-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MfgRaZG3IGNERjSNS2uxlPri/6ZRhT1+jksTHUjW5HdAvaQL/wRnGt7izduECYe6 IWBJs4jvg2KFDPgp+8EOaw== 0000021175-96-000003.txt : 19960402 0000021175-96-000003.hdr.sgml : 19960402 ACCESSION NUMBER: 0000021175-96-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNA FINANCIAL CORP CENTRAL INDEX KEY: 0000021175 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 366169860 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05823 FILM NUMBER: 96542156 BUSINESS ADDRESS: STREET 1: CNA PLZ CITY: CHICAGO STATE: IL ZIP: 60685 BUSINESS PHONE: 3128225000 MAIL ADDRESS: STREET 1: CNA PLAZA CITY: CHICAGO STATE: IL ZIP: 60685 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER 1-5823 -------------------- CNA FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 36-6169860 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) CNA PLAZA CHICAGO, ILLINOIS 60685 (Address of principal executive offices) (Zip Code) (312) 822-5000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ---------------- Common Stock New York Stock Exchange with a par value Chicago Stock Exchange of $2.50 per share Pacific Stock Exchange ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(G)OF THE ACT: None ------------------------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No.... As of March 1, 1996, 61,798,262 shares of common stock were outstanding and the aggregate market value of the common stock of CNA Financial Corporation held by non-affiliates was approximately $1,145 million. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the CNA Financial Corporation 1995 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 1996 annual meeting of shareholders, pursuant to Regulation 14A, are incorporated by reference into Part III of this Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CNA FINANCIAL CORPORATION FORM 10-K REPORT FOR THE YEAR ENDED DECEMBER 31, 1995 Item Page Number PART I Number ------ ------ 1 Business.............................................. 3 2 Properties............................................ 19 3 Legal Proceedings..................................... 20 4 Submission of Matters to a Vote of Security Holders..................................... 20 PART II 5 Market for the Registrant's Common Stock and Related Stockholder Matters.......................... 20 6 Selected Financial Data............................... 20 7 Management's Discussion and Analysis of Financial Condition and Results of Operations........ 20 8 Financial Statements and Supplementary Data........... 20 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............... 20 PART III 10 Directors and Executive Officers of the Registrant.... 21 11 Executive Compensation................................ 21 12 Security Ownership of Certain Beneficial Owners and Management........................................ 21 13 Certain Relationships and Related Transactions........ 21 PART IV 14 Financial Statements, Schedules, Exhibits, and Reports on Form 8-K................................... 21 2 PART I ITEM 1. BUSINESS 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. In late 1994, CNA reached an agreement to acquire all the outstanding common stock of The Continental Corporation ("Continental") through a cash merger for approximately $1.1 billion. On May 9, 1995, Continental shareholders approved the agreement and the merger was completed on May 10. As a result and upon consummation of the merger, Continental became a wholly owned subsidiary of CNA. The Continental Corporation, a New York corporation incorporated in 1968, is an insurance holding company. Its principal subsidiary, The Continental Insurance Company ("CIC") was organized in 1853. The principal business of Continental is the ownership of a group of property and casualty insurance companies. CNA's property and casualty insurance operations are conducted by CCC and its property and casualty insurance affiliates and CIC and its property and casualty insurance affiliates. Life insurance operations are conducted by CAC and its life insurance affiliates. CNA's principal business is insurance conducted through its insurance subsidiaries. As multiple-line insurers, the insurance companies underwrite property, casualty, life, and accident and health coverages. Their principal market for insurance is the United States. COMPETITION All aspects of the insurance business are highly competitive. CNA's insurance operations compete with a large number of stock and mutual insurance companies and other entities for both producers and customers and must continuously allocate resources to refine and improve insurance products and services. There are approximately 3,300 companies that sell property/casualty insurance in the United States, approximately 900 of which operate in all or most states. CNA's consolidated property/casualty subsidiaries (including CIC on a proforma basis) would have been ranked as the third largest property/casualty insurance organization in 1994 based upon statutory net written premium. 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-fourth largest life insurance organization based on 1994 consolidated statutory premium volume. DIVIDENDS BY INSURANCE SUBSIDIARIES The payment of dividends to CNA by its insurance affiliates without prior approval of the affiliate's domiciliary state insurance commissioners is limited to amounts determined by formula in accordance with the accounting practices prescribed or permitted by the state's insurance departments. This formula varies by state. The formula for the majority of the states is the greater of 10% of prior year statutory surplus or prior year statutory net income, less the aggregate of all dividends paid during the twelve months prior to date of payment. Some states, however, have an additional stipulation that dividends can't exceed prior year earned surplus. Based upon the various states formulas, approximately $860 million in dividends could be paid to CNA by its insurance affiliates in 1996 without prior approval. All dividends must be reported to the insurance department prior to declaration and payment. 3 REGULATION The insurance industry is subject to comprehensive and detailed regulation and supervision throughout the United States. Each state has established supervisory agencies with broad administrative power relative to licensing insurers and agents, approving policy forms, establishing reserve requirements, fixing minimum interest rates for accumulation of surrender values and maximum interest rates of policy loans, prescribing the form and content of statutory financial reports, 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. There has been a growing legislative trend, particularly for personal lines products and workers compensation, directly impacting insurance rate development, rate application and the ability of insurers to cancel or renew insurance policies. Insurers are also required by the states to provide coverage to insureds who would not otherwise be considered eligible by the insurers. Each state dictates the types of insurance and the level of coverage which must be provided to such involuntary risks. CNA's insurance subsidiaries' share of these involuntary risks is mandatory and generally a function of its respective share of the voluntary market by line of insurance in each state. 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 more closely regulate for solvency, minimized the diversity of approved statutory accounting and actuarial practices, and increased the annual statutory statement disclosure requirements. The RBC formulas are designed to identify an insurer's minimum capital requirements based upon the inherent risks (e.g., asset default, credit and underwriting) of its operations. In addition to the minimum capital requirements, the RBC formula and related regulations identify various levels of capital adequacy and corresponding actions that the state insurance departments should initiate. The level of capital adequacy below which insurance departments would take action is defined as the Company Action Level. As of December 31, 1995, all of CNA's life insurance affiliates and property/casualty affiliates have adjusted capital amounts in excess of Company Action Levels. The NAIC 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 through application of a number of financial ratios. These ratios 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 no IRIS ratios with unusual values in 1995. The one ratio with an unusual value in 1994 was 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. Catastrophe losses and reserve increases associated with Fibreboard Corporation litigation (see Note J of the Consolidated Financial Statements) recorded in 1992 and 1993 triggered the unusual values for the operating ratios generated in 1993 and 1994 and the reserve development ratios generated in 1993. Additionally, lower interest rates in 1993, coupled with a proportionately large short-term investment portfolio, triggered the unusual value for the investment yield ratio. 4 REGULATION-(CONTINUED) CIC had three IRIS ratios with unusual values in 1995. These ratios were change in writings, two-year overall operating ratio, and the two-year reserve development to surplus. The overall decline in premiums written is attributable to CIC's efforts to shift its business mix towards more profitable lines. The two-year overall operating and the two-year reserve development to surplus ratios were adversely impacted by the establishment of environmental reserves of $400 million for incurred but not reported losses in 1994 and $200 million in other loss reserve development, principally in workers' compensation. Further, in 1994, results were adversely affected by catastrophe losses. CAC had no IRIS ratios with unusual values in 1995 or 1994. CAC had two unusual values for IRIS ratios in 1993, which were net gain to total income and change in net written premium. CAC's reported statutory net income was adversely affected in 1993 by depressed investment earnings. The unusual value for the change in premium ratio primarily related to decreases in the Separate Account annuity products fund deposits. The potential for health care reform had been widely publicized and debated in 1994. Although these legislative reforms failed in 1994, and none were enacted in 1995, some Federal or state health care reform could emerge in the future. Federal regulation of the insurance industry and repeal of the McCarran-Ferguson anti-trust exemptions for the insurance industry were widely discussed topics in the 103rd Congress but have not been of interest in the first session of the 104th Congress in 1995, and are not anticipated to be of interest in the second session in 1996. 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. A number of states have adopted some "tort reform" measures which, among other things, limit non-economic and punitive damages and otherwise limit damage awards in product liability and malpractice cases. Illinois and Texas adopted substantial tort reform in 1995 limiting non-economic damages and the amount of punitive damages in all civil actions. Arizona, Colorado, Connecticut, Indiana, Michigan, Montana, New Jersey, North Carolina, North Dakota, Oklahoma, Oregon, South Dakota and Wisconsin all adopted some measure of tort reform. Environmental 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. See Note K of the Consolidated Financial Statements for further discussion. REINSURANCE CNA assumes and cedes insurance with other insurers and reinsurers. CNA utilizes reinsurance arrangements to limit its maximum loss, to provide greater diversification of risk and to minimize aggregate exposures. 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 its states of domicile, CNA receives collateral primarily in the form of bank letters of credit, securing a large portion of the recoverables. Such collateral totaled approximately $1.12 billion and $165 million at December 31, 1995 and 1994, respectively. CNA's largest recoverable from a single reinsurer, including prepaid reinsurance premiums, was approximately $435 million and $348 million with Lloyd's of London at December 31, 1995 and 1994, respectively. 5 EMPLOYEE RELATIONS CNA has approximately 25,000 full-time equivalent employees and has experienced satisfactory labor relations. CNA has never had work stoppages due to labor disputes. CNA has comprehensive benefit plans for substantially all of its employees, including retirement plans, savings plans, disability programs, group life programs, and group health care programs. BUSINESS SEGMENTS Information as to CNA's business segments is set forth in Note L of the Consolidated Financial Statements, incorporated by reference in Item 8, herein. PROPERTY/CASUALTY BUSINESS CNA's property/casualty operations market commercial and personal lines of property/casualty insurance through independent agents and brokers. CNA 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 large commercial account policies are written under retrospectively-rated contracts which are experience-rated. Premiums for such contracts may be adjusted, subject to limitations set by contract, based on loss experience of the insureds. Other experience-rated policies include provisions for adjustments to dividends based on loss experience. Experience-rated contracts reduce but do not eliminate risk to the insurer. Approximately 12% 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 19%, 19% and 18%, respectively, of 1995 premiums earned. CNA is required by the various states in which it does business to provide coverage for risks that would not otherwise be considered under CNA's underwriting standards. CNA's share of involuntary risks is mandatory and generally a function of its respective share of the voluntary market by line of insurance in each state. Premiums for involuntary risks result from mandatory participation in residual markets. CNA also markets personal lines of insurance, primarily automobile and homeowners' coverages sold to individuals under monoline and package policies. The Continental merger made CNA the market leader in package personal lines products. 6 PROPERTY/CASUALTY BUSINESS-(CONTINUED) The following table sets forth supplemental data on a GAAP basis, except where indicated, for the property/casualty business:
- --------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1995 (a) 1994 1993 1992 1991 (In millions of dollars) - --------------------------------------------------------------------------------------------------------------- COMMERCIAL PREMIUMS EARNED General liability......................... $ 1,648.9 $ 1,261.1 $ 1,154.5 $ 1,176.0 $ 1,292.6 Professional and specialty................ 1,557.7 1,010.1 798.9 741.5 763.9 Workers' compensation..................... 1,475.8 1,426.3 1,501.5 1,669.2 1,920.4 Multiple peril............................ 869.9 389.0 368.5 374.9 397.2 Reinsurance and other..................... 973.9 773.5 712.2 556.0 482.0 Accident and health....................... 699.1 557.1 428.3 352.6 294.2 ---------- ---------- ---------- --------- --------- $ 7,225.3 $ 5,417.1 $ 4,963.9 $ 4,870.2 $ 5,150.3 ========== ========== ========== ========= ========= PERSONAL PREMIUMS EARNED Personal lines packages................... $ 781.6 $ 562.6 $ 510.7 $ 447.3 $ 335.6 Monoline automobile and property coverages 325.4 314.2 343.5 395.0 470.7 Accident and health....................... 107.8 88.9 85.6 88.6 88.8 ---------- ---------- ---------- --------- --------- $ 1,214.8 $ 965.7 $ 939.8 $ 930.9 $ 895.1 ========== ========== ========== ========= ========= INVOLUNTARY RISKS PREMIUMS EARNED (B) Workers' compensation..................... $ 178.2 $ 350.0 $ 292.3 $ 451.4 $ 499.5 Private passenger auto.................... 79.7 46.4 23.2 52.5 39.2 Commercial passenger auto................. 19.9 54.3 50.3 44.9 66.6 Property and multiple peril............... 5.9 5.0 5.5 3.7 4.6 ---------- ---------- ---------- --------- --------- $ 283.7 $ 455.7 $ 371.3 $ 552.5 $ 609.9 ========== ========== ========== ========= ========= NET INVESTMENT INCOME AND OTHER INCOME Commercial................................ $ 1,713.1 $ 1,145.2 $ 979.8 $ 1,087.3 $ 1,131.3 Personal.................................. 230.4 177.6 156.1 165.3 160.1 Involuntary risks......................... 104.3 88.1 75.7 83.6 78.5 ---------- ---------- ---------- --------- --------- $ 2,047.8 $ 1,410.9 $ 1,211.6 $ 1,336.2 $ 1,369.9 ========== ========== ========== ========= ========= UNDERWRITING LOSS Commercial................................ $ (920.8) $ (945.7) $ (1,535.6) $(2,505.9) $ (707.1) Personal.................................. (101.9) (185.2) (99.7) (152.8) (172.1) Involuntary risks......................... (98.8) (70.3) (156.5) (340.9) (345.5) ----------- ----------- ----------- ---------- ---------- $ (1,121.5) $ (1,201.2) $ (1,791.8) $(2,999.6) $(1,224.7) =========== =========== =========== ========== ==========
- --------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1995 (a) 1994 1993 1992 1991 (In millions of dollars) - --------------------------------------------------------------------------------------------------------------- TRADE RATIOS (C) Loss ratio................................ 77.9% 81.9% 96.2% 116.7% 88.1% Expense ratio............................. 29.4 28.3 27.2 26.2 25.8 Combined ratio (before policyholder 107.3 110.2 123.4 142.9 113.9 dividends)................................ Policyholder dividend ratio............... 3.0 4.8 3.9 1.9 2.5 TRADE RATIOS - STATUTORY BASIS (C) Loss ratio................................ 78.6% 82.2% 96.4% 116.3% 88.2% Expense ratio............................. 29.2 27.8 27.1 25.6 25.6 Combined ratio (before policyholder 107.8 110.0 123.5 141.9 113.8 dividends)................................ Policyholder dividend ratio............... 2.1 3.8 3.1 2.4 2.7 OTHER DATA - STATUTORY BASIS (D) Capital and surplus....................... $ 5,695.9 $ 3,367.3 $ 3,598.4 $ 3,135.8 $ 3,927.5 Written to surplus ratio.................. 1.7 2.0 1.7 2.0 1.7 - ---------------------------------------------------------------------------------------------------------------- (a) Premiums earned, net investment income and other income, and underwriting loss includes the results of The Continental Corporation since May 10, 1995. (b) Property/casualty involuntary risks include mandatory participation in residual markets, statutory assessments for insolvencies of other insurers, and other involuntary charges. (c) GAAP trade ratios reflect the results of Continental Casualty Company and its property/casualty insurance subsidiaries for the whole year, along with the results of the Continental Insurance Company since May 10, 1995. Statutory trade ratios reflect the results of Continental Casualty Company, its property/casualty insurance subsidiaries and Continental Insurance Company for the entire year of 1995. Prior year ratios have not been restated to include Continental. Trade ratios are industry measures of property/casualty underwriting results. The loss ratio is the percentage of incurred claim and claim adjustment expenses to premiums earned. Under generally accepted accounting principles, the expense ratio is the percentage of underwriting expenses, including the change in deferred acquisition costs, to premiums earned. Under statutory accounting practices, the expense ratio is the percentage of underwriting expenses (with no deferral of acquisition costs) to premiums written.
7 PROPERTY/CASUALTY BUSINESS-(CONTINUED) The combined ratio, before policyholder dividends, is the sum of the loss and expense ratios. The policyholder dividend ratio is the ratio of dividends incurred to premiums earned. (d) Other Data is determined on the basis of statutory accounting practices and reflects a capital contribution from CNA of $475 million in 1993. In addition, dividends of $325 million, $175 million, $150 million, $100 million and $130 million were paid to CNA by Continental Casualty Company in 1995, 1994, 1993, 1992 and 1991, respectively. Property/casualty insurance subsidiaries have received reimbursement from CNA for general management and administrative expenses, unallocated loss adjustment expenses and investment expenses of $197.0, $169.6, $167.5, $141.1, and $133.8 million in 1995, 1994, 1993, 1992 and 1991, respectively. The following table displays the distribution of domestic written premium by state: --------------------------------------------------------------------------- Gross Written Premium by State % of Total ----------------------------------- Year Ended December 31 1995 1994 1993 --------------------------------------------------------------------------- New York...................... 10.3 8.6 8.4 California.................... 9.7 11.4 12.1 Texas......................... 6.5 6.5 6.2 Pennsylvania.................. 5.4 5.7 5.9 Illinois...................... 5.2 4.9 5.1 New Jersey.................... 4.6 3.2 3.3 Florida....................... 4.1 4.6 4.1 All other states (a).......... 48.8 43.2 43.1 Reinsurance assumed: Voluntary..................... 3.4 5.9 6.9 Involuntary................... 2.0 6.0 4.9 ----- ----- ----- 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. CNA's property/casualty operations continued to show significant improvement in profitability during 1995, reflecting both improved investment income and improved underwriting results. Contributing to the improved underwriting results were continued favorable claim frequency (rate of claim occurrence) and severity (average cost per claim) in the workers' compensation line. 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 an effort to maintain growth, CNA has intensified efforts in the political arena 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 its 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. 8 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 undiscounted (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 losses on assumed insurance, and (d) estimates of future expenses to be incurred in settlement of claims. In establishing these estimates, consideration is given to current conditions and trends as well as past Company and industry experience. Structured settlements have been negotiated for certain property/casualty insurance claims. 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 CAC. Related annuity obligations are carried in future policy benefits reserves. Obligations for structured settlements not funded by annuities are carried at the present value of future benefits. Such reserves, discounted at interest rates ranging from 6.25% to 7.5%, totaled $897.4 million and $839.0 million at December 31, 1995 and 1994, respectively. Ultimate payouts under all structured settlements at December 31, 1995 and 1994, will approximate $3.0 billion and $2.4 billion, respectively. Reserving practices under both statutory accounting practices and generally accepted accounting principles allow discounting of claim reserves related to workers' compensation lifetime claims and accident and health disability claims. 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 the Company's and current industry experience. At December 31, 1995 and 1994, such discounted reserves totaled $2.7 billion and $1.1 billion, respectively. Ultimate payouts for these claims are estimated to be $3.6 billion and $1.5 billion at December 31, 1995 and 1994, respectively. 9 PROPERTY/CASUALTY CLAIM AND CLAIM EXPENSES (CONT.) The loss reserve development table below illustrates the change over time of reserves established for property/casualty claims and claims expense at the end of various calendar years. The first section shows the reserves as originally reported at the end of the stated year. The second section, reading down, shows the cumulative amounts paid as of the end of successive years with respect to that reserve liability. The third section, reading down, shows re-estimates of the original recorded reserve as of the end of each successive year which is the result of CNA's expanded awareness of additional facts and circumstances that pertain to the unsettled claims. The last section compares the latest re-estimated reserve to the reserve originally established, and indicates whether or not the original reserve was adequate or inadequate to cover the estimated costs of unsettled claims. The loss reserve development table is cumulative and, therefore, ending balances should not be added since the amount at the end of each calendar year includes activity for both the current and prior years.
- -------------------------------------------------------------------------------------------------------------------- SCHEDULE OF PROPERTY/CASUALTY LOSS RESERVE DEVELOPMENT CALENDAR YEAR ENDED 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995* 1995 (In millions of dollars) - -------------------------------------------------------------------------------------------------------------------- Gross reserves for unpaid claim and claim expenses............$ -- $ -- $ -- $ -- $ -- $16,530 $17,712 $20,034 $20,812 $21,639 $ 9,713 $31,044 Ceded recoverable... -- -- -- -- -- 3,440 3,297 2,867 2,491 2,705 3,650 6,089 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net reserves for unpaid claim and claim expenses............ 4,873 6,243 8,045 9,552 11,267 13,090 14,415 17,167 18,321 18,934 6,063 24,955 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- NET PAID (CUMULATIVE)AS OF: One year later...... 1,594 1,335 1,763 2,040 2,670 3,285 3,411 3,706 3,629 3,656 1,392 -- Two years later..... 2,932 2,383 2,961 3,622 4,724 5,623 6,024 6,354 6,143 -- -- -- Three years later... 3,022 3,197 4,031 4,977 6,294 7,490 7,946 8,121 -- -- -- -- Four years later.... 3,642 3,963 5,007 6,078 7,534 8,845 9,218 -- -- -- -- -- Five years later.... 4,175 4,736 5,801 6,960 8,485 9,726 -- -- -- -- -- -- Six years later..... 4,735 5,339 6,476 7,682 9,108 -- -- -- -- -- -- -- Seven years later... 5,233 5,880 7,061 8,142 -- -- -- -- -- -- -- -- Eight years later... 5,668 6,382 7,426 -- -- -- -- -- -- -- -- -- Nine years later.... 6,116 6,690 -- -- -- -- -- -- -- -- -- -- Ten years later..... 6,379 -- -- -- -- -- -- -- -- -- -- -- - --------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------- SCHEDULE OF PROPERTY/CASUALTY LOSS RESERVE DEVELOPMENT CALENDAR YEAR ENDED 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995* 1995 (In millions of dollars) - -------------------------------------------------------------------------------------------------------------------- NET RESERVES RE-ESTIMATED AS OF: End of initial year. 4,873 6,243 8,045 9,552 11,267 13,090 14,415 17,167 18,321 18,934 6,063 24,955 One year later...... 5,047 6,642 8,086 9,737 11,336 12,984 16,032 17,757 18,250 18,922 6,197 -- Two years later..... 5,573 6,763 8,345 9,781 11,371 14,693 16,810 17,728 18,125 -- -- -- Three years later... 5,788 6,989 8,424 9,796 13,098 15,737 16,944 17,823 -- -- -- -- Four years later.... 6,170 7,166 8,516 11,471 14,118 15,977 17,376 -- -- -- -- -- Five years later.... 6,422 7,314 10,196 12,496 14,395 16,441 -- -- -- -- -- -- Six years later..... 6,566 9,022 11,239 12,742 14,811 -- -- -- -- -- -- -- Seven years later... 8,317 10,070 11,480 13,167 -- -- -- -- -- -- -- -- Eight years later... 9,365 10,317 11,898 -- -- -- -- -- -- -- -- -- Nine years later.... 9,635 10,755 -- -- -- -- -- -- -- -- -- -- Ten years later..... 10,074 -- -- -- -- -- -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total net (deficiency) redundancy.......... (5,201) (4,512) (3,853) (3,615) (3,544) (3,351) (2,961) (656) 196 12 (134) -- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Reconciliation to Gross Re-estimated Reserves: Net reserves re-estimated 16,441 17,376 17,823 18,125 18,922 6,197 -- Re-estimated ceded recoverable 3,029 2,925 2,546 2,522 2,760 3,650 -- ------ ------ ------ ------ ------ ----- ---- Total gross re-estimated reserves 19,470 20,301 20,369 20,647 21,682 9,847 -- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Net (Deficiency) Redundancy Related to: Asbestos claims..... (2,937) (2,973) (2,925) (2,868) (2,769) (2,631) (2,583) (894) (294) (258) -- -- Environmental claims (957) (957) (943) (937) (910) (899) (853) (806) (360) (181) (60) -- Total asbestos and ------ ------ ------ ------ ------ ------ ------ ------ ------ ----- ----- ---- environmental..... (3,894) (3,930) (3,868) (3,805) (3,679) (3,530) (3,436) (1,700) (654) (439) (60) Other............... (1,307) (582) 15 190 135 179 475 1,044 850 451 (74) -- Total net ------ ------ ------ ------ ------ ------ ------ ------ ---- ---- ----- ---- (deficiency) redundancy.......... (5,201) (4,512) (3,853) (3,615) (3,544) (3,351) (2,961) (656) 196 12 (134) -- - ---------------------------------------------------------------------------------------------------------------------- *Represents Continental reserves acquired on May 10, 1995 and subsequent development thereon, through December 31, 1995. This balance combined with balances reflected in the 1994 column determine development recorded for the consolidated CNA property/casualty subsidiaries.
10 PROPERTY/CASUALTY CLAIM AND CLAIM EXPENSES (CONT.) Reserve Development - ------------------- The table below provides a reconciliation between beginning and ending claim and claim expense reserve balances for 1995, 1994 and 1993. 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 development related to prior years [increasing/(decreasing) premium] of $(173), $29 and $(127) million in 1995, 1994 and 1993, respectively.
- ----------------------------------------------------------------------------------------------------------- CHANGES IN RESERVES FOR PROPERTY/CASUALTY CLAIMS AND CLAIM EXPENSES YEAR ENDED DECEMBER 31 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------- (In millions of dollars) Reserves at beginning of year: Gross................................................................ $21,639 $20,812 $20,034 Ceded reinsurance.................................................... 2,705 2,491 2,867 - ----------------------------------------------------------------------------------------------------------- Net reserves at beginning of year............................. 18,934 18,321 17,167 The Continental Corporation reserves at acquisition - net............ 6,063 --- --- - ----------------------------------------------------------------------------------------------------------- Total net reserves 24,997 18,321 17,167 - ----------------------------------------------------------------------------------------------------------- Net incurred claims and claim expenses: Provision for insured events of current year...................... 6,787 5,611 5,388 Increase (decrease) in provision for insured events of prior years** 122 (71) 590 Amortization of discount.......................................... 106 100 94 - ----------------------------------------------------------------------------------------------------------- Total net incurred 7,015 5,640 6,072 - ----------------------------------------------------------------------------------------------------------- Net payments attributable to: Current year events............................................... 2,000 1,388 1,202 Prior year events................................................. 5,048 3,629 3,706 Amortization of discount.......................................... 9 10 10 - ----------------------------------------------------------------------------------------------------------- Total net payments 7,057 5,027 4,918 - ----------------------------------------------------------------------------------------------------------- Net reserves at end of year.......................................... 24,955 18,934 18,321 Ceded reinsurance at end of year................................... 6,089 2,705 2,491 - ----------------------------------------------------------------------------------------------------------- GROSS RESERVES AT END OF YEAR* $ 31,044 $21,639 $20,812 =========================================================================================================== *Excludes life claim and claim expense reserves and intercompany eliminations of $988 million, $926 million, and $858 million as of December 31, 1995, 1994 and 1993, respectively, included in the Consolidated Balance Sheet. **Includes $500 for Fibreboard in 1993. See Note J of the Consolidated Financial Statements in the Annual Report to Shareholders.
11 PROPERTY/CASUALTY CLAIM AND CLAIM EXPENSES (CONT.) CNA, consistent with sound insurance reserving practices, regularly adjusts its reserve estimates in subsequent reporting periods as new facts and circumstances emerge that indicate the previous estimates need to be modified. These adjustments, referred to as "reserve development," are inevitable given the complexities of the reserving process and are recorded in the statement of operations in the period the need for the adjustments becomes apparent. The property/casualty underwriting losses include net adverse (favorable) reserve development of $122 million, $(71) million and $590 million for the years 1995, 1994 and 1993, respectively. This reserve development reflects the effects of CNA's ongoing evaluation of reserve levels and is comprised of the following components: - -------------------------------------------------------------------------------- DEVELOPMENT- ADVERSE (FAVORABLE) DECEMBER 31 1995 1994 1993 (In millions of dollars) - -------------------------------------------------------------------------------- Environmental............... $241 $181 $446 Asbestos.................... 258 37 601 Other....................... (377) (289) (457) - -------------------------------------------------------------------------------- TOTAL $122 $(71) $590 ================================================================================ Asbestos and Environmental Claims - --------------------------------- CNA believes its reserves for environmental and asbestos claims are appropriately established based upon known facts and current case law. However, due to inconsistencies of court coverage decisions, the number of waste sites subject to clean-up, the standards for clean-up and liability, and other factors, the ultimate exposure to CNA for these claims may vary materially from the amounts currently recorded, resulting in a potential increase in the claim reserves recorded. In addition, issues related to, among other things, specific policy provisions, multiple insurers and allocation of liability among insurers, consequences of conduct of the insured, missing policies and proof of coverage make quantification of liabilities exceptionally difficult and subject to adjustment based upon newly available data. Due to uncertainties and factors described above, CNA believes it is not practicable to develop a meaningful range for any such additional reserves that may be required. See Note K of the Consolidated Financial Statements for further discussion of environmental and asbestos reserves. Adverse 1995 environmental reserve development of $241 million includes $60 million related to Continental and results from CNA's on-going monitoring of current settlement patterns, current pending cases and potential future claims. 1995 adverse asbestos reserve development of $258 million is based on management's assessment of the effects of 1995 payments and settlement activity as well as an on-going review of pending asbestos cases and related legal decisions. Other 1995 reserve development, which nets to $377 million of favorable reserve development, is principally due to favorable claim frequency (rate of claim occurrence) and severity (average cost per claim) experience in the workers' compensation line of business. The 1993 environmental development includes an allocation of reserves for incurred but not reported environmental claims of $340 million. The 1993 asbestos development includes $500 million related to Fibreboard. See Note J of the Consolidated Financial Statements. 12 PROPERTY/CASUALTY CLAIM AND CLAIM EXPENSES--(CONTINUED) The following table summarizes, for 1995 and 1994, the reserve development for environmental and asbestos claims. Claims activity for Continental is included for the period May 10, 1995 through December 31, 1995.
- ---------------------------------------------------------------------------------------------------------------------- RESERVE SUMMARY DECEMBER 31 1995 1994 ------------------------------------- ------------------------------------- ENVIRONMENTAL ASBESTOS ENVIRONMENTAL ASBESTOS (In millions of dollars) - ---------------------------------------------------------------------------------------------------------------------- Gross reserves: Reported claims............ $ 336.9 $1,963.3 $ 89.1 $1,954.1 Unreported claims.......... 839.7 358.3 427.0 114.0 ---------- -------- ------ -------- 1,176.6 2,321.6 516.1 2,068.1 Less reinsurance recoverables....... (146.7) (97.4) (10.4) (129.4) - ---------------------------------------------------------------------------------------------------------------------- NET RESERVES $1,029.9 $2,224.2 $505.7 $1,938.7 ======================================================================================================================
The following tables summarize claim activity for environmental and asbestos claims.
- -------------------------------------------------------------------------------------------------------------------- CHANGES IN ENVIRONMENTAL RESERVES YEAR ENDED DECEMBER 31 1995 1994 1993 (In millions of dollars) - -------------------------------------------------------------------------------------------------------------------- Net reserves at beginning of year........... $505.7 $432.6 $58.6 Continental net reserves at May 10, 1995.... 410.0 -- -- ------- ------- ------- Total net reserves...................... 915.7 432.6 58.6 ------- ------- ------- Plus: Reserve strengthening................ 240.9 180.6 445.9 ------- ------- ------- Less: Gross payments....................... 188.2 131.8 75.0 Reinsurance recoveries............... (61.5) (24.3) (3.1) ------- ------- ------- Net payments......................... 126.7 107.5 71.9 - -------------------------------------------------------------------------------------------------------------------- NET RESERVES AT END OF YEAR $1,029.9 $505.7 $432.6 ==================================================================================================================== - -------------------------------------------------------------------------------------------------------------------- CHANGES IN ASBESTOS RESERVES YEAR ENDED DECEMBER 31 1995 1994 1993 (In millions of dollars) - -------------------------------------------------------------------------------------------------------------------- Net reserves at beginning of year........... $1,938.7 $2,080.0 $1,682.8 Continental net reserves May 10, 1995....... 203.5 -- -- Total net reserves...................... 2,142.2 2,080.0 1,682.8 ------- ------- ------- Plus: Reserve strengthening................ 258.0 36.8 601.4 ------- ------- ------- Less: Gross payments....................... 239.8 245.9 204.3 Reinsurance recoveries............... (63.8) (67.8) (0.1) ------- ------- ------- Net payments......................... 176.0 178.1 204.2 - -------------------------------------------------------------------------------------------------------------------- NET RESERVES AT END OF YEAR $2,224.2 $1,938.7 $2,080.0 ====================================================================================================================
13 LIFE BUSINESS CNA's life insurance operations market individual and group insurance products through licensed agents, most of whom are independent contractors, who sell life and/or group insurance for CNA and for other companies on a commission basis. Individual insurance products include life and annuity products, which are sold to individuals and small businesses. The individual life products currently being marketed consist primarily of term, universal and participating life policies and annuities. The individual accident and health policies currently being marketed are long-term disability products. Individual annuity products consist of both single premium annuities and periodic payment annuities. Group insurance products include life, accident and health and pension products which 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. The growth in premium and in-force is attributable to new term and permanent life products, as well as annuities. CNA's products are designed and priced using assumptions management believes to be reasonably conservative for mortality, morbidity, persistency, expense levels and investment results. Underwriting practices that management believes are prudent are followed in selecting the risks that will be insured. Further, actual experience related to pricing assumptions is monitored closely so that prospective adjustments to these assumptions may be implemented as necessary. CNA mitigates the risk related to persistency by including contractual surrender charge provisions in its ordinary life and annuity policies in the first five to ten years, thus providing for the recovery of acquisition expenses. The investment portfolios supporting interest sensitive products, including universal life and individual annuities, are managed separately to minimize disintermediation 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 comprehensive health care reforms were not enacted in 1995, some health care initiatives could emerge in 1996. 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. 14 LIFE BUSINESS--(CONTINUED) The following table sets forth supplemental data for the life insurance business:
- ------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991 (In millions of dollars) - ------------------------------------------------------------------------------------------------------------------ INDIVIDUAL PREMIUMS Life and annuities....................... $ 497.1 $ 369.4 $ 312.1 $ 294.7 $ 287.9 Accident and health...................... 32.7 32.6 30.9 27.1 24.3 --------- --------- --------- --------- --------- $ 529.8 $ 402.0 $ 343.0 $ 321.8 $ 312.2 ========= ========= ========= ========= ========= GROUP PREMIUMS Life..................................... $ 167.7 $ 138.7 $ 107.2 $ 100.7 $ 90.8 Accident and health (a).................. 2,189.8 2,111.2 1,983.0 1,957.5 1,887.0 Annuities................................ 145.1 26.3 9.0 57.7 24.3 --------- --------- --------- --------- --------- $ 2,502.6 $ 2,276.2 $ 2,099.2 $ 2,115.9 $ 2,002.1 ========= ========= ========= ========= ========= NET INVESTMENT INCOME AND OTHER INCOME Individual............................... $ 247.3 $ 193.8 $ 154.2 $ 163.0 $ 162.5 Group.................................... 198.1 166.4 142.8 156.6 185.4 --------- --------- --------- --------- --------- $ 445.4 $ 360.2 $ 297.0 $ 319.6 $ 347.9 ========= ========= ========= ========= ========= INCOME EXCLUDING REALIZED CAPITAL GAINS, BEFORE INCOME TAX Individual............................... $ 65.4 $ 47.3 $ 14.5 $ 22.5 $ 13.8 Group.................................... 94.9 87.1 51.9 56.1 76.0 --------- --------- --------- --------- --------- $ 160.3 $ 134.4 $ 66.4 $ 78.6 $ 89.8 ========= ========= ========= ========= ========= GROSS LIFE INSURANCE IN FORCE Individual (b)........................... $ 113,901 $ 80,560 $ 76,835 $ 75,569 $ 71,539 Group.................................... 52,146 46,873 35,413 29,643 27,139 --------- --------- --------- --------- --------- $ 166,047 $ 127,433 $ 112,248 $ 105,212 $ 98,678 ========= ========= ========= ========= ========= OTHER DATA - STATUTORY BASIS(C) Capital and surplus...................... $ 1,127.6 $ 1,054.6 $ 1,022.0 $ 1,003.0 $ 968.4 Capital and surplus-percent of total liabilities..................... 28.2% 29.4% 30.1% 33.4% 29.9% Participating policyholders-percent of gross life insurance in force 0.6 0.9 1.1 1.2 1.6 - ------------------------------------------------------------------------------------------------------------------
(a) Group accident and health premiums include contracts involving U.S. government employees and their dependents amounting to approximately $1.9, $1.8, $1.7, $1.6, and $1.5 billion in 1995, 1994, 1993, 1992, and 1991, respectively. (b) Lapse ratios, for individual life insurance, as measured by surrenders and withdrawals as a percentage of average ordinary life insurance in force were 9.4%, 9.7%, 9.7%, 8.6%, and 10.4%, in 1995, 1994, 1993, 1992, and 1991, respectively. (c) Other Data is determined on the basis of statutory accounting practices. Life insurance subsidiaries have received reimbursement from CNA for general management and administrative expenses and investment expenses of $21.3, $24.7, $25.6, $24.5, and $25.7 million in 1995, 1994, 1993, 1992, and 1991, 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 as created reserves) as surplus.
15 LIFE BUSINESS - (CONTINUED) Guaranteed Investment Contracts - ------------------------------- CAC writes the majority of its group pension products as guaranteed investment contracts in a fixed Separate Account, which is permitted by Illinois insurance statutes. CAC guarantees principal and a specified return to guaranteed investment contractholders. This guarantee affords the contractholders additional security, in the form of CAC's general account surplus, which supports the principal and interest payments. CNA manages the liquidity and interest rate risks on the guaranteed investment contract portfolio by matching the duration of fixed maturity securities included in the guaranteed investment contract portfolio with the corresponding payout pattern of the contracts, and assessing market value surrender charges on the majority of the contracts. The table below shows a comparison of the duration of assets and contracts, weighted average investment yield, weighted average interest crediting rates, and withdrawal characteristics of the guaranteed investment contract portfolio. - -------------------------------------------------------------------------------- December 31 1995 1994 1993 - -------------------------------------------------------------------------------- Duration in years: Assets..................................... 3.12 3.23 2.68 Contracts.................................. 2.98 2.99 2.73 ---- ---- ----- Difference................................. 0.14 0.24 (0.05) ==== ==== ===== Weighted average investment yield............. 7.58% 7.67% 7.11% Weighted average interest crediting rates..... 7.45% 7.53% 7.74% Withdrawal characteristics: With market value adjustment.................. 92% 79% 81% Non-withdrawable........................... 8 15 13 Without market value adjustment............ 0 6 6 - -------------------------------------------------------------------------------- Total 100% 100% 100% ================================================================================ As shown above, the investment yield at December 31, 1995 and 1994 was more than the average crediting rate. The investment yields at December 31, 1993 was less than the average crediting rate. 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 contract obligations. 16 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. CNA has the capacity to hold its fixed maturity portfolio to maturity. However, securities may be sold as part of CNA's asset/liability strategies or to take advantage of investment opportunities generated by changing interest rates, prepayments, tax and credit considerations, or other similar factors. Accordingly, the fixed maturity 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, 1995, 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 $800 million of collateral for securities sold under agreements to repurchase, $1.0 billion in an escrow account (see Note A of the Consolidated Financial Statements) and approximately $1.9 billion of other short-term investments. The following summarizes CNA's distribution of general account investments at fair value: ---------------------------------------------- ---------- ---------- ---------- DISTRIBUTION OF INVESTMENTS-GENERAL ACCOUNT DECEMBER 31 1995 1994 1993 (In millions of dollars) ---------------------------------------------- ---------- ---------- ---------- Fixed maturities: Tax-exempt bonds......................... $ 3,603 $ 3,770 $ 5,015 Taxable bonds............................ 26,725 16,629 12,145 Redeemable preferred stocks.............. 116 429 448 Equity securities: Common stocks............................ 915 755 508 Non-redeemable preferred stocks.......... 3 - - Mortgage loans and real estate.............. 122 47 62 Policy loans................................ 177 176 174 Other invested assets....................... 500 101 67 Short-term investments...................... 3,725 5,036 6,944 ---------------------------------------------- ---------- ---------- ---------- Total investments at fair value $35,886 $26,943 $25,363 =============================================================================== 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 17). ------------------------------------------------------------------------------- BOND PORTFOLIO QUALITY - GENERAL ACCOUNT DECEMBER 31 1995 1994 1993 ------------------------------------------------------------------------------- AAA........................................ 78% 82% 77% AA......................................... 5 6 8 A.......................................... 6 5 7 BBB........................................ 5 2 5 Below BBB.................................. 6 5 3 ------------------------------------------------------------------------------- Total 100% 100% 100% =============================================================================== CNA's Separate Account investment portfolio is managed to specifically support the underlying insurance products (see the discussion of guaranteed investment contracts on page 16 above). Approximately 85% or $5.0 billion of Separate Account investments are used to fund guaranteed investment contracts; the remaining investments are used to fund variable products. 17 INVESTMENTS (CONTINUED) Approximately 96% of the guaranteed investment contracts investment portfolio is comprised of taxable fixed income securities. The quality of the guaranteed investment contracts fixed maturity portfolio is as follows (see Note below): - -------------------------------------------------------------------------------- BOND PORTFOLIO QUALITY - GUARANTEED INVESTMENT PORTFOLIO DECEMBER 31 1995 1994 1993 - -------------------------------------------------------------------------------- AAA............................................. 54% 49% 44% AA.............................................. 5 5 6 A............................................... 14 13 18 BBB............................................. 7 9 13 Below BBB....................................... 20 24 19 - -------------------------------------------------------------------------------- Total 100% 100% 100% ================================================================================ Note: The bond ratings shown in the two tables above are primarily from Standard & Poor's (93% of the general account portfolio and 95% of the guaranteed investment portfolio in 1995). In the case of private placements and other unrated securities, comparable internal ratings are developed by CNA. These ratings are derived by management using information available 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. High yield securities are bonds rated below investment grade by bond rating agencies, plus private placements and other unrated securities, which in CNA's opinion, are below investment grade (below BBB). 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. As of December 31, 1995, CNA's concentration of high yield bonds including separate accounts was approximately 4.7% of total assets. At December 31, 1995 and 1994, high yield securities within the general and guaranteed investment portfolios were carried at fair value and amounted to $2.8 billion and $2.1 billion, respectively. Carrying values and fair values of high yield securities in the general account were $1.9 billion at December 31, 1995, compared to $1.0 billion at December 31, 1994. In 1995, the level of high yield investments within the guaranteed investment portfolio decreased $158 million to $944 million at year end. Market value exceeded amortized cost for high yield securities by approximately $53 million at December 31, 1995 compared to December 31, 1994 when amortized cost exceeded market value by $138 million. Included in CNA's 1995 AAA-rated fixed income securities (general and guaranteed investment portfolios) are $8.5 billion of asset-backed securities, consisting of approximately 32% in collateralized mortgage obligations ("CMO's"), 57% in U.S. government agency issued pass-through certificates, and 11% 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. CNA invests from time to time in certain derivative financial instruments to increase investment returns and to eliminate the impact of changes in interest rates on certain corporate borrowings. Financial instruments used for such purposes include interest rate swaps, put and call options, commitments to purchase securities, and short sale of common stock. The gross notional principal or contractual amounts of these instruments at December 31, 1995, totaled $2,769.8 million (including $1.2 billion of interest rate swaps associated with corporate borrowings) compared to $127.9 million at December 31, 1994. See Note F of the Consolidated Financial Statements for further discussion. 18 ITEM 2. PROPERTIES CNA Plaza, owned by Continental Assurance Company, serves as the home office for CNA and its insurance subsidiaries. An adjacent building (located at 55 E. Jackson Blvd.), jointly owned by Continental Casualty Company and Continental Assurance Company, is partially situated on grounds under leases expiring in 2058. Approximately 35% of the adjacent building is rented to non-affiliates. CNA's subsidiaries lease office space in various cities throughout the United States and in other countries. The following table sets forth certain information with respect to the principal office buildings owned or leased by CNA's subsidiaries: ------------------------------------------------------------------------- Amount Of Building Owned and Occupied or Leased by CNA or its Location Subsidiaries Principal Usage ------------------------------------------------------------------------- CNA Plaza 1,421,000 * Principal Executive 333 S. Wabash offices of CNA Chicago, Illinois 180 Maiden Lane 850,453* Property/Casualty New York, New York Insurance Offices 1 Continental Drive 490,993** Property/Casualty Cranbury, New Jersey Insurance Offices 55 E. Jackson Blvd. 323,040 * Principal Executive Chicago, Illinois offices of CNA 200 S. Wacker Drive 296,822** Property/Casualty Chicago, Illinois Insurance Offices 401 Penn Street 251,691* Property/Casualty Reading, Pennsylvania Insurance Offices 100 CNA Drive 251,363* Life Insurance Offices Nashville, Tennessee 7361 Calhoun Place 224,175** Life Insurance Offices Rockville, Maryland 1111 E. Broad St. 197,537** Property/Casualty Columbus, Ohio Insurance Offices 333 Glen Street 158,700** Property/Casualty Glen Falls, New York Insurance Offices; Residual Market Center 3501 State Highway 123,184** Data Processing No. 66 Facilities Neptune, New Jersey 15400 Calhoun Drive 106,848** Life Insurance Offices Rockville, Maryland ------------------------------------------------------------------------- Amount Of Building Owned and Occupied or Leased by CNA or its Location Subsidiaries Principal Usage ------------------------------------------------------------------------- 1431 Opus Place 100,991** Property,/Casualty, Downers Grove, Il. Surety Insurance Offices 1100 Ward Avenue, 95,450* First Insurance Honolulu, Hawaii Company of Hawaii, Ltd. Headquarters * Represents property owned by CNA or its subsidiaries. ** Represents property leased by CNA or its subsidiaries. 19 ITEM 3. LEGAL PROCEEDINGS Incorporated herein by reference from Note J of the Consolidated Financial Statements in the 1995 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 76 of the 1995 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA Incorporated herein by reference from page 2 of the 1995 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 25 of the 1995 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Balance Sheet - December 31, 1995 and 1994 Statement of Consolidated Operations - Years Ended December 3l, 1995, 1994 and 1993 Statement of Consolidated Stockholders' Equity - Years Ended December 31, 1995, 1994 and 1993 Statement of Consolidated Cash Flows - Years Ended December 31, 1995, 1994 and 1993 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 26 through 74 of the 1995 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required in Part III has been omitted as the Registrant intends to file a definitive proxy statement pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year. ITEM 11. EXECUTIVE COMPENSATION Information required in Part III has been omitted as the Registrant intends to file a definitive proxy statement pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required in Part III has been omitted as the Registrant intends to file a definitive proxy statement pursuant to Regulation l4A with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required in Part III has been omitted as the Registrant intends to file a definitive proxy statement pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year. PART IV ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
Page (a) 1. FINANCIAL STATEMENTS: Number A separate index to the Consolidated Financial Statements is presented in Part II, Item 8.............................................................. 21 (a) 2. FINANCIAL STATEMENT SCHEDULES: Schedule I Summary of Investments...................................... 26 Schedule II Condensed Financial Information (Parent Company)............ 27 Schedule III Supplementary Insurance Information......................... 31 Schedule V Valuation and Qualifying Accounts and Reserves.............. 32 Schedule VI Supplemental Information Concerning Property/Casualty Insurance Operations........................................ 32 Other schedules are omitted because of the absence of conditions under which they are required or because the required information is provided in the Consolidated Financial Statements or notes thereto. Independent Auditors' Report.................................................... 33
21 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 August 2, 1995................ 3.2* (4) Instruments defining the rights of security holders, including indentures: CNA Financial Corporation hereby agrees to furnish to the Commission upon request copies of instruments with respect to long-term debt, pursuant to Item 601(b) (4) (iii) of Regulation S-K............................ - (10) Material contracts: Continental Casualty Company "CNA" Annual Incentive Bonus Plan Provisions (Exhibit 10.1 to 1994 Form 10K incorporated herein by reference)............... 10.1 Employment Agreement between CNA Financial Corporation and Dennis H. Chookaszian, dated December 31, 1995................................. 10.2* Employment Agreement between CNA Financial Corporation and Philip L. Engel, dated December 31, 1995....................................... 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
22 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 reference).............................................................. 10.11 Glossary of Terms in Global Settlement Agreement, Trust Agreement, Trust Distribution Process and Defendant Class Settlement Agreement as of December 23, 1993 (Exhibit 10.12 to 1993 Form 10-K incorporated herein by reference).............................................................. 10.12 Fibreboard Asbestos Corporation Trust Agreement dated December 23, 1993 (Exhibit 10.13 to 1993 Form 10-K incorporated herein by reference)......... 10.13 Trust Distribution Process - Annex A to the Trust Agreement as of December 23, 1993 (Exhibit 10.14 to 1993 Form 10-K incorporated herein by reference).............................................................. 10.14 Defendant Class Settlement Agreement dated December 22, 1993 (Exhibit 10.15 to 1993 Form 10-K incorporated herein by reference).................. 10.15 Escrow Agreement among Continental Casualty Company, Pacific Indemnity Company and The First National Bank of Chicago dated December 23, 1993 (Exhibit 10.16 to 1993 Form 10-K incorporated herein by reference)......... 10.16
23 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) 1995 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 CNA's property/casualty insurance subsidiaries 1995 Annual Statutory Statements provided to state insurance regulatory authorities............ 28.2 ** * Filed herewith ** Filed hard copy under Regulation S-T Rule 311(c) Form SE (b) REPORTS ON FORM 8-K: NONE
24
SCHEDULE I CNA FINANCIAL CORPORATION SUMMARY OF INVESTMENTS - ------------------------------------------------------------------------------------------------------------------ DECEMBER 31 1995 1994 ------------------------------- ------------------------------- 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.... $17,903.4 $18,511.4 $18,511.4 $13,404.4 $12,704.2 $12,704.2 States, municipalities and political subdivisions-tax exempt............. 3,452.8 3,603.1 3,603.1 3,704.6 3,769.6 3,769.6 Foreign governments and political subdivisions........................ 1,509.3 1,543.3 1,543.3 662.9 653.4 653.4 Public utilities..................... 280.2 305.2 305.2 186.8 190.0 190.0 Convertibles and bonds with warrants attached............................ 252.2 260.8 260.8 271.9 257.5 257.5 All other corporate.................. 5,881.4 6,098.8 6,098.8 2,937.2 2,824.2 2,824.2 Redeemable preferred stocks.............. 106.1 122.1 122.1 419.3 428.8 428.8 -------- -------- -------- -------- -------- -------- Total fixed maturities 29,385.4 30,444.7 30,444.7 21,587.1 20,827.7 20,827.7 ======== ======== ======== ======== ======== ======== available-for-sale Equity securities available-for-sale: Common stocks: Public utilities..................... 17.7 23.5 23.5 26.2 26.3 26.3 Banks, trusts, and insurance companies 84.3 96.7 96.7 134.6 129.0 129.0 Industrial and other................. 631.8 795.0 795.0 567.9 599.5 599.5 Non -redeemable preferred stocks......... 2.5 2.5 2.5 7.6 - - -------- -------- -------- -------- -------- -------- Total equity securities available-for-sale................. 736.3 $917.7 917.7 736.3 $754.8 754.8 -------- ======== -------- -------- ======== -------- Mortgage loans.............................. 139.8 119.3 43.8 -------- -------- -------- Real estate: Investment properties.................... 6.6 3.0 6.3 3.0 Acquired in satisfaction of debt......... 0.2 0.1 0.2 0.1 -------- -------- -------- -------- Total real estate.................. 6.8 3.1 6.5 3.1 -------- -------- -------- -------- Policy loans................................ 177.1 177.2 176.3 176.3 Other invested assets....................... 483.5 499.9 103.4 101.1 Short-term investments...................... 3,724.5 3,724.5 5,036.1 5,036.1 - ------------------------------------------------------------------------------------------------------------------ Total investments $34,653.4 $35,886.4 $27,689.5 $26,942.9 ==================================================================================================================
25
SCHEDULE II CNA FINANCIAL CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION FINANCIAL POSITION - -------------------------------------------------------------------------------------------------------- DECEMBER 31 1995 1994 (In millions of dollars) - -------------------------------------------------------------------------------------------------------- ASSETS: Investments in subsidiaries................................ $8,060.6 $4,082.1 Federal income taxes recoverable........................... 136.6 23.7 Deferred income taxes...................................... 785.2 1,475.2 Notes Receivable from affiliate............................ 205.0 --- ------- ------- Other...................................................... 7.9 3.8 ------- ------- Total assets....................................... 9,195.3 5,584.8 ------- ------- LIABILITIES: Debt....................................................... 2,222.4 896.4 Amounts due to affiliates.................................. 190.3 112.0 Other...................................................... 47.1 30.5 ------- ------- Total liabilities.................................. 2,459.8 1,038.9 Total stockholders' equity......................... 6,735.5 4,545.9 - -------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,195.3 $5,584.8 ========================================================================================================
RESULTS OF OPERATIONS - -------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1995 1994 1993 (In millions of dollars) - -------------------------------------------------------------------------------------------------------- REVENUES: Equity in income of subsidiaries before income tax: Operating income (loss)................................. $923.5 $389.1 $(467.6) Realized investment gains (losses)...................... 453.0 (256.8) 790.3 Net investment income...................................... 9.0 0.3 1.7 Other...................................................... (1.2) (3.7) (3.5) Realized investment gains (losses)......................... 3.1 (.3) 12.7 ------- ------- ------- 1,387.4 128.6 333.6 ------- ------- ------- EXPENSES: Administrative and general expenses........................ 219.7 193.1 198.9 Interest expense........................................... 125.3 69.6 41.3 ------- ------- ------- 345.0 262.7 240.2 ------- ------- Income (loss) before income tax..................... 1,042.4 (134.1) 93.4 Income tax (expense) benefit............................... (285.4) 170.6 174.1 - -------------------------------------------------------------------------------------------------------- NET INCOME $757.0 $ 36.5 $ 267.5 ======================================================================================================== See accompanying Notes to Condensed Financial Information.
26
SCHEDULE II (CONTINUED) CNA FINANCIAL CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION CASH FLOW - ------------------------------------------------------------------------------------------------------------ DECEMBER 31 1995 1994 1993 (In millions of dollars) - ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................. $ 757.0 $ 36.5 $ 267.5 -------- ------ ------ Adjustments to reconcile net income to net cash used in operating activities: Equity in earnings of unconsolidated affiliates........ (1,200.7) (98.0) (349.5) Realized (gains) losses................................ (3.1) 0.3 (12.6) Changes in: Accrued investment income............................. - 1.1 (0.1) Federal income taxes.................................. (112.9) 5.6 42.2 Deferred income taxes................................. 173.2 (115.0) (124.3) Other, net............................................ 86.7 (23.6) (17.7) -------- ------ ------ TOTAL ADJUSTMENTS.................................... (1,056.8) (229.6) (462.0) -------- ------ ------ NET CASH USED IN OPERATING ACTIVITIES................ (299.8) (193.1) (194.5) -------- ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of The Continental Corporation................... (1,125.5) - - Other acquisition.......................................... (13.0) - - Purchase of fixed maturities............................... (709.0) (195.7) (999.3) Proceeds from fixed maturities: Sales................................................... 501.2 19.6 984.5 Maturities.............................................. 200.6 192.4 - Net proceeds from the sale of equity securities............ (0.5) 4.0 - Change in short-term investments........................... 0.8 1.1 47.6 Change in other investments................................ 10.3 2.3 (4.2) Capital contribution to Continental Casualty Company....... - - (475.0) Other...................................................... (3.3) (1.0) - -------- ------ ------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.. (1,138.4) 22.7 (446.4) -------- ------ ------
CASH FLOW - ------------------------------------------------------------------------------------------------------------ DECEMBER 31 1995 1994 1993 (In millions of dollars) - ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid to preferred shareholders................... (7.3) (4.5) (4.0) Dividend from Continental Casualty Company................. 325.8 175.0 150.0 Proceeds from issuance of long-term debt................... 1,325.0 - 494.9 Loan to The Continental Corporation........................ (205.0) - - -------- ------ ------ NET CASH PROVIDED BY FINANCING ACTIVITIES............ 1,438.5 170.5 640.9 -------- ------ ------ NET INCREASE IN CASH................................ 0.3 0.1 - Cash at beginning of year..................................... 0.1 - - - ------------------------------------------------------------------------------------------------------------ CASH AT END OF YEAR........................................... $ 0.4 $ 0.1 $ - ============================================================================================================ Supplemental disclosures of cash flow information: Cash received (paid): Interest expense....................................... $(169.5) $ (70.5) $ (34.9) Federal income taxes................................... 102.5 53.1 (54.2) ============================================================================================================
Supplemental disclosures of cash flow information relating to acquisitions: Noncash investing activities that are not reflected in the Statement of Cash Flows are listed below. - -------------------------------------------------------------------------------- The Continental December 31, 1995 Corporation Other - -------------------------------------------------------------------------------- Fair value of assets acquired......... $ 15,258.5 $ 13.0 Liabilities assumed................... (14,133.0) - ---------- ------ Cash paid......................... $ 1,125.5 $ 13.0 ================================================================================ See accompanying Notes to Condensed Financial Information.
27 SCHEDULE II (Continued) CNA FINANCIAL CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION NOTES TO CONDENSED FINANCIAL INFORMATION a. Debt: - -------------------------------------------------------------------------------- DECEMBER 31 1995 1994 (In millions of dollars) - -------------------------------------------------------------------------------- Long-term Acquisition debt: Credit Facility, due May 10, 2000 $ 825.0 $ -- Commercial Paper (variable interest rates) 500.0 -- Senior Notes: 8 5/8%, due March 1, 1996* -- 249.4 8 7/8 %, due March 1, 1998 149.2 148.8 6 1/4%, due November 15, 2003 248.2 248.1 7 1/4% Debenture, due November 15, 2023 247.1 247.1 1.0% Urban Development Action Grant, due May 7, 2019 3.0 3.0 ------ ------ Total long-term debt 1,972.5 896.4 Short-term debt* 249.9 -- - -------------------------------------------------------------------------------- Total $ 2,222.4 $ 896.4 ================================================================================ * Included in short-term debt in 1995. To finance the acquisition of Continental (including the refinancing of $205 million of Continental debt), CNA entered into a five-year $1.325 billion revolving credit facility involving 16 banks. The interest rate for the facility is based on the one, two, three, or six month London Interbank Offered Rate (LIBOR), plus 25 basis points. Additionally, there is a facility fee of 10 basis points annually. The average interest rate on the borrowings under the revolving credit facility at December 31, 1995 was 6.12%. Under the terms of the facility, CNA may prepay the debt without penalty. On August 10, 1995, to take advantage of favorable interest rates, CNA established a commercial paper program borrowing $500 million to replace a like amount of credit facility financing. The average interest rate on the commercial paper at December 31, 1995 was 6.05%. The commercial paper borrowings are classified as long-term as $500 million of the facility will support the commercial paper. Standard and Poor's and Moody's issued short-term debt ratings of A2 and P2, respectively, for CNA's commercial paper program. As of March 1, 1996, the outstanding loans under the revolving credit facility were $825 million. There was no unused borrowing capacity under the facility after the effects of the commercial paper program. CNA entered into interest rate swap agreements with several banks which terminate from May to December, 2000. CNA entered into interest rate swap agreements with several banks which terminate from May to December, 2000. The effect of these interest rate swaps was to increase interest expense by $2 million for the year ended December 31, 1995. See Notes D and F of the Consolidated Financial Statements for further discussion. The weighted average interest rate (interest and facility fees) on the acquisition debt, which includes the revolving credit facility, commercial paper, and the effect of the interest rate swaps, was 6.50% on December 31, 1995. An additional $500 million of securities and/or preferred stock remain available for issuance under the shelf registration statement. 28 NOTES TO CONDENSED FINANCIAL INFORMATION (CONTINUED) b. CNA has reimbursed, or will reimburse, its subsidiaries for general management and administrative expenses, unallocated loss adjustment expenses and investment expense of $218.3 million, $194.3 million, and $193.1 million in 1995, 1994, and 1993, respectively. c. CNA contributed $475 million in capital to Continental Casualty Company in 1993. There were no capital contributions by CNA in 1995, or 1994. - -------------------------------------------------------------------------------- 29
SCHEDULE III CNA FINANCIAL CORPORATION SUPPLEMENTARY INSURANCE INFORMATION - ----------------------------------------------------------------------------------------------- GROSS INSURANCE RESERVES -------------------------------------- CLAIM DEFERRED AND FUTURE POLICY- ACQUISITION CLAIM POLICY UNEARNED HOLDERS' (In millions of dollars) COSTS EXPENSE BENEFITS PREMIUMS FUNDS - ----------------------------------------------------------------------------------------------- DECEMBER 31, 1995 Property/Casualty Commercial............ $ 701.9 $27,309.3 $ 38.5 $ 3,607.0 $ 162.6 Personal.............. 258.2 1,426.5 259.9 868.9 - Involuntary risks..... 8.6 2,308.5 - 73.5 - Life: Individual............ 505.7 162.3 2,678.8 - 31.0 Group................. 18.9 473.0 538.7 - 511.4 ------ -------- ------ ------ ----- CNA Insurance....... $ 1,493.3 31,679.6 $ 3,515.9 $ 4,549.4 $ 705.0 ======= ======= ======= ===== Other and intercompany eliminations.......... 352.8 -------- $32,032.4 ======== DECEMBER 31, 1994 Property/Casualty: Commercial............ $ 395.2 $18,920.3 $ 28.5 $ 2,129.1 $ 128.4 Personal.............. 197.1 1,042.4 199.0 559.9 - Involuntary risks..... - 1,675.9 - 1.7 - Life: Individual............ 427.3 145.2 2,414.9 - 31.7 Group................. 6.8 439.4 407.4 - 472.4 ------ -------- ------- ------- ----- CNA Insurance....... $ 1,026.4 22,223.2 $ 3,049.8 $ 2,690.7 $ 632.5 ======= ======= ======= ===== Other and intercompany eliminations.......... 341.6 -------- $22,564.8 ========
SCHEDULE III (CONT.) CNA FINANCIAL CORPORATION SUPPLEMENTARY INSURANCE INFORMATION - ----------------------------------------------------------------------------------------------- GROSS INSURANCE RESERVES -------------------------------------- CLAIM DEFERRED AND FUTURE POLICY- ACQUISITION CLAIM POLICY UNEARNED HOLDERS' (In millions of dollars) COSTS EXPENSE BENEFITS PREMIUMS FUNDS - ----------------------------------------------------------------------------------------------- DECEMBER 31, 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 ========
SCHEDULE III (CONT.) CNA FINANCIAL CORPORATION SUPPLEMENTARY INSURANCE INFORMATION - ------------------------------ ------------ ------------------------------------------------------------------- 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, 1995 Property/Casualty Commercial............ $7,225.3 $ 1,463.1 $ 5,995.2 $ 1,494.8 $ 915.3 $ 7,561.3 Personal.............. 1,214.8 132.4 891.6 271.4 228.5 1,254.3 Involuntary risks..... 283.7 104.3 234.0 16.7 145.8 310.5 Life: Individual............ 529.8 214.6 506.8 70.5 134.3 - Group................. 2,502.6 154.6 2,340.1 (9.9) 275.6 - -------- ------- ------- -------- ------- ------- CNA Insurance....... 11,756.2 2,069.0 9,967.7 $ 1,843.5 1,699.5 $ 9,126.1 ======== ======= Other and intercompany eliminations.......... (21.1) 7.6 (23.8) (19.7) -------- ------- ------- ------- $11,735.1 $ 2,076.6 $ 9,943.9 $ 1,679.8 ======== ======= ======= ======= DECEMBER 31, 1994 Property/Casualty: Commercial............ $5,417.1 $ 1,050.8 $ 4,845.8 $ 1,099.2 $ 512.3 $ 5,488.7 Personal.............. 965.7 101.5 833.2 229.6 164.1 1,037.3 Involuntary risks..... 455.7 88.1 339.6 - 186.4 438.7 Life: Individual............ 402.0 172.2 392.2 46.7 109.6 - Group................. 2,276.2 138.4 2,092.9 2.0 260.6 - -------- ------ ------- ------- ------- -------- CNA Insurance....... 9,516.7 1,551.0 8,503.7 $ 1,377.5 1,233.0 $ 6,964.7 ======= ======== Other and intercompany eliminations.......... (42.3) 0.2 (42.5) 2.4 ------- ------- ------- ------ $9,474.4 $ 1,551.2 $ 8,461.2 $ 1,235.4 ======= ======= ======= =======
SCHEDULE III (CONT.) CNA FINANCIAL CORPORATION SUPPLEMENTARY INSURANCE INFORMATION - ------------------------------ ------------ ------------------------------------------------------------------- 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, 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 ======= ======= ======= =======
30
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, 1995 Deducted from assets: Allowance for doubtful accounts: Insurance receivables................. $ 127.5 $ 39.0 $ 143.5* $ 21.3 $ 288.7 ====== ====== ======= ====== ====== YEAR ENDED DECEMBER 31, 1994 Deducted from assets: Allowance for doubtful accounts: Insurance receivables................. $ 117.3 $ 18.6 $ - $ 8.4 $ 127.5 ====== ====== ====== ====== ====== YEAR ENDED DECEMBER 31, 1993 Deducted from assets: Allowance for doubtful accounts: Insurance receivables................. $ 110.4 $ 9.2 $ - $ 2.3 $ 117.3 ====== ====== ====== ====== ====== - ---------------------------------------------------------------------------------------------------------------- * Includes Continental allowance at acquisition.
SCHEDULE VI CNA FINANCIAL CORPORATION SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS - ------------------------------------------------------------------------------------------------------ CONSOLIDATED PROPERTY/ CASUALTY ENTITIES ---------------------------------------- YEAR ENDED DECEMBER 31 ---------------------------------------- (In millions of dollars) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------- Deferred acquisition costs............................... $ 968.7 $ 592.3 $ 562.0 Reserves for unpaid claims and claim expenses............ 31,044.3 21,638.6 20,812.0 Discount, if any, deducted above (based on interest rates ranging from 3.5% to 7.5%)......................... 2,426.9 1,951.3 1,886.5 Unearned premiums........................................ 4,549.4 2,690.7 2,556.0 Earned premiums.......................................... 8,723.8 6,838.5 6,275.0 Net investment income.................................... 1,699.8 1,240.4 1,059.8 Claim and claim expenses related to current year......... 6,787.3 5,610.8 5,387.9 Claim and claim expenses related to prior years.......... 121.8 (71.2) 590.0 Amortization of deferred acquisition costs............... 1,782.9 1,328.8 1,172.4 Paid claim and claim expenses............................ 7,057.5 5,026.6 4,917.9 Premiums written......................................... 9,126.1 6,964.7 6,382.3 - -------------------------------------------------------------------------------------------------------
31 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, 1995 and 1994 and for each of the three years in the period ended December 31, 1995, and have issued our report thereon dated February 14, 1996, which report includes an explanatory paragraph as to a change in accounting for certain investments in debt and equity securities in 1993; such consolidated financial statements and report are included in the Company's 1995 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedules of CNA Financial Corporation and subsidiaries listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects, the information set forth therein. S/DELOITTE & TOUCHE LLP Deloitte & Touche LLP Chicago, Illinois February 14, 1996 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CNA Financial Corporation By S/LAURENCE A. TISCH -------------------------------------------------------- Laurence A. Tisch Chief Executive Officer (Principal Executive Officer) By S/PETER E. JOKIEL -------------------------------------------------------- Peter E. Jokiel Senior Vice President and Chief Financial Officer Date: March 29, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. SIGNATURE TITLE S/ANTOINETTE COOK BUSH Director | - ---------------------------------- | Antoinette Cook Bush | | S/DENNIS H. CHOOKASZIAN Director | - ---------------------------------- | Dennis H. Chookaszian | | S/PHILIP L. ENGEL Director | - ---------------------------------- | Philip L. Engel | | S/ROBERT P. GWINN Director | - ---------------------------------- | Robert P. Gwinn | | S/EDWARD J. NOHA Chairman of the Board | - ---------------------------------- and Director | Edward J. Noha | | S/JOSEPH ROSENBERG Director | - ---------------------------------- | Joseph Rosenberg | |- Dated: S/RICHARD L. THOMAS Director | March 29, 1996 - ---------------------------------- | Richard L. Thomas | SIGNATURE TITLE S/JAMES S. TISCH Director | - ---------------------------------- | James S. Tisch | | S/LAURENCE A. TISCH Chief Executive Officer | - ---------------------------------- and Director | Laurence A. Tisch | | S/PRESTON R. TISCH Director | - ---------------------------------- | Preston R. Tisch | | S/MARVIN ZONIS Director | - ---------------------------------- | Marvin Zonis 33
EXHIBIT 11.1 CNA FINANCIAL CORPORATION COMPUTATION OF NET INCOME PER COMMON SHARE - --------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991 (In millions of dollars, 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...................................... $ 757.0 $ 36.5 $ 267.5 $(662.5) $ 612.5 Less preferred stock dividends............................ 6.9 5.3 4.0 4.2 6.8 ------ ------- ------ ------ ------ Net income (loss) before cumulative effect of accounting changes available to common stockholders.. 750.1 31.2 263.5 (666.7) 605.7 Cumulative effect on prior years of changes in accounting principles................................... - - - 331.9 - ------ ------ ------ ------ ---- Net income (loss) available to common stockholders..... $ 750.1 $ 31.2 $ 263.5 $(334.8) $ 605.7 ====== ====== ====== ====== ===== Earnings per share: Net income (loss) before cumulative effect of accounting changes...................................... $ 12.14 $ 0.51 $ 4.26 $ (10.79) $ 9.80 Cumulative effect on prior years of changes in accounting principles................................ - - - 5.37 - ------ ------ ------ ------- ---- Net income (loss) available to common stockholders..... $ 12.14 $ 0.51 $ 4.26 $ (5.42) $ 9.80 ======= ======= ======= ======= ======= - ---------------------------------------------------------- -----------------------------------------------------
34
EXHIBIT 12.1 CNA FINANCIAL CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - -------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991 (In millions of dollars, except ratios) - -------------------------------------------------------------------------------------------------------------- Income (loss) before income tax and cumulative effect of accounting changes......................... $1,042.4 $(134.0) $93.5 $(1,374.9) $555.9 Add: Interest expense.................................. 182.3 70.5 36.3 36.7 38.3 Interest element of operating lease rental........ 46.7 19.1 18.2 17.6 17.6 ------- ----- ----- -------- ----- Income before income tax and cumulative effect of accounting changes, as adjusted................. $1,271.4 $(44.4) $148.0 $(1,320.6) $611.8 ======= ===== ===== ======== ===== Fixed charges: Interest expense.................................. $182.3 $70.5 $36.3 $36.7 $38.3 Interest element of operating lease rental........ 46.7 19.1 18.2 17.6 17.6 ----- ---- ---- ---- ---- Fixed charges........................................ $229.0 $89.6 $54.5 $54.3 $55.9 ===== ==== ==== ==== ==== Ratio of earnings to fixed charges (1)............... 5.6 (0.5) 2.7 (24.3) 10.9 - -------------------------------------------------------------------------------------------------------------- (1) For purposes of computing this ratio, earnings consist of income before income taxes and cumulative effect of accounting changes plus fixed charges of consolidated companies. Fixed charges consist of interest and that portion of operating lease rental expense which is deemed to be an interest factor for such rentals.
EXHIBIT 12.2 CNA FINANCIAL CORPORATION COMPUTATION OF RATIO OF NET INCOME, AS ADJUSTED, TO FIXED CHARGES - --------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991 (In millions of dollars, except ratios) - --------------------------------------------------------------------------------------------------------- Net income (loss)................................ $ 757.0 $ 36.5 $ 267.5 $ (330.5) $ 612.5 Add: Interest expense, after tax................... 118.5 45.8 23.6 24.2 25.3 Interest element of operating lease rental, after tax................................... 30.3 12.4 11.8 11.7 11.6 ----- ----- ----- ----- ----- Net income (loss), as adjusted................... $ 905.8 $ 94.7 $ 302.9 $ (294.6) $ 649.4 ===== ===== ===== ===== ===== Fixed charges: Interest expense, after tax................... $ 118.5 $ 45.8 $ 23.6 $ 24.2 $ 25.3 Interest element of operating lease rental, after tax................................... 30.3 12.4 11.8 11.7 11.6 ----- ----- ----- ----- ----- Fixed charges.................................... $ 148.8 $ 58.2 $ 35.4 $ 35.9 $ 36.9 ====== ===== ===== ===== ===== Ratio of net income (loss), as adjusted, to fixed charges (1)........................... 6.1 1.6 8.6 (8.2) 17.6 - -------------------------------------------------------------------------------------------------------- (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.
35
EXHIBIT 21.1 SUBSIDIARIES OF CNA PLACE OF COMPANY INCORPORATION - ------- ------------- 1897 Corporation Delaware 1911 Corp. and 2 Subsidiaries Delaware AFCO Agent Service Corporation Delaware Agency Management Services, Inc. and 6 Subsidiaries Delaware Alexsis, Inc. and 4 Subsidiaries Maryland American Casualty Company of Reading, Pennsylvania (ACCO) Pennsylvania Bayside Management Company, Inc. California Bayside Reinsurance Company, Ltd. Bermuda Boston Old Colony Insurance Company Massachusetts California Central Trust Bank Corporation California CICAN I Investment Holding Company Canada CICAN II Investment Holding Company Canada Cinema Completions International, Inc. Delaware Claims Administration Corp. Maryland CNA (Bermuda) Services, Ltd. Bermuda CNA Automation, Inc. Illinois CNA Casualty of California California CNA Casualty of Illinois Illinois CNA Financial Corporation (CNA) Delaware CNA Management (International) Limited Jersey Channel Islands CNA Management Company Limited and 2 Subsidiaries United Kingdom CNA Real Estate Services, Inc. Illinois CNA Realty Corp. and 1 Subsidiary Delaware CNA Reinsurance Company Illinois CNA Risk Management Holding Company, Inc. Illinois CNA Services, Incorporated Illinois CNA Structured Settlements, Inc. Illinois Collateral Holding Subsidiaries Illinois Columbia Casualty Company Illinois Commercial Insurance Company of Newark, N.J. New Jersey Continental Assurance Company (CAC) Illinois Continental Casualty Company (CCC) Illinois Continental Center Associates New York Continental Corporate Realty Services, Inc. New York Continental Guaranty & Credit Corporation New York Continental Holding Corporation Delaware Continental Holdings Ltd. New South Wales Continental Insurance (International Agencies) Australia Pty Limited New South Wales Continental International Insurance, Limited Puerto Rico Continental Life (Europe) Limited United Kingdom Continental Life (International) Limited Guemsey Continental Lloyd's Insurance Company Texas Continental Loss Adjusting Services, Inc. Illinois Continental Maiden Lane, Inc. Delaware Continental Management Services, Ltd. United Kingdom 36 EXHIBIT 21.1 (CONT.) SUBSIDIARIES OF CNA Continental Pacific (Australia) Holding Limited Australia Continental Pacific Insurance Company (Australia) Limited New South Wales Continental Re Management, Inc. New York Continental Rehabilitation Resources, Inc. New Jersey Continental Reinsurance Corporation California Continental Reinsurance Corporation International Limited Bermuda Continental Reinsurance Corporation (U.K.) Limited United Kingdom Continental Reinsurance Management Company Limited United Kingdom Continental Reinsurance Management Holding Company Limited United Kingdom Continental Risk Services, Ltd. Bermuda Continental Risk Services (Barbados) Ltd. Barbados Continental Service Plan, Inc. New Jersey Continental Solution, Inc. Illinois Continental Subsidiary Corporation Delaware Continental Vision Financial Services, Inc. Delaware Convida Holdings Ltd and 1 Subsidiary Bahamas CPI Pension Services Inc. California Ctek, Inc. New Jersey Davies & Company Pty., Ltd. Australia East River Indemnity Company (Barbados), Ltd. Barbados East River Insurance Company Ltd. West Indies East River Insurance Company (Bermuda), Ltd. Bermuda Firemen's Insurance Company of Newark, New Jersey New Jersey First Benefit Services, Inc. California First Fire & Casualty Insurance Company of Hawaii, Inc. Hawaii First Indemnity Insurance of Hawaii, Inc. Hawaii First Insurance Company of Hawaii, Ltd. Hawaii Foundation Insurance Agency, Inc. New Jersey Galway Insurance Company California Global Management Consultants, Inc. New Jersey Hull & Cargo Surveyors, Inc. New York Hull & Cargo Surveyors, Inc. (Canada) British Columbia IDBI Managers, Inc. New York Kansas City Fire and Marine Insurance Company Missouri Larwin Developments, Inc. California LCI Finance Limited United Kingdom Lombard Continental Insurance Holdings Limited United Kingdom Marine Office of America Corporation New York Marine Office of America Corporation (Canada) Ontario Marine Office of America (Deutschland) GmbH Germany Marine Office of America Corporation Italia, Spa Italy Marine Office of America Corporation (U.K.) Ltd. United Kingdom Master Capital Corporation Delaware National Fire Insurance Company of Hartford (NFI) Connecticut National-Ben Franklin Insurance Company of Illinois Illinois Niagara Fire Insurance Company Delaware North Pearl Management, Inc. Texas Pacific Insurance Company California Pacific Underwriters, Inc. Texas Pension/Profit Sharing Systems, Inc. California Settlement Options, Inc. New Jersey TCC Acquisition Corp. Delaware 37 EXHIBIT 21.1 (CONT.) SUBSIDIARIES OF CNA TCC Holdings, Inc. Delaware TCC Properties, Inc. New York The Buckeye Union Insurance Company Ohio The Continental Corporation (CIC) New York The Continental Insurance Company New Hampshire The Continental Insurance Company of New Jersey New Jersey The Continental Insurance Company (Europe) Limited United Kingdom The Continental Insurance Company of Puerto Rico Puerto Rico The Continental Insurance Holdings (Europe) Limited United Kingdom The CPI Group, Inc. Delaware The Fidelity and Casualty Company of New York New Hampshire The Glens Falls Insurance Company Delaware The Hong Kong Fire Insurance Company, Ltd Hong Kong The Maiden Lane Syndicate Inc. New York The Mayflower Insurance Company, Ltd. Indiana The South Place Syndicate Inc. New York Transcontinental Insurance Company New York Transcontinental Technical Services, Inc. (ServCo) Illinois Transportation Insurance Company Illinois UAM Limited United Kingdom United States P & I Agency, Inc. New York Valley Forge Insurance Company Pennsylvania Valley Forge Life Insurance Company Pennsylvania Viaticus, Inc. Delaware Western National Warranty Corporation Arizona Zeuxis Corp. VIII Delaware
38 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 14, 1996, 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, 1995. S/DELOITTE & TOUCHE LLP Deloitte & Touche LLP Chicago, Illinois March 29, 1996 39 EXHIBIT 28.1 PROPERTY/CASUALTY RESERVE RECONCILIATION- STATUTORY BASIS TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES A reconciliation of property/casualty reserves as shown in CNA's property/casualty insurance subsidiaries 1995 annual statutory statements Schedule P to reserves for unpaid claims and claim expenses, as shown in the Annual Report on Form 10-K follows. 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 1995 (In millions of dollars) - ------------------------------------------------------------------------------------------------------ Total claims and claim expenses per Schedule P (net of reinsurance)................... $24,047 Non-domestic affiliates............................................................... 908 Ceded claims and claim expenses....................................................... 6,089 - ------------------------------------------------------------------------------------------------------ Reserve for claims and claim expenses--generally accepted accounting principles $31,044 ======================================================================================================
40 EX-3.(II) 2 BY-LAWS BY-LAWS OF CNA FINANCIAL CORPORATION (As Amended Effective August 2, 1995) 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. - 1 - SECTION 6. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than fifty days before the date of the meeting, to each stockholder entitled to vote at such meeting. SECTION 7. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. SECTION 8. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 9. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Certificate of Incorporation, a different vote is required, in which case such express provision shall govern and control the decision of such question. SECTION 10. Each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. SECTION 11. Whenever the vote of stockholders at a meeting thereof is required or permitted to be taken for or in connection with any corporate action, by any provision of the statutes, the meeting and vote of stockholders may be dispensed with if all of the stockholders who would have been entitled to vote upon the action if such meeting were held shall consent in writing to such corporate action being taken; or if the Certificate of Incorporation authorizes the action to be taken with the written consent of the holders of less than all of the stock who would have been entitled to vote upon the action if a meeting were held, then on the written consent of the stockholders having not less than such percentage of the total number of votes as may be authorized in the Certificate of Incorporation; provided that in no case shall the written consent be by the holders of stock having less than the minimum percentage of the total required by statute for the proposed corporate action, and provided that prompt notice must be given to all stockholders of the taking of corporate action without a meeting and by less than unanimous written consent. ARTICLE III. DIRECTORS. SECTION 1. The number of Directors which shall constitute the whole Board shall be eleven. 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. - 2 - 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 unsound mind by an order of Court or convicted of a felony, or for any other proper cause, of if, within sixty days after notice of his election as a Director, he does not accept such office either in writing or by attending a meeting of the Board of Directors. Vacancies and newly created directorships resulting from any increase in the authorized number of Directors may be filled by a majority of the Directors then in office, though less than a quorum, or by a sole remaining Director, and the Directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no Directors in office, then an election of Directors may be held in the manner provided by statute. If, at the time of filing any vacancy or any newly created directorship, the Directors then in office shall constitute less than a majority of the whole Board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such Directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the Directors chosen by the Directors then in office. SECTION 3. The business of the Corporation shall be managed by its Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. MEETINGS OF THE BOARD OF DIRECTORS SECTION 4. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. The Directors may designate a Director as the Chairman of the Board of Directors. The Chairman of the Board of Directors shall not be an officer of the Corporation. SECTION 5. The first meeting of each newly elected Board of Directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected Directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected Board of Directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the Directors. SECTION 6. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board. SECTION 7. Special meetings of the Board of Directors may be called by the Chief Executive Officer, the President or the Secretary, and shall be called upon the written request of any two or more Directors. Notice of the time and place of such meetings shall be served upon or telephoned to each Director at least 24 hours, or mailed (postage prepaid) or telegraphed (charges prepaid) to each Director at his address as shown on the books of the Corporation at least 48 hours, prior to the time of the meeting, and if such notice is mailed or telegraphed as above provided, the notice shall be deemed to have been given at the time it is deposited in the United States mail or with the telegraph office for transmission, as the case may be. - 3 - 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 of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the Directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. SECTION 9. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. COMMITTEES OF DIRECTORS SECTION 10. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of two or more of the Directors of the Corporation. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; provided, however, that in the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Unless otherwise provided by the Board of Directors, a majority of the members of any committee appointed by the Board of Directors pursuant to this Section shall constitute a quorum at any meeting thereof and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of such committee. Any such committee shall, subject to any rules prescribed by the Board of Directors, prescribe its own rules for calling, giving notice of and holding meetings and its method of procedure at such meetings and shall keep a written record of all action taken by it. SECTION 11. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. SECTION 12. In the absence or disqualification of one or more members of any Committee, the member or members present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member or members. COMPENSATION OF DIRECTORS SECTION 13. The Directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated fee as Director. No such payment shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. - 4 - ARTICLE IV. NOTICE. SECTION 1. Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these By-Laws, notice is required to be given to any Director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such Director or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to Directors may also be given by telegram or telephone. SECTION 2. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V. OFFICERS. SECTION 1. The officers of the Corporation shall be chosen by the Board of Directors and shall be a Chief Executive Officer, Secretary and Chief Financial Officer. The Board of Directors may also choose a President and one or more Vice Presidents. The Board of Directors may designate one or more of the Vice Presidents as Senior Vice President or Executive Vice President and may use descriptive words or phrases to designate the standing, seniority or area of special competence of the Vice Presidents. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these By-Laws otherwise provide. SECTION 2. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a Chief Executive Officer, a Chief Financial Officer and a Secretary. SECTION 3. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. SECTION 4. The Board of Directors shall fix the compensation of the Chief Executive Officer and, unless otherwise established by the Board of Directors or a committee appointed by the Board of Directors, the Chief Executive Officer shall fix the compensation of any or all other officers of the Corporation. SECTION 5. The officers of the Corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. CHIEF EXECUTIVE OFFICER SECTION 6. The Chief Executive Officer shall be the chief executive officer of the Corporation and shall have general and active control of its business and affairs. He shall preside at the meetings of the stockholders and the Board of Directors, and may exercise any and all of the powers of a chief executive officer. The Chief Executive Officer shall have such other powers and duties as may be assigned to or vested in him from time to time by the Board of Directors or by the Executive Committee. SECTION 7. The Chief Executive Officer may execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. - 5 - THE PRESIDENT SECTION 8. The President, if one shall be chosen, shall have general supervision and direction of all other officers of the Corporation, subject to the direction of the Board of Directors, and shall carry into effect the orders of the Board of Directors and Chief Executive Officer of the Board of Directors. The President shall also have such other duties and powers as may be assigned to or vested in him from time to time by the Board of Directors or by the Executive Committee. THE VICE PRESIDENTS SECTION 9. The Vice Presidents shall assist the Chief Executive Officer, and shall perform such other duties as may from time to time be directed by the Board of Directors, the Chief Executive Officer or the President. THE SECRETARY AND ASSISTANT SECRETARY SECTION 10. The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the Corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision he shall be. He shall have custody of the corporate seal of the Corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed it may be attested by his signature or by the signature of such assistant secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. SECTION 11. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. THE CHIEF FINANCIAL OFFICER AND ASSISTANT TREASURER SECTION 12. The Chief Financial Officer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. SECTION 13. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as treasurer and of the financial condition of the Corporation. SECTION 14. If required by the Board of Directors, he shall give the Corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. - 6 - SECTION 15. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Chief Financial Officer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. ARTICLE VI. CERTIFICATES OF STOCK. SECTION 1. Except as otherwise provided in the Certificate of Incorporation, every holder of stock in the Corporation shall be entitled to have a certificate, signed by, or in the name of the Corporation by, the Chief Executive Officer, the President or a Vice President and the Chief Financial Officer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by him in the Corporation. SECTION 2. If the Corporation shall be authorized to issue more than one class or more than one series of any class, the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each stockholder who so requests the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. SECTION 3. Where a certificate is countersigned (1) by a transfer agent other than the Corporation or its employees, or, (2) by a registrar other than the Corporation or its employees, the signatures of the officers of the Corporation may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of issue. LOST CERTIFICATES SECTION 4. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of the fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. TRANSFER OF STOCK SECTION 5. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the 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. - 7 - 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. FISCAL YEAR SECTION 5. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. - 8 - 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 theprovisions 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-10.2 3 EMPLOYMENT AGREEMENT FOR DENNIS H. CHOOKASZIAN EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of December 31, 1995, by and between CNA FINANCIAL CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), and DENNIS H. CHOOKASZIAN (hereinafter referred to as the "Executive"); W I T N E S S E T H: WHEREAS, the Company desires to continue to employ the Executive, and the Executive is willing to render such services in accordance with the terms hereinafter set forth; NOW, THEREFORE, in consideration of the premises and of the mutual promises herein contained, it is agreed by and between the Company and the Executive as follows: FIRST: The Company agrees to and does hereby employ the Executive to perform such executive duties commensurate with his level of compensation as may from time to time be assigned to him by the Board for a period of three (3) years beginning January 1, 1996, and ending December 31, 1998. It is understood and agreed that until further action of the Board, the executive duties to be performed by the Executive under this Agreement shall be those of Chief Executive Officer of the CNA Insurance Companies. SECOND: The Executive agrees to and does hereby accept such employment and further agrees that during the period of his employment under this Agreement he will devote his entire working time and energy to the interests and business of the Company, that he will perform such executive duties commensurate with his level of compensation as shall be assigned to him from time to time by the Board, and that if he shall be elected by the Board or the board of directors of any subsidiary to any one or more corporate offices in the Company or its subsidiaries he will accept and serve in such capacity or capacities without any additional compensation to that provided in paragraph THIRD of this Agreement. The Executive shall be permitted to devote reasonable time to, and to have investments in, other businesses and enterprises so long as there is no conflict with his duties hereunder, except that the Executive shall not invest in any business or enterprise principally devoted to any activity which, at the time of such investment, is competitive to any business or enterprise of the Company or any of its subsidiaries other than an investment of up to 1% of the outstanding capital stock of any such competitor which is listed on a national securities exchange. Subject to normal business travel, the Executive shall perform his service hereunder in, and shall not be required to change his place of residence from, the Chicago metropolitan area. THIRD: The Company agrees to pay or cause to be paid to the Executive as compensation for services rendered to the Company by him for each year of his employment under this Agreement, a base salary at the rate of $950,000.00 per year ("Base Salary"), which shall be payable in substantially equal bi-weekly installments. In addition, the Executive shall participate in a Performance Based Compensation Plan ("Performance Plan") established by the Compensation Committee of the Board of Directors for the Executive for the time that this Agreement is in effect. Upon attainment of the annual performance goals as established under the Performance Plan, the Executive shall receive incentive compensation under the Performance Plan as awarded by the Compensation Committee. 2 The Base Salary above provided to be paid to the Executive may be increased from time to time by the Board in its sole discretion. FOURTH: While the parties recognize that the right to elect directors and officers is by law vested in the stockholders and directors, respectively, of a corporation, it is nevertheless mutually contemplated, subject to such right, that during the terms of his employment under this Agreement the Executive shall be elected, and shall serve as, a member of the Board of Directors of the Company and Chairman of the Board of Directors of each of the CNA Insurance Companies. FIFTH: In the event that in the judgment of the Board, the Executive shall at any time during the period of his employment under this Agreement be unable to perform satisfactorily his duties under this Agreement for a period of six (6) months or more in the aggregate in any twelve (12) month period, by reason of any physical or mental disability, the term of the Executive's employment under this Agreement may, at the discretion of the Board, be terminated upon at least fifteen (15) days' prior written notice to the Executive. In the event of such termination the Company shall pay to the Executive an amount equal to the applicable Termination Rate set forth in paragraph EIGHTH hereof from January 1 to the end of the month in which such notice is given, less the Base Salary paid to the Executive from January 1 of that year through the end of the month in which such notice is given. The Company shall have no further obligation to make any payments under paragraph THIRD hereof, but the Executive shall continue to be entitled to the benefits provided for in paragraph SIXTH hereof. 3 SIXTH: The Executive shall be entitled to such employee benefits as may be offered under any insurance policy or policies or under any other similar type of program or programs maintained by the Company for its employees and executives generally, subject to the terms and conditions provided by such respective policy or program, and subject to the Executive meeting the eligibility requirements provided for in such policy or program. Benefits under any benefit plan in which the Executive participates wherein benefits are dependent upon the level of compensation of the Executive shall be computed assuming compensation at the applicable Termination Rate set forth in paragraph EIGHTH hereof, subject to appropriate adjustment in relation to incentive compensation actually awarded under the Performance Plan (the "Assumed Compensation Rate"). In addition, during the term of this Agreement, the Company will provide and maintain for the Executive, at its own cost and expense, Long-Term Disability protection providing coverage substantially equivalent to that provided on January 1, 1996 under the Company's Long-Term Disability program, with benefits based on the Assumed Compensation Rate commencing the 1st of the month following notice of termination for such disability and payable as long as the Executive remains totally disabled but not beyond age 65. The Executive shall be entitled to participate in the qualified and supplemental pension plan maintained by the Company for its employees or executives. The rights, if any, of the Executive under any pension or retirement plan or program of the Company are governed solely by the terms of such plan or program, unless expanded by this Agreement, and no provision of this Agreement is intended to, nor shall it restrict such rights. Any incentive based compensation paid under the Performance Plan shall be included in the computation of pensionable earnings. Executive shall also be entitled to participate in the qualified and supplemental savings plan in effect from time to time and shall be entitled to receive the Company matching amounts then in effect on the amount of his contributions subject to matching, which matching amounts shall also be included in the computation of pensionable earnings. 4 The Executive shall not be entitled to any other compensation from the Company except as contemplated by this Agreement provided, however, that this Agreement is not intended to, and shall not, prejudice the Executive's participation in any present or future stock option, insurance or similar plan of the Company embracing executive and managerial personnel generally. SEVENTH: The Company agrees that should the Executive die during the period of his employment under this Agreement, it will pay to the Executive's surviving spouse, if any, an amount equal to the applicable Termination Rate set forth in paragraph EIGHTH hereof from January 1 of the year of Executive's death to the end of the month of his death, less the Base Salary paid to the Executive from January 1 of the year of death to the end of the month of his death, and the Company shall have no further obligation to make any payments under paragraph THIRD hereof. EIGHTH: The Company may terminate the employment of the Executive at any time by action of the Board, but if it terminates the employment of the Executive in the absence of Cause (as defined in paragraph NINTH), then the Company shall make bi-weekly payments to the Executive for a period of three years from the date of such termination at the rate per annum (the "Termination Rate") set forth below for the year in which such termination occurs: 1996 $2,400,000 1997 $2,600,000 1998 $2,800,000 5 In addition to the payments set forth above, the Executive shall be paid in a single sum an amount equal to the applicable Termination Rate as set forth above, prorated from January 1, of the year of termination to the date of termination less the Base Salary paid to the Executive from January 1 of that year to the date of termination. In the event this Agreement has not been extended or renewed at the end of its term on December 31, 1998 and the employment of the Executive is continued, then such employment shall constitute an employment at will from month to month at a stated salary of $233,333.33 per month. Should the Company terminate the employment of the Executive without cause during such employment at will following expiration of this Agreement, or this Agreement shall not be renewed or a new Employment Agreement entered into by March 31, 1999, the Executive's employment shall terminate on March 31, 1999 and the Company shall continue to make bi-weekly payments to the Executive for a period of three years from the date of such termination at the rate of $2,800,000 per annum. Such payments to the Executive following termination shall not be required if at least 30 days prior to March 31, 1999 the Company shall have offered in writing to renew this Agreement for a further extended term of three years and otherwise upon substantially the terms in effect at December 31, 1998, at an annual base salary of not less than $950,000 and an entitlement to participate in the Performance Plan which provides opportunity to earn incentive based compensation of not less than $1,850,000, and the Executive shall not have accepted such renewal in writing prior to March 31, 1999. Should the Executive die within the three year period after termination when payments are being made as the result of termination, the Company shall pay to the Executive's surviving spouse, if any, or if his spouse is not living thirty days after the Executive's death, to his estate, the balance of the compensation otherwise payable to the Executive under this paragraph. 6 NINTH: In the event that the Executive shall engage in any conduct which the Board, in its sole discretion, shall determine to be fraudulent, a substantial breach of any material provision of this Agreement, willful malfeasance or gross negligence or inconsistent with the dignity and character of a senior executive of the Company, and only if such conduct is determined by the Board to have a material adverse effect on the business of the Company (defined herein as "Cause"), this entire Agreement shall be automatically terminated instanter and the Company shall have no obligation to thereafter make any payments to the Executive or to his surviving spouse under any paragraph of this Agreement. TENTH: The Executive agrees that for a period of three (3) years following the termination of his employment under this Agreement for any reason whatsoever, he will not, directly or indirectly: (i) employ, hire or cause to be employed or hired any person who is employed by the Company or any of its subsidiaries as an executive or key managerial employee on the termination date of such employment or was so employed within one (1) year prior to termination; or (ii) cause, invite, solicit, entice or induce any such person to terminate his employment with the Company or any of its subsidiaries. ELEVENTH: The Executive agrees that during the term of this Agreement, and thereafter, he shall not disclose directly or indirectly to any person, corporation, firm, partnership or other entity (collectively "person") or any officer, director, stockholder, partner, associate, employee, agent or representative of any person, any confidential information or trade secrets of the Company or of any subsidiary, except in the performance of his duties hereunder or with the prior written consent of the Company, and on the 7 termination of his employment for any reason the Executive agrees not to remove or retain without the express consent of the Board, any letters, papers, documents, instruments or copies thereof or any other confidential information of any type or description. The Executive acknowledges that the remedy at law for any breach or threatened breach by him of this paragraph ELEVENTH will be inadequate and that, accordingly, the Company shall be entitled to injunctive relief without being required to post bond or other surety. TWELFTH: The rights of the Executive under this Agreement shall not be transferable by assignment or otherwise, nor shall they be subject in any manner to anticipation or commutation, encumbrance, or claims of his creditors. THIRTEENTH: This Agreement shall be binding upon and inure to the benefit of the Executive and the Company and any successor organization which shall succeed to substantially all of its assets and business. FOURTEENTH: Any notice or communication by either party with respect to this Agreement shall be made in writing and may either be delivered personally or sent by first class mail to the appropriate address from time to time designated by the other party. FIFTEENTH: This Agreement shall be construed under and governed by the laws of the State of Illinois. 8 IN WITNESS WHEREOF, the Company has caused its corporate name to be hereunto subscribed by an executive officer and its corporate seal to be hereunto affixed, and DENNIS H. CHOOKASZIAN has hereunto subscribed his name, all as of the day, month and year first above written. CNA FINANCIAL CORPORATION ATTEST: S/MARY A. RIBIKAWSKIS By S/DONALD LOWRY - --------------------- -------------------- Mary A. Ribikawskis Donald M. Lowry By S/DENNIS CHOOKASZIAN -------------------- Dennis H. Chookaszian 9 EX-10.3 4 EMPLOYMENT AGREEMENT FOR PHILIP L. ENGEL EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into December 31, 1995, by and between CNA FINANCIAL CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), and PHILIP L. ENGEL (hereinafter referred to as the "Executive"); W I T N E S S E T H: WHEREAS, the Company desires to continue to employ the Executive, and the Executive is willing to render such services in accordance with the terms hereinafter set forth; NOW, THEREFORE, in consideration of the premises and of the mutual promises herein contained, it is agreed by and between the Company and the Executive as follows: FIRST: The Company agrees to and does hereby employ the Executive to perform such executive duties commensurate with his level of compensation as may from time to time be assigned to him by the Board for a period of three (3) years beginning January 1, 1996, and ending December 31, 1998. It is understood and agreed that until further action of the Board, the executive duties to be performed by the Executive under this Agreement shall be those of President of the CNA Insurance Companies. SECOND: The Executive agrees to and does hereby accept such employment and further agrees that during the period of his employment under this Agreement he will devote his entire working time and energy to the interests and business of the Company, that he will perform such executive duties commensurate with his level of compensation as shall be assigned to him from time to time by the Board, and that if he shall be elected by the Board or the board of directors of any subsidiary to any one or more corporate offices in the Company or its subsidiaries he will accept and serve in such capacity or capacities without any additional compensation to that provided in paragraph THIRD of this Agreement. The Executive shall be permitted to devote reasonable time to, and to have investments in, other businesses and enterprises so long as there is no conflict with his duties hereunder, except that the Executive shall not invest in any business or enterprise principally devoted to any activity which, at the time of such investment, is competitive to any business or enterprise of the Company or any of its subsidiaries other than an investment of up to 1% of the outstanding capital stock of any such competitor which is listed on a national securities exchange. Subject to normal business travel, the Executive shall perform his service hereunder in, and shall not be required to change his place of residence from, the Chicago metropolitan area. THIRD: The Company agrees to pay or cause to be paid to the Executive as compensation for services rendered to the Company by him for each year of his employment under this Agreement, a base salary at the rate of $800,000.00 per year ("Base Salary"), which shall be payable in substantially equal bi-weekly installments. In addition, the Executive shall participate in a Performance Based Compensation Plan ("Performance Plan") established by the Compensation Committee of the Board of Directors for the Executive for the time that this Agreement is in effect. Upon attainment of the annual performance goals as established under the Performance Plan, the Executive shall receive incentive compensation under the Performance Plan as awarded by the Compensation Committee. 2 The Base Salary above provided to be paid to the Executive may be increased from time to time by the Board in its sole discretion. FOURTH: While the parties recognize that the right to elect directors and officers is by law vested in the stockholders and directors, respectively, of a corporation, it is nevertheless mutually contemplated, subject to such right, that during the terms of his employment under this Agreement the Executive shall be elected, and shall serve as, a member of the Board of Directors of the Company and President of each of the CNA Insurance Companies. FIFTH: In the event that in the judgment of the Board, the Executive shall at any time during the period of his employment under this Agreement be unable to perform satisfactorily his duties under this Agreement for a period of six (6) months or more in the aggregate in any twelve (12) month period, by reason of any physical or mental disability, the term of the Executive's employment under this Agreement may, at the discretion of the Board, be terminated upon at least fifteen (15) days' prior written notice to the Executive. In the event of such termination the Company shall pay to the Executive an amount equal to the applicable Termination Rate set forth in paragraph EIGHTH hereof from January 1 to the end of the month in which such notice is given, less the Base Salary paid to the Executive from January 1 of that year through the end of the month in which such notice is given. The Company shall have no further obligation to make any payments under paragraph THIRD hereof, but the Executive shall continue to be entitled to the benefits provided for in paragraph SIXTH hereof. 3 SIXTH: The Executive shall be entitled to such employee benefits as may be offered under any insurance policy or policies or under any other similar type of program or programs maintained by the Company for its employees and executives generally, subject to the terms and conditions provided by such respective policy or program, and subject to the Executive meeting the eligibility requirements provided for in such policy or program. Benefits under any benefit plan in which the Executive participates wherein benefits are dependent upon the level of compensation of the Executive shall be computed assuming compensation at the applicable Termination Rate set forth in paragraph EIGHTH hereof, subject to appropriate adjustment in relation to incentive compensation actually awarded under the Performance Plan (the "Assumed Compensation Rate"). In addition, during the term of this Agreement, the Company will provide and maintain for the Executive, at its own cost and expense, Long-Term Disability protection providing coverage substantially equivalent to that provided on January 1, 1996 under the Company's Long-Term Disability program, with benefits based on the Assumed Compensation Rate commencing the 1st of the month following notice of termination for such disability and payable as long as the Executive remains totally disabled but not beyond age 65. The Executive shall be entitled to participate in the qualified and supplemental pension plan maintained by the Company for its employees or executives. The rights, if any, of the Executive under any pension or retirement plan or program of the Company are governed solely by the terms of such plan or program, unless expanded by this Agreement, and no provision of this Agreement is intended to, nor shall it restrict such rights. Any incentive based compensation paid under the Performance Plan shall be included in the computation of pensionable earnings. Executive shall also be entitled to participate in the qualified and supplemental savings plan in effect from time to time and shall be entitled to receive the Company matching amounts then in effect on the amount of his contributions subject to matching, which matching amounts shall also be included in the computation of pensionable earnings. 4 The Executive shall not be entitled to any other compensation from the Company except as contemplated by this Agreement provided, however, that this Agreement is not intended to, and shall not, prejudice the Executive's participation in any present or future stock option, insurance or similar plan of the Company embracing executive and managerial personnel generally. SEVENTH: The Company agrees that should the Executive die during the period of his employment under this Agreement, it will pay to the Executive's surviving spouse, if any, an amount equal to the applicable Termination Rate set forth in paragraph EIGHTH hereof from January 1 of the year of Executive's death to the end of the month of his death, less the Base Salary paid to the Executive from January 1 of the year of death to the end of the month of his death, and the Company shall have no further obligation to make any payments under paragraph THIRD hereof. EIGHTH: The Company may terminate the employment of the Executive at any time by action of the Board, but if it terminates the employment of the Executive in the absence of Cause (as defined in paragraph NINTH), then the Company shall make bi-weekly payments to the Executive for a period of three years from the date of such termination at the rate per annum (the "Termination Rate") set forth below for the year in which such termination occurs: 1996 $1,200,000 1997 $1,300,000 1998 $1,400,000 5 In addition to the payments set forth above, the Executive shall be paid in a single sum an amount equal to the applicable Termination Rate as set forth above, prorated from January 1, of the year of termination to the date of termination less the Base Salary paid to the Executive from January 1 of that year to the date of termination. In the event this Agreement has not been extended or renewed at the end of its term on December 31, 1998 and the employment of the Executive is continued, then such employment shall constitute an employment at will from month to month at a stated salary of $116,666.67 per month. Should the Company terminate the employment of the Executive without cause during such employment at will following expiration of this Agreement, or this Agreement shall not be renewed or a new Employment Agreement entered into by March 31, 1999, the Executive's employment shall terminate on March 31, 1999 and the Company shall continue to make bi-weekly payments to the Executive for a period of three years from the date of such termination at the rate of $1,400,000 per annum. Such payments to the Executive following termination shall not be required if at least 30 days prior to March 31, 1999 the Company shall have offered in writing to renew this Agreement for a further extended term of three years and otherwise upon substantially the terms then in effect at December 31, 1998, at an annual base salary of not less than $800,000 and an entitlement to participate in the Performance Plan which provides opportunity to earn incentive based compensation of not less than $600,000, and the Executive shall not have accepted such renewal in writing prior to March 31, 1999. Should the Executive die within the three year period after termination when payments are being made as the result of termination, the Company shall pay to the Executive's surviving spouse, if any, or if his spouse is not living thirty days after the Executive's death, to his estate, the balance of the compensation otherwise payable to the Executive under this paragraph. 6 NINTH: In the event that the Executive shall engage in any conduct which the Board, in its sole discretion, shall determine to be fraudulent, a substantial breach of any material provision of this Agreement, willful malfeasance or gross negligence or inconsistent with the dignity and character of a senior executive of the Company, and only if such conduct is determined by the Board to have a material adverse effect on the business of the Company (defined herein as "Cause"), this entire Agreement shall be automatically terminated instanter and the Company shall have no obligation to thereafter make any payments to the Executive or to his surviving spouse under any paragraph of this Agreement. TENTH: The Executive agrees that for a period of three (3) years following the termination of his employment under this Agreement for any reason whatsoever, he will not, directly or indirectly: (i) employ, hire or cause to be employed or hired any person who is employed by the Company or any of its subsidiaries as an executive or key managerial employee on the termination date of such employment or was so employed within one (1) year prior to termination; or (ii) cause, invite, solicit, entice or induce any such person to terminate his employment with the Company or any of its subsidiaries. ELEVENTH: The Executive agrees that during the term of this Agreement, and thereafter, he shall not disclose directly or indirectly to any person, corporation, firm, partnership or other entity (collectively "person") or any officer, director, stockholder, partner, associate, employee, agent or representative of any person, any confidential information or trade secrets of the Company or of any subsidiary, except in the performance of his duties hereunder or with the prior written consent of the Company, and on the 7 termination of his employment for any reason the Executive agrees not to remove or retain without the express consent of the Board, any letters, papers, documents, instruments or copies thereof or any other confidential information of any type or description. The Executive acknowledges that the remedy at law for any breach or threatened breach by him of this paragraph ELEVENTH will be inadequate and that, accordingly, the Company shall be entitled to injunctive relief without being required to post bond or other surety. TWELFTH: The rights of the Executive under this Agreement shall not be transferable by assignment or otherwise, nor shall they be subject in any manner to anticipation or commutation, encumbrance, or claims of his creditors. THIRTEENTH: This Agreement shall be binding upon and inure to the benefit of the Executive and the Company and any successor organization which shall succeed to substantially all of its assets and business. FOURTEENTH: Any notice or communication by either party with respect to this Agreement shall be made in writing and may either be delivered personally or sent by first class mail to the appropriate address from time to time designated by the other party. FIFTEENTH: This Agreement shall be construed under and governed by the laws of the State of Illinois. 8 IN WITNESS WHEREOF, the Company has caused its corporate name to be hereunto subscribed by an executive officer and its corporate seal to be hereunto affixed, and PHILIP L. ENGEL has hereunto subscribed his name, all as of the day, month and year first above written. CNA FINANCIAL CORPORATION ATTEST: S/MARY A. RIBIKAWSKIS By S/DONALD LOWRY - --------------------- ------------- Mary A. Ribikawskis Donald M. Lowry By S/PHILIP ENGEL ----------------- Philip L. Engel 9 EX-13.1 5 1995 ANNUAL REPORT CNA FINANCIAL CORPORATION 1995 A N N U A L R E P O R T CNA PROFILE - -------------------------------------------------------------------------------- CNA FINANCIAL CORPORATION CNA Financial Corporation is the parent company of the CNA Insurance Companies, the largest writer of commercial property/casualty insurance and the sixth largest insurance organization in the United States. - -------------------------------------------------------------------------------- As a multiple-line insurer, CNA underwrites property and casualty coverages; life, accident and health insurance; fidelity and surety products; 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 1995 assets of $59.9 billion and stockholders' equity of $6.7 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. In 1995, CNA acquired The Continental Corporation. CNA Financial Corporation stock is traded on the New York Stock Exchange and, as of December 31, 1995, was 84 percent owned by Loews Corporation. CNA FINANCIAL CORPORATION ------------------------- CNA TABLE OF CONTENTS - -------------------------------------------------------------------------------- 1995 2 FINANCIAL HIGHLIGHTS 4 LETTER FROM CNA FINANCIAL CORPORATION CHAIRMAN EDWARD J. NOHA 5 LETTER FROM CNA INSURANCE COMPANIES CHAIRMAN AND CEO DENNIS H. CHOOKASZIAN 11 FINANCIAL SECTION CONTENTS 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 26 FINANCIAL STATEMENTS 75 INDEPENDENT AUDITORS' REPORT 76 COMMON STOCK INFORMATION 77 CORPORATE DIRECTORY CNA FINANCIAL CORPORATION -------------------------
FINANCIAL HIGHLIGHTS - ------------------------------------------------------------------------------------------------------------- Results of Operations - ------------------------------------------------------------------------------------------------------------- Year Ended December 31 1995* 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------- (In millions of dollars, except per share data) RESULTS OF OPERATIONS - ------------------------------------------------------------------------------------------------------------- Revenues $ 14,699.7 $ 10,999.5 $ 11,010.8 $ 10,793.4 $ 11,131.4 - ------------------------------------------------------------------------------------------------------------- Income (loss) before income tax 1,042.4 (134.0) 93.4 (1,375.0) 555.9 Net income (loss) excluding net realized investment gains/losses and accounting changes: Property/Casualty 457.0 147.9 (266.6) (928.4) 289.7 Life 103.8 87.0 43.5 52.0 60.4 Other (98.2) (47.9) (28.6) (21.4) (22.8) - ------------------------------------------------------------------------------------------------------------- Net operating income (loss) 462.6 187.0 (251.7) (897.8) 327.3 Net realized investment gains (losses) 294.4 (150.5) 519.2 235.3 285.2 Accounting changes -- - - 331.9 - - -------------------------------------------------------------------------------------------------------------- Net income (loss) $ 757.0 $ 36.5 $ 267.5 $ (330.6) $ 612.5 ============================================================================================================== EARNINGS PER SHARE - -------------------------------------------------------------------------------------------------------------- Net income (loss) excluding net realized investment gains/losses and accounting changes $ 7.37 $ 2.94 $ (4.14) $ (14.60) $ 5.19 Net realized investment gains (losses) 4.77 (2.43) 8.40 3.81 4.61 Accounting changes - - - 5.37 - - ------------------------------------------------------------------------------------------------------------- Net income (loss) $ 12.14 $ 0.51 $ 4.26 $ ( 5.42) $ 9.80 ============================================================================================================== FINANCIAL POSITION - -------------------------------------------------------------------------------------------------------------- Assets $ 59,901.8 $ 44,320.4 $ 41,912.3 $ 39,743.9 $ 39,161.7 Debt 3,025.5 913.8 915.3 415.0 437.1 Stockholders' equity 6,735.5 4,545.9 5,381.1 4,789.2 5,108.6 Book value per common share 106.56 71.13 84.65 75.07 80.24 ============================================================================================================== * Includes The Continental Corporation since May 10, 1995.
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 and stockholders' equity from 1985 through 1995. 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 12/31/85...................| $ 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 | $39.9 | $4.8 | 75.07 | |FYE 12/31/93...................| $11.0 | $41.9 | $5.4 | 84.65 | |FYE 12/31/94...................| $11.0 | $44.3 | $4.5 | 71.13 | |FYE 12/31/95...................| $14.7 | $59.9 | $6.7 | 106.56 | |---------------------------------------------------------------------------------------|
CNA FINANCIAL CORPORATION ------------------------- 3 A LETTER TO OUR SHAREHOLDERS - ------------------------------------------------------------------------------- 1995 FROM CNA FINANCIAL CORPORATION CHAIRMAN EDWARD J. NOHA CNA Financial Corporation reported strong earnings in 1995. Net income was $757.0 million, or $12.14 per share, compared with net income of $36.5 million, or $0.51 per share, in 1994. Net income excluding net realized investment gains for 1995 was $462.6 million, or $7.37 per share, compared with $187.0 million, or $2.94 per share, in 1994. Net realized investment gains for 1995 were $294.4 million, or $4.77 per share, compared with losses of $150.5 million, or $2.43 per share, in 1994. Consolidated revenues for 1995 were $14.7 billion, compared with $11.0 billion in 1994. CNA's 1995 results include the results of The Continental Corporation since May 10, 1995. On that date, The Continental Corporation and CNA Financial Corporation closed a merger agreement under which CNA acquired all outstanding Continental shares for approximately $1.1 billion, financed through a five-year revolving credit facility. The merger with Continental makes CNA the sixth largest U.S. insurance organization and the largest writer of commercial lines of insurance. The Continental acquisition and other business initiatives in 1995 were built on a solid financial foundation. At year-end, the surplus of our property/casualty companies was approximately $5.7 billion, one of the largest in the industry. The surplus of CNA's life insurance subsidiaries was more than $1.1 billion. In addition, CNA continues to maintain a high-quality investment portfolio heavily weighted toward U.S. government bonds. In 1995, CNA strengthened its position as one of the leading U.S. insurance organizations. With a sound financial base, market-driven strategies and a substantial increase in the scale and outreach of its operations, CNA will continue to move ahead. On behalf of the Board of Directors, I would like to thank you, our shareholders, for your commitment and support. Sincerely, S/EDWARD J. NOHA Edward J. Noha Chairman of the Board CNA Financial Corporation CNA FINANCIAL CORPORATION ------------------------- 4 A LETTER TO OUR SHAREHOLDERS - -------------------------------------------------------------------------------- 1995 FROM CNA INSURANCE COMPANIES CHAIRMAN AND CHIEF EXECUTIVE OFFICER DENNIS H.CHOOKASZIAN In 1995, CNA focused on building existing businesses and, at the same time, moving ahead on the first major merger in the property/casualty insurance industry in 20 years. Measured against these objectives, CNA performed very well. Financially, 1995 was also a successful year. After the weak earnings of 1994 and the impact of significant additions to asbestos reserves in the two prior years, CNA came back strongly. The recovery reflects improvement in underlying operations, notably in individual life and workers' compensation and reduced catastrophe losses. In addition, the 1995 results were bolstered by an improving investment climate driven by lower interest rates. The strong earnings in 1995 represent a major step forward in achieving our full earnings potential. CNA will continue to emphasize profitable growth, expense control and the strength of the individual businesses. The Continental merger has progressed well. We are on track for substantially completing the consolidation activities in one year. Economies of scale and operating efficiencies should generate annual cost savings of $300 million. Since closing the Continental transaction last May, CNA has restructured its commercial and personal lines branches, consolidated the products and operations of the two companies, and licensed and recontracted with CNA and former Continental agents. Today, one-third of CNA's officers are from Continental, a mix that is close to the ratio of Continental to CNA property/casualty premiums prior to the merger. By blending the best of both companies, we have built a stronger, more efficient organization. Even without the Continental merger, 1995 was a year of change at CNA. We completed a strategic re-evaluation in our group health business, and on the life side, we established a strong service capability. CNA's progress on many fronts reflects a tremendous level of teamwork and effort by employees throughout the organization. We also benefited from the support and input from the independent brokers and agents who stood by CNA in a year of rapid change. We greatly appreciate the contributions of both groups to CNA's continuing success. The entire insurance industry is evolving rapidly. Consolidation and financial restructuring will result in a smaller number of more effective competitors. New sources of outside investment capital will increase the current emphasis on efficiency and profitability. Controversial attempts at liability restructuring underscore the importance of a solid financial foundation. CNA FINANCIAL CORPORATION ------------------------- 5 A LETTER TO OUR SHAREHOLDERS - -------------------------------------------------------------------------------- 1995 In this environment of rapid change, CNA is building a stronger, more efficient operation. Over the past two years, CNA has reconfigured its organization from a centralized, top-down structure to a flatter, decentralized company of strategic business units (SBUs) focused on specific segments of CNA's business. This structure has increased accountability and shifted operating decision making closer to the customer across the full range of CNA's businesses. PROPERTY/CASUALTY CNA is the largest U.S. writer of commercial property/casualty insurance. This business encompasses such coverages as workers' compensation, general liability, professional and specialty insurance, and reinsurance. In workers' compensation, general liability, multiple peril and other standard lines of business insurance, CNA's strength is based on a strategy of industry segmentation. The merger with Continental advanced this strategy by increasing the economies of scale needed to develop specialized capabilities. For small- to medium-size business customers, CNA seeks to be a quality, low-cost provider of insurance products and services. In 1995, CNA introduced new products for the small commercial marketplace, as well as point-of-sale automation to reduce operating expenses and increase ease of doing business. We launched 15 new Commercial Affiliation Marketing (CAM) programs for targeted classes of business. A new unit was formed to focus more precisely on customers in the range of $500,000 to $1 million in annual premium. In the large commercial marketplace, CNA operates around a solution-based strategy that focuses on tailoring services and programs to fit the unique characteristics and problems of each client. In 1995, we established a dedicated claims organization and formed specialized service units to deliver best-in-market services in risk management information, loss control and cost management. Additionally, captive facilities in Bermuda and Barbados provide the necessary tools to meet the needs of very large customers. In early 1995, CNA acquired Alexsis, a subsidiary of Alexander & Alexander Services Inc. Alexsis is one of the largest property/casualty third-party administrators in the United States. This acquisition enables CNA to serve large commercial customers across the full spectrum of service offerings. CNA is one of the largest underwriters of professional and specialty commercial coverages. This business includes liability coverage for architects and engineers, lawyers, doctors, nurses and other professionals; liability coverage for directors and officers, marine insurance, surety and other specialized coverages. CNA FINANCIAL CORPORATION ------------------------- 6 - -------------------------------------------------------------------------------- 1995 The professional and specialty businesses are characterized by a focus on select customers and exceptional knowledge of their coverage needs. In several cases the businesses have long-standing, successful partnerships with managing general underwriters such as Victor O. Schinnerer, Aon Corporation and Poe & Brown. During 1995, we continued to strengthen expertise in specialty lines by adding underwriters and claims professionals who have worked in medicine, entertainment, law and other professions we serve. The Continental merger substantially increased CNA's capabilities in professional and specialty coverages. For example, Continental's institutional health care and large law firm businesses were significant enhancements to the professional liability operations. Continental's Marine Office of America Corporation (MOAC) is the No. 1 ocean marine underwriter in North America and a major player in inland marine. MOAC also serves the auto warranty, recreational watercraft and electronic and hospital equipment warranty markets. During the third quarter, CNA acquired Western National Warranty Corp., one of the largest U.S. providers of extended service contracts on new and used cars. The acquisition will extend CNA's growth into the automotive insurance market. The combined Continental and CNA surety business is the largest surety operation in the world. CNA will seek continued growth while becoming the surety of choice in the contract and commercial business segments. The Continental transaction also brought a substantial book of credit insurance business to CNA. In this market, we will emphasize new product development while also building on a successful export credit product. In reinsurance, CNA continues to benefit from the 1994 consolidation of its operations into a single management structure. CNA strategy is built around long-term partnerships with core producers, superior customer service, a broad range of products and an operating expense advantage over the competition. In the United States, CNA targets selected segments of the property/casualty reinsurance marketplace. As a result of the Continental merger, we formed a financial reinsurance unit to build on Continental's book of financial reinsurance. We also formed a new unit to develop Latin American treaty business. In international reinsurance, CNA's London and Amsterdam offices continue to gain clients as a consequence of the uncertainty surrounding the restructuring of Lloyd's. The increased business reflects CNA's long-term position as a significant player in the London market, its long-time presence in Europe and the high caliber of CNA's reinsurance professionals. CNA FINANCIAL CORPORATION ------------------------- 7 A LETTER TO OUR SHAREHOLDERS - -------------------------------------------------------------------------------- 1995 In addition to commercial insurance, CNA's property/casualty operations include personal insurance, primarily auto and homeowners coverages sold to individuals on a package or monoline basis. The Continental merger made CNA the market leader in package personal lines products. This leadership position will enable us to grow the business and achieve the scale necessary to meet our objective of being a consistently profitable, top writer of personal lines insurance. In 1995, CNA laid the foundation for a reinvigorated personal lines business. We organized into nine regional offices with responsibility for products, pricing, distribution and profitability. We also developed a new direct marketing distribution channel for employer and affinity group marketing. CNA will further improve personal lines profitability through redesigned claims processes, expense control, enhanced underwriting, catastrophe management and appropriate rate increases. We will continue to expand production through independent agents. Other sources of future growth include alternative distribution methods and possible acquisitions. INDIVIDUAL LIFE In 1995, CNA continued its growth strategies for the individual life business, which markets term, universal and participating life policies, long-term care coverage and annuities. Life, annuity and long-term care applications increased to more than 200,000 in 1995 from 91,000 in 1994. First-year paid premium increased to $350 million from $115 million. The new Managing General Agency distribution channel, which CNA started in 1994, produced almost half the first-year premium. In addition to growth, CNA developed a strong service capability by adding staff and reorganizing into producer-oriented teams. Other notable accomplishments included the conversion of all business to a more efficient PC-based processing system. We also solidified partnerships with key producers by putting administrative and underwriting capabilities into their offices. CNA will continue to benefit from strong distribution partners and service capacity to handle a substantial volume of business at low cost. In life reinsurance, CNA added several significant new accounts and began expanding medical and underwriting capabilities to support a strategic focus on select market segments. CNA FINANCIAL CORPORATION ------------------------- 8 - -------------------------------------------------------------------------------- 1995 GROUP LIFE AND HEALTH CNA is a prominent player in group life and health insurance. We offer a range products, including medical and hospitalization coverages, accident and disability insurance, long-term care coverage and pension products sold to businesses, groups and associations. In the medical and hospitalization market, CNA's $2 billion Federal Employees Health Benefits Program continues to compete effectively. CNA has undertaken a number of initiatives to enhance service, manage health care utilization demand and quality, and strengthen CNA's networks of physicians, hospitals and other providers. In the market for private employer medical benefits, CNA launched a niche strategy of developing risk- and profit-sharing partnerships with health care providers for point-of-service managed care products in selected geographic markets. Looking ahead, we will also promote full-service medical savings account products. In the accident, disability and group long-term care markets, CNA is building on its tradition of product innovation and expanding its focus to enable significant growth in premiums and profit. Our five-year goal is to be one of the top five disability writers and the No. 1 accident product provider, while continuing our leadership in long-term care. The pensions business performed well in 1995 with new product introductions and strong earnings. Throughout the group life and health business in 1995, CNA's focus on customer needs and efficient processes was reflected in significant reengineering. These continuous improvement activities are advancing CNA's strategies for leadership. CNA performed well in 1995. Through the outstanding effort of CNA employees and the support of our distribution partners, we moved ahead on a major merger, launched significant changes in many businesses and produced strong earnings. In 1996, CNA will complete activities already under way and increase its momentum toward sustainable, profitable growth. In the rapidly changing insurance environment, CNA is well positioned for continued success. Sincerely, S/ DENNIS H. CHOOKASZIAN Dennis H. Chookaszian Chairman and Chief Executive Officer CNA Insurance Companies CNA FINANCIAL CORPORATION ------------------------- 9 CNA FINANCIAL SECTION CONTENTS - -------------------------------------------------------------------------------- 1995 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 26 CONSOLIDATED BALANCE SHEET 28 STATEMENT OF CONSOLIDATED OPERATIONS 29 STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY 30 STATEMENT OF CONSOLIDATED CASH FLOWS 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 75 INDEPENDENT AUDITORS' REPORT 76 COMMON STOCK INFORMATION 77 CORPORATE DIRECTORY CNA FINANCIAL CORPORATION ------------------------- 11 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Continental Acquisition The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes found on pages 26 to 74. Continental Acquisition: CNA reached an agreement in late 1994 to acquire The Continental Corporation (Continental) through a cash merger for $1.1 billion. On May 9, 1995, Continental shareholders approved the agreement and the merger was completed on May 10. As a result, Continental became a wholly owned subsidiary of CNA Financial Corporation. CNA funded the cash purchase price with proceeds from a five-year revolving credit facility from a syndicate of banks. See Liquidity and Capital Resources section for a summary description of financing of the acquisition. Continental is an insurance holding company principally engaged in the business of owning a group of property and casualty insurance companies. This acquisition makes CNA the largest U.S. commercial lines insurer, the third largest U.S. property-casualty organization, and the sixth largest U.S. insurance group, based on 1994 premiums. CNA set an ambitious goal of substantially completing the transition in one year. Processes such as policy conversions at renewal and systems integration will take longer. CNA's top priority is to consolidate the two organizations as quickly as possible without disruption to its existing businesses and completion of that task remains its number one objective in 1996. The merged organization will operate under the name CNA with headquarters in Chicago. The Company is merging most of the Continental and CNA sales and support offices nationwide. CNA continues to remain committed to strong relationships with the agents and brokers who distribute its products and services. The combined organization is expected to be stronger and more competitive than either company could have been on its own. CNA will benefit from a stronger market position in nearly all property/casualty businesses, increased economies of scale and efficiencies, and expanded distribution of new and existing products. CNA FINANCIAL CORPORATION ------------------------- 12 - -------------------------------------------------------------------------------- Results of Operations Results of Operations: - ---------------------- The following chart summarizes key components of consolidated operating results for each of the last three years. CONSOLIDATED OPERATIONS - -------------------------------------------------------------------------------- Year Ended December 31 1995 1994 1993 - -------------------------------------------------------------------------------- (In millions of dollars) OPERATING SUMMARY (excluding realized investment gains/losses): Revenues: Premiums $11,735.1 $ 9,474.4 $ 8,688.8 Net investment income 2,076.6 1,551.2 1,314.3 Other 424.2 220.1 191.6 - -------------------------------------------------------------------------------- Total revenues 14,235.9 11,245.7 10,194.7 Benefits and expenses 13,649.5 11,144.4 10,904.3 - -------------------------------------------------------------------------------- Income (loss) before income tax 586.4 101.3 (709.6) Income tax (expense) benefit (123.8 85.7 457.9 - -------------------------------------------------------------------------------- Net operating income (loss) (excluding realized investment gains/losses) $ 462.6 $ 187.0 (251.7) ================================================================================ SUPPLEMENTAL FINANCIAL DATA: Net operating income (loss) by group: Property/Casualty $ 457.0 $ 147.9 $ (266.6) Life 103.8 87.0 43.5 Other (98.2) (47.9) (28.6) - -------------------------------------------------------------------------------- 462.6 187.0 (251.7) - -------------------------------------------------------------------------------- Net realized investment gains (losses) by group: Property/Casualty 207.9 (104.6) 435.8 Life 85.4 (45.6) 72.6 Other 1.1 (0.3) 10.8 - -------------------------------------------------------------------------------- 294.4 (150.5) 519.2 - -------------------------------------------------------------------------------- Net income (loss) by group: Property/Casualty 664.9 43.3 169.2 Life 189.2 41.4 116.1 Other (97.1) (48.2) (17.8) - -------------------------------------------------------------------------------- $ 757.0 $ 36.5 $ 267.5 ================================================================================ CNA FINANCIAL CORPORATION ------------------------- 13 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Consolidated Results Consolidated Results After the weak earnings of 1994 and the impact of Fibreboard, as discussed in Note J of the Consolidated Financial Statements, in the prior two years, CNA came back strongly in 1995. The recovery reflects improvement in underlying operations, notably in individual life and workers' compensation, reduced catastrophe losses, increased investment income and significant realized gains in 1995. The 1995 results of operations include Continental subsequent to May 10, 1995. Today, CNA is the largest commercial insurer in the United States and the third largest property/ casualty company in the country. Based on market share CNA ranks first among United States insurers in commercial multiple peril, commercial auto, personal packages, surety and ocean marine; second in general liability, workers' compensation, offshore energy, medical malpractice, multiple peril crop and federal employees health benefit plans; and third in aircraft, credit, recreational watercraft, automobile warranty, farmowners and products liability insurance. Revenues excluding realized gains/losses were $14.236 billion, up 26.6% from 1994 and up 39.6% from 1993. For 1995, revenues reflect increases of $2.261 billion (23.9%) in earned premiums, $525.4 million (33.9%) in net investment income and $204.1 million (92.7%) in other income. These increases were principally attributable to the Continental acquisition. For Continental, earned premiums during the period from May 10 through December 31, 1995 were $1.747 billion, net investment income was $284.5 million, and other income, comprised primarily of claims adjusting fees and insurance inspection fees was $46.0 million. For 1995, CNA reported net operating income (which excludes net realized investment gains/losses) of $462.6 million, or $7.37 per share, compared to $187.0 million, or $2.94 per share, for 1994 and a net operating loss of $251.7 million, or $4.14 per share, for 1993. The 1993 operating loss reflects a $500 million addition to asbestos claim reserves, which resulted in a $325 million charge against after-tax earnings, or $5.26 per share. This reserving action was taken in recognition of litigation with Fibreboard as discussed in Note J of the Consolidated Financial Statements. Net realized investment gains, net of tax, amounted to $294.4 million, or $4.77 per share in 1995, compared to net realized investment losses of $150.5 million, or $2.43 per share in 1994 and net realized investment gains of $519.2 million, or $8.40 per share, in 1993. Net income for 1995 was $757.0 million, or $12.14 per share, compared with net income of $36.5 million, or $0.51 per share, for 1994 and $267.5 million, or $4.26 per share in 1993. CNA FINANCIAL CORPORATION ------------------------- 14 - ------------------------------------------------------------------------------- Property/Casualty Operations Property/Casualty Operations PROPERTY/CASUALTY GROUP - ------------------------------------------------------------------------------- Year Ended December 31 1995 1994 1993 - ------------------------------------------------------------------------------- (In millions of dollars) OPERATING SUMMARY (excluding realized investment gains/losses): Revenues: Premiums $ 8,723.8 $6,838.5 $6,275.0 Net investment income 1,699.8 1,240.4 1,059.8 Other 348.0 170.4 151.8 - ------------------------------------------------------------------------------- 10,771.6 8,249.3 7,486.6 Benefits and expenses 10,193.3 8,210.1 8,218.6 - ------------------------------------------------------------------------------- Operating income (loss) before income tax 578.3 39.2 (732.0) Income tax benefit (expense) (121.3) 108.7 465.4 - ------------------------------------------------------------------------------- Net operating income (loss) (excluding realized investment gains/losses) $ 457.0 $ 147.9 $ (266.6) =============================================================================== 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 large commercial account policies are written under retrospectively-rated contracts, which are experience-rated. Premiums for such contracts may be adjusted, subject to limitations set by contract, based on loss experience of the insureds. Other experience-rated policies include provisions for dividends based on loss experience. Experience-rated contracts reduce but do not eliminate risk to the insurer. Approximately 12% 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. In early 1995, CNA acquired Alexsis, one of the largest property/casualty third-party administrators in the United States. This acquisition enables CNA to serve large commercial customers across the full spectrum of service offerings. Revenues from Alexsis contributed $89 million to other revenues. CNA FINANCIAL CORPORATION ------------------------- 15 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 19%, 19% and 18%, respectively, of 1995 premiums earned. 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 profitability continued to show significant improvement in 1995 and reflects both improved investment income and underwriting results. Pretax operating income excluding net realized investment gains/losses for the property/casualty insurance subsidiaries was $578.3 million in 1995, compared to pretax operating income of $39.2 million in 1994 and a pretax operating loss of $732.0 million for 1993. Net operating income excluding net realized investment gains/losses of CNA's property/casualty insurance subsidiaries was $457.0 million for 1995, compared to $147.9 million in 1994 and a net loss of $266.6 million for 1993. Property/casualty revenues, excluding net realized investment gains/losses were $10.772 billion, up 30.6% from 1994 and up 43.9% from 1993. Property/casualty earned premiums were $8.724 billion in 1995, up 28% from the $6.839 billion earned in 1994 and up 39% from 1993. The 1995 earned premium increase of $1.885 billion was principally attributable to the inclusion of Continental business ($1.747 billion) and increases in other CNA business including small and medium commercial accounts, mass marketing and reinsurance offset in part by decreases in large account premium business due to the continued shift to high deductible insurance contracts and decreases in involuntary residual markets. Property/casualty investment income for 1995 was $1.700 billion, up 37.0% from the $1.240 billion in 1994 and up 60.4% from 1993. Investment income increased primarily due to the acquisition of Continental, continued strong positive cash flow and higher yielding investments resulting from a shift in 1994 to longer term securities. Interest rates on fixed maturity securities generally rose throughout 1994, but have generally declined in 1995. The bond segment of the investment portfolio yielded 6. 9%, on an annualized basis, in 1995 compared with 6.4% in 1994. The underwriting loss for 1995 was $1,121.5 million, compared to $1,201.2 million and $1,791.8 million in 1994 and 1993, respectively. The combined ratio was 110.3 for 1995, compared with 115.0 and 127.3 for 1994 and 1993, respectively. Contributing to the 1995 improvement in underwriting results were continued favorable loss trends in the workers' compensation line and lower catastrophe losses. As discussed in the previous section, the primary reason for the 1993 poor operating results was the reserve additions of $500 million related to Fibreboard. Such loss provisions increased the combined ratio by 8.0 percentage points in 1993. CNA FINANCIAL CORPORATION ------------------------- 16 - -------------------------------------------------------------------------------- Property/Casualty Operations(cont.) Catastrophe losses for 1995 on a pretax basis were approximately $149 million, compared with $283 million in 1994 and $74 million in 1993. CNA's 1995 catastrophe losses related primarily to tropical storms and hail storms in Texas. CNA's 1994 catastrophe losses related primarily to the Northridge earthquake near Los Angeles and severe winter storms in the Northeast. CNA, consistent with sound insurance reserving practices, regularly adjusts its reserve estimates in subsequent reporting periods as new facts and circumstances emerge that indicate the previous estimates need to be modified. These adjustments, referred to as "reserve development," are inevitable given the complexities of the reserving process and are recorded in the statement of operations in the period the need for the adjustments becomes apparent. The property/casualty underwriting losses include net adverse (favorable) reserve development of $122, $(71) million and $590 million for the years 1995, 1994 and 1993, respectively. This reserve development reflects the effects of management's ongoing evaluation of reserve levels and is comprised of the following components: - ---------------------------------------------- Development- adverse (favorable) 1995 1994 1993 - ---------------------------------------------- ($ in millions, of dollars) Environmental $ 241 $ 181 $ 446 Asbestos 258 37 601 Other (377) (289) (457) - ---------------------------------------------- Total $ 122 $(71) $ 590 ============================================== Management believes its reserves for environmental and asbestos claims are appropriately established based upon known facts and current case law. However, due to the inconsistencies of court coverage decisions, the number of waste sites subject to clean-up, the standards for clean-up and liability, and other factors, the ultimate exposure to CNA for these claims may vary materially from the amounts currently recorded, resulting in a potential increase in the claim reserves recorded. In addition, issues related to, among other things, specific policy provisions, multiple insurers and allocation of liability among insurers, consequences of conduct of the insured, missing policies and proof of coverage make quantification of liabilities exceptionally difficult and subject to adjustment based upon newly available data. Due to the uncertainties and factors described above, management believes it is not practicable to develop a meaningful range for any such additional reserves that may be required. See Note K of the Consolidated Financial Statements for further discussion of environmental and asbestos reserves. Adverse 1995 environmental reserve development of $241 million includes $60 million related to Continental and results from CNA's on-going monitoring of current settlement patterns, current pending cases and potential future claims. 1995 adverse asbestos reserve development of $258 million is based on management's assessment of the effects of 1995 payments and settlement activity as well as an on-going review of pending asbestos cases and related legal decisions. Other 1995 reserve development, which nets to $ 377 million of favorable reserve development, is principally due to favorable claim frequency (rate of claim occurrence) and severity (average cost per claim) experience in the workers' compensation line of business. The 1993 environmental development includes an allocation of reserves for incurred but not reported environmental claims of $ 340 million. The 1993 asbestos development includes $500 million related to Fibreboard. See Note J of the Consolidated Financial Statements. CNA FINANCIAL CORPORATION ------------------------- 17 MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------------------------------------------------- Life Operations Life Operations LIFE GROUP - ---------------------------------------------------------------------------- Year Ended December 31 1995 1994 1993 - ---------------------------------------------------------------------------- (In millions of dollars) OPERATING SUMMARY (excluding realized investment gains/losses): Revenues: Premiums $ 3,032.4 $ 2,678.2 $ 2,442.2 Net investment income 369.2 310.6 259.7 Other 76.2 49.6 37.3 - ---------------------------------------------------------------------------- 3,477.8 3,038.4 2,739.2 Benefits and expenses 3,317.5 2,904.0 2,672.8 - ---------------------------------------------------------------------------- Income before income tax 160.3 134.4 66.4 Income tax expense 56.5 47.4 22.9 - ---------------------------------------------------------------------------- Net operating income (excluding realized investment gains/losses) $ 103.8 $ 87.0 $ 43.5 ============================================================================ CNA sells a variety of individual and group insurance products. The individual 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. In 1994, CNA 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. All new products were very well received in the marketplace, as 1995 applications for new policies increased to more than 200,000 from 91,000 in 1994. Profits increased due to increased investment income and improved mortality experience and increased interest rate spreads on interest sensitive products. Life insurance revenues excluding net realized investment gains were up 14.5% from 1994 and up 27.0% from 1993. Life insurance and annuity premiums for 1995 were up 13.2% from 1994 and up 24.2% from 1993. The premium growth in 1995 was principally attributable to increases in new business in individual life operations. The premium growth in 1994 was $236 million and was principally attributable to increases in new business in group operations and pension operations. Life investment income increased by approximately 18.9% due to continued strong positive cash flow and higher yielding investments resulting from a shift in 1994 to longer term securities. The bond segment of the life investment portfolio yielded 6.9% in 1995 compared with 6.6% in 1994. CNA's life insurance subsidiaries' net operating income excluding net realized investment gains/losses was $103.8 million for 1995, compared to $87.0 million and $43.5 million for 1994 and 1993, respectively. CNA FINANCIAL CORPORATION ------------------------- 18 - -------------------------------------------------------------------------------- Financial Condition Financial Condition: - -------------------- CNA's property/casualty insurance subsidiaries' statutory surplus grew from $3.1 billion in 1990 to $3.9 billion in 1991. In 1992, property/casualty surplus declined to $3.1 billion primarily due to $1.5 billion (pretax) in adverse asbestos reserve development. In 1993, property/casualty surplus rose to approximately $3.6 billion due to substantial realized investment gains and a capital contribution by CNA of $475 million, offset by another $500 million (pretax) increase in asbestos reserves relating to Fibreboard. In 1994, surplus declined to $3.4 billion primarily attributable to realized investment losses. In 1995, surplus rose $2.3 billion to $5.7 billion due to the acquisition of Continental ($1.7 billion) and improved net income. Included in the changes in the property/casualty surplus are capital contributions from CNA to Casualty of $475 million in 1993 and $120 million in 1990. Dividends of $325 million, $175 million, $150 million, $100 million and $130 million were paid to CNA by Casualty in 1995, 1994, 1993, 1992 and 1991 respectively. Statutory surplus of CNA's life insurance subsidiaries grew from $849 million at December 31, 1990 to $1.128 billion at December 31, 1995. Life statutory surplus includes capital contributions from Casualty to Continental Assurance Company of $100 million in 1990. Assets totaled $59.9 billion; $14.3 billion related to Continental, at the end of 1995, an increase of 35.2% over 1994 and 42.9% over 1993. CNA's investment portfolio increased by $8.9 billion, or 33.2%, over the 1994 level of $26.9 billion; $7.4 billion of this increase related to Continental. CNA's consolidated stockholders' equity was $6.7 billion at December 31, 1995, compared to $4.5 billion and $5.4 billion at December 31, 1994 and 1993, respectively. The volatility in stockholders' equity the last two years has primarily been the result of recognizing the effects of unrealized appreciation/depreciation on fixed maturity securities within stockholders' equity. 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) - --------------------------------------------- --------------------------------- 1995 $5,696 $1,128 $59,902 $6,735 $106.56 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 - -------------------------------------------------------------------------------- CNA FINANCIAL CORPORATION ------------------------- 19 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Investments Investments: - ------------ The following table summarizes CNA's general account investments with fixed maturity securities shown at amortized cost for each of the last five years.
DISTRIBUTION OF INVESTMENTS -GENERAL ACCOUNT - ------------------------------------------------------------------------------------------------------------------ December 31 1995 % 1994 % 1993 % 1992 % 1991 % - ------------------------------------------------------------------------------------------------------------------ (In millions of dollars) Investments: Fixed maturities (at amortized cost): Bonds: Tax exempt $ 3,453 10 $ 3,717 13 $ 4,725 19 $ 9,502 42 $ 8,998 41 Taxable 25,832 74 17,483 63 11,933 48 7,286 32 9,674 44 Redeemable preferred stocks 100 -- 423 2 445 2 568 3 103 1 Equity securities: Common stocks 915 3 755 3 508 2 348 2 230 1 Non-redeemable preferred stocks 3 -- -- -- -- -- 9 -- 11 -- Mortgage loans and real estate 146 -- 47 -- 62 -- 89 -- 122 1 Policy loans 177 1 176 1 174 1 179 1 181 1 Other invested assets 500 1 101 -- 68 -- 53 -- 56 -- Short-term investments 3,725 11 5,036 18 6,944 28 4,444 20 2,511 11 - ------------------------------- ---------- ---- ---------- ---- ---------- ---- ---------- ----- --------- ----- Investments $ 34,851 100% $ 27,738 100% $ 24,859 100% $ 22,478* 100% $ 21,886* 100% =============================== ========== ==== ========== ==== ========== ==== ========== ===== ========= ===== Investments at Fair Value $ 35,886* $ 26,943* $ 25,363* $ 23,324 $ 22,816 =============================== ========== ===== ========== ==== ========== ===== ========== ===== ========= ===== *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 maturity portfolio to maturity. However, securities may be sold as part of CNA's asset/liability strategies or to take advantage of investment opportunities generated by changing interest rates, prepayments, tax and credit considerations, or other similar factors. Accordingly, the fixed maturity securities are classified as available-for-sale. The general account portfolio consists primarily of high quality marketable fixed maturities, 94% of which are rated as investment grade, at December 31, 1995. At December 31, 1995, 62% of the general account's fixed maturity portfolio was invested in U.S. government and affiliated securities, 15% in other AAA rated securities, and 12% in AA and A CNA FINANCIAL CORPORATION ------------------------- 20 - -------------------------------------------------------------------------------- Investments (cont.) rated securities. CNA's guaranteed investment fixed maturity portfolio is comprised of 36% U.S. government and affiliated securities, 17% other AAA rated securities, and 19% in AA and A rated securities. These ratings are primarily from Standard & Poor's (93% of the general account portfolio and 95% of the guaranteed investment portfolio). In addition, CNA's investment in mortgage loans and real estate are substantially below the industry average based upon these investments as a percentage of total assets. 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, 1995, CNA's concentration in high yield bonds including Separate Accounts was approximately 4.7% of total assets. Included in CNA's fixed maturity securities at December 31, 1995 (general and guaranteed investment portfolios) are $8.5 billion of asset-backed securities, consisting of approximately 57% in U.S. government agency issued pass-through certificates, 32% in collateralized mortgage obligations (CMO's), and 11% 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 prepayments by concentrating its CMO investments in planned amortization classes with relatively short principal repayment windows. CNA avoids investments in complex mortgage derivatives without readily ascertainable market prices. At December 31, 1995, the fair value of asset-backed securities was in excess of the amortized cost by approximately $200 million compared with unrealized losses of $181 million at December 31, 1994. At December 31, 1995 and 1994, 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 1995 1994 - ------------------------------------------------- (In millions of dollars) Security repurchase $ 776.0 $2,478.8 collateral Escrow-Note A 1,044.6 1,009.9 Other 1,903.9 1,547.4 ================================================= Total short-term investments $3,724.5 $5,036.1 ================================================= CNA invests from time to time in certain derivative financial instruments to increase investment returns and to eliminate the impact of changes in interest rates on certain corporate borrowings. CNA considers its derivative securities as held for trading purposes, except for interest rate swaps associated with corporate borrowings and as such, are recorded at fair value at the reporting date. The interest rate swaps on corporate borrowings are accounted as an adjustment to interest expense. See Note F of the Consolidated Financial Statements for further information. CNA FINANCIAL CORPORATION ------------------------- 21 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Investments (cont.) CNA's general account investments in bonds and redeemable preferred stocks were carried at a fair value of $30.4 billion at December 31,1995, compared with $20.8 billion at December 31, 1994. At December 31, 1995, net unrealized gains on fixed maturity securities amounted to approximately $1,059 million. This compares with net unrealized losses of $795 million at December 31, 1994. The gross unrealized gains and losses for the fixed maturity securities portfolio at December 31, 1995, were $1,136 million and $77 million, respectively, compared to $194 million and $989 million, respectively, at December 31, 1994. Net unrealized gains on general account bonds at December 31, 1995 include net unrealized gains on high yield securities of $67 million, compared with net unrealized losses of $30 million at December 31, 1994. 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 values and fair values of high yield securities in the general account were $1.9 billion at December 31, 1995, compared to $1.0 billion at December 31, 1994. At December 31, 1995, total Separate Account cash and investments amounted to $5.9 billion with taxable fixed maturities representing approximately 94% of the Separate Accounts portfolio. Approximately 85% of Separate Account investments are used to fund guaranteed investments for which Continental Assurance Company guarantees principal and a specified return to the contractholders. The duration of fixed maturity securities included in the guaranteed investment portfolio are matched approximately with the corresponding payout pattern of the liabilities of the guaranteed investment contracts. At December 31, 1995, all fixed maturity securities in the guaranteed investment portfolio were carried at fair value and amounted to $4.8 billion. At December 31, 1995, net unrealized gains on fixed maturity securities amounted to approximately $63 million. This compares to $195 million in net unrealized losses at December 31, 1994. The gross unrealized gains and losses for the fixed maturity securities portfolio at December 31, 1995, were $122 million and $59 million, respectively, compared to $34 million and $229 million, respectively, at December 31, 1994. At December 31, 1995, high yield securities in the guaranteed investment portfolio were carried at fair value and amounted to $944 million, compared with $1.102 billion at December 31, 1994. Net unrealized losses on high yield securities held in such Separate Accounts were $14 million at December 31, 1995, compared with net unrealized losses of $108 million at December 31, 1994. CNA FINANCIAL CORPORATION ------------------------- 22 - -------------------------------------------------------------------------------- Liquidity and Capital Resources The following table summarizes the General Account's unrealized net gains and losses from fixed maturity and equity securities for the last five years. UNREALIZED APPRECIATION (DEPRECIATION) FIXED MATURITY AND EQUITY SECURITIES-GENERAL ACCOUNT - ------------------------------------------------------------------------------- December 31 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------- (In millions of dollars) Bonds $1,043 $(801) $501 $842 $918 Redeemable preferred stocks 16 6 3 4 13 Equity securities 181 18 76 46 33 - ------------------------------------------------------------------------------- Liquidity and Capital Resources: - -------------------------------- The liquidity requirements of CNA, excluding the acquisition of Continental, 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, 1995, CNA's operating activities generated net positive cash flows of approximately $875 million, compared with $1.0 billion in 1994 and $1.3 billion in 1993. CNA believes that future liquidity needs will be met primarily by cash generated from operations. 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. On May 10, 1995, CNA acquired all the outstanding shares of Continental for approximately $1.1 billion. To finance the acquisition of Continental (including the refinancing of $205 million of Continental debt) CNA entered into a five-year $1.325 billion revolving credit facility involving 16 banks. The interest rate for the facility is based on the one, two, three, or six month London Interbank Offered Rate (LIBOR), plus 25 basis points. Additionally, there is a facility fee of 10 basis points annually. The average interest rate on the borrowings under the revolver at December 31, 1995 was 6.12%. Under the terms of the facility, CNA may prepay the debt without penalty, giving CNA flexibility to arrange longer-term financing on more favorable terms. To offset the variable rate characteristics of the facility, CNA entered into five year interest rate swap agreements with several banks. These agreements convert variable rate debt into fixed rate debt resulting in fixed rates on notional amounts of $1.2 billion. The effect of these interest rate swaps was to increase interest expense by $2 million for the year ended December 31, 1995. CNA FINANCIAL CORPORATION ------------------------- 23 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Liquididty and Capital Resources (cont.) On August 10, 1995, to take advantage of favorable interest rates, CNA established a commercial paper program, borrowing $500 million from investors to replace a like amount of bank financing. The weighted-average yield on commercial paper at December 31, 1995 was 6.05%. The commercial paper borrowings are classified as long-term, as $500 million of the committed bank facility will support the commercial paper program (at an undrawn cost of 10 basis points). Standard and Poor's and Moody's issued short-term debt ratings of A2 and P2, respectively, for CNA's commercial paper program. As of March 1, 1996, the outstanding loans under the revolving credit facility were $825 million. There was no unused borrowing capacity under the facility after the effects of the commercial paper program. The weighted-average interest rate (interest and facility fees) on the acquisition debt, which includes the revolving credit facility, commercial paper and the effect of the interest rate swaps, was 6.50% at December 31, 1995. Coincident with the Continental acquisition, A.M. Best, Standard and Poor's, Moody's and Duff & Phelps issued revised ratings for CNA's Continental Casualty Company (CCC) Intercompany Pool, Continental Insurance Company (CIC) Intercompany Pool and Continental Assurance (CAC) Company Intercompany Pool. Also rated were the senior debt of both CNA and The Continental Corporation (Continental) and CNA's preferred stock. In some cases the rating agencies affirmed the previous ratings. In others, the ratings were lowered because of the increased level of debt associated with the Continental acquisition. The chart below lists the current ratings.
|------------------|-----------------------------||-----------------------------------------| | | INSURANCE RATINGS || DEBT AND STOCK RATINGS | | |-----------------------------||-----------------------------|-----------| | | Financial Strength || | | | |-----------------------------|| | | | | || CNA |Continental| | | ||--------|-----------|--------|-----------| | | || Senior | Commercial|Preferre| Senior | | | CCC CAC CIC || Debt | Paper | Stock | Debt | | | || | | | | | |-----------------------------||--------|-----------|--------|-----------| | | || | | | | |A.M. Best | A A A- || - | - | - | -| | | | || | | | | | | || | | | | |Moody's | A1 A1 A2 || A3 | P2 | a3 | Baa1 | | | || | | | | | | || | | | | | |-----------------------------|| | | | | | | Claims Paying Ability || | | | | | |-----------------------------|| | | | | | | || | | | | |Standard & Poor's | A+ AA A- || A- | A2 | A- | BBB- | | | || | | | | | | || | | | | |Duff & Phelps | AA- AA - || A- | - | A- | - | |------------------|-----------------------------||--------|-----------|--------|-----------|
CNA FINANCIAL CORPORATION ------------------------- 24 ------------------------------------------------------------------------------ Accounting Standards Accounting Standards: - -------------------- Disclosures of Certain Significant Risks and Uncertainties In December 1994, 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 had no impact on the results of operations of CNA. Accounting by Creditors for Impairment of a Loan In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (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 did not have a significant impact on CNA. Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This Statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used for long-lived assets and certain identifiable intangibles to be disposed of. This statement requires that long-lived assets and certain identifiable intangibles to be held and used by the entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This Statement will be effective for 1996 financial statements, although earlier adoption is permissible. This Statement will not have a significant impact on CNA. Accounting for Stock-Based Compensation In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation". This Statement establishes financial accounting and reporting standards for stock-based employee compensation plans. The requirements of this Statement will generally be effective for 1996 financial statements. This Statement will have no impact on the results of operations of CNA as the Company has no compensation which qualifies. CNA FINANCIAL CORPORATION ------------------------- 25 CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- Consolidated Balance Sheet
ASSETS - ------------------------------------------------------------------------------------------------------------------ December 31 1995 1994 - ------------------------------------------------------------------------------------------------------------------ (In millions of dollars) Investments-Note C: Fixed maturities available-for-sale (cost: $29,385.4 and $21,623.1) $ 30,444.7 $ 20,827.7 Equity securities available-for-sale (cost: $736.3 and $736.3) 917.7 754.8 Mortgage loans and real estate (less accumulated depreciation: $3.6 and $3.4) 122.4 46.9 Policy loans 177.2 176.3 Other invested assets 499.9 101.1 Short-term investments-Note A 3,724.5 5,036.1 - ---------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS 35,886.4 26,942.9 - ---------------------------------------------------------------------------------------------------------------- Cash 221.6 147.6 Insurance receivables: Reinsurance receivables 7,169.1 3,187.7 Other insurance receivables 5,302.4 3,861.4 Less allowance for doubtful accounts (288.7) (127.5) Deferred acquisition costs 1,493.3 1,026.4 Accrued investment income 545.4 407.1 Receivables for securities sold 185.2 258.7 Federal income taxes recoverable (includes $153.0 and $85.8 due from Loews)-Note H 132.7 93.4 Deferred income taxes-Note H 1,254.9 1,662.5 Property and equipment at cost (less accumulated depreciation: $313.7 and $244.9) 584.7 263.3 Prepaid reinsurance premiums 495.4 175.1 Intangibles-Note M 456.3 17.6 Other assets 595.0 323.9 Separate Account business 5,868.1 6,080.3 - ---------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 59,901.8 $ 44,320.4 ================================================================================================================ See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION ------------------------- 26 CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Consolidated Balance Sheet (cont.)
LIABILITIES AND STOCKHOLDERS' EQUITY - ---------------------------------------------------------------------------------------------- December 31 1995 1994 - ---------------------------------------------------------------------------------------------- (In millions of dollars) Liabilities: Insurance reserves: Claim and claim expense-Note K $ 32,032.4 $ 22,564.7 Future policy benefits 3,515.9 3,049.8 Unearned premiums 4,549.4 2,690.7 Policyholders' funds 705.0 632.5 Securities sold under repurchase agreements 774.1 2,478.6 Payables for securities purchased 163.3 281.4 Participating policyholders' equity 140.1 98.0 Short-term debt-Note D 257.6 2.0 Long-term debt-Note D 2,767.9 911.8 Other liabilities 2,392.5 984.7 Separate Account business 5,868.1 6,080.3 - --------------------------------------------------------------------------------------------- TOTAL LIABILITIES 53,166.3 39,774.5 - --------------------------------------------------------------------------------------------- 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 5,065.6 4,315.5 Net unrealized investment gains (losses)-Note C 933.1 (506.4) Treasury stock, at cost (2.5) (2.5) - --------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 6,735.5 4,545.9 - --------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 59,901.8 $ 44,320.4 ============================================================================================= See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION ------------------------- 27 CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Statement of Consolidated Operations
- ----------------------------------------------------------------------------------------------------- Year Ended December 31 1995 1994 1993 - ----------------------------------------------------------------------------------------------------- (In millions of dollars, except per share data) Revenues: Premiums-Note G $ 11,735.1 $ 9,474.4 $ 8,688.8 Net investment income-Note C 2,076.6 1,551.2 1,314.3 Realized investment gains (losses)-Note C 463.8 (246.2) 816.1 Other 424.2 220.1 191.6 - ----------------------------------------------------------------------------------------------------- 14,699.7 10,999.5 11,010.8 - ----------------------------------------------------------------------------------------------------- Benefits and expenses: Insurance claims and policyholders' benefits-Note G 9,951.7 8,450.3 8,556.6 Amortization of deferred acquisition costs 1,843.5 1,377.5 1,200.3 Other operating expenses 1,679.8 1,235.2 1,119.7 Interest expense 182.3 70.5 40.8 - ----------------------------------------------------------------------------------------------------- 13,657.3 11,133.5 10,917.4 - ----------------------------------------------------------------------------------------------------- Income (loss) before income tax 1,042.4 (134.0) 93.4 Income tax (expense) benefit -Note H (285.4) 170.5 174.1 - ----------------------------------------------------------------------------------------------------- NET INCOME $ 757.0 $ 36.5 $ 267.5 - ----------------------------------------------------------------------------------------------------- EARNINGS PER SHARE $ 12.14 $ 0.51 $ 4.26 ===================================================================================================== See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION ------------------------- 28 - -------------------------------------------------------------------------------- Statement of Consolidated Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------- Net Additional Unrealized Common Preferred Treasury Paid-in Retained Investment Total Stock Stock Stock Capital Earnings Gains (Losses) - ------------------------------------------------------------------------------------------------------------------- (In millions of dollars) 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- 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 - - - - - (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 Net income - - - - 757.0 - 757.0 Unrealized investment gains-Note C - - - - - 1,439.5 1,439.5 Preferred dividends - - - - (6.9) - (6.9) - ------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 $ 154.6 150.0 (2.5) 434.7 $ 5,065.6 $ 933.1 $ 6,735.5 =================================================================================================================== See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION ------------------------- 29 CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Statement of Consolidated Cash Flows
- ---------------------------------------------------------------------------------------------------- Year Ended December 31 1995 1994 1993 - ---------------------------------------------------------------------------------------------------- (In millions of dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 757.0 $ 36.5 $ 267.5 ------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Pretax realized investment (gains) losses (463.8) 246.2 (816.1) Participating policyholders' interest (3.6) (12.0) (4.3) Amortization of intangible assets 18.9 3.1 8.5 Amortization of bond discount (142.7) (95.5) (88.1) Depreciation 101.0 66.1 46.5 Changes in: Reinsurance and other insurance receivables, net (271.0) (430.2) 643.2 Deferred acquisition costs (160.8) (41.0) (85.3) Accrued investment income (30.4) (161.2) 41.6 Federal income taxes (39.3) (14.9) 268.8 Deferred income taxes 221.0 (96.3) (161.3) Prepaid reinsurance premiums 129.8 (7.8) (15.0) Insurance reserves 427.0 1,468.9 1,211.7 Reinsurance payables 9.9 (25.0) 30.5 Other, net 322.0 45.3 (76.1) - ----------------------------------------------------------------------------------------------------- Total adjustments 118.0 945.7 1,004.6 - ----------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 875.0 $ 982.2 $ 1,272.1 - ----------------------------------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION ------------------------- 30 - -------------------------------------------------------------------------------- Statement of Consolidated Cash Flows (cont.)
- ----------------------------------------------------------------------------------------------------------------- Year Ended December 31 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------- (In millions of dollars) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of The Continental Corporation (1,125.5) - - Cash acquired in connection with the Continental merger 165.1 - - Other acquisitions (72.0) - - Purchases of fixed maturities (29,255.3) (34,149.4) (42,828.9) Proceeds from fixed maturities: Sales 24,065.1 25,287.0 41,216.9 Maturities, calls and redemptions 2,855.2 4,506.3 2,347.7 Purchases of equity securities (1,094.1) (892.8) (758.9) Proceeds from sales of equity securities 1,317.2 649.9 736.1 Change in short-term investments 2,941.5 1,895.8 (2,485.5) Purchases of property and equipment (126.2) (109.5) (89.5) Change in securities sold under repurchase agreements (1,704.5) 1,865.3 102.4 Change in other investments 157.9 (21.7) 9.4 Other, net (38.5) 1.8 (1.2) - ---------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (1,914.1) (967.3) (1,751.5) - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid to preferred shareholders (6.9) (4.9) (4.0) Receipts from investment contracts credited to policyholder account balances 22.6 32.8 47.5 Return of policyholder account balances on investment contracts (34.3) (22.4) (18.2) Retirement of notes payable (205.0) - - Changes in short-term debt 3.0 - - Principal payments on long-term debt (3.3) (2.9) (1.0) Proceeds from issuance of long-term debt 1,337.0 0.5 500.6 - ---------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 1,113.1 3.1 524.9 - ---------------------------------------------------------------------------------------------------------------- NET INCREASE IN CASH 74.0 18.0 45.5 Cash at beginning of period 147.6 129.6 84.1 - ---------------------------------------------------------------------------------------------------------------- CASH AT END OF PERIOD $ 221.6 $ 147.6 $ 129.6 ================================================================================================================ See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION ------------------------- 31 CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Statement of Consolidated Cash Flows (cont.) - ------------------------------------------------------------------------------- Year Ended December 31 1995 1994 1993 - ------------------------------------------------------------------------------- (In millions of dollars) Supplemental disclosures of cash flow information: Cash (paid) received: Interest expense $ (169.5) $ (71.4) $ (36.3) Federal income taxes (102.5) 70.0 293.6 =============================================================================== Supplemental disclosure of cash flow information relating to acquisitions: Noncash investing and financing transactions that are not reflected in the Statement of Consolidated Cash Flows are listed below. - ------------------------------------------------------------------------------- The Continental Year Ended December 31, 1995 Corporation Other - ------------------------------------------------------------------------------- (In millions of dollars) Fair value of assets acquired, excluding cash acquired $ 15,094 $ 231 Liabilities assumed (14,133) (159) - ------------------------------------------------------------------------------- Cash paid, net of cash acquired $ 961 $ 72 =============================================================================== See accompanying Notes to Consolidated Financial Statements. CNA FINANCIAL CORPORATION ------------------------- 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note A - Significant Accounting Policies Note A - Significant Accounting Policies: - ----------------------------------------- BASIS OF PRESENTATION - -------------------------------------------------------------------------------- The Consolidated Financial Statements include CNA Financial Corporation (CNA or the Company) and its operating subsidiaries which consist of property/casualty insurance companies (principally Continental Casualty Company and Continental Insurance Company) and life insurance companies (principally Continental Assurance Company). Loews Corporation (Loews) owns approximately 84% of the outstanding common stock of CNA. CNA reached an agreement in late 1994 to acquire all of the common stock of The Continental Corporation (Continental) through a cash merger for approximately $1.1 billion. The merger was completed on May 10, 1995, and, as a result, the financial statements include the results of Continental since that date. CNA is a multiple-line insurer underwriting property and casualty coverages; life, accident and health insurance; fidelity and surety products; 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. 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 1995. All significant intercompany amounts have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of CNA's management, these statements include all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial position, results of operations and cash flows in the accompanying consolidated financial statements. 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. Other life insurance premiums are recognized as revenue when due after deductions for ceded insurance. CNA FINANCIAL CORPORATION ------------------------- 33 - -------------------------------------------------------------------------------- Note A - Significant Accounting Policies (cont.) Claim and claim expense reserves Claim and claim expense reserves, except reserves for structured settlements, workers' compensation lifetime claims and accident and health disability claims, are based on undiscounted (a) case basis estimates for losses reported on direct business, adjusted in the aggregate for ultimate loss expectations, (b) estimates of unreported losses based upon past experience, (c) estimates of losses on assumed insurance, and (d) estimates of future expenses to be incurred in settlement of claims. In establishing these estimates, consideration is given to current conditions and trends as well as past Company and industry experience. Claim and claim expense reserves are based on estimates and the ultimate liability may vary significantly from such estimates. CNA regularly reviews its reserves, and any adjustments that are made to the reserves are reflected in operating income in the period the need for such adjustments become apparent. Further discussion of claim and claim expense reserves may be found in Note K. 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 the present value of future benefits. Such reserves, discounted at interest rates ranging from 6.25% to 7.5%, totaled $897 million and $839 million at December 31, 1995 and 1994, 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 the Company's and current industry experience. Such discounted reserves totaled $2,688.2 million and $1,114.9 million at December 31, 1995 and 1994, respectively. 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 mandatory and generally a function of its share of the voluntary market by line of insurance in each state. CNA records the estimated effects of its mandatory participation in residual markets on an accrual basis. CNA records assessments for insolvencies as they are paid. Accrual of such assessments is not practical, as past experience is not a reliable indicator of future activity. Reinsurance CNA assumes and cedes insurance with other insurers and reinsurers and members of various reinsurance pools and associations. CNA utilizes reinsurance arrangements to limit its maximum loss, provide greater diversification of risk and minimize exposures on larger risks. The reinsurance coverages are tailored to the specific risk characteristics of each product line with CNA's retained amount varying by type of coverage. Generally, reinsurance coverage for property CNA FINANCIAL CORPORATION ------------------------- 34 - -------------------------------------------------------------------------------- Note A - Significant Accounting Policies (cont.) risks is on an excess of loss, per risk basis. Liability coverages are generally reinsured on a quota share basis in excess of CNA's retained risk. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability. Deferred acquisition costs Costs of acquiring property/casualty insurance business which vary with and are primarily related to the production of such business are deferred and amortized ratably over the period the related premiums are recognized. Such costs include commissions, premium taxes and certain underwriting and policy issuance costs. Anticipated investment income is considered in the determination of the recoverability of deferred acquisition costs. Life acquisition costs are capitalized and amortized based on assumptions consistent with those used for computing policy benefit reserves. Acquisition costs on ordinary life business are amortized over the assumed premium paying periods. Universal life and annuity acquisition costs are amortized in proportion to the present value of estimated gross profits over the products' assumed durations, which are regularly evaluated and adjusted as appropriate. 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 stockholders' equity. Valuation of investments CNA believes it has the ability to hold all fixed maturity securities until they mature. 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) as available-for-sale and CNA also classifies its equity securities as available-for-sale and as such, are carried at fair value. Unrealized holding gains and losses are reflected as a separate component of stockholders' equity, net of deferred income taxes and participating policyholders' interest. The amortized cost of fixed maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in investment income. CNA considers its derivative securities as held for trading purposes, except for interest rate swaps associated with corporate borrowings and as such, trading derivatives are recorded at fair value at the reporting date. Interest rate swaps associated with corporate borrowings are accounted for as an adjustment to interest expense. Mortgage loans are carried at unpaid principal balances, including unamortized premium or discount. Real estate is carried at depreciated cost. Policy loans are carried at unpaid balances. Short-term investments are carried at amortized cost which approximates fair 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, except for the CNA FINANCIAL CORPORATION ------------------------- 35 NOTES TO THE CONSOLIDATED FINANACIAL STATEMENTS - -------------------------------------------------------------------------------- Note A - Significant Accounting Policies (cont.) interest rate swaps associated with corporate borrowings, are reflected as part of realized investment gains and losses. Unrealized gains or losses related to changes in the value of the interest rate swaps associated with corporate borrowings are deferred. Investments are written down to estimated fair values and losses are charged to income when a decline in value is considered to be other than temporary. 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 fair 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). 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. The liabilities for securities sold under repurchase agreements, are recorded at their contracted repurchase amounts Restricted investments On December 30, 1993, CNA deposited $986.8 million in an escrow account, pursuant to the Fibreboard Global Settlement Agreement, as discussed in Note J. The funds are included in short-term investments and are invested in U.S. treasury securities. The escrow account amounted to $1,044.6 and $1,009.9 million, respectively, at December 31, 1995 and 1994. Participating business Participating business represented 0.6%, 0.9%, and 1.1% of gross life insurance in force and 0.8%, 1.0%, and 1.1% of life insurance premium income for 1995, 1994, and 1993, 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 supporting assets and liabilities of these contracts are legally segregated and reflected in the accompanying Consolidated Balance Sheet as assets and liabilities of Separate Account business. Continental Assurance Company guarantees principal and a specified return to the contractholders on approximately 85% of the Separate Account business. Substantially all assets of the Separate Accounts are carried at fair value. 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 and net operating loss carryforwards. CNA FINANCIAL CORPORATION ------------------------- 36 - -------------------------------------------------------------------------------- Note B Change in Accounting Principle 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 $10.7 million, $8.3 million, and $9.2 million in . 1995, 1994 and 1993, respectively. EARNINGS PER SHARE - -------------------------------------------------------------------------------- Earnings per share applicable to common stock are based on weighted average outstanding shares of common stock of 61,798,000 in 1995, 1994 and 1993, respectively. Note B - Change In Accounting for Certain 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.). The effect at December 31, 1993 of adopting this Statement was to increase stockholders' 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. CNA FINANCIAL CORPORATION ------------------------- 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- Note C - Investments Note C - Investments: - ---------------------- NET INVESTMENT INCOME - -------------------------------------------------------------------------- Year Ended December 31 1995 1994 1993 - -------------------------------------------------------------------------- (In millions of dollars) Fixed maturities: Bonds: Taxable $1,512.1 $ 1,009.8 $ 531.9 Tax exempt 262.8 333.7 504.9 Redeemable preferred stocks 3.9 13.5 21.2 Equity securities 47.3 17.6 7.6 Mortgage loans 12.6 4.3 5.3 Real estate 0.9 0.9 1.1 Policy loans 12.6 10.2 10.0 Short-term investments 214.7 130.5 245.2 Security repurchase transactions income 166.8 149.7 6.3 Other 46.2 22.2 10.9 - -------------------------------------------------------------------------- 2,279.9 1,692.4 1,344.4 Investment expense (46.1) (23.7) (24.8) Security repurchase transactions expenses (157.2) (117.5) (5.3) and fees - -------------------------------------------------------------------------- NET INVESTMENT INCOME $ 2,076.6 $ 1,551.2 $1,314.3 ========================================================================== CNA FINANCIAL CORPORATION ------------------------- 38 - ------------------------------------------------------------------------------- Note C - Investments (cont.)
ANALYSIS OF INVESTMENT GAINS (LOSSES) - ---------------------------------------------------------------------------------------------- Year Ended December 31 1995 1994 1993 - ---------------------------------------------------------------------------------------------- (In millions of dollars) Realized investment gains (losses): Fixed maturities $ 221.8 $ (296.9) $ 740.8 Equity securities 140.6 44.5 82.5 Derivative securities 18.7 6.3 (12.0) Other, principally Separate Accounts business 82.7 (0.1) 4.8 ---------------------------------- 463.8 (246.2) 816.1 Allocated to participating policyholders (7.8) 10.9 (13.1) Income tax (expense) benefit (161.6) 84.8 (283.8) - ---------------------------------------------------------------------------------------------- Net realized investment gains (losses) 294.4 (150.5) 519.2 - ---------------------------------------------------------------------------------------------- Change in net unrealized investment gains (losses): Fixed maturities 1,854.7 (1,299.8) -- Equity securities 162.9 (57.0) 29.4 Other, principally Separate Accounts business 323.2 (45.5) (10.4) ---------------------------------- 2,340.8 (1,402.3) 19.0 Allocated to participating policyholders (44.2) 32.5 -- Income tax (expense) benefit (857.1) 503.4 (10.2) - ---------------------------------------------------------------------------------------------- Change in net unrealized investment gains (losses) 1,439.5 (866.4) 8.8 - ---------------------------------------------------------------------------------------------- Change in accounting for adoption of SFAS 115-Note B ---- -- 319.5 - ---------------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED $ 1,733.9$ (1,016.9) $ 847.5 INVESTMENT GAINS (LOSSES) ==============================================================================================
SUMMARY OF GROSS REALIZED INVESTMENT GAINS (LOSSES) FOR FIXED MATURITIES AND EQUITY SECURITIES - ------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 ------------------------- -------------------------- ------------------------- Fixed Equity Fixed Equity Fixed Equity Year Ended December 31 Maturities Securities Maturities Securities Maturities Securities - ------------------------------------ ------------ ------------ ------------ ------------- ------------ ------------ (In millions of dollars) Proceeds from sales $24,065.1 $1,317.2 $25,287.0 $649.9 $41,216.9 $736.1 ===================================== ============ ============ ============ ============ ============ ============ Gross realized gains $ 412.3 $ 198.9 $ 178.5 $ 65.8 $ 833.5 $ 103.3 Gross realized losses (190.5) (58.3) (475.4) (21.3) (92.7) (20.8) - ------------------------------------ ------------ ------------ ------------ ------------- ------------ ------------ Net realized gains (losses) on $ 221.8 $ 140.6 $(296.9) $ 44.5 $ 740.8 $ 82.5 sales ===================================== ============ ============ ============ ============ ============ ============
CNA FINANCIAL CORPORATION ------------------------- 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- Note C - Investments (cont.)
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES) INCLUDED IN STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------------------------------- 1995 1994 ------------------------------ ---------------------------- December 31 Gains Losses Net Gains Losses Net - --------------------------------------------------------------------------------------------------------- (In millions of dollars) Fixed maturities $ 1,136.4 $(77.1) $ 1,059.3 $ 194.2 $ (989.6) $(795.4) Equity securities 197.5 (16.1) 181.4 55.6 (37.1) 18.5 Other, principally Separate Accounts 304.1 (70.9) 233.2 2.5 (92.5) (90.0) ------------------------------------------------------------- $ 1,638.0 $164.1) $ 1,473.9 $ 252.3 $(1,119.2) $(866.9) ===================== ==================== Allocated to participating policyholders (18.1) 26.1 Deferred income tax (expense)benefit (522.7) 334.4 - ---------------------------------------------------------------------------------------------------------- NET UNREALIZED INVESTMENT GAINS $ 933.1 $(506.4) (LOSSES) ==========================================================================================================
SUMMARY OF INVESTMENTS IN FIXED MATURITIES AND EQUITY SECURITIES AVAILABLE FOR SALE - ------------------------------------------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Market December 31, 1995 Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------ (In millions of dollars) United States Treasury securities and obligations of government agencies $ 13,064.0 $ 479.5 $ 1.3 $ 13,542.2 Asset-backed securities 5,939.7 160.3 13.8 6,086.2 States, municipalities and political subdivisions - tax exempt 3,452.8 163.7 13.4 3,603.1 Corporate securities 4,522.3 210.3 39.9 4,692.7 Other debt securities 2,306.3 105.4 7.5 2,404.2 Redeemable preferred stocks 100.3 17.2 1.2 116.3 - ------------------------------------------------------------------------------------------------------------- Total fixed maturities 29,385.4 1,136.4 77.1 30,444.7 Equity securities 736.3 197.5 16.1 917.7 - ------------------------------------------------------------------------------------------------------------- TOTAL $ 30,121.7 $ 1,333.9 $ 93.2 $ 31,362.4 =============================================================================================================
CNA FINANCIAL CORPORATION ------------------------- 40 - -------------------------------------------------------------------------------- Note C - Investments (cont.)
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 ==============================================================================================================
SUMMARY OF INVESTMENTS IN FIXED MATURITIES BY CONTRACTUAL MATURITY. - ----------------------------------------------------------------------------------------------------------------- 1995 1994 ---------------------- ----------------------- AMORTIZED MARKET Amortized Market December 31 COST VALUE Cost Value - ----------------------------------------------------------------------------------------------------------------- (In millions of dollars) Due in one year or less $ 862.7 $ 866.5 $ 1,618.8 $ 1,610.7 Due after one year through five years 11,912.8 12,117.3 7,475.7 7,076.1 Due after five years through ten years 4,537.8 4,761.4 4,713.3 4,400.7 Due after ten years 6,145.3 6,626.8 5,122.1 5,176.7 Asset-backed securities not due at a single maturity date 5,926.8 6,072.7 2,693.2 2,563.5 - ----------------------------------------------------------------------------------------------------------------- TOTAL $ 29,385.4 $30,444.7 $21,623.1 $20,827.7 =================================================================================================================
Actual maturities may differ from contractual maturities because securities may be called or prepaid with or without call or prepayment penalties. The carrying value of investments (other than equity securities) that have not produced income for the last twelve months is $94.8 million at December 31, 1995. There are no investments in a single issuer, other than the U.S. government, that when aggregated exceed 10% of stockholders' equity. CNA FINANCIAL CORPORATION ------------------------- 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note D - Debt Note D - Debt: - --------------- Long-term and short-term borrowings consisted of the following: LONG-TERM AND SHORT-TERM DEBT - -------------------------------------------------------------------------------- December 31 1995 1994 - -------------------------------------------------------------------------------- (In millions of dollars) Long-term: Acquisition Debt: Credit Facility, due May 10, 2000 $ 825.0 $ -- Commercial Paper (variable interest rates) 500.0 -- Senior Notes: 8 5/8%, due March 1, 1996* -- 249.4 8 7/8%, due March 1, 1998 149.2 148.8 8 1/4%, due April 15, 1999 102.8 -- 7 1/4%, due March 1, 2003 145.4 -- 6 1/4%, due November 15, 2003 248.2 248.1 8 3/8%, due August 15, 2012 97.9 -- 7 1/4% Debenture, due November 15, 2023 247.1 247.1 11% Secured Mortgage Notes, due June 30, 2013 386.6 -- 8% - 13.7% Secured Capital Leases, due December 31, 2011 46.0 -- Other debt, due 1997 through 2016: Fixed interest rates 1.0% to 12.1% 8.2 4.7 Variable interest rates--3.8% to 10.0% 11.5 13.7 - -------------------------------------------------------------------------------- Total long-term debt 2,767.9 911.8 Short-term debt 257.6 2.0 - -------------------------------------------------------------------------------- TOTAL DEBT $ 3,025.5 $ 913.8 ================================================================================ *Included in short-term debt in 1995 To finance the acquisition of Continental (including the refinancing of $205 million of Continental debt) CNA entered into a five-year $1.325 billion revolving credit facility involving 16 banks. The interest rate for the facility is based on the one, two, three, or six month London Interbank Offered Rate (LIBOR), plus 25 basis points. Additionally, there is a facility fee of 10 basis points annually. The average interest rate on the borrowings under the revolving credit facility at December 31, 1995 was 6.12%. Under the terms of the facility, CNA may prepay the debt without penalty. On August 10, 1995, to take advantage of favorable interest rates, CNA established a commercial paper program borrowing $500 million to replace a like amount of credit facility financing. The average interest rate on the commercial paper at December 31, 1995 was 6.05%. The commercial paper borrowings are classified as long-term as $500 million of the facility will support the commercial paper. Standard and Poor's and Moody's issued short-term debt ratings of A2 and P2, respectively, for CNA's commercial paper program. CNA FINANCIAL CORPORATION ------------------------- 42 - -------------------------------------------------------------------------------- Note D - Debt (cont.) As of March 1, 1996, the outstanding loans under the revoving credit facility were $825 million. There was no unused borrowing capacity under the facility after the effects of the commercial paper program. CNA entered into interest rate swap agreements with several banks which terminate from May to December, 2000. The effect of these interest rate swaps was to increase interest expense by $2 million for the year ended December 31, 1995. The weighted average interest rate (interest and facility fees) on the acquisition debt, which includes the revolving credit facility, commercial paper, and the effect of the interest rate swaps, was 6.50% at December 31, 1995. An additional $500 million of securities and/or preferred stock remain available for issuance under a shelf registration statement. Aggregate maturities of long-term debt for 1996 through 2000 are $295.5 million, $45.2 million, $202.3 million, $162.1 million and $1,385.4 million, respectively. The weighted average interest rates of outstanding short-term debt, excluding current maturities of long-term debt, for the two years ended December 31, 1995 were 6.19% and 4.99%, respectively. CNA FINANCIAL CORPORATION ------------------------- 43 NOTES TO CONSOLIDATED FINACIAL STATEMENTS - -------------------------------------------------------------------------------- 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 1995 1994 - ---------------------------------------------------------------------------------------------------- Preferred stock, without par value-non-voting: Authorized 12,500,000 12,500,000 Money market cumulative preferred stock, without par value non-voting: Issued and outstanding: Series E (stated value $100,000 per share) 750 750 Series F (stated value $100,000 per share) 750 750 Common stock with par value of $2.50-voting stock: Authorized 200,000,000 200,000,000 Issued 61,841,969 61,841,969 Outstanding 61,798,262 61,798,262 Treasury stock 43,707 43,707 - ----------------------------------------------------------------------------------------------------
The dividend rate on money market preferred stock is determined approximately every 49 days by auction. The money market preferred stock is redeemable at CNA's option, as a whole or in part, at $100,000 per share plus accrued and unpaid dividends. CNA's ability to pay dividends to its stockholders is affected, in part, by receipt of dividends from its affiliates. The payment of dividends to CNA by its insurance affiliates without prior approval of the Insurance Department of each affiliate's state of domicile is limited to formula amounts. As of December 31, 1995, approximately $860 million was not subject to prior Insurance Department approval. Statutory capital and surplus and net income, determined in accordance with accounting practices prescribed by the regulations and statutes of various insurance departments, for property/casualty and life insurance subsidiaries are as follows:
- ------------------------------------------------------------------------------------------------------- Statutory Capital and Statutory Net Income Surplus - ------------------------------------------------------------------------------------------------------- December 31 Year Ended December 31 ----------------------------------------------------------- 1995 1994 * 1995** 1994 * 1993 * - ------------------------------------------------------------------------------------------------------- (In millions of dollars) Property/Casualty Insurance Subsidiaries $5,695.9 $3,367.3 $1,208.3 $67.3 $120.7 Life Insurance Subsidiaries 1,127.6 1,054.6 30.2 65.1 0.1 - ------------------------------------------------------------------------------------------------------- * Excludes The Continental Corporation. ** Includes The Continental Corporation for the twelve months ended December 31, 1995.
CNA FINANCIAL CORPORATION ------------------------- 44 - -------------------------------------------------------------------------------- Note F - Financial Instruments Note E - (cont.) - ---------------- STATUTORY ACCOUNTING PRACTICES - ------------------------------ CNA's insurance affiliates are domiciled in various states including Illinois, California, Connecticut, Delaware, Hawaii, Indiana, Massachusetts, Missouri, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Puerto Rico 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 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. Potential taxes and other transaction costs have not been considered in estimating fair value. The estimates presented herein are subjective in nature and are not necessarily indicative of the amounts that CNA could realize in a current market exchange. Any difference would not be expected to be material. All non-financial 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. CNA FINANCIAL CORPORATION ------------------------- 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note F - Financial Instruments (cont.)
FINANCIAL ASSETS - ----------------------------------------------------------------------------------------------------- 1995 1994 --------------------------------------------------------- CARRYING ESTIMATED Carrying Estimated December 31 AMOUNT FAIR VALUE Amount Fair Value - ----------------------------------------------------------------------------------------------------- (In millions of dollars) Investments: Fixed maturities - Note C $ 30,444.7 $ 30,444.7 $ 20,827.7 $ 20,827.7 Equity securities - Note C 917.7 917.7 754.8 754.8 Mortgage loans 119.3 115.9 43.8 43.3 Policy loans 177.2 166.6 176.3 155.2 Other invested assets 499.9 543.4 101.1 102.1 Separate Account business: Fixed maturities 5,499.3 5,499.3 5,250.2 5,250.2 Equity securities 242.7 242.7 139.5 139.5 Other 126.1 133.2 690.6 691.8 - -----------------------------------------------------------------------------------------------------
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, other insurance receivables, accrued investment income, receivables for securities sold, securities sold under repurchase agreements, payables for securities purchased, short-term debt and certain other assets and other liabilities because of their short-term nature. 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. CNA FINANCIAL CORPORATION ------------------------- 46 - -------------------------------------------------------------------------------- Note F - Financial Instruments (cont.)
FINANCIAL LIABILITIES - ----------------------------------------------------------------------------------------------- 1995 1994 ------------------------------------------------------- Carrying Estimated Carrying Estimated December 31 Amount Fair Value Amount Fair Value - ----------------------------------------------------------------------------------------------- (In millions of dollars) Premium deposits and annuity contracts $ 825.5 $ 776.8 $ 603.0 $ 593.6 Long-term debt 2,767.9 2,819.9 911.8 819.9 Financial guarantee liabilities 479.6 472.8 441.8 425.2 Separate Account business: Guaranteed investment contracts 4,315.8 4,455.5 4,747.9 4,874.6 Deferred annuities 74.1 108.2 62.5 89.0 Variable separate accounts 228.0 228.0 168.4 168.4 Other 585.8 585.8 658.6 658.6 - -----------------------------------------------------------------------------------------------
Premium deposits and annuity contracts are valued based on cash surrender values and the outstanding fund balances. CNA's senior notes and debenture are valued based on quoted market prices. The fair value for other long-term debt is estimated using discounted cash flow analyses, based on current incremental borrowing rates for similar types of borrowing arrangements. The fair value of the liability for financial guarantee contracts is based on discounted cash flows utilizing interest rates currently being offered for similar contracts or spot interest rates. 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. CNA FINANCIAL CORPORATION ------------------------- 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note F - Financial Instruments (cont.) DERIVATIVE FINANCIAL INSTRUMENTS - -------------------------------- CNA invests from time to time in certain derivative financial instruments to increase investment returns and to eliminate the impact of changes in interest rates on certain corporate borrowings. Financial instruments used for such purposes include interest rate swaps, put and call options, commitments to purchase securities, and short sales of common stock. The gross notional principal or contractual amounts of these instruments at December 31, 1995, totaled $2,769.8 million compared to $127.9 million at December 31, 1994. The fair values associated with these instruments are generally affected by changes in interest rates and the stock market. The credit exposure associated with these instruments is generally limited to the unrealized fair value of the instruments and will vary based on changes in market prices. The risk of default depends on the creditworthiness of the 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 upon termination of the contracts at the reporting date. Dealer quotes are available for substantially all of CNA's derivatives. For securities not actively traded, fair values are estimated using values obtained from independent pricing services, costs to settle, or quoted market prices of comparable instruments. CNA FINANCIAL CORPORATION ------------------------- 48 - -------------------------------------------------------------------------------- Note F - Financial Instruments (cont.) A summary of the aggregate notional or contractual amounts and estimated fair values of these instruments at December 31, 1995 and 1994, as well as the monthly average fair values for 1995, are presented below.
- --------------------------------------------------------------------------------------------------------------------- 1995 1994 --------------------------------------------------------------------------------- Contractual/ Fair Value Average Contractual/ Fair Value Average December 31 Notional Asset for Year Notional Asset for Year Value (Liability) Value (Liability) - --------------------------------------------------------------------------------------------------------------------- (In millions of dollars) Interest rate swaps-acquisition debt$ 1,200.0 $ (28.7) $ (14.9) $ -- $ -- $ -- Trading: Interest rate swaps 93.0 10.0 1.0 75.0 0.6 (1.3) Commitments to purchase government and municipal securities -- -- 267.6 -- -- (0.3) Short sale-equity securities 7.7 (7.6) (6.6) 4.0 (3.3) (2.1) Options purchased 973.2 41.4 10.0 48.9 0.5 3.9 Options written-debt and equity securities 495.9 (10.0) (1.7) -- -- (3.1) - ---------------------------------------------------------------------------------------------------------------------
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 has entered into interest rate swap agreements to convert the variable rate of the borrowing under the revolving credit facility to a fixed rate. At December 31, 1995, CNA had outstanding interest rate swap agreements with several banks having a total notional principal amount of $1.2 billion. Those agreements which terminate from May to December, 2000 effectively fix the Company's interest rate exposure on $1.2 billion of variable rate debt. CNA's outstanding trading interest rate swaps consist primarily of an exchange of the 90-day treasury bill rate plus 25 basis points for the total return of a Commodities Index. Other trading interest rate swap transactions involve the exchange, at specified intervals, of interest rate payments calculated by reference to an underlying notional amount. Commitments to purchase government and municipal securities are a commitment to purchase securities in the future at a predetermined price. Such commitments are made when management believes this market is favorable to the current cash market. Options are contracts that grant the purchaser, for a premium payment, the right, but not the obligation, to either purchase or sell a financial instrument at a specified price within a specified period of time. Short sales are commitments to sell a financial instrument not owned at the time of sale, usually done in anticipation of a price decline. CNA holds bonds which are convertible into shares of the stock which it has sold short. CNA FINANCIAL CORPORATION ------------------------- 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note G - Reinsurance Note G - Reinsurance: - -------------------- The effects of reinsurance on earned premiums are shown in the following schedules: - ------------------------------------------------------------------------------ Earned Premiums Assumed/ ----------------------------------------- Net Year Ended December 31 Direct Assumed Ceded Net % - ----------------------------------------------------------------------------- (In millions of dollars) 1995 Life $ 701 $ 109 $ 21 $ 789 13.8 Accident and health 3,017 125 106 3,036 4.1 Property and casualty 7,868 1,335 1,293 7,910 16.9 - ------------------------------------------------------------------------------ TOTAL PREMIUMS $11,586 $ 1,569 $1,420 $11,735 13.4 ============================================================================== 1994 Life $ 408 $ 107 $ 23 $ 492 21.7 Accident and health 2,678 158 45 2791 5.7 Property and casualty 5601 1251 661 6191 20.2 - ------------------------------------------------------------------------------ Total premiums $ 8,687 $ 1,516 $ 729 $ 9,474 16.0 ============================================================================== 1993 Life $ 312 $ 108 $ 20 $ 400 27.0 Accident and health 2413 149 32 2530 5.9 Property and casualty 5228 1027 496 5759 17.8 - ------------------------------------------------------------------------------ Total premiums $ 7,953 $ 1,284 $ 548 $ 8,689 14.8 ============================================================================== The ceding of insurance does not discharge primary liability of the original insurer. CNA places reinsurance with other carriers only after careful review of the nature of the contract and a thorough assessment of the reinsurers' credit quality and claim settlement performance. Further, for carriers that are not authorized reinsurers in its states of domiciles, CNA receives collateral, primarily in the form of bank letters of credit, securing a large portion of the recoverables. Such collateral totaled approximately $1.1 billion and $165 million at December 31, 1995 and 1994, respectively. CNA's largest billed recoverable from a single reinsurer, including prepaid reinsurance premiums was approximately $435 million and $348 million with Lloyd's of London at December 31, 1995 and 1994, respectively. Insurance claims and policyholder benefits are net of reinsurance recoveries of $934.8 million, $827.9 million and $177.6 million for 1995, 1994 and 1993, respectively. CNA FINANCIAL CORPORATION ------------------------- 50 - -------------------------------------------------------------------------------- Note H - Income Taxes The impact of reinsurance on life insurance in-force is shown in the following schedule: - --------------------------------------------------------------------------- Life Insurance In-Force --------------------------------------- Assumed/ Net (In millions of dollars) Direct Assumed Ceded Net % - --------------------------------------------------------------------------- December 31, 1995 $111,917 $54,129 $8,578 $157,468 34.4 December 31, 1994 75,419 52,014 5,953 121,480 42.8 December 31, 1993 58,978 53,270 5,713 106,535 50.0 =========================================================================== 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 1995 the inclusion of the CNA Tax Group in the consolidated Federal income tax return of Loews resulted in an increased Federal income tax liability for Loews. Accordingly, CNA will pay to Loews approximately $35 million for 1995. In 1994 and 1993, the inclusion of the CNA Tax Group reduced the Federal income tax liability for Loews. Accordingly, CNA has received from Loews approximately $84 million for 1994 and $17 million for 1993. At December 31, 1995, CNA has net operating loss carryforwards of $850 million for income tax purposes that expire in years 2000 through 2010. Those carryforwards resulted from the Company's 1995 acquisition of Continental. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. CNA FINANCIAL CORPORATION ------------------------- 51 NOTES TO CONSOLIDATED FINANACIAL STATEMENTS - -------------------------------------------------------------------------------- Note H - Income Taxes (cont.) Significant components of CNA's deferred tax assets and liabilities as of December 31, 1995 and 1994 are shown in the table below. COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES - ------------------------------------------------------------------------------- December 31 1995 1994 - ------------------------------------------------------------------------------- (In millions of dollars) Insurance reserves: Property/casualty claim reserve discounting $ 1,328.0 $ 1,027.4 Unearned premium reserves 251.0 137.4 Life reserve differences 153.4 115.9 Other insurance reserves 22.8 10.3 Deferred acquisition costs (457.2) (313.0) Alternative minimum tax credit carryforward -- 239.6 Foreign tax credits 14.0 -- Investment valuation differences 74.8 86.3 Postretirement benefits other than pensions 140.5 45.9 Unrealized (gains)/losses (522.7) 333.9 Net operating loss carryforwards 298.0 -- Other, net 202.3 (21.2) - ------------------------------------------------------------------------------ Total deferred tax assets and liabilities 1,504.9 1,662.5 Valuation allowance (250.0) -- - ------------------------------------------------------------------------------ NET DEFERRED TAX ASSETS $ 1,254.9 $ 1,662.5 ============================================================================== At December 31, 1995, gross deferred tax assets and liabilities amounted to $2,717.4 and $1,462.5 million, respectively. Gross deferred tax assets and liabilities, at December 31, 1994, amounted to $2,045.1 million and $382.6 million, respectively. The Loews/CNA Tax Group has a history of profitability and anticipates future taxable income sufficient to fully support recognition of its deferred tax balance at December 31, 1995, including but not limited to the reversal of existing temporary differences and the implementation of tax planning strategies, if needed. At December 31, 1994, CNA had an alternative minimum tax credit carryforward of approximately $240 million. This credit was fully utilized in 1995. A valuation allowance is maintained due to the uncertainty regarding the realizability of deferred tax assets related to the Continental acquisition. Accordingly, any subsequent decrease in the valuation allowance will be reflected as an adjustment to intangible assets. CNA FINANCIAL CORPORATION ------------------------- 52 - -------------------------------------------------------------------------------- Note H - Income Taxes (cont.) Significant companonets of CNA's income tax provision are as follows: PROVISION FOR INCOME TAX (EXPENSE) BENEFIT - -------------------------------------------------------------------------------- Year Ended December 31 1995 1994 1993 - -------------------------------------------------------------------------------- (In millions of dollars) Current tax (expense) benefit on: Ordinary loss $ 94.0 $ 16.8 $ 355.5 Realized investment (gains) losses (158.4) 57.4 (342.8) - -------------------------------------------------------------------------------- Total current tax (expense) benefit (64.4) 74.2 12.7 - -------------------------------------------------------------------------------- Deferred tax (expense) benefit on: Ordinary (income) loss (217.8) 68.9 102.4 Realized investment (gains) losses (3.2) 27.4 59.0 - -------------------------------------------------------------------------------- Total deferred tax (expense)/benefit (221.0) 96.3 161.4 - -------------------------------------------------------------------------------- TOTAL INCOME TAX (EXPENSE) BENEFIT $(285.4) $170.5 $ 174.1 ================================================================================ A reconciliation of the expected income tax (expense) benefit resulting from the use of statutory tax rates to the effective income tax (expense) benefit follows:
RECONCILIATION OF EXPECTED AND EFFECTIVE TAXES - ---------------------------------------------------------------------------------------------------------------- % of % of % of Pretax Pretax Pretax Year Ended December 31 1995 Income 1994 Income 1993 Income - ----------------------------------------------------------------------------------------------------------------- (In millions of dollars) Expected tax (expense) benefit on ordinary income at statutory rates $(205.2) (35.0%) $ (35.5) (35.0%) $ 248.3 35.0% Exempt interest and dividends received deduction 79.2 13.5 110.1 108.7 166.1 23.4 Effect of 1% change in tax rate on the January 1, 1993 deferred tax balance -- -- -- -- 28.3 3.9 Other items, net 2.2 0.4 11.1 10.9 15.2 2.2 - ----------------------------------------------------------------------------------------------------------------- Income tax (expense) benefit on ordinary income (123.8) (21.1%) 85.7 84.6% 457.9 64.5% - ----------------------------------------------------------------------------------------------------------------- Expected tax (expense) benefit on realized investment gains/losses at statutory rates (159.6) (35.0%) 82.4 35.0% (281.0) (35.0%) Effect of 1% change in tax rate on the January 1, 1993 deferred tax balance -- -- -- -- 1.5 0.2 Other items, net (2.0) (0.3) 2.4 1.0 (4.3) (0.5) - ----------------------------------------------------------------------------------------------------------------- Income tax (expense) benefit on realized investment gains/losses (161.6) (35.3%) 84.8 36.0% (283.8) (35.3%) - ----------------------------------------------------------------------------------------------------------------- INCOME TAX (EXPENSE) BENEFIT $(285.4) $ 170.5 $ 174.1 =================================================================================================================
CNA FINANCIAL CORPORATION ------------------------- 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note I - Benefit Plans Note I - Benefit Plans: - ----------------------- PENSION PLANS - -------------------------------------------------------------------------------- CNA has several noncontributory pension plans covering all full-time employees age 21 or over who have completed at least one year of service. The benefits for the plans are based on years of credited service and the employee's highest sixty consecutive months of compensation. CNA's funding policy is to make contributions in accordance with applicable governmental regulatory requirements. The assets of the plans are invested primarily in U.S. government securities with the balance in short-term investments, common stocks and other fixed income securities. In conjunction with the Continental merger during 1995, CNA continued to maintain a separate trust to administer the Continental Corporation Retirement Plans. The retirement benefits to be received by Continental employees, who leave CNA after December 31, 1995, will be equivalent to the benefits to which employees under the CNA Employees' Retirement Plan are entitled. Effective January 1, 1996, the retirement plans redefined compensation to include base pay, overtime and bonuses. This amendment generated an unrecognized prior service cost of $20.2 million. In 1994, the plans adopted the Rule of 65. This change will allow participants to receive early retirement benefits if their combined years of age and months of service with CNA equals a minimum of 65. This amendment generated an unrecognized prior service cost of $1.6 million.
- ----------------------------------------------------------------------------------------------------------- December 31 1995 * 1994 1993 - ----------------------------------------------------------------------------------------------------------- OVERFUNDED UNDERFUNDED Overfunded Overfunded PLANS PLANS Plans Plans - ----------------------------------------------------------------------------------------------------------- (In millions of dollars) Actuarial present value of accumulated plan benefits: Vested $ 508.5 $ 628.6 $ 376.4 $ 401.5 Nonvested 31.2 11.3 39.1 41.6 - ----------------------------------------------------------------------------------------------------------- ACCUMULATED BENEFIT OBLIGATION $ 539.7 $ 639.9 $ 415.5 $ 443.1 =========================================================================================================== Projected benefit obligation $ 808.3 $ 771.0 $ 651.4 $ 617.8 Plan assets at fair value 629.7 496.3 495.5 465.3 - ----------------------------------------------------------------------------------------------------------- Plan assets less than projected benefit obligation (178.6) (274.7) (155.9) (152.5) Unrecognized net asset at January 1, 1986 being recognized over 12 years (12.2) ---- (17.3) (22.3) Unrecognized prior service costs 38.6 86.9 20.8 21.6 Unrecognized net loss 172.3 5.8 174.0 160.8 - ---------------------------------------------------------------------------------------------------------- NET PENSION ASSET (LIABILITY) $ 20.1 $(182.0) $ 21.6 $ 7.6 =========================================================================================================== * The 1995 data includes The Continental Corporation retirement plans which are underfunded.
CNA FINANCIAL CORPORATION ------------------------- 54 - -------------------------------------------------------------------------------- Note I - Benefit Plans (cont.)
- --------------------------------------------------------------------------------------------------------- Year Ended December 31 1995 1994 1993 - --------------------------------------------------------------------------------------------------------- OVERFUNDED UNDERFUNDED Overfunded Overfunded PLANS PLANS Plans Plans - --------------------------------------------------------------------------------------------------------- (In million of dollars) Net periodic pension cost: Service cost - benefits attributed to employee service during the year $ 33.0 $ 10.7 $ 32.3 $ 27.5 Interest cost on projected benefit obligation 52.8 31.0 44.7 40.6 Actual return on plan assets (115.4) (43.4) 11.6 (25.6) Net amortization and deferral 73.3 18.7 (43.3) (13.9) - -------------------------------------------------------------------------------------------------------- NET PERIODIC PENSION COST $ 43.7 $ 17.0 $ 45.3 $ 28.6 ======================================================================================================== * The 1995 data includes The Continental Corporation retirement plans which are underfunded. Actuarial assumptions are set forth in the following table. Assumptions - ----------------------------------------------------------------------------- December 31 1995 1994 1993 1992 - ----------------------------------------------------------------------------- Discount rate 7.25% 8.50% 7.25% 8.25% Rate of increase in compensation levels* 2.75 4.00 4.50 5.25 Expected long-term rate of return on plan assets 7.50 8.75 7.50 9.00 - ----------------------------------------------------------------------------- * Excludes 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. CNA FINANCIAL CORPORATION ------------------------- 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note I - Benefit Plans (cont.) POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS - -------------------------------------------------------------------------------- CNA provides certain health and dental care benefits for eligible retirees, through age 64, and provides life insurance and reimbursement of Medicare Part B premiums for all eligible retired persons. CNA continues to fund benefit costs principally on the basis of current benefit payments. Additionally, in conjunction with the Continental merger, CNA is administering the postretirement health care and life insurance benefits for Continental's eligible pre-1996 retirees under a separate program. The benefits received by the Continental retirees who terminate employment after December 31, 1995, are equivalent to the benefits to which employees under the CNA postretirement health care and life insurance plan are entitled. As described previously, in 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, 1995, 1994, and 1993.
- ------------------------------------------------------------------------------------------------- December 31 1995* 1994 1993 - ------------------------------------------------------------------------------------------------- (In millions of dollars) Accumulated postretirement benefit obligation: Retirees $185.5 $ 27.1 $ 26.2 Fully eligible, active plan participants 59.2 53.7 24.1 Other active plan participants 62.5 41.1 70.8 - ------------------------------------------------------------------------------------------------- Total accumulated postretirement benefit obligation 307.2 121.9 121.1 Unrecognized prior service cost -- (11.2) -- Unrecognized net gain (loss) 7.4 19.7 (5.3) - ------------------------------------------------------------------------------------------------- ACCRUED POSTRETIREMENT BENEFIT COST $314.6 $ 130.4 $ 115.8 ================================================================================================= Net periodic postretirement benefit cost: Service cost - benefits attributed to employee service during the year $ 6.0 $ 8.6 $ 5.6 Interest cost on accumulated postretirement benefit obligation 17.5 10.3 7.6 Amortization (1.0) .7 -- - ------------------------------------------------------------------------------------------------- NET PERIODIC POSTRETIREMENT BENEFIT COST $ 22.5 $ 19.6 $ 13.2 ================================================================================================= * The 1995 data includes postretirement benefit obligations for The Continental Corporation retirees.
CNA FINANCIAL CORPORATION ------------------------- 56 - -------------------------------------------------------------------------------- Note I -- Benefit Plans (cont.) ASSUMPTIONS - --------------------------------------------------------------------------- December 31 1995 1994 1993 - --------------------------------------------------------------------------- Assumptions used in determining net periodic benefit cost: Discount rate 8.50% 7.25% 8.25% Rate of increase in compensation levels* 4.00 4.50 5.25 Assumptions used in determining projected benefit obligation (liability): Discount rate 7.25 8.50 7.25 Rate of increase in compensation levels* 2.75 4.00 4.50 - --------------------------------------------------------------------------- *Excludes age/service related merits and productivity increases. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 13% in 1995, 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, 1995 by $17.5 million and the aggregate net periodic postretirement benefit cost for 1995 by $1.9 million. SAVINGS PLANS - -------------------------------------------------------------------------------- The CNA Employees' Savings Plan is a contributory plan which allows employees to make regular contributions of up to 6% of their salary. CNA contributes an additional amount equal to 70% of the employee's regular contribution. Employees may also make additional contributions of up to 10% of their salaries for which there is no additional contribution by CNA. Subsequent to the Continental merger, CNA began administering the Continental Incentive Savings Plan. CNA made contributions to the Continental Incentive Savings Plan using an equivalent formula to that used for the CNA Employees' Savings Plan. Effective January 1, 1996, the Continental Incentive Savings Plan was merged with the CNA Employees' Savings Plan. Contributions to the savings plans were $21.6 million, $17.0 million and $17.2 million in 1995, 1994 and 1993, respectively. CNA FINANCIAL CORPORATION ------------------------- 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- Note J - Legal Proceedings and Contingent Liabilities (cont.) Note J - Legal Proceedings and Contingent Liabilities: - -------------------------- FIBREBOARD LITIGATION - -------------------------------------------------------------------------------- CNA's primary property/casualty subsidiary, Continental Casualty Company ("Casualty"), 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, Casualty, Fibreboard, another insurer (Pacific Indemnity, a subsidiary of the Chubb Corporation), and a negotiating committee of asbestos claimant attorneys (collectively referred to as Settling Parties) have reached a Global Settlement (the "Global Settlement") to resolve all future asbestos-related bodily injury claims involving Fibreboard, which is subject to court approval. Casualty, 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 or is subsequently successfully attacked. The implementation of the Global Settlement or the Trilateral Agreement would have the effect of settling Casualty's litigation with Fibreboard. On July 27, 1995, the United States District Court for the Eastern District of Texas entered judgment approving the Global Settlement Agreement and the Trilateral Agreement. As expected, appeals were filed as respects both of these decisions. The last briefs have been filed with the United States Fifth Circuit Court of Appeals in New Orleans on December 18, 1995, and the Court heard oral arguments on March 5 and 6, 1996. Decisions regarding these appeals are possible by the third quarter, 1996. 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. Casualty 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 Casualty 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 Casualty, 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, although the policies had a $500,000 per person limit and a $1,000,000 per occurrence limit, they contained no aggregate limit of liability in relation to such claims. The judgment was appealed. CNA FINANCIAL CORPORATION ------------------------- 58 - ------------------------------------------------------------------------------- Note J - Legal Proceedings and Contingent Liabilities (cont.) 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 Casualty 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 Casualty, of, among other things, the trigger and scope of coverage issues. The order granting review had no effect on the Court of Appeal's order severing the issues unique to Casualty and Pacific Indemnity. On October 19, 1995 the California Supreme Court transferred the case back to the Court of Appeal with directions to vacate its decision and reconsider the case in light of the Supreme Court's decision in Montrose Chemical Corp. v. Admiral Ins. Co. (1995) --------------------------------------------------- 10 Cal.4th 645, where the Court adopted a continuous trigger in litigation over - -------------- the duty to defend bodily injury and property damage due to exposure to D.D.T. Additional briefs were filed in the Court of Appeal on December 20, 1995 and a decision by the court is expected by the end of May, 1996. Casualty cannot predict the time frame within which the issues before the California Courts will finally be resolved. The appeal of issues such as trigger of coverage and scope of coverage are in process notwithstanding the pending proceedings to approve the Global and Trilateral Agreements. If neither the Global Settlement nor the Trilateral Agreement is finally approved, it is anticipated that Casualty and Pacific Indemnity will resume the coverage appeal process of the issues discrete to them. Casualty'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. Casualty'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, Casualty's position is that there would be no coverage under Casualty's policy for injuries which were first manifest outside the policy period. * 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, but is now again before the Court due to the Supreme Court's transfer order. Casualty'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, Casualty would only be liable for that proportion of the bodily injury that occurred during the 22-month period its policy was in force. CNA FINANCIAL CORPORATION ------------------------- 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- Note J - Legal Proceedings and Contingent Liabilities (cont.) * Casualty 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, Casualty's position is that coverage under the Casualty policy is restricted to those who 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. * Casualty's policy had a $1 million per occurrence limit. Casualty 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 manufacture and sale of the product. Because the manufacture and sale proceeded from two locations, Casualty 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 Casualty were successful on appeal on the dual coverage requirements or the number of occurrences and were thereby to limit its liability, if the final decision in the coverage case affirms the trial court's decision on the existence of the Pacific Indemnity policy, then Casualty would still have obligations under the Casualty and Pacific Indemnity Agreement described below. Under various reinsurance agreements, Casualty has asserted a right to reimbursement for a portion of its potential exposure to Fibreboard. The reinsurers have disputed Casualty's right to reimbursement and have taken the position that any claim by Casualty 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 Casualty will be successful in obtaining a significant recovery under its reinsurance agreements. On April 9, 1993, Casualty and Fibreboard entered into an agreement pursuant to which, among other things, the parties agreed to use their best efforts to negotiate and finalize a global class action settlement with asbestos-related bodily injury and death claimants. Through December 31, 1995, Casualty, Fibreboard and plaintiff attorneys had reached settlements with respect to approximately 137,700 claims, subject to resolution of the coverage issues, for an estimated settlement amount of approximately $1.62 billion plus any applicable interest. If neither the Global Settlement nor the Trilateral Agreement receives final court approval, Casualty's obligation to pay under these 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, may total as much as approximately $788 million, of which approximately $582 million was paid through December 31, 1995. Casualty may negotiate other agreements with various classes of claimants including groups who may have previously reached agreement with Fibreboard. Casualty will continue to pursue its appeals in the coverage litigation and all other litigation involving Fibreboard if the Global Settlement or the Trilateral Agreement cannot be implemented. CNA FINANCIAL CORPORATION ------------------------- 60 - ------------------------------------------------------------------------------- Note J - Legal Proceedings and Contingent Liabilities (cont.) Global Settlement On August 27, 1993, Casualty, 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 Agreement was executed on December 23, 1993. The agreement calls for contribution by Casualty and Pacific Indemnity of an aggregate of $1.525 billion to a trust fund for a class of all future asbestos claimants, defined generally as those persons whose claims against Fibreboard were neither filed nor settled before August 27, 1993. An additional $10 million is to be contributed to the fund by Fibreboard. As indicated hereinabove, the Global Settlement approval has been appealed and oral arguments were heard on March 5 and March 6, 1996. 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, Casualty, Fibreboard and Pacific Indemnity entered into the Trilateral Agreement subject to court approval which would among other things, settle the coverage case in the event the Global Settlement approval by the trial court is not upheld on appeal. In such case, Casualty 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 for claims settled before August 23, 1993. Casualty's share of such fund would be $1.44 billion reduced by a portion of an additional payment of $635 million which Pacific Indemnity has agreed to pay for claims either filed or settled before August 27, 1993. Casualty has agreed that if either the Global Settlement or the Trilateral Agreement is finally approved, it will assume responsibility for the claims that had been settled 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, Casualty would be released by Fibreboard from any further liability under the comprehensive general liability policy written for Fibreboard by Casualty, including but not limited to liability for asbestos-related claims against Fibreboard. As noted above, the Trilateral Agreement approval by the trial court has also been appealed as noted hereinabove and oral arguments were heard on March 5 and March 6, 1996. Casualty 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 coverage case is finally resolved, either through final court approval of one or both of the Global Settlement Agreement and Trilateral Agreement or through a final decision in the California courts. It also governs certain obligations between the parties in the event the Global Settlement is upheld on appeal including the payment of claims which are not included in the Global Settlement. In addition, Casualty and Pacific Indemnity have entered into an agreement (the "Casualty-Pacific Agreement") which sets forth the parties' agreement with respect to the means for allocating among themselves responsibility for payments arising out of the Fibreboard insurance policies whether or not the Global Settlement or the Trilateral Agreement is finally approved. Under the Casualty-Pacific Agreement, Casualty and Pacific Indemnity have agreed to pay 64.71% and 35.29%, respectively, of CNA FINANCIAL CORPORATION ------------------------- 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- Note J - Legal Proceedings and Contingent Liabilities (cont.) the $1.525 billion to be used to satisfy the claims of future claimants, plus certain expenses. The $1.525 billion has already been deposited into an escrow for such purpose. If neither the Global Settlement nor the Trilateral Agreement is finally approved, Casualty 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 for 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 finally approved, Pacific Indemnity's share for unsettled present claims and presently settled claims will be $635 million. Reserves In the fourth quarter of 1992, Casualty increased its reserve with respect to potential exposure to asbestos-related bodily injury cases by $1.5 billion. In connection with the agreement in principle announced on August 27, 1993, Casualty added $500 million to such claim reserve in the third quarter of 1993. The Fibreboard litigation represents the major portion of Casualty'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 approved by the trial court have been appealed as noted hereinabove and oral arguments were heard on March 5th and 6th, 1996. 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 Casualty's potential liability for such future claimants if neither the approval of the Global Settlement nor the Trilateral Agreement is upheld on appeal, keeping in mind that Casualty'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 for exposure starting after 1959. As indicated above, as of December 31, 1995, Casualty, Fibreboard and plaintiff attorneys have reached settlements with respect to approximately 137,700 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 Casualty is not a party. CNA FINANCIAL CORPORATION ------------------------- 62 - ------------------------------------------------------------------------------- Note J - Legal Proceedings and Contingent Liabilities (cont.) 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 $13,300 per claim for the before 1959 claims processed through December 31, 1995. 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 Casualty. Casualty intervened and settled these claims for approximately $77,000 on average, with a portion of the payment contingent on final approval on appeal of the Global Settlement or the Trilateral Agreement, and if neither is finally approved, subject to resolution of the coverage appeal. Casualty 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 upheld on appeal, in light of the factors discussed herein, the range of Casualty'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. CNA FINANCIAL CORPORATION ------------------------- 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note K - Liability for Unpaid Claims and Claim Adjustment Expenses 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 ------------------------- 64 - -------------------------------------------------------------------------------- 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 1995, 1994 and 1993.
CHANGES IN RESERVES FOR PROPERTY/CASUALTY CLAIMS AND CLAIM EXPENSES - -------------------------------------------------------------------------------------------- Year Ended December 31 1995 1994 1993 - -------------------------------------------------------------------------------------------- (In millions of dollars) Reserves at beginning of year: Gross $21,639 $20,812 $20,034 Ceded reinsurance 2,705 2,491 2,867 - -------------------------------------------------------------------------------------------- Net reserves at beginning of year 18,934 18,321 17,167 The Continental Corporation reserves at acquisition - net 6,063 --- --- - -------------------------------------------------------------------------------------------- Total net reserves 24,997 18,321 17,167 - -------------------------------------------------------------------------------------------- Net incurred claims and claim expenses: Provision for insured events of current year 6,787 5,611 5,388 Increase (decrease) in provision for insured events of prior years** 122 (71) 590 Amortization of discounts 106 100 94 - -------------------------------------------------------------------------------------------- Total net incurred 7,015 5,640 6,072 - -------------------------------------------------------------------------------------------- Net payments attributable to: Current year events 2,000 1,388 1,202 Prior year events 5,048 3,629 3,706 Amortization of discounts 9 10 10 - -------------------------------------------------------------------------------------------- Total net payments 7,057 5,027 4,918 - -------------------------------------------------------------------------------------------- Net reserves at end of year 24,955 18,934 18,321 Ceded reinsurance at the end of the year 6,089 2,705 2,491 - -------------------------------------------------------------------------------------------- GROSS RESERVES AT END OF YEAR* $ 31,044 $21,639 $20,812 ============================================================================================ * Excludes life claim and claim expense reserves and intercompany eliminations of $988 million, $926 million, and $858 million as of December 31, 1995, 1994 and 1993, respectively, included in the Consolidated Balance Sheet. ** Includes $500 million for Fibreboard in 1993. See Note J.
CNA FINANCIAL CORPORATION ------------------------- 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- Note K - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.) ENVIRONMENTAL AND ASBESTOS - -------------------------------------------------------------------------------- The CNA property/casualty insurance companies have potential exposures related to environmental and asbestos-related claims. Environmental clean-up is the subject of both federal and state regulation. By some estimates, there are thousands of potential waste sites subject to clean-up. The insurance industry is involved in extensive litigation regarding coverage issues. Judicial interpretations in many cases have expanded the scope of coverage and liability beyond the original intent of the policies. The Comprehensive Environmental Response Compensation and Liability Act of 1980 ("Superfund") and comparable state statutes ("mini-Superfund") govern the clean-up and restoration of abandoned toxic waste sites and formalize the concept of legal liability for clean-up and restoration by "Potentially Responsible Parties" ("PRP's"). Superfund and the mini-Superfunds (Environmental Clean-up Laws or "ECLs") establish a mechanism to pay for clean-up of waste sites if PRP's fail to do so, and to assign liability to PRP's. The extent of liability to be allocated to a PRP is dependent on a variety of factors. Further, the number of waste sites subject to clean-up is unknown. To date, approximately 1,300 clean-up sites have been identified by the Environmental Protection Agency on its National Priorities List. On the other hand, the Congressional Budget Office is estimating that there will be 4,500 National Priority List sites, and other estimates project as many as 30,000 sites that will require clean-up under ECLs. Very few sites have been subject to clean-up to date. The extent of clean-up necessary and the assignment of liability has not been established. CNA and the insurance industry are disputing coverage for many such claims. Key coverage issues include whether Superfund response costs are considered damages under the policies, trigger of coverage, applicability of pollution exclusions, the potential for joint and several liability and definition of an occurrence. Similar coverage issues exist for clean-up of waste sites not covered under Superfund. To date, courts have been inconsistent in their rulings on these issues. A number of proposals to reform Superfund have been made by various parties. Despite the Superfund taxing authority expiring at the end of 1995, no reforms have been enacted by the 104th Congress. While the next session 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 ultimate exposure to CNA for environmental pollution claims cannot be meaningfully quantified. Claim and claim expense reserves represent management's estimates of ultimate liabilities based on currently available facts and case law. However, in addition to the uncertainties previously discussed, additional issues related to, among other things, specific policy provisions, CNA FINANCIAL CORPORATION ------------------------- 66 - ------------------------------------------------------------------------------- Note K -- Liability for Unpaid Claims and Claim Adjustment Expenses (cont.) multiple insurers and allocation of liability among insurers, consequences of conduct by the insured, missing policies and proof of coverage make quantification of liabilities exceptionally difficult and subject to adjustment based on new data. As of December 31, 1995 and December 31, 1994, CNA carried approximately $1,030 million and $506 million, respectively, of claim and claim expense reserves, net of reinsurance recoverable, for reported and unreported environmental claims. Unfavorable environmental reserve development for the years ended December 31, 1995, 1994 and 1993 totaled $241 million, $181 million and $446 million, respectively. Adverse 1995 environmental reserve development of $241 million includes $60 million related to Continental and results from CNA's on-going monitoring of settlement patterns, current pending cases and potential future claims. The 1993 environmental development includes an allocation of reserves for incurred but not reported environmental claims of $340 million. The foregoing reserve information relates to claims for accident years 1988 and prior, which coincides with CNA's adoption of the Simplified Commercial General Liability coverage form which included an absolute pollution exclusion. CNA has exposure to asbestos-related claims, including those 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. Estimation of asbestos-related claim reserves encounter many of the same limitations discussed above for environmental pollution claims such as inconsistency of court decisions, specific policy provisions, multiple insurers and allocation of liability among insurers, missing policies and proof of coverage. As of December 31, 1995 and 1994, CNA carried approximately $2,224 million and $1,939 million, respectively, of claim and claim expense reserves, net of reinsurance recoverable, for reported and unreported asbestos-related claims. Unfavorable asbestos reserve development for the years ended December 31, 1995, 1994 and 1993 totaled $258, $37 and $601 million, respectively. The 1993 asbestos development includes $500 million related to Fibreboard. See Note J. Other 1995 reserve development, which nets to $377 million of favorable reserve development, is principally due to favorable claim frequency (rate of claim occurrence) and severity (average cost per claim) experience in the workers' compensation line of business. The results of operations in future years may continue to be adversely affected by environmental claims and claim expenses. Management will continue to monitor potential liabilities and make further adjustments as warranted. 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 tables provides additional data related to CNA's environmental and asbestos-related claims activity. Claims activity for Continental is included for the period May 10, 1995 through December 31, 1995. CNA FINANCIAL CORPORATION ------------------------- 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- Note K - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)
- ------------------------------------------------------------------------------------------- Reserve Summary December 31 1995 1994 ------------------------------------------------------------- ENVIRONMENTAL ASBESTOS Environmental Asbestos - ------------------------------------------------------------------------------------------- (In millions of dollars) Gross reserves: Reported claims $ 336.9 $ 1,963.3 $ 89.1 $ 1,954.1 Unreported claims 839.7 358.3 427.0 114.0 ----------------------------------------------------------- 1,176.6 2,321.6 516.1 2,068.1 Less reinsurance recoverable (146.7) (97.4) (10.4) (129.4) - ------------------------------------------------------------------------------------------ NET RESERVES $ 1,029.9 $ 2,224.2 $ 505.7 $ 1,938.7 ========================================================================================== The following tables summarize claim activity for environmental and asbestos claims. - -------------------------------------------------------------------------------- Changes in Environmental Reserves Year ended December 31 1995 1994 1993 - ------------------------------------------------------------------------------- (In millions of dollars) Net reserves at beginning of year $ 505.7 $ 432.6 $ 58.6 Continental net reserves at May 10, 1995 410.0 -- -- ---------------------------------- Total net reserves 915.7 432.6 58.6 ---------------------------------- Plus: Reserve strengthening 240.9 180.6 445.9 ---------------------------------- Less: Gross payments 188.2 131.8 75.0 Reinsurance recoveries (61.5) (24.3) (3.1) ---------------------------------- Net payments 126.7 107.5 71.9 - ------------------------------------------------------------------------------- NET RESERVES AT END OF YEAR $1,029.9 $ 505.7 $ 432.6 ===============================================================================
- ------------------------------------------------------------------------------- Changes in Asbestos Reserves 1995 1994 1993 Year ended December 31 - ------------------------------------------------------------------------------- (In millions of dollars) Net reserves at beginning of year $1,938.7 $2,080.0 $1,682.8 Continental net reserves May 10, 1995 203.5 -- -- ----------------------------------- Total net reserves 2,142.2 2,080.0 1,682.8 ----------------------------------- Plus: Reserve strengthening 258.0 36.8 601.4 Less: Gross payments 239.8 245.9 204.3 Reinsurance recoveries (63.8) (67.8) (0.1) ----------------------------------- Net payments 176.0 178.1 204.2 - ------------------------------------------------------------------------------- NET RESERVES AT END OF YEAR $2,224.2 $1,938.7 $2,080.0 ===============================================================================
CNA FINANCIAL CORPORATION ------------------------- 68 - -------------------------------------------------------------------------------- Note L - Business Segments Note L - Business Segments: - ---------------------------- REVENUES - -------------------------------------------------------------------------------- Year Ended December 31 1995 1994 1993 - -------------------------------------------------------------------------------- (In millions of dollars) Property/Casualty-commercial $ 8,952.9 $ 6,562.3 $ 5,943.7 Property/Casualty-personal 1,425.9 1,143.2 1,095.9 Property/Casualty-involuntary risks 392.8 543.8 447.0 Life-individual 777.2 595.8 497.2 Life-group 2,700.6 2,442.6 2,242.0 - -------------------------------------------------------------------------------- CNA Insurance 14,249.4 11,287.7 10,225.8 Other and intercompany eliminations (13.5) (42.0) (31.1) - -------------------------------------------------------------------------------- Revenues excluding realized investment gains (losses) 14,235.9 11,245.7 10,194.7 Realized investment gains (losses): Property/Casualty 320.6 (164.7) 673.5 Life 139.2 (81.2) 126.0 Other 4.0 (0.3) 16.6 - -------------------------------------------------------------------------------- Total realized investment gains (losses) 463.8 (246.2) 816.1 - -------------------------------------------------------------------------------- TOTAL REVENUES $14,699.7 $10,999.5 $11,010.8 - -------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAX - -------------------------------------------------------------------------------- Year Ended December 31 1995 1994 1993 - -------------------------------------------------------------------------------- (In millions of dollars) Property/Casualty-commercial $ 555.5 $ 105.0 $ (638.9) Property/Casualty-personal 24.6 (83.6) (12.3) Property/Casualty-involuntary risks (1.8) 17.8 (80.8) Life-individual 65.4 47.3 14.5 Life-group 94.9 87.1 51.9 - -------------------------------------------------------------------------------- CNA Insurance 738.6 173.6 (665.6) Interest, other and intercompany eliminations (152.2) (72.3) (44.0) - -------------------------------------------------------------------------------- Income (loss) excluding realized investment gains (losses) 586.4 101.3 (709.6) - -------------------------------------------------------------------------------- Realized investment gains (losses) net of policyholder's interest: Property/Casualty 320.6 (164.7) 673.5 Life 131.4 (70.3) 112.9 Other 4.0 (0.3) 16.6 - -------------------------------------------------------------------------------- Total realized investment gains (losses) net of policyholders' interest 456.0 (235.3) 803.0 - -------------------------------------------------------------------------------- TOTAL INCOME (LOSS) BEFORE INCOME TAX $1,042.4 $(134.0)$ 93.4 ================================================================================ CNA FINANCIAL CORPORATION ------------------------- 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note L - Business Segments (cont.) NET INCOME (LOSS) - ------------------------------------------------------------------------------- Year Ended December 31 1995 1994 1993 - ------------------------------------------------------------------------------- (In millions of dollars) Property/Casualty-commercial $431.3 $ 169.0 $(241.5) Property/Casualty-personal 21.9 (41.7) 13.3 Property/Casualty-involuntary risks 3.8 20.6 (38.4) Life-individual 42.6 30.5 9.6 Life-group 61.2 56.5 33.9 - ------------------------------------------------------------------------------- CNA Insurance 560.8 234.9 (223.1) Interest, other and intercompany eliminations (98.2) (47.9) (28.6) - ------------------------------------------------------------------------------- Net income (loss) excluding net realized investment gains (losses) 462.6 187.0 (251.7) - ------------------------------------------------------------------------------- Net realized investment gains (losses): Property/Casualty 207.9 (104.6) 435.8 Life 85.4 (45.6) 72.6 Other 1.1 (0.3) 10.8 - ------------------------------------------------------------------------------- Total net realized investment gains (losses) 294.4 (150.5) 519.2 - ------------------------------------------------------------------------------- TOTAL NET INCOME $757.0 $ 36.5 $ 267.5 =============================================================================== ASSETS - ------------------------------------------------------------------------ December 31 1995 1994 1993 - ------------------------------------------------------------------------ (In millions of dollars) Property/Casualty-commerical $ 40,627.6 $ 27,441.2 $ 25,356.7 Property/Casualty-personal 3,137.8 2,344.7 2,213.1 Property/Casualty-involuntary risks 3,466.2 2,166.6 2,187.2 Life-individual 3,996.5 3,733.0 3,329.6 Life-group 9,003.6 8,711.3 8,932.2 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ CNA Insurance 60,231.7 44,396.8 42,018.8 Other and intercompany eliminations (329.9) (76.4) (106.5) - ------------------------------------------------------------------------ TOTAL ASSETS $ 59,901.8 $ 44,320.4 $ 41,912.3 ======================================================================== CNA FINANCIAL CORPORATION ------------------------- 70 - -------------------------------------------------------------------------------- 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, 1995 and 1994, gross exposure of financial guarantee insurance contracts amounted to $707 million and $630 million, respectively. The degree of risk attached to this exposure is substantially reduced through reinsurance, collateral requirements and diversification of exposures. At December 31, 1995 and 1994, collateral consisting of letters of credit and debt service reserves amounted to $39 million and $45 million, respectively. In addition, security interests in the real estate are also obtained. Approximately 44% and 38% of the risks were ceded to reinsurers at December 31, 1995 and 1994. Total exposure, net of reinsurance, amounted to $395 million and $393 million at December 31, 1995 and 1994, respectively . Gross unearned premium reserves for financial guarantee contracts were $17 million and $22 million at December 31, 1995 and 1994, respectively. Gross claim and claim expense reserves totaled $463 million and $420 million at December 31, 1995 and 1994, respectively. Life revenues include $1.9 billion, $1.8 billion and $1.7 billion in 1995, 1994 and 1993, respectively, under contracts covering U.S. government employees and their dependents. CNA FINANCIAL CORPORATION ------------------------- 71 NOTES TO CONOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note M - The Continental Corporation Note M - The Continental Corporation: - ------------------------------------ Acquisition of Continental: On December 6, 1994, CNA entered into a merger agreement providing for the payment of approximately $1.1 billion to holders of The Continental Corporation (Continental) common stock. To finance the acquisition, CNA entered into a five-year $1.325 billion revolving credit facility (see Note D). On May 9, 1995, at a Special Meeting of Continental Shareholders called to approve the merger agreement, holders of 77% of the outstanding shares of Continental common stock voted to approve the Merger. Final regulatory approvals of the merger were received on May 9, 1995 and the merger was consummated on May 10, 1995. The acquisition of Continental has been accounted for as a purchase, therefore Continental's operations are included in the Consolidated Financial Statements since of May 10, 1995. CNA has completed its preliminary purchase accounting analysis. The purchase of Continental currently reflects goodwill of approximately $366 million which will be amortized over twenty years at an annual charge to income of $18 million. Evaluation and appraisal of the net assets is continuing and allocation of the purchase price may be adjusted. The unaudited pro forma condensed results of operations presented below assume the above transaction had occurred at the beginning of the periods presented: - ------------------------------------------------------------------------- Pro Forma-Unaudited Year Ended December 31 1995 1994 - ------------------------------------------------------------------------- (In millions of dollars) Revenues $16,154.8 $16,106.5 ======== ======== Realized investment gains (losses) included in revenue 582.8 (170.2) ===== ======= Income (loss) from continuing operations before income tax $1,085.0 $(1,233.0) Income tax (expense) benefit (316.0) 562.3 ------ ----- Income (loss) from continuing operations 769.0 (670.7) ----- ------ Income from discontinued operations, net of income tax -- 39.5 - ------------------------------------------------------------------------- NET INCOME (LOSS) $769.0 $(631.2) ========================================================================= The unaudited pro forma condensed financial information is not necessarily indicative of the results of operations that would have occurred had the Continental acquisition been consummated at the beginning of the period presented or of future operations of the combined companies. CNA filed a Current Report on Form 8-K/A with the Securities and Exchange Commission on July 24, 1995. Included in this report is pro forma consolidated financial information including a discussion of the preliminary purchase price allocation based on fair values. CNA FINANCIAL CORPORATION ------------------------- 72 - -------------------------------------------------------------------------------- Note N -- Leases Note M - (cont.) - ----------------- Discontinued Operations: Certain discontinued operations were acquired as part of the Continental merger; therefore, results of operations for the twelve-month period ended December 31, 1995, reflects only activity from May 10, 1995 through December 31, 1995. Operating results of the discontinued operations were as follows: - ------------------------------------------ Year ended December 31 1995 - ------------------------------------------ (In millions of dollars) Revenues $31.8 Expenses 31.8 Income before income taxes -- Income taxes -- - ------------------------------------------ INCOME FROM DISCONTINUED OPERATIONS $ -- ========================================== Net assets of discontinued insurance operations at December 31, 1995 were included in Other Assets, net of intercompany eliminations, and were as follows: - ---------------------------------------- December 31 1995 - ---------------------------------------- (In millions of dollars) Assets: Cash and investments $825.3 Reinsurance receivables and other assets 521.9 - --------------------------------------- Total assets 1,347.2 - --------------------------------------- Liabilities: Claim and claim expenses 955.7 Other liabilities 257.6 - ---------------------------------------- Total liabilities 1,213.3 - ---------------------------------------- NET ASSETS $133.9 ======================================== Note N - Leases: - --------------- CNA occupies facilities under lease agreements that expire at various dates through 2011. CNA's home office is partially situated on grounds under leases expiring in 2058. In addition, data processing, office and transportation equipment is leased under agreements that expire at various dates through 2001. Most leases contain renewal options that may provide for rent increases based on prevailing market conditions. Some leases contain purchase options based on fair market values or contractual values, if greater. Rent expense for the years ended December 31, 1995, 1994 and 1993 was $92.4 million, $50.9 million and $54.5 million, respectively. Rent expense in 1995 included $41.7 million for Continental facilities. The table below shows the future minimum lease payments to be made under non-cancelable leases at December 31, 1995. - -------------------------------------------- Furture Minimum Lease Payments - -------------------------------------------- (In millions of dollars) 1996 $114.6 1997 97.0 1998 71.8 1999 52.4 2000 39.1 Thereafter 201.5 - -------------------------------------------- TOTAL $576.4 ============================================ CNA FINANCIAL CORPORATION ------------------------- 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note O - Unaudited Quarterly Financial Data Note O - Unaudited Quarterly Financial Data: - -----------------------------------------
- --------------------------------------------------------------------------------------------------------- First Second Third Fourth Year - --------------------------------------------------------------------------------------------------------- (In millions of dollars, except per share data) 1995 QUARTERS Revenues $3,052.8 $3,659.2 $4,000.9 $3,986.8 $14,699.7 Net operating income excluding realized gains/losses 131.5 127.2 103.2 100.7 462.6 Net income 152.8 256.7 166.3 181.2 757.0 Earnings per share 2.44 4.12 2.66 2.91 12.14 1994 Quarters Revenues $2,604.4 $2,731.0 $2,844.3 $2,819.8 $10,999.5 Net operating income (loss) excluding realized gains/losses (16.8) 17.7 63.6 122.5 187.0 Net income (loss) (78.1) (36.3) 55.0 95.9 36.5 Earnings per share (1.28) (0.61) 0.87 1.53 0.51 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 - ---------------------------------------------------------------------------------------------------------
CNA FINANCIAL CORPORATION ------------------------- 74 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, 1995 and 1994 and the related statements of consolidated operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note B to the Consolidated Financial Statements, the Company changed its method of accounting for certain investments in debt and equity securities in 1993. S/DELOITTE & TOUCHE, LLP Chicago, Illinois February 14, 1996 CNA FINANCIAL CORPORATION ------------------------- 75 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, 1996, was 3,113. As of March 1, 1996, 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 of the Consolidated Financial Statements. COMMON STOCK INFORMATION - ----------------------------------------------------------------------- 1995 1994 --------------------------------------------- Quarter HIGH LOW High Low - ----------------------------------------------------------------------- Fourth 123 1/4 106 1/8 66 3/4 60 3/4 Third 106 1/2 86 64 60 Second 86 7/8 74 66 5/8 61 1/8 First 76 1/2 64 3/4 82 1/4 63 5/8 - ----------------------------------------------------------------------- INVITATION TO THE ANNUAL MEETING - ------------------------------------------------------------------------------- Shareholders are cordially invited to attend the annual meeting at 10 a.m. Wednesday, May 1, 1996, 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 ------------------------- 76 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, CNA Financial Corporation JOSEPH ROSENBERG Senior Investment Stategist, Loews Corporation RICHARD L. THOMAS Chairman, Audit Committee; Chairman of the Board, First Chicago NBD Corporation and The First National Bank of Chicago JAMES S. TISCH Chairman, Finance Committee; President and Chief Operating Officer, Loews Corporation LAURENCE A. TISCH Chief Executive Officer of CNA; Co-Chairman of the Board and Co-Chief Executive Officer, Loews Corporation; Chairman of the Board 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 Busines University of Chicago EXECUTIVE COMMITTEE - ------------------------------------------------------------------------------- Preston R. Tisch, Chairman Antoinette Cook Bush Dennis H. Chookaszian Philip L. Engel Robert P. Gwinn Edward J. Noha Joseph Rosenberg Richard L. Thomas James S. Tisch Laurence A. Tisch Marvin Zonis FINANCE COMMITTEE - ------------------------------------------------------------------------------- James S. Tisch, Chairman Antoinette Cook Bush Dennis H. Chookaszian Philip L. Engel Robert P. Gwinn Edward J. Noha Joseph Rosenberg Richard L. Thomas Laurence A. Tisch Preston R. Tisch Marvin Zonis AUDIT COMMITTEE - ------------------------------------------------------------------------------- Richard L. Thomas, Chairman Antoinette Cook Bush Robert P. Gwinn Marvin Zonis OFFICERS - -------------------------------------------------------------------------------- LAURENCE A. TISCH Chief Executive Officer, CNA Financial Corporation DENNIS H. CHOOKASZIAN Chairman and Chief Executive Officer, CNA Insurance Companies PHILIP L. ENGEL President, CNA Insurance Companies DONALD M. LOWRY Senior Vice President, Secretary and General Counsel, CNA Financial Corporation PETER E. JOKIEL Senior Vice President and Chief Financial Officer, CNA Financial Corporation CNA INSURANCE COMPANIES ADMINISTRATIVE OFFICES - -------------------------------------------------------------------------------- CNA Plaza Chicago, Illinois 60685 312/822-5000 TRANSFER AGENT AND REGISTRAR - -------------------------------------------------------------------------------- The First National Bank of Chicago CNA FINANCIAL CORPORATION ------------------------- 77 CNA FINANCIAL CORPORATION APPENDIX OMITTED GRAPH MATERIAL AND OTHER Exhibit 13.1 - CNA Financial Corporation Annual Report: * Bar graphs of: - Revenues for the period 1985 through 1995 - Assets for the period 1985 through 1995 - Stockholders' equity for the period 1985 through 1995 - Book value per common share 1985 through 1995 (See page 3 of Exhibit 13.1 for a table showing the data points used in the above graphs.) * The following are outquotes located in the margins from the Letter To Our Shareholders found on pages 4 through 9 of the annual report. Page Outquotes 4 The Continental acquisition and other business initiatives built on a solid financial foundation. 5 Financially, 1995 was a successful year. 5 The Continental merger has progressed well. 6 CNA is the largest U.S. writer of commercial property/casualty insurance. 7 The Continental merger substantially increased CNA's capabilities in professional and specialty coverages. 8 CNA substantially completed the rebuilding of its individual life business. 9 CNA is well positioned for continued success. Page 4 is from CNA Financial Corporation Chairman Edward J. Noha, and pages 5 through 9 are from CNA Insurance Companies Chairman and Chief Executive Officer Dennis H. Chookaszian. EX-27 6 ARTICLES 7 FDS FOR 10-K
7 0000021175 CNA FINANCIAL CORPORATION 1,000,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 30,445 0 0 918 119 3 35,886 222 7,169 1,493 59,902 35,548 4,549 140 705 3,026 0 150 155 6,431 59,902 11,735 2,077 464 424 9,952 1,844 1,680 1,042 (285) 757 0 0 0 757 12.14 12.14 24,997 6,893 (122) 2,009 5,048 24,955 (122)
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