10-K
1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1994 COMMISSION FILE NUMBER 1-5823
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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
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Common Stock New York Stock Exchange
with a par value Chicago Stock Exchange
of $2.50 per share Pacific Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
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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. []
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 1, 1995, 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 $721 million.
DOCUMENTS INCORPORATED
BY REFERENCE:
Portions of the CNA Financial Corporation 1994 Annual Report to Shareholders
are incorporated by reference into Parts I and II of this Report.
Portions of the CNA Financial Corporation Annual Proxy Statement prepared
for the 1995 annual meeting of shareholders, pursuant to Regulation 14A, are
incorporated by reference into Part III of this Report.
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1
CNA FINANCIAL CORPORATION
FORM 10-K REPORT
FOR THE YEAR ENDED DECEMBER 31, 1994
Item Page
Number PART I Number
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1 Business ...................................................... 3
2 Properties .................................................... 16
3 Legal Proceedings.............................................. 16
4 Submission of Matters to a Vote of Security Holders............ 16
PART II
5 Market for the Registrant's Common Stock and
Related Stockholder Matters.................................. 16
6 Selected Financial Data........................................ 16
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................ 16
8 Financial Statements and Supplementary Data.................... 16
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ...................... 16
PART III
10 Directors and Executive Officers of the Registrant ............ 17
11 Executive Compensation ........................................ 17
12 Security Ownership of Certain Beneficial Owners and Management. 17
13 Certain Relationships and Related Transactions ................ 17
PART IV
14 Financial Statements, Schedules, Exhibits, and Reports on
Form 8-K....................................................... 17
2
PART I
ITEM 1. BUSINESS
CNA Financial Corporation and its consolidated subsidiaries (CNA)
constitute the twelfth largest insurance company in the United States as
measured by 1993 statutory premium volume. 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. CNA's property and casualty insurance operations are conducted by
CCC and its property and casualty insurance affiliates, and its life
insurance operations are conducted by CAC and its life insurance
affiliate. CNA's principal business conducted through its insurance
subsidiaries is insurance. As multiple-line insurers, the insurance
companies underwrite property, casualty, life, and accident and health
coverages. Their principal market for insurance is the United States.
Foreign operations are not significant.
In the fourth quarter of 1994, CNA reached an agreement to purchase
the outstanding shares of common stock of The Continental Corporation
(CIC) under which CNA will acquire CIC through a cash merger for
approximately $1.1 billion, or $20 per CIC share. The acquisition will
create the third-largest U.S. property/casualty insurance group and make
CNA the seventh-largest U.S. insurance organization. The acquisition will
be accounted for as a purchase and, accordingly, CIC's results of
operations will be included in CNA's consolidated results of operations
for periods subsequent to the date of closing, which is expected to be in
the second quarter of 1995. CNA and CIC are jointly seeking prompt
regulatory approvals. The transaction closing is subject to the approvals
of the Continental shareholders and state insurance regulators. The
transaction is also subject to review by the Federal Trade Commission and
the Department of Justice (which review has been completed). Until the
required approvals are received and the acquisition is complete, the
companies will continue to operate independently.
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 3,900 companies that sell property/casualty
insurance in the United States, about 900 of which operate in all or most
states. CCC and its consolidated subsidiaries are ranked as the sixth
largest property/casualty insurance organization based on statutory
net premiums written in 1993.
There are approximately 1,800 companies selling life insurance
(including health insurance and pension products) in the United States.
CAC is ranked as the twenty-third largest life insurance organization
based on consolidated statutory premium revenue in 1993.
Dividends by Insurance Subsidiaries
The payment of dividends to CNA by its insurance affiliates without
prior approval of the Illinois Insurance Department ("IID") is limited to
formula amounts determined in accordance with the accounting practices
prescribed or permitted by the IID. The current formula limits dividends,
without approval of the insurance commissioner, to 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. For 1995, approximately $336 million in dividends could be paid
to CNA by its insurance affiliates without prior approval. The National
Association of Insurance Commissioners ("NAIC") Financial Regulation
Standards and Accreditation Committee approved the Illinois dividend
formula as complying with the NAIC Model Dividend Law. All dividends must
be reported to the insurance department within five business days of
declaration and ten days prior to 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, maintaining guarantee funds, 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 and 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.
The trend for legislation and voter initiatives continues,
particularly for personal lines products, directly impacting insurance
rate development, rate application and the ability of insurers to cancel
or renew insurance policies. Restrictions on the consideration of certain
expenses, limits on services provided by advisory organizations and
politically suppressed workers' compensation rates in certain states
continue to be of concern.
Insurers are also required by the states to provide coverage to risks
which 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 generally a function of their respective share of
the voluntary market by line of insurance in each state.
In recent years, insolvencies of a few large insurers previously
believed to be on solid financial ground by many rating agencies and
state regulators led to increased scrutiny of state regulated insurer
solvency requirements by certain members of the U.S. Congress. Had
Congress formally adopted initiatives in the 103rd Congress, insurers
would have been subject to federal solvency regulation. In response to
this challenge the National Association of Insurance Commissioners (NAIC)
developed industry minimum Risk-Based Capital (RBC) requirements,
established a formal state accreditation process designed to minimize the
diversity of approved statutory accounting and actuarial practices, and
has increased the annual statutory statement disclosure requirements.
RBC requirements were first effective for life insurers in 1993 and
for property and casualty insurers in 1994. The RBC formulas were
designed to identify an insurer's minimum capital requirements based upon
the inherent risks (e.g., asset default, credit and insurance) of its
operations. In addition to the minimum capital requirements, the RBC
formula and related regulations identify various levels of capital
adequacy and corresponding action 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, 1994, all of CNA's life insurance affiliates and
property/casualty domestic affiliates have adjusted capital amounts in
excess of NAIC Company Action Levels.
The NAIC established minimum capital requirements and also maintains
the Insurance Regulatory Information System ("IRIS"), which assists the
state insurance departments in overseeing the financial condition of both
life and property/casualty insurers. These tests are in the form of
ratios and have a range of results characterized as "usual" by the NAIC.
The NAIC IRIS user guide regarding these ratios specifically states that
"Falling outside the usual range is not considered a failing result..."
and "...in some years it may not be unusual for financially sound
companies to have several ratios with results outside the usual range."
It is important, therefore, that IRIS ratio test results be reviewed
carefully in conjunction with all other financial information.
CCC had one IRIS ratio with an unusual value in 1994, three in 1993
and four in 1992. The ratio with an unusual value in 1994 is the two year
overall operating ratio. The three IRIS ratios with unusual values in
1993 were the two year overall operating, investment yield, and the two
year reserve development ratios. The four IRIS ratios with unusual values
in 1992 were the two year overall operating, the change in surplus, and
both the one and two year reserve development ratios. Catastrophe losses
and reserve increases associated with Fibreboard Corporation litigation
(see Note J to the Consolidated Financial Statements) recognized in 1992
and 1993 triggered the unusual values for the operating ratios generated
in 1993 and 1994 and development ratios generated in 1993. Additionally,
lower interest
4
Regulation--(continued)
rates in the capital markets in 1993, coupled with a proportionately
large short-term investment portfolio, triggered the unusual value for
the investment yield ratio.
CAC had no IRIS ratios with unusual values in 1994. CAC had two
unusual values for IRIS ratios in 1993, net gain to total income and
change in net written premium, and one unusual value for IRIS ratios in
1992, net gain to total income. CAC's reported statutory net income was
adversely affected in both 1993 and 1992 by the transfer of significant
realized capital gains to the Interest Maintenance Reserve and depressed
investment earnings. The unusual value for the change in premium ratio
primarily relates to decreases in the Separate Account annuity products
fund deposits.
Federal measures, which if reintroduced in the 104th Congress and
enacted, would significantly affect the insurance business include
proposals for directly regulating insurance company solvency as well as
repeal of the McCarran-Ferguson Act, which exempts certain aspects of
insurance from Federal regulation to the extent regulated by the states.
The potential for Federal health care reform had been widely publicized
and debated over the past year. Although legislative reforms failed in
1994, some health care reform could emerge in 1995. Such possible
reforms include legislation affecting tort reform, medical malpractice,
insurance market reforms and tax laws affecting health care and long term
care benefits.
Although the courts and legislatures are often asked to expand
liability, there is a growing trend among business and professional
organizations to wage campaigns, which in several instances have been
successful, aimed at limiting their liability risks. Several states have
adopted and some are considering "tort reform" measures which, among
other things, limit non-economic and punitive damages and otherwise limit
damage awards in product liability and malpractice cases. The U.S. House
of Representatives has passed three bills providing for significant tort
reform. The passage of these bills, in their present form, by the Senate
is uncertain.
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, to provide greater
diversification of risk and to minimize exposures on larger risks. The
reinsurance coverages are tailored 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.
The ceding of insurance does not discharge the 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
Illinois, CNA receives collateral primarily in the form of bank letters
of credit, securing a large portion of the recoverables. Such collateral
totaled approximately $165 and $155 million at December 31, 1994 and
1993, respectively. CNA's largest recoverable, including prepaid
reinsurance premiums was approximately $348 and $484 million with Lloyd's
of London at December 31, 1994 and 1993, respectively.
Employee Relations
CNA has approximately 15,600 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 a retirement plan, a savings plan, a
disability program, a group life program, and a group health care
program.
Business Segments
Information as to CNA's business segments is set forth in Note L to
the Consolidated Financial Statements, incorporated by reference in Item
8, herein.
5
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 insurance for CNA and for other companies on a
commission basis. Individual insurance products include life, accident
and health and annuity products, and are sold to individuals and small
businesses.
The individual life products currently being marketed consist
primarily of term, universal life and participating policies. Included in
the universal life category is a salary allotment product marketed
through employers as a supplement to employers' benefit plans. Premiums
are collected from employees through payroll deduction. The individual
accident and health policies currently being marketed are long-term
disability products. Individual annuity products are primarily periodic
payment plans.
Group insurance products include life, accident and health and pension
products, and are sold to employers, employer associations and trusts
ranging in size from small local employers to large multinational
corporations. The group accident and health plans are primarily major
medical and hospitalization. Most of the major medical and
hospitalization plans are written under experience-rated contracts or
contracts to provide claim administrative services only.
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 as a separate
portfolio to minimize liquidity 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.
Although the Federal Government's proposed comprehensive health care
reform failed to be enacted in 1994, some health care initiatives could
emerge in 1995. Such possible reforms include legislation affecting tort
reform, medical malpractice, insurance market reforms and tax laws
affecting health care and long term care benefits. CNA has urged a
meaningful role for the private sector in any proposed plan. The present
health care system is clearly in need of reform, and CNA has emphasized
that the competitive strengths of the insurance industry must be an
integral part of a workable solution.
6
Life Business--(continued)
The following table sets forth supplemental data for the life
insurance business:
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YEAR ENDED DECEMBER 31 1994 1993 1992 1991 1990
(In millions of dollars)
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INDIVIDUAL PREMIUMS
Life and annuities.................................................... $ 369.4 $ 312.1 $ 294.7 $ 287.9 $ 239.5
Accident and health................................................... 32.6 30.9 27.1 24.3 21.1
------- ------- ------- ------- -------
$ 402.0 $ 343.0 $ 321.8 $ 312.2 $ 260.6
======= ======= ====== ====== ======
GROUP PREMIUMS
Life.................................................................. $ 138.7 $ 107.2 $ 100.7 $ 90.8 $ 82.6
Accident and health (a)............................................... 2,111.2 1,983.0 1,957.5 1,887.0 1,713.3
Annuities............................................................. 26.3 9.0 57.7 24.3 51.6
------- ------- ------- ------- -------
$2,276.2 $2,099.2 $2,115.9 $2,002.1 $1,847.5
======= ======= ======= ======= =======
NET INVESTMENT INCOME AND OTHER INCOME
Individual............................................................ $ 193.8 $ 154.2 $ 163.0 $ 162.5 $ 162.2
Group................................................................. 166.4 142.8 156.6 185.4 188.8
------- ------- ------- ------- -------
$ 360.2 $ 297.0 $ 319.6 $ 347.9 $ 351.0
======= ======= ======= ======= =======
INCOME EXCLUDING REALIZED CAPITAL GAINS, BEFORE INCOME TAX
Individual............................................................ $ 47.3 $ 14.5 $ 22.5 $ 13.8 $ 15.3
Group................................................................. 87.1 51.9 56.1 76.0 76.2
------- ------- ------- ------- -------
$ 134.4 $ 66.4 $ 78.6 $ 89.8 $ 91.5
======= ======= ======= ======= =======
GROSS LIFE INSURANCE IN FORCE
Individual (b)........................................................ $ 80,560 $ 76,835 $ 75,569 $ 71,539 $ 68,095
Group................................................................. 46,873 35,413 29,643 27,139 21,167
------- ------- ------- ------- -------
$127,433 $112,248 $105,212 $ 98,678 $ 89,262
======= ======= ======= ======= =======
OTHER DATA - Statutory basis (c)
Capital and surplus................................................... $1,054.6 $1,022.0 $1,003.0 $ 968.4 $ 848.8
Capital and surplus-percent of
total liabilities (as defined)....................................... 29.4% 30.1% 33.4% 29.9% 26.4%
Participating policyholders'-percent of gross life insurance in force. 0.9 1.1 1.2 1.6 1.5
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(a) Group accident and health premiums include contracts involving
U.S. government employees and their dependents amounting to approximately
$1.8, $1.7, $1.6, $1.5, and $1.3 billion in 1994, 1993, 1992, 1991 and
1990, respectively.
(b) Lapse ratios as measured by surrenders and withdrawals as a
percentage of average ordinary life insurance in force were 9.7%, 9.7%,
8.6%, 10.4%, and 11.4%, in 1994, 1993, 1992, 1991, and 1990,
respectively.
(c) Other Data is determined on the basis of statutory accounting
principles and reflects capital contributions from Continental Casualty
Company of $100 million in 1990. Life insurance subsidiaries have
received, or will receive, reimbursement from CNA for general management
and administrative expenses and investment expenses in the amounts of
$24.7, $25.6, $24.5, $25.7, and $25.0 million in 1994, 1993, 1992, 1991
and 1990, respectively. Statutory capital and surplus as a percent of
total liabilities is determined after excluding Separate Account
liabilities and reclassifying the Asset Valuation and Interest
Maintenance Reserves (statutorily defined and created reserves) as
surplus.
Annuities and Guaranteed Investment Contracts
---------------------------------------------
CAC writes the majority of its annuities and guaranteed investment
contracts ("GIC's") in a fixed Separate Account, which is permitted by
Illinois insurance statutes. CAC guarantees principal and a specified
return to GIC contractholders. This guarantee affords the contractholders
additional security, in the form of CAC's general account surplus, which
supports any principal and/or guaranteed interest payment shortfalls of
the Separate Account.
CNA manages the liquidity and interest rate risks on the GIC portfolio
by matching the GIC assets and liabilities on the basis of duration and
maintaining market value surrender adjustments on the majority of the
contracts.
7
Life Business--(continued)
The table below shows a comparison of the duration of assets and
liabilities, the investment yield, the weighted average interest
crediting rates and withdrawal characteristics of the GIC portfolio.
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December 31 1994 1993 1992
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Duration in years:
Assets ............................................................................. 3.23 2.68 3.04
Liabilities......................................................................... 2.99 2.73 2.69
---- ---- ----
Mismatch ........................................................................... 0.24 (0.05) 0.35
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Weighted average investment yield..................................................... 7.67% 7.11% 8.05%
Weighted average interest crediting rates............................................. 7.53% 7.74% 8.32%
Withdrawal characteristics:
With market value adjustment......................................................... 79% 81% 83%
Non-withdrawable..................................................................... 15 13 12
Without market value adjustment...................................................... 6 6 5
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Total 100% 100% 100%
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As shown above, the investment yield at December 31, 1994 was more
than the average crediting rate. The investment yields at December 31,
1993 and 1992 were less than the average crediting rates. This resulted
from the reinvestment of proceeds from security sales, that generated
substantial gains, at rates that were lower than those of the securities
sold. However, because the security sales created a larger asset base to
reinvest, the aggregate future cash flows from interest and principal
were substantially unchanged and sufficient to meet the product
obligations.
Property/Casualty Business
CNA's property/casualty operations market commercial and personal
lines of property/casualty insurance through independent agents and
brokers.
CCC and its property/casualty insurance subsidiaries write primarily
commercial lines coverages. 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
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 adjustments to dividends based on loss experience.
Experience-rated contracts reduce but do not eliminate risk to the
insurer. Approximately 38% of CNA's property/casualty insurance is
written on an experience-rated basis.
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.
Commercial business includes such lines as workers' compensation,
general liability, professional and specialty, multiple peril, and
accident and health coverages. 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. CNA also assumes commercial
risks from other insurers. The major components of CNA's commercial
business are workers' compensation, general liability and professional
and specialty coverages, which accounted for 26%, 18% and 15%,
respectively, of 1994 premiums earned including premiums for involuntary
risks on these lines of business. Premiums for involuntary risks result
from mandatory participation in residual markets. 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 generally a function of
its share of the voluntary market by line of insurance in each state.
CNA also markets personal lines of insurance, primarily automobile and
homeowners coverages sold to individuals under monoline and package
policies.
8
Property/Casualty Business--(continued)
The following table sets forth supplemental data for the
property/casualty business:
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YEAR ENDED DECEMBER 31 1994 1993 1992 1991 1990
(In millions of dollars)
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COMMERCIAL PREMIUMS EARNED
Workers' compensation................................... $ 1,426.3 $ 1,501.5 $ 1,669.2 $ 1,920.4 $ 1,803.8
General liability ...................................... 1,261.1 1,154.5 1,176.0 1,292.6 1,250.7
Professional and specialty.............................. 1,010.1 798.9 741.5 763.9 786.3
Reinsurance and other .................................. 773.5 712.2 556.0 482.0 448.2
Accident and health .................................... 557.1 428.3 352.6 294.2 254.4
Multiple peril.......................................... 389.0 368.5 374.9 397.2 395.2
------- ------- ------- ------- -------
$ 5,417.1 $ 4,963.9 $ 4,870.2 $ 5,150.3 $ 4,938.6
======= ======= ======= ======= =======
PERSONAL PREMIUMS EARNED
Personal lines packages ................................ $ 562.5 $ 510.7 $ 447.3 $ 335.6 $ 225.2
Monoline automobile and property coverages.............. 314.2 343.5 395.0 470.7 493.0
Accident and health .................................... 88.9 85.6 88.6 88.8 72.5
------- ------- ------- ------- -------
$ 965.6 $ 939.8 $ 930.9 $ 895.1 $ 790.7
======= ======= ======= ======= =======
INVOLUNTARY RISKS PREMIUMS EARNED (a)
Workers' compensation ................................. $ 350.0 $ 292.3 $ 451.4 $ 499.5 $ 448.4
Commercial passenger auto.............................. 54.3 50.3 44.9 66.6 48.1
Private passenger auto................................. 46.4 23.2 52.5 39.2 65.8
Property and multiple peril ........................... 5.0 5.5 3.7 4.6 5.0
------- ------- ------- ------- -------
$ 455.7 $ 371.3 $ 552.5 $ 609.9 $ 567.3
======= ======= ======= ======= =======
NET INVESTMENT INCOME AND OTHER INCOME
Commercial............................................. $ 1,145.2 $ 979.8 $ 1,087.3 $ 1,131.3 $ 1,059.0
Personal............................................... 177.6 156.1 165.3 160.1 137.3
Involuntary risks...................................... 88.1 75.7 83.6 78.5 58.7
------- ------- ------- ------- -------
$ 1,410.9 $ 1,211.6 $ 1,336.2 $ 1,369.9 $ 1,255.0
======= ======= ======= ======= =======
UNDERWRITING INCOME (LOSS)
Commercial............................................. $ (945.7) $(1,535.6) $(2,505.9) $ (707.1) $ (664.4)
Personal............................................... (185.2) (99.7) (152.8) (172.1) (123.6)
Involuntary risks ..................................... (70.3) (156.5) (340.9) (345.5) (327.7)
------- ------- ------- ------- -------
$(1,201.2) $(1,791.8) $(2,999.6) $(1,224.7) $(1,115.7)
======= ======= ======= ======= =======
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YEAR ENDED DECEMBER 31 1994 1993 1992 1991 1990
(In millions of dollars)
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TRADE RATIOS - GAAP BASIS (b)
Loss ratio............................................. 81.9% 96.2% 116.7% 88.1% 88.2%
Expense ratio ......................................... 28.3 27.2 26.2 25.8 25.1
Combined ratio (before policyholder dividends)......... 110.2 123.4 142.9 113.9 113.3
Policyholder dividend ratio ........................... 4.8 3.9 1.9 2.5 2.2
TRADE RATIOS - STATUTORY BASIS (b)
Loss ratio............................................. 82.2% 96.4% 116.3% 88.2% 88.3%
Expense ratio ......................................... 27.8 27.1 25.6 25.6(*) 24.6
Combined ratio (before policyholder dividends)......... 110.0 123.5 141.9 113.8(*) 112.9
Policyholder dividend ratio ........................... 3.8 3.1 2.4 2.7 2.1
OTHER DATA - STATUTORY BASIS (c)
Capital and surplus ................................... $ 3,367.3 $ 3,598.4 $ 3,135.8 $ 3,927.5 $ 3,146.9
Written to surplus ratio............................... 2.0 1.7 2.0 1.7(*) 2.0
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(*)In 1991, CNA changed its statutory method of accounting for
property/casualty written premium on indeterminate premium products
(policies subject to exposure audits). This new method defers the
recognition of written premium and acquisition expenses generally until
billed. The effect of this change in 1991 was a one-time reduction in
written premium and related acquisition expenses of $864 million and $78
million, respectively. In order to provide comparability, the Other Data
and Trade Ratios for 1991 shown above do not reflect the one-time impact
of this statutory accounting change.
(a) Property/casualty involuntary risks include mandatory
participation in residual markets, statutory assessments for insolvencies
of other insurers and other involuntary charges.
(b) Trade ratios reflect the results of Continental Casualty Company
and its property/casualty insurance subsidiaries. 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.
9
Property/Casualty Business--(continued)
(c) Other Data is determined on the basis of statutory accounting
principles and reflects capital contributions from CNA of $475 million in
1993 and $120 million in 1990. In addition, dividends of $175 million,
$150 million, $100 million and $130 million were paid to CNA by
Continental Casualty Company in 1994, 1993, 1992 and 1991, 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 in
the amounts of $169.6, $167.5, $141.1, $133.8, and $128.1 million in
1994, 1993, 1992, 1991 and 1990, respectively.
The following table displays the distribution of domestic written
premium by state:
-------------------------------------------------------------------
GROSS WRITTEN PREMIUM BY STATE % OF TOTAL
-------------------------
YEAR ENDED DECEMBER 31 1994 1993 1992
-------------------------------------------------------------------
California.............................. 11.4 12.1 11.8
New York................................ 8.6 8.4 8.0
Texas................................... 6.5 6.2 5.7
Pennsylvania............................ 5.7 5.9 6.1
Illinois................................ 4.9 5.1 5.1
Florida................................. 4.6 4.1 3.3
New Jersey.............................. 3.2 3.3 3.1
All other states (a).................... 43.2 43.1 41.5
Reinsurance assumed:
Voluntary ........................... 5.9 6.9 7.9
Involuntary ......................... 6.0 4.9 7.5
----- ----- -----
100.0 100.0 100.0
===================================================================
(a) No other state accounts for more than 3.0% of gross
written premium.
The growth and profitability of CNA's property/casualty insurance
business is dependent on many factors, including competitive and
regulatory influences, the efficiency and costs of operations,
underwriting quality, the level of natural disasters, and investment
results.
In recent years, CNA's growth and earnings have been impacted by a
prolonged cycle of inadequate commercial lines pricing. CNA has
intensified efforts in the political sphere to achieve a more predictable
and equitable insurance marketing climate. Among CNA's marketing
strategies are to emphasize responsible pricing over premium growth and
to aggressively adapt to changes in certain markets such as those in
which self-insurance has become important. CNA has also initiated
wide-scale cost management measures. CNA has continued actions to reduce
or stabilize the costs of doing business, including costs of health care,
fraud and tort liability. Programs include managed health care programs
and intensified efforts of fighting fraud.
The workers' compensation line has improved steadily since 1992.
Legislative reforms have cut costs in some states, residual market losses
have dropped, and the insurance regulators have sharpened their focus on
workers' compensation fraud.
Property/Casualty Claim and Claim Expenses
Property/casualty claim and claim expense reserves, except reserves
for structured settlements, workers' compensation lifetime claims and
accident and health disability claims are based on (a) case basis
estimates for losses reported on direct business, adjusted in the
aggregate for ultimate loss expectations, (b) estimates of unreported
losses based upon past experience, (c) estimates of assumed insurance,
(d) estimates of future expenses to be incurred in settlement of claims
and (e) estimates of claim recoveries. In establishing these estimates,
consideration is given to current conditions and trends as well as past
Company and industry experience. The schedule on page 9 provides
information on mix of business.
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. Related annuity obligations are carried in future policy
benefits reserves. Obligations for structured settlements not funded by
annuities are carried at discounted values which approximate the
alternative cost of annuity purchases. Such reserves, discounted at
interest rates ranging from 6.25% to 7.5%, totaled $839.0 million and
$748.9 million at December 31, 1994 and 1993, respectively. Ultimate
payouts under all structured settlements,
10
Property/Casualty Claim and Claim Expenses--(continued)
funded or unfunded, at December 31, 1994 and, 1993 will approximate $2.4
billion and $2.2 billion, respectively.
In 1992, CNA changed its accounting for claim reserves related to
workers' compensation lifetime claims and accident and health disability
claims. Reserving practices under both statutory and generally accepted
accounting principles allow discounting of reserves for fixed and
determinable claim obligations. Reserve discounting for these types of
claims is common industry practice. These claim reserves are discounted
at interest rates ranging from 3.5% to 6.0% with mortality and morbidity
assumptions reflecting current industry experience. At December 31, 1994
and 1993, such discounted reserves totaled $1,115 million and $970
million, respectively. Ultimate payouts for these claims are estimated to
be $1.5 billion and $1.4 billion at December 31, 1994 and 1993,
respectively.
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 such adjustments
become apparent.
The retention limits of CNA as a result of reinsurance of its
property/casualty business vary by type of coverage and are based on
individual risks underwritten. In general, retention limits have been
increased. See additional discussion of reinsurance in Notes G and K to
the Consolidated Financial Statements.
Asbestos-related and Environmental Pollution Claims
---------------------------------------------------
Reserves include estimated amounts for exposures to asbestos-related
and environmental pollution claims. Reserving for such claims involves
significant uncertainties for both CNA and the industry, characterized by
complex and costly litigation and further compounded by the tendency of
the courts to broadly interpret contracts beyond their original intent.
A summary of asbestos-related and environmental pollution claim and
claim expense activity follows:
---------------------------------------------------------------------------------------
CLAIM AND CLAIM EXPENSE
----------------------------------------------------
RESERVES, NET OF
REINSURANCE PAYMENTS
DECEMBER 31 YEAR ENDED DECEMBER 31
---------------- ------------------------
(In millions of dollars) 1994 1993 1994 1993 1992
---------------------------------------------------------------------------------------
Asbestos-related................. $1,939 $2,080 $178 $204 $112
Environmental pollution.......... 506 433 107 72 38
----- ----- --- --- ---
Total........................ $2,445 $2,513 $285 $276 $150
=======================================================================================
A major portion of CNA's asbestos-related claim exposure involves
litigation with Fibreboard Corporation, as discussed in Note J to the
Consolidated Financial Statements. Adverse reserve development for
asbestos-related claims totaled $37 million, $601 million, and $1.689
billion in 1994, 1993 and 1992, respectively, which include approximately
$500 million and $1.5 billion related to Fibreboard for 1993 and 1992,
respectively.
Potential exposures also exist for claims involving environmental
pollution including toxic waste clean-up. 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. CNA has not attributed any reinsurance to reserves for
unreported environmental pollution claims. The reserves in the table
above are net of reinsurance recoverables of $3 million and $5 million at
December 31, 1994 and 1993, respectively. 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.
11
Property/Casualty Claim and Claim Expenses--(continued)
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.
Reserve Development
-------------------
The table below provides a reconciliation between beginning and ending
claim and claim expense reserve balances for 1994, 1993 and 1992. Not
included in the table below is premium development related to certain
insurance policies subject to retroactive premium adjustments which are
based on various factors including loss experience. As a result, CNA also
recorded premium and dividend related development to prior years
(increasing (decreasing) premium) of $(29), $(127) and $50 million in
1994, 1993 and 1992, respectively.
-------------------------------------------------------------------------------------------------------
CHANGES IN RESERVES FOR PROPERTY/CASUALTY
CLAIM AND CLAIM EXPENSES
YEAR ENDED DECEMBER 31 1994 1993 1992
(In millions of dollars)
-------------------------------------------------------------------------------------------------------
Reserves at beginning of year:
Gross............................................................... $20,812 $20,034 $17,712
Ceded reinsurance................................................... 2,491 2,867 3,297
------ ------ ------
Net............................................................... 18,321 17,167 14,415
------ ------ ------
Net incurred claim and claim expenses:
Provision for insured events of current year........................ 5,611 5,388 5,708
Increase (decrease) in provision for insured events of prior years*. (71) 590 1,617
Amortization of discounts........................................... 100 94 104
------ ------ ------
Total net incurred ............................................... 5,640 6,072 7,429
------ ------ ------
Net payments:
Attributable to current year events................................. 1,388 1,202 1,260
Attributable to prior year events................................... 3,629 3,706 3,411
Amortization of discounts........................................... 10 10 6
------ ------ ------
Total net payments ............................................... 5,027 4,918 4,677
------ ------ ------
Net reserves at end of year ......................................... $18,934 $18,321 $17,167
====== ====== ======
-------------------------------------------------------------------------------------------------------
CHANGES IN RESERVES FOR PROPERTY/CASUALTY
CLAIM AND CLAIM EXPENSES
YEAR ENDED DECEMBER 31 1994 1993 1992
(In millions of dollars)
-------------------------------------------------------------------------------------------------------
Gross reserves at beginning of year ................................. $20,812 $20,034 $17,712
------ ------ ------
Gross incurred claim and claim expenses:
Provision for insured events of current year ....................... 6,125 5,817 6,382
Increase in provision for insured events of prior years............. 213 305 1,487
Amortization of discounts........................................... 100 94 104
------ ------ ------
Total gross incurred ............................................. 6,438 6,216 7,973
------ ------ ------
Gross payments:
Attributable to current year events................................. 1,468 1,278 1,348
Attributable to prior year events................................... 4,133 4,150 4,297
Amortization of discounts........................................... 10 10 6
------ ------ ------
Total gross payments ............................................. 5,611 5,438 5,651
------ ------ ------
-------------------------------------------------------------------------------------------------------
Gross reserves at end of year $21,639 $20,812 $20,034
=======================================================================================================
*Includes $500 and $1,500 for Fibreboard in 1993 and 1992, respectively.
See Note J to the Consolidated Financial Statements in the Annual Report
to Shareholders.
12
Property/Casualty Claim and Claim Expenses--(continued)
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 retroactive reestimates 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 reestimated reserve to the reserve originally established, and
indicates whether of 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 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
(In millions of dollars)
-----------------------------------------------------------------------------------------------------------------------------------
Gross reserves for unpaid claim
and claim expenses.................. $ - $ - $ - $ - $ - $ - $16,530 $17,712 $20,034 $20,812 $21,639
Ceded recoverable.................... - - - - - - 3,440 3,297 2,867 2,491 2,705
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net reserves for unpaid claim
and claim expenses.................. 3,931 4,873 6,243 8,045 9,552 11,267 13,090 14,415 17,167 18,321 18,934
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET PAID (CUMULATIVE) AS OF:
One year later ...................... 1,330 1,594 1,335 1,763 2,040 2,670 3,285 3,411 3,706 3,629 -
Two years later...................... 1,936 2,932 2,383 2,961 3,622 4,724 5,623 6,024 6,354 - -
Three years later.................... 2,493 3,022 3,197 4,031 4,977 6,294 7,490 7,946 - - -
Four years later .................... 2,963 3,642 3,963 5,007 6,078 7,534 8,845 - - - -
Five years later .................... 3,407 4,175 4,736 5,801 6,960 8,485 - - - - -
Six years later...................... 3,766 4,735 5,339 6,476 7,682 - - - - - -
Seven years later.................... 4,156 5,233 5,880 7,061 - - - - - - -
Eight years later.................... 4,512 5,668 6,382 - - - - - - - -
Nine years later .................... 4,901 6,116 - - - - - - - - -
Ten years later...................... 5,291 - - - - - - - - - -
-----------------------------------------------------------------------------------------------------------------------------------
SCHEDULE OF PROPERTY/CASUALTY
LOSS RESERVE DEVELOPMENT
CALENDAR YEAR ENDED 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
(In millions of dollars)
-----------------------------------------------------------------------------------------------------------------------------------
NET RESERVES REESTIMATED AS OF:
End of initial year.................. 3,931 4,873 6,243 8,045 9,552 11,267 13,090 14,415 17,167 18,321 18,934
One year later ...................... 3,985 5,047 6,642 8,086 9,737 11,336 12,984 16,032 17,757 18,250 -
Two years later...................... 4,122 5,573 6,763 8,345 9,781 11,371 14,693 16,810 17,728 - -
Three years later.................... 4,659 5,788 6,989 8,424 9,796 13,098 15,737 16,944 - - -
Four years later .................... 4,855 6,170 7,166 8,516 11,471 14,118 15,977 - - - -
Five years later .................... 5,171 6,422 7,314 10,196 12,496 14,395 - - - - -
Six years later...................... 5,395 6,566 9,022 11,239 12,742 - - - - - -
Seven years later.................... 5,486 8,317 10,070 11,480 - - - - - - -
Eight years later.................... 7,215 9,365 10,317 - - - - - - - -
Nine years later .................... 8,270 9,635 - - - - - - - - -
Ten years later...................... 8,524 - - - - - - - - - -
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total net (deficiency) redundancy.. (4,593) (4,762) (4,074) (3,435) (3,190) (3,128) (2,887) (2,529) (561) 71 -
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Reconciliation to Gross Reestimated
Reserves:
Net reserves reestimated............. 15,977 16,944 17,728 18,250 -
Reestimated ceded recoverable........ 3,466 3,293 2,828 2,775 -
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total gross reestimated reserves 19,443 20,237 20,556 21,025 -
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Net (Deficiency) Redundancy Related to:
Asbestos-related claims.............. (2,653) (2,682) (2,718) (2,670) (2,612) (2,512) (2,374) (2,326) (637) (37) -
Environmental pollution claims....... (777) (778) (778) (763) (757) (730) (719) (673) (626) (180) -
Other................................ (1,163) (1,302) (578) (2) 179 114 206 470 702 288 -
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total net (deficiency) redundancy.. (4,593) (4,762) (4,074) (3,435) (3,190) (3,128) (2,887) (2,529) (561) 71 -
-----------------------------------------------------------------------------------------------------------------------------------
Most of CNA's unfavorable reserve development has been due to
asbestos-related and environmental pollution claims. A discussion of
CNA's litigation with Fibreboard Corporation regarding asbestos-related
bodily injury claims can be found in Note J to the Consolidated
Financial Statements in the Annual Report to Shareholders.
13
Investments
CNA's general account investment portfolio is managed to maximize
after-tax investment return, while minimizing credit risks with
investments concentrated in high quality securities to support its
insurance underwriting operations. At December 31, 1994, approximately
14% of CNA's general account portfolio is invested in long-term state and
municipal bonds in order to maximize after-tax yield and provide for a
more stable yield on the portfolio with a higher quality of investment
than may otherwise be available.
CNA has the capacity to hold its fixed income 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, prepayments, tax and credit considerations, or
other similar factors. Accordingly, the fixed income securities are
classified as available-for-sale. CNA's portfolio is managed based on the
following investment strategies: i) diversification is used to limit
exposures to any one issue or issuer, and ii) in general, the public
market is used in order to provide liquidity.
Historically, CNA has maintained short-term assets at a level that
provided for liquidity to meet its short-term obligations, principally
anticipated claim payments. At December 31, 1994, short-term investments
primarily consisted of U.S. treasury bills and high-grade commercial
paper. The major components of the short-term investment portfolio were
$2.5 billion of collateral for securities sold under agreements to
repurchase, $1.0 billion in an escrow account (see Note A to the
Consolidated Financial Statements) and approximately $1.5 billion of
other short-term investments.
The following summarizes CNA's distrbution of general account
investments:
--------------------------------------------------------------------------------
DISTRIBUTION OF INVESTMENTS - GENERAL ACCOUNT
DECEMBER 31 1994* 1993* 1992
(In millions of dollars)
--------------------------------------------------------------------------------
Fixed maturities:
Tax-exempt bonds ........................ $ 3,770 $ 5,015 $ 9,502
Taxable bonds............................ 16,629 12,145 7,286
Redeemable preferred stocks.............. 429 448 568
Equity securities:
Common stocks............................ 755 508 348
Non-redeemable preferred stocks.......... - - 9
Mortgage loans and real estate.............. 47 62 89
Policy loans ............................... 176 174 179
Other invested assets....................... 101 67 53
Short-term investments ..................... 5,036 6,944 4,444
--------------------------------------------------------------------------------
Total investments at carrying value $26,943 $25,363 $22,478
================================================================================
*Fixed maturity securities are reported at fair value in 1994 and 1993 in
the Annual Report.
CNA's general account fixed income portfolio has consistently been of
high quality as illustrated in the following table using the Standard &
Poor's ratings convention (see Note on page 15).
------------------------------------------------------------------
BOND PORTFOLIO QUALITY - GENERAL ACCOUNT
DECEMBER 31 1994 1993 1992
------------------------------------------------------------------
AAA...................................... 82% 77% 73%
AA ...................................... 6 8 10
A........................................ 5 7 10
BBB...................................... 2 5 3
Below BBB................................ 5 3 4
------------------------------------------------------------------
Total 100% 100% 100%
==================================================================
CNA's Separate Account investment portfolio is managed to specifically
support the underlying insurance products (see the discussion of
annuities and GIC's in "Life Insurance" above). Approximately 88% or $5.2
billion of Separate Account investments are used to fund GIC's; the
remaining investments are used to fund variable products.
14
Investments--(continued)
Approximately 88% of the GIC investment portfolio is comprised of taxable
fixed income securities. The quality of the GIC fixed income portfolio is
as follows (see Note below):
------------------------------------------------------------------
BOND PORTFOLIO QUALITY - GIC PORTFOLIO
DECEMBER 31 1994 1993 1992
------------------------------------------------------------------
AAA...................................... 49% 44% 50%
AA....................................... 5 6 9
A........................................ 13 18 18
BBB...................................... 9 13 10
Below BBB................................ 24 19 13
------------------------------------------------------------------
Total 100% 100% 100%
==================================================================
Note: The bond ratings shown in the two tables above are primarily
from Standard & Poor's (95% of the general account portfolio
and 94% of the GIC portfolio in 1994). In the case of private
placements and other unrated securities, comparable internal
ratings are developed by CNA. These ratings are derived by
management using available information on the issuer to assess
the credit risk. Reference also may be made to similar
instruments of the issuer that are rated by Standard & Poor's.
In the case of unrated municipal bonds, an AAA rating may be
assigned to issues with financial guarantee insurance.
CNA actively manages its high yield bonds and maintains the level of
such investments at prudent levels. In 1994, the level of high yield
investments within the GIC portfolio increased $34 million to $1.102
billion at year end. This increase is a result of the relative
attractiveness of the high yield investment market in comparison to other
investment opportunities during the year. Although the level of high
yield investments has increased, the components of the high yield
portfolio have shifted toward lower risk issues, with B and BB rated
bonds comprising 95% of the high yield portfolio at December 31, 1994,
compared to 91% at the end of 1993 and 82% at the end of 1992. High yield
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. Further, CNA's
investment in real estate and mortgage loans amounted to less than
one-half of one percent of its total assets, substantially below industry
averages.
At December 31, 1994 and 1993, high yield securities within the
general and GIC portfolios were carried at fair value and amounted to
$2.1 billion and $1.8 billion, respectively. Amortized cost exceeded
market value for high yield securities by approximately $138 million at
December 31, 1994 compared to December 31, 1993 when market value
exceeded amortized cost by $72 million.
Included in CNA's 1994 AAA-rated fixed income securities (general and
GIC portfolios) are $4.6 billion of asset-backed securities, consisting
of approximately 50% in collateralized mortgage obligations ("CMO's"),
34% in U.S. government agency issued pass-through certificates, and 16%
in corporate asset-backed obligations. The majority of CMO's held are
U.S. government agency issues which are actively traded in liquid markets
and are priced monthly by broker-dealers. CNA limits the risks associated
with interest rate fluctuations and prepayment by concentrating its CMO
investments in planned amortization classes with relatively short
principal repayment windows. CNA generally does not invest in complex
mortgage derivatives without readily ascertainable market prices.
15
ITEM 2. PROPERTIES
A. Home Office
CNA Plaza, owned by Continental Assurance Company, is a 1,421,000
square foot office complex located at 333 S. Wabash, Chicago, Illinois.
The forty-five story office building serves as the home office for CNA
and its insurance subsidiaries. An adjacent building (a 614,000 square
foot 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 35% of the adjacent building is rented to non-affiliates.
B. Field Offices
CNA also maintains four regional offices and forty branch offices and
processing centers in major cities throughout the United States. This
office space is leased except for offices located in three CNA owned
buildings.
ITEM 3. LEGAL PROCEEDINGS
Incorporated herein by reference from Note J to the Consolidated
Financial Statements in the 1994 Annual Report to Shareholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Incorporated herein by reference from page 73 of the 1994 Annual
Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference from page 2 of the 1994 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 27 of the 1994
Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheet - December 31, 1994 and 1993
Statement of Consolidated Operations - Years Ended December 3l, 1994,
1993 and 1992
Statement of Consolidated Stockholders' Equity - Years Ended
December 31, 1994, 1993 and 1992
Statement of Consolidated Cash Flows - Years Ended December 31, 1994,
1993 and 1992
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 28 through 72 of the 1994
Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
16
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 14A
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
(a) 1. FINANCIAL STATEMENTS: Number
------
A separate index to the Consolidated Financial Statements
is presented in Part II, Item 8........................... 16
(a) 2. FINANCIAL STATEMENT SCHEDULES:
Schedule I Summary of Investments..................... 21
Schedule II Condensed Financial Information (Parent
Company)................................... 22
Schedule III Supplementary Insurance Information........ 25
Schedule IV Reinsurance ............................... 26
Schedule V Valuation and Qualifying Accounts and
Reserves................................... 26
Schedule VI Supplemental Information Concerning
Property/Casualty Insurance Operations..... 27
Other schedules are omitted because of the absence of con-
ditions under which they are required or because the
required information is provided in the Consolidated
Financial Statements or notes thereto.
Independent Auditors' Report ............................. 28
17
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
May 4, 1994.......................................... 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.............. -
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS, AND REPORTS ON
FORM 8-K (CONTINUED)
(a) 3. EXHIBITS:
Exhibit
Description of Exhibit Number
---------------------- -------
(10) Material contracts:
Continental Casualty Company "CNA" Annual Incentive
Bonus Plan Provisions................................ 10.1*
Employment Agreement between CNA Financial
Corporation and Dennis H. Chookaszian, dated
February 22, 1993 (Exhibit 10.1 to 1992 Form 10-K
incorporated herein by reference.)................... 10.2
Employment Agreement between CNA Financial
Corporation and Philip L. Engel, dated February 22,
1993 (Exhibit 10.2 to 1992 Form 10-K 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
18
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS, AND REPORTS ON
FORM 8-K (CONTINUED)
(a) 3. EXHIBITS:
Exhibit
Description of Exhibit 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 refernce................................... 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-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
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS, AND REPORTS ON
FORM 8-K (CONTINUED)
(a) 3. EXHIBITS:
Exhibit
Description of Exhibit Number
---------------------- -------
Defendant Class Settlement Agreement dated
December 22, 1993 (Exhibit 10.15 to 1993 Form-K
incorporated herin 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
19
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) 1994 Annual Report................................... 13.1*
(21) Subsidiaries of CNA.................................. 21.1*
(23) Consent of Deloitte & Touche LLP..................... 23.1*
(27) Financial Data Schedule.............................. 27*
(28) Information from reports furnished to state insurance
regulatory authorities:
Property/Casualty Reserve Reconciliation-Statutory
Basis to Generally Accepted Accounting Principles.... 28.1*
Schedule P from Continental Casualty Company's 1994
Consolidated Annual Statutory Statement provided to
state insurance regulatory authorities............... 28.2*
*Filed herewith
(b) REPORTS ON FORM 8-K:
In a report on Form 8-K dated December 6, 1994, CNA issued a press
release which stated that CNA and The Continental Corporation
(Continental) signed an agreement under which CNA will acquire
Continental through a cash merger for $1.1 billion.
In a report on Form 8-K dated December 9, 1994, CNA through its
Continental Casualty subsidiary, consummated its purchase of certain
securities of the Continental Corporation ("Continental"), as
contemplated by the Securities Purchase Agreement dated as of
December 6, 1994, by and between the CNA and Continental, for cash
consideration of $275 million.
20
SCHEDULE I
CNA FINANCIAL CORPORATION
SUMMARY OF INVESTMENTS
--------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 1994 1993
------------------------------------- --------------------------------------
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 ..................... $13,404.4 $12,704.2 $12,704.2 $ 8,551.5 $ 8,688.3 $ 8,688.3
States, municipalities and political
subdivisions-tax exempt.................. 3,704.6 3,769.6 3,769.6 4,724.0 5,014.8 5,014.8
Foreign governments and political
subdivisions............................. 662.9 653.4 653.4 420.9 423.4 423.4
Public utilities ......................... 186.8 190.0 190.0 235.4 256.5 256.5
Convertibles and bonds with warrants
attached................................. 271.9 257.5 257.5 188.6 193.9 193.9
All other corporate....................... 2,937.2 2,824.2 2,824.2 2,461.7 2,582.7 2,582.7
Redeemable preferred stocks................. 419.3 428.8 428.8 444.6 448.0 448.0
-------- -------- -------- -------- -------- --------
Total fixed maturities available-for-sale 21,587.1 20,827.7 20,827.7 17,026.7 17,607.6 17,607.6
-------- ======== -------- -------- ======== --------
Equity securities available-for-sale:
Common stocks:
Public utilities ......................... 26.2 26.3 26.3 21.6 21.8 21.8
Banks, trusts, and insurance companies.... 134.6 129.0 129.0 57.8 56.7 56.7
Industrial and other ..................... 567.9 599.5 599.5 353.3 429.7 429.7
Nonredeemable preferred stocks.............. 7.6 - - - - -
---------- -------- -------- -------- -------- --------
Total equity securities
available-for-sale...................... 736.3 $ 754.8 754.8 432.7 $ 508.2 508.2
---------- ======== -------- -------- ======== --------
Mortgage loans............................... 43.8 43.8 57.6 57.6
---------- -------- -------- --------
Real estate:
Investment properties....................... 6.3 3.0 7.3 3.9
Acquired in satisfaction of debt............ 0.2 0.1 0.2 0.1
---------- -------- -------- --------
Total real estate ....................... 6.5 3.1 7.5 4.0
---------- -------- -------- --------
Policy loans................................. 176.3 176.3 174.0 174.0
Other invested assets ....................... 103.4 101.1 69.2 68.0
Short-term investments....................... 5,036.1 5,036.1 6,944.0 6,944.0
--------------------------------------------------------------------------------------------------------------------------------
Total investments $27,689.5 $26,942.9 $24,711.7 $25,363.4
================================================================================================================================
21
SCHEDULE II
CNA FINANCIAL CORPORATION
(PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION
FINANCIAL POSITION
-------------------------------------------------------------------------------------------------
DECEMBER 31 1994 1993
(In millions of dollars)
-------------------------------------------------------------------------------------------------
Assets:
Investments in subsidiaries ................................. $4,082.1 $5,410.0
Federal income taxes recoverable............................. 23.7 29.2
Deferred income taxes ....................................... 1,475.2 974.6
Other ....................................................... 3.8 29.8
------- -------
Total assets ........................................... 5,584.8 6,443.6
------- -------
LIABILITIES:
Debt......................................................... 896.4 895.5
Amounts due to affiliates ................................... 112.0 136.9
Other ....................................................... 30.5 30.1
------- -------
Total liabilities....................................... 1,038.9 1,062.5
Total stockholders' equity.............................. 4,545.9 5,381.1
-------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,584.8 $6,443.6
=================================================================================================
RESULTS OF OPERATIONS
-------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1994 1993 1992
(In millions of dollars)
-------------------------------------------------------------------------------------------------
REVENUES:
Equity in income of subsidiaries before income tax:
Operating income (loss) ............................. $ 389.1 $(467.6) $(1,530.7)
Realized investment gains (losses)................... (220.1) 790.3 342.1
Net investment income ................................. 0.3 1.7 2.5
Other ................................................. (3.7) (3.5) 4.1
Realized investment gains (losses)..................... (37.0) 12.7 12.6
----- ----- -------
128.6 333.6 (1,169.4)
----- ----- -------
EXPENSES:
Administrative and general expenses ................... 193.1 198.9 169.5
Interest expense ...................................... 69.6 41.3 36.1
----- ----- -------
262.7 240.2 205.6
----- ----- -------
Income (loss) before income tax................... (134.1) 93.4 (1,375.0)
Income tax benefit..................................... 170.6 174.1 712.5
----- ----- -------
Income (loss) before cumulative effect of
accounting changes....................... 36.5 267.5 (662.5)
Cumulative effect on prior years of accounting changes:
Income taxes......................................... - - 133.0
Post retirement benefits other than pensions
(net of income tax benefit of $32.8)............. - - (63.6)
Discounting for certain workers' compensation and
disability claim reserves
(net of income tax expense of $135.2)............ - - 262.5
-------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 36.5 $ 267.5 $ (330.6)
=================================================================================================
See accompanying Notes to Condensed Financial Information.
22
SCHEDULE II
(CONTINUED)
CNA FINANCIAL CORPORATION
(PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION
CASH FLOW
--------------------------------------------------------------------------------------------------
DECEMBER 31 1994 1993 1992
(In millions of dollars)
--------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................. $ 36.5 $267.5 $(330.6)
----- ----- -----
Adjustments to reconcile net income to net cash
used in operating activities:
Cumulative effect of accounting changes - Parent ............. - - 18.6
Equity in earnings of unconsolidated affiliates:
Cumulative effect of accounting changes ..................... - - (350.5)
Earnings before cumulative effect of accounting changes...... (98.0) (349.5) 935.6
Realized (gains) losses....................................... 0.3 (12.6) (12.6)
Changes in:
Accrued investment income ................................... 1.1 (0.1) 0.2
Federal income taxes......................................... 5.6 42.2 (78.7)
Deferred income taxes ....................................... (115.0) (124.3) (293.4)
Other, net................................................... (23.6) (17.7) 22.1
----- ----- -----
Total adjustments ......................................... (229.6) (462.0) 241.3
----- ----- -----
NET CASH USED IN OPERATING ACTIVITIES ..................... (193.1) (194.5) (89.3)
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturities ................................ (195.7) (999.3) (441.2)
Proceeds from fixed maturities:
Sales........................................................ 19.6 984.5 92.2
Maturities................................................... 192.4 - 396.1
Net proceeds from the sale of equity securities............... 4.0 - -
Change in short-term investments.............................. 1.1 47.6 (50.3)
Change in other investments .................................. 2.3 (4.2) 24.2
Capital contribution to Continental Casualty Company.......... - (475.0) -
Other ........................................................ (1.0) - -
----- ----- -----
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES........ 22.7 (446.4) 21.0
----- ----- -----
CASH FLOW
--------------------------------------------------------------------------------------------------
DECEMBER 31 1994 1993 1992
(In millions of dollars)
--------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to preferred shareholders...................... (4.5) (4.0) (4.7)
Dividend from Continental Casualty Company.................... 175.0 150.0 100.0
Proceeds from issuance of long-term debt...................... - 494.9 -
Principal payments on long-term debt.......................... - - (27.0)
----- ----- -----
NET CASH PROVIDED BY FINANCING ACTIVITIES ................. 170.5 640.9 68.3
----- ----- -----
NET INCREASE (DECREASE) IN CASH ........................... 0.1 - -
Cash at beginning of year ....................................... - - -
--------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 0.1 $ - $ -
==================================================================================================
Supplemental disclosures of cash flow information:
Cash received (paid):
Interest expense ............................................. $ (70.5) $(34.9) $ (35.4)
Federal income taxes ......................................... 53.1 (54.2) 89.4
==================================================================================================
See accompanying Notes to Condensed Financial Information.
23
SCHEDULE II
(CONTINUED)
CNA FINANCIAL CORPORATION
(PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL INFORMATION
a. DEBT:
--------------------------------------------------------------------------------------
DECEMBER 31 1994 1993
(In millions of dollars)
--------------------------------------------------------------------------------------
Long-term debt:
8.625% Senior Notes, due March 1, 1996 ................... $249.4 $249.0
8.875% Senior Notes, due March 1, 1998 ................... 148.8 148.6
6.250% Senior Notes, due November 15, 2003 ............... 248.1 247.9
7.250% Debenture, due November 15, 2023................... 247.1 247.0
1.000% Urban Development Action Grant, due May 7, 2019.... 3.0 3.0
--------------------------------------------------------------------------------------
Total $896.4 $895.5
======================================================================================
In October 1993, a shelf registration statement was filed with the
Securities and Exchange Commission which made $900 million of debt
securities available for issuance from time to time. In addition,
$100 million from a previous shelf registration remained available
for issuance.
In November 1993, CNA sold $250 million principal amount of 6.25%
senior notes due 2003 and $250 million principal amount of 7.25%
debentures due 2023 at effective rates per annum of 6.4% and 7.3%,
respectively. An additional $500 million of securities and/or
preferred stock is available for issuance under the shelf
registration statement.
b. CNA has reimbursed, or will reimburse, its subsidiaries for general
management and administrative expenses, unallocated loss adjustment
expenses and investment expense in the amounts of $194.3 million,
$193.1 million and $165.6 million in 1994, 1993, and 1992,
respectively.
c. CNA contributed $475 millionin capital to Continental Casualty
Company in 1993. There were no capital contributions by CNA in 1994
or 1992.
24
CNA FINANCIAL CORPORATION SCHEDULE III
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, 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
========
DECEMBER 31, 1993
Property/Casualty:
Commercial................... $ 371.9 $18,157.4 $ 17.2 $2,001.2 $ 23.5
Personal..................... 190.2 1,013.0 151.8 536.2 -
Involuntary risks............ - 1,641.6 - 18.6 -
Life:
Individual................... 416.7 143.6 2,178.0 - 32.0
Group ....................... 6.6 434.0 406.6 - 423.1
------- -------- ------- ------- -----
CNA Insurance.............. $ 985.4 21,389.6 $2,753.6 $2,556.0 $ 478.6
======= ======= ======= =====
Other and intercompany eliminations 280.6
--------
$21,670.2
========
DECEMBER 31, 1992
Property/Casualty:
Commercial................... $ 337.2 $17,286.0 $ 10.5 $1,873.0 $ 69.1
Personal..................... 170.3 990.3 114.9 529.4 -
Involuntary risks............ - 1,757.3 - 22.7 -
Life:
Individual................... 385.3 126.1 1,977.1 - 33.7
Group ....................... 7.3 421.1 418.1 - 435.5
------- -------- ------- ------- -----
CNA Insurance.............. $ 900.1 20,580.8 $2,520.6 $2,425.1 $538.3
======= ======= ======= =====
Other and intercompany eliminations 152.6
--------
$20,733.4
========
-----------------------------------------------------------------------------------------------------------------------------
CNA FINANCIAL CORPORATION SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION (CONTINUED)
-----------------------------------------------------------------------------------------------------------------------------
AMORTIZATION
INSURANCE OF
NET NET CLAIMS AND DEFERRED OTHER
PREMIUM INVESTMENT POLICYHOLDERS' ACQUISITION OPERATING PREMIUMS
(In millions of dollars) REVENUE INCOME BENEFITS COSTS EXPENSES WRITTEN
-----------------------------------------------------------------------------------------------------------------------------
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
======= ======= ======= =======
DECEMBER 31, 1993
Property/Casualty:
Commercial................... $4,964.0 $ 896.6 $5,171.9 $ 951.2 $ 459.7 $5,030.9
Personal..................... 939.8 87.5 756.0 221.2 130.9 984.2
Involuntary risks............ 371.2 75.7 336.3 - 191.5 367.2
Life:
Individual................... 343.0 142.8 362.2 25.5 95.0 -
Group ....................... 2,099.2 116.9 1,945.6 2.4 242.1 -
------- ------- ------- ------- ------- -------
CNA Insurance.............. 8,717.2 1,319.5 8,572.0 $1,200.3 1,119.2 $6,382.3
======= =======
Other and intercompany eliminations (28.4) (5.2) (28.6) 0.5
------- ------- ------- -------
$8,688.8 $1,314.3 $8,543.4* $1,119.7
======= ======= ======= =======
DECEMBER 31, 1992
Property/Casualty:
Commercial................... $4,870.2 $1,039.3 $6,140.8 $ 820.2 $ 463.8 $4,766.2
Personal..................... 930.9 101.2 808.9 212.4 125.9 964.1
Involuntary risks............ 552.5 83.6 644.0 - 249.4 555.9
Life:
Individual................... 321.8 150.6 321.8 40.7 99.7 -
Group ....................... 2,115.9 132.9 1,966.5 1.2 248.6 -
------- ------- ------- ------- ------- -------
CNA Insurance.............. 8,791.3 1,507.6 9,882.0 $1,074.5 1,187.4 $6,286.2
======= =======
Other and intercompany eliminations (23.3) 1.1 (23.5) (0.9)
------- ------- ------- -------
$8,768.0 $1,508.7 $9,858.5* $1,186.5
======= ======= ======= =======
=============================================================================================================================
*Excludes participating policyholders' interest related to realized
investment gains (losses) of $10.9, $(13.1), and $(12.1) in 1994,
1993 and 1992, respectively.
**1992 has been restated to conform to the classifications followed in 1993 and
1994 upon adoption of SFAS 113.
25
SCHEDULE IV
CNA FINANCIAL CORPORATION
REINSURANCE
The effects of reinsurance on premium revenues are shown in the following
schedule:
----------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 EARNED PREMIUMS ASSUMED/
------------------------------------- NET
(In millions of dollars) DIRECT CEDED ASSUMED NET %
----------------------------------------------------------------------------------------------------
1994
Life.......................................... $ 408 $ 23 $ 107 $ 492 21.7%
Accident and health........................... 2,678 45 158 2,791 5.7
Property and casualty......................... 5,601 661 1,251 6,191 20.2
----- --- ----- -----
Total premiums............................... $8,687 $729 $1,516 $9,474 16.0
===== === ===== =====
1993
Life.......................................... $ 312 $ 20 $ 108 $ 400 27.0%
Accident and health........................... 2,413 32 149 2,530 5.9
Property and casualty......................... 5,228 496 1,027 5,759 17.8
----- --- ----- -----
Total premiums............................... $7,953 $548 $1,284 $8,689 14.8
===== === ===== =====
1992
Life.......................................... $ 336 $ 21 $ 115 $ 430 26.7%
Accident and health........................... 2,287 33 173 2,427 7.1
Property and casualty......................... 5,324 475 1,062 5,911 18.0
----- --- ----- -----
Total premiums............................... $7,947 $529 $1,350 $8,768 15.4
===== === ===== =====
----------------------------------------------------------------------------------------------------
The impact of reinsurance on life insurance in-force is shown in the
following schedule:
----------------------------------------------------------------------------------------------------
LIFE INSURANCE IN-FORCE ASSUMED/
------------------------------------- NET
(In millions if dollars) DIRECT CEDED ASSUMED NET %
----------------------------------------------------------------------------------------------------
December 31, 1994 ............................. $75,419 $5,953 $52,014 $121,480 42.8%
December 31, 1993 ............................. 58,978 5,713 53,270 106,535 50.0
December 31, 1992 ............................. 53,869 5,146 51,343 100,066 51.3
----------------------------------------------------------------------------------------------------
SCHEDULE V
CNA FINANCIAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
----------------------------------------------------------------------------------------------------
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, 1994
Deducted from assets:
Allowance for doubtful accounts:
Insurance receivables ........... $ 117.3 $ 18.6 $ - $ 8.4 $ 127.5
====== ===== ===== ==== ======
YEAR ENDED DECEMBER 31, 1993
Deducted from assets:
Allowance for doubtful accounts:
Insurance receivables ........... $ 110.4 $ 9.2 $ - $ 2.3 $ 117.3
====== ===== ===== ==== ======
YEAR ENDED DECEMBER 31, 1992
Deducted from assets:
Allowance for doubtful accounts:
Insurance receivables ........... $ 100.4 $ 27.2 $ - $17.2 $ 110.4
====== ===== ===== ==== ======
----------------------------------------------------------------------------------------------------
26
SCHEDULE VI
CNA FINANCIAL CORPORATION
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY
INSURANCE OPERATIONS
-------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED PROPERTY/
CASUALTY ENTITIES
------------------------------------
YEAR ENDED DECEMBER 31
------------------------------------
(In millions of dollars) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------------
Deferred acquisition costs .......................................................... $ 592.3 $ 562.0 $ 507.5
Reserves for unpaid claims and claim expenses........................................ 21,638.6 20,812.0 20,033.6
Discount, if any, deducted above (based on interest rates ranging from 3.5% to 7.5%). 1,951.3 1,886.5 1,787.3
Unearned premiums.................................................................... 2,690.7 2,556.0 2,425.1
Earned premiums...................................................................... 6,838.5 6,275.0 6,353.6
Net investment income................................................................ 1,240.4 1,059.8 1,224.1
Claim and claim expenses related to current year .................................... 5,610.8 5,387.9 5,708.2
Claim and claim expenses related to prior years...................................... (71.2) 590.0 1,617.4
Amortization of deferred acquisition costs .......................................... 1,328.8 1,172.4 1,032.6
Paid claim and claim expenses........................................................ 5,026.6 4,916.9 4,676.6
Premiums written .................................................................... 6,964.7 6,382.3 6,286.2
--------------------------------------------------------------------------------------------------------------------------------
27
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, 1994 and 1993 and for each of the three years in the period
ended December 31, 1994, and have issued our report thereon dated February
15, 1995, which report includes an explanatory paragraph as to certain
accounting changes; such consolidated financial statements and report are
included in the Company's 1994 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.
Deloitte & Touche LLP
Chicago, Illinois
February 15, 1995
28
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 Laurence A. Tisch
-----------------------------
Laurence A. Tisch
Chief Executive Officer
(Principal Executive Officer)
By Peter E. Jokiel
-----------------------------
Peter E. Jokiel
Senior Vice President and
Chief Financial Officer
Date: March 23, 1995
SIGNATURES --(CONTINUED)
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
Antoinette Cook Bush Director
------------------------------
Antoinette Cook Bush
Dennis H. Chookaszian Director
------------------------------
Dennis H. Chookaszian
Philip L. Engel Director
------------------------------
Philip L. Engel
Robert P. Gwinn Director
------------------------------
Robert P. Gwinn
Edward J. Noha Chairman of the Board
------------------------------ and Director
Edward J. Noha
Dated:
Richard L. Thomas Director March 23, 1995
------------------------------
Richard L. Thomas
James S. Tisch
------------------------------ Director
James S. Tisch
Laurence A. Tisch Chief Executive Officer
------------------------------ and Director
Laurence A. Tisch
Preston R. Tisch Director
------------------------------
Preston R. Tisch
Marvin Zonis Director
------------------------------
Marvin Zonis
29
EX-11.1
2
EXHIBIT 11.1
CNA FINANCIAL CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1994 1993 1992 1991 1990
(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...... $ 36.5 $267.5 $(662.5) $612.5 $366.5
Less preferred stock dividends........................................ 5.3 4.0 4.2 6.8 9.8
----- ----- ----- ----- -----
Net income (loss) before cumulative effect of accounting changes
available to common stockholders.................................. 31.2 263.5 (666.7) 605.7 356.7
Cumulative effect on prior years of changes in accounting principles.. - - 331.9 - -
----- ----- ----- ----- -----
Net income (loss) available to common stockholders.................. $ 31.2 $263.5 $(334.8) $605.7 $356.7
===== ===== ===== ===== =====
Earnings per share:
Net income (loss) before cumulative effect of accounting changes...... $ 0.51 $ 4.26 $(10.79) $ 9.80 $ 5.77
Cumulative effect on prior years of changes in accounting principles.. - - 5.37 - -
----- ----- ----- ----- -----
Net income (loss) available to common stockholders.................. $ 0.51 $ 4.26 $ (5.42) $ 9.80 $ 5.77
===== ===== ===== ===== =====
------------------------------------------------------------------------------------------------------------------
EX-12.1
3
EXHIBIT 12.1
CNA FINANCIAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1994 1993 1992 1991 1990
(In millions of dollars, except ratios)
---------------------------------------------------------------------------------------------------------------------------------
Income before income tax and cumulative effect of accounting changes... $(134.0) $ 93.5 $(1,374.9) $555.9 $101.0
Add:
Interest expense ..................................................... 70.5 36.3 36.7 38.3 19.9
Interest element of operating lease rental............................ 19.1 18.2 17.6 17.6 16.8
----- ----- ------- ----- -----
Income before income tax and cumulative effect of
accounting changes, as adjusted....................................... $ (44.4) $148.0 $(1,320.6) $611.8 $137.7
===== ===== ======= ===== =====
Fixed charges:
Interest expense ..................................................... $ 70.5 $ 36.3 $ 36.7 $ 38.3 $ 19.9
Interest element of operating lease rental............................ 19.1 18.2 17.6 17.6 16.8
----- ----- ------- ----- -----
Fixed charges ......................................................... $ 89.6 $ 54.5 $ 54.3 $ 55.9 $ 36.7
===== ===== ======= ===== =====
Ratio of earnings to fixed charges (1)................................. (0.5) 2.7 (24.3) 10.9 3.8
---------------------------------------------------------------------------------------------------------------------------------
(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.
EX-12.2
4
EXHIBIT 12.2
CNA FINANCIAL CORPORATION
COMPUTATION OF RATIO OF NET INCOME,
AS ADJUSTED, TO FIXED CHARGES
---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1994 1993 1992 1991 1990
(In millions of dollars, except ratios)
---------------------------------------------------------------------------------------------------------------------------------
Net income........................................................... $ 36.5 $267.5 $(330.5) $612.5 $366.5
Add:
Interest expense, after tax......................................... 45.8 23.6 24.2 25.3 13.1
Interest element of operating lease rental, after tax............... 12.4 11.8 11.7 11.6 11.1
----- ----- ----- ----- -----
Net income, as adjusted ............................................. $ 94.7 $302.9 $(294.6) $649.4 $390.7
===== ===== ===== ===== =====
Fixed charges:
Interest expense, after tax......................................... $ 45.8 $ 23.6 $ 24.2 $ 25.3 $ 13.1
Interest element of operating lease rental, after tax............... 12.4 11.8 11.7 11.6 11.1
----- ----- ----- ----- -----
Fixed charges ....................................................... $ 58.2 $ 35.4 $ 35.9 $ 36.9 $ 24.2
===== ===== ===== ===== =====
Ratio of net income, as adjusted, to fixed charges (1)............... 1.6 8.6 (8.2) 17.6 16.1
---------------------------------------------------------------------------------------------------------------------------------
(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.
31
EX-21.1
5
EXHIBIT 21.1
SUBSIDIARIES OF CNA
STATE OF
COMPANY INCORPORATION OWNED BY
------- ------------- --------
CNA Financial Corporation (CNA) Delaware 84 % Loews
Corporation
Continental Casualty Company (CCC) Illinois 100 % CNA
1897 Corporation Delaware 100 % CNA
Chicago Acquisition Corporation New York 100 % CNA
Cinema Completions International, Inc. Delaware 50 % CNA
CNA Structured Settlements, Inc. Illinois 100 % CNA
CNA Management (International) Limited Jersey Channel Islands 100 % CNA
CNA (Bermuda) Services, Ltd. Bermuda 100 % CNA
Viaticus, Inc. Delaware 100 % CNA
Continental Assurance Company (CAC) Illinois 100 % CCC
1911 Corp. and 3 Subsidiaries Delaware 100 % CCC
Claims Administration Corp. Maryland 100 % CCC
CNA Automation, Inc. Illinois 100 % CCC
Agency Management Services, Inc. and
6 Subsidiaries Delaware 90.6 % CCC
American Casualty Company of Reading,
Pennsylvania (ACCO) Pennsylvania 100 % CCC
National Fire Insurance Company
of Hartford (NFI) Connecticut 100 % CCC
Columbia Casualty Company Illinois 100 % CCC
CNA Casualty of California California 100 % CCC
Transportation Insurance Company Illinois 100 % CCC
Collateral Holding Subsidiaries Illinois 100 % CCC
Transcontinental Technical Services,
Inc. (ServCo) Illinois 100 % CCC
CNA Management Company Limited and
2 Subsidiaries United Kingdom 100 % CCC
CNA Realty Corp. and 1 Subsidiary Delaware 100 % CCC
Larwin Developments, Inc. California 100 % CCC
CNA Services, Incorporated Illinois 100 % CCC
CNA Casualty of Illinois Illinois 100 % CCC
CNA Reinsurance Company Illinois 100 % CCC
Galway Insurance Company California 100 % CCC
Valley Forge Life Insurance Company Pennsylvania 100 % CAC
Valley Forge Insurance Company Pennsylvania 100 % ACCO
Transcontinental Insurance Company New York 100 % NFI
32
EX-23.1
6
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
report dated February 15, 1995, 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, 1994.
Deloitte & Touche LLP
Chicago, Illinois
March 30, 1995
33
EX-28.1
7
EXHIBIT 28.1
PROPERTY/CASUALTY RESERVE RECONCILIATION-
STATUTORY BASIS TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
A reconciliation of property/casualty reserves as shown on Schedule P to
reserves for unpaid claims and claim expenses, as shown in the Annual
Report on Form 10-K follows. Schedule P is from Continental Casualty
Company's 1994 consolidated annual statutory statement provided to state
insurance regulatory authorities. Statutory claim and claim expense
reserves are presented net of ceded reinsurance. Under generally accepted
accounting principles such reserves are recorded "gross" of reinsurance
with corresponding ceded reinsurance recoverables recorded as assets.
----------------------------------------------------------------------------------------------------------
PROPERTY/CASUALTY RESERVE RECONCILIATION
STATUTORY BASIS TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
DECEMBER 31 1994
(In millions of dollars)
----------------------------------------------------------------------------------------------------------
Total claim and claim expenses per Schedule P (net of reinsurance) ....................... $18,418
Non-domestic affiliates .................................................................. 516
Ceded claim and claim expenses ........................................................... 2,705
----------------------------------------------------------------------------------------------------------
Reserve for claim and claim expenses - generally accepted accounting principles $21,639
==========================================================================================================
34
EX-27
8
ARTICLES 7 FDS FOR 10-K
7
0000021175
CNA FINANCIAL CORPORATION
1,000,000
DEC-31-1994
JAN-01-1994
DEC-31-1994
12-MOS
20,828
0
0
755
44
3
26,943
148
3,188
1,026
44,320
25,615
2,691
633
98
914
155
0
150
4,241
44,320
9,474
1,551
(246)
220
8,450
1,378
1,235
(134)
(171)
37
0
0
0
37
.51
.51
18,321
5,711
(71)
1,398
3,629
18,934
(71)
EX-3.2
9
EXHIBIT 3.2
BY-LAWS
OF
CNA FINANCIAL CORPORATION
(As Amended Effective May 4, 1994)
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
-1-
called, 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 ofless 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 ten. 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 doneby 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 Directors present at any meeting at which there is a
quorum shall be the act
-3-
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.
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
-4-
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-10.1
10
10.1
CONTINENTAL CASUALTY COMPANY
"CNA" ANNUAL INCENTIVE BONUS PLAN
PROVISIONS
OBJECTIVES
----------
. The Annual Incentive Bonus Program has three key objectives:
- Increase the focus on key corporate, SBU and department goals.
- Provide accountability for the results expected from key employees.
- Reward those key officers who have contributed to CNA's success.
The plan design has been established with significant flexibility to
achieve these objectives.
. It is CNA's intent to continue to refine the Annual Incentive Bonus
in future years to ensure its effectiveness and be responsive to changing
conditions.
ELIGIBILITY
-----------
. Participation will include all CNA officers. Participation at other levels
in the organization may be considered in future years.
AWARD OPPORTUNITY
-----------------
. The targeted award opportunity varies by level in the organization.
For 1994, these targets are:
1994 1994
Position Target Bonus* Maximum Bonus*
-------- ------------ -------------
Senior Vice President 22.5% 45%
Group Vice President 17.5% 35%
Vice President 12.5% 25%
Assistant Vice President 7.5% 15%
* as a percent of base salary
. The maximum award attainable based upon performance is two times the target.
The minimum award is 0%.
Page 1
GOAL SETTING PROCESS
--------------------
. All participants will have their bonuses determined based on performance
against pre-set goals in three categories:
- "C" Goals: Corporate Goals
- "S" Goals: Shared Goals
- "I" Goals: Individual Goals
The weighting of each category will vary by participant. Each category
has a minimum weight of 20%
. The pre-set goals for each participant have been developed to be quantifiable
or definable to the extent possible. It is expected that the assessment of
results will require significant judgment, especially in the transition years.
. In most cases, each goal will have a targeted level of performance. Where
possible, goals will have minimum and maximum levels of performance stated.
- Many goals will only have a target (no minimum or maximum) to convey the
need for perspective and management judgment in performance assessment.
- Some goals do not provide a specified target, but rather a list of criteria
that will be considered in the evaluation of performance.
"C" GOALS
---------
. "C" goals represent corporate goals, and will reflect profit and premium
volume targets. Target performance will be represented by a single number
for profit and for premium volume. All participants will have a 20% weight
for the "C" goals, except for senior staff, who have a 40% weight.
. Profit will be expressed as net economic value adjusted for the development of
the two prior years, with investment income normalized via assumptions (the
adjustment periods will be fully implemented by 1996).
. The premium volume target will be determined by the CFO, Chief Marketing
Officer and president and approved by the CEO.
. Communications regarding corporate performance relating to the "C" goal will
occur quarterly.
Page 2
"S" GOALS
---------
. "S" goals represent shared goals. In order to be considered an "S" goal, the
exact goal must be shared with at least one other person.
- Within the department/SBU
- Across the entire department/SBU
- In another department/SBU
. The total weighting for all "S" goals may be 20%, 40% or 60%, as determined by
the department head. The "S" goal measurements, targets and results must be
identical for all parties sharing a goal. However, the weightings within the
"S" category can vary by individual.
. There is a greater need to establish shared responsibilities throughout the
officer group, and it is expected that the use of shared goals will expand in
the future.
"I" GOALS
---------
. "I" goals represent individual goals. These are focus or emphasis areas to be
driven by the individual officer, and may include personal development
initiatives. "I" goals may be objective or subjective in nature.
. "I" goals may reflect dependencies or joint efforts with others (similar to
shared goals, except that the measurement, target and result are not
identical).
. The total weighting for "I" goals will be at least 20%.
ADMINISTRATIVE PROCESSES
------------------------
. The assessment of performance against the "S" and "I" goals will be made at
year end by the department head who will seek input or an evaluation from the
appropriate levels of management. The CEO will make the final assessment of
corporate performance.
. The bonus payment will be computed using the end of year base salary for the
performance year.
. All awards will be paid in March when final results are determined.
. CNA reserves the right to reduce or eliminate bonuses uniformly due to
extreme adverse financial conditions. This is expected to occur very
infrequently.
Page 3
ADMINISTRATIVE PROCESSES (Cont'd)
------------------------
. The payments from the Annual Incentive Bonus will not be used in calculating
salary related benefits.
. No bonus will be payable if overall individual performance is not acceptable.
In addition, if no bonus is payable for the "S" and "I" goal categories, the
Corporate or "C" goal bonus will not be paid.
. Review and Approval Process:
- "C" goals and targets: Established, reviewed and approved by the CEO,
president, CFO and Chief Marketing Officer.
- "S" goals and targets: Establishment, review and approval will depend on the
type of goal, target and level of the position. For example:
-- "S" goals within a department, division, SBG or SBU will be reviewed and
approved by the department head, with input from the CEO and president.
-- "S" goals that cross departments, divisions, SBGs or SBUs will be
reviewed and approved by the department head(s), with input from the CEO
and president.
-- "S" goals for department heads will be established by the department
head, and reviewed and approved by the CEO and president.
In all cases, additional input will be provided from the CFO and Human
Resources department head, as appropriate.
- "I" goals and targets: The respective department, division, SBG or SBU Head
will establish, review and approve all "I" goals for their participants. The
department head approves the goals with input from the CEO and president.
The CEO and president will establish, review and approve all "I" goals for
department heads.
- Final approvals for bonus payments:
-- "C" performance: CEO, with input from CFO.
-- "S" and "I" performance: In the case of senior staff, assessment and
approval by the CEO and president; for all other participants, assessment
of results and recommendations by the department head and approval by
the CEO and president.
Page 4
ADMINISTRATIVE PROCESSES (Cont'd)
------------------------
. Payments on termination of employment:
- Voluntary termination: The program is designed for active employees. The
executive must be actively employed at the time the bonus is paid.
- Involuntary termination: No bonus will be paid.
- Retirement: The intent of the program is to pay bonuses to officers who have
completed the performance year, but retire (begin payments under the CNA
Employees' Retirement Plan) prior to the normal March payment date. For
example, an officer who retires on February 1, 1995 after completing the 1994
performance year, would receive the March 1995 bonus payment for the 1994
performance year.
For partially completed performance years, bonus payments will occur as
follows:
-- For retirement in the first quarter, no bonus payable for the current
performance year.
-- For retirement after the first quarter, bonus payments will be at the
discretion of the department head with the approval of the CEO.
Consideration will be given to the length of time the retiree was in the
position in the current performance year and whether there was an
opportunity to materially impact the goal results.
- Disability: Executives who complete a full performance year but are absent
due to illness or injury at the time bonus payments are made will receive
the bonus for the prior performance year. For all other incidents of
extended absence, consideration will be given to the length of time the
officer was in the position in the current performance year and whether
there was an opportunity to materially impact the goal results.
- Death: Bonuses will be paid the same as retirement.
. Transfers:
- If the transfer occurs in the first quarter, the bonus will be based
entirely on performance in the new position.
- If the transfer occurs in the last quarter, the bonus will be based entirely
on performance in the old position.
- If the transfer occurs between April 1 and September 30, the bonus will be
based on the weighted average performance using the length of service in
each position.
Page 5
ADMINISTRATIVE PROCESSES (Cont'd)
------------------------
. New Hire:
- If hired in the first quarter, the bonus will not be pro rated.
- If hired in the fourth quarter, no bonus will be payable for performance in
that year.
- If hired between April 1 and September 30, the bonus payable will be pro
rated based upon completed months of service during the year.
. Promotions:
- Promoted into the bonus plan:
-- If promoted in the first quarter, the bonus will not be pro rated.
-- If promoted after April 1, the bonus for that performance year will be
pro rated based upon months of service.
- Promoted while a bonus participant:
-- If promoted in the first quarter, the bonus for that performance year
will be based entirely on the new position.
-- If promoted in the last quarter:
--- The bonus will be based on the goals from the prior position.
--- The bonus target will be pro rated based on time in each position.
-- If promoted between April 1 and September 30:
--- Bonus target will be the weighted average of the two targets based on
time spent in each position.
--- Performance will be based on the goals for each position, with the
final determination a weighted average based on length of service in
each position.
Page 6
ADMINISTRATIVE PROCESSES (Cont'd)
------------------------
. Demotions:
- Demoted into non-bonus eligible position.
-- If demoted in the first quarter, no bonus will be payable for that
performance year.
-- If demoted after April 1, the bonus payable for that performance year
will be pro rated based on months of service.
- Demoted from one bonus eligible position to another.
-- If demoted in the first quarter, the bonus will be based entirely on the
new position.
-- If demoted in the last quarter:
--- The bonus will be based on goals from the prior position.
--- The bonus target will be pro rated based on time spent in each
position.
-- If demoted between April 1 and September 30:
--- Bonus target will be the weighted average of the two targets based on
time spent in each position.
--- Performance will be based on the goals for each position, with the
final determination a weighted average based on length of service in
each position.
GENERAL INFORMATION
-------------------
CNA, at the sole discretion of the Chairman of the Boards and Chief Executive
Officer of the CNA Insurance Companies may at any time:
. Modify, suspend or terminate this program;
. Waive as to any eligible individual or individuals any term, condition or
requirement of this program which waiver shall not create any right in any
other individual.
Page 7
EX-13.1
11
EXHIBIT 13.1
CNA FINANCIAL CORPORATION
1994 A N N U A L R E P O R T
CNA
PROFILE
------------------------------------------------------------------------
CNA Financial Corporation
is the parent company of the CNA Insurance Companies,
the 12th largest insurance organization in
the United States, as measured by premium volume.
------------------------------------------------------------------------
As a multiple-line insurer, CNA underwrites property and casualty
coverages; life, accident and health insurance; fidelity and surety pro-
ducts; excess and surplus lines; reinsurance; and pension and annuity
business. CNA serves a wide spectrum of insureds, including individuals;
small, medium and large businesses; associations; professionals and
groups. CNA's property/casualty and life/health insurance products are
marketed primarily through independent agents and brokers.
CNA Financial Corporation, with 1994 assets of $44.3 billion and
stockholders' equity of $4.5 billion, was formed in 1967 by Continental
Casualty Company, which was incorporated in 1897, and Continental
Assurance Company, incorporated in 1911. In 1975, Continental Assurance
Company became a wholly owned subsidiary of Continental Casualty
Company. CNA Financial Corporation stock is traded on the New York Stock
Exchange and, as of December 31, 1994, is 84 percent owned by Loews
Corporation.
CNA FINANCIAL CORPORATION
-------------------------
CNA
TABLE OF CONTENTS
----------------------------------------------------------------
1994
2
FINANCIAL HIGHLIGHTS
4
LETTER FROM CNA FINANCIAL CORPORATION
CHAIRMAN EDWARD J. NOHA
6
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
28
FINANCIAL STATEMENTS
72
INDEPENDENT AUDITORS' REPORT
73
COMMON STOCK INFORMATION
74
CORPORATE DIRECTORY
CNA FINANCIAL CORPORATION
-------------------------
FINANCIAL HIGHLIGHTS
-----------------------------------------------------------------------
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------------------------
(In millions of dollars,
except per share data)
Revenues $10,999.5 $11,010.8 $10,793.4 $11,131.4 $9,944.4
-------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax (134.0) 93.4 (1,375.0) 555.9 101.0
Net income (loss) excluding
net realized investment gains/losses
and accounting changes:
Property/Casualty 147.9 (266.6) (928.4) 289.7 324.5
Life 87.0 43.5 52.0 60.4 66.7
Other (47.9) (28.6) (21.4) (22.8) 4.9
-------------------------------------------------------------------------------------------------------------------------
Net operating income (loss) 187.0 (251.7) (897.8) 327.3 396.1
Net realized investment gains (losses) (150.5) 519.2 235.3 285.2 (29.6)
Accounting changes - - 331.9 - -
-------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 36.5 $ 267.5 $ (330.6) $ 612.5 $ 366.5
=========================================================================================================================
EARNINGS PER SHARE
-------------------------------------------------------------------------------------------------------------------------
Net income (loss) excluding net
realized investment gains/losses
and accounting changes $ 2.94 $ (4.14) $ (14.60) $ 5.19 $ 6.25
Net realized investment gains (losses) (2.43) 8.40 3.81 4.61 (0.48)
Accounting changes -- Note B - - 5.37 - -
--------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.51 $ 4.26 $ (5.42) $ 9.80 $ 5.77
--------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
--------------------------------------------------------------------------------------------------------------------------
Assets $44,320.4 $41,912.3 $39,743.9 $39,161.7 $34,712.9
Debt 913.8 915.3 415.0 437.1 439.5
Stockholders' equity 4,545.9 5,381.1 4,789.2 5,108.6 4,490.0
Book value per common share 71.13 84.65 75.07 80.24 70.23
==========================================================================================================================
CNA FINANCIAL CORPORATION
-------------------------
2
----------------------------------------------------------------------
RESULTS OF OPERATIONS
This page of CNA Financial Corporation's annual report has four bar graphs
which illustrate the trend in revenues, assets, stockholders' equity, and
book value per common share from 1984 through 1994.
The table below shows the data points used in those graphs.
CNA FINANCIAL CORPORATION (1984-1994)
($ in billions except per share data)
---------------------------------------------------------------------------------------
| Measurement Period | | |Stockholders'|Book Value Per|
| (Fiscal Year Covered) | Revenues | Assets | Equity | Common Share |
|------------------------------------------------------------------------|--------------|
|
| | | | | |
|FYE 12/31/84...................| $ 3.7 | $12.4 | $1.5 | 26.32 |
|FYE 12/31/85...................| $ 4.7 | $15.4 | $2.1 | 33.24 |
|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 |
| | | | | |
---------------------------------------------------------------------------------------
CNA FINANCIAL CORPORATION
-------------------------
3
A LETTER TO OUR SHAREHOLDERS
-----------------------------------------------------------------------
1994
FROM CNA FINANCIAL CORPORATION
CHAIRMAN EDWARD J. NOHA
CNA Financial Corporation reported reduced earnings in 1994, reflecting
the adverse conditions that prevailed in the insurance industry over the
past 12 months. These included the eighth straight year of inadequate
pricing in commercial property/casualty lines and the second heaviest
catastrophe losses in history.
In 1994, CNA Financial reported net income of $36.5 million, or $0.51
per share, compared with net income of $267.5 million, or $4.26 per
share, in 1993.
Net income excluding net realized investment losses for 1994 was $187.0
million, or $2.94 per share, compared with a net loss of $251.7 million,
or $4.14 per share, in 1993. Net realized investment losses for 1994
were $150.5 million, or $2.43 per share, compared with gains of $519.2
million, or $8.40 per share, in 1993.
Consolidated revenues were $11.0 billion for the years 1994 and 1993.
CNA's profits in 1994 were adversely affected by pretax catastrophe
losses of $283 million and net realized investment losses. The
catastrophe losses primarily related to the Northridge earthquake near
Los Angeles and winter storms. The net realized investment losses
resulted from rising interest rates. The losses occurred as we
repositioned our portfolios to longer maturities, for the most part in
government bonds, to improve future overall investment returns.
In spite of these pressures, CNA continues to rank among the strongest
and most stable insurance organizations in the United States. Management
remains deeply committed to preserving a solid financial base. At year-
end, the surplus of our property/casualty companies was approximately
$3.4 billion, one of the largest in the industry. The surplus of CNA's
life insurance subsidiaries was approximately $1.1 billion.
CNA FINANCIAL CORPORATION
-------------------------
4
-----------------------------------------------------------------------
1994
In addition, CNA avoided undue exposure to higher-risk investments.
CNA's portfolio is among the most conservative in the industry. At
year-end, less than 5.5 percent of total CNA assets, including separate
accounts, were in high-yield bonds, commercial mortgages and investment
real estate. This is far below the industry average.
In the fourth quarter of 1994, CNA signed an agreement to acquire The
Continental Corporation. In early 1995, CNA acquired Alexsis, a major
property/casualty third party administrator. The Continental and Alexsis
acquisitions are described in more detail in the letter from Dennis
Chookaszian.
Last year, CNA also reached an important historical milestone: the 20th
anniversary of the Loews Corporation investment in CNA. Since 1974,
Loews has provided CNA with unwavering financial support and invaluable
investment acumen. This long-term partnership between the two companies
has enabled CNA to grow into one of the nation's pre-eminent insurance
organizations.
In today's rapidly changing insurance marketplace, CNA's emphasis on
conservative financial strategies continues to provide a solid base for
growth and success. In 1994, CNA again demonstrated its ability to live
up to its commitments and to build for the future. On behalf of the board
of directors, I would like to thank you, our shareholders, for your
commitment and support.
Sincerely,
EDWARD J. NOHA
Edward J. Noha
Chairman of the Board
CNA Financial Corporation
CNA FINANCIAL CORPORATION
-------------------------
5
A LETTER TO OUR SHAREHOLDERS
-----------------------------------------------------------------------
1994
FROM CNA INSURANCE COMPANIES CHAIRMAN AND
CHIEF EXECUTIVE OFFICER DENNIS H. CHOOKASZIAN
CNA had an eventful year in 1994, marked by satisfactory performance in
our core businesses and a pending major acquisition that will make CNA
the third largest U.S. property/casualty insurance organization.
In December, CNA and The Continental Corporation signed an agreement
under which CNA will acquire Continental through a cash merger for $1.1
billion or $20 per Continental share. The merger is a very positive step
for both organizations. We will benefit from a stronger market position
in the businesses we have in common, while the unique businesses of CNA
and Continental will broaden the scope of our total operation. In
addition, the combined organization will become more competitive through
a wide range of operating efficiencies and economies of scale.
CNA and Continental are jointly seeking regulatory approvals as quickly
as possible. Until the transaction is completed, the two companies will
continue to operate independently.
In February 1995, CNA acquired Alexsis, a subsidiary of Alexander &
Alexander Services Inc., for approximately $45 million. Alexsis is one
of the three largest property/casualty third party administrators in the
United States. This acquisition will increase CNA's ability to serve
large commercial accounts that fully or partially self-insure. For more
information on the Continental and Alexsis transactions, see pages 13,
14 and 71 of this report.
Market conditions in the insurance industry in 1994 were a repeat of the
past few years. Customers looked for higher quality, improved service
and lower costs. Competition was tougher than ever, and the same intense
pressures held down prices in commercial property/casualty lines.
Nevertheless, CNA performed well. The new Strategic Business Units (SBUs)
made solid
CNA FINANCIAL CORPORATION
-------------------------
6
-----------------------------------------------------------------------
1994
progress in strengthening our businesses and sharpening our focus on
customers. SBUs are responsible for specific segments of CNA's business.
The Business Accounts SBU introduced account service teams, simplified
processing procedures for the small account marketplace and a
three-year, fixed-rate policy for small businesses. These and other
developments support our strategy of reducing operating expenses while
providing high-value products and convenience to agents and customers.
The Custom Accounts SBU launched 10 new Commercial Affiliation Marketing
programs for targeted classes of business in the medium commercial
marketplace. CNA continues to dominate the commercial affiliation
marketplace through its long-term commitment to difficult classes of
business, extensive underwriting experience in those classes, dividend
programs for insureds and superior marketing support for agents and
brokers.
In the large commercial marketplace, the Major Accounts SBU emphasized
cost control solutions that support long-term relationships among CNA,
agents and brokers, and customers. We are further differentiating
ourselves by investing in medical and disability management expertise
that is difficult for competitors to reproduce.
The Personal Accounts SBU increased our marketing flexibility and
operating efficiency with the Universal Security Policy (USP) Portfolio
Program, the next generation of our flagship personal lines package
policy. The new Affluent Market Program increased our USP business among
affluent clients with detailed appraisal packages and other value-added
services. We also expanded the use of agency service teams in our policy
administration center for faster, more responsive service at a lower
cost.
In professional liability, directors and officers liability and other
specialized lines of insurance, CNA continued to build on underwriting
and risk management expertise, a stable market presence and
CNA FINANCIAL CORPORATION
-------------------------
7
A LETTER TO OUR SHAREHOLDERS
-----------------------------------------------------------------------
1994
solid relationships with agents and brokers who target these businesses.
We reorganized all our medical professional liability programs into a
single unit to reduce costs and respond to an increasingly integrated
health care system. We also positioned CNA for growth in the
international reinsurance marketplace by consolidating all reinsurance
operations into a single management group.
CNA formed the Life Operations Department to substantially increase its
presence and profitability in the individual life marketplace. The
department introduced new term and permanent life products as well as
annuities. All new products were very well received in the marketplace,
doubling our rate of monthly applications for new policies by the end of
the year. However, the new business volume has strained our service
capacity, which is being increased with additional staff and accelerated
implementation of new systems. Even with these challenges, sales have
continued to increase as a result of the new products.
In all of the markets served by the Group Benefits Department, the SBUs
have reduced expenses and improved their service capabilities. To meet
the needs of the group medical market, we continued to capitalize on our
access to provider networks through our Private Healthcare Systems joint
venture, and we developed other joint ventures to improve our
competitiveness in a managed care environment. Meanwhile, efforts to
refine and enhance our customer focus in special risks and mass
marketing have resulted in new products and services and record sales in
both of these arenas.
Across all our businesses, CNA continued to emphasize long-term
relationships with independent agents and brokers who market CNA
products and services. In 1994, we marked the 70th anniversary of GAMA,
our life agency advisory council. On the property/casualty side, we
worked closely with our agency council, PACER, on a wide range of
business issues. Collaboration with agents on re-engineering and
automation projects resulted in faster, more efficient service for our
mutual customers.
In addition, CNA streamlined its operations. We realigned many staff
functions in the Home Office
CNA FINANCIAL CORPORATION
-------------------------
8
-----------------------------------------------------------------------
1994
around the SBUs to shorten lines of communication and increase
productivity. Our branch offices formed agency service teams and claims
teams, making it easier for agents and customers to do business with CNA.
Overall, these changes resulted in very positive initial feedback from
several customer satisfaction surveys of agents and brokers. The
combination of re-engineering and professional automation has enabled CNA
to reduce staff substantially over the past two years without sacrificing
service quality. Further reductions are anticipated to achieve the expense
levels we need to remain competitive.
As in the past, CNA played an active role in the legislative and
regulatory arena. Many of our customers, agents, employees and retirees
received our grassroots mailings and participated in important campaigns
to achieve reforms in workers' compensation and personal auto.
At the national level, comprehensive health reform threatened to
integrate the medical coverages of workers' compensation into health
insurance. CNA participated in an industrywide effort to block this
misguided proposal. We were also active in the continuing efforts to
correct the inefficiency and delays of Superfund, the federal program to
clean up abandoned waste sites.
In 1994, CNA remained among the leaders of the insurance industry. We
sharpened our customer focus, increased service quality without raising
costs and reached an acquisition agreement that will improve our
competitiveness. In a challenging business environment, CNA is moving
ahead with sound strategies for continued growth and success.
Sincerely,
DENNIS CHOOKASZIAN
Dennis H. Chookaszian
Chairman and Chief Executive Officer
CNA Insurance Companies
CNA FINANCIAL CORPORATION
-------------------------
9
CNA
FINANCIAL SECTION CONTENTS
-----------------------------------------------------------------------
1994
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
28
CONSOLIDATED BALANCE SHEET
30
STATEMENT OF CONSOLIDATED OPERATIONS
31
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
32
STATEMENT OF CONSOLIDATED CASH FLOWS
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
72
INDEPENDENT AUDITORS' REPORT
73
COMMON STOCK INFORMATION
74
CORPORATE DIRECTORY
CNA FINANCIAL CORPORATION
-------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
-----------------------------------------------------------------------
OVERVIEW
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and related notes found on pages
28 to 71, which contain additional information helpful in evaluating
operating results and financial condition.
Overview
--------
The prolonged soft market in commercial property/casualty lines that
depressed property/casualty earnings last year in much of the insurance
industry did not change significantly in 1994. Significant catastrophe
claims related to the Northridge earthquake and severe winter storms in
the Northeast and declining market values of bond portfolios due to
rising interest rates put additional pressure on surplus of the
industry. Industry catastrophe losses of $14.9 billion have already made
1994 the second worst year on record for catastrophic losses, behind the
record $22.9 billion in 1992. The earthquake losses will approach $10.4
billion, more than four times earlier estimates of $2.5 billion.
On the other hand, the workers' compensation line has improved steadily
since 1992. Legislative reforms have cut costs in some states, residual
market losses have dropped, and the insurance regulators have sharpened
their focus on workers' compensation fraud.
In this difficult business climate, CNA remains among the strongest and
most competitive multiline organizations in the insurance industry and
remains committed to conservative financial strategies as the foundation
for profitable growth.
In 1994, CNA was impacted by all the industry factors mentioned above.
Net income was reduced by substantial catastrophe losses and by realized
investment losses due to rising interest rates. However, results were
satisfactory in our core businesses. Workers' compensation profitability
continued to improve. CNA's new Strategic Business Units (SBUs)
sharpened customer focus, increased efficiencies and strengthened
management accountability in all of its businesses. SBUs are operating
groups dedicated to specific segments of CNA business in commercial,
personal, life/health and specialty insurance.
Life operations experienced significant growth as a result of new
products, with life profitability increasing primarily due to increased
investment income and improved mortality experience. Other significant
events included continued progress toward a global settlement regarding
the Fibreboard asbestos claim and significant merger and acquisition
activity resulting in agreements to acquire The Continental Corporation
and Alexsis.
Fibreboard
As described in Note J in the Notes to Consolidated Financial
Statements, Continental Casualty Company (Casualty) has greatly reduced
a major source of financial uncertainty by reaching a Global Settlement
executed in December 1993 to resolve all future asbestos-related bodily
injury
CNA FINANCIAL CORPORATION
-------------------------
12
-----------------------------------------------------------------------
OVERVIEW -- (cont.)
claims involving Fibreboard Corporation (Fibreboard), a former
asbestos manufacturer.
On July 29, 1994, the United States District Court for the Eastern
District of Texas preliminarily approved the Global Settlement
agreement. A final fairness hearing to determine whether to finally
approve the Global Settlement agreement commenced on December 12, 1994.
During the hearing various parties presented evidence in opposition to
the Global Settlement.
Also pending in the United States District Court for the Eastern District
of Texas is litigation over the Trilateral Agreement. Trial on the issues
raised by this agreement occurred on February 13, 1995, with evidence
submitted to the Court in opposition to final court approval of the
Trilateral Agreement.
CNA and the other parties to the Global Settlement agreement and the
Trilateral Agreement undertook a comprehensive court approved notice
program to provide potential claimants information about their rights
and possible benefits under the Global Settlement agreement and
Trilateral Agreement. Final arguments concerning the Global Settlement
agreement occurred on February 27, 1995; the court's rulings are
expected in the spring of 1995. No date has been set for final legal
arguments for the Trilateral Agreement.
The Continental Corporation
In the fourth quarter of 1994, CNA reached an agreement to purchase the
outstanding shares of common stock of The Continental Corporation (CIC)
for approximately $1.1 billion, or $20 per CIC share. The acquisition
will create the third-largest U.S. property/casualty insurance group and
make CNA the seventh-largest U.S. insurance organization. The
acquisition will be accounted for as a purchase and, accordingly, CIC's
results of operations will be included in CNA's consolidated results of
operations for periods subsequent to the date of closing, which is
expected to be in the second quarter of 1995. CNA and CIC are jointly
seeking prompt regulatory approvals. The transaction closing is subject
to the approvals of the Continental shareholders and state insurance
regulators. The transaction is also subject to review by the Federal
Trade Commission and the Department of Justice (which review has been
completed). Until the required approvals are received and the
acquisition is complete, the Companies will continue to operate
independently.
As part of the CIC transaction, on December 6, 1994, CNA invested $275
million of cash in exchange for sinking fund preferred stock of CIC. At
December 31, 1994, this investment is shown in CNA's financial
statements as redeemable preferred stock.
CNA has reached an agreement in principle with a syndicate of banks to
provide initial financing through a revolving loan facility. The loan
will have a maturity of five years without any prepayment restrictions.
The loan will allow CNA to consummate the merger and facilitate a smooth
CNA FINANCIAL CORPORATION
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13
MANAGEMENT'S DISCUSSION AND ANALYSIS
-----------------------------------------------------------------------
OVERVIEW -- (cont.)
transition expeditiously, while providing the needed flexibility to
determine the ultimate capital structure at a time when it is
advantageous in the capital markets to raise debt or potentially a
combination of debt and equity.
CIC, with approximately 8,000 employees, is headquartered in New York,
and is the 11th largest U.S. property/casualty insurance company based
on 1993 premium volume. The revenues and net loss of CIC and
subsidiaries for the year ended December 31, 1994 were $5.1 billion and
$602.9 million, respectively. Total assets were $16.0 billion at
December 31, 1994.
CIC's business strengths are in its package policies for commercial and
personal lines and its specialty lines business.
There will be market efficiencies and economies of scale in many of the
product lines both companies write. CNA will be integrating the best
features of both companies. CIC has established expertise and market
position in the higher margin specialty lines that complement CNA's
specialty lines. In personal lines, the combined businesses will create
the critical mass needed to be a very low cost producer.
CIC's commercial distribution system will enhance CNA's network of
strong agency relationships.
In 1995, CNA's priority will be integrating CIC, while continuing to
keep CNA's current businesses running smoothly. Transition planning
teams will take up this challenge. The transition organization is
similar to what CIC and CNA currently have in place; a structure of
business units with a high degree of independence, but share centralized
services where that is more efficient.
Alexsis
CNA's Continental Casualty subsidiary has acquired all of the stock of
Alexsis, a wholly owned subsidiary of Alexander & Alexander Services,
Inc. (A&A) for approximately $45 million in cash according to a
definitive agreement signed January 16, 1995.
Alexsis is one of the country's three largest property/casualty third-
party administrators (TPAs) with 1994 revenues of more than $100
million and 1,300 employees in 60 offices. Alexsis customers are large
organizations that fully or partly self-insure their risks and
separately purchase services, such as claims administration, from TPAs.
The acquisition closed February 28, 1995.
CNA FINANCIAL CORPORATION
-------------------------
14
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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 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
OPERATING SUMMARY (excluding realized investment
gains/losses and accounting changes):
Revenues:
Premiums $ 9,474.4 $ 8,688.8 $ 8,768.0
Net investment income 1,551.2 1,314.3 1,508.7
Other 220.1 191.6 149.9
-------------------------------------------------------------------------------------------------------------------
11,245.7 10,194.7 10,426.6
Benefits and expenses 11,144.4 10,904.3 12,156.3
-------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax 101.3 (709.6) (1,729.7)
Income tax benefit 85.7 457.9 831.9
-------------------------------------------------------------------------------------------------------------------
Net operating income (loss) (excluding realized investment gains/losses) $ 187.0 $ (251.7) $ (897.8)
===================================================================================================================
CONSOLIDATED OPERATIONS
-------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
SUPPLEMENTAL FINANCIAL DATA:
Net operating income (loss) by group:
Property/Casualty $ 147.9 $ (266.6) $ (928.4)
Life 87.0 43.5 52.0
Other (47.9) (28.6) (21.4)
-------------------------------------------------------------------------------------------------------------------
187.0 (251.7) (897.8)
-------------------------------------------------------------------------------------------------------------------
Net realized investment gains (losses) by group:
Property/Casualty (104.6) 435.8 175.9
Life (45.6) 72.6 53.2
Other (0.3) 10.8 6.2
-------------------------------------------------------------------------------------------------------------------
(150.5) 519.2 235.3
-------------------------------------------------------------------------------------------------------------------
Accounting changes by group:
Property/Casualty - - 307.9
Life - - 24.0
-------------------------------------------------------------------------------------------------------------------
- - 331.9
-------------------------------------------------------------------------------------------------------------------
Net income (loss) by group:
Property/Casualty 43.3 169.2 (444.6)
Life 41.4 116.1 129.2
Other (48.2) (17.8) (15.2)
-------------------------------------------------------------------------------------------------------------------
$ 36.5 $ 267.5 $ (330.6)
===================================================================================================================
CNA FINANCIAL CORPORATION
-------------------------
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
-----------------------------------------------------------------------
CONSOLIDATED RESULTS
Consolidated Results
Revenues excluding realized losses were $11.246 billion, up 10.3% from
1993 and up 7.9% from 1992. For 1994, revenues reflect increases of $786
million (9.0%) in earned premiums, $237 million (18.0%) in net
investment income and $29 million (14.9%) in other income.
For 1994, CNA reported net operating income (which excludes net realized
investment gains/losses) of $187.0 million, or $2.94 per share, compared
to a loss of $251.7 million, or $4.14 per share, for 1993 and a net
operating loss of $897.8 million, or $14.60 per share, for 1992.
In 1993 and 1992, results were adversely affected by substantial
additions to reserves for asbestos-related bodily injury claims. The
1993 operating loss reflects a third quarter $500 million addition to
Casualty's claim reserves, which resulted in a $325 million charge
against after-tax earnings, or $5.26 per share, against CNA's net
income. In 1992, Casualty also increased its claim reserves with respect
to asbestos-related bodily injury cases by $1.5 billion in the fourth
quarter, resulting in an after-tax charge of $990 million, or $16.02 per
share. These reserving actions were taken in recognition of Casualty's
litigation with Fibreboard as discussed previously.
Realized investment losses, net of tax, amounted to $150.5 million, or a
loss of $2.43 per share in 1994, compared to net realized investment
gains of $519.2 million, or $8.40 per share in 1993 and $235.3 million,
or $3.81 per share, in 1992.
CNA's total income tax benefit for 1994 amounted to $170.5 million
compared to $174.1 million and $712.5 million for the same periods in
1993 and 1992, respectively.
CNA's income tax benefit on net operating income (which excludes net
realized investment gains/losses) amounted to $85.7 million for 1994,
compared to $457.9 million for 1993, and $831.9 million for 1992. The
income tax benefit on realized investment losses totaled $84.8 million
for 1994, compared with an income tax expense of $283.8 million and
$119.4 million for 1993 and 1992, respectively.
Net income for 1994 was $36.5 million, or $0.51 per share, compared with
net income of $267.5 million, or $4.26 per share, for 1993 and a net
loss of $330.6 million, or $5.42 per share in 1992. Included in 1992
net income were accounting changes related to the discounting of certain
workers' compensation and disability claims, as well as the adoption of
Statements of Financial Accounting Standards on Postretirement Benefits
(SFAS 106) and Accounting for Income Taxes (SFAS 109). The cumulative
effect of adopting these accounting changes was to decrease the 1992 net
loss by $331.9 million, or $5.37 per share.
CNA FINANCIAL CORPORATION
-------------------------
16
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PROPERTY/CASUALTY OPERATIONS
Property/Casualty Operations
PROPERTY/CASUALTY GROUP
-------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
OPERATING SUMMARY (excluding realized investment
gains/losses and accounting changes):
Revenues:
Premiums $6,838.5 $6,275.0 $6,353.6
Net investment income 1,240.4 1,059.8 1,224.1
Other 170.4 151.8 112.1
-------------------------------------------------------------------------------------------------------------------------------
8,249.3 7,486.6 7,689.8
Benefits and expenses 8,210.1 8,218.6 9,465.3
-------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) before income tax 39.2 (732.0) (1,775.5)
Income tax benefit 108.7 465.4 847.1
-------------------------------------------------------------------------------------------------------------------------------
Net operating income (loss) (excluding realized investment gains/losses
and accounting changes) $ 147.9 $ (266.6) $ (928.4)
===============================================================================================================================
Property/casualty profitability, as measured by pretax operating income
before realized losses, improved significantly in 1994 despite increased
catastrophe losses largely associated with the Northridge earthquake and
continued strengthening of environmental reserves. Contributing to the
improvement in underwriting results were a significant decline in
asbestos-related (Fibreboard) reserve development and favorable loss
trends in workers' compensation resulting in both favorable prior year
reserve development and improvement in current accident year loss
ratios. Investment income also increased significantly due to efforts
taken during the year to lengthen the bond portfolio's duration and the
overall rise in market interest rates.
The property/casualty group writes primarily commercial lines coverages.
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 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
adjustments to dividends based on loss experience. Experience-rated
contracts reduce but do not eliminate risk to the insurer. Approximately
38% of the property/casualty insurance is written on an experience-rated
basis.
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.
CNA FINANCIAL CORPORATION
-------------------------
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
-----------------------------------------------------------------------
PROPERTY/CASUALTY OPERATIONS (cont.)
Commercial business includes such lines as workers' compensation,
general liability, professional and specialty, multiple peril, and
accident and health coverages. 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. CNA also assumes commercial
risks from other insurers. The major components of CNA's commercial
business are workers' compensation, general liability and professional
and specialty coverages, which accounted for 26%, 18% and 15%,
respectively, of 1994 premiums earned, including premiums for
involuntary risks.
The property/casualty group also markets personal lines of insurance,
primarily automobile and homeowners coverages sold to individuals under
monoline and package policies.
Property/casualty revenues, excluding net realized investment losses
were $8.249 billion, up 10.2% from 1993 and up 7.3% from 1992.
Property/casualty earned premiums were $6.839 billion, up 9.0% from the
$6.275 billion earned in 1993 and up 7.6% from 1992. The 1994 earned
premium increase was $563.5 million and was principally attributable to
increases in medium commercial accounts ($211 million), group
accident/health ($132 million), professional liability ($138 million),
and international reinsurance ($65 million). The growth in professional
liability is due to a combination of new business and rate increases in
selected programs. The increase in premium for the other lines of
business mentioned above is primarily due to growth in customers.
Property/casualty investment income for 1994 was up 17.0% from the
$1.060 billion in 1993 and up 1.3% from 1992. Investment income
increased primarily due to the general increase in interest rates and a
shift on the part of CNA to longer-term and higher yielding investments,
which in turn resulted in a decrease in short-term investments
(excluding investments relating to loaned securities) from $5.1 billion
at December 31, 1993 to $2.3 billion at December 31, 1994. This
repositioning was undertaken to improve future overall investment
returns.
Casualty sold approximately $25.0 billion of fixed income and equity
securities in 1994, realizing pretax net losses of $167.9 million. Of
the securities sold, approximately $15 billion, $7 billion and $3
billion were from the U.S. treasury, government mortgage-backed and
tax-exempt municipal bond portfolios, respectively. Net operating income
excluding net realized investment gains/losses of CNA's
property/casualty insurance subsidiaries was $147.9 million for 1994,
compared to a net loss of $266.6 million in 1993 and $928.4 million for
1992. Net realized investment losses for 1994 were $104.6 million,
compared to net realized gains of $435.8 million and $175.9 million for
1993 and 1992, respectively.
Pretax operating income excluding net realized investment gains/losses
for the property/casualty insurance subsidiaries was $39.2 million in
1994, compared to an operating loss of $732.0 million and $1,775.5
million for 1993 and 1992, respectively. The underwriting loss for 1994
was $1,201.2 million, compared to $1,791.8 million and $2,999.6 million
in 1993 and 1992, respectively. The GAAP combined ratio was 115.0 for
1994, compared with 127.3 and 144.8 for 1993 and 1992, respectively. As
discussed in the previous section, the primary reasons for the 1993 and
1992 poor operating results were the reserve additions of $500 million
related to Fibreboard in the third
CNA FINANCIAL CORPORATION
-------------------------
18
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PROPERTY/CASUALTY OPERATIONS (cont.)
quarter of 1993 and $1.5 billion in the fourth quarter of 1992. Such
loss provisions increased the GAAP combined ratio by 8.0% and 23.6% in
1993 and 1992, respectively.
Catastrophe losses for 1994 on a pretax basis were approximately $283
million, compared with $74 million in 1993 and $270 million in 1992.
CNA's 1994 catastrophe losses related primarily to the Northridge
earthquake near Los Angeles and severe winter storms in the Northeast.
Property/casualty pretax results include income for involuntary risks of
$17.8 million in 1994. The results are due to the overall improvement in
the workers' compensation market over the last two years and reflect
releases of claim reserves related to prior years, as noted below.
Involuntary risk charges were $80.8 million and $257.3 million in 1993
and 1992, respectively. Involuntary risks include mandatory
participation in residual markets, statutory assessments for
insolvencies of other insurers and other involuntary charges.
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
adjustment is apparent. The property/casualty underwriting losses
include net favorable reserve development of $71 million for the year
1994.
Results for 1994 include adverse development for asbestos and
environmental pollution claims which were offset by favorable
development in other lines. Favorable trends include positive severity
experience in professional liability lines and improvement in voluntary
and involuntary workers' compensation experience, resulting in reserve
decreases of $188 million and $100 million, respectively.
Reserve strengthening ("unfavorable development") related to prior
years, net of reinsurance recoverable, amounted to $590 million and
$1,617 million for the years 1993 and 1992, respectively. Reserve
development includes strengthening of $37 million, $601 million and
$1,689 million for the years 1994, 1993 and 1992, respectively, for
asbestos claims primarily representing reserve additions related to the
Fibreboard litigation, as discussed previously.
Adverse reserve development for environmental pollution claims and claim
expenses totaled $180 million, $446 million and $48 million for the
years 1994, 1993 and 1992, respectively. The 1993 development includes
$340 million of reserves for unreported environmental claims that was
previously recorded, but not explicitly allocated, to environmental
claims.
As of December 31, 1994 and 1993, CNA carried approximately $427 million
and $340 million, respectively, of claim and claim expense reserves for
unreported environmental pollution claims in addition to the $79 million
and $94 million, respectively, of reserves recorded for reported claims.
CNA has not attributed any reinsurance to reserves for unreported
claims. The reserves for reported claims cited above are net of
reinsurance recoverable of $3 million and $5 million at December 31,
1994 and 1993, respectively. Refer to Notes J and K of the Consolidated
Financial Statements for further discussion of asbestos and
environmental pollution exposures.
While it is too early to estimate the magnitude of CNA's losses from the
January, 1995 earthquake in Kobe, Japan, the ultimate amounts are not
expected to be significant.
CNA FINANCIAL CORPORATION
-------------------------
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
-----------------------------------------------------------------------
LIFE OPERATIONS
Life Operations
LIFE GROUP
-----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
OPERATING SUMMARY (excluding realized investment
gains/losses and accounting changes):
Revenues:
Premiums $2,678.2 $2,442.2 $2,437.7
Net investment income 310.6 259.7 283.5
Other 49.6 37.3 36.1
-----------------------------------------------------------------------------------------------------------------------------
3,038.4 2,739.2 2,757.3
Benefits and expenses 2,904.0 2,672.8 2,678.7
-----------------------------------------------------------------------------------------------------------------------------
Income before income tax 134.4 66.4 78.6
Income tax expense 47.4 22.9 26.6
-----------------------------------------------------------------------------------------------------------------------------
Net operating income (excluding realized investment gains/losses
and accounting changes) $ 87.0 $ 43.5 $ 52.0
=============================================================================================================================
CNA sells a variety of individual and group insurance products. The
individual and group insurance products currently being marketed consist
primarily of term, universal life, participating policies and individual
annuity products. Group insurance products include life, accident and
health consisting primarily of major medical and hospitalization, and
pension products.
CNA has formed the Life Operations Department to increase substantially
its presence and profitability in the individual life marketplace. The
department introduced new term and permanent life products, as well as
annuities in 1994. All new products were very well received in the
marketplace, with monthly applications for new policies doubling by the
end of the year. Sales have continued to increase as a result of the new
products. Profits increased primarily due to increased investment income
and improved mortality.
CNA is also benefiting from favorable trends in the life/health
insurance industry. Solid profits for the industry reflect lower
crediting rates on interest-sensitive products, expense reductions, and
moderation in health care costs.
Life insurance revenues excluding realized net investment gains were up
10.9% from 1993 and up 10.2% from 1992. Life insurance and annuity
premiums for 1994 were up 9.7% from 1993 and up 9.9% from 1992. The
premium growth in 1994 was $236 million and was principally attributable
to increases in new business in group operations ($140 million) and pension
operations ($80 million). Life investment income increased by approximately
20% due to the same reasons described for property/casualty operations. A
move on the part of CNA to longer-term and higher yielding investments
resulted in a decrease in the short-term investments (excluding investments
relating to loaned securities) for the life group from $1.2 billion at
December 31, 1993 to $260.7 million at December 31, 1994.
CNA's life insurance subsidiaries' net operating income excluding net
realized investment gains/losses was $87.0 million for 1994, compared
to $43.5 million and $52.0 million for 1993 and 1992, respectively.
Net realized investment losses for 1994 were $45.6 million, compared to
net realized gains of $72.6 million for 1993 and $53.2 million for 1992.
CNA FINANCIAL CORPORATION
-------------------------
20
-----------------------------------------------------------------------
FINANCIAL CONDITION
Financial Condition
-------------------
CNA's property/casualty insurance subsidiaries' statutory surplus grew
from $3.1 billion in 1989 to $3.9 billion in 1991. In 1992,
property/casualty surplus declined to $3.1 billion primarily due to $1.5
billion in adverse asbestos reserve development and offset partially by
the accounting changes described in Note B in the Notes to the
Consolidated Financial Statements. In 1993, property/casualty surplus
rose to approximately $3.6 billion despite another $500 million increase
in asbestos reserves relating to Fibreboard. In 1994, surplus declined
to $3.4 billion. The decline in surplus was primarily attributable to
realized losses. Included in the changes in the property/casualty
surplus are capital contributions from CNA to Casualty of $475 million
in 1993, $120 million in 1990 and $200 million in 1989. Dividends of
$175 million, $150 million, $100 million, $130 million and $100 million
were paid to CNA by Casualty in 1994, 1993, 1992, 1991 and 1989,
respectively.
Statutory surplus of CNA's life insurance subsidiaries grew from $786
million at December 31, 1989 to more than $1 billion at December 31,
1994. Life statutory surplus includes capital contributions from
Casualty to Continental Assurance Company of $100 million and $130
million in 1990 and 1989, respectively.
Assets totaled $44.3 billion at the end of 1994, an increase of 5.7%
over 1993 and 11.5% over 1992. CNA's investment portfolio increased by
$1.6 billion, or 6.2%, over the 1993 level of $26.9 billion. These
increases were primarily the result of increased securities lending
activity of $1.9 billion where CNA sells securities to brokers while
agreeing to repurchase them at a future date.
CNA's consolidated stockholders' equity was $4.5 billion at December 31,
1994, compared to $5.4 billion and $4.8 billion at December 31, 1993 and
1992, respectively. The volatility in stockholders' equity the last two
years has primarily been the result of recognizing the effects of
unrealized appreciation/depreciation on debt securities.
FINANCIAL CONDITION
----------------------------------------------------------------------------------------------------------------------------------
STATUTORY SURPLUS CONSOLIDATED
----------------- -------------------------------------
PROPERTY/ STOCKHOLDERS' BOOK VALUE
December 31 CASUALTY LIFE ASSETS EQUITY PER SHARE
----------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars, except per share data)
1994 $3,367 $1,055 $44,320 $4,546 $71.13
1993 3,598 1,022 41,912 5,381 84.65
1992 3,136 1,003 39,744 4,789 75.07
1991 3,928 968 39,162 5,109 80.24
1990 3,147 849 34,713 4,490 70.23
1989 3,118 786 30,883 4,154 64.74
---------------------------------------------------------------------------------------------------------------------------------
CNA FINANCIAL CORPORATION
-------------------------
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
-----------------------------------------------------------------------
INVESTMENTS
INVESTMENTS:
The following table summarizes CNA's general account investments with
debt securities shown at amortized cost for each of the last five years.
DISTRIBUTION OF INVESTMENTS --
GENERAL ACCOUNT
-----------------------------------------------------------------------------------------------------------------------------------
December 31 1994 % 1993 % 1992 % 1991 % 1990 %
-----------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
Investments:
Fixed maturities (at amortized cost):
Bonds:
Tax exempt $ 3,717 13 $ 4,725 19 $ 9,502 42 $ 8,998 41 $ 7,985 44
Taxable 17,483 63 11,933 48 7,286 32 9,674 44 6,885 38
Redeemable preferred stocks 423 2 445 2 568 3 103 1 157 1
Equity securities:
Common stocks 755 3 508 2 348 2 230 1 440 2
Non-redeemable preferred stocks - - - - 9 - 11 - 9 -
Mortgage loans and real estate 47 - 62 - 89 - 122 1 145 1
Policy loans 176 1 174 1 179 1 181 1 185 1
Other invested assets 101 - 68 - 53 - 56 - 24 -
Short-term investments 5,036 18 6,944 28 4,444 20 2,511 11 2,405 13
-----------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS $27,738 100% $24,859 100% $22,478* 100% $21,886* 100% $18,235* 100%
===================================================================================================================================
INVESTMENTS AT MARKET VALUE $26,943* $25,363* $23,324 $22,816 $18,466
===================================================================================================================================
*As reported in the Consolidated Balance Sheet.
CNA's general account investment portfolio is managed to maximize
after-tax investment return while minimizing credit risks with
investments concentrated in high quality securities to support its
insurance underwriting operations.
CNA has the capacity to hold its fixed income 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, prepayments, tax and credit considerations, or
other similar factors. Accordingly, the fixed income securities are
classified as available-for-sale.
The general account portfolio consists primarily of high quality
marketable debt securities, 95% of which are rated as investment grade.
At December
CNA FINANCIAL CORPORATION
-------------------------
22
-----------------------------------------------------------------------
INVESTMENTS (cont.)
31, 1994, tax-exempt securities and short-term investments comprised
approximately 13% and 18%, respectively, of the general account's total
investment portfolio compared to 19% and 28%, respectively, at December
31, 1993. At December 31, 1994 and 1993, 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 1994 1993
-------------------------------------------------------------------------
(In millions of dollars)
Security repurchase collateral $ 2,478.8 $ 623.0
Escrow--Note A 1,009.9 986.8
Other 1,547.4 5,334.2
-------------------------------------------------------------------------
Total short-term investments $ 5,036.1 $ 6,944.0
=========================================================================
CNA holds a small amount of derivative financial instruments for
purposes of enhancing income and total return. The derivative securities
are marked-to-market and reported as realized investment gains and
losses. CNA's investment in, and risk in relation to, derivative
securities is not significant. See Note F for further information.
As of December 31, 1994, in accordance with SFAS 115, CNA's general
account investments in bonds and redeemable preferred stocks were
carried at a fair value of $20.8 billion, compared with $17.6 billion at
December 31, 1993. At December 31, 1994, net unrealized losses on fixed
income securities amounted to approximately $795 million. This compares
with $504 million and $846 million of net unrealized gains at December
31, 1993 and 1992, respectively. The gross unrealized gains and losses
for the fixed maturity securities portfolio at December 31, 1994, were
$194 million and $989 million, respectively, compared to $564 million
and $60 million, respectively, at December 31, 1993 and $931 million and
$85 million, respectively, at December 31, 1992.
Net unrealized losses on general account bonds at December 31, 1994
include net unrealized losses on high yield securities of $30 million,
compared with net unrealized gains of $15 million at December 31, 1993
and $44 million at December 31, 1992. 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. Carrying and fair values of high
yield securities in the general account were $1.0 billion at December
31,1994, compared to $727 million at December 31, 1993.
At December 31, 1994, total Separate Account cash and investments
amounted to $6.1 billion with taxable debt securities representing
approximately 88% of the Separate Accounts portfolio. Approximately 88%
of Separate Account investments are used to fund guaranteed investment
contracts (GIC's) for which Continental Assurance Company guarantees
principal and a specified return to the contractholders. Securities
included in the GIC portfolio are matched with the corresponding
liability in the GIC contract. At December 31, 1994, all fixed income
securities in the GIC portfolio were carried at fair value in accordance
with SFAS 115 and amounted to $4.6 billion. At December 31, 1994, net
unrealized losses on fixed income securities amounted to
CNA FINANCIAL CORPORATION
-------------------------
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
-----------------------------------------------------------------------
INVESTMENTS (cont.)
approximately $195 million. This compares to $148 million in net unrealized
gains at December 31, 1993 and $158 million at December 31, 1992. The gross
unrealized gains and losses for the fixed income securities portfolio at
December 31, 1994, were $34 million and $229 million, respectively,
compared to $163 million and $15 million, respectively, at December 31,
1993 and $184 million and $26 million, respectively at December 31, 1992.
At December 31, 1994, high yield securities in the GIC portfolio were
carried at fair value and amounted to $1.102 billion, compared with
$1.068 billion at December 31, 1993. Net unrealized losses on high yield
securities held in such Separate Accounts were $108 million at December
31, 1994, compared with net unrealized gains of $56 million at December
31, 1993 and of $28 million at December 31, 1992.
High yield 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, 1994, CNA's concentration in high yield bonds including
Separate Accounts was approximately 4.8% of total assets.
Included in CNA's fixed income securities at December 31, 1994 (general
and GIC portfolios) are $4.6 billion of asset-backed securities,
consisting of approximately 34% in U.S. government agency issued
pass-through certificates, 50% in collateralized mortgage obligations
(CMO's), and 16% in corporate asset-backed obligations. The majority of
CMO's 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
prepayment 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, 1994, the amortized cost of
asset-backed securities was in excess of the fair value by approximately
$181 million compared with unrealized gains of $87 million for the
comparable period a year ago.
Over the last few years, much concern has been raised regarding the
quality of insurance company invested assets. At December 31, 1994, 64%
of the general account's debt securities portfolio was invested in U.S.
government and affiliated securities, 18% in other AAA rated securities,
and 11% in AA and A rated securities. CNA's GIC fixed income portfolio
is comprised of 29% U.S. government and affiliated securities, 20% other
AAA rated securities, and 18% in AA and A rated securities. These
ratings are primarily from Standard & Poor's (95% of the general account
portfolio and 94% of the GIC portfolio). In addition, CNA's investment
in mortgage loans and real estate are substantially below the industry
average.
CNA FINANCIAL CORPORATION
-------------------------
24
-----------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes the General Account's unrealized net gains
and losses on fixed income and equity securities for the last five years.
UNREALIZED APPRECIATION (DEPRECIATION)
FIXED INCOME AND EQUITY SECURITIES--GENERAL ACCOUNT
----------------------------------------------------------------------------------------------------
December 31 1994 1993 1992 1991 1990
----------------------------------------------------------------------------------------------------
(In millions of dollars)
Bonds $(801) $501 $842 $918 $246
Redeemable preferred stocks 6 3 4 13 (15)
Equity securities 18 76 46 33 23
----------------------------------------------------------------------------------------------------
Liquidity and Capital Resources:
--------------------------------
The liquidity requirements of CNA 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.
For the year ended December 31, 1994, CNA's operating activities
generated net positive cash flows of approximately $1.0 billion,
compared with $1.3 billion in 1993 and $1.0 billion in 1992. The
decrease in 1994 cash flow, as compared with 1993, is due primarily to
Fibreboard claim payments, catastrophe claim payments, and a decline in
Federal income tax recoveries. CNA believes that future liquidity needs
will be met primarily by cash generated from operations, other than for
financing needs related to the CIC acquisition.
Net cash flows from operations are 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.
CNA FINANCIAL CORPORATION
-------------------------
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
-----------------------------------------------------------------------
ACCOUNTING STANDARDS
Accounting Standards:
---------------------
Standards adopted during 1994:
Accounting for Post-employment Benefits
In November 1992, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 112, "Employers'
Accounting for Post-employment Benefits." This Statement established
accounting standards for employers who provide benefits to former or
inactive employees after employment but before retirement (post-
employment benefits). Post-employment benefits include salary
continuation, supplemental unemployment benefits, severance benefits,
disability-related benefits, job training and counseling, and
continuation of benefits such as health care benefits and life insurance
coverage. This Statement is effective beginning in 1994. CNA has
historically followed the requirements of SFAS 112.
Disclosures about Derivative Financial Instruments and
Fair Value of Financial Instruments
In October 1994, the FASB issued SFAS 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments." This
Statement requires disclosures about derivative financial instruments,
including--futures, forwards, swaps, option contracts, or other
financial instruments with similar characteristics. This Statement is
effective for financial statements issued for fiscal years ending after
December 15, 1994. See Note F in the Notes to the Consolidated Financial
Statements.
Disclosures of Certain Matters in the
Financial Statements of Insurance Enterprises
In December 1994, the Accounting Standards Division of the American
Institute of Certified Public Accountants (AICPA) issued Statement of
Position (SOP) 94-5, "Disclosures of Certain Matters in the Financial
Statements of Insurance Enterprises." This SOP requires insurance
enterprises to disclose in their GAAP financial statements permitted
statutory accounting practices, including transactions which prescribed
statutory accounting practices do not address. Disclosures are also
required for information about liability for unpaid claims and claim
adjustment expenses. This Statement is effective for financial
statements issued for fiscal years ending after December 15, 1994. For
more information see Notes E and K in the Notes to the Consolidated
Financial Statements.
CNA FINANCIAL CORPORATION
-------------------------
26
-----------------------------------------------------------------------
ACCOUNTING STANDARDS (cont.)
Standards to be adopted in the future:
Disclosures of Certain Significant Risks and Uncertainties
In December 1994, the Accounting Standards Division of the AICPA issued
SOP 94-6, "Disclosure of Certain Significant Risks and Uncertainties."
This SOP requires reporting entities to include in their financial
statements disclosures about the nature of their operations and the use
of estimates in the preparation of financial statements. Additional
disclosures are required for certain significant estimates utilized in
the financial statements and current vulnerability due to certain
concentrations if specific criteria are met. This Statement is effective
for financial statements issued for fiscal years ending after December
15, 1995. The adoption of this Statement is not expected to have a
significant impact on CNA.
Accounting by Creditors for Impairment of a Loan
In May 1993, the FASB issued SFAS 114, "Accounting by Creditors for
Impairment of a Loan." This Statement addresses the accounting by
creditors for impairment of certain loans. It also requires that
applicable loans be treated as impaired when it is probable that a
creditor will be unable to collect all amounts (both principal and
interest) contractually due. This Statement applies to financial
statements for fiscal years beginning after December 15, 1994. In
October 1994, the FASB issued SFAS 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures" which amends
SFAS 114 to allow a creditor to use existing methods for recognizing
interest income on an impaired loan. It also amends the disclosure
requirements to require information about the recorded investment in
certain impaired loans and about how a creditor recognizes interest
income related to those impaired loans. The adoption of these Statements
is not expected to have a significant impact on CNA.
CNA FINANCIAL CORPORATION
-------------------------
27
CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
ASSETS
----------------------------------------------------------------------------------------------------------------------------
December 31 1994 1993
----------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
Investments--Note C:
Fixed maturities available-for-sale (cost: $21,623.1 and $17,103.2) $20,827.7 $17,607.6
Equity securities available-for-sale (cost: $736.3 and $432.7) 754.8 508.2
Mortgage loans and real estate (less accumulated depreciation: $3.4 and $3.5) 46.9 61.6
Policy loans 176.3 174.0
Other invested assets 101.1 68.0
Short-term investments--Note A 5,036.1 6,944.0
----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 26,942.9 25,363.4
----------------------------------------------------------------------------------------------------------------------------
Cash 147.6 129.6
Insurance receivables:
Reinsurance receivables--Notes A and B 3,187.7 2,951.7
Other insurance receivables 3,861.4 3,657.0
Less allowance for doubtful accounts (127.5) (117.3)
Deferred acquisition costs 1,026.4 985.4
Accrued investment income 407.1 245.9
Receivables for securities sold 258.7 387.5
Federal income taxes recoverable (includes $85.8 and $71.8 due from Loews)--Note H 93.4 78.5
Deferred income taxes--Note H 1,662.5 1,029.7
Property and equipment at cost (less accumulated depreciation: $244.9 and $219.4) 263.3 221.5
Prepaid reinsurance premiums 175.1 167.3
Other assets 341.5 271.5
Separate Account business 6,080.3 6,540.6
----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $44,320.4 $41,912.3
============================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION
-------------------------
28
-----------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET (cont.)
LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------------------------------
December 31 1994 1993
----------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
Liabilities:
Insurance reserves:
Claim and claim expense--Note K $22,564.7 $21,670.2
Future policy benefits 3,049.8 2,753.6
Unearned premiums 2,690.7 2,556.0
Policyholders' funds 632.5 478.6
Participating policyholders' equity 98.0 141.5
Securities sold under repurchase agreements 2,478.6 613.3
Payables for securities purchased 281.4 40.1
Short-term debt--Note D 2.0 2.0
Long-term debt--Note D 911.8 913.3
Other liabilities 984.7 822.0
Separate Account business 6,080.3 6,540.6
----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 39,774.5 36,531.2
----------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities--Notes G, J and K
Stockholders' equity--Note E:
Common stock ($2.50 par value; Authorized - 200,000,000 shares;
Issued - 61,841,969 shares) 154.6 154.6
Preferred stock 150.0 150.0
Additional paid-in capital 434.7 434.7
Retained earnings 4,315.5 4,284.3
Net unrealized investment gains (losses)--Note C (506.4) 360.0
Treasury stock, at cost (2.5) (2.5)
----------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 4,545.9 5,381.1
----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $44,320.4 $41,912.3
============================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION
-------------------------
29
CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------
STATEMENT OF CONSOLIDATED OPERATIONS
-----------------------------------------------------------------------------------------------------------------------------
Year Eended December 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------------------
(In millions of dollars, except per share data)
Revenues:
Premiums--Note G $ 9,474.4 $ 8,688.8 $ 8,768.0
Net investment income--Note C 1,551.2 1,314.3 1,508.7
Realized investment gains (losses)--Note C (246.2) 816.1 366.8
Other 220.1 191.6 149.9
-----------------------------------------------------------------------------------------------------------------------------
10,999.5 11,010.8 10,793.4
-----------------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Insurance claims and policyholders' benefits--Note G 8,450.3 8,556.6 9,870.7
Amortization of deferred acquisition costs 1,377.5 1,200.3 1,074.5
Other operating expenses 1,235.2 1,119.7 1,186.5
Interest expense 70.5 40.8 36.7
-----------------------------------------------------------------------------------------------------------------------------
11,133.5 10,917.4 12,168.4
-----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax (134.0) 93.4 (1,375.0)
Income tax benefit--Note H 170.5 174.1 712.5
-----------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of accounting changes 36.5 267.5 (662.5)
Cumulative effect on prior years of accounting changes--Note B:
Income taxes - - 133.0
Postretirement benefits other than pensions (net of income tax benefit of $32.8) - - (63.6)
Discounting of certain workers' compensation and disability claim reserves
(net of income tax expense of $135.2) - - 262.5
-----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 36.5 $ 267.5 $ (330.6)
=============================================================================================================================
EARNINGS PER SHARE
Income (loss) before cumulative effect of accounting changes $ 0.51 $ 4.26 $ (10.79)
Cumulative effect of accounting changes--Note B - - 5.37
-----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 0.51 $ 4.26 $ (5.42)
=============================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION
-------------------------
30
-----------------------------------------------------------------------
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------------------------------
NET
ADDITIONAL UNREALIZED
COMMON PREFERRED TREASURY PAID-IN RETAINED INVESTMENT
STOCK STOCK STOCK CAPITAL EARNINGS GAINS (LOSSES) TOTAL
----------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
BALANCE, DECEMBER 31, 1991 $154.6 $150.0 $(2.8) $435.0 $4,355.5 $16.3 $5,108.6
Net loss - - - - (330.6) - (330.6)
Unrealized investment gains,
net--Note C - - - - - 15.4 15.4
Preferred dividends - - - - (4.2) - (4.2)
Other - - 0.3 (0.3) - - -
----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 154.6 150.0 (2.5) 434.7 4,020.7 31.7 4,789.2
Net income - - - - 267.5 - 267.5
Unrealized investment gains,
net--Note C - - - - - 8.8 8.8
Adjustment resulting from
change in accounting for
debt securities, net of
income tax expense of
$176.5 and participating
policyholders' interest of
$8.3--Note B - - - - - 319.5 319.5
Preferred dividends - - - - (3.9) - (3.9)
----------------------------------------------------------------------------------------------------------------------------
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
Unrealized investment losses,
net--Note C - - - - - (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
============================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION
-------------------------
31
CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------
STATEMENT OF CONSOLIDATED CASH FLOWS
--------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
-------------------------------------
Net income (loss) $ 36.5 $ 267.5 $ (330.6)
------------------------------------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of accounting changes - - (331.9)
Pretax realized (gains) losses 246.2 (816.1) (366.8)
Participating policyholders' interest (12.0) (4.3) (3.7)
Amortization of bond discount (95.5) (88.1) (126.7)
Depreciation 66.1 46.5 39.8
Changes in:
Other insurance receivables, net (194.2) 345.0 68.3
Reinsurance receivables (236.0) 298.2 457.9
Prepaid reinsurance premiums (7.8) (15.0) (0.4)
Deferred acquisition costs (41.0) (85.3) (27.2)
Accrued investment income (161.2) 41.6 (25.9)
Insurance reserves 1,468.9 1,211.7 2,478.4
Federal income taxes (14.9) 268.8 (387.6)
Deferred income taxes (96.3) (161.3) (360.6)
Reinsurance payables (25.0) 30.5 36.5
Other, net 48.4 (67.6) (107.1)
--------------------------------------------------------------------------------------------------------------------------
Total adjustments 945.7 1,004.6 1,343.0
--------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 982.2 $1,272.1 $1,012.4
--------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION
-------------------------
32
----------------------------------------------------------------------
STATEMENT OF CONSOLIDATED CASH FLOWS (cont.)
--------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
CASH FLOWS FROM INVESTING ACTIVITIES:
-------------------------------------
Purchases of fixed maturities $(34,149.4) $(42,828.9) $(32,289.8)
Proceeds from fixed maturities:
Sales 25,287.0 41,216.9 32,762.6
Maturities, calls and redemptions 4,506.3 2,347.7 1,415.0
Purchases of equity securities (892.8) (758.9) (485.8)
Proceeds from sale of equity securities 649.9 736.1 397.5
Change in short-term investments 1,895.8 (2,485.5) (1,942.1)
Purchases of property and equipment (109.5) (89.5) (31.9)
Change in securities sold under repurchase agreements 1,865.3 102.4 (889.4)
Change in other investments (21.7) 9.4 51.7
Other, net 1.8 (1.2) 0.9
--------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (967.3) (1,751.5) (1,011.3)
--------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
-------------------------------------
Dividends paid to preferred shareholders (4.9) (4.0) (4.7)
Receipts from investment contracts credited to
policyholder account balances 32.8 47.5 47.3
Return of policyholder account balances in investment contracts (22.4) (18.2) (18.5)
Net decrease in short-term debt - - (23.4)
Principal payments on long-term debt (2.9) (1.0) (0.9)
Proceeds from issuance of long-term debt 0.5 500.6 1.5
--------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3.1 524.9 1.3
--------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 18.0 45.5 2.4
Cash at beginning of period 129.6 84.1 81.7
--------------------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 147.6 $ 129.6 $ 84.1
==========================================================================================================================
Supplemental disclosures of cash flow information:
Cash received (paid):
Interest expense $ (71.4) $ (36.3) $ (36.2)
Federal income taxes 70.0 293.6 (30.2)
==========================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION
-------------------------
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Note A - Significant Accounting Policies:
-----------------------------------------
BASIS OF PRESENTATION
------------------------------------------------------------------------
Loews Corporation (Loews) owns approximately 84% of the outstanding
common stock of CNA Financial Corporation (CNA).
The Consolidated Financial Statements include CNA and its principal
operating groups which consist of property/casualty insurance
subsidiaries (principally Continental Casualty Company) and life
insurance subsidiaries (principally Continental Assurance Company).
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 1994. All significant intercompany amounts
have been eliminated.
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 life type contracts are
comprised of contract charges and fees which are recognized over the
coverage period when assessed against the policyholders' account
balances. 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 (a) case basis estimates for
losses reported on direct business, adjusted in the aggregate for
ultimate loss expectations, (b) estimates of unreported losses based
upon past experience, (c) estimates of assumed insurance, (d) estimates
of future expenses to be incurred in settlement of claims and (e)
estimates of claim recoveries. In establishing these estimates,
consideration is given to current conditions and trends as well as past
Company and industry experience.
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. Related annuity obligations are carried
in future policy benefits reserves. Obligations for structured
settlements not funded by annuities are carried at discounted values
which approximate the alternative cost of annuity purchases. Such
reserves, discounted at interest rates ranging from 6.25% to 7.5%,
totaled $839.0 million and $748.9 million at December 31, 1994 and 1993,
respectively.
Workers' compensation lifetime claims and accident and health disability
claim reserves are discounted at interest rates ranging from 3.5% to 6%
with mortality and morbidity assumptions reflecting current industry
experience. Such discounted reserves totaled $1,114.9 million and $969.8
million at December 31, 1994 and 1993, respectively.
Claim and claim expense reserves are based on estimates and the ultimate
liability may vary significantly from such estimates. CNA regularly
CNA FINANCIAL CORPORATION
-------------------------
34
-----------------------------------------------------------------------
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (cont.)
reviews its reserves, and any adjustments that are made to the reserves
are reflected in operating income in the period such adjustments become
apparent. Further discussion of claim and claim expense reserves may be
found in Note K.
Future policy benefits reserves
Reserves for traditional life insurance products are computed based upon
net level premium methods 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
10.5% 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 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. These estimates are adjusted as premium, claim and
expense activity is received from the residual markets' administrators.
CNA records assessments for insolvencies as they are paid rather than on
an accrual basis. Such an accrual process would be very difficult, as
past experience is not a reliable indicator of future activity. Further,
information currently available from all the states' life and
property/casualty guarantee funds is fairly limited and would not
provide reliable data on which to base an estimated liability. Many
states allow recovery of insolvency assessments by a direct offset to
premium taxes or a separate policy surcharge. In addition, some states
assess prospectively based on current premiums written.
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, to provide greater
diversification of risk and to minimize exposures on larger risks. The
reinsurance coverages are tailored 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 associated with the reinsured policy.
Deferred acquisition costs
Costs of acquiring insurance business which vary with and are primarily
related to the production of such business are deferred. Such costs
include commissions, premium taxes and certain underwriting and policy
issuance costs. Property/casualty acquisition costs are amortized
ratably over the period the related premiums are recognized. 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 investment
annuity acquisition costs are
CNA FINANCIAL CORPORATION
-------------------------
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (cont.)
amortized in proportion to the present value of estimated gross profits
over the products' assumed durations, which are regularly evaluated and
adjusted as appropriate. To the extent that unrealized gains or losses
on available-for-sale securities would result in an adjustment of deferred
policy acquisition costs had those gains or losses actually been realized,
the related unamortized deferred policy acquisition costs are recorded as
an adjustment of the unrealized gains or losses included in shareholders'
equity.
Valuation of investments
CNA believes it has the ability to hold all fixed income investments
until maturity. However, securities may be sold to take advantage of
investment opportunities generated by changing interest rates,
prepayments, tax and credit considerations, as part of the Company's
asset/liability strategy, or for other similar reasons. As a result, CNA
considers its fixed maturity securities (bonds and redeemable preferred
stocks) and equity securities as available-for-sale. At December 31,
1993, CNA adopted the provisions of Statement of Financial Accounting
Standards (SFAS) 115, "Accounting for Certain Investments in Debt and
Equity Securities." Under SFAS 115, available-for-sale securities are
carried at fair value. The amortized cost of debt securities is adjusted
for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
CNA considers its derivative securities as held for trading purposes and
as such, are recorded at fair value at the reporting date.
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 cost of
the specific securities sold. 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 are reflected as part of realized
investment gains and losses. Investments with an other than temporary
decline in value are written down to net realizable values resulting in
losses that are included in realized investment gains and losses.
Securities sold under agreements to repurchase
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 market value of the securities if
the collateral is cash, or 102%, if the collateral is securities. Cash
deposits from these transactions have been invested in short-term
investments (primarily commercial paper). Securities sold under
repurchase agreements are recorded at their contracted repurchase
amounts. CNA continues to receive the interest on the loaned debt
securities, as beneficial owner, and accordingly, the loaned debt
securities are included in fixed maturity securities.
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 J to the Consolidated Financial
CNA FINANCIAL CORPORATION
-------------------------
36
-----------------------------------------------------------------------
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (cont.)
Statements. The funds are included in short-term investments and are
invested in U.S. treasury securities. At December 31, 1994, the escrow
account amounted to $1,009.9 million. The escrow account is the prefunding
mechanism to the trust fund for future claimants.
Participating business
Participating business represented 0.9%, 1.1% and 1.2% of gross life
insurance in force and 1.0%, 1.1% and 1.2% of life insurance premium
income for 1994, 1993 and 1992, 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, less dividends determined by the Board of Directors as allowed
by applicable laws. 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 assets and liabilities of which 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 of approximately 88% of the Separate Account business.
Substantially all assets of the Separate Accounts are carried at fair
value. Separate Account liabilities are carried at the higher of
contract value or the fair value of the underlying assets. Investment
income and gains and losses for the Separate Account accrue to the
contractholders and are therefore not included in the Statements of
Consolidated Operations or Cash Flows.
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 as required
by SFAS 109. 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 alternative minimum
tax credit 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 $8.3, $9.2 and $7.6 million
in 1994, 1993 and 1992, respectively, and are included in the Statement
of Consolidated Operations.
EARNINGS PER SHARE
-----------------------------------------------------------------------
Earnings per share applicable to common stock are based on weighted
average outstanding shares of common stock of 61,798,000, 61,798,000 and
61,794,000 in 1994, 1993 and 1992, respectively.
CNA FINANCIAL CORPORATION
-------------------------
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------
NOTE B -- CHANGES IN ACCOUNTING PRINCIPLES
Note B -- Changes in Accounting Principles:
-------------------------------------------
1993 ACCOUNTING CHANGES
-----------------------------------------------------------------------
Investments in Debt and Equity Securities
Effective December 31, 1993, CNA adopted Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS) 115,
"Accounting for Certain Investments in Debt and Equity Securities." This
Statement requires that investments in debt and equity securities
classified as available-for-sale be carried at fair value. Previously,
fixed income securities classified as available-for-sale were carried at
the lower of aggregate amortized cost or market value. Unrealized
holding gains and losses are reflected as a separate component of
shareholders' equity, net of deferred income taxes and participating
policyholders' interest. The effect in 1993 of adopting this Statement
was to increase shareholders' equity by $319.5 million (net of $176.5
million in deferred income taxes and $8.3 million of participating
policyholders' interest). The adoption of this Statement did not impact
net income. Separate Account assets invested in debt securities have
also been classified as available-for-sale and are carried at fair
value.
Reinsurance Accounting
Effective January 1, 1993, CNA adopted SFAS 113, "Accounting and
Reporting for Reinsurance of Short-duration and Long-duration
Contracts." This Statement establishes the conditions required for a
contract to be accounted for as reinsurance, prescribes accounting and
reporting standards for those contracts, and requires that balances
pertaining to reinsurance transactions be reported "gross" on the
balance sheet rather than as reductions of insurance reserves. At
December 31, 1993, reinsurance recoverables on insurance claims and
policy reserves of $2.5 billion and ceded unearned premiums of $167
million are reported as assets. 1992 balances were restated to conform
to the classifications followed in 1993. As a result, assets and
liabilities at December 31, 1992 were each increased by $3.1 billion.
The provisions of SFAS 113 that pertain to risk transfer and recognition
of revenues and costs did not impact CNA's income or stockholders'
equity as all material reinsurance arrangements are prospective and
provides for the transfer of risk.
CNA FINANCIAL CORPORATION
-------------------------
38
-----------------------------------------------------------------------
NOTE B -- CHANGES IN ACCOUNTING PRINCIPLES (cont.)
1992 ACCOUNTING CHANGES
-----------------------------------------------------------------------
In 1992, CNA adopted SFAS 109 "Accounting for Income Taxes," which
requires a balance sheet approach in determining income tax expense and
SFAS 106 "Employers' Accounting for Post-retirement Benefits Other than
Pensions," which resulted in significant changes in accounting for
postretirement benefits. In addition, CNA changed its accounting
practice of reporting ultimate reserves for fixed and determinable claim
reserves related to workers' compensation lifetime claims, and accident
and health disability claims to discounting such reserves consistent
with accounting practices on other similar fixed and determinable
claims.
The cumulative effect as of January 1, 1992 of adopting these accounting
changes was:
-------------------------------------------------------------------------------------------------------------
Year Ended December 31 1992 PER SHARE
-------------------------------------------------------------------------------------------------------------
(In millions of dollars, except per share data)
Accounting for income taxes $ 133.0 $ 2.15
Postretirement benefits other than pensions (net of income tax
benefit of $32.8) (63.6) (1.03)
Discounting of certain workers' compensation and disability claim
reserves (net of income tax expense of $135.2) 262.5 4.25
-------------------------------------------------------------------------------------------------------------
$ 331.9 $ 5.37
=============================================================================================================
CNA FINANCIAL CORPORATION
-------------------------
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------
NOTE C -- INVESTMENTS
Note C -- Investments:
----------------------
NET INVESTMENT INCOME
-------------------------------------------------------------------------------------------------
Year Ended December 31 1994 1993 1992
-------------------------------------------------------------------------------------------------
(In millions of dollars)
Fixed maturities:
Bonds:
Tax exempt $ 333.7 $ 504.9 $ 728.1
Taxable 1,009.8 531.9 591.5
Redeemable preferred stocks 13.5 21.2 11.2
Equity securities 17.6 7.6 14.5
Mortgage loans 4.3 5.3 8.0
Real estate 0.9 1.1 1.7
Policy loans 10.2 10.0 10.0
Short-term investments 130.5 245.2 141.0
Security repurchase transactions--income 149.7 6.3 18.6
Other 22.2 10.9 19.6
-------------------------------------------------------------------------------------------------
1,692.4 1,344.4 1,544.2
Investment expense (23.7) (24.8) (22.4)
Security repurchase transactions--expenses and fees (117.5) (5.3) (13.1)
-------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $1,551.2 $1,314.3 $1,508.7
=================================================================================================
CNA FINANCIAL CORPORATION
-------------------------
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------
NOTE C -- INVESTMENTS (cont.)
ANALYSIS OF INVESTMENT GAINS (LOSSES)
--------------------------------------------------------------------------------------------------
Year Ended December 31 1994 1993 1992
--------------------------------------------------------------------------------------------------
(In millions of dollars)
Realized investment gains (losses):
Fixed maturities $ (296.9) $ 740.8 $ 292.6
Equity securities 44.5 82.5 28.9
Real estate 0.4 0.5 2.9
Derivative securities 6.3 (12.0) (8.5)
Other, principally Separate Accounts (0.5) 4.3 50.9
---------------------------------
(246.2) 816.1 366.8
Allocated to participating policyholders 10.9 (13.1) (12.1)
Income tax (expense) benefit 84.8 (283.8) (119.4)
--------------------------------------------------------------------------------------------------
Net realized investment gains (losses) (150.5) 519.2 235.3
--------------------------------------------------------------------------------------------------
Change in unrealized investment gains (losses):
Fixed maturities (1,299.8) - -
Equity securities (57.0) 29.4 13.5
Other, principally Separate Accounts (45.5) (10.4) 5.8
---------------------------------
(1,402.3) 19.0 19.3
Allocated to participating policyholders 32.5 - 0.7
Income tax (expense) benefit 503.4 (10.2) (4.6)
--------------------------------------------------------------------------------------------------
Change in net unrealized investment gains (losses) (866.4) 8.8 15.4
--------------------------------------------------------------------------------------------------
Change in accounting for adoption of SFAS 115--Note B - 319.5 -
--------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES) $(1,016.9) $ 847.5 $ 250.7
==================================================================================================
SUMMARY OF REALIZED GAINS (LOSSES)
FOR FIXED MATURITIES AND EQUITY SECURITIES
-------------------------------------------------------------------------------------------------------------------
1994 1993 1992
---------------------- ---------------------- ----------------------
Fixed Equity Fixed Equity Fixed Equity
Year Ended December 31 Maturities Securities Maturities Securities Maturities Securities
-------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
Proceeds* $29,793.3 $649.9 $43,564.6 $736.1 $34,177.6 $397.5
===================================================================================================================
Gross realized gains $ 178.5 $ 65.8 $ 833.5 $103.3 $ 421.1 $ 40.3
Gross realized losses (475.4) (21.3) (92.7) (20.8) (128.5) (11.4)
-------------------------------------------------------------------------------------------------------------------
NET REALIZED GAINS
(LOSSES) ON SALE $ (296.9) $ 44.5 $ 740.8 $ 82.5 $ 292.6 $ 28.9
===================================================================================================================
* Proceeds from sales of investments in fixed income securities during 1994, 1993 and 1992 included $17.8, $19.4
and $25.9 billion, respectively of U.S. treasury securities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------
NOTE C -- INVESTMENTS (cont.)
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES)
INCLUDED IN STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------------------------------
1994 1993
-------------------------------- --------------------------------
December 31 GAINS LOSSES NET GAINS LOSSES NET
----------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
Fixed maturities $194.2 $ (989.6) $(795.4) $564.7 $ (60.3) $504.4
Equity securities 55.6 (37.1) 18.5 84.9 (9.4) 75.5
Other, principally Separate Accounts 2.5 (59.2) (56.7) 2.1 (13.3) (11.2)
---------------------------------------------------------------------
$252.3 $(1,085.9) (833.6) $651.7 $(83.0) 568.7
=================== ==================
Allocated to participating policyholders 26.1 (6.4)
Deferred income tax benefit (expense) 301.1 (202.3)
----------------------------------------------------------------------------------------------------------------------------
NET UNREALIZED INVESTMENT GAINS (LOSSES) $(506.4) $360.0
============================================================================================================================
SUMMARY OF INVESTMENTS IN FIXED
MATURITIES AND EQUITY SECURITIES AVAILABLE-FOR-SALE
-------------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
December 31, 1994 COST GAINS LOSSES VALUE
-------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
United States Treasury securities and obligations of
government agencies $11,395.2 $ 15.6 $ 629.1 $10,781.7
Asset-backed securities 2,693.2 11.2 140.9 2,563.5
States, municipalities and political subdivisions-tax exempt 3,716.7 121.8 68.9 3,769.6
Corporate securities 1,936.2 12.8 101.7 1,847.3
Other debt securities 1,459.3 23.3 45.8 1,436.8
Redeemable preferred stocks 422.5 9.5 3.2 428.8
-------------------------------------------------------------------------------------------------------------------------------
Total fixed maturities 21,623.1 194.2 989.6 20,827.7
Equity securities 736.3 55.6 37.1 754.8
-------------------------------------------------------------------------------------------------------------------------------
TOTAL $22,359.4 $249.8 $1,026.7 $21,582.5
===============================================================================================================================
CNA FINANCIAL CORPORATION
-------------------------
42
-----------------------------------------------------------------------
NOTE C -- INVESTMENTS (cont.)
SUMMARY OF INVESTMENTS IN FIXED
MATURITIES AND EQUITY SECURITIES AVAILABLE-FOR-SALE
-------------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
December 31, 1993 COST GAINS LOSSES VALUE
-------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
United States treasury securities and obligations of
government agencies $ 6,482.8 $ 80.1 $ 8.4 $ 6,554.5
Asset-backed securities 2,514.6 42.1 9.4 2,547.3
States, municipalities and political subdivisions-tax exempt 4,725.4 316.7 27.3 5,014.8
Corporate securities 1,765.8 48.2 12.4 1,801.6
Other debt securities 1,170.0 73.4 2.0 1,241.4
Redeemable preferred stocks 444.6 4.2 0.8 448.0
-------------------------------------------------------------------------------------------------------------------------------
Total fixed maturities 17,103.2 564.7 60.3 17,607.6
Equity securities 432.7 84.9 9.4 508.2
-------------------------------------------------------------------------------------------------------------------------------
TOTAL $17,535.9 $649.6 $69.7 $18,115.8
===============================================================================================================================
The amortized cost and market value of fixed maturities at December 31,
1994 and 1993 are shown below by contractual maturity.
----------------------------------------------------------------------------------------------------------------------------------
1994 1993
-------------------------- -------------------------
AMORTIZED MARKET AMORTIZED MARKET
December 31 COST VALUE COST VALUE
----------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
Due in one year or less $ 1,618.8 $ 1,610.7 $ 687.7 $ 702.7
Due after one year through five years 7,475.7 7,076.1 7,486.8 7,581.3
Due after five years through ten years 4,713.3 4,400.7 1,445.3 1,486.2
Due after ten years 5,122.1 5,176.7 4,968.8 5,290.1
Asset-backed securities 2,693.2 2,563.5 2,514.6 2,547.3
----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 21,623.1 $ 20,827.7 $ 17,103.2 $ 17,607.6
==================================================================================================================================
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
$80.9 million at December 31, 1994. 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
-------------------------
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------
NOTE D -- DEBT
Note D -- Debt:
---------------
LONG AND SHORT-TERM DEBT
---------------------------------------------------------------------------------------
December 31 1994 1993
---------------------------------------------------------------------------------------
(In millions of dollars)
Long-term debt:
8 5/8% Senior Notes, due March 1, 1996 $249.4 $249.0
8 7/8% Senior Notes, due March 1, 1998 148.8 148.6
6 1/4% Senior Notes, due November 15, 2003 248.1 247.9
7 1/4% Debenture, due November 15, 2023 247.1 247.0
Other debt, due 1995 through 2019:
Fixed interest rates 1.0% to 14.2% 4.7 4.8
Variable interest rates 3.85% to 10.0% 13.7 16.0
---------------------------------------------------------------------------------------
Total long-term debt 911.8 913.3
Short-term debt 2.0 2.0
---------------------------------------------------------------------------------------
TOTAL DEBT $913.8 $915.3
=======================================================================================
In October 1993, the Company filed a shelf registration statement with
the Securities and Exchange Commission which made $900 million of debt
securities available for issuance from time to time. In addition, $100
million from a previous shelf registration remained available for
issuance.
In November 1993, CNA sold $250 million principal amount of
6.25% senior notes due 2003 and $250 million principal amount of 7.25%
debentures due 2023 at effective rates per annum of 6.4% and 7.3%,
respectively. CNA contributed $475 million of the proceeds from this
offering to the capital of Casualty. An additional $500 million of
securities and/or preferred stock remain available for issuance under
the shelf registration statement.
Aggregate maturities of long-term debt (in millions) for 1995 through
1999 are $1.6, $251.3, $0.9, $150.5 and $0, respectively.
The weighted average interest rates of outstanding short-term debt for
the two years ended December 31, 1994, were 4.99% and 4.43%,
respectively.
CNA FINANCIAL CORPORATION
-------------------------
44
-----------------------------------------------------------------------
NOTE E -- STOCKHOLDERS' EQUITY AND STATUTORY FINANCIAL INFORMATION
Note E -- Stockholders' Equity and Statutory Financial Information:
-------------------------------------------------------------------
SUMMARY OF CAPITAL STOCK
---------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES
--------------------------
December 31 1994 1993
----------------------------------------------------------------------------------------------------------------
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 61,797,856
Treasury stock 43,707 44,113
----------------------------------------------------------------------------------------------------------------
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'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 Illinois
Insurance Department is limited to formula amounts. As of December 31,
1994, approximately $336 million was not subject to prior Insurance
Department approval.
Statutory capital and surplus and net income (loss), determined in
accordance with accounting practices prescribed or permitted by the
Illinois Insurance Department, for property/casualty and life insurance
subsidiaries are as follows:
----------------------------------------------------------------------------------------------------------------------------
STATUTORY CAPITAL
AND SURPLUS STATUTORY NET INCOME (LOSS)
---------------------------- --------------------------------------
December 31 Year Ended December 31
---------------------------- --------------------------------------
1994 1993 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
Property/Casualty insurance subsidiaries $3,367.3 $3,598.4 $ 67.3 $120.7 $(1,043.1)
Life insurance subsidiaries 1,054.6 1,022.0 65.1 0.1 11.8
---------------------------------------------------------------------------------------------------------------------------
CNA FINANCIAL CORPORATION
-------------------------
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------
NOTE F -- FINANCIAL INSTRUMENTS
STATUTORY ACCOUNTING PRACTICES
-----------------------------------------------------------------------
CNA's insurance affiliates are domiciled in Illinois, California,
Connecticut, New York, Pennsylvania and Texas. These affiliates prepare
their statutory financial statements in accordance with accounting
practices specifically "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 (NAIC), as well as state laws,
regulations, and general administrative rules. The Company has no
material "permitted" accounting practices.
Note F - 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 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. Further, potential taxes and other transaction costs have
not been considered in estimating fair value. Accordingly, 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 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 and estimated fair values of CNA's financial
instrument assets and liabilities are listed below. Derivative
instruments are shown in a separate table.
FINANCIAL ASSETS
-------------------------------------------------------------------------------------------------------------------------------
1994 1993
---------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
December 31 AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
Investments:
Fixed maturities available-for-sale--Note C $20,827.7 $20,827.7 $17,607.6 $17,607.6
Equity securities available-for-sale--Note C 754.8 754.8 508.2 508.2
Mortgage loans 43.8 43.3 57.6 60.7
Policy loans 176.3 155.2 174.0 163.6
Other invested assets 101.1 102.1 68.0 70.7
Separate Account assets:
Fixed maturities available-for-sale 5,250.2 5,250.2 6,235.0 6,235.0
Equity securities available-for-sale 139.5 139.5 145.7 145.7
Other 690.6 691.8 159.9 168.5
-------------------------------------------------------------------------------------------------------------------------------
CNA FINANCIAL CORPORATION
-------------------------
46
------------------------------------------------------------------------
NOTE F -- FINANCIAL INSTRUMENTS (cont.)
FINANCIAL LIABILITIES
-------------------------------------------------------------------------------------------------------------------------------
1994 1993
---------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
December 31 AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
Premium deposits and annuity contracts $ 603.0 $ 593.6 $ 544.7 $ 534.9
Long-term debt 911.8 819.9 913.3 940.2
Financial guarantee liabilities 441.8 425.2 352.5 350.3
Separate Account liabilities:
Guaranteed investment contracts 4,747.9 4,874.6 4,875.4 5,178.8
Deferred annuities 62.5 89.0 66.5 81.4
Variable Separate Accounts 168.4 168.4 222.8 222.8
Other 658.6 658.6 887.4 887.4
-------------------------------------------------------------------------------------------------------------------------------
The following methods and assumptions were used by CNA in estimating its
fair value disclosures for the above financial instruments:
The carrying amounts reported in the balance sheet approximate fair
value for cash, short-term investments, 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. As such, these
financial instruments are not shown in the above table.
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.
Other invested assets and other Separate Account assets consist of
investments in limited partnerships and various miscellaneous assets.
Valuation techniques to determine fair value consist of discounted cash
flows and quoted market prices of a) the investments, b) comparable
instruments, or c) underlying assets of the investments.
Premium deposits and annuity contracts are valued based on cash
surrender values and the outstanding fund balances.
CNA's senior notes and debenture, which represent the majority of CNA's
long-term debt, 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.
CNA FINANCIAL CORPORATION
-------------------------
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------
NOTE F -- FINANCIAL INSTRUMENTS (cont.)
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 and spot interest rates.
Guaranteed investment contracts and deferred annuities of the Separate
Accounts 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 Accounts are based on the quoted market values of the
underlying assets of each variable Separate Account. The fair value of
other Separate Account liabilities approximates carrying value.
DERIVATIVE FINANCIAL INSTRUMENTS
-----------------------------------------------------------------------
CNA invests from time to time in certain derivative financial
instruments to increase investment returns. Financial instruments used
for such purposes include interest rate swaps, put and call options,
commitments to purchase securities, and short sales of common stock. The
gross notional principal or contractual amounts of these instruments at
December 31, 1994, totaled $127.9 million compared to $483.8 million for
the prior year end. The notional or contractual amounts of these
instruments are indications of the volume of transactions and do not
represent market risk or credit risk. These amounts greatly exceed the
credit risk associated with these instruments and do not reflect the
netting of off-setting transactions.
The market values associated with these instruments are generally
affected by changes in interest rates. 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 counterparty to
the instrument. Although the Company is exposed to the aforementioned
credit risk, it does not expect any counterparties to fail to perform as
contracted given 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 to terminate 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
-------------------------
48
------------------------------------------------------------------------
NOTE F -- FINANCIAL INSTRUMENTS (cont.)
A summary of the aggregate notional or contractual amounts and estimated
fair values of derivative financial instruments at December 31, 1994 and
1993 as well as the monthly average fair values during 1994 are presented
below.
-----------------------------------------------------------------------------------------------------------------------------------
1994 1993
---------------------------------------- -------------------------
FAIR VALUE AVERAGE FAIR VALUE
CONTRACTUAL/ ASSET FAIR VALUE CONTRACTUAL/ ASSET
December 31 NOTIONAL VALUE (LIABILITY) DURING YEAR NOTIONAL VALUE (LIABILITY)
-----------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
Interest rate swap $75.0 $ 0.6 $(1.3) $ 75.0 $(8.0)
Commitments to purchase government and
municipal securities - - (0.3) 211.0 0.1
Short sale - equity securities 4.0 (3.3) (2.1) - -
Options purchased* 48.9 0.5 3.9 67.7 3.6
Options written - debt and equity securities - - (3.1) 130.1 (7.5)
-----------------------------------------------------------------------------------------------------------------------------------
*Included in Other invested assets.
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 floating rate index. CNA's outstanding interest rate
swap represents an exchange of the return on the 90-day treasury bill
plus 25 basis points for the total return of a Commodities Index.
Commitments to purchase government and municipal securities are a
commitment to purchase securities in the future at a predetermined
price. These commitments are made when this market is favorable to the
current cash market.
Options are contracts that grant the purchaser, for a premium payment,
the right to either purchase or sell a financial instrument at a specified
price within a specified period of time. As a holder in large positions of
intermediate U. S. treasury securities, the occasional selling of put and
call options against these positions is a method of enhancing income.
CNA FINANCIAL CORPORATION
-------------------------
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------
NOTE G -- REINSURANCE
Note G - 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, to provide greater
diversification of risk and to minimize exposures on larger risks. The
reinsurance coverages are tailored 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.
The ceding of insurance does not discharge the 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 Illinois,
CNA receives collateral, primarily in the form of bank letters of
credit, securing a large portion of the recoverables. Such collateral
totaled approximately $165 and $155 million at December 31, 1994 and
1993, respectively. CNA's largest recoverable, including prepaid
reinsurance premiums was approximately $348 and $484 million with
Lloyd's of London at December 31, 1994 and 1993, respectively.
The effects of the reinsurance on written premiums and earned premiums
are shown in the following schedules:
WRITTEN PREMIUMS
-------------------------------------------------------------------------------------
Year Ended December 31 DIRECT ASSUMED CEDED NET
-------------------------------------------------------------------------------------
(In millions of dollars)
1994
Long Duration Contracts $ 518.3 $ 118.4 $ 25.9 $ 610.8
Short Duration Contracts 8,344.4 1,398.3 710.6 9,032.1
-------------------------------------------------------------------------------------
TOTAL $8,862.7 $1,516.7 $736.5 $9,642.9
=====================================================================================
1993
Long Duration Contracts $ 422.7 $ 141.6 $ 23.0 $ 541.3
Short Duration Contracts 7,654.9 1,168.4 540.1 8,283.2
-------------------------------------------------------------------------------------
TOTAL $8,077.6 $1,310.0 $563.1 $8,824.5
=====================================================================================
/TABLE
WRITTEN PREMIUMS - (cont.)
-------------------------------------------------------------------------------------
Year Ended December 31 DIRECT ASSUMED CEDED NET
-------------------------------------------------------------------------------------
(In millions of dollars)
1992
Long Duration Contracts $ 413.8 $ 146.5 $ 23.2 $ 537.1
Short Duration Contracts 7,325.8 1.367.5 506.5 8,186.8
-------------------------------------------------------------------------------------
TOTAL $7,739.6 $1,514.0 $529.7 $8,723.9
=====================================================================================
CNA FINANCIAL CORPORATION
-------------------------
50
-----------------------------------------------------------------------
NOTE H -- INCOME TAXES
EARNED PREMIUMS
-------------------------------------------------------------------------------------
Year Ended December 31 DIRECT ASSUMED CEDED NET
-------------------------------------------------------------------------------------
(In millions of dollars)
1994
Long Duration Contracts $ 413.8 $ 118.4 $ 25.9 $ 506.3
Short Duration Contracts 8,273.4 1,397.4 702.7 8,968.1
-------------------------------------------------------------------------------------
TOTAL $8,687.2 $1,515.8 $728.6 $9,474.4
=====================================================================================
1993
Long Duration Contracts $ 350.1 $ 140.9 $ 23.0 $ 468.0
Short Duration Contracts 7,603.2 1,142.7 525.1 8,220.8
-------------------------------------------------------------------------------------
TOTAL $7,953.3 $1,283.6 $548.1 $8,688.8
=====================================================================================
1992
Long Duration Contracts $ 376.4 $ 146.5 $ 23.2 $ 499.7
Short Duration Contracts 7,570.5 1,203.9 506.1 8,268.3
-------------------------------------------------------------------------------------
TOTAL $7,946.9 $1,350.4 $529.3 $8,768.0
=====================================================================================
Insurance claims and policyholders' benefits are net of reinsurance
recoveries of $827.9 million, $177.6 million and $570.2 million for the
years ended December 31, 1994, 1993 and 1992, respectively.
Note H - 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.
In 1994, 1993 and 1992, the inclusion of the CNA Tax Group in the
consolidated Federal income tax return of Loews resulted in a reduced
Federal income tax liability for Loews. Accordingly, CNA will receive,
or has received, from Loews approximately $84 million for 1994, $17
million for 1993, and $350 million for 1992.
Effective January 1, 1992, CNA changed its method of accounting for
income taxes from the deferred method, as specified by Accounting
CNA FINANCIAL CORPORATION
-------------------------
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------
NOTE H -- INCOME TAXES (cont.)
Principles Board Opinion (APB) 11, to the liability method required by
the Financial Accounting Standards Board's Statement of Financial
Accounting Standards (SFAS) 109.
The cumulative effect of adopting SFAS 109, as of January 1, 1992,
increased net income by $133 million due primarily to recognizing the
remaining fresh start tax benefit which resulted from discounting the
January 1, 1987, property/casualty loss reserves under the Tax Reform
Act of 1986 (the Act). Under the Act, this reduction in reserves,
previously deducted for tax purposes, does not give rise to taxable
income.
Under SFAS 109, 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.
Significant components of CNA's deferred tax assets and liabilities,
as of December 31, 1994 and 1993, are shown in the table below.
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
------------------------------------------------------------------------------------------------
December 31 1994 1993
------------------------------------------------------------------------------------------------
(In millions of dollars)
Insurance reserves:
Property/casualty claim reserve discounting $1,027.4 $ 990.2
Unearned premium reserves 137.4 125.6
Life reserve differences 115.9 144.1
Other insurance reserves 10.3 (12.1)
Deferred acquisition costs (313.0) (310.2)
Alternative minimum tax credit carryforward 239.6 165.2
Investment valuation differences 86.3 101.8
Postretirement benefits other than pensions 45.9 40.4
Unrealized (gains)/losses 300.6 (202.8)
Other, net 12.1 (12.5)
------------------------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS $1,662.5 $1,029.7
================================================================================================
At December 31, 1994, gross deferred tax assets and liabilities amounted
to $2,045.1 million and $382.6 million, respectively. Gross deferred tax
assets and liabilities, at December 31, 1993, amounted to $1,618.2
million and $588.5 million, respectively.
The Loews/CNA Tax Group has a past history of profitability and
anticipates future taxable income sufficient enough to fully support its
deferred tax balance at December 31, 1994, including but not limited to
the reversal of existing temporary differences and the implementation of
tax planning strategies, if needed.
The 1986 Tax Reform Act requires companies to pay taxes equal to the
greater of those calculated at the regular statutory rate (regular tax)
or those
CNA FINANCIAL CORPORATION
-------------------------
52
------------------------------------------------------------------------
NOTE H -- INCOME TAXES (cont.)
calculated under Alternative Minimum Tax (AMT). Under the Act, the excess
of AMT over the regular tax may be recovered in future years if, and to the
extent, the taxpayer pays regular taxes in those years in excess of AMT.
Due to the substantial operating loss sustained in 1992, the excess of AMT
over regular tax for 1992 was approximately $152 million. In 1993, CNA
experienced additional operating losses; however, these losses were
substantially offset by the realization of available gains in its fixed
income security portfolio. In 1994, CNA realized investment losses. After
carryback of these losses, CNA will generate additional AMT credit
carryforwards. CNA has prepared various analyses of future operating and
tax earnings and has identified various steps that it will take to manage
its tax position so as to recover the aforementioned AMT credits. Based on
these analyses and the provisions of SFAS 109, CNA has recorded at December
31, 1994, $239 million of cumulative AMT credits as it is "more likely than
not" that such credits will be realized.
Significant components of CNA's income tax provision are as follows:
PROVISION FOR INCOME TAX BENEFIT
------------------------------------------------------------------------------------------
Year Ended December 31 1994 1993 1992
------------------------------------------------------------------------------------------
(In millions of dollars)
Current tax benefit (expense):
On ordinary income/loss $ 16.8 $355.5 $510.8
On realized investment gains/losses 57.4 (342.8) (158.9)
------------------------------------------------------------------------------------------
Total current tax benefit 74.2 12.7 351.9
------------------------------------------------------------------------------------------
Deferred tax benefit:
On ordinary income/loss 68.9 102.4 321.1
On realized investment gains/losses 27.4 59.0 39.5
------------------------------------------------------------------------------------------
Total deferred tax benefit 96.3 161.4 360.6
------------------------------------------------------------------------------------------
TOTAL INCOME TAX BENEFIT $170.5 $174.1 $712.5
==========================================================================================
CNA FINANCIAL CORPORATION
-------------------------
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------
NOTE H -- INCOME TAXES (cont.)
A reconciliation of the expected income tax benefit (expense) resulting
from the use of statutory tax rates to the effective income tax benefit
(expense) follows:
RECONCILIATION OF EXPECTED AND EFFECTIVE TAXES
--------------------------------------------------------------------------------------------------------------------------
% of % of % of
Pretax Pretax Pretax
Year Ended December 31 1994 Income 1993 Income 1992 Income
--------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
Expected tax benefit (expense) on ordinary
income at statutory rates $ (35.5) (35.0)% $ 248.3 35.0% $ 588.1 34.0%
Exempt interest and dividends received
deduction 110.1 108.7 166.1 23.4 224.4 13.0
Effect of 1% change in tax rate on the
January 1, 1993 deferred tax balance - - 28.3 3.9 - -
Special deduction--salvage and subrogation - - 17.1 2.4 16.6 1.0
Revision of prior years' liability 11.1 10.9 - - 2.6 0.1
State taxes (2.1) (2.1) (1.0) (0.1) (4.1) (0.2)
Other items, net 2.1 2.1 (0.9) (0.1) 4.3 0.2
--------------------------------------------------------------------------------------------------------------------------
Income tax benefit on ordinary income 85.7 84.6% 457.9 64.5% 831.9 48.1%
--------------------------------------------------------------------------------------------------------------------------
Expected tax benefit (expense) on realized
investment gains/losses at statutory rates 82.4 35.0% (281.0) (35.0)% (120.6) (34.0)%
Effect of 1% change in tax rate on the
January 1, 1993 deferred tax balance - - 1.5 0.2 - -
Rate difference on capital loss carryback (3.0) (1.3) - - - -
Revision of prior years' liability 4.3 1.8 - - - -
State income taxes - - (3.1) (0.4) (2.3) (0.6)
Other items, net 1.1 0.5 (1.2) (0.1) 3.5 0.9
--------------------------------------------------------------------------------------------------------------------------
Income tax benefit (expense) on realized
investment gains/losses 84.8 36.0% (283.8) (35.3)% (119.4) (33.7)%
--------------------------------------------------------------------------------------------------------------------------
INCOME TAX BENEFIT $170.5 $174.1 $ 712.5
==========================================================================================================================
CNA FINANCIAL CORPORATION
-------------------------
54
-----------------------------------------------------------------------
NOTE I -- BENEFIT PLANS
Note I - Benefit Plans:
-----------------------
PENSION PLAN
-----------------------------------------------------------------------
The CNA Employees' Retirement Plan is a noncontributory pension plan
covering all full-time employees age 21 or over who have completed at
least one year of service. Plan benefits 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. Plan assets are
invested primarily in U.S. government securities with the balance in
short-term investments, common stocks and other fixed income securities.
Effective January 1, 1994, the Plan adopted the Rule of 65. This change
will allow Plan participants to receive early retirement benefits if
their combined years and months of age and service with CNA equals a
minimum of 65. This amendment generated an unrecognized prior service
cost of $1.6 million.
The following table sets forth the plan's funded status and amounts
recognized in CNA's Consolidated Financial Statements at December 31,
1994, 1993 and 1992.
-------------------------------------------------------------------------------------------------------------------------------
December 31 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
Actuarial present value of accumulated plan benefits:
Vested $362.7 $386.1 $285.9
Nonvested 37.3 40.3 42.7
-------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED BENEFIT OBLIGATION $400.0 $426.4 $328.6
===============================================================================================================================
Projected benefit obligation $620.1 $591.7 $480.7
Plan assets at fair value 486.6 458.9 412.0
-------------------------------------------------------------------------------------------------------------------------------
Plan assets less than projected benefit obligation (133.5) (132.8) (68.7)
Unrecognized net asset at January 1, 1986 being recognized over 12 years (17.3) (22.3) (27.4)
Unrecognized prior service costs 16.1 16.3 21.4
Unrecognized net loss 166.9 155.9 81.0
-------------------------------------------------------------------------------------------------------------------------------
NET PENSION ASSET $ 32.2 $ 17.1 $ 6.3
===============================================================================================================================
/TABLE
-------------------------------------------------------------------------------------------------------------------------------
December 31 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
Net periodic pension cost:
Service cost--benefits attributed to employee
service during the year $ 30.3 $ 25.9 $ 23.8
Interest cost on projected benefit obligation 42.5 39.1 36.0
Actual return on plan assets 11.5 (25.1) (30.5)
Net amortization and deferral (43.7) (14.5) (5.2)
-------------------------------------------------------------------------------------------------------------------------------
NET PERIODIC PENSION COST $ 40.6 $ 25.4 $ 24.1
===============================================================================================================================
CNA FINANCIAL CORPORATION
-------------------------
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------
NOTE I -- BENEFIT PLANS (cont.)
Actuarial assumptions for the pension plan are set forth in the following
table.
ASSUMPTIONS
---------------------------------------------------------------------------------------------------------------------
December 31 1994 1993 1992 1991
---------------------------------------------------------------------------------------------------------------------
Discount rate 8.50% 7.25% 8.25% 8.50%
Rate of increase in compensation levels* 4.00 4.50 5.25 5.75
Expected long-term rate of return on plan assets 8.75 7.50 9.00 9.25
---------------------------------------------------------------------------------------------------------------------
*Plus age/service related merit and productivity increases.
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. In addition, CNA maintains other unfunded supplemental benefit
plans for officers and other key employees. Benefits provided under
these plans are those that would otherwise have been payable under the
qualified plans but for compensation and/or benefit restrictions imposed
by the Internal Revenue Code.
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.
As described previously, effective January 1, 1994, the Plan adopted the
Rule of 65. For the postretirement plan, this amendment generated an
unrecognized prior service cost of $11.2 million.
The following table sets forth the amounts recognized in CNA's
Consolidated Financial Statements at December 31, 1994, 1993 and 1992.
----------------------------------------------------------------------------------------------------------------------------------
December 31 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
Accumulated postretirement benefit obligation:
Retirees $ 27.1 $ 26.2 $ 22.6
Fully eligible, active plan participants 53.7 24.1 21.7
Other active plan participants 41.1 70.8 65.7
----------------------------------------------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation $121.9 $121.1 $110.0
Unrecognized prior service cost (11.2) - -
Unrecognized net gain (loss) 19.7 (5.3) (3.1)
----------------------------------------------------------------------------------------------------------------------------------
ACCRUED POSTRETIREMENT BENEFIT COST $130.4 $115.8 $106.9
==================================================================================================================================
Net periodic postretirement benefit cost:
Service cost benefits attributed to employee service during the year $ 8.6 $ 5.6 $ 6.2
Interest cost on accumulated postretirement benefit obligation 10.3 7.6 8.1
Amortization 0.7 - -
----------------------------------------------------------------------------------------------------------------------------------
NET PERIODIC POSTRETIREMENT BENEFIT COST $ 19.6 $ 13.2 $ 14.3
==================================================================================================================================
CNA FINANCIAL CORPORATION
-------------------------
56
------------------------------------------------------------------------
NOTE I -- BENEFIT PLANS (cont.)
Actuarial assumptions for the postretirement plan are set forth in the
following table.
ASSUMPTIONS
----------------------------------------------------------------------------------------------------------------------------------
December 31 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
Assumptions used in determining net periodic benefit cost:
Discount rate 7.25% 8.25% 8.50%
Rate of increase in compensation levels* 4.50 5.25 5.75
Assumptions used in determining projected benefit obligation (liability):
Discount rate 8.50 7.25 8.25
Rate of increase in compensation levels* 4.00 4.50 5.25
----------------------------------------------------------------------------------------------------------------------------------
*Plus age/service related merits and productivity increases.
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation was 14% in 1994, 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,
1994, by $9.9 million and the aggregate net periodic postretirement
benefit cost for 1994 by $2.0 million.
SAVINGS PLAN
-----------------------------------------------------------------------
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. CNA contributions to the plan were $17.0 million,
$17.2 million and $16.1 million in 1994, 1993 and 1992, respectively.
CNA FINANCIAL CORPORATION
-------------------------
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------
NOTE J -- LEGAL PROCEEDINGS AND CONTINGENT LIABILITIES
Note J - Legal Proceedings and Contingent Liabilities:
------------------------------------------------------
FIBREBOARD LITIGATION
-----------------------------------------------------------------------
CNA's primary property/casualty subsidiary, Continental Casualty Company
("Continental"), is 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, Continental,
Fibreboard, another insurer (Pacific Indemnity, a subsidiary of the
Chubb Corporation), and a negotiating committee of asbestos claimant
attorneys have reached a Global Settlement (the "Global Settlement") to
resolve all future asbestos-related bodily injury claims involving
Fibreboard. Continental, Fibreboard and Pacific Indemnity have also
reached an agreement (the "Trilateral Agreement"), which is subject to
court approval, on a settlement to resolve the coverage litigation in
the event the Global Settlement does not obtain final court approval.
The implementation of the Global Settlement or the Trilateral Agreement
would have the effect of settling Continental's litigation with
Fibreboard.
On July 29, 1994, the United States District Court for the
Eastern District of Texas preliminarily approved the Global Settlement
agreement. A final fairness hearing to determine whether to finally
approve the Global Settlement agreement commenced on December 12, 1994.
During the hearing various parties presented evidence in opposition to
the Global Settlement.
Also pending in the United States District Court for the Eastern
District of Texas is litigation over the Trilateral Agreement. Trial on
the issues raised by this agreement occurred on February 13, 1995, with
evidence submitted to the Court in opposition to final court approval of
the Trilateral Agreement.
CNA and the other parties to the Global Settlement agreement and the
Trilateral Agreement undertook a comprehensive court approved notice
program to provide potential claimants information about their rights
and possible benefits under the Global Settlement agreement and
Trilateral Agreement. Final arguments concerning the Global Settlement
agreement occurred on February 27, 1995; the court's rulings are
expected in the spring of 1995. No date has been set for final legal
arguments for the Trilateral Agreement.
Coverage Litigation
Between 1928 and 1971, Fibreboard manufactured insulation products
containing asbestos. Since the 1970's, thousands of claims have been
filed against Fibreboard by individuals claiming bodily injury as a
result of asbestos exposure.
Continental insured Fibreboard under a comprehensive general liability
policy between May 4, 1957, and March 15, 1959. Fibreboard disputed the
coverage positions taken by its insurers and, in 1979, Fireman's Fund,
another of Fibreboard's insurers, brought suit with respect to coverage
for defense and indemnity costs. In January 1990, the San Francisco
Superior Court (Judicial Council Coordination Proceeding 1072) rendered
a decision against the insurers including Continental and Pacific
Indemnity. The court held that the insurers owed a duty to defend and
indemnify Fibreboard for certain of the asbestos-related bodily injury
claims asserted against Fibreboard (in the case of Continental, for all
claims involving exposure to Fibreboard's asbestos products if there was
exposure to asbestos at any time prior to 1959 including years prior to
1957, regardless of when the claims were asserted or injuries manifested)
and that the
CNA FINANCIAL CORPORATION
-------------------------
58
------------------------------------------------------------------------
NOTE J -- LEGAL PROCEEDINGS AND CONTINGENT LIABILITIES (cont.)
policies contained no aggregate limit of liability in relation to such
claims. The judgment was appealed.
The Court of Appeal entered an opinion on November 15, 1993, as modified
on December 13, 1993, which substantially affirmed the lower court's
decisions on scope of coverage and trigger of coverage issues, as
described below. The Court of Appeal withheld its ruling on the issues
discrete to Continental and Pacific Indemnity pending final court
approval of either the Global Settlement or the Trilateral Agreement
described below. On January 27, 1994, the California Supreme Court
granted a Petition for Review filed by several insurers, including
Continental, of, among other things, the trigger and scope of coverage
issues. The order granting review has no effect on the Court of Appeal's
order severing the issues unique to Continental and Pacific Indemnity.
Continental cannot predict the time frame within which the issues before
the California Supreme Court may be resolved. If neither the Global
Settlement nor the Trilateral Agreement is approved, it is anticipated
that Continental and Pacific Indemnity will resume the appeal process.
Continental's appeal of the coverage judgment raises many legal issues.
Key issues on appeal under the policy are trigger of coverage, scope of
coverage, dual coverage requirements and number of occurrences:
. The trial court adopted a continuous trigger of coverage theory under
which all insurance policies in effect at any time from first
exposure to asbestos until the date of the claim filing or death are
triggered. The Court of Appeal endorsed the continuous trigger
theory, but modified the ruling to provide that policies are
triggered by a claimant's first exposure to the policyholder's
products, as opposed to the first exposure to any asbestos product.
Therefore, an insurance policy is not triggered if a claimant's first
exposure to the policyholder's product took place after the policy
period. The court, however, placed the burden on the insurer to prove
the claimant was not exposed to its policyholder's product before or
during the policy period. The trigger of coverage issue is now on
appeal to the California Supreme Court.
Continental's position is that its policy is triggered under
California law by manifestation of appreciable harm during the policy
period. The bodily injury cannot be said to occur within the meaning
of the policy until actual physical symptoms and associated
functional impairment manifest themselves. Thus, Continental's
position is that if existing California law were applied, there would
be no coverage under Continental's policy.
. The scope of coverage decision imposed a form of"joint and several"
liability that makes each triggered policy liable in whole for each
covered claim, regardless of the length of the period the policy was
in effect. This decision was affirmed by the Court of Appeal,
and is now on appeal to the California Supreme Court. Continental's
position is that liability for asbestos claims should be shared not
jointly, but severally and on a pro rata basis between the insurers
and insured. Under this theory, Continental would only be liable for
that proportion of the bodily injury that occurred during the
22-month period its policy was in force.
. Continental maintains that both the occurrence and the injury
resulting therefrom must happen during the policy period for the
policy to be triggered. Consequently, if the court holds that the
occurrence is exposure to asbestos, Continental's position is that
coverage under the Continental policy is restricted to those who
CNA FINANCIAL CORPORATION
-------------------------
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------
NOTE J -- LEGAL PROCEEDINGS AND CONTINGENT LIABILITIES
actually inhaled Fibreboard asbestos fibers and suffered injury from
May 4, 1957, to March 15, 1959. The Court of Appeal withheld ruling
on this issue, as noted above.
. Continental's policy had a $1 million per occurrence limit.
Continental contends the number of occurrences under California law
must be determined by the general cause of the injuries, not the
number of claimants, and that the cause of the injury was the
continuous sale and manufacture of the product. Because the
manufacture and sale proceeded from two locations, Continental
maintains that there were only two occurrences and thus only $2
million of coverage under the policy. However, the per occurrence
limit was interpreted by the trial court to mean that each claim
submitted by each individual constituted a separate occurrence. The
Court of Appeal withheld ruling on this issue, as noted above.
Even if Continental were successful on appeal on the dual coverage
requirements or the number of occurrences, if the final decision in the
coverage case affirms the trial court's decision on the existence of the
Pacific Indemnity policy, then Continental would still have obligations
under the Continental and Pacific Indemnity Agreement described below.
Under various reinsurance agreements, Continental has asserted a right
to reimbursement for a portion of its potential exposure to Fibreboard.
The reinsurers have disputed Continental's right to reimbursement and
have taken the position that any claim by Continental is subject to
arbitration under provisions in the reinsurance agreement. A Federal
court has ruled that the dispute must be resolved by arbitration. There
can be no assurance that Continental will be successful in obtaining a
recovery under its reinsurance agreements.
On April 9, 1993, Continental 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.
Through December 31, 1994, Continental, Fibreboard and plaintiff
attorneys had reached settlements with respect to approximately 135,000
claims, subject to resolution of the coverage issues, for a maximum
settlement amount of approximately $1.58 billion. If neither the Global
Settlement nor the Trilateral Agreement receives final court approval,
Continental's obligation to pay under all settlements will be partially
subject to the results of the pending appeal in the coverage litigation.
Minimum amounts payable under all such agreements, regardless of the
outcome of coverage litigation, total approximately $751.8 million, of
which $486.6 million was paid through December 31, 1994. Continental may
negotiate other agreements with various classes of claimants including
groups who may have previously reached agreement with Fibreboard.
Continental will continue to pursue its appeals in respect of the
coverage litigation and all other litigation involving Fibreboard if the
Global Settlement or the Trilateral Agreement cannot be implemented.
Global Settlement
On August 27, 1993, Continental, Pacific Indemnity, Fibreboard and a
negotiating committee of asbestos claimant attorneys reached an
agreement in principle for an omnibus settlement to resolve all future
asbestos-related bodily injury claims involving Fibreboard. The Global
Settlement was executed on December 23, 1993. The agreement calls for
contribution by Continental and Pacific Indemnity of an aggregate of
$1.525
CNA FINANCIAL CORPORATION
-------------------------
60
------------------------------------------------------------------------
NOTE J -- LEGAL PROCEEDINGS AND CONTINGENT LIABILITIES (cont.)
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. The Global Settlement is
subject to court approval and possible appeals. As noted below, 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,
Continental, Fibreboard and Pacific Indemnity entered into the
Trilateral Agreement which sets forth the parties' obligations in the
event the Global Settlement is not approved by the court. In such case,
Continental and Pacific Indemnity would 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 in respect of previously settled claims. Continental'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 in respect of unsettled present claims and previously settled
claims. Continental has agreed that if either the Global Settlement or
the Trilateral Agreement is approved, it will assume responsibility for
the claims that had been settled and paid before August 27, 1993. A
portion of the additional $635 million to be contributed by Pacific
Indemnity would be applied to the payment of such claims as well. As a
part of the Global Settlement and the Trilateral Agreement, Continental
would be released by Fibreboard from any further liability under the
comprehensive general liability policy written for Fibreboard by
Continental, including but not limited to liability for asbestos-related
claims against Fibreboard. The Trilateral Agreement is subject to court
approval and possible appeals.
Continental and Fibreboard have entered into a supplemental agreement
(the "Supplemental Agreement") which governs the interim arrangements
and obligations between the parties until such time as the Global
Settlement is either approved or disapproved by the court and also governs
certain obligations between the parties in the event the Global Settlement
is approved, including the payment of claims which are not included in the
Global Settlement.
In addition, Continental and Pacific Indemnity have entered into an
agreement (the "Continental-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 whether or not the Global Settlement or the
Trilateral Agreement is approved. Under the Continental-Pacific
Agreement, Continental and Pacific Indemnity have agreed to pay 64.71%
and 35.29%, respectively, of the $1.525 billion plus expenses and
interest accrued in escrow to be used to satisfy the claims of future
claimants. If neither the Global Settlement nor the Trilateral Agreement
is approved, Continental and Pacific Indemnity would share, in the same
percentages, most but not all liabilities and costs of either insurer
including, but not limited to, liabilities in respect of unsettled
present claims and presently settled claims (regardless of whether
either such insurer would otherwise have any liability therefor). If
either the Trilateral Agreement or the Global Settlement is approved by
the court, Pacific Indemnity's share for unsettled present claims and
presently settled claims will be $635 million.
Reserves
In the fourth quarter of 1992, Continental increased its reserve with
respect to potential exposure to asbestos-related bodily injury cases by
CNA FINANCIAL CORPORATION
-------------------------
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------
NOTE J -- LEGAL PROCEEDINGS AND CONTINGENT LIABILITIES (cont.)
$1.5 billion. In connection with the agreement in principle announced on
August 27, 1993, Continental added $500 million to such claim reserve in
the third quarter of 1993. The Fibreboard litigation represents the
major portion of Continental's asbestos-related claim exposure.
There are inherent uncertainties in establishing a reserve for complex
litigation of this type. Courts have tended to impose joint and several
liability, and because the number of manufacturers who remain
potentially liable for asbestos-related injuries has diminished on
account of bankruptcies, as has the potential number of insurers due to
operation of policy limits, the liability of the remaining defendants is
difficult to estimate. Further, a recent trend by courts to consolidate
like cases into mass tort trials limits the discovery ability of insurers,
generally does not allow for individual claim adjudication, restricts the
identification of appropriate allocation methods and thereby results in an
increasing likelihood for fraud and disproportionate and potentially
excessive judgments. Additionally, management believes that recent court
decisions would appear to be based on social or other considerations
irrespective of the facts and legal issues involved.
The Global Settlement and the Trilateral Agreement are subject to court
approval. There is limited precedent with settlements which determine
the rights of future claimants to seek relief. It is extremely difficult
to assess the magnitude of Continental's potential liability in respect
of such future claimants if neither the Global Settlement nor the
Trilateral Agreement is approved and upheld, keeping in mind that
Continental's potential liability is limited to persons exposed to
asbestos prior to the termination of the policy in 1959.
Projections by experts of future trends differ widely, based upon
different assumptions with respect to a host of complex variables. Some
recently published studies, not specifically related to Fibreboard,
conclude that the number of future asbestos-related bodily injury claims
against asbestos manufacturers could be several times the number of
claims brought to date. Such studies include claims asserted against
asbestos manufacturers for all years, including claims filed or
projected to be filed in respect of periods after 1959. As indicated
above, as of December 31, 1994, Continental, Fibreboard and plaintiff
attorneys have reached settlements with respect to approximately 135,000
claims, subject to the resolution of coverage issues. Such amount does
not include presently pending or unsettled claims, claims previously
dismissed or claims settled pursuant to agreements to which Continental
is not a party.
Another aspect of the complexity in establishing a reserve arises from
the widely disparate values that have been ascribed to claims by courts
and in the context of settlements. Under the terms of a settlement
reached with plaintiffs' counsel in August 1993, the expected settlement
for approximately 49,500 claims for exposure to asbestos both prior to
and after 1959 is currently averaging approximately $13,400 per claim
for the before 1959 claims processed through December 31, 1994. Based on
reports by Fibreboard, between September 1988 and April 1993, Fibreboard
resolved approximately 40,000 claims, approximately 45% of which
involved no cost to Fibreboard other than defense costs, with the
remaining claims involving the payment of approximately $11,000 per
claim. On the other hand, a trial court in Texas in 1990 rendered a
verdict in which Fibreboard's liability in respect of 2,300 claims was
found to be approximately $310,000 per claim including interest and
punitive damages. Fibreboard entered into a settlement of such claims by
means of an assignment of its potential proceeds from its policy with
Continental. Continental intervened and settled these
CNA FINANCIAL CORPORATION
-------------------------
62
-----------------------------------------------------------------------
NOTE K -- LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
claims for approximately $77,000 on average, with a portion of the
payment contingent on approval of the Global Settlement or the Trilateral
Agreement, and if neither is approved, subject to resolution of the
coverage appeal.
Continental believes that as a result of the Global Settlement and the
Trilateral Agreement it has greatly reduced the uncertainty of its
exposure with respect to the Fibreboard matter. However, if neither the
Global Settlement, nor the Trilateral Agreement is approved and upheld,
in light of the factors discussed herein the range of Continental's
potential liability cannot be meaningfully estimated and there can be
no assurance that the reserves established would be sufficient to pay
all amounts which ultimately could become payable in respect of
asbestos-related bodily injury liabilities.
While it is possible that the ultimate outcome of this matter could have
a material adverse impact on the equity of the Company, management does
not believe that a further loss material to equity is probable.
Management will continue to monitor the potential liabilities with
respect to asbestos-related bodily injury claims and will make
adjustments to the claim reserves if warranted.
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.
Note K - Liability for Unpaid Claims and Claim Adjustment Expenses:
-------------------------------------------------------------------
CNA's property/casualty insurance claims and claims expense reserve
represents 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 present-valued 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
-------------------------
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------
NOTE K -- 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 1994, 1993 and 1992.
CHANGES IN RESERVES FOR PROPERTY/CASUALTY
CLAIMS AND CLAIM EXPENSES
----------------------------------------------------------------------------------------------------
Year Ended December 31 1994 1993 1992
----------------------------------------------------------------------------------------------------
(In millions of dollars)
Reserves at beginning of year:
Gross $20,812 $20,034 $17,712
Ceded reinsurance 2,491 2,867 3,297
----------------------------------------------------------------------------------------------------
Net 18,321 17,167 14,415
----------------------------------------------------------------------------------------------------
Net incurred claims and claim expenses:
Provision for insured events of current year 5,611 5,388 5,708
Increase (decrease) in provision for insured events of prior years* (71) 590 1,617
Amortization of discounts 100 94 104
----------------------------------------------------------------------------------------------------
Total net incurred 5,640 6,072 7,429
----------------------------------------------------------------------------------------------------
Net payments:
Attributable to current year events 1,388 1,202 1,260
Attributable to prior year events 3,629 3,706 3,411
Amortization of discounts 10 10 6
----------------------------------------------------------------------------------------------------
Total net payments 5,027 4,918 4,677
----------------------------------------------------------------------------------------------------
NET RESERVES AT END OF YEAR $18,934 $18,321 $17,167
====================================================================================================
/TABLE
CHANGES IN RESERVES FOR PROPERTY/CASUALTY
CLAIMS AND CLAIM EXPENSES - (cont.)
----------------------------------------------------------------------------------------------------
Year Ended December 31 1994 1993 1992
----------------------------------------------------------------------------------------------------
(In millions of dollars)
Gross reserves at beginning of year $20,812 $20,034 $17,712
----------------------------------------------------------------------------------------------------
Gross incurred claims and claim expenses:
Provision for insured events of current year 6,125 5,817 6,382
Increase (decrease) in provision for insured events of prior years 213 305 1,487
Amortization of discounts 100 94 104
----------------------------------------------------------------------------------------------------
Total gross incurred 6,438 6,216 7,973
----------------------------------------------------------------------------------------------------
Gross payments:
Attributable to current year events 1,468 1,278 1,348
Attributable to prior year events 4,133 4,150 4,297
Amortization of discounts 10 10 6
----------------------------------------------------------------------------------------------------
Total gross payments 5,611 5,438 5,651
----------------------------------------------------------------------------------------------------
GROSS RESERVES AT END OF YEAR** $21,639 $20,812 $20,034
====================================================================================================
*Includes $500 and $1,500 for Fibreboard in 1993 and 1992, respectively. See Note J.
**Excludes life claim and claim expense reserves and intercompany eliminations of $926 million, $858
million, and $699 million as of December 31, 1994, 1993 and 1992, respectively, included in the
Consolidated Balance Sheet.
CNA FINANCIAL CORPORATION
-------------------------
64
------------------------------------------------------------------------
NOTE K -- LIABILITY FOR UNPAID CLAIMS AND
CLAIM ADJUSTMENT EXPENSES (cont.)
ENVIRONMENTAL POLLUTION AND ASBESTOS
-----------------------------------------------------------------------
Potential exposures exist for claims involving environmental pollution,
including toxic waste clean-up. 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 "Responsible Parties" ("RP's"). Superfund
and the mini-Superfunds (Environmental Clean-up Laws or "ECLs")
establish a mechanism to pay for clean-up of waste sites if RP's fail
to do so and to assign liability to RP's. The extent of liability to be
allocated to a RP 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 extent of clean-up
necessary and the assignment of liability has not been established.
CNA and the insurance industry are disputing over 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, however, no reforms were enacted by Congress in 1994. The
Superfund taxing authority will expire at the end of 1995 and will,
therefore, need to be addressed by the 104th Congress. While Congress
may address this issue, 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 exposure to
CNA for environmental pollution claims cannot be meaningfully
quantified. As of December 31, 1994 and 1993, CNA carried approximately
$427 million and $340 million, respectively, of claim and claim expense
reserves for unreported environmental pollution claims in addition to
the $79 million and $94 million, respectively, of reserves recorded for
reported claims. CNA has not attributed any reinsurance to reserves for
unreported claims. The reserves for reported claims cited above
CNA FINANCIAL CORPORATION
-------------------------
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------
NOTE K -- LIABILITY FOR UNPAID CLAIMS AND
CLAIM ADJUSTMENT EXPENSES (cont.)
are net of reinsurance recoverable of $3 million and $5 million at
December 31, 1994 and 1993, respectively. Claim and claim expense reserves
represent management's estimates of ultimate liabilities based on currently
available facts and 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 later adjustment based on new data.
The number of claims filed with CNA for environmental pollution coverage
continues to increase. Approximately 1,900 claims were reported in 1994
and approximately 20,000 claims have been reported to date. Pending
claims totaled approximately 9,900 and 10,100 at December 31, 1994 and
1993, respectively. Approximately 10,100 claims were closed through
December 31, 1994, of which approximately 9,100 claims were settled
without payment, except for claim expenses of $26 million. Settlements
for the remaining 1,000 claims totaled $129 million, plus claim expenses
of $36 million (net of reinsurance recoveries of $34 million and $4
million for claims and claim expenses, respectively). The foregoing
claims statistics represent 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.
In previous filings, such disclosures included claims for all accident
years.
The results of operations in future years may continue to be adversely
affected by environmental pollution claims and claim expenses.
Management will continue to monitor potential liabilities and make
further adjustments as warranted.
Most of the unfavorable asbestos-related reserve development is
attributable to CNA's on-going 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 J.
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.
The following table summarizes for 1994 and 1993 the reserve development,
after effects of reinsurance.
--------------------------------------------------------------------
Year Ended December 31 1994 1993
--------------------------------------------------------------------
(In millions of dollars)
Asbestos strengthening $ (37) $(601)*
Environmental strengthening (180) (446)
Other reserve releases, net 288 457
--------------------------------------------------------------------
NET RESERVE (STRENGTHENING) RELEASE $ 71 $(590)
====================================================================
*Includes approximately $500 million related to Fibreboard,
discussed in Note J.
CNA FINANCIAL CORPORATION
-------------------------
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------
NOTE L -- BUSINESS SEGMENTS
Note L -- Business Segments:
---------------------------
REVENUES
---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
Property/Casualty--commercial $ 6,562.3 $ 5,943.7 $ 5,957.5
Property/Casualty--personal 1,143.2 1,095.9 1,096.2
Property/Casualty--involuntary risks 543.8 447.0 636.1
Life--individual 595.8 497.2 484.8
Life--group 2,442.6 2,242.0 2,272.5
---------------------------------------------------------------------------------------------------------------------------------
CNA Insurance 11,287.7 10,225.8 10,447.1
Other and intercompany eliminations (42.0) (31.1) (20.5)
---------------------------------------------------------------------------------------------------------------------------------
Revenues excluding realized investment gains (losses) 11,245.7 10,194.7 10,426.6
Realized investment gains (losses):
Property/Casualty (164.7) 673.5 262.5
Life (81.2) 126.0 94.8
Other (0.3) 16.6 9.5
---------------------------------------------------------------------------------------------------------------------------------
Total realized investment gains (losses) (246.2) 816.1 366.8
---------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $10,999.5 $11,010.8 $10,793.4
=================================================================================================================================
INCOME (LOSS) BEFORE INCOME TAX
---------------------------------------------------------------------------------------------------------------------------------
Property/Casualty--commercial $ 105.0 $ (638.9) $(1,466.6)
Property/Casualty--personal (83.6) (12.3) (51.6)
Property/Casualty--involuntary risks 17.8 (80.8) (257.3)
Life--individual 47.3 14.5 22.5
Life--group 87.1 51.9 56.1
---------------------------------------------------------------------------------------------------------------------------------
CNA Insurance 173.6 (665.6) (1,696.9)
Interest, other and intercompany eliminations (72.3) (44.0) (32.8)
---------------------------------------------------------------------------------------------------------------------------------
Income (loss) excluding realized investment gains (losses) 101.3 (709.6) (1,729.7)
---------------------------------------------------------------------------------------------------------------------------------
Realized investment gains (losses):
Property/Casualty (164.7) 673.5 262.5
Life (70.3) 112.9 82.7
Other (0.3) 16.6 9.5
---------------------------------------------------------------------------------------------------------------------------------
Total realized investment gains (losses) net of policyholders' interest (235.3) 803.0 354.7
---------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME (LOSS) BEFORE INCOME TAX $ (134.0) $ 93.4 $(1,375.0)
=================================================================================================================================
CNA FINANCIAL CORPORATION
-------------------------
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------
NOTE L -- BUSINESS SEGMENTS (cont.)
NET INCOME (LOSS)
---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
Property/Casualty--commercial $ 169.0 $ (241.5) $ (765.6)
Property/Casualty--personal (41.7) 13.3 (8.7)
Property/Casualty--involuntary risks 20.6 (38.4) (154.1)
Life--individual 30.5 9.6 14.5
Life--group 56.5 33.9 37.5
---------------------------------------------------------------------------------------------------------------------------------
CNA Insurance 234.9 (223.1) (876.4)
Interest, other and intercompany eliminations (47.9) (28.6) (21.4)
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) excluding net realized investment gains (losses)
and accounting changes 187.0 (251.7) (897.8)
----------------------------------------------------------------------------------------------------------------------------------
Net realized investment gains (losses):
Property/Casualty (104.6) 435.8 175.9
Life (45.6) 72.6 53.2
Other (0.3) 10.8 6.2
---------------------------------------------------------------------------------------------------------------------------------
Total net realized investment gains (losses) (150.5) 519.2 235.3
---------------------------------------------------------------------------------------------------------------------------------
Accounting Changes:
Property/Casualty - - 307.9
Life - - 24.0
---------------------------------------------------------------------------------------------------------------------------------
Total accounting changes - - 331.9
----------------------------------------------------------------------------------------------------------------------------------
TOTAL NET INCOME (LOSS) $ 36.5 $ 267.5 $ (330.6)
==================================================================================================================================
ASSETS
----------------------------------------------------------------------------------------------------------------------------------
December 31 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
Property/Casualty--commercial $27,441.2 $25,356.7 $23,357.6
Property/Casualty--personal 2,344.7 2,213.1 1,981.9
Property/Casualty--involuntary risks 2,166.6 2,187.2 2,114.4
Life--individual 3,733.0 3,329.6 3,145.5
Life--group 8,711.3 8,932.2 9,247.1
-----------------------------------------------------------------------------------------------------------------------------------
CNA Insurance 44,396.8 42,018.8 39,846.5
Other and intercompany eliminations (76.4) (106.5) (102.6)
----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $44,320.4 $41,912.3 $39,743.9
==================================================================================================================================
CNA FINANCIAL CORPORATION
-------------------------
68
-----------------------------------------------------------------------
NOTE L -- 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 participations 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, 1994 and 1993, gross exposure of financial guarantee
insurance contracts amounted to $630 million and $792 million,
respectively. The degree of risk attached to this exposure is
substantially reduced through reinsurance, collateral requirements and
diversification of exposures. At December 31, 1994 and 1993, collateral
consisting of letters of credit and debt service reserves amounted to
$45 million and $48 million, respectively. In addition, security
interests in the real estate are also obtained. Approximately 38% of the
risks were ceded to reinsurers at December 31, 1994 and 1993,
respectively. Total exposure, net of reinsurance, amounted to $393
million and $492 million at December 31, 1994 and 1993, respectively.
Gross unearned premium reserves for financial guarantee contracts were
$22 million and $33 million at December 31, 1994 and 1993, respectively.
Gross claim and claim expense reserves totaled $420 million and $320
million at December 31, 1994 and 1993, respectively.
Life revenues include $1.8 billion, $1.7 billion and $1.6 billion in
1994, 1993 and 1992, respectively, under contracts covering U.S.
government employees and their dependents.
CNA FINANCIAL CORPORATION
-------------------------
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------
NOTE M -- UNAUDITED QUARTERLY FINANCIAL DATA:
Note M -- Unaudited Quarterly Financial Data:
---------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars, except per share data)
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
Earning per share (1.28) (0.61) 0.87 1.53 0.51
1993 QUARTERS
Revenues $2,917.5 2,628.2 2,756.9 2,708.2 11,010.8
Net operating income (loss) excluding
realized gains/losses 24.5 (12.7) (300.8) 37.3 (251.7)
Net income (loss) 313.6 74.8 (208.3) 87.4 267.5
Earnings per share 5.06 1.19 (3.39) 1.40 4.26
1992 QUARTERS
Revenues $2,715.4 2,691.2 2,702.6 2,684.2 10,793.4
Net operating income (loss) excluding
realized gains/losses 67.8 67.5 (72.0) (961.1) (897.8)
Income (loss) before cumulative effect of
accounting changes 109.5 145.6 (3.3) (914.3) (662.5)
Net income (loss) 441.4 145.6 (3.3) (914.3) (330.6)
Earnings per share:
Before cumulative effect of accounting changes 1.76 2.33 (0.07) (14.81) (10.79)
Net income (loss) 7.13 2.33 (0.07) (14.81) (5.42)
------------------------------------------------------------------------------------------------------------------------------
CNA FINANCIAL CORPORATION
-------------------------
70
-----------------------------------------------------------------------
NOTE N -- PROPOSED ACQUISITIONS (UNAUDITED)
Note N - Proposed Acquisitions (Unaudited):
-------------------------------------------
The Continental Corporation
In the fourth quarter of 1994, CNA reached an agreement to purchase the
outstanding shares of common stock of The Continental Corporation (CIC)
for approximately $1.1 billion, or $20 per CIC share. The acquisition
will be accounted for as a purchase and, accordingly CIC's results of
operations will be included in CNA's consolidated results of operations
for the period subsequent to the date of closing, which is expected in
the second quarter of 1995. CNA and CIC are jointly seeking prompt
regulatory approvals. The transaction closing is subject to the
approvals of the Continental shareholders and state insurance
regulators. The transaction is also subject to review by the Federal
Trade Commission and the Department of Justice (which review has
been completed). Until the required approvals are received and the
acquisition is complete, the Companies will continue to operate
independently.
CNA has reached an agreement in principle with a syndicate of banks to
provide initial financing through a revolving loan facility. The loan
will have a maturity of five years without any prepayment restrictions.
The loan will allow CNA to consummate the merger and facilitate a smooth
transition expeditiously, while providing the needed flexibility to
determine the ultimate capital structure at a time when it is
advantageous in the capital markets to raise debt or potentially a
combination of debt and equity.
CIC, headquartered in New York, is the 11th largest U.S.
property/casualty insurance company based on 1993 premium volume. The
revenues and net loss of CIC and subsidiaries for the year ended
December 31, 1994, were $5.1 billion and $602.9 million, respectively.
Total assets were $16.0 billion at December 31, 1994.
Alexsis
CNA's Continental Casualty subsidiary has acquired all of the stock of
Alexsis, a wholly owned subsidiary of Alexander & Alexander Services,
Inc. (A&A) for approximately $45 million in cash according to a
definitive agreement signed January 16, 1995, by CNA and A&A.
Alexsis is one of the country's three largest property/casualty
third-party administrators (TPAs) with 1994 revenues of more than $100
million and 1,300 employees in 60 offices. Alexsis customers are large
organizations that fully or partially self-insure their risks and
separately purchase services, such as claims administration, from TPAs.
The acquisition closed February 28, 1995.
CNA FINANCIAL CORPORATION
-------------------------
71
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, 1994 and 1993 and the related statements of consolidated
operations, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1994. 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, 1994 and 1993, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles.
As discussed in Note B to the Consolidated Financial Statements, the
Company changed its methods of accounting for reinsurance and certain
investments in debt and equity securities in 1993 and its methods of
accounting for income taxes, postretirement benefits, and certain
workers' compensation and disability claims in 1992.
DELOITTE AND TOUCHE LLP
Chicago, Illinois
February 15, 1995
CNA FINANCIAL CORPORATION
-------------------------
72
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 1, 1995,
was 3,326. As of March 1, 1995, Loews Corporation owned 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 E to the Consolidated
Financial Statements.
COMMON STOCK INFORMATION
---------------------------------------------------------------------------
1994 1993
------------------ ------------------
Quarter HIGH LOW HIGH LOW
---------------------------------------------------------------------------
Fourth 66 3/4 60 3/4 88 74 1/4
Third 64 60 94 1/2 83 3/4
Second 66 5/8 61 1/8 100 5/8 87
First 82 1/4 63 5/8 101 90 5/8
---------------------------------------------------------------------------
INVITATION TO THE ANNUAL MEETING
-----------------------------------------------------------------------
Shareholders are cordially invited to attend the annual meeting at 11
a.m. Wednesday, May 3, 1995, in Room 308, 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
-------------------------
73
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, Encyclopaedia Britannica
Edward J. Noha
Chairman of the Board of CNA
Richard L. Thomas
Chairman, Audit Committee; Chairman and Chief Executive Officer,
The First National Bank of Chicago and First Chicago Corporation
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;
Chairman of the Board, President and Chief Executive Officer of CBS Inc.
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
CORPORATE DIRECTORY - (cont.)
----------------------------------------------------------------------
EXECUTIVE COMMITTEE OFFICERS
---------------------------- -------------------------------------
Preston R. Tisch, Chairman Laurence A. Tisch
Antoinette Cook Bush Chief Executive Officer,
Dennis H. Chookaszian CNA Financial Corporation
Philip L. Engel
Robert P. Gwinn Dennis H. Chookaszian
Edward J. Noha Chairman and Chief Executive Officer,
Richard L. Thomas CNA Insurance Companies
James S. Tisch
Laurence A. Tisch Philip Engel
Marvin Zonis President, CNA Insurance Companies
Donald Lowry
Senior Vice President, Secretary and
Finance Committee General Counsel,
--------------------------- CNA Financial Corporation
James S. Tisch, Chairman
Antoinette Cook Bush Peter E. Jokiel
Dennis H. Chookaszian Senior Vice President and
Philip L. Engel Chief Financial Officer,
Robert P. Gwinn CNA Financial Corporation
Edward J. Noha
Richard L. Thomas Carolyn L. Murphy
Laurence A. Tisch Senior Vice President,
Preston R. Tisch CNA Insurance Companies
Marvin Zonis
Jae L. Wittlich
Senior Vice President,
CNA Insurance Companies
Audit Committee
--------------------------- CNA INSURANCE COMPANIES
Richard L. Thomas, Chairman ADMINISTRATIVE OFFICES
Antoinette Cook Bush -------------------------------------
Robert P. Gwinn CNA Plaza
Marvin Zonis Chicago, Illinois 60685
312/822-5000
TRANSFER AGENT AND REGISTRAR
----------------------------
The First National Bank of Chicago
CNA FINANCIAL CORPORATION
-------------------------
74
CNA FINANCIAL CORPORATION
APPENDIX
OMITTED GRAPH MATERIAL AND OTHER
Exhibit 13.1 - CNA Financial Corporation 1994 Annual Report
. Bar graphs of:
- Revenues for the period 1984 through 1994
- Assets for the period 1984 through 1994
- Stockholders' equity for the period 1984 through 1994
- Book value per common share 1984 through 1994
(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 Outquote
4 CNA continues to rank among the strongest and most stable insurance
organizations in the United States.
5 Loews has provided CNA with unwavering financial support and
invaluable investment acumen.
6 CNA and The Continental Corporation signed an agreement under which
CNA will acquire Continental.
7 CNA continues to dominate the commercial affiliation marketplace.
8 CNA continued to emphasize long-term relationships with independent
agents and brokers.
9 CNA is moving ahead with sound strategies for continued growth and
success.
Pages 4 and 5 are from CNA Financial Corporation Chairman Edward
J. Noha, and pages 6 through 9 are from CNA Insurance Companies
Chairman and Chief Executive Officer Dennis H. Chookaszian.
EX-28.2
12
EXHIBIT 28.2
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF THE CONTINENTAL CASUALTY COMPANY
SCHEDULE P - ANALYSIS OF LOSSES AND LOSS EXPENSES
Notes to Schedule P
(1) The Parts of Schedule P:
Part 1 - detailed information on losses and loss expenses.
Part 2 - history of incurred losses and allocated expenses.
Part 3 - history of loss and allocated expense payments.
Part 4 - history of bulk and incurred-but-not reported reserves.
Part 5 - history of claims.
Part 4 - history of premiums earned.
Schedule P Interrogatories
(2) Lines of business A through M, R, and S are groupings of the lines of
business used on Page 14, the state page.
(3) Reinsurance A, B, C, and D (lines N to Q) are:
Reinsurance A = nonproportional property (1988 and subsequent)
Reinsurance B = nonproportional liability (1988 and subsequent)
Reinsurance C = financial lines (1988 and subsequent)
Reinsurance D = old Schedule O line 30 (1987 and prior)
SCHEDULE P - PART 1 - SUMMARY
(000 omitted)
!-------------#-----------------------------------------#-----------------------------------------------------------!
| | Premiums Earned | Loss and Loss Expense Payments |
| 1 |-------------#-------------#-------------|-----------------------------#-----------------------------|
| Years | 2 | 3 | 4 | Loss Payments | Allocated Loss |
| in Which | | | | | Expense Payments |
|Premiums Were| | | |--------------#--------------|--------------#--------------|
| Earned and | Direct | | Net | 5 | 6 | 7 | 8 |
| Losses Were | and | Ceded | (2 - 3) | Direct | | Direct | |
| Incurred | Assumed | | | and Assumed | Ceded | and Assumed | Ceded |
|-------------|-------------|-------------|-------------|--------------|--------------|--------------|--------------|
|
| 1. Prior | X X X X | X X X X | X X X X | 420,726 | 137,405 | 121,406 | 15,903 |
| 2. 1985 | 2,756,886 | 425,772 | 2,331,114 | 2,329,418 | 605,053 | 316,547 | 41,801 |
| 3. 1986 | 4,300,449 | 550,592 | 3,749,857 | 2,154,422 | 322,105 | 326,131 | 34,033 |
| 4. 1987 | 4,915,810 | 665,280 | 4,250,529 | 2,423,657 | 347,165 | 289,438 | 14,346 |
| 5. 1988 | 5,399,645 | 613,422 | 4,786,223 | 2,881,508 | 349,332 | 315,744 | 17,982 |
| 6. 1989 | 5,768,987 | 549,762 | 5,219,225 | 3,567,826 | 382,535 | 342,400 | 23,979 |
| 7. 1990 | 6,595,234 | 454,185 | 6,141,049 | 3,610,848 | 225,831 | 351,237 | 13,704 |
| 8. 1991 | 6,891,720 | 425,638 | 6,466,082 | 3,159,956 | 167,336 | 283,412 | 8,955 |
| 9. 1992 | 6,535,769 | 434,065 | 6,101,704 | 2,741,868 | 204,385 | 179,762 | 8,203 |
|10. 1993 | 6,404,755 | 454,555 | 5,950,200 | 1,829,177 | 136,622 | 85,787 | 3,799 |
|11. 1994 | 6,955,762 | 522,977 | 6,432,785 | 1,198,298 | 73,232 | 34,920 | 1,365 |
|-------------|-------------|-------------|-------------|--------------|--------------|--------------|--------------|
|12. Totals | X X X X | X X X X | X X X X | 26,317,705 | 2,951,001 | 2,646,784 | 184,071 |
| | | | | | | | |
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