-----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, U4DPD8+nZgYgFo76Xnxpupdfv4WBiHBf5U/gAVfltW4Ah8OeHhxMLVf8GI7mYuzU SYkP3I+h3QhiKwA9xUi8XQ== 0000021175-97-000017.txt : 19970404 0000021175-97-000017.hdr.sgml : 19970404 ACCESSION NUMBER: 0000021175-97-000017 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970403 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-05823 FILM NUMBER: 97574394 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/A 1 FORM 10-K/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 TO FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-5823 CNA FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 36-6169860 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) CNA PLAZA CHICAGO, ILLINOIS 60685 (Address of principal executive offices) (Zip Code) (312) 822-5000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) The registrant hereby amends the following items, financial statements, exhibits or other portions of its Annual Report on Form 10-K for the year ended December 31, 1996 filed on March 31, 1997 as set forth in the pages attached hereto: Part I: Item 1. Business (To correct typographical errors on page 7 of Form 10-K) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CNA FINANCIAL CORPORATION FORM 10-K/A ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1996 Page Number ------ Part 1 Item 1 Business................................ 3-12 Signature Page......................................... 13 Independent Auditors' Consent.......................... 14 2 PART I ITEM 1. BUSINESS CNA Financial Corportion ("CNA") was incorporated in 1967 as the parent company of Continental Casualty Company ("CCC"), incorporated in 1897, and Continental Assurance Company ("CAC") incorporated in 1911. In 1975, CAC became a wholly-owned subsidiary of CCC. On May 10, 1995, CNA acquired all the outstanding common stock of The Continental Corporation ("Continental") and it became a wholly owned subsidiary of CNA. The Continental Corporation, a New York corporation incorporated in 1968, is an insurance holding company. Its principal subsidiary, The Continental Insurance Company ("CIC") was organized in 1853. The principal business of Continental is the ownership of a group of property and casualty insurance companies. CNA's property and casualty insurance operations are conducted by CCC and its property and casualty insurance affiliates and CIC and its property and casualty insurance affiliates. Life insurance operations are conducted by CAC and its life insurance affiliates. CNA's principal business is insurance conducted through its insurance subsidiaries. As multiple-line insurers, the insurance companies underwrite property, casualty, life and accident and health coverages, as well as pension products and annuities. Their principal market for insurance products is the United States. COMPETITION All aspects of the insurance business are highly competitive. CNA's insurance operations compete with a large number of stock and mutual insurance companies and other entities for both producers and customers and must continuously allocate resources to refine and improve insurance products and services. There are approximately 3,300 companies that sell property/casualty insurance in the United States, approximately 900 of which operate in all or most states. CNA's consolidated property/casualty subsidiaries (including CIC for the full year of 1995) would have been ranked as the third largest property/casualty insurance organization in 1995 based upon statutory net written premium. There are approximately 1,770 companies selling life insurance (including accident and health insurance and pension products and annuities) in the United States. CAC is ranked as the twenty-second largest life insurance organization based on 1995 consolidated statutory premium volume. DIVIDENDS BY INSURANCE SUBSIDIARIES The payment of dividends to CNA by its insurance affiliates without prior approval of the affiliate's domiciliary state insurance commissioners is limited to amounts determined by formula in accordance with the accounting practices prescribed or permitted by the state's insurance department. This formula varies by state. The formula for the majority of the states is the greater of 10% of prior year statutory surplus or prior year statutory net income, less the aggregate of all dividends paid during the twelve months prior to date of payment. Some states, however, have an additional stipulation that dividends can't exceed prior year surplus. Based upon the various state formulas, approximately $941 million in dividends can be paid to CNA by its insurance affiliates in 1997 without prior approval. All dividends must be reported to the domiciliary insurance department prior to declaration and payment. 3 REGULATION The insurance industry is subject to comprehensive and detailed regulation and supervision throughout the United States. Each state has established supervisory agencies with broad administrative power relative to licensing insurers and agents, approving policy forms, establishing reserve requirements, fixing minimum interest rates for accumulation of surrender values and maximum interest rates of policy loans, prescribing the form and content of statutory financial reports, regulating solvency and the type and amount of investments permitted. Regulatory powers also extend to premium rate regulations which require that rates not be excessive, inadequate or unfairly discriminatory. In addition to regulation of dividends by insurance subsidiaries discussed above, intercompany transfers of assets may be subject to prior notice or approval, depending on the size of such transfers and payments in relation to the financial position of the insurance affiliates making the transfer. Insurers are also required by the states to provide coverage to insureds who would not otherwise be considered eligible by the insurers. Each state dictates the types of insurance and the level of coverage which must be provided to such involuntary risks. CNA's insurance subsidiaries' share of these involuntary risks is mandatory and generally a function of its respective share of the voluntary market by line of insurance in each state. After failing to enact the massive health reform introduced in 1994, Congress passed a health insurance reform bill in August of 1996 and the President signed it into law (P.L. 104-191) on August 21, 1996. The new law does little for Americans without health insurance but it will protect those who have health insurance from losing it. The 105th Congress is expected to consider additional incremental health care reform as it attempts to provide greater access and affordability to Americans. Among the bills that have been introduced this year are measures that would allow small businesses to band together to form association health plans to buy insurance; bar the use of clauses restricting what doctors can tell patients about treatment options; restructure the Medicare program; subsidize health insurance for uninsured children; and limit or prohibit underwriting on the basis of genetic information. We cannot predict if any of these proposals will be enacted or the extent to which they may affect the insurance industry. Last year, a moderate product liability bill was vetoed and Congress was not able to override the veto. This year, a similar product liability reform bill was introduced in the Senate. The bill contains many of the provisions of the vetoed bill and thus, one cannot predict if any reform will be adopted. Although federal standards would create more uniform laws, tort reform supporters still look primarily to the states for passage of reform measures. Over the last decade, many states have passed some type of reform, but more recently, state courts have modified or overturned approximately 38% of these reforms. Additionally, new causes of action and theories of damages are more frequently proposed in state courts or legislatures. Continued unpredicability in the law means that insurance underwriting and rating is difficult in commercial lines, professional liability and some specialty coverages. Environmental clean-up remains the subject of both federal and state regulation. Last year Congress and the Clinton Administration failed to reach an agreement on efforts to overhaul the federal Superfund hazardous waste program. The legislative stalemate was the result of a failure by Superfund stakeholders and Congress to reach a compromise on clean-up standards, the repeal of retroactive liability and how to finance future clean-up costs. In the new Congress, Superfund reform has been listed as one of the legislative priorities. At this time we cannot predict if any reform will be enacted. By some estimates, there are thousands of potential waste sites subject to clean-up. The insurance industry is involved in extensive litigation regarding coverage issues concerning clean up of hazardous waste. Judicial interpretations in many cases have expanded the scope of coverage and liability beyond the original intent of the policies. See Note E of the Consolidated Financial Statements of the 1996 Annual Report to Shareholders for further discussion. 4 REGULATION --(CONTINUED) In recent years, increased scrutiny of state regulated insurer solvency requirements by certain members of the U.S. Congress, resulted in the National Association of Insurance Commissioners developing industry minimum Risk-Based Capital (RBC) requirements, establishing a formal state accreditation process designed to more closely regulate for solvency, minimize the diversity of approved statutory accounting and actuarial practices and increasing the annual statutory statement disclosure requirements. The RBC formulas are designed to identify an insurer's minimum capital requirements based upon the inherent risks (e.g., asset default, credit and underwriting) of its operations. In addition to the minimum capital requirements, the RBC formula and related regulations identify various levels of capital adequacy and corresponding actions that the state insurance departments should initiate. The level of capital adequacy below which insurance departments would take action is defined as the Company Action Level. As of December 31, 1996, all of CNA's property/casualty and life insurance affiliates have adjusted capital amounts in excess of Company Action Levels. REINSURANCE Information as to CNA's reinsurance business is set forth in Note G of the Consolidated Financial Statements of the 1996 Annual Report to Shareholders, incorporated by reference in Item 8, herein. EMPLOYEE RELATIONS CNA has approximately 24,300 full-time equivalent employees and has experienced satisfactory labor relations. CNA has never had work stoppages due to labor disputes. CNA has comprehensive benefit plans for substantially all of its employees, including retirement plans, savings plans, disability programs, group life programs and group health care programs. BUSINESS SEGMENTS Information as to CNA's business segments is set forth in Note M of the Consolidated Financial Statements of the 1996 Annual Report to Shareholders, incorporated by reference in Item 8, herein. 5 PROPERTY/CASUALTY BUSINESS CNA's property/casualty operations market commercial and personal lines of property/casualty insurance through independent agents and brokers. Commercial lines customers include large national corporations, small and medium-sized businesses, groups and associations and professionals. Coverages are written primarily through traditional insurance contracts under which risk is transferred to the insurer. Many large commercial account policies are written under retrospectively-rated contracts which are experience-rated. Premiums for such contracts may be adjusted, subject to limitations set by contract, based on loss experience of the insureds. Other experience-rated policies include provisions for dividends based on loss experience. Experience-rated contracts reduce but do not eliminate risk to the insurer. Commercial business includes such lines as workers' compensation, general liability and commercial automobile, professional and specialty, multiple peril and accident and health coverages as well as reinsurance. Professional and specialty coverages include liability coverage for architects and engineers, lawyers, accountants, medical and dental professionals; directors and officers liability; and other specialized coverages. The major components of CNA's commercial business are professional and specialty coverages, general liability and commercial automobile and workers' compensation which accounted for 18%, 17% and 17%, respectively, of 1996 premiums earned. The property/casualty group markets personal lines of insurance, primarily automobile and homeowners' coverages sold to individuals under monoline and package policies. CNA is required by the various states in which it does business to provide coverage for risks that would not otherwise be considered under CNA's underwriting standards. CNA's share of involuntary risks is mandatory and generally a function of its share of the voluntary market by line of insurance in each state. Premiums for involuntary risks result from mandatory participation in residual markets. Property/casualty involuntary risks include mandatory participation in residual markets, statutory assessments for insolvencies of other insurers and other charges. CNA also provides loss control, policy administration and claim administration services under service contracts for fees. Such services are provided primarily in the workers' compensation market, where retention of more risk by the employer through self-insurance or high-deductible programs has become increasingly prevalent. 6 PROPERTY/CASUALTY BUSINESS--(CONTINUED)
The following table sets forth supplemental data on a GAAP basis, except where indicated, for the property/casualty business: - --------------------------------------------------------------------------------------------------------------- Year Ended December 31 1996 1995(a) 1994 1993 1992 (In millions of dollars) - --------------------------------------------------------------------------------------------------------------- Commercial Premiums Earned Professional and specialty............... $ 1,844.9 $ 1,557.7 $ 1,010.1 $ 798.9 $ 741.5 General liability and commercial automobile 1,754.1 1,648.9 1,261.1 1,154.5 1,176.0 Workers' compensation.................... 1,542.5 1,475.8 1,426.3 1,501.5 1,669.2 Multiple peril.......................... 1,046.9 869.9 389.0 368.5 374.9 Accident and health..................... 919.0 699.1 557.1 428.3 352.6 Reinsurance and other.................... 1,188.9 973.9 773.5 712.2 556.0 --------- --------- --------- ---------- --------- $ 8,296.3 $ 7,225.3 $ 5,417.1 $ 4,963.9 $ 4,870.2 ========= ========= ========= ========== ========= Personal Premiums Earned Personal lines packages.................. $ 1,063.3 $ 781.6 $ 562.6 $ 510.7 $ 447.3 Monoline automobile and property coverages 366.5 325.4 314.2 343.5 395.0 Accident and health...................... 168.9 107.8 88.9 85.6 88.6 --------- ---------- --------- ---------- --------- $ 1,598.7 $ 1,214.8 $ 965.7 $ 939.8 $ 930.9 ========= ========== ========= ========== ========= Involuntary Risks Premiums Earned (b) Workers' compensation.................... $ 135.6 $ 178.2 $ 350.0 $ 292.3 $ 451.4 Private passenger automobile............. 57.9 79.7 46.4 23.2 52.5 Commercial automobile.................... 36.4 19.9 54.3 50.3 44.9 Property and multiple peril.............. 2.2 5.9 5.0 5.5 3.7 --------- ---------- --------- --------- --------- $ 232.1 $ 283.7 $ 455.7 $ 371.3 $ 552.5 ========= ========== ========= ========= ========= Net Investment Income and Other Income Commercial............................... $ 1,943.3 $ 1,713.1 $ 1,145.1 $ 979.8 $ 1,087.3 Personal................................. 353.0 230.4 177.6 156.1 165.3 Involuntary risks........................ 93.4 104.3 88.1 75.7 83.6 --------- ---------- --------- --------- --------- $ 2,389.7 $ 2,047.8 $ 1,410.8 $ 1,211.6 $ 1,336.2 ========= ========== ========= ========= ========= Underwriting (Loss) Commercial............................... $ (853.1) $ (920.8) $ (945.7) $(1,535.6) $(2,505.9) Personal................................ (183.8) (101.9) (185.2) (99.7) (152.8) Involuntary risks........................ (106.3) (98.8) (70.3) (156.5) (340.9) ---------- ---------- ---------- ---------- ---------- $(1,143.2) $(1,121.5) $(1,201.2) $(1,791.8) $(2,999.6) ========== ========== ========== ========== ========== - --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------- Year Ended December 31 1996 1995(a) 1994 1993 1992 (In millions of dollars) - --------------------------------------------------------------------------------------------------------------- Trade Ratios (c) Loss ratio............................... 76.4% 77.9% 81.9% 96.2% 116.7% Expense ratio........................... 30.9 29.4 28.3 27.2 26.2 Combined ratio (before policyholder dividends)............................... 107.3 107.3 110.2 123.4 142.9 Policyholder dividend ratio.............. 1.6 3.0 4.8 3.9 1.9 Trade Ratios - Statutory basis (c) Loss ratio............................... 76.8% 78.6% 82.2% 96.4% 116.3% Expense ratio............................ 30.4 29.2 27.8 27.1 25.6 Combined ratio (before policyholder dividends)............................... 107.2 107.8 110.0 123.5 141.9 Policyholder dividend ratio.............. 1.4 2.1 3.8 3.1 2.4 Other Data - Statutory basis (d) Capital and surplus...................... $6,348.8 $5,695.9 $3,367.3 $3,598.4 $3,135.8 Written to surplus ratio................. 1.6 1.7 2.0 1.7 2.0 - ---------------------------------------------------------------------------------------------------------------
(a) Premium earned, net investment income and underwriting loss includes the results of The Continental Corporation since May 10, 1995. (b) Property/casualty involuntary risks include mandatory participation in residual markets, statutory assessments for insolvencies of other insurers and other involuntary charges. 7 PROPERTY/CASUALTY BUSINESS--(CONTINUED) (c) GAAP trade ratios reflect the results of Continental Casualty Company and its property/casualty insurance subsidiaries for the entire year, along with the results of The Continental Insurance Company and its property/casualty insurance subsidiaries since May 10, 1995. Statutory trade ratios reflect the results of Continental Casualty Company and its property/casualty insurance subsidiaries and The Continental Insurance Company and its property/casualty insurance subsidiaries since January 1, 1995. Prior year ratios have not been restated to include Continental. Trade ratios are industry measures of property/casualty underwriting results. The loss ratio is the percentage of incurred claim and claim adjustment expenses to premiums earned. Under generally accepted accounting principles, the expense ratio is the percentage of underwriting expenses, including the change in deferred acquisition costs, to premiums earned. Under statutory accounting principles, the expense ratio is the percentage of underwriting expenses (with no deferral of acquisition costs) to premiums written. The combined ratio is the sum of the loss and expense ratios. The policyholder dividend ratio is the ratio of dividends incurred to premiums earned. (d) Other Data is determined on the statutory basis of accounting and reflects a capital contribution from CNA of $475 million in 1993. In addition, dividends of $545 million, $325 million, $175 million, $150 million and $100 million were paid to CNA by Continental Casualty Company in 1996, 1995, 1994, 1993 and 1992, respectively. Property/casualty insurance subsidiaries have received, or will receive, reimbursement from CNA for general management and administrative expenses, unallocated loss adjustment expenses and investment expenses of $194.6, $197.0, $169.6, $167.5, and $141.1 million in 1996, 1995, 1994, 1993 and 1992, respectively. The following table displays the distribution of gross written premium: ------------------------------------------------------------------------ Gross Written Premium % of Total --------------------- Year Ended December 31 1996 1995 1994 ------------------------------------------------------------------------ New York..................................... 9.3 10.3 8.6 California................................... 8.5 9.7 11.4 Texas........................................ 6.0 6.5 6.5 Illinois..................................... 5.3 5.2 4.9 Pennsylvania................................. 4.9 5.4 5.7 Florida...................................... 4.2 4.1 4.6 New Jersey................................... 4.1 4.6 3.2 All other states, countries or political subdivisions (a)............................. 46.8 44.4 43.2 Reinsurance assumed: Voluntary.................................. 9.1 7.8 5.9 Involuntary................................ 1.8 2.0 6.0 ------ ------- ------ 100.0 100.0 100.0 ======================================================================== (a) No other state, country or political subdivision accounts for more than 3.0% of gross written premium. 8 PROPERTY/CASUALTY CLAIM AND CLAIM EXPENSES The loss reserve development table below illustrates the change over time of reserves established for property/casualty claims and claims expense at the end of various calendar years. The first section shows the reserves as originally reported at the end of the stated year. The second section, reading down, shows the cumulative amounts paid as of the end of successive years with respect to that reserve liability. The third section, reading down, shows re-estimates of the original recorded reserve as of the end of each successive year which is the result of CNA's expanded awareness of additional facts and circumstances that pertain to the unsettled claims. The last section compares the latest re-estimated reserve to the reserve originally established, and indicates whether or not the original reserve was adequate or inadequate to cover the estimated costs of unsettled claims. The loss reserve development table is cumulative and, therefore, ending balances should not be added since the amount at the end of each calendar year includes activity for both the current and prior years.
- -------------------------------------------------------------------------------------------------------------------- Schedule of Property/Casualty Loss Reserve Development Calendar Year Ended 1986(a) 1987(a) 1988(a)1989(a) 1990(a) 1991(a) 1992(a) 1993(a) 1994(b) 1995(c) 1996 (In millions of dollars) - -------------------------------------------------------------------------------------------------------------------- Gross reserves for unpaid claim and claim expenses................$ -- $ -- $ -- $ -- $16,530 $17,712 $20,034 $20,812 $21,639 $31,044 $29,830 Ceded recoverable....... -- -- -- -- 3,440 3,297 2,867 2,491 2,705 6,089 6,095 ----- ----- ----- ----- ------- ------- ------- ------- ------- ------- ------- Net reserves for unpaid claim and claim expenses................ 6,243 8,045 9,552 11,267 13,090 14,415 17,167 18,321 18,934 24,955 23,735 ------ ----- ----- ------ ------ ------ ------ ------ ------ ------ ------ NET PAID (CUMULATIVE) AS OF: One year later.......... 1,335 1,763 2,040 2,670 3,285 3,411 3,706 3,629 3,656 6,510 -- Two years later......... 2,383 2,961 3,622 4,724 5,623 6,024 6,354 6,143 7,087 -- -- Three years later....... 3,197 4,031 4,977 6,294 7,490 7,946 8,121 8,764 -- -- -- Four years later........ 3,963 5,007 6,078 7,534 8,845 9,218 10,241 -- -- -- -- Five years later........ 4,736 5,801 6,960 8,485 9,726 10,950 -- -- -- -- -- Six years later......... 5,339 6,476 7,682 9,108 11,207 -- -- -- -- -- -- Seven years later....... 5,880 7,061 8,142 10,393 -- -- -- -- -- -- -- Eight years later....... 6,382 7,426 9,303 -- -- -- -- -- -- -- -- Nine years later........ 6,690 8,522 -- -- -- -- -- -- -- -- -- Ten years later......... 7,738 -- -- -- -- -- -- -- -- -- -- - --------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------- Schedule of Property/Casualty Loss Reserve Development - continued Calendar Year Ended 1986(a) 1987(a) 1988(a) 1989(a) 1990(a) 1991(a) 1992(a) 1993(a) 1994(b) 1995(c) 1996 (In millions of dollars) - -------------------------------------------------------------------------------------------------------------------- NET RESERVES RE-ESTIMATED AS OF: End of initial year..... 6,243 8,045 9,552 11,267 13,090 14,415 17,167 18,321 18,934 24,955 23,735 One year later.......... 6,642 8,086 9,737 11,336 12,984 16,032 17,757 18,250 18,922 24,864 -- Two years later......... 6,763 8,345 9,781 11,371 14,693 16,810 17,728 18,125 18,500 -- -- Three years later....... 6,989 8,424 9,796 13,098 15,737 16,944 17,823 17,868 -- -- -- Four years later........ 7,166 8,516 11,471 14,118 15,977 17,376 17,765 -- -- -- -- Five years later........ 7,314 10,196 12,496 14,396 16,440 17,329 -- -- -- -- -- Six years later......... 9,022 11,239 12,742 14,811 16,430 -- -- -- -- -- -- Seven years later.......10,070 11,480 13,167 14,810 -- -- -- -- -- -- -- Eight years later.......10,317 11,898 13,174 -- -- -- -- -- -- -- -- Nine years later........10,755 11,925 -- -- -- -- -- -- -- -- -- Ten years later.........10,823 -- -- -- -- -- -- -- -- -- -- ------- ------ ------ ------ ------- ------ ------ ------ ------ ------ ----- Total net (deficiency) redundancy (4,580) (3,880) (3,622) (3,543) (3,340) (2,914) (598) 453 434 91 -- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Reconciliation to Gross Re-estimated Reserves: Net reserves re-estimated............ 10,823 11,925 13,174 14,810 16,430 17,329 17,765 17,868 18,500 24,864 -- Re-estimated ceded recoverable -- -- -- -- 2,855 2,610 2,046 1,918 2,472 6,262 -- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ----- Total gross re-estimated reserves -- -- -- -- 19,285 19,939 19,811 19,786 20,972 31,126 -- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Net (Deficiency) Redundancy Related to: Asbestos claims.........(3,021) (2,973) (2,917) (2,818) (2,681) (2,634) (945) (345) (309) (51) -- Environmental claims....(1,021) (1,007) (1,002) (975) (964) (918) (871) (425) (246) (65) -- ------- ------- ------- ------- ------- ------- ----- ----- ----- ----- ----- Total asbestos and (4,042) (3,980) (3,919) (3,793) (3,645) (3,552)(1,816) (770) (555) (116) -- environmental Other................... (538) 100 297 250 305 638 1,218 1,223 989 207 -- ------- ------- ------- ------- ------- ------- ------ ------ ----- ----- ------ Total net (deficiency) redundancy..............(4,580) (3,880) (3,622) (3,543) (3,340) (2,914) (598) 453 434 91 -- - ------------------------------------------------------------------------------------------------------------------------- (a) Reflects reserves of CNA, excluding Continental reserves which were acquired on May 10, 1995. Accordingly, the reserve development (net reserves recorded at the end of the year, as initially estimated, less net reserves re-estimated as of subsequent years) relates only to the operations of CNA and does not include Continental. (b) Reserve development related to the 1994 reserves of CNA, excluding Continental, as determined by the balances in this column, plus adverse reserve development of $134 million related to the reserves of Continental, acquired on May 10, 1995, which are not reflected in this column, were recorded by CNA in 1995 and subsequent periods. (c) Includes Continental gross reserves of $9,713 million and net reserves of $6,063 million acquired on May 10, 1995 and subsequent development thereon.
9 PROPERTY/CASUALTY CLAIM AND CLAIM EXPENSES - (CONTINUED) Additional information as to CNA's property/casualty claim and claim expense reserves is set forth in Notes A and E of the Consolidated Financial Statements of the 1996 Annual Report to Shareholders, incorporated by reference in Item 8, herein. RESERVE DEVELOPMENT Information as to CNA's reserve development is set forth in Note E of the Consolidated Financial Statements of the 1996 Annual Report to Shareholders, incorporated by reference in Item 8, herein. LIFE BUSINESS CNA's life insurance operations market individual and group insurance products through licensed agents, most of whom are independent contractors, who sell life and/or group insurance for CNA and for other companies on a commission basis. The individual insurance products consist primarily of term, universal life, participating policies and annuity products. Products developed in 1996 included a portfolio of variable products and new universal life products which are expected to be marketed in 1997. Group insurance products include life, accident and health consisting primarily of major medical and hospitalization and pension products, such as guaranteed investment contracts and annuities. In the medical and hospitalization market, CNA underwrites the Federal Employees Health Benefits Program (FEHBP) which had revenues of $2.1 billion, $1.9 billion and $1.8 billion in 1996, 1995 and 1994. CNA has undertaken a number of initiatives to enhance service, manage health care utilization demand and quality and strengthen CNA's networks of physicians, hospitals and other providers. CNA's products are designed and priced using assumptions management believes to be reasonably conservative for mortality, morbidity, persistency, expense levels and investment results. Underwriting practices that management believes are prudent are followed in selecting the risks that will be insured. Further, actual experience related to pricing assumptions is monitored closely so that prospective adjustments to these assumptions may be implemented as necessary. CNA mitigates the risk related to persistency by including contractual surrender charge provisions in its ordinary life and annuity policies in the first five to ten years, thus providing for the recovery of acquisition expenses. The investment portfolios supporting interest sensitive products, including universal life and individual annuities, are managed separately to minimize surrender and interest rate risk. Profitability in the health insurance business continues to be impacted by intense competition and rising medical costs. CNA has aggressively pursued expense reduction through increases in automation and other productivity improvements. Further, increasing costs of health care have resulted in a continued market shift away from traditional forms of health coverage toward managed care products and experience-rated plans. CNA's ability to compete in this market will be increasingly dependent on its ability to control costs through managed care techniques, innovation and quality customer-focused service in order to properly position CNA in the evolving health care environment. 10 LIFE BUSINESS--(CONTINUED)
The following table sets forth supplemental data for the life insurance business: - -------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1996 1995 1994 1993 1992 (In millions of dollars) - -------------------------------------------------------------------------------------------------------------------- INDIVIDUAL PREMIUM Life and annuities................................ $ 629.1 $ 497.1 $ 369.4 $ 312.1 $ 294.7 Accident and health............................... 1.8 32.7 32.6 30.9 27.1 --------- --------- --------- --------- --------- $ 630.9 $ 529.8 $ 402.0 $ 343.0 $ 321.8 ========= ========= ========= ========= ========= GROUP PREMIUM Accident and health (a)........................... $ 2,548.0 $ 2,189.7 $ 2,111.2 $ 1,983.0 $ 1,957.5 Life and annuities................................ 194.9 312.9 165.0 116.2 158.4 --------- --------- --------- --------- --------- $ 2,742.9 $ 2,502.6 $ 2,276.2 $ 2,099.2 $ 2,115.9 ========= ========= ========= ========= ========= NET INVESTMENT INCOME AND OTHER INCOME Individual........................................ $ 292.2 $ 247.3 $ 193.8 $ 154.2 $ 163.0 Group............................................. 214.2 198.1 166.4 142.8 156.6 --------- --------- --------- --------- --------- $ 506.4 $ 445.4 $ 360.2 $ 297.0 $ 319.6 ========= ========= ========= ========= ========= INCOME EXCLUDING REALIZED CAPITAL GAINS, BEFORE INCOME TAX Individual........................................ $ 100.9 $ 65.4 $ 47.3 $ 14.5 $ 22.5 Group............................................. 69.8 94.9 87.1 51.9 56.1 --------- --------- --------- --------- --------- $ 170.7 $ 160.3 $ 134.4 $ 66.4 $ 78.6 ========= ========= ========= ========= ========= GROSS LIFE INSURANCE IN FORCE Individual (b).................................... $ 172,213 $ 113,901 $ 80,560 $ 76,835 $ 75,569 Group............................................. 64,796 52,146 46,873 35,413 29,643 --------- --------- --------- --------- --------- $ 237,009 $ 166,047 $ 127,433 $ 112,248 $ 105,212 ========= ========= ========= ========= ========= OTHER DATA - STATUTORY BASIS(C) Capital and surplus............................... $ 1,163.4 $ 1,127.6 $ 1,054.6 $ 1,022.0 $ 1,003.0 Capital and surplus-percent of total liabilities.. 25.5% 28.2% 29.4% 30.1% 33.4% Participating policyholders-percent of gross life insurance in force 0.5 0.6 0.9 1.1 1.2 - -------------------------------------------------------------------------------------------------------------------- (a) Group accident and health premiums include contracts involving U.S. government employees and their dependents amounting to approximately $2.1, $1.9, $1.8, $1.7 and $1.6 billion in 1996, 1995, 1994, 1993 and 1992, respectively. (b) Lapse ratios for individual life insurance, as measured by surrenders and withdrawals as a percentage of average ordinary life insurance in force were 7.2%, 9.4%, 9.7%, 9.7% and 8.6%, in 1996, 1995, 1994, 1993 and 1992, respectively. (c) Other Data is determined on the basis of statutory accounting practices. Life insurance subsidiaries have received reimbursement from CNA for general management and administrative expenses and investment expenses of $28.5, $21.3, $24.7, $25.6 and $24.5 million in 1996, 1995, 1994, 1993 and 1992, respectively. Statutory capital and surplus as a percent of total liabilities is determined after excluding Separate Account liabilities and reclassifying the statutorily required Asset Valuation and Interest Maintenance Reserves as surplus.
11 LIFE BUSINESS - (CONTINUED) Guaranteed Investment Contracts - ------------------------------- CAC writes the majority of its group pension products as guaranteed investment contracts in a fixed Separate Account, which is permitted by Illinois insurance statutes. CAC guarantees principal and a specified return to guaranteed investment contractholders. This guarantee affords the contractholders additional security, in the form of CAC's general account surplus, which supports the principal and interest payments. CNA manages the liquidity and interest rate risks on the guaranteed investment contract portfolio by matching the approximate duration of fixed maturity securities included in the investment portfolio supporting the guaranteed investment contracts with the corresponding payout pattern of the contracts, and assessing market value surrender charges on the majority of the contracts. The table below shows a comparison of the duration of assets and contracts, weighted average investment yield, weighted average interest crediting rates, and withdrawal characteristics of the guaranteed investment contract portfolio. - -------------------------------------------------------------------------------- December 31 1996 1995 1994 - -------------------------------------------------------------------------------- Duration in years: Assets...................................... 3.12 3.12 3.23 Contracts................................... 3.16 2.98 2.99 ---- ---- ---- Difference.................................. (0.04) 0.14 0.24 ====== ==== ==== Weighted average investment yield.............. 7.44% 7.58% 7.67% Weighted average interest crediting rates...... 7.32% 7.45% 7.53% Withdrawal characteristics: With market value adjustment................ 95% 92% 79% Non-withdrawable............................ 5 8 15 Without market value adjustment............. - - 6 - -------------------------------------------------------------------------------- Total 100% 100% 100% ================================================================================ As shown above, the weighted average investment yield at December 31, 1996, 1995 and 1994 was more than the weighted average interest crediting rate. INVESTMENTS Information as to CNA's investments is set forth in Note B of the Consolidated Financial Statements of the 1996 Annual Report to Shareholders, incorporated by reference in Item 8, herein. 12 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/PATRICIA L. KUBERA ----------------------------------------------------- Patricia L. Kubera Group Vice President and Controller Date: April 3, 1997 13 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-50753 of CNA Financial Corporation and subsidiaries on Form S-3 of our reports dated February 12, 1997, appearing in and incorporated by reference in the Annual Report on Form 10-K/A of CNA Financial Corporation and subsidiaries for the year ended December 31, 1996. S/DELOITTE & TOUCHE LLP Deloitte & Touche LLP Chicago, Illinois April 3, 1997 14 -----END PRIVACY-ENHANCED MESSAGE-----