-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GxD2V74YW5CALZ5GdVVI/c5v04yMq4lW8rh6lEbfjL0bd/ntl6L7GiFEwnJS0QP8 UWhR+ieHLnWXB40kaEiEPA== 0000021175-97-000016.txt : 19970401 0000021175-97-000016.hdr.sgml : 19970401 ACCESSION NUMBER: 0000021175-97-000016 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNA FINANCIAL CORP CENTRAL INDEX KEY: 0000021175 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 366169860 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05823 FILM NUMBER: 97569071 BUSINESS ADDRESS: STREET 1: CNA PLZ CITY: CHICAGO STATE: IL ZIP: 60685 BUSINESS PHONE: 3128225000 MAIL ADDRESS: STREET 1: CNA PLAZA CITY: CHICAGO STATE: IL ZIP: 60685 10-K 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Year Ended December 31, 1996 Commission File Number 1-5823 ------------------------------ CNA FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 36-6169860 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) CNA PLAZA CHICAGO, ILLINOIS 60685 (Address of principal executive offices) (Zip Code) (312) 822-5000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED - ------------------- ------------------------- Common Stock New York Stock Exchange with a par value Chicago Stock Exchange of $2.50 per share Pacific Stock Exchange ----------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None ------------------------------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No.... As of March 3, 1997, 61,798,262 shares of common stock were outstanding and the aggregate market value of the common stock of CNA Financial Corporation held by non-affiliates was approximately $1,077 million. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the CNA Financial Corporation 1996 Annual Report to Shareholders are incorporated by reference into Parts I and II of this Report. Portions of the CNA Financial Corporation Proxy Statement prepared for the 1997 annual meeting of shareholders, pursuant to Regulation 14A, are incorporated by reference into Part III of this Report. ================================================================================ CNA FINANCIAL CORPORATION FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1996 Item Page Number PART I Number - ------ ------ 1 Business............................................. 3 2 Properties........................................... 13 3 Legal Proceedings.................................... 14 4 Submission of Matters to a Vote of Security Holders.. 14 PART II 5 Market for the Registrant's Common Stock and Related Stockholder Matters........................... 17 6 Selected Financial Data.............................. 17 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................... 17 8 Financial Statements and Supplementary Data........... 17 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 17 PART III 10 Directors and Executive Officers of the Registrant..... 18 11 Executive Compensation................................. 18 12 Security Ownership of Certain Beneficial Owners and Management............................................. 18 13 Certain Relationships and Related Transactions......... 18 PART IV 14 Financial Statements, Schedules, Exhibits and Reports on Form 8-K............................................ 18 2 PART I ITEM 1. BUSINESS CNA Financial Corportion ("CNA") was incorporated in 1967 as the parent company of Continental Casualty Company ("CCC"), incorporated in 1897, and Continental Assurance Company ("CAC") incorporated in 1911. In 1975, CAC became a wholly-owned subsidiary of CCC. On May 10, 1995, CNA acquired all the outstanding common stock of The Continental Corporation ("Continental") and it became a wholly owned subsidiary of CNA. The Continental Corporation, a New York corporation incorporated in 1968, is an insurance holding company. Its principal subsidiary, The Continental Insurance Company ("CIC") was organized in 1853. The principal business of Continental is the ownership of a group of property and casualty insurance companies. CNA's property and casualty insurance operations are conducted by CCC and its property and casualty insurance affiliates and CIC and its property and casualty insurance affiliates. Life insurance operations are conducted by CAC and its life insurance affiliates. CNA's principal business is insurance conducted through its insurance subsidiaries. As multiple-line insurers, the insurance companies underwrite property, casualty, life and accident and health coverages, as well as pension products and annuities. Their principal market for insurance products is the United States. COMPETITION All aspects of the insurance business are highly competitive. CNA's insurance operations compete with a large number of stock and mutual insurance companies and other entities for both producers and customers and must continuously allocate resources to refine and improve insurance products and services. There are approximately 3,300 companies that sell property/casualty insurance in the United States, approximately 900 of which operate in all or most states. CNA's consolidated property/casualty subsidiaries (including CIC for the full year of 1995) would have been ranked as the third largest property/casualty insurance organization in 1995 based upon statutory net written premium. There are approximately 1,770 companies selling life insurance (including accident and health insurance and pension products and annuities) in the United States. CAC is ranked as the twenty-second largest life insurance organization based on 1995 consolidated statutory premium volume. DIVIDENDS BY INSURANCE SUBSIDIARIES The payment of dividends to CNA by its insurance affiliates without prior approval of the affiliate's domiciliary state insurance commissioners is limited to amounts determined by formula in accordance with the accounting practices prescribed or permitted by the state's insurance department. This formula varies by state. The formula for the majority of the states is the greater of 10% of prior year statutory surplus or prior year statutory net income, less the aggregate of all dividends paid during the twelve months prior to date of payment. Some states, however, have an additional stipulation that dividends can't exceed prior year surplus. Based upon the various state formulas, approximately $941 million in dividends can be paid to CNA by its insurance affiliates in 1997 without prior approval. All dividends must be reported to the domiciliary insurance department prior to declaration and payment. 3 REGULATION The insurance industry is subject to comprehensive and detailed regulation and supervision throughout the United States. Each state has established supervisory agencies with broad administrative power relative to licensing insurers and agents, approving policy forms, establishing reserve requirements, fixing minimum interest rates for accumulation of surrender values and maximum interest rates of policy loans, prescribing the form and content of statutory financial reports, regulating solvency and the type and amount of investments permitted. 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 discussed above, intercompany transfers of assets may be subject to prior notice or approval, depending on the size of such transfers and payments in relation to the financial position of the insurance affiliates making the transfer. Insurers are also required by the states 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 which must be provided to such involuntary risks. CNA's insurance subsidiaries' share of these involuntary risks is mandatory and generally a function of its respective share of the voluntary market by line of insurance in each state. After failing to enact the massive health reform introduced in 1994, Congress passed a health insurance reform bill in August of 1996 and the President signed it into law (P.L. 104-191) on August 21, 1996. The new law does little for Americans without health insurance but it will protect those who have health insurance from losing it. The 105th Congress is expected to consider additional incremental health care reform as it attempts to provide greater access and affordability to Americans. Among the bills that have been introduced this year are measures that would allow small businesses to band together to form association health plans to buy insurance; bar the use of clauses restricting what doctors can tell patients about treatment options; restructure the Medicare program; subsidize health insurance for uninsured children; and limit or prohibit underwriting on the basis of genetic information. We cannot predict if any of these proposals will be enacted or the extent to which they may affect the insurance industry. Last year, a moderate product liability bill was vetoed and Congress was not able to override the veto. This year, a similar product liability reform bill was introduced in the Senate. The bill contains many of the provisions of the vetoed bill and thus, one cannot predict if any reform will be adopted. Although federal standards would create more uniform laws, tort reform supporters still look primarily to the states for passage of reform measures. Over the last decade, many states have passed some type of reform, but more recently, state courts have modified or overturned approximately 38% of these reforms. Additionally, new causes of action and theories of damages are more frequently proposed in state courts or legislatures. Continued unpredicability in the law means that insurance underwriting and rating is difficult in commercial lines, professional liability and some specialty coverages. Environmental clean-up remains the subject of both federal and state regulation. Last year Congress and the Clinton Administration failed to reach an agreement on efforts to overhaul the federal Superfund hazardous waste program. The legislative stalemate was the result of a failure by Superfund stakeholders and Congress to reach a compromise on clean-up standards, the repeal of retroactive liability and how to finance future clean-up costs. In the new Congress, Superfund reform has been listed as one of the legislative priorities. At this time we cannot predict if any reform will be enacted. By some estimates, there are thousands of potential waste sites subject to clean-up. The insurance industry is involved in extensive litigation regarding coverage issues concerning clean up of hazardous waste. Judicial interpretations in many cases have expanded the scope of coverage and liability beyond the original intent of the policies. See Note E of the Consolidated Financial Statements of the 1996 Annual Report to Shareholders for further discussion. 4 REGULATION --(CONTINUED) In recent years, increased scrutiny of state regulated insurer solvency requirements by certain members of the U.S. Congress, resulted in the National Association of Insurance Commissioners developing industry minimum Risk-Based Capital (RBC) requirements, establishing a formal state accreditation process designed to more closely regulate for solvency, minimize the diversity of approved statutory accounting and actuarial practices and increasing the annual statutory statement disclosure requirements. The RBC formulas are designed to identify an insurer's minimum capital requirements based upon the inherent risks (e.g., asset default, credit and underwriting) of its operations. In addition to the minimum capital requirements, the RBC formula and related regulations identify various levels of capital adequacy and corresponding actions that the state insurance departments should initiate. The level of capital adequacy below which insurance departments would take action is defined as the Company Action Level. As of December 31, 1996, all of CNA's property/casualty and life insurance affiliates have adjusted capital amounts in excess of Company Action Levels. REINSURANCE Information as to CNA's reinsurance business is set forth in Note G of the Consolidated Financial Statements of the 1996 Annual Report to Shareholders, incorporated by reference in Item 8, herein. EMPLOYEE RELATIONS CNA has approximately 24,300 full-time equivalent employees and has experienced satisfactory labor relations. CNA has never had work stoppages due to labor disputes. CNA has comprehensive benefit plans for substantially all of its employees, including retirement plans, savings plans, disability programs, group life programs and group health care programs. BUSINESS SEGMENTS Information as to CNA's business segments is set forth in Note M of the Consolidated Financial Statements of the 1996 Annual Report to Shareholders, incorporated by reference in Item 8, herein. 5 PROPERTY/CASUALTY BUSINESS CNA's property/casualty operations market commercial and personal lines of property/casualty insurance through independent agents and brokers. Commercial lines customers include large national corporations, small and medium-sized businesses, groups and associations and professionals. Coverages are written primarily through traditional insurance contracts under which risk is transferred to the insurer. Many large commercial account policies are written under retrospectively-rated contracts which are experience-rated. Premiums for such contracts may be adjusted, subject to limitations set by contract, based on loss experience of the insureds. Other experience-rated policies include provisions for dividends based on loss experience. Experience-rated contracts reduce but do not eliminate risk to the insurer. Commercial business includes such lines as workers' compensation, general liability and commercial automobile, professional and specialty, multiple peril and accident and health coverages as well as reinsurance. Professional and specialty coverages include liability coverage for architects and engineers, lawyers, accountants, medical and dental professionals; directors and officers liability; and other specialized coverages. The major components of CNA's commercial business are professional and specialty coverages, general liability and commercial automobile and workers' compensation which accounted for 18%, 17% and 17%, respectively, of 1996 premiums earned. The property/casualty group markets personal lines of insurance, primarily automobile and homeowners' coverages sold to individuals under monoline and package policies. CNA is required by the various states in which it does business to provide coverage for risks that would not otherwise be considered under CNA's underwriting standards. CNA's share of involuntary risks is mandatory and generally a function of its share of the voluntary market by line of insurance in each state. Premiums for involuntary risks result from mandatory participation in residual markets. Property/casualty involuntary risks include mandatory participation in residual markets, statutory assessments for insolvencies of other insurers and other charges. CNA also provides loss control, policy administration and claim administration services under service contracts for fees. Such services are provided primarily in the workers' compensation market, where retention of more risk by the employer through self-insurance or high-deductible programs has become increasingly prevalent. 6 PROPERTY/CASUALTY BUSINESS--(CONTINUED)
The following table sets forth supplemental data on a GAAP basis, except where indicated, for the property/casualty business: - --------------------------------------------------------------------------------------------------------------- Year Ended December 31 1996 1995(a) 1994 1993 1992 (In millions of dollars) - --------------------------------------------------------------------------------------------------------------- Commercial Premiums Earned Professional and specialty............... $ 1,844.9 $ 1,557.7 $ 1,010.1 $ 798.9 $ 741.5 General liability and commercial automobile 1,754.1 1,648.9 1,261.1 1,154.5 1,176.0 Workers' compensation.................... 1,542.5 1,475.8 1,426.3 1,501.5 1,669.2 Multiple peril.......................... 1,046.9 869.9 389.0 368.5 374.9 Accident and health..................... 919.0 699.1 557.1 428.3 352.6 Reinsurance and other.................... 1,188.9 973.9 773.5 712.2 556.0 --------- --------- --------- ---------- --------- $ 8,296.3 $ 7,225.3 $ 5,417.1 $ 4,963.9 $ 4,870.2 ========= ========= ========= ========== ========= Personal Premiums Earned Personal lines packages.................. $ 1,063.3 $ 781.6 $ 562.6 $ 510.7 $ 447.3 Monoline automobile and property coverages 366.5 325.4 314.2 343.5 395.0 Accident and health...................... 168.9 107.8 88.9 85.6 88.6 --------- ---------- --------- ---------- --------- $ 1,598.7 $ 1,214.8 $ 965.7 $ 939.8 $ 930.9 ========= ========== ========= ========== ========= Involuntary Risks Premiums Earned (b) Workers' compensation.................... $ 135.6 $ 178.2 $ 350.0 $ 292.3 $ 451.4 Private passenger automobile............. 57.9 79.7 46.4 23.2 52.5 Commercial automobile.................... 36.4 19.9 54.3 50.3 44.9 Property and multiple peril.............. 2.2 5.9 5.0 5.5 3.7 --------- ---------- --------- --------- --------- $ 232.1 $ 283.7 $ 455.7 $ 371.3 $ 552.5 ========= ========== ========= ========= ========= Net Investment Income and Other Income Commercial............................... $ 1,943.3 $ 1,713.1 $ 1,145.1 $ 979.8 $ 1,087.3 Personal................................. 353.0 230.4 177.6 156.1 165.3 Involuntary risks........................ 93.4 104.3 88.1 75.7 83.6 --------- ---------- --------- --------- --------- $ 2,389.7 $ 2,047.8 $ 1,410.8 $ 1,211.6 $ 1,336.2 ========= ========== ========= ========= ========= Underwriting (Loss) Commercial............................... $ (853.1) $ (920.8) $ (945.7) $(1,535.6) $(2,505.9) Personal................................ (183.8) (101.9) (185.2) (99.7) (152.8) Involuntary risks........................ (106.3) (98.8) (70.3) (156.5) (340.9) ---------- ---------- ---------- ---------- ---------- $(1,143.2) $(1,121.5) $(1,201.2) $(1,791.8) $(2,999.6) ========== ========== ========== ========== ========== - --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------- Year Ended December 31 1996 1995(a) 1994 1993 1992 (In millions of dollars) - --------------------------------------------------------------------------------------------------------------- Trade Ratios (c) Loss ratio............................... 76.4% 77.9% 81.9% 96.2% 116.7% Expense ratio........................... 30.9 29.4 28.3 27.2 26.2 Combined ratio (before policyholder dividends)............................... 107.3 107.3 110.2 123.4 142.9 Policyholder dividend ratio.............. 1.6 3.0 4.8 3.9 1.9 Trade Ratios - Statutory basis (c) Loss ratio............................... 76.8% 78.6% 82.2% 96.4% 116.3% Expense ratio............................ 31.6 29.2 27.8 27.1 25.6 Combined ratio (before policyholder dividends)............................... 108.4 107.8 110.0 123.5 141.9 Policyholder dividend ratio.............. 1.4 2.1 3.8 3.1 2.4 Other Data - Statutory basis (d) Capital and surplus...................... $6,348.8 $5,695.9 $3,367.3 $3,598.4 $3,135.8 Written to surplus ratio................. 1.6 1.7 2.0 1.7 2.0 - ---------------------------------------------------------------------------------------------------------------
(a) Premium earned, net investment income and underwriting loss includes the results of The Continental Corporation since May 10, 1995. (b) Property/casualty involuntary risks include mandatory participation in residual markets, statutory assessments for insolvencies of other insurers and other involuntary charges. 7 PROPERTY/CASUALTY BUSINESS--(CONTINUED) (c) GAAP trade ratios reflect the results of Continental Casualty Company and its property/casualty insurance subsidiaries for the entire year, along with the results of The Continental Insurance Company and its property/casualty insurance subsidiaries since May 10, 1995. Statutory trade ratios reflect the results of Continental Casualty Company and its property/casualty insurance subsidiaries and The Continental Insurance Company and its property/casualty insurance subsidiaries since January 1, 1995. Prior year ratios have not been restated to include Continental. Trade ratios are industry measures of property/casualty underwriting results. The loss ratio is the percentage of incurred claim and claim adjustment expenses to premiums earned. Under generally accepted accounting principles, the expense ratio is the percentage of underwriting expenses, including the change in deferred acquisition costs, to premiums earned. Under statutory accounting principles, the expense ratio is the percentage of underwriting expenses (with no deferral of acquisition costs) to premiums written. The combined ratio is the sum of the loss and expense ratios. The policyholder dividend ratio is the ratio of dividends incurred to premiums earned. (d) Other Data is determined on the statutory basis of accounting and reflects a capital contribution from CNA of $475 million in 1993. In addition, dividends of $545 million, $325 million, $175 million, $150 million and $100 million were paid to CNA by Continental Casualty Company in 1996, 1995, 1994, 1993 and 1992, respectively. Property/casualty insurance subsidiaries have received, or will receive, reimbursement from CNA for general management and administrative expenses, unallocated loss adjustment expenses and investment expenses of $194.6, $197.0, $169.6, $167.5, and $141.1 million in 1996, 1995, 1994, 1993 and 1992, respectively. The following table displays the distribution of gross written premium: ------------------------------------------------------------------------ Gross Written Premium % of Total --------------------- Year Ended December 31 1996 1995 1994 ------------------------------------------------------------------------ New York..................................... 9.3 10.3 8.6 California................................... 8.5 9.7 11.4 Texas........................................ 6.0 6.5 6.5 Illinois..................................... 5.3 5.2 4.9 Pennsylvania................................. 4.9 5.4 5.7 Florida...................................... 4.2 4.1 4.6 New Jersey................................... 4.1 4.6 3.2 All other states, countries or political subdivisions (a)............................. 46.8 44.4 43.2 Reinsurance assumed: Voluntary.................................. 9.1 7.8 5.9 Involuntary................................ 1.8 2.0 6.0 ------ ------- ------ 100.0 100.0 100.0 ======================================================================== (a) No other state, country or political subdivision accounts for more than 3.0% of gross written premium. 8 PROPERTY/CASUALTY CLAIM AND CLAIM EXPENSES The loss reserve development table below illustrates the change over time of reserves established for property/casualty claims and claims expense at the end of various calendar years. 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 that reserve liability. The third section, reading down, shows re-estimates of the original recorded reserve as of the end of each successive year which is the result of CNA's expanded awareness of additional facts and circumstances that pertain to the unsettled claims. The last section compares the latest re-estimated reserve to the reserve originally established, and indicates whether or not the original reserve was 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.
- -------------------------------------------------------------------------------------------------------------------- Schedule of Property/Casualty Loss Reserve Development Calendar Year Ended 1986(a) 1987(a) 1988(a)1989(a) 1990(a) 1991(a) 1992(a) 1993(a) 1994(b) 1995(c) 1996 (In millions of dollars) - -------------------------------------------------------------------------------------------------------------------- Gross reserves for unpaid claim and claim expenses................$ -- $ -- $ -- $ -- $16,530 $17,712 $20,034 $20,812 $21,639 $31,044 $29,830 Ceded recoverable....... -- -- -- -- 3,440 3,297 2,867 2,491 2,705 6,089 6,095 ----- ----- ----- ----- ------- ------- ------- ------- ------- ------- ------- Net reserves for unpaid claim and claim expenses................ 6,243 8,045 9,552 11,267 13,090 14,415 17,167 18,321 18,934 24,955 23,735 ------ ----- ----- ------ ------ ------ ------ ------ ------ ------ ------ NET PAID (CUMULATIVE) AS OF: One year later.......... 1,335 1,763 2,040 2,670 3,285 3,411 3,706 3,629 3,656 6,510 -- Two years later......... 2,383 2,961 3,622 4,724 5,623 6,024 6,354 6,143 7,087 -- -- Three years later....... 3,197 4,031 4,977 6,294 7,490 7,946 8,121 8,764 -- -- -- Four years later........ 3,963 5,007 6,078 7,534 8,845 9,218 10,241 -- -- -- -- Five years later........ 4,736 5,801 6,960 8,485 9,726 10,950 -- -- -- -- -- Six years later......... 5,339 6,476 7,682 9,108 11,207 -- -- -- -- -- -- Seven years later....... 5,880 7,061 8,142 10,393 -- -- -- -- -- -- -- Eight years later....... 6,382 7,426 9,303 -- -- -- -- -- -- -- -- Nine years later........ 6,690 8,522 -- -- -- -- -- -- -- -- -- Ten years later......... 7,738 -- -- -- -- -- -- -- -- -- -- - --------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------- Schedule of Property/Casualty Loss Reserve Development - continued Calendar Year Ended 1986(a) 1987(a) 1988(a) 1989(a) 1990(a) 1991(a) 1992(a) 1993(a) 1994(b) 1995(c) 1996 (In millions of dollars) - -------------------------------------------------------------------------------------------------------------------- NET RESERVES RE-ESTIMATED AS OF: End of initial year..... 6,243 8,045 9,552 11,267 13,090 14,415 17,167 18,321 18,934 24,955 23,735 One year later.......... 6,642 8,086 9,737 11,336 12,984 16,032 17,757 18,250 18,922 24,864 -- Two years later......... 6,763 8,345 9,781 11,371 14,693 16,810 17,728 18,125 18,500 -- -- Three years later....... 6,989 8,424 9,796 13,098 15,737 16,944 17,823 17,868 -- -- -- Four years later........ 7,166 8,516 11,471 14,118 15,977 17,376 17,765 -- -- -- -- Five years later........ 7,314 10,196 12,496 14,396 16,440 17,329 -- -- -- -- -- Six years later......... 9,022 11,239 12,742 14,811 16,430 -- -- -- -- -- -- Seven years later.......10,070 11,480 13,167 14,810 -- -- -- -- -- -- -- Eight years later.......10,317 11,898 13,174 -- -- -- -- -- -- -- -- Nine years later........10,755 11,925 -- -- -- -- -- -- -- -- -- Ten years later.........10,823 -- -- -- -- -- -- -- -- -- -- ------- ------ ------ ------ ------- ------ ------ ------ ------ ------ ----- Total net (deficiency) redundancy (4,580) (3,880) (3,622) (3,543) (3,340) (2,914) (598) 453 434 91 -- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Reconciliation to Gross Re-estimated Reserves: Net reserves re-estimated............ 10,823 11,925 13,174 14,810 16,430 17,329 17,765 17,868 18,500 24,864 -- Re-estimated ceded recoverable -- -- -- -- 2,855 2,610 2,046 1,918 2,472 6,262 -- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ----- Total gross re-estimated reserves -- -- -- -- 19,285 19,939 19,811 19,786 20,972 31,126 -- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Net (Deficiency) Redundancy Related to: Asbestos claims.........(3,021) (2,973) (2,917) (2,818) (2,681) (2,634) (945) (345) (309) (51) -- Environmental claims....(1,021) (1,007) (1,002) (975) (964) (918) (871) (425) (246) (65) -- ------- ------- ------- ------- ------- ------- ----- ----- ----- ----- ----- Total asbestos and (4,042) (3,980) (3,919) (3,793) (3,645) (3,552)(1,816) (770) (555) (116) -- environmental Other................... (538) 100 297 250 305 638 1,218 1,223 989 207 -- ------- ------- ------- ------- ------- ------- ------ ------ ----- ----- ------ Total net (deficiency) redundancy..............(4,580) (3,880) (3,622) (3,543) (3,340) (2,914) (598) 453 434 91 -- - ------------------------------------------------------------------------------------------------------------------------- (a) Reflects reserves of CNA, excluding Continental reserves which were acquired on May 10, 1995. Accordingly, the reserve development (net reserves recorded at the end of the year, as initially estimated, less net reserves re-estimated as of subsequent years) relates only to the operations of CNA and does not include Continental. (b) Reserve development related to the 1994 reserves of CNA, excluding Continental, as determined by the balances in this column, plus adverse reserve development of $134 million related to the reserves of Continental, acquired on May 10, 1995, which are not reflected in this column, were recorded by CNA in 1995 and subsequent periods. (c) Includes Continental gross reserves of $9,713 million and net reserves of $6,063 million acquired on May 10, 1995 and subsequent development thereon.
9 PROPERTY/CASUALTY CLAIM AND CLAIM EXPENSES - (CONTINUED) Additional information as to CNA's property/casualty claim and claim expense reserves is set forth in Notes A and E of the Consolidated Financial Statements of the 1996 Annual Report to Shareholders, incorporated by reference in Item 8, herein. RESERVE DEVELOPMENT Information as to CNA's reserve development is set forth in Note E of the Consolidated Financial Statements of the 1996 Annual Report to Shareholders, incorporated by reference in Item 8, herein. LIFE BUSINESS CNA's life insurance operations market individual and group insurance products through licensed agents, most of whom are independent contractors, who sell life and/or group insurance for CNA and for other companies on a commission basis. The individual insurance products consist primarily of term, universal life, participating policies and annuity products. Products developed in 1996 included a portfolio of variable products and new universal life products which are expected to be marketed in 1997. Group insurance products include life, accident and health consisting primarily of major medical and hospitalization and pension products, such as guaranteed investment contracts and annuities. In the medical and hospitalization market, CNA underwrites the Federal Employees Health Benefits Program (FEHBP) which had revenues of $2.1 billion, $1.9 billion and $1.8 billion in 1996, 1995 and 1994. CNA has undertaken a number of initiatives to enhance service, manage health care utilization demand and quality and strengthen CNA's networks of physicians, hospitals and other providers. CNA's products are designed and priced using assumptions management believes to be reasonably conservative for mortality, morbidity, persistency, expense levels and investment results. Underwriting practices that management believes are prudent are followed in selecting the risks that will be insured. Further, actual experience related to pricing assumptions is monitored closely so that prospective adjustments to these assumptions may be implemented as necessary. CNA mitigates the risk related to persistency by including contractual surrender charge provisions in its ordinary life and annuity policies in the first five to ten years, thus providing for the recovery of acquisition expenses. The investment portfolios supporting interest sensitive products, including universal life and individual annuities, are managed separately to minimize surrender and interest rate risk. Profitability in the health insurance business continues to be impacted by intense competition and rising medical costs. CNA has aggressively pursued expense reduction through increases in automation and other productivity improvements. Further, increasing costs of health care have resulted in a continued market shift away from traditional forms of health coverage toward managed care products and experience-rated plans. CNA's ability to compete in this market will be increasingly dependent on its ability to control costs through managed care techniques, innovation and quality customer-focused service in order to properly position CNA in the evolving health care environment. 10 LIFE BUSINESS--(CONTINUED)
The following table sets forth supplemental data for the life insurance business: - -------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1996 1995 1994 1993 1992 (In millions of dollars) - -------------------------------------------------------------------------------------------------------------------- INDIVIDUAL PREMIUM Life and annuities................................ $ 629.1 $ 497.1 $ 369.4 $ 312.1 $ 294.7 Accident and health............................... 1.8 32.7 32.6 30.9 27.1 --------- --------- --------- --------- --------- $ 630.9 $ 529.8 $ 402.0 $ 343.0 $ 321.8 ========= ========= ========= ========= ========= GROUP PREMIUM Accident and health (a)........................... $ 2,548.0 $ 2,189.7 $ 2,111.2 $ 1,983.0 $ 1,957.5 Life and annuities................................ 194.9 312.9 165.0 116.2 158.4 --------- --------- --------- --------- --------- $ 2,742.9 $ 2,502.6 $ 2,276.2 $ 2,099.2 $ 2,115.9 ========= ========= ========= ========= ========= NET INVESTMENT INCOME AND OTHER INCOME Individual........................................ $ 292.2 $ 247.3 $ 193.8 $ 154.2 $ 163.0 Group............................................. 214.2 198.1 166.4 142.8 156.6 --------- --------- --------- --------- --------- $ 506.4 $ 445.4 $ 360.2 $ 297.0 $ 319.6 ========= ========= ========= ========= ========= INCOME EXCLUDING REALIZED CAPITAL GAINS, BEFORE INCOME TAX Individual........................................ $ 100.9 $ 65.4 $ 47.3 $ 14.5 $ 22.5 Group............................................. 69.8 94.9 87.1 51.9 56.1 --------- --------- --------- --------- --------- $ 170.7 $ 160.3 $ 134.4 $ 66.4 $ 78.6 ========= ========= ========= ========= ========= GROSS LIFE INSURANCE IN FORCE Individual (b).................................... $ 172,213 $ 113,901 $ 80,560 $ 76,835 $ 75,569 Group............................................. 64,796 52,146 46,873 35,413 29,643 --------- --------- --------- --------- --------- $ 237,009 $ 166,047 $ 127,433 $ 112,248 $ 105,212 ========= ========= ========= ========= ========= OTHER DATA - STATUTORY BASIS(C) Capital and surplus............................... $ 1,163.4 $ 1,127.6 $ 1,054.6 $ 1,022.0 $ 1,003.0 Capital and surplus-percent of total liabilities.. 25.5% 28.2% 29.4% 30.1% 33.4% Participating policyholders-percent of gross life insurance in force 0.5 0.6 0.9 1.1 1.2 - -------------------------------------------------------------------------------------------------------------------- (a) Group accident and health premiums include contracts involving U.S. government employees and their dependents amounting to approximately $2.1, $1.9, $1.8, $1.7 and $1.6 billion in 1996, 1995, 1994, 1993 and 1992, respectively. (b) Lapse ratios for individual life insurance, as measured by surrenders and withdrawals as a percentage of average ordinary life insurance in force were 7.2%, 9.4%, 9.7%, 9.7% and 8.6%, in 1996, 1995, 1994, 1993 and 1992, respectively. (c) Other Data is determined on the basis of statutory accounting practices. Life insurance subsidiaries have received reimbursement from CNA for general management and administrative expenses and investment expenses of $28.5, $21.3, $24.7, $25.6 and $24.5 million in 1996, 1995, 1994, 1993 and 1992, respectively. Statutory capital and surplus as a percent of total liabilities is determined after excluding Separate Account liabilities and reclassifying the statutorily required Asset Valuation and Interest Maintenance Reserves as surplus.
11 LIFE BUSINESS - (CONTINUED) Guaranteed Investment Contracts - ------------------------------- CAC writes the majority of its group pension products as guaranteed investment contracts in a fixed Separate Account, which is permitted by Illinois insurance statutes. CAC guarantees principal and a specified return to guaranteed investment contractholders. This guarantee affords the contractholders additional security, in the form of CAC's general account surplus, which supports the principal and interest payments. CNA manages the liquidity and interest rate risks on the guaranteed investment contract portfolio by matching the approximate duration of fixed maturity securities included in the investment portfolio supporting the guaranteed investment contracts with the corresponding payout pattern of the contracts, and assessing market value surrender charges on the majority of the contracts. The table below shows a comparison of the duration of assets and contracts, weighted average investment yield, weighted average interest crediting rates, and withdrawal characteristics of the guaranteed investment contract portfolio. - -------------------------------------------------------------------------------- December 31 1996 1995 1994 - -------------------------------------------------------------------------------- Duration in years: Assets...................................... 3.12 3.12 3.23 Contracts................................... 3.16 2.98 2.99 ---- ---- ---- Difference.................................. (0.04) 0.14 0.24 ====== ==== ==== Weighted average investment yield.............. 7.44% 7.58% 7.67% Weighted average interest crediting rates...... 7.32% 7.45% 7.53% Withdrawal characteristics: With market value adjustment................ 95% 92% 79% Non-withdrawable............................ 5 8 15 Without market value adjustment............. 0 0 6 - -------------------------------------------------------------------------------- Total 100% 100% 100% ================================================================================ As shown above, the weighted average investment yield at December 31, 1996, 1995 and 1994 was more than the weighted average interest crediting rate. INVESTMENTS Information as to CNA's investments is set forth in Note B of the Consolidated Financial Statements of the 1996 Annual Report to Shareholders, incorporated by reference in Item 8, herein. 12 ITEM 2. PROPERTIES CNA Plaza, owned by Continental Assurance Company, serves as the home office for CNA and its insurance subsidiaries. An adjacent building (located at 55 E. Jackson Blvd.), jointly owned by Continental Casualty Company and Continental Assurance Company, is partially situated on grounds under leases expiring in 2058. Approximately 30% of the adjacent building is rented to non-affiliates. CNA's subsidiaries lease office space in various cities throughout the United States and in other countries. The following table sets forth certain information with respect to the principal office buildings owned or leased by CNA's subsidiaries: - -------------------------------------------------------------------------------- AMOUNT OF BUILDING OWNED AND OCCUPIED OR LEASED BY CNA OR ITS LOCATION SUBSIDIARIES PRINCIPAL USAGE - -------------------------------------------------------------------------------- CNA Plaza 1,144,378 * Principal Executive Offices 333 S. Wabash of CNA Chicago, Illinois 180 Maiden Lane 507,547* Property/Casualty New York, New York Insurance Offices 1 Continental Drive 490,993** Property/Casualty Cranbury, New Jersey Insurance Offices 55 E. Jackson Blvd. 308,750 * Principal Executive Chicago, Illinois Offices of CNA 401 Penn Street 251,691* Property/Casualty Reading, Pennsylvania Insurance Offices 100 CNA Drive 251,363* Life Insurance Offices Nashville, Tennessee 7361 Calhoun Place 224,725** Life Insurance Offices Rockville, Maryland 1111 E. Broad St. 215,470** Property/Casualty Columbus, Ohio Insurance Offices 200 S. Wacker Drive 214,997** Property/Casualty Chicago, Illinois Insurance Offices 333 Glen Street 157,825** Property/Casualty Glen Falls, New York Insurance Offices; Residual Market Center 111 Congressional Blvd. 118,215** Personal Lines Indianapolis, Indiana 1431 Opus Place 106,151** Property/Casualty, Downers Grove, Illinois Surety Insurance Offices 2401 Pleasant Valley 102,376** Commercial Operations York, Pennsylvania 1100 Ward Avenue 93,771* First Insurance Company Honolulu, Hawaii of Hawaii, Ltd.Headquarters * Represents property owned by CNA or its subsidiaries. ** Represents property leased by CNA or its subsidiaries. 13 ITEM 3. LEGAL PROCEEDINGS Incorporated herein by reference from Note F of the Consolidated Financial Statements in the 1996 Annual Report to Shareholders. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 14 EXECUTIVE OFFICERS OF THE REGISTRANT FIRST BECAME POSITION AND OFFICER OF OFFICES HELD THE CNA WITH INSURANCE NAME REGISTRANT AGE COMPANIES PRINCIPAL OCCUPATION DURING PAST FIVE YEARS Laurence A. Tisch Chief Executive 74 **** Co-Chairman of the Officer Board and Co-Chief Executive Officer of Loews Corporation. President, Chief Executive Officer and Director of CBS, Inc. until November 1995. Executive officer of the Registrant since 1974. Dennis H. Chookaszian Chairman of the 53 1975 Chairman of the Board Board and Chief and Chief Executive Executive Officer, Officer of the CNA CNA Insurance Insurance Companies Companies since September 1992. Prior thereto, Mr. Chookaszian was President and Chief Operating Officer of the CNA Insurance Companies. Executive officer of the Registrant since 1975. Philip L. Engel President, CNA 56 1977 President of the CNA Insurance Insurance Companies Companies since September 1992. Prior thereto, Mr. Engel was Executive Vice President of the CNA Insurance Companies. Executive officer of the Registrant since 1992. William J. Senior Vice 44 1987 Senior Vice President Adamson, Jr. President, CNA of the CNA Insurance Insurance Companies since November Companies 1995; Group Vice President of the CNA Insurance Companies from April 1993 through October 1995. Prior thereto, Mr. Adamson was Vice President of the CNA Insurance Companies. Exectuive officer of the Registrant since 1996. FIRST BECAME POSITION AND OFFICER OF OFFICES HELD THE CNA WITH INSURANCE NAME REGISTRANT AGE COMPANIES PRINCIPAL OCCUPATION DURING PAST FIVE YEARS James P. Flood Senior Vice 46 1995 Senior Vice President of President, CNA the CNA Insurance Companies Insurance since May 1995; Senior Companies Vice President of The Continental Insurance Company from October 1992 through May 1995. Prior thereto, Mr. Flood was Vice President of The Continental Insurance Company. Executive officer of the Registrant since 1996. Michael C. Garner Senior Vice 44 1993 Senior Vice President of President, CNA the CNA Insurance Companies Insurance since September 1993. Companies Prior thereto, Mr. Garner was a partner of Coopers and Lybrand LLP. Executive officer of the Registrant since 1996. Bernard L. Hengesbaugh Senior Vice 50 1980 Senior Vice President of President, CNA the CNA Insurance Companies Insurance since November 1990. Companies Executive officer of the Registrant since 1996. Peter E. Jokiel Senior Vice 49 1985 Senior Vice President and President and Chief Financial Officer Chief Financial since November 1990. Officer Executive officer of the Registrant since 1990. Jonathan D. Kantor Senior Vice 41 1994* Group Vice President of the President* CNA Insurance Companies since April 1994. Prior thereto, partner at the law firm of Shea & Gould. Executive officer of the Registrant effective April 1, 1997.** Donald M. Lowry Senior Vice 67 1982 Senior Vice President, President, Secretary and General Secretary and Counsel since August 1992. General Prior thereto, Mr. Lowry Counsel*** was Senior Vice President and General Counsel of the CNA Insurance Companies. Executive officer of the Registrant since 1992. Carolyn L. Murphy Senior Vice 52 1978 Senior Vice President of President, CNA the CNA Insurance Companies Insurance since November 1990. Companies Executive officer of the Registrant since 1992. FIRST BECAME POSITION AND OFFICER OF OFFICES HELD THE CNA WITH INSURANCE NAME REGISTRANT AGE COMPANIES PRINCIPAL OCCUPATION DURING PAST FIVE YEARS William H. Sharkey,Jr. Senior Vice 48 1994 Senior Vice President of President, CNA the CNA Insurance Companies Insurance since January 1994. Prior Companies therto, Mr. Sharkey was Senior Vice President of Cigna Healthcare. Executive officer of the Registrant since 1996. 15 EXECUTIVE OFFICERS OF THE REGISTRANT - CONTINUED FIRST BECAME POSITION AND OFFICER OF OFFICES HELD THE CNA WITH INSURANCE NAME REGISTRANT AGE COMPANIES PRINCIPAL OCCUPATION DURING PAST FIVE YEARS Adrian M. Tocklin Senior Vice 45 1995 Senior Vice President of President, CNA the CNA Insurance Companies Insurance since May 1995; President Companies of The Continental Insurance Company from June 1994 through May 1995; Executive Vice President of The Continental Insurance Company from August 1991 through June 1994. Prior thereto, Ms. Tocklin was Senior Vice President of The Continental Insurance Company. Executive officer of the Registrant since 1996. Jae L. Wittlich Senior Vice 54 1977 Senior Vice President of President, the CNA Insurance Companies CNA since November 1990. Insurance Executive officer of the Companies Registrant since 1992. David W. Wroe Senior Vice 50 1996 Senior Vice President of President, the CNA Insurance Companies CNA since June 1996. Prior Insurance thereto, Mr. Wroe was Companies President of Agency Management Systems. Executive officer of the Registrant since 1996. - ------------------------------- Officers are elected and hold office until their successors are elected and qualified, and are subject to removal by the Board of Directors. *Mr. Kantor will succeed Donald Lowry as Senior Vice President , Secretary and General Counsel of the CNA Insurance Companies effective April 1, 1997 and as Senior Vice President and General Counsel of the Registrant effective 1998. **Shea & Gould declared bankruptcy in 1995. ***Mr. Lowry will remain Senior Vice President, Secretary and General Counsel of the Registrant until 1998. ****Mr. Tisch is not an officer of the CNA Insurance Companies. 16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Incorporated herein by reference from page 82 of the 1996 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA Incorporated herein by reference from page 2 of the 1996 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated herein by reference from pages 12 through 29 of the 1996 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Balance Sheet - December 31, 1996 and 1995 Statement of Consolidated Operations - Years Ended December 3l, 1996, 1995 and 1994 Statement of Consolidated Stockholders' Equity - December 31, 1996, 1995 and 1994 Statement of Consolidated Cash Flows - Years Ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements Independent Auditors' Report The above Consolidated Financial Statements, the related Notes to the Consolidated Financial Statements and the Independent Auditors' Report are incorporated herein by reference from pages 30 through 81 of the 1996 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 17 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required in Part III has been omitted as the Registrant intends to file a definitive proxy statement pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year. ITEM 11. EXECUTIVE COMPENSATION Information required in Part III has been omitted as the Registrant intends to file a definitive proxy statement pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required in Part III has been omitted as the Registrant intends to file a definitive proxy statement pursuant to Regulation l4A with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required in Part III has been omitted as the Registrant intends to file a definitive proxy statement pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year. PART IV ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K Page Number ------ (a) 1. FINANCIAL STATEMENTS: A separate index to the Consolidated Financial Statements is presented in Part II, Item 8.......................... 17 (a) 2. FINANCIAL STATEMENT SCHEDULES: Schedule I Summary of Investments..................... 22 Schedule II Condensed Financial Information (Parent Company). 23 Schedule III Supplementary Insurance Information.............. 27 Schedule V Valuation and Qualifying Accounts and Reserves.. 28 Schedule VI Supplementary Information Concerning Property/Casualty Insurance Operations.......... 28 Other schedules are omitted because of the absence of conditions under which they are required or because the required information is provided in the Consolidated Financial Statements or notes thereto. Independent Auditors' Report................................. 29 18 PART IV ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED) (a) 3. EXHIBITS: Exhibit Description of Exhibit Number ---------------------- ------- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession: Securities Purchase Agreement, dated as of December 6, 1994, by and between CNA Financial Corporation and The Continental Corporation (with exhibits thereto) (Exhibit 1 to Form 8-K dated December 9, 1994 incorporated herein by reference.).... 2.1 Merger Agreement, dated as of December 6, 1994, by and among CNA Financial Corporation, Chicago Acquisition Corp. and The Continental Corporation (Exhibit 2 to Form 8-K dated December 9, 1994 incorporated herein by reference.)................... 2.2 (3) Articles of incorporation and by-laws: Certificate of Incorporation of CNA Financial Corporation, as amended May 6, 1987 (Exhibit 3.1 to 1987 Form 10-K incorporated herein by reference.)........................................ 3.1 By-Laws of CNA Financial Corporation, as amended February 12, 1997......................................................... 3.2* (4) Instruments defining the rights of security holders, including indentures: CNA Financial Corporation hereby agrees to furnish to the Commission upon request copies of instruments with respect to long-term debt, pursuant to Item 601(b)(4)(iii) of Regulation S-K.......................................... -- (10) Material contracts: Continental Casualty Company "CNA" Annual Incentive Bonus Plan Provisions (Exhibit 10.1 to 1994 Form 10K incorporated herein by reference.)................................................ 10.1 Employment Agreement between CNA Financial Corporation and Dennis H. Chookaszian, dated December 31, 1995 (Exhibit 10.2 to 1995 Form 10K incorporated herein by reference.)................................................... 10.2 Employment Agreement between CNA Financial Corporation and Philip L. Engel, dated December 31, 1995 (Exhibit 10.3 to 1995 Form 10K incorporated herein by reference.)................... 10.3 Continuing Services Agreement between CNA Financial Corporation and Edward J. Noha, dated February 27, 1991 (Exhibit 6.0 to 1991 Form 8-K, filed March 18, 1991, incorporated herein by reference.)................................................... 10.4 CNA Employees' Retirement Benefit Equalization Plan, as amended through January 1, 1993 (Exhibit 10.4 to 1992 Form 10-K incorporated herein by reference.)............................. 10.5 CNA Employees' Supplemental Savings Plan, as amended through January 1, 1993 (Exhibit 10.6 to 1992 Form 10-K incorporated herein by reference.).......................................... 10.6 19 PART IV ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K (continued) (a) 3. EXHIBITS: Exhibit Description of Exhibit Number Number ----------------------------- ------- (10)Material contracts (continued): Federal Income Tax Allocation Agreement dated February 29, 1980 between CNA Financial Corporation and Loews Corporation (Exhibit 10.2 to 1987 Form 10-K incorporated herein by reference.)........................................ 10.7 Agreement between Fibreboard Corporation and Continental Casualty Company, dated April 9, 1993 (Exhibit A to 1993 Form 8-K filed April 12, 1993 incorporated herein by reference.).... 10.8 Settlement Agreement entered into on October 12, 1993 by and among Fibreboard Corporation, Continental Casualty Company, CNA Casualty of California, Columbia Casualty Company and Pacific Indemnity Company together the "Parties" (Exhibit 10.1 to September 30, 1993 Form 10-Q incorporated herein by reference.)................................................... 10.9 Continental-Pacific Agreement entered into October 12, 1993 between Continental Casualty Company and Pacific Indemnity Company (Exhibit 10.2 to September 30, 1993 Form 10-Q incorporated herein by reference.)............................. 10.10 Global Settlement Agreement among Fibreboard Corporation, Continental Casualty Company, CNA Casualty Company of California, Columbia Casualty Company, Pacific Indemnity Company and the Settlement Class dated December 23, 1993 (Exhibit 10.11 to 1993 Form 10-K incorporated herein by reference.).............................................. 10.11 Glossary of Terms in Global Settlement Agreement, Trust Agreement, Trust Distribution Process and Defendant Class Settlement Agreement as of December 23, 1993 (Exhibit 10.12 to 1993 Form 10-K incorporated herein by reference.)............. 10.12 Fibreboard Asbestos Corporation Trust Agreement dated December 23, 1993 (Exhibit 10.13 to 1993 Form 10-K incorporated herein by reference.).......................................... 10.13 Trust Distribution Process - Annex A to the Trust Agreement as of December 23, 1993 (Exhibit 10.14 to 1993 Form 10-K incorporated herein by reference.)............................ 10.14 Defendant Class Settlement Agreement dated December 22, 1993 (Exhibit 10.15 to 1993 Form 10-K incorporated herein by reference.).................................................... 10.15 Escrow Agreement among Continental Casualty Company, Pacific Indemnity Company and The First National Bank of Chicago dated December 23, 1993 (Exhibit 10.16 to 1993 Form 10-K incorporated herein by reference.).......................................... 10.16 20 PART IV ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED) (a) 3. EXHIBITS: Exhibit Description of Exhibit Number ---------------------- ------ (11) Computation of Net Income per Common Share................ 11.1* (12) Statements regarding computation of ratios: Computation of Ratio of Earnings to Fixed Charges......... 12.1* Computation of Ratio of Net Income, As Adjusted, to Fixed Charges.......................................... 12.2* (13) 1996 Annual Report........................................ 13.1* (21) Subsidiaries of CNA....................................... 21.1* (23) Independent Auditor's Consent............................. 23.1* (27) Financial Data Schedule................................... 27* *Filed herewith (b) REPORTS ON FORM 8-K: None 21
SCHEDULE I CNA FINANCIAL CORPORATION SUMMARY OF INVESTMENTS - ------------------------------------------------------------------------------------------------------------------- DECEMBER 31 1996 1995 ------------------------------ ----------------------------------- MARKET CARRYING MARKET CARRYING (In millions of dollars) COST VALUE VALUE COST VALUE VALUE - ------------------------------------------------------------------------------------------------------------------- Fixed maturities available-for-sale: Bonds: United States government and government agencies and authorities-taxable.... $15,046.9 $15,045.3 $15,045.3 $17,903.4 $18,511.4 $18,511.4 States, municipalities and political subdivisions-tax exempt............. 4,859.6 4,951.2 4,951.2 3,452.8 3,603.1 3,603.1 Foreign governments and political subdivisions........................ 1,200.1 1,213.9 1,213.9 1,509.3 1,543.3 1,543.3 Public utilities..................... 195.5 205.4 205.4 280.2 305.2 305.2 Convertibles and bonds with warrants attached............................ 166.6 168.7 168.7 252.2 260.8 260.8 All other corporate.................. 6,021.7 6,070.5 6,070.5 5,887.2 6,104.6 6,104.6 Redeemable preferred stocks.............. 49.2 65.6 65.6 100.3 116.3 116.3 -------- -------- -------- -------- -------- -------- Total fixed maturities 27,539.6 27,720.6 27,720.6 29,385.4 30,444.7 30,444.7 available-for-sale ======== ======== ======== ======== ======== ======== Equity securities available-for-sale: Common stocks: Public utilities..................... 11.0 15.1 15.1 17.7 23.5 23.5 Banks, trusts and insurance companies 131.5 185.1 185.1 84.3 96.7 96.7 Industrial and other................. 335.1 431.0 431.0 631.8 795.0 795.0 Non redeemable preferred stocks.......... 224.3 227.9 227.9 2.5 2.5 2.5 -------- -------- -------- -------- -------- -------- Total equity securities 701.9 $ 859.1 859.1 736.3 $ 917.7 917.7 available-for-sale................. -------- -------- -------- -------- -------- -------- Mortgage loans.............................. 112.6 112.6 139.8 119.3 -------- -------- -------- -------- Real estate: Investment properties.................... 14.7 10.7 6.6 3.0 Acquired in satisfaction of debt......... 0.2 0.1 0.2 0.1 -------- -------- -------- -------- Total real estate.................. 14.9 10.8 6.8 3.1 -------- -------- -------- -------- Policy loans................................ 174.4 174.4 177.1 177.2 Other invested assets....................... 616.6 681.2 483.5 499.9 Short-term investments...................... 5,853.7 5,853.7 3,724.5 3,724.5 - ------------------------------------------------------------------------------------------------------------------- Total investments $35,013.7 $35,412.4 $34,653.4 $35,886.4 ===================================================================================================================
SCHEDULE II CNA FINANCIAL CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION FINANCIAL POSITION - -------------------------------------------------------------------------------- DECEMBER 31 1996 1995 (In millions of dollars) - -------------------------------------------------------------------------------- ASSETS: Investments in subsidiaries......................... $ 8,098.9 $ 8,060.6 Federal income taxes recoverable.................... -- 136.6 Deferred income taxes............................... 877.2 785.2 Notes receivable from affiliate..................... 205.0 205.0 Other............................................... 17.9 7.9 ---------- ---------- Total assets................................ $ 9,199.0 $ 9,195.3 LIABILITIES: ========== ========== Debt................................................ $ 1,971.2 $ 2,222.4 Federal income taxes payable........................ 28.7 -- Amounts due to affiliates........................... 101.7 190.3 Other............................................... 37.6 47.1 ---------- ---------- Total liabilities........................... 2,139.2 2,459.8 ---------- ---------- Total stockholders' equity.................. 7,059.8 6,735.5 - ------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,199.0 $ 9,195.3 ==============================================================================
RESULTS OF OPERATIONS - ---------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1996 1995 1994 (In millions of dollars) - ---------------------------------------------------------------------------------------------- REVENUES: Equity in income of subsidiaries before income tax: Operating income ............................... $1,088.8 $ 923.5 $ 389.1 Realized investment gains (losses).............. 609.7 453.0 (256.8) Net investment income.............................. 13.6 9.0 0.3 Realized investment gains (losses)................. (5.4) 3.1 (0.3) --------- -------- ------ 1,706.7 1,388.6 132.3 --------- -------- ------ EXPENSES: Administrative and general expenses................ 222.6 219.7 193.1 Interest expense................................... 135.0 125.3 69.6 Other.............................................. 4.0 1.2 3.7 -------- -------- ------ 361.6 346.2 266.4 -------- -------- ------ Income (loss) before income tax............. 1,345.1 1,042.4 (134.1) Income tax benefit (expense)....................... (380.3) (285.4) 170.6 ============================================================================================== Net income $ 964.8 $ 757.0 $ 36.5 ============================================================================================== See accompanying Notes to Condensed Financial Information.
SCHEDULE II (Continued) CNA FINANCIAL CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION STATEMENT OF CASH FLOWS - ----------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1996 1995 1994 (In millions of dollars) - ----------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................... $ 964.8 $ 757.0 $ 36.5 ------- ------- ----- Adjustments to reconcile net income to net cash used in operating activities: Equity in earnings of unconsolidated affiliates (1,376.7) (1,200.7) (98.0) Realized (gains) losses.......................................... 5.4 (3.1) 0.3 Changes in: Accrued investment income....................................... - - 1.1 Federal income taxes............................................ 165.3 (112.9) 5.6 Deferred income taxes........................................... 93.3 173.2 (115.0) Other, net...................................................... (131.9) 86.7 (23.6) ------- ------- ------ TOTAL ADJUSTMENTS..............................................(1,244.6) (1,056.8) (229.6) -------- -------- ------ NET CASH USED IN OPERATING ACTIVITIES.......................... (279.8) (299.8) (193.1) ------- ------- ------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of The Continental Corporation............................. - (1,125.5) - Other acquisition.................................................... - (13.0) - Purchases of fixed maturities........................................ (0.2) (709.0) (195.7) Proceeds from fixed maturities: Sales............................................................. - 501.2 19.6 Maturities........................................................ - 200.6 192.4 Net proceeds from the sale of equity securities...................... - (0.5) 4.0 Change in short-term investments..................................... (1.7) 0.8 1.1 Change in other investments.......................................... (4.6) 10.3 2.3 Other................................................................ - (3.3) (1.0) ------- ------- ------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............ (6.5) (1,138.4) 22.7 -------- -------- ------ CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid to preferred shareholders............................. (6.3) (7.3) (4.5) Dividend from affiliates............................................. 547.5 325.8 175.0 Proceeds from issuance of long-term debt............................. 248.1 1,325.0 - Principal payments on long-term debt................................ (500.0) - - Loan to The Continental Corporation.................................. - (205.0) - ------- ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES...................... 289.3 1,438.5 170.5 ------- ------- ------- NET INCREASE IN CASH.......................................... 3.0 0.3 0.1 Cash at beginning of year............................................... 0.4 0.1 - - --------------------------------------------------------------------------------------------------------- CASH AT END OF YEAR $ 3.4 $ 0.4 $ 0.1 ===========================================================================================================
STATEMENT OF CASH FLOWS - CONTINUED - ----------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1996 1995 1994 (In millions of dollars) - ----------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash received (paid): Interest expense................................................. $(140.9) $(169.5) $(70.5) Federal income taxes............................................. 15.4 102.5 53.1 ===========================================================================================================
Supplemental disclosures of cash flow information relating to acquisitions: Noncash investing activities that are not reflected in the Statement of Cash Flows are listed below*. - ------------------------------------------------------------------------------------------------------------ The Continental Other December 31, 1995 Corporation - ------------------------------------------------------------------------------------------------------------ Fair value of assets acquired......................................... $15,258.5 $ 13.0 Liabilities assumed................................................... (14,133.0) - --------- ------- Cash paid....................................................... $ 1,125.5 $ 13.0 ============================================================================================================ * There were no significant acquisitions by CNA Financial Corporation (Parent Company) during the year ended December 31, 1996 and December 31, 1994.
See accompanying Notes to Condensed Financial Information. SCHEDULE II (CONTINUED) CNA FINANCIAL CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION Notes to Condensed Financial Information a. Basis of Presentation The financial statements of the registrant should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the CNA Financial Corporation Annual Report to Shareholders. Certain amounts applicable to prior years have been reclassified to conform to classifications followed in 1996. b. Debt:
------------------------------------------------------------------------- DECEMBER 31 1996 1995 (In millions of dollars) ------------------------------------------------------------------------- Long-term Variable rate debt: Credit Facility..................................$ 400.0 $ 825.0 Commercial Paper................................. 675.0 500.0 Senior Notes: 8 7/8 %, due March 1, 1998....................... 149.6 149.2 6 1/4%, due November 15, 2003.................... 248.4 248.2 6 3/4%, due November 15, 2006.................... 248.1 -- 7 1/4% Debenture, due November 15, 2023............. 247.1 247.1 1.0% Urban Development Action Grant, due May 7, 2019. 3.0 3.0 -------- -------- Total long-term debt............................. 1,971.2 1,972.5 Short-term debt......................................... -- 249.9 ------------------------------------------------------------------------- Total $1,971.2 $2,222.4 =========================================================================
To finance the acquisition of Continental (including the refinancing of $205 million of Continental debt) CNA entered into a five-year $1.325 billion revolving credit facility. In 1996, the Company renegotiated the facility extending the maturity to May 2001. The interest rate for the facility is based on the London Interbank Offered Rate (LIBOR), plus 16 basis points. Additionally, there is a facility fee of 9 basis points annually. The average interest rate on the borrowings under the revolver at December 31, 1996 was 5.72%. Under the terms of the facility, CNA may prepay the debt without penalty. On November 15, 1996, CNA issued $250 million 6 3/4% senior notes, due November 15, 2006. The net proceeds from this issuance of approximately $248 million were used to pay down a portion of the borrowings outstanding under the revolving credit facility. As a result of this debt issuance, borrowing capacity under the revolving credit facility was reduced by $250 million, to $1.075 billion. An additional $250 million of securities remain available for issuance under a shelf registration. 25 NOTES TO CONDENSED FINANCIAL INFORMATION (CONTINUED) In 1995, to take advantage of favorable interest rates, CNA established a commercial paper program borrowing $500 million from investors to replace a like amount of credit facility financing. During 1996, CNA increased its borrowings under the commercial paper program to $675 million. The average interest rate on the commercial paper at December 31, 1996 was 5.67%. The commercial paper borrowings are classified as long-term as borrowing capacity under the credit facility will support the commercial paper. At year end 1996, the outstanding loans under the revolving credit facility were $400 million. There was no unused borrowing capacity under the facility after the effects of the commercial paper program. In 1995, CNA entered into interest rate swap agreements with a notional principal amount of $1.2 billion, which terminate from May to December 2000. These agreements provide that CNA pay interest at a fixed rate, averaging 6.20% at December 31, 1996 in exchange for the receipt of interest at the three month LIBOR rate. Concurrent with the paydown of $250 million on the revolving credit facility, CNA terminated interest rate swaps with a total notional amount of $250 million. The effect of these interest rate swaps was to increase interest expense by approximately $7 million and $2 million for the years ended December 31, 1996 and 1995, respectively. The weighted average interest rate (interest and facility fees) on the variable rate debt, which includes the revolving credit facility, commercial paper and the effect of the interest rate swaps, was 6.28% and 6.50% at December 31, 1996 and 1995, respectively. c. CNA has reimbursed, or will reimburse, its subsidiaries for general management and administrative expenses, unallocated loss adjustment expenses and investment expense of $223.1 million, $218.3 million and $194.3 million in 1996, 1995 and 1994, respectively. d. There were no capital contributions by CNA in 1996, 1995 or 1994. - -------------------------------------------------------------------------------- 26
SCHEDULE III CNA FINANCIAL CORPORATION SUPPLEMENTARY INSURANCE INFORMATION - ------------------------------------------------------------------------------------------------- Gross Insurance Reserves --------------------------------------------------- CLAIM DEFERRED AND FUTURE POLICY- ACQUISITION CLAIM POLICY UNEARNED HOLDERS' (In millions of dollars) COSTS EXPENSE BENEFITS PREMIUMS FUNDS - ------------------------------------------------------------------------------------------------- DECEMBER 31, 1996 Property/Casualty: Commercial............ $ 822.3 $26,321.8 $ 47.4 $ 3,591.3 $ 171.8 Personal.............. 262.1 1,556.8 325.5 1,043.8 - Involuntary risks..... - 1,951.4 - 23.6 - Life: Individual............ 735.8 147.9 3,138.5 - 30.2 Group................. 34.0 519.2 669.9 - 543.6 ------- --------- ------- ------- ------ CNA Insurance....... $1,854.2 30,497.1 $4,181.3 $ 4,658.7 $ 745.6 ======= ======== ======= ====== Other and intercompany eliminations.......... 332.4 --------- $30,829.5 ======== DECEMBER 31, 1995 Property/Casualty Commercial............ $ 701.9 $27,309.3 $ 38.5 $ 3,607.0 $ 162.6 Personal.............. 258.2 1,426.5 259.9 868.9 - Involuntary risks..... 8.6 2,308.5 - 73.5 - Life: Individual............ 505.7 162.3 2,678.8 - 31.0 Group................. 18.9 473.0 538.7 - 511.4 ------- --------- ------- ------ ------ CNA Insurance....... $1,493.3 31,679.6 $3,515.9 $ 4,549.4 $ 705.0 ======= ======= ======= ====== Other and intercompany eliminations.......... 352.8 --------- $32,032.4 ========= DECEMBER 31, 1994 Property/Casualty: Commercial............ $ 395.2 $18,920.3 $ 28.5 $ 2,129.1 $ 128.4 Personal.............. 197.1 1,042.4 199.0 559.9 - Involuntary risks..... - 1,675.9 - 1.7 - Life: Individual............ 427.3 145.2 2,414.9 - 31.7 Group................. 6.8 439.4 407.4 - 472.4 ------- --------- ------- -------- ------ CNA Insurance....... $1,026.4 22,223.2 $3,049.8 $ 2,690.7 $ 632.5 ======= ======= ======== ====== Other and intercompany eliminations.......... 341.6 --------- $22,564.8 =========
CNA FINANCIAL CORPORATION SUPPLEMENTARY INSURANCE INFORMATION - CONTINUED - ------------------------------------------------------------------------------------------------------------- Amortization Insurance of Net Net Claims and Deferred Other Premium Investment Policyholders' Acquisition Operating Premiums Revenue Income Benefits Costs Expenses Written - ------------------------------------------------------------------------------------------------------------- December 31, 1996 Property/Casualty: Commercial............ $ 8,296.3 $1,622.7 $ 6,703.2 $1,715.3 $ 1,103.9 $ 8,592.7 Personal.............. 1,598.7 166.0 1,183.8 402.2 273.5 1,731.5 Involuntary risks..... 232.1 92.6 243.6 61.6 91.6 286.5 Life: Individual............ 630.9 227.6 666.9 26.4 128.8 - Group................. 2,742.9 172.5 2,579.2 (13.4) 321.6 - --------- ------- -------- -------- ------- --------- CNA Insurance....... 13,500.9 2,281.4 11,376.7 $2,192.1 1,919.4 $ 10,610.7 ========= ========= Other and intercompany eliminations.......... (21.9) (5.4) (20.4) (39.7) --------- -------- --------- ------ $13,479.0 $2,276.0 $ 11,356.3 $ 1,879.7 ======== ======== ========= ======== December 31, 1995 Property/Casualty: Commercial............ $ 7,225.3 $1,463.1 $ 5,995.2 $1,494.8 $ 915.3 $ 7,561.3 Personal.............. 1,214.8 132.4 891.6 271.4 228.5 1,254.3 Involuntary risks..... 283.7 104.3 234.0 16.7 145.8 310.5 Life: Individual............ 529.8 214.6 506.8 70.5 134.3 - Group................. 2,502.6 154.6 2,340.1 (9.9) 275.6 - --------- ------- -------- -------- ------- --------- CNA Insurance....... 11,756.2 2,069.0 9,967.7 $1,843.5 1,699.5 $ 9,126.1 ======== ========= Other and intercompany eliminations.......... (21.1) 7.6 (23.8) (19.7) --------- -------- -------- ------- $11,735.1 $2,076.6 $ 9,943.9 $ 1,679.8 ======== ======== ======== ======== December 31, 1994 Property/Casualty: Commercial............ $ 5,417.1 $1,050.8 $ 4,845.8 $ 1,099.2 $ 512.3 $ 5,488.7 Personal.............. 965.7 101.5 833.2 229.6 164.1 1,037.3 Involuntary risks..... 455.7 88.1 339.6 - 186.4 438.7 Life: Individual............ 402.0 172.2 392.2 46.7 109.6 - Group................. 2,276.2 138.4 2,092.9 2.0 260.6 - --------- ------- -------- ------- ------- -------- CNA Insurance....... 9,516.7 1,551.0 8,503.7 $ 1,377.5 1,233.0 $ 6,964.7 ======= ======== Other and intercompany eliminations.......... (42.3) 0.2 (42.5) 2.4 --------- -------- ------- ------- $ 9,474.4 $1,551.2 $ 8,461.2 $ 1,235.4 ======== ======== ======= =======
27
SCHEDULE V CNA FINANCIAL CORPORATION VALUATION AND QUALIFYING ACCOUNTS AND RESERVES - ----------------------------------------------------------------------------------------------------------- Balance Balance Balance at Charged to Charged to at Beginning Costs and Other End of (In millions of dollars) of Period Expenses Amounts Deductions Period ---------------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 Deducted from assets: Allowance for doubtful accounts: Insurance receivables............ $ 288.7 $ 34.5 $ - $ 46.0 $ 277.2 ======= ======= ======= ======= ======= Year Ended December 31, 1995 Deducted from assets: Allowance for doubtful accounts: Insurance receivables............ $ 127.5 $ 39.0 $ 143.5* $ 21.3 $ 288.7 ======= ======= ======== ======= ======= Year Ended December 31, 1994 Deducted from assets: Allowance for doubtful accounts: Insurance receivables............ $ 117.3 $ 18.6 $ - $ 8.4 $ 127.5 ======= ======= ======= ======= ======= --------------------------------------------------------------------------------------------------------- * Includes Continental allowance at acquisition.
SCHEDULE VI CNA FINANCIAL CORPORATION SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS - ---------------------------------------------------------------------------------------------- CONSOLIDATED PROPERTY/ CASUALTY ENTITIES ------------------------------------- YEAR ENDED DECEMBER 31 1996 1995 1994 (In millions of dollars) - ---------------------------------------------------------------------------------------------- Deferred acquisition costs...............................$ 1,084 $ 969 $ 592 Reserves for unpaid claims and claim expenses............ 29,830 31,044 21,639 Discount, if any, deducted above (based on interest rates ranging from 3.5% to 7.5%)......................... 2,459 2,449 1,951 Unearned premiums........................................ 4,659 4,549 2,691 Earned premiums.......................................... 10,127 8,724 6,839 Net investment income.................................... 1,881 1,700 1,240 Claim and claim expenses related to current year......... 7,922 6,787 5,611 Claim and claim expenses related to prior years.......... (91) 122 (71) Amortization of deferred acquisition costs............... 2,179 1,783 1,329 Paid claim and claim expenses............................ 9,201 7,058 5,027 Premiums written......................................... 10,611 9,126 6,965 - ----------------------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders CNA Financial Corporation We have audited the consolidated financial statements of CNA Financial Corporation (an affiliate of Loews Corporation) and subsidiaries as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 and have issued our report thereon dated February 12, 1997. Such consolidated financial statements and report are included in the Company's 1996 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedules of CNA Financial Corporation and subsidiaries listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. S/DELOITTE & TOUCHE LLP Deloitte & Touche LLP Chicago, Illinois February 12, 1997 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CNA Financial Corporation By S/LAURENCE A. TISCH ----------------------------------------------------- Laurence A. Tisch Chief Executive Officer (Principal Executive Officer) By S/PETER E. JOKIEL ----------------------------------------------------- Peter E. Jokiel Senior Vice President and Chief Financial Officer Date: March 28, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. SIGNATURE TITLE S/ANTOINETTE COOK BUSH Director | - ---------------------------------- | Antoinette Cook Bush | | | S/DENNIS H. CHOOKASZIAN Director | - ---------------------------------- | Dennis H. Chookaszian | | | S/PHILIP L. ENGEL Director | Dated - ---------------------------------- | Philip L. Engel | March 28, 1997 | | S/ROBERT P. GWINN Director | - ---------------------------------- | Robert P. Gwinn | | | S/WALTER F. MONDALE Director | - ---------------------------------- | Walter F. Mondale | 30 SIGNATURE TITLE S/EDWARD J. NOHA Chairman of the | - ---------------------------------- Board and Director| Edward J. Noha | | | S/JOSEPH ROSENBERG Director | - ---------------------------------- | Joseph Rosenberg | | | S/RICHARD L. THOMAS Director | Dated - ---------------------------------- | Richard L. Thomas | March 28, 1997 | | S/JAMES S. TISCH Director | - ---------------------------------- | James S. Tisch | | | S/LAURENCE A. TISCH Chief Executive | - ---------------------------------- Officer and | Laurence A. Tisch Director | | | | S/PRESTON R. TISCH Director | - ---------------------------------- | Preston R. Tisch | | | S/MARVIN ZONIS Director | - ---------------------------------- | Marvin Zonis | 31
EXHIBIT 11.1 CNA FINANCIAL CORPORATION COMPUTATION OF NET INCOME PER COMMON SHARE - ------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1996 1995 1994 1993 1992 (In millions, except per share data) - ------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding............................... 61.8 61.8 61.8 61.8 61.8 ======= ======= ======= ======= ======= Net income (loss) before cumulative effect of accounting changes.. $ 964.8 $ 757.0 $ 36.5 $ 267.5 $(662.5) Less preferred stock dividends.................................... 6.1 6.9 5.3 4.0 4.2 ------- ------- ------- ------- ------- Net income (loss) before cumulative effect of accounting changes available to common stockholders............................. 958.7 750.1 31.2 263.5 (666.7) Cumulative effect on prior years of changes in accounting principles - - - - 331.9 ------- ------- ------- ------- ------- Net income (loss) available to common stockholders............. $ 958.7 $ 750.1 $ 31.2 $ 263.5 $(334.8) ======= ======= ======= ======= ======= Earnings per share: Net income (loss) before cumulative effect of accounting changes.. $ 15.51 $ 12.14 $ 0.51 $ 4.26 $ (10.79) Cumulative effect on prior years of changes in accounting principles - - - - 5.37 -------- -------- ------- -------- -------- Net income (loss) available to common stockholders............. $ 15.51 $ 12.14 $ 0.51 $ 4.26 $ (5.42) ======== ======== ======== ======== ========= - --------------------------------------------------------------------------------------------------------------------
32
EXHIBIT 12.1 CNA FINANCIAL CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - -------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1996 1995 1994 1993 1992 (In millions of dollars, except ratios) - -------------------------------------------------------------------------------------------------------------------- Income before income tax and cumulative effect of accounting changes..................................................... $ 1,345.1 $ 1,042.4 $(134.0) $ 93.5 $(1,374.9) Adjustments: Interest expense......................................... 200.4 182.3 70.5 36.3 36.7 Interest element of operating lease rental............... 31.8 46.7 19.1 18.2 17.6 --------- --------- --------- -------- --------- Income before income tax and cumulative effect of accounting changes, as adjusted........................ $ 1,577.3 $ 1,271.4 $ (44.4) $ 148.0 $(1,320.6) ========= ========= ========= ======== ========= Fixed charges: Interest expense......................................... $ 200.4 $ 182.3 $ 70.5 $ 36.3 $ 36.7 Interest element of operating lease rental............... 31.8 46.7 19.1 18.2 17.6 --------- --------- ------- ------- --------- Fixed charges............................................... $ 232.2 $ 229.0 $ 89.6 $ 54.5 $ 54.3 ======== ======== ======= ======= ========= Ratio of earnings to fixed charges (1)...................... 6.8 5.6 (0.5) 2.7 (24.3) - -------------------------------------------------------------------------------------------------------------------- (1) For purposes of computing this ratio, earnings consist of income before income taxes and cumulative effect of accounting changes plus fixed charges of consolidated companies. Fixed charges consist of interest and that portion of operating lease rental expense which is deemed to be an interest factor for such rentals.
EXHIBIT 12.2 CNA FINANCIAL CORPORATION COMPUTATION OF RATIO OF NET INCOME, AS ADJUSTED, TO FIXED CHARGES - ------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31 1996 1995 1994 1993 1992 (In millions of dollars, except ratios) - ------------------------------------------------------------------------------------------------------------------ Net income................................................. $ 964.8 $ 757.0 $ 36.5 $ 267.5 $ (330.6) Adjustments: Interest expense, after tax............................. 130.3 118.5 45.8 23.6 24.2 Interest element of operating lease rental, after tax... 20.7 30.3 12.4 11.8 11.7 --------- -------- ------- ------- -------- Net income, as adjusted.................................... $ 1,115.8 $ 905.8 $ 94.7 $ 302.9 $ (294.6) ========= ======== ======= ======= ======== Fixed charges: Interest expense, after tax............................. $ 130.3 $ 118.5 $ 45.8 $ 23.6 $ 24.2 Interest element of operating lease rental, after tax... 20.7 30.3 12.4 11.8 11.7 --------- -------- ------ -------- --------- Fixed charges.............................................. $ 151.0 $ 148.8 $ 58.2 $ 35.4 $ 35.9 ========= ======== ====== ======== ========= Ratio of net income, as adjusted, to fixed charges (1)..... 7.4 6.1 1.6 8.6 (8.2) - ------------------------------------------------------------------------------------------------------------------ (1) For purposes of computing this ratio, net income has been adjusted to include fixed charges of consolidated companies, after tax. Fixed charges consist of interest and that portion of operating lease rental expense which is deemed to be an interest factor for such rentals.
33 EXHIBIT 21.1 PRIMARY SUBSIDIARIES OF CNA PLACE OF COMPANY INCORPORATION - ------- -------------- AMS Services, Inc. and subsidiaries (10) Delaware Alexsis, Inc. and subsidiaries (4) Maryland American Casualty Company of Reading, Pennsylvania (ACCO) Pennsylvania Boston Old Colony Insurance Company Massachusetts Claims Administration Corp. Maryland CNA Casualty of California California Columbia Casualty Company Illinois Commercial Insurance Company of Newark, N.J. New Jersey Continental Assurance Company (CAC) Illinois Continental Casualty Company (CCC) Illinois Continental Lloyd's Insurance Company Texas Continental Reinsurance Corporation California Firemen's Insurance Company of Newark, New Jersey New Jersey Kansas City Fire and Marine Insurance Company Missouri National Fire Insurance Company of Hartford (NFI) Connecticut National-Ben Franklin Insurance Company of Illinois Illinois Niagara Fire Insurance Company Delaware Pacific Insurance Company California 34 EXHIBIT 21.1 - (continued) PRIMARY SUBSIDIARIES OF CNA - CONTINUED The Buckeye Union Insurance Company Ohio The Continental Corporation, Inc. (CIC) New York The Continental Insurance Company New Hampshire The Continental Insurance Company of New Jersey New Jersey Convida Holdings, Ltd and subsidiary (1) Bahamas The Fidelity and Casualty Company of New York New Hampshire The Glens Falls Insurance Company Delaware The Mayflower Insurance Company, Ltd. Indiana Transcontinental Insurance Company New York Transcontinental Technical Services, Inc. (ServCo) Illinois Transportation Insurance Company Illinois Valley Forge Insurance Company Pennsylvania Valley Forge Life Insurance Company Pennsylvania Western National Warranty Corporation and subsidiary (1) Arizona All other subsidiaries, when aggregated, are not considered significant. 34 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-50753 of CNA Financial Corporation and subsidiaries on Form S-3 of our reports dated February 12, 1997, appearing in and incorporated by reference in the Annual Report on Form 10-K of CNA Financial Corporation and subsidiaries for the year ended December 31, 1996. S/DELOITTE & TOUCHE LLP Deloitte & Touche LLP Chicago, Illinois March 31, 1997 36 EX-3.(II) 2 AMENDED BY-LAWS (FEBRUARY 12, 1997) BY-LAWS OF CNA FINANCIAL CORPORATION (As Amended Effective February 12, 1997) ARTICLE I. OFFICES. SECTION 1. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware. SECTION 2. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II. MEETINGS OF STOCKHOLDERS. SECTION 1. Meetings of stockholders for any purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. SECTION 2. Annual meetings of stockholders, commencing with the year 1970, shall be held on the first Wednesday in May if not a legal holiday, and if a legal holiday, then on the next business day following, at 10:00 a.m., or at such other date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which they shall elect by a plurality vote a Board of Directors, and transact such other business as may properly be brought before the meeting. Elections of Directors need not be by ballot. SECTION 3. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than fifty days before the date of the meeting. SECTION 4. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be opened to the examination of any stockholder, for the purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 5. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the Chief Executive Officer or President and shall be called by the President or Secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning not less than one-fifth of all shares issued and outstanding and entitled to vote on any proposal to be submitted to said meeting. Such request shall state the purpose or purposes of the proposed meeting. SECTION 6. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, - 1 - shall be given not less than ten nor more than fifty days before the date of the meeting, to each stockholder entitled to vote at such meeting. SECTION 7. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. SECTION 8. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 9. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Certificate of Incorporation, a different vote is required, in which case such express provision shall govern and control the decision of such question. SECTION 10. Each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. SECTION 11. Whenever the vote of stockholders at a meeting thereof is required or permitted to be taken for or in connection with any corporate action, by any provision of the statutes, the meeting and vote of stockholders may be dispensed with if all of the stockholders who would have been entitled to vote upon the action if such meeting were held shall consent in writing to such corporate action being taken; or if the Certificate of Incorporation authorizes the action to be taken with the written consent of the holders of less than all of the stock who would have been entitled to vote upon the action if a meeting were held, then on the written consent of the stockholders having not less than such percentage of the total number of votes as may be authorized in the Certificate of Incorporation; provided that in no case shall the written consent be by the holders of stock having less than the minimum percentage of the total required by statute for the proposed corporate action, and provided that prompt notice must be given to all stockholders of the taking of corporate action without a meeting and by less than unanimous written consent. ARTICLE III. DIRECTORS. SECTION 1. The number of Directors which shall constitute the whole Board shall be twleve. Except as provided in Section 2 of this Article, the Directors shall be elected at the annual meeting of the stockholders, and each Director shall hold office until his successor is elected and qualified. Directors need not be stockholders. SECTION 2. The office of a Director shall become vacant if he dies or resigns by a writing signed by him and delivered to the Corporation, and the Board of Directors may declare vacant the office of a Director if he be declared of - 2 - unsound mind by an order of Court or convicted of a felony, or for any other proper cause, of if, within sixty days after notice of his election as a Director, he does not accept such office either in writing or by attending a meeting of the Board of Directors. Vacancies and newly created directorships resulting from any increase in the authorized number of Directors may be filled by a majority of the Directors then in office, though less than a quorum, or by a sole remaining Director, and the Directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no Directors in office, then an election of Directors may be held in the manner provided by statute. If, at the time of filing any vacancy or any newly created directorship, the Directors then in office shall constitute less than a majority of the whole Board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such Directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the Directors chosen by the Directors then in office. SECTION 3. The business of the Corporation shall be managed by its Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. MEETINGS OF THE BOARD OF DIRECTORS SECTION 4. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. The Directors may designate a Director as the Chairman of the Board of Directors. The Chairman of the Board of Directors shall not be an officer of the Corporation. SECTION 5. The first meeting of each newly elected Board of Directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected Directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected Board of Directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the Directors. SECTION 6. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board. SECTION 7. Special meetings of the Board of Directors may be called by the Chief Executive Officer, the President or the Secretary, and shall be called upon the written request of any two or more Directors. Notice of the time and place of such meetings shall be served upon or telephoned to each Director at least 24 hours, or mailed (postage prepaid) or telegraphed (charges prepaid) to each Director at his address as shown on the books of the Corporation at least 48 hours, prior to the time of the meeting, and if such notice is mailed or telegraphed as above provided, the notice shall be deemed to have been given at the time it is deposited in the United States mail or with the telegraph office for transmission, as the case may be. SECTION 8. At all meetings of the Board six (6) Directors shall constitute a quorum for the transaction of business and the act of a majority of the - 3 - Directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the Directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. SECTION 9. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. COMMITTEES OF DIRECTORS SECTION 10. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of two or more of the Directors of the Corporation. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; provided, however, that in the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Unless otherwise provided by the Board of Directors, a majority of the members of any committee appointed by the Board of Directors pursuant to this Section shall constitute a quorum at any meeting thereof and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of such committee. Any such committee shall, subject to any rules prescribed by the Board of Directors, prescribe its own rules for calling, giving notice of and holding meetings and its method of procedure at such meetings and shall keep a written record of all action taken by it. SECTION 11. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. SECTION 12. In the absence or disqualification of one or more members of any Committee, the member or members present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member or members. COMPENSATION OF DIRECTORS SECTION 13. The Directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated fee as Director. No such payment shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. - 4 - ARTICLE IV. NOTICE. SECTION 1. Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these By-Laws, notice is required to be given to any Director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such Director or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to Directors may also be given by telegram or telephone. SECTION 2. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V. OFFICERS. SECTION 1. The officers of the Corporation shall be chosen by the Board of Directors and shall be a Chief Executive Officer, Secretary and Chief Financial Officer. The Board of Directors may also choose a President and one or more Vice Presidents. The Board of Directors may designate one or more of the Vice Presidents as Senior Vice President or Executive Vice President and may use descriptive words or phrases to designate the standing, seniority or area of special competence of the Vice Presidents. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these By-Laws otherwise provide. SECTION 2. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a Chief Executive Officer, a Chief Financial Officer and a Secretary. SECTION 3. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. SECTION 4. The Board of Directors shall fix the compensation of the Chief Executive Officer and, unless otherwise established by the Board of Directors or a committee appointed by the Board of Directors, the Chief Executive Officer shall fix the compensation of any or all other officers of the Corporation. SECTION 5. The officers of the Corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. CHIEF EXECUTIVE OFFICER SECTION 6. The Chief Executive Officer shall be the chief executive officer of the Corporation and shall have general and active control of its business and affairs. He shall preside at the meetings of the stockholders and the Board of Directors, and may exercise any and all of the powers of a chief executive officer. The Chief Executive Officer shall have such other powers and duties as may be assigned to or vested in him from time to time by the Board of Directors or by the Executive Committee. SECTION 7. The Chief Executive Officer may execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. - 5 - THE PRESIDENT SECTION 8. The President, if one shall be chosen, shall have general supervision and direction of all other officers of the Corporation, subject to the direction of the Board of Directors, and shall carry into effect the orders of the Board of Directors and Chief Executive Officer of the Board of Directors. The President shall also have such other duties and powers as may be assigned to or vested in him from time to time by the Board of Directors or by the Executive Committee. THE VICE PRESIDENTS SECTION 9. The Vice Presidents shall assist the Chief Executive Officer, and shall perform such other duties as may from time to time be directed by the Board of Directors, the Chief Executive Officer or the President. THE SECRETARY AND ASSISTANT SECRETARY SECTION 10. The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the Corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision he shall be. He shall have custody of the corporate seal of the Corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed it may be attested by his signature or by the signature of such assistant secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. SECTION 11. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. THE CHIEF FINANCIAL OFFICER AND ASSISTANT TREASURER SECTION 12. The Chief Financial Officer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. SECTION 13. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as treasurer and of the financial condition of the Corporation. SECTION 14. If required by the Board of Directors, he shall give the Corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. - 6 - SECTION 15. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Chief Financial Officer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. ARTICLE VI. CERTIFICATES OF STOCK. SECTION 1. Except as otherwise provided in the Certificate of Incorporation, every holder of stock in the Corporation shall be entitled to have a certificate, signed by, or in the name of the Corporation by, the Chief Executive Officer, the President or a Vice President and the Chief Financial Officer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by him in the Corporation. SECTION 2. If the Corporation shall be authorized to issue more than one class or more than one series of any class, the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each stockholder who so requests the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. SECTION 3. Where a certificate is countersigned (1) by a transfer agent other than the Corporation or its employees, or, (2) by a registrar other than the Corporation or its employees, the signatures of the officers of the Corporation may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of issue. LOST CERTIFICATES SECTION 4. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of the fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. TRANSFER OF STOCK SECTION 5. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the - 7 - duty of the Corporation to cause to be issued a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. FIXING RECORD DATE SECTION 6. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. REGISTERED STOCKHOLDERS SECTION 7. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII. GENERAL PROVISIONS. DIVIDENDS SECTION 1. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors, or a duly constituted Committee thereof, at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. SECTION 2. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Directors shall think conducive to the interest of the Corporation, and the Directors may modify or abolish any such reserve in the manner in which it was created. ANNUAL STATEMENT SECTION 3. The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the Corporation. CHECKS SECTION 4. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. - 8 - FISCAL YEAR SECTION 5. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. SEAL SECTION 6. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE VIII. AMENDMENTS. SECTION 1. These By-Laws may be altered or repealed at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration or repeal be contained in the notice of such special meeting. ARTICLE IX. MISCELLANEOUS. SECTION 1. Unless otherwise ordered by the Board of Directors, the Chief Executive Officer or the President, or any Vice President, or the Secretary or the Chief Financial Officer in person or by proxy or proxies appointed by any of them shall have full power and authority on behalf of the Corporation to vote, act and consent with respect to any shares of stock issued by other corporations which the Corporation may own or as to which the Corporation otherwise has the right to vote, act or consent. SECTION 2. In the event the protective conditions or restrictions of any outstanding series of Preferred Stock, fixed by the Board of Directors pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation and Section 151 of Title 8 of the Delaware Code of 1953, are inconsistent with any provision of these By-Laws, such provision shall be deemed to be amended to remove any inconsistency. SECTION 3. Business Combinations with interested Stockholders. Pursuant to the provisions of Section 203(a)(2) of the General Corporation Law of Delaware, the Corporation, by action of the Board, expressly elects not to be governed by Section 203 of the General Corporation Law of Delaware, dealing with the business combinations with interested stockholders. Notwithstanding anything to the contrary in these By-Laws, the provisions of this Section may not be further amended by the Board except as may be specifically authorized by the General Corporation Law. - 9 - EX-13.1 3 1996 ANNUAL REPORT CNA FINANCIAL CORPORATION 1996 ANNUAL REPORT CNA PROFILE - -------------------------------------------------------------------------------- CNA Financial Corporation (CNA) is the largest writer of commercial property/casualty insurance and is ranked as one of the ten largest insurance organizations in the United States. - -------------------------------------------------------------------------------- CNA serves businesses and individuals with a broad range of insurance and risk management products and services. Insurance products include property and casualty coverages; life, accident and health insurance; and pension products and annuities. CNA services include risk management, information services, health care management and claims administration. CNA products and services are marketed through agents, brokers, general agents and direct sales. CNA Financial Corporation, with 1996 assets of $60.7 billion and stockholder's equity of $7.1 billion, is the holding company of Continental Casualty Company, which was incorporated in 1897, Continental Assurance Company, incorporated in 1911, and The Continental Corporation, incorporated in 1968, which is the holding company of The Continental Insurance Company, incorporated in 1853. In 1997, CNA observes its centennial year, celebrating a century of financial strength, stability and commitment to customers and business partners. CNA Financial Corporation stock is traded primarily on the New York Stock Exchange and, as of December 31, 1996, was approximately 84 percent owned by Loews Corporation. CNA FINANCIAL CORPORATION ------------------------- CNA TABLE OF CONTENTS - -------------------------------------------------------------------------------- 1996 2 FINANCIAL HIGHLIGHTS 4 LETTER FROM CNA FINANCIAL CORPORATION CHAIRMAN EDWARD J. NOHA 5 LETTER FROM CNA INSURANCE COMPANIES CHAIRMAN AND CEO DENNIS H. CHOOKASZIAN 11 FINANCIAL SECTION CONTENTS 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 30 FINANCIAL STATEMENTS 81 INDEPENDENT AUDITORS' REPORT 82 COMMON STOCK INFORMATION 83 CORPORATE DIRECTORY CNA FINANCIAL CORPORATION ------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- Results of Operations and Financial Condition
- ----------------------------------------------------------------------------------------------------------- Year Ended December 31 1996 1995* 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------- (In millions of dollars, except per share data) RESULTS OF OPERATIONS - ----------------------------------------------------------------------------------------------------------- Revenues $16,987.8 $14,699.7 $10,999.5 $11,010.8 $10,793.4 - ----------------------------------------------------------------------------------------------------------- Income (loss) before income tax 1,345.0 1,042.4 (134.0) 93.4 (1,375.0) - ----------------------------------------------------------------------------------------------------------- Net income (loss) excluding net realized investment gains/losses and accounting changes: Property/Casualty 575.8 457.0 147.9 (266.6) (928.4) Life 109.9 103.8 87.0 43.5 52.0 Other (108.0) (98.2) (47.9) (28.6) (21.4) - ----------------------------------------------------------------------------------------------------------- Net operating income (loss) 577.7 462.6 187.0 (251.7) (897.8) Net realized investment gains (losses) 387.1 294.4 (150.5) 519.2 235.3 Accounting changes -- -- -- -- 331.9 - ----------------------------------------------------------------------------------------------------------- Net income (loss) $ 964.8 $ 757.0 $ 36.5 $ 267.5 $ (330.6) ============================================================================================================ EARNINGS PER SHARE - ------------------------------------------------------------------------------------------------------------ Net operating income (loss) $ 9.25 $ 7.37 $ 2.94 $ (4.14) $ (14.60) Net realized investment gains (losses) 6.26 4.77 (2.43) 8.40 3.81 Accounting changes -- -- -- -- 5.37 - ------------------------------------------------------------------------------------------------------------ Net income (loss) $ 15.51 $ 12.14 $ 0.51 $ 4.26 $ (5.42) ============================================================================================================ FINANCIAL POSITION - ------------------------------------------------------------------------------------------------------------ Assets $60,734.7 $60,360.4 $44,320.4 $41,912.3 $39,743.9 Debt 2,764.9 3,025.5 913.8 915.3 415.0 Stockholders' equity 7,059.8 6,735.5 4,545.9 5,381.1 4,789.2 Book value per common share 111.81 106.56 71.13 84.65 75.07 ============================================================================================================ STATUTORY SURPLUS - ------------------------------------------------------------------------------------------------------------ Property/Casualty $ 6,348.8 $ 5,695.9 $ 3,367.3 $ 3,598.4 $ 3,136.8 Life 1,163.4 1,127.6 1,055.6 1,022.0 1,003.0 ============================================================================================================ * Includes The Continental Corporation since May 10, 1995.
CNA FINANCIAL CORPORATION ------------------------- 2 - -------------------------------------------------------------------------------- FINANCIAL POSITION This page of CNA Financial Corporation's annual report has four bar graphs which illustrate the trend in revenues, assets and stockholders' equity from 1986 through 1996. CNA FINANCIAL CORPORATION (1986-1996) ($ in billions except per share data) |---------------------|-----------|--------|---------------|----------------| |Measurement Period | | | Stockholders' | Book Value Per| |(Fiscal Year Covered)| Revenues | Assets | Equity | Common Share | |---------------------|-----------|--------|---------------|----------------| | | | | | | |FYE 12/31/86.........| 6.5 | 18.2 | 2.7 | 40.37 | |FYE 12/31/87.........| 6.9 | 21.6 | 3.1 | 46.40 | |FYE 12/31/88.........| 8.3 | 25.9 | 3.6 | 54.87 | |FYE 12/31/89.........| 9.1 | 30.9 | 4.2 | 64.74 | |FYE 12/31/90.........| 9.9 | 34.7 | 4.5 | 70.23 | |FYE 12/31/91.........| 11.1 | 39.2 | 5.1 | 80.24 | |FYE 12/31/92.........| 10.8 | 39.7 | 4.8 | 75.07 | |FYE 12/31/93.........| 11.0 | 41.9 | 5.4 | 84.65 | |FYE 12/31/94.........| 11.0 | 44.3 | 4.5 | 71.13 | |FYE 12/31/95.........| 14.7 | 60.4 | 6.7 | 106.56 | |FYE 12/31/96.........| 17.0 | 60.7 | 7.1 | 111.81 | |---------------------|-----------|--------|---------------|----------------| CNA FINANCIAL CORPORATION ------------------------- 3 A LETTER TO OUR SHAREHOLDERS - -------------------------------------------------------------------------------- 1996 FROM CNA FINANCIAL CORPORATION CHAIRMAN EDWARD J. NOHA CNA Financial Corporation reported strong earnings in 1996. Net income was $964.8 million, or $15.51 per share, compared with net income of $757.0 million, or $12.14 per share, in 1995. Exclusive of securities transactions, net income for 1996 amounted to $577.7 million, or $9.25 per share, compared with $462.6 million, or $7.37 per share, in 1995. Consolidated revenues for 1996 were approximately $17.0 billion, compared with approximately $14.7 billion in 1995. Continuation of an upward trend in earnings, the substantial completion of the merger with The Continental Corporation, and several business expansion initiatives were highlights of a successful year. Thanks to the contributions of employees and business partners, CNA continued to strengthen its leadership in the insurance marketplace. Taking a broader perspective, the decade of the `90s is a time of rapid change for the insurance industry. Consolidation, intensifying competition and globalization are transforming the market for insurance products and services. In this environment of challenge and opportunity, CNA is well positioned for continued success. Across the broad range of its businesses, CNA builds on a foundation of financial strength. At year-end 1996, the statutory surplus of our property/casualty companies was approximately $6.3 billion, one of the largest in the industry. The statutory surplus of CNA's life insurance subsidiaries was approximately $1.2 billion. In addition, CNA continues to maintain a high-quality investment portfolio heavily weighted toward U.S. government bonds. In addition to its financial foundation, CNA builds on a heritage of service and commitment. Continental Casualty Company, the founding company of CNA, was founded in 1897. Since then, CNA has kept its promises to its customers. It has grown by staying focused on a set of fundamental strengths: a solid financial base, lasting business relationships and a strong will to stay in the forefront of its chosen markets. This tradition gives CNA a running start toward a new century of even greater achievement. In 1996, CNA served its customers, grew profitably and set a course for future success. On behalf of the board of directors, I would like to thank you, our shareholders, for your commitment and support. Sincerely, S/EDWARD J. NOHA Edward J. Noha Chairman of the Board CNA Financial Corporation CNA FINANCIAL CORPORATION ------------------------- 4 A LETTER TO OUR SHAREHOLDERS - -------------------------------------------------------------------------------- 1996 FROM CNA INSURANCE COMPANIES CHAIRMAN AND CHIEF EXECUTIVE OFFICER DENNIS H. CHOOKASZIAN In 1996, CNA had another successful year, serving its customers well, achieving solid profits and moving ahead on several opportunities for business expansion. Several factors contributed to the strong earnings, including improved loss experience in property/casualty businesses, efficiencies from the 1995 merger with The Continental Corporation, and continuing growth and profit in the individual life business. In addition, 1996 earnings were bolstered by gains on CNA's investment portfolio. CNA achieved its goal of substantially completing the merger with Continental. The final stage of the merger, including integration of computer systems, remains on course. Building on the momentum of the Continental merger, CNA focused on a number of business expansion activities. In the accident and health business, CNA acquired the managed care division of CoreSource, Inc., a leader in the field of developing and managing health care networks for large corporate customers outside major metropolitan areas. The acquired organization, which now operates independently as CNA Health Partners, supports our long-term strategy of profitable growth in the managed health care environment. In reinsurance, CNA launched a facultative reinsurance operation, a major strategic addition to our capabilities in the U.S. market. The new operation expands the range of CNA services and presents opportunities to expand existing relationships with treaty reinsurance customers. In specialty insurance, CNA and Capsure Holdings Corp. (Capsure) agreed to form a new stock company, CNA Surety Corporation, subject to the approval of Capsure's shareholders. Combining the surety businesses of CNA and Capsure, CNA Surety Corporation will be the largest U.S. surety organization with a substantial leadership position in all segments of the surety marketplace. The transaction is expected to be finalized in the second quarter of 1997. In addition, during the first quarter of 1997, CNA announced the formation of a new company, Hedge Financial Products, which will pursue opportunities to securitize insurance risks. The formation of Hedge Financial puts CNA at the forefront of the emerging securitization business, in which insurance risk is converted into monetized instruments that can be traded among investors. Also in 1997, CNA entered into an agreement by which it will become a co-owner of RVI Guaranty Co., Ltd., the largest monoline residual value insurance company in the world. This type of insurance protects the residual value of assets financed by banks and other financial institutions, including leased automobiles, commercial equipment and real estate. This agreement will enable CNA to participate in a largely untapped segment of the commercial insurance market and to broaden its long-standing relationships with financial institutions. CNA FINANCIAL CORPORATION ------------------------- 5 A LETTER TO OUR SHAREHOLDERS - -------------------------------------------------------------------------------- 1996 Along with business expansion, CNA advanced on many fronts in the area of technology in 1996. We improved service and reduced costs of the basic systems and structures that form the technology infrastructure of CNA. During the fourth quarter, CNA entered into an agreement with Computer Sciences Corporation (CSC) to set up the CSC Advanced Technology Center in Chicago that will further improve our technology processes. In addition to the Technology Center, CNA and CSC agreed to launch a new life insurance outsourcing business. The new service will handle many of the administrative processes involved in life insurance, for example, issuing policies and managing recordkeeping functions. Outsourcing has become increasingly attractive to life insurance companies because of intense competitive pressures and the complexity of automating their administrative functions. CNA also invested in InsWeb, the first interactive insurance marketplace on the Internet. The investment positions CNA to sell insurance products over the Internet in conjunction with its agents. Along with efforts to advance its technological capabilities, CNA strengthened its marketing focus through the development of a corporate positioning and branding strategy. Based on the key CNA values of financial strength, stability and commitment, the strategy entails a concerted effort to present the CNA name in a consistent, compelling fashion. The branding and positioning strategy coincides well with a milestone in CNA's history. In 1997, CNA's founding company, Continental Casualty Company, celebrates its 100th anniversary. The centennial presents a unique opportunity to link the revitalized marketing strategy to CNA's legacy of strong values and dedicated employees. In addition to these corporate activities, 1996 was a year of accomplishment for CNA's various businesses. PROPERTY/CASUALTY CNA is the largest U.S. writer of commercial property/casualty insurance, encompassing such coverages as workers' compensation, general liability, multiple peril, marine, agriculture, professional and specialty lines, and reinsurance. In 1996, CNA continued to build on its proven strategy of industry segmentation. For the past two years, CNA has capitalized on opportunities to apply this approach to the large book of general commercial business acquired in the Continental merger. By aligning the full range of its business processes with the industry segmentation strategy, CNA is moving toward the goal of being the low-cost, high-quality provider of insurance products and services in the commercial marketplace. Specifically, CNA expanded its offering of simplified products to increase convenience and choice for agents and small commercial insureds. In the small and medium commercial segment, CNA launched seven new Commercial Affiliation Marketing (CAM) programs for targeted classes of business. In addition, CNA CNA FINANCIAL CORPORATION ------------------------- 6 - -------------------------------------------------------------------------------- 1996 strengthened its commitment to the High Performance Agency Program, a preferred agency program based on partnership with independent agents. At the same time, CNA entered into strategic partnerships with brokers to reach classes of customers who have traditionally worked with brokers to meet their risk management needs. In the large commercial marketplace, CNA reported strong sales volume, including several important new accounts. These successes reflect CNA's ability to respond to large corporate customers with a broad offering of products and services. In addition, CNA has built up its specialized service units to deliver best-in-market services in the areas of risk management information, claims, cost management and consulting. In agricultural insurance, CNA continued to build on the business acquired from the Continental merger. The purchase of a 40 percent interest in the voting common stock of North American Crop Underwriters established a strategic relationship between CNA and a well-respected provider of farm and crop insurance. Beyond its strong presence in basic commercial insurance, CNA is one of the largest underwriters of professional and specialty coverages. This business includes liability insurance for healthcare providers, architects & engineers, lawyers, accountants and other professionals; entertainment insurance; liability coverage for corporate directors and officers; and excess and surplus lines insurance. In addition, CNA is a major presence in marine insurance, surety, credit, aviation and warranty. Several of these businesses are built on long-standing successful partnerships with managing general underwriters such as Victor O. Schinnerer, Aon Corporation and Poe & Brown. During 1996, CNA's professional and specialty businesses performed well. The Company continued to pursue a strategy of focusing on select customer groups and developing exceptional knowledge of their coverage needs. Thanks to a new structured process for increasing our understanding of customers in conjunction with our distribution partners, we are creating "virtual teams" around key market segments. In addition, CNA continued to strengthen its expertise in specialty lines by hiring staff who have worked in the professions we serve. The Marine Office of America Corporation (MOAC), the leading ocean marine underwriter in North America, had one of its most successful years ever, based on superior underwriting and unmatched knowledge of the marine market. On a historical note, MOAC insured all the sailing, rowing and kayaking events, as well as the marinas and service vessels associated with the Olympic Games in Atlanta. In the international market for primary insurance, CNA is moving ahead with plans to establish a strong, flexible international franchise. These plans encompass alliances with other international insurers, efforts to build indigenous operations and selected acquisitions. CNA continues to develop a strategic partnership relationship with Assicurazioni Generali S.p.A., one of the largest European insurance organizations. CNA FINANCIAL CORPORATION ------------------------- 7 A LETTER TO OUR SHAREHOLDERS - -------------------------------------------------------------------------------- 1996 In reinsurance, along with the launch of the facultative reinsurance operation, CNA pursued several avenues of growth. In the United States, CNA enlarged its treaty reinsurance line in the alternative risk market, and in such established markets as professional liability and financial reinsurance. Internationally, the reinsurance operations moved ahead with a strategy of establishing CNA as the market of choice among key brokers and ceding customers. In the London market, CNA became an investor in four Lloyd's of London syndicates, and also received approval from Lloyd's for the establishment of a CNA syndicate. In Europe, we continued to expand business relationships from offices in Amsterdam, Milan and Zurich. In addition to commercial insurance and reinsurance, CNA's property/casualty operations include personal automobile and homeowners insurance sold to individuals. In 1996, CNA continued to build the foundation of a revitalized personal insurance business. The company finalized and began implementing a long-term growth strategy to position CNA as one of the largest and most successful personal lines organizations over the next decade. Key elements of the strategy include substantially increasing business from existing distribution channels, identifying likely acquisition candidates and exploring expanded modes of distribution. INDIVIDUAL LIFE CNA had its second consecutive year of strong growth and improved service in the individual life insurance marketplace. CNA's products include term, universal and participating life policies, long-term care coverage and annuities. Expanded marketing effort resulted in increased applications for life products by more than 40 percent to over 285,000. First-year paid premium for life and annuity products rose to more than $215 million in 1996 from $138 million in 1995, while annuity premiums rose to $221 million in 1996 from $174 million in 1995. Meanwhile, CNA continued to strengthen its service capability. To meet the continuing demands of new sales, CNA made significant additions to staff, completed a change in computer architecture and finished reorganizing its service function into producer teams. In addition, the business process outsourcing agreement with CSC will further enhance our ability to provide low-cost, quality service to distributors and policyholders. In addition to providing excellent service, CNA is building its position in the individual life business with rapid introduction of new products and an emphasis on strong distribution partnerships. 1996 product introductions included a portfolio of variable products, new universal life and second-to-die products, and a series of products for high-risk individuals. GROUP LIFE AND HEALTH In this marketplace, CNA focuses on four general product categories: medical benefits; pension products; reinsurance; and group life, accident & disability CNA FINANCIAL CORPORATION ------------------------- 8 - -------------------------------------------------------------------------------- 1996 and long-term care insurance. These products are sold to businesses, groups and associations. In the market for private medical benefits, CNA's strategy is based on the development of very close partnerships with health care providers. In 1996, we advanced this strategy by developing and marketing products and services that build on the growing presence of Physician Hospital Organizations and Integrated Delivery Systems in the managed care environment. We also strengthened our capabilities in the areas of provider network development and management, medical management and health care systems integration. These activities were reinforced by the acquisition of CNA Health Partners. Meanwhile, CNA's $2 billion in premium Federal Employees Health Benefits Program benefited from ongoing investments in communications and claims automation. In pension products, CNA is broadening its product offerings in the small to medium-size market through California Central Trust Bank Corporation (CalTrust), a California trust and savings bank, a subsidiary acquired as a result of the Continental merger. In life and group reinsurance, CNA continued to build on a strong market position. On the life side, we are implementing a growth strategy based on strong service to the facultative and treaty markets. On the group side, CNA is moving forward with a strategy of being a risk partner for managed care organizations. In group life, accident & disability and long-term care insurance, CNA focused on system improvements, claims process redesign and enhanced products and distribution within the context of an effort to position itself as a market leader. In summary, CNA ended a very successful first century in 1996. Through the support of our business partners and the continuing dedication of CNA employees, we moved ahead with a range of business expansion opportunities while continuing to produce strong earnings. Looking ahead, 1997 is likely to be even more challenging than 1996. It is expected that excess capacity in the industry across virtually all lines will put greater pressure on margins. CNA will continue to focus on efficiency, flexibility and profitability with an emphasis on technology, distribution outreach and selected opportunities for business expansion. These directions, combined with its foundation of financial strength, position CNA for continued success. Our challenge is to build on the legacy of the past for an even brighter future. Sincerely, S/DENNIS H. CHOOKASZIAN Dennis H. Chookaszian Chairman and Chief Executive Officer CNA Insurance Companies CNA FINANCIAL CORPORATION ------------------------- 9 CNA FINANCIAL SECTION CONTENTS - -------------------------------------------------------------------------------- 1996 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 30 CONSOLIDATED BALANCE SHEET 32 STATEMENT OF CONSOLIDATED OPERATIONS 33 STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY 34 STATEMENT OF CONSOLIDATED CASH FLOWS 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 81 INDEPENDENT AUDITORS' REPORT 82 COMMON STOCK INFORMATION 83 CORPORATE DIRECTORY CNA FINANCIAL CORPORATION ------------------------- 11 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Consolidated Results Consolidated Results In 1996, CNA substantially completed its merger with The Continental Corporation (Continental) while continuing to build on the strength of 1995's operating results. The results reflect continued improvement in the underlying operations, including improved loss experience, particularly in workers' compen- sation business and growth in individual life, partially offset by increased weather related catastrophes. Additionally, capital gains contribut- ed significantly to earnings. CNA acquired Continental through a cash merger for approximately $1.1 billion on May 10, 1995 (See Note L). As a result, Continental became a wholly owned subsidiary of CNA Financial Corporation, and the consolidated results of operations include Continental subsequent to the acquisition date. CNA funded the cash purchase price with proceeds from a five-year revolving credit facility. Continental is an insurance holding company principally engaged in the business of owning a group of property and casualty insurance companies. CNA is the largest commercial insurer in the United States, third largest property-casualty company and the twenty second largest life insurance company in the country, based on 1995 net written premium. Based on market share, CNA ranks first among United States insurers in commercial affiliation marketing, commercial multiple peril, personal packages and ocean marine; second in commercial auto, general liability, medical malpractice, federal employees health benefit plans, multiple peril crop, surety, offshore energy, accounts receivable credit; third in automobile warranty, directors & officers, farmowners multiple peril, and recreational watercraft; fourth in workers' compensation and sixth in reinsurance in the United States. In addition, CNA ranks first, second or third for various errors & omissions coverages for architects and engineers, accountants, lawyers and other professionals. Revenues excluding realized gains/losses were $16.4 billion, up 15.0% from 1995 and up 45.6% from 1994. For 1996, revenues reflect increases of $1.7 billion (14.9%) in earned premiums, $199.4 million (9.6%) in net investment income and $190.0 million (44.8%) in other revenues. For 1996, CNA reported net operating income (which excludes net realized investment gains/losses) of $577.7 million, or $9.25 per share, compared to $462.6 million, or $7.37 per share, for 1995 and $187.0 million, or $2.94 per share, for 1994. Realized investment gains, net of tax, amounted to $387.1 million, or $6.26 per share in 1996, compared to net realized investment gains of $294.4 million, or $4.77 per share in 1995 and net realized investment losses of $150.5 million, or $2.43 per share, in 1994. Net income for 1996 was $964.8 million, or $15.51 per share, compared with net income of $757.0 million, or $12.14 per share, for 1995 and $36.5 million, or $0.51 per share in 1994. CNA FINANCIAL CORPORATION ------------------------- 12 - -------------------------------------------------------------------------------- Results of Operations Results of Operations: - ---------------------- The following chart summarizes key components of consolidated operating results for each of the last three years.
CONSOLIDATED OPERATIONS - ------------------------------------------------------------------------------------------- Year Ended December 31 1996 1995* 1994 - ------------------------------------------------------------------------------------------- (In millions of dollars) OPERATING SUMMARY (excluding realized investment gains/losses): Revenues: Premiums $13,479.0 $11,735.1 $9,474.4 Net investment income 2,276.0 2,076.6 1,551.2 Other 614.2 424.2 220.1 - ------------------------------------------------------------------------------------------- Total revenues 16,369.2 14,235.9 11,245.7 Benefits and expenses 15,628.5 13,649.5 11,144.4 Income before income tax 740.7 586.4 101.3 Income tax (expense) benefit (163.0) (123.8) 85.7 - ------------------------------------------------------------------------------------------- Net operating income (excluding realized investment gains/losses) $ 577.7 $ 462.6 $ 187.0 =========================================================================================== SUPPLEMENTAL FINANCIAL DATA: Net operating income (loss) by group: Property/Casualty $ 575.8 $ 457.0 $ 147.9 Life 109.9 103.8 87.0 Other, primarily interest expense (108.0) (98.2) (47.9) - -------------------------------------------------------------------------------------------- 577.7 462.6 187.0 - -------------------------------------------------------------------------------------------- Net realized investment gains (losses) by group: Property/Casualty 303.5 207.9 (104.6) Life 95.7 85.4 (45.6) Other (12.1) 1.1 (0.3) - --------------------------------------------------------------------------------------------- 387.1 294.4 (150.5) - --------------------------------------------------------------------------------------------- Net income (loss) by group: Property/Casualty 879.3 664.9 43.3 Life 205.6 189.2 41.4 Other, primarily interest expense (120.1) (97.1) (48.2) - -------------------------------------------------------------------------------------------- $ 964.8 $ 757.0 $ 36.5 ============================================================================================ *Includes the results of The Continental Corporation since May 10, 1995.
CNA FINANCIAL CORPORATION ------------------------- 13 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Property/Casualty Operations Property/Casualty Operations
PROPERTY/CASUALTY GROUP - -------------------------------------------------------------------------------------------- Year Ended December 31 1996 1995* 1994 - -------------------------------------------------------------------------------------------- (In millions of dollars) Operating Summary (excluding realized investment gains/losses): Revenues: Premiums $10,127.1 $8,723.8 $6,838.5 Net investment income 1,881.3 1,699.8 1,240.4 Other 508.4 348.0 170.4 - -------------------------------------------------------------------------------------------- 12,516.8 10,771.6 8,249.3 Benefits and expenses 11,778.7 10,193.3 8,210.1 - -------------------------------------------------------------------------------------------- Operating income before income tax 738.1 578.3 39.2 Income tax (expense) benefit (162.3) (121.3) 108.7 - -------------------------------------------------------------------------------------------- Net operating income (excluding realized investment gains/losses) $ 575.8 $ 457.0 $ 147.9 ============================================================================================ *Includes the results of The Continental Corporation since May 10, 1995.
Commercial lines customers include large national corporations, small and medium-sized businesses, groups and associations, and professionals. Coverages are written primarily through traditional insurance contracts, under which risk is transferred to the insurer. Many large commercial account policies are written under retrospectively-rated contracts, which are experience-rated. Premiums for such contracts may be adjusted, subject to limitations set by contract, based on loss experience of the insureds. Other experience-rated policies include provisions for dividends based on loss experience. Experience-rated contracts reduce but do not eliminate risk to the insurer. The property/casualty group markets personal lines of insurance, primarily automobile and homeowners coverages sold to individuals under monoline and package policies. Property/casualty involuntary risks include mandatory participation in residual markets, statutory assessments for insolvencies of other insurers, and other charges. The property/casualty group also provides loss control, policy administration and claim administration services under service contracts for fees. Such services are provided primarily in the workers' compensation market, where retention of more risk by the employer through self-insurance or high-deductible programs has become increasingly prevalent. Property/casualty profitability continued to show improvement in 1996 and reflects both increases in investment income and improved underwriting results. Pretax operating income excluding net realized investment gains/losses for the property/casualty insurance subsidiaries was $738.1 million in 1996, compared to $578.3 million and $39.2 million in 1995 and 1994, respectively. Net operating income excluding net realized investment gains/losses of CNA's property/casualty insurance subsidiaries was $575.8 million for 1996, compared to $457.0 million and $147.9 million in 1995 and 1994, respectively. CNA FINANCIAL CORPORATION ------------------------- 14 - ------------------------------------------------------------------------------- Property/Casualty Operations (cont.) Property/casualty revenues, excluding net realized investment gains/losses were $12.5 billion, up approximately 16.2% from $10.8 billion in 1995 and up from $8.2 billion in 1994. Continental revenues, excluding net realized investment gains/losses, for 1996 and 1995 were $3.2 billion and $2.1 billion,respectively. The 1995 Continental results are subsequent to May 10, 1995. Property/casualty earned premiums were $10.1 billion in 1996, up approximately 16.1% from the $8.7 billion earned in 1995 and up from $6.8 billion in 1994. Continental earned premiums for 1996 and 1995 were $2.7 billion and $1.7 billion, respectively. The 1995 Continental results are subsequent to May 10, 1995. Property/casualty investment income for 1996 was $1.9 billion, up approximately 10.7% from the $1.7 billion in 1995 and up 51.7% from the $1.2 billion in 1994. Investment income increased primarily due to the inclusion of the Continental portfolio for the full year of 1996 offset in part by slightly lower yields on the bond segment of the investment portfolio. The bond segment of the investment portfolio yielded 6.8% in 1996 compared with 6.9% and 6.4% in 1995 and 1994, respectively. The underwriting loss for 1996 was $1,143.2 million, compared to $1,121.5 million and $1,201.2 million in 1995 and 1994, respectively. The GAAP combined ratio was 108.9 for 1996, compared with 110.3 and 115.0 for 1995 and 1994, respectively. Catastrophe losses for 1996 on a pretax basis were approximately $315 million, compared with $149 million in 1995 and $283 million in 1994. CNA's 1996 catastrophe losses were primarily weather related losses, including winter storms and flooding. CNA's 1995 catastrophe losses related primarily to tropical storms and hail storms in Texas. CNA's 1994 catastrophe losses related primarily to the Northridge earthquake near Los Angeles and severe winter storms in the Northeast. CNA FINANCIAL CORPORATION ------------------------- 15 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Property Casualty Operations (cont.) The following table shows the components of underwriting results for commercial lines:
PROPERTY/CASUALTY - COMMERCIAL - ------------------------------------------------------------------------------------------------- Year Ended December 31 1996 1995* 1994 - ------------------------------------------------------------------------------------------------- (In millions of dollars) Premiums Earned: Professional and specialty $1,844.9 $1,557.7 $1,010.1 General liability and commercial automobile 1,754.1 1,648.9 1,261.1 Workers' compensation 1,542.5 1,475.8 1,426.3 Multiple peril 1,046.9 869.9 389.0 Accident and health 919.0 699.1 557.1 Reinsurance and other 1,188.9 973.9 773.5 - ------------------------------------------------------------------------------------------------- 8,296.3 7,225.3 5,417.1 Losses and expenses 9,149.4 8,146.1 6,362.8 - ------------------------------------------------------------------------------------------------- Net underwriting losses before investment income $ (853.1) $ (920.8) $ (945.7) ================================================================================================== * Includes the results of The Continental Corporation since May 10, 1995.
Premiums for the property/casualty commercial segment increased 14.8% in 1996 to $8.3 billion from $7.2 billion in 1995 and up from $5.4 billion in 1994. Commercial premiums for Continental were $1.7 billion and $1.4 billion in 1996 and 1995, respectively. The Continental results for 1995 were subsequent to May 10, 1995. Professional and specialty earned premium increased approximately 18.4% to $1.8 billion in 1996, up from $1.6 billion in 1995 and $1.0 billion in 1994. The 1996 premium increase was primarily a result of a full year of Continental premium revenue which added approximately $175 million in additional premium from 1995 levels. Continental added approximately $460 million of the 1995 increase over 1994. General liability and commercial automobile earned premiums were approximately $1.8 billion in 1996, up approximately 6.4% from the $1.6 billion earned in 1995 and up 39.1% from the $1.3 billion in 1994. The increase in general liability premium resulted primarily from an increase in commercial affiliation marketing business of $180 million. Continental premium revenue was approximately $275 million of the increase in 1995 premium over 1994. Earned premium from workers' compensation increased approximately 4.5% in 1996, up from the $1.5 billion and $1.4 billion earned in 1995 and 1994, respectively. The increase in workers' compensation premium earned resulted from the inclusion of Continental business for a full year. Multiple peril earned premium increased approximately 20.3% to $1.0 billion in 1996, from $0.9 billion in 1995 and $0.4 billion in 1994. The 1996 premium increase of $177 million is primarily attributable to an increase in commercial package business of $90 million and $40 million resulting from inclusion of Continental for a full year. Continental premium in 1995 was approximately $440 million or 91% of the growth from 1994. CNA FINANCIAL CORPORATION ------------------------- 16 - -------------------------------------------------------------------------------- Property/Casualty Operations (cont.) Accident and health earned premiums were approximately $0.9 billion in 1996, increasing approximately 31.5% from the $0.7 billion earned in 1995 and up from the $0.6 billion in 1994. Accident and health premium increased primarily due to increases in mass market association premium of $145 million, group long-term disability premium of $25 million, as well as an increase from a full year of Continental of $28 million. Earned premium from reinsurance and other increased approximately 22.1% to $1.2 billion in 1996, up from the $1.0 billion and $0.8 billion earned in 1995 and 1994, respectively. Reinsurance and other premium earned increased by approximately $215 million to which the inclusion of Continental results for a full year contributed $163 million. Continental added approximately $105 million to 1995 results. Underwriting results in commercial lines improved to a loss of $853.1 million, an improvement of approximately 7.4% from the $920.8 million loss in 1995 and an improvement of 9.8% from the $945.7 million in 1994. This improvement is primarily the result of improved loss experience, particularly in workers' compensation business, partially offset by increased weather related catastrophes. The following table shows the components of underwriting results for personal lines:
PROPERTY/CASUALTY - PERSONAL - --------------------------------------------------------------------------------------------- Year Ended December 31 1996 1995* 1994 - --------------------------------------------------------------------------------------------- (In millions of dollars) Premiums Earned: Personal lines packages $1,063.3 $ 781.6 $ 562.6 Monoline automobile and property coverages 366.5 325.4 314.2 Accident and health 168.9 107.8 88.9 - --------------------------------------------------------------------------------------------- 1,598.7 1,214.8 965.7 Losses and expenses 1,782.5 1,316.7 1,150.9 - --------------------------------------------------------------------------------------------- Net underwriting losses before investment income $ (183.8) $ (101.9) $ (185.2) ============================================================================================== * Includes the results of The Continental Corporation since May 10, 1995.
Personal lines earned premium increased 31.6% to $1.6 billion from the $1.2 billion earned in 1995 and up from the $966 million earned in 1994. The 1996 increase in personal lines premium resulted primarily from the cancellation of a quota share agreement, under which Continental ceded premium, and the inclusion of Continental business for the full year of 1996. Continental was responsible for $206 million of the $249 million in premium revenue growth from 1994 to 1995. The underwriting loss in personal lines was $183.8 million, an increase of approximately 80.4% from the $101.9 million loss in 1995 and an improvement of approximately 0.8% from the $185.2 million loss in 1994. The change from 1995 to 1996 was primarily due to increased weather related catastrophes and additional premium volume due to the cancellation of the quota share agreement, noted above. CNA FINANCIAL CORPORATION ------------------------- 17 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Property/Casualty Operations (cont.) The following table shows the components of underwriting results for involuntary risks:
PROPERTY/CASUALTY - INVOLUNTARY RISKS - ------------------------------------------------------------------------------------------------ Year Ended December 31 1996 1995* 1994 - ------------------------------------------------------------------------------------------------ (In millions of dollars) Premiums Earned: Workers' compensation $ 135.6 $178.2 $350.0 Private passenger automobile 57.9 79.7 46.4 Commercial automobile 36.4 19.9 54.3 Property and multiple peril 2.2 5.9 5.0 - ------------------------------------------------------------------------------------------------ 232.1 283.7 455.7 Losses and expenses 338.4 382.5 526.0 - ------------------------------------------------------------------------------------------------ Net underwriting losses before investment income $(106.3) $(98.8) $(70.3) ================================================================================================ * Includes the results of The Continental Corporation since May 10, 1995.
Involuntary risk earned premium decreased to $232 million down approximately 18.2% from the $284 million earned in 1995 and down from the $456 million earned in 1994. The decrease in involuntary risk premium resulted from a greater willingness on the part of the voluntary market to write these types of risks, particularly workers' compensation and private passenger automobile coverages. CNA FINANCIAL CORPORATION ------------------------- 18 - -------------------------------------------------------------------------------- Property/Casualty Operations (Cont.) CNA, consistent with sound insurance reserving practices, regularly adjusts its reserve estimates in subsequent reporting periods as new facts and circumstances emerge that indicate the previous estimates need to be modified. These adjustments, referred to as "reserve development," are inevitable given the complexities of the reserving process and are recorded in the statement of operations in the period the need for the adjustments becomes apparent. The following table reflects the effects of management's ongoing evaluation of reserve levels and is comprised of the following components: RESERVE DEVELOPMENT - ------------------------------------------------------ Year Ended December 31 1996 1995 1994 - ------------------------------------------------------ (In millions of dollars, (adverse)/favorable) Environmental Pollution $(65) $(226) $(181) Asbestos (51) (274) (37) Other 207 378 289 - ------------------------------------------------------ Total $ 91 $(122) $ 71 ====================================================== Management believes its reserves for environmental pollution and asbestos claims are appropriately established based upon known facts and current case law. However, due to the inconsistencies of court coverage decisions, the number of waste sites subject to clean-up, the standards for clean-up and liability, and other factors, the ultimate exposure to CNA for these claims may vary materially From the amounts currently recorded, resulting in a potential increase in the claim reserves recorded. In addition, issues related to, among other things, specific policy provisions, multiple insurers and allocation of liability among insurers, consequences of conduct of the insured, missing policies and proof of coverage make quantification of liabilities exceptionally difficult and subject to adjustment based upon newly available data. Due to the uncertainties and factors described above, management believes it is not practicable to develop a meaningful range for any such additional reserves that may be required. See Note E to the Consolidated Financial Statements for further discussion of environmental pollution and asbestos reserves. Unfavorable 1996 environmental pollution and asbestos reserve development of $65 million and $51 million, respectively, results from CNA's on-going monitoring of current payment and settlement patterns, current pending cases and potential future claims. Other 1996 and 1995 favorable reserve development, which aggregated to $207 million and $378 million, respectively, was principally due to favorable claim frequency (rate of claim occurrence) and severity (average cost per claim) experience in the workers' compensation line of business. These trends reflect the positive effects of changes in workers' compensation laws, more moderate increases in medical costs, and a generally strong economy in which individuals return to the workplace more quickly. Other favorable reserve development during 1994 aggregated to $289 million, which was principally attributable to positive severity experience in professional liability lines and improvement in voluntary and involuntary workers' compensation experience. CNA FINANCIAL CORPORATION ------------------------- 19 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Life Operations Life Operations
LIFE GROUP - --------------------------------------------------------------------------------------------- Year Ended December 31 1996 1995 1994 - --------------------------------------------------------------------------------------------- (In millions of dollars) OPERATING SUMMARY (excluding realized investment gains/losses): Revenues: Individual Premium Accident and health $ 1.8 $ 32.7 $ 32.6 Life and annuity 629.1 497.1 369.4 - ---------------------------------------------------------------------------------------------- Total individual 630.9 529.8 402.0 - ---------------------------------------------------------------------------------------------- Group Premium Accident and health 2,548.0 2,189.7 2,111.2 Life and annuity 194.9 312.9 165.0 - ---------------------------------------------------------------------------------------------- Total group 2,742.9 2,502.6 2,276.2 - ---------------------------------------------------------------------------------------------- Total premiums 3,373.8 3,032.4 2,678.2 Net investment income 400.0 369.2 310.6 Other 106.4 76.2 49.6 - ---------------------------------------------------------------------------------------------- Total revenues 3,880.2 3,477.8 3,038.4 Total benefits and expenses 3,709.5 3,317.5 2,904.0 - ---------------------------------------------------------------------------------------------- Operating income before income tax 170.7 160.3 134.4 Income tax expense 60.8 56.5 47.4 - ---------------------------------------------------------------------------------------------- Net operating income (excluding realized investment gains/losses) $ 109.9 $ 103.8 $ 87.0 ==============================================================================================
During 1996, CNA's individual and group operations experienced another year of strong growth, building on the momentum established last year. Profits rose due to increased investment income and continued favorable mortality experience as well as a change in interest rate spread assumptions on interest sensitive products. CNA sells a variety of individual and group insurance products. The individual insurance products consist primarily of term, universal life, participating policies and individual annuity products. Products developed in 1996 included a portfolio of variable products and new universal life products which are expected to be marketed in 1997. Group insurance products include life, accident and health consisting primarily of major medical and hospitalization, and pension products, such as guaranteed investment contracts and annuities. CNA has undertaken a number of initiatives to enhance service, manage health care utilization demand and quality, and strengthen CNA's networks of physicians, hospitals and other providers. In the medical and hospitalization market, CNA underwrites the Federal Employees Health Benefits Program (FEHBP) which had revenues of $2.1 billion, $1.9 billion and $1.8 billion in 1996, 1995 and 1994, respectively. CNA FINANCIAL CORPORATION -------------------------- 20 - -------------------------------------------------------------------------------- Life Operations (cont.) Life insurance revenues, excluding net realized investment gains, were up 11.6% to $3.9 billion for 1996 as compared to $3.5 billion for 1995 and up 27.7% from $3.0 billion for 1994. Life premiums for 1996 were up 11.3% to $3.4 billion as compared to $3.0 billion for 1995 and up 26.0% from 1994 premiums of $2.7 billion. Life and annuity premiums continue to increase as demand for CNA's Viaterm product remains strong, with premium increasing approximately $76 million over 1995's level, as well as an increase in annuity premiums of approximately $47 million. Individual policies in-force increased 22% in 1996 to 799,000 from 653,000 in 1995. Individual accident and health premiums declined due to CNA selling its individual disability income business in late 1995. Group accident and health premium increases were primarily attributable to increases in CNA's FEHBP business of approximately $230 million and an increase in other group medical business of approximately $75 million. These increases were offset, in part, by reductions in group life and annuity business. Life investment income increased by approximately 8.3% due to a larger asset base generated from the increased cashflows resulting from premium growth. The bond segment of the life investment portfolio yielded 6.5% in 1996 compared with 6.9% and 6.6% in 1995 and 1994, respectively. CNA's life insurance net operating income excluding net realized investment gains was $109.9 million for 1996, compared to $103.8 million and $87.0 million for 1995 and 1994, respectively. CNA FINANCIAL CORPORATION --------------------------- 21 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Investments Investments - ----------- The following table summarizes CNA's general account investments shown at cost or amortized cost for each of the last five years.
DISTRIBUTION OF INVESTMENTS - GENERAL ACCOUNT - ------------------------------------------------------------------------------------------------- December 31 1996 % 1995 % 1994 % 1993 % 1992 % - ------------------------------------------------------------------------------------------------- (In millions of dollars) Investments: Fixed maturities (at amortized cost): Bonds: Taxable $22,631 65 $25,832 75 $17,484 63 $11,933 48 $ 7,286 33 Tax-exempt 4,860 14 3,453 10 3,717 13 4,725 19 9,502 42 Redeemable preferred stocks 49 -- 100 -- 423 2 445 2 568 3 Equity securities: Common stocks 478 1 734 2 729 3 433 2 305 1 Non-redeemable preferred stocks 224 1 3 -- 8 -- -- -- 5 -- Mortgage loans and real estate 123 -- 122 -- 47 -- 62 -- 89 -- Policy loans 174 -- 177 1 176 1 174 1 179 1 Other invested assets 617 2 483 1 103 -- 69 -- 55 -- Short-term investments 5,854 17 3,725 11 5,036 18 6,944 28 4,444 20 - -------------------------------------------------------------------------------------------------- Investments $35,010 100% $34,629 100% $27,723 100% $24,785 100% $22,433 100% ================================================================================================== Investments at Carrying Value* $35,412 $35,886 $26,943 $25,363 $22,478 ================================================================================================== *As reported in the Consolidated Balance Sheet
CNA's general account investment portfolio is managed to maximize after-tax investment return while minimizing credit risk with investments concentrated in high quality securities to support its insurance underwriting operations. At December 31, 1996, total Separate Account business cash and investments amounted to $5.7 billion with taxable fixed maturities representing approximately 80.9% of the total. Approximately 81.6% of Separate Accounts investments are used to fund guaranteed investment contracts for which Continental Assurance Company guarantees principal and a specified return to the contractholders. The duration of fixed maturity securities included in the guaranteed investment contract portfolio are matched approximately with the corresponding payout pattern of the liabilities of the guaranteed investment contracts. CNA has the capacity to hold its fixed maturity portfolio to maturity. However, securities may be sold as part of CNA's asset/liability strategies or to take advantage of investment opportunities generated by changing interest rates, tax and credit considerations, or other similar factors. Accordingly, the fixed maturity securities are classified as available-for-sale. CNA FINANCIAL CORPORATION ------------------------ 22 - -------------------------------------------------------------------------------- Investments (cont.) The general account portfolio consists primarily of high quality (BBB or higher) marketable fixed maturities, 92.7% and 93.9% of which are rated as investment grade at December 31, 1996 and 1995, respectively. The following table summarizes the ratings of CNA's general account fixed maturity debt portfolio at carrying value (market):
- ---------------------------------------------------------------------------------------------------------- December 31 1996 % 1995 % 1994 % - ---------------------------------------------------------------------------------------------------------- (In millions of dollars) U.S. government and affiliated securities $11,625.5 42.0% $18,904.7 62.3% $12,697.8 63.8% Other AAA rated 9,184.2 33.2 4,625.2 15.3 3,666.3 18.4 AA and A rated 3,657.3 13.3 3,511.5 11.6 2,153.6 10.8 BBB rated 1,167.4 4.2 1,424.5 4.7 475.1 2.4 Below investment grade 2,020.3 7.3 1,862.1 6.1 919.6 4.6 - --------------------------------------------------------------------------------------------------------- Total $27,654.7 100% $30,328.0 100% $19,912.4 100% =========================================================================================================
The following table summarizes the ratings of CNA's guaranteed investment contract separate account fixed maturity debt portfolio at carrying value (market):
- -------------------------------------------------------------------------------------------------------- December 31 1996 % 1995 % 1994 % - -------------------------------------------------------------------------------------------------------- (In millions of dollars) U.S. government and affiliated securities $ 192.4 5.0% $ 1,743.4 36.4% $ 1,302.6 28.4% Other AAA rated 2,244.9 58.1 827.6 17.3 933.4 20.4 AA and A rated 661.5 17.1 913.6 19.1 806.9 17.6 BBB rated 292.2 7.6 361.1 7.5 436.3 9.5 Below investment grade 471.6 12.2 944.0 19.7 1,102.1 24.1 - -------------------------------------------------------------------------------------------------------- Total $ 3,862.6 100% $ 4,789.7 100% $ 4,581.3 100% ========================================================================================================
The ratings in the two tables above are primarily from independent rating agencies. In 1996, 1995 and 1994, respectively, 89%, 93% and 95% of the general account portfolio and 85%, 95% and 94% of the guaranteed investment portfolio were rated by Standard and Poor's. In addition, CNA's investment in mortgage loans and real estate as a percentage of total assets, is substantially below the industry average. High yield securities are bonds rated as below investment grade by bond rating agencies, plus private placements and other unrated securities which, in the opinion of management, are below investment grade (below BBB). High yield CNA FINANCIAL CORPORATION -------------------------- 23 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Investments (cont.) securities generally involve a greater degree of risk than that of investment grade securities. Expected returns should, however, compensate for the added risk. The risk is also considered in the interest rate assumptions in the underlying insurance products. As of December 31, 1996, CNA's concentration in high yield bonds including Separate Account business was approximately 4.2% of total assets, compared with approximately 4.7% of total assets as of December 31, 1995. Included in CNA's fixed maturity securities at December 31, 1996 (general and guaranteed investment portfolios) are $8.6 billion of asset-backed securities, consisting of approximately 46.5% in U.S. government agency issued pass-through certificates, 37.1% in collateralized mortgage obligations (CMOs), and 16.4% in corporate asset-backed obligations. The majority of CMOs held are U.S. government agency issues, which are actively traded in liquid markets and are priced by broker-dealers. CNA limits the risks associated with interest rate fluctuations and prepayments by concentrating its CMO investments in planned amortization classes with relatively short principal repayment windows. CNA avoids investments in complex mortgage derivatives without readily ascertainable market prices. At December 31, 1996, the amortized cost of asset-backed securities was in excess of the fair value by approximately $5 million compared with unrealized gains of approximately $200 million at December 31, 1995. At December 31, 1996 and 1995, short-term investments primarily consisted of U. S. Treasury bills and commercial paper. The components of the short-term investment portfolio were as follows: SHORT-TERM INVESTMENTS - ------------------------------------------------- December 31 1996 1995 - ------------------------------------------------- (In millions of dollars) Security repurchase collateral $ 100.5 $ 776.0 Escrow* 1,062.2 1,044.6 Commercial paper 3,207.3 1,613.1 Money markets 746.4 114.2 Other 737.3 176.6 - ------------------------------------------------- Total short-term investments $5,853.7 $3,724.5 ================================================= *See Note A to the Consolidated Financial Statements. CNA invests from time to time in certain derivative financial instruments to increase investment returns and to reduce the impact of changes in interest rates on certain corporate borrowings. CNA considers its derivative securities as held for trading purposes, except for interest rate swaps associated with corporate borrowings, and as such, such derivative securities are recorded at fair value at the reporting date with changes in market value reflected in income. The interest rate swaps on corporate borrowings are accounted for as an adjustment to interest expense. See Note C of the Consolidated Financial Statements for further information. CNA's general account investments in bonds and redeemable preferred stocks were carried at their fair value of $27.7 billion at December 1996, compared with $30.4 billion at December 31, 1995. At December 31, 1996 and 1995, net unrealized gains on fixed maturity securities amounted to approximately $181 million and $1,059 million, respectively. The gross unrealized gains and losses for the fixed maturity securities portfolio at December 31, 1996, were $444 million and $263 million, respectively, compared to $1,136 million and $77 million, respectively, at December 31, 1995. CNA FINANCIAL CORPORATION -------------------------- 24 - -------------------------------------------------------------------------------- Investments (cont.) Net unrealized gains on general account bonds at December 31, 1996 and 1995 include net unrealized gains on high yield securities of $41 million and $67 million, respectively. Carrying values of high yield securities in the general account were $2.0 billion and $1.9 billion at December 31, 1996 and 1995, respectively. At December 31, 1996, all fixed maturity securities in the guaranteed investment contract portfolio were carried at fair value and amounted to $3.9 billion. At December 31, 1996, net unrealized losses on fixed maturity securities amounted to approximately $1 million. This compares to $63 million in net unrealized gains at December 31, 1995. The gross unrealized gains and losses for the fixed maturity securities portfolio at December 31, 1996, were $55 million and $56 million, respectively, compared to $122 million and $59 million, respectively, at December 31, 1995. At December 31, 1996, high yield securities in the guaranteed investment contract portfolio were carried at fair value and amounted to $472 million, compared with $944 million at December 31, 1995. Net unrealized losses on high yield securities held in such Separate Accounts were $6 million and $14 million at December 31, 1996 and 1995, respectively. CNA FINANCIAL CORPORATION ------------------------- 25 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Liquidity and Capital Resources Liquidity and Capital Resources: - -------------------------------- The liquidity requirements of CNA, excluding the acquisition of Continental described below, have been met primarily by funds generated from operations. The principal operating cash flow sources of CNA's property/casualty and life insurance subsidiaries are premiums, investment income, and sales and maturities of investments. The primary operating cash flow uses are payments for claims, policy benefits and operating expenses. Net cash flows from operations are primarily invested in marketable securities. Investment strategies employed by CNA's insurance subsidiaries consider the cash flow requirements of the insurance products sold and the tax attributes of the various types of marketable investments. For the year ended December 31, 1996, CNA's operating activities generated net positive cash flows of approximately $620 million, compared with $875 million in 1995 and $982 million in 1994. CNA believes that future liquidity needs will be met primarily by cash generated from operations. As a result of the settlement of the Fibreboard litigation, CNA anticipates that 1997 operating cash flows will be substantially lower, due to anticipated claim payments. The Fibreboard claim payments for 1997 will include approximately $500 million in payments made in late December 1996, which are reflected in the balance sheet as other liabilities (see Note F of the Consolidated Financial Statements). To finance the acquisition of Continental (including the refinancing of $205 million of Continental debt) CNA entered into a five-year $1.325 billion revolving credit facility. The interest rate for the facility is based on the one, two, three, or six month London Interbank Offered Rate (LIBOR), plus 16 basis points. Additionally, there is a facility fee of 9 basis points annually. The average interest rate on the borrowings under the revolver was 5.72% and 6.12% at December 31, 1996 and 1995, respectively. Under the terms of the facility, CNA may prepay the debt without penalty, giving CNA flexibility to arrange longer-term financing on more favorable terms. On November 15, 1996, CNA issued $250 million, 6.75% Senior Notes, due November 15, 2006. The net proceeds from this issuance of approximately $248 million were used to pay down a portion of the borrowings under the revolving credit facility. As a result of this additional debt issuance, the borrowing capacity under the revolving credit facility was reduced by $250 million to $1.075 billion. In 1995, CNA entered into five year interest rate swap agreements with several banks. These agreements convert variable rate debt into fixed rate debt resulting in fixed rates on notional amounts of $1.2 billion as of December 31, 1995. In conjunction with the pay down of $250 million of the revolving credit facility, the Company terminated swaps with a like notional amount. The weighted-average fixed swap rate was 6.20% and 6.29% at December 31, 1996 and 1995, respectively. The effect of these interest rate swaps was to increase interest expense by approximately $7 million and $2 million for the years ended December 31, 1996 and 1995, respectively. CNA FINANCIAL CORPORATION ------------------------- 26 - -------------------------------------------------------------------------------- Liquidity and Capital Resources (cont.) During 1995, to take advantage of favorable interest rates, CNA established a commercial paper program, borrowing from investors and replacing a like amount of bank financing. As of December 31, 1996 and 1995, the commercial paper program borrowing totaled $675 million and $500 million, respectively. The weighted-average interest rate on commercial paper was 5.67% and 6.05% at December 31, 1996 and 1995, respectively. The commercial paper borrowings are classified as long-term, as borrowing capacity under the committed bank facility will support the commercial paper program (at an undrawn cost of 9 basis points). The weighted-average interest rate (interest and facility fees) on the revolving credit facility, commercial paper and the effect of the interest rate swaps, was 6.28% and 6.50% at December 31, 1996 and 1995, respectively. As of December 31, 1996, the outstanding loans under the revolving credit facility were $400 million. There was no unused borrowing capacity under the facility after the effects of the commercial paper program as described above. The table below reflects ratings issued by A.M. Best, Standard and Poor's, Moody's and Duff & Phelps for CNA's Continental Casualty Company (CCC) Intercompany Pool, Continental Insurance Company (CIC) Intercompany Pool and Continental Assurance Company (CAC) Intercompany Pool. Also rated were the senior debt of both CNA and The Continental Corporation (Continental) and CNA's preferred stock.
|-------------------|==================================||---------------------------------------------| | | INSURANCE RATINGS || DEBT AND STOCK RATINGS | | |==================================||---------------------------------------------| | | Financial Strength || | | | | | | || | CNA | |Continental | | | CCC | CAC | CIC || Senior |Commercial| Preferred | Senior | | | | | || Debt | Paper | Stock | Debt | | |------------|------------|--------||---------|----------|-----------|------------| | A.M. Best | A | A | A- || - | - | - | - | | Moody's | A1 | A1* | A2 || A3 | P2 | a3 | Baa1 | | |------------|------------|--------|| | | | | | | Claims Paying Ability || | | | | | |==================================|| | | | | | Standard & Poor's | A+ | AA | A- || A- | A2 | A- | BBB- | | Duff & Phelps | AA- | AA | - || A- | - | A- | - | |-------------------|==================================||---------|----------|-----------|------------| *Applies to Continental Assurance Company only.
CNA FINANCIAL CORPORATION ------------------------- 27 MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------------------------------------------------- Accounting Standards Accounting Standards - -------------------- Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This Statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used for long-lived assets and certain identifiable intangibles to be disposed of. This statement requires that long-lived assets and certain identifiable intangibles to be held and used by the entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This Statement is effective for 1996 financial statements. This Statement did not have a significant impact on CNA. Accounting for Stock-Based Compensation In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation. " This Statement establishes financial accounting and reporting standards for stock-based employee compensation plans. The requirements of this Statement is effective for 1996 financial statements. This Statement had no impact on CNA as the Company has no compensation which qualifies. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities In June 1996, the FASB issued SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This Statement has been amended and is now effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996 or 1997, depending on the type of transaction. This Statement will not have a significant impact on CNA. Accounting Disclosure Rules and Practices In January 1997, the Securities and Exchange Commission approved amendments to Regulation S-X, Regulation S-K, Regulation S-B, and various forms to clarify and expand existing disclosure requirements with respect to derivative financial instruments and derivative commodity instruments. The new rules would require enhanced descriptions in the footnotes to the financial statements of accounting policies for derivative financial instruments and derivative commodity instruments. They would also require disclosure outside the financial statements of qualitative and quantitative information about market risk related to derivative financial instruments, other financial instruments, and derivative commodity instruments. The requirement of these amendments are effective for 1997 financial statements. These amendments will not have a significant impact on CNA. CNA FINANCIAL CORPORATION ------------------------- 28 - -------------------------------------------------------------------------------- Forward-Looking Statements Forward-Looking Statements When included in this report, the words "expects," "intends," "anticipates," "estimates," and analogous expressions are intended to identify forward-looking statements. Such statements inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, among others, general economic and business conditions, competition, changes in financial markets (credit, currency, commodities and stocks), changes in foreign, political, social and economic conditions, regulatory initiatives and compliance with governmental regulations, judicial decisions and rulings, and various other matters, many of which are beyond the Company's control. These forward-looking statements speak only as of the date of this Report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based. CNA FINANCIAL CORPORATION ------------------------- 29 CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET
ASSETS - -------------------------------------------------------------------------------------------------- December 31 1996 1995 - -------------------------------------------------------------------------------------------------- (In millions of dollars) Investments-Note B: Fixed maturities available for sale (cost: $27,539.6 and $29,385.4) $27,720.6 $30,444.7 Equity securities available for sale (cost: $701.9 and $736.3) 859.1 917.7 Mortgage loans and real estate (less accumulated depreciation: $4.1 and $3.6) 123.4 122.4 Policy loans 174.4 177.2 Other invested assets 681.2 499.9 Short-term investments-Note A 5,853.7 3,724.5 - -------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS 35,412.4 35,886.4 - -------------------------------------------------------------------------------------------------- Cash 257.1 221.6 Insurance receivables: Reinsurance receivables 6,965.0 7,169.1 Other insurance receivables 5,942.5 5,833.9 Less allowance for doubtful accounts (277.2) (288.7) Deferred acquisition costs 1,854.2 1,493.3 Accrued investment income 507.4 545.4 Receivables for securities sold 264.4 185.2 Federal income taxes recoverable (includes $151.4 and $153.0 due from Loews)-Note D 133.8 132.7 Deferred income taxes-Note D 1,347.0 1,254.9 Property and equipment at cost (less accumulated depreciation $436.3 and $313.7) 645.4 584.7 Prepaid reinsurance premiums 295.2 495.4 Intangibles-Note L 417.7 456.3 Other assets 848.9 522.1 Separate Account business 6,120.9 5,868.1 - -------------------------------------------------------------------------------------------------- TOTAL ASSETS $60,734.7 $60,360.4 ================================================================================================== See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION ------------------------- 30 - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET (cont.)
LIABILITIES AND STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------------------------- December 31 1996 1995 Liabilities: Insurance reserves: Claim and claim expense-Note E $30,829.5 $32,032.4 Unearned premiums 4,658.7 4,549.4 Future policy benefits 4,181.3 3,515.9 Policyholders' funds 745.6 705.0 Securities sold under repurchase agreements 100.5 774.1 Payables for securities purchased 405.2 163.3 Participating policyholders' equity 118.5 140.1 Short-term debt-Note H 0.0 257.6 Long-term debt-Note H 2,764.9 2,767.9 Other liabilities 3,749.8 2,851.1 Separate Account business 6,120.9 5,868.1 - -------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 53,674.9 53,624.9 - -------------------------------------------------------------------------------------------------- Commitments and contingent liabilities-Notes E, F and G Stockholders'equity-Note K: Common stock ($2.50 par value; Authorized - 200,000,000 shares; Issued - 61,841,969 shares) 154.6 154.6 Money market cumulative preferred stock 150.0 150.0 Additional paid-in capital 434.7 434.7 Retained earnings 6,024.3 5,065.6 Net unrealized investment gains-Note B 298.7 933.1 Treasury stock, at cost (2.5) (2.5) - -------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 7,059.8 6,735.5 - -------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $60,734.7 $60,360.4 ================================================================================================== See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION ------------------------- 31 CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- STATEMENT OF CONSOLIDATED OPERATIONS
- -------------------------------------------------------------------------------------------------- Year Ended December 31 1996 1995 1994 - -------------------------------------------------------------------------------------------------- (In millions of dollars, except per share data) Revenues: Premiums-Note G $13,479.0 $11,735.1 $ 9,474.4 Net investment income-Note B 2,276.0 2,076.6 1,551.2 Realized investment gains (losses)-Note B 618.6 463.8 (246.2) Other 614.2 424.2 220.1 - -------------------------------------------------------------------------------------------------- 16,987.8 14,699.7 10,999.5 - -------------------------------------------------------------------------------------------------- Benefits and expenses: Insurance claims and policyholders' benefits-Note G 11,370.6 9,951.7 8,450.3 Amortization of deferred acquisition costs 2,192.1 1,843.5 1,377.5 Other operating expenses 1,879.7 1,679.8 1,235.2 Interest expense 200.4 182.3 70.5 - -------------------------------------------------------------------------------------------------- 15,642.8 13,657.3 11,133.5 - -------------------------------------------------------------------------------------------------- Income (loss) before income tax 1,345.0 1,042.4 (134.0) Income tax (expense) benefit -Note D (380.2) (285.4) 170.5 - -------------------------------------------------------------------------------------------------- NET INCOME $ 964.8 $ 757.0 $ 36.5 - -------------------------------------------------------------------------------------------------- EARNINGS PER SHARE $ 15.51 $ 12.14 $ 0.51 ================================================================================================== WEIGHTED AVERAGE OUTSTANDING SHARES OF COMMON STOCK 61.8 61.8 61.8 ================================================================================================== See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION ------------------------- 32 - -------------------------------------------------------------------------------- STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------ Net Unrealized Additional Investment Common Preferred Treasury Paid-In Retained Gains Stock Stock Stock Captital Earnings (Losses) Total - ------------------------------------------------------------------------------------------------------------ In millions of dollars) Balance, December 31, 1993 $154.6 $150.0 $(2.5) $434.7 $4,284.3 $ 360.0 $5,381.1 Net Income - - - - 36.5 - 36.5 Change in net unrealized gains/(losses) - Note B. - - - - - (866.4) (866.4) Preferred dividends - - - - (5.3) - (5.3) - ----------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1994 $154.6 $150.0 $(2.5) $434.7 $4,315.5 $ (506.4) $4,545.9 =========================================================================================================== Balance, December 31, 1994 $154.6 $150.0 $(2.5) $434.7 $4,315.5 $ (506.4) $4,545.9 Net income - - - - 757.0 - 757.0 Change in net unrealized gains/(losses) - Note B - - - - - 1,439.5 1,439.5 Preferred dividends - - - - (6.9) - (6.9) - ----------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 $154.6 $150.0 $(2.5) $434.7 $5,065.6 $ 933.1 $6,735.5 ============================================================================================================ Balance, December 31, 1995 $154.6 $150.0 $(2.5) $434.7 $5,065.6 $ 933.1 $6,735.5 Net income - - - - 964.8 - 964.8 Change in net unrealized gains/(losses) - Note B - - - - - (634.4) (634.4) Preferred dividends - - - - (6.1) - (6.1) - ----------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 $154.6 $150.0 $(2.5) $434.7 $6,024.3 $ 298.7 $7,059.8 =========================================================================================================== See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION ------------------------- 33 CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- STATEMENT OF CONSOLIDATED CASH FLOWS
- ------------------------------------------------------------------------------------------------ Year Ended December 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------ (In millions of dollars) CASH FLOWS FROM OPERATING ACTIVITIES: - ------------------------------------- Net income $ 964.8 $ 757.0 $ 36.5 ---------------------------------- Adjustments to reconcile net income to net cash flows from operating activities: Net realized investment (gains)/losses, pre-tax (618.6) (463.8) 246.2 Participating policyholders' interest (4.8) (3.6) (12.0) Amortization of intangibles 25.1 18.9 3.1 Amortization of bond discount (177.6) (142.7) (95.5) Depreciation 138.2 101.0 66.1 Changes in: Insurance receivables, net 83.8 (802.5) (430.2) Deferred acquisition costs (360.9) (160.8) (41.0) Accrued investment income 38.0 (30.4) (161.2) Federal income taxes (1.0) (39.3) (14.9) Deferred income taxes 352.6 221.0 (96.3) Prepaid reinsurance premiums 200.2 129.8 (7.8) Insurance reserves (358.0) 427.0 1,468.9 Reinsurance payables (228.5) 285.9 (25.0) Other, net 566.9 577.5 45.3 - ------------------------------------------------------------------------------------------------ Total adjustments (344.6) 118.0 945.7 - ------------------------------------------------------------------------------------------------ NET CASH FLOWS FROM OPERATING ACTIVITIES $ 620.2 $ 875.0 $ 982.2 - ------------------------------------------------------------------------------------------------ See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION ------------------------ 34 - -------------------------------------------------------------------------------- Statement of Consolidated Cash Flows (Cont.)
- ------------------------------------------------------------------------------------------------ Year Ended December 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------ (In millions of dollars) CASH FLOWS FROM INVESTING ACTIVITIES: - -------------------------------------- Purchases of fixed maturities $(34,312.2) $(29,255.3) $(34,149.4) Proceeds from fixed maturities: Sales 34,864.3 24,065.1 25,287.0 Maturities, calls and redemptions 1,796.3 2,855.2 4,506.3 Purchases of equity securities (971.6) (1,094.1) (892.8) Proceeds from sale of equity securities 1,077.4 1,317.2 649.9 Change in short-term investments (2,028.9) 2,941.5 1,895.8 Purchases of property and equipment (205.3) (126.2) (109.5) Change in securities sold under repurchase agreements (673.6) (1,704.5) 1,865.3 Change in other investments 146.1 157.9 (21.7) Purchase of The Continental Corporation - (1,125.5) - Cash acquired in connection with the Continental merger - 165.1 - Other acquisitions - (72.0) - Other, net 19.7 (38.5) 1.8 - ------------------------------------------------------------------------------------------------ NET CASH FLOWS FROM INVESTING ACTIVITIES (287.8) (1,914.1) (967.3) - ------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: - ------------------------------------- Dividends paid to preferred shareholders (6.3) (6.9) (4.9) Receipts from investment contracts credited to policyholder account balances 11.0 22.6 32.8 Return of policyholder account balances on investment contracts (40.6) (34.3) (22.4) Change in short-term debt (257.7) 3.0 - Principal payments on long-term debt (253.7) (3.3) (2.9) Retirement of notes payable - (205.0) - Proceeds from issuance of long-term debt 250.4 1,337.0 0.5 - ------------------------------------------------------------------------------------------------- NET CASH FLOWS FROM FINANCING ACTIVITIES (296.9) 1,113.1 3.1 - ------------------------------------------------------------------------------------------------- NET CASH FLOWS 35.5 74.0 18.0 Cash at beginning of period 221.6 147.6 129.6 - ------------------------------------------------------------------------------------------------- CASH AT END OF PERIOD $ 257.1 $ 221.6 $ 147.6 ================================================================================================= See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION ------------------------- 35 CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Statement of Consolidated Cash Flows (cont.)
- -------------------------------------------------------------------------------------------------- Year Ended December 31 1996 1995 1994 - -------------------------------------------------------------------------------------------------- (In millions of dollars) Supplemental disclosure of cash flow information: Cash (paid) received: Interest expense $(210.8) $(169.5) $(71.4) Federal income taxes 15.5 (102.5) 70.0 ================================================================================================== Supplemental disclosure of cash flow information relating to acquisitions: Noncash investing activities that are not reflected in the Statement of Cash Flows are listed below*. - ------------------------------------------------------------------------------------------------- The Continental Year Ended December 31, 1995 Corporation Other - ------------------------------------------------------------------------------------------------- (In millions of dollars) Fair value of assets acquired, excluding cash acquired $ 15,094 $ 231 Liabilities assumed (14,133) (159) - ------------------------------------------------------------------------------------------------- Cash paid, net of cash acquired $ 961 $ 72 ================================================================================================= See accompanying Notes to Consolidated Financial Statements. * There were no significant acquisitions by CNA Financial Corporation during the years ended December 31, 1996 and December 31, 1994.
CNA FINANCIAL CORPORATION ------------------------- 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- Note A - Significant Accounting Policies: Note A - Significant Accounting Policies: - ----------------------------------------- BASIS OF PRESENTATION - -------------------------------------------------------------------------------- The Consolidated Financial Statements include CNA Financial Corporation (CNA or the Company) and its subsidiaries which consist of property/casualty insurance companies (principally Continental Casualty Company and The Continental Insurance Company) and life insurance companies (principally Continental Assurance Company and Valley Forge Life Insurance Company). Loews Corporation (Loews) owns approximately 84% of the outstanding common stock of CNA. CNA acquired The Continental Corporation (Continental) through a cash merger for approximately $1.1 billion on May 10, 1995, and as a result, the financial statements include the results of Continental subsequent to that date. CNA is a multiple-line insurer underwriting property and casualty coverages; life, accident and health insurance; and pension and annuity business. CNA serves a wide spectrum of insureds, including individuals; small, medium and large businesses; associations; professionals and groups. The accompanying Consolidated Financial Statements have been prepared in conformity with generally accepted accounting principles. Certain amounts applicable to prior years have been reclassified to conform to classifications followed in 1996. All significant intercompany amounts have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INSURANCE - -------------------------------------------------------------------------------- Premium revenue Insurance premiums on property/casualty and health insurance contracts are earned ratably over the terms of the policies after provision for estimated adjustments on retrospectively-rated policies and deductions for ceded insurance. Revenues on universal lifetype contracts are comprised of contract charges and fees which are recognized over the coverage period. Other life insurance premiums are recognized as revenue when due after deductions for ceded insurance. Claim and claim expense reserves Claim and claim expense reserves, except reserves for structured settlements, workers' compensation lifetime claims and accident and health disability claims, are based on undiscounted (a) case basis estimates for losses reported on direct business, adjusted in the aggregate for ultimate loss expectations, CNA FINANCIAL CORPORATION ------------------------ 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note A - Significant Accounting Policies (cont.) (b)estimates of unreported losses based upon past experience, (c) estimates of losses on assumed insurance, and (d) estimates of future expenses to be incurred in settlement of claims. In establishing these estimates, consideration is given to current conditions and trends as well as past Company and industry experience. Claim and claim expense reserves are based on estimates and the ultimate liability may vary significantly from such estimates. CNA regularly reviews its reserves, and any adjustments that are made to the reserves are reflected in operating income in the period the need for such adjustments become apparent. Further discussion of claim and claim expense reserves may be found in Note E. Structured settlements have been negotiated for claims on certain property/casualty insurance policies. Structured settlements are agreements to provide periodic payments to claimants, which are fixed and determinable as to the amount and time of payment. Certain structured settlements are funded by annuities purchased from Continental Assurance Company for which the related annuity obligations are recorded in future policy benefits reserves. Obligations for structured settlements not funded by annuities are carried at the present value of future benefits. At December 31, 1996 and 1995, such reserves, discounted at interest rates ranging from 6.25% to 7.5%, totaled $924 million and $897 million, respectively, (reflecting a discount of $1,556 million and $1,555 million, respectively). Workers' compensation lifetime claims and accident and health disability claim reserves are discounted at interest rates ranging from 3.5% to 6.0% with mortality and morbidity assumptions reflecting the Company's and current industry experience. At December 31, 1996 and 1995, such discounted reserves totaled $2,165 million and $2,240 million, respectively (reflecting a discount of $903 million and $894 million, respectively). Future policy benefits reserves Reserves for traditional life insurance products are computed based upon the net level premium method using actuarial assumptions as to interest rates, mortality, morbidity, withdrawals and expenses. Actuarial assumptions include a margin for adverse deviation and generally vary by plan, age at issue and policy duration. Interest rates range from 3% to 11% and mortality, morbidity and withdrawal assumptions reflect CNA and industry experience prevailing at the time of issue. Renewal expense estimates include the estimated effects of inflation and expenses beyond the premium paying period. Involuntary risks CNA's share of involuntary risks is mandatory and generally a function of its share of the voluntary market by line of insurance in each state. CNA records the estimated effects of its mandatory participation in residual markets on an accrual basis. CNA records assessments for insolvencies as they are paid. Accrual of such assessments is not practical, as past experience is not a reliable indicator of future activity. Reinsurance CNA assumes and cedes insurance with other insurers and reinsurers and members of various reinsurance pools and associations. CNA utilizes reinsurance arrangements to limit its maximum loss, provide greater diversification of risk and minimize exposures on larger risks. The reinsurance coverages are tailored CNA FINANCIAL CORPORATION ------------------------- 38 - ------------------------------------------------------------------------------- Note A - Significant Accounting Policies (cont.) to the specific risk characteristics of each product line with CNA's retained amount varying by type of coverage. Generally, reinsurance coverage for property risks is on an excess of loss, per risk basis. Liability coverages are generally reinsured on a quota share basis in excess of CNA's retained risk. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability. Deferred acquisition costs Costs of acquiring property/casualty insurance business which vary with and are primarily related to the production of such business are deferred and amortized ratably over the period the related premiums are recognized. Such costs include commissions, premium taxes and certain underwriting and policy issuance costs. Anticipated investment income is considered in the determination of the recoverability of deferred acquisition costs. Life acquisition costs are capitalized and amortized based on assumptions consistent with those used for computing policy benefit reserves. Acquisition costs on ordinary life business are amortized over the assumed premium paying periods. Universal life and annuity acquisition costs are amortized in proportion to the present value of estimated gross profits over the products' assumed durations, which are regularly evaluated and adjusted as appropriate. Valuation of investments CNA classifies its fixed maturity securities (bonds and redeemable preferred stocks) and its equity securities as available-for-sale, and as such, they are carried at fair value. The amortized cost of fixed maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in investment income. CNA considers its derivative securities as held for trading purposes, except for interest rate swaps associated with corporate borrowings, and as such, trading derivatives are recorded at fair value at the reporting date. Interest rate swaps associated with corporate borrowings are accounted for as an adjustment to interest expense. Mortgage loans are carried at unpaid principal balances, including unamortized premium or discount. Real estate is carried at depreciated cost. Policy loans are carried at unpaid balances. Short-term investments are carried at amortized cost which approximates market value. Investment gains and losses All securities transactions are recorded on the trade date. Realized investment gains and losses are determined on the basis of the amortized cost of the specific securities sold. Investments are written down to estimated fair values and losses are charged to income when a decline in value is considered to be other than temporary. Unrealized investment gains and losses on fixed maturity and equity securities are reflected as part of stockholders' equity, net of applicable deferred income taxes and participating policyholders' interest. Unrealized investment gains and losses on derivative securities, except for the interest rate swaps associated with corporate borrowings, are reflected as part of realized investment gains and losses. Unrealized gains or losses related to changes in the value of the interest rate swaps associated with corporate borrowings are not recognized. CNA FINANCIAL CORPORATION -------------------------- 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note A - Significant Accounting Policies (cont.) Securities sold under repurchase agreements CNA has a securities lending program where securities are loaned to third parties, primarily major brokerage firms. Borrowers of these securities must deposit 100% of the fair value of the securities if the collateral is cash, or 102%, if the collateral is securities. Cash deposits from these transactions are invested in short-term investments (primarily commercial paper). CNA continues to receive the interest on loaned debt securities, as beneficial owner, and accordingly, loaned debt securities are included within fixed maturity securities. The liabilities for securities sold subject to repurchase agreements are recorded at their contractual repurchase amounts. Restricted investments On December 30, 1993, CNA deposited $986.8 million in an escrow account, pursuant to the Fibreboard Global Settlement Agreement, as discussed in Note F. The funds are included in short-term investments and are invested in U.S. Treasury securities. The escrow account amounted to $1,071.2 million and $1,044.6 million at December 31, 1996 and 1995, respectively. Participating business Participating business represented 0.5%, 0.6%, and 0.9% of gross life insurance in force and 0.7%, 0.8%, and 1.0% of life insurance premium income for 1996, 1995, and 1994, respectively. Participating policyholders' equity is determined by allocating 90% of the net income or loss and unrealized investment gains or losses related to such business as allowed by applicable laws, less dividends determined by the Board of Directors. In the accompanying Statement of Consolidated Operations, revenues and benefits and expenses include amounts related to participating policies; the net income or loss allocated to participating policyholders' equity is a component of insurance claims and policyholders' benefits. Separate Account business Continental Assurance Company issues certain investment and annuity contracts. The supporting assets and liabilities of these contracts are legally segregated and reflected in the accompanying Consolidated Balance Sheet as assets and liabilities of Separate Account business. Continental Assurance Company guarantees principal and a specified return to the contractholders on approximately 82% of the Separate Account business. Substantially all assets of the Separate Account business are carried at fair value. CNA FINANCIAL CORPORATION -------------------------- 40 - ------------------------------------------------------------------------------- Note A - Significant Accounting Policies (cont.) INCOME TAXES - -------------------------------------------------------------------------------- The provision for income taxes includes deferred taxes, resulting from temporary differences between the financial statement and tax return bases of assets and liabilities under the liability method. Such temporary differences primarily relate to insurance reserves (principally claim reserve discounting), unearned premium reserves, net unrealized investment gains/losses and deferred acquisition costs. Deferred taxes also arise from net operating loss carryforwards. PROPERTY AND EQUIPMENT - -------------------------------------------------------------------------------- Property and equipment are carried at cost less accumulated depreciation. Depreciation is based on the estimated useful lives of the various classes of property and equipment and determined principally on accelerated methods. The cost of maintenance and repairs is charged to income as incurred; major improvements are capitalized. MANAGEMENT SERVICES - -------------------------------------------------------------------------------- CNA reimburses Loews for management services, travel and similar expenses, and expenses of investment facilities and services provided to CNA. Such expenses amounted to approximately $14.8 million, $10.7 million and $8.3 million in 1996, 1995 and 1994, respectively. EARNINGS PER SHARE - -------------------------------------------------------------------------------- Earnings per share applicable to common stock are based on weighted average outstanding shares of common stock of 61,798,000 in 1996, 1995 and 1994, respectively. CNA FINANCIAL CORPORATION ------------------------- 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note B - Investments Note B--Investments: - --------------------
NET INVESTMENT INCOME - -------------------------------------------------------------------------------------------------- Year Ended December 31 1996 1995 1994 - --------------------------------------------------------------------------------------------------- (In millions of dollars) Fixed maturities: Bonds: Taxable $1,716.4 $1,512.1 $1,009.8 Tax-exempt 272.5 262.8 333.7 Redeemable preferred stocks 2.0 3.9 13.5 Equity securities 24.6 47.3 17.6 Mortgage loans 9.6 12.6 4.3 Real estate 1.1 0.9 0.9 Policy loans 12.5 12.6 10.2 Short-term investments 231.3 214.7 130.5 Security repurchase transactions-income 77.0 166.8 149.7 Other 45.1 46.2 22.2 - --------------------------------------------------------------------------------------------------- 2,392.1 2,279.9 1,692.4 Investment expense (43.2) (46.1) (23.7) Security repurchase transactions expenses and fees (72.9) (157.2) (117.5) - --------------------------------------------------------------------------------------------------- Net investment income $2,276.0 $2,076.6 $1,551.2 ===================================================================================================
CNA FINANCIAL CORPORATION --------------------------- 42 - -------------------------------------------------------------------------------- NOTE B - Investments (cont.)
ANALYSIS OF INVESTMENT GAINS (LOSSES) - ------------------------------------------------------------------------------------------------ Year Ended December 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------ (In millions of dollars) Realized investment gains (losses): Fixed maturities $ 292.8 $ 221.8 $ (296.9) Equity securities 216.3 140.6 44.5 Derivative securities 18.1 18.7 6.3 Other, including Separate Account business 91.4 82.7 (0.1) ----------------------------------- 618.6 463.8 (246.2) Allocated to participating policyholders (14.3) (7.8) 10.9 Income tax (expense) benefit (217.2) (161.6) 84.8 - ------------------------------------------------------------------------------------------------ Net realized investment gains (losses) 387.1 294.4 (150.5) - ------------------------------------------------------------------------------------------------ Change in net unrealized investment gains (losses): Fixed maturities (874.8) 1,854.7 (1,299.8) Equity securities (26.2) 162.9 (57.0) Other, including Separate Account business (44.9) 323.2 (45.5) ----------------------------------- (945.9) 2,340.8 (1,402.3) Allocated to participating policyholders 18.0 (44.2) 32.5 Income tax benefit (expense) 293.5 (857.1) 503.4 - ------------------------------------------------------------------------------------------------ Change in net unrealized investment (losses) gains (634.4) 1,439.5 (866.4) - ------------------------------------------------------------------------------------------------ Net realized and unrealized investment gains (losses) $(247.3) $1,733.9 $(1,016.9) =================================================================================================
SUMMARY OF GROSS REALIZED INVESTMENT GAINS (LOSSES) FOR FIXED MATURITIES AND EQUITY SECURITIES - ---------------------------------------------------------------------------------------------------------- Year Ended December 31 1996 1995 1994 ---------------------- ------------------------------ ------------------------- Fixed Equity Fixed Equity Fixed Equity Maturities Securities Maturities Securities Maturities Securities - ---------------------------------------------------------------------------------------------------------- (In millions of dollars) Proceeds from sales $34,864.3 $1,077.4 $24,065.1 $1,317.2 $ 25,287.0 $649.9 ========================================================================================================== Gross realized gains $ 412.2 $ 241.2 $ 412.3 $ 198.9 $ 178.5 $ 65.8 Gross realized losses (119.4) (24.9) (190.5) (58.3) (475.4) (21.3) - ---------------------------------------------------------------------------------------------------------- Net realized gains (losses) on sales $ 292.8 $ 216.3 $ 221.8 $ 140.6 $ (296.9) $ 44.5 ==========================================================================================================
CNA FINANCIAL CORPORATION ------------------------- 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note B - Investments (cont.)
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES) INCLUDED IN STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------------------------- 1996 1995 --------------------------------- ---------------------------------- December 31 Gains Losses Net Gains Losses Net - --------------------------------------------------------------------------------------------------- (In millions of dollars) Fixed maturities $443.8 $(262.8) $181.0 $1,136.4 $ (77.1) $1,059.3 Equity securities 254.3 (97.1) 157.2 197.5 (16.1) 181.4 Other, including Separate Account business 171.0 (69.5) 101.5 304.1 (70.9) 233.2 ----------------------------------------------------------------------- $869.1 $(429.4) 439.7 $1,638.0 $(164.1) $1,473.9 ======= ======= ======== ======= Allocated to participating policyholders -- (18.1) Deferred income tax expense (141.0) (522.7) - --------------------------------------------------------------------------------------------------- Net unrealized investment gains $298.7 $ 933.1 ===================================================================================================
SUMMARY OF INVESTMENTS IN FIXED MATURITIES AND EQUITY SECURITIES AVAILABLE FOR SALE - ------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market December 31, 1996 Cost Gains Losses Value - ------------------------------------------------------------------------------------------- (In millions of dollars) United States Treasury securities and obligations of government agencies $ 9,854.8 $ 72.4 $ 91.9 $ 9,835.3 Asset-backed securities 6,297.9 53.3 58.9 6,292.3 States, municipalities and political subdivisions - tax-exempt 4,859.6 120.9 29.3 4,951.2 Corporate securities 4,730.1 121.0 63.2 4,787.9 Other debt securities 1,748.0 59.5 19.2 1,788.3 Redeemable preferred stocks 49.2 16.7 .3 65.6 - -------------------------------------------------------------------------------------------- Total fixed maturities 27,539.6 443.8 262.8 27,720.6 Equity securities 701.9 254.3 97.1 859.1 - -------------------------------------------------------------------------------------------- Total $28,241.5 $698.1 $359.9 $28,579.7 ============================================================================================
CNA FINANCIAL CORPORATION -------------------------- 44 - -------------------------------------------------------------------------------- Note B - Investments Cont.)
SUMMARY OF INVESTMENTS IN FIXED MATURITIES AND EQUITY SECURITIES AVAILABLE FOR SALE - -------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market December 31, 1995 Cost Gains Losses Value - -------------------------------------------------------------------------------------------------- (In millions of dollars) United States Treasury securities and obligations of government agencies $13,064.0 $ 479.5 $ 1.3 $13,542.2 Asset-backed securities 5,939.7 160.3 13.8 6,086.2 States, municipalities and political subdivisions - tax-exempt 3,452.8 163.7 13.4 3,603.1 Corporate securities 4,522.3 210.3 39.9 4,692.7 Other debt securities 2,306.3 105.4 7.5 2,404.2 Redeemable preferred stocks 100.3 17.2 1.2 116.3 - -------------------------------------------------------------------------------------------------- Total fixed maturities 29,385.4 1,136.4 77.1 30,444.7 Equity securities 736.3 197.5 16.1 917.7 - -------------------------------------------------------------------------------------------------- Total $30,121.7 $1,333.9 $93.2 $31,362.4 ==================================================================================================
SUMMARY OF INVESTMENTS IN FIXED MATURITIES BY CONTRACTUAL MATURITY - ------------------------------------------------------------------------------------------------ 1996 1995 -------------------------- ------------------------ Amortized Market Amortized Market December 31 Cost Value Cost Value - ------------------------------------------------------------------------------------------------ (In millions of dollars) Due in one year or less $ 2,494.1 $ 2,506.4 $ 849.8 $ 853.0 Due after one year through five years 8,376.9 8,294.8 11,912.8 12,117.3 Due after five years through ten years 4,810.4 4,828.5 4,537.8 4,761.4 Due after ten years 5,560.3 5,798.6 6,145.3 6,626.8 Asset-backed securities not due at a single maturity date 6,297.9 6,292.3 5,939.7 6,086.2 - -------------------------------------------------------------------------------------------------- Total $27,539.6 $27,720.6 $29,385.4 $30,444.7 ==================================================================================================
Actual maturities may differ from contractual maturities because securities may be called or prepaid with or without call or prepayment penalties. The carrying value of investments (other than equity securities) that have not produced income for the last twelve months is $101.3 million at December 31, 1996, compared to $94.8 million for the same period in 1995. There are no investments in a single issuer, other than the U.S. government, that, when aggregated, exceed 10% of stockholders' equity. CNA FINANCIAL CORPORATION ------------------------- 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note C -- Financial Instruments Note C - Financial Instruments: - ------------------------------ In the normal course of business, CNA invests in various financial assets, incurs various financial liabilities, and enters into agreements involving derivative securities, including off-balance sheet financial instruments. Fair values are required to be disclosed for all financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values may be based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. Potential taxes and other transaction costs have not been considered in estimating fair value. The estimates presented herein are subjective in nature and are not necessarily indicative of the amounts that CNA could realize in a current market exchange. Any difference would not be expected to be material. All nonfinancial instruments such as deferred acquisition costs, property and equipment, deferred income taxes, intangibles and insurance reserves are excluded from fair value disclosure. Thus, the total fair value amounts cannot be aggregated to determine the underlying economic value of CNA. The carrying amounts reported in the balance sheet approximate fair value for cash, short-term investments, other insurance receivables, accrued investment income, receivables for securities sold, securities sold under repurchase agreements, payables for securities purchased, short-term debt and certain other assets and other liabilities because of their short-term nature. Accordingly, these assets and liabilities are not listed in the tables below. The carrying amounts and estimated fair values of CNA's other financial instrument assets and liabilities are listed below. Derivative instruments are shown in a separate table. CNA FINANCIAL CORPORATION ------------------------- 46 - -------------------------------------------------------------------------------- Note C -- Financial Instruments (cont.)
FINANCIAL ASSETS - ------------------------------------------------------------------------------------- 1996 1995 --------------------------- ---------------------- CARRYING ESTIMATED Carrying Estimated AMOUNT FAIR VALUE Amount Fair Value - ------------------------------------------------------------------------------------- (In millions of dollars) Investments: Fixed maturities - Note B $27,720.6 $27,720.6 $30,444.7 $30,444.7 Equity securities - Note B 859.1 859.1 917.7 917.7 Mortgage loans 112.6 114.5 119.3 115.9 Policy loans 174.4 162.7 177.2 166.6 Other invested assets 681.2 681.2 499.9 543.4 Separate Account business: Fixed maturities 4,608.3 4,608.3 5,499.3 5,499.3 Equity securities 169.2 169.2 242.7 242.7 Short-term Investments 906.1 906.1 84.5 84.5 Other 437.3 437.3 41.6 48.7 - -------------------------------------------------------------------------------------
The following methods and assumptions were used by CNA in estimating its fair value disclosures for the above financial instruments. Fixed maturity securities and equity securities are based on quoted market prices, where available. For securities not actively traded, fair values are estimated using values obtained from independent pricing services, costs to settle, or quoted market prices of comparable instruments. The fair values for mortgage loans and policy loans are estimated using discounted cash flow analyses at interest rates currently offered for similar loans to borrowers with comparable credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. Valuation techniques to determine fair value of other invested assets and other Separate Account business assets consist of discounted cash flows and quoted market prices of (a) the investments, (b) comparable instruments, or (c) underlying assets of the investments. CNA FINANCIAL CORPORATION ------------------------- 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note C -- Financial Instruments (cont.)
FINANCIAL LIABILITIES - --------------------------------------------------------------------------------------------- 1996 1995 ---------------------------------------------------- CARRYING ESTIMATED Carrying Estimated December 31 AMOUNT FAIR VALUE Amount Fair Value - --------------------------------------------------------------------------------------------- (In millions of dollars) Premium deposits and annuity contracts $1,064.5 $1,017.6 $ 825.5 $ 776.8 Long-term debt 2,764.9 2,762.2 2,767.9 2,819.9 Financial guarantee liabilities 382.0 378.3 479.6 472.8 Separate Account business: Guaranteed investment contracts 3,989.5 4,011.5 4,315.8 4,455.5 Deferred annuities 73.0 84.1 74.1 108.2 Variable separate accounts 568.6 568.6 228.0 228.0 Other 895.6 895.6 585.8 585.8 - ---------------------------------------------------------------------------------------------
Premium deposits and annuity contracts are valued based on cash surrender values and the outstanding fund balances. CNA's Senior Notes and debenture are valued based on quoted market prices. The fair value for other long-term debt is estimated using discounted cash flow analyses, based on current incremental borrowing rates for similar types of borrowing arrangements. The fair value of the liability for financial guarantee contracts is based on discounted cash flows utilizing interest rates currently being offered for similar contracts or spot interest rates. The fair value of guaranteed investment contracts and deferred annuities of the Separate Account business are estimated using discounted cash flow calculations, based on interest rates currently being offered for similar contracts with similar maturities. The fair values of the liabilities for variable Separate Account business are based on the quoted market values of the underlying assets of each variable Separate Account. The fair value of other Separate Account business liabilities approximates carrying value. CNA FINANCIAL CORPORATION ------------------------- 48 - ------------------------------------------------------------------------------- Note C - Financial Instruments (cont.) DERIVATIVE FINANCIAL INSTRUMENTS - -------------------------------- CNA invests from time to time in certain derivative financial instruments to increase investment returns and to eliminate the impact of changes in interest rates on certain corporate borrowings. Financial instruments used for such purposes include interest rate swaps, put and call options, commitments to purchase securities, futures and forwards. The gross notional principal or contractual amounts of these instruments in the general account at December 31, 1996, totaled $1,730.2 million compared to $2,762.1 million at December 31, 1995. The fair values associated with these instruments are generally affected by changes in interest rates and the stock market. The credit exposure associated with these instruments is generally limited to the unrealized fair value of the instruments and will vary based on changes in market prices. The risk of default depends on the creditworthiness of the counterpart to the instrument. Although the Company is exposed to the aforementioned credit risk, it does not expect any counterparty to fail to perform as contracted based on their high credit ratings. Due to the nature of the derivative securities, the Company does not require collateral. The fair value of derivatives generally reflects the estimated amounts that CNA would receive or pay upon termination of the contracts at the reporting date. Dealer quotes are available for substantially all of CNA's derivatives. For securities not actively traded, fair values are estimated using values obtained from independent pricing services, costs to settle, or quoted market prices of comparable instruments. CNA FINANCIAL CORPORATION ------------------------- 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note C -- Financial Instruments (cont.) A summary of the aggregate notional or contractual amounts and estimated fair values of these instruments at December 31, 1996 and 1995, as well as the monthly average fair values, are presented below.
- ------------------------------------------------------------------------------------------------------------------- 1996 1995 ----------------------------------------------------------------------------------------- Fair Value Fair Value ----------------- ------------------- CONTRACTUAL/ Contractual/ NOTIONAL ASSET MONTHLY RECOGNIZED Notional Asset Monthly Recognized December 31 VALUE (LIABILITY) AVERAGE GAIN(LOSS) Value (Liability) Average Gain (Loss) - ------------------------------------------------------------------------------------------------------------------- (In millions of dollars) Interest rate swaps - acquisition debt $ 950.0 $3.0 $ 6.7 $(4.8) $1,200.0 $(28.7) $(14.9) $ -- Trading: Futures 38.2 0.7 1.6 (1.0) -- -- -- -- Forwards 193.8 (2.1) (1.8) (13.1) -- -- -- -- Interest rate swaps 85.0 (0.4) 2.3 29.0 93.0 10.0 1.0 8.9 Commitments to purchase government and municipal securities 406.5 (0.8) (1.0) -- -- -- -- -- Options purchased 56.7 2.1 4.8 6.8 973.2 41.4 10.0 9.8 Options written-debt and equity securities -- -- (1.5) 1.2 495.9 (10.0) (1.7) -- - ------------------------------------------------------------------------------------------------------------------- TOTAL $1,730.2 $2.5 $11.1 $18.1 $2,762.1 $ 12.7 $(5.6) $18.7 - -------------------------------------------------------------------------------------------------------------------
An interest rate swap is an agreement in which two parties agree to exchange, at specified intervals, interest payment streams calculated on an agreed-upon notional principal amount with at least one stream based upon a specified float- ing rate index. CNA has entered into interest rate swap agreements to convert the variable rate of the borrowing under the revolving credit facility and the commercial paper program to a fixed rate. At December 31, 1996, CNA had outstanding interest rate swap agreements with several banks having a total notional principal amount of $950.0 million. Those agreements which terminate from May to December 2000 effectively fix the Company's interest rate exposure on $950.0 million of variable rate debt. Futures are contracts to buy or sell a standard quantity and quality of a commodity, financial instrument, or index at a specified future date and price. CNA FINANCIAL CORPORATION ------------------------- 50 - -------------------------------------------------------------------------------- Note C - Financial Instruments (cont.) Forwards are contracts between two parties to purchase and sell a specific quantity of a commodity, government security, foreign currency, or other financial instrument at a price specified now, with delivery and settlement of specified future date. Commitments to purchase government and municipal securities are a commitment to purchase securities in the future at a predetermined price. Such commitments are made when management believes this market is favorable to the current cash market. Options are contracts that grant the purchaser, for a premium payment, the right, but not the obligation, to either purchase or sell a financial instrument at a specified price within a specified period of time. CNA FINANCIAL CORPORATION ------------------------- 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note D -- Income Taxes Note D - Income Taxes: - ---------------------- CNA and its eligible subsidiaries (CNA Tax Group) are included in the consolidated Federal income tax return of Loews and its eligible subsidiaries. Loews and CNA have agreed that for each taxable year, CNA will (i) be paid by Loews the amount, if any, by which the Loews consolidated Federal income tax liability is reduced by virtue of the inclusion of the CNA Tax Group in the Loews consolidated Federal income tax return, or (ii) pay to Loews an amount, if any, equal to the Federal income tax which would have been payable by the CNA Tax Group filing a separate consolidated return. In the event that Loews should have a net operating loss in the future computed on the basis of filing a separate consolidated tax return without the CNA Tax Group, CNA may be required to repay tax recoveries previously received from Loews. This agreement between Loews and CNA may be canceled by either party upon thirty days written notice. For 1996, the inclusion of the CNA Tax Group in the consolidated Federal income tax return of Loews will result in an increased Federal income tax liability for Loews. Accordingly, CNA will pay to Loews approximately $99 million for 1996. In 1995 and 1994, the inclusion of the CNA Tax Group reduced the Federal income tax liability for Loews. Accordingly, CNA received from Loews approximately $78 million for 1995 and $26 million for 1994. At December 31, 1996, CNA had net operating loss carryforwards of approximately $800 million for income tax purposes that expire in years 2000 through 2010. Those carryforwards resulted from the Company's 1995 acquisition of Continental. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. CNA FINANCIAL CORPORATION ------------------------- 52 - -------------------------------------------------------------------------------- Note D - Income Taxes (cont.) Significant components of CNA's deferred tax assets and liabilities as of December 31, 1996 and 1995 are shown in the table below.
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES - ---------------------------------------------------------------------------------------------- December 31 1996 1995 - ---------------------------------------------------------------------------------------------- (In millions of dollars) Insurance reserves: Property/casualty claim reserve discounting $1,145.2 $1,328.0 Unearned premium reserves 268.0 251.0 Life reserve differences 141.1 153.4 Other insurance reserves 31.4 22.8 Deferred acquisition costs (570.1) (457.2) Investment valuation differences 32.4 74.8 Postretirement benefits other than pensions 142.5 140.5 Net unrealized gains (141.0) (522.7) Net operating loss carryforwards 279.9 298.0 Other, net 267.6 216.3 - ---------------------------------------------------------------------------------------------- Total deferred tax assets and liabilities 1,597.0 1,504.9 Valuation allowance (250.0) (250.0) - ---------------------------------------------------------------------------------------------- NET DEFERRED TAX ASSETS $1,347.0 $1,254.9 ==============================================================================================
At December 31, 1996, gross deferred tax assets and liabilities amounted to $2.652 billion and $1.305 billion, respectively. At December 31, 1995, gross deferred tax assets and liabilities amounted to $2.717 billion and $1.462 billion, respectively. The Loews/CNA Tax Group has a history of profitability and anticipates future taxable income sufficient to fully support recognition of its deferred tax balance at December 31, 1996, including but not limited to the reversal of existing temporary differences and the implementation of tax planning strategies, if needed. A valuation allowance is maintained due to the uncertainty regarding the realizability of deferred tax assets related to the Continental acquisition. CNA FINANCIAL CORPORATION ------------------------- 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note D - Income Taxes (cont.) Significant components of CNA's income tax provision are as follows:
PROVISION FOR INCOME TAX ========================================================================================= Year Ended December 31 1996 1995 1994 - ----------------------------------------------------------------------------------------- (In millions of dollars) Current tax (expense) benefit on: Ordinary loss $ 163.5 $ 94.0 $ 16.8 Realized investment (gains) losses (192.4) (158.4) 57.4 - ---------------------------------------------------------------------------------------- Total current tax (expense) benefit (28.9) (64.4) 74.2 - ---------------------------------------------------------------------------------------- Deferred tax (expense) benefit on: Ordinary (income) loss (326.5) (217.8) 68.9 Realized investment (gains) losses (24.8) (3.2) 27.4 - ---------------------------------------------------------------------------------------- Total deferred tax (expense) benefit $(351.3) (221.0) 96.3 - ---------------------------------------------------------------------------------------- TOTAL INCOME TAX (EXPENSE) BENEFIT $(380.2) $(285.4) $170.5 ========================================================================================
A reconciliation of the expected income tax (expense) benefit resulting from the use of statutory tax rates to the effective income tax (expense) benefit follows:
RECONCILIATION OF EXPECTED AND EFFECTIVE TAXES ================================================================================================= % of % of % of Pretax Pretax Pretax Year Ended December 31 1996 Income 1995 Income 1994 Income - ------------------------------------------------------------------------------------------------- (In millions of dollars) Expected tax expense on ordinary income at statutory rates $(259.2) (35.0)% $(205.2) (35.0)% $(35.5) (35.0)% Exempt interest and dividends received deduction 86.5 11.7 79.2 13.5 110.1 108.7 Other items, net 9.7 1.3 2.2 0.4 11.1 10.9 - -------------------------------------------------------------------------------------------------- Income tax (expense) benefit on ordinary income (163.0) (22.0) (123.8) (21.1) 85.7 84.6 - --------------------------------------------------------------------------------------------------- Expected tax (expense) benefit on realized investment gains/losses at statutory rates (211.5) (35.0) (159.6) (35.0) 82.4 35.0 Other items, net (5.7) (0.9) (2.0) (0.3) 2.4 1.0 - --------------------------------------------------------------------------------------------------- Income tax (expense) benefit on realized investment gains/losses (217.2) (35.9)% (161.6) (35.3)% 84.8 36.0% - --------------------------------------------------------------------------------------------------- INCOME TAX (EXPENSE) BENEFIT $(380.2) $(285.4) $170.5 ===================================================================================================
CNA FINANCIAL CORPORATION ------------------------- 54 - -------------------------------------------------------------------------------- Note E - Liability for Unpaid Claims and Claim Adjustment Expenses Note E - Liability for Unpaid Claims and Claim Adjustment Expenses - ------------------------------------------------------------------ CNA's property/casualty insurance claims and claims expense reserves represent the estimated amounts necessary to settle all outstanding claims, including claims which are incurred but not reported, as of the reporting date. The Company's reserve projections are based primarily on detailed analysis of the facts in each case, CNA's experience with similar cases, and various historical development patterns. Consideration is given to such historical patterns as field reserving trends, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions and public attitudes. All of these can affect the estimation of reserves. The effects of inflation, which can be significant, are implicitly considered in the reserving process and are part of the recorded reserve balance. Reserves are not discounted except in the case of workers' compensation lifetime claims and accident and health disability claims where the reserves are explicitly discounted at rates allowed by insurance regulators that range from 3.5% to 6.0% and structured settlements where such reserves are discounted at interest rates ranging from 6.25% to 7.5%. Estimating loss reserves is a difficult process as there are many factors that can ultimately affect the final settlement of a claim and, therefore, the reserve that is needed. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can all impact ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably predictable than long-tail claims, such as general liability and professional liability claims. CNA FINANCIAL CORPORATION ------------------------- 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.) The table below provides a reconciliation between beginning and ending claim and claim expense reserve balances for 1996, 1995 and 1994.
CHANGES IN RESERVES FOR PROPERTY/CASUALTY CLAIMS AND CLAIM EXPENSES - ------------------------------------------------------------------------------------------ Year Ended December 31 1996 1995 1994 - ------------------------------------------------------------------------------------------- In millions of dollars) Reserves at beginning of year: Gross $31,044 $21,639 $20,812 Ceded reinsurance 6,089 2,705 2,491 - ------------------------------------------------------------------------------------------- Net reserves at beginning of year 24,955 18,934 18,321 Continental reserves at acquisition - net --- 6,063 --- - ------------------------------------------------------------------------------------------- Total net reserves 24,955 24,997 18,321 - ------------------------------------------------------------------------------------------- Net incurred claims and claim expenses: Provision for insured events of current year 7,922 6,787 5,611 Increase (decrease) in provision for insured events of prior years (91) 122 (71) Amortization of discount 149 106 100 - ------------------------------------------------------------------------------------------- Total net incurred 7,980 7,015 5,640 - ------------------------------------------------------------------------------------------- Net payments attributable to: Current year events 2,676 2,000 1,388 Prior year events 6,524 5,057 3,639 - ------------------------------------------------------------------------------------------ Total net payments 9,200 7,057 5,027 - ------------------------------------------------------------------------------------------ Net reserves at end of year 23,735 24,955 18,934 Ceded reinsurance at end of year 6,095 6,089 2,705 - ------------------------------------------------------------------------------------------ Gross reserves at end of year* $29,830 $31,044 $21,639 ========================================================================================== * Excludes life claim and claim expense reserves and intercompany eliminations of $1 billion, $988 million, and $926 million as of December 31, 1996, 1995 and 1994, respectively, included in the Consolidated Balance Sheet.
The following reserve development reflects the effects of management's ongoing evaluation of reserve levels and is comprised of the following components: RESERVE DEVELOPMENT - -------------------------------------------------------------------------------- Year Ended December 31 1996 1995 1994 - -------------------------------------------------------------------------------- (In millions of dollars,(adverse)/favorable) Environmental Pollution $(65) $(226) $(181) Asbestos (51) (274) (37) Other 207 378 289 - -------------------------------------------------------------------------------- Total $ 91 $(122) $ 71 - -------------------------------------------------------------------------------- CNA FINANCIAL CORPORATION ------------------------ 56 - -------------------------------------------------------------------------------- Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.) ENVIRONMENTAL AND ASBESTOS - -------------------------------------------------------------------------------- The CNA property/casualty insurance companies have potential exposures related to environmental pollution and asbestos claims. Environmental pollution clean-up is the subject of both federal and state regulation. By some estimates, there are thousands of potential waste sites subject to clean-up. The insurance industry is involved in extensive litigation regarding coverage issues. Judicial interpretations in many cases have expanded the scope of coverage and liability beyond the original intent of the policies. The Comprehensive Environmental Response Compensation and Liability Act of 1980 ("Superfund") and comparable state statutes ("mini-Superfund") govern the clean-up and restoration of abandoned toxic waste sites and formalize the concept of legal liability for clean-up and restoration by "Potentially Responsible Parties" ("PRP's"). Superfund and the mini-Superfunds (Environmental Clean-up Laws or "ECLs") establish mechanisms to pay for clean-up of waste sites if PRP's fail to do so, and to assign liability to PRP's. The extent of liability to be allocated to a PRP is dependent on a variety of factors. Further, the number of waste sites subject to clean-up is unknown. To date, approximately 1,300 clean-up sites have been identified by the Environmental Protection Agency on its National Priorities List. On the other hand, the Congressional Budget Office is estimating that there will be 4,500 National Priority List sites, and other estimates project as many as 30,000 sites that will require clean-up under ECLs. Very few sites have been subject to clean-up to date; the addition of new clean-up sites has substantially slowed in recent years. The extent of clean-up necessary and the assignment of liability has not been established. CNA and the insurance industry are disputing coverage for many such claims. Key coverage issues include whether Superfund response costs are considered damages under the policies, trigger of coverage, applicability of pollution exclusions, the potential for joint and several liability and definition of an occurrence. Similar coverage issues exist for clean-up of waste sites not covered under Superfund. To date, courts have been inconsistent in their rulings on these issues. A number of proposals to reform Superfund have been made by various parties. Despite Superfund taxing authority expiring at the end of 1995, no reforms have been enacted by Congress. No predictions can be made as to what positions the Congress or the Administration will take and what legislation, if any, will result. If there is legislation, and in some circumstances even if there is no legislation, the federal role in environmental clean up may be materially reduced in favor of state action. Substantial changes in the federal statute or the activity of the EPA may cause states to reconsider their environmental clean up statutes and regulations. There can be no meaningful prediction of the pattern of regulation that would result. Due to the inherent uncertainties described above, including the inconsistency of court decisions, the number of waste sites subject to clean-up, and the standards for clean-up and liability, the ultimate exposure to CNA for environmental pollution claims cannot be meaningfully quantified. CNA FINANCIAL CORPORATION ------------------------- 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.) Claim and claim expense reserves represent management's estimates of ultimate liabilities based on currently available facts and case law. However, in addition to the uncertainties previously discussed, additional issues related to, among other things, specific policy provisions, multiple insurers and allocation of liability among insurers, consequences of conduct by the insured, missing policies and proof of coverage make quantification of liabilities exceptionally difficult and subject to adjustment based on new data. As of December 31, 1996 and December 31, 1995, CNA carried approximately $908 million and $1,063 million, respectively, of claim and claim expense reserves, net of reinsurance recoverable, for reported and unreported environmental pollution claims. The reserves relate to claims for accident years 1988 and prior, which coincides with CNA's adoption of the Simplified Commercial General Liability coverage form which included an absolute pollution exclusion. Unfavorable reserve development for the year ended December 31, 1996 was $65 million as compared to unfavorable reserve development for the years ended December 31, 1995 and 1994 which totaled $226 million and $181 million, respectively. Unfavorable environmental reserve development results from CNA's on-going monitoring of settlement patterns, current pending cases and potential future claims. CNA has exposure to asbestos claims, including those attributable to CNA's litigation with Fibreboard Corporation. A detailed discussion of CNA's litigation with Fibreboard Corporation regarding asbestos-related bodily injury claims can be found in Note F. Estimation of asbestos claim reserves encounter many of the same limitations discussed above for environmental pollution claims such as inconsistency of court decisions, specific policy provisions, multiple insurers and allocation of liability among insurers, missing policies and proof of coverage. As of December 31, 1996 and 1995, CNA carried approximately $1,506 million and $2,191 million, respectively, of claim and claim expense reserves, net of reinsurance recoverable, for reported and unreported asbestos-related claims. Unfavorable reserve development for the years ended December 31, 1996, 1995 and 1994 totaled $51 million,$274 million and $37 million, respectively. The results of operations in future years may continue to be adversely affected by environmental pollution and asbestos claims and claim expenses. Management will continue to monitor potential liabilities and make further adjustments as warranted. CNA FINANCIAL CORPORATION -------------------------- 58 - ------------------------------------------------------------------------------- Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.) OTHER - ----- Other 1996 and 1995 reserve development, which aggregated to $207 million and $378 million, respectively, of favorable reserve development, was principally due to favorable claim frequency (rate of claim occurrence) and severity (average cost per claim) experience in the workers' compensation line of business. These trends reflect the positive effects of changes in workers compensation laws, more moderate increases in medical costs, and a generally strong economy in which individuals return to the workplace more quickly. Other favorable reserve development during 1994 aggregated to $289 million which was principally attributable to positive severity experience in professional liability lines and improvement in voluntary and involuntary workers' compensation experience. CNA, consistent with sound reserving practices, regularly adjusts its reserve estimates in subsequent reporting periods as new facts and circumstances emerge that indicate the previous estimates need to be modified. Beginning the latter part of 1995 and through 1996 to date, CNA has been actively settling many of its larger environmental pollution and asbestos- related claim exposures. This strategy has resulted in a large volume of claim payments during 1996, and corresponding reductions in reserves. In addition, Fibreboard claim payments escalated in 1996 as some scheduled payments came due. Management does not believe that these recent activities have changed facts or circumstances evident at December 31, 1995, therefore, no material modifications to previous reserve estimates have been made in 1996. CNA FINANCIAL CORPORATION ------------------------- 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.) The following tables provide additional data related to CNA's environmental pollution and asbestos-related claims activity. Continental claims activity for 1995 is included for the period May 10, 1995 through December 31, 1995.
Reserve Summary - -------------------------------------------------------------------------------- December 31 1996 1995 ------------------------ --------------------------- Environmental Environmental Pollution Asbestos Pollution Asbestos - -------------------------------------------------------------------------------- (In millions of dollars) Gross reserves: Reported claims $ 288.9 $1,551.4 $ 288.4 $1,947.1 Unreported claims 714.0 94.0 895.0 369.0 ----------------------------------------------------- 1,002.9 1,645.4 1,183.4 2,316.1 Less reinsurance recoverable (95.1) (139.2) (120.4) (125.0) - -------------------------------------------------------------------------------- Net reserves $ 907.8 $1,506.2 $1,063.0 $2,191.1 ================================================================================ The following tables summarize claim activity for environmental pollution and asbestos.
Environmental Pollution Changes in Reserves - -------------------------------------------------------------------------------- Year ended December 31 1996 1995 1994 - -------------------------------------------------------------------------------- (In millions of dollars) Net reserves at beginning of year $1,063.0 $ 948.8* $432.6 Reserve strengthening 64.7 226.0 180.6 Less: Gross payments 304.2 183.4 131.8 Reinsurance recoveries (84.3) (71.6) (24.3) --------------------------------------- Net payments 219.9 111.8 107.5 - -------------------------------------------------------------------------------- Net reserves at end of year $ 907.8 $1,063.0 $505.7 ================================================================================ * Includes Continental net reserves of $443.1 million at May 10, 1995.
Asbestos Changes in Reserves - -------------------------------------------------------------------------------- Year ended December 31 1996 1995 1994 - -------------------------------------------------------------------------------- (In millions of dollars) Net reserves at beginning of year $2,191.1 $2,109.1** $2,080.0 Reserve strengthening 50.5 273.7 36.8 Less: Gross payments 787.7 267.8 245.9 Reinsurance recoveries (52.3) (76.1) (67.8) --------------------------------------- Net payments 735.4 191.7 178.1 - -------------------------------------------------------------------------------- Net reserves at end of year $1,506.2 $2,191.1 $1,938.7 ================================================================================ ** Includes Continental net reserves of $170.4 million at May 10, 1995.
CNA FINANCIAL CORPORATION ------------------------- 60 - -------------------------------------------------------------------------------- Note F - Legal Proceedings and Contingent Liabilities Fibreboard Litigation - --------------------- CNA's primary property/casualty subsidiary, Continental Casualty Company ("Casualty"), has been party to litigation with Fibreboard Corporation ("Fibreboard") involving coverage for certain asbestos-related claims and defense costs (San Francisco Superior Court, Judicial Council Coordination Proceeding 1072). As described below, Casualty, Fibreboard, another insurer (Pacific Indemnity, a subsidiary of the Chubb Corporation), and a negotiating committee of asbestos claimant attorneys (collectively referred to as Settling Parties) have reached a Global Settlement (the "Global Settlement") to resolve all future asbestos-related bodily injury claims involving Fibreboard, which is subject to court approval. Casualty, Fibre- board and Pacific Indemnity have also reached an agreement (the "Trilateral Agreement"), on a settlement to resolve the coverage litigation in the event the Global Settlement does not obtain final court approval or is subsequently successfully attacked. The implementation of either the Global Settlement or the Trilateral Agreement would have the effect of settling Casualty's litigation with Fibreboard. On July 27, 1995, the United States District Court for the Eastern District of Texas entered judgment approving the Global Settlement Agreement and the Trilateral Agreement. As expected, appeals were filed as respects both of these decisions. On July 25, 1996, a panel of the United States Fifth Circuit Court of Appeals in New Orleans affirmed the judgment approving the Global Settlement Agreement by a 2 to 1 vote and affirmed the judgment approving the Trilateral Agreement by a 3 to 0 vote. Petitions for rehearing by the panel and Suggestions for Rehearing by the entire Fifth Circuit Court of Appeals as respects the decision on the Global Settlement Agreement were denied. Two petitions for certiorari were filed in the Supreme Court. No further appeal was filed with respect to the Trilateral Agreement; therefore, court approval of the Trilateral Agreement has become final. Global Settlement Agreement On April 9, 1993, Casualty and Fibreboard entered into an agreement pursuant to which, among other things, the parties agreed to use their best efforts to negotiate and finalize a global class action settlement with asbestos-related bodily injury and death claimants. On August 27, 1993, the Settling Parties reached an agreement in principle for an omnibus settlement to resolve all future asbestos-related bodily injury claims involving Fibreboard. The Global Settlement Agreement was executed on December 23, 1993. The agreement calls for contribution by Casualty and Pacific Indemnity of an aggregate of $1.525 billion to a trust fund for a class of all future asbestos claimants, defined generally as those persons whose claims against Fibreboard were neither filed nor settled before August 27, 1993. An additional $10 million is to be contributed to the fund by Fibreboard. As indicated hereinabove, although the Global Settlement approval has so far been affirmed on appeal, further review is being sought. There is limited precedent with settlements which determine the rights of future claimants to seek relief. Subsequent to the announcement of the agreement in principle, Casualty, Fibreboard and Pacific Indemnity entered into the Trilateral Agreement which among other things, settles the coverage case in the event the Global Settlement approval is not CNA FINANCIAL CORPORATION ------------------------- 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- Note F - Legal Proceedings and Contingent Liabilities (cont.) ultimately upheld. In such case, Casualty and Pacific Indemnity will contribute to a settlement fund an aggregate of $2 billion, less certain adjustments. Such fund would be devoted to the payment of Fibreboard's asbestos liabilities other than liabilities for claims settled before August 23, 1993. Casualty's share of such fund would be $1.44 billion reduced by a portion of an additional payment of $635 million which Pacific Indemnity has agreed to pay for claims either filed or settled before August 27, 1993. As a result of the final approval of the Trilateral Agreement, Casualty has assumed responsibility for the claims that were settled before August 27, 1993. As a part of the Global Settlement and the Trilateral Agreement, Casualty is to be released by Fibreboard from any further liability under the comprehensive general liability policy written for Fibreboard by Casualty, including but not limited to liability for asbestos-related claims against Fibreboard. As indicated above, court approval of the Trilateral Agreement has become final. Casualty and Fibreboard have entered into a supplemental agreement which governs the interim arrangements and obligations between the parties until such time as there is either final court approval or disapproval of the Global Settlement Agreement. It also governs certain obligations between the parties upon the Global Settlement being upheld on appeal including the payment of claims which are not included in the Global Settlement. In addition, Casualty and Pacific Indemnity have entered into an agreement (the "Casualty-Pacific Agreement") which sets forth the parties' agreement with respect to the means for allocating among themselves responsibility for payments arising out of the Fibreboard insurance policies. Under the Casualty-Pacific Agreement, Casualty and Pacific Indemnity have agreed to pay 64.71% and 35.29%, respectively, of the $1.525 billion to be used to satisfy the claims of future claimants, plus certain expenses. The $1.525 billion has already been deposited into an escrow for such purpose. As a result of final approval of the Trilateral Agreement, Pacific Indemnity's share for unsettled present claims and presently settled claims will be $635 million. Through December 31, 1996, Casualty, Fibreboard and plaintiff attorneys had reached settlements with respect to approximately 135,200 claims, for an estimated settlement amount of approximately $1.60 billion plus any applicable interest. Final court approval of the Trilateral Agreement obligates Casualty to pay under these settlements. Approximately $1.31 billion was paid through December 31, 1996, including approximately $500 million paid in the fourth quarter of 1996 as a result of the Trilateral Agreement becoming final. As described above, such payments are partially recoverable from Pacific Indemnity. Casualty may negotiate other agreements with various classes of claimants including groups who may have previously reached agreement with Fibreboard. Casualty believes that final court approval of the Trilateral Agreement and its implementation has eliminated any further material exposure with respect to the Fibreboard matter, and subsequent reserve adjustments, if any, will not materially affect the equity of CNA. OTHER LITIGATION - -------------------------------------------------------------------------------- CNA and its subsidiaries are also parties to other litigation arising in the ordinary course of business. The outcome of this other litigation will not, in the opinion of management, materially affect the results of operations or equity of CNA. CNA FINANCIAL CORPORATION ------------------------- 62 - -------------------------------------------------------------------------------- Note G - Reinsurance Note G -- Reinsurance - --------------------- The effects of reinsurance on earned premiums are shown in the following schedules:
- --------------------------------------------------------------------------------------- Earned Assumed/ Premiums Net ---------------------------------------------------------- Year Ended December 31 Direct Assumed Ceded Net % - --------------------------------------------------------------------------------------- (In millions of dollars) 1996 Life $ 736 $ 121 $ 55 $ 802 15.1% Accident and health 3,575 187 176 3,586 5.2 Property/casualty 8,957 1,558 1,424 9,091 17.1 - --------------------------------------------------------------------------------------- TOTAL PREMIUMS $13,268 $1,866 $1,655 $13,479 13.8% ======================================================================================= 1995 Life $ 701 $ 109 $ 21 $ 789 13.8% Accident and health 3,017 125 106 3,036 4.1 Property/casualty 7,868 1,335 1,293 7,910 16.9 - --------------------------------------------------------------------------------------- Total premiums $11,586 $1,569 $1,420 $11,735 13.4% ======================================================================================= 1994 Life $ 408 $ 107 $ 23 $ 492 21.7% Accident and health 2,678 158 45 2,791 5.7 Property/casualty 5,601 1,251 661 6,191 20.2 - --------------------------------------------------------------------------------------- Total premiums $ 8,687 $1,516 $ 729 $ 9,474 16.0% =======================================================================================
CNA FINANCIAL CORPORATION ------------------------- 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note G - Reinsurance (cont.) The effects of reinsurance on written premiums are shown in the following schedules:
- ------------------------------------------------------------------------------------------------ Year Ended December 31 Written Premiums ---------------------------------------------------- Assumed/ (In millions of dollars) Direct Assumed Ceded Net Net % - ----------------------------------------------------------------------------------------------- 1996 Life $ 736 $ 121 $ 55 $ 802 15.1% Accident and health 3,708 188 183 3,713 5.1 Property/casualty 9,032 1,632 1,287 9,377 17.4 - ------------------------------------------------------------------------------------------------ TOTAL PREMIUMS $13,476 $1,941 $1,525 $13,892 14.0% ================================================================================================ 1995 Life $ 701 $ 109 $ 21 $ 789 13.8% Accident and health 3,159 126 137 3,148 4.0 Property/casualty 9,421 1,408 1,814 9,015 15.6 - ------------------------------------------------------------------------------------------------ Total premiums $13,281 $1,643 $1,972 $12,952 12.7% ================================================================================================ 1994 Life $ 408 $ 107 $ 23 $ 492 21.7% Accident and health 2,746 159 45 2,860 5.5 Property/casualty 5,647 1,251 669 6,229 20.1 - ------------------------------------------------------------------------------------------------ Total premiums $8,801 $1,517 $ 737 $ 9,581 15.8% ================================================================================================
The ceding of insurance does not discharge primary liability of the original insurer. CNA places reinsurance with other carriers only after careful review of the nature of the contract and a thorough assessment of the reinsurers' credit quality and claim settlement performance. Further, for carriers that are not authorized reinsurers in its states of domiciles, CNA receives collateral, primarily in the form of bank letters of credit, securing a large portion of the recoverables. Such collateral totaled approximately $800.9 million and $1.1 billion at December 31, 1996 and 1995, respectively. CNA's largest recoverable from a single reinsurer, including prepaid reinsurance premiums, is with Lloyds of London and approximates $440 million and $435 million at December 31, 1996 and 1995, respectively. Insurance claims and policyholder benefits are net of reinsurance recoveries of $1,220.0 million, $934.8 million and $827.9 million for 1996, 1995 and 1994, respectively. The impact of reinsurance on life insurance in-force is shown in the following schedule:
- ---------------------------------------------------------------------------- Life Insurance In-Force Assumed/ ----------------------------------- (In millions of dollars) Direct Assumed Ceded Net Net% - ---------------------------------------------------------------------------- December 31, 1996 $171,715 $65,294 $32,561 $204,448 31.9% December 31, 1995 111,917 54,129 8,578 157,468 34.4 December 31, 1994 75,419 52,014 5,953 121,480 42.8 ============================================================================
CNA FINANCIAL CORPORATION ------------------------- 64 - -------------------------------------------------------------------------------- Note H - Debt Note H -- Debt - -------------- Long-term and short-term borrowings consisted of the following:
LONG-TERM AND SHORT-TERM DEBT - -------------------------------------------------------------------------------------------- December 31 1996 1995 - -------------------------------------------------------------------------------------------- (In millions of dollars) Long-term: Variable Rate Debt: Credit Facility $ 400.0 $ 825.0 Commercial Paper 675.0 500.0 Senior Notes: 8 7/8%, due March 1, 1998 149.6 149.2 8 1/4%, due April 15, 1999 102.0 102.8 7 1/4%, due March 1, 2003 145.9 145.4 6 1/4%, due November 15, 2003 248.4 248.2 6 3/4%, due November 15, 2006 248.1 - 8 3/8%, due August 15, 2012 97.9 97.9 71/4% Debenture, due November 15, 2023 247.1 247.1 11% Secured Mortgage Notes, due June 30, 2013 386.6 386.6 5.9% - 16.29% Secured Capital Leases, due through December 31, 2011 46.8 46.0 Other debt, due 1997 through 2019 (rates of 1% to 12.71%) 17.5 19.7 - --------------------------------------------------------------------------------------------- Total long-term debt 2,764.9 2,767.9 Short-term debt - 257.6 - --------------------------------------------------------------------------------------------- TOTAL DEBT $2,764.9 $3,025.5 =============================================================================================
To finance the acquisition of Continental (including the refinancing of $205 million of Continental debt) CNA entered into a five-year $1.325 billion revolving credit facility. In 1996, the Company renegotiated the facility extending the maturity to May 2001. The interest rate for the facility is based on the London Interbank Offered Rate (LIBOR), plus 16 basis points. Additionally, there is a facility fee of 9 basis points annually. The average interest rate on the borrowings under the revolver at December 31, 1996 was 5.72%. Under the terms of the facility, CNA may prepay the debt without penalty. On November 15, 1996, CNA issued $250 million of 6 3/4% senior notes, due November 15, 2006. The net proceeds from this issuance of approximately $248 million were used to pay down a portion of the borrowings outstanding under the revolving credit facility. As a result of this debt issuance, borrowing capacity under the revolving credit facility was reduced by $250 million, to $1.075 billion. An additional $250 million of securities remain available for issuance under a shelf registration. In 1995, to take advantage of favorable interest rates, CNA established a commercial paper program borrowing $500 million from investors to replace a like amount of credit facility financing. During 1996, CNA increased its borrowings under the commercial paper program to $675 million. The average interest rate on the commercial paper at December 31, 1996 was 5.67%. The commercial paper borrowings are classified as long-term as borrowing capacity under the credit facility will support the commercial paper. CNA FINANCIAL CORPORATION ------------------------- 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE H - Debt (cont.) At year end 1996, the outstanding loans under the revolving credit facility were $400 million. There was no unused borrowing capacity under the facility after the effects of the commercial paper program. In 1995, CNA entered into interest rate swap agreements with a notional principal amount of $1.2 billion, which terminate from May to December 2000. These agreements provide that CNA pay interest at a fixed rate, averaging 6.20% at December 31, 1996 in exchange for the receipt of interest at the three month LIBOR rate. Concurrent with the paydown of $250 million on the revolving credit facility, CNA terminated interest rate swaps with a total notional amount of $250 million. The effect of these interest rate swaps was to increase interest expense by approximately $7 million and $2 million for the years ended December 31, 1996 and 1995, respectively. The weighted average interest rate (interest and facility fees) on the variable rate debt, which includes the revolving credit facility, commercial paper, and the effect of the interest rate swaps, was 6.28% and 6.50% at December 31, 1996 and 1995, respectively. On March 1, 1996, CNA paid at the due date $250 million of 8 5/8% senior notes. These notes were classified as short-term debt in 1995. The weighted average interest rates of outstanding short-term debt, excluding current maturities of long-term debt, for the year ended December 31, 1995 was 6.19%. There was no debt classified as short-term debt at December 31, 1996. The following table shows the future aggregate minimum principal payments on debt and capitalized lease obligations: - ------------------------------------------------------- Future Aggregate Minimum Principal Payments - ------------------------------------------------------- (In millions of dollars) 1997 $ 4.0 1998 153.8 1999 104.9 2000 5.5 2001 1,081.3 Thereafter 1,426.4 - ------------------------------------------------------ Total $ 2,775.9 ====================================================== CNA FINANCIAL CORPORATION -------------------------- 66 - -------------------------------------------------------------------------------- Note I -- Benefit Plans Note I - Benefit Plans: - ---------------------- PENSION PLANS - -------------------------------------------------------------------------------- CNA has several noncontributory pension plans covering all full-time employees age 21 or over who have completed at least one year of service. The benefits for the plans are based on years of credited service and the employee's highest sixty consecutive months of compensation. CNA's funding policy is to make contributions in accordance with applicable governmental regulatory requirements. The assets of the plans are invested primarily in U.S. government securities with the balance in short-term investments, common stocks and other fixed income securities. In conjunction with the Continental merger, CNA established a separate trust to administer the Continental Corporation Retirement Plans. The retirement benefits received by Continental employees are equivalent to the benefits to which employees under the CNA Employees' Retirement Plan are entitled. Effective January 1, 1996, the retirement plans redefined compensation to include base pay, overtime and bonuses. This amendment generated an unrecognized prior service cost of $20.2 million. The funded status is determined using assumptions at the end of the year. Pension cost is determined using assumptions at the beginning of the year.
ACCUMULATED BENEFIT OBLIGATION - ----------------------------------------------------------------------------------------------------- December 31 1996* 1995 * 1994 - ----------------------------------------------------------------------------------------------------- OVERFUNDED UNDERFUNDED Overfunded Underfunded Overfunded PLANS PLANS Plans Plans Plans - ------------------------------------------------------------------------------------------------------ (In millions of dollars) Actuarial present value of accumulated plan benefits: Vested $517.2 $622.5 $491.1 $646.0 $376.4 Nonvested 37.7 32.4 28.3 14.1 39.1 - ----------------------------------------------------------------------------------------------------- ACCUMULATED BENEFIT OBLIGATION $554.9 $654.9 $519.4 $660.1 $415.5 ===================================================================================================== * The 1996 and 1995 data includes The Continental Corporation Retirement Plans which are underfunded.
CNA FINANCIAL CORPORATION --------------------------- 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note I - Benefit Plans (cont.)
NET PENSIONS ASSET (LIABILITY) - ----------------------------------------------------------------------------------------------------- December 31 1996* 1995 * 1994 - ------------------------------------------------------------------------------------------------------ OVERFUNDED UNDERFUNDED Overfunded Underfunded Overfunded PLANS PLANS Plans Plans Plans - ------------------------------------------------------------------------------------------------------ (In millions of dollars) Projected benefit obligation $777.8 $ 788.3 $770.0 $ 809.3 $651.4 Plan assets at fair value 701.9 503.6 629.7 496.3 495.5 - ------------------------------------------------------------------------------------------------------ Plan assets less than projected benefit obligation (75.9) (284.7) (140.3) (313.0) (155.9) Unrecognized net asset at January 1, 1986 being recognized over 12 years (7.1) --- (12.2) --- (17.3) Unrecognized prior service costs 19.1 77.7 21.4 104.0 20.8 Unrecognized net loss 122.2 (11.8) 164.6 13.5 174.0 - ------------------------------------------------------------------------------------------------------ NET PENSION ASSET (LIABILITY) $ 58.3 $(218.8) $ 33.5 $(195.5) $ 21.6 ====================================================================================================== * The 1996 and 1995 data includes The Continental Corporation Retirement Plans which are underfunded.
NET PERIODIC PENSION COST - ------------------------------------------------------------------------------------------------------------------- December 31 1996* 1995* 1994* - -------------------------------------------------------------------------- ----------------------------- ---------- OVERFUNDED UNDERFUNDED Overfunded Underfunded Overfunded PLANS PLANS Plans Plans Plans - ------------------------------------------------------------------------------------------------------------------- (In millions of dollars) Net periodic pension cost: Service cost - benefits attributed to employee service during the year $36.5 $18.8 $ 32.1 $11.6 $32.3 Interest cost on projected benefit obligation 53.5 56.8 51.1 32.8 44.7 - -------------------------------------------------------------------------------------------------------------------- Actual return on plan assets (31.1) (29.0) (115.4) (43.4) 11.6 Net amortization and deferral (16.0) (6.0) 72.4 19.5 (43.3) NET PERIODIC PENSION COST $42.9 $40.6 $ 40.2 $20.5 $45.3 ==================================================================================================================== * The 1996 and 1995 data includes The Continental Corporation Retirement Plans which are underfunded.
Actuarial assumptions are set forth in the following table.
ASSUMPTIONS - ---------------------------------------------------------------------------------------------------- December 31 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------- Discount rate 7.50% 7.25% 8.50% 7.25% Rate of increase in compensation levels* 2.75 2.75 4.00 4.50 Expected long-term rate of return on plan assets 7.75-8.50 7.50-8.50 8.75 7.50 - ----------------------------------------------------------------------------------------------------- * Excludes age/service related merit and productivity increases.
CNA FINANCIAL CORPORATION -------------------------- 68 - -------------------------------------------------------------------------------- Note I - Benefit Plans (cont.) POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS - -------------------------------------------------------------------------------- CNA provides certain health and dental care benefits for eligible retirees, through age 64, and provides life insurance and reimbursement of Medicare Part B premiums for all eligible retired persons. CNA continues to fund benefit costs principally on the basis of current benefit payments. Additionally, in conjunction with the Continental merger, CNA is administering a separate trust for the postretirement health care and life insurance benefits for Continental employees who retired prior to January 1, 1996. The benefits received by Continental retirees are equivalent to the benefits to which employees under the CNA postretirement health care and life insurance plan are entitled.
ACCRUED POSTRETIREMENT BENEFIT COST - ---------------------------------------------------------------------------------------- December 31 1996* 1995* 1994 - ---------------------------------------------------------------------------------------- (In millions of dollars) Accumulated postretirement benefit obligation: Retirees $172.0 $185.5 $ 27.1 Fully eligible, active plan participants 89.0 59.2 53.7 Other active plan participants 88.2 62.5 41.1 - ---------------------------------------------------------------------------------------- Total accumulated postretirement benefit obligation 349.2 307.2 121.9 Unrecognized prior service cost -- -- (11.2) Unrecognized net gain (loss) (12.3) 7.4 19.7 - ---------------------------------------------------------------------------------------- ACCRUED POSTRETIREMENT BENEFIT COST $336.9 $314.6 $130.4 ======================================================================================== * The 1996 and 1995 data includes postretirement benefit obligations for The Continental Corporation retirees.
NET PERIODIC POSTRETIREMENT BENEFIT COST - --------------------------------------------------------------------------------------- Year Ended December 31 1996* 1995* 1994 - --------------------------------------------------------------------------------------- (In millions of dollars) Net periodic postretirement benefit cost: Service cost - benefits attributed to employee service during the year $11.9 $ 6.0 $ 8.6 Interest cost on accumulated postretirement benefit obligation 24.1 17.5 10.3 Amortization .4 (1.0) .7 - --------------------------------------------------------------------------------------- NET PERIODIC POSTRETIREMENT BENEFIT COST $36.4 $ 22.5 $19.6 ======================================================================================= * The 1996 and 1995 data includes postretirement benefit obligations for The Continental Corporation retirees.
CNA FINANCIAL CORPORATION -------------------------- 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- Note I - Benefit Plans (Cont.) ASSUMPTIONS - -------------------------------------------------------------------------- December 31 1996 1995 1994 - -------------------------------------------------------------------------- Discount rate: Assumptions used in determining net periodic benefit cost: 7.25% 8.50% 7.25% Assumptions used in determining projected benefit obligation (liability) 7.50 7.25 8.50 - -------------------------------------------------------------------------- The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 12% in 1996, declining by 1% per year to an ultimate rate of 5% in 2002. The health care cost trend rate assumption has a significant effect on the amount of the benefit obligation and periodic cost reported. An increase in the assumed health care cost trend rate of 1% in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 by $24.2 million and the aggregate net periodic postretirement benefit cost for 1996 by $3.1 million. SAVINGS PLANS - -------------------------------------------------------------------------------- The CNA Employees' Savings Plan is a contributory plan which allows employees to make regular contributions of up to 6% of their salary. CNA contributes an additional amount equal to 70% of the employee's regular contribution. Employees may also make additional contributions of up to 10% of their salaries for which there is no additional contribution by CNA. In 1995, CNA made contributions to the Continental Incentive Savings Plan using an equivalent formula to that used for the CNA Employees' Savings Plan. Effective January 1, 1996, the Continental Incentive Savings Plan was merged with the CNA Employees' Savings Plan. Contributions by the Company to the savings plans were $23.8 million, $21.6 million and $17.0 million in 1996, 1995 and 1994, respectively CNA FINANCIAL CORPORATION ------------------------- 70 - -------------------------------------------------------------------------------- Note J -- Leases Note J - Leases: - ---------------- CNA occupies facilities under lease agreements that expire at various dates throughout 2011. CNA's home office is partially situated on grounds under leases expiring in 2058. In addition, data processing, office and transportation equipment is leased under agreements that expire at various dates through 2001. Most leases contain renewal options that may provide for rent increases based on prevailing market conditions. Some leases contain purchase options based on fair market values or contractual values, if greater. Rent expense for the years ended December 31, 1996, 1995 and 1994 was $85.2 million, $92.4 million and $50.9 million, respectively. The table below shows the future minimum lease payments to be made under non-cancelable leases at December 31, 1996. Future Minimum Lease Payments - -------------------------------------------- (in millions of dollars) 1997 $115.6 1998 88.4 1999 71.1 2000 57.4 2001 44.1 Thereafter 262.3 - ------------------------------------------- Total $638.9 =========================================== CNA FINANCIAL CORPORATION -------------------------- 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note K -- Stockholders' Equity and Statutory Financial Information Note K - Stockholders' Equity and Statutory Financial Information: - ------------------------------------------------------------------ SUMMARY OF CAPITAL STOCK - -------------------------------------------------------------------------------- Number of Shares ------------------------------- December 31 1996 1995 - -------------------------------------------------------------------------------- Preferred stock, without par value-non-voting: Authorized 12,500,000 12,500,000 Money market cumulative preferred stock, without par value non-voting: Issued and outstanding: Series E (stated value $100,000 per share) 750 750 Series F (stated value $100,000 per share) 750 750 Common stock with par value of $2.50-voting stock: Authorized 200,000,000 200,000,000 Issued 61,841,969 61,841,969 Outstanding 61,798,262 61,798,262 Treasury stock 43,707 43,707 - -------------------------------------------------------------------------------- The dividend rate on money market preferred stock is determined approximately every 49 days by auction. The money market preferred stock is redeemable at CNA's option, as a whole or in part, at $100,000 per share plus accrued and unpaid dividends. CNA FINANCIAL CORPORATION ------------------------- 72 - -------------------------------------------------------------------------------- Note K - Stockholder's Equity and Statutory Financial Information (cont.) STATUTORY ACCOUNTING PRACTICES - ------------------------------ CNA's insurance affiliates are domiciled in various states, provinces or countries. These affiliates prepare their statutory financial statements in accordance with accounting practices prescribed or otherwise permitted by the respective state's insurance department. Prescribed statutory accounting practices are set forth in a variety of publications of the National Association of Insurance Commissioners as well as state laws, regulations, and general administrative rules. The Company's insurance affiliates have no material permitted accounting practices. CNA's ability to pay dividends to its stockholders is affected, in part, by receipt of dividends from its affiliates. The payment of dividends to CNA by its insurance affiliates without prior approval of the insurance department of each affiliate's state of domicile is limited to formula amounts. As of December 31, 1996, approximately $941 million was not subject to prior insurance department approval. Statutory capital and surplus and net income, determined in accordance with accounting practices prescribed by the regulations and statutes of various insurance departments, for property/casualty and life insurance subsidiaries are as follows: - -------------------------------------------------------------------------------- Statutory Capital and Surplus Statutory Net Income ----------------------------- ------------------------ December 31 Year Ended December 31 - ----------------------------------------------------- ------------------------- 1996 1995** 1996 1995** 1994* - -------------------------------------------------------------------------------- (In millions of dollars) Property/Casualty Insurance Subsidiaries $6,348.8 $5,695.9 $1,208.0 $1,208.3 $67.3 Life Insurance Subsidiaries 1,163.4 1,127.6 57.6 30.2 65.1 - -------------------------------------------------------------------------------- * Excludes The Continental Corporation. ** Includes The Continental Corporation for the twelve months ended December 31, 1995. CNA FINANCIAL CORPORATION --------------------------- 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note L - Continental Acquistion Note L -- Continental Acquisition: - ---------------------------------- On December 6, 1994, CNA entered into a merger agreement to acquire all the outstanding common stock of The Continental Corporation (Continental). To finance the acquisition, CNA entered into a five-year $1.325 billion revolving credit facility (see Note H). The merger was consummated on May 10, 1995. The acquisition of Continental has been accounted for as a purchase; therefore, Continental's operations are included in the Consolidated Financial Statements since May 10, 1995. Based on CNA's final evaluation and appraisal of the net assets, goodwill approximated $316 million before amortization. The goodwill is being amortized over twenty years at an annual charge to income of approximately $16 million. The unaudited pro forma condensed results of operations presented below assume the Continental acquisition had occurred at the beginning of the periods presented:
- -------------------------------------------------------------------------------- Pro- Forma - Unaudited Year Ended December 31 1995 1994 - -------------------------------------------------------------------------------- (In millions of dollars) Revenues $16,154.8 $16,106.5 ========= ========== Realized investment gains (losses) included in revenue $ 582.8 $ (170.2) ========= ========== Income (loss) from continuing operations before income tax $ 1,085.0 $(1,233.0) Income tax (expense) benefit (316.0) 562.3 ---------- ---------- Income (loss) from continuing operations 769.0 (670.7) Income from discontinued operations, net of income tax -- 39.5 - -------------------------------------------------------------------------------- Net income (loss) $ 769.0 $ (631.2) ================================================================================
The unaudited pro forma condensed financial information is not necessarily indicative of the results of operations that would have occurred had the Continental acquisition been consummated at the beginning of the period presented or of future operations of the combined companies. CNA FINANCIAL CORPORATION ------------------------- 74 - -------------------------------------------------------------------------------- Note L - Continental Acquistion (cont.) Discontinued Operations: Certain discontinued operations were acquired as part of the Continental merger. Operating results of the discontinued operations were as follows:
- -------------------------------------------------------------------------------- Year Ended December 31 1996 1995* - -------------------------------------------------------------------------------- (In millions of dollars) Revenues: Premiums $ 1.6 $ 4.8 Net investment income 31.1 25.6 Realized investment gains 6.0 1.4 Other 3.8 -- - -------------------------------------------------------------------------------- Total revenues 42.5 31.8 Benefits and expenses 42.5 31.8 - -------------------------------------------------------------------------------- Income (loss) before income taxes -- -- Income taxes -- -- - -------------------------------------------------------------------------------- Income (loss) from discontinued operations $ -- $ -- ================================================================================
*Includes the results of Continental since May 10, 1995. Net assets of discontinued insurance operations are included in Other Assets, net of intercompany eliminations, and are as follows:
- -------------------------------------------------------------------------------- December 31 1996 1995* - -------------------------------------------------------------------------------- (In millions of dollars) Assets: Investments $ 669.1 $ 657.2 Cash 22.2 34.1 Insurance receivables (net) 407.8 424.2 Other assets 389.2 231.9 - -------------------------------------------------------------------------------- Total assets 1,488.3 1,347.2 - -------------------------------------------------------------------------------- Liabilities: Claim and claim expenses 846.9 955.7 Other liabilities 427.1 257.6 - -------------------------------------------------------------------------------- Total liabilities 1,274.0 1,213.3 - -------------------------------------------------------------------------------- Net assets $ 214.3 $ 133.9 ================================================================================
CNA FINANCIAL CORPORATION ------------------------- 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note M -- Business Segments
Note M-- Business Segments: - --------------------------- REVENUES - ------------------------------------------------------------------------------------------------------------- Year Ended December 31 1996 1995* 1994 - ------------------------------------------------------------------------------------------------------------- (In millions of dollars) Property/Casualty-commercial $10,241.7 $ 8,952.9 $ 6,562.3 Property/Casualty-personal 1,892.3 1,425.9 1,143.2 Property/Casualty-involuntary risks 382.8 392.8 543.8 Life-individual 923.1 777.2 595.8 Life-group 2,957.1 2,700.6 2,442.6 - ------------------------------------------------------------------------------------------------------------- CNA Insurance 16,397.0 14,249.4 11,287.7 Other and intercompany eliminations (27.8) (13.5) (42.0) - ------------------------------------------------------------------------------------------------------------- Revenues excluding realized investment gains (losses) 16,369.2 14,235.9 11,245.7 Realized investment gains (losses): Property/Casualty 473.6 320.6 (164.7) Life 163.6 139.2 (81.2) Other (18.6) 4.0 (0.3) - ------------------------------------------------------------------------------------------------------------- Total realized investment gains (losses) 618.6 463.8 (246.2) - ------------------------------------------------------------------------------------------------------------- TOTAL REVENUES $16,987.8 $14,699.7 $10,999.5 ============================================================================================================= *Includes the results of Continental since May 10, 1995.
INCOME (LOSS) BEFORE INCOME TAX - ------------------------------------------------------------------------------------------------------------- Year Ended December 31 1996 1995* 1994 - ------------------------------------------------------------------------------------------------------------- (In millions of dollars) Property/Casualty-commercial $ 769.6 $ 555.5 $ 105.0 Property/Casualty-personal (17.8) 24.6 (83.6) Property/Casualty-involuntary risks (13.7) (1.8) 17.8 Life-individual 100.9 65.4 47.3 Life-group 69.8 94.9 87.1 - -------------------------------------------------------------------------------------------------------------- CNA Insurance 908.8 738.6 173.6 Interest, other and intercompany eliminations (168.1) (152.2) (72.3) - -------------------------------------------------------------------------------------------------------------- Income (loss) excluding realized investment gains (losses) 740.7 586.4 101.3 - -------------------------------------------------------------------------------------------------------------- Realized investment gains (losses) net of policyholder's interest: Property/Casualty 473.6 320.6 (164.7) Life 149.3 131.4 (70.3) Other (18.6) 4.0 (0.3) - -------------------------------------------------------------------------------------------------------------- Total realized investment gains (losses) net of policyholders' interest 604.3 456.0 (235.3) - -------------------------------------------------------------------------------------------------------------- TOTAL INCOME (LOSS) BEFORE INCOME TAX $1,345.0 $1,042.4 $(134.0) ============================================================================================================== *Includes the results of Continental since May 10, 1995.
CNA FINANCIAL CORPORATION ------------------------- 76 - -------------------------------------------------------------------------------- Note M -- Business Segments
NET INCOME (LOSS) - ---------------------------------------------------------------------------------------------------- Year Ended December 31 1996 1995* 1994 - ---------------------------------------------------------------------------------------------------- (In millions of dollars) Property/Casualty-commercial $ 585.4 $ 431.3 $ 169.0 Property/Casualty-personal (5.8) 21.9 (41.7) Property/Casualty-involuntary risks (3.8) 3.8 20.6 Life-individual 65.5 42.6 30.5 Life-group 44.4 61.2 56.5 - ----------------------------------------------------------------------------------------------------- CNA Insurance 685.7 560.8 234.9 Interest, other and intercompany eliminations (108.0) (98.2) (47.9) - ----------------------------------------------------------------------------------------------------- Net income excluding net realized investment gains (losses) 577.7 462.6 187.0 - ----------------------------------------------------------------------------------------------------- Net realized investment gains (losses): Property/Casualty 303.5 207.9 (104.6) Life 95.7 85.4 (45.6) Other (12.1) 1.1 (0.3) - ---------------------------------------------------------------------------------------------------- Total net realized investment gains (losses) 387.1 294.4 (150.5) - ---------------------------------------------------------------------------------------------------- TOTAL NET REVENUES $ 964.8 $ 757.0 $ 36.5 ==================================================================================================== *Includes the results of Continental since May 10, 1995.
ASSETS - ----------------------------------------------------------------------------------------------------- December 31 1996 1995* 1994 - ----------------------------------------------------------------------------------------------------- (In millions of dollars) Property/Casualty-commercial $39,927.0 $40,886.4 $27,441.2 Property/Casualty-personal 4,664.9 4,614.1 2,344.7 Property/Casualty-involuntary risks 2,406.9 2,464.7 2,166.6 Life-individual 4,739.8 3,996.5 3,733.0 Life-group 9,274.3 9,003.6 8,711.3 - ----------------------------------------------------------------------------------------------------- CNA Insurance 61,012.9 60,965.3 44,396.8 Other and intercompany eliminations (278.2) (604.9) (76.4) - ----------------------------------------------------------------------------------------------------- TOTAL ASSETS $60,734.7 $60,360.4 $44,320.4 ===================================================================================================== *Includes Continental since May 10, 1995.
CNA FINANCIAL CORPORATION ------------------------- 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note M - Business Segments (cont.) Assets and investment income of the property/casualty group are allocated to business segments on the basis of insurance reserves after attribution of separately identifiable assets. Life group assets and investment income are allocated to business segments based on cash flows after attribution of separately identifiable assets. Income taxes have been allocated on the basis of taxable operating income of the respective insurance segments. Property/casualty involuntary risks include mandatory participation in residual markets, statutory assessments for insolvencies of other insurers and other involuntary charges. CNA's share of involuntary risks is generally a function of its share of the voluntary market by line of insurance in each state. Through August 1, 1989, CNA's property/casualty operations wrote financial guarantee insurance contracts. These contracts primarily represent industrial development bond guarantees and equity guarantees typically extending from ten to thirteen years. For these guarantees, CNA received an advance premium which is recognized over the exposure period and in proportion to the underlying exposure insured. At December 31, 1996 and 1995, gross exposure of financial guarantee insurance contracts amounted to $582 million and $707 million, respectively. The degree of risk attached to this exposure is substantially reduced through reinsurance, diversification of exposures and collateral requirements. In addition, security interests in the real estate are also obtained. Approximately 47% and 44% of the risks were ceded to reinsurers at December 31, 1996 and 1995. Total exposure, net of reinsurance, amounted to $311 million and $395 million at December 31, 1996 and 1995, respectively. At December 31, 1996 and 1995, collateral consisting of letters of credit and debt service reserves amounted to $28 million and $39 million, respectively. Gross unearned premium reserves for financial guarantee contracts were $11 million and $17 million at December 31, 1996 and 1995, respectively. Gross claim and claim expense reserves totaled $371 million and $463 million at December 31, 1996 and 1995, respectively. Life revenues include $2.1 billion, $1.9 billion and $1.8 billion in 1996, 1995 and 1994, respectively, under contracts covering U.S. government employees and their dependents (FEHBP). CNA FINANCIAL CORPORATION --------------------------- 78 - -------------------------------------------------------------------------------- Note N - Unaudited Quarterly Financial Data Note N - Unaudited Quarterly Financial Data: - --------------------------------------------
- -------------------------------------------------------------------------------------------------------- First Second Third Fourth Year - -------------------------------------------------------------------------------------------------------- (In millions of dollars, except per share data) 1996 QUARTERS Revenues $4,315.4 $4,095.2 $4,255.5 $4,321.7 $16,987.8 Net operating income excluding realized gains/losses 145.3 151.5 160.7 120.2 577.7 Net income 329.3 202.1 238.5 194.9 964.8 Earnings per share 5.30 3.25 3.83 3.13 15.51 1995 Quarters Revenues $3,052.8 $3,659.2 $4,000.9 $3,986.8 $14,699.7 Net operating income excluding realized gains/losses 131.5 127.2 103.2 100.7 462.6 Net income 152.8 256.7 166.3 181.2 757.0 Earnings per share 2.44 4.12 2.66 2.91 12.14 1994 Quarters Revenues $2,604.4 $2,731.0 $2,844.3 $2,819.8 $10,999.5 Net operating income (loss) excluding realized gains/losses (16.8) 17.7 63.6 122.5 187.0 Net income (loss) (78.1) (36.3) 55.0 95.9 36.5 Earnings per share (1.28) (0.61) 0.87 1.53 0.51 - ---------------------------------------------------------------------------------------------------------
CNA FINANCIAL CORPORATION ------------------------- 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note O - Proposed Acquisition Note O -- Proposed Acquisition: - ------------------------------ In the fourth quarter of 1996, CNA entered into a merger agreement with Capsure Holdings Corp. (Capsure) to form a new stock company, CNA Surety Corporation. CNA will be the majority shareholder of the new company owning approximately 62% of the shares. The remaining shares will be held by existing Capsure shareholders and option holders. The transaction will be accounted for as a purchase and is expected to close in the second quarter of 1997. The transaction closing is subject to the approvals of the Capsure shareholders, state insurance regulators, certain governmental authorities and the satisfaction of certain other conditions. Until the required approvals are received and the transaction is complete, the companies will continue to operate independently. Capsure provides surety and fidelity bonds nationwide through its subsidiaries Western Surety Company and Universal Surety of America. Capsure's revenues for the year ended December 31, 1996 were approximately $111 million. Total assets were approximately $313 million at December 31, 1996. CNA FINANCIAL CORPORATION ------------------------- 80 INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- The Board of Directors and Shareholders CNA Financial Corporation We have audited the consolidated balance sheets of CNA Financial Corporation (an affiliate of Loews Corporation) and subsidiaries as of December 31, 1996 and 1995 and the related statements of consolidated operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of CNA Financial Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. S/DELOITTE & TOUCHE LLP Chicago, Illinois February 12, 1997 CNA FINANCIAL CORPORATION ------------------------- 81 COMMON STOCK INFORMATION - ------------------------------------------------------------------------------ CNA's common stock is listed on the New York, Chicago and Pacific Stock Exchanges and is also traded on the Philadelphia Stock Exchange. The number of holders of record of CNA's common stock as of March 3, 1997, was 2,963. As of March 3, 1997, Loews Corporation owned approximately 84 percent of CNA's outstanding common stock. The table below sets forth the high and low closing sales prices for CNA's common stock based on the New York Stock Exchange Composite Transactions. No dividends have been paid on CNA's common stock in order to develop and maintain a strong surplus position for CNA's insurance subsidiaries, which is necessary to support business growth in an increasingly competitive environment. CNA's ability to pay dividends is influenced, in part, by dividend restrictions of its principal operating insurance subsidiaries as described in Note K to the Consolidated Financial Statements. COMMON STOCK INFORMATION - ------------------------------------------------------------- 1996 1995 ----------------------------------------------- Quarter HIGH LOW High Low - ------------------------------------------------------------- Fourth 108 5/8 95 7/8 123 1/4 106 1/8 Third 104 1/2 95 7/8 106 1/2 86 Second 112 95 3/4 86 7/8 74 First 117 1/2 109 1/2 76 1/2 64 3/4 - ------------------------------------------------------------- INVITATION TO THE ANNUAL MEETING - -------------------------------------------------------------------------------- Shareholders are cordially invited to attend the annual meeting at 10 a.m. Wednesday, May 7, 1997, in Room 207N, CNA Plaza, 333 South Wabash Avenue, Chicago. Shareholders unable to attend are requested to exercise their right to vote by proxy. Proxy material will be mailed to shareholders prior to the meeting. FORM 10-K - -------------------------------------------------------------------------------- A copy of CNA Financial Corporation's annual report on Form 10-K, which is filed with the Securities and Exchange Commission, will be furnished to shareholders without charge upon written request to: Donald M. Lowry Senior Vice President, Secretary and General Counsel CNA Financial Corporation CNA Plaza, 43 South Chicago, Illinois 60685 CNA FINANCIAL CORPORATION ------------------------- 82 CORPORATE DIRECTORY - -------------------------------------------------------------------------------- DIRECTORS - -------------------------------------------------------------------------------- Antoinette Cook Bush Partner; Skadden, Arps, Slate, Meagher & Flom Dennis H. Chookaszian Chairman and Chief Executive Officer, CNA Insurance Companies Philip L. Engel President, CNA Insurance Companies Robert P. Gwinn Retired Chairman and Chief Executive Officer, Encyclopedia Britannica Walter F. Mondale Partner; Dorsey & Whitney LLP Edward J. Noha Chairman of the Board, CNA Financial Corporation Joseph Rosenberg Senior Investment Strategist, Loews Corporation Richard L. Thomas Chairman, Audit Committee; Retired Chairman of the Board, First Chicago NBD Corporation and The First National Bank of Chicago James S. Tisch Chairman, Finance Committee; President and Chief Operating Officer, Loews Corporation Laurence A. Tisch Chief Executive Officer of CNA; Co-Chairman of the Board and Co-Chief Executive Officer, Loews Corporation Preston R. Tisch Chairman, Executive Committee; Co-Chairman and Co-Chief Executive Officer, Loews Corporation Marvin Zonis Professor of International Political Economy, Graduate School of Business University of Chicago EXECUTIVE COMMITTEE - -------------------------------------- Preston R. Tisch, Chairperson Antoinette Cook Bush Dennis H. Chookaszian Philip L. Engel Robert P. Gwinn Walter F. Mondale Edward J. Noha Joseph Rosenberg Richard L. Thomas James S. Tisch Laurence A. Tisch Marvin Zonis FINANCE COMMITTEE - --------------------------------------- James S. Tisch, Chairperson Antoinette Cook Bush Dennis H. Chookaszian Philip L. Engel Robert P. Gwinn Walter F. Mondale Edward J. Noha Joseph Rosenberg Richard L. Thomas Laurence A. Tisch Preston R. Tisch Marvin Zonis AUDIT COMMITTEE - --------------------------------------- Richard L. Thomas, Chairperson Antoinette Cook Bush Robert P. Gwinn Walter F. Mondale Marvin Zonis INCENTIVE COMPENSATION COMMITTEE - --------------------------------------- Antoinette Cook Bush, Chairperson Robert P. Gwinn Richard L. Thomas Marvin Zonis CNA FINANCIAL CORPORATION ------------------------- 83 CORPORATE DIRECTORY - -------------------------------------------------------------------------------- OFFICERS - -------------------------------------------------------------------------------- Laurence A. Tisch Chief Executive Officer, CNA Financial Corporation Dennis H. Chookaszian Chairman and Chief Executive Officer, CNA Insurance Companies Philip L. Engel President, CNA Insurance Companies William J. Adamson, Jr. Senior Vice President, CNA Reinsurance Group CNA Insurance Companies James P. Flood Senior Vice President, Claims CNA Insurance Companies Michael C. Garner Senior Vice President, CNA Consulting Group and Human Resources CNA Insurance Companies Bernard L. Hengesbaugh Senior Vice President, Specialty Operations CNA Insurance Companies Peter E. Jokiel Senior Vice President and Chief Financial Officer, CNA Financial Corporation Jonathan D. Kantor * Senior Vice President, Secretary and General Counsel CNA Insurance Companies Patricia L. Kubera Group Vice President and Controller CNA Financial Corporation Donald M. Lowry Senior Vice President, Secretary and General Counsel, CNA Financial Corporation Carolyn L. Murphy Senior Vice President, Commercial Operations CNA Insurance Companies William H. Sharkey, Jr. Senior Vice President, Marketing CNA Insurance Companies Adrian M. Tocklin Senior Vice President, Diversified Operations CNA Insurance Companies Jae L. Wittlich Senior Vice President, Group Operations CNA Insurance Companies David W. Wroe Senior Vice President, Information Technology CNA Insurance Companies CNA INSURANCE COMPANIES ADMINISTRATIVE OFFICES - --------------------------------------- CNA Plaza Chicago, Illinois 60685 312/822-5000 TRANSFER AGENT AND REGISTRAR - ---------------------------------------- First Chicago Trust Company of New York - ------------------------------------- *Effective April 1, 1997 CNA FINANCIAL CORPORATION ------------------------- 84 CNA FINANCIAL COPORATION APPENDIX OMITTED GRAPH MATERIAL AND OTHER Exhibit 13.1 - CNA Financial Corporation Annual Report: * Bar graphs of: - Revenues for the period 1986 through 1996 - Assets for the period 1986 through 1996 - Stockholders' equity for the period 1986 through 1996 - Book value per common share 1986 through 1996 (See page 3 of Exhibit 13.1 for a table showing the data points used in the above graphs.) * The following are outquotes located in the margins from the Letter To Our Shareholders found on pages 4 through 9 of the annual report. Page Outquotes 4 CNA continued to strenthen its leadership in the insurance marketplance. 5 CNA focused on a number of business expansion activities. 6 CNA is the largest U.S. writer of commercial property/casualty insurance. 7 CNA continued to build on its proven strategy of industry segmentation. 8 CNA had its second consecutive year of strong growth in the individual life insurance marketplance. 9 Our challenge is to build on the legacy of the past for an even brighter future. Page 4 is from CNA Financial Corporation Chairman Edward J. Noha, and pages 5 through 9 are from CNA Insurnance Companies Chairman and Chief Executive Officer Dennis H. Chookaszian. EX-27 4 ARTICLE 7 FDS FOR 10-K
7 0000021175 CNA FINANCIAL COPORATION 1,000,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 27,721 0 0 859 113 11 35,412 257 6,965 1,854 60,735 35,011 4,659 119 746 2,765 0 150 155 6,755 60,735 13,479 2,276 619 614 11,371 2,192 1,880 1,345 (380) 965 0 0 0 965 15.51 15.51 24,955 8,071 91 2,676 6,524 23,735 91
-----END PRIVACY-ENHANCED MESSAGE-----