns, fair value measurements, income taxes, insurance reserves, reinsurance, debt, benefit plans, and segment analysis Controls and Procedures The company's CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2021, with no material changes to internal control over financial reporting during the fourth quarter - Management, including the CEO and CFO, concluded that as of December 31, 2021, the company's disclosure controls and procedures were effective[451] - No changes in internal control over financial reporting occurred during the fourth quarter of 2021 that materially affected, or are reasonably likely to materially affect, these controls[451] PART III Directors, Executive Officers and Corporate Governance This section provides information about the company's executive officers, with additional details on directors and corporate governance incorporated by reference from the definitive proxy statement - A table lists the company's executive officers, including CEO Dino E. Robusto and Interim CFO Larry A. Haefner, along with their professional backgrounds[453][454] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details securities authorized for issuance under equity compensation plans, with approximately 3.2 million securities to be issued upon exercise and 5.6 million available for future issuance as of December 31, 2021 Equity Compensation Plan Information (as of Dec 31, 2021) | Plan Category (as of Dec 31, 2021) | Securities to be issued upon exercise (a) | Weighted avg. exercise price (b) | Securities remaining available for future issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 3,196,059 | $42.01 | 5,570,594 | PART IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits included in the Form 10-K filing, such as consolidated financial statements, auditor reports, supplementary schedules, and material contracts - This section provides a comprehensive list of all financial statements, schedules (such as Summary of Investments and Supplementary Insurance Information), and exhibits filed with the annual report[462][465][466]