CNA Financial Corporation (CNAF) was incorporated in 1967 and is an insurance holding company. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. References to “CNA,” “the Company,” “we,” “our,” “us” or like terms refer to the business of CNAF and its subsidiaries. CNA's property and casualty and remaining life and group insurance operations are primarily conducted by Continental Casualty Company (CCC), The Continental Insurance Company, Western Surety Company and Continental Assurance Company (CAC). Loews Corporation (Loews) owned approximately 90% of our outstanding common stock as of December 31, 2011.
Our insurance products primarily include commercial property and casualty coverages, including surety. Our services include risk management, information services, warranty and claims administration. Our products and services are primarily marketed through independent agents, brokers and managing general underwriters to a wide variety of customers, including small, medium and large businesses, associations, professionals and other groups.
Our core business, commercial property and casualty insurance operations, is reported in two business segments: CNA Specialty and CNA Commercial. Our non-core businesses are managed in two business segments: Life & Group Non-Core and Corporate & Other Non-Core. Each segment is managed separately due to differences in their product lines and markets. Discussions of each segment including the products offered, customers served, and distribution channels used are set forth in the Management's Discussion and Analysis (MD&A) included under Item 7 and in Note N to the Consolidated Financial Statements included under Item 8.
Competition
The property and casualty insurance industry is highly competitive both as to rate and service. We compete with a large number of stock and mutual insurance companies and other entities for both distributors and customers. Insurers compete on the basis of factors including products, price, services, ratings and financial strength. We must continuously allocate resources to refine and improve our insurance products and services.
There are approximately 2,500 individual companies that sell property and casualty insurance in the United States. Based on 2010 statutory net written premiums, we are the seventh largest commercial insurance writer and the 13th largest property and casualty insurance organization in the United States.
Regulation
The insurance industry is subject to comprehensive and detailed regulation and supervision. Each domestic and foreign jurisdiction has established supervisory agencies with broad administrative powers relative to licensing insurers and agents, approving policy forms, establishing reserve requirements, prescribing the form and content of statutory financial reports, and regulating capital adequacy and the type, quality and amount of investments permitted. Such regulatory powers also extend to premium rate regulations, which require that rates not be excessive, inadequate or unfairly discriminatory. In addition to regulation of dividends by insurance subsidiaries, intercompany transfers of assets may be subject to prior notice or approval by insurance regulators, depending on the size of such transfers and payments in relation to the financial position of the insurance subsidiaries making the transfer or payment.
The European Union's executive body, the European Commission, is implementing new capital adequacy and risk management regulations called Solvency II that would apply to our European operations. In addition, global regulators, including the United States National Association of Insurance Commissioners, are working with the International Association of Insurance Supervisors (IAIS) to consider changes to insurance company supervision. Among the areas being addressed are company and group capital requirements, group supervision and enterprise risk management. It is not currently clear to what extent the activities of the IAIS will impact the Company or U.S. insurance regulation.
Insurers are also required by the state insurance regulators to provide coverage to insureds who would not otherwise be considered eligible by the insurers. Each state dictates the types of insurance and the level of coverage that must be provided to such involuntary risks. Our share of these involuntary risks is mandatory and generally a function of our respective share of the voluntary market by line of insurance in each state.
Further, insurance companies are subject to state guaranty fund and other insurance-related assessments. Guaranty fund assessments are levied by the state departments of insurance to cover claims of insolvent insurers. Other insurance-related assessments are generally levied by state agencies to fund various organizations including disaster relief funds, rating bureaus, insurance departments, and workers' compensation second injury funds, or by industry organizations that assist in the statistical analysis and ratemaking process.
Although the federal government does not directly regulate the business of insurance, federal legislative and regulatory initiatives can impact the insurance industry in a variety of ways. These initiatives and legislation include tort reform proposals; proposals addressing natural catastrophe exposures; terrorism risk mechanisms; federal financial services reforms; various tax proposals affecting insurance companies; and possible regulatory limitations, impositions and restrictions arising from the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as the Patient Protection and Affordable Care Act, both enacted in 2010.
Various legislative and regulatory efforts to reform the tort liability system have, and will continue to, impact our industry. Although there has been some tort reform with positive impact to the insurance industry, new causes of action and theories of damages continue to be proposed in state court actions or by federal or state legislatures that continue to expand liability for insurers and their policyholders. For example, some state legislatures have from time to time considered legislation addressing direct actions against insurers related to bad faith claims. As a result of this unpredictability in the law, insurance underwriting is expected to continue to be difficult in commercial lines, professional liability and other specialty coverages.
The Dodd-Frank Wall Street Reform and Consumer Protection Act expands the federal presence in insurance oversight and may increase the regulatory requirements to which we may be subject. The Act's requirements include streamlining the state-based regulation of reinsurance and nonadmitted insurance (property or casualty insurance placed from insurers that are eligible to accept insurance, but are not licensed to write insurance in a particular state). The Act also establishes a new Federal Insurance Office within the U.S. Department of the Treasury with powers over all lines of insurance except health insurance, certain long-term care insurance and crop insurance, to, among other things, monitor aspects of the insurance industry, identify issues in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the overall financial system, coordinate federal policy on international insurance matters and preempt state insurance measures under certain circumstances. The Act calls for numerous studies and contemplates further regulation.
The Patient Protection and Affordable Care Act and the related amendments in the Health Care and Education Reconciliation Act may increase our operating costs and underwriting losses. This landmark legislation may lead to numerous changes in the health care industry that could create additional operating costs for us, particularly with respect to our workers' compensation and long term care products. These costs might arise through the increased use of health care services by our claimants or the increased complexities in health care bills that could require additional levels of review. In addition, due to the expected number of new participants in the health care system and the potential for additional malpractice claims, we may experience increased underwriting risk in the lines of our business that provide management and professional liability insurance to individuals and businesses engaged in the health care industry. The lines of our business that provide professional liability insurance to attorneys, accountants and other professionals who advise clients regarding the health care reform legislation may also experience increased underwriting risk due to the complexity of the legislation.
Employee Relations
As of December 31, 2011, we had approximately 7,600 employees and have experienced satisfactory labor relations. We have never had work stoppages due to labor disputes.
We have comprehensive benefit plans for substantially all of our employees, including retirement plans, savings plans, disability programs, group life programs and group health care programs. See Note J to the Consolidated Financial Statements included under Item 8 for further discussion of our benefit plans.
4
Direct Written Premiums by Geographic Concentration
Set forth below is the distribution of our direct written premiums by geographic concentration.
Years ended December 31
Percent of Total
2011
2010
2009
California
9.4
%
9.3
9.1
New York
6.7
6.8
Texas
6.5
6.6
Florida
6.1
6.2
Illinois
4.9
4.0
3.8
New Jersey
3.5
3.7
Missouri
3.4
3.6
Pennsylvania
3.2
Canada
3.0
2.9
2.5
All other states, countries or political subdivisions (a)
52.9
53.5
54.5
Total
100.0
Approximately 8.8%, 6.9% and 7.0% of our direct written premiums were derived from outside of the United States for the years ended December 31, 2011, 2010 and 2009.
Property and Casualty Claim and Claim Adjustment Expenses
The following loss reserve development table illustrates the change over time of reserves established for property and casualty claim and claim adjustment expenses at the end of the preceding ten calendar years for our property and casualty insurance companies. The table excludes our life insurance subsidiaries, and as such, the carried reserves will not agree to the Consolidated Financial Statements included under Item 8. The first section shows the reserves as originally reported at the end of the stated year. The second section, reading down, shows the cumulative amounts paid as of the end of successive years with respect to the originally reported reserve liability. The third section, reading down, shows re-estimates of the originally recorded reserves as of the end of each successive year, which is the result of our property and casualty insurance subsidiaries' expanded awareness of additional facts and circumstances that pertain to the unsettled claims. The last section compares the latest re-estimated reserves to the reserves originally established, and indicates whether the original reserves were adequate or inadequate to cover the estimated costs of unsettled claims.
The loss reserve development table is cumulative and, therefore, ending balances should not be added since the amount at the end of each calendar year includes activity for both the current and prior years. The development amounts in the table below include the impact of reinsurance commutations, but exclude the impact of the provision for uncollectible reinsurance.
Schedule of Loss Reserve Development
Calendar Year Ended
2001
2002 (a)
2003
2004
2005
2006
2007
2008
2010 (b)
(In millions)
Originally reported gross reserves for unpaid claim and claim adjustment expenses
$
29,649
25,719
31,284
31,204
30,694
29,459
28,415
27,475
26,712
25,412
24,228
Originally reported ceded recoverable
11,703
10,490
13,847
13,682
10,438
8,078
6,945
6,213
5,524
6,060
4,967
Originally reported net reserves for unpaid claim and claim adjustment expenses
17,946
15,229
17,437
17,522
20,256
21,381
21,470
21,262
21,188
19,352
19,261
Cumulative net paid as of:
One year later
5,981
5,373
4,382
2,651
3,442
4,436
4,308
3,930
3,762
3,472
—
Two years later
10,355
8,768
6,104
4,963
7,022
7,676
7,127
6,746
6,174
Three years later
12,954
9,747
7,780
7,825
9,620
9,822
9,102
8,340
Four years later
13,244
10,870
10,085
9,914
11,289
11,312
10,121
Five years later
13,922
12,814
11,834
11,261
12,465
11,973
Six years later
15,493
14,320
12,988
12,226
12,917
Seven years later
16,769
15,291
13,845
12,551
Eight years later
17,668
16,022
14,073
Nine years later
18,286
16,180
Ten years later
18,391
Net reserves re-estimated as of:
End of initial year
17,980
17,650
17,671
18,513
20,588
21,601
21,463
21,021
20,643
18,923
20,533
18,248
19,120
19,044
20,975
21,706
21,259
20,472
20,237
21,109
19,814
19,760
19,631
21,408
21,609
20,752
20,014
22,547
20,384
20,425
20,212
21,432
21,286
20,350
22,983
21,076
21,060
20,301
21,326
20,982
23,603
21,769
21,217
20,339
24,267
21,974
20,142
24,548
22,168
21,199
24,765
22,016
24,657
Total net (deficiency) redundancy
(6,711
)
(6,787
(3,762
(2,620
(804
399
1,120
1,248
951
429
Reconciliation to gross re-estimated reserves:
Net reserves re-estimated
Re-estimated ceded recoverable
17,039
16,432
14,817
13,684
11,022
8,711
7,341
6,322
5,689
6,206
Total gross re-estimated reserves
41,696
38,448
36,016
33,826
32,082
29,693
27,691
26,336
25,926
25,129
Total gross (deficiency) redundancy
(12,047
(12,729
(4,732
(2,622
(1,388
(234
724
1,139
786
283
Net (deficiency) redundancy related to:
Asbestos
(818
(827
(177
(123
(113
(112
(107
(79
Environmental pollution
(288
(282
(209
(159
(76
Total asbestos and environmental pollution
(1,106
(1,109
(386
(332
(272
(271
(266
(155
Core (Non-asbestos & environmental pollution)
(5,605
(5,678
(3,376
(2,288
(532
670
1,386
1,403