Annual Report

Annual Report 2018 CNA Financial Corporation Depicted on the front cover, CNA’s new global headquarters was established on June 1, 2018, at 151 North Franklin Street in Chicago. The new, modern building in Chicago’s Loop business district makes it easier for employees to connect all that CNA has to offer its customers. With upgrades to work spaces and technology, CNA’s corporate headquarters now enables faster connections both internally and externally, and encourages collaboration across all functions and dimensions. 2018 Financial Highlights Revenue (in billions) Net Income (in millions) $10.1 $813 Earnings per Share Dividends Paid (in millions) $2.98 $896 Shareholders’ Equity (in billions) Shareholder Return Including $6.40 of Dividends Received % in 2017 & 2018 $11.2 22 $50.55 $44.15* $41.50* 2016 2017 2018 *Stock Price 2018 Letter to our Shareholders I am pleased to report our 2018 accomplishments. Momentum has grown over the last two years as we pursue our overarching goal of delivering top-quartile performance on a sustained basis. A few highlights of the year include core income of $845 million, despite another year of significant catastrophe losses for the industry. The underlying Property & Casualty (P&C) combined ratio of 95.4 percent improved slightly from 2017 and is the best in over a decade. Our core return on equity was 7 percent. For the fifth year in a row, we are pleased to have declared a $2 per share special dividend — while also increasing our regular quarterly dividend to an annualized $1.40 per share. Our leadership team has diligently focused on the key ingredients of institutionalizing our collective expertise and underwriting acumen across the organization, developing talent, elevating our engagement with agents and brokers, making additional investments in technology and analytics, and embedding a disciplined expense management culture. Our entire organization has made very good progress across each of these areas, which is reflected in our increased underwriting profits and improved underlying combined ratio results in each of the past two years. At our core, CNA is an underwriting company. The ultimate success of the enterprise will be driven by our ability to underwrite Property & Casualty risks profitably on an ongoing and long-term basis. In 2018 the Global Underwriting Committee continued its work in support of this goal. This included advancing underwriting expertise across the enterprise, driving more active portfolio management in each segment, furthering disciplined underwriting governance, and actively driving cross-functional collaboration among the Underwriting, Claim, and Actuarial functions. Momentum has grown as we pursue our overarching goal of delivering top-quartile performance on a sustained basis. Increased underwriting profits and improved underlying combined ratio results in each of the past two years. Along with the efforts of the Global Underwriting Committee, talent is an essential part of the formula for our success. In addition to steadfast efforts to train and develop our talent throughout the organization, we have continued to successfully attract top talent from across the industry. In 2018, we added a significant number of deeply talented underwriters across our P&C portfolio. We also created a new Chief Operations Officer role responsible for Information Technology, Analytics and Operations, as well as new key leadership positions in Marketing and Reinsurance. In addition, with Craig Mense’s retirement, we filled the Chief Financial Officer role internally with James Anderson. We are proud of our success in attracting and developing talented people. With our renewed focus on underwriting discipline, an increasingly talented underwriting team, and a clarified value proposition, agents and brokers are more frequently providing CNA with the opportunity to compete for their highest quality accounts. We know this opportunity has to be earned, and we are confident that the success we have had in doing so — reflected in 13 percent new business growth in 2018 — will continue. Paramount to our success is enhancing our technology and analytic capabilities. During 2018, we entered a multi- year relationship with Atos — a global leader in digital transformation as well as infrastructure and data management platforms — to own and manage the entire CNA IT infrastructure. This partnership will facilitate the transformation of our IT operations through orchestrated cloud migration and meaningful enhancement of the user experience, while reducing our infrastructure costs materially. Beginning in 2019, this will allow us to shift our IT spend toward more projects that will improve the business going forward. We have also invested in MTech Capital, a fund that invests in newly formed InsureTech companies that we expect will give us additional strategic insights into the evolution of technology and analytics. We are excited by the advancements technology and analytics will continue to offer us across our value chain. All of this leads to our organization being well-positioned going into 2019. Of course, we recognize there is more to do as we strive to be a top-quartile performer on a sustained basis, but our meaningful progress over the last two years strengthens our confidence in achieving this goal. 2018 Earnings In 2018, CNA produced a net income of $813 million, or $2.98 per share. Core income was $845 million, or $3.10 per share. Core return on equity was 7 percent. Both income measures were lower than our strong 2017 results, as improved underwriting results were more than offset by investment losses in our Limited Partnerships and Common Equity portfolios in the fourth quarter. Our P&C underwriting profits grew 22 percent to $226 million with an overall combined ratio of 96.7 percent; and our underlying underwriting profit grew to $315 million, a 12 percent increase over 2017, as the underlying combined ratio improved slightly to 95.4 percent. Our P&C expense ratio improved to 33.2 percent, one point lower than 2017, with approximately half of the improvement coming from reduced expenses and half from premium growth. This is evidence of our increasingly disciplined expense culture within the company, and we expect the expense ratio improvement to continue over time. We also maintain a very strong balance sheet with a conservative capital structure and ample liquidity. At year-end 2018, CNA shareholders’ equity was $11.2 billion. Shareholders’ equity excluding Accumulated Other Comprehensive Income, was $12.1 billion or $44.55 per share, an increase of 6 percent from year-end 2017 adjusting for $3.30 per share dividends paid. Our financial strength, earnings stability and improving prospects translated into an outlook upgrade from two rating agencies in 2018. Standard & Poor’s upgraded CNA’s financial strength and long-term issuer credit outlook to positive from stable, while A.M. Best upgraded CNA’s long-term issuer credit outlook to positive from stable. As mentioned above, in the second quarter of 2018, we increased our regular quarterly dividend to $0.35 per share, and we declared a special dividend of $2.00 per share, returning $896 million in dividends to you, our shareholders. Our Business Today Our P&C business is made up of three segments: Specialty, Commercial and International. In each of these, we focus on select industries and specialized insurance products in which we have established expertise. In recent years, our approach to underwriting, which has focused on improved risk selection and more sophisticated pricing, has translated to improved P&C profitability and increased brand loyalty among agents, brokers and customers. The P&C underlying combined ratio of 95.4 percent improved slightly and is the lowest in over a decade. Both Specialty and Commercial improved their underlying combined ratios by approximately 1 point in 2018. We also achieved 4 percent net written premium growth and are continuing to achieve meaningful rate across our P&C portfolio. Our continued focus on driving rate increases should help our margin, as our long-run loss cost trends are still relatively stable and benign. $ 3.30 per share of dividends paid. Our Specialty segment continued to deliver strong results, generating an overall combined ratio of 88.2 percent. The underlying combined ratio of 92.7 percent is a 1.1 point improvement over 2017, driven by 1.2 points of underlying loss ratio improvement. Importantly, Specialty achieved new business growth of 46 percent. Our Commercial segment continued to make progress with a strong underlying combined ratio of 95 percent, an improvement of nearly one point over 2017. Commercial’s overall combined ratio of 101.1 percent was affected by higher than normal catastrophe losses during the year, but was still 1.6 points better than 2017. Commercial’s rate achievement gained momentum in the second half of the year and net written premiums increased 5 percent. Our International segment generated a combined ratio of 106.5 percent and an underlying combined ratio of 103.6 percent. In the second half of 2018, we announced an aggressive re-underwriting in the London operation, including the full withdrawal from certain underperforming lines in our Lloyd’s portfolio beginning in early 2019. As a result of our actions, we expect our International premium volume in 2019 to be lower as we take the necessary actions to return this segment to profitability. In 2018, our Life & Group business produced $43 million of core income, compared with $50 million in 2017 — two very good years in a challenging environment. Long Term Care morbidity experience continued to be consistent with our reserve assumptions, while persistency remained favorable — foundational elements reflecting an operation on solid footing which continue to perform as expected. Thank You for your Support As a direct result of tremendous execution on all fronts over the last two years, we have made great progress in pursuit of top-quartile performance. While there is still more to do, I am confident that we are on the path to achieve our overarching goal on a sustained basis.

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